8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

January 11, 2007

Date of Report

(Date of earliest event reported)

TOWER GROUP, INC.

(Exact name of registrant as specified in its charter)

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

120 Broadway, 31st Floor,
New York, NY	10271
(Address of principal executive offices)	(Zip Code)

(212) 655-2000

(Registrant’s telephone number, including area code)

N/A

(Former Name or Former Address, if Changed Since Last Report)

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 1.01. Entry into a Material Definitive Agreement

On January 11, 2007, Tower Group, Inc. (the “Company”) and CastlePoint Management Corp. (“CastlePoint Management”) entered into an agreement (the “Exchange Agreement”) pursuant to which Tower issued to CastlePoint Management 40,000 shares of a new series of preferred stock, Series A-1 Preferred Stock, in exchange for the 40,000 shares of Series A Preferred Stock held by CastlePoint Management.  The terms of the Series A-1 Preferred Stock are generally similar to those of the Series A Preferred Stock but provide, among other things, that the 30,000 shares of Series A-1 Preferred Stock that would otherwise mandatorily be converted into shares of the Company’s common stock upon the closing of a public offering of common stock will not be converted if previously called for redemption.  The Series A-1 Preferred Stock also has a shorter period than the Series A Preferred Stock for providing notice of redemption.  A copy of the Exchange Agreement is filed with this report as Exhibit 10.1.

Item 3.02. Unregistered Sales of Equity Securities

Please see Item 1.01 above.  The Series A-1 Preferred Stock has the following terms:

·Liquidation preference of $1,000 per share.

·Dividends are non-cumulative and are payable quarterly at the rate of 8.66% per annum.  If dividends on the Series A-1 Preferred S tock are not declared and paid for any period, no dividends may be declared on the Company’s common stock for such period.

·The Series A-1 Preferred Stock is redeemable by the Company at any time, in whole or in part, at a price per share equal to the liquidation preference plus declared and unpaid dividends.

·If the Company completes an underwritten public offe ring of common stock in the future, 30,000 shares of the Series A-1 Preferred Stock will be mandatorily convertible into the Company’s common stock (unless previously called for redemption) and the other 10,000 shares of Series A-1 Preferred Stock will be convertible into the Company’s common stock at the option of the holder, in each case at a price per share of common stock equal to the price per share in the public offering.

·In the event of a change in control of the Company, the Series A-1 Preferred Stock will also be convertible at the option of the holder into shares of the Company’s common stock worth $40 million (plus declared and unpaid dividends), valued at the value per share of common stock in the change in control transaction.

·The Series A-1 Preferred Stock will not have voting rights except as required by law, except that if the Company fails to pay six dividends, whether or not consecutive, the holders of the Series A-1 Preferred Stock, voting as a separate class, will be entitled to elect one director to the Company’s board of directors until the Company has thereafter paid in full at least four dividends, whether or not consecutive.

Because the Series A-1 Preferred Stock was exchanged by the Company with an existing security holder exclusively where no commission or other remuneration was paid or given

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directly or indirectly for soliciting such exchange, the Company believes that the issuance of the Series A-1 Preferred Stock is exempt from registration under the Securities Act pursuant to Section 3(a)(9) of the Securities Act.  In addition, based on the provisions of the Exchange Agreement, including the representations and warranties of CastlePoint Management therein, the Company believes that the issuance of the Series A Preferred Stock is exempt from registration under the Securities Act pursuant to Section 4(2) of the Securities Act.

Item 5.03. Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year.

Please see Item 3.02 above.  The Certificate of Designations for the Series A-1 Preferred Stock is filed with this report as Exhibit 3.1 and is incorporated by reference herein.

Item 8.01. Other Events

As previously announced, on November 13, 2006, the Company agreed to purchase all of the issued and outstanding shares of capital stock of Preserver Group, Inc. (“Preserver”).  The audited consolidated financial statements of Preserver for the year ended December 31, 2005 and the unaudited condensed consolidated financial statements of Preserver for the nine months ended September 30, 2006 are filed with this report as Exhibits 99.1 and 99.2, respectively.  The unaudited pro forma condensed consolidated financial information filed herewith as Exhibit 99.3 gives effect to the proposed acquisition as if it had occurred as of September 30, 2006 for purposes of the unaudited pro forma condensed consolidated balance sheet, as of January 1, 2005 for purposes of the unaudited pro forma condensed consolidated statement of income for the year ended December 31, 2005 and as of January 1, 2006 for purpo ses of the unaudited pro forma condensed consolidated statement of income for the nine months ended September 30, 2006.

On January 11, 2007, the Company filed with the SEC a pre-effective amendment to its previously filed shelf registration statement on Form S-3.  The amendment increases the aggregate amount registered to $81 million and removes from registration any shares to be sold for the account of Michael H. Lee, the Company’s Chairman, President and Chief Executive Officer.

The Company issued a press release announcing the amendment to the registration statement on January 11, 2007.  The press release also reiterated the Company’s previously issued earnings guidance for 2007.  A copy of the press release is filed with this report as Exhibit 99.4.

Also on January 11, 2007, the Company filed with the SEC a preliminary prospectus relating to a public offering of $70 million of common stock.  The preliminary prospectus contains important information relating to the Company, Preserver and the pending acquisition of Preserver.

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Item 9.01. Financial Statements and Exhibits.

Exhibit Number	Description
3.1	Certificate of Designations of Series A-1 Preferred Stock of Tower Group, Inc.
10.1	Exchange Agreement between Tower Group, Inc. and CastlePoint Management Corp. dated as of January 11, 2007.
23.1	Consent of BDO Seidman, LLP.
99.1	Audited consolidated financial statements of Preserver Group, Inc. for the year ended December 31, 2005.
99.2	Unaudited condensed consolidated financial statements of Preserver Group, Inc. for the nine months ended September 30, 2006.
99.3	Tower Group, Inc.’s unaudited pro forma condensed consolidated balance sheet as of September 30, 2006 and unaudited pro forma condensed consolidated statements of income for the nine months ended September 30, 2006 and the year ended December 31, 2005.
99.4	Press release issued by Tower Group, Inc. on January 11, 2007.

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SIGNATURES

Pursuant to the requirements 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.

Date: January 11, 2007

TOWER GROUP, INC.
By:	/s/ Stephen L. Kibblehouse
	Stephen L. Kibblehouse
	Senior Vice President and General Counsel

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EX-3.1

Exhibit 3.1

CERTIFICATE OF DESIGNATIONS

OF

SERIES A-1 PREFERRED STOCK

OF

TOWER GROUP, INC.

Pursuant to Section 151 of the General Corporation Law
of the State of Delaware

Tower Group, Inc., a Delaware corporation (the “Company”), in accordance with the provisions of Sections 103 and 151 of the General Corporation Law of the State of Delaware (the “DGCL”) thereof, does hereby make this Certificate of Designations and DOES HEREBY CERTIFY:

That the board of directors of the Company (the “Board”) has the authority, pursuant to the Amended and Restated Certificate of Incorporation of the Company (the “Certificate of Incorporation”) and the DGCL, to adopt resolutions providing for the designations, preferences and relative, participating, optional and other special rights, and qualifications, limitations or restrictions of one or more series of preferred stock, par value $0.01 per share, of the Company (the “Preferred Stock”).

That pursuant to resolutions of the Board of Directors adopted on January 10, 2007, the creation of the Series A-1 Preferred Stock, $0.01 par value per share (the “Series A-1 Preferred Stock”), was authorized and the designations, preferences and relative, participating, optional and other special rights and qualifications, limitations and restrictions of such Series A-1 Preferred Stock, in addition to those set forth in the Certificate of Incorporation and Amended and Restated By-Laws (the “By-Laws”) of the Company, were fixed as follows:

1.             Designation.

The designation of the Series A-1 Preferred Stock shall be “Series A-1 Preferred Stock,” and the number of shares constituting the Series A-1 Preferred Stock shall be 40,000.  The Series A-1 Preferred Stock shall have a liquidation preference of $1,000 per share.  The Company may from time to time, without notice to or the consent of holders of the Series A-1 Preferred Stock, issue additional preferred stock.  No such issuance shall affect the due authorization of any issued and outstanding shares of the Series A-1 Preferred Stock.

2.             Definitions.

“Board” shall mean the Board of Directors of the Company or any duly authorized committee of the Board of Directors.

“Business Day” shall mean a day that is a Monday, Tuesday, Wednesday, Thursday or Friday and is not a day on which banking institutions in New York City generally are authorized or obligated by law or executive order to close.

“Certificate of Designations” shall mean this Certificate of Designations relating to the Series A-1 Preferred Stock, as amended from time to time.

“Change in Control” shall have the meaning assigned to such term in Section 6(a).

“Common Stock” shall mean the common stock, par value $0.01 per share, of the Company.

“Conversion” shall have the meaning set forth in Section 5(a) hereof.

“Conversion Date” shall have the meaning set forth in Section 5(a) hereof.

“Dividend Payment Date” shall have the meaning assigned to such term in Section 3(a)(i).

“Dividend Period” shall have the meaning assigned to such term in Section 3(c).

“Dividend Rate” shall mean 8.66% per annum.

“Dividend Record Date” shall have the meaning assigned to such term in Section 3(b).

“Issue Date” shall mean the initial date of delivery of the Series A-1 Preferred Stock.

“Junior Stock” shall mean the Common Stock and any other class or series of shares of the Company that ranks junior to the Series A-1 Preferred Stock either as to the payment of dividends or as to the distribution of assets upon any liquidation, dissolution or winding up of the Company.

“Liquidation Preference” shall have the meaning assigned to such term in Section 8(b).

“Nonpayment” shall have the meaning assigned to such term in Section 10(b).

“Optional Conversion Shares” shall have the meaning assigned to such term in Section 5(a).

“Parity Stock” shall mean any class or series of preferred shares of the Company that ranks equally with the Series A-1 Preferred Stock in the payment of dividends and in the distribution of assets on any liquidation, dissolution or winding up of the Company.

“Person” shall mean any individual, corporation, partnership, joint venture, trust, limited liability company or corporation, unincorporated organization or government or any agency or political subdivision thereof.

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“Preferred Stock Director” shall have the meaning assigned to such term in Section 10(b).

“solvent” shall have the meaning assigned to such term in Section 3(a).

“Value of Consideration” shall have the meaning assigned to such term in Section 6(a).

“Voting Preferred Stock” shall mean any other class or series of preferred stock of the Company ranking equally with the Series A-1 Preferred Stock either as to dividends or the distribution of assets upon liquidation, dissolution or winding up and upon which voting rights similar to those granted to the holders of the Series A-1 Preferred Stock have been conferred and are exercisable.

3.             Dividends.

(a)           Dividend Payment Dates.  The holders of the Series A-1 Preferred Stock shall be entitled to receive cash dividends when, as and if declared by the Board or a duly authorized committee of the Board, out of assets legally available for that purpose and to the extent the Company is able to pay its debts as they fall due (“solvent”) after giving effect thereto, at the applicable Dividend Rate set forth below in this Section 3.  Dividends on the Series A-1 Preferred Stock shall be payable on a non-cumulative basis, quarterly in arrears on the 27th day of March, June, September and December of each year, the Mandatory Conversion Date (except with respect to shares of Series A-1 Preferred Stock that have been called for redemption pursuant to Section 4) and, if applicable, the date of consummation of any Change in Control (each, a “Dividend Payment Date”), subject to Section 3(e).

(b)           Dividend Record Date.  Each such dividend shall be paid to the holders of record of the Series A-1 Preferred Stock as they appear on the share register of the Company on the applicable record date (each, a “Dividend Record Date”), which shall be a record date fixed by the Board that is not more than 60 nor less than 10 days prior to such Dividend Payment Date or, if no such date is fixed by the Board, shall be 10 days prior to such Dividend Payment Date.  The Dividend Record Date shall apply regardless of whether any particular Dividend Record Date is a Business Day.

(c)           Dividend Period.  Each dividend period (a “Dividend Period”) shall commence on and include a Dividend Payment Date and shall run to but excluding the next Dividend Payment Date, except that the initial Dividend Period will commence on and include December 27, 2006, and will run to and exclude the first Dividend Payment Date thereafter.

(d)           Day Count Convention.  The amount of dividends payable per share of Series A-1 Preferred Stock on each Dividend Payment Date will be calculated using the per annum Dividend Rate and on the basis of a 360-day year consisting of twelve 30-day months.

(e)           Business Day Convention.  If any Dividend Payment Date is not a Business Day, then dividends will be payable on the first Business Day following such Dividend Payment Date unless such day is in the next calendar month, in which case dividends shall be payable on the first Business Day preceding such Dividend Payment Date and dividends, in each case, shall accrue to the actual payment date.

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(f)            Junior Stock.  So long as any shares of Series A-1 Preferred Stock remain outstanding for any Dividend Period, unless the full dividends for the current Dividend Period on all outstanding Series A-1 Preferred Stock and Parity Stock have been declared and paid (or declared and a sum sufficient for the payment thereof has been set aside): (i) no dividend whatsoever shall be paid or declared during such Dividend Period on the Common Stock or other Junior Stock (other than a dividend payable solely in Common Stock or other Junior Stock); and (ii) no Common Stock or other Junior Stock shall be purchased, redeemed or otherwise acquired for consideration by the Company, directly or indirectly (other than as a result of a reclassification of such Junior Stock for or into other Junior Stock, or the exchange or conversion of one share of Junior Stock for or into another share of Junior Stock) during such Dividend Period.

(g)           Pro Rata Adjustments.  When dividends are not paid in full (or duly provided for) on any Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within a Dividend Period) upon the Series A-1 Preferred Stock and any Parity Stock, all dividends declared upon the Series A-1 Preferred Stock and all such Parity Stock payable on such Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within the Dividend Period related to such Dividend Payment Date) shall be declared pro rata so that the respective amounts of such dividends shall bear the same ratio to each other as all accrued but unpaid dividends per share of Series A-1 Preferred Stock and all Parity Stock payable on such Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within the related Dividend Period) bear to each other.

(h)           Additional Series A-1 Preferred Stock.  In the event that additional shares of the Series A-1 Preferred Stock are issued after the original issue date, dividends on such shares may accrue from the original issue date or any other date specified by the Company at the time such additional shares are issued.  These dividends will accrue, with respect to each Dividend Period, in the manner set forth in Sections 3(a)(i) and 3(b).

(i)            Non-Cumulative Dividends.  Dividends on Series A-1 Preferred Stock shall be non-cumulative.  To the extent that any dividends payable on the Series A-1 Preferred Stock on any Dividend Payment Date are not declared and paid, in full or otherwise, on such Dividend Payment Date, then such unpaid dividends shall not cumulate and shall cease to accrue and be payable and the Company shall have no obligation to pay dividends accrued for the applicable Dividend Period subsequent to such Dividend Payment Date or to pay interest with respect to such dividends, whether or not dividends are declared on Series A-1 Preferred Stock for any subsequent Dividend Period.

4.             Redemption.

(a)           The Company, at its option, may redeem, in whole at any time or in part from time to time, the Series A-1 Preferred Stock at the time outstanding, upon notice given as provided in Section 4(c) below, at a redemption price equal to $1,000 per share of Series A-1 Preferred Stock, together with an amount equal to any dividends that have been declared but not paid prior to the redemption date (but with no amount in respect of any dividends that have not

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been declared prior to such date).  The redemption price for the Series A-1 Preferred Stock shall be payable on the redemption date to the holder of such shares against surrender of the certificate(s) evidencing such shares to the Company or its agent.  If the redemption date occurs subsequent to the Dividend Record Date for a Dividend Period, any declared but unpaid dividends payable on such redemption date shall not be paid to the holder entitled to receive the redemption price on the redemption date, but rather shall be paid to the holder of record of the redeemed shares on such Dividend Record Date relating to the Dividend Payment Date as provided in Section 3.

(b)           Notice of redemption shall be given to the holders of record of the Series A-1 Preferred Stock in accordance with Section 14(a) hereof at least one Business Day before the date fixed for redemption.  Any notice delivered as provided in Section 14(a) shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, but failure to duly give such notice, or any defect in such notice or in the mailing thereof, to any holder of Series A-1 Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other Series A-1 Preferred Stock.  Each such notice given to a holder shall state: (i) the redemption date; (ii) the number of shares of Series A-1 Preferred Stock to be redeemed and, if less than all the shares of the Series A-1 Preferred Stock held by such holder are to be redeemed, the number of such shares of Series A-1 Preferred Stock to be redeemed from such holder and whether the shares to be redeemed are Optional Conversion Shares; (iii) the redemption price; and (iv) the place or places where holders may surrender certificates evidencing the shares of Series A-1 Preferred Stock for payment of the redemption price.

(c)           If notice of redemption has been duly given and if on or before the redemption date specified in the notice all funds necessary for the redemption have been set aside by the Company for the benefit of the holders of the Series A-1 Preferred Stock called for the redemption, then on and after the redemption date dividends shall cease to accrue on such shares of Series A-1 Preferred Stock so called for redemption, all such shares of Series A-1 Preferred Stock so called for redemption shall no longer be deemed outstanding and all rights with respect to such shares of Series A-1 Preferred Stock shall forthwith on such redemption date cease and terminate, except only the right of the holders thereof to receive the amount payable on such redemption, without interest.

(d)           In case of any redemption of only part of the Series A-1 Preferred Stock at the time outstanding, the shares to be redeemed shall be selected either pro rata or in such other manner as the Board may determine to be fair and equitable.  Subject to the provisions hereof, the Board shall have full power and authority to prescribe the terms and conditions upon which the Series A-1 Preferred Stock shall be redeemed from time to time.  In case fewer than all the shares of Series A-1 Preferred Stock represented by any certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder thereof.

5.             Conversion in Connection with a Public Offering.

(a)           Unless previously called for redemption pursuant to Section 4, on the closing date of the Company’s first underwritten public offering of its common stock after October 31, 2006 (other than offers made to employees, officers or directors of the Company registered on a Form S-8 or offers made to agents of the Company pursuant to shares registered on a Form S-3 filed

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with the United States Securities and Exchange Commission (the “SEC”)) (the “Conversion Date”), 30,000 shares of Series A-1 Preferred Stock will automatically convert (the “Conversion”) into a number of shares of Common Stock per share of Series A-1 Preferred Stock equal to the liquidation preference amount of a share of Series A-1 Preferred Stock divided by the offering price of the Common Stock in such offering or private placement (the “Conversion Price”).  The remaining 10,000 shares of Series A-1 Preferred Stock (the “Optional Conversion Shares”) shall be convertible on the Conversion Date at the election of the holders of the shares of the Series A-1 Preferred Stock.  Such Optional Conversion Shares shall be converted into a number of shares of Common Stock per Optional Conversion Share based on the Conversion Price as defined above.  Notice of such election shall be delivered to the Company in accordance with the provisions of Section 14(a) not later than the date on which the preliminary prospectus pertaining to the underwritten public offering is filed with the SEC.

(b)           The holders of the Series A-1 Preferred Stock to be converted on the Conversion Date shall have the right to receive, in addition to the number of shares of Common Stock specified in Section 5(a), an amount in cash equal to any dividends that have been declared but not paid prior to the Conversion Date (but with no amount in respect of any dividends that have not been declared prior to such date), such amount to be paid at the time of the Conversion, to the extent that the Company has sufficient lawful funds to pay such amount at such time.  If the Conversion Date occurs subsequent to the Dividend Record Date for a Dividend Period, any declared but unpaid dividends payable on the Conversion Date shall not be paid to the holder entitled to receive the redemption price on the Mandatory Conversion Date, but rather shall be paid to the holder of record of the redeemed shares on such Dividend Record Date relating to the Dividend Payment Date as provided in Section 3.

(c)           To the extent that the Company does not have sufficient lawful funds to pay in cash the amount equal to all of such dividends that have been declared but not paid prior to the Conversion Date, the holders of Series A-1 Preferred Stock to be converted on the Conversion Date shall be entitled to receive, upon conversion of such Series A-1 Preferred Stock on the Conversion Date, an additional number of shares of Common Stock per share of Series A-1 Preferred Stock equal to the amount of such dividends that have been declared but not paid prior to the Conversion Date in cash divided by the Conversion Price.  Any resulting fractional shares of Common Stock shall be settled in cash as provided below, subject to the availability of sufficient lawful funds to make such settlement.

(d)           From and after the Conversion Date, all shares of Series A-1 Preferred Stock that have been converted on such Conversion Date shall no longer be deemed outstanding and all rights with respect to such shares of Series A-1 Preferred Stock shall forthwith cease and terminate, except only the right of the holders thereof to receive the Common Stock and any cash due and owing on conversion of the Series A-1 Preferred Stock, without interest.

(e)           No fractional shares of Common Stock will be issued to holders of Series A-1 Preferred Stock as a result of any Conversion of shares of Series A-1 Preferred Stock pursuant to this Section 5.  In lieu of any fractional share of Common Stock otherwise issuable in respect of any Conversion pursuant to this Section 5, the Company shall pay an amount in cash (computed to the nearest cent) equal to the same fraction of the Conversion Price.

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(f)            Notwithstanding this Section 5, if the Conversion shall result in the issuance of shares of common stock of the Company that would require the vote of the stockholders of the outstanding shares of common stock pursuant to the listing rules of the Nasdaq Global Select Market, the number of shares of Series A-1 Preferred Stock to be initially converted into Common Stock shall be limited to a number that would not require such a vote and the remaining shares of Series A-1 Preferred Stock shall not be converted until the required stockholder vote is obtained.

(g)           The issuance of certificates for shares of Common Stock on Conversion of the Series A-1 Preferred Stock pursuant to this Section 5 shall be made without charge to the holder of the Series A-1 Preferred Stock for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the holder of such shares of Series A-1 Preferred Stock so converted and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.

6.             Conversion Upon Change in Control.

(a)           Immediately prior to the consummation of any Change in Control (as defined below) that is consummated at a time when CastlePoint Holdings, Ltd. or one of its subsidiaries holds any shares of Series A-1 Preferred Stock, each share of Series A-1 Preferred Stock held by CastlePoint Holdings, Ltd. or one of its subsidiaries shall be converted into a number of shares of Common Stock equal to the liquidation preference amount of a share of Series A-1 Preferred Stock, determined in accordance with Section 8(a), divided by the Value of the Consideration (as defined below) per share of Common Stock in such Change in Control.  A “Change in Control” means (i) any merger or consolidation of the Company with and into another company, other than a merger or consolidation in which (x) the Company is the surviving entity and (y) the holders of the Company’s Common Stock immediately prior to the consummation of such merger or consolidation own more than 50% of the voting equity interests of the surviving entity immediately after the consummation of such merger or consolidation; (ii) any transaction by which any person or group of persons (within the meaning of Rule 13d-5 under the Securities Exchange Act of 1934, as amended, or any successor or replacement rule) acquires beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended, or any successor or replacement rule) of securities of the Company representing more than 50% of the voting power of the Company holder of at the time of such Change in Control.  The “Value of Consideration” means the value of any consideration paid per share of Common Stock or value of the consideration into which a share of Common Stock is converted in a Change in Control transaction or, if such Change in Control Value does not involve a merger or consolidation of the Company or the acquisition of shares of Common Stock, the equivalent value placed upon a share of Common Stock in such transaction; provided, that (i) in the case of any publicly traded securities payable per share of Common Stock or into which a share of Common Stock shall be converted, the value of such securities shall be the last price at which such securities are traded on a public market immediately prior to the closing of the Change in Control and (ii) in the case of any securities that are not publicly traded or any other property

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payable per share of Common Stock or into which a share of Common Stock shall be converted, the value of such securities shall be fixed in good faith by the Board.

(b)           The holders of the Series A-1 Preferred Stock to be converted in connection with a Change in Control shall have the right to receive, in addition to the number of shares of Common Stock specified in Section 6(a), an amount in cash equal to any dividends that have been declared but not paid prior to the consummation of such Change in Control (but with no amount in respect of any dividends that have not been declared prior to such date), such amount to be paid at the time of the consummation of such Change in Control, to the extent that the Company has sufficient lawful funds to pay such amount at such time.  If the consummation of such Change in Control occurs subsequent to the Dividend Record Date for a Dividend Period, any declared but unpaid dividends payable upon the consummation of such Change in Control shall not be paid to the holder entitled to receive the redemption price on the date of the consummation of such Change in Control, but rather shall be paid to the holder of record of the redeemed shares on such Dividend Record Date relating to the Dividend Payment Date as provided in Section 3.

(c)           To the extent that the Company does not have sufficient lawful funds to pay in cash the amount equal to all of such dividends that have been declared but not paid prior to the consummation of a Change in Control, the holders of Series A-1 Preferred Stock to be converted in connection with a Change in Control shall be entitled to receive, upon conversion of such Series A-1 Preferred Stock upon the consummation of such Change in Control, an additional number of shares of Common Stock per share of Series A-1 Preferred Stock equal to the amount of such dividends that have been declared but not paid prior to the consummation of such Change in Control in cash divided by the Value of Consideration.  Any resulting fractional shares of Common Stock shall be settled in cash as provided below, subject to the availability of sufficient lawful funds to make such settlement.

(d)           From and after the consummation of a Change in Control, all shares of Series A-1 Preferred Stock that have been converted in connection with such Change in Control shall no longer be deemed outstanding and all rights with respect to such shares of Series A-1 Preferred Stock shall forthwith cease and terminate, except only the right of the holders thereof to receive the Common Stock and any cash due and owing on conversion of the Series A-1 Preferred Stock, without interest.

(e)           No fractional shares of Common Stock will be issued to holders of Series A-1 Preferred Stock as a result of any conversion of shares of Series A-1 Preferred Stock pursuant to this Section 6.  In lieu of any fractional share of Common Stock otherwise issuable in respect of any conversion pursuant to this Section 6, the Company shall pay an amount in cash (computed to the nearest cent) equal to the same fraction of the Value of Conversion.

(f)            The issuance of certificates for shares of Common Stock on conversion of the Series A-1 Preferred Stock pursuant to this Section 6 shall be made without charge to the holder of the Series A-1 Preferred Stock for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the holder of such shares of Series A-1 Preferred Stock so converted and the Company shall not be

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required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.

7.             Conversion Upon Regulatory Change.

If both (a) and (b) below occur:

(a)           after the date of the issuance of the Series A-1 Preferred Stock, the criteria used by A.M. Best Company, Inc. for determining whether and to what extent a security qualifies as permanent equity capital shall change such that the Series A-1 Preferred Stock no longer qualifies for treatment as favorable as the treatment afforded to the Series A-1 Preferred Stock on its date of issuance, and

(b)           the Company affirmatively elects to qualify the Series A-1 Preferred Stock for treatment as permanent equity capital by A.M. Best Company, Inc. without any sublimit or other quantitative restriction on the inclusion of the Series A-1 Preferred Stock in permanent equity capital (other than any limitation the Company elects to accept and any limitation requiring that common equity or a specified form of common equity constitute the dominant form of permanent equity capital) under such criteria,

then, upon such affirmative election, the Series A-1 Preferred Stock shall be convertible at the Company’s option into a new series of preferred stock having terms and provisions substantially identical to those of the Series A-1 Preferred Stock, except that such new series may have such additional or modified rights, preferences, privileges and voting powers, and limitations and restrictions thereof, as are necessary in the judgment of the Board (after consultation with legal counsel of recognized standing) to comply with the Required Equity Capital Provisions (as defined below), provided that the Company will not cause any such conversion unless the Board determines that the rights, preferences, privileges and voting powers, and the qualifications, limitations and restrictions thereof, of such new series of preferred stock, taken as a whole, are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers, and the qualifications, limitations and restrictions thereof, of the Series A-1 Preferred Stock, taken as a whole.

As used above, the term “Required Equity Capital Provisions” means such terms and provisions as are, in the judgment of the Company (after consultation with legal counsel of recognized standing), required for preferred stock to qualify for equity capital treatment by A.M. Best Company, Inc. that is as favorable as the treatment afforded to the Series A-1 Preferred Stock on its date of issuance, without any sublimit or other quantitative restriction on the inclusion of such preferred stock in permanent equity capital (other than any limitation the Company elects to accept and any limitation requiring that common equity or a specified form of common equity constitute the dominant form of permanent equity capital) pursuant to the applicable criteria used by A.M. Best Company, Inc.

8.             Liquidation Rights.

(a)           Upon the voluntary or involuntary dissolution, liquidation or winding up of the Company, the holders of the Series A-1 Preferred Stock shall be entitled to receive and to be paid out of the assets of the Company available for distribution to its stockholders, before any

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payment or distribution shall be made on the Common Stock or on any other Junior Stock the liquidation preference of $1,000 per share of Series A-1 Preferred Stock, plus any declared and unpaid dividends for the then-current Dividend Period, without accumulation of any undeclared dividends.

(b)           If in any distribution described in Section 5(a) above the assets of the Company or proceeds thereof are not sufficient to pay the Liquidation Preferences (as defined below) in full to all holders of the Series A-1 Preferred Stock and all holders of any Parity Stock, the amounts paid to the holders of the Series A-1 Preferred Stock and to the holders of all such other Parity Stock shall be paid pro rata in accordance with the respective aggregate Liquidation Preferences of the holders of the Series A-1 Preferred Stock and the holders of all such other Parity Stock.  In any such distribution, the “Liquidation Preference” of any holder of Series A-1 Preferred Stock or Parity Stock shall mean the amount otherwise payable to such holder in such distribution, including any declared but unpaid dividends (and, in the case of any holder of shares other than Series A-1 Preferred Stock and on which dividends accrue on a cumulative basis, an amount equal to any unpaid, accrued cumulative dividends, whether or not declared, as applicable).

(c)           If the Liquidation Preference has been paid in full to all holders of the Series A-1 Preferred Stock, the holders of other shares of the Company shall be entitled to receive all remaining assets of the Company according to their respective rights and preferences and the holders of the Series A-1 Preferred Stock as such shall have no right or claim to any of the remaining assets of the Company.

(d)           Neither the sale, lease, exchange, transfer or conveyance of all or substantially all of the assets of the Company for cash, securities or other property, nor the merger or consolidation of the Company into or with any other corporation or the merger or consolidation of any other corporation into or with the Company, shall be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this Section 8.

9.             Ranking.

The Series A-1 Preferred Stock shall rank, with respect to the payment of dividends and distributions prior to or upon the liquidation, dissolution or winding up of the Company:

(i)            senior to all Common Stock outstanding and other Junior Stock, and each other series of Junior Stock that the Company may later issue;

(ii)           equally with Parity Stock and each other series of Parity Stock that the Company may later issue; and

(iii)          junior to any series of senior shares that the Company may later issue, subject to compliance with Section 11(b).

10.          Voting and Certain Other Rights.

(a)           Except as set forth herein or required by applicable law, holders of Series A-1 Preferred Stock shall have no voting rights.

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(b)           Whenever dividends on any Series A-1 Preferred Stock shall have not been declared and paid for the equivalent of six or more dividend payments, whether or not for consecutive Dividend Periods (a “Nonpayment”), the holders of such Series A-1 Preferred Stock, voting together as a single class with holders of any and all other series of Voting Preferred Stock then outstanding, will be entitled to vote for the election of a total of one additional member to the Board (the “Preferred Stock Director”), provided that the election of any such director shall not cause the Company to violate the corporate governance requirement of the Nasdaq Global Select Market (or any other exchange on which the securities of the Company may be listed) that listed companies must have a majority of independent directors.  The Preferred Stock Director shall be elected by simple majority at a special meeting called at the request of the holders of record of at least 20% of the shares of Series A-1 Preferred Stock or of any other series of Voting Preferred Stock then outstanding (unless such request for a special meeting is received less than 90 days before the date fixed for the next annual meeting or special meeting of the stockholders of the Company, in which event such election shall be held only at such next annual or special meeting of stockholders), and at each subsequent annual meeting of stockholders of the Company.  For this purpose, the Board shall reserve one vacant place on the Board of the Company to accommodate such election and pass such resolutions as are necessary to give effect to such election.

(c)           If the holders of the Series A-1 Preferred Stock become entitled to elect a director to the Board, the Company shall promptly give notice to all holders and take all action necessary, including calling a meeting or circulating a consent to permit the nomination and election of such director.  Applicable provisions of the Company’s Certificate of Incorporation shall be applicable to the holders of Series A-1 Preferred Stock and any other Voting Preferred Stock as a class, provided that any written consents approved by the holders of record of a majority of the Series A-1 Preferred Stock and any other Voting Preferred Stock outstanding shall be effective and shall bind all holders of Series A-1 Preferred Stock.  If and when dividends for at least four Dividend Periods, whether or not consecutive, following a Nonpayment have been paid in full (or declared and a sum sufficient for such payment has been set aside), then the right of the holders of the Series A-1 Preferred Stock to elect the Preferred Stock Director shall cease (but subject to revesting of such voting rights in the event of any future Nonpayment pursuant to this Section 10) and the number of Dividend Periods in which dividends have not been declared and paid shall be reset to zero and, if and when any rights of holders of the Series A-1 Preferred Stock to elect the Preferred Stock Director shall have ceased, the terms of office of the Preferred Stock Director shall terminate forthwith and the number of directors constituting the Board shall automatically be reduced by one.

(d)           The Preferred Stock Director may be removed at any time without cause by the holders of record of a majority of the outstanding Series A-1 Preferred Stock and any other shares of Voting Preferred Stock, when they have the voting rights described above (voting together as a single class).  So long as a Nonpayment shall continue, any vacancy in the office of the Preferred Stock Director (other than prior to the initial election of a Preferred Stock Director after a Nonpayment) may be filled by a vote of the holders of record of a majority of the shares of Series A-1 Preferred Stock outstanding and any other Voting Preferred Stock then outstanding (voting together as a single class), when they have the voting rights described above.  The Preferred Stock Director shall be entitled to one vote on any matter.

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(e)           Holders of the Series A-1 Preferred Stock shall be entitled to vote on matters as described in Section 11.

11.          Modification.

(a)           With the Consent of Holders.  Except as provided below in this Section 11(a), this Certificate of Designations may be amended, modified or supplemented, and noncompliance in any particular instance with any provision of this Certificate of Designations or the Series A-1 Preferred Stock may be waived, in each case with the written consent or affirmative vote of the holders of at least two-thirds of the shares of Series A-1 Preferred Stock at the time outstanding, including any modification occurring in connection with any merger or consolidation of the Company or otherwise.

Subject to Sections 6 and 7, without the written consent or the affirmative vote or consent of the holders of at least two-thirds of the outstanding shares of Series A-1 Preferred Stock, given in person or by proxy, either in writing or at a meeting, an amendment or waiver under this Section 11(a) may not:

(i)            amend, alter or repeal the provisions of the Company’s Certificate of Incorporation, By-Laws or this Certificate of Designations so as to materially and adversely affect the special rights, preferences, privileges and voting powers of the Series A-1 Preferred Stock, taken as a whole; or

(ii)           consummate a binding share exchange or reclassification involving the Series A-1 Preferred Stock or a merger or consolidation of the Company with another entity, unless in each case the Series A-1 Preferred Stock (x) remains outstanding or (y) in the case of any such merger or consolidation with respect to which the Company is not the surviving or resulting entity, is converted into or exchanged for preference securities of the surviving or resulting entity or its ultimate parent having such rights, preferences, privileges and voting powers, taken as a whole, as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers of the Series A-1 Preferred Stock, taken as a whole;

provided, however, that for all purposes of this Section 11(a), any increase in the amount of the authorized or issued Series A-1 Preferred Stock, or the creation and issuance, or an increase in the authorized or issued amount, of any other series of preferred stock ranking equally with and/or junior to the Series A-1 Preferred Stock with respect to the payment of dividends (whether such dividends are cumulative or non-cumulative) and/or the distribution of assets upon liquidation, dissolution or winding up of the Company will not be deemed to adversely affect the special rights, preferences, privileges or voting powers of the Series A-1 Preferred Stock.

(b)           Changes after Provision for Redemption.  No vote or consent of the holders of the Series A-1 Preferred Stock shall be required pursuant to Sections 10(b) and 11(a) above if, at or prior to the time when any such vote or consent would otherwise be required pursuant to such Section, all outstanding Series A-1 Preferred Stock shall have been redeemed, or called for redemption upon proper notice and sufficient funds shall have been set aside by the Company for

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the benefit of holders of such Series A-1 Preferred Stock called for redemption, in each case pursuant to Section 4 above.

12.          Currency of Payments.

Any cash payments with respect to the Series A-1 Preferred Stock shall be paid in United States dollars in immediately available funds.

13.          No Preemptive Rights.

No holder of Series A-1 Preferred Stock shall have any preemptive right as to any additional issue of shares of capital stock of the Company, or to any security convertible, exercisable or exchangeable into such shares.

14.          Miscellaneous.

(a)           Notices.  Any and all notices or other communications or deliveries to be provided by the holders hereunder shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service, addressed to the Company, at 120 Broadway, 31st Floor, New York, New York 10271, facsimile number (646) 514-8612, Attn: General Counsel, or such other address or facsimile number as the Company may specify for such purposes by notice to the holders delivered in accordance with this Section.  Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service addressed to each holder of record of the Series A-1 Preferred Stock at the facsimile telephone number or address of such holder of record at their respective last addresses or facsimile telephone number appearing on the share register of the Company, or if no such facsimile telephone number or address appears, at the principal place of business of the holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 5:30 p.m. (New York City time), (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 5:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) the second Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given.

(b)           Lost or Mutilated Preferred Stock Certificate. If a holder’s Series A-1 Preferred Stock certificate shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated certificate, or in lieu of or in substitution for a lost, stolen or destroyed certificate, a new certificate for the shares of Series A-1 Preferred Stock so mutilated, lost, stolen or destroyed but only upon receipt of evidence of such loss, theft or destruction of such certificate, and of the ownership hereof, and indemnity, if requested, all reasonably satisfactory to the Company.

(c)           Waiver. Any waiver by the Company or the holder of a breach of any provision of this Certificate of Designations shall not operate as or be construed to be a waiver of any other

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breach of such provision or of any breach of any other provision of this Certificate of Designations. The failure of the Company or the holder to insist upon strict adherence to any term of this  Certificate of Designations on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Certificate of Designations. Any waiver must be in writing.

(d)           Status of Converted or Redeemed Preferred Stock.  In case any shares of Series A-1 Preferred Stock shall be converted, redeemed or reacquired by the Company, such shares shall resume the status of authorized but unissued shares of preferred stock and shall no longer be designated as Series A-1 Preferred Stock.

(e)           Other Rights.  Except as provided in Sections 5, 6 and 7, the Series A-1 Preferred Stock will not be convertible into, or exchangeable for, any other class or series of securities of the Company, and holders of the Series A-1 Preferred Stock will have no subscription rights to acquire additional shares of the Company.  Holders of the Series A-1 Preferred Stock shall have no right to require the redemption or repurchase of the Series A-1 Preferred Stock.

[Signature appears on subsequent page.]

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IN WITNESS WHEREOF, I have affixed my signature hereto this 11th day of January, 2007.

TOWER GROUP, INC.
By:	/s/ Steven G. Fauth
Corporate Secretary

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EX-10.1

Exhibit 10.1

EXCHANGE AGREEMENT

This Exchange Agreement (this “Agreement”) is made and entered into as of January 11, 2007, by and between TOWER GROUP, INC., a Delaware corporation (the “Company”), and CASTLEPOINT MANAGEMENT CORP., a Delaware corporation (the “Purchaser”).

RECITALS

WHEREAS, the Purchaser currently owns 40,000 shares of Series A Preferred Stock of the Company.

WHEREAS, the Company has authorized the issuance of up to an aggregate of 40,000 shares of its Series A-1 Preferred Stock (the “Shares”) to the Purchaser in exchange for the shares of Series A Preferred Stock of the Company owned by the Purchaser; and

WHEREAS, the Purchaser and the Company desire that the Company shall exchange the Shares for such shares of Series A Preferred Stock on the terms and conditions set forth herein;

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises, representations, warranties, and covenants hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.CERTAIN DEFINITIONS.

For all purposes of this Agreement, the following terms shall have the respective meanings set forth in this Article 1 (such definitions to be equally applicable to both the singular and plural forms of the terms herein defined):

“8-K Filing” has the meaning ascribed to such term in Section 6.3.

“2005 Annual Report” has the meaning ascribed to such term in Section 4.6(a).

“Action” means any legal, administrative, arbitration or other similar suit, inquiry, notice of violation, investigation, proceeding, claim, or action.

“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 144 under the Securities Act.

“Agreement” has the meaning ascribed to such term in the Recitals.

“Applicable Law” means any federal, state, local or foreign statute, law, ordinance, rule, regulation, order, writ, injunction, judgment, decree, directive, principle of common law or interpretation of any of the foregoing by a Governmental Authority applicable to a Person or any such Person’s subsidiaries, properties, assets, officers, directors, employees or agents.

“Bylaws” has the meaning ascribed to such term in Section 4.4.

“Certificate of Designations” has the meaning ascribed to such term in Section 2.1.

“Certificate of Incorporation” has the meaning ascribed to such term in Section 2.1.

“Closing” has the meaning ascribed to such term in Section 3.1.

“Closing Date” has the meaning ascribed to such term in Section 3.1.

“Common Stock” has the meaning ascribed to such term in Section 2.1.

“Contracts” shall mean all written agreements, contracts, commitments and undertakings, indentures, notes, bonds, loans, instruments, treaties, leases, mortgages and other binding arrangements.

“Conversion Shares” has the meaning ascribed to such term in Section 2.1.

“Disclosure Schedule” has the meaning ascribed to such term in the preamble to Article 4.

“Domiciliary Regulators” means the Governmental Authorities responsible for regulating insurance companies in the Insurance Companies’ respective states of domicile.

“DTC” has the meaning ascribed to such term in Section 7.1.

“DTC Transfer Conditions” has the meaning ascribed to such term in Section 7.1.

“Encumbrance” means any lien, pledge, security interest, easement or encumbrance of any kind or nature whatsoever, and any agreement to give or grant or permit any of the foregoing; provided that this definition of “Encumbrance” shall not include: (i) liens for current Taxes and assessments not yet due and payable, including, without limitation, liens for non-delinquent ad valorem Taxes, non-delinquent statutory liens arising other than by reason of any default on the part of the Company or the Subsidiaries and liens for Taxes being contested by the Company in good faith, (ii) such liens, minor imperfections of title or easements on real property, leasehold estates or personal property as do not in any material respect detract from the value thereof and do not in any material respect interfere with the present use of the property subject thereto, (iii) materialmen’s, mechanics’, workmen’s, repairmen’s, employees’, carriers’, warehousemen’s and other like liens arising in the ordinary course of business or relating to any construction, rebuilding or repair of any property leased, so long as the obligations to which such liens relate are not delinquent and also so long as any such lien does not materially impair the value of such leased property, (iv) any such lien, pledge, security interest, easement or encumbrance arising solely as a result of any action taken by Purchaser or any of its Affiliates and (v) any limitation or restriction imposed upon the transfer of the Securities by any registration provision of the Securities Act of 1933, as amended, or any applicable state securities law regulating the disposition of the Securities.

“Exchange Act” has the meaning ascribed to such term in Section 4.6.

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“GAAP” has the meaning ascribed to such term in Section 4.6.

“Global Select Market” has the meaning ascribed to such term in Section 4.13.

“Governmental Authority” means any nation or government, any state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government or any self-regulatory agency, commissioner or authority.

 “Indemnities” has the meaning ascribed to such term in Section 9.11.

“Indemnified Liabilities” has the meaning ascribed to such term in Section 9.11.

“Insurance Company” means any Subsidiary that is engaged in the business of issuing insurance policies.

“Insurance Contract” means any insurance policy, annuity contract, or guaranteed investment contract entered into with a customer whether directly or by reinsurance.

 “Investigation” means any governmental or regulatory investigation.

“Lock-Up Period” has the meaning ascribed to such term in Section 7.5.

“Material Adverse Effect” has the meaning ascribed to such term in Section 4.1.

“Non-Domiciliary Regulators” means the Governmental Authorities responsible for regulating insurance companies outside of the Insurance Companies’ respective states of domicile.

“Permits” means all licenses, permits, orders, consents, approvals, registrations, authorizations, qualifications and filings with and under all Applicable Laws and Governmental Authorities and all industry or other non-governmental self-regulatory organizations.

“Person” means any individual, corporation, company, partnership (limited or general), joint venture, limited liability company, association, trust, a government, any department or agency thereof or any other entity.

“Press Release” has the meaning ascribed to such term in Section 6.3.

“Purchaser” has the meaning ascribed to such term in the Recitals.

 “Registration Rights Agreement” has the meaning ascribed to such term in Section 3.2.

“Regulation D” has the meaning ascribed to such term in the Recitals.

 “Required Minimum” means, as of any date, 125% of the maximum aggregate number of shares of Common Stock then issuable in the future pursuant to the Transaction Documents, including any Conversion Shares issuable upon the exchange of all Shares, ignoring any

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exchange, conversion or exercise limits set forth therein, determined on the basis of the Exchange Rate (as defined in the Certificate of Designation), in each case as in effect on the Trading Day immediately prior to the date of determination.

“Rule 144” means Rule 144 promulgated by the SEC pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC having substantially the same effect as such Rule.

“SEC” has the meaning ascribed to such term in Section 4.3(b).

“SEC Reports” has the meaning ascribed to such term in Section 4.6.

“Securities Act” has the meaning ascribed to such term in Section 4.6.

“Security” and “Securities” have the meaning ascribed to such terms in Section 2.1.

“Select SEC Reports” has the meaning ascribed to such term in Section 4.6.

“Shares” has the meaning ascribed to such term in the Recitals.

“Subsidiaries” has the meaning ascribed to such term in Section 4.1.

“Tax” means (i) all federal, state, local and foreign taxes, charges, fees, imposts, levies and other assessments, including, without limitation, all income, gross receipts, capital, sales, use, ad valorem, value added, transfer, franchise, profits, inventory, capital stock, license, payroll, employment, social security, unemployment, excise, severance, stamp, occupation, property and estimated taxes, all taxes which are required to be withheld, customs duties, fees, assessments and charges of any kind whatsoever, (ii) all interest, penalties, fines, additions to tax  and additional amounts imposed by any Taxing Authority in connection with any item described in clause (i), and (iii) any transferee liability in respect of any items described in clauses (i) or (ii) payable by reason of contract, assumption, transferee liability, operation of law, Treasury Regulation Section 1.1502-6(a) (or any predecessor or successor thereof of any analogous or similar provision under law) or otherwise.

“Taxing Authority” means the Internal Revenue Service or any other Governmental Authority responsible for the administration of any Tax.

“Trading Day” means a day on which the Common Stock is traded on the Global Select Market.

 “Transaction Documents” has the meaning ascribed to such term in Section 3.2.

2.AGREEMENT TO SELL AND PURCHASE.

2.1Authorization of Shares.  The Company has authorized (a) the issuance to Purchaser of the Shares and (b) the issuance of such shares of its common stock, par value $0.01 per share (the “Common Stock”) to be issued upon conversion of the Shares (the

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“Conversion Shares”).  The Shares and the Conversion Shares are collectively referenced herein as the “Securities” and each of them may individually be referred to herein as a “Security.”  The Securities have the rights, preferences, privileges and restrictions set forth in the Amended and Restated Certificate of Incorporation of the Company (the “Certificate of Incorporation”) and the Certificate of Designations of the Series A-1 Preferred Stock attached hereto as Exhibit A (the “Certificate of Designations”).

2.2Exchange.  Subject to the terms and conditions hereof, at the Closing (as hereinafter defined), the Company and the Purchaser hereby agree to exchange the Shares for the shares of Series A Preferred Stock of the Company held by the Purchaser.

3.CLOSING, DELIVERY AND PAYMENT.

3.1Closing.  Subject to the satisfaction (or waiver) of the conditions set forth in Article 8 hereof, the closing of the sale and purchase of the Shares (the “Closing”) shall take place at 10:00 a.m., New York City time, on the date hereof, at the offices of the Company, 120 Broadway, New York, New York 10271 or at such other time or place as the Company and the Purchaser shall mutually agree (such date is hereinafter referred to as the “Closing Date”).

3.2Delivery.  At the Closing, subject to the terms and conditions hereof, the Company will deliver to the Purchaser a certificate representing the Shares, against delivery by the Purchaser of the certificate or certificates representing 40,000 shares of Series A Preferred Stock of the Company, duly endorsed for transfer and accompanied by such instruments of transfer as the Company shall reasonably request, free and clear of all liens, claims, charges, pledges, encumbrances and security interests of any kind or nature whatsosever.  This Agreement, the Registration Rights Agreement dated as of December 4, 2006 between the Company and the Purchaser (as assignee of CastlePoint Reinsurance Company, Ltd.) (the “Registration Rights Agreement”) and the Certificate of Designations are collectively referred to herein as the “Transaction Documents.”

3.3Registration Rights Agreement.  The Company and the Purchaser agree that the Shares and the Conversion Shares shall constitute “Registrable Securities” as such term is defined in the Registration Rights Agreement.

3.4Fees and Expenses.  Subject to Section 3.3 or as otherwise set forth herein or the Registration Rights Agreement, the Company and the Purchaser shall each be responsible for the fees and expenses incurred by it in connection with this Agreement and the transactions contemplated hereby.

4.REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

Except as set forth under the corresponding section of the disclosure schedule delivered to the Purchaser concurrently herewith (the “Disclosure Schedule”), the Company hereby represents and warrants as of the date hereof to Purchaser as follows:

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4.1Organization, Good Standing and Qualification.  The Company and each of its direct and indirect subsidiaries (collectively, the “Subsidiaries”) is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated, and has all requisite corporate power and authority to own and operate its properties and assets, to carry on its business as presently conducted  The Company and each of its Subsidiaries is duly qualified to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions in which failure to do so would not have or reasonably be expected to have a Material Adverse Effect.  For purposes of this Agreement, “Material Adverse Effect” means any effect which, individually or in the aggregate with all other effects, reasonably would be expected to be materially adverse to (i) the legality, validity or enforceability any of the Transaction Documents or the Securities, (ii) the ability of the Company to perform on a timely basis its obligations under this Agreement or any of the other Transaction Documents or (iii) the business, operations, assets, properties, prospects, reputation, financial condition or results of operations of the Company and its Subsidiaries, taken as a whole.

4.2Authorization; Binding Obligations.  (i) The Company has the requisite corporate power and authority to execute and deliver this Agreement and the other Transaction Documents, to issue and sell the Securities in accordance with the terms thereof and to carry out the provisions of this Agreement and the other Transaction Documents, and (ii) all corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement and each of the other Transaction Documents, the performance of all obligations of the Company hereunder and thereunder and the authorization, sale, issuance and delivery of the Shares pursuant hereto and the Conversion Shares pursuant to the Certificate of Incorporation and the Certificate of Designations has been taken.  Assuming that this Agreement and the Registration Rights Agreement have been duly authorized, executed and delivered by the Purchaser and constitute valid and binding obligations of the Purchaser, this Agreement is, and the other Transaction Documents will be at the Closing, valid and binding obligations of the Company enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors’ rights, (b) general principles of equity that restrict the availability of equitable remedies, and (c) to the extent that the enforceability of the indemnification provisions in the Registration Rights Agreement may be limited by Applicable Law.

4.3Capitalization; Voting Rights.

(a)The authorized capital stock of the Company consists of 40 million shares of Common Stock and two million shares of preferred stock, par value $0.01 per share (“Preferred Stock”), of which 40,000 shares are (or upon filing of the Certificate of Designation, will be) designated as Series A Preferred Stock.  As of November 1, 2006, 19,982,038 shares of Common Stock were issued and outstanding and no shares of Preferred Stock were issued and outstanding.

(b)Except as provided in the Company’s filings with the United States Securities and Exchange Commission (the “SEC”), and except for the Securities,

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there are no outstanding options, warrants, scrip, rights (including conversion, anti-dilution or preemptive rights and rights of first refusal or similar rights), or contracts, commitments, understandings or agreements of any kind by which the Company or any of its Subsidiaries is or may become bound to issue any of its securities, nor are any such issuances, contracts, commitments, understandings or arrangements contemplated.

(c)All issued and outstanding shares of capital stock of the Company (i) have been duly authorized and validly issued and are fully paid and nonassessable, and (ii) were issued in compliance with all applicable state and federal laws concerning the issuance of securities.

(d)The Company does not have any shareholder rights plan, “poison pill” or other anti-takeover plans or similar arrangements.

(e)Except as set forth in the Company’s filings with the SEC, there are no proxy, stockholder agreements, voting agreements or other similar agreements with respect to the Company’s capital stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company’s stockholders.

(f)The Company or one of its Subsidiaries has the unrestricted right to vote, and (subject to limitations imposed by Applicable Law) to receive dividends and distributions on, all shares of capital stock of its Subsidiaries as owned by the Company or any such Subsidiary.

(g)The rights, preferences, privileges and restrictions of the Securities are as stated in the Certificate of Incorporation and the Certificate of Designations.  The Securities are duly authorized and when issued in compliance with the provisions of this Agreement, the Certificate of Designations and the Certificate of Incorporation, (i) the Securities will be validly issued, fully paid and non-assessable, and will be free of any liens, taxes, claims or other Encumbrances and (ii) will not be subject to preemptive rights, rights of first refusal or other similar rights of stockholders of the Company or any other person provided, however, that the Shares and the Conversion Shares may be subject to restrictions on transfer under the Registration Rights Agreement, state and/or federal securities laws as set forth herein or as otherwise required by such laws at the time a transfer is proposed.  As of the Closing Date, the Company shall have reserved from its duly authorized capital stock a number of shares of Common Stock for issuance of the Conversion Shares at least equal to the Required Minimum on the date hereof.

4.4Compliance with Other Instruments; Absence of Conflicts.  Neither the Company nor any of its Subsidiaries is in violation or default of, and the execution, delivery, and performance of and compliance with this Agreement and the other Transaction Documents by the Company, and, assuming the accuracy of the warranties and representations of the Purchaser herein, the issuance and sale of the Shares pursuant hereto and of the Conversion Shares pursuant to the Certificate of Incorporation and the Certificate of Designations, will not, with or without the passage of time or giving of notice, result in any violation of, or be in conflict with or constitute a default under, (i) any term of the Certificate of Incorporation or the Company’s bylaws as in effect on the date hereof (the “Bylaws”) or the Subsidiaries’

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organizational documents, (ii) any provision of any Contract to which the Company or any of its Subsidiaries is party or by which it or any of them or any of its or their respective properties is bound or affected, or (iii) any Applicable Law to which the Company or any of its Subsidiaries is subject  (including United States federal and state securities laws, rules and regulations and rules and regulations of any self-regulatory organizations to which either the Company or its securities are subject) or by which any property or asset of the Company or any of its Subsidiaries is bound or affected, other than, in the case of clauses (ii) and (iii), any such violation, default, conflict that would not, individually or in the aggregate, have a Material Adverse Effect.  The execution, delivery, and performance by the Company of and compliance by the Company with this Agreement and the other Transaction Documents, and the issuance and sale of the Shares pursuant hereto and of the Conversion Shares pursuant to the Certificate of Incorporation and the Certificate of Designations, will not, with or without the passage of time or giving of notice, result in the creation of any Encumbrance or charge upon any of the properties or assets of the Company or any of its Subsidiaries or the suspension, revocation, impairment, forfeiture or nonrenewal of any Permit applicable to the Company or any of its Subsidiaries or any of its or their assets or properties, other than any such Encumbrances, charges, suspensions, revocations, impairments, forfeitures or nonrenewals that would not, individually or in the aggregate, have a Material Adverse Effect.

4.5Consents.                                        0;  No governmental orders, permissions, consents, approvals or authorizations are required to be obtained by the Company and no registrations or declarations are required to be filed by the Company in connection with the execution and delivery of this Agreement or the issuance of the Shares or the Conversion Shares, except such as have been duly and validly obtained or filed, or with respect to any filings that must be made after the Closing, as will be filed in a timely manner.

4.6SEC Reports; Financial Statements.  The Company has filed in a timely manner (within applicable extension periods) all documents that the Company was required to file with the SEC under the Securities Act of 1933, as amended (the “Securities Act”) and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), preceding the date of this Agreement (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein, the “SEC Reports”).  The SEC Reports complied in all material respects with the applicable requirements of the Exchange Act or the Securities Act, as the case may be, and the rules and regulations of the SEC as of their respective filing dates, and the information contained therein as of the date thereof did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.  Except as disclosed on Section 4.6 of the Disclosure Schedule, none of the statements made in any such SEC Reports is, or has been, required to be amended or updated under Applicable Law (except for such statements as have been amended or updated in subsequent filings made prior to the date hereof).  As of their respective dates, the financial statements of the Company included in the SEC Reports complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC applicable with respect thereto.  Such financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), consistently applied, during the periods involved (except as may be otherwise

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indicated in such financial statements or the notes thereto or, in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the consolidated financial position of the Company and its consolidated Subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments).  Except as set forth in the most recent financial statements of the Company included in the Select SEC Reports, the Company has no liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to the date of such financial statements and (ii) liabilities incurred in the ordinary course of business and not required under GAAP to be reflected in such financial statements, which liabilities and obligations referred to in clauses (i) and (ii), individually or in the aggregate, are not material to the financial condition or operating results of the Company.  For purposes of this Agreement, “Select SEC Reports” means the Company’s (A) Proxy Statement for its 2006 Annual Meeting, (B) Annual Report on Form 10-K/A for the fiscal year ended December 31, 2005 (the “2005 Annual Report”), (C) Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2006, June 30, 2006, September 30, 2006 and (D) Current Reports on Form 8-K filed since September 30, 2006.

4.7Absence of Certain Changes; No Material Adverse Effect.  Except as set forth in the Select SEC Reports, since December 31, 2005, there has been no event or occurrence which has had or would reasonably be expected to have a Material Adverse Effect.  The Company has not taken any steps, and does not currently expect to take any steps, to seek protection pursuant to any bankruptcy or receivership law, nor does the Company or any of its Subsidiaries have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings with respect to the Company or any of its Subsidiaries.

4.8Filings.Except as set forth in the Select SEC Reports or in Section 4.8 of the Disclosure Schedule, since January 1, 2004, (i) the Company and the Subsidiaries have filed all material reports, statements, documents, registrations, filings and submissions required to be filed with any Governmental Authority, and all such reports, statements, documents, registrations, filing and submissions complied in all material respects with Applicable Law in effect when filed, and (ii) no material deficiencies have been asserted in writing by, nor have any material comments been received from, nor any material penalties imposed by, any such Governmental Authorities with respect to such reports, statements, documents, registrations, filings or submissions.

4.9Permits.                                         ;         The Company and its Subsidiaries have all Permits in each of the jurisdictions in which the Company and the Subsidiaries conduct or operate their respective businesses as now being conducted, and all such Permits are in full force and effect, with such exceptions which singularly and in the aggregate have not and would not reasonably be expected to have a Material Adverse Effect, and the Company believes it or its Subsidiaries can obtain, without undue burden or expense, any similar authority for the conduct of their respective businesses as planned to be conducted.  The Company and the Subsidiaries are, and at all times since January 1, 2004 have been, in compliance in all material respects with the terms of the Permits.  No event has occurred or circumstance exists that (with or without the giving of notice or lapse of time or both) (1) constitutes or would reasonably be expected to result in, directly or indirectly, a violation of, or a failure to comply with any Permit, or (2) has resulted or

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would reasonably be expected to result, directly or indirectly, in the revocation, withdrawal, suspension, cancellation, or termination of, or any modification to, any Permit, except for such violations or failures to comply or revocations, withdrawals, suspensions, cancellations, terminations or modifications that would not reasonably be expected to have a Material Adverse Effect.  The consummation of the transactions contemplated by this Agreement and the other Transaction Documents will not result in any revocation, cancellation, suspension or nonrenewal of any such material Permit.

4.10Litigation.

(a)Except as disclosed in the Select SEC Reports and other than Actions arising in the ordinary course of business from or related to the obligations of the Company under any Insurance Contract or similar contract written, assumed or reinsured by the Company, there are no pending or, to the knowledge of the Company, threatened Actions against and to the knowledge of the Company, no pending or threatened Investigations of, the Company, any Subsidiary or any of their properties or assets challenging the validity or propriety of, or that have the effect of preventing, delaying, making illegal or otherwise interfering with any of the transactions contemplated by this Agreement or the other Transaction Documents.

(b)As of the date of this Agreement, there are no pending Actions or, to the knowledge of the Company, threatened material Actions against, and to the knowledge of the Company, no pending or threatened Investigations of, any current or former officer or director of any of the Company or the Subsidiaries in his or her capacity as an officer or director of any of the Company or the Subsidiaries.

4.11Registration Rights.  Except as required pursuant to the Registration Rights Agreement and except as disclosed in the SEC Reports, the Company is presently not under any obligation, and has not granted any rights, to register under the Securities Act, any of the Company’s presently outstanding securities or any of its securities that may hereafter be issued.

4.12Broker’s Fees.  No agent, broker, investment banker, person or firm acting on behalf of or under the authority of the Company is or will be entitled to any fee or commission from the Purchaser directly or indirectly in connection with the transactions contemplated herein.

4.13Listing and Maintenance Requirements.  The Common Stock is registered pursuant to Section 12(b) of the Exchange Act, and the Company has taken no action designed to, or which to its knowledge is likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act nor has the Company received any notification that the Commission is contemplating terminating such registration.  The Common Stock is currently listed for trading on the Nasdaq Global Select Market (the “Global Select Market”).  The Company has not received notice from the Global Select Market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in compliance with the listing or maintenance requirements of the Global Select Market. The Company is, and has no reason to believe that it will not continue to be, in compliance with all such listing and maintenance requirements.  Prior to the conversion of the Shares, the Company shall secure the

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listing of the Conversion Shares on the Global Select Market and on each other national securities exchange, automated quotation system or over-the-counter market upon which the shares of Common Stock are then listed (subject to official notice of issuance).  The issuance and delivery of the Shares pursuant hereto and the Conversion Shares pursuant to the Certificate of Incorporation and the Certificate of Designations will not constitute a change of control under the rules of the Global Select Market.

4.14                        Anti-Takeover Provisions.  The Company and its board of directors have taken all necessary action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under its Certificate of Incorporation or the laws of the state of its incorporation (including §203 of the Delaware General Corporation Law) which is or could become applicable to Purchaser as a result of the transactions contemplated by this Agreement, including, without limitation, the Company’s issuance of the Securities and Purchaser’s ownership of the Securities.

4.15                        Private Placement.  Assuming the accuracy of the Purchaser’s representations and warranties set forth in Section 5.3, no registration under the Securities Act or any state securities laws is required for the offer and sale of the Securities by the Company to Purchaser as contemplated hereby. The issuance and sale of the Securities hereunder does not contravene the rules and regulations of the Global Select Market or any state securities laws.

4.16                        No General Solicitation or Integrated Offering.  Neither the Company nor any distributor participating on the Company’s behalf in the transactions contemplated hereby (if any) nor any Person acting for the Company, or any such distributor, has conducted any “general solicitation” (as such term is defined in Regulation D) or general advertising with respect to any of the Securities being offered hereby.  Neither the Company nor any of its Affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would require registration of the Securities being offered hereby under the Securities Act or cause this offering of Securities to be integrated with any prior offering of securities of the Company for purposes of the Securities Act, which result of such integration would require registration under the Securities Act, or that would be integrated with the offer or sale of the Securities for the purpose of the rules and regulations of the Global Select Market or any applicable stockholder approval provisions.

5.REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.

The Purchaser hereby represents and warrants to the Company as follows (provided that such representations and warranties do not lessen or obviate the representations and warranties of the Company set forth in this Agreement):

5.1                          Organization and Good Standing.  The Purchaser is duly incorporated, validly existing and in good standing under the laws of the State of Delaware.  The Purchaser has all requisite corporate power and authority to own and operate its properties and assets, to carry on its business as presently conducted, to execute and deliver this Agreement and

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the Registration Rights Agreement and to carry out the provisions of this Agreement and the Registration Rights Agreement.

5.2                          Requisite Power and Authority.  All corporate action on the part of the Purchaser, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement and the Registration Rights Agreement and the performance of all obligations of the Purchaser hereunder and thereunder has been taken.  Assuming that this Agreement and the Registration Rights Agreement have been duly authorized, executed and delivered by the Company and constitute valid and binding obligations of the Company, this Agreement is, and the Registration Rights Agreement will be at the Closing, valid and binding obligations of the Purchaser enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors’ rights, (b) general principles of equity that restrict the availability of equitable remedies, and (c) to the extent that the enforceability of the indemnification provisions in the Registration Rights Agreement may be limited by applicable laws.

5.3                          Investment Representations.  The Purchaser understands that neither the Shares nor the Conversion Shares have been registered under the Securities Act or under any state or non-U.S. securities law.  The Purchaser also understands that the Shares are being offered and sold pursuant to an exemption from registration contained in the Securities Act based in part upon the Purchaser’s representations contained in this Agreement.  The Purchaser hereby represents and warrants as follows:

(a)                           The Purchaser Bears Economic Risk.  The Purchaser is knowledgeable, sophisticated and experienced in making, and is qualified to make decisions with respect to investments in shares presenting an investment decision like that involved in the purchase of the Shares capable of evaluating the merits and risks of its investment in the Company and has the capacity to protect its own interests.  The Purchaser understands that it must bear the economic risk of this investment indefinitely unless the Shares (or the Conversion Shares) are transferred in a transaction that is registered pursuant to the Securities Act or exempt from registration.  The Purchaser understands that the Company has no present intention of registering the Shares or the Conversion Shares except as provided in the Registration Rights Agreement.  The Purchaser also understands that there is no assurance that any exemption from registration under the Securities Act will be available for any proposed transfer of the Shares or the Conversion Shares and that, even if available, such exemption may not allow the Purchaser to transfer all or any portion of the Shares or the Conversion Shares under the circumstances, in the amounts or at the times the Purchaser might propose.

(b)                           Acquisition for Own Account.  The Purchaser is acquiring the Shares and the Conversion Shares for the Purchaser’s own account for investment only, and not with a view towards their distribution.

(c)                           Accredited Investor.  The Purchaser represents that it is an institutional “accredited investor” within the meaning of Regulation D under the Securities Act.

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(d)                           Company Information.  The Purchaser has received and read the SEC Reports and has had an opportunity to discuss the Company’s business, management and financial affairs with directors, officers and management of the Company and has had the opportunity to review the Company’s operations and facilities.  The Purchaser has also had the opportunity to ask questions of and receive answers from, the Company and its management regarding the terms and conditions of this investment.  The Purchaser has, in connection with the decisions to purchase the Shares, relied only upon the SEC Reports and the representations and warranties of the Company set forth in the Transaction Documents.

(e)                           No Action Outside the United States.  The Purchaser acknowledges that the Company has taken no action or will take any action in any jurisdiction outside the United States to permit an offering of the Shares or the Conversion Shares, or possession or distribution of offering materials in connection with the issuance of the Shares or the Conversion Shares, in any jurisdiction outside the United States where legal action by the Company for that purpose is required.  The Purchaser will comply with all applicable laws and regulations in each jurisdiction outside the United States in which it purchases, offers, sells or delivers Shares or Conversion Shares or has in its possession or distributes any offering material, in each case at its own expense.

5.4                          Transfer Restrictions.  The Purchaser acknowledges and agrees that the Shares and, if issued, the Conversion Shares are subject to restrictions on transfer as set forth herein and in the Registration Rights Agreement.

5.5                          Covering Short Positions.  The Purchaser will not use the Shares or the Conversion Shares to cover any short position in the Common Stock if doing so would be in violation of applicable securities laws.

5.6                          No Legal, Tax or Investment Advice.  The Purchaser understands that nothing in the SEC Reports, this Agreement, the Registration Rights Agreement or any other materials presented to the Purchaser in connection with the purchase and sale of the Shares constitutes legal, tax or investment advice.  The Purchaser has consulted such legal, tax and investment advisors as it, in its sole discretion, has deemed necessary or appropriate in connection with its purchase of the Shares.

5.7                          Ownership of Company Stock.  None of the Purchaser or the Purchaser’s subsidiaries beneficially owns (as such term is defined for purposes of Section 13(d) of the Exchange Act) any shares of the Common Stock of the Company or any other class or series of the Company’s capital stock.

5.8                          Broker’s Fees.  No agent, broker, investment banker, person or firm acting on behalf of or under the authority of the Purchaser is or will be entitled to any fee or commission from the Company directly or indirectly in connection with the transactions contemplated herein.

5.9                          Title to Shares of Series A Preferred Stock.  The Purchaser has, and immediately prior to the Closing will have, legal and valid title to 40,000 shares of Series A Preferred Stock of the Company free and clear of all liens, claims, charges, pledges,

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encumbrances and security interests of any kind or nature whatsoever.  At the Closing the Company will acquire legal and valid title to such shares of Series A Preferred Stock of the Company, in each case free and clear of all liens, claims, charges, encumbrances and security interests of any kind or nature whatsoever, provided that no representation is made as to any of the foregoing resulting from any action or omission by the Company.

6.                             COVENANTS.

6.1                          Best Efforts.  The parties shall use their respective best efforts timely to satisfy each of the conditions described in Sections 8.1 and 8.2 of this Agreement.

6.2                          [Reserved]

6.3                          Press Release; Form 8-K; Publicity. The Company may issue on or before the next business day following the date hereof a press release (the “Press Release”) announcing the entry into the transactions contemplated hereby and shall within two days following the date hereof file a Current Report on Form 8-K with the SEC concerning this Agreement and the transactions contemplated hereby (the “8-K Filing”).  The Company and the Purchaser shall consult with each other in issuing any other press releases with respect to the transactions contemplated hereby, and neither the Company nor the Purchaser shall issue any such press release or otherwise make any such public statement without the prior consent of the Company, with respect to any press release of the Purchaser, or without the prior consent of the Purchaser, with respect to any press release of the Company, which consent shall not unreasonably be withheld, except if such disclosure is required by law, in which case the disclosing party shall promptly provide the other party with prior notice of such public statement or communication.

6.4                          Reservation of Shares.  The Company shall, if applicable: (i) in the time and manner required by the Global Select Market, but in any event prior to the conversion of the Shares into Common Stock, prepare and file with the Global Select Market an additional shares listing application covering a number of shares of Common Stock at least equal to the Required Minimum on the date of such application, (ii) take all steps necessary to cause such shares of Common Stock to be approved for listing on the Global Select Market as soon as possible thereafter, (iii) provide to the Purchaser evidence of such listing, and (iv) from and after the conversion of the Shares into Common  Stock, maintain the listing of such Common Stock on the Global Select Market.

6.5                          No Integrated Offerings.  The Company shall not make any offers or sales of any security (other than the Securities) under circumstances that would require registration of the Securities being offered or sold hereunder under the Securities Act or cause this offering of the Securities to be integrated with any other offering of securities by the Company for purposes of any stockholder approval provision applicable to the Company or its securities.

6.6                          Legal Compliance.  The Company shall conduct its business and the business of its Subsidiaries in compliance with all Applicable Laws, except where the failure to do so would not have a Material Adverse Effect.

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6.7                          Information.  So long as Purchaser (or any of its Affiliates) beneficially owns any of the Securities, the Company shall furnish to Purchaser the information the Company must deliver to any holder or to any prospective transferee of Securities in order to permit the sale or other transfer of such Securities pursuant to Rule 144A of the SEC or any similar rule then in effect.  The Company shall keep at its principal executive office a true copy of this Agreement (as at the time in effect), and cause the same to be available for inspection at such office during normal business hours by any holder of Securities or any prospective transferee of Securities designated by a holder thereof.

6.8                          Pledge of Securities.  The Company acknowledges and agrees that the Securities may be pledged by Purchaser in connection with a bona fide margin agreement or other loan or financing arrangement that is secured by the Securities.  The pledge of Securities shall not be deemed to be a transfer, sale or assignment of the Securities hereunder, and if Purchaser effects a pledge of Securities, it shall not be required to provide the Company with any notice thereof or otherwise make any delivery to the Company pursuant to this Agreement or any other Transaction Document.  The Company shall execute and deliver such documentation as a pledgee of the Securities may reasonably request in connection with a pledge of the Securities to such pledgee by Purchaser.

6.9                          Investment Company Act.  The Company shall conduct its business in a manner so that it will not be required to register as an investment company under the Investment Company Act.

7.                             SECURITIES TRANSFER MATTERS.

7.1                          Conversion and Exercise.  Upon conversion of the Shares by any person, (i) if the DTC Transfer Conditions (as defined below) are satisfied, the Company shall cause its transfer agent to electronically transmit all Conversion Shares by crediting the account of such person or its nominee with the Depository Trust Company (“DTC”) through its Deposit Withdrawal Agent Commission system; or (ii) if the DTC Transfer Conditions are not satisfied, the Company shall issue and deliver, or instruct its transfer agent to issue and deliver, certificates (subject to the legend and other applicable provisions hereof and the Certificate of Designation), registered in the name of such person its nominee, physical certificates representing the Conversion Shares.  Even if the DTC Transfer Conditions are satisfied, any person effecting a conversion of Shares may instruct the Company to deliver to such person or its nominee physical certificates representing the Conversion Shares, in lieu of delivering such shares by way of DTC Transfer.  For purposes of this Agreement, “DTC Transfer Conditions” means that (A) the Company’s transfer agent is participating in the DTC Fast Automated Securities Transfer program and (B) the certificates for the Conversion Shares required to be delivered do not bear a legend and the person effecting such conversion or exercise is not then required to return such certificate for the placement of a legend thereon.

7.2                          Transfer or Resale.  Purchaser understands that (i) except as provided in the Registration Rights Agreement, the sale or resale of the Securities have not been and are not being registered under the Securities Act or any state securities laws, and the Securities may not be transferred unless (A) the transfer is made pursuant to and as set forth in an effective registration statement under the Securities Act covering the Securities; or (B) Purchaser

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shall have delivered to the Company an opinion of counsel reasonably satisfactory to the Company (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from such registration; or (C) sold or transferred to an affiliate of Purchaser that agrees to be bound by this Article 7; and (ii) neither the Company nor any other person is under any obligation to register such Securities under the Securities Act or any state securities laws (other than pursuant to the terms of the Registration Rights Agreement).  Notwithstanding the foregoing or anything else contained herein to the contrary, the Securities may be pledged as collateral in connection with a bona fide margin account or other lending arrangement, provided such pledge is consistent with Applicable Laws.

7.3                          Legends.  Purchaser understands that the Shares and, until such time as the Conversion Shares have been registered under the Securities Act (including registration pursuant to Rule 416 thereunder) as contemplated by the Registration Rights Agreement or otherwise may be sold by such Purchaser under Rule 144, the Certificates for the Conversion Shares may bear a restrictive legend in substantially the following form:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR IN ANY OTHER JURISDICTION.  THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED, SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS UNLESS OFFERED, SOLD OR TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.

The Company shall, immediately prior to a registration statement covering the Securities (including, without limitation, the Registration Statement contemplated by the Registration Rights Agreement) being declared effective, deliver to its transfer agent an opinion letter of counsel, opining that at any time such registration statement is effective, the transfer agent may issue, in connection with the issuance of the Conversion Shares, certificates representing such Conversion Shares without the restrictive legend above, provided such Conversion Shares are to be sold pursuant to the prospectus contained in such registration statement.  Upon receipt of such opinion, the Company shall cause the transfer agent to confirm, for the benefit of the holders, that no further opinion of counsel is required at the time of transfer in order to issue such shares without such restrictive legend.

The legend set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of any Security upon which it is stamped, if, unless otherwise required by state securities laws, (i) the sale of such Security is registered under the Securities Act (including registration pursuant to Rule 416 thereunder) or (ii) such holder provides the Company with an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that a public sale or transfer of such Security may be made without registration under the Securities Act.  If the holder of any Security is an affiliate of the Company, the legend on any such Security shall not be so removed.  In the event

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the above legend is removed from any Security and thereafter the effectiveness of a registration statement covering such Security is suspended or the Company determines that a supplement or amendment thereto is required by applicable securities laws, then upon reasonable advance written notice to Purchaser the Company may require that the above legend be placed on any such Security that cannot then be sold pursuant to an effective registration statement or under Rule 144 and Purchaser shall cooperate in the replacement of such legend.  Such legend shall thereafter be removed when such Security may again be sold pursuant to an effective registration statement or under Rule 144.

7.4                          Transfer Agent Instruction.  Upon compliance by Purchaser with the provisions of this Article 7 with respect to the transfer of any Securities, the Company shall permit the transfer of such Securities and, in the case of the transfer of Conversion Shares, promptly instruct its transfer agent to issue one or more certificates (or effect a DTC Transfer) in such name and in such denominations as specified by Purchaser.  The Company shall not give any instructions to its transfer agent with respect to the Securities, other than any permissible or required instructions provided in this Article 7, and the Securities shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement.

7.5                          Lock-Up Period.  During the period from the date hereof until 180 days from November 13, 2006 (the “Lock-Up Period”), the Purchaser will not (a) directly or indirectly, offer, sell, agree to offer or sell, solicit offers to purchase, grant any call option or purchase any put option with respect to, pledge, borrow or otherwise dispose of any Registrable Security, as defined in the Registration Rights Agreement, (b) establish or increase any “put equivalent position” or liquidate or decrease any “call equivalent position” with respect to any Registrable Security (in each case within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder), or (c) otherwise enter into any swap, derivative or other transaction or arrangement that transfers to another, in whole or in part, any of the economic consequence of ownership of a Registrable Security, whether or not such transaction is to be settled by delivery of Registrable Securities, other securities, cash or other consideration.

8.                             CONDITIONS TO CLOSING.

8.1                          Conditions to the Purchaser’s Obligations to Purchase the Shares.  The Purchaser’s obligations to purchase the Shares at the Closing are subject to the satisfaction or waiver on or prior to the Closing Date of the following conditions:

(a)                           Representations and Warranties True; Performance of Obligations.  The representations and warranties made by the Company in Article 4 shall be true and correct in all material respects as of the Closing Date, with the same force and effect as if they had been made on and as of said date, and the Company shall have performed, satisfied and complied with all obligations, covenants and conditions herein required to be performed, satisfied or complied with by it on or prior to the Closing.

(b)                           Legal Investment.  On the Closing Date, the sale and issuance of the Shares and the proposed issuance of the Conversion Shares shall be legally permitted by all laws and regulations to which the Purchaser and the Company are subject.

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(c)                           Consents, Permits, Waivers and Approvals.  The Company and the Purchaser shall have obtained any and all consents, permits, waivers and approvals necessary or appropriate for consummation of the transactions contemplated by this Agreement and the other Transaction Documents and such consents, permits, waivers and approvals shall be in full force and effect.

(d)                           Compliance Certificate.  The Company shall have delivered to the Purchaser a Compliance Certificate, executed by the Senior Vice President and CFO of the Company, dated the Closing Date to the effect that the conditions specified in subsections (a) and (c) (as it pertains to the Company) of this Section 8.1 have been satisfied, except that such Compliance Certificate shall not be required if the Closing Date is the date hereof or the Business Day immediately following the date hereof.

(e)                           Listing.  The Common Stock shall be authorized for quotation and listed on the Global Select Market and trading in the Common Stock (or on the Global Select Market generally) shall not have been suspended by the SEC or the Global Select Market.

(f)                            Certificate of Designations.  The Certificate of Designations, substantially in the form attached hereto as Exhibit A, shall have been approved and adopted by the Company.

8.2                          Conditions to Obligations of the Company to Issue and Sell the Shares.  The Company’s obligation to issue and sell the Shares to the Purchaser at the Closing is subject to the satisfaction or waiver of the following conditions:

(a)                           Representations and Warranties True.  The representations and warranties in Article 5 made by the Purchaser shall be true and correct in all material respects as of the Closing Date, with the same force and effect as if they had been made on and as of said date, and the Purchaser shall have performed all obligations and conditions herein required to be performed or observed by it on or prior to the Closing.

(b)                           Consents, Permits, Waivers and Approvals.  The Company and the Purchaser shall have obtained any and all consents, permits, waivers and approvals necessary or appropriate for consummation of the transactions contemplated by this Agreement and the other Transaction Documents and such consents, permits, waivers and approvals shall be in full force and effect.

(c)                           Compliance Certificate.  The Purchaser shall have delivered to the Company a Compliance Certificate, executed by an executive officer of the Purchaser, dated the Closing Date to the effect that the conditions specified in subsections (a) and (b) (as it pertains to the Purchaser) of this Section 8.2 have been satisfied, except that such Compliance Certificate shall not be required if the Closing Date is the date hereof or the Business Day immediately following the date hereof.

18

9.                             MISCELLANEOUS.

9.1                          Governing Law.  This Agreement shall be governed by and construed under the laws of the State of Delaware.  The parties agree that any action brought by either party under or in relation to this Agreement, including without limitation to interpret or enforce any provision of this Agreement, shall be brought in, and each party agrees to and does hereby submit to the jurisdiction and venue of, any state or federal court located in the County of New Castle, State of Delaware.  The Company irrevocably waives the defense of an inconvenient forum to the maintenance of such suit or proceeding in such forum.  The Company further agrees that service of process upon the Company mailed by first class mail shall be deemed in every respect effective service of process upon the Company in any such suit or proceeding.  Nothing herein shall affect the right of Purchaser to serve process in any other manner permitted by law.  The Company agrees that a final non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner.

9.2                          Successors and Assigns.  The Purchaser may assign its right to purchase the Shares to any one or more direct or indirect majority-owned subsidiaries; provided that no such assignment shall relieve the Purchaser of its obligations hereunder to the extent that the assignee fails to fulfill the same.  Upon any such permitted assignment, the references in this Agreement to the Purchaser shall also apply to any such assignee unless the context otherwise requires.  Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of and be binding upon the parties hereto and their respective successors, assigns, heirs, executors and administrators; provided, however, that prior to the receipt by the Company of adequate written notice of the transfer of any Shares specifying the full name and address of the transferee, the Company may deem and treat the person listed as the holder of such Shares in its records as the absolute owner and holder of such Shares for all purposes.

9.3                          Entire Agreement.  This Agreement, the Disclosure Schedule and the other Transaction Documents and the other documents delivered pursuant hereto or thereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof.

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

9.5                          Amendment and Waiver.  This Agreement may be amended or modified, and the rights and obligations of the Company and the Purchaser may be waived, only upon the written consent of the Company and the holders of at least a majority of the Shares purchased or agreed to be purchased pursuant to this Agreement.

9.6                          Notices.  All notices or other communications required or permitted hereunder shall be in writing and shall be deemed effectively given:  (i) upon personal delivery to the party to be notified, (ii) upon receipt, if sent by facsimile during normal business

19

hours of the recipient or, if not sent by facsimile during normal business hours of the recipient, then on the next business day; (iii) three days after having been sent, if sent by registered or certified mail, return receipt requested, postage prepaid; or (iv) one day after deposit with a nationally recognized overnight courier, if sent by such a courier, specifying next day delivery, with written verification of receipt.  Notices to the Company shall be addressed to:

Tower Group, Inc.
120 Broadway, 31st Floor
New York, New York 10271
Attention:  Stephen L. Kibblehouse, Esq.
Fax Number: (646) 514-8612

with a copy to:

LeBoeuf, Lamb, Greene & MacRae LLP
125 West 55th Street
New York, New York 10019
Attention:  Matthew Ricciardi, Esq.
Fax Number: (212) 424-8500

Notices to the Purchaser shall be addressed to:

CastlePoint Management Corp.
120 Broadway
New York, New York  10271
Attention:  Roger A. Brown
Fax Number:  (212) 847-9549

9.7                          Titles and Subtitles.  The titles of the sections and subsections of the Agreement are for convenience of reference only and are not to be considered in construing this Agreement.

9.8                          Third Party Beneficiaries.  This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person.

9.9                          Survival.  The representations and warranties of the Company and the agreements and covenants set forth in Sections 4, 6, 7 and 9 hereof shall survive until the one year anniversary of the Closing notwithstanding any due diligence investigation conducted by or on behalf of Purchaser.  Moreover, none of the representations and warranties made by the Company herein shall act as a waiver of any rights or remedies Purchaser may have under applicable U.S. federal or state securities laws.

9.10                        Further Assurances.  Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably

20

request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

9.11                        Indemnification.  In consideration of Purchaser’s execution and delivery of this Agreement and the other Transaction Documents and purchase of the Securities hereunder, and in addition to all of the Company’s other obligations under this Agreement and the other Transaction Documents, from and after the Closing, the Company shall defend, protect, indemnify and hold harmless Purchaser and all of its officers, directors and employees and any of the foregoing persons’ agents or other representatives (including, without limitation, those retained in connection with the transactions contemplated by this Agreement, collectively, the “Indemnitees”) from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys’ fees and disbursements (the “Indemnified Liabilities”), incurred by any Indemnitee as a result of, or arising out of, or relating to (i) any misrepresentation or breach of any representation or warranty made by the Company in this Agreement, any other Transaction Document or any other certificate, instrument or document delivered by the Company at the Closing or (ii) any breach of any covenant, agreement or obligation of the Company contained in this Agreement, any other Transaction Document or any other certificate, instrument or document delivered by the Company at the Closing.  To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under Applicable Law.  Except as otherwise set forth herein, the procedures with respect to the rights and obligations under this Section 9.11 shall be the same as those set forth in Section 6 of the Registration Rights Agreement.

9.12                        Payment Set Aside. To the extent that the Company makes a payment or payments to Purchaser, or the Purchaser makes a payment or payments to the Company, hereunder or pursuant to any of the other Transaction Documents or Purchaser or the Company enforces or exercises its respective rights hereunder or thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company or Purchaser, as applicable, a trustee, receiver or any other person under any Applicable Law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.

9.13                        Joint Participation in Drafting.  Each party to this Agreement has participated in the negotiation and drafting of this Agreement and the other Transaction Documents.  As such, the language used herein and therein shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any party to this Agreement.

9.14                        Remedies.  No provision of this Agreement or any other Transaction Document providing for any remedy to Purchaser shall limit any other remedy

21

which would otherwise be available to Purchaser at law, in equity or otherwise.  Nothing in this Agreement or any other Transaction Document shall limit any rights Purchaser may have under any applicable federal or state securities laws with respect to the investment contemplated hereby.

9.15                        Knowledge.  As used in this Agreement, the term “knowledge” of any person or entity shall mean and include (i) actual knowledge and (ii) that knowledge which a reasonably prudent business person could have obtained in the management of his or her business affairs after making due inquiry and exercising due diligence which a prudent business person should have made or exercised, as applicable, with respect thereto.

9.16                        Arms-Length Transaction.  Each of the Parties acknowledges and agrees that they are acting on their own behalf and in the capacity of an arm’s-length purchaser or seller, as applicable.  Each Party further acknowledges and agrees that it has independently evaluated the merits of the transactions contemplated by this Agreement and the other Transaction Documents, that it has independently determined to enter into the transactions contemplated hereby and thereby, that it is not relying on any advice from or evaluation by any other person (other than its representatives), and that it is not acting in concert with any other person in making its purchase of securities hereunder or in monitoring its investment in the Company.

9.17                        Counterparts.  This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.  Facsimile signatures shall be as effective as original signatures.

22

IN WITNESS WHEREOF, the parties hereto have executed this Exchange Agreement as of the date set forth in the first paragraph hereof.

TOWER GROUP, INC.
By:		/s/ Francis M. Colalucci
Name:			Francis M. Colalucci
Title:			Senior Vice President and CFO
CASTLEPOINT MANAGEMENT CORP.
By:	/s/ Joel Weiner
Name:			Joel Weiner
Title:			Senior Vice President and CFO

Exhibit A

Certificate of Designations

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

Tower Group, Inc.

New York, New York

We consent to the inclusion in this current report on Form 8-K and the incorporation by reference in the registration statement on Form S-3 (Registration No. 333-138749) of Tower Group, Inc. of our report dated March 15, 2006 relating to the consolidated financial statements, and schedules of Preserver Group, Inc. and affiliates for the year ended December 31, 2005 and our report dated December 20, 2006, relating to the unaudited condensed consolidated financial statements of Preserver Group, Inc. and affiliates for the nine month period ended September 30, 2006.

We also consent to the reference to us under the caption “Experts” in the registration statement.

/s/ BDO Seidman, LLP

New York, New York

January 11, 2007

EX-99.1

Exhibit 99.1

Preserver Group, Inc.

and Subsidiaries

Consolidated Financial Statements
and Supplementary Information
Year Ended December 31, 2005

Preserver Group, Inc.

and Subsidiaries

Consolidated Financial Statements
and Supplementary Information
Year Ended December 31, 2005

1

Preserver Group, Inc.

and Subsidiaries

	Contents
Independent auditors’ report	3
Consolidated financial statements:
Balance sheet	4
Statement of operations and comprehensive income	5
Statement of changes in stockholders’ equity	6
Statement of cash flows	7
Notes to consolidated financial statements	8-39
Supplementary information:
Summary of investments – other than investments in related parties (Schedule I)	40
Supplementary insurance information (Schedule III)	41
Reinsurance (Schedule IV)	42
Consolidated supplementary property and casualty insurance information (Schedule VI)	43

2

Independent Auditors’ Report

To the Board of Directors and Stockholders of
     Preserver Group, Inc. and Subsidiaries

We have audited the consolidated balance sheet of Preserver Group, Inc. and subsidiaries as of December 31, 2005 and the related consolidated statements of operations and comprehensive income, changes in stockholders’ equity and cash flows for the year then ended. Our audit also included the financial statement schedules listed in the accompanying index. These consolidated financial statements and the financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedules based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Preserver Group, Inc. and subsidiaries as of December 31, 2005 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the financial statement schedules referred to above when considered in relation to the basic consolidated financial statements taken together as a whole present fairly, in all material respects, the information set forth therein.

/s/ BDO Seidman, LLP

New York, New York

March 15, 2006

3

Preserver Group, Inc.

and Subsidiaries

Consolidated Balance Sheet

(000’s omitted, except share par value)

December 31, 2005
Assets
Investments available-for-sale, at fair value:
Fixed maturities (amortized cost of $129,514)	$	125,706
Equity securities (cost of $84)	884
Mortgage loans (amortized cost of $17)	17
Cash and cash equivalents	5,352
Premiums receivable	28,767
Reinsurance recoverable on:
Paid losses and loss expenses	5,101
Unpaid losses and loss expenses	18,514
Deferred policy acquisition costs	13,140
Fixed assets, net	5,417
Prepaid reinsurance premiums	3,924
Deferred tax asset	8,636
Goodwill	1,424
Federal income tax recoverable	321
Other assets	3,222
	$	220,425
Liabilities and Stockholders’ Equity
Liabilities:
Unpaid losses and loss expenses	$	93,623
Unearned premiums	42,573
Commissions payable	7,035
Accounts payable and accrued expenses	6,860
Long-term debt obligations	42,754
Total liabilities	192,845
Commitments and contingencies
Stockholders’ equity:
Common stock, par value $.50 per share: authorized - 10,000 shares; issued and outstanding - 2,124 shares	1,062
Additional paid-in capital	888
Accumulated other comprehensive loss	(2,012		)
Retained earnings	27,642
Total stockholders’ equity	27,580
	$	220,425

See accompanying notes to consolidated financial statements.

4

Preserver Group, Inc.

and Subsidiaries

Consolidated Statement of Operations and

Comprehensive Income

(000’s omitted)

Year ended December 31, 2005
Revenues:
Insurance premiums (net of ceded premiums of $14,341)	$	81,461
Net investment income	5,221
Realized losses on sales of investments	(22		)
Other revenues	881
Total revenues	87,541
Losses and expenses:
Insurance losses and loss expenses incurred (net of ceded losses of $5,536)	44,765
Operating expenses	36,644
Settlement and curtailment of pension plan	10,720
Interest expense	3,698
Total losses and expenses	95,827
Loss before benefit for Federal income taxes	(8,286		)
Benefit for Federal income taxes	6,253
Net loss	(2,033		)
Other comprehensive income, net of tax:
Unrealized holding losses on securities available-for-sale	(1,207		)
Reclassification adjustment for losses included in earnings	15
Adjustment for minimum pension liability	5,287
Comprehensive income	$	2,062

See accompanying notes to consolidated financial statements.

5

Preserver Group, Inc.

and Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity

(000’s omitted)

	Common stock					Accumulated  other
	Number of			Additional		comprehensive			Retained
Year ended December 31, 2005	shares	Amount		paid-in capital		loss			earnings			Total
Balance, December 31, 2004	2,124	$	1,062	$	888	$	(6,107	)	$	29,675		$	25,518
Other comprehensive income	—	—		—		4,095			—			4,095
Net loss	—	—		—		—			(2,033		)	(2,033		)
Balance, December 31, 2005	2,124	$	1,062	$	888	$	(2,012	)	$	27,642		$	27,580

See accompanying notes to consolidated financial statements.

6

Preserver Group, Inc.

and Subsidiaries

Consolidated Statement of Cash Flows

(000’s omitted)

Year ended December 31, 2005
Cash flows from operating activities:
Net loss	$	(2,033	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of fixed assets	1,892
Amortization of bond discount	1,068
Loss on sale of investments	22
Minimum pension liability loss recognized	8,011
Change in assets and liabilities:
Premium receivable	4,036
Deferred policy acquisition costs	1,540
Prepaid reinsurance premium	878
Federal income tax - current liability	(2,419		)
Federal income tax - deferred liability	(2,939		)
Federal income tax recoverable	(321		)
Reinsurance recoverable	6,137
Other assets	(434		)
Unpaid loss and loss expenses	(17,020		)
Unearned premium	(7,244		)
Commission payable	(1,073		)
Other liabilities	(2,869		)
Net cash used in operating activities	(12,768		)
Cash flows from investing activities:
Sale of investments	33,329
Purchase of investments	(24,617		)
Purchase of fixed assets	(3,127		)
Net cash provided by investing activities	5,585
Net decrease in cash and cash equivalents	(7,183		)
Cash and cash equivalents, beginning of year	12,535
Cash and cash equivalents, end of year	$	5,352
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest	$	3,717
Income taxes refund	(304		)

See accompanying notes to consolidated financial statements.

7

Preserver Group, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

(000’s omitted)

1.Nature of Operations

The consolidated financial statements of Preserver Group, Inc. (the “Company”) include its accounts and those of its wholly-owned subsidiary companies. The Company’s insurance subsidiaries, Preserver Insurance Company (“Preserver”), Mountain Valley Indemnity Company (“Mountain Valley”) and North East Insurance Company (“North East”) are collectively referred to as the “Insurance Companies.”

The Company is a New Jersey corporation which owns the Insurance Companies. The Insurance Companies engage in property and casualty insurance, principally small commercial, private passenger automobile and homeowners’ insurance, produced by independent agents. The Company generates substantially all of its revenues from its insurance operations.

Preserver writes insurance in New Jersey, New Hampshire and in Pennsylvania. Mountain Valley writes insurance in Maine, Massachusetts, New Hampshire, New York, Rhode Island and Vermont. North East writes insurance in Maine and New York.

Motor Club of America Insurance Company (“Motor Club”) primarily wrote insurance in the State of New Jersey. In July 2001, Motor Club was placed under administrative supervision by the New Jersey Department of Banking and Insurance (“NJDOBI”). In February 2004, Motor Club announced that it was withdrawing from the New Jersey Private Passenger Automobile Market and began non-renewing policies effective May 6, 2004. Its last policy expired on May 5, 2005. Effective May 7, 2005, Motor Club merged with Preserver, with Preserver being the surviving entity. The merger was approved by the NJDOBI on April 29, 2005.

8

2.Summary of Significant Accounting Policies

(a)Principles of Consolidation

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States and reflect the consolidated accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

(b)Basis of Presentation

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America that differ from statutory accounting practices prescribed or permitted for insurance companies by regulatory authorities.

(c)Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes.  Such estimates and assumptions could change in the future, as more information becomes known which could impact the amounts reported and disclosed herein.

(d)Investments

All of the Company’s fixed maturity and equity securities are classified as available-for-sale securities, and are stated at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of applicable deferred taxes.

The Company does not invest in, hold or issue any derivative financial instruments.

9

Premium and discount amounts are amortized into income based on the stated contractual lives of the securities. The Company recognizes income for the mortgage-backed and asset-backed bond portion of its fixed maturity securities portfolio using the constant effective yield method.

Net investment income, consisting of interest and dividends, net of investment expense, is recognized when earned. Realized gains and losses on investments are recognized when investments are sold or redeemed on a specific identification basis.

(e)Cash and Cash Equivalents

Cash equivalents are carried at cost, which approximates their fair values. It consists of money market accounts and securities maturing within 90 days of purchase.

(f)Insurance Premiums

Insurance premiums are recorded to income using the daily pro rata method over the terms of the policies. Insurance policies generally are for terms of one year.

(g)Deferred Policy Acquisition Costs

Deferred policy acquisition costs are costs that vary with and are primarily related to the production of new and renewal business. Such costs include commissions, premium taxes and certain underwriting and policy issuance costs which are deferred when incurred and amortized as expenses as the related written premiums are earned. Deferred policy acquisition costs are evaluated to determine if recorded amounts exceed estimated recoverable amounts after allowing for anticipated investment income. Premium deficiency, if any, is recorded as amortization of deferred policy acquisition costs.

(h)Other Revenues

Other revenues consist principally of interest on mortgage loans and servicing fees from motor club membership fees, which are earned when services are rendered.

10

(i)Losses and Loss Expenses

The estimated liability for losses is based on (1) the accumulation of cost estimates for unpaid losses reported prior to the close of the accounting period; and (2) estimates of incurred but not reported losses based upon past experience; less (3) estimates of anticipated salvage and subrogation recoveries. In the normal course of business, the Company seeks to reduce the loss that may arise from catastrophes or other events that may cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with reinsurers.

This liability is subject to the impact of future changes in claims severity and frequency, as well as numerous other factors. Management believes that the liability for losses and loss expenses is adequate, but the ultimate net cost of settling this liability may vary from the estimated amounts. Accordingly, these estimates are continually reviewed and adjustments, if any, are reflected in current operations.

The liability for loss expenses (“LAE”) is based on estimates of expenses to be incurred in the settlement of claims.

(j)Reinsurance

The Insurance Companies assume and cede reinsurance and participate in State reinsurance pools. Amounts recoverable from reinsurers are estimated in a manner consistent with the liability for unpaid losses and loss expenses associated with the reinsured policies. Reserves for losses and loss expenses and unearned premiums ceded to reinsurers have been reported as assets in the consolidated balance sheets. Amounts shown in the accompanying consolidated statements of operations and comprehensive income for earned premiums, losses and LAE and the related underwriting expenses include both direct business and reinsurance assumed and are presented net of reinsurance ceded.

11

(k)Fixed Assets

Depreciation on leasehold improvements is computed using the straight-line method over the lease term. Depreciation on furniture and fixtures, technology investments and other equipment is computed using the straight-line method over the estimated useful lives, ranging from three to twenty years.

Expenditures for major renewals and betterments are capitalized, and expenditures for maintenance and repairs are charged to income as incurred. When fixed assets are retired, or otherwise disposed of, the cost thereof and related accumulated depreciation are eliminated from the accounts. Any gain or loss on disposal is credited or charged to operations.

(l)Income Taxes

The Company accounts for income taxes using the liability method.  Accordingly, deferred tax, assets and liabilities are recognized for the future tax consequences attributable to the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates expected to apply in the years in which the differences are expected to reverse.

(m)Goodwill

The Company’s acquisition of North East in September 1999 resulted in goodwill of $1,615. The goodwill at December 31, 2005 is $1,424.

12

The Company performs an annual impairment analysis to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any). This annual test is performed at December 31 of each year or more frequently if events or circumstances change that require the Company to perform the impairment analysis on an interim basis. Goodwill impairment testing requires the evaluation of the estimated fair value of each reporting unit to its carrying value, including the goodwill. An impairment charge is recorded if the carrying amount of the reporting unit exceeds its estimated fair value. As a result of the impairment analysis, no change in the carrying amount of goodwill was recorded by the Company for the year ended December 31, 2005.

(n)Comprehensive Income

Comprehensive income consists of net income, the unfunded accumulated benefit obligation in excess of plan assets (“minimum pension liability”) and net unrealized investment gains or losses on available-for-sale securities and is presented separately in Note 14. These amounts are reported net of deferred income taxes.

(o)Fair Value of Financial Instruments

The carrying amounts reported in the consolidated balance sheet for cash and cash equivalents, premium receivables, accounts payable and notes payable approximate those assets and liabilities fair values due to the short-term nature of the instruments. The fair value of investments and convertible subordinated debentures are addressed in the related footnotes.

13

(p)New Accounting Pronouncements

In November 2005, the Financial Accounting Standards Board (the “FASB”) issued FASB Staff Position (“FSP”) FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” (“FSP 115-1”), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and how to measure such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 supersedes Emerging Issues Task Force (“EITF”) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-1”) and EITF Topic D-44, “Recognition of Other-Than-Temporary Impairment on the Planned Sale of a Security Whose Cost Exceeds Fair Value” (“Topic D-44”) and nullifies the accounting guidance on the determination of whether an investment is other-than-temporarily impaired as set forth in EITF 03-1. FSP 115-1 is required to be applied to reporting periods beginning after December 15, 2005. It is not expected to have a material impact on the Company’s consolidated financial statements in the coming year.

14

In December 2004, the FASB issued FASB Statement No. 123 (revised 2004), “Share-Based Payment”, which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation”. Statement 123(R) supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and amends FASB Statement No. 95, “Statement of Cash Flows”. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. In April 2005, the SEC amended the compliance dates for Statement 123(R) from fiscal periods beginning after June 15, 2005 to fiscal years beginning after December 15, 2005. It is not expected to have an impact on the Company’s consolidated financial statements in the coming year.

In May 2005, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections”, a replacement of APB Opinion No. 20 and SFAS No. 3 (“SFAS No. 154”). The statement is a result of a broader effort by the FASB to converge standards with the International Accounting Standards Board (“IASB”). The statement requires retrospective application to prior periods’ financial statements for a voluntary change in accounting principle unless it is impracticable. It also requires that a change in method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate rather than a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. SFAS No. 154 did not have and is not expected in the coming year to have a material impact on the Company’s consolidated financial statements.

15

In March 2005, the FASB issued FAS FSP FIN 46(R)-5, “Implicit Variable Interests Under FASB Interpretation No. 46(R)” (“FSP FIN 46(R)-5”), which requires an enterprise to consider whether it holds an implicit variable interest in a Variable Interest Entity (“VIE”) and what effect this may have on the calculation of expected losses and residual returns of the VIE and the determination of which party, if any, is considered the primary beneficiary of the VIE. FSP FIN 46(R)-5 was effective for the first reporting period beginning after March 3, 2005 and did not have an impact on the Company’s financial condition or results of operations.

3.Investments

The amortized cost and fair value of investments are as follows:

December 31, 2005	Gross  amortized  cost		Gross  unrealized  gains		Gross  unrealized  losses			Fair value
Fixed maturities:
U.S. Government securities	$	36,001	$	30	$	(1,505	)	$	34,526
Mortgage and asset-backed securities	46,201		61		(1,346		)	44,916
Corporate securities	38,021		101		(1,096		)	37,026
Municipal securities	9,291		47		(100		)	9,238
Total fixed maturities	129,514		239		(4,047		)	125,706
Equity securities	84		800		—			884
Mortgage loans	17		—		—			17
	$	129,615	$	1,039	$	(4,047	)	$	126,607

16

The amortized cost and fair value of investments in fixed maturity securities at December 31, 2005, by contractual maturity, are as follows:

	Amortized  cost		Fair value
Due in one year or less	$	15,373	$	15,268
Due after one year through five years	32,114		31,422
Due after five years through ten years	39,282		37,251
Due after ten years	42,745		41,765
Total	$	129,514	$	125,706

The above maturity tables include mortgage-backed and asset-backed securities, which were classified based on the contractual lives of the securities. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

Proceeds from the sale of available-for-sale fixed maturity investments for the year ended December 31, 2005 was $33,329.

Net investment income by category of investments consisted of the following:

Year ended December 31, 2005
Fixed maturities	$	5,177
Other principally short-term investments	338
Total investment income	5,515
Investment expenses	(294		)
Net investment income	$	5,221

At December 31, 2005, fixed maturity investments of $5,513 were on deposit with the various states where the Insurance Companies conduct business.

17

Net unrealized losses on available-for-sale securities were as follows:

Year ended December 31, 2005
Fixed maturities	$	(2,157	)
Equity securities	350
Total net unrealized	(1,807		)
Deferred income tax benefit	615
Net unrealized losses, net of deferred income tax	$	(1,192	)
Increase in net unrealized losses, net of deferred income tax	$	345

At December 31, 2005, the Company evaluated the unrealized loss position for various securities and deemed them to be temporarily impaired. Positive evidence considered in reaching the Company’s conclusion that the investments in an unrealized loss position are not other-than-temporarily impaired consisted of: 1) there were no specific events related to the credit risk of the issuer which caused concerns; 2) there were no past due interest payments; 3) there has been a rise in market prices; 4) the Company’s ability and intent to retain the investment for a sufficient amount of time to allow an anticipated recovery in the market value; and 5) the Company also determined that the changes in market value were considered normal in relation to overall fluctuations in interest rates.

18

The following table represents the fair value and gross unrealized losses for securities where the estimated fair value had declined and remained below amortized cost by less than 12 months, or 12 months or more as of December 31, 2005:

Type of fixed	Less than 12 months					12 months or longer					Total
maturity  investment	Fair  value		Unrealized loss			Fair  value		Unrealized loss			Fair value		Unrealized loss
US government securities	$	1,841	$	(17	)	$	22,118	$	(1,488	)	$	23,959	$	(1,505	)
Mortgage and asset backed securities	8,979		(217		)	32,079		(1,129		)	41,058		(1,346		)
Corporate securities	3,573		(38		)	26,470		(1,058		)	30,043		(1,096		)
Municipal securities	8,684		(85		)	618		(15		)	9,302		(100		)
	$	23,077	$	(357	)	$	81,285	$	(3,690	)	$	104,362	$	(4,047	)

4.Fixed Assets

Fixed assets consist of the following:

December 31, 2005
Leasehold improvements	$	228
Office furniture, fixtures and data processing equipment	11,411
	11,639
Less:  Accumulated depreciation and amortization	6,222
	$	5,417

Depreciation expense was $1,892 for the year ended December 31, 2005.

19

5.Unpaid Losses and Loss Expenses

The following table provides a reconciliation of the beginning and ending balances for unpaid losses and loss expenses for 2005:

December 31, 2005
Balance, January 1,	$	110,643
Less:  reinsurance recoverables	26,282
Net balance, January 1,	84,361
Incurred losses and loss expenses:
Provision for current year claims	43,730
Increase in provision for prior years’ claims	1,035
Total incurred losses and loss expenses	44,765
Payment for losses and loss expenses:
Payment on current year claims	(16,144		)
Payment on prior years’ claims	(37,873		)
Total payments for losses and loss expenses	(54,017		)
Net balance, December 31,	75,109
Plus:  Reinsurance recoverables	18,514
Balance, December 31,	$	93,623

The Company’s liabilities for unpaid losses and loss expense, net of related reinsurance recoverables, at December 31, 2005 were increased by $1,035 for claims that had occurred for prior years.  The unfavorable development during 2005 is mainly attributable to workers’ compensation, private passenger automobile, and other liability lines of businesses offset by favorable development in auto physical damage, homeowners’, and commercial multi-peril lines of businesses.

No additional premiums have been accrued as a result of the increases to prior year unpaid losses and loss expense.

A decrease in anticipated salvage and subrogation of $750 is included in losses incurred for the year ended December 31, 2005.

20

6.Reinsurance

Certain premiums and claims are assumed from and ceded to other insurance companies under various reinsurance agreements. Reinsurance contracts do not relieve the Insurance Companies from their obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Insurance Companies. Generally, Preserver and Mountain Valley reinsure all risks in excess of $300 for 2005 and prior for liability lines and property lines with the exception of workers’ compensation for which the retention up until July 1, 2005 was $150 and $300 thereafter. In addition, Preserver provides reinsurance through state reinsurance pools.

North East’s principal reinsurance protection is provided through a combined per risk excess of loss treaty and reinsures all risks in excess of a retention of $150.

The Company acquired Mountain Valley on March 1, 2000. All business prior to that date was retained by the former owner, Trinity Universal Insurance Company (“Trinity”), a subsidiary of Unitrin, Inc., through reinsurance.

Accordingly, as of March 1, 2000, Mountain Valley had and will continue to have no net unpaid loss and loss expense reserves for losses incurred before March 1, 2000. Reinsurance recoverables on unpaid loss and loss expenses due under the Trinity Quota Share were $1,556 at December 31, 2005. Mountain Valley is subject to credit risk should Trinity not be able to pay its obligations under the Trinity Quota Share. However, Trinity is presently rated A (excellent) by A.M. Best and had $1,153,960 in statutory surplus as of December 31, 2005. Thus, management believes that such credit risk is not material at this time.

Reinsurance recoverable on paid and unpaid loss and loss expenses includes amounts recoverable from the Unsatisfied Claim and Judgment Fund (“UCJF”) of the State of New Jersey, which pertains to New Jersey Personal Injury Protection claims in excess of Preserver’s statutory retention limit of $75,000. Reinsurance recoverable from the UCJF was $3,349 as of December 31, 2005.

21

The Insurance Companies also maintain additional reinsurance contracts for boiler and machinery coverages, commercial umbrella and workers’ compensation policies, catastrophe events and for certain risks that it underwrites which it does not believe are appropriate for coverage by its treaty reinsurance.

The Insurance Companies continually evaluate the financial condition of their reinsurers and monitor concentrations of credit risk arising from activities or economic characteristics of the reinsurers to minimize their exposure to significant losses from future reinsurer insolvencies.

The effect of reinsurance on premiums written and earned is as follows:

December 31, 2005	Written			Earned
Direct	$	88,537		$	95,784
Assumed	16			18
Ceded	(13,459		)	(14,341		)
Net	$	75,094		$	81,461

22

The total amounts included in the accompanying consolidated financial statements for reinsurance are as follows:

December 31, 2005	Premiums  written		Incurred  losses and LAE			Unpaid  losses and LAE		Prepaid  premiums
Ceded to:
Employers Reinsurance Company	$	9,837	$	4,147		$	7,322	$	3,551
American Reinsurance Company	1,307		3,362			7,509		158
Trinity Universal Insurance Co.	—		(1,499		)	1,555		—
NJ Mandatory Pools	238		(2,037		)	1,001		—
Others	2,077		1,563			1,127		215
	$	13,459	$	5,536		$	18,514	$	3,924

7.Long-Term Debt Obligations

Long-term debt obligations consist of the following:

December 31, 2005
Convertible senior debentures	$	10,000
Notes payable	11,500
Convertible subordinated debentures	9,254
Junior subordinated debentures	12,000
	$	42,754

23

In September 1999, the Company issued $10,000 of Convertible Subordinated Debentures (“Debentures”), in one series, under a plan previously approved by its stockholders. The Debentures are due on September 23, 2009 and bear an interest rate of 8.44%, which was 2.5% over the London Interbank Offered Rate (“LIBOR”), fixed as of September 23, 1999, the date the series was issued. At each holder’s option, the Debentures are convertible at any time, in whole or in part, into 646 of the Company’s common shares at the applicable conversion price of $15.49 per share. Interest paid on the Debentures was $781 in 2005. After paydowns, all of the outstanding Debentures of $9,254 are now held by the Company’s 100% shareholders, a group which consists of three individuals (“Ownership Group”).

In February 2000, the Ownership Group extended unsecured debt financing (“Notes”) in the amount of $11,500 to the Company. The original maturity date was February 28, 2002; however, the Notes were amended twice to defer maturity. The first amendment effective February 28, 2003 extended the maturity to February 28, 2006 with an interest rate of 10.605%, and the second amendment effective May 28, 2005 extended the maturity to February 28, 2012 with an interest rate of 8.25%. Interest paid in 2005 was $1,060.

In October 2003, the Company issued $10,000 of Convertible Senior Debentures (“Senior Debentures”) to two members of the Ownership Group. At each holder’s option, the Senior Debentures are convertible at any time, in whole or in part, into 1,280 of Company’s common shares at the applicable conversion price of $7.75 per share.  The Senior Debentures mature October 30, 2023 and pay variable interest quarterly based on the three-month LIBOR, plus 600 basis points. The Senior Debentures had a weighted average interest rate of 9% and interest paid was $909 during 2005.

24

In May 2004, the Company issued $12,000 in Junior Subordinated Notes (“Junior Notes”) to Preserver Capital Trust I (the “Trust”), a subsidiary of the Company. At the same time, the Trust sold trust preferred securities using the Wilmington Trust Company as trustee. The Junior Notes are redeemable in whole or in part on any interest payment date subsequent to May 24, 2009. They bear interest at a three-month LIBOR rate plus 4.25%, with a cap of 12.50% through May 24, 2009. The Company incurred loan origination costs of $368 which are being amortized over the term of the Junior Notes. The Junior Notes had a weighted average interest rate of 8% and interest paid was $949 during 2005.

Future minimum principal payments for the long-term debt obligations are as follows:

Year ending December 31,
2006	$	—
2007	—
2008	—
2009	9,254
Thereafter	33,500
	$	42,754

8.Income Taxes

The Company and its insurance subsidiaries participate in a tax-sharing arrangement. Under this agreement, income taxes are allocated based upon separate return calculations with current credit for losses. Intercompany tax balances are settled annually.

Significant components of the benefit (provision) for income taxes  are as follows:

Year ended December 31, 2005
Total current benefit	$	3,245
Total deferred benefit	3,008
Total benefit	$	6,253

25

The net Federal income tax refund in 2005 was $(304). The provision for Federal income taxes has been determined on the basis of a consolidated return.

The reconciliation of income tax computed at the Company’s U.S. Federal statutory rate of 34% for income tax benefit is as follows:

Year ended December 31, 2005
Income tax benefit at prevailing corporate income tax rates applied to pretax income	$	2,818
Increases in:
Tax-exempt interest	139
Net operating loss recaptured	3,245
Prior year adjustments	36
Other	15
Net income tax benefit	$	6,253

26

Significant components of the Company’s net deferred tax assets as of December 31, 2005 are as follows:

December 31, 2005
Deferred tax assets:
Loss reserve discounting	$	3,181
Unearned premium discount	2,644
Net operating loss carryforward	6,181
FASB 115	1,038
AMT credits	67
Other	265
Total deferred tax assets	13,376
Deferred tax liabilities:
Deferred acquisition costs	(4,468		)
Salvage and subrogation discount	(234		)
Other	(38		)
Total deferred tax liabilities	(4,740		)
Valuation allowance	—
Net deferred tax asset	$	8,636

The Company has $18,180 of regular tax loss carryforwards which will expire through 2023. The Company’s alternative minimum tax credit carryforward for income tax purposes of $67 has no expiration date.

Management periodically evaluates the reliability of its net deferred tax asset and adjusts the level of the valuation allowance if it is deemed more likely than not that all or a portion of the asset is not realizable. As of December 31, 2005, the Company has determined that no valuation allowance is required.

27

9.Stockholders’ Equity

The Insurance Companies prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the respective Departments of Insurance in which they are domiciled (“SAP”).

Prescribed SAP includes a variety of publications of the National Association of Insurance Commissioners (“NAIC”), as well as state laws, regulations and general administrative rules. Permitted SAP encompass all other accounting policies allowed by various departments of insurance.

The consolidated financial statements of the Company’s insurance subsidiaries have been prepared in accordance with GAAP, which differ in certain respects from SAP.

The principal differences relate to (1) acquisition costs incurred in connection with acquiring new business are charged to expense under SAP but under GAAP are deferred and amortized as the related premiums are earned; (2) anticipated salvage and subrogation recoveries which have not been credited to losses incurred for SAP; (3) limitations on net deferred tax assets created by the tax effects of temporary differences; (4) unpaid losses and loss expense and unearned premium reserves are presented gross of reinsurance with a corresponding asset recorded; and (5) fixed maturity portfolios that qualify as available for sale are carried at fair value and changes in fair value are reflected directly in unassigned surplus, net of related deferred taxes.

28

\

As of and for the year ended December 31, 2005	Statutory surplus/ stockholders’ equity (deficit)			Net income  (loss)
Combined statutory basis amounts:	$	65,028		$	6,315
Add (deduct):
Deferred acquisition cost	13,139			(1,540		)
Federal income tax/deferred tax adjustment	(4,087		)	614
Nonadmitted assets	88			—
Other, net	(1,989		)	80
Anticipated salvage and subrogation	7,050			(750		)
Schedule F penalty	199			—
Adjustment to record fixed maturities of insurance subsidiaries at fair value	(3,811		)	—
Combined Insurance Companies GAAP basis amounts	75,617			4,719
GAAP basis amounts of Preserver Group, Inc.	(48,037		)	(6,752		)
Consolidated stockholders’ equity/net loss	$	27,580		$	(2,033	)

29

Statutory basis surplus and statutory basis net income of each of the Insurance Companies are as follows:

	Statutory basis
As of and for the year ended December 31, 2005	Surplus		Net income
Preserver	$	36,573	$	3,537
Mountain Valley	11,962		270
North East	16,493		2,508
	$	65,028	$	6,315

10.Dividend Restrictions

The Insurance Companies are required by law to maintain certain minimum surplus on a statutory basis, and are subject to risk-based capital requirements and to regulations under which payment of a dividend from statutory surplus is restricted and may require prior approval of regulatory authorities. Applying the current regulatory restrictions as of December 31, 2005, and to the extent that statutorily defined surplus is available, $9,889 would be available for distribution to the Company without prior approval. Distribution by the Insurance Companies of the excess of GAAP stockholders’ equity over statutory capital and surplus to the Company is prohibited by law.

11.Risk-Based Capital

Insurance Companies are subject to certain risk-based capital (“RBC”) requirements as specified by the NAIC. Under those requirements, the amount of capital and surplus maintained by a property and casualty insurance company is to be determined based on the various risk factors related to it. At December 31, 2005, each of the Insurance Companies met or exceeded its minimum RBC requirements.

30

12.Pension Plan

The Company maintains a defined contribution plan for substantially all employees. Employer contributions in the amount of $224 was made by the Company in 2005 for its employees and charged to expense.

The Company also maintains a non-qualified deferred compensation plan for certain executive employees. Employer contributions of a discretionary amount are made by the Company. Contributions during 2005 were minimal.

The Company had a noncontributory defined benefit plan (the “Plan”). The Company terminated the Plan effective October 31, 2004. During 2005, the Company received the necessary governmental approval for termination of the Plan and settled all pension plan liabilities resulting in a loss on curtailment of $10,720.

Net periodic pension cost for 2005 included the following components:

December 31, 2005
Interest cost	$	618
Expected return on plan assets	(620		)
Recognized loss	671
Net periodic cost	$	669

Measurement of the Company’s benefit obligation and pension expense as of December 31, 2005 used the following assumptions:

December 31, 2005
Discount rate	5.75	%
Expected return on plan assets	7.75	%
Rate of compensation increase	N/A

31

A reconciliation of the changes in the Plan’s benefit obligations and fair value of assets during 2005 and a statement of the funded status of the Plan as of December 31, 2005 is as follows:

December 31, 2005
Change in benefit obligation:
Benefit obligation at January 1,	$	12,038
Interest cost	618
Actuarial loss	2,478
Benefits paid	(4,285		)
Other - annuities purchased	(10,849		)
Benefit obligation at December 31,	$	—
Change in plan assets:
Fair value of plan assets at January 1,	$	8,106
Actual return on plan assets	411
Employer contribution	6,672
Benefits paid	(4,285		)
Other - annuities purchased	(10,849		)
Fair value of plan assets at December 31,	$	55
Funded status at December 31,	$	—
Unrecognized loss	—
Net amount recognized at December 31,	$	—

32

Plan assets consisted of:

December 31, 2005
Cash and cash equivalents	$	55

13.Post-Retirement Benefits

The Company currently provides certain life and health benefits to retired employees who had twenty-five or more years of service, subject to certain eligibility restrictions. These benefits consist of the payment of medical, life and dental premiums for the retired employees. The Company’s funding policy is to pay for the premiums currently; any future increases in the cost of these benefits will be borne by the retirees and not the Company.

On December 8, 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the “Act”) was signed into law. The Act introduces a prescription drug benefit under Medicare (“Medicare Part D”) as well as a Federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. As of December 31, 2005, the Company had not made a final determination that the Plan provided a benefit that was the actuarial equivalent to Medicare Part D. Accordingly, no provision has been made in the accompanying financial statements for any benefit that may result under the new legislation.

33

Net periodic post-retirement benefit cost included the following components:

Year ended December 31, 2005
Service cost	$	—
Interest cost	53
Amortization of transition obligation	28
Amortization of net loss	47
Net post-retirement expense	$	128

Measurement of the Company’s benefit obligation and post-retirement benefit expense as of December 31 used the following assumptions:

December 31, 2005
Discount rate	5.25	%
Health care cost trend rate	N/A
Expected return on assets	N/A
Average rate of increase in compensation	N/A

34

A reconciliation of the changes in the benefit obligations and fair value of assets during 2005 and a statement of the funded status is as follows:

December 31, 2005
Change in accumulated post-retirement benefit obligation:
Benefit obligation at January 1,	$	982
Service cost	—
Interest cost	53
Employee contributions	121
Benefit paid	(195		)
Actuarial gain	(146		)
Benefit obligation at December 31,	$	815

December 31, 2005
Change in plan assets:
Fair value of plan assets at January 1	$	—
Company contribution	75
Employee contributions	121
Benefits paid	(196		)
Fair value of plan assets at December 31,	$	—
Funded status of the plan:
Benefit obligation less plan assets	$	(815	)
Unamortized transition obligation	193
Unamortized net loss	364
Net accrued liabilities	$	(258	)

35

The development of accrued liabilities is as follows:

December 31, 2005
Accrued benefit liability, beginning of year	$	205
Net post-retirement expense	128
Employer benefit payments	(75		)
Net amount recognized	$	258

It is the policy of the Company that any future increase in the premium to provide life and health care benefits will be borne by the retirees and not the Company; as a result, there will be no increase in either the accumulated post-retirement benefit obligation or the service and interest cost components of net periodic post-retirement benefit cost related to a 1% increase in the health care trend rate.

The following is a summary of projected benefit payments in future years:

Year ending December 31,	Payments without Medicare Part D
2006	$	76
2007	73
2008	69
2009	66
2010	69
2011-2014	315

36

14.          Comprehensive Income

Comprehensive income consisted of the following:

Year ended December 31, 2005
Net loss	$	(2,033	)
Other comprehensive income:
Unrealized gains on securities:
Unrealized during period (net of taxes of $622)	(1,207		)
Reclassification adjustment for losses included in net income (net of taxes of $7)	15
Net unrealized losses	(1,192		)
Minimum pension liability adjustment (net of taxes of $2,723)	5,287
Other comprehensive income	4,095
Comprehensive income	$	2,062

15.          Segment Information

SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” requires that companies report certain information about their operating segments in the interim and annual financial statements, including information about the products and services from which revenues are derived, the geographic areas of operation and information regarding major customers. SFAS No. 131 defines operating segments based on internal management reporting and management’s decisions about assessing performance and allocating resources.

37

The Company considers the financial results of each of the individual Insurance Companies a separate segment:

Year ended December 31, 2005
Revenues:
Insurance Companies:
Preserver	$	38,926
Mountain Valley	24,206
North East	23,735
Total Insurance Companies	86,867
Preserver Group, Inc.	674
Total consolidated group	$	87,541

Year ended December 31, 2005
Net income from consolidated operations:
Insurance Companies:
Preserver	$	2,884
Mountain Valley	(1,234		)
North East	3,069
Total Insurance Companies	4,719
Preserver Group, Inc.	(6,752		)
Total consolidated group	$	(2,033	)

A summary of the Company’s total assets by each segment follows:

December 31, 2005
Insurance Companies:
Preserver	$	117,720
Mountain Valley	40,575
North East	38,677
Total Insurance Companies	196,972
Preserver Group, Inc.	23,453
Total consolidated group	$	220,425

38

16.          Lease Obligations

The Company and its subsidiaries lease office space suitable to conduct its operations, including its home office in Paramus, New Jersey, and office facilities in Albany, New York, Bedford, New Hampshire and Scarborough, Maine under varying terms and expiration dates. These leases are considered operating leases for financial reporting purposes. Some of these leases have options to extend the length of the leases and contain clauses for cost of living, operating expense and real estate tax adjustments. Rental expense was $910 in 2005.

Future minimum lease payments (without provisions for sublease income) are as follows:

Year ending December 31,
2006	$	812
2007	812
2009	812
2009	755
Thereafter	650

17.          Related Party Transactions

The Ownership Group owns 100% of the outstanding common stock of the Company at December 31, 2005. The Company paid directors fees’ of $321 during 2005 to the Ownership Group.

18.          Contingencies

The Company and its subsidiaries are parties to various legal actions and administrative proceedings and subject to various claims arising in the ordinary course of business. The Company believes that the disposition of these matters will not have a material adverse effect on the financial position, the results of operations or cash flows of the Company.

39

Preserver Group, Inc.

and Subsidiaries

Summary of Investments - Other Than Investments

in Related Parties (Schedule I)

(000’s omitted)

					Amount at  which shown
					in the balance
December 31, 2005	Cost*		Value		sheet
Fixed maturities:
Bonds:
United States governmental and governmental agencies and authorities	$	36,001	$	34,526	$	34,526
States, municipalities and political subdivisions	9,291		9,238		9,238
Mortgage and asset-backed securities	46,201		44,916		44,916
All other corporate bonds	38,021		37,026		37,026
Total fixed maturities	129,514		125,706		125,706
Equity securities:
Common stock:
Insurance company	84		884		884
Other invested assets (approximates market value)	17		17		17
Total investments	$	129,615	$	126,607	$	126,607

* Original cost of equity securities and, as to fixed maturities, original cost reduced by repayments    and adjusted for amortization of premiums or accrual of discounts.

40

Preserver Group, Inc.

and Subsidiaries

Supplementary Insurance Information

(Schedule III)

(000’s omitted)

Year ended December 31,  2005 Segment			Reserves for
			losses and								Losses and		Amortization
	Deferred		loss								loss		of deferred
	policy		expenses						Net		expenses		policy		Other		Net
	acquisition		future policy,		Unearned		Premium		investment		incurred,		acquisition		operating		premiums
	costs		benefits		premiums		revenue		income		benefits		costs		expenses		written
Preserver	$	5,989	$	47,304	$	19,647	$	35,196	$	3,203	$	20,046	$	657	$	14,683	$	33,002
Mountain Valley	3,228		37,169		11,387		23,444		781		13,536		789		10,326		19,548
North East	3,923		9,150		11,539		22,821		914		11,183		94		9,294		22,544
Preserver Group	—		—		—		—		323		—		—		801		—
	$	13,140	$	93,623	$	42,573	$	81,461	$	5,221	$	44,765	$	1,540	$	35,104	$	75,094

41

Preserver Group, Inc.

and Subsidiaries

Reinsurance

(Schedule IV)

(000’s omitted)

Year ended December 31, 2005	Gross  amount		Ceded to  other  companies		Assumed  from other  companies		Net amount		Percent of  amount assumed to net
Written premiums:
General insurance	$	88,537	$	13,459	$	16	$	75,094	.02	%

42

Preserver Group, Inc.

and Subsidiaries

Consolidated Supplementary Property and Casualty

Insurance Information (Schedule VI)

(000’s omitted)

	Losses and loss adjustment  expenses incurred related to				Paid losses and loss  adjustment
December 31, 2005	Current year		Prior years		expenses
	$	43,730	$	1,035	$	54,017

43

EX-99.2

Exhibit 99.2

Preserver Group, Inc.
and Subsidiaries

Condensed Consolidated
Financial Statements

Nine Months Ended September 30, 2006 and 2005

Preserver Group, Inc.
and Subsidiaries

Condensed Consolidated
Financial Statements
Nine Months Ended September 30, 2006 and 2005

1

Preserver Group, Inc.
and Subsidiaries

	Contents
Independent accountants’ review report	3
Financial statements:
Condensed consolidated balance sheets	4
Unaudited condensed consolidated statements of income and comprehensive income	5
Unaudited condensed consolidated statements of changes in stockholders’ equity	6
Unaudited condensed consolidated statements of cash flows	7
Notes to unaudited condensed consolidated financial statements	8-20

2

Independent Accountants’ Review Report

To the Board of Directors and Stockholders of
Preserver Group, Inc. and Subsidiaries

We have reviewed the accompanying condensed consolidated balance sheet of Preserver Group, Inc. and Subsidiaries (the “Company”) as of September 30, 2006, and the related condensed consolidated statements of income and comprehensive income, changes in stockholders’ equity and cash flows for the nine-month periods ended September 30, 2006 and 2005 in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. These interim financial statements are the responsibility of the Company’s management.

A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements in order for them to be in conformity with generally accepted accounting principles.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of the Company as of December 31, 2005, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity and cash flows for the year then ended and in our report dated March 15, 2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2005 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ BDO Seidman, LLP

New York, New York

December 20, 2006

3

Preserver Group, Inc.
and Subsidiaries

Condensed Consolidated Balance Sheets
(000’s omitted, except share par value)

	September 30, 2006			December 31, 2005
	(unaudited)
Assets
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost of $113,756 and $129,615, respectively)	$	110,092		$	125,706
Equity securities (cost of $84)	884			884
Mortgage loans (amortized cost of $10 and $17, respectively)	10			17
Cash and cash equivalents	10,184			5,352
Premiums receivable (net of allowance for doubtful accounts of $227 and $288, respectively)	28,257			28,767
Reinsurance recoverable on:
Paid losses and loss expenses	5,471			5,101
Unpaid losses and loss expenses	22,756			18,514
Deferred policy acquisition costs	13,220			13,140
Fixed assets, net	5,938			5,417
Prepaid reinsurance premiums	3,572			3,924
Deferred tax asset	8,027			8,636
Goodwill	1,424			1,424
Federal income tax recoverable	321			321
Other assets	2,304			3,222
	$	212,460		$	220,425
Liabilities and Stockholders’ Equity
Liabilities:
Unpaid losses and loss expenses	$	88,700		$	93,623
Unearned premiums	41,344			42,573
Commissions payable	6,246			7,035
Accounts payable and accrued expenses	4,110			6,860
Long-term debt obligations	42,754			42,754
Total liabilities	183,154			192,845
Commitments and contingencies
Stockholders’ equity:
Common stock, par value $.50 per share: authorized – 10,000 shares; issued and outstanding – 2,124 shares	1,062			1,062
Additional paid-in capital	888			888
Accumulated other comprehensive loss	(1,918		)	(2,012		)
Retained earnings	29,274			27,642
Total stockholders’ equity	29,306			27,580
	$	212,460		$	220,425

See accompanying independent accountants’ review report and
notes to unaudited condensed consolidated financial statements.

4

Preserver Group, Inc.
and Subsidiaries

Unaudited Condensed Consolidated Statements of Income and
Comprehensive Income
(000’s omitted)

Nine months ended September 30,	2006			2005
Revenues:
Insurance premiums (net of ceded premiums:  2006 - $8,845 and 2005 - $9,799)	$	56,593		$	62,033
Net investment income	3,878			3,902
Realized gains (losses) on sales of investments	5			(3		)
Other revenues	277			798
Total revenues	60,753			66,730
Losses and expenses:
Insurance losses and loss expenses incurred (net of ceded losses:  2006 - $8,760 and 2005 - $8,226)	30,169			35,390
Operating expenses	25,365			26,526
Interest expense	3,047			2,666
Total losses and expenses	58,581			64,582
Income before (provision) benefit for Federal income taxes	2,172			2,148
(Provision) benefit for Federal income taxes	(540		)	3,043
Net income	1,632			5,191
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities available-for-sale	97			(1,129		)
Reclassification adjustment for (gains) losses included in earnings	(3		)	2
Comprehensive income	$	1,726		$	4,064

See accompanying independent accountants’ review report and
notes to unaudited condensed consolidated financial statements.

5

Preserver Group, Inc.
and Subsidiaries

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity
(000’s omitted)

	Common stock					Accumulated other
	Number of			Additional		comprehensive			Retained
Nine months ended September 30, 2005	shares	Amount		paid-in capital		loss			earnings		Total
Balance, January 1, 2005	2,124	$	1,062	$	888	$	(6,107	)	$	29,675	$	25,518
Other comprehensive loss	—	—		—		(1,127		)	—		(1,127		)
Net income	—	—		—		—			5,191		5,191
Balance, September 30, 2005	2,124	$	1,062	$	888	$	(7,234	)	$	34,866	$	29,582

	Common stock					Accumulated other
	Number of			Additional		comprehensive			Retained
Nine months ended September 30, 2006	shares	Amount		paid-in capital		loss			earnings		Total
Balance, January 1, 2006	2,124	$	1,062	$	888	$	(2,012	)	$	27,642	$	27,580
Other comprehensive income	—	—		—		94			—		94
Net income	—	—		—		—			1,632		1,632
Balance, September 30, 2006	2,124	$	1,062	$	888	$	(1,918	)	$	29,274	$	29,306

See accompanying independent accountants’ review report and
notes to unaudited condensed consolidated financial statements.

6

Preserver Group, Inc.
and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows
(000’s omitted)

Nine months ended September 30,	2006			2005
Cash flows from operating activities:
Net income	$	1,632		$	5,191
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization of fixed assets	1,277			1,397
Amortization of bond discount	650			836
Loss (gain) on sale of investments	(5		)	3
Change in assets and liabilities:
Premium receivable	510			3,684
Deferred policy acquisition costs	(80		)	1,415
Prepaid reinsurance premium	352			1,152
Federal income tax - current liability	—			(2,419		)
Federal income tax - deferred liability	540			(246		)
Federal income tax recoverable	—			(3,116		)
Reinsurance recoverable	(4,612		)	2,042
Other assets	918			86
Unpaid loss and loss expenses	(4,923		)	(10,078		)
Unearned premium	(1,229		)	(7,151		)
Commission payable	(789		)	(1,749		)
Other liabilities	(2,750		)	(1,712		)
Net cash used in operating activities	(8,509		)	(10,665		)
Cash flows from investing activities:
Sale of investments	25,768			23,986
Purchase of investments	(10,629		)	(16,624		)
Purchase of fixed assets	(1,798		)	(2,222		)
Net cash provided by investing activities	13,341			5,140
Net increase (decrease) in cash and cash equivalents	4,832			(5,525		)
Cash and cash equivalents, beginning of period	5,352			12,535
Cash and cash equivalents, end of period	$	10,184		$	7,010
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	3,014		$	2,684
Income taxes paid	—			3,000

See accompanying independent accountants’ review report and
notes to unaudited condensed consolidated financial statements.

7

Preserver Group, Inc.
and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements
(000’s omitted)

1.	Business
The consolidated financial statements of Preserver Group, Inc. (the “Company”) include its accounts and those of its wholly-owned subsidiary companies. The Company’s insurance subsidiaries, Preserver Insurance Company (“Preserver”), Mountain Valley Indemnity Company (“Mountain Valley”) and North East Insurance Company (“North East”) are collectively referred to as the “Insurance Companies.”
The Company is a New Jersey corporation which owns the Insurance Companies. The Insurance Companies engage in property and casualty insurance, principally small commercial, private passenger automobile and homeowners’ insurance, produced by independent agents. The Company generates substantially all of its revenues from its insurance operations.
2.	Basis of Reporting
The accompanying condensed consolidated balance sheet as of December 31, 2005 (which has been derived from audited financial statements), the condensed unaudited consolidated balance sheet as of September 30, 2006 and the unaudited September 30, 2005 and 2006 condensed consolidated statements of operations and comprehensive income, changes in stockholders’ equity and cash flows have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented.

See accompanying independent accountants’ review report.

8

These condensed consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2005. A summary of more significant accounting policies is set forth in the notes to those audited consolidated financial statements. These financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.
All significant intercompany transactions and accounts have been eliminated in the consolidated financial statements.
3.	Recent Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 155, “Accounting for Certain Hybrid Financial Instruments”. SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, and allows an entity to remeasure at fair value a hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcations from the host if the holder irrevocably elects to account for the whole instrument on a fair value basis. Subsequent changes in the fair value of the instrument would be recognized in earnings. SFAS No. 155 also removed an exception included in an interpretation of SFAS No. 133 (Implementation Issue No. B39) that kept holders of mortgage-backed securities from testifying for the need to bifurcate the value embedded in the mortgage-backed securities related to the ability to prepay. The FASB is currently reviewing the removal of such exception. SFAS No. 155 is effective for financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after

See accompanying independent accountants’ review report.

9

September 15, 2006. The Company has not yet determined the estimated impact on its financial condition or results of operations, if any, of adopting SFAS No. 155 which becomes effective in 2007.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of SFAS No. 109. FIN 48 establishes the threshold for recognizing the benefits of tax-return positions in the financial statements as more-likely-than-not to be sustained by the taxing authorities, and prescribes a measurement methodology for those positions meeting the recognition threshold. The Company has not yet determined the estimated impact on its financial condition or results of operations, if any, of adopting FIN 48 which becomes effective in 2007.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and enhances disclosures about fair value measurements. SFAS No. 157 applies when other accounting pronouncements require fair value measurements; it does not require new fair value measurements. The Company has not yet determined the estimated impact on its financial condition or results of operations, if any, of adopting SFAS No. 157 which becomes effective in 2007.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post- Retirement Plans”. This statement requires an employer to recognize the over-funded or under-funded status of a defined benefit post-retirement plan and to recognize changes in the funded status in the year of change through comprehensive income. The statement is effective as of the end of the fiscal year ending after December 31, 2006. The Company currently does not have any benefit plans subject to this new statement and, therefore, expects no impact to its results of operations or financial position.

See accompanying independent accountants’ review report.

10

4.	Investments
The amortized cost and fair value of investments are as follows:

September 30, 2006	Gross amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Fixed maturities:
U.S. Government securities	$	28,956	$	85	$	(1,586	)	$	27,455
Mortgage and asset-backed securities	39,411		37		(1,346		)	38,102
Corporate securities	33,266		66		(839		)	32,493
Municipal securities	12,123		35		(116		)	12,042
Total fixed maturities	113,756		223		(3,887		)	110,092
Equity securities	84		800		—			884
Mortgage loans	10		—		—			10
	$	113,850	$	1,023	$	(3,887	)	$	110,986

December 31, 2005	Gross amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Fixed maturities:
U.S. Government securities	$	36,001	$	30	$	(1,505	)	$	34,526
Mortgage and asset-backed securities	46,201		61		(1,346		)	44,916
Corporate securities	38,021		101		(1,096		)	37,026
Municipal securities	9,291		47		(100		)	9,238
Total fixed maturities	129,514		239		(4,047		)	125,706
Equity securities	84		800		—			884
Mortgage loans	17		—		—			17
	$	129,615	$	1,039	$	(4,047	)	$	126,607

See accompanying independent accountants’ review report.

11

Net investment income by category of investments consisted of the following:

Nine months ended September 30,	2006			2005
Fixed maturities	$	3,753		$	3,946
Other principally short-term investments	361			161
Total investment income	4,114			4,107
Investment expenses	(236		)	(205		)
Net investment income	$	3,878		$	3,902

See accompanying independent accountants’ review report.

12

The Company evaluated the unrealized loss position for various securities and deemed them to be temporarily impaired. Positive evidence considered in reaching the Company’s conclusion that the investments in an unrealized loss position are not other-than-temporarily impaired consisted of: (1) there were no specific events related to the credit risk of the issuer which caused concerns; (2) there were no past due interest payments; (3) there has been a rise in market prices; (4) the Company’s ability and intent to retain the investment for a sufficient amount of time to allow an anticipated recovery in the market value; and (5) the Company also determined that the changes in market value were considered normal in relation to overall fluctuations in interest rates.

The table below summarizes the gross unrealized losses of fixed maturity and equity securities as of September 30, 2006 based on the duration that the security has remained in an unrealized loss position:

	Less than 12 months					12 months or longer					Total
	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
U.S. Government securities	$	—	$	—		$	26,009	$	(1,586	)	$	26,009	$	(1,586	)
Mortgage and asset-backed securities	570		(2		)	35,008		(1,344		)	35,578		(1,346		)
Corporate securities	983		(4		)	20,932		(835		)	21,915		(839		)
Municipal securities	—		—			9,310		(116		)	9,310		(116		)
Total	$	1,553	$	(6	)	$	91,259	$	(3,881	)	$	92,812	$	(3,887	)

See accompanying independent accountants’ review report.

13

The table below summarizes the gross unrealized losses of fixed maturity and equity securities as of December 31, 2005, based on the duration that the security has remained in an unrealized loss position:

	Less than 12 months					12 months or longer					Total
	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
U.S. Government securities	$	1,841	$	(17	)	$	22,118	$	(1,488	)	$	23,959	$	(1,505	)
Mortgage and asset-backed securities	8,979		(217		)	32,079		(1,129		)	41,058		(1,346		)
Corporate securities	3,573		(38		)	26,470		(1,058		)	30,043		(1,096		)
Municipal securities	8,684		(85		)	618		(15		)	9,302		(100		)
Total	$	23,077	$	(357	)	$	81,285	$	(3,690	)	$	104,362	$	(4,047	)

See accompanying independent accountants’ review report.

14

5.            Long-Term Debt Obligations

Long-term debt obligations consist of the following:

	September 30, 2006		December 31, 2005
Convertible senior debentures	$	10,000	$	10,000
Notes payable	11,500		11,500
Convertible subordinated debentures	9,254		9,254
Junior subordinated debentures	12,000		12,000
	$	42,754	$	42,754

In September 1999, the Company issued $10,000 of Convertible Subordinated Debentures (“Debentures”), in one series, under a plan previously approved by its stockholders. The Debentures are due on September 23, 2009 and bear an interest rate of 8.44%, which was 2.5% over the London Interbank Offered Rate (“LIBOR”), fixed as of September 23, 1999, the date the series was issued. At each holder’s option, the Debentures are convertible at any time, in whole or in part, into 646 of the Company’s common shares at the applicable conversion price of $15.49 per share. Interest paid on the Debentures was $781 in 2005 and 2004, respectively. After paydowns, all of the outstanding Debentures of $9,254 are now held by the Company’s 100% shareholders, a group which consists of three individuals (“Ownership Group”).

In February 2000, the Ownership Group extended unsecured debt financing (“Notes”) in the amount of $11,500 to the Company. The original maturity date was February 28, 2002; however, the Notes were amended twice to defer maturity. The first amendment effective February 28, 2003 extended the maturity to February 28, 2006 with an interest rate of 10.605%, and the second amendment effective May 28, 2005 extended the maturity to February 28, 2012 with an interest rate of 8.25%.

See accompanying independent accountants’ review report.

15

In October 2003, the Company issued $10,000 of Convertible Senior Debentures (“Senior Debentures”) to two members of the Ownership Group. At each holder’s option, the Senior Debentures are convertible at any time, in whole or in part, into 1,280 of Company’s common shares at the applicable conversion price of $7.75 per share.  The Senior Debentures mature October 30, 2023 and pay variable interest quarterly based on the three-month LIBOR, plus 600 basis points. The Senior Debentures had a weighted average interest rate of 9% and 7.5%.

In May 2004, the Company issued $12,000 in Junior Subordinated Notes (“Junior Notes”) to Preserver Capital Trust I (the “Trust”), a subsidiary of the Company. At the same time, the Trust sold trust preferred securities using the Wilmington Trust Company as trustee. The Junior Notes are redeemable in whole or in part on any interest payment date subsequent to May 24, 2009. They bear interest at a three-month LIBOR rate plus 4.25%, with a cap of 12.50% through May 24, 2009. The Company incurred loan origination costs of $368 which are being amortized over the term of the Junior Notes. The Junior Notes had a weighted average interest rate of 8% and 6%.

6.            Income Taxes

The Company and its insurance subsidiaries participate in a tax-sharing arrangement. Under this agreement, income taxes are allocated based upon separate return calculations with current credit for losses. Intercompany tax balances are settled annually.

See accompanying independent accountants’ review report.

16

Income tax (expense) benefit for the nine months ended September 30, 2006 was $(540) compared to $3,043 for the same period of 2005. The following table reconciles the Company’s statutory federal income tax rate to its effective tax rate (in thousands):

September 30,	2006			2005
Income tax provision at prevailing corporate income tax rates applied to pretax income	$	738		$	731
Increase (decrease) in:
Tax-exempt interest	(97		)	(86		)
Prior year adjustments	14			(398		)
Net operating loss recapture	—			(3,245		)
Other	(115		)	21
AMT credit utilized	—			(66		)
Net income tax provision (benefit)	$	540		$	(3,043	)
GAAP effective tax rate	24.9		%	(141.7		)%

7.            Litigation

The Company’s insurance subsidiaries are named as defendants in various legal actions arising principally from claims made under insurance policies and contracts. Those actions are considered by the Company in estimating the loss and LAE reserves. The Company’s management believes the resolution of those actions will not have a material adverse effect on the Company’s financial position or results of operations.

See accompanying independent accountants’ review report.

17

8.            Segment Information

SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” requires that companies report certain information about their operating segments in the interim and annual financial statements, including information about the products and services from which revenues are derived, the geographic areas of operation and information regarding major customers. SFAS No. 131 defines operating segments based on internal management reporting and management’s decisions about assessing performance and allocating resources.

The Company considers the financial results of each of the individual Insurance Companies a separate segment:

Period ended September 30,	2006		2005
Revenues:
Insurance Companies:
Preserver	$	28,194	$	29,709
Mountain Valley	14,531		18,696
North East	17,913		17,738
Total Insurance Companies	60,638		66,143
Preserver Group, Inc.	115		587
Total consolidated group	$	60,753	$	66,730

See accompanying independent accountants’ review report.

18

Period ended September 30,	2006			2005
Net income from consolidated operations:
Insurance Companies:
Preserver	$	2,507		$	271
Mountain Valley	(109		)	(504		)
North East	362			1,820
Total Insurance Companies	2,760			1,587
Preserver Group, Inc.	(1,128		)	3,604
Total consolidated group	$	1,632		$	5,191

A summary of the Company’s total assets by each segment follows:

	September 30, 2006		December 31, 2005
Insurance Companies:
Preserver	$	125,497	$	117,720
Mountain Valley	41,543		40,575
North East	44,393		38,677
Total Insurance Companies	211,433		196,972
Preserver Group, Inc.	1,027		23,453
Total consolidated group	$	212,460	$	220,425

See accompanying independent accountants’ review report.

19

9.            Pension Plan

The Company maintains a defined contribution plan for substantially all employees. Employer contributions in the amount of $181 and $180, respectively, were made by the Company during the nine months ended September 30, 2006 and 2005 for its employees and charged to expense.

The Company also maintains a non-qualified deferred compensation plan for certain executive employees. Employer contributions of a discretionary amount are made by the Company. Contributions during the nine months ended September 30, 2006 and 2005 were minimal.

The Company had a noncontributory defined benefit plan (the “Plan”). The Company terminated the Plan effective October 31, 2004. The Company received the necessary governmental approval for termination of the Plan and settled all pension plan liabilities in October 2005 resulting in a loss on curtailment of $10,720 recognized during the fourth quarter of 2005.

10.          Subsequent Event

The stockholders of the Company have entered into an agreement on November 13, 2006 to sell all of the outstanding common stock of the Company to Tower Group, Inc. This agreement is subject to customary regulatory approvals.

See accompanying independent accountants’ review report.

20

EX-99.3

Exhibit 99.3

SELECTED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

On November 13, 2006, Tower Group, Inc. (“Tower”) entered into a Stock Purchase Agreement (the “Agreement”) to acquire all the outstanding shares of common stock of Preserver Group, Inc. (“Preserver”) for a base purchase price of approximately $68.3 million, subject to certain closing adjustments and receipt of regulatory approvals. The closing is expected to occur during the first quarter of 2007. The Agreement provides for using a portion of the proceeds to pay off certain debt owed to Preserver shareholders and to settle Preserver’s direct transaction costs. These transactions have been reflected in the unaudited pro forma condensed consolidated balance sheet as if completed as of September 30, 2006 and in the unaudited condensed consolidated statements of income and comprehensive net income as if it had occurred at the beginning of the period presented. The Preserver consolidated financial statements will be included as an exhibit in this Form 8-K.

The following unaudited pro forma condensed consolidated financial information consolidates the historical consolidated statements of income and consolidated balance sheet of Tower and the historical consolidated statements of income and consolidated balance sheet of Preserver. Those historical financial statements were prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The unaudited pro forma condensed consolidated financial information has been prepared using the assumptions described in the notes thereto.

The unaudited pro forma condensed consolidated financial information below should be read in conjunction with the notes thereto and the historical consolidated financial statements of Preserver, including the notes thereto, which are also included as an exhibit to this Form 8-K, as well as in conjunction with the historical consolidated financial information of Tower included in its Annual Report on Form 10-K for the year ended December 31, 2005 and Quarterly Report on Form 10-Q for the nine months ended September 30, 2006. This unaudited pro forma condensed consolidated financial information is presented for informational purposes only and is not necessarily indicative of the financial position or results of operations of the consolidated company that would have actually occurred had the acquisition been effective during the periods presented or of the future financial position or future results of operations of the consolidated company. The consolidated financial information as of September 30, 2006 and for the periods that are presented may have been different had the companies actually been consolidated as of that date or during those periods due to, among other factors, possible revenue enhancements, expense efficiencies and integration costs. Additionally, as discussed in Note 1, the actual allocation of the purchase price to the acquired assets and liabilities may vary materially from the assumptions used in preparing the unaudited pro forma condensed consolidated financial information.

1

TOWER GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
September 30, 2006
($ in thousands, except par value and share amounts)

									Pro Forma				Pro Forma
	Historical				Historical				Purchase				Financing						Pro Forma
	Tower				Preserver				Adjustments				Adjustments				Notes		Consolidated
Assets
Investments & cash		$	486,256			$	121,170			$	(68,250	)		$			2			$
										3,479							2, 3(a	)
										(2,100		)					2, 3(a	)
														70,000			2(i), 3(a	)
														(5,364		)	2(i), 3(a	)
														20,619			2(i), 3(a	)
														39,600			2(i), 3(a	)
														(40,000		)	2(i), 3(a	)		625,410
Investment income receivable		4,123				—				—				—						4,123
Agents’ balances receivable		55,245				28,257				—				—						83,502
Assumed premiums receivable		4,910				—				—				—						4,910
Reinsurance recoverable		108,515				28,227				—				—			3(h), 3(b	)		136,742
Receivable—claims paid by agency		3,633				—				—				—						3,633
Prepaid reinsurance premiums		79,102				3,572				—				—						82,674
Deferred acquisition costs net of deferred ceding commission revenue		34,783				13,220				—				—						48,003
Federal and state income taxes recoverable		3,134				321				887				—			3(c	)		4,342
Deferred income taxes		242				8,027				1,517				—			3(c	)		9,786
Intangible assets		5,830				—				10,243				—			3(d	)
										5,200				—			3(d	)		21,273
Goodwill		—				1,424				(1,424		)		—			3(e	)		—
Fixed assets, net of accumulated depreciation		23,912				5,938				(2,533		)		—			3(g	)		27,317
Investment in unconsolidated affiliate		27,436				—				—				—						27,436
Other assets		4,342				2,304				—				—						6,646
Total Assets		$	841,463			$	212,460			$	(52,981	)		$	84,855					$	1,085,797
Liabilities
Loss and loss adjustment expenses		$	279,600			$	88,700			$	—			—			3(h	)		$	368,300
Unearned premium		204,666				41,344				—				—						246,010
Reinsurance balances payable		24,851				6,246				—				—						31,097
Payable to issuing carriers		1,818				—				—				—						1,818
Funds held as agent		8,195				—				—				—						8,195
Funds held under reinsurance agreements		57,024				—				—				—						57,024
Accounts payable and accrued expenses		12,179				4,110				3,660				—			3(a	)		19,949
Payable to selling shareholders										3,419				—			3(d	)		3,419
Deferred rent		6,040				—				—				—						6,040
Payable for securities		939				—				—				—						939
Other liabilities		3,580				—				—				—						3,580
Long-term debt						30,754				(30,754		)		—			3(a	)		—
Subordinated debentures		68,045				12,000				—				20,619			2(i), 3(a	)		100,664
Total Liabilities		666,937				183,154				(23,675		)		20,619						847,035
Stockholders’ Equity
Common Stock ($0.01 par value per share)		200				1,062				(1,062		)		32			3(i), 3(a	)		232
Preferred stock ($1,000 liquidation preference per share)						—				—				39,600			2(i), 3(a	)		—
														(39,600		)	2(i), 3(a	)
Paid-in-capital		112,824				888				(888		)		—			3(i	)
										—				(400		)	3(a	)
										—				69,968			2(i), 3(a	)
										—				(5,364		)	2(i), 3(a	)		177,035
Accumulated other comprehensive net income		(1,108		)		(1,918		)		1,918				—			3(i	)		(1,108		)
Retained earnings		62,789				29,274				(29,274		)		—			3(i	)		62,789
Treasury stock		(179		)		—				—				—						(179		)
Total Stockholders’ Equity		174,526				29,306				(29,306		)		64,236						238,762
Total Liabilities and Stockholders’ Equity		$	841,463			$	212,460			$	(52,981	)		$	84,855					$	1,085,797

2

TOWER GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENTS OF INCOME
For the Nine Months Ended September 30, 2006

(in thousands, except per share amounts)

	Historical Tower			Historical Preserver			Pro Forma Purchase Adjustments				Pro Forma Financing Adjustments			Notes	Pro Forma Consolidated
Revenues
Net premiums earned	$	168,908			$	55,758		$	—			$	—		$	224,666
Ceding commission revenue	30,550				1,552			—				—			32,102
Insurance services revenue	5,274				—			—				—			5,274
Net investment income	15,875				3,878			—				866		3(k)	20,619
Net realized gains (losses) on investments	(84		)		5			—				—			(79		)
Policy billing fees	830				835			—				—			1,665
Other revenus	—				277			—				—			277
Total revenues	221,353				62,305			—				866			284,524
Expenses
Loss and loss adjustment expenses	105,026				30,169			—				—			135,195
Direct commission expense	43,654				—			—				—			43,654
Other operating expenses	38,718				26,917			—				—
								253				—		3(d)
								(894		)		—		3(l)
								(218		)		—		3(g)	64,776
Interest Expense	5,066				3,047			(2,174		)				3(i)
								—				1,243		3(j)	7,182
Total expenses	192,464				60,133			(3,033		)		1,243			250,807
Other Income
Equity increase in unconsolidated affiliate	364				—			—				—			364
Gain from issuance of common stock by unconsolidated affiliate	7,883				—			—				—			7,883
Warrant received from unconsolidated affiliate	4,605				—			—				—			4,605
Income before income taxes	41,741				2,172			3,033				(377)			46,569
Income tax expense	14,490				540			1,062				(132)		3(m)	15,960
								22				—		3(m)	22
Net Income	$	27,251			$	1,632		$	1,949			$	(245)		$	30,587
Earnings Per Share
Basic earnings per common share	$	1.38													$	1.38
Diluted earnings per common share	$	1.36													$	1.36
Weighted-Average Common Shares Outstanding:
Basic	19,734,365														22,122,365
Diluted	20,032,256														22,420,256

3

TOWER GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENTS OF INCOME
For the Twelve Months Ended December 31, 2005
(in thousands, except per share amounts)

	Historical Tower		Historical Preserver				Pro Forma Purchase Adjustments				Pro Forma Financing Adjustments				Notes		Pro Forma Consolidated
Revenues
Net premiums earned	$	164,436		$	80,272			$	—			$	—					$	244,708
Ceding commission revenue	25,218			—				—				—						25,218
Insurance services revenue	14,103			—				—				—						14,103
Net investment income	14,983			5,221				—				1,052				3(k)		21,256
Net realized gains (losses) on investments	122			(22		)		—				—						100
Policy billing fees	892			1,189				—				—						2,081
Other revenues	—			881				—				—						881
Total revenues	219,754			87,541								1,052						308,347
Expenses
Loss and loss adjustment expenses	96,614			44,765				—				—						141,379
Direct commission expense	43,839			—				—				—						43,839
Other operating expenses	42,632			36,644				—				—
								337				—				3(d)
								(1,205		)		—				3(l)
								(291		)		—				3(g)		78,117
Settlement and curtailment—pension plan	—			10,720				—				—						10,720
Interest Expense	4,853			3,698				(2,750		)		—				3(j)
												1,658				3(j)		7,459
Total expenses	187,938			95,827				(3,909		)		1,658						281,514
Other Income
Equity increase in unconsolidated affiliate	—			—				—				—						—
Gain from issuance of common stock by unconsolidated affiliate	—			—				—				—						—
Warrant received from unconsolidated affiliate	—			—				—				—						—
Income before income taxes	31,816			(8,286		)		3,909				(606		)				26,833
Income tax expense	11,062			(6,253		)		1,368				(212		)		3(m)		5,965
								(82		)		—				3(m)		(82		)
Net Income	$	20,754		$	(2,033	)		$	2,623			$	(394	)				$	20,950
Earnings Per Share
Basic earnings per common share	$	1.06																$	0.95
Diluted earnings per common share	$	1.03																$	0.93
Weighted-Average Common Shares Outstanding:
Basic	19,571,081																	21,959,081
Diluted	20,147,073																	22,535,073

4

Tower Group, Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED FINANCIAL INFORMATION

1.   BASIS OF PRESENTATION

The unaudited pro forma condensed consolidated financial information gives effect to the proposed acquisition as if it had occurred at September 30, 2006 for the purposes of the unaudited pro forma condensed consolidated balance sheet and at January 1, 2006 and January 1, 2005 for the purposes of the unaudited pro forma condensed consolidated statements of income for the nine months ended September 30, 2006 and the year ended December 31, 2005, respectively. The unaudited pro forma condensed consolidated financial information has been prepared by Tower’s management and is based on Tower’s historical consolidated financial statements and Preserver’s historical consolidated financial statements, which have been prepared by Preserver. Certain amounts from Preserver’s historical consolidated financial statements have been reclassified to conform to the Tower presentation

This unaudited pro forma condensed consolidated financial information is prepared in conformity with GAAP. The unaudited pro forma condensed consolidated balance sheet as of September 30, 2006 and the unaudited pro forma condensed consolidated statements of income for the year ended December 31, 2005 and the nine months ended September 30, 2006 have been prepared using the following information:

(a)Unaudited historical consolidated financial statements of Tower as of September 30, 2006 and for the nine months ended September 30, 2006;

(b)Unaudited historical consolidated financial statements of Preserver as of September 30, 2006 and for the nine months ended September 30, 2006;

(c)Audited historical consolidated financial statements of Tower for the year ended December 31, 2005;

(d)Audited historical consolidated financial statements of Preserver for the year ended December 31, 2005; and

(e)Such other supplementary information as considered necessary to reflect the acquisition in the unaudited pro forma condensed consolidated financial information.

The pro forma adjustments reflecting the acquisition of Preserver under the purchase method of accounting are based on certain estimates and assumptions. The unaudited pro forma condensed consolidated adjustments may be revised as additional information becomes available. The actual adjustments upon consummation of the acquisition and the allocation of the final purchase price of Preserver will depend on a number of factors, including additional financial information available at such time, changes in values and changes in Preserver’s operating results between the date of preparation of this unaudited pro forma condensed consolidated financial information and the effective date of the acquisition. Therefore, it is likely that the actual adjustments will differ from the pro forma adjustments and it is possible 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 the anticipated financial benefits or expenses from operating expense efficiencies or revenue enhancements

5

Tower Group, Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements (Continued)

arising from the acquisition nor does the unaudited pro forma condensed consolidated financial information include the portion of restructuring and integration costs to be incurred by Tower, except for certain fair value adjustments, interest expense and directors fees which have been eliminated as a consequence of the completion of the acquisition.

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 acquisition 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, 2005 and Quarterly Report on Form 10-Q for the nine months ended September 30, 2006, as well as  the historical consolidated financial statements of Preserver which are also included as an exhibit to this Form 8-K.

2.   PURCHASE PRICE AND FINANCING CONSIDERATIONS

Pursuant to the Agreement, Tower will pay Preserver a base purchase price of approximately $68.3 million at the closing to acquire all of the outstanding shares of capital stock of Preserver and to redeem $30.8 million of debt to Preserver’s shareholders and settle $3.5 million of Preserver’s transaction costs. The net amount paid to Preserver’s shareholders at the closing is expected to be $64.8 million. The closing is expected to occur during the first quarter of 2007. This purchase price is subject to certain adjustments, including adjustments based on differences between estimated and actual adjusted stockholders’ equity at closing. The potential purchase price adjustments are more fully described in the Agreement.

The financing related to the cash portion of the purchase price will be finalized as a consequence of the completion of this offering and may include the use of preferred stock, common stock and trust preferred securities.

The pro forma financial information included herein reflects management’s best estimate of the forms and amounts of financing at the time this pro forma financial information was prepared. The actual form of financing of the acquisition may involve different forms of financing and/or different amounts of the same financing vehicles. These differences in form and amount of financing could result in materially different pro forma adjustments than those presented in this pro forma financial information. The pro forma financial information presented herein is based upon the following:

(i)On November 13, 2006, Tower entered into a Stock Purchase Agreement (the “Preferred Stock Purchase Agreement”) with CastlePoint Reinsurance Company, Ltd. (“CastlePoint Reinsurance”) pursuant to which the Company agreed to issue and sell 40,000 shares of non-cumulative, perpetual series A preferred stock (the “Preferred Stock”) to CastlePoint Reinsurance for an aggregate consideration of $40 million. On December 4, 2006, Tower received $39.6 million in net proceeds after issuance costs from CastlePoint Reinsurance in full payment for the preferred stock. The preferred stock has a liquidation preference of $1,000 per share. Dividends will be non-cumulative and will be payable quarterly at the rate of 8.66% per annum. The Preferred Stock is redeemable by the Company at any time, in whole or

6

Tower Group, Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements (Continued)

in part, at a price per share equal to the liquidation preference plus declared and unpaid dividends. In December 2006, CastlePoint Reinsurance and Tower entered into discussion to redeem the entire 40,000 shares of Preferred Stock at the time of this offering. The pro forma financial information assumes that the Company successfully completes an underwritten public offering of $70 million of common stock and that the preferred stock will be redeemed with funds raised from the common stock offering and from a $20.6 million trust preferred offering as discussed below.

The unaudited pro forma condensed consolidated statements of income reflect the impact of these financing arrangements using Tower’s current borrowing rates for such types of securities and the actual dividend rate included in the preferred stock purchase agreement with CastlePoint Reinsurance. The estimated issuance costs for the trust preferred securities and equity is approximately $5.0 million, which represents a 5% underwriting discount and 1% for other issuance costs for the equity issuance and a 2% placement fee for the issuance of the trust preferred securities and ..25% for other issuance costs. Actual borrowing and issuance costs may vary from such estimates which are based on the best information available at the time the unaudited pro forma condensed consolidated financial information was prepared. Changes in interest rates and credit spreads could change the assumed borrowing rate for the trust preferred securities.

On November 16, 2006, Tower Group, Inc. filed a shelf registration on Form S-3 for $60 million of equity securities with the Securities and Exchange Commission. On January 11, 2007, Tower amended that registration statement to increase the amount registered to $81 million. The pro forma financial information assumes that the amount raised was increased to $70 million subsequent to the original shelf Registration Statement.

7

Tower Group, Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements (Continued)

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

($ in thousands)

	Pro forma Footnote			Anticipated Financing			Range of Potential Financing	Interest/Dividend Rate		Interest/ Dividend Annual $
Sources (in thousands):
Tower Group, Inc. Common Stock (A)				$	70,000.0		$60,000–$81,000		$0.10 per share	$	281.3
Trust Preferred Securities (B)		2	(i)	20,619.0			$12,000–30,000		8.039%	1,657.6
Preferred Stock		2	(i)	40,000.0			Executed on 12/4/2006		8.660%	3,464.0
Total Sources of funds:				$	130,619.0
Uses:
Debt Issuance Costs ($20.6 million x 2.25%) (A)		3	(a)	$	463.9
Equity Issuance Costs (A)		3	(a)	4,500.0
Preferred Stock Issuance Costs on 12-4-06				400.0
Purchase Price Paid to Preserver		2		66,871.0
General Corporate Purposes (C)				18,384.1
Preferred Stock Repayment		2	(i)	40,000.0
Total Uses of funds				$	130,619.0
Purchase Price
Purchase Price Paid to Preserver				$	64,771.0
Other transaction costs—Tower’s		3	(i)	2,100.0
Total Purchase Price				66,871.0
Allocation of Purchase Price (D)
Book value of Preserver at 9/30/2006				$	29,306.0
Preserver Shareholder Debt Repayment				30,754.0
Less Accrual for Preserver transaction costs net of tax				(2,379.0		)
Estimated Fair Value Adjustments				12,608.6
Estimated Fair Value of New Assets Acquired				70,289.6
Estimated Payable to Selling Shareholders (E)				(3,418.6		)

(A)Common stock dividend rates are set annually and are not reflected in the unaudited pro forma condensed consolidated financial information.

8

Tower Group, Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements (Continued)

(A)The issuance costs are an estimate that the Company expects to incur as a result of the $70 million offering of common stock and the $20.6 million offering of trust preferred securities. Issuance costs will change based upon the final amounts raised.

(B)Debt securities are expected to consist of subordinated debentures underlying trust preferred securities, which may be fixed or floating rate debt.

The interest rate estimate noted above, which has been used to calculate the impact of the financing on the pro forma financial information, reflects the range associated with such potential issuances and is based on Tower’s borrowing rates at the time of the preparation of the pro forma financial information. The actual interest rates may differ from those estimated above.

Tower’s borrowing rates are sensitive to changes in risk-free rates and credit spreads. An increase in composite interest rates of one-quarter of one percent on debt issuances would result in an increase in annual interest expense of $50 thousand and the related impact on earnings per share would be minor.

(C)The remaining funds will be used for general corporate purposes. On December 8, 2006, the Company contributed $39.6 million to TICNY from the proceeds of the issuance of preferred stock which in turn will be used to fund approximately $25 million towards the acquisition of Preserver and will invest the remaining funds.

(D)The purchase price is allocated to balance sheet assets acquired (including identifiable intangible assets arising from the acquisition) and liabilities assumed based on their estimated fair value. The fair value adjustments to the Preserver historical consolidated balance sheet in connection with the acquisition are described below in Note 3.

(E)As described more fully in footnotes 3(b) and 3(f), the Company is considering entering into a reinsurance agreement which may cause the estimate of goodwill and the estimate for the payable to the selling shareholders in this pro forma financial information to be materially different at the closing date. Due to the uncertainty of Preserver reaching agreeable terms with respect to the reinsurance agreement, an estimated liability for a payable to selling shareholders has been recorded in accordance with FASB 141, paragraph 46 which requires the Company to record a liability for the excess of the fair value of new assets acquired in a business combination over the purchase price. This liability is only recorded for a business combination involving a contingent consideration agreement that might result in the recognition of an additional element of cost of the acquired entity when the contingency is resolved.

3.   PRO FORMA ADJUSTMENTS

Adjustments

As discussed above, these pro forma adjustments are based on certain estimates and assumptions made as of the date of the unaudited pro forma condensed consolidated financial information. The actual adjustments will depend on a number of factors, including changes in the estimated fair value of net balance sheet assets and operating results of Preserver between September 30, 2006 and the effective date of the acquisition. Tower expects to make such adjustments at the effective date of the acquisition. These adjustments may be different from the adjustments made to prepare the unaudited pro forma condensed consolidated financial information and such differences may be material.

(a)The pro forma financing adjustments represent funds raised as a result of the issuance of $40 million of preferred stock, $70 million of common stock and $20.6 million of trust preferred securities. The Company expects to redeem all of the $40 million of the preferred stock as discussed in note 2(i).

9

Tower Group, Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements (Continued)

(a)On the closing date, $30.8 million of the $64.8 million net proceeds will be used to redeem Preserver shareholder debt.

Issuance costs of $5.4 million represent $4.5 million for the common stock offering, $0.5 million for the trust preferred securities offering debt and $0.4 million for the preferred stock issuance.

Transaction costs of $2.1 million consist primarily of accounting, actuarial and legal fees. Actual costs may vary from such estimates. In addition, Preserver’s purchase price was reduced by $2.4 million representing employee incentive costs associated with shareholder efforts to sell the company, net of tax, and $1.1 million representing legal and accounting costs.

(b)Reinsurance - Under the Preserver Purchase Agreement, Tower has the right to cause Preserver to adjust its loss and loss adjustment expense reserves or execute a loss portfolio transfer (“LPT”) cover. Tower and Preserver have been discussing with CastlePoint Reinsurance the terms of a possible LPT reinsurance agreement between CastlePoint Reinsurance and the insurance subsidiaries of Preserver.  Under the LPT, which would be entered into immediately before the closing of the Preserver acquisition, CastlePoint Reinsurance would reinsure 75% of the ultimate net reserves for losses and loss adjustment expenses of the Preserver insurance companies as of the closing date of the acquisition for accident years 2006 and prior.  The premium consideration under discussion for this cover is estimated to be 75% of the Preserver insurance companies’ carried net reserves as of December 31, 2006 plus an additional amount in the range of $14 to $16 million. The total premium would be adjusted for loss and loss adjustment expense payments and any reserve strengthening by Preserver from December 31, 2006 up to the effective date of the LPT cover relating to loss occurrences on or before December 31, 2006.  The terms would also include a profit commission payable to the Preserver insurance companies in the event and to the extent that the net reserves as of December 31, 2006 prove not to be deficient or are deficient by less than an amount to be determined. The profit commission would fund an additional purchase price that may be payable under the Preserver Purchase Agreement in approximately three years following the closing. However, current negotiations between Tower and Preserver include consideration of an amendment to the Preserver purchase agreement under which the provisions relating to the original purchase price would be deleted in consideration for increasing the purchase price payable at closing.

There is no signed agreement with CastlePoint Reinsurance, and the premium, limits of coverage, terms of the profit sharing commission and other terms of the LPT will not be finalized until after Preserver’s reserves for losses and loss adjustment expenses as of December 31, 2006 have been determined.  The terms of the LPT agreement would be subject to regulatory approval.  Accordingly, there can be no assurance that CastlePoint Reinsurance will agree to provide an LPT cover or that the terms of any LPT cover will be on the terms described above. Due to this uncertainty, the effect of the LPT has not been reflected in the pro forma statements.

However, if executed, and inasmuch as the LPT cover would be contingent on and expected to occur contemporaneously with the acquisition, the LPT would qualify for prospective reinsurance accounting treatment under the Emerging Issues Task Force Technical Matter Document No. D-54 ("EITF Topic D-54").  This would characterize the protection as an indemnification by the seller for increases in the liabilities for losses and loss adjustment expenses that existed at the acquisition date. If the Preserver insurance companies are successful in executing an LPT agreement, the pro forma statements will materially differ at the closing date.  The ceded loss and loss adjustment expense

10

Tower Group, Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements (Continued)

reserves at September 30, 2006 would have been $49.5 million and Preserver would have recorded approximately $64.5 million of ceded premium written and earned and $49.5 million of ceded losses for both the nine months ended September 30, 2006 and for the year ended December 31, 2005.  The pre tax loss and net loss would have been approximately $15.0 million and $9.8 million, respectively.

The net book value of Preserver would decrease by $9.8 million, while goodwill would increase to $6.3 million.  In addition, investments and cash would decrease by approximately the amount of the premium for the LPT, which was estimated to be $64.5 million at September 30, 2006 based upon the terms discussed above.  If the LPT is executed with CastlePoint Reinsurance, Preserver’s reinsurance recoverables arising from the LPT would be collateralized under a trust agreement and/or a letter of credit.

(c)Deferred income taxes are adjusted to reflect the income tax effects of the pro forma purchase adjustments. The net effect of such adjustments is an increase in deferred tax assets by $1.5 million, which primarily relates to the increase in Preserver’s net operating losses arising from Preserver’s transaction costs, discussed in note 3(a) and Preserver’s marginal tax rate increasing from 34% to Tower’s marginal tax rate of 35%. As discussed in footnote 3(b) Preserver is currently in discussions with CastlePoint Reinsurance to execute a LPT cover which would increase the deferred tax asset. The pro forma statements of income includes an adjustment to increase Preserver’s marginal tax rate to 35%.

(d)Represents the recognition of $15.4 million of identifiable intangible assets, comprised of $10.2 million relating to Preserver’s renewal and agency force book of business acquired as a part of the purchase and $5.2 million relating to insurance licenses. The pro forma statements of income reflect amortization expense for the first nine months of 2006 and a full year 2005 of $0.3 million and $0.3 million, respectively. The renewal rights and agency force book of business acquired will be amortized over ten and twenty years, respectively, and is subject to impairment testing. The intangible asset related to the insurance licenses is perpetual and will be subject to annual impairment testing.

(e)Elimination of Preserver’s historical goodwill of $1.4 million.

(f)As more fully discussed in footnote 3(b), Preserver is negotiating with CastlePoint Reinsurance for a LPT cover which, if executed, would reduce Preserver’s pro forma book value and the estimated fair value of net assets acquired. Since the purchase price would remain the same, goodwill would, therefore, increase to an estimated $4.4 million. However, due to the uncertainty of executing an LPT, no adjustment has been reflected in the pro forma balance sheet for such a transaction. Excluding such an adjustment, the estimated fair value of net assets acquired of $70.3 million is greater than the purchase price of $66.9 million. Therefore, a liability for a payable to selling shareholders of $3.4 million has been reflected in the pro forma balance sheet pending the resolution of the negotiations with CastlePoint Reinsurance.

(g)Adjustment to fixed assets of $2.5 million ($1.6 million net of tax) represents the fair value adjustment for abandoning certain software related costs. These costs are associated with internally developed software and other software applications, which the Company expects to abandon as a result of migrating Preserver to Tower’s technology platform. The estimated useful life has been reduced as a result of the acquisition and for pro forma purposes, management has assumed that the migration will be completed by June 30, 2008. The pro forma statements of income reflect depreciation expense for the first nine months of 2006 and the full year 2005 of $0.2 million and $0.3 million, respectively.

11

Tower Group, Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements (Continued)

(h)The fair value of Preserver’s reserve for losses and loss adjustment expenses and related reinsurance recoverables were estimated based on the present value of the underlying cash flows of the loss reserves and reinsurance recoverables, and includes a risk premium. In determining the fair value estimate, management discounted Preserver’s historical undiscounted net loss reserves to present value assuming a 4.6% discount rate, which approximates the current U.S. Treasury rate for a duration similar to the loss and loss adjustment expense duration of Preserver. The discounting pattern was actuarially developed from Preserver’s historical loss data. Additionally, an estimated risk premium of 8.0% was applied to the discounted loss reserves, which is deemed to be reasonable and consistent with expectations in the market place given the nature and the related degree of uncertainty of such reserves. Management uses historical loss development patterns to set loss reserves. Risks that are not captured in the analysis include new or emerging torts, increases in the rate of inflation, new classes of claimants, payout pattern faster than expected,  occurrence policies that do not have a deadline to file a claim,  and pricing risk in the most recent accident year where a significant portion of the reserves reside. These risks could materially impact the booked reserves and management is assuming that such risks not captured in the historical data equal the discount in the loss reserves. The above calculation did not result in an adjustment to Preserver’s carried reserves for losses and loss adjustment expenses.

(i)Elimination of Preserver’s historical equity balances.

(j)Interest expense from financing was increased by $1.2 million and $1.7 million, respectively, for the nine months of 2006 and full year of 2005, which resulted from the issuance of the trust preferred securities disclosed in Note 2. Interest expense also decreased by $2.2 million and $2.8 million, respectively, on the pro forma statement of income for the nine months of 2006 and full year of 2005, resulting from the repayment of the shareholder debt as disclosed in note 2. The yield of 8.039% on the trust preferred securities approximates Tower’s currently available market interest rate for these securities.

(k)Net investment income increased as a result of the increase in funds resulting from both the net equity proceeds and the trust preferred securities. The pro forma financing adjustment for the net equity proceeds increased net investment income by $3.6 million and $4.3 million, respectively, for the nine months of 2006 and the full year 2005. The pro forma financing adjustment for the trust preferred securities increased net investment income by $0.9 million and $1.1 million, respectively, for the nine months of 2006 and full year 2005. Tower’s average yield of fixed maturities was 5.6% and 5.1%, respectively, for the nine months of 2006 and the full year 2005.

(l)The pro forma statements of income assumes the elimination of Preserver’s board of director’s fees of $0.9 million and $1.2 million, respectively, for the nine months ending September 30, 2006 and the full year 2005.

(m)Represents the income tax effect of all pro forma consolidated statement of income adjustments using a tax rate of 35% adjusted to eliminate certain tax items which are not relevant to this current pro forma presentation. For pro forma statement purposes only, Preserver’s marginal tax rate was increased to Tower’s marginal tax rate of 35%.

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Tower Group, Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements (Continued)

4.   EARNINGS PER COMMON SHARE

(a)Pro forma earnings per common share for the nine months ended September 30, 2006 and the year ended December 31, 2005 has been calculated based on the estimated weighted average number of common shares outstanding on a pro forma basis, as described below. The historical weighted average number of common shares outstanding of Tower was 19,734,365 and 20,032,256, basic and diluted, respectively, for the nine months ended September 30, 2006 and 19,571,081 and 20,147,073, respectively for the year ended December 31, 2005.

(b)The pro forma weighted average number of common shares outstanding for the nine months ended September 30, 2006, after giving effect to the common stock offering, is 22,122,365 and 22,420,256, basic and diluted, respectively. The additional common stock was calculated using the $62.9 million of new equity expected to be used for the acquisition divided by an estimated stock price of $28.00 per share or 2,388,000 shares. The remainder of the proceeds of the common stock offering will be used for general corporate purposes and formation and capitalization of an insurance company, which will write excess and surplus lines insurance. These proceeds are excluded from the pro forma calculation as they are not directly associated with the acquisition of Preserver. The pro forma weighted average number of common shares outstanding for the twelve months ended December 31, 2005, after giving effect to the common stock offering, is 21,959,081 and 22,535,073, basic and diluted, respectively.

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EX-99.4

Exhibit 99.4

	Press Release
Contact Information:
Thomas Song
Managing Vice President
Tower Group, Inc.
212-655-4789
tsong@twrgrp.com

Tower Group, Inc. Amends Shelf Registration Statement — Maintains 2007 Guidance

New York — January 11, 2007 — Tower Group, Inc. (NASDAQ: TWGP) today amended the Form S-3 registration statement filed with the Securities and Exchange Commission on November 16, 2006 to register $81 million of equity securities for the account of the Company and to remove from registration the $5 million of common stock for the account of a selling stockholder.

Proceeds from the issuance and sale of securities under the registration statement as well as other proposed offerings by the Company are expected to be used to fund a portion of the purchase price of the Company’s recently announced acquisition of Preserver Group, Inc., to redeem the Company’s outstanding preferred stock and for general corporate purposes, including support for anticipated premium growth in 2007.

Including the expected effects of any financings resulting from this amended registration statement, Tower Group, Inc., reiterates its anticipated net income in 2007 to be in a range between $55 million and $57 million and diluted earnings per share in 2007 to be between $2.40 and $2.50 per diluted share.

About Tower Group, Inc.

Tower Group, Inc., headquartered in New York City, offers property and casualty insurance products and services through its insurance company and insurance service subsidiaries. Its two insurance company subsidiaries are Tower Insurance Company of New York which is rated A- (Excellent) by A.M. Best Company and offers commercial insurance products to small to medium-size businesses and personal insurance products to individuals and Tower National Insurance Company which is also rated A- (Excellent) by A.M. Best Company. Its insurance services subsidiary, Tower Risk Management, acts as a managing general agency, adjusts claims and negotiates reinsurance terms on behalf of other insurance companies.

This press release may constitute a “free writing prospectus” and an “issuer free writing prospectus” as such terms are defined in Rule 405 and Rule 433, respectively, under the Securities Act of 1933, as amended, and relates to the registration statement on Form S-3 filed by Tower Group, Inc. with the SEC on November 16, 2006 (Registration No. 333-138749).

The registration statement has not yet become effective.  No securities may be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective.

Tower Group, Inc. has filed a registration statement (including a prospectus) with the SEC for the offering to which this communication relates.  Before you invest, you should read the prospectus in that registration statement and other documents Tower Group, Inc. has filed with the SEC for more complete information about Tower Group, Inc. and this offering.  You may get these documents for free by visiting EDGAR on the SEC Web site at www.sec.gov or the Investor Relations section of Tower Group, Inc.’s Web site at www.twrgrp.com.  Alternatively, Tower Group, Inc., any underwriter or any dealer participating in the offering will arrange to send you the prospectus if you request it by calling toll-free (877) 490-0049.

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This release or any other written or oral statements made by or on behalf of the Company may include forward-looking statements that reflect the Company’s current views with respect to future events and financial performance. All statements other than statements of historical fact included in this release are forward-looking statements. Forward-looking statements can generally be identified by the use of forward-looking terminology such as “may,” “will,” “plan,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” or their negative or variations or similar terminology. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include but are not limited to ineffectiveness or obsolescence of our business strategy due to changes in current or future market conditions; increased competition on the basis of pricing, capacity, coverage terms or other factors; greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events, than our underwriting, reserving or investment practices anticipate based on historical experience or industry data; the effects of acts of terrorism or war; developments in the world’s financial and capital markets that adversely affect the performance of our investments; changes in regulations or laws applicable to us, our subsidiaries, brokers or customers; changes in the level of demand for our insurance and reinsurance products and services, including new products and services; changes in the availability, cost or quality of reinsurance and failure of our reinsurers to pay claims timely or at all; loss of the services of any of our executive officers or other key personnel; the effects of mergers, acquisitions and divestitures; changes in rating agency policies or practices; changes in legal theories of liability under our insurance policies; changes in accounting policies or practices; and changes in general economic conditions, including inflation and other factors. Forward-looking statements speak only as of the date on which they are made, and the Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

Regarding the transactions described above, we would add the following cautions to those included in our filings with the SEC:

    —  the acquisition of Preserver may not occur as expected or it may take longer to accomplish than we expect;

    —  governmental approvals of the acquisition may not be obtained, or adverse regulatory conditions may be imposed in connection with governmental approvals of the acquisition;

    —  we may not be as successful as we anticipate in managing the integration of Preserver, including with respect to realizing cost savings and distributing our products through Preserver’s agencies;

    —  the completion of the acquisition is subject to the satisfaction or waiver of certain conditions which are beyond our control; and

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    —  adverse conditions in the capital markets may require us to sell more shares than we anticipate and may make it more expensive for us or limit our ability to raise capital to support this acquisition and other growth opportunities.

For more information visit Tower’s website at http://www.twrgrp.com/.

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