10-Q

UNITED STATES SECURITIES AND EXCHANGE

COMMISSION

Washington, D.C. 20549

FORM 10-Q

x Quarterly Report Pursuant To Section 13 or 15(d) of the Securities

Exchange Act Of 1934

For the quarterly period ended September 30, 2007

o Transition Report Pursuant to Section 13 or 15(d) of the Securities

Exchange Act of 1934

For the transition period from _________________ to _________________

Commission file no. 000-50990

Tower Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware	13-3894120
(State or other jurisdiction of incorporation or organization)	(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

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

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

 Large accelerated filer o Accelerated filer  x Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).

  Yes o  No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 23,192,002 shares of common stock, par value $0.01 per share, as of November 5, 2007. 

INDEX

		PAGE
PART I FINANCIAL INFORMATION
Item 1.	Financial statements
	Consolidated Balance Sheets – September 30, 2007 (unaudited) and December 31, 2006	2
	Consolidated Statements of Income and Comprehensive Net Income
	- Three months ended September 30, 2007 and 2006 (unaudited)	3
	- Nine months ended September 30, 2007 and 2006 (unaudited)	3
	Consolidated Statements of Cash Flows
	- Three months ended September 30, 2007 and 2006 (unaudited)	4
	- Nine months ended September 30, 2007 and 2006 (unaudited)	4
	Notes to Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	37
PART II OTHER INFORMATION
Item 6.	Exhibits	37
SIGNATURES		38

1

Part I – FINANCIAL INFORMATION

Item 1.  Financial Statements

Tower Group, Inc.

Consolidated Balance Sheets

	(Unaudited)
	September 30,			December 31,
	2007			2006
	($ in thousands, except par value and share amounts)
Assets
Fixed-maturity securities, available-for-sale, at fair value (amortized cost
$603,338 at September 30, 2007 and $416,642 at December 31, 2006)	$	592,401		$	414,567
Equity securities, available-for-sale, at fair value (cost $59,810 at
September 30, 2007 and $47,971 at December 31, 2006)		50,148			49,453
Total investments		642,549			464,020
Cash and cash equivalents		52,526			100,598
Investment income receivable		6,682			4,767
Agents' balances receivable		98,638			65,578
Assumed premiums receivable		472			77
Ceding commission receivable		3,469			3,237
Reinsurance recoverable		200,686			118,003
Receivable - claims paid by agency		6,842			5,186
Prepaid reinsurance premiums		132,736			94,063
Deferred acquisition costs, net of deferred ceding commission revenue		39,408			35,811
Federal and state taxes recoverable		712			-
Deferred income taxes		22,394			-
Intangible assets		21,992			5,423
Goodwill		9,608			-
Fixed assets, net of accumulated depreciation		30,659			20,563
Investment in unconsolidated affiliate		31,906			27,944
Investment in statutory business trusts, equity method		3,036			2,045
Other assets		9,166			6,767
Total Assets	$	1,313,481		$	954,082
Liabilities
Loss and loss adjustment expenses	$	487,627		$	302,541
Unearned premium		282,069			227,017
Reinsurance balances payable		54,213			38,560
Payable to issuing carriers		13,320			662
Funds held as agent		6,068			8,181
Funds held under reinsurance agreements		40,724			51,527
Accounts payable and accrued expenses		17,078			18,267
Deferred rent liability		7,323			6,295
Payable for securities		336			2,922
Other liabilities		5,475			3,515
Federal and state income taxes payable		-			1,163
Deferred income taxes		-			1,255
Dividends payable		-			212
Subordinated debentures		101,036			68,045
Total Liabilities		1,015,269			730,162
Stockholders' Equity
Series A perpetual preferred stock ($0.01 par value per share; 2,000,000 shares
authorized; no shares issued and outstanding at September 30, 2007; 40,000
shares issued and outstanding at December 31, 2006; liquidation preference of
$1,000 per share, net of $0.4 million of issuance costs)		-			39,600
Common stock ($0.01 par value per share; 40,000,000 shares authorized,
23,215,118 and 20,005,758 shares issued at September 30, 2007 and
December 31, 2006, respectively, and 23,192,708 and 19,980,306 shares
outstanding at September 30, 2007 and December 31, 2006, respectively)		232			200
Paid-in-capital		205,182			113,168
Accumulated other comprehensive net loss		(13,869	)		(437	)
Retained earnings		106,984			71,596
Treasury stock (22,410 and 25,452 shares at September 30, 2007 and
December 31, 2006, respectively)		(317	)		(207	)
Total Stockholders' Equity		298,212			223,920
Total Liabilities and Stockholders' Equity	$	1,313,481		$	954,082

See accompanying notes to the consolidated financial statements.

2

Tower Group, Inc.

Consolidated Statements of Income and Comprehensive Income

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
	($ in thousands, except share and per share amounts)
Revenues
Net premiums earned	$	73,124		$	52,366		$	207,542		$	168,908
Ceding commission revenue		19,601			13,171			50,867			30,550
Insurance services revenue		9,137			1,243			12,236			5,274
Policy billing fees		599			286			1,444			830
Net investment income		9,615			5,923			27,016			15,875
Net realized gains (losses) on investments		(62	)		32			10			(84	)
Total revenues		112,014			73,021			299,115			221,353
Expenses
Loss and loss adjustment expenses		40,007			30,392			114,528			105,026
Direct commission expense		26,422			15,309			66,865			43,654
Other operating expenses		21,311			13,127			55,832			38,718
Interest expense		2,313			1,863			6,843			5,066
Total expenses		90,053			60,691			244,068			192,464
Other Income
Equity income in unconsolidated affiliate		746			418			2,169			364
Gain from issuance of common stock by unconsolidated  affiliate		-			-			2,705			7,883
Warrant received from unconsolidated affiliate		-			-			-			4,605
Income before income taxes		22,707			12,748			59,921			41,741
Income tax expense		8,323			4,292			21,530			14,490
Net income	$	14,384		$	8,456		$	38,391		$	27,251
Comprehensive Income
Net income	$	14,384		$	8,456		$	38,391		$	27,251
Other comprehensive income:
Gross unrealized investment holding gains (losses)
arising during period		(9,140	)		9,150			(20,169	)		3,273
Equity in net unrealized gains in investment in
unconsolidated affiliate’s investment portfolio		(236	)		296			(658	)		184
Less: reclassification adjustment for (gains) losses
included in net income		62			(32	)		(10	)		84
		(9,314	)		9,414			(20,837	)		3,541
Income tax (expense) benefit related to items of other
comprehensive income		3,260			(3,295	)		7,293			(1,297	)
Total other comprehensive net income (loss)		(6,054	)		6,119			(13,544	)		2,244
Comprehensive income	$	8,330		$	14,575		$	24,847		$	29,495
Earnings Per Share
Basic earnings per common share	$	0.63		$	0.43		$	1.67		$	1.38
Diluted earnings per common share	$	0.62		$	0.42		$	1.65		$	1.36
Weighted Average Common Shares Outstanding:
Basic		22,983,325			19,776,188			22,622,672			19,734,365
Diluted		23,189,031			20,074,058			22,885,001			20,032,256
Dividends declared and paid per common share:
Common stock	$	0.05		$	0.025		$	0.10		$	0.075

See accompanying notes to the consolidated financial statements.

3

Tower Group, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
	($ in thousands)
Cash flows provided by (used in) operating activities:
Net income	$	14,384		$	8,456		$	38,391		$	27,251
Adjustments to reconcile net income to net cash provided by
(used in) operations:
Gain from IPO of common shares of unconsolidated affiliate		-			-			(2,705	)		(7,883	)
Warrant received from unconsolidated affiliate		-			-			-			(4,605	)
(Gain) loss on sale of investments		62			(32	)		(10	)		84
Depreciation		1,849			1,273			5,411			3,236
Amortization of intangible assets		322			110			721			316
Amortization of bond premium or discount		42			176			396			644
Amortization of debt issuance costs		16			14			48			38
Amortization of restricted stock		503			262			1,504			604
Deferred income taxes		(249	)		2,001			(900	)		1,666
Excess tax benefits from share-based payment arrangements		(76	)		(202	)		(1,035	)		(852	)
(Increase) decrease in assets:
Investment income receivable		(229	)		(66	)		(670	)		(786	)
Agents’ balances receivable		(32	)		(938	)		(3,365	)		(9,241	)
Assumed premiums receivable		1,291			2,073			(395	)		(3,834	)
Ceding commissions receivable		886			-			(232	)		8,727
Reinsurance recoverable		(12,890	)		(12,994	)		(44,429	)		(5,028	)
Prepaid reinsurance premiums		3,369			(5,653	)		(34,710	)		(35,783	)
Deferred acquisition costs, net		709			(1,928	)		10,356			(5,591	)
Federal and state income taxes recoverable		(712	)		(3,229	)		(712	)		(3,229	)
Intangible assets		-			(281	)		-			(311	)
Equity in unconsolidated affiliate		(684	)		(418	)		(2,107	)		(364	)
Other assets		(1,313	)		2,150			(1,829	)		(381	)
Increase (decrease) in liabilities:
Loss and loss adjustment expenses		18,718			25,188			70,739			80,876
Unearned premium		(7,942	)		4,948			12,329			46,887
Reinsurance balances payable		(6,839	)		(8,270	)		10,850			5,651
Payable to issuing carriers		7,401			(1,767	)		12,658			(3,434	)
Accounts payable and accrued expenses		1,771			391			(9,077	)		(802	)
Deferred rent		(48	)		6,040			1,028			6,040
Funds held under reinsurance agreement		(3,922	)		(2,768	)		(12,916	)		(2,014	)
Federal and state income taxes payable		1,910			(3,236	)		(1,163	)		-
Net cash flows provided by operations		18,297			11,300			48,176			97,882
Cash flows provided by (used in) investing activities:
Acquisition of Preserver Group Inc.		-			-			(66,233	)		-
Preserver transaction costs		-			-			(4,729	)		-
Purchase of fixed assets		(3,578	)		(14,158	)		(10,130	)		(19,228	)
Investment in unconsolidated affiliate		(190	)		128			423			(14,400	)
Disposal of fixed assets		85			-			85			-
Purchase of investments:
Fixed-maturity securities		(42,282	)		(52,711	)		(177,594	)		(124,685	)
Equity securities		(499	)		(35,362	)		(14,386	)		(35,995	)
Short-term investments-net		-			16			-			16
Sale or maturity of investments:
Fixed-maturity securities		16,796			24,956			87,314			53,168
Equity securities		-			24,558			3,776			24,558
Net cash flows used in investing activities		(29,668	)		(52,573	)		(181,474	)		(116,566	)

(Continued)

See accompanying notes to the consolidated financial statements.

4

Tower Group, Inc.

Consolidated Statements of Cash Flows—(Continued)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
	($ in thousands)
Cash flows provided by (used in) financing activities:
Redemption of preferred stock		-			-			(40,000	)		-
Proceeds from issuance of subordinated debentures		-			-			20,619			20,619
Purchase of common trust securities - statutory business trusts		-			-			(619	)		(619	)
Dividends paid		(1,149	)		(493	)		(2,804	)		(1,481	)
Stock repurchase		(16	)		(2	)		39			(69	)
Exercise of stock options & warrants		17			270			1,027			1,155
Excess tax benefits from share-based payment arrangements		76			202			1,035			852
Equity offering and over allotment, net of issuance costs		-			-			89,366			-
Net cash flows provided by (used in) financing activities		(1,072	)		(23	)		68,663			20,457
Increase (decrease) in cash and cash equivalents		(12,444	)		(41,296	)		(64,635	)		1,773
Cash and cash equivalents, beginning of period		64,969			81,829			117,161			38,760
Cash and cash equivalents, end of period	$	52,525		$	40,533		$	52,526		$	40,533
Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	6,574		$	7,982		$	21,746		$	15,306
Cash paid for interest	$	2,772		$	1,479		$	6,264		$	3,384

See accompanying notes to the consolidated financial statements.

5

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions for Form 10-Q and, accordingly, do not include the information and disclosures required by generally accepted accounting principles (“GAAP”) in the United States of America.  These statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2006 and notes thereto included in the Company’s Annual Report on Form 10-K filed on March 8, 2007.  The accompanying consolidated financial statements have not been audited by an independent registered public accounting firm in accordance with standards of the Public Company Accounting Oversight Board (United States), but in the opinion of management such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Company’s financial position and results of operations.  The results of operations for the three months and nine months ended September 30, 2007 may not be indicative of the results that may be expected for the year ending December 31, 2007.  The consolidated financial statements as of September 30, 2007 include the accounts of Tower Group, Inc. (the “Company”), its wholly owned subsidiaries Tower Insurance Company of New York (“TICNY”), Tower National Insurance Company (“TNIC”), Tower Risk Management Corp. (“TRM”), Preserver Group, Inc. (“Preserver”) and its subsidiaries, Preserver Insurance Company (“PIC”), Mountain Valley Indemnity Company (“MV”) and North East Insurance Company (“NE”), and other entities required by GAAP.  All significant inter-company balances have been eliminated.  Business segment results are presented net of all material inter-segment transactions.

Acquisition of Preserver Group, Inc.

On April 10, 2007, the Company completed the acquisition of 100% of the issued and outstanding common stock of Preserver, a New Jersey corporation, pursuant to the stock purchase agreement (“the Agreement”), dated as of November 13, 2006, by and among the Company, Preserver and the Sellers named therein.  The acquisition was accounted for using the purchase method in accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations.  Under the terms of the Agreement, the Company acquired Preserver for approximately $64.9 million comprised of $34.1 million in cash paid to the Sellers and a contribution of $30.8 million to the capital of Preserver to enable Preserver to repay the principal and accrued interest on indebtedness held by certain of the Sellers.

In accordance with SFAS No. 141, the cost of the acquisition was preliminarily allocated to the assets acquired and liabilities assumed based on their fair values as of the close of the acquisition, with the amounts exceeding the fair value recorded as goodwill.  As the values of certain assets and liabilities are preliminary in nature, they are subject to adjustment as additional information is obtained, including, but not limited to, valuation of separately identifiable intangibles, fixed assets, and deferred taxes.  The valuations will be finalized within 12 months of the close of the acquisition.  When the valuations are finalized, any changes to the preliminary valuation of assets acquired or liabilities assumed may result in adjustments to separately identifiable intangibles and goodwill.  The results of operations of Preserver have been included in the Company’s consolidated financial statements since April 10, 2007.

Selected unaudited pro forma results of operations assuming the acquisition had occurred as of January 1, 2006, are set forth below:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
	($ in thousands, except share and per share amounts)
Total revenue	$	112,014	$	93,905	$	321,668	$	284,746
Net income		14,384		9,122		37,072		29,122
Net income per common share-basic	$	0.63	$	0.40	$	1.61	$	1.28
Net income per common share-diluted	$	0.62	$	0.39	$	1.59	$	1.26

6

The above pro forma results are presented for information purposes only and may not be indicative of the operating results that would have occurred had this acquisition been completed as of the beginning of 2006.

The following unaudited condensed balance sheet presents assets acquired and liabilities assumed with the acquisition of Preserver on April 10, 2007, based on their fair values ($ in thousands):

Assets
Investments	$	98,079
Cash & cash equivalents		16,563
Accounts receivable		30,035
Reinsurance recoverable		39,910
Deferred acquisition costs, net		13,954
Fixed assets		5,462
Goodwill		9,608
Intangibles		17,290
Deferred income taxes		15,724
Other assets		5,846
Total Assets	$	252,471
Loss and loss adjustment expenses	$	114,348
Unearned premiums		42,723
Accounts payable and accrued expenses		16,795
Subordinated debentures		12,372
Total liabilities		186,238
Total Stockholders’ equity		66,233
Total Liabilities & Stockholders’ equity	$	252,471

Preserver’s stockholders’ equity on April 10, 2007 was $66.2 million, which includes the purchase price of $64.9 million plus an additional $1.3 million for Tower’s direct transaction costs.

The base purchase price was reduced by the amount (net of taxes) of certain expenses paid by Preserver in connection with the transaction including amounts that were paid or payable to officers, directors and employees of Preserver and legal and financial advisor fees in connection with the sale of Preserver.  The amount of this reduction was approximately $3.3 million.  An additional purchase price may be payable approximately three years following the closing if Preserver has favorable development on its June 30, 2006 reserves for losses and loss adjustment expenses.  The amount of this additional purchase price will be 65% of any such favorable development but will not exceed $13 million.

Prior to closing the acquisition of Preserver on April 10, 2007, the Company formulated a plan to terminate a number of employees of Preserver primarily working in the underwriting, operations, and information technology areas.  The Company accrued a liability as of the closing date, in accordance with Emerging Issues Task Force (“EITF”) number 95-3 in the amount of $500,000 representing severance costs, including employee benefits of the terminated employees.  The Company expects that all planned terminations will be completed by the end of 2007.  As of September 30, 2007, the accrued liability is $223,000.

Equity Offering

On January 22, 2007, the Company signed an underwriting agreement providing for the issuance and sale of 2,704,000 shares of common stock at a price of $31.25 per share, less underwriting discounts, and granted to the underwriters an option to purchase up to 405,600 additional shares of common stock at the same price to cover over-allotments.

On January 26, 2007, the Company closed on its sale of 2,704,000 shares of common stock.  On February 5, 2007, the underwriters exercised their over-allotment option with respect to 340,600 shares of common stock.  The Company received aggregate net proceeds of approximately $89.4 million from the offering and over-allotment option, after underwriting discounts and expenses.

7

Subordinated Debentures

On January 25, 2007, the Company participated in a private placement of $20.0 million of fixed/floating rate capital securities (the “Trust Preferred Securities”) issued by Tower Group Statutory Trust VI (the “Trust”), an affiliated Delaware trust formed on January 11, 2007.  The Trust Preferred Securities mature in April 2036, are redeemable at the Company’s option at par beginning April 7, 2011, and require quarterly distributions of interest by the Trust to the holder of the Trust Preferred Securities.  Interest distributions are initially at a fixed rate of 8.155% for the first five years and will then reset quarterly for changes in the three-month London Interbank Offered Rate (“LIBOR”) plus 300 basis points.  The Trust used the proceeds from the sale of the Trust Preferred Securities and common securities to purchase for $20.6 million a junior subordinated debt security due 2037 issued by the Company.  The Company does not consolidate interest in its statutory business trusts for which the Company holds 100% of the common trust securities because the Company is not the primary beneficiary of the trusts.  The Company reports the outstanding subordinated debentures owed to the statutory business trusts as a liability.  The net proceeds to the Company from the sale of the debenture to the Trust were used by the Company to redeem a portion of the Company’s perpetual preferred stock as described below.  The Company incurred $0.4 million of fees related to the issuance of these subordinated debentures which have been capitalized and will be amortized over the term of the subordinated debentures.

As part of the Preserver acquisition, the Company assumed $12.3 million in Junior Subordinated Notes (“Junior Notes”) issued by Preserver to the Preserver Capital Trust I (“Preserver Capital Trust”), an affiliated Delaware Trust.  The Company does not consolidate Preserver Capital Trust as the Company is not considered the primary beneficiary.  The Junior Notes mature on April 10, 2034 and 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 425 basis points, with a cap of 12.50% through May 24, 2009.  The Junior Notes had an interest rate of 9.75% at September 30, 2007. Preserver incurred $0.4 million of fees related to the issuance of these subordinated debentures which were capitalized and are currently being amortized over the term of the subordinated debentures. The Trust simultaneously issued 372 of the Trust’s common securities to the Company for a purchase price of $0.4 million, which constitutes all of the issued and outstanding common securities of the Trust.

Aggregate scheduled maturities of the Company’s outstanding subordinated debentures at September 30, 2007 are ($ in thousands):

2033	$	20,620
2034		25,775
2035		13,403
2036		41,238
Total	$	101,036

Redemption of Perpetual Preferred Stock

On November 13, 2006, the Company entered into the Stock Purchase Agreement with a subsidiary of CastlePoint pursuant to which the Company agreed to issue and sell 40,000 shares of perpetual preferred stock to the subsidiary for aggregate consideration of $40 million.  The transaction closed on December 4, 2006.

On January 10, 2007, the Company exchanged its outstanding Series A Perpetual Preferred stock for 40,000 shares of the Series A-1 Perpetual Preferred Stock (the “Series A-1 Perpetual Preferred Stock). On January 26, 2007, the Company fully redeemed all 40,000 shares of the Series A-1 stock for $40.0 million using $20.0 million of the net proceeds from its Trust Preferred Securities issued on January 25, 2007 and $20.0 million of the net proceeds from its common stock offering.

Investment in Unconsolidated Affiliate-CastlePoint

At September 30, 2007, the Company’s maximum exposure to a loss from its investment in CastlePoint Holdings, Ltd. (“CastlePoint”) was approximately $31.9 million, which consists of its equity ownership interest with a carrying value of approximately $27.3 million as of September 30, 2007 and the warrant the Company received from CastlePoint in 2006, with a carrying value of $4.6 million as of September 30, 2007.

8

The carrying value of the Company’s equity investment in CastlePoint as of September 30, 2007 is as follows ($ in millions):

Carrying value of equity investment in CastlePoint at December 31, 2006	$	27.9
Equity in net income of CastlePoint		2.2
Gain from IPO of common stock of CastlePoint		2.7
Equity in net unrealized loss of the CastlePoint investment portfolio		(0.7	)
Dividends received from CastlePoint		(0.2	)
Carrying value of equity investment in CastlePoint at September 30, 2007	$	31.9

The Company has determined that CastlePoint qualifies as a variable interest entity (“VIE”) under the provisions of Financial Accounting Standards Board Interpretation (“FIN”) 46-(R).  The Company has determined that its investment in CastlePoint does not meet the requirements for consolidation because the Company is not the primary beneficiary of the VIE as defined in FIN 46-(R). However, the Company has recorded its investment in CastlePoint using the equity method of accounting as the Company exercises significant influence over CastlePoint.  The Company and CastlePoint have the same Chief Executive Officer, Michael H. Lee.

On March 23, 2007, CastlePoint raised $114.8 million net of expenses in an initial public offering which reduced the Company’s investment ownership from 8.6% to 6.7%.  As a result of the initial public offering, the book value of CastlePoint increased from $279.7 million as of December 31, 2006 to $401.3 million as of March 31, 2007.  Accordingly, in the three months ended March 31, 2007, the Company recorded a gain of $2.7 million in income before taxes on its common stock investment in CastlePoint in accordance with the Securities and Exchange Commission’s staff accounting bulletin (“SAB”) No. 51-“Accounting for Sales of Stock by a Subsidiary.”

Dividends of $0.025 per share were declared and paid by CastlePoint in December 2006, March 2007, June 2007 and September 2007. The Company has recorded $383,000 of CastlePoint dividends received or accrued since inception as a reduction to its investment in CastlePoint.

As of September 30, 2007, the aggregate fair value of the Company’s investment in its 2,555,000 shares of CastlePoint common stock listed on the Nasdaq Global Market under the symbol “CPHL” was $29,382,500.

Affiliated Agreements with CastlePoint

The Company and/or its subsidiaries are parties to a master agreement, certain reinsurance agreements, and other agreements, including program management agreements and service and expense sharing agreements, with CastlePoint.

Reinsurance Agreements with CastlePoint

The Company’s insurance subsidiaries are parties to three multi-year quota share reinsurance agreements with CastlePoint Reinsurance Company, Ltd. (“CastlePoint Reinsurance”) covering brokerage business, traditional program business and specialty program business.  Under the brokerage business quota share reinsurance agreement, which covers business that the Company has historically written through its retail and wholesale agents, the Company’s insurance subsidiaries cede between 25% and 50% of premiums and losses, such ceding percentage being subject to periodic adjustment by the Company.  The Company’s insurance subsidiaries ceded $49.0 million and $169.7 million of premiums written during the three and nine months ended September 30, 2007, under this agreement.  For the period April 1, 2007 through June 30, 2007, CastlePoint Insurance Company (“CPIC”) was added as a reinsurer under the brokerage business quota share reinsurance agreement and the Company ceded 9% of its premiums and losses to CPIC and 40% of its premiums and losses to CastlePoint Reinsurance.  The Company and CastlePoint  intended to replace CPIC’s  participation in the brokerage business quota share reinsurance agreement with a brokerage business risk sharing arrangement under which the Company and CPIC would share approximately 85% and 15%, respectively, of the Company’s and CPIC’s combined brokerage business. This agreement began on July 1, 2007. Under this risk sharing arrangement, the Company and CPIC agreed to enter into aggregate excess of loss agreements, also effective July 1, 2007, under which the Company would have reinsured 85% of CPIC’s brokerage business in excess of a 52.5% net loss ratio and CPIC would have reinsured 15% of the Company’s brokerage business in excess of a 52.5% net loss ratio. These

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agreements are subject to regulatory approval and have not yet been approved by insurance regulators and therefore have not yet been executed by the Company.  To adjust for the total amount of brokerage business that was expected to be transferred to CastlePoint under the risk sharing arrangements, the Company, through TRM, entered into a management agreement with CPIC, effective July 1, 2007, to produce and manage, on behalf CPIC, CPIC’s 15% share of the brokerage business.  During the three and nine months ended September 30, 2007, TRM produced $23.4 million of premium and earned $7.5 million in management fees from CPIC, pursuant to this agreement.

Effective April 1, 2007, under the brokerage business quota share reinsurance agreement, CastlePoint agreed to pay 30% of the Company’s property catastrophe reinsurance premiums and 30% of the Company’s net retained property catastrophe losses.  The premium payment was $0.7 million and $2.2 million for the three and nine months ending September 30, 2007, respectively.  CastlePoint Reinsurance also participated as a reinsurer on the Company’s overall property catastrophe reinsurance program from July 1, 2006 to June 30, 2007, and the Company’s excess of loss reinsurance program, effective May 1, 2006.  Under these programs, the Company’s insurance subsidiaries ceded premiums to CastlePoint Reinsurance of $0.8 million and $3.6 million for the three and nine months ended September 30, 2007, respectively. Effective July 1, 2007 CastlePoint Reinsurance no longer participates as a reinsurer on the Company’s catastrophe reinsurance program which now includes coverage for business written by CPIC and produced and managed by TRM.

Program Management Agreement with CastlePoint

Under the traditional program business quota share reinsurance agreement between TICNY and TNIC and CastlePoint Reinsurance, covering program business historically written by the Company, the Company cedes 50% of its traditional program business to CastlePoint Reinsurance.  The Company’s insurance subsidiaries ceded $0.6 million of premiums written for the three and nine months ended September 30, 2007, under this agreement.

Under the specialty program business quota share reinsurance agreement between TICNY and TNIC and CastlePoint Reinsurance, covering business not historically written by the Company, the Company cedes 85% of its net retention on specialty program business to CastlePoint Reinsurance.  The Company’s insurance subsidiaries ceded $2.0 million and $4.1 million of premiums written during the three and nine months ended September 30, 2007, under this agreement.

Service and Expense Sharing Agreements with CastlePoint

Effective May 2007, TRM entered into a service agreement with CastlePoint Management Corp. (“CPM”) pursuant to which TRM provides to CPM and CPM may provide to TRM insurance company services such as claim adjustment, policy administration, technologies solutions, underwriting and risk management services. Under this agreement TRM agreed to produce and manage, on behalf of CPM, CPIC’s 15% share of Tower’s brokerage business. TRM will receive a 34% provisional management fee that is subject to adjustment based on the ultimate loss ratio of the business managed and earned as premiums are produced.  During the three and nine months ended September 30, 2007, TRM produced $0 million and $0.5 million of premium and earned $0 million and $0.2 million in management fees from CPIC, pursuant to this agreement. As discussed above, effective July 1, 2007, TRM entered into a management agreement with CPIC, to produce and manage business.

Investments

All fixed maturity and equity securities are carried at fair value. The fair value is based on quoted market prices or dealer quotes provided by independent pricing services.

Impairment of investment securities results in a charge to net income when a market decline below cost is deemed to be other-than-temporary.  As of September 30, 2007, the Company reviewed its fixed-maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments.  The Company determined that it did not hold any investments that would have been considered other-than-temporarily impaired.

The following table presents information regarding the Company’s invested assets that were in an unrealized loss position at September 30, 2007 by amount of time in a continuous unrealized loss position ($ in thousands):

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	Less than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
U.S. Gov't bonds	$	3,813	$	(58	)	$	-	$	-		$	3,813	$	(58	)
Municipal bonds		28,437		(102	)		45,285		(391	)		73,722		(493	)
Corporate and other bonds		92,063		(2,544	)		34,439		(790	)		126,502		(3,334	)
Commercial mortgage-backed securities		21,687		(1,582	)		3,989		(17	)		25,676		(1,599	)
Collateralized mortgage obligations		11,088		(1,219	)		3,151		(89	)		14,239		(1,308	)
Residential mortgage-backed securities		67,983		(3,098	)		53,417		(1,898	)		121,400		(4,996	)
Asset-backed securities		5,145		(1,050	)		7,714		(869	)		12,859		(1,919	)
Total fixed maturities		230,216		(9,653	)		147,995		(4,054	)		378,211		(13,707	)
Equities		44,209		(11,227	)		1,006		(58	)		45,215		(11,285	)
Total	$	274,425	$	(20,880	)	$	149,001	$	(4,112	)	$	423,426	$	(24,992	)

The process of determining whether a security is impaired involves analyzing many factors including the financial condition of the issuer, the length of time the security has been in an unrealized loss position, the magnitude of the unrealized loss, specific credit issues related to the issuer such as changes in credit rating, reduction or elimination of dividends or non-payment of scheduled interest payments and the collateral structure and credit support that may be applicable to asset and mortgage-backed securities.  The Company also considers its ability and intent to retain the security for a sufficient period of time to allow for the market price to recover to the Company’s original cost basis.

The unrealized loss position for equity securities was primarily due to the Company’s investment in a closed-end investment fund and seven Real Estate Investment Trusts (“REITs”).  The total unrealized loss for these eight investments at September 30, 2007 was $10.4 million and has subsequentially increased to $13.8 million at October 31, 2007.

The closed-end investment fund, Hyperion Brookfield Collateralized Securities Fund (“HCS Fund”), had a fair value of $30.6 million and $26.2 million representing 10.3% and 11.6% of the Company’s stockholders’ equity at September 30, 2007 and December 31, 2006, respectively.  HCS Fund invests in various investment grade mortgage-backed and asset-backed securities.  HCS Fund has been in an unrealized loss position since March 2007, but the loss only began to increase materially in June 2007.  At September 30, 2007 the unrealized loss related to HCS Fund was $6.7 million.  HCS Funds subprime exposure is 46.3% of their total assets.

All seven REITs are publicly traded and at September 30, 2007 had a fair value of $8.7 million and an unrealized loss of $3.7 million.  These REITs have been in an unrealized loss position for less than four months as of September 30, 2007.  The severity of the impairment in relation to the carrying amounts of REITs is between 18.0% and 36.1%.  Except for Crystal River Capital, the REITs do not have any significant exposure to subprime mortgages.  Crystal River Capital’s subprime exposure is 3% of their total assets.  The Company’s investment in Crystal River Capital, at fair value, was $3.4 million.

Investments in all types of real estate related mortgage-backed securities did not perform well in the third quarter of 2007 as a result of the reduced market liquidity.  While interest on bonds and dividends on REITs continue to be paid, the market has demanded a higher risk premium and that has adversely affected the current market value of these types of investments.

As previously noted the unrealized loss on HCS Fund and REITs was $10.4 million and accounted for 41.7% of the unrealized loss as of September 30, 2007.  Subsequent to September 30, 2007, HCS Fund and the publicly traded REITs have continued to experience reductions in market prices.  As part of its impairment testing the Company considered all relevant factors including the magnitude of the unrealized loss and compared it to the short length of time the securities have been held and have had an unrealized loss.  The Company also considered the lack of specific credit issues related to these securities and that it is continuing to receive dividends.  These factors combined with the Company’s intent and ability to hold these investments to allow for the market price to recover to the Company’s original cost, leads to the conclusion that any impairment in the value of these securities should not be considered to be other-than-temporarily impaired at the current time.

The Company recorded unrealized losses in its investments in mortgage-backed and asset-backed fixed maturity securities.   These investments include directly held subprime mortgage assets of $11.9 million, at fair

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value, which are also discussed in more detail below.  The Company evaluated all 134 mortgage-backed and asset-backed fixed maturity security investments that were in an unrealized loss position as of September 30, 2007 noting that 47 of these securities had been in an unrealized loss position for more than 12 months. The total unrealized loss on these 47 investments at September 30, 2007 was $2.8 million. The Company evaluated the severity of the impairment in relation to the carrying amount for 115 of the 134 securities referred to above and found it to be between 0.01% and 14.5%. The corresponding unrealized loss was $4.9 million which accounted for 19.8% of the unrealized loss.  The 19 remaining investments were impaired between 15.3% and 29.9% of their carrying value. The corresponding unrealized loss on these 19 investments was $4.2 million and accounted for 16.9% of the unrealized loss as of September 30, 2007.  The Company considered all relevant factors, including a review of the subprime exposure and particularly the length of time the fair value has been below cost in assessing whether the loss was other-than-temporary.  The Company also considered its ability and intent to hold these investments until there is a recovery of fair value to the Company’s original cost basis which may be maturity.  As a result, the Company does not consider these investments to be other-than-temporarily impaired.

The Company’s total investment in subprime mortgages is $11.9 million and consists of highly rated securities of which 100% are investment grade, with an average rating of “AA-” and duration of approximately 2.61 years. The following table identifies the fair value, vintage year and corresponding rating of our subprime mortgage-backed securities, as of September 30, 2007:

	Vintage Year ($ in thousands)
	2003 & prior			2004			2005			Total			% of Total
AA		552			3,414			1,574			5,540			46.7	%
A		-			4,266			1,807			6,073			51.3	%
BBB		240			-			-			240			2.0	%
Total	$	792		$	7,681		$	3,381		$	11,853			100.0	%
% of Total		6.7	%		64.8	%		28.5	%		100.0	%

Intangible Assets

Intangible assets consist of finite and indefinite life assets.  Finite life intangible assets include both renewal rights and the agency force book of business.  Insurance company licenses are considered indefinite life intangible assets subject to annual impairment testing.  The weighted average amortization period of identified intangible assets of finite useful life is 17.9 years.

With the acquisition of Preserver on April 10, 2007, the Company recognized $17.3 million of identifiable intangible assets including Preserver’s renewal rights of $1.9 million, its agency force book of business of $10.2 million and insurance company licenses of $5.2 million.  The renewal rights and agency force book of business acquired are finite lived assets that will be amortized over ten and twenty years, respectively and are subject to annual impairment testing.  The insurance company licenses are included as indefinite lived intangibles subject to annual impairment testing.

The components of intangible assets are summarized as follows ($ in thousands):

			Accumulated			Net Intangible
	Balance		Amortization			Assets
September 30, 2007
Insurance licenses	$	6,503	$	-		$	6,503
Renewal rights		3,164		(845	)		2,319
Agency force		13,926		(756	)		13,170
Total Intangible assets	$	23,593	$	(1,601	)	$	21,992

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December 31, 2006
Insurance licenses		1,303	_-				1,303
Renewal rights		1,250		(505	)		745
Agency force		3,750		(375	)		3,375
Total Intangible assets	$	6,303	$	(880	)	$	5,423

Goodwill

Goodwill is calculated as the excess of purchase price over the net fair value of assets acquired.  In acquiring Preserver, the Company entered into an agreement that provided for a base purchase price of approximately $68.3 million, subject to certain purchase price adjustments.  The Agreement provided for using a portion of the proceeds to pay off certain debt owed to Preserver shareholders and to settle Preserver’s direct transaction costs.  The purchase price, net of Preserver’s direct transaction costs, was approximately $64.9 million plus approximately $1.3 million of transaction costs incurred by Tower.  Approximately $30.8 million of the purchase price was used to pay off certain debt owed to Preserver stockholders.

The determination of goodwill as it relates to the Preserver acquisition is based upon the following ($ in thousands):

Purchase Price
Base purchase price paid	$	68,250
Preserver direct transaction costs, net of tax benefit		(3,322	)
Total purchase price paid to Preserver		64,928
Direct transaction costs		1,305
Total purchase price		66,233
Allocation of Purchase Price
Book value of Preserver at 4/10/2007		11,064
Preserver shareholder debt repayment		30,754
Estimated fair value adjustments		14,807
Estimated fair value of assets acquired		56,625
Goodwill as of September 30, 2007	$	9,608

The purchase price was allocated to balance sheet assets acquired (including identifiable intangible assets arising from the acquisition) and liabilities assumed based on their estimated fair value.

Goodwill at September 30, 2007 and December 31, 2006 was $9.6 million and $0, respectively.  The Company performs an annual impairment analysis to identify potential goodwill impairment and measures 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 in a way that requires the Company to perform the impairment analysis on an interim basis.  Goodwill impairment testing requires an evaluation of the estimated fair value of each reporting unit to its carrying value, including the goodwill.  An impairment charge is recorded if the estimated fair value is less than the carrying amount of the reporting unit.

Dividends Declared

Dividends declared by the Company on common stock for the three and nine months ended September 30, 2007 were $1,149,430 and $2,293,501, or $0.05 and $0.10 per share, respectively.  Dividends declared by the Company on common stock for the three months and nine months ended September 30, 2006 were $494,503 and $1,481,152 or $0.025 and $0.075 per share, respectively.

Dividends paid by the Company on its perpetual preferred Series A-1 stock for the three months and nine months ended September 30, 2007 were $0 and $298,289 and none in the three months and nine months ended September 30, 2006.

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Equity Compensation Plans

Restricted Stock Awards

During the three and nine months ended September 30, 2007, 932 and 90,060 restricted stock shares were granted to senior officers, directors and key employees.  The fair value of the awards was $30,000 and $2.9 million, respectively, on the grant date.  For the three and nine months ended September 30, 2007, 19,150 and 68,406 restricted stock shares, respectively, vested, and 162 and 6,226 shares, respectively, were forfeited.  Compensation expense related to restricted stock awards recognized for the three months ended September 30, 2007 and 2006 was $279,000 and $170,000 net of tax, respectively.  Compensation expense recognized for the nine months ended September 30, 2007 and 2006 was $771,000 and $393,000 net of tax, respectively.  Total unrecognized compensation expense, before tax, for grants of restricted stock was $4.2 million and $2.6 million at September 30, 2007 and December 31, 2006, respectively.  The intrinsic value of the unvested restricted stock outstanding as of September 30, 2007 is $5.0 million.

Changes in restricted stock for the nine months ended September 30, 2007 were as follows:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Outstanding at December 31, 2006		180,766		$	17.35
Granted		90,060		$	32.42
Vested		(68,406	)	$	15.03
Forfeited		(6,226	)	$	24.00
Outstanding at September 30, 2007		196,194		$	24.87

Stock Options

Compensation expense net of tax related to stock options was $12,000 and $68,000 for the three and nine months ended September 30, 2007 compared to $14,000 and $49,000, respectively, in the same periods last year.  Total unrecognized expense net of tax for grants of stock options was $99,000 and $155,000 as of September 30, 2007 and December 31, 2006, respectively.  The intrinsic value of stock options outstanding as of September 30, 2007 is $5.8 million, of which $5.0 million is related to vested options.

Changes in stock options for the nine months ended September 30, 2007 were as follows:

				Average
	Number of			Exercise
	Shares			Price
Outstanding at December 31, 2006		362,996		$	4.94
Exercised		(74,700	)	$	2.78
Outstanding at September 30, 2007		288,296		$	5.50
Exercisable at September 30, 2007		239,696		$	4.90

Options outstanding and exercisable as of September 30, 2007 were as follows:

	Options Outstanding
			Average				Options Exercisable
			Remaining		Average				Average
	Number of		Contractual		Exercise		Number of		Exercise
Range of Exercise Prices	Shares		Life		Price		Shares		Price
Under $4.00		150,980		3.3	$	2.78		150,980	$	2.78
$5.00 - $10.00		137,316		7.0	$	8.50		88,716	$	8.50
Total options		288,296		5.0	$	5.50		239,696	$	4.90

Income Taxes

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007.  As of September 30, 2007,

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the Company had no material unrecognized tax benefit and no adjustments to liabilities or operations were required.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.  Such interest and penalties were zero for the three and nine months ended September 30, 2007.

Tax years 2003 through 2006 are subject to examination by the federal authorities.  There is currently a New York State Department of Taxation and Finance audit under way for the tax years of 2003 through 2004, but the Company does not anticipate any material adjustments.

Accounting Pronouncements

In February 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 155, “Accounting for Certain Hybrid Financial Instruments.”  Under the current GAAP, an entity that holds a financial instrument with an embedded derivative must bifurcate the financial instrument, resulting in the host and the embedded derivative being accounted for separately.  SFAS No. 155 permits, but does not require, entities to account for financial instruments with an embedded derivative at fair value, thus negating the need to bifurcate the instrument between its host and the embedded derivative.  The Company adopted SFAS No. 155 on January 1, 2007.  The adoption of SFAS No. 155 did not have any effect on its consolidated financial condition or results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”  SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. It applies to other pronouncements that require or permit fair value but does not require any new fair value measurements. The statement defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”  SFAS 157 establishes a fair value hierarchy to increase consistency and comparability in fair value measurements and disclosures. The hierarchy is based on the inputs used in valuation and gives the highest priority to quoted prices in active markets. The highest possible level should be used to measure fair value.  SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company does not expect the provisions of SFAS 157 to have a material effect on its consolidated financial condition or results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of SFAS No. 115.”  This standard permits an entity to choose to measure many financial instruments and certain other items at fair value.  Most of the provisions in SFAS No. 159 are elective; however, the amendment to SFAS No. 115 applies to all entities with available-for-sale and trading securities.  The FASB’s stated objective in issuing this standard is as follows:  “to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.”  The fair value option established by SFAS No. 159 permits all entities to choose to measure eligible items at fair value at specified election dates.  A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.  The fair value option:  (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments.  SFAS No. 159 is effective as of the beginning of the entity’s first fiscal year that begins after November 15, 2007.  The Company is currently evaluating the impact that the adoption of SFAS No. 159 will have on its consolidated financial condition or results of operations.

In June 2007, the FASB issued Emerging Issues Task Force No. 06-11 (“EITF Issue No. 06-11”), “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.”  EITF Issue No. 06-11 requires that the tax benefit related to dividend equivalents paid on restricted stock, which are expected to vest, be recorded as an increase to additional paid-in capital.  The Company currently accounts for this tax benefit as a reduction to income tax expense.  EITF Issue No. 06-11 is to be applied prospectively for tax benefits on dividends declared in fiscal years beginning after December 15, 2007, and the Company expects to adopt the provisions of EITF Issue No. 06-11 beginning in the first quarter of 2008.  EITF Issue No. 06-11 is not expected to have a material impact on the Company’s consolidated financial condition or results of operations.

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Earnings Per Share

The following table shows the computation of the Company’s earnings per share:

	Income			Shares		Per Share
	(Numerator)			(Denominator)		Amount
	($ in thousands, except share and per share amounts)
Three Months Ended September 30, 2007
Net Income	$	14,384
Basic earnings per share	$	14,384			22,983,325	$	0.63
Effect of dilutive securities:
Stock options		-			149,331
Unvested restricted stock		-			31,490
Warrants		-			24,885
Diluted earnings per share	$	14,384			23,189,031	$	0.62
Three Months Ended September 30, 2006
Net Income	$	8,456
Basic earnings per share	$	8,456			19,776,188	$	0.43
Effect of dilutive securities:
Stock options		-			195,798
Unvested restricted stock		-			69,286
Warrants		-			32,786
Diluted earnings per share	$	8,456			20,074,058	$	0.42
Nine months Ended September 30, 2007
Net Income	$	38,391
Less: Preferred stock dividends		(298	)
Preferred stock excess consideration		(400	)
Basic earnings per share	$	37,693			22,622,672	$	1.67
Effect of dilutive securities:
Stock options		-			178,445
Unvested restricted stock		-			54,195
Warrants		-			29,689
Diluted earnings per share	$	37,693			22,885,001	$	1.65
Nine months Ended September 30, 2006
Net Income	$	27,251
Basic earnings per share	$	27,251			19,734,365	$	1.38
Effect of dilutive securities:
Stock options		-			204,087
Unvested restricted stock		-			62,799
Warrants		-			31,005
Diluted earnings per share	$	27,251			20,032,256	$	1.36

Changes in Estimates

TICNY and TNIC recorded favorable development in their net loss reserves from prior accident years of $405,000 and $433,000 in the three and nine months ended September 30, 2007, respectively, compared to $616,000 and $1,298,000 of favorable development in the three and nine months ended September 30, 2006, respectively.  Preserver’s insurance companies recorded favorable development in their net loss reserves from the prior accident years of $114,000 and $118,000 in the three and nine months ended September 30, 2007.

TICNY and TNIC changes in estimated sliding scale ceding commission resulted in a decrease in ceding commission revenue of $126,000 and $123,000 in the three and nine months ended September 30, 2007, respectively, as compared to an increase in ceding commission revenue of $245,000 and $1,046,000 in the third quarter and nine months ended September 30, 2006, respectively.

TRM’s changes in estimated sliding scale commission was an increase in direct commission revenue of $465,000 and $1,486,000 in the three and nine months ended September 30, 2007, compared to an increase in direct commission revenue of $393,000 and $180,000 in the three and nine months ended September 30, 2006, respectively.

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Segment Information

The Company manages its operations through three business segments: insurance (commercial and personal lines underwriting), reinsurance and insurance services (managing general agency, claims administration and reinsurance intermediary operations).  The Company considers many factors in determining reportable segments including economic characteristics, production sources, products or services offered and regulatory environment.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.  The Company evaluates segment performance based on segment profit, which excludes investment income, realized gains and losses, interest expense, income taxes and incidental corporate expenses.  The Company does not allocate assets to segments because assets, which consist primarily of investments and fixed assets, are considered in total by management for decision-making purposes.

The Company included Preserver’s insurance operations in its insurance segment for the three and nine months ended September 30, 2007.  Business segments results are as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Insurance Segment Information	($ in thousands)
Revenues
Net premiums earned	$	72,279	$	49,796	$	202,414	$	152,356
Ceding commission revenue		19,599		13,171		50,867		30,550
Policy billing fees		599		286		1,444		825
Total revenues		92,477		63,253		254,725		183,731
Expenses
Net loss and loss adjustment expenses		39,721		28,853		112,406		89,895
Underwriting expenses		40,758		25,688		111,169		73,263
Total expenses		80,479		54,541		223,575		163,158
Underwriting profit	$	11,998	$	8,712	$	31,150	$	20,573

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007		2006			2007		2006
Reinsurance Segment	($ in thousands)
Revenues
Net premiums earned	$	845	$	2,569		$	5,128	$	16,552
Ceding commission revenue		2		-			-		-
Total revenues		847		2,569			5,128		16,552
Expenses
Net loss and loss adjustment expenses		286		1,538			2,122		15,131
Underwriting expenses		407		1,235			2,505		2,354
Total expenses		693		2,773			4,627		17,485
Underwriting profit (loss)	$	154	$	(204	)	$	501	$	(933	)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Insurance Services Segment	($ in thousands)
Revenue
Direct commission revenue from managing general agency	$	8,028	$	380	$	9,088	$	2,291
Claims administration revenue		524		688		1,624		2,572
Other Administration Revenue		326		-		924		-
Reinsurance intermediary fees		254		176		595		411

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Policy billing fees		5		-		5		5
Total revenues		9,137		1,244		12,236		5,279
Expenses
Direct commissions expense paid to producers		3,808		211		3,959		1,545
Other insurance services expenses		1,687		193		2,302		735
Claims expense reimbursement to TICNY		520		687		1,618		2,556
Total expenses		6,015		1,091		7,879		4,836
Insurance services pretax income	$	3,122	$	153	$	4,357	$	443

Underwriting expenses in the insurance segment are net of expense reimbursements that are made by the insurance services segment pursuant to an expense sharing agreement between TRM, TNIC and TICNY.  In accordance with terms of this agreement, TRM reimburses TICNY for a portion of TICNY's underwriting and other expenses resulting from TRM's use of TICNY's personnel, facilities and equipment in underwriting insurance on behalf of TRM's issuing companies.  The reimbursement for underwriting and other expenses is calculated as a minimum reimbursement of 5% of the premiums produced by TRM and is adjustable according to the terms of the agreement based on the number of policies in-force and additional expenses that may be incurred by TRM.  The amount of this reimbursement was $1.7 million and $2.3 million for the three and nine months ended September 30, 2007, respectively, and $0.2 million and $0.7 million for the three and nine months ended September 30, 2006, respectively.  TRM also reimburses TICNY, at cost, for claims administration expenses pursuant to the terms of this expense sharing agreement.  Claims expenses reimbursed by TRM were $0.5 million and $1.6 million for the three and nine months ended September 30, 2007, respectively, and $0.7 million and $2.6 million for the three and nine months ended September 30, 2006, respectively.  TICNY is also reimbursed, at cost, for other administrative services provided to CastlePoint pursuant to the terms of the service and expense sharing agreement.  These reimbursements were $0.3 million and $0.9 million during the three and nine months ended September 30, 2007, respectively.

The following table reconciles revenue by segment to consolidated revenues:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007			2006		2007		2006
	($ in thousands)
Insurance segment	$	92,477		$	63,253	$	254,725	$	183,731
Reinsurance segment		847			2,569		5,128		16,552
Insurance services segment		9,137			1,244		12,236		5,279
Total segment revenues		102,461			67,066		272,089		205,562
Investment income		9,615			5,923		27,016		15,875
Realized capital gains (losses)		(62	)		32		10		(84	)
Consolidated revenues	$	112,014		$	73,021	$	299,115	$	221,353

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The following table reconciles the results of the Company’s individual segments to consolidated income before taxes:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
	($ in thousands)
Insurance segment underwriting profit	$	11,998		$	8,712		$	31,150		$	20,573
Reinsurance segment underwriting profit (loss)		154			(204	)		501			(933	)
Total underwriting profit (loss)		12,152			8,508			31,651			19,640
Insurance services segment pretax income		3,122			153			4,357			443
Net investment income		9,615			5,923			27,016			15,875
Net realized investment gain (loss)		(62	)		32			10			(84	)
Corporate expenses		(553	)		(423	)		(1,144	)		(1,919	)
Interest expense		(2,313	)		(1,863	)		(6,843	)		(5,066	)
Other Income *		746			418			4,874			12,852
Income before taxes	$	22,707		$	12,748		$	59,921		$	41,741
* See note on investment in unconsolidated affiliate-CastlePoint

Subsequent Events

On October 24, 2007, the Company’s Board of Directors approved a quarterly dividend of $0.05 per share payable December 27, 2007 to stockholders of record as of December 14, 2007.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Note on Forward-Looking Statements

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

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

·   ineffectiveness or obsolescence of our business strategy due to changes in current or future market conditions;

·   developments that may delay or limit our ability to enter new markets as quickly as we anticipate;

·   increased competition on the basis of pricing, capacity, coverage terms or other factors;

·   greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events, than our underwriting, reserving or investment practices anticipate based on historical experience or industry data;

·   the effects of acts of terrorism or war;

·   developments in the world’s financial and capital markets that adversely affect the performance of our investments;

·   changes in regulations or laws applicable to us, our subsidiaries, brokers or customers;

·   acceptance of our products and services, including new products and services;

·   changes in the availability, cost or quality of reinsurance and failure of our reinsurers to pay claims timely or at all;

·   changes in the percentage of our premiums written that we cede to reinsurers;

·   decreased demand for our insurance or reinsurance products;

·   loss of the services of any of our executive officers or other key personnel;

·   the effects of mergers, acquisitions and divestitures;

·   changes in rating agency policies or practices;

·   changes in legal theories of liability under our insurance policies;

·   changes in accounting policies or practices; and

·   changes in general economic conditions, including inflation, interest rates and other factors.

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

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Consolidated Results of Operations

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Revenues	($ in thousands)
Premiums earned
Gross premiums earned	$	138,752		$	92,528		$	378,000		$	264,711
Less: Ceded premiums earned		(65,628	)		(40,162	)		(170,458	)		(95,803	)
Net premiums earned		73,124			52,366			207,542			168,908
Total commission and fee income		29,337			14,700			64,547			36,654
Net investment income		9,615			5,923			27,016			15,875
Net realized investment (losses) gains		(62	)		32			10			(84	)
Total		112,014			73,021			299,115			221,353
Expenses
Net loss and loss adjustment expenses		40,007			30,392			114,528			105,026
Operating expenses		47,733			28,436			122,697			82,372
Interest Expense		2,313			1,863			6,843			5,066
Total Expenses		90,053			60,691			244,068			192,464
Equity in income of unconsolidated affiliate		746			418			2,169			364
Gain from issuance of common stock by unconsolidated affiliate		-			-			2,705			7,883
Warrant received from unconsolidated affiliate		-			-			-			4,605
Income before taxes		22,707			12,748			59,921			41,741
Federal and state income taxes		8,323			4,292			21,530			14,490
Net Income	$	14,384		$	8,456		$	38,391		$	27,251
Key Measure
Return on average equity		19.6	%		20.2	%		20.4	%		22.8	%

Significant Events − Three and Nine Months Ended September 30, 2007

On April 10, 2007 we acquired 100% of the issued and outstanding common stock of Preserver pursuant to the stock purchase agreement, dated November 13, 2006, by and among the Company, Preserver and the Sellers named therein (the “Agreement”).  The acquisition was accounted for using the purchase method in accordance with FASB SFAS No. 141, Business Combinations (“SFAS No. 141”).  The Company’s consolidated results for the three and nine month periods ended September 30, 2007 include the results of Preserver for the period April 11, 2007 to September 30, 2007.  Preserver’s contribution to net income during the three and nine months ending September 30, 2007 was $1.6 million and $3.3 million, respectively.

Consolidated Results of Operations Three Months Ended September 30, 2007 and 2006

Total revenues.  Total revenues increased by 53.4% to $112.0 million for the three months ended September 30, 2007 compared to $73.0 million for the same period in 2006.  The total revenue increase is primarily due to the increase in earned premiums, total commission and fee income and net investment income.  The acquisition of Preserver added $18.8 million to total revenues in the third quarter of 2007.  Net premiums earned represented 65.3% of total revenues for the three months ended September 30, 2007 compared to 71.7% for the same period in 2006.  Net investment income, excluding realized capital gains and losses, represented 8.6% and 8.1% of total revenues for the three months ended September 30, 2007 and 2006, respectively.  Total commission and fee income increased for the three months ended September 30, 2007 to $29.3 million, or 26.2% of total revenues, compared to $14.7 million, or 20.1% of total revenues, for the same period in 2006.

Total revenues were affected by changes in the amount of, and the means by which we transferred business to CastlePoint and the acquisition of Preserver.  We entered into three multi-year quota share reinsurance agreements with CastlePoint on April 6, 2006.  In order to achieve our targeted net retention consistent with our hybrid business model, we increased the quota share ceding percentage for the first six months of 2007 to 49% in 2007, compared to 30% for the first six months of 2006.  For the period April 1, 2007 through June 30, 2007, we ceded 40% of premiums and losses to CastlePoint Reinsurance and 9% to CPIC.  On July 1, 2007, the 9% quota share

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cession to CPIC was replaced by placing $23.4 million of brokerage business premium with CPIC through TRM.  The increase in the quota share ceding percentage and commission on premiums produced by TRM, as well as the acquisition of Preserver, contributed to the increase in commission and fee income in the three months ended September 30, 2007 as compared with the same period in 2006.  Policies in-force, before the effect of the Preserver acquisition increased by 15.7% to 161,100 as of September 30, 2007 compared to September 30, 2006.  The growth in policies in-force includes the growth in premium produced by TRM, on behalf of CPIC, during the third quarter as previously discussed.  The placement of these policies with CPIC generates fee income for TRM, enhancing our net income and return on equity consistent with our hybrid business model.

Premiums earned.  Net premiums earned increased by 39.6% to $73.1 million for the three months ended September 30, 2007 compared to $52.4 million for the same period in 2006.  The increase in net premiums earned in the third quarter of 2007 was due to new business and the acquisition of Preserver, offset in part, by an increase in ceded premiums earned for the three months ended September 30, 2007 arising from the increased quota share ceding percentage in 2007.  The acquisition of Preserver added $15.6 million in net premiums earned in the third quarter of 2007.  During the three months ended September 30, 2007, we ceded $52.5 million of our premiums earned to CastlePoint compared to $25.4 million in the three months ended September 30, 2006.

Commission and fee income.  Total commission and fee income increased by 99.6% to $29.3 million in the third quarter of 2007 compared to $14.7 million in the third quarter of 2006.  Ceding commission revenue earned increased as a result of the overall increase in ceded premiums earned as discussed above.  During May 2007 our managing general agency subsidiary, TRM, began producing business on behalf of CPIC.  In the third quarter of 2007, TRM produced $23.4 million in premium on behalf of CPIC and earned $7.5 million in fee income.  The acquisition of Preserver and its inclusion in the CastlePoint brokerage business quota share reinsurance agreement also added $1.8 million in commission and fee income in the third quarter of 2007.  Commission and fee income includes other administrative revenue of $0.3 million from services provided to and reimbursed by CastlePoint.  For the three months ended September 30, 2007, the change in the estimated sliding scale commission rate for commissions earned in prior periods in both the Insurance Segment and the Insurance Services Segment resulted in a net increase of $0.3 million, compared to a net increase of $0.6 million in the same period last year.

Net investment income and realized gains.  Net investment income increased by 62.3% to $9.6 million for the three months ended September 30, 2007 compared to $5.9 million for the same period in 2006.  The majority of this increase resulted from an increase in invested assets to $642.5 million as of September 30, 2007 compared to $443.7 million as of September 30, 2006.  Preserver added $1.4 million of net investment income in the third quarter of 2007.  Net cash flow provided by operations was $18.3 million during the three months ended September 30, 2007 and contributed to the increase in invested assets.  The increase in invested assets in the third quarter of 2006 resulted from net cash flow provided by operations of $11.3 million.  On a tax equivalent basis the yield was 5.9% as of September 30, 2007 compared to 5.6% as of September 30, 2006.

Net realized capital losses were $62,000 for the three months ended September 30, 2007 compared to net realized capital gains of $32,000 for the same period in 2006.  There was no impact on net realized gains attributable to adjustments for other than temporary impairment of securities held during the three months ending September 30, 2007 or during the same period in 2006.

Loss and loss adjustment expenses.  Gross loss and loss adjustment expenses and the gross loss ratio for the Insurance and Reinsurance Segments combined for the three months ended September 30, 2007 were $69.9 million and 50.4%, respectively, compared to $49.1 million and 53.1%, respectively, for the same period in 2006.  The net loss ratio for the combined segments was 54.7% for the three months ended September 30, 2007, as compared to 58.0% in the same period of 2006.

Operating expenses.  Operating expenses increased by 67.9% to $47.7 million for the three months ended September 30, 2007 from $28.4 million for the same period in 2006.  The increase was due primarily to the increase in underwriting expenses resulting from the growth in gross premiums earned.  The acquisition of Preserver added $7.9 million of operating expenses for the three months ended September 30, 2007.  Cost reductions were realized as part of the Preserver integration and Preserver’s gross expense ratio was reduced to 34.9% for the three months ended September 30, 2007, compared to 35.7% for the three months ended June 30, 2007.

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Interest expense.  Interest expense increased for the three months ended September 30, 2007 to $2.3 million compared to $1.9 million for the same period in 2006.  The increase resulted from $0.4 million of interest expense related to the $20.6 million of subordinated debentures issued on January 25, 2007 and $0.1 million related to the $12.3 million of outstanding junior subordinated notes of Preserver, partially offset by a decrease of $0.1 million in the amounts credited to reinsurers on funds withheld in segregated trusts as collateral for reinsurance recoverables due to the reduction in the corresponding reinsured losses.

Other income.  For the three months ended September 30, 2007 and 2006 we recorded other income of $0.7 million and $0.4 million, respectively, representing our equity in CastlePoint’s net income for the respective periods.

Income tax expense.  Our income tax expense was $8.3 million for the three months ended September 30, 2007 compared to $4.3 million for the same period in 2006.  The increase was due primarily to the increase in income before income taxes, as well as an increase in state and local income taxes for TRM, which is included in our insurance services segment.  As previously discussed, we significantly increased premiums produced on behalf of CPIC in our insurance services segment in the third quarter of 2007 resulting in higher commission income in that segment.  The effective income tax rate was 36.7% for the three months ending September 30, 2007 compared to 33.7% for the same period in 2006.

Net income and return on average equity.  Our net income and annualized return on average equity was $14.4 million and 19.6%, respectively, for the three months ended September 30, 2007 compared to $8.5 million and 20.2%, respectively, for the same period in 2006.  For the third quarter of 2007, the return was calculated by dividing annualized net income of $57.5 million by an average stockholders’ equity of $294.3 million.  For the third quarter of 2006, the return was calculated by dividing annualized net income of $33.8 million by an average stockholders’ equity of $167.2 million.

Consolidated Results of Operations Nine Months Ended September 30, 2007 and 2006

Total revenues.  Total revenues increased by 35.1% to $299.1 million for the nine months ended September 30, 2007 compared to $221.4 million for the same period in 2006.  The increase is primarily due to the increase in earned premiums, total commission and fee income and net investment income, excluding net realized investment gains and losses.  The acquisition of Preserver added $37.4 million to total revenues in the nine months ended September 30, 2007.  Net premiums earned represented 69.4% of total revenues for the nine months ended September 30, 2007 compared to 76.3% for the same period in 2006.  Net investment income, excluding realized capital losses, represented 9.0% and 7.2% of total revenues for the nine months ended September 30, 2007 and September 30, 2006, respectively.  Total commission and fee income increased to $64.5 million, or 21.6% of total revenues, for the nine months ended September 30, 2007 compared to $36.7 million, or 16.6% of total revenues, for the same period in 2006.  We did not place quota share reinsurance for policies written during the first quarter of 2006 in expectation that CastlePoint Reinsurance, post formation, would agree to enter into a multi-year quota share reinsurance agreement with us.  We entered into three multi-year quota share reinsurance agreements with CastlePoint Reinsurance on April 6, 2006.  In order to achieve our targeted net retention consistent with our hybrid business model, we increased the quota share ceding percentage on policies written during the first three months of 2007 to CastlePoint Reinsurance to 49.0% compared to 30% for the six months of 2006.  For the period April 1, 2007 through June 30, 2007 we ceded 40% of our premiums and losses to CastlePoint Reinsurance and 9% to CPIC.  On July 1, 2007, the 9% quota share ceded to CPIC was replaced by placing $23.9 million of brokerage business premiums with CPIC through TRM.  The increase in both the quota share ceding percentage and commission on premiums produced by TRM contributed to the increase in commission and fee income in the first nine months of 2007.

Premiums earned.  Net premiums earned increased by 22.9% to $207.5 million for the nine months ended September 30, 2007 compared to $168.9 million for the same period in 2006.  The increase in net premiums earned was due to the 24.3% increase in gross premiums written for the nine months ended September 30, 2007 compared to the same period last year, offset in part, by a 77.9% increase in ceded premiums earned for the nine months ended September 30, 2007 compared to the same period last year.  The acquisition of Preserver added $32.2 million in net premiums earned in the nine months ended September 30, 2007.  Also, in 2006 we executed novation agreements with PXRE, which added $11.4 million of net premiums earned in the second quarter.

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During the nine months ended September 30, 2007 we ceded $135.4 million of our premiums earned to CastlePoint, compared to $45.8 million in 2006.

Commission and fee income.  Total commission and fee income increased by 76.1% to $64.5 million in the nine months ended September 30, 2007 compared to $36.7 million in the same period of 2006.  Ceding commission revenue earned increased as a result of the overall increase in ceded premiums earned as discussed above.  During May 2007 our managing general agency subsidiary, TRM, began producing business on behalf of CPIC.  During the nine months ended September 30, 2007, TRM produced $23.9 million in premium on behalf of CPIC and earned $7.7 million in fee income.  Preserver’s inclusion in the CastlePoint quota share agreement added $2.6 million in commission and fee income for the nine months ended September 30, 2007.  In addition, commission and fee income includes other administration revenue of $0.9 million from services provided to and reimbursed by CastlePoint.  For the nine months ended September 30, 2007 the change in estimated sliding scale commission rate for commissions earned in prior periods in both the Insurance Segment and the Insurance Services Segment resulted in a net increase of $1.4 million compared to a net increase $1.2 million in the same period last year.

Net investment income and realized gains.  Net investment income increased by 70.2% to $27.0 million for the nine months ended September 30, 2007 compared to $15.9 million for the same period in 2006.  The increase in net investment income resulted from an increase in invested assets to $642.5 million as of September 30, 2007 compared to $443.7 million as of September 30, 2006.  Net cash flows provided by operations of $48.2 million contributed to the increase in invested assets during the nine months ended September 30, 2007. The increase in invested assets was also due to cash flow provided by financing activities of $68.7 million as a result of our net proceeds from the issuance of subordinated debentures on January 25, 2007, an equity offering on January 26, 2007 and the exercise of the underwriters’ over-allotment option on February 5, 2007, partially offset by the funds used to redeem our preferred stock.  Preserver added $2.5 million of net investment income for the nine months ended September 30, 2007.  The net cash flow used in investing activities was $181.5 million for the nine months ended September 30, 2007 and includes $66.2 million for the purchase of Preserver.  On a tax equivalent basis, the yield was 5.9% as of September 30, 2007 and 5.6% as of September 30, 2006.

Net realized capital gains were $10,000 in the nine months ended September 30, 2007 compared to net realized capital losses of $84,000 for the same period in 2006.  There was no impact on net realized gains attributable to adjustments for other than temporary impairment of securities held during the nine months ended September 30, 2007 or during the same period in 2006.

Loss and loss adjustment expenses.  Gross loss and loss adjustment expenses and the gross loss ratio for the Insurance and Reinsurance Segments combined for the nine months ended September 30, 2007 were $194.1 million and 51.3%, respectively, compared to $151.0 million and 57.0%, respectively, for the same period in 2006.  The net loss ratio for the combined segments was 55.2% for the nine months ended September 30, 2007 as compared to 62.2% in the same period of 2006.  For the first nine months of 2006, the net loss ratio for the combined segments reflected a $1.6 million charge resulting from the commutation and novation agreements with PXRE.  This charge added 4.3 percentage points to the net loss ratio for the combined segments for the nine months ended September 30, 2006.

Operating expenses.  Operating expenses increased by 49.0% to $122.7 million for the nine months ended September 30, 2007 from $82.4 million for the same period in 2006.  The increase was due primarily to the increase in underwriting expenses resulting from the growth in premiums earned and additional staffing and facility expenses.  The acquisition of Preserver added $14.9 million of operating expenses for the nine months ended September 30, 2007.

Interest expense.  Our interest expense increased for the nine months ended September 30, 2007 to $6.8 million compared to $5.1 million for the same period in 2006.  The increase resulted from $1.1 million of interest expense from the $20.6 million of subordinated debentures issued on January 25, 2007, $0.4 million of interest expense from the $20.6 million of subordinated debentures issued on March 31, 2006, $0.1 million resulting from an increase in interest rates on the floating rate portions of our subordinated debentures and $0.4 million from $12.3 million of outstanding junior subordinated notes of Preserver, partially offset by a decrease of $0.3 million in the amounts credited to reinsurers on funds withheld in segregated trusts as collateral for reinsurance recoverables due to the reduction in the corresponding reinsured losses.

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Other income. For the nine months ended September 30, 2007 and 2006 we recorded other income of $4.9 million and $12.9 million, respectively.  The $4.9 million of other income for the nine months ended September 30, 2007 represents our equity in CastlePoint’s 2007 net income for the nine months ended September 30, 2007 as well as a $2.7 million gain which resulted from our investment in CastlePoint as a result of its initial public offering which occurred in the first quarter of 2007.

Income tax expense.  Our income tax expense was $21.5 million for the nine months ended September 30, 2007 compared to $14.5 million for the same period in 2006.  The increased income tax expense was due primarily to the increase in income before income taxes, as well as an increase in state and local income taxes for TRM, which is included in the insurance services segment.  The effective income tax rate was 35.9% for the nine months ending September 30, 2007 compared to 34.7% for the same period in 2006.

Net income and return on average equity.  Our net income and annualized return on average equity was $38.4 million and 20.4%, respectively, for the nine months ended September 30, 2007 compared to $27.3 million and 22.8%, respectively, for the same period in 2006.  For the nine months ended September 30, 2007, the return was calculated by dividing annualized net income, after deducting $0.7 million of preferred stock dividends and excess consideration, of $50.3 million by an average stockholders’ equity of $246.5 million. As a result of the significant increase in stockholders’ equity from our offering and over-allotment exercise in the first quarter, average common stockholders’ equity for the nine months ended September 30, 2007 was calculated using a quarterly average for the nine months ended September 30, 2007.  For the nine months ended September 30, 2006, the return was calculated by dividing annualized net income of $36.3 million by an average stockholders’ equity of $159.6 million.

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Insurance Segment Results of Operations

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2007			2006			2007			2006
Revenues		($ in thousands)
Premiums earned
	Gross premiums earned	$	137,911		$	89,910		$	372,832		$	248,066
	Less: ceded premiums earned		(65,632	)		(40,114	)		(170,418	)		(95,710	)
	Net premiums earned		72,279			49,796			202,414			152,356
Ceding commission revenue			19,599			13,171			50,867			30,550
Policy billing fees			599			286			1,444			825
Total			92,477			63,253			254,725			183,731
Expenses
Loss and loss adjustment expenses
	Gross loss and loss adjustment expenses		69,600			47,551			191,868			136,044
	Less: ceded loss and loss adjustment expenses		(29,879	)		(18,698	)		(79,462	)		(46,149	)
	Net loss and loss adjustment expenses		39,721			28,853			112,406			89,895
Underwriting expenses
	Direct commission expense		22,297			14,204			61,052			40,444
	Other underwriting expenses		18,461			11,484			50,117			32,819
	Total underwriting expenses		40,758			25,688			111,169			73,263
Underwriting Profit		$	11,998		$	8,712		$	31,150		$	20,573
Key Measures
Premiums written
	Gross premiums written	$	127,670		$	98,523		$	387,169		$	289,779
	Less: ceded premiums written		(60,917	)		(48,071	)		(202,912	)		(131,507	)
	Net premiums written	$	66,753		$	50,452		$	184,257		$	158,272
Loss Ratios
Gross			50.5	%		52.9	%		51.5	%		54.8	%
Net			55.0	%		57.9	%		55.5	%		59.0	%
Accident Year Loss Ratio
Gross			50.4	%		53.5	%		51.5	%		55.2	%
Net			55.4	%		59.1	%		55.2	%		58.8	%
Underwriting Expense Ratios
Gross			29.1	%		28.3	%		29.4	%		29.2	%
Net			28.4	%		24.6	%		29.1	%		27.5	%
Combined Ratios
Gross			79.6	%		81.2	%		80.9	%		84.0	%
Net			83.4	%		82.5	%		84.6	%		86.5	%

Insurance Segment Results of Operations Three Months Ended September 30, 2007 and 2006

Gross premiums.  Gross premiums written increased by 29.6% to $127.7 million for the three months ended September 30, 2007 compared to $98.5 million for the same period in 2006.  Gross premiums earned increased by 53.4% to $137.9 million for the three months ended September 30, 2007 compared to $89.9 million for the same period in 2006.  The acquisition of Preserver added $17.6 million and $21.9 million in gross premiums written and earned, respectively, in the three months ended September 30, 2007.  The remaining increase resulted from organic growth in our commercial multi-peril and auto related lines of business.  Policies in-force, before the effect of the Preserver acquisition, increased by 8.9% as of September 30, 2007 compared to an increase of 19.1% for the same period last year.  The reduction in the growth rate of policies in-force was impacted by the placement of brokerage business premiums with CPIC, through TRM, during the third quarter of 2007, as previously discussed.  We expect this trend to continue in the fourth quarter of 2007 and in 2008 as TRM is expected to continue to produce brokerage business premiums on behalf of CPIC.  Preserver’s policies in-force decreased by 4.8% as of September 30, 2007, compared to September 30, 2006.  The decrease is attributable to market conditions in private passenger auto written in the New England region, as well as Preserver’s agents renewing policies in TICNY and TNIC, which are both rated “A-“ by A.M. Best.  During the third quarter of 2007, premium increases on renewed business averaged 9.3% in personal lines and 2.4% in commercial lines.  The retention rate was 88%

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for personal lines and 77% for commercial lines.  The Preserver retention rate was 75% for personal lines and 74% for commercial lines.

Ceded premiums.  Ceded premiums written increased by 26.7% to $60.9 million for the three months ended September 30, 2007 compared to $48.1 million for the same period in 2006.  During the third quarter of 2007 we ceded $49.0 million of quota share reinsurance to CastlePoint of which $6.9 million was ceded by the Preserver insurance companies.  Separately, under our excess of loss reinsurance programs, $0.8 million and $0.9 million of premiums were ceded to CastlePoint for the three months ended September 30, 2007 and 2006, respectively.  In the third quarter of 2006 we ceded $0.5 million of catastrophe reinsurance premium to CastlePoint Reinsurance.  Effective July 1, 2007, CastlePoint Reinsurance no longer participates as a reinsurer on our catastrophe reinsurance program, which now includes coverage for business written by CPIC and produced and managed by TRM.  Additionally, under the brokerage business quota share agreement CastlePoint paid us $0.7 million, which represented a 30% share of our catastrophe reinsurance costs.  Effective April 1, 2007, under the brokerage business quota share reinsurance agreement, CastlePoint agreed to pay 30% of our property catastrophe reinsurance premiums and 30% of our net retained property catastrophe losses.  Catastrophe ceded premiums were $3.5 million, after CastlePoint’s reimbursement, in the third quarter of 2007 as compared to $3.9 million in the third quarter of last year.

Quota share cessions reflect a 49% quota share ceding percentage through June 30, 2007 and a 40% ceding percentage for the period July 1, 2007 to September 30, 2007.

Ceded premiums earned increased 63.6% during the three months ending September 30, 2007 as compared to the same period last year as a result of the increase in gross premiums earned and the aforementioned changes in quota share ceding percentages.

Net premiums.  Net premiums written increased by 32.3% to $66.8 million for the three months ended September 30, 2007 compared to $50.5 million for the same period in 2006.  This increase was the result of the increase in gross premiums written as discussed above.  Net premiums earned increased by 45.2% to $72.3 million in the three months ended September 30, 2007 compared to $49.8 million in the same period in 2006  This increase was driven primarily by the increase in gross premiums earned offset, in part, by the increase in the quota share ceding percentage in 2007 from 2006.

Ceding commission revenue.  Ceding commission revenue increased by 48.8% to $19.6 million for the three months ended September 30, 2007 compared to $13.2 million for the same period in 2006, largely due to the 63.6% increase in ceded premiums earned.  The acquisition of Preserver and its inclusion in the quota share reinsurance agreements added $1.6 million in ceding commission revenue in the third quarter of 2007.  Ceding commission revenue decreased by $0.1 million in 2007 as a result of an increase in the ceded loss ratios on prior years’ quota share treaties and increased by $0.2 million in 2006 as a result of a decrease in the ceded loss ratios on prior years’ quota share treaties in the third quarter of 2006.

Loss and loss adjustment expenses and loss ratio.  Gross and net loss and loss adjustment expenses were $69.6 million and $39.7 million, respectively, for the three months ended September 30, 2007 compared with $47.6 million and $28.9 million, respectively, for the same period in 2006.  Our gross loss ratio was 50.5% for the three months ended September 30, 2007 as compared with 52.9% for the same period in 2006.  The net loss ratio was 55.0% for the three months ended September 30, 2007 compared to 57.9% in the same period of 2006.  The loss ratio on the Preserver business reduced the gross loss ratio by 0.9 percentage points and reduced the net loss ratio by 0.3 percentage points for the three months ended September 30, 2007.  The decrease in the net loss ratio in the third quarter of 2007 compared to the same period in 2006 was due to a decrease in the gross loss ratio resulting from the continuing effects of strong premium increases in personal lines and moderate premium increases in commercial lines.  Also, the net loss ratio benefited in part from lower ceded catastrophe premiums.  We ceded catastrophe reinsurance premiums equal to 4.6% of net premiums earned during the three months ended September 30, 2007 as compared to 7.2% in the same period in 2006.  There was favorable development of $0.3 million on a net basis in the third quarter of 2007 compared to favorable development of $0.6 million on prior years’ net loss reserves in the same period of 2006.  Loss and loss adjustment expenses are net of reimbursements for loss and loss adjustment expenses made by TRM pursuant to the expense sharing between TICNY and TRM.  See “Insurance Services Segment Results of Operations” for the amounts of loss and loss adjustment expense reimbursements.

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Underwriting expenses and underwriting expense ratio.  Underwriting expenses, which include direct commission expenses and other underwriting expenses, were $40.8 million for the three months ended September 30, 2007 as compared with $25.7 million for the same period in 2006.  Our gross expense ratio was 29.1% for the three months ended September 30, 2007 as compared with 28.3% for the same period in 2006.  The higher expense ratio of Preserver added 1.1 percentage points to the gross expense ratio for the three months ended September 30, 2007.  We expect to continue to reduce Preserver expenses through the first quarter of 2008 and achieve a gross expense ratio consistent with Tower’s.

The commission portion of the gross expense ratio, which expresses direct commission expense paid to our producers as a percentage of gross premiums earned, was 16.2% for the three months ended September 30, 2007, compared to a 15.8% ratio for the same period in 2006.  The 2007 commission was higher than 2006 due to an increase in incentives profit commission with our agents resulting from an improvement in loss performance.

The underwriting expense portion of the gross expense ratio was 13.0% for the three months ended September 30, 2007 as compared to 12.5% for the same period in 2006.  The increase in costs is partially related to the acquisition of Preserver.  Gross expenses also increased due to facility and staff related costs.  The higher expense ratio of Preserver added 1.3 percentage points to the gross underwriting expense ratio for the three months ended September 30, 2007.

The net underwriting expense ratio, which reflects the benefit of ceding commission revenue that lowers the gross expense ratio, was 28.4% for the three months ended September 30, 2007 as compared to 24.6% for the same period in 2006.  Preserver’s higher expense ratio added 2.8 percentage points to the net underwriting expense ratio for the three months ended September 30, 2007.

Underwriting profit and combined ratio.  The underwriting profit, which reflects our underwriting results on a net basis after the effects of reinsurance, was $12.0 million in the third quarter of 2007 and $8.7 million in the same period in 2006.  Preserver’s contribution to underwriting profit was $1.2 million in the third quarter of 2007.  The gross combined ratio was 79.6% for the three months ended September 30, 2007 as compared with 81.2% for the same period in 2006.  The net combined ratio was 83.4% for the three months ended September 30, 2007 as compared to 82.5% for the same period in 2006.  Preserver added 0.2 and 2.5 percentage points to the gross and net combined ratios, respectively.

Insurance Segment Results of Operations Nine Months Ended September 30, 2007 and 2006

Gross premiums.  Gross premiums written increased by 33.6% to $387.2 million for the nine months ended September 30, 2007 compared to $289.8 million for the same period in 2006.  Gross premiums earned increased by 50.3% to $372.8 million for the nine months ended September 30, 2007 compared to $248.1 million for the same period in 2006.  The acquisition of Preserver on April 10, 2007 added $36.6 million and $41.0 million in gross premiums written and earned, respectively, in the nine months ended September 30, 2007.  The remaining increase resulted from organic growth in our homeowners, commercial multi-peril and other liability lines of business.  Policies in-force, before the effect of the Preserver acquisition, increased by 8.9% as of September 30, 2007 compared to September 30, 2006.  The reduction in the growth rate of policies in-force was impacted by the placement of brokerage business premiums with CPIC through TRM during the third quarter of 2007, as previously discussed.  See “Total Revenues” under “Consolidated Results of Operation for the Three Months Ended September 30, 3007 and 2006” for further discussion.  During the nine months ended September 30, 2007, premium increases on renewed business averaged 10.1% in personal lines and 1.2% in commercial lines.  The retention rate was 85% for personal lines and 77% for commercial lines.  The Preserver retention rate was 72% for personal lines and 77% for commercial lines.

Ceded premiums.  Ceded premiums written increased by 54.3% to $202.9 million for the nine months ended September 30, 2007 compared to $131.5 million for the same period in 2006.  During the nine months ended September 30, 2007 we ceded $169.7 million of quota share reinsurance to CastlePoint, of which $15.6 million was ceded by the Preserver insurance companies.  Separately, under our excess of loss and property catastrophe reinsurance programs, $3.6 million and $1.4 million of premiums were ceded to CastlePoint for the nine months ended September 30, 2007 and 2006, respectively.

We entered into three multi-year quota share reinsurance agreements with CastlePoint Reinsurance on April 6, 2006.  Since we did not place quota share reinsurance in the first quarter of 2006, pending the formation of CastlePoint, for the six months ended September 30, 2006, we ceded $109.7 million of premiums written to

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CastlePoint Reinsurance including $40.9 million of unearned premiums as of April 1, 2006.  In order to achieve our targeted net retention consistent with our hybrid business model, we increased the quota share ceding percentage on policies written during the first three months of 2007 from 30.0% to 49.0%.  For the period April 1, 2007 through June 30, 2007, we ceded 40% of its premiums and losses to CastlePoint Reinsurance and 9% of its premiums and losses to CPIC.  We continue to cede 40% of our premiums to CastlePoint Reinsurance.  On July 1, 2007, the 9% quota share cession to CPIC was replaced by the placement of brokerage business premiums with CPIC through TRM.  Additionally, effective April 1, 2007, under the brokerage business quota share agreement CastlePoint paid us $2.2 million, which represented a 30% share of our catastrophe reinsurance costs.  Overall, catastrophe ceded premiums were $10.8 million in the nine months ended September 30, 2007 as compared to $6.3 million in the same period in 2006, net of reimbursements for catastrophe reinsurance from CastlePoint

Ceded premiums earned increased 78.1% during the nine months ending September 30, 2007 as compared to the same period last year.  This was due primarily to the 54.3% increase in ceded premiums written in 2007 and slightly lower ceded premiums earned in 2006 since we did not cede any premiums in the first quarter of 2006 and the quota share ceding percentage was only 30% for the three months ending June 30, 2006.

Net premiums.  Net premiums written increased by 16.4% to $184.3 million for the nine months ended September 30, 2007 compared to $158.3 million for the same period in 2006.  Although gross premiums written increased 33.6% for the nine months, the increased quota share ceding percentage mentioned above reduced the increase in net premiums written.  Net premiums earned increased by 32.9% to $202.4 million in the nine months ended September 30, 2007 compared to $152.4 million in the same period in 2006.  The growth was driven primarily by the increase in gross premiums earned, offset in part, by an increase in the quota share ceding percentage and an increase in catastrophe reinsurance costs.

Ceding commission revenue.  Ceding commission revenue increased by 66.5% to $50.9 million for the nine months ended September 30, 2007 compared to $30.6 million for the same period in 2006 largely due to the 78.1% increase in ceded premiums earned.  Also, as a result of the commutation agreements with PXRE, we recorded a charge of $3.2 million to ceding commission revenue in the nine months ended September 30, 2006.  Ceding commission revenue decreased by $0.1 million as a result of the deterioration in the ceded loss ratios on prior years’ quota share treaties and increased $1.0 million in the comparable period in 2006 as a result of an improvement in the ceded loss ratios on prior years’ quota share treaties.

Loss and loss adjustment expenses and loss ratio.  Gross and net losses and loss adjustment expenses were $191.9 million and $112.4 million, respectively, for the nine months ended September 30, 2007 compared with $136.0 million and $89.9 million, respectively, for the same period in 2006.  Our gross loss ratio was 51.5% for the nine months ended September 30, 2007 as compared with 54.8% for the same period in 2006.  Our net loss ratio was 55.5% for the nine months ended September 30, 2007 as compared with 59.0% for the same period in 2006.  For the nine months ended September 30, 2006, the net loss ratio for the combined segments reflected a $1.6 million charge resulting from the commutation agreements with PXRE that added 1.0 percentage point to the net loss ratio for the Insurance Segment for the nine months ended September 30, 2006.  Preserver added 0.1 percentage point to the gross loss ratio and reduced the net loss ratio by 0.6 percentage points for the nine months ended September 30, 2007.  The decrease in the net loss ratio in the nine months ended September 30, 2007 compared to the same period in 2006 was due to a decrease in the gross loss ratio.  However, the effect of the decrease on the net loss ratio was offset in part by higher ceded catastrophe premiums.  We ceded catastrophe reinsurance premiums equal to 5.1% of premiums earned during the nine months ended September 30, 2007 as compared to 4.0% in the same period in 2006.  There was unfavorable reserve development of $0.7 million on a net basis in the nine months ended September 30, 2007 compared to favorable development of $1.2 million on prior years’ net loss reserves in the same period of 2006 excluding the $1.6 million of losses incurred as a result of the commutation with PXRE.  The unfavorable reserve development in 2007 related to losses on commercial multi-peril liability business on both the 2004 and 2006 accident years.  Loss and loss adjustment expenses are net of reimbursements for loss and loss adjustment expenses made by TRM pursuant to the expense sharing arrangement between TICNY and TRM.  See “Insurance Services Segment Results of Operations” for the amounts of loss and loss adjustment expense reimbursements.

Underwriting expenses and underwriting expense ratio.  Underwriting expenses, which include direct commission expenses and other underwriting expenses, were $111.2 million for the nine months ended September 30, 2007 as compared with $73.3 million for the same period in 2006.  Our gross expense ratio was 29.4% for the

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nine months ended September 30, 2007 as compared with 29.2% for the same period in 2006.  The acquisition of Preserver added 0.7 percentage points to the gross expense ratio for the nine months ended September 30, 2007.

The commission portion of the gross expense ratio, which expresses direct commission expense paid to our producers as a percentage of gross premiums earned, was 16.4% for the nine months ended September 30, 2007, compared to 16.3% for the same period in 2006.

The underwriting expense portion of the gross expense ratio was 13.1% for the nine months ended September 30, 2007 as compared to 12.9% for the same period in 2006.  Although underwriting expenses increased due to the growth in premium volume, the gross underwriting expense ratio excluding the effects of Preserver declined as gross premiums earned increased more rapidly than underwriting expenses.  Preserver added 0.7 percentage points to the gross underwriting expense ratio for the nine months ended September 30, 2007.

The net underwriting expense ratio was 29.1% for the nine months ended September 30, 2007 as compared to 27.5% for the same period in 2006.  Preserver added 1.8 percentage points to the net underwriting expense ratio for the nine months ended September 30, 2007.  The net expense ratio for 2006 was affected by the reduction in ceding commissions of $3.2 million resulting from the commutations with PXRE which added 2.1 percentage points to the net expense ratio.

Underwriting profit and combined ratio.  The underwriting profit, which reflects our underwriting results on a net basis after the effects of reinsurance, was $31.1 million in the first nine months of 2007 and $20.6 million in the same period in 2006. Preserver’s contribution to underwriting profit was $2.9 million in the nine months ended September 30, 2007.  The gross combined ratio was 80.9% for the nine months ended September 30, 2007 as compared with 84.0% for the same period in 2006.  The lower gross combined ratio in the first nine months of 2007 resulted primarily from a lower gross loss ratio in 2007 compared to 2006.  The net combined ratio was 84.6% for the nine months ended September 30, 2007 as compared to 86.5% for the same period in 2006.   The decrease in the net combined ratio resulted from a decrease in the net loss ratio, offset in part, by an increase in the net underwriting expense ratio.  The effects of the commutations reduced underwriting profits in the nine months ended September 30, 2006 by $4.8 million and added 3.1 percentage points to the net combined ratio.  The higher expense ratio of Preserver added 0.8 and 1.2 percentage points to the gross and net combined ratios, respectively.

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Reinsurance Segment Results of Operations

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2007			2006			2007			2006
Revenues		($ in thousands)
Premiums earned
	Gross premiums earned	$	841		$	2,617		$	5,168		$	16,645
	Less: ceded premiums earned		4			(48	)		(40	)		(93	)
	Net premiums earned		845			2,569			5,128			16,552
Ceding commission revenue			2			-			-			-
Total			847			2,569			5,128			16,552
Expenses
Loss and loss adjustment expenses
	Gross loss and loss adjustment expenses		288			1,549			2,188			14,930
	Less: ceded loss and loss adjustment expenses		(2	)		(11	)		(66	)		201
	Net loss and loss adjustment expenses		286			1,538			2,122			15,131
Underwriting expenses
	Direct commission expense		317			895			1,854			1,665
	Other underwriting expenses		90			340			651			689
	Total underwriting expenses		407			1,235			2,505			2,354
Underwriting Profit		$	154		$	(204	)	$	501		$	(933	)
Key Measures
Premiums written
	Gross premiums written	$	1		$	1,287		$	218		$	21,818
	Less: ceded premiums written		5			(79	)		-			(79	)
	Net premiums written	$	6		$	1,208		$	218		$	21,739
Loss Ratios
Gross			34.2	%		59.2	%		42.3	%		89.7	%
Net			33.8	%		59.9	%		41.4	%		91.4	%
Accident Year Loss Ratio
Gross			58.4	%		59.3	%		66.2	%		91.3	%
Net			58.1	%		60.4	%		66.7	%		91.8	%
Underwriting expense Ratios
Gross			48.4	%		47.2	%		48.5	%		14.1	%
Net			47.9	%		48.1	%		48.8	%		14.2	%
Combined Ratios
Gross			82.6	%		106.4	%		90.8	%		103.8	%
Net			81.8	%		108.0	%		90.2	%		105.6	%

Reinsurance Segment Results of Operations Three Months Ended September 30, 2007 and 2006

Gross premiums.  Gross premiums written decreased to less than $1,000 for the three months ended September 30, 2007 and represents endorsements and other additional premiums on policies assumed in 2006 and produced by TRM as compared to $1.3 million for the same period in 2006.  Gross premiums earned decreased to $0.8 million from $2.6 million in the third quarter of 2006.  We have not assumed any policies produced by TRM during the third quarter of 2007 as such business was produced on behalf of CPIC in our Insurance Services segment.

Net premiums.  The variances for net premiums are the same as for gross premiums.

Loss and loss adjustment expenses and loss ratio.  Gross loss and loss adjustment expenses were $0.3 million for the three months ended September 30, 2007 as compared to $1.5 million for the same period in 2006.  Net losses were $0.3 million for the three months ended September 30, 2007 as compared to $1.5 million for the same period in 2006.  The gross and net loss ratios were 34.2% and 33.8%, respectively, for the three months ended September 30, 2007 as compared to 59.2% and 59.9%, respectively, in the same period in 2006.  There was favorable development of $0.2 million on a net basis on prior years’ net reserves in the third quarter of 2007 mostly due to favorable run-off of the PXRE novation.

Underwriting expenses and underwriting expense ratio.  Underwriting expenses for the Reinsurance Segment are comprised of ceding commission expense paid to TRM’s issuing companies and other third-party reinsurers to

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acquire premiums and this segment’s allocated share of other underwriting expenses.  Gross underwriting expenses decreased for the three months ended September 30, 2007 to $407,000 compared to $1.2 million in the same period in 2006.  The gross and net underwriting expense ratios were 48.4% and 47.9% for the three months ended September 30, 2007 compared to 47.2% and 48.1%, respectively, for the same period in 2006.

Underwriting profit and combined ratio.  The underwriting profit from assumed reinsurance for the third quarter of 2007 was $154,000 compared to an underwriting loss from assumed reinsurance of $204,000 for the third quarter of 2006.  The net combined ratio was 81.8% for the third quarter of 2007 compared to 107.9% for the third quarter of 2006.  The lower net combined ratio for the third quarter of 2007 in comparison to the third quarter of 2006 was due to favorable loss development as discussed above.

The gross combined ratio decreased to 82.6% in the third quarter of 2007 compared to 106.4% in the same period last year due to favorable loss development as discussed above.

Reinsurance Segment Results of Operations Nine Months Ended September 30, 2007 and 2006

Gross premiums.  Gross premiums written decreased to $218,000 for the nine months ended September 30, 2007 as compared to $21.8 million for the same period in 2006.  We have assumed $0.2 million of policies produced by TRM on behalf of issuing carriers during the nine months ending, September 30, 2007, but most of TRM’s premium was produced on behalf of CPIC in our Insurance Services segment.  In the first nine months of 2006, we entered into novation agreements with PXRE which increased gross premiums written and earned by $11.4 million, in addition to the premiums produced by TRM.  Gross premiums earned decreased to $5.2 million for the nine months ended September 30, 2007 from $16.6 million in the nine months ended September 30, 2006 due to the significant increase in gross premiums written and the novation agreements with PXRE in 2006.

Net premiums.  Net premiums written decreased to $218,000 for the nine months ended September 30, 2007 as compared to $21.7 million for the same period in 2006.  The decrease in net premiums written was due to the decrease in gross premiums.

Loss and loss adjustment expenses and loss ratio.  Gross loss and loss adjustment expenses were $2.2 million for the nine months ended September 30, 2007 as compared to $14.9 million for the same period in 2006.  Net loss and loss adjustment expenses were $2.2 million for the nine months ended September 30, 2007 as compared to $15.1 million for the same period in 2006. Both gross and net loss and loss adjustment expenses for the nine months ended September 30, 2006 were increased by $12.2 million as a result of the novation agreements with PXRE.  The gross and net loss ratios were 42.3% and 41.4%, respectively, for the nine months ended September 30, 2007 as compared to 89.7% and 91.4%, respectively, in the same period in 2006. The novation agreements added 37.5 percentage points and 34.4 percentage points to the gross and net loss ratio, respectively, for the nine months ending September 30, 2006.  There was favorable development of $1.3 million on a net basis on prior years’ net reserves for the nine months ended September 30, 2007 mostly due to favorable run-off of the PXRE novation.  This compares to favorable development of $68,000 on prior years’ net loss reserves in the same period of 2006.

Underwriting expenses and underwriting expense ratio.  Gross underwriting expenses increased for the nine months ended September 30, 2007 to $2.5 million as compared to $2.4 million for the same period in 2006.  The gross and net underwriting expense ratios were 48.5% and 48.8%, respectively, for the nine months ended September 30, 2007 compared to 14.1% and 14.2%, respectively, for the same period last year.  The lower gross and net underwriting expense ratios in the nine months ended September 30, 2006 were the direct result of the $11.4 million of additional gross and net premiums earned from the PXRE novation which did not incur a commission expense.  The effects of the PXRE novation reduced the gross and net underwriting expense ratios by 31.1 percentage points and 31.8 percentage points, respectively, for the nine months ended September 30, 2006.

Underwriting profit and combined ratio.  The underwriting profit from assumed reinsurance for the nine months ended September 30, 2007 was $501,000 compared to underwriting loss of $933,000 for the same period of 2006 which includes the charge of $0.8 million resulting from the novation agreements with PXRE.  The net combined ratio was 90.2% for the nine months ended September 30, 2007 compared to 105.6% for the same period of 2006.  The lower net combined ratio for the first nine months of 2007 was the result of the decreased net loss ratio offset in part, by the increase in the net underwriting expense ratio as explained above.

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The gross combined ratio decreased to 90.8% for the nine months ended September 30, 2007 compared to 103.8% for the same period of 2006 due to the decrease in the gross loss ratio offset in part, by an increase in the gross underwriting expense ratio as explained above.  The effects of the novation agreements added 6.5 percentage points and 2.5 percentage points to the gross and net combined ratios, respectively, for the nine months ended September 30, 2006.

Insurance Services Segment Results of Operations

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Revenue	($ in thousands)
Direct commission revenue from managing general agency	$	8,028	$	380	$	9,088	$	2,291
Claims administration revenue		524		688		1,624		2,572
Other administration revenue (1)		326		-		924		-
Reinsurance intermediary fees (2)		254		176		595		411
Policy billing fees		5		-		5		5
Total		9,137		1,244		12,236		5,279
Expenses
Direct commissions expense paid to producers		3,808		211		3,959		1,545
Other insurance services expenses		1,687		193		2,302		735
Claims expense reimbursement to TICNY (3)		520		687		1,618		2,556
Total		6,015		1,091		7,879		4,836
Insurance services pre-tax income (loss)	$	3,122	$	153	$	4,357	$	443
Premiums produced by TRM on behalf of issuing companies	$	23,433	$	1,408	$	24,094	$	10,270

⁽¹⁾The other administration revenue includes amounts reimbursed by CPM for services rendered pursuant to a service and expense sharing agreement.

⁽²⁾The reinsurance intermediary fees include commissions earned for placement of reinsurance on behalf of TICNY and TNIC.

⁽³⁾Consists of underwriting expenses reimbursed to TICNY pursuant to an expense sharing agreement and to CPM pursuant to a service and expense sharing agreement.

Insurance Services Segment Results of Operations Three Months Ended September 30, 2007 and 2006

Total revenues.  Total revenues for the insurance services segment were $9.1 million for the three months ended September 30, 2007 as compared with $1.2 million for the same period in 2006, principally because of the business that TRM produced on behalf of CPIC.  The principal components of total revenues for our insurance services segment are direct commission revenue, claims administration revenue, other administration revenue and reinsurance intermediary fees.

The increase in total revenues was primarily due to direct commission revenue that increased significantly to $8.0 million for the third quarter of 2007 compared to $380,000 for the third quarter of 2006.  Direct commission revenue is dependent upon the premiums and losses on business produced by TRM on behalf of its issuing companies.  Premiums produced by TRM on behalf of CPIC increased to $23.4 million in the third quarter of 2007 as compared to $1.4 million of premiums produced for other non-related issuing carriers in the same period last year.  The premium produced on behalf of CastlePoint is an important component of our hybrid business model, which through reinsurance and risk sharing or direct placement through TRM, transfers 49% of our total premiums written and produced to CastlePoint Reinsurance and its insurance company subsidiaries.  In addition there was an increase in commission revenue of $465,000 in the third quarter of 2007 as a result of favorable loss development on the premiums produced in prior years compared to an increase of $0.4 million in the same period of last year.  Claims administration revenues decreased to $524,000 in the third quarter of 2007 compared to $688,000 in the same period of last year as a result of fewer hours associated with claims handled on behalf of issuing carriers.  Reinsurance intermediary fees increased by 44.3% to $254,000 for the third quarter of 2007 as compared to $176,000 for the third quarter of 2006 from increased reinsurance premiums.  Other administrative revenue was $326,000 for the third quarter of 2007 and includes reimbursements from CastlePoint under our service and expense sharing agreement for underwriting, claims, legal and other corporate services, such as human resources and information technology.

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Direct commission expense.  TRM’s direct commission expense rate was 16.3% for the third quarter of 2007 compared to 15.0% for the third quarter of 2006.  The direct commission expense rate increased in the third quarter of 2007 because a greater proportion of the business produced on behalf of CPIC has a smaller average premium per policy which carries a higher commission rate.  In 2006 the direct commission expense rate was lower as a larger proportion of policies had larger premiums with lower commission rates.

Other insurance services expenses.  The amount of reimbursement for underwriting expenses by TRM to TICNY in the third quarter of 2007 was $1.7 million as compared to $193,000 in the third quarter of 2006.  The increase in other insurance services expenses resulted from an increase in premium produced.

Claims expense reimbursement.  The amount of reimbursement by TRM for claims administration pursuant to the terms of the expense sharing agreement with TICNY in the third quarter of 2007 was $520,000 as compared to $687,000 in the third quarter of 2006 due to a decrease in the number of claims handled.

Pre-tax income.  Pre-tax income in the third quarter of 2007 increased to $3.1 million as compared to $153,000 in the third quarter of 2006.  The increase was due to the significant increase in premium produced.

Insurance Services Segment Results of Operations Nine Months Ended September 30, 2007 and 2006

Total revenues.  Total revenues for the insurance services segment were $12.2 million for the nine months ended September 30, 2007 as compared with $5.3 million for the same period in 2006.  The principal components of total revenues for our insurance services segment are direct commission revenue, claims administration revenue, other administration revenue and reinsurance intermediary fees.  The increase in total revenues was primarily due to direct commission revenue that increased significantly to $9.1 million for the nine months ending September 30, 2007 compared to $2.3 million in the same period last year.  Claims administration revenues decreased to $1.6 million for the nine months ending September 30, 2007 compared to $2.6 million in the same period of last year as a result of fewer hours associated with claims handled on behalf of issuing carriers.  Reinsurance intermediary fees revenue increased by 44.8% to $595,000 for the nine months ending September 30, 2007 as compared to $411,000 for the same period last year from increased reinsurance premiums.  Other administrative revenue was $924,000 for the nine months ended September 30, 2007 and includes reimbursements from CastlePoint under our service and expense sharing agreement.

For the first nine months of 2007, direct commission revenues increased as compared to the comparable period of last year as a result of the significant increase in premiums produced by TRM to $24.1 million for the nine months ended September 30, 2007, from $10.3 million for the same period last year.  In May 2007 our managing general agency subsidiary, TRM, began producing business on behalf of CPIC.  In addition there was an increase in commission revenue of $1.5 million and $0.2 million in the nine months ended September 30, 2007 and 2006, respectively, as a result of favorable loss development on the premiums produced in prior years.

Direct commission expense.  TRM’s direct commission expense rate was 16.4% for the first nine months of 2007 compared to 15.0% for the same period last year.  The direct commission expense rate increased in the third quarter of 2007 as previously discussed above.  In 2006 the direct commission expense rate was lower as a larger proportion of policies had larger premiums with lower commission rates.

Other insurance services expenses.  The amount of reimbursement for underwriting expenses by TRM to TICNY in the first nine months of 2007 was $2.3 million as compared to $0.7 million in the same period last year. The increase in other insurance expenses resulted from an increase in premium produced.

Claims expense reimbursement.  The amount of reimbursement by TRM for claims administration pursuant to the terms of the expense sharing agreement with TICNY in the first nine months of 2007 was $1.6 million as compared to $2.6 million in the same period last year due to a decrease in the number of claims handled.

Pre-tax income.  Pre-tax income in the first nine months of 2007 increased to $4.4 million as compared to $0.4 million in the same period last year.  The increase was due to the favorable adjustment in direct commission revenue and the increase in premiums produced for the nine months ended September 30, 2007 as compared to the same period last year.

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Liquidity and Capital Resources

Cash flows.  Cash and cash equivalents at September 30, 2007 were $52.5 million as compared to $100.6 million at December 31, 2006.  Cash equivalents increased in December 2006 as a result of raising $48 million through the issuance of $40 million of perpetual preferred stock and $8 million from the sale of Tower Indemnity Company of America.  At the time we raised these funds the yield curve was relatively flat.  At December 31, 2006, we had $65 million of cash equivalents invested in agency backed discount notes and commercial paper that had interest yields between 5.14% and 5.25%.  Our belief then was that longer term interest rates would rise in 2007.  Cash and cash equivalents at September 30, 2007 include $19.7 million of corporate funds which remain from the follow-on equity offering after paying for the Preserver acquisition.

During the third quarter of 2007, yield spreads widened as a result of the lack of liquidity in the market which increased the gross unrealized investment loss by $9.1million and $20.2million for the three month and nine month periods ending September 30, 2007, respectively, as reflected in other comprehensive income.  The increase in the unrealized investment loss primarily was caused by our investments in Mortgage-backed securities and our Equity securities which primarily are invested in Real Estate Investment trusts. Changes in interest rates directly impact the fair value for our fixed maturity portfolio.  We regularly review both our fixed-maturity and equity portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments.  We have determined that we did not hold any investments that would have been considered other than temporarily impaired and that the recent increase in the gross unrealized investment loss was caused by an increase in interest rates.  We expect cash flows from operations to be sufficient to meet our liquidity requirements.  We intend, and we believe we have the ability, to hold these investments until a recovery in value, which may be at maturity for fixed maturity securities.

For the three and nine months ended September 30, 2007, net cash provided by operating activities was $18.3 million and $48.2 million, respectively. Net cash provided by operations was $11.3 million and $97.9 million, respectively, for the same periods in 2006.  The decrease in cash flow for 2007 was a result of Federal income tax payments of $6.6 million and $21.7 million for the three months and nine months ended September 30, 2007, as well as increased reinsurance costs.  In addition, net cash provided by operating activities for 2006 included $37 million received from PXRE which resulted from the commutation and novation transactions.

The net cash flows used in investing activities for the three and nine months ended September 30, 2007 was $29.7 million and $181.5 million, respectively.  The net cash flows used in investing activities for the three and nine months ended September 30, 2006 was $52.6 million and $116.6 million, respectively.  The nine months ended September 30, 2007 included the payment of $66.2 million for the acquisition of Preserver Group, Inc.  In addition, we paid $4.7 million of Preserver’s direct transaction costs in connection with the acquisition.  During 2006, the Company relocated its New York City Corporate Headquarters within the same building.  The Company capitalized $8.0 million and $9.5 million for leasehold improvements, $3.9 million and $5.1 million for furniture & equipment and $2.2 million and $4.6 million for computer hardware and software, for the three and nine months ended September 30, 2006.  In addition, there were increases in the corporate bonds, U. S. Treasuries and mortgage-backed investments in the third quarter of 2007.

The net cash flows used in financing activities for the three months ended September 30, 2007 was $1.1 million, while $68.7 million was provided during the nine months ended September 30, 2007. Included are the net proceeds from the issuance of $20.6 million in subordinated debentures on January 25, 2007, the $89.4 million of net proceeds from the January 26, 2007 equity offering and the related exercise of the underwriters’ over allotment option, offset by $40.0 million used for the redemption of preferred stock .  For the three months and nine months ended September 30, 2006, we had $23,000 of net cash flow used by financing activities and $20.5 million, principally related to the issuance of subordinated debentures; respectively, of net cash flows provided by financing activities.

The operating subsidiaries’ primary sources of cash are net premiums received, commission and fee income, net investment income and proceeds from the sale and redemption of both equity and fixed-maturity investments.  Cash is used to pay claims, commissions and operating expenses, to purchase investments and fixed assets and to pay dividends to the holding company.  Our insurance companies are subject to significant regulatory restrictions limiting their ability to declare and pay dividends. As of September 30, 2007, the maximum amount of distributions that our insurance companies could pay to us without approval of their domiciliary Insurance Department was approximately $19.1 million.

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Cash flow needs at the holding company level are primarily for dividends to our stockholders and interest payments on our $101.0 million of subordinated debentures.

Subordinated Debentures

On January 25, 2007, we participated in a private placement of $20.0 million of fixed/floating rate capital securities (the “Trust Preferred Securities”) issued by Tower Group Statutory Trust VI (the “Trust”), an affiliated Delaware trust formed on January 11, 2007.  The Trust Preferred Securities mature in April 2036, are redeemable at our option at par beginning April 7, 2011, and require quarterly distributions of interest by the Trust to the holder of the Trust Preferred Securities.  Interest distributions are initially at a fixed rate of 8.155% for the first five years and will then reset quarterly for changes in the three-month London Interbank Offered Rate (“LIBOR”) plus 300 basis points.  The Trust simultaneously issued 619 of the Trust’s common securities to us for a purchase price of $0.6 million, which constitutes all of the issued and outstanding common securities of the Trust.  The Trust used the proceeds from the sale of the Trust Preferred Securities and common securities to purchase for $20.6 million a junior subordinated debt security due 2037 issued by us.  We do not consolidate interest in statutory business trusts for which we hold 100% of the common trust securities because we are not the primary beneficiary of the trusts.  We report the outstanding subordinated debentures owed to the statutory business trusts as a liability.  The net proceeds we received from the sale of the debenture to the Trust and $20.0 million of the net proceeds from our common stock offering in the three months ended March 31, 2007 were used to redeem our perpetual preferred stock.  We incurred $0.4 million of fees related to the issuance of these subordinated debentures.

Investments

Impairment of investment securities results in a charge to net income when a market decline below cost is deemed to be other-than-temporary.  As of September 30, 2007, we reviewed our fixed-maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments.  We determined that we did not hold any investments that would have been considered other than temporarily impaired.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Market risk relates to changes in the value of financial instruments that arise from adverse movements in factors such as interest rates and equity prices.  We are exposed mainly to changes in interest rates that affect the fair value of our investments in securities.

Sensitivity Analysis

Sensitivity analysis is a measurement of potential loss in future earnings, fair values or cash flows of market sensitive instruments resulting from one or more selected hypothetical changes in interest rates and other market rates or prices over a selected time.  In our sensitivity analysis model, we select a hypothetical change in market rates that reflects what we believe are reasonably possible near-term changes in those rates.  The term “near-term” means a period of time going forward up to one year from the date of the consolidated financial statements.  Actual results may differ from the hypothetical change in market rates assumed in this disclosure, especially since this sensitivity analysis does not reflect the results of any action that we may take to mitigate such hypothetical changes in fair value.

In this sensitivity analysis model, we use fair values to measure our potential loss.  The sensitivity analysis model includes fixed maturities and short-term investments.

For invested assets, we use modified duration modeling to calculate changes in fair values.  Durations on invested assets are adjusted for call, put and interest rate reset features.  Durations on tax-exempt securities are adjusted for the fact that the yield on such securities is less sensitive to changes in interest rates compared to Treasury securities.  Invested asset portfolio durations are calculated on a market value weighted basis, including accrued investment income, using holdings as of September 30, 2007.

The following table summarizes the estimated change in fair value on our fixed maturity portfolio including short-term investments based on specific changes in interest rates as of September 30, 2007:

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	Estimated	Estimated
	Increase	Percentage
	(decrease)	Increase
	in Fair Value	(Decrease)
Change in interest rate	($ in thousands)	in Fair Value
300 basis point rise	(74,994)	-12.7%
200 basis point rise	(51,145)	-8.6%
100 basis point rise	(26,110)	-4.4%
No change	0	0.0%
50 basis point decline	12,816	2.2%
100 basis point decline	25,465	4.3%

The sensitivity analysis model used by us produces a predicted pre-tax loss in fair value of market-sensitive instruments of $26.1 million, or 4.4%, based on a 100 basis point increase in interest rates as of September 30, 2007.  This loss amount only reflects the impact of an interest rate increase on the fair value of our fixed maturities, which constituted approximately 92.2% of our total invested assets as of September 30, 2007.

As of September 30, 2007 we had a total of $23.7 million of outstanding floating rate debt, all of which is outstanding subordinated debentures underlying trust securities issued by our wholly owned statutory business trusts carrying an interest rate that is determined by reference to market interest rates.  If interest rates increase, the amount of interest payable by us would also increase.

Item 4.  Controls and Procedures

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to provide reasonable assurance that material information relating to us and our consolidated subsidiaries required to be disclosed in our reports filed with or submitted to the Securities and Exchange Commission under the Securities Exchange Act is made known to such officers by others within these entities, particularly during the period this quarterly report was prepared, in order to allow timely decisions regarding required disclosure.

On April 10, 2007, we completed our acquisition of Preserver.  Preserver has not previously been subject to a review of internal controls under the Sarbanes Oxley Act of 2002, and its operations have been excluded from our review of the internal controls under Section 404 of the Sarbanes Oxley Act of 2002.  We have begun the process of integrating Preserver’s operations including internal controls and processes and extending our Section 404 compliance program to Preserver’s operations.  Preserver accounts for 19.6% of assets and 7.0% of net income of the Company.  See the Notes to the Consolidated Financial Statements in Item 1 for discussion of the acquisition and related financial data.

Part II– OTHER INFORMATION

Item 6.  Exhibits

10.1	Management Agreement, dated July 1, 2007, by and between CastlePoint Insurance Company and Tower Risk Management Corp.
10.2	Employment Agreement, dated as of July 23, 2007, by and between Tower Group Inc. and Gary S. Maier
31.1	Certification of Chief Executive Officer pursuant to Sarbanes-Oxley Act of 2002 Section 302
31.2	Certification of Chief Financial Officer pursuant to Sarbanes-Oxley Act of 2002 Section 302
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Sarbanes-Oxley Act of 2002 Section 906

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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 thereunto duly authorized.

Tower Group, Inc.

Registrant

Date: November 8, 2007	/s/ Michael H. Lee
	Michael H. Lee Chairman of the Board, President and Chief Executive Officer

Date: November 8, 2007	/s/ Francis M. Colalucci
	Francis M. Colalucci Senior Vice President, Chief Financial Officer and Treasurer

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EX-10.1

EXHIBIT 10.1

MANAGEMENT AGREEMENT

between

CastlePoint Insurance Company

and

Tower Risk Management Corp.

This Agreement, entered into as of July 1, 2007 (the “Agreement”) by and between CASTLEPOINT INSURANCE COMPANY, a property and casualty insurance company domiciled in New York (the “Company”), and TOWER RISK MANAGEMENT CORP., a New York corporation (“Manager”), each having offices located at 120 Broadway, New York, N.Y. 10271.

PREAMBLE

WHEREAS, Company desires to appoint Manager as its manager for performing underwriting and claims and other services with respect to certain business, which includes but is not limited to Brokerage Business and business that is not Specialty Program Business and Insurance Risk-Sharing Business or Traditional Program Business, as set forth in this Agreement; and

WHEREAS, Manager desires to perform such responsibilities;

NOW, THEREFORE, Company and Manager, in consideration of the mutual promises herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, agree as follows:

1.           Appointment.

Company does hereby nominate, constitute, and appoint Manager as non-exclusive manager for: (i) the soliciting, underwriting, quoting, binding, issuing, and servicing of such of the Company's insurance policies as the Company determines for time-to-time on Exhibit A  (such insurance and any policies, contracts, binders, endorsements, certificates, agreements, or evidence of insurance, individually and collectively, will be referred to as "Policy" or "Policies" hereunder), which business includes, but is not limited to, Brokerage Business and business that is not Specialty Program Business and Insurance Risk Sharing Business or Traditional Program Business.

2.           Authority.  Manager is authorized to:

2.1           Issue, or direct Company to issue, Policies subject to: (i) the scope and limits granted in Exhibit A attached hereto; (ii) the terms and conditions (including exclusions) of forms of Policies prescribed by Company; (iii) applicable state insurance laws, rules, and regulations; (iv) the underwriting guidelines approved by Company; (v) Company's ultimate right to veto the solicitation, underwriting, quoting, binding, and issuing of any Policy by Manager; (vi) Company's ultimate right to cancel any Policy subject to applicable governmental regulatory requirements for cancellation and non-renewal; (vii) Company's ultimate right to veto the appointment by Manager of any agent, broker or producer, and the ultimate power of Company to cancel any such agency pursuant to Section 2.4; (viii) Company's right to approve all advertising with respect to the Policies in which Company's name is used.

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2.2           Collect, account, receipt for, and remit premiums on Policies that Manager writes on behalf of Company in accordance with Section 2.1 and to retain its provisional management fee and policy billing fees, if any,  out of premiums so collected.  Manager agrees to pay all costs and expenses of collection from insureds where premiums to be received by Manager pursuant to this Agreement are not paid in full by the insured.  Manager agrees that all premiums, including return premiums received by Manager, are Company's property and will be paid over to the Company.

2.3           Secure or obtain agents and producers to produce business.  Company appointments will follow upon Manager providing evidence that the agents and producers are lawfully licensed to transact the type of insurance they are expected to write, are not serving on Company's or Manager's board of directors and complete Company’s appointment process.  The agents and producers must meet the applicable compliance regulations for licensure.

2.4           Terminate agents and producers.

2.5           Investigate and settle claims as provided in Section 10 below and establish reserves for such claims.

2.6           Purchase and maintain in effect treaty and facultative reinsurance to limit Company’s exposure on the Policies to the net amounts outlined in Exhibit A.  Company shall reimburse Manager for the Company’s proportionate share, but not greater than 15% of catastrophe reinsurance costs attributable to the business written by it.

3.           Performance.

3.1           Manager hereby accepts the foregoing appointment and agrees faithfully to perform the duties thereof in a professional manner as an agent of Company and to obey promptly such reasonable instructions as it may receive from time to time from Company in accordance with this Agreement.

3.2           If Manager commits a material breach of this Agreement, Company may, as one remedy but not as an exclusive remedy, require its own employees or designated representatives to carry out Manager's duties hereunder.  Manager shall reimburse Company for Company's reasonable expenses, including salaries, incurred for having Company’s employees or representatives perform such duties or, at Company's option, Manager shall pay such employees or representatives directly.  Such reimbursement or direct payments shall be made by Manager within five (5) days after Manager's receipt of invoices of such expenses.

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4.           Fees.

 Manager shall receive a management fee quarterly for the foregoing services (“Management Fees”) during each calendar year of this agreement (or part thereof) equal to (A) the management fee percentage for such year (as set forth below) (the “Management Fee Percentage”) times (B) the amount of Subject  Written Premium on Policies managed by Manager for Company, net of return premiums. “Subject Written Premium” shall mean direct written premium net of specific, aggregate and property catastrophe excess of loss reinsurance costs. It is expressly agreed that the Management Fee Percentage payable to the manager shall be reduced by any expenses attributable to boards, bureaus and taxes that are required to be paid by Company. The provisional Management Fee Percentage shall be 34%.

Such Management Fee Percentage shall be subject to adjustment until all losses for a given year have been settled (or deemed settled as set forth below).  Within sixty (60) days following the end of each year, Company shall calculate the Net Loss Ratio for each year that remains open and shall forward copies of such calculations to Manager. The Management Fee Percentage shall be increased nine-tenths of a percentage point for every percentage point by which the Net Loss Ratio is below 61% up to a maximum Management Fee Percentage of 36%, and decreased nine-tenths of a percentage point for every percentage point by which the Net Loss Ratio exceeds 61%, subject to a minimum Management Fee Percentage of 31% as follows:

Net Loss Ratio	Management Fee Percentage
64.33% or higher	31.0
64	31.3
63	32.2
62	33.1
61	34.0
60	349
59	35.8
58.78 or lower	36.0

The parties will settle amounts due within ten (10) days thereafter.  The Net Loss Ratio for each year shall be deemed to be finalized six (6) years following the close of such year or at any time before six (6) years by mutual agreement of the parties.

For the purposes of this paragraph 4, "Net Loss Ratio" shall mean, for any period of time, the ratio of Net Losses incurred during such period to Net Premium Earned for such period, where “Net Losses” means, for any period of time, any and all amounts that the Company is required to pay to or on behalf of insureds for insurance claims made under its Policies including loss adjustment expenses, after the application of any applicable reinsurance.

5.           Territory.

Manager's authority to solicit, quote, underwrite, bind, issue, or service Policies extends only to insureds or prospective insureds located in the states specified in Exhibit A attached hereto, subject to: (i) the applicable licensing authority of Company, (ii) Company having made and received approval of all necessary regulatory filings and (iii) Manager obtaining licenses if required for activities conducted by Manager pursuant to this Agreement.

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6.           Representations and Warranties of Manager.  On the effective date hereof, during the term of this Agreement, and for any period described in Section 14.5, Manager hereby represents and warrants to Company as follows:

6.1           Laws and Licenses.  Manager has complied and will comply with all applicable laws, rules, and regulations.  Manager shall provide current copies of Manager's licenses, which will be maintained in Company's records.  Company will appoint Manager in all applicable states.  Manager will obtain and maintain at its own expense all licenses required for it to perform this Agreement.

6.2           No Breach.  This Agreement is a valid and binding obligation of Manager.  The execution and delivery of this Agreement and the consummation of the transactions contemplated herein will not breach or conflict with Manager's by-laws or certificate of incorporation, nor with any agreement, covenant, or understanding (oral or written) to which Manager is bound, and will not adversely affect the application for issuance or the validity of any license of Manager.

6.3           Status.  Manager is a duly organized and validly existing corporation in the State of New York.

6.4           Authorization.  The execution, delivery, and performance of this Agreement by Manager have been duly and properly authorized by it.

7.           Representations and Warranties of Company.  On the effective date hereof, during the term of this Agreement, and for any period described in Section 14.5, each Company hereby represents and warrants to Manager as follows:

7.1           Laws and Licenses.  Company has complied and will comply with all applicable laws, rules and regulations and shall, whenever necessary, obtain and maintain at its own expense all licenses required for it to perform this Agreement.

7.2           No Breach.  This Agreement is a valid and binding obligation of Company.  The execution and delivery of this Agreement and the consummation of the transactions contemplated herein will not breach or conflict with Company's by-laws or articles of incorporation, nor with any agreement, covenant, or understanding (oral or written) to which Company is bound, and will not adversely affect the application for issuance or the validity of any license of Company.

7.3           Status.                        Company is a duly organized and validly existing corporation in the State of New York.

7.4           Authorization.  The execution, delivery, and performance of this Agreement by Company have been duly and properly authorized by it.

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8.           Duties and Responsibilities. Subject to Company's supervision and instructions, Manager agrees to perform the following duties and services in addition to those otherwise enumerated in this Agreement with regards to Policies it manages hereunder:

8.1           Solicit, underwrite, quote, bind, issue, secure proper countersignature when required by applicable laws, and service Policies on behalf of Company.

8.2           Cancel Policies issued or underwritten by Manager in accordance with the terms of the Policies and applicable state regulations.

8.3           Issue Policies only on forms approved by Company and filed with and approved by regulatory authorities wherever such filing and approval is required.

8.4           Underwrite and issue Policies in accordance with the premium rates and underwriting criteria and guidelines as approved by Company.

8.5           Investigate and settle claims as provided in Section 10 below and establish reserves for such claims.

8.6           Maintain at Manager's expense data processing systems and equipment, an office or offices and a staff of employees sufficient in number and qualifications to perform the duties set forth in this Agreement.

8.7           Pay to Company any fines imposed by regulatory authorities, taxation authorities, and their agents for data collection and advisory organizations, due to late filing or poor quality of data provided by Manager.

8.8           Pay to Company any fines imposed by regulatory authorities upon Company due to the use of unapproved forms or rates by Manager or due to other market conduct violations caused by Manager's willful misconduct.

8.9           Maintain separately for Company and each other insurer with which Manager does business, complete and current records and accounts, including underwriting files, which Manager shall retain in accordance with Section 12 and any applicable laws.

8.10           Refund within sixty (60) days of the end of each calendar month, return commissions on Policy cancellations or premium reduction, in each case at the same rate at which such commissions were originally retained.

8.11           Collect, account and receipt for premiums on Policies that Manager writes on behalf of Company in accordance with Section 2.1, and return premiums to policyowners, as necessary.  Manager shall promptly remit premiums collected on Company’s behalf, less return premium, reinsurance costs and Management Fees, to Company.

8.12           Hold all monies, including premiums, return premiums, and monies received by Manager, in a fiduciary capacity for Company. Except as otherwise authorized by this Agreement, Manager shall maintain such monies in a separate and segregated bank account in a bank that is a member of the Federal Reserve System and is insured by the Federal Deposit Insurance Corporation. This account shall not be used for any purpose other than payments to or on behalf of Company. Any investment income produced from this bank account is the property of Manager.

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8.13           Comply with all regulatory requirements including, but not limited to, the cancellation, non-renewal, or conditional renewal of policies.

8.14           Return upon demand after termination of this Agreement, all unused Policies, forms, and other property furnished to Manager by Company. Such items remain the property of Company. Manager shall fully cooperate with and assist Company in recovering such items from third parties, if any.

8.15           Exercise Manager's authority through authorized employees of Manager or its affiliates.

8.16           Exercise exclusive and independent control of Manager's time and conduct.

9.           Limitations of Authority.

Notwithstanding the foregoing, all underwriting services provided to Company by Manager shall be based upon the written criteria, standards and guidelines of Company which shall retain the final authority over underwriting decisions including, but not limited to, acceptance, rejection, cancellation and termination of risks.

10.           Claims.

10.1           Manager shall or shall arrange to investigate, negotiate, and settle all Policy claims or losses on behalf of Company; however, Manager shall obtain the prior approval of Company before handling and settling any Policy claim or loss which is in excess of One Hundred Thousand Dollars ($100,000) gross incurred loss.  Manager shall determine coverage for claims; however, Manager shall obtain the prior written approval of Company for the handling of litigation in which the Company is named as a defendant or claims in which Manager seeks declaratory relief on behalf of Company.  All claims or losses shall be reported in monthly statements pursuant to Section 11 below.  In addition, Manager shall immediately notify Company in writing of any claim or loss as Company requests upon receiving notice or knowledge of: (i) any Policy claim or loss in excess of Two Hundred Fifty Thousand Dollars ($250,000) gross incurred loss; or (ii) any loss regardless of incurred dollar amount involving the following: fatalities; brain stem/brain damage injuries; spinal cord injuries; heart attacks; severe, non-accumulative hearing loss; severe, non-accumulative vision loss; amputation of major body part; paraplegia; quadriplegia; serious burns (i.e. second or third degree and/or burns over 50% of the body); non-union, compound, comminuted, serious fractures; injury to the spine or pervasive nerve damage; class action suits; allegations of criminal conduct by an insured or allegations of criminal conduct by an insured or allegations of criminal conduct on the insured’s premises; bad faith claims or suits; demands in excess of policy limits; actual or alleged violations of the Deceptive Trade Practices Act; actual or alleged violations of the applicable State Insurance Codes; actual or alleged violation of law by Manager; or litigation naming Company as a defendant.  In determining gross incurred loss, Manager shall consider the facts and circumstance of the claim or loss, Manager’s analysis of the insured’s liability for the claim or loss, Manager’s analysis of damages resulting from the claim or loss and Manager’s analysis of the applicability of coverage for the claim or loss.  These individually reported claims or losses should be updated semi-annually and more frequently upon the occurrence of any material change in any claim or loss or any information previously reported to Company.  Company shall be immediately notified if Manager is closing a file on a reported claim or loss and of the reason for this file closure.  Failure to promptly notify Company of claims under this Section 10.1 shall be considered a material breach of this Agreement and subject to all the remedies provided herewith.

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10.2           Whenever Manager shall deem it prudent to engage legal counsel or loss adjusters to protect Company's interest regarding claims or losses, such services shall be provided only by qualified attorneys-at-law and/or licensed loss adjusters selected by Manager, who have substantial experience in the handling of claims litigation of the type involved. Upon execution of this Agreement, Manager shall submit to Company for approval a list of the attorneys and loss adjusters it intends to use. Such list shall be considered approved unless Company objects to any of such firms or individuals within fourteen (14) days after receipt of such list. Any provision hereof to the contrary notwithstanding, it is agreed that, with respect to any claim or loss of any amount, Manager shall promptly furnish Company, or its designee, any additional claim or loss information requested by Company with respect to a claim or loss pertaining to any Policy covered by this Agreement, and it is further agreed with respect to any claim or loss of any amount as follows:

a. Company may assign an attorney of its own choice to assume the defense of any claim or loss reported to Company and, in the event an attorney has already been employed by Manager, the service of such attorney which has already been employed by Manager shall be terminated by Manager forthwith and Manager shall waive any conflict of interest that may have been created by such attorney's employment by Manager.

b. In the event that Company is named as a defendant in any lawsuit, Manager shall, as soon as it has notice or knowledge of such lawsuit, immediately give written notice thereof to Company accompanied by a copy of the complaint and any court papers related to such lawsuit.

10.3           All claims services provided to Company by Manager shall be based upon the written criteria, standards and guidelines of Company which shall retain the final authority over claims decisions including, but not limited to, payment and non-payment of claims.

10.4    The Company will establish a bank account to fund claim payments on its policies managed by Manager.  Manager shall be made an authorized signatory on, and shall pay claims out of such account.  Manager shall not be obligated to pay claims unless such account is sufficiently funded by the Company.

11.    Accounting and Reporting Procedures.

Manager shall:

Within thirty (30) days after the end of each month, remit to Company all premiums collected on Policies issued under the terms of this Agreement, less the provisional management fee due to Manager in accordance with Exhibit A attached hereto.  Manager may not offset balances due to Company hereunder against balances due Manager under any other contract with Company;

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On behalf of Company supply accounting, underwriting, and claim bordereaux with copies to Company, pursuant to these terms and conditions;

With regard to business placed by Manager with Company hereunder, furnish to Company, in electronic format, within thirty (30) days after the end of each quarter a report of  written, earned, and unearned premiums; losses and loss adjustment expenses paid and outstanding; loss and loss adjustment expenses incurred; commissions earned by Manager;

Provide detail and summary reports, in an electronic or printed medium, as are required to meet all reporting requirements of state regulatory or taxation authorities, their managers for data collection, and advisory organizations including but not limited to:

a.           Within thirty (30) days of the close of the calendar quarter:  direct premiums (written and earned); in force premiums; policy counts (written and in force); direct losses and loss adjustment expenses including subrogation (paid and reserved); number of claims open, closed with payment, and closed without payment; as prescribed by state regulatory authorities.

b.           Within thirty (30) days of the close of the calendar quarter:  direct written premium, losses, and loss adjustment expense including subrogation (paid and reserved) transaction data as prescribed by advisory organizations providing loss cost and policy forms.

c.           Thirty (30) days prior to the prescribed deadline:  the reports of direct premiums (written and earned), losses, and loss adjustment expenses including salvage and subrogation (paid and reserved) as required by state regulatory data collection agents, including but not limited to financial calls, unit statistical data, summary statistical data, and detailed claim information for National Council on Compensation Insurance (NCCI), Insurance Services Office (ISO), and National Association of Independent Insurers (NAII), and various state-specific reporting requirements as necessary.

By the first business day of February of each year, Manager shall provide Company with any information Company may require in order to complete its statutory financial statements for the prior year. Company shall notify Manager of the material information required by December 31 of the prior year.

12.           Books and Records.

Manager shall keep such books and records as may be (i) reasonably requested by Company; or (ii) required by law, rulings, or orders of the insurance departments of the states having jurisdiction over: (a) Manager or Manager's business or (b) any Policies.  Manager shall make such books and records available for examination, audit, and copying by the insurance departments of such states and by Company, or by their authorized representatives.  Company shall have the right to examine and review at any reasonable time all books, records, files, and papers, including, but not by way of limitation, claim files and underwriting files

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maintained and kept by Manager which relate to this Agreement and the Policies.  Manager shall institute and maintain retention and disposal systems for claim files and underwriting files in accordance with procedures and requirements as prescribed by law. All books and records of Manager shall be maintained at the principal

place of business of Manager and shall be complete, accurate, and up-to-date, and shall reflect all monies paid or received by Agent and all transactions of Manager pursuant to this Agreement. Anything to the contrary notwithstanding, all of the books, records, files, and papers maintained and kept by Manager relating to underwriting and claims matters involving this Agreement or the Policies, shall be and remain the sole and exclusive property of Company except that upon termination of this Agreement, all right, title, and interest in and to all Policy renewals or expirations and all records with respect to renewals and expirations shall automatically and irrevocably transfer to and vest in Manager provided Manager has accounted for and has made payments of all amounts due Company and continues to do so.

13.           Indemnification.

13.1           Manager shall indemnify and hold harmless Company from and against all losses, damages, costs, expenses, claims, fines, penalties, or liabilities of any description suffered by Company with respect to Manager on any Policies issued or underwritten by Manager, including, without limitation, any attorney's fees, in connection with or arising out of: (i) any violations by Manager of laws, rules, or regulations to which it is subject; (ii) any material breach of any warranty or representation of Manager made in this Agreement or any other material breach of this Agreement by Manager; or (iii) any willful misconduct, gross negligence, or misrepresentation, of Manager or of it officers, directors, employees, agents, sub-producers, or independent contractors.

13.2           Company shall indemnify and hold harmless Manager from and against all losses, damages, costs, expenses, claims, fines, penalties, or liabilities of any description suffered by Manager with respect to Company on any Policies issued or underwritten by Company, including, without limitation, any attorney's fees, in connection with or arising out of: (i) any violations by Company of laws, rules, or regulations to which it is subject; (ii) any breach of any warranty or representation of Company made in this Agreement or any other breach of this Agreement by Company; or (iii) any alleged or actual misconduct, negligence, misrepresentation, or other acts or failures to act of Company or of it officers, directors, employees, agents, sub-producers, or independent contractors.

14.           Termination of Agreement.

14.1This Agreement shall continue until terminated in accordance with Sections 14.2 through 14.6 below.

14.2This Agreement may be terminated immediately by either party upon giving written notice to the other party via electronic, certified or registered mail in the event of:

a.           The misappropriation by either party of any funds or property belonging to the other party;

b.           The fraud, gross negligence, or willful misconduct of the other party;

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c.           The license or certificate of authority of the other party in their state of domicile is canceled, non-renewed or suspended by any public authority;

d.           An assignment by the other party for the benefit of creditors; the dissolution or liquidation of the other party; the appointment of a conservator, receiver, or liquidator for a substantial part of the other party’s property; the institution of bankruptcy, insolvency, or similar proceedings by or against the other party;

e.           Material breach by the other party of any provision of this Agreement;

f.           If any law or regulation of the federal, state, or local government of any jurisdiction in which the other party is doing business shall render illegal or invalid any transaction contemplated by this Agreement, or any term of this Agreement, this Agreement may be terminated insofar as it applies to such jurisdiction by either party giving notice to the other party to such effect or by either party giving notice to the other party to such effect;

g.           Change in ownership of ten percent (10%) or more of the outstanding voting stock of the other party, sale or transfer of the other party’s assets, merger of the other  party, or change or resignation of any principal officer or director of the other party;

h.           The licenses required of the other party for it to perform under this Agreement expire, are terminated, or are not valid pursuant to the law of the State in which the other party is transacting business on behalf of either party.

14.3           This Agreement may be terminated at any time by the Company if the Reinsurance covering the business under this agreement is cancelled, terminated or expired.

14.4           This Agreement may be terminated at any time by mutual written agreement, or upon sixty (60) days prior written notice by either Company or Manager.

14.5           If at any time either party sends notice of termination to the other party as provided in Section 14.2 above or the Agreement is otherwise terminated as provided herein, the Manager shall not solicit, underwrite, quote, bind, or issue any Policies or renew any existing Policies for which the inception date or renewal date falls after the effective date of termination of this Agreement, nor shall Manager cancel and rewrite any existing Policies.

14.6           Unless otherwise indicated by this Agreement or either party otherwise notifies the other party in writing, Manager's duties and responsibilities under this Agreement shall survive termination of this Agreement until such time as all Policies issued, underwritten, or serviced by Manager pursuant to this Agreement have expired and all known losses under such Policies have been paid or settled, have run off or otherwise have been disposed of in the judgment of Company, all incurred but not reported loss reserves have been reduced to zero, and any amounts owed to Company by others has been paid. The only compensation Manager shall receive for its performance of its duties hereunder (both during and after the term of this Agreement) is set forth in Section 4.

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14.7                      Upon termination of the Agreement, Manager shall, unless notified in writing to the contrary by Company:

a.           Continue to represent Company for the purpose of servicing Policies placed by Manager with Company which are in force on, or renewed at Company's election, or as required by law, after the date of termination of this Agreement, and Manager shall continue to receive its normal compensation for such services.

b.           Issue and countersign appropriate endorsements on Policies in force, provided that without prior written approval of Company, such endorsement shall not increase nor extend Company's liability nor extend the term of any Policy.

c.           Collect and receipt for premiums and retain commissions out of premiums collected as full compensation.

14.8           Any notice issued pursuant to this Section shall be effective on the day after it is received by Manager.

15.           Suspension of Manager's Authority.

15.1In lieu of terminating this Agreement, Company may give written notice to Manager that Company is immediately suspending Manager's authority in its entirety or in any particular state to bind new or renewal business, change any existing Policy and/or settle any claim during the pendency of any of the following events:

a.           Manager is delinquent in payment of any monies due Company;

b.           Any dispute exists between Manager and Company regarding the existence of any of the events listed in Section 14.2;

15.2Such suspension shall remain in effect until such delinquency is cured or dispute is resolved and Manager receives written notification from Company to that effect. If such delinquency is not cured within fifteen (15) days from the date of receipt of written notification by Manager of such delinquency, Company may exercise its right to terminate this Agreement under Section 14.2.

15.3 Unless otherwise notified in writing to the contrary by Company, Manager's obligation under this Agreement shall continue during the suspension of Manager's authority under this Agreement.

15.4 Any notice of suspension issued pursuant to this Section shall be effective immediately.

16.           Ownership of Expirations.

The use and control of expirations of the Policies will remain the property of Manager; and Company will not, without consent of Manager, (a) refer or communicate to any other agent or broker, Company’s records of insureds, expiration dates and other material information relating to specific risks except for loss or claims information specifically requested by the insured or the insured’s authorized representative nor (b) use such material information relating to specific risks for purposes of solicitation.

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17.           Mediation; Arbitration and Injunctive Relief.

17.1           If any dispute arises between Company and Manager with reference to the interpretation, performance, or breach of this Agreement (whether the dispute arises before or after termination of this Agreement) such dispute, if not resolved by the parties, must be submitted to non-binding mediation.  If such dispute is not resolved by non-binding mediation within sixty (60) days it will then be submitted for decision to a panel of three arbitrators.  Notice requesting arbitration will be in writing and sent certified or registered mail, return receipt requested.

17.2           One arbitrator shall be chosen by each party and the two arbitrators shall, before instituting the hearing, choose an impartial third arbitrator who shall preside at the hearing.  If either party fails for any reason to appoint its arbitrator within thirty (30) days after being requested to do so by the other party, the latter, after ten (10) days notice by certified or registered mail of its intention to do so, may appoint the second arbitrator.  If the two arbitrators are unable to agree upon the third arbitrator within thirty (30) days of their appointment, the third arbitrator shall be selected from a list of six individuals (three named by each arbitrator) by a judge of the United States District Court having jurisdiction over the geographical area in which the arbitration is to take place, or if that court declines to act, the state court having general jurisdiction in such area.

17.3           All arbitrators shall be active or retired disinterested officials of insurance or reinsurance companies not under the control or management of either party to this Agreement and will not have personal or financial interests in the result of the arbitration.

17.4           Within thirty (30) days after notice of appointment of all arbitrators, the panel shall meet and determine timely periods for briefs, discovery procedures, and schedules for hearings.

17.5           The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence.  Arbitration shall take place in New York, New York.  Insofar as the arbitration panel looks to substantive law, it shall consider the law of the State of New York.  The decision of any two arbitrators when rendered in writing shall be final and binding.  The panel is empowered to grant interim relief as it may deem appropriate.

17.6           The panel shall interpret this Agreement as an honorable engagement rather than merely a legal obligation and shall make its decision considering the custom and practice of the applicable insurance and reinsurance businesses within sixty (60) days following the termination of the hearing unless the parties consent to an extension.  Judgment upon the award may be entered in any court having jurisdiction thereof.

17.7           Punitive damages will not be awarded.  The arbitrators may, however, at their discretion award such other costs and expenses as they deem appropriate, including but not limited to attorneys' fees, the cost of arbitration, and arbitrators’ fees, to the extent permitted by law.

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17.8           It is understood and agreed that in the event of any breach or threatened breach, Company may apply to a court of competent jurisdiction for, and shall be entitled to, injunctive relief from such court, without the requirement of posting a bond or proof of damages, designed to cure existing breaches and to prevent a future occurrence or threatened future occurrence of like breaches on the part of Manager.  It is further understood and agreed that the remedies and recourses herein provided shall be in addition to, and not in lieu of, any other remedy or recourse which is available to Company either at law or in equity in the absence of this paragraph including without limitation the right to damages.

18.           Miscellaneous.

18.1This Agreement may be revised by mutual agreement of Manager and Company and such revision shall be evidenced by a written agreement duly executed by authorized representatives of Manager and Company, which specifies the effective date thereof. Any amendment to which section 1505 of the New York Insurance Laws is applicable shall be resubmitted to the Superintendent of Insurance in accordance with the provisions of that section.

18.2Manager shall not have authority to represent Company on any exclusive basis with respect to any policy form, line, or class or subclass of business, unless otherwise authorized in writing by Company.

18.3Manager shall not commit Company to any expenses or obligations not specifically provided for herein without the prior written permission of Company.  Company shall reimburse Manager for expenses and costs incurred by Manager which are not in the ordinary course of business and which Company has specifically approved.

18.4Company shall have the right to oversee and supervise the operation of this Agreement, including but not limited to the right at all reasonable times to have access to and to copy at Company's expense Manager's books and records as they relate to this Agreement, which rights shall survive the termination or expiration of this Agreement. The director or commissioner of insurance of any state where Manager issues Policies on behalf of Company shall have at all reasonable times the right of access to all books, records, and bank account of Manager in a form usable by such official.

18.5During the term of this Agreement, Manager shall obtain and maintain in full force and effect, at its expense, fidelity insurance with a minimum policy limit of $1,000,000, errors and omissions insurance with a minimum policy limit of $2,000,000, directors and officers insurance with a minimum policy limit of $2,000,000, and general liability insurance with a minimum policy limit of $1,000,000 and on such terms as are reasonably acceptable to Company.  Manager shall furnish Company with copies of the certificates of insurance for such insurance, and shall not cancel or amend any such insurance without Company's prior written consent.

18.6Manager shall provide to Company, copies of its quarterly financial reports and annual audited financial reports.

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18.7If Manager fails in any respect to fulfill its duties and responsibilities under this Agreement, then the expense incurred by Company in order to fulfill Manager's duties and responsibilities under this Agreement will be fully reimbursed by Manager.

18.8This Agreement may not be directly or indirectly assigned by either party in whole or in part, nor may Manager appoint a sub managing general Manager.

18.9Any provision of this Agreement which conflicts with applicable law or regulation will be amended to the minimum extent necessary to effectuate compliance with such law or regulation.

18.10Manager is an independent contractor, not an employee of Company, and nothing in this Agreement shall be construed to create an employer/employee relationship between Company and Manager.

18.11This Agreement shall be construed in accordance with the laws of the State of New York.

18.12Neither Company nor Manager shall disclose material details of this Agreement and the Policies without the prior consent of the other party.  However, this restriction will not apply to disclosures made by Company or Manager to its agents, producers, shareholders, policyholders, auditors, accountants, arbitrators, legal counsel, or other third parties as required in the ordinary course of business, nor to disclosures required by arbitration panels, governmental agencies, regulatory authorities, or courts of law.

18.13Failure of either party to enforce compliance with any term or condition of this Agreement shall not constitute a waiver of such term or condition.  No waiver of any breach or default hereunder shall be valid unless in writing and signed by the party giving such waiver, and no such waiver shall be deemed a waiver of any subsequent breach or default of the same or similar nature.

18.14Manager acknowledges and agrees that it will benefit from this Agreement and that a breach by it of the covenants contained herein would cause Company irreparable damages that could not adequately be compensated for only by monetary compensation.  Manager shall notify Company in writing via electronic, certified or registered mail, within five (5) days if there is a change in ownership of ten percent (10%) or more of the outstanding voting stock of Manager, sale or transfer of all Manager's assets, merger of Manager, or change of any principal officer or director of Manager including, but not limited to, resignation.

18.15Any notice or other communications required or permitted hereunder shall be sufficiently given if sent by electronic, certified or registered mail, postage prepaid, if to Company, addressed to Tower Risk Management Corp., 120 Broadway, 31st Floor, New York, New York, 10271, Attention: Stephen Kibblehouse, General Counsel, and if to Company addressed to CastlePoint Insurance Company., 120 Broadway, 30th Floor, New York, NY 10271, Attention: General Counsel or such other address as notified by either party to the other.

18.16Notwithstanding any other provisions of this Agreement, the business and affairs of Company shall be managed by its board of directors, and, to the extent delegated by the board, by its appropriately authorized officers. The board of directors and officers of Manager shall not have any management prerogatives with respect to the business affairs and operations of the Company.

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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first written above.

TOWER RISK MANAGEMENT CORP.

/s/ Francis M. Colalucci

Name: Francis M. Colalucci

Title: Senior Vice President &

Chief Financial Officer

CASTLEPOINT INSURANCE COMPANY

/s/ Joel S. Weiner

Name: Joel S. Weiner

Title: Senior Vice President &

Chief Financial Officer

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EXHIBIT A

SCHEDULE OF AUTHORITY

Manager is only authorized to accept or bind business, as defined in Section A below, subject to the amounts and stipulations indicated below.  Amounts in excess of the authorized limits or classifications must be referred to Company for review and approval prior to binding.

A.           GROSS NET WRITTEN PREMIUM LIMIT.   A maximum of $100,000,000 unless Manager obtains the prior written consent of Company.  Gross Net Written Premium shall mean gross written premium of Company less returned premium for cancellations and reductions.

B.           POLICY LIMITS, COVERAGE CLASSIFICATIONS AND MAXIMUM NET LINES (after treaty and facultative reinsurance).

Coverage	Limit	Maximum Net Lines
Property (including Equipment Breakdown)	$50 Million or TBA	$1 Million per risk/per occurrence
General Liability and Auto Liability	$1 Million per Occurrence / $2 Million Aggregate	$1 Million per occurrence
Workers’ Compensation Employer’s Liability	Statutory $1 Million	$1 Million per occurrence
Excess and Umbrella Liability	$10 Million	$250,000 per occurrence

The above coverages are provided on ISO forms and on certain independent manuscript forms to be agreed.

Other classifications of insurance may be written on Company's insurance policies subject to Company’s prior approval.

C.           TERRITORIAL LIMITATIONS.   Manager shall not issue any policy in any jurisdiction other than the authorized states defined as those states in which Company is licensed and has filed and approved rates and policies.  Company at its own discretion may limit or revoke Manager's authority as regards any particular state.

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EX-10.2

EXHIBIT 10.2

EMPLOYMENT AGREEMENT

THIS AGREEMENT (the "Agreement"), dated as of July 23, 2007, is by and between Tower Group, Inc., a Delaware corporation (the "Company"), and Gary S. Maier (the "Executive").

WITNESSETH THAT

WHEREAS, the Executive and the Company wish to enter into a written agreement setting forth the terms and conditions of the Executive's employment with the Company; and

WHEREAS, this Agreement is the entire agreement between the parties concerning the subject matter hereof and supersedes all prior agreements concerning the same subject.

NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the Company and. the Executive hereby agree as follows:

1.         Term.

(a)         Term of Employment

(i)         The Company shall employ the Executive, and the Executive shall serve the Company, on the terms and subject to the conditions set forth in this Agreement, commencing on July 23, 2007 (the "Effective Date") and, unless sooner terminated pursuant to section 4, continuing until the date that is the one-year anniversary of the Effective Date or such later date as provided in subsection 1(a)(ii) below (the "Term of Employment").

(ii)         The Term of Employment shall be extended automatically for one additional year on the last day before the first anniversary of the Effective Date and for one additional year on each anniversary thereafter unless and until either party gives written notice to the other not to extend this Agreement at least six months before such extension would be effectuated.

(b)         Term of the Agreement. This Agreement shall become effective on the Effective Date and shall continue in effect throughout the Term of Employment; provided, however, the restrictive covenants contained in section 10 of this Agreement and, as applicable, the Company's and the Executive's obligations under the other provisions of this Agreement shall survive the Term of Employment and shall continue in effect through the periods provided therein and/or until the Company's and/or the Executive's obligations, as applicable, thereunder are satisfied.

2.         Position and Duties.

(a)         Positions, Duties, and Responsibilities. The Executive shall serve as Senior Vice President, Chief Underwriting Officer of the Company and/or in such other positions as the Chief Executive Officer of the Company (the "CEO"), the Board of Directors of the Company (the "Board") or a committee of the Board may from time to time prescribe, with such duties and responsibilities as are customarily assigned to such position(s). The Executive shall report solely to the CEO unless the CEO, the Board or a committee of the Board determines otherwise. The Executive agrees to serve without additional compensation in such capacities (including, without limitation, as an employee or director) with Company and its affiliates as the CEO, the Board or a committee of the Board may in its discretion prescribe. Upon termination of the Executive's employment with the Company, any employment, board membership or other service relationship with the Company and any Company affiliate shall automatically terminate unless otherwise determined by the parties hereto.

(b)         Time and Attention. Excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive shall devote substantially all of his attention and time during normal working hours to the business and affairs of the Company and its affiliates. It shall not be considered a violation of the foregoing, however, for the Executive to (i) serve on corporate, industry, educational, religious, civic, or charitable boards or committees or (ii) make and attend to passive personal investments in such form as will not require any material time or attention to the operations thereof during normal working time and will not violate the provisions of section 10 hereof, so long as such activities in clauses (i) and (ii) do not materially interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement or violate section 10 of this Agreement.

3.         Compensation. Except as otherwise expressly set forth below, the Executive's compensation shall be determined by, and in the sole discretion of, the Board or a committee of the Board.

(a)         Annual Base Salary. Subject to adjustment pursuant to this subsection 3(a), the Executive shall receive an annual base salary of $295,000 during the Term of Employment (the annual base salary in effect from time to time, "Annual Base Salary"). The Annual Base Salary shall be payable in accordance with the Company's regular payroll practice for its senior officers, as in effect from time to time. The Annual Base Salary shall be reviewed. from time to time, but not less frequently than annually, and, in the discretion of the Board and/or the Compensation Committee of the Board (the "Committee”), may be adjusted but not decreased below the amount set forth in the first sentence of this subsection 3(a). To the extent Annual Base Salary is adjusted, then such adjusted salary shall be the Executive's Annual Base Salary for all purposes of this Agreement.

(b)         Annual Bonus. The Executive shall have an opportunity to receive annual bonuses during the Term of Employment (the "Annual Bonus"), subject to such terms and conditions as the Board, the Committee or a delegatee thereof shall prescribe. The Executive's target Annual Bonus opportunity shall be equal to 30% of his Annual Base Salary, it being understood that the actual Annual Bonus received by the Executive will depend on the level of attainment of performance and other factors used by the Company to determine Annual Bonus amounts and that there is no guarantee that an Annual Bonus will be earned. The Executive's target Annual Bonus opportunity shall be reviewed from time to time, but not less frequently than annually, and, in the discretion of the Board and/or the Committee, may be adjusted but not decreased below the amount set forth in the second sentence of this subsection 3(b).

(c)         Employee Benefits; Fringe Benefits. In addition to the foregoing, during the Term of Employment,

(i)         to the extent not duplicative of the specific benefits provided herein, the Executive shall be eligible to participate in all incentive compensation, retirement, supplemental retirement, and deferred compensation plans, policies and arrangements that are provided generally to other senior officers of the Company;

(ii)         the Executive and, as applicable, the Executive's covered dependents shall be eligible to participate in all of the Company's health and welfare benefit plans (within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended); and

(iii)                 the Executive shall be entitled to receive fringe benefits provided for senior officers of the Company, and shall be entitled to avail himself of paid holidays, as determined from time to time by the Company.

(d)         Vacation. The Executive shall be entitled to not less than 4 weeks of paid vacation per calendar year during the Term of Employment. Vacation days not used within the year shall be carried forward to subsequent years, as determined by the Company and subject to such conditions or restrictions as the Company may prescribe.

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(e)         Expenses. The Executive shall be reimbursed by the Company for reasonable business expenses actually incurred in rendering to the Company the services provided for hereunder during the Term of Employment, payable in accordance with customary Company practice, after the Executive presents written expense statements or such other supporting information as the Company may require of its senior officers for reimbursement of such expenses.

4.         Termination of Employment.

(a)         Termination of Employment and Term of Employment.  The Company or the Executive may terminate the Executive's employment at any time and for any reason in accordance with subsection 4(b) below. The Term of Employment shall be deemed to have ended on the last day of the Executive's employment. The Term of Employment shall terminate upon the Executive's death.

(b)         Notice of Termination. Any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with the notice provisions contained in subsection 15(b) below. For purposes of this Agreement, a "Notice of Termination" shall mean a notice that indicates the Date of Termination and, with respect to a termination due to Disability, Cause or Good Reason, sets forth in reasonable detail the facts and circumstances that are alleged to provide a basis for such termination. A Notice of Termination from the Company shall specify whether the termination is with or without Cause or due to the Executive's Disability. A Notice of Termination from the Executive shall specify whether the termination is with or without Good Reason and, if the termination is without Good Reason, whether the termination is due to his Disability or retirement. For avoidance of doubt, the Executive shall not be deemed to have retired for purposes of this Agreement if his employment is terminated by the Company (whether or not such termination is with or without Cause or due to the Executive's Disability), by the Executive with Good Reason, due to a Disability or due to the Executive's death.

(c)         Date of Termination.  For purposes of this Agreement, "Date of Termination" shall mean the date specified in the Notice of Termination (but in no event shall such date be earlier than the 30th day following the date the Notice of Termination is given, unless expressly agreed to by the parties hereto) or the date of the Executive's death.

(d)         No Waiver. The failure to set forth any fact or circumstance in a Notice of Termination, which fact or circumstance was not known to the party giving the Notice of Termination when the notice was given, shall not constitute a waiver of the right to assert such fact or circumstance in an attempt to enforce any right under or provision of this Agreement.

(e)         Cause. For purposes of this Agreement, the term "Cause" means: (i) the Executive's gross negligence or gross misconduct or (ii) the Executive's having been convicted of, or entered a plea of nolo contendere to, a crime involving moral turpitude or a felony. No act or failure to act directly related to Company action or inaction that constitutes Good Reason shall constitute Cause under this Agreement if the Executive has provided a Notice of Termination based on such Good Reason event prior to the Company's giving of the Notice of Termination for Cause. The Executive's termination for Cause shall be effective when and if a resolution is duly adopted by an affirmative vote of the entire Board (less the Executive), stating that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in the Notice of Termination, and such conduct constitutes Cause under this Agreement; provided, however, that the Executive shall have been given the opportunity (i) to cure any act or omission that constitutes Cause if capable of cure and (ii), together with counsel, during the 30-day period following the receipt by the Executive of the Notice of Termination and prior to the adoption of the Board's resolution, to be heard by the Board.

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(f)         Disability. For purposes of this Agreement, the Executive shall be deemed to have a Disability if the Executive is entitled to long-term disability benefits under the Company's long-term disability plan or policy, as the case may be, as in effect on the Date of Termination.

(g)         Good Reason. For purposes of this Agreement, the term "Good Reason" means the occurrence (without the Executive's express written consent) of any of the following acts or failures to act by the Company:

(i)         any reduction in the Executive's Annual Base Salary or target Annual Bonus opportunity;

(ii)         requiring the Executive to be based more than 50 miles away from the Company's headquarters in New York, New York;

(iii)                 the material breach by the Company of any of its other obligations under this Agreement; or

(iv)         the failure of the Company to obtain the assumption of this Agreement as contemplated in subsection 13(b) hereof.

The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder; provided, however, that no such event described above shall constitute Good Reason unless the Executive has given a Notice of Termination to the Company specifying the condition or event relied upon for such termination within 90 days from the Executive's actual knowledge of the occurrence of such event and, if capable of cure, the Company has failed to cure the condition or event constituting Good Reason within the 30 day period following receipt of the Executive's Notice of Termination.

5.         Obligations of the Company upon Termination.

(a)         Termination by the Company for other than Cause or by the Executive for Good Reason.  If the Executive's employment is terminated by the Company for any reasons other than Cause or Disability or by the Executive for Good Reason:

(i)         The Company shall pay to the Executive, within thirty business days of the Date of Termination, any earned but unpaid Annual Base Salary;

(ii)         The Company shall pay to the Executive, within thirty business days of the Date of Termination, a prorated Annual Bonus based on (A) the target Annual Bonus opportunity in the year in which the Date of Termination occurs or the prior year if no target Annual Bonus opportunity has yet been determined (disregarding any reduction in target Annual Bonus opportunity that was the basis for a termination by the Executive for Good Reason) and (B) the fraction of the year the Executive was employed.

(iii)                 The Company shall pay to the Executive, within thirty business days of the Date of Termination, a lump-sum payment equal to the sum of 100% of (x) the Executive's Annual Base Salary in effect immediately prior to the Date of Termination (disregarding any reduction in Annual Base Salary that was the basis for a. termination by the Executive for Good Reason), and (y) the Executive's target Annual Bonus opportunity for the year in which the Date of Termination occurs or the prior year if no target Annual Bonus opportunity has yet been determined (disregarding any reduction in target Annual Bonus opportunity that was the basis for a termination by the Executive for Good Reason);

(iv)         For a one (1) year period after the Date of Termination, the Company will arrange to provide the Executive (and any covered dependents), without cost to the Executive, with life, accident and health insurance benefits substantially similar to those the Executive and any covered dependents were receiving immediately prior to the Notice of Termination, except for any such benefits that were waived by the Executive in writing. If the Company arranges to

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provide the Executive and covered dependents with life, accident and health insurance benefits, those benefits will be reduced to the extent comparable benefits are actually received by, or made available to, the Executive by a subsequent employer without cost during the one (1) year period following the Executive's Date of Termination. The Executive must report to the Company any such benefits that he actually receives or are made available. In lieu of the benefits described in this subsection 5(a)(iv), the Company, in its sole discretion, may elect to pay to the Executive a lump sum cash payment equal to the total premiums that would have been paid by the Company to provide such benefits to the Executive (determined based on the premiums paid by the Company immediately prior to the Date of Termination). Nothing in this subsection 5(a)(iv) will affect the Executive's right to elect COBRA continuation coverage in accordance with applicable law or extend the COBRA. continuation coverage period; and

(v)         The Executive shall have at least three (3) months (or until the last day of the stock option term; whichever occurs first) to exercise any then vested outstanding stock options and all of the Executive’s other outstanding equity-based awards shall become fully vested on the Date of Termination.

(b)         Termination in Connection with a Change in Control.

(i)         if, in anticipation of or within the 24 month period following a Change in Control (as defined below), the Executive's employment is terminated by the Company for any reason other than Cause or Disability or by the Executive for Good Reason, the Executive shall receive the payments and benefits described in subsection 5(a), except that the payment described in section 5(a)(iii) shall be equal to 100% of the amounts described in (x) and (y) thereof, the continuation period described in section 5(a)(iv) shall be one (1) years, regardless of how long the Executive has been employed, and all of the Executive's outstanding equity-based awards shall become fully vested on the Date of Termination.

(ii)         For purposes of this Agreement, the term "Change in Control" means the occurrence of any of the following events:

(A)         any "person" (within the meaning ascribed to such term in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended from time to time (the "Exchange Act") and used in Sections 13(d) and 14(d) thereof, including a "group" as used in Section 13 (d) thereof), other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as the ownership of stock of the Company, (a "Person") that is not on the Effective Date the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 20% of the combined voting power of the Company's then outstanding securities becomes after the Effective Date the beneficial owner, directly or indirectly, of securities of the Company representing more than 20% of the combined voting power of the Company's then outstanding securities;

(B)         individuals who, as of the Effective Date, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of the Company, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company) shall be, for purposes of this definition, considered as though such person were a member of the Incumbent Board;

(C)         consummation of a merger, consolidation, reorganization, share exchange or similar transaction (a "Transaction") of the Company with any other entity, other than (I) a Transaction that would result in the voting securities of the Company outstanding immediately prior thereto directly or indirectly continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or a parent company) more than 80% of the combined voting power of the voting securities of the Company or such surviving entity or parent company outstanding immediately after such Transaction or (II) a Transaction effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires more than 20% of the combined voting power of the Company's then outstanding securities;

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(D)         the sale, transfer or other disposition (in one transaction or a series of related transactions) of more than 50% of the operating assets of the Company; or

(E)         the approval by the shareholders of a plan or proposal for the liquidation or dissolution of the Company.

(c)         Termination by the Company for Cause or by the Executive without Good Reason. If the Executive's employment is terminated by the Company for Cause the Company shall pay to the Executive, within thirty business days of the Date of Termination, any earned but unpaid Annual Base Salary and all outstanding stock options (whether or not then exercisable), restricted stock and other incentive awards shall be forfeited. If the Executive's employment is terminated by the Executive without Good Reason (and not due to death, Disability or retirement), the Company shall pay to the Executive, within thirty business days of the Date of Termination, any earned but unpaid Annual Base Salary, the Executive shall have three months (or until the last day of the stock option term, whichever occurs first) to exercise any outstanding vested stock options and all of the Executive's unvested equity-based awards shall be forfeited as of the Date of Termination.

(d)         Termination due to Death or Disability.  If the Executive's employment is terminated due: to death or Disability, (i) the Company shall pay to the Executive (or to the Executive's estate or personal representative in the case of the Executive's death), within thirty business days after the Date of Termination, (A) any earned but unpaid Annual Base Salary and (B) a prorated Annual Bonus based on (I) the target Annual Bonus opportunity in the year in which the Date of Termination occurs or the prior year if no target Annual Bonus opportunity has yet been determined and (II) the fraction of the year the Executive was employed, and (ii) all of the Executive's outstanding equity-based awards shall vest on the Date of Termination and the Executive's outstanding stock options shall remain exercisable for one year following the Date of Termination (or until the last day of the stock option term, whichever occurs first).

(e)         Retirement.  If the Executive retires with at least 15 years of service and after having attained age 55, (i) the Company shall pay to the Executive, within thirty business days after the Date of Termination, any earned but unpaid Annual Base Salary, (ii) the Company shall pay to the Executive, within thirty business days after the Date of Termination, a prorated Annual Bonus based on (A) the target Annual Bonus opportunity in the year in which the Date of Termination occurs or the prior year if no target Annual Bonus opportunity has yet been determined and (B) the fraction of the year the Executive was employed, (iii) the Executive shall receive applicable retiree benefits, if any, provided at such time by the Company to retirees or as the Company shall determine, (iv) the Executive's outstanding equity-based awards shall vest on the Date of Termination, and (v) the Executive's stock options shall remain exercisable until the last day of the option term thereof The Executive shall only be deemed to have retired for purposes of this Agreement if he has satisfied the conditions set forth in this Section 5(e) and the Executive specifies in the Notice of Termination that the termination is due to retirement. For avoidance of doubt, the Executive shall not be entitled to receive benefits pursuant to this Section 5(e) if he receives benefits under Section 5(a), (b), (c) or (d).

6.         Certain Tax Consequences.

(a)         The Excise Tax and Gross-Up Payment. If any payments or benefits paid or provided or to be paid or provided to the Executive or for his benefit pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, his employment with the Company (a "Payment" or "Payments")

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would be subject to any excise tax (the "Excise Tax") imposed by section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), then the Executive will be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest, penalties, additional tax, or similar items imposed with respect thereto and the Excise Tax), including any such taxes imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments.

(b)         Determination of Excise Tax and Gross-Up Payment. An initial determination as to whether a Gross-Up Payment is required pursuant to this Agreement and the amount of such Gross-Up Payment will be made at the Company's expense by an accounting firm selected by the Company. The accounting firm will provide its determination, together with detailed supporting calculations and documentation, to the Company and the Executive within 10 days after the Date of Termination, or such other time as requested by the Company or by the Executive. If the accounting firm determines that no Excise Tax is payable by the Executive with respect to a Payment or Payments, it will furnish the Executive with an opinion reasonably acceptable to the Executive to that effect. The Gross-Up Payment, if any, will be paid by the Company to the Executive within thirty business days of the receipt of the accounting firm's determination. Within 10 days after the accounting firm delivers its determination to the Executive, the Executive will have the right to dispute the determination. The existence of a dispute will not in any way affect the Executive's right to receive the Gross-Up Payment in accordance with the determination. If there is no dispute, the determination will be binding, final, and conclusive upon the Company and the Executive. If there is a dispute, the Company and the Executive will together select a second accounting firm, which will review the determination and the Executive's basis for the dispute and then will render its own determination, which will be binding, final, and conclusive on the Company and on the Executive. The Company will bear all costs associated with that determination, unless the determination is not greater than the initial determination, in which case all such costs will be borne by the Executive.

(c)         Tax Rate. For purposes of determining the amount of the Gross ­Up Payment, the Executive will be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and applicable state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination, net of the maximum reduction in federal income taxes that would be obtained from deduction of those state and local taxes.

(d)         Withholding. Notwithstanding anything contained in this Agreement to the contrary, in the event that, according to the accounting firm's determination, an Excise Tax will be imposed on any Payment or Payments, the Company will pay to the applicable government taxing authorities as Excise Tax withholding, the amount of the Excise Tax that the Company has actually withheld from the Payment or Payments in accordance with law.

7.         Release. Notwithstanding any provision herein to the contrary, the Company will require that, prior to payment of any amount  under section 5 of this Agreement (other than due to the Executive's death), the Executive shall have executed a complete release of the Company and its affiliates and related parties in such form as is reasonably required by the Company, and any waiting periods contained in such release shall have expired.

8.         Non-Exclusivity of Rights. Except as otherwise provided in this Agreement, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies for which the Executive may qualify (other than severance policies). Vested benefits and other amounts that the Executive is otherwise entitled to receive under any other plan, program, policy, or practice of, or any contract or agreement with, the Company or any of its affiliated companies on or after the Date of Termination shall be payable in accordance with the terms of each such plan, program, policy, practice, contract or agreement, as the case may be, except as expressly modified by this Agreement.

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9.         Full Settlement. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as otherwise provided in subsections 5(a)(iv) and 5(e), the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise.

10.         Non-Competition; Confidential Information; and Non-Solicitation.

(a)         Non-Competition. During the Term of Employment and for the one year period following the Date of Termination for any reason , the Executive shall not, without the prior written consent of the Company, as a shareholder, officer, director, partner, consultant, employee or otherwise, engage in any business or enterprise which is "in competition" (as defined below) with the Company, its affiliates, or their successors or assigns (such entities collectively referred to hereinafter in this section 10 as the "Company") in the states of New York and New Jersey; provided, however, that the Executive's ownership of less than five percent of the issued and outstanding voting securities of a publicly traded company shall not, in and of itself, be deemed to constitute such competition. A business or enterprise is deemed to be "in competition" if it is engaged in any business in which the Company either (i) is engaged in as of the Date of Termination or (ii) as of the Date of Termination, contemplates engaging in within one (1) year following the Date of Termination.

(b)         Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge, trade secrets, methods, know-how or data relating to the Company or its affiliates and their businesses or acquisition :prospects that the Executive obtained or obtains during the Executive's employment by the Company ("Confidential Information"), provided that "Confidential Information" shall not include any secret or confidential information, knowledge, trade secrets, methods, know-how or data that is or becomes generally known to the public (other than as a result of the Executive's violation of this section 10). Except as may be required and appropriate in connection with carrying out his duties under this Agreement, the Executive shall not communicate, divulge, or disseminate any material Confidential Information at any time during or after the Executive's employment with the Company, except with the prior written consent of the Company or as otherwise required by law or legal process; provided, however, that if so required, the Executive will provide the Company with reasonable notice to contest such disclosure.

(c)         Non-Solicitation. During the Term of Employment and for the one (1) year period following the Date of Termination for any reason, the executive will not, directly or indirectly, initiate any action to solicit or recruit anyone who is then an employee of the Company for the purpose of being employed by him or by any business, individual, partnership, firm, corporation or other entity on whose behalf he is acting as an agent, representative, employee or otherwise.

(d)         Non-Interference with Customers or Producers. During the Term of Employment and for the one (1) year period following the Date of Termination for any reason, the Executive will not interfere with any business relationship between the Company and any of its customers or agents or brokers that produce insurance business for the Company.

(e)         Remedies; Severability.

(i)         The Executive acknowledges that if the Executive shall breach or threaten to breach any provision of subsections 10(a) through (d), the damages to the Company may be substantial, although difficult to ascertain, and money damages will not afford the Company an adequate remedy.Therefore, if the provisions of subsections 10(a) through (d) are violated, in whole or in part, the Company shall be entitled to specific performance and injunctive relief, without prejudice to other remedies the Company may have at law or in equity.

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(ii)         If any term or provision of this section 10, or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the remainder of this section 10, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this section 10 shall be valid and enforceable to the fullest extent permitted by law. Moreover, if a court of competent jurisdiction deems any provision of subsections 10(a) through (d) to be too broad in time, scope, or area, it is expressly agreed that such provision shall be reformed to the maximum degree that would not render it unenforceable.

11.         Attorneys' Fees. Each party shall pay its own legal fees, court costs, litigation expenses and/or arbitration expenses (as applicable) in connection with any dispute, litigation or arbitration regarding the validity or enforceability of, or liability under or otherwise involving;, any provision of this Agreement, except that if the Executive prevails on the majority of material claims disputed, the Company shall pay all reasonable legal fees, court cost, litigation expenses and/or arbitration expenses.

12.         Indemnification.  The Executive shall be indemnified by the Company for actions taken in his position as an officer, director, employee and agent of the Company to the greatest extent permitted by applicable law. The Executive shall also be covered as an insured by a liability insurance policy secured by and maintained by the Company covering acts of officers and members of the Board.

13.         Successors.

(a)         Assignment of Agreement.       This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution.

(b)         Successors of the Company.     No rights or obligations of the Company under this Agreement may be assigned or transferred except that the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as herein before defined and any successor that executes and delivers the agreement provided for in this section 13 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law.

14.         Arbitration. Except for matters covered under section 10, in the event of any dispute or difference between the Company and the Executive with respect to the subject matter of this Agreement and the enforcement of rights hereunder, either the Executive or the Company may, by written notice to the other, require such dispute or difference to be submitted to arbitration. The arbitrator or arbitrators shall be selected by agreement of the parties or, if they cannot agree on an arbitrator or arbitrators within 30 days after the date arbitration is required by either party, then the arbitrator or arbitrators shall be selected by the American Arbitration Association upon the application of the Executive or the Company. The determination reached in such arbitration shall be final and binding on both parties without any right of appeal or further dispute. Execution of the determination by such arbitrator may be sought in any court of competent jurisdiction. The arbitrators shall not be bound by judicial formalities and may abstain from following the strict rules of evidence and shall interpret this Agreement as an honorable engagement and not merely as a legal obligation. Unless otherwise agreed by the parties, any such arbitration shall take place in New York, New York.

15.         Miscellaneous.

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(a)         Governing Law and Captions. This Agreement shall be governed by, and construed in accordance with, the laws of New York without reference to principles of conflict of laws.  The captions of this Agreement are not part of the provisions hereof and shall have no force or effect.

(b)         Notices. All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery or by facsimile (provided confirmation of receipt of such facsimile is received) to the other party or by registered or certified mail, return receipt requested, postage prepaid, or by Federal Express or other nationally-recognized overnight courier that requires signatures of recipients upon delivery and provides tracking services, addressed as follows:

If to the Executive:

Gary s. Maier

60 Mayflower Drive

Tenafly, New Jersey 

07670

If to the Company:

Tower Group, Inc.

120 Broadway

New York, New York 10271

Attention: General Counsel

Facsimile: 212-271-5492

or to such other address as either party furnishes to the other in writing in accordance with this subsection 15(b). Notices and communications shall be effective when actually received by the addressee.

(c)         Amendment. This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives.

(d)         Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. If any provision of this Agreement shall be held invalid or unenforceable in part and if the rights and obligations of any to this Agreement will not be materially and adversely affected thereby, the remaining portion of such provision, together with all other provisions of this Agreement, shall remain valid and enforceable and continue in full force and effect to the fullest extent consistent with law.

(e)         Withholding. Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local, and foreign taxes that are required to be withheld by applicable laws or regulations.

(f)         Waiver. The Executive's or the Company's failure to insist upon strict compliance with any provision of, or to assert any right under, this Agreement (including, without limitation, the right of the Executive to terminate employment for Good Reason) shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement.

(g)         Entire Understanding; Counterparts. The Executive and the Company acknowledge that this Agreement supersedes and terminates any other severance and/or employment agreements between the Executive and the Company or any Company affiliates. This Agreement may be executed in several counterparts, each of which shall be deemed an original, and said counterparts shall constitute but one and the same instrument.

(h)         Rights and Benefits Unsecured.  The rights and benefits of the Executive under this Agreement may not be anticipated, assigned, alienated, or subject to attachment, garnishment, levy; execution, or other legal or equitable process except as required by law. Any attempts by the Executive to anticipate, alienate, assign, sell, transfer, pledge or encumber the same shall be void. Payments hereunder shall not be considered assets of the Executive in the event of insolvency or bankruptcy.

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(i)         Noncontravention. The Company represents that the Company is not prevented from entering into, or performing this Agreement by the terms of any law, order, rule or regulation, its by-laws or declaration of trust, or any agreement to which it is a party.

(j)         Section and Subsection Headings. The section and subsection headings in this Agreement are for convenience of reference only; they form no part of this Agreement and shall not affect its interpretation.

IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization of the Board, the Company has caused this Agreement to be executed, all as of the day and year first above written.

TOWER GROUP, INC.

/s/ Michael H. Lee

Name:  Michael H. Lee

Title: CEO & President

/s/  Gary S. Maier

Gary S. Maier

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EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael H. Lee, certify that:

1.   I have reviewed the Quarterly Report of Tower Group, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”);

2.   Based on my knowledge, the Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the Report;

3.   Based on my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in the Report;

4.   The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the Company and have:

a)   designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within the Company, particularly during the period in which the Report is being prepared;

b)   designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)   evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in the Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the Report based on such evaluation; and

d)   disclosed in the Report any changes in the Company’s internal control over financial reporting that occurred during the Company’s third quarter of 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5.   The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and to the audit committee of the Company’s Board of Directors:

a)   all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

November 8,  2007	/s/ Michael H. Lee
	Michael H. Lee Chief Executive Officer

39

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Francis M. Colalucci, certify that:

1.   I have reviewed the Quarterly Report of Tower Group, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”);

2.   Based on my knowledge, the Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the Report;

3.   Based on my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in the Report;

4.   The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the Company and have:

a)   designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within the Company, particularly during the period in which the Report is being prepared;

b)   designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)   evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in the Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the Report based on such evaluation; and

d)   disclosed in the Report any changes in the Company’s internal control over financial reporting that occurred during the Company’s third quarter of 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5.   The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and to the audit committee of the Company’s Board of Directors:

a)   all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

November 8,  2007	/s/ Francis M. Colalucci
	Francis M. Colalucci Chief Financial Officer

40

EX-32

Exhibit 32

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT FOF 2002

In connection with the Quarterly Report of Tower Group, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Michael H. Lee, President and Chief Executive Officer of the Company, and Francis M. Colalucci, Senior Vice President, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities and Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 8, 2007	/s/  Michael H. Lee
	Michael H. Lee President and Chief Executive Officer
November 8, 2007	/s/  Francis M. Colalucci
	Francis M. Colalucci Senior Vice President, Chief Financial Officer and Treasurer

41