UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
		EXCHANGE ACT OF 1934
		For the fiscal year ended December 31, 2009
		Or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
		For the transition period from       to

Commission File Number: 000-50990

Tower Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware		13-3894120
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
120 Broadway, 31st Floor
New York, New York		10271
(Address of principal executive offices)		(Zip Code)

(212) 655-2000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock, $0.0l par value per share		NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of Securities

Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the

Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

	Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
					(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

The aggregate market value of the registrant’s common stock held by non-affiliates on June 30, 2009 (based on the closing price on the NASDAQ Global Select Market on such date) was approximately $902,254,519.

As of February 25, 2010, the registrant had 44,987,732 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Part III of this Form 10-K incorporates by reference certain information from the registrant’s definitive Proxy Statement with respect to the registrant’s 2010 Annual Meeting of Shareholders, to be filed not later than 120 days after the close of the registrant’s fiscal year (the “Proxy Statement”).

 

 

TABLE OF CONTENTS

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

PART I

Item 1. Business

Overview

As used in this Form 10-K, references to the “Company”, “we”, “us”, or “our” refer to Tower Group, Inc. (“Tower”) and its subsidiaries, Tower Insurance Company of New York (“TICNY”), Tower National Insurance Company (“TNIC”), Preserver Insurance Company (“PIC”), Mountain Valley Indemnity Company (“MVIC”), North East Insurance Company (“NEIC”), CastlePoint Insurance Company (“CPIC”), CastlePoint Florida Insurance Company (“CPFL”), Hermitage Insurance Company (“HIC”), Kodiak Insurance Company (“KIC”), and CastlePoint National Insurance Company (still operating in some jurisdictions as SUA Insurance Company) (“CPNIC”), Tower Risk Management Corp. (“TRM”), CastlePoint Management Corp. (“CPM”), Specialty Underwriters’ Alliance, Inc. (“SUA”) and CastlePoint Risk Management of Florida, Corp. (still operating in some jurisdictions as AequiCap CP Services Group, Inc.) (“CPRMFL”) unless the context suggests otherwise. The term “Insurance Subsidiaries” refers to TICNY, TNIC, PIC, MVIC, NEIC, CPIC, CPFL, HIC, KIC and CPNIC.

References to “CastlePoint” refer to Ocean I Corp. (formerly known as CastlePoint Holdings, Ltd.) and its subsidiaries, which include CastlePoint Management Corp., CastlePoint Bermuda Holdings, Ltd., CastlePoint Reinsurance Company, Ltd. (“CastlePoint Reinsurance”), CPFL and CPIC, unless the context suggests otherwise. Tower completed the acquisition of CastlePoint on February 5, 2009.

Through our Insurance Subsidiaries, we offer a broad range of commercial, personal and specialty property and casualty insurance products and services to businesses in various industries and to individuals throughout the United States. With the exception of CPNIC, which is currently rated B+ (Good), all of our Insurance Subsidiaries are currently rated A- (Excellent) by A.M. Best Company, Inc. (“A.M. Best Company”). We provide these products on both an admitted and an excess and surplus (“E&S”) lines basis. Insurance companies writing on an admitted basis are licensed by the states in which they sell policies and are required to offer policies using premium rates and forms that are filed with state insurance regulators. Non-admitted carriers writing in the E&S market are not bound by most of the rate and form regulations imposed on standard market companies, allowing them the flexibility to change the coverage offered and the rate charged without the time constraints and financial costs associated with the filing process.

Through our Brokerage Insurance segment, we provide commercial lines products comprised of commercial package, commercial property, inland marine, general liability, workers’ compensation, commercial auto and commercial umbrella policies to businesses such as residential and commercial building owners, retail and wholesale stores, food service establishments, including restaurants, artisan contractors and automotive service operations. We also provide personal lines products that insure modestly valued homes and dwellings as well as personal automobiles. These products are distributed through an extensive network of retail and wholesale agents throughout the United States and serviced through 18 branch offices. As a result of the acquisitions of CastlePoint and SUA, we have expanded our commercial product offerings to target narrowly-defined, homogenous classes of business that we refer to as specialty businesses through our Specialty Business segment. These products are distributed through 20 program underwriting agents throughout the United States that provide insurance coverages to classes of business such as auto dealerships, professional employers organizations, temporary staffing firms, public entities and specialty auto and trucking.

Competitive Strengths and Strategies

We believe our diversified business platform, market segmentation expertise, underwriting expertise, effective use of capital and acquisitions capability provide us with competitive strengths, as described below.

Diversified Business Platform and Market Segmentation Expertise.   We have established a diversified business platform comprised of a broad range of commercial, specialty and personal lines products tailored to meet the needs of businesses in various industries and individuals throughout the United States. We also segment our products into different pricing and coverage tiers as well as different premium size categories to meet the specific needs of our customers. We position our products in preferred, standard and non-standard segments of the admitted market as well as in the E&S lines market segment. We generally deliver preferred and standard products through our retail agents, non-standard and E&S lines products through our wholesale agents and specialty products through our program underwriting agents. We believe our diversified business platform and market segmentation expertise provide us with a competitive advantage by allowing us to access profitable market segments with significant premium volume opportunities to support our growth.

Underwriting Expertise.   We have generated favorable underwriting results as demonstrated by our average combined ratio of 83.3% during the period from 2005 to 2009. We have been able to achieve these underwriting results using our diversified business platform to allocate our capital to the most profitable

market segments in response to changing market conditions. In addition, we have historically focused on customers that present low to moderate hazard risks and utilized our in-house claims and legal defense capabilities to adjust and defend claims effectively. We also apply this underwriting approach when we analyze and integrate any company business that we acquire from other insurance companies into our Brokerage Insurance segment or when we consider expanding our brokerage business into any new territory or product classification. With respect to our specialty business, we focus on underwriting established books of narrowly defined homogenous classes of business with a demonstrated track record of underwriting profitability written through highly skilled program underwriting agents.

Effective Use of Capital.   We utilize a business model under which we (i) retain premiums to generate investment and underwriting income through the use of our own capital and (ii) transfer premiums to reinsurers and produce business for other insurance companies to generate commission and fee income. Our business model allows us to create and support a significantly larger premium base and a more robust and efficient infrastructure than otherwise would be achievable through only net retained premium. By doing so, we have been able to achieve a return on average equity that we believe is higher than many other insurance companies with a traditional business model. From 2005 to 2009 our average annual return on average equity was 19.2%, excluding net realized investment gains or losses and acquisition-related transaction costs. Although the acquisition of CastlePoint consolidates and eliminates the commission and fee income that we previously earned from ceding premiums to CastlePoint, we anticipate that as we increase our premium volume and place additional business with reinsurers and insurance companies other than CastlePoint we will generate commission and fee income from those companies. If the pending acquisition of OneBeacon Insurance Group’s (“OneBeacon”) personal lines division (the “Personal Lines Division”) is approved and completed, we expect to generate fee income from managing the reciprocal insurance companies in 2010.

Acquisitions Capability.  We acquired and integrated insurance companies and renewal books of business to expand our diversified business platform. Over the past six years, we have successfully executed this acquisition strategy by (i) expanding our distribution and servicing capability nationally, (ii) expanding into difference product lines and classes of business, and (iii) improving the profitability of the acquired companies through increased financial strength, expense reduction, re-underwriting and cross-selling. Due to the increased premium volume resulting from these acquisitions, we also are able to be selective and prudent in underwriting our business while meeting our growth objectives. We believe that the continuation of the soft property and casualty market environment is causing some competitors to consider various strategic initiatives including the sale of their companies. Because these sellers continue to be challenged by poor operating fundamentals, valuations for potential acquisition targets have become more reasonable. For these reasons, we anticipate that we will continue to seek acquisitions in the foreseeable future by applying our advantages which include our strong capitalization, track record and management expertise in execution and integration.

Strategic Relationship and Agreements with CastlePoint: February 2006 - February 2009

We acquired CastlePoint on February 5, 2009. Prior to that date, we had a strategic relationship with CastlePoint. Also, in addition to his positions at the Company, Michael H. Lee served as Chairman and Chief Executive Officer of CastlePoint Holdings, Ltd.

We organized and sponsored CastlePoint with an initial investment of $15.0 million on February 6, 2006. After CastlePoint raised $249.9 million in a private placement stock offering in 2006 and $114.8 million in a public stock offering in 2007, the Company’s investment ownership in CastlePoint as of December 31, 2008 was approximately 6.7%. In addition, the Company received a warrant from CastlePoint on April 6, 2006 to purchase an additional 1,127,000 shares of common stock.

CastlePoint was a Bermuda holding company organized to provide property and casualty insurance and reinsurance business solutions, products and services primarily to small insurance companies and program underwriting agents in the United States. Program underwriting agents are insurance intermediaries that aggregate insurance business from retail and wholesale agents and manage business on behalf of insurance companies. Their functions may include some or all of risk selection, underwriting, premium collection, policy form and design, and client service.

CastlePoint operated through a number of subsidiaries, including CastlePoint Reinsurance, a Bermuda reinsurance company; CPIC, a New York domiciled insurance company; CPM, which provides insurance services, and CPFL, which became licensed to sell workers’ compensation and commercial auto liability lines only in Florida in February 2009.

In April 2006, we entered into various agreements with CastlePoint such that CastlePoint would manage the program business, which we now refer to as specialty business, and we would manage the brokerage business. Under the agreements with CastlePoint, we managed the brokerage business and ceded reinsurance or earned management fees for the brokerage business that was expected to result in approximately a 95% combined ratio for CastlePoint. Also, CastlePoint managed the programs and other specialty business, and we participated in that business through various reinsurance agreements that was expected to result in approximately a 93% combined ratio for us. We had entered into service and expense sharing agreements with CastlePoint under which CPM was entitled to purchase from us, and we were entitled to purchase from CPM, certain insurance company services, such as claims adjustment, policy

administration, technology solutions, underwriting, and risk management services. The reimbursement for these charges has been recorded as “Other administration revenues” in our Insurance Services segment.

Acquisitions

In addition to the acquisition of CastlePoint on February 5, 2009 as described above, the Company completed, or as indicated below has agreed to complete, the following acquisitions.

Hermitage

On February 27, 2009, the Company completed the acquisition of HIG, Inc. (“Hermitage”), a property and casualty insurance holding company, pursuant to a stock purchase agreement, from a subsidiary of Brookfield Asset Management Inc. for cash consideration of $130.1 million. Hermitage offers both admitted and E&S lines products. This transaction further expanded the Company’s wholesale distribution system nationally and established a network of retail agents in the Southeast.

AequiCap

On October 14, 2009, the Company completed the acquisition of the renewal rights to the workers’ compensation business of AequiCap Program Administrators Inc. (“AequiCap”), an underwriting agency based in Fort Lauderdale, Florida. The acquired business primarily consists of small, low to moderate hazard workers compensation policies in Florida. During 2009, we entered into an agreement with AequiCap to provide claims handling services for workers’ compensation claims. Most of the employees of AequiCap involved in the servicing of the workers compensation business became employees of the Company. The acquisition of this business expands the Company’s regional presence in the Southeast.

Specialty Underwriters’ Alliance

On November 13, 2009, the Company completed the acquisition of 100% of the issued and outstanding common stock of Specialty Underwriters’ Alliance, Inc. (“SUA”), a holding company, for approximately $107 million of the Company’s common stock, pursuant to the terms and conditions of an Amended and Restated Agreement and Plan of Merger executed on July 22, 2009 and effective as of June 21, 2009, by and among the Company, Tower S.F. Merger Corporation and SUA. In connection with the closing of the transaction, the Company issued an aggregate of 4,460,098 shares of its common stock to SUA stockholders. SUA, a Delaware corporation headquartered in Chicago, Illinois, was incorporated in April 2003, and through its wholly-owned subsidiary, SUA Insurance Company, offers specialty commercial property and casualty insurance products through program underwriting agents that serve niche groups of insureds. After the acquisition, SUA Insurance Company was renamed CastlePoint National Insurance Company, which name change is still pending in some jurisdictions. The acquisition of SUA strengthens the Company’s Specialty Business segment and its regional presence in the Midwest.

OneBeacon Personal Lines Division

On February 2, 2010 the Company announced the signing of a definitive agreement to acquire the Personal Lines Division of OneBeacon, subject to customary closing conditions and regulatory approvals. For the purchase price of $32.5 million plus book value, Tower will acquire Massachusetts Homeland Insurance Company, York Insurance Company of Maine and two management companies. The management companies are the attorneys-in-fact for Adirondack Insurance Exchange, a New York reciprocal insurer, and New Jersey Skylands Insurance Association, a New Jersey reciprocal insurer, and its New Jersey domiciled stock insurance subsidiary, New Jersey Skylands Insurance Company. Tower will also purchase the surplus notes issued by the two reciprocal insurers for an amount equal to the statutory surplus in the exchanges (approximately $103 million at December 31, 2009). This transaction is subject to approvals by the appropriate regulatory agencies and is expected to close at the end of the second quarter of 2010. The insurance companies write approximately $250 million of annual premiums, and the management companies are attorneys-in-fact that manage approximately $250 million in annual premium written through two reciprocal insurance exchanges. Tower will write and manage the private passenger automobile, homeowners and package policies through the companies currently issuing these policies and combine 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 Lines Division writes business in the Northeastern United States with offices in: Canton, Massachusetts; South Portland, Maine; and Williamsville, New York.

Business Segments

The Company has changed the presentation of its business results, beginning January 1, 2009. We had previously reported business results for two segments: Insurance and Insurance Services. As of January 1, 2009, we present three segments as a result of splitting the results of the Insurance segment into

Brokerage Insurance and Specialty Business segments. The prior period segment disclosures have been restated to conform to the current presentation.

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

Brokerage Insurance Segment

Through our Brokerage Insurance segment, we offer a broad and diversified range of property and casualty insurance products and services to small to mid-sized businesses and to individuals throughout the United States. We also segment our business into different pricing and coverage tiers as well as different premium size categories to meet the specific needs of our customers. These products are underwritten and serviced through our 18 offices and distributed through approximately 1,173 retail agents and 196 wholesale agents. Approximately 71% of the direct premiums written by the Brokerage Insurance segment in 2009 was from the Northeast. However, in the past several years we have expanded our brokerage business beyond the Northeast through acquisitions and by appointing wholesale agents in California, Texas and Florida.

Using our broad product line offering, we are able to provide a comprehensive product solution to our producers and allow them to place more business with us. In addition, our diversified business platform allows us to allocate our capital to profitable market segments and avoid unprofitable market segments. We provide commercial lines products comprised of commercial package, general liability, workers’ compensation, commercial auto and commercial umbrella policies to businesses in different industries. We have generally focused on specific classes of business in the real estate, retail, wholesale and service industries such as retail and wholesale stores, residential and commercial buildings, restaurants and artisan contractors. We target these classes of business because we believe that they are less complex and have reduced potential for loss severity. We also offer personal lines products that provide coverage for modestly valued homes and dwellings as well as personal automobiles for individuals located predominately in the Northeast.

We offer our products on an admitted basis in the preferred, standard, and non-standard pricing and coverage tiers and on a non-admitted basis using our E&S coverage and pricing tier. For each of the preferred, standard, non-standard and E&S coverage and pricing tiers, we have developed different pricing, coverage and underwriting guidelines. For example, the pricing for the preferred risk segment is generally the lowest, followed by the pricing for the standard, non-standard and E&S segments. The underwriting guidelines are correspondingly stricter for preferred risks in order to justify the lower premium rates charged for these risks with underwriting guidelines becoming progressively less restrictive for standard, non-standard and E&S risks. We generally distribute policies for risks with preferred and standard underwriting characteristics through our retail agents and policies for risks with non-standard and E&S underwriting characteristics through our wholesale agents. In addition to segmenting our products into various pricing and coverage tiers, we further classify our products into the following premium size segments: under $25,000 (small), $25,000 to $150,000 (medium) and over $150,000 (large).

While we have succeeded in underwriting business in all market segments, we have experienced particular success in targeting nonstandard risks that do not fit the underwriting criteria of standard risk carriers due to factors such as type of business, location and premium per policy. For example, we have historically targeted risks located in urban areas such as New York City that require special underwriting expertise and have generally been avoided by other insurance companies. We have also historically had more success in the small premium size segment due to our focus on reducing our underwriting expenses by realizing economies of scale, utilizing technology and developing efficient business processes. We believe that due to the lack of flexibility in the underwriting of small policies, other insurance companies have not been able to price competitively in this underserved segment. Our expense advantage has allowed us to maintain adequate rates through industry cycles. With the softening market conditions that were experienced throughout 2009, our primary business segments were less impacted by the competitive rate pressures that affected premium adequacy on larger risks within the upper middle market segment.

The following table shows the direct premiums written for the Brokerage Insurance segment as of December 31, 2009, 2008 and 2007:

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

Specialty Business Segment

Following the previously discussed acquisition of SUA on November 13, 2009, we consolidated the specialty insurance business we obtained through the CastlePoint acquisition with the business of SUA to form a single Specialty Business segment operating out of the Chicago office. Our specialty business consists of insurance covering narrowly defined, homogeneous classes of business including Long-term Healthcare workers, Specialty Transportation, Professional Employers Organizations, Temporary Staffing Firms, Public Entities, Commercial Construction and Auto Dealerships.

Our specialty business is produced through a select number of program underwriting agents, who have specialized underwriting expertise in the classes they underwrite and who have established books of business with proven track records. We rely on our program underwriting agents for industry insight, regional underwriting knowledge and understanding of the specific risks in the niche markets we serve. We couple that knowledge with our disciplined underwriting practices, leading edge technology and systems capabilities to provide insurance programs and products customized to the needs of the specialty markets we serve.

Our focus in the specialty market is on those classes of business traditionally underserved by standard property and casualty insurers due to the complex business knowledge, awareness of regional market conditions and investment required to achieve attractive underwriting profits. We believe this segment of the market is attractive because competition is based primarily on customer service, availability and continuity of insurance capacity, specialized policy forms, efficient claims handling and other value-added considerations, rather than just price.

Further, we believe that our operating structure and systems capabilities afford us a distinct competitive advantage in underwriting specialty program business. Specifically, our systems enable us to provide a full underwriting processing and claims support interface in those situations where it is required, while the existence of a dedicated specialty claims unit provides an attractive alternative to the use of third party administrators in situations where the program underwriting agent does not provide such services.

Our Specialty Business segment in 2009 also included a limited amount of reinsurance business that we acquired from CastlePoint. We provided a limited amount of quota share, excess and catastrophe reinsurance business to primarily small insurance companies. After the CastlePoint acquisition, we began non-renewing this business and allocated the capital previously used to support this business to finance our acquisitions and support our growth in the Brokerage Insurance and Specialty Business segments. While we may retain a few reinsurance accounts after 2009, we do not anticipate that this business will have a material impact on our overall results.

The following table shows Gross Premiums Written in our Specialty Business segment broken down by program business and reinsurance for the years ended December 31, 2009, 2008 and 2007:

		Year Ended December 31,
($ in millions)		2009				2008				2007
Programs			$ 213.4				$ 124.8				$ 26.1
Reinsurance			50.8				-				-
Total			$ 264.2				$ 124.8				$ 26.1

Insurance Services Segment

In our Insurance Services segment, we generate fees from performing various aspects of insurance company functions for other insurance companies, including underwriting, claims administration, reinsurance intermediary, operational and technology services. We provide these services through our managing general agencies, TRM, CPM and CPRMFL. Prior to the acquisition of CastlePoint in February of 2009, TRM generated fees from managing brokerage business on behalf of CPIC, whereas CPM generated fees from managing program business on behalf of Tower. After CastlePoint was acquired by Tower in February of 2009, these fees earned by TRM and CPM were eliminated. Tower generates fees from placing Tower’s business with other insurers and reinsurers, although

as a result of the CastlePoint acquisition, the amount of fee income was limited to $5.1 million for 2009 as compared to $68.5 million in 2008. Upon the closing of the acquisition of OneBeacon’s Personal Lines Division, we will generate additional fee income from managing the two reciprocal exchanges, which we plan to reflect in the Insurance Services segment.

The following shows premiums managed by TRM, CPM and CPRMFL and the fee income derived from those managed premiums for the years ended December 31, 2009, 2008 and 2007:

		Year Ended December 31,
($ in millions)		2009				2008				2007
Managed Premiums			$ 11.7				$ 175.4				$ 85.1
Fee Income			$ 5.1				$ 68.5				$ 33.3

Products and Services

Our diversified business platform allows us to provide a broad range of products in all states in the U.S. Our products include the following:

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

The following table shows total Gross Premiums Earned and Gross Loss Ratio by product line for the years ended December 31, 2009, 2008 and 2007:

		For the year ended December 31,
		2009								2008								2007
		Gross								Gross								Gross
		Premium				Gross Loss				Premium				Gross Loss				Premium				Gross Loss
($ in millions)		Earned				Ratio				Earned				Ratio				Earned				Ratio
Commercial multiple-peril			$ 349.6				52.0	%			$ 242.2				51.5	%			$ 221.1				51.8	%
Other liability			150.9				52.3	%			63.2				42.6	%			72.9				64.2	%
Workers’ Compensation			216.2				54.4	%			88.4				47.6	%			54.1				34.1	%
Commercial Automobile			122.4				58.5	%			77.8				61.1	%			54.3				54.6	%
Homeowners			145.9				48.9	%			83.2				35.5	%			92.7				39.9	%
Fire and allied lines and inland marine			26.6				42.5	%			16.9				57.7	%			19.1				53.5	%
Personal auto			34.7				98.7	%			6.6				116.0	%			7.9				101.9	%
All Lines			$ 1,046.3				54.2	%			$ 578.3				49.9	%			$ 522.1				50.7	%

Organizational Structure

 

In 2009, we redesigned our organizational structure to support our national presence and expansion from two to three business segments. In addition, our corporate functions are divided into three areas: corporate, profit and service centers. The corporate functions are performed from our headquarters located in downtown New York City and are comprised of Legal, Corporate Communications & Marketing, Corporate Development & Investor Relations, Financial Operations, Human Resources & Corporate Administration and Actuarial. The service center functions encompass Operations, Technology and Claims. The profit center functions include the three business segments, Corporate Underwriting, Business Development and oversight of the field offices in the five regions.

We have established our field offices into five regions throughout the United States, the Northeast, Southeast, Midwest, Southwest, and West, to provide business development, underwriting, policyholders services and claims functions to the Brokerage Insurance and Specialty Business segments. The Northeast region is comprised of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont. The West region is comprised of Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington. The Southeast region includes Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, and West Virginia. The Southwest region states include: Arkansas, Colorado, Kansas, Louisiana, Nebraska, New Mexico, Oklahoma, Texas, Utah, and Wyoming. Tower’s Midwest region is comprised of Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, North Dakota, Ohio, South Dakota, and Wisconsin.

The Northeast Region is headquartered in New York and has eight branches. The Southeast Region has branches in Atlanta, GA, Fort Lauderdale, FL, Maitland, FL and Mobile, AL. The Midwest Region will be headquartered in Chicago, IL, co-located with our Specialty Business segment office, and this region is expected to grow beginning in 2010. The West Region is headquartered in Irvine, CA and has a branch office in Palm Springs, CA. The Southwest Region consists of business mostly from Texas. This business is currently underwritten and managed by our office in New York while the claims function operates out of the branch office in Irving, TX.

The following table shows the direct premiums written by region for the years ended December 31, 2009, 2008 and 2007:

		Year Ended December 31,
($ in millions)		2009				2008				2007
Northeast Region			$ 724.4				$ 469.5				$ 501.3
Southeast Region			80.0				23.5				11.3
Midwest Region			18.6				6.2				3.5
Southwest Region			32.6				11.7				0.5
West Region			164.2				123.9				7.4
Total			$ 1,019.8				$ 634.8				$ 524.0

Distribution

We generate business through independent retail, wholesale and program underwriting agents, whom we refer to collectively as producers. These producers sell policies for us as well as for other insurance companies. We carefully select our producers by evaluating several factors such as their need for our products, premium production potential, loss history with other insurance companies that they represent, product and market knowledge, and the size of the agency. We generally appoint producers with a total annual premium volume greater than $10,000,000. We expect a new producer to be able to produce at least $500,000 in annual premiums for us during the first year and $1 million in annual premiums after three years. We select our program underwriting agents based upon their underwriting expertise in specific niche markets, type of business, size and profitability of the existing book of business.

Commissions incurred in 2009 and 2008 averaged 19.4% and 18.3% of gross premiums earned, respectively. Our commission schedules are 1 to 2.5 points higher for wholesale than retail agents. Our commissions are also higher for program underwriting agents that perform additional underwriting and processing services on our behalf, including premium collection, policy issuance and data collection. In our Brokerage Insurance segment we also have a profit sharing plan that added approximately 1 / 2 of 1 percent to overall commission rates in the past several years. In our Specialty Business segment we typically have contingent commissions that are tied to the loss ratio performance for each program.

To ensure that we obtain profitable business from our producers, we attempt to position ourselves as our producers’ primary provider within the product segments that we offer. We manage the results of our producers through periodic reviews to monitor premium volume and profitability. We have access to online premium and loss ratio reports by producer and we estimate each producer’s profitability at least annually using actuarial techniques. We continuously monitor the performance of our producers by assessing leading indicators and metrics that signal the need for corrective action. Corrective action may include increased frequency of producer meetings and more detailed business planning. If loss ratio issues arise, we increase the monitoring of individual risks and consider reducing that producer’s binding authority. Review and enforcement of the agency agreement requirements can be used to address inadequate adherence to administrative duties and responsibilities. Noncompliance can lead to reduction of authority and potential termination.

In 2009, approximately 45% of the Company’s total business was generated by wholesale agents, 30% from retail producers and 20% from program underwriting agents with the remaining 5% from third party reinsurance. The pending acquisition of OneBeacon’s Personal Lines Division transaction is expected to provide access to over 900 retail agents, approximately one-half of which will be new to the Company.

Our largest producers in 2009 were Northeast Agencies and Morstan General Agency. In the year ended December 31, 2009, these producers accounted for 9% and 8%, respectively, of the total of our gross premiums written and produced. No other producer was responsible for more than 3% of our gross premiums written. Approximately 45% of the 2009 gross premiums written and managed in the Brokerage Insurance segment were produced by our top 18 producers representing 1.3% of our active agents, brokers and program underwriting agents. These producers each have annual written premiums of $5,000,000 or more. As we build a broader distribution base, the number of producers with significant premium volume with Tower is increasing, particularly with the addition of producers through acquisitions and territorial expansion in the Northeast, Southeast and Midwest regions.

The number of agencies from which we receive business has increased over the past several years as follows:

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

Underwriting

The underwriting strategy for controlling our loss ratio is to seek diversification in our products and an appropriate business mix for any given year, emphasizing profitable lines of business and de-emphasizing unprofitable lines. At the beginning of each year, we establish target loss ratios for each line of business, which we monitor throughout the year on a monthly basis. If any line of business fails to meet its target loss ratio, a cross-functional team comprised of personnel from line underwriting, corporate underwriting, actuarial, claims and loss control departments meet to develop corrective action plans that may involve revising underwriting guidelines, non-renewing unprofitable segments or entire lines of business and/or implementing rate increases. During

the period of time that a corrective action plan is being implemented with respect to any product line that fails to meet its target loss ratio, premium for that product line is reduced or maintained depending upon its effect on our total loss ratio. To offset the reduction or lack of growth in premium volume for the products that are undergoing corrective action, we seek to expand our premium writings in existing profitable lines of business or add new lines of business with better underwriting profit potential.

We generally use actuarial loss costs promulgated by the Insurance Services Office, a company providing statistical, actuarial and underwriting claims information and related services to insurers, as a benchmark in the development of pricing for our products. We further tailor pricing to each specific product we underwrite (other than workers’ compensation), taking into account our historical loss experience and individual risk and coverage characteristics. For workers’ compensation policies, we use individual state administered rates, loss costs or rates promulgated by the National Council on Compensation Insurance, Inc. in developing our pricing, subject to individual requirements.

Brokerage business

With respect to the business written through our Brokerage Insurance segment, we establish underwriting guidelines for all the products that we underwrite to ensure a uniform approach to risk selection, pricing and risk evaluation among our underwriters and to achieve underwriting profitability. Our underwriting process involves securing an adequate level of underwriting information from our producers, inspections and surveys to identify and evaluate risk exposures and subsequently pricing the risks we choose to accept. For certain approved classes of commercial risks and most personal lines policies, we allow our producers to initially bind these risks utilizing rating criteria that we provide to them. Also, our web-based platforms, webPlus (“webPlus” ^® ) and Preserver Online, provide our producers with the capability to submit and receive quotes over the internet and contain our risk selection and pricing logic, thereby enabling us to streamline our initial submission and screening process. If the individual risk does not meet the initial submission and screening parameters contained within webPlus or Preserver Online, the risk is automatically referred to our assigned underwriter for specific offline review. See “Business—Technology.”

Once a risk is bound by our underwriter or producer, our internal or outside loss control representatives conduct physical inspections of the insured premises to validate the information provided by our producers and provide a loss control report to our underwriters to make a final evaluation of the risk. With the exception of a few typically low risk classes of business such as offices, all of the new risks that are bound are physically inspected or subject to a telephone survey, generally within 60 days from the effective date of the policy, and generally reviewed by underwriting within that 60 day period. If the inspection reveals that the risk insured under the policy does not meet our established underwriting guidelines, the policy is typically cancelled within the first 60 days from its effective date. If the inspection reveals that the risk meets our established underwriting guidelines but the policy was bound with incorrect rating information, the policy is amended through an endorsement based upon the correct information. We supplement the inspection by using online data sources to further evaluate the building value, claim experience, financial history and catastrophe exposures of the insured. In addition, we specifically tailor coverage to match the insured’s exposure and premium requirements. We complete internal file reviews and audits on a monthly, quarterly and annual basis to confirm that underwriting standards and pricing programs are being consistently followed. Our property risks are generally comprised of residential buildings, retail stores and restaurants covered under policies with low building and content limits. We carefully underwrite potential catastrophe exposures to terrorism losses. Our underwriting guidelines are designed to avoid properties designated as, or in close proximity to, high profile or target risks, individual buildings over 25 stories and any site within 500 feet of major transportation centers, bridges, tunnels and other governmental or institutional buildings. In addition, we monitor the concentration of employees insured under our workers’ compensation policies and avoid writing risks with more than 100 employees in any one building. Please see “Risk Factors-Risks Related to Our Business.” We may face substantial exposure to losses from terrorism and we are currently required by law to offer coverage against such losses.

We underwrite our products through our underwriting business units that are each headed by an underwriting manager, having on average 26 years of experience in the property and casualty industry. These underwriting offices are supported by professionals in the corporate underwriting, actuarial, operations, business development and loss control departments. The corporate underwriting department is responsible for managing and analyzing the profitability of our entire book of business, supporting line underwriting with technical assistance, developing underwriting guidelines, granting underwriting authority, training, developing new products and monitoring underwriting quality control through audits. The actuarial department is responsible for monitoring rate adequacy for all of our products and analyzing loss data on a monthly basis. The underwriting operations department is responsible for developing workflows, conducting operational audits and providing technical assistance to the underwriting teams. The loss control department conducts loss control inspections on nearly all new commercial and personal lines business written, utilizing in-house loss control representatives and outside vendors. The business development department works with the underwriting teams to manage relationships with our producers.

Specialty business

The underwriting process utilized for the specialty business is based on our understanding of best industry practices and, as such, we consider the appropriateness of insuring the client by evaluating the quality of its management, its risk management strategy and its track record. In addition, we require each program that we underwrite in the specialty business segment to include significant information regarding the nature of the perils to be included and detailed aggregate information pertaining to the location(s) of the risks covered. We obtain available information on the client’s loss history for the perils being insured or reinsured, together with relevant underwriting considerations. In conjunction with testing each proposed program against our underwriting criteria, our underwriters evaluate the proposal in terms of its risk/reward profile to assess the adequacy of the proposed pricing and its potential impact on our overall return on capital and corporate risk objectives. Our underwriting process integrates the actuarial and underwriting disciplines. We utilize our in-house actuarial staff as well as rely on outside consultants as necessary. The actuarial and underwriting estimates that we develop in our underwriting and pricing analyses are explicitly tracked by program on a continuous basis through our underwriting audit and actuarial reserving processes. We require significant amounts of data from our clients and accept business for which the data provided to us is sufficient for us to make an appropriate analysis. We may supplement the data provided to us by our clients with information from the Insurance Services Offices, Inc., the National Council on Compensation Insurance, Inc., other advisory rate-making associations and other organizations that provide projected loss cost data to their members.

Claims Management

We manage the claims function through our regional claims offices throughout the United States. We also utilize third party administrators who specialize in handling certain types of claims, generally for our specialty business. In some situations in our specialty business, the program underwriting agent is also appointed by us as the third party administrator for claims for a particular program.

Our claims adjustors are assigned to cases based upon their expertise for various types of claims, and we monitor the results of the adjusters handling the claims using peer reviews, claim file audits and results monitoring. We monitor claims adjusting performed by third-party administrators similarly to how we monitor claims adjusting conducted by our own personnel. We maintain databases of the claims experience of each of our products, territories, and programs results, and our claims managers work with our underwriters and actuaries to assess results and trends.

We also obtain claims adjustment and legal defense or claims audit services for various types of claims for which additional expertise is needed. We maintain working relationships with claims defense firms in key locations throughout the U.S.

We establish case loss reserves for each claim based upon all of the facts available at the time to record our best estimate of the ultimate potential loss of each claim. We also establish reserves on a case-by-case basis for the estimated legal defense costs of third-party claims, sometimes referred to as allocated loss adjustment expense reserves. In addition, we establish reserves to record, on an overall basis, the costs of adjusting claims that have occurred but have not yet been settled, sometimes referred to as unallocated loss adjustment expense reserves.

Competition

The insurance industry is highly competitive. Each year we attempt to assess and project the market conditions when we develop prices for our products, but we cannot fully know our profitability until all claims have been reported and settled.

We compete with many insurance companies in each segment in which we write business, and we compete within our producers’ offices to write the types of business that we desire. Some of our competitors have more, and in some cases substantially more, capital and greater marketing and management resources than we have, and some of our competitors have greater name and brand recognition than we have, especially in areas outside of the Northeast where we have more experience.

Competition in the types of business that we underwrite and intend to underwrite is based on many factors, including:

•

reputation;

•

multiple solution capability;

•

strength of client relationships;

•

perceived financial strength and financial ratings assigned by independent rating agencies;

•

management’s experience in the product, territory, or program;

•

premiums charged and other terms and conditions offered;

•

services provided, products offered and scope of business, both by size and geographic location; and

•

reputation for claims handling.

Increased competition could result in fewer applications for coverage, lower premium rates and less favorable policy terms, which could adversely affect us. We are unable to predict the extent to which new, proposed or potential initiatives may affect the demand for our products or the risks that may be available for us to consider underwriting.

In our commercial and personal lines admitted business segments, we compete with major U.S. insurers and certain underwriting syndicates, including large national companies such as Travelers Companies, Inc., Allstate Insurance Company and State Farm Insurance; regional insurers such as Selective Insurance Company, Harleysville Insurance Company, Hanover Insurance and Peerless Insurance Company and smaller, more local competitors such as Greater New York Mutual, Magna Carta Companies and Utica First Insurance Company. Our non-admitted binding authority and brokerage business with general agents competes with Scottsdale Insurance Company, Admiral Insurance Company, Mt. Hawley Insurance Company, Navigators Group, Inc., Essex Insurance Company, Colony Insurance Company, Century Insurance Group, Nautilus Insurance Group, RLI Corp., United States Liability Insurance Group and Burlington Insurance Group, Inc. In our program business, we compete against companies that write program business such as QBE Insurance Group Limited, Delos Insurance Group, Am Trust Financial Services, Inc., RLI Corp., Chartis Inc., W.R. Berkley Corporation, Markel Corporation, Great American Insurance Group and Philadelphia Insurance Companies.

Loss and Loss Adjustment Expense Reserves

We are required to establish reserves for incurred losses that are unpaid, including reserves for claims and loss adjustment expenses, which represent the expenses of settling and adjusting those claims. These reserves are balance sheet liabilities representing estimates of future amounts required to pay losses and loss expenses for insured and/or reinsured claims that have occurred at or before the balance sheet date, whether already known to us or not yet reported. Our policy is to establish these losses and loss reserves prudently after considering all information known to us as of the date they are recorded.

Loss reserves fall into two categories: case reserves for reported losses and loss expenses associated with a specific reported insured claim, and reserves for incurred but not reported (“IBNR”) losses and loss adjustment expenses. We establish these two categories of loss reserves as follows:

•

Reserves for reported losses - When a claim is received from an insured, broker or ceding company, or claimant we establish a case reserve for the estimated amount of its ultimate settlement and its estimated loss expenses. We establish case reserves based upon the known facts about each claim at the time the claim is reported and may subsequently increase or reduce the case reserves as our claims department deems necessary based upon the development of additional facts about the claim.

•

IBNR reserves - We also estimate and establish reserves for loss and loss adjustment expense (“LAE”) amounts incurred but not yet reported, including expected development of reported claims. IBNR reserves are calculated as ultimate losses and LAE less reported losses and LAE. Ultimate losses are projected by using generally accepted actuarial techniques.

Loss reserves represent our best estimate, at a given point in time, of the ultimate settlement and administration cost of claims incurred. For workers’ compensation, our reserves are discounted for claims that are settled or expected to be settled as long-term annuity payments, and as of December 31, 2009 the total amount of this discount was $4.5 million. To estimate loss reserves, we utilize information from our pricing analyses, actuarial analysis of claims experience by product and segment, and relevant insurance industry information such as loss settlement patterns for the type of business being reserved.

Since the process of estimating loss reserves requires significant judgment about a number of variables, such as fluctuations in inflation, judicial trends, legislative changes and changes in claims handling procedures, our ultimate liability may exceed or be less than these estimates. We revise reserves for losses and loss expenses as additional information becomes available and reflect adjustments, if any, in earnings in the periods in which they are determined.

We engage independent external actuarial specialists, from time to time, to review specific pricing and reserving methods and results. We also engage an independent external actuarial specialist to opine on the statutory reserves that are recorded at our Insurance Subsidiaries.

Reconciliation of Loss and Loss Adjustment Expenses

The table below shows the reconciliation of loss and LAE on a gross and net basis for each of the last three calendar years, reflecting changes in losses incurred and paid losses:

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

Our claims reserving practices are designed to set reserves that in the aggregate are adequate to pay all claims at their ultimate settlement value. We discount a portion of our workers’ compensation reserves and our consolidated loss and LAE reserves are net of a $4.5 million discount at December 31, 2009. With respect to companies that are acquired, we also determine a Reserves Risk Premium that reflects the present value of cash flows and required statutory capital as the loss reserves are run off. The Reserves Risk Premium is amortized based upon the projected paid losses underlying the acquired company’s reserves.

Loss Reserve Development

Shown below is the loss reserve development for business written each year from 1999 through 2009. The table portrays the changes in our loss and LAE reserves in subsequent years from the prior loss estimates based on experience as of the end of each succeeding year.

The first line of the table shows, for the years indicated, our net reserve liability including the reserve for incurred but not reported losses as originally estimated. For example, as of December 31, 2000 we estimated that $7.9 million would be a sufficient reserve to settle all claims not already settled that had occurred prior to December 31, 2000 whether reported or unreported to us. The next section of the table shows, by year, the cumulative amounts of losses and loss adjustment expenses paid as of the end of each succeeding year. For example, with respect to the net losses and loss expense reserve of $7.9 million as of December 31, 2000, by December 31, 2009 (nine years later) $8.9 million had actually been paid in settlement of the claims.

The next section of the table sets forth the re-estimations in later years of incurred losses, including payments, for the years indicated. For example, as reflected in that section of the table, the original reserve of $7.9 million was re-estimated to be $10.4 million at December 31, 2009. The increase from the original estimate is caused by a combination of factors, including: (1) claims being settled for amounts different than originally estimated, (2) reserves being increased or decreased for claims remaining open as more information becomes known about those individual claims and (3) more or fewer claims being reported after December 31, 2000 than anticipated.

The “cumulative redundancy/ (deficiency)” represents, as of December 31, 2009, the difference between the latest re-estimated liability and the reserves as originally estimated. A redundancy means the original estimate was higher than the current estimate; a deficiency means that the current estimate is higher than the original estimate. For example, as of December 31, 2009 and based upon updated information, we re-estimated that the reserves which were established as of December 31, 2008 were $0.3 million redundant ($312.5 million net re-estimated liability less $312.8 million original net liability).

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

	Year ended December 31,
($ in millions)		1999				2000				2001				2002				2003				2004				2005				2006				2007				2008				2009
Original Net Liability			6.8				7.9				8.6				15.5				24.4				36.9				101.7				192.5				311.7				312.8				932.3
Cumulative payments as of:
One year later			2.6				3.4				2.9				4.1				7.5				10.9				13.7				49.5				102.4				111.4
Two years later			4.8				5.4				4.9				6.7				11.9				4.5				36.7				90.9				163.8
Three years later			6.2				7.0				6.4				9.1				2.9				16.8				60.6				120.0
Four years later			6.9				7.9				7.2				4.5				11.7				30.2				73.9
Five years later			7.2				8.3				6.7				8.9				17.8				34.9
Six years later			7.5				8.7				7.8				11.7				20.8
Seven years later			7.7				9.0				8.3				13.4
Eight years later			7.9				9.1				8.6
Nine years later			8.0				8.9
Ten years later			7.8
Net liability re-estimated as of:
One year later			7.5				9.7				11.5				15.6				24.2				36.6				101.0				191.1				303.9				312.5
Two years later			8.7				11.7				11.3				14.7				24.8				40.7				101.5				178.3				288.1
Three years later			9.5				11.5				10.5				16.5				29.0				48.3				99.5				171.4
Four years later			9.2				10.8				11.9				19.6				36.2				45.3				96.6
Five years later			9.0				11.9				13.3				25.1				33.6				40.2
Six years later			10.0				12.7				15.7				23.0				27.9
Seven years later			10.6				12.7				13.8				17.0
Eight years later			10.6				11.7				10.8
Nine years later			9.6				10.4
Ten years later			8.7
Cumulative Net redundancy/
(deficiency)			(1.8	)			(2.5	)			(2.2	)			(1.5	)			(3.5	)			(3.2	)			5.1				21.1				23.6				0.3
Reinsurance Commutations			-				-				1.2				3.2				7.2				9.2				9.2				-				-				-
Cumulative net redundancy/
(deficiency) excluding
Reinsurance Commutations			(1.8	)			(2.5	)			(0.9	)			1.7				3.6				5.9				14.3				21.1				23.6				0.3
Net reserves			6.8				7.9				8.6				15.5				24.4				36.9				101.7				192.5				311.7				312.8				932.3
Ceded reserves			17.4				20.6				29.0				50.2				75.1				91.8				97.0				110.0				189.5				222.2				199.7
Gross reserves			24.2				28.5				37.6				65.7				99.5				128.7				198.7				302.5				501.2				535.0				1,132.0
Net re-estimated			8.7				10.4				10.8				17.0				27.9				40.2				96.6				171.4				288.1				312.5
Ceded re-estimated			25.0				28.1				34.8				48.8				70.8				86.6				86.5				93.6				163.8				212.3
Gross re-estimated			33.7				38.5				45.6				65.8				98.7				126.8				183.1				265.0				451.9				524.8
Cumulative gross redundancy/
(deficiency)			(9.5	)			(10.0	)			(8.0	)			(0.1	)			0.8				1.9				15.6				37.5				49.3				10.2

(1)		The cumulative payments and the net liabilities are affected by commutations. We commuted several reinsurance treaties in 2001 that had the effect of lowering the cumulative payments by $0.6 million in 2001, $6.8 million in 2002, and $10.1 million in 2003, 2004, 2005 and 2006.
(2)		The net redundancies reflected in the above table for 2009 and 2008 resulted primarily from the following: Reserve reductions in 2009 from commercial multi-peril liability and other liability. Reserve reductions in 2008 from commercial multi-peril liability, workers’ compensation, other liability and property lines of business in accident year 2006.

(3)

The net deficiencies reflected in the above table for years 2004 and prior resulted primarily from the reinsurance commutation impact of $1.2 million, $3.2 million, $7.2 million, and $9.2 million for 2001, 2002, 2003, and 2004, respectively.

(4)

“Net re-estimated” for the year ended December 31, 2008 excludes favorable development of $2.0 pertaining to CastlePoint and Hermitage. Total favorable development recorded in 2009 on 2008 and prior accident years totaled $2.3 million, which includes CastlePoint and Hermitage reserve development recognized after the acquisitions.

Analysis of Reserves

The following table shows our estimated net outstanding case loss reserves and IBNR by line of business as of December 31, 2009:

		Case Loss
($ in millions)		Reserves				IBNR				Total
Commercial Multiple Peril			$ 189.3				$ 103.8				$ 293.1
Other Liability			110.0				127.3				237.3
Workers’ Compensation			118.5				85.3				203.8
Commercial Automobile			63.5				48.3				111.8
Homeowners			38.9				17.7				56.6
Fire and Allied Lines			6.6				2.3				8.9
Personal Automobile			13.4				7.4				20.8
All Lines			$ 540.2				$ 392.1				$ 932.3

In 2009 we recognized favorable development in our net losses from prior accident years of $2.3 million including $2.0 million pertaining to CastlePoint and Hermitage recognized after the acquisitions.

We carefully monitor our gross, ceded and net loss reserves by segment and line of business to ensure that they are adequate, since a deficiency in reserves may result in or indicate inadequate pricing on our products and may impact our financial condition.

Loss development methods, the Bornhuetter-Ferguson (“B-F”) method, and loss ratio projections are the predominant methodologies that our actuaries utilize to project losses and corresponding reserves. Based upon these methods our actuaries determine a best estimate of the loss reserves. All of these methods are standard actuarial approaches. Loss development factors are derived from our data, as well as in some cases from claims experience obtained from other carriers or based upon industry experience, and the loss development factors are utilized in each of the actuarial methods. The loss ratio projection method applies loss development factors to older accident years and projects the loss ratio to the most recent periods based upon trend factors for inflation and pricing changes. Generally, the loss ratio projection method is given the most weight for the recent accident year when there is high volatility in the development patterns, since this method gives little or no weight to immature claims experience that may be unrepresentative of ultimate loss activity. The B-F method combines the loss ratio method and the loss development method to determine loss reserves by adding an expected development (loss ratio times premium times percent unreported) to the reported reserves, and is generally given more weight as each accident year matures. The loss development methods utilize reported paid and incurred claims experience and loss development factors, and these methods are given increasing weight as each accident year matures.

The incurred method relies on historical development factors derived from changes in our incurred estimates of claims paid and case reserves over time. The paid method relies on our claim payment patterns and ultimate claim costs. The incurred method is sensitive to changes in case reserving practices over time. Thus, if case reserving practices change over time, the incurred method may produce significant variations in estimates of ultimate losses. The paid method relies on actual claim payments and therefore is not sensitive to changes in case reserve estimates.

The table below shows the range of the reserves estimates by line of business. The low end of the range of our sensitivity analysis was derived by giving more weight to the lowest estimate among the alternative methods for each line of business and accident year. Similarly, the high end of the range of our sensitivity analysis was derived by giving more weight to the highest estimate among the alternative methods for each line of business and accident year. We believe that changing the weighting for the four methods by line of business and accident year reflects reasonably likely outcomes, although even further variation could result based upon changes in various inputs within each method, such as variation in loss development patterns or variation in expected loss ratios. We believe the results of the sensitivity analysis, which are summarized in the table below, constitute a reasonable range of expected outcomes of our reserves for net loss and LAE:

	Range of Reserve Estimates
($ in millions)		High				Low				Carried
Commercial Multiple Peril			$ 310.8				$ 269.7				$ 293.1
Other Liability			260.6				210.8				237.3
Workers’ Compensation			217.0				188.3				203.8

Commercial Auto			119.2				98.1				111.8
Homeowners.			59.4				53.7				56.6
Fire and Allied Lines			9.3				8.4				8.9
Personal Auto			22.2				18.7				20.8
All Lines			$ 998.5				$ 847.7				$ 932.3

The resulting range derived from our sensitivity analysis would have increased net reserves by $66.1 million, or 7.1%, and or decreased net reserves by $84.6 million, or 9.7%.

We are not aware of any claims trends that have emerged or that would cause future adverse development that have not already been considered in existing case reserves and in our current loss development factors.

In New York State, lawsuits for negligence, subject to certain limitations, must be commenced within three years from the date of the accident or are otherwise barred. Accordingly, our exposure to IBNR for accident years 2005 and prior is limited although there remains the possibility of adverse development on reported claims.

Due to the close monitoring and analysis of reserves, we believe our loss reserves are adequate. This is reflected by the favorable loss development that we have experienced in each of the past several years. However, there are no assurances that future loss development and trends will be consistent with our past loss development history, and so adverse loss reserve development remains a risk factor to our business. See “Risk Factors—Risks Related to Our Business—If our actual loss and LAE exceed our loss reserves, our financial condition and results of operations could be significantly adversely affected.” See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Loss and Loss Adjustment Expense Reserves.”

Investments

Our investment guidelines specify minimum criteria for overall credit quality, liquidity and risk-return characteristics of our investment portfolio and include limitations on the size of particular holdings, as well as restrictions on investments in different asset classes. We utilize several independent investment advisors to effect investment transactions, render investment accounting services and provide investment advice. We also have retained and may retain other investment advisors to manage or advise us regarding portions of our overall investment portfolio.

The Company’s investment strategy supports the Company’s overall business strategy. The investment strategy seeks to achieve the appropriate balance among providing stability of principal to meet future policyholder obligations, providing income to enhance profitability, maintaining liquidity to sustain operations and growing the stockholders’ equity over time.

The Company’s investment strategy will manage investment risk based on the organization’s ability to accept such risk. The investment strategy will:

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

We monitor the quality of investments, duration, sector mix, and actual and expected investment returns. Investment decision-making is guided by general economic conditions as well as management’s forecast of our cash flows, including the nature and timing of our expected liability payouts and the possibility that we may have unexpected cash demands, for example, to satisfy claims due to catastrophic losses. We expect our investment portfolio will continue to consist mainly of highly rated and liquid fixed-income securities; however, we may invest a portion of our funds in other asset types including common equity investments and non-investment grade bonds.

Our investment guidelines require compliance with applicable government regulations and laws. Without the approval of our board of directors, we cannot purchase, and we have not purchased, financial futures, options or other derivatives. We expect the majority of our investment holdings to continue to be denominated in U.S. dollars. We report overall investment results to the board of directors on a quarterly basis.

Ratings

Ratings by independent agencies are an important factor in establishing the competitive position of insurance and reinsurance companies and are important to our ability to market and sell our products. Rating organizations continually review the financial positions of insurers. A.M. Best is one of the most important rating agencies for insurance and reinsurance companies. A.M. Best maintains a letter scale rating system ranging from A++ (Superior) to F (In liquidation). In evaluating a company’s financial strength, A.M. Best reviews the company’s profitability, leverage and liquidity, as well as its book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its loss and loss expense reserves, the adequacy of its surplus, its capital structure, the experience and competence of its management and its market presence.

The objective of A.M. Best’s ratings system is to provide an opinion of an insurer’s or reinsurer’s financial strength and ability to meet ongoing obligations to its policyholders. These ratings reflect the ability to pay policyholder claims and are not a recommendation to buy, sell or hold the shares of a particular company. These ratings are subject to periodic review by, and may be revised or revoked at the sole discretion of A.M. Best.

With the exception of CPNIC, which is currently rated B+ (Good), A.M. Best has assigned each of our insurance company subsidiaries a Financial Strength rating of A- (Excellent—assigned to companies that have, in their opinion, an excellent ability to meet their ongoing obligations to policyholders), which is the fourth highest of fifteen rating levels

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 rating process is designed to provide an objective baseline for assessing solvency which in turn provides insight into changes in financial stability. Demotech’s Financial Stability Ratings are based upon a series of quantitative ratios and quantitative considerations which together comprise a Financial Stability Analysis Model.

Regulatory Matters

Our Insurance Subsidiaries are subject to extensive governmental regulation and supervision in the U.S., and our reinsurance subsidiary, CastlePoint Reinsurance, is subject to governmental regulation in Bermuda. Most insurance regulations are designed to protect the interests of policyholders rather than shareholders and other investors. These regulations, generally administered by a department of insurance in each jurisdiction relate to, among other things:

•

approval of policy forms and premium rates for our primary insurance operations;

•

standards of solvency, including risk-based capital measurements;

•

licensing of insurers and their agents;

•

restrictions on the nature, quality and concentration of investments;

•

restrictions on the ability to pay dividends to us;

•

restrictions on transactions between insurance company subsidiaries and their affiliates;

•

restrictions on the size of risks insurable under a single policy;

•

requiring deposits for the benefit of policyholders;

•

requiring certain methods of accounting;

•

periodic examinations of our operations and finances;

•

establishment of trust funds for the protection of policyholders;

•

prescribing the form and content of records of financial condition required to be filed; and

•

requiring reserves for unearned premium, losses and other purposes.

Our Insurance Subsidiaries also are subject to state laws and regulations that require diversification of investment portfolios and that limit types of permitted investments and the amount of investments in certain investment categories. Failure to comply with these laws and regulations may cause non-conforming investments to be treated as non-admitted assets for purposes of measuring statutory capital and surplus and, in some instances, would require divestiture.

Insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to financial condition, holding company issues and other matters.

In addition, regulatory authorities have relatively broad discretion to deny or revoke insurance licenses for various reasons, including the violation of regulations. We base some of our practices on our interpretations of regulations or practices that we believe are generally followed by the industry. These practices may turn out to be different from the interpretations of regulatory authorities. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or otherwise penalize us. This could adversely affect us. Further, changes in the level of regulation of the insurance or reinsurance industry or changes in laws or regulations themselves or interpretations by regulatory authorities could adversely affect us.

Regulation

U.S. Insurance Holding Company Regulation of Tower

Tower, as the parent of the Insurance Subsidiaries, is subject to the insurance holding company laws of New York, Florida, Illinois, Maine, Massachusetts, New Hampshire and New Jersey, the domestic jurisdictions of the Insurance Subsidiaries. In addition, for certain limited purposes, some Insurance Subsidiaries may have to comply with the laws of jurisdictions of commercial domicile, as defined by state law, including California. These laws generally require the Insurance Subsidiaries to register with their respective domiciliary state Insurance Department (“Insurance Department”) and to furnish annually financial and other information about the operations of companies within the holding company system. Generally under these laws, all material transactions among companies in the holding company system to which an Insurance Subsidiary is a party, including sales, loans, reinsurance agreements and service agreements, must be fair and reasonable and, if material or of a specified category, require prior notice and approval or non-disapproval by the Insurance Department.

Changes of Control

Before a person can acquire control of an Insurance Subsidiary, prior written approval must be obtained from the Superintendent or the Commissioner of the Insurance Department (“Superintendent”) of the Insurance Subsidiary’s domestic jurisdiction or jurisdiction of commercial domicile. Prior to granting approval of an application to acquire control of an insurer, the Superintendent considers such factors as: the financial strength of the applicant, the integrity and management of the applicant’s Board of Directors and executive officers, the acquirer’s plans for the future operations of the domestic insurer and any anti-competitive results that may arise from the consummation of the acquisition of control. Pursuant to insurance holding company laws, “control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the company, whether through the ownership of voting securities, by contract (except a commercial contract for goods or non-management services) or otherwise. Control is presumed to exist if any person directly or indirectly owns, controls or holds with the power to vote a certain threshold percentage of the voting securities of the company. In the domestic jurisdictions of all but one of the Insurance Subsidiaries, the threshold percentage of voting securities that triggers a presumption of control is 10% or more. In Florida, the threshold percentage that triggers a presumption of control is 5% of the voting securities. The Insurance Department, after notice and a hearing, may determine that a person or entity which directly or indirectly owns, controls or holds with the power to vote less than the threshold percentage of the voting securities of the company, “controls” the company. Because a person acquiring 10% or more of our common stock would indirectly control the same percentage of the stock of the Insurance Subsidiaries, the insurance company change of control laws of New York, California, Illinois, New Jersey, New Hampshire, Maine and Massachusetts would likely apply to such a transaction. The insurance company change of control laws of Florida would likely apply to an acquisition of 5% or more of our voting stock.

These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of Tower, including through transactions, and in particular unsolicited transactions, that some or all of the stockholders of Tower might consider to be desirable.

Legislative Changes

From time to time, various regulatory and legislative changes have been proposed in the insurance industry. Among the proposals that have in the past been or are at present being considered are the possible introduction of Federal regulation in addition to, or in lieu of, the current system of state regulation of insurers and proposals in various state legislatures (some of which proposals have been enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the National Association of Insurance Commissioners (“NAIC”). We are unable to predict whether any of these laws and regulations will be adopted, the form in which any such laws and regulations would be adopted, or the effect, if any, these developments would have on our operations and financial condition.

In 2002, the Federal government enacted legislation designed to ensure the availability of insurance coverage for terrorist acts in the United States of America and established a Federal assistance program. Subsequent laws were enacted in 2005 and 2007 extending and modifying the prior legislation. For a discussion of this legislation, see “Business—Reinsurance—Terrorism Reinsurance.” As a result of this legislation, potential losses from a terrorist attack could be

substantially larger than previously expected, could also adversely affect our ability to obtain reinsurance on favorable terms, including pricing, and may affect our underwriting strategy, rating, and other elements of our operation.

State Insurance Regulation

State insurance authorities have broad regulatory powers with respect to various aspects of the business of U.S. insurance companies. The primary purpose of such regulatory powers is to protect individual policyholders. The extent of such regulation varies, but generally has its source in statutes that delegate regulatory, supervisory and administrative power to state Insurance Departments. Such powers relate to, among other things, licensing to transact business, accreditation of reinsurers, admittance of assets to statutory surplus, regulating unfair trade and claims practices, establishing reserve requirements and solvency standards, regulating investments and dividends, approving policy forms and related materials in certain instances and approving premium rates in certain instances. State insurance laws and regulations require an insurance company to file financial statements with Insurance Departments everywhere it will be licensed to conduct insurance business, and its operations are subject to examination by those departments.

Our Insurance Subsidiaries prepare statutory financial statements in accordance with Statutory Accounting Principles (“SAP”) and procedures prescribed or permitted by their state of domicile. As part of their regulatory oversight process, Insurance Departments conduct periodic detailed examinations of the books and records, financial reporting, policy filings and market conduct of insurance companies domiciled in their states, generally once every three to five years. Examinations are generally carried out in cooperation with the Insurance Departments of other states under guidelines promulgated by the NAIC.

The terms and conditions of reinsurance agreements generally are not subject to regulation by any U.S. state Insurance Department with respect to rates or policy terms. As a practical matter, however, the rates charged by primary insurers do have an effect on the rates that can be charged by reinsurers.

Insurance Regulatory Information System Ratios

The Insurance Regulatory Information System, or IRIS, was developed by the NAIC and is intended primarily to assist state Insurance Departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies thirteen industry ratios and specifies “usual values” for each ratio. Departure from the usual values on four or more of the ratios can lead to inquiries from individual state insurance commissioners as to certain aspects of an insurer’s business.

In 2009, TICNY, CPIC and CNIC ’s results were outside the usual values for one IRIS ratio and within the usual values for twelve IRIS ratios. The one IRIS ratio that was outside the usual value was adjusted liabilities to liquid assets. The ratio outside of the usual value was caused by intercompany pooling liabilities between Tower’s insurance company pool members. The ratio would have been within the usual balance if we excluded these intercompany payables from the calculation. TICNY and its insurance company subsidiaries were members of an intercompany pooling arrangement in 2009 and 2008. NEIC’s IRIS results were outside the usual values for two IRIS ratios and within the usual values for twelve IRIS ratios. The two ratios that were outside the usual values were adjusted liabilities to liquid assets and change in net premium written which were caused by the intercompany pooling arrangement. The Tower intercompany pool experienced significant premium growth as a result of the CastlePoint, SUA and Hermitage acquisitions in 2009. These ratios would have been within the usual balances on a combined pool basis. PIC, MVIC, and KIC’s IRIS results were outside the usual values for three IRIS ratios and within the usual values for ten IRIS ratios. The three IRIS ratios that were outside the usual values were changes in change in net premiums written, adjusted liabilities to liquid assets and estimated current reserve deficiency to policyholders’ surplus. The change in net premiums and the estimated current reserve deficiency to policyholders’ surplus was caused by growth in premium which resulted from the 2009 insurance company acquisitions, while the adjusted liabilities to liquid assets was due to the aforementioned reasons. KIC also reinsured all of its inforce premium and new and renewal business to PIC effective July 1, 2009 which caused significant changes in both KIC and PIC. These ratios would have been within the usual balances on a combined pool basis. HIC’s results were outside the usual values for three IRIS ratios and within the usual values for ten IRIS ratios. The three IRIS ratios that were outside the usual values were changes in change in net premiums written, adjusted liabilities to liquid assets and change in adjusted policyholders’ surplus The change in net premiums and the adjusted liabilities to liquid assets was due to the aforementioned reasons. The change in adjusted policyholders’ surplus resulted from unrealized gains on investments, profitable underwriting results assumed from the intercompany pool and an increase in admitted deferred tax assets. These ratios would have been within the usual balances on a combined pool basis. TNIC’s IRIS results were outside the usual values for four IRIS ratios and within the usual values for nine IRIS ratios. The four IRIS ratios that were outside the usual values were gross premiums written to policyholders’ surplus, change in net premiums written, investment yield and adjusted liabilities to liquid assets. The ratios outside of the usual values were caused by growth in TNIC’s direct premium written, as well as the growth in its net premium written which resulted from changes made to the intercompany pooling arrangement which was amended in 2009 as Tower acquired new insurance companies. The IRIS ratio was also outside the usual value for the adjusted liabilities to liquid assets, which also was caused by intercompany pooling liabilities which were owed by TNIC to the pool manager, TICNY. The ratio would have been within the usual balance if we excluded

these intercompany payables from the ratio. CPFL’s IRIS results were outside the usual values for six IRIS ratios and within the usual values for seven IRIS ratios. The six IRIS ratios that were outside the usual values were change in net premiums written, two-year operating ratio, investment yield, gross change in policyholders’ surplus, change in adjusted policyholders’ surplus and gross agents’ balances to policyholders’ surplus. The ratios outside of the usual values primarily resulted from CPFL commencing its operations in 2009 which caused significant growth in 2009.

State Dividend Limitations

Tower’s ability to receive dividends from its Insurance Subsidiaries is restricted by the state laws and insurance regulations of the Insurance Subsidiaries’ domiciliary states. TICNY’s ability to pay dividends is subject to restrictions contained in the insurance laws and related regulations of New York. Under New York law, TICNY may pay dividends out of statutory earned surplus. In addition, the New York Insurance Department must approve any dividend declared or paid by TICNY that, together with all dividends declared or distributed by TICNY during the preceding 12 months, exceeds the lesser of (1) 10% of TICNY’s policyholder’s surplus as shown on its latest statutory financial statement filed with the New York Insurance Department or (2) 100% of adjusted net investment income during the preceding twelve months. TICNY declared approximately $2.0 million, $5.2 million and $8.5 million in dividends to Tower in 2009, 2008 and 2007, respectively. As of December 31, 2009, the maximum distribution that our Insurance Subsidiaries could pay without prior regulatory approval was approximately $52.8 million. The other Insurance Subsidiaries are subject to similar restrictions, usually related to policyholders’ surplus, unassigned funds or net income, and notice requirements of their domiciliary state.

Risk-Based Capital Regulations

The Insurance Departments require domestic property and casualty insurers to report their risk-based capital based on a formula developed and adopted by the NAIC that attempts to measure statutory capital and surplus needs based on the risks in the insurer’s mix of products and investment portfolio. The formula is designed to allow the Insurance Departments to identify potential weakly-capitalized companies. Under the formula, a company determines its “risk-based capital” by taking into account certain risks related to the insurer’s assets (including risks related to its investment portfolio and ceded reinsurance) and the insurer’s liabilities (including underwriting risks related to the nature and experience of its insurance business). At December 31, 2009, risk-based capital levels of our Insurance Subsidiaries exceeded the minimum level that would trigger regulatory attention. In their 2009 statutory statements, our Insurance Subsidiaries complied with the NAIC’s risk-based capital reporting requirements.

Statutory Accounting Principles

Each U.S. insurance company is required to file quarterly and annual statements that conform to SAP. SAP is a basis of accounting developed to assist insurance regulators in monitoring and regulating the solvency of insurance companies. It is primarily concerned with measuring an insurer’s surplus to policyholders. Accordingly, statutory accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with appropriate insurance law and regulatory provisions applicable in each insurer’s domiciliary state.

GAAP is concerned with a company’s solvency, but it is also concerned with other financial measurements, such as income and cash flows. Accordingly, GAAP gives more consideration to appropriate matching of revenue and expenses and accounting for management’s stewardship of assets than does SAP. As a direct result, different assets and liabilities and different amounts of assets and liabilities will be reflected in financial statements prepared in accordance with GAAP as opposed to SAP.

Statutory accounting practices established by the NAIC and adopted, in part, by the state regulators determine, among other things, the amount of statutory surplus and statutory net income of the Insurance Subsidiaries and thus determine, in part, the amount of funds that are available to pay dividends.

Loss Reserve Specialist and Statements of Actuarial Opinion

Each U.S. insurance company is required to provide a Statement of Actuarial Opinion concerning the adequacy of its loss and loss expense reserves. Similarly, CastlePoint Reinsurance is required to submit an opinion of its approved loss reserve specialist with its statutory financial return in respect of its loss and LAE provisions.

Statements of Actuarial Opinion are prepared and signed by the designated actuary for each U.S. company, and by the loss reserve specialist in the case a Bermuda company such as CastlePoint Reinsurance. The designated actuary and loss reserve specialist normally is a qualified casualty actuary, and in the case of CastlePoint Reinsurance, must be approved by the Bermuda Monetary Authority.

An independent external actuarial firm provides Statements of Actuarial Opinions for all of our Insurance Subsidiaries. This firm utilizes Fellows of the Casualty Actuarial Society and Members of the American Academy of Actuaries to provide the service necessary for the Statements of Actuarial Opinion.

Guaranty Associations

In most of the jurisdictions where the Insurance Subsidiaries are currently licensed to transact business there is a requirement that property and casualty insurers doing business within the jurisdiction participate in guaranty associations, which are organized to pay contractual benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers. These associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premium written by member insurers in the lines of business in which the impaired, insolvent or failed insurer is engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets.

In none of the past five years has the assessment in any year levied against our Insurance Subsidiaries been material. Property and casualty insurance company insolvencies or failures may result in additional security fund assessments to our Insurance Subsidiaries at some future date. At this time we are unable to determine the impact, if any such assessments may have on the consolidated financial position or results of operations. We have established liabilities for guaranty fund assessments with respect to insurers that are currently subject to insolvency proceedings and assessments by the various workers’ compensation funds. See “Note 17 —Commitments and Contingencies” in the notes to our audited consolidated financial statements included elsewhere in this report.

Residual Market Plans

Our Insurance Subsidiaries are required to participate in various mandatory insurance facilities or in funding mandatory pools, which are generally designed to provide insurance coverage for consumers who are unable to obtain insurance in the voluntary insurance market. These pools generally provide insurance coverage for workers’ compensation, personal and commercial automobile and property-related risks.

TRM, CPM and CPRMFL

The activities of TRM, CPM and CPRMFL are subject to licensing requirements and regulation under the laws of New York, New Jersey and the other states where they operate. The businesses of TRM, CPM and CPRMFL business depend on the validity of, and continued good standing under, the licenses and approvals pursuant to which they operate, as well as compliance with pertinent regulations. TRM, CPM and CPRMFL therefore devote significant effort toward maintaining their licenses to ensure compliance with a diverse and complex regulatory structure.

Reinsurance

We purchase reinsurance to reduce our net liability on individual risks, to protect against possible catastrophes, to achieve a target ratio of net premiums written to policyholders’ surplus and to expand our underwriting capacity. Reinsurance coverage can be purchased on a facultative basis when individual risks are reinsured, or on a treaty basis when a class or type of business is reinsured. We purchase facultative reinsurance to provide limits in excess of the limits provided by our treaty reinsurance. Treaty reinsurance falls into three categories: quota share (also called pro rata), excess of loss and catastrophe treaty reinsurance. Under our quota share reinsurance contracts, we cede a predetermined percentage of each risk for a class of business to the reinsurer and recover the same percentage of losses and LAE on the business ceded. We pay the reinsurer the same percentage of the original premium, less a ceding commission. The ceding commission rate is based upon the ceded loss ratio on the ceded quota share premiums earned and in certain contracts is adjusted for loss experience under those contracts. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies-Ceding commissions earned.” Under our excess of loss treaty reinsurance, we cede all or a portion of the liability in excess of a predetermined deductible or retention. We also purchase catastrophe reinsurance on an excess of loss basis to protect ourselves from an accumulation of net loss exposures from a catastrophic event or series of events such as terrorist acts, riots, windstorms, hailstorms, tornadoes, hurricanes, earthquakes, blizzards and freezing temperatures. We do not receive any commission for ceding business under excess of loss or catastrophe reinsurance agreements.

The type, cost and limits of reinsurance we purchase can vary from year to year based upon our desired retention levels and the availability of quality reinsurance at acceptable prices, terms and conditions. Our excess of loss reinsurance program was renewed on January 1, 2010 and our catastrophe reinsurance program was renewed July 1, 2009.

In recent years, the reinsurance industry has undergone very dramatic changes. Soft market conditions created by years of inadequate pricing brought poor results, which were exacerbated by the events of September 11, 2001. As a result, market capacity was reduced significantly. Reinsurers exited lines of business, significantly raised rates and imposed much tighter terms and conditions, where coverage was offered, to limit or reduce their exposure to loss. The hurricanes that struck Florida and the Gulf coast in 2004 and 2005 contributed to this trend, particularly in regard to catastrophe reinsurance. These conditions abated somewhat during 2007 but continued in 2008 and 2009 as the Gulf coast was again impacted by hurricane activity in 2008.

In an effort to maintain quota share capacity for our business with favorable commission levels, we have accepted loss ratio caps in our reinsurance treaties. Loss ratio caps cut off the reinsurers’ liability for losses above a specified loss ratio. These provisions have been structured to provide reinsurers with some limit on the amount of potential loss being assumed, while maintaining the transfer of significant insurance risk with the possibility of a significant loss to the reinsurers. We believe our reinsurance arrangements qualify for reinsurance accounting in accordance with GAAP and SAP guidance. The loss ratio caps for our quota share treaties were 95.0% in 2005, 95.0% in 2004, 92.0% in 2003 and 97.5% in 2002. In 2008, we accepted a loss ratio cap from the Swiss Re America quota share agreement. This loss ratio was capped at 120% of earned premium and the agreement expired on December 31, 2008. In 2009, we accepted a loss ratio cap of 110% under a brokerage liability quota share agreement effective October 1, 2009.

Regardless of type, reinsurance does not legally discharge the ceding insurer from primary liability for the full amount due under the reinsured policies. However, the assuming reinsurer is obligated to indemnify the ceding company to the extent of the coverage ceded. To protect our company from the possibility of a reinsurer becoming unable to fulfill its obligations under the reinsurance contracts, we attempt to select financially strong reinsurers with an A.M. Best Company rating of A- (Excellent) or better and continue to evaluate their financial condition and monitor various credit risks to minimize our exposure to losses from reinsurer insolvencies.

To further minimize our exposure to reinsurance recoverables, the 2009 and 2010 brokerage quota share agreements were placed on a “funds withheld” basis under which ceded premiums written are deposited in segregated trust funds from which we receive payments for losses and ceding commission adjustments. Our reinsurance receivables from non-admitted reinsurers are collateralized either by Letter of Credit or New York Regulation 114 compliant trust accounts.

The following table summarizes our reinsurance exposures by reinsurer as of December 31, 2009:

																		Funds Held,				Amounts in
														Prepaid				Ceded Payables				Trust Accounts				Net
						Recoverable on								and Return				and Deferred				or Secured by				Exposure
		A.M. Best				Paid								Reinsurance				Ceding				Letters of				to
($ in millions)		Rating				Losses				Reserves				Premium				Commission				Credit				Reinsurer
Reinsurer
One Beacon Insurance			A				$ -				$ 42.8				$ -				$ -				$ -				$ 42.8
Endurance Reinsurance Corp of America			A				-				10.1				2.7				2.2				-				10.6
Lloyds Syndicates			A				-				9.8				2.6				2.0				-				10.4
Axis Reinsurance Co.			A				-				8.9				2.6				1.3				-				10.2
Hannover Ruckversicherungs AG			A				0.3				8.2				4.1				2.6				-				10.0
Platinum Underwriters Reinsurance Inc.			A				0.2				7.3				3.6				2.3				-				8.8
Munich Reinsurance America Inc			A+				3.7				7.0				-				2.2				-				8.5
Westport Insurance Corp.			A				-				6.2				-				(0.7	)			-				6.9
QBE Reinsurance Corporation			A				0.2				4.8				1.2				0.7				-				5.5
Others							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 Reinsurance

In 2002, in response to the tightening of supply in certain insurance and reinsurance markets resulting from, among other things, the September 11, 2001, terrorist attacks, the Terrorism Risk Insurance Act (“TRIA”) was enacted. TRIA is designed to ensure the availability of insurance coverage for foreign terrorist acts in the United States of America. This law established a federal assistance program through the end of 2005 to help the commercial property and casualty insurance industry cover claims related to future terrorism-related losses and requires such companies to offer coverage for certain acts of terrorism.

On December 17, 2005, Congress passed a two-year extension of TRIA though December 31, 2007 with the passage of the Terrorism Risk Insurance Extension Act (“TRIEA”). Under the terms of TRIEA, the minimum size of the triggering event increased and Tower’s deductible increased. Under TRIEA, federal assistance for insured terrorism losses has been reduced as compared to the assistance previously available under TRIA. As a consequence of these changes, potential losses from a terrorist attack could be substantially larger than previously expected.

On December 26, 2007, the President signed the Terrorism Risk Insurance Program Reauthorization Act of 2007 (the “2007 Act”) which extends TRIA for seven years through December 31, 2014. The 2007 Act maintains the same triggering event size of $100 million, company deductible of 20%, industry retention of $27.5 billion, federal share of 85% and program aggregate insured loss limit of $100 billion put in place by TRIEA. The 2007 Act extends coverage to domestic terrorism and requires additional notice to policyholders regarding the $100 billion program limit.

Technology

We seek to continue our success in the area of technology as we grow by continuing to redesign business processes in order to gain operating efficiencies and effectiveness. We have benefited in recent years from our advanced technology strategy in the areas of the application, data, and infrastructure environments.

Over the last several years, we have implemented and advanced a number of technological improvements and redesigned business processes, including an online imaging system, a data warehouse that houses both claims and underwriting data to provide management and financial reporting, and a web-based platform, webPlus, for quoting and capturing policy submissions directly from our producers. An additional significant advancement was the deployment of the ImageRight electronic document repository, which allows the organization to be less dependent on paper previously needed for records of policies and claims, as well as less dependent on soft and hard copy format generally. We are well positioned so that other functions within the organization can gain ease of electronic availability. Other departments will begin their paperless conversion strategy, including the finance department. Furthermore, the WorkSiteMP and IManage systems will migrate to ImageRight in 2010.

During 2009, we expanded our use of the webPlus platform and POINT-IN Policy Administration system in connection with workers’ compensation policies to forty-seven states, which provides us with a highly competitive advantage for the Brokerage Insurance segment. We also extended our use of the Commercial Package Policy to eight states in the Southeast region, which has allowed us to retire the Insurity Policy Administration systems previously used by our subsidiary, KIC. These system deployments have also resulted in a major reduction in the use of the Phoenix system in connection with the commercial lines of business. Similarly, the use of the webPlus platform and POINT-IN Policy Administration system has replaced the agent and internal user population who previously generated policies manually for the lines of business in the northeast office locations acquired from the Hermitage acquisition. These deployments have enhanced our cost reduction and replacement system strategy.

In 2009, we began a significant business and technology initiative called ProgramIQ for specialty business as a result of the CastlePoint acquisition. The initiative is centered on data automation integration and collection of data into the internal organization data warehouse for managing general agents and third party administrators who have qualified technology platforms for policy and claims administration. We are completing this work with the partnership of AgencyPort, Inc., who co-develops the webPlus system with the internal technology development staff. This initiative will help us collect data in a more efficient manner for the purposes of underwriting, claims, actuarial, finance and external bureau reporting, and will create a more efficient financial closing process for the Company

In connection with the SUA acquisition in 2009, we acquired two important technological products: Policy+, which was co-developed by the SUA technology team and external resources from Duck Creek Technologies; and Claims+, a Guidewire based product. We use Claims+ as the claims system strategy for the entire user population of our organization. We use Policy+, coupled with the development team in Chicago, as an advantageous tool to expand the brokerage system capabilities in an expeditious fashion.

All mission critical systems run on fully redundant hardware in an off-site secure facility with fully redundant power, air conditioning, communications and 24-hour support. Systems and data are backed up to tape daily and are taken to an offsite facility by an outside vendor. We have acquired access to another data center in the Chicago area in connection with the SUA acquisition, which provides us with a state-of-the-art disaster recovery facility for all of our critical technology systems. As advancement in the area of disaster recovery for smaller remote office locations, we have implemented Agility Technologies, which allows for portable trailer office configurations to be set up as support for temporary office displacement via the use of commercial satellite communication.

Our technology plan envisions that we will continue to expand our use of webPlus/POINT-IN, Policy+, Claims+, and ProgramIQ for additional product processing, improved business functionality, and efficiency. We also intend to exploit technological improvements and economies of scale realized through premium growth to continue to lower our underwriting expense ratio while offering a strong value proposition to our producer base.

Employees

As of December 31, 2009, we had 987 full-time employees. None of these employees is covered by a collective bargaining agreement. We have employment agreements with a number of our senior executive officers. The remainder of our employees consists of at-will employees.

Available Information

We file periodic reports, proxy statements and other information with the SEC. Such reports, proxy statements and other information may be viewed at 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. Information pertaining to the operation of the Public Reference Room can be obtained by calling 1-800-SEC-0330.

The address for our internet website is www.twrgrp.com. We make available, free of charge, through our internet site, our annual report on Form 10-K, annual report to shareholders, quarterly reports on Form 10-Q and current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such materials with, or furnish it to, the SEC.

Glossary of Selected Insurance Terms

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

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

Statutory or policyholders’ surplus; statutory capital and surplus		The excess of admitted assets over total liabilities (including loss reserves), determined in accordance with SAP.
Third party administrator		A service group who provides various claims administration, risk management, loss prevention and related services, primarily to self-insured clients under a fee arrangement or to insurance carriers on an unbundled basis. No insurance risk is undertaken in the arrangement.
Treaty reinsurance		The reinsurance of a specified type or category of risks defined in a reinsurance agreement (a “treaty”) between a primary insurer or other reinsured and a reinsurer. Typically, in treaty reinsurance, the primary insurer or reinsured is obligated to offer and the reinsurer is obligated to accept a specified portion of all agreed upon types or categories of risks originally written by the primary insurer or reinsured.
Underwriting		The insurer’s/reinsurer’s process of reviewing applications submitted for insurance coverage, deciding whether to accept all or part of the coverage requested and determining the applicable premiums.
Unearned premium		The portion of a premium representing the unexpired portion of the exposure period as of a certain date.
Unearned premium reserve		Liabilities established by insurers and reinsurers to reflect unearned premiums which are usually refundable to policyholders if an insurance or reinsurance contract is canceled prior to expiration of the contract term.

Note on Forward-Looking Statements

Some of the statements under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this Form 10-K may include forward-looking statements that reflect our current views with respect to future events and financial performance. These statements include forward-looking statements both with respect to us specifically and to the insurance sector in general. Statements that include the words “expect,” “intend,” “plan,” “believe,” “project,” “estimate,” “may,” “should,” “anticipate,” “will” and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the Federal securities laws or otherwise.

All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to, those described under “Risk Factors” and the following:

•		ineffectiveness or obsolescence of our business strategy due to changes in current or future market conditions;
•		developments that may delay or limit our ability to enter new markets as quickly as we anticipate;
•		increased competition on the basis of pricing, capacity, coverage terms or other factors;
•		greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events, than our underwriting, reserving or investment practices anticipate based on historical experience or industry data;
•		the effects of acts of terrorism or war;
•		developments in the world’s financial and capital markets that adversely affect the performance of our investments;
•		changes in regulations or laws applicable to us, our subsidiaries, brokers or customers;
•		changes in acceptance of our products and services, including new products and services;
•		changes in the availability, cost or quality of reinsurance and failure of our reinsurers to pay claims timely or at all;
•		changes in the percentage of our premiums written that we cede to reinsurers;
•		decreased demand for our insurance or reinsurance products;
•		loss of the services of any of our executive officers or other key personnel;
•		the effects of mergers, acquisitions and divestitures;
•		changes in rating agency policies or practices;
•		changes in legal theories of liability under our insurance policies;

•		changes in accounting policies or practices;
•		changes in general economic conditions, including inflation, interest rates and other factors;
•		unanticipated difficulties in combining Tower and SUA;
•		disruptions in Tower’s business arising from the integration of Tower with acquired businesses and the anticipation of potential and pending acquisitions or mergers; and
•		currently pending or future litigation or governmental proceedings.

The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Form 10-K. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we project. Any forward-looking statements you read in this Form 10-K reflect our views as of the date of this Form 10-K with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph. Before making an investment decision, you should specifically consider all of the factors identified in this Form 10-K that could cause actual results to differ.

Item 1A. Risk Factors

An investment in our common stock involves a number of risks. You should carefully consider the following information about these risks, together with the other information contained in this Form 10-K, in considering whether to invest in or hold our common stock. Additional risks not presently known to us, or that we currently deem immaterial may also impair our business or results of operations. Any of the risks described below could result in a significant or material adverse effect on our financial condition or results of operations, and a corresponding decline in the market price of our common stock. You could lose all or part of your investment.

This Form 10-K also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including the risks described below and elsewhere in this Form 10-K. See “Business—Note on Forward-Looking Statements.”

Risks Related to Our Business

     If our actual loss and loss adjustment expenses exceed our loss reserves, our financial condition and results of operations could be significantly adversely affected.

Our results of operations and financial condition depend upon our ability to estimate the potential losses associated with the risks that we insure and reinsure. We estimate loss and loss adjustment expense reserves to cover our estimated liability for the payment of all losses and loss adjustment expenses incurred under the policies that we write. Loss reserves include case reserves, which are established for specific claims that have been reported to us, and reserves for claims that have been incurred but not reported (or “IBNR”). To the extent that loss and loss adjustment expenses exceed our estimates, we will be required to immediately recognize the less favorable experience and increase loss and loss adjustment expense reserves, with a corresponding reduction in our net income in the period in which the deficiency is identified. For example, over the past ten years we have experienced adverse development of reserves for losses and loss adjustment expenses incurred in prior years.

Although loss reserves on property lines of business tend to be relatively predictable from an actuarial standpoint, the reserving process for losses on the liability coverage portions of our commercial and personal lines policies possesses characteristics that make case and IBNR reserving inherently less susceptible to accurate actuarial estimation. Unlike property losses, liability losses are claims made by third parties of which the policyholder may not be aware and therefore may be reported a significant amount of time, sometimes years, after the occurrence. As liability claims most often involve claims of bodily injury, assessment of the proper case reserve is a far more subjective process than claims involving property damage. In addition, the determination of a case reserve for a liability claim is often without the benefit of information, which develops slowly over the life of the claim and can subject the case reserve to substantial modification well after the claim was first reported. Numerous factors impact the liability case reserving process, including venue, the amount of monetary damage, the permanence of the injury, and the age of the claimant among other factors.

Estimating an appropriate level of loss and loss adjustment expense reserves is an inherently uncertain process. Accordingly, actual loss and loss adjustment expenses paid will likely deviate, perhaps substantially, from the reserve estimates reflected in our consolidated financial statements. It is possible that claims could exceed our loss and loss adjustment expense reserves and have a material adverse effect on our financial condition or results of operations.

Many of our quota share reinsurance agreements contain provisions for a ceding commission under which the commission rate that we receive varies inversely with the loss ratio on the ceded premiums, with higher commission rates corresponding to lower loss ratios and vice versa. The loss ratio depends on our estimate of the loss and loss adjustment expense reserves on the ceded business. As a result, the same uncertainties associated with estimating loss and loss adjustment expense reserves affect the estimates of ceding commissions earned. If and to the extent that we have to increase our reserves on the business that is subject to these reinsurance agreements, we may have to reduce the ceding commission rate, which would amplify the reduction in our net income in the period in which the increase in our reserves is made.

     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 in the Northeast United States. As a result, a single catastrophe occurrence, destructive weather pattern, terrorist attack, regulatory development or other condition or general economic trend affecting the region within which we conduct our business could adversely affect our financial condition or results of operations more significantly than that of other insurance companies that conduct business across a broader geographical area. During our history, we have not experienced any single event that materially affected our results of operations. The most significant catastrophic event was Hurricane Ike, which occurred during the third quarter of 2008 in the Gulf of Mexico area, in which we suffered $1,800,000 in net losses (entities acquired by us since this event have not suffered substantial losses).

The incidence and severity of catastrophes are inherently unpredictable and our losses from catastrophes could be substantial. The occurrence of claims from catastrophic events is likely to result in substantial volatility in our financial condition or results of operations for any fiscal quarter or year and could have a material adverse effect on our financial condition or results of operations and our ability to write new business. Increases in the values and concentrations of insured property may increase the severity of such occurrences in the future. Although we attempt to manage our exposure to such events, including through the use of reinsurance, the frequency or severity of catastrophic events could exceed our estimates. As a result, the occurrence of one or more catastrophic events could have a material adverse effect on our financial condition or results of operations.

     If we cannot obtain adequate reinsurance protection for the risks we have underwritten, we may be exposed to greater losses from these risks or we may reduce the amount of business we underwrite, which will reduce our revenues.

Under state insurance law, insurance companies are required to maintain a certain level of capital in support of the policies they issue. In addition, rating agencies will reduce an insurance company’s ratings if the company’s premiums exceed specified multiples of its capital. As a result, the level of our Insurance Subsidiaries’ statutory surplus and capital limits the amount of premiums that they can write and on which they can retain risk. Historically, we have utilized reinsurance to expand our capacity to write more business than our Insurance Subsidiaries’ surplus would have otherwise supported.

From time to time, market conditions have limited, and in some cases have prevented, insurers from obtaining the types and amounts of reinsurance that they consider adequate for their business needs. These conditions could produce unfavorable changes in prices, reduced ceding commission revenue or other potentially adverse changes in the terms of reinsurance. Accordingly, we may not be able to obtain our desired amounts of reinsurance. In addition, even if we are able to obtain such reinsurance, we may not be able to obtain such reinsurance from entities with satisfactory creditworthiness or negotiate terms that we deem appropriate or acceptable.

     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.

As of December 31, 2009, we had a net balance due us from our reinsurers of $309.3 million, consisting of $199.7 million in reinsurance recoverables on unpaid losses, $14.8 million in reinsurance recoverables on paid losses and $94.8 million in prepaid reinsurance premiums. Since October 1, 2003, we have sought to manage our exposure to our reinsurers by placing our quota share reinsurance on a “funds withheld” basis and requiring any non-admitted reinsurers to collateralize their share of unearned premium and loss reserves. However, we have recoverables from our pre-October 1, 2003 reinsurance arrangements that are uncollateralized, in that they are not supported by letters of credit, trust accounts, “funds withheld” arrangements or similar mechanisms intended to protect us against a reinsurer’s inability or unwillingness to pay. Our net exposure to our reinsurers totaled $139.1 million as of December 31, 2009. As of December 31, 2009, our largest net exposure to any one reinsurer was approximately $42.8 million, related to OneBeacon Insurance which is rated A by A. M. Best Company. Because we remain primarily liable to our policyholders for the payment of their claims, in the event that one of our reinsurers under an

uncollateralized treaty became insolvent or refused to reimburse us for losses paid, or delayed in reimbursing us for losses paid, our cash flow and financial results could be materially and adversely affected. As of December 31, 2009, our largest balance due from any one reinsurer was approximately $94.2 million, which was due from Swiss Reinsurance America Corp. which is rated A+ by A. M. Best Company.

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.

Ratings have become an increasingly important factor in establishing the competitive position of insurance companies. A.M. Best Company maintains a letter scale rating system ranging from A++ (Superior) to F (In Liquidation). With the exception of CPNIC, A.M. Best has assigned each of our insurance company subsidiaries a Financial Strength rating of A- (Excellent) which is the fourth highest of fifteen rating levels. However, there is no assurance that any additional U.S. licensed insurance companies that we may acquire will receive such rating. These ratings are subject to, among other things, A.M. Best’s evaluation of our capitalization and performance on an ongoing basis including our management of terrorism and natural catastrophe risks, loss reserves and expenses, and there is no guarantee that our Insurance Subsidiaries will maintain their respective ratings.

Our ratings are subject to periodic review by, and may be revised downward or revoked at the sole discretion of, A.M. Best. A decline in a company’s ratings indicating reduced financial strength or other adverse financial developments can cause concern about the viability of the downgraded insurer among its agents, brokers and policyholders, resulting in a movement of business away from the downgraded carrier to other stronger or more highly rated carriers. Because many of our agents and brokers (whom we refer to as “producers”) and policyholders purchase our policies on the basis of our current ratings, the loss or reduction of any of our ratings will adversely impact our ability to retain or expand our policyholder base. The objective of the rating agencies’ rating systems is to provide an opinion of an insurer’s financial strength and ability to meet ongoing obligations to its policyholders. Our ratings reflect the rating agencies’ opinion of our financial strength and are not evaluations directed to investors in our common stock, nor are they recommendations to buy, sell or hold our common stock.

     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.

Various provisions of our policies, such as limitations or exclusions from coverage or choice of forum, which have been negotiated to limit our risks, may not be enforceable in the manner we intend. At the present time we employ a variety of endorsements to our policies that limit exposure to known risks, including but not limited to exclusions relating to coverage for lead paint poisoning, asbestos and most claims for bodily injury or property damage resulting from the release of pollutants.

In addition, the policies we issue contain conditions requiring the prompt reporting of claims to us and our right to decline coverage in the event of a violation of that condition. Our policies also include limitations restricting the period in which a policyholder may bring a breach of contract or other claim against us, which in many cases is shorter than the statutory limitations for such claims in the states in which we write business. While these exclusions and limitations reduce the loss exposure to us and help eliminate known exposures to certain risks, it is possible that a court or regulatory authority could nullify or void an exclusion or legislation could be enacted modifying or barring the use of such endorsements and limitations in a way that would adversely effect our loss experience, which could have a material adverse effect on our financial condition or results of operations.

     We may face substantial exposure to losses from terrorism and we are currently required by law to provide coverage against such losses.

Our location and amount of business written in New York City and adjacent areas by our Insurance Subsidiaries may expose us to losses from terrorism. U.S. insurers are required by state and Federal law to offer coverage for terrorism in certain lines.

Although our Insurance Subsidiaries are protected by the federally funded terrorism reinsurance, there is a substantial deductible that must be met, the payment of which could have an adverse effect on our results of operations. See—“Business—Reinsurance.” As a consequence of this legislation, potential losses from a terrorist attack could be substantially larger than previously expected, could also adversely affect our ability to obtain reinsurance on favorable terms, including pricing, and may affect our underwriting strategy, rating, and other elements of our operation.

     The effects of emerging claim and coverage issues on our business are uncertain.

As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until some time after we have issued insurance or reinsurance contracts that are

affected by the changes. As a result, the full extent of liability under our insurance or reinsurance contracts may not be known for many years after a contract is issued.

     Since we depend on a core of selected producers for a large portion of our revenues, loss of business provided by any one of them could adversely affect us.

Our products are marketed by independent producers. In our Brokerage Insurance segment, these independent producers are comprised of retail agents and wholesale agents who aggregate business from retail agents. In our Specialty Business segment, these independent producers are comprised of managing general agencies who handle various underwriting and policy issuance tasks on our behalf and who generally accept submissions from various other independent producers.

Other insurance companies compete with us for the services and allegiance of these producers. These producers may choose to direct business to our competitors, or may direct less desirable risks to us. In our Brokerage Insurance segment, approximately 45% of the 2009 gross premiums written, including premiums produced by TRM on behalf of its issuing companies, were produced by our top 18 producers, representing 1.3% of our active agents and brokers. These producers each have annual written premiums of $5.0 million or more. As we build a broader territorial base, the number of producers with significant premium volumes with Tower in each of our segments is increasing.

Our largest producers in 2009 were Northeast Agencies and Morstan General Agency. In the year ended December 31, 2009, these producers accounted for 9% and 8%, respectively, of the total of our gross premiums written. No other producer was responsible for more than 3% of our gross premiums written.

With the closing of the CastlePoint transactions and the SUA transaction, we have also added program underwriting agents who may become significant producers. A significant decrease in business from, or the entire loss of, our largest producer or several of our other large producers would cause us to lose premium and require us to seek alternative producers or to increase submissions from existing producers. In the event we are unable to find replacement producers or increase business produced by our existing producers, our premium revenues would decrease and our business and results of operations would be materially and adversely affected.

     Our reliance on producers subjects us to their credit risk.

With respect to the premiums produced by TRM for its issuing companies and a limited amount of premium volume written by our Insurance Subsidiaries, producers collect premium from the policyholders and forward them to TRM and our Insurance Subsidiaries. In most jurisdictions, when the insured pays premiums for these policies to producers for payment over to TRM or our Insurance Subsidiaries, the premiums are considered to have been paid under applicable insurance laws and regulations and the insured will no longer be liable to us for those amounts, whether or not we have actually received the premiums from the producer. Consequently, we assume a degree of credit risk associated with producers. Although producers’ failures to remit premiums to us have not caused a material adverse impact on us to date, there have been instances where producers collected premium but did not remit it to us, and we were nonetheless required under applicable law to provide the coverage set forth in the policy despite the absence of premium. Because the possibility of these events is dependent in large part upon the financial condition and internal operations of our producers, which in most cases is not public information, we are not able to quantify the exposure presented by this risk. If we are unable to collect premiums from our producers in the future, our financial condition and results of operations could be materially and adversely affected.

     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.

The property and casualty insurance industry is highly competitive and has historically been characterized by periods of significant pricing competition alternating with periods of greater pricing discipline, during which competition focuses on other factors. Beginning in 2000, the market environment was increasingly favorable as rates increased significantly. During the latter part of 2004 and throughout 2005, increased competition in the marketplace became evident and, as a result, average annual rate increases became moderate. The catastrophe losses of 2004 and 2005 produced increased pricing and reduced capacity for insurance of catastrophe-exposed property. However, a softening of the non-catastrophe-exposed market in 2006 through 2009 has led to more aggressive pricing in specific segments of the commercial lines business, particularly in those lines of business and accounts with larger annual premiums. The Insurance Information Institute indicates that the industry-wide change in net premiums written in the Property & Casualty industry in 2007 decreased to a zero growth (0.0 percent) condition. A.M. Best Company reported that the industry-wide change in net premiums written in the property and casualty industry was -2.0% in 2008 compared to -0.7% in 2007 and is estimated to have declined -4.2% in 2009.

The new capacity that had entered the market had placed more pressure on production and profitability targets. A. M. Best had stated that industry policyholder surplus grew for five consecutive years; 2003-2007, but declined in 2008. However, policyholder surplus is estimated to have increased by 9.4% in 2009 to

$519.3 billion from 2008. This places the premium-to-surplus ratio at 0.8:$1.00 at year-end 2009.

Competition driven by strong earnings and capital gains can be projected to moderate as economic conditions impacting those sources deteriorate. Overall capacity and declining underwriting profits may result in a lessening of competitive pressure from other insurers that previously sought to expand the types or amount of business they write. This may cause a shift in focus by some insurers from an interest in market share to increase their concentration on underwriting discipline. We attempt to compete based primarily on products offered, service, experience, the strength of our client relationships, reputation, speed of claims payment, financial strength, ratings, scope of business, commissions paid and policy and contract terms and conditions. There are no assurances that in the future we will be able to retain or attract customers at prices which we consider to be adequate.

In our commercial and personal lines admitted business segments, we compete with major U.S. insurers and certain underwriting syndicates, including large national companies such as Travelers Companies, Inc., Allstate Insurance Company and State Farm Insurance; regional insurers such as Selective Insurance Company, Harleysville Insurance Company, Hanover Insurance and Peerless Insurance Company and smaller, more local competitors such as Greater New York Mutual, Magna Carta Companies and Utica First Insurance Company. Our non-admitted binding authority and brokerage business with general agents competes with Scottsdale Insurance Company, Admiral Insurance Company, Mt. Hawley Insurance Company, Navigators Group, Inc., Essex Insurance Company, Colony Insurance Company, Century Insurance Group, Nautilus Insurance Group, RLI Corp., United States Liability Insurance Group and Burlington Insurance Group, Inc. In our program business, we compete against competitors that write program business such as QBE Insurance Group Limited, Delos Insurance Group, Am Trust Financial Services, Inc., RLI Corp., Chartis Inc., W.R. Berkley Corporation, Markel Corporation, Great American Insurance Group and Philadelphia Insurance Companies.

Many of these companies have greater financial, marketing and management resources than we do. Many of these competitors also have more experience, better ratings and more market recognition than we do. We seek to distinguish ourselves from our competitors by providing a broad product line offering and targeting those market segments that provide us with the best opportunity to earn an underwriting profit. We also compete with other companies by quickly and opportunistically delivering products that respond to our producers’ needs.

In addition to competition in the operation of our business, we face competition from a variety of sources in attracting and retaining qualified employees. We also face competition because of entities that self-insure, primarily in the commercial insurance market. From time to time, established and potential customers may examine the benefits and risks of self-insurance and other alternatives to traditional insurance.

     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 or acquire other insurance companies with multi-state property and casualty licensing in order to expand our product and service offerings geographically. We also intend to continue to acquire books of business that fit our underwriting competencies from competitors, managing agents and other producers and to acquire other insurance companies. This expansion strategy may present special risks:

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We have achieved our prior success by applying a disciplined approach to underwriting and pricing in select markets that are not well served by our competitors. We may not be able to successfully implement our underwriting, pricing and product strategies in companies or books of business we acquire or over a larger operating region;

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We may not be successful in obtaining the required regulatory approvals to offer additional insurance products or expand into additional states; and

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We may have difficulty in efficiently combining an acquired company or block of business with our present financial, operational and management information systems.

We cannot assure you that we will be successful in expanding our business or that any new business will be profitable. If we are unable to expand our business or to manage our expansion effectively, our results of operations and financial condition could be adversely affected.

     Our acquisitions could result in integration difficulties, unexpected expenses, diversion of management’s attention and other negative consequences.

As part of our growth strategy, we have made numerous acquisitions in recent years. Assuming we have access to adequate levels of debt and equity capital, we plan to continue to acquire complementary businesses as a key element of our growth strategy. We must integrate the technology, operations, systems

and personnel of acquired businesses with our own and attempt to grow the acquired businesses as part of our company. The integration of other businesses is a complex process and places significant demands on our management, financial, technical and other resources. The successful integration of businesses we have acquired in the past and may acquire in the future is critical to our future success. If we are unsuccessful in integrating these businesses, our financial and operating performance could suffer. The risks and challenges associated with the acquisition and integration of acquired businesses include:

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We may be unable to efficiently consolidate our financial, operational and administrative functions with those of the businesses we acquire;

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

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We may be unable to retain and motivate key employees of an acquired company;

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

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Litigation, indemnification claims and other unforeseen claims and liabilities may arise from the acquisition or operation of acquired businesses;

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The costs necessary to complete integration may exceed our expectations or outweigh some of the intended benefits of the transactions we complete;

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We may be unable to maintain the customers or goodwill of an acquired business; and

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

We may be unable to integrate our acquisitions successfully with our operations on schedule or at all. We can provide no assurances that we will not incur large expenses in connection with business units we acquire. Further, we can provide no assurances that acquisitions will result in cost savings or sufficient revenues or earnings to justify our investment in, or our expenses related to, these acquisitions.

     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 of insurance entities, many of which have contributed significantly to our growth in book value. Failure to identify and complete future acquisition opportunities could limit our ability to achieve our target returns. Even if we were to identify and complete future acquisition opportunities, there is no assurance that such acquisitions will ultimately achieve their anticipated benefits.

     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 a result, future mergers or acquisitions may occur at any time. A pending merger or acquisition is typically subject to the satisfaction or waiver of a number of conditions, including the receipt of required regulatory approvals, satisfactory due diligence and other customary closing conditions. There can be no assurance that the conditions to the completion of a pending merger or acquisition will be satisfied or waived. If a pending merger or acquisition is delayed or not completed, we would not realize the anticipated benefits of having completed, or having completed on a timely basis, as the case may be, such merger or acquisition, which may adversely affect our business, financial condition, results of operation, prospects and stock price.

     We could be adversely affected by the loss of one or more principal employees or by an inability to attract and retain staff.

Our success will depend in substantial part upon our ability to attract and retain qualified executive officers, experienced underwriting talent and other skilled employees who are knowledgeable about our business. We rely substantially upon the services of our executive management team. If we were to lose the services of members of our key management team, our business could be adversely affected. We believe we have been successful in attracting and retaining key personnel throughout our history. We have employment agreements with Michael H. Lee, our Chairman of the Board, President and Chief Executive Officer, and other members of our senior management team. We do not currently maintain key man life insurance policies with respect to our employees except for Michael H. 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.

We invest the premium we receive from policyholders until it is needed to pay policyholder claims or other expenses. At December 31, 2009, our invested assets consisted of $1.8 billion in fixed maturity securities and $76.7 million in equity securities at fair value. Additionally, we held $201.4 million in cash and cash equivalents and short-term investments. In 2009, we earned $74.9 million of net investment income representing 7.6% of our total revenues and 44.7% of our pre-tax income. At December 31, 2009, we had unrealized gains of $53.2 million which could change significantly depending on changes in market conditions. Our funds are invested by outside professional investment advisory management firms under the direction of our management team in accordance with detailed investment guidelines set by us. Although our investment policies stress diversification of risks, conservation of principal and liquidity, our investments are subject to a variety of investment risks, including risks relating to general economic conditions, market volatility, interest rate fluctuations, liquidity risk and credit and default risk. (Interest rate risk is discussed below under the heading, “We may be adversely affected by interest rate changes.”) In particular, the volatility of our claims may force us to liquidate securities, which may cause us to incur capital losses. If we do not structure our investment portfolio so that it is appropriately matched with our insurance and reinsurance liabilities, we may be forced to liquidate investments prior to maturity at a significant loss to cover such liabilities. Investment losses could significantly decrease our asset base and statutory surplus, thereby affecting our ability to conduct business. We recognized net realized capital gains for 2009 which amounted to $1.5 million yet included OTTI charges of $23.5 million. The OTTI charges were primarily the result of mortgage-backed securities and, to a lesser extent, corporate bonds. As a result of the market volatility, we may experience difficulty in determining accurately the value of our various investments.

     We may be adversely affected by interest rate changes.

Our operating results are affected, in part, by the performance of our investment portfolio. General economic conditions affect the markets for interest-rate-sensitive securities, including the level and volatility of interest rates and the extent and timing of investor participation in such markets. Unexpected changes in general economic conditions could create volatility or illiquidity in these markets in which we hold positions and harm our investment return. Our investment portfolio contains interest rate sensitive instruments, such as bonds, which may be adversely affected by changes in interest rates. A significant increase in interest rates could have a material adverse effect on our financial condition or results of operations. Generally, bond prices decrease as interest rates rise. Changes in interest rates could also have an adverse effect on our investment income and results of operations. For example, if interest rates decline, investment of new premiums received and funds reinvested may earn less than expected.

As of December 31, 2009, mortgage-backed securities constituted approximately 25.2% of our invested assets, including cash and cash equivalents. As with other fixed income investments, the fair market value of these securities fluctuates depending on market and other general economic conditions and the interest rate environment. Changes in interest rates can expose us to prepayment risks on these investments. When interest rates fall, mortgage-backed securities may be prepaid more quickly than expected and the holder must reinvest the proceeds at lower interest rates. Certain of our mortgage-backed securities currently consist of securities with features that reduce the risk of prepayment, but there is no guarantee that we will not invest in other mortgage-backed securities that lack this protection. In periods of increasing interest rates, mortgage-backed securities are prepaid more slowly, which may require us to receive interest payments that are below the interest rates then prevailing for longer than expected.

Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control.

     We may require additional capital in the future, which may not be available or may only be available on unfavorable terms.

Our future capital requirements depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. To the extent that our present capital is insufficient to meet future operating requirements and/or cover losses, we may need to raise additional funds through financings or curtail our growth. Based on our current operating plan, we believe our current capital will support our operations without the need to raise additional capital. However, we cannot provide any assurance in that regard, since many factors will affect our capital needs and their amount and timing, including our growth and profitability, our claims experience, and the availability of reinsurance, as well as possible acquisition opportunities, market disruptions and other unforeseeable developments. If we had to raise additional capital, equity or debt financing may not be available at all or may be available only on terms that are not favorable to us. In the case of equity financings, dilution to our stockholders could result, and in any case such securities may have rights, preferences and privileges that are senior to those of holders of our common stock. Historically, we have raised additional capital through the offering of trust preferred securities. As a result of the recent crisis in the global capital markets, financing through the offering of trust preferred securities may not be available at all or may be available only on terms that are not favorable to us. If we cannot obtain adequate capital on favorable terms or at all, our business, liquidity needs, financial condition or results of operations could be materially adversely affected.

     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 regulation and supervision in their respective jurisdictions of domicile. The purpose of the insurance laws and regulations is to protect insureds, not our stockholders. These regulations are generally administered by the Insurance Departments in which the individual insurance companies are domiciled and relate to, among other things:

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standards of solvency, including risk based capital measurements;

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restrictions on the nature, quality and concentration of investments;

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required methods of accounting;

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rate and form regulation pertaining to certain of our insurance businesses;

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mandating certain insurance benefits;

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potential assessments for the provision of funds necessary for the settlement of covered claims under certain policies provided by impaired, insolvent or failed insurance companies; and

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transactions with affiliates.

Significant changes in these laws and regulations could make it more expensive to conduct our business. The Insurance Subsidiaries’ domiciliary state Insurance Departments, and, with respect to the acquisition of CastlePoint, the Bermuda Monetary Authority, also conduct periodic examinations of the affairs of their domiciled insurance companies and require the filing of annual and other reports relating to financial condition, holding company issues and other matters. These regulatory requirements may adversely affect or inhibit our ability to achieve some or all of our business objectives.

Our Insurance Subsidiaries may not be able to obtain or maintain necessary licenses, permits, authorizations or accreditations in new states we intend to enter, or may be able to do so only at significant cost. In addition, we may not be able to comply fully with or obtain appropriate exemptions from, the wide variety of laws and regulations applicable to insurance companies or holding companies. Failure to comply with or to obtain appropriate authorizations and/or exemptions under any applicable laws could result in restrictions on our ability to do business or engage in certain activities that are regulated in one or more of the jurisdictions in which we operate and could subject us to fines and other sanctions, which could have a material adverse effect on our business. In addition, changes in the laws or regulations to which our operating subsidiaries are subject could adversely affect our ability to operate and expand our business or could have a material adverse effect on our financial condition or results of operations.

In recent years, the U.S. insurance regulatory framework has come under increased Federal scrutiny, and some state legislators have considered or enacted laws that may alter or increase state regulation of insurance and reinsurance companies and holding companies. Moreover, state insurance regulators regularly re-examine existing laws and regulations, often focusing on modifications to holding company regulations, interpretations of existing laws and the development of new laws. Changes in these laws and regulations or the interpretation of these laws and regulations could have a material adverse effect on our financial condition or results of operations. The highly publicized investigations of the insurance industry by state and other regulators and government officials in recent years have led to, and may continue to lead to, additional legislative and regulatory requirements for the insurance industry and may increase the costs of doing business.

The activities of TRM, CPM and CPRMFL are subject to licensing requirements and regulation under the laws of New York, New Jersey and other states where they do business. The businesses of TRM, CPM and CPRMFL depend on the validity of, and continued good standing under, the licenses and approvals pursuant to which they operate, as well as compliance with pertinent regulations. As of February 5, 2009, the date of closing of our acquisition of CastlePoint, our activities became subject to certain licensing requirements and regulation under the laws of Bermuda.

Licensing laws and regulations vary from jurisdiction to jurisdiction. In all jurisdictions, the applicable licensing laws and regulations are subject to amendment or interpretation by regulatory authorities. Generally such authorities are vested with relatively broad and general discretion as to the granting, renewing and revoking of licenses and approvals. Licenses may be denied or revoked for various reasons, including the violation of such regulations, conviction of crimes and the like. Possible sanctions which may be imposed include the suspension of individual employees, limitations on engaging in a particular business for specified periods of time, revocation of licenses, censures, redress to clients and fines. In some instances, TRM follows practices based on its or its counsel’s interpretations of laws and regulations, or those generally followed by the industry, which may prove to be different from those of regulatory authorities.

As industry practices and legal, judicial, social and other environmental conditions change, unexpected issues related to claims and coverage may emerge. These issues may adversely affect us by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until some time after we have issued insurance or reinsurance contracts that are affected by the changes. As a result, the full extent of liability under our insurance or reinsurance contracts may not be known for many years after a contract is issued. The effects of this and other unforeseen emerging claim and coverage issues are extremely hard to predict and could adversely affect us.

     If the assessments we are required to pay are increased drastically, our results of operations and financial condition will suffer.

Our Insurance Subsidiaries are required to participate in various mandatory insurance facilities or in funding mandatory pools, which are generally designed to provide insurance coverage for consumers who are unable to obtain insurance in the voluntary insurance market. Our Insurance Subsidiaries are subject to assessments in the states where we do business for various purposes, including the provision of funds necessary to fund the operations of the Insurance Department and insolvency funds. In 2009, the Insurance Subsidiaries were assessed approximately $11.8 million by various state insurance-related agencies. These assessments are generally set based on an insurer’s percentage of the total 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. We rely upon our systems, as well as. As of December 31, 2009, the liability for the various workers’ compensation funds, which includes amounts assessed on workers’ compensation policies, was $11.6 million for our Insurance Subsidiaries. As our company grows, our share of any assessments may increase. However, we cannot predict with certainty the amount of future assessments because they depend on factors outside our control, such as insolvencies of other insurance companies. Significant assessments could have a material adverse effect on our financial condition or results of operations.

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

Tower is a holding company and, as such, has no direct operations of its own. Tower does not expect to have any significant operations or assets other than its ownership of the shares of its operating subsidiaries. Dividends and other permitted payments from our operating subsidiaries are expected to be our primary source of funds to meet ongoing cash requirements, including any future debt service payments and other expenses, and to pay dividends, if any, to our stockholders. As of December 31, 2009, the maximum amount of distributions that our operating subsidiaries could pay to Tower without approval was $52.8 million. The inability of our operating subsidiaries to pay dividends and other permitted payments in an amount sufficient to enable us to meet our cash requirements at the holding company level would have a material adverse effect on our operations and our ability to pay dividends to our stockholders. Accordingly, if you require dividend income you should carefully consider these risks before making an investment in our company.

     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 sufficient cash is available, and we currently intend to pay dividends in each quarter of 2010. However, future cash dividends will depend upon our results of operations, financial condition, cash requirements and other factors, including the ability of our subsidiaries to make distributions to us, which ability is restricted in the manner previously discussed in this section. Also, there can be no assurance that we will continue to pay dividends even if the necessary financial conditions are met and if sufficient cash is available for distribution.

     We rely on our information technology and telecommunications systems to conduct our business.

Our business is dependent upon the functioning of our information technology and telecommunication systems. We rely upon our systems, as well as the systems of our vendors to underwrite and process our business, make claim payments, provide customer service, provide policy administration services, such as, endorsements, cancellations and premium collections, comply with insurance regulatory requirements and perform actuarial and other analytical functions necessary for pricing and product development. Our operations are dependent upon our ability to timely and efficiently process our business and protect our information and telecommunications systems from physical loss, telecommunications failure or other similar catastrophic events, as well as from security breaches. While we have implemented business contingency plans and other reasonable and appropriate internal controls to protect our systems from interruption, loss or security breaches, a sustained business interruption or system failure could adversely impact our ability to process our business, provide customer service, pay claims in a timely manner or perform.

The operations and maintenance of our policy, billing and claims administration systems have been outsourced to Computer Sciences Corporation to minimize deployment time and operational cost, as well as for scalability and business continuity. The CSC technology deployment will be implemented over a multi-year period that began in 2008. Until these systems are fully migrated over to the CSC platform, we must depend on existing technology platforms that

require more manual or duplicate processing.

     Combining Tower and SUA may be more difficult than expected.

The Tower and SUA merger closed in November 2009. The companies agreed to merge their businesses with the expectation that the merger would result in various benefits, including, among other things, (a) the opportunity for Tower and SUA to share profit center resources in the specialty property and casualty insurance market and consolidate certain functions, resulting in cost savings to the combined company, (b) the opportunity to create long-term stockholder value by increasing SUA’s growth by cross-selling products with Tower and accessing Tower’s higher A.M. Best Company rating and capital base, (c) the ability to manage market cycles through diversity of lines of business and geography while maintaining a culture of disciplined underwriting and pricing, (d) the opportunity to achieve enhanced growth opportunities and leverage SUA’s scalable infrastructure, (e) access to a large pool of capital at an attractive cost of capital, (f) the expansion of Tower’s underwriting capacity in the specialty property and casualty insurance market, which will further broaden Tower’s product offerings, and (g) the opportunity for Tower to utilize SUA’s office headquarters to develop Tower’s brokerage business written through retail and wholesale agents in the Midwestern United States. Achieving the anticipated benefits of the merger is subject to a number of uncertainties, including whether Tower and SUA are integrated in an efficient and effective manner, and general competitive factors in the marketplace. Failure to achieve these anticipated benefits could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy and could negatively impact the combined company’s business, financial condition, results of operations, prospects and stock price.

In addition, employees and producers may experience uncertainty about their future roles with the combined company, which might adversely affect our ability to retain key executives, managers and other employees and producers.

     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’s ability to receive the appropriate rate for the risk it insures with its policyholders and may impact its policy flow. In an economic downturn, the degree to which prospective policyholders apply for insurance and fail to pay all balances owed may increase. Existing policyholders may exaggerate or even falsify claims to obtain higher claims payments. These outcomes would reduce the combined company’s underwriting profit to the extent these effects are not reflected in the rates charged by the combined company.

     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, regulatory inquiries and governmental and other legal proceedings arising out of the ordinary course of its business. Many of these matters raise difficult and complicated factual and legal issues and are subject to uncertainties and complexities. The timing of the final resolutions to these types of matters is often uncertain. Additionally, the possible outcomes or resolutions to these matters could include adverse judgments or settlements, either of which could require substantial payments, adversely affecting our business, financial condition, results of operations, prospects and stock price.

     It may be difficult for a third party to acquire Tower, even if doing so may be beneficial to Tower stockholders.

Certain provisions of Tower’s amended and restated certificate of incorporation and amended and restated by-laws may discourage, delay or prevent a change in control of Tower that a stockholder may consider favorable. These provisions include, among other things, the following:

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classifying its board of directors with staggered three-year terms, which may lengthen the time required to gain control of Tower’s board of directors;

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prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of the stockholders;

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limiting who may call special meetings of stockholders;

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establishing advance notice requirements for nominations of candidates for election to its board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; and

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the existence of authorized and unissued Tower common stock which would allow Tower’s board of directors to issue shares to persons friendly to current management.

Furthermore, Tower’s ownership of U.S. insurance company subsidiaries can, under applicable state insurance company laws and regulations, delay or impede a change of control of Tower. Such regulations might limit the possibility of a change of control, leading to depressed market prices for Tower common stock, and may deter a change in control that would be beneficial to Tower stockholders.

Risks Related to Our Industry

     The threat of terrorism and military and other actions may adversely affect our investment portfolio and may result in decreases in our net income, revenue and assets under management.

The threat of terrorism, both within the United States and abroad, and military and other actions and heightened security measures in response to these types of threats, may cause significant volatility and declines in the equity markets in the United States, Europe and elsewhere, as well as loss of life, property damage, additional disruptions to commerce and reduced economic activity. Some of the assets in our investment portfolio may be adversely affected by declines in the equity markets and economic activity caused by the continued threat of terrorism, ongoing military and other actions and heightened security measures.

We can offer no assurances that terrorist attacks or the threat of future terrorist events in the United States and abroad or military actions by the United States will not have a material adverse effect on our business, financial condition or results of operations.

     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.

The results of operations of companies in the property and casualty insurance industry historically have been subject to significant fluctuations and uncertainties. Our profitability can be affected significantly by:

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competition;

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rising levels of loss costs that we cannot anticipate at the time we price our products;

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volatile and unpredictable developments, including man-made, weather-related and other natural catastrophes or terrorist attacks;

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changes in the level of reinsurance capacity and insurance capacity;

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changes in the amount of loss and loss adjustment expense reserves resulting from new types of claims and new or changing judicial interpretations relating to the scope of insurers’ liabilities; and

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fluctuations in equity markets and interest rates, inflationary pressures, conditions affecting the credit markets, segments thereof or particular asset classes and other changes in the investment environment, which affect returns on invested assets and may impact the ultimate payout of losses.

The supply of insurance is related to prevailing prices, the level of insured losses and the level of industry surplus which, in turn, may fluctuate in response to changes in rates of return on investments being earned in the insurance and reinsurance industry. As a result, the insurance business historically has been a cyclical industry characterized by periods of intense price competition due to excessive underwriting capacity alternating with periods when shortages of capacity permitted favorable premium levels. Significant amounts of new capital flowing into the insurance and reinsurance sectors could lead to a significant reduction in premium rates, less favorable policy terms and fewer submissions for our underwriting services. In addition to these considerations, changes in the frequency and severity of losses suffered by insureds and insurers may affect the cycles of the insurance business significantly, and we expect to experience the effects of such cyclicality.

This cyclicality could have a material adverse effect on our results of operations and revenues, which may cause the price of Tower securities issued to investors to be volatile.

     Changing climate conditions may adversely affect our financial condition or profitability.

There is an emerging scientific consensus that the earth is getting warmer. Climate change, to the extent it produces rising temperatures and changes in weather patterns, may affect the frequency and severity of storms and other weather events, the affordability, availability and underwriting results of homeowners and commercial property insurance and, if frequency and severity patterns increase, could negatively affect our financial results.

Risk Factors Relating to Disruptions in the Financial Markets

     Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, access to capital and cost of capital.

The capital and credit markets have been experiencing volatility and disruption in certain market sectors.

We need liquidity to pay claims, reinsurance premiums, operating expenses, 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 are insurance premiums, reinsurance recoveries, ceding commissions, fee revenues, cash flow from our investment portfolio and other assets, consisting mainly of cash or assets that are readily convertible into cash. Other sources of liquidity in normal markets also include a variety of instruments, including medium- and long-term debt, junior subordinated debt securities and stockholders’ equity.

In the event current resources do not satisfy our needs, we may have to seek additional financing. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the volume of trading activities, the overall availability of credit to the financial services industry, our credit ratings and credit capacity, as well as the possibility that customers or lenders could develop a negative perception of our long- or short-term financial prospects if we incur large investment losses or if the level of our business activity decreased due to a market downturn. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. Our internal sources of liquidity may prove to be insufficient, and in such case, we may not be able to successfully obtain additional financing on favorable terms, or at all.

Disruptions, uncertainty or volatility in the capital and credit markets may also limit our access to capital required to operate our business. Such market conditions may limit our ability to satisfy statutory capital requirements, generate fee income and access the capital necessary to grow our business. As such, we may be forced to delay raising capital, issue shorter tenor securities than we prefer, or bear an unattractive cost of capital which could decrease our profitability and significantly reduce our financial flexibility. Our results of operations, financial condition, cash flows and statutory capital position could be materially adversely affected by disruptions in the financial markets.

     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 the capital markets and the economy generally. The stress experienced by capital markets that began in the second half of 2007 continued throughout 2009 and has continued into 2010. Recently, concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the mortgage market and a declining real estate market have contributed to increased volatility and diminished expectations for the economy and markets going forward. These concerns and the continuing market upheavals may have an adverse effect on us. Our revenues may decline in such circumstances and our profit margins could erode. In addition, in the event of extreme prolonged market disruptions we could incur significant losses. Even in the absence of a market downturn, we are exposed to substantial risk of loss due to market volatility.

Factors such as consumer spending, business investment, government spending, the volatility and strength of the capital markets, and inflation all affect the business and economic environment and, ultimately, the amount and profitability of our business. In an economic downturn characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending, the demand for our insurance products could be adversely affected. In addition, we may experience an elevated incidence of claims. Adverse changes in the economy could affect earnings negatively and could have a material adverse effect on our business, results of operations and financial condition. The current mortgage crisis has also raised the possibility of future legislative and regulatory actions that could further impact our business. We cannot predict whether or when such actions may occur, or what impact, if any, such actions could have on our business, results of operations and financial condition.

     The impairment of other financial institutions could adversely affect us.

We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, reinsurers and other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty. We also have exposure to various financial institutions in the form of unsecured debt instruments and equity investments and unsecured debt instruments issued by various state and local municipal authorities. There can be no assurance that any such losses or impairments to the carrying value of these assets would not materially and adversely affect our business and results of operations.

     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.

We are exposed to significant financial and capital markets risk, including changes in interest rates, credit spreads, equity prices, real estate values, market volatility, the performance of the economy in general, the performance of the specific obligors included in our portfolio and other factors outside our control. Our exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest rates. A rise in interest rates will increase the net unrealized loss position of our investment portfolio. Our investment portfolio contains interest rate sensitive instruments, such as fixed income securities, which may be adversely affected by changes in interest rates from governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. A rise in interest rates would increase the net unrealized loss position of our investment portfolio, offset by our ability to earn higher rates of return on funds reinvested. Conversely, a decline in interest rates would decrease the net unrealized loss position of our investment portfolio, offset by lower rates of return on funds reinvested.

Our exposure to credit spreads primarily relates to market price associated with changes in credit spreads. A widening of credit spreads will increase the net unrealized loss position of the investment portfolio and, if issuer credit spreads increase significantly or for an extended period of time, would likely result in higher other-than-temporary impairments. Credit spread tightening will reduce net investment income associated with new purchases of fixed maturities. Our investment portfolio also has significant exposure to risks associated with mortgage-backed securities. As with other fixed income investments, the fair market value of these securities fluctuates depending on market and other general economic conditions and the interest rate environment.

In addition, market volatility can make it difficult to value certain of our securities if trading becomes less frequent. As such, valuations may include assumptions or estimates that may have significant period to period changes which could have a material adverse effect on our consolidated results of operations or financial condition. Continuing challenges include continued weakness in the real estate market and increased mortgage delinquencies, investor anxiety over the economy, rating agency downgrades of various structured products and financial issuers, unresolved issues with structured investment vehicles, deleveraging of financial institutions and hedge funds and a serious dislocation in the inter-bank market. If significant, continued volatility, changes in interest rates, changes in credit spreads and defaults, a lack of pricing transparency, market liquidity and declines in equity prices, individually or in tandem, could have a material adverse effect on our results of operations, financial condition or cash flows through realized losses, impairments, and changes in unrealized positions.

     Our valuation of fixed maturity and equity securities may include methodologies, estimations and assumptions which are subject to differing interpretations and could result in changes to investment valuations that may materially adversely affect our results of operations or financial condition.

We have categorized our fixed maturity and equity securities into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. The relevant GAAP guidance defines the input levels as follows:

Level 1 —Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities traded in active markets. Included are those investments traded on an active exchange, such as the NASDAQ Global Select Market.

Level 2 —Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs. Included are investments in U.S. Treasury securities and obligations of U.S. government agencies, together with municipal bonds, corporate debt securities, commercial mortgage and asset-backed securities and certain residential mortgage-backed securities that are generally investment grade.

Level 3 —Inputs to the valuation methodology are unobservable for the asset or liability and are significant to the fair value measurement. Material assumptions and factors considered in pricing investment securities may include projected cash flows, collateral performance including delinquencies, defaults and recoveries, and any market clearing activity or liquidity circumstances in the security or similar securities that may have occurred since the prior pricing period. Included in this valuation methodology are investments in certain mortgage-backed and asset-backed securities.

At December 31, 2009, approximately 4.8%, 94.5%, and 0.7% of these securities represented Level 1, Level 2 and Level 3, respectively. The availability of observable inputs varies and is affected by a wide variety of factors. When the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment. The degree of judgment exercised by management in determining fair value is greatest for investments

During periods of market disruption including periods of significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, it may be difficult to value certain of our securities, for example, non-agency residential mortgage backed securities if trading becomes less frequent and/or market data becomes less observable. There may be certain asset classes that were in active markets with significant observable data that become illiquid due to the current financial environment. In such cases, more securities may fall to Level 3 and thus require more subjectivity and management judgment. As such, valuations may include inputs and assumptions that are less observable or require greater estimation as well as valuation methods which are more sophisticated or require greater estimation thereby resulting in values which may be less than the value at which the investments may be ultimately sold. Further, rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of securities as reported within our consolidated financial statements and the period-to-period changes in value could vary significantly. Decreases in value may have a material adverse effect on our results of operations or financial condition.

          Some of our investments are relatively illiquid and are in asset classes that have been experiencing significant market valuation fluctuations.

We hold certain investments that may lack liquidity, such as non-agency residential mortgage backed securities, subprime mortgage backed securities and certain commercial mortgage backed securities, rated below AA. These asset classes represented 4.9% of the carrying value of our total cash and invested assets as of December 31, 2009.

The reported values of our less liquid asset classes described in the paragraph above do not necessarily reflect the lowest current market price for the asset. If we were forced to sell certain of our assets in the current market, there can be no assurance that we would be able to sell them for the prices at which we have recorded them and we may be forced to sell them at lower prices.

          The determination of the amount of impairments taken on our investments is highly subjective and could materially impact our results of operations or financial position.

The determination of the amount of allowances and impairments varies by investment type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Management updates its evaluations regularly and reflects changes in allowances and impairments in operations as such evaluations are revised. There can be no assurance that our management has accurately assessed the level of impairments taken in our financial statements. Furthermore, additional impairments may need to be taken in the future. Historical trends may not be indicative of future impairments.

For example, the cost of our fixed maturity and equity securities is adjusted for impairments in value deemed to be other-than-temporary in the period in which the determination is made. The assessment of whether impairments have occurred is based on management’s case-by-case evaluation of the underlying reasons for the decline in fair value.

Our management regularly reviews our fixed-maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. In evaluating potential impairment, management considers, among other criteria: (i) the current fair value compared to amortized cost or cost, as appropriate; (ii) the length of time the security’s fair value has been below amortized cost or cost; (iii) specific credit issues related to the issuer such as changes in credit rating, reduction or elimination of dividends or non-payment of scheduled interest payments; (iv) management’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in value to cost; (v) specific cash flow estimations for certain mortgage-backed securities; and (vi) current economic conditions.

          Gross unrealized losses may be realized or result in future impairments.

Our gross unrealized losses on fixed maturity securities at December 31, 2009 were $17.9 million pre-tax, and the amount of gross unrealized losses on securities that have been in an unrealized loss position for twelve months or more is approximately $14.1 million pre-tax. Realized losses or impairments may have a material adverse impact on our results of operation and financial position.

          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.

Goodwill represents the excess of the amounts we paid to acquire subsidiaries and other businesses over the fair value of their net assets at the date of acquisition. We test goodwill at least annually for impairment. Impairment testing is performed based upon estimates of the fair value of the reporting units to which the goodwill relates. The estimated fair value of the acquired net assets is impacted by the ongoing performance of the related business. If it is determined that the goodwill has been impaired, we must write down the goodwill by the amount of the impairment, with a corresponding charge

to income. Such write downs could have a material adverse effect on our results of operations or financial position.

Intangible assets represent the amount of fair value assigned to certain assets when we acquire a subsidiary or a book of business. Intangible assets are classified as having either a finite or an indefinite life. We test the recoverability of indefinite life intangibles at least annually. We test the recoverability of finite life intangibles whenever events or changes in circumstances indicate that the carrying value of a finite life intangible may not be recoverable. An impairment is recognized if the carrying value of an intangible asset is not recoverable and exceeds its fair value in which circumstances we must write down the intangible asset by the amount of the impairment, with a corresponding charge to income. Such write downs could have a material adverse effect on our results of operations or financial position.

          Deferred income tax represents the tax effect of the differences between the book and tax basis of assets and liabilities. Deferred tax assets are assessed periodically by management to determine if they are realizable. Factors in management’s determination include the performance of the business including the ability to generate taxable capital gains. If based on available information, it is more likely than not that the deferred income tax asset will not be realized, then a valuation allowance must be established with a corresponding charge to net income. Such charges could have a material adverse effect on our results of operations or financial position.

Item 1B. Unresolved Staff Comments

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

Item 2. Properties

We lease approximately 118,500 square feet of space at 120 Broadway, New York, New York, which consists of the 30th and 31st floors and part of the 29th floor. The lease will end on December 31, 2021. See Note 17—“Commitments and Contingencies” in the notes to our audited consolidated financial statements included elsewhere in this report.

We also lease office space in Paramus, New Jersey; Melville, New York; Buffalo, New York; Quincy, Massachusetts; Scarborough, Maine; Bedford, New Hampshire; Maitland, Florida; Irving, Texas; Lisle, Illinois; White Plains, New York; Mobile, Alabama; Irvine, California; Palm Springs, California; Glastonbury, Connecticut; Atlanta, Georgia; Chicago, Illinois; and Hamilton, Bermuda.

Item 3. Legal Proceedings

From time to time, we are involved in various legal proceedings in the ordinary course of business. For example, to the extent a claim asserted by a third party in a lawsuit against one of our insureds is covered by a particular policy, we may have a duty to defend the insured party against the claim. These claims may relate to bodily injury, property damage or other compensable injuries as set forth in the policy. Thus, when such a lawsuit is submitted to us, in accordance with our contractual duty we appoint counsel to represent any covered policyholders named as defendants in the lawsuit. In addition, from time to time we may take a coverage position (e.g., denying coverage) on a submitted property or liability claim with which the policyholder is in disagreement. In such cases, we may be sued by the policyholder for a declaration of its rights under the policy and/or for monetary damages, or we may institute a lawsuit against the policyholder requesting a court to confirm the propriety of our position. We do not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material adverse effect on our business, results of operations or financial condition.

In addition to litigation arising from the policies we issue, as with any company actively engaged in business, from time to time we may be involved in litigation involving non-policyholders such as vendors or other third parties with whom we have entered into contracts and out of which disputes have arisen, or litigation arising from employment-related matters, such as actions by employees claiming unlawful treatment or improper termination.

On May 28, 2009, Munich Reinsurance America, Inc. (“Munich”) commenced an action against TICNY in the United States District Court for the District of New Jersey seeking, inter alia, to recover approximately $6.1 million under various retrocessional contracts pursuant to which TICNY reinsures Munich. On June 22, 2009, TICNY filed its answer, in which it, inter alia, asserted two separate counterclaims seeking to recover approximately $2.8 million under various reinsurance contracts pursuant to which Munich reinsures TICNY. On June 17, 2009, Munich commenced a separate action against TICNY in the United States District Court for the District of New Jersey seeking a declaratory judgment that Munich is entitled to access to TICNY’s books and records pertaining to various quota share agreements, to which TICNY filed its answer on July 7, 2009. Because the litigation is only in its preliminary stage, management is unable to assess the likelihood of any particular outcome, including what amounts, if any, will be recovered by the parties from each other under the reinsurance and retrocession contracts that are at issue. Accordingly, an estimate of the possible range of loss, if any, cannot be made.

Item 4. Reserved

PART II

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Shareholders

Our common stock is traded on the NASDAQ Global Select Market (“NASDAQ”) under the ticker symbol “TWGP”. We have one class of authorized common stock for 100,000,000 shares at a par value of $0.01 per share.

As of February 25, 2010, there were 44,987,732 common shares issued and outstanding that were held by 159 shareholders of record.

Price Range of Common Stock and Dividends Declared

The high and low sales prices for quarterly periods from January 1, 2008 through December 31, 2009 were as follows:

										Common
										Stock
										Dividends
		High				Low				Declared
2009
First quarter			$31.05				$19.70				$0.050
Second quarter			28.32				22.70				0.070
Third quarter			26.10				22.88				0.070
Fourth quarter			25.78				22.29				0.070
2008
First quarter			$33.73				$23.17				$0.050
Second quarter			28.26				21.03				0.050
Third quarter			27.53				17.83				0.050
Fourth quarter			28.69				15.76				0.050

Dividend Policy

The Company paid quarterly dividends of $0.05 per share on March 16, 2009 and $0.07 on June 15, 2009, September 14, 2009 and December 14, 2009. Any future determination to pay dividends will be at the discretion of our Board of Directors and will be dependent upon our results of operations and cash flows, our financial position and capital requirements, general business conditions, legal, tax, regulatory and any contractual restrictions on the payment of dividends and any other factors our Board of Directors deems relevant.

Tower is a holding company and has no direct operations. Its ability to pay dividends depends, in part, on the ability of our Insurance Subsidiaries and TRM to pay dividends to it. Our Insurance Subsidiaries are subject to significant regulatory restrictions limiting their ability to declare and pay dividends. See “Business—Regulation” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Pursuant to the terms of the subordinated debentures underlying our trust preferred securities, we and our subsidiaries cannot declare or pay any dividends if we are in default of or if we have elected to defer payments of interest on those debentures. The Company declared dividends on common stock as follows:

(in $ thousands)		2009				2008
Common stock dividends declared		$	10,740			$	4,608

In 2009, the Company purchased 38,268 shares of its common stock from employees in connection with the vesting of restricted stock issued in connection with its 2004 Long Term Equity Compensation Plan (the “Plan”). The shares were withheld at the direction of the employees as permitted under the Plan

in order to pay the minimum amount of tax liability owed by the employee from the vesting of those shares.

The following table summarizes the Company’s stock repurchases for the three-month period ended December 31, 2009, and represents employees’ withholding tax obligations on the vesting of restricted stock:

										Total Number
										of Shares				Maximum Number
		Total								Purchased as Part				(or Approximate
		Number				Average				of Publically				Dollar Value) of
		of Shares				Price Paid				Announced Plans				Shares that May Yet
Period		Purchased				per Share				or Programs				be Purchased Under
October 1 - 31, 2009			3,365				$24.68				—				—
November 1 - 30, 2009			11,395				24.62				—				—
December 1 - 31, 2009			5,719				23.53				—				—
Total			20,479				$24.32				—				—

Item 6. Selected Consolidated Financial Information

The selected consolidated income statement data for the years ended December 31, 2009, 2008, 2007, and the balance sheet data as of December 31, 2009 and 2008 are derived from our audited financial statements included elsewhere in this document, which have been prepared in accordance with GAAP and have been audited by Johnson Lambert & Co. LLP, our independent registered public accounting firm. You should read the following selected consolidated financial information along with the information contained in this document, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this Form 10-K.

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