8-K/A

UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549

FORM 8-K/A

(Amendment No. 1)

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): July 1, 2010

Tower Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware	000-50990	13-3894120
(State or other jurisdiction of incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)

120 Broadway, 31^st Floor
New York, NY 10271

(Address of principal executive offices)

(212) 655-2000

(Registrant’s telephone number, including area code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.01. Completion of Acquisition or Disposition of Assets

As previously reported in the Current Report on Form 8-K dated July 1, 2010 (the “Original Form 8-K”), Tower Group, Inc. (“Tower”) completed the acquisition of the Personal Lines Division of OneBeacon Insurance Group, Ltd. (“OneBeacon”) for a cash purchase price of $167 million pursuant to the Purchase Agreement, dated as of February 2, 2010, by and among Tower, OneBeacon, OneBeacon Insurance Group LLC, OneBeacon America Insurance Company, The Employers’ Fire Insurance Company, The Camden Fire Insurance Association, Homeland Insurance Company of New York, OneBeacon Insurance Company, OneBeacon Midwest Insurance Company, Pennsylvania General Insurance Company and The Northern Assurance Company of America (the “Purchase Agreement”). This Amendment No. 1 on Form 8-K/A amends and supplements the Original Form 8-K of the Company to include financial statements and pro forma financial information.

Item 9.01. Financial Statements and Exhibits

(a) Financial statements of business acquired.

The following financial statements required by Item 9.01(a) of Form 8-K are attached hereto as Exhibits 99.2 and 99.3, respectively.

Carve-out Financial Statements of
OneBeacon Insurance Group, Ltd.’s
Traditional Personal Lines Business
(a Carve-out of OneBeacon Insurance Group, Ltd.)

(i) Interim Unaudited Carve-out Financial Statements (Exhibit 99.2)

• Unaudited Carve-out Balance Sheets as of June 30, 2010 and December 31, 2009

• Unaudited Carve-out Statements of Operations for the six months ended June 30, 2010 and 2009

• Unaudited Carve-out Statements of Changes in Equity as of June 30, 2010 and 2009

• Unaudited Carve-out Statements of Cash Flows for the six months ended June 30, 2010 and 2009

• Notes to Unaudited Carve-out Financial Statements

(ii) Annual Carve-out Financial Statements (Exhibit 99.3)

• Report of Independent Registered Public Accounting Firm

• Carve-out Balance Sheets as of December 31, 2009 and 2008

• Carve-out Statements of Operations for the years ended December 31, 2009 and 2008

• Carve-out Statements of Changes in Equity for the years ended December 31, 2009 and 2008

• Carve-out Statements of Cash Flows for the years ended December 31, 2009 and 2008

• Notes to Carve-out Financial Statements

(b) Pro forma financial information

The following unaudited condensed consolidated pro forma financial information required by Item 9.01(b) of Form 8-K is attached hereto as Exhibit 99.4.

Unaudited Pro Forma Financial Information (Exhibit 99.4)

• Unaudited Condensed Consolidated Pro Forma Balance Sheet as of June 30, 2010

• Unaudited Condensed Consolidated Pro Forma Statement of Income for the six months ended June 30, 2010

• Unaudited Condensed Consolidated Pro Forma Statement of Income for the year ended December 31, 2009

• Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

(c) Not applicable

(d) Exhibits

Number	Description
23.1	Consent of PricewaterhouseCoopers, Independent Registered Public Accounting Firm
99.2	• Unaudited Carve-out Balance Sheets as of June 30, 2010 and December 31, 2009
	• Unaudited Carve-out Statements of Operations for the six months ended June 30, 2010 and 2009
	• Unaudited Carve-out Statements of Changes in Equity as of June 30, 2010 and 2009
	• Unaudited Carve-out Statements of Cash Flows for the six months ended June 30, 2010 and 2009
	• Notes to Unaudited Carve-out Financial Statements
99.3	• Report of Independent Registered Public Accounting Firm
	• Carve-out Balance Sheets as of December 31, 2009 and 2008
	• Carve-out Statements of Operations for the years ended December 31, 2009 and 2008
	• Carve-out Statements of Changes in Equity for the years ended December 31, 2009 and 2008
	• Carve-out Statements of Cash Flows for the years ended December 31, 2009 and 2008
	• Notes to Carve-out Financial Statements
99.4	• Unaudited Condensed Consolidated Pro Forma Balance Sheet as of June 30, 2010
	• Unaudited Condensed Consolidated Pro Forma Statement of Income for the six months ended June 30, 2010
	• Unaudited Condensed Consolidated Pro Forma Statement of Income for the year ended December 31, 2009
	• Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	Tower Group, Inc.
	Registrant
Date: September 13, 2010	/s/ William E. Hitselberger
	WILLIAM E. HITSELBERGER
	Senior Vice President & Chief Financial Officer

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Tower Group, Inc.
New York, New York

We hereby consent to the incorporation by reference in the registration statements on Form S-8 (No.333-120320, 333-151801, 333-157112 and 333-163117) of Tower Group, Inc. of our report dated April 15, 2010 relating to the carve-out financial statements of OneBeacon Insurance Group, Ltd.’s Traditional Personal Lines which appears on Form 8-K/A of Tower Group, Inc. dated September 10, 2010.

/s/ PricewaterhouseCoopers LLP

New York, NY
September 13, 2010

EX-99.2

Exhibit 99.2

CARVE-OUT FINANCIAL STATEMENTS OF
ONEBEACON INSURANCE GROUP, LTD.’S
TRADITIONAL PERSONAL LINES BUSINESS
(A CARVE-OUT OF ONEBEACON INSURANCE GROUP, LTD.)

Financial Statements
For the Period Ended June 30, 2010

CARVE-OUT FINANCIAL STATEMENTS OF
ONEBEACON INSURANCE GROUP, LTD.’S TRADITIONAL PERSONAL LINES BUSINESS
(A CARVE-OUT OF ONEBEACON INSURANCE GROUP, LTD.)
INDEX TO CARVE-OUT FINANCIAL STATEMENTS

	Pages
Carve-out Financial Statements (Unaudited)
Carve-Out Balance Sheets:
As of June 30, 2010 and December 31, 2009		2
Carve-Out Statements of Operations:
Six months ended June 30, 2010 and 2009		3
Carve-Out Statements of Changes in Equity:
Six months ended June 30, 2010 and 2009		4
Carve-Out Statements of Cash Flows:
Six months ended June 30, 2010 and 2009		5
Notes to Carve-Out Financial Statements		6

CARVE-OUT FINANCIAL STATEMENTS OF
ONEBEACON INSURANCE GROUP, LTD.’S TRADITIONAL PERSONAL LINES BUSINESS
CARVE-OUT BALANCE SHEETS

	June 30,		December 31,
	2010		2009
	(Unaudited)
	($ in millions)
Assets
Fixed maturity investments, at fair value (amortized cost $4.6 and $302.4)	$	4.7	$	312.2
Short-term investments, at amortized cost (which approximates fair value)		309.6		32.7
Allocated investment asset		322.5		357.5
Cash		9.1		2.8
Reinsurance recoverable on unpaid losses		35.6		33.0
Reinsurance recoverable on paid losses		5.6		2.3
Premiums receivable		105.1		115.5
Deferred acquisition costs		41.7		45.1
Net deferred tax asset		1.9		1.0
Investment income accrued		—		2.7
Ceded unearned premiums		27.4		30.3
Other assets		0.1		6.8
Total assets	$	863.3	$	941.9
Liabilities
Loss and LAE reserves	$	346.2	$	351.6
Unearned premiums		235.9		255.7
Other liabilities		34.8		56.8
Total liabilities		616.9		664.1
Equity
Net investment in OB Personal Lines		246.4		277.8
Total liabilities and equity	$	863.3	$	941.9

See Notes to Carve-Out Financial Statements

2

CARVE-OUT FINANCIAL STATEMENTS OF
ONEBEACON INSURANCE GROUP, LTD.’S TRADITIONAL PERSONAL LINES BUSINESS
CARVE-OUT STATEMENTS OF OPERATIONS
(Unaudited)

	Six months ended June 30,
	2010			2009
	($ in millions)
Revenues
Earned premiums	$	200.9		$	241.0
Net investment income		2.3			5.7
Net realized and unrealized investment gains		2.5			8.2
Allocated investment income		7.0			21.5
Total revenues		212.7			276.4
Expenses
Loss and LAE		151.9			162.7
Policy acquisition expenses		36.1			41.1
Other underwriting expenses		31.1			29.4
General and administrative expenses		0.6			1.0
Total expenses		219.7			234.2
Pre-tax (loss) income		(7.0	)		42.2
Income tax expense		(3.8	)		(12.1	)
Net (loss) income	$	(10.8	)	$	30.1

See Notes to Carve-Out Financial Statements.

3

CARVE-OUT FINANCIAL STATEMENTS OF
ONEBEACON INSURANCE GROUP, LTD.’S TRADITIONAL PERSONAL LINES BUSINESS
CARVE-OUT STATEMENTS OF CHANGES IN EQUITY
(Unaudited)

	Net
	Investment in
	OB Personal
	Lines
	($ in millions)
Balance at January 1, 2010	$	277.8
Net loss		(10.8	)
Dividends		(4.7	)
Other net distributions to OneBeacon		(15.9	)
Balance at June 30, 2010	$	246.4

	Net
	Investment in
	OB Personal
	Lines
	($ in millions)
Balance at January 1, 2009	$	308.2
Net income		30.1
Other net distributions to OneBeacon		(46.3	)
Balance at June 30, 2009	$	292.0

See Notes to Carve-Out Financial Statements.

4

CARVE-OUT FINANCIAL STATEMENTS OF
ONEBEACON INSURANCE GROUP, LTD.’S TRADITIONAL PERSONAL LINES BUSINESS
CARVE-OUT STATEMENTS OF CASH FLOWS
(Unaudited)

	Six months ended June 30,
	2010			2009
	($ in millions)
Cash flows from operations:
Net (loss) income	$	(10.8	)	$	30.1
Charges (credits) to reconcile net (loss) income to cash flows (used for) provided from operations:
Net realized and unrealized investment gains		(2.5	)		(8.2	)
Deferred income tax (benefit) expense		(0.8	)		1.3
Other operating items:
Net change in loss and LAE reserves		(5.4	)		(1.1	)
Net change in unearned premiums		(19.8	)		(5.0	)
Net change in ceded unearned premiums		2.9			(19.1	)
Net change in premiums receivable		10.4			(4.8	)
Net change in reinsurance recoverable on paid and unpaid losses		(5.9	)		(2.1	)
Net change in other assets and liabilities		(9.1	)		32.7
Net cash (used for) provided from operations		(41.0	)		23.8
Cash flows from investing activities:
Net maturities, purchases and sales of short-term investments		(276.8	)		(0.9	)
Maturities of fixed maturity investments		19.8			12.1
Sales of fixed maturity investments		328.2			102.1
Purchases of fixed maturity investments		(38.2	)		(140.5	)
Net change in allocated investment asset		34.9			52.1
Net cash provided from investing activities		67.9			24.9
Cash flows from financing activities:
Cash dividends paid to OneBeacon		(4.7	)		—
Other net distributions to OneBeacon		(15.9	)		(46.3	)
Net cash used for financing activities		(20.6	)		(46.3	)
Net increase in cash during period		6.3			2.4
Cash balance at beginning of period		2.8			6.9
Cash balance at end of period	$	9.1		$	9.3

See Notes to Carve-Out Financial Statements.

5

NOTES TO CARVE-OUT FINANCIAL STATEMENTS

NOTE 1. Nature of Operations and Summary of Significant Accounting Policies

     The accompanying carve-out financial statements include the historical accounts of the Traditional Personal Lines business (“OB Personal Lines”) of OneBeacon Insurance Group, Ltd. (“OB Ltd.”) and its subsidiaries (collectively, “OneBeacon”), the sale of which to Tower Group, Inc. (“Tower”), as described below, was completed on July 1, 2010, and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). OB Ltd. is an exempted Bermuda limited liability company. As of June 30, 2010, White Mountains Insurance Group, Ltd. (“White Mountains”), an insurance holding company domiciled in Bermuda, indirectly owned 75.7% of OB Ltd.’s common shares.

     On February 2, 2010, OB Ltd. and certain of its subsidiaries entered into a definitive agreement to sell OB Personal Lines to Tower (the “PL Transaction”). As described in Note 10, the PL Transaction was completed on July 1, 2010. Regulatory approvals for the PL Transaction were received during June 2010. The PL Transaction includes the execution of various reinsurance agreements.

     OB Personal Lines provides a comprehensive suite of personal insurance products sold through select independent agents with a focus on eight Northeastern states. The personal lines products include automobile, homeowners and package. OB Personal Lines also includes management services provided to reciprocal insurance exchanges (“reciprocals”) and the inclusion of the reciprocals as described below and in Note 8.

     OB Personal Lines includes two insurance companies, York Insurance Company of Maine (“York”) and Massachusetts Homeland Insurance Company (“MHIC”), through which the majority of the personal lines business is written on a direct basis, and two attorneys-in-fact, Adirondack AIF, LLC (“AAIF”) and New Jersey Skylands Management LLC (“NJSM”), which provide management services for a fee to the reciprocals that write the personal lines business in New York and New Jersey, respectively, Adirondack Insurance Exchange (“AIE”) and New Jersey Skylands Insurance Association (“NJSIA”), and NJSIA’s wholly-owned subsidiary New Jersey Skylands Insurance Company (together ‘New Jersey Skylands Insurance”).

     Reciprocals are policyholder-owned insurance carriers organized as unincorporated associations. Each policyholder insured by the reciprocal shares risk with the other policyholders. Policyholders share profits and losses in the same proportion as the amount of insurance purchased but are not subject to assessment for net losses of the reciprocal.

     OneBeacon capitalized NJSIA and AIE by loaning funds to them in exchange for surplus notes. New Jersey Skylands Insurance was capitalized with a $31.3 million surplus note issued to The Camden Fire Insurance Association (“CFIA”), a subsidiary within OneBeacon, in 2002. CFIA also loaned $0.2 million to New Jersey Skylands Insurance in the form of a security deposit. New Jersey Skylands Insurance began writing personal automobile coverage for new customers in August 2002. In 2008, New Jersey Skylands Insurance began writing homeowners business. AIE was capitalized with a $70.7 million surplus note issued to Homeland Insurance Company of New York (“HONY”), a subsidiary within OneBeacon, in May 2006. AIE began writing personal automobile and homeowners business in August 2006. Principal and interest on the surplus notes are repayable to OneBeacon only with regulatory approval. The obligation to repay principal on the notes is subordinated to all other liabilities including obligations to policyholders and claimants for benefits under insurance policies. The surplus notes issued by NJSIA and AIE will be transferred to Tower as part of the PL Transaction.

Basis of presentation

     All significant intercompany transactions have been eliminated. These interim financial statements include all adjustments, consisting of a normal recurring nature, considered necessary by management to fairly present the financial position, results of operations and cash flows of OB Personal Lines. These interim financial statements may not be indicative of financial results for the full year and should be read in conjunction with OB Personal Lines’ 2009 annual audited financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Refer to OB Personal Lines’ 2009 annual audited carve-out financial statements for a complete discussion regarding OB Personal Lines’ significant accounting policies.

     OB Personal Lines is an integrated business of OneBeacon that has operated within the personal lines underwriting unit and not a stand-alone entity. The carve-out financial statements of OB Personal Lines reflect the historical assets, liabilities, revenues and expenses directly attributable to OB Personal Lines, as well as allocations deemed reasonable by management, to present the financial position, results of operations, changes in equity and cash flows of OB Personal Lines on a stand-alone basis. The allocation methodologies are consistent with those described in the 2009 annual audited financial statements. The financial information included herein may not necessarily reflect the financial position, results of operations, changes in equity and cash flows of the OB Personal Lines in the future or what they would have been had it been a separate, stand-alone entity during the periods presented.

6

Recently Adopted Changes in Accounting Principles

Transfers of Financial Assets and Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities

     On January 1, 2010, OB Personal Lines adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2009-16 and ASU 2009-17, codified within Accounting Standards Codification (“ASC”) 860 and ASC 810, respectively. Under ASC 860, the concept of a qualifying special-purpose entity (“QSPE”) has been eliminated and accordingly, any existing QSPE must be evaluated for consolidation upon adoption. The appropriateness of derecognition is evaluated based on whether or not the transferor has surrendered control of the transferred assets. The evaluation must consider any continuing involvement by the transferor. OB Personal Lines does not have any entities that were considered a QSPE under guidance prior to ASC 860. ASC 810 clarifies the application of consolidation accounting for entities for which the controlling financial interest might not be solely identified through voting rights. The guidance under ASC 810 still requires a reporting entity to perform an analysis to determine if its variable interests give it a controlling financial interest in a variable interest entity (“VIE”). The analysis required identifies the primary beneficiary of a VIE as the entity having both of the following:

• The power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance; and

• The obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.

     In addition, a reporting entity must assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining if it has the power to direct the activities of the VIE that most significantly affect the entity’s economic performance. The concept of a reconsideration event is retained and an ongoing reassessment of whether a reporting entity is the primary beneficiary of a VIE is required. Specifically, the list of reconsideration events includes a change in facts and circumstances where the holders of an equity investment at risk as a group lose the power from voting or similar rights to direct the activities of the entity that most significantly affect the entity’s economic performance. In addition, a troubled debt-restructuring is now defined as a reconsideration event. Both statements expand required disclosures and are effective as of the beginning of the first annual reporting period that begins after November 15, 2009. The adoption of ASC 860 and ASC 810 had no material impact on OB Personal Lines’ financial position or results of operations.

Improving Disclosures about Fair Value Measurements

     On January 1, 2010, OB Personal Lines adopted ASU 2010-06, codified within ASC 820. ASU 2010-06 requires new disclosures and clarifies existing disclosure requirements for fair value measurements. ASU 2010-06 requires disclosure of the amounts and nature of the transfers in and out of Level 1 and Level 2 measurements. The ASU also requires a gross presentation of activity within the Level 3 rollforward, presenting separately information about purchases, sales, issuances and settlements. In addition, fair value measurements by Level will now be presented on a more disaggregated basis, by asset or liability class. The ASU also requires more detailed disclosures about inputs and valuation techniques for Level 2 and Level 3 measurements for interim and annual reporting periods. The ASU is effective for the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 rollforward, which is required for annual reporting periods beginning after December 15, 2010 and for interim reporting periods within those years. The adoption of ASU 2010-06 had no material impact on OB Personal Lines’ financial position or results of operations. See Note 4 for required disclosures.

7

NOTE 2. Reserves for Unpaid Loss and LAE

     The following table summarizes the loss and LAE reserve activities of OB Personal Lines for the six months ended June 30, 2010 and 2009:

	Six months ended
	June 30,
	2010			2009
	($ in millions)
Gross beginning balance	$	351.6		$	362.1
Less beginning reinsurance recoverable on unpaid losses		33.0			28.3
Net loss and LAE reserves		318.6			333.8
Net loss and LAE incurred relating to:
Current year losses		155.8			152.9
Prior year losses		(3.9	)		9.8
Total net incurred loss and LAE		151.9			162.7
Net loss and LAE paid relating to:
Current year losses		(82.5	)		(78.5	)
Prior year losses		(77.4	)		(87.2	)
Total net loss and LAE payments		(159.9	)		(165.7	)
Net ending balance		310.6			330.8
Plus ending reinsurance recoverable on unpaid losses		35.6			30.2
Gross ending balance	$	346.2		$	361.0

     During the six months ended June 30, 2010, OB Personal Lines experienced $3.9 million of favorable loss and LAE reserve development on prior accident year loss reserves. During the six months ended June 30, 2009, OB Personal Lines experienced $9.8 million of unfavorable loss and LAE reserve development on prior accident year loss reserves. The unfavorable loss reserve development was related to losses in both automobile and homeowners lines of business.

NOTE 3. Reinsurance

     In the normal course of its business, OneBeacon purchases reinsurance from high-quality, highly rated third-party reinsurers in order to minimize loss from large risks or catastrophic events. OB Personal Lines participated in certain of these reinsurance contracts and incurred premium charges proportionate to its risk profile for the respective reinsurance purchased by OneBeacon. OB Personal Lines remains liable for risks reinsured even if the reinsurer does not honor its obligations under reinsurance contracts.

     Effective July 1, 2009, management renewed OneBeacon’s property catastrophe reinsurance program. The program provides coverage for OneBeacon’s personal and commercial property business as well as certain acts of terrorism. Under the program, the first $100 million of losses resulting from any single catastrophe are retained and the next $750 million of losses resulting from the catastrophe are reinsured. Any loss above $850 million would be retained. In the event of a catastrophe, this property catastrophe reinsurance program is reinstated for the remainder of the original contract term by paying a reinstatement premium that is based on the percentage of coverage reinstated and the original property catastrophe coverage premium. Effective April 1, 2009, New Jersey Skylands Insurance and AIE combined exposures and purchased coverage under a property catastrophe excess of loss reinsurance program. Under the program, the first $3 million of New Jersey Skylands Insurance losses and the first $10 million of AIE losses, resulting from any single catastrophe, are retained and all other losses up to $300 million resulting from the catastrophe are reinsured. Any loss above $300 million would be retained. This program has been extended to July 1, 2010. As described in Note 10, the PL Transaction closed on July 1, 2010. During the six months ended June 30, 2010 and 2009, OB Personal Lines incurred $13.9 million and $0.1 million, respectively, of catastrophe losses.

     Effective January 1, 2009, OneBeacon entered into a quota share agreement with a group of reinsurers to cede 30% of written premiums from OB Personal Lines’ Northeast homeowners business. The program provides supplemental protection to previously established reinsurance. Effective January 1, 2010, OneBeacon renewed the quota share agreement. During the six months ended June 30, 2010 and 2009, OB Personal Lines ceded $25.6 million and $30.0 million, respectively, of written premiums under this quota share agreement. Effective as of July 1, 2010, the closing date of the PL Transaction, the agreement was amended to remove OneBeacon. AIE and NJSIA remained as parties to the agreement.

8

NOTE 4. Investments

     These carve-out financial statements include discrete investments directly owned by the entities included in OB Personal Lines and an allocated investment asset. The presentation below is segregated for the directly owned and the allocated investment asset.

Directly Owned Investments

     OB Personal Lines’ net investment income is comprised primarily of interest income associated with fixed maturity investments and interest income from its short-term investments. Net investment income for the six months ended June 30, 2010 and 2009 consisted of the following:

	Six months ended
	June 30,
	2010			2009
	($ in millions)
Investment income:
Fixed maturity investments	$	2.4		$	5.8
Short-term investments		0.1			0.1
Gross investment income		2.5			5.9
Less investment expenses		(0.2	)		(0.2	)
Net investment income, pre-tax	$	2.3		$	5.7

     The composition of net realized investment gains, a component of net realized and unrealized investment gains, consisted of the following:

	Six months ended
	June 30,
	2010			2009
	($ in millions)
Fixed maturity investments	$	12.4		$	0.4
Net realized investment gains, pre-tax		12.4			0.4
Income taxes		(4.3	)		(0.1	)
Net realized investment gains, after tax	$	8.1		$	0.3

     The net changes in fair value of fixed maturity investments for the six months ended June 30, 2010 and 2009 were $(9.9) million and $7.8 million, respectively, which include changes in net deferred gains and losses on sales of investments between the legal entities in OB Personal Lines and entities under White Mountains’ common control of $(0.2) for the six months ended June 30, 2010. Net changes in fair value for the six months ended June 30, 2009 also included $0.2 million related to OB Personal Lines’ securities lending program.

     The cost or amortized cost, gross unrealized investment gains and losses, and carrying values of the OB Personal Lines’ fixed maturity investments as of June 30, 2010 and December 31, 2009 were as follows:

	June 30, 2010
	Cost or		Gross		Gross
	amortized		unrealized		unrealized		Carrying
	cost		gains		losses		value
			($ in millions)
U.S. Government and agency obligations	$	4.6	$	0.1	$	—	$	4.7
Total fixed maturity investments	$	4.6	$	0.1	$	—	$	4.7

9

	December 31, 2009
	Cost or		Gross		Gross
	amortized		unrealized		unrealized			Carrying
	cost		gains		losses			value
			($ in millions)
U.S. Government and agency obligations	$	60.1	$	0.4	$	(0.1	)	$	60.4
Debt securities issued by industrial corporations		113.2		7.0		(0.3	)		119.9
Asset-backed securities		116.0		2.3		(0.5	)		117.8
Debt securities issued by foreign corporations		13.1		1.0		—			14.1
Total fixed maturity investments	$	302.4	$	10.7	$	(0.9	)	$	312.2

Fair value measurements

     On January 1, 2008, OB Personal Lines adopted ASC 820 which provides a revised definition of fair value, establishes a framework for measuring fair value and expands financial statement disclosure requirements for fair value information. Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an “exit price”). ASC 820 establishes a fair value hierarchy that distinguishes between inputs based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (“unobservable inputs”). The fair value hierarchy in ASC 820 prioritizes fair value measurements into three levels based on the nature of the inputs as follows:

Level 1—Valuations based on quoted prices in active markets for identical assets;

Level 2—Valuations based on observable inputs that do not meet the criteria for Level 1, including quoted prices in inactive markets and quoted prices in active markets for similar, but not identical instruments; and

Level 3—Valuations based on unobservable inputs.

     As of both June 30, 2010 and December 31, 2009, 100% of the investment portfolio recorded at fair value was priced based upon observable inputs.

     Fair values for securities for which quoted prices are unavailable are estimated based upon reference to observable inputs other than quoted prices, such as benchmark interest rates, market comparables, broker quotes and other relevant observable inputs. In circumstances where observable inputs are adjusted to reflect management’s best estimate of fair value, such fair value measurements are considered a lower level measurement in the fair value hierarchy.

     The fair value measurements at June 30, 2010 and December 31, 2009 and their related inputs were as follows:

	Fair value at
	June 30, 2010		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
			($ in millions)
Fixed maturity investments:
U.S. Government and agency obligations	$	4.7	$	4.7	$	—	$	—
Fixed maturity investments		4.7		4.7		—		—
Short-term investments		309.6		309.6		—		—
Total	$	314.3	$	314.3	$	—	$	—

	Fair value at
	December 31, 2009		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
			($ in millions)
Fixed maturity investments:
U.S. Government and agency obligations	$	60.4	$	60.4	$	—	$	—
Debt securities issued by industrial corporations		119.9		—		119.9		—
Asset-backed securities		117.8		—		117.8		—
Debt securities issued by foreign corporations		14.1		—		14.1		—
Fixed maturity investments		312.2		60.4		251.8		—
Short-term investments		32.7		32.7		—		—
Total	$	344.9	$	93.1	$	251.8	$	—

10

     During the six months ended June 30, 2010, with the exception of deposits with certain regulatory agencies required in order to maintain insurance licenses, all of OB Personal Lines’ fixed maturity investments were sold in preparation of the close of the PL Transaction and re-invested in short-term investments.

Allocated Investment Asset

     As described above, these carve-out financial statements include discrete investments directly owned by the entities included in OB Personal Lines. However, not all business included in OB Personal Lines is retained or written by the legal entities included in OB Personal Lines as both York and MHIC are parties to a reinsurance agreement with an affiliate, OBIC pursuant to which they ceded 100% of their respective direct business to OBIC. Further, management does not allocate investments to the underlying insurance operations. Therefore, cash and investments related to OB Personal Lines were generally not segregated but were co-mingled with other insurance company subsidiaries of OneBeacon. For purposes of these carve-out financial statements, OB Personal Lines recorded an allocated investment asset which represents a receivable from OneBeacon based on the capital attributed to support the OB Personal Lines’ business.

     Investment income or loss related to the allocated investment asset, which represent net investment income and net realized and unrealized investment gains and losses, was calculated using rates of return consistent with those realized at OneBeacon for the periods presented. OneBeacon recognized gross returns of 2.2% and 4.9%, respectively, for the six months ended June 30, 2010 and 2009.

     The OneBeacon investment portfolio that generated the gross returns discussed above was comprised of the following types of investments as of June 30, 2010 and 2009:

	Asset Allocation at
	June 30,
	2010			2009
Fixed maturity investments:
U.S. Government and agency obligations		7.2	%		12.0	%
Debt securities issued by industrial corporations		23.7			35.3
Municipal obligations		0.1			0.1
Asset-backed securities		24.0			23.1
Foreign government obligations		0.5			0.5
Preferred stocks		2.1			1.8
Fixed maturity investments		57.6			72.8
Short-term investments		28.0			14.7
Common equity securities		6.2			1.5
Convertible bonds		3.5			6.0
Other investments		4.7			5.0
Total		100.0	%		100.0	%

Securities Lending

     York and MHIC had participated in a securities lending program as a mechanism for generating additional investment income on their fixed maturity and common equity portfolios. Under the securities lending arrangements, certain of the fixed maturity were loaned to other institutions for short periods of time through a lending agent. Management maintained control over the securities it loaned, retained the earnings and cash flows associated with the loaned securities and received a fee from the borrower for the temporary use of the asset. Collateral, in the form of cash and United States government securities, was required at a rate of 102% of the fair value of the loaned securities. An indemnification agreement with the lending agent protected York and MHIC in the event a borrower became insolvent or failed to return any of the securities on loan. In the event of a shortfall in the collateral amount required to be returned to the securities lending counterparty (e.g., as a result of investment losses), York and MHIC were obligated to make up any deficiency.

     In February 2009, York and MHIC amended the terms of the securities lending program to give them more control over the investment of borrowers’ collateral and to separate the assets supporting that collateral into a segregated account. Pursuant to the amendment, (i) the guidelines for the investment of any new cash collateral as well as the reinvestment of cash were narrowed to permit investment in only cash equivalent securities, (ii) York and MHIC had the authority to direct the lending agent to both sell specific collateral securities in the segregated account and to not sell certain collateral securities which the lending agent proposes to sell, and (iii) York, MHIC and the lending agent agreed to manage the securities lending program toward an orderly wind-down. In May 2009, York and MHIC instructed the lending agent not to make any additional loans of securities and to

11

recall all of the securities on loan and fund the return of collateral to the borrowers. As of December 31, 2009, all collateral had been returned to the borrowers.

     Prior to February 2009, the collateral was controlled by the lending agent. The lending agent managed the investment of the cash collateral, however, other than in the event of default by the borrower, this collateral was not available to York and MHIC and was remitted to the borrower by the lending agent upon the return of the loaned securities. Because of these restrictions, York and MHIC considered their securities lending activities to be non-cash transactions. The fair value of the securities lending collateral was recorded as both an asset and liability on the balance sheet.

NOTE 5. Income Taxes

     With the exception of the reciprocals, OneBeacon companies file as members of a consolidated income tax return with affiliated companies pursuant to Internal Revenue Code Section 1502. The consolidated parent, which is not included in these carve-out financial statements, is OneBeacon U.S. Financial Services, Inc. (“OBFS”). Federal income tax expense is allocated between members of the consolidated group according to a written tax-sharing agreement. Pursuant to this agreement, each member’s tax is calculated as if it filed a separate tax return with the Internal Revenue Service (“IRS”). Payments and refunds are made to and received from the common parent company as if the parent were the IRS.

     Income tax expense related to pre-tax (loss) income for the six months ended June 30, 2010 and 2009 represented effective tax rates of (53.5)% and 28.7%, respectively. The effective tax rate for the six months ended June 30, 2010 was different than the U.S. statutory rate of 35% due to the pre-tax loss and an increase in the valuation allowance for the insurance reciprocals. The effective tax rate for the six months ended June 30, 2009 was different than the U.S. statutory rate of 35% due to the receipt of nontaxable interest and dividend income and a decrease in the valuation allowance.

     OB Personal Lines classifies all interest and penalties on unrecognized tax benefits as part of income tax expense. During the six months ended June 30, 2010 and 2009, OB Personal Lines did not recognize any interest expense or penalties for uncertain tax positions and has no balance of accrued interest or penalties at June 30, 2010 or December 31, 2009.

     In October 2008, the IRS commenced examination of OneBeacon’s U.S. income tax returns for 2005 and 2006. On July 30, 2010 OBFS received Form 4549-A (Income Tax Discrepancy Adjustments) from the IRS relating to the examination of tax years 2005 and 2006. The estimated total assessment, including interest is $24.6 million. OBFS disagrees with the adjustments proposed by the IRS and intends to vigorously defend its position. The timing of the resolution of these issues is uncertain, however, it is reasonably possible that the resolution could occur within the next 12 months. An estimate of the range of potential outcomes cannot be made at this time. When ultimately settled, OneBeacon does not expect the resolution of this examination to result in a material change to the financial position of OneBeacon or OB Personal Lines.

NOTE 6. Retirement Plans

     OB Personal Lines participates in OneBeacon-sponsored qualified and non-qualified, non-contributory, defined benefit pension plans (collectively the “Plans”). The Plans cover substantially all employees who were employed as of December 31, 2001 and remain actively employed with OneBeacon. OneBeacon’s Plans were frozen and curtailed in the fourth quarter of 2002. OB Personal Lines recorded pension expense (income) of $0.4 million and $(0.2) million, respectively, for the six months ended June 30, 2010 and 2009.

NOTE 7. Employee Share-Based Incentive Compensation Plans

     OB Personal Lines participates in OneBeacon’s share-based incentive compensation plans. OneBeacon’s share-based compensation plans consist of performance shares, stock options granted in connection with OB Ltd.’s initial public offering and restricted stock units. OneBeacon’s share-based compensation plans are designed to maximize shareholder value over long periods of time by aligning the financial interests of its management with those of its owners. Performance shares are payable only upon achievement of pre-defined business goals and are valued based on the market value of OB Ltd.’s common shares at the time awards are earned. See “Performance Shares” below. Performance shares are typically paid in cash, though, in some instances, they may be paid in common shares or may be deferred in accordance with the terms of one of the deferred compensation plans of OB Ltd.’s subsidiaries.

     OB Personal Lines records its share-based compensation in accordance with SFAS No. 123(R), “Share-Based Payment”, subsequently codified within ASC 718. ASC 718 applies to new grants of share-based awards, award modifications and the remaining portion of the fair value of the unvested awards. The unvested portion of OB Personal Lines’ performance share awards, as well as the stock options granted in connection with OB Ltd.’s initial public offering, are subject to the fair value measurement and recognition requirements of ASC 718. OB Personal Lines expenses the full cost of all share-based compensation for its direct management personnel that participate in the respective plans and also its share of compensation

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expense for management personnel within centralized and corporate services that support the personal lines business. Compensation costs for centralized and corporate services are allocated to OB Personal Lines based on earned premiums.

Performance Shares

     The following summarizes performance share activity for direct OB Personal Lines management personnel for OB Performance Shares for the six months ended June 30, 2010 and 2009:

	Six months ended June 30,
	2010						2009
	Target OB						Target OB
	Performance						Performance
	Shares			Accrued			Shares			Accrued
	outstanding			expense			outstanding			expense
				($ in millions)
Beginning of period		214,453		$	1.5			195,577		$	0.3
Payments and deferrals(1)(2)		(89,382	)		(0.3	)		(8,244	)		—
New awards		1,118			—			26,376			—
Forfeitures and net change in assumed forfeitures		(17,850	)		(0.2	)		(1,490	)		—
Expense recognized		—			0.1			—			0.3
End of period		108,339		$	1.1			212,219		$	0.6

(1)	Performance shares earned for the 2007-2009 performance cycle were based upon a performance factor of 14.2%.
(2)	Performance shares earned for the 2007-2008 performance cycle were based upon a performance factor of 1.4%.

     For the six months ended June 30, 2010 and 2009, OB Personal Lines also recognized $0.3 million and $0.4 million, respectively, of performance unit expense related to direct OB Personal Lines management personnel. For the six months ended June 30, 2010 and 2009, OB Personal Lines also recognized $0.6 million and $0.2 million, respectively, of allocated performance share and performance unit expense.

     The following summarizes performance shares outstanding and accrued performance share expense for direct OB Personal Lines management personnel at June 30, 2010 for each performance cycle:

	Target OB
	Performance
	Shares			Accrued
	outstanding			expense
	($ in millions)
Performance cycle:
2008 - 2010		83,704		$	0.9
2009 - 2011		24,025			0.2
2010 - 2012		1,118			—
Sub-total		108,847			1.1
Assumed forfeitures		(508	)		—
Total at June 30, 2010		108,339		$	1.1

     If 100% of the outstanding performance shares had been vested on June 30, 2010, the total additional compensation cost to be recognized for direct OB Personal Lines management personnel would have been $0.1 million, based on current accrual factors (common share price and payout assumptions).

     All performance shares earned for the 2007-2009 and 2007-2008 performance cycles were settled in cash or by deferral into certain non-qualified deferred compensation plans of OB Ltd.’s subsidiaries.

Stock Options

     As described in the 2009 annual audited financial statements, in November 2006, in connection with OB Ltd.’s initial public offering, options to acquire OB Ltd.’s common shares at an above-market fixed price were issued to certain key

13

employees as a one-time incentive. The options vest in equal installments on each of the third, fourth and fifth anniversaries of their issuance. These options expire five and a half years from the anniversary of issuance. The fair value of each option award at grant date was estimated using a Black-Scholes option pricing model using an expected volatility assumption of 30.0%, a risk-free interest rate assumption of 4.6%, a forfeiture assumption of 5.0%, an expected dividend rate assumption of 3.4% and an expected term assumption of 5.5 years. The options originally had a per share exercise price of $30.00. On May 27, 2008, the Compensation Committee adjusted the exercise price to $27.97 as a result of OB Ltd.’s $2.03 per share special dividend paid in the first quarter of 2008. The compensation expense associated with the options and the incremental fair value of the award modification is being recognized ratably over the remaining period.

     As of June 30, 2010 and 2009, OB Personal Lines had 129,653 options and 142,001 options, respectively, outstanding for direct OB Personal Lines management personnel. During the six months ended June 30, 2010 and 2009, 12,348 options and 0 options, respectively, were forfeited. OB Personal Lines recognized compensation (income) expense of approximately $(0.1) million and $0.1 million, respectively, in connection with these options for direct OB Personal Lines management personnel in each of the six months ended June 30, 2010 and 2009. OB Personal Lines also recognized allocated compensation expense of $0.1 million and $0.2 million, respectively, in connection with options issued to personnel in centralized and corporate service areas in each of the six months ended June 30, 2010 and 2009.

Restricted Stock Units

     The options granted in connection with OB Ltd.’s initial public offering did not include a mechanism in the options to reflect the contribution to total return from the regular quarterly dividend. As a result, on February 26, 2008, OB Ltd. granted 13,090 Restricted Stock Units (“RSUs”) to actively employed OB Personal Lines’ option holders. The RSUs vest one-third on each of November 9, 2009, 2010 and 2011 subject to, for each vesting tranche of units, various factors including but not limited to the attainment of growth of 4% per cycle in OneBeacon’s adjusted book value per share. The performance goal for the first tranche of units was not attained by the 2009 vesting date and will be reassessed at the 2010 and 2011 vesting dates, consistent with the terms of the RSU plan. Upon vesting, the RSUs will be mandatorily deferred into one of the non-qualified deferred compensation plans of OB Ltd.’s subsidiaries and will be paid out in 2012 in cash or shares at the discretion of the Compensation Committee. The expense associated with the RSUs is being recognized over the vesting period. As of June 30, 2010, there were 5,700 RSUs outstanding for direct OB Personal Lines management personnel. For the six months ended June 30, 2010 and 2009, OB Personal Lines recognized approximately $14,000 and approximately $55,000, respectively, in expense. OB Personal Lines recognized $0.1 million and $0.1 million, respectively, of allocated expenses related to the RSUs for the six months ended June 30, 2010 and 2009.

NOTE 8. Variable Interest Entities

     As described in Note 1, OneBeacon has capitalized two reciprocals, NJSIA and AIE, by loaning funds to them in exchange for surplus notes. Management has determined that these reciprocals are VIEs and that OB Personal Lines is the primary beneficiary. Accordingly, OB Personal Lines has included the reciprocals in the carve-out financial statements. As described in Note 1, the PL Transaction, which was completed on July 1, 2010, includes the sale of NJSM and AAIF and the transfer of the surplus notes issued by NJSIA and AIE.

     At June 30, 2010 and December 31, 2009, consolidated amounts related to New Jersey Skylands Insurance included total assets of $124.9 million and $134.3 million, respectively, and total liabilities of $153.2 million and $153.8 million, respectively. At June 30, 2010, the net amount of capital at risk is equal to the surplus note of $31.3 million less the accumulated losses as of June 30, 2010 of $28.3 million which includes accrued interest on the surplus note of $23.9 million which has been eliminated in the carve-out financial statements.

     At June 30, 2010 and December 31, 2009, amounts related to AIE included total assets of $270.7 million and $280.9 million, respectively, and total liabilities of $280.9 million and $281.7 million, respectively. At June 30, 2010, the net amount of capital at risk is equal to the surplus note of $70.7 million less the accumulated losses as of June 30, 2010 of $10.2 million which includes accrued interest on the surplus note of $30.3 million which has been eliminated in the carve-out financial statements.

NOTE 9. Fair Value of Financial Instruments

     SFAS No. 107, “Disclosure about Fair Value of Financial Instruments”, subsequently codified within ASC 825, requires disclosure of fair value information of financial instruments. For certain financial instruments where quoted market prices are not available, other independent valuation techniques and assumptions are used. Because considerable judgment is used, these estimates are not necessarily indicative of amounts that could be realized in a current market exchange. Certain financial instruments are excluded from disclosure, including insurance contracts, other than financial guarantees and investment contracts. OB Personal Lines carries all of its financial instruments on its balance sheet at fair value.

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NOTE 10. Subsequent Events

     As described in Note 1, the PL Transaction closed on July 1, 2010.

     Management has evaluated events subsequent to the balance sheet date through August 16, 2010, which is the date these carve-out financial statements were issued, and has determined that, except as described above, there are no subsequent events requiring disclosure.

15

EX-99.3

Exhibit 99.3

CARVE-OUT FINANCIAL STATEMENTS OF
ONEBEACON INSURANCE GROUP,LTD.’S
TRADITIONAL PERSONAL LINES BUSINESS
(A CARVE-OUT OF ONEBEACON INSURANCE GROUP,LTD.)

Financial Statements
As of and For the Years Ended December 31, 2009 and 2008

CARVE-OUT FINANCIAL STATEMENTS OF
ONEBEACON INSURANCE GROUP, LTD.’S TRADITIONAL PERSONAL LINES BUSINESS
(A CARVE-OUT OF ONEBEACON INSURANCE GROUP, LTD.)
INDEX TO CARVE-OUT FINANCIAL STATEMENTS

	Pages
Audited Carve-out Financial Statements
Report of Independent Registered Public Accounting Firm		2
Carve-Out Balance Sheets:
As of December 31, 2009 and 2008		3
Carve-Out Statements of Operations:
For the years ended December 31, 2009 and 2008		4
Carve-Out Statements of Changes in Equity:
For the years ended December 31, 2009 and 2008		5
Carve-Out Statements of Cash Flows:
For the years ended December 31, 2009 and 2008		6
Notes to Carve-Out Financial Statements		7

PricewaterhouseCoopers LLP

300 Madison Avenue

New York NY 10017

Telephone (646) 471-3000

pwc.com

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of OneBeacon Insurance Group, Ltd.:

In our opinion, the accompanying carve-out balance sheets and the related carve-out statements of operations, changes in equity and cash flows present fairly, in all material respects, the financial position of the Traditional Personal Lines business of OneBeacon Insurance Group, Ltd. and its subsidiaries (collectively “OneBeacon”), as defined in Note 1 to the carve-out financial statements, at December 31, 2009 and December 31, 2008, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the OneBeacon’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

New York, New York
April 15, 2010

2

CARVE-OUT FINANCIAL STATEMENTS OF
ONEBEACON INSURANCE GROUP, LTD.’S TRADITIONAL PERSONAL LINES BUSINESS
CARVE-OUT BALANCE SHEETS

	December 31,
	2009		2008
	($ in millions)
Assets
Fixed maturity investments, at fair value (amortized cost $302.4 and $252.4)	$	312.2	$	248.7
Short-term investments, at amortized cost (which approximates fair value)		32.7		47.1
Allocated investment asset		357.5		437.8
Cash		2.8		6.9
Reinsurance recoverable on unpaid losses		33.0		28.3
Reinsurance recoverable on paid losses		2.3		1.4
Premiums receivable		115.5		127.8
Deferred acquisition costs		45.1		54.5
Net deferred tax asset		1.0		1.1
Investment income accrued		2.7		2.5
Ceded unearned premiums		30.3		5.7
Other assets		6.8		25.3
Total assets	$	941.9	$	987.1
Liabilities
Loss and LAE reserves	$	351.6	$	362.1
Unearned premiums		255.7		278.4
Other liabilities		56.8		38.4
Total liabilities		664.1		678.9
Equity
Net investment in OB Personal Lines		277.8		308.2
Total liabilities and equity	$	941.9	$	987.1

See Notes to Carve-Out Financial Statements including Note 11—“Commitments and Contingencies.”

3

CARVE-OUT FINANCIAL STATEMENTS OF
ONEBEACON INSURANCE GROUP, LTD.’S TRADITIONAL PERSONAL LINES BUSINESS
CARVE-OUT STATEMENTS OF OPERATIONS

	Year ended December 31,
	2009			2008
	($ in millions)
Revenues
Earned premiums	$	467.2		$	512.9
Net investment income		11.5			12.4
Net realized and unrealized investment gains (losses)		14.7			(7.4	)
Allocated investment income (loss)		38.2			(66.4	)
Total revenues		531.6			451.5
Expenses
Loss and LAE		305.5			308.8
Policy acquisition expenses		83.5			105.0
Other underwriting expenses		61.6			61.1
General and administrative expenses		2.2			2.2
Total expenses		452.8			477.1
Pre-tax income (loss)		78.8			(25.6	)
Income tax (expense) benefit		(22.2	)		7.3
Net income (loss)	$	56.6		$	(18.3	)

See Notes to Carve-Out Financial Statements.

4

CARVE-OUT FINANCIAL STATEMENTS OF
ONEBEACON INSURANCE GROUP, LTD.’S TRADITIONAL PERSONAL LINES BUSINESS
CARVE-OUT STATEMENTS OF CHANGES IN EQUITY

	Net Investment in
	OB Personal Lines
	($ in millions)
Balance at January 1, 2008	$	317.0
Net loss		(18.3	)
Dividends		(5.4	)
Contribution to paid-in capital from OneBeacon		1.0
Other net contributions from OneBeacon		13.9
Balance at December 31, 2008		308.2
Net income		56.6
Dividends		(7.5	)
Other net distributions to OneBeacon		(79.5	)
Balance at December 31, 2009	$	277.8

See Notes to Carve-Out Financial Statements.

5

CARVE-OUT FINANCIAL STATEMENTS OF
ONEBEACON INSURANCE GROUP, LTD.’S TRADITIONAL PERSONAL LINES BUSINESS
CARVE-OUT STATEMENTS OF CASH FLOWS

	Year ended December 31,
	2009			2008
	($ in millions)
Cash flows from operations:
Net income (loss)	$	56.6		$	(18.3	)
Charges (credits) to reconcile net income (loss) to cash flows provided from (used for) operations:
Net realized and unrealized investment (gains) losses		(14.7	)		7.4
Deferred income tax expense (benefit)		0.1			2.7
Other operating items:
Net change in loss and LAE reserves		(10.5	)		(38.5	)
Net change in unearned premiums		(22.7	)		(9.5	)
Net change in ceded unearned premiums		(24.6	)		1.5
Net change in premiums receivable		12.3			3.5
Net change in reinsurance recoverable on paid and unpaid losses		(5.6	)		1.1
Net change in other assets and liabilities		46.8			(6.8	)
Net cash provided from (used for) operations		37.7			(56.9	)
Cash flows from investing activities:
Net maturities, purchases and sales of short-term investments		14.4			2.5
Maturities of fixed maturity investments		109.7			41.6
Sales of fixed maturity investments		48.7			54.7
Purchases of fixed maturity investments		(207.9	)		(135.1	)
Net change in allocated investment asset		80.3			86.8
Net cash provided from investing activities		45.2			50.5
Cash flows from financing activities:
Cash dividends paid to OneBeacon		(7.5	)		(5.4	)
Contributions to paid-in-capital from OneBeacon		—			1.0
Other net (distributions to) contributions from OneBeacon		(79.5	)		13.9
Net cash (used for) provided from financing activities		(87.0	)		9.5
Net (decrease) increase in cash during year		(4.1	)		3.1
Cash balance at beginning of year		6.9			3.8
Cash balance at end of year	$	2.8		$	6.9

See Notes to Carve-Out Financial Statements.

6

NOTES TO CARVE-OUT FINANCIAL STATEMENTS

NOTE 1. Nature of Operations and Summary of Significant Accounting Policies

     The accompanying carve-out financial statements include the historical accounts of the Traditional Personal Lines business (“OB Personal Lines”) of OneBeacon Insurance Group, Ltd. (“OB Ltd.”) and its subsidiaries (collectively, “OneBeacon”), which, as described below, is being sold to Tower Group, Inc. (“Tower”), and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). OB Ltd. is an exempted Bermuda limited liability company. White Mountains Insurance Group, Ltd. (“White Mountains”), an insurance holding company domiciled in Bermuda, indirectly owns 75.4% of OB Ltd.’s common shares.

     On February 2, 2010, OB Ltd. and certain of its subsidiaries entered into a definitive agreement to sell OB Personal Lines to Tower (the “PL Transaction”). The PL Transaction includes the execution of various reinsurance agreements and is subject to regulatory approval.

     OB Personal Lines provides a comprehensive suite of personal insurance products sold through select independent agents with a focus on eight Northeastern states. The personal lines products include automobile, homeowners and package. OB Personal Lines also includes management services provided to reciprocals insurance exchanges (“reciprocals”) and the inclusion of the reciprocals as described below and in Note 8.

     OB Personal Lines includes two insurance companies, York Insurance Company of Maine (“York”) and Massachusetts Homeland Insurance Company(“MHIC”), through which the majority of the personal lines business is written on a direct basis, and two attorneys-in-fact, Adirondack AIF, LLC (“AAIF”) and New Jersey Skylands Management LLC (“NJSM”), which provide management services for a fee to the reciprocals that write the personal lines business in New York and New Jersey, respectively, Adirondack Insurance Exchange (“AIE”) and New Jersey Skylands Insurance Association (“NJSIA”), and NJSIA’s wholly-owned subsidiary New Jersey Skylands Insurance Company (together ‘New Jersey Skylands Insurance”).

     Reciprocals are policyholder-owned insurance carriers organized as unincorporated associations. Each policyholder insured by the reciprocal shares risk with the other policyholders. Policyholders share profits and losses in the same proportion as the amount of insurance purchased but are not subject to assessment for net losses of the reciprocal.

     OneBeacon capitalized NJSIA and AIE by loaning funds to them in exchange for surplus notes. New Jersey Skylands Insurance was capitalized with a $31.3 million surplus note issued to The Camden Fire Insurance Association (“CFIA”), a subsidiary within OneBeacon, in 2002. CFIA also loaned $0.2 million to New Jersey Skylands Insurance in the form of a security deposit. New Jersey Skylands Insurance began writing personal automobile coverage for new customers in August 2002. In 2008, New Jersey Skylands Insurance began writing homeowners business. AIE was capitalized with a $70.7 million surplus note issued to Homeland Insurance Company of New York (“HONY”), a subsidiary within OneBeacon, in May 2006. AIE began writing personal automobile and homeowners business in August 2006. Principal and interest on the surplus notes are repayable to OneBeacon only with regulatory approval. The obligation to repay principal on the notes is subordinated to all other liabilities including obligations to policyholders and claimants for benefits under insurance policies. The surplus notes issued by NJSIA and AIE will be transferred to Tower as part of the PL Transaction.

Basis of presentation

     All significant intercompany transactions have been eliminated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

     OB Personal Lines is an integrated business of OneBeacon that has operated within the personal lines underwriting unit and not a stand-alone entity. The carve-out financial statements of OB Personal Lines reflect the historical assets, liabilities, revenues and expenses directly attributable to OB Personal Lines, as well as allocations deemed reasonable by management, to present the financial position, results of operations, changes in equity and cash flows of OB Personal Lines on a stand-alone basis. The allocation methodologies are described below. The financial information included herein may not necessarily reflect the financial position, results of operations, changes in equity and cash flows of the OB Personal Lines in the future or what they would have been had they been a separate, stand-alone entity during the periods presented.

7

Attributed Capital

     OneBeacon uses an internally developed economic capital model to allocate capital to each of its businesses. The capital model uses various financial inputs such as loss reserves, net written premium and other assets and liabilities of the business. Applied to these financial inputs are capital risk factors by respective line of business, such as automobile liability, automobile physical damage and homeowners, to determine capital deployed by each OneBeacon underwriting business. Management believes it is appropriate to allocate capital for inclusion in these carve-out financial statements consistent with how management plans, reports and evaluates capital for its respective businesses. For purposes of the carve-out financial statements, results of the OB Personal Lines business above these capital levels are presumed to be distributed to OneBeacon and results below these levels are presumed to be contributed from OneBeacon. Net investment in OB Personal Lines presented in the carve-out balance sheets and statements of changes in equity include discrete capital and retained earnings of the legal entities included in OB Personal Lines and allocated amounts as described herein. Allocated amounts are presented separate from historical capital contributions or distributions of the respective legal entities in the carve-out statements of changes in equity as other net contributions to or distributions from OneBeacon. The legal entities included in the carve-out financial statements paid dividends of $7.5 million and $5.4 million during the years ended December 31, 2009 and 2008, respectively.

Allocated Investment Asset

     These carve-out financial statements include discrete investments owned by the entities included in the PL Transaction. However, not all of the OB Personal Lines business is retained or written by the entities being sold as both York and MHIC are parties to a reinsurance agreement with an affiliate, OneBeacon Insurance Company (“OBIC”) pursuant to which they cede 100% of their respective direct business to OBIC. Further, management does not allocate investments to the underlying insurance operations. Therefore, cash and investments related to OB Personal Lines were generally not segregated but were co-mingled with other insurance company subsidiaries of OneBeacon. For purposes of the carve-out financial statements, OB Personal Lines recorded an allocated investment asset which represents a receivable from OneBeacon based on the capital attributed to support the OB Personal Lines’ business discussed above. The allocated investment asset and the related investment income or loss, which represents net investment income and net realized and unrealized investment gains and losses, are presented in the carve-out balance sheets, statements of operations and cash flows in a single line item. Investment income or loss related to the allocated investment asset was calculated using a rate of return consistent with those realized at OneBeacon for the periods presented.

Investments

     On January 1, 2008, OB Personal Lines adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, subsequently codified within Accounting Standards Codification (the “Codification” or “ASC”) 825, which allows companies to make an election, on an individual instrument basis, to report financial assets and liabilities at fair value. The election must be made at the inception of a transaction and may not be reversed. The election may also be made for existing financial assets and liabilities at the time of adoption. Unrealized gains and losses on assets or liabilities for which the fair value option has been elected are reported in revenues. Upon adoption, OB Personal Lines recorded an adjustment of $2.6 million to reclassify net unrealized gains, after tax, and net unrealized foreign currency translation gains, after tax, related to investments from accumulated other comprehensive income to opening retained earnings. Management believes that making the election results in reporting its investment results on a basis consistent with one of its operating principles, namely to manage investments for total return.

     In accordance with the election of the fair value option, OB Personal Lines classifies its portfolio of fixed maturity investments as trading securities. Trading securities are reported at fair value as of the balance sheet date as determined by quoted market prices when available. Realized and unrealized investment gains and losses on trading securities are reported pre-tax in revenues.

     Short-term investments consist of money market funds, certificates of deposit and other securities which, at the time of purchase, mature or become available for use within one year. Short-term investments are carried at amortized cost, which approximated fair value as of December 31, 2009 and 2008.

     On January 1, 2008, OB Personal Lines adopted SFAS No. 157, “Fair Value Measurements”, subsequently codified as ASC 820. ASC 820 provides a revised definition of fair value, establishes a framework for measuring fair value and expands financial statement disclosure requirements for fair value information. Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an “exit price”). ASC 820 establishes a fair value hierarchy that distinguishes between inputs based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (“unobservable inputs”). The fair value hierarchy prioritizes fair value

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measurements into three levels based on the nature of the inputs. Quoted prices in active markets for identical assets or liabilities have the highest priority (“Level 1”), followed by observable inputs other than quoted prices, including prices for similar but not identical assets or liabilities (“Level 2”) and unobservable inputs, including the reporting entity’s estimates of the assumptions that market participants would use, having the lowest priority (“Level 3”).

     OB Personal Lines uses brokers and outside pricing services to assist in determining fair values. For investments in active markets, OB Personal Lines uses the quoted market prices provided by the outside pricing services to determine fair value. The outside pricing services OB Personal Lines uses have indicated that they will only provide prices where observable inputs are available. In circumstances where quoted market prices are unavailable, OB Personal Lines utilizes fair value estimates based upon other observable inputs including matrix pricing, benchmark interest rates, market comparables and other relevant inputs. In circumstances where observable inputs are adjusted to reflect management’s best estimate of fair value, such fair value measurements are considered a lower level measurement in the fair value hierarchy.

     OB Personal Lines’ process to validate the market prices obtained from the outside pricing sources include, but is not limited to, periodic evaluation of model pricing methodologies and analytical reviews of certain prices. OB Personal Lines also periodically performs back-testing of selected sales activity to determine whether there are any significant differences between the market price used to value the security prior to sale and the actual sale price.

Securities Lending

     York and MHIC participated in a securities lending program as a mechanism for generating additional investment income on its fixed maturity and common equity portfolios. Under the securities lending arrangements, certain of its fixed maturity were loaned to other institutions for short periods of time through a lending agent. Management maintained control over the securities it loaned, retained the earnings and cash flows associated with the loaned securities and received a fee from the borrower for the temporary use of the asset. Collateral, in the form of cash and United States government securities, was required at a rate of 102% of the fair value of the loaned securities. An indemnification agreement with the lending agent protected York and MHIC in the event a borrower became insolvent or failed to return any of the securities on loan. In the event of a shortfall in the collateral amount required to be returned to the securities lending counterparty (e.g., as a result of investment losses), York and MHIC were obligated to make up any deficiency.

     In February 2009, York and MHIC amended the terms of the securities lending program to give it more control over the investment of borrowers’ collateral and to separate the assets supporting that collateral into a segregated account. Pursuant to the amendment, (i) the guidelines for the investment of any new cash collateral as well as the reinvestment of cash were narrowed to permit investment in only cash equivalent securities, (ii) York and MHIC had the authority to direct the lending agent to both sell specific collateral securities in the segregated account and to not sell certain collateral securities which the lending agent proposes to sell, and (iii) York, MHIC and the lending agent agreed to manage the securities lending program toward an orderly wind-down. In May 2009, York and MHIC instructed the lending agent not to make any additional loans of securities and to recall all of the securities on loan and fund the return of collateral to the borrower. As of December 31, 2009, all collateral had been returned to the borrower.

     Prior to February 2009, the collateral was controlled by the lending agent. The lending agent managed the investment of the cash collateral, however, other than in the event of default by the borrower, this collateral was not available to York and MHIC and was remitted to the borrower by the lending agent upon the return of the loaned securities. Because of these restrictions, York and MHIC considered its securities lending activities to be non-cash transactions. The fair value of the securities lending collateral was recorded as both an asset and liability on the balance sheet. At December 31, 2008, prior to the amendment of the terms of the securities lending program, the total market value of York’s and MHIC’s securities on loan was $4.1 million with corresponding collateral of $3.9 million. As a result of the actions described above, the securities lending assets are no longer segregated and are included within the investments of York and MHIC.

Cash

     Cash includes amounts on hand and demand deposits with banks and other financial institutions.

Insurance Operations

     OB Personal Lines accounts for insurance policies that it writes in accordance with SFAS No. 60, “Accounting and Reporting by Insurance Enterprises”, subsequently codified within ASC 944. Premiums written are recognized as revenues and are earned ratably over the term of the related policy. Unearned premiums represent the portion of premiums written that are applicable to future insurance coverage provided by policies.

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     Deferred acquisition costs include costs, such as commissions and premium taxes, which are directly attributable to and vary with the production of business. These costs are deferred and amortized over the applicable premium recognition period as policy acquisition expenses. Deferred acquisition costs are limited to the amount expected to be recovered from future earned premiums and anticipated investment income. This limitation is referred to as a premium deficiency. A premium deficiency is recognized if the sum of expected loss and loss adjustment expenses (“LAE”), unamortized acquisition costs, and maintenance costs exceeds related unearned premiums. A premium deficiency is recognized by charging any unamortized acquisition costs to expense to the extent required in order to eliminate the deficiency. If the premium deficiency exceeds unamortized acquisition costs then a liability is accrued for the excess deficiency. During the years ended December 31, 2009 and 2008, no deferred acquisition costs were charged to expense based on the determination of a premium deficiency.

     Loss and LAE are charged against income as incurred. Unpaid insurance loss and LAE are based on estimates (generally determined by claims adjusters, legal counsel and actuarial staff) of the ultimate costs of settling claims, including the effects of inflation and other societal and economic factors. Unpaid reinsurance loss and LAE are based primarily on reports received from ceding companies and actuarial projections. Unpaid loss and LAE reserves represent management’s best estimate of ultimate loss and LAE, net of estimated salvage and subrogation recoveries, if applicable. Such estimates are regularly reviewed and updated and any adjustments resulting there from are reflected in current operations. The process of estimating loss and LAE involves a considerable degree of judgment by management and the ultimate amount of expense to be incurred could be considerably greater than or less than the amounts currently reflected in the financial statements.

     OneBeacon enters into ceded reinsurance contracts from time to time to protect from losses due to concentration of risk, to manage its operating leverage ratios and to limit losses arising from catastrophic events. OB Personal Lines participates in certain of these reinsurance contracts. The majority of such reinsurance contracts are executed through excess of loss treaties and catastrophe contracts under which the reinsurer indemnifies for a specified part or all of certain types of losses over stipulated amounts arising from any one occurrence or event. OneBeacon has also entered into quota share treaties with reinsurers under which all risks meeting prescribed criteria are covered on a pro rata basis. The amount of each risk ceded by OneBeacon is subject to maximum limits which vary by line of business and type of coverage. Amounts related to reinsurance contracts are recorded in accordance with SFAS No. 113, “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts”, subsequently codified within ASC 944.

     Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies and recorded as an asset. The collectibility of reinsurance recoverables is subject to the solvency of the reinsurers. OneBeacon is selective in regard to its reinsurers, principally placing reinsurance with those reinsurers with strong financial condition, industry ratings and underwriting ability. Management monitors the financial condition and ratings of its reinsurers on an ongoing basis.

     Reinsurance premiums, commissions, expense reimbursements and reserves related to reinsured business are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums ceded to other companies are reported as a reduction of premiums written. Ceded unearned premiums are recorded as an asset. Expense allowances received in connection with reinsurance ceded have been accounted for as a reduction of the related policy acquisition costs and are deferred and amortized accordingly.

Accounting for Mandatory Shared Market Mechanisms

     As a condition to its licenses to do business in certain states, OB Personal Lines must participate in various mandatory shared market mechanisms commonly referred to as “residual” or “involuntary” markets. These markets generally consist of risks considered to be undesirable from a standard or routine underwriting perspective. Each state dictates the levels of insurance coverage that are mandatorily assigned to participating insurers within these markets. The total amount of such business an insurer must accept in a particular state is generally based on that insurer’s market share of voluntary business written within that state. In certain cases, OB Personal Lines is obligated to write business from shared market mechanisms at a future date based on its historical market share of all voluntary policies written within that state. Involuntary business generated from mandatory shared market mechanisms, which may be treated as assumed reinsurance depending on the structure of the mechanism, is accounted for in accordance with ASC 944.

     OB Personal Lines market assignments are typically required to be written in the current period, although, in certain cases OB Personal Lines is required to accept policy assignments at a future date. OB Personal Lines’ residual market assignments to be written in the future primarily relate to private passenger automobile assigned risk exposures within the State of New York where OB Personal Lines writes voluntary automobile insurance. The share of involuntary written premium for policies assigned by the NYAIP to a particular insurer in a given year is based on the proportion of the total voluntary writings in New York two years prior. Anticipated losses associated with future market assignments are recognized in accordance with SFAS No. 5, “Accounting for Contingencies”, subsequently codified within ASC 450, when the amount of such anticipated losses is determined to be probable and can be reasonably estimated.

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Accounting for Insurance Related Assessments

     Under existing guaranty fund laws in all states, insurers licensed to do business in those states can be assessed for certain obligations of insolvent insurance companies to policyholders and claimants. In accordance with Statement of Position (“SOP”) 97-3, “Accounting by Insurance and Other Enterprises for Insurance Related Assessments”, subsequently codified within ASC 405, OB Personal Lines records guaranty fund assessments when such assessments are billed by the respective guaranty funds. In addition, OB Personal Lines’ policy is to accrue for any significant insolvencies when the loss is probable and the assessment amount can be reasonably estimated.

Allocated Expenses

     OneBeacon holding companies, including OB Ltd., incur certain expenses for centralized and corporate services such as salaries and benefits of corporate executives, corporate accounting, regulatory compliance and other related services that either directly or indirectly benefit OB Personal Lines (“allocated expenses”). Expenses incurred by OneBeacon holding companies are reflected in general and administrative expenses in its financial statements. For purposes of the carve-out financial statements, management has ‘pushed down’ a best estimate of allocated expenses from OneBeacon holdings companies to OB Personal Lines based on what OB Personal Lines would have reasonably incurred if it had historically operated on a stand-alone basis. Management determined this allocation consistent with the allocation methodology followed during the OneBeacon financial close to allocate expenses incurred in centralized and corporate service areas that support insurance operations and are recognized within other underwriting expenses to the respective businesses. For the years ended December 31, 2009 and 2008, OB Personal Lines recognized $2.0 million and $2.2 million, respectively, of expenses related to centralized and corporate services for costs incurred at OneBeacon holdings companies.

Defined Benefit Plans

     In accordance with guidance within ASC 715 “Compensation — Retirement Plans”, OB Personal Lines has recorded its participation in OneBeacon-sponsored defined benefit plans as participation in multiemployer pension plans. See Note 6.

Income Taxes

     With the exception of the reciprocals, the OneBeacon companies file as members of a consolidated income tax return with affiliated companies pursuant to Internal Revenue Code Section 1502. The consolidated parent, which is not included in these financial statements, is OneBeacon U.S. Financial Services, Inc. (“OBFS”). Federal income tax expense is allocated between members of the consolidated group according to a written tax-sharing agreement. Pursuant to this agreement, each member’s tax is calculated as if it filed a separate tax return with the Internal Revenue Service (“IRS”). Payments and refunds are made to and received from the common parent company as if the parent were the IRS.

     The OB Personal Lines balance sheets and statements of operations reflect the current and deferred income taxes resulting from the application of ASC740 as if the legal entities and the business within OB Personal Lines were separate taxpayers. The taxes reflected in the carve-out financial statements have been calculated using the separate tax return basis pursuant to SAB Topic 1.B.1 and the tax sharing agreement that is currently in place. Permanent and temporary differences between book and tax amounts have been calculated based on historical differences applicable to the legal entities along with differences resulting from the allocation of an investment asset and execution of reinsurance agreements in relation to the carve-out.

     Deferred tax assets and liabilities are recorded when a difference between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for tax purposes exists, and for other temporary differences as defined by SFAS No. 109, “Accounting for Income Taxes”, subsequently codified as ASC 740. The deferred tax asset or liability is recorded based on tax rates expected to be in effect when the difference reverses. The deferred tax asset is recognized when it is more likely than not that it will be realized.

Variable Interest Entities

     OB Personal Lines records the reciprocals as defined above, in accordance with FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (“FIN 46R”), subsequently codified as ASC 810. ASC 810 addresses consolidation issues surrounding special purpose entities and certain other entities, collectively termed variable interest entities (“VIE”), to which previous accounting guidance on consolidation does not apply. A VIE is an entity in which the equity investors do not have the characteristics of a controlling interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Under ASC 810, the primary beneficiary of a VIE is required to consolidate the VIE in its financial statements. The primary beneficiary is an entity that has a variable interest that

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will absorb the majority of the VIE’s expected losses if they occur, receive a majority of the entity’s expected residual returns if they occur, or both. See Note 8.

     OneBeacon has no ownership interest in New Jersey Skylands Insurance or AIE. Under the provisions of ASC 810, management has determined that each of the reciprocals qualifies as a VIE. Further, management has determined that it is the primary beneficiary and accordingly, has included the two reciprocals in the carve-out financial statements.

Recently Adopted Changes in Accounting Principles

Accounting Standards Codification

     In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” which establishes the FASB Codification as the source of authoritative accounting principles to be applied in the preparation of financial statements in conformity with GAAP. Subsequently codified as ASC 105, the Codification is effective for interim and annual periods ending after September 15, 2009. All existing non-Securities and Exchange Commission (“SEC”) accounting and reporting were superseded by the Codification. OB Personal Lines adopted the Codification for the year ended December 31, 2009. Adoption had no effect on OB Personal Lines’ accounting policies or financial statement presentation. The Codification did change the basis for reference to authoritative GAAP guidance, and, accordingly, OB Personal Lines’ note disclosures reflect the references under Codification. New accounting guidance is issued by the FASB in the form of Accounting Standard Updates (“ASUs”). Accounting guidance that became effective prior to the adoption of Codification has been described using the original FASB reference with a reference to the principal Codification topic into which the guidance has been incorporated.

Fair Value Measurements

     On January 1, 2009, OB Personal Lines adopted FSP FAS 157-2, “Effective Date of FASB Statement No. 157”, subsequently codified within ASC 820. Fair value measurement under ASC 820 was delayed for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. OB Personal Lines adopted ASC 820 for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) as of January 1, 2008 with respect to its investments securities. Refer to Note 4 for the required disclosures related to investments. The adoption of ASC 820 with regard to nonfinancial assets and nonfinancial liabilities had no impact on OB Personal Lines’ financial position or results of operations.

Determining Fair Values in an Inactive Market and Distressed Transactions

     On June 30, 2009, OB Personal Lines adopted FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”, subsequently codified within ASC 820. ASC 820 provides guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased and on identifying circumstances that indicate a transaction is not orderly. Factors to consider include few recent transactions, price quotations that are not based on current information or which vary substantially over time or among market makers, a significant increase in implied liquidity risk premiums, yields, or performance indicators, a wide bid-ask spread, a significant decline or absence of a market for new issuances or limited information released publicly. A reporting entity should evaluate whether there has been a significant decrease in the volume and level of activity for the asset or liability when compared with normal activity for the asset or liability or similar assets or liabilities. If the reporting entity concludes that there has been a significant decrease in the volume and level of activity, transactions or quoted prices may not be determinative of fair value. Further analysis of the transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction. In addition, ASC 820 expands interim disclosures to require a description of the inputs and valuation techniques used to estimate fair value and a discussion of changes during the period. The adoption of ASC 820 had no material impact on OB Personal Lines’ financial position or results of operations.

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Subsequent Events

     On December 31, 2009, OB Personal Lines adopted SFAS No. 165, “Subsequent Events”, subsequently codified within ASC 855, which establishes principles and requirements for subsequent events. ASC 855 establishes the period after the balance sheet date during which management shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements; and the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date. Subsequent events that provide additional evidence about conditions that existed at the balance sheet date are to be recognized in the financial statements. Subsequent events that are conditions that arose after the balance sheet date but prior to the issuance of the financial statements are not recognized in the financial statements, but should be disclosed if failure to do so would render the financial statements misleading. ASC 855 requires disclosure of the date through which subsequent events have been evaluated. For subsequent events not recognized, disclosures should include a description of the nature of the event and either an estimate of its financial effect or a statement that such an estimate cannot be made. The adoption of ASC 855 had no impact on the recognition or disclosure of subsequent events. Management evaluated subsequent events up to April 15, 2010. See Note 13 for additional disclosures.

NOTE 2. Reserves for Unpaid Loss and LAE

     OB Personal Lines establishes loss and LAE reserves that are estimates of amounts needed to pay claims and related expenses in the future for insured events that have already occurred. The process of estimating reserves involves a considerable degree of judgment by management and, as of any given date, is inherently uncertain.

     Reserves are typically comprised of (1) case reserves for claims reported and (2) reserves for losses that have occurred but for which claims have not yet been reported, referred to as incurred but not reported (“IBNR”) reserves, which include a provision for expected future development on case reserves. Case reserves are estimated based on the experience and knowledge of claims staff regarding the nature and potential cost of each claim and are adjusted as additional information becomes known or payments are made. IBNR reserves are derived by subtracting paid loss and LAE and case reserves from estimates of ultimate loss and LAE. Actuaries estimate ultimate loss and LAE using various generally accepted actuarial methods applied to known losses and other relevant information. Like case reserves, IBNR reserves are adjusted as additional information becomes known or payments are made.

     Ultimate loss and LAE are generally determined by extrapolation of claim emergence and settlement patterns observed in the past that can reasonably be expected to persist into the future. In forecasting ultimate loss and LAE with respect to any line of business, past experience with respect to that line of business is the primary resource, but cannot be relied upon in isolation. OB Personal Lines’ own experience, particularly claims development experience, such as trends in case reserves, payments on and closings of claims, as well as changes in business mix and coverage limits, is the most important information for estimating its reserves. External data, available from organizations such as statistical bureaus, consulting firms and reinsurance companies, is sometimes used to supplement or corroborate OB Personal Lines own experience, and can be especially useful for estimating costs of new business.

     Uncertainties in estimating ultimate loss and LAE are magnified by the time lag between when a claim actually occurs and when it is reported and settled. This time lag is sometimes referred to as the “claim-tail”. The claim-tail for most property coverages is typically short (usually a few days up to a few months). The claim-tail for liability/casualty coverages, such as automobile liability, can be especially long as claims are often reported and ultimately paid or settled years, even decades, after the related loss events occur. During the long claims reporting and settlement period, additional facts regarding coverages written in prior accident years, as well as about actual claims and trends may become known and, as a result, OB Personal Lines may adjust its reserves. If management determines that an adjustment is appropriate, the adjustment is booked in the accounting period in which such determination is made in accordance with GAAP. Accordingly, should reserves need to be increased or decreased in the future from amounts currently established, future results of operations would be negatively or positively impacted, respectively.

     In determining ultimate loss and LAE, the cost to indemnify claimants, provide needed legal defense and other services for insureds and administer the investigation and adjustment of claims are considered. These claim costs are influenced by many factors that change over time, such as expanded coverage definitions as a result of new court decisions, inflation in costs to repair or replace damaged property, inflation in the cost of medical services and legislated changes in statutory benefits, as well as by the particular, unique facts that pertain to each claim. As a result, the rate at which claims arose in the past and the costs to settle them may not always be representative of what will occur in the future. The factors influencing changes in claim costs are often difficult to isolate or quantify and developments in paid and incurred losses from historical trends are frequently subject to multiple and conflicting interpretations. Changes in coverage terms or claims handling practices may also cause future experience and/or development patterns to vary from the past. A key objective of actuaries in developing estimates of ultimate loss and LAE, and resulting IBNR reserves, is to identify aberrations and systemic changes occurring within historical experience and

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accurately adjust for them so that the future can be projected reliably. Because of the factors previously discussed, this process requires the use of informed judgment and is inherently uncertain.

     OB Personal Lines’ actuaries use several generally accepted actuarial methods to evaluate its loss reserves, each of which has its own strengths and weaknesses. OB Personal Lines places more or less reliance on a particular method based on the facts and circumstances at the time the reserve estimates are made. These methods generally fall into one of the following categories or are hybrids of one or more of the following categories:

• Historical paid loss development methods: These methods use historical loss payments over discrete periods of time to estimate future losses. Historical paid loss development methods assume that the ratio of losses paid in one period to losses paid in an earlier period will remain constant. These methods necessarily assume that factors that have affected paid losses in the past, such as inflation or the effects of litigation, will remain constant in the future. Because historical paid loss development methods do not use case reserves to estimate ultimate losses, they can be more reliable than the other methods discussed below that look to case reserves (such as actuarial methods that use incurred losses) in situations where there are significant changes in how case reserves are established by a company’s claims adjusters. However, historical paid loss development methods are more leveraged, meaning that small changes in payments have a larger impact on estimates of ultimate losses, than actuarial methods that use incurred losses because cumulative loss payments take much longer to equal the expected ultimate losses than cumulative incurred amounts. In addition, and for similar reasons, historical paid loss development methods are often slow to react to situations when new or different factors arise than those that have affected paid losses in the past.

• Historical incurred loss development methods: These methods, like historical paid loss development methods, assume that the ratio of losses in one period to losses in an earlier period will remain constant in the future. However, instead of using paid losses, these methods use incurred losses (i.e., the sum of cumulative historical loss payments plus outstanding case reserves) over discrete periods of time to estimate future losses. Historical incurred loss development methods can be preferable to historical paid loss development methods because they explicitly take into account open cases and the claims adjusters’ evaluations of the cost to settle all known claims. However, historical incurred loss development methods necessarily assume that case reserving practices are consistently applied over time. Therefore, when there have been significant changes in how case reserves are established, using incurred loss data to project ultimate losses can be less reliable than other methods.

• Expected loss ratio methods: These methods are based on the assumption that ultimate losses vary proportionately with premiums. Expected loss ratios are typically developed based upon the information used in pricing, and are multiplied by the total amount of premiums written to calculate ultimate losses. Expected loss ratio methods are useful for estimating ultimate losses in the early years of long-tailed lines of business, when little or no paid or incurred loss information is available.

• Adjusted historical paid and incurred loss development methods: These methods take traditional historical paid and incurred loss development methods and adjust them for the estimated impact of changes from the past in factors such as inflation, the speed of claim payments or the adequacy of case reserves. Adjusted historical paid and incurred loss development methods are often more reliable methods of predicting ultimate losses in periods of significant change, provided the actuaries can develop methods to reasonably quantify the impact of changes.

     OB Personal Lines performs an actuarial review of its recorded reserves each quarter. OB Personal Lines’ actuaries compare the previous quarter’s estimates of paid loss and LAE, case reserves and IBNR to amounts indicated by actual experience. Differences between previous estimates and actual experience are evaluated to determine whether a given actuarial method for estimating loss and LAE should be relied upon to a greater or lesser extent than it had been in the past. While some variance is expected each quarter due to the inherent uncertainty in loss and LAE, persistent or large variances would indicate that prior assumptions and/or reliance on certain reserving methods may need to be revised going forward.

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Loss and LAE reserve summary

     The following table summarizes the loss and LAE reserve activities of OB Personal Lines for the years ended December 31, 2009 and 2008:

	Year ended
	December 31,
	2009		2008
	($ in millions)
Gross beginning balance	$	362.1	$	400.6
Less beginning reinsurance recoverable on unpaid losses		28.3		29.0
Net loss and LAE reserves		333.8		371.6
Loss and LAE incurred relating to:
Current year losses		297.4		315.2
Prior year losses		8.1		(6.4	)
Total incurred loss and LAE		305.5		308.8
Loss and LAE paid relating to:
Current year losses		180.2		185.7
Prior year losses		140.5		160.9
Total loss and LAE payments		320.7		346.6
Net ending balance		318.6		333.8
Plus ending reinsurance recoverable on unpaid losses		33.0		28.3
Gross ending balance	$	351.6	$	362.1

     In 2009, OB Personal Lines experienced $8.1 million of unfavorable loss and LAE reserve development on prior accident year loss reserves. The unfavorable loss reserve development was related to losses in both automobile and homeowners lines of business. In 2008, OB Personal Lines experienced $6.4 million of favorable loss and LAE reserve development on prior accident year loss reserves. The favorable loss reserve development was primarily related to automobile liability losses.

NOTE 3. Reinsurance

     In the normal course of its business, OneBeacon management purchases reinsurance from high-quality, highly rated third party reinsurers in order to minimize loss from large risks or catastrophic events. OB Personal Lines participated in certain of these reinsurance contracts and incurred premium charges proportionate to its risk profile for the respective reinsurance purchased by OneBeacon. OB Personal Lines remains liable for risks reinsured even if the reinsurer does not honor its obligations under reinsurance contracts. The effects of reinsurance on OB Personal Lines’ written and earned premiums and on loss and LAE were as follows:

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	Year ended
	December 31,
	2009			2008
	($ in millions)
Written premiums:
Direct(1)	$	520.5		$	555.4
Assumed (2)		(5.8	)		(0.9	)
Ceded(1)		(94.7	)		(49.4	)
Net written premiums	$	420.0		$	505.1
Earned premiums:
Direct	$	538.8		$	565.0
Assumed (2)		(1.4	)		(0.9	)
Ceded		(70.2	)		(51.2	)
Net earned premiums	$	467.2		$	512.9
Loss and LAE:
Direct	$	323.6		$	324.4
Assumed (2)		(1.5	)		(4.2	)
Ceded		(16.6	)		(11.4	)
Net loss and LAE	$	305.5		$	308.8

(1)	Includes policies written under a quota share agreement with a group of reinsurers to cede 30% of written premiums from OB Personal Lines’ Northeast homeowners business effective January 1, 2009, as described below.
(2)	Assumed balances are negative due to the effect of reductions in amounts reported by involuntary pools and associations in which OB Personal Lines participates.

     The timing and size of catastrophe losses are unpredictable and the level of losses experienced in any year could be material to OB Personal Lines operating results and financial position. Examples of catastrophes include losses caused by earthquakes, wildfires, hurricanes and other types of storms and terrorist acts. The extent of losses caused by catastrophes is a function of the amount and type of insured exposure in an area affected by the event as well as the severity of the event. Management continually assesses and implements programs to manage its exposure to catastrophe losses through individual risk selection and by limiting its concentration of insurance written in catastrophe-prone areas, such as coastal regions. In addition, management imposes wind deductibles on existing coastal windstorm exposures. OB Personal Lines’ largest single event natural catastrophe exposure is Northeastern United States windstorms.

     Management seeks to further reduce its potential loss from catastrophe exposures through the purchase of catastrophe reinsurance. Effective July 1, 2009, management renewed OneBeacon’s property catastrophe reinsurance program. The program provides coverage for OneBeacon’s personal and commercial property business as well as certain acts of terrorism. Under the program, the first $100 million of losses resulting from any single catastrophe are retained and the next $750 million of losses resulting from the catastrophe are reinsured. Any loss above $850 million would be retained. In the event of a catastrophe, this property catastrophe reinsurance program is reinstated for the remainder of the original contract term by paying a reinstatement premium that is based on the percentage of coverage reinstated and the original property catastrophe coverage premium. Effective April 1, 2009, New Jersey Skylands Insurance and AIE combined exposures and purchased coverage under a property catastrophe excess of loss reinsurance program. Under the program, the first $3 million of New Jersey Skylands Insurance losses and the first $10 million of AIE losses, resulting from any single catastrophe, are retained and all other losses up to $300 million resulting from the catastrophe are reinsured. Any loss above $300 million would be retained. This program has been extended to July 1, 2010.

     Effective January 1, 2009, OneBeacon entered into a quota share agreement with a group of reinsurers to cede 30% of written premiums from OB Personal Lines’ Northeast homeowners business. The program provides supplemental protection to previously established reinsurance. During the year ended December 31, 2009, OB Personal Lines ceded $59.9 million of written premiums under this quota share agreement. Effective January 1, 2010, OB Personal Lines renewed the quota share agreement.

     OneBeacon’s property catastrophe reinsurance program does not cover personal property losses resulting from nuclear events or biological, chemical or radiological terrorist attacks or losses resulting from acts of terrorism as defined under the Terrorism Risk Insurance Act of 2002, as amended, committed by an individual or individuals acting on behalf of any foreign person or foreign interest.

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     Reinsurance contracts do not relieve OB Personal Lines of its obligations.

NOTE 4. Investments

     As described in Note 1, these carve-out financial statements include discrete investments directly owned by the entities included in OB Personal Lines and an allocated investment asset. The presentation below is segregated for the directly owned and the allocated investment asset.

Directly Owned Investments

     OB Personal Lines’ net investment income is comprised primarily of interest income associated with fixed maturity investments and interest income from its short-term investments. Net investment income for the years ended December 31, 2009 and 2008 consisted of the following:

	Year ended
	December 31,
	2009			2008
	($ in millions)
Investment income:
Fixed maturity investments	$	11.8		$	11.5
Short-term investments		0.1			1.3
Gross investment income		11.9			12.8
Less investment expenses		(0.4	)		(0.4	)
Net investment income, pre-tax	$	11.5		$	12.4

     The composition of net realized investment gains (losses), a component of net realized and unrealized investment gains (losses), consisted of the following:

	Year ended
	December 31,
	2009			2008
	($ in millions)
Fixed maturity investments	$	1.3		$	(1.5	)
Net realized investment gains (losses), pre-tax		1.3			(1.5	)
Income taxes		(0.5	)		0.5
Net realized investment gains (losses), after tax	$	0.8		$	(1.0	)

     OB Personal Lines recognized gross realized investment gains of $3.9 million and $0.5 million and gross realized investment losses of $2.6 million and $2.0 million on sales on investment securities during the years ended December 31, 2009 and 2008, respectively.

     As of December 31, 2009 and 2008, OB Personal Lines did not have any accounts payable on unsettled investment purchases or accounts receivable on unsettled investment sales.

     The net changes in fair value of fixed maturity investments for the years ended December 31, 2009 and 2008 were $13.2 million and $(5.7) million, respectively, which include changes in net deferred gains and losses on sales of investments between the legal entities in OB Personal Lines and entities under White Mountains’ common control of $(0.2) and $(0.1) for the years ended December 31, 2009 and 2008, respectively. Net changes in fair value for the years ended December 31, 2009 and 2008 also included $0.2 million and $(0.2) million, respectively, related to OB Personal Lines’ securities lending program.

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     The cost or amortized cost, gross unrealized investment gains and losses, and carrying values of the OB Personal Lines’ fixed maturity investments as of December 31, 2009 and 2008 were as follows:

	December 31, 2009
	Cost or		Gross		Gross
	amortized		unrealized		unrealized			Carrying
	cost		gains		losses			value
	($ in millions)
U.S. Government and agency obligations	$	60.1	$	0.4	$	(0.1	)	$	60.4
Debt securities issued by industrial corporations		113.2		7.0		(0.3	)		119.9
Asset-backed securities		116.0		2.3		(0.5	)		117.8
Debt securities issued by foreign corporations		13.1		1.0		—			14.1
Total fixed maturity investments	$	302.4	$	10.7	$	(0.9	)	$	312.2

	December 31, 2008
	Cost or		Gross		Gross
	amortized		unrealized		unrealized			Carrying
	cost		gains		losses			value
	($ in millions)
U.S. Government and agency obligations	$	90.0	$	3.4	$	(0.3	)	$	93.1
Debt securities issued by industrial corporations		60.4		0.7		(3.6	)		57.5
Asset-backed securities		88.1		1.4		(4.5	)		85.0
Debt securities issued by foreign corporations		13.9		—		(0.8	)		13.1
Total fixed maturity investments	$	252.4	$	5.5	$	(9.2	)	$	248.7

     The cost or amortized cost and carrying value of OB Personal Lines’ fixed maturity investments at December 31, 2009 is presented below by contractual maturity. Actual maturities could differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.

	December 31, 2009
	Cost or
	amortized		Carrying
	cost		value
	($ in millions)
Due in one year or less	$	19.9	$	20.0
Due after one year through five years		155.8		163.4
Due after five years through ten years		9.2		9.6
Due after ten years		1.5		1.4
Asset-backed securities		116.0		117.8
Total	$	302.4	$	312.2

     Sales and maturities of investments, excluding short-term investments, totaled $158.4 million and $96.3 million for the years ended December 31, 2009 and 2008, respectively. There were no non-cash exchanges or involuntary sales of investment securities during the years ended December 31, 2009 or 2008.

     OB Personal Lines is required to maintain deposits with certain insurance regulatory agencies in order to maintain their insurance licenses. The fair value of such deposits totaled $4.5 million and $4.6 million as of December 31, 2009 and 2008, respectively.

Fair value measurements

     On January 1, 2008, OB Personal Lines adopted ASC 820 which provides a revised definition of fair value, establishes a framework for measuring fair value and expands financial statement disclosure requirements for fair value information. Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an “exit price”). ASC 820 establishes a fair value hierarchy that distinguishes between inputs based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (“unobservable inputs”). The fair value hierarchy in ASC 820 prioritizes fair value measurements into three levels based on the nature of the inputs as follows:

Level 1—Valuations based on quoted prices in active markets for identical assets;

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Level 2—Valuations based on observable inputs that do not meet the criteria for Level 1, including quoted prices in inactive markets and quoted prices in active markets for similar, but not identical instruments; and

Level 3—Valuations based on unobservable inputs.

     As of December 31, 2009 and 2008, approximately 100% and 99%, respectively, of the investment portfolio recorded at fair value was priced based upon observable inputs.

     Fair values for securities for which quoted prices are unavailable are estimated based upon reference to observable inputs other than quoted prices, such as benchmark interest rates, market comparables, broker quotes and other relevant observable inputs. In circumstances where observable inputs are adjusted to reflect management’s best estimate of fair value, such fair value measurements are considered a lower level measurement in the fair value hierarchy.

     The fair value measurements at December 31, 2009 and 2008 and their related inputs were as follows:

	Fair value at
	December 31, 2009		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
	($ in millions)
Fixed maturity investments:
U.S. Government and agency obligations	$	60.4	$	60.4	$	—	$	—
Debt securities issued by industrial corporations		119.9		—		119.9		—
Asset-backed securities		117.8		—		117.8		—
Debt securities issued by foreign corporations		14.1		—		14.1		—
Fixed maturity investments		312.2		60.4		251.8		—
Short-term investments		32.7		32.7		—		—
Total	$	344.9	$	93.1	$	251.8	$	—

	Fair value at
	December 31, 2008		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
	($ in millions)
Fixed maturity investments:
U.S. Government and agency obligations	$	93.1	$	39.5	$	53.6	$	—
Debt securities issued by industrial corporations		57.5		—		57.5		—
Asset-backed securities		85.0		—		84.4		0.6
Debt securities issued by foreign corporations		13.1		—		13.1		—
Fixed maturity investments		248.7		39.5		208.6		0.6
Short-term investments		47.1		47.1		—		—
Total	$	295.8	$	86.6	$	208.6	$	0.6

     The changes in Level 3 fair value measurements for fixed maturity investments for the year ended December 31, 2009 are as follows:

	Fixed Maturity
	Investments
	($ in millions)
Balance at January 1, 2009	$	0.6
Total net realized and unrealized gains (losses)		—
Purchases		—
Sales		(0.6	)
Transfers in		—
Transfers out		—
Balance at December 31, 2009	$	—

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Allocated Investment Asset

     As described above, these carve-out financial statements include discrete investments directly owned by the entities included in OB Personal Lines. However, not all business included in OB Personal Lines is retained or written by the legal entities included in OB Personal Lines as both York and MHIC are parties to a reinsurance agreement with an affiliate, OBIC pursuant to which they cede 100% of their respective direct business to OBIC. Further, management does not allocate investments to the underlying insurance operations. Therefore, cash and investments related to OB Personal Lines were generally not segregated but were co-mingled with other insurance company subsidiaries of OneBeacon. For purposes of these carve-out financial statements, OB Personal Lines recorded an allocated investment asset which represents a receivable from OneBeacon based on the capital attributed to support the OB Personal Lines’ business.

     Investment income or loss related to the allocated investment asset, which represent net investment income and net realized and unrealized investment gains and losses, was calculated using a rate of return consistent with those realized at OneBeacon for the periods presented. OneBeacon recognized gross returns of 9.9% and (13.5)%, respectively, for the years ended December 31, 2009 and 2008. Returns for the year ended December 31, 2008 exclude the impact of assets held to economically defease OneBeacon’s mandatorily redeemable preferred stock, which was redeemed in May 2008.

     The OneBeacon investment portfolio that generated the gross returns discussed above was comprised of the following types of investments as of December 31, 2009 and 2008:

	Asset Allocation at
	December 31,
	2009			2008
Fixed maturity investments:
U.S. Government and agency obligations		13.1	%		10.7	%
Debt securities issued by industrial corporations		33.3			22.8
Municipal obligations		0.1			0.1
Asset-backed securities		25.1			19.9
Foreign government obligations		0.7			1.0
Preferred stocks		1.8			1.5
Fixed maturity investments		74.1			56.0
Short-term investments		13.5			25.2
Common equity securities		4.6			7.3
Convertible bonds		4.2			6.3
Other investments		3.6			5.2
Total		100.0	%		100.0	%

NOTE 5. Income Taxes

     OneBeacon’s U.S. subsidiaries join in the filing of a federal consolidated tax return. The consolidated parent, OneBeacon U.S. Financial Services, Inc. (“OBFS”), formerly known as Fund American Financial Services Inc, is not included in these carve-out financial statements. For all years, the companies included within the U.S. consolidated tax return are parties to a tax sharing agreement, which provides that each company pays the amount of income taxes or estimated tax or receives refunds that it would have to make or be entitled to if it filed its own separate tax return. As a result, certain companies have made payments, and received refunds from the consolidated parent that are different than amounts payable to the Internal Revenue Service (“IRS”). The total income tax (expense) benefit for the years ended December 31, 2009 and 2008 consisted of the following:

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	Year ended
	December 31,
	2009			2008
	($ in millions)
Current tax (expense) benefit:
Federal	$	(22.1	)	$	10.0
State		—			—
Total current tax (expense) benefit		(22.1	)		10.0
Deferred tax (expense) benefit:
Federal		(0.1	)		(2.7	)
State		—			—
Total deferred tax (expense) benefit		(0.1	)		(2.7	)
Total income tax (expense) benefit	$	(22.2	)	$	7.3

     Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for tax purposes. An outline of the significant components of OB Personal Lines’ deferred tax assets and liabilities follows:

	December 31,
	2009			2008
	($ in millions)
Deferred income tax assets related to:
Unearned premiums	$	15.7		$	18.9
Discounting of loss and LAE reserves		9.0			8.7
Involuntary pool and guaranty fund accruals		1.9			1.3
Fixed assets		0.2			0.2
Investment basis differences		0.1			0.4
Net unrealized investment losses		—			1.4
Compensation and bonus accruals		0.1			0.4
Net operating loss and capital loss carryforwards		0.1			0.9
Total gross deferred income tax assets		27.1			32.2
Less valuation allowance		(6.9	)		(12.0	)
Total net deferred income tax assets		20.2			20.2
Deferred income tax liabilities related to:
Deferred acquisition costs		15.6			18.9
Net unrealized investment gains		3.4			—
Other items		0.2			0.2
Total deferred income tax liabilities		19.2			19.1
Net deferred tax asset	$	1.0		$	1.1

     At December 31, 2009 and 2008, a valuation allowance of $6.9 million and $12.0 million, respectively, was established for the net deferred tax assets of NJ Skylands and AIE, which each file their own income tax return. During 2009, based on profitable results and the weight of available positive and negative evidence, the full amount of AIE’s valuation allowance was released.

     Management believes that, based upon its prior earnings history, expected future earnings and capacity for carry-back of losses, it is more likely than not that the deferred tax asset balances (net of valuation allowance) carried at December 31, 2009 and 2008 will be realized.

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     A reconciliation of taxes calculated using the 35% U.S. statutory rate to the income tax (expense) benefit on pre-tax earnings follows:

	Year ended December 31,
	2009			2008
	($ in millions)
Tax (expense) benefit at the U.S. statutory rate	$	(27.5	)	$	9.0
Differences in taxes resulting from:
Tax exempt interest and dividends		0.2			0.5
Change in valuation allowance		5.1			(1.8	)
Other, net		—			(0.4	)
Total income tax (expense) benefit on pre-tax earnings	$	(22.2	)	$	7.3

     At December 31, 2009, there were capital loss carryforwards of $0.3 million, which will begin to expire in 2011, related to NJ Skylands, which files its own income tax return.

     On January 1, 2007, OB Personal Lines adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, subsequently codified within ASC 740, which prescribes when the benefit of a given tax position should be recognized and how it should be measured. Under the guidance, recognition is based upon whether or not a company determines that it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. In evaluating the more-likely-than-not recognition threshold, OB Personal Lines must presume that the tax position will be subject to examination by a taxing authority with full knowledge of all relevant information. If the recognition threshold is met, then the tax position is measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement. The adoption of ASC 740 had no effect on the operating results of OB Personal Lines. OB Personal Lines did not record a cumulative effect adjustment relating to the adoption of ASC 740.

     On November 18, 2009 the Internal Revenue Service (“IRS”) issued Coordinated Issue Paper (LMSB4-1109-041) on Margins and Other Unsubstantiated Additions to Insurance Company Reserves (“CIP”). The CIP provides instructions to IRS agents, but is not an official pronouncement of the law or the position of the IRS. The CIP states that the IRS will disallow any margin or other addition to unpaid losses to the extent it exceeds a fair and reasonable estimate. Management believes that the loss reserves as recorded represent a fair and reasonable estimate of the amount OB Personal Lines would be required to pay.

     OB Personal Lines classifies all interest and penalties on unrecognized tax benefits as part of income tax expense. During the years ended December 31, 2009 and 2008, OB Personal Lines did not recognize any interest expense or penalties for uncertain tax positions and has no balance of accrued interest or penalties at December 31, 2009 and 2008.

     With few exceptions, OneBeacon is no longer subject to U.S. federal, state or non-U.S. income tax examinations by tax authorities for years before 2005. On October 14, 2009, a settlement was reached with the IRS on the 2003 and 2004 federal tax exam, which resulted in an assessment of $24.9 million of additional tax, or a total assessment of $51.7 million including interest, withholding tax and utilization of tax credits. OneBeacon’s overall liability for tax assessments for 2003 and 2004 was limited due to the Tax Make Whole Agreement with White Mountains, which fixes the liability for these items at the amount recorded on OneBeacon’s books. OneBeacon recorded a tax benefit in the statement of operations of $15.5 million offset by a capital distribution of approximately $8.4 million, reflected in shareholders’ equity, which resulted in a net increase to book value of $7.1 million in the fourth quarter of 2009 from the settlement of the 2003 and 2004 tax examination. None of these adjustments related to OB Personal Lines.

     In October 2008, the IRS commenced examination of OneBeacon’s U.S. income tax returns for 2005 and 2006. As of December 31, 2009, the IRS has not proposed any significant adjustments to taxable income as a result of the 2005 and 2006 tax examination. It is possible that the 2005 and 2006 examination will conclude within the next 12 months. However, an estimate of the range of potential outcomes can not be made at this time. OneBeacon does not expect to receive any adjustments that would result in a material change to the financial position of OneBeacon or OB Personal Lines.

     Net cash payments for federal, state and non-U.S. income taxes, including tax sharing payments to related companies, totaled $4.9 million and $4.6 million for the years ended December 31, 2009 and 2008, respectively.

NOTE 6. Retirement Plans

     OB Personal Lines participates in OneBeacon-sponsored qualified and non-qualified, non-contributory, defined benefit pension plans (collectively the “Plans”). The Plans cover substantially all employees who were employed as of December 31,

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2001 and remain actively employed with OneBeacon. OneBeacon’s Plans were frozen and curtailed in the fourth quarter of 2002. The Plans no longer add new participants or increase benefits for existing participants, which effectively causes the projected benefit obligation to equal the accumulated benefit obligation. Non-vested plan participants continue to vest during their employment with OneBeacon. The benefits for the Plans are based primarily on years of service and employees’ compensation through December 31, 2002. Participants generally vest after five years of continuous service. OB Personal Lines recorded pension expense of $0.3 million for the year ended December 31, 2009. There was no pension expense recorded for the year ended December 31, 2008.

NOTE 7. Employee Share-Based Incentive Compensation Plans

     OB Personal Lines participates in OneBeacon’s share-based incentive compensation plans. OneBeacon’s share-based compensation plans consist of performance shares, stock options granted in connection with OB Ltd.’s initial public offering and restricted stock units. OneBeacon’s share-based compensation plans are designed to maximize shareholder value over long periods of time by aligning the financial interests of its management with those of its owners. Performance shares are payable only upon achievement of pre-defined business goals and are valued based on the market value of OB Ltd.’s common shares at the time awards are earned. See “Performance Shares” below. Performance shares are typically paid in cash, though, in some instances, they may be paid in common shares or may be deferred in accordance with the terms of one of the deferred compensation plans of OB Ltd.’s subsidiaries.

     OB Personal Lines records its share-based compensation in accordance with SFAS No. 123(R), “Share-Based Payment”, subsequently codified within ASC 718. ASC 718 applies to new grants of share-based awards, award modifications and the remaining portion of the fair value of the unvested awards. The unvested portion of OB Personal Lines performance share awards, as well as the stock options granted in connection with OB Ltd.’s initial public offering are subject to the fair value measurement and recognition requirements of ASC 718. OB Personal Lines expenses the full cost of all share-based compensation for its direct management personnel that participate in the respective plans and also its share of compensation expense for management personnel within centralized and corporate services that support the personal lines business. Compensation costs for centralized and corporate services are allocated to OB Personal Lines based on earned premiums.

OneBeacon Long-Term Incentive Plan (the “Incentive Plan”)

     The Incentive Plan provides for granting various types of share-based incentive awards including performance shares, performance units, options, share appreciation rights and restricted shares to certain key employees of OneBeacon. The Incentive Plan was adopted by OB Ltd.’s Board of Directors (the “Board”) in October 2006. In 2007, the Board and shareholders of OB Ltd. approved the 2007 OneBeacon Long-Term Incentive Plan (the “2007 Incentive Plan”). The 2007 Incentive Plan provides for all of the awards referenced above as well as restricted stock units. Awards are granted under the 2007 Incentive Plan.

Performance Shares and Performance Units

     Performance shares are conditional grants of a specified maximum number of OB Ltd. common shares or an equivalent amount of cash. In general, grants are earned, subject to the attainment of pre-specified performance goals, at the end of a three-year period or as otherwise determined by the Compensation Committee of the Board (the “Compensation Committee”) and are valued based on the market value of OB Ltd. common shares at the time awards are paid. Results that significantly exceed pre-specified targets can result in a performance share payout of up to 200% of granted shares whereas results significantly below target result in no payout. The value of OneBeacon’s performance shares is based upon the market price of an underlying OB Ltd. common share (“OB Performance Shares”).

     For awards granted in February 2007, the Compensation Committee defined growth in intrinsic business value per share (“GIBVPS”) to be a weighted measure comprised of growth in OneBeacon’s adjusted book value per share, underwriting return on equity and growth in OB Ltd.’s common price per share. The targeted performance goal for full payment of the outstanding performance shares granted during the year ended December 31, 2007 is the attainment of a GIBVPS of 13%. At a GIBVPS of 6% or less, no performance shares would be earned and at a GIBVPS of 20% or more, 200% of performance shares would be earned.

     For awards granted in February 2008, the Compensation Committee defined GIBVPS to be a weighted measure comprised of growth in OneBeacon’s adjusted book value per share and underwriting return on equity. The targeted performance goal for full payment of the outstanding performance shares granted during the year ended December 31, 2008 is the attainment of a GIBVPS of 11%. At a GIBVPS of 4% or less, no performance shares would be earned and at a GIBVPS of 18% or more, 200% of performance shares would be earned.

     For awards granted in February 2009, the Compensation Committee granted performance shares with a goal of OneBeacon growth in book value per share (“GBVPS”). The targeted performance goal for full payment of the outstanding

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performance shares granted during the year ended December 31, 2009 is the attainment of a GBVPS of 12%. At a GBVPS of 5% or less, no performance shares would be earned and at a GBVPS of 19% or more, 200% of performance shares would be earned.

     In February 2009, the Compensation Committee determined that it was appropriate to grant executive officers and senior management a mix of performance shares that are earned as OneBeacon’s book value per share grows and performance units that are earned as OneBeacon’s underlying insurance businesses perform against operational targets.

     Performance units represent the right to receive cash if specified performance goals are satisfied with respect to an award in a specified performance cycle. Performance units are payable upon completion of pre-defined business goals and are settled in cash. The total value earned by a participant with respect to an award of performance units is equal to $100, which is the value of each performance unit, multiplied by the number of performance units earned over the performance cycle.

     The number of performance units payable depends on OneBeacon’s adjusted economic GAAP combined ratio (“AECR”). With respect to the 2009-2011 performance cycle, target performance is the attainment of an AECR of 95%. At an AECR of 99% or more, 0% of the target number of performance units awarded will be payable, and at an AECR of 91% or less, 200% of the target number of performance units awarded will be payable.

     The following summarizes performance share activity for direct OB Personal Lines management personnel for OB Performance Shares for the years ended December 31, 2009 and 2008:

	December 31,
	2009					2008
	Target OB					Target OB
	Performance					Performance
	Shares			Accrued		Shares			Accrued
	outstanding			expense		outstanding			expense
				($ in millions)
Beginning of period		195,577		$	0.3		128,411		$	1.1
Payments and deferrals(1)(2)		(8,244	)		—		(14,427	)		(0.2	)
New awards		26,376			—		101,902			—
Forfeitures and net change in assumed forfeitures		744			—		(20,309	)		(0.1	)
Expense (income) recognized		—			1.2		—			(0.5	)
End of period		214,453		$	1.5		195,577		$	0.3

(1)	Performance share payments in 2009 for the 2007-2008 performance cycle were based upon a performance factor of 1.4%.
(2)	Performance share payments in 2008 for the 2007 performance cycle were based upon a performance factor of 63%.

     For the years ended December 31, 2009 and 2008, OB Personal Lines also recognized $0.9 million and $0.6 million, respectively, of performance unit expense related to direct OB Personal Lines management personnel. For the years ended December 31, 2009 and 2008, OB Personal Lines also recognized $1.5 million and $0.4 million, respectively, of allocated performance share and performance unit expense.

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     The following summarizes performance shares outstanding and accrued performance share expense for direct OB Personal Lines management personnel at December 31, 2009 for each performance cycle:

	Target OB
	Performance
	Shares			Accrued
	outstanding			expense
	($ in millions)
Performance cycle:
2007 - 2009		89,382		$	0.3
2008 - 2010		101,902			0.9
2009 - 2011		26,376			0.3
Sub-total		217,660			1.5
Assumed forfeitures		(3,207	)		—
Total at December 31, 2009		214,453		$	1.5

     If 100% of the outstanding performance shares had been vested on December 31, 2009, the total additional compensation cost to be recognized for direct OB Personal Lines management personnel would have been $1.0 million, based on current accrual factors (common share price and payout assumptions).

     All performance shares earned for the 2007-2008 and 2007 performance cycles were settled in cash or by deferral into certain non-qualified deferred compensation plans of OB Ltd.’s subsidiaries.

     At December 31, 2009, 26,376, 101,902 and 89,382 performance shares had been granted at target and remained outstanding for direct OB Personal Lines management personnel under the Incentive Plan for the performance periods 2009-2011, 2008-2010 and 2007-2009, respectively.

Stock Options

     At December 31, 2009, OB Personal Lines had 142,001 of OB Ltd. options outstanding for direct OB Personal Lines management personnel representing 0.1% of OB Ltd.’s common shares outstanding. These options were issued in November 2006 in connection with OB Ltd.’s initial public offering to certain key employees as a one-time incentive. The options vest in equal installments on each of the third, fourth and fifth anniversaries of their issuance. These options expire five and a half years from the anniversary of issuance. The fair value of each option award at grant date was estimated using a Black-Scholes option pricing model using an expected volatility assumption of 30.0%, a risk-free interest rate assumption of 4.6%, a forfeiture assumption of 5.0%, an expected dividend rate assumption of 3.4% and an expected term assumption of 5.5 years. The options originally had a per share exercise price of $30.00. On May 27, 2008, the Compensation Committee adjusted the exercise price to $27.97 as a result of OB Ltd.’s $2.03 per share special dividend paid in the first quarter of 2008. The compensation expense associated with the options and the incremental fair value of the award modification is being recognized ratably over the remaining period. The unrecognized compensation expense associated with the options as of December 31, 2009 is $0.2 million and is being recognized ratably over two years. OB Personal Lines recognized compensation expense of $0.1 million in connection with these options for direct OB Personal Lines management personnel in both of the years ended December 31, 2009 and 2008. OB Personal Lines also recognized allocated compensation expense of $0.3 million in connection with options issued to personnel in centralized and corporate service areas in each of the years ended December 31, 2009 and 2008.

     The following summarizes option activity for direct OB Personal Lines management personnel for the years ended December 31, 2009 and 2008:

	December 31,
	2009				2008
	Target OB				Target OB
	options		Accrued		options		Accrued
	outstanding		expense		outstanding		expense
			($ in millions)
Beginning of year		142,001	$	0.4		142,001	$	0.3
Forfeitures		—		—		—		—
Expense recognized		—		0.1		—		0.1
End of year		142,001	$	0.5		142,001	$	0.4

25

Restricted Stock Units

     The options granted in connection with OB Ltd.’s initial public offering did not include a mechanism in the options to reflect the contribution to total return from the regular quarterly dividend. As a result, on February 26, 2008, OB Ltd. granted 13,090 Restricted Stock Units (“RSUs”) to actively employed OB Personal Lines’ option holders. The RSUs vest one-third on each of November 9, 2009, 2010 and 2011 subject to, for each vesting tranche of units, various factors including but not limited to the attainment of growth of 4% per cycle in OneBeacon’s adjusted book value per share. Upon vesting, the RSUs will be mandatorily deferred into one of the non-qualified deferred compensation plans of OB Ltd.’s subsidiaries and will be paid out in 2012 in cash or shares at the discretion of the Compensation Committee. The expense associated with the RSUs is being recognized over the vesting period. For each of the years ended December 31, 2009 and 2008, OB Personal Lines recognized $0.1 million in expense. As of December 31, 2009, there were 13,090 RSUs outstanding for direct OB Personal Lines management personnel. OB Personal Lines also recognized $0.2 million and $0.1 million, respectively, of allocated expenses related to the RSUs for the years ended December 31, 2009 and 2008.

NOTE 8. Variable Interest Entities

     As described in Note 1, OneBeacon has capitalized two reciprocals, NJSIA and AIE, by loaning funds to them in exchange for surplus notes. At December 31, 2009 and 2008, consolidated amounts related to New Jersey Skylands Insurance included total assets of $134.3 million and $118.0 million, respectively, and total liabilities of $153.8 million and $139.3 million, respectively. At December 31, 2009, the net amount of capital at risk is equal to the surplus note of $31.3 million less the accumulated losses as of December 31, 2009 of $19.5 million which includes accrued interest on the surplus note of $21.3 million which eliminates in the carve-out financial statements.

     At December 31, 2009 and 2008, amounts related to AIE included total assets of $280.9 million and $250.3 million, respectively, and total liabilities of $281.7 million and $264.3 million, respectively. At December 31, 2009, the net amount of capital at risk is equal to the surplus note of $70.7 million less the accumulated losses as of December 31, 2009 of $0.8 million which includes accrued interest on the surplus note of $28.0 million which eliminates in the carve-out financial statements.

NOTE 9. Fair Value of Financial Instruments

     SFAS No. 107, “Disclosure about Fair Value of Financial Instruments”, subsequently codified within ASC 825, requires disclosure of fair value information of financial instruments. For certain financial instruments where quoted market prices are not available, other independent valuation techniques and assumptions are used. Because considerable judgment is used, these estimates are not necessarily indicative of amounts that could be realized in a current market exchange. Certain financial instruments are excluded from disclosure, including insurance contracts, other than financial guarantees and investment contracts. OB Personal Lines carries its financial instruments on its balance sheet at fair value.

NOTE 10. Related Party Disclosures

Investment Management Agreement with WM Advisors

     OneBeacon entered into an Investment Management Agreement with White Mountains Advisors LLC (the “Advisor”), a Delaware corporation ultimately wholly-owned by White Mountains, to act as discretionary adviser with respect to the invested assets of OneBeacon. Under this agreement, the Advisor provides investment management services, including the investment and reinvestment of OneBeacon’s invested assets. The fee for these services is paid on a quarterly basis at rates applied to OneBeacon’s investment portfolio. For the years ended December 31, 2009 and 2008, OB Personal Lines incurred $0.4 million and $0.3 million, respectively, for such services and at December 31, 2009 and 2008 had $0.1 million and $0.1 million, respectively, due to the Advisor.

Esurance Claims Administration Services

     Esurance Insurance Services, Inc., a subsidiary of White Mountains (“Esurance Insurance”), and NJSM entered into a Transition Services Agreement (the “Transition Services Agreement”) dated as of June 28, 2007 and a related Termination Agreement (the “Termination Agreement”) dated as of the same date. The Termination Agreement terminated a Claims Administration Agreement (the “Claims Administration Agreement”) dated as of February 1, 2005 between Esurance Insurance and NJSM pursuant to which NJSM had been providing claims administration services to Esurance Insurance in the State of New Jersey. Pursuant to the Transition Services Agreement, NJSM provided certain transition services to Esurance Insurance during the period from July 2, 2007 through May 2009. NJSM provided the following services to Esurance Insurance pursuant to the Transition Services Agreement: facilities and building services (cubicles, office furniture, common space, conference rooms,telecommunications equipment and services, building management services and mailroom services) and IT services (network

26

connections and voice and telecommunications services). For the years ended December 31, 2009 and 2008, Esurance Insurance paid NJSM $0.1 million and $0.3 million, respectively, under the Transition Services Agreement.

Esurance Insurance Claims Counsel Services

     From time to time, OneBeacon provides OB Personal Lines staff counsel services to Esurance Insurance. OB Personal Lines’ staff counsel defends Esurance Insurance policyholders when the policyholders are sued by third party tort plaintiffs arising from automobile accidents. The hourly cost of the staff counsels’ time is charged to Esurance Insurance. For each of the years ended December 31, 2009 and 2008, OB Personal Lines had billed Esurance Insurance $0.1 million for counsel services.

NOTE 11. Commitments and Contingencies

Assigned Risks

     As a condition of OneBeacon’s licenses to do business in certain states, it is required to participate in mandatory shared market mechanisms. Each state dictates the types of insurance and the level of coverage that must be provided. The total amount of such business an insurer is required to accept is based on its market share of voluntary business in the state. In certain cases, OB Personal Lines is obligated to write business from mandatory shared market mechanisms at some time in the future based on the market share of voluntary policies it is currently writing. Underwriting results related to assigned risk plans are typically adverse and are not subject to the predictability associated with OB Personal Lines’ voluntarily written business.

     Under existing guaranty fund laws in all states, insurers licensed to do business in those states can be assessed for certain obligations of insolvent insurance companies to policyholders and claimants. In accordance with ASC 405, OB Personal Lines records guaranty fund assessments when such assessments are billed by the respective guaranty funds. In addition, each insurance subsidiary’s policy is to accrue for any significant insolvencies when the loss is probable and the assessment amount can be reasonably estimated. The actual amount of such assessments will depend upon the final outcome of rehabilitation proceedings and will be paid over several years.

Legal Contingencies

     OB Personal Lines, and the insurance industry in general, is subject to litigation and arbitration in the normal course of business. OB Personal Lines is not a party to any material litigation or arbitration other than as routinely encountered in claims activity, none of which is expected by management to have a material adverse effect on OB Personal Lines’ financial condition and/or cash flows.

NOTE 12. Statutory Capital and Surplus

     OneBeacon’s insurance operations are subject to regulation and supervision in each of the jurisdictions where they are domiciled and licensed to conduct business. Generally, regulatory authorities have broad supervisory and administrative powers over such matters as licenses, standards of solvency, premium rates, policy forms, investments, security deposits, methods of accounting, form and content of financial statements, reserves for unpaid loss and LAE, reinsurance, minimum capital and surplus requirements, dividends and other distributions to shareholders, periodic examinations and annual and other report filings. In general, such regulation is for the protection of policyholders rather than shareholders. Over the last several years most states have implemented laws that establish standards for current, as well as continued, state accreditation. In addition, the National Association of Insurance Commissioners uses risk-based capital (“RBC”) standards for property and casualty insurers as a means of monitoring certain aspects affecting the overall financial condition of insurance companies. At December 31, 2009, the regulated legal entities included in OB Personal Lines met their respective RBC requirements.

NOTE 13. Subsequent Events

     Management has evaluated events subsequent to the balance sheet date through April 15, 2010, which is the date these carve-out financial statements were issued, and has determined that except as set forth below there are no subsequent events requiring disclosure under ASC 855. As described in Note 1, On February 2, 2010, OB Ltd. and certain of its subsidiaries entered into a definitive agreement to sell OB Personal Lines to Tower. The PL Transaction also includes the execution of various reinsurance agreements and is subject to regulatory approval. During the three months ended March 31, 2010, OB Personal Lines incurred $12.5 million of current accident year catastrophe losses related to storms in the Northeastern United States.

27

EX-99.4

Exhibit 99.4

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma condensed consolidated financial statements are based on the historical financial statements of Tower Group, Inc.(“Tower”), and OneBeacon Personal Lines Division (“OBPL”), after giving effect to the acquisition of OBPL, which was consummated on July 1, 2010.

The unaudited pro forma condensed consolidated financial information gives effect to the acquisition as if it had occurred (i) on June 30, 2010 for the purposes of the unaudited pro forma condensed consolidated balance sheet as of June 30, 2010 and (ii) on January 1, 2009 for the purposes of the unaudited pro forma condensed consolidated statements of income for the year ended December 31, 2009 and for the six months ended June 30, 2010. The unaudited pro forma condensed consolidated financial information has been prepared by and is the responsibility of Tower’s management. Certain amounts from OBPL’s historical carve-out financial statements have been reclassified to conform to Tower’s presentation.

The unaudited pro forma condensed consolidated financial statements have been prepared for illustrative purposes only and are not necessarily indicative of the financial condition or results of operations of future periods or the financial condition or results of operations that actually would have been realized had the entities been a single entity as of or for the periods presented. The unaudited pro forma condensed consolidated financial information should be read together with the historical financial statements and related notes of Tower, which has been filed with the SEC and OBPL which are included as an exhibit herewith.

1

Tower Group, Inc.
Unaudited Condensed Consolidated Pro Forma Balance Sheet
June 30, 2010

					Pro
	Historical				Forma					Pro Forma
($ in millions)	Tower		OBPL		Adjs.			Notes		Combined
Assets
Investments
Fixed maturities & equity securities	$	1,722.6	$	314.3	$	—				$	2,036.9
Short-term investments				322.5		(109.5	)		3		213.0
Total investments		1,722.6		636.8		(109.5	)				2,249.9
Cash		348.5		9.1		(166.6	)		2		191.0
Investment income receivable		19.4		—		—					19.4
Premiums receivable		308.8		105.1		—					413.9
Reinsurance recoverable		252.7		41.2		14.6			12		308.5
Prepaid reinsurance premiums		67.9		27.4		0.4			12		95.7
Deferred acquisition costs, net		183.7		41.7		(41.7	)		5
						41.8			5		225.5
Deferred income taxes		25.0		1.9		(16.5	)		3,9		10.4
Intangible assets		50.7		—		65.8			4		116.5
Goodwill		243.7		—		5.5			4,11		249.2
Fixed assets, net		79.4		—		—					79.4
Investment in subsidiaries		—		—		166.6			2
						(166.6	)		7		—
Other assets		77.7		0.1		—					77.8
Total assets	$	3,380.1	$	863.3	$	(206.2	)			$	4,037.2
Liabilities
Loss and loss adjustment expenses	$	1,188.4	$	346.2	$	41.4			6
						14.6			12	$	1,590.6
Unearned premium		631.1		235.9		0.4			12		867.4
Reinsurance balances payable		48.7		6.0		—					54.7
Funds held under reinsurance agreements		69.3		—		—					69.3
Other liabilities		81.6		28.8		(16.2	)		3		94.2
Debt		291.1		—		—					291.1
Total liabilities		2,310.2		616.9		40.2					2,967.3
Stockholders’ equity		1,069.9		246.4		(101.3	)		3
						(145.1	)		7		1,069.9
Total stockholders’ equity attributable to Tower Group, Inc.		1,069.9		246.4		(246.4	)				1,069.9
Total liabilities and stockholders’ equity	$	3,380.1	$	863.3	$	(206.2	)			$	4,037.2

See “Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements” below.

2

Tower Group, Inc.
Unaudited Condensed Consolidated Pro Forma Statement of Income
Six Months Ended June 30, 2010
(in millions, except per share amounts)

												Tower/
							Pro					OBPL
	Historical						Forma					Pro Forma
	Tower			OBPL			Adjs.			Notes		Combined
Revenues
Net premiums earned	$	541.0		$	200.9		$	—				$	741.9
Ceding commission revenue		18.6			—			—					18.6
Insurance services revenue		0.8			—			—					0.8
Policy billing fees		1.8			—			—					1.8
Net investment income		47.2			2.3			—					49.5
Allocated investment income		—			7.0			(7.0	)		3		—
Net realized gain (losses)
Other-than-temporary impairments		(9.0	)		—			—					(9.0	)
Portion of loss recognized in other comprehensive income (loss)		5.7			—			—					5.7
Other net realized investment gains (losses)		9.2			12.4			—					21.6
Change in unrealized investment gains		—			(9.9	)		9.9			3		—
Total net realized investment gains (losses)		5.9			2.5			9.9					18.3
Total revenues		615.3			212.7			2.9					830.9
Expenses
Loss and loss adjustment expenses		329.2			151.9			(2.7	)		6		478.4
Underwriting expenses		206.6			67.2			0.5			4		274.3
Acquisition-related transaction costs		1.3			—			(1.3	)		8		—
Interest expense		10.1			—			—					10.1
Total expenses		547.2			219.1			(3.5	)				762.8
Other Income (expense)
Other		(0.5	)		(0.6	)		—					(1.1	)
Income before income taxes		67.6			(7.0	)		6.4					67.0
Income tax expense (benefit)		21.9			3.8			—					25.7
Net income (loss)		45.7			(10.8	)		6.4					41.3
Less: Net income (loss) attributable to noncontrolling interests		—			—			(9.2	)		10		(9.2	)
Net income (loss) available to Tower Group, Inc.’s common stockholders	$	45.7		$	(10.8	)	$	15.6				$	50.5
Basic and diluted earnings per share
Basic	$	1.02										$	1.13
Diluted	$	1.02										$	1.12
Weighted average common shares outstanding
Basic		44.7											44.7
Diluted		44.9											44.9

See “Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements” below.

3

Tower Group, Inc.
Unaudited Condensed Consolidated Pro Forma Statement of Income
Year Ended December 31, 2009
(in millions, except per share amounts)

				Pro Forma
				Adjustments-														Tower/
				CastlePoint,									Pro					OBPL
	Historical			Hermitage			Pro Forma						Forma					Pro Forma
	Tower			and SUA (a)			Combined			OBPL			Adjs.			Notes		Combined
Revenues
Net premiums earned	$	854.7		$	182.2		$	1,036.9		$	467.2		$	—				$	1,504.1
Ceding commission revenue		43.9			(6.2	)		37.7			—			—					37.7
Insurance services revenue		5.1			(5.1	)		—			—			—					—
Policy billing fees		3.0						3.0			—			—					3.0
Net investment income		74.9			12.2			87.1			11.5			—					98.6
Allocated investment income		—			—			—			38.2			(38.2	)		3		—
Net realized gain (losses)
Other-than-temporary impairments		(44.2	)		—			(44.2	)		—			—					(44.2	)
Portion of loss recognized in other comprehensive income (loss)		20.7			—			20.7			—			—					20.7
Other net realized investment gains (losses)		25.0			(1.4	)		23.6			1.3			—					24.9
Change in unrealized investment gains		—			—			—			13.4			(13.4	)		3		—
Total net realized investment gains (losses)		1.5			(1.4	)		0.1			14.7			(13.4	)				1.4
Total revenues		983.1			181.7			1,164.8			531.6			(51.6	)				1,644.8
Expenses
Loss and loss adjustment expenses		475.5			121.4			596.9			305.5			(5.1	)		6		897.3
Underwriting expenses		334.4			57.4			391.8			145.2			1.1			4
														0.1			5		538.2
Acquisition-related transaction costs		14.0			—			14.0			—			(14.0	)		8		—
Interest expense		18.1			—			18.1			—			—					18.1
Total expenses		842.0			178.8			1,020.8			450.7			(17.9	)				1,453.6
Other Income (expense)
Equity income in unconsolidated affiliate		(0.8	)		0.8			—			—			—					—
Gain on investment in acquired unconsolidated affiliate		7.4			(7.4	)		—			—			—					—
Gain on bargain purchase		13.2			(13.2	)		—			—			—					—
Other		—			—			—			(2.2	)		—					(2.2	)
Income before income taxes		160.9			(16.9	)		144.0			78.7			(33.7	)				189.0
Income tax expense (benefit)		51.6			(1.2	)		50.4			22.2			(19.3	)		9		53.3
Net income (loss)		109.3			(15.7	)		93.6			56.5			(14.4	)				135.7
Less: Net income (loss) attributable to noncontrolling interests		—			—			—			—			9.3			10		9.3
Net income (loss) available to Tower Group, Inc.’s common stockholders	$	109.3		$	(15.7	)	$	93.6		$	56.5		$	(23.7	)			$	126.4
Basic and diluted earnings per share
Basic	$	2.78					$	2.29										$	3.21
Diluted	$	2.76					$	2.27										$	3.19
Weighted average common shares outstanding
Basic		39.4					$	40.9											39.4
Diluted		39.6					$	41.1											39.6

(a) The pro forma adjustments are made to reflect the results of operations of CastlePoint, Hermitage and SUA assuming their acquisition by Tower had occurred on January 1, 2009. Certain one-time charges were excluded from the pro forma results including, (i) transaction costs of $11.4 million, $3.6 million and $2.7 million, respectively, related to the acquisitions of CastlePoint, Hermitage and SUA, (ii) CastlePoint’s severance expenses of $2.0 million (iii) Tower’s gain of $7.4 million related to the acquisition of CastlePoint, and (iv) Tower’s gain on bargain purchase of $13.2 million related to the acquisition of SUA.

See “Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements” below.

4

Tower Group, Inc.

Notes to Unaudited Pro forma Condensed Consolidated Financial Statements

1. Basis of Presentation

The unaudited pro forma condensed consolidated financial information gives effect to the acquisition of OBPL as if it had occurred (i) on June 30, 2010 for the purposes of the unaudited pro forma condensed consolidated balance sheet and (ii) on January 1, 2009 for the purposes of the unaudited pro forma condensed consolidated statements of income for the year ended December 31, 2009 and for the six months ended June 30, 2010. The unaudited pro forma condensed consolidated statements of income for the year ended December 31, 2009 give effect to the acquisitions of CastlePoint Holdings, Ltd. (“CastlePoint”), Hermitage Insurance Company (“Hermitage”) and Specialty Underwriters’ Alliance (“SUA”), which were completed on February 5, 2009, February 27, 2009 and November 13, 2009, respectively, as if they had occurred on January 1, 2009. The unaudited pro forma condensed consolidated financial information has been prepared by Tower’s management. Certain amounts from OBPL’s historical consolidated financial statements have been reclassified to conform to Tower’s presentation.

General

This unaudited pro forma condensed consolidated financial information has been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”). The unaudited pro forma condensed consolidated balance sheet as of June 30, 2010 and the unaudited pro forma condensed consolidated statements of income for the year ended December 31, 2009 and the six months ended June 30, 2010 have been prepared using the following information:

• Unaudited historical consolidated financial statements of Tower as of June 30, 2010 and for the six months ended June 30, 2010;

• Unaudited historical carve-out financial statements of OBPL as of June 30, 2010 and for the six months ended June 30, 2010;

• Unaudited historical financial statements for CastlePoint, Hermitage and SUA for the period from January 1, 2009 through their respective acquisition dates;

• Audited historical consolidated financial statements of Tower for the year ended December 31, 2009;

• Audited historical carve-out financial statements of OBPL for the year ended December 31, 2009;

• Such other supplementary information as considered necessary to reflect the proposed acquisition in the unaudited pro forma condensed consolidated financial information.

The pro forma adjustments reflecting the acquisition of OBPL by Tower are based on certain estimates and assumptions. The unaudited pro forma adjustments may be revised as additional information becomes available. The actual adjustments and the allocation of the final purchase price of OBPL will depend on a number of factors, including additional financial information available at such time. Therefore, the actual adjustments will differ from the pro forma adjustments and it is possible that the differences may be material. Tower’s management believes that its assumptions provide a reasonable basis for presenting all of the significant effects of the transactions contemplated and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed consolidated financial information.

The unaudited pro forma condensed consolidated financial information does not include financial benefits or expenses from operating expense efficiencies or revenue enhancements arising from the acquisition of OBPL and the acquisitions of CastlePoint, Hermitage and SUA by Tower nor does the unaudited pro forma condensed consolidated financial information include the portion of restructuring and integration costs to be incurred by Tower, CastlePoint, Hermitage, SUA and OBPL.

The unaudited pro forma condensed consolidated financial information is not intended to reflect the results of operations or the financial position that would have resulted had the acquisitions of OBPL, CastlePoint, Hermitage and SUA by Tower been effected on the dates indicated and if the companies had been managed as one entity. The unaudited pro forma condensed consolidated financial information should be read in conjunction with the historical consolidated financial statements of Tower included in Tower’s Annual Report on Form 10-K for the year ended December 31, 2009 and Quarterly Report on Form 10-Q for the quarter and six months ended June 30, 2010 and the historical carve-out financial statements of OBPL included as an Exhibit to this Current Report on Form 8-K.

2. Purchase Price and Related Considerations

On July 1, 2010, Tower completed the acquisition of OBPL from OneBeacon Insurance Group, Ltd. (“OneBeacon”), pursuant to the definitive agreement (“the Purchase Agreement”), dated as of February 2, 2010, by and among Tower and OneBeacon.

Under the terms of the Agreement, the Company acquired Massachusetts Homeland Insurance Company (“Homeland”), York Insurance Company of Maine (“York”) and two management companies (together the “Stock Companies”). The management companies are the attorneys-in-fact for Adirondack Insurance Exchange, a New York reciprocal insurer, and New Jersey

5

Tower Group, Inc.

Notes to Unaudited Pro forma Condensed Consolidated Financial Statements

Skylands Insurance Association, a New Jersey reciprocal insurer (collectively, the “Reciprocals”). In addition, Tower purchased from OneBeacon $102 million principal of surplus notes issued by the Reciprocals (the “Surplus Notes”). The total consideration for this acquisition was $167 million.

Tower will consolidate OBPL as of July 1, 2010 and the purchase consideration will be allocated to the assets acquired and liabilities assumed, including separately identified intangible assets, based on their fair values as of the close of the acquisition. Direct costs of the acquisition are accounted for separately from the business combination and are expensed as incurred. As the values of certain assets and liabilities are preliminary in nature, they are subject to adjustment as additional information is obtained, including, but not limited to, valuation of separately identifiable intangibles, fixed assets, deferred taxes and loss reserves. The valuations will be finalized within 12 months of the close of the acquisition. When the valuations are finalized, any changes to the preliminary valuation of assets acquired or liabilities assumed may result in adjustments to separately identifiable intangible assets and goodwill.

The accompanying unaudited pro forma condensed consolidated financial statements include the results of the Reciprocals because Tower has determined that the Reciprocals qualify as variable interest entities and that Tower is the primary beneficiary due to its investment in the Surplus Notes and Tower’s ability to direct the activities of the Reciprocals through the management companies. Accordingly, the Reciprocals are consolidated in the accompanying pro forma financial statements for the periods presented.

For a complete description of the acquisition, refer to the Purchase Agreement, which was attached as Exhibit 2.1 to the Current Report on Form 8-K, filed on February 3, 2010, and is incorporated herein by reference.

For purposes of presentation in the unaudited pro forma condensed consolidated financial information, the allocation of the purchase consideration is assumed to be as follows:

($ in thousands)
Purchase Consideration
Purchase price paid in cash	$	166,566
Total purchase consideration		166,566
Allocation of Purchase Consideration
Total assets		863,269
Total liabilities		(616,827	)
Effect of reversing carve-out adjustments		(101,302	)
Estimated fair value adjustments, net of taxes of ($8,575)		15,925
Estimated fair value of net assets acquired		161,065
Goodwill	$	5,501

The purchase price is allocated to balance sheet assets acquired (including identifiable intangible assets arising from the merger) and liabilities assumed based on their estimated fair value. The fair value adjustments to the OBPL historical consolidated balance sheet in connection with the merger are described in the Notes below.

3. In connection with the preparation of the carve-out financial statements, OneBeacon management allocated capital consistent with the way it planned, reported and evaluated capital for its respective businesses. This allocation was based on their internally developed economic capital model that allocated capital to each of its businesses. Allocated capital and the investment assets associated with the allocated capital, allocated investment income or loss, and associated current and deferred taxes were removed from the pro forma balance sheets and statements of operations, since they are not part of the assets acquired or liabilities assumed in the acquisition and cash and other short term investments to support the liabilities were transferred to Tower. In addition, certain adjustments were made to conform OBPL accounting policies to those used by Tower.

4. Identifiable intangible assets and their amortization periods are, as follows:

	Amount		Amortization
Description	(in millions)		Period (in years)
Management contract	$	54.6	Indefinite
Distribution network		7.3		10
Trademark and name		2.6		5 - 10
Insurance licenses		1.3	Indefinite
Total	$	65.8

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Tower Group, Inc.

Notes to Unaudited Pro forma Condensed Consolidated Financial Statements

     All intangible assets and goodwill will be tested for impairment whenever events or change in circumstances indicate that a carrying amount may be impaired. In addition, indefinite lived intangible assets and goodwill will be subject to an impairment test at least annually. The pro forma statements of income reflect amortization expense for intangibles of $0.6 million for the six months ended June 30, 2010 and $1.1 million for the year ended December 31, 2009.

5. Deferred acquisition costs (“DAC”), which includes the value of business acquired (“VOBA”) increased by $0.1 million. The valuation for the policies that were in force on the acquisition date has been determined by using a cash flow model rather than an observable market price, as a liquid market for valuing the in force business could not be determined. The valuation model uses an estimate of the expected underwriting profit and the net nominal future cash flows associated with the in force policies that a market participant would expect as of the date of the acquisition. The fair value of the VOBA recorded on June 30, 2010 was $41.8 million and replaced OBPL’s carried DAC of $41.7 million as part of the business combination adjustments. The fair value adjustment will be amortized in proportion to the timing of the expected underwriting profit associated with the in force policies acquired. The cash flow or interest component of the VOBA asset will be amortized in proportion to the expected underwriting profit associated with the in force policies acquired. The amortization will be reflected as a component of underwriting expenses. As a result of this business combination adjustment, the Company’s pro forma underwriting expenses increased by $0.1 million for the year ended December 31, 2009.

6. The fair value of the loss and LAE reserves increased by $41.4 million as a result of the required fair value adjustment on loss and LAE reserves. This valuation has been determined by using a cash flow model rather than an observable market price as a liquid market for such underwriting liabilities could not be determined. The valuation model uses an estimate of net nominal future cash flows related to liabilities for losses and LAE that a market participant would expect as of the closing date. These future cash flows are adjusted for the time value of money at a risk free rate and a risk margin to compensate an acquirer for bearing the risk associated with the liabilities. The risk premium component of the fair value adjustment for loss and LAE reserves of $11.7 million will be amortized over the loss and LAE payout pattern and reflected as a component of loss and LAE incurred. The pro forma statements of income reflect the amortization of the fair value adjustments of $2.7 million for the six months ended June 30, 2010 and $5.1 million for the year ended December 31, 2009.

7. This amount reflects elimination of OBPL’s historical equity balances.

8. For pro forma purposes, acquisition-related transaction costs incurred by Tower were reversed since they are of a non-recurring nature.

9. Deferred taxes and income tax expense were adjusted to reflect the effects of the purchase GAAP accounting entries.

10. Net income (loss) attributable to noncontrolling interests represents the net income (loss) for the Reciprocals and is presented separately as required under GAAP to arrive at net income available to Tower Group Inc.’s common stockholders.

11. Goodwill increased by $5.5 million and represents the excess of the purchase price over the estimated fair value of net assets and liabilities acquired. Final purchase accounting adjustments may differ from the unaudited pro forma adjustments presented herein.

12. These balances were adjusted to reflect the commercial insurance business written in the OBPL entities which was simultaneously reinsured back to OneBeacon Insurance Group.

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