Tower 2009AR Dated 31 Mar 2010

2 0 0 9 a n n u a l r e p o r t

Dear Stockholders, Employees and Business Partners:

In 2009, Tower Group marked our fifth full year as a public company, and

we continued to build on the strong track record of profitability that we

have maintained since we went public in October 2004. While prevailing

macroeconomic conditions continued to constrain demand for insurance

products, and competition within our industry intensified, we once again

produced strong operating results. We also seized emerging opportunities

within our market to make four strategic acquisitions that increased our scale,

broadened our reach and expanded our capabilities. Together, these achievements

enabled Tower to enter 2010 as a larger, stronger and more diversified company

that is well positioned for continued success.

page 1

A Five-Year Record of Strong Results In 2008, we responded to financial turmoil within the global economy by developing a strategy to significantly increase our financial size, strengthen our balance sheet and achieve the diversification required to manage changing market cycles more effectively. In 2009, we successfully executed this strategy by completing four acquisitions while continuing to deliver strong operating performance. As a result, we increased our stockholders’ equity from $335 million at year-end 2008 to $1.1 billion at year-end 2009, while driving our book value per share from $14.36 to $23.35 over the same period. We also increased the gross premiums written and managed by our insurance company subsidiaries from $805 million in 2008 to $1.1 billion in 2009. We achieved this while maintaining our underwriting discipline, as reflected by the 88.3 percent combined ratio that we posted for the year. We also grew our operating income by 79.4 percent to $119.8 million during 2009, up from $66.8 million in 2008, and we posted an operating return on equity of 15.2 percent for the year, significantly outperforming our industry peers.

As we reflect on completing five full years as a public company, we are proud of what we have achieved and the value that we have created for our stockholders. From 2005 to 2009, we have increased operating earnings at a compounded annual growth rate of 55.2 percent, produced an average operating return on equity of 19.2 percent, and achieved an average combined ratio of 86 percent. We also increased our stockholders’ equity from $119 million at the time of our initial public offering to $1.1 billion at year-end 2009. Over the same period, our book value per share rose from $6.22 to $23.35, while the market price of our stock appreciated from $8.50 to $23.41 per share. In addition to achieving our finan-cial goals, our efforts over the last five years have enabled us to realize our founding vision for Tower: to become a market leader in our industry, recognized for profitability, quality, efficiency and innovation.

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$334

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$421

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$608

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$805

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$1,082

TOTAL PREMIUMS*($ in mi l l ions)

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$21

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$37

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$56

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$67

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$120

OPERATING INCOME($ in mi l l ions)

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$145

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$224

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$309

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$335

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$1,051

STOCKHOLDERS’ EQUITY($ in mi l l ions) STOCKHOLDERS’ EQUITY

($ in mi l l ions)

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TOTAL PREMIUMS($ in mi l l ions)

*Gross premiums written through our insurance subsidiaries and produced as managing general agent on behalf of other insurance companies.

*2009 estimated for P&C industry dataSource: A.M. Best Company for P&C industry data

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$2.84

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$3.03

OPERATING EARNINGS PER SHARE

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$7.29

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$9.23

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$13.34

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$14.36

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$23.35

BOOK VALUE PER SHARE

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15.1%

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22.2%

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22.6%

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15.2%

OPERATING RETURN ON EQUITY OPERATING

RETURN ON EQUITY

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55.2%

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51.7%

77.1%

’09*

55.6%

72.5%

UNDERWRITING PROFITABILITY(Net Loss Rat io 2005-2009) OPERATING EARNINGS PER SHARE

Tower Combined Segments P&C Industry

page 2

Seizing OpportunityThroughout our history, we have consistently found ways to take advantage of the business opportunities that emerge during different phases of our industry’s market cycle. In the current competitive market environment and challenging economic climate, most companies, including Tower, are seeing limited organic growth opportunities. Unlike the 88.3 percent combined ratio that Tower has achieved, however, the 2009 combined ratios for many companies in our industry were near or in excess of 100 percent. As a result, we are seeing a growing pipeline of companies making strategic decisions to sell or exit certain lines of business at more reasonable valuation levels than we have seen in quite some time. Tower is uniquely positioned to take advantage of these opportuni-ties, and we have a proven track record of successfully acquiring and integrat-ing insurance companies to expand our diversified business platform. After acquiring these companies, we have consistently succeeded in improving their profitability by cross-selling products, lowering expenses by taking advantage of our scale and automation capabilities, and eliminating unprofitable business to reduce loss ratios.

During the past year, we continued to successfully execute our acquisition strategy, advancing our goal of building Tower into a diversified national insurance company capable of delivering a broad range of products to diverse customer groups using multiple distribution channels. In February 2009, we completed the acquisition of CastlePoint Holdings, Ltd. to establish our specialty business and to access capital to finance our acquisitions. Also in February 2009, we acquired the Hermitage Insurance Group, which expanded our capabilities in the excess and surplus lines market and established offices for us in Atlanta, Georgia and Mobile, Alabama. In June 2009, we announced our agreement to acquire Specialty Underwriters’ Alliance, Inc., a transaction that we successfully closed in November 2009. This acquisition has created a separate specialty profit center for Tower, which allows us to take advantage of a strong pipeline of specialty opportunities. It has also enabled us to establish a Midwest regional office to support our continued geographic expansion in the U.S. In October 2009, we acquired the renewal rights to the workers’ compensation business of AequiCap Program Administrators, positioning us to further expand our presence in the Southeast region. This business represents $40 million in annual premiums and is comprised of small, low- to moderate-hazard workers’ compensation policies in Florida that are consistent with Tower’s current underwriting guidelines.

As we move into 2010, we are continuing to seize attractive market opportunities that enable us to execute our acquisition strategy. In February, we announced the acquisition of OneBeacon Insurance Group’s Personal Lines Division, a transaction we expect to complete during the second quarter of this year. This acquisition is expected to create a sepa-rate personal lines business segment with annualized premiums written and managed of approximately $700 million when combined with Tower’s existing personal lines business, providing the potential to significantly broaden Tower’s mix of product lines and distribution channels in 2010 and beyond. The acquisition is also expected to give us access to more than 900 retail agencies in the Northeast, approximately 550 of which are new to us, and to expand Tower’s suite of personal lines insurance products to include private passenger automobile, homeowners, umbrella and a personal package product, which provides customers with a single policy for all of their homeowners, auto and umbrella needs.

Moving AheadAs I look back on 2009—and on the past five years—I am proud not only of the financial and business milestones we have passed, but also of the people who were behind our success: from the loyal and dedicated team at Tower, to our network

We are rapidly building Tower into a diversified national insurance company capable of delivering a broad range of products to diverse customer groups using multiple distribution channels.

page 3

of producers across the country. Our employees stand out because they are true to our mission, and because they live our core values, bringing passion, hard work and teamwork to all of our efforts, and enabling us to realize our vision for Tower. Our loyal network of retail, wholesale and program underwriting agents embraces our business model and advances our commitment to driving their success by working with us to deliver products and services that respond to changing market conditions. Our success in 2009 and during the past five years would not have been possible without the contributions of all of these individuals.

As we look ahead to the next five years, we remain cautious, fully recognizing that the economy and the property and casualty insurance market will continue to present challenges. In response, we have already made adjustments to our business plan to enable us to proactively manage market-cycle risks. This included revising our loss ratio estimates for 2009 and 2010 to reflect continued soft market conditions, especially in certain commercial business market segments. We are confident that this measure will position Tower to stay ahead of market trends and deliver long-term value. In 2010, we plan to place even greater emphasis on managing our risk through diversification, underwriting and pricing dis-cipline. Despite the challenges that are inherent in our marketplace, we remain optimistic about our future—a result of our continued profitability relative to our industry peers, combined with our ability to be nimble and opportunistic, especially on the acquisitions front. We expect that this latter attribute will continue to be a significant competitive advantage for Tower in the months ahead as adverse market conditions inevitably accelerate change in our industry.

As always, we are prepared not only to meet the challenges ahead but also to identify ways to use those challenges to our advantage. We remain hopeful and excited at the unique opportunity we have to continue to build Tower into a company that delivers strong performance and steadily increasing value.

Michael H. LeeChairman of the Board, President and Chief Executive Officer

In 2009, we increased our operating

income by 79.4 percent to $119.8

million, and we posted an operating

return on equity of 15.2 percent,

significantly outperforming our

industry peers.

page 5

TOWer GrOUP IS A LeADING PrOvIDer OF DIverSIFIeD NICHe-

OrIeNTeD PrOPerTy AND CASUALTy INSUrANCe PrODUCTS

AND ServICeS. HeADqUArTereD IN NeW yOrk CITy, We OPerATe

THrOUGH TeN INSUrANCe COMPANy SUBSIDIArIeS, ALL OF

WHICH Are rATeD A- (exCeLLeNT) By A.M. BeST.

Tower is recognized throughout our industry for our innovative and responsive approach to business, exceptional underwriting performance, financial strength and stability. Through our subsidiaries, we deliver a broad range of products across various industries and market segments using multiple distribution channels. Specifically, we provide insurance products to individuals and small- to medium-sized businesses through a dedicated team of retail and wholesale agents. We also offer specialty products on an admitted and non-admitted basis, as well as specialty services through a growing network of program underwriting agents. Tower Group is listed on the NASDAq Global Select Market under the symbol TWGP.

Tower’s success over The pasT five years is The resulT

of enTrepreneurial drive, careful planning and

disciplined execuTion. We continuously monitor changing

market conditions, seizing opportunities to leverage our existing

capabilities and to develop new ones that create value for our

stockholders, employees and business partners. In 2009, we took

advantage of the favorable market for acquisitions created by

the challenging economic climate by completing four strategic

acquisitions at attractive valuation levels and laying the groundwork to

complete a fifth acquisition in mid-2010. Together, these transactions

have increased our scale, broadened our reach and expanded our

capabilities—firmly positioning Tower for continued success.

page 7

l i n e s o f

B u s i n e s sExpand Product Lines and

Industry Classes of Business

c O M M e R c i A l

p e R S O n A l

S p e c i A l t Y

page 8

Building sTrengTh and sTaBiliTy Through producT diversificaTion

Our diversified business platform is an important competitive advantage that helps Tower effectively manage risk and generate steady operating performance in a range of market cycles. We use our diversified business platform to access markets with significant premium volume and to strategically allocate our capital to profitable market opportunities. This strategy enables us to expand our business, while maintaining the underwriting selectivity and discipline required to achieve desirable underwriting results.

The cornerstone of our diversified business platform is our broad portfolio of commercial, specialty and personal insur-ance products. We deliver our broad product offering to diverse customer groups across different geographic regions through our multiple distribution channels. We further diversify our business by segmenting our products into different pricing and coverage tiers, as well as different premium size categories. This approach enables us to deliver products and services that are customized for the precise needs of customers in targeted market segments.

In 2009, we continued to diversify our business platform, primarily through strategic acquisitions that enabled us to expand into the specialty business and strengthen our capabilities in the excess and surplus market. We acquired CastlePoint Holdings, Ltd. and Specialty Underwriters’ Alliance, Inc. to create a new specialty business unit and expand our product offering into specialty niche markets. Through the acquisition of Hermitage Insurance Group, we expanded our excess and surplus lines capabilities. We also paved the way to establish a separate personal lines business segment with an expanded selection of personal lines products through our planned acquisition of the Personal Lines Division of OneBeacon Insurance Group, which we expect to complete in mid-2010.

T e r r i T o r yExpand by

GeographicallyLeveraging

ExistingProducts

s i z e / c o v e r a g eSegment Markets

Based Upon Premium Size, Pricing and Coverage Tier

reTail agenTs

progr am underwriTing agenTs

wholesale agenTs

page 9

expanding our reach naTionwide

Tower was established in New york City in 1990 with the goal of growing from a successful regional company into a national insurance provider that could distribute a broad range of products through multiple business channels. Over the years, we have steadily advanced toward this goal both through organic initiatives and acquisitions.

Our organic growth efforts have included leveraging our wholesale distribution system to extend our flagship geographic base from New york City into the Northeast and then into other regions throughout the country, including California, Texas, Florida and key areas in the Southeast. While market dynamics limited organic growth opportunities in our industry during 2009, we continued to expand our presence throughout the country. Our efforts on this front included opening a California office to expedite our growth in the West, and developing a regional infrastructure that will facilitate our continued national expansion while enabling us to remain focused on the specific needs of each local market.

Our major growth during 2009 stemmed from a series of strategic acquisitions that further expanded our presence in existing regions and quickly positioned us in new ones. Through these acquisitions, we expanded our wholesale distribution system nationally, established a network of retail agents in the Southeast, and created a Midwest regional office. As a result, Tower’s goal of having a national presence is now a reality. Today, we operate multiple insurance companies that enable us to conduct business in all 50 states and the District of Columbia, and we have a total of 17 offices across the United States and Bermuda. In 2010, we announced our intention to continue our expansion efforts by acquiring the Personal Lines Division of OneBeacon Insurance Group in a transaction that is expected to further strengthen our foothold in the Northeast.

page 10

larry rogers

Tower Group, Inc.—West Coast regional Manager

Tower is a leader in using acquisitions to create long-term value.

Our formula is simple: We apply our proven business model, strategy and

technology platforms to the companies we acquire to increase their return

on equity. At the same time, we draw on their capabilities to drive our

growth in new regions and industry classes—consistently building

Tower into a larger, stronger and more capable company.

“

”

execuTing our mulTi-channel disTriBuTion sTraTegy

A core component of Tower’s diversification strategy is our practice of distributing our products through multiple channels, including wholesale agents, retail agents and program underwriting agents who give us direct access to different market segments. We typically deliver our preferred products through our retail agents and our non-standard and excess and surplus lines products through our wholesale agents. We conduct our specialty program business through our program underwriting agents.

page 11

consisTenTly ouTperforming our indusTry

Tower has a proud record of producing superior results, and during our five years as a public company, we have consistently outperformed our industry peers in terms of premiums and earnings growth rates, combined ratio, and return on equity (rOe). This success is driven by our diversified business platform, as well as our proven market segmentation, underwriting, capital management and acquisition capabilities:

diversified Business platform and market segmentationOur diversified business platform affords us access to a wide range of markets. We leverage this platform by segmenting our products into different pricing and coverage tiers, as well as different premium size categories that meet specific customer needs. This approach positions us to identify and access profitable market segments with significant premium volume.

underwriting expertise We use our diversified business platform to allocate capital to the most profitable market segments in response to changing market conditions. We focus on underwriting small, simple, low-hazard commercial and personal lines products through our brokerage unit and narrowly defined homogenous classes of business with demonstrated underwriting profitability through our specialty business unit.

effective use of capital We effectively use our capital by retaining premiums to generate investment and underwriting income, as well as by transferring premi-ums to reinsurers and producing business for other insurance companies to generate commission and fee income. This strategy, in combination with our proven underwriting capability, helps us to deliver a strong rOe.

acquisitions capability We have a proven ability to acquire and integrate insurance companies and program underwriting agents that expand our diversified business platform. We are well versed in improving the profitability of these companies by reducing their expenses and cross-selling products. These acquisitions also generate increased premium volume, positioning us to make prudent underwriting decisions while meeting our growth objectives.

Collectively, these capabilities drive Tower’s strong growth rate, combined ratio and rOe. Since our IPO in October 2004, our stock has provided a return of 171.3 percent versus 23.4 percent (NASDAq Insurance) for our industry peers. Despite this robust growth rate, we have consistently maintained our underwriting discipline, as reflected by the 86.0 percent average combined ratio we have posted over the past five years. Our average annual operating rOe for the past five years is 19.2 percent—a metric that we believe is much higher than many other insurance companies with a traditional business model.

page 12

While Tower has a history of strong

and rapid growth, it has never come at

the expense of profitability, as our

average combined ratio over the past

five years demonstrates. We maintain

this ratio by using a proven strategy

that fuels our expansion while mini-

mizing our exposure to loss.

CO

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InE

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86%90

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page 13

Integrate the businesses we acquired in 2009 into our organization, leveraging their capabilities to strengthen our business and applying our proven operational processes to increase their ROE performance.

Develop our three business segments, personal, commercial and specialty, creating the strategies, infrastructure and support framework to drive their long-term success.

2 0 1 0 s t r a t e g i c g o a l s

page 14

DIversIfy our business platform further by using our growing capabilities to enter promising product areas, market segments and geographies.

establIsh a regional infrastructure to support our plans for continued national expansion.

DelIver the superior financial and operational performance our stockholders have come to expect.

acquIre select insurance companies and program underwriting agencies that can broaden our product portfolio and help us expand into new markets, including closing the acquisition of the Personal Lines Division of OneBeacon Insurance Group.

focusing on The fuTure

For the past two decades, Tower has maintained a clear strategic vision: to become a market leader in our industry, recognized for responsible growth, profitability, quality, efficiency and innovation. We have steadily advanced toward this goal through several initiatives. We have built a diversified business platform through a combination of organic growth and acquisitions. We have used this platform to drive our growth by expanding into new product lines, geographic regions and customer segments. We have worked closely with our business partners, and we have listened to our customers, delivering products and services that meet their needs and respond to evolving market conditions. Finally, we have maintained our profitability through changing market cycles by upholding our underwriting discipline, focusing on niche markets, leveraging our scale and creating efficiencies.

As we conclude our first five years as a public company, we remain committed to creating value for our stockholders, responding to the needs of our customers, and providing our employees with opportunities to succeed in a challenging and entrepreneurial work environment. In the years ahead, we plan to continue to drive profitable organic growth by developing new products for different customer groups and building our regional presence throughout the country. We also plan to continue to make strategic acquisitions that complement our existing operations. In order to support our expansion, we will continuously strengthen our infrastructure by developing and applying the best strategies and business processes for our functional areas, as well as integrating leading technology to make our business more efficient. We will also work to attract top talent, and to train and develop our people so they can realize their full potential and maintain the entrepreneurial spirit and passion that define Tower’s corporate culture.

page 15

commiTTed To profiTaBle growTh

We focus on maximizing stockholder value by consistently delivering superior rOe and driving long-term apprecia-tion. In 2009, we continued to fulfill these objectives by strengthening our capital base, expanding our capabilities and generating profitable growth—all within a highly challenging market cycle that was defined by continued economic softness, reduced underwriting profitability and growing pricing pressure.

Despite these hurdles, we delivered 2009 net income of $109.3 million and operating income of $119.8 million, representing increases of 90.2 percent and 79.4 percent, respectively, when compared with 2008. Our efficient use of capital also enabled us to post an operating rOe of 15.2 percent for the year.

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RETURN ON EQUITY

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page 16

Year Ended December 31,

($ in thousands, except per share data) 2009 2008 2007 2006 2005

consolidated operating dataGross premiums written $ 1,070,716 $�634,820 $�524,015 $�432,663 $�300,107Premiums produced by managing general agency 11,722 175,391 85,098 12,926 35,177Net premiums written 886,189 344,043 259,183 245,070 211,782Net premiums earned 854,711 314,551 286,106 223,988 164,436Net income 109,330 57,473 45,082 36,764 20,754earnings per share—Diluted $ 2.76 $� 2.45 $� 1.92 $� 1.79 $� 1.01return on average equity 13.9% 17.8% 18.0% 22.2% 15.1%Combined ratio 88.3% 82.4% 83.7% 87.6% 88.1%

Reconciliation of operating income to net income on a GAAp basis(1)

Net income $ 109,330 $� 57,473 $� 45,082 $� 36,764 $� 20,754Net realized gains (losses) on investments, net of tax 976 (9,330) (11,382) 8 79Acquisition-related transaction costs, net of tax (11,466) — — — —

Operating Income 119,820 66,803 56,464 36,756 20,675

Operating earnings per share $ 3.03 $� 2.84 $� 2.41 $� 1.78 $� 1.01Operating return on average equity 15.2% 20.7% 22.6% 22.2% 15.1%

segment data(2)

Brokerage insurance segment Gross premiums written $ 806,545 $�510,045 $�497,913 $�421,565 $�300,107 Loss ratio 54.4% 51.4% 55.2% 60.3% 58.8% expense ratio 33.5% 30.5% 28.5% 27.3% 29.3%

Combined ratio 87.9% 81.9% 83.7% 87.6% 88.1%

Specialty business segment Gross premiums written $ 264,171 $�124,774 $� 26,102 $� 11,098 $� — Loss ratio 59.0% 57.2% 59.1% 58.3% — expense ratio 30.5% 34.6% 29.7% 41.7% —

Combined ratio 89.5% 91.8% 88.8% 100.0% —

insurance services segment Pre-tax income $ 861 $� 23,963 $� 11,183 $� 1,299 $� 2,840

As of December 31,

2009 2008 2007 2006 2005

Balance sheet dataTotal investments and cash $ 2,061,711 $�677,226 $�696,747 $�564,618 $�395,933Loss reserves 1,131,989 534,991 501,183 302,541 198,724Stockholders’ equity 1,050,501 335,204 309,387 223,920 144,822Book value per share $� 23.35 $� 14.36 $� 13.34 $� 9.23 $� 7.29

(1) Operating income is a common performance measurement for insurance companies and excludes realized investment gains or losses and expenses related to business combinations. We believe this presentation enhances the understanding of our results of operations by highlighting the underlying profitability of our insurance business. The Federal statutory tax rate of 35% was used to calculate the tax applicable to net realized gains or losses on investments and tax deductible acquisition-related transaction costs. Operating earnings per share is operating income divided by diluted weighted average shares outstanding. Operating return on equity is annualized operating income divided by average common stockholders’ equity.

(2) Tower has changed the presentation of its business results, beginning January 1, 2009, by allocating its previously reported insurance segment into brokerage insurance and specialty business based on the way management organizes the segments for making operating decisions and assessing profitability. This results in the reporting of three operating segments. Prior period segment data has been conformed to the current presentation.

s e l e c T e d f i n a n c i a l h i g h l i g h T s

page 17

s T o c k p r i c e p e r f o r m a n c e

The graph below compares the cumulative total stockholder return on Tower Group’s common stock (assuming quarterly reinvestment of dividends) with the NASDAq Composite Index (“IxIC”) and the NASDAq Insurance Index (“IxIS”). The comparison assumes that $100 was invested in the Company’s common stock and in each of the foregoing indices on October 21, 2004, which was the first day that Tower Group’s stock was publicly traded after its initial public offering.

TOWER GROUP, INC.—TOTAL RETURN

050

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10.21.2004 12.31.2004 12.31.2005 12.31.2007 12.31.2008 12.31.2009

$116$123

$271

12.31.2006

Tower Group, Inc. NASDAQ Insurance NASDAQ Composite

10.21.2004 12.31.2004 12.31.2005 12.31.2007 12.31.2008 12.31.200912.31.2006

Tower Group, Inc. NASDAQ Insurance NASDAQ Composite

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$116$123

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page 18

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RETURN ON EQUITY

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55.6%

72.5%



page 19

page 20

Strong leadership is the hallmark of any successful company, and Tower is no exception. Our senior management team is made up of seasoned insurance industry experts who understand the forces that drive our business and are fully committed to fueling our continued success.

s e n i o r m a n a g e m e n T

d e d i c a T i o n a n d l e a d e r s h i p

michael h. leeChairman, President and Chief executive Officer

salvatore abanoSenior vice President, Chief Information Officer

francis m. colalucci, c.p.a.Senior vice President, Chief Financial Officer and Treasurer (through March 15, 2010)

angelica m. facchiniManaging vice President, Strategic Planning

Bill hitselbergerSenior vice President, Chief Financial Officer (effective March 15, 2010)

gary s. maierSenior vice President, Brokerage Underwriting and Chief Underwriting Officer

scott T. melnikManaging vice President, Claims Operations

elliot orolSenior vice President, General Counsel and Secretary

christian pechmannSenior vice President, Marketing and Distribution

laurie ranegarSenior vice President, Operations

James robertsManaging vice President, Corporate Planning and Development

larry rogersManaging vice President, West Coast regional Manager

Bruce sandersonManaging vice President, east Coast regional Manager

courtney smithSenior vice President, Specialty Underwriting

Thomas songManaging vice President, Corporate Development and Investor relations

Joel weinerSenior vice President, Chief Actuary

eric weisburgManaging vice President, Strategic Initiatives

catherine m. wraggManaging vice President, Human resources and Administration

In November of 2009, Frank Colalucci announced his intention to retire from his position as Tower Group’s Chief Financial Officer in March of 2010, and to step down from our Board of Directors when his term expires on May 12, 2010. Since he joined Tower in 2002, Frank has been a tremendous asset to our organization, playing a pivotal role in our initial public offering in 2004 and providing excellent leadership to our financial team over the years. We thank him for his many contributions and wish him well in his future endeavors.

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page 22

Tower’s Board of Directors is composed primarily of independent members who have exceptional expertise in the insurance industry and in related fields that influence our operations. Drawing on their collective experience and wisdom, our Board steadily guides Tower’s decisions and supports our progress.

B o a r d o f d i r e c T o r s

michael h. leeChairman of the Board, President and Chief executive Officer, Tower Group, Inc.

francis m. colalucci, c.p.a.Senior vice President, Chief Financial Officer and Treasurer, Director (through May 12, 2010), Tower Group, Inc.

charles a. Bryan, c.p.a., cpcu, fcasPresident, CAB Consulting, LLC

william w. fox, Jr.Former Chief executive Officer, Balis & Co., Inc.

Jan r. van gorderFormer Senior executive vice President, Secretary and General Counsel, erie Insurance Group

william a. robbie, c.p.a.President and Owner, robbie Financial Consulting

steven w. schusterCo-chair, Corporate and Securities Department, McLaughlin Stern, LLP

robert s. smithPrincipal, Sherier Capital, LLC Managing Director, National Capital Merchant Banking, LLC

austin p. young, iii, c.p.a.Director and Chairman of Audit Committee, Administaff, Inc. and Amerisafe, Inc.

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new york offices:

New york City Branch120 Broadway, 31st FloorNew york, Ny 10271Phone: (212) 655-2000Fax: (212) 655-2199

Long Island Branch225 Broadhollow road, Suite 410Melville, Ny 11747Phone: (631) 465-1300Fax: (877) 306-8565

Western New york Branch600 essjay roadWilliamsville, Ny 14221Phone: (866) 584-9127Fax: (716) 568-8445

Westchester Branch1311 Mamaroneck Avenue, Suite 135White Plains, Ny 10605Phone: (914) 683-8008Fax: (914) 683-8245

alaBama office:

Mobile Branch1111 Hillcrest roadMobile, AL 36695Phone: (800) 826-6570Fax: (251) 633-2944

california offices:

Palm Springs Branch777 e. Tahquitz Canyon Way, Suite 333Palm Springs, CA 92262Phone: (760) 866-1080Fax: (760) 866-1095

Irvine BranchJamboree Center—3 Park PlazaIrvine, CA 92614Phone: (707) 484-6832Fax: (949) 242-2457

connecTicuT office:

Glastonbury Branch655 Winding Brook Drive, 3rd FloorGlastonbury, CT 06033Phone: (860) 659-1919Fax: (860) 659-1713

florida offices:

Ft. Lauderdale Branch3000 Cypress Creek roadFt. Lauderdale, FL 33309Phone: (800) 417-4577Fax: (954) 489-9389

Maitland Branch101 South Hall Lane, Suite 365Maitland, FL 32751Phone: (866) 450-8608Fax: (866) 450-8609

georgia office:

Atlanta Branch2780 Bert Adams road, Suite 302Atlanta, GA 30339Phone: (770) 434-2391Fax: (770) 433-0815

illinois office:

222 South riverside Plaza, Suite 1600Chicago, IL 60606Phone: (312) 277-1600Fax: (877) 782-2098

maine office:

Scarborough Branch482 Payne road, 4th FloorScarborough, Me 04074Phone: (800) 456-1819Fax: (207) 883-1564

massachuseTTs office:

quincy BranchOne Adams Place859 Willard Street, Suite 400quincy, MA 02169Phone: (781) 353-6457Fax: (617) 687-1291

new Jersey office:

Paramus Branch95 route 17 SouthParamus, NJ 07653Phone: (800) 242-0332Fax: (201) 632-6477

Texas office:

Irving Branch4425 W. Airport Freeway, Suite 230Irving, Tx 75062Phone: (877) 782-2109Fax: (877) 782-2110

inTernaTional office:

Bermuda Officevictoria Hall11 victoria StreetHamilton, HM 11, BermudaPhone: (441) 294-6400Fax: (441) 296-9715

B r a n c h o f f i c e s

INveSTOr INFOrMATION

The Company’s home page on the World Wide Web is at: www.twrgrp.com

Thomas SongManaging vice President, Corporate Development and Investor relations (212) 655-4789

STOCkHOLDerS’ INFOrMATION

Corporate Headquarters120 Broadway, 31st FloorNew york, Ny 10271

reGISTrAr AND TrANSFer AGeNT

American Stock Transfer and Trust Company, LLC 59 Maiden LaneNew york, Ny 10038

INDePeNDeNT AUDITOrS

Johnson Lambert & Co. LLP3110 Fairview Park Drive, Suite 800Falls Church, vA 22042

c o r p o r a T e i n f o r m a T i o n

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page 25

57 MarketforRegistrant’sCommonEquity,RelatedStockholderMattersandIssuerPurchasesofEquitySecurities

59 Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations

F-2 ReportofIndependentRegisteredPublicAccountingFirm

F-3 ConsolidatedBalanceSheets

F-4 ConsolidatedStatementsofIncomeandComprehensiveIncome

F-5 ConsolidatedStatementsofChangesinStockholders’Equity

F-6 ConsolidatedStatementsofCashFlow

F-8 NotestoConsolidatedFinancialStatements:

UNITeD STaTeSSeCURITIeS aND eXCHaNge COMMISSION

Washington,D.C.20549

FORM 10-K(MarkOne) H ANNUALREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIES EXCHANGEACTOF1934 ForthefiscalyearendedDecember31,2009 Or M TRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHE SECURITIESACTOF1934 Forthetransitionperiodfromto

CommissionFileNumber:000-50990

Tower group, Inc.(Exactnameofregistrantasspecifiedinitscharter)

Delaware 13-3894120 (Stateorotherjurisdictionof (I.R.S.EmployerIdentificationNo.) incorporationororganization)

120Broadway,31stFloor NewYork,NewYork 10271 (Addressofprincipalexecutiveoffices) (ZipCode)

(212)655-2000(Registrant’stelephonenumber,includingareacode)

SecuritiesregisteredpursuanttoSection12(b)oftheAct:

Titleofeachclass Nameofeachexchangeonwhichregistered

CommonStock,$0.01parvaluepershare NASDAQGlobalSelectMarket

SecuritiesregisteredpursuanttoSection12(g)oftheAct:None

Indicatebycheckmarkiftheregistrantisawell-knownseasonedissuer,asdefinedinRule405ofSecuritiesAct.YesMNoH

IndicatebycheckmarkiftheregistrantisnotrequiredtofilereportspursuanttoSection13orSection15(d)oftheAct.YesMNoH

Indicatebycheckmarkwhethertheregistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.YesHNoM

Indicatebycheckmarkwhether the registranthas submittedelectronicallyandpostedon its corporateWebsite, if any,every InteractiveDataFilerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or for such shorter period that theregistrantwasrequiredtosubmitandpostsuchfiles).YesMNoM

IndicatebycheckmarkifdisclosureofdelinquentfilerspursuanttoItem405ofRegulationS-Kisnotcontainedherein,andwillnotbecontained,tothebestoftheregistrant’sknowledge,indefinitiveproxyorinformationstatementsincorporatedbyreferenceinPartIIIofthisForm10-Koranyamend-menttothisForm10-K.M

Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,anon-acceleratedfiler,orasmallerreportingcompany.Seethedefinitionsof“largeacceleratedfiler,”“acceleratedfiler”and“smallerreportingcompany”inRule12b-2oftheExchangeAct.(Checkone):

LargeacceleratedfilerH AcceleratedfilerM Non-acceleratedfilerM SmallerreportingcompanyM

(Donotcheckifasmallerreportingcompany)

Indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b-2oftheAct).YesMNoH

Theaggregatemarketvalueoftheregistrant’scommonstockheldbynon-affiliatesonJune30,2009(basedontheclosingpriceontheNASDAQGlobalSelectMarketonsuchdate)wasapproximately$902,254,519.

AsofFebruary25,2010,theregistranthad44,987,732sharesofcommonstockoutstanding.

DOCUMeNTS INCORpORaTeD BY ReFeReNCe:PartIIIofthisForm10-Kincorporatesbyreferencecertaininformationfromtheregistrant’sdefinitiveProxyStatementwithrespecttotheregistrant’s2010AnnualMeetingofShareholders,tobefilednotlaterthan120daysafterthecloseoftheregistrant’sfiscalyear(the“ProxyStatement”).

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Table of Contents

PARTI 30Item1. Business 30Item1A. RiskFactors 47Item1B. UnresolvedStaffComments 57Item2. Properties 57Item3. LegalProceedings 57Item4. Reserved 57

PARTII 57Item5. MarketForRegistrant’sCommonEquity,RelatedStockholderMattersandIssuerPurchasesofEquitySecurities 57Item6. SelectedConsolidatedFinancialInformation 58Item7. Management’sDiscussionAndAnalysisOfFinancialConditionAndResultsOfOperations 59Item7A. QuantitativeAndQualitativeDisclosuresAboutMarketRisk 82Item8. FinancialStatementsAndSupplementaryData F-1Item9. ChangesInAndDisagreementsWithAccountantsOrAccountingAndFinancialDisclosure 121Item9A. ControlsAndProcedures 121Item9B. OtherInformation 121

PARTIII 122Item10. DirectorsAndExecutiveOfficersOfTheRegistrant 122Item11. ExecutiveCompensation 122Item12. SecurityOwnershipOfCertainBeneficialOwnersAndManagementAndRelatedStockholderMatters 122Item13. CertainRelationshipsAndRelatedTransactions,AndDirectorIndependence 122Item14. PrincipalAccountantFeesAndServices 122

PARTIV 122Item15. Exhibits,FinancialStatementSchedules 122

EX-21.1EX-23.1EX-31.1EX-31.2EX-32

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part I

Item1.BusIness

OverviewAs used in this Form 10-K, references to the “Company”, “we”, “us”, or“our” refer to Tower Group, Inc. (“Tower”) and its subsidiaries, TowerInsuranceCompanyofNewYork(“TICNY”),TowerNationalInsuranceCompany(“TNIC”),Preserver InsuranceCompany(“PIC”),MountainValleyIndemnityCompany(“MVIC”),NorthEastInsuranceCompany(“NEIC”), CastlePoint Insurance Company (“CPIC”), CastlePointFlorida Insurance Company (“CPFL”), Hermitage Insurance Company(“HIC”),KodiakInsuranceCompany(“KIC”),andCastlePointNationalInsurance Company (still operating in some jurisdictions as SUAInsurance Company) (“CPNIC”), Tower Risk Management Corp.(“TRM”), CastlePoint Management Corp. (“CPM”), SpecialtyUnderwriters’Alliance,Inc.(“SUA”)andCastlePointRiskManagementofFlorida,Corp. (stilloperating in some jurisdictionsasAequiCapCPServices Group, Inc.) (“CPRMFL”) unless the context suggests other-wise. The term “Insurance Subsidiaries” refers to TICNY, TNIC, PIC,MVIC,NEIC,CPIC,CPFL,HIC,KICandCPNIC.

Referencesto“CastlePoint”refertoOceanICorp.(formerlyknownas CastlePoint Holdings, Ltd.) and its subsidiaries, which includeCastlePoint Management Corp., CastlePoint Bermuda Holdings, Ltd.,CastlePoint Reinsurance Company, Ltd. (“CastlePoint Reinsurance”),CPFL and CPIC, unless the context suggests otherwise. TowercompletedtheacquisitionofCastlePointonFebruary5,2009.

ThroughourInsuranceSubsidiaries,weofferabroadrangeofcom-mercial,personalandspecialtypropertyandcasualtyinsuranceproductsand services to businesses in various industries and to individualsthroughout the United States. With the exception of CPNIC, which iscurrentlyratedB+(Good),allofourInsuranceSubsidiariesarecurrentlyrated A- (Excellent) by A.M. Best Company, Inc. (“A.M. BestCompany”). We provide these products on both an admitted and anexcess and surplus (“E&S”) lines basis. Insurance companies writing onanadmittedbasisarelicensedbythestatesinwhichtheysellpoliciesandarerequiredtoofferpoliciesusingpremiumratesandformsthatarefiledwithstateinsuranceregulators.Non-admittedcarrierswritingintheE&Smarketarenotboundbymostoftherateandformregulationsimposedon standard market companies, allowing them the flexibility to changethecoverageofferedandtheratechargedwithoutthetimeconstraintsandfinancialcostsassociatedwiththefilingprocess.

ThroughourBrokerageInsurancesegment,weprovidecommer-cial lines products comprised of commercial package, commercialproperty, inlandmarine,general liability,workers’compensation,com-mercial auto and commercial umbrella policies to businesses such asresidentialandcommercialbuildingowners,retailandwholesalestores,food service establishments, including restaurants, artisan contractorsand automotive service operations. We also provide personal linesproducts that insure modestly valued homes and dwellings as well aspersonalautomobiles.Theseproductsaredistributedthroughanexten-sivenetworkofretailandwholesaleagentsthroughouttheUnitedStatesand serviced through 18 branch offices. As a result of the acquisitionsof CastlePoint and SUA, we have expanded our commercial productofferings to target narrowly-defined, homogenous classes of businessthat we refer to as specialty businesses through our Specialty Businesssegment.Theseproductsaredistributedthrough20programunderwrit-ing agents throughout the United States that provide insurance cover-ages to classes of business such as auto dealerships, professionalemployers organizations, temporary staffing firms, public entities andspecialtyautoandtrucking.

CompetItIvestrengthsandstr ategIesWe believe our diversified business platform, market segmentationexpertise,underwritingexpertise,effectiveuseofcapitalandacquisitionscapabilityprovideuswithcompetitivestrengths,asdescribedbelow.

Diversified Business platform and Market Segmentation expertise.Wehave established a diversified business platform comprised of a broadrange of commercial, specialty and personal lines products tailored tomeet the needs of businesses in various industries and individualsthroughouttheUnitedStates.Wealsosegmentourproductsintodiffer-entpricingandcoveragetiersaswellasdifferentpremiumsizecatego-ries to meet the specific needs of our customers. We position ourproducts in preferred, standard and non-standard segments of theadmittedmarketaswellasintheE&Slinesmarketsegment.Wegener-ally deliver preferred and standard products through our retail agents,non-standardandE&Slinesproductsthroughourwholesaleagentsandspecialtyproductsthroughourprogramunderwritingagents.Webelieveour diversified business platform and market segmentation expertiseprovideuswithacompetitiveadvantagebyallowingustoaccessprofit-ablemarketsegmentswithsignificantpremiumvolumeopportunitiestosupportourgrowth.

Underwriting expertise. We have generated favorable underwritingresultsasdemonstratedbyouraveragecombinedratioof83.3%duringthe period from 2005 to 2009. We have been able to achieve theseunderwriting results using our diversified business platform to allocateourcapitaltothemostprofitablemarketsegmentsinresponsetochang-ingmarketconditions. Inaddition,wehavehistorically focusedoncus-tomers that present low to moderate hazard risks and utilized ourin-house claims and legal defense capabilities to adjust and defendclaims effectively. We also apply this underwriting approach when weanalyzeandintegrateanycompanybusinessthatweacquirefromotherinsurancecompaniesintoourBrokerageInsurancesegmentorwhenweconsider expanding our brokerage business into any new territory orproduct classification. With respect to our specialty business, we focuson underwriting established books of narrowly defined homogenousclasses of business with a demonstrated track record of underwritingprofitabilitywrittenthroughhighlyskilledprogramunderwritingagents.

effective Use of Capital. Weutilizeabusinessmodelunderwhichwe(i)retain premiums to generate investment and underwriting incomethroughtheuseofourowncapitaland(ii)transferpremiumstoreinsur-ers and produce business for other insurance companies to generatecommissionandfeeincome.Ourbusinessmodelallowsustocreateandsupportasignificantlylargerpremiumbaseandamorerobustandeffi-cientinfrastructurethanotherwisewouldbeachievablethroughonlynetretainedpremium.Bydoingso,wehavebeenabletoachieveareturnonaverageequitythatwebelieveishigherthanmanyotherinsurancecom-panieswithatraditionalbusinessmodel.From2005to2009ouraverageannualreturnonaverageequitywas19.2%,excludingnetrealizedinvest-mentgainsorlossesandacquisition-relatedtransactioncosts.AlthoughtheacquisitionofCastlePointconsolidatesandeliminates thecommis-sionandfeeincomethatwepreviouslyearnedfromcedingpremiumstoCastlePoint,weanticipatethatasweincreaseourpremiumvolumeandplaceadditionalbusinesswithreinsurersandinsurancecompaniesotherthan CastlePoint we will generate commission and fee income fromthose companies. If the pending acquisition of OneBeacon InsuranceGroup’s (“OneBeacon”) personal lines division (the “Personal LinesDivision”)isapprovedandcompleted,weexpecttogeneratefeeincomefrommanagingthereciprocalinsurancecompaniesin2010.

page 31

acquisitions Capability.Weacquiredandintegratedinsurancecompa-nies and renewal books of business to expand our diversified businessplatform. Over the past six years, we have successfully executed thisacquisitionstrategyby(i)expandingourdistributionandservicingcapa-bilitynationally,(ii)expandingintodifferenceproductlinesandclassesofbusiness,and(iii) improvingtheprofitabilityof theacquiredcompaniesthroughincreasedfinancialstrength,expensereduction,re-underwritingandcross-selling.Duetothe increasedpremiumvolumeresultingfromtheseacquisitions,wealsoareabletobeselectiveandprudentinunder-writing our business while meeting our growth objectives. We believethatthecontinuationofthesoftpropertyandcasualtymarketenviron-mentiscausingsomecompetitorstoconsidervariousstrategicinitiativesincludingthesaleoftheircompanies.Becausethesesellerscontinuetobechallengedbypooroperatingfundamentals,valuations forpotentialacquisitiontargetshavebecomemorereasonable.Forthesereasons,weanticipate that we will continue to seek acquisitions in the foreseeablefuturebyapplyingouradvantageswhichincludeourstrongcapitalization,trackrecordandmanagementexpertiseinexecutionandintegration.

Strategic Relationship and agreements with Castlepoint: February 2006—February 2009WeacquiredCastlePointonFebruary5,2009.Priortothatdate,wehadastrategicrelationshipwithCastlePoint.Also,inadditiontohispositionsat the Company, Michael H. Lee served as Chairman and ChiefExecutiveOfficerofCastlePointHoldings,Ltd.

WeorganizedandsponsoredCastlePointwithaninitialinvestmentof$15.0milliononFebruary6,2006.AfterCastlePointraised$249.9mil-lioninaprivateplacementstockofferingin2006and$114.8millioninapublic stock offering in 2007, the Company’s investment ownership inCastlePointasofDecember31,2008wasapproximately6.7%. Inaddi-tion,theCompanyreceivedawarrantfromCastlePointonApril6,2006topurchaseanadditional1,127,000sharesofcommonstock.

CastlePointwasaBermudaholdingcompanyorganizedtoprovideproperty and casualty insurance and reinsurance business solutions,products and services primarily to small insurance companies and pro-gram underwriting agents in the United States. Program underwritingagents are insurance intermediaries that aggregate insurance businessfrom retail and wholesale agents and manage business on behalf ofinsurance companies. Their functions may include some or all of riskselection,underwriting,premiumcollection,policyformanddesign,andclientservice.

CastlePoint operated through a number of subsidiaries, includingCastlePoint Reinsurance, a Bermuda reinsurance company; CPIC, aNew York domiciled insurance company; CPM, which providesinsurance services, and CPFL, which became licensed to sell workers’compensation and commercial auto liability lines only in Florida inFebruary2009.

InApril2006,weenteredintovariousagreementswithCastlePointsuch that CastlePoint would manage the program business, which wenowrefertoasspecialtybusiness,andwewouldmanagethebrokeragebusiness.UndertheagreementswithCastlePoint,wemanagedthebro-keragebusinessandcededreinsuranceorearnedmanagementfeesforthe brokerage business that was expected to result in approximately a95% combined ratio for CastlePoint. Also, CastlePoint managed theprogramsandotherspecialtybusiness,andweparticipatedinthatbusi-nessthroughvariousreinsuranceagreementsthatwasexpectedtoresultinapproximatelya93%combinedratioforus.WehadenteredintoserviceandexpensesharingagreementswithCastlePointunderwhichCPMwasentitledtopurchasefromus,andwewereentitledtopurchasefromCPM,certain insurance company services, such as claims adjustment, policyadministration,technologysolutions,underwriting,andriskmanagementservices. The reimbursement for these charges has been recorded as“Otheradministrationrevenues”inourInsuranceServicessegment.

aCquIsItIonsIn addition to the acquisition of CastlePoint on February 5, 2009 asdescribed above, the Company completed, or as indicated below hasagreedtocomplete,thefollowingacquisitions.

HermitageOnFebruary27,2009,theCompanycompletedtheacquisitionofHIG,Inc.(“Hermitage”),apropertyandcasualtyinsuranceholdingcompany,pursuanttoastockpurchaseagreement,fromasubsidiaryofBrookfieldAsset Management Inc. for cash consideration of $130.1 million.Hermitage offers both admitted and E&S lines products. This transac-tion further expanded the Company’s wholesale distribution systemnationallyandestablishedanetworkofretailagentsintheSoutheast.

aequiCapOn October 14, 2009, the Company completed the acquisition of therenewal rights to the workers’ compensation business of AequiCapProgram Administrators Inc. (“AequiCap”), an underwriting agencybased in Fort Lauderdale, Florida. The acquired business primarilyconsistsofsmall,lowtomoderatehazardworkers’compensationpoliciesinFlorida.During2009,weenteredintoanagreementwithAequiCaptoprovideclaimshandlingservicesforworkers’compensationclaims.MostoftheemployeesofAequiCapinvolvedintheservicingoftheworkers’compensationbusinessbecameemployeesoftheCompany.Theacqui-sition of this business expands the Company’s regional presence intheSoutheast.

Specialty Underwriters’ allianceOn November 13, 2009, the Company completed the acquisition of100% of the issued and outstanding common stock of SpecialtyUnderwriters’ Alliance, Inc. (“SUA”), a holding company, for approxi-mately $107 million of the Company’s common stock, pursuant to thetermsandconditionsofanAmendedandRestatedAgreementandPlanofMergerexecutedonJuly22,2009andeffectiveasofJune21,2009,byandamongtheCompany,TowerS.F.MergerCorporationandSUA.Inconnectionwiththeclosingofthetransaction,theCompanyissuedanaggregateof4,460,098sharesof itscommonstocktoSUAstockhold-ers.SUA,aDelawarecorporationheadquarteredinChicago,Illinois,wasincorporated in April 2003, and through its wholly-owned subsidiary,SUA Insurance Company, offers specialty commercial property andcasualty insurance products through program underwriting agents thatserve niche groups of insureds. After the acquisition, SUA InsuranceCompany was renamed CastlePoint National Insurance Company,whichnamechangeisstillpendinginsomejurisdictions.TheacquisitionofSUAstrengthenstheCompany’sSpecialtyBusinesssegmentanditsregionalpresenceintheMidwest.

OneBeacon personal Lines DivisionOnFebruary2,2010,theCompanyannouncedthesigningofadefini-tive agreement to acquire the Personal Lines Division of OneBeacon,subject to customary closing conditions and regulatory approvals. Forthe purchase price of $32.5 million plus book value, Tower will acquireMassachusetts Homeland Insurance Company, York InsuranceCompanyofMaineandtwomanagementcompanies.Themanagementcompaniesaretheattorneys-in-factforAdirondackInsuranceExchange,a New York reciprocal insurer, and New Jersey Skylands InsuranceAssociation, a New Jersey reciprocal insurer, and its New Jerseydomiciled stock insurance subsidiary, New Jersey Skylands InsuranceCompany.Towerwillalsopurchasethesurplusnotes issuedbythetworeciprocal insurers for an amount equal to the statutory surplus in theexchanges (approximately $103 million at December 31, 2009). Thistransaction is subject toapprovals by the appropriate regulatory agen-ciesand isexpectedtocloseat theendof thesecondquarterof2010.The insurance companies write approximately $250 million of annualpremiums, and the management companies are attorneys-in-fact that

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manageapproximately$250million inannualpremiumwrittenthroughtwo reciprocal insurance exchanges. Tower will write and manage theprivate passenger automobile, homeowners and package policiesthrough thecompaniescurrently issuing thesepoliciesandcombine itsexisting personal lines operations, which is currently reflected in ourBrokerage Insurance segment, with the business being acquired.ExcludedfromthistransactionareAutoOne,specialtycollectorcarandboatbusinesses, and Houston General companies. The Personal LinesDivisionwritesbusinessintheNortheasternUnitedStateswithofficesin:Canton, Massachusetts; South Portland, Maine; and Williamsville,NewYork.

BusInesssegmentsThe Company has changed the presentation of its business results,beginningJanuary1,2009.Wehadpreviouslyreportedbusinessresultsfor two segments: Insurance and Insurance Services. As of January 1,2009,wepresentthreesegmentsasaresultofsplittingtheresultsoftheInsurancesegmentintoBrokerageInsuranceandSpecialtyBusinessseg-ments.Thepriorperiodsegmentdisclosureshavebeenrestatedtocon-formtothecurrentpresentation.

The Company currently operates three business segments:Brokerage Insurance, Specialty Business and Insurance Services. Uponthe closing of the acquisition of OneBeacon’s Personal Lines Division,the Company intends to separately manage its personal lines businessand will separate the Brokerage Insurance segment into a CommercialBusinesssegmentandaPersonalBusinesssegment.

Brokerage Insurance SegmentThroughourBrokerageInsurancesegment,weofferabroadanddiversi-fied rangeofpropertyandcasualty insuranceproductsandservices tosmall tomid-sizedbusinessesandto individuals throughout theUnitedStates.Wealsosegmentourbusinessintodifferentpricingandcoveragetiers as well as different premium size categories to meet the specificneedsofourcustomers.Theseproductsareunderwrittenandservicedthroughour18officesanddistributedthroughapproximately1,173retailagentsand196wholesaleagents.Approximately71%ofthedirectpremi-umswrittenbytheBrokerageInsurancesegment in2009wasfromtheNortheast.However,inthepastseveralyearswehaveexpandedourbro-kerage business beyond the Northeast through acquisitions and byappointingwholesaleagentsinCalifornia,TexasandFlorida.

Using our broad product line offering, we are able to provide acomprehensive product solution to our producers and allow them toplacemorebusinesswithus.Inaddition,ourdiversifiedbusinessplatformallowsustoallocateourcapitaltoprofitablemarketsegmentsandavoidunprofitable market segments. We provide commercial lines productscomprisedofcommercialpackage,general liability,workers’compensa-tion,commercialautoandcommercialumbrellapoliciestobusinessesindifferent industries. We have generally focused on specific classes ofbusinessintherealestate,retail,wholesaleandserviceindustriessuchasretailandwholesalestores,residentialandcommercialbuildings,restau-rants and artisan contractors. We target these classes of businessbecausewebelievethattheyarelesscomplexandhavereducedpoten-tial for loss severity.Wealsoofferpersonal linesproducts thatprovidecoverage for modestly valued homes and dwellings as well as personalautomobilesforindividualslocatedpredominatelyintheNortheast.

We offer our products on an admitted basis in the preferred,standard, and non-standard pricing and coverage tiers and on a non-admittedbasisusingourE&Scoverageandpricingtier.Foreachofthepreferred, standard, non-standard and E&S coverage and pricing tiers,wehavedevelopeddifferentpricing,coverageandunderwritingguide-lines.Forexample,thepricingforthepreferredrisksegmentisgenerallythe lowest, followed by the pricing for the standard, non-standard andE&Ssegments.Theunderwritingguidelinesarecorrespondinglystricterforpreferredrisksinordertojustifythelowerpremiumrateschargedfor

these risks with underwriting guidelines becoming progressively lessrestrictive for standard, non-standard and E&S risks. We generally dis-tributepoliciesforriskswithpreferredandstandardunderwritingcharac-teristicsthroughourretailagentsandpoliciesforriskswithnon-standardand E&S underwriting characteristics through our wholesale agents. Inaddition to segmentingourproducts intovariouspricingandcoveragetiers, we further classify our products into the following premium sizesegments: under $25,000 (small), $25,000 to $150,000 (medium) andover$150,000(large).

While we have succeeded in underwriting business in all marketsegments,wehaveexperiencedparticularsuccessintargetingnonstan-dardrisksthatdonotfittheunderwritingcriteriaofstandardriskcarriersduetofactorssuchastypeofbusiness,locationandpremiumperpolicy.For example, we have historically targeted risks located in urban areassuch as New York City that require special underwriting expertise andhave generally been avoided by other insurance companies. We havealsohistoricallyhadmoresuccessinthesmallpremiumsizesegmentduetoourfocusonreducingourunderwritingexpensesbyrealizingecono-miesofscale,utilizingtechnologyanddevelopingefficientbusinesspro-cesses.Webelievethatduetothelackofflexibilityintheunderwritingofsmall policies, other insurance companies have not been able to pricecompetitivelyinthisunderservedsegment.Ourexpenseadvantagehasallowedustomaintainadequateratesthroughindustrycycles.Withthesofteningmarketconditionsthatwereexperiencedthroughout2009,ourprimarybusiness segmentswere less impactedby thecompetitive ratepressures that affected premium adequacy on larger risks within theuppermiddlemarketsegment.

The following table shows the direct premiums written for theBrokerageInsurancesegmentasofDecember31,2009,2008and2007:

December31,

($inmillions) 2009 2008 2007

Commercialpackage $�287.1 $�202.3 $�190.6Landlord 27.3 20.3 22.4Businessowners 38.5 32.6 23.0

Totalcommercialmultiple-peril 352.9 255.2� 236.0Monolinecommercialgeneralliability 90.2 50.5 51.9Workers’compensation 83.6 17.5 37.5Commercialautomobile 71.4 72.6 60.2Personalautomobile 10.6 9.9 7.5Homeowners 167.1 85.0 85.1FireandalliedLines 30.7 19.3 19.7

Alllines $�806.5 $�510.0 $�497.9

Specialty Business SegmentFollowingthepreviouslydiscussedacquisitionofSUAonNovember13,2009, we consolidated the specialty insurance business we obtainedthroughtheCastlePointacquisitionwiththebusinessofSUAtoformasingleSpecialtyBusinesssegmentoperatingoutoftheChicagooffice.Ourspecialtybusinessconsistsof insurancecoveringnarrowlydefined,homogeneous classes of business including Long-term Healthcareworkers,SpecialtyTransportation,ProfessionalEmployersOrganizations,Temporary Staffing Firms, Public Entities, Commercial ConstructionandAutoDealerships.

Ourspecialtybusinessisproducedthroughaselectnumberofpro-gramunderwritingagents,whohavespecializedunderwritingexpertisein theclasses theyunderwriteandwhohaveestablishedbooksofbusi-ness with proven track records. We rely on our program underwritingagentsforindustryinsight,regionalunderwritingknowledgeandunder-standingof thespecific risks in thenichemarketsweserve.Wecouplethatknowledgewithourdisciplinedunderwritingpractices,leadingedgetechnologyandsystemscapabilitiestoprovideinsuranceprogramsandproductscustomizedtotheneedsofthespecialtymarketsweserve.

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Our focus in the specialty market is on those classes of businesstraditionallyunderservedbystandardpropertyandcasualtyinsurersduetothecomplexbusinessknowledge,awarenessofregionalmarketcondi-tionsandinvestmentrequiredtoachieveattractiveunderwritingprofits.Webelievethissegmentofthemarketisattractivebecausecompetitionis based primarily on customer service, availability and continuity ofinsurancecapacity,specializedpolicyforms,efficientclaimshandlingandothervalue-addedconsiderations,ratherthanjustprice.

Further,webelievethatouroperatingstructureandsystemscapa-bilities afford us a distinct competitive advantage in underwriting spe-cialtyprogrambusiness.Specifically,oursystemsenableustoprovideafullunderwritingprocessingandclaimssupport interfaceinthosesitua-tions where it is required, while the existence of a dedicated specialtyclaims unit provides an attractive alternative to the use of third partyadministratorsinsituationswheretheprogramunderwritingagentdoesnotprovidesuchservices.

Our Specialty Business segment in 2009 also included a limitedamountofreinsurancebusinessthatweacquiredfromCastlePoint.Weprovideda limitedamountofquotashare,excessandcatastropherein-surance business to primarily small insurance companies. After theCastlePointacquisition,webegannon-renewingthisbusinessandallo-catedthecapitalpreviouslyusedtosupportthisbusinesstofinanceouracquisitions and support our growth in the Brokerage Insurance andSpecialty Business segments. While we may retain a few reinsuranceaccountsafter2009,wedonotanticipate that thisbusinesswill haveamaterialimpactonouroverallresults.

ThefollowingtableshowsGrossPremiumsWritteninourSpecialtyBusinesssegmentbrokendownbyprogrambusinessandreinsurancefortheyearsendedDecember31,2009,2008and2007:

YearEndedDecember31,

($inmillions) 2009 2008 2007

Programs $�213.4 $�124.8 $�26.1Reinsurance 50.8 — —

Total $�264.2 $�124.8 $�26.1

Insurance Services SegmentIn our Insurance Services segment, we generate fees from performingvariousaspectsofinsurancecompanyfunctionsforotherinsurancecom-panies, including underwriting, claims administration, reinsurance inter-mediary,operationalandtechnologyservices.Weprovidetheseservicesthrough our managing general agencies, TRM, CPM and CPRMFL.PriortotheacquisitionofCastlePointinFebruaryof2009,TRMgener-atedfeesfrommanagingbrokeragebusinessonbehalfofCPIC,whereasCPM generated fees from managing program business on behalf ofTower. After CastlePoint was acquired by Tower in February of 2009,thesefeesearnedbyTRMandCPMwereeliminated.Towergeneratesfees from placing Tower’s business with other insurers and reinsurers,although as a result of the CastlePoint acquisition, the amount of feeincomewaslimitedto$5.1millionfor2009ascomparedto$68.5millionin 2008. Upon the closing of the acquisition of OneBeacon’s PersonalLines Division, we will generate additional fee income from managingthe tworeciprocalexchanges,whichweplan to reflect in the InsuranceServicessegment.

The following shows premiums managed by TRM, CPM andCPRMFL and the fee income derived from those managed premiumsfortheyearsendedDecember31,2009,2008and2007:


($inmillions) 2009 2008 2007

ManagedPremiums $�11.7 $�175.4 $�85.1FeeIncome 5.1 68.5 33.3

produCtsandservICesOurdiversifiedbusinessplatformallowsustoprovideabroadrangeofproductsinallstatesintheU.S.Ourproductsincludethefollowing:• Commercial Multiple-peril packages. Coverage offered under our

commercialpackageandbusinessowners’policiescombinesproperty,liability(includinggeneralliabilityandproductsandcompletedopera-tions),businessinterruption,equipmentbreakdown,fidelityandinlandmarinecoveragestailoredforcommercialbusinessesandenterprises.Commercial packages and business owners’ policies are generallyofferedbyourBrokerageInsurancesegment.

• Fire and allied Lines and Inland Marine.Wewritefireandalliedlinespolicies for individuals and businesses. Individual dwelling policiesgenerally include personal property with optional liability coveragethatprovideanalternativetothehomeowner’spolicyforthepersonallines customer. Commercial fire and allied lines policies provideprotection for damage to commercial buildings and their contents,and these policies may be utilized in selected circumstances as analternative to a commercial package policy. We write inland marineinsurance protection for the property of businesses that is not at afixedlocationandforitemsofpersonalpropertythatareeasilytrans-portable,typically includingbuildersrisk,contractors’equipmentandinstallation, domestic transit and transportation, fine arts, propertyfloaters and leased property. These products are offered by ourBrokerage Insurance segment and our Specialty Business segmentthroughtheirrespectivedistributionsystems.

• Other Liability. InourBrokerage Insurance segment,wewriteotherliability policies for individuals and business owners including mono-line commercial general liability (generally for risks that do not havepropertyexposureorwhosepropertyexposure is insuredelsewhere)andcommercialumbrellapolicies.Also,inourSpecialtyBusinessseg-ment we write General Liability policies for businesses in programsthat are tailored to narrowly defined industry classes, such as smallpublicentities.

• Workers’ Compensation. We write workers’ compensation policies,which are a statutory coverage requirement in almost every state toprotectemployeesincaseofinjuryonthejob,andtheemployerfromliability for an accident involving an employee. In our BrokerageInsurancesegmentwewriteworkers’compensationpoliciesgenerallyforsmallandmediumbusinesses,and inourSpecialtyBusinessseg-mentwewriteworkers’compensationpoliciesinprogramstargetedtospecificindustryclasses,suchasworkersinthehealthcareindustry.

• Commercial automobile.Wewritecoverageforautomobilepoliciesby providing automobile liability, collision and comprehensive insur-anceincludingcommercialandpersonalautomobilepoliciesforbothfleetandnon-fleetrisks(personalautomobilebusinessisdescribedinthebulletbelow).WewritecommercialAutomobilepolicies throughour Brokerage Insurance segment that focuseson business automo-bilesandsmalltrucksforbusinessesotherthantransportationcompa-nies.OurSpecialtyBusinesssegmentfocusesontruckingbusinessesandotherspecialtytransportationbusinesses.

• personal automobile.Wewritepersonalautomobilepoliciesonalim-ited basis in our Brokerage Insurance segment, and we intend toincreaseourpersonalautomobilebusinessaftertheacquisitionoftheOneBeaconPersonalLinesDivision.Wealsowritealimitedamountofnon-standardpersonalautomobilebusiness inourSpecialtyBusinesssegmentthroughseveraltargetedprogramsforthismarkettier.

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• Homeowner’s and personal Dwellings.Ourhomeowner’spolicy isamultiple-perilpolicy,providingpropertyand liabilitycoverages foroneandtwo-family,owner-occupiedresidencesoradditionalcoveragetothehomeownerforpersonalumbrellaandpersonal inlandmarine.WewritethisbusinessthroughourBrokerageInsurancesegment.

The following table shows total Gross Premiums Earned and Gross Loss Ratio by product line for the years ended December 31, 2009, 2008and2007:


2009 2008 2007

($inmillions)

gross premium earned

gross Loss Ratio

GrossPremiumEarned

GrossLossRatio

GrossPremiumEarned

GrossLossRatio

Commercialmultiple-peril $� �349.6 52.0% $242.2 51.5% $221.1 51.8%Otherliability 150.9 52.3% 63.2 42.6% 72.9 64.2%Workers’Compensation 216.2 54.4% 88.4 47.6% 54.1 34.1%CommercialAutomobile 122.4 58.5% 77.8 61.1% 54.3 54.6%Homeowners 145.9 48.9% 83.2 35.5% 92.7 39.9%Fireandalliedlinesandinlandmarine 26.6 42.5% 16.9 57.7% 19.1 53.5%Personalauto 34.7 98.7% 6.6 116.0% 7.9 101.9%

AllLines $1,046.3 54.2% $578.3 49.9% $522.1 50.7%

Organizational StructureIn2009,weredesignedourorganizationalstructuretosupportournationalpresence and expansion from two to three business segments.Inaddition,ourcorporatefunctionsaredividedintothreeareas:corporate,profitandservicecenters.Thecorporatefunctionsareperformedfromourheadquarters located indowntownNewYorkCityandarecomprisedofLegal,CorporateCommunications&Marketing,CorporateDevelopment&InvestorRelations,FinancialOperations,HumanResources&CorporateAdministration and Actuarial. The service center functions encompassOperations,TechnologyandClaims.Theprofitcenter functions includethe three business segments, Corporate Underwriting, BusinessDevelopmentandoversightofthefieldofficesinthefiveregions.

Wehaveestablishedour fieldoffices into five regions throughoutthe United States, the Northeast, Southeast, Midwest, Southwest, andWest,toprovidebusinessdevelopment,underwriting,policyholdersser-vices and claims functions to the Brokerage Insurance and SpecialtyBusinesssegments.TheNortheastregioniscomprisedofConnecticut,Delaware, Maine, Maryland, Massachusetts, New Hampshire, NewJersey,NewYork,Pennsylvania,RhodeIsland,andVermont.TheWestregion is comprised of Alaska, Arizona, California, Hawaii, Idaho,Montana, Nevada, Oregon, and Washington. The Southeast regionincludesAlabama,Florida,Georgia,Mississippi,NorthCarolina,SouthCarolina,Tennessee,Virginia,andWestVirginia.TheSouthwestregionstates include: Arkansas, Colorado, Kansas, Louisiana, Nebraska, NewMexico,Oklahoma,Texas,Utah,andWyoming.Tower’sMidwestregionis comprised of Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota,Missouri,NorthDakota,Ohio,SouthDakota,andWisconsin.

TheNortheastRegionisheadquarteredinNewYorkandhaseightbranches. The Southeast Region has branches in Atlanta, GA, FortLauderdale,FL,Maitland,FLandMobile,AL.TheMidwestRegionwillbeheadquarteredinChicago,IL,co-locatedwithourSpecialtyBusinesssegmentoffice,and this region isexpected togrowbeginning in2010.TheWestRegionisheadquarteredinIrvine,CAandhasabranchofficeinPalmSprings,CA.TheSouthwestRegionconsistsofbusinessmostlyfromTexas.ThisbusinessiscurrentlyunderwrittenandmanagedbyourofficeinNewYorkwhiletheclaimsfunctionoperatesoutofthebranchofficeinIrving,TX.

ThefollowingtableshowsthedirectpremiumswrittenbyregionfortheyearsendedDecember31,2009,2008and2007:


($inmillions) 2009 2008 2007

NortheastRegion $� 724.4 $469.5 $501.3SoutheastRegion 80.0 23.5 11.3MidwestRegion 18.6 6.2 3.5SouthwestRegion 32.6 11.7 0.5WestRegion 164.2 123.9 7.4

Total $�1,019.8 $634.8 $524.0

DistributionWe generate business through independent retail, wholesale and pro-gram underwriting agents, whom we refer to collectively as producers.Theseproducerssellpoliciesforusaswellasforotherinsurancecompa-nies.Wecarefullyselectourproducersbyevaluatingseveralfactorssuchastheirneedforourproducts,premiumproductionpotential,losshistorywithotherinsurancecompaniesthattheyrepresent,productandmarketknowledge,andthesizeoftheagency.Wegenerallyappointproducerswith a total annual premium volume greater than $10,000,000. Weexpectanewproducertobeabletoproduceatleast$500,000inannualpremiumsforusduringthefirstyearand$1million inannualpremiumsafter three years. We select our program underwriting agents basedupontheirunderwritingexpertiseinspecificnichemarkets,typeofbusi-ness,sizeandprofitabilityoftheexistingbookofbusiness.

Commissionsincurredin2009and2008averaged19.4%and18.3%ofgrosspremiumsearned,respectively.Ourcommissionschedulesare1to 2.5 points higher for wholesale than retail agents. Our commissionsarealsohigherforprogramunderwritingagentsthatperformadditionalunderwritingandprocessing servicesonourbehalf, includingpremiumcollection,policyissuanceanddatacollection.InourBrokerageInsurancesegmentwealsohaveaprofitsharingplanthataddedapproximately1/2of1percenttooverallcommissionrates inthepastseveralyears. InourSpecialty Business segment we typically have contingent commissionsthataretiedtothelossratioperformanceforeachprogram.

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Toensure thatweobtainprofitablebusiness fromourproducers,we attempt to position ourselves as our producers’ primary providerwithin the product segments that we offer. We manage the results ofour producers through periodic reviews to monitor premium volumeand profitability. We have access to online premium and loss ratioreports by producer and we estimate each producer’s profitability atleastannuallyusingactuarialtechniques.Wecontinuouslymonitortheperformanceofourproducersbyassessingleadingindicatorsandmet-rics that signal the need for corrective action. Corrective action mayinclude increased frequency of producer meetings and more detailedbusinessplanning.Iflossratioissuesarise,weincreasethemonitoringofindividualrisksandconsiderreducingthatproducer’sbindingauthority.Reviewandenforcementoftheagencyagreementrequirementscanbeused to address inadequate adherence to administrative duties andresponsibilities.Noncompliancecan leadtoreductionofauthorityandpotentialtermination.

In 2009, approximately 45% of the Company’s total business wasgeneratedbywholesaleagents,30%fromretailproducersand20%fromprogram underwriting agents with the remaining 5% from third partyreinsurance. The pending acquisition of OneBeacon’s Personal LinesDivision transaction is expected to provide access to over 900 retailagents,approximatelyone-halfofwhichwillbenewtotheCompany.

Our largest producers in 2009 were Northeast Agencies andMorstanGeneralAgency.IntheyearendedDecember31,2009,theseproducers accounted for 9% and 8%, respectively, of the total of ourgrosspremiumswrittenandproduced.Nootherproducerwasresponsi-bleformorethan3%ofourgrosspremiumswritten.Approximately45%of the 2009 gross premiums written and managed in the BrokerageInsurancesegmentwereproducedbyourtop18producersrepresenting1.3% of our active agents, brokers and program underwriting agents.Theseproducerseachhaveannualwrittenpremiumsof$5,000,000ormore.Aswebuildabroaderdistributionbase,thenumberofproducerswith significant premium volume with Tower is increasing, particularlywiththeadditionofproducersthroughacquisitionsandterritorialexpan-sionintheNortheast,SoutheastandMidwestregions.

The number of agencies from which we receive business hasincreasedoverthepastseveralyearsasfollows:

December31,

2009 2008 2007

RetailAgencies 1,173 940 857WholesaleAgencies 196 102 69ProgramUnderwritingAgents 20 8 5

Total 1,389 1,050 931

underwrItIngTheunderwritingstrategyforcontrollingourlossratioistoseekdiversi-fication in our products and an appropriate business mix for any givenyear, emphasizing profitable lines of business and de-emphasizingunprofitablelines.Atthebeginningofeachyear,weestablishtargetlossratiosforeachlineofbusiness,whichwemonitorthroughouttheyearonamonthlybasis.Ifanylineofbusinessfailstomeetitstargetlossratio,across-functional team comprised of personnel from line underwriting,corporate underwriting, actuarial, claims and loss control departmentsmeettodevelopcorrectiveactionplansthatmayinvolverevisingunder-writingguidelines,non-renewingunprofitablesegmentsorentirelinesofbusinessand/or implementingrateincreases.Duringtheperiodoftimethat a corrective action plan is being implemented with respect to anyproductlinethatfailstomeetitstargetlossratio,premiumforthatprod-uctlineisreducedormaintaineddependinguponitseffectonourtotallossratio.Tooffsetthereductionor lackofgrowth inpremiumvolumefor the products that are undergoing corrective action, we seek toexpand our premium writings in existing profitable lines of business oraddnewlinesofbusinesswithbetterunderwritingprofitpotential.

WegenerallyuseactuariallosscostspromulgatedbytheInsuranceServicesOffice,acompanyprovidingstatistical,actuarialandunderwrit-ingclaimsinformationandrelatedservicestoinsurers,asabenchmarkinthedevelopmentofpricingforourproducts.Wefurthertailorpricingtoeachspecificproductweunderwrite(otherthanworkers’compensation),takingintoaccountourhistorical lossexperienceandindividualriskandcoverage characteristics. For workers’ compensation policies, we useindividualstateadministeredrates,losscostsorratespromulgatedbytheNational Council on Compensation Insurance, Inc. in developing ourpricing,subjecttoindividualrequirements.

Brokerage BusinessWith respect to the business written through our Brokerage Insurancesegment, we establish underwriting guidelines for all the products thatweunderwritetoensureauniformapproachtoriskselection,pricingandriskevaluationamongourunderwritersandtoachieveunderwritingprof-itability.Ourunderwritingprocessinvolvessecuringanadequatelevelofunderwritinginformationfromourproducers,inspectionsandsurveystoidentifyandevaluateriskexposuresandsubsequentlypricingtheriskswechoosetoaccept.Forcertainapprovedclassesofcommercial risksandmostpersonallinespolicies,weallowourproducerstoinitiallybindtheserisksutilizingratingcriteriathatweprovidetothem.Also,ourweb-basedplatforms,webPlus(“webPlus”®)andPreserverOnline,provideourpro-ducerswiththecapabilitytosubmitandreceivequotesovertheinternetand contain our risk selection and pricing logic, thereby enabling us tostreamlineour initialsubmissionandscreeningprocess. Ifthe individualrisk does not meet the initial submission and screening parameterscontained within webPlus or Preserver Online, the risk is automaticallyreferred to our assigned underwriter for specific offline review.See“Business—Technology.”

Onceariskisboundbyourunderwriterorproducer,ourinternaloroutside losscontrol representativesconductphysical inspectionsof theinsuredpremises tovalidate the informationprovidedbyourproducersandprovidealosscontrolreporttoourunderwriterstomakeafinalevalu-ationoftherisk.Withtheexceptionofafewtypically lowriskclassesofbusinesssuchasoffices,allofthenewrisksthatareboundarephysicallyinspectedorsubjecttoatelephonesurvey,generallywithin60daysfromtheeffectivedateof thepolicy,andgenerally reviewedbyunderwritingwithin that60dayperiod. If the inspection reveals that the risk insuredunderthepolicydoesnotmeetourestablishedunderwritingguidelines,thepolicyistypicallycancelledwithinthefirst60daysfromitseffectivedate. If the inspectionreveals thattheriskmeetsourestablishedunder-writingguidelinesbutthepolicywasboundwithincorrectratinginforma-tion, the policy is amended through an endorsement based upon thecorrect information.Wesupplementtheinspectionbyusingonlinedatasourcestofurtherevaluatethebuildingvalue,claimexperience,financialhistoryandcatastropheexposuresoftheinsured.Inaddition,wespecifi-cally tailor coverage to match the insured’s exposure and premiumrequirements.Wecompleteinternalfilereviewsandauditsonamonthly,quarterly and annual basis to confirm that underwriting standards andpricingprogramsarebeingconsistentlyfollowed.Ourpropertyrisksaregenerallycomprisedof residentialbuildings, retail storesandrestaurantscoveredunderpolicieswithlowbuildingandcontentlimits.Wecarefullyunderwrite potential catastrophe exposures to terrorism losses. Ourunderwritingguidelinesaredesignedtoavoidpropertiesdesignatedas,orincloseproximityto,highprofileortargetrisks, individualbuildingsover25 stories and any site within 500 feet of major transportation centers,bridges, tunnels and other governmental or institutional buildings. Inaddition,wemonitor theconcentrationofemployees insuredunderourworkers’compensationpoliciesandavoidwritingriskswithmorethan100employeesinanyonebuilding.Pleasesee“RiskFactors—RisksRelatedtoOurBusiness.”Wemayfacesubstantialexposuretolossesfromterrorismandwearecurrentlyrequiredbylawtooffercoverageagainstsuchlosses.

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We underwrite our products through our underwriting businessunitsthatareeachheadedbyanunderwritingmanager,havingonaver-age26yearsofexperienceinthepropertyandcasualtyindustry.Theseunderwriting offices are supported by professionals in the corporateunderwriting,actuarial,operations,businessdevelopmentandlosscon-troldepartments.Thecorporateunderwritingdepartmentisresponsibleformanagingandanalyzingtheprofitabilityofourentirebookofbusi-ness, supporting lineunderwritingwith technicalassistance,developingunderwritingguidelines,grantingunderwritingauthority,training,devel-opingnewproductsandmonitoringunderwritingqualitycontrolthroughaudits.Theactuarialdepartmentisresponsibleformonitoringrateade-quacyforallofourproductsandanalyzinglossdataonamonthlybasis.The underwriting operations department is responsible for developingworkflows,conductingoperationalauditsandproviding technicalassis-tancetotheunderwritingteams.Thelosscontroldepartmentconductslosscontrol inspectionsonnearlyallnewcommercialandpersonallinesbusinesswritten,utilizing in-house losscontrol representativesandout-side vendors. The business development department works with theunderwritingteamstomanagerelationshipswithourproducers.

Specialty BusinessTheunderwritingprocessutilizedforthespecialtybusiness isbasedonour understanding of best industry practices and, as such, we considertheappropriatenessofinsuringtheclientbyevaluatingthequalityofitsmanagement,itsriskmanagementstrategyanditstrackrecord.Inaddi-tion,werequireeachprogramthatweunderwrite in thespecialtybusi-nesssegmentto includesignificant informationregardingthenatureoftheperilstobe includedanddetailedaggregate informationpertainingto the location(s) of the risks covered. We obtain available informationon the client’s loss history for the perils being insured or reinsured,together with relevant underwriting considerations. In conjunction withtesting each proposed program against our underwriting criteria, ourunderwriters evaluate the proposal in terms of its risk/reward profile toassesstheadequacyoftheproposedpricinganditspotentialimpactonour overall return on capital and corporate risk objectives. Our under-writingprocessintegratestheactuarialandunderwritingdisciplines.Weutilizeourin-houseactuarialstaffaswellasrelyonoutsideconsultantsasnecessary.Theactuarialandunderwritingestimates thatwedevelop inourunderwritingandpricinganalysesareexplicitly trackedbyprogramon a continuous basis through our underwriting audit and actuarialreserving processes. We require significant amounts of data from ourclientsandacceptbusinessforwhichthedataprovidedtousissufficientfor us to make an appropriate analysis. We may supplement the dataprovidedtousbyourclientswithinformationfromtheInsuranceServicesOffices, Inc., the National Council on Compensation Insurance, Inc.,other advisory rate-making associations and other organizations thatprovideprojectedlosscostdatatotheirmembers.

Cl aImsmanagementWe manage the claims function through our regional claims officesthroughouttheUnitedStates.Wealsoutilizethirdpartyadministratorswhospecializeinhandlingcertaintypesofclaims,generallyforourspe-cialtybusiness.Insomesituationsinourspecialtybusiness,theprogramunderwritingagentisalsoappointedbyusasthethirdpartyadministra-torforclaimsforaparticularprogram.

Ourclaimsadjustorsareassignedtocasesbasedupontheirexper-tiseforvarioustypesofclaims,andwemonitortheresultsoftheadjustershandlingtheclaimsusingpeerreviews,claimfileauditsandresultsmoni-toring.Wemonitorclaimsadjustingperformedbythird-partyadministra-torssimilarlytohowwemonitorclaimsadjustingconductedbyourownpersonnel.Wemaintaindatabasesoftheclaimsexperienceofeachofourproducts,territories,andprogramsresults,andourclaimsmanagersworkwithourunderwritersandactuariestoassessresultsandtrends.

Wealsoobtainclaimsadjustmentandlegaldefenseorclaimsauditservices for various types of claims for which additional expertise isneeded.Wemaintainworkingrelationshipswithclaimsdefensefirms inkeylocationsthroughouttheU.S.

Weestablishcaselossreservesforeachclaimbaseduponallofthefacts available at the time to record our best estimate of the ultimatepotentiallossofeachclaim.Wealsoestablishreservesonacase-by-casebasis for theestimated legaldefensecostsof third-partyclaims,some-timesreferredtoasallocatedlossadjustmentexpensereserves.Inaddi-tion, we establish reserves to record, on an overall basis, the costs ofadjustingclaimsthathaveoccurredbuthavenotyetbeensettled,some-timesreferredtoasunallocatedlossadjustmentexpensereserves.

CompetItIonThe insurance industry is highly competitive. Each year we attempt toassessandprojectthemarketconditionswhenwedeveloppricesforourproducts,butwecannotfullyknowourprofitabilityuntilallclaimshavebeenreportedandsettled.

We compete with many insurance companies in each segment inwhichwewritebusiness,andwecompetewithinourproducers’officestowritethetypesofbusinessthatwedesire.Someofourcompetitorshavemore,andinsomecasessubstantiallymore,capitalandgreatermarket-ingandmanagementresourcesthanwehave,andsomeofourcompeti-torshavegreaternameandbrandrecognitionthanwehave,especiallyinareasoutsideoftheNortheastwherewehavemoreexperience.

Competitioninthetypesofbusinessthatweunderwriteandintendtounderwriteisbasedonmanyfactors,including:• reputation;• multiplesolutioncapability;• strengthofclientrelationships;• perceivedfinancialstrengthandfinancialratingsassignedbyindepen-

dentratingagencies;• management’sexperienceintheproduct,territory,orprogram;• premiumschargedandothertermsandconditionsoffered;• services provided, products offered and scope of business, both by

sizeandgeographiclocation;and• reputationforclaimshandling.

Increasedcompetitioncouldresult infewerapplicationsforcover-age, lower premium rates and less favorable policy terms, which couldadverselyaffectus.Weareunable topredict theextent towhichnew,proposedorpotentialinitiativesmayaffectthedemandforourproductsortherisksthatmaybeavailableforustoconsiderunderwriting.

Inourcommercial andpersonal linesadmittedbusiness segments,wecompetewithmajorU.S.insurersandcertainunderwritingsyndicates,including large national companies such as Travelers Companies, Inc.,AllstateInsuranceCompanyandStateFarmInsurance;regionalinsurerssuchasSelective InsuranceCompany,Harleysville InsuranceCompany,Hanover InsuranceandPeerless InsuranceCompanyandsmaller,morelocal competitors such as Greater New York Mutual, Magna CartaCompaniesandUticaFirstInsuranceCompany.Ournon-admittedbind-ingauthorityandbrokeragebusinesswithgeneralagentscompeteswithScottsdaleInsuranceCompany,AdmiralInsuranceCompany,Mt.HawleyInsuranceCompany,NavigatorsGroup,Inc.,EssexInsuranceCompany,Colony Insurance Company, Century Insurance Group, NautilusInsuranceGroup,RLICorp.,UnitedStatesLiabilityInsuranceGroupandBurlington InsuranceGroup, Inc. Inourprogrambusiness,wecompeteagainst companies thatwriteprogrambusiness suchasQBE InsuranceGroupLimited,DelosInsuranceGroup,AmTrustFinancialServices,Inc.,RLICorp.,Chartis Inc.,W.R.BerkleyCorporation,MarkelCorporation,GreatAmericanInsuranceGroupandPhiladelphiaInsuranceCompanies.

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lossandlossadjustmentexpensereservesWearerequiredtoestablishreservesforincurredlossesthatareunpaid,includingreservesforclaimsandlossadjustmentexpenses,whichrepre-senttheexpensesofsettlingandadjustingthoseclaims.Thesereservesare balance sheet liabilities representing estimates of future amountsrequired to pay losses and loss expenses for insured and/or reinsuredclaims thathaveoccurredatorbefore thebalancesheetdate,whetheralreadyknowntousornotyetreported.Ourpolicyistoestablishtheselossesandlossreservesprudentlyafterconsideringallinformationknowntousasofthedatetheyarerecorded.

Loss reserves fall into two categories: case reserves for reportedlosses and loss expenses associated with a specific reported insuredclaim, and reserves for incurred but not reported (“IBNR”) losses andloss adjustment expenses. We establish these two categories of lossreservesasfollows:• Reserves for reported losses—When a claim is received from an

insured, broker or ceding company, or claimant we establish a casereserve for the estimated amount of its ultimate settlement and itsestimated lossexpenses.Weestablishcase reservesbasedupon theknown facts about each claim at the time the claim is reported andmaysubsequently increaseor reducethecasereservesasourclaimsdepartmentdeemsnecessarybaseduponthedevelopmentofaddi-tionalfactsabouttheclaim.

• IBNR reserves—Wealsoestimateandestablishreservesfor lossandloss adjustment expense (“LAE”) amounts incurred but not yetreported, includingexpecteddevelopmentof reportedclaims. IBNRreservesarecalculatedasultimatelossesandLAElessreportedlossesand LAE. Ultimate losses areprojected byusinggenerallyacceptedactuarialtechniques.

Lossreservesrepresentourbestestimate,atagivenpointintime,oftheultimatesettlementandadministrationcostofclaimsincurred.Forworkers’ compensation, our reserves are discounted for claims that aresettledorexpectedtobesettledaslong-termannuitypayments,andasofDecember31,2009thetotalamountofthisdiscountwas$4.5million.Toestimate lossreserves,weutilize informationfromourpricinganaly-ses,actuarialanalysisofclaimsexperiencebyproductandsegment,andrelevant insuranceindustry informationsuchas losssettlementpatternsforthetypeofbusinessbeingreserved.

Since the process of estimating loss reserves requires significantjudgmentaboutanumberofvariables,suchas fluctuations in inflation,judicialtrends,legislativechangesandchangesinclaimshandlingproce-dures,ourultimate liabilitymayexceedorbe lessthantheseestimates.Werevisereservesforlossesandlossexpensesasadditionalinformationbecomesavailableandreflectadjustments,ifany,inearningsintheperi-odsinwhichtheyaredetermined.

Weengageindependentexternalactuarialspecialists,fromtimetotime, to review specific pricing and reserving methods and results. WealsoengageanindependentexternalactuarialspecialisttoopineonthestatutoryreservesthatarerecordedatourInsuranceSubsidiaries.

Reconciliation of Loss and Loss adjustment expensesThetablebelowshowsthereconciliationoflossandLAEonagrossandnetbasisforeachofthe lastthreecalendaryears,reflectingchanges inlossesincurredandpaidlosses:


($inmillions) 2009 2008 2007

BalanceatJanuary1 $� 535.0 $�501.2 $�302.5Lessreinsurancerecoverablesonunpaidlosses (222.2) (189.5) (110.0)

312.8 311.7 192.5Netreserves,atfairvalue,ofacquiredcompanies 549.9 — 85.1Incurredrelatedto: Currentyear 477.8 171.6 159.5 Prioryears (2.3) (8.9) (1.6)

Totalincurred 475.5 162.7 157.9Paidrelatedto: Currentyear 154.2 59.2 55.3 Prioryears 251.7 102.4 68.5

Totalpaid 405.9 161.6 123.8

Netbalanceatendofyear 932.3 312.8 311.7Addreinsurancerecoverablesonunpaidlosses 199.7 222.2 189.5

BalanceatDecember31, $�1,132.0 $�535.0 $�501.2

Ourclaimsreservingpracticesaredesignedtosetreservesthat intheaggregateareadequatetopayallclaimsattheirultimatesettlementvalue.Wediscountaportionofourworkers’compensationreservesandourconsolidatedlossandLAEreservesarenetofa$4.5milliondiscountatDecember31,2009.Withrespecttocompaniesthatareacquired,wealsodetermineaReservesRiskPremiumthatreflectsthepresentvalueofcash flowsand requiredstatutorycapitalas the loss reservesare runoff.TheReservesRiskPremiumisamortizedbasedupontheprojectedpaidlossesunderlyingtheacquiredcompany’sreserves.

Loss Reserve DevelopmentShownbelow is the loss reservedevelopmentforbusinesswritteneachyearfrom1999through2009.Thetableportraysthechangesinourlossand LAE reserves in subsequent years from the prior loss estimatesbasedonexperienceasoftheendofeachsucceedingyear.

The first line of the table shows, for the years indicated, our netreserveliabilityincludingthereserveforincurredbutnotreportedlossesasoriginallyestimated.Forexample,asofDecember31,2000weesti-mated that$7.9millionwouldbeasufficient reserve tosettleallclaimsnot already settled that had occurred prior to December 31, 2000whether reported or unreported to us. The next section of the tableshows, by year, the cumulative amounts of losses and loss adjustmentexpensespaidasoftheendofeachsucceedingyear.Forexample,withrespect to the net losses and loss expense reserve of $7.9 million as ofDecember31,2000,byDecember31,2009(nineyearslater)$8.9millionhadactuallybeenpaidinsettlementoftheclaims.

Thenext sectionof the tablesets forth the re-estimations in lateryearsofincurredlosses,includingpayments,fortheyearsindicated.Forexample,asreflectedinthatsectionofthetable,theoriginalreserveof$7.9millionwasre-estimatedtobe$10.4millionatDecember31,2009.The increase from the original estimate is caused by a combination offactors, including: (1) claims being settled for amounts different thanoriginallyestimated,(2)reservesbeingincreasedordecreasedforclaimsremainingopenasmore informationbecomesknownaboutthose indi-vidual claims and (3) more or fewer claims being reported afterDecember31,2000thananticipated.

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The“cumulativeredundancy/(deficiency)”represents,asofDecember31,2009,thedifferencebetweenthelatestre-estimatedliabilityandthereservesasoriginallyestimated.Aredundancymeanstheoriginalestimatewashigherthanthecurrentestimate;adeficiencymeansthatthecurrentestimateishigherthantheoriginalestimate.Forexample,asofDecember31,2009andbaseduponupdatedinformation,were-estimatedthatthereserveswhichwereestablishedasofDecember31,2008were$0.3millionredundant($312.5millionnetre-estimatedliabilityless$312.8millionoriginalnetliability).

The bottom part of the table shows the impact of reinsurance reconciling the net reserves shown in the upper portion of the table togrossreserves.


($inmillions) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

OriginalNetLiability 6.8 7.9 8.6 15.5 24.4 36.9 101.7 192.5 311.7 312.8 932.3Cumulativepaymentsasof: Oneyearlater 2.6 3.4 2.9 4.1 7.5 10.9 13.7 49.5 102.4 111.4 Twoyearslater 4.8 5.4 4.9 6.7 11.9 4.5 36.7 90.9 163.8 Threeyearslater 6.2 7.0 6.4 9.1 2.9 16.8 60.6 120.0 Fouryearslater 6.9 7.9 7.2 4.5 11.7 30.2 73.9 Fiveyearslater 7.2 8.3 6.7 8.9 17.8 34.9 Sixyearslater 7.5 8.7 7.8 11.7 20.8 Sevenyearslater 7.7 9.0 8.3 13.4 Eightyearslater 7.9 9.1 8.6 Nineyearslater 8.0 8.9 Tenyearslater 7.8Netliabilityre-estimatedasof: Oneyearlater 7.5 9.7 11.5 15.6 24.2 36.6 101.0 191.1 303.9 312.5 Twoyearslater 8.7 11.7 11.3 14.7 24.8 40.7 101.5 178.3 288.1 Threeyearslater 9.5 11.5 10.5 16.5 29.0 48.3 99.5 171.4 Fouryearslater 9.2 10.8 11.9 19.6 36.2 45.3 96.6 Fiveyearslater 9.0 11.9 13.3 25.1 33.6 40.2 Sixyearslater 10.0 12.7 15.7 23.0 27.9 Sevenyearslater 10.6 12.7 13.8 17.0 Eightyearslater 10.6 11.7 10.8 Nineyearslater 9.6 10.4 Tenyearslater 8.7CumulativeNetredundancy/(deficiency) (1.8) (2.5) (2.2) (1.5) (3.5) (3.2) 5.1 21.1 23.6 0.3 ReinsuranceCommutations — — 1.2 3.2 7.2 9.2 9.2 — — —Cumulativenetredundancy/(deficiency)excluding ReinsuranceCommutations (1.8) (2.5) (0.9) 1.7 3.6 5.9 14.3 21.1 23.6 0.3 Netreserves 6.8 7.9 8.6 15.5 24.4 36.9 101.7 192.5 311.7 312.8 932.3 Cededreserves 17.4 20.6 29.0 50.2 75.1 91.8 97.0 110.0 189.5 222.2 199.7

Grossreserves 24.2 28.5 37.6 65.7 99.5 128.7 198.7 302.5 501.2 535.0 1,132.0 Netre-estimated 8.7 10.4 10.8 17.0 27.9 40.2 96.6 171.4 288.1 312.5 Cededre-estimated 25.0 28.1 34.8 48.8 70.8 86.6 86.5 93.6 163.8 212.3

Grossre-estimated 33.7 38.5 45.6 65.8 98.7 126.8 183.1 265.0 451.9 524.8

Cumulativegrossredundancy/(deficiency) (9.5) (10.0) (8.0) (0.1) 0.8 1.9 15.6 37.5 49.3 10.2

(1) Thecumulativepaymentsandthenetliabilitiesareaffectedbycommutations.Wecommutedseveralreinsurancetreatiesin2001thathadtheeffectofloweringthecumulativepaymentsby$0.6millionin2001,$6.8millionin2002,and$10.1millionin2003,2004,2005and2006.

(2) Thenet redundancies reflected in theabovetable for2009and2008resultedprimarily fromthe following:Reserve reductions in2009fromcommercialmulti-peril liabilityandotherliability.Reservereductionsin2008fromcommercialmulti-perilliability,workers’compensation,otherliabilityandpropertylinesofbusinessinaccidentyear2006.

(3) Thenetdeficienciesreflectedintheabovetableforyears2004andpriorresultedprimarilyfromthereinsurancecommutationimpactof$1.2million,$3.2million,$7.2million,and$9.2millionfor2001,2002,2003,and2004,respectively.

(4) “Netre-estimated”fortheyearendedDecember31,2008excludesfavorabledevelopmentof$2.0pertainingtoCastlePointandHermitage.Totalfavorabledevelopmentrecordedin2009on2008andprioraccidentyearstotaled$2.3million,whichincludesCastlePointandHermitagereservedevelopmentrecognizedaftertheacquisitions.

analysis of ReservesThefollowingtableshowsourestimatednetoutstandingcaselossreservesandIBNRbylineofbusinessasofDecember31,2009:

($inmillions)CaseLossReserves IBNR Total

CommercialMultiplePeril $189.3 $�103.8 $�293.1OtherLiability 110.0 127.3 237.3Workers’Compensation 118.5 85.3 203.8CommercialAutomobile 63.5 48.3 111.8Homeowners 38.9 17.7 56.6FireandAlliedLines 6.6 2.3 8.9PersonalAutomobile 13.4 7.4 20.8

AllLines $540.2 $�392.1 $�932.3

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In 2009 we recognized favorable development in our net lossesfromprioraccidentyearsof$2.3millionincluding$2.0millionpertainingtoCastlePointandHermitagerecognizedaftertheacquisitions.

Wecarefullymonitorourgross,cededandnetlossreservesbyseg-mentandlineofbusinesstoensurethattheyareadequate,sinceadefi-ciency in reserves may result in or indicate inadequate pricing on ourproductsandmayimpactourfinancialcondition.

Loss development methods, the Bornhuetter-Ferguson (“B-F”)method,and loss ratioprojections are thepredominant methodologiesthat our actuaries utilize to project losses and corresponding reserves.Baseduponthesemethodsouractuariesdetermineabestestimateoftheloss reserves. All of these methods are standard actuarial approaches.Lossdevelopment factorsarederived fromourdata,aswellas in somecasesfromclaimsexperienceobtainedfromothercarriersorbaseduponindustryexperience,andthelossdevelopmentfactorsareutilizedineachof theactuarialmethods. The loss ratioprojection methodapplies lossdevelopmentfactorstoolderaccidentyearsandprojectsthelossratiotothemostrecentperiodsbasedupontrendfactorsforinflationandpricingchanges. Generally, the loss ratio projection method is given the mostweight for the recent accident year when there is high volatility in thedevelopment patterns, since this method gives little or no weight toimmatureclaimsexperiencethatmaybeunrepresentativeofultimatelossactivity. TheB-Fmethod combines the loss ratio method and the lossdevelopmentmethodtodeterminelossreservesbyaddinganexpecteddevelopment(lossratiotimespremiumtimespercentunreported)tothereported reserves, and isgenerallygivenmoreweightaseachaccidentyearmatures.The lossdevelopmentmethodsutilize reportedpaidandincurred claims experience and loss development factors, and thesemethodsaregivenincreasingweightaseachaccidentyearmatures.

The incurred method relies on historical development factorsderivedfromchanges inour incurredestimatesofclaimspaidandcasereserves over time. The paid method relies on our claim payment pat-terns and ultimate claim costs. The incurred method is sensitive tochanges in case reserving practices over time. Thus, if case reservingpractices change over time, the incurred method may produce signifi-cantvariationsinestimatesofultimatelosses.Thepaidmethodreliesonactualclaimpaymentsandtherefore isnotsensitivetochanges incasereserveestimates.

Thetablebelowshowstherangeofthereservesestimatesby lineof business. The low end of the range of our sensitivity analysis wasderivedbygivingmoreweighttothelowestestimateamongthealterna-tive methods for each line of business and accident year. Similarly, thehigh end of the range of our sensitivity analysis was derived by givingmoreweighttothehighestestimateamongthealternativemethodsforeach line of business and accident year. We believe that changing theweighting for the four methods by line of business and accident yearreflectsreasonablylikelyoutcomes,althoughevenfurthervariationcouldresultbaseduponchangesinvariousinputswithineachmethod,suchasvariationinlossdevelopmentpatternsorvariationinexpectedlossratios.Webelievetheresultsofthesensitivityanalysis,whicharesummarizedinthetablebelow,constituteareasonablerangeofexpectedoutcomesofourreservesfornetlossandLAE:

RangeofReserveEstimates

($inmillions) High Low Carried

CommercialMultiplePeril $�310.8 $�269.7 $�293.1OtherLiability 260.6 210.8 237.3Workers’Compensation 217.0 188.3 203.8CommercialAutomobile 119.2 98.1 111.8Homeowners 59.4 53.7 56.6FireandAlliedLines 9.3 8.4 8.9PersonalAutomobile 22.2 18.7 20.8

AllLines $�998.5 $�847.7 $�932.3

Theresultingrangederivedfromoursensitivityanalysiswouldhaveincreased net reserves by $66.1 million, or 7.1%, and or decreased netreservesby$84.6million,or9.7%.

Wearenotawareofanyclaims trends thathaveemergedor thatwould cause future adverse development that have not alreadybeen considered in existing case reserves and in our current lossdevelopmentfactors.

InNewYorkState,lawsuitsfornegligence,subjecttocertainlimita-tions,mustbecommencedwithinthreeyearsfromthedateoftheacci-dent or are otherwise barred. Accordingly, our exposure to IBNR foraccidentyears2005andpriorislimitedalthoughthereremainsthepos-sibilityofadversedevelopmentonreportedclaims.

Duetotheclosemonitoringandanalysisofreserves,webelieveourlossreservesareadequate.Thisisreflectedbythefavorablelossdevel-opment that we have experienced in each of the past several years.However, there are no assurances that future loss development andtrendswillbeconsistentwithourpast lossdevelopmenthistory,andsoadverse loss reservedevelopment remainsa risk factor toourbusiness.See“RiskFactors—RisksRelatedtoOurBusiness—IfouractuallossandLAEexceedourlossreserves,ourfinancialconditionandresultsofoper-ations could be significantly adversely affected.” See “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Critical Accounting Policies—Loss and Loss AdjustmentExpenseReserves.”

InvestmentsOur investment guidelines specify minimum criteria for overall creditquality,liquidityandrisk-returncharacteristicsofourinvestmentportfo-lio and include limitations on the size of particular holdings, as well asrestrictions on investments in different asset classes. We utilize severalindependentinvestmentadvisorstoeffectinvestmenttransactions,ren-der investmentaccountingservicesandprovide investmentadvice.Wealsohaveretainedandmayretainotherinvestmentadvisorstomanageoradviseusregardingportionsofouroverallinvestmentportfolio.

TheCompany’sinvestmentstrategysupportstheCompany’sover-all business strategy. The investment strategy seeks to achieve theappropriatebalanceamongprovidingstabilityofprincipaltomeetfuturepolicyholder obligations, providing income to enhance profitability,maintainingliquiditytosustainoperationsandgrowingthestockholders’equityovertime.

The Company’s investment strategy will manage investment riskbased on the organization’s ability to accept such risk. The investmentstrategywill:• Maintain adequate liquidity and capital to meet the organization’s

responsibilitytopolicyholders,• ProvideaconsistentlevelofincometosupporttheCompany’sprofit-

abilityandoperatinggoals,• Seek to grow the value of assets over time, thereby increasing the

Company’scapitalstrength,and• ManagetheinvestmentriskbasedontheCompany’sabilitytoaccept

suchrisk.

We monitor the quality of investments, duration, sector mix, andactualandexpected investment returns. Investmentdecision-making isguided by general economic conditions as well as management’s fore-castofourcashflows, includingthenatureandtimingofourexpectedliability payouts and the possibility that we may have unexpected cashdemands, for example, to satisfy claims due to catastrophic losses.We expect our investment portfolio will continue to consist mainly ofhighlyratedandliquidfixed-incomesecurities;however,wemayinvestaportion of our funds in other asset types including common equityinvestmentsandnon-investmentgradebonds.

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Our investment guidelines require compliance with applicablegovernmentregulationsandlaws.Withouttheapprovalofourboardofdirectors, we cannot purchase, and we have not purchased, financialfutures, options or other derivatives. We expect the majority of ourinvestment holdings to continue to be denominated in U.S. dollars.We report overall investment results to the board of directors on aquarterlybasis.

r atIngsRatingsbyindependentagenciesareanimportantfactorinestablishingthecompetitivepositionofinsuranceandreinsurancecompaniesandareimportanttoourabilitytomarketandsellourproducts.Ratingorganiza-tions continually review the financial positions of insurers. A.M. Best isoneofthemostimportantratingagenciesforinsuranceandreinsurancecompanies. A.M. Best maintains a letter scale rating system rangingfrom A++ (Superior) to F (In liquidation). In evaluating a company’sfinancial strength, A.M. Best reviews the company’s profitability, lever-age and liquidity, as well as its book of business, the adequacy andsoundnessof its reinsurance, thequalityandestimatedmarketvalueofits assets, the adequacy of its loss and loss expense reserves, the ade-quacyofitssurplus,itscapitalstructure,theexperienceandcompetenceofitsmanagementanditsmarketpresence.

TheobjectiveofA.M.Best’sratingssystemistoprovideanopinionofaninsurer’sorreinsurer’sfinancialstrengthandabilitytomeetongoingobligationstoitspolicyholders.Theseratingsreflecttheabilitytopaypoli-cyholder claims and are not a recommendation to buy, sell or hold thesharesofaparticularcompany.Theseratingsaresubjecttoperiodicreviewby,andmayberevisedorrevokedatthesolediscretionofA.M.Best.

WiththeexceptionofCPNIC,whichiscurrentlyratedB+(Good),A.M. Best has assigned each of our insurance company subsidiaries aFinancial Strength rating of A- (Excellent—assigned to companies thathave, intheiropinion,anexcellentabilitytomeettheirongoingobliga-tionstopolicyholders),whichisthefourthhighestoffifteenratinglevels.

Our Insurance Subsidiaries are also rated by Demotech, Inc.(“Demotech”), and have received a Financial Stability Rating of A’(A Prime), which is the second highest of Demotech’s six ratings.Demotech’s ratingprocess isdesignedtoprovideanobjectivebaselinefor assessing solvency which in turn provides insight into changes infinancialstability.Demotech’sFinancialStabilityRatingsarebasedupona series of quantitative ratios and quantitative considerations whichtogethercompriseaFinancialStabilityAnalysisModel.

regul atorymattersOurInsuranceSubsidiariesaresubjecttoextensivegovernmentalregu-lation and supervision in the U.S., and our reinsurance subsidiary,CastlePoint Reinsurance, is subject to governmental regulation inBermuda.Mostinsuranceregulationsaredesignedtoprotecttheinter-estsofpolicyholdersratherthanshareholdersandotherinvestors.Theseregulations,generallyadministeredbyadepartmentofinsuranceineachjurisdictionrelateto,amongotherthings:• approvalofpolicyformsandpremiumratesforourprimaryinsurance

operations;• standardsofsolvency,includingrisk-basedcapitalmeasurements;• licensingofinsurersandtheiragents;• restrictionsonthenature,qualityandconcentrationofinvestments;• restrictionsontheabilitytopaydividendstous;• restrictions on transactions between insurance company subsidiaries

andtheiraffiliates;• restrictionsonthesizeofrisksinsurableunderasinglepolicy;• requiringdepositsforthebenefitofpolicyholders;

• requiringcertainmethodsofaccounting;• periodicexaminationsofouroperationsandfinances;• establishmentoftrustfundsfortheprotectionofpolicyholders;• prescribing the form and content of records of financial condition

requiredtobefiled;and• requiringreservesforunearnedpremium,lossesandotherpurposes.

OurInsuranceSubsidiariesalsoaresubjecttostatelawsandregula-tions that require diversification of investment portfolios and that limittypesofpermittedinvestmentsandtheamountofinvestmentsincertaininvestmentcategories.Failuretocomplywiththeselawsandregulationsmaycausenon-conforming investments tobetreatedasnon-admittedassets for purposes of measuring statutory capital and surplus and, insomeinstances,wouldrequiredivestiture.

Insurance departments also conduct periodic examinations of theaffairsofinsurancecompaniesandrequirethefilingofannualandotherreports relating to financial condition, holding company issues andothermatters.

Inaddition,regulatoryauthoritieshaverelativelybroaddiscretiontodenyorrevokeinsurancelicensesforvariousreasons,includingtheviola-tionofregulations.Webasesomeofourpracticesonourinterpretationsofregulationsorpracticesthatwebelievearegenerallyfollowedbytheindustry.Thesepracticesmayturnouttobedifferentfromtheinterpre-tationsofregulatoryauthorities. Ifwedonothavetherequisite licensesandapprovalsordonotcomplywithapplicableregulatoryrequirements,insurance regulatory authorities could preclude or temporarily suspendusfromcarryingonsomeorallofouractivitiesorotherwisepenalizeus.Thiscouldadverselyaffectus.Further,changesinthelevelofregulationoftheinsuranceorreinsuranceindustryorchangesinlawsorregulationsthemselves or interpretations by regulatory authorities could adverselyaffectus.

regul atIon

U.S. Insurance Holding Company Regulation of TowerTower,astheparentoftheInsuranceSubsidiaries,issubjecttotheinsur-ance holding company laws of New York, Florida, Illinois, Maine,Massachusetts,NewHampshireandNewJersey,thedomesticjurisdic-tions of the Insurance Subsidiaries. In addition, for certain limited pur-poses,someInsuranceSubsidiariesmayhavetocomplywiththelawsofjurisdictions of commercial domicile, as defined by state law, includingCalifornia. These laws generally require the Insurance Subsidiaries toregister with their respective domiciliary state Insurance Department(“Insurance Department”) and to furnish annually financial and otherinformationabouttheoperationsofcompanieswithintheholdingcom-panysystem.Generallyundertheselaws,allmaterialtransactionsamongcompanies in the holding company system to which an InsuranceSubsidiaryisaparty, includingsales, loans,reinsuranceagreementsandserviceagreements,mustbefairandreasonableand, ifmaterialorofaspecifiedcategory,requirepriornoticeandapprovalornon-disapprovalbytheInsuranceDepartment.

Changes of ControlBefore a person can acquire control of an Insurance Subsidiary, priorwritten approval must be obtained from the Superintendent or theCommissioner of the Insurance Department (“Superintendent”) ofthe InsuranceSubsidiary’sdomestic jurisdictionor jurisdictionof com-mercialdomicile.Priortograntingapprovalofanapplicationtoacquirecontrolofan insurer, theSuperintendentconsiderssuchfactorsas:thefinancialstrengthoftheapplicant,theintegrityandmanagementoftheapplicant’s Board of Directors and executive officers, the acquirer’splans for the future operations of the domestic insurer and anyanti-competitive results that may arise from the consummation of theacquisition of control. Pursuant to insurance holding company laws,

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“control”meansthepossession,directorindirect,ofthepowertodirectorcausethedirectionofthemanagementandpoliciesofthecompany,whetherthroughtheownershipofvotingsecurities,bycontract(exceptacommercialcontract forgoodsornon-managementservices)orother-wise. Control is presumed to exist if any person directly or indirectlyowns, controlsorholdswith thepower tovoteacertain thresholdper-centageofthevotingsecuritiesofthecompany.Inthedomesticjurisdic-tionsofallbutoneoftheInsuranceSubsidiaries,thethresholdpercentageofvotingsecuritiesthattriggersapresumptionofcontrolis10%ormore.InFlorida,thethresholdpercentagethattriggersapresumptionofcon-trolis5%ofthevotingsecurities.TheInsuranceDepartment,afternoticeand a hearing, may determine that a person or entity which directly orindirectly owns, controls or holds with the power to vote less than thethresholdpercentageofthevotingsecuritiesofthecompany,“controls”thecompany.Becauseapersonacquiring10%ormoreofourcommonstock would indirectly control the same percentage of the stock of theInsuranceSubsidiaries,theinsurancecompanychangeofcontrollawsofNew York,California, Illinois,New Jersey,New Hampshire,MaineandMassachusetts would likely apply to such a transaction. The insurancecompanychangeofcontrollawsofFloridawouldlikelyapplytoanacqui-sitionof5%ormoreofourvotingstock.

Theselawsmaydiscouragepotentialacquisitionproposalsandmaydelay,deterorpreventachangeofcontrolofTower, includingthroughtransactions,andinparticularunsolicitedtransactions,thatsomeorallofthestockholdersofTowermightconsidertobedesirable.

Legislative ChangesFromtimetotime,variousregulatoryandlegislativechangeshavebeenproposed in the insurance industry. Among the proposals that have inthepastbeenorareatpresentbeingconsideredarethepossibleintro-ductionofFederalregulationinadditionto,orinlieuof,thecurrentsys-tem of state regulation of insurers and proposals in various statelegislatures (some of which proposals have been enacted) to conformportions of their insurance laws and regulations to various model actsadopted by the National Association of Insurance Commissioners(“NAIC”).Weareunabletopredictwhetheranyoftheselawsandregu-lationswillbeadopted,theforminwhichanysuchlawsandregulationswouldbeadopted,ortheeffect,ifany,thesedevelopmentswouldhaveonouroperationsandfinancialcondition.

In 2002, the Federal government enacted legislation designed toensure the availability of insurance coverage for terrorist acts in theUnitedStatesofAmericaandestablishedaFederalassistanceprogram.Subsequentlawswereenactedin2005and2007extendingandmodify-ingthepriorlegislation.Foradiscussionofthislegislation,see“Business—Reinsurance—Terrorism Reinsurance.” As a result of this legislation,potential lossesfromaterroristattackcouldbesubstantially largerthanpreviouslyexpected,couldalsoadverselyaffectourabilitytoobtainrein-suranceonfavorableterms,includingpricing,andmayaffectourunder-writingstrategy,rating,andotherelementsofouroperation.

State Insurance RegulationStateinsuranceauthoritieshavebroadregulatorypowerswithrespecttovarious aspects of the business of U.S. insurance companies. The pri-marypurposeofsuchregulatorypowers is toprotect individualpolicy-holders.Theextentofsuchregulationvaries,butgenerallyhasitssourcein statutes that delegate regulatory, supervisory and administrativepower to state Insurance Departments. Such powers relate to, amongother things, licensing to transact business, accreditation of reinsurers,admittance of assets to statutory surplus, regulating unfair trade andclaims practices, establishing reserve requirements and solvency stan-dards,regulatinginvestmentsanddividends,approvingpolicyformsandrelatedmaterialsincertaininstancesandapprovingpremiumratesincer-taininstances.Stateinsurancelawsandregulationsrequireaninsurancecompany to file financial statements with Insurance Departments

everywhere it will be licensed to conduct insurance business, and itsoperationsaresubjecttoexaminationbythosedepartments.

OurInsuranceSubsidiariespreparestatutoryfinancialstatementsinaccordance with Statutory Accounting Principles (“SAP”) and proce-duresprescribedorpermittedbytheirstateofdomicile.Aspartoftheirregulatory oversight process, Insurance Departments conduct periodicdetailedexaminationsofthebooksandrecords,financialreporting,pol-icyfilingsandmarketconductofinsurancecompaniesdomiciledintheirstates,generallyonceeverythreetofiveyears.Examinationsaregener-allycarriedoutincooperationwiththeInsuranceDepartmentsofotherstatesunderguidelinespromulgatedbytheNAIC.

Thetermsandconditionsofreinsuranceagreementsgenerallyarenot subject to regulation by any U.S. state Insurance Department withrespecttoratesorpolicyterms.Asapracticalmatter,however,theratescharged by primary insurers do have an effect on the rates that canbechargedbyreinsurers.

Insurance Regulatory Information System RatiosThe Insurance Regulatory Information System, or IRIS, was developedby the NAIC and is intended primarily to assist state InsuranceDepartmentsinexecutingtheirstatutorymandatestooverseethefinan-cialconditionofinsurancecompaniesoperatingintheirrespectivestates.IRIS identifies thirteen industry ratios and specifies “usual values” foreachratio.Departurefromtheusualvaluesonfourormoreoftheratioscanleadtoinquiriesfromindividualstateinsurancecommissionersastocertainaspectsofaninsurer’sbusiness.

In2009,TICNY,CPICandCNIC’sresultswereoutsidetheusualvaluesforoneIRISratioandwithintheusualvaluesfortwelveIRISratios.TheoneIRISratiothatwasoutsidetheusualvaluewasadjustedliabilitiestoliquidassets.Theratiooutsideoftheusualvaluewascausedbyinter-company pooling liabilities between Tower’s insurance company poolmembers. The ratio would have been within the usual balance if weexcludedtheseintercompanypayablesfromthecalculation.TICNYandits insurance company subsidiaries were members of an intercompanypooling arrangement in 2009 and 2008. NEIC’s IRIS results were out-side theusualvalues for two IRIS ratiosandwithin theusualvalues fortwelveIRISratios.Thetworatiosthatwereoutsidetheusualvalueswereadjusted liabilities to liquid assets and change in net premium writtenwhich were caused by the intercompany pooling arrangement.TheTower intercompanypoolexperiencedsignificantpremiumgrowthasaresultoftheCastlePoint,SUAandHermitageacquisitionsin2009.Theseratioswouldhavebeenwithintheusualbalancesonacombinedpool basis. PIC, MVIC, and KIC’s IRIS results were outside the usualvaluesforthreeIRISratiosandwithintheusualvaluesfortenIRISratios.ThethreeIRISratiosthatwereoutsidetheusualvalueswerechangesinchange in net premiumswritten, adjusted liabilities to liquidassets andestimated current reserve deficiency to policyholders’ surplus. Thechangeinnetpremiumsandtheestimatedcurrentreservedeficiencytopolicyholders’surpluswascausedbygrowth inpremiumwhichresultedfromthe2009insurancecompanyacquisitions,whiletheadjustedliabili-ties to liquid assets was due to the aforementioned reasons. KIC alsoreinsuredallofitsinforcepremiumandnewandrenewalbusinesstoPICeffectiveJuly1,2009whichcausedsignificantchangesinbothKICandPIC.Theseratioswouldhavebeenwithintheusualbalancesonacom-bined pool basis. HIC’s results were outside the usual values for threeIRISratiosandwithintheusualvaluesfortenIRISratios.ThethreeIRISratiosthatwereoutsidetheusualvalueswerechanges inchange innetpremiums written, adjusted liabilities to liquid assets and change inadjusted policyholders’ surplus. The change in net premiums and theadjusted liabilities to liquid assets was due to the aforementionedreasons. The change in adjusted policyholders’ surplus resulted fromunrealizedgainsoninvestments,profitableunderwritingresultsassumedfrom the intercompany pool and an increase in admitted deferredtaxassets.Theseratioswouldhavebeenwithintheusualbalancesona

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combinedpoolbasis.TNIC’s IRISresultswereoutsidetheusualvaluesfor four IRIS ratiosandwithin theusualvalues fornine IRIS ratios.ThefourIRISratiosthatwereoutsidetheusualvaluesweregrosspremiumswrittentopolicyholders’surplus,changeinnetpremiumswritten,invest-mentyieldandadjusted liabilities to liquidassets.The ratiosoutsideoftheusualvalueswerecausedbygrowthinTNIC’sdirectpremiumwrit-ten,aswellasthegrowthinitsnetpremiumwrittenwhichresultedfromchanges made to the intercompany pooling arrangement which wasamendedin2009asToweracquirednewinsurancecompanies.TheIRISratiowasalsooutsidetheusualvaluefortheadjustedliabilitiestoliquidassets, which also was caused by intercompany pooling liabilities whichwereowedbyTNICtothepoolmanager,TICNY.Theratiowouldhavebeen within the usual balance if we excluded these intercompany pay-ablesfromtheratio.CPFL’sIRISresultswereoutsidetheusualvaluesforsix IRIS ratios andwithin the usual values for seven IRIS ratios. The sixIRISratiosthatwereoutsidetheusualvalueswerechangeinnetpremi-umswritten,two-yearoperatingratio,investmentyield,grosschangeinpolicyholders’ surplus, change in adjusted policyholders’ surplus andgrossagents’balancestopolicyholders’surplus.TheratiosoutsideoftheusualvaluesprimarilyresultedfromCPFLcommencingitsoperationsin2009whichcausedsignificantgrowthin2009.

State Dividend LimitationsTower’s ability to receive dividends from its Insurance Subsidiaries isrestricted by the state laws and insurance regulations of the InsuranceSubsidiaries’domiciliarystates.TICNY’sabilitytopaydividendsissub-jecttorestrictionscontainedintheinsurancelawsandrelatedregulationsof New York. Under New York law, TICNY may pay dividends out ofstatutory earned surplus. In addition, the New York InsuranceDepartment must approve any dividend declared or paid by TICNYthat,togetherwithalldividendsdeclaredordistributedbyTICNYdur-ing thepreceding12months,exceeds the lesserof (1) 10%ofTICNY’spolicyholder’ssurplusasshownonitslateststatutoryfinancialstatementfiledwiththeNewYork InsuranceDepartmentor(2)100%ofadjustednet investment income during the preceding twelve months. TICNYdeclaredapproximately$2.0million,$5.2millionand$8.5millionindivi-dendstoTower in2009,2008and2007,respectively.AsofDecember31,2009,themaximumdistributionthatourInsuranceSubsidiariescouldpay without prior regulatory approval was approximately $52.8 million.Theother InsuranceSubsidiariesaresubjecttosimilar restrictions,usu-ally related to policyholders’ surplus, unassigned funds or net income,andnoticerequirementsoftheirdomiciliarystate.

Risk-Based Capital RegulationsThe Insurance Departments require domestic property and casualtyinsurerstoreporttheirrisk-basedcapitalbasedonaformuladevelopedand adopted by the NAIC that attempts to measure statutory capitalandsurplusneedsbasedontherisksintheinsurer’smixofproductsandinvestment portfolio. The formula is designed to allow the InsuranceDepartmentstoidentifypotentialweakly-capitalizedcompanies.Undertheformula,acompanydeterminesits“risk-basedcapital”bytakingintoaccountcertainrisksrelatedtotheinsurer’sassets(includingrisksrelatedtoitsinvestmentportfolioandcededreinsurance)andtheinsurer’sliabil-ities(includingunderwritingrisksrelatedtothenatureandexperienceofitsinsurancebusiness).AtDecember31,2009,risk-basedcapitallevelsofourInsuranceSubsidiariesexceededtheminimumlevelthatwouldtrig-ger regulatory attention. In their 2009 statutory statements, ourInsurance Subsidiaries complied with the NAIC’s risk-based capitalreportingrequirements.

Statutory accounting principlesEach U.S. insurance company is required to file quarterly and annualstatementsthatconformtoSAP.SAPisabasisofaccountingdevelopedtoassist insuranceregulators inmonitoringandregulatingthesolvencyof insurance companies. It is primarily concerned with measuring an

insurer’s surplus to policyholders. Accordingly, statutory accountingfocusesonvaluingassetsand liabilitiesof insurersat financial reportingdatesinaccordancewithappropriateinsurancelawandregulatoryprovi-sionsapplicableineachinsurer’sdomiciliarystate.

GAAPisconcernedwithacompany’ssolvency,but it isalsocon-cerned with other financial measurements, such as income and cashflows. Accordingly, GAAP gives more consideration to appropriatematching of revenue and expenses and accounting for management’sstewardshipofassetsthandoesSAP.Asadirectresult,differentassetsand liabilities and different amounts of assets and liabilities will bereflectedinfinancialstatementspreparedinaccordancewithGAAPasopposedtoSAP.

Statutory accounting practices established by the NAIC andadopted,inpart,bythestateregulatorsdetermine,amongotherthings,theamountofstatutorysurplusandstatutorynetincomeoftheInsuranceSubsidiaries and thus determine, in part, the amount of funds that areavailabletopaydividends.

Loss Reserve Specialist and Statements of actuarial OpinionEach U.S. insurance company is required to provide a Statement ofActuarialOpinionconcerningtheadequacyofitslossandlossexpensereserves. Similarly, CastlePoint Reinsurance is required to submit anopinionof itsapprovedlossreservespecialistwithitsstatutoryfinancialreturninrespectofitslossandLAEprovisions.

Statements of Actuarial Opinion are prepared and signed by thedesignated actuary for each U.S. company, and by the loss reservespecialist in the case of a Bermuda company such as CastlePointReinsurance.Thedesignatedactuaryandlossreservespecialistnormallyisaqualifiedcasualtyactuary,andinthecaseofCastlePointReinsurance,mustbeapprovedbytheBermudaMonetaryAuthority.

An independent external actuarial firm provides Statements ofActuarialOpinionsforallofourInsuranceSubsidiaries.ThisfirmutilizesFellowsoftheCasualtyActuarialSocietyandMembersoftheAmericanAcademy of Actuaries to provide the service necessary for theStatementsofActuarialOpinion.

guaranty associationsInmostofthejurisdictionswheretheInsuranceSubsidiariesarecurrentlylicensed to transact business there is a requirement that property andcasualty insurers doing business within the jurisdiction participate inguaranty associations, which are organized to pay contractual benefitsowed pursuant to insurance policies issued by impaired, insolvent orfailed insurers. These associations levy assessments, up to prescribedlimits,onallmemberinsurersinaparticularstateonthebasisofthepro-portionateshareofthepremiumwrittenbymemberinsurersinthelinesofbusinessinwhichtheimpaired,insolventorfailedinsurerisengaged.Some states permit member insurers to recover assessments paidthroughfullorpartialpremiumtaxoffsets.

Innoneofthepastfiveyearshastheassessmentinanyyearleviedagainstour InsuranceSubsidiariesbeenmaterial.Propertyandcasualtyinsurancecompanyinsolvenciesorfailuresmayresultinadditionalsecu-rityfundassessmentstoourInsuranceSubsidiariesatsomefuturedate.Atthistimeweareunabletodeterminetheimpact, ifany,suchassess-mentsmayhaveontheconsolidatedfinancialpositionorresultsofoper-ations.Wehaveestablishedliabilitiesforguarantyfundassessmentswithrespect to insurers thatarecurrently subject to insolvencyproceedingsand assessments by the various workers’ compensation funds. See“Note17—CommitmentsandContingencies”inthenotestoourauditedconsolidatedfinancialstatementsincludedelsewhereinthisreport.

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Residual Market plansOurInsuranceSubsidiariesarerequiredtoparticipateinvariousmanda-toryinsurancefacilitiesorinfundingmandatorypools,whicharegener-ally designed to provide insurance coverage for consumers who areunable to obtain insurance in the voluntary insurance market. Thesepools generally provide insurance coverage for workers’ compensation,personalandcommercialautomobileandproperty-relatedrisks.

TRM, CpM and CpRMFLThe activities of TRM, CPM and CPRMFL are subject to licensingrequirements and regulation under the laws of New York, New Jerseyandtheotherstateswheretheyoperate.ThebusinessesofTRM,CPMandCPRMFLbusinessdependon thevalidityof,andcontinuedgoodstanding under, the licenses and approvals pursuant to which theyoperate, as well as compliance with pertinent regulations. TRM, CPMand CPRMFL therefore devote significant effort toward maintainingtheir licenses to ensure compliance with a diverse and complexregulatorystructure.

reInsur anCeWepurchasereinsurancetoreduceournetliabilityonindividualrisks,toprotectagainstpossiblecatastrophes,toachieveatargetratioofnetpre-miumswrittentopolicyholders’surplusandtoexpandourunderwritingcapacity.Reinsurancecoveragecanbepurchasedonafacultativebasiswhen individual risksare reinsured,orona treatybasiswhenaclassortypeofbusinessisreinsured.Wepurchasefacultativereinsurancetopro-vide limits in excess of the limits provided by our treaty reinsurance.Treatyreinsurancefallsintothreecategories:quotashare(alsocalledprorata),excessoflossandcatastrophetreatyreinsurance.Underourquotashare reinsurance contracts, we cede a predetermined percentage ofeach risk for a class of business to the reinsurer and recover the samepercentageoflossesandLAEonthebusinessceded.Wepaytherein-surer thesamepercentageof theoriginalpremium, lessacedingcom-mission.Thecedingcommissionrateisbaseduponthecededlossratioon the ceded quota share premiums earned and in certain contracts isadjustedforlossexperienceunderthosecontracts.See“Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Critical Accounting Policies—Ceding CommissionsEarned.”Underourexcessoflosstreatyreinsurance,wecedeallorapor-tionoftheliabilityinexcessofapredetermineddeductibleorretention.Wealsopurchasecatastrophereinsuranceonanexcessof lossbasis toprotect ourselves from an accumulation of net loss exposures from acatastrophiceventor seriesofeventssuchas terroristacts, riots,wind-storms, hailstorms, tornadoes, hurricanes, earthquakes, blizzards andfreezing temperatures. We do not receive any commission for cedingbusinessunderexcessoflossorcatastrophereinsuranceagreements.

Thetype,costandlimitsofreinsurancewepurchasecanvaryfromyeartoyearbaseduponourdesiredretentionlevelsandtheavailabilityof quality reinsurance at acceptable prices, terms and conditions. OurexcessoflossreinsuranceprogramwasrenewedonJanuary1,2010andourcatastrophereinsuranceprogramwasrenewedJuly1,2009.

In recent years, the reinsurance industry has undergone verydramaticchanges.Softmarketconditionscreatedbyyearsofinadequatepricing brought poor results, which were exacerbated by the events ofSeptember 11, 2001. As a result, market capacity was reduced signifi-cantly. Reinsurers exited lines of business, significantly raised rates andimposedmuchtightertermsandconditions,wherecoveragewasoffered,to limit or reduce their exposure to loss. The hurricanes that struckFloridaandtheGulfcoast in2004and2005contributedto this trend,particularly in regard to catastrophe reinsurance. These conditionsabatedsomewhatduring2007butcontinued in2008and2009as theGulfcoastwasagainimpactedbyhurricaneactivityin2008.

Inanefforttomaintainquotasharecapacityforourbusinesswithfavorablecommissionlevels,wehaveacceptedlossratiocapsinourrein-surancetreaties.Lossratiocapscutoffthereinsurers’ liabilityfor lossesabove a specified loss ratio. These provisions have been structured toprovidereinsurerswithsomelimitontheamountofpotentiallossbeingassumed,whilemaintainingthetransferofsignificantinsuranceriskwiththepossibilityofasignificantlosstothereinsurers.Webelieveourrein-surancearrangementsqualify for reinsuranceaccounting inaccordancewithGAAPandSAPguidance.Thelossratiocapsforourquotasharetreatieswere95.0%in2005,95.0%in2004,92.0%in2003and97.5%in2002.In2008,weacceptedalossratiocapfromtheSwissReAmericaquota share agreement. This loss ratio was capped at 120% of earnedpremiumandtheagreementexpiredonDecember31,2008.In2009,weacceptedalossratiocapof110%underabrokerageliabilityquotashareagreementeffectiveOctober1,2009.

Regardlessoftype,reinsurancedoesnotlegallydischargetheced-inginsurerfromprimaryliabilityforthefullamountdueundertherein-suredpolicies.However,theassumingreinsurerisobligatedtoindemnifythecedingcompanytotheextentofthecoverageceded.Toprotectourcompanyfromthepossibilityofareinsurerbecomingunabletofulfillitsobligationsunderthereinsurancecontracts,weattempttoselectfinan-cially strong reinsurers with an A.M. Best Company rating of A-(Excellent) or better and continue to evaluate their financial conditionandmonitorvariouscreditriskstominimizeourexposuretolossesfromreinsurerinsolvencies.

To furtherminimizeourexposure to reinsurance recoverables, the2009 and 2010 brokerage quota share agreements were placed on a“fundswithheld”basisunderwhichcededpremiumswrittenaredepos-itedinsegregatedtrustfundsfromwhichwereceivepaymentsforlossesandcedingcommissionadjustments.Our reinsurance receivables fromnon-admitted reinsurers are collateralized either by Letter of Credit orNewYorkRegulation114complianttrustaccounts.

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ThefollowingtablesummarizesourreinsuranceexposuresbyreinsurerasofDecember31,2009:

($inmillions)A.M.Best

Rating

PrepaidandReturn

ReinsurancePremium

FundsHeld,CededPayables

andDeferredCeding

Commission

AmountsinTrustAccountsorSecuredby

LettersofCredit

NetExposuretoReinsurer

Recoverableon

PaidLosses Reserves

ReinsurerOneBeaconInsurance A $� �— $� 42.8 $� ��— $� �— $� �— $� 42.8EnduranceReinsuranceCorp.ofAmerica A — 10.1 2.7 2.2 — 10.6LloydsSyndicates A — 9.8 2.6 2.0 — 10.4AxisReinsuranceCo. A — 8.9 2.6 1.3 — 10.2HannoverRuckversicherungsAG A 0.3 8.2 4.1 2.6 — 10.0PlatinumUnderwritersReinsuranceInc. A 0.2 7.3 3.6 2.3 — 8.8MunichReinsuranceAmericaInc. A+ 3.7 7.0 — 2.2 �— 8.5WestportInsuranceCorp. A — 6.2 — (0.7) — 6.9QBEReinsuranceCorporation A 0.2 4.8 1.2 0.7 — 5.5Others 10.4 94.6 78.0 84.6 73.2 25.2

Total $14.8 $199.7 $94.8 $97.2 $73.2 $138.9

Terrorism ReinsuranceIn2002,inresponsetothetighteningofsupplyincertaininsuranceandreinsurancemarketsresultingfrom,amongotherthings,theSeptember11,2001,terroristattacks,theTerrorismRiskInsuranceAct(“TRIA”)wasenacted.TRIAisdesignedtoensuretheavailabilityofinsurancecover-age for foreign terrorist acts in the United States of America. This lawestablishedafederalassistanceprogramthroughtheendof2005tohelpthe commercial property and casualty insurance industry cover claimsrelatedtofutureterrorism-relatedlossesandrequiressuchcompaniestooffercoverageforcertainactsofterrorism.

OnDecember17,2005,Congresspassedatwo-yearextensionofTRIA though December 31, 2007 with the passage of the TerrorismRisk InsuranceExtensionAct (“TRIEA”).Under the termsofTRIEA,the minimum size of the triggering event increased and Tower’sdeductibleincreased.UnderTRIEA,federalassistanceforinsuredter-rorism losses has been reduced as compared to the assistance previ-ously available under TRIA. As a consequence of these changes,potentiallossesfromaterroristattackcouldbesubstantiallylargerthanpreviouslyexpected.

On December 26, 2007, the President signed the Terrorism RiskInsuranceProgramReauthorizationActof2007(the“2007Act”)whichextendsTRIAforsevenyearsthroughDecember31,2014.The2007Actmaintains the same triggering event size of $100 million, companydeductibleof20%,industryretentionof$27.5billion,federalshareof85%andprogramaggregateinsuredloss limitof$100billionput inplacebyTRIEA. The 2007 Act extends coverage to domestic terrorism andrequires additional notice to policyholders regarding the $100 billionprogramlimit.

teChnologyWeseektocontinueoursuccessintheareaoftechnologyaswegrowbycontinuingtoredesignbusinessprocessesinordertogainoperatingeffi-cienciesandeffectiveness.Wehavebenefited in recentyears fromouradvancedtechnologystrategy intheareasoftheapplication,data,andinfrastructureenvironments.

Overthelastseveralyears,wehaveimplementedandadvancedanumber of technological improvements and redesigned business pro-cesses,includinganonlineimagingsystem,adatawarehousethathousesbothclaimsandunderwritingdatatoprovidemanagementandfinancialreporting,andaweb-basedplatform,webPlus, forquotingandcaptur-ingpolicysubmissionsdirectlyfromourproducers.Anadditionalsignifi-cant advancement was the deployment of the ImageRight electronicdocumentrepository,whichallowstheorganizationtobelessdependentonpaperpreviouslyneededforrecordsofpoliciesandclaims,aswellaslessdependentonsoftandhardcopyformatgenerally.Wearewellposi-

tioned so that other functions within the organization can gain ease ofelectronicavailability.Otherdepartmentswillbegintheirpaperlesscon-version strategy, including the finance department. Furthermore, theWorkSiteMPandIManagesystemswillmigratetoImageRightin2010.

During 2009, we expanded our use of the webPlus platform andPOINT-IN Policy Administration system in connection with workers’compensation policies to forty-seven states, which provides us with ahighly competitive advantage for the Brokerage Insurance segment.We also extended our use of the Commercial Package Policy to eightstatesintheSoutheastregion,whichhasallowedustoretiretheInsurityPolicy Administration systems previously used by our subsidiary, KIC.Thesesystemdeploymentshavealsoresultedinamajorreductionintheuse of the Phoenix system in connection with the commercial lines ofbusiness. Similarly, the use of the webPlus platform and POINT-INPolicy Administration system has replaced the agent and internal userpopulation who previously generated policies manually for the lines ofbusiness in thenortheastoffice locationsacquired fromtheHermitageacquisition.Thesedeploymentshaveenhancedourcost reductionandreplacementsystemstrategy.

In2009,we began a significant business and technology initiativecalled ProgramIQ for specialty business as a result of the CastlePointacquisition.Theinitiativeiscenteredondataautomationintegrationandcollection of data into the internal organization data warehouse formanaginggeneralagentsandthirdpartyadministratorswhohavequali-fied technology platforms for policy and claims administration. We arecompleting this work with the partnership of AgencyPort, Inc., whoco-develops thewebPlussystemwith the internal technologydevelop-mentstaff.Thisinitiativewillhelpuscollectdatainamoreefficientman-ner for the purposes of underwriting, claims, actuarial, finance andexternal bureau reporting, and will create a more efficient financialclosingprocessfortheCompany.

In connection with the SUA acquisition in 2009, we acquired twoimportant technological products: Policy+, which was co-developed bythe SUA technology team and external resources from Duck CreekTechnologies;andClaims+,aGuidewirebasedproduct.WeuseClaims+astheclaimssystemstrategyfortheentireuserpopulationofourorgani-zation.WeusePolicy+,coupledwiththedevelopmentteaminChicago,asanadvantageoustooltoexpandthebrokeragesystemcapabilitiesinanexpeditiousfashion.

Allmissioncriticalsystemsrunonfullyredundanthardwareinanoff-sitesecurefacilitywithfullyredundantpower,airconditioning,communi-cations and 24-hour support. Systems and data are backed up to tapedailyandare taken toanoffsite facilitybyanoutsidevendor.WehaveacquiredaccesstoanotherdatacenterintheChicagoareainconnectionwith the SUA acquisition, which provides us with a state-of-the-art

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disasterrecoveryfacilityforallofourcriticaltechnologysystems.Asadvancementintheareaofdisasterrecoveryforsmallerremoteofficelocations,wehaveimplementedAgilityTechnologies,whichallowsforportabletrailerofficeconfigurationstobesetupassupportfortemporaryofficedisplacementviatheuseofcommercialsatellitecommunication.

OurtechnologyplanenvisionsthatwewillcontinuetoexpandouruseofwebPlus/POINT-IN,Policy+,Claims+,andProgramIQforadditionalproduct processing, improved business functionality, and efficiency. We also intend to exploit technological improvements and economies ofscale realized through premium growth to continue to lower our underwriting expense ratio while offering a strong valuepropositiontoourproducerbase.

employeesAs of December 31, 2009, we had 987 full-time employees. None of these employees is covered by a collective bargaining agreement. We haveemploymentagreementswithanumberofourseniorexecutiveofficers.Theremainderofouremployeesconsistsofat-willemployees.

avaIl aBleInFormatIonWefileperiodicreports,proxystatementsandotherinformationwiththeSEC.Suchreports,proxystatementsandotherinformationmaybeviewedat the SEC’s website at www.sec.gov or viewed or obtained at the SEC Public Reference Room at 100 F Street, NE, Washington, D.C. 20549.InformationpertainingtotheoperationofthePublicReferenceRoomcanbeobtainedbycalling1-800-SEC-0330.

Theaddressforourinternetwebsiteiswww.twrgrp.com.Wemakeavailable,freeofcharge,throughourinternetsite,ourannualreportonForm10-K,annualreporttoshareholders,quarterlyreportsonForm10-QandcurrentreportsonForm8-KandallamendmentstothosereportsfiledorfurnishedpursuanttoSection13(a)or15(d)oftheSecuritiesExchangeActof1934assoonasreasonablypracticableafterweelectronicallyfilesuchmaterialswith,orfurnishitto,theSEC.

glossaryoFseleCtedInsur anCeterms

Accidentyear Theyear inwhichaneventoccurs, regardlessofwhenanypoliciescovering itarewritten,whentheevent isreported,orwhentheassociatedclaimsareclosedandpaid.

Acquisitionexpense The cost of acquiring both new and renewal insurance business, including commissions to agents or brokers andpremiumtaxes.

Agent Onewhonegotiatesinsurancecontractsonbehalfofaninsurer.Theagentreceivesacommissionforplacementandotherservicesrendered.

Broker Onewhonegotiatesinsuranceorreinsurancecontractsbetweenparties.Aninsurancebrokernegotiatesonbehalfofaninsuredandaprimaryinsurer.Areinsurancebrokernegotiatesonbehalfofaprimaryinsurerorotherreinsuredandareinsurer.Thebrokerreceivesacommissionforplacementandotherservicesrendered.

Casereserves Lossreservesestablishedbyclaimspersonnelwithrespecttoindividualreportedclaims.Casualtyinsuranceand/orreinsurance

Insuranceand/orreinsurancethat isconcernedprimarilywiththe lossescausedbyinjuriestothirdpersons(inotherwords,personsotherthanthepolicyholder)andthelegalliabilityimposedontheinsuredresultingtherefrom.

Catastrophereinsurance A form of excess of loss property reinsurance that, subject to a specified limit, indemnifies the ceding company fortheamountoflossinexcessofaspecifiedretentionwithrespecttoanaccumulationoflossesresultingfromacatastrophicevent.

Cede;cedingcompany Whenaninsurancecompanyreinsuresitsriskwithanother,it“cedes”businessandisreferredtoasthe“cedingcompany.”Combinedratio The sum of losses and LAE, acquisition expenses, operating expenses and policyholders’ dividends, all divided by net

premiumsearned.Directpremiumswritten Theamountschargedbyaprimaryinsurerforthepoliciesthatitunderwrites.Excessandsurpluslines Excessinsurancereferstocoveragethatattachesforaninsuredoverthelimitsofaprimarypolicyorastipulatedself-insuredreten-

tion.Policiesareboundoracceptedbycarriersnotlicensedinthejurisdictionwheretheriskislocated,andgenerallyarenotsubjecttoregulationsgoverningpremiumratesorpolicylanguage.Surpluslinesrisksarethoserisksnotfittingnormalunderwritingpatterns,involvingadegreeof risk that isnotcommensuratewithstandardratesand/orpolicy forms,or thatwillnotbewrittenbystandardcarriersbecauseofgeneralmarketconditions.

Excessoflossreinsurance Thegenerictermdescribingreinsurancethatindemnifiesthereinsuredagainstalloraspecifiedportionoflossesonunderlyinginsur-ancepoliciesinexcessofaspecifieddollaramount,calleda“layer”or“retention.”Alsoknownasnon-proportionalreinsurance.

Fundsheld The holding by a ceding company of funds usually representing the unearned premium reserve or the outstanding loss reservesappliedtothebusinessitcedestoareinsurer.

Grosspremiumswritten Totalpremiumsfordirectinsuranceandreinsuranceassumedduringagivenperiod.Incurredbutnotreported(“IBNR”)reserves

Lossreservesforestimatedlossesthathavebeenincurredbutnotyetreportedtotheinsurerorreinsurer.

Incurredlosses Thetotallossessustainedbyaninsurancecompanyunderapolicyorpolicies,whetherpaidorunpaid.Incurredlossesincludeaprovi-sionforclaimsthathaveoccurredbuthavenotyetbeenreportedtotheinsurer(“IBNR”).

Lossadjustmentexpenses(“LAE”)

The expenses of settling claims, including legal and other fees and the portion of general expenses allocated to claim settlementcosts.

LossandLAEratio LossandLAEratioisequaltolossesandLAEincurreddividedbyearnedpremiums.

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glossaryoFseleCtedInsur anCeterms(continued)Lossreserves Liabilitiesestablishedbyinsurersandreinsurerstoreflecttheestimatedcostofclaimspaymentsthattheinsurerorreinsurerbelieves

itwillultimatelyberequiredtopaywithrespecttoinsuranceorreinsuranceithaswritten.ReservesareestablishedforlossesandforLAEandconsistofcasereservesandIBNR.Reservesarenot,andcannotbe,anexactmeasureofaninsurers’ultimateliability.

Managinggeneralagent Apersonor firmauthorizedbyan insurer totransact insurancebusinesswhomayhaveauthoritytobindthe insurer, issuepolicies,appoint producers, adjust claims and provide administrative support for the types of insurance coverage pursuant to an agencyagreement.

Netpremiumsearned Theportionofnetpremiumswrittenthatisearnedduringaperiodandrecognizedforaccountingpurposesasrevenue.Netpremiumswritten Grosspremiumswrittenforagivenperiodlesspremiumscededtoreinsurersorretrocessionairesduringsuchperiod.Primaryinsurer An insurance company that issues insurance policies to consumers or businesses on a first dollar basis, sometimes subject to a

deductible.Prorata,orquotashare,reinsurance

Aformof reinsurance inwhichthereinsurersharesaproportionalpartof theceded insurance liability,premiumsand lossesof thecedingcompany.Prorata,orquotashare,reinsurancealsoisknownasproportionalreinsuranceorparticipatingreinsurance.

Programunderwritingagent Aninsuranceintermediarythatunderwritesprogrambusinessbyaggregatingbusinessfromretailandwholesaleagentsandperformscertainfunctionsonbehalfofinsurancecompanies,includingunderwriting,premiumcollection,policyformdesignandotheradmin-istrativefunctionstopolicyholders.

Propertyinsuranceand/orreinsurance

Insuranceand/orreinsurancethatindemnifiesapersonwithaninsurableinterestintangiblepropertyforhispropertyloss,damageorlossofuse.

Reinsurance Atransactionwherebythereinsurer,forconsideration,agreestoindemnifythereinsuredcompanyagainstallorpartofthelossthecompanymaysustainunderthepolicyorpoliciesithasissued.Thereinsuredmaybereferredtoastheoriginalorprimaryinsurerorthecedingcompany.

Renewalretentionrate Thecurrent period renewal premium,excludingpricing,exposure and policy form changes, as a percentage of the total premiumavailableforrenewal.

Retention,retentionlayer Theamountorportionofriskthataninsurerorreinsurerretainsforitsownaccount.Lossesinexcessoftheretentionlayerarereim-bursedtotheinsurerorreinsurerbythereinsurerorretrocessionaire.Inproportionaltreaties,theretentionmaybeapercentageoftheoriginalpolicy’slimit.Inexcessoflossbusiness,theretentionisadollaramountofloss,alossratioorapercentage.

Retrocession;retrocessionaire Atransactionwherebyareinsurercedestoanotherreinsurer,knownasaretrocessionaire,allorpartofthereinsuranceithasassumed.Retrocessiondoesnotlegallydischargethecedingreinsurerfromitsliabilitywithrespecttoitsobligationstothereinsured.

Statutoryaccountingprinciples(“SAP”)

Recordingtransactionsandpreparingfinancialstatements inaccordancewiththerulesandproceduresprescribedorpermittedbystateinsuranceregulatoryauthoritiesandtheNAIC.

Statutoryorpolicyholders’surplus;statutorycapitalandsurplus

Theexcessofadmittedassetsovertotalliabilities(includinglossreserves),determinedinaccordancewithSAP.

Thirdpartyadministrator Aservicegroupwhoprovidesvariousclaimsadministration,riskmanagement,losspreventionandrelatedservices,primarilytoself-insured clients under a fee arrangement or to insurance carriers on an unbundled basis. No insurance risk is undertaken in thearrangement.

Treatyreinsurance Thereinsuranceofaspecifiedtypeorcategoryofrisksdefinedinareinsuranceagreement(a“treaty”)betweenaprimaryinsurerorotherreinsuredandareinsurer.Typically,intreatyreinsurance,theprimaryinsurerorreinsuredisobligatedtoofferandthereinsurerisobligatedtoacceptaspecifiedportionofallagreedupontypesorcategoriesof risksoriginallywrittenbytheprimary insurerorreinsured.

Underwriting Theinsurer’s/reinsurer’sprocessofreviewingapplicationssubmittedforinsurancecoverage,decidingwhethertoacceptallorpartofthecoveragerequestedanddeterminingtheapplicablepremiums.

Unearnedpremium Theportionofapremiumrepresentingtheunexpiredportionoftheexposureperiodasofacertaindate.Unearnedpremiumreserve Liabilitiesestablishedbyinsurersandreinsurerstoreflectunearnedpremiumswhichareusuallyrefundabletopolicyholdersifaninsur-

anceorreinsurancecontractiscanceledpriortoexpirationofthecontractterm.

noteonForward-lookIngstatementsSomeofthestatementsunder“RiskFactors,”“Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations,”“Business”andelsewhereinthisForm10-Kmayincludeforward-lookingstatementsthatreflectourcurrentviewswithrespecttofutureeventsandfinancialper-formance.Thesestatementsincludeforward-lookingstatementsbothwithrespecttousspecificallyandtotheinsurancesectoringeneral.Statementsthatincludethewords“expect,”“intend,”“plan,”“believe,”“project,”“estimate,”“may,”“should,”“anticipate,”“will”andsimilarstatementsofafutureorforward-lookingnatureidentifyforward-lookingstatementsforpurposesoftheFederalsecuritieslawsorotherwise.

Allforward-lookingstatementsaddressmattersthatinvolverisksanduncertainties.Accordingly,thereareorwillbeimportantfactorsthatcouldcause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are notlimitedto,thosedescribedunder“RiskFactors”andthefollowing:• ineffectivenessorobsolescenceofourbusinessstrategyduetochangesincurrentorfuturemarketconditions;• developmentsthatmaydelayorlimitourabilitytoenternewmarketsasquicklyasweanticipate;• increasedcompetitiononthebasisofpricing,capacity,coveragetermsorotherfactors;

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• greaterfrequencyorseverityofclaimsandlossactivity,includingasaresultofnaturalorman-madecatastrophicevents,thanourunderwrit-ing, reserving or investment practices anticipate based on historicalexperienceorindustrydata;

• theeffectsofactsofterrorismorwar;• developments in the world’s financial and capital markets that

adverselyaffecttheperformanceofourinvestments;• changes in regulations or laws applicable to us, our subsidiaries,

brokersorcustomers;• changes in acceptance of our products and services, including new

productsandservices;• changesintheavailability,costorqualityofreinsuranceandfailureof

ourreinsurerstopayclaimstimelyoratall;• changes in the percentage of our premiums written that we cede to

reinsurers;• decreaseddemandforourinsuranceorreinsuranceproducts;• loss of the services of any of our executive officers or other key

personnel;• theeffectsofmergers,acquisitionsanddivestitures;• changesinratingagencypoliciesorpractices;• changesinlegaltheoriesofliabilityunderourinsurancepolicies;• changesinaccountingpoliciesorpractices;• changes in general economic conditions, including inflation, interest

ratesandotherfactors;• unanticipateddifficultiesincombiningTowerandSUA;• disruptions in Tower’s business arising from the integration of Tower

withacquiredbusinessesandtheanticipationofpotentialandpendingacquisitionsormergers;and

• currentlypendingorfuturelitigationorgovernmentalproceedings.

TheforegoingreviewofimportantfactorsshouldnotbeconstruedasexhaustiveandshouldbereadinconjunctionwiththeothercautionarystatementsthatareincludedinthisForm10-K.Weundertakenoobliga-tiontopubliclyupdateorreviewanyforward-lookingstatement,whetherasaresultofnewinformation,futuredevelopmentsorotherwise.

Ifoneormoreoftheseorotherrisksoruncertaintiesmaterialize,orif our underlying assumptions prove to be incorrect, actual results mayvary materially from what we project. Any forward-looking statementsyoureadinthisForm10-KreflectourviewsasofthedateofthisForm10-K with respect to future events and are subject to these and otherrisks,uncertaintiesandassumptionsrelatingtoouroperations,resultsofoperations,growthstrategyandliquidity.Allsubsequentwrittenandoralforward-looking statements attributable to us or individuals acting onour behalf are expressly qualified in their entirety by this paragraph.Beforemakingan investmentdecision,youshould specificallyconsiderall of the factors identified in this Form 10-K that could cause actualresultstodiffer.

Item1a.rIskFaCtorsAn investment in our common stock involves a number of risks. Youshould carefully consider the following information about these risks,togetherwiththeotherinformationcontainedinthisForm10-K,incon-sideringwhethertoinvestinorholdourcommonstock.Additionalrisksnot presently known to us, or that we currently deem immaterial mayalso impair our business or results of operations. Any of the risksdescribedbelowcould result ina significantormaterialadverseeffectonourfinancialconditionorresultsofoperations,andacorrespondingdecline inthemarketpriceofourcommonstock.Youcould loseallorpartofyourinvestment.

This Form 10-K also contains forward-looking statements thatinvolverisksanduncertainties.Ouractualresultscoulddiffermateriallyfrom thoseanticipated in the forward-looking statementsasa result ofcertainfactors,includingtherisksdescribedbelowandelsewhereinthisForm10-K.See“Business—NoteonForward-LookingStatements.”

rIsksrel atedtoourBusInessIf our actual loss and loss adjustment expenses exceed our loss reserves, our financial condition and results of operations could be significantly adversely affected.Ourresultsofoperationsandfinancialconditiondependuponourabilityto estimate the potential losses associated with the risks thatwe insureandreinsure.Weestimatelossandlossadjustmentexpensereservestocover our estimated liability for the payment of all losses and lossadjustment expenses incurred under the policies that we write.Loss reserves include case reserves, which are established for specificclaimsthathavebeenreportedtous,andreserves forclaimsthathavebeenincurredbutnotreported(or“IBNR”).Totheextentthatlossandloss adjustment expenses exceed our estimates, we will be required toimmediately recognize the less favorable experience and increase lossandlossadjustmentexpensereserves,withacorrespondingreductioninour net income in the period in which the deficiency is identified. Forexample,overthepasttenyearswehaveexperiencedadversedevelop-ment of reserves for losses and loss adjustment expenses incurred inprioryears.

Althoughlossreservesonpropertylinesofbusinesstendtoberela-tivelypredictablefromanactuarialstandpoint,thereservingprocessforlossesontheliabilitycoverageportionsofourcommercialandpersonallinespoliciespossessescharacteristicsthatmakecaseandIBNRreserv-ing inherently less susceptible to accurate actuarial estimation. Unlikepropertylosses,liabilitylossesareclaimsmadebythirdpartiesofwhichthepolicyholdermaynotbeawareandthereforemaybereportedasig-nificantamountoftime,sometimesyears,aftertheoccurrence.Asliabil-ity claims most often involve claims of bodily injury, assessment of thepropercasereserveisafarmoresubjectiveprocessthanclaimsinvolvingpropertydamage.Inaddition,thedeterminationofacasereserveforaliabilityclaimisoftenwithoutthebenefitofinformation,whichdevelopsslowlyoverthelifeoftheclaimandcansubjectthecasereservetosub-stantial modification well after the claim was first reported. Numerousfactors impact the liability case reserving process, including venue, theamountofmonetarydamage,thepermanenceoftheinjury,andtheageoftheclaimantamongotherfactors.

Estimatinganappropriateleveloflossandlossadjustmentexpensereserves isan inherentlyuncertainprocess.Accordingly,actual lossandloss adjustment expenses paid will likely deviate, perhaps substantially,fromthereserveestimatesreflectedinourconsolidatedfinancialstate-ments. It is possible that claims could exceed our loss and loss adjust-ment expense reserves and have a material adverse effect on ourfinancialconditionorresultsofoperations.

Manyofourquotasharereinsuranceagreementscontainprovisionsforacedingcommissionunderwhichthecommissionratethatwereceivevaries inversely with the loss ratio on the ceded premiums, with highercommissionratescorrespondingtolowerlossratiosandviceversa.Theloss ratio depends on our estimate of the loss and loss adjustmentexpensereservesonthecededbusiness.Asaresult,thesameuncertain-tiesassociatedwithestimatinglossandlossadjustmentexpensereservesaffecttheestimatesofcedingcommissionsearned.Ifandtotheextentthatwehave to increaseour reserveson thebusiness that is subject tothesereinsuranceagreements,wemayhavetoreducethecedingcom-missionrate,whichwouldamplifythereductioninournetincomeintheperiodinwhichtheincreaseinourreservesismade.

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a substantial amount of our business currently comes from a limited geographical area. any single catastrophe or other condition affecting losses in this area could adversely affect our results of operations.Our Insurance Subsidiaries currently write the bulk of their business inthe Northeast United States. As a result, a single catastropheoccurrence, destructive weather pattern, terrorist attack, regulatorydevelopmentorotherconditionorgeneraleconomictrendaffectingtheregionwithinwhichweconductourbusinesscouldadverselyaffectourfinancialconditionorresultsofoperationsmoresignificantlythanthatofotherinsurancecompaniesthatconductbusinessacrossabroadergeo-graphical area. During our history, we have not experienced any singleeventthatmateriallyaffectedourresultsofoperations.Themostsignifi-cant catastrophic event was Hurricane Ike, which occurred during thethird quarter of 2008 in the Gulf of Mexico area, in which we suffered$1,800,000innetlosses(entitiesacquiredbyussincethiseventhavenotsufferedsubstantiallosses).

The incidence and severity of catastrophes are inherently unpre-dictable and our losses from catastrophes could be substantial. Theoccurrence of claims from catastrophic events is likely to result in sub-stantialvolatilityinourfinancialconditionorresultsofoperationsforanyfiscal quarter or year and could have a material adverse effect on ourfinancial condition or results of operations and our ability to write newbusiness.Increasesinthevaluesandconcentrationsofinsuredpropertymayincreasetheseverityofsuchoccurrencesinthefuture.Althoughweattempttomanageourexposuretosuchevents, includingthroughtheuseofreinsurance,thefrequencyorseverityofcatastrophiceventscouldexceedourestimates.Asa result, theoccurrenceofoneormorecata-strophiceventscouldhaveamaterialadverseeffectonourfinancialcon-ditionorresultsofoperations.

If we cannot obtain adequate reinsurance protection for the risks we have underwritten, we may be exposed to greater losses from these risks or we may reduce the amount of business we underwrite, which will reduce our revenues.Understateinsurancelaw,insurancecompaniesarerequiredtomaintainacertainlevelofcapitalinsupportofthepoliciestheyissue.Inaddition,ratingagencieswillreduceaninsurancecompany’sratingsifthecompa-ny’s premiums exceed specified multiples of its capital. As a result, thelevelofourInsuranceSubsidiaries’statutorysurplusandcapitallimitstheamount of premiums that they can write and on which they can retainrisk.Historically,wehaveutilizedreinsurancetoexpandourcapacitytowritemorebusinessthanourInsuranceSubsidiaries’surpluswouldhaveotherwisesupported.

From time to time, market conditions have limited, and in somecaseshaveprevented,insurersfromobtainingthetypesandamountsofreinsurancethattheyconsideradequatefortheirbusinessneeds.Theseconditionscouldproduceunfavorablechangesinprices,reducedcedingcommissionrevenueorotherpotentiallyadversechangesinthetermsofreinsurance. Accordingly, we may not be able to obtain our desiredamounts of reinsurance. In addition, even if we are able to obtain suchreinsurance,wemaynotbeabletoobtainsuchreinsurancefromentitieswith satisfactory creditworthiness or negotiate terms that we deemappropriateoracceptable.

even if we are able to obtain reinsurance, our reinsurers may not pay losses in a timely fashion, or at all, which may cause a substantial loss and increase our costs.AsofDecember31,2009,wehadanetbalancedueusfromourreinsur-ers of $309.3 million, consisting of $199.7 million in reinsurancerecoverablesonunpaid losses, $14.8million in reinsurance recoverablesonpaidlossesand$94.8millioninprepaidreinsurancepremiums.SinceOctober1,2003,wehavesoughttomanageourexposuretoourreinsur-ers by placing our quota share reinsurance on a “funds withheld” basisandrequiringanynon-admittedreinsurers tocollateralizetheirshareof

unearned premium and loss reserves. However, we have recoverablesfromourpre-October1,2003reinsurancearrangementsthatareuncol-lateralized, in that they are not supported by letters of credit, trustaccounts,“fundswithheld”arrangementsorsimilarmechanismsintendedto protect us against a reinsurer’s inability or unwillingness to pay. Ournetexposuretoourreinsurerstotaled$139.1millionasofDecember31,2009. As of December 31, 2009, our largest net exposure to any onereinsurer was approximately $42.8 million, related to OneBeaconInsurancewhichisratedAbyA.M.BestCompany.Becauseweremainprimarilyliabletoourpolicyholdersforthepaymentoftheirclaims,intheeventthatoneofourreinsurersunderanuncollateralizedtreatybecameinsolventorrefusedtoreimburseusfor lossespaid,ordelayed inreim-bursing us for losses paid, our cash flow and financial results could bemateriallyandadverselyaffected.AsofDecember31,2009,ourlargestbalance due from any one reinsurer was approximately $94.2 million,whichwasduefromSwissReinsuranceAmericaCorp.whichisratedA+byA.M.BestCompany.

a decline in the ratings assigned by a. M. Best or other rating agencies to our insurance subsidiaries could affect our standing among brokers, agents and insureds and cause our sales and earnings to decrease.Ratingshavebecomeanincreasinglyimportantfactorinestablishingthecompetitive position of insurance companies. A.M. Best Companymaintainsa letterscaleratingsystemrangingfromA++(Superior)toF(InLiquidation).WiththeexceptionofCPNIC,A.M.BesthasassignedeachofourinsurancecompanysubsidiariesaFinancialStrengthratingofA- (Excellent) which is the fourth highest of fifteen rating levels.However, there is no assurance that any additional U.S. licensed insur-ancecompaniesthatwemayacquirewillreceivesuchrating.Theserat-ings are subject to, among other things, A.M. Best’s evaluation of ourcapitalizationandperformanceonanongoingbasis includingourman-agement of terrorism and natural catastrophe risks, loss reserves andexpenses,andthere isnoguaranteethatour InsuranceSubsidiarieswillmaintaintheirrespectiveratings.

Our ratingsare subject toperiodic reviewby,andmaybe reviseddownwardorrevokedatthesolediscretionofA.M.Best.Adeclineinacompany’sratingsindicatingreducedfinancialstrengthorotheradversefinancial developments can cause concern about the viability of thedowngradedinsureramongitsagents,brokersandpolicyholders,result-ing in a movement of business away from the downgraded carrier tootherstrongerormorehighlyratedcarriers.Becausemanyofouragentsand brokers (whom we refer to as “producers”) and policyholders pur-chaseourpoliciesonthebasisofourcurrentratings,thelossorreductionofanyofourratingswilladverselyimpactourabilitytoretainorexpandourpolicyholderbase.Theobjectiveof the ratingagencies’ rating sys-temsistoprovideanopinionofaninsurer’sfinancialstrengthandabilitytomeetongoingobligationstoitspolicyholders.Ourratingsreflecttheratingagencies’opinionofourfinancialstrengthandarenotevaluationsdirected to investors in our common stock,nor are they recommenda-tionstobuy,sellorholdourcommonstock.

The failure of any of the loss limitation methods we employ could have a material adverse effect on our financial condition or our results of operations.Variousprovisionsofourpolicies,suchas limitationsorexclusionsfromcoverage or choice of forum, which have been negotiated to limit ourrisks, may not be enforceable in the manner we intend. At the presenttimeweemployavarietyofendorsementstoourpoliciesthatlimitexpo-sure to known risks, including but not limited to exclusions relating tocoverage for lead paint poisoning, asbestos and mostclaims for bodilyinjuryorpropertydamageresultingfromthereleaseofpollutants.

In addition, the policies we issue contain conditions requiring thepromptreportingofclaimstousandourrighttodeclinecoverageintheeventofaviolationofthatcondition.Ourpoliciesalsoincludelimitations

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restricting the period in which a policyholder may bring a breach ofcontractorotherclaimagainstus,whichinmanycasesisshorterthanthestatutorylimitationsforsuchclaimsinthestatesinwhichwewritebusi-ness.Whiletheseexclusionsandlimitationsreducethelossexposuretousandhelpeliminateknownexposurestocertainrisks,itispossiblethatacourtorregulatoryauthoritycouldnullifyorvoidanexclusionorlegis-lationcouldbeenactedmodifyingorbarring theuseof suchendorse-ments and limitations in a way that would adversely effect our lossexperience,whichcouldhaveamaterialadverseeffectonour financialconditionorresultsofoperations.

We may face substantial exposure to losses from terrorism and we are currently required by law to provide coverage against such losses.OurlocationandamountofbusinesswritteninNewYorkCityandadja-cent areas by our Insurance Subsidiaries may expose us to losses fromterrorism. U.S. insurers are required by state and Federal law to offercoverageforterrorismincertainlines.

AlthoughourInsuranceSubsidiariesareprotectedbythefederallyfundedterrorismreinsurance,thereisasubstantialdeductiblethatmustbemet,thepaymentofwhichcouldhaveanadverseeffectonourresultsof operations. See—“Business—Reinsurance.” As a consequence of thislegislation,potential losses fromaterroristattackcouldbesubstantiallylargerthanpreviouslyexpected,couldalsoadverselyaffectourabilitytoobtainreinsuranceonfavorableterms,includingpricing,andmayaffectourunderwritingstrategy,rating,andotherelementsofouroperation.

The effects of emerging claim and coverage issues on our business are uncertain.As industrypracticesand legal, judicial, socialandotherenvironmentalconditionschange,unexpectedandunintended issuesrelatedtoclaimsandcoveragemayemerge.Theseissuesmayadverselyaffectourbusi-nessbyeitherextendingcoveragebeyondourunderwritingintentorbyincreasingthenumberorsizeofclaims.Insomeinstances,thesechangesmay not become apparent until some time after we have issued insur-ance or reinsurance contracts that are affected by the changes. As aresult, the full extent of liability under our insurance or reinsurancecontractsmaynotbeknownformanyyearsafteracontractisissued.

Since we depend on a core of selected producers for a large portion of our revenues, loss of business provided by any one of them could adversely affect us.Ourproductsaremarketedbyindependentproducers.InourBrokerageInsurancesegment,theseindependentproducersarecomprisedofretailagentsandwholesaleagentswhoaggregatebusinessfromretailagents.In our Specialty Business segment, these independent producers arecomprisedofmanaginggeneralagencieswhohandlevariousunderwrit-ing and policy issuance tasks on our behalf and who generally acceptsubmissionsfromvariousotherindependentproducers.

Other insurance companies compete with us for the services andallegiance of these producers. These producers may choose to directbusinesstoourcompetitors,ormaydirectlessdesirableriskstous.InourBrokerageInsurancesegment,approximately45%ofthe2009grosspre-miums written, including premiums produced by TRM on behalf of itsissuingcompanies,wereproducedbyourtop18producers,representing1.3%ofouractiveagentsandbrokers.Theseproducerseachhaveannualwrittenpremiumsof$5.0millionormore.Aswebuildabroaderterrito-rialbase,thenumberofproducerswithsignificantpremiumvolumeswithTowerineachofoursegmentsisincreasing.

Our largest producers in 2009 were Northeast Agencies andMorstanGeneralAgency.IntheyearendedDecember31,2009,theseproducers accounted for 9% and 8%, respectively, of the total of ourgross premiums written. No other producer was responsible for morethan3%ofourgrosspremiumswritten.

With the closing of the CastlePoint transactions and the SUAtransaction,wehavealsoaddedprogramunderwritingagentswhomaybecomesignificantproducers.Asignificantdecreaseinbusinessfrom,ortheentirelossof,ourlargestproducerorseveralofourotherlargepro-ducerswouldcauseustolosepremiumandrequireustoseekalternativeproducers or to increase submissions from existing producers. In theeventweareunabletofindreplacementproducersorincreasebusinessproduced by our existing producers, our premium revenues woulddecreaseandourbusinessandresultsofoperationswouldbemateriallyandadverselyaffected.

Our reliance on producers subjects us to their credit risk.WithrespecttothepremiumsproducedbyTRMforitsissuingcompa-niesanda limitedamountofpremiumvolumewrittenbyourInsuranceSubsidiaries,producerscollectpremiumfromthepolicyholdersandfor-wardthemtoTRMandourInsuranceSubsidiaries.Inmostjurisdictions,whentheinsuredpayspremiumsforthesepoliciestoproducersforpay-mentovertoTRMorourInsuranceSubsidiaries,thepremiumsarecon-sideredtohavebeenpaidunderapplicableinsurancelawsandregulationsandtheinsuredwillnolongerbeliabletousforthoseamounts,whetheror not we have actually received the premiums from the producer.Consequently,weassumeadegreeofcreditriskassociatedwithproduc-ers. Although producers’ failures to remit premiums to us have notcaused a material adverse impact on us to date, there have beeninstanceswhereproducerscollectedpremiumbutdidnotremitittous,and we were nonetheless required under applicable law to provide thecoverage set forth in the policy despite the absence of premium.Becausethepossibilityoftheseevents isdependent in largepartuponthefinancialconditionandinternaloperationsofourproducers,whichinmost cases is not public information, we are not able to quantify theexposure presented by this risk. If we are unable to collect premiumsfrom our producers in the future, our financial condition and results ofoperationscouldbemateriallyandadverselyaffected.

We operate in a highly competitive environment. If we are unsuccessful in competing against larger or more well-established rivals, our results of operations and financial condition could be adversely affected.Thepropertyandcasualty insurance industry ishighlycompetitiveandhashistoricallybeencharacterizedbyperiodsofsignificantpricingcom-petition alternating with periods of greater pricing discipline, duringwhichcompetitionfocusesonotherfactors.Beginningin2000,themar-ket environment was increasingly favorable as rates increased signifi-cantly. During the latter part of 2004 and throughout 2005, increasedcompetitioninthemarketplacebecameevidentand,asaresult,averageannualrateincreasesbecamemoderate.Thecatastrophelossesof2004and2005producedincreasedpricingandreducedcapacityforinsuranceof catastrophe-exposed property. However, a softening of the non-catastrophe-exposed market in 2006 through 2009 has led to moreaggressivepricinginspecificsegmentsofthecommerciallinesbusiness,particularlyinthoselinesofbusinessandaccountswithlargerannualpre-miums.The Insurance Information Institute indicates that the industry-widechangeinnetpremiumswrittenintheProperty&Casualtyindustryin2007decreasedtoazerogrowth(0.0percent)condition.A.M.BestCompanyreportedthattheindustry-widechangeinnetpremiumswrit-teninthepropertyandcasualtyindustrywas-2.0%in2008comparedto-0.7%in2007andisestimatedtohavedeclined-4.2%in2009.

The new capacity that had entered the market had placed morepressureonproductionandprofitability targets.A.M.Besthadstatedthatindustrypolicyholdersurplusgrewforfiveconsecutiveyears;2003-2007,butdeclined in2008.However,policyholder surplus isestimatedtohaveincreasedby9.4%in2009to$519.3billionfrom2008.Thisplacesthepremium-to-surplusratioat0.8:$1.00atyear-end2009.

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Competition driven by strong earnings and capital gains can beprojectedtomoderateaseconomicconditionsimpactingthosesourcesdeteriorate. Overall capacity and declining underwriting profits mayresultinalesseningofcompetitivepressurefromotherinsurersthatpre-viously sought to expand the types or amount of business they write.Thismaycauseashiftinfocusbysomeinsurersfromaninterestinmar-ketshareto increasetheirconcentrationonunderwritingdiscipline.Weattempttocompetebasedprimarilyonproductsoffered,service,experi-ence,thestrengthofourclientrelationships,reputation,speedofclaimspayment,financialstrength,ratings,scopeofbusiness,commissionspaidandpolicyandcontract termsandconditions.Therearenoassurancesthat inthefuturewewillbeabletoretainorattractcustomersatpriceswhichweconsidertobeadequate.

Inourcommercialandpersonal linesadmittedbusinesssegments,we compete with major U.S. insurers and certain underwriting syndi-cates, includinglargenationalcompaniessuchasTravelersCompanies,Inc., Allstate Insurance Company and State Farm Insurance; regionalinsurers such as Selective Insurance Company, Harleysville InsuranceCompany, Hanover Insurance and Peerless Insurance Company andsmaller, more local competitors such as Greater New York Mutual,MagnaCartaCompaniesandUticaFirstInsuranceCompany.Ournon-admittedbindingauthorityandbrokeragebusinesswithgeneralagentscompetes with Scottsdale Insurance Company, Admiral InsuranceCompany, Mt. Hawley Insurance Company, Navigators Group, Inc.,Essex Insurance Company, Colony Insurance Company, CenturyInsurance Group, Nautilus Insurance Group, RLI Corp., United StatesLiability Insurance Group and Burlington Insurance Group, Inc. In ourprogrambusiness,wecompeteagainstcompetitors thatwriteprogrambusinesssuchasQBEInsuranceGroupLimited,DelosInsuranceGroup,AmTrustFinancialServices, Inc.,RLICorp.,Chartis Inc.,W.R.BerkleyCorporation, Markel Corporation, Great American Insurance GroupandPhiladelphiaInsuranceCompanies.

Many of these companies have greater financial, marketing andmanagementresourcesthanwedo.Manyofthesecompetitorsalsohavemore experience, better ratings and more market recognition than wedo.Weseektodistinguishourselvesfromourcompetitorsbyprovidingabroad product line offering and targeting those market segments thatprovideuswiththebestopportunitytoearnanunderwritingprofit.Wealso compete with other companies by quickly and opportunisticallydeliveringproductsthatrespondtoourproducers’needs.

Inadditiontocompetitionintheoperationofourbusiness,wefacecompetitionfromavarietyofsourcesinattractingandretainingqualifiedemployees.Wealsofacecompetitionbecauseofentitiesthatself-insure,primarilyinthecommercialinsurancemarket.Fromtimetotime,estab-lished and potential customers may examine the benefits and risks ofself-insuranceandotheralternativestotraditionalinsurance.

We may experience difficulty in expanding our business, which could adversely affect our results of operations and financial condition.In addition to our recent acquisitions of Hermitage, CastlePoint,AequiCap and SUA, we plan to continue to expand our licensing oracquire other insurance companies with multi-state property andcasualty licensing inorder toexpandourproductandserviceofferingsgeographically.Wealsointendtocontinuetoacquirebooksofbusinessthat fit our underwriting competencies from competitors, managingagentsandotherproducersand toacquireother insurancecompanies.Thisexpansionstrategymaypresentspecialrisks:• Wehaveachievedourpriorsuccessbyapplyingadisciplinedapproach

tounderwritingandpricinginselectmarketsthatarenotwellservedby our competitors. We may not be able to successfully implementour underwriting, pricing and product strategies in companies orbooksofbusinessweacquireoroveralargeroperatingregion;

• We may not be successful in obtaining the required regulatoryapprovals to offer additional insurance products or expand intoadditionalstates;and

• Wemayhavedifficultyinefficientlycombininganacquiredcompanyor block of business with our present financial, operational andmanagementinformationsystems.

Wecannotassureyou thatwewillbesuccessful inexpandingourbusinessor thatanynewbusinesswillbeprofitable. Ifweareunabletoexpandourbusinessortomanageourexpansioneffectively,ourresultsofoperationsandfinancialconditioncouldbeadverselyaffected.

Our acquisitions could result in integration difficulties, unexpected expenses, diversion of management’s attention and other negative consequences.Aspartofourgrowthstrategy,wehavemadenumerousacquisitionsinrecentyears.Assumingwehaveaccess toadequate levelsofdebtandequitycapital,weplantocontinuetoacquirecomplementarybusinessesasakeyelementofourgrowthstrategy.Wemustintegratethetechnol-ogy,operations,systemsandpersonnelofacquiredbusinesseswithourown and attempt to grow the acquired businesses as part of our com-pany.Theintegrationofotherbusinessesisacomplexprocessandplacessignificantdemandsonourmanagement, financial, technicalandotherresources.Thesuccessful integrationofbusinesseswehaveacquired inthe past and may acquire in the future is critical to our future success.Ifweareunsuccessful in integrating thesebusinesses,our financial andoperatingperformancecouldsuffer.Therisksandchallengesassociatedwiththeacquisitionandintegrationofacquiredbusinessesinclude:• Wemaybeunabletoefficientlyconsolidateourfinancial,operational

andadministrativefunctionswiththoseofthebusinessesweacquire;• Our management’s attention may be diverted from other business

concerns;• We may be unable to retain and motivate key employees of an

acquiredcompany;• We may enter markets in which we have little or no prior direct

experience;• Litigation, indemnification claims and other unforeseen claims and

liabilities may arise from the acquisition or operation of acquiredbusinesses;

• Thecostsnecessarytocompleteintegrationmayexceedourexpecta-tionsoroutweighsomeoftheintendedbenefitsofthetransactionswecomplete;

• We may be unable to maintain the customers or goodwill of anacquiredbusiness;and

• The costs necessary to improve or replace the operating systems,products and services of acquired businesses may exceed ourexpectations.

We may be unable to integrate our acquisitions successfully withouroperationsonscheduleoratall.Wecanprovidenoassurancesthatwe will not incur large expenses in connection with business units weacquire.Further,wecanprovidenoassurancesthatacquisitionswillresultincostsavingsorsufficientrevenuesorearningstojustifyourinvestmentin,orourexpensesrelatedto,theseacquisitions.

In recent years we have successfully created shareholder value through acquisitions of insurance entities. We may not be able to continue to create shareholder value through such transactions in the future.In the past several years, we have completed numerous acquisitions ofinsurance entities, many of which have contributed significantly to ourgrowthinbookvalue.Failuretoidentifyandcompletefutureacquisitionopportunitiescouldlimitourabilitytoachieveourtargetreturns.Evenif

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we were to identify and complete future acquisition opportunities,there isnoassurance that suchacquisitionswill ultimatelyachieve theiranticipatedbenefits.

Failure to complete, or complete on a timely basis, a pending merger or acquisition may negatively impact our business, financial condition, results of operation, prospects and stock price.We regularly evaluate merger and acquisition opportunities, and as aresult, futuremergersoracquisitionsmayoccuratanytime.Apendingmergeroracquisitionistypicallysubjecttothesatisfactionorwaiverofanumber of conditions, including the receipt of required regulatoryapprovals,satisfactoryduediligenceandothercustomaryclosingcondi-tions.Therecanbenoassurancethattheconditionstothecompletionofapendingmergeroracquisitionwillbesatisfiedorwaived.Ifapendingmergeroracquisitionisdelayedornotcompleted,wewouldnotrealizetheanticipatedbenefitsofhavingcompleted,orhavingcompletedonatimelybasis,asthecasemaybe,suchmergeroracquisition,whichmayadversely affect our business, financial condition, results of operation,prospectsandstockprice.

We could be adversely affected by the loss of one or more principal employees or by an inability to attract and retain staff.Oursuccesswilldependinsubstantialpartuponourabilitytoattractandretain qualified executive officers, experienced underwriting talent andother skilled employees who are knowledgeable about our business.We rely substantially upon the services of our executive managementteam.Ifweweretolosetheservicesofmembersofourkeymanagementteam, our business could be adversely affected. We believe we havebeensuccessfulinattractingandretainingkeypersonnelthroughoutourhistory. We have employment agreements with Michael H. Lee, ourChairman of the Board, President and Chief Executive Officer, andother members of our senior management team. We do not currentlymaintain key man life insurance policies with respect to our employeesexceptforMichaelH.Lee.

Our investment performance may suffer as a result of adverse capital market developments or other factors, which may affect our financial results and ability to conduct business.Weinvestthepremiumwereceivefrompolicyholdersuntilitisneededto pay policyholder claims or other expenses. At December 31, 2009,our invested assets consisted of $1.8 billion in fixed maturity securitiesand$76.7millioninequitysecuritiesatfairvalue.Additionally,weheld$201.4millionincashandcashequivalentsandshort-terminvestments.In2009,weearned$74.9millionofnetinvestmentincomerepresenting7.6% of our total revenues and 44.7% of our pre-tax income.At December 31, 2009, we had unrealized gains of $53.2 million whichcouldchangesignificantlydependingonchanges inmarketconditions.Our funds are invested by outside professional investment advisorymanagement firms under the direction of our management team inaccordancewithdetailedinvestmentguidelinessetbyus.Althoughourinvestmentpoliciesstressdiversificationofrisks,conservationofprincipalandliquidity,ourinvestmentsaresubjecttoavarietyofinvestmentrisks,includingrisksrelatingtogeneraleconomicconditions,marketvolatility,interestratefluctuations,liquidityriskandcreditanddefaultrisk.(Interestrate risk is discussed below under the heading, “We may be adverselyaffected by interest rate changes.”) In particular, the volatility of ourclaimsmay forceus to liquidatesecurities,whichmaycauseus to incurcapitallosses.Ifwedonotstructureourinvestmentportfoliosothatitisappropriatelymatchedwithour insuranceand reinsurance liabilities,wemaybeforcedto liquidate investmentspriortomaturityatasignificantlosstocoversuchliabilities.Investmentlossescouldsignificantlydecreaseourassetbaseandstatutorysurplus,therebyaffectingourabilitytocon-ductbusiness.Werecognizednetrealizedcapitalgains for2009whichamountedto$1.5millionyetincludedOTTIchargesof$23.5million.The

OTTI charges were primarily the result of mortgage-backed securitiesand,toalesserextent,corporatebonds.Asaresultofthemarketvolatil-ity,wemayexperiencedifficulty indeterminingaccurately thevalueofourvariousinvestments.

We may be adversely affected by interest rate changes.Our operating results are affected, in part, by the performance of ourinvestment portfolio. General economic conditions affect the marketsfor interest-rate-sensitive securities, including the level and volatility ofinterestratesandtheextentandtimingofinvestorparticipationinsuchmarkets.Unexpectedchangesingeneraleconomicconditionscouldcre-atevolatilityorilliquidityinthesemarketsinwhichweholdpositionsandharmour investment return.Our investmentportfoliocontains interestrate sensitive instruments, such as bonds, which may be adverselyaffected by changes in interest rates. A significant increase in interestratescouldhaveamaterialadverseeffectonour financial conditionorresults of operations. Generally, bond prices decrease as interest ratesrise.Changes in interest ratescouldalsohaveanadverseeffectonourinvestment income and results of operations. For example, if interestratesdecline,investmentofnewpremiumsreceivedandfundsreinvestedmayearnlessthanexpected.

AsofDecember31,2009,mortgage-backedsecuritiesconstitutedapproximately 25.2% of our invested assets, including cash and cashequivalents. As with other fixed income investments, the fair marketvalueofthesesecuritiesfluctuatesdependingonmarketandothergen-eraleconomicconditionsandtheinterestrateenvironment.Changesininterest rates can expose us to prepayment risks on these investments.When interest rates fall, mortgage-backed securities may be prepaidmorequicklythanexpectedandtheholdermustreinvesttheproceedsatlowerinterestrates.Certainofourmortgage-backedsecuritiescurrentlyconsistofsecuritieswithfeaturesthatreducetheriskofprepayment,butthere isnoguarantee thatwewillnot invest inothermortgage-backedsecuritiesthatlackthisprotection.Inperiodsofincreasinginterestrates,mortgage-backedsecuritiesareprepaidmoreslowly,whichmayrequireustoreceiveinterestpaymentsthatarebelowtheinterestratesthenpre-vailingforlongerthanexpected.

Interestratesarehighlysensitivetomanyfactors,includinggovern-mental monetary policies, domestic and international economic andpoliticalconditionsandotherfactorsbeyondourcontrol.

We may require additional capital in the future, which may not be available or may only be available on unfavorable terms.Ourfuturecapitalrequirementsdependonmanyfactors, includingourabilitytowritenewbusinesssuccessfullyandtoestablishpremiumratesand reserves at levels sufficient to cover losses. To the extent that ourpresentcapitalisinsufficienttomeetfutureoperatingrequirementsand/orcoverlosses,wemayneedtoraiseadditionalfundsthroughfinancingsorcurtailourgrowth.Basedonourcurrentoperatingplan,webelieveourcurrentcapitalwillsupportouroperationswithouttheneedtoraiseaddi-tionalcapital.However,wecannotprovideanyassuranceinthatregard,since many factors will affect our capital needs and their amount andtiming,includingourgrowthandprofitability,ourclaimsexperience,andtheavailabilityof reinsurance,aswellaspossibleacquisitionopportuni-ties, market disruptions and other unforeseeable developments. If wehadtoraiseadditionalcapital,equityordebtfinancingmaynotbeavail-ableatallormaybeavailableonlyontermsthatarenotfavorabletous.Inthecaseofequityfinancings,dilutiontoourstockholderscouldresult,and in any case such securities may have rights, preferences and privi-legesthatareseniortothoseofholdersofourcommonstock.Historically,wehaveraisedadditionalcapitalthroughtheofferingoftrustpreferredsecurities. As a result of the recent crisis in the global capital markets,financing through the offering of trust preferred securities may not beavailableatallormaybeavailableonlyontermsthatarenot favorabletous. Ifwecannotobtainadequatecapitalonfavorabletermsoratall,

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ourbusiness, liquidityneeds, financialconditionorresultsofoperationscouldbemateriallyadverselyaffected.

The regulatory system under which we operate, and potential changes thereto, could have a material adverse effect on our business.Our Insurance Subsidiaries are subject to comprehensive regulationandsupervisionintheirrespectivejurisdictionsofdomicile.Thepurposeof the insurance laws and regulations is to protect insureds, notour stockholders. These regulations are generally administered by theInsuranceDepartmentsinwhichtheindividualinsurancecompaniesaredomiciledandrelateto,amongotherthings:• standardsofsolvency,includingriskbasedcapitalmeasurements;• restrictionsonthenature,qualityandconcentrationofinvestments;• requiredmethodsofaccounting;• rate and form regulation pertaining to certain of our insurance

businesses;• mandatingcertaininsurancebenefits;• potentialassessmentsfortheprovisionoffundsnecessaryfortheset-

tlementofcoveredclaimsundercertainpoliciesprovidedbyimpaired,insolventorfailedinsurancecompanies;and

• transactionswithaffiliates.

Significant changes in these laws and regulations could make itmore expensive to conduct our business. The Insurance Subsidiaries’domiciliarystateInsuranceDepartments,and,withrespecttotheacqui-sition of CastlePoint, the Bermuda Monetary Authority, also conductperiodicexaminationsoftheaffairsoftheirdomiciledinsurancecompa-niesandrequirethefilingofannualandotherreportsrelatingtofinancialcondition,holdingcompany issuesandothermatters.Theseregulatoryrequirementsmayadverselyaffectorinhibitourabilitytoachievesomeorallofourbusinessobjectives.

Our InsuranceSubsidiariesmaynotbeable toobtainormaintainnecessarylicenses,permits,authorizationsoraccreditationsinnewstateswe intend to enter, or may be able to do so only at significant cost. Inaddition,wemaynotbeabletocomplyfullywithorobtainappropriateexemptionsfrom,thewidevarietyof lawsandregulationsapplicabletoinsurancecompaniesorholdingcompanies.Failuretocomplywithortoobtainappropriateauthorizationsand/orexemptionsunderanyapplica-blelawscouldresultinrestrictionsonourabilitytodobusinessorengageincertainactivitiesthatareregulatedinoneormoreofthejurisdictionsin which we operate and could subject us to finesand other sanctions,whichcouldhaveamaterialadverseeffectonourbusiness. Inaddition,changesinthelawsorregulationstowhichouroperatingsubsidiariesaresubjectcouldadverselyaffectourabilitytooperateandexpandourbusi-nessorcouldhaveamaterialadverseeffectonourfinancialconditionorresultsofoperations.

Inrecentyears,theU.S.insuranceregulatoryframeworkhascomeunderincreasedFederalscrutiny,andsomestatelegislatorshaveconsid-eredorenactedlawsthatmayalterorincreasestateregulationofinsur-ance and reinsurance companies and holding companies. Moreover,stateinsuranceregulatorsregularlyre-examineexistinglawsandregula-tions, often focusing on modifications to holding company regulations,interpretations of existing laws and the development of new laws.Changesintheselawsandregulationsortheinterpretationoftheselawsand regulations could have a material adverse effect on our financialconditionorresultsofoperations.Thehighlypublicizedinvestigationsofthe insurance industry by state and other regulators and governmentofficials in recentyearshave led to,andmaycontinue to lead to,addi-tional legislativeandregulatoryrequirementsforthe insurance industryandmayincreasethecostsofdoingbusiness.

TheactivitiesofTRM,CPMandCPRMFLaresubjecttolicensingrequirements and regulation under the laws of New York, New Jerseyandotherstateswheretheydobusiness.ThebusinessesofTRM,CPMandCPRMFLdependonthevalidityof,andcontinuedgoodstandingunder,thelicensesandapprovalspursuanttowhichtheyoperate,aswellas compliance with pertinent regulations. As of February 5, 2009, thedate of closing of our acquisition of CastlePoint, our activities becamesubject tocertain licensing requirementsand regulationunder the lawsofBermuda.

Licensinglawsandregulationsvaryfromjurisdictiontojurisdiction.Inall jurisdictions,theapplicablelicensinglawsandregulationsaresub-jecttoamendmentorinterpretationbyregulatoryauthorities.Generallysuchauthoritiesarevestedwithrelativelybroadandgeneraldiscretionasto the granting, renewing and revoking of licenses and approvals.Licenses may be denied or revoked for various reasons, including theviolationofsuch regulations,convictionofcrimesandthe like.Possiblesanctions which may be imposed include the suspension of individualemployees,limitationsonengaginginaparticularbusinessforspecifiedperiods of time, revocation of licenses, censures, redress to clients andfines. In some instances, TRM follows practices based on its or itscounsel’s interpretationsof lawsand regulations,or thosegenerally fol-lowed by the industry, which may prove to be different from those ofregulatoryauthorities.

As industry practices and legal, judicial, social and other environ-mentalconditionschange,unexpectedissuesrelatedtoclaimsandcov-erage may emerge. These issues may adversely affect us by eitherextendingcoveragebeyondourunderwritingintentorbyincreasingthenumber or size of claims. In some instances, these changes may notbecomeapparentuntilsometimeafterwehaveissuedinsuranceorrein-surancecontracts thatareaffectedbythechanges.Asa result, thefullextentof liabilityunderour insuranceor reinsurancecontractsmaynotbeknownformanyyearsafteracontractisissued.Theeffectsofthisandotherunforeseenemergingclaimandcoverageissuesareextremelyhardtopredictandcouldadverselyaffectus.

If the assessments we are required to pay are increased drastically, our results of operations and financial condition will suffer.OurInsuranceSubsidiariesarerequiredtoparticipateinvariousmanda-toryinsurancefacilitiesorinfundingmandatorypools,whicharegener-ally designed to provide insurance coverage for consumers who areunable to obtain insurance in the voluntary insurance market.OurInsuranceSubsidiariesaresubjecttoassessmentsinthestateswherewe do business for various purposes, including the provision of fundsnecessarytofundtheoperationsoftheInsuranceDepartmentandinsol-vencyfunds.In2009,theInsuranceSubsidiarieswereassessedapproxi-mately $11.8 million by various state insurance-related agencies. Theseassessments are generally set based on an insurer’s percentage of thetotal premiums written in a state within a particular line of business.The Company is permitted to assess premium surcharges on workers’compensation policies that are based on statutorily enacted rates. Werelyuponoursystems,aswellas.AsofDecember31,2009,theliabilityfor the various workers’ compensation funds, which includes amountsassessed on workers’ compensation policies, was $11.6 million for ourInsuranceSubsidiaries.Asourcompanygrows,ourshareofanyassess-ments may increase. However, we cannot predict with certainty theamountof futureassessmentsbecausetheydependonfactorsoutsideourcontrol,suchasinsolvenciesofotherinsurancecompanies.Significantassessments could have a material adverse effect on our financialconditionorresultsofoperations.

Our ability to meet ongoing cash requirements and pay dividends may be limited by our holding company structure and regulatory constraints.Towerisaholdingcompanyand,assuch,hasnodirectoperationsofitsown.Towerdoesnotexpecttohaveanysignificantoperationsorassets

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other than its ownership of the shares of its operating subsidiaries.Dividendsandotherpermittedpaymentsfromouroperatingsubsidiar-iesareexpectedtobeourprimarysourceoffundstomeetongoingcashrequirements, including any future debt service payments and otherexpenses, and to pay dividends, if any, to our stockholders. As ofDecember31,2009,themaximumamountofdistributionsthatouroper-atingsubsidiariescouldpaytoTowerwithoutapprovalwas$52.8million.Theinabilityofouroperatingsubsidiariestopaydividendsandotherper-mittedpayments inanamountsufficient toenableus tomeetourcashrequirementsattheholdingcompanylevelwouldhaveamaterialadverseeffectonouroperationsandourabilitytopaydividendstoourstockhold-ers. Accordingly, if you require dividend income you should carefullyconsidertheserisksbeforemakinganinvestmentinourcompany.

although we have paid cash dividends in the past, we may not pay cash dividends in the future.We have a history of paying dividends to our stockholders when suffi-cientcash isavailable,andwecurrently intendtopaydividends ineachquarter of 2010. However, future cash dividends will depend upon ourresults of operations, financial condition, cash requirements and otherfactors, including theabilityofour subsidiaries tomakedistributions tous, which ability is restricted in the manner previously discussed in thissection. Also, there can be no assurance that we will continue to paydividendsevenifthenecessaryfinancialconditionsaremetandifsuffi-cientcashisavailablefordistribution.

We rely on our information technology and telecommunications systems to conduct our business.Ourbusinessisdependentuponthefunctioningofourinformationtech-nology and telecommunication systems. We rely upon our systems, aswellas thesystemsofourvendors tounderwriteandprocessourbusi-ness, make claim payments, provide customer service, provide policyadministration services, such as endorsements, cancellations and pre-mium collections, comply with insurance regulatory requirements andperformactuarialandotheranalyticalfunctionsnecessaryforpricingandproductdevelopment.Ouroperationsaredependentuponourabilitytotimelyandefficientlyprocessourbusinessandprotectour informationandtelecommunicationssystemsfromphysicalloss,telecommunicationsfailure or other similar catastrophic events, as well as from securitybreaches.Whilewehave implementedbusinesscontingencyplansandotherreasonableandappropriateinternalcontrolstoprotectoursystemsfrom interruption, loss or security breaches, a sustained business inter-ruption or system failure could adversely impact our ability to processour business, provide customer service, pay claims in a timely mannerorperform.

The operations and maintenance of our policy, billing and claimsadministration systems have been outsourced to Computer SciencesCorporationtominimizedeploymenttimeandoperationalcost,aswellasforscalabilityandbusinesscontinuity.TheCSCtechnologydeploy-mentwillbeimplementedoveramulti-yearperiodthatbeganin2008.Until these systems are fully migrated over to the CSC platform, wemustdependonexistingtechnologyplatformsthatrequiremoremanualorduplicateprocessing.

Combining Tower and SUa may be more difficult than expected.TheTowerandSUAmergerclosedinNovember2009.Thecompaniesagreed tomerge theirbusinesseswith theexpectation that themergerwould result in various benefits, including, among other things, (a) theopportunity for Tower and SUA to share profit center resources inthe specialty property and casualty insurance market and consolidatecertain functions, resulting in cost savings to the combined company,(b)theopportunitytocreatelong-termstockholdervaluebyincreasingSUA’sgrowthbycross-sellingproductswithTowerandaccessingTower’shigher A.M. Best Company rating and capital base, (c) the ability to

managemarketcyclesthroughdiversityoflinesofbusinessandgeogra-phywhilemaintainingacultureofdisciplinedunderwritingandpricing,(d)theopportunitytoachieveenhancedgrowthopportunitiesandlever-ageSUA’sscalableinfrastructure,(e)accesstoalargepoolofcapitalatan attractive cost of capital, (f) the expansion of Tower’s underwritingcapacity inthespecialtypropertyandcasualty insurancemarket,whichwill furtherbroadenTower’sproductofferings,and(g)theopportunityforTowertoutilizeSUA’sofficeheadquarterstodevelopTower’sbroker-age business written through retail and wholesale agents in theMidwestern United States. Achieving the anticipated benefits of themergerissubjecttoanumberofuncertainties,includingwhetherTowerandSUAareintegratedinanefficientandeffectivemanner,andgeneralcompetitive factors in the marketplace. Failure to achieve these antici-patedbenefitscouldresultinincreasedcosts,decreasesintheamountofexpectedrevenuesanddiversionofmanagement’stimeandenergyandcould negatively impact the combined company’s business, financialcondition,resultsofoperations,prospectsandstockprice.

Inaddition,employeesandproducersmayexperienceuncertaintyabout their future roles with the combined company, which mightadverselyaffectourabilitytoretainkeyexecutives,managersandotheremployeesandproducers.

adverse economic factors including recession, inflation, periods of high unemployment or lower economic activity could result in the combined company selling fewer policies than expected and/or an increase in premium defaults which, in turn, could affect the combined company’s growth and profitability.Negative economic factors may also affect the combined company’sabilitytoreceivetheappropriateratefortheriskitinsureswithitspolicy-holders and may impact its policy flow. In an economic downturn, thedegreetowhichprospectivepolicyholdersapplyforinsuranceandfailtopayallbalancesowedmayincrease.Existingpolicyholdersmayexagger-ateorevenfalsifyclaimstoobtainhigherclaimspayments.Theseout-comeswouldreducethecombinedcompany’sunderwritingprofittotheextent these effects are not reflected in the rates charged by thecombinedcompany.

Currently pending or future litigation or governmental proceedings could result in material adverse consequences, including injunctions, judgments or settlements.We are and from time to time become involved in lawsuits, regulatoryinquiries and governmental and other legal proceedings arising out oftheordinarycourseof itsbusiness.Manyofthesemattersraisedifficultandcomplicatedfactualandlegalissuesandaresubjecttouncertaintiesand complexities. The timing of the final resolutions to these typesof matters is often uncertain. Additionally, the possible outcomes orresolutionstothesematterscould includeadverse judgmentsorsettle-ments, either of which could require substantial payments, adverselyaffecting our business, financial condition, results of operations,prospectsandstockprice.

It may be difficult for a third party to acquire Tower, even if doing so may be beneficial to Tower stockholders.CertainprovisionsofTower’samendedandrestatedcertificateofincor-poration and amended and restated by-laws may discourage, delay orprevent a change in control of Tower that a stockholder may considerfavorable.Theseprovisionsinclude,amongotherthings,thefollowing:• classifying its board of directors with staggered three-year terms,

whichmaylengthenthetimerequiredtogaincontrolofTower’sboardofdirectors;

• prohibitingstockholderactionbywrittenconsent,therebyrequiringallstockholderactionstobetakenatameetingofthestockholders;

• limitingwhomaycallspecialmeetingsofstockholders;

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• establishing advance notice requirements for nominations of candi-dates for election to its board of directors or for proposing mattersthatcanbeacteduponbystockholdersatstockholdermeetings;and

• theexistenceofauthorizedandunissuedTowercommonstockwhichwould allow Tower’s board of directors to issue shares to personsfriendlytocurrentmanagement.

Furthermore,Tower’sownershipofU.S.insurancecompanysubsid-iaries can, under applicable state insurance company laws and regula-tions, delay or impede a change of control of Tower. Such regulationsmight limit the possibility of a change of control, leading to depressedmarketpricesforTowercommonstock,andmaydeterachangeincon-trolthatwouldbebeneficialtoTowerstockholders.

rIsksrel atedtoourIndustry

The threat of terrorism and military and other actions may adversely affect our investment portfolio and may result in decreases in our net income, revenue and assets under management.The threatof terrorism,bothwithin theUnitedStatesandabroad,andmilitaryandotheractionsandheightenedsecuritymeasuresinresponsetothesetypesofthreats,maycausesignificantvolatilityanddeclinesintheequitymarketsintheUnitedStates,Europeandelsewhere,aswellasloss of life, property damage, additional disruptions to commerce andreduced economic activity. Some of the assets in our investmentportfolio may be adversely affected by declines in the equity marketsand economic activity caused by the continued threat of terrorism,ongoingmilitaryandotheractionsandheightenedsecuritymeasures.

We can offer no assurances that terrorist attacks or the threat offutureterroristeventsintheUnitedStatesandabroadormilitaryactionsby the United States will not have a material adverse effect on ourbusiness,financialconditionorresultsofoperations.

Our results of operations and revenues may fluctuate as a result of many factors, including cyclical changes in the insurance industry, which may cause the price of Tower securities issued to investors to be volatile.Theresultsofoperationsofcompaniesinthepropertyandcasualtyinsur-anceindustryhistoricallyhavebeensubjecttosignificantfluctuationsanduncertainties.Ourprofitabilitycanbeaffectedsignificantlyby:• competition;• risinglevelsoflosscoststhatwecannotanticipateatthetimeweprice

ourproducts;• volatile and unpredictable developments, including man-made,

weather-relatedandothernaturalcatastrophesorterroristattacks;• changesinthelevelofreinsurancecapacityandinsurancecapacity;• changes in theamountof lossand lossadjustmentexpense reserves

resultingfromnewtypesofclaimsandneworchangingjudicialinter-pretationsrelatingtothescopeofinsurers’liabilities;and

• fluctuationsinequitymarketsandinterestrates,inflationarypressures,conditionsaffectingthecreditmarkets,segmentsthereoforparticularassetclassesandotherchangesintheinvestmentenvironment,whichaffectreturnsoninvestedassetsandmayimpacttheultimatepayoutoflosses.

Thesupplyof insurance is related toprevailingprices, the levelofinsuredlossesandthelevelofindustrysurpluswhich,inturn,mayfluctu-ateinresponsetochangesinratesofreturnoninvestmentsbeingearnedin the insurance and reinsurance industry. As a result, the insurancebusinesshistoricallyhasbeenacyclicalindustrycharacterizedbyperiodsof intense price competition due to excessive underwriting capacityalternatingwithperiodswhenshortagesofcapacitypermittedfavorablepremium levels. Significant amounts of new capital flowing into the

insuranceandreinsurancesectorscouldleadtoasignificantreductioninpremiumrates,lessfavorablepolicytermsandfewersubmissionsforourunderwritingservices.Inadditiontotheseconsiderations,changesinthefrequency and severity of losses suffered by insureds and insurers mayaffectthecyclesoftheinsurancebusinesssignificantly,andweexpecttoexperiencetheeffectsofsuchcyclicality.

Thiscyclicalitycouldhaveamaterialadverseeffectonourresultsofoperationsandrevenues,whichmaycausethepriceofTowersecuritiesissuedtoinvestorstobevolatile.

Changing climate conditions may adversely affect our financial condi-tion or profitability.There is an emerging scientific consensus that the earth is gettingwarmer. Climate change, to the extent it produces rising temperaturesandchangesinweatherpatterns,mayaffectthefrequencyandseverityof storms and other weather events, the affordability, availability andunderwritingresultsofhomeownersandcommercialpropertyinsuranceand, iffrequencyandseveritypatterns increase,couldnegativelyaffectourfinancialresults.

rIskFaCtorsrel atIngtodIsruptIonsIntheFInanCIalmarkets

adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, access to capital and cost of capital.The capital and credit markets have been experiencing volatility anddisruptionincertainmarketsectors.

We need liquidity topay claims, reinsurance premiums,operatingexpenses, interest on our debt and dividends on our capital stock.Without sufficient liquidity, we will be forced to curtail our operations,and our business will suffer. The principal sources of our liquidity areinsurance premiums, reinsurance recoveries, ceding commissions, feerevenues,cashflowfromourinvestmentportfolioandotherassets,con-sisting mainly of cash or assets that are readily convertible into cash.Other sources of liquidity in normal markets also include a variety ofinstruments,includingmedium-andlong-termdebt,juniorsubordinateddebtsecuritiesandstockholders’equity.

In the event current resources do not satisfy our needs, we mayhavetoseekadditionalfinancing.Theavailabilityofadditionalfinancingwilldependonavarietyoffactorssuchasmarketconditions,thegeneralavailabilityofcredit,thevolumeoftradingactivities,theoverallavailabil-ityofcredittothefinancialservicesindustry,ourcreditratingsandcreditcapacity, as well as the possibility that customers or lenders coulddevelop a negative perception of our long- or short-term financialprospectsifweincurlargeinvestmentlossesorifthelevelofourbusinessactivity decreased due to a market downturn. Similarly, our access tofunds may be impaired if regulatory authorities or rating agencies takenegativeactionsagainstus.Our internalsourcesof liquiditymayprovetobe insufficient,and in suchcase,wemaynotbeable to successfullyobtainadditionalfinancingonfavorableterms,oratall.

Disruptions,uncertaintyor volatility in thecapital andcredit mar-ketsmayalsolimitouraccesstocapitalrequiredtooperateourbusiness.Such market conditions may limit our ability to satisfy statutory capitalrequirements,generate fee incomeandaccess thecapitalnecessary togrow our business. As such, we may be forced to delay raising capital,issueshortertenorsecuritiesthanweprefer,orbearanunattractivecostofcapitalwhichcoulddecreaseourprofitabilityandsignificantlyreduceourfinancialflexibility.Ourresultsofoperations,financialcondition,cashflowsandstatutorycapitalpositioncouldbemateriallyadverselyaffectedbydisruptionsinthefinancialmarkets.

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Difficult conditions in the global capital markets and the economy generally may materially adversely affect our business and results of operations and we do not expect these conditions to improve in the near future.Our results of operations are materially affected by conditions in thecapital markets and the economy generally. The stress experienced bycapitalmarketsthatbeganinthesecondhalfof2007continuedthrough-out2009andhascontinuedinto2010.Recently,concernsoverinflation,energy costs, geopolitical issues, the availability and cost of credit, themortgagemarketandadecliningrealestatemarkethavecontributedtoincreased volatility and diminished expectations for the economy andmarkets going forward. These concerns and the continuing marketupheavalsmayhaveanadverseeffectonus.Ourrevenuesmaydeclineinsuchcircumstancesandourprofitmarginscoulderode.Inaddition,intheeventofextremeprolongedmarketdisruptionswecould incur sig-nificantlosses.Evenintheabsenceofamarketdownturn,weareexposedtosubstantialriskoflossduetomarketvolatility.

Factorssuchasconsumerspending,businessinvestment,govern-ment spending, the volatility and strength of the capital markets, andinflation all affect the business and economic environment and, ulti-mately, the amount and profitability of our business. In an economicdownturncharacterizedbyhigherunemployment,lowerfamilyincome,lower corporate earnings, lower business investment and lower con-sumer spending, the demand for our insurance products could beadversely affected. In addition, we may experience an elevated inci-denceofclaims.Adversechangesintheeconomycouldaffectearningsnegatively and could have a material adverse effect on our business,resultsofoperationsandfinancialcondition.Thecurrentmortgagecri-sis has also raised the possibility of future legislative and regulatoryactions that could further impact our business. We cannot predictwhether or when such actions may occur, or what impact, if any, suchactions could have on our business, results of operations andfinancialcondition.

The impairment of other financial institutions could adversely affect us.Wehaveexposuretomanydifferent industriesandcounterparties,androutinely execute transactions with counterparties in the financial ser-vices industry, includingbrokersanddealers,commercialbanks, invest-mentbanks,reinsurersandotherinstitutions.Manyofthesetransactionsexpose us to credit risk in the event of default of our counterparty.We also have exposure to various financial institutions in the form ofunsecureddebtinstrumentsandequityinvestmentsandunsecureddebtinstrumentsissuedbyvariousstateandlocalmunicipalauthorities.Therecanbenoassurancethatanysuchlossesorimpairmentstothecarryingvalue of these assets would not materially and adversely affect ourbusinessandresultsofoperations.

We are exposed to significant financial and capital markets risk which may adversely affect our results of operations, financial condition and liquidity, and our net investment income can vary from period to period.Weareexposedtosignificantfinancialandcapitalmarketsrisk,includingchangesininterestrates,creditspreads,equityprices,realestatevalues,marketvolatility,theperformanceoftheeconomyingeneral,theperfor-manceofthespecificobligorsincludedinourportfolioandotherfactorsoutsideourcontrol.Ourexposuretointerestrateriskrelatesprimarilytothe market price and cash flow variability associated with changes ininterestrates.Ariseininterestrateswill increasethenetunrealizedlosspositionofour investmentportfolio.Our investmentportfoliocontainsinterestratesensitiveinstruments,suchasfixedincomesecurities,whichmaybeadverselyaffectedbychangesininterestratesfromgovernmen-talmonetarypolicies,domesticandinternationaleconomicandpoliticalconditionsandother factorsbeyondourcontrol.Arise in interest rateswouldincreasethenetunrealizedlosspositionofourinvestmentportfo-lio,offsetbyourabilitytoearnhigherratesofreturnonfundsreinvested.

Conversely,adeclineininterestrateswoulddecreasethenetunrealizedlosspositionofour investmentportfolio,offsetby lower ratesof returnonfundsreinvested.

Our exposure to credit spreads primarily relates to market priceassociatedwithchanges increditspreads.Awideningofcreditspreadswill increasethenetunrealized losspositionofthe investmentportfolioand, if issuer credit spreads increase significantly or for an extendedperiodoftime,wouldlikelyresultinhigherother-than-temporaryimpair-ments.Creditspreadtighteningwillreducenetinvestmentincomeasso-ciatedwithnewpurchasesoffixedmaturities.Our investmentportfolioalso has significant exposure to risks associated with mortgage-backedsecurities.Aswithotherfixedincomeinvestments,thefairmarketvalueof these securities fluctuates depending on market and other generaleconomicconditionsandtheinterestrateenvironment.

Inaddition,marketvolatilitycanmakeitdifficulttovaluecertainofoursecurities iftradingbecomeslessfrequent.Assuch,valuationsmayinclude assumptions or estimates that may have significant period toperiod changes which could have a material adverse effect on ourconsolidated results of operations or financial condition. Continuingchallenges include continued weakness in the real estate market andincreased mortgage delinquencies, investor anxiety over the economy,rating agency downgrades of various structured products andfinancial issuers, unresolved issues with structured investment vehicles,deleveragingoffinancialinstitutionsandhedgefundsandaseriousdis-location in the inter-bank market. If significant, continued volatility,changesininterestrates,changesincreditspreadsanddefaults,alackofpricingtransparency,marketliquidityanddeclinesinequityprices,indi-viduallyorintandem,couldhaveamaterialadverseeffectonourresultsof operations, financial condition or cash flows through realized losses,impairments,andchangesinunrealizedpositions.

Our valuation of fixed maturity and equity securities may include meth-odologies, estimations and assumptions which are subject to differing interpretations and could result in changes to investment valuations that may materially adversely affect our results of operations or finan-cial condition.We have categorized our fixed maturity and equity securities into athree-levelhierarchy,basedonthepriorityoftheinputstotherespectivevaluationtechnique.Thefairvaluehierarchygivesthehighestprioritytoquotedpricesinactivemarketsforidenticalassetsorliabilities(Level1)andthelowestprioritytounobservableinputs(Level3).Anassetorlia-bility’sclassificationwithinthefairvaluehierarchyisbasedonthelowestlevelof significant input to itsvaluation.The relevantGAAPguidancedefinestheinputlevelsasfollows:

Level 1—Inputstothevaluationmethodologyarequotedprices(unad-justed)foridenticalassetsorliabilitiestradedinactivemarkets.Includedare those investments traded on an active exchange, such as theNASDAQGlobalSelectMarket.

Level 2—Inputstothevaluationmethodologyincludequotedpricesforsimilarassetsorliabilitiesinactivemarkets,quotedpricesforidenticalorsimilarassetsorliabilitiesinmarketsthatarenotactive,inputsotherthanquoted prices that are observable for the asset or liability and market-corroboratedinputs.IncludedareinvestmentsinU.S.Treasurysecuritiesand obligations of U.S. government agencies, together with municipalbonds, corporate debt securities, commercial mortgage and asset-backedsecuritiesandcertainresidentialmortgage-backedsecuritiesthataregenerallyinvestmentgrade.

Level 3—Inputstothevaluationmethodologyareunobservablefortheasset or liability and are significant to the fair value measurement.Materialassumptionsandfactorsconsideredinpricinginvestmentsecu-ritiesmayincludeprojectedcashflows,collateralperformanceincludingdelinquencies,defaultsand recoveries,andanymarketclearingactivity

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or liquidity circumstances in the security or similar securities that mayhave occurred since the prior pricing period. Included in this valuationmethodology are investments in certain mortgage-backed and asset-backedsecurities.

At December 31, 2009, approximately 4.8%, 94.5%, and 0.7% ofthesesecuritiesrepresentedLevel1,Level2andLevel3,respectively.Theavailabilityofobservableinputsvariesandisaffectedbyawidevarietyoffactors. When the valuation is based on models or inputs that are lessobservableorunobservableinthemarket,thedeterminationoffairvaluerequiressignificantlymorejudgment.Thedegreeofjudgmentexercisedbymanagementindeterminingfairvalueisgreatestforinvestments.

During periods of market disruption including periods of signifi-cantlyrisingorhighinterestrates,rapidlywideningcreditspreadsorilli-quidity,itmaybedifficulttovaluecertainofoursecurities,forexample,non-agencyresidentialmortgage-backedsecurities, if tradingbecomeslessfrequentand/ormarketdatabecomeslessobservable.Theremaybecertainassetclassesthatwere inactivemarketswithsignificantobserv-abledatathatbecomeilliquidduetothecurrentfinancialenvironment.Insuchcases,moresecuritiesmayfalltoLevel3andthusrequiremoresubjectivityandmanagementjudgment.Assuch,valuationsmayincludeinputsandassumptionsthatare lessobservableor requiregreateresti-mation as well as valuation methods which are more sophisticated orrequiregreaterestimationtherebyresulting invalueswhichmaybelessthanthevalueatwhichtheinvestmentsmaybeultimatelysold.Further,rapidlychangingandunprecedentedcreditandequitymarketconditionscouldmateriallyimpactthevaluationofsecuritiesasreportedwithinourconsolidated financial statements and the period-to-period changes invalue could vary significantly. Decreases in value may have a materialadverseeffectonourresultsofoperationsorfinancialcondition.

Some of our investments are relatively illiquid and are in asset classes that have been experiencing significant market valuation fluctuations.Weholdcertaininvestmentsthatmaylackliquidity,suchasnon-agencyresidential mortgage-backed securities, subprime mortgage-backedsecurities and certain commercial mortgage-backed securities, ratedbelowAA.Theseassetclassesrepresented4.9%ofthecarryingvalueofourtotalcashandinvestedassetsasofDecember31,2009.

Thereportedvaluesofourlessliquidassetclassesdescribedintheparagraph above do not necessarily reflect the lowest current marketprice for theasset. Ifwewere forced to sell certainofourassets in thecurrentmarket,therecanbenoassurancethatwewouldbeabletosellthem for the prices at which we have recorded them and we may beforcedtosellthematlowerprices.

The determination of the amount of impairments taken on our invest-ments is highly subjective and could materially impact our results of operations or financial position.Thedeterminationoftheamountofallowancesandimpairmentsvariesby investment type and is based upon our periodic evaluation andassessment of known and inherent risks associated with the respectiveassetclass.Suchevaluationsandassessmentsare revisedasconditionschangeandnew informationbecomesavailable.Managementupdatesitsevaluations regularlyand reflectschanges inallowancesand impair-ments in operations as such evaluations are revised. There can be noassurance that our management has accurately assessed the level ofimpairments taken in our financial statements. Furthermore, additionalimpairments may need to be taken in the future.Historical trendsmaynotbeindicativeoffutureimpairments.

Forexample,thecostofourfixedmaturityandequitysecuritiesisadjusted for impairments invaluedeemedtobeother-than-temporaryin the period in which the determination is made. The assessment ofwhetherimpairmentshaveoccurredisbasedonmanagement’scase-by-caseevaluationoftheunderlyingreasonsforthedeclineinfairvalue.

Our management regularly reviews our fixed-maturity and equitysecurities portfolios to evaluate the necessity of recording impairmentlossesforother-than-temporarydeclinesinthefairvalueofinvestments.Inevaluatingpotentialimpairment,managementconsiders,amongothercriteria:(i)thecurrentfairvaluecomparedtoamortizedcostorcost,asappropriate; (ii) the length of time the security’s fair value has beenbelow amortized cost or cost; (iii) specific credit issues related to theissuer suchaschanges incredit rating, reductionoreliminationofdivi-dends or non-payment of scheduled interest payments; (iv) manage-ment’s intent and ability to retain the investment for a period of timesufficienttoallowforanyanticipatedrecovery invaluetocost;(v)spe-cific cash flow estimations for certain mortgage-backed securities; and(vi)currenteconomicconditions.

gross unrealized losses may be realized or result in future impairments.OurgrossunrealizedlossesonfixedmaturitysecuritiesatDecember31,2009 were $17.9 million pre-tax, and the amount of gross unrealizedlosses on securities that have been in an unrealized loss position fortwelve months or more is approximately $14.1 million pre-tax. Realizedlossesorimpairmentsmayhaveamaterialadverseimpactonourresultsofoperationandfinancialposition.

If our business does not perform well, we may be required to recognize an impairment of our goodwill, intangible or other long-lived assets or to establish a valuation allowance against the deferred income tax asset, which could adversely affect our results of operations or financial condition.Goodwillrepresentstheexcessoftheamountswepaidtoacquiresub-sidiariesandotherbusinessesoverthefairvalueoftheirnetassetsatthedate of acquisition. We test goodwill at least annually for impairment.Impairmenttestingisperformedbaseduponestimatesofthefairvalueof the reporting units to which the goodwill relates. The estimated fairvalueoftheacquirednetassetsisimpactedbytheongoingperformanceof the related business. If it is determined that the goodwill has beenimpaired, we must write down the goodwill by the amount of theimpairment, with a corresponding charge to income. Such write downscould have a material adverse effect on our results of operations orfinancialposition.

Intangibleassetsrepresenttheamountoffairvalueassignedtocer-tainassetswhenweacquireasubsidiaryorabookofbusiness.Intangibleassetsareclassifiedashavingeitherafiniteoranindefinitelife.Wetestthe recoverabilityof indefinite life intangiblesat leastannually.Wetesttherecoverabilityoffinitelifeintangibleswhenevereventsorchangesincircumstances indicate that the carrying value of a finite life intangiblemay not be recoverable. An impairment is recognized if the carryingvalueofanintangibleassetisnotrecoverableandexceedsitsfairvalueinwhich circumstances we must write down the intangible asset by theamount of the impairment, with a corresponding charge to income.Suchwritedownscouldhaveamaterialadverseeffectonourresultsofoperationsorfinancialposition.

Deferred income tax represents the tax effect of the differencesbetween the book and tax basis of assets and liabilities. Deferred taxassetsareassessedperiodicallybymanagementtodetermineiftheyarerealizable. Factors in management’s determination include the perfor-mance of the business including the ability to generate taxable capitalgains.Ifbasedonavailableinformation,itismorelikelythannotthatthedeferredincometaxassetwillnotberealized,thenavaluationallowancemust be established with a corresponding charge to net income.Such charges could have a material adverse effect on our results ofoperationsorfinancialposition.

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Item1B.unresolvedstaFFCommentsThe Company has no unresolved staff comments as of December 31,2009.

Item2.propertIesWe leaseapproximately 118,500square feetof spaceat 120Broadway,NewYork,NewYork,whichconsistsofthe30thand31stfloorsandpartof the 29th floor. The lease will end on December 31, 2021. See Note17—“Commitments and Contingencies” in the notes to our auditedconsolidatedfinancialstatementsincludedelsewhereinthisreport.

Wealso leaseofficespaceinParamus,NewJersey;Melville,NewYork; Buffalo, NewYork;Quincy, Massachusetts; Scarborough, Maine;Bedford,NewHampshire;Maitland,Florida; Irving,Texas;Lisle, Illinois;White Plains, New York; Mobile, Alabama; Irvine, California; PalmSprings, California; Glastonbury, Connecticut; Atlanta, Georgia;Chicago,Illinois;andHamilton,Bermuda.

Item3.legalproCeedIngsFrom time to time, we are involved in various legal proceedings in theordinarycourseofbusiness.Forexample,totheextentaclaimassertedbya thirdparty ina lawsuitagainstoneofour insureds iscoveredbyaparticularpolicy,wemayhaveadutytodefendtheinsuredpartyagainsttheclaim.Theseclaimsmayrelatetobodilyinjury,propertydamageorothercompensableinjuriesassetforthinthepolicy.Thus,whensuchalawsuit is submitted to us, in accordance with our contractual duty weappoint counsel to represent any covered policyholders named asdefendants in the lawsuit. Inaddition, fromtimetotimewemaytakeacoverage position (e.g., denying coverage) on a submitted property orliability claim with which the policyholder is in disagreement. In suchcases,wemaybesuedbythepolicyholderforadeclarationofitsrightsunder the policy and/or for monetary damages, or we may institute alawsuitagainstthepolicyholderrequestingacourttoconfirmthepropri-etyofourposition.Wedonotbelievethattheresolutionofanycurrentlypending legal proceedings, either individually or taken as a whole, willhaveamaterialadverseeffectonourbusiness, resultsofoperationsorfinancialcondition.

Inadditiontolitigationarisingfromthepoliciesweissue,aswithanycompany actively engaged in business, from time to time we may beinvolved in litigation involving non-policyholders such as vendors orotherthirdpartieswithwhomwehaveenteredintocontractsandoutofwhichdisputeshavearisen,orlitigationarisingfromemployment-relatedmatters, such as actions by employees claiming unlawful treatment orimpropertermination.

On May 28, 2009, Munich Reinsurance America, Inc. (“Munich”)commenced an action against TICNY in the United States DistrictCourt for the District of New Jersey seeking, inter alia, to recoverapproximately$6.1millionundervariousretrocessionalcontractspursu-anttowhichTICNYreinsuresMunich.OnJune22,2009,TICNYfiledits answer, in which it, inter alia, asserted two separate counterclaimsseekingtorecoverapproximately$2.8millionundervariousreinsurancecontractspursuanttowhichMunichreinsuresTICNY.OnJune17,2009,Munich commenced a separate action against TICNY in the UnitedStatesDistrictCourtfortheDistrictofNewJerseyseekingadeclaratoryjudgment that Munich is entitled to access to TICNY’s books andrecordspertainingtovariousquotashareagreements,towhichTICNYfiled itsansweronJuly7,2009.Becausethe litigation isonly in itspre-liminarystage,managementisunabletoassessthelikelihoodofanypar-ticularoutcome,includingwhatamounts,ifany,willberecoveredbythepartiesfromeachotherunderthereinsuranceandretrocessioncontractsthatareatissue.Accordingly,anestimateofthepossiblerangeofloss,ifany,cannotbemade.

Item4.reserved

part IIItem5.marketForregIstr ant’sCommonequIty,rel atedstoCkholdermattersandIssuerpurChasesoFequItyseCurItIes

shareholdersOur common stock is traded on the NASDAQ Global Select Market(“NASDAQ”)underthetickersymbol“TWGP”.Wehaveoneclassofauthorizedcommonstockfor100,000,000sharesataparvalueof$0.01pershare.

As of February 25, 2010, there were 44,987,732 common sharesissuedandoutstandingthatwereheldby159shareholdersofrecord.

prICer angeoFCommonstoCkand dIvIdendsdeCl aredThehighandlowsalespricesforquarterlyperiodsfromJanuary1,2008throughDecember31,2009wereasfollows:

High Low

CommonStock

DividendsDeclared

2009Firstquarter $�31.05 $�19.70 $0.050Secondquarter 28.32 22.70 0.070Thirdquarter 26.10 22.88 0.070Fourthquarter 25.78 22.29 0.0702008Firstquarter $�33.73 $�23.17 $�0.050Secondquarter 28.26 21.03 0.050Thirdquarter 27.53 17.83 0.050Fourthquarter 28.69 15.76 0.050

dIvIdendpolICyTheCompanypaidquarterlydividendsof$0.05pershareonMarch16,2009and$0.07onJune15,2009,September14,2009andDecember14,2009.Anyfuturedeterminationtopaydividendswillbeatthediscre-tionofourBoardofDirectorsandwillbedependentuponourresultsofoperations and cash flows, our financial position and capital require-ments, general business conditions, legal, tax, regulatory and any con-tractual restrictionson thepaymentofdividendsandanyother factorsourBoardofDirectorsdeemsrelevant.

Towerisaholdingcompanyandhasnodirectoperations.Itsabilityto pay dividends depends, in part, on the ability of our InsuranceSubsidiariesandTRMtopaydividendstoit.OurInsuranceSubsidiariesare subject to significant regulatory restrictions limiting their ability todeclare and pay dividends. See “Business—Regulation” and“Management’s Discussion and Analysis of Financial Condition andResultsofOperations.”

Pursuant to the terms of the subordinated debentures underlyingour trustpreferredsecurities,weandoursubsidiariescannotdeclareorpayanydividends ifweare indefaultofor ifwehaveelected todeferpaymentsofinterestonthosedebentures.TheCompanydeclareddivi-dendsoncommonstockasfollows:

($inthousands) 2009 2008

Commonstockdividendsdeclared $10,740 $4,608

In 2009, the Company purchased 38,268 shares of its commonstockfromemployeesinconnectionwiththevestingofrestrictedstockissued in connection with its 2004 Long Term Equity CompensationPlan (the “Plan”). The shares were withheld at the direction of theemployees as permitted under the Plan in order to pay the minimumamount of tax liability owed by the employee from the vesting ofthoseshares.

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The following table summarizes the Company’s stock repurchases for the three-month period ended December 31, 2009, and representsemployees’withholdingtaxobligationsonthevestingofrestrictedstock:

Period

TotalNumberofShares

Purchased

AveragePricePaidperShare

TotalNumberofShares

PurchasedasPartofPublically

AnnouncedPlansorPrograms

MaximumNumber(orApproximateDollarValue)of

SharesthatMayYetbePurchasedUnder

October1–31,2009 3,365 $24.68 — —November1–30,2009 11,395 24.62 — —December1–31,2009 5,719 23.53 — —

Total 20,479 $24.32 — —

Item6.seleCtedConsolIdatedFInanCIalInFormatIonTheselectedconsolidatedincomestatementdatafortheyearsendedDecember31,2009,2008,2007,andthebalancesheetdataasofDecember31,2009and2008arederivedfromourauditedfinancialstatementsincludedelsewhereinthisdocument,whichhavebeenpreparedinaccordancewithGAAPandhavebeenauditedbyJohnsonLambert&Co.LLP,our independent registeredpublicaccounting firm.Youshould read the followingselectedconsolidatedfinancialinformationalongwiththeinformationcontainedinthisdocument,including“Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations”andtheconsolidatedfinancialstatementsandrelatednotesincludedelsewhereinthisForm10-K.

FortheYearEndedDecember31,

($inmillions,exceptpershareamounts) 2009 � 2008 � 2007� 2006 2005

Income Statement Data � � � � � � � � � �Grosspremiumswritten $�1,070.7 $� 634.8 $� 524.0 $� 432.7 $� 300.1Cededpremiumswritten 184.5 290.8 264.8 187.6 88.3

Netpremiumswritten 886.2 344.0 259.2 245.1 211.8

Netpremiumsearned 854.7 314.6 286.1 224.0 164.4Cedingcommissionrevenue 43.9 79.1 71.0 43.1 25.2Insuranceservicesrevenue 5.1 68.2 33.3 8.0 14.1Policybillingfees 3.0 2.3 2.0 1.1 0.9Netinvestmentincome 74.9 34.6 36.7 23.0 15.0Netrealizedgains(losses)oninvestments 1.5 (14.4) (17.5) — 0.1

Totalrevenues 983.1 484.4 411.6 299.2 219.7Lossesandlossadjustmentexpenses 475.5 162.7 157.9 135.1 96.6Operatingexpenses: Directandcedingcommissionexpenses 204.6 132.5 101.0 60.5 43.8 Otheroperatingexpenses(1) 129.9 91.5 77.3 53.7 42.6 Acquisition-relatedtransactioncosts 14.0 — — — —Interestexpense 18.1 8.4 9.3 6.9 4.9

Totalexpenses 842.1 395.1 345.5 256.2 187.9OtherIncomeEquityinunconsolidatedaffiliate (0.8) 0.3 2.4 0.9 —Gainfromissuanceofcommonstockbyunconsolidatedaffiliate — — 2.7 7.9 —Gainoninvestmentinacquiredunconsolidatedaffiliate 7.4 — — — —Gainonbargainpurchase 13.2 — — — —Warrantreceivedfromunconsolidatedaffiliate — — — 4.6 —

Incomebeforeincometaxes 160.8 89.6 71.2 56.4 31.8Incometaxexpense 51.5 32.1 26.1 19.7 11.1

Netincome $� 109.3 $� 57.5 $� 45.1 $� 36.7 $� 20.7

Netincomeavailabletocommonstockholders $� 109.3 $� 57.5 $� 44.4 $� 36.6 $� 20.7

per Share DataBasicearningspershare(9) $� 2.78 $� 2.47 $� 1.94 $� 1.83 $� 1.05Dilutedearningspershare(9) $� 2.76 $� 2.45 $� 1.92 $� 1.79 $� 1.01Weightedaverageoutstanding(inthousands): Basic 39,363 23,291 22,927 19,932 19,756 Diluted 39,581 23,485 23,128 20,511 20,518Selected Insurance RatiosGrosslossratio(2) 54.2% 49.9% 50.7% 55.0% 56.8%Grossunderwritingexpenseratio(3) 30.9% 30.4% 29.2% 28.7% 30.8%

Grosscombinedratio(4) 85.1% 80.3% 79.9% 83.7% 87.6%

Netlossratio(5) 55.6% 51.7% 55.2% 60.3% 58.8%Netunderwritingexpenseratio(6) 32.7% 30.7% 28.5% 27.3% 29.3%

Netcombinedratio(7) 88.3% 82.4% 83.7% 87.6% 88.1%

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Selected Consolidated Financial Information (continued) AsofDecember31,

($inmillions,exceptpershareamounts) 2009 � 2008 � 2007� 2006 2005

Income Statement Data � � � � � � � �Summary Balance Sheet Data Cashandcashequivalents $� 164.9 $� 136.3 $� 77.7 $�100.6 $� 38.8Investmentsatfairvalue 1,896.8 541.0 619.1 464.0 357.2Reinsurancerecoverable 214.5 272.6 207.8 118.0 104.8Deferredacquisitioncosts,net 170.7 53.1 39.3 35.8 29.2 Totalassets 3,313.0 1,538.4 1,355.6 954.1 657.5Lossandlossadjustmentexpenses 1,132.0 535.0 501.2 302.5 198.7Unearnedpremium 658.9 328.8 272.8 227.0 157.8Long-termdebtandredeemablepreferredstock 235.1 101.0 101.0 68.0 47.4 Totalstockholders’equity 1,050.5 335.2 309.4 223.9 144.8

per Share Data: Bookvaluepershare(8) $� 23.35 $� 14.36 $� 13.34 $� 9.23 $� 7.29Dividendsdeclaredpershare-commonstock $� 0.26 $� 0.20 $� 0.15 $� 0.10 $� 0.10

(1) Includesacquisitionexpensesandotherunderwritingexpenses(whicharegeneraladministrativeexpensesrelatedtounderwritingoperationsinourInsuranceSubsidiaries)aswellasotherinsuranceservicesexpenses(whicharegeneraladministrativeexpensesrelatedtoinsuranceservicesoperations).

(2) Thegrosslossratioiscalculatedbydividinggrosslosses(consistingoflossesandlossadjustmentexpenses)bygrosspremiumsearned.(3) Thegrossunderwritingexpenseratioiscalculatedbydividinggrossunderwritingexpenses(consistingofdirectcommissionexpensesandotherunderwritingexpensesnetofpolicybilling

fees)bygrosspremiumsearned.(4) Thegrosscombinedratioisthesumofthegrosslossratioandthegrossunderwritingexpenseratio.(5) Thenetlossratioiscalculatedbydividingnetlossesandlossadjustmentexpensesbynetpremiumsearned.(6) Thenetunderwritingexpenseratioiscalculatedbydividingnetunderwritingexpenses(consistingofdirectcommissionexpensesandotherunderwritingexpensesnetofpolicybillingfees

andcedingcommissionrevenue)bynetpremiumsearned.Historically,thecedingcommissionrevenueweearnonourcededpremiumshasbeenhigherthanourexpenses incurredtoproducethosepremiums;ourextensiveuseofquotasharereinsurancehascausedournetunderwritingexpenseratioincertainperiodstobelowerthanourgrossunderwritingexpenseratiounderGAAP.

(7) Thenetcombinedratioisthesumofthenetlossratioandthenetunderwritingexpenseratio.(8) Bookvaluepershareisbasedontotalcommonstockholders’equitydividedbycommonsharesoutstandingatyearend.(9) PrioryearearningspersharehavebeenrestatedfornewGAAPguidanceadoptedin2009whichrequiresunvestedshare-basedpaymentawardsthatcontainnon-forfeitablerightstodivi-

dendsordividendequivalentsbeconsideredparticipatingsecuritiesandincludedinthecomputationofearningspershare.

Item7.management’sdIsCussIonandanalysIsoFFInanCIalCondItIonandresultsoFoper atIonsThe following discussion and analysis of our financial condition andresultsofoperationsshouldbereadinconjunctionwithourconsolidatedaudited financial statements and accompanying notes which appearelsewhereinthisForm10-K.Itcontainsforward-lookingstatementsthatinvolverisksanduncertainties.See“Business—NoteonForward-LookingStatements”formoreinformation.Ouractualresultscoulddiffermateri-ally from those anticipated in these forward-looking statements as aresultofvariousfactors, includingthosediscussedbelowandelsewherein this Form 10-K, particularly under the headings “Business—RiskFactors”and“Business—NoteonForward-LookingStatements.”

overvIewTower,throughitssubsidiaries,offersabroadrangeofcommercial,per-sonal and specialty property and casualty insurance products and ser-vices to businesses in various industries and to individuals. We providecoverage for many different market segments, including non-standardrisksthatdonotfittheunderwritingcriteriaofstandardriskcarriersduetofactorssuchastypeofbusiness,locationandpremiumperpolicy.Weprovide these products on both an admitted and excess and surplus(“E&S”)basis.

Ourconsolidatedresultsofoperationsreflectsignificantchangesin2009 as a result of acquisitions completed in the year. During the firstquarter of 2009, we closed on the acquisitions of CastlePoint andHermitage on February 5, 2009 and February 27, 2009, respectively.During the fourth quarter of 2009, we closed on the renewal rightsacquisition of AequiCap’s workers’ compensation business and theacquisitionofSUA.Theacquisitionscompleted in2009,expandedourdistributionplatform.Asa resultof theacquisitionsofCastlePointandSUA, we have expanded our commercial product offerings to targetnarrowly defined homogeneous classes of business that we refer to asspecialty business through our Specialty Business segment. We haveexpandedourexcessandsurpluslinesdistributionthroughHermitageinourBrokeragesegment.

As a result of the significant changes in our business, we havechangedthepresentationofourbusinessresultsbyallocatingourprevi-ously reported insurance segment into our Brokerage Insurance andSpecialtyBusiness segmentsbasedon thewaymanagementorganizesthesegmentsformakingoperatingdecisionsandassessingprofitability.Accordingly, we now report results for three segments: BrokerageInsurance,SpecialtyBusinessandInsuranceServices.Theprioryearseg-mentdisclosureshavebeenrestatedtoconformtothecurrentpresenta-tion.Becausewedonotmanageourassetsbysegments,ourinvestmentincome is not allocated among our segments. Operating expensesincurredbyeachsegmentarerecordedinsuchsegmentdirectly.Generalcorporate overhead not incurred by an individual segment is allocatedbased upon the methodology deemed to be most appropriate whichmayincludeemployeeheadcount,policycountandpremiumsearnedineachsegment.

We offer our products and services through our InsuranceSubsidiaries, which include TICNY, TNIC, PIC, NEIC, MVIC, CPIC,CPFL,HIC,KICandCPNIC(operatingasSUAinsomejurisdictions)as well as our management services subsidiaries, which include TRM,CPMandCPRMFL(operatingasAequiCapCPServicesGroup,Inc.insomejurisdictions).ResultsforourInsuranceSubsidiariesarereportedinourBrokerage Insurance segment forproductsdistributed throughournetworkofretailandwholesaleagentsandinourSpecialtyBusinessseg-mentforproductsdistributedthroughprogramunderwritingagentsandreinsurance. Results for our Management Services subsidiaries arereportedinourInsuranceServicessegment.

Our commercial lines products include commercial multiple-peril(providesbothpropertyandliabilityinsurance),monolinegeneralliabil-ity (insures bodily injury or property damage liability), commercialumbrella, monoline property (insures buildings, contents or businessincome), workers’ compensation and commercial automobile policies.Ourpersonal linesproductsconsistofhomeowners,dwelling, personalautomobileandotherliabilitypolicies.

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InourInsuranceServicessegment,wegeneratemanagementfeesand commission income from our managing general agencies by pro-ducingpremiumsonbehalfofissuingcompanies,andwegeneratefeesbyprovidingclaimsadministrationandreinsuranceintermediaryservices.

aCquIsItIons

Specialty Underwriters’ alliance, Inc.On November 13, 2009, the Company completed the acquisition ofSUA,aspecialtypropertyandcasualtyinsurancecompanyforapproxi-mately$107million.SUAoffersspecialtycommercialpropertyandcasu-alty insurance products through independent program underwritingagents that serve niche groups of insureds. The acquisition of SUAexpands the Company’s Specialty Business segment and its regionalpresenceintheMidwest.

aequiCapOn October 14, 2009, the Company completed the acquisition of therenewal rights to the workers’ compensation business of AequiCapProgram Administrators Inc. (“AequiCap”), an underwriting agencybased in Fort Lauderdale, Florida. The acquired business primarilyconsistsofsmall,lowtomoderatehazardworkers’compensationpoliciesinFlorida.During2009,weenteredintoanagreementwithAequiCaptoprovideclaimshandlingservicesforworkers’compensationclaims.MostoftheemployeesofAequiCapinvolvedintheservicingoftheworkers’compensationbusinessbecameemployeesoftheCompany.Theacqui-sition of this business expands the Company’s regional presence intheSoutheast.

HermitageOn February 27, 2009, the Company completed the acquisition ofHermitage, a property and casualty insurance holding company.Hermitage offers both admitted and excess and surplus lines (“E&S”)products. This transaction further expands the Company’s wholesaledistributionsystemnationallyandestablishesanetworkofretailagentsintheSoutheast.

CastlepointOnFebruary5,2009,theCompanycompletedtheacquisitionof100%of the issuedandoutstanding common stock ofCastlePoint Holdings,Ltd. (“CastlePoint”), aBermuda exemptedcorporation, pursuant toanAgreementand Plan of Merger,dated as of August4, 2008, betweenthe Company and CastlePoint. CastlePoint was a Bermuda holdingcompany organized to provide property and casualty insurance andreinsurance business solutions, products and services primarily tosmall insurance companies and program underwriting managers in theUnitedStates.

See “Footnote 3—Acquisitions” for further details. Prior to theacquisition,wehadan investment inCastlePointwhichwasrevaluedatacquisitionresultingina$7.4millionpre-taxgainin2009.

preserverOnApril 10,2007,wecompletedtheacquisitionof100%of the issuedandoutstandingcommonstockofPreserver.Thetransactionhadabasepurchaseprice of approximately $64.7 million. Inaddition, we assumed$12 million of Preserver’s trust preferred securities at the closing.Preserverwasaprivately-heldholdingcompanyforaregionalinsurancecompanygroupspecializinginsmallcommercialandpersonallinesinsur-anceintheNortheast.TheacquisitiongavetheCompanyaccessto250newretailagenciesandacceleratedourNortheastexpansionplans.

prInCIpalrevenueandexpenseItemsWegeneraterevenuefromfourprimarysources:• Netpremiumearned,• Cedingcommissionrevenue,• InsuranceServicerevenue,and• Netinvestmentincomeandrealizedgainsandlossesoninvestments.

Weincurexpensesfromfourprimarysources:• Lossesandlossadjustmentexpenses,• Operatingexpenses,• Interestexpense,and• Incometaxes.Eachoftheseisdiscussedbelow.

Net premiums earned.Premiumswrittenincludeallpremiumsreceivedin an accounting period. Premiums are earned over the term of therelatedpolicy.Theportionofthepremiumthatrelatestothepolicytermthathasnotyetexpiredisincludedinthebalancesheetasunearnedpre-miumtobeearnedinsubsequentaccountingperiods.Premiumscanbeassumed from or ceded to reinsurers. Direct premiums combined withassumed premiums are referred to as gross premiums and subtractingpremiumscededtoreinsurersresultsinnetpremiums.

Ceding commission revenue.Weearncedingcommissionrevenue(gen-erallyapercentageofthepremiumsceded)onthegrosspremiumswrit-tenthatwecedetoreinsurersunderquotasharereinsuranceagreements.

Insurance Service revenue.Weearnfeeincomeintheformofcommis-sionsgeneratedbyTRM,CPMandCPRMFLonpremiumsproducedby their managing general agencies and fees earned from their claimsadministration,otheradministrationservicesandreinsuranceintermedi-ary services.Wealsoearn fee income in the formofpolicybilling feesarisinginthecourseofcollectingpremiumsfromourpolicyholders.

Net investment income and realized gains and losses on investments. We invest our available funds in cash, cash equivalents and securities.Our investment income includes interest and dividends earned on ourinvestedassets.Realizedgainsandlossesoninvestedassetsarereportedseparately from net investment income. We earn realized gains wheninvestedassetsaresoldforanamountgreaterthantheiramortizedcost,in the case of fixed maturity securities, and cost, in the case of equitysecurities,andwerecognizerealizedlosseswheninvestedassetsarewrit-tendownorsoldforanamountlessthantheiramortizedcostoractualcost,asapplicable.

Losses and loss adjustment expenses.Weestablishlossandlossadjust-mentexpense (“LAE”) reserves inanamountequal toourestimateoftheultimateliabilityforclaimsunderourinsurancepoliciesandthecostofadjustingandsettlingthoseclaims.Lossandlossadjustmentexpensesrecorded in a period include estimates for losses incurred during theperiodandchangesinestimatesforpriorperiods.

Operating expenses.InourBrokerageInsuranceandSpecialtyBusinesssegments,werefertotheoperatingexpensesthatweincurtounderwriterisksasunderwritingexpenses.Theseincludedirectandcedingcommis-sion expenses (payments to our producers for the premiums that theygenerate for us) and other underwriting expenses. In our InsuranceServices segment, operating expenses consist of direct commissionspaidtoproducersandotherinsuranceserviceexpenses.

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Interest expense. We pay interest on our loans, on our subordinateddebentures and on segregated assets placed in trust accounts on a“fundswithheld”basis inordertocollateralize reinsurancerecoverables.Inaddition, interestexpenseincludesamortizationofanydebtissuancecostsovertheremainingtermofoursubordinateddebentures.

Income taxes. We pay Federal, state and local income taxes andothertaxes.

measurementoFresultsWeusevariousmeasurestoanalyzethegrowthandprofitabilityofourbusiness segments. In our Brokerage Insurance and Specialty Businesssegments,wemeasuregrowth in termsofgross,cededandnetpremi-umswritten,andwemeasureunderwritingprofitabilitybyexaminingourloss,expenseandcombinedratios.Wealsomeasureourgrossandnetwrittenpremiumstosurplusratiostomeasuretheadequacyofcapitalinrelation to premiums written. In the Insurance Services segment, wemeasure growth in terms of premiums produced by TRM, CPM andCPRMFL on behalf of other insurance companies as well as fee andcommissionrevenuereceived,andweanalyzeprofitabilitybyevaluatingincomebeforetaxesandthesizeofsuchincomerelativetoourInsuranceSubsidiaries’netpremiumsearned.Onaconsolidatedbasis,wemeasureprofitabilityintermsofnetincomeandreturnonaverageequity.

premiums written. We use gross premiums written to measure oursales of insurance products and, in turn, our ability to generate cedingcommission revenues from premiums that we cede to reinsurers.Gross premiums written also correlates to our ability to generate netpremiumsearned.

Loss ratio.ThelossratioistheratiooflossesandLAEincurredtopremi-umsearnedandmeasurestheunderwritingprofitabilityofacompany’sinsurancebusiness.Wemeasureourlossratioonagross(beforereinsur-ance)andnet(afterreinsurance)basis.Wealsomeasurethelossratioonthecededportion(thedifferencebetweengrossandnetpremiums)forourBrokerage InsuranceandSpecialtyBusinesssegments.Weuse thegross loss ratio as a measure of the overall underwriting profitability oftheinsurancebusinesswewriteandtoassesstheadequacyofourpric-ing.Weusethelossratioonthecededportionofourinsurancebusinesstomeasuretheexperienceonthepremiumsthatwecedetoreinsurers,including the premiums ceded under our quota share treaties. Since2001,thelossratioonsuchcededbusinessisconsideredindeterminingthecedingcommission rate thatweearnoncededpremiums.Ournetlossratioismeaningfulinevaluatingourfinancialresults,whicharenetofcededreinsurance,asreflectedinourconsolidatedfinancialstatements.Inaddition,weuseaccidentyearandcalendaryearlossratiostomeasureourunderwritingprofitability.AnaccidentyearlossratiomeasureslossesandLAEfor insuredeventsoccurring inaparticularyear, regardlessofwhentheyarereported,asapercentageofpremiumsearnedduringthatparticularaccidentyear.Acalendaryear loss ratiomeasures lossesandLAE for insured events occurring during a particular year and thechangesinestimatesinlossandLAEreservesfromprioraccidentyearsasapercentageofpremiumsearnedduringthatparticularcalendaryear.

Underwriting expense ratio.Thegrossunderwritingexpenseratioistheratio of direct commission expenses and other underwriting expenseslesspolicybillingfeestogrosspremiumsearned.Thegrossunderwritingexpenseratiomeasuresacompany’soperationalefficiencyinproducing,underwriting and administering its insurance business. Due to our his-torically high levels of reinsurance, we also calculate our underwritingexpenseratioaftertheeffectofcededreinsurance.Cedingcommissionrevenueisappliedtoreduceourunderwritingexpensesinourinsurancecompanyoperation.Becausethecedingcommissionrateweearnonourpremiums ceded has historically been higher than our underwritingexpense ratio on those premiums, our extensive use of quota share

reinsurancehas,incertainperiods,causedournetunderwritingexpenseratioincertainperiodstobelowerthanourgrossexpenseratio.

Combined ratio.Weusethecombinedratiotomeasureourunderwrit-ingperformance.Thecombinedratioisthesumofthelossratioandtheunderwriting expense ratio. We analyze the combined ratio on a gross(beforetheeffectofreinsurance)andnet(aftertheeffectofreinsurance)basis.Ifthecombinedratioisatorabove100%,aninsurancecompanyisnotunderwritingprofitablyandmaynotbeprofitableunlessinvestmentincomeissufficienttooffsetunderwritinglosses.

premiums produced by TRM, CpM and CpRMFL.Thesecompaniesoperate managing general agencies that earn commissions on writtenpremiumsproducedonbehalfoftheirissuingcompanies.AlthoughTRMisnotan insurancecompany,wehavehistoricallyutilizedTRM’saccessto its issuing companies as a means to expand our ability to generatepremiumsinstateswhereourInsuranceSubsidiarieswerenotyetlicensed.

Net income and return on average equity.Weusenetincometomea-sureourprofitsandreturnonaverageequitytomeasureoureffective-ness in utilizing our stockholders’ equity to generate net income on aconsolidatedbasis. Indetermining returnonaverageequity foragivenyear, net income is divided by the average of stockholders’ equity forthatyear.

Operating income.Operatingincomeexcludesrealizedgainsandlossesand acquisition-related transaction costs, net of tax. This is a commonmeasurement for property and casualty insurance companies. Webelieve this presentation enhances the understanding of our results ofoperations by highlighting the underlying profitability of our insurancebusiness. Additionally, these measures are a key internal managementperformancestandard.

ThefollowingtableprovidesareconciliationofoperatingincometonetincomeonaGAAPbasis.Theoperatingincomeisusedtocalculateoperatingearningspershareandoperatingreturnonaverageequity.

December31,

($inthousands) 2009 2008 2007

Operatingincome $119,820 $�66,803 $�56,464 Netrealizedgains(losses)on investments,netoftax 976 (9,330) (11,382) Acquisition-relatedtransactioncosts, netoftax (11,466) — —

NetIncome $109,330 $�57,473 $�45,082

CrItICalaCCountIngestImatesIn preparing our consolidated financial statements, management isrequiredtomakeestimatesandassumptionsthataffectreportedassets,liabilities, revenues and expenses and the related disclosures as of thedateof the financial statements.Managementconsidersanaccountingestimatetobecritical if itrequiresassumptionstobemadethatinvolveuncertaintyatthetimetheestimateismadeand,haddifferentassump-tionsbeenselected,thechangesintheoutcomecouldhaveasignificanteffect on our financial statements. We review our critical accountingestimatesandassumptionsquarterly.Actual resultsmaydiffer,perhapssubstantially,fromtheestimates.

Our most critical accounting estimates involve the reporting ofreservesforlosses(includinglossesthathaveoccurredbuthadnotbeenreported by the financial statement date) and LAE, establishing fairvalueof lossesandLAEforacquiredbusinesses,netearnedpremiums,the reporting of ceding commissions earned, the amount and recover-ability of reinsurance recoverable balances, deferred acquisition costs,investment impairments and potential impairments of goodwill andintangibleassets.

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Loss and Lae reserves.ThereservingprocessforlossandLAEreservesprovides our best estimate at a particular point in time of the ultimateunpaid cost of all losses and LAE incurred, including settlement andadministration of losses, and is based on facts and circumstances thenknownandincludinglossesthathavebeenincurredbutnotyetreported.Theprocessincludesusingactuarialmethodologiestoassistinestablish-ing these estimates, judgments relative to estimates of future claimsseverityandfrequency, the lengthof timebefore losseswilldeveloptotheirultimatelevelandthepossiblechangesinthelawandotherexternalfactors that are often beyond our control. There are various actuarialmethodsthatareappropriateforthedifferentlinesofbusiness,andouractuaries’useofaparticularmethodorweightingofmethodsdependsinpartonthematurityofeachaccidentyearbylineofbusiness,thelimitsof liabilitycoveredunder thepolicies, thepresenceorabsenceof largeclaimsintheexperience,andotherfactors.Ingeneral,thevariousactu-arialmethodscanbegroupedintothreecategories:lossratioprojection,incurredlossprojection,andtheBornhuetter-Ferguson(“B-F”)method.For themost recentaccident year and for liability lines of business theactuarialmethodgiventhemostweightisusuallythelossratiomethod,sincethepercentageofultimateclaimsreportedtodate isexpectedtobelowandtheimmaturereportedclaimsexperienceisnotareliableindi-catorofultimatelossesforthataccidentyear.Forpropertylinesofbusi-ness forthemostrecentaccidentyeartheB-Fmethod isusuallygiventhemostweight,becauseexperiencetypicallyshowsthatthereisasmallpercentageofclaims reported in the subsequentperioddue tonormallagsinreportingandprocessingofclaimsintheselinesofbusinessthatcanberelativelyreliablyestimatedasapercentageofpremiums,whichisreflected in the B-F method. For each line of business, the actuarialreservingmethodusuallygiventhemostweightshiftsfromthelossratioprojection to the B-F method to the incurred loss projection as eachaccidentyearmatures.Thesemethodsaredescribedin“Business—LossandLossAdjustmentExpenseReserves.”

This process helps management set carried loss reserves basedupon the actuaries’ best estimates, using estimates made by segment,product or line of business, territory, and accident year. The actuariesalsoseparatelyestimatelossreservesfromLAEreservesandwithinLAEreservesestimatesaremadefordefenseandcostcontainmentexpensesorAllocatedLossAdjustmentExpenses(“ALAE”)andforotherclaimsadjusting expenses or Unallocated Loss Adjustment Expenses(“ULAE”).Theamountof lossandLAEreservesforreportedclaimsisbased primarily upon a case-by-case evaluation of coverage, liability,injury severity, and any other information considered pertinent to esti-mating the exposure presented by the claim. The amounts of loss andLAEreservesforunreportedclaimsaredeterminedusinghistoricalinfor-mation by line of business as adjusted to current conditions. Since ourprocessproduceslossreservessetbymanagementbasedupontheactu-aries’ best estimate, there is no explicit or implicit provision for uncer-tainty in the carried loss reserves, except for required provisions inconnectionwithacquisitionswhichareseparatelydetermined.

Duetotheinherentuncertaintyassociatedwiththereservingpro-cess, the ultimate liability may differ, perhaps substantially, from theoriginalestimate.Suchestimatesareregularlyreviewedandupdatedandany resulting adjustments are included in the current year’s results.Reserves are closely monitored and are recomputed periodically usingthemostrecentinformationonreportedclaimsandavarietyofstatisticaltechniques.Specifically,onatleastaquarterlybasis,wereview,bylineofbusiness,existingreserves,newclaims,changestoexistingcasereservesand paid losses with respect to the current and prior years. See“Business—LossandLossAdjustmentExpenseReserves”foradditionalinformationregardingourlossandLAEreserves.

Wesegregateourdata forestimating loss reserves.ThepropertylinesincludeFire,Homeowners,CMPProperty,Multi-FamilyDwellingsand Auto Physical Damage. The casualty lines include CMP Liability,

OtherLiability,Workers’Compensation,CommercialAutoLiability,andPersonalAutoLiability.BrokerageInsurancesegmentreservesareesti-mated separately from Specialty Business segment reserves. For theBrokerage Insurance segment we analyze reserves by line of businessand,whereappropriate,we further segregate thedata foranalysispur-poses between small, middle and large policies sizes and by state orregion.Wealsoanalyzevariousproducers’businessseparatelywherethevolume of business from those producers is considered significant andthe characteristics of the business from those particular producers areperceived to be different. Within the Specialty Business segment, weestimatelossandlossexpensesreservesutilizingsimilar lineofbusinessbreakdowns, and generally we also estimate the loss and loss expensereservesbyprogramandwithinthereinsurancebusinessbytreaty.

Two key assumptions that materially impact the estimate of lossreservesarethelossratioestimateforthecurrentaccidentyearandthelossdevelopment factor selections forall accidentyears.The loss ratioestimateforthecurrentaccidentyearisselectedafterreviewinghistori-cal accident year loss ratios adjusted for rate and price changes, trend,mixofbusiness,andotherfactors.

In most cases, our data is sufficiently credible to determine lossdevelopment factors utilizing our own data. In some cases, we supple-mentourownlossdevelopmentexperiencewithindustrydataandutiliz-ing historical loss development experience for particular books ofbusiness,programsortreatiesobtainedfromoursources.Thelossdevel-opment factors are reviewed at least annually, and whenever there is asignificantchange in theunderlyingbusiness.Eachquarterwe test theloss development by analyzing actual emerging claims compared toexpecteddevelopment.

The chart below shows the average number of years by productline when we expect approximately 50%, 90% and 99% of losses to bereported for a given accident year, although these reporting lagsmay differ significantly by territory and for differences in underlyingcoveragecharacteristics:

NumberofYears

Segment 50% 90% 99%

Fire <�1�year <�1�year 2�yearsHomeowners <�1�year <�2�years 3�yearsMulti-FamilyDwelling <�2�years <�2�years 5�yearsCMPProperty <�1�year 1�year 2�yearsCMPLiability <�2�years 5�years 9�yearsWorkers’Compensation <�1�year 2�years 5�yearsOtherLiability 3�years 4�years 9�yearsCommercialAutoLiability <�1�year 3�years 4�yearsAutoPhysicalDamage <�1�year <�1�year 1�yearPersonalAutoLiability <�1�year <�2�years 4�years

WeestimateALAEreservesseparatelyforclaimsthataredefendedbyin-houseattorneys,claimsthatarehandledbyotherattorneysthatarenotemployees,andmiscellaneousALAEcostssuchaswitnessfeesandcourtcosts.

Forclaimsthataredefendedbyin-houseattorneys,weestimatethedefensecostperclaim,andweattributetoeachoftheseclaimsafixedfeefordefensework.Weallocatetoeachoftheselitigatedclaims50%ofthefixedfeewhenlitigationonaparticularclaimbeginsand50%ofthefeewhenthelitigationisclosed.Thefeeisdeterminedactuariallybasedupontheprojectednumberoflitigatedclaimsandexpectedclosingpat-ternsat thebeginningofeachyearaswellas theprojectedbudget forourin-houseattorneys,andtheseamountsarecalibratedeachquartertoreimburseourin-houselegaldepartmentforalloftheircosts.

For LAE stemming from defense by other attorneys who are notour employees, we implemented automated legal fee auditing in thefourthquarterof2008thatwebelievehasbecomerelativelycommonintheinsuranceindustryandhasbeenshowntoreduceexternalattorneys’billsby5%to10%.

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ULAEforclaimsthatarehandledin-housebyourclaimsadjustersutilizeasimilarprocesstothatdescribedaboveforALAE.Wedeterminefixedfeesperclaimbylineofbusiness,andassignthesecoststolineofbusinessandaccidentyear,with50%ofthefixedfeeattributedtoclaimswhen a claim is opened and 50% attributed to claims when they areclosed.TheIBNRportionofULAEfortheseclaimsisbasedupon50%ofthefixedfeeperclaimsforin-houseULAEmultipliedbythenumberofclaimsopenandby100%ofthefixedfeemultipliedbytheestimatednumberofclaimstobereportedforprioraccidentdates.

Forsometypesofclaimsandforsomeprogramswhereweutilizethird-party administrators (“TPA”) to adjust claims, we pay them feeswhich are included in ULAE. In some cases, we arrange for fixed per-centagesofpremiumsearnedtobethefeeforclaimsadministration,andinothercaseswearrange for fixed feesperclaimorhourlycharges forULAEservices.ThereservesforULAEforthesesituationsisestimatedbased upon the particular arrangement for these types of claims byproductorprogram.

establishing fair value of loss and Lae reserves for acquired companies.Atacquisitiondate,lossandLAEreservesmustbesettofairvalue.Astherearenoreadilyobservablemarketsfortheseliabilities,weuse a valuation model that estimates net nominal future cash flowsrelated to the loss and LAE reserve. This valuation is adjusted for thetimevalueofmoneyandariskmargintocompensatetheCompanyforbearingtheriskassociatedwiththeliabilities.

Net premiums earned. Insurance policies issued or reinsured by us areshort-duration contracts. Accordingly, premium revenue, includingdirectwritingsandreinsuranceassumed,netofpremiumscededtorein-surers,isrecognizedasearnedinproportiontotheamountofinsuranceprotectionprovided,onaproratabasisoverthetermsoftheunderlyingpolicies. Unearned premiums represent premiums applicable to theunexpired portions of in-force insurance contracts at the end of eachyear.Prepaid reinsurancepremiums represent theunexpiredportionofreinsurancepremiumsceded.

Ceding commissions earned.Wehavehistoricallyreliedonquotashare,excess of loss and catastrophe reinsurance to manage our regulatorycapital requirementsand limitourexposure to loss.Generally,wehaveceded a significant portion of our insurance premiums to reinsurers inordertomaintainournetleverageratioatourdesiredtargetlevel.

Ceding commissions under a quota share reinsurance agreementarebasedontheagreeduponcommissionrateappliedtotheamountofcededpremiumswritten.Cedingcommissionsarerealizedasincomeasceded premiums written are earned. The ultimate commission rateearned on our quota share reinsurance contracts is determined by theloss ratio on the ceded premiums earned. If the estimated loss ratiodecreasesfromthelevelcurrentlyineffect,thecommissionrateincreasesandadditionalcedingcommissionsareearnedintheperiodinwhichthedecreaseisrecognized.Iftheestimatedlossratioincreases,thecommis-sion rate decreases, which reduces ceding commissions earned. As aresult, the same uncertainties associated with estimating loss and LAEreservesaffecttheestimatesofcedingcommissionsearned.Wemonitorthecededultimatelossratioonaquarterlybasistodeterminetheeffectonthecommissionrateofthecededpremiumsearnedthatweaccruedduring prior accounting periods. The estimated ceding commissionincome relating toprioryears recorded in2009,2008,and2007wasadecrease of $2.2 million, a decrease of $1.8 million and a decrease of$0.5million,respectively.

Reinsurance recoverables.Reinsurancerecoverablebalancesareestab-lishedfortheportionofpaidandunpaidlossandLAEthatisassumedbyreinsurers.Prepaidreinsurancepremiumsrepresentunearnedpremiumsthat are ceded to reinsurers. Reinsurance recoverables and prepaidreinsurance premiums are reported on our balance sheet separately asassets, insteadofnettedagainst the related liabilities, since reinsurancedoesnotrelieveusofourlegalliabilitytopolicyholdersandcedingcom-panies.Wearerequiredtopaylossesevenifareinsurerfailstomeetitsobligationsundertheapplicablereinsuranceagreement.Consequently,webearcredit riskwith respect toour individual reinsurersandmayberequiredtomakejudgmentsastotheultimaterecoverabilityofourrein-surance recoverables. Additionally, the same uncertainties associatedwithestimatinglossandLAEreservesaffecttheestimatesoftheamountofcededreinsurancerecoverables.Wecontinuallymonitorthefinancialconditionandratingagencyratingsofourreinsurers.Non-admittedrein-surersarerequiredtocollateralizetheirshareofunearnedpremiumandloss reserves either by placing funds in a trust account meeting therequirements of New York Regulation 114 or by providing a letter ofcredit.Inaddition,fromOctober2003toDecember31,2005,weplacedourquotasharetreatiesona“fundswithheld”basis,underwhichTICNYretainedthecededpremiumswrittenandplacedthatamount insegre-gatedtrustaccountsfromwhichTICNYmaywithdrawamountsduetoitfromthereinsurers.

Deferred acquisition costs, net.Wedefercertainexpensesandcommis-sionrevenuesthatvarywithandaredirectlyrelatedtotheacquisitionofnew and renewal insurance business, including commission expense ongrosspremiumswritten,commissionincomeoncededpremiumswritten,premiumtaxesandcertainothercostsrelatedtotheacquisitionofinsur-ancecontracts.Thesecostsandrevenuesarecapitalizedandtheresult-ing asset, deferred acquisition costs, net, is amortized and charged toexpenseorincomeinfutureperiodsasgrossandcededpremiumswrit-tenareearned.Themethodfollowedincomputingdeferredacquisitioncosts,net, limits theamountofsuchdeferredamounts to itsestimatedrealizablevalue.Theultimaterecoverabilityofdeferredacquisitioncostsisdependenton thecontinuedprofitabilityofour insuranceunderwrit-ing. We also consider anticipated invested income in determining therecoverabilityof thesecosts. Ifour insuranceunderwritingceases tobeprofitable,wemayhavetowriteoffaportionofourdeferredacquisitioncosts, resulting inafurtherchargeto incomeintheperiod inwhichtheunderwriting losses are recognized. The value of business acquired(“VOBA”)isanintangibleassetrelatingtotheestimatedfairvalueoftheunexpiredinsurancepoliciesacquiredinabusinesscombination.VOBAisdeterminedatthetimeofabusinesscombinationand is reportedontheconsolidatedbalancesheetwithDACandisamortizedinproportiontothetimingoftheestimatedunderwritingprofitassociatedwiththeinforcepoliciesacquired.ThecashfloworinterestcomponentofVOBAisamortized in proportion to the expected pattern of future cash flows.TheCompanyconsidersanticipated investment incomeindeterminingtherecoverabilityofthesecostsandbelievestheyarefullyrecoverable.

Impairment of invested assets. Impairment of investment securitiesresults in a charge to operations when a market decline below cost isdeemed to be other-than-temporary. We regularly review our fixed-maturity and equity securities portfolios to evaluate the necessity ofrecordingimpairmentlossesforother-than-temporarydeclinesinthefairvalue of investments. In evaluating potential impairment, we consider,amongothercriteria:• theoverallfinancialconditionoftheissuer;• the current fair value compared to amortized cost or cost, as

appropriate;• the lengthoftimethesecurity’s fairvaluehasbeenbelowamortized

costorcost;

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• specificcreditissuesrelatedtotheissuersuchaschangesincreditrat-ing, reductionoreliminationofdividendsornon-paymentof sched-uledinterestpayments;

• whethermanagementintendstosellthesecurityand,ifnot,whetheritismore likely thannot that theCompanywillbe required to sell thesecuritybeforerecoveryofitsamortizedcostbasis;

• specificcashflowestimationsformortgage-backedsecurities;and• currenteconomicconditions.

If an other-than-temporary-impairment (“OTTI”) loss is deter-minedforafixed-maturitysecurity,thecreditportionisrecordedintheincome statement as net realized losses on investments and the non-creditportionisrecordedinaccumulatedothercomprehensiveincome.Thecreditportionresults inapermanent reduction in thecostbasisofthe underlying investment. The determination of OTTI is a subjectiveprocessanddifferent judgmentsandassumptionscouldaffectthetim-ingoflossrealization.WerecordedOTTIlossesinourfixedmaturityandequitysecuritiesintheamountsof$44.2million,$22.7millionand$10.1millionin2009,2008,and2007,respectively.

Since total unrealized losses are a component of stockholders’equity,anyrecognitionofadditionalOTTI losseswouldhavenoeffectonourcomprehensiveincomeorstockholders’equity.

See “Business-Investments” and “Note 4—Investments” in thenotestoconsolidatedfinancialstatementsforadditionaldetailregardingour investment portfolio at December 31, 2009, including disclosuresregardingotherthantemporarydeclinesininvestmentvalue.

goodwill and intangible assets and potential impairment. The costsassociatedwithagroupofassetsacquiredinatransactionareallocatedtotheindividualassets,includingidentifiableintangibleassets,basedontheirrelativefairvalues.Purchaseconsiderationinexcessofthefairvalueoftangibleandintangibleassetsisrecordedasgoodwill.

Identifiable intangible assets with a finite useful life are amortizedover theperiod inwhich theasset isexpected tocontributedirectlyorindirectlytoourfuturecashflows.Identifiableintangibleassetswithfiniteuseful livesare tested for recoverability whenevereventsor changes incircumstances indicate thatacarryingamountmaynotbe recoverable.Identifiableintangibleassetswithindefiniteusefullivesandgoodwillarenotamortized.Rather,theyaretestedforrecoverabilityatleastannuallyorwhenevereventsorchangesincircumstancesindicatethatacarryingamountmaynotberecoverable.

Animpairment loss isrecognizedifthecarryingvalueofan intan-gibleassetorgoodwillisnotrecoverableanditscarryingamountexceedsitsfairvalue.Noimpairmentlosseswererecognizedin2009,2008,and2007.Significantchangesinthefactorsweconsiderwhenevaluatingourintangibleassetsandgoodwillforimpairmentlossescouldresultinasig-nificantchargeforimpairmentlossesreportedinourconsolidatedfinan-cial statements. See “Note 6—Goodwill and Intangible Assets” in thenotestoconsolidatedfinancialstatements.

ConsolIdatedresultsoFoper atIonsAs noted in the Overview section of “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” we com-pleted theacquisitionsofCastlePointonFebruary5,2009,Hermitageon February 27, 2009, AequiCap on October 14, 2009 and SUA onNovember13,2009.

Accordingly, our consolidated revenues and expenses reflect sig-nificantchangesasaresultoftheseacquisitionsparticularlythroughtheexpansionofourdistributionplatformthatnow includesallof thespe-cialtybusinessproducedthroughprogramunderwritingagentsandsmallinsurancecompanies throughCastlePointandSUA,as reported inourSpecialty Business segment, and excess and surplus lines distributionthroughHermitage,asreportedinourBrokerageInsurancesegment.

Our results of operations are discussed below in two parts. The first part discusses the consolidated results of operations. The second partdiscussestheresultsofeachofourthreesegments.


($inmillions) 2009� Change % 2008 Change % 2007

Brokerageinsurancesegmentunderwritingprofit $� 75.6 $� 21.9 41% $� 53.7 $� 7.3 16% $� 46.4Specialtybusinesssegmentunderwritingprofit 24.2 22.7 NM 1.5 1.3 NM 0.2Insuranceservicessegmentpretaxincome 0.9 (23.1) (96%) 24.0 12.8 114% 11.2Netinvestmentincome 74.9 40.3 117% 34.6 (2.1) (6%) 36.7Netrealizedgains(losses)oninvestments,including other-than-temporaryimpairments 1.5 15.9 (110%) (14.4) 3.1 (18%) (17.5)Corporateexpenses (3.8) (2.2) 134% (1.6) — 2% (1.6)Acquisition-relatedtransactioncosts (14.0) (14.0) — — — — —Interestexpense (18.1) (9.7) 114% (8.4) 0.9 (9%) (9.3)Otherincome(loss) 19.6 19.4 NM 0.2 (4.9) (95%) 5.1

Income before taxes 160.8 71.2 199% 89.6 18.4 4% 71.2Incometaxexpense 51.5 19.4 60% 32.1 6.0 23% 26.1

Net income $� 109.3 $� 51.8 92% $� 57.5 $� 12.4 30% $� 45.1

KeY MeaSUReSgross premiums written and produced:WrittenbyBrokerageandSpecialtyInsuranceSegments $�1,070.7 $�435.9 68.7% $�634.8 $�110.8 21.1% $�524.0ProducedbyInsuranceServicesSegment 11.7 (163.7) �(93.3%) 175.4 90.3 106.1% 85.1Assumedpremiums — 5.2 (100.4%) (5.2) (4.5) NM (0.7)

Total $�1,082.4 $�277.4 34.5% $�805.0 $�196.6 32.3% $�608.4

NMisshownwherepercentagechangeexceeds500%.

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2009 2008 2007

percent of total revenues:Netpremiumsearned 86.9% 64.9% 69.5%Commissionandfeeincome 5.3% 30.9% 25.8%Netinvestmentincome 7.6% 7.2% 8.9%Netrealizedinvestmentgains(losses) 0.2% (3.0%) (4.2%)

Underwriting Ratios for Brokerage Insurance and Specialty Business Segments Combined

Loss Ratios Gross 54.2% 49.9% 50.7% Net 55.6% 51.7% 55.2%accident Year Loss Ratios Gross 55.2% 53.6% 51.5% Net 55.9% 54.5% 55.8%Underwriting expense Ratios Gross 30.9% 30.4% 29.2% Net 32.7% 30.7% 28.5%Combined Ratios Gross 85.1% 80.3% 79.9% Net 88.3% 82.4% 83.7%

Return on average equity(1) 13.9% 17.8% 18.0%

(1) Theimpactofnetrealizedinvestmentgains(losses)andacquisition-relatedtransactioncosts,netoftaxloweredthereturnonaverageequityby1.3%,2.9%and4.6%fortheyearsendedDecember31,2009,2008and2007,respectively.

Consolidated Results of Operations 2009 Compared to 2008

Total revenues.Total revenues increasedduetosignificant increases innet premiums earned and net investment income stemming primarilyfromtheacquisitionsofCastlePointandHermitagethatoccurredinthefirst quarter of 2009. Net premiums earned also increased due to theinclusionofBrokerageInsurancepremiumsmanagedbyTowerbutpre-viously placed with CastlePoint Insurance Company. These sources ofgrowth in total revenueswerepartiallyoffsetby reductions incommis-sionandfeeincomeduetolowercedingquotasharereinsurancein2009as compared to prior years. Taken together, these changes caused netpremiums earned to be a significantly higher percentage of total reve-nues in 2009 as compared to 2008. This is discussed more fully under“Brokerage Insurance Segment Results of Operations” and “SpecialtyBusiness Segment Results of Operations” below. The following tableshows the effects of the various acquisitions on our gross premiumswrittenin2009:

($inmillions) Amount%

Change

Grosspremiumswrittenfortheyearended December31,2008 $� 634.8Grosspremiumswrittenfromcompaniesacquired duringyear 346.3 55%Organicgrowthduringyear 89.6 14%

gross premiums written for the year ended December 31, 2009 $�1,070.7 69%

We measure organic growth by including CPIC gross premiumswritten as if we owned CPIC in the comparable prior year period. Webelievethis ismeaningfulbecauseCPICwrotebrokeragebusinessthatwas managed by Tower and Tower wrote program business that wasmanaged by CPIC. Organic growth, as defined, was 14% for the yearendedDecember31,2009andresultedfromexpansionofthebrokeragebusinessoutsideoftheNortheast,thegrowthofprogramsthatbeganinlate2008intheSpecialtyBusinesssegmentandtheadditionofseveralnewprogramswithintheSpecialtyBusinesssegmentin2009.

premiums earned.Grosspremiumsearnedincreasedsignificantlyduetothe CastlePoint and Hermitage acquisitions. Net premiums earned byCastlePointandHermitage since the respectiveacquisitiondateswere$351.2 million and $56.0 million, respectively, for the year endedDecember 31, 2009. Net premiums earned also increased relativeto gross premiums earned, because, as a result of the additionalcapital obtained via the CastlePoint acquisition, as well as increasedretained earnings, we did not cede as much premiums for year endedDecember31,2009comparedtothesameperiodof2008.Cededpre-miumsearned reflect runoffofquota sharecededpremiumswritten in2008, excess of loss and property catastrophe ceded premiums and aquota share reinsurance contract ceding our Brokerage Insurance seg-ment’sliabilitybusinesstoSwissReandAllianzenteredintointhefourthquarter of 2009. Under this quota share agreement, we ceded 50% ofearnedpremiumsand incurred lossesonBrokerage InsurancesegmentliabilitylinesthatarepartofCommercialMulti-PerilpoliciesandOther

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Liabilitypolicies.Wedidnothaveanyotherquotasharetreatiesinforcein2009.Forperiodspriorto2009thequotasharecedingpercentagesonourpolicieswereasfollows:

Dates QuotaShareReinsuranceAgreementWithCeded

Amount

January1,2007–March31,2007 CastlePointReinsurance 49%April12007–June30,2007 CastlePointReinsurance 40%April12007–June30,2007 CastlePointInsuranceCompany 9%July1,2007–December31,2007(2) CastlePointReinsurance 40%January1,2008–March31,2008(2) CastlePointReinsurance 40%April1,2008–June30,2008(2) CastlePointReinsurance 35%July1,2008–September30,2008 CastlePointReinsurance 25%April1,2008–September30,2008 SwissReAmericaCorporation 5%�October1,2008–December31,2008 CastlePointReinsurance 17.5%October1,2008–December31,2008 SwissReAmericaCorporation 28.0%July1,2009–December31,2009 CastlePointReinsurance 50.0%October1,2009–December31,2009(3) SwissReAmericaCorporation 37.5%October1,2009–December31,2009(3) AllianzRiskTransferAG(Bermuda) 12.5%

(1) Multi-yearquotasharereinsuranceagreementswithCastlePointReinsurancebeganApril6,2006.(2) OnJuly1,2008,wereducedthecedingpercentageunderourbrokeragebusinessquotasharereinsuranceagreementwithCastlePointReinsuranceto25%applicabletoboththeceded

unearnedpremiumreserveasofJuly1,2008andnewandrenewalpremiumswritteninthethirdquarterof2008.(3) Quotasharereinsuresbrokerageliabilitybusinessforcommercialmulti-lineandotherliability.

Commission and fee income. Commission and fee income decreasedprimarilyduetoourdecisiontonotcedeasmuchbrokeragepremiumsin2009 as discussed above. Ceding commission revenue in 2009 repre-sentscommissionsoncededpremiumsearnedfromquotasharereinsur-ancecontractswrittenin2008andcontinuingtoearnin2009,aswellascedingcommissionearnedonthebrokerageliabilityquotashareagree-mentdescribedabove,effectiveOctober1,2009.TRMalsoceasedpro-ducing business on behalf of CPIC subsequent to the CastlePointacquisition date. Commission and fee income during 2008 included$55.4millioninfeeincomeearnedfromCPICand$71.2millionearnedonquotasharecededpremiumsfromCastlePointRe(“CPRe”).In2009,the effects of transactions between Tower and CastlePoint areeliminatedinconsolidation.

Net investment income and net realized gains (losses).Netinvestmentincome was $74.9 million for 2009 compared to $34.6 million in 2008.Theincreaseinnetinvestmentincomeresultedfromanincreaseincashandinvestedassetstoapproximately$2.1billionasofDecember31,2009comparedto$677millionasofDecember31,2008.Theincreaseincashand invested assets resulted primarily from the acquisitions ofCastlePoint,Hermitage,SUA,andfromcashprovidedfromoperationsof$214.7millionin2009,partiallyoffsetby$130.1millionofcashusedtoacquire Hermitage in the first quarter of 2009. The positive cash flowfromoperationswastheresultoftheaforementionedacquisitionsandanincreaseinpremiumsresultingfromthegrowthofourbookofbusiness.NetinvestmentincomeattributabletoCastlePoint,HermitageandSUAwas$33.8million,$7.5million,and$1.5million,respectivelyfor2009.Thetax equivalent investment yield, including cash, was 5.5% at December31,2009comparedwith4.6%atDecember31,2008.ThehigheryieldisgenerallyduetotheacquisitionofCastlePoint,whoseinvestmentport-folio had a market yield, excluding cash, on the date of acquisition of7.0%.CastlePoint’s investmentportfolio’smarketyieldbecameTower’sbookyieldduetobusinesscombinationaccountingrules.BookyieldsontheTowerportfolios,excludingthebusinessesacquired,werehigherby5.2basispointsin2009ascomparedto2008primarilyduetotherein-vestmentofcashintheTowerportfoliosinthefourthquarterof2009.

Netrealizedinvestmentgainswere$1.5millionfor2009comparedto lossesof$14.4million in2008. Included in the2009 realized invest-mentgainsareapproximately$23.5millionofcredit-relatedOTTIlosses.The$23.5millionofOTTIlossesarecomprisedof$21.6millionrelatedtocertainstructuredsecuritiesand$1.9millionrelatedtotheimpairmentofourbondholdingsofCITGroup,Inc.

Realized capital gains in 2009 were primarily from opportunisticsalesofcommercialandresidentialmortgage-backedsecurities,primar-ily purchased in the first and second quarters when yield spreads werewideandsoldinthethirdquarterwhenyieldspreadsnarrowed,aswellassalesofcorporatebondswhichwerepositivelyaffectedbyspreadtight-ening.Proceedsweregenerallyinvestedincorporatebondsandfinancialpreferredstockswithbetterrelativevalue.

Loss and loss adjustment expenses. The gross and net loss ratioincreasedfor2009comparedto2008,duetoagreaterdegreeoffavor-ablereservedevelopmentin2008andtheinclusionofspecialtybusinessacquired from CastlePoint and SUA in the currentperiod which had ahigherlossratio.Thenetaccidentyearlossratioincreasedoverthepriorperiodby1.4percentagepoints,whichwascomprisedofapproximately1.4percentagepointsincreaseduetothesoftmarketconditionsand0.6percentagepointsduetotheincreasedmixofspecialtybusiness,offsetbyafavorableimpactof0.6percentagepointsduetotheamortizationof thereserveriskpremiumon loss reserves inaccordancewithGAAPforthebusinesscombinationsoccurringduring2009.

For2009wehadfavorableprioryearreservedevelopmentof$2.3million, comprised of $4.8 million of favorable development in theBrokerageInsurancesegmentoffsetby$2.5millionofunfavorabledevel-opmentintheSpecialtyBusinesssegmentcomparedtofavorableprioryearreservedevelopmentof$8.9millionintheBrokerageInsuranceseg-mentin2008.See“BrokerageInsuranceSegmentResultsofOperations”and“SpecialtyBusinessSegmentResultsofOperations”.

Operating expenses.Operatingexpenses in2009increasedcomparedto2008primarilyresultingfromincreasedunderwritingexpensesduetothegrowthinpremiumsearned,primarilyrelatingtotheCastlePointandHermitageacquisitionsandadditionaldepreciationcosts relatedtoourincreasedinvestmentintechnology.See“BrokerageInsuranceSegmentResults of Operations” and “Specialty Business Segment Results ofOperations”forfurtherdiscussion.

acquisition-related transaction costs. Acquisition-related transactioncosts in 2009 relate to the acquisition of CastlePoint and, to a lesserextent,theacquisitionsofHermitageandSUA.

Interest expense. Interest expense increased by $9.7 million in 2009comparedto2008.Theincreasewasmainlydueto$10.6millionofinter-est expense on $130 million of subordinated debentures which wereassumedasaresultofour2009acquisitions.

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Other income.Otherincomefor2009includesagainof$7.4milliononthe revaluation of the shares owned in CastlePoint at the time of theacquisition,aswellasagainonbargainpurchaseof$13.2millionrelatedtotheacquisitionofSUA.Ourequityinnetincome(loss)ofCastlePointalsodecreasedby$0.8millionduetoCastlePoint’soperatinglossduring2009comparedto2008.AsaresultoftheacquisitionofCastlePointonFebruary5,2009,weonly recordedequity inCastlePoint’snet income(loss)fortheperiodofJanuary1,2009throughFebruary5,2009.

Income tax expense. Income tax expense increased as a result of anincrease in income before income taxes. The effective income tax rate(includingstateandlocaltaxes)was32.0%for2009,comparedto35.8%for2008.

The decrease in the effective tax rate for the year endedDecember31,2009primarilyrelatestothegainonbargainpurchaseofSUAof$13.2million,which isnot subject to tax, an increase inour taxexempt municipal investments, and, to a lesser extent, lower state andlocal income taxes because of the decline in pre-tax earnings in theInsuranceServicessegment.Thereductionintheeffectivetaxratewaspartially offset by the limited amount of acquisition-related transactioncoststhataretaxdeductible.

Net income and return on average equity. Net income and return onaverage equity were $109.3 million and 13.9%, respectively, for 2009compared to $57.5 million and 17.8%, respectively, for 2008. For 2009,the return on average equity was calculated by dividing net income of$109.3millionbyaveragecommonstockholders’equityof$787.9million.For 2008, the return on average equity was calculated by dividing netincomeof$57.5millionbyanaveragecommon stockholders’ equity of$322.3 million. Net income for 2009 was negatively impacted by$11.5 million, net of tax, of acquisition-related transaction expensespertainingtotheacquisitionsofCastlePointandSUAwhichreducedthereturn on average equity by 1.3 percentage points for the year endedDecember31,2009.

Consolidated Results of Operations 2008 Compared to 2007Total revenues.Theincreaseisprimarilyduetotheincreaseinnetpre-miums earned and insurance services revenue. Net premiums earnedincreased9.9%ascomparedto2007.Netpremiumsearneddecreasedasa percentage of revenue due to the significant increase in commissionandfee income.Thiswastheresultofan increase indirectcommissionrevenueonpremiumsproducedbyTRMonbehalfofCPIC.Netpremi-umsearnedincreasedprincipallyduetoreducingthequotasharecessionto CPRe on brokerage business. Neither CPIC nor CPRe were whollyowned and consolidated subsidiaries in 2008 or 2007. Net investmentincomedecreasedin2008primarilyduetolowerinvestmentyields.Netrealizedinvestmentlosseswere$14.4millionin2008comparedto$17.5millionin2007.Netrealizedinvestmentlossesin2008and2007includedOTTI lossesof$22.7millionand$10.1million,respectively. In2008,wealsohadrealizedgainsonsalesofsecuritiesof$8.3million,whilein2007wehadlossesonsalesofsecuritiesof$7.4million.

premiums earned.The9.9%increaseinnetpremiumsearnedin2008ascomparedto2007wasduetotheeffectof the10.8% increase ingrosspremiumsearned,offsetinpartbyan11.9%increaseincededpremiumsearned for 2008 compared to 2007. Other items affecting the year toyearcomparisonareshownbelow:

During 2008 we ceded $201.9 million of our premiums earned toCastlePoint as compared to $189.8 million in 2007. In 2008, we alsoceded$9.3millionofcededpremiumsearnedtoSwissReAmerica.Thequota share ceding percentages on our policies are noted in the tableincludedinthe“ConsolidatedResultsofOperations2009Comparedto2008”above.

Policies in-force for our brokerage business, including businessmanagedbyusandproducedonbehalfofCPIC,increasedby23.7%asofDecember31,2008comparedtoDecember31,2007.During2008,premiums on renewed business increased 3.4% in personal lines anddecreased2.0%incommerciallines.Theretentionrateincludingbroker-agebusinessrenewedbyTRMonbehalfofCPICwas86%forpersonallines and 78% for commercial lines. Gross premiums written and pro-duced increased 32.3% to $805.0 million in 2008 compared to $608.4millionin2007.

Commission and fee income. Ceding commission revenue earnedincreasedasaresultoftheoverallincreaseincededpremiumsearnedasdiscussedaboveaswellasanincreaseinthecedingcommissionrateonbusinesscededtoSwissReAmerica.Also,asdiscussedabove, in2008and2007ourmanaginggeneralagencysubsidiary,TRM,producedpre-miumsof$171.7millionand$84.2million,respectively,onbehalfofCPICand earned $55.4 million and $27.0 million, respectively, in direct com-missionrevenue.

Net investment income and realized gains (losses). Net investmentincomedecreased from2007 to2008due toadecrease in investmentyields,particularlyyieldsonmortgage-backedsecurities.Total investedassets, including cash and cash equivalents, were approximately thesame at $677.2 million and $696.8 million for 2008 and 2007, respec-tively.Netcashflowsprovidedbyoperationswere$61.7millionin2008.Onataxequivalentbasis, thebookyieldwas4.6%asofDecember31,2008and5.6%asofDecember31,2007.

Netrealizedinvestmentlosseswere$14.4millionand$17.5millionin2008and2007,respectively.Netrealizedinvestmentgainsand(losses),excludingOTTI,were$8.3millionand($7.4)million in2008and2007,respectively.Therealizedlossin2007wasprimarilyrelatedtothesaleofa closed-end investment fund that invested in mortgage-backed andasset-backedsecurities.Inadditionwerecognized$22.7millionand$10.1millionofOTTIlossesin2008and2007,respectively.TheOTTIlossesin 2008 related principally to lower rated residential mortgage-backedsecuritieswithprojectedadversecashflowsaswellastheimpairmentofthreeLehmanBrothers fixedmaturity securitiesand the impairmentofanassetbackedsecuritywhichheldcollateralizedbankdebt.TheOTTIlossesin2007includedallofourequityinvestmentsinREITs,aswellascertainasset-backedsub-primesecurities.

Loss and loss adjustment expenses. The gross loss ratio for 2008improvedto49.8%ascomparedto50.7%for2007,andthenetlossratioimproved to 51.7% for 2008 as compared to 55.2% for 2007. Theseimprovements resulted from favorable reserves development in 2008.The net accident year loss ratio improved to 54.6% for 2008 as com-paredto55.7%for2007.

Operating expenses.Operatingexpensesincreasedby25.6%to$223.9millionfor2008from$178.3millionfor2007.Theincreasewasduepri-marilytotheincreaseinunderwritingexpensesresultingfromthegrowthin premiums earned, increased commission expense on traditional andspecialty program business and depreciation expense of $10.5 millionrelatedtoourincreasedinvestmentintechnologyassets.

Interest expense. Our interest expense decreased approximately $0.2million due to lower rates on our floating rate debt and approximately$0.6millionontheamountscreditedtoreinsurersonfundswithheld insegregatedtrustaccountsascollateralforreinsurancerecoverablesduetoreductionsinthecorrespondingreinsuredlosses.

Other income.OurequityinnetincomeofCastlePoint,whichwasnotawholly owned and consolidated subsidiary in 2008 or 2007, decreased$2.2milliondue toadecrease inCastlePoint’soperating income,com-binedwith$15.1millionofCastlePoint’sOTTIlosses,ofwhichoursharewasapproximately$1.0million,recordedin2008.

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Income tax expense.Ourincometaxexpensewas$32.1millionfor2008comparedto$26.2millionfor2007.Theincreasedincometaxexpensewasdueprimarilytotheincreaseinincomebeforeincometaxes,anincreaseinpre-taxincomeofTRM,whichistaxedatbothalocalandstatelevelresult-inginahighereffectivetaxrate,offsetbyanincreaseintaxexemptinterestreceivedin2008.The2008taxexpensewasalsofavorablyimpactedbychangesrecordedwhenwefiledthefinal2007taxreturns.Theeffectiveincometaxratewas35.8%for2008comparedto36.7%for2007.

Net income and return on average equity.Ournetincomeandreturnonaverageequitywere$57.5millionand17.8%,respectively,for2008comparedto$45.1millionand18.0%,respectively,for2007.Excludingnetrealizedinvestmentlosses,ourreturnonaverageequityfor2008and2007wouldhaveincreased2.9%and4.6%,respectively.For2008,thereturnonaverageequitywascalculatedbydividingnetincomeof$57.5millionbyaveragestock-holders’equityof$323.5million.For2007,thereturnonaverageequitywascalculatedbydividingnetincome,afterdeducting$0.7millionofpreferredstockdividendsandexcessconsiderationpaidfortheredemptionofpreferredstockinJanuary2007,of$44.4million,byaveragestockholders’equityof$246.9million.

Brokerage Insurance Segment Results of Operations YearEndedDecember31,

($inmillions) 2009� Change percent 2008 Change Percent 2007

Revenuespremiums earned Grosspremiumsearned $�774.9 $�274.5 54.9% $500.4 $� (4.5) (0.9%) $�504.9 Less:cededpremiumsearned (149.9) 53.8 (26.4%) (203.7) 17.0 (7.7%) (220.7)

Netpremiumsearned 625.0 328.3 110.6% 296.7 12.5 4.4% 284.2Cedingcommissionrevenue 34.2 (26.9) (43.9%) 61.1 (5.4) (8.1%) 66.5Policybillingfees 3.0 1.0 46.9% 2.0 (0.1) (4.8%) 2.1

Totalrevenue 662.2 302.4 84.1% 359.8 7.0 2.0% 352.8

expensesLoss and loss adjustment expenses Grosslossandlossadjustmentexpenses 405.2 161.9 66.5% 243.3 (11.6) (4.5%) 254.9 Less:cededlossandlossadjustmentexpenses (65.2) 25.6 (28.2%) (90.8) 7.3 (7.5%) (98.1)

Netlossandlossadjustmentexpenses 340.0 187.5 0.0% 152.5 (4.3) 0.0% 156.8Underwritingexpenses Directcommissionexpenses 143.1 58.5 69.1% 84.6 2.0 2.4% 82.6 Otherunderwritingexpenses 103.5 34.5 50.2% 69.0 2.0 2.8% 67.0

Totalunderwritingexpenses 246.6 93.1 60.6% 153.6 4.0 2.6% 149.6

Underwritingprofit $75.6 $� 21.9 40.7% $� 53.7 $� 7.3 15.8% $� 46.4

KeY MeaSUReSpremiums written Grosspremiumswritten $�806.5 $�296.5 58.1% $�510.0 $�12.1 2.4% $�497.9 Less:cededpremiumswritten (149.7) 44.7 (23.0%) (194.4) 48.6 (20.0%) (243.0)

Net premiums written $�656.8 $�341.2 108.1% $�315.6 $�60.7 23.8% $�254.9


2009 2008 2007

Ceded premiums as a percent of gross premiums Written 18.6% 38.1% 48.8% Earned 19.3% 40.7% 43.7%Loss Ratios � � � � � Gross 52.3% 48.6% 50.5% Net 54.4% 51.4% 55.2%accident Year Loss Ratios � � � � � Gross 53.9% 53.0% 51.3% Net 55.2% 54.4% 55.7%Underwriting expense Ratios � � � � � Gross 31.4% 30.3% 29.2% Net 33.5% 30.5% 28.5%Combined Ratios � � � � � Gross 83.7% 78.9% 79.7% Net 87.9% 81.9% 83.7%

Brokerage Insurance Segment Results of Operations 2009 Compared to 2008gross premiums. Brokerage Insurance gross premiums written increased during 2009 as compared to 2008 primarily due to the acquisitions ofCastlePointandHermitageonFebruary5,2009andFebruary27,2009,respectively,whichadded$214.7millionand$55.9millioningrosspremiumsearned,respectively,fortheyearendedDecember31,2009.OuracquisitionofHermitageaddedsignificantlytoourretaildistributionparticularlyintheSoutheastandtoournon-admittedwholesalecapabilitieswhiletheacquisitionofCastlePointbroadenedourSpecialtybusiness.Ourorganicgrowthwasprimarily fromterritorialexpansion incommercialbusinessandan increase inhomeownersbusiness.Asmeasured to includebusinessplaced inCPICin2008,butexcludingtheeffectoftheHermitageacquisitionin2009,thisgrowthwas8.6%duringtheyearendedDecember31,2009.

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During2009,premiumsonrenewedbusinessincreased2.9%inper-sonal lines and decreased 1.4% in commercial lines. Brokerage renewalretention overall was 80% for 2009, which was comprised of a renewalretentionforpersonallinesof88%andforcommerciallinesof75%,com-pared to 86% and 78%, respectively, for 2008. In commercial lines weincreased pricing on middle and large accounts that had the effect ofloweringtherenewalretentionforthosesizecategories,althoughtheseunderwritingactionswerelargelyoffsetbystrongrenewalretentionsforsmallcommercialpolicies.

Excluding Hermitage, policies in force for our brokerage businessincreasedby19.3%in2009comparedto2008.

Ceded premiums.Cededpremiumswrittenandearnedweresignificantlylowerfor2009comparedto2008asaresultofourdecisiontoretainmostofourbusinessfollowingtheincreaseinourcapitalaftertheCastlePointacquisition.In2008wehadeitherplacedwithCPICorcededtoCPReasubstantialportionofthebrokeragepremiumswritten,$171.7millionand$112.7 million, respectively, and for policies written during the first ninemonthsof2009wedidnotcedepremiumswrittentothirdpartyreinsur-ersonaquotasharebasis.Inthefourthquarterof2009weceded50%ofournewandrenewalwrittenandearnedpremiumsonCommercialMulti-Peril andOtherLiabilitypolicies to thirdparty reinsurersamounting to$86.9millionand$27.2million,respectively.

Catastrophe reinsurance ceded premiums were $37.6 million for2009 compared to $16.9 million for 2008. The increase in catastrophecosts in 2009 was due primarily to increased gross premiums writtenfrom increased property exposures arising from the aforementionedacquisitions and higher cost of catastrophe coverage when our cededcatastrophereinsurancetreatywasrenewedonJuly1,2009.

Net premiums. As a result of the increase in gross premiums andthedecreaseincededpremiumsdescribedabove,netpremiumsearnedincreased $328.3 million in 2009 compared to 2008. The increasein net premiums earned was consistent with the increase in netpremiumswritten.

Ceding commission revenue.Cedingcommissionrevenuedecreasedin2009by43.9%compared to2008.Thedecreasewasdue to the lowercessionofquotasharepremiumsdescribedaboveandareductioninthecedingcommissionrate.Cedingcommissionrevenuealsodecreasedby$2.2millionduring2009asa resultof increases inceded loss ratiosonprioryears’quotasharetreaties,comparedtoadecreaseof$1.8millionfor2008.

Loss and loss adjustment expenses and loss ratio. We had favorableprior year reserve development that lowered our loss ratio on both agross and net basis in 2009 amounting to $4.8 million as compared tofavorable prior year development experienced in 2008 of $8.9 million,thus the benefit in the loss ratio from prior year reserves developmentwaslessthanin2008.Thefavorabledevelopmentthatweexperiencedin 2009 was largely due to savings in loss adjustment expenses fromshiftingourin-houseattorneysfromhourlybillingtofixedfeeperclaimbillingforCastlePointandHermitage,whichdidnotutilizethispracticepriortoouracquisition.Wealsoimplementedlegalfeeauditingofexter-nalattorneys’billsforthesenewlyacquiredcompanies.FixedfeebillinglimitsboththeoverallamountsthatcanbebilledonanyoneclaimandtheamountofdevelopmentforALAE.

The accident year loss ratio increased slightly by 0.9 points on agrossbasisandby0.8pointsonanetbasisascomparedtotheprioryear.Theincreaseintheaccidentyearlossratioreflectssoftermarketcondi-tions, although we mitigated some of the weaker insurance pricing byshiftingourbusinessmixtowardssmallpoliciesandmoreprofitablelinesofbusiness,especiallyhomeowners.Wefurthermitigatedthenetacci-dent year loss ratio through a quota share reinsurance contract in thefourthquarterof2009tocede50%ofournewandrenewalpremiumson

liability lines. In addition, the net accident year loss ratio was favorablyimpacted by 0.6 percentage points due to the amortization of thereserveriskpremiumonlossreservesinaccordancewithGAAPforthebusinesscombinationsoccurringduring2009.

Underwriting expenses and underwriting expense ratio. Underwritingexpenses include direct commissions and other underwriting expenses.The increase inunderwritingexpenseswasduetothe increase ingrosspremiums earned, which was primarily due to the CastlePoint andHermitageacquisitions.Ourgrossunderwritingexpenseratiowas31.4%for2009ascomparedto30.3%for2008.

The commission portion of the gross underwriting expense ratiowas18.5%for2009comparedto16.9%fortheprioryear.Ourproducercommissions did not vary significantly in 2009. The increase in thecommissionratioresultedfromtheamortizationofCastlePoint’sVOBAwhich was based on CastlePoint’s higher commission ratio. See“Note 3—Acquisitions” to the financial statements elsewhere in thisForm10-KforinformationonVOBA.

The other underwriting expense (“OUE”), which includes boards,bureausand taxes,portionof thegrossunderwritingexpense ratiowas13.0% for 2009 compared to 13.4% for the prior year. We continue tofocusonimprovingcostefficiencies,particularlythroughourcontinuinginvestments in technology and reducing expenses of acquired compa-nies.Theacquisitionsin2009providedincreasedeconomiesofscaleandthe additional amount of premiums contributed to a lower OUE ratio.Offsetting thebenefitof theadditionalpremiumvolume,we recorded$2.2millionofNewYorkStateworkers’compensationassessmentsthatexceededamountswewereoriginallypermittedtoassesspolicyholdersbasedonstatutorilyenactedratesin2009comparedto$0in2008.

Thenetunderwritingexpenseratiowas33.5%and30.5%for2009and2008, respectively.The increasewasdue inpart to the increase inthecommissionexpenseratiobutmoresoduetothedecreaseincedingcommission revenue which reduced the net expense ratio less in 2009thanin2008.

Underwriting profit and combined ratio. The net combined ratio was87.9%for2009,anincreaseof6.0percentagepointscomparedto2008.Theincreaseinthecombinedratioresultedfromincreasesinthenetlossratiodescribedaboveduetorelativelylessfavorabledevelopmentinthe2009calendaryearascomparedto2008andsoftermarketconditions,aswellasincreasesinthenetexpenseratiodueprimarilytothechangeincedingcommissionrevenuedescribedabove.

Underwritingprofitsincreased40.7%fortheyearendedDecember31, 2009 compared to the prior year. This increase was driven by theincreaseinnetpremiumsearned,butwaspartiallyoffsetbytheincreaseinthecombinedratiodescribedabove.

Brokerage Insurance Segment Results of Operations 2008 Compared to 2007gross premiums.BrokerageInsurancegrosspremiumswrittenincreasedby2.4%in2008ascomparedto2007asaresultofvariousinitiativestoappointwholesaleandotheragentsoutsideoftheNortheastregion.WehadwrittenexcessandsurpluslinesbusinessinFloridaandTexasinthepriorperiod,whichwasexpanded to includeCaliforniaonanadmittedbasisin2008.

Ceded premiums. Ceded premiums written decreased in 2008 ascomparedto2007,becauseofalowerquotasharecedingpercentageinthe second half of 2008. The reduction in ceding percentage toCastlePointRewasoffsetbyanincreaseinmanagedpremiumsthatweplacedinCastlePointInsuranceCompanythatbenefitedourInsuranceServicessegment.

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Net premiums.Netpremiumswrittenincreased23.8%in2008ascomparedto2007,primarilyasaresultofthedecreaseincededpremiumswritten.Netpremiumsearnedincreasedby4.4%in2008ascomparedto2007,andthisincreasewaslessthanfornetpremiumswrittenduetotimingdiffer-encesasthechangetothecedingpercentagesoccurredinthelasthalfof2008.

Ceding commission revenue. The decrease in ceding commission revenue in 2008 as compared to 2007 was due to the reduction in quota sharepremiumscededin2008asdescribedabove.

Loss and loss adjustment expenses and loss ratio.Thedecreaseinthegrossandnetlossratiosfor2008comparedto2007wasprimarilyduetolowerthanexpectedlossemergenceforworkers’compensation,generalliability,andhomeowners’linesofbusiness.Thedecreasealsowasaffectedbythedecrease in loss adjustment expenses as a result of changing to fixed fee billing for our in-house attorneys. Fixed fee billing both limits the overallamountsthatcanbebilledonanyoneclaim,andalsolimitstheamountofdevelopmentforALAE.Theprioryearreservesdevelopedfavorablyby$8.9million,ofwhich$4.0millionwasattributabletotheimprovementinlossadjustmentexpensereserves.

Underwriting expenses and underwriting expense ratio. Underwritingexpensesincludedirectcommissionsandotherunderwritingexpenses.Directcommissions increasedto16.9%for2008comparedto16.4%for2007,whileotherunderwritingexpenses increasedto13.4%for2008comparedto12.9%for2007,respectively.

Thenetunderwritingexpenseratioincreasedto30.5%in2008comparedto28.5%in2007,althoughthisincreasewasoffsetbyincreasesinman-agementfeeincomeintheInsuranceServicessegmentfromincreasingtheamountofbrokeragebusinessplacedintoCastlePointInsuranceCompany,particularlyduringthelatterhalfof2008.

Underwriting profit and combined ratio.Thenetcombinedratioimprovedto81.9%in2008from83.7%duetotheimprovementinlossratiodescribedabove,whichwaspartiallyoffsetbytheincreaseintheexpenseratio.

Specialty Business Segment Results of Operations YearEndedDecember31,


Revenuespremiums earned Grosspremiumsearned $�271.4 $�193.4 248.1% $� 78.0 $�61.0 358.8% $�17.0 Less:cededpremiumsearned (41.6) 18.5 (30.7%) (60.1) (45.0) 298.1% (15.1)

Netpremiumsearned 229.8 211.9 NM 17.9 16.0 NM 1.9Cedingcommissionrevenue 9.7 (8.4) (46.4%) 18.1 13.6 304.4% 4.5

Total 239.5 203.5 NM 36.0 29.6 464.3% 6.4

expensesLoss and loss adjustment expenses Grosslossandlossadjustmentexpenses 161.6 116.6 258.8% 45.0 35.1 356.4% 9.9 Less:cededlossandlossadjustmentexpenses (26.1) 8.7 (25.1%) (34.8) (26.0) 298.1% (8.8)

Netlossandlossadjustmentexpenses 135.5 125.3 NM 10.2 9.1 NM 1.1Underwritingexpenses Directcommissionexpenses 59.7 38.7 184.1% 21.0 16.6 380.7% 4.4 Otherunderwritingexpenses 20.1 16.8 NM 3.3 2.6 388.2% 0.7

Totalunderwritingexpenses 79.8 55.5 228.5% 24.3 19.2 381.7% 5.1

Underwritingprofit $� 24.2 $� 22.7 NM $� 1.5 $� 1.3 NM $� 0.2

KeY MeaSUReSpremiums written Grosspremiumswritten $�264.2 $�139.4 111.7% $�124.8 $�98.7 378.0% $�26.1 Less:cededpremiumswritten (34.9) 61.5 (63.8%) (96.4) (74.6) 341.9% (21.8)

Net premiums written $�229.3 $�200.9 NM $� 28.4 $�24.1 NM $� 4.3


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2009 2008 2007

Ceded premiums as a percent of gross premiums Written 13.2% 77.2% 83.6% Earned 15.4% 77.1% 88.9%Loss Ratios � � � � � Gross 59.5% 57.7% 58.0% Net 59.0% 57.2% 59.1%accident Year Loss Ratios � � � � � Gross 58.9% 57.7% 58.0% Net 57.9% 57.2% 59.1%Underwriting expense Ratios � � � � � Gross 29.4% 31.1% 29.7% Net 30.5% 34.6% 29.7%Combined Ratios � � � � � Gross 88.9% 88.9% 87.7% Net 89.5% 91.8% 88.8%

Specialty Business Segment Results of Operations 2009 Compared to 2008

gross premiums. Total Specialty Business gross premiums writtenincreased in2009ascomparedtotheprioryearprimarilyasa resultofouracquisitionsofCastlePointandSUA.Also,during2009webegantowritenewprogramsfocusingonworkers’compensationforextendedliv-ingfacilitiesworkers,autodealerships,andspecialtyautotruckingliabil-ity.OnanadjustedbasisincludingCastlePointgrosspremiumswritten,butexcludingSUAgrosspremiumswritten,ourgrosspremiumswrittengrewby25.6%in2009.GrowthinprogrambusinessintheU.S.wasoff-set by a reduction in assumed reinsurance business in CPRe, as weshiftedcapitalfromCPRetosupportprimaryspecialtybusiness.

Ceded premiums.Cededpremiumswrittenandearnedwerereducedasa result of Tower’s acquisition of CastlePoint on February 5, 2009, asTowerhadcededasignificantportionofthespecialtyprogramsbusinesstoCastlePointRe in2008.Oncertainspecificprogramswecederein-suranceonaquotashareorexcessoflossbasistoreduceourrisk,includ-ing quota share reinsurance to insurance companies affiliated with theprogramunderwritingmanagerhandling suchprogrambusiness,whichwe term “risk sharing.” As a result, ceded premiums written were$34.9millionand$96.4millionfor2009and2008,respectively.Cededpremiums as a percentage of gross premiums earned are lower in2009 because of the termination and elimination of the reinsuranceagreementswithCPRe.

Net premiums. Net premiums written increased from $28.4 million to$229.3 million for 2009, as compared to the prior year. The increasereflectstheincreasesingrosspremiumswrittenanddecreasesincededpremiumswrittendescribedabove.

TheincreaseinnetpremiumsearnedfortheyearendedDecember31,2009mirrorsthegrowthinnetpremiumswritten.

Loss and loss adjustment expenses.The loss ratio increasedonbothagrossandnetbasisfor2009comparedtolastyear.Wehadunfavorabledevelopmentofapproximately$2.5millionstemmingfromtherunoffofspecialtybusinessinCastlePointRe.OnanaccidentyearbasisthegrossandnetlossratiosincreasedduetotheinclusionofreinsurancebusinessandotherprogramsunderwrittenbyCastlePointandSUAthatimpactedthebusinessmixinthecurrentperiod.Inaddition,thenetaccidentyearloss ratio was favorably impacted by 0.6 percentage points due to theamortizationofthereserveriskpremiumonlossreservesinaccordancewithGAAPforthebusinesscombinationsoccurringduring2009.

Underwriting expenses and underwriting expense ratio.Thenetunder-writing expenses ratio decreased significantly from 34.6% for 2009 to30.5%for2008,reflectingtheshiftinbusinessmixtodecreaseassumedreinsuranceandincreaseprogramsbusinesswhichhassignificantlylowercommission costs. This shift resulted in the commission portion of thegross underwriting expense ratio decreasing 5 percentage points to22.0%in2009.

TheOUEportionofthegrossunderwritingexpenseratiowas7.4%for 2009 compared to 4.2% in 2008. The increase in the OUE ratioresultedfromabsorbingtheCastlePointstaffcosts.Priortotheacquisi-tion,CastlePointmanagedallspecialtybusinessandthestaffcostswererecorded by them, and we recorded a higher commission expense toreflectthesecosts.

Underwriting profit and combined ratio. The increase in underwritingprofitfortheyearendedDecember31,2009primarilyresultedfromtheacquisitionofCastlePointinthefirstquarterof2009whichincreasednetpremiums earned significantly. Our net combined ratio improved by2.3points reflecting improvedexpense ratios thatmore thanoffset the1.8pointincreaseinourlossratio.

Specialty Business Segment Results of Operations 2008 Compared to 2007

gross premiums. Gross premiums written increased in 2008 from ourparticipation in the specialty business managed by CastlePoint. Theincreased premiums were generated by CastlePoint from several pro-gramsthatconcentratedonsmallpolicies in lowtomoderateclassesofworkers’compensation,particularlyinCalifornia.

Ceded premiums.The increase incededpremiumswrittenwasdue toour agreements with CastlePoint to cede significant portions of thespecialtyandtraditionalprogramsthatCastlePointmanagedandunder-wrote utilizing our insurance subsidiaries’ paper. The increase in cededpremiums from $21.8 million in 2007 to $96.4 million in 2008 wascommensuratewiththegrowthingrosspremiumswritten.

Net premiums. Net premiums written increased from $4.3 millionin 2007 to $28.4 million for 2008, in line with the increases in grosspremiumswrittendescribedabove.

Loss and loss adjustment expenses. The gross loss ratio was relativelyunchangedbetween2008and2007,whilethenetlossratioimprovedto57.2%for2008comparedto59.1%for2007.Thedecline inthenet lossratiowasduetoretainingalargerpercentageofworkers’compensationprogramswhichhadlowerlossratiosincomparisontootherprograms.

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Underwriting expenses and underwriting expense ratio.Thegrossandnetunderwritingexpenseratios increased in2008duetoan increase intheamountpaidtoCPMforspecialtyandtraditionalbusinessmanagedandproduced.Weincurreda5%additionalcommissiononCPMmanagedbusi-nessin2008.Thisincreasewaspartiallyoffsetasthemixofbusinesschangedandwewroteworkers’compensationprogramwhichhadalowercom-missionrate.

Underwriting profit and combined ratio.The increase inunderwritingprofit for2008wasgenerated fromthesignificant increase innetpremiumsearned, although the combined ratio increased to 91.8% for 2008 compared to 88.8% for 2007 primarily due to the increase in expense ratio asdescribedabove.

Insurance Services Segment Results of Operations YearEndedDecember31,


RevenueDirectcommissionrevenuefrommanaginggeneralagency � $� 1.6 $� (56.6) (97.3%) $� 58.2 $�29.4 102.2% $�28.8Claimsadministrationrevenue � 1.5 (3.9) 72.5% 5.4 3.1 133.0% 2.3Otheradministrationrevenue � 0.5 (3.1) (84.0%) 3.6 2.2 150.5% 1.4Reinsuranceintermediaryfees 1.5 0.5 50.3% 1.0 0.2 28.6% 0.8Policybillingfees — (0.3) (94.0%) 0.3 0.3 NM —

Totalrevenue � 5.1 (63.4) (92.5%) 68.5 35.2 105.5% 33.3

expensesDirectcommissionexpensespaidtoproducers 1.7 (25.1) (93.6%) 26.8 12.7 90.7% 14.1

Otherinsuranceservicesexpenses 1.4 (10.9) (88.3%) 12.3 6.6 113.1% 5.7ClaimsexpensereimbursementtoTICNY 1.1 (4.3) (79.0%) 5.4 3.1 134.2% 2.3

Total 4.2 (40.3) (90.4%) 44.5 22.4 101.1% 22.1

Insuranceservicespre-taxincome $� 0.9 $� (23.1) (96.4%) $� 24.0 $�12.8 114.3% $�11.2

PremiumsproducedbyTRMonbehalfofissuingcompanies � $�11.7 $�(163.7) (93.3%) $�175.4 $�90.3 106.1% $�85.1


Insurance Services Segment Results of Operations 2009 Compared to 2008

Total revenues.Thedecreaseintotalrevenues,ofwhichdirectcommis-sionrevenueistheprincipalcomponent,for2009comparedto2008wasprimarily due to the acquisition of CastlePoint in February 2009.PremiumsproducedandmanagedbyTRMonbehalfofCPICdecreasedto$10.7millionin2009comparedto$85.1millionfor2008.Asaresultofthedecreaseinpremiumsproduced,revenuesdeclinedto$5.1millionin2009 compared to $68.5 million in 2008. Claims administration andother administration revenues earned in 2008 were primarily earnedfrom CPIC managed business and declined in 2009 as intercompanytransactionsbetweenusandCPICwereeliminated.Thedeclineinbothclaimsandotheradministrationrevenueswaspartiallyoffsetasaresultofentering into two new agreements in 2009. During 2009 we recorded$0.4millionofclaimsadministrationrevenuesasaresultofenteringintoan agreement with AequiCap to provide claims handling services forworkers’compensationclaims.Thedeclineinotheradministrationreve-nuewasalsooffsetasaresultof theHermitageacquisition.Hermitageprovides administrative services to an insurance company and earned$0.3millionin2009.

Direct commission expense. The decrease in direct commissionexpenseswasaresultofthedecreaseinbusinessproducedbyTRMonbehalfofCPIC.SubsequenttothecompletionoftheCastlePointacqui-sitionallofCPIC’sunderwritingexpenseswereincludedintheBrokerageInsurancesegment.

Other insurance services expenses. The decrease in other insuranceexpenses resulted fromthedecline inpremiumproduced.TheamountofreimbursementforunderwritingexpensesbyTRMtoTICNYfortheyear ended December 31, 2009 was $1.4 million as compared to $12.3millionfor2008.

Claims expense reimbursement. The amount of reimbursement byTRM for claims administration is based on the terms of the expensesharing agreement with TICNY. Claims expense reimbursement hasdeclinedasaresultoftheCastlePointacquisitionasamajorityofthesereimbursementswereduefromCPIC.

pre-tax income. Pre-tax income decreased to $0.9 million for the yearended December 31, 2009 as compared to $24.0 million in 2008.Thedecreasewasprimarilyduetothedecreaseinpremiumsproduced.

If the acquisition of OneBeacon’s Personal Lines Division isapproved and completed, we expect to reflect fee income in thissegmentfrommanagingthereciprocalinsurancecompaniesin2010.

Insurance Services Segment Results of Operations 2008 Compared to 2007

Total revenues. The increase in 2008 revenues resulted from businessproduced by TRM on behalf of CPIC of $171.7 million for 2008 com-pared to $84.2 million for the same period last year. As a result of theincreaseinpremiumsproduced,directcommissionrevenueincreasedto$58.2 million for the year ended December 31, 2008 as compared to$28.8millionfortheprioryear.Directcommissionrevenuealsobenefit-ted from favorable loss development on premiums produced in prioryears of $1.9 million for 2008 compared to $1.8 million for the sameperiodlastyear.Claimsadministrationrevenuesincreasedto$5.4millionfor 2008 compared to $2.3 million in 2007 as a result of the increasedvolumeofclaimshandledonbehalfof issuingcarriers.Policies in-forcefor our brokerage business managed by us and produced on behalf ofCPICincreased221.4%asofDecember31,2008comparedtoDecember31,2007.During2008,premiumsonrenewedbusinessincreased3.4%.

Direct commission expense.TRM’sdirectcommissionexpensepaidtoproducers increasedasa resultof the increase inbusinessproducedbyTRMonbehalfofCPIC.Thedirectcommissionexpenseratiodecreasedto15.3%for2008,comparedto16.5%forthecomparableperiodin2007,asaresultofachangeinthemixofbusinessplacedwithCPICin2008to

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includeagreaterproportionofhomeowners’andworkers’compensationlinesthattypicallyhavelowercommissionrates.TheCPICbookofbusi-nessisproducedthroughthesameagentswhoproducebrokeragebusi-nesswrittenthroughourInsuranceSubsidiariesandTRM’scommissionratesaresimilartothecommissionratesinourInsurancesubsidiariesforsimilarlinesofbusiness.

Other insurance services expenses.Theamountof reimbursement forunderwriting expenses by TRM to TICNY for 2008 was $12.3 millioncompared to $5.8 million for the same period in 2007. The increaseresultedfromtheincreaseinpremiumsproduced.

Claims expense reimbursement. The increased amount of reimburse-ment by TRM for claims administration pursuant to the terms of theexpense sharing agreement with TICNY for 2008 resulted from anincrease in the number of claims handled related to the CPIC bookofbusiness.

pre-tax income. As a result of the factors discussed above, pre-taxincome increased to $24.0 million for 2008 compared to $11.1 millionfor2007.

Investments

portfolio SummaryWe classify our investments in fixed maturity securities as available forsale and report these securities at their estimated fair values based on

quoted market prices or, in circumstances where quoted market pricesare unavailable, based upon other observable or unobservable inputsincluding matrix pricing, benchmark interest rates, market comparablesand other relevant inputs. Changes in unrealized gains and losses onthesesecuritiesarereportedasaseparatecomponentofcomprehensivenetincomeandaccumulatedunrealizedgainsandlossesarereportedasaccumulatedothercomprehensive income,acomponentof stockhold-ers’equity.Realizedgainsandlossesarechargedorcreditedtoincomeintheperiodinwhichtheyarerealized.

TheaggregatefairvalueofourinvestedassetsasofDecember31,2009was$1.9billion.Ourfixedmaturitysecuritiesasofthisdatehadafairvalueof$1.8billionandanamortizedcostof$1.7billion.Equitysecu-ritiescarriedatfairvaluewere$76.7millionwithacostof$78.3millionasofDecember31,2009.

Impairment of investment securities results in a charge to netincomewhenamarketdeclinebelowcost isdeemedtobeother-than-temporary.Wereviewourfixed-maturityandequitysecuritiesportfoliostoevaluatethenecessityofrecordingimpairmentlossesforother-than-temporarydeclinesinthefairvalueofinvestments.WerecordedOTTIlossesinourfixedmaturityandequitysecuritiesintheamountsof$44.2millionand$22.7millionin2009and2008,respectively.

Thefollowingtablepresentsabreakdownofthecostoramortizedcost,grossunrealizedgainsandlossesandaggregatefairvaluebyinvestmenttypeasofDecember31,2009and2008:

($inthousands)

CostorAmortized

Cost

GrossUnrealized

Gains

GrossUnrealizedLosses

FairValue%ofFair

ValueLessthan12Months

Morethan12Months

December 31, 2009U.S.Treasurysecurities $� 73,281 $� �235 $� �(225) $� �� — $� 73,291 3.9%U.S.Agencysecurities 40,063 134 (214) — 39,983 2.1%Municipalbonds 508,204 18,241 (587) (143) 525,715 27.7%Corporateandotherbonds 589,973 27,934 (1,054) (1,732) 615,121 32.4%Commercial,residentialandasset-backedsecurities 517,596 25,834 (1,691) (12,253) 529,486 27.9%

Totalfixed-maturitysecurities 1,729,117 72,378 (3,771) (14,128) 1,783,596 94.0%Equitysecurities 78,051 997 (1,591) (724) 76,733 4.1%Short-terminvestments 36,500 — — — 36,500 1.9%

Total $�1,843,668 $73,375 $��(5,362) $(14,852) $�1,896,829 100.0%

December31,2008U.S.Treasurysecurities $� 26,482 $� ��524 $� � �— $� �� — $� 27,006 4.9%U.S.Agencysecurities 361 38 — — 399 0.1%Municipalbonds 179,734 2,865 (2,485) (166) 179,948 33.3%Corporateandotherbonds 210,006 932 (13,948) (10,015) 186,975 34.6%Commercial,residentialandasset-backedsecurities 164,885 1,838 (10,603) (20,289) 135,831 25.1%

Totalfixed-maturitysecurities 581,468 6,197 (27,036) (30,470) 530,159 98.0%Equitysecurities 12,726 5 (60) (1,857) 10,814 2.0%

Total $� 594,194 $� �6,202 $(27,096) $��(32,327) $� 540,973 100.0%

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Credit Rating of Fixed-Maturity SecuritiesTheaveragecreditratingofourfixed-maturitysecurities,usingratingsassignedtosecuritiesbyStandard&Poor’s,wasAA-atDecember31,2009and2008.Thefollowingtableshowstheratingsdistributionofourfixed-maturityportfolio:

December�31,�2009 December31,2008

($inthousands)Fair

Valuepercentage

of Fair ValueFair

ValuePercentageof

FairValue

RatingU.S.Treasurysecurities $� 73,291 4.1% $� 27,006 5.1%AAA 597,932 33.5% 187,377 35.3%AA 377,283 21.2% 110,601 20.9%A 400,638 22.4% 113,651 21.4%BBB 165,173 9.3% 62,566 11.8%BelowBBB 169,278 9.5% 28,958 5.5%

Total $�1,783,596 100.0% $�530,159 100.0%

Fixed Maturity Investments—Time to MaturityThefollowingtableshowsthecompositionofourfixedmaturityportfoliobyremainingtimetomaturityatDecember31,2009and2008.Forsecuritiesthatareredeemableattheoptionoftheissuerandhaveamarketpricethatisgreaterthanredemptionvalue,thematurityusedforthetablebelowistheearliestredemptiondate.Forsecuritiesthatareredeemableattheoptionoftheissuerandhaveamarketpricethatislessthanredemptionvalue,thematurityusedforthetablebelowisthefinalmaturitydate:

December�31,�2009 December31,2008

($inthousands)

Fair Market Value

percentage of Fair Market

Value

FairMarketValue

PercentageofFairMarket

Value

Lessthanoneyear $� 30,465 1.7% $� 8,789 2.1%Onetofiveyears 355,402 19.9% 112,514 19.4%Fivetotenyears 492,517 27.6% 176,218 31.0%Morethantenyears 375,726 21.1% 96,807 13.7%Mortgageandasset-backedsecurities 529,486 29.7% 135,831 33.8%

Total $1,783,596 100.0% $�530,159 100.0%

Fixed Maturity Investments with Third party guaranteesAtDecember31,2009,$208millionofourmunicipalbonds,atfairvalue,were guaranteed by third parties from the total of $1.8 billion of fixed-maturity securities held by us. We do not have any direct exposure toguarantors and the amount of securities guaranteed by third partiesalongwiththecreditratingwithandwithouttheguaranteeisasfollows:

($inthousands)With

GuaranteeWithout

Guarantee

AAA $� 3,905 $� 2,032AA 142,856 115,090A 60,217 79,455BBB — 2,536BB 978 978Nounderlyingrating — 7,865

Total $207,956 $207,956

Thesecuritiesguaranteedbyguarantorareasfollows:

($inthousands)Guaranteed

AmountPercentofTotal

NationalPublicFinanceGuaranteeCorp. $��91,069 44%AssuredGuarantyMunicipalCorp. 53,280 25%AmbacFinancialCorp. 33,695 16%BerkshireHathawayAssuranceCorp. 5,628 3%FGICCorp. 5,444 3%Others 18,840 9%

Total $207,956 100%

Fair Value ConsiderationAs disclosed in Note 5—Fair Value Measurements in the notes to theconsolidatedfinancialstatements,effectiveJanuary1,2008,weadopted

new GAAP guidance, which provides a revised definition of fair value,establishes a framework for measuring fair value and expands financialstatements disclosure requirements for fair value. Under this guidance,fairvalueisdefinedasthepricethatwouldbereceivedtosellanassetorpaid to transfer a liability in an orderly transaction between marketparticipants (an “exit price”). The statement establishes a fair valuehierarchythatdistinguishesbetween inputsbasedonmarketdata fromindependent sources (“observable inputs”) and a reporting entity’sinternal assumptions based upon the best information available whenexternal market data is limited or unavailable (“unobservable inputs”).The fair value hierarchy in GAAP prioritizes fair value measurementsinto three levels based on the nature of the inputs. Quoted prices inactive markets for identical assets have the highest priority (“Level 1”),followedbyobservableinputsotherthanquotedpricesincludingpricesforsimilarbutnotidenticalassetsorliabilities(“Level2”),andunobserv-ableinputs, includingthereportingentity’sestimatesoftheassumptionthatmarketparticipantswoulduse,havingthelowestpriority(“Level3”).

AsofDecember31,2009,99%oftheinvestmentportfoliorecordedat fair value was priced based upon quoted market prices or otherobservableinputs.Forinvestmentsinactivemarkets,weusedthequotedmarketpricesprovidedbytheoutsidepricingservicestodeterminefairvalue.Incircumstanceswherequotedmarketpriceswereunavailable,weusedfairvalueestimatesbaseduponotherobservable inputs includingmatrixpricing,benchmark interestrates,marketcomparablesandotherrelevant inputs.Whenobservable inputswereadjusted to reflectman-agement’sbestestimateoffairvalue,suchfairvaluemeasurementsareconsideredalowerlevelmeasurementintheGAAPfairvaluehierarchy.

Ourprocesstovalidatethemarketpricesobtainedfromtheoutsidepricing sources includes, but is not limited to, periodic evaluation ofmodelpricingmethodologiesandanalyticalreviewsofcertainprices.Wealso periodically perform testing of the market to determine trading

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activity,orlackoftradingactivity,aswellasevaluatingthevariabilityofmarketprices.Securitiessoldduringthequarterarealso“back-tested”(i.e.,thesalespriceiscomparedtothepreviousmonthendreportedmarketpricetodeterminereasonablenessofthereportedmarketprice).

Inaddition,incertaininstances,giventhemarketdislocation,wedeemeditnecessarytoutilizeLevel3pricingoverpricesavailablethroughpricingservicesresultingintransfersfromLevel2toLevel3.Inperiodsofmarketdislocation,theabilitytoobservestablepricesandinputsmaybereducedformanyinstrumentsascurrentlyisthecasefornon-investmentgradenon-agencyresidentialmortgage-backedsecurities.

AnumberofourLevel3investmentshavebeenwrittendownasaresultofourimpairmentanalysis.AtDecember31,2009,therewere66securi-tiesthatwerepricedinLevel3withafairvalueof$13.6millionandanunrealizedgainof$0.7million.

As more fully described in Note 4—Investments—Impairment Review in the notes to the consolidated financial statements, we completed adetailedreviewofalloursecuritiesinacontinuouslossposition,includingbutnotlimitedtoresidentialandcommercialmortgage-backedsecurities,andconcludedthattheunrealized losses intheseassetclassesaretheresultofadecline inestimatedcashflowsresultinggenerallyfromweakenedeconomicconditions.Specifically,ResidentialMortgage-backedSecurities(“RMBS”)cashflowsarenegativelyimpactedbyadeclineinhomepricesand a high unemployment rate while Commercial Mortgage-backed Securities (“CMBS”) cash flows are negatively impacted by higher projecteddelinquencies.Theseunrealizedlossesaredeemedtobetemporaryinnature.

RefertoNote5—FairValueMeasurementinthenotestotheconsolidatedfinancialstatementsforadescriptionofthevaluationmethodologyutilizedtovalueLevel3assets,howthevaluationmethodologyisvalidatedandananalysisofthechangeinfairvalueofLevel3assets.AsofDecember31,2009,thefairvalueofLevel3assetsasapercentageofourtotalassetscarriedatfairvaluewasasfollows:

($inthousands)

AssetsCarriedatFairValueat

December31,2009

FairValueofLevel3

Assets

Level3AssetsasaPercentageof

TotalAssetsCarriedatFairValue

Fixed-maturityinvestments $1,783,596 $13,595 0.8%Equityinvestments 76,733 — —Short-terminvestments 36,500 — —

Totalinvestmentsavailableforsale 1,896,829 13,595 0.7%Cashandcashequivalents 164,882 — —

Total $2,061,711 � $13,595 0.7%

Unrealized LossesIn2009,U.S.GovernmentandAgencysecuritiesunderperformedagainstother fixed incomeclasses,a reversalof thetrend in2008.Oneofthemajorthemesfor2009wasthereversaloftheflight-to-qualitytrendseenin2008.Assuch,highyieldingbondswerethestrongestperformingsectorin2009.Corporatebonds,especially in the financial institution sector,extendedgains throughout2009.CMBSgarneredsolid returns, fueledbystrong demand resulting from the TALF program and from investors in search for yield. The continued strong rally had a pronounced effect onTower’sinvestmentportfolioasnetunrealizedlosseswere$53.2millionatDecember31,2008andimprovedtonetunrealizedgainsof$52.4millionatDecember31,2009.

Changes in interest ratesdirectly impact the fairvalueofour fixedmaturityportfolio.Weregularly reviewbothour fixed-maturityandequityportfoliostoevaluatethenecessityofrecordingimpairmentlossesforother-thantemporarydeclinesinthefairvalueofinvestments.

The following table presents information regarding our invested assets that were in an unrealized loss position at December 31, 2009 andDecember31,2008byamountoftimeinacontinuousunrealizedlossposition:

Lessthan12Months 12MonthsorLonger Total

($inthousands) No.Fair

ValueUnrealized

Losses No.Fair

ValueUnrealized

Losses No.Fair

ValueUnrealized

Losses

December 31, 2009U.S.Treasurysecurities 24 $� 43,421 $� �(225) — $� — $� � ��— 24 $� 43,421 $�� (225)U.S.Agencysecurities 21 27,652 (214) — — — 21 27,652 (214)Municipalbonds 42 50,526 (587) 5 2,569 (143) 47 53,095 (730)Corporateandotherbonds Finance 32 28,342 (291) 20 14,906 (1,099) 52 43,248 (1,390) Industrial 104 69,475 (726) 25 14,563 (608) 129 84,038 (1,334) Utilities 6 3,575 (37) 2 625 (25) 8 4,200 (62)Commercialmortgage-backedsecurities 20 25,810 (598) 27 22,904 (8,138) 47 48,714 (8,736)Residentialmortgage-backedsecurities Agency-backed 43 79,005 (963) — — — 43 79,005 (963) Non—agency-backed 4 1,081 (14) 37 19,672 (2,910) 41 20,753 (2,924)Asset-backedsecurities 5 334 (116) 11 2,962 (1,205) 16 3,296 (1,321)

Totalfixed—maturitysecurities 301 329,221 (3,771) 127 78,201 (14,128) 428 407,422 (17,899)Preferredstocks 87 59,243 (1,441) 6 4,827 (724) 93 64,070 (2,165)Commonstocks 4 31 (150) — — — 4 31 (150)

Total 392 $�388,495 $(5,362) 133 $�83,028 $(14,852) 525 $�471,523 $(20,214)

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ValueUnrealized

Losses No.Fair

ValueUnrealized

Losses No.Fair

ValueUnrealized

Losses

December31,2008Municipalbonds 53 $� 49,879 $��(2,485) 1 $� 371 $� �(166) 54 $� 50,250 $� (2,651)Corporateandotherbonds Finance 55 42,007 (6,003) 38 20,575 (4,173) 93 62,582 (10,176) Industrial 110 72,787 (7,740) 32 17,701 (5,639) 142 90,488 (13,379) Utilities 5 1,974 (205) 2 446 (204) 7 2,420 (409)Commercialmortgage-backedsecurities 15 13,997 (4,399) 22 16,430 (16,626) 37 30,427 (21,026)Residentialmortgage-backedsecurities Agency-backed 6 3,408 (16) 1 582 (20) 7 3,990 (36) Non—agency-backed 32 12,676 (3,536) 16 9,953 (3,594) 48 22,629 (7,130)Asset-backedsecurities 20 6,481 (2,652) 2 551 (49) 22 7,032 (2,701)

Totalfixed—maturitysecurities 296 203,209 (27,036) 114 66,609 (30,471) 410 269,818 (57,508)Preferredstocks — — — 6 3,694 (1,857) 6 3,694 (1,857)Commonstocks 1 1,440 (60) — — — 1 1,440 (60)

Total 297 $�204,649 $(27,096) 120 $�70,303 $(32,328) 417 $�274,952 $(59,425)

At December 31, 2009, the unrealized losses for fixed-maturity securities were primarily in our investments in mortgage and asset-backedsecurities.

Thefollowingtableshowsthenumberofsecurities,fairvalue,unrealizedlossamountandpercentagebelowamortizedcostandthepercentageoffairvaluebysecurityrating:

UnrealizedLoss FairValuebySecurityRating

($inthousands) CountFair

Value AmountPercentof

AmortizedCost AAA AA A BBBBBorLower

U.S.Treasurysecurities 24 $� 43,421 $�� (225) (1%) 100% 0% 0% 0% 0%U.S.Agencysecurities 21 27,652 (214) (1%) 73% 9% 12% 6% 0%Municipalbonds 47 53,095 (730) (1%) 21% 41% 26% 8% 4%Corporateandotherbonds 189 131,487 (2,786) (2%) 1% 14% 49% 16% 20%Commercialmortgage-backedsecurities 47 48,714 (8,736) (15%) 31% 2% 46% 6% 15%Residentialmortgage-backedsecurities 41 20,753 (2,924) (12%) 26% 4% 35% 9% 26%Agency-backedsecurities 16 3,296 (1,321) (29%) 16% 7% 13% 0% 64%Equities 97 64,101 (2,315) (4%) 0% 0% 50% 24% 26%

Corporate and Other BondsThefollowingtablesshowthefairvalueandunrealizedlossbysectorandcreditqualityratingofourcorporateandotherbondsinanunrealizedlosspositionatDecember31,2009:

Fair ValueRating

($inthousands) AAA AA A BBBorLower

FairValue

SectorFinancial $��— $� 5,251 $�23,574 $10,559 $� 3,864 $� 43,248Industrial 928 12,921 38,672 9,856 21,661 84,038Utilities — — 2,679 — 1,521 4,200

Totalfairvalue $928 $18,172 $64,925 $20,415 $27,046 $131,486

%offairvalue 1% 14% 49% 16% 21% 100%

Unrealized LossesRating

($inthousands) AAA AA A BBBorLower

UnrealizedLoss

SectorFinancial $— $��(16) $(427) $(774) $�(173) $(1,390)Industrial (7) (233) (282) (178) (633) (1,333)Utilities — — (10) — (52) (62)

Totalunrealizedloss $(7) $(249) $(719) $(952) $�(858) $(2,785)

%ofbookvalue (2)%

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ThemajorityofourcorporatebondsthatareinanunrealizedlosspositionareratedbelowAA.Basedonouranalysisofthesesecuritiesandcur-rent market conditions, we expect price recovery on these over time, and we have determined that these securities are temporarily impaired as ofDecember31,2009.

Securitized assetsThefollowingtablesshowthefairvalueandunrealizedlossbycreditqualityratinganddealoriginationyearofourcommercial,residentialnon-agency-backedandasset-backedsecuritiesinanunrealizedlosspositionatDecember31,2009:

Commercial Mortgage-backed SecuritiesFair Value

Rating

($inthousands)DealOriginationYear AAA AA A B

BBorLower

FairValue

2002 $� — $� — $� — $� — $� 180 $� 1802005 2,937 — — — 2,270 5,2072006 3,407 — — 363 73 3,8432007 8,580 970 22,295 2,685 4,955 39,484

Totalfairvalue $�14,924 $�970 $�22,295 $�3,048 $�7,478 $�48,714

%offairvalue 31% 2% 46% 6% 15% 100%



BBorLower

UnrealizedLoss

2002 $� — $� — $� — $� — $� (294) $��(294)2005 (52) — — — (67) (119)2006 (64) — — (1,526) (52) (1,642)2007 (410) (983) (410) (498) (4,382) (6,683)

Totalunrealizedloss $�(526) $�(983) $�(410) $�(2,024) $�(4,795) $(8,738)

%ofbookvalue (15)%

Non-agency Residential Mortgage-backed SecuritiesFair Value

Rating


BBorLower

FairValue

2002 $� 278 $� — $� — $� — $� — $� 2782003 743 — 171 — 563 1,4772004 4,318 — — 399 1,508 6,2252005 — 855 2,125 613 317 3,9102006 — — 1,648 — 235 1,8832007 — — 3,320 820 2,840 6,980

Totalfairvalue $�5,339 $�855 $�7,264 $�1,832 $�5,463 $�20,753

%offairvalue 26% 4% 35% 9% 26% 100%



BBorLower

UnrealizedLoss

2002 $� (74) $� — $� — $� — $� — $� �(74)2003 (109) — (2) — (93) (204)2004 (113) — — (52) (441) (606)2005 — (141) (242) (430) (87) (900)2006 — — (216) — (30) (246)2007 — — (297) (180) (417) (894)

Totalunrealizedloss $� (296) $�(141) $�(757) $� (662) $(1,068) $(2,924)

%ofbookvalue (12)%

page 78

asset-backed SecuritiesFair Value

Rating


BBorLower

FairValue

2003 $499 $242 $� — $�— $� — $� 7412004 — — 444 — 1,509 1,9532005 — — — — 571 5712006 16 — — — 15 31

Totalfairvalue $515 $242 $444 $— $�2,095 $�3,296

%offairvalue 16% 7% 13% 0% 64% 100%



BBorLower

UnrealizedLoss

2003 $(2) $(75) $� — $— $� �— $� (�77)2004 — — (336) — (792) (1,128)2005 — — — — (0) (0)2006 (0) — — — (17) (17)2007 — — — — (98) (98)

Totalunrealizedloss $(2) $(75) $(336) $— $(907) $(1,320)

%ofbookvalue (29)%

Forthosefixed-maturityinvestmentsdeemednottobeinanOTTIposition,webelievethatthegrossunrealizedinvestmentlosswasprimar-ily caused by a lack of liquidity in the capital markets. We expect cashflowsfromoperationstobesufficienttomeetourliquidityrequirementsand,therefore,wedonotintendtosellthesefixedmaturitysecuritiesandwedonotbelievethatwewillberequiredtosellthesesecuritiesbeforerecovering their cost basis. For equity securities not considered OTTI,webelievewehavetheabilitytoholdtheseinvestmentsuntilarecoveryoffairvaluetoourcostbasis.Asubstantialportionoftheunrealizedlossrelating to the mortgage-backed securities is the result of a lack ofliquidityinthemarketthatwebelievetobetemporary.

SeeNote4—“Investments”intheconsolidatedfinancialstatementsfor further information about impairment testing and other-than-temporaryimpairments.

lIquIdItyandCapItalresourCes

Sources and Uses of FundsTower is organized as a holding company with multiple intermediateholdingcompanies, ten InsuranceSubsidiariesandseveralmanagementcompanies. Tower’s principal liquidity needs include interest on debt,incometaxesandstockholderdividends.Ourprincipalsourcesofliquidityincludedividendsandotherpermittedpaymentsfromoursubsidiaries,aswellasfinancingthroughborrowingsandsalesofsecurities.

Under New York law, TICNY is limited to paying dividends toTower only from statutory earned surplus. In addition, the New YorkInsuranceDepartmentmustapprove anydividenddeclaredorpaidbyTICNY that, together with all dividends declared or distributed byTICNY during the preceding twelve months, exceeds the lesser of(1)10%ofTICNY’spolicyholders’surplusasshownonitslateststatutoryfinancialstatementfiledwiththeNewYorkStateInsuranceDepartmentor (2) 100% of adjusted net investment income during the precedingtwelve months. TICNY declared $2.0 million, $5.2 million and $8.5millionindividendstoTowerin2009,2008and2007,respectively.

Bermuda legislation imposes limitations on the dividends thatCastlePoint Re may pay. We are subject to Bermuda regulatory con-straints thataffectourability topaydividendsonoursharesandmakeother payments. Under the Companies Act 1981 of Bermuda, as

amended(the“CompaniesAct”),wemaydeclareorpayadividendoutofdistributablereservesonlyifwehavereasonablegroundsforbelievingthatweare,orwouldafterthepayment,beabletopayour liabilitiesastheybecomedueandiftherealizablevalueofourassetswouldtherebynotbe less thantheaggregateofour liabilitiesand issuedsharecapitalandsharepremiumaccounts.

Under the Insurance Act of 1978, as amended (the “InsuranceAct”),CastlePointReisrequiredtomaintainaspecifiedsolvencymarginandaminimumliquidityratioandisprohibitedfromdeclaringorpayinganydividendsifdoingsowouldcauseCastlePointRetofailtomeetitssolvency margin and its minimum liquidity ratio. Under the InsuranceAct, CastlePoint Re is prohibited from declaring or paying dividendswithouttheapprovaloftheBermudaMonetaryAuthority,ifCastlePointRefailedtomeetitssolvencymarginandminimumliquidityratioonthelastdayofthepreviousfiscalyear.UndertheInsuranceAct,CastlePointReisprohibited,withouttheapprovaloftheBMA,fromreducingby15%or more its total statutory capital as set forth on its audited statutoryfinancialstatementsforthepreviousyear.

Theother InsuranceSubsidiariesaresubjecttosimilarrestrictions,usually related to policyholders’ surplus, unassigned surplus or netincome and notice requirements of their domiciliary state. As ofDecember 31, 2009, the amount of distributions that our InsuranceSubsidiaries could pay to Tower without approval of their domiciliaryInsuranceDepartmentswas$52.8million.

TRM is not subject to any limitations on its dividends to Tower,other than the basic requirement that dividends may be declared orpaid if the net assets of TRM remaining after such declaration or pay-ment will at least equal the amount of TRM’s stated capital. TRMdeclareddividendsof$6.0million,$7.2millionand$0in2009,2008and2007,respectively.

Pursuant to a Tax Allocation Agreement, we compute and payFederal income taxes on a consolidated basis. At the end of eachconsolidatedreturnyear,eachentitymustcomputeandpaytoToweritsshare of the Federal income tax liability primarily based on separatereturncalculations.ThetaxallocationagreementallowsTowertomakecertain Code elections in the consolidated Federal tax return. In theevent suchCodeelectionsaremade, any benefit or liability is accrued

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orpaidbyeachentity.Ifaunitaryorcombinedstateincometaxreturnisfiled, each entity’s share of the liability is based on the methodologyrequiredorestablishedbystateincometaxlawor, ifnone,thepercent-age equal to each entity’s separate income or tax divided by the totalseparate income or tax reported on the return. During 2009, Towerreceived $55.9 million in tax payments from its subsidiaries underthisagreement.

Cash Flows from Follow-on OfferingOn January22, 2007,we sold 2,704,000 shares of common stockat apriceof$31.25pershare,lessunderwritingdiscounts,andgrantedtotheunderwriters an option to purchase up to 405,600 additional shares ofcommonstockatthesamepricetocoverover-allotments.OnFebruary5, 2007, the underwriters exercised their over-allotment option withrespect to 340,600 shares of common stock. We received aggregatenetproceedsofapproximately$89.4millionfromtheofferingandover-allotmentoption,afterunderwritingdiscountsandexpenses.

Cash Flows from Issuance of Subordinated Debentures and perpetual preferred StockInJanuary2007weissued$20millionofsubordinateddebentures.

On November 13, 2006, we entered into the Stock PurchaseAgreementwithasubsidiaryofCastlePointpursuanttowhichweagreedtoissueandsell40,000sharesofperpetualpreferredstocktothesub-sidiaryforaggregateconsiderationof$40million.Thetransactionclosedon December 4, 2006. On January 26, 2007, we fully redeemed all40,000sharesofthepreferredstockfor$40.0millionusing$20.0millionofthenetproceedsfromourtrustpreferredsecuritiesissuedonJanuary25, 2007 and $20.0 million of the net proceeds from our commonstockoffering.

Surplus LevelsOurInsuranceSubsidiariesarerequiredbylawtomaintainacertainmin-imum levelofpolicyholders’ surplusona statutorybasis.Policyholders’surplus is calculated by subtracting total liabilities from total assets.TheNAICmaintainsrisk-basedcapital(“RBC”)requirementsforprop-ertyandcasualty insurancecompanies.RBCisaformulathatattemptsto evaluate the adequacy of statutory capital and surplus in relation toinvestments and insurance risks. The formula is designed to allow thestate Insurance Departments to identify potential weakly capitalizedcompanies. Under the formula, a company determines its risk-basedcapitalbytaking intoaccountcertainrisksrelatedtothe insurer’sassets(includingrisksrelatedtoitsinvestmentportfolioandcededreinsurance)and the insurer’s liabilities (including underwriting risks related to thenature and experience of its insurance business). Applying theRBCrequirementsasofDecember31,2009,ourInsuranceSubsidiaries’risk-based capital exceeded the minimum level that would triggerregulatoryattention.

Cash FlowsThe primary sources of cash flow in our Insurance Subsidiaries are netpremiumscollected,cedingcommissionsreceivedfromourquotasharereinsurers,losspaymentsbyourreinsurers,investmentincomeandpro-ceeds from the sale or maturity of investments. The InsuranceSubsidiariesuse funds for losspaymentsand lossadjustmentexpensesonournetbusiness,commissionstoproducers,salariesandotherunder-writingexpensesaswellastopurchaseinvestments,fixedassetsandtopaydividendstoTower.FundsarealsousedbytheInsuranceSubsidiariesforcededpremiumpaymentstoreinsurers,whicharepaidonanetbasisafter subtracting losses paid on reinsured claims and reinsurance com-missions.TRM’sprimarysourcesofcasharecommissionandfeeincome.

Ourreconciliationofnetincometocashprovidedfromoperationsisgenerallyinfluencedbythecollectionofpremiumsinadvanceofpaidlosses, the timingof reinsurance, issuingcompanysettlementsand losspayments.

Cashflowandliquidityarecategorizedintothreesources:(1)oper-atingactivities;(2)investingactivities;and(3)financingactivities,whichareshowninthefollowingtable:

CashFlowSummary YearEndedDecember31,

($inmillions) 2009 2008 2007

Cashprovidedby(usedin): Operatingactivities $�214.7 $� 61.7 $� 75.9 Investingactivities (175.2) 1.6 (182.9) Financingactivities (10.9) (4.7) 67.5

Netincreaseincashandcashequivalents 28.6 58.6 (39.5)Cashandcashequivalents,beginningofyear 136.3 77.7 117.2

Cashandcashequivalents,endofperiod $�164.9 $�136.3 $� 77.7

Comparison of Years ended December 31, 2009 and 2008Theincreaseinoperatingcashflowin2009wasprimarilyaresultofaddi-tional cash flows provided through the acquisition of CastlePoint andHermitage and in increase in premiums collected, partially offset byincreasedclaimsandtaxpayments.

Net cash flows used in investing activities were $156.9 million in2009 compared to net cash flow provided in 2008 of $1.6 million.In2009,netcashacquiredfromacquisitionsof$254.5millionwasoffsetby the purchase of fixed assets of $26.3 million and the net increase ininvestmentsof$385.1million.In2008,wepurchased$17.2millionoffixedassetsandhadanetcashinflowof$18.8millionfrominvestments.

Net cash flows used in financing activities related primarily to thepaymentofdividendstostockholdersof$10.7millionin2009,comparedto$4.6millionin2008.

Comparison of Years ended December 31, 2008 and 2007For2008and2007,netcashprovidedbyoperatingactivitieswas$61.7millionand$75.9million,respectively.Thedecreaseincashflowfor2008wasdue,inpart,tofasterpaymentstoCPICbyTRMin2008comparedto2007aswellasdirecttransactioncostsfortheCastlePointacquisition.

Thenetcashflowsprovidedbyinvestingactivitiesfor2008was$1.6millionascomparedtonetcashusedbyinvestingactivitiesof$182.9mil-lionforthesameperiodin2007.During2008,wecapitalized$15.3millionforsoftware,principallyexpendituresforoperatingsystemsandhardware.Theseexpenditureswereoffsetbynet salesof fixedmaturity securitiestotaling$19.9millionandnetpurchasesofequitiesof$0.6million.

The net cash flows used by financing activities for 2008 relatedprimarilytothepaymentofdividends.

LiquidityOur Insurance Subsidiaries maintain sufficient liquidity to pay claims,operatingexpensesandmeetourotherobligations.Weheld$164.9mil-lion and $136.3 million of cash and cash equivalents at December 31,2009and2008,respectively.Wemonitorourexpectedclaimspaymentneedsandmaintainasufficientportionofourinvestedassetsincashandcashequivalentstoenableustofundourclaimspaymentswithouthav-ing to sell longer-duration investments. As necessary, we adjust ourholdings of short-term investments and cash and cash equivalents toprovidesufficientliquiditytorespondtochangesintheanticipatedpat-ternofclaimspayments.See“Business—Investments.”

In2009and2008,wecontributed$5.3and$0.3milliontoTICNY,respectively.Wealsocontributed$1.3milliontoCPICin2009.In2007,we contributed $3.2 million to TICNY, $2.5 million to PIC and $2.5milliontoNEIC.

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CommitmentsThe following table summarizes information about contractual obligations and commercial commitments. The minimum payments under theseagreementsasofDecember31,2009wereasfollows:

PaymentsDuebyPeriod

($inmillions) TotalLessthan

1Year1-3

Years4-5

YearsAfter5Years

SubordinatedDebentures $� 235.1 $� �— $� — $� — $235.1Interestonsubordinateddebentures 463.0 17.3 34.7 34.7 376.3Operatingleaseobligations 60.5 8.6 13.6 10.7 27.6Grosslossreserves 1,132.0 347.6 429.9 210.2 144.3

Totalcontractualobligations $1,890.6 $373.5 $�478.2 $�255.6 $783.3

ThegrosslossreservepaymentsduebyperiodinthetableabovearebaseduponthelossandlossexpensereservesestimatesasofDecember31,2009andactuarialestimatesofexpectedpayoutpatternsby lineofbusiness.Asa result,ourcalculationof loss reservepaymentsduebyperiod issubject to the sameuncertaintiesassociated with determining the levelof reserves and to theadditionaluncertainties arising from thedifficulty ofpredicting when claims (including claims that have not yet been reported to us) will be paid. The projected gross loss payments presented do notincludetheestimatedamountsrecoverablefromreinsurersthatamountedto$199.7million,whichareestimatedtoberecoveredasfollows:lessthanoneyear,$59.6million;onetothreeyears,$74.8million;fourtofiveyears,$38million;andafterfiveyears,$27.3million.Theinterestonthesubordi-nateddebenturesiscalculatedusinginterestratesineffectatDecember31,2009forvariableratedebentures.

ForadiscussionofourlossandLAEreservingprocess,see“CriticalAccountingPolicies—LossandLAEReserves.”Actualpaymentsoflossesandlossadjustmentexpensesbyperiodwillvary,perhapsmaterially,fromtheabovetabletotheextentthatcurrentestimatesoflossreservesvaryfromactualultimateclaimsamountsandasaresultofvariationsbetweenexpectedandactualpayoutpatterns.See“RiskFactors—RisksRelatedtoOurBusiness.Ifouractuallossandlossadjustmentexpensesexceedourlossreserves,ourfinancialconditionandresultsofoperationscouldbeadverselyaffected,”foradiscussionoftheuncertaintiesassociatedwithestimatinglossandLAEexpensereserves.Theestimatedcededreservesrecoverablereferredtoabovealsoassumestimelyreimbursementfromourreinsurers.Ifourreinsurersdonotmeettheircontractualobligationsonatimelybasis,thepaymentassumptionspresentedabovecouldvarymaterially.

Capital ResourcesAtvarioustimesoverthepastfiveyearswehaveissuedtrustpreferredsecuritiesthroughwholly-ownedDelawarestatutorybusinesstrusts.Thetrustsuse theproceedsof thesaleof the trustpreferredsecuritiesandcommonsecurities thatweacquire fromthetrust topurchase juniorsubordinateddebenturesfromuswithtermsthatmatchthetermsofthetrustpreferredsecurities.Interestonthejuniorsubordinateddebenturesandthetrustpre-ferredsecuritiesispayablequarterly.Insomecases,theinterestrateisfixedforaninitialperiodoffiveyearsafterissuanceandthenfloatswithchangesintheLondonInterbankOfferedRate(“LIBOR”).InothercasestheinterestratefloatswithLIBORwithoutanyinitialfixed-rateperiod.Theprincipaltermsoftheoutstandingtrustpreferredsecuritiesaresummarizedinthefollowingtable:

IssueDate Issuer MaturityDate EarlyRedemption InterestRate

AmountofInvestmentinCommonSecuritiesofTrust

PrincipalAmountofJuniorSubordinatedDebentureIssuedtoTrust

May2003 TowerGroupStatutoryTrustI May2033

AtouroptionatparonorafterMay15,2008

Three-monthLIBORplus410basispoints $0.3million $10.3million

September2003TowerGroupStatutoryTrustII September2033

AtouroptionatparonorafterSeptember30,2008

7.5%untilSeptember30,2008;three-monthLIBORplus400basispointsthereafter $0.3million $10.3million

May2004 PreserverCapitalTrustI May2034

AtouroptionatparonorafterMay24,2009


December2004 TowerGroupStatutoryTrustIII December2034

AtouroptionatparonorafterDecember15,2009

7.4%untilDecember7,2009;three-monthLIBORplus340basispointsthereafter $0.4million $13.4million

December2004

TowerGroupStatutoryTrustIV March2035

AtouroptionatparonorafterDecember21,2009


March2006 TowerGroupStatutoryTrustV April2036

AtouroptionatparonorafterApril7,2011

8.5625%untilMarch31,2011;three-monthLIBORplus330basispointsthereafter $0.6million $20.6million

January2007

TowerGroupStatutoryTrustVI March2037

AtouroptionatparonorafterMarch15,2012

8.155%untilJanuary25,2012;three-monthLIBORplus300basispointsthereafter $0.6million $20.6million

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December2006 CastlePointManagementStatutoryTrustII

December2036 AtouroptionatparonorafterDecember14,2011

8.5551%untilDecember14,2011;three-monthLIBORplus330basispointsthereafter

$1.6million $51.6million

December2006 CastlePointManagementStatutoryTrustI




September2007 CastlePointBermudaCapitalTrustI

December2037 AtouroptionatparonorafterSeptember27,2012

8.39%untilSeptember27,2012;three-monthLIBORplus350basispointsthereafter


Wedonotconsolidate interest inourstatutorybusiness trusts forwhichwehold100%ofthecommontrustsecuritiesbecausewearenottheprimarybeneficiaryofthetrusts.Our investments incommontrustsecuritiesofthestatutorybusinesstrustsarereportedininvestmentsasequity securities. We report as a liability the outstanding subordinateddebenturesowedtothestatutorybusinesstrusts.Under the terms for all of the trust preferred securities, an event ofdefaultmayoccurupon:• non-paymentofinterestonthetrustpreferredsecurities,unlesssuch

non-paymentisduetoavalidextensionofaninterestpaymentperiod;• non-paymentofalloranypartof theprincipalof thetrustpreferred

securities;• our failure to comply with the covenants or other provisions of the

indenturesorthetrustpreferredsecurities;or• bankruptcyorliquidationofusorthetrusts.

Ifaneventofdefaultoccursand iscontinuing, theentireprincipaland the interest accrued on the affected trust preferred securities andjuniorsubordinateddebenturesmaybedeclaredtobedueandpayableimmediately.

Pursuant to the terms of our subordinated debentures, we andoursubsidiariescannotdeclareorpayanydividendsifweareindefaultor have elected to defer payments of interest on the subordinateddebentures.

Off-Balance Sheet arrangementsWehavenooff-balancesheetarrangementsatDecember31,2009.

InflationProperty and casualty loss and loss adjustment expense reserves areestablished before we know the amount of losses and loss adjustmentexpensesortheextenttowhich inflationmayaffectsuchamounts.WeattempttoanticipatethepotentialimpactofinflationinestablishingourlossandLAEreserves.InflationinexcessofthelevelswehaveassumedcouldcauselossandLAEexpensestobehigherthanweanticipated.

Substantial future increases in inflation could also result in futureincreasesininterestrates,whichinturnarelikelytoresultinadeclineinthemarketvalueoftheinvestmentportfolioandcauseunrealizedlossesorreductionsinstockholders’equity.

adoption of New accounting pronouncementsFor a discussion of accounting standards, see Note 1 of Notes toConsolidatedFinancialStatements.

marketpl aCeCondItIonsandtrendsThe property and casualty insurance industry is affected by naturallyoccurringindustrycyclesknownas“hard”and“soft”markets.Forthefirsttenyearsafterourcompanybegan,weoperatedinasoftmarket,gener-allyconsideredanadverse industryconditioninthepropertyandcasu-alty insurance industry. A soft market is characterized by intensecompetitionthatresultsininadequatepricing,expandedcoveragetermsandincreasedcommissionspaidtodistributionsourcesinordertocom-peteforbusiness.Ahardmarket,generallyconsideredabeneficialindus-trytrend, ischaracterizedbyreducedcompetitionthatresults inhigherpricing, reduced coverage terms and lower commissions paid toacquirebusiness.

In the last three decades, there have been three hard markets inwhich industry-wide inflation-adjusted premiums grew. Each of theseperiods was followed by an increase in capacity, price competition andthe aggressive terms and conditions that are typical of a soft market.According to A.M. Best a prolonged period of competitive conditionsdrove industry net premiums written down by 4.2% to $426.8 billion in2009and,forthefirsttimeinA.M.Best’srecordedhistory,netpremiumswrittenhavedeclinedinthreeconsecutiveyears.

Despitethedeclineinnetpremiumswritten,A.M.Bestexpectstheindustry’snetincometoincreaseto$30.6billionin2009from$3.8billionin2008asunderwritingresultsbenefitedfromlowercatastropherelatedlosses,favorabledevelopmentonprioraccidentyearsandanincreaseininvestment gains. According to A.M. Best, the substantial increase inearnings combined with the $70 billion swing from unrealized lossesin2008tounrealizedgainsin2009allowedpolicyholders’surplus,whichreboundedby9.4%, tobereplenishedto levels thatofferedcomfort tothemarketandpreventedaturnaround inpricing.A.M.Bestestimatesthattheindustrycombinedratiofor2009willbe100.6%,adecreaseof4.5 percentage points from the 105.1% in 2008 of which 2.3 points isattributable to an improvement in the mortgage and financialguarantyresults.

Theoutlookfor2010suggeststhattheeconomy,althoughsluggish,isshowingsignsofrecoveryasbanks lessenrestrictionson lending,thehousingsectorseemstobebottomingoutandconsumerandbusinessdebt loads are shrinking. These factors suggest a modest organic pre-miumgrowth fromnewbusinessand renewal retention.Thedegreeofgrowthwillbe influencedbya slowly improving jobsectorandgeneraluncertaintyofthedirectionofkeyeconomicindicators.Productionpres-sures in the P&C industry continue as evidenced by ongoing ratedecreases,reductionsinexposureunitssuchaspayroll,sales,newhous-ingstartsandlimitednewbusinesscreation.A.M.Bestprojectsa1.6%decreaseinnetpremiumswrittenin2010.Withratesflattoslightlydown,therearenosignsofameaningfulmarkethardeningand,barringamajorcatastrophe,aturninthecyclemaybedelayeduntil2011attheearliest.Overall industry combined ratio estimates project the greatestnegative impact to be seen in Workers’ Compensation, Commercial

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Multi-Peril,OtherLiability,Fire&AlliedLinesandMedicalProfessionalLiability.Thesewillbedrivenbyaccidentyearlossdevelopment,escalat-ingmedicalcostsandananticipatedreturntoanormalweather-relatedcatastropheresults.ThePrivatePassengerAutoline,withselectedrateincreases making an impact coupledwith a stable loss frequency,proj-ectsacombinedratioimprovementfor2010.Whileoverallresultsoftheindustryareexpected tocontinue todeteriorateuntil ageneralmarketimprovement,thosecompaniesthatmanagethecycleeffectivelywillbewell-positionedtotakeadvantageofthecurrentadverseconditionsandsubstantiallyoutperformtheirpeers.

Our product and geographic expansion initiatives, including theacquisition and consolidation of existing profitable books of businesscompleted in2009,willbe followedby thebroadeningofourpersonallines segment in2010.Thiswill featureaprivatepassengerautomobilecapability and a signature personal package policy resulting from thepending acquisition of the One Beacon personal lines division. Thesesignificanteffortswillprovideamplegrowthforusin2010.Furthermore,ourcontinuedexpansionintonarrowlydefinedclassesofspecialtycom-mercialbusinesswillgenerategrowthinthesmallandlowermiddlemar-ketcommercial segments.Wewill continue tobe less interested in thehigherpremiumperpolicylevelsoftheuppermiddlemarket,whicharechallenged by severe competitive conditions. It is expected that theindustry’slossofsurplusin2008willbefullyrecoveredin2010.Thiswilladd to the excess underwriting capacity and, with the treasury yieldcurveremainingatitsdepressedlevelreducinginvestmentincome,con-tinued pressure on top line growth will further extend the soft marketconditions.Incontrasttothesetrends,weexpecttomaintainunderwrit-ingintegrityandpremiumadequacyinlowtomoderatehazardclassesofbusiness with a strong niche market focus providing solutions to ourcustomers’needs.Thismarketdisciplinewillspaneachofthecommercialand personal lines, as well as specialty segments by demonstratingconsistentriskselectionandprovidingcoveragetermsandconditionsatadequate pricing. Our broad product line portfolio and diversifieddistributionplatformwillallowustomanageourbusinessmixbyallocat-ing capital in response to profit opportunities within the currentmarketenvironment.

Item7a.quantItatIveandqualItatIvedIsClosuresaBoutmarketrIskMarketrisk istheriskthatwewill incur losses inour investmentsduetoadversechanges inmarketratesandprices.Marketrisk isdirectly influ-enced by the volatility and liquidity in the market in which the relatedunderlying assets are invested. We believe that we are principallyexposedtothreetypesofmarketrisk:• changesininterestrates,• changes in the credit quality of issuers of investment securities and

reinsurers,and• changesinequityprices.

Interest Rate RiskInterest rate risk is the risk that we may incur economic losses due toadversechangesininterestrates.Theprimarymarketrisktotheinvest-ment portfolio is interest rate risk associated with investments in fixedmaturitysecurities,althoughconditionsaffectingparticularassetclasses(such as conditions in the housing market that affect residentialmortgage-backed securities) can also be a significant source of marketrisk.Fluctuationsininterestrateshaveadirectimpactonthemarketval-uation of these securities. Our fixed maturity portfolio is comprised ofprimarily investment grade corporate securities, U.S. government andagency securities, municipal obligations and mortgage-backed securi-ties. Our fixed maturity securities are classified as available-for-sale inaccordancewithGAAPandreportedatfairvalue,withunrealizedgainsandlossesexcludedfromearningsexceptforthecreditportionoflosses

considered to be other than temporarily impaired and reported as aseparatecomponentofstockholders’equity.Thefairvalueofour fixedmaturitysecuritiesasofDecember31,2009was$1.8billion.

For fixed maturity securities, short-term liquidity needs and thepotential liquidity needs for the business are key factors in managingourportfolio.Weusemodifieddurationanalysistomeasurethesensitiv-ity of the fixed income portfolio to changes in interest rates. As ofDecember31,2009,theaveragedurationofthefixedmaturityportfoliowas4.5years.

As of December 31, 2009, we had a total of $59.7 million of out-standing floating rate debt, all of which is outstanding subordinateddebenturesunderlyingourtrustpreferredsecuritiesissuedbyourwhollyowned statutory business trusts and carrying an interest rate that isdeterminedbyreferencetomarketinterestrates.Ifinterestratesincrease,theamountofinterestpayablebyuswouldalsoincrease.

Sensitivity analysisSensitivityanalysisisameasurementofpotentiallossinfutureearnings,fair values or cash flows of market sensitive instruments resulting fromone or more selected hypothetical changes in interest rates and othermarket rates or prices over a selected time. In our sensitivity analysismodel,weselectahypotheticalchangeinmarketratesthatreflectswhatwebelievearereasonablypossiblenear-termchangesinthoserates.Theterm“near-term”meansaperiodof timegoingforwarduptooneyearfrom the date of the consolidated financial statements. Actual resultsmaydifferfromthehypotheticalchangeinmarketratesassumedinthisdisclosure, especially since this sensitivity analysis does not reflect theresults of any action that we may take to mitigate such hypotheticallossesinfairvalue.

Inthissensitivityanalysismodel,weusefairvaluestomeasureourpotentialloss.Thesensitivityanalysismodelincludesfixedmaturitiesandshort-terminvestments.

For investedassets,weusemodifieddurationmodelingtocalcu-latechangesinfairvalues.Durationsoninvestedassetsareadjustedforcall,putandinterestrateresetfeatures.Durationsontax-exemptsecu-rities are adjusted for the fact that the yield on such securities is lesssensitive to changes in interest rates compared to Treasury securities.Invested asset portfolio durations are calculated on a market valueweightedbasis,includingaccruedinvestmentincome,usingholdingsasofDecember31,2009.

Thefollowingtablesummarizestheestimatedchangeinfairvalueonour fixedmaturityportfolio including short-term investmentsbasedonspecificchangesininterestratesasofDecember31,2009:

EstimatedIncrease EstimatedPercentage(Decrease)inFairValue Increase(Decrease)

Changeininterestrate ($inthousands) inFairValue

300basispointrise $(255,967) –14.3%200basispointrise (174,779) –9.7%100basispointrise (88,647) –4.9%100basispointdecline 91,545 5.1%

Thesensitivityanalysismodelusedbyusproducesapredictedpre-tax loss in fair value of market-sensitive instruments of $88.6 million or4.9%basedona100basispointincreaseininterestratesasofDecember31, 2009. This loss amount only reflects the impact of an interest rateincreaseonthefairvalueofourfixedmaturitiesinvestments,whichcon-stitutedapproximately94.0%ofourtotalinvestedassetsexcludingcashandcashequivalentsasofDecember31,2009.

page 83

Interestexpensewouldalsobeaffectedbyahypotheticalchangeininterestrates.AsofDecember31,2009wehad$36.0millionoffloatingratedebtobligations.Assumingthisamount remainsconstant,ahypo-thetical 100 basis point increase in interest rates would increase annualinterestexpenseby$360,000,a200basispointincreasewouldincreaseinterest expense by $720,000, and a 300 basis point increase wouldincreaseinterestexpenseby$1,080,000.

With respect to investment income, the most significant assess-mentof theeffectsofhypothetical changes in interest rateson invest-mentincomewouldberelatedtoresidentialmortgage-backedsecurities.The rates at which the residential mortgages underlying mortgage-backedsecuritiesareprepaid,andthereforetheaveragelifeofresidentialmortgage-backedsecurities,canvarydependingonchangesininterestrates(forexample,mortgagesareprepaidfasterandtheaveragelifeofmortgage-backedsecuritiesfallswheninterestratesdecline).Theadjust-ments forchanges inamortization,whicharebasedonrevisedaveragelifeassumptions,wouldhaveanimpactoninvestmentincomeifasignifi-cantportionofourresidentialmortgage-backedsecuritiesholdingshadbeenpurchasedatsignificantdiscountsorpremiumstoparvalue.AsofDecember 31, 2009, the par value of our residential mortgage-backedsecuritiesholdingswas$330.6millionandtheamortizedcostofourresi-dential mortgage-backed securities holdings was $311.0 million.Thisequates toanaveragepriceof94%ofpar.Historically, fewofourmortgage-backed securities were purchased at more than three points(below 97% and above 103%) from par, thus an adjustment would nothaveasignificanteffectoninvestmentincome.However,sincemanyofour non-investment grade mortgage-backed securities have beenimpaired as a result of adverse cash flows, the required adjustment tobookyieldcanhaveasignificanteffectonourfutureinvestmentincome.

Furthermore, significant hypothetical changes in interest rates ineither direction would likely not have a significant effect on principalredemptions,andthereforeinvestment income,becauseoftheprepay-ment protected mortgage securities in the portfolio. The residentialmortgage-backedsecuritiesportionof theportfolio totaled 17.7%asofDecember 31, 2009. Of this total, 91.3% was in agency pass throughsecurities, which have the highest amount of prepayment risk fromdecliningrates.Theremainderofourmortgage-backedsecuritiesport-folioisinvestedinagencyplannedamortizationclasscollateralizedmort-gageobligationsandnon-agencyresidentialnon-acceleratingsecurities.

Theplannedamortizationclasscollateralizedmortgageobligationsecurities maintain their average life over a wide range of prepaymentassumptions, while the non-agency residential non-accelerating securi-tieshavefiveyearsofprincipal lock-outprotectionandthecommercialmortgage-backed securities have very onerous prepayment and yieldmaintenance provisions that greatly reduce the exposure of thesesecuritiestoprepayments.

Credit RiskOurcreditriskisthepotentiallossinmarketvalueresultingfromadversechangeintheborrower’sabilitytorepayitsobligations.Ourinvestmentobjectives are to preserve capital, generate investment income andmaintainadequateliquidityforthepaymentofclaimsanddebtservice.Weseektoachievethesegoalsbyinvestinginadiversifiedportfolioofsecurities.Wemanagecreditriskthroughregularreviewandanalysisofthe creditworthiness of all investments and potential investments.Although we experienced increased credit risk during 2009 due to thedislocationofthecreditmarketsandageneraleconomicdeteriorationinthehousingmarketsprimarilythroughout2008andcontinuingin2009,ourfixedmaturityportfoliomaintainedanaverageS&PratingofAA-.

Wealsobearcreditriskonourreinsurancerecoverablesandpremi-ums ceded to reinsurers. As of December31, 2009, we had unsecuredreinsurancerecoverablesof$42.8millionowedbyOneBeaconInsurance,$11 million owed by Endurance Reinsurance Corporation, $10.4 millionowed by Lloyd Syndicates, $10 million owed by HannoverRuckversicherungsAG,$9.7millionowedbyAxisReinsuranceCompany,$8.8millionowedbyPlatinumUnderwritersReinsuranceInc.,$8.5millionowed by Munich Reinsurance America Inc., $6.9 million owed byWestport Insurance Corp., $5.5 million owed by QBE ReinsuranceCorporation, and other reinsurersowing in total $25.5million. If any ofthese reinsurers fails to pay its obligations to us, or substantially delaysmakingpaymentsonthereinsurancerecoverables,ourfinancialconditionand resultsofoperations could be impaired. Tomitigate thecredit riskassociatedwithreinsurancerecoverables,wesecurecertainofourreinsur-ancerecoverablesbywithholdingcededpremiumandrequiringfundstobeplacedintrustaswellasmonitoringourreinsurers’financialconditionandratingagencyratingsandoutlook.See“Business—Reinsurance.”

WealsobearcreditriskforpremiumsproducedbyTRMandalim-itedportion,generallyadepositamount,ofthedirectpremiumswrittenby our Insurance Subsidiaries. Producers collect such premiums andremitthemtouswithinprescribedperiods.Afterreceivingadeposit,theInsurance Subsidiaries premiums are directly billed to insureds. In NewYork State and other jurisdictions, premiums paid to producers by aninsuredmaybeconsideredtohavebeenpaidunderapplicableinsurancelaws and regulations and the insured will no longer be liable to us forthoseamounts,whetherornotwehaveactually received thepremiumpaymentfromtheproducer.Consequently,weassumeadegreeofcreditrisk associated with producers. Due to the unsettled and fact specificnatureofthelaw,weareunabletoquantifyourexposuretothisrisk.

equity RiskEquityriskistheriskthatwemayincureconomiclossesduetoadversechanges inequityprices.Ourexposuretochanges inequitypricespri-marily results from our holdings of preferred stocks, and to a lesserextent, common stocks, mutual funds and other equities. Our equitysecurities are classified as available for sale in accordance with GAAPand carried on the balance sheet at fair value. Our outside investmentmanagersareconstantlyreviewingthefinancialhealthoftheseissuers.Inaddition,weperformperiodicreviewsoftheseissuers.

page F-1

Item8.FInanCIalstatementsandsupplementarydata

Index to Consolidated Financial Statements

Page

ReportofIndependentRegisteredPublicAccountingFirm F-2

ConsolidatedBalanceSheetsasofDecember31,2009and2008 F-3

ConsolidatedStatementsofIncomeandComprehensiveIncomefortheyearsendedDecember31,2009,2008,and2007 F-4

ConsolidatedStatementsofChangesinStockholders’EquityfortheyearsendedDecember31,2009,2008,and2007 F-5

ConsolidatedStatementsofCashFlowfortheyearsendedDecember31,2009,2008,and2007 F-6

NotestoConsolidatedFinancialStatements F-8

page F-2

To the Board of Directors and Stockholders Tower group, Inc.

We have audited the accompanying consolidated balance sheets ofTowerGroup,Inc.(“theCompany”)asofDecember31,2009and2008,andtherelatedconsolidatedstatementsof incomeandcomprehensivenet income,changes in stockholders’equityandcash flows foreachoftheyearsinthethree-yearperiodendedDecember31,2009.OurauditsalsoincludedthefinancialstatementscheduleslistedinItem15.WealsohaveauditedtheCompany’s internalcontrolover financial reportingasofDecember31,2009,basedoncriteriaestablishedinInternalControl—Integrated Framework issued by the Committee of SponsoringOrganizationsof theTreadwayCommission(COSO).TheCompany’smanagement is responsible for these financial statements and financialstatement schedules, for maintaining effective internal control overfinancialreporting,andforitsassessmentoftheeffectivenessofinternalcontrol over financial reporting, included in the accompanyingManagement’s Annual Report on Internal Control Over FinancialReporting.Ourresponsibility istoexpressanopiniononthesefinancialstatementsandthefinancialstatementschedulesandanopinionontheCompany’sinternalcontroloverfinancialreportingbasedonouraudits.

Weconductedouraudits inaccordancewith thestandardsof thePublic Company Accounting Oversight Board (United States). Thosestandardsrequirethatweplanandperformtheauditstoobtainreason-ableassuranceaboutwhetherthefinancialstatementsarefreeofmate-rial misstatement and whether effective internal control over financialreportingwasmaintainedinallmaterialrespects.Ourauditsofthefinan-cialstatementsincludedexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements,assessing theaccountingprinciplesusedandsignificantestimatesmadebyman-agement, and evaluating the overall financial statement presentation.Ourauditof internalcontroloverfinancialreportingincludedobtainingan understanding of internal control over financial reporting, assessingthe risk that a material weakness exists, and testing and evaluating thedesign and operating effectiveness of internal control based on theassessedrisk.Ourauditsalsoincludedperformingsuchotherproceduresas we considered necessary in the circumstances. We believe that ourauditsprovideareasonablebasisforouropinions.

A company’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability offinancialreportingandthepreparationoffinancialstatementsforexter-nal purposes in accordance with generally accepted accounting princi-ples.Acompany’sinternalcontroloverfinancialreportingincludesthosepolicies and procedures that (1) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactionsand dispositions of the assets of the company; (2) provide reasonableassurancethattransactionsarerecordedasnecessarytopermitprepara-tion of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the com-panyarebeingmadeonlyinaccordancewithauthorizationsofmanage-mentanddirectorsofthecompany;and(3)providereasonableassuranceregarding prevention or timely detection of unauthorized acquisition,use, or disposition of the company’s assets that could have a materialeffectonthefinancialstatements.

Because of its inherent limitations, internal control over financialreportingmaynotpreventordetectmisstatements.Also,projectionsofanyevaluationofeffectiveness to futureperiodsare subject to the riskthatcontrolsmaybecomeinadequatebecauseofchangesinconditions,or that the degree of compliance with the policies or proceduresmaydeteriorate

AsdescribedinManagement’sAnnualReportonInternalControlover Financial Reporting, the Company has excluded SpecialtyUnderwriters’Alliance, Inc. from its assessment of internal controloverfinancial reportingasofDecember31,2009asSpecialtyUnderwriters’Alliance,Inc.anditssubsidiarywereacquiredbytheCompanyinabusi-ness combination during 2009. We have also excluded SpecialtyUnderwriters’Alliance,Inc.fromourauditofinternalcontroloverfinan-cial reporting.The totalassetsand revenuesofSpecialtyUnderwriters’Alliance, Inc.represent15%and3%,respectively,oftherelatedconsoli-dated financial statement amounts as of and for the year endedDecember31,2009.

AsdiscussedinNote1totheconsolidatedfinancialstatements,theCompanychanged itsmethodofaccountingforother-than-temporaryimpairmentsofdebtsecuritiesasofJanuary1,2009duetotheadoptionofnewFASBguidance.

In our opinion, the consolidated financial statements referred toabove present fairly, in all material respects, the financial position ofTowerGroup,Inc.asofDecember31,2009and2008,andtheresultsofitsconsolidatedoperationsanditscashflowsforeachoftheyearsinthethree-yearperiodendedDecember31,2009inconformitywithaccount-ing principles generally accepted in the United States of America. Inaddition, inouropinion, such financial statement schedules,whencon-sidered in relation to thebasic financial statements asawhole,presentfairly,inallmaterialrespects,theinformationsetforththerein.Alsoinouropinion,TowerGroup,Inc.maintained,inallmaterialrespects,effectiveinternalcontroloverfinancialreportingasofDecember31,2009,basedoncriteriaestablished in InternalControl-IntegratedFramework issuedby the Committee of Sponsoring Organizations of the TreadwayCommission(COSO).

/s/JohnsonLambert&Co.LLP

FallsChurch,VirginiaMarch1,2010

Report of Independent Registered public accounting Firm

page F-3

Tower group, Inc.Consolidated Balance Sheets

December31,

($inthousands,exceptparvalueandshareamounts) 2009 2008

assetsFixed-maturitysecurities,available-for-sale,atfairvalue(amortizedcostof$1,729,117and$581,470) $�1,783,596 $� 530,159Equitysecurities,available-for-sale,atfairvalue(costof$78,051and$12,726) 76,733 10,814Short-terminvestments,available-forsale,atfairvalue(costof$36,500) 36,500 —

Totalinvestments 1,896,829 540,973Cashandcashequivalents 164,882 136,253Investmentincomereceivable 20,240 6,972Premiumsreceivable 280,357 188,643Reinsurancerecoverableonpaidlosses 14,819 50,377Reinsurancerecoverableonunpaidlosses 199,687 222,229Prepaidreinsurancepremiums 94,818 153,650Deferredacquisitioncosts,netofdeferredcedingcommissionrevenue 170,652 53,080Deferredincometaxes 41,757 36,207Intangibleassets 53,350 20,464Goodwill 244,690 18,962Fixedassets,netofaccumulateddepreciation 66,429 39,038�Investmentinunconsolidatedaffiliate — 29,293Otherassets 64,442 42,240

Totalassets $�3,312,952 $�1,538,381

LiabilitiesLossandlossadjustmentexpenses $�1,131,989 $� 534,991Unearnedpremium 658,940 328,847Reinsurancebalancespayable 89,080 134,598Fundsheldunderreinsuranceagreements 13,737 20,474Accountspayable,accruedliabilitiesandotherliabilities 133,647 83,231Subordinateddebentures 235,058 101,036

Totalliabilities 2,262,451 1,203,177Stockholders’ equityCommonstock($0.01parvalue;100,000,000sharesauthorized,45,092,321and 23,408,145sharesissued,and44,984,953and23,339,470sharesoutstanding) 451 234Treasurystock(107,368and68,675shares) (1,995) (1,026)Paid-in-capital 751,878 208,094Accumulatedothercomprehensiveincome(loss) 34,554 (37,498)Retainedearnings 265,613 165,400

Totalstockholders’equity 1,050,501 335,204

Totalliabilitiesandstockholders’equity $�3,312,952 $�1,538,381

Seeaccompanyingnotestotheconsolidatedfinancialstatements.

page F-4


($inthousands,exceptpershareandshareamounts) 2009 2008 2007

RevenuesNetpremiumsearned $� 854,711 $� 314,551 $� 286,106Cedingcommissionrevenue 43,937 79,162 71,010Insuranceservicesrevenue 5,123 68,156 33,300Policybillingfees 2,965 2,347 2,038Netinvestmentincome 74,866 34,568 36,699Netrealizedgains(losses) Other-than-temporaryimpairments (44,210) (22,651) (10,094) Portionoflossrecognizedinothercomprehensiveincome(loss) 20,722 — — Othernetrealizedinvestmentgains(losses) 24,989 8,297 (7,417)

Totalnetrealizedinvestmentgains(losses) 1,501 (14,354) (17,511)

Totalrevenues 983,103 484,430 411,642expensesLossandlossadjustmentexpenses 475,497 162,739 157,906Directandcedingcommissionexpense 204,565 132,445 101,030Otheroperatingexpenses 129,846 91,491 77,319Acquisition-relatedtransactioncosts 14,038 — —Interestexpense 18,122 8,449 9,290

Totalexpenses 842,068 395,124 345,545Other income (expense)Equity(loss)incomeinunconsolidatedaffiliate (777) 269 2,438Gainoninvestmentinacquiredunconsolidatedaffiliate 7,388 — —Gainfromissuanceofcommonstockbyunconsolidatedaffiliate — — 2,705Gainonbargainpurchase 13,186 — —

Incomebeforeincometaxes 160,832 89,575 71,240Incometaxexpense 51,502 32,102 26,158

Net income $� 109,330 $� 57,473 $� 45,082

Grossunrealizedinvestmentholdinggains(losses)arisingduringperiods 108,879 (56,098) (29,424)Cumulativeeffectadjustmentresultingfromadoptionofnewaccountingguidance (2,497) — —Equityinnetunrealized(losses)gainsoninvestmentinunconsolidatedaffiliate’sinvestmentportfolio 3,124 (3,142) (218)Less:reclassificationadjustmentfor(gains)lossesincludedinnetincome (1,501) 14,354 17,511Incometaxbenefit(expense)relatedtoitemsofothercomprehensiveincome (37,700) 15,710 4,246

Comprehensive net income $� 179,635 $� 28,297 $� 37,197

Basic and diluted earnings per shareBasic—Commonstock: Distributed $� 0.26 $� 0.20 $� 0.15 Undistributed 2.52 2.27 1.79

Total $� 2.78 $� 2.47 $� 1.94

Diluted $� 2.76 $� 2.45 $� 1.92

WeightedaveragecommonsharesoutstandingBasic 39,363,324 23,290,506 22,927,087Diluted 39,580,654 23,484,614 23,128,052

Dividendsdeclaredandpaidpercommonshare $� 0.26 $� 0.20 $� 0.15


Tower group, Inc.Consolidated Statements of Income and Comprehensive Income

page F-5

(inthousands)

PreferredStock CommonStockTreasury

StockPaid-inCapital

AccumulatedOther

ComprehensiveIncome

RetainedEarnings

TotalStockholders’

EquityShares Amount Shares Amount

Balance at December 31, 2006 40 $�39,600 20,006 $��200 $� (207) $�113,168 $ (437) �$� 71,596 $� 223,920Dividendsdeclared — — — — — — — (3,444) (3,444)Dividendsdeclaredonpreferredstock — — — — — — — (298) (298)Stockbasedcompensation — — 175 2 (341) 2,904 — — 2,565Redemptionofpreferredstock (40) (39,600) — — — — — (400) (40,000)Equityofferingandover-allotment, netofissuancecosts — — 3,045 30 — 89,334 — — 89,364Warrantexercise — — — — 55 29 — — 84Netincome — — — — — — — 45,082 45,082Netunrealizeddepreciationon securitiesavailableforsale, netofincometax — — — — — — (7,885) — (7,885)

Balance at December 31, 2007 — — 23,225 232 (493) 205,435 (8,322) 112,535 309,387Dividendsdeclared — — — — — — — (4,608) (4,608)Stockbasedcompensation — — 183 2 (592) 2,634 — — 2,044Warrantexercise — — — — 59 25 — — 84Netincome — — — — — — — 57,473 57,473Netunrealizeddepreciationon securitiesavailableforsale, netofincometax — — — — — — (29,176) — (29,176)

Balance at December 31, 2008 — — 23,408 234 (1,026) 208,094 (37,498) 165,400 335,204Cumulativeeffectofadjustment resultingfromadoptionof newaccountingguidance — — — — — — (1,623) 1,623

adjusted balance at December 31, 2008 — — 23,408 234 (1,026) 208,094 (39,121) 167,023 335,205Dividendsdeclared — — — — — — — (10,740) (10,740)Stockbasedcompensation — — 346 3 (1,059) 6,664 — — 5,608Issuanceofcommonstock — — 21,338 214 —� 527,292 — — 527,505Fairvalueofoutstanding CastlePointandSUAstockoptions — — — — — 9,918 — — 9,918Warrantexercise — — — — 90 (90) — — —Netincome — — — — — — — 109,330 109,330Netunrealizedappreciationon securitiesavailableforsale, netofincometax — — — — — — 73,675 — 73,675

Balance at December 31, 2009 — $� — 45,092 $�451 $�(1,995) $�751,878 $ 34,554 $�265,613 $1,050,501


Tower group, Inc.Consolidated Statements of Changes in Stockholders’ equity

page F-6

December31,

($inthousands) 2009 2008 2007

Cash flows provided by (used in) operating activities:NetIncome $� 109,330 $� 57,473 $� 45,082Adjustmentstoreconcilenetincometonetcashprovidedby(usedin)operations: GainfromIPOofcommonsharesofunconsolidatedaffiliate — — (2,705) Gainoninvestmentinacquiredunconsolidatedaffiliate (7,388) — — Gainonbargainpurchase (13,186) — — Acquisition-relatedtransactioncosts 14,038 — — (Gain)lossonsaleofinvestments (24,989) (8,297) 7,417 Other-than-temporary-impairmentlossoninvestments 23,488 22,651 10,094 Depreciationandamortization 19,344 11,718 8,725 Amortizationofbondpremiumordiscount 100 1,067 591 Amortizationofrestrictedstock 5,608 2,480 1,919 Deferredincometaxes 5,089 (4,201) (4,774) Excesstaxbenefitsfromshare-basedpaymentarrangements (191) (175) (1,105) (Increase)decreaseinassets: Investmentincomereceivable (5,785) (426) (534) Premiumsreceivable 164,382 (64,043) (27,237) Reinsurancerecoverable 147,547 (64,778) (49,915) Prepaidreinsurancepremiums 89,571 (28,816) (26,808) Deferredacquisitioncosts,net (26,758) (13,809) 10,494 Otherassets 6,922 (1,664) (10,165) Increase(decrease)inliabilities: Lossandlossadjustmentexpenses (94,258) 33,808 81,383 Unearnedpremium (54,390) 56,073 3,033 Reinsurancebalancespayable (103,575) 75,859 15,378 Payabletoissuingcarriers (47,399) 4,446 42,193 Accountspayableandaccruedexpenses 28,839 (8) (9,044) Fundsheldunderreinsuranceagreement (21,628) (17,624) (18,094)

Netcashflowsprovidedbyoperations 214,711 61,734 75,928

Cash flows provided by (used in) investing activities:NetcashacquiredfromacquisitionofCastlePoint 218,373 — —AcquisitionofHermitage,netofcashacquired (43,596) — —NetcashacquiredfromacquisitionofSUA 51,952 — —AcquisitionofPreserverGroupInc,netofcashacquired — — (70,737)Purchaseoffixedassets (26,299) (17,210) (13,993)Purchase—fixed-maturitysecurities (1,244,713) (336,465) (306,638)Purchase—equitysecurities (85,777) (7,175) (15,885)Short-terminvestments—net (31,766) — —Saleormaturity—fixed-maturitysecurities 936,028 355,966 199,628Sale—equitysecurities 50,582 6,511 24,759

Netcashflows(usedin)investingactivities (175,216) 1,627 (182,866)

Seeaccompanyingnotestotheconsolidatedfinancialstatements. (continued)

Tower group, Inc.Consolidated Statements of Cash Flow

page F-7

December31,

($inthousands) 2009 2008 2007

Cash flows provided by (used in) financing activities:Equityofferingandoverallotment,netofissuancecosts $� — $� — $� 89,366Redemptionofpreferredstock — — (40,000)Proceedsfromissuanceofsubordinateddebentures — — 20,619Purchaseofcommontrustsecurities—statutorybusinesstrusts — — (619)Exerciseofstockoptionsandwarrants 741 179 1,167Excesstaxbenefitsfromshare-basedpaymentarrangements 191 175 1,105Treasurystockacquired—netemployeeshare-basedcompensation (1,058) (533) (439)Dividendspaid (10,740) (4,608) (3,743)

Netcashflows(usedin)providedbyfinancingactivities (10,866) (4,787) 67,456

Increase(decrease)incashandcashequivalents 28,629 58,574 (39,482)Cashandcashequivalents,beginningofperiod 136,253 77,679 117,161

Cashandcashequivalents,endofperiod $� 164,882 $�136,253 $� 77,679

Supplemental disclosures of cash flow information:Cashpaidforincometaxes $� 61,521 $� 27,110 $� 27,555Cashpaidforinterest 18,053 7,882 8,145Scheduleofnon-cashinvestingandfinancingactivities:IssuanceofcommonstockinacquisitionofCastlePointandSUA 527,505 — —ValueofCastlePointandSUAstockoptionsatdateofacquisition 9,918 — —


Tower group, Inc.Consolidated Statements of Cash Flow (continued)

page F-8

note1—natureoFBusInessTower Group, Inc. (the “Company”), through its subsidiaries, offers abroadrangeofcommercial,personalandspecialtypropertyandcasualtyinsuranceproductsandservicestobusinessesinvariousindustriesandtoindividuals. The Company’s common stock is publicly traded on theNASDAQGlobalSelectMarketunderthesymbol“TWGP.”

TheCompanyhaschangedthepresentationofitsbusinessresults,beginning January 1, 2009, by allocating its previously reported insur-ancesegmentintobrokerageinsuranceandspecialtybusiness,basedonthe way management organizes the segments for making operatingdecisions and assessing profitability. The prior period segment disclo-sures have been restated to conform to the current presentation. Wenowreportthreeoperatingsegmentsasfollows:• Brokerage Insurance(“Brokerage”)Segmentoffersabroadrangeof

commercial lines and personal lines property and casualty insuranceproducts tosmall tomid-sizedbusinessesand individualsdistributedthroughanetworkofretailandwholesaleagentsonbothanadmittedandnon-admittedbasis;

• SpecialtyBusiness(“Specialty”)Segmentprovidesspecialtyclassesofbusiness through program underwriting agents. This segment alsoincludes reinsurance solutions provided primarily to small insurancecompanies;and

• Insurance Services (“Services”) Segment provides underwriting,claimsandreinsurancebrokerageservicestoinsurancecompanies.

OnFebruary5,2009, theCompanycompletedtheacquisitionof100% of the issued and outstanding common stock of CastlePointHoldings, Ltd. (“CastlePoint”), a Bermuda exempted corporation.CastlePoint was a Bermuda holding company organized to provideproperty and casualty insurance and reinsurance business solutions,products and services primarily to small insurance companies and pro-gramunderwritingmanagersintheUnitedStates.

OnFebruary27,2009,theCompanyanditssubsidiary,CastlePoint,completed the acquisition of HIG, Inc. (“Hermitage”), a property andcasualty insurance holding company. Hermitage offers both admittedandexcessandsurplus lines (“E&S”)products.This transaction furtherexpanded the Company’s wholesale distribution system nationally andestablishedanetworkofretailagentsintheSoutheast.

OnOctober14,2009,theCompanycompletedtheacquisitionofthe renewal rights to theworkers’ compensationbusinessofAequiCapProgram Administrators, Inc. (“AequiCap”), an underwriting agencybasedinFortLauderdale,Florida.

OnNovember 13, 2009, the Companycompleted theacquisitionof 100% of the issued and outstanding common stock of SpecialtyUnderwriters’ Alliance, Inc. (“SUA”). SUA offers specialty commercialpropertyandcasualtyinsuranceproductsthroughprogramunderwritingmanagersthatservenichegroupsofinsureds.

note2—aCCountIngpolICIesandBasIs oFpresentatIon

Basis of presentationThe consolidated financial statements include the accounts of TowerGroup, Inc. (“Tower”) and its insurance subsidiaries, Tower InsuranceCompanyofNewYork(“TICNY”),TowerNationalInsuranceCompany(“TNIC”),PreserverInsuranceCompany(“PIC”),NorthEastInsuranceCompany (“NEIC”), Mountain Valley Indemnity Company (“MVIC”),CastlePoint Insurance Company (“CPIC”), CastlePoint ReinsuranceCompany, Ltd. (“CPRe”), CastlePoint Florida Insurance Company

(“CPFL”), Hermitage Insurance Company (“HIC”), Kodiak InsuranceCompany (“KIC”), and SUA Insurance Company (“SUA”) (renamedCastlePointNational InsuranceCompany(“CPNIC”)) (collectively the“InsuranceSubsidiaries”),anditsmanaginggeneralagencies,TowerRiskManagementCorp.(“TRM”),CastlePointManagementCorp.(“CPM”)and AequiCap CP Services Group, Inc. (renamed CastlePoint RiskManagement of Florida, Inc. (“CPRMFL”)). The Company has fourintermediateholdingcompanies,PreserverGroup,Inc.(“PGI”),OceanICorporation, CastlePoint Bermuda Holdings, Ltd. (“CBH”), and HIG,Inc. (“Hermitage”). The accompanying consolidated financial state-ments have been prepared in accordance with accounting principlesgenerallyacceptedintheUnitedStatesofAmerica(“GAAP”).Allsig-nificant inter-companyaccountsandtransactionshavebeeneliminatedinconsolidation.

Use of estimatesThe preparation of financial statements in conformity with GAAPrequires management to make estimates and assumptions that affectreportedassets,liabilities,revenuesandexpensesandtherelateddisclo-sures as of the date of the financial statements. As more informationbecomesavailable,actualresultscoulddiffer,perhapssubstantially,fromthoseestimates.

ReclassificationsCertainreclassificationshavebeenmadetoprioryearfinancialinforma-tiontoconformtothecurrentyearpresentation.Noneofthesereclassi-ficationshadaneffectontheCompany’sconsolidatednetearnings,totalstockholders’equityorcashflows.

Net premiums earnedInsurancepoliciesissuedorreinsuredbytheCompanyareshort-durationcontracts. Accordingly, premium revenue, including direct writings andreinsuranceassumed,netofpremiumscededtoreinsurers,isrecognizedonaproratabasisover thetermsof theunderlyingpolicies.Unearnedpremiumsrepresentpremiumapplicabletotheunexpiredriskofin-forceinsurancecontractsateachbalancesheetdate.Prepaidreinsurancepre-miumsrepresenttheunexpiredportionofreinsurancepremiumsonriskscededandareearnedconsistentwithpremiums.

Ceding Commission RevenueCommissions on reinsurance premiums ceded are earned in a mannerconsistent with the recognition of the costs to acquire the underlyingpolicies,generallyonaproratabasisoverthetermsofthepoliciesrein-sured. Certain reinsurance agreements contain provisions whereby thecedingcommissionratesvarybasedonthe lossexperienceofthepoli-ciescoveredbytheagreements.TheCompanyrecordscedingcommis-sion revenue based on its current estimate of losses on the reinsuredpolicies subject to variable commission rates. The Company recordsadjustments to the ceding commission revenue in the period thatchangesintheestimatedlossesaredetermined.

Insurance Services RevenueDirect commission revenue from the Company’s managing generalunderwritingservicesisrecognizedandearnedasinsurancepoliciesareplacedwiththe issuingcompaniesofTRM,CPM,andCPRMFL.FeesrelatingtotheprovisionofreinsuranceintermediaryservicesareearnedwhentheCompany’sInsuranceSubsidiariesortheissuingcompaniesofTRM,CPM,andCPRMFLcedepremiumstoreinsurers.Claimsadmin-istration fees and other administration revenues are earned as servicesareperformed.

Tower group, Inc.Notes to Consolidated Financial Statements

page F-9

policy Billing FeesPolicy billing fees are earned as they are collected. These fees includeinstallmentandotherfeesrelatedtobillingandcollections.

Loss and Loss adjustment expenses (“Lae”)TheliabilityforlossandLAErepresentsmanagement’sbestestimateoftheultimatecostandexpenseofallreportedandunreportedlossesthatareunpaidasof thebalance sheetdateand the fair valueadjustmentsrelatedtotheacquisitionsofCastlePoint,HermitageandSUA.Thelia-bilityfor lossandLAEisgenerallyestimatedonanundiscountedbasis,using individual case-basis valuations, statistical analyses and variousactuarialprocedures.TheCompanyrecordedatabularreservediscountfor workers’ compensation and excess workers’ compensation claims intheamountof$4.5millionatDecember31, 2009,primarilydue to theacquisition of SUA. The gross undiscounted amount of these reserveswas$166.8million.Theprojectionoffutureclaimspaymentsandreport-ingisbasedonananalysisoftheCompany’shistoricalexperience,sup-plementedbyanalysesofindustrylossdata.Managementbelievesthatthe liability for loss and LAE is adequate to cover the ultimate cost oflossesandclaimstodate;however,becauseoftheuncertaintyfromvari-ous sources, includingchanges in reportingpatterns, claims settlementpatterns, judicial decisions, legislation, and economic conditions, actuallossexperiencemaynotconformtotheassumptionsusedindeterminingthe estimated amounts for such liability at the balance sheet date. Asadjustmentstotheseestimatesbecomenecessary,suchadjustmentsarereflected inexpensefortheperiod inwhichtheestimatesarechanged.Becauseofthenatureofthebusinesshistoricallywritten,theCompany’smanagementbelieves that theCompanyhas limitedexposure toenvi-ronmentalclaimliabilities.

Towerestimatesreservesseparatelyforlosses,allocatedlossadjust-ment expenses, and unallocated loss adjustment expenses. Allocatedlossadjustmentexpenses(“ALAE”)referstocostsofattorneysaswellasmiscellaneouscostssuchaswitnessfeesandcourtcostsattributabletospecific claims that generally are in various stages of litigation.Unallocated loss adjustment expenses (“ULAE”) refers to costs foradministeringclaims thatarenot related toattorney feesandmiscella-neous costs associated with litigated claims. ULAE includes overheadcostsattributabletotheclaimsfunction.TowerestimatestheALAElia-bility separately for claims that are defended by in-house attorneys,claimsthatarehandledbyotherattorneysthatarenotemployees,andmiscellaneousALAEcostssuchaswitnessfeesandcourtcosts.

For ALAE stemming from defense by in-house attorneys theCompanydeterminesa fixedfeeper in-house litigatedclaim,andallo-catestoeachoftheselitigatedclaims50%ofthisfixedfeewhenlitigationon a particular claim begins and 50% of the fee when the litigation isclosed.Thefeeisdeterminedactuariallybasedupontheprojectednum-beroflitigatedclaimsandexpectedclosingpatternsatthebeginningofeach year as well as the projected budget for the Company’s in-houseattorneys, and these amounts are subject to adjustment each quarterbaseduponactualexperience.

ForULAEtheCompanydeterminesastandardcostperclaimforeachlineofbusinessthatrepresentstheultimateaveragecosttoadmin-isterthatclaim.50%ofthisstandardcostisrecordedaspaidULAEwhena claim is opened, and 50% of this standard cost is recorded as paidULAE when a claim is closed. The standard costs are determinedactuarially and subject to adjustment each quarter such that the totalcalendarperiodcostsfortheclaimsfunctionisrecordedaspaidULAEeachquarter.

ReinsuranceThe Company uses reinsurance to limit its exposure to certain risks.Management has evaluated its reinsurance arrangements and deter-mined that significant insurance risk is transferred to the reinsurers.Reinsurance agreements have been determined to be short-duration

prospectivecontractsand,accordingly, thecostsof the reinsurancearerecognizedoverthelifeofthecontractsinamannerconsistentwiththeearning of premiums on the underlying policies subject to the reinsur-ancecontract.

Reinsurancerecoverablerepresentsmanagement’sbestestimateofpaidandunpaidlossandLAErecoverablefromreinsurers.CededlossesrecoverableareestimatedusingtechniquesandassumptionsconsistentwiththoseusedinestimatingtheliabilityforlossandLAE.Thesetech-niquesandassumptionsarecontinually reviewedandupdatedwithanyresulting adjustments recorded in current earnings. Loss and LAEincurredaspresentedintheconsolidatedstatementofincomeandcom-prehensivenetincomearenetofreinsurancerecoveries.

Management estimates uncollectible amounts receivable fromreinsurersbasedonanassessmentofanumberoffactors.TheCompanyrecorded no allowance for uncollectible reinsurance at December 31,2009and2008anddidnotwrite-offanybalancesfromreinsurersduringthethree-yearperiodendedDecember31,2009.

Cash and Cash equivalentsCash consists of cash in banks, generally in operating accounts.TheCompanymaintainsitscashbalancesatseveralfinancialinstitutions.Managementmonitorsbalances inexcessof insuredlimitsandbelievestheydonotrepresentasignificantcreditrisktotheCompany.

TheCompanyconsidersallhighly liquid investmentswithoriginalmaturitiesofthreemonthsorlesstobecashequivalents.Cashandcashequivalentsarepresentedatcost,whichapproximatesfairvalue.

InvestmentsThe Company’s fixed-maturity and equity securities are classified asavailable-for-sale and carried at fair value. The Company may sell itsavailable-for-salesecuritiesinresponsetochangesininterestrates,risk/rewardcharacteristics,liquidityneedsorotherfactors.

Fairvalueforfixed-maturitysecuritiesandequitysecuritiesisbasedon quoted market prices or a recognized pricing service, with limitedexceptionsasdiscussedin“Note5—FairValueMeasurements”.Changesinunrealizedgainsandlosses,netoftaxeffects,arereportedasasepa-ratecomponentofothercomprehensiveincomewhilecumulativeunre-alizedgainsandlossesarereportedinstockholders’equityasaseparatecomponent. Realized gains and losses are determined on the specificidentificationmethod.Investmentincomeisrecordedwhenearnedandincludestheamortizationofpremiumanddiscountoninvestments.

TheCompanyregularlyreviewsitsfixed-maturityandequitysecu-rity portfolios to evaluate the necessity of recording impairment lossesfor other-than-temporary declines in the fair value of investments.Inevaluatingpotentialimpairment,managementconsiders,amongothercriteria:(i)theoverallfinancialconditionoftheissuer,(ii)thecurrentfairvaluecomparedtoamortizedcostorcost,asappropriate;(iii)thelengthof time thesecurity’s fairvaluehasbeenbelowamortizedcostorcost;(iv) specific credit issues related to the issuer suchaschanges in creditrating, reductionoreliminationofdividendsornon-paymentofsched-uled interest payments; (v) whether management intends to sell thesecurity and, if not, whether it is not more likely than not that theCompanywillberequiredtosellthesecuritybeforerecoveryofitscostor amortized cost basis; (vi) specific cash flow estimations for certainmortgage-backed securities and (vii) current economic conditions.Ifanother-than-temporary-impairment(“OTTI”)lossisdeterminedforafixed-maturitysecurity,thecreditportionisrecordedinthestatementofincomeasnetrealizedlossesoninvestmentsandthenon-creditpor-tionisrecordedinaccumulatedothercomprehensiveincome.Thecreditportion results in a permanent reduction of the cost basis of theunderlyinginvestment.

Fair ValueGAAP establishes a three-level hierarchy that prioritizes the inputs tovaluationtechniquesusedtomeasurefairvalue.Thefairvaluehierarchy

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givesthehighestprioritytoquotedpricesinactivemarketsforidenticalassetsorliabilities(Level1)followedbysimilarbutnotidenticalassetsorliabilities (Level 2) and the lowest priority to unobservable inputs(Level3).Iftheinputsusedtomeasuretheassetsorliabilitiesfallwithindifferentlevelsofthehierarchy,theclassificationisbasedonthelowestlevel input that issignificant tothefairvaluemeasurementof theassetor liability. Classification of assets and liabilities within the hierarchyconsidersthemarketsinwhichtheassetsandliabilitiesaretraded,includ-ingduringperiodsofmarketdisruption,andthereliabilityandtranspar-ency of the assumptions used to determine fair value. The hierarchyrequirestheuseofobservablemarketdatawhenavailable.

TheCompanyusesoutsidepricingservicesand,toalesserextent,brokerstoassistindeterminingfairvalues.Forinvestmentsinactivemar-kets,theCompanyusesthequotedmarketpricesprovidedbytheout-sidepricingservicestodeterminefairvalue.Theoutsidepricingservicesusedby theCompanyhave indicated that theywillonlyprovidepriceswhere observable inputs are available. In circumstances where quotedmarketpricesareunavailable,theCompanyutilizesfairvalueestimatesbaseduponotherobservableinputsincludingmatrixpricing,benchmarkinterestrates,marketcomparablesandotherrelevantinputs.

The Company’s process to validate the market prices obtainedfromtheoutsidepricingsourcesinclude,butarenotlimitedto,periodicevaluationofmodelpricingmethodologiesandanalyticalreviewsofcer-tain prices. The Company also periodically performs back-testing ofselectedsalesactivitytodeterminewhetherthereareanysignificantdif-ferencesbetweenthemarketpriceusedtovaluethesecuritypriortosaleandtheactualsaleprice.

premiums ReceivablePremiums receivable represent amounts due from insureds and rein-suredsforinsurancecoverageandarepresentednetofanallowancefordoubtfulaccountsof$1.3millionand$0.6millionatDecember31,2009and2008,respectively.Theallowanceforuncollectibleamountsisbasedon an analysis of amounts receivable giving consideration to historicallossexperienceandcurrenteconomicconditionsandreflectsanamountthat,inmanagement’sjudgment,isadequate.Uncollectibleagent’spre-miumsreceivableof$0.9million,$0.4million,and$0.2millionwerewrit-tenoffin2009,2008and2007,respectively.

With respect to the business produced by TRM for other issuingcarriers, agents collect premiums from the policyholders and forwardthemtoTRM.Incertainjurisdictions,whentheinsuredpaysapremiumforthesepoliciestoagentsforpaymenttoTRM,thepremiumsarecon-sideredtohavebeenpaidandtheinsuredwillnolongerbeliabletoTRMforthoseamounts,whetherornotTRMhasactuallyreceivedthepremi-umsfromtheagent.Consequently,TRMassumesadegreeofcreditriskassociatedwithagentsandbrokers.TheCompanyrecordednolossesin2009,2008and2007forthisactivity.

Deferred acquisition Costs and Deferred Ceding Commission RevenueAcquisitioncosts represent thecostsofwritingbusiness thatvarywith,andareprimarilyrelatedto,theproductionofinsurancebusiness(princi-pallycommissions,premiumtaxesandcertainunderwritingcosts).Policyacquisitioncostsaredeferredandrecognizedasexpenseasrelatedpre-miumsareearned.Deferredacquisitioncosts(“DAC”)presentedinthebalancesheetarenetofdeferredcedingcommissionrevenue.Thevalueofbusinessacquired(“VOBA”)isanintangibleassetrelatingtotheesti-mated fairvalueof theunexpired insurancepoliciesacquired inabusi-ness combination. VOBA is determined at the time of a businesscombination and is reported on the consolidated balance sheet withDAC and is amortized in proportion to the timing of the estimatedunderwriting profit associated with the in force policies acquired. ThecashfloworinterestcomponentofVOBAisamortizedinproportiontothe expected pattern of future cash flows. The Company considers

anticipatedinvestmentincomeindeterminingtherecoverabilityofthesecostsandbelievestheyarefullyrecoverable.

goodwill and Intangible assetsInbusinesscombinations, includingtheacquisitionofagroupofassets,theCompanyallocatesthepurchasepricetothenettangibleandintan-gibleassetsacquiredbasedon their relative fair values.Anyportionofthepurchasepriceinexcessofthisamountresultsingoodwill.Identifiableintangible assets with a finite useful life are amortized over the periodthattheassetisexpectedtocontributedirectlyorindirectlytothefuturecashflowsoftheCompany. Intangibleassetswithan indefinite lifeandgoodwillarenotamortizedandaresubjecttoannualimpairmenttesting.The Company conducted the required annual goodwill and intangibleasset impairment testing as of September 30 for 2009 whereas it hadperformedthistestingasofDecember31 inprioryears.All identifiableintangible assets and goodwill are tested for recoverability whenevereventsorchangesincircumstancesindicatethatacarryingamountmaynotberecoverable.Noimpairmentlosseswererecognizedin2009,2008and2007.

Fixed assetsFurniture, leasehold improvements,computerequipment,andsoftwareare reported at cost less accumulated depreciation and amortization.Depreciationandamortizationisprovidedusingthestraight-linemethodovertheestimatedusefullivesoftheassets.TheCompanyestimatestheusefullifeforcomputerequipmenttobethreeyears,computersoftware,three to seven years, furniture and other equipment seven years andleaseholdimprovementsisthetermofthelease.

Investment in Unconsolidated affiliateAlthoughtheCompanyowned less than20%of theoutstandingcom-mon stock of CastlePoint Holdings, Ltd. (“CastlePoint”) at December31, 2008, it recorded its investment in CastlePoint under the equitymethodofaccountingasitwasabletosignificantlyinfluencetheoperat-ing and financial policies and decisions of CastlePoint. The Companyacquired100%ofthecommonstockofCastlePointonFebruary5,2009,atwhichtimeitbecameawholly-ownedsubsidiary.

Statutory Business TrustsTheCompanydoesnotconsolidateitsinterestinthestatutorybusinesstrustsforwhichtheCompanyholds100%ofthecommontrustsecuritiesbecause Tower is not the primary beneficiary of the trusts. See“Note 12—Debt” for more details. The Company’s investment in com-mon trust securities of the statutory business trust are reported in bal-ancesheetatequity.TheCompanyreportsasaliabilitytheoutstandingsubordinateddebenturesowedtothestatutorybusinesstrusts.

Income TaxesPursuanttoaTaxSharingAgreement,eachoftheentitiesinthegroupisrequiredtomakepaymentstoTowerforfederalincometaximposedonits taxable income in a manner consistent with filing a separate federalincometax return(but subject tocertain limitations thatareapplied totheTowerconsolidatedgroupasawhole).

Deferredtaxassetsand liabilitiesarerecognizedforthefuturetaxconsequences attributable to differences between the financial state-mentcarryingamountsofexistingassetsandliabilitiesandtheirrespec-tive tax basis and for operating loss and tax credit carryforwards.Deferred taxassetsand liabilitiesaremeasuredusingenactedtax ratesexpectedtoapplytotaxableincomeintheyearsinwhichthosetempo-rarydifferencesareexpectedtoberecoveredorsettled.Theeffectondeferredtaxassetsandliabilitiesofachangeintaxratesisrecognizedinincome in the period that includes the enactment date. Deferred taxassets are reduced by a valuation allowance if it is more likely than notthatallorsomeportionofthedeferredtaxassetwillnotberealized.

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Treasury StockTheCompanyaccountsforthetreasurystockattherepurchasepriceasareductiontostockholders’equityasitdoesnotintendtoretirethetrea-surystockheldatDecember31,2009.

Stock-based CompensationTheCompanyaccountsforrestrictedstocksharesandoptionsawardedatfairvalueatthedateawardedandcompensationexpenseisrecordedover the requisite service period that has not been rendered. TheCompanyamortizesawardswithgradedvestingonastraight-linebasisovertherequisiteserviceperiod.

assessmentsInsurance related assessments are accrued in the period in which theyhavebeenincurred.Atypicalobligatingeventwouldbetheissuanceofaninsurancepolicyorthepaymentofaclaim.TheCompanyissubjecttoavarietyofassessments.Amongsuchassessmentsarestateguarantyfundsaswellasworkers’compensationsecondinjuryfunds.Stateguar-anty fund assessments are used by state insurance oversight boards tocover losses of policyholders of insolvent insurance companies and fortheoperatingexpensesofsuchagencies.TheCompanyusesestimatesderived from state regulators and/or NAIC Tax and AssessmentsGuidelines.

earnings per ShareTheCompanymeasuresearningspershareattwolevels:basicearningspershareanddilutedearningspershare.Basicearningspershareiscal-culatedbydividing income(loss)allocabletocommonstockholdersbytheweightedaveragenumberofcommonsharesoutstandingduringtheyear.Thisweightedaveragenumberofshares includesunvestedshare-basedawardsthatcontainnonforfeitablerightstodividendsordividendequivalents whether paid or unpaid (“participating securities”). Dilutedearnings per share is calculated by dividing income (loss) allocable tocommon stockholders by the weighted average number of commonsharesoutstandingduringtheyear,asadjustedforthepotentiallydilutiveeffectsofstockoptions,warrants,unvestedrestrictedstockand/orpre-ferredstockthatarenotparticipatingsecurities,unlesscommonequiva-lentsharesareantidilutive.

Concentration and Credit RiskFinancial instruments thatpotentially subject theCompany toconcen-trationofcreditriskareprimarilycashandcashequivalents,investmentsand accounts receivable. Investments are diversified through manyindustriesandgeographic regionsthroughtheuseofmoneymanagerswho employ different investment strategies. The Company limits theamountofcreditexposurewithanyonefinancialinstitutionandbelievesthatnosignificantconcentrationofcreditriskexistswithrespecttocashandinvestments.Thepremiumsreceivablebalancesaregenerallydiver-sifiedduetothenumberofentitiescomprisingtheCompany’sdistribu-tion force and its customer base, which is largely concentrated in theNortheast(primarilyNewYork),Florida,TexasandCalifornia.Toreducecreditrisk,theCompanyperformsongoingevaluationsofitsdistributionforce’sandcustomers’financialcondition.TheCompanyalsohasreceiv-ables from its reinsurers. Reinsurance contracts do not relieve theCompany from its obligations to policyholders. Failure of reinsurers tohonor their obligations could result in losses to the Company. TheCompany periodically evaluates the financial condition of its reinsurersand,incertaincases,requirescollateralfromitsreinsurerstominimizeitsexposuretosignificantlossesfromreinsurerinsolvencies.Management’spolicyistoreviewalloutstandingreceivablesatperiodendaswellasthebaddebtwrite-offsexperienced in thepastandestablishanallowancefordoubtfulaccounts,ifdeemednecessary.

One agent accounted for approximately 4%, 7% and 12%, respec-tively, of the Insurance Subsidiaries and TRM’s premiums receivablebalances at December 31, 2009, 2008 and 2007. The same agentaccounted for 10%, 10% and 11% of the Insurance Subsidiaries’ directpremiums written and TRM’s premiums produced in 2009, 2008 and2007, respectively. In addition, SUA has one agent that accounted for12% of the Insurance Subsidiaries and TRM’s premiums receivablebalanceat2009.

The line of business that subjects the Company to concentrationrisk is primarily the commercial multiple-peril line. For the years endedDecember31,2009,2008and2007,33%,42%and42%,respectively,ofgrosspremiumsearnedwereforthecommercialmultiple-perilline.

Statutory accounting principlesTheCompany’sInsuranceSubsidiariesarerequiredtopreparestatutorybasisfinancialstatementsinaccordancewithpracticesprescribedorper-mittedbythestateinwhichtheyaredomiciled.See“Note20—StatutoryFinancialInformationandAccountingPolicies”formoredetails.

aCCountIngpronounCements

accounting guidance adopted in 2009InDecember2007,theFinancialAccountingStandardsBoard(“FASB”)issuedguidanceonbusinesscombinations,whereanacquiringentity isrequiredtorecognizeassetsacquiredandliabilitiesassumedatfairvalue,with very few exceptions. In addition, transaction costs are no longerincluded in the measurement of the cost of the business acquired, butareexpensedasincurred.Thenewguidanceappliestoallbusinesscom-binationsforwhichtheacquisitiondateisonorafterthebeginningofthefirstannualreportingperiodbeginningonorafterDecember15,2008.The Company adopted the guidance on January 1, 2009. SeeNote3—“Acquisitions”foradditionalinformation.

OnJanuary 1, 2009,guidance regarding fair value measurementsforcertainnonfinancialassetsandnonfinancial liabilitiesandassociatedrequired disclosures became effective and the Company applied theguidancetothenonfinancialassetsandnonfinancialliabilitiesmeasuredatfairvalueresultingfromthebusinesscombinationsduring2009.

In April 2008, the FASB issued new guidance in determining theusefullifeofarecognizedintangibleasset.Thepurposeofthisguidanceis to improveconsistencybetween theuseful lifeofan intangibleassetandtheperiodofexpectedcashflowsusedtomeasurethefairvalueoftheasset forpurposesofdeterminingpossible impairments.Thisguid-ancerequiresanentitytodisclose informationrelatedtotheextenttheexpectedfuturecashflowsassociatedwiththeassetareaffectedbytheentity’s intent and/or ability to renew or extend the arrangement.Thisguidanceisrequiredtobeappliedprospectivelytoallnewintangi-ble assets acquired after January 1, 2009. The Company adopted thenew guidance on January 1, 2009, with no material effects on thefinancialstatements.

In June 2008, the FASB issued new guidance related to earningspershare(“EPS”)calculationsandtheparticipatingsecuritiesinthebasicearnings per share calculation under the two-class method. This newguidance requires that unvested share-based awards that contain non-forfeitable rights todividendsordividendequivalents (whetherpaidorunpaid)areparticipatingsecuritiesandshallbeincludedinthecomputa-tionofEPSpursuanttothetwo-classmethod.ThisguidanceiseffectiveforfinancialstatementsissuedforfiscalyearsbeginningafterDecember15, 2008, and interim periods within those years. All prior-period EPSdata presented have been adjusted retrospectively (including interimfinancialstatements,summariesofearnings,andselectedfinancialdata)to conform to the guidance. The Company adopted the guidance onJanuary1,2009,whichdidnothaveamaterialeffectontheCompany’searningspershare.

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InApril 2009, theFASB issuednewguidance tohelpanentity indeterminingwhetheramarketforanassetisnotactiveandwhenapricefor a transaction isnot distressed.The guidance includes the followingtwosteps:• Determine whether there are factors present that indicate that the

marketfortheassetisnotactiveatthemeasurementdate;and• Evaluate the quoted price (i.e., a recent transaction or broker price

quotation) to determine whether the quoted price is not associatedwithadistressedtransaction.

This guidance is effective for interim and annual periods endingafter June 15, 2009, with early adoption permitted for periods endingafter March 15, 2009. The Company adopted the new provisions onJanuary 1, 2009. The adoption did not have a material effect on theCompany’sconsolidatedfinancialconditionandresultsofoperations.

In April 2009, the FASB issued new guidance forOther-Than-Temporary-Impairment(“OTTI”)offixed-maturitysecuri-ties for which management asserts that it does not have the intent tosellthesecurityanditismorelikelythannotthatitwillnotberequiredtosell thesecuritybefore recoveryofcostoramortizedcost.Subsequentto thisguidance,companiesare requiredtoseparateOTTI into(a) theamount representing thecredit loss,whichcontinues tobe recorded inearnings, and (b) the amount related to all other factors, which isrecorded in other comprehensive net income/loss. The new guidancerequired a cumulative-effect adjustment for those securities that wereother-than-temporarily-impairedattheeffectivedate.Thiscumulative-effect adjustment reclassifies the noncredit portion of a previouslyother-than-temporarily-impaired instrument held at the effective date,net of related tax effects, to accumulated other comprehensive netincome/loss from retained earnings. Early adoption was permitted forperiods ending after March 15, 2009. The Company adopted theguidance on January 1, 2009, and was required to make a cumulativeeffect adjustment to the opening balance of retained earnings for thenon-credit portion of the previously recorded other-than-temporarilysecuritiesintheamountof$1.6million,netoftax.

As a result of adopting the guidance, the amounts of net invest-ment income, net realized investment losses from impairment chargesand net income reported for the year ended December 31, 2009 weredifferent than the amounts that would have been reported under thepreviousaccountingguidance.Theguidanceresultedinlessnetrealizedinvestmentlossesfromimpairmentin2009,andaccordingly,anincreasein net income of approximately $13.5 million ($20.7 million pretax) or$0.34pershare,basicanddiluted.

In April 2009, the FASB issued new guidance regarding require-ments for disclosures relating to fair value of financial instruments.ThisguidancespecifiesthatafterreportingperiodsendedJune15,2009,allinterim,aswellasannual,financialstatementsmustcontaintheaddi-tional disclosures regarding fair value of financial instruments.Earlyadoptionwaspermitted forperiodsendingafterMarch15,2009.TheCompanyadoptedthisguidanceonJanuary1,2009.Asthisguid-ancerelatestodisclosureratherthanmeasurementofassetsandliabili-ties, there will be no effect on the financial results or position oftheCompany.

In May2009, theFASB issuednew guidance requiring entities todisclosethedatethroughwhichtheyhaveevaluatedsubsequenteventsand whether the date corresponds with the release of their financialstatements. The Company implemented this guidance as of April 1,2009.Asthisguidancerelatestodisclosureratherthanmeasurementofassets and liabilities, there will be no effect on the financial results orpositionoftheCompany.

InJune2009,theFASBissuedguidanceestablishinganewhierar-chyofgenerallyacceptedaccountingprinciplescalled“FASBAccountingStandards Codification”. The new hierarchy is the new single source ofauthoritativenongovernmentalU.S.generallyacceptedaccountingprin-ciples.ThecodificationreorganizesthethousandsofGAAPpronounce-ments into roughly 90 accounting topics and displays them using aconsistent structure. Also included is relevant Securities and ExchangeCommission guidance organized using the same topical structure inseparatesections.EffectiveforinterimandannualperiodsthatendafterSeptember15,2009,theCompanyimplementedthisguidanceasofJuly1,2009andhasremovedallreferencestopriorauthoritativeliterature.

InAugust2009,theFASBissuednewguidanceconcerningthefairvaluemeasurementofliabilities.Thisnewguidanceprovidesclarificationthatincircumstancesinwhichaquotedpriceinanactivemarketfortheidenticalliabilityisnotavailable,fairvaluecanbemeasuredusingavalu-ationtechniquethatusesthequotedpriceoftheidenticalliabilitywhentraded as an asset (Level 1) or similar liability when traded as an asset(Level2)oranothervaluationtechniquethatisconsistentwiththeprinci-palsoffairvalue.Underthisguidance,acompanyisnotrequiredtomakeanadjustment to reflect theexistenceofa restriction thatprevents thetransferof the liability. This guidance iseffective for the first reportingperiod, including interim periods, beginning after issuance. TheCompanyadopted thisguidanceonOctober 1,2009,withnomaterialeffectonthefinancialstatements.

accounting guidance not yet effectiveInJune2009,theFASBissuednewguidancewhichrequiresmoreinfor-mationabouttransfersoffinancialassets, includingsecuritizationtrans-actions,andwhereentitieshavecontinuingexposuretotherisksrelatedtotransferredfinancialassets.Thisguidanceeliminatestheconceptofa“qualifyingspecial-purposeentity,”changestherequirementsforderec-ognizing financial assets, and requires additional disclosures. The newguidanceenhancesinformationreportedtousersoffinancialstatementsbyprovidinggreatertransparencyabouttransfersoffinancialassetsandan entity’s continuing involvement in transferred financial assets.This guidance will be effective for annual reporting periods beginningon or after January 1, 2010. Early application is not permitted. TheCompanyiscurrentlyanalyzingtheeffectthisguidancemayhaveonitsfinancialstatements.

InJune2009, theFASB issuednewguidancewhichconcerns theconsolidation of variable interest entities and changes how a reportingentitydetermineswhenanentitythatisinsufficientlycapitalizedorisnotcontrolledthroughvoting(orsimilarrights)shouldbeconsolidated.Thedetermination of whether a reporting entity is required to consolidateanother entity is based on, among other things, the other entity’s pur-poseanddesignandthereportingentity’sabilitytodirecttheactivitiesof the other entity that most significantly affect the other entity’s eco-nomicperformance.Thenewguidancewillrequireareportingentitytoprovideadditionaldisclosuresaboutitsinvolvementwithvariableinterestentitiesandanysignificantchangesinriskexposureduetothatinvolve-ment.Areportingentitywillberequiredtodisclosehowitsinvolvementwithavariableinterestentityaffectsthereportingentity’sfinancialstate-ments. This guidance will be effective for annual reporting periodsbeginningonorafterJanuary1,2010.Earlyapplicationisnotpermitted.TheCompany iscurrentlyanalyzingtheeffect thisguidancemayhaveonitsfinancialstatements.

InJanuary2010,theFASBissuednewguidancethatrequiresaddi-tionaldisclosureof the fair valueofassetsand liabilities.Thisguidancecalls foradditionaldisclosures tobemadeabout significant transfers inandoutofLevels1and2ofthefairvaluehierarchywithinGAAP.Thisrequirement will be effective for annual and interim periods beginningafterDecember15,2009.Thisguidancealsocalls foradditionaldisclo-sure about the gross activity within Level 3 of the fair value hierarchywithin GAAP as opposed to the net disclosure currently required.

page F-13

Thisdisclosurewillbeeffectiveforannualandinterimperiodsbeginningafter December 15, 2010. As this guidance relates to disclosure ratherthanmeasurementofassetsandliabilities,therewillbenoeffectonthefinancialresultsorpositionoftheCompany.TheCompanywillcomplywiththedisclosurerequirementsastheybecomeeffective.

note3—aCquIsItIons

acquisition of Specialty Underwriters’ alliance, Inc.On November 13, 2009, the Company completed the acquisition of100% of the issued and outstanding common stock of SpecialtyUnderwriters’ Alliance, Inc. (“SUA”), a specialty property and casualtyinsurancecompanyfor$106.7million.

The acquisition was accounted for using the purchase method inaccordancewithGAAPguidanceonbusinesscombinationseffectivein2009.Thepurchaseconsiderationconsistsprimarilyof4,460,092sharesofTowercommonstockwithanaggregatevalueof$105.9millionissuedtoSUAshareholdersataratioof0.28sharesofTowercommonstockforeach share of SUAcommon stock.Additionally, $0.7 million related tothe replacement of SUA employee stock options with Tower commonstockoptionswasincludedinthepurchaseconsideration.TheCompanyissued 201,058 employee stock options to replace the SUA employeestock options as of the acquisition date and 92,276 shares for deferredrestrictedstockawards.

The following table presents the fair value of assets acquired andliabilities assumed with the acquisition of SUA and the fair valuehierarchylevelunderGAAPasofNovember13,2009:

($inthousands) Level1 Level2 Level3 Total

assetsInvestments $� 4,734 $241,515 $� — $�246,249Cashandcashequivalents 54,377 — — 54,377Receivables — — 62,039 62,039Prepaidreinsurancepremiums — — 1,930 1,930Reinsurancerecoverable — — 73,888 73,888Deferredacquisition costs/VOBA — — 17,149 17,149Deferredincometaxes — — 11,450 11,450Intangibles — — 11,930 11,930Otherassets — — 21,133 21,133Liabilities and Stockholders’ equityLossandloss adjustmentexpenses — — (252,905) (252,905)Unearnedpremium — — (98,577) (98,577)Otherliabilities — — (28,814) (28,814)

Netassetsacquired 119,849

Totalpurchaseconsideration 106,663

Gainonbargainpurchase $� (13,186)

TheCompanybeganconsolidatingthefinancialresultsofSUAasofthedateofacquisition.Asthefairvalueofnetassetsacquiredwasinexcessofthetotalpurchaseconsideration,thegainonbargainpurchaseof $13.2 million shown in the schedule above has been recognized inotherincome.Theassetsandliabilitieswereadjustedtofairvalueasofthe acquisition date, and as a part of these adjustments the nominalvalueofthelossandlossadjustmentexpensereserveswasincreasedby$25.7million.Thevaluationmodelthenusedanestimateofnetnominalfuture cash flows related to the loss and loss adjustment expensereserveswhichwereadjustedforthetimevalueofmoneyatariskfreerateandariskmargintocompensateTowerforbearingtheriskassoci-atedwiththeliabilities.Theadjustmentforthetimevalueofmoneyanda riskmarginamounted to$1.9million.The total fairvalueadjustmentimpacting loss and loss adjustment expense reserves totaled $27.6million. This adjustment is based upon our actuaries’ best estimate of

SUA’s reserves using loss reserving techniques consistent with thoseutilizedbyTowerforlinesofbusinessthathaverelativelylongreportingand settlement claims patterns. The Company incurred approximately$2.3millionoftransactioncosts, includinglegal,accounting, investmentadvisory and other costs directly related to the acquisition which wereexpensedin2009.

acquisition of the Renewal Rights of aequiCapOn October 14, 2009, the Company completed the acquisition of therenewal rights to the workers’ compensation business of AequiCapProgram Administrators Inc. (“AequiCap”), an underwriting agencybasedinFortLauderdale,Florida.Theacquiredbusinessprimarilycon-sistsofsmall, lowtomoderatehazardworkers’compensationpolicies inFlorida.MostoftheemployeesofAequiCapinvolvedintheservicingoftheworkers’compensationbusinessbecameemployeesoftheCompany.The acquisition of this business strengthens the Company’s regionalpresenceintheSoutheast.

The acquisition was accounted for using the purchase method inaccordancewithrecentlyissuedGAAPguidanceonbusinesscombina-tions. Under the terms of the Agreement, the Company acquiredAequiCapfor$5.5millionincash.Thedistributionnetworkwastheonlyidentifiableintangibleassetacquired.Thefairvalueofthisassetwas$5.3millionandthefairvalueofmiscellaneousassetsacquiredwas$0.1mil-lionresultingin$0.1millionofgoodwill.

acquisition of Castlepoint Holdings, Ltd.OnFebruary5,2009,theCompanycompletedtheacquisitionof100%oftheissuedandoutstandingcommonstockofCastlePoint,aBermudaexemptedcorporation.Theacquisitionwasaccountedforusingthepur-chasemethod inaccordancewithGAAPguidanceonbusinesscombi-nationseffectivein2009.TheCompanyacquiredCastlePointfor$491.4millionconsistingof 16,869,572 sharesofTowercommonstockwithanaggregatevalueof$421.7million,$4.4millionrelatedtothefairvalueofunexercised warrants, and $65.3 million of cash. The Company issued1,148,308employeestockoptions to replacetheCastlePointemployeeand director stock options as of the acquisition date. The value oftheCompany’sstockoptionsattributedtotheservicesrenderedbytheCastlePointemployeesasoftheacquisitiondatetotaled$9.1millionandis included in the purchase consideration. Also, the fair value ofthe CastlePoint acquisition included the fair value of the Company’spreviouslyheldinterestinCastlePointandispresentedasfollows:

($inthousands)

Purchaseconsideration $�491,366FairvalueofoutstandingCastlePointstockoptions 9,138

Totalpurchaseconsideration 500,504FairvalueofpreviouslyheldinvestmentinCastlePoint 34,673

FairvalueofCastlePointatacquisition $�535,177

CastlePointwasaBermudaholdingcompanyorganizedtoprovideproperty and casualty insurance and reinsurance business solutions,products and services primarily to small insurance companies and pro-gramunderwritingmanagersintheUnitedStates.Programunderwritingmanagersareinsuranceintermediariesthataggregateinsurancebusinessfromretailandwholesaleagentsandmanagebusinessonbehalfofinsur-ancecompanies.Theirfunctionsmayincludesomeorallofriskselection,underwriting,premiumcollection,policyformanddesign,andclientser-vice.Asaresultofthistransaction,theCompanyexpectstoexpandanddiversify itssourceofrevenuebyaccessingCastlePoint’sprograms,risksharingandreinsurancebusinesses.

page F-14

The Company began consolidating CastlePoint’s financial state-mentsasoftheclosingdate.Thepurchaseconsiderationhasbeenallo-catedtotheassetsacquiredandliabilitiesassumed,includingseparatelyidentified intangibleassets,basedon their fairvaluesasof thecloseofthe acquisition, with the amounts exceeding the fair value recorded asgoodwill.Thegoodwillconsists largelyof thesynergiesandeconomiesofscaleexpectedfromcombiningtheoperationsof theCompanyandCastlePoint.

Thefollowingpresentsassetsacquiredandliabilitiesassumedwiththe acquisition of CastlePoint, based on their fair values and the fairvaluehierarchylevelunderGAAPasofFebruary5,2009:


assetsInvestments $� 868 $484,937 $� 229 $�486,034Cashandcashequivalents 307,632 — — 307,632Receivables — — 211,464 211,464Prepaidreinsurancepremiums — — 23,424 23,424Reinsurancerecoverable — — 8,249 8,249Deferredacquisition costs/VOBA — — 68,231 68,231Deferredincometaxes — — 21,373 21,373Intangibles — — 9,100 9,100Otherassets — — 7,448 7,448Liabilities and Stockholders’ equityLossandlossadjustment expenses — — (291,076) (291,076)Unearnedpremium — — (242,365) (242,365)Otherliabilities — — (130,623) (130,623)Subordinateddebt — — (134,022) (134,022)


Purchaseconsideration 535,177

Goodwill $�190,308

In connection with recording the acquisition, the Company reval-ueditspreviousinvestmentinCastlePointatfairvalueontheacquisitiondate,resultinginagainof$7.4million,beforeincometaxes.ThisgainwasincludedintheConsolidatedStatementsofIncomeinthefirstquarterof2009.TheCompanyincurredapproximately$11.4millionoftransactioncosts, including legal, accounting, investment advisory and other costsdirectlyrelatedtotheacquisition,whichwereexpensedinthefirstquar-terof2009.

acquisition of HermitageOn February 27, 2009, the Company completed the acquisition ofHermitage,apropertyandcasualty insuranceholdingcompany,fromasubsidiary of Brookfield Asset Management Inc. for $130.1 million.Hermitage offers both admitted and Excess & Surplus (“E&S”) linesproducts. This transaction further expanded the Company’s wholesaledistributionsystemnationallyandestablishesanetworkofretailagentsintheSoutheast.

TheCompanybeganconsolidatingtheHermitagefinancialstate-ments as of the closing date. The purchase consideration has beenallocatedtotheassetsacquiredand liabilitiesassumed, includingsepa-rately identified intangible assets, based on their fair values as of theclose of the acquisition, with the amounts exceeding the fair valuerecordedasgoodwill.Thegoodwillconsistslargelyofthesynergiesandeconomies of scale expected from combining the operations of theCompanyandHermitage.

ThefollowingtablepresentsassetsacquiredandliabilitiesassumedwiththeacquisitionofHermitage,basedontheirfairvaluesandthefairvaluehierarchylevelunderGAAPasofFebruary27,2009:


assetsInvestments $� 151 $101,296 $� — $�101,447Cashandcashequivalents 88,167 — — 88,167Receivables — — 11,761 11,761Prepaidreinsurancepremiums — — 7,329 7,329Reinsurancerecoverable — — 15,390 15,390Deferredacquisition costs/VOBA — — 11,319 11,319Deferredincometaxes — — 6,423 6,423Intangibles — — 10,830 10,830Otherassets — — 2,077 2,077Liabilities and Stockholders’ equityLossandlossadjustment expenses — — (101,297) (101,297)Unearnedpremium — — (45,485) (45,485)Otherliabilities — — (13,166) (13,166)


Purchaseconsideration 130,115

Goodwill $� 35,320

The Company recorded goodwill from the acquisitions ofCastlePoint,HermitageandAequiCapintheamountof$190.3million,$35.3 million and $0.1 million, respectively. The acquisition of SUAresulted in negative goodwill which was recorded as a gain on bargainpurchaseintheincomestatementin2009.TheCompanyestimatedthat$17.0millionofgoodwillrelatedtotheHermitageacquisitionisdeduct-ible for tax purposes. The Company has determined that none of thegoodwillrelatedtotheCastlePointacquisitionmaybedeductiblefortaxpurposes.See“Note6—GoodwillandIntangibleAssets”forthealloca-tionofgoodwilltosegmentsasrequiredbyGAAP.

page F-15

acquired Companies Contribution to Revenue and IncomeFor the period covering their respective acquisition dates through yearended December 31, 2009, the Company included total revenues andnet income for the companies acquired in 2009 in its ConsolidatedStatementsofIncomeasfollows: YearEndedDecember31,2009

($inthousands) CastlePoint Hermitage SUA

TotalRevenue $410,631 $68,629 $30,275NetIncome 52,409 10,346 1,606

Theamounts inthetableabove includerevenuesandnet incomeforCastlePoint,HermitageandSUAbasedoneachcompany’snetpre-miumsearnedpriortopooling.RevenuesandnetincomeforCastlePointReincludetheassumedbusiness,onaquotasharebasis,fromtheTowerinsurancesubsidiaries.Netlossesincurredandnetunderwritingexpensesincurredarebasedontherelatednet ratioof thepool.Net investmentincomerepresentsactualnetinvestmentincomeearned.

sIgnIFICantFaCtorsaFFeCtIngaCquIsItIon dateFaIrvalues

Value of Business acquired (“VOBa”)Fairvalueisdefinedasthepricethatwouldbereceivedtosellanassetorpaidtotransfera liability inanorderlytransactionbetweenmarketpar-ticipantsatthemeasurementdate.Thevaluationfortheinsurancepoli-ciesthatwereinforceontheacquisitiondateswasdeterminedbyusingacashflowmodelratherthananobservablemarketpriceasaliquidmar-ketforvaluingtheinforcebusinesscouldnotbedetermined.Thevalua-tion model used an estimate of the underwriting profit and the netnominal future cash flows associated with the in force policies that amarket participant would expect as of the dates of the acquisitions.Theestimatedunderwritingprofitandthefuturecashflowswereadjustedforthetimevalueofmoneyatariskfreerateandariskmargintocom-pensateanacquirerforbearingtheriskassociatedwiththeinforcebusi-ness.Anestimateoftheexpectedlevelofpolicycancellationsthatwouldoccuraftertheacquisitiondateswasalsoincluded,whereapplicable.

TheunderwritingprofitcomponentoftheVOBAwillbeamortizedinproportion to the timingof theestimatedunderwritingprofitassoci-atedwiththeinforcepoliciesacquired.Thecashfloworinterestcompo-nentoftheVOBAassetwillbeamortizedinproportiontotheexpectedpatternofthefuturecashflows.Theamortizationwillbereflectedasacomponent of underwriting expenses in both the brokerage insuranceandspecialtybusinesssegments.VOBAisdeterminedatthetimeofabusinesscombinationandisreportedontheconsolidatedbalancesheetwithDAC.

At the acquisition dates of CastlePoint, Hermitage and SUA,VOBAwas$96.7million,andtheCompanyamortized$80.9millionfortheyearendedDecember31,2009withtheremaindertobeamortizedin2010.

IntangiblesThefairvalueofintangibleassetsrepresentsacquiredcustomerrelation-ships,insurancelicensesandtrademarks.Thefairvalueofcustomerrela-tionshipsandtrademarkswasestimatedbaseduponanincomeapproachmethodology. The fair value of insurance licenses was based upon amarketapproachmethodology.Critical inputs intothevaluationmodelfor customer relationships included estimations of expected premiumandattritionrates,expectedoperatingmarginsandcapitalrequirements.

Loss and Loss adjustment expense Reserves acquiredThevaluationoflossandlossadjustmentexpensereservesacquiredwasdetermined using a cash flow model rather than an observable marketprice sincea liquidmarket for suchunderwriting liabilities couldnotbedetermined.Thevaluationmodelusedanestimateofnetnominalfuturecashflowsrelatedto liabilitiesfor lossesandLAEthatamarketpartici-pantwouldexpectasofthedateoftheacquisitions.Thesefuturecashflowswereadjustedforthetimevalueofmoneyatariskfreerateandariskmargintocompensateanacquirerforbearingtheriskassociatedwiththeliabilities.

The fairvalueadjustment for lossandLAEof$19.1millionwillbeamortizedovertheexpectedlossandLAEpayoutpatternandreflectedas a component of loss and loss adjustment expenses. The Companyamortized$5.0million for theyearendedDecember31,2009with theremaindertobeamortizedoverthenextthreetofouryears.

Non-financial assets and LiabilitiesReceivables, other assets and liabilities were valued at fair value whichapproximatedcarryingvalue.

proFormaresultsoFoper atIons

Selected unaudited pro forma results of operations assuming theCastlePoint,Hermitage,AequiCapandSUAacquisitionshadoccurredasofJanuary1,2008,aresetforthbelow:


(inthousands,exceptpershareamounts) 2009 2008

Totalrevenue $1,164,716 $1,056,654Netincome(1) 93,501 74,348Netincomepershare—basic $2.29 $1.85Netincomepershare—diluted $2.27 $1.85

WeightedaveragecommonsharesoutstandingBasic 40,891 40,095Diluted 41,108 40,289

(1) TheCompanyexcludedcertainone-timechargesfromtheproformaresultsfortheyearendedDecember31,2009and2008including,(i)transactioncostsof$14.1million,and$9.4million,respectivelyrelatedtotheacquisitionsofCastlePoint,HermitageandSUA,(ii) CastlePoint’s severance expenses of $2.0 million for the year ended December 31,2009, (iii) Tower’s gain of $7.4 million related to the acquisition of CastlePoint for theyearendedDecember31,2009and(iv)Tower’sgainonbargainpurchaseof$13.2millionrelatedtotheacquisitionofSUAfortheyearendedDecember31,2009.

page F-16

note4—InvestmentsThecostoramortizedcostandfairvalueofinvestmentsinfixed-maturitysecurities,equitiesandshort-terminvestmentsandgrossunrealizedgains,lossesandother-than-temporaryimpairmentlossesasofDecember31,2009and2008aresummarizedasfollows:

GrossUnrealizedLosses

($inthousands)

CostorAmortized

Cost

GrossUnrealized

Gains

Lessthan12Months

Morethan

12MonthsFair

Value

UnrealizedOTTI

Losses(1)

December 31, 2009U.S.Treasurysecurities $� 73,281 $� �235 $� �(225) $� � �— $� 73,291 $� � �—U.S.Agencysecurities 40,063 134 (214) — 39,983 —Municipalbonds 508,204 18,241 (587) (143) 525,715 —Corporateandotherbonds Finance 174,971 11,150 (291) (1,099) 184,731 — Industrial 371,848 13,225 (726) (608) 383,739 — Utilities 43,154 3,559 (37) (25) 46,651 —Commercialmortgage-backedsecurities 195,580 16,603 (598) (8,138) 203,447 (7,713)Residentialmortgage-backedsecurities Agencybackedsecurities 283,403 6,245 (963) — 288,685 — Non-agencybackedsecurities 27,597 2,772 (14) (2,910) 27,445 (1,948)Asset-backedsecurities 11,016 214 (116) (1,205) 9,909 (1,301)

Totalfixed-maturitysecurities 1,729,117 72,378 (3,771) (14,128) 1,783,596 (10,962)Preferredstocks,principallyfinancialsector 77,536 919 (1,441) (724) 76,290 —Commonstocks 515 78 (150) — 443 —Short-terminvestments 36,500 — — — 36,500 —

Total $�1,843,668 $73,375 $�(5,362) $(14,852) $�1,896,829 $(10,962)

December31,2008U.S.Treasurysecurities $� 26,482 $� � 524 $� � ��— $� � ��— $� 27,006U.S.Agencysecurities 361 38 — — 399Municipalbonds 179,734 2,865 (2,485) (166) 179,948Corporateandotherbonds Finance 84,579 458 (6,003) (4,173) 74,860 Industrial 122,599 475 (7,740) (5,639) 109,695 Utilities 2,829 — (205) (204) 2,420Commercialmortgage-backedsecurities 52,558 3 (4,399) (16,626) 31,535Residentialmortgage-backedsecurities Agencybackedsecurities 70,416 1,799 (16) (20) 72,179 Non-agencybackedsecurities 31,441 4 (3,536) (3,594) 24,315Asset-backedsecurities 10,471 32 (2,652) (49) 7,802

Totalfixed-maturitysecurities 581,470 6,198 (27,036) (30,471) 530,159Preferredstocks,principallyfinancialsector 5,551 — — (1,857) 3,694Commonstocks 7,175 5 (60) — 7,120

Total $� 594,196 $� �6,203 $(27,096) $�(32,328) $� 540,973

(1) Representsthegrossunrealizedlossonother-than-temporarilyimpairedsecuritiesasofDecember31,2009recognizedinaccumulatedothercomprehensiveincome(loss).

At December 31, 2009 and 2008, U.S. Treasury Notes and othersecurities with carrying values of approximately $113.1 million and $21.7million,respectively,wereondepositwithvariousstatestocomplywiththeinsurancelawsofthestatesinwhichtheCompanyislicensed.

Major categories of the Company’s net investment income aresummarizedasfollows:


($inthousands) 2009 2008 2007

Income Fixed-maturitysecurities $�72,619 $�31,791 $�28,279 Equitysecurities 3,600 730 4,332 Cashandcashequivalents 1,103 2,897 4,974 Dividendsoncommontrustsecurities 559 244 215

Total 77,881 35,662 37,800Expenses Investmentexpenses 3,015 1,094 1,101

Netinvestmentincome $�74,866 $�34,568 $�36,699

Proceeds from the sale and maturity of fixed-maturity securitieswere$936.6million,$356.0millionand$199.6millionin2009,2008and2007, respectively. Proceeds from the sale of equity securities were$50.6 million, $6.5 million and $24.8 million in 2009, 2008 and2007,respectively.

page F-17

TheCompany’sgrossrealizedgains, lossesand impairmentwrite-downsoninvestmentsaresummarizedasfollows:


($inthousands) 2009 2008 2007

Fixed-maturitysecurities Grossrealizedgains $�25,131 $� 7,322 $� 3,189 Grossrealizedlosses (574) (918) (599)

24,557 6,404 2,590Equitysecurities Grossrealizedgains 528 1,968 1,324 Grossrealizedlosses (96) (75) (11,331)

432 1,893 (10,007)

Netrealizedgains(losses)oninvestments 24,989 8,297 (7,417)

Other-than-temporaryimpairment lossesrecognizedinearnings Fixed-maturitysecurities (23,488) (20,215) (4,879) EquitySecurities — (2,436) (5,215)

Totalother-than-temporary impairmentlosses (23,488) (22,651) (10,094)

Totalnetrealizedgains(losses), includingother-than-temporary impairmentlosses $� 1,501 $�(14,354) $�(17,511)

TheCompanymay disposeofaparticular securitydue to signifi-cantchangesineconomicfactsandcircumstancesrelatedtoaninvestedassetthathavearisensincetheCompany’slastanalysisofthefactssup-portingtheCompany’sintentandabilitytoretaintheinvestmentinthesecurity foraperiodof timesufficient to recover theamortizedcostorcostbasisasofthepriorreportingperiod.

Impairment ReviewThe Company regularly reviews its fixed-maturity and equity securityportfolios to evaluate the necessity of recording impairment losses forother-than-temporarydeclinesinthefairvalueofinvestments.Inevalu-atingpotential impairment,managementconsiders,amongothercrite-ria:(i)theoverallfinancialconditionoftheissuer,(ii)thecurrentfairvaluecompared to amortized cost or cost, as appropriate; (iii) the length oftimethesecurity’sfairvaluehasbeenbelowamortizedcostorcost;(iv)specificcreditissuesrelatedtotheissuersuchaschangesincreditrating,reduction or elimination of dividends or non-payment of scheduledinterestpayments;(v)whethermanagement intendstosell thesecurityand,ifnot,whetheritisnotmorelikelythannotthattheCompanywillberequiredtosell thesecuritybefore recoveryof itsamortizedcostbasis;(vi) specific cash flow estimations for certain mortgage-backed andasset-backed securities and (vii) current economic conditions. If another-than-temporaryimpairmentlossisdeterminedforafixed-maturitysecurity and management does not intend to sell and it is more likelythannotthatitwillnotberequiredtosellthesecuritybeforerecoveryofcostoramortizedcost,thecreditportionisincludedinthestatementofincomeinnetrealizedinvestmentgains(losses)andthenon-creditpor-tionisincludedincomprehensivenetincome.Thecreditportionresultsinapermanentreductionofthecostbasisoftheunderlyinginvestment.ThedeterminationofOTTI is a subjectiveprocessanddifferent judg-mentsandassumptionscouldaffectthetimingoflossrealization.

The Company’s commercial mortgage-backed securities(“CMBS”), non-agency residential mortgage-backed securities(“RMBS”) and corporate bonds represent our largest unrealized losspositionsasofDecember31,2009.

For certain non-highly rated structured fixed-maturity securities,the Company determines the credit loss component by utilizingdiscounted cash flow modeling to determine the present value of thesecurity and comparing the present value with the amortized cost of

thesecurity.Iftheamortizedcostisgreaterthanthepresentvalueoftheexpected cash flows, the difference is considered a credit loss andincluded in net realized investment gains (losses). During the yearended December 31, 2009 the Company recorded $23.5 million ofcredit related OTTI primarily related to commercial and non-agencyresidentialmortgage-backedsecurities.

Forcertainnon-structuredfixed-maturitysecurities(U.S.Treasurysecurities, obligations of U.S. Government and government agenciesandauthorities,obligationsofstates,municipalitiesandpoliticalsubdivi-sions,debtsecuritiesissuedbyforeigngovernments,andcertaincorpo-rate debt), the estimate of expected cash flows is determined byprojecting a recovery value and a recovery time frame and assessingwhetherfurtherprincipalandinterestwillbereceived.Thedeterminationof recovery value incorporates an issuer valuation assumption utilizingone or a combination of valuation methods as deemed appropriate bythe Company. The present value of the cash flows is determined byapplyingtheeffectiveyieldofthesecurityatthedateofacquisition(orthemost recent implied rateused toaccrete thesecurity if the impliedratehaschangedasaresultofapreviousimpairment)andanestimatedrecoverytimeframe.Generally, thattimeframeforsecurities forwhichtheissuerisinbankruptcyis12months.Forsecuritiesforwhichtheissuerisfinanciallytroubledbutnotinbankruptcy,thattimeframeisgenerallylonger. Included in thepresentvaluecalculationareexpectedprincipalandinterestpayments;however,forsecuritiesforwhichtheissuerisclas-sifiedasbankruptorindefault,thepresentvaluecalculationassumesnointerestpaymentsandasinglerecoveryamount.Insituationsforwhichapresent value of cash flows cannot be estimated, a write down to fairvalueisrecorded.

Inestimatingtherecoveryvalue,significantjudgmentisinvolvedinthedevelopmentofassumptionsrelatingtoamyriadoffactorsrelatedtotheissuerincluding,butnotlimitedto,revenue,marginandearningspro-jections, the likelymarketor liquidationvaluesofassets,potentialaddi-tional debt to be incurred pre- or post- bankruptcy/restructuring, theabilitytoshiftexistingornewdebttodifferentprioritylayers,theamountofrestructuring/bankruptcyexpenses,thesizeandpriorityofunfundedpensionobligations, litigationorothercontingentclaims, thetreatmentof intercompany claims and the likely outcome with respect to inter-creditorconflicts.

Thenon-agencyRMBSholdingsincludesecuritieswithunderlyingprime mortgages. Sub-prime and Alt-A mortgages are included inAgency-backedSecurities.TheCompanyanalyzescertainofitsRMBSonaquarterlybasisusingdefaultlossmodelsbasedontheperformanceof the underlying loans. Performance metrics include delinquencies,defaults, foreclosures, prepayment speeds and cumulative lossesincurred.Theexpectedlossesforamortgagepoolarecomparedtothebreak-even loss, which represents the point at which the Company’stranchebeginstoexperiencelosses.Thetimingofprojectedcashflowsonthesesecuritieshaschangedaseconomicconditionshavepreventedthe underlying borrowers from refinancing the mortgages underlyingthesesecurities,therebyreducingtheamountofprojectedprepayments.Additionally, for certain of the non-agency RMBS holdings, the esti-matedcashflowshavecontinuedtodeclinethroughouttheyear.Thisisprimarilyattributabletothecontinueddeclineinhomepricesduringthefirsthalfoftheyear,butwhichseemstohavestabilizedduringthesec-ondhalfof2009.Additionally,unemploymenthassteadilyrisenthrough-out 2009 from 7.4% at December 2008 to 10.0% at December 2009.Thesearecritical factors impactingfutureprojected losses.Asaresult,the default and loss severity estimates have increased based on thesehome price change estimates and the increase in unemployment. Seethe table below for a summary of OTTI losses recorded in 2009. TheOTTIchargesarerecognizedandrecordedintheperiodwhenthereareadversechangesinprojectedcashflows,whichtheCompanytestsonaquarterlybasis.

page F-18

The Company’s CMBS are also evaluated on a quarterly basisusing analytical techniques and various metrics including the level ofsubordination,debt-service-coverage ratios, loan-to-value ratios,delin-quencies,defaultsandforeclosures.Forcertainof theCMBSholdings,theestimatedcashflowshavecontinuedtodeclinethroughouttheyear,similartoRMBS.Theprimarydriverofthisdeclinehasbeenanincreaseofdelinquenciesfrom1.5%atDecember31,2008to5.3%bythefourthquarter of 2009. Additionally, the weak economy is causing highervacancies, negatively impacting income to support debt payments.Furthermore, a lack of financing in the CMBS market and a decline inrealestatevaluesisresultinginhigherlongertermprojectedlossesduetotheincreaseinrefinancingriskofcommercial loansupontheballoondates. See the table below for a summary of OTTI losses recorded in2009. The OTTI charges are recognized and recorded in the periodwhen there are adverse changes in projected cash flows, which theCompanytestsonaquarterlybasis.

The following table shows the number and amount of fixed-maturityandequitysecuritiesthattheCompanydeterminedwereOTTIfortheyearsendedDecember31,2009,2008and2007.Thisresultedinrecording impairment write-downs included in net realized investmentgains (losses), and reduced the unrealized loss in other comprehensivenetincome:� YearEndedDecember31,

� 2009 2008 2007

($inthousands) No. amount No. Amount No. Amount

Corporateand otherbonds � 14 $� (1,851) 3 $� (3,276) 2 $� (457)Commercialmortgage- backedsecurities � 50 (25,229) 1 (338) — —Residentialmortgage- backedsecurities � 75 (12,479) 17 (14,107) 22 (4,422)Asset-backedsecurities � 30 (4,651) 3 (2,494) —Equities � — — 7 (2,436) 7 (5,215)

� 169 (44,210) 31 (22,651) 31 (10,094)Portionoflossrecognized inother comprehensivenet income,principally residential mortgage-backed securities � 20,722 — —

Impairmentlosses recognizedinearnings � $�(23,488) $�(22,651) $�(10,094)

The�following�table�provides�a�rollforward�of�the�cumulative�pre-tax�amount�of�OTTI�showing�the�amounts�that�have�been�included�in�earnings�for�securities�still�held�for�the�year�ended�December�31,�2009:

($inthousands)

Balance,January1,2009 $�24,638 Cumulativeeffectofadjustmentuponadoptionof 2009GAAPguidanceonOTTI (2,497) NoOTTIhasbeenpreviouslyrecognized 16,076 OTTIhasbeenpreviouslyrecognized 7,412 Securitiessoldduringtheperiod(realized) (4,895)

Balance,December31,2009 $�40,734

Unrealized LossesThereare525investmentpositionsatDecember31,2009thataccountforthegrossunrealizedloss,noneofwhichisdeemedbytheCompanyto be OTTI. Temporary losses on investments resulted primarily frompurchasesmadeinalowerinterestrateenvironmentorloweryieldspreadenvironmentasopposedtomarketilliquidityandmarketdislocationthatexistedduring2008.Therehavebeensomeratingsdowngradeswithinthecorporatesectorduetotheweak,butimproving,economicenviron-ment.However,afteranalyzingthecreditquality,balancesheetstrengthandcompanyoutlook,managementbelievesthesesecuritieswillrecoverin value as liquidity and the economy continue to improve. The struc-turedsecuritiesthathadsignificantunrealizedlossesresultedfromcon-tinuing declines in both residential and commercial real estate prices.However, declines in home and commercial property prices have notadverselyaffectedprojectedcashflowsonthesesecurities.Totheextentprojected cash flows on structured securities change adversely, theywouldbeconsideredOTTIandanimpairmentlosswouldberecognized.TheCompanyconsideredallrelevantfactors,includingexpectedrecov-erabilityofcashflows,inassessingwhetherthelosswasotherthantem-porary. The Company does not intend to sell these fixed maturitysecuritiesanditisnotmorelikelythannotthatwewillberequiredtosellthesesecuritiesbeforerecoveringtheircostbasis.

ForallsecuritiesinanunrealizedlosspositionatDecember31,2009,theCompanyhasreceivedallcontractualinterestpayments(andprinci-pal if applicable).Basedon thecontinuing receiptof cash flowand theforegoinganalyses,theCompanyexpectscontinuedtimelypaymentsofprincipalandinterestandconsidersthelossestobetemporary.

page F-19

ThefollowingtablepresentsinformationregardingtheCompany’sinvestedassetsthatwereinanunrealizedlosspositionatDecember31,2009andDecember31,2008byamountoftimeinacontinuousunrealizedlossposition:



ValueUnrealized

Losses No.Fair

ValueUnrealized

Losses No.AggregateFairValue

UnrealizedLosses

December 31, 2009U.S.Treasurysecurities 24 $� 43,421 $�� (225) — $� — $� � �— 24 $�� 43,421 $� ��(225)U.S.Agencysecurities 21 27,652 (214) — — — 21 27,652 (214)Municipalbonds 42 50,526 (587) 5 2,569 (143) 47 53,095 (730)Corporateandotherbonds Finance 32 28,342 (291) 20 14,906 (1,099) 52 43,248 (1,390) Industrial 104 69,475 (726) 25 14,563 (608) 129 84,038 (1,334) Utilities 6 3,575 (37) 2 625 (25) 8 4,200 (62)Commercialmortgage-backedsecurities 20 25,810 (598) 27 22,904 (8,138) 47 48,714 (8,736)Residentialmortgage-backedsecurities Agency-backed 43 79,005 (963) — — — 43 79,005 (963) Non-agency-backed 4 1,081 (14) 37 19,672 (2,910) 41 20,753 (2,924)Asset-backedsecurities 5 334 (116) 11 2,962 (1,205) 16 3,296 (1,321)

Totalfixed-maturitysecurities 301 329,221 (3,771) 127 78,201 (14,128) 428 407,422 (17,899)Preferredstocks 87 59,243 (1,441) 6 4,827 (724) 93 64,070 (2,165)Commonstocks 4 31 (150) — — — 4 31 (150)

Total 392 $388,495 $�(5,362) 133 $�83,028 $(14,852) 525 $471,523 $(20,214)

December31,2008Municipalbonds 53 $� 49,879 $��(2,485) 1 $� 371 $� ��(166) 54 $� �50,250 $� �(2,651)Corporateandotherbonds Finance 55 42,007 (6,003) 38 20,575 (4,173) 93 62,582 (10,176) Industrial 110 72,787 (7,740) 32 17,701 (5,639) 142 90,488 (13,379) Utilities 5 1,974 (205) 2 446 (204) 7 2,420 (409)Commercialmortgage-backedsecurities 15 13,997 (4,399) 22 16,430 (16,626) 37 30,427 (21,026)Residentialmortgage-backedsecurities Agency-backed 6 3,408 (16) 1 582 (20) 7 3,990 (36) Non-agency-backed 32 12,676 (3,536) 16 9,953 (3,594) 48 22,629 (7,130)Asset-backedsecurities 20 6,481 (2,652) 2 551 (49) 22 7,032 (2,701)

Totalfixed-maturitysecurities 296 203,209 (27,036) 114 66,609 (30,471) 410 269,818 (57,508)Preferredstocks — — — 6 3,694 (1,857) 6 3,694 (1,857)Commonstocks 1 1,440 (60) — — — 1 1,440 (60)

Total 297 $�204,649 $(27,096) 120 $70,303 $�(32,328) 417 $�274,952 $�(59,425)

Theunrealizedpositionassociatedwiththefixed-maturityportfolioincluded$17.9millioninunrealizedlosses,consistingprimarilyofasset-backedandmortgage-backedsecuritiesrepresenting69%andcorporatebondsrepresenting14%oftheunrealizedloss.Thefixed-maturityportfoliounrealizedlossesincluded428securitieswhichwere,inaggregate,approximately4.0%belowamortizedcost.Ofthe428investments,127havebeeninanunreal-izedlosspositionformorethan12months.ThetotalunrealizedlossontheseinvestmentsatDecember31,2009was$14.1million.TheCompanydoesnotconsidertheseinvestmentstobeother-than-temporarilyimpaired.

TheunrealizedlossesontheCompany’sinvestmentsinpreferredsecuritieswereprimarilyduetopurchasesmadeduringthethirdquarterof2009wherepricingwasadverselyaffectedaftertheex-dividenddatewasdeclared.TheCompanyevaluatedpreferredsecuritiesthatwereinanunrealizedlosspositionasofDecember31,2009.Theevaluationconsistedofadetailedreviewincludingbutnotlimitedtosomeorallofthefollowingfactorsforeachsecurity:thecurrentS&Prating,analysts’reports,pastearningstrendsandanalysts’earningsexpectationsforthenext12months,liquidity,neartermfinancingrisk,andwhetherthecompanywascurrentlypayingdividendsonitsequitysecurities.Webelievethedeclineinvaluetobetemporaryinnatureandwedonotconsidertheseinvestmentstobeother-than-temporarilyimpaired.

page F-20

Thefollowingtablesstratify,bysecuritizedassetsandallotherassets, thegrossunrealized losses in theCompany’sportfolioatDecember31,2009,bydurationinalosspositionandmagnitudeofthelossasapercentageofthecostofthesecurity:

SecuritizedAssets

TotalGross DeclineofInvestmentValue

Fair Unrealized >15% >25% >50%

($inthousands) Value Losses No. Amount No. Amount No. Amount

Unrealizedlossforlessthan6months $106,188 $� (1,511) 2 $� �(42) 2 $� �(106) 1 $� �(150)Unrealizedlossforover6months 6 — — — — — — —Unrealizedlossforover12months 3,081 (446) 2 (138) — — 5 (179)Unrealizedlossforover18months 15,933 (1,753) 4 (431) 2 (99) 2 (311)Unrealizedlossforover2years 26,560 (10,234) 8 (1,204) 5 (2,811) 14 (5,432)

$151,768 $(13,944) 16 $(1,815) 9 $(3,016) 22 $(6,072)

AllOtherAssets

TotalGross DeclineofInvestmentValue

Fair Unrealized >15% >25% >50%

($inthousands) Value Losses No. Amount No. Amount No. Amount

Unrealizedlossforlessthan6months $281,180 $��(3,642) — $� ��— 2 $� �(21) 2 $� � �(3)Unrealizedlossforover6months 2,759 (127) 1 (1) — — 3 (95)Unrealizedlossforover12months 58 (172) — — 1 (38) 3 (135)Unrealizedlossforover18months 10,972 (708) 1 (411) — — — —Unrealizedlossforover2years 24,786 (1,622) 1 (7) 2 (239) — —

$319,755 $��(6,271) 3 $� �(419) 5 $� �(298) 8 $� �(233)

TheCompanyevaluatedtheseverityoftheimpairmentinrelationtothecarryingamountforthesecuritiesreferredtoaboveandconsideredallrelevantfactorsinassessingwhetherthelosswasother-than-temporary.TheCompanydoesnotintendtosellitsfixed-maturitysecurities,anditisnotmorelikelythannotthattheCompanywillberequiredtoselltheseinvestmentsuntilthereisarecoveryoffairvaluetotheCompany’soriginalcostoramortizedcostbasis,which,forfixedmaturities,maybeatmaturity.

Fixed-Maturity Investments—Time to MaturityThe following tableshows thecompositionofour fixed-maturityportfolioby remaining time tomaturityatDecember31,2009andDecember31,2008.Forsecuritiesthatareredeemableattheoptionoftheissuerandhaveamarketpricethatisgreaterthanparvalue,thematurityusedforthetablebelowistheearliestredemptiondate.Forsecuritiesthatareredeemableattheoptionoftheissuerandhaveamarketpricethatislessthanparvalue,thematurityusedforthetablebelowisthefinalmaturitydate.

December 31, 2009 December31,2008

($inthousands)Amortized

CostFair

ValueAmortized

CostFair

Value

RemainingTimetoMaturityLessthanoneyear $� 30,282 $� 30,465 $� ��8,813 $� 8,789Onetofiveyears 346,309 355,402 115,645 112,514Fivetotenyears 477,843 492,517 189,267 176,218Morethantenyears 357,086 375,726 102,859 96,807Mortgageandasset-backedsecurities 517,597 529,486 164,886 135,831

Total $�1,729,117 $�1,783,596 $581,470 $530,159

note5—FaIrvaluemeasurementsGAAPestablishesathree-levelhierarchythatprioritizestheinputstovaluationtechniquesusedtomeasurefairvalue.Thefairvaluehierarchygivesthehighestprioritytoquotedpricesinactivemarketsforidenticalassetsorliabilities(Level1)andthelowestprioritytounobservableinputs(Level3).Iftheinputsusedtomeasuretheassetsorliabilitiesfallwithindifferentlevelsofthehierarchy,theclassificationisbasedonthelowestlevelinputthatissig-nificanttothefairvaluemeasurementoftheassetorliability.Classificationofassetsandliabilitieswithinthehierarchyconsidersthemarketsinwhichtheassetsandliabilitiesaretraded,includingduringperiodsofmarketdisruption,andthereliabilityandtransparencyoftheassumptionsusedtodeter-minefairvalue.Thehierarchyrequirestheuseofobservablemarketdatawhenavailable.Thelevelsofthehierarchyandthoseinvestmentsincludedineachareasfollows:

Level 1—Inputs to thevaluationmethodologyarequotedprices (unadjusted) for identicalassetsor liabilities traded inactivemarkets. Includedarethoseinvestmentstradedonanactiveexchange,suchastheNASDAQGlobalSelectMarket.

Level 2—Inputstothevaluationmethodologyincludequotedpricesforsimilarassetsorliabilitiesinactivemarkets,quotedpricesforidenticalorsimilarassetsorliabilitiesinmarketsthatarenotactive,inputsotherthanquotedpricesthatareobservablefortheassetorliabilityandmarket-corroboratedinputs. Includedare investments inU.S.TreasurysecuritiesandobligationsofU.S.governmentagencies, togetherwithmunicipalbonds,corporatedebtsecurities,commercialmortgageandasset-backedsecurities,certainresidentialmortgage-backedsecuritiesthataregenerallyinvestmentgradeandcertainequitysecurities.

page F-21

Level 3—Inputs to thevaluationmethodologyareunobservable for theassetor liabilityandaresignificant to the fairvaluemeasurement.Materialassumptionsandfactorsconsideredinpricinginvestmentsecuritiesmayincludeprojectedcashflows,collateralperformanceincludingdelinquencies,defaultsandrecoveries,andanymarketclearingactivityorliquiditycircumstancesinthesecurityorsimilarsecuritiesthatmayhaveoccurredsincethepriorpricingperiod.Generallyincludedinthisvaluationmethodologyareinvestmentsincertainmortgage-backedandasset-backedsecurities.

Theavailabilityofobservableinputsvariesandisaffectedbyawidevarietyoffactors.Whenthevaluationisbasedonmodelsorinputsthatarelessobservableorunobservableinthemarket,thedeterminationoffairvaluerequiressignificantlymorejudgment.ThedegreeofjudgmentexercisedbymanagementindeterminingfairvalueisgreatestforinvestmentscategorizedasLevel3.Forinvestmentsinthiscategory,theCompanyconsiderspricesandinputsthatarecurrentasofthemeasurementdate.Inperiodsofmarketdislocation,ascharacterizedbycurrentmarketconditions,theabilitytoobservestablepricesandinputsmaybereducedformanyinstruments.Thisconditioncouldcauseasecuritytobereclassifiedbetweenlevels.

AsatDecember31,2009and2008,theCompany’sfixed-maturitiesandequityinvestmentsareallocatedamonglevelsasfollows:


December 31, 2009Fixed-maturityinvestments U.S.Treasurysecurities $� — $� 73,290 $� — $� 73,290 U.S.Agencysecurities — 39,983 — 39,983 Municipalbonds — 525,716 — 525,716 Corporateandotherbonds — 615,122 — 615,122 Commercialmortgage-backedsecurities — 203,447 — 203,447 Residentialmortgage-backedsecurities Agency — 288,686 — 288,686 Non-agency — 16,936 10,508 27,444 Asset-backedsecurities — 6,821 3,087 9,908

Totalfixed-maturities — 1,770,001 13,595 1,783,596Equityinvestments 54,044 22,689 — 76,733Short-terminvestments 36,500 — — 36,500

Total $90,544 $1,792,690 $�13,595 $1,896,829

December31,2008Fixed-maturityinvestments U.S.Treasurysecurities $� — $� 27,006 $� — $� 27,006 U.S.Agencysecurities — 399 — 399 Municipalbonds — 179,948 — 179,948 Corporateandotherbonds — 186,975 — 186,975 Commercialmortgage-backedsecurities — 25,940 5,595 31,535 Residentialmortgage-backedsecurities Agency — 72,179 — 72,179 Non-agency — 15,720 8,595 24,315 Asset-backedsecurities — 3,907 3,895 7,802

Totalfixed-maturities — 512,074 18,085 530,159Equityinvestments 5,134 5,680 — 10,814

Total $� 5,134 $� 517,754 $�18,085 $� 540,973

ThefairvaluesoftheCompany’sfixed-maturityandequityinvest-ments are determined by management after taking into considerationavailablesourcesofdata.Managementbelievesthatpricingsources,attimes, use unrealistically low prices based on trades in inactive or dis-tressedmarkets.TheCompanyconsidersvariousfactorsthatmayindi-cateaninactivemarket,includinglevelsofactivity,sourceandtimelinessof quotes, abnormal liquidity risk premiums, unusually wide bid-askspreads,andlackofcorrelationbetweenfairvalueofassetsandrelevantindices.IfmanagementbelievesthatthepriceprovidedfromthepricingsourceisdistressedbasedontheCompany’sevaluationofmarketactiv-ity, the Company will use a valuation method that reflects an orderlytransaction between market participants, generally a discounted cashflow method that incorporates relevant interest rate, risk and liquidityfactors.

77%oftheportfoliovaluationsclassifiedasLevel1orLevel2intheabove table are priced by utilizing the services of several independentpricing services thatprovide the Company with a price quote for eachsecurity.Theremaining23%oftheportfoliovaluationsrepresentsnon-bindingbrokerquotes.TheCompanyhasnotmadeanyadjustmentstothepricesobtainedfromtheindependentpricingsourcesanddealersonsecuritiesclassifiedasLevel1orLevel2.

TheLevel3classifiedsecuritiesinthetableaboveconsistofsecuri-tiesthatwereeithernottradedorverythinlytradedduetoconcernsinthesecuritiesmarket.Management,inconjunctionwithitsoutsideport-foliomanager,consideredthevariousfactorsthatmayindicateaninac-tive market and concluded that prices provided by the pricing sourcesrepresented an inactive or distressed market. As a result, prices fromindependentthirdpartypricingservices,brokerquotesorotherobserv-ableinputswerenotalwaysavailable,orweredeemedunrealisticallylow,or,inthecaseofcertainbrokerquotes,werenon-binding.Therefore,thefairvaluesofthesesecuritiesweredeterminedusingamodeltodevelopasecuritypriceusingfuturecashflowexpectationsthatweredevelopedbasedoncollateralcompositionandperformanceanddiscountedatanestimatedmarket rate(includingestimatedriskand liquiditypremiums)takingintoaccountestimatesoftherateoffutureprepayments,currentcredit spreads, credit subordination protection, mortgage originationyear, default rates, benchmark yields and time to maturity. For certainsecurities,non-bindingbrokerquoteswereavailableandthesewerealsoconsideredindeterminingtheappropriatenessofthesecurityprice.

TheCompany’suseofLevel3(theunobservable inputs) included66and60securitiesandaccountedforapproximately0.7%and3.3%oftotalinvestmentsatDecember31,2009and2008,respectively.

page F-22

The Company has reviewed the pricing techniques and methodologies of the independent pricing sources and believes that their policiesadequatelyconsidermarketactivity,eitherbasedonspecifictransactionsfortheissuevaluedorbasedonmodelingofsecuritieswithsimilarcreditqual-ity,duration,yieldandstructurethatwererecentlytraded.TheCompanymonitorssecurity-specificvaluationtrendsanddiscussesmaterialchangesortheabsenceofexpectedchangeswiththepricingsourcestounderstandtheunderlyingfactorsandinputsandtovalidatethereasonablenessofpricing.

ThefollowingtablesummarizeschangesinLevel3assetsmeasuredatfairvalueatDecember31,2009and2008:



Beginningbalance,January1 $�18,085 $� —Totalgains(losses)—realized/unrealized Includedinnetincome (11,321) (12,290) Includedinothercomprehensiveincome(loss) 1,818 2,945 Purchases,issuancesandsettlements 3,513 (3,627) Nettransfersinto(outof)Level3 1,501 31,057

Endingbalance,December31 $�13,595 $�18,085

note6—goodwIllandIntangIBleassets

goodwillGoodwilliscalculatedastheexcessofpurchasepriceoverthenetfairvalueofassetsacquired.SeeNote3—“Acquisitions”forinformationregardingthecalculationofgoodwillrelatedtotheacquisitionsofCastlePoint,HermitageandAequiCap.TheacquisitionofSUAresultedinnegativegoodwillwhichwasrecordedasagainonbargainpurchase in incomein2009.UnderGAAP,theCompany is requiredtoallocategoodwill to itsreportablesegments.Thefollowingisasummaryofgoodwillbyreportingunits:

($inthousands)BrokerageInsurance

SpecialtyBusiness

InsuranceServices Total

Balance,January1,2009 $��18,962 $� � �— $— $� 18,962 Additions(a) 193,661 32,067 — 225,728

Total $212,623 $32,067 $— $�244,690

(a) PrimarilyrelatestotheacquisitionsofCastlePointandHermitage.

TheCompanyperformsananalysisannuallytoidentifypotentialgoodwillimpairmentandmeasurestheamountofanygoodwillimpairmentlossthatmayneedtoberecognized.ThistestisperformedduringthefourthquarterofeachyearormorefrequentlyifeventsorcircumstanceschangeinawaythatrequirestheCompanytoperformtheimpairmentanalysisonaninterimbasis.Goodwill impairmenttestingrequiresanevaluationoftheestimatedfairvalueofeachreportingunittoitscarryingvalue,includingthegoodwill.Animpairmentchargeisrecordediftheestimatedfairvalueislessthanthecarryingamountofthereportingunit.Noimpairmentshavebeenidentifiedtodate.

IntangiblesIntangible assets consist of finite and indefinite life assets. Finite life intangible assets include customer relationships and trademarks. Insurancecompanylicensesareconsideredindefinite life intangibleassetssubjecttoannual impairmenttesting.Theweightedaverageamortizationperiodofidentifiedintangibleassetswithafinitelifeis7.1yearsasofDecember31,2009.

Thecomponentsofintangibleassetsandtheirusefullives,accumulatedamortization,andnetcarryingvalueasofDecember31,2009and2008areasfollows:

December 31, 2009 December31,2008

($inthousands)

UsefulLife

(inyrs)

gross Carrying amount

accumulated amortization

Net Carrying amount

GrossCarryingAmount

AccumulatedAmortization

NetCarryingAmount

Insurancelicenses — $17,703 $� � �— $17,703 $��6,503 $� ��— $��6,503Customerrelationships 10–25 39,290 (5,858) 33,432 17,090 (3,129) 13,961Trademarks 5 2,690 (475) 2,215 — — —

Total $59,683 $(6,333) $53,350 $23,593 $(3,129) $20,464

TheactivityinthecomponentsofintangibleassetsfortheyearendedDecember31,2009consistedofintangibleassetsacquiredfrombusinesscombinationsandamortizationexpenseasshowninthetablebelow:

($inthousands)InsuranceLicenses

CustomerRelationships Trademarks Total

Balance,January1,2009 $��6,503 $�13,961 $�� — $20,464 Additions(a) 11,200 22,200 2,690 36,090 Deductions(b) — (2,729) (475) (3,204)

Balance,December31,2009 $17,703 $�33,432 $2,215 $53,350

(a) RelatestotheacquisitionofCastlePoint,Hermitage,AequiCapandSUA.(b)Amortization.

page F-23

The Company recorded amortization expense related to intangi-blesof$3.2million,$1.2millionand$1.0millionin2009,2008,and2007,respectively. The estimated amortization expense for each of the nextfiveyearsis:

($inthousands)

2010 $5,3282011 4,1752012 3,5712013 2,8462014 2,464

note7—InvestmentInunConsolIdatedaFFIlIate—CastlepoIntTheCompanyacquiredCastlePointonFebruary5,2009,atwhichtimeitbecameawholly-ownedsubsidiaryandtheCompanybeganconsoli-dating its financial results. Changes in the carrying value of the equityinvestmentinCastlePointareasfollows:


($inmillions) 2009 2008

Investmentinunconsolidatedaffiliate,beginningofyear $�29.3 $32.6 Equityinnetincome(loss)ofCastlePoint (0.8) 0.3 Equityinnetunrealizedgain(loss)oftheCastlePoint

investmentportfolio (0.8) (3.2) DividendsreceivedfromCastlePoint (0.1) (0.4) AcquisitionofCastlePointbyToweronFebruary5,2009 (27.6) —

Investmentinunconsolidatedaffiliate,endofyear $� — $29.3

The Company and/or its subsidiaries were parties to a masteragreement, certain reinsurance agreements, and other agreements,including program management agreements and service and expense

sharing agreements, with CastlePoint prior to its acquisition onFebruary 5, 2009. The more significant agreements were the MasterAgreementandtheReinsuranceAgreementwithCastlePoint.

Master agreementIn April 2006, the Company entered into a master agreement withCastlePoint ( “Master Agreement”). The Master Agreement providedthat,subjecttothereceiptofrequiredregulatoryapprovals,CastlePointwould manage the traditional program business and the specialty pro-grambusiness,andtheCompanywouldmanagethebrokeragebusiness.Theprogrammanagerswererequiredtopurchasepropertyandcasualtyexcessof loss reinsuranceandpropertycatastropheexcessof loss rein-surance from third party reinsurers to protect the net exposure of theparticipants. Inpurchasingthepropertycatastropheexcessof lossrein-surance,themanagercouldretainriskequatingtonomorethan10%ofthe combined surplus of the Company and CastlePoint InsuranceCompany(referredtoasthepooledcatastropheretention).

The parties to the Master Agreement agreed to exercise goodfaith,andtocausetheirrespectivesubsidiariestoexercisegoodfaith,tocarryouttheintentofpartiesintheeventthespecificagreementscon-templated by the Master Agreement must be revised to comply withregulatory requirements. The Master Agreement is no longer in forceand effect as of the acquisition of CastlePoint by the Company onFebruary5,2009.

Reinsurance agreements with CastlepointTheCompany’s InsuranceSubsidiarieswereparties to threemulti-yearquota share reinsurance agreements with CastlePoint ReinsuranceCompany, Ltd. (“CastlePoint Reinsurance”) covering brokerage busi-ness,traditionalprogrambusinessandspecialtyprogrambusiness.TheseagreementswereterminatedonDecember31,2008onarun-offbasis.

ThefollowingtableprovidesananalysisofthereinsuranceactivitybetweentheCompanyandCastlePointReinsurancefortheyearsendedDecember31,2008and2007,respectively:

($inthousands)

CededPremiums

Written

CededPremiums

Earned

CedingCommissions

Revenue

CedingCommissionPercentage

2008Brokeragebusiness $112,710 $158,694 $56,896 35.9%Traditionalprogrambusiness 7,648 6,522 1,988 30.5%Specialtyprogrambusinessandinsurancerisk-sharingbusiness 64,355 36,696 12,307 33.5%

Total $184,713 $201,912 $71,191 35.3%

2007Brokeragebusiness $209,576 $184,851 $64,199 34.7%Traditionalprogrambusiness 1,669 950 285 30.0%Specialtyprogrambusinessandinsurancerisk-sharingbusiness 9,824 4,030 1,209 30.0%

Total $221,069 $189,831 $65,693 34.6%

EffectiveApril1,2007,underthebrokeragebusinessquotasharereinsuranceagreement,CastlePointagreedtopay30%oftheCompany’sprop-ertycatastrophereinsurancepremiumsrelatingtothebrokeragebusinesspoolmanagedbytheCompanyand30%of theCompany’snet retainedpropertycatastrophelosses.CastlePointandtheCompanyparticipatedproportionatelyincatastrophereinsuranceontheunderlyingbrokeragebusi-nesspool.Thepremiumpaymentwas$7.3millionand$2.3millionin2008and2007,respectively.CastlePointReinsurancealsoparticipatedasarein-surerontheCompany’soverallpropertycatastrophereinsuranceprogramfromJuly1,2008tothedatetheCompanyacquireditonFebruary5,2009,andfromJuly1,2006toJune30,2007,andtheCompany’sexcessoflossreinsuranceprogram,effectiveMay1,2006throughDecember31,2008.Underthecatastropheandexcessreinsuranceprograms,theCompanycededpremiumsof$4.5millionand$4.4milliontoCastlePointReinsurancein2008and2007,respectively.

Inaddition,theCompanyenteredintotwoaggregateexcessoflossreinsuranceagreementsforthebrokeragebusinesswithCastlePointeffectiveOctober1,2007.ThepurposeofthetwoaggregateexcessoflossreinsuranceagreementswastoequalizethelossratiosforthebrokeragebusinesswrittenbyCastlePointInsuranceCompany(“CPIC”)andtheCompany.Underthefirstagreement,TICNYreinsuredapproximately85%(whichper-centagetobeadjustedtoequalTower’sactualpercentageofthetotalbrokeragebusinesswrittenbytheCompanyandCPIC)ofCPIC’sbrokeragebusinesslossesabovealossratioof52.5%.Underthesecondagreement,CPICreinsuredapproximately15%(whichpercentagetobeadjustedtoequalCastlePoint’sactualpercentageofthetotalbrokeragebusinesswrittenbytheCompanyandCPIC)oftheCompany’sbrokeragebusinesslossesabove

page F-24

alossratioof52.5%.FortheyearsendedDecember31,2008and2007,theCompanypaid$3.0millionand$0.8milliontoCPICforreinsurancebrokerage business written by the Company and received $3.0 millionand$0.8million fromCPICforbusinessassumedwhichwasproducedby TRM as part of the brokerage business pool, respectively. TheCompanyrecorded$2.7millionand$0millioninnetlossrecoveriesfromthe aggregate stop loss agreements with CPIC for the years endedDecember31,2008and2007,respectively.TheaggregateexcessoflossagreementswereterminatedeffectiveDecember31,2008.

At December 31, 2008, the Company’s receivables and payableswithCastlePointarisinginthenormalcourseofbusinesswereasfollows:

($inthousands)

December31,2008Prepaidreinsurancepremiums $� 95,701Reinsurancerecoverable 182,634Reinsurancebalancespayable (93,381)Payabletoissuingcarriers (46,780)

Total $�138,174

note8—deFerredaCquIsItIonCostsanddeFerredCedIngCommIssIonrevenueAcquisition costs incurred and policy-related ceding commission reve-nue are deferred and amortized to income on property and casualtybusinessasfollows:

($inthousands) 2009 2008 2007

Deferredacquisitioncostsnetofceding commissionrevenue,January1 $� 53,080 $� 39,271 $�35,811Acquisitiondatebalancesofacquired companies(VOBA) 96,700 — 13,955

Costincurredanddeferredduringyears: Commissionsandbrokerage 212,478 124,670 88,284 Otherunderwritingand acquisitioncosts 121,582 74,363 65,821 Cedingcommissionrevenue (37,852) (77,677) (81,864)

Deferredacquisitioncostsnetofceding commissionrevenue 296,208 121,356 72,241Amortization (275,336) (107,547) (82,736)

Deferredacquisitioncosts,netofceding commissionrevenue,December31, $�170,652 $� 53,080 $�39,271

note9—FIxedassetsThecomponentsoffixedassetsaresummarizedasfollows:

($inthousands) CostAccumulatedDepreciation Net

December 31, 2009Furniture $� 3,395 $ (1,477) $� 1,918Leaseholdimprovements 14,066 (3,527) 10,539Computerequipment 16,365 (10,990) 5,375Software 79,562 (30,965) 48,597

Total $�113,388 $ (46,959) $�66,429

December31,2008Furniture $� 2,064 $ (747) $� 1,317Leaseholdimprovements 13,863 (2,313) 11,550Computerequipment 11,383 (8,374) 3,009Software 43,029 (19,867) 23,162

Total $� 70,339� $ (31,301) $�39,038

Additionsof$15.1millionwereattributabletothefairvalueoffixedassetsofacquiredcompaniesin2009.

Included in software are internally developed applications.TheCompanyaccountsforcostsincurredtodevelopcomputersoftwarefor internal use in accordance with applicable GAAP guidance.The Company capitalizes the costs incurred during the applicationdevelopmentstage,whichincludecoststodesignthesoftwareconfigu-ration and interfaces, coding, installation, and testing. Costs incurredduringthepreliminaryprojectalongwithpost-implementationstagesofinternal use computer software are expensed as incurred. Capitalizeddevelopmentcostsareamortizedovervariousperiodsuptothreeyears.Costs incurred to maintain existing product offerings are expensed asincurred.Thecapitalizationandongoingassessmentofrecoverabilityofdevelopmentcostsrequiresconsiderablejudgmentbymanagementwithrespecttocertainexternalfactors,including,butnotlimitedto,techno-logical and economic feasibility, and estimated economic life. For theyears ended December 31, 2009 and 2008, the Company capitalizedsoftwaredevelopmentcostsof$13millionand$6.0million,respectively.As of December 31, 2009 and 2008, net capitalized software coststotaled$29.5millionand$7.8million,respectively.

Depreciation expense for 2009, 2008 and 2007 was $13.3 million,$10.5millionand$7.7million,respectively.

note10—reInsur anCeTheCompanyhasautomatic treatycapacityof$30.0million forprop-ertyrisks,$1.0million/$2.0millionforliabilitycoverages,$50.0millionforworkers’compensation,$5.0millionforumbrellaliabilityand$100.0mil-lion for equipment breakdown. The Company may offer higher limitsthroughitsuseoffacultativereinsurance.Inaddition,theCompanyhasclashcoverage ineffect for2009 fora limitof$9.0million inexcessof$1.0millionwhichapplies totheaggregate liability losses frommultipleinsuredsinvolvedinthesameoccurrence.

Throughvariousquota share,excessof lossandcatastrophe rein-suranceagreements,asdescribedfurtherbelow,theCompanylimitsitsexposuretoamaximumlossonanyonerisk:

From/ToMaximumLoss

Exposure

January1,2009–December31,2009 $1,500,000October1,2008–December31,2008 4,520,000April1,2008–September30,2008 4,750,000January1,2008–March31,2008 4,800,000January1,2007–December31,2007 4,500,000

Certain of the Company’s reinsurance agreements contain provi-sionsfor lossratiocapstoprovidethereinsurerswithsomelimitontheamountofpotentiallossbeingassumed,whilemaintainingthetransferofsignificant insurance risk with the possibility of a significant loss to thereinsurer.Lossratiocapscutoffthereinsurers’liabilityforlossesaboveaspecifiedlossratio.Thelossratiocapsinthe2005,2004and2003quotashareagreementswere95.0%,95.0%and92.0%, respectively.The lossratiocapinthe2008SwissRequotashareagreementwas120%.Thelossratio cap for the brokerage liability quota share agreements effectiveOctober1,2009andJanuary1,2010is110%.Therewasnolossratiocapin2007and2006.

The structureof theCompany’s reinsuranceprogramenables theCompany to reflect significant reductions in premiums written andearned and also provides income as a result of ceding commissionsearnedpursuanttoreinsurancecontracts.ThisstructurehasenabledtheCompany to significantly grow its premium volume while maintainingregulatorycapitalandotherfinancialratioswithinexpectedrangesusedforregulatoryoversightpurposes.TheCompany’sparticipationinrein-surancearrangementsdoesnotrelievetheCompanyfromitsobligationstopolicyholders.

page F-25

Approximatereinsurancerecoverablesbyreinsurerareasfollows:

($inthousands)UnpaidLosses

PaidLosses Total

December 31, 2009SwissReinsuranceAmericaCorp. $� 39,677 $� 6,112 $� 45,789OneBeaconInsurance 42,755 — 42,755MaxBermudaLtd. 12,701 — 12,701MunichReinsuranceAmericaInc. 6,979 3,662 10,641TokioMillenniumReLtd. 9,426 625 10,051LloydsSyndicates 10,051 (6) 10,045AxisReinsuranceCo. 9,755 8 9,763EnduranceReinsuranceCorp.ofAmerica 8,908 19 8,927HannoverRuckversicherungsAG 8,246 303 8,549PlatinumUnderwritersReinsuranceInc. 7,334 222 7,556WestportInsuranceCorp. 6,217 20 6,237HannoverReIrelandLtd. 5,224 454 5,678MidwestInsuranceCo. 5,183 243 5,426QBEReinsuranceCorporation 4,791 212 5,003Others 22,440 2,945 25,385

Total $�199,687 $14,819 $214,506

December31,2008CastlePointReinsuranceCompany,Ltd. $�135,437 $�39,022 $�174,459MunichReinsuranceAmericaInc. 12,964 2,528 15,492TokioMillenniumReLtd. 12,814 1,259 14,073WestportInsuranceCorp. 7,459 3,644 11,103HannoverReIrelandLtd. 7,576 935 8,511CastlePointInsuranceCompany 7,600 575 8,175EnduranceReinsuranceCorp.ofAmerica 6,839 (3) 6,836PlatinumUnderwritersReinsuranceInc. 6,741 1 6,742HannoverRuckversicherungsAG 6,052 7 6,059SwissReinsuranceAmericaCorp. 5,102 617 5,719Others 13,645 1,792 15,437

Total $�222,229 $�50,377 $�272,606

TheCompanyrecordedprepaidreinsurancepremiumsasfollows:

December31,


SwissReinsuranceAmericaCorp. $48,443 $� 41,644AllianzRiskTransferAG(Bermuda) 16,125 —MaidenInsuranceCo. 5,565 —HannoverRuckversicherungsAG 4,052 2,131PlatinumUnderwritersReinsuranceInc. 3,602 1,010CastlePointReinsuranceCompany,Ltd. — 95,701Others 17,031 13,164

Total $94,818 $153,650

page F-26

ThefollowingcollateralisavailabletotheCompanyforamountsrecoverablefromreinsurersasofDecember31,2009and2008:

($inthousands)Regulation114Trust

LettersofCredit

FundsHeld Total

December 31, 2009AequiCapInsuranceCo. $� � �— $� � ��— $� 350 $� 350AllianzRiskTransferAG — 4,964 — 4,964TokioMillenniumReLtd. 6,638 — 8,437 15,075HannoverReinsurance(Ireland)Ltd. — 4,964 4,938 9,902MaidenInsuranceCompany 5,260 — — 5,260MaxBermudaLtd. 12,412 — — 12,412MidwestInsuranceCompany 6,292 — — 6,292SwissReinsuranceAmericaCorp. 31,555 — — 31,555Others — 1,081 12 1,093

Total $�62,157 $11,009 $�13,737 $�86,903

December31,2008CastlePointReinsuranceCompany,Ltd. $225,839 $� � — $� — $225,839TokioMillenniumReLtd. 6,183 — 12,905 19,088HannoverReinsurance(Ireland)Ltd. — 4,964 7,556 12,520MidwestInsuranceCo. 5,322 — — 5,322Others — 796 13 809

Total $237,344 $� �5,760 $�20,474 $263,578

TheCompany isobligedunder thequota share reinsuranceagreements,effectiveOctober 1, 2003,January 1, 2004andJanuary 1, 2005, tocreditreinsurerswithanannualeffectiveyieldof2.5%,2.5%and3.0%,respectively,onthemonthlybalanceinthefundsheldunderreinsuranceagree-mentsliabilityaccounts.Theamountscreditedfor2009,2008and2007were$0.7million,$0.6millionand$1.2million,respectively,andhavebeenrecordedasinterestexpense.

Ceding CommissionsTheCompanyearnscedingcommissionsunderquotasharereinsuranceagreementsfor2008,2007,2005and2004basedonaslidingscaleofcom-missionratesandultimatetreatyyear lossratiosonthepolicies reinsuredundereachoftheseagreements.Theslidingscale includesminimumandmaximumcommissionratesinrelationtospecifiedultimatelossratios.Thecommissionrateandcedingcommissionsearnedincreasewhentheesti-matedultimatelossratiodecreases,andconversely,thecommissionrateandcedingcommissionsearneddecreasewhentheestimatedultimatelossratioincreases.

AsofDecember31,2009,theCompany’sestimatedultimatelossratiosattributabletothesecontractsarelowerthanthecontractualultimatelossratiosatwhichtheminimumamountofcedingcommissionscanbeearned.Accordingly,theCompanyhasrecordedcedingcommissionsearnedthataregreaterthantheminimumcommissions.TherelevantestimatedultimatelossratiosandcommissionsasofDecember31,2009aresetforthbelowfortreatiesthatremainineffectasofDecember31,2009($inmillions):

TreatyWithTreatyYear

ContractualLossRatioatWhichMinimumCeding

CommissionRateApplies

EstimatedUltimate

LossRatio

CedingCommissions

EarnedMinimum

Commission

MaximumPotential

ReductionofCeding

CommissionEarned

TokioMillennium 2003 65.6% 64.6% $21.2 $20.6 $0.6HannoverReIreland 2004 68.0% 52.8% 30.2 20.6 9.6HannoverReIreland 2005 68.0% 52.9% 30.5 20.8 9.7SwissRe 2008 61.5% 56.0% 26.0 22.3 3.7SwissRe 2009 75.0% 65.0% 6.3 5.5 0.8Allianz 2009 75.0% 65.0% 2.1 1.9 0.3

Basedontheamountofcededpremiumsearned,themaximumpotentialreductiontocedingcommissionsearnedrelatedtoanincreaseintheCompany’sestimatedultimatelossratiosis$33.5millionforalltreatiesforallfiveyears.Thecededpremiumsforthe2004,2005,2006,2007and2008treatyyearshavebeenfullyearnedasofDecember31,2009.AsofDecember31,2009,thecededpremiumearnedandprepaidreinsurancepremiumsforthe2009treatyyearwere$27.2millionand$59.7million,respectively.

TheestimatedultimatelossratiosaretheCompany’sbestestimatebasedonfactsandcircumstancesknownattheendofeachperiodthatlossesareestimated.Theestimationprocessiscomplexandinvolvestheuseofinformedestimates,judgmentsandactuarialmethodologiesrelativetofutureclaimsseverityandfrequency,thelengthoftimeforlossestodeveloptotheirultimatelevel,possiblechangesinlawandotherexternalfactors.Thesameuncertaintiesassociatedwithestimating lossadjustmentexpense reservesaffect theestimatesofcedingcommissionsearned.TheCompanymonitorsandadjuststheultimatelossratioonaquarterlybasistodeterminetheeffectonthecommissionrateandcedingcommissionsearned.Theincrease(decrease)inestimatedcedingcommissionincomerelatingtoprioryearsrecordedin2009,2008and2007was($2.2)million,($1.8)millionand($0.5)million,respectively.

page F-27

note11—propertyandCasualtyInsur anCeaCtIvIty

Premiumswrittencededandearnedareasfollows:

($inthousands) Direct Assumed Ceded Net

PercentageofAmountAssumed

toNet

2009Premiumswritten $�989,771 $� 80,946 $�184,528 $�886,190 9.1%Changeinunearnedpremiums (52,554) 28,097 7,022 (31,479) –89.3%

Premiumsearned $�937,217 $�109,043 $�191,550 $�854,711 12.8%

2008Premiumswritten $�627,319 $� 7,501 $�290,777 $�344,043 2.2%Changeinunearnedpremiums (56,105) (370) (26,983) (29,492) 1.3%

Premiumsearned $�571,214 $� 7,131 $�263,794 $�314,551 2.3%

2007Premiumswritten $�520,421 $� 3,593 $�264,832 $�259,182 1.4%Changeinunearnedpremiums (7,189) 5,109 (29,004) 26,924 19.0%

Premiumsearned $�513,232 $� 8,702 $�235,828 $�286,106 3.0%

ThecomponentsoftheliabilityforlossandLAEexpenses(“LAE”)andrelatedreinsurancerecoverablesareasfollows:

($inthousands) Gross

LiabilityReinsuranceRecoverable

December 31, 2009Case-basisreserves $� 638,476 $�� 98,212IBNRreserves 493,513 101,475Recoverableonpaidlosses —� 14,819

Total $�1,131,989 $214,506

December31,2008Case-basisreserves $� 316,284 $�126,064IBNRreserves 218,707 96,165Recoverableonpaidlosses — 50,377

Total $� 534,991 $��272,606

The following table provides a reconciliation of the beginningand ending balances for unpaid losses and LAE for the year endedDecember31,2009:


($inthousands) 2009 2008 2007

BalanceatJanuary1 $� 534,991 $�501,183 $�302,541Lessreinsurancerecoverables onunpaidlosses (222,229) (189,525) � (110,042)

312,762 311,658 192,499Netreserves,atfairvalue,of acquiredcompanies 549,978 — 85,055Incurredrelatedto: Currentyear 477,757 171,616 159,512 Prioryears (2,260) (8,877) (1,606)

Totalincurred 475,497 162,739 157,906Paidrelatedto: Currentyear 154,207 59,205 55,308 Prioryears 251,728 102,430 68,494

Totalpaid 405,935 161,635 123,802

Netbalanceatendofyear 932,302 312,762 311,658Addreinsurancerecoverables onunpaidlosses 199,687� 222,229 189,525

BalanceatDecember31 $1,131,989 $�534,991� $�501,183

Incurred losses and LAE of $483.8 million were reduced by$5.0millionpertainingtotheamortizationofthereserveriskpremiumonloss reserves in accordance with GAAP for the business combinationsoccurringduring2009.

Incurred lossesandLAEarenetofamountscededunderreinsur-ancecontractsof$91.3million,$125.6millionand$106.8millionin2009,2008and2007,respectively.

IncurredlossandLAEattributabletoinsuredeventsofprioryearsdecreasedby$2.3million,$8.9millionand$1.6millionin2009,2008and2007,respectively.Prioryeardevelopmentisbaseduponnumerousesti-matesbylineofbusinessandaccidentyear.Noadditionalpremiumsorreturnpremiumshavebeenaccruedasaresultoftheprioryeareffects;however,thesechangesinestimatedlossesimpacttheCompany’sslid-ing scale commission income estimates. The Company’s managementcontinuallymonitorsclaimsactivitytoassesstheappropriatenessofcar-ried case and IBNR reserves, giving consideration to Company andindustrytrends.

Loss and loss adjustment expense reserves. The reserving process forloss and LAE reserves provides for the Company’s best estimate at aparticularpointintimeoftheultimateunpaidcostofalllossesandLAEincurred,includingsettlementandadministrationoflosses,andisbasedon facts and circumstances then known and including losses that havebeenincurredbutnotyetbeenreported.Theliabilityfor lossandLAEalso includes the fair value adjustment related to the acquisitions ofCastlePoint, Hermitage and SUA The process includes using actuarialmethodologiestoassist inestablishingtheseestimates, judgmentsrela-tive to estimates of future claims severity and frequency, the length oftime before losses will develop to their ultimate level and the possiblechangesinthelawandotherexternalfactorsthatareoftenbeyondtheCompany’s control. The methods used to select the estimated lossreserves include the loss ratio projection, loss development projection,and the Bornhuetter-Ferguson (B-F) method. The process producescarriedreservessetbymanagementbasedupontheactuaries’bestesti-mateandistheresultofnumerousbestestimatesmadebylineofbusi-ness, accident year, and loss and LAE. The amount of loss and LAEreservesforreportedclaimsisbasedprimarilyuponacase-by-caseeval-uation of coverage, liability, injury severity, and any other informationconsideredpertinenttoestimatingtheexposurepresentedbytheclaim.TheamountsoflossandLAEreservesforunreportedclaimsaredeter-mined using historical information by line of insurance as adjusted tocurrentconditions.SinceourprocessproduceslossandLAEreservessetby management based upon the actuaries’ best estimate, there is no

page F-28

explicit or implicit risk premium provision for uncertainty in the carriedloss and LAE reserves, excluding the loss and LAE reserves assumedthroughbusinesscombinationsin2009.

Foreachacquisition, theCompanyestimatesandrecordsthe lossLAEreservesbaseduponits independentanalysisofthosereserves. InthecaseofSUA,thelossandLAEreserveswereincreasedby$27.5mil-lionabovetheamountspriortotheacquisition,whichwascomprisedofanadditional$25.7millioninnominalstatutoryandGAAPbasisreservesbasedupontheCompany’sindependentactuarialanalysisplusanaddi-tional$1.8millioninGAAPbasislossandLAEreservespertainingtothereservesriskpremiumrequiredunderGAAP.

IncludedinthereservesforthelossandLAEreserveis$4.5millionof tabular reserve discount for workers’ compensation and excessworkers’compensationclaimsacquiredaspartoftheSUAtransaction.

AsofDecember31,2009,theCompanyhadrecorded$14.1millionof reserve riskpremiumon loss reserves inaccordancewithGAAPforthebusinesscombinationsoccurringduring2009.

The Company has implemented two changes in estimating LAEreserves. These two changes impacted costs to handle litigation forclaimshandledbytheCompany’sattorneysandcoststohandlelitigationforclaimshandledbyattorneyswhoarenotemployedbytheCompany.

Beginning in the fourth quarter of 2008, LAE stemming fromdefensebyin-houseattorneysisattributedtoclaimsbaseduponadeter-minedfixedfeeperin-houselitigatedclaim.TheCompanyallocatestoeachof these litigatedclaims50%of the fixed feewhen litigationonaparticularclaimbeginsand50%ofthefeewhenthelitigationisclosed.The fee isdeterminedactuariallybasedupon theprojectednumberoflitigatedclaimsandexpectedclosingpatternsat thebeginningofeachyear,aswellastheprojectedbudgetfortheCompany’sin-houseattor-neys,andtheseamountsaresubject toadjustmenteachquarterbaseduponactualexperience.

For LAE stemming from defense by other attorneys who are notemployees,theCompanyimplementedautomatedlegalfeeauditinginthefourthquarterof2008.

Duetotheinherentuncertaintyassociatedwiththereservingpro-cess, the ultimate liability may differ, perhaps substantially, from theoriginalestimate.Suchestimatesareregularlyreviewedandupdatedandany resulting adjustments are included in the current year’s results.Reserves are closely monitored and are recomputed periodically usingthemostrecentinformationonreportedclaimsandavarietyofstatisticaltechniques. Specifically, on at least a quarterly basis, the Companyreviews, by line of business, existing reserves, new claims, changes toexisting case reserves and paid losses with respect to the current andprioryears.

The Company segregates data for estimating loss reserves.Property lines includeFire,Homeowners,CMPProperty,Multi-FamilyDwellings and Auto Physical Damage. Casualty lines include CMPLiability, Other Liability, Workers’ Compensation, Commercial AutoLiability, and Personal Auto Liability. The Company also analyzes andrecordsreservesseparatelyforSpecialtyBusinessprogramsandtreatiesandforBrokerageInsurance.

Two key assumptions that materially impact the estimate of lossreservesarethelossratioestimateforthecurrentaccidentyearandthelossdevelopment factor selections forall accidentyears.The loss ratioestimateforthecurrentaccidentyearisselectedafterreviewinghistori-cal accident year loss ratios adjusted for rate changes, trend, and mixofbusiness.

In most cases, the Company’s data have sufficient credibility andhistorical experience to base development factors on its own data.Wherenecessary,wesupplementourowndatawithhistoricalexperienceforthebusinessthatisavailablefromthepreviousinsurancecarrier,andwe may utilize industry loss development factors, where appropriate.

There have only been minor changes in selected loss developmentfactorssince2003.Thechartbelowshowsthenumberofyearsbyprod-uctlinewhentheCompanyexpects50%,90%and99%of lossestobereportedforagivenaccidentyear,althoughforsomeclassesofbusinessthedevelopmentpatternsmaybesignificantlylonger:

NumberofYears

Segment 50% 90% 99%

Fire <�1�year <�1�year 2�yearsHomeowners <�1�year <�2�years 3�yearsMulti-FamilyDwellings <�2�years <�2�years� 5�yearsCMPProperty <�1�year 1�year 2�yearsCMPLiability <�2�years 5�years 9�yearsWorkers’compensation <�1�year 2�years� 5�yearsOtherliability 3�years 4�years 9�yearsCommercialautoliability <�1�year 3�years� 4�yearsAutophysicaldamage <�1�year <�1�year 1�yearPersonalautoliability <�1�year <�2�years 4�years

Loss development methods, the Bornhuetter-Ferguson (B-F)methodandvariationsofthismethod,andlossratioprojectionsarethepredominant methodologies the Company’s actuaries use to projectlosses and corresponding reserves. Based on these methods theCompany’s actuaries determine a best estimate of the loss reserves.Allof thesemethodsarestandardactuarialapproaches in the industry.Generally,thelossdevelopmentmethodsarerelieduponforolderacci-dentyears,andthelossratiomethodisusedforthemostrecentaccidentyear when there is less reliability in the loss development methods.TheB-Fmethodcombinesthelossratiomethodandthelossdevelop-mentmethodstodeterminelossreservesbyaddinganexpecteddevel-opment(lossratiotimespremiumtimespercentunreported)tothecasereserves,and thismethodmaybeutilized for themost recentaccidentyear or relatively immature accident years when the loss developmentmethodsarenotfullyreliable.

The incurred method relies on historical development factorsderived from changes in the Company’s incurred estimates of claimspaid and case reserves over time. The paid method relies on theCompany’s claim payment patterns and ultimate claim costs. Theincurredmethodissensitivetochangesincasereservingpracticesovertime. Thus, if case reserving practices change over time, the incurredmethodmayproducesignificantvariationinestimatesofultimatelosses.The paid method relies on actual claim payments and therefore is notsensitivetochangesincasereserveestimates.

TheCompanyisnotawareofanyclaimstrendsthathaveemergedor thatwould cause futureadverse development thathave not alreadybeenconsideredinexistingcasereservesandinitscurrentlossdevelop-mentfactors.

InNewYorkState,lawsuitsfornegligence,subjecttocertainlimita-tions,mustbecommencedwithinthreeyearsfromthedateoftheacci-dent or are otherwise barred. Accordingly, the Company’s exposure toIBNRisrelativelylimited,althoughthereremainsapossibilityofadversedevelopmenton reportedclaims.This is reflectedby the lossdevelop-ment for our Brokerage Insurance segment for which New York Statecomprisesasignificantproportionof thebusiness,particularly forolderaccidentyears.However,therearenoassurancesthatfuturelossdevel-opmentandtrendswillbeconsistentwithitspastlossdevelopmenthis-tory,andsoadverse loss reservesdevelopment remainsa risk factor totheCompany’sbusiness.

page F-29

note12—deBt

Subordinated DebenturesThe Company and its wholly-owned subsidiaries have issued trust preferred securities through wholly-owned Delaware statutory business trusts.ThetrustsusetheproceedsofthesaleofthetrustpreferredsecuritiesandcommonsecuritiesthattheCompanyacquiredfromthetruststopurchasejuniorsubordinateddebenturesfromtheCompanywithtermsthatmatchthetermsofthetrustpreferredsecurities.Interestonthejuniorsubordinateddebenturesandthetrustpreferredsecuritiesispayablequarterly.Insomecases,theinterestrateisfixedforaninitialperiodoffiveyearsafterissuance,thenfloatswithchanges intheLondonInterbankOfferedRate(“LIBOR”)andinothercasesthe interestratefloatswithLIBORwithoutany initialfixed-rate period. The principal terms of the outstanding trust preferred securities, including those which were assumed by the Company throughacquisitions,aresummarizedinthefollowingtable:




May2003 TowerGroupStatutoryTrustI

May2033 AtouroptionatparonorafterMay15,2008

Three-monthLIBORplus410basispoints


September2003 TowerGroupStatutoryTrustII

September2033 AtouroptionatparonorafterSeptember30,2008



May2004 PreserverCapitalTrustI

May2034 AtouroptionatparonorafterMay24,2009



December2004 TowerGroupStatutoryTrustIII




December2004 TowerGroupStatutoryTrustIV

March2035 AtouroptionatparonorafterDecember21,2009



March2006 TowerGroupStatutoryTrustV

April2036 AtouroptionatparonorafterApril7,2011

8.5625%untilMarch31,2011;three-monthLIBORplus330basispointsthereafter


January2007 TowerGroupStatutoryTrustVI

March2037 AtouroptionatparonorafterMarch15,2012

8.155%untilJanuary25,2012;three-monthLIBORplus300basispointsthereafter


December2006 CastlePointManagementStatutoryTrustII




December2006 CastlePointManagementStatutoryTrustI




September2007 CastlePointBermudaCapitalTrustI

December2037 AtouroptionatparonorafterSeptember27,2012



Thecarryingamountreportedforthesubordinateddebentureswas$235.1millionand$101.0millionatDecember31,2009and2008,respec-tively.Baseduponmodelsusingthespreadsbetweenthe interest ratesonthesubordinateddebtand30-yearTreasuryNotes,managementhasestimatedthefairvalueofthesubordinateddebttobe$248.4millionatDecember31,2009.

Total interest expense incurred for all subordinated debentures,including amortization of deferred origination costs, was $17.4 million,$7.9 million and $8.2 million, respectively, for the three years endedDecember31,2009,2008and2007.

AggregatescheduledmaturitiesofthesubordinateddebenturesatDecember31,2009are:

($inthousands)

2033 $� 20,6202034 25,7752035 13,4032036 123,7132037 51,547

$235,058

page F-30

note13—stoCkholders’equIty

authorized Shares of Common StockOnJanuary28,2009,anamendmenttoincreasethenumberofautho-rized shares of common stock, par value $0.01 per share, from40,000,000 shares to 100,000,000 shares was approved at a specialmeetingofstockholders.TheamendmentwasfiledwiththeSecretaryoftheStateofDelawareonFebruary4,2009.

Shares of Common Stock IssuedIn connection with the acquisition of Specialty Underwriters’ Alliance(“SUA”)onNovember13,2009,theCompanyissued4,460,092sharestotheshareholdersofSUAincreasingCommonStockby$44,600andPaid-inCapitalby$105.8million.

In connection with the acquisition of CastlePoint on February 5,2009, the Company issued 16,869,572 shares to the shareholders ofCastlePointincreasingCommonStockby$169,000andPaid-inCapitalby$421.5million.

In2007,theCompanyissued3,450,200sharesfromwhichitraised$89.4million,netofunderwritingdiscountsandexpenses.

For the year ended December 31, 2009, the Company issued52,310newcommonsharesastheresultofemployeestockoptionexer-cisesand issued310,208newcommonsharesastheresultof restrictedstock grants. For the year ended December 31, 2008, the Companyissued23,366newcommonsharesastheresultofemployeestockoptionexercises and issued 159,740 new common shares as the result ofrestricted stock grants. For the year ended December 31, 2007, theCompany issued81,100newcommonsharesas the resultofemployeestock option exercises and issued 93,581 new common shares as theresultofrestrictedstockgrants.

FortheyearsendedDecember31,2009and2008,theCompanypurchased 43,820 and 24,615 shares, respectively, of its common stockfromemployeesinconnectionwiththevestingofrestrictedstockissuedinconjunctionwithits2004LongTermEquityCompensationPlan(the“Plan”).Theshareswerewithheldatthedirectionofemployeesasper-mittedunderthePlaninordertopaytheexpectedamountoftaxliabilityowedbytheemployeesfromthevestingofthoseshares.Inaddition,fortheyearendedDecember31,2009and2008,11,065and14,889shares,respectively, of common stock were surrendered to the Company as aresultofrestrictedstockforfeitures.

WarrantsAspartoftheIPOinOctober2004,theCompanyissuedtoFriedman,Billings, Ramsey & Co., Inc. (“FBR”), the lead underwriter, warrants topurchase189,000sharesoftheCompany’scommonstockatanexercisepriceof$8.50pershare.ThewarrantswereexercisableforatermoffiveyearsbeginningonOctober20,2004andexpiredonOctober20,2009.

During 2008, FBR assigned the then outstanding warrants to six of itsemployees,twoofwhomexercisedtheirwarrantsduring2008.In2009,theCompanyissued16,193treasurysharestoFBRemployeesincashlessexercisesoftheirwarrants.AsofDecember31,2009,therewerenowar-rantsoutstanding.

Dividends DeclaredTheCompanydeclareddividendsoncommonstockof$10.7millionand$4.6millionyearendedDecember31,2009and2008,respectively.

note14—stoCkBasedCompensatIon

2004 Long-Term equity Compensation planIn2004,theCompany’sBoardofDirectorsadoptedanditsstockholdersapproved a long-term incentive plan (the “2004 Long-Term EquityCompensationPlan”).

Theplanprovides for thegrantingofnon-qualifiedstockoptions,incentivestockoptions(withinthemeaningofSection422oftheCode),stockappreciationrights(“SARs”), restrictedstockandrestrictedstockunitawards,performancesharesandothercashorshare-basedawards.Themaximumamountofshare-basedawardsauthorizedis2,325,446ofwhich239,166areavailableforfuturegrantsasofDecember31,2009.

2001 Stock award planInDecember2000,theBoardofDirectorsadoptedalong-termincen-tiveplan(the“2001StockAwardPlan”).Theplanprovidedforavarietyof awards, including incentive or non-qualified stock options, perfor-manceshares,SARsoranycombinationoftheforegoing.

As of December 31, 2009, there are 122,580 shares of commonstockoptionsoutstandingthatarefullyvested.Withtheadoptionofthe2004Long-TermIncentiveCompensationPlan,nofurtherawardsmaybegrantedunderthe2001StockAwardPlan.

Restricted Stock awardsDuring the three years ended December 31, 2009, 2008 and 2007,restrictedstocksharesweregrantedtoseniorofficersandkeyemployeesas shown in the table below. Included in the restricted stock sharesgranted in2009were83,228restrictedstocksharesthatwereoriginallyissuedtoemployeesordirectorsofCastlePointandwereconvertedintorestrictedsharesoftheCompany’scommonstockupontheacquisitionofCastlePoint.Thefairvalueofallrestrictedstockawardsonthedateofgrantduring2009,2008and2007was$7.3million,$3.9millionand$3.0million, respectively. Compensation expense recognized for the threeyearsendedDecember 31, 2009, 2008and 2007 was$2.6 million, $1.3millionand$1.0millionnetoftax,respectively.Thetotalintrinsicvalueofrestrictedstockvestingwas$1.8million,$2.0millionand$2.1milliondur-ing2009,2008and2007,respectively.TheintrinsicvalueoftheunvestedrestrictedstockoutstandingasofDecember31,2009is$11.1million.

ChangesinrestrictedstockforthethreeyearsendedDecember31,2009,2008and2007wereasfollows:


2009 2008 2007

Number of

Shares

Weighted average

grant Date Fair Value

Numberof

Shares

WeightedAverage

GrantDateFairValue

Numberof

Shares

WeightedAverage

GrantDateFairValue

Outstanding,January1 258,645 $26.05 195,468 $24.69 180,766 $17.35 Granted 310,208 23.50 159,740 24.39 93,581 32.20 Vested (83,765) 24.58 (81,674) 19.41 (68,587) 15.92 Forfeitures (11,065) 26.04 (14,889) 26.88 (10,292) 22.59

Outstanding,December31 474,023 $24.64 258,645 $26.05 195,468 $24.69

page F-31

SUa Restricted Deferred Stock awardsAsummaryofthestatusoftheSUAnon-vestedrestrictedstockawards,afterconversionoftheawardstotheCompany’scommonstockonthedateofacquisitiononNovember13,2009,asofDecember31,2009andchangesduringtheperiodfromtheacquisitiontoDecember31,2009ispresentedinthefollowingtable:

Numberof

Shares

WeightedAverage

GrantDateFairValue

Outstanding,dateofacquisition — $� �— Granted 92,276 23.74 Vested (46,088) 23.74 Forfeitures — —

Outstanding,December31,2009 46,188 $23.74

Stock OptionsThefollowingtableprovidesananalysisofstockoptionactivityduringthethreeyearsendedDecember31,2009,2008and2007:

2009 2008 2007

Number of Shares

average exercise

priceNumberofShares

AverageExercise

Price

Numberof

Shares

AverageExercise

Price

Outstanding,January1 258,530 $��5.47 281,896 $5.57 362,996 $4.94 Grantedatfairvalue 1,349,361 22.51 — — — — Exercised (52,310) 14.17 (23,366) 6.65 (81,100) 2.78 Forfeituresandexpirations (168,562) 22.70 — — — —

Outstanding,December31 1,387,019 $19.62 258,530 $5.47 281,896 $5.57

Exercisable,December31 1,197,459 $19.34 234,230 $5.15 233,296 $4.95

OptionsoutstandingandexcercisableasofDecember31,2009areshownonthefollowingtable:

OptionsOutstanding OptionsExercisable

RangeofExercisePricesNumberofShares

AverageRemaining

ContractualLife(Years)

AverageExercise

PriceNumberofShares

AverageExercise

Price

Under$5.00 244,080 2.9 $� 5.63 244,080 $��5.63$5.00–$10.00 735,680 6.7 18.50 609,934 18.47$10.01–$20.00 230,006 7.9 26.94 166,192 27.02$20.01–$30.00 177,253 4.9 34.05 177,253 34.05

TotalOptions 1,387,019 6.0 $19.62 1,197,459 $19.34

Includedinoptionsgrantedin2009were1,148,308stockoptionsthatwereoriginallyissuedtoemployeesordirectorsofCastlePointonfourgrant

datesandwereconvertedintooptionstoacquiresharesoftheCompany’scommonstockupontheacquisitionofCastlePoint.Alsoincludedinoptionsgrantedin2009were201,058stockoptionsthatwereoriginallyissuedtoemployeesofSUAontwograntdatesandwereconvertedintooptionstoacquiresharesoftheCompany’scommonstockupontheacquisitionofSUA.

ThefairvalueoftheoptionsgrantedtoreplacetheCastlePointoptionswasestimatedusingtheBlack-ScholespricingmodelasofFebruary5,2009,thedateofconversionfromCastlePointstockoptionstotheCompany’sstockoptions,withthefollowingweightedaverageassumptions:riskfreeinterestrateof1.46%to1.83%,dividendyieldof0.8%,volatilityfactorsoftheexpectedmarketpriceoftheCompany’scommonstockof43.8%to45.3%,andaweighted-averageexpectedlifeoftheoptionsof3.3to5.3years.

ThefairvalueoftheoptionsgrantedtoreplacetheSUAoptionswasestimatedusingtheBlack-ScholespricingmodelasofNovember13,2009,thedateofconversionfromSUAstockoptionstotheCompany’sstockoptions,withthefollowingweightedaverageassumptions:riskfreeinterestrateof1.66%,dividendyieldof1.2%,volatility factorsof theexpectedmarketpriceof theCompany’scommonstockof43.8%,andaweighted-averageexpectedlifeoftheoptionsof1.4years.

ThefairvaluemeasurementobjectiveoftherelevantGAAPguidanceisachievedusingtheBlack-Scholesmodelasthemodel(a)isappliedinamannerconsistentwiththefairvaluemeasurementobjectiveandotherrequirementsofGAAP,(b)isbasedonestablishedprinciplesoffinancialeco-nomictheoryandgenerallyappliedinthatfieldand(c)reflectsallsubstantivecharacteristicsoftheinstrument.

Compensation expense (net of tax) related to stock options was $1.0 million and $49,900 for the year ended December 31, 2009 and 2008,respectively.TheintrinsicvalueofstockoptionsoutstandingasofDecember31,2009is$8.0million,ofwhich$7.4millionisrelatedtovestedoptions.

page F-32

Total equity Compensation Not Yet RecognizedThe total remaining compensation cost related to non-vested stockoptions and restricted stock awards not yet recognized in the incomestatement was $8.9 million of which $0.6 million was for stock optionsand$8.3millionwas for restrictedstockasofDecember31,2009.Theweightedaverageperiodoverwhichthiscompensationcostisexpectedtoberecognizedis3.3years.

note15—InCometa xesTheCompanyfilesaconsolidatedFederalincometaxreturn.Theprovi-sion for Federal, state and local income taxes consists of the followingcomponents:

($inthousands) 2009 2008 2007

CurrentFederalincometaxexpense $�54,082 $�28,346 $�27,417Currentstateincometaxexpense 2,458 5,432 3,545DeferredFederalandstateincome tax(benefit) (5,038) (1,676) (4,804)

Provisionforincometaxes $�51,502 $�32,102 $�26,158

Deferredtaxassetsandliabilitiesaredeterminedusingtheenactedtaxratesapplicabletotheperiodthetemporarydifferencesareexpectedto be recovered. Accordingly, the current period income tax provisioncan be affected by the enactment of new tax rates. The net deferredincome taxes on the balance sheet reflect temporary differencesbetween the carrying amounts of the assets and liabilities for financialreportingpurposesandincometaxpurposes,taxeffectedata35%rate.Significant components of the Company’s deferred tax assets andliabilitiesareasfollows:



Deferred tax asset: Claimsreservediscount $� 32,477 $�11,863 Unearnedpremium 40,113 12,837 Equitycompensationplans 7,077 273 Investmentimpairments 16,103 8,680 Netoperatinglosscarryforwards 18,839 13,632 Capitallosscarryforwards — 2,848 Other 2,360 650

Totaldeferredtaxassets 116,969 50,783Deferred tax liability: Deferredacquisitioncostsnetofdeferred cedingcommissionrevenue 40,673 18,578 Warrantreceivedfromunconsolidatedaffiliate — 1,612 Gainfromissuanceofcommonstockby unconsolidatedaffiliate — 3,706 Depreciationandamortization 14,439 7,096 Netunrealizedappreciation(depreciation) ofsecurities 18,730 (18,919) Equityincomeinunconsolidatedaffiliate — 1,111 Salvageandsubrogation 314 764 Accuralofbonddiscount 986 628 Other 70 —

Totaldeferredtaxliabilities 75,212� 14,576

Deferredincometaxes $� 41,757 $�36,207�

Inassessingthevaluationofdeferredtaxassets,theCompanycon-siders whether it is more likely than not that some portion or all of thedeferred tax assets will not be realized. The ultimate realization ofdeferredtaxassets isdependentuponthegenerationof future taxableincomeduringtheperiodsinwhichthosetemporarydifferencesbecomedeductible.Priortopurchase,CPMestablishedavaluationallowanceof$1.9millionagainstitsstateNOLbenefits.TheCompanyhasreviewed

theCPMvaluationallowanceanddeterminedthatitshouldberecordedbytheCompanyasoftheacquisitiondate.

Preserver,whichwasacquiredbytheCompanyonApril 10,2007,CastlePoint,whichwasacquiredbytheCompanyonFebruary5,2009,andSUA,whichwasacquiredbytheCompanyonNovember13,2009,have tax loss carryforwards and other tax assets that the Companybelieveswillbeusedinthefuture,subjecttochangeofownershiplimita-tionspursuanttoSection382oftheInternalRevenueCode(“IRC”)andtotheabilityofthecombinedpost-mergercompanytogeneratesuffi-cient taxable income to use the benefits before the expiration of theapplicablecarryforwardperiods.

Section382 imposes limitationsonacorporation’sability toutilizeitsnetoperatinglosscarryforwards(“NOL”)ifitexperiencesan“owner-shipchange.”Asaresultoftheacquisitions,Preserver,CastlePointandSUA underwent ownership changes as defined in the IRC. Use of theNOLfromPreserver,CastlePointandSUAof$36.2million,$15.0millionand$2.7million, respectively,or$53.9million in total, are subject toanannual limitationunderSection382determinedbymultiplyingthepur-chasepriceofPreserver,CastlePointandSUAby theapplicable long-term tax free rate resulting in an annual limitation amount ofapproximately $2.8 million, $11.1 million and $4.6 million, respectively.Any unused annual limitation may be carried over to later years.Preserver’sNOLbalancehasbeenadjustedtoreflectthefinalizationofPreserver’s income tax returns with the IRS. The $53.8 million of NOLwillexpireifunusedin2011-2027.

TheCompanymadeelectionsunderIRC§338(g)forCPBHandCPRe,bothofwhichareBermudaentities.TheeffectoftheseelectionsistotreatCPBHandCPReasnewcorporations,effectiveasofthedayof the closing, with a fair market value basis in their assets for US taxpurposes and a new taxable year beginning the day after the closing.TheCompanyalsomadea“check-the-box”electiontotreatCPBHasadisregarded entity for US tax purposes. Furthermore, the Companymade an IRC § 953(d) election with regards to CPRe for the taxableyear beginning after the date of acquisition. The 953(d) election willcause CPRe to be treated as a domestic corporation for US incometaxpurposes.

The Company has also made elections under IRC § 338(h) (10)withregardstoitspurchaseofHermitage.Theeffectoftheseelectionsisto treatHermitageasanewcorporation,effectiveasof thedayof theclosing,withafairmarketvaluebasisintheirassetsforUStaxpurposesandanewtaxableyearbeginningthedayaftertheclosing.

TheCompanyadoptedtherelevantprovisionsofGAAPconcern-ing uncertainties in income taxes on January 1, 2007. At the adoptiondateandasofDecember31,2009,theCompanyhadnomaterialunrec-ognizedtaxbenefitsandnoadjustmentstoliabilitiesoroperationswererequired.

The Company recognizes interest and penalties related to uncer-tain tax positions in income tax expense which was zero for the yearsendedDecember31,2009,2008and2007.

Tax years 2004 through 2008 are subject to examination by theInternalRevenueService,which iscurrentlyperforminganauditof the2006 tax year. In addition, the Internal Revenue Service is auditingCPRe’sfederalexcisetaxandprotectiveincometaxreturnsforthe2008taxyearandSUA’sfederalincometaxreturnforthe2007taxyear.ThereiscurrentlyaNewYorkStateDepartmentofTaxationandFinanceauditunderwayforthetaxyearsof2003through2004.TheCompanydoesnotanticipateanymaterialadjustmentsfromtheseaudits.

page F-33

The provision for Federal income taxes incurred is different fromthatwhichwouldbeobtainedbyapplyingtheFederalincometaxratetonetincomebeforetaxes.Theitemscausingthisdifferenceareasfollows:

($inthousands) 2009 2008 2007

Federalincometaxexpenseat U.S.statutoryrate(35%) $�56,291 $�31,353 $�24,934 Taxexemptinterest (4,159) (1,953) (1,466) StateincometaxesnetofFederalbenefit 1,597 3,531 2,303 Gainonbargainpurchase (4,615) — — Acquisition-relatedtransactioncosts 2,342 — — Other 46 (829) 387

Provisionforincometaxes $�51,502 $�32,102 $�26,158

note16—employeeBeneFItpl ansThe Company maintains a defined contribution Employee PretaxSavings Plan (401(k) Plan) for its employees. The Company matches50%ofeachparticipant’scontributionupto8%oftheparticipant’seligi-blecontribution.TheCompanyincurredapproximately$1.4million,$1.3millionand$1.0millionofexpensein2009,2008and2007,respectively,relatedtothe401(k)Plan.

Supplemental executive Retirement plan (“SeRp”)The SERP is a non-qualified defined contribution plan effective as ofJanuary1,2009that is intendedtoenhanceretirementbenefitsfortheCompany’s most senior executives and certain other key employees.Eligibility to participate in the SERP generally requires three years ofprior employment with the Company for Senior Vice Presidents andbetween five and 10 years of prior employment with the Company forother key employees. In 2010, it is expected that all of the NamedExecutiveOfficersandcertainotherkeyexecutivesselectedatthedis-cretionoftheCompensationCommitteewillbeeligibletoparticipateintheSERP.TheCompanywillmakeannualcontributionstotheSERPonbehalfofeachparticipant.ForMr.Lee,theamountoftheannualcontri-bution isequaltotheproductof2.0%ofhisannualcashcompensationmultipliedbyhisnumberofyearsofservicewiththeCompany,uptoamaximumof30years.Forotherparticipants,theamountoftheannualcontribution is equal to 5.0% of their annual cash compensation.Companycontributionsforeachparticipantremainunvesteduntilsuchparticipant has completed 10 years of service with the Company, andvest in fulluponcompletionof 10yearsof service.TheCompensationCommitteehasdiscretiontoterminatetheSERPortoadjustupwardordownwardtheleveloftheCompany’scontributioneachyear.

note17—CommItmentsandContIngenCIes

Legal proceedingsFromtimetotime,theCompanyisinvolvedinvariouslegalproceedingsin the ordinary course of business. For example, to the extent a claimasserted by a third party in a law suit against one of the Company’sinsuredscoveredbyaparticularpolicy,theCompanymayhaveadutytodefend the insuredpartyagainst theclaim.Theseclaimsmay relate tobodilyinjury,propertydamageorothercompensableinjuriesassetforthinthepolicy.SuchproceedingsareconsideredinestimatingtheliabilityforlossandLAEexpenses.

On May 28, 2009, Munich Reinsurance America, Inc. (“Munich”)commencedanactionagainstTower InsuranceCompanyofNewYork(“TICNY”) in theUnitedStatesDistrictCourt for theDistrictofNewJersey seeking, inter alia, to recover approximately $6.1 million undervarious retrocessional contracts pursuant to which TICNY reinsuresMunich.OnJune22,2009,TICNYfileditsanswer,inwhichit,interalia,asserted two separate counterclaims seeking to recover approximately$2.8 million under various reinsurance contracts pursuant to whichMunich reinsures TICNY. On June 17, 2009, Munich commenced a

separate actionagainst TICNY in theUnited States District Court fortheDistrictofNewJerseyseekingadeclaratoryjudgmentthatMunichisentitled to access to the TICNY’s books and records pertaining tovariousquotashareagreements,towhichtheTICNYfileditsansweronJuly7,2009.Becausethelitigationisonlyinitspreliminarystage,man-agement is unable to assess the likelihood of any particular outcome,includingwhatamounts,ifany,willberecoveredbythepartiesfromeachotherunderthereinsuranceandretrocessioncontractsthatareatissue.Accordingly, an estimate of the possible range of loss, if any, cannotbemade.

LeasesThe Company has various lease agreements for office space, furnitureandequipment.Thetermsoftheofficespaceleaseagreementsprovidefor annual rental increases and certain lease incentives including initialfree rent periods and cash allowances for leasehold improvements.The Company amortizes scheduled annual rental increases and leaseincentives ratably over the term of the lease. The Company’s futureminimumleasepaymentsareasfollows:

($inthousands) Amount

2010 $� 8,5712011 7,8802012 5,7632013 5,3862014 5,347Thereafter 27,537

$�60,484

Totalrentalexpensechargedtooperationswasapproximately$7.9million,$3.8millionand$4.3millionin2009,2008and2007,respectively.

assessmentsTower’sInsuranceSubsidiariesarealsorequiredtoparticipateinvariousmandatory insurancefacilitiesor infundingmandatorypools,whicharegenerallydesignedtoprovideinsurancecoverageforconsumerswhoareunable to obtain insurance in the voluntary insurance market. TheInsurance Subsidiaries are subject to assessments in New York, NewJerseyandother states forvariouspurposes, including theprovisionoffunds necessary to fund the operations of the New York InsuranceDepartment and the New York Property/Casualty Insurance SecurityFund, which pays covered claims under certain policies provided byimpaired, insolvent or failed insurance companies and various fundsadministered by the New York Workers’ Compensation Board, whichpayscoveredclaimsundercertainpoliciesprovidedby impaired, insol-vent or failed insurance companies. The Company was assessed $0 in2009and2008and$624,000 in2007 for itsproportional share of thetotalassessment for theProperty/CasualtySecurityFundandapproxi-mately$4.0million,$2.0millionand$1.4millionin2009,2008and2007,respectively, for itsproportionalshareof theoperatingexpensesof theNewYorkInsuranceDepartment.PropertycasualtyinsurancecompanyinsolvenciesorfailuresmayresultinadditionalsecurityfundassessmentstotheCompanyatsomefuturedate.AtthistimetheCompanyisunableto estimate the possible amounts, if any, of such assessments.Accordingly, the Company is unable to determine the impact, if any,suchassessmentsmayhaveonfinancialpositionorresultsofoperationsof the Company. The Company is permitted to assess premium sur-chargesonworkers’compensationpoliciesthatarebasedonstatutorilyenacted rates. Actual assessments have resulted in differences to theoriginalestimatesbasedonpermittedsurchargesof$2.2million,$0and($2.2million) in2009,2008and2007,respectively.TheCompanyesti-mates its liability for futureassessmentsbasedonactualwrittenpremi-umsandhistorical ratesandavailable information.AsofDecember31,2009 the liability for the various workers’ compensation funds, whichincludes amounts assessed on workers’ compensation policies was

page F-34

$11.6 million. This amount is expected to be paid over an eighteenmonth period ending June 30, 2011. As of December 31, 2008, theliabilityforthevariousworkers’compensationfundswas$1.0million.

note18—statutoryFInanCIalInFormatIonandaCCountIngpolICIes

United StatesForregulatorypurposes,theCompany’sInsuranceSubsidiariespreparetheir statutory basis financial statements in accordance with practicesprescribed or permitted by the state they are domiciled in (“statutorybasis” or “SAP”).The more significant SAP variances from GAAP areasfollows:• Policy acquisition costs are charged to operations in the year such

costsareincurred,ratherthanbeingdeferredandamortizedaspremi-umsareearnedoverthetermsofthepolicies.

• Ceding commission revenues are earned when ceded premiums arewritten except for ceding commission revenues in excess of antici-pated acquisition costs, which are deferred and amortized as cededpremiumsareearned.GAAPrequiresthatallcedingcommissionrev-enuesbeearnedas theunderlyingcededpremiumsareearnedoverthetermofthereinsuranceagreements.

• Certain assets including certain receivables, a portion of the netdeferredtaxasset,prepaidexpensesandfurnitureandequipmentarenotadmitted.

• Investmentsinfixed-maturitysecuritiesarevaluedatNAICvalueforstatutoryfinancialpurposes,whichisprimarilyamortizedcost.GAAPrequires certain investments in fixed-maturity securities classified asavailableforsale,tobereportedatfairvalue.

• Certainamounts related toceded reinsuranceare reportedonanetbasis within the statutory basis financial statements. GAAP requirestheseamountstobeshowngross.

• ForSAPpurposes,changesindeferredincometaxesrelatingtotem-porary differences between net income for financial reporting pur-posesandtaxableincomearerecognizedasaseparatecomponentofgainsandlossesinsurplusratherthanincludedinincometaxexpenseorbenefitasrequiredunderGAAP.

StateinsurancelawsrestricttheabilityofourInsuranceSubsidiariestodeclaredividends.State insurance regulators require insurancecom-panies to maintain specified levels of statutory capital and surplus.Generally, dividends may only be paid out of earned surplus, and theamountofaninsurer’ssurplusfollowingpaymentofanydividendsmustbereasonable inrelationtothe insurer’soutstanding liabilitiesandade-quatetomeetitsfinancialneeds.Further,priorapprovaloftheinsurancedepartmentofitsstateofdomicileisrequiredbeforeanyofourInsuranceSubsidiaries can declare and pay an “extraordinary dividend” to theCompany.

For the years ended December 31, 2009, 2008 and 2007, theCompany’sInsuranceSubsidiarieshadSAPnetincomeof$32.8million,$30.2millionand$43.6million,respectively.AtDecember31,2009and2008theCompany’sInsuranceSubsidiarieshadreportedSAPsurplusasregardspolicyholdersof$593.9millionand$305.2million, respectively,asfiledwiththeinsuranceregulators.

The Company’s Insurance Subsidiaries paid approximately $15.0million,$5.2millionand$8.5millionindividendsand/orreturnofcapitalto Tower in 2009, 2008 and 2007, respectively. As of December 31,2009, the maximum distribution that Tower’s Insurance Subsidiariescould pay without prior regulatory approval was approximately$52.8million.

BermudaCPReisregisteredasaClass3reinsurerunderTheInsuranceAct1978(Bermuda),amendmentstheretoandrelatedregulations(the“InsuranceAct”).UndertheInsuranceAct,CPReisrequiredtoprepareStatutoryFinancial Statements and to file a Statutory Financial Return. TheInsuranceActalsorequiresCPRetomaintainminimumsharecapitalandsurplus,andithasmettheserequirementsasofDecember31,2009.

For the year ended December 31, 2009, CPRe had statutory netincomeof$19.1millionandatDecember31,2009,hadstatutorysurplusof$255.0million.

For Bermuda registered companies, there are some differencesbetween financial statements prepared in accordance with GAAP andthose prepared on a statutory basis. Certain assets are non-admittedunder Bermuda regulations and deferred policy acquisition costs havebeenfullyexpensedtoincomeunderBermudaregulationsandprepaidexpensesandfixedassethavebeenremovedfromthestatutorybalancesheetunderBermudaregulations.

note19—FaIrvalueoFFInanCIalInstrumentsGAAPguidancerequiresallentitiestodisclosethefairvalueoffinancialinstruments,bothassetsandliabilitiesrecognizedandnotrecognizedinthebalancesheet, forwhich it ispracticable toestimate fair value.SeeNote 3—“Acquisitions” for further information about the fair value ofassetsandliabilitiesofCastlePoint,HermitageandSUAacquireduponacquisition.TheCompanyusesthefollowingmethodsandassumptionsinestimatingitsfairvaluedisclosuresforfinancialinstruments:

equity and fixed income investments:Fairvaluedisclosures for invest-mentsareincludedin“Note4—Investments.”

Common trust securities—statutory business trusts: Common trustsecuritiesareinvestmentsinrelatedparties;assuchit isnotpracticaltoestimatethefairvalueoftheseinstruments.Accordingly,theseamountsarereportedusingtheequitymethod.

agents’ balances receivable, assumed premiums receivable, receivable-claims paid by agency:Thecarryingvaluesreportedintheaccompany-ingbalancesheetsforthesefinancial instrumentsapproximatetheirfairvalues.

Reinsurance balances payable, payable to issuing carrier and funds held: Thecarryingvaluereportedinthebalancesheetforthesefinancialinstrumentsapproximatesfairvalue.

Subordinated debentures: Fair value disclosures for the subordinateddebt carried on the balance sheet for these financial statements areincludedin“Note12—Debt.”

note20—earnIngspershareEffectiveJanuary1,2009, theCompanyadopted relevantnewGAAPguidance, which requires that unvested share-based payment awardsthat contain nonforfeitable rights to dividends or dividend equivalents(whether paid or unpaid) be considered participating securities andincludedinthecomputationofearningspersharepursuanttothetwo-class method. This guidance became effective for financial statementsissued for fiscal years beginning after December 15, 2008, and interimperiodswithinthoseyears.

page F-35

In accordance with the two-class method, the Companyallocatesitsundistributednetearnings(netincomelessdividendsdeclaredduringthe period) to both its common stock and unvested share-based pay-mentawards(“unvestedrestrictedstock”).Becausethecommonshare-holdersandshare-basedpaymentawardholdersshareindividendsona1:1basis, theearningspershareonundistributedearnings isequivalent.Undistributedearningsareallocatedtoalloutstandingshare-basedpay-mentawards,includingthoseforwhichtherequisiteserviceperiodisnotexpectedtoberendered.

Allprior-periodearningspersharedatahavebeenadjustedretro-spectivelytoconformtotheprovisionsofthisnewguidance.Asaresult,weighted average common shares outstanding for the years endedDecember31,2008and2007increasedby250,010and212,424sharesto23,290,506and22,927,087 shares, respectively.Basicanddilutedearn-ings per share for the years ended December 31, 2008 and 2007decreasedby$0.02and$0.01,respectively.

The following table shows the computation of the Company’searningspersharepursuanttothetwo-classmethod:


(inthousands,exceptpershareamounts) 2009 2008 2007

NumeratorNetincome $�109,330 $�57,473 $�45,082DenominatorWeightedaveragecommon sharesoutstanding 39,363 23,291 22,927Effectofdilutivesecurities: Stockoptions 205 135 172 Unvestedrestrictedstockunits 9 36 — Warrants 3 23 29

Weightedaveragecommonandpotential dilutivesharesoutstanding 39,580 23,485 23,128

Earningspershare—basic Distributedearnings $� 0.26 $� 0.20 $� 0.15 Undistributedearnings 2.52 2.27 1.79

Total $� 2.78 $� 2.47 $� 1.94

Earningspershare—diluted $� 2.76 $� 2.45� $� 1.92

For the year ended December 31, 2009, 401,659 options to pur-chase Tower shares were not included in the computation of dilutedearningspersharebecausetheexercisepriceoftheoptionswasgreaterthantheaveragemarketprice.

note21—segmentInFormatIonThe Company has changed the presentation of its business results byallocating its previously reported insurance segment into brokerageinsuranceandspecialtybusiness,basedonthewaymanagementorga-nizesthesegments,formakingoperatingdecisionsandassessingprofit-ability. This change results in reporting three segments: brokerage(commercial and personal lines underwriting), specialty, which includesthirdpartyreinsuranceassumedbyCPRe,andinsuranceservices(under-writing, claims and reinsurance services). The prior period segmentdisclosures have been restated to conform to the current presentation.The Company considers many factors in determining reportable seg-mentsincludingeconomiccharacteristics,productionsources,productsorservicesofferedandtheregulatoryenvironment.

TheCompanyevaluatessegmentperformancebasedonsegmentprofit,whichexcludesinvestmentincome,realizedgainsandlosses,inter-est expense, income taxes and incidental corporate expenses.The Company does not allocate assets to segments because assets,whichconsistprimarilyofinvestmentsandfixedassets,otherthanintan-giblesandgoodwill,areconsideredintotalbymanagementfordecision-makingpurposes.Intangiblesandgoodwillareallocatedforpurposesofimpairment testing as more fully described in Note 6—“Goodwill andIntangibleAssets.”

Businesssegmentsresultsareasfollows:


($inthousands,) 2009 2008 2007

Brokerage Insurance SegmentREVENUESNetpremiumsearned $624,994 $296,719 $284,216Cedingcommissionrevenue 34,231 61,051 66,531Policybillingfees 2,944 2,004 2,005

Totalrevenues 662,169 359,774 352,752

EXPENSESLossandlossadjustmentexpenses 340,035 152,546 156,790Underwritingexpenses 246,556 153,495 149,565

Totalexpenses 586,591 306,041 306,355

Underwritingprofit $� 75,578 $� 53,733� $� 46,397

Specialty Business SegmentREVENUESNetpremiumsearned $�229,717 $� 17,832 $� 1,890Cedingcommissionrevenue 9,706 18,111 4,479

Totalrevenues 239,423 35,943 6,369

EXPENSESLossandlossadjustmentexpenses 135,462 10,193 1,116Underwritingexpenses 79,771 24,280 5,041

Totalexpenses 215,233 34,473 6,157

Underwritingprofit $� 24,190 $� 1,470� $� 212

Insurance Services SegmentREVENUESDirectcommissionrevenuefrom managinggeneralagency $� 1,583 $� 58,215 $� 28,795Claimsadministrationrevenue 1,482 5,392 2,314Otheradministrationrevenue 570 3,559 1,421Reinsuranceintermediaryfees 1,488 990 770Policybillingfees 21 343 33

Totalrevenues 5,144 68,499 33,333

EXPENSESDirectcommissionexpense paidtoproducers 1,707 26,798 14,055Otherinsuranceservicesexpenses: Underwritingexpensesreimbursed

toTICNY 1,446 12,346 5,793 Claimsexpensereimbursement

toTICNY 1,130 5,392 2,302

Totalexpenses 4,283 44,536 22,150

Insuranceservicespretaxincome $� 861 $� 23,963 $� 11,183

page F-36

Thefollowingtablereconcilesrevenuebysegmenttoconsolidatedrevenue:YearEndedDecember31,

($inthousands) 2009 2008 2007

Brokerageinsurancesegment $662,169 $359,774 $352,752Specialtybusinesssegment 239,423 35,943 6,369Insuranceservicessegment 5,144 68,499 33,333

Totalsegmentrevenues 906,736 464,216 392,454Netinvestmentincome 74,866 34,568 36,699Netrealizedgains(losses)oninvestments,includingother-than-temporaryimpairments 1,501 (14,354) (17,511)

Consolidatedrevenues $983,103 $484,430� $411,642

ThefollowingtablereconcilestheresultsoftheCompany’sindividualsegmentstoconsolidatedincomebeforetaxes:


($inthousands) 2009 2008 2007

Brokerageinsurancesegmentunderwritingprofit $� 75,578 $�53,733 $�46,397Specialtybusinesssegmentunderwritingprofit 24,190 1,470 212Insuranceservicessegmentpretaxincome 861 23,963 11,183Netinvestmentincome 74,866 34,568 36,699Netrealizedgains(losses)oninvestments,includingother-than-temporaryimpairments 1,501 (14,354) (17,511)Corporateexpenses (3,801) (1,626) (1,593)Acquisition-relatedexpenses (14,038) — —Interestexpense (18,122) (8,449) (9,290)Otherincome(loss) 19,797 270 5,143

Incomebeforetaxes $160,832 $�89,575� $�71,240

note22—suBsequentevents

acquisition of the personal Lines Division of OneBeacon group Ltd.OnFebruary2,2010theCompanyannouncedthesigningofadefinitiveagreementtoacquirethePersonalLinesDivisionofOneBeacon,subjecttocustomary closing conditions and regulatory approvals. For the purchase price of $32.5 million plus book value, Tower will acquire MassachusettsHomelandInsuranceCompany,YorkInsuranceCompanyofMaineandtwomanagementcompanies.Themanagementcompaniesaretheattorneys-in-factforAdirondackInsuranceExchange,aNewYorkreciprocal insurer,andNewJerseySkylandsInsuranceAssociation,aNewJerseyreciprocalinsurer,anditsNewJerseydomiciledstockinsurancesubsidiary,NewJerseySkylandsInsuranceCompany.Towerwillalsopurchasethesurplusnotesissuedbythetworeciprocalinsurersforanamountequaltothestatutorysurplusintheexchanges(approximately$103millionatDecember31,2009).Thistransactionissubjecttoapprovalsbytheappropriateregulatoryagenciesandisexpectedtocloseattheendofthesecondquarterof2010.Towerwillwriteandmanagetheprivatepassengerautomobile,homeownersandpackagepoliciesthroughthecompaniescurrentlyissuingthesepoliciesandcombine its existing personal lines operations, which is currently reflected in our Brokerage Insurance segment, with the business being acquired.Excluded from this transaction are AutoOne, specialty collector car and boat businesses, and Houston General companies. The Personal LinesDivisionwritesbusinessintheNortheasternUnitedStateswithofficesin:Canton,Massachusetts;SouthPortland,Maine;andWilliamsville,NewYork.

Share Repurchase programAspartoftheCompany’scapitalmanagementplan,theBoardofDirectorsofToweronFebruary,26,2010,approveda$100millionsharerepurchaseprogram.Purchaseswillbemadefromtimetotimeintheopenmarketorinprivatelynegotiatedtransactionsinaccordancewithapplicablelawsandregulations. The program has no expiration date. Based on the closing stock price of Tower common stock on February 26, 2010, the authorizedrepurchasewouldrepresentapproximately9.5%ofoutstandingshares.

Quarterly DividendTowerGroup,Inc.’sBoardofDirectorsapprovedaquarterlydividendonFebruary5,2010of$0.07persharepayableMarch26,2010tostockholdersofrecordasofMarch15,2010.

page F-37

note23—unaudItedquarterlyFInanCIalInFormatIon

2009

($inthousands,exceptpershareamounts) First Second Third Fourth Total

Revenues $200,322 $254,983 $256,340 $�271,458 $�983,103NetIncome 17,976 30,627 29,978 30,749 109,330Netincomepershare: Basic(1) $� 0.53 $� 0.76 $� 0.74 $� 0.72 $� 2.78 Diluted(1) $� 0.53 $� 0.75 $� 0.74 $� 0.72 $� 2.76

2008

First Second Third Fourth Total

Revenues $�110,492 $�106,798 $�130,747 $�136,393 $�484,430NetIncome 14,853 10,169 16,716 15,735 57,473Netincomepershare: Basic(1),(2) $� 0.64 $� 0.44 $� 0.72 $� 0.67 $� 2.47 Diluted(1),(2) $� 0.63 $� 0.44 $� 0.71 $� 0.67 $� 2.45

2007

First Second Third Fourth Total

Revenues $� 84,317 $�102,784 $�112,014 $�112,527 $�411,642NetIncome 11,628 12,379 14,384 6,691 45,082Netincomepershare: Basic(1),(2) $� 0.49 $� 0.54 $� 0.62 $� 0.29 $� 1.94 Diluted(1),(2) $� 0.49 $� 0.53 $� 0.61 $� 0.29 $� 1.92

(1) Sincetheweightedaveragesharesforthequartersarecalculatedindependentlyoftheweightedaveragesharesfortheyear,quarterlyearningspersharemaynottotaltoannualearningsper share. In addition, preferred dividends are excluded from the quarterly calculations of earnings per share in 2007 since they are anti-dilutive, but are included in the year endcalculations.

(2) PrioryearearningspersharehavebeenrestatedfornewGAAPguidanceadoptedin2009whichrequiresunvestedshare-basedpaymentawardsthatcontainnon-forfeitablerightstodivi-dends or dividend equivalents be considered participating securities and included in the computation of earnings per share. Basic and diluted earnings per share for the years endedDecember31,2008and2007decreasedby$0.02and$0.01,respectively.

page 121

Item9.ChangesInanddIsagreementswIthaCCountantsoraCCountIngandFInanCIaldIsClosureOnNovember30,2009, theAuditCommitteeapproved theengage-ment of PricewaterhouseCoopers LLP (“PWC”) as the Company’sindependentregisteredpublicaccountingfirmfortheCompany’sfiscalyear beginning January 1, 2010. During the two fiscal years endedDecember 31, 2009, and the interim period through the filing of thisForm10-KonMarch1,2010, theCompanydidnotconsultwithPWCwith respect to the application of accounting principles to any specifictransactionor the typeofauditopinion thatmightbe renderedon theCompany’sfinancialstatements.Further,PWCdidnotprovideanywrit-ten or oral advice that was an important factor considered by theCompany in reachingadecisionas toanysuchaccounting,auditingorfinancial reporting or any matter being the subject of disagreement or“reportableevent”oranyothermatterasdefinedinRegulationS-K,Item304(a)(1)(iv)or(a)(1)(v).

OnNovember30,2009,weinformedJohnsonLambert&Co.LLP(“JLCO”)thatitwouldbedismissedastheCompany’sindependentreg-istered public accounting firm effective following the completion byJLCO of its report on the consolidated financial statements of theCompanyasofDecember31,2009andforthefiscalyearthenended,atwhichtimetheCompanywouldamenditsForm8-KfiledonDecember3, 2009 to reflect the actual dismissal date of JLCO. The AuditCommitteeapproved thedismissalofJLCO.The reportbyJLCOontheconsolidatedfinancialstatementsoftheCompanyasofDecember31,2009and2008andforthefiscalyearsthenendeddidnotcontainanadverseopinionoradisclaimerofopinion,norwasanysuchreportquali-fiedormodifiedastouncertainty,auditscopeoraccountingprinciples.DuringthefiscalyearsendedDecember31,2009and2008,andthroughthe filing of thisForm10-KonMarch 1, 2010, there were nodisagree-ments with JLCO on any matter of accounting principles or practices,financial statement disclosure, or auditing scope or procedure which, ifnot resolved to thesatisfactionofJLCO,wouldhavecausedJLCOtomakereferencetothesubjectmatterofthedisagreement(s)initsreportsonthefinancialstatementsforsuchyears.DuringthefiscalyearsendedDecember31,2009and2008andthroughthefilingofthisForm10-KonMarch1,2010,therewereno“reportableevents”withrespecttotheCompany as that term is defined in Item 304(a)(1)(iv) or (a)(1)(v) ofRegulationS-K.

Item9a.ControlsandproCedures

(a) Disclosure Controls and proceduresTheCompany’sprincipalexecutiveofficeranditsprincipalfinancialoffi-cer,basedontheirevaluationoftheCompany’sdisclosurecontrolsandprocedures(asdefinedinExchangeActRule13a-15(e)),haveconcludedthattheCompany’sdisclosurecontrolsandproceduresareeffectiveforthe purposes set forth in the definition thereof in Exchange Act Rule13a-15(e)asofDecember31,2009.

(b) Management’s Report on Internal Control over Financial ReportingThemanagementofTowerGroup,Inc.anditssubsidiariesisresponsibleforestablishingandmaintainingadequateinternalcontroloverfinancialreporting for Tower as defined in Rule 13a-15(f) under the SecuritiesExchangeActof1934.

Our internalcontrolover financial reporting isaprocessdesignedbyorunderthesupervisionofourprincipalexecutiveandprincipalfinan-cial officers to provide reasonable assurance regarding the reliability offinancialreportingandthepreparationoffinancialstatementsforexter-nal purposes in accordance with generally accepted accounting princi-ples. Our internal control over financial reporting includes policies andproceduresthat(1)pertaintothemaintenanceofrecordsthat,inreason-abledetail, accuratelyand fairly reflect transactionsanddispositionsofassets;(2)providereasonableassurancethattransactionsarerecordedasnecessary to permit preparation of financial statements in accordancewith generally accepted accounting principles, and that receipts andexpendituresarebeingmadeonly inaccordancewithauthorizationsofmanagementandthedirectorsoftheCompany;and(3)providereason-ableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionoftheCompany’sassetsthatcouldhaveamaterialeffectonourfinancialstatements.

Because of its inherent limitations, internal control over financialreportingmaynotpreventordetectmisstatements.Also,projectionsofany evaluation of effectiveness to future periods are subject to theriskthatcontrolsmaybecomeinadequatebecauseofchangesincondi-tions,or that thedegreeorcompliancewith thepoliciesorproceduresmaydeteriorate.

On November 3, 2009, we completed our acquisition of SUA.ItsoperationshavebeenexcludedfromourreviewoftheinternalcontrolsunderSection404oftheSarbanes-OxleyActof2002.Weareintegrat-ing SUA’s operations, including internal controls and processes, andextending our Section 404 compliance program to SUA’s operations.SUA accounted for 14.7% of assets and 13.5% of net income of theCompanyin2009.

Managementhasassesseditsinternalcontrolsoverfinancialreport-ingasofDecember31,2009 in relation tocriteria foreffective internalcontroloverfinancialreportingdescribedinInternalControl—IntegratedFramework Issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (COSO). Based on this assessment underthose criteria, Tower’s management concluded that its internal controloverfinancialreportingwaseffectiveasofDecember31,2009.

(c) attestation report of the Company’s registered public accounting firmJohnsonLambert&Co.LLP,anindependentregisteredpublicaccount-ing firm, which has audited and reported on the consolidated financialstatementscontainedinthisForm10-K,hasissueditswrittenattestationreportontheCompany’s internalcontroloverfinancialreportingwhichappearsonpageF-2ofthisreport.

(d) Changes in internal control over financial reportingOn November 13, 2009, we completed the acquisition of SpecialtyUnderwriters’ Alliance, Inc. (SUA). SUA has an existing program ofinternalcontrolsoverfinancialreportingincompliancewiththeSarbanes-OxleyActof2002,which isbeing integrated intoourSarbanes-Oxleyprogramforinternalcontrolsoverfinancialreporting.

Item9B.otherInFormatIonNotapplicable.

page 122

paRT IIIItem10.dIreCtorsandexeCutIveoFFICersoFtheregIstr antThe informationcalled forby this Itemandnotprovidedhereinwillbecontained in the Company’s Proxy Statement, which the Companyintendstofilewithin120daysaftertheendofthecompany’sfiscalyearendedDecember31,2009,andsuchinformationis incorporatedhereinbyreference.

The Company has adopted a Code of Business Conduct andEthicsandposteditonitswebsitehttp://www.twrgrp.com/underInvestorInformationandthenunderCorporateGovernance.

Item11.exeCutIveCompensatIonTheinformationcalledforbythisitemwillbecontainedintheCompany’sProxy Statement, which the Company intends to file within 120 daysafter the end of the Company’s fiscal year ended December 31, 2009,andsuchinformationisincorporatedhereinbyreference.

Item12.seCurItyownershIpoFCertaInBeneFICIalownersandmanagementandrel atedstoCkholdermattersThe informationcalled for by the Item and not provided hereinwillbecontained in the Company’s Proxy Statement, which the Companyintendstofilewithin120daysaftertheendoftheCompany’sfiscalyearendedDecember31,2009,andsuchinformationis incorporatedhereinbyreference.

Item13.CertaInrel atIonshIpsandrel atedtr ansaCtIons,anddIreCtorIndependenCeThe informationcalled for by the Item and not provided hereinwillbecontained in the Company’s Proxy Statement, which the Companyintendstofilewithin120daysaftertheendoftheCompany’sfiscalyearendedDecember31,2009,andsuchinformationis incorporatedhereinbyreference.

Item14.prInCIpalaCCountantFeesandservICesThe informationcalled for by the Item and not provided hereinwillbecontained in the Company’s Proxy Statement, which the Companyintendstofilewithin120daysaftertheendoftheCompany’sfiscalyearendedDecember31,2009,andsuchinformationis incorporatedhereinbyreference.

paRT IVItem15.exhIBIts,FInanCIalstatementsChedules

A. (1) Thefinancialstatementsandnotestofinancialstatementsarefiledaspartofthisreportin“Item8.FinancialStatementsandSupplementaryData.”

(2) The financial statement schedules are listed in the Index toConsolidatedFinancialStatementSchedules.

(3) TheexhibitsarelistedintheIndextoExhibits.

Thefollowingentireexhibitsareincluded:

Exhibit21.1 SubsidiariesofTowerGroup,Inc.

Exhibit23.1 ConsentofJohnsonLambert&Co.LLP

Exhibit31.1 CertificationofCEOtoSection302(a)

Exhibit31.2 CertificationofCFOtoSection302(a)

Exhibit32 CertificationofCEOandCFOtoSection906

page 123

SIgNaTUReSPursuanttotherequirementsofSection13or15(d)oftheSecuritiesExchangeActof1934,theregistranthasdulycausedthisreporttobesignedonitsbehalfbytheundersigned,thereuntodulyauthorized.

TOWeR gROUp, INC. Registrant

Date:March1,2010 /s/MichaelH.Lee MichaelH.Lee ChairmanoftheBoard, PresidentandChiefExecutiveOfficer

PursuanttotherequirementsoftheSecuritiesActof1934,thisreporthasbeensignedbythefollowingpersonsonbehalfoftheregistrantandinthecapacitiesindicated.

Signature Title Date/s/ MICHAELH.LEE ChairmanoftheBoard,PresidentandChiefExecutive

Officer(PrincipalExecutiveOfficer)March1,2010

MichaelH.Lee

/s/ FRANCISM.COLALUCCI Senior Vice President, Chief Financial Officer andTreasurer, Director (Principal Financial Officer,PrincipalAccountingOfficer)

March1,2010

FrancisM.Colalucci

/s/ CHARLESA.BRYAN Director March1,2010

CharlesA.Bryan

/s/ WILLIAMW.FOX,JR. Director March1,2010

WilliamW.Fox,Jr.

/s/ WILLIAMA.ROBBIE Director March1,2010

WilliamA.Robbie

/s/ STEVENW.SCHUSTER Director March1,2010

StevenW.Schuster

/s/ ROBERTS.SMITH Director March1,2010

RobertS.Smith

/s/ JANR.VANGORDER Director March1,2010

JanR.VanGorder

/s/ AUSTINP.YOUNG,III Director March1,2010

AustinP.Young,III

page S-1

Tower group, Inc.Index to Financial Statement SchedulesSchedules Page

I SummaryofInvestments—OtherThanInvestmentsinRelatedParties S-2

II CondensedFinancialInformationoftheRegistrantasofandfortheyearsendedDecember31,2009,2008,and2007 S-3

III SupplementaryInsuranceInformationfortheyearsendedDecember31,2009,2008,and2007 S-6

IV ReinsurancefortheYearsEndedDecember31,2009,2008,and2007 S-7

V ValuationandQualifyingAccountsfortheyearsendedDecember31,2009,2008,and2007 S-8

VI SupplementalInformationConcerningInsuranceOperationsfortheyearsendedDecember31,2009,2008,and2007 S-9

page S-2

December 31, 2009

($inthousands) Cost Fair Value

amount Reflected on

Balance Sheet

Fixedmaturities:Availableforsale: U.S.Treasurysecuritiesandobligationsof U.S.Governmentagencies $� 113,344 $� 113,272 $� ��113,272 Corporatesecurities 589,973 615,122 615,122 Mortgage-backedsecurities 517,596 529,486 529,486 Municipalsecurities 508,204 525,716 525,716

Totalfixedmaturities 1,729,117 1,783,596 1,783,596Preferredstocks 77,536 76,290 76,290Commonstock 515 443 443

Totalequities 78,051 76,733 76,733Short-terminvestments 36,500 36,500 36,500

Totalinvestments $1,843,668 $1,896,829 $1,896,829

December31,2008

($inthousands) Cost FairValue

AmountReflectedon

BalanceSheet

Fixedmaturities:Availableforsale: U.S.Treasurysecuritiesandobligationsof U.S.Governmentagencies $� 26,843 $� 27,405 $� ��27,405 Corporatesecurities 210,007 186,975 186,975 Mortgage-backedsecurities 164,886 135,831 135,831 Municipalsecurities 179,734 179,948 179,948

Totalfixedmaturities 581,470 530,159 530,159 Preferredstocks 5,551 3,694 3,694 Commonstock 7,175 7,120 7,120

Totalequities 12,726 10,814 10,814

Totalinvestments $� 594,196 $� 540,973 $� ��540,973

Tower group, Inc.Schedule I—Summary of Investments—Other Than Investments in Related parties

page S-3

Tower group, Inc.Schedule II—Condensed Financial Information of the RegistrantCondensed Balance Sheets

December31,


assetsCashandcashequivalents $� 18,619 $� 22,291Investmentinsubsidiaries 1,118,491 359,486Federalandstatetaxesrecoverable — 1,960Fixedassets,netofaccumulateddepreciation 10,175 11,180Investmentinunconsolidatedaffiliate — 29,293Investmentinstatutorybusinesstrusts,equitymethod 2,664 2,664Duefromaffiliate 784 673Otherassets 2,141 9,699

Totalassets $�1,152,874 $437,246

LiabilitiesAccountspayableandaccruedexpenses 3,314 666Deferredrentliability 6,032 6,411Federalandstateincometaxespayable 2,714 —Deferredincometaxes 1,649 6,301Subordinateddebentures 88,664 88,664

Totalliabilities 102,373 102,042

Stockholders’equity 1,050,501 335,204

Totalliabilitiesandstockholders’equity $�1,152,874 $437,246

page S-4

Tower group, Inc.Schedule II—Condensed Financial Information of the RegistrantCondensed Statements of Income and Comprehensive Income


($inthousands) 2009 2008 2007

RevenuesInvestmentincome $� 3,216 $� 774 $� 1,893Equityinnetearningsofsubsidiaries 118,983 62,135 46,557

Totalrevenues 122,199 62,909 48,450expensesOtheroperatingexpenses 2,302 1,626 1,594Interestexpense 6,112 6,950 7,359

Totalexpenses 8,414 8,576 8,953OtherIncomeEquityincomeinunconsolidatedaffiliate (777) 269 2,438Gainfromissuanceofcommonstockbyunconsolidatedaffiliate — — 2,705Gainoninvestmentinacquiredunconsolidatedaffiliate 7,388 — —Acquisitionrelatedtransactioncosts (13,989) — —

Incomebeforeincometaxes 106,407 54,602 44,640Provision/(benefit)forincometaxes (2,923) (2,871) (442)

Netincome $�109,330 $�57,473 $�45,082

Grossunrealizedinvestmentholdinggains(losses)arisingduringtheperiod 108,879 (56,098) (29,424) Cumulativeeffectofadjustmentresultingfromadoptionofnewaccountingguidance (2,497) — — Equityinnetunrealizedgainsininvestmentinunconsolidatedaffiliates’investmentportfolio 3,124 (3,142) (218) Less:reclassificationadjustmentfor(gains)lossesincludedinnetincome (1,501) 14,354 17,511 Incometax(expense)benefitrelatedtoitemsofothercomprehensiveincome (37,700) 15,710 4,246

Comprehensiveincome $�179,635 $�28,297 $�37,197

page S-5

Tower group, Inc.Schedule II—Condensed Financial Information of the RegistrantCondensed Statements of Cash Flows


($inthousands) 2009 2008 2007

Cash flows provided by (used in) operating activities:Netincome $�109,330 $�57,473 $� 45,082 Adjustmentstoreconcilenetincometonetcashprovidedby(used)inoperations: Gainonissuanceofcommonsharesofunconsolidatedaffiliate — — (2,705) Dividendsreceivedfromconsolidatedsubsidiaries 8,000 12,400 8,500 Equityinundistributednetincomeofsubsidiaries (118,983) (62,135) (46,557) Depreciationandamortization 1,018 1,021 1,815 Amortizationofrestrictedstock 5,608 2,480 1,919 Deferredincometax (4,652) 564 1,517 (Increase)decreaseinassets: Federalandstateincometaxrecoverable 4,674 1,891 (1,556) Equityloss(income)inunconsolidatedaffiliate 777 (269) (2,438) Excesstaxbenefitsfromshare-basedpaymentarrangements (191) (175) (1,105) Otherassets (640) (8,571) 2,582 (Increase)decreaseinliabilities: Accountspayableandaccruedexpenses 2,644 (1,507) 3,583 Deferredrent (380) (380) 832 Other—net — 448 321

Netcashflowsprovidedbyoperations 7,204 3,240 11,789

Cash flows provided by (used in) investing activities:AcquisitionofPreserverGroup,Inc. — — (48,286)Preservertransactioncosts — — (4,729)Purchaseoffixedassets (12) (182) (2,540)Investmentinsubsidiary — — (4,759)

Netcashflowsusedininvestingactivities (12) (182) (60,314)

Cash flows provided by (used in) financing activities:Equityofferingandoverallotment,netofissuancecosts — — 89,366Repaymentofredeemablepreferredstock — — (40,000)Proceedsfromissuanceofsubordinateddebentures — — 20,619Purchaseofcommontrustsecurities—statutorybusinesstrusts — — (619)Exerciseofstockoptionsandwarrants 741 179 1,166Excesstaxbenefitsfromshare-basedpaymentarrangements 191 175 1,105Stockrepurchase (1,058) (533) (439)Dividendspaid (10,739) (4,608) (3,743)

Netcashflowsprovidedby(usedin)financingactivities (10,865) (4,787) 67,455

Increase(decrease)incashandcashequivalents (3,672) (1,729) 18,931Cashandcashequivalents,beginningofyear 22,291 24,020 5,089

Cashandcashequivalents,endofyear $� 18,619 $�22,291 $� 24,020

page S-6

Tower group, Inc.Schedule III—Supplementary Insurance Information

($inthousands)

DeferredAcquisition

Cost,NetofDeferredCeding

CommissionRevenue

GrossFuturePolicy

Benefits,Lossesand

LossExpenses

Benefits,Gross

UnearnedPremiums

NetEarnedPremiums

Benefits,Losses

andLossExpenses

AmortizationofDAC

OperatingExpenses

NetPremiums

Written

2009 BrokerageSegment $�121,629 $� �696,253 $445,403 $624,994 $340,035 $�(174,852) $103,424 $�656,882 SpecialtySegment 49,023 435,736 213,537 229,717 135,462 (100,484) 20,044 229,308

Total $170,652 $1,131,989 $658,940 $854,711 $475,497 $�(275,336) $123,468 $�886,190

2008 BrokerageSegment $� �33,694 $� 487,155 $�267,525 $�296,718 $�152,546 $��(114,463) $� �68,871 $�315,655 SpecialtySegment 19,386 47,836 61,322 17,832 10,193 6,915 3,256 28,387

Total $� �53,080 $� 534,991 $��328,847 $�314,550 $�162,739 $��(107,548) $�� 72,127 $�344,042

2007 BrokerageSegment $� �35,200 $� 488,228 $�258,255 $�284,216 $�156,790 �$�� (84,076) $� �66,962 $�254,891 SpecialtySegment 4,071 12,955 14,519 1,890 1,116 1,340 668 4,292

Total $� �39,271 $� 501,183 $�272,774 $�286,106 $�157,906 $� ��(82,736) $� �67,630 $�259,183

page S-7

Tower group, Inc.Schedule IV—Reinsurance

($inthousands)Direct

Amount

CededtoOther

Companies

AssumedfromOtherCompanies

NetAmount

PercentageofAmountAssumed

toNet

Year ended December 31, 2009Premiums Propertyandcasualtyinsurance $�989,771 $184,528 $80,945 $886,190 9.1% Accidentandhealthinsurance — — — — 0.0%

TotalPremiums $�989,771 $184,528 $80,945 $886,190 9.1%

YearendedDecember31,2008Premiums Propertyandcasualtyinsurance $�627,319 $�290,777 $� �7,501 $�344,043 2.2% Accidentandhealthinsurance — — — — 0.0%

TotalPremiums $�627,319 $�290,777 $� �7,501 $�344,043 2.2%

YearendedDecember31,2007Premiums Propertyandcasualtyinsurance $�520,421 $�264,832 $� �3,593 $�259,182 1.4% Accidentandhealthinsurance — — — — 0.0%

TotalPremiums $�520,421 $�264,832 $� �3,593 $�259,182 1.4%

page S-8

Tower group, Inc.Schedule V—Valuation and Qualifying accounts


($inthousands) 2009 2008 2007

Balance,January1 $� 550 $�204 $�248Additions 1,671 707 157Deletions (949) (361) (201)

Balance,December31 $�1,272 $�550 $�204

page S-9

Tower group, Inc.Schedule VI—Supplemental Information Concerning Insurance Operations

($inthousands)

DeferredAcquisition

Cost

ReservesForUnpaidClaims

andClaimAdjustment

ExpensesDiscounted

ReservesUnearnedPremium

EarnedPremium

NetInvestment

Income

ClaimsandClaimsAdjustmentExpenses

IncurredandRelatedto

AmortizationofDAC

PaidClaimsandClaim

AdjustmentExpenses

NetPremiums

WrittenCurrent

Year

PriorYear*IncludesPXRE

Commutation

2009Consolidated Insurance Subsidiaries $170,652 $1,131,989 $�166,778 $658,940 $854,711 $74,866 $477,757 $(2,260) $(275,336) $405,935 $886,189Unconsolidated affiliate(1),(2) — — — — 2,627 2,098 2,105 (20) 914 967 1,3752008Consolidated Insurance Subsidiaries 53,080 534,991 — 328,847 314,551 34,568 171,616 (8,877) (107,547) 161,635 344,043Unconsolidated affiliate(1) 5,452 18,232 — 17,541 29,663 1,968 17,376 86 (12,214) 8,365 31,2422007Consolidated Insurance Subsidiaries 39,271 501,183 — 272,774 286,106 36,699 159,512 (1,606) (82,736) 123,804 259,183Unconsolidated affiliate(1) 5,204 8,647 — 15,490 17,687 2,101 9,442 (89) (6,523) 3,141 26,792

(1) InformationrelatestoCastlePointHoldings,Ltd.(“CP”).(2) TheCompanyacquiredCPonFebruary5,2009.TheseareamountsfortheperiodendedFebruary5,2009orfortheperiodfromJanuary1,2009–February5,2009.Subsequentto

February5,2009,CPamountsareincludedwithconsolidatedinsurancesubsidiaries.

2.1 AgreementandPlanofMerger,datedasofAugust4,2008,byandamongTowerGroup,Inc.,OceanICorporationandCastlePointHoldings,Ltd.,incorporatedbyreferencetoExhibit2.1totheCompany’sCurrentReportonForm8-K/AfiledonAugust6,2008

2.2 Agreement and Plan of Merger, dated as of June 21, 2009, by and among Tower Group, Inc., Tower S.F. Merger Corporation andSpecialtyUnderwriters’Alliance,Inc.,incorporatedbyreferencetoExhibit2.1totheCompany’sCurrentReportonForm8filedonJune22,2009

2.3 AmendedandRestatedAgreementandPlanofMerger,datedasofJune21,2009,byandamongTowerGroup,Inc.,TowerS.F.MergerCorporationandSpecialtyUnderwriters’Alliance, Inc., incorporatedby reference toExhibit 2.1 to theCompany’sCurrentReportonForm8-K/AfiledonJuly23,2009

2.4 PurchaseAgreement,datedasofFebruary2,2010,byandamongTowerGroup,Inc.,OneBeaconInsuranceGroup,Ltd.,OneBeaconInsuranceGroupLLC,OneBeaconAmericaInsuranceCompany,TheEmployers’FireInsuranceCompany,TheCamdenFireInsuranceAssociation,HomelandInsuranceCompanyofNewYork,OneBeaconInsuranceCompany,OneBeaconMidwestInsuranceCompany,PennsylvaniaGeneralInsuranceCompanyandTheNorthernAssuranceCompanyofAmerica,incorporatedbyreferencetoExhibit2.1totheCompany’sCurrentReportonForm8-KfiledonFebruary3,2010

3.1 AmendedandRestatedCertificateof IncorporationofTowerGroup, Inc., incorporatedby reference toExhibit3.1 to theCompany’sRegistrationStatementonFormS-1(AmendmentNo.2)(No.333-115310)filedonJuly23,2004

3.2 CertificateofAmendmenttoAmendedandRestatedCertificateof IncorporationofTowerGroup, Inc., incorporatedbyreferencetoExhibit3.1totheCompany’sRegistrationStatementonFormS-8(No.333-115310)filedonFebruary5,2009

3.3 Certificate of Designations of Preferred Stock, incorporated by reference to the Company’s Current Report on Form 8-K filed onDecember8,2006

3.4 CertificateofDesignationsofSeriesA-1PreferredStockofTowerGroup,Inc.incorporatedbyreferencetoExhibit3.1totheCompany’sCurrentReportonForm8-KfiledonJanuary12,2007

3.5 AmendedandRestatedBy-lawsofTowerGroup, Inc.asamendedOctober24,2007, incorporatedby reference toExhibit 3.1 to theCompany’sCurrentReportonForm8-KfiledonOctober26,2007

4.1 SpecimenCommonStockCertificate, incorporatedbyreferencetoExhibit4.1totheCompany’sRegistrationStatementonFormS-1(AmendmentNo.6)(No.333-115310)filedonSeptember30,2004

4.2 Warrant issued to Friedman, Billings, Ramsey & Co., Inc., incorporated by reference to Exhibit 4.3 to the Company’s RegistrationStatementonFormS-1(AmendmentNo.3)(No.333-115310)filedonAugust25,2004

9.1 VotingAgreement,datedAugust4,2008,betweenTowerGroup,Inc.andMichaelH.Lee,incorporatedbyreferencetoExhibit10.1totheCompany’sCurrentReportonForm8-KfiledonAugust5,2008

10.1 EmploymentAgreement,datedasofAugust1,2004,byandbetweenTowerGroup,Inc.andMichaelH.Lee,incorporatedbyreferencetoExhibit10.1totheCompany’sRegistrationStatementonFormS-1(AmendmentNo.3)(No.333-115310)filedonAugust25,2004

10.2 Employment Agreement, dated as of August 1, 2004, by and between TowerGroup, Inc. and Francis M. Colalucci, incorporated byreference to Exhibit 10.3 to the Company’s Registration Statement on Form S-1 (Amendment No. 3) (No. 333-115310) filed onAugust25,2004

10.3 EmploymentAgreement,datedasofMarch23,2009,byandbetweenTowerGroup,Inc.andRichardBarrow,incorporatedbyreferencetoExhibit10.1totheCompany’sQuarterlyReportonForm10-QfiledonMay11,2009

10.4 EmploymentAgreement,datedasofNovember19,2009,byandbetweenTowerGroup,Inc.andWilliamE.Hitselberger,incorporatedbyreferencetoExhibit10.1totheCompany’sCurrentReportonForm8-KfiledonNovember19,2009

10.4 2004Long-TermEquityCompensationPlan,asamendedandrestatedeffectiveMay15,2008,incorporatedbyreferencetoExhibit99.1totheCompany’sRegistrationStatementonFormS-8(No.333-115310)filedonJune20,2008

10.5 2001 Stock Award Plan, incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1 (No. 333-115310)filedonMay7,2004

10.6 2000DeferredCompensationPlan, incorporatedby referencetoExhibit 10.9 to theCompany’sRegistrationStatementonFormS-1(AmendmentNo.6)(No.333-115310)filedonSeptember30,2004

10.7 Amended&RestatedDeclarationofTrust,datedasofMay15,2003,byandbetweenTowerGroup,Inc.,TowerStatutoryTrustIandU.S.BankNationalAssociation,incorporatedbyreferencetoExhibit10.10totheCompany’sRegistrationStatementonFormS-1(No.333-115310)filedonMay7,2004

10.8 Indenture,datedasofMay15,2003,byandbetweenTowerGroup,Inc.andU.S.BankNationalAssociation,incorporatedbyreferencetoExhibit10.11totheCompany’sRegistrationStatementonFormS-1(No.333-115310)filedonMay7,2004

10.9 GuaranteeAgreement,datedasofMay15,2003,byandbetweenTowerGroup,Inc.andU.S.BankNationalAssociation,incorporatedbyreferencetoExhibit10.12totheCompany’sRegistrationStatementonFormS-1(No.333-115310)filedonMay7,2004

ExhibitNumber DescriptionofExhibits

Theexhibitslistedbelowareincorporatedbyreferencetothedocumentsfollowingthedescriptionsoftheexhibits.

10.10 AmendedandRestatedTrustAgreement,datedasofSeptember30,2003,byandbetweenTowerGroup,Inc.,JPMorganChaseBank,ChaseManhattanBankUSA,NationalAssociationandMichaelH.Lee,StevenG.FauthandFrancisM.ColalucciasAdministrativeTrusteesofTowerGroupStatutoryTrustII,incorporatedbyreferencetoExhibit10.13totheCompany’sRegistrationStatementonFormS-1(No.333-115310)filedonMay7,2004

10.11 JuniorSubordinatedIndenture,datedasofSeptember30,2003,byandbetweenTowerGroup,Inc.andJPMorganChaseBank,incor-poratedbyreferencetoExhibit10.14totheCompany’sRegistrationStatementonFormS-1(No.333-115310)filedonMay7,2004

10.12 GuaranteeAgreement,datedasofSeptember30,2003,byandbetweenTowerGroup,Inc.andJPMorganChaseBank,incorporatedbyreferencetoExhibit10.15totheCompany’sRegistrationStatementonFormS-1(No.333-115310)filedonMay7,2004

10.13 ServiceandExpenseSharingAgreement,datedasofDecember28,1995,byandbetweenTowerInsuranceCompanyofNewYorkandTowerRiskManagementCorp.,incorporatedbyreferencetoExhibit10.16totheCompany’sRegistrationStatementonFormS-1(No.333-115310)filedonMay7,2004

10.14 RealEstateLeaseandamendmentsthereto,byandbetweenBroadpineRealtyHoldingCompany,Inc.andTowerInsuranceCompanyofNewYork,incorporatedbyreferencetoExhibit10.17totheCompany’sRegistrationStatementonFormS-1(AmendmentNo.1)(No.333-115310)filedonJune24,2004

10.15 ThirdAmendmenttoLeasebetweenTowerInsuranceCompanyofNewYorkand120BroadwayHoldings,LLCexecutedSeptember1,2005,incorporatedbyreferencetoExhibit10.01totheCompany’sCurrentReportonForm8-KfiledonAugust26,2005

10.16 LicenseandServicesAgreement,datedasofJune11,2002,byandbetweenAgencyPortInsuranceServices,Inc.andTowerInsuranceCompanyofNewYork,incorporatedbyreferencetoExhibit10.18totheCompany’sRegistrationStatementonFormS-1(AmendmentNo.3)(No.333-115310)filedonAugust25,2004

10.17 Agreement, dated as of April 17, 1996, between Morstan General Agency, Inc. and Tower Risk Management Corp., incorporated byreferencetoExhibit10.19totheCompany’sRegistrationStatementonFormS-1(No.333-115310)filedonMay7,2004

10.18 Amended and Restated Declaration of Trust, dated December 15, 2004,by and among Wilmington Trust Company, as InstitutionalTrustee;WilmingtonTrustCompany,asDelawareTrustee;TowerGroup,Inc.,asSponsor;andtheTrustAdministratorsMichaelH.Lee,FrancisM.ColalucciandSteveG.Fauth,incorporatedbyreferencetoExhibit10.04totheCompany’sCurrentReportonForm8-KfiledonDecember20,2004

10.19 IndenturebetweenTowerGroup,Inc.andWilmingtonTrustCompany,asTrustee,datedDecember15,2004,incorporatedbyreferencetoExhibit10.03totheCompany’sCurrentReportonForm8-KfiledonDecember20,2004

10.20 GuaranteeAgreementdatedDecember15,2004,byandbetweenTowerGroup,Inc.andWilmingtonTrustCompany,incorporatedbyreferencetoExhibit10.02totheCompany’sCurrentReportonForm8-KfiledonDecember20,2004

10.21 AmendedandRestatedDeclarationofTrust,datedDecember21,2004,byandamongJPMorganChaseBank,NationalAssociation,asInstitutionalTrustee,ChaseManhattanBankUSA,NationalAssociation,asDelawareTrustee;TowerGroup,Inc.,asSponsor;andtheTrust Administrators Michael H. Lee, Francis M. Colalucci and Steve G. Fauth, incorporated by reference to Exhibit 10.04 to theCompany’sCurrentReportonForm8-KfiledonDecember23,2004

10.22 IndenturebetweenTowerGroup,Inc.andJPMorganChaseBank,NationalAssociation,asTrustee,datedDecember21,2004,incorpo-ratedbyreferencetoExhibit10.03totheCompany’sCurrentReportonForm8-KfiledonDecember23,2004

10.23 GuaranteeAgreementdatedDecember21,2004,byandbetweenTowerGroup,Inc.andJPMorganChaseBank,NationalAssociation,incorporatedbyreferencetoExhibit10.02totheCompany’sCurrentReportonForm8-KfiledonDecember23,2004

10.24 Amended and Restated Declaration of Trust, dated March 31, 2006, by and among Wells Fargo Bank, National Association, asInstitutional Trustee; Wells Fargo Delaware Trust Company, as Delaware Trustee; Tower Group, Inc., as Sponsor; and the TrustAdministratorsFrancisM.ColalucciandSteveG.Fauth,incorporatedbyreferencetoExhibit10.04totheCompany’sCurrentReportonForm8-KfiledonApril6,2006

10.25 IndenturebetweenTowerGroup,Inc.andWellsFargoBank,NationalAssociation,asTrustee,datedMarch31,2006,incorporatedbyreferencetoExhibit10.03totheCompany’sCurrentReportonForm8-KfiledonApril6,2006

10.26 GuaranteeAgreementdatedMarch31,2006,byandbetweenTowerGroup,Inc.andWellsFargoDelawareTrustCompany,incorpo-ratedbyreferencetoExhibit10.02totheCompany’sCurrentReportonForm8-KfiledonApril6,2006

10.27 Stock Purchase Agreement by and among Tower Group, Inc. and Preserver Group, Inc. dated November 13, 2006, incorporated byreferencetoExhibit10.1totheCompany’sCurrentReportonForm8-KfiledonNovember17,2006

10.28 ExchangeAgreementbyandamongTowerGroup, Inc.andCastlePointManagementCorp.datedJanuary11,2007 incorporatedbyreferencetoExhibit10.1totheCompany’sCurrentReportonForm8-KfiledonJanuary12,2007

10.29 Master Agreement dated April 4, 2006 by and among Tower Group, Inc., Tower Insurance Company of New York, Tower NationalInsuranceCompany,CastlePointHoldings,Ltd.andCastlePointManagementCorp. incorporatedby reference toExhibit 10.1 to theCompany’sCurrentReportonForm8-KfiledonJanuary22,2007

10.30 AddendumNo.1totheMasterAgreementbyandamongTowerGroup,Inc.andCastlePointHoldings,Ltd.incorporatedbyreferencetoExhibit10.2totheCompany’sCurrentReportonForm8-KfiledonJanuary22,2007


10.31 AmendedandRestatedDeclarationofTrust,datedJanuary25,2007,byandamongWilmingtonTrust,asInstitutionalTrusteeandasDelawareTrustee;TowerGroup, Inc.,asSponsor;andtheTrustAdministratorsMichaelH.Lee,FrancisM.ColalucciandStephenL.Kibblehouse,incorporatedbyreferencetoExhibit10.02totheCompany’sCurrentReportonForm8-KfiledonJanuary26,2007

10.32 IndenturebetweenTowerGroup,Inc.andWilmingtonTrustCompany,asTrustee,datedJanuary25,2007,incorporatedbyreferencetoExhibit4.01totheCompany’sCurrentReportonForm8-KfiledonJanuary26,2007

10.33 GuaranteeAgreementdatedJanuary25,2007,byandbetweenTowerGroup, Inc.andWilmingtonTrustCompany, incorporatedbyreferencetoExhibit10.01totheCompany’sCurrentReportonForm8-KfiledonJanuary26,2007

10.34 ManagementAgreement,datedJuly 1, 2007,byandbetweenCastlePoint InsuranceCompanyandTowerRiskManagementCorp.,incorporatedbyreferencetoExhibit10.1totheCompany’sQuarterlyReportonForm10-QfiledonNovember9,2007

10.35 EmploymentAgreement,datedasofJuly23,2007,byandbetweenTowerGroupInc.andGaryS.Maier,incorporatedbyreferencetoExhibit10.2totheCompany’sQuarterlyReportonForm10-QfiledonNovember9,2007

10.36 FourthAmendmenttoLeasebetweenTowerInsuranceCompanyofNewYorkand120BroadwayHoldings,LLCdatedJuly25,2006,incorporatedbyreferencetoExhibit10.49totheCompany’sAnnualReportonForm10-KfiledonMarch14,2008

10.37 FifthAmendmenttoLeasebetweenTower InsuranceCompanyofNewYorkand120BroadwayHoldings,LLCdatedDecember20,2006,incorporatedbyreferencetoExhibit10.50totheCompany’sAnnualReportonForm10-KfiledonMarch14,2008

10.38 EmploymentAgreement,datedasofNovember12,2006,byandbetweenTowerGroupInc.andPatrickJ.Haveron,incorporatedbyreferencetoExhibit10.1totheCompany’sCurrentReportonForm8-KfiledonApril12,2007

10.39 ServiceAgreementdatedMay1,2007byandamongTowerRiskManagementCorp.andCastlePointManagementCorp. , incorpo-ratedbyreferencetoExhibit10.59totheCompany’sAnnualReportonForm10-KfiledonMarch14,2008

10.40 FormofTowerGroup,Inc.2004LongTermEquityCompensationPlanRestrictedStockAwardAgreement,incorporatedbyreferencetoExhibit10.1totheCompany’sCurrentReportonForm8-KfiledonMarch18,2008

10.41 Form of Tower Group, Inc. 2004 Long Term Equity Compensation Plan Performance Shares Award Agreement, incorporated byreferencetoExhibit10.50totheCompany’sAnnualReportonForm10-KfiledonMarch16,2009

10.42 FormofTowerGroup,Inc.2004LongTermEquityCompensationPlan,asamendedandrestatedeffectiveMay15,2008,RestrictedStock Units Award Agreement, incorporated by reference to Exhibit 10.63 to the Company’s Annual Report on Form 10-K filed onMarch14,2008

10.43 Stock Purchase Agreement dated August 27, 2008 between CastlePoint Reinsurance Company, Ltd., HIG, Inc. and Brookfield USCorporation,incorporatedbyreferencetoExhibit2.1toCastlePointHoldings,Ltd.’sCurrentReportonForm8-KfiledonSeptember2,2008

10.44 Asset Purchase Agreement, dated as of August 26, 2008, by and among CastlePoint Reinsurance Company, Ltd., Tower InsuranceCompany of New York, Tower National Insurance Company, Preserver Insurance Company, Mountain Valley Insurance Company,NorthEastInsuranceCompanyandTowerRiskManagementCorp.,incorporatedbyreferencetoExhibit2.1totheCompany’sCurrentReportonForm8-KfiledAugust27,2008

10.45 Limited Waiver Agreement, dated as of August 26, 2008, by and among Tower Group, Inc., Ocean I Corporation and CastlePointHoldings,Ltd.,incorporatedbyreferencetoExhibit2.2totheCompany’sCurrentReportonForm8-KfiledAugust27,2008

10.46 ParentGuarantee Agreement, datedasofDecember 1, 2006,betweenCastlePoint Holdings,Ltd. andWilmingtonTrust Company,incorporatedbyreferencetoExhibit10.32toCastlePointHoldingsLtd.’sRegistrationStatementonFormS-1(No.333-139939)filedonJanuary11,2007

10.47 Guarantee Agreement, dated as of December 1, 2006, between CastlePoint Management Corp. and Wilmington Trust Company,incorporatedbyreferencetoExhibit10.33toCastlePointHoldingsLtd.’sRegistrationStatementonFormS-1(No.333-139939)filedonJanuary11,2007

10.48 Indenture,datedasofDecember1,2006,betweenCastlePointManagementCorp.andWilmingtonTrustCompany,incorporatedbyreferencetoExhibit10.34toCastlePointHoldingsLtd.’sRegistrationStatementonFormS-1(No.333-139939)filedonJanuary11,2007

10.49 AmendedandRestatedDeclarationofTrust,datedasofDecember1,2006,amongWilmingtonTrustCompanyasInstitutionalTrustee,WilmingtonTrustCompany,asDelawareTrustee,CastlePointManagementCorp.,asSponsor,andJoelWeiner,JamesDulliganandRogerBrown, as Administrators, incorporated by reference toExhibit 10.35 toCastlePoint Holdings Ltd.’sRegistration Statement onFormS-1(No.333-139939)filedonJanuary11,2007

10.50 ParentGuaranteeAgreement,datedasofDecember14,2006,betweenCastlePointHoldings,Ltd.andWilmingtonTrustCompany,incorporatedbyreferencetoExhibit10.36toCastlePointHoldingsLtd.’sRegistrationStatementonFormS-1(No.333-139939)filedonJanuary11,2007

10.51 GuaranteeAgreementofCastlePointManagementCorp.,datedasofDecember14,2006,betweenCastlePointManagementCorp.andWilmingtonTrustCompany, incorporatedby referencetoExhibit 10.37 toCastlePointHoldingsLtd.’sRegistrationStatementonFormS-1(No.333-139939)filedonJanuary11,2007



10.52 Indenture,datedasofDecember14,2006,betweenCastlePointManagementCorp.andWilmingtonTrustCompany,incorporatedbyreferencetoExhibit10.38toCastlePointHoldingsLtd.’sRegistrationStatementonFormS-1(No.333-139939)filedonJanuary11,2007

10.53 Amended and Restated Declaration of Trust, dated as of December 14, 2006, among Wilmington Trust Company as InstitutionalTrustee, Wilmington Trust Company, as Delaware Trustee, CastlePoint Management Corp., as Sponsor, and Joel Weiner, JamesDulligan and Roger Brown, as Administrators, incorporated by reference to Exhibit 10.39 to CastlePoint Holdings Ltd.’s RegistrationStatementonFormS-1(No.333-139939)filedonJanuary11,2007

10.54 CastlePoint Holdings, Ltd. 2006 Long-Term Equity Compensation Plan, incorporated by reference to Exhibit 10.4 to CastlePointHoldingsLtd.’sRegistrationStatementonFormS-1(FileNo.333-134628)filedonJune1,2006

10.55 AmendmentNo.1toCastlePointHoldings,Ltd.2006Long-TermEquityCompensationPlan,incorporatedbyreferencetoExhibit4.5toCastlePointHoldingsLtd.’sRegistrationStatementonFormS-8(FileNo.333-134628)filedonDecember5,2007

10.56 FormofStockOptionAgreementforExecutiveEmployeeRecipientsofOptionsunder2006Long-TermEquityCompensationPlan,incorporatedbyreferencetoExhibit10.5toCastlePointHoldingsLtd.’sRegistrationStatementonFormS-1(FileNo.333-134628)filedonJune1,2006

10.57 FormofStockOptionAgreement forNon-EmployeeDirectorRecipientsofOptionsunder2006Long-TermEquityCompensationPlan,incorporatedbyreferencetoExhibit10.6toCastlePointHoldingsLtd.’sRegistrationStatementonFormS-1(FileNo.333-134628)filedonJune1,2006

10.58 IndenturebetweenCastlePointBermudaHoldings,Ltd.andWilmingtonTrustCompany,asTrustee,datedSeptember27,2007,incor-poratedbyreferencetoExhibit4.1toCastlePointHoldingsLtd.’sCurrentReportonForm8-KfiledonOctober1,2007

10.59 GuaranteeAgreementdatedSeptember27,2007byandbetweenCastlePointBermudaHoldings,Ltd.andWilmingtonTrustCompany,incorporatedbyreferencetoExhibit4.2toCastlePointHoldingsLtd.’sCurrentReportonForm8-KfiledonOctober1,2007

10.60 AmendedandRestatedDeclarationofTrust,datedSeptember27,2007,byWilmingtonTrust,asInstitutionalTrusteeandasDelawareTrustee;CastlePointBermudaHoldings,Ltd.asSponsor,andTrustAdministratorsRogerA.Brown,JoelS.WeinerandJamesDulligan,incorporatedbyreferencetoExhibit4.3toCastlePointHoldingsLtd.’sCurrentReportonForm8-KfiledonOctober1,2007

10.61 Fixed/FloatingRateJuniorSubordinatedDeferrableInterestDebenture,datedSeptember27,2007byCastlePointBermudaHoldings,Ltd.infavorofWilmingtonTrustCompanyasinstitutionaltrustee,incorporatedbyreferencetoExhibit4.4toCastlePointHoldingsLtd.’sCurrentReportonForm8-KfiledonOctober1,2007

10.62 SupplementalGuarantee,datedasofFebruary5,2009,byandamongOceanICorporation,CastlePointHoldings,Ltd.andWilmingtonTrustCompany(relatedtothatcertainParentGuaranteeAgreement,datedasofDecember1,2006,betweenCastlePointHoldings,Ltd.andWilmingtonTrustCompany),incorporatedbyreferencetoExhibit10.71totheCompany’sAnnualReportonForm10-KfiledonMarch16,2009

10.63 SupplementalGuarantee,datedasofFebruary5,2009,byandamongOceanICorporation,CastlePointHoldings,Ltd.andWilmingtonTrustCompany(relatedtothatcertainParentGuaranteeAgreement,datedasofDecember14,2006,betweenCastlePointHoldings,Ltd.andWilmingtonTrustCompany),incorporatedbyreferencetoExhibit10.72totheCompany’sAnnualReportonForm10-KfiledonMarch16,2009

10.64 SupplementalGuarantee,datedasofFebruary5,2009,byandamongOceanICorporation,CastlePointHoldings,Ltd.andWilmingtonTrustCompany(relatedtothatcertainParentGuaranteeAgreement,datedasofNovember8,2007,betweenCastlePointHoldings,Ltd.andWilmingtonTrustCompany),incorporatedbyreferencetoExhibit10.73totheCompany’sAnnualReportonForm10-KfiledonMarch16,2009

10.65 SeparationAgreement,datedasofFebruary27,2009,byandbetweenTowerGroup,Inc.andPatrickJ.Haveron,incorporatedbyrefer-encetoExhibit10.75totheCompany’sAnnualReportonForm10-KfiledonMarch16,2009

10.66 ConsultingAgreement,datedasofFebruary27,2009,byandbetweenTowerGroup,Inc.andPatrickJ.Haveron,incorporatedbyrefer-encetoExhibit10.76totheCompany’sAnnualReportonForm10-KfiledonMarch16,2009

10.67 LetterofAmendmentdatedFebruary23,2009toStockPurchaseAgreementdatedAugust27,2008betweenCastlePointReinsuranceCompany,Ltd.,HIG,Inc.andBrookfieldUSCorporation,incorporatedbyreferencetoExhibit10.77totheCompany’sAnnualReportonForm10-KfiledonMarch16,2009


21.1 Subsidiariesoftheregistrant 23.1 ConsentofJohnsonLambert&Co. 31.1 CertificationPursuanttoSection302oftheSarbanes-OxleyActof2002byMichaelH.Lee 31.2 CertificationPursuanttoSection302oftheSarbanes-OxleyActof2002byFrancisM.Colalucci 32 CertificationofChiefExecutiveOfficerandChiefFinancialOfficer,Pursuantto18U.S.C.Section1350,asAdoptedPursuanttoSection

906oftheSarbanes-OxleyActof2002

exhIBIt21.1

Subsidiaries of Tower group, Inc.

NameJurisdictionofIncorporation Parent

PercentageOwnership

TowerInsuranceCompanyofNewYork(“TICNY”) NewYork TowerGroup,Inc. 100%(“TGI”)

TowerRiskManagementCorp. NewYork TGI 100%TowerNationalInsuranceCompany Commonwealthof

MassachusettsTGI 100%

PreserverGroup,Inc.(“PGI”) NewJersey TGI 62.6%TICNY 37.4%

PreserverInsuranceCompany NewJersey PGI 100%MountainValleyIndemnityCompany NewHampshire PGI 100%NorthEastInsuranceCompany(“NEIC”) Maine PGI 100%NorthAtlanticUnderwriters,Inc. Maine NEIC 100%OceanIICorporation Delaware TGI 100%OceanICorporation Delaware OceanIICorp. 100%CastlePointBermudaHoldings,Ltd.(“CPBH”) Bermuda OceanICorp. 100%CastlePointReinsuranceCompany,Ltd.(“CPRe”) Bermuda CPBH 100%CastlePointManagementCorp.(“CPM”) Delaware OceanICorp. 100%CastlePointRiskManagementofFlorida,Corp.(f/k/a Florida CPM 100% AequiCapCPServicesGroup,Inc.) CastlePointInsuranceCompany(“CPIC”) NewYork CPRe 50%

CPM 50%CastlePointFloridaInsuranceCompany Florida CPIC 100%HIG,Inc. Delaware CPRe 100%HermitageInsuranceCompany(“HIC”) NewYork HIG,Inc. 100%KodiakInsuranceCompany NewJersey HIC 100%AmericanResourcesInsuranceConsultants,LLC Alabama HIG,Inc. 100%SpecialtyUnderwritersAlliance,Inc.(“SUA”) Delaware TGI 100%CastlePointNationalInsuranceCompany(f/k/a Illinois SUA 100% SUAInsuranceCompany) SUAInsuranceServices,Inc. Delaware SUA 100%

exhIBIt23.1

ConsentoFIndependentregIsteredpuBlICaCCountIngFIrm

WeconsenttotheincorporationbyreferenceintheregistrationstatementsonFormS-8(No.333-151801,No.333-120320,No.333-157112,No.333-163117)andFormS-3(No.333-138749)ofTowerGroup,Inc.ofourreportsdatedMarch1,2010withrespecttotheconsolidatedfinancialstatements,financialstatementschedules,andtheeffectivenessof internalcontroloverfinancialreportingofTowerGroup,Inc., includedinthisAnnualReport(Form10-K)fortheyearendedDecember31,2009.

/s/JOHNSONLAMBERT&CO.LLP

FallsChurch,VirginiaMarch1,2010

exhIBIt31.1

CertIFICatIonpursuanttoseCtIon302oFthesarBanes-oxleyaCtoF2002

I, MichaelH.Lee,certifythat:

1. IhavereviewedtheAnnualReportofTowerGroup,Inc.(the“Company”)onForm10-KfortheperiodendingDecember31,2009asfiledwiththeSecuritiesandExchangeCommissiononthedatehereof(the“Report”);

2. Basedonmyknowledge,theReportdoesnotcontainanyuntruestatementofamaterialfactoromittostateamaterialfactnecessarytomakethestatementsmade,inlightofthecircumstancesunderwhichsuchstatementsweremade,notmisleadingwithrespecttotheperiodcoveredbytheReport;

3. Basedonmyknowledge,thefinancialstatements,andotherfinancialinformationincludedintheReport,fairlypresentinallmaterialrespectsthefinancialcondition,resultsofoperationsandcashflowsoftheCompanyasof,andfor,theperiodspresentedintheReport;

4. TheCompany’sothercertifyingofficerand Iare responsible forestablishingandmaintainingdisclosurecontrolsandprocedures(asdefined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a—15(f) and15d—15(f))fortheCompanyandhave:

a) designedsuchdisclosurecontrolsandprocedures,orcausedsuchdisclosurecontrolsandprocedurestobedesignedunderoursupervision,toensure thatmaterial information relating to theCompany, including itsconsolidatedsubsidiaries, ismadeknown tousbyotherswithin theCompany,particularlyduringtheperiodinwhichtheReportisbeingprepared;

b) designedsuchinternalcontroloverfinancialreporting,orcausedsuchinternalcontroloverfinancialreportingtobedesignedunderoursuper-vision,toprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples;

c) evaluatedtheeffectivenessoftheCompany’sdisclosurecontrolsandproceduresandpresentedintheReportourconclusionsabouttheeffec-tivenessofthedisclosurecontrolsandprocedures,asoftheendoftheperiodcoveredbytheReportbasedonsuchevaluation;and

d) disclosed in the Report any changes in the Company’s internal control over financial reporting that occurred during the Company’sfourthquarterof2009thathasmateriallyaffected,or is reasonably likely tomateriallyaffect, theCompany’s internalcontrolover financialreporting;and

5. TheCompany’sothercertifyingofficerandIhavedisclosed,basedonourmostrecentevaluationofinternalcontroloverfinancialreporting,totheCompany’sauditorsandtotheauditcommitteeoftheCompany’sBoardofDirectors:

a) allsignificantdeficienciesandmaterialweaknessesinthedesignoroperationofinternalcontroloverfinancialreportingwhicharereasonablylikelytoadverselyaffecttheCompany’sabilitytorecord,process,summarizeandreportfinancialinformation;and

b) Anyfraud,whetherornotmaterial,thatinvolvesmanagementorotheremployeeswhohaveasignificantroleintheCompany’sinternalcontroloverfinancialreporting.

March1,2010 /s/MICHAELH.LEE

MichaelH.Lee ChiefExecutiveOfficer

exhIBIt31.2

CertIFICatIonpursuanttoseCtIon302oFthesarBanes-oxleyaCtoF2002

I,FrancisM.Colalucci,certifythat:

1. IhavereviewedtheAnnualReportofTowerGroup,Inc.(the“Company”)onForm10-KfortheperiodendingDecember31,2009asfiledwiththeSecuritiesandExchangeCommissiononthedatehereof(the“Report”);

2. Basedonmyknowledge,theReportdoesnotcontainanyuntruestatementofamaterialfactoromittostateamaterialfactnecessarytomakethestatementsmade,inlightofthecircumstancesunderwhichsuchstatementsweremade,notmisleadingwithrespecttotheperiodcoveredbytheReport;

3. Basedonmyknowledge,thefinancialstatements,andotherfinancialinformationincludedintheReport,fairlypresentinallmaterialrespectsthefinancialcondition,resultsofoperationsandcashflowsoftheCompanyasof,andfor,theperiodspresentedintheReport;

4. TheCompany’sothercertifyingofficerand Iare responsible forestablishingandmaintainingdisclosurecontrolsandprocedures(asdefined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a—15(f) and15d—15(f))fortheCompanyandhave:

a) designedsuchdisclosurecontrolsandprocedures,orcausedsuchdisclosurecontrolsandprocedurestobedesignedunderoursupervision,toensure thatmaterial information relating to theCompany, including itsconsolidatedsubsidiaries, ismadeknown tousbyotherswithin theCompany,particularlyduringtheperiodinwhichtheReportisbeingprepared;

b) designedsuchinternalcontroloverfinancialreporting,orcausedsuchinternalcontroloverfinancialreportingtobedesignedunderoursuper-vision,toprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples;

c) evaluatedtheeffectivenessoftheCompany’sdisclosurecontrolsandproceduresandpresentedintheReportourconclusionsabouttheeffec-tivenessofthedisclosurecontrolsandprocedures,asoftheendoftheperiodcoveredbytheReportbasedonsuchevaluation;and

d) disclosed in the Report any changes in the Company’s internal control over financial reporting that occurred during the Company’sfourthquarterof2009thathasmateriallyaffected,or is reasonably likely tomateriallyaffect, theCompany’s internalcontrolover financialreporting;and

5. TheCompany’sothercertifyingofficerandIhavedisclosed,basedonourmostrecentevaluationofinternalcontroloverfinancialreporting,totheCompany’sauditorsandtotheauditcommitteeoftheCompany’sBoardofDirectors:

a) allsignificantdeficienciesandmaterialweaknessesinthedesignoroperationofinternalcontroloverfinancialreportingwhicharereasonablylikelytoadverselyaffecttheCompany’sabilitytorecord,process,summarizeandreportfinancialinformation;and

b) anyfraud,whetherornotmaterial,thatinvolvesmanagementorotheremployeeswhohaveasignificantroleintheCompany’sinternalcontroloverfinancialreporting.

March1,2010 /s/FRANCISM.COLALUCCI

FrancisM.Colalucci ChiefFinancialOfficer

exhIBIt32

CertIFICatIonoFChIeFexeCutIveoFFICerandChIeFFInanCIaloFFICer

pursuantto18u.s.C.seCtIon1350,asadoptedpursuantto

seCtIon906oFthesarBanes-oxleyaCtoF2002

InconnectionwiththeAnnualReportofTowerGroup,Inc.(the“Company”)onForm10-KfortheperiodendingDecember31,2009,asfiledwiththeSecuritiesandExchangeCommissiononthedatehereof(the“Report”),we,MichaelH.Lee,PresidentandChiefExecutiveOfficeroftheCompany,and Francis M. Colalucci, Senior Vice President, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. § 1350, asadoptedpursuantto§906oftheSarbanes-OxleyActof2002,that:

(1) TheReportfullycomplieswiththerequirementsofSection13(a)and15(d)oftheSecuritiesandExchangeActof1934;and

(2) TheinformationcontainedintheReportfairlypresents,inallmaterialrespects,thefinancialconditionandresultsofoperationsoftheCompany.

March1,2010 /s/MICHAELH.LEE

MichaelH.Lee PresidentandChiefExecutiveOfficer

March1,2010 /s/FRANCISM.COLALUCCI

FrancisM.Colalucci SeniorVicePresident,ChiefFinancialOfficerandTreasurer

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Documents

Tower 2009AR Dated 31 Mar 2010