##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934For the fiscal year ended December 31, 2009Oro
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934For the transition period from       to
 Commission File Number: 000-50990
 Tower Group, Inc.
  Delaware
    
    13-3894120(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)120 Broadway, 31st FloorNew York, New York
    
    10271(Address of principal executive offices)
    
    (Zip Code)
 (212) 655-2000  (Registrants telephone number, including area code)
 Securities registered pursuant to Section 12(b) of the Act:
 Title of each class
    
    Name of each exchange on which registeredCommon Stock, $0.0l par value per share
    
    NASDAQ Global Select Market
 Securities registered pursuant to Section 12(g) of the Act:
None
  o þ
  o þ
 þ o
 o o
 o
  Large accelerated filerþ
    
    Accelerated filer o
    
    Non-accelerated filero
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE:




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##### 



TABLE OF CONTENTS
  
 PART I
    
    
    
    
    1Item 1.
    
    Business
    
    
    1Item 1A.
    
    Risk Factors
    
    
    26Item 1B.
    
    Unresolved Staff Comments
    
    
    40Item 2.
    
    Properties
    
    
    40Item 3.
    
    Legal Proceedings
    
    
    40Item 4.
    
    Reserved
    
    
    40PART II
    
    
    
    
    41Item 5.
    
    Market For Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    41Item 6.
    
    Selected Consolidated Financial Information
    
    
    43Item 7.
    
    Managements Discussion And Analysis Of Financial Condition And Results Of Operations
    
    
    44Item 7A.
    
    Quantitative And Qualitative Disclosures About Market Risk
    
    
    75Item 8.
    
    Financial Statements And Supplementary Data
    
    
    F-1Item 9.
    
    Changes In And Disagreements With Accountants Or Accounting And Financial Disclosure
    
    
    78Item 9A.
    
    Controls And Procedures
    
    
    78Item 9B.
    
    Other Information
    
    
    79PART III
    
    
    
    
    79Item 10.
    
    Directors And Executive Officers Of The Registrant
    
    
    79Item 11.
    
    Executive Compensation
    
    
    79Item 12.
    
    Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters
    
    
    79Item 13.
    
    Certain Relationships And Related Transactions, And Director Independence
    
    
    79Item 14.
    
    Principal Accountant Fees And Services
    
    
    79PART IV
    
    
    
    
    80Item 15.
    
    Exhibits, Financial Statement Schedules
    
    
    80EX-21.1EX-23.1EX-31.1EX-31.2EX-32




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##### Table of Contents



PART I
 
 Item 1. Business
 Overview
     Competitive Strengths and Strategies
  Diversified Business Platform and Market Segmentation Expertise.
 Underwriting Expertise.
 1




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Effective Use of Capital.
 Acquisitions Capability .
 Strategic Relationship and Agreements with CastlePoint: February 2006 - February 2009
      2




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Acquisitions
  Hermitage
  AequiCap
  Specialty Underwriters Alliance
  OneBeacon Personal Lines Division
  Business Segments
  3




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Brokerage Insurance Segment
     4




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##### Table of Contents



December 31,($ in millions)
    
    2009
    
    
    2008
    
    
    2007Commercial package
    
    
    $ 287.1
    
    
    
    $ 202.3
    
    
    
    $ 190.6Landlord
    
    
    27.3
    
    
    
    20.3
    
    
    
    22.4Business owners
    
    
    38.5
    
    
    
    32.6
    
    
    
    23.0Total commercial multiple-peril
    
    
    352.9
    
    
    
    255.2
    
    
    
    236.0Monoline commercial general liability
    
    
    90.2
    
    
    
    50.5
    
    
    
    51.9Workers compensation
    
    
    83.6
    
    
    
    17.5
    
    
    
    37.5Commercial automobile
    
    
    71.4
    
    
    
    72.6
    
    
    
    60.2Personal automobile
    
    
    10.6
    
    
    
    9.9
    
    
    
    7.5Homeowners
    
    
    167.1
    
    
    
    85.0
    
    
    
    85.1Fire and allied Lines
    
    
    30.7
    
    
    
    19.3
    
    
    
    19.7All lines
    
    
    $ 806.5
    
    
    
    $ 510.0
    
    
    
    $ 497.9
 Specialty Business Segment
       Year Ended December 31,($ in millions)
    
    2009
    
    
    2008
    
    
    2007Programs
    
    
    $ 213.4
    
    
    
    $ 124.8
    
    
    
    $ 26.1Reinsurance
    
    
    50.8
    
    
    
    -
    
    
    
    -Total
    
    
    $ 264.2
    
    
    
    $ 124.8
    
    
    
    $ 26.1
 Insurance Services Segment
  5




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##### Table of Contents



Year Ended December 31,($ in millions)
    
    2009
    
    
    2008
    
    
    2007Managed Premiums
    
    
    $ 11.7
    
    
    
    $ 175.4
    
    
    
    $ 85.1Fee Income
    
    
    $ 5.1
    
    
    
    $ 68.5
    
    
    
    $ 33.3
 Products and Services
  
    
    Commercial Multiple-peril Packages.Coverage offered under our commercial package and
business owners policies combines property, liability (including general liability and
products and completed operations), business interruption, equipment breakdown, fidelity and
inland marine coverages tailored for commercial businesses and enterprises. Commercial
packages and business owners policies are generally offered by our Brokerage Insurance
segment.
    
    Fire and Allied Lines and Inland Marine.We write fire and allied lines policies for
individuals and businesses. Individual dwelling policies generally include personal property
with optional liability coverage that provide an alternative to the homeowners policy for the
personal lines customer. Commercial fire and allied lines policies provide protection for
damage to commercial buildings and their contents, and these policies may be utilized in
selected circumstances as an alternative to a commercial package policy. We write inland
marine insurance protection for the property of businesses that is not at a fixed location and
for items of personal property that are easily transportable, typically including builders
risk, contractors equipment and installation, domestic transit and transportation, fine arts,
property floaters and leased property. These products are offered by our Brokerage Insurance
segment and our Specialty Business segment through their respective distribution systems.
    
    Other Liability.In our Brokerage Insurance segment, we write other liability policies for
individuals and business owners including mono-line commercial general liability (generally
for risks that do not have property exposure or whose property exposure is insured elsewhere)
and commercial umbrella policies. Also, in our Specialty Business segment we write General
Liability policies for businesses in programs that are tailored to narrowly defined industry
classes, such as small public entities.
    
    Workers Compensation.We write workers compensation policies, which are a statutory
coverage requirement in almost every state to protect employees in case of injury on the job,
and the employer from liability for an accident involving an employee. In our Brokerage
Insurance segment we write workers compensation policies generally for small and medium
businesses, and in our Specialty Business segment we write workers compensation policies in
programs targeted to specific industry classes, such as workers in the healthcare industry.
    
    Commercial Automobile.We write coverage for automobile policies by providing automobile
liability, collision and comprehensive insurance including commercial and personal automobile
policies for both fleet and non-fleet risks (personal automobile business is described in the
bullet below). We write commercial Automobile policies through our Brokerage Insurance segment
that focuses on business automobiles and small trucks for businesses other than transportation
companies. Our Specialty Business segment focuses on trucking businesses and other specialty
transportation businesses.
    
    Personal Automobile.We write personal automobile policies on a limited basis in our
Brokerage Insurance segment, and we intend to increase our personal automobile business after
the acquisition of the OneBeacon Personal Lines Division. We also write a limited amount of
non-standard personal automobile business in our Specialty Business segment through several
targeted programs for this market tier.
    
    Homeowners and Personal Dwellings. Our homeowners policy is a multiple-peril policy,
providing property and liability coverages for one and two-family, owner-occupied residences
or additional coverage to the homeowner for personal
umbrella and personal inland marine. We write this business through our Brokerage Insurance
segment.
 6




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For the year ended December 31,2009
    
    
    2008
    
    
    2007Gross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossPremium
    
    
    Gross Loss
    
    
    Premium
    
    
    Gross Loss
    
    
    Premium
    
    
    Gross Loss($ in millions)
    
    Earned
    
    
    Ratio
    
    
    Earned
    
    
    Ratio
    
    
    Earned
    
    
    RatioCommercial multiple-peril
    
    
    $ 349.6
    
    
    
    52.0
    %
    
    
    $ 242.2
    
    
    
    51.5
    %
    
    
    $ 221.1
    
    
    
    51.8
    %Other liability
    
    
    150.9
    
    
    
    52.3
    %
    
    
    63.2
    
    
    
    42.6
    %
    
    
    72.9
    
    
    
    64.2
    %Workers Compensation
    
    
    216.2
    
    
    
    54.4
    %
    
    
    88.4
    
    
    
    47.6
    %
    
    
    54.1
    
    
    
    34.1
    %Commercial Automobile
    
    
    122.4
    
    
    
    58.5
    %
    
    
    77.8
    
    
    
    61.1
    %
    
    
    54.3
    
    
    
    54.6
    %Homeowners
    
    
    145.9
    
    
    
    48.9
    %
    
    
    83.2
    
    
    
    35.5
    %
    
    
    92.7
    
    
    
    39.9
    %Fire and allied lines and inland marine
    
    
    26.6
    
    
    
    42.5
    %
    
    
    16.9
    
    
    
    57.7
    %
    
    
    19.1
    
    
    
    53.5
    %Personal auto
    
    
    34.7
    
    
    
    98.7
    %
    
    
    6.6
    
    
    
    116.0
    %
    
    
    7.9
    
    
    
    101.9
    %All Lines
    
    
    $ 1,046.3
    
    
    
    54.2
    %
    
    
    $ 578.3
    
    
    
    49.9
    %
    
    
    $ 522.1
    
    
    
    50.7
    %
 Organizational Structure
      Year Ended December 31,($ in millions)
    
    2009
    
    
    2008
    
    
    2007Northeast Region
    
    
    $ 724.4
    
    
    
    $ 469.5
    
    
    
    $ 501.3Southeast Region
    
    
    80.0
    
    
    
    23.5
    
    
    
    11.3Midwest Region
    
    
    18.6
    
    
    
    6.2
    
    
    
    3.5Southwest Region
    
    
    32.6
    
    
    
    11.7
    
    
    
    0.5West Region
    
    
    164.2
    
    
    
    123.9
    
    
    
    7.4Total
    
    
    $ 1,019.8
    
    
    
    $ 634.8
    
    
    
    $ 524.0
 7




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Distribution
       December 31,2009
    
    
    2008
    
    
    2007Retail Agencies
    
    
    1,173
    
    
    
    940
    
    
    
    857Wholesale Agencies
    
    
    196
    
    
    
    102
    
    
    
    69Program Underwriting Agents
    
    
    20
    
    
    
    8
    
    
    
    5Total
    
    
    1,389
    
    
    
    1,050
    
    
    
    931
 Underwriting
  8




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Brokerage business
 ®
   9




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Specialty business
  Claims Management
     Competition
    
    
    reputation;
 
    
    multiple solution capability;
 
    
    strength of client relationships;
 
    
    perceived financial strength and financial ratings assigned by independent rating agencies;
 
    
    managements experience in the product, territory, or program;
 
    
    premiums charged and other terms and conditions offered;
 10




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
    
    services provided, products offered and scope of business, both by size and geographic
location; and
 
    
    reputation for claims handling.
   Loss and Loss Adjustment Expense Reserves
   
    
    Reserves for reported losses -When a claim is received from an insured, broker or ceding
company, or claimant we establish a case reserve for the estimated amount of its ultimate
settlement and its estimated loss expenses. We establish case reserves based upon the known
facts about each claim at the time the claim is reported and may subsequently increase or
reduce the case reserves as our claims department deems necessary based upon the development
of additional facts about the claim.
 
    
    IBNR reserves -We also estimate and establish reserves for loss and loss adjustment expense
(LAE) amounts incurred but not yet reported, including expected development of reported
claims. IBNR reserves are calculated as ultimate losses and LAE less reported losses and LAE.
Ultimate losses are projected by using generally accepted actuarial techniques.
    Reconciliation of Loss and Loss Adjustment Expenses
  11




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Year Ended December 31,($ in millions)
    
    2009
    
    
    2008
    
    
    2007Balance at January 1
    
    
    $ 535.0
    
    
    
    $ 501.2
    
    
    
    $ 302.5Less reinsurance recoverables on unpaid losses
    
    
    (222.2
    )
    
    
    (189.5
    )
    
    
    (110.0
    )312.8
    
    
    
    311.7
    
    
    
    192.5Net reserves, at fair value, of acquired companies
    
    
    549.9
    
    
    
    -
    
    
    
    85.1Incurred related to:Current year
    
    
    477.8
    
    
    
    171.6
    
    
    
    159.5Prior years
    
    
    (2.3
    )
    
    
    (8.9
    )
    
    
    (1.6
    )Total incurred
    
    
    475.5
    
    
    
    162.7
    
    
    
    157.9Paid related to:Current year
    
    
    154.2
    
    
    
    59.2
    
    
    
    55.3Prior years
    
    
    251.7
    
    
    
    102.4
    
    
    
    68.5Total paid
    
    
    405.9
    
    
    
    161.6
    
    
    
    123.8Net balance at end of year
    
    
    932.3
    
    
    
    312.8
    
    
    
    311.7Add reinsurance recoverables on unpaid losses
    
    
    199.7
    
    
    
    222.2
    
    
    
    189.5Balance at December 31
    
    
    $ 1,132.0
    
    
    
    $ 535.0
    
    
    
    $ 501.2
  Loss Reserve Development
      12




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Year ended December 31,($ in millions)
    
    1999
    
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009Original Net Liability
    
    
    6.8
    
    
    
    7.9
    
    
    
    8.6
    
    
    
    15.5
    
    
    
    24.4
    
    
    
    36.9
    
    
    
    101.7
    
    
    
    192.5
    
    
    
    311.7
    
    
    
    312.8
    
    
    
    932.3Cumulative payments as of:One year later
    
    
    2.6
    
    
    
    3.4
    
    
    
    2.9
    
    
    
    4.1
    
    
    
    7.5
    
    
    
    10.9
    
    
    
    13.7
    
    
    
    49.5
    
    
    
    102.4
    
    
    
    111.4Two years later
    
    
    4.8
    
    
    
    5.4
    
    
    
    4.9
    
    
    
    6.7
    
    
    
    11.9
    
    
    
    4.5
    
    
    
    36.7
    
    
    
    90.9
    
    
    
    163.8Three years later
    
    
    6.2
    
    
    
    7.0
    
    
    
    6.4
    
    
    
    9.1
    
    
    
    2.9
    
    
    
    16.8
    
    
    
    60.6
    
    
    
    120.0Four years later
    
    
    6.9
    
    
    
    7.9
    
    
    
    7.2
    
    
    
    4.5
    
    
    
    11.7
    
    
    
    30.2
    
    
    
    73.9Five years later
    
    
    7.2
    
    
    
    8.3
    
    
    
    6.7
    
    
    
    8.9
    
    
    
    17.8
    
    
    
    34.9Six years later
    
    
    7.5
    
    
    
    8.7
    
    
    
    7.8
    
    
    
    11.7
    
    
    
    20.8Seven years later
    
    
    7.7
    
    
    
    9.0
    
    
    
    8.3
    
    
    
    13.4Eight years later
    
    
    7.9
    
    
    
    9.1
    
    
    
    8.6Nine years later
    
    
    8.0
    
    
    
    8.9Ten years later
    
    
    7.8Net liability re-estimated as of:One year later
    
    
    7.5
    
    
    
    9.7
    
    
    
    11.5
    
    
    
    15.6
    
    
    
    24.2
    
    
    
    36.6
    
    
    
    101.0
    
    
    
    191.1
    
    
    
    303.9
    
    
    
    312.5Two years later
    
    
    8.7
    
    
    
    11.7
    
    
    
    11.3
    
    
    
    14.7
    
    
    
    24.8
    
    
    
    40.7
    
    
    
    101.5
    
    
    
    178.3
    
    
    
    288.1Three years later
    
    
    9.5
    
    
    
    11.5
    
    
    
    10.5
    
    
    
    16.5
    
    
    
    29.0
    
    
    
    48.3
    
    
    
    99.5
    
    
    
    171.4Four years later
    
    
    9.2
    
    
    
    10.8
    
    
    
    11.9
    
    
    
    19.6
    
    
    
    36.2
    
    
    
    45.3
    
    
    
    96.6Five years later
    
    
    9.0
    
    
    
    11.9
    
    
    
    13.3
    
    
    
    25.1
    
    
    
    33.6
    
    
    
    40.2Six years later
    
    
    10.0
    
    
    
    12.7
    
    
    
    15.7
    
    
    
    23.0
    
    
    
    27.9Seven years later
    
    
    10.6
    
    
    
    12.7
    
    
    
    13.8
    
    
    
    17.0Eight years later
    
    
    10.6
    
    
    
    11.7
    
    
    
    10.8Nine years later
    
    
    9.6
    
    
    
    10.4Ten years later
    
    
    8.7Cumulative Net redundancy/(deficiency)
    
    
    (1.8
    )
    
    
    (2.5
    )
    
    
    (2.2
    )
    
    
    (1.5
    )
    
    
    (3.5
    )
    
    
    (3.2
    )
    
    
    5.1
    
    
    
    21.1
    
    
    
    23.6
    
    
    
    0.3Reinsurance Commutations
    
    
    -
    
    
    
    -
    
    
    
    1.2
    
    
    
    3.2
    
    
    
    7.2
    
    
    
    9.2
    
    
    
    9.2
    
    
    
    -
    
    
    
    -
    
    
    
    -Cumulative net redundancy/(deficiency) excludingReinsurance Commutations
    
    
    (1.8
    )
    
    
    (2.5
    )
    
    
    (0.9
    )
    
    
    1.7
    
    
    
    3.6
    
    
    
    5.9
    
    
    
    14.3
    
    
    
    21.1
    
    
    
    23.6
    
    
    
    0.3Net reserves
    
    
    6.8
    
    
    
    7.9
    
    
    
    8.6
    
    
    
    15.5
    
    
    
    24.4
    
    
    
    36.9
    
    
    
    101.7
    
    
    
    192.5
    
    
    
    311.7
    
    
    
    312.8
    
    
    
    932.3Ceded reserves
    
    
    17.4
    
    
    
    20.6
    
    
    
    29.0
    
    
    
    50.2
    
    
    
    75.1
    
    
    
    91.8
    
    
    
    97.0
    
    
    
    110.0
    
    
    
    189.5
    
    
    
    222.2
    
    
    
    199.7Gross reserves
    
    
    24.2
    
    
    
    28.5
    
    
    
    37.6
    
    
    
    65.7
    
    
    
    99.5
    
    
    
    128.7
    
    
    
    198.7
    
    
    
    302.5
    
    
    
    501.2
    
    
    
    535.0
    
    
    
    1,132.0Net re-estimated
    
    
    8.7
    
    
    
    10.4
    
    
    
    10.8
    
    
    
    17.0
    
    
    
    27.9
    
    
    
    40.2
    
    
    
    96.6
    
    
    
    171.4
    
    
    
    288.1
    
    
    
    312.5Ceded re-estimated
    
    
    25.0
    
    
    
    28.1
    
    
    
    34.8
    
    
    
    48.8
    
    
    
    70.8
    
    
    
    86.6
    
    
    
    86.5
    
    
    
    93.6
    
    
    
    163.8
    
    
    
    212.3Gross re-estimated
    
    
    33.7
    
    
    
    38.5
    
    
    
    45.6
    
    
    
    65.8
    
    
    
    98.7
    
    
    
    126.8
    
    
    
    183.1
    
    
    
    265.0
    
    
    
    451.9
    
    
    
    524.8Cumulative gross redundancy/(deficiency)
    
    
    (9.5
    )
    
    
    (10.0
    )
    
    
    (8.0
    )
    
    
    (0.1
    )
    
    
    0.8
    
    
    
    1.9
    
    
    
    15.6
    
    
    
    37.5
    
    
    
    49.3
    
    
    
    10.2
 (1)
    
    The cumulative payments and the net liabilities are affected by commutations. We commuted
several reinsurance treaties in 2001 that had the effect of lowering the cumulative payments
by $0.6 million in 2001, $6.8 million in 2002, and $10.1 million in 2003, 2004, 2005 and
2006.(2)
    
    The net redundancies reflected in the above table for 2009 and 2008 resulted primarily from
the following:
Reserve reductions in 2009 from commercial multi-peril liability and other liability.
Reserve reductions in 2008 from commercial multi-peril liability, workers compensation, other
liability and property lines of business in accident year 2006.
 (3)
    
    The net deficiencies reflected in the above table for years 2004 and prior resulted
primarily from the reinsurance commutation impact of $1.2 million, $3.2 million, $7.2
million, and $9.2 million for 2001, 2002, 2003, and 2004, respectively.
 (4)
    
    Net re-estimated for the year ended December 31, 2008 excludes favorable development of
$2.0 pertaining to CastlePoint and Hermitage. Total favorable development recorded in 2009
on 2008 and prior accident years totaled $2.3 million, which includes CastlePoint and
Hermitage reserve development recognized after the acquisitions.
 13




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##### Table of Contents



Analysis of Reserves
  Case Loss($ in millions)
    
    Reserves
    
    
    IBNR
    
    
    TotalCommercial Multiple Peril
    
    
    $ 189.3
    
    
    
    $ 103.8
    
    
    
    $ 293.1Other Liability
    
    
    110.0
    
    
    
    127.3
    
    
    
    237.3Workers Compensation
    
    
    118.5
    
    
    
    85.3
    
    
    
    203.8Commercial Automobile
    
    
    63.5
    
    
    
    48.3
    
    
    
    111.8Homeowners
    
    
    38.9
    
    
    
    17.7
    
    
    
    56.6Fire and Allied Lines
    
    
    6.6
    
    
    
    2.3
    
    
    
    8.9Personal Automobile
    
    
    13.4
    
    
    
    7.4
    
    
    
    20.8All Lines
    
    
    $ 540.2
    
    
    
    $ 392.1
    
    
    
    $ 932.3
      Range of Reserve Estimates($ in millions)
    
    High
    
    
    Low
    
    
    CarriedCommercial Multiple Peril
    
    
    $ 310.8
    
    
    
    $ 269.7
    
    
    
    $ 293.1Other Liability
    
    
    260.6
    
    
    
    210.8
    
    
    
    237.3Workers Compensation
    
    
    217.0
    
    
    
    188.3
    
    
    
    203.8
 Commercial Auto
    
    
    119.2
    
    
    
    98.1
    
    
    
    111.8Homeowners.
    
    
    59.4
    
    
    
    53.7
    
    
    
    56.6Fire and Allied Lines
    
    
    9.3
    
    
    
    8.4
    
    
    
    8.9Personal Auto
    
    
    22.2
    
    
    
    18.7
    
    
    
    20.8All Lines
    
    
    $ 998.5
    
    
    
    $ 847.7
    
    
    
    $ 932.3
 14




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##### Table of Contents



Investments
    
    
    Maintain adequate liquidity and capital to meet the organizations responsibility to
policyholders,
    
    Provide a consistent level of income to support the Companys profitability and
operating goals,
    
    Seek to grow the value of assets over time, thereby increasing the Companys capital
strength, and
    
    Manage the investment risk based on the Companys ability to accept such risk.
   15




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##### Table of Contents



Ratings
    
 Regulatory Matters
  
    
    approval of policy forms and premium rates for our primary insurance operations;
 
    
    standards of solvency, including risk-based capital measurements;
 
    
    licensing of insurers and their agents;
 
    
    restrictions on the nature, quality and concentration of investments;
 
    
    restrictions on the ability to pay dividends to us;
 
    
    restrictions on transactions between insurance company subsidiaries and their affiliates;
 
    
    restrictions on the size of risks insurable under a single policy;
 
    
    requiring deposits for the benefit of policyholders;
 
    
    requiring certain methods of accounting;
 
    
    periodic examinations of our operations and finances;
 
    
    establishment of trust funds for the protection of policyholders;
 
    
    prescribing the form and content of records of financial condition required to be filed; and
 
    
    requiring reserves for unearned premium, losses and other purposes.
   16




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##### Table of Contents



Regulation
 U.S. Insurance Holding Company Regulation of Tower
  Changes of Control
   Legislative Changes
   17




---



##### Table of Contents



State Insurance Regulation
    Insurance Regulatory Information System Ratios
   18




---



##### Table of Contents



State Dividend Limitations
  Risk-Based Capital Regulations
  Statutory Accounting Principles
    Loss Reserve Specialist and Statements of Actuarial Opinion
   19




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##### Table of Contents



Guaranty Associations
   Residual Market Plans
  TRM, CPM and CPRMFL
  Reinsurance
    20




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##### Table of Contents



Funds Held,
    
    Amounts inPrepaid
    
    Ceded Payables
    
    Trust Accounts
    
    NetRecoverable on
    
    and Return
    
    and Deferred
    
    or Secured by
    
    ExposureA.M. Best
    
    Paid
    
    
    
    
    
    Reinsurance
    
    Ceding
    
    Letters of
    
    to($ in millions)
    
    Rating
    
    Losses
    
    Reserves
    
    Premium
    
    Commission
    
    Credit
    
    ReinsurerReinsurerOne Beacon Insurance
    
    
    A
    
    
    
    $ -
    
    
    
    $ 42.8
    
    
    
    $ -
    
    
    
    $ -
    
    
    
    $ -
    
    
    
    $ 42.8Endurance Reinsurance Corp of
America
    
    
    A
    
    
    
    -
    
    
    
    10.1
    
    
    
    2.7
    
    
    
    2.2
    
    
    
    -
    
    
    
    10.6Lloyds Syndicates
    
    
    A
    
    
    
    -
    
    
    
    9.8
    
    
    
    2.6
    
    
    
    2.0
    
    
    
    -
    
    
    
    10.4Axis Reinsurance Co.
    
    
    A
    
    
    
    -
    
    
    
    8.9
    
    
    
    2.6
    
    
    
    1.3
    
    
    
    -
    
    
    
    10.2Hannover Ruckversicherungs AG
    
    
    A
    
    
    
    0.3
    
    
    
    8.2
    
    
    
    4.1
    
    
    
    2.6
    
    
    
    -
    
    
    
    10.0Platinum Underwriters
Reinsurance Inc.
    
    
    A
    
    
    
    0.2
    
    
    
    7.3
    
    
    
    3.6
    
    
    
    2.3
    
    
    
    -
    
    
    
    8.8Munich Reinsurance America Inc
    
    
    A+
    
    
    
    3.7
    
    
    
    7.0
    
    
    
    -
    
    
    
    2.2
    
    
    
    -
    
    
    
    8.5Westport Insurance Corp.
    
    
    A
    
    
    
    -
    
    
    
    6.2
    
    
    
    -
    
    
    
    (0.7
    )
    
    
    -
    
    
    
    6.9QBE Reinsurance Corporation
    
    
    A
    
    
    
    0.2
    
    
    
    4.8
    
    
    
    1.2
    
    
    
    0.7
    
    
    
    -
    
    
    
    5.5Others
    
    
    
    
    
    
    10.4
    
    
    
    94.6
    
    
    
    78.0
    
    
    
    84.6
    
    
    
    73.2
    
    
    
    25.2Total
    
    
    
    
    
    $
    14.8
    
    
    $
    199.7
    
    
    $
    94.8
    
    
    $
    97.2
    
    
    $
    73.2
    
    
    $
    138.9
 Terrorism Reinsurance
   21




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Technology
        22




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##### Table of Contents



Employees
  Available Information
 www.sec.gov
  Glossary of Selected Insurance Terms
 Accident year
    
    The year in which an event occurs, regardless of when any policies covering it are
written, when the event is reported, or when the associated claims are closed and paid.Acquisition expense
    
    The cost of acquiring both new and renewal insurance business, including commissions to
agents or brokers and premium taxes.Agent
    
    One who negotiates insurance contracts on behalf of an insurer. The agent receives a
commission for placement and other services rendered.Broker
    
    One who negotiates insurance or reinsurance contracts between parties. An insurance
broker negotiates on behalf of an insured and a primary insurer. A reinsurance broker
negotiates on behalf of a primary insurer or other reinsured and a reinsurer. The broker
receives a commission for placement and other services rendered.Case reserves
    
    Loss reserves established by claims personnel with respect to individual reported claims.Casualty insurance and/or 
reinsurance
    
    Insurance and/or reinsurance that is concerned primarily with the losses caused by
injuries to third persons (in other words, persons other than the policyholder) and the legal liability imposed on the insured resulting therefrom.Catastrophe reinsurance
    
    A form of excess of loss property reinsurance that, subject to a specified limit,
indemnifies the ceding company for the amount of loss in excess of a specified retention
with respect to an accumulation of losses resulting from a catastrophic event.Cede; ceding company
    
    When an insurance company reinsures its risk with another, it cedes business and is
referred to as the ceding company.Combined ratio
    
    The sum of losses and LAE, acquisition expenses, operating expenses and policyholders
dividends, all divided by net premiums earned.Direct premiums written
    
    The amounts charged by a primary insurer for the policies that it underwrites.Excess and surplus lines
    
    Excess insurance refers to coverage that attaches for an insured over the limits of a
primary policy or a stipulated self-insured retention. Policies are bound or accepted by
carriers not licensed in the jurisdiction where the risk is located, and generally are
not subject to regulations governing premium rates or policy language. Surplus lines
risks are those risks not fitting normal underwriting patterns, involving a degree of
risk that is not commensurate with standard rates and/or policy forms, or that will not
be written by standard carriers because of general market conditions.Excess of loss reinsurance
    
    The generic term describing reinsurance that indemnifies the reinsured against all or a
specified portion of losses on underlying insurance policies in excess of a specified
dollar amount, called a layer or retention. Also known as non-proportional
reinsurance.
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##### Table of Contents



Funds held
    
    The holding by a ceding company of funds usually representing the unearned premium
reserve or the outstanding loss reserves applied to the business it cedes to a
reinsurer.Gross premiums written
    
    Total premiums for direct insurance and reinsurance assumed during a given period.Incurred but not reported
(IBNR) reserves
    
    Loss reserves for estimated losses that have been incurred but not yet reported to the
insurer or reinsurer.Incurred losses
    
    The total losses sustained by an insurance company under a policy or policies, whether
paid or unpaid. Incurred losses include a provision for claims that have occurred but
have not yet been reported to the insurer (IBNR).Loss adjustment expenses
(LAE)
    
    The expenses of settling claims, including legal and other fees and the portion of
general expenses allocated to claim settlement costs.Loss and LAE ratio
    
    Loss and LAE ratio is equal to losses and LAE incurred divided by earned premiums.Loss reserves
    
    Liabilities established by insurers and reinsurers to reflect the estimated cost of
claims payments that the insurer or reinsurer believes it will ultimately be required to
pay with respect to insurance or reinsurance it has written. Reserves are established
for losses and for LAE and consist of case reserves and IBNR. Reserves are not, and
cannot be, an exact measure of an insurers ultimate liability.Managing general agent
    
    A person or firm authorized by an insurer to transact insurance business who may have
authority to bind the insurer, issue policies, appoint producers, adjust claims and
provide administrative support for the types of insurance coverage pursuant to an agency
agreement.Net premiums earned
    
    The portion of net premiums written that is earned during a period and recognized for
accounting purposes as revenue.Net premiums written
    
    Gross premiums written for a given period less premiums ceded to reinsurers or
retrocessionaires during such period.Primary insurer
    
    An insurance company that issues insurance policies to consumers or businesses on a
first dollar basis, sometimes subject to a deductible.Pro rata, or quota share, 
reinsurance
    
    A form of reinsurance in which the reinsurer shares a proportional part of the ceded
insurance liability, premiums and losses of the ceding company. Pro rata, or quota
share, reinsurance also is known as proportional reinsurance or participating
reinsurance.Program underwriting agent
    
    An insurance intermediary that underwrites program business by aggregating business from
retail and wholesale agents and performs certain functions on behalf of insurance
companies, including underwriting, premium collection, policy form design and other
administrative functions to policyholders.Property insurance and/or 
reinsurance
    
    Insurance and/or reinsurance that indemnifies a person with an insurable interest in
tangible property for his property loss, damage or loss of use.Reinsurance
    
    A transaction whereby the reinsurer, for consideration, agrees to indemnify the
reinsured company against all or part of the loss the company may sustain under the
policy or policies it has issued. The reinsured may be referred to as the original or
primary insurer or the ceding company.Renewal retention rate
    
    The current period renewal premium, excluding pricing, exposure and policy form changes,
as a percentage of the total premium available for renewal.Retention, retention layer
    
    The amount or portion of risk that an insurer or reinsurer retains for its own account.
Losses in excess of the retention layer are reimbursed to the insurer or reinsurer by
the reinsurer or retrocessionaire. In proportional treaties, the retention may be a
percentage of the original policys limit. In excess of loss business, the retention is
a dollar amount of loss, a loss ratio or a percentage.Retrocession;
retrocessionaire
    
    A transaction whereby a reinsurer cedes to another reinsurer, known as a
retrocessionaire, all or part of the reinsurance it has assumed. Retrocession does not
legally discharge the ceding reinsurer from its liability with respect to its
obligations to the reinsuredStatutory accounting 
principles (SAP)
    
    Recording transactions and preparing financial statements in accordance with the rules
and procedures prescribed or permitted by state insurance regulatory authorities and the
NAIC.
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##### Table of Contents



Statutory or
policyholders surplus;
statutory capital and
surplus
    
    The excess of admitted assets over total liabilities (including loss reserves),
determined in accordance with SAP.Third party administrator
    
    A service group who provides various claims administration, risk management, loss
prevention and related services, primarily to self-insured clients under a fee
arrangement or to insurance carriers on an unbundled basis. No insurance risk is
undertaken in the arrangement.Treaty reinsurance
    
    The reinsurance of a specified type or category of risks defined in a reinsurance
agreement (a treaty) between a primary insurer or other reinsured and a reinsurer.
Typically, in treaty reinsurance, the primary insurer or reinsured is obligated to offer
and the reinsurer is obligated to accept a specified portion of all agreed upon types or
categories of risks originally written by the primary insurer or reinsured.Underwriting
    
    The insurers/reinsurers process of reviewing applications submitted for insurance
coverage, deciding whether to accept all or part of the coverage requested and
determining the applicable premiums.Unearned premium
    
    The portion of a premium representing the unexpired portion of the exposure period as of
a certain date.Unearned premium reserve
    
    Liabilities established by insurers and reinsurers to reflect unearned premiums which
are usually refundable to policyholders if an insurance or reinsurance contract is
canceled prior to expiration of the contract term.
 Note on Forward-Looking Statements
   
    
    ineffectiveness or obsolescence of our business strategy due to changes in current or
future market conditions;
    
    developments that may delay or limit our ability to enter new markets as quickly as we
anticipate;
    
    increased competition on the basis of pricing, capacity, coverage terms or other factors;
    
    greater frequency or severity of claims and loss activity, including as a result of natural
or man-made catastrophic events, than our underwriting, reserving or investment practices
anticipate based on historical experience or industry data;
    
    the effects of acts of terrorism or war;
    
    developments in the worlds financial and capital markets that adversely affect the
performance of our investments;
    
    changes in regulations or laws applicable to us, our subsidiaries, brokers or customers;
    
    changes in acceptance of our products and services, including new products and services;
    
    changes in the availability, cost or quality of reinsurance and failure of our reinsurers
to pay claims timely or at all;
    
    changes in the percentage of our premiums written that we cede to reinsurers;
    
    decreased demand for our insurance or reinsurance products;
    
    loss of the services of any of our executive officers or other key personnel;
    
    the effects of mergers, acquisitions and divestitures;
    
    changes in rating agency policies or practices;
    
    changes in legal theories of liability under our insurance policies;
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##### Table of Contents




    
    changes in accounting policies or practices;
    
    changes in general economic conditions, including inflation, interest rates and other
factors;
    
    unanticipated difficulties in combining Tower and SUA;
    
    disruptions in Towers business arising from the integration of Tower with acquired
businesses and the anticipation of potential and pending acquisitions or mergers; and
    
    currently pending or future litigation or governmental proceedings.
   
 Item 1A. Risk Factors
   Risks Related to Our Business
 If our actual loss and loss adjustment expenses exceed our loss reserves, our financial
condition and results of operations could be significantly adversely affected.
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A substantial amount of our business currently comes from a limited geographical area. Any
single catastrophe or other condition affecting losses in this area could adversely affect our
results of operations.
   If we cannot obtain adequate reinsurance protection for the risks we have underwritten, we may
be exposed to greater losses from these risks or we may reduce the amount of business we
underwrite, which will reduce our revenues.
   Even if we are able to obtain reinsurance, our reinsurers may not pay losses in a timely
fashion, or at all, which may cause a substantial loss and increase our costs.
  27




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##### Table of Contents



A decline in the ratings assigned by A. M. Best or other rating agencies to our insurance
subsidiaries could affect our standing among brokers, agents and insureds and cause our sales and
earnings to decrease.
   The failure of any of the loss limitation methods we employ could have a material adverse
effect on our financial condition or our results of operations.
   We may face substantial exposure to losses from terrorism and we are currently required by law
to provide coverage against such losses.
   The effects of emerging claim and coverage issues on our business are uncertain.
  28




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Since we depend on a core of selected producers for a large portion of our revenues, loss of
business provided by any one of them could adversely affect us.
     Our reliance on producers subjects us to their credit risk.
  We operate in a highly competitive environment. If we are unsuccessful in competing against
larger or more well-established rivals, our results of operations and financial condition could be
adversely affected.
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We may experience difficulty in expanding our business, which could adversely affect our
results of operations and financial condition.
  
    
    We have achieved our prior success by applying a disciplined approach to underwriting and
pricing in select markets that are not well served by our competitors. We may not be able to
successfully implement our underwriting, pricing and product strategies in companies or books
of business we acquire or over a larger operating region;
 
    
    We may not be successful in obtaining the required regulatory approvals to offer additional
insurance products or expand into additional states; and
 
    
    We may have difficulty in efficiently combining an acquired company or block of business
with our present financial, operational and management information systems.
  Our acquisitions could result in integration difficulties, unexpected expenses, diversion of
managements attention and other negative consequences.
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##### Table of Contents




    
    We may be unable to efficiently consolidate our financial, operational and administrative
functions with those of the businesses we acquire;
 
    
    Our managements attention may be diverted from other business concerns;
 
    
    We may be unable to retain and motivate key employees of an acquired company;
 
    
    We may enter markets in which we have little or no prior direct experience;
 
    
    Litigation, indemnification claims and other unforeseen claims and liabilities may arise
from the acquisition or operation of acquired businesses;
 
    
    The costs necessary to complete integration may exceed our expectations or outweigh some of
the intended benefits of the transactions we complete;
 
    
    We may be unable to maintain the customers or goodwill of an acquired business; and
 
    
    The costs necessary to improve or replace the operating systems, products and services of
acquired businesses may exceed our expectations.
  In recent years we have successfully created shareholder value through acquisitions of
insurance entities. We may not be able to continue to create shareholder value through such
transactions in the future.
  Failure to complete, or complete on a timely basis, a pending merger or acquisition may
negatively impact our business, financial condition, results of operation, prospects and stock
price.
  We could be adversely affected by the loss of one or more principal employees or by an
inability to attract and retain staff.
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##### Table of Contents



Our investment performance may suffer as a result of adverse capital market developments or
other factors, which may affect our financial results and ability to conduct business.
  We may be adversely affected by interest rate changes.
    We may require additional capital in the future, which may not be available or may only be
available on unfavorable terms.
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##### Table of Contents



The regulatory system under which we operate, and potential changes thereto, could have a
material adverse effect on our business.
  
    
    standards of solvency, including risk based capital measurements;
 
    
    restrictions on the nature, quality and concentration of investments;
 
    
    required methods of accounting;
 
    
    rate and form regulation pertaining to certain of our insurance businesses;
 
    
    mandating certain insurance benefits;
 
    
    potential assessments for the provision of funds necessary for the settlement of covered
claims under certain policies provided by impaired, insolvent or failed insurance companies;
and
 
    
    transactions with affiliates.
      33




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##### Table of Contents



If the assessments we are required to pay are increased drastically, our results of operations
and financial condition will suffer.
  Our ability to meet ongoing cash requirements and pay dividends may be limited by our holding
company structure and regulatory constraints.
  Although we have paid cash dividends in the past, we may not pay cash dividends in the future.
  We rely on our information technology and telecommunications systems to conduct our business.
   34




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##### 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.
  Currently pending or future litigation or governmental proceedings could result in material
adverse consequences, including injunctions, judgments or settlements.
  It may be difficult for a third party to acquire Tower, even if doing so may be beneficial to
Tower stockholders.
  
    
    classifying its board of directors with staggered three-year terms, which may lengthen the
time required to gain control of Towers board of directors;
 
    
    prohibiting stockholder action by written consent, thereby requiring all stockholder
actions to be taken at a meeting of the stockholders;
 
    
    limiting who may call special meetings of stockholders;
 
    
    establishing advance notice requirements for nominations of candidates for election to its
board of directors or for proposing matters that can be acted upon by stockholders at
stockholder meetings; and
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##### Table of Contents




    
    the existence of authorized and unissued Tower common stock which would allow Towers board
of directors to issue shares to persons friendly to current management.
  Risks Related to Our Industry
 The threat of terrorism and military and other actions may adversely affect our investment
portfolio and may result in decreases in our net income, revenue and assets under management.
   Our results of operations and revenues may fluctuate as a result of many factors, including
cyclical changes in the insurance industry, which may cause the price of Tower securities issued to
investors to be volatile.
  
    
    competition;
 
    
    rising levels of loss costs that we cannot anticipate at the time we price our
products;
 
    
    volatile and unpredictable developments, including man-made, weather-related and
other natural catastrophes or terrorist attacks;
 
    
    changes in the level of reinsurance capacity and insurance capacity;
 
    
    changes in the amount of loss and loss adjustment expense reserves resulting from
new types of claims and new or changing judicial interpretations relating to the scope of
insurers liabilities; and
 
    
    fluctuations in equity markets and interest rates, inflationary pressures,
conditions affecting the credit markets, segments thereof or particular asset classes and
other changes in the investment environment, which affect returns on invested assets and may
impact the ultimate payout of losses.
   Changing climate conditions may adversely affect our financial condition or profitability.
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##### Table of Contents



Risk Factors Relating to Disruptions in the Financial Markets
 Adverse capital and credit market conditions may significantly affect our ability to meet
liquidity needs, access to capital and cost of capital.
     Difficult conditions in the global capital markets and the economy generally may materially
adversely affect our business and results of operations and we do not expect these conditions to
improve in the near future.
   The impairment of other financial institutions could adversely affect us.
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##### Table of Contents



We are exposed to significant financial and capital markets risk which may adversely affect
our results of operations, financial condition and liquidity, and our net investment income can
vary from period to period.
    Our valuation of fixed maturity and equity securities may include methodologies, estimations
and assumptions which are subject to differing interpretations and could result in changes to
investment valuations that may materially adversely affect our results of operations or financial
condition.
  Level 1
 Level 2
 Level 3
  38




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##### Table of Contents



Some of our investments are relatively illiquid and are in asset classes that have been
experiencing significant market valuation fluctuations.
   The determination of the amount of impairments taken on our investments is highly subjective
and could materially impact our results of operations or financial position.
    Gross unrealized losses may be realized or result in future impairments.
  If our business does not perform well, we may be required to recognize an impairment of our
goodwill, intangible or other long-lived assets or to establish a valuation allowance against the
deferred income tax asset, which could adversely affect our results of operations or financial
condition.
  39




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##### Table of Contents



Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
   
 Item 3. Legal Proceedings
   inter alia inter alia
 
 Item 4. Reserved
 40




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##### Table of Contents



PART II
 
 Item 5. Market For Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
 Shareholders
   Price Range of Common Stock and Dividends Declared
  CommonStockDividendsHigh
    
    
    Low
    
    
    Declared2009First quarter
    
    
    $31.05
    
    
    
    $19.70
    
    
    
    $0.050Second quarter
    
    
    28.32
    
    
    
    22.70
    
    
    
    0.070Third quarter
    
    
    26.10
    
    
    
    22.88
    
    
    
    0.070Fourth quarter
    
    
    25.78
    
    
    
    22.29
    
    
    
    0.0702008First quarter
    
    
    $33.73
    
    
    
    $23.17
    
    
    
    $0.050Second quarter
    
    
    28.26
    
    
    
    21.03
    
    
    
    0.050Third quarter
    
    
    27.53
    
    
    
    17.83
    
    
    
    0.050Fourth quarter
    
    
    28.69
    
    
    
    15.76
    
    
    
    0.050
 Dividend Policy
    (in $ thousands)
    
    2009
    
    
    2008Common stock dividends declared
    
    $
    10,740
    
    
    $
    4,608
  41




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##### Table of Contents



Total Numberof Shares
    
    
    Maximum NumberTotal
    
    
    
    
    
    
    Purchased as Part
    
    
    (or ApproximateNumber
    
    
    Average
    
    
    of Publically
    
    
    Dollar Value) ofof Shares
    
    
    Price Paid
    
    
    Announced Plans
    
    
    Shares that May YetPeriod
    
    Purchased
    
    
    per Share
    
    
    or Programs
    
    
    be Purchased UnderOctober 1 - 31, 2009
    
    
    3,365
    
    
    
    $24.68

    
    
    
    
    
    
    November 1 - 30, 2009
    
    
    11,395
    
    
    
    24.62

    
    
    
    
    
    
    December 1 - 31, 2009
    
    
    5,719
    
    
    
    23.53

    
    
    
    
    
    
    Total
    
    
    20,479
    
    
    
    $24.32

    
    
    
    
    
    
    
 42




---



##### Table of Contents



Item 6. Selected Consolidated Financial Information
  For the year ended December 31,($ in millions, except per share amounts)
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005Income Statement DataGross premiums written
    
    
    $1,070.7
    
    
    
    $634.8
    
    
    
    $524.0
    
    
    
    $432.7
    
    
    
    $300.1Ceded premiums written
    
    
    184.5
    
    
    
    290.8
    
    
    
    264.8
    
    
    
    187.6
    
    
    
    88.3Net premiums written
    
    
    886.2
    
    
    
    344.0
    
    
    
    259.2
    
    
    
    245.1
    
    
    
    211.8Net premiums earned
    
    
    854.7
    
    
    
    314.6
    
    
    
    286.1
    
    
    
    224.0
    
    
    
    164.4Ceding commission revenue
    
    
    43.9
    
    
    
    79.1
    
    
    
    71.0
    
    
    
    43.1
    
    
    
    25.2Insurance services revenue
    
    
    5.1
    
    
    
    68.2
    
    
    
    33.3
    
    
    
    8.0
    
    
    
    14.1Policy billing fees
    
    
    3.0
    
    
    
    2.3
    
    
    
    2.0
    
    
    
    1.1
    
    
    
    0.9Net investment income
    
    
    74.9
    
    
    
    34.6
    
    
    
    36.7
    
    
    
    23.0
    
    
    
    15.0Net realized gains (losses) on investments
    
    
    1.5
    
    
    
    (14.4
    )
    
    
    (17.5
    )
    
    
    -
    
    
    
    0.1Total revenues
    
    
    983.1
    
    
    
    484.4
    
    
    
    411.6
    
    
    
    299.2
    
    
    
    219.7Losses and loss adjustment expenses
    
    
    475.5
    
    
    
    162.7
    
    
    
    157.9
    
    
    
    135.1
    
    
    
    96.6Operating expenses:Direct and ceding commission expenses
    
    
    204.6
    
    
    
    132.5
    
    
    
    101.0
    
    
    
    60.5
    
    
    
    43.8Other
operating expenses (1)
    
    
    129.9
    
    
    
    91.5
    
    
    
    77.3
    
    
    
    53.7
    
    
    
    42.6Acquisition-related transaction costs
    
    
    14.0
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -Interest expense
    
    
    18.1
    
    
    
    8.4
    
    
    
    9.3
    
    
    
    6.9
    
    
    
    4.9Total expenses
    
    
    842.1
    
    
    
    395.1
    
    
    
    345.5
    
    
    
    256.2
    
    
    
    187.9Other IncomeEquity in unconsolidated affiliate
    
    
    (0.8
    )
    
    
    0.3
    
    
    
    2.4
    
    
    
    0.9
    
    
    
    -Gain from issuance of common stock
by unconsolidated affiliate
    
    
    -
    
    
    
    -
    
    
    
    2.7
    
    
    
    7.9
    
    
    
    -Gain on investment in acquired unconsolidated affiliate
    
    
    7.4
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -Gain on bargain purchase
    
    
    13.2
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -Warrant received from unconsolidated affiliate
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    4.6
    
    
    
    -Income before income taxes
    
    
    160.8
    
    
    
    89.6
    
    
    
    71.2
    
    
    
    56.4
    
    
    
    31.8Income tax expense
    
    
    51.5
    
    
    
    32.1
    
    
    
    26.1
    
    
    
    19.7
    
    
    
    11.1Net income
    
    
    $109.3
    
    
    
    $57.5
    
    
    
    $45.1
    
    
    
    $36.7
    
    
    
    $20.7Net income available to common stockholders
    
    
    $109.3
    
    
    
    $57.5
    
    
    
    $44.4
    
    
    
    $36.6
    
    
    
    $20.7Per Share DataBasic earnings per share (9)
    
    
    $2.78
    
    
    
    $2.47
    
    
    
    $1.94
    
    
    
    $1.83
    
    
    
    $1.05Diluted earnings per share (9)
    
    
    $2.76
    
    
    
    $2.45
    
    
    
    $1.92
    
    
    
    $1.79
    
    
    
    $1.01Weighted
average outstanding (in thousands):Basic
    
    
    39,363
    
    
    
    23,291
    
    
    
    22,927
    
    
    
    19,932
    
    
    
    19,756Diluted
    
    
    39,581
    
    
    
    23,485
    
    
    
    23,128
    
    
    
    20,511
    
    
    
    20,518Selected Insurance RatiosGross loss
ratio (2)
    
    
    54.2%
    
    
    
    49.9%
    
    
    
    50.7%
    
    
    
    55.0%
    
    
    
    56.8%Gross
underwriting expense ratio (3)
    
    
    30.9%
    
    
    
    30.4%
    
    
    
    29.2%
    
    
    
    28.7%
    
    
    
    30.8%Gross
combined ratio (4)
    
    
    85.1%
    
    
    
    80.3%
    
    
    
    79.9%
    
    
    
    83.7%
    
    
    
    87.6%Net loss
ratio (5)
    
    
    55.6%
    
    
    
    51.7%
    
    
    
    55.2%
    
    
    
    60.3%
    
    
    
    58.8%Net
underwriting expense ratio (6)
    
    
    32.7%
    
    
    
    30.7%
    
    
    
    28.5%
    
    
    
    27.3%
    
    
    
    29.3%Net combined
ratio (7)
    
    
    88.3%
    
    
    
    82.4%
    
    
    
    83.7%
    
    
    
    87.6%
    
    
    
    88.1%
 43




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##### Table of Contents



As of December 31,($ in millions, except per share amounts)
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005Summary Balance Sheet DataCash and cash equivalents
    
    
    $164.9
    
    
    
    $136.3
    
    
    
    $77.7
    
    
    
    $100.6
    
    
    
    $38.8Investments at fair value
    
    
    1,896.8
    
    
    
    541.0
    
    
    
    619.1
    
    
    
    464.0
    
    
    
    357.2Reinsurance recoverable
    
    
    214.5
    
    
    
    272.6
    
    
    
    207.8
    
    
    
    118.0
    
    
    
    104.8Deferred acquisition costs, net
    
    
    170.7
    
    
    
    53.1
    
    
    
    39.3
    
    
    
    35.8
    
    
    
    29.2Total assets
    
    
    3,313.0
    
    
    
    1,538.4
    
    
    
    1,355.6
    
    
    
    954.1
    
    
    
    657.5Loss and loss adjustment expenses
    
    
    1,132.0
    
    
    
    535.0
    
    
    
    501.2
    
    
    
    302.5
    
    
    
    198.7Unearned premium
    
    
    658.9
    
    
    
    328.8
    
    
    
    272.8
    
    
    
    227.0
    
    
    
    157.8Long-term debt and redeemable preferred stock
    
    
    235.1
    
    
    
    101.0
    
    
    
    101.0
    
    
    
    68.0
    
    
    
    47.4Total stockholders equity
    
    
    1,050.5
    
    
    
    335.2
    
    
    
    309.4
    
    
    
    223.9
    
    
    
    144.8Per Share Data:Book value per share(8)
    
    
    $23.35
    
    
    
    $14.36
    
    
    
    $13.34
    
    
    
    $9.23
    
    
    
    $7.29Dividends declared per share-common stock
    
    
    $0.26
    
    
    
    $0.20
    
    
    
    $0.15
    
    
    
    $0.10
    
    
    
    $0.10
 (1)
    
    Includes acquisition expenses and other underwriting expenses (which are general administrative expenses related to
underwriting operations in our Insurance Subsidiaries) as well as other insurance services expenses (which are
general administrative expenses related to insurance services operations).(2)
    
    The gross loss ratio is calculated by dividing gross losses (consisting of losses and loss adjustment expenses) by
gross premiums earned.(3)
    
    The gross underwriting expense ratio is calculated by dividing gross underwriting expenses (consisting of direct
commission expenses and other underwriting expenses net of policy billing fees) by gross premiums earned.(4)
    
    The gross combined ratio is the sum of the gross loss ratio and the gross underwriting expense ratio.(5)
    
    The net loss ratio is calculated by dividing net losses and loss adjustment expenses by net premiums earned.(6)
    
    The net underwriting expense ratio is calculated by dividing net underwriting expenses (consisting of direct
commission expenses and other underwriting expenses net of policy billing fees and ceding commission revenue) by
net premiums earned. Historically, the ceding commission revenue we earn on our ceded premiums has been higher than
our expenses incurred to produce those premiums; our extensive use of quota share reinsurance has caused our net
underwriting expense ratio in certain periods to be lower than our gross underwriting expense ratio under GAAP.(7)
    
    The net combined ratio is the sum of the net loss ratio and the net underwriting expense ratio.(8)
    
    Book value per share is based on total common stockholders equity divided by common shares outstanding at year end.(9)
    
    Prior year earnings per share have been restated for new GAAP guidance adopted in 2009 which requires unvested
share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents be considered
participating securities and included in the computation of earnings per share.
 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
  Overview
  44




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##### Table of Contents



Acquisitions
 Specialty Underwriters Alliance, Inc.
  AequiCap
  Hermitage
  45




---



##### Table of Contents



CastlePoint
   Preserver
  Principal Revenue and Expense Items
  
    
    Net premium earned,
 
    
    Ceding commission revenue,
 
    
    Insurance Service revenue, and
 
    
    Net investment income and realized gains and losses on investments.
  
    
    Losses and loss adjustment expenses,
 
    
    Operating expenses,
 
    
    Interest expense, and
 
    
    Income taxes.
  Net premiums earned.
 Ceding commission revenue.
 Insurance Service revenue.
 Net investment income and realized gains and losses on investments.
 Losses and loss adjustment expenses.
 46




---



##### Table of Contents



Operating expenses.
 Interest expense.
 Income taxes.
 Measurement of Results
  Premiums written.
 Loss ratio.
 Underwriting expense ratio.
 Combined ratio.
 Premiums produced by TRM, CPM and CPRMFL.
 47




---



##### Table of Contents



Net income and return on average equity.
 Operating income.
  December 31,(in $ thousands)
    
    2009
    
    2008
    
    2007Operating income
    
    
    $ 119,820
    
    
    
    $ 66,803
    
    
    
    $ 56,464Net realized gains (losses) on investments, net of tax
    
    
    976
    
    
    
    (9,330
    )
    
    
    (11,382
    )Acquisition-related transaction costs, net of tax
    
    
    (11,466
    )
    
    
    -
    
    
    
    -Net Income
    
    
    $ 109,330
    
    
    
    $ 57,473
    
    
    
    $ 45,082
 Critical Accounting Estimates
   Loss and LAE reserves.
  48




---



##### Table of Contents



Number of yearsSegment
    
    50%
    
    90%
    
    99%Fire
    
    < 1 year
    
    < 1 year
    
    2 yearsHomeowners
    
    < 1 year
    
    < 2 years
    
    3 yearsMulti-Family Dwelling
    
    < 2 years
    
    < 2 years
    
    5 yearsCMP Property
    
    < 1 year
    
    1 year
    
    2 yearsCMP Liability
    
    < 2 years
    
    5 years
    
    9 yearsWorkers Compensation
    
    < 1 year
    
    2 years
    
    5 yearsOther Liability
    
    3 years
    
    4 years
    
    9 yearsCommercial Auto Liability
    
    < 1 year
    
    3 years
    
    4 yearsAuto Physical Damage
    
    < 1 year
    
    < 1 year
    
    1 yearPersonal Auto Liability
    
    < 1 year
    
    < 2 years
    
    4 years
   49




---



##### Table of Contents



Establishing fair value of loss and LAE reserves for acquired companies
 Net premiums earned.
 Ceding commissions earned.
  Reinsurance recoverables.
 Deferred acquisition costs, net.
 50




---



##### Table of Contents



Impairment of invested assets.
 
    
    the overall financial condition of the issuer;
    
    the current fair value compared to amortized cost or cost, as appropriate;
    
    the length of time the securitys fair value has been below amortized cost or cost;
    
    specific credit issues related to the issuer such as changes in credit rating, reduction or
elimination of dividends or non-payment of scheduled interest payments;
    
    whether management intends to sell the security and, if not, whether it is more likely than
not that the Company will be required to sell the security before recovery of its amortized
cost basis;
    
    specific cash flow estimations for mortgage-backed securities and
    
    current economic conditions.
    Goodwill and intangible assets and potential impairment.
   Consolidated Results of Operations
  51




---



##### Table of Contents



Year Ended December 31,($ in millions)
    
    2009
    
    Change
    
    %
    
    2008
    
    Change
    
    %
    
    2007Brokerage insurance segment underwriting profit
    
    
    $ 75.6
    
    
    
    $ 21.9
    
    
    
    41
    %
    
    
    $ 53.7
    
    
    
    $ 7.3
    
    
    
    16
    %
    
    
    $ 46.4Specialty business segment underwriting profit
    
    
    24.2
    
    
    
    22.7
    
    
    NM

    
    
    1.5
    
    
    
    1.3
    
    
    NM

    
    
    0.2Insurance services segment pretax income
    
    
    0.9
    
    
    
    (23.1
    )
    
    
    -96
    %
    
    
    24.0
    
    
    
    12.8
    
    
    
    114
    %
    
    
    11.2Net investment income
    
    
    74.9
    
    
    
    40.3
    
    
    
    117
    %
    
    
    34.6
    
    
    
    (2.1
    )
    
    
    -6
    %
    
    
    36.7Net realized
gains (losses) on investments, including
other-than-temporary
impairments
    
    
    1.5
    
    
    
    15.9
    
    
    
    -110
    %
    
    
    (14.4
    )
    
    
    3.1
    
    
    
    -18
    %
    
    
    (17.5
    )Corporate expenses
    
    
    (3.8
    )
    
    
    (2.2
    )
    
    
    134
    %
    
    
    (1.6
    )
    
    
    -
    
    
    
    2
    %
    
    
    (1.6
    )Acquisition-related transaction costs
    
    
    (14.0
    )
    
    
    (14.0
    )
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -Interest expense
    
    
    (18.1
    )
    
    
    (9.7
    )
    
    
    114
    %
    
    
    (8.4
    )
    
    
    0.9
    
    
    
    -9
    %
    
    
    (9.3
    )Other income (loss)
    
    
    19.6
    
    
    
    19.4
    
    
    NM

    
    
    0.2
    
    
    
    (4.9
    )
    
    
    -95
    %
    
    
    5.1Income before taxes
    
    
    160.8
    
    
    
    71.2
    
    
    
    199
    %
    
    
    89.6
    
    
    
    18.4
    
    
    
    4
    %
    
    
    71.2Income tax expense
    
    
    51.5
    
    
    
    19.4
    
    
    
    60
    %
    
    
    32.1
    
    
    
    6.0
    
    
    
    23
    %
    
    
    26.1Net income
    
    
    $ 109.3
    
    
    
    $ 51.8
    
    
    
    92
    %
    
    
    $ 57.5
    
    
    
    $ 12.4
    
    
    
    30
    %
    
    
    $ 45.1Key MeasuresGross premiums written and produced:Written by Brokerage and Specialty
Insurance Segments
    
    
    $ 1,070.7
    
    
    
    $ 435.9
    
    
    
    68.7
    %
    
    
    $ 634.8
    
    
    
    $ 110.8
    
    
    
    21.1
    %
    
    
    $ 524.0Produced by Insurance Services Segment
    
    
    11.7
    
    
    
    (163.7
    )
    
    
    -93.3
    %
    
    
    175.4
    
    
    
    90.3
    
    
    
    106.1
    %
    
    
    85.1Assumed premiums
    
    
    -
    
    
    
    5.2
    
    
    
    -100.4
    %
    
    
    (5.2
    )
    
    
    (4.5
    )
    
    NM

    
    
    (0.7
    )Total
    
    
    $ 1,082.4
    
    
    
    $ 277.4
    
    
    
    34.5
    %
    
    
    $ 805.0
    
    
    
    $ 196.6
    
    
    
    32.3
    %
    
    
    $ 608.4
 NM is shown where percentage change exceeds 500%
 Year Ended December 31,2009
    
    2008
    
    2007Percent of total revenues:Net premiums earned
    
    
    86.9
    %
    
    
    64.9
    %
    
    
    69.5
    %Commission and fee income
    
    
    5.3
    %
    
    
    30.9
    %
    
    
    25.8
    %Net investment income
    
    
    7.6
    %
    
    
    7.2
    %
    
    
    8.9
    %Net realized investment gains (losses)
    
    
    0.2
    %
    
    
    -3.0
    %
    
    
    -4.2
    %Underwriting Ratios for Brokerage Insurance and Specialty Business Segments CombinedLoss RatiosGross
    
    
    54.2
    %
    
    
    49.9
    %
    
    
    50.7
    %Net
    
    
    55.6
    %
    
    
    51.7
    %
    
    
    55.2
    %Accident Year Loss RatiosGross
    
    
    55.2
    %
    
    
    53.6
    %
    
    
    51.5
    %Net
    
    
    55.9
    %
    
    
    54.5
    %
    
    
    55.8
    %Underwriting Expense RatiosGross
    
    
    30.9
    %
    
    
    30.4
    %
    
    
    29.2
    %Net
    
    
    32.7
    %
    
    
    30.7
    %
    
    
    28.5
    %Combined RatiosGross
    
    
    85.1
    %
    
    
    80.3
    %
    
    
    79.9
    %Net
    
    
    88.3
    %
    
    
    82.4
    %
    
    
    83.7
    %Return on average equity (1)
    
    
    13.9
    %
    
    
    17.8
    %
    
    
    18.0
    %
 (1)
    
    The impact of net realized investment gains (losses) and
acquisition-related transaction costs, net of tax lowered the return on average equity by 1.3%,
2.9% and 4.6% for the years ended December 31, 2009, 2008 and 2007, respectively. 52




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##### Table of Contents



Consolidated Results of Operations 2009 Compared to 2008
 Total revenues .
 %($ in millions)
    
    Amount
    
    ChangeGross premiums written for the year ended December 31, 2008
    
    
    $ 634.8Gross premiums written from companies acquired during year
    
    
    346.3
    
    
    
    55
    %Organic growth during year
    
    
    89.6
    
    
    
    14
    %Gross premiums written for the year ended December 31, 2009
    
    
    $ 1,070.7
    
    
    
    69
    %
  Premiums earned .
 CededDates
    
    Quota Share Reinsurance Agreement With
    
    AmountJanuary 1, 2007 - March 31, 2007
    
    CastlePoint Reinsurance
    
    
    49
    %April 1 2007 - June 30, 2007
    
    CastlePoint Reinsurance
    
    
    40
    %April 1 2007 - June 30, 2007
    
    CastlePoint Insurance Company
    
    
    9
    %July 1, 2007 - December 31, 2007 (2)
    
    CastlePoint Reinsurance
    
    
    40
    %January 1, 2008 - March 31, 2008 (2)
    
    CastlePoint Reinsurance
    
    
    40
    %April 1, 2008 - June 30, 2008 (2)
    
    CastlePoint Reinsurance
    
    
    35
    %July 1, 2008 - September 30, 2008
    
    CastlePoint Reinsurance
    
    
    25
    %April 1, 2008 - September 30, 2008
    
    Swiss Re America Corporation
    
    
    5
    %October 1, 2008 - December 31, 2008
    
    CastlePoint Reinsurance
    
    
    17.5
    %October 1, 2008 - December 31, 2008
    
    Swiss Re America Corporation
    
    
    28.0
    %July 1, 2009 to December 31, 2009
    
    CastlePoint Reinsurance
    
    
    50.0
    %October 1, 2009 - December 31, 2009 (3)
    
    Swiss Re America Corporation
    
    
    37.5
    %October 1, 2009 - December 31, 2009 (3)
    
    Allianz Risk Transfer AG (Bermuda)
    
    
    12.5
    %
 53




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##### Table of Contents



(1)
    
    Multi year quota share reinsurance agreements with CastlePoint Reinsurance began April 6, 2006.(2)
    
    On July 1, 2008, we reduced the ceding percentage under our brokerage business quota share reinsurance agreement with CastlePoint
Reinsurance to 25% applicable to both the ceded unearned premium reserve as of July 1, 2008 and new and renewal premiums
written in the third quarter of 2008.(3)
    
    Quota share reinsures brokerage liability business for commercial multi-line and other liability. Commission and fee income .
 Net investment income and net realized gains (losses) .
   Loss and loss adjustment expenses .
  Operating expenses.
 Acquisition-related transaction costs.
 54




---



##### Table of Contents



Interest expense.
 Other income.
 Income tax expense .
  Net income and return on average equity .
 Consolidated Results of Operations 2008 Compared to 2007
 Total revenues.
 Premiums earned.
   Commission and fee income.
 Net investment income and realized gains (losses).
 55




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##### Table of Contents



Loss and loss adjustment expenses.
 Operating expenses.
 Interest expense.
 Other income.
 Income tax expense.
 Net income and return on average equity.
 56




---



##### Table of Contents



Brokerage Insurance Segment Results of Operations
 For the year ended December 31,($ in millions)
    
    2009
    
    Change
    
    Percent
    
    2008
    
    Change
    
    Percent
    
    2007RevenuesPremiums earnedGross premiums earned
    
    
    $ 774.9
    
    
    
    $ 274.5
    
    
    
    54.9
    %
    
    
    500.4
    
    
    $
    (4.5
    )
    
    
    (0.9
    %)
    
    
    $ 504.9Less: ceded premiums earned
    
    
    (149.9
    )
    
    
    53.8
    
    
    
    (26.4
    %)
    
    
    (203.7
    )
    
    
    17.0
    
    
    
    (7.7
    %)
    
    
    (220.7
    )Net premiums earned
    
    
    625.0
    
    
    
    328.3
    
    
    
    110.6
    %
    
    
    296.7
    
    
    
    12.5
    
    
    
    4.4
    %
    
    
    284.2Ceding commission revenue
    
    
    34.2
    
    
    
    (26.9
    )
    
    
    (43.9
    %)
    
    
    61.1
    
    
    
    (5.4
    )
    
    
    (8.1
    %)
    
    
    66.5Policy billing fees
    
    
    3.0
    
    
    
    1.0
    
    
    
    46.9
    %
    
    
    2.0
    
    
    
    (0.1
    )
    
    
    (4.8
    %)
    
    
    2.1Total revenue
    
    
    662.2
    
    
    
    302.4
    
    
    
    84.1
    %
    
    
    359.8
    
    
    
    7.0
    
    
    
    2.0
    %
    
    
    352.8ExpensesLoss and loss adjustment expensesGross loss and loss adjustment expenses
    
    
    405.2
    
    
    
    161.9
    
    
    
    66.5
    %
    
    
    243.3
    
    
    
    (11.6
    )
    
    
    (4.5
    %)
    
    
    254.9Less: ceded
loss and loss adjustment expenses
    
    
    (65.2
    )
    
    
    25.6
    
    
    
    (28.2
    %)
    
    
    (90.8
    )
    
    
    7.3
    
    
    
    (7.5
    %)
    
    
    (98.1
    )Net loss and loss adjustment expenses
    
    
    340.0
    
    
    
    187.5
    
    
    
    0.0
    %
    
    
    152.5
    
    
    
    (4.3
    )
    
    
    0.0
    %
    
    
    156.8Underwriting expensesDirect commission expenses
    
    
    143.1
    
    
    
    58.5
    
    
    
    69.1
    %
    
    
    84.6
    
    
    
    2.0
    
    
    
    2.4
    %
    
    
    82.6Other underwriting expenses
    
    
    103.5
    
    
    
    34.5
    
    
    
    50.2
    %
    
    
    69.0
    
    
    
    2.0
    
    
    
    2.8
    %
    
    
    67.0Total underwriting expenses
    
    
    246.6
    
    
    
    93.1
    
    
    
    60.6
    %
    
    
    153.6
    
    
    
    4.0
    
    
    
    2.6
    %
    
    
    149.6Underwriting profit
    
    
    $ 75.6
    
    
    
    $ 21.9
    
    
    
    40.7
    %
    
    
    $ 53.7
    
    
    
    $ 7.3
    
    
    
    15.8
    %
    
    
    $ 46.4Key MeasuresPremiums writtenGross premiums written
    
    
    $ 806.5
    
    
    
    $ 296.5
    
    
    
    58.1
    %
    
    
    $ 510.0
    
    
    
    $ 12.1
    
    
    
    2.4
    %
    
    
    $ 497.9Less: ceded premiums written
    
    
    (149.7
    )
    
    
    44.7
    
    
    
    (23.0
    %)
    
    
    (194.4
    )
    
    
    48.6
    
    
    
    (20.0
    %)
    
    
    (243.0
    )Net premiums written
    
    
    $ 656.8
    
    
    
    $ 341.2
    
    
    
    108.1
    %
    
    
    $ 315.6
    
    
    
    $ 60.7
    
    
    
    23.8
    %
    
    
    $ 254.9
 Year Ended December 31,2009
    
    
    2008
    
    
    2007Ceded premiums as a percent of gross premiumsWritten
    
    
    18.6
    %
    
    
    38.1
    %
    
    
    48.8
    %Earned
    
    
    19.3
    %
    
    
    40.7
    %
    
    
    43.7
    %Loss RatiosGross
    
    
    52.3
    %
    
    
    48.6
    %
    
    
    50.5
    %Net
    
    
    54.4
    %
    
    
    51.4
    %
    
    
    55.2
    %Accident Year Loss RatiosGross
    
    
    53.9
    %
    
    
    53.0
    %
    
    
    51.3
    %Net
    
    
    55.2
    %
    
    
    54.4
    %
    
    
    55.7
    %Underwriting Expense RatiosGross
    
    
    31.4
    %
    
    
    30.3
    %
    
    
    29.2
    %Net
    
    
    33.5
    %
    
    
    30.5
    %
    
    
    28.5
    %Combined RatiosGross
    
    
    83.7
    %
    
    
    78.9
    %
    
    
    79.7
    %Net
    
    
    87.9
    %
    
    
    81.9
    %
    
    
    83.7
    %
 Brokerage Insurance Segment Results of Operations 2009 Compared to 2008
 Gross premiums .
 57




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Ceded premiums .
  Net premiums .
 Ceding commission revenue.
 Loss and loss adjustment expenses and loss ratio .
  Underwriting expenses and underwriting expense ratio
   58




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##### Table of Contents



Underwriting profit and combined ratio .
  Brokerage Insurance Segment Results of Operations 2008 Compared to 2007
 Gross premiums .
 Ceded premiums .
 Net premiums .
 Ceding commission revenue.
 Loss and loss adjustment expenses and loss ratio .
 Underwriting expenses and underwriting expense ratio
  Underwriting profit and combined ratio .
 59




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Specialty Business Segment Results of Operations
 Year Ended December 31,($ in millions)
    
    2009
    
    
    Change
    
    
    Percent
    
    
    2008
    
    
    Change
    
    
    Percent
    
    
    2007RevenuesPremiums earnedGross premiums earned
    
    
    $ 271.4
    
    
    
    $ 193.4
    
    
    
    248.1%
    
    
    
    $ 78.0
    
    
    
    $ 61.0
    
    
    
    358.8%
    
    
    
    $ 17.0Less: ceded premiums earned
    
    
    (41.6)
    
    
    
    18.5
    
    
    
    -30.7%
    
    
    
    (60.1)
    
    
    
    (45.0)
    
    
    
    298.1%
    
    
    
    (15.1)Net premiums earned
    
    
    229.8
    
    
    
    211.9
    
    
    NM
    
    
    
    17.9
    
    
    
    16.0
    
    
    NM
    
    
    
    1.9Ceding commission revenue
    
    
    9.7
    
    
    
    (8.4)
    
    
    
    -46.4%
    
    
    
    18.1
    
    
    
    13.6
    
    
    
    304.4%
    
    
    
    4.5Total
    
    
    239.5
    
    
    
    203.5
    
    
    NM
    
    
    
    36.0
    
    
    
    29.6
    
    
    
    464.3%
    
    
    
    6.4ExpensesLoss and loss adjustment expensesGross loss and loss adjustment expenses
    
    
    161.6
    
    
    
    116.6
    
    
    
    258.8%
    
    
    
    45.0
    
    
    
    35.1
    
    
    
    356.4%
    
    
    
    9.9Less: ceded
loss and loss adjustment expenses
    
    
    (26.1)
    
    
    
    8.7
    
    
    
    -25.1%
    
    
    
    (34.8)
    
    
    
    (26.0)
    
    
    
    298.1%
    
    
    
    (8.8)Net loss and loss adjustment expenses
    
    
    135.5
    
    
    
    125.3
    
    
    NM
    
    
    
    10.2
    
    
    
    9.1
    
    
    NM
    
    
    
    1.1Underwriting expensesDirect commission expense
    
    
    59.7
    
    
    
    38.7
    
    
    
    184.1%
    
    
    
    21.0
    
    
    
    16.6
    
    
    
    380.7%
    
    
    
    4.4Other underwriting expenses
    
    
    20.1
    
    
    
    16.8
    
    
    NM
    
    
    
    3.3
    
    
    
    2.6
    
    
    
    388.2%
    
    
    
    0.7Total underwriting expenses
    
    
    79.8
    
    
    
    55.5
    
    
    
    228.5%
    
    
    
    24.3
    
    
    
    19.2
    
    
    
    381.7%
    
    
    
    5.1Underwriting profit
    
    
    $ 24.2
    
    
    
    $ 22.7
    
    
    NM
    
    
    
    $ 1.5
    
    
    
    $ 1.3
    
    
    NM
    
    
    
    $ 0.2Key MeasuresPremiums writtenGross premiums written
    
    
    $ 264.2
    
    
    
    $ 139.4
    
    
    
    111.7%
    
    
    
    $ 124.8
    
    
    
    $ 98.7
    
    
    
    378.0%
    
    
    
    $ 26.1Less: ceded premiums written
    
    
    (34.9)
    
    
    
    61.5
    
    
    
    -63.8%
    
    
    
    (96.4)
    
    
    
    (74.6)
    
    
    
    341.9%
    
    
    
    (21.8)Net premiums written
    
    
    $ 229.3
    
    
    
    $ 200.9
    
    
    NM
    
    
    
    $ 28.4
    
    
    
    $ 24.1
    
    
    NM
    
    
    
    $ 4.3NM is shown where percentage change exceeds 500%Year Ended December 31,2009
    
    
    2008
    
    
    2007Ceded premiums as a percent of gross premiumsWritten
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13.2%
    
    
    
    77.2%
    
    
    
    83.6%Earned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.4%
    
    
    
    77.1%
    
    
    
    88.9%Loss RatiosGross
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59.5%
    
    
    
    57.7%
    
    
    
    58.0%Net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59.0%
    
    
    
    57.2%
    
    
    
    59.1%Accident Year Loss RatiosGross
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58.9%
    
    
    
    57.7%
    
    
    
    58.0%Net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57.9%
    
    
    
    57.2%
    
    
    
    59.1%Underwriting Expense RatiosGross
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29.4%
    
    
    
    31.1%
    
    
    
    29.7%Net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30.5%
    
    
    
    34.6%
    
    
    
    29.7%Combined RatiosGross
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88.9%
    
    
    
    88.9%
    
    
    
    87.7%Net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89.5%
    
    
    
    91.8%
    
    
    
    88.8%
 
  Specialty Business Segment Results of Operations 2009 Compared to 2008
 Gross premiums.
 60




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##### Table of Contents



Ceded premiums.
 Net premiums.
  Loss and loss adjustment expenses
 Underwriting expenses and underwriting expense ratio.
  Underwriting profit and combined ratio.
 Specialty Business Segment Results of Operations 2008 Compared to 2007
 Gross premiums.
 Ceded premiums.
 Net premiums.
 Loss and loss adjustment expenses
 Underwriting expenses and underwriting expense ratio.
 Underwriting profit and combined ratio.
 61




---



##### Table of Contents



Insurance Services Segment Results of Operations
 Year ended December 31,($ in millions)
    
    2009
    
    
    Change
    
    
    Percent
    
    
    2008
    
    
    Change
    
    
    Percent
    
    
    2007RevenueDirect commission revenue from
managing general agency
    
    
    $ 1.6
    
    
    
    $ (56.6)
    
    
    $
    -97.3%
    
    
    
    $ 58.2
    
    
    
    $ 29.4
    
    
    
    102.2%
    
    
    
    $ 28.8Claims administration revenue
    
    
    1.5
    
    
    
    (3.9)
    
    
    
    -72.5%
    
    
    
    5.4
    
    
    
    3.1
    
    
    
    133.0%
    
    
    
    2.3Other administration revenue
    
    
    0.5
    
    
    
    (3.1)
    
    
    
    -84.0%
    
    
    
    3.6
    
    
    
    2.2
    
    
    
    150.5%
    
    
    
    1.4Reinsurance intermediary fees
    
    
    1.5
    
    
    
    0.5
    
    
    
    50.3%
    
    
    
    1.0
    
    
    
    0.2
    
    
    
    28.6%
    
    
    
    0.8Policy billing fees
    
    
    -
    
    
    
    (0.3)
    
    
    
    -94.0%
    
    
    
    0.3
    
    
    
    0.3
    
    
    NM
    
    
    
    -Total revenue
    
    
    5.1
    
    
    
    (63.4)
    
    
    
    -92.5%
    
    
    
    68.5
    
    
    
    35.2
    
    
    
    105.5%
    
    
    
    33.3ExpensesDirect commission expenses paid
to producers
    
    
    1.7
    
    
    
    (25.1)
    
    
    
    -93.6%
    
    
    
    26.8
    
    
    
    12.7
    
    
    
    90.7%
    
    
    
    14.1Other insurance services expenses
    
    
    1.4
    
    
    
    (10.9)
    
    
    
    -88.3%
    
    
    
    12.3
    
    
    
    6.6
    
    
    
    113.1%
    
    
    
    5.7Claims expense reimbursement to TICNY
    
    
    1.1
    
    
    
    (4.3)
    
    
    
    -79.0%
    
    
    
    5.4
    
    
    
    3.1
    
    
    
    134.2%
    
    
    
    2.3Total
    
    
    4.2
    
    
    
    (40.3)
    
    
    
    -90.4%
    
    
    
    44.5
    
    
    
    22.4
    
    
    
    101.1%
    
    
    
    22.1Insurance services pre-tax income
    
    
    $ 0.9
    
    
    
    $ (23.1)
    
    
    
    -96.4%
    
    
    
    $ 24.0
    
    
    
    $ 12.8
    
    
    
    114.3%
    
    
    
    $ 11.2Premiums produced by TRM on behalf
of issuing companies
    
    
    $ 11.7
    
    
    
    $ (163.7)
    
    
    
    -93.3%
    
    
    
    $ 175.4
    
    
    
    $ 90.3
    
    
    
    106.1%
    
    
    
    $ 85.1
  Insurance Services Segment Results of Operations 2009 Compared to 2008
 Total revenues.
 Direct commission expense .
 Other insurance services expenses .
 Claims expense reimbursement .
 Pre-tax income .
  62




---



##### Table of Contents



Insurance Services Segment Results of Operations 2008 Compared to 2007
 Total revenues .
 Direct commission expense .
 Other insurance services expenses.
 Claims expense reimbursement .
 Pre-tax income.
 Investments
 Portfolio Summary
    63




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##### Table of Contents



Cost or
    
    
    Gross
    
    
    Gross Unrealized Losses
    
    
    
    
    
    
    % ofAmortized
    
    
    Unrealized
    
    
    Less than 12
    
    
    More than 12
    
    
    Fair
    
    
    Fair($ in thousands)
    
    Cost
    
    
    Gains
    
    
    Months
    
    
    Months
    
    
    Value
    
    
    ValueDecember 31, 2009U.S. Treasury securities
    
    
    $ 73,281
    
    
    
    $ 235
    
    
    
    $ (225)
    
    
    
    $ -
    
    
    
    $ 73,291
    
    
    
    3.9%U.S. Agency securities
    
    
    40,063
    
    
    
    134
    
    
    
    (214)
    
    
    
    -
    
    
    
    39,983
    
    
    
    2.1%Municipal bonds
    
    
    508,204
    
    
    
    18,241
    
    
    
    (587)
    
    
    
    (143)
    
    
    
    525,715
    
    
    
    27.7%Corporate and other bonds
    
    
    589,973
    
    
    
    27,934
    
    
    
    (1,054)
    
    
    
    (1,732)
    
    
    
    615,121
    
    
    
    32.4%Commercial, residential and
asset-backed securities
    
    
    517,596
    
    
    
    25,834
    
    
    
    (1,691)
    
    
    
    (12,253)
    
    
    
    529,486
    
    
    
    27.9%Total fixed-maturity securities
    
    
    1,729,117
    
    
    
    72,378
    
    
    
    (3,771)
    
    
    
    (14,128)
    
    
    
    1,783,596
    
    
    
    94.0%Equity securities
    
    
    78,051
    
    
    
    997
    
    
    
    (1,591)
    
    
    
    (724)
    
    
    
    76,733
    
    
    
    4.1%Short-term investments
    
    
    36,500
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    36,500
    
    
    
    1.9%Total
    
    
    $ 1,843,668
    
    
    
    $ 73,375
    
    
    
    $ (5,362)
    
    
    
    $ (14,852)
    
    
    
    $ 1,896,829
    
    
    
    100.0%December 31, 2008U.S. Treasury securities
    
    
    $ 26,482
    
    
    
    $ 524
    
    
    
    $ -
    
    
    
    $ -
    
    
    
    $ 27,006
    
    
    
    4.9%U.S. Agency securities
    
    
    361
    
    
    
    38
    
    
    
    -
    
    
    
    -
    
    
    
    399
    
    
    
    0.1%Municipal bonds
    
    
    179,734
    
    
    
    2,865
    
    
    
    (2,485)
    
    
    
    (166)
    
    
    
    179,948
    
    
    
    33.3%Corporate and other bonds
    
    
    210,006
    
    
    
    932
    
    
    
    (13,948)
    
    
    
    (10,015)
    
    
    
    186,975
    
    
    
    34.6%Commercial, residential and
asset-backed securities
    
    
    164,885
    
    
    
    1,838
    
    
    
    (10,603)
    
    
    
    (20,289)
    
    
    
    135,831
    
    
    
    25.1%Total fixed-maturity securities
    
    
    581,468
    
    
    
    6,197
    
    
    
    (27,036)
    
    
    
    (30,470)
    
    
    
    530,159
    
    
    
    98.0%Equity securities
    
    
    12,726
    
    
    
    5
    
    
    
    (60)
    
    
    
    (1,857)
    
    
    
    10,814
    
    
    
    2.0%Total
    
    
    $ 594,194
    
    
    
    $ 6,202
    
    
    
    $ (27,096)
    
    
    
    $ (32,327)
    
    
    
    $ 540,973
    
    
    
    100.0%
 Credit Rating of Fixed-Maturity Securities
  December 31, 2009
    
    
    December 31, 2008Percentage of
    
    
    
    
    
    
    Percentage of($ in thousands)
    
    Fair Value
    
    
    Fair Value
    
    
    Fair Value
    
    
    Fair ValueRatingU.S. Treasury securities
    
    
    $ 73,291
    
    
    
    4.1%
    
    
    
    $ 27,006
    
    
    
    5.1%AAA
    
    
    597,932
    
    
    
    33.5%
    
    
    
    187,377
    
    
    
    35.3%AA
    
    
    377,283
    
    
    
    21.2%
    
    
    
    110,601
    
    
    
    20.9%A
    
    
    400,638
    
    
    
    22.4%
    
    
    
    113,651
    
    
    
    21.4%BBB
    
    
    165,173
    
    
    
    9.3%
    
    
    
    62,566
    
    
    
    11.8%Below BBB
    
    
    169,278
    
    
    
    9.5%
    
    
    
    28,958
    
    
    
    5.5%Total
    
    
    $ 1,783,596
    
    
    
    100.0%
    
    
    
    $ 530,159
    
    
    
    100.0%
 Fixed Maturity InvestmentsTime to Maturity
  64




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##### Table of Contents



December 31, 2009
    
    
    December 31, 2008Percentage of
    
    
    
    
    
    
    Percentage ofFair Market
    
    
    Fair Market
    
    
    Fair Market
    
    
    Fair Market($ in thousands)
    
    Value
    
    
    Value
    
    
    Value
    
    
    ValueLess than one year
    
    
    $ 30,465
    
    
    
    1.7%
    
    
    
    $ 8,789
    
    
    
    2.1%One to five years
    
    
    355,402
    
    
    
    19.9%
    
    
    
    112,514
    
    
    
    19.4%Five to ten years
    
    
    492,517
    
    
    
    27.6%
    
    
    
    176,218
    
    
    
    31.0%More than ten years
    
    
    375,726
    
    
    
    21.1%
    
    
    
    96,807
    
    
    
    13.7%Mortgage and asset-backed securities
    
    
    529,486
    
    
    
    29.7%
    
    
    
    135,831
    
    
    
    33.8%Total
    
    
    $ 1,783,596
    
    
    
    100.0%
    
    
    
    $ 530,159
    
    
    
    100.0%
 Fixed Maturity Investments with Third Party Guarantees
  With
    
    
    Without($ in thousands)
    
    Guarantee
    
    
    GuaranteeAAA
    
    
    $ 3,905
    
    
    
    $ 2,032AA
    
    
    142,856
    
    
    
    115,090A
    
    
    60,217
    
    
    
    79,455BBB
    
    
    -
    
    
    
    2,536BB
    
    
    978
    
    
    
    978No underlying rating
    
    
    -
    
    
    
    7,865Total
    
    
    $ 207,956
    
    
    
    $ 207,956
  Guaranteed
    
    
    Percent($ in thousands)
    
    Amount
    
    
    of TotalNational Public Finance Guarantee Corp.
    
    
    $ 91,069
    
    
    
    44%Assured Guaranty Municipal Corp.
    
    
    53,280
    
    
    
    25%Ambac Financial Corp.
    
    
    33,695
    
    
    
    16%Berkshire Hathaway Assurance Corp.
    
    
    5,628
    
    
    
    3%FGIC Corp.
    
    
    5,444
    
    
    
    3%Others
    
    
    18,840
    
    
    
    9%Total
    
    
    $ 207,956
    
    
    
    100%
 Fair Value Consideration
  65




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##### Table of Contents



Level 3 AssetsAssets Carried at
    
    Fair Value
    
    as a Percentage ofFair Value at
    
    of Level 3
    
    Total Assets Carried($ in thousands)
    
    December 31, 2009
    
    Assets
    
    at Fair ValueFixed-maturity investments
    
    
    $ 1,783,596
    
    
    
    $ 13,595
    
    
    
    0.8%Equity investments
    
    
    76,733
    
    
    
    -Short-term investments
    
    
    36,500
    
    
    
    -Total investments available for sale
    
    
    1,896,829
    
    
    
    13,595
    
    
    
    0.7%Cash and cash equivalents
    
    
    164,882
    
    
    
    -Total
    
    
    $ 2,061,711
    
    
    
    $ 13,595
    
    
    
    0.7%
 Unrealized Losses
   66




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##### Table of Contents



Less than 12 Months
    
    
    12 Months or Longer
    
    
    TotalFair
    
    
    Unrealized
    
    
    
    
    
    
    Fair
    
    
    Unrealized
    
    
    
    
    
    
    Fair
    
    
    Unrealized($ in thousands)
    
    No.
    
    
    Value
    
    
    Losses
    
    
    No.
    
    
    Value
    
    
    Losses
    
    
    No.
    
    
    Value
    
    
    LossesDecember 31, 2009U.S. Treasury securities
    
    
    24
    
    
    
    $ 43,421
    
    
    
    $ (225)
    
    
    
    -
    
    
    
    $ -
    
    
    
    $ -
    
    
    
    24
    
    
    
    $ 43,421
    
    
    
    $ (225)U.S. Agency securities
    
    
    21
    
    
    
    27,652
    
    
    
    (214)
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    21
    
    
    
    27,652
    
    
    
    (214)Municipal bonds
    
    
    42
    
    
    
    50,526
    
    
    
    (587)
    
    
    
    5
    
    
    
    2,569
    
    
    
    (143)
    
    
    
    47
    
    
    
    53,095
    
    
    
    (730)Corporate and other
bondsFinance
    
    
    32
    
    
    
    28,342
    
    
    
    (291)
    
    
    
    20
    
    
    
    14,906
    
    
    
    (1,099)
    
    
    
    52
    
    
    
    43,248
    
    
    
    (1,390)Industrial
    
    
    104
    
    
    
    69,475
    
    
    
    (726)
    
    
    
    25
    
    
    
    14,563
    
    
    
    (608)
    
    
    
    129
    
    
    
    84,038
    
    
    
    (1,334)Utilities
    
    
    6
    
    
    
    3,575
    
    
    
    (37)
    
    
    
    2
    
    
    
    625
    
    
    
    (25)
    
    
    
    8
    
    
    
    4,200
    
    
    
    (62)Commercial mortgage-backed securities
    
    
    20
    
    
    
    25,810
    
    
    
    (598)
    
    
    
    27
    
    
    
    22,904
    
    
    
    (8,138)
    
    
    
    47
    
    
    
    48,714
    
    
    
    (8,736)Residential mortgage-backed securitiesAgency backed
    
    
    43
    
    
    
    79,005
    
    
    
    (963)
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    43
    
    
    
    79,005
    
    
    
    (963)Non-agency backed
    
    
    4
    
    
    
    1,081
    
    
    
    (14)
    
    
    
    37
    
    
    
    19,672
    
    
    
    (2,910)
    
    
    
    41
    
    
    
    20,753
    
    
    
    (2,924)Asset-backed securities
    
    
    5
    
    
    
    334
    
    
    
    (116)
    
    
    
    11
    
    
    
    2,962
    
    
    
    (1,205)
    
    
    
    16
    
    
    
    3,296
    
    
    
    (1,321)Total fixed-maturity
securities
    
    
    301
    
    
    
    329,221
    
    
    
    (3,771)
    
    
    
    127
    
    
    
    78,201
    
    
    
    (14,128)
    
    
    
    428
    
    
    
    407,422
    
    
    
    (17,899)Preferred stocks
    
    
    87
    
    
    
    59,243
    
    
    
    (1,441)
    
    
    
    6
    
    
    
    4,827
    
    
    
    (724)
    
    
    
    93
    
    
    
    64,070
    
    
    
    (2,165)Common stocks
    
    
    4
    
    
    
    31
    
    
    
    (150)
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    4
    
    
    
    31
    
    
    
    (150)Total
    
    
    392
    
    
    
    $ 388,495
    
    
    
    $ (5,362)
    
    
    
    133
    
    
    
    $ 83,028
    
    
    
    $ (14,852)
    
    
    
    525
    
    
    
    $ 471,523
    
    
    
    $ (20,214)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
    
    
    
    (19)
    
    
    
    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
    
    
    
    551
    
    
    
    (51)
    
    
    
    22
    
    
    
    7,032
    
    
    
    (2,701)Total fixed-maturity
securities
    
    
    296
    
    
    
    203,208
    
    
    
    (27,036)
    
    
    
    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
    
    
    
    $ (32,328)
    
    
    
    417
    
    
    
    $ 274,952
    
    
    
    $ (59,424)
   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
    
    
    24
    
    
    
    $ 43,421
    
    
    
    $ (225)
    
    
    
    -1%
    
    
    
    100%
    
    
    
    0%
    
    
    
    0%
    
    
    
    0%
    
    
    
    0%U.S. Agency securities
    
    
    21
    
    
    
    27,652
    
    
    
    (214)
    
    
    
    -1%
    
    
    
    73%
    
    
    
    9%
    
    
    
    12%
    
    
    
    6%
    
    
    
    0%Municipal bonds
    
    
    47
    
    
    
    53,095
    
    
    
    (730)
    
    
    
    -1%
    
    
    
    21%
    
    
    
    41%
    
    
    
    26%
    
    
    
    8%
    
    
    
    4%Corporate and other bonds
    
    
    189
    
    
    
    131,487
    
    
    
    (2,786)
    
    
    
    -2%
    
    
    
    1%
    
    
    
    14%
    
    
    
    49%
    
    
    
    16%
    
    
    
    20%Commercial mortgage-backed securities
    
    
    47
    
    
    
    48,714
    
    
    
    (8,736)
    
    
    
    -15%
    
    
    
    31%
    
    
    
    2%
    
    
    
    46%
    
    
    
    6%
    
    
    
    15%Residential mortgage-backed securities
    
    
    41
    
    
    
    20,753
    
    
    
    (2,924)
    
    
    
    -12%
    
    
    
    26%
    
    
    
    4%
    
    
    
    35%
    
    
    
    9%
    
    
    
    26%Asset-backed securities
    
    
    16
    
    
    
    3,296
    
    
    
    (1,321)
    
    
    
    -29%
    
    
    
    16%
    
    
    
    7%
    
    
    
    13%
    
    
    
    0%
    
    
    
    64%Equities
    
    
    97
    
    
    
    64,101
    
    
    
    (2,315)
    
    
    
    -4%
    
    
    
    0%
    
    
    
    0%
    
    
    
    50%
    
    
    
    24%
    
    
    
    26%
 67




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##### Table of Contents



Corporate and other bonds
  Corporate and Other Bonds  Fair Value
 RatingBB or
    
    
    Fair($ in thousands)
    
    AAA
    
    
    AA
    
    
    A
    
    
    B
    
    
    lower
    
    
    valueSectorFinancial
    
    
    $ -
    
    
    
    $ 5,251
    
    
    
    $ 23,574
    
    
    
    $ 10,559
    
    
    
    $ 3,864
    
    
    
    $ 43,248Industrial
    
    
    928
    
    
    
    12,921
    
    
    
    38,672
    
    
    
    9,856
    
    
    
    21,661
    
    
    
    84,038Utilities
    
    
    -
    
    
    
    -
    
    
    
    2,679
    
    
    
    -
    
    
    
    1,521
    
    
    
    4,200Total fair value
    
    
    $ 928
    
    
    
    $ 18,172
    
    
    
    $ 64,925
    
    
    
    $ 20,415
    
    
    
    $ 27,046
    
    
    
    $ 131,486% of fair value
    
    
    1%
    
    
    
    14%
    
    
    
    49%
    
    
    
    16%
    
    
    
    21%
    
    
    
    100%
 Unrealized Loss
 RatingBB or
    
    
    Unrealized($ in thousands)
    
    AAA
    
    
    AA
    
    
    A
    
    
    B
    
    
    lower
    
    
    LossSectorFinancial
    
    
    $ -
    
    
    
    $ (16)
    
    
    
    $ (427)
    
    
    
    $ (774)
    
    
    
    $ (173)
    
    
    
    (1,390)Industrial
    
    
    (7)
    
    
    
    (233)
    
    
    
    (282)
    
    
    
    (178)
    
    
    
    (633)
    
    
    
    (1,333)Utilities
    
    
    -
    
    
    
    -
    
    
    
    (10)
    
    
    
    -
    
    
    
    (52)
    
    
    
    (62)Total unrealized loss
    
    
    $ (7)
    
    
    
    $ (249)
    
    
    
    $ (719)
    
    
    
    $ (952)
    
    
    
    $ (858)
    
    
    
    $ (2,785)% of book value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2%)
  Securitized assets
  Commercial Mortgage-backed Securities  Fair Value
 Rating($ in thousands)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BB or
    
    
    FairDeal Origination Year
    
    AAA
    
    
    AA
    
    
    A
    
    
    BBB
    
    
    Lower
    
    
    Value2002
    
    
    $ -
    
    
    
    $ -
    
    
    
    $ -
    
    
    
    $ -
    
    
    
    $ 180
    
    
    
    $ 1802005
    
    
    2,937
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    2,270
    
    
    
    5,2072006
    
    
    3,407
    
    
    
    -
    
    
    
    -
    
    
    
    363
    
    
    
    73
    
    
    
    3,8432007
    
    
    8,580
    
    
    
    970
    
    
    
    22,295
    
    
    
    2,685
    
    
    
    4,955
    
    
    
    39,484Total fair value
    
    
    $ 14,924
    
    
    
    $ 970
    
    
    
    $ 22,295
    
    
    
    $ 3,048
    
    
    
    $ 7,478
    
    
    
    $ 48,714% of fair value
    
    
    31%
    
    
    
    2%
    
    
    
    46%
    
    
    
    6%
    
    
    
    15%
    
    
    
    100%
 Unrealized losses
 Rating($ in thousands)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BB or
    
    
    UnrealizedDeal Origination Year
    
    AAA
    
    
    AA
    
    
    A
    
    
    BBB
    
    
    Lower
    
    
    Loss2002
    
    
    $ -
    
    
    
    $ -
    
    
    
    $ -
    
    
    
    $ -
    
    
    
    $ (294)
    
    
    
    $ (294)2005
    
    
    (52)
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    (67)
    
    
    
    (119)2006
    
    
    (64)
    
    
    
    -
    
    
    
    -
    
    
    
    (1,526)
    
    
    
    (52)
    
    
    
    (1,642)2007
    
    
    (410)
    
    
    
    (983)
    
    
    
    (410)
    
    
    
    (498)
    
    
    
    (4,382)
    
    
    
    (6,683)Total unrealized loss
    
    
    $ (526)
    
    
    
    $ (983)
    
    
    
    $ (410)
    
    
    
    $ (2,024)
    
    
    
    $ (4,795)
    
    
    
    $ (8,738)% of book value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15%)
 68




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##### Table of Contents



Non-agency Residential Mortgage-backed Securities  Fair Value
 Rating($ in thousands)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BB or
    
    
    FairDeal Origination Year
    
    AAA
    
    
    AA
    
    
    A
    
    
    BBB
    
    
    Lower
    
    
    Value2002
    
    
    $ 278
    
    
    
    $ -
    
    
    
    $ -
    
    
    
    $ -
    
    
    
    $ -
    
    
    
    $ 2782003
    
    
    743
    
    
    
    -
    
    
    
    171
    
    
    
    -
    
    
    
    563
    
    
    
    1,4772004
    
    
    4,318
    
    
    
    -
    
    
    
    -
    
    
    
    399
    
    
    
    1,508
    
    
    
    6,2252005
    
    
    -
    
    
    
    855
    
    
    
    2,125
    
    
    
    613
    
    
    
    317
    
    
    
    3,9102006
    
    
    -
    
    
    
    -
    
    
    
    1,648
    
    
    
    -
    
    
    
    235
    
    
    
    1,8832007
    
    
    -
    
    
    
    -
    
    
    
    3,320
    
    
    
    820
    
    
    
    2,840
    
    
    
    6,980Total fair value
    
    
    $ 5,339
    
    
    
    $ 855
    
    
    
    $ 7,264
    
    
    
    $ 1,832
    
    
    
    $ 5,463
    
    
    
    $ 20,753% of fair value
    
    
    26%
    
    
    
    4%
    
    
    
    35%
    
    
    
    9%
    
    
    
    26%
    
    
    
    100%
 Unrealized Losses
 Rating($ in thousands)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BB or
    
    
    UnrealizedDeal Origination Year
    
    AAA
    
    
    AA
    
    
    A
    
    
    BBB
    
    
    Lower
    
    
    Loss2002
    
    
    $ (74)
    
    
    
    $ -
    
    
    
    $ -
    
    
    
    $ -
    
    
    
    $ -
    
    
    
    $ (74)2003
    
    
    (109)
    
    
    
    -
    
    
    
    (2)
    
    
    
    -
    
    
    
    (93)
    
    
    
    (204)2004
    
    
    (113)
    
    
    
    -
    
    
    
    -
    
    
    
    (52)
    
    
    
    (441)
    
    
    
    (606)2005
    
    
    -
    
    
    
    (141)
    
    
    
    (242)
    
    
    
    (430)
    
    
    
    (87)
    
    
    
    (900)2006
    
    
    -
    
    
    
    -
    
    
    
    (216)
    
    
    
    -
    
    
    
    (30)
    
    
    
    (246)2007
    
    
    -
    
    
    
    -
    
    
    
    (297)
    
    
    
    (180)
    
    
    
    (417)
    
    
    
    (894)Total unrealized loss
    
    
    $ (296)
    
    
    
    $ (141)
    
    
    
    $ (757)
    
    
    
    $ (662)
    
    
    
    $ (1,068)
    
    
    
    $ (2,924)% of book value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12%)
 Asset-backed Securities  Fair Value
 Rating($ in thousands)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BB or
    
    
    FairDeal Origination Year
    
    AAA
    
    
    AA
    
    
    A
    
    
    BBB
    
    
    Lower
    
    
    Value2003
    
    
    $ 499
    
    
    
    $ 242
    
    
    
    $ -
    
    
    
    $ -
    
    
    
    $ -
    
    
    
    $ 7412004
    
    
    -
    
    
    
    -
    
    
    
    444
    
    
    
    -
    
    
    
    1,509
    
    
    
    1,9532005
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    571
    
    
    
    5712006
    
    
    16
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    15
    
    
    
    31Total fair value
    
    
    $ 515
    
    
    
    $ 242
    
    
    
    $ 444
    
    
    
    $ -
    
    
    
    $ 2,095
    
    
    
    $ 3,296% of fair value
    
    
    16%
    
    
    
    7%
    
    
    
    13%
    
    
    
    0%
    
    
    
    64%
    
    
    
    100%
 Unrealized Losses
 Rating($ in thousands)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BB or
    
    
    UnrealizedDeal Origination Year
    
    AAA
    
    
    AA
    
    
    A
    
    
    BBB
    
    
    Lower
    
    
    Loss2003
    
    
    $ (2)
    
    
    
    $ (75)
    
    
    
    $ -
    
    
    
    $ -
    
    
    
    $ -
    
    
    
    $ (77)2004
    
    
    -
    
    
    
    -
    
    
    
    (336)
    
    
    
    -
    
    
    
    (792)
    
    
    
    (1,128)2005
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    (0)
    
    
    
    (0)2006
    
    
    (0)
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    (17)
    
    
    
    (17)2007
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    (98)
    
    
    
    (98)Total unrealized loss
    
    
    $ (2)
    
    
    
    $ (75)
    
    
    
    $ (336)
    
    
    
    $ -
    
    
    
    $ (907)
    
    
    
    $ (1,320)% of book value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29%)
  69




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Liquidity and Capital Resources
 Sources and Uses of Funds
        70




---



##### Table of Contents



Cash Flows from Follow-on Offering
  Cash Flows from Issuance of Subordinated Debentures and Perpetual Preferred Stock
   Surplus Levels
  Cash Flows
    Cash Flow Summary
    
    Year ended December 31,($ in millions)
    
    2009
    
    
    2008
    
    
    2007Cash provided by (used in):Operating activities
    
    
    $ 214.7
    
    
    
    $ 61.7
    
    
    
    $ 75.9Investing activities
    
    
    (175.2)
    
    
    
    1.6
    
    
    
    (182.9)Financing activities
    
    
    (10.9)
    
    
    
    (4.7)
    
    
    
    67.5Net increase in cash and cash equivalents
    
    
    28.6
    
    
    
    58.6
    
    
    
    (39.5)Cash and cash equivalents, beginning of year
    
    
    136.3
    
    
    
    77.7
    
    
    
    117.2Cash and cash equivalents, end of period
    
    
    $ 164.9
    
    
    
    $ 136.3
    
    
    
    $ 77.7
 71




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##### Table of Contents



Comparison of Years Ended December 31, 2009 and 2008
    Comparison of Years Ended December 31, 2008 and 2007
    Liquidity
   Commitments
  Payments due by period($ in millions)
    
    Total
    
    
    Less than 1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    After 5 YearsSubordinated Debentures
    
    
    $ 235.1
    
    
    
    $ -
    
    
    
    $ -
    
    
    
    $ -
    
    
    
    $ 235.1Interest on subordinated debentures
    
    
    463.0
    
    
    
    17.3
    
    
    
    34.7
    
    
    
    34.7
    
    
    
    376.3Operating lease obligations
    
    
    60.5
    
    
    
    8.6
    
    
    
    13.6
    
    
    
    10.7
    
    
    
    27.6Gross loss reserves
    
    
    1,132.0
    
    
    
    347.6
    
    
    
    429.9
    
    
    
    210.2
    
    
    
    144.3Total contractual obligations
    
    
    $ 1,890.6
    
    
    
    $ 373.5
    
    
    
    $ 478.2
    
    
    
    $ 255.6
    
    
    
    $ 783.3
  72




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##### Table of Contents



Capital Resources
  PrincipalAmount of
    
    Amount ofInvestment in
    
    JuniorCommon
    
    SubordinatedMaturity
    
    Early
    
    Interest
    
    Securities of
    
    DebentureIssue Date
    
    Issuer
    
    Date
    
    Redemption
    
    Rate
    
    Trust
    
    Issued toTrustMay 2003
    
    Tower Group
Statutory Trust I
    
    May 2033
    
    At our option at
par on or after 
May
15, 2008
    
    Three-month LIBOR
plus 410 basis
points
    
    $0.3 million
    
    $10.3 millionSeptember 2003
    
    Tower Group
Statutory Trust II
    
    September 2033
    
    At our option at
par on or after
September 30, 2008
    
    7.5% until September 30, 2008; three-month LIBOR plus 400 basis points thereafter
    
    $0.3 million
    
    $10.3 millionMay 2004
    
    Preserver Capital
Trust I
    
    May 2034
    
    At our option at
par on or after May
24, 2009
    
    Three-month LIBOR
plus 425 basis
points
    
    $0.4 million
    
    $12.4 millionDecember 2004
    
    Tower Group
Statutory Trust III
    
    December 2034
    
    At our option at
par on or after
December 15, 2009
    
    7.4% until December
7, 2009;
three-month LIBOR
plus 340 basis
points thereafter
    
    $0.4 million
    
    $13.4 millionDecember 2004
    
    Tower Group
Statutory Trust IV
    
    March 2035
    
    At our option at
par on or after
December 21, 2009
    
    Three-month LIBOR
plus 340 basis
points
    
    $0.4 million
    
    $13.4 millionMarch 2006
    
    Tower Group
Statutory Trust V
    
    April 2036
    
    At our option at
par on or after
April 7, 2011
    
    8.5625% until March
31, 2011;
three-month LIBOR
plus 330 basis
points thereafter
    
    $0.6 million
    
    $20.6 millionJanuary 2007
    
    Tower Group
Statutory Trust VI
    
    March 2037
    
    At our option at
par on or after
March 15, 2012
    
    8.155% until
January 25, 2012;
three-month LIBOR
plus 300 basis
points thereafter
    
    $0.6 million
    
    $20.6 millionDecember 2006
    
    CastlePoint
Management
Statutory Trust II
    
    December 2036
    
    At our option at
par on or after
December 14, 2011
    
    8.5551% until
December 14, 2011;
three-month LIBOR
plus 330 basis
points thereafter
    
    $1.6 million
    
    $51.6 millionDecember 2006
    
    CastlePoint
Management
Statutory Trust I
    
    December 2036
    
    At our option at
par on or after
December 1, 2011
    
    8.66% until
December 1, 2011;
three-month LIBOR
plus 350 basis
points thereafter
    
    $1.6 million
    
    $51.6 millionSeptember 2007
    
    CastlePoint Bermuda
Capital Trust I
    
    December 2037
    
    At our option at
par on or after
September 27, 2012
    
    8.39% until
September 27, 2012;
three-month LIBOR
plus 350 basis
points thereafter
    
    $0.9 million
    
    $30.9 million
 73




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##### Table of Contents




    
    non-payment of interest on the trust preferred securities, unless such non-payment
is due to a valid extension of an interest payment period;
    
    non-payment of all or any part of the principal of the trust preferred securities;
    
    our failure to comply with the covenants or other provisions of the indentures or
the trust preferred securities; or
    
    bankruptcy or liquidation of us or the trusts.
   Off-Balance Sheet Arrangements
  Inflation
   Adoption of New Accounting Pronouncements
  Marketplace Conditions and Trends
  74




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##### Table of Contents



Item 7A. Quantitative And Qualitative Disclosures About Market Risk
  
    
    changes in interest rates,
    
    changes in the credit quality of issuers of investment securities and reinsurers, and
    
    changes in equity prices.
 75




---



##### Table of Contents



Interest Rate Risk
    Sensitivity Analysis
     Estimated Increase
    
    Estimated Percentage(Decrease) in Fair Value
    
    Increase (Decrease)Change in interest rate
    
    ($ in thousands)
    
    in Fair Value300 basis point rise
    
    $(255,967)
    
    -14.3%200 basis point rise
    
    (174,779)
    
    -9.7%100 basis point rise
    
    (88,647)
    
    -4.9%100 basis point decline
    
    91,545
    
    5.1%
   76




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##### Table of Contents



Credit Risk
    Equity Risk
  77




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Index to Consolidated Financial Statements
 PageReport of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets as of December 31, 2009 and 2008
    
    F-4Consolidated Statements of Income and Comprehensive Income for the years ended December
31, 2009, 2008, and 2007
    
    F-5Consolidated Statements of Changes in Stockholders Equity for the years ended December
31, 2009, 2008, and 2007
    
    F-6Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008, and 2007
    
    F-7Notes to Consolidated Financial Statements
    
    F-9
 F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
      F-2




---



##### Table of Contents



F-3




---



##### Table of Contents



Tower Group, Inc.
 
 Consolidated Balance Sheets
 December 31,($ in thousands, except par value and share amounts)
    
    2009
    
    
    2008AssetsFixed-maturity securities, available-for-sale, at fair value (amortized cost of
$1,729,117 and $581,470)
    
    
    $ 1,783,596
    
    
    
    $ 530,159Equity securities, available-for-sale, at fair value (cost of $78,051 and $12,726)
    
    
    76,733
    
    
    
    10,814Short-term investments, available-for sale, at fair value (cost of $36,500)
    
    
    36,500
    
    
    
    -Total investments
    
    
    1,896,829
    
    
    
    540,973Cash and cash equivalents
    
    
    164,882
    
    
    
    136,253Investment income receivable
    
    
    20,240
    
    
    
    6,972Premiums receivable
    
    
    280,357
    
    
    
    188,643Reinsurance recoverable on paid losses
    
    
    14,819
    
    
    
    50,377Reinsurance recoverable on unpaid losses
    
    
    199,687
    
    
    
    222,229Prepaid reinsurance premiums
    
    
    94,818
    
    
    
    153,650Deferred acquisition costs, net of deferred ceding commission revenue
    
    
    170,652
    
    
    
    53,080Deferred income taxes
    
    
    41,757
    
    
    
    36,207Intangible assets
    
    
    53,350
    
    
    
    20,464Goodwill
    
    
    244,690
    
    
    
    18,962Fixed assets, net of accumulated depreciation
    
    
    66,429
    
    
    
    39,038Investment in unconsolidated affiliate
    
    
    -
    
    
    
    29,293Other assets
    
    
    64,442
    
    
    
    42,240Total assets
    
    
        $ 3,312,952
    
    
    
        $ 1,538,381LiabilitiesLoss and loss adjustment expenses
    
    
    1,131,989
    
    
    
    534,991Unearned premium
    
    
    658,940
    
    
    
    328,847Reinsurance balances payable
    
    
    89,080
    
    
    
    134,598Funds held under reinsurance agreements
    
    
    13,737
    
    
    
    20,474Accounts payable, accrued liabilities and other liabilities
    
    
    133,647
    
    
    
    83,231Subordinated debentures
    
    
    235,058
    
    
    
    101,036Total liabilities
    
    
    2,262,451
    
    
    
    1,203,177Stockholders EquityCommon stock ($0.01 par value; 100,000,000 shares authorized, 45,092,321 and
and 23,408,145 shares issued, and 44,984,953 and 23,339,470 shares outstanding)
    
    
    451
    
    
    
    234Treasury stock (107,368 and 68,675 shares)
    
    
    (1,995
    )
    
    
    (1,026
    )Paid-in-capital
    
    
    751,878
    
    
    
    208,094Accumulated other comprehensive income (loss)
    
    
    34,554
    
    
    
    (37,498
    )Retained earnings
    
    
    265,613
    
    
    
    165,400Total stockholders equity
    
    
    1,050,501
    
    
    
    335,204Total liabilities and stockholders equity
    
    
        $ 3,312,952
    
    
    
        $ 1,538,381
 See accompanying notes to the consolidated financial statements.
 F-4




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##### Table of Contents



Tower Group, Inc.
 
 Consolidated Statements of Income and Comprehensive Income
 ($ in thousands, except

    Year Ended December 31,per share and share amounts)
    
    
    2009
    
    
    
    2008
    
    
    
    2007RevenuesNet premiums earned
    
    
    $ 854,711
    
    
    
    $ 314,551
    
    
    
    $ 286,106Ceding commission revenue
    
    
    43,937
    
    
    
    79,162
    
    
    
    71,010Insurance services revenue
    
    
    5,123
    
    
    
    68,156
    
    
    
    33,300Policy billing fees
    
    
    2,965
    
    
    
    2,347
    
    
    
    2,038Net investment income
    
    
    74,866
    
    
    
    34,568
    
    
    
    36,699Net realized gains (losses)Other-than-temporary impairments
    
    
    (44,210
    )
    
    
    (22,651
    )
    
    
    (10,094
    )Portion of loss recognized in other comprehensive
income (loss)
    
    
    20,722
    
    
    
    -
    
    
    
    -Other net realized investment gains (losses)
    
    
    24,989
    
    
    
    8,297
    
    
    
    (7,417
    )Total net realized investment gains (losses)
    
    
    1,501
    
    
    
    (14,354
    )
    
    
    (17,511
    )Total revenues
    
    
    983,103
    
    
    
    484,430
    
    
    
    411,642ExpensesLoss and loss adjustment expenses
    
    
    475,497
    
    
    
    162,739
    
    
    
    157,906Direct and ceding commission expense
    
    
    204,565
    
    
    
    132,445
    
    
    
    101,030Other operating expenses
    
    
    129,846
    
    
    
    91,491
    
    
    
    77,319Acquisition-related transaction costs
    
    
    14,038
    
    
    
    -
    
    
    
    -Interest expense
    
    
    18,122
    
    
    
    8,449
    
    
    
    9,290Total expenses
    
    
    842,068
    
    
    
    395,124
    
    
    
    345,545Other income (expense)Equity (loss) income in unconsolidated affiliate
    
    
    (777
    )
    
    
    269
    
    
    
    2,438Gain on investment in acquired unconsolidated affiliate
    
    
    7,388
    
    
    
    -
    
    
    
    -Gain from issuance of common stock by unconsolidated affiliate
    
    
    -
    
    
    
    -
    
    
    
    2,705Gain on bargain purchase
    
    
    13,186
    
    
    
    -
    
    
    
    -Income before income taxes
    
    
    160,832
    
    
    
    89,575
    
    
    
    71,240Income tax expense
    
    
    51,502
    
    
    
    32,102
    
    
    
    26,158Net income
    
    
        $ 109,330
    
    
    
        $ 57,473
    
    
    
        $ 45,082Gross unrealized investment holding gains (losses) arising during periods
    
    
    108,879
    
    
    
    (56,098
    )
    
    
    (29,424
    )Cumulative effect adjustment resulting from adoption of new
accounting guidance
    
    
    (2,497
    )
    
    
    -
    
    
    
    -Equity in net unrealized (losses) gains on investment in unconsolidated
affiliates investment portfolio
    
    
    3,124
    
    
    
    (3,142
    )
    
    
    (218
    )Less: reclassification adjustment for (gains) losses included in net income
    
    
    (1,501
    )
    
    
    14,354
    
    
    
    17,511Income tax benefit (expense) related to items of other comprehensive income
    
    
    (37,700
    )
    
    
    15,710
    
    
    
    4,246Comprehensive net income
    
    
        $ 179,635
    
    
    
        $ 28,297
    
    
    
        $ 37,197Basic and diluted earnings per shareBasic-Common stock:Distributed
    
    
    $ 0.26
    
    
    
    $ 0.20
    
    
    
    $ 0.15Undistributed
    
    
    2.52
    
    
    
    2.27
    
    
    
    1.79Total
    
    
        $ 2.78
    
    
    
        $ 2.47
    
    
    
        $ 1.94Diluted
    
    
        $ 2.76
    
    
    
        $ 2.45
    
    
    
        $ 1.92Weighted average common shares outstandingBasic
    
    
    39,363,324
    
    
    
    23,290,506
    
    
    
    22,927,087Diluted
    
    
    39,580,654
    
    
    
    23,484,614
    
    
    
    23,128,052Dividends declared and paid per common share
    
    
    $ 0.26
    
    
    
    $ 0.20
    
    
    
    $ 0.15
 See accompanying notes to the consolidated financial statements.
 F-5




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##### Table of Contents



Tower Group, Inc.
 
 Consolidated Statements of Changes in Stockholders Equity
 AccumulatedOther
    
    
    
    
    
    
    TotalPreferred Stock
    
    
    Common Stock
    
    
    Treasury
    
    
    Paid-in
    
    
    Comprehensive
    
    
    Retained
    
    
    Stockholders(in thousands)
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Stock
    
    
    Capital
    
    
    Income
    
    
    Earnings
    
    
    EquityBalance at December 31, 2006
    
    
    40
    
    
    
        $ 39,600
    
    
    
    20,006
    
    
    
        $ 200
    
    
    
    $ (207
    )
    
    
        $ 113,168
    
    
    
    $ (437
    )
    
    
        $ 71,596
    
    
    
        $ 223,920Dividends declared
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    (3,444
    )
    
    
    (3,444
    )Dividends declared on preferred stock
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    (298
    )
    
    
    (298
    )Stock based compensation
    
    
    -
    
    
    
    -
    
    
    
    175
    
    
    
    2
    
    
    
    (341
    )
    
    
    2,904
    
    
    
    -
    
    
    
    -
    
    
    
    2,565Redemption of preferred stock
    
    
    (40
    )
    
    
    (39,600
    )
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    (400
    )
    
    
    (40,000
    )Equity offering and over-allotment, net of
issuance costs
    
    
    -
    
    
    
    -
    
    
    
    3,045
    
    
    
    30
    
    
    
    -
    
    
    
    89,334
    
    
    
    -
    
    
    
    -
    
    
    
    89,364Warrant exercise
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    55
    
    
    
    29
    
    
    
    -
    
    
    
    -
    
    
    
    84Net income
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    45,082
    
    
    
    45,082Net unrealized depreciation on securities available
for sale, net of income tax
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    (7,885
    )
    
    
    -
    
    
    
    (7,885
    )Balance 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
    
    
    
    335,205Dividends declared
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    (10,740
    )
    
    
    (10,740
    )Stock based compensation
    
    
    -
    
    
    
    -
    
    
    
    346
    
    
    
    3
    
    
    
    (1,059
    )
    
    
    6,664
    
    
    
    -
    
    
    
    -
    
    
    
    5,608Issuance of common stock
    
    
    -
    
    
    
    -
    
    
    
    21,338
    
    
    
    214
    
    
    
    -
    
    
    
    527,292
    
    
    
    -
    
    
    
    -
    
    
    
    527,505Fair value of outstanding CastlePoint
and SUA stock options
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    9,918
    
    
    
    -
    
    
    
    -
    
    
    
    9,918Warrant exercise
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    90
    
    
    
    (90
    )
    
    
    -
    
    
    
    -
    
    
    
    -Net income
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    109,330
    
    
    
    109,330Net unrealized appreciation on securities available
for sale, net of income tax
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    73,675
    
    
    
    -
    
    
    
    73,675Balance at December 31, 2009
    
    
    -
    
    
    
        $ -
    
    
    
    45,092
    
    
    
        $ 451
    
    
    
    $ (1,995
    )
    
    
        $ 751,878
    
    
    
        $ 34,554
    
    
    
        $ 265,613
    
    
    
        $ 1,050,501
 See accompanying notes to the consolidated financial statements
 F-6




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##### Table of Contents



Tower Group, Inc.
 
 Consolidated Statements of Cash Flow
 December 31,($ in thousands)
    
    2009
    
    
    2008
    
    
    2007Cash flows provided by (used in) operating activities:Net Income
    
    
    $ 109,330
    
    
    
    $ 57,473
    
    
    
    $ 45,082Adjustments to reconcile net income to net cash provided by (used in) operations:Gain from IPO of common shares of unconsolidated affiliate
    
    
    -
    
    
    
    
    
    
    
    (2,705
    )Gain on investment in acquired unconsolidated affiliate
    
    
    (7,388
    )
    
    
    -
    
    
    
    -Gain on bargain purchase
    
    
    (13,186
    )
    
    
    -
    
    
    
    -Acquisition-related transaction costs
    
    
    14,038
    
    
    
    -
    
    
    
    -(Gain) loss on sale of investments
    
    
    (24,989
    )
    
    
    (8,297
    )
    
    
    7,417Other-than-temporary-impairment loss on investments
    
    
    23,488
    
    
    
    22,651
    
    
    
    10,094Depreciation and amortization
    
    
    19,344
    
    
    
    11,718
    
    
    
    8,725Amortization of bond premium or discount
    
    
    100
    
    
    
    1,067
    
    
    
    591Amortization of restricted stock
    
    
    5,608
    
    
    
    2,480
    
    
    
    1,919Deferred income taxes
    
    
    5,089
    
    
    
    (4,201
    )
    
    
    (4,774
    )Excess tax benefits from share-based payment arrangements
    
    
    (191
    )
    
    
    (175
    )
    
    
    (1,105
    )(Increase) decrease in assets:Investment income receivable
    
    
    (5,785
    )
    
    
    (426
    )
    
    
    (534
    )Premiums receivable
    
    
    164,382
    
    
    
    (64,043
    )
    
    
    (27,237
    )Reinsurance recoverable
    
    
    147,547
    
    
    
    (64,778
    )
    
    
    (49,915
    )Prepaid reinsurance premiums
    
    
    89,571
    
    
    
    (28,816
    )
    
    
    (26,808
    )Deferred acquisition costs, net
    
    
    (26,758
    )
    
    
    (13,809
    )
    
    
    10,494Other assets
    
    
    6,922
    
    
    
    (1,664
    )
    
    
    (10,165
    )Increase (decrease) in liabilities:Loss and loss adjustment expenses
    
    
    (94,258
    )
    
    
    33,808
    
    
    
    81,383Unearned premium
    
    
    (54,390
    )
    
    
    56,073
    
    
    
    3,033Reinsurance balances payable
    
    
    (103,575
    )
    
    
    75,859
    
    
    
    15,378Payable to issuing carriers
    
    
    (47,399
    )
    
    
    4,446
    
    
    
    42,193Accounts payable and accrued expenses
    
    
    28,839
    
    
    
    (8
    )
    
    
    (9,044
    )Funds held under reinsurance agreement
    
    
    (21,628
    )
    
    
    (17,624
    )
    
    
    (18,094
    )Net cash flows provided by operations
    
    
    214,711
    
    
    
    61,734
    
    
    
    75,928Cash flows provided by (used in) investing activities:Net cash acquired from acquisition of CastlePoint
    
    
    218,373
    
    
    
    -
    
    
    
    -Acquisition of Hermitage, net of cash acquired
    
    
    (43,596
    )
    
    
    -
    
    
    
    -Net cash acquired from acquisition of SUA
    
    
    51,952
    
    
    
    -
    
    
    
    -Acquisition of Preserver Group Inc, net of cash acquired
    
    
    -
    
    
    
    -
    
    
    
    (70,737
    )Purchase of fixed assets
    
    
    (26,299
    )
    
    
    (17,210
    )
    
    
    (13,993
    )Purchase - fixed-maturity securities
    
    
    (1,244,713
    )
    
    
    (336,465
    )
    
    
    (306,638
    )Purchase - equity securities
    
    
    (85,777
    )
    
    
    (7,175
    )
    
    
    (15,885
    )Short-term investments-net
    
    
    (31,766
    )
    
    
    -
    
    
    
    -Sale or maturity - fixed-maturity securities
    
    
    936,028
    
    
    
    355,966
    
    
    
    199,628Sale - equity securities
    
    
    50,582
    
    
    
    6,511
    
    
    
    24,759Net cash flows (used in) investing activities
    
    
    (175,216
    )
    
    
    1,627
    
    
    
    (182,866
    )
 (Continued)
 F-7




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##### Table of Contents



Tower Group, Inc.
Consolidated Statements of Cash Flow-(Continued)
 December 31,($ in thousands)
    
    2009
    
    
    2008
    
    
    2007Cash flows provided by (used in) financing activities:Equity offering and over allotment, net of issuance costs
    
    
    $ -
    
    
    
    $ -
    
    
    
    $ 89,366Redemption of preferred stock
    
    
    -
    
    
    
    -
    
    
    
    (40,000
    )Proceeds from issuance of subordinated debentures
    
    
    -
    
    
    
    -
    
    
    
    20,619Purchase of common trust securities - statutory business trusts
    
    
    -
    
    
    
    -
    
    
    
    (619
    )Exercise of stock options and warrants
    
    
    741
    
    
    
    179
    
    
    
    1,167Excess tax benefits from share-based payment arrangements
    
    
    191
    
    
    
    175
    
    
    
    1,105Treasury stock acquired-net employee share-based compensation
    
    
    (1,058
    )
    
    
    (533
    )
    
    
    (439
    )Dividends paid
    
    
    (10,740
    )
    
    
    (4,608
    )
    
    
    (3,743
    )Net cash flows (used in) provided by financing activities
    
    
    (10,866
    )
    
    
    (4,787
    )
    
    
    67,456Increase (decrease) in cash and cash equivalents
    
    
    28,629
    
    
    
    58,574
    
    
    
    (39,482
    )Cash and cash equivalents, beginning of period
    
    
    136,253
    
    
    
    77,679
    
    
    
    117,161Cash and cash equivalents, end of period
    
    
        $ 164,882
    
    
    
        $ 136,253
    
    
    
        $ 77,679Supplemental disclosures of cash flow information:Cash paid for income taxes
    
    
    $ 61,521
    
    
    
    $ 27,110
    
    
    
    $ 27,555Cash paid for interest
    
    
    18,053
    
    
    
    7,882
    
    
    
    8,145Schedule of non-cash investing and financing activities:Issuance of common stock in acquisition of CastlePoint and SUA
    
    
    527,505
    
    
    
    -
    
    
    
    -Value of CastlePoint and SUA stock options at date of acquisition
    
    
    9,918
    
    
    
    -
    
    
    
    -
  F-8




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##### Table of Contents



Tower Group, Inc.
 
 Notes to Consolidated Financial Statements
 Note 1Nature of Business
   
    
    Brokerage Insurance (Brokerage) Segment offers a broad range of commercial lines
and personal lines property and casualty insurance products to small to mid-sized businesses
and individuals distributed through a network of retail and wholesale agents on both an
admitted and non-admitted basis;
 
    
    Specialty Business (Specialty) Segment provides specialty classes of business
through program underwriting agents. This segment also includes reinsurance solutions provided
primarily to small insurance companies; and
 
    
    Insurance Services (Services) Segment provides underwriting, claims and
reinsurance brokerage services to insurance companies.
     Note 2Accounting Policies and Basis of Presentation
 Basis of Presentation
  F-9




---



##### Table of Contents



Use of Estimates
  Reclassifications
  Net Premiums Earned
  Ceding Commission Revenue
  Insurance Services Revenue
  Policy Billing Fees
  Loss and Loss Adjustment Expenses (LAE)
   F-10




---



##### Table of Contents



Reinsurance
    Cash and Cash Equivalents
   Investments
    F-11




---



##### Table of Contents



Fair Value
    Premiums Receivable
   Deferred Acquisition Costs and Deferred Ceding Commission Revenue
  Goodwill and Intangible Assets
  F-12




---



##### Table of Contents



Fixed Assets
  Investment in Unconsolidated Affiliate
  Statutory Business Trusts
  Income Taxes
   Treasury Stock
  Stock-based Compensation
  Assessments
  F-13




---



##### Table of Contents



Earnings per Share
  Concentration and Credit Risk
    Statutory Accounting Principles
  Accounting Pronouncements
 Accounting guidance adopted in 2009
   F-14




---



##### 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.
      F-15




---



##### Table of Contents



Accounting guidance not yet effective
    Note 3Acquisitions
 Acquisition of Specialty Underwriters Alliance, Inc.
   F-16




---



##### Table of Contents



($ in thousands)
    
    Level 1
    
    Level 2
    
    Level 3
    
    TotalAssetsInvestments
    
    
    $4,734
    
    
    $
    241,515
    
    
    
    $-
    
    
    $
    246,249Cash and cash equivalents
    
    
    54,377
    
    
    
    -
    
    
    
    -
    
    
    
    54,377Receivables
    
    
    -
    
    
    
    -
    
    
    
    62,039
    
    
    
    62,039Prepaid reinsurance premiums
    
    
    -
    
    
    
    -
    
    
    
    1,930
    
    
    
    1,930Reinsurance recoverable
    
    
    -
    
    
    
    -
    
    
    
    73,888
    
    
    
    73,888Deferred acquisition costs/VOBA
    
    
    -
    
    
    
    -
    
    
    
    17,149
    
    
    
    17,149Deferred income taxes
    
    
    -
    
    
    
    -
    
    
    
    11,450
    
    
    
    11,450Intangibles
    
    
    -
    
    
    
    -
    
    
    
    11,930
    
    
    
    11,930Other assets
    
    
    -
    
    
    
    -
    
    
    
    21,133
    
    
    
    21,133Liabilities and Stockholders EquityLoss and loss adjustment expenses
    
    
    -
    
    
    
    -
    
    
    
    (252,905
    )
    
    
    (252,905
    )Unearned premium
    
    
    -
    
    
    
    -
    
    
    
    (98,577
    )
    
    
    (98,577
    )Other liabilities
    
    
    -
    
    
    
    -
    
    
    
    (28,814
    )
    
    
    (28,814
    )Net assets acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119,849Total purchase consideration
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    106,663Gain on bargain purchase
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (13,186
    )
  Acquisition of the Renewal Rights of AequiCap
   Acquisition of CastlePoint Holdings, Ltd.
  F-17




---



##### Table of Contents



($ in thousands)Purchase consideration
    
    $
    491,366Fair value of outstanding CastlePoint stock options
    
    
    9,138Total purchase consideration
    
    
    500,504Fair value of previously held investment in CastlePoint
    
    
    34,673Fair value of CastlePoint at acquisition
    
    $
    535,177
    ($ in thousands)
    
    Level 1
    
    Level 2
    
    Level 3
    
    TotalAssetsInvestments
    
    
    $868
    
    
    $
    484,937
    
    
    
    $229
    
    
    $
    486,034Cash 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
    
    
    -
    
    
    
    -
    
    
    
    21,373
    
    
    
    21,373Intangibles
    
    
    -
    
    
    
    -
    
    
    
    9,100
    
    
    
    9,100Other assets
    
    
    -
    
    
    
    -
    
    
    
    7,448
    
    
    
    7,448Liabilities and Stockholders EquityLoss and loss adjustment expenses
    
    
    -
    
    
    
    -
    
    
    
    (291,076
    )
    
    
    (291,076
    )Unearned premium
    
    
    -
    
    
    
    -
    
    
    
    (242,365
    )
    
    
    (242,365
    )Other liabilities
    
    
    -
    
    
    
    -
    
    
    
    (130,623
    )
    
    
    (130,623
    )Subordinated debt
    
    
    -
    
    
    
    -
    
    
    
    (134,022
    )
    
    
    (134,022
    )Net assets acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    344,869Purchase consideration
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    535,177Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    190,308
  Acquisition of Hermitage
   F-18




---



##### Table of Contents



($ in thousands)
    
    Level 1
    
    Level 2
    
    Level 3
    
    TotalAssetsInvestments
    
    
    $151
    
    
    $
    101,296
    
    
    
    $-
    
    
    $
    101,447Cash and cash equivalents
    
    
    88,167
    
    
    
    -
    
    
    
    -
    
    
    
    88,167Receivables
    
    
    -
    
    
    
    -
    
    
    
    11,761
    
    
    
    11,761Prepaid reinsurance premiums
    
    
    -
    
    
    
    -
    
    
    
    7,329
    
    
    
    7,329Reinsurance recoverable
    
    
    -
    
    
    
    -
    
    
    
    15,390
    
    
    
    15,390Deferred acquisition costs/VOBA
    
    
    -
    
    
    
    -
    
    
    
    11,319
    
    
    
    11,319Deferred income taxes
    
    
    -
    
    
    
    -
    
    
    
    6,423
    
    
    
    6,423Intangible
    
    
    -
    
    
    
    -
    
    
    
    10,830
    
    
    
    10,830Other assets
    
    
    -
    
    
    
    -
    
    
    
    2,077
    
    
    
    2,077Liabilities and Stockholders EquityLoss and loss adjustment expenses
    
    
    -
    
    
    
    -
    
    
    
    (101,297
    )
    
    
    (101,297
    )Unearned premium
    
    
    -
    
    
    
    -
    
    
    
    (45,485
    )
    
    
    (45,485
    )Other liabilities
    
    
    -
    
    
    
    -
    
    
    
    (13,166
    )
    
    
    (13,166
    )Net assets acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94,795Purchase consideration
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130,115Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    35,320
  Acquired Companies Contribution to Revenue and Income
  Year Ended December 31, 2009($ in thousands)
    
    CastlePoint
    
    Hermitage
    
    SUATotal Revenue
    
    $
    410,631
    
    
    $
    68,629
    
    
    $
    30,275Net Income
    
    
    52,409
    
    
    
    10,346
    
    
    
    1,606
  F-19




---



##### Table of Contents



Significant Factors Affecting Acquisition Date Fair Values
 Value of Business Acquired (VOBA)
    Intangibles
  Loss and Loss Adjustment Expense Reserves Acquired
   Non-financial Assets and Liabilities
  Pro Forma Results of Operations
  Year Ended December 31,(in thousands, except per share amounts)
    
    2009
    
    2008Total revenue
    
    $
    1,164,716
    
    
    $
    1,056,654Net income (1)
    
    
    93,501
    
    
    
    74,348Net income per share-basic
    
    
    $2.29
    
    
    
    $1.85Net income per share-diluted
    
    
    $2.27
    
    
    
    $1.85Weighted average common shares outstandingBasic
    
    
    40,891
    
    
    
    40,095Diluted
    
    
    41,108
    
    
    
    40,289
 (1) 
The Company excluded certain one-time charges from the pro forma results for the year ended
December 31, 2009 and 2008 including, (i) transaction costs of $14.1 million, and $9.4 million,
respectively related to the acquisitions of CastlePoint, Hermitage
and SUA, (ii) CastlePoints
severance expenses of $2.0 million for the year ended F-20




---



##### Table of Contents



December 31, 2009, (iii) Towers gain of $7.4
million related to the acquisition of CastlePoint for the year ended December 31, 2009 and (iv)
Towers gain on bargain purchase of $13.2 million related to the acquisition of SUA for the year
ended December 31, 2009. Note 4  Investments
  F-21




---



##### 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)December 31, 2009U.S. Treasury securities
    
    
    73,281
    
    
    
    235
    
    
    
    (225
    )
    
    
    -
    
    
    
    73,291
    
    
    
    -U.S. Agency securities
    
    
    40,063
    
    
    
    134
    
    
    
    (214
    )
    
    
    -
    
    
    
    39,983
    
    
    
    -Municipal bonds
    
    
    508,204
    
    
    
    18,241
    
    
    
    (587
    )
    
    
    (143
    )
    
    
    525,715
    
    
    
    -Corporate and other bonds
    
    
    -
    
    
    
    -
    
    
    
    -Finance
    
    
    174,971
    
    
    
    11,150
    
    
    
    (291
    )
    
    
    (1,099
    )
    
    
    184,731
    
    
    
    -Industrial
    
    
    371,848
    
    
    
    13,225
    
    
    
    (726
    )
    
    
    (608
    )
    
    
    383,739
    
    
    
    -Utilities
    
    
    43,154
    
    
    
    3,559
    
    
    
    (37
    )
    
    
    (25
    )
    
    
    46,651
    
    
    
    -Commercial mortgage-backed
securities
    
    
    195,580
    
    
    
    16,603
    
    
    
    (598
    )
    
    
    (8,138
    )
    
    
    203,447
    
    
    
    (7,713
    )Residential mortgage-backed
securities
    
    
    -
    
    
    
    -
    
    
    
    -Agency backed securities
    
    
    283,403
    
    
    
    6,245
    
    
    
    (963
    )
    
    
    -
    
    
    
    288,685
    
    
    
    -Non-agency backed securities
    
    
    27,597
    
    
    
    2,772
    
    
    
    (14
    )
    
    
    (2,910
    )
    
    
    27,445
    
    
    
    (1,948
    )Asset-backed securities
    
    
    11,016
    
    
    
    214
    
    
    
    (116
    )
    
    
    (1,205
    )
    
    
    9,909
    
    
    
    (1,301
    )Total fixed-maturity securities
    
    
    1,729,117
    
    
    
    72,378
    
    
    
    (3,771
    )
    
    
    (14,128
    )
    
    
    1,783,596
    
    
    
    (10,962
    )Preferred stocks, principally financial sector
    
    
    77,536
    
    
    
    919
    
    
    
    (1,441
    )
    
    
    (724
    )
    
    
    76,290
    
    
    
    -Common stocks
    
    
    515
    
    
    
    78
    
    
    
    (150
    )
    
    
    -
    
    
    
    443
    
    
    
    -Short-term investments
    
    
    36,500
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    36,500
    
    
    
    -Total
    
    $
    1,843,668
    
    
    $
    73,375
    
    
    $
    (5,362
    )
    
    $
    (14,852
    )
    
    $
    1,896,829
    
    
    $
    (10,962
    )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
    
    
    
    458
    
    
    
    (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, principally financial sector
    
    
    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 December 31, 2009 recognized in accumulated other
comprehensive income (loss).   F-22




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##### Table of Contents



Year Ended December 31,($ in thousands)
    
    2009
    
    2008
    
    2007IncomeFixed-maturity securities
    
    $
    72,619
    
    
    $
    31,791
    
    
    $
    28,279Equity securities
    
    
    3,600
    
    
    
    730
    
    
    
    4,332Cash and cash equivalents
    
    
    1,103
    
    
    
    2,897
    
    
    
    4,974Dividends on common trust securities
    
    
    559
    
    
    
    244
    
    
    
    215Total
    
    
    77,881
    
    
    
    35,662
    
    
    
    37,800ExpensesInvestment expenses
    
    
    3,015
    
    
    
    1,094
    
    
    
    1,101Net investment income
    
    $
    74,866
    
    
    $
    34,568
    
    
    $
    36,699
   Year Ended December 31,($ in thousands)
    
    2009
    
    2008
    
    2007Fixed-maturity securitiesGross realized gains
    
    $
    25,131
    
    
    $
    7,322
    
    
    $
    3,189Gross realized losses
    
    
    (574
    )
    
    
    (918
    )
    
    
    (599
    )24,557
    
    
    
    6,404
    
    
    
    2,590Equity securitiesGross realized gains
    
    
    528
    
    
    
    1,968
    
    
    
    1,324Gross realized losses
    
    
    (96
    )
    
    
    (75
    )
    
    
    (11,331
    )432
    
    
    
    1,893
    
    
    
    (10,007
    )Net realized gains (losses) on investments
    
    
    24,989
    
    
    
    8,297
    
    
    
    (7,417
    )Other-than-temporary impairment losses recognized in earningsFixed-maturity securities
    
    
    (23,488
    )
    
    
    (20,215
    )
    
    
    (4,879
    )Equity securities
    
    
    -
    
    
    
    (2,436
    )
    
    
    (5,215
    )Total other-than-temporary impairment losses
    
    
    (23,488
    )
    
    
    (22,651
    )
    
    
    (10,094
    )Total net realized gains (losses), including other-than
temporary impairment losses
    
    $
    1,501
    
    
    $
    (14,354
    )
    
    $
    (17,511
    )
  Impairment Review
  F-23




---



##### Table of Contents



F-24




---



##### Table of Contents



Year Ended December 31,2009

    
    2008

    
    2007($ in thousands)
    
    No.
    
    
    Amount
    
    
    No.
    
    
    Amount
    
    
    No.
    
    
    AmountCorporate and other bonds
    
    
    14
    
    
    $
    (1,851
    )
    
    
    3
    
    
    $
    (3,276
    )
    
    
    2
    
    
    $
    (457
    )Commercial mortgage-backed securities
    
    
    50
    
    
    
    (25,229
    )
    
    
    1
    
    
    
    (338
    )
    
    
    -
    
    
    
    -Residential mortgage-backed securities
    
    
    75
    
    
    
    (12,479
    )
    
    
    17
    
    
    
    (14,107
    )
    
    
    22
    
    
    
    (4,422
    )Asset-backed securities
    
    
    30
    
    
    
    (4,651
    )
    
    
    3
    
    
    
    (2,494
    )
    
    
    -
    
    
    
    -Equities
    
    
    -
    
    
    
    -
    
    
    
    7
    
    
    
    (2,436
    )
    
    
    7
    
    
    
    (5,215
    )169
    
    
    
    (44,210
    )
    
    
    31
    
    
    
    (22,651
    )
    
    
    31
    
    
    
    (10,094
    )Portion of loss recognized in other comprehensive net
income, principally residential
mortgage-backed securities
    
    
    
    
    
    
    20,722
    
    
    
    
    
    
    
    -
    
    
    
    
    
    
    
    -Impairment losses recognized in earnings
    
    
    
    
    
    $
    (23,488
    )
    
    
    
    
    
    $
    (22,651
    )
    
    
    
    
    
    $
    (10,094
    )
  ($ in thousands)Balance, January 1, 2009
    
    $
    24,638Cumulative effect of adjustment upon adoption of 2009 GAAP guidance on OTTI
    
    
    (2,497
    )No OTTI has been previously recognized
    
    
    16,076OTTI has been previously recognized
    
    
    7,412Securities sold during the period (realized)
    
    
    (4,895
    )Balance, December 31, 2009
    
    $
    40,734
 Unrealized Losses
    F-25




---



##### 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
    
    LossesDecember 31, 2009U.S. Treasury securities
    
    
    24
    
    
    $
    43,421
    
    
    $
    (225
    )
    
    
    -
    
    
    $
    -
    
    
    $
    -
    
    
    
    24
    
    
    $
    43,421
    
    
    $
    (225
    )U.S. Agency securities
    
    
    21
    
    
    
    27,652
    
    
    
    (214
    )
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    21
    
    
    
    27,652
    
    
    
    (214
    )Municipal bonds
    
    
    42
    
    
    
    50,526
    
    
    
    (587
    )
    
    
    5
    
    
    
    2,569
    
    
    
    (143
    )
    
    
    47
    
    
    
    53,095
    
    
    
    (730
    )Corporate and other
bondsFinance
    
    
    32
    
    
    
    28,342
    
    
    
    (291
    )
    
    
    20
    
    
    
    14,906
    
    
    
    (1,099
    )
    
    
    52
    
    
    
    43,248
    
    
    
    (1,390
    )Industrial
    
    
    104
    
    
    
    69,475
    
    
    
    (726
    )
    
    
    25
    
    
    
    14,563
    
    
    
    (608
    )
    
    
    129
    
    
    
    84,038
    
    
    
    (1,334
    )Utilities
    
    
    6
    
    
    
    3,575
    
    
    
    (37
    )
    
    
    2
    
    
    
    625
    
    
    
    (25
    )
    
    
    8
    
    
    
    4,200
    
    
    
    (62
    )Commercial mortgage-backed securities
    
    
    20
    
    
    
    25,810
    
    
    
    (598
    )
    
    
    27
    
    
    
    22,904
    
    
    
    (8,138
    )
    
    
    47
    
    
    
    48,714
    
    
    
    (8,736
    )Residential mortgage-
backed securitiesAgency backed
    
    
    43
    
    
    
    79,005
    
    
    
    (963
    )
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    43
    
    
    
    79,005
    
    
    
    (963
    )Non-agency backed
    
    
    4
    
    
    
    1,081
    
    
    
    (14
    )
    
    
    37
    
    
    
    19,672
    
    
    
    (2,910
    )
    
    
    41
    
    
    
    20,753
    
    
    
    (2,924
    )Asset-backed securities
    
    
    5
    
    
    
    334
    
    
    
    (116
    )
    
    
    11
    
    
    
    2,962
    
    
    
    (1,205
    )
    
    
    16
    
    
    
    3,296
    
    
    
    (1,321
    )Total fixed-maturity
securities
    
    
    301
    
    
    
    329,221
    
    
    
    (3,771
    )
    
    
    127
    
    
    
    78,201
    
    
    
    (14,128
    )
    
    
    428
    
    
    
    407,422
    
    
    
    (17,899
    )Preferred stocks
    
    
    87
    
    
    
    59,243
    
    
    
    (1,441
    )
    
    
    6
    
    
    
    4,827
    
    
    
    (724
    )
    
    
    93
    
    
    
    64,070
    
    
    
    (2,165
    )Common stocks
    
    
    4
    
    
    
    31
    
    
    
    (150
    )
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    4
    
    
    
    31
    
    
    
    (150
    )Total
    
    
    392
    
    
    $
    388,495
    
    
    $
    (5,362
    )
    
    
    133
    
    
    $
    83,028
    
    
    $
    (14,852
    )
    
    
    525
    
    
    $
    471,523
    
    
    $
    (20,214
    )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
    
    
    
    16,430
    
    
    
    (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
    
    
    
    551
    
    
    
    (49
    )
    
    
    22
    
    
    
    7,032
    
    
    
    (2,701
    )Total fixed-maturity
securities
    
    
    296
    
    
    
    203,209
    
    
    
    (27,036
    )
    
    
    114
    
    
    
    66,609
    
    
    
    (30,471
    )
    
    
    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
    
    
    $
    204,649
    
    
    $
    (27,096
    )
    
    
    120
    
    
    $
    70,303
    
    
    $
    (32,328
    )
    
    
    417
    
    
    $
    274,952
    
    
    $
    (59,425
    )
   F-26




---



##### 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
    
    $
    106,188
    
    
    $
    (1,511
    )
    
    
    2
    
    
    $
    (42
    )
    
    
    2
    
    
    $
    (106
    )
    
    
    1
    
    
    $
    (150
    )Unrealized loss for over 6 months
    
    
    6
    
    
    
    (0
    )
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -Unrealized loss for over 12 months
    
    
    3,081
    
    
    
    (446
    )
    
    
    2
    
    
    
    (138
    )
    
    
    -
    
    
    
    -
    
    
    
    5
    
    
    
    (179
    )Unrealized loss for over 18 months
    
    
    15,933
    
    
    
    (1,753
    )
    
    
    4
    
    
    
    (431
    )
    
    
    2
    
    
    
    (99
    )
    
    
    2
    
    
    
    (311
    )Unrealized loss for over 2 years
    
    
    26,560
    
    
    
    (10,234
    )
    
    
    8
    
    
    
    (1,204
    )
    
    
    5
    
    
    
    (2,811
    )
    
    
    14
    
    
    
    (5,432
    )$
    151,768
    
    
    $
    (13,944
    )
    
    
    16
    
    
    $
    (1,815
    )
    
    
    9
    
    
    $
    (3,016
    )
    
    
    22
    
    
    $
    (6,072
    )
 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
    
    $
    281,180
    
    
    $
    (3,642
    )
    
    
    -
    
    
    $
    -
    
    
    
    2
    
    
    $
    (21
    )
    
    
    2
    
    
    $
    (3
    )Unrealized loss for over 6 months
    
    
    2,759
    
    
    
    (127
    )
    
    
    1
    
    
    
    (1
    )
    
    
    -
    
    
    
    -
    
    
    
    3
    
    
    
    (95
    )Unrealized loss for over 12 months
    
    
    58
    
    
    
    (172
    )
    
    
    -
    
    
    
    -
    
    
    
    1
    
    
    
    (38
    )
    
    
    3
    
    
    
    (135
    )Unrealized loss for over 18 months
    
    
    10,972
    
    
    
    (708
    )
    
    
    1
    
    
    
    (411
    )
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -Unrealized loss for over 2 years
    
    
    24,786
    
    
    
    (1,622
    )
    
    
    1
    
    
    
    (7
    )
    
    
    2
    
    
    
    (239
    )
    
    
    -
    
    
    
    -$
    319,755
    
    
    $
    (6,271
    )
    
    
    3
    
    
    $
    (419
    )
    
    
    5
    
    
    $
    (298
    )
    
    
    8
    
    
    $
    (233
    )
  Fixed-Maturity InvestmentsTime to Maturity
  December 31, 2009
    
    December 31, 2008Amortized
    
    
    
    
    
    Amortized($ in thousands)
    
    Cost
    
    Fair Value
    
    Cost
    
    Fair ValueRemaining Time to MaturityLess than one year
    
    $
    30,282
    
    
    $
    30,465
    
    
    $
    8,813
    
    
    $
    8,789One to five years
    
    
    346,309
    
    
    
    355,402
    
    
    
    115,645
    
    
    
    112,514Five to ten years
    
    
    477,843
    
    
    
    492,517
    
    
    
    189,267
    
    
    
    176,218More than 10 years
    
    
    357,086
    
    
    
    375,726
    
    
    
    102,859
    
    
    
    96,807Mortgage and asset-backed securities
    
    
    517,597
    
    
    
    529,486
    
    
    
    164,886
    
    
    
    135,831Total
    
    $
    1,729,117
    
    
    $
    1,783,596
    
    
    $
    581,470
    
    
    $
    530,159
 Note 5Fair Value Measurements
  F-27




---



##### Table of Contents



Level 1
 Level 2
 Level 3
   ($ in thousands)
    
    Level 1
    
    Level 2
    
    Level 3
    
    TotalDecember 31, 2009Fixed-maturity investmentsU.S. Treasury securities
    
    $
    -
    
    
    $
    73,290
    
    
    $
    -
    
    
    $
    73,290U.S. Agency securities
    
    
    -
    
    
    
    39,983
    
    
    
    -
    
    
    
    39,983Municipal bonds
    
    
    -
    
    
    
    525,716
    
    
    
    -
    
    
    
    525,716Corporate and other bonds
    
    
    -
    
    
    
    615,122
    
    
    
    -
    
    
    
    615,122Commercial mortgage-backed securities
    
    
    -
    
    
    
    203,447
    
    
    
    -
    
    
    
    203,447Residential mortgage-backed securities
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -Agency
    
    
    -
    
    
    
    288,686
    
    
    
    -
    
    
    
    288,686Non-agency
    
    
    -
    
    
    
    16,936
    
    
    
    10,508
    
    
    
    27,444Asset-backed securities
    
    
    -
    
    
    
    6,821
    
    
    
    3,087
    
    
    
    9,908Total fixed-maturities
    
    
    -
    
    
    
    1,770,001
    
    
    
    13,595
    
    
    
    1,783,596Equity investments
    
    
    54,044
    
    
    
    22,689
    
    
    
    -
    
    
    
    76,733Short-term investments
    
    
    36,500
    
    
    
    -
    
    
    
    -
    
    
    
    36,500Total
    
    $
    90,544
    
    
    $
    1,792,690
    
    
    $
    13,595
    
    
    $
    1,896,829December 31, 2008Fixed-maturity investmentsU.S. Treasury securities
    
    $
    -
    
    
    $
    27,006
    
    
    $
    -
    
    
    $
    27,006U.S. Agency securities
    
    
    -
    
    
    
    399
    
    
    
    -
    
    
    
    399Municipal bonds
    
    
    -
    
    
    
    179,948
    
    
    
    -
    
    
    
    179,948Corporate and other bonds
    
    
    -
    
    
    
    186,975
    
    
    
    -
    
    
    
    186,975Commercial mortgage-backed securities
    
    
    -
    
    
    
    25,940
    
    
    
    5,595
    
    
    
    31,535Residential mortgage-backed securities
Agency
    
    
    -
    
    
    
    72,179
    
    
    
    -
    
    
    
    72,179Non-agency
    
    
    -
    
    
    
    15,720
    
    
    
    8,595
    
    
    
    24,315Asset-backed securities
    
    
    -
    
    
    
    3,907
    
    
    
    3,895
    
    
    
    7,802Total fixed-maturities
    
    
    -
    
    
    
    512,074
    
    
    
    18,085
    
    
    
    530,159Equity investments
    
    
    5,134
    
    
    
    5,680
    
    
    
    -
    
    
    
    10,814Total
    
    $
    5,134
    
    
    $
    517,754
    
    
    $
    18,085
    
    
    $
    540,973
 F-28




---



##### Table of Contents



Year Ended December 31,($ in thousands)
    
    2009
    
    2008Beginning balance, January 1
    
    $
    18,085
    
    
    
    $-Total gains (losses)-realized / unrealizedIncluded in net income
    
    
    (11,321
    )
    
    
    (12,290
    )Included in other comprehensive income (loss)
    
    
    1,818
    
    
    
    2,945Purchases, issuances and settlements
    
    
    3,513
    
    
    
    (3,627
    )Net transfers into (out of) Level 3
    
    
    1,501
    
    
    
    31,057Ending balance, December 31
    
    $
    13,595
    
    
    $
    18,085
 F-29




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##### Table of Contents



Note 6Goodwill and Intangible Assets
 Goodwill
  Brokerage
    
    Specialty
    
    Insurance($ in thousands)
    
    Insurance
    
    Business
    
    Services
    
    TotalBalance, January 1, 2009
    
    $
    18,962
    
    
    $
    -
    
    
    $
    -
    
    
    $
    18,962Additions (a)
    
    
    193,661
    
    
    
    32,067
    
    
    
    -
    
    
    
    225,728Total
    
    $
    212,623
    
    
    $
    32,067
    
    
    $
    -
    
    
    $
    244,690
 (a)
    
    Primarily relates to the acquisitions of CastlePoint and Hermitage  Intangibles
   December 31, 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
    
    
    -
    
    
    $
    17,703
    
    
    $
    -
    
    
    $
    17,703
    
    
    $
    6,503
    
    
    $
    -
    
    
    $
    6,503Customer relationships
    
    
    10-25
    
    
    
    39,290
    
    
    
    (5,858
    )
    
    
    33,432
    
    
    
    17,090
    
    
    
    (3,129
    )
    
    
    13,961Trademarks
    
    
    5
    
    
    
    2,690
    
    
    
    (475
    )
    
    
    2,215
    
    
    
    -
    
    
    
    -
    
    
    
    -Total
    
    
    
    
    
    $
    59,683
    
    
    $
    (6,333
    )
    
    $
    53,350
    
    
    $
    23,593
    
    
    $
    (3,129
    )
    
    $
    20,464
  Insurance
    
    Customer($ in thousands)
    
    Licenses
    
    Relationships
    
    Trademarks
    
    TotalBalance, January 1, 2009
    
    $
    6,503
    
    
    $
    13,961
    
    
    $
    -
    
    
    $
    20,464Additions (a)
    
    
    11,200
    
    
    
    22,200
    
    
    
    2,690
    
    
    
    36,090Deductions (b)
    
    
    -
    
    
    
    (2,729
    )
    
    
    (475
    )
    
    
    (3,204
    )Balance, December 31, 2009
    
    $
    17,703
    
    
    $
    33,432
    
    
    $
    2,215
    
    
    $
    53,350
 (a)
    
    Relates to the acquisition of CastlePoint, Hermitage, AequiCap and SUA F-30




---



##### Table of Contents



($ in thousands)2010
    
    $
    5,3282011
    
    
    4,1752012
    
    
    3,5712013
    
    
    2,8462014
    
    
    2,464
 Note 7Investment in Unconsolidated AffiliateCastlePoint
  Year Ended December 31,($ in millions)
    
    2009
    
    
    2008Investment in unconsolidated affiliate, beginning of year
    
    $
    29.3
    
    
    $
    32.6Equity in net income (loss) of CastlePoint
    
    
    (0.8
    )
    
    
    0.3Equity in net unrealized gain (loss) of the CastlePoint investment portfolio
    
    
    (0.8
    )
    
    
    (3.2
    )Dividends received from CastlePoint
    
    
    (0.1
    )
    
    
    (0.4
    )Acquisition of CastlePoint by Tower on February 5, 2009
    
    
    (27.6
    )
    
    
    -Investment in unconsolidated affiliate, end of year
    
    $
    -
    
    
    $
    29.3
  Master Agreement
   Reinsurance Agreements with CastlePoint
   F-31




---



##### Table of Contents



Ceded
    
    
    Ceded
    
    
    Ceding
    
    
    CedingPremiums
    
    
    Premiums
    
    
    Commissions
    
    
    Commission($ in thousands)
    
    Written
    
    
    Earned
    
    
    Revenue
    
    
    Percentage2008Brokerage business
    
    
    $ 112,710
    
    
    
    $ 158,694
    
    
    
    $ 56,896
    
    
    
    35.9
    %Traditional program business
    
    
    7,648
    
    
    
    6,522
    
    
    
    1,988
    
    
    
    30.5
    %Specialty program business and insurance risk-sharing
business
    
    
    64,355
    
    
    
    36,696
    
    
    
    12,307
    
    
    
    33.5
    %Total
    
    
    $ 184,713
    
    
    
    $ 201,912
    
    
    
    $ 71,191
    
    
    
    35.3
    %2007Brokerage business
    
    
    $ 209,576
    
    
    
    $ 184,851
    
    
    
    $ 64,199
    
    
    
    34.7
    %Traditional program business
    
    
    1,669
    
    
    
    950
    
    
    
    285
    
    
    
    30.0
    %Specialty program business and insurance risk-sharing
business
    
    
    9,824
    
    
    
    4,030
    
    
    
    1,209
    
    
    
    30.0
    %Total
    
    
    $ 221,069
    
    
    
    $ 189,831
    
    
    
    $ 65,693
    
    
    
    34.6
    %
    ($ in thousands)December 31, 2008Prepaid reinsurance premiums
    
    
    $ 95,701Reinsurance recoverable
    
    
    182,634Reinsurance balances payable
    
    
    (93,381
    )Payable to issuing carriers
    
    
    (46,780
    )Total
    
    
    $ 138,174
 Note 8  Deferred Acquisition Costs and Deferred Ceding Commission Revenue
  F-32




---



##### Table of Contents



($ in thousands)
    
    2009
    
    
    2008
    
    
    2007Deferred acquisition costs net of ceding commission revenue, January 1
    
    
    $ 53,080
    
    
    
    $ 39,271
    
    
    
    $ 35,811Acquisition date balances of acquired companies (VOBA)
    
    
    96,700
    
    
    
    -
    
    
    
    13,955Cost incurred and deferred during years:Commissions and brokerage
    
    
    212,478
    
    
    
    124,670
    
    
    
    88,284Other underwriting and acquisition costs
    
    
    121,582
    
    
    
    74,363
    
    
    
    65,821Ceding commission revenue
    
    
    (37,852
    )
    
    
    (77,677
    )
    
    
    (81,864
    )Deferred acquisition costs net of ceding commission revenue
    
    
    296,208
    
    
    
    121,356
    
    
    
    72,241Amortization
    
    
    (275,336
    )
    
    
    (107,547
    )
    
    
    (82,736
    )Deferred acquisition costs, net of ceding commission revenue,
December 31,
    
    
    $ 170,652
    
    
    
    $ 53,080
    
    
    
    $ 39,271
 Note 9Fixed Assets
  Accumulated($ in thousands)
    
    Cost
    
    
    Depreciation
    
    
    NetDecember 31, 2009Furniture
    
    
    $ 3,395
    
    
    
    $ (1,477
    )
    
    
    $ 1,918Leasehold improvements
    
    
    14,066
    
    
    
    (3,527
    )
    
    
    10,539Computer equipment
    
    
    16,365
    
    
    
    (10,990
    )
    
    
    5,375Software
    
    
    79,562
    
    
    
    (30,965
    )
    
    
    48,597Total
    
    
    $ 113,388
    
    
    
    $ (46,959
    )
    
    
    $ 66,429December 31, 2008Furniture
    
    
    $ 2,064
    
    
    
    $ (747
    )
    
    
    $ 1,317Leasehold improvements
    
    
    13,863
    
    
    
    (2,313
    )
    
    
    11,550Computer equipment
    
    
    11,383
    
    
    
    (8,374
    )
    
    
    3,009Software
    
    
    43,029
    
    
    
    (19,867
    )
    
    
    23,162Total
    
    
    $ 70,339
    
    
    
    $ (31,301
    )
    
    
    $ 39,038
    Note 10  Reinsurance
   F-33




---



##### Table of Contents



Maximum LossFrom / To
    
    ExposureJanuary 1, 2009 - December 31, 2009
    
    
    $ 1,500,000October 1, 2008 - December 31, 2008
    
    
    4,520,000April 1, 2008 - September 30, 2008
    
    
    4,750,000January 1, 2008 - March 31, 2008
    
    
    4,800,000January 1, 2007 - December 31, 2007
    
    
    4,500,000
    Unpaid
    
    
    Paid($ in thousands)
    
    Losses
    
    
    Losses
    
    
    TotalDecember 31, 2009Swiss Reinsurance America Corp.
    
    $
    39,677
    
    
    $
    6,112
    
    
    $
    45,789One Beacon Insurance
    
    
    42,755
    
    
    
    -
    
    
    
    42,755Max Bermuda Ltd.
    
    
    12,701
    
    
    
    -
    
    
    
    12,701Munich Reinsurance America Inc
    
    
    6,979
    
    
    
    3,662
    
    
    
    10,641Tokio Millennium Re Ltd
    
    
    9,426
    
    
    
    625
    
    
    
    10,051Lloyds Syndicates
    
    
    10,051
    
    
    
    (6
    )
    
    
    10,045Axis Reinsurance Co.
    
    
    9,755
    
    
    
    8
    
    
    
    9,763Endurance Reinsurance Corp of America
    
    
    8,908
    
    
    
    19
    
    
    
    8,927Hannover Ruckversicherungs AG
    
    
    8,246
    
    
    
    303
    
    
    
    8,549Platinum Underwriters Reinsurance Inc.
    
    
    7,334
    
    
    
    222
    
    
    
    7,556Westport Insurance Corp.
    
    
    6,217
    
    
    
    20
    
    
    
    6,237Hannover Re Ireland Ltd.
    
    
    5,224
    
    
    
    454
    
    
    
    5,678Midwest Insurance Co.
    
    
    5,183
    
    
    
    243
    
    
    
    5,426QBE Reinsurance Corporation
    
    
    4,791
    
    
    
    212
    
    
    
    5,003Others
    
    
    22,440
    
    
    
    2,945
    
    
    
    25,385Total
    
    $
    199,687
    
    
    $
    14,819
    
    
    $
    214,506December 31, 2008CastlePoint Reinsurance Company, Ltd.
    
    $
    135,437
    
    
    $
    39,022
    
    
    $
    174,459Munich Reinsurance America Inc
    
    
    12,964
    
    
    
    2,528
    
    
    
    15,492Tokio Millennium Re Ltd
    
    
    12,814
    
    
    
    1,259
    
    
    
    14,073Westport Insurance Corp.
    
    
    7,459
    
    
    
    3,644
    
    
    
    11,103Hannover Re Ireland Ltd.
    
    
    7,576
    
    
    
    935
    
    
    
    8,511CastlePoint Insurance Company
    
    
    7,600
    
    
    
    575
    
    
    
    8,175Endurance Reinsurance Corp of America
    
    
    6,839
    
    
    
    (3
    )
    
    
    6,836Platinum Underwriters Reinsurance Inc.
    
    
    6,741
    
    
    
    1
    
    
    
    6,742Hannover Ruckversicherungs AG
    
    
    6,052
    
    
    
    7
    
    
    
    6,059Swiss Reinsurance America Corp.
    
    
    5,102
    
    
    
    617
    
    
    
    5,719Others
    
    
    13,645
    
    
    
    1,792
    
    
    
    15,437Total
    
    $
    222,229
    
    
    $
    50,377
    
    
    $
    272,606
 F-34




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##### Table of Contents



December 31,($ in thousands)
    
    2009
    
    
    2008Swiss Rein America Corp.
    
    $
    48,443
    
    
    $
    41,644Allianz Risk Transfer AG (Bermuda)
    
    
    16,125
    
    
    
    -Maiden Insurance Co.
    
    
    5,565
    
    
    
    -Hannover Ruckversicherungs AG
    
    
    4,052
    
    
    
    2,131Platinum Underwriters Reinsurance Inc.
    
    
    3,602
    
    
    
    1,010CastlePoint Reinsurance Company, Ltd.
    
    
    -
    
    
    
    95,701Others
    
    
    17,031
    
    
    
    13,164Total
    
    $
    94,818
    
    
    $
    153,650
  Regulation
    
    
    Letters of
    
    
    Funds($ in thousands)
    
    114 Trust
    
    
    Credit
    
    
    Held
    
    
    TotalDecember 31, 2009AequiCap Insurance Co.
    
    
    $ -
    
    
    
    $ -
    
    
    
    $ 350
    
    
    
    $ 350Allianz Risk Transfer AG
    
    
    -
    
    
    
    4,964
    
    
    
    -
    
    
    
    4,964Tokio Millennium Re Ltd.
    
    
    6,638
    
    
    
    -
    
    
    
    8,437
    
    
    
    15,075Hannover Reinsurance (Ireland) Ltd.
    
    
    -
    
    
    
    4,964
    
    
    
    4,938
    
    
    
    9,902Maiden Insurance Company
    
    
    5,260
    
    
    
    -
    
    
    
    -
    
    
    
    5,260Max Bermuda Ltd.
    
    
    12,412
    
    
    
    -
    
    
    
    -
    
    
    
    12,412Midwest Insurance Company
    
    
    6,292
    
    
    
    -
    
    
    
    -
    
    
    
    6,292Swiss Reinsurance America Corp.
    
    
    31,555
    
    
    
    -
    
    
    
    -
    
    
    
    31,555Others
    
    
    -
    
    
    
    1,081
    
    
    
    12
    
    
    
    1,093Total
    
    
    $ 62,157
    
    
    
    $ 11,009
    
    
    
    $ 13,737
    
    
    
    $ 86,903December 31, 2008CastlePoint Reinsurance Company, Ltd.
    
    
    $ 225,839
    
    
    
    $ -
    
    
    
    $ -
    
    
    
    $ 225,839Tokio Millennium Re Ltd.
    
    
    6,183
    
    
    
    -
    
    
    
    12,905
    
    
    
    19,088Hannover Reinsurance (Ireland) Ltd.
    
    
    -
    
    
    
    4,964
    
    
    
    7,556
    
    
    
    12,520Midwest Insurance Co.
    
    
    5,322
    
    
    
    -
    
    
    
    -
    
    
    
    5,322Others
    
    
    -
    
    
    
    796
    
    
    
    13
    
    
    
    809Total
    
    
    $ 237,344
    
    
    
    $ 5,760
    
    
    
    $ 20,474
    
    
    
    $ 263,578
  Ceding Commissions
   F-35




---



##### Table of Contents



ContractualLoss Ratio
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Maximumat Which
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    PotentialMinimum
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ReductionCeding
    
    
    Estimated
    
    
    Ceding
    
    
    
    
    
    
    of CedingTreaty
    
    
    Commission
    
    
    Ultimate
    
    
    Commissions
    
    
    Minimum
    
    
    CommissionTreaty With
    
    Year
    
    
    Rate Applies
    
    
    Loss Ratio
    
    
    Earned
    
    
    Commission
    
    
    EarnedTokio Millenium
    
    
    2003
    
    
    
    65.6
    %
    
    
    64.6
    %
    
    
    $ 21.2
    
    
    
    $ 20.6
    
    
    
    $ 0.6Hannover Re Ireland
    
    
    2004
    
    
    
    68.0
    %
    
    
    52.8
    %
    
    
    30.2
    
    
    
    20.6
    
    
    
    9.6Hannover Re Ireland
    
    
    2005
    
    
    
    68.0
    %
    
    
    52.9
    %
    
    
    30.5
    
    
    
    20.8
    
    
    
    9.7Swiss Re
    
    
    2008
    
    
    
    61.5
    %
    
    
    56.0
    %
    
    
    26.0
    
    
    
    22.3
    
    
    
    3.7Swiss Re
    
    
    2009
    
    
    
    75.0
    %
    
    
    65.0
    %
    
    
    6.3
    
    
    
    5.5
    
    
    
    0.8Allianz
    
    
    2009
    
    
    
    75.0
    %
    
    
    65.0
    %
    
    
    2.1
    
    
    
    1.9
    
    
    
    0.3
   Note 11Property and Casualty Insurance Activity
  PercentageOf AmountAssumed to($ in thousands)
    
    Direct
    
    
    Assumed
    
    
    Ceded
    
    
    Net
    
    
    Net2009Premiums written
    
    
    $ 989,771
    
    
    
    $ 80,946
    
    
    
    $ 184,528
    
    
    
    $ 886,190
    
    
    
    9.1
    %Change in unearned premiums
    
    
    (52,554
    )
    
    
    28,097
    
    
    
    7,022
    
    
    
    (31,479
    )
    
    
    -89.3
    %Premiums earned
    
    
    $ 937,217
    
    
    
    $ 109,043
    
    
    
    $ 191,550
    
    
    
    $ 854,711
    
    
    
    12.8
    %2008Premiums written
    
    
    $ 627,319
    
    
    
    $ 7,501
    
    
    
    $ 290,777
    
    
    
    $ 344,043
    
    
    
    2.2
    %Change in unearned premiums
    
    
    (56,105
    )
    
    
    (370
    )
    
    
    (26,983
    )
    
    
    (29,492
    )
    
    
    1.3
    %Premiums earned
    
    
    $ 571,214
    
    
    
    $ 7,131
    
    
    
    $ 263,794
    
    
    
    $ 314,551
    
    
    
    2.3
    %2007Premiums written
    
    
    $ 520,421
    
    
    
    $ 3,593
    
    
    
    $ 264,832
    
    
    
    $ 259,182
    
    
    
    1.4
    %Change in unearned premiums
    
    
    (7,189
    )
    
    
    5,109
    
    
    
    (29,004
    )
    
    
    26,924
    
    
    
    19.0
    %Premiums earned
    
    
    $ 513,232
    
    
    
    $ 8,702
    
    
    
    $ 235,828
    
    
    
    $ 286,106
    
    
    
    3.0
    %
  F-36




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##### Table of Contents



Gross
    
    
    Reinsurance($ in thousands)
    
    Liability
    
    
    RecoverableDecember 31, 2009Case-basis reserves
    
    
    $ 638,476
    
    
    
    $ 98,212IBNR reserves
    
    
    493,513
    
    
    
    101,475Recoverable on paid losses
    
    
    -
    
    
    
    14,819Total
    
    
    $ 1,131,989
    
    
    
    $ 214,506December 31, 2008Case-basis reserves
    
    
    $ 316,284
    
    
    
    $ 126,064IBNR reserves
    
    
    218,707
    
    
    
    96,165Recoverable on paid losses
    
    
    -
    
    
    
    50,377Total
    
    
    $ 534,991
    
    
    
    $ 272,606
  Year ended December 31,($ in thousands)
    
    2009
    
    
    2008
    
    
    2007Balance at January 1
    
    $
    534,991
    
    
    $
    501,183
    
    
    $
    302,541Less reinsurance recoverables on unpaid losses
    
    
    (222,229
    )
    
    
    (189,525
    )
    
    
    (110,042
    )312,762
    
    
    
    311,658
    
    
    
    192,499Net reserves, at fair value, of acquired companies
    
    
    549,978
    
    
    
    -
    
    
    
    85,055Incurred related to:Current year
    
    
    477,757
    
    
    
    171,616
    
    
    
    159,512Prior years
    
    
    (2,260
    )
    
    
    (8,877
    )
    
    
    (1,606
    )Total incurred
    
    
    475,497
    
    
    
    162,739
    
    
    
    157,906Paid related to:Current year
    
    
    154,207
    
    
    
    59,205
    
    
    
    55,308Prior years
    
    
    251,728
    
    
    
    102,430
    
    
    
    68,494Total paid
    
    
    405,935
    
    
    
    161,635
    
    
    
    123,802Net balance at end of year
    
    
    932,302
    
    
    
    312,762
    
    
    
    311,658Add reinsurance recoverables on unpaid losses
    
    
    199,687
    
    
    
    222,229
    
    
    
    189,525Balance at December 31
    
    $
    1,131,989
    
    
    $
    534,991
    
    
    $
    501,183
    Loss and loss adjustment expense reserves.
 F-37




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##### Table of Contents



Number of yearsSegment
    
    50%
    
    90%
    
    99%Fire
    
    < 1 year
    
    < 1 year
    
    2 yearsHomeowners
    
    < 1 year
    
    < 2 years
    
    3 yearsMulti-Family Dwellings
    
    < 2 years
    
    < 2 years
    
    5 yearsCMP Property
    
    < 1 year
    
    1 year
    
    2 yearsCMP Liability
    
    < 2 years
    
    5 years
    
    9 yearsWorkers compensation
    
    < 1 year
    
    2 years
    
    5 yearsOther liability
    
    3 years
    
    4 years
    
    9 yearsCommercial auto liability
    
    < 1 year
    
    3 years
    
    4 yearsAuto physical damage
    
    < 1 year
    
    < 1 year
    
    1 yearPersonal auto liability
    
    < 1 year
    
    < 2 years
    
    4 years
 F-38




---



##### Table of Contents



Note 12Debt
 Subordinated Debentures
  F-39




---



##### Table of Contents



PrincipalAmount of
    
    Amount ofInvestment in
    
    JuniorCommon
    
    SubordinatedMaturity
    
    Early
    
    Interest
    
    Securities of
    
    DebentureIssue Date
    
    Issuer
    
    Date
    
    Redemption
    
    Rate
    
    Trust
    
    Issued to TrustMay 2003
    
    Tower Group
Statutory Trust I
    
    May 2033
    
    At our option at
par on or after May
15, 2008
    
    Three-month LIBOR
plus 410 basis
points
    
    $0.3 million
    
    $10.3 millionSeptember 2003
    
    Tower Group
Statutory Trust II
    
    September 2033
    
    At our option at
par on or after
September 30, 2008
    
    7.5% until
September 30, 2008;
three-month LIBOR
plus 400 basis
points thereafter
    
    $0.3 million
    
    $10.3 millionMay 2004
    
    Preserver Capital
Trust I
    
    May 2034
    
    At our option at
par on or after May
24, 2009
    
    Three-month LIBOR
plus 425 basis
points
    
    $0.4 million
    
    $12.4 millionDecember 2004
    
    Tower Group
Statutory Trust III
    
    December 2034
    
    At our option at
par on or after
December 15, 2009
    
    7.4% until December
7, 2009;
three-month LIBOR
plus 340 basis
points thereafter
    
    $0.4 million
    
    $13.4 millionDecember 2004
    
    Tower Group
Statutory Trust IV
    
    March 2035
    
    At our option at
par on or after
December 21, 2009
    
    Three-month LIBOR
plus 340 basis
points
    
    $0.4 million
    
    $13.4 millionMarch 2006
    
    Tower Group
Statutory Trust V
    
    April 2036
    
    At our option at
par on or after
April 7, 2011
    
    8.5625% until March
31, 2011;
three-month LIBOR
plus 330 basis
points thereafter
    
    $0.6 million
    
    $20.6 millionJanuary 2007
    
    Tower Group
Statutory Trust VI
    
    March 2037
    
    At our option at
par on or after
March 15, 2012
    
    8.155% until
January 25, 2012;
three-month LIBOR
plus 300 basis
points thereafter
    
    $0.6 million
    
    $20.6 millionDecember 2006
    
    CastlePoint
Management
Statutory Trust II
    
    December 2036
    
    At our option at
par on or after
December 14, 2011
    
    8.5551% until
December 14, 2011;
three-month LIBOR
plus 330 basis
points thereafter
    
    $1.6 million
    
    $51.6 millionDecember 2006
    
    CastlePoint
Management
Statutory Trust I
    
    December 2036
    
    At our option at
par on or after
December 1, 2011
    
    8.66% until
December 1, 2011;
three-month LIBOR
plus 350 basis
points thereafter
    
    $1.6 million
    
    $51.6 millionSeptember 2007
    
    CastlePoint Bermuda
Capital Trust I
    
    December 2037
    
    At our option at
par on or after
September 27, 2012
    
    8.39% until
September 27, 2012;
three-month LIBOR
plus 350 basis
points thereafter
    
    $0.9 million
    
    $30.9 million
    ($ in thousands)2033
    
    $
    20,6202034
    
    
    25,7752035
    
    
    13,4032036
    
    
    123,7132037
    
    
    51,547$
    235,058
 F-40




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##### Table of Contents



Note 13Stockholders Equity
 Authorized Shares of Common Stock
  Shares of Common Stock Issued
      Warrants
  Dividends Declared
  Note 14Stock Based Compensation
 2004 Long-Term Equity Compensation Plan
   2001 Stock Award Plan
   F-41




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##### Table of Contents



Restricted Stock Awards
    Year Ended December 31,2009
    
    
    2008
    
    
    2007Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageNumber of
    
    Grant Date
    
    
    Number of
    
    Grant Date
    
    
    Number of
    
    Grant DateShares
    
    Fair Value
    
    
    Shares
    
    Fair Value
    
    
    Shares
    
    Fair ValueOutstanding, January 1
    
    
    258,645
    
    
    $
    26.05
    
    
    
    195,468
    
    
    $
    24.69
    
    
    
    180,766
    
    
    $
    17.35Granted
    
    
    310,208
    
    
    
    23.50
    
    
    
    159,740
    
    
    
    24.39
    
    
    
    93,581
    
    
    
    32.20Vested
    
    
    (83,765
    )
    
    
    24.58
    
    
    
    (81,674
    )
    
    
    19.41
    
    
    
    (68,587
    )
    
    
    15.92Forfeitures
    
    
    (11,065
    )
    
    
    26.04
    
    
    
    (14,889
    )
    
    
    26.88
    
    
    
    (10,292
    )
    
    
    22.59Outstanding, December 31
    
    
    474,023
    
    
    $
    24.64
    
    
    
    258,645
    
    
    $
    26.05
    
    
    
    195,468
    
    
    $
    24.69
 SUA Restricted Deferred Stock Awards
  WeightedAverageNumber of
    
    Grant DateShares
    
    Fair ValueOutstanding, date of acquisition
    
    
    -
    
    
    
    $-Granted
    
    
    92,276
    
    
    
    23.74Vested
    
    
    (46,088
    )
    
    
    23.74Forfeitures
    
    
    -
    
    
    
    -Outstanding, December 31, 2009
    
    
    46,188
    
    
    $
    23.74
 Stock Options
  2009
    
    
    2008
    
    
    2007Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Number of
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding, January 1
    
    
    258,530
    
    
    $
    5.47
    
    
    
    281,896
    
    
    $
    5.57
    
    
    
    362,996
    
    
    $
    4.94Granted at fair value
    
    
    1,349,361
    
    
    
    22.51
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -Exercised
    
    
    (52,310
    )
    
    
    14.17
    
    
    
    (23,366
    )
    
    
    6.65
    
    
    
    (81,100
    )
    
    
    2.78Forfeitures and expirations
    
    
    (168,562
    )
    
    
    22.70
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -Outstanding, December 31
    
    
    1,387,019
    
    
    $
    19.62
    
    
    
    258,530
    
    
    $
    5.47
    
    
    
    281,896
    
    
    $
    5.57Exercisable, December 31
    
    
    1,197,459
    
    
    $
    19.34
    
    
    
    234,230
    
    
    $
    5.15
    
    
    
    233,296
    
    
    $
    4.95
  F-42




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##### Table of Contents



Options Outstanding
    
    
    Options ExercisableAverageRemaining
    Average
    
    
    
    
    
    AverageNumber of
    
    
    Contractual
    Exercise
    
    
    Number of
    
    ExerciseRange of Exercise Prices
    
    Shares
    
    
    Life (Years)
    Price
    
    
    Shares
    
    PriceUnder $5.00
    
    
    244,080
    
    
    
    2.9
    
    
    $
    5.63
    
    
    
    244,080
    
    
    $
    5.63$5.00 - $10.00
    
    
    735,680
    
    
    
    6.7
    
    
    
    18.50
    
    
    
    609,934
    
    
    
    18.47$10.01 - $20.00
    
    
    230,006
    
    
    
    7.9
    
    
    
    26.94
    
    
    
    166,192
    
    
    
    27.02$20.01 - $30.00
    
    
    177,253
    
    
    
    4.9
    
    
    
    34.05
    
    
    
    177,253
    
    
    
    34.05Total Options
    
    
    1,387,019
    
    
    
    6.0
    
    
    $
    19.62
    
    
    
    1,197,459
    
    
    $
    19.34
      Total Equity Compensation Not Yet Recognized
  Note 15Income Taxes
  ($ in thousands)
    
    2009
    
    
    2008
    
    
    2007Current Federal income tax expense
    
    
    $ 54,082
    
    
    
    $ 28,346
    
    
    
    $ 27,417Current state income tax expense
    
    
    2,458
    
    
    
    5,432
    
    
    
    3,545Deferred Federal and State income tax (benefit)
    
    
    (5,038
    )
    
    
    (1,676
    )
    
    
    (4,804
    )Provision for income taxes
    
    
    $ 51,502
    
    
    
    $ 32,102
    
    
    
    $ 26,158
  F-43




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##### Table of Contents



December 31,($ in thousands)
    
    2009
    
    
    2008Deferred tax asset:Claims reserve discount
    
    
    $ 32,477
    
    
    
    $ 11,863Unearned premium
    
    
    40,113
    
    
    
    12,837Equity compensation plans
    
    
    7,077
    
    
    
    273Investment impairments
    
    
    16,103
    
    
    
    8,680Net operating loss carryforwards
    
    
    18,839
    
    
    
    13,632Capital loss carryforwards
    
    
    -
    
    
    
    2,848Other
    
    
    2,360
    
    
    
    650Total deferred tax assets
    
    
    116,969
    
    
    
    50,783Deferred tax liability:Deferred acquisition costs net of deferred ceding commission revenue
    
    
    40,673
    
    
    
    18,578Warrant received from unconsolidated affiliate
    
    
    -
    
    
    
    1,612Gain from issuance of common stock by unconsolidated affiliate
    
    
    -
    
    
    
    3,706Depreciation and amortization
    
    
    14,439
    
    
    
    7,096Net unrealized appreciation (depreciation) of securities
    
    
    18,730
    
    
    
    (18,919
    )Equity income in unconsolidated affiliate
    
    
    -
    
    
    
    1,111Salvage and subrogation
    
    
    314
    
    
    
    764Accrual of bond discount
    
    
    986
    
    
    
    628Other
    
    
    70
    
    
    
    -Total deferred tax liabilities
    
    
    75,212
    
    
    
    14,576Deferred income taxes
    
    
    $ 41,757
    
    
    
    $ 36,207
      F-44




---



##### Table of Contents



($ in thousands)
    
    2009
    
    
    2008
    
    
    2007Federal income tax expense atU.S. statutory rate (35%)
    
    
    $ 56,291
    
    
    
    $ 31,353
    
    
    
    $ 24,934Tax exempt interest
    
    
    (4,159
    )
    
    
    (1,953
    )
    
    
    (1,466
    )State income taxes net of Federal benefit
    
    
    1,597
    
    
    
    3,531
    
    
    
    2,303Gain on bargain purchase
    
    
    (4,615
    )
    
    
    -
    
    
    
    -Acquisition-related transaction costs
    
    
    2,342
    
    
    
    -
    
    
    
    -Other
    
    
    46
    
    
    
    (829
    )
    
    
    387Provision for income taxes
    
    
    $ 51,502
    
    
    
    $ 32,102
    
    
    
    $ 26,158
 Note 16Employee Benefit Plans
  Supplemental Executive Retirement Plan (SERP)
  Note 17Commitments and Contingencies
 Legal Proceedings
  F-45




---



##### Table of Contents



inter alia inter alia
 Leases
  ($ in thousands)
    
    Amount2010
    
    $
    8,5712011
    
    
    7,8802012
    
    
    5,7632013
    
    
    5,3862014
    
    
    5,347Thereafter
    
    
    27,537$
    60,484
  Assessments
  F-46




---



##### Table of Contents



Note 18  Statutory Financial Information and Accounting Policies
 United States
  
    
    Policy acquisition costs are charged to operations in the year such costs are incurred,
rather than being deferred and amortized as premiums are earned over the terms of the
policies.
    
    Ceding commission revenues are earned when ceded premiums are written except for ceding
commission revenues in excess of anticipated acquisition costs, which are deferred and
amortized as ceded premiums are earned. GAAP requires that all ceding commission revenues be
earned as the underlying ceded premiums are earned over the term of the reinsurance
agreements.
    
    Certain assets including certain receivables, a portion of the net deferred tax asset,
prepaid expenses and furniture and equipment are not admitted.
    
    Investments in fixed-maturity securities are valued at NAIC value for statutory financial
purposes, which is primarily amortized cost. GAAP requires certain investments in
fixed-maturity securities classified as available for sale, to be reported at fair value.
    
    Certain amounts related to ceded reinsurance are reported on a net basis within the
statutory basis financial statements. GAAP requires these amounts to be shown gross.
    
    For SAP purposes, changes in deferred income taxes relating to temporary differences
between net income for financial reporting purposes and taxable income are recognized as a
separate component of gains and losses in surplus rather than included in income tax expense
or benefit as required under GAAP.
    Bermuda
    F-47




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##### Table of Contents



Note 19Fair Value of Financial Instruments
  Equity and fixed income investments:
 Common trust securitiesstatutory business trusts:
 Agents balances receivable, assumed premiums receivable, receivable-claims paid by agency:
 Reinsurance balances payable, payable to issuing carrier and funds held:
 Subordinated debentures:
 Note 20Earnings per Share
     Years Ended December 31,($ in thousands, except per share amounts)
    
    2009
    
    2008
    
    2007NumeratorNet income
    
    $
    109,330
    
    
    $
    57,473
    
    
    $
    45,082DenominatorWeighted average common shares outstanding
    
    
    39,363
    
    
    
    23,291
    
    
    
    22,927Effect of dilutive securities:Stock options
    
    
    205
    
    
    
    135
    
    
    
    172Unvested restricted stock units
    
    
    9
    
    
    
    36
    
    
    
    -Warrants
    
    
    3
    
    
    
    23
    
    
    
    29Weighted average common and potential dilutive shares outstanding
    
    
    39,580
    
    
    
    23,485
    
    
    
    23,128Earnings per share - basicDistributed earnings
    
    $
    0.26
    
    
    $
    0.20
    
    
    $
    0.15Undistributed earnings
    
    
    2.52
    
    
    
    2.27
    
    
    
    1.79Total
    
    $
    2.78
    
    
    $
    2.47
    
    
    $
    1.94Earnings per share - diluted
    
    $
    2.76
    
    
    $
    2.45
    
    
    $
    1.92
 F-48




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##### Table of Contents



Note 21Segment Information
    Year Ended December 31,($ in thousands)
    
    2009
    
    
    2008
    
    
    2007Brokerage Insurance SegmentRevenuesNet premiums earned
    
    
    $ 624,994
    
    
    
    $ 296,719
    
    
    
    $ 284,216Ceding commission revenue
    
    
    34,231
    
    
    
    61,051
    
    
    
    66,531Policy billing fees
    
    
    2,944
    
    
    
    2,004
    
    
    
    2,005Total revenues
    
    
    662,169
    
    
    
    359,774
    
    
    
    352,752ExpensesLoss and loss adjustment expenses
    
    
    340,035
    
    
    
    152,546
    
    
    
    156,790Underwriting expenses
    
    
    246,556
    
    
    
    153,495
    
    
    
    149,565Total expenses
    
    
    586,591
    
    
    
    306,041
    
    
    
    306,355Underwriting profit
    
    
    $ 75,578
    
    
    
    $ 53,733
    
    
    
    $ 46,397Specialty Business SegmentRevenuesNet premiums earned
    
    
    $ 229,717
    
    
    
    $ 17,832
    
    
    
    $ 1,890Ceding commission revenue
    
    
    9,706
    
    
    
    18,111
    
    
    
    4,479Total revenues
    
    
    239,423
    
    
    
    35,943
    
    
    
    6,369ExpensesLoss and loss adjustment expenses
    
    
    135,462
    
    
    
    10,193
    
    
    
    1,116Underwriting expenses
    
    
    79,771
    
    
    
    24,280
    
    
    
    5,041Total expenses
    
    
    215,233
    
    
    
    34,473
    
    
    
    6,157Underwriting profit
    
    
    $ 24,190
    
    
    
    $ 1,470
    
    
    
    $ 212Insurance Services SegmentRevenuesDirect commission revenue from managing general agency
    
    
    $ 1,583
    
    
    
    $ 58,215
    
    
    
    $ 28,795Claims administration revenue
    
    
    1,482
    
    
    
    5,392
    
    
    
    2,314Other administration revenue
    
    
    570
    
    
    
    3,559
    
    
    
    1,421Reinsurance intermediary fees
    
    
    1,488
    
    
    
    990
    
    
    
    770Policy billing fees
    
    
    21
    
    
    
    343
    
    
    
    33Total revenues
    
    
    5,144
    
    
    
    68,499
    
    
    
    33,333ExpensesDirect commission expense paid to producers
    
    
    1,707
    
    
    
    26,798
    
    
    
    14,055Other insurance services expenses:Underwriting expenses reimbursed to TICNY
    
    
    1,446
    
    
    
    12,346
    
    
    
    5,793Claims expense reimbursement to TICNY
    
    
    1,130
    
    
    
    5,392
    
    
    
    2,302Total expenses
    
    
    4,283
    
    
    
    44,536
    
    
    
    22,150Insurance services pretax income
    
    
    $ 861
    
    
    
    $ 23,963
    
    
    
    $ 11,183
 F-49




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##### Table of Contents



Year Ended December 31,($ in thousands)
    
    2009
    
    
    2008
    
    
    2007Brokerage insurance segment
    
    
    $ 662,169
    
    
    
    $ 359,774
    
    
    
    $ 352,752Specialty business segment
    
    
    239,423
    
    
    
    35,943
    
    
    
    6,369Insurance services segment
    
    
    5,144
    
    
    
    68,499
    
    
    
    33,333Total segment revenues
    
    
    906,736
    
    
    
    464,216
    
    
    
    392,454Net investment income
    
    
    74,866
    
    
    
    34,568
    
    
    
    36,699Net realized gains (losses) on investments, including
other-than-temporary impairments
    
    
    1,501
    
    
    
    (14,354
    )
    
    
    (17,511
    )Consolidated revenues
    
    
    $ 983,103
    
    
    
    $ 484,430
    
    
    
    $ 411,642
  Year Ended December 31,($ in thousands)
    
    2009
    
    2008
    
    2007Brokerage insurance segment underwriting profit
    
    $
    75,578
    
    
    $
    53,733
    
    
    $
    46,397Specialty business segment underwriting profit
    
    
    24,190
    
    
    
    1,470
    
    
    
    212Insurance services segment pretax income
    
    
    861
    
    
    
    23,963
    
    
    
    11,183Net investment income
    
    
    74,866
    
    
    
    34,568
    
    
    
    36,699Net realized gains (losses) on investments, including
other-than-temporary impairments
    
    
    1,501
    
    
    
    (14,354
    )
    
    
    (17,511
    )Corporate expenses
    
    
    (3,801
    )
    
    
    (1,626
    )
    
    
    (1,593
    )Acquisition-related expenses
    
    
    (14,038
    )
    
    
    -
    
    
    
    -Interest expense
    
    
    (18,122
    )
    
    
    (8,449
    )
    
    
    (9,290
    )Other income (loss)
    
    
    19,797
    
    
    
    270
    
    
    
    5,143Income before taxes
    
    $
    160,832
    
    
    $
    89,575
    
    
    $
    71,240
 Note 22Subsequent Events
 Acquisition of the Personal Lines Division of OneBeacon Group Ltd
  F-50




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##### Table of Contents



Share Repurchase Program
  Quarterly Dividend
  Note 23  Unaudited Quarterly Financial Information
 2009($ in thousands, except per share amounts)
    
    First
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    TotalRevenues
    
    
    $ 200,322
    
    
    
    $ 254,983
    
    
    
    $ 256,340
    
    
    
    $ 271,458
    
    
    
    $ 983,103Net Income
    
    
    17,976
    
    
    
    30,627
    
    
    
    29,978
    
    
    
    30,749
    
    
    
    109,330Net income per share:Basic (1)
    
    
    $ 0.53
    
    
    
    $ 0.76
    
    
    
    $ 0.74
    
    
    
    $ 0.72
    
    
    
    $ 2.78Diluted (1)
    
    
    $ 0.53
    
    
    
    $ 0.75
    
    
    
    $ 0.74
    
    
    
    $ 0.72
    
    
    
    $ 2.76
 2008First
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    TotalRevenues
    
    
    $ 110,492
    
    
    
    $ 106,798
    
    
    
    $ 130,747
    
    
    
    $ 136,393
    
    
    
    $ 484,430Net Income
    
    
    14,853
    
    
    
    10,169
    
    
    
    16,716
    
    
    
    15,735
    
    
    
    57,473Net income per share:Basic (1) (2)
    
    
    $ 0.64
    
    
    
    $ 0.44
    
    
    
    $ 0.72
    
    
    
    $ 0.67
    
    
    
    $ 2.47Diluted (1) (2)
    
    
    $ 0.63
    
    
    
    $ 0.44
    
    
    
    $ 0.71
    
    
    
    $ 0.67
    
    
    
    $ 2.45
 2007First
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    TotalRevenues
    
    
    $ 84,317
    
    
    
    $ 102,784
    
    
    
    $ 112,014
    
    
    
    $ 112,527
    
    
    
    $ 411,642Net Income
    
    
    11,628
    
    
    
    12,379
    
    
    
    14,384
    
    
    
    6,691
    
    
    
    45,082Net income per share:Basic (1) (2)
    
    
    $ 0.49
    
    
    
    $ 0.54
    
    
    
    $ 0.62
    
    
    
    $ 0.29
    
    
    
    $ 1.94Diluted (1) (2)
    
    
    $ 0.49
    
    
    
    $ 0.53
    
    
    
    $ 0.61
    
    
    
    $ 0.29
    
    
    
    $ 1.92
 (1)
    
    Since the weighted-average shares for the quarters are calculated
independently of the weighted-average shares for the year, quarterly
earnings per share may not total to annual earnings per share. In
addition, preferred dividends are excluded from the quarterly
calculations of earnings per share in 2007 since they are
anti-dilutive, but are included in the year end calculations.(2)
    
    Prior year earnings per share have been restated for new GAAP guidance
adopted in 2009 which requires unvested share-based payment awards
that contain non-forfeitable rights to dividends or dividend
equivalents be considered participating securities and included in the
computation of earnings per share. Basic and diluted earnings per
share for the years ended December 31, 2008 and 2007 decreased by
$0.02 and $0.01, respectively.
 F-51




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##### Table of Contents



Item 9. Changes In And Disagreements With Accountants Or Accounting And Financial Disclosure
   
 Item 9A. Controls and Procedures
 (a) Disclosure Controls and Procedures
  (b) Managements Report on Internal Control over Financial Reporting
      78




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##### Table of Contents



(c) Attestation report of the Companys registered public accounting firm
  (d) Changes in internal control over financial reporting
  
 Item 9B. Other Information
  
 PART III
 
 Item 10. Directors And Executive Officers Of The Registrant
   
 Item 11. Executive Compensation
  
 Item 12. Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters
  
 Item 13. Certain Relationships And Related Transactions, And Director Independence
  
 Item 14. Principal Accountant Fees And Services
  79




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##### Table of Contents



PART IV
 
 Item 15. Exhibits, Financial Statement Schedules
 A.
    
    (1
    )
    
    
    The financial statements and notes to financial statements are filed as part of this
report in Item 8. Financial Statements and Supplementary Data.(2
    )
    
    
    The financial statement schedules are listed in the Index to Consolidated Financial
Statement Schedules.(3
    )
    
    
    The exhibits are listed in the Index to Exhibits
  Exhibit 21.1
    
    Subsidiaries of Tower Group, Inc.Exhibit 23.1
    
    Consent of Johnson Lambert & Co. LLPExhibit 31.1
    
    Certification of CEO to Section 302(a)Exhibit 31.2
    
    Certification of CFO to Section 302(a)Exhibit 32
    
    Certification of CEO and CFO to Section 906
 80




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##### Table of Contents



SIGNATURES
  Tower Group, Inc.

Registrant
 Date: March 1, 2010
    
    /s/ Michael H. Lee

  Michael H. Lee
  Chairman of the Board,
  President and Chief Executive Officer
  Signature
    
    Title
    
    Date/s/   MICHAEL H. LEE

Michael H. Lee
    
    Chairman of the
Board, President
and Chief Executive
Officer (Principal
Executive Officer)
    
    March 1, 2010/s/   FRANCIS M. COLALUCCI

Francis M. Colalucci
    
    Senior Vice
President, Chief
Financial Officer
and Treasurer,
Director (Principal
Financial Officer,
Principal
Accounting Officer)
    
    March 1, 2010/s/   CHARLES A. BRYAN

Charles A. Bryan
    
    Director
    
    March 1, 2010/s/   WILLIAM W. FOX, JR.

William W. Fox, Jr.
    
    Director
    
    March 1, 2010/s/   WILLIAM A. ROBBIE

William A. Robbie
    
    Director
    
    March 1, 2010/s/   STEVEN W. SCHUSTER

Steven W. Schuster
    
    Director
    
    March 1, 2010/s/   ROBERT S. SMITH

Robert S. Smith
    
    Director
    
    March 1, 2010/s/   JAN R. VAN GORDER

Jan R. Van Gorder
    
    Director
    
    March 1, 2010/s/   AUSTIN P. YOUNG, III

Austin P. Young, III
    
    Director
    
    March 1, 2010
 81




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##### Table of Contents



Tower Group, Inc.
 Index to Financial Statement Schedules
 Schedules
    
    
    
    PagesI
    
    Summary of Investmentsother than investments in related parties
    
    S-2II
    
    Condensed Financial Information of the Registrant as of and for the years ended December
31, 2009, 2008, and 2007
    
    S-3III
    
    Supplementary Insurance Information for the years ended December 31, 2009, 2008, and 2007
    
    S-6IV
    
    Reinsurance for the years ended December 31, 2009, 2008, and 2007
    
    S-7V
    
    Valuation and Qualifying Accounts for the years ended December 31, 2009, 2008, and 2007
    
    S-8VI
    
    Supplemental Information Concerning Insurance Operations for the years ended December
31, 2009, 2008, and 2007
    
    S-9
 S-1




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##### Table of Contents



Tower Group, Inc.
 Schedule I - Summary of Investments - Other Than Investments in Related Parties
 December 31, 2009AmountFair
    
    
    Reflected on($ in thousands)
    
    Cost
    
    
    Value
    
    
    Balance SheetFixed maturities:Available for sale:U.S. Treasury securities and obligations ofU.S. Government agencies
    
    $
    113,344
    
    
    $
    113,272
    
    
    $
    113,272Corporate securities
    
    
    589,973
    
    
    
    615,122
    
    
    
    615,122Mortgage-backed securities
    
    
    517,596
    
    
    
    529,486
    
    
    
    529,486Municipal securities
    
    
    508,204
    
    
    
    525,716
    
    
    
    525,716Total fixed maturities
    
    
    1,729,117
    
    
    
    1,783,596
    
    
    
    1,783,596Preferred stocks
    
    
    77,536
    
    
    
    76,290
    
    
    
    76,290Common stock
    
    
    515
    
    
    
    443
    
    
    
    443Total equities
    
    
    78,051
    
    
    
    76,733
    
    
    
    76,733Short-term investments
    
    
    36,500
    
    
    
    36,500
    
    
    
    36,500Total investments
    
    $
    1,843,668
    
    
    $
    1,896,829
    
    
    $
    1,896,829
 December 31, 2008AmountFair
    
    
    Reflected on($ in thousands)
    
    Cost
    
    
    Value
    
    
    Balance SheetFixed maturities:Available for sale:U.S. Treasury securities and obligations ofU.S. Government agencies
    
    $
    26,843
    
    
    $
    27,405
    
    
    $
    27,405Corporate securities
    
    
    210,007
    
    
    
    186,975
    
    
    
    186,975Mortgage-backed securities
    
    
    164,886
    
    
    
    135,831
    
    
    
    135,831Municipal securities
    
    
    179,734
    
    
    
    179,948
    
    
    
    179,948Total fixed maturities
    
    
    581,470
    
    
    
    530,159
    
    
    
    530,159Preferred stocks
    
    
    5,551
    
    
    
    3,694
    
    
    
    3,694Common stock
    
    
    7,175
    
    
    
    7,120
    
    
    
    7,120Total equities
    
    
    12,726
    
    
    
    10,814
    
    
    
    10,814Total investments
    
    $
    594,196
    
    
    $
    540,973
    
    
    $
    540,973
 S-2




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##### Table of Contents



Tower Group, Inc.
Schedule II - Condensed Financial Information of the Registrant
Condensed Balance Sheets
 December 31,($ in thousands)
    
    2009
    
    
    2008AssetsCash and cash equivalents
    
    
    $ 18,619
    
    
    
    $ 22,291Investment in subsidiaries
    
    
    1,118,491
    
    
    
    359,486Federal and state taxes recoverable
    
    
    -
    
    
    
    1,960Fixed assets, net of accumulated depreciation
    
    
    10,175
    
    
    
    11,180Investment in unconsolidated affiliate
    
    
    -
    
    
    
    29,293Investment in statutory business trusts, equity method
    
    
    2,664
    
    
    
    2,664Due from affiliate
    
    
    784
    
    
    
    673Other assets
    
    
    2,141
    
    
    
    9,699Total assets
    
    
    $ 1,152,874
    
    
    
    $ 437,246LiabilitiesAccounts payable and accrued expenses
    
    
    3,314
    
    
    
    $ 666Deferred rent liability
    
    
    6,032
    
    
    
    6,411Federal and state income taxes payable
    
    
    2,714
    
    
    
    -Deferred income taxes
    
    
    1,649
    
    
    
    6,301Subordinated debentures
    
    
    88,664
    
    
    
    88,664Total liabilities
    
    
    102,373
    
    
    
    102,042Stockholders equity
    
    
    1,050,501
    
    
    
    335,204Total liabilities and stockholders equity
    
    
    $ 1,152,874
    
    
    
    $ 437,246
 S-3




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##### Table of Contents



Tower Group, Inc.
Schedule II - Condensed Financial Information of the Registrant
Condensed Statements of Income and Comprehensive Income
 Year Ended December 31,($ in thousands)
    
    2009
    
    
    2008
    
    
    2007RevenuesInvestment income
    
    
    $ 3,216
    
    
    
    $ 774
    
    
    
    $ 1,893Equity in net earnings of subsidiaries
    
    
    118,983
    
    
    
    62,135
    
    
    
    46,557Total revenues
    
    
    122,199
    
    
    
    62,909
    
    
    
    48,450ExpensesOther operating expenses
    
    
    2,302
    
    
    
    1,626
    
    
    
    1,594Interest expense
    
    
    6,112
    
    
    
    6,950
    
    
    
    7,359Total expenses
    
    
    8,414
    
    
    
    8,576
    
    
    
    8,953Other IncomeEquity income in unconsolidated affiliate
    
    
    (777
    )
    
    
    269
    
    
    
    2,438Gain from issuance of common stock by unconsolidated affiliate
    
    
    -
    
    
    
    -
    
    
    
    2,705Gain on investment in acquired unconsolidated affilitate
    
    
    7,388
    
    
    
    -
    
    
    
    -Acquisition related transaction costs
    
    
    (13,989
    )
    
    
    -
    
    
    
    -Income before income taxes
    
    
    106,407
    
    
    
    54,602
    
    
    
    44,640Provision/(benefit) for income taxes
    
    
    (2,923
    )
    
    
    (2,871
    )
    
    
    (442
    )Net income
    
    
    $ 109,330
    
    
    
    $ 57,473
    
    
    
    $ 45,082Gross unrealized investment holding gains (losses) arising during the period
    
    
    108,879
    
    
    
    (56,098
    )
    
    
    (29,424
    )Cumulative effect of adjustment resulting from adoption of new accounting guidance
    
    
    (2,497
    )
    
    
    -
    
    
    
    -Equity in net unrealized gains in investment in unconsolidated affiliates investment portfolio
    
    
    3,124
    
    
    
    (3,142
    )
    
    
    (218
    )Less: reclassification adjustment for (gains) losses included in net income
    
    
    (1,501
    )
    
    
    14,354
    
    
    
    17,511Income tax (expense) benefit related to items of other comprehensive income
    
    
    (37,700
    )
    
    
    15,710
    
    
    
    4,246Comprehensive income
    
    
    $ 179,635
    
    
    
    $ 28,297
    
    
    
    $ 37,197
 S-4




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##### Table of Contents



Tower Group, Inc.
Schedule II - Condensed Finanacial Information of the Registrant
Condensed Statements of Cash Flows
 Year Ended December 31,($ in thousands)
    
    2009
    
    
    2008
    
    
    2007Cash flows provided by (used in) operating activities:Net income
    
    
    $ 109,330
    
    
    
    $ 57,473
    
    
    
    $ 45,082Adjustments to reconcile net income to net cash provided by
(used) in operations:Gain on issuance of common shares of unconsolidated affiliate
    
    
    -
    
    
    
    -
    
    
    
    (2,705
    )Dividends received from consolidated subsidiaries
    
    
    8,000
    
    
    
    12,400
    
    
    
    8,500Equity in undistributed net income of subsidiaries
    
    
    (118,983
    )
    
    
    (62,135
    )
    
    
    (46,557
    )Depreciation and amortization
    
    
    1,018
    
    
    
    1,021
    
    
    
    1,815Amortization of restricted stock
    
    
    5,608
    
    
    
    2,480
    
    
    
    1,919Deferred income tax
    
    
    (4,652
    )
    
    
    564
    
    
    
    1,517(Increase) decrease in assets:Federal and state income tax recoverable
    
    
    4,674
    
    
    
    1,891
    
    
    
    (1,556
    )Equity loss (income) in unconsolidated affiliate
    
    
    777
    
    
    
    (269
    )
    
    
    (2,438
    )Excess tax benefits from share-based payment arrangements
    
    
    (191
    )
    
    
    (175
    )
    
    
    (1,105
    )Other assets
    
    
    (640
    )
    
    
    (8,571
    )
    
    
    2,582(Increase) decrease in liabilities:Accounts payable and accrued expenses
    
    
    2,644
    
    
    
    (1,507
    )
    
    
    3,583Deferred rent
    
    
    (380
    )
    
    
    (380
    )
    
    
    832Other-net
    
    
    -
    
    
    
    448
    
    
    
    321Net cash flows provided by operations
    
    
    7,204
    
    
    
    3,240
    
    
    
    11,789Cash flows provided by (used in) investing activities:Acquisition of Preserver Group, Inc.
    
    
    -
    
    
    
    -
    
    
    
    (48,286
    )Preserver transaction costs
    
    
    -
    
    
    
    -
    
    
    
    (4,729
    )Purchase of fixed assets
    
    
    (12
    )
    
    
    (182
    )
    
    
    (2,540
    )Investment in subsidiary
    
    
    -
    
    
    
    -
    
    
    
    (4,759
    )Net cash flows used in investing activities
    
    
    (12
    )
    
    
    (182
    )
    
    
    (60,314
    )Cash flows provided by (used in) financing activities:Equity offering and over allotment, net of issuance costs
    
    
    -
    
    
    
    -
    
    
    
    89,366Repayment of redeemable preferred stock
    
    
    -
    
    
    
    -
    
    
    
    (40,000
    )Proceeds from issuance of subordinated debentures
    
    
    -
    
    
    
    -
    
    
    
    20,619Purchase of common trust securitiesstatutory business trusts
    
    
    -
    
    
    
    -
    
    
    
    (619
    )Exercise of stock options and warrants
    
    
    741
    
    
    
    179
    
    
    
    1,166Excess tax benefits from share-based payment arrangements
    
    
    191
    
    
    
    175
    
    
    
    1,105Stock repurchase
    
    
    (1,058
    )
    
    
    (533
    )
    
    
    (439
    )Dividends paid
    
    
    (10,739
    )
    
    
    (4,608
    )
    
    
    (3,743
    )Net cash flows provided by (used in) financing activities
    
    
    (10,865
    )
    
    
    (4,787
    )
    
    
    67,455Increase (decrease) in cash and cash equivalents
    
    
    (3,672
    )
    
    
    (1,729
    )
    
    
    18,931Cash and cash equivalents, beginning of year
    
    
    22,291
    
    
    
    24,020
    
    
    
    5,089Cash and cash equivalents, end of year
    
    
    $ 18,619
    
    
    
    $ 22,291
    
    
    
    $ 24,020
 S-5




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##### Table of Contents



Tower Group, Inc.
Schedule III - Supplementary Insurance Information
 DeferredAcquisitionCost, Net of
    
    
    GrossDeferred
    
    
    Future PolicyCeding
    
    
    Benefits,
    
    
    Gross
    
    
    
    
    
    
    Benefits,
    
    
    
    
    
    
    
    
    
    
    NetCommission
    
    
    Losses and
    
    
    Unearned
    
    
    Net Earned
    
    
    Losses and
    
    
    Amortization
    
    
    Operating
    
    
    Premiums($ in thousands)
    
    Revenue
    
    
    Loss Expenses
    
    
    Premiums
    
    
    Premiums
    
    
    Loss Expenses
    
    
    of DAC
    
    
    Expenses
    
    
    Written2009Brokerage Segment
    
    
    $ 121,629
    
    
    
    $ 696,253
    
    
    
    $ 445,403
    
    
    
    $ 624,994
    
    
    
    $ 340,035
    
    
    $
    (174,852
    )
    
    
    $ 103,424
    
    
    
    $ 656,882Specialty Segment
    
    
    49,023
    
    
    
    435,736
    
    
    
    213,537
    
    
    
    229,717
    
    
    
    135,462
    
    
    
    (100,484
    )
    
    
    20,044
    
    
    
    229,308Total
    
    
    $ 170,652
    
    
    
    $ 1,131,989
    
    
    
    $ 658,940
    
    
    
    $ 854,711
    
    
    
    $ 475,497
    
    
    $
    (275,336
    )
    
    
    $ 123,468
    
    
    
    $ 886,1902008Brokerage Segment
    
    
    $ 33,694
    
    
    
    $ 487,155
    
    
    
    $ 267,525
    
    
    
    $ 296,718
    
    
    
    $ 152,546
    
    
    $
    (114,463
    )
    
    
    $ 68,871
    
    
    
    $ 315,655Specialty Segment
    
    
    19,386
    
    
    
    47,836
    
    
    
    61,322
    
    
    
    17,832
    
    
    
    10,193
    
    
    
    6,915
    
    
    
    3,256
    
    
    
    28,387Total
    
    
    $ 53,080
    
    
    
    $ 534,991
    
    
    
    $ 328,847
    
    
    
    $ 314,550
    
    
    
    $ 162,739
    
    
    $
    (107,548
    )
    
    
    $ 72,127
    
    
    
    $ 344,0422007Brokerage Segment
    
    
    $ 35,200
    
    
    
    $ 488,228
    
    
    
    $ 258,255
    
    
    
    $ 284,216
    
    
    
    $ 156,790
    
    
    $
    (84,076
    )
    
    
    $ 66,962
    
    
    
    $ 254,891Specialty Segment
    
    
    4,071
    
    
    
    12,955
    
    
    
    14,519
    
    
    
    1,890
    
    
    
    1,116
    
    
    
    1,340
    
    
    
    668
    
    
    
    4,292Total
    
    
    $ 39,271
    
    
    
    $ 501,183
    
    
    
    $ 272,774
    
    
    
    $ 286,106
    
    
    
    $ 157,906
    
    
    $
    (82,736
    )
    
    
    $ 67,630
    
    
    
    $ 259,183
 S-6




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##### Table of Contents



Tower Group , Inc.
Schedule IV - Reinsurance
 Percentage ofCeded to
    
    
    Assumed from
    
    
    
    
    
    
    AmountDirect
    
    
    Other
    
    
    Other
    
    
    Net
    
    
    Assumed to($ in thousands)
    
    Amount
    
    
    Companies
    
    
    Companies
    
    
    Amount
    
    
    NetYear ended December 31, 2009PremiumsProperty and casualty insurance
    
    
    $ 989,771
    
    
    
    $ 184,528
    
    
    
    $ 80,945
    
    
    
    $ 886,190
    
    
    
    9.1
    %Accident and health insurance
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    0.0
    %Total Premiums
    
    
    $ 989,771
    
    
    
    $ 184,528
    
    
    
    $ 80,945
    
    
    
    $ 886,190
    
    
    
    9.1
    %Year ended December 31, 2008PremiumsProperty and casualty insurance
    
    
    $ 627,319
    
    
    
    $ 290,777
    
    
    
    $ 7,501
    
    
    
    $ 344,043
    
    
    
    2.2
    %Accident and health insurance
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    0.0
    %Total Premiums
    
    
    $ 627,319
    
    
    
    $ 290,777
    
    
    
    $ 7,501
    
    
    
    $ 344,043
    
    
    
    2.2
    %Year ended December 31, 2007PremiumsProperty and casualty insurance
    
    
    $ 520,421
    
    
    
    $ 264,832
    
    
    
    $ 3,593
    
    
    
    $ 259,182
    
    
    
    1.4
    %Accident and health insurance
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    0.0
    %Total Premiums
    
    
    $ 520,421
    
    
    
    $ 264,832
    
    
    
    $ 3,593
    
    
    
    $ 259,182
    
    
    
    1.4
    %
 S-7




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##### Table of Contents



Tower Group, Inc.
Schedule V - Valuation and Qualifying Accounts
 Year Ended December 31,($ in thousands)
    
    2009
    
    
    2008
    
    
    2007Balance, January 1
    
    $
    550
    
    
    $
    204
    
    
    $
    248Additions
    
    
    1,671
    
    
    
    707
    
    
    
    157Deletions
    
    
    (949
    )
    
    
    (361
    )
    
    
    (201
    )Balance, December 31
    
    $
    1,272
    
    
    $
    550
    
    
    $
    204
 S-8




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##### Table of Contents



Tower Group, Inc.
 Schedule VI - Supplemental Information Concerning Insurance Operations
 Claims and ClaimsReserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjustment ExpensesFor Unpaid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Incurred and Related toClaims and
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Prior Year*
    
    
    
    
    
    
    Paid ClaimsDeferred
    
    
    Claim
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net
    
    
    
    
    
    
    Includes
    
    
    Amortization
    
    
    and Claim
    
    
    NetAcquisition
    
    
    Adjustment
    
    
    Discounted
    
    
    Unearned
    
    
    Earned
    
    
    Investment
    
    
    Current
    
    
    PXRE
    
    
    of
    
    
    Adjustment
    
    
    Premiums($ in thousands)
    
    Cost
    
    
    Expenses
    
    
    Reserves
    
    
    Premium
    
    
    Premium
    
    
    Income
    
    
    Year
    
    
    Commutation
    
    
    DAC
    
    
    Expenses
    
    
    Written2009Consolidated Insurance Subsidiaries
    
    
    $ 170,652
    
    
    
    $ 1,131,989
    
    
    
    $ -
    
    
    
    $ 658,940
    
    
    
    $ 854,711
    
    
    
    $ 74,866
    
    
    
    $ 477,757
    
    
    $
    (2,620
    )
    
    $
    (279,187
    )
    
    
    $ 405,935
    
    
    
    $ 886,189Unconsolidated affiliate (1) (2)
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    2,627
    
    
    
    2,098
    
    
    
    2,105
    
    
    
    (20
    )
    
    
    914
    
    
    
    967
    
    
    
    1,3752008Consolidated Insurance Subsidiaries
    
    
    53,080
    
    
    
    534,991
    
    
    
    -
    
    
    
    328,847
    
    
    
    314,551
    
    
    
    34,568
    
    
    
    171,616
    
    
    
    (8,877
    )
    
    
    (107,547
    )
    
    
    161,635
    
    
    
    344,043Unconsolidated affiliate (1)
    
    
    5,452
    
    
    
    18,232
    
    
    
    -
    
    
    
    17,541
    
    
    
    29,663
    
    
    
    1,968
    
    
    
    17,376
    
    
    
    86
    
    
    
    (12,214
    )
    
    
    8,365
    
    
    
    31,2422007Consolidated Insurance Subsidiaries
    
    
    39,271
    
    
    
    501,183
    
    
    
    -
    
    
    
    272,774
    
    
    
    286,106
    
    
    
    36,699
    
    
    
    159,512
    
    
    
    (1,606
    )
    
    
    (82,736
    )
    
    
    123,804
    
    
    
    259,183Unconsolidated affiliate (1)
    
    
    5,204
    
    
    
    8,647
    
    
    
    -
    
    
    
    15,490
    
    
    
    17,687
    
    
    
    2,101
    
    
    
    9,442
    
    
    
    (89
    )
    
    
    (6,523
    )
    
    
    3,141
    
    
    
    26,792
 (1) Information relates to CastlePoint Holdings, Ltd.
(CP)(2) The Company acquired CP on February 5, 2009. These are amounts for the period ended February 5, 2009 or for the period from January 1, 2009  February 5, 2009. Subsequent to February 5, 2009, CP amounts are
included with
consolidated insurance subsidiaries.
 S-9




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits2.1
    
    Agreement and Plan of Merger, dated as of August 4, 2008, by and among Tower Group, Inc.,
Ocean I Corporation and CastlePoint Holdings, Ltd., incorporated by reference to Exhibit 2.1
to the Companys Current Report on Form 8-K/A filed on August 6, 20082.2
    
    Agreement and Plan of Merger, dated as of June 21, 2009, by and among Tower Group, Inc., Tower
S.F. Merger Corporation and Specialty Underwriters Alliance, Inc., incorporated by reference
to Exhibit 2.1 to the Companys Current Report on Form 8 filed on June 22, 20092.3
    
    Amended and Restated Agreement and Plan of Merger, dated as of June 21, 2009, by and among
Tower Group, Inc., Tower S.F. Merger Corporation and Specialty Underwriters Alliance, Inc.,
incorporated by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K/A filed
on July 23, 20092.4
    
    Purchase Agreement, dated as of February 2, 2010, by and among Tower Group, Inc., OneBeacon
Insurance Group, Ltd., OneBeacon Insurance Group LLC, OneBeacon America Insurance Company, The
Employers Fire Insurance Company, The Camden Fire Insurance Association, Homeland Insurance
Company of New York, OneBeacon Insurance Company, OneBeacon Midwest Insurance Company,
Pennsylvania General Insurance Company and The Northern Assurance Company of America,
incorporated by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K filed on
February 3, 20103.1
    
    Amended and Restated Certificate of Incorporation of Tower Group, Inc., incorporated by
reference to Exhibit 3.1 to the Companys Registration Statement on Form S-1 (Amendment No. 2)
(No. 333-115310) filed on July 23, 20043.2
    
    Certificate of Amendment to Amended and Restated Certificate of Incorporation of Tower Group,
Inc., incorporated by reference to Exhibit 3.1 to the Companys Registration Statement on Form
S-8 (No. 333-115310) filed on February 5, 20093.3
    
    Certificate of Designations of Preferred Stock, incorporated by reference to the Companys
Current Report on Form 8-K filed on December 8, 20063.4
    
    Certificate of Designations of Series A-1 Preferred Stock of Tower Group, Inc. incorporated by
reference to Exhibit 3.1 to the Companys Current Report on Form 8-K filed on January 12, 20073.5
    
    Amended and Restated By-laws of Tower Group, Inc. as amended October 24, 2007, incorporated by
reference to Exhibit 3.1 to the Companys Current Report on Form 8-K filed on October 26, 20074.1
    
    Specimen Common Stock Certificate, incorporated by reference to Exhibit 4.1 to the Companys
Registration Statement on Form S-1 (Amendment No. 6) (No. 333-115310) filed on September 30,
20044.2
    
    Warrant issued to Friedman, Billings, Ramsey & Co., Inc., incorporated by reference to Exhibit
4.3 to the Companys Registration Statement on Form S-1 (Amendment No. 3) (No. 333-115310)
filed on August 25, 20049.1
    
    Voting Agreement, dated August 4, 2008, between Tower Group, Inc. and Michael H. Lee,
incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on
August 5, 200810.1
    
    Employment Agreement, dated as of August 1, 2004, by and between Tower Group, Inc. and Michael
H. Lee, incorporated by reference to Exhibit 10.1 to the Companys Registration Statement on
Form S-1 (Amendment No. 3) (No. 333-115310) filed on August 25, 200410.2
    
    Employment Agreement, dated as of August 1, 2004, by and between Tower Group, Inc. and Francis
M. Colalucci, incorporated by reference to Exhibit 10.3 to the Companys Registration
Statement on Form S-1 (Amendment No. 3) (No. 333-115310) filed on August 25, 200410.3
    
    Employment Agreement, dated as of March 23, 2009, by and between Tower Group, Inc. and Richard
Barrow, incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form
10-Q filed on May 11, 200910.4
    
    Employment Agreement, dated as of November 19, 2009, by and between Tower Group, Inc. and
William E. Hitselberger, incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K filed on November 19, 200910.4
    
    2004 Long-Term Equity Compensation Plan, as amended and restated effective May 15, 2008,
incorporated by reference to Exhibit 99.1 to the Companys Registration Statement on Form S-8
(No. 333-115310) filed on June 20, 200810.5
    
    2001 Stock Award Plan, incorporated by reference to Exhibit 10.8 to the Companys Registration
Statement on Form S-1 (No. 333-115310) filed on May 7, 200410.6
    
    2000 Deferred Compensation Plan, incorporated by reference to Exhibit 10.9 to the Companys
Registration Statement on Form S-1 (Amendment No. 6) (No. 333-115310) filed on September 30,
200410.7
    
    Amended & Restated Declaration of Trust, dated as of May 15, 2003, by and between Tower Group,
Inc., Tower Statutory Trust I and U.S. Bank National Association, incorporated by reference to
Exhibit 10.10 to the Companys Registration Statement on Form S-1 (No. 333-115310) filed on
May 7, 200410.8
    
    Indenture, dated as of May 15, 2003, by and between Tower Group, Inc. and U.S. Bank National
Association, incorporated by reference to Exhibit 10.11 to the Companys Registration
Statement on Form S-1 (No. 333-115310) filed on May 7, 200410.9
    
    Guarantee Agreement, dated as of May 15, 2003, by and between Tower Group, Inc. and U.S. Bank
National Association, incorporated by reference to Exhibit 10.12 to the Companys Registration
Statement on Form S-1 (No. 333-115310) filed on May 7, 2004




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits10.10
    
    Amended and Restated Trust Agreement, dated as of September 30, 2003, by and between Tower
Group, Inc., JPMorgan Chase Bank, Chase Manhattan Bank USA, National Association and Michael
H. Lee, Steven G. Fauth and Francis M. Colalucci as Administrative Trustees of Tower Group
Statutory Trust II, incorporated by reference to Exhibit 10.13 to the Companys Registration
Statement on Form S-1 (No. 333-115310) filed on May 7, 200410.11
    
    Junior Subordinated Indenture, dated as of September 30, 2003, by and between Tower Group,
Inc. and JPMorgan Chase Bank, incorporated by reference to Exhibit 10.14 to the Companys
Registration Statement on Form S-1 (No. 333-115310) filed on May 7, 200410.12
    
    Guarantee Agreement, dated as of September 30, 2003, by and between Tower Group, Inc. and
JPMorgan Chase Bank, incorporated by reference to Exhibit 10.15 to the Companys Registration
Statement on Form S-1 (No. 333-115310) filed on May 7, 200410.13
    
    Service and Expense Sharing Agreement, dated as of December 28, 1995, by and between Tower
Insurance Company of New York and Tower Risk Management Corp., incorporated by reference to
Exhibit 10.16 to the Companys Registration Statement on Form S-1 (No. 333-115310) filed on
May 7, 200410.14
    
    Real Estate Lease and amendments thereto, by and between Broadpine Realty Holding Company,
Inc. and Tower Insurance Company of New York, incorporated by reference to Exhibit 10.17 to
the Companys Registration Statement on Form S-1 (Amendment No. 1) (No. 333-115310) filed on
June 24, 200410.15
    
    Third Amendment to Lease between Tower Insurance Company of New York and 120 Broadway
Holdings, LLC executed September 1, 2005, incorporated by reference to Exhibit 10.01 to the
Companys Current Report on Form 8-K filed on August 26, 200510.16
    
    License and Services Agreement, dated as of June 11, 2002, by and between AgencyPort Insurance
Services, Inc. and Tower Insurance Company of New York, incorporated by reference to Exhibit
10.18 to the Companys Registration Statement on Form S-1 (Amendment No. 3) (No. 333-115310)
filed on August 25, 200410.17
    
    Agreement, dated as of April 17, 1996, between Morstan General Agency, Inc. and Tower Risk
Management Corp., incorporated by reference to Exhibit 10.19 to the Companys Registration
Statement on Form S-1 (No. 333-115310) filed on May 7, 200410.18
    
    Amended and Restated Declaration of Trust, dated December 15, 2004, by and among Wilmington
Trust Company, as Institutional Trustee; Wilmington Trust Company, as Delaware Trustee; Tower
Group, Inc., as Sponsor; and the Trust Administrators Michael H. Lee, Francis M. Colalucci and
Steve G. Fauth, incorporated by reference to Exhibit 10.04 to the Companys Current Report on
Form 8-K filed on December 20, 200410.19
    
    Indenture between Tower Group, Inc. and Wilmington Trust Company, as Trustee, dated December
15, 2004, incorporated by reference to Exhibit 10.03 to the Companys Current Report on Form
8-K filed on December 20, 200410.20
    
    Guarantee Agreement dated December 15, 2004, by and between Tower Group, Inc. and Wilmington
Trust Company, incorporated by reference to Exhibit 10.02 to the Companys Current Report on
Form 8-K filed on December 20, 200410.21
    
    Amended and Restated Declaration of Trust, dated December 21, 2004, by and among JPMorgan
Chase Bank, National Association, as Institutional Trustee, Chase Manhattan Bank USA, National
Association, as Delaware Trustee; Tower Group, Inc., as Sponsor; and the Trust Administrators
Michael H. Lee, Francis M. Colalucci and Steve G. Fauth, incorporated by reference to Exhibit
10.04 to the Companys Current Report on Form 8-K filed on December 23, 200410.22
    
    Indenture between Tower Group, Inc. and JPMorgan Chase Bank, National Association, as Trustee,
dated December 21, 2004, incorporated by reference to Exhibit 10.03 to the Companys Current
Report on Form 8-K filed on December 23, 200410.23
    
    Guarantee Agreement dated December 21, 2004, by and between Tower Group, Inc. and JPMorgan
Chase Bank, National Association, incorporated by reference to Exhibit 10.02 to the Companys
Current Report on Form 8-K filed on December 23, 200410.24
    
    Amended and Restated Declaration of Trust, dated March 31, 2006, by and among Wells Fargo
Bank, National Association, as Institutional Trustee; Wells Fargo Delaware Trust Company, as
Delaware Trustee; Tower Group, Inc., as Sponsor; and the Trust Administrators Francis M.
Colalucci and Steve G. Fauth, incorporated by reference to Exhibit 10.04 to the Companys
Current Report on Form 8-K filed on April 6, 200610.25
    
    Indenture between Tower Group, Inc. and Wells Fargo Bank, National Association, as Trustee,
dated March 31, 2006, incorporated by reference to Exhibit 10.03 to the Companys Current
Report on Form 8-K filed on April 6, 200610.26
    
    Guarantee Agreement dated March 31, 2006, by and between Tower Group, Inc. and Wells Fargo
Delaware Trust Company, incorporated by reference to Exhibit 10.02 to the Companys Current
Report on Form 8-K filed on April 6, 200610.27
    
    Stock Purchase Agreement by and among Tower Group, Inc. and Preserver Group, Inc. dated
November 13, 2006, incorporated by reference to Exhibit 10.1 to the Companys Current Report
on Form 8-K filed on November 17, 2006




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits10.28
    
    Exchange Agreement by and among Tower Group, Inc. and CastlePoint Management Corp. dated
January 11, 2007 incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed on January 12, 200710.29
    
    Master Agreement dated April 4, 2006 by and among Tower Group, Inc., Tower Insurance Company
of New York, Tower National Insurance Company, CastlePoint Holdings, Ltd. and CastlePoint
Management Corp. incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed on January 22, 200710.30
    
    Addendum No. 1 to the Master Agreement by and among Tower Group, Inc. and CastlePoint
Holdings, Ltd. incorporated by reference to Exhibit 10.2 to the Companys Current Report on
Form 8-K filed on January 22, 200710.31
    
    Amended and Restated Declaration of Trust, dated January 25, 2007, by and among Wilmington
Trust, as Institutional Trustee and as Delaware Trustee; Tower Group, Inc., as Sponsor; and
the Trust Administrators Michael H. Lee, Francis M. Colalucci and Stephen L. Kibblehouse,
incorporated by reference to Exhibit 10.02 to the Companys Current Report on Form 8-K filed
on January 26, 200710.32
    
    Indenture between Tower Group, Inc. and Wilmington Trust Company, as Trustee, dated January
25, 2007, incorporated by reference to Exhibit 4.01 to the Companys Current Report on Form
8-K filed on January 26, 200710.33
    
    Guarantee Agreement dated January 25, 2007, by and between Tower Group, Inc. and Wilmington
Trust Company, incorporated by reference to Exhibit 10.01 to the Companys Current Report on
Form 8-K filed on January 26, 200710.34
    
    Management Agreement, dated July 1, 2007, by and between CastlePoint Insurance Company and
Tower Risk Management Corp., incorporated by reference to Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q filed on November 9, 200710.35
    
    Employment Agreement, dated as of July 23, 2007, by and between Tower Group Inc. and Gary S.
Maier, incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report on Form
10-Q filed on November 9, 200710.36
    
    Fourth Amendment to Lease between Tower Insurance Company of New York and 120 Broadway
Holdings, LLC dated July 25, 2006, incorporated by reference to Exhibit 10.49 to the Companys
Annual Report on Form 10-K filed on March 14, 200810.37
    
    Fifth Amendment to Lease between Tower Insurance Company of New York and 120 Broadway
Holdings, LLC dated December 20, 2006, incorporated by reference to Exhibit 10.50 to the
Companys Annual Report on Form 10-K filed on March 14, 200810.38
    
    Employment Agreement, dated as of November 12, 2006, by and between Tower Group Inc. and
Patrick J. Haveron, incorporated by reference to Exhibit 10.1 to the Companys Current Report
on Form 8-K filed on April 12, 200710.39
    
    Service Agreement dated May 1, 2007 by and among Tower Risk Management Corp. and CastlePoint
Management Corp. , incorporated by reference to Exhibit 10.59 to the Companys Annual Report
on Form 10-K filed on March 14, 200810.40
    
    Form of Tower Group, Inc. 2004 Long Term Equity Compensation Plan Restricted Stock Award
Agreement, incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form
8-K filed on March 18, 200810.41
    
    Form of Tower Group, Inc. 2004 Long Term Equity Compensation Plan Performance Shares Award
Agreement, incorporated by reference to Exhibit 10.50 to the Companys Annual Report on Form
10-K filed on March 16, 200910.42
    
    Form of Tower Group, Inc. 2004 Long Term Equity Compensation Plan, as amended and restated
effective May 15, 2008, Restricted Stock Units Award Agreement, incorporated by reference to
Exhibit 10.63 to the Companys Annual Report on Form 10-K filed on March 14, 200810.43
    
    Stock Purchase Agreement dated August 27, 2008 between CastlePoint Reinsurance Company, Ltd.,
HIG, Inc. and Brookfield US Corporation, incorporated by reference to Exhibit 2.1 to
CastlePoint Holdings, Ltd.s Current Report on Form 8-K filed on September 2, 200810.44
    
    Asset Purchase Agreement, dated as of August 26, 2008, by and among CastlePoint Reinsurance
Company, Ltd., Tower Insurance Company of New York, Tower National Insurance Company,
Preserver Insurance Company, Mountain Valley Insurance Company, North East Insurance Company
and Tower Risk Management Corp., incorporated by reference to Exhibit 2.1 to the Companys
Current Report on Form 8-K filed August 27, 200810.45
    
    Limited Waiver Agreement, dated as of August 26, 2008, by and among Tower Group, Inc., Ocean I
Corporation and CastlePoint Holdings, Ltd., incorporated by reference to Exhibit 2.2 to the
Companys Current Report on Form 8-K filed August 27, 200810.46
    
    Parent Guarantee Agreement, dated as of December 1, 2006, between CastlePoint Holdings, Ltd.
and Wilmington Trust Company, incorporated by reference to Exhibit 10.32 to CastlePoint
Holdings Ltd.s Registration Statement on Form S-1 (No. 333-139939) filed on January 11, 200710.47
    
    Guarantee Agreement, dated as of December 1, 2006, between CastlePoint Management Corp. and
Wilmington Trust Company, incorporated by reference to Exhibit 10.33 to CastlePoint Holdings
Ltd.s Registration Statement on Form S-1 (No. 333-139939) filed on January 11, 200710.48
    
    Indenture, dated as of December 1, 2006, between CastlePoint Management Corp. and Wilmington
Trust Company, incorporated by reference to Exhibit 10.34 to CastlePoint Holdings Ltd.s
Registration Statement on Form S-1 (No. 333-139939) filed on January 11, 200710.49
    
    Amended and Restated Declaration of Trust, dated as of December 1, 2006, among Wilmington
Trust Company as




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##### Table of Contents



ExhibitNumber
    
    Description of ExhibitsInstitutional Trustee, Wilmington Trust Company, as Delaware Trustee,
CastlePoint Management Corp., as Sponsor, and Joel Weiner, James Dulligan and Roger Brown, as
Administrators, incorporated by reference to Exhibit 10.35 to CastlePoint Holdings Ltd.s
Registration Statement on Form S-1 (No. 333-139939) filed on January 11, 200710.50
    
    Parent Guarantee Agreement, dated as of December 14, 2006, between CastlePoint Holdings, Ltd.
and Wilmington Trust Company, incorporated by reference to Exhibit 10.36 to CastlePoint
Holdings Ltd.s Registration Statement on Form S-1 (No. 333-139939) filed on January 11, 200710.51
    
    Guarantee Agreement of CastlePoint Management Corp., dated as of December 14, 2006, between
CastlePoint Management Corp. and Wilmington Trust Company, incorporated by reference to
Exhibit 10.37 to CastlePoint Holdings Ltd.s Registration Statement on Form S-1 (No.
333-139939) filed on January 11, 200710.52
    
    Indenture, dated as of December 14, 2006, between CastlePoint Management Corp. and Wilmington
Trust Company, incorporated by reference to Exhibit 10.38 to CastlePoint Holdings Ltd.s
Registration Statement on Form S-1 (No. 333-139939) filed on January 11, 200710.53
    
    Amended and Restated Declaration of Trust, dated as of December 14, 2006, among Wilmington
Trust Company as Institutional Trustee, Wilmington Trust Company, as Delaware Trustee,
CastlePoint Management Corp., as Sponsor, and Joel Weiner, James Dulligan and Roger Brown, as
Administrators, incorporated by reference to Exhibit 10.39 to CastlePoint Holdings Ltd.s
Registration Statement on Form S-1 (No. 333-139939) filed on January 11, 200710.54
    
    CastlePoint Holdings, Ltd. 2006 Long-Term Equity Compensation Plan, incorporated by reference
to Exhibit 10.4 to CastlePoint Holdings Ltd.s Registration Statement on Form S-1 (File No.
333-134628) filed on June 1, 200610.55
    
    Amendment No. 1 to CastlePoint Holdings, Ltd. 2006 Long-Term Equity Compensation Plan,
incorporated by reference to Exhibit 4.5 to CastlePoint Holdings Ltd.s Registration Statement
on Form S-8 (File No. 333-134628) filed on December 5, 200710.56
    
    Form of Stock Option Agreement for Executive Employee Recipients of Options under 2006
Long-Term Equity Compensation Plan, incorporated by reference to Exhibit 10.5 to CastlePoint
Holdings Ltd.s Registration Statement on Form S-1 (File No. 333-134628) filed on June 1, 200610.57
    
    Form of Stock Option Agreement for Non-Employee Director Recipients of Options under 2006
Long-Term Equity Compensation Plan, incorporated by reference to Exhibit 10.6 to CastlePoint
Holdings Ltd.s Registration Statement on Form S-1 (File No. 333-134628) filed on June 1, 200610.58
    
    Indenture between CastlePoint Bermuda Holdings, Ltd. and Wilmington Trust Company, as Trustee,
dated September 27, 2007, incorporated by reference to Exhibit 4.1 to CastlePoint Holdings
Ltd.s Current Report on Form 8-K filed on October 1, 200710.59
    
    Guarantee Agreement dated September 27, 2007 by and between CastlePoint Bermuda Holdings, Ltd.
and Wilmington Trust Company, incorporated by reference to Exhibit 4.2 to CastlePoint Holdings
Ltd.s Current Report on Form 8-K filed on October 1, 200710.60
    
    Amended and Restated Declaration of Trust, dated September 27, 2007, by Wilmington Trust, as
Institutional Trustee and as Delaware Trustee; CastlePoint Bermuda Holdings, Ltd. as Sponsor,
and Trust Administrators Roger A. Brown, Joel S. Weiner and James Dulligan, incorporated by
reference to Exhibit 4.3 to CastlePoint Holdings Ltd.s Current Report on Form 8-K filed on
October 1, 200710.61
    
    Fixed/Floating Rate Junior Subordinated Deferrable Interest Debenture, dated September 27,
2007 by CastlePoint Bermuda Holdings, Ltd. in favor of Wilmington Trust Company as
institutional trustee, incorporated by reference to Exhibit 4.4 to CastlePoint Holdings Ltd.s
Current Report on Form 8-K filed on October 1, 200710.62
    
    Supplemental Guarantee, dated as of February 5, 2009, by and among Ocean I Corporation,
CastlePoint Holdings, Ltd. and Wilmington Trust Company (related to that certain Parent
Guarantee Agreement, dated as of December 1, 2006, between CastlePoint Holdings, Ltd. and
Wilmington Trust Company), incorporated by reference to Exhibit 10.71 to the Companys Annual
Report on Form 10-K filed on March 16, 200910.63
    
    Supplemental Guarantee, dated as of February 5, 2009, by and among Ocean I Corporation,
CastlePoint Holdings, Ltd. and Wilmington Trust Company (related to that certain Parent
Guarantee Agreement, dated as of December 14, 2006, between CastlePoint Holdings, Ltd. and
Wilmington Trust Company), incorporated by reference to Exhibit 10.72 to the Companys Annual
Report on Form 10-K filed on March 16, 200910.64
    
    Supplemental Guarantee, dated as of February 5, 2009, by and among Ocean I Corporation,
CastlePoint Holdings, Ltd. and Wilmington Trust Company (related to that certain Parent
Guarantee Agreement, dated as of November 8, 2007, between CastlePoint Holdings, Ltd. and
Wilmington Trust Company), incorporated by reference to Exhibit 10.73 to the Companys Annual
Report on Form 10-K filed on March 16, 200910.65
    
    Separation Agreement, dated as of February 27, 2009, by and between Tower Group, Inc. and
Patrick J. Haveron, incorporated by reference to Exhibit 10.75 to the Companys Annual Report
on Form 10-K filed on March 16, 200910.66
    
    Consulting Agreement, dated as of February 27, 2009, by and between Tower Group, Inc. and
Patrick J. Haveron, incorporated by reference to Exhibit 10.76 to the Companys Annual Report
on Form 10-K filed on March 16, 200910.67
    
    Letter of Amendment dated February 23, 2009 to Stock Purchase Agreement dated August 27, 2008
between CastlePoint Reinsurance Company, Ltd., HIG, Inc. and Brookfield US Corporation,
incorporated by reference to Exhibit 10.77 to the Companys Annual Report on Form 10-K filed
on March 16, 2009




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits21.1
    
    Subsidiaries of the registrant23.1
    
    Consent of Johnson Lambert & Co.31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Michael H. Lee31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Francis M. Colalucci32
    
    Certification of Chief Executive Officer and Chief Financial Officer, Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002