Document:

TOWER GROUP, INC.

                            13,000 CAPITAL SECURITIES

                     FIXED/FLOATING RATE CAPITAL SECURITIES

               (LIQUIDATION AMOUNT $1,000.00 PER CAPITAL SECURITY)

                               PLACEMENT AGREEMENT

                              --------------------

                                                               December 7, 2004

FTN Financial Capital Markets
845 Crossover Lane, Suite 150
Memphis, Tennessee  38117

Keefe, Bruyette & Woods, Inc.
787 7th Avenue, 4th Floor
New York, New York  10019

Ladies and Gentlemen:

         Tower Group, Inc., incorporated and existing under the laws of Delaware
(the "Company"), and its financing subsidiary,  Tower Group Statutory Trust III,
a Delaware  statutory  trust (the  "Trust," and  hereinafter  together  with the
Company, the "Offerors"), hereby confirm their agreement (this "Agreement") with
you as placement agents (the "Placement Agents"), as follows:

      SECTION 1. ISSUANCE AND SALE OF SECURITIES.

            1.1  INTRODUCTION.  The  Offerors  propose  to issue and sell at the
      Closing  (as  defined  in  Section  2.3.1  hereof)  13,000 of the  Trust's
      Fixed/Floating  Rate  Capital  Securities,  with a  liquidation  amount of
      $1,000.00 per capital  security (the "Capital  Securities"),  to Preferred
      Term  Securities XVI, Ltd., a company with limited  liability  established
      under the laws of the Cayman  Islands  (the  "Purchaser")  pursuant to the
      terms of a Subscription  Agreement  entered into, or to be entered into on
      or prior to the Closing Date (as defined in Section 2.3.1 hereof), between
      the Offerors and the Purchaser (the "Subscription Agreement"), the form of
      which is  attached  hereto as  Exhibit A and  incorporated  herein by this
      reference.

            1.2 OPERATIVE AGREEMENTS.  The Capital Securities shall be fully and
      unconditionally  guaranteed  on a  subordinated  basis by the Company with
      respect to distributions and amounts payable upon liquidation,  redemption
      or  repayment  (the  "Guarantee")  pursuant  and subject to the  Guarantee
      Agreement (the "Guarantee Agreement"), to be

<PAGE>

      dated as of the Closing Date and executed and delivered by the Company and
      Wilmington  Trust Company ("WTC"),  as trustee (the "Guarantee  Trustee"),
      for  the  benefit  from  time  to  time  of the  holders  of  the  Capital
      Securities.  The  entire  proceeds  from  the  sale  by the  Trust  to the
      Purchaser  of the Capital  Securities  shall be  combined  with the entire
      proceeds  from the  concurrent  sale by the  Trust to the  Company  of its
      common  securities  (the  "Common  Securities"),  and shall be used by the
      Trust to purchase  $13,403,000 in principal  amount of the  Fixed/Floating
      Rate Junior Subordinated Deferrable Interest Debentures (the "Debentures")
      of the Company.  The Capital  Securities and the Common Securities for the
      Trust shall be issued  pursuant to an Amended and Restated  Declaration of
      Trust among WTC, as Delaware  Trustee (the  "Delaware  Trustee"),  WTC, as
      institutional trustee (the "Institutional Trustee"), the administrators of
      the Trust named  therein,  and the Company,  to be dated as of the Closing
      Date and in substantially  the form heretofore  delivered to the Placement
      Agents (the "Trust Agreement"). The Debentures shall be issued pursuant to
      an  Indenture  (the  "Indenture"),  to be  dated as of the  Closing  Date,
      between  the  Company  and  WTC,  as  indenture  trustee  (the  "Indenture
      Trustee"). This Agreement and the documents identified in this Section 1.2
      and in Section 1.1 are referred to herein as the "Operative Documents."

            1.3 RIGHTS OF PURCHASER. The Capital Securities shall be offered and
      sold by the Trust directly to the Purchaser without registration of any of
      the  Capital  Securities,  the  Debentures  or  the  Guarantee  under  the
      Securities Act of 1933, as amended (the  "Securities  Act"),  or any other
      applicable   securities   laws  in  reliance  upon   exemptions  from  the
      registration  requirements  of the  Securities  Act and  other  applicable
      securities   laws.  The  Offerors  agree  that  this  Agreement  shall  be
      incorporated  by  reference  into  the  Subscription   Agreement  and  the
      Purchaser  shall be  entitled  to each of the  benefits  of the  Placement
      Agents and the  Purchaser  under this  Agreement  and shall be entitled to
      enforce  obligations  of the Offerors  under this Agreement as fully as if
      the  Purchaser  were a  party  to this  Agreement.  The  Offerors  and the
      Placement  Agents  have  entered  into this  Agreement  to set forth their
      understanding as to their relationship and their respective rights, duties
      and obligations.

            1.4 LEGENDS.  Upon original issuance thereof, and until such time as
      the same is no longer  required under the applicable  requirements  of the
      Securities Act, the Capital  Securities and Debentures  certificates shall
      each  contain  a  legend  as  required  pursuant  to any of the  Operative
      Documents.

      SECTION 2. PURCHASE OF CAPITAL SECURITIES.

            2.1 EXCLUSIVE RIGHTS; PURCHASE PRICE. From the date hereof until the
      Closing  Date  (which  date may be  extended  by mutual  agreement  of the
      Offerors  and the  Placement  Agents),  the  Offerors  hereby grant to the
      Placement  Agents  the  exclusive  right  to  arrange  for the sale of the
      Capital  Securities to the Purchaser at a purchase  price of $1,000.00 per
      Capital Security.

            2.2  SUBSCRIPTION  AGREEMENT.  The Offerors hereby agree to evidence
      their  acceptance  of the  subscription  by  countersigning  a copy of the
      Subscription Agreement and returning the same to the Placement Agents.

                                       2
<PAGE>

      2.3 CLOSING AND DELIVERY OF PAYMENT.

            2.3.1  CLOSING;  CLOSING DATE.  The sale and purchase of the Capital
      Securities by the Offerors to the Purchaser  shall take place at a closing
      (the "Closing") at the offices of LeBoeuf,  Lamb, Greene & MacRae, L.L.P.,
      at 10:00 a.m.  (New York City time) on December  15,  2004,  or such other
      business  day as may be  agreed  upon by the  Offerors  and the  Placement
      Agents (the "Closing Date"); provided, however, that in no event shall the
      Closing Date occur later than December 22, 2004 unless consented to by the
      Purchaser.  Payment  by the  Purchaser  shall be payable in the manner set
      forth in the  Subscription  Agreement and shall be made prior to or on the
      Closing Date.

            2.3.2 DELIVERY.  The certificate for the Capital Securities shall be
      in definitive form, registered in the name of the Purchaser or its nominee
      and in the  aggregate  amount of the Capital  Securities  purchased by the
      Purchaser.

            2.3.3 TRANSFER  AGENT.  The Offerors  shall deposit the  certificate
      representing  the  Capital  Securities  with,  or as  instructed  by,  the
      Institutional Trustee on the Closing Date.

      2.4 PLACEMENT AGENTS' FEES AND EXPENSES.

            2.4.1 PLACEMENT AGENTS' COMPENSATION.  Because the proceeds from the
      sale of the Capital  Securities  shall be used to purchase the  Debentures
      from the  Company,  the Company  shall pay an aggregate of $20.00 for each
      $1,000.00 of principal  amount of Debentures sold to the Trust  (excluding
      the Debentures related to the Common Securities purchased by the Company).
      Of  this  amount,  $10.00  for  each  $1,000.00  of  principal  amount  of
      Debentures  shall be payable to FTN Financial  Capital  Markets and $10.00
      for each $1,000.00 of principal  amount of Debentures  shall be payable to
      Keefe,  Bruyette & Woods,  Inc.  Such  amount  shall be  delivered  to the
      Institutional  Trustee or such other person  designated  by the  Placement
      Agents on the Closing Date and shall be allocated  between and paid to the
      respective Placement Agents as directed by the Placement Agents.

            2.4.2  COSTS  AND  EXPENSES.   Whether  or  not  this  Agreement  is
      terminated  or the sale of the  Capital  Securities  is  consummated,  the
      Company hereby  covenants and agrees that it shall pay or cause to be paid
      (directly or by reimbursement)  all reasonable costs and expenses incident
      to  the  performance  of  the  obligations  of  the  Offerors  under  this
      Agreement,  including all fees,  expenses and disbursements of counsel and
      accountants  for the  Offerors;  the  reasonable  costs and charges of any
      trustee,  transfer  agent or registrar and the fees and  disbursements  of
      counsel to any trustee,  transfer  agent or registrar in each case only to
      the extent attributable to the Debentures and the Capital Securities;  all
      reasonable  expenses incurred by the Offerors incident to the preparation,
      execution  and delivery of the Trust  Agreement,  the  Indenture,  and the
      Guarantee;  and all other  reasonable  costs and expenses  incident to the
      performance  of the  obligations  of the Company  hereunder  and under the
      Trust Agreement.

                                       3

<PAGE>

            2.5  FAILURE  TO  CLOSE.  If any of the  conditions  to the  Closing
      specified  in  this  Agreement  shall  not  have  been  fulfilled  to  the
      satisfaction  of the  Placement  Agents or if the  Closing  shall not have
      occurred on or before 10:00 a.m. (New York City time) on December 22, 2004
      or such later  Closing  Date  consented  to by the  Purchaser  pursuant to
      Section  2.3.1,  then each party hereto,  notwithstanding  anything to the
      contrary in this Agreement,  shall be relieved of all further  obligations
      under this  Agreement  without  thereby  waiving any rights it may have by
      reason of such  nonfulfillment  or failure;  PROVIDED,  HOWEVER,  that the
      obligations of the parties under Sections 2.4.2, 7.5 and 9 shall not be so
      relieved and shall continue in full force and effect.

      SECTION 3. CLOSING  CONDITIONS.  The  obligations of the Purchaser and the
      Placement Agents on the Closing Date shall be subject to the accuracy,  at
      and as of the Closing Date, of the  representations  and warranties of the
      Offerors  contained in this Agreement,  to the accuracy,  at and as of the
      Closing Date, of the  statements of the Offerors made in any  certificates
      pursuant to this  Agreement,  to the  performance by the Offerors of their
      respective obligations under this Agreement,  to compliance,  at and as of
      the Closing Date, by the Offerors with their respective  agreements herein
      contained, and to the following further conditions:

            3.1 OPINIONS OF COUNSEL.  On the Closing Date, the Placement  Agents
      shall have received the following favorable opinions, each dated as of the
      Closing Date: (a) from McLaughlin & Stern,  LLP,  counsel for the Offerors
      and addressed to the Purchaser and the Placement  Agents in  substantially
      the form set forth on EXHIBIT B-1 attached hereto and incorporated  herein
      by this  reference,  (b) from  Richards,  Layton & Finger,  P.A.,  special
      Delaware  counsel to the Offerors  and  addressed  to the  Purchaser,  the
      Placement Agents and the Offerors,  in substantially the form set forth on
      EXHIBIT B-2 attached hereto and incorporated herein by this reference, and
      (c) from LeBoeuf,  Lamb, Greene & MacRae,  L.L.P.,  special tax counsel to
      the Offerors,  and addressed to the Placement Agents and the Offerors,  in
      substantially  the form set  forth on  EXHIBIT  B-3  attached  hereto  and
      incorporated herein by this reference,  subject to the receipt by LeBoeuf,
      Lamb, Greene & MacRae,  L.L.P. of a representation letter from the Company
      in the form set forth in  EXHIBIT  B-3  completed  in a manner  reasonably
      satisfactory to LeBoeuf, Lamb, Greene & MacRae, L.L.P. (collectively,  the
      "Offerors'  Counsel   Opinions").   In  rendering  the  Offerors'  Counsel
      Opinions,  counsel to the  Offerors  may rely as to factual  matters  upon
      certificates  or other  documents  furnished  by officers,  directors  and
      trustees  of the  Offerors  (copies  of which  shall be  delivered  to the
      Placement Agents and the Purchaser) and by government officials,  and upon
      such other  documents as counsel to the Offerors may, in their  reasonable
      opinion,  deem appropriate as a basis for the Offerors'  Counsel Opinions.
      Counsel to the  Offerors may specify the  jurisdictions  in which they are
      admitted  to  practice  and that they are not  admitted to practice in any
      other   jurisdiction  and  are  not  experts  in  the  law  of  any  other
      jurisdiction.  If the Offerors' counsel is not admitted to practice in the
      State of New York,  the  opinion of  Offerors'  counsel  may  assume,  for
      purposes  of the  opinion,  that  the  laws of the  State  of New York are
      substantively  identical,  in all respects material to the opinion, to the
      internal  laws of the state in which such counsel is admitted to practice.
      Such  Offerors'  Counsel  Opinions  shall  not  state  that they are to be
      governed  or  qualified  by, or that they are  otherwise  subject  to, any
      treatise,  written  policy or other document  relating to legal  opinions,
      including, without limitation, the Legal Opinion Accord of the ABA Section
      of Business Law (1991).

                                       4
<PAGE>

            3.2 OFFICER'S  CERTIFICATE.  At the Closing Date,  the Purchaser and
      the  Placement  Agents  shall have  received  certificates  from the Chief
      Executive  Officer of the Company,  dated as of the Closing Date,  stating
      that (a) the  representations  and warranties of the Offerors set forth in
      Section 5 hereof are true and correct as of the Closing  Date and that the
      Offerors have complied with all agreements and satisfied all conditions on
      their part to be performed  or satisfied at or prior to the Closing  Date,
      (b) since the date of this  Agreement  the Offerors  have not incurred any
      liability  or  obligation,  direct  or  contingent,  or  entered  into any
      material  transactions,  other than in the  ordinary  course of  business,
      which is material to the Offerors,  and (c) covering such other matters as
      the Placement Agents may reasonably request.

            3.3 ADMINISTRATOR'S  CERTIFICATE. At the Closing Date, the Purchaser
      and the Placement  Agents shall have received a certificate of one or more
      administrators  of the Trust,  dated as of the Closing Date,  stating that
      the representations and warranties of the Trust set forth in Section 5 are
      true and  correct as of the Closing  Date and that the Trust has  complied
      with  all  agreements  and  satisfied  all  conditions  on its  part to be
      performed or satisfied at or prior to the Closing Date.

            3.4 PURCHASE  PERMITTED BY APPLICABLE  LAWS; LEGAL  INVESTMENT.  The
      purchase of and payment for the Capital  Securities  as  described in this
      Agreement  and  pursuant to the  Subscription  Agreement  shall (a) not be
      prohibited  by any  applicable  law or  governmental  regulation,  (b) not
      subject the  Purchaser or the  Placement  Agents to any penalty or, in the
      reasonable  judgment of the  Purchaser  and the  Placement  Agents,  other
      onerous conditions under or pursuant to any applicable law or governmental
      regulation,  and (c) be  permitted  by the  laws  and  regulations  of the
      jurisdictions to which the Purchaser and the Placement Agents are subject.

            3.5  CONSENTS  AND  PERMITS.  The  Company  and the Trust shall have
      received all consents, permits and other authorizations, and made all such
      filings and  declarations,  as may be  required  from any person or entity
      pursuant to any law, statute,  regulation or rule (federal,  state,  local
      and foreign),  or pursuant to any agreement,  order or decree to which the
      Company  or the  Trust  is a party  or to  which  either  is  subject,  in
      connection with the transactions contemplated by this Agreement.

            3.6 SALE OF  PURCHASER  SECURITIES.  The  Purchaser  shall have sold
      securities issued by the Purchaser in an amount such that the net proceeds
      of such sale shall be (i)  available  on the  Closing  Date and (ii) in an
      amount sufficient to purchase the Capital Securities and all other capital
      or similar securities contemplated in agreements similar to this Agreement
      and the Subscription Agreement.

            3.7 INFORMATION. Prior to or on the Closing Date, the Offerors shall
      have  furnished  to  the  Placement   Agents  such  further   information,
      certificates,  opinions and  documents  addressed to the Purchaser and the
      Placement  Agents,  which the  Placement  Agents may  reasonably  request,
      including,  without limitation,  a complete set of the Operative Documents
      or any other documents or certificates required by this Section 3; and all
      proceedings  taken by the Offerors in connection with the issuance,  offer
      and  sale of the  Capital  Securities  as  herein  contemplated  shall  be
      reasonably satisfactory in form and substance to the Placement Agents.

                                       5
<PAGE>

            If any  condition  specified  in this  Section 3 shall not have been
      fulfilled  when  and  as  required  in  this  Agreement,  or if any of the
      opinions or  certificates  mentioned  above or elsewhere in this Agreement
      shall  not  be  reasonably  satisfactory  in  form  and  substance  to the
      Placement Agents, this Agreement may be terminated by the Placement Agents
      by notice to the  Offerors  at any time at or prior to the  Closing  Date.
      Notice of such termination shall be given to the Offerors in writing or by
      telephone or facsimile confirmed in writing.

      SECTION 4. CONDITIONS TO THE OFFERORS' OBLIGATIONS. The obligations of the
      Offerors to sell the Capital  Securities to the  Purchaser and  consummate
      the  transactions  contemplated  by this Agreement shall be subject to the
      accuracy,  at and as of  the  Closing  Date,  of the  representations  and
      warranties of the Placement  Agents contained in this Agreement and to the
      following further conditions:

            4.1 EXECUTED  AGREEMENT.  The Offerors  shall have received from the
      Placement Agents an executed copy of this Agreement.

            4.2  FULFILLMENT OF OTHER  OBLIGATIONS.  The Placement  Agents shall
      have fulfilled all of their other  obligations  and duties  required to be
      fulfilled under this Agreement prior to or at the Closing.

      SECTION 5.  REPRESENTATIONS AND WARRANTIES OF THE OFFERORS.  Except as set
      forth on the  Disclosure  Schedule (as defined in Section  11.1)  attached
      hereto,  if any, the Offerors jointly and severally  represent and warrant
      to the Placement  Agents and the Purchaser as of the date hereof and as of
      the Closing Date as follows:

            5.1 SECURITIES LAW MATTERS; AUTHORIZATIONS.

                  (a)  Neither  the  Company  nor the  Trust,  nor any of  their
      "Affiliates"  (as  defined  in Rule  501(b)  of  Regulation  D  under  the
      Securities  Act  ("Regulation  D")), nor any person acting on any of their
      behalf has, directly or indirectly,  made offers or sales of any security,
      or solicited offers to buy any security,  under  circumstances  that would
      require the  registration  under the  Securities Act of any of the Capital
      Securities,   the   Guarantee  or  the   Debentures   (collectively,   the
      "Securities")  or any  other  securities  to be  issued,  or which  may be
      issued, by the Purchaser.

                  (b)  Neither  the  Company  nor the  Trust,  nor any of  their
      Affiliates,  nor any  person  acting on its or their  behalf has (i) other
      than the  Placement  Agents,  offered  for  sale or  solicited  offers  to
      purchase the  Securities,  (ii) engaged or will engage,  in any  "directed
      selling  efforts"  within the meaning of Regulation S under the Securities
      Act ("Regulation  S") with respect to the Securities,  or (iii) engaged in
      any form of offering,  general solicitation or general advertising (within
      the meaning of Regulation  D) in connection  with any offer or sale of any
      of the Securities.

                                       6
<PAGE>

                  (c) The Securities  satisfy the  eligibility  requirements  of
      Rule 144A(d)(3) under the Securities Act.

                  (d)  Neither the  Company  nor the Trust is or,  after  giving
      effect  to the  offering  and  sale  of the  Capital  Securities  and  the
      consummation of the transactions  described in this Agreement,  will be an
      "investment company" or an entity "controlled" by an "investment company,"
      in each case within the meaning of Section 3(a) of the Investment  Company
      Act of 1940, as amended (the "Investment Company Act"),  without regard to
      Section 3(c) of the Investment Company Act.

                  (e)  Neither  the  Company nor the Trust has paid or agreed to
      pay to any  person  or  entity  (other  than  the  Placement  Agents)  any
      compensation for soliciting another to purchase any of the Securities.

                  (f) No authorization,  approval,  consent, order, registration
      or qualification of or with any court or governmental  authority or agency
      (including,  without limitation,  any insurance regulatory agency or body)
      is required in connection  with the offering and sale of the Securities or
      the Guarantee  hereunder,  or the consummation by the Company or the Trust
      of any other  transaction  contemplated  hereby,  except such as have been
      obtained  and made under the federal  securities  laws or state  insurance
      laws and such as may be required under state or foreign securities or Blue
      Sky laws.

            5.2 INCORPORATED DOCUMENTS.  The documents of the Company filed with
      the Securities and Exchange  Commission (the  "Commission")  in accordance
      with the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
      from and  including  the  commencement  of the fiscal year  covered by the
      Company's most recent Annual Report on Form 10-K, at the time they were or
      hereafter are filed by the Company with the Commission,  complied and will
      comply in all material  respects with the requirements of the Exchange Act
      and the rules and  regulations of the Commission  thereunder,  and, at the
      date of this  Agreement  and on the  Closing  Date,  do not and  will  not
      include an untrue statement of a material fact or omit to state a material
      fact  required to be stated  therein or necessary  to make the  statements
      therein, in the light of the circumstances under which they were made, not
      misleading;  and other than such  instruments,  agreements,  contracts and
      other documents as are filed as exhibits to the Company's Annual Report on
      Form 10-K,  Quarterly Reports on Form 10-Q or Current Reports on Form 8-K,
      and  Registration  Statement  on  Form  S-1,  there  are  no  instruments,
      agreements, contracts or documents of a character described in Item 601 of
      Regulation  S-K  promulgated by the Commission to which the Company or any
      of its subsidiaries is a party.

            5.3 ORGANIZATION, STANDING AND QUALIFICATION OF THE TRUST. The Trust
      has been duly  created  and is  validly  existing  in good  standing  as a
      statutory  trust under the Delaware  Statutory  Trust Act (the  "Statutory
      Trust Act") with the power and  authority  to own  property and to conduct
      the business it  transacts  and proposes to transact and to enter into and
      perform its obligations under the Operative  Documents.  The Trust is duly
      qualified to transact business as a foreign entity and is in good standing
      in each  jurisdiction  in which such  qualification  is necessary,  except
      where the  failure to so qualify or be in good  standing  would not have a
      material  adverse  effect  on the  Trust.  The  Trust is not a party to or
      otherwise bound by any agreement other than the Operative  Documents.  The
      Trust is and will, under current law, be classified for federal income tax
      purposes  as a  grantor  trust  and  not as an  association  taxable  as a
      corporation.

                                       7
<PAGE>

            5.4 TRUST AGREEMENT. The Trust Agreement has been duly authorized by
      the Company  and, on the Closing  Date,  will have been duly  executed and
      delivered  by the  Company  and  the  administrators  of the  Trust,  and,
      assuming due authorization, execution and delivery by the Delaware Trustee
      and the Institutional  Trustee,  will be a valid and binding obligation of
      the  Company  and  such   administrators,   enforceable  against  them  in
      accordance  with  its  terms,   subject  to  (a)  applicable   bankruptcy,
      insolvency,  moratorium,  receivership,  reorganization,  liquidation  and
      other laws relating to or affecting  creditors' rights generally,  and (b)
      general principles of equity (regardless of whether considered and applied
      in a proceeding in equity or at law)  ("Bankruptcy  and Equity").  Each of
      the  administrators  of the  Trust is an  employee  or a  director  of the
      Company or of a subsidiary of the Company and has been duly  authorized by
      the Company to execute and deliver the Trust Agreement.

            5.5 GUARANTEE AGREEMENT AND THE INDENTURE. Each of the Guarantee and
      the Indenture has been duly  authorized by the Company and, on the Closing
      Date will have been duly  executed  and  delivered  by the  Company,  and,
      assuming  due  authorization,  execution  and  delivery  by the  Guarantee
      Trustee,  in the case of the Guarantee,  and by the Indenture Trustee,  in
      the case of the Indenture,  will be a valid and binding  obligation of the
      Company  enforceable  against it in accordance with its terms,  subject to
      Bankruptcy and Equity.

            5.6 CAPITAL SECURITIES AND COMMON SECURITIES. The Capital Securities
      and the Common Securities have been duly authorized by the Trust Agreement
      and, when issued and  delivered  against  payment  therefor on the Closing
      Date to the Purchaser,  in the case of the Capital Securities,  and to the
      Company, in the case of the Common Securities,  will be validly issued and
      represent undivided  beneficial interests in the assets of the Trust. None
      of  the  Capital  Securities  or  the  Common  Securities  is  subject  to
      preemptive or other similar rights. On the Closing Date, all of the issued
      and  outstanding  Common  Securities will be directly owned by the Company
      free and clear of any  pledge,  security  interest,  claim,  lien or other
      encumbrance.

            5.7  DEBENTURES.  The  Debentures  have been duly  authorized by the
      Company  and,  at the  Closing  Date,  will have been  duly  executed  and
      delivered to the Indenture  Trustee for  authentication in accordance with
      the Indenture,  and, when  authenticated in the manner provided for in the
      Indenture  and  delivered  against  payment  therefor  by the Trust,  will
      constitute  valid and binding  obligations of the Company  entitled to the
      benefits of the  Indenture  enforceable  against the Company in accordance
      with their terms, subject to Bankruptcy and Equity.

            5.8 POWER AND AUTHORITY.  This  Agreement has been duly  authorized,
      executed and  delivered by the Company and the Trust and  constitutes  the
      valid and binding  obligation  of the  Company and the Trust,  enforceable
      against the Company and the Trust in accordance with its terms, subject to
      Bankruptcy and Equity.

                                       8
<PAGE>

            5.9  NO  DEFAULTS.  The  Trust  is  not in  violation  of the  Trust
      Agreement or, to the  knowledge of the  administrators  of the Trust,  any
      provision  of  the  Statutory  Trust  Act.  The  execution,  delivery  and
      performance by the Company or the Trust of this Agreement or the Operative
      Documents to which it is a party, and the consummation of the transactions
      contemplated herein or therein and the use of the proceeds therefrom, will
      not conflict with or constitute a breach of, or a default under, or result
      in the creation or  imposition  of any lien,  charge or other  encumbrance
      upon any  property  or  assets of the  Trust,  the  Company  or any of the
      Company's  Significant  Subsidiaries  (as defined in Section  5.11 hereof)
      pursuant to any contract, indenture, mortgage, loan agreement, note, lease
      or  other  instrument  to  which  the  Trust,  the  Company  or any of its
      Significant  Subsidiaries  is a party or by which it or any of them may be
      bound,  or to  which  any of the  property  or  assets  of any of  them is
      subject,  except  for  a  conflict,   breach,  default,  lien,  charge  or
      encumbrance  which could not,  singly or in the  aggregate,  reasonably be
      expected to have a Material  Adverse Effect nor will such action result in
      any violation of the Trust Agreement or the Statutory Trust Act or require
      the consent, approval, authorization or order of any court or governmental
      agency or body, except for those consents,  approvals,  authorizations and
      orders that have been obtained or made. As used herein, the term "Material
      Adverse Effect" means any one or more effects that  individually or in the
      aggregate are material and adverse to the Offerors'  ability to consummate
      the transactions  contemplated herein or in the Operative Documents or any
      one or more effects that individually or in the aggregate are material and
      adverse to the condition  (financial  or  otherwise),  earnings,  affairs,
      business  prospects  or  results  of  operations  of the  Company  and its
      Significant  Subsidiaries taken as whole,  whether or not occurring in the
      ordinary course of business.

            5.10  ORGANIZATION,  STANDING AND QUALIFICATION OF THE COMPANY.  The
      Company  has  been  duly   incorporated  and  is  validly  existing  as  a
      corporation  in good  standing  under  the  laws  of  Delaware,  with  all
      requisite  corporate power and authority to own its properties and conduct
      the business it transacts and proposes to transact,  and is duly qualified
      to transact  business and is in good standing as a foreign  corporation in
      each  jurisdiction  where  the  nature  of its  activities  requires  such
      qualification,  except where the failure of the Company to be so qualified
      would not, singly or in the aggregate, have a Material Adverse Effect.

            5.11 SUBSIDIARIES OF THE COMPANY.  Each of the Company's significant
      subsidiaries  (as  defined in Section  1-02(w)  of  Regulation  S-X to the
      Securities Act (the  "Significant  Subsidiaries"))  is listed in EXHIBIT C
      attached  hereto  and   incorporated   herein  by  this  reference.   Each
      Significant Subsidiary has been duly organized and is validly existing and
      in good  standing  under  the  laws of the  jurisdiction  in  which  it is
      chartered or organized,  with all requisite power and authority to own its
      properties and conduct the business it transacts and proposes to transact,
      and is duly  qualified to transact  business and is in good  standing as a
      foreign  entity in each  jurisdiction  where the nature of its  activities
      requires  such  qualification,  except  where  the  failure  of  any  such
      Significant  Subsidiaries  to be so qualified  would not, singly or in the
      aggregate,  have  a  Material  Adverse  Effect.  All  of  the  issued  and
      outstanding  shares of capital stock of the Significant  Subsidiaries  (a)
      have been duly authorized and are validly  issued,  (b) are fully paid and
      nonassessable,  and (c) are wholly owned,  directly or indirectly,  by the
      Company free and clear of any security interest,  mortgage,  pledge, lien,
      encumbrance,  restriction  upon  voting or  transfer,  preemptive  rights,
      claim, equity or other defect.

                                       9
<PAGE>

            5.12 PERMITS.  The Company and each of its Significant  Subsidiaries
      have all requisite power and authority, and all necessary  authorizations,
      approvals,  orders,  licenses  (including,  without limitation,  insurance
      licenses from the insurance  departments  of the various  states where the
      Significant   Subsidiaries   write  insurance   business  (the  "Insurance
      Licenses")),  certificates and permits, including those that are necessary
      to own or lease their respective properties (collectively,  "Permits"), of
      and from regulatory or governmental  officials,  bodies and tribunals that
      are material to the Company and its  Significant  Subsidiaries  taken as a
      whole and are necessary to conduct the business now operated by them;  the
      Company and its Significant  Subsidiaries are in compliance with the terms
      and  conditions of all such Insurance  Licenses and Permits,  except where
      the failure so to comply would not, singly or in the aggregate,  result in
      a Material Adverse Effect;  all of the Insurance  Licenses and Permits are
      valid and in full force and effect,  except where the  invalidity  of such
      Insurance  Licenses and Permits or the failure of such Insurance  Licenses
      and Permits to be in full force and effect  would not result in a Material
      Adverse  Effect;  and  neither  the  Company  nor  any of its  Significant
      Subsidiaries  has  received  any  notice of  proceedings  relating  to the
      revocation  or  modification  of any such  Insurance  Licenses and Permits
      which, singly or in the aggregate, may reasonably be expected to result in
      a Material Adverse Effect.

            5.13 CONFLICTS,  AUTHORIZATIONS  AND APPROVALS.  Neither the Company
      nor any of its Significant  Subsidiaries is in violation of its respective
      articles or  certificate of  incorporation,  charter or by-laws or similar
      organizational documents or in default in the performance or observance of
      any  obligation,   agreement,  covenant  or  condition  contained  in  any
      contract,  indenture,  mortgage,  loan  agreement,  note,  lease  or other
      agreement  or  instrument  to  which  either  the  Company  or  any of its
      Significant  Subsidiaries is a party, or by which it or any of them may be
      bound or to which any of the  property  or assets of the Company or any of
      its Significant  Subsidiaries is subject, the effect of which violation or
      default  in  performance  or  observance  would  have,  singly  or in  the
      aggregate, a Material Adverse Effect.

      5.14 FINANCIAL STATEMENTS.

                  (a) The consolidated  balance sheets of the Company and all of
      its  Significant  Subsidiaries  as of December  31, 2002 and  December 31,
      2003, and related consolidated income statements and statements of changes
      in  shareholders'  equity for the 3 years ended December 31, 2003 together
      with the notes thereto, and the consolidated balance sheets of the Company
      and all of its  Significant  Subsidiaries as of September 30, 2004 and the
      related  consolidated  income  statements  and  statements  of  changes in
      shareholders'   equity  for  the  9  months  then  ended  (the  "Financial
      Statements"),  copies of each of which have been provided to the Placement
      Agents,   have  been  prepared  in  accordance  with  generally   accepted
      accounting  principles  ("GAAP")  applied on a consistent basis (except as
      may be disclosed  therein) and fairly present in all material respects the
      financial   position  and  the  results  of  operations   and  changes  in
      shareholders'   equity  of  the  Company   and  all  of  its   Significant
      Subsidiaries as of the dates and for the periods  indicated  (subject,  in
      the case of interim  financial  statements,  to normal recurring  year-end
      adjustments,  none of which shall be  material).  The books and records of
      the Company and all of its  Significant  Subsidiaries  have been,  and are
      being,  maintained in all material  respects in accordance  with generally
      accepted  accounting   principles  and  any  other  applicable  legal  and
      accounting requirements and reflect only actual transactions.

                                       10
<PAGE>

                  (b) The audited statutory financial  statements as of December
      31,  2002,  and December 31, 2003 and the  unaudited  statutory  financial
      statements  as  of  September  30,  2004  (collectively,   the  "Statutory
      Financial   Statements")  of  each  of  the  Company's  insurance  company
      subsidiaries  have for each  relevant  period been  prepared in accordance
      with statutory accounting practices ("SAP") prescribed or permitted by the
      National Association of Insurance Commissioners,  and with respect to each
      insurance subsidiary, the appropriate Insurance Department of the state of
      domicile  of such  insurance  subsidiary,  and SAP has been  applied  on a
      consistent basis throughout the periods involved.

                  (c) Since the  respective  dates of the most recent  Financial
      Statements  and the  Statutory  Financial  Statements,  there  has been no
      material  adverse  change or  development  with  respect to the  financial
      condition  or  earnings  of  the  Company  and  all  of  its   Significant
      Subsidiaries, taken as a whole.

                  (d) The accountants of the Company who certified the Financial
      Statements  are  independent  public  accountants  of the  Company and its
      Significant  Subsidiaries within the meaning of the Securities Act and the
      rules and regulations thereunder.

            5.15  INTERNAL  CONTROLS.  Each of the Company and its  subsidiaries
      maintain a system of internal  accounting  controls  sufficient to provide
      reasonable assurance that (i) transactions are executed in accordance with
      the management's general or specific authorizations, (ii) transactions are
      recorded as necessary to permit  preparation  of financial  statements  in
      conformity  with GAAP  and/or  SAP, as  applicable  and to maintain  asset
      accountability,  (iii)  access to assets is permitted  only in  accordance
      with the management's general or specific authorization, (iv) the recorded
      accountability  for  assets  is  compared  with  the  existing  assets  at
      reasonable  intervals and appropriate  action is taken with respect to any
      differences and (v) material  information  relating to the Company and its
      subsidiaries is made known to management. Management has (a) evaluated the
      effectiveness of the internal  accounting  controls of each of the Company
      and its  subsidiaries  and (b) disclosed to the  accountants who certified
      the Financial Statements and the Statutory Financial Statements and to the
      audit  committee  (1)  all  significant  deficiencies  in  the  design  or
      operation of internal controls which could adversely affect the ability of
      the Company and its subsidiaries to record, process, summarize, and report
      financial  data,  and have  identified for such  accountants  any material
      weaknesses  in  internal  controls  and  (2)  any  fraud,  whether  or not
      material,   that  involves  management  or  other  employees  who  have  a
      significant  role  in  the  internal  controls  of  the  Company  and  its
      subsidiaries,  and any such deficiencies or fraud would not, singularly or
      in the aggregate, be expected to result in a Material Adverse Effect.

                                       11
<PAGE>

            5.16 REGULATORY ENFORCEMENT MATTERS.  Neither the Company nor any of
      its  Significant  Subsidiaries  is subject or is party to, or has received
      any notice or advice that any of them may become  subject or party to, any
      investigation  with  respect to, any  cease-and-desist  order,  agreement,
      consent  agreement,   memorandum  of  understanding  or  other  regulatory
      enforcement  action,  proceeding or order with or by, or is a party to any
      commitment  letter  or  similar  undertaking  to,  or is  subject  to  any
      directive  by, or has been  since  January  1, 2001,  a  recipient  of any
      supervisory  letter from, or since January 1, 2001,  has adopted any board
      resolutions at the request of, any agency charged with the  supervision or
      regulation of insurance  companies (a "Regulatory  Agency") that currently
      restricts in any material respect the conduct of their business or that in
      any material  manner relates to their capital  adequacy,  their ability or
      authority to pay dividends or make  distributions to their shareholders or
      make  payments of principal or interest on their debt  obligations,  their
      management or their business (each, a "Regulatory Agreement"), nor has the
      Company or any of its Significant  Subsidiaries been advised since January
      1,  2001,  by any  Regulatory  Agency  that it is  considering  issuing or
      requesting any such Regulatory Agreement.  There is no material unresolved
      violation, criticism or exception by any Regulatory Agency with respect to
      any report or statement relating to any examinations of the Company or any
      of its Significant Subsidiaries.

            5.17 NO  MATERIAL  CHANGE.  Since the  respective  dates of the most
      recent Financial Statements and Statutory Financial Statements,  there has
      been no  material  adverse  change  or  development  with  respect  to the
      condition (financial or otherwise),  earnings, affairs, business prospects
      or results of operations of the Company or its Significant Subsidiaries on
      a  consolidated  basis,  whether or not arising in the ordinary  course of
      business.

            5.18 INSURANCE RESERVING PRACTICES.  The Company and its Significant
      Subsidiaries  have made no material  change in their  insurance  reserving
      practices since the respective  dates as of which  information is given in
      the most recent Financial Statements and Statutory Financial Statements.

            5.19  REINSURANCE  TREATIES.   All  reinsurance  and  retrocessional
      treaties, contracts,  agreements and arrangements to which any Significant
      Subsidiary  is a party are in full  force and  effect  and no  Significant
      Subsidiary  is  in  violation  of,  or  in  default  in  the  performance,
      observance  or  fulfillment  of, any  obligation,  agreement,  covenant or
      condition  contained  therein,   with  such  exceptions  that  would  not,
      singularly or in the aggregate,  have a Material  Adverse  Effect;  and no
      Significant  Subsidiary  has  received  any  notice  from any of the other
      parties to such treaties, contracts,  agreements or arrangements that such
      other party intends not to perform  thereunder  and, to the best knowledge
      of the Company and the Significant Subsidiaries, none of the other parties
      to such treaties, contracts,  agreements or arrangements will be unable to
      perform  thereunder  except to the extent adequately and properly reserved
      for in the  consolidated  financial  statements of the Company,  with such
      exceptions that would not, singularly or in the aggregate, have a Material
      Adverse Effect.

                                       12
<PAGE>

            5.20 NO UNDISCLOSED LIABILITIES.  Neither the Company nor any of its
      Significant  Subsidiaries  has any material  liability,  whether  known or
      unknown,  whether asserted or unasserted,  whether absolute or contingent,
      whether  accrued or unaccrued,  whether  liquidated or  unliquidated,  and
      whether due or to become due, including any liability for taxes (and there
      is no past or present fact,  situation,  circumstance,  condition or other
      basis for any present or future action, suit, proceeding, hearing, charge,
      complaint,  claim  or  demand  against  the  Company  or  its  Significant
      Subsidiaries   giving  rise  to  any  such  liability),   except  (i)  for
      liabilities set forth in the Financial  Statements and Statutory Financial
      Statements,  respectively,  (ii) normal  fluctuation  in the amount of the
      liabilities  referred  to in clause (i) above  occurring  in the  ordinary
      course of business of the Company and all of its Significant  Subsidiaries
      since the date of the most recent  balance sheet included in the Financial
      Statements and Statutory Financial Statements,  respectively, and (iii) as
      may be specifically disclosed in writing to the Placement Agents.

            5.21 LITIGATION. No inquiry, charge, investigation,  action, suit or
      proceeding  (including,  without  limitation,  any proceeding to revoke or
      deny renewal of any Insurance Licenses) is pending or, to the knowledge of
      the  Offerors,  threatened,  against  or  affecting  the  Company  or  its
      Significant  Subsidiaries or any of their respective  properties before or
      by (i) any court wherein an unfavorable decision,  ruling or finding could
      reasonably  be expected to have,  singly or in the  aggregate,  a Material
      Adverse  Effect,  or (ii) any regulatory,  administrative  or governmental
      official,  commission,  board,  agency or other  authority or body, or any
      arbitrator, wherein an unfavorable decision, ruling or finding could have,
      singly or in the aggregate, a Material Adverse Effect.

            5.22 DEFERRAL OF INTEREST PAYMENTS ON DEBENTURES. The Company has no
      present  intention to exercise its option to defer payments of interest on
      the Debentures as provided in the Indenture. The Company believes that the
      likelihood  that it would exercise its right to defer payments of interest
      on the  Debentures  as provided in the  Indenture at any time during which
      the Debentures are outstanding is remote because of the restrictions  that
      would be imposed on the  Company's  ability to declare or pay dividends or
      distributions  on, or to redeem,  purchase,  acquire or make a liquidation
      payment with  respect to, any of the  Company's  capital  stock and on the
      Company's  ability to make any payments of principal,  interest or premium
      on, or repay,  repurchase or redeem,  any of its debt securities that rank
      PARI PASSU in all respects with, or junior in interest to, the Debentures.

      SECTION 6.  REPRESENTATIONS  AND WARRANTIES OF THE PLACEMENT AGENTS.  Each
      Placement Agent  represents and warrants to the Offerors as to itself (but
      not as to the other Placement Agent) as follows:

      6.1 ORGANIZATION, STANDING AND QUALIFICATION.

                  (a) FTN  Financial  Capital  Markets  is a  division  of First
      Tennessee  Bank,  N.A., a national  banking  association  duly  organized,
      validly existing and in good standing under the laws of the United States,
      with full power and authority to own, lease and operate its properties and
      conduct its business as currently being conducted.  FTN Financial  Capital
      Markets is duly  qualified to transact  business as a foreign  corporation
      and is in good  standing  in each other  jurisdiction  in which it owns or
      leases   property  or  conducts   its  business  so  as  to  require  such
      qualification  and in which the failure to so qualify would,  individually
      or in the  aggregate,  have a  material  adverse  effect on the  condition
      (financial  or  otherwise),  earnings,  business,  prospects or results of
      operations of FTN Financial Capital Markets.

                                       13
<PAGE>

                  (b)  Keefe,  Bruyette  & Woods,  Inc.  is a  corporation  duly
      organized,  validly  existing and in good  standing  under the laws of the
      State of New York, with full power and authority to own, lease and operate
      its  properties  and conduct its  business as currently  being  conducted.
      Keefe,  Bruyette & Woods, Inc. is duly qualified to transact business as a
      foreign  corporation and is in good standing in each other jurisdiction in
      which it owns or leases property or conducts its business so as to require
      such  qualification  and  in  which  the  failure  to  so  qualify  would,
      individually  or in the aggregate,  have a material  adverse effect on the
      condition  (financial  or  otherwise),  earnings,  business,  prospects or
      results of operations of Keefe, Bruyette & Woods, Inc.

            6.2 POWER AND AUTHORITY. The Placement Agent has all requisite power
      and authority to enter into this  Agreement,  and this  Agreement has been
      duly and validly authorized, executed and delivered by the Placement Agent
      and  constitutes the legal,  valid and binding  agreement of the Placement
      Agent,  enforceable  against the Placement  Agent in  accordance  with its
      terms,  subject to Bankruptcy and Equity and except as any indemnification
      or  contribution  provisions  thereof  may  be  limited  under  applicable
      securities laws.

            6.3 GENERAL  SOLICITATION.  In the case of the offer and sale of the
      Capital Securities, no form of general solicitation or general advertising
      was used by the Placement Agent or its representatives  including, but not
      limited  to,  advertisements,  articles,  notices or other  communications
      published in any  newspaper,  magazine or similar medium or broadcast over
      television  or radio or any seminar or meeting whose  attendees  have been
      invited by any general  solicitation or general  advertising.  Neither the
      Placement Agent nor its representatives have engaged or will engage in any
      "directed selling efforts" within the meaning of Regulation S with respect
      to the Capital Securities.

            6.4 PURCHASER.  The Placement Agent has made such reasonable inquiry
      as is necessary to determine  that the  Purchaser is acquiring the Capital
      Securities  for its own  account,  that the  Purchaser  does not intend to
      distribute the Capital  Securities in  contravention of the Securities Act
      or any other  applicable  securities laws, and that the Purchaser is not a
      "U.S.  person"  as that term is defined  under Rule 902 of the  Securities
      Act.

            6.5 QUALIFIED  PURCHASERS.  The  Placement  Agent has not offered or
      sold and will not arrange for the offer or sale of the Capital  Securities
      except  (i)  in  an  offshore  transaction  complying  with  Rule  903  of
      Regulation S, or (ii) to those the Placement Agent reasonably believes are
      "accredited  investors" (as defined in Rule 501 of Regulation D), or (iii)
      in any other  manner  that does not  require  registration  of the Capital
      Securities  under the Securities  Act. In connection  with each such sale,
      the Placement Agent has taken or will take reasonable steps to ensure that
      the  Purchaser is aware that (a) such sale is being made in reliance on an
      exemption  under the  Securities  Act,  and (b)  future  transfers  of the
      Capital  Securities  will not be made except in compliance with applicable
      securities laws.

                                       14
<PAGE>

            6.6  OFFERING  CIRCULARS.   Neither  the  Placement  Agent  nor  its
      representatives will include any non-public information about the Company,
      the  Trust  or any of  their  affiliates  in any  registration  statement,
      prospectus,  offering  circular or private  placement  memorandum  used in
      connection  with any  purchase  of Capital  Securities  without  the prior
      written consent of the Trust and the Company.

      SECTION 7. COVENANTS OF THE OFFERORS. The Offerors covenant and agree with
      the Placement Agents and the Purchaser as follows:

            7.1  COMPLIANCE  WITH  REPRESENTATIONS  AND  WARRANTIES.  During the
      period from the date of this  Agreement to the Closing Date,  the Offerors
      shall use their best efforts and take all action  necessary or appropriate
      to cause  their  representations  and  warranties  contained  in Section 5
      hereof  to be true as of the  Closing  Date,  after  giving  effect to the
      transactions  contemplated by this Agreement,  as if made on and as of the
      Closing Date.

            7.2 SALE AND  REGISTRATION  OF  SECURITIES.  The  Offerors and their
      Affiliates  shall not nor shall any of them  permit any  person  acting on
      their behalf (other than the Placement Agents),  to directly or indirectly
      (a) sell,  offer for sale or solicit offers to buy or otherwise  negotiate
      in respect of any security (as defined in the  Securities  Act) that would
      or could be integrated with the sale of the Capital Securities in a manner
      that  would  require  the  registration  under the  Securities  Act of the
      Securities,  or (b) make offers or sales of any such Security,  or solicit
      offers to buy any such Security,  under  circumstances  that would require
      the  registration of any of such Securities  under the Securities Act. 7.3
      USE OF  PROCEEDS.  The Trust shall use the  proceeds  from the sale of the
      Capital Securities to purchase the Debentures from the Company.

            7.4 INVESTMENT COMPANY. The Offerors shall not engage, or permit any
      subsidiary  to  engage,  in  any  activity  which  would  cause  it or any
      subsidiary  to be an  "investment  company"  under the  provisions  of the
      Investment Company Act.

            7.5 REIMBURSEMENT OF EXPENSES. If the sale of the Capital Securities
      provided for herein is not consummated (a) because any condition set forth
      in  Section 3 hereof is not  satisfied,  or (b)  because  of any  refusal,
      inability  or failure  on the part of the  Company or the Trust to perform
      any  agreement  herein or comply with any  provision  hereof other than by
      reason of a breach by the Placement  Agents,  the Company shall  reimburse
      the  Placement  Agents  upon  demand  for all of their  pro rata  share of
      out-of-pocket  expenses  (including  reasonable fees and  disbursements of
      counsel)  in an  amount  not to exceed  $50,000.00  that  shall  have been
      incurred by them in connection with the proposed  purchase and sale of the
      Capital Securities.  Notwithstanding the foregoing, the Company shall have
      no obligation to reimburse  the Placement  Agents for their  out-of-pocket
      expenses if the sale of the Capital  Securities fails to occur because the
      condition set forth in Section 3.6 is not  satisfied or because  either of
      the Placement Agents fails to fulfill a condition set forth in Section 4.

                                       15
<PAGE>

            7.6 DIRECTED  SELLING  EFFORTS,  SOLICITATION  AND  ADVERTISING.  In
      connection with any offer or sale of any of the  Securities,  the Offerors
      shall not, nor shall either of them permit any of their  Affiliates or any
      person acting on their behalf,  other than the Placement  Agents,  to, (a)
      engage in any "directed  selling efforts" within the meaning of Regulation
      S,  or  (b)  engage  in  any  form  of  general  solicitation  or  general
      advertising (as defined in Regulation D).

            7.7 COMPLIANCE  WITH RULE  144A(D)(4)  UNDER THE SECURITIES  ACT. So
      long  as  any  of the  Securities  are  outstanding  and  are  "restricted
      securities" within the meaning of Rule 144(a)(3) under the Securities Act,
      the Offerors will,  during any period in which they are not subject to and
      in  compliance  with  Section  13 or 15(d)  of the  Exchange  Act,  or the
      Offerors are not exempt from such reporting  requirements  pursuant to and
      in compliance with Rule 12g3-2(b) under the Exchange Act,  provide to each
      holder of such restricted securities and to each prospective purchaser (as
      designated by such holder) of such restricted securities, upon the request
      of such holder or  prospective  purchaser in connection  with any proposed
      transfer, any information required to be provided by Rule 144A(d)(4) under
      the Securities Act, if applicable. This covenant is intended to be for the
      benefit of the holders, and the prospective  purchasers designated by such
      holders, from time to time of such restricted securities.  The information
      provided by the  Offerors  pursuant  to this  Section 7.7 will not, at the
      date thereof,  contain any untrue  statement of a material fact or omit to
      state any material fact necessary to make the statements therein, in light
      of the circumstances under which they were made, not misleading.

            7.8  QUARTERLY  REPORTS.  Within  50  days of the end of each of the
      first three  calendar  year quarters and within 75 days of the end of each
      calendar year during which the Debentures are issued and outstanding,  the
      Offerors shall submit to The Bank of New York a completed quarterly report
      in the form  attached  hereto as EXHIBIT D. The Offerors  acknowledge  and
      agree that The Bank of New York and its  successors and assigns is a third
      party beneficiary of this Section 7.8.

      SECTION  8.  COVENANTS  OF THE  PLACEMENT  AGENTS.  The  Placement  Agents
      covenant and agree with the Offerors that, during the period from the date
      of this  Agreement to the Closing  Date,  the  Placement  Agents shall use
      their best efforts and take all action  necessary or  appropriate to cause
      their  representations and warranties contained in Section 6 to be true as
      of Closing Date, after giving effect to the  transactions  contemplated by
      this  Agreement,  as if made on and as of the Closing Date.  The Placement
      Agents  further  covenant and agree not to engage in hedging  transactions
      with  respect to the  Capital  Securities  unless  such  transactions  are
      conducted in compliance with the Securities Act.

                                       16
<PAGE>

      SECTION 9. INDEMNIFICATION.

            9.1  INDEMNIFICATION  OBLIGATION.  The  Offerors  shall  jointly and
      severally  indemnify  and  hold  harmless  the  Placement  Agents  and the
      Purchaser and each of their  respective  agents,  employees,  officers and
      directors and each person that controls either of the Placement  Agents or
      the Purchaser  within the meaning of Section 15 of the  Securities  Act or
      Section 20 of the  Exchange  Act,  and  agents,  employees,  officers  and
      directors or any such controlling person of either of the Placement Agents
      or the Purchaser (each such person or entity, an "Indemnified Party") from
      and against any and all losses, claims, damages, judgments, liabilities or
      expenses,  joint or several,  to which such  Indemnified  Party may become
      subject  under the  Securities  Act, the Exchange Act or other  federal or
      state  statutory  law  or  regulation,  or  at  common  law  or  otherwise
      (including in settlement of any litigation, if such settlement is effected
      with the written consent of the Offerors), insofar as such losses, claims,
      damages,  judgments,  liabilities  or  expenses  (or  actions  in  respect
      thereof)  arise out of, or are based  upon,  or relate  to, in whole or in
      part, (a) any untrue  statement or alleged untrue  statement of a material
      fact contained in any information  (whether  written or oral) or documents
      executed in favor of,  furnished or made available to the Placement Agents
      or the Purchaser by the Offerors,  or (b) any omission or alleged omission
      to state  in any  information  (whether  written  or  oral)  or  documents
      executed in favor of,  furnished or made available to the Placement Agents
      or the  Purchaser  by the Offerors a material  fact  required to be stated
      therein or necessary to make the statements  therein not  misleading,  and
      shall reimburse each Indemnified Party for any legal and other expenses as
      such  expenses  are  reasonably  incurred  by such  Indemnified  Party  in
      connection with investigating, defending, settling, compromising or paying
      any such  loss,  claim,  damage,  judgment,  liability,  expense or action
      described  in this  Section  9.1. In  addition to their other  obligations
      under this  Section  9, the  Offerors  hereby  agree  that,  as an interim
      measure during the pendency of any claim, action,  investigation,  inquiry
      or other  proceeding  arising  out of, or based  upon,  or  related to the
      matters  described  above in this Section 9.1, they shall  reimburse  each
      Indemnified  Party on a quarterly basis for all reasonable  legal or other
      expenses  incurred in connection with  investigating or defending any such
      claim, action, investigation, inquiry or other proceeding, notwithstanding
      the  absence  of  a  judicial   determination  as  to  the  propriety  and
      enforceability  of the possibility  that such payments might later be held
      to have been improper by a court of competent jurisdiction.  To the extent
      that  any  such  interim  reimbursement  payment  is so held to have  been
      improper, each Indemnified Party shall promptly return such amounts to the
      Offerors together with interest, determined on the basis of the prime rate
      (or other  commercial  lending rate for  borrowers  of the highest  credit
      standing)  announced from time to time by First  Tennessee Bank, N.A. (the
      "Prime Rate"). Any such interim  reimbursement  payments that are not made
      to an  Indemnified  Party  within 30 days of a request  for  reimbursement
      shall bear interest at the Prime Rate from the date of such request.

            9.2 CONDUCT OF INDEMNIFICATION  PROCEEDINGS.  Promptly after receipt
      by an Indemnified Party under this Section 9 of notice of the commencement
      of any action, such Indemnified Party shall, if a claim in respect thereof
      is to be made  against  the  Offerors  under this  Section  9,  notify the
      Offerors in writing of the commencement  thereof;  but, subject to Section
      9.4, the  omission to so notify the  Offerors  shall not relieve them from
      any  liability  pursuant to Section 9.1 which the Offerors may have to any
      Indemnified  Party  unless and to the  extent  that the  Offerors  did not
      otherwise learn of such action and such failure by the  Indemnified  Party
      results  in the  forfeiture  by the  Offerors  of  substantial  rights and
      defenses. In case any such action is brought against any Indemnified Party

                                       17
<PAGE>

      and such  Indemnified  Party seeks or intends to seek  indemnity  from the
      Offerors,  the Offerors shall be entitled to  participate  in, and, to the
      extent that they may wish,  to assume the  defense  thereof  with  counsel
      reasonably  satisfactory to such Indemnified Party; PROVIDED,  HOWEVER, if
      the defendants in any such action include both the  Indemnified  Party and
      the Offerors and the  Indemnified  Party shall have  reasonably  concluded
      that there may be a conflict between the positions of the Offerors and the
      Indemnified  Party in  conducting  the  defense of any such action or that
      there  may be legal  defenses  available  to it and/or  other  Indemnified
      Parties which are different  from or additional to those  available to the
      Offerors,  the  Indemnified  Party shall have the right to select separate
      counsel to assume such legal defenses and to otherwise  participate in the
      defense of such action on behalf of such Indemnified  Party.  Upon receipt
      of notice from the Offerors to such Indemnified Party of their election to
      so assume the defense of such action and approval by the Indemnified Party
      of counsel,  the Offerors  shall not be liable to such  Indemnified  Party
      under this Section 9 for any legal or other expenses subsequently incurred
      by such  Indemnified  Party in connection  with the defense thereof unless
      (a) the  Indemnified  Party shall have employed such counsel in connection
      with the  assumption of legal  defenses in accordance  with the proviso in
      the preceding  sentence (it being understood,  however,  that the Offerors
      shall not be liable for the  expenses  of more than one  separate  counsel
      representing the Indemnified  Parties who are parties to such action),  or
      (b) the Offerors shall not have employed counsel  reasonably  satisfactory
      to the  Indemnified  Party to  represent  the  Indemnified  Party within a
      reasonable  time after notice of  commencement  of the action,  in each of
      which  cases the fees and  expenses of counsel of such  Indemnified  Party
      shall be at the expense of the Offerors.

            9.3  CONTRIBUTION.  If the  indemnification  provided  for  in  this
      Section 9 is  required  by its  terms,  but is for any  reason  held to be
      unavailable to or otherwise  insufficient  to hold harmless an Indemnified
      Party  under  Section  9.1 in  respect  of any  losses,  claims,  damages,
      judgments, liabilities or expenses referred to herein or therein, then the
      Offerors  shall   contribute  to  the  amount  paid  or  payable  by  such
      Indemnified Party as a result of any losses, claims,  damages,  judgments,
      liabilities  or expenses  referred to herein (a) in such  proportion as is
      appropriate to reflect the relative benefits received by the Offerors,  on
      the one hand,  and the  Indemnified  Party,  on the other  hand,  from the
      offering of such Capital Securities,  or (b) if the allocation provided by
      clause (a) above is not permitted by applicable law, in such proportion as
      is  appropriate to reflect not only the relative  benefits  referred to in
      clause (a) above but also the relative  fault of the Offerors,  on the one
      hand, and the Placement  Agents, on the other hand, in connection with the
      statements  or  omissions  or  inaccuracies  in  the  representations  and
      warranties herein or other breaches which resulted in such losses, claims,
      damages, judgments, liabilities or expenses, as well as any other relevant
      equitable considerations. The respective relative benefits received by the
      Offerors,  on the one hand, and the Placement  Agents,  on the other hand,
      shall be deemed to be in the same proportion, in the case of the Offerors,
      as the total price paid to the Offerors for the Capital Securities sold by
      the  Offerors  to the  Purchaser  (net  of the  compensation  paid  to the
      Placement Agents  hereunder,  but before deducting  expenses),  and in the
      case of the Placement Agents, as the compensation  received by them, bears
      to the total of such  amounts  paid to the  Offerors  and  received by the
      Placement Agents as  compensation.  The relative fault of the Offerors and
      the  Placement  Agents shall be  determined  by reference  to, among other
      things,  whether the untrue  statement  or alleged  untrue  statement of a

                                       18
<PAGE>

      material  fact or the omission or alleged  omission of a material  fact or
      the inaccurate or the alleged  inaccurate  representation  and/or warranty
      relates to  information  supplied by the Offerors or the Placement  Agents
      and the parties'  relative  intent,  knowledge,  access to information and
      opportunity  to  correct  or  prevent  such  statement  or  omission.  The
      provisions set forth in Section 9.2 with respect to notice of commencement
      of any action shall apply if a claim for  contribution  is made under this
      Section  9.3;  PROVIDED,  HOWEVER,  that no  additional  notice  shall  be
      required  with respect to any action for which notice has been given under
      Section  9.2  for  purposes  of  indemnification.  The  Offerors  and  the
      Placement  Agents  agree  that it  would  not be  just  and  equitable  if
      contribution  pursuant  to this  Section 9.3 were  determined  by pro rata
      allocation or by any other method of allocation that does not take account
      of the  equitable  considerations  referred to in this  Section  9.3.  The
      amount paid or payable by an Indemnified  Party as a result of the losses,
      claims,  damages,  judgments,  liabilities or expenses referred to in this
      Section 9.3 shall be deemed to  include,  subject to the  limitations  set
      forth  above,  any legal or other  expenses  reasonably  incurred  by such
      Indemnified  Party in connection with  investigating or defending any such
      action or claim.  In no event shall the liability of the Placement  Agents
      hereunder be greater in amount than the dollar amount of the  compensation
      (net of payment of all expenses) received by the Placement Agents upon the
      sale of the Capital  Securities giving rise to such obligation.  No person
      found  guilty of  fraudulent  misrepresentation  (within  the  meaning  of
      Section  11(f) of the  Securities  Act) shall be entitled to  contribution
      from  any   person   who  was  not  found   guilty   of  such   fraudulent
      misrepresentation.

            9.4 ADDITIONAL REMEDIES.  The indemnity and contribution  agreements
      contained  in this  Section 9 are in  addition to any  liability  that the
      Offerors may otherwise have to any Indemnified Party.

            9.5 ADDITIONAL INDEMNIFICATION. The Company shall indemnify and hold
      harmless the Trust against all loss, liability,  claim, damage and expense
      whatsoever, as due from the Trust under Sections 9.1 through 9.4 hereof.

      SECTION 10. RIGHTS AND RESPONSIBILITIES OF PLACEMENT AGENTS.

            10.1 RELIANCE. In performing their duties under this Agreement,  the
      Placement  Agents shall be entitled to rely upon any notice,  signature or
      writing  which they shall in good  faith  believe to be genuine  and to be
      signed or presented by a proper party or parties. The Placement Agents may
      rely upon any opinions or certificates or other documents delivered by the
      Offerors or their counsel or designees to either the  Placement  Agents or
      the Purchaser.

            10.2 RIGHTS OF PLACEMENT  AGENTS. In connection with the performance
      of their duties under this  Agreement,  the Placement  Agents shall not be
      liable  for any error of  judgment  or any  action  taken or omitted to be
      taken unless the  Placement  Agents were  grossly  negligent or engaged in
      willful misconduct in connection with such performance or non-performance.
      No provision  of this  Agreement  shall  require the  Placement  Agents to
      expend or risk their own funds or otherwise incur any financial  liability
      on behalf of the Purchaser in connection  with the  performance  of any of
      their duties hereunder.  The Placement Agents shall be under no obligation
      to exercise any of the rights or powers vested in them by this Agreement.

                                       19
<PAGE>
      SECTION 11. MISCELLANEOUS.

            11.1 DISCLOSURE  SCHEDULE.  The term "Disclosure  Schedule," as used
      herein,  means the schedule,  if any, attached to this Agreement that sets
      forth items the  disclosure  of which is  necessary or  appropriate  as an
      exception  to one or  more  representations  or  warranties  contained  in
      Section 5 hereof. The Disclosure  Schedule shall be arranged in paragraphs
      corresponding  to the section  numbers  contained in Section 5. Nothing in
      the Disclosure  Schedule shall be deemed adequate to disclose an exception
      to a representation or warranty made herein unless the Disclosure Schedule
      identifies the exception with reasonable  particularity  and describes the
      relevant facts in reasonable  detail.  Without  limiting the generality of
      the immediately  preceding  sentence,  the mere listing (or inclusion of a
      copy) of a document or other item in the Disclosure  Schedule shall not be
      deemed adequate to disclose an exception to a  representation  or warranty
      made  herein  unless the  representation  or  warranty  has to do with the
      existence of the document or other item  itself.  Information  provided by
      the Company in response to any due  diligence  questionnaire  shall not be
      deemed part of the  Disclosure  Schedule  and shall not be deemed to be an
      exception  to one or  more  representations  or  warranties  contained  in
      Section 5 hereof unless such  information is specifically  included on the
      Disclosure  Schedule in  accordance  with the  provisions  of this Section
      11.1.

            11.2 NOTICES.  Prior to the Closing,  and thereafter with respect to
      matters   pertaining  to  this  Agreement  only,  all  notices  and  other
      communications  provided  for or  permitted  hereunder  shall  be  made in
      writing by hand-delivery, first-class mail, telex, telecopier or overnight
      air courier guaranteeing next day delivery:

      if to the Placement Agents, to:

                                FTN Financial Capital Markets
                                845 Crossover Lane, Suite 150
                                Memphis, Tennessee  38117
                                Telecopier:  901-435-4706
                                Telephone:  800-456-5460
                                Attention:  James D. Wingett

                                         and

                                Keefe, Bruyette & Woods, Inc.
                                787 7th Avenue, 4th Floor
                                New York, New York  10019
                                Telecopier:  212-887-7777
                                Telephone:  212-541-6668
                                Attention:  Mitchell Kleinman, General Counsel

                                       20
<PAGE>

      with a copy to:

                                 LeBoeuf, Lamb, Greene & MacRae, L.L.P.
                                 125 West 55th Street
                                 New York, New York  10019
                                 Telecopier:  212-424-8500
                                 Telephone:  212-424-8000
                                 Attention:  Alexander M. Dye, Esq.

                                         and

                                 Sidley Austin Brown & Wood LLP
                                 787 7th Avenue
                                 New York, New York  10019
                                 Telecopier:  212-839-5599
                                 Telephone:  212-839-5300
                                 Attention:  Renwick Martin, Esq.

      if to the Offerors, to:

                                 Tower Group, Inc.
                                 120 Broadway, 14th Floor
                                 New York, New York 10271-1699
                                 Telecopier:  212-271-5492
                                 Telephone:  212-655-2000
                                 Attention:  Francis M. Colalucci

      with a copy to:

                                 McLaughlin & Stern, LLP
                                 260 Madison Avenue
                                 New York, New York 10016
                                 Telecopier:  212-448-1100
                                 Telephone:  212-448-0066
                                 Attention:  Steven W. Schuster

         All such notices and  communications  shall be deemed to have been duly
given (a) at the time  delivered  by hand,  if  personally  delivered,  (b) five
business days after being deposited in the mail, postage prepaid, if mailed, (c)
when  answered  back,  if  telexed,  (d)  the  next  business  day  after  being
telecopied,  or (e) the next business day after timely delivery to a courier, if
sent by overnight air courier guaranteeing next day delivery. From and after the
Closing,  the  foregoing  notice  provisions  shall be  superseded by any notice
provisions of the Operative Documents under which notice is given. The Placement
Agents, the Company,  and their respective counsel,  may change their respective
notice  addresses  from time to time by written  notice to all of the  foregoing
persons.

                                       21
<PAGE>

            11.3  PARTIES  IN  INTEREST,   SUCCESSORS  AND  ASSIGNS.  Except  as
      expressly set forth herein,  this Agreement is made solely for the benefit
      of the  Placement  Agents,  the  Purchaser and the Offerors and any person
      controlling the Placement Agents,  the Purchaser or the Offerors and their
      respective  successors  and assigns;  and no other person shall acquire or
      have any right under or by virtue of this Agreement.  This Agreement shall
      inure to the benefit of and be binding upon the  successors and assigns of
      each of the parties.

            11.4  COUNTERPARTS.  This  Agreement  may be executed by the parties
      hereto in separate  counterparts,  each of which when so executed shall be
      deemed to be an original and all of which taken together shall  constitute
      one and the same agreement.

            11.5 HEADINGS. The headings in this Agreement are for convenience of
      reference only and shall not limit or otherwise affect the meaning hereof.

            11.6  GOVERNING  LAW.  PURSUANT  TO  SECTION  5-1401 OF THE  GENERAL
      OBLIGATIONS LAW OF THE STATE OF NEW YORK, THIS AGREEMENT SHALL BE GOVERNED
      BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

      EACH  OF  THE  TRUST  AND  THE  COMPANY,  ON  BEHALF  OF  ITSELF  AND  ITS
      SUBSIDIARIES   (INCLUDING,   WITHOUT   LIMITATION,   THE  TRUST),   HEREBY
      IRREVOCABLY  SUBMITS TO THE EXCLUSIVE  JURISDICTION OF THE FEDERAL AND NEW
      YORK STATE COURTS  LOCATED IN THE CITY OF NEW YORK IN CONNECTION  WITH ANY
      SUIT, ACTION OR PROCEEDING RELATED TO THIS AGREEMENT OR ANY OF THE MATTERS
      CONTEMPLATED  HEREBY,  IRREVOCABLY  WAIVES ANY DEFENSE OF LACK OF PERSONAL
      JURISDICTION  AND  IRREVOCABLY  AGREES  THAT ALL  CLAIMS IN RESPECT OF ANY
      SUIT,  ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT.
      EACH  OF  THE  TRUST  AND  THE  COMPANY,  ON  BEHALF  OF  ITSELF  AND  ITS
      SUBSIDIARIES  (INCLUDING,  WITHOUT  LIMITATION,  THE  TRUST),  IRREVOCABLY
      WAIVES,  TO THE FULLEST EXTENT IT MAY  EFFECTIVELY DO SO UNDER  APPLICABLE
      LAW, ANY  OBJECTION  WHICH IT MAY NOW OR  HEREAFTER  HAVE TO THE LAYING OF
      VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND
      ANY CLAIM THAT ANY SUCH  SUIT,  ACTION OR  PROCEEDING  BROUGHT IN ANY SUCH
      COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

            11.7  ENTIRE  AGREEMENT.  This  Agreement,  together  with the other
      Operative  Documents and the other documents  delivered in connection with
      the  transactions  contemplated  by this  Agreement,  is  intended  by the
      parties as a final  expression  of their  agreement  and  intended to be a
      complete and exclusive statement of the agreement and understanding of the
      parties  hereto in  respect of the  subject  matter  contained  herein and
      therein. There are no restrictions,  promises, warranties or undertakings,
      other  than  those  set forth or  referred  to herein  and  therein.  This
      Agreement,  together  with the  other  Operative  Documents  and the other
      documents  delivered in connection  with the  transaction  contemplated by
      this Agreement, supersedes all prior agreements and understandings between
      the parties with respect to such subject matter.

                                       22
<PAGE>

            11.8  SEVERABILITY.  In  the  event  that  any  one or  more  of the
      provisions   contained   herein,   or  the  application   thereof  in  any
      circumstances,  is held invalid,  illegal or  unenforceable in any respect
      for any reason,  the  validity,  legality and  enforceability  of any such
      provision in every other  respect and of the remaining  provisions  hereof
      shall not be in any way impaired or affected,  it being  intended that all
      of the Placement  Agents' and the Purchaser's  rights and privileges shall
      be enforceable to the fullest extent permitted by law.

            11.9 DISCLOSURE OF TAX TREATMENT AND TAX STRUCTURE.  Notwithstanding
      anything  herein to the contrary,  any party to this  Agreement  (and each
      employee,  representative  or other agent of any party to this  Agreement)
      may disclose to any and all persons,  without  limitation of any kind, the
      tax  treatment  and tax structure of the offering and all materials of any
      kind, the tax treatment and tax structure of the transactions contemplated
      by this  Agreement  and all materials of any kind  (including  opinions or
      other tax analyses) that are provided to it relating to such tax treatment
      and tax structure. However, such information relating to the tax treatment
      or tax  structure  is  required  to be  kept  confidential  to the  extent
      necessary to comply with any applicable  federal or state securities laws.
      For this purpose,  "tax structure" means any facts relevant to the federal
      income tax treatment of the offering  contemplated  by this  Agreement but
      does not include information relating to the identity of the Offerors.

            11.10 SURVIVAL. The Placement Agents and the Offerors, respectively,
      agree that the representations,  warranties and agreements made by each of
      them  in  this  Agreement  and  in any  certificate  or  other  instrument
      delivered  pursuant hereto shall remain in full force and effect and shall
      survive the delivery of, and payment for, the Capital Securities.

                     SIGNATURES APPEAR ON THE FOLLOWING PAGE

                                       23
<PAGE>

         If this Agreement is satisfactory to you, please so indicate by signing
the  acceptance of this  Agreement and deliver such  counterpart to the Offerors
whereupon this Agreement will become binding  between us in accordance  with its
terms.

Very truly yours,

TOWER GROUP, INC.

By:   /s/  Michael H. Lee
     -------------------------------------------
Name:      Michael H. Lee
     -------------------------------------------
Title:     President and Chief Executive Officer
      ------------------------------------------

TOWER GROUP STATUTORY TRUST III

By:   /s/  Francis M. Colalucci
     -----------------------------------------
Name:      Francis M. Colalucci
     -----------------------------------------
Title:     Administrator

           CONFIRMED AND ACCEPTED,
     as of the date first set forth above

FTN FINANCIAL CAPITAL MARKETS,
A DIVISION OF FIRST TENNESSEE BANK, N.A.,
AS A PLACEMENT AGENT

By:   /s/  James D. Wingett
     -----------------------------------------
Name:      James D. Wingett
Title      Managing Director

KEEFE, BRUYETTE & WOODS, INC.
A NEW YORK CORPORATION, AS A PLACEMENT AGENT

By:   /S/  Peter J. Wirth
     -----------------------------------------
Name:      Peter J. Wirth
Title:     Managing Director

                                       24
<PAGE>

                               DISCLOSURE SCHEDULE

5.14 On December 2, 2004, Tower Group, Inc. entered into a letter agreement with
Cohen Bros & Company to offer up to $13 million in subordinated  trust preferred
securities of a trust to be formed by Tower Group, Inc. and to be purchased by a
special purpose entity,  which offering is anticipated to have similar structure
to the offering of trust preferred securities consummated on September 30, 2003.

                                       25
<PAGE>

                                    EXHIBIT A

                         FORM OF SUBSCRIPTION AGREEMENT

                         TOWER GROUP STATUTORY TRUST III

                                TOWER GROUP, INC.

                             SUBSCRIPTION AGREEMENT

                                DECEMBER 15, 2004

      THIS  SUBSCRIPTION  AGREEMENT  (this  "Agreement")  made among Tower Group
Statutory Trust III (the "Trust"),  a statutory trust created under the Delaware
Statutory  Trust Act  (Chapter 38 of Title 12 of the Delaware  Code,  12 Del. C.
ss.ss.  3801,  ET SEQ.),  Tower Group,  Inc., a Delaware  corporation,  with its
principal  offices  located at 120  Broadway,  14th  Floor,  New York,  New York
10271-1699 (the "Company," and collectively with the Trust, the "Offerors"), and
Preferred Term Securities XVI, Ltd. (the "Purchaser").

                                    RECITALS:

      A.    The Trust desires to issue 13,000 of its Fixed/Floating Rate Capital
            Securities (the "Capital Securities"),  liquidation amount $1,000.00
            per Capital Security,  representing an undivided beneficial interest
            in the assets of the Trust (the  "Offering"),  to be issued pursuant
            to an Amended and Restated  Declaration of Trust (the "Declaration")
            by and among the Company,  Wilmington  Trust  Company  ("WTC"),  the
            administrators  named therein, and the holders (as defined therein),
            which  Capital  Securities  are to be guaranteed by the Company with
            respect to distributions and payments upon  liquidation,  redemption
            and otherwise pursuant to the terms of a Guarantee Agreement between
            the Company and WTC, as trustee (the "Guarantee"); and

      B.    The  proceeds  from  the  sale  of the  Capital  Securities  will be
            combined with the proceeds from the sale by the Trust to the Company
            of its common securities,  and will be used by the Trust to purchase
            an  equivalent  amount of  Fixed/Floating  Rate Junior  Subordinated
            Deferrable  Interest Debentures of the Company (the "Debentures") to
            be issued by the Company  pursuant to an indenture to be executed by
            the Company and WTC, as trustee (the "Indenture"); and

      C.    In consideration of the premises and the mutual  representations and
            covenants  hereinafter  set  forth,  the  parties  hereto  agree  as
            follows:

<PAGE>

                                   ARTICLE I
                     PURCHASE AND SALE OF CAPITAL SECURITIES

      1.1. Upon the execution of this Agreement, the Purchaser hereby subscribes
for and agrees to purchase from the Trust 13,000  Capital  Securities at a price
equal to $1,000.00  per Capital  Security (the  "Purchase  Price") and the Trust
agrees to sell such Capital Securities to the Purchaser for said Purchase Price.
The  rights  and  preferences  of the  Capital  Securities  are set forth in the
Declaration.  The Purchase  Price is payable in immediately  available  funds on
December  15,  2004,  or such other  business  day as may be  designated  by the
Purchaser,  but in no event later than December 22, 2004 (the  "Closing  Date").
The Offerors  shall provide the Purchaser  wire transfer  instructions  no later
than 1 day following the date hereof.

      1.2. The certificate for the Capital  Securities shall be delivered by the
Trust on the Closing Date to the Purchaser or its designee.

      1.3.  The  Placement  Agreement,  dated  December 7, 2004 (the  "Placement
Agreement"),  among the Offerors and the  Placement  Agents  identified  therein
includes  certain  representations  and warranties,  covenants and conditions to
closing  and  certain  other  matters  governing  the  Offering.  The  Placement
Agreement  is hereby  incorporated  by  reference  into this  Agreement  and the
Purchaser shall be entitled to each of the benefits of the Placement  Agents and
the Purchaser under the Placement Agreement and shall be entitled to enforce the
obligations of the Offerors  under such  Placement  Agreement as fully as if the
Purchaser were a party to such Placement Agreement.

                                   ARTICLE II
                   REPRESENTATIONS AND WARRANTIES OF PURCHASER

      2.1. The Purchaser  understands and acknowledges  that neither the Capital
Securities,  the  Debentures nor the Guarantee  have been  registered  under the
Securities  Act of  1933,  as  amended  (the  "Securities  Act"),  or any  other
applicable  securities  law,  are  being  offered  for  sale  by  the  Trust  in
transactions not requiring registration under the Securities Act, and may not be
offered,  sold,  pledged or otherwise  transferred  by the  Purchaser  except in
compliance with the registration requirements of the Securities Act or any other
applicable  securities  laws,  pursuant  to  an  exemption  therefrom  or  in  a
transaction not subject thereto.

      2.2. The Purchaser represents, warrants and certifies that (i) it is not a
"U.S. person" as such term is defined in Rule 902 under the Securities Act, (ii)
it is not  acquiring  the Capital  Securities  for the account or benefit of any
such  U.S.  person,  (iii)  the  offer  and sale of  Capital  Securities  to the
Purchaser  constitutes  an  "offshore  transaction"  under  Regulation  S of the
Securities Act, and (iv) it will not engage in hedging  transactions with regard
to the Capital  Securities  unless such transactions are conducted in compliance
with the  Securities  Act and the  Purchaser  agrees to the legends and transfer
restrictions set forth on the Capital Securities certificate.

                                      A-2
<PAGE>

      2.3. The  Purchaser  represents  and warrants  that it is  purchasing  the
Capital Securities for its own account, for investment,  and not with a view to,
or for offer or sale in connection with, any  distribution  thereof in violation
of the  Securities  Act or other  applicable  securities  laws,  subject  to any
requirement  of law that the  disposition of its property be at all times within
its  control  and  subject to its  ability  to resell  such  Capital  Securities
pursuant to an effective  registration  statement  under the  Securities  Act or
under Rule 144A or any other  exemption from  registration  available  under the
Securities Act or any other applicable securities law.

      2.4. The  Purchaser  represents  and  warrants  that it has full power and
authority to execute and deliver this Agreement, to make the representations and
warranties  specified  herein,  and to consummate the transactions  contemplated
herein and it has full right and power to subscribe for Capital  Securities  and
perform its obligations pursuant to this Agreement.

      2.5. The  Purchaser,  a Cayman  Islands  company whose  business  includes
issuance of certain notes and acquiring the Capital Securities and other similar
securities, represents and warrants that it has such knowledge and experience in
financial and business  matters that it is capable of evaluating  the merits and
risks of  purchasing  the Capital  Securities,  has had the  opportunity  to ask
questions of, and receive answers and request  additional  information from, the
Offerors  and is aware that it may be required to bear the  economic  risk of an
investment in the Capital Securities.

      2.6.  The  Purchaser  represents  and  warrants  that no filing  with,  or
authorization, approval, consent, license, order, registration, qualification or
decree of, any governmental  body, agency or court having  jurisdiction over the
Purchaser,  other than those that have been made or  obtained,  is  necessary or
required for the  performance  by the  Purchaser of its  obligations  under this
Agreement or to consummate the transactions contemplated herein.

      2.7. The Purchaser  represents  and warrants that this  Agreement has been
duly authorized, executed and delivered by the Purchaser.

      2.8. The Purchaser  represents  and warrants that (i) the Purchaser is not
in violation or default of any term of its Memorandum of Association or Articles
of  Association,  of  any  provision  of  any  mortgage,  indenture,  agreement,
instrument  or contract to which it is a party or by which it is bound or of any
judgment,  decree,  order,  writ or,  to its  knowledge,  any  statute,  rule or
regulation  applicable to the Purchaser  which would prevent the Purchaser  from
performing  any material  obligation set forth in this  Agreement;  and (ii) the
execution,  delivery and performance of and compliance with this Agreement,  and
the  consummation of the  transactions  contemplated  herein,  will not, with or
without  the  passage of time or giving of notice,  result in any such  material
violation,  or be in conflict  with or constitute a default under any such term,
or the  suspension,  revocation,  impairment,  forfeiture or  non-renewal of any
permit,  license,  authorization  or approval  applicable to the Purchaser,  its
business or operations  or any of its assets or  properties  which would prevent
the  Purchaser  from  performing  any  material  obligations  set  forth in this
Agreement.

      2.9.  The  Purchaser  represents  and  warrants  that the  Purchaser is an
exempted company with limited liability duly incorporated,  validly existing and
in good  standing  under the laws of the  Cayman  Islands,  with full  power and
authority to perform its obligations under this Agreement.

                                      A-3
<PAGE>

      2.10. The Purchaser  understands  and  acknowledges  that the Company will
rely  upon  the   truth  and   accuracy   of  the   foregoing   acknowledgments,
representations,  warranties  and  agreements  and  agrees  that,  if any of the
acknowledgments,  representations,  warranties or agreements deemed to have been
made by it by its purchase of the Capital Securities are no longer accurate,  it
shall promptly notify the Company.

      2.11.  The Purchaser  understands  that no public market exists for any of
the Capital  Securities,  and that it is unlikely that a public market will ever
exist for the Capital Securities.

                                  ARTICLE III
                                  MISCELLANEOUS

      3.1. Any notice or other  communication  given  hereunder  shall be deemed
sufficient  if in writing  and sent by  registered  or  certified  mail,  return
receipt  requested,  international  courier or delivered by hand against written
receipt therefor,  or by facsimile  transmission and confirmed by telephone,  to
the following addresses,  or such other address as may be furnished to the other
parties as herein provided:

         To the Offerors:           Tower Group, Inc.
                                    120 Broadway, 14th Floor
                                    New York, New York 10271-1699
                                    Attention:  Francis M. Colalucci
                                    Telecopier:  212-271-5492

         To the Purchaser:          Preferred Term Securities XVI, Ltd.
                                    c/o Maples Finance Limited
                                    P.O. Box 1093 GT
                                    Queensgate House
                                    South Church Street
                                    George Town, Grand Cayman
                                    Cayman Islands
                                    Attention:  The Directors
                                    Telecopier  345-945-7100

      Unless otherwise  expressly  provided  herein,  notices shall be deemed to
have been  given on the date of  mailing,  except  notice of change of  address,
which shall be deemed to have been given when received.

      3.2. This Agreement shall not be changed,  modified or amended except by a
writing  signed by the  parties to be  charged,  and this  Agreement  may not be
discharged  except by performance  in accordance  with its terms or by a writing
signed by the party to be charged.

                                      A-4
<PAGE>

      3.3. Upon the execution and delivery of this  Agreement by the  Purchaser,
this Agreement  shall become a binding  obligation of the Purchaser with respect
to the purchase of Capital Securities as herein provided.

      3.4.  Notwithstanding  anything expressed or implied to the contrary, each
Purchaser of Capital  Securities  (and each employee,  representative,  or other
agent of a Purchaser) may disclose to any and all persons, without limitation of
any kind,  the U.S. tax  treatment  and U.S. tax  structure of the  transactions
contemplated by this Agreement and all materials of any kind (including opinions
or other tax analyses) that are provided to the Purchaser  relating to such U.S.
tax  treatment  and U.S.  tax  structure  as such terms are  defined in Treasury
Regulation Section 1.6011-4;  provided, that any such disclosure of the U.S. tax
treatment and U.S. tax structure and materials  related  thereto may not be made
(i) in a manner that would constitute an offer to sell or the solicitation of an
offer to buy the Capital Securities  offered herein under applicable  securities
laws  or  (ii)  when  nondisclosure  is  reasonably  necessary  to  comply  with
applicable   securities   laws.   This   authorization   of  tax  disclosure  is
retroactively effective to the commencement of the first discussions between the
parties regarding the transactions contemplated herein.

      3.5.  PURSUANT  TO SECTION  5-1401 OF THE GENERAL  OBLIGATIONS  LAW OF THE
STATE OF NEW YORK,  THIS  AGREEMENT  SHALL BE  GOVERNED  BY,  AND  CONSTRUED  IN
ACCORDANCE  WITH,  THE LAWS OF THE STATE OF NEW  YORK.  EACH OF THE  TRUST,  THE
PURCHASER AND THE COMPANY, ON BEHALF OF ITSELF AND ITS SUBSIDIARIES  (INCLUDING,
WITHOUT  LIMITATION,  THE TRUST),  HEREBY  IRREVOCABLY  SUBMITS TO THE EXCLUSIVE
JURISDICTION OF THE FEDERAL AND NEW YORK STATE COURTS LOCATED IN THE CITY OF NEW
YORK IN CONNECTION WITH ANY SUIT, ACTION OR PROCEEDING RELATED TO THIS AGREEMENT
OR ANY OF THE MATTERS  CONTEMPLATED  HEREBY,  IRREVOCABLY  WAIVES ANY DEFENSE OF
LACK OF PERSONAL  JURISDICTION AND IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT
OF ANY SUIT, ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT.
EACH OF THE TRUST,  THE PURCHASER  AND THE COMPANY,  ON BEHALF OF ITSELF AND ITS
SUBSIDIARIES (INCLUDING,  WITHOUT LIMITATION, THE TRUST), IRREVOCABLY WAIVES, TO
THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER  APPLICABLE LAW, ANY OBJECTION
WHICH IT MAY NOW OR  HEREAFTER  HAVE TO THE  LAYING  OF VENUE OF ANY SUCH  SUIT,
ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT,
ACTION  OR  PROCEEDING  BROUGHT  IN  ANY  SUCH  COURT  HAS  BEEN  BROUGHT  IN AN
INCONVENIENT FORUM.

      3.6. The parties agree to execute and deliver all such further  documents,
agreements  and  instruments  and take such other and  further  action as may be
necessary or appropriate to carry out the purposes and intent of this Agreement.

      3.7. This  Agreement may be executed in one or more  counterparts  each of
which shall be deemed an original,  but all of which shall  together  constitute
one and the same instrument.

                                      A-5
<PAGE>

      3.8. In the event that any one or more of the provisions contained herein,
or the application  thereof in any  circumstances,  is held invalid,  illegal or
unenforceable  in any  respect  for  any  reason,  the  validity,  legality  and
enforceability of any such provision in every other respect and of the remaining
provisions  hereof  shall  not be in any way  impaired  or  affected,  it  being
intended  that all of the Offerors' and the  Purchaser's  rights and  privileges
shall be enforceable to the fullest extent permitted by law.

                     SIGNATURES APPEAR ON THE FOLLOWING PAGE

                                      A-6
<PAGE>

         IN WITNESS  WHEREOF,  the  undersigned  has caused this Agreement to be
duly executed as of the day and year first written above.

PREFERRED TERM SECURITIES XVI, LTD.

By:
   --------------------------------------------------
Name:
     ------------------------------------------------
Title:
      -----------------------------------------------

         IN WITNESS WHEREOF,  this Agreement is agreed to and accepted as of the
day and year first written above.

                          TOWER GROUP, INC.

                          By:
                             --------------------------------------------------
                          Name:  Michael H. Lee
                          Title:  President and Chief Executive Officer

                          TOWER GROUP STATUTORY TRUST III

                          By:
                             --------------------------------------------------
                          Name:  Michael H. Lee
                          Title:  Administrator

                                      A-7

<PAGE>

                                   EXHIBIT B-1

                         FORM OF COMPANY COUNSEL OPINION

                                December 15, 2004

Preferred Term Securities XVI, Ltd.       FTN Financial Capital Markets
c/o Maples Finance Limited                845 Crossover Lane, Suite 150
P. O. Box 1093 GT                         Memphis, Tennessee  38117
Queensgate House
South Church Street                       Keefe, Bruyette & Woods, Inc.
George Town, Grand Cayman                 787 7th Avenue, 4th Floor
Cayman Islands                            New York, New York  10019

Wilmington Trust Company
Rodney Square North
1100 North Market Street
Wilmington, Delaware  19890-1600

Ladies and Gentlemen:

         We have  acted as counsel  to Tower  Group,  Inc.  (the  "Company"),  a
Delaware  corporation in connection with a certain  Placement  Agreement,  dated
December 7, 2004,  (the  "Placement  Agreement"),  between the Company and Tower
Group Statutory Trust III (the "Trust"),  on one hand, and FTN Financial Capital
Markets and Keefe, Bruyette & Woods, Inc. (the "Placement Agents"), on the other
hand.  Pursuant  to the  Placement  Agreement,  and  subject  to the  terms  and
conditions  stated  therein,  the Trust  will issue and sell to  Preferred  Term
Securities XVI, Ltd. (the "Purchaser"),  $13,000,000  aggregate principal amount
of  Fixed/Floating  Rate Capital  Securities  (liquidation  amount $1,000.00 per
capital security) (the "Capital Securities").

         Capitalized  terms used herein and not otherwise defined shall have the
same meanings ascribed to them in the Placement Agreement.

         The law covered by the opinions  expressed herein is limited to the law
of the United States of America and of the State of Delaware and New York.

         We have  made such  investigations  of law as,  in our  judgment,  were
necessary  to render  the  following  opinions.  We have also  reviewed  (a) the
Company's Articles of Incorporation,  as amended,  and its By-Laws,  as amended,
and (b) such corporate documents,  records,  information and certificates of the
Company and its Significant  Subsidiaries,  certificates of public  officials or
government  authorities  and other  documents  as we have  deemed  necessary  or
appropriate  as a basis for the opinions  hereinafter  expressed.  As to certain
facts  material to our  opinions,  we have relied,  with your  permission,  upon
statements,  certificates or representations,  including those delivered or made
in  connection  with the  above-referenced  transaction,  of officers  and other
representatives of the Company and its Significant Subsidiaries and the Trust.

                                     B-1-1

<PAGE>

         As used herein,  the phrase "to our  knowledge"  or "to the best of our
knowledge" or other similar  phrase means the actual  knowledge of the attorneys
who have had active involvement in the transactions  described above or who have
prepared  or  signed  this  opinion  letter,   or  who  otherwise  have  devoted
substantial attention to legal matters for the Company.

         To the extent it may be relevant to the opinions  expressed  herein, we
have assumed that the parties to the Operative  Documents other than the Company
have the power to enter into and perform such  documents and to  consummate  the
transactions  contemplated  thereby  and that  such  documents  have  been  duly
authorized,  executed and delivered by, and constitute legal,  valid and binding
obligations of, such parties.

         Our opinion as to the  enforceability  of the  Operative  Documents  is
subject  to  general   principles   of  equity   (regardless   of  whether  such
enforceability  is  considered  in a  proceeding  in  equity  or at  law or in a
bankruptcy proceeding) and assumes that the parties seeking enforcement will act
with commercial  reasonableness  in exercising each of their rights and remedies
thereunder.  We further  assume  that the  enforcement  of any rights may in all
cases be  subject  to an  implied  duty of good  faith and fair  dealing  and to
general  principles  of equity  (regardless  of whether such  enforceability  is
considered in a proceeding at law or in equity).

         We express no opinion on the validity, binding effect or enforceability
under any  provisions  of the  Operative  Documents  (i) which  waive any rights
afforded to any party  thereto under any statute or  constitutional  provisions,
(ii) which waive  broadly or vaguely  stated rights or future  rights,  or waive
certain  rights or  defenses  to  obligations  where such  waivers  are  against
statutes,  laws or public policy,  or (ii) the breach of which a court concludes
is not material or does not adversely affect the non-breaching party. Insofar as
the   indemnity   provisions   of  the   Operative   Documents   may   encompass
indemnification  with respect to violation of laws,  enforcement  thereof may be
limited by public policies underlying such laws.

         We express no opinion as to the accuracy of factual  matters  contained
in any  exhibits or schedules to the  Operative  Documents.  No opinion is given
herein as to the  choice of law or  internal  substantive  rules of law that any
court or  other  tribunal  may  apply to the  transactions  contemplated  by the
Operative Documents.

         This opinion is issued as of the date hereof and is necessarily limited
to the laws now in effect  and the facts  and  circumstances  known to us on the
date hereof. We are not assuming any obligation to review or update this opinion
should applicable law or the existing fact and circumstances change.

         Based upon and subject to the foregoing and the further  qualifications
set forth below, we are of the opinion as of the date hereof that:

1. The Company is validly  existing and in good  standing  under the laws of the
State of Delaware. Each of the Significant  Subsidiaries is validly existing and
in good standing under the laws of its jurisdiction of organization. Each of the
Company and the Significant  Subsidiaries has full corporate power and authority
to own or lease its  properties  and to conduct its business as such business is
currently conducted in all material respects. To the best of our knowledge,  all
outstanding  shares of capital stock of the Significant  Subsidiaries  have been
duly authorized and validly  issued,  and are fully paid and  nonassessable  and
owned of record and beneficially, directly or indirectly by the Company.

                                     B-1-2
<PAGE>

2. The issuance,  sale and delivery of the  Debentures  in  accordance  with the
terms and conditions of the Placement Agreement and the Operative Documents have
been duly authorized by all necessary actions of the Company. The issuance, sale
and  delivery  of the  Debentures  by the  Company  and the  issuance,  sale and
delivery of the Trust Securities by the Trust do not give rise to any preemptive
or other rights to subscribe  for or to purchase any shares of capital  stock or
equity securities of the Company or the Significant Subsidiaries pursuant to the
corporate  Articles  of  Incorporation  or Charter,  By-Laws or other  governing
documents of the Company or the Significant Subsidiaries, or, to the best of our
knowledge,  any  agreement or other  instrument  to which either  Company or the
Significant  Subsidiaries  is a party or by which the Company or the Significant
Subsidiaries may be bound.

3. The Company has all requisite  corporate  power to enter into and perform its
obligations under the Placement  Agreement and the Subscription  Agreement,  and
the  Placement  Agreement  and the  Subscription  Agreement  have  been duly and
validly  authorized,  executed and delivered by the Company and  constitute  the
legal,  valid and binding  obligations of the Company  enforceable in accordance
with their terms,  except as the  enforcement  thereof may be limited by general
principles of equity and by bankruptcy or other laws affecting creditors' rights
generally, and except as the indemnification and contribution provisions thereof
may be limited under  applicable laws and certain  remedies may not be available
in the case of a non-material breach.

4. Each of the Indenture,  the Trust  Agreement and the Guarantee  Agreement has
been duly authorized,  executed and delivered by the Company, and is a valid and
legally  binding  obligation of the Company  enforceable in accordance  with its
terms,  subject  to  the  effect  of  bankruptcy,  insolvency,   reorganization,
receivership,  moratorium  and other laws  affecting  the rights and remedies of
creditors generally and of general principles of equity.

5. The  Debentures  have been duly  authorized,  executed  and  delivered by the
Company,  are entitled to the benefits of the Indenture and are legal, valid and
binding obligations of the Company enforceable against the Company in accordance
with  their   terms,   subject  to  the   effect  of   bankruptcy,   insolvency,
reorganization, receivership, moratorium and other laws affecting the rights and
remedies of creditors generally and of general principles of equity.

6. To the best of our knowledge,  neither the Company,  the Trust, nor any other
Significant Subsidiaries of the Company is in breach or violation of, or default
under,  with or  without  notice  or  lapse  of time or both,  its  Articles  of
Incorporation  or  Charter,  By-Laws  or other  governing  documents  (including
without  limitation,   the  Trust  Agreement).   The  execution,   delivery  and
performance  of the  Placement  Agreement  and the  Operative  Documents and the
consummation of the transactions contemplated by the Placement Agreement and the
Operative Documents do not and will not (i) result in the creation or imposition
of any  material  lien,  claim,  charge,  encumbrance  or  restriction  upon any
property  or assets of the  Company  or its  Significant  Subsidiaries,  or (ii)
conflict  with,  constitute a material  breach or violation  of, or constitute a
material default under,  with or without notice or lapse of time or both, any of
the terms,  provisions  or conditions  of (A) the Articles of  Incorporation  or
Charter,  By-Laws or other governing documents of the Company or its Significant
Subsidiaries,  or (B) to the  best  of our  knowledge,  any  material  contract,
indenture,  mortgage,  deed of trust,  loan or credit  agreement,  note,  lease,
franchise,  license or any other agreement or instrument to which the Company or
its Significant  Subsidiaries is a party or by which any of them or any of their
respective  properties  may  be  bound  or  (C)  any  order,  decree,  judgment,
franchise,  license,  permit,  rule  or  regulation  of any  court,  arbitrator,
government,  or  governmental  agency or  instrumentality,  domestic or foreign,
known to us having jurisdiction over the Company or its Significant Subsidiaries
or any of their respective  properties which, in the case of each of (i) or (ii)
above,  is  material  to the  Company  and  its  Significant  Subsidiaries  on a
consolidated basis.

                                     B-1-3
<PAGE>

7. Except for filings,  registrations or qualifications  that may be required by
applicable securities laws, no authorization,  approval, consent or order of, or
filing,  registration  or  qualification  with, any person  (including,  without
limitation,  any court,  governmental  body or authority) is required  under the
laws of the State of New York in connection with the  transactions  contemplated
by the Placement  Agreement and the Operative  Documents in connection  with the
offer  and sale of the  Capital  Securities  as  contemplated  by the  Placement
Agreement and the Operative Documents.

8. To the best of our knowledge  (i) no action,  suit or proceeding at law or in
equity is pending  or  threatened  to which the  Offerors  or their  Significant
Subsidiaries  are or may be a party,  and (ii) no action,  suit or proceeding is
pending or  threatened  against or affecting  the Offerors or their  Significant
Subsidiaries or any of their properties,  before or by any court or governmental
official,  commission,  board or other administrative agency, authority or body,
or any  arbitrator,  wherein an  unfavorable  decision,  ruling or finding could
reasonably be expected to have a material  adverse effect on the consummation of
the  transactions  contemplated  by the  Placement  Agreement  and the Operative
Documents  or the issuance and sale of the Capital  Securities  as  contemplated
therein or the condition (financial or otherwise),  earnings, affairs, business,
or results of operations of the Offerors and their Significant Subsidiaries on a
consolidated basis.

9. Assuming the truth and accuracy of the  representations and warranties of the
Placement   Agents  in  the  Placement   Agreement  and  the  Purchaser  in  the
Subscription  Agreement,  it is not necessary in  connection  with the offering,
sale and delivery of the Capital  Securities,  the  Debentures and the Guarantee
Agreement (or the  Guarantee) to register the same under the  Securities  Act of
1933,  as  amended,  under  the  circumstances  contemplated  in  the  Placement
Agreement and the Subscription Agreement.

10.  Neither the Company nor the Trust is or after giving effect to the offering
and sale of the Capital  Securities  and the  consummation  of the  transactions
described in the  Placement  Agreement  will be, an  "investment  company" or an
entity "controlled" by an "investment  company," in each case within the meaning
of the  Investment  Company Act of 1940, as amended,  without  regard to Section
3(c) of such Act .

                                     B-1-4
<PAGE>

         The opinion expressed in the first two sentences of numbered  paragraph
1 of  this  Opinion  Letter  is  based  solely  upon  certain  certificates  and
confirmations  issued by the applicable  governmental  officer or authority with
respect to each of the Company and the Significant Subsidiaries.

         [With respect to the foregoing  opinions,  since no member of this firm
is actively engaged in the practice of law in the States of Delaware,  we do not
express any  opinions as to the laws of such states and have  relied,  with your
approval,  upon the opinion of Richards,  Layton & Finger,  P.A. with respect to
matters of  Delaware  law.  Except with  respect to the  opinions  expressed  in
paragraphs  2, 6 and 10, we also  express no opinion  with  respect to the Trust
except to the extent such matters are opined upon by Richards,  Layton & Finger,
P.A. in the opinion  dated the date  hereof,  including,  but not limited to the
enforceability  of any Operative  Documents  with respect to the Trust,  without
regard to conflict of law provisions.]

         This  opinion is rendered to you solely  pursuant to Section  3.1(a) of
the Placement Agreement.  As such, it may be relied upon by you only and may not
be used or relied upon by any other  person for any purpose  whatsoever  without
our prior written consent.

                                                              Very truly yours,

                                     B-1-5
<PAGE>

                                   EXHIBIT B-2

                        FORM OF DELAWARE COUNSEL OPINION

To Each of the Persons
Listed on Schedule A Hereto

         Re:      Tower Group Statutory Trust III

Ladies and Gentlemen:

         We have acted as special  Delaware  counsel for Tower  Group  Statutory
Trust III, a Delaware  statutory  trust (the  "Trust"),  in connection  with the
matters set forth herein.  At your request,  this opinion is being  furnished to
you.

         For  purposes  of  giving  the  opinions  hereinafter  set  forth,  our
examination  of documents  has been limited to the  examination  of originals or
copies of the following:

      (a) The Certificate of Trust of the Trust (the "Certificate of Trust"), as
filed in the  office of the  Secretary  of State of the State of  Delaware  (the
"Secretary of State") on December 3, 2004;

      (b) The  Declaration of Trust,  dated as of December 3, 2004,  among Tower
Group, Inc., a Delaware corporation (the "Company"), Wilmington Trust Company, a
Delaware banking corporation  ("WTC"),  as trustee and the administrators  named
therein (the "Administrators");

      (c) The Amended and Restated  Declaration of Trust of the Trust,  dated as
of  December  15, 2004  (including  the form of Capital  Securities  Certificate
attached thereto as Exhibit A-1 and the terms of the Capital Securities attached
as Annex I) (the "Declaration of Trust"), among the Company, as sponsor, WTC, as
Delaware  trustee  (the  "Delaware  Trustee")  and  institutional  trustee  (the
"Institutional Trustee"), the Administrators and the holders, from time to time,
of undivided beneficial interests in the assets of the Trust;

      (d) The  Placement  Agreement,  dated  December  7, 2004  (the  "Placement
Agreement"), among the Company, the Trust, and FTN Financial Capital Markets and
Keefe, Bruyette & Woods, Inc., as placement agents;

      (e) The Subscription Agreement, dated December 15, 2004 (the "Subscription
Agreement"),  among the Trust,  the Company and Preferred Term  Securities  XIV,
Ltd.  (the  documents  identified  in items (c) through  (e) being  collectively
referred to as the "Operative Documents");

      (f) The Capital  Securities  being issued on the date hereof (the "Capital
Securities");

                                     B-2-1
<PAGE>

      (g) The Common  Securities  being  issued on the date hereof (the  "Common
Securities") (the documents  identified in items (f) and (g) being  collectively
referred to as the "Trust Securities"); and

      (h) A  Certificate  of Good  Standing  for the Trust,  dated  [CERTIFICATE
DATE], 2004, obtained from the Secretary of State.

         Capitalized  terms used  herein and not  otherwise  defined are used as
defined  in the  Declaration  of  Trust,  except  that  reference  herein to any
document shall mean such document as in effect on the date hereof.  This opinion
is being delivered pursuant to Section 3.1 of the Placement Agreement.

         For purposes of this opinion,  we have not reviewed any documents other
than the documents listed in paragraphs (a) through (h) above. In particular, we
have not reviewed any document  (other than the  documents  listed in paragraphs
(a) through (h) above) that is referred to in or  incorporated by reference into
the documents  reviewed by us. We have assumed that there exists no provision in
any document  that we have not reviewed that is  inconsistent  with the opinions
stated herein. We have conducted no independent factual investigation of our own
but rather have relied solely upon the foregoing  documents,  the statements and
information  set forth  therein and the  additional  matters  recited or assumed
herein,  all of which we have  assumed to be true,  complete and accurate in all
material respects.

         With respect to all  documents  examined by us, we have assumed (i) the
authenticity of all documents submitted to us as authentic  originals,  (ii) the
conformity  with the  originals  of all  documents  submitted to us as copies or
forms, and (iii) the genuineness of all signatures.

         For purposes of this opinion,  we have assumed (i) that the Declaration
of Trust constitutes the entire agreement among the parties thereto with respect
to  the  subject  matter  thereof,  including  with  respect  to  the  creation,
operation,  and termination of the Trust,  and that the Declaration of Trust and
the  Certificate of Trust are in full force and effect and have not been amended
further,  (ii) that there are no proceedings  pending or  contemplated,  for the
merger,  consolidation,  liquidation,  dissolution  or termination of the Trust,
(iii) except to the extent provided in paragraph 1 below, the due creation,  due
formation or due  organization,  as the case may be, and valid existence in good
standing  of each party to the  documents  examined  by us under the laws of the
jurisdiction governing its creation,  formation or organization,  (iv) that each
party to the  documents  examined  by us is  qualified  to do  business  in each
jurisdiction  where such  qualification  is required  generally  or necessary in
order for such party to enforce its rights under the  documents  examined by us,
(v) the legal  capacity of each natural  person who is a party to the  documents
examined by us, (vi) except to the extent set forth in  paragraph 2 below,  that
each of the parties to the documents  examined by us has the power and authority
to execute and deliver,  and to perform its obligations  under,  such documents,
(vii)  except to the extent  provided  in  paragraph  3 below,  that each of the
parties  to the  documents  examined  by us has duly  authorized,  executed  and
delivered  such  documents,  (viii) the receipt by each Person to whom a Capital
Security  is to be issued by the Trust (the  "Capital  Security  Holders")  of a
Capital  Security  Certificate for the Capital  Security and the payment for the
Capital  Securities  acquired by it, in accordance with the Declaration of Trust
and the Subscription Agreement,  (ix) that the Capital Securities are issued and
sold to the Holders of the Capital Securities in accordance with the Declaration
of Trust and the  Subscription  Agreement,  (x) the  receipt by the Person  (the
"Common Securityholder") to whom the common securities of the Trust representing
common  undivided  beneficial  interests in the assets of the Trust (the "Common
Securities" and, together with the Capital  Securities,  the "Trust Securities")
are to be issued by the Trust of a Common  Security  Certificate  for the Common
Securities  and the  payment  for  the  Common  Securities  acquired  by it,  in
accordance  with the Declaration of Trust,  (xi) that the Common  Securities are
issued and sold to the Common  Securityholder in accordance with the Declaration
of Trust,  (xii) that each of the  parties to the  documents  reviewed by us has
agreed to and  received  the  stated  consideration  for the  incurrence  of its
obligations under such documents and (xiii) that each of the documents  reviewed
by us (other  than the  Declaration  of Trust) is a legal,  valid,  binding  and
enforceable  obligation  of the  parties  thereto in  accordance  with the terms
thereof.  We have not participated in the preparation of any offering  materials
with  respect  to the Trust  Securities  and  assume no  responsibility  for its
contents.

                                     B-2-2
<PAGE>

         This opinion is limited to the laws of the State of Delaware (excluding
the  securities  laws of the State of Delaware),  and we have not considered and
express no opinion on the laws of any other jurisdiction, including federal laws
and rules and regulations  relating thereto. Our opinions are rendered only with
respect to Delaware laws and rules,  regulations and orders  thereunder that are
currently in effect.

         We express no opinion as to (i) the effect of suretyship  defenses,  or
defenses  in  the  nature  thereof,  with  respect  to  the  obligations  of any
applicable  guarantor,  joint obligor,  surety,  accommodation  party,  or other
secondary  obligor or any  provisions  of the Trust  Agreement  with  respect to
indemnification  or  contribution  and (ii) the accuracy or  completeness of any
exhibits or schedules to the Operative Documents.  No opinion is given herein as
to the  choice  of law or  internal  substantive  rules of law that any court or
other  tribunal  may apply to the  transactions  contemplated  by the  Operative
Documents.

         We  express  no  opinion  as to the  enforceability  of any  particular
provision of the Trust  Agreement or the other Operative  Documents  relating to
remedies after default.

         We  express  no  opinion  as to the  enforceability  of any  particular
provision of any of the Operative Documents relating to (i) waivers of rights to
object to jurisdiction  or venue,  or consents to  jurisdiction  or venue,  (ii)
waivers of rights to (or methods  of) service of process,  or rights to trial by
jury, or other rights or benefits bestowed by operation of law, (iii) waivers of
any applicable defenses, setoffs, recoupments, or counterclaims, (iv) waivers or
variations of provisions  which are not capable of waiver or variation under the
Uniform  Commercial  Code  ("UCC")  of the  State,  (v) the  grant of  powers of
attorney to any person or entity,  or (vi)  exculpation or exoneration  clauses,
indemnity  clauses,  and clauses  relating  to releases or waivers of  unmatured
claims or rights.

         We have made no  examination  of, and no opinion is given  herein as to
the  Trustee's  or the  Trust's  title to or other  ownership  rights in, or the
existence of any liens,  charges or encumbrances  on, or adverse claims against,
any asset or property held by the Institutional Trustee or the Trust. We express
no opinion as to the creation, validity,  attachment,  perfection or priority of
any  mortgage,  security  interest or lien in any asset or property  held by the
Institutional Trustee or the Trust.

                                     B-2-3
<PAGE>

         We  express   no  opinion  as  to  the  effect  of  events   occurring,
circumstances arising, or changes of law becoming effective or occurring,  after
the date hereof on the matters  addressed in this opinion letter,  and we assume
no  responsibility  to inform you of additional or changed facts,  or changes in
law, of which we may become aware.

         We  express  no  opinion  as to any  requirement  that any party to the
Operative  Documents (or any other persons or entities  purportedly  entitled to
the benefits  thereof) qualify or register to do business in any jurisdiction in
order to be able to  enforce  its  rights  thereunder  or  obtain  the  benefits
thereof.

         Based upon the foregoing, and upon our examination of such questions of
law and  statutes of the State of Delaware as we have  considered  necessary  or
appropriate,  and subject to the  assumptions,  qualifications,  limitations and
exceptions set forth herein, we are of the opinion that:

      1. The  Trust  has been  duly  created  and is  validly  existing  in good
standing as a statutory trust under the Delaware Statutory Trust Act (12 Del. C.
ss. 3801, et seq.) (the "Act"). All filings required under the laws of the State
of Delaware  with respect to the creation and valid  existence of the Trust as a
statutory trust have been made.

      2.  Under the  Declaration  of Trust and the Act,  the Trust has the trust
power and  authority  to (A) execute and deliver the  Operative  Documents,  (B)
perform its obligations  under such Operative  Documents and (C) issue the Trust
Securities.

      3. The execution and delivery by the Trust of the Operative Documents, and
the  performance  by the  Trust of its  obligations  thereunder,  have been duly
authorized by all necessary trust action on the part of the Trust.

      4.  The  Declaration  of Trust  constitutes  a legal,  valid  and  binding
obligation  of  the  Company,  the  Trustees  and  the  Administrators,  and  is
enforceable  against  the  Company,  the  Trustees  and the  Administrators,  in
accordance with its terms.

      5. Each of the Operative Documents  constitutes a legal, valid and binding
obligation of the Trust,  enforceable  against the Trust, in accordance with its
terms.

      6. The Capital  Securities  have been duly  authorized for issuance by the
Declaration  of Trust,  and, when duly executed and delivered to and paid for by
the  purchasers  thereof  in  accordance  with the  Declaration  of  Trust,  the
Subscription Agreement and the Placement Agreement,  the Capital Securities will
be validly issued,  fully paid and, subject to the  qualifications  set forth in
paragraph 8 below, nonassessable undivided beneficial interests in the assets of
the Trust and will entitle the Capital Securities Holders to the benefits of the
Declaration of Trust.  The issuance of the Capital  Securities is not subject to
preemptive or other similar rights under the Act or the Declaration of Trust.

                                     B-2-4
<PAGE>

      7. The Common  Securities  have been duly  authorized  for issuance by the
Declaration  of Trust and,  when duly  executed and  delivered to the Company as
Common  Security  Holder in accordance  with the  Declaration of Trust,  will be
validly issued,  fully paid and, subject to paragraph 8 below and Section 9.1(b)
of the  Declaration  of Trust  (which  provides  that the  Holder of the  Common
Securities  are  liable  for  debts and  obligations  of  Trust),  nonassessable
undivided  beneficial  interests in the assets of the Trust and will entitle the
Common Security Holder to the benefits of the Declaration of Trust. The issuance
of the Common  Securities is not subject to  preemptive or other similar  rights
under the Act or the Declaration of Trust.

      8. Under the  Declaration of Trust and the Act, the Holders of the Capital
Securities,  as  beneficial  owners of the Trust,  will be  entitled to the same
limitation  of  personal   liability   extended  to   stockholders   of  private
corporations for profit organized under the General Corporation Law of the State
of Delaware.  We note that the Holders of the Capital  Securities and the Holder
of the Common Securities may be obligated, pursuant to the Declaration of Trust,
(A) to provide  indemnity  and/or  security in connection  with and pay taxes or
governmental  charges  arising from  transfers or exchanges of Capital  Security
Certificates and the issuance of replacement Capital Security Certificates,  and
(B)  to  provide  security  or  indemnity  in  connection  with  requests  of or
directions to the Institutional  Trustee to exercise its rights and powers under
the Declaration of Trust.

      9. Neither the  execution,  delivery and  performance  by the Trust of the
Operative  Documents,   nor  the  consummation  by  the  Trust  of  any  of  the
transactions  contemplated  thereby,  requires  the consent or approval  of, the
authorization  of, the  withholding  of  objection on the part of, the giving of
notice to, the filing,  registration or qualification with, or the taking of any
other action in respect of, any governmental authority or agency of the State of
Delaware,  other than the filing of the  Certificate of Trust with the Secretary
of State (which Certificate of Trust has been duly filed).

      10.  Neither the execution,  delivery and  performance by the Trust of the
Trust  Documents,  nor  the  consummation  by  the  Trust  of  the  transactions
contemplated  thereby, (i) is in violation of the Trust Agreement or of any law,
rule or regulation  of the State of Delaware  applicable to the Trust or (ii) to
the  best  of  our  knowledge,  without  independent  investigation,   violates,
contravenes or constitutes a default under,  or results in a breach of or in the
creation of any lien (other than as permitted by the Operative  Documents)  upon
any property of the Trust under any indenture,  mortgage, chattel mortgage, deed
of trust, conditional sales contract, bank loan or credit agreement,  license or
other  agreement or  instrument  to which the Trust is a party or by which it is
bound.

      11.  Assuming  that the Trust  will not be taxable  as a  corporation  for
federal income tax purposes,  but rather will be classified for such purposes as
a grantor trust under Subpart E, Part I of Subchapter J of the Internal  Revenue
Code of 1986,  as  amended,  the Trust will not be  subject  to any tax,  fee or
governmental charge under the laws of the State of Delaware.

                                     B-2-5
<PAGE>

         The opinions expressed in paragraph 4, 5, 6, 7 and 8 above are subject,
as to  enforcement,  to  the  effect  upon  the  Declaration  of  Trust  of  (i)
bankruptcy, insolvency, moratorium, receivership,  reorganization,  liquidation,
fraudulent  conveyance  and  transfer,  and other  similar  laws  relating to or
affecting  the rights and remedies of creditors  generally,  (ii)  principles of
equity,  including  applicable law relating to fiduciary  duties  (regardless of
whether  considered  and applied in a proceeding in equity or at law), and (iii)
the effect of  applicable  public  policy on the  enforceability  of  provisions
relating to indemnification or contribution.

         We consent to your  relying  as to  matters of  Delaware  law upon this
opinion in connection with the Placement Agreement.  We also consent to LeBoeuf,
Lamb, Greene & MacRae, L.L.P. and McLaughlin & Stern LLP's relying as to matters
of Delaware law upon this opinion in connection  with opinions to be rendered by
them on the date hereof pursuant to the Placement Agreement.

         Except as stated above, without our prior written consent, this opinion
may not be  furnished  or quoted to, or relied upon by, any other Person for any
purpose.

                                                      Very truly yours,

                                     B-2-6
<PAGE>

NYB 596174.4 07935 00429
                                   SCHEDULE I

         Wilmington Trust Company

         FTN Financial Capital Markets

         Keefe, Bruyette & Woods, Inc.

         Preferred Term Securities XVI, Ltd.

         Preferred Term Securities XVI, Inc.

         Tower Group, Inc.

<PAGE>

                            EXHIBIT A TO EXHIBIT B-2

                         CERTIFICATE OF LEGAL EXISTENCE

                                  See attached

<PAGE>

                                   EXHIBIT B-3

                           FORM OF TAX COUNSEL OPINION

                                                               December 15, 2004

Tower Group, Inc.
120 Broadway, 14th Floor
New York, New York 10271-1699

Tower Group Statutory Trust III
c/o Tower Group, Inc.
120 Broadway, 14th Floor
New York, New York 10271-1699

FTN Financial Capital Markets
845 Crossover Lane, Suite 150
Memphis, Tennessee 38117

Keefe, Bruyette & Woods, Inc.
787 7th Avenue, 4th Floor
New York, New York 10019

Dear Sirs:

         We are acting as special  United  States  tax  counsel to Tower  Group,
Inc.,  a  corporation  organized  and existing  under the laws of Delaware  (the
"Company"),  and to Tower Group  Statutory  Trust III, a statutory trust created
under the laws of  Delaware  (the  "Trust"),  in  connection  with the  proposed
issuance of (i) Floating Rate Capital  Securities,  liquidation amount $1,000.00
per Capital  Security (the "Capital  Securities") of the Trust,  pursuant to the
terms of the  Amended  and  Restated  Declaration  of Trust dated as of the date
hereof by and among the Company,  Wilmington Trust Company, as Delaware trustee,
Wilmington Trust Company, as institutional  trustee, and Michael H. Lee, Francis
M. Colalucci and Steven G. Fauth,  as  Administrators  (the "Trust  Agreement"),
(ii)  Floating  Rate Common  Securities,  liquidation  amount  $1,000 per common
security (the "Common  Securities")  of the Trust,  pursuant to the terms of the
Trust Agreement,  (iii) Floating Rate Junior  Subordinated  Deferrable  Interest
Debentures  (the  "Corresponding  Debentures") of the Company issued pursuant to
the  terms of an  Indenture  dated as of the date  hereof  from the  Company  to
Wilmington  Trust Company,  as trustee (the  "Indenture"),  which  Corresponding
Debentures  are to be sold by the Company to the Trust,  and (iv) the  Guarantee
Agreement of the Company with respect to the Capital  Securities dated as of the
date hereof (the "Guarantee")  between the Company and Wilmington Trust Company,
as guarantee  trustee.  The Capital  Securities,  the Common  Securities and the
Corresponding Debentures are to be issued pursuant to the terms of the Placement
Agreement  among the Company,  the Trust,  FTN Financial  Capital  Markets,  and
Keefe, Bruyette & Woods, Inc. dated December 7, 2004 (the "Placement Agreement")
as described in the Offering Circular (the "Offering Circular") dated [OC DATE],
2004 prepared by Preferred Term Securities XVI, Ltd., an entity formed under the
Companies Law of the Cayman Islands,  and Preferred Term Securities XVI, Inc., a
Delaware corporation.

                                     B-3-1
<PAGE>

         In  formulating  our opinions,  we have  examined  originals or copies,
certified or otherwise identified to our satisfaction,  of documents,  corporate
records and other  instruments as we have deemed  necessary or  appropriate  for
purposes  of  this  opinion  including  (i)  the  Offering  Circular,  (ii)  the
Indenture, (iii) the form of the Corresponding Debentures attached as an exhibit
to the Indenture,  (iv) the Trust  Agreement,  (v) the  Guarantee,  and (vi) the
forms of  Capital  Securities  Certificate  and  Common  Securities  Certificate
attached as  exhibits to the Trust  Agreement  (collectively  the  "Documents").
Furthermore, we have relied upon certain representations made by the Company and
upon the opinion of  Richards,  Layton & Finger,  P.A. as to certain  matters of
Connecticut law.

         In such examination,  we have assumed the authenticity of all documents
submitted  to us as  originals,  the  conformity  to original  documents  of all
documents  submitted to us as certified  photostatic copies, the authenticity of
the originals of such latter  documents,  the  genuineness of all signatures and
the  correctness of all  representations  made therein.  We have further assumed
that there are no agreements or understandings  contemplated  therein other than
those contained in the Documents.

         In  rendering  our  opinions,  we have  assumed  that the  transactions
described in or  contemplated  by the Documents have been or will be carried out
strictly in accordance  with the Documents,  and that such Documents  accurately
reflect the material facts of such  transactions.  Any variance in the facts may
result in United States federal income tax  consequences  that differ from those
reflected  in the opinions  set forth  herein.  Our opinion is also based on the
Internal Revenue Code of 1986, as amended,  (the "Code"),  Treasury regulations,
administrative  rulings,  judicial decisions,  and other applicable authorities.
The statutory  provisions,  regulations and interpretations on which our opinion
is based are subject to change, possibly retroactively.  In addition,  there can
be no  assurance  that the  Internal  Revenue  Service  will not take  positions
contrary to those stated in our opinion.

         Subject to the  foregoing,  under current law and based upon the facts,
assumptions and qualifications contained herein, it is our opinion that:

          1.  The Corresponding Debentures will be classified as indebtedness of
              the Company for United States federal income tax purposes; and

          2.  The Trust will be  characterized  as a grantor trust and not as an
              association  taxable as a corporation  for United  States  federal
              income tax purposes.

         The opinions we express herein are limited  solely to matters  governed
by the  federal  income tax laws of the United  States.  Our opinion is provided
solely to you as a legal opinion only, and not as a guaranty or warranty, and is
limited to the specific transactions, documents, and matters described above. No
opinion may be implied or inferred beyond that which is expressly stated in this
letter.

                                     B-3-2
<PAGE>

         We  express  no opinion  with  respect  to any matter not  specifically
addressed by the foregoing opinions,  including state or local tax consequences,
or any federal, state, or local issue not specifically referred to and discussed
above including,  without limitation,  the effect on the matters covered by this
opinion of the laws of any other jurisdiction.

         We are  furnishing  this  opinion  to you  solely  for your  benefit in
connection with the issuance of the Capital  Securities,  the Common  Securities
and the Corresponding Debentures,  and this opinion is not to be relied upon for
any other purpose or by any other person  without our express  written  consent.
Notwithstanding the foregoing, (i) copies of this opinion letter may be provided
for the  benefit of [RATING  AGENCY]  and (ii) you (and each of your  employees,
representatives  and  other  agents)  may  disclose  this  letter to any and all
persons,  without  limitation of any kind, to the extent such  disclosure may be
relevant to understanding  the tax treatment or tax structure of any transaction
contemplated  by the Placement  Agreement.  We disclaim any obligation to update
this opinion  letter for events  occurring or coming to our attention  after the
date hereof.

                                                              Very truly yours,

                                     B-3-3
<PAGE>

                                Tower Group, Inc.

                                                               December 15, 2004

LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, New York  10019
Attention: Robert A.N. Cudd

         Re:      Representations Concerning the Issuance of Fixed/Floating
                  Rate Junior Subordinated Deferrable
                  Interest Debentures (the "Corresponding Debentures")
                  to Tower Group Statutory Trust III (the "Trust")
                  and Sale of Trust Securities
                  (THE "TRUST SECURITIES") OF THE TRUST

Dear Sirs:

         In accordance  with your  request,  Tower Group,  Inc. (the  "Company")
hereby makes the following representations in connection with the preparation of
your opinion letter as to the United States federal income tax  consequences  of
the issuance by the Company of the Corresponding Debentures to the Trust and the
sale of the Trust Securities.

         The Company hereby represents that:

      (1) The sole assets of the Trust will be the Corresponding Debentures, any
      interest  paid  on  the   Corresponding   Debentures  to  the  extent  not
      distributed,  proceeds  of  the  Corresponding  Debentures,  or any of the
      foregoing.

      (2) The  Company  intends  to use the net  proceeds  from  the sale of the
      Corresponding Debentures for general corporate purposes.

      (3) The Trust was not formed to conduct any trade or  business  and is not
      authorized  to conduct  any trade or  business.  The Trust  exists for the
      exclusive  purposes of (i) issuing and selling the Trust Securities,  (ii)
      using  the  proceeds  from the sale of Trust  Securities  to  acquire  the
      Corresponding Debentures,  and (iii) engaging only in activities necessary
      or incidental thereto.

      (4) The Trust was formed to facilitate  direct investment in the assets of
      the  Trust,  and  the  existence  of  multiple  classes  of  ownership  is
      incidental to that purpose.  There is no intent to provide holders of such
      interests in the Trust with diverse interests in the assets of the Trust.

      (5) The Company intends to create a debtor-creditor  relationship  between
      the Company,  as debtor,  and the Trust, as a creditor,  upon the issuance
      and sale of the Corresponding  Debentures to the Trust by the Company. The
      Company  will  (i)  record  and at  all  times  continue  to  reflect  the
      Corresponding Debentures as indebtedness on its separate books and records
      for  financial  accounting  purposes,  and (ii)  treat  the  Corresponding
      Debentures as indebtedness for all United States federal,  state and local
      income tax purposes.

                                     B-3-4
<PAGE>

      (6) During each year,  the Trust's  income will consist solely of payments
      made by the Company with  respect to the  Corresponding  Debentures.  Such
      payments  will not be  derived  from the  active  conduct  of a  financial
      business by the Trust. Both the Company's obligation to make such payments
      and the  measurement of the amounts  payable by the Company are defined by
      the  terms  of  the  Corresponding   Debentures.   Neither  the  Company's
      obligation  to make  such  payments  nor the  measurement  of the  amounts
      payable by the Company is dependent on income or profits of the Company or
      any affiliate of the Company.

      (7) The Company has reviewed  projections of earnings,  cash flow, capital
      and surplus and other relevant financial and economic data relating to the
      Company and its  affiliates.  Based on the current and  estimated net cash
      flow and the  projections of earnings,  cash flow,  capital and surplus of
      the Company and its  affiliates,  the Company  believes  its net cash flow
      will be in excess of the amount of principal  and interest  required to be
      paid in accordance with the terms of the Corresponding  Debentures and the
      Company  expects  that it will be able to  make,  and  will  make,  timely
      payment of  principal  and  interest in  accordance  with the terms of the
      Corresponding  Debentures  with available  capital or accumulated net cash
      flow.

      (8) The  principal  insurance  operating  subsidiary  of the  Company  has
      received either a financial  strength rating of at least B+ with a neutral
      or positive  outlook from A.M. Best Company,  Inc., or an investment grade
      financial  strength rating from either Standard & Poor's Ratings Services,
      a division of The McGraw-Hill Companies, Inc. or Fitch Ratings.

      (9) The terms and conditions of the  Corresponding  Debentures,  including
      the interest rate, were determined on an arm's length basis.

      (10) The Company  presently has no intention to defer interest payments on
      the  Corresponding  Debentures,  and it considers the likelihood of such a
      deferral to be remote  because,  if it were to exercise its right to defer
      payments of interest  with  respect to the  Corresponding  Debentures,  it
      would not be  permitted to declare or pay any  dividends or  distributions
      on, or redeem,  purchase,  acquire,  or make a  liquidation  payment  with
      respect  to, any  capital  stock of the  Company or any  affiliate  of the
      Company (other than payments of dividends or distributions to the Company)
      or make any payment of principal of or interest or premium,  if any, on or
      repay,  repurchase,  or redeem any debt  securities  of the Company or any
      affiliate  of the  Company  that rank PARI PASSU in all  respects  with or
      junior in interest to the Corresponding  Debentures,  in each case subject
      to  limited  exceptions  stated in  Section  2.11 of the  Indenture  to be
      entered  into  in  connection  with  the  issuance  of  the  Corresponding
      Debentures.

                                     B-3-5
<PAGE>

      (11) Immediately after the issuance of the Corresponding  Debentures,  the
      debt-to-equity   ratio  of  the  Company  (as   determined  for  financial
      accounting  purposes)  will be no higher  than  three to one (3 : 1).  The
      Company has no plan or intention to issue debt that would cause such ratio
      to exceed three to one (3 : 1). For purposes of this paragraph 11, (i) the
      Corresponding Debentures will be treated as debt and payments thereon will
      be treated as  interest,  (ii) other  debt (as  determined  for  financial
      accounting   purposes)   shall  include  both   short-term  and  long-term
      indebtedness of the Company, and (iii) equity (as determined for financial
      accounting purposes) shall include capital stock, preferred stock, if any,
      paid in surplus and retained earnings of the Company.

      (12)  To the  best  of  our  knowledge,  the  Company's  subsidiaries  are
      currently in compliance  with all  applicable  federal,  state,  and local
      capital requirements, except to the extent that failure to comply with any
      such requirements  would not have a material adverse effect on the Company
      and its subsidiaries.

      (13) For purposes hereof, you may rely on the representations  made by the
      Company in the  Placement  Agreement  dated as of December 7, 2004, by and
      among FTN Financial Capital Markets,  Keefe,  Bruyette & Woods,  Inc., the
      Trust and the Company.

      (14) The  Company  will not issue any class of common  stock or  preferred
      stock senior in rights (such as payment rights and liquidation preference)
      to the Corresponding Debentures during their term.

      (15)  The  Internal  Revenue  Service  has  not  challenged  the  interest
      deduction on any class of the Company's  subordinated debt in the last ten
      (10) years on the basis  that such debt  constitutes  equity  for  federal
      income tax purposes.

         The above  representations  are accurate as of the date hereof and will
continue to be accurate through the issuance of the Trust Securities, unless you
are otherwise  notified by us in writing.  The undersigned  understands that you
will rely on the foregoing in connection with rendering  certain legal opinions,
and possesses the authority to make the representations set forth in this letter
on behalf of the Company.

                                  Very truly yours,

                                  Tower Group, Inc.

                                  By:
                                     -----------------------------------------
                                     Name:
                                     Title:

                                     B-3-6

<PAGE>

                                    EXHIBIT C

                            SIGNIFICANT SUBSIDIARIES

Tower Insurance Company of New York

Tower Risk Management Corp.

<PAGE>

NYB 596174.4 07935 00429
                                               EXHIBIT D

                                        FORM OF QUARTERLY REPORT

Preferred Term Securities XVI, Ltd.
c/o The Bank of New York
101 Barclay Street, Floor 8-East
CDO Unit
New York, New York  10286
Attention:  Franco Talavera
CDO Relationship Manager

PLEASE COMPLETE FOR THE PRINCIPAL INSURANCE OPERATING SUBSIDIARY

AS OF YEAR END _______, 20__

NAIC Risk Based Capital Ratio (authorized control level)               _______%

AS OF [MARCH 31, JUNE 30, SEPTEMBER 30, OR DECEMBER 31,] 20___

Total Policyholders' Surplus                                          $_______

Consolidated Debt to Total Policyholders' Surplus                      _______%

Total Assets                                                          $_______

NAIC Class 1 & 2 Rated Investments to Total Fixed Income Investments   _______%

NAIC Class 1 & 2 Rated Investments to Total Investments                _______%

Return on Policyholders' Surplus                                       _______%

FOR PROPERTY & CASUALTY COMPANIES

EXPENSE RATIO                                                          _______%

LOSS AND LAE RATIO                                                     _______%

COMBINED RATIO                                                         _______%

NET PREMIUMS WRITTEN (ANNUALIZED) TO POLICYHOLDERS' SURPLUS            _______%

<PAGE>

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>
Naic Risk Based Capital Ratio-P&C                       (Total Adjusted  Capital/authorized  Control Level  Risk-based
                                                        Capita/)/2
--------------------------------------------------------------------------------------------------------------------------------
Naic Risk Based Capital Ratio-life                      ((Total Adjusted Capital-asset  Valuation  Reserve)/authorized
                                                        Control Level Risk-based Capita/)/2
--------------------------------------------------------------------------------------------------------------------------------
Total                                                   Capital and  Surplus-life  Common Capital Stock + Preferred  Capital
                                                        Stock + Aggregate  Write-ins for Other Than Special  Surplus Funds
                                                        Surplus  Notes +Gross  Paid-in and  Contributed  Surplus + Aggregate
                                                        Write-ins for Special  Surplus Funds + Unassigned  Funds (Surplus) -
                                                        Treasury Stock
-------------------------------------------------------------------------------------------------------------------------------
Total                                                   Capital and  Surplus-P&C  Aggregate  Write-ins for Special Surplus Funds +
                                                        Common Capital Stock + Preferred  Capital Stock + Aggregate  Writ
                                                        Other Than  Special  Surplus  Funds + Surplus  Notes  +Gross  Pai
                                                        Contributed Surplus + Unassigned Funds (Surplus) - Treasury Stock
-------------------------------------------------------------------------------------------------------------------------------
Total  Class 1 & 2  Rated  Investments  to  Total       (Total Class 1 + Total Class 2 Rated  Investments)/total Fixed
Fixed  Income Investments                               Income Investments
-------------------------------------------------------------------------------------------------------------------------------
Total Class 1 & 2 Rated Investments to                  (Total  Class  1 +  Total  Class  2  Rated  Investments)/total
 Total Investments                                      Investments
-------------------------------------------------------------------------------------------------------------------------------
Total Assets                                            Total Assets
-------------------------------------------------------------------------------------------------------------------------------
Return On Policyholders' Surplus                        Net Income/policyholders' Surplus
-------------------------------------------------------------------------------------------------------------------------------
Expense Ratio                                           Other Underwriting Expenses Incurred/net Premiums Earned
-------------------------------------------------------------------------------------------------------------------------------
Loss and Lae Ratio                                      (Losses Incurred + Loss Expenses Incurred)/net Premiums Earned
-------------------------------------------------------------------------------------------------------------------------------
Combined Ratio                                          Expense Ratio + Loss and Lae Ratio
-------------------------------------------------------------------------------------------------------------------------------
Net Premiums Written (Annualized) to                    Net Premiums Written/policyholders' Surplus
Policyholders' Surplus
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>EXHIBIT 10.02
===============================================================================

                               GUARANTEE AGREEMENT

                                 BY AND BETWEEN

                                TOWER GROUP, INC.

                                       AND

                            WILMINGTON TRUST COMPANY

                          DATED AS OF DECEMBER 15, 2004

===============================================================================

<PAGE>

<TABLE>
<CAPTION>
                                TABLE OF CONTENTS

                                                                                                               Page

<S>                                                                                                             <C>
ARTICLE I          DEFINITIONS AND INTERPRETATION.................................................................1

    Section 1.1       Definitions and Interpretation..............................................................1

ARTICLE II         POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE.............................................5

    Section 2.1       Powers and Duties of the Guarantee Trustee..................................................5
    Section 2.2       Certain Rights of the Guarantee Trustee.....................................................6
    Section 2.3       Not Responsible for Recitals or Issuance of Guarantee.......................................8
    Section 2.4       Events of Default; Waiver...................................................................8
    Section 2.5       Events of Default; Notice...................................................................8

ARTICLE III        GUARANTEE TRUSTEE..............................................................................9

    Section 3.1       Guarantee Trustee; Eligibility..............................................................9
    Section 3.2       Appointment, Removal and Resignation of the Guarantee Trustee...............................9

ARTICLE IV         GUARANTEE.....................................................................................10

    Section 4.1       Guarantee..................................................................................10
    Section 4.2       Waiver of Notice and Demand................................................................10
    Section 4.3       Obligations Not Affected...................................................................10
    Section 4.4       Rights of Holders..........................................................................11
    Section 4.5       Guarantee of Payment.......................................................................12
    Section 4.6       Subrogation................................................................................12
    Section 4.7       Independent Obligations....................................................................12
    Section 4.8       Enforcement by a Beneficiary...............................................................12

ARTICLE V          LIMITATION OF TRANSACTIONS; SUBORDINATION.....................................................13

    Section 5.1       Limitation of Transactions.................................................................13
    Section 5.2       Ranking....................................................................................13

ARTICLE VI         TERMINATION...................................................................................14

    Section 6.1       Termination................................................................................14

ARTICLE VII        INDEMNIFICATION...............................................................................14

    Section 7.1       Exculpation................................................................................14
    Section 7.2       Indemnification............................................................................15
    Section 7.3       Compensation; Reimbursement of Expenses....................................................16

                                       i
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
<S>                                                                                                              <C>
ARTICLE VIII       MISCELLANEOUS.................................................................................16

    Section 8.1       Successors and Assigns.....................................................................16
    Section 8.2       Amendments.................................................................................16
    Section 8.3       Notices....................................................................................17
    Section 8.4       Benefit....................................................................................17
    Section 8.5       Governing Law..............................................................................17
    Section 8.6       Counterparts...............................................................................18
    Section 8.7       Separability...............................................................................18

</TABLE>

                                       ii
<PAGE>

                               GUARANTEE AGREEMENT

                 This  GUARANTEE  AGREEMENT  (this  "Guarantee"),  dated  as  of
December 15, 2004,  is executed and  delivered by Tower Group,  Inc., a Delaware
corporation (the "Guarantor"),  and Wilmington Trust Company, a Delaware banking
corporation,  as  trustee  (the  "Guarantee  Trustee"),  for the  benefit of the
Holders (as defined  herein)  from time to time of the  Capital  Securities  (as
defined herein) of Tower Group  Statutory Trust III, a Delaware  statutory trust
(the "Issuer").

         WHEREAS,  pursuant to an Amended and Restated Declaration of Trust (the
"Declaration"),  dated as of the date hereof among Wilmington Trust Company, not
in  its  individual   capacity  but  solely  as   institutional   trustee,   the
administrators of the Issuer named therein,  the Guarantor,  as sponsor, and the
holders from time to time of undivided beneficial interests in the assets of the
Issuer,  the Issuer is issuing on the date  hereof  those  undivided  beneficial
interests,  having an aggregate  liquidation amount of $13,000,000 (the "Capital
Securities"); and

         WHEREAS,   as  incentive  for  the  Holders  to  purchase  the  Capital
Securities,  the Guarantor desires  irrevocably and unconditionally to agree, to
the  extent  set  forth in this  Guarantee,  to pay to the  Holders  of  Capital
Securities the Guarantee  Payments (as defined herein) and to make certain other
payments on the terms and conditions set forth herein;

         NOW, THEREFORE,  in consideration of the purchase by each Holder of the
Capital Securities, which purchase the Guarantor hereby agrees shall benefit the
Guarantor, the Guarantor executes and delivers this Guarantee for the benefit of
the Holders.

                                   ARTICLE I.

                         DEFINITIONS AND INTERPRETATION

SECTION 1.1       DEFINITIONS AND INTERPRETATION.

         In this Guarantee, unless the context otherwise requires:

      (a)  capitalized  terms  used in this  Guarantee  but not  defined  in the
preamble  above have the  respective  meanings  assigned to them in this Section
1.1;

      (b) a term  defined  anywhere  in  this  Guarantee  has the  same  meaning
throughout;

      (c) all  references  to "the  Guarantee" or "this  Guarantee"  are to this
Guarantee as modified, supplemented or amended from time to time;

      (d) all  references in this  Guarantee to "Articles" or "Sections"  are to
Articles or Sections of this Guarantee, unless otherwise specified;

      (e) terms defined in the  Declaration  as at the date of execution of this
Guarantee have the same meanings when used in this Guarantee,  unless  otherwise
defined in this Guarantee or unless the context otherwise requires; and

<PAGE>

      (f) a reference to the singular includes the plural and vice versa.

         "AFFILIATE"  has the same  meaning as given to that term in Rule 405 of
the Securities Act of 1933, as amended, or any successor rule thereunder.

         "BENEFICIARIES"  means any  Person to whom the  Issuer is or  hereafter
becomes indebted or liable.

         "CAPITAL  SECURITIES" has the meaning set forth in the recitals to this
Guarantee.

         "COMMON SECURITIES" means the common securities issued by the Issuer to
the Guarantor pursuant to the Declaration.

         "CORPORATE  TRUST OFFICE" means the office of the Guarantee  Trustee at
which the  corporate  trust  business of the  Guarantee  Trustee  shall,  at any
particular  time,  be  principally  administered,  which  office  at the date of
execution of this Guarantee is located at Rodney Square North, 1100 North Market
Street,   Wilmington,   Delaware   19890-1600,    Attention:   Corporate   Trust
Administration.

         "COVERED PERSON" means any Holder of Capital Securities.

         "DEBENTURES" means the debt securities of the Guarantor  designated the
Fixed/Floating Rate Junior Subordinated  Deferrable Interest Debentures due 2034
held by the Institutional Trustee (as defined in the Declaration) of the Issuer.

         "DECLARATION  EVENT OF DEFAULT"  means an "Event of Default" as defined
in the Declaration.

         "EVENT OF DEFAULT" has the meaning set forth in Section 2.4(a).

         "GUARANTEE  PAYMENTS"  means the following  payments or  distributions,
without duplication,  with respect to the Capital Securities,  to the extent not
paid or made by the Issuer: (i) any accrued and unpaid Distributions (as defined
in the Declaration)  which are required to be paid on such Capital Securities to
the extent the Issuer  shall have funds  available  therefor,  (ii) the Optional
Redemption  Price to the extent the Issuer has funds  available  therefor,  with
respect to any Capital Securities called for redemption by the Issuer, (iii) the
Special Redemption Price to the extent the Issuer has funds available  therefor,
with respect to Capital  Securities  redeemed  upon the  occurrence of a Special
Event,  and (iv)  upon a  voluntary  or  involuntary  liquidation,  dissolution,
winding-up  or  termination  of the Issuer  (other than in  connection  with the
distribution of Debentures to the Holders of the Capital  Securities in exchange
therefor as provided in the Declaration), the lesser of (a) the aggregate of the
liquidation  amount and all  accrued  and unpaid  Distributions  on the  Capital
Securities  to the date of  payment,  to the extent the Issuer  shall have funds
available  therefor,  and (b) the  amount  of  assets  of the  Issuer  remaining
available for  distribution  to Holders in  liquidation of the Issuer (in either
case, the "Liquidation Distribution").

                                       2
<PAGE>

         "GUARANTEE  TRUSTEE" means Wilmington Trust Company,  until a Successor
Guarantee Trustee has been appointed and has accepted such appointment  pursuant
to the  terms  of this  Guarantee  and  thereafter  means  each  such  Successor
Guarantee Trustee.

         "GUARANTOR" means  Tower  Group,  Inc. and  each of its successors  and
assigns.

         "HOLDER"  means any holder,  as  registered on the books and records of
the Issuer, of any Capital Securities;  PROVIDED,  HOWEVER, that, in determining
whether the Holders of the requisite percentage of Capital Securities have given
any request, notice, consent or waiver hereunder, "Holder" shall not include the
Guarantor or any Affiliate of the Guarantor.

         "INDEMNIFIED  PERSON" means the Guarantee Trustee, any Affiliate of the
Guarantee Trustee, or any officers, directors, shareholders,  members, partners,
employees,  representatives,  nominees,  custodians  or agents of the  Guarantee
Trustee.

         "INDENTURE" means the Indenture dated as of the date hereof between the
Guarantor and  Wilmington  Trust  Company,  not in its  individual  capacity but
solely as trustee, and any indenture  supplemental thereto pursuant to which the
Debentures are to be issued to the institutional trustee of the Issuer.

         "ISSUER"  has the meaning set forth in the  opening  paragraph  to this
Guarantee.

         "LIQUIDATION  DISTRIBUTION" has the meaning set forth in the definition
of "Guarantee Payments" herein.

         "MAJORITY  IN  LIQUIDATION  AMOUNT  OF THE  CAPITAL  SECURITIES"  means
Holder(s) of outstanding  Capital  Securities,  voting together as a class,  but
separately  from the  holders  of  Common  Securities,  of more  than 50% of the
aggregate  liquidation amount (including the stated amount that would be paid on
redemption,  liquidation or otherwise,  plus accrued and unpaid Distributions to
the date upon  which the  voting  percentages  are  determined)  of all  Capital
Securities then outstanding.

         "OBLIGATIONS"  means  any  costs,  expenses  or  liabilities  (but  not
including  liabilities related to taxes) of the Issuer other than obligations of
the  Issuer to pay to  holders  of any Trust  Securities  the  amounts  due such
holders pursuant to the terms of the Trust Securities.

         "OFFICER'S   CERTIFICATE"   means,   with  respect  to  any  Person,  a
certificate  signed by one  Authorized  Officer of such  Person.  Any  Officer's
Certificate  delivered  with respect to compliance  with a condition or covenant
provided for in this Guarantee shall include:

            (a) a statement that the officer  signing the Officer's  Certificate
      has read the covenant or condition and the definitions relating thereto;

            (b) a brief  statement of the nature and scope of the examination or
      investigation  undertaken  by  the  officer  in  rendering  the  Officer's
      Certificate;
                                       3
<PAGE>

            (c) a  statement  that the  officer  has made  such  examination  or
      investigation as, in such officer's  opinion,  is necessary to enable such
      officer to express an informed  opinion as to whether or not such covenant
      or condition has been complied with; and

            (d) a statement as to whether,  in the opinion of the officer,  such
      condition or covenant has been complied with.

         "OPTIONAL REDEMPTION PRICE" has the meaning set forth in the Indenture.

         "PERSON" means a legal person,  including any individual,  corporation,
estate, partnership,  joint venture,  association,  joint stock company, limited
liability  company,  trust,  unincorporated  association,  or  government or any
agency or political subdivision thereof, or any other entity of whatever nature.

         "RESPONSIBLE OFFICER" means, with respect to the Guarantee Trustee, any
officer within the Corporate Trust Office of the Guarantee Trustee including any
Vice President, Assistant Vice President,  Secretary, Assistant Secretary or any
other officer of the Guarantee Trustee customarily  performing functions similar
to those  performed  by any of the above  designated  officers  and  also,  with
respect to a particular  corporate trust matter,  any other officer to whom such
matter is referred  because of that officer's  knowledge of and familiarity with
the particular subject.

         "SPECIAL EVENT" has the meaning set forth in the Indenture.

         "SPECIAL REDEMPTION PRICE" has the meaning set forth in the Indenture.

         "SUBSIDIARY"  means with respect to any Person,  (i) any corporation at
least a majority of the outstanding voting stock of which is owned,  directly or
indirectly,  by such  Person or by one or more of its  Subsidiaries,  or by such
Person and one or more of its Subsidiaries,  (ii) any general partnership, joint
venture or similar entity, at least a majority of the outstanding partnership or
similar  interests of which shall at the time be owned by such Person, or by one
or  more  of  its  Subsidiaries,  or by  such  Person  and  one or  more  of its
Subsidiaries  and (iii) any limited  partnership  of which such Person or any of
its  Subsidiaries  is a general  partner.  For the purposes of this  definition,
"voting stock" means shares,  interests,  participations or other equivalents in
the equity interest  (however  designated) in such Person having ordinary voting
power for the election of a majority of the  directors  (or the  equivalent)  of
such Person, other than shares,  interests,  participations or other equivalents
having such power only by reason of the occurrence of a contingency.

         "SUCCESSOR  GUARANTEE  TRUSTEE"  means a  successor  Guarantee  Trustee
possessing the qualifications to act as Guarantee Trustee under Section 3.1.

         "TRUST  SECURITIES"  means  the  Common  Securities  and   the  Capital
Securities.

                                       4
<PAGE>

                                   ARTICLE II

                        POWERS, DUTIES AND RIGHTS OF THE
                                GUARANTEE TRUSTEE

      SECTION 2.1. POWERS AND DUTIES OF THE GUARANTEE TRUSTEE.

      (a) This Guarantee shall be held by the Guarantee  Trustee for the benefit
of the Holders of the Capital  Securities,  and the Guarantee  Trustee shall not
transfer  this  Guarantee  to any Person  except a Holder of Capital  Securities
exercising  his or her  rights  pursuant  to  Section  4.4(b) or to a  Successor
Guarantee  Trustee on  acceptance  by such  Successor  Guarantee  Trustee of its
appointment to act as Successor Guarantee Trustee. The right, title and interest
of the Guarantee  Trustee shall  automatically  vest in any Successor  Guarantee
Trustee,  and such vesting and cessation of title shall be effective  whether or
not  conveyancing  documents  have been executed and  delivered  pursuant to the
appointment of such Successor Guarantee Trustee.

      (b) If an Event of Default actually known to a Responsible  Officer of the
Guarantee  Trustee has occurred and is continuing,  the Guarantee  Trustee shall
enforce this Guarantee for the benefit of the Holders of the Capital Securities.

      (c) The Guarantee  Trustee,  before the occurrence of any Event of Default
and after the curing or waiving of all Events of Default that may have occurred,
shall  undertake  to perform only such duties as are  specifically  set forth in
this  Guarantee,  and no  implied  covenants  shall be read into this  Guarantee
against the Guarantee  Trustee.  In case an Event of Default has occurred  (that
has not been cured or waived pursuant to Section 2.4) and is actually known to a
Responsible  Officer of the  Guarantee  Trustee,  the  Guarantee  Trustee  shall
exercise such of the rights and powers vested in it by this  Guarantee,  and use
the same degree of care and skill in its exercise  thereof,  as a prudent person
would exercise or use under the  circumstances  in the conduct of his or her own
affairs.

      (d) No  provision  of this  Guarantee  shall be  construed  to relieve the
Guarantee Trustee from liability for its own negligent action, its own negligent
failure to act, or its own willful misconduct, except that:

            (i) prior to the  occurrence  of any Event of Default  and after the
      curing or waiving of all such Events of Default that may have occurred:

                  (A) the duties and obligations of the Guarantee  Trustee shall
            be determined  solely by the express  provisions of this  Guarantee,
            and  the  Guarantee  Trustee  shall  not be  liable  except  for the
            performance of such duties and obligations as are  specifically  set
            forth in this  Guarantee,  and no implied  covenants or  obligations
            shall be read into this Guarantee against the Guarantee Trustee; and

                  (B) in the  absence of bad faith on the part of the  Guarantee
            Trustee,  the  Guarantee  Trustee may  conclusively  rely, as to the
            truth  of  the  statements  and  the  correctness  of  the  opinions
            expressed  therein,  upon any certificates or opinions  furnished to
            the Guarantee  Trustee and  conforming to the  requirements  of this
            Guarantee; but in the case of any such certificates or opinions that
            by any provision hereof are specifically required to be furnished to
            the Guarantee  Trustee,  the Guarantee Trustee shall be under a duty
            to examine the same to determine  whether or not they conform to the
            requirements of this Guarantee;

                                        5
<PAGE>

            (ii) the  Guarantee  Trustee  shall not be  liable  for any error of
      judgment  made in good faith by a  Responsible  Officer  of the  Guarantee
      Trustee,  unless it shall be proved that such  Responsible  Officer of the
      Guarantee  Trustee or the Guarantee  Trustee was negligent in ascertaining
      the pertinent facts upon which such judgment was made;

            (iii) the Guarantee  Trustee shall not be liable with respect to any
      action taken or omitted to be taken by it in good faith in accordance with
      the  written  direction  of the  Holders  of not less than a  Majority  in
      liquidation amount of the Capital Securities  relating to the time, method
      and place of conducting  any  proceeding  for any remedy  available to the
      Guarantee  Trustee,  or  relating  to the  exercise  of any trust or power
      conferred upon the Guarantee Trustee under this Guarantee; and

            (iv) no  provision of this  Guarantee  shall  require the  Guarantee
      Trustee  to  expend  or risk its own  funds or  otherwise  incur  personal
      financial  liability  in the  performance  of any of its  duties or in the
      exercise of any of its rights or powers,  if the  Guarantee  Trustee shall
      have reasonable  grounds for believing that the repayment of such funds is
      not reasonably assured to it under the terms of this Guarantee or security
      and indemnity,  reasonably satisfactory to the Guarantee Trustee,  against
      such risk or liability is not reasonably assured to it.

      SECTION 2.2 CERTAIN RIGHTS OF THE GUARANTEE TRUSTEE.

      (a) Subject to the provisions of Section 2.1:

            (i) The Guarantee Trustee may conclusively  rely, and shall be fully
      protected  in acting or  refraining  from  acting  upon,  any  resolution,
      certificate,  statement,  instrument,  opinion,  report, notice,  request,
      direction,  consent,  order,  bond,  debenture,  note,  other  evidence of
      indebtedness  or other paper or document  believed by it to be genuine and
      to have been signed, sent or presented by the proper party or parties.

            (ii) Any  direction  or act of the  Guarantor  contemplated  by this
      Guarantee shall be sufficiently evidenced by an Officer's Certificate.

            (iii)  Whenever,  in  the  administration  of  this  Guarantee,  the
      Guarantee  Trustee  shall  deem it  desirable  that a matter  be proved or
      established before taking, suffering or omitting any action hereunder, the
      Guarantee   Trustee   (unless  other   evidence  is  herein   specifically
      prescribed)  may,  in the  absence of bad faith on its part,  request  and
      conclusively  rely upon an Officer's  Certificate of the Guarantor  which,
      upon  receipt  of  such  request,  shall  be  promptly  delivered  by  the
      Guarantor.

            (iv)  The  Guarantee  Trustee  shall  have  no  duty  to  see to any
      recording,  filing or registration of any instrument (or any re-recording,
      refiling or re-registration thereof).

                                       6
<PAGE>

            (v) The Guarantee Trustee may consult with counsel of its selection,
      and the advice or opinion of such counsel  with  respect to legal  matters
      shall be full and complete  authorization and protection in respect of any
      action  taken,  suffered or omitted by it  hereunder  in good faith and in
      accordance with such advice or opinion. Such counsel may be counsel to the
      Guarantor or any of its  Affiliates  and may include any of its employees.
      The  Guarantee   Trustee  shall  have  the  right  at  any  time  to  seek
      instructions  concerning  the  administration  of this  Guarantee from any
      court of competent jurisdiction.

            (vi) The Guarantee  Trustee shall be under no obligation to exercise
      any of the rights or powers vested in it by this  Guarantee at the request
      or direction of any Holder,  unless such Holder shall have provided to the
      Guarantee Trustee such security and indemnity,  reasonably satisfactory to
      the Guarantee Trustee,  against the costs,  expenses (including attorneys'
      fees and  expenses  and the expenses of the  Guarantee  Trustee's  agents,
      nominees or custodians)  and  liabilities  that might be incurred by it in
      complying  with such  request  or  direction,  including  such  reasonable
      advances as may be requested by the Guarantee Trustee; PROVIDED,  HOWEVER,
      that  nothing  contained  in this  Section  2.2(a)(vi)  shall  relieve the
      Guarantee  Trustee,  upon the  occurrence  of an Event of Default,  of its
      obligation  to  exercise  the  rights  and  powers  vested  in it by  this
      Guarantee.

            (vii)  The  Guarantee  Trustee  shall  not  be  bound  to  make  any
      investigation  into  the  facts  or  matters  stated  in  any  resolution,
      certificate,  statement,  instrument,  opinion,  report, notice,  request,
      direction,  consent,  order,  bond,  debenture,  note,  other  evidence of
      indebtedness or other paper or document, but the Guarantee Trustee, in its
      discretion, may make such further inquiry or investigation into such facts
      or matters as it may see fit.

            (viii) The Guarantee Trustee may execute any of the trusts or powers
      hereunder or perform any duties hereunder either directly or by or through
      agents, nominees, custodians or attorneys, and the Guarantee Trustee shall
      not be  responsible  for any  misconduct  or negligence on the part of any
      agent or attorney appointed with due care by it hereunder.

            (ix)  Any  action  taken  by the  Guarantee  Trustee  or its  agents
      hereunder  shall  bind the  Holders  of the  Capital  Securities,  and the
      signature of the Guarantee Trustee or its agents alone shall be sufficient
      and effective to perform any such action. No third party shall be required
      to inquire as to the authority of the Guarantee Trustee to so act or as to
      its  compliance  with any of the terms and  provisions of this  Guarantee,
      both of which shall be conclusively  evidenced by the Guarantee  Trustee's
      or its agent's taking such action.

            (x) Whenever in the  administration  of this Guarantee the Guarantee
      Trustee  shall deem it desirable to receive  instructions  with respect to
      enforcing  any remedy or right or taking any other action  hereunder,  the
      Guarantee  Trustee  (i) may  request  instructions  from the  Holders of a
      Majority in liquidation amount of the Capital Securities, (ii) may refrain
      from enforcing such remedy or right or taking such other action until such
      instructions  are received,  and (iii) shall be protected in  conclusively
      relying on or acting in accordance with such instructions.

                                       7
<PAGE>

            (xi) The Guarantee Trustee shall not be liable for any action taken,
      suffered,  or omitted to be taken by it in good faith, without negligence,
      and reasonably believed by it to be authorized or within the discretion or
      rights or powers conferred upon it by this Guarantee.

      (b) No provision of this  Guarantee  shall be deemed to impose any duty or
obligation on the  Guarantee  Trustee to perform any act or acts or exercise any
right, power, duty or obligation conferred or imposed on it, in any jurisdiction
in which it  shall  be  illegal  or in  which  the  Guarantee  Trustee  shall be
unqualified or incompetent in accordance with applicable law to perform any such
act or acts or to  exercise  any  such  right,  power,  duty or  obligation.  No
permissive  power or  authority  available  to the  Guarantee  Trustee  shall be
construed to be a duty.

      SECTION 2.3 NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF GUARANTEE.

      The recitals  contained in this Guarantee shall be taken as the statements
of the Guarantor,  and the Guarantee Trustee does not assume any  responsibility
for their  correctness.  The Guarantee Trustee makes no representation as to the
validity or sufficiency of this Guarantee.

      SECTION 2.4 EVENTS OF DEFAULT; WAIVER.

      (a) An Event of Default under this  Guarantee  will occur upon the failure
of the Guarantor to perform any of its payment or other obligations hereunder.

      (b) The  Holders  of a  Majority  in  liquidation  amount  of the  Capital
Securities may, voting or consenting as a class, on behalf of the Holders of all
of the Capital Securities, waive any past Event of Default and its consequences.
Upon such waiver,  any such Event of Default shall cease to exist,  and shall be
deemed to have been  cured,  for every  purpose of this  Guarantee,  but no such
waiver shall extend to any  subsequent  or other  default or Event of Default or
impair any right consequent thereon.

      SECTION 2.5 EVENTS OF DEFAULT; NOTICE.

      (a) The Guarantee Trustee shall, within 90 days after the occurrence of an
Event of Default,  transmit by mail, first class postage prepaid, to the Holders
of the Capital  Securities and the  Guarantor,  notices of all Events of Default
actually known to a Responsible  Officer of the Guarantee  Trustee,  unless such
defaults  have been cured before the giving of such notice,  PROVIDED,  HOWEVER,
that the Guarantee  Trustee shall be protected in withholding such notice if and
so long  as a  Responsible  Officer  of the  Guarantee  Trustee  in  good  faith
determines  that the  withholding  of such  notice  is in the  interests  of the
Holders of the Capital Securities.

      (b) The  Guarantee  Trustee  shall not be deemed to have  knowledge of any
Event of Default unless the Guarantee Trustee shall have received written notice
from the Guarantor or a Holder of the Capital  Securities (except in the case of
a payment  default),  or a Responsible  Officer of the Guarantee Trustee charged
with the  administration  of this Guarantee shall have obtained actual knowledge
thereof.

                                       8
<PAGE>

                                  ARTICLE III

                                GUARANTEE TRUSTEE

      SECTION 3.1 GUARANTEE TRUSTEE; ELIGIBILITY.

      (a) There shall at all times be a Guarantee Trustee which shall:

                  (i) not be an Affiliate of the Guarantor, and

                  (ii)  be  a  banking   corporation  or  national   association
            organized and doing  business under the laws of the United States of
            America  or any State or  Territory  thereof or of the  District  of
            Columbia, or Person authorized under such laws to exercise corporate
            trust  powers,  having a combined  capital  and  surplus of at least
            fifty million U.S. dollars ($50,000,000), and subject to supervision
            or  examination  by  Federal,  State,  Territorial  or  District  of
            Columbia  authority.  If such  corporation  or national  association
            publishes reports of condition at least annually, pursuant to law or
            to  the  requirements  of the  supervising  or  examining  authority
            referred  to  above,   then,   for  the  purposes  of  this  Section
            3.1(a)(ii),  the combined capital and surplus of such corporation or
            national  association shall be deemed to be its combined capital and
            surplus  as set  forth in its most  recent  report of  condition  so
            published.

      (b) If at any time the Guarantee  Trustee shall cease to be eligible to so
act under Section 3.1(a),  the Guarantee Trustee shall immediately resign in the
manner and with the effect set forth in Section 3.2(c).

      (c)  If the  Guarantee  Trustee  has or  shall  acquire  any  "conflicting
interest"  within the meaning of Section 310(b) of the Trust  Indenture Act, the
Guarantee  Trustee shall either  eliminate such interest or resign to the extent
and in the manner provided by, and subject to this Guarantee.

SECTION 3.2 APPOINTMENT, REMOVAL AND RESIGNATION OF THE GUARANTEE TRUSTEE.

      (a) Subject to Section 3.2(b),  the Guarantee  Trustee may be appointed or
removed  without  cause at any time by the  Guarantor  except during an Event of
Default.

      (b) The Guarantee  Trustee shall not be removed in accordance with Section
3.2(a) until a Successor  Guarantee  Trustee has been appointed and has accepted
such  appointment by written  instrument  executed by such  Successor  Guarantee
Trustee and delivered to the Guarantor.

      (c) The  Guarantee  Trustee  appointed to office shall hold office until a
Successor  Guarantee  Trustee shall have been  appointed or until its removal or
resignation.  The  Guarantee  Trustee may resign from office  (without  need for
prior or subsequent  accounting)  by an  instrument  in writing  executed by the
Guarantee  Trustee and delivered to the Guarantor,  which  resignation shall not
take effect  until a Successor  Guarantee  Trustee  has been  appointed  and has
accepted such appointment by an instrument in writing executed by such Successor
Guarantee  Trustee and delivered to the  Guarantor  and the resigning  Guarantee
Trustee.

                                       9
<PAGE>

      (d) If no  Successor  Guarantee  Trustee  shall  have been  appointed  and
accepted  appointment  as  provided  in this  Section  3.2  within 60 days after
delivery of an  instrument  of removal or  resignation,  the  Guarantee  Trustee
resigning or being removed may petition any court of competent  jurisdiction for
appointment of a Successor  Guarantee Trustee.  Such court may thereupon,  after
prescribing  such  notice,  if any, as it may deem  proper,  appoint a Successor
Guarantee Trustee.

      (e) No Guarantee  Trustee shall be liable for the acts or omissions to act
of any Successor Guarantee Trustee.

      (f) Upon  termination  of this  Guarantee or removal or resignation of the
Guarantee  Trustee  pursuant to this Section 3.2, the Guarantor shall pay to the
Guarantee  Trustee all amounts owing to the Guarantee Trustee under Sections 7.2
and 7.3 accrued to the date of such termination, removal or resignation.

                                   ARTICLE IV

                                    GUARANTEE

      SECTION 4.1 GUARANTEE.

      (a) The Guarantor irrevocably and unconditionally agrees to pay in full to
the Holders the Guarantee Payments (without  duplication of amounts  theretofore
paid by the  Issuer),  as and when due,  regardless  of any defense  (except the
defense of payment by the  Issuer),  right of set-off or  counterclaim  that the
Issuer  may have or  assert.  The  Guarantor's  obligation  to make a  Guarantee
Payment  may be  satisfied  by direct  payment  of the  required  amounts by the
Guarantor  to the  Holders or by causing  the Issuer to pay such  amounts to the
Holders.

      (b) The Guarantor  hereby also agrees to assume any and all Obligations of
the Issuer and in the event any such  Obligation  is not so assumed,  subject to
the  terms  and  conditions   hereof,   the  Guarantor  hereby  irrevocably  and
unconditionally  guarantees to each  Beneficiary  the full payment,  when and as
due,  of any and  all  Obligations  to such  Beneficiaries.  This  Guarantee  is
intended  to be  for  the  benefit  of,  and  to be  enforceable  by,  all  such
Beneficiaries, whether or not such Beneficiaries have received notice hereof.

      SECTION 4.2 WAIVER OF NOTICE AND DEMAND.

      The Guarantor  hereby waives notice of acceptance of this Guarantee and of
any liability to which it applies or may apply, presentment, demand for payment,
any right to require a proceeding  first  against the Issuer or any other Person
before proceeding against the Guarantor,  protest, notice of nonpayment,  notice
of dishonor, notice of redemption and all other notices and demands.

      SECTION 4.3 OBLIGATIONS NOT AFFECTED.

         The  obligations,  covenants,  agreements  and duties of the  Guarantor
under this  Guarantee  shall in no way be  affected or impaired by reason of the
happening from time to time of any of the following:

                                       10
<PAGE>

      (a) the  release or  waiver,  by  operation  of law or  otherwise,  of the
performance  or  observance  by the Issuer of any express or implied  agreement,
covenant,  term or condition  relating to the Capital Securities to be performed
or observed by the Issuer;

      (b) the  extension  of time for the  payment  by the  Issuer of all or any
portion of the  Distributions,  Optional  Redemption Price,  Special  Redemption
Price, Liquidation Distribution or any other sums payable under the terms of the
Capital  Securities  or the extension of time for the  performance  of any other
obligation under,  arising out of or in connection with, the Capital  Securities
(other  than an  extension  of  time  for  payment  of  Distributions,  Optional
Redemption Price,  Special Redemption Price,  Liquidation  Distribution or other
sum payable that results from the  extension of any interest  payment  period on
the Debentures or any extension of the maturity date of the Debentures permitted
by the Indenture);

      (c) any failure,  omission,  delay or lack of diligence on the part of the
Holders to enforce,  assert or exercise  any right,  privilege,  power or remedy
conferred on the Holders pursuant to the terms of the Capital Securities, or any
action on the part of the Issuer granting indulgence or extension of any kind;

      (d) the voluntary or  involuntary  liquidation,  dissolution,  sale of any
collateral, receivership,  insolvency, bankruptcy, assignment for the benefit of
creditors, reorganization,  arrangement, composition or readjustment of debt of,
or other similar proceedings  affecting,  the Issuer or any of the assets of the
Issuer;

      (e) any invalidity of, or defect or deficiency in, the Capital Securities;

      (f) the  settlement or compromise of any obligation  guaranteed  hereby or
hereby incurred; or

      (g) any other  circumstance  whatsoever that might otherwise  constitute a
legal or equitable  discharge or defense of a guarantor,  it being the intent of
this  Section  4.3 that the  obligations  of the  Guarantor  hereunder  shall be
absolute and unconditional under any and all circumstances.

         There  shall be no  obligation  of the  Holders  to give  notice to, or
obtain  consent of, the  Guarantor  with respect to the  happening of any of the
foregoing.

      SECTION 4.4 RIGHTS OF HOLDERS.

      (a) The  Holders  of a  Majority  in  liquidation  amount  of the  Capital
Securities have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Guarantee  Trustee in respect of this
Guarantee  or to direct the  exercise of any trust or power  conferred  upon the
Guarantee  Trustee under this  Guarantee;  PROVIDED,  HOWEVER,  that (subject to
Section 2.1) the Guarantee Trustee shall have the right to decline to follow any
such direction if the Guarantee Trustee being advised by counsel determines that
the  action  or  proceeding  so  directed  may not  lawfully  be taken or if the
Guarantee Trustee in good faith by its board of directors or trustees, executive
committees  or a trust  committee of directors  or trustees  and/or  Responsible
Officers  shall  determine  that the action or  proceedings  so  directed  would
involve the Guarantee Trustee in personal liability.

      (b) Any Holder of Capital  Securities  may  institute  a legal  proceeding
directly  against the Guarantor to enforce the Guarantee  Trustee's rights under
this Guarantee, without first instituting a legal proceeding against the Issuer,
the  Guarantee  Trustee or any other Person.  The Guarantor  waives any right or
remedy to require that any such action be brought first against the Issuer,  the
Guarantee Trustee or any other Person before so proceeding  directly against the
Guarantor.

                                       11
<PAGE>

      SECTION 4.5 GUARANTEE OF PAYMENT.

      This Guarantee creates a guarantee of payment and not of collection.

      SECTION 4.6 SUBROGATION.

      The Guarantor shall be subrogated to all (if any) rights of the Holders of
Capital  Securities  against the Issuer in respect of any  amounts  paid to such
Holders by the  Guarantor  under this  Guarantee;  PROVIDED,  however,  that the
Guarantor shall not (except to the extent  required by applicable  provisions of
law) be entitled to enforce or exercise  any right that it may acquire by way of
subrogation or any indemnity,  reimbursement or other agreement, in all cases as
a result of payment  under this  Guarantee,  if, after giving effect to any such
payment,  any amounts  are due and unpaid  under this  Guarantee.  If any amount
shall be paid to the  Guarantor  in  violation of the  preceding  sentence,  the
Guarantor  agrees to hold such  amount in trust for the  Holders and to pay over
such amount to the Holders.

      SECTION 4.7 INDEPENDENT OBLIGATIONS.

      The Guarantor  acknowledges that its obligations hereunder are independent
of the obligations of the Issuer with respect to the Capital Securities and that
the  Guarantor  shall be liable as  principal  and as debtor  hereunder  to make
Guarantee Payments pursuant to the terms of this Guarantee  notwithstanding  the
occurrence of any event referred to in subsections  (a) through (g),  inclusive,
of Section 4.3 hereof.

      SECTION 4.8 ENFORCEMENT BY A BENEFICIARY.

      A Beneficiary  may enforce the  obligations of the Guarantor  contained in
Section 4.1(b) directly against the Guarantor and the Guarantor waives any right
or remedy to require that any action be brought  against the Issuer or any other
person or entity before proceeding against the Guarantor. The Guarantor shall be
subrogated  to all  rights  (if any) of any  Beneficiary  against  the Issuer in
respect of any amounts paid to the  Beneficiaries  by the  Guarantor  under this
Guarantee; PROVIDED, HOWEVER, that the Guarantor shall not (except to the extent
required by mandatory  provisions of law) be entitled to enforce or exercise any
rights that it may acquire by way of subrogation or any indemnity, reimbursement
or other agreement, in all cases as a result of payment under this Guarantee, if
at the time of any such payment,  and after giving  effect to such payment,  any
amounts are due and unpaid under this Guarantee.

                                       12
<PAGE>

                                   ARTICLE V

                    LIMITATION OF TRANSACTIONS; SUBORDINATION

      SECTION 5.1 LIMITATION OF TRANSACTIONS.

      So long as any Capital Securities remain  outstanding,  if (a) there shall
have occurred and be  continuing  an Event of Default or a Declaration  Event of
Default or (b) the Guarantor shall have selected an Extension Period as provided
in the  Declaration  and such  period,  or any  extension  thereof,  shall  have
commenced and be continuing,  then the Guarantor  shall not and shall not permit
any Affiliate of the Guarantor controlled by the Guarantor to (x) declare or pay
any  dividends or  distributions  on, or redeem,  purchase,  acquire,  or make a
liquidation  payment with respect to, any of the Guarantor's or such Affiliate's
capital  stock  (other  than  payments  of  dividends  or  distributions  to the
Guarantor or a Subsidiary of the Guarantor) or make any guarantee  payments with
respect to the foregoing; or (y) make any payment of principal of or interest or
premium,  if any, on or repay,  repurchase or redeem any debt  securities of the
Guarantor or any  Affiliate of the Guarantor  controlled  by the Guarantor  that
rank PARI PASSU in all  respects  with or junior in interest  to the  Debentures
(other  than,  with  respect to  clauses  (x) and (y)  above,  (i)  repurchases,
redemptions or other acquisitions of shares of capital stock of the Guarantor or
any  Subsidiary  of the Guarantor in connection  with any  employment  contract,
benefit plan or other similar arrangement with or for the benefit of one or more
employees,  officers,  directors or  consultants,  in connection with a dividend
reinvestment  or  stockholder  stock  purchase  plan or in  connection  with the
issuance of capital stock of the Guarantor or of such  Subsidiary (or securities
convertible  into or exercisable for such capital stock) as  consideration in an
acquisition  transaction  entered into prior to the  occurrence  of the Event of
Default,  Declaration Event of Default or Extension Period, as applicable,  (ii)
as a  result  of any  exchange  or  conversion  of any  class or  series  of the
Guarantor's  capital  stock  (or  any  capital  stock  of a  Subsidiary  of  the
Guarantor) for any class or series of the  Guarantor's  capital stock (or in the
case of a Subsidiary of the Guarantor,  any class or series of such Subsidiary's
capital stock) or of any class or series of the Guarantor's indebtedness for any
class or series of the Guarantor's capital stock (or in the case of indebtedness
of a Subsidiary of the  Guarantor,  of any class or series of such  Subsidiary's
indebtedness for any class or series of such Subsidiary's  capital stock), (iii)
the purchase of fractional  interests in shares of the Guarantor's capital stock
(or  the  capital  stock  of a  Subsidiary  of the  Guarantor)  pursuant  to the
conversion or exchange  provisions  of such capital stock or the security  being
converted or exchanged,  (iv) any  declaration of a dividend in connection  with
any  stockholders'  rights  plan,  or the  issuance  of  rights,  stock or other
property under any stockholders' rights plan, or the redemption or repurchase of
rights  pursuant  thereto,  (v) any  dividend  in the form of  stock,  warrants,
options or other  rights  where the dividend  stock or the stock  issuable  upon
exercise of such warrants,  options or other rights is the same stock as that on
which the  dividend  is being  paid or ranks  PARI  PASSU with or junior to such
stock and any cash  payments in lieu of  fractional  shares issued in connection
therewith, or (vi) payments under this Guarantee).

      SECTION 5.2 RANKING.

      This  Guarantee will  constitute an unsecured  obligation of the Guarantor
and will rank  subordinate  and junior in right of payment  to all  present  and
future Senior  Indebtedness (as defined in the Indenture) of the Guarantor.  The
Guarantor's  obligations in respect of this Guarantee shall rank pari passu with
the Guarantor's obligations under (i) the Guarantee Agreement by and between the
Guarantor and U.S. Bank National Association,  dated as of May 15, 2003 and (ii)
the  Guarantor's  obligations  under the Guarantee  Agreement by and between the
Guarantor  and JP Morgan Chase Bank,  dated as of September  30, 2003.  By their
acceptance  thereof,  each Holder of Capital  Securities agrees to the foregoing
provisions of this Guarantee and the other terms set forth herein.

                                       13
<PAGE>

      The right of the Guarantor to participate in any distribution of assets of
any of its Subsidiaries upon any such Subsidiary's liquidation or reorganization
or otherwise  is subject to the prior  claims of  creditors of that  Subsidiary,
except to the extent the  Guarantor  may itself be  recognized  as a creditor of
that Subsidiary.  Accordingly,  the Guarantor's obligations under this Guarantee
will be effectively  subordinated to all existing and future  liabilities of the
Guarantor's  Subsidiaries,  and claimants  should look only to the assets of the
Guarantor for payments  hereunder.  This Guarantee does not limit the incurrence
or issuance  of other  secured or  unsecured  debt of the  Guarantor,  including
Senior Indebtedness of the Guarantor, under any indenture that the Guarantor may
enter into in the future or otherwise.

                                   ARTICLE VI

                                   TERMINATION

      SECTION 6.1 TERMINATION.

      This Guarantee shall terminate as to the Capital  Securities (i) upon full
payment of the  Optional  Redemption  Price or Special  Redemption  Price of all
Capital  Securities then  outstanding,  (ii) upon the distribution of all of the
Debentures  to the Holders of all of the Capital  Securities  or (iii) upon full
payment  of  the  amounts  payable  in  accordance  with  the  Declaration  upon
dissolution of the Issuer.  This Guarantee will continue to be effective or will
be  reinstated,  as the  case  may be,  if at any time  any  Holder  of  Capital
Securities must restore payment of any sums paid under the Capital Securities or
under this Guarantee.

                                  ARTICLE VII

                                 INDEMNIFICATION

SECTION 7.1 EXCULPATION.

      (a) No Indemnified  Person shall be liable,  responsible or accountable in
damages or otherwise to the Guarantor or any Covered Person for any loss, damage
or claim incurred by reason of any act or omission  performed or omitted by such
Indemnified  Person in good faith in  accordance  with this  Guarantee  and in a
manner that such Indemnified  Person reasonably  believed to be within the scope
of the authority  conferred on such  Indemnified  Person by this Guarantee or by
law, except that an Indemnified Person shall be liable for any such loss, damage
or claim incurred by reason of such Indemnified  Person's  negligence or willful
misconduct with respect to such acts or omissions.

                                       14
<PAGE>

      (b) An  Indemnified  Person  shall be fully  protected  in relying in good
faith upon the records of the Issuer or the Guarantor and upon such information,
opinions,  reports or statements presented to the Issuer or the Guarantor by any
Person as to matters the Indemnified Person reasonably  believes are within such
other Person's  professional  or expert  competence and who, if selected by such
Indemnified  Person,  has been selected with reasonable care by such Indemnified
Person, including information,  opinions,  reports or statements as to the value
and amount of the  assets,  liabilities,  profits,  losses,  or any other  facts
pertinent  to the  existence  and amount of assets from which  Distributions  to
Holders of Capital Securities might properly be paid.

      SECTION 7.2 INDEMNIFICATION.

      (a) The Guarantor agrees to indemnify each Indemnified  Person for, and to
hold each  Indemnified  Person harmless  against,  any and all loss,  liability,
damage,  claim or expense incurred without  negligence or willful  misconduct on
the part of the  Indemnified  Person,  arising out of or in connection  with the
acceptance or administration of the trust or trusts  hereunder,  including,  but
not  limited to, the costs and  expenses  (including  reasonable  legal fees and
expenses) of the Indemnified Person defending itself against,  or investigating,
any claim or liability in connection  with the exercise or performance of any of
the Indemnified Person's powers or duties hereunder. The obligation to indemnify
as set forth in this Section 7.2 shall survive the resignation or removal of the
Guarantee Trustee and the termination of this Guarantee.

      (b) Promptly after receipt by an Indemnified Person under this Section 7.2
of notice of the commencement of any action,  such Indemnified Person will, if a
claim in respect  thereof is to be made against the Guarantor under this Section
7.2,  notify  the  Guarantor  in writing of the  commencement  thereof;  but the
failure so to notify the  Guarantor  (i) will not  relieve  the  Guarantor  from
liability  under paragraph (a) above unless and to the extent that the Guarantor
did  not  otherwise  learn  of such  action  and  such  failure  results  in the
forfeiture  by the  Guarantor of  substantial  rights and defenses and (ii) will
not, in any event, relieve the Guarantor from any obligations to any Indemnified
Person  other than the  indemnification  obligation  provided in  paragraph  (a)
above.  The Guarantor  shall be entitled to appoint  counsel of the  Guarantor's
choice at the  Guarantor's  expense to represent the  Indemnified  Person in any
action for which  indemnification  is sought (in which case the Guarantor  shall
not thereafter be responsible for the fees and expenses of any separate  counsel
retained  by the  Indemnified  Person or  Persons  except  as set forth  below);
PROVIDED,  HOWEVER,  that such counsel shall be REASONABLY  satisfactory  to the
Indemnified Person.  Notwithstanding the Guarantor's election to appoint counsel
to represent the Guarantor in an action,  the Indemnified  Person shall have the
right to employ separate counsel  (including  local counsel),  and the Guarantor
shall bear the reasonable  fees,  costs and expenses of such separate counsel if
(i) the use of counsel  chosen by the  Guarantor  to represent  the  Indemnified
Person would  present such counsel with a conflict of interest,  (ii) the actual
or  potential  defendants  in, or targets of, any such action  include  both the
Indemnified  Person and the  Guarantor  and the  Indemnified  Person  shall have
reasonably  concluded  that there may be legal  defenses  available to it and/or
other  Indemnified  Person(s)  which are  different  from or additional to those
available to the Guarantor,  (iii) the Guarantor shall not have employed counsel
satisfactory  to the  Indemnified  Person to represent  the  Indemnified  Person
within a reasonable  time after notice of the institution of such action or (iv)
the Guarantor shall authorize the Indemnified  Person to employ separate counsel
at the  expense of the  Guarantor.  The  Guarantor  will not,  without the prior
written consent of the Indemnified  Persons,  settle or compromise or consent to
the entry of any  judgment  with  respect to any  pending or  threatened  claim,
action,  suit or proceeding in respect of which  indemnification or contribution
may be sought  hereunder  (whether or not the Indemnified  Persons are actual or
potential parties to such claim or action) unless such settlement, compromise or
consent  includes an unconditional  release of each Indemnified  Person from all
liability arising out of such claim, action, suit or proceeding.

                                       15
<PAGE>

      SECTION 7.3 COMPENSATION; REIMBURSEMENT OF EXPENSES.

      The Guarantor agrees:

      (a) to pay to the  Guarantee  Trustee from time to time such  compensation
for all services  rendered by it  hereunder  as the parties  shall agree to from
time to time (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust); and

      (b) except as  otherwise  expressly  provided  herein,  to  reimburse  the
Guarantee  Trustee upon request for all reasonable  expenses,  disbursements and
advances  incurred  or made  by it in  accordance  with  any  provision  of this
Guarantee   (including  the  reasonable   compensation   and  the  expenses  and
disbursements of its agents and counsel), except any such expense,  disbursement
or advance as may be attributable to its negligence or willful misconduct.

      The  provisions  of this  Section  7.3 shall  survive the  resignation  or
removal of the Guarantee Trustee and the termination of this Guarantee.

                                  ARTICLE VIII

                                  MISCELLANEOUS

      SECTION 8.1 SUCCESSORS AND ASSIGNS.

      All guarantees and agreements  contained in this Guarantee  shall bind the
successors,  assigns,  receivers,  trustees and representatives of the Guarantor
and shall inure to the benefit of the  Holders of the  Capital  Securities  then
outstanding.  Except  in  connection  with any  merger or  consolidation  of the
Guarantor  with or into  another  entity or any sale,  transfer  or lease of the
Guarantor's  assets to another  entity,  in each case,  to the extent  permitted
under the  Indenture,  the  Guarantor  may not assign its rights or delegate its
obligations under this Guarantee without the prior approval of the Holders of at
least a Majority in liquidation amount of the Capital Securities.

      SECTION 8.2 AMENDMENTS.

      Except with respect to any changes that do not adversely affect the rights
of Holders of the Capital  Securities in any material  respect (in which case no
consent of Holders will be  required),  this  Guarantee may be amended only with
the prior  approval of the  Holders of not less than a Majority  in  liquidation
amount of the  Capital  Securities  and the  Guarantor.  The  provisions  of the
Declaration  with  respect  to  amendments  thereof  apply to the giving of such
approval.

                                       16
<PAGE>

      SECTION 8.3 NOTICES.

      All notices  provided  for in this  Guarantee  shall be in  writing,  duly
signed by the party giving such notice,  and shall be  delivered,  telecopied or
mailed by first class mail, as follows:

      (a) If given to the Guarantee Trustee,  at the Guarantee Trustee's mailing
address set forth below (or such other address as the Guarantee Trustee may give
notice of to the Holders of the Capital Securities and the Guarantor):

                  Wilmington Trust Company
                  Rodney Square North
                  1100 North Market Street
                  Wilmington, Delaware 19890-1600
                  Attention: Corporate Trust Administration
                  Telecopy:  302-636-4140

      (b) If given to the  Guarantor,  at the  Guarantor's  mailing  address set
forth below (or such other  address as the  Guarantor  may give notice of to the
Holders of the Capital Securities and to the Guarantee Trustee):

                  Tower Group, Inc.
                  120 Broadway, 14th Floor
                  New York, New York 10271
                  Attention:  Francis M. Colalucci
                  Telecopy:  212-271-5492

      (c) If given to any Holder of the Capital  Securities,  at the address set
forth on the books and records of the Issuer.

         All such  notices  shall be deemed to have been given when  received in
person,  telecopied  with  receipt  confirmed,  or mailed by first  class  mail,
postage  prepaid,  except that if a notice or other document is refused delivery
or cannot be  delivered  because  of a changed  address  of which no notice  was
given,  such notice or other  document shall be deemed to have been delivered on
the date of such refusal or inability to deliver.

      SECTION 8.4 BENEFIT.

         This  Guarantee  is solely for the  benefit of the  Beneficiaries  and,
subject to Section  2.1(a),  is not  separately  transferable  from the  Capital
Securities.

      SECTION 8.5 GOVERNING LAW.

         PURSUANT TO SECTION 5-1401 OF THE GENERAL  OBLIGATIONS LAW OF THE STATE
OF NEW YORK,  THIS GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED
IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.

                                       17
<PAGE>

SECTION 8.6       COUNTERPARTS.

         This  Guarantee  may be executed in one or more  counterparts,  each of
which shall be an original, but all of which taken together shall constitute one
and the same instrument.

      SECTION 8.7 SEPARABILITY.

      In case one or more of the provisions  contained in this  Guarantee  shall
for any reason be held to be invalid,  illegal or  unenforceable in any respect,
such  invalidity,  illegality  or  unenforceability  shall not  affect any other
provisions of this  Guarantee,  but this Guarantee shall be construed as if such
invalid or illegal or unenforceable provision had never been contained herein.

                     SIGNATURES APPEAR ON THE FOLLOWING PAGE

                                       18
<PAGE>

         THIS GUARANTEE is executed as of the day and year first above written.

                  Tower Group, Inc., as Guarantor

                  By:        /s/  Michael H. Lee
                           ------------------------------------------
                           Name:     Michael H. Lee
                           Title:       President and CEO

                  WILMINGTON TRUST COMPANY, as Guarantee Trustee

                  By:         /s/  C. Slaybaugh
                           ------------------------------------------
                           Name:     Christopher J. Slaybaugh
                           Title:       Financial Services Officer

                                       19

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00076-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00076-of-00352.parquet"}]]