##### 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 September 30, 2009
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 For the transition period from _______________ to _______________
 Commission file no. 000-50990
 Tower Group, Inc.
 (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
 o 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  September 30, 2009 (unaudited) and December 31, 2008
    
    
    1Consolidated Statements of Income and Comprehensive Income  Three and
Nine Months Ended September 30, 2009 (unaudited)
    
    
    2Consolidated Statements of Changes in Stockholders Equity  Nine Months Ended
September 30, 2009 (unaudited) and Year-Ended December 31, 2008
    
    
    3Consolidated Statements of Cash Flow  Nine Months Ended September 30, 2009 and 2008 (unaudited)
    
    
    4Notes to Unaudited Interim Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    35Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    53Item 4. Controls and Procedures
    
    
    54PART II OTHER INFORMATION
    
    
    56Item 1. Legal Proceedings
    
    
    56Item 1A. Risk Factors
    
    
    56Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    59Item 6. Exhibits
    
    
    59SIGNATURES
    
    
    60EX-31.1EX-31.2EX-32




---



##### Table of Contents



Part I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Tower Group, Inc.
 
 Consolidated Balance Sheets
 (Unaudited)September 30,
    
    December 31,($ in thousands, except par value and share amounts)
    
    2009
    
    2008AssetsFixed-maturity securities, available-for-sale, at fair value (amortized cost of
$1,324,067 and $581,470)
    
    $
    1,387,011
    
    
    $
    530,159Equity securities, available-for-sale, at fair value (cost of $79,089 and $12,726)
    
    
    76,097
    
    
    
    10,814Short-term investments, available-for-sale, at fair value (cost of $17,188)
    
    
    17,188
    
    
    
    Total investments
    
    
    1,480,296
    
    
    
    540,973Cash and cash equivalents
    
    
    150,625
    
    
    
    136,253Receivable for securities
    
    
    67,778
    
    
    
    3,542Investment income receivable
    
    
    17,283
    
    
    
    6,972Premiums receivable
    
    
    229,086
    
    
    
    188,643Reinsurance recoverable on unpaid losses
    
    
    105,053
    
    
    
    222,229Reinsurance recoverable on paid losses
    
    
    18,833
    
    
    
    50,377Prepaid reinsurance premiums
    
    
    38,731
    
    
    
    153,650Deferred acquisition costs, net of deferred ceding commission revenue
    
    
    151,696
    
    
    
    53,080Deferred income taxes
    
    
    30,943
    
    
    
    36,207Intangible assets
    
    
    38,028
    
    
    
    20,464Goodwill
    
    
    236,407
    
    
    
    18,962Fixed assets, net of accumulated depreciation
    
    
    49,994
    
    
    
    39,038Investment in unconsolidated affiliate
    
    
    
    
    
    
    29,293Other assets
    
    
    26,678
    
    
    
    38,698Total assets
    
    $
    2,641,431
    
    
    $
    1,538,381LiabilitiesLoss and loss adjustment expenses
    
    $
    827,946
    
    
    $
    534,991Unearned premium
    
    
    532,076
    
    
    
    328,847Reinsurance balances payable
    
    
    34,232
    
    
    
    134,598Payable to issuing carriers
    
    
    66
    
    
    
    47,301Funds held under reinsurance agreements
    
    
    14,865
    
    
    
    20,474Accounts payable, accrued liabilities and other liabilities
    
    
    77,513
    
    
    
    35,930Subordinated debentures
    
    
    235,058
    
    
    
    101,036Total liabilities
    
    
    1,721,756
    
    
    
    1,203,177Stockholders equityCommon stock ($0.01 par value; 100,000,000 shares authorized, 40,560,948 and
23,408,145 shares issued, and 40,479,611 and 23,339,470 shares outstanding)
    
    
    405
    
    
    
    234Treasury stock (81,337 and 68,675 shares)
    
    
    (1,365
    )
    
    
    (1,026
    )Paid-in-capital
    
    
    643,652
    
    
    
    208,094Accumulated other comprehensive income (loss)
    
    
    38,969
    
    
    
    (37,498
    )Retained earnings
    
    
    238,014
    
    
    
    165,400Total stockholders equity
    
    
    919,675
    
    
    
    335,204Total liabilities and stockholders equity
    
    $
    2,641,431
    
    
    $
    1,538,381
 See accompanying notes to the consolidated financial statements.
 1




---



##### Table of Contents



Tower Group, Inc.
 
 Consolidated Statements of Income and Comprehensive Income
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in thousands, except per share and share amounts)
    
    2009
    
    2008
    
    2009
    
    2008RevenuesNet premiums earned
    
    $
    223,978
    
    
    $
    88,249
    
    
    $
    621,519
    
    
    $
    226,793Ceding commission revenue
    
    
    6,933
    
    
    
    18,432
    
    
    
    27,674
    
    
    
    60,577Insurance services revenue
    
    
    270
    
    
    
    17,993
    
    
    
    4,253
    
    
    
    41,896Policy billing fees
    
    
    871
    
    
    
    583
    
    
    
    2,191
    
    
    
    1,716Net investment income
    
    
    21,733
    
    
    
    8,174
    
    
    
    53,683
    
    
    
    26,335Net
realized gains  (losses)Other-than-temporary impairments
    
    
    (19,451
    )
    
    
    (5,606
    )
    
    
    (34,322
    )
    
    
    (16,335
    )Portion of loss recognized in accumulated other
comprehensive income (loss)
    
    
    7,761
    
    
    
    
    
    
    
    15,278
    
    
    
    Other net realized investment gains (losses)
    
    
    14,245
    
    
    
    2,922
    
    
    
    21,369
    
    
    
    7,055Total net realized investment gains (losses)
    
    
    2,555
    
    
    
    (2,684
    )
    
    
    2,325
    
    
    
    (9,280
    )Total revenues
    
    
    256,340
    
    
    
    130,747
    
    
    
    711,645
    
    
    
    348,037ExpensesLoss and loss adjustment expenses
    
    
    120,839
    
    
    
    43,907
    
    
    
    330,922
    
    
    
    118,127Direct and ceding commission expense
    
    
    50,289
    
    
    
    35,406
    
    
    
    150,238
    
    
    
    92,040Other operating expenses
    
    
    31,631
    
    
    
    23,060
    
    
    
    89,794
    
    
    
    66,917Acquisition-related transaction costs
    
    
    1,987
    
    
    
    
    
    
    
    13,335
    
    
    
    Interest expense
    
    
    5,055
    
    
    
    2,110
    
    
    
    13,497
    
    
    
    6,593Total expenses
    
    
    209,801
    
    
    
    104,483
    
    
    
    597,786
    
    
    
    283,677Other Income (expense)Equity income (loss) in unconsolidated affiliate
    
    
    
    
    
    
    (820
    )
    
    
    (777
    )
    
    
    700Gain on investment in acquired unconsolidated affiliate
    
    
    
    
    
    
    
    
    
    
    7,388
    
    
    
    Income before income taxes
    
    
    46,539
    
    
    
    25,444
    
    
    
    120,470
    
    
    
    65,060Income tax expense
    
    
    16,561
    
    
    
    8,728
    
    
    
    41,888
    
    
    
    23,321Net income
    
    $
    29,978
    
    
    $
    16,716
    
    
    $
    78,582
    
    
    $
    41,739Gross unrealized investment holding gains (losses) arising during
periods
    
    
    67,113
    
    
    
    (31,732
    )
    
    
    115,672
    
    
    
    (54,201
    )Cumulative effect of adjustment resulting from adoption of
new accounting guidance
    
    
    
    
    
    
    
    
    
    
    (2,497
    )
    
    
    Equity in net unrealized gains (losses) on investment in
unconsolidated affiliates investment portfolio
    
    
    
    
    
    
    (1,615
    )
    
    
    3,124
    
    
    
    (2,722
    )Less: reclassification adjustment for (gains) losses included in net
income
    
    
    (2,555
    )
    
    
    2,684
    
    
    
    (2,325
    )
    
    
    9,280Income tax
benefit (expense) related to items of other comprehensive
income
    
    
    (20,934
    )
    
    
    10,732
    
    
    
    (37,507
    )
    
    
    16,675Comprehensive net income
    
    $
    73,602
    
    
    $
    (3,215
    )
    
    $
    155,049
    
    
    $
    10,771Basic and diluted earnings per shareBasic-Common stock:Distributed
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    0.19
    
    
    $
    0.15Undistributed
    
    
    0.67
    
    
    
    0.67
    
    
    
    1.86
    
    
    
    1.64Total
    
    $
    0.74
    
    
    $
    0.72
    
    
    $
    2.05
    
    
    $
    1.79Diluted
    
    $
    0.74
    
    
    $
    0.71
    
    
    $
    2.04
    
    
    $
    1.78Weighted average common shares outstandingBasic
    
    
    40,481,517
    
    
    
    23,293,783
    
    
    
    38,247,867
    
    
    
    23,281,200Diluted
    
    
    40,701,217
    
    
    
    23,490,053
    
    
    
    38,462,320
    
    
    
    23,475,645Dividends declared and paid per common share
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    0.19
    
    
    $
    0.15
 See accompanying notes to the consolidated financial statements.
 2




---



##### Table of Contents



Tower Group, Inc.
 
 Consolidated Statements of Changes in Stockholders Equity
  AccumulatedOther
    
    
    
    
    
    TotalCommon Stock
    
    Treasury
    
    Paid-in
    
    Comprehensive
    
    Retained
    
    Stockholders(in thousands)
    
    Shares
    
    Amount
    
    Stock
    
    Capital
    
    Income
    
    Earnings
    
    EquityBalance at December 31, 2007
    
    
    23,225
    
    
    $
    232
    
    
    $
    (493
    )
    
    $
    205,435
    
    
    $
    (8,322
    )
    
    $
    112,535
    
    
    $
    309,387Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,608
    )
    
    
    (4,608
    )Stock based compensation
    
    
    183
    
    
    
    2
    
    
    
    (592
    )
    
    
    2,634
    
    
    
    
    
    
    
    
    
    
    
    2,044Warrant exercise
    
    
    
    
    
    
    
    
    
    
    59
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    84Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,473
    
    
    
    57,473Net unrealized depreciation on securities available
for sale, net of income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,176
    )
    
    
    
    
    
    
    (29,176
    )Balance at December 31, 2008
    
    
    23,408
    
    
    
    234
    
    
    
    (1,026
    )
    
    
    208,094
    
    
    
    (37,498
    )
    
    
    165,400
    
    
    
    335,204Cumulative effect of adjustment resulting from
adoption of new accounting guidance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,623
    )
    
    
    1,623
    
    
    
    Adjusted balance at December 31, 2008
    
    
    23,408
    
    
    
    234
    
    
    
    (1,026
    )
    
    
    208,094
    
    
    
    (39,121
    )
    
    
    167,023
    
    
    
    335,204Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,592
    )
    
    
    (7,592
    )Stock based compensation
    
    
    283
    
    
    
    2
    
    
    
    (429
    )
    
    
    5,056
    
    
    
    
    
    
    
    
    
    
    
    4,629Issuance of common stock
    
    
    16,870
    
    
    
    169
    
    
    
    
    
    
    
    421,454
    
    
    
    
    
    
    
    
    
    
    
    421,623Fair value of outstanding CastlePoint stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,138
    
    
    
    
    
    
    
    
    
    
    
    9,138Warrant exercise
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    (90
    )
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,582
    
    
    
    78,582Net unrealized appreciation on securities available
for sale, net of income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,090
    
    
    
    
    
    
    
    78,090Balance at September 30, 2009
    
    
    40,561
    
    
    $
    405
    
    
    $
    (1,365
    )
    
    $
    643,652
    
    
    $
    38,969
    
    
    $
    238,014
    
    
    $
    919,675
 See accompanying notes to the consolidated financial statements
 3




---



##### Table of Contents



Tower Group, Inc.
 
 Consolidated Statements of Cash Flow
  Nine Months EndedSeptember 30,($ in thousands)
    
    2009
    
    2008Cash flows provided by (used in) operating activities:Net income
    
    $
    78,582
    
    
    $
    41,739Adjustments to reconcile net income to net cash provided by (used in) operations:Gain on investment in acquired unconsolidated affiliate
    
    
    (7,388
    )
    
    
    (Gain) loss on sale of investments
    
    
    (21,369
    )
    
    
    (7,055
    )Other-than-temporary-impairment loss on investments
    
    
    19,044
    
    
    
    16,335Depreciation and amortization
    
    
    13,629
    
    
    
    8,541Amortization of bond premium or discount
    
    
    (633
    )
    
    
    (5,593
    )Amortization of restricted stock
    
    
    4,504
    
    
    
    1,767Deferred income taxes
    
    
    2,429
    
    
    
    3,398Excess tax benefits from share-based payment arrangements
    
    
    (82
    )
    
    
    (195
    )(Increase) decrease in assets:Investment income receivable
    
    
    (5,448
    )
    
    
    (314
    )Premiums receivable
    
    
    178,907
    
    
    
    (7,379
    )Reinsurance recoverable
    
    
    164,279
    
    
    
    (37,680
    )Prepaid reinsurance premiums
    
    
    143,728
    
    
    
    2,813Deferred acquisition costs, net
    
    
    (20,013
    )
    
    
    (17,811
    )Intangible assets and goodwill
    
    
    (5,447
    )
    
    
    Other assets
    
    
    25,992
    
    
    
    (3,395
    )Increase (decrease) in liabilities:Loss and loss adjustment expenses
    
    
    (145,396
    )
    
    
    23,941Unearned premium
    
    
    (82,677
    )
    
    
    33,596Reinsurance balances payable
    
    
    (158,423
    )
    
    
    17,139Payable to issuing carriers
    
    
    (47,235
    )
    
    
    (14,749
    )Accounts payable and accrued expenses
    
    
    16,589
    
    
    
    (1,283
    )Funds held
under reinsurance agreements
    
    
    (19,977
    )
    
    
    (11,764
    )Net cash flows provided by operations
    
    
    133,595
    
    
    
    42,051Cash flows provided by (used in) investing activities:Net cash acquired from acquisition of CastlePoint
    
    
    242,338
    
    
    
    Acquisition of Hermitage, net of cash acquired
    
    
    (42,218
    )
    
    
    Acquisition related transaction costs
    
    
    
    
    
    
    (7,058
    )Purchase of fixed assets
    
    
    (17,572
    )
    
    
    (12,809
    )Purchase  fixed-maturity securities
    
    
    (834,375
    )
    
    
    (298,008
    )Purchase  equity securities
    
    
    (82,260
    )
    
    
    Short-term investments, net
    
    
    (17,188
    )
    
    
    Sale or maturity  fixed-maturity securities
    
    
    593,192
    
    
    
    298,019Sale  equity securities
    
    
    46,243
    
    
    
    5,066Net cash flows provided by (used in) investing activities
    
    
    (111,840
    )
    
    
    (14,790
    )Cash flows provided by (used in) financing activities:Exercise of stock options and warrants
    
    
    556
    
    
    
    296Excess tax benefits from share-based payment arrangements
    
    
    82
    
    
    
    195Treasury stock acquired-net employee share-based compensation
    
    
    (429
    )
    
    
    (578
    )Dividends paid
    
    
    (7,592
    )
    
    
    (3,457
    )Net cash flows (used in) provided by financing activities
    
    
    (7,383
    )
    
    
    (3,544
    )Increase (decrease) in cash and cash equivalents
    
    
    14,372
    
    
    
    23,717Cash and cash equivalents, beginning of period
    
    
    136,253
    
    
    
    77,679Cash and cash equivalents, end of period
    
    $
    150,625
    
    
    $
    101,396
 See accompanying notes to the consolidated financial statements.
 4




---



##### Table of Contents



Tower Group, Inc.
 
 Notes to Unaudited Interim Consolidated Financial Statements
 Note 1Nature of Business
        Note 2Accounting Policies and Basis of Presentation
 Basis of Presentation
   5




---



##### Table of Contents



Consolidation
  Supplemental Disclosures of Cash Flow Information
  Nine Months EndedSeptember 30,($ in thousands)
    
    2009
    
    2008Supplemental disclosures of cash flow information:Cash paid for income taxes
    
    $
    40,879
    
    
    $
    26,475Cash paid for interest
    
    
    13,766
    
    
    
    5,956Schedule of non-cash investing and financing activities:Issuance of common stock in acquisition of CastlePoint
    
    
    421,623
    
    
    
    Value of CastlePoint stock options at date of acquisition
    
    
    9,138
    
    
    
    
 Loss and Loss Adjustment Expenses (LAE)
    6




---



##### Table of Contents



Deferred Acquisition Costs / Commission Revenue
  Use of Estimates
  Reclassifications
  Accounting Pronouncements
 Accounting guidance adopted in 2009
   7




---



##### Table of Contents




    
    Determine whether there are factors present that indicate that the market for the asset is
not active at the measurement date; and
 
    
    Evaluate the quoted price (i.e., a recent transaction or broker price quotation) to determine
whether the quoted price is not associated with a distressed transaction.
     8




---



##### Table of Contents



Accounting guidance not yet effective
    Note 3Acquisitions
 Acquisition of CastlePoint Holdings, Ltd.
  9




---



##### Table of Contents



($ in thousands)Purchase consideration
    
    $
    491,366Fair value of outstanding CastlePoint stock options
    
    
    9,138Total purchase consideration
    
    
    500,504Fair value of investment in CastlePoint
    
    
    34,673Fair value of CastlePoint at acquisition
    
    $
    535,177
    ($ in thousands)
    
    Level 1
    
    Level 2
    
    Level 3
    
    TotalAssetsInvestments
    
    $
    868
    
    
    $
    484,937
    
    
    $
    1,358
    
    
    $
    487,163Cash and cash equivalents
    
    
    307,632
    
    
    
    
    
    
    
    
    
    
    
    307,632Receivables
    
    
    
    
    
    
    
    
    
    
    211,464
    
    
    
    211,464Prepaid reinsurance premiums
    
    
    
    
    
    
    
    
    
    
    23,424
    
    
    
    23,424Reinsurance recoverable
    
    
    
    
    
    
    
    
    
    
    8,249
    
    
    
    8,249Deferred acquisition costs / VOBA
    
    
    
    
    
    
    
    
    
    
    68,231
    
    
    
    68,231Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    27,414
    
    
    
    27,414Goodwill
    
    
    
    
    
    
    
    
    
    
    183,138
    
    
    
    183,138Intangibles
    
    
    
    
    
    
    
    
    
    
    9,100
    
    
    
    9,100Other assets
    
    
    
    
    
    
    
    
    
    
    7,448
    
    
    
    7,448Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,333,263Liabilities and Stockholders EquityLoss and loss adjustment expenses
    
    
    
    
    
    
    
    
    
    
    291,076
    
    
    
    291,076Unearned premium
    
    
    
    
    
    
    
    
    
    
    242,365
    
    
    
    242,365Other liabilities
    
    
    
    
    
    
    
    
    
    
    130,623
    
    
    
    130,623Subordinated debt
    
    
    
    
    
    
    
    
    
    
    134,022
    
    
    
    134,022Total liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    798,086Stockholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    535,177Total liabilities and stockholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,333,263
   10




---



##### Table of Contents



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




---



##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30, 2009
    
    September 30, 2009($ in thousands)
    
    CastlePoint
    
    Hermitage
    
    CastlePoint
    
    HermitageTotal revenue
    
    $
    104,789
    
    
    $
    19,597
    
    
    $
    300,042
    
    
    $
    53,470Net income
    
    
    16,683
    
    
    
    3,903
    
    
    
    42,636
    
    
    
    8,445
   Significant Factors Affecting Acquisition Date Fair Values
 Value of Business Acquired (VOBA)
    Intangibles
  12




---



##### Table of Contents



Loss and Loss Adjustment Expense Reserves Acquired
   Non-financial Assets and Liabilities
  Pro Forma Results of Operations
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in thousands)
    
    2009
    
    2008
    
    2009
    
    2008Total revenue
    
    $
    256,340
    
    
    $
    231,382
    
    
    $
    757,225
    
    
    $
    654,522Net income
    
    
    29,978
    
    
    
    10,188
    
    
    
    77,957
    
    
    
    62,988Net income per share  basic
    
    $
    0.74
    
    
    $
    0.26
    
    
    $
    1.97
    
    
    $
    1.58Net income per share  diluted
    
    $
    0.74
    
    
    $
    0.25
    
    
    $
    1.96
    
    
    $
    1.57Weighted average common shares outstandingBasic
    
    
    40,481,517
    
    
    
    39,910,068
    
    
    
    39,648,202
    
    
    
    39,832,386Diluted
    
    
    40,701,217
    
    
    
    40,120,214
    
    
    
    39,862,655
    
    
    
    40,119,531
  Note:
  Note 4  Investments
  13




---



##### Table of Contents



Cost or
    
    Gross
    
    Gross Unrealized Losses
    
    
    
    
    
    UnrealizedAmortized
    
    Unrealized
    
    Less than 12
    
    More than 12
    
    Fair
    
    OTTI($ in thousands)
    
    Cost
    
    Gains
    
    Months
    
    Months
    
    Value
    
    Losses (1)September 30, 2009U.S. Treasury securities
    
    $
    35,267
    
    
    $
    352
    
    
    $
    (24
    )
    
    $
    
    
    
    $
    35,594
    
    
    $
    U.S. Agency securities
    
    
    9,215
    
    
    
    243
    
    
    
    (99
    )
    
    
    
    
    
    
    9,359
    
    
    
    Municipal bonds
    
    
    428,120
    
    
    
    29,523
    
    
    
    (13
    )
    
    
    (97
    )
    
    
    457,533
    
    
    
    Corporate and other bondsFinance
    
    
    136,250
    
    
    
    11,841
    
    
    
    (230
    )
    
    
    (2,045
    )
    
    
    145,816
    
    
    
    Industrial
    
    
    274,348
    
    
    
    11,850
    
    
    
    (291
    )
    
    
    (981
    )
    
    
    284,926
    
    
    
    Utilities
    
    
    40,110
    
    
    
    2,890
    
    
    
    (2
    )
    
    
    (52
    )
    
    
    42,946
    
    
    
    Commercial mortgage-backed
securities
    
    
    150,373
    
    
    
    17,392
    
    
    
    (83
    )
    
    
    (8,657
    )
    
    
    159,025
    
    
    
    (5,917
    )Residential mortgage-backed
securitiesAgency backed securities
    
    
    209,236
    
    
    
    6,463
    
    
    
    (5
    )
    
    
    
    
    
    
    215,694
    
    
    
    Non-agency backed securities
    
    
    24,318
    
    
    
    1,688
    
    
    
    (4
    )
    
    
    (4,962
    )
    
    
    21,040
    
    
    
    (2,735
    )Asset-backed securities
    
    
    16,831
    
    
    
    172
    
    
    
    (117
    )
    
    
    (1,808
    )
    
    
    15,078
    
    
    
    (1,709
    )Total fixed-maturity
securities
    
    
    1,324,067
    
    
    
    82,414
    
    
    
    (868
    )
    
    
    (18,602
    )
    
    
    1,387,011
    
    
    
    (10,361
    )Preferred stocks, principally finance
    
    
    78,578
    
    
    
    571
    
    
    
    (2,605
    )
    
    
    (987
    )
    
    
    75,557
    
    
    
    Common stocks
    
    
    511
    
    
    
    82
    
    
    
    (53
    )
    
    
    
    
    
    
    540
    
    
    
    Total
    
    $
    1,403,156
    
    
    $
    83,067
    
    
    $
    (3,526
    )
    
    $
    (19,589
    )
    
    $
    1,463,108
    
    
    $
    (10,361
    )December 31, 2008U.S. Treasury securities
    
    $
    26,482
    
    
    $
    524
    
    
    $
    
    
    
    $
    
    
    
    $
    27,006U.S. Agency securities
    
    
    361
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    399Municipal bonds
    
    
    179,734
    
    
    
    2,865
    
    
    
    (2,485
    )
    
    
    (166
    )
    
    
    179,948Corporate and other bondsFinance
    
    
    84,579
    
    
    
    457
    
    
    
    (6,003
    )
    
    
    (4,173
    )
    
    
    74,860Industrial
    
    
    122,599
    
    
    
    475
    
    
    
    (7,740
    )
    
    
    (5,639
    )
    
    
    109,695Utilities
    
    
    2,829
    
    
    
    
    
    
    
    (205
    )
    
    
    (204
    )
    
    
    2,420Commercial mortgage-backed
securities
    
    
    52,558
    
    
    
    3
    
    
    
    (4,399
    )
    
    
    (16,626
    )
    
    
    31,535Residential mortgage-backed
securitiesAgency backed securities
    
    
    70,416
    
    
    
    1,799
    
    
    
    (16
    )
    
    
    (20
    )
    
    
    72,179Non-agency backed securities
    
    
    31,441
    
    
    
    4
    
    
    
    (3,536
    )
    
    
    (3,594
    )
    
    
    24,315Asset-backed securities
    
    
    10,471
    
    
    
    32
    
    
    
    (2,652
    )
    
    
    (49
    )
    
    
    7,802Total fixed-maturity
securities
    
    
    581,470
    
    
    
    6,198
    
    
    
    (27,036
    )
    
    
    (30,471
    )
    
    
    530,159Preferred stocks
    
    
    5,551
    
    
    
    
    
    
    
    
    
    
    
    (1,857
    )
    
    
    3,694Common stocks
    
    
    7,175
    
    
    
    5
    
    
    
    (60
    )
    
    
    
    
    
    
    7,120Total
    
    $
    594,196
    
    
    $
    6,203
    
    
    $
    (27,096
    )
    
    $
    (32,328
    )
    
    $
    540,973
 (1)
    
    Represents the gross unrealized loss on other-than-temporarily impaired securities as of September 30, 2009 recognized in
accumulated other comprehensive income (loss).
   14




---



##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in thousands)
    
    2009
    
    2008
    
    2009
    
    2008IncomeFixed-maturity securities
    
    $
    20,362
    
    
    $
    7,779
    
    
    $
    51,910
    
    
    $
    24,054Equity securities
    
    
    1,684
    
    
    
    109
    
    
    
    2,233
    
    
    
    604Cash and cash equivalents
    
    
    95
    
    
    
    591
    
    
    
    919
    
    
    
    2,305Dividends on common trust securities
    
    
    139
    
    
    
    17
    
    
    
    412
    
    
    
    181Total
    
    
    22,280
    
    
    
    8,496
    
    
    
    55,474
    
    
    
    27,144ExpensesInvestment expenses
    
    
    547
    
    
    
    322
    
    
    
    1,791
    
    
    
    809Net investment income
    
    $
    21,733
    
    
    $
    8,174
    
    
    $
    53,683
    
    
    $
    26,335
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in thousands)
    
    2009
    
    2008
    
    2009
    
    2008Fixed-maturity securitiesGross realized gains
    
    $
    14,163
    
    
    $
    1,276
    
    
    $
    21,279
    
    
    $
    6,301Gross realized losses
    
    
    (11
    )
    
    
    (177
    )
    
    
    (335
    )
    
    
    (1,139
    )14,152
    
    
    
    1,099
    
    
    
    20,944
    
    
    
    5,162Equity securitiesGross realized gains
    
    
    123
    
    
    
    1,823
    
    
    
    516
    
    
    
    1,968Gross realized losses
    
    
    (30
    )
    
    
    
    
    
    
    (91
    )
    
    
    (75
    )93
    
    
    
    1,823
    
    
    
    425
    
    
    
    1,893Net realized gains (losses) on investments
    
    
    14,245
    
    
    
    2,922
    
    
    
    21,369
    
    
    
    7,055Other-than-temporary impairment lossesFixed-maturity securities
    
    
    (11,690
    )
    
    
    (5,606
    )
    
    
    (19,044
    )
    
    
    (13,899
    )Equity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,436
    )Total other-than-temporary impairment losses
    
    
    (11,690
    )
    
    
    (5,606
    )
    
    
    (19,044
    )
    
    
    (16,335
    )Total net realized gains (losses), including other-than
temporary impairment losses
    
    $
    2,555
    
    
    $
    (2,684
    )
    
    $
    2,325
    
    
    $
    (9,280
    )
  15




---



##### Table of Contents



Impairment Review
       16




---



##### Table of Contents



Three Months Ended September 30,
    
    Nine Months Ended September 30,2009
    
    2008
    
    2009
    
    2008($ in thousands)
    
    No.
    
    Amount
    
    No.
    
    Amount
    
    No.
    
    Amount
    
    No.
    
    AmountCorporate and other bonds
    
    
    6
    
    
    $
    (485
    )
    
    
    3
    
    
    $
    (3,276
    )
    
    
    14
    
    
    $
    (1,851
    )
    
    
    3
    
    
    $
    (3,276
    )Commercial mortgage-backed securities
    
    
    27
    
    
    
    (13,566
    )
    
    
    
    
    
    
    
    
    
    
    42
    
    
    
    (21,593
    )
    
    
    
    
    
    
    Residential mortgage-backed securities
    
    
    31
    
    
    
    (3,785
    )
    
    
    8
    
    
    
    (2,175
    )
    
    
    55
    
    
    
    (7,884
    )
    
    
    23
    
    
    
    (10,470
    )Asset-backed securities
    
    
    8
    
    
    
    (1,615
    )
    
    
    1
    
    
    
    (153
    )
    
    
    21
    
    
    
    (2,994
    )
    
    
    1
    
    
    
    (153
    )Equities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    (2,436
    )72
    
    
    $
    (19,451
    )
    
    
    12
    
    
    $
    (5,604
    )
    
    
    132
    
    
    $
    (34,322
    )
    
    
    34
    
    
    $
    (16,335
    )Portion of loss recognized in
accumulated other comprehensive net
income (loss), principally residential mortgage-
backed securities
    
    
    
    
    
    
    7,761
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,278
    
    
    
    
    
    
    
    Impairment losses recognized in
earnings
    
    
    
    
    
    $
    (11,690
    )
    
    
    
    
    
    $
    (5,604
    )
    
    
    
    
    
    $
    (19,044
    )
    
    
    
    
    
    $
    (16,335
    )
  ($ in thousands)Balance, January 1, 2009
    
    $
    24,638Cumulative effect of adjustment upon adoption of 2009 GAAP guidance on OTTI
    
    
    (2,497
    )Additional credit losses recognized during the period, related to securities for which:No OTTI has been previously recognized
    
    
    14,041OTTI has been previously recognized
    
    
    5,003Reductions due to:Securities sold during the period (realized)
    
    
    (320
    )Securities which will be sold in coming periods
    
    
    Balance, September 30, 2009
    
    $
    40,865
 Unrealized Losses
  17




---



##### Table of Contents



18




---



##### Table of Contents



Less than 12 Months
    
    12 Months or Longer
    
    TotalFair
    
    Unrealized
    
    
    
    
    
    Fair
    
    Unrealized
    
    
    
    
    
    Aggregate
    
    Unrealized($ in thousands)
    
    No.
    
    Value
    
    Losses
    
    No.
    
    Value
    
    Losses
    
    No.
    
    Fair Value
    
    LossesSeptember 30, 2009U.S. Treasury securities
    
    
    6
    
    
    $
    5,007
    
    
    $
    (24
    )
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    6
    
    
    $
    5,007
    
    
    $
    (24
    )U.S. Agency securities
    
    
    6
    
    
    
    1,021
    
    
    
    (99
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    1,021
    
    
    
    (99
    )Municipal bonds
    
    
    1
    
    
    
    530
    
    
    
    (13
    )
    
    
    5
    
    
    
    2,618
    
    
    
    (97
    )
    
    
    6
    
    
    
    3,148
    
    
    
    (110
    )Corporate and other
bondsFinance
    
    
    13
    
    
    
    4,101
    
    
    
    (230
    )
    
    
    26
    
    
    
    20,692
    
    
    
    (2,045
    )
    
    
    39
    
    
    
    24,793
    
    
    
    (2,275
    )Industrial
    
    
    32
    
    
    
    10,637
    
    
    
    (291
    )
    
    
    43
    
    
    
    18,598
    
    
    
    (981
    )
    
    
    75
    
    
    
    29,235
    
    
    
    (1,272
    )Utilities
    
    
    2
    
    
    
    293
    
    
    
    (2
    )
    
    
    2
    
    
    
    598
    
    
    
    (52
    )
    
    
    4
    
    
    
    891
    
    
    
    (54
    )Commercial mortgage-
backed securities
    
    
    2
    
    
    
    1,444
    
    
    
    (83
    )
    
    
    23
    
    
    
    22,138
    
    
    
    (8,657
    )
    
    
    25
    
    
    
    23,582
    
    
    
    (8,740
    )Residential mortgage-
backed securitiesAgency backed
    
    
    6
    
    
    
    3,175
    
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    3,175
    
    
    
    (5
    )Non-agency backed
    
    
    3
    
    
    
    99
    
    
    
    (4
    )
    
    
    37
    
    
    
    18,776
    
    
    
    (4,962
    )
    
    
    40
    
    
    
    18,875
    
    
    
    (4,966
    )Asset-backed securities
    
    
    3
    
    
    
    156
    
    
    
    (117
    )
    
    
    11
    
    
    
    3,934
    
    
    
    (1,808
    )
    
    
    14
    
    
    
    4,090
    
    
    
    (1,925
    )Total fixed-maturity
securities
    
    
    74
    
    
    
    26,463
    
    
    
    (868
    )
    
    
    147
    
    
    
    87,354
    
    
    
    (18,602
    )
    
    
    221
    
    
    
    113,817
    
    
    
    (19,470
    )Preferred stocks
    
    
    8
    
    
    
    67,333
    
    
    
    (2,605
    )
    
    
    5
    
    
    
    4,564
    
    
    
    (987
    )
    
    
    13
    
    
    
    71,897
    
    
    
    (3,592
    )Common stocks
    
    
    2
    
    
    
    84
    
    
    
    (53
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    84
    
    
    
    (53
    )Total
    
    
    84
    
    
    $
    93,880
    
    
    $
    (3,526
    )
    
    
    152
    
    
    $
    91,918
    
    
    $
    (19,589
    )
    
    
    236
    
    
    $
    185,798
    
    
    $
    (23,115
    )December 31, 2008Municipal bonds
    
    
    53
    
    
    $
    49,879
    
    
    $
    (2,485
    )
    
    
    1
    
    
    $
    371
    
    
    $
    (166
    )
    
    
    54
    
    
    $
    50,250
    
    
    $
    (2,651
    )Corporate and other
bondsFinance
    
    
    55
    
    
    
    42,007
    
    
    
    (6,003
    )
    
    
    38
    
    
    
    20,575
    
    
    
    (4,173
    )
    
    
    93
    
    
    
    62,582
    
    
    
    (10,176
    )Industrial
    
    
    110
    
    
    
    72,787
    
    
    
    (7,740
    )
    
    
    32
    
    
    
    17,701
    
    
    
    (5,639
    )
    
    
    142
    
    
    
    90,488
    
    
    
    (13,379
    )Utilities
    
    
    5
    
    
    
    1,974
    
    
    
    (205
    )
    
    
    2
    
    
    
    446
    
    
    
    (204
    )
    
    
    7
    
    
    
    2,420
    
    
    
    (409
    )Commercial mortgage-
backed securities
    
    
    15
    
    
    
    13,997
    
    
    
    (4,399
    )
    
    
    22
    
    
    
    16,431
    
    
    
    (16,626
    )
    
    
    37
    
    
    
    30,427
    
    
    
    (21,026
    )Residential mortgage-
backed securitiesAgency backed
    
    
    6
    
    
    
    3,408
    
    
    
    (16
    )
    
    
    1
    
    
    
    582
    
    
    
    (20
    )
    
    
    7
    
    
    
    3,990
    
    
    
    (36
    )Non-agency backed
    
    
    32
    
    
    
    12,676
    
    
    
    (3,536
    )
    
    
    16
    
    
    
    9,953
    
    
    
    (3,594
    )
    
    
    48
    
    
    
    22,629
    
    
    
    (7,130
    )Asset-backed securities
    
    
    20
    
    
    
    6,481
    
    
    
    (2,652
    )
    
    
    2
    
    
    
    552
    
    
    
    (49
    )
    
    
    22
    
    
    
    7,032
    
    
    
    (2,701
    )Total fixed-maturity
securities
    
    
    296
    
    
    
    203,208
    
    
    
    (27,037
    )
    
    
    114
    
    
    
    66,610
    
    
    
    (30,472
    )
    
    
    410
    
    
    
    269,818
    
    
    
    (57,508
    )Preferred stocks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    3,694
    
    
    
    (1,857
    )
    
    
    6
    
    
    
    3,694
    
    
    
    (1,857
    )Common stocks
    
    
    1
    
    
    
    1,440
    
    
    
    (60
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1,440
    
    
    
    (60
    )Total
    
    
    297
    
    
    $
    204,648
    
    
    $
    (27,096
    )
    
    
    120
    
    
    $
    70,304
    
    
    $
    (32,329
    )
    
    
    417
    
    
    $
    274,952
    
    
    $
    (59,424
    )
   19




---



##### Table of Contents



Securitized AssetsTotal Gross
    
    Decline of Investment ValueFair
    
    Unrealized
    
    >15%
    
    >25%
    
    >50%($ in thousands)
    
    Value
    
    Losses
    
    No.
    
    Amount
    
    No.
    
    Amount
    
    No.
    
    AmountUnrealized loss for less than 6 months
    
    $
    4,658
    
    
    $
    (89
    )
    
    
    
    
    
    $
    
    
    
    
    1
    
    
    $
    (1
    )
    
    
    
    
    
    $
    Unrealized loss for over 6 months
    
    
    218
    
    
    
    (121
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    (116
    )Unrealized loss for over 12 months
    
    
    7,771
    
    
    
    (1,420
    )
    
    
    4
    
    
    
    (986
    )
    
    
    1
    
    
    
    (67
    )
    
    
    5
    
    
    
    (0
    )Unrealized loss for over 18 months
    
    
    16,226
    
    
    
    (5,218
    )
    
    
    7
    
    
    
    (844
    )
    
    
    9
    
    
    
    (2,207
    )
    
    
    3
    
    
    
    (1,913
    )Unrealized loss for over 2 years
    
    
    20,849
    
    
    
    (8,789
    )
    
    
    3
    
    
    
    (624
    )
    
    
    11
    
    
    
    (3,729
    )
    
    
    8
    
    
    
    (3,614
    )$
    49,722
    
    
    $
    (15,636
    )
    
    
    14
    
    
    $
    (2,454
    )
    
    
    22
    
    
    $
    (6,004
    )
    
    
    18
    
    
    $
    (5,642
    )
 All Other AssetsTotal Gross
    
    Decline of Investment ValueFair
    
    Unrealized
    
    >15%
    
    >25%
    
    >50%($ in thousands)
    
    Value
    
    Losses
    
    No.
    
    Amount
    
    No.
    
    Amount
    
    No.
    
    AmountUnrealized loss for less than 6 months
    
    $
    83,765
    
    
    $
    (3,166
    )
    
    
    1
    
    
    $
    (1
    )
    
    
    
    
    
    $
    
    
    
    
    8
    
    
    $
    (243
    )Unrealized loss for over 6 months
    
    
    5,242
    
    
    
    (150
    )
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    (90
    )
    
    
    2
    
    
    
    (40
    )Unrealized loss for over 12 months
    
    
    9,338
    
    
    
    (1,012
    )
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    (769
    )
    
    
    
    
    
    
    Unrealized loss for over 18 months
    
    
    13,694
    
    
    
    (1,228
    )
    
    
    1
    
    
    
    (355
    )
    
    
    1
    
    
    
    (105
    )
    
    
    
    
    
    
    Unrealized loss for over 2 years
    
    
    24,038
    
    
    
    (1,922
    )
    
    
    4
    
    
    
    (658
    )
    
    
    1
    
    
    
    (208
    )
    
    
    
    
    
    
    $
    136,076
    
    
    $
    (7,479
    )
    
    
    6
    
    
    $
    (1,013
    )
    
    
    7
    
    
    $
    (1,172
    )
    
    
    10
    
    
    $
    (283
    )
  Fixed-Maturity InvestmentTime to Maturity
  20




---



##### Table of Contents



September 30, 2009
    
    December 31, 2008Amortized
    
    
    
    
    
    Amortized($ in thousands)
    
    Cost
    
    Fair Value
    
    Cost
    
    Fair ValueRemaining Time to MaturityLess than one year
    
    $
    21,439
    
    
    $
    21,617
    
    
    $
    8,813
    
    
    $
    8,789One to five years
    
    
    255,669
    
    
    
    266,582
    
    
    
    115,645
    
    
    
    112,514Five to ten years
    
    
    335,029
    
    
    
    349,262
    
    
    
    189,267
    
    
    
    176,218More than 10 years
    
    
    311,171
    
    
    
    338,713
    
    
    
    102,859
    
    
    
    96,807Mortgage and asset-backed securities
    
    
    400,759
    
    
    
    410,837
    
    
    
    164,886
    
    
    
    135,831Total
    
    $
    1,324,067
    
    
    $
    1,387,011
    
    
    $
    581,470
    
    
    $
    530,159
 Note 5Fair Value Measurements
  Level 1
 Level 2
 Level 3
   21




---



##### Table of Contents



($ in thousands)
    
    Level 1
    
    Level 2
    
    Level 3
    
    TotalFixed-maturity investmentsU.S. Treasury securities
    
    $
    
    
    
    $
    35,595
    
    
    $
    
    
    
    $
    35,595U.S. Agency securities
    
    
    
    
    
    
    9,359
    
    
    
    
    
    
    
    9,359Municipal bonds
    
    
    
    
    
    
    457,534
    
    
    
    
    
    
    
    457,534Corporate and other bonds
    
    
    
    
    
    
    473,688
    
    
    
    
    
    
    
    473,688Commercial mortgage-backed securities
    
    
    
    
    
    
    119,464
    
    
    
    39,561
    
    
    
    159,025Residential mortgage-backed securitiesAgency
    
    
    
    
    
    
    215,694
    
    
    
    
    
    
    
    215,694Non-agency
    
    
    
    
    
    
    5,315
    
    
    
    15,725
    
    
    
    21,040Asset-backed securities
    
    
    
    
    
    
    11,447
    
    
    
    3,631
    
    
    
    15,078Total fixed-maturities
    
    
    
    
    
    
    1,328,094
    
    
    
    58,917
    
    
    
    1,387,011Equity investments
    
    
    75,793
    
    
    
    305
    
    
    
    
    
    
    
    76,097Short-term investments
    
    
    
    
    
    
    17,188
    
    
    
    
    
    
    
    17,188Total
    
    $
    75,793
    
    
    $
    1,345,587
    
    
    $
    58,917
    
    
    $
    1,480,296
      22




---



##### Table of Contents



($ in thousands)Beginning balance, January 1, 2009
    
    $
    18,084Total gains (losses)-realized / unrealizedIncluded in net income
    
    
    (17,193
    )Included in other comprehensive income (loss)
    
    
    9,701Purchases, issuances and settlements
    
    
    34,266Net transfers into (out of) Level 3
    
    
    14,059Ending balance, September 30, 2009
    
    $
    58,917
 Note 6Goodwill and Intangible Assets
 Goodwill
   Intangibles
    23




---



##### Table of Contents



September 30, 2009
    
    December 31, 2008Useful
    
    Gross
    
    
    
    
    
    Net
    
    Gross
    
    
    
    
    
    NetLife
    
    Carrying
    
    Accumulated
    
    Carrying
    
    Carrying
    
    Accumulated
    
    Carrying($ in thousands)
    
    (in-yrs)
    
    Amount
    
    Amortization
    
    Amount
    
    Amount
    
    Amortization
    
    AmountInsurance licenses
    
    
    
    
    
    $
    10,603
    
    
    $
    
    
    
    $
    10,603
    
    
    $
    6,503
    
    
    $
    
    
    
    $
    6,503Customer relationships
    
    
    10-20
    
    
    
    30,540
    
    
    
    (5,156
    )
    
    
    25,384
    
    
    
    17,090
    
    
    
    (3,129
    )
    
    
    13,961Trademarks
    
    
    5
    
    
    
    2,340
    
    
    
    (299
    )
    
    
    2,041
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    $
    43,483
    
    
    $
    (5,455
    )
    
    $
    38,028
    
    
    $
    23,593
    
    
    $
    (3,129
    )
    
    $
    20,464
  ($ in thousands)2009
    
    $
    8782010
    
    
    3,1832011
    
    
    2,8282012
    
    
    2,5352013
    
    
    2,2912014
    
    
    1,947
 Note 7Investment in Unconsolidated AffiliateCastlePoint
  Note 8  Other Assets
 (Unaudited)September 30,
    
    December 31,($ in thousands)
    
    2009
    
    2008Receivable  claims paid by agency
    
    $
    6,467
    
    
    $
    4,639Investment in statutory business trusts, equity method
    
    
    7,058
    
    
    
    3,036Deferred merger and acquisition expenses
    
    
    
    
    
    
    9,412Prepaids, deposits and advances
    
    
    3,828
    
    
    
    4,006Receivable from residual market plans
    
    
    6,231
    
    
    
    2,818Commission receivable from issuing carriers
    
    
    2,705
    
    
    
    7,887Other
    
    
    389
    
    
    
    6,900Other assets
    
    $
    26,678
    
    
    $
    38,698
 Note 9Loss and Loss Adjustment Expense
  24




---



##### Table of Contents



($ in thousands)Balance at January 1, 2009
    
    $
    534,991Less reinsurance recoverables on unpaid losses
    
    
    (222,229
    )312,762CastlePoint net reserves at date of acquisition, at fair value
    
    
    282,434Hermitage net reserves at date of acquisition, at fair value
    
    
    87,567Incurred related to:Current year
    
    
    337,556Prior years
    
    
    (6,634
    )Total incurred
    
    
    330,922Paid related to:Current year
    
    
    105,009Prior years
    
    
    185,783Total paid
    
    
    290,792Net balance at end of year
    
    
    722,893Add reinsurance recoverables on unpaid losses
    
    
    105,053Balance at September 30, 2009
    
    $
    827,946
 Note 10 Accounts Payable, Accrued Liabilities and Other Liabilities
 (Unaudited)September 30,
    
    December 31,($ in thousands)
    
    2009
    
    2008Funds held as agent
    
    $
    2,627
    
    
    $
    3,516Accounts payable and accrued expenses
    
    
    40,530
    
    
    
    12,470Deferred rent liability
    
    
    6,749
    
    
    
    7,014Federal and state income taxes payable
    
    
    4,499
    
    
    
    5,368Other
    
    
    23,108
    
    
    
    7,562Accounts payable, accrued expenses and other liabilities
    
    $
    77,513
    
    
    $
    35,930
 Note 11Debt
 Subordinated Debentures
  25




---



##### Table of Contents



PrincipalAmount of
    
    Amount ofInvestment
    
    Juniorin
    
    SubordinatedCommon
    
    Debenture($ in millions)
    
    
    
    
    
    
    
    
    
    Early
    
    
    
    Securities
    
    Issued toIssue Date
    
    Amount
    
    Issuer
    
    Maturity Date
    
    Redemption
    
    Interest Rate
    
    of Trust
    
    TrustSeptember 2007
    
    $
    30
    
    
    CastlePoint Bermuda
Capital Trust I
    
    September 2037
    
    At our option at
par on or after
September 27, 2012
    
    8.39% until
September 27, 2012;
three-month LIBOR
plus 350 basis
points thereafter
    
    $
    0.9
    
    
    $
    30.9December 2006
    
    $
    50
    
    
    CastlePoint
Management
Statutory Trust II
    
    December 2036
    
    At our option at
par on or after
December 14, 2011
    
    8.5551% until
December 14, 2011;
three-month LIBOR
plus 330 basis
points thereafter.
    
    $
    1.6
    
    
    $
    51.6December 2006
    
    $
    50
    
    
    CastlePoint
Management
Statutory Trust I
    
    December 2036
    
    At our option at
par on or after
December 1, 2011
    
    8.66% until
December 1, 2011;
three-month LIBOR
plus 350 basis
points thereafter
    
    $
    1.6
    
    
    $
    51.6
   ($ in thousands)2033
    
    $
    20,6202034
    
    
    25,7752035
    
    
    13,4032036
    
    
    123,7412037
    
    
    51,519$
    235,058
 26




---



##### Table of Contents



Note 12Stockholders Equity
 Authorized Shares of Common Stock
  Shares of Common Stock Issued
  Warrants
  Exercise Date
    
    Exercised by
    
    Exercise Type
    
    Surrendered
    
    Shares IssuedJanuary 2, 2009
    
    FBR employee
    
    Cashless
    
    
    5,000
    
    
    
    3,211March 2, 2009
    
    FBR employee
    
    Cashless
    
    
    6,000
    
    
    
    3,945March 30, 2009
    
    FBR employee
    
    Cashless
    
    
    6,000
    
    
    
    3,823April 6, 2009
    
    FBR employee
    
    Cashless
    
    
    8,000
    
    
    
    5,214
  Dividends Declared
  Note 13Stock Based Compensation
 Restricted Stock Awards
   27




---



##### Table of Contents



Nine Months Ended September 30,2009
    
    2008Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageNumber of
    
    Grant Date
    
    Number of
    
    Grant DateShares
    
    Fair Value
    
    Shares
    
    Fair ValueOutstanding, January 1
    
    
    258,645
    
    
    $
    26.05
    
    
    
    195,468
    
    
    $
    24.97Granted
    
    
    317,545
    
    
    
    22.89
    
    
    
    138,326
    
    
    
    24.75Vested
    
    
    (73,945
    )
    
    
    26.24
    
    
    
    (79,983
    )
    
    
    19.28Forfeitures
    
    
    (11,011
    )
    
    
    26.05
    
    
    
    (14,891
    )
    
    
    26.88Outstanding, September 30
    
    
    491,234
    
    
    $
    23.98
    
    
    
    238,920
    
    
    $
    26.40
 Stock Options
  Nine Months Ended September 30,2009
    
    2008Average
    
    
    
    
    
    AverageNumber of
    
    Exercise
    
    Number of
    
    ExerciseShares
    
    Price
    
    Shares
    
    PriceOutstanding, January 1
    
    
    258,530
    
    
    $
    5.47
    
    
    
    281,896
    
    
    $
    5.57Granted at fair value
    
    
    1,148,308
    
    
    
    20.61
    
    
    
    
    
    
    
    Exercised
    
    
    (40,076
    )
    
    
    13.84
    
    
    
    (23,366
    )
    
    
    6.65Forfeitures and expirations
    
    
    (134,617
    )
    
    
    22.37
    
    
    
    
    
    
    
    Outstanding, September 30
    
    
    1,232,145
    
    
    $
    17.46
    
    
    
    258,530
    
    
    $
    5.47Exercisable, September 30
    
    
    1,043,985
    
    
    $
    16.76
    
    
    
    234,230
    
    
    $
    5.15
      28




---



##### Table of Contents



Note 14Income Taxes
  September 30,
    
    December 31,($ in thousands)
    
    2009
    
    2008Deferred tax asset:Claims reserve discount
    
    $
    26,264
    
    
    $
    11,863Unearned premium
    
    
    35,215
    
    
    
    12,837Equity compensation plans
    
    
    5,741
    
    
    
    273Investment impairments
    
    
    13,895
    
    
    
    8,680Net operating loss carryforwards
    
    
    19,196
    
    
    
    13,632Capital loss carryforwards
    
    
    
    
    
    
    2,848Allowance for doubtful accounts
    
    
    320
    
    
    
    136Other
    
    
    3,106
    
    
    
    514Total deferred tax assets
    
    
    103,737
    
    
    
    50,783Deferred tax liability:Deferred acquisition costs net of deferred ceding commission revenue
    
    
    48,772
    
    
    
    18,578Warrant received from unconsolidated affiliate
    
    
    
    
    
    
    1,612Gain from issuance of common stock by unconsolidated affiliate
    
    
    
    
    
    
    3,706Equity income in unconsolidated affiliate
    
    
    
    
    
    
    1,111Depreciation and amortization
    
    
    1,402
    
    
    
    7,096Net unrealized appreciation (depreciation) of securities
    
    
    21,322
    
    
    
    (18,919
    )Salvage and subrogation
    
    
    289
    
    
    
    764Accrual of bond discount
    
    
    976
    
    
    
    628Other
    
    
    33
    
    
    
    Total deferred tax liabilities
    
    
    72,794
    
    
    
    14,576Net deferred income tax asset
    
    $
    30,943
    
    
    $
    36,207
   29




---



##### Table of Contents



Note 15Fair Value of Financial Instruments
  Equity and fixed income investments:
 Common trust securitiesstatutory business trusts:
 Agents balances receivable, assumed premiums receivable, receivable-claims paid by agency:
 Reinsurance balances payable, payable to issuing carrier and funds held:
 30




---



##### Table of Contents



Subordinated debentures:
 Note 16Earnings per Share
     Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in thousands, except share and per share amounts)
    
    2009
    
    2008
    
    2009
    
    2008NumeratorNet income
    
    $
    29,978
    
    
    $
    16,716
    
    
    $
    78,582
    
    
    $
    41,739DenominatorWeighted average common shares outstanding
    
    
    40,481,517
    
    
    
    23,293,783
    
    
    
    38,247,867
    
    
    
    23,281,200Effect of dilutive securities:Stock options
    
    
    210,004
    
    
    
    129,891
    
    
    
    201,924
    
    
    
    137,823Unvested restricted stock units
    
    
    9,696
    
    
    
    44,607
    
    
    
    8,630
    
    
    
    32,776Warrants
    
    
    
    
    
    
    21,772
    
    
    
    3,900
    
    
    
    23,846Weighted average common and potential dilutiveshares outstanding
    
    
    40,701,217
    
    
    
    23,490,053
    
    
    
    38,462,320
    
    
    
    23,475,645Earnings per share  basicCommon stock:Distributed earnings
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    0.19
    
    
    $
    0.15Undistributed earnings
    
    
    0.67
    
    
    
    0.67
    
    
    
    1.86
    
    
    
    1.64Total
    
    
    0.74
    
    
    
    0.72
    
    
    
    2.05
    
    
    
    1.79Earnings per share  diluted
    
    $
    0.74
    
    
    $
    0.71
    
    
    $
    2.04
    
    
    $
    1.78
 Note 17Changes in Estimates
  
 31




---



##### Table of Contents



Note 18Segment Information
   32




---



##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in thousands)
    
    2009
    
    2008
    
    2009
    
    2008Brokerage Insurance SegmentRevenuesNet premiums earned
    
    $
    173,852
    
    
    $
    82,596
    
    
    $
    474,715
    
    
    $
    215,598Ceding commission revenue
    
    
    3,908
    
    
    
    11,259
    
    
    
    20,461
    
    
    
    48,150Policy billing fees
    
    
    930
    
    
    
    485
    
    
    
    2,171
    
    
    
    1,446Total revenues
    
    
    178,690
    
    
    
    94,340
    
    
    
    497,347
    
    
    
    265,194ExpensesNet loss and loss adjustment expenses
    
    
    93,852
    
    
    
    40,694
    
    
    
    249,510
    
    
    
    111,695Underwriting expenses
    
    
    63,271
    
    
    
    37,573
    
    
    
    181,840
    
    
    
    114,890Total expenses
    
    
    157,123
    
    
    
    78,267
    
    
    
    431,350
    
    
    
    226,585Underwriting profit
    
    $
    21,567
    
    
    $
    16,073
    
    
    $
    65,997
    
    
    $
    38,609Specialty Business SegmentRevenuesNet premiums earned
    
    $
    50,127
    
    
    $
    5,653
    
    
    $
    146,804
    
    
    $
    11,195Ceding commission revenue
    
    
    3,024
    
    
    
    7,173
    
    
    
    7,213
    
    
    
    12,427Total revenues
    
    
    53,151
    
    
    
    12,826
    
    
    
    154,017
    
    
    
    23,622ExpensesNet loss and loss adjustment expenses
    
    
    26,985
    
    
    
    3,213
    
    
    
    81,411
    
    
    
    6,432Underwriting expenses
    
    
    17,926
    
    
    
    8,903
    
    
    
    51,298
    
    
    
    15,828Total expenses
    
    
    44,911
    
    
    
    12,116
    
    
    
    132,709
    
    
    
    22,260Underwriting profit
    
    $
    8,240
    
    
    $
    710
    
    
    $
    21,308
    
    
    $
    1,362Insurance Services SegmentRevenuesDirect commission revenue from managing general agency
    
    $
    (270
    )
    
    $
    15,286
    
    
    $
    2,013
    
    
    $
    35,353Claims administration revenue
    
    
    71
    
    
    
    1,606
    
    
    
    1,053
    
    
    
    3,576Other administration revenue
    
    
    53
    
    
    
    846
    
    
    
    469
    
    
    
    2,426Reinsurance intermediary fees
    
    
    417
    
    
    
    255
    
    
    
    718
    
    
    
    540Policy billing fees
    
    
    (59
    )
    
    
    99
    
    
    
    20
    
    
    
    271Total revenues
    
    
    212
    
    
    
    18,092
    
    
    
    4,273
    
    
    
    42,166ExpensesDirect commission expense paid to producers
    
    
    56
    
    
    
    6,857
    
    
    
    1,672
    
    
    
    15,382Other insurance services expenses:Underwriting expenses reimbursed to TICNY
    
    
    (14
    )
    
    
    3,225
    
    
    
    1,025
    
    
    
    7,970Claims expense reimbursement to TICNY
    
    
    71
    
    
    
    1,606
    
    
    
    1,053
    
    
    
    3,576Total expenses
    
    
    113
    
    
    
    11,688
    
    
    
    3,750
    
    
    
    26,928Insurance services pretax income
    
    $
    99
    
    
    $
    6,404
    
    
    $
    523
    
    
    $
    15,238
 33




---



##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in thousands)
    
    2009
    
    2008
    
    2009
    
    2008Brokerage insurance segment
    
    $
    178,690
    
    
    $
    94,340
    
    
    $
    497,347
    
    
    $
    265,194Specialty business segment
    
    
    53,151
    
    
    
    12,826
    
    
    
    154,017
    
    
    
    23,622Insurance services segment
    
    
    212
    
    
    
    18,092
    
    
    
    4,273
    
    
    
    42,166Total segment revenues
    
    
    232,053
    
    
    
    125,258
    
    
    
    655,637
    
    
    
    330,982Net investment income
    
    
    21,733
    
    
    
    8,174
    
    
    
    53,683
    
    
    
    26,335Net realized gains (losses) on investments, including
other-than-temporary impairments
    
    
    2,555
    
    
    
    (2,684
    )
    
    
    2,325
    
    
    
    (9,280
    )Consolidated revenues
    
    $
    256,340
    
    
    $
    130,747
    
    
    $
    711,645
    
    
    $
    348,037
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in thousands)
    
    2009
    
    2008
    
    2009
    
    2008Brokerage insurance segment underwriting profit
    
    $
    21,567
    
    
    $
    16,073
    
    
    $
    65,997
    
    
    $
    38,609Specialty business segment underwriting profit
    
    
    8,240
    
    
    
    710
    
    
    
    21,308
    
    
    
    1,362Insurance services segment pretax income
    
    
    99
    
    
    
    6,404
    
    
    
    523
    
    
    
    15,238Net investment income
    
    
    21,733
    
    
    
    8,174
    
    
    
    53,683
    
    
    
    26,335Net realized gains (losses) on investments, including
other-than-temporary impairments
    
    
    2,555
    
    
    
    (2,684
    )
    
    
    2,325
    
    
    
    (9,280
    )Corporate expenses
    
    
    (613
    )
    
    
    (303
    )
    
    
    (3,146
    )
    
    
    (1,312
    )Acquisition-related expenses
    
    
    (1,987
    )
    
    
    
    
    
    
    (13,335
    )
    
    
    Interest expense
    
    
    (5,055
    )
    
    
    (2,110
    )
    
    
    (13,497
    )
    
    
    (6,593
    )Other income (loss) *
    
    
    
    
    
    
    (820
    )
    
    
    6,611
    
    
    
    700Income before taxes
    
    $
    46,539
    
    
    $
    25,443
    
    
    $
    120,469
    
    
    $
    65,059
 *
    
    See Note 3  Acquisitions and Note 7  Investments in Unconsolidated AffiliateCastlePoint
 Note 19Contingencies
 Legal Proceedings
 inter alia inter alia
 Note 20Subsequent Events
  34




---



##### Table of Contents



Acquisition of AequiCap Renewal Rights
  Pending Acquisition of Specialty Underwriters Alliance, Inc.
      Dividends
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Note on Forward-Looking Statements
  35




---



##### Table of Contents




    
    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, recession and
other factors;
    
    disruptions in Towers business arising from the integration of CastlePoint and Hermitage
into Tower;
    
    increases in Towers exposure to risk of loss arising from the CastlePoint merger or the
Hermitage acquisition;
    
    the possibility that Tower will incur significant charges on writing down the goodwill and
intangibles established in connection with acquisitions if those businesses do not perform
well or Tower does not integrate these acquired businesses successfully;
    
    the possibility that the proposed merger with SUA may not be completed or may be delayed;
    
    unanticipated difficulties in combining Tower and SUA;
    
    disruptions in Towers business arising from the anticipation of the transactions and the
integration of Tower and SUA; and
    
    Currently pending or future litigation or governmental proceedings.
  Critical Accounting Policies
  36




---



##### Table of Contents



Consolidated Results of Operations
    Three Months Ended September 30,
    
    Nine Months Ended September 30,($ in millions)
    
    2009
    
    2008
    
    Change
    
    Percent
    
    2009
    
    2008
    
    Change
    
    PercentRevenuesGross premiums earned
    
    $
    263.7
    
    
    $
    150.5
    
    
    $
    113.2
    
    
    
    75.2
    %
    
    $
    747.4
    
    
    $
    424.3
    
    
    $
    323.1
    
    
    
    76.2
    %Less: Ceded premiums earned
    
    
    (39.8
    )
    
    
    (62.3
    )
    
    
    22.5
    
    
    
    (36.1
    %)
    
    
    (125.9
    )
    
    
    (197.5
    )
    
    
    71.6
    
    
    
    (36.2
    %)Net premiums earned
    
    
    223.9
    
    
    
    88.2
    
    
    
    135.7
    
    
    
    153.8
    %
    
    
    621.5
    
    
    
    226.8
    
    
    
    394.7
    
    
    
    174.0
    %Total commission and fee income
    
    
    8.1
    
    
    
    37.0
    
    
    
    (28.9
    )
    
    
    (78.2
    %)
    
    
    34.1
    
    
    
    104.2
    
    
    
    (70.1
    )
    
    
    (67.3
    %)Net investment income
    
    
    21.7
    
    
    
    8.2
    
    
    
    13.5
    
    
    
    165.9
    %
    
    
    53.7
    
    
    
    26.3
    
    
    
    27.4
    
    
    
    103.8
    %Net realized investment gains (losses)
    
    
    2.6
    
    
    
    (2.7
    )
    
    
    5.3
    
    
    
    (195.2
    %)
    
    
    2.3
    
    
    
    (9.3
    )
    
    
    11.6
    
    
    
    (125.1
    %)Total
    
    
    256.3
    
    
    
    130.7
    
    
    
    125.6
    
    
    
    96.1
    %
    
    
    711.6
    
    
    
    348.0
    
    
    
    363.6
    
    
    
    104.5
    %ExpensesNet loss and loss adjustment expenses
    
    
    120.8
    
    
    
    43.9
    
    
    
    76.9
    
    
    
    175.2
    %
    
    
    330.9
    
    
    
    118.1
    
    
    
    212.8
    
    
    
    180.1
    %Operating expenses
    
    
    81.9
    
    
    
    58.5
    
    
    
    23.4
    
    
    
    40.1
    %
    
    
    240.0
    
    
    
    159.0
    
    
    
    81.0
    
    
    
    51.0
    %Acquisition-related transaction costs
    
    
    2.0
    
    
    
    
    
    
    
    2.0
    
    
    
    
    
    
    
    13.3
    
    
    
    
    
    
    
    13.3Interest expense
    
    
    5.1
    
    
    
    2.1
    
    
    
    3.0
    
    
    
    139.6
    %
    
    
    13.5
    
    
    
    6.6
    
    
    
    6.9
    
    
    
    104.7
    %Total expenses
    
    
    209.8
    
    
    
    104.5
    
    
    
    105.3
    
    
    
    100.8
    %
    
    
    597.7
    
    
    
    283.7
    
    
    
    314.0
    
    
    
    110.7
    %Other income (expense)Equity in income (loss) of
unconsolidated affiliate
    
    
    
    
    
    
    (0.8
    )
    
    
    0.8
    
    
    
    (100.0
    %)
    
    
    (0.8
    )
    
    
    0.7
    
    
    
    (1.5
    )
    
    
    (210.9
    %)Gain on investment in acquired
unconsolidated affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.4
    
    
    
    
    
    
    
    7.4
    
    
    
    0.0
    %Income before taxes
    
    
    46.5
    
    
    
    25.4
    
    
    
    21.1
    
    
    
    82.9
    %
    
    
    120.5
    
    
    
    65.0
    
    
    
    55.5
    
    
    
    85.2
    %Federal and state income taxes
    
    
    16.6
    
    
    
    8.7
    
    
    
    7.9
    
    
    
    89.8
    %
    
    
    41.9
    
    
    
    23.3
    
    
    
    18.6
    
    
    
    79.6
    %Net Income
    
    $
    29.9
    
    
    $
    16.7
    
    
    $
    13.2
    
    
    
    79.3
    %
    
    $
    78.6
    
    
    $
    41.7
    
    
    $
    36.9
    
    
    
    88.3
    %Percent of total revenues:Net premiums earned
    
    
    87.4
    %
    
    
    67.5
    %
    
    
    
    
    
    
    
    
    
    
    87.3
    %
    
    
    65.2
    %Commission and fee income
    
    
    3.2
    %
    
    
    28.3
    %
    
    
    
    
    
    
    
    
    
    
    4.8
    %
    
    
    29.9
    %Net investment income
    
    
    8.5
    %
    
    
    6.3
    %
    
    
    
    
    
    
    
    
    
    
    7.5
    %
    
    
    7.6
    %Net realized investment gains (losses)
    
    
    1.0
    %
    
    
    (2.1
    %)
    
    
    
    
    
    
    
    
    
    
    0.3
    %
    
    
    (2.7
    %)Return on average equity (1)
    
    
    13.6
    %
    
    
    20.9
    %
    
    
    
    
    
    
    
    
    
    
    16.3
    %
    
    
    17.7
    %
 37




---



##### Table of Contents



(1)
    
    The impact of net realized investment gains and acquisition-related transaction
costs, net of tax, lowered return on average equity by 0.1% for the third quarter of 2009 and
lowered return on average equity by 2.0% for the nine months ended September 30, 2009.
 Key Measures
 Three Months Ended September 30,
    
    Nine Months Ended September 30,($ in millions)
    
    2009
    
    2008
    
    Change
    
    Percent
    
    2009
    
    2008
    
    Change
    
    PercentGross premiums written and produced:Written by Brokerage and Specialty
insurance segments
    
    $
    282.8
    
    
    $
    157.2
    
    
    $
    125.6
    
    
    
    79.9
    %
    
    $
    743.5
    
    
    $
    458.3
    
    
    $
    285.2
    
    
    
    62.2
    %Produced by Insurance Services Segment
    
    
    0.3
    
    
    
    46.6
    
    
    
    (46.3
    )
    
    
    -99.3
    %
    
    
    11.5
    
    
    
    106.0
    
    
    
    (94.5
    )
    
    
    -89.1
    %Assumed premiums
    
    
    (0.2
    )
    
    
    (0.8
    )
    
    
    0.6
    
    
    
    -79.4
    %
    
    
    0.2
    
    
    
    (3.5
    )
    
    
    3.6
    
    
    
    -105.3
    %Total
    
    $
    283.0
    
    
    $
    203.0
    
    
    $
    79.9
    
    
    
    39.4
    %
    
    $
    755.2
    
    
    $
    560.8
    
    
    $
    194.4
    
    
    
    34.7
    %Underwriting Ratios for Brokerage Insurance and Specialty Business Segments CombinedLoss RatiosGross
    
    
    48.0
    %
    
    
    46.5
    %
    
    
    1.4
    %
    
    
    
    
    
    
    52.3
    %
    
    
    48.8
    %
    
    
    3.5
    %Net
    
    
    54.0
    %
    
    
    49.8
    %
    
    
    4.2
    %
    
    
    
    
    
    
    53.2
    %
    
    
    52.1
    %
    
    
    1.2
    %Accident Year Loss RatiosGross
    
    
    54.1
    %
    
    
    52.4
    %
    
    
    1.7
    %
    
    
    
    
    
    
    54.3
    %
    
    
    51.6
    %
    
    
    2.7
    %Net
    
    
    54.1
    %
    
    
    53.3
    %
    
    
    0.8
    %
    
    
    
    
    
    
    54.3
    %
    
    
    54.1
    %
    
    
    0.3
    %Underwriting Expense RatiosGross
    
    
    30.4
    %
    
    
    30.6
    %
    
    
    -0.1
    %
    
    
    
    
    
    
    30.9
    %
    
    
    30.5
    %
    
    
    0.4
    %Net
    
    
    32.7
    %
    
    
    31.2
    %
    
    
    1.5
    %
    
    
    
    
    
    
    32.7
    %
    
    
    30.3
    %
    
    
    2.4
    %Combined RatiosGross
    
    
    78.4
    %
    
    
    77.1
    %
    
    
    1.2
    %
    
    
    
    
    
    
    83.2
    %
    
    
    79.3
    %
    
    
    3.9
    %Net
    
    
    86.7
    %
    
    
    81.0
    %
    
    
    5.7
    %
    
    
    
    
    
    
    86.0
    %
    
    
    82.4
    %
    
    
    3.6
    %
 Consolidated Results of Operations for Three and Nine Months Ended September 30, 2009 and 2008
 Total revenues .
  Premiums earned .
 38




---



##### Table of Contents



Commission and fee income .
 Net investment income and net realized gains (losses) .
   Loss and loss adjustment expenses .
  Operating expenses.
 39




---



##### Table of Contents



Acquisition-related transaction costs.
 Interest expense.
 Other income (expense).
 Income tax expense .
   Net income and return on average equity .
  40




---



##### Table of Contents



Brokerage Insurance Segment Results of Operations
 Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in millions)
    
    2009
    
    2008
    
    Change
    
    Percent
    
    2009
    
    2008
    
    Change
    
    PercentRevenuesPremiums earnedGross premiums earned
    
    $
    205.1
    
    
    $
    124.2
    
    
    $
    80.9
    
    
    
    65.1
    %
    
    $
    569.2
    
    
    $
    375.1
    
    
    $
    194.1
    
    
    
    51.7
    %Less: ceded premiums earned
    
    
    (31.2
    )
    
    
    (41.6
    )
    
    
    10.4
    
    
    
    (24.9
    %)
    
    
    (94.5
    )
    
    
    (159.5
    )
    
    
    65.0
    
    
    
    (40.8
    %)Net premiums earned
    
    
    173.9
    
    
    
    82.6
    
    
    
    91.3
    
    
    
    110.5
    %
    
    
    474.7
    
    
    
    215.6
    
    
    
    259.1
    
    
    
    120.2
    %Ceding commission revenue
    
    
    3.9
    
    
    
    11.3
    
    
    
    (7.4
    )
    
    
    (65.3
    %)
    
    
    20.5
    
    
    
    48.2
    
    
    
    (27.7
    )
    
    
    (57.5
    %)Policy billing fees
    
    
    0.9
    
    
    
    0.5
    
    
    
    0.4
    
    
    
    91.8
    %
    
    
    2.2
    
    
    
    1.4
    
    
    
    0.8
    
    
    
    50.1
    %Total revenue
    
    
    178.7
    
    
    
    94.4
    
    
    
    84.3
    
    
    
    89.4
    %
    
    
    497.4
    
    
    
    265.2
    
    
    
    232.2
    
    
    
    87.5
    %ExpensesLoss and loss adjustment expensesGross loss and loss adjustment
expenses
    
    
    95.2
    
    
    
    55.0
    
    
    
    40.3
    
    
    
    73.2
    %
    
    
    290.4
    
    
    
    178.8
    
    
    
    111.6
    
    
    
    62.5
    %Less: ceded loss and loss
adjustment
expenses
    
    
    (1.4
    )
    
    
    (14.3
    )
    
    
    12.9
    
    
    
    (90.4
    %)
    
    
    (40.9
    )
    
    
    (67.1
    )
    
    
    26.2
    
    
    
    (39.0
    %)Net loss and loss adjustment
expenses
    
    
    93.8
    
    
    
    40.7
    
    
    
    53.2
    
    
    
    130.6
    %
    
    
    249.5
    
    
    
    111.7
    
    
    
    137.8
    
    
    
    123.4
    %Underwriting expensesDirect commission expenses
    
    
    35.8
    
    
    
    20.9
    
    
    
    14.9
    
    
    
    71.5
    %
    
    
    108.2
    
    
    
    62.9
    
    
    
    45.3
    
    
    
    72.2
    %Other underwriting expenses
    
    
    27.5
    
    
    
    16.7
    
    
    
    10.8
    
    
    
    64.6
    %
    
    
    73.6
    
    
    
    52.0
    
    
    
    21.6
    
    
    
    41.5
    %Total underwriting expenses
    
    
    63.3
    
    
    
    37.6
    
    
    
    25.7
    
    
    
    68.4
    %
    
    
    181.8
    
    
    
    114.9
    
    
    
    66.9
    
    
    
    58.3
    %Underwriting profit
    
    $
    21.6
    
    
    $
    16.1
    
    
    $
    5.4
    
    
    
    34.2
    %
    
    $
    66.1
    
    
    
    38.6
    
    
    $
    27.5
    
    
    
    70.9
    %Key MeasuresPremiums writtenGross premiums written
    
    $
    205.5
    
    
    $
    117.6
    
    
    $
    87.8
    
    
    
    74.7
    %
    
    $
    571.1
    
    
    $
    370.9
    
    
    $
    200.2
    
    
    
    54.0
    %Less: ceded premiums written
    
    
    (13.4
    )
    
    
    (11.9
    )
    
    
    (1.5
    )
    
    
    13.0
    %
    
    
    (37.7
    )
    
    
    (125.6
    )
    
    
    87.9
    
    
    
    (70.0
    %)Net premiums written
    
    $
    192.1
    
    
    $
    105.7
    
    
    $
    86.3
    
    
    
    81.6
    %
    
    $
    533.4
    
    
    $
    245.3
    
    
    $
    288.1
    
    
    
    117.5
    %Ceded premiums as a percent of
gross premiumsWritten
    
    
    6.5
    %
    
    
    10.1
    %
    
    
    
    
    
    
    
    
    
    
    6.6
    %
    
    
    33.9
    %Earned
    
    
    15.2
    %
    
    
    33.5
    %
    
    
    
    
    
    
    
    
    
    
    16.6
    %
    
    
    42.5
    %Loss RatiosGross
    
    
    46.4
    %
    
    
    44.3
    %
    
    
    
    
    
    
    
    
    
    
    51.0
    %
    
    
    47.7
    %Net
    
    
    54.0
    %
    
    
    49.3
    %
    
    
    
    
    
    
    
    
    
    
    52.6
    %
    
    
    51.8
    %Accident Year Loss RatiosGross
    
    
    54.6
    %
    
    
    51.3
    %
    
    
    
    
    
    
    
    
    
    
    53.5
    %
    
    
    50.7
    %Net
    
    
    54.0
    %
    
    
    53.1
    %
    
    
    
    
    
    
    
    
    
    
    53.7
    %
    
    
    53.9
    %Underwriting Expense RatiosGross
    
    
    30.4
    %
    
    
    29.9
    %
    
    
    
    
    
    
    
    
    
    
    31.6
    %
    
    
    30.2
    %Net
    
    
    33.6
    %
    
    
    31.3
    %
    
    
    
    
    
    
    
    
    
    
    33.5
    %
    
    
    30.3
    %Combined RatiosGross
    
    
    76.8
    %
    
    
    74.1
    %
    
    
    
    
    
    
    
    
    
    
    82.6
    %
    
    
    77.9
    %Net
    
    
    87.6
    %
    
    
    80.5
    %
    
    
    
    
    
    
    
    
    
    
    86.1
    %
    
    
    82.1
    %
  Brokerage Insurance Segment Results of Operations for Three and Nine Months Ended September 30,
2009 and 2008
 Gross premiums .
 41




---



##### Table of Contents



Ceded premiums .
  Net premiums .
 Ceding commission revenue.
 Loss and loss adjustment expenses and loss ratio .
   42




---



##### Table of Contents



Underwriting expenses and underwriting expense ratio
    Underwriting profit and combined ratio .
  43




---



##### Table of Contents



Specialty Business Segment Results of Operations
 Three Months Ended September 30,
    
    Nine Months Ended September 30,($ in millions)
    
    2009
    
    2008
    
    Change
    
    Percent
    
    2009
    
    2008
    
    Change
    
    PercentRevenuesPremiums earnedGross premiums earned
    
    $
    58.6
    
    
    $
    26.3
    
    
    $
    32.3
    
    
    
    122.8
    %
    
    $
    178.2
    
    
    $
    49.2
    
    
    $
    129.1
    
    
    
    262.6
    %Less: ceded premiums earned
    
    
    (8.5
    )
    
    
    (20.7
    )
    
    
    12.1
    
    
    
    (58.8
    %)
    
    
    (31.4
    )
    
    
    (38.0
    )
    
    
    6.5
    
    
    
    (17.2
    %)Net premiums earned
    
    
    50.1
    
    
    
    5.7
    
    
    
    44.5
    
    
    NM
    
    
    146.8
    
    
    
    11.2
    
    
    
    135.6
    
    
    NMCeding commission revenue
    
    
    3.0
    
    
    
    7.2
    
    
    
    (4.1
    )
    
    
    (57.8
    %)
    
    
    7.2
    
    
    
    12.4
    
    
    
    (5.2
    )
    
    
    (42.0
    %)Total
    
    
    53.2
    
    
    
    12.8
    
    
    
    40.3
    
    
    
    314.4
    %
    
    
    154.0
    
    
    
    23.6
    
    
    
    130.4
    
    
    NMExpensesLoss and loss adjustment expensesGross loss and loss
adjustment expenses
    
    
    31.2
    
    
    
    15.2
    
    
    
    16.1
    
    
    
    106.1
    %
    
    
    100.5
    
    
    
    28.4
    
    
    
    72.1
    
    
    
    253.6
    %Less: ceded loss and loss
adjustment expenses
    
    
    (4.3
    )
    
    
    (11.9
    )
    
    
    7.7
    
    
    
    (64.3
    %)
    
    
    (19.1
    )
    
    
    (22.0
    )
    
    
    2.9
    
    
    
    (13.1
    %)Net loss and loss
adjustment expenses
    
    
    27.0
    
    
    
    3.2
    
    
    
    23.8
    
    
    NM
    
    
    81.4
    
    
    
    6.4
    
    
    
    75.0
    
    
    NMUnderwriting expensesDirect commission expense
    
    
    14.5
    
    
    
    7.7
    
    
    
    6.8
    
    
    
    88.1
    %
    
    
    40.3
    
    
    
    13.8
    
    
    
    26.5
    
    
    
    192.3
    %Other underwriting expenses
    
    
    3.5
    
    
    
    1.2
    
    
    
    2.2
    
    
    
    186.0
    %
    
    
    11.0
    
    
    
    2.0
    
    
    
    8.9
    
    
    
    440.6
    %Total underwriting expenses
    
    
    17.9
    
    
    
    8.9
    
    
    
    9.0
    
    
    
    101.3
    %
    
    
    51.3
    
    
    
    15.8
    
    
    
    35.5
    
    
    
    224.1
    %Underwriting profit
    
    $
    8.2
    
    
    $
    0.7
    
    
    $
    7.5
    
    
    NM
    
    $
    21.3
    
    
    $
    1.4
    
    
    $
    19.9
    
    
    NMKey MeasuresPremiums writtenGross premiums written
    
    $
    77.3
    
    
    $
    39.6
    
    
    $
    37.8
    
    
    
    95.4
    %
    
    $
    172.4
    
    
    $
    87.4
    
    
    $
    85.0
    
    
    
    97.2
    %Less: ceded premiums written
    
    
    (10.7
    )
    
    
    (30.7
    )
    
    
    20.0
    
    
    
    (65.1
    %)
    
    
    (25.1
    )
    
    
    (67.1
    )
    
    
    42.0
    
    
    
    (62.6
    %)Net premiums written
    
    $
    66.6
    
    
    $
    8.9
    
    
    $
    57.8
    
    
    NM
    
    $
    147.3
    
    
    $
    20.3
    
    
    $
    127.0
    
    
    NMNM is shown where percentage change exceeds 500%Ceded premiums as a percent
of gross premiumsWritten
    
    
    13.9
    %
    
    
    77.6
    %
    
    
    
    
    
    
    
    
    
    
    14.6
    %
    
    
    76.8
    %Earned
    
    
    14.5
    %
    
    
    78.5
    %
    
    
    
    
    
    
    
    
    
    
    17.6
    %
    
    
    77.2
    %Loss RatiosGross
    
    
    53.3
    %
    
    
    57.6
    %
    
    
    
    
    
    
    
    
    
    
    56.4
    %
    
    
    57.8
    %Net
    
    
    53.8
    %
    
    
    56.8
    %
    
    
    
    
    
    
    
    
    
    
    55.5
    %
    
    
    57.5
    %Accident Year Loss RatiosGross
    
    
    52.5
    %
    
    
    57.6
    %
    
    
    
    
    
    
    
    
    
    
    56.7
    %
    
    
    57.8
    %Net
    
    
    54.3
    %
    
    
    56.8
    %
    
    
    
    
    
    
    
    
    
    
    56.4
    %
    
    
    57.5
    %Underwriting Expense RatiosGross
    
    
    30.6
    %
    
    
    33.8
    %
    
    
    
    
    
    
    
    
    
    
    28.8
    %
    
    
    32.2
    %Net
    
    
    29.7
    %
    
    
    30.6
    %
    
    
    
    
    
    
    
    
    
    
    30.0
    %
    
    
    30.4
    %Combined RatiosGross
    
    
    83.8
    %
    
    
    91.4
    %
    
    
    
    
    
    
    
    
    
    
    85.2
    %
    
    
    90.0
    %Net
    
    
    83.6
    %
    
    
    87.4
    %
    
    
    
    
    
    
    
    
    
    
    85.5
    %
    
    
    87.8
    %
  Specialty Business Segment Results of Operations for Three and Nine Months Ended September 30, 2009
and 2008
 Gross premiums.
 44




---



##### Table of Contents



Ceded premiums.
 Net premiums.
 Loss and loss adjustment expenses
  Underwriting expenses and underwriting expense ratio.
    Underwriting profit and combined ratio.
 45




---



##### Table of Contents



Insurance Services Segment Results of Operations
 Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in millions)
    
    2009
    
    2008
    
    Change
    
    Percent
    
    2009
    
    2008
    
    Change
    
    PercentRevenueDirect commission revenue from
managing general
    
    $
    (0.3
    )
    
    $
    15.3
    
    
    $
    (15.6
    )
    
    
    (101.8
    %)
    
    $
    2.0
    
    
    $
    35.4
    
    
    $
    (33.3
    )
    
    
    (94.3
    %)Claims administration revenue
    
    
    0.1
    
    
    
    1.6
    
    
    
    (1.5
    )
    
    
    (95.6
    %)
    
    
    1.1
    
    
    
    3.6
    
    
    
    (2.5
    )
    
    
    (70.6
    %)Other administration revenue
    
    
    0.1
    
    
    
    0.8
    
    
    
    (0.8
    )
    
    
    (93.7
    %)
    
    
    0.5
    
    
    
    2.4
    
    
    
    (2.0
    )
    
    
    (80.7
    %)Reinsurance intermediary fees
    
    
    0.4
    
    
    
    0.3
    
    
    
    0.2
    
    
    
    63.5
    %
    
    
    0.7
    
    
    
    0.5
    
    
    
    0.2
    
    
    
    33.0
    %Policy billing fees
    
    
    (0.1
    )
    
    
    0.1
    
    
    
    (0.2
    )
    
    
    (160.0
    %)
    
    
    
    
    
    
    0.3
    
    
    
    (0.3
    )
    
    
    (92.6
    %)Total revenue
    
    
    0.2
    
    
    
    18.1
    
    
    
    (17.9
    )
    
    
    (98.8
    %)
    
    
    4.3
    
    
    
    42.2
    
    
    
    (37.9
    )
    
    
    (89.9
    %)ExpensesDirect commission expenses paid to
producers
    
    
    0.1
    
    
    
    6.9
    
    
    
    (6.8
    )
    
    
    (99.2
    %)
    
    
    1.7
    
    
    
    15.4
    
    
    
    (13.7
    )
    
    
    (89.1
    %)Other insurance services expenses
    
    
    
    
    
    
    3.2
    
    
    
    (3.2
    )
    
    
    (100.4
    %)
    
    
    1.0
    
    
    
    8.0
    
    
    
    (6.9
    )
    
    
    (87.1
    %)Claims expense reimbursement to TICNY
    
    
    0.1
    
    
    
    1.6
    
    
    
    (1.5
    )
    
    
    (95.6
    %)
    
    
    1.1
    
    
    
    3.6
    
    
    
    (2.5
    )
    
    
    (70.6
    %)Total
    
    
    0.1
    
    
    
    11.7
    
    
    
    (11.6
    )
    
    
    (99.0
    %)
    
    
    3.8
    
    
    
    26.9
    
    
    
    (23.2
    )
    
    
    (86.1
    %)Insurance services pre-tax income
    
    $
    0.1
    
    
    $
    6.4
    
    
    $
    (6.3
    )
    
    
    (98.4
    %)
    
    $
    0.5
    
    
    $
    15.2
    
    
    $
    (14.7
    )
    
    
    (96.6
    %)Premiums produced by TRM on behalf
of issuing companies
    
    $
    0.3
    
    
    $
    46.6
    
    
    $
    (46.3
    )
    
    
    (99.3
    %)
    
    $
    11.5
    
    
    $
    106.0
    
    
    $
    (94.5
    )
    
    
    (89.1
    %)
 Insurance Services Segment Results of Operations for Three and Nine Months Ended September 30, 2009
and 2008
 Total revenues.
 Direct commission expense .
 Other insurance services expenses .
 Claims expense reimbursement .
 Pre-tax income .
 46




---



##### Table of Contents



Investments
 Portfolio Summary
  Cost or
    
    Gross
    
    Gross Unrealized Losses
    
    
    
    
    
    % ofAmortized
    
    Unrealized
    
    Less than 12
    
    More than 12
    
    Fair
    
    Fair($ in thousands)
    
    Cost
    
    Gains
    
    Months
    
    Months
    
    Value
    
    ValueSeptember 30, 2009U.S. Treasury securities
    
    $
    35,267
    
    
    $
    352
    
    
    $
    (24
    )
    
    $
    
    
    
    $
    35,594
    
    
    
    2.4
    %U.S. Agency securities
    
    
    9,215
    
    
    
    243
    
    
    
    (99
    )
    
    
    
    
    
    
    9,359
    
    
    
    0.6
    %Municipal bonds
    
    
    428,120
    
    
    
    29,523
    
    
    
    (13
    )
    
    
    (97
    )
    
    
    457,533
    
    
    
    31.3
    %Corporate and other bonds
    
    
    450,708
    
    
    
    26,581
    
    
    
    (523
    )
    
    
    (3,078
    )
    
    
    473,688
    
    
    
    32.4
    %Commercial, residential and
asset-backed securities
    
    
    400,758
    
    
    
    25,715
    
    
    
    (209
    )
    
    
    (15,427
    )
    
    
    410,837
    
    
    
    28.1
    %Total fixed-maturity securities
    
    
    1,324,067
    
    
    
    82,414
    
    
    
    (868
    )
    
    
    (18,602
    )
    
    
    1,387,011
    
    
    
    94.8
    %Equity securities
    
    
    79,089
    
    
    
    653
    
    
    
    (2,658
    )
    
    
    (987
    )
    
    
    76,097
    
    
    
    5.2
    %Total
    
    $
    1,403,156
    
    
    $
    83,067
    
    
    $
    (3,526
    )
    
    $
    (19,589
    )
    
    $
    1,463,108
    
    
    
    100.0
    %December 31, 2008U.S. Treasury securities
    
    $
    26,482
    
    
    $
    524
    
    
    $
    
    
    
    $
    
    
    
    $
    27,006
    
    
    $
    5.0
    %U.S. Agency securities
    
    
    361
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    399
    
    
    
    0.1
    %Municipal bonds
    
    
    179,734
    
    
    
    2,865
    
    
    
    (2,485
    )
    
    
    (166
    )
    
    
    179,948
    
    
    
    33.3
    %Corporate and other bonds
    
    
    210,007
    
    
    
    932
    
    
    
    (13,948
    )
    
    
    (10,016
    )
    
    
    186,975
    
    
    
    34.6
    %Commercial, residential and
asset-backed securities
    
    
    164,885
    
    
    
    1,838
    
    
    
    (10,603
    )
    
    
    (20,290
    )
    
    
    135,830
    
    
    
    25.1
    %Total fixed-maturity securities
    
    
    581,470
    
    
    
    6,197
    
    
    
    (27,037
    )
    
    
    (30,472
    )
    
    
    530,159
    
    
    
    98.0
    %Equity securities
    
    
    12,726
    
    
    
    5
    
    
    
    (60
    )
    
    
    (1,857
    )
    
    
    10,814
    
    
    
    2.0
    %Total
    
    $
    594,196
    
    
    $
    6,202
    
    
    $
    (27,096
    )
    
    $
    (32,329
    )
    
    $
    540,973
    
    
    $
    100.0
    %
 Credit Rating of Fixed-Maturity Securities
  September 30, 2009
    
    December 31, 2008Percentage of
    
    
    
    
    
    Percentage of($ in thousands)
    
    Fair Value
    
    Fair Value
    
    Fair Value
    
    Fair ValueRatingU.S. Treasury securities
    
    $
    35,595
    
    
    
    2.6
    %
    
    $
    27,006
    
    
    
    5.1
    %AAA
    
    
    514,505
    
    
    
    37.1
    %
    
    
    187,377
    
    
    
    35.3
    %AA
    
    
    287,936
    
    
    
    20.8
    %
    
    
    110,601
    
    
    
    20.9
    %A
    
    
    264,920
    
    
    
    19.1
    %
    
    
    113,651
    
    
    
    21.4
    %BBB
    
    
    160,374
    
    
    
    11.6
    %
    
    
    62,566
    
    
    
    11.8
    %Below BBB
    
    
    123,681
    
    
    
    8.9
    %
    
    
    28,958
    
    
    
    5.5
    %Total
    
    $
    1,387,011
    
    
    
    100.0
    %
    
    $
    530,159
    
    
    
    100.0
    %
 Fixed- Maturity Investments with Third Party Guarantees
  47




---



##### Table of Contents



With
    
    Without($ in thousands)
    
    Guarantee
    
    GuaranteeAAA
    
    $
    3,942
    
    
    $
    2,041AA
    
    
    116,007
    
    
    
    94,953A
    
    
    42,544
    
    
    
    56,967BBB
    
    
    
    
    
    
    529BB
    
    
    984
    
    
    
    984No underlying rating
    
    
    
    
    
    
    8,003Total
    
    $
    163,477
    
    
    $
    163,477
  Guaranteed
    
    Percent($ in thousands)
    
    Amount
    
    of TotalNational Public Finance Guarantee Corp.
    
    $
    69,274
    
    
    
    42
    %Financial Security Assurance
    
    
    45,610
    
    
    
    28
    %Ambac Financial Corp.
    
    
    18,592
    
    
    
    11
    %Berkshire Hathaway Assurance Corp.
    
    
    5,899
    
    
    
    4
    %Others
    
    
    24,102
    
    
    
    15
    %Total
    
    $
    163,477
    
    
    
    100
    %
 Fair Value Consideration
      48




---



##### Table of Contents



Level 3 AssetsAssets Carried at
    
    Fair Value
    
    as a Percentage ofFair Value at
    
    of Level 3
    
    Total Assets Carried($ in thousands)
    
    September 30, 2009
    
    Assets
    
    at Fair ValueFixed-maturity investments
    
    $
    1,387,011
    
    
    $
    58,917
    
    
    
    4.2
    %Equity investments
    
    
    76,097
    
    
    
    
    
    
    
    0.0
    %Total investments available for sale
    
    
    1,463,108
    
    
    
    58,917
    
    
    
    4.0
    %Cash and cash equivalents
    
    
    150,625
    
    
    
    
    
    
    
    0.0
    %Total
    
    $
    1,613,733
    
    
    $
    58,917
    
    
    
    3.7
    %
 Unrealized Losses
    49




---



##### Table of Contents



Less than 12 Months
    
    12 Months or Longer
    
    TotalFair
    
    Unrealized
    
    
    
    
    
    Fair
    
    Unrealized
    
    
    
    
    
    Aggregate
    
    Unrealized($ in thousands)
    
    No.
    
    Value
    
    Losses
    
    No.
    
    Value
    
    Losses
    
    No.
    
    Fair Value
    
    LossesSeptember 30, 2009U.S. Treasury securities
    
    
    6
    
    
    $
    5,007
    
    
    $
    (24
    )
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    6
    
    
    $
    5,007
    
    
    $
    (24
    )U.S. Agency securities
    
    
    6
    
    
    
    1,021
    
    
    
    (99
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    1,021
    
    
    
    (99
    )Municipal bonds
    
    
    1
    
    
    
    530
    
    
    
    (13
    )
    
    
    5
    
    
    
    2,618
    
    
    
    (97
    )
    
    
    6
    
    
    
    3,148
    
    
    
    (110
    )Corporate and other
bondsFinance
    
    
    13
    
    
    
    4,101
    
    
    
    (230
    )
    
    
    26
    
    
    
    20,692
    
    
    
    (2,045
    )
    
    
    39
    
    
    
    24,793
    
    
    
    (2,275
    )Industrial
    
    
    32
    
    
    
    10,637
    
    
    
    (291
    )
    
    
    43
    
    
    
    18,598
    
    
    
    (981
    )
    
    
    75
    
    
    
    29,235
    
    
    
    (1,272
    )Utilities
    
    
    2
    
    
    
    293
    
    
    
    (2
    )
    
    
    2
    
    
    
    598
    
    
    
    (52
    )
    
    
    4
    
    
    
    891
    
    
    
    (54
    )Commercial mortgage-
backed securities
    
    
    2
    
    
    
    1,444
    
    
    
    (83
    )
    
    
    23
    
    
    
    22,138
    
    
    
    (8,657
    )
    
    
    25
    
    
    
    23,582
    
    
    
    (8,740
    )Residential mortgage-
backed securitiesAgency backed
    
    
    6
    
    
    
    3,175
    
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    3,175
    
    
    
    (5
    )Non-agency backed
    
    
    3
    
    
    
    99
    
    
    
    (4
    )
    
    
    37
    
    
    
    18,776
    
    
    
    (4,962
    )
    
    
    40
    
    
    
    18,875
    
    
    
    (4,966
    )Asset-backed securities
    
    
    3
    
    
    
    156
    
    
    
    (117
    )
    
    
    11
    
    
    
    3,934
    
    
    
    (1,808
    )
    
    
    14
    
    
    
    4,090
    
    
    
    (1,925
    )Total fixed-maturity
securities
    
    
    74
    
    
    
    26,463
    
    
    
    (868
    )
    
    
    147
    
    
    
    87,354
    
    
    
    (18,602
    )
    
    
    221
    
    
    
    113,817
    
    
    
    (19,470
    )Preferred stocks
    
    
    8
    
    
    
    67,333
    
    
    
    (2,605
    )
    
    
    5
    
    
    
    4,564
    
    
    
    (987
    )
    
    
    13
    
    
    
    71,897
    
    
    
    (3,592
    )Common stocks
    
    
    2
    
    
    
    84
    
    
    
    (53
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    84
    
    
    
    (53
    )Total
    
    
    84
    
    
    $
    93,880
    
    
    $
    (3,526
    )
    
    
    152
    
    
    $
    91,918
    
    
    $
    (19,589
    )
    
    
    236
    
    
    $
    185,798
    
    
    $
    (23,115
    )December 31, 2008Municipal bonds
    
    
    53
    
    
    $
    49,879
    
    
    $
    (2,485
    )
    
    
    1
    
    
    $
    371
    
    
    $
    (166
    )
    
    
    54
    
    
    $
    50,250
    
    
    $
    (2,651
    )Corporate and other
bondsFinance
    
    
    55
    
    
    
    42,007
    
    
    
    (6,003
    )
    
    
    38
    
    
    
    20,575
    
    
    
    (4,173
    )
    
    
    93
    
    
    
    62,582
    
    
    
    (10,176
    )Industrial
    
    
    110
    
    
    
    72,787
    
    
    
    (7,740
    )
    
    
    32
    
    
    
    17,701
    
    
    
    (5,639
    )
    
    
    142
    
    
    
    90,488
    
    
    
    (13,379
    )Utilities
    
    
    5
    
    
    
    1,974
    
    
    
    (205
    )
    
    
    2
    
    
    
    446
    
    
    
    (204
    )
    
    
    7
    
    
    
    2,420
    
    
    
    (409
    )Commercial mortgage-
backed securities
    
    
    15
    
    
    
    13,997
    
    
    
    (4,399
    )
    
    
    22
    
    
    
    16,431
    
    
    
    (16,626
    )
    
    
    37
    
    
    
    30,427
    
    
    
    (21,026
    )Residential mortgage-
backed securitiesAgency backed
    
    
    6
    
    
    
    3,408
    
    
    
    (16
    )
    
    
    1
    
    
    
    582
    
    
    
    (20
    )
    
    
    7
    
    
    
    3,990
    
    
    
    (36
    )Non-agency backed
    
    
    32
    
    
    
    12,676
    
    
    
    (3,536
    )
    
    
    16
    
    
    
    9,953
    
    
    
    (3,594
    )
    
    
    48
    
    
    
    22,629
    
    
    
    (7,130
    )Asset-backed securities
    
    
    20
    
    
    
    6,481
    
    
    
    (2,652
    )
    
    
    2
    
    
    
    552
    
    
    
    (49
    )
    
    
    22
    
    
    
    7,032
    
    
    
    (2,701
    )Total fixed-maturity

securities
    
    
    296
    
    
    
    203,208
    
    
    
    (27,037
    )
    
    
    114
    
    
    
    66,610
    
    
    
    (30,472
    )
    
    
    410
    
    
    
    269,818
    
    
    
    (57,508
    )Preferred stocks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    3,694
    
    
    
    (1,857
    )
    
    
    6
    
    
    
    3,694
    
    
    
    (1,857
    )Common stocks
    
    
    1
    
    
    
    1,440
    
    
    
    (60
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1,440
    
    
    
    (60
    )Total
    
    
    297
    
    
    $
    204,648
    
    
    $
    (27,096
    )
    
    
    120
    
    
    $
    70,304
    
    
    $
    (32,329
    )
    
    
    417
    
    
    $
    274,952
    
    
    $
    (59,424
    )
   50




---



##### Table of Contents



Unrealized LossPercent of
    
    Fair Value by Security RatingFair
    
    
    
    
    
    Amortized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BB or($ in thousands)
    
    Count
    
    Value
    
    Amount
    
    Cost
    
    AAA
    
    AA
    
    A
    
    BBB
    
    LowerU.S. Treasury securities
    
    
    6
    
    
    $
    5,007
    
    
    $
    (24
    )
    
    
    0
    %
    
    
    100
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %U.S. Agency securities
    
    
    6
    
    
    
    1,021
    
    
    
    (99
    )
    
    
    -9
    %
    
    
    0
    %
    
    
    99
    %
    
    
    0
    %
    
    
    0
    %
    
    
    1
    %Municipal bonds
    
    
    7
    
    
    
    3,148
    
    
    
    (110
    )
    
    
    -3
    %
    
    
    34
    %
    
    
    0
    %
    
    
    19
    %
    
    
    15
    %
    
    
    31
    %Corporate and other bonds
    
    
    119
    
    
    
    54,920
    
    
    
    (3,601
    )
    
    
    -6
    %
    
    
    0
    %
    
    
    8
    %
    
    
    19
    %
    
    
    26
    %
    
    
    48
    %Commercial mortgage-
backed securities
    
    
    25
    
    
    
    23,582
    
    
    
    (8,740
    )
    
    
    -27
    %
    
    
    83
    %
    
    
    0
    %
    
    
    0
    %
    
    
    13
    %
    
    
    4
    %Residential mortgage-
backed securities
    
    
    40
    
    
    
    18,875
    
    
    
    (4,967
    )
    
    
    -21
    %
    
    
    24
    %
    
    
    4
    %
    
    
    29
    %
    
    
    13
    %
    
    
    30
    %Asset-backed securities
    
    
    14
    
    
    
    4,090
    
    
    
    (1,925
    )
    
    
    -32
    %
    
    
    16
    %
    
    
    6
    %
    
    
    13
    %
    
    
    0
    %
    
    
    65
    %Equities
    
    
    119
    
    
    
    71,981
    
    
    
    (3,645
    )
    
    
    -5
    %
    
    
    0
    %
    
    
    0
    %
    
    
    40
    %
    
    
    38
    %
    
    
    22
    %
  Liquidity and Capital Resources
 Cash Flows
    Nine Months EndedCash Flow Summary
    
    September 30,($ in thousands)
    
    2009
    
    2008Cash provided by (used in):Operating activities
    
    $
    133,595
    
    
    $
    42,051Investing activities
    
    
    (111,840
    )
    
    
    (14,790
    )Financing activities
    
    
    (7,383
    )
    
    
    (3,544
    )Net increase in cash and cash equivalents
    
    
    14,372
    
    
    
    23,717Cash and cash equivalents, beginning of year
    
    
    136,253
    
    
    
    77,679Cash and cash equivalents, end of period
    
    $
    150,625
    
    
    $
    101,396
   51




---



##### Table of Contents



Subordinated Debentures
     52




---



##### Table of Contents



Off-Balance Sheet Arrangements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
    Sensitivity Analysis
     53




---



##### Table of Contents



Estimated Increase
    
    Estimated Percentage(Decrease) in Fair Value
    
    Increase (Decrease)Change in interest rate
    
    ($ in thousands)
    
    in Fair Value300 basis point rise
    
    
    (214,299
    )
    
    
    (14.7
    %)200 basis point rise
    
    
    (146,653
    )
    
    
    (10.0
    %)100 basis point rise
    
    
    (75,063
    )
    
    
    (5.1
    %)As of September 30, 2009
    
    
    
    
    
    
    0.0
    %100 basis point decline
    
    
    76,641
    
    
    
    5.2
    %
      
 Item 4. Controls and Procedures
  54




---



##### Table of Contents



Changes in internal control over financial reporting
 
 55




---



##### Table of Contents



Part II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
 inter alia inter alia
 
 Item 1A. Risk Factors
    Risks Relating to the Proposed Merger with Specialty Underwriters Alliance, Inc. (SUA)
 Failure to complete the merger may negatively impact Towers business, financial condition,
results of operations, prospects and stock price.
  
    
    SUA stockholders adoption of the merger agreement and approval of the merger;
    
    the absence of laws and regulatory actions by governmental authorities that impose terms,
conditions, obligations or restrictions upon Tower, SUA or their respective subsidiaries,
that would, individually or in the aggregate, reasonably be expected to have a regulatory
material adverse effect, as defined in the merger agreement; and
    
    other customary closing conditions.
  
    
    the current market price of Towers common stock may reflect a market assumption that the
merger will occur and a failure to complete the merger could result in a negative perception
of Tower by equity investors and a resulting decline in the market price of Towers common
stock;
 
    
    Tower may be required to reimburse SUA for certain reasonable, out-of-pocket transaction
expenses, up to $1,000,000;
 56




---



##### Table of Contents




    
    Tower is expected to incur substantial transaction costs in connection with the merger; and
    
    Tower would not realize any of the anticipated benefits of having completed the merger.
  The announcement and pendency of the merger could have an adverse effect on Towers stock
price, business, financial condition, results of operations or business prospects.
  
    
    employees may experience uncertainty regarding their future roles with the combined company,
which might adversely affect Towers ability to retain, recruit and motivate key personnel;
 
    
    the attention of Tower management may be directed toward the completion of the merger and
transaction-related considerations and may be diverted from the day-to-day business
operations of the Company, and matters related to the merger may require commitments of time
and resources that could otherwise have been devoted to other opportunities that might have
been beneficial to Tower; and
 
    
    third parties with business relationships with Tower may seek to terminate and/or
renegotiate their relationships with Tower as a result of the merger, whether pursuant to the
terms of their existing agreements with Tower or otherwise.
  Risk Factors Relating to Tower Following the Merger
 The parties must obtain governmental and other consents to complete the merger. If these
consents are delayed, not granted or granted with unacceptable conditions, it may jeopardize or
postpone the completion of the merger, result in additional expenditures of money and resources
and/or reduce the anticipated benefits of the merger.
  There may be unexpected delays in the consummation of the merger, which could impact Towers
ability to timely achieve cost savings associated with the merger.
  57




---



##### Table of Contents



Combining Tower and SUA may be more difficult than expected.
  Adverse economic factors including recession, inflation, periods of high unemployment or lower
economic activity could result in the combined company selling fewer policies than expected and/or
an increase in premium defaults which, in turn, could affect the combined companys growth and
profitability.
  The loss of key personnel could have a material adverse effect on the combined companys
business, financial condition, results of operations and prospects.
  The market price of Tower common stock and Towers earnings per share may decline as a result
of the merger.
  Currently pending or future litigation or governmental proceedings could result in material
adverse consequences, including injunctions, judgments or settlements.
  58




---



##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 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
 59




---



##### Table of Contents



Signatures
  Tower Group, Inc.


RegistrantDate: November 6, 2009
    /s/ Michael H. LeeMichael H. LeeChairman of the Board,

President and Chief Executive OfficerDate: November 6, 2009
    /s/ Francis M. ColalucciFrancis M. Colalucci

Senior Vice President,

Chief Financial Officer and Treasurer 60