10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

   Exchange Act Of 1934

   For the quarterly period ended June 30, 2012

¨ 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.   þ  Yes   ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( § 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).þ  Yes    ¨   No

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

Large accelerated filer þ  Accelerated filer ¨  Non-accelerated filer ¨  Smaller reporting company ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 38,377,091 shares of common stock, par value $0.01 per share, as of August 1, 2012.

Tower Group, Inc.

Quarterly Report on Form 10-Q

For the Period Ended June 30, 2012

INDEX

	Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements of Tower Group, Inc.
Consolidated Balance Sheets (Unaudited) – June 30, 2012 and December 31, 2011		1
Consolidated Statements of Operations (Unaudited) – Three and Six Months Ended June  30, 2012 and 2011		2
Consolidated Statements of Comprehensive Income (Unaudited) – Three and Six Months Ended June  30, 2012 and 2011		3
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Six Months Ended June 30, 2012 and 2011		4
Consolidated Statements of Cash Flows (Unaudited) – Six Months Ended June 30, 2012 and 2011		5
Notes to Consolidated Financial Statements (Unaudited)		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 3. Quantitative and Qualitative Disclosures About Market Risk		52
Item 4. Controls and Procedures		54
PART II OTHER INFORMATION
Item 1. Legal Proceedings		54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		54
Item 6. Exhibits		55
SIGNATURES		56

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements

Tower Group, Inc.

Consolidated Balance Sheets

(Unaudited)

($ in thousands, except par value and share amounts)	June 30, 2012			December 31, 2011
Assets
Investments - Tower
Available-for-sale investments, at fair value:
Fixed-maturity securities (amortized cost of $1,937,174 and $2,046,932)	$	2,060,802		$	2,153,620
Equity securities (cost of $126,685 and $91,069)		128,490			87,479
Other invested assets		52,333			44,347
Investments - Reciprocal Exchanges
Available-for-sale investments, at fair value:
Fixed-maturity securities (amortized cost of $280,843 and $288,180)		299,172			300,054
Equity securities (cost of $6,840 and $1,965)		7,903			1,866
Total investments		2,548,700			2,587,366
Cash and cash equivalents (includes $6,906 and $666 relating to Reciprocal Exchanges)		199,005			114,098
Investment income receivable (includes $3,078 and $2,978 relating to Reciprocal Exchanges)		27,233			26,782
Premiums receivable (includes $38,662 and $41,290 relating to Reciprocal Exchanges)		381,983			408,626
Reinsurance recoverable on paid losses (includes $1,799 and $5,670 relating to Reciprocal Exchanges)		19,076			23,903
Reinsurance recoverable on unpaid losses (includes $19,661 and $11,253 relating to Reciprocal Exchanges)		301,620			319,664
Prepaid reinsurance premiums (includes $16,419 and $14,685 relating to Reciprocal Exchanges)		55,691			54,037
Deferred acquisition costs, net (includes $12,758 and $11,866 relating to Reciprocal Exchanges)		185,507			168,858
Intangible assets (includes $7,146 and $4,839 relating to Reciprocal Exchanges)		110,918			114,920
Goodwill		250,103			250,103
Funds held by reinsured companies		133,968			69,755
Other assets (includes $4,021 and $2,685 relating to Reciprocal Exchanges)		269,838			304,083
Total assets	$	4,483,642		$	4,442,195
Liabilities
Loss and loss adjustment expenses (includes $133,547 and $136,274 relating to Reciprocal Exchanges)	$	1,701,833		$	1,632,113
Unearned premium (includes $103,408 and $102,991 relating to Reciprocal Exchanges)		926,456			893,176
Reinsurance balances payable (includes $4,875 and $3,466 relating to Reciprocal Exchanges)		14,418			20,794
Funds held under reinsurance agreements		91,142			96,726
Other liabilities (includes $7,700 and $7,154 relating to Reciprocal Exchanges)		194,901			266,155
Deferred income taxes (includes $3,392 and $4,511 relating to Reciprocal Exchanges)		33,058			29,337
Debt		448,291			426,901
Total liabilities		3,410,099			3,365,202
Contingencies (Note 12)		-			-
Stockholders’ equity
Common stock ($0.01 par value; 100,000,000 shares authorized, 46,769,519 and 46,448,341 shares issued, and 38,377,091 and 39,221,102 shares outstanding)		468			465
Treasury stock (8,392,428 and 7,227,239 shares)		(181,324	)		(158,185	)
Paid-in-capital		775,542			772,938
Accumulated other comprehensive income		75,866			62,244
Retained earnings		347,521			356,680
Tower Group, Inc. stockholders’ equity		1,018,073			1,034,142
Noncontrolling interests		55,470			42,851
Total stockholders’ equity		1,073,543			1,076,993
Total liabilities and stockholders’ equity	$	4,483,642		$	4,442,195

See accompanying notes to the unaudited consolidated financial statements.

1

Tower Group, Inc.

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands, except per share amounts)	2012			2011			2012			2011
Revenues
Net premiums earned	$	460,153		$	393,530		$	880,311		$	773,325
Ceding commission revenue		10,080			10,655			15,243			18,836
Insurance services revenue		1,359			(73	)		1,856			529
Policy billing fees		3,000			2,659			6,134			4,837
Net investment income		31,781			31,798			65,724			64,176
Net realized investment gains (losses):
Other-than-temporary impairments		(2,525	)		(210	)		(5,246	)		(378	)
Portion of loss recognized in other comprehensive income		286			-			286			24
Other net realized investment gains		2,003			(2,104	)		8,307			5,400
Total net realized investment gains (losses)		(236	)		(2,314	)		3,347			5,046
Total revenues		506,137			436,255			972,615			866,749
Expenses
Loss and loss adjustment expenses		349,775			240,846			617,268			481,022
Direct and ceding commission expense		95,186			76,210			174,871			152,813
Other operating expenses		78,100			69,749			157,071			136,088
Acquisition-related transaction costs		720			-			1,982			12
Interest expense		7,902			8,257			15,478			16,357
Total expenses		531,683			395,062			966,670			786,292
Income (loss) before income taxes		(25,546	)		41,193			5,945			80,457
Income tax expense (benefit)		(7,239	)		12,877			(5,389	)		25,635
Net income (loss)	$	(18,307	)	$	28,316		$	11,334		$	54,822
Less: Net income (loss) attributable to Noncontrolling interests		(3,194	)		4,195			5,813			5,016
Net income (loss) attributable to Tower Group, Inc.	$	(15,113	)	$	24,121		$	5,521		$	49,806
Earnings (loss) per share attributable to Tower Group, Inc. stockholders:
Basic	$	(0.39	)	$	0.58		$	0.14		$	1.20
Diluted	$	(0.39	)	$	0.58		$	0.14		$	1.20
Weighted average common shares outstanding:
Basic		39,117			41,303			39,206			41,404
Diluted		39,117			41,395			39,268			41,518
Dividends declared and paid per common share	$	0.19		$	0.19		$	0.38		$	0.32

See accompanying notes to the unaudited consolidated financial statements.

2

Tower Group, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2012			2011			2012			2011
Net income (loss)	$	(18,307	)	$	28,316		$	11,334		$	54,822
Other comprehensive income (loss) before tax
Gross unrealized investment holding gains arising during periods		8,524			25,755			33,585			24,430
Less: Reclassification adjustment for investment (gains) losses included in net income		236			2,290			(3,347	)		(5,046	)
Portion of other-than-temporary impairment losses recognized in other comprehensive income		(286	)		-			(286	)		(24	)
Deferred gain (loss) on cash flow hedge		(1,160	)		(4,583	)		(1,391	)		(3,645	)
Other comprehensive income before tax		7,314			23,462			28,561			15,715
Income tax benefit (expense) related to items of other comprehensive income (loss)		(2,629	)		(8,218	)		(9,911	)		(5,459	)
Other comprehensive income, net of income tax	$	4,685		$	15,244			18,650			10,256
Comprehensive income (loss)	$	(13,622	)	$	43,560		$	29,984		$	65,078
Less: Comprehensive income (loss) attributable to Noncontrolling interests		(1,006	)		6,775			10,841			8,411
Comprehensive income (loss) attributable to Tower Group, Inc.	$	(12,616	)	$	36,785		$	19,143		$	56,667

See accompanying notes to the unaudited consolidated financial statements.

3

Tower Group, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

	Common Stock				Treasury			Paid-in			Accumulated Other Comprehensive		Retained			Noncontrolling		Total Stockholders’
(in thousands)	Shares		Amount		Stock			Capital			Income (loss)		Earnings			Interests		Equity
Balance at December 31, 2010		45,742	$	457	$	(91,779	)	$	763,064		$	48,883	$	324,376		$	22,837	$	1,067,838
Dividends declared		-		-		-			-			-		(12,855	)		-		(12,855	)
Stock based compensation		656		7		(1,640	)		5,377			-		-			-		3,744
Repurchase of common stock		-		-		(19,990	)		-			-		-			-		(19,990	)
Net income		-		-		-			-			-		49,806			5,016		54,822
Other comprehensive income		-		-		-			-			6,861		-			3,395		10,256
Balance at June 30, 2011		46,398	$	464	$	(113,409	)	$	768,441		$	55,744	$	361,327		$	31,248	$	1,103,815
Balance at December 31, 2011		46,448	$	465	$	(158,185	)	$	772,938		$	62,244	$	356,680		$	42,851	$	1,076,993
Dividends declared		-		-		-			-			-		(14,680	)		-		(14,680	)
Stock based compensation		321		3		(2,152	)		4,382			-		-			-		2,233
Repurchase of common stock		-		-		(20,987	)		-			-		-			-		(20,987	)
Net income		-		-		-			-			-		5,521			5,813		11,334
Transfer of assets to Reciprocal Exchanges		-		-		-			(1,778	)		-		-			1,778		-
Other comprehensive income		-		-		-			-			13,622		-			5,028		18,650
Balance at June 30, 2012		46,769	$	468	$	(181,324	)	$	775,542		$	75,866	$	347,521		$	55,470	$	1,073,543

See accompanying notes to the unaudited consolidated financial statements.

4

Tower Group, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended June 30,
($ in thousands)	2012			2011
Cash flows provided by operating activities:
Net income	$	11,334		$	54,822
Adjustments to reconcile net income to net cash provided by (used in) operations:
Net realized investment (gains) losses		(3,347	)		(5,046	)
Depreciation and amortization		15,985			13,145
Amortization of bond and debt premium or discount		5,377			3,124
Amortization of restricted stock		4,382			5,041
Deferred income taxes		(7,481	)		9,010
Changes in operating assets and liabilities:
Investment income receivable		(451	)		(2,296	)
Premiums receivable		26,643			1,762
Reinsurance recoverable		22,871			(4,421	)
Prepaid reinsurance premiums		(1,654	)		27,916
Deferred acquisition costs, net		(16,649	)		(3,373	)
Other assets		(68,724	)		(21,746	)
Loss and loss adjustment expenses		69,720			(25,722	)
Unearned premium		33,280			(12,228	)
Reinsurance balances payable		(6,376	)		(15,250	)
Funds held under reinsurance agreements		(5,584	)		8,395
Other liabilities		(6,889	)		20,329
Net cash flows provided by operations		72,437			53,462
Cash flows (used in) investing activities:
Purchase of fixed assets		(19,426	)		(11,705	)
Purchase - fixed-maturity securities		(997,657	)		(965,648	)
Purchase - equity securities		(802,154	)		(296,441	)
Short-term investments, net		-			(3,438	)
Change in other invested assets		(7,986	)		-
Sale or maturity - fixed-maturity securities		1,111,663			945,867
Sale - equity securities		745,618			285,322
Net cash flows provided by (used in) investing activities		30,058			(46,043	)
Cash flows (used in) financing activities:
Proceeds from credit facility borrowings		20,000			17,000
Repayment of credit facility borrowings		-			(17,000	)
Issuance of common stock under stock-based compensation programs		3			343
Excess tax benefits from share-based payment arrangements		228			(147	)
Treasury stock acquired-net employee share-based compensation		(2,152	)		(1,640	)
Repurchase of Common Stock		(20,987	)		(19,990	)
Dividends paid		(14,680	)		(12,855	)
Net cash flows (used in) financing activities		(17,588	)		(34,289	)
Increase (decrease) in cash and cash equivalents		84,907			(26,870	)
Cash and cash equivalents, beginning of period		114,098			140,221
Cash and cash equivalents, end of period	$	199,005		$	113,351

See accompanying notes to the unaudited consolidated financial statements.

5

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 1—Nature of Business

Tower Group, Inc. (the “Company” or “Tower”) offers a broad range of commercial, specialty and personal specialty property and casualty insurance products and services through its subsidiaries to businesses in various industries and to individuals. The Company’s common stock is publicly traded on the NASDAQ Global Select Market under the symbol “TWGP”.

The Company operates three business segments as follows:

• Commercial Insurance (“Commercial”) Segment offers a broad range of standard and specialty commercial lines property and casualty insurance products to businesses distributed through a network of retail and wholesale agents and program underwriting agents on both an admitted and non-admitted basis. This segment also includes assumed reinsurance;

• Personal Insurance (“Personal”) Segment offers a broad range of personal lines property and casualty insurance products to individuals distributed through a network of retail and wholesale agents; and

• Insurance Services (“Services”) Segment provides underwriting, claims and reinsurance brokerage services to insurance companies.

Note 2—Accounting Policies and Basis of Presentation

Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Tower and its insurance subsidiaries, managing general agencies and management companies. The unaudited consolidated financial statements also include the accounts of Adirondack Insurance Exchange, a New York reciprocal insurer, and New Jersey Skylands Insurance Association, a New Jersey reciprocal insurer (together, the “Reciprocal Exchanges”). The Company does not own the Reciprocal Exchanges but manages their business operations through its wholly owned management companies.

The accompanying unaudited consolidated financial statements included in this report have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. The principles for condensed interim financial information do not require the inclusion of all the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2011 and notes thereto included in the Annual Report on Form 10-K filed on February 29, 2012. 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, results of operations and cash flows. All inter-company transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Moreover, the results of operations for the six months ended June 30, 2012 may not be indicative of the results that may be expected for the year ending December 31, 2012.

Intercompany transactions

In the first quarter 2012, Tower transferred a licensed insurance subsidiary shell to the Reciprocal Exchanges and received cash for its statutory book value. At the date of the transfer, Tower’s GAAP carrying basis in this subsidiary exceeded the statutory book value and the transfer resulted in a loss to Tower of $1.8 million. Since this was a non-recurring transaction between entities under common control, assets are transferred at historical book value. Any difference in the consideration paid and the book value of the assets transferred is treated as an adjustment to equity. This transaction had no effect on consolidated stockholders’ equity.

6

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Reclassifications and Adjustments

Certain reclassifications have been made to prior years’ financial information to conform to the current year presentation.

Cash amounts presented on the consolidated statements of cash flows for the six months ended June 30, 2011 have been revised to present book overdrafts representing outstanding checks in excess of funds on deposit with individual financial institutions within Other liabilities. These balances have previously been reported in Cash and cash equivalents. This revision increased Cash and cash equivalents and Other liabilities by $52.9 million as of June 30, 2011 and Net cash flows provided by operations by $15.6 million for the six months ended June 30, 2011. Management concluded this adjustment is not material to previously issued annual and quarterly consolidated financial statements.

Comprehensive income attributable to Noncontrolling interests and Comprehensive income attributable to Tower Group, Inc. for the three and six months ended June 30, 2011 have been revised. The revision increased Comprehensive income attributable to Noncontrolling interests and decreased Comprehensive income attributable to Tower Group, Inc. for the three and six months ended June 30, 2011 by $4.2 million and $5.0 million, respectively. This revision had no effect on consolidated Comprehensive income. The change corrected a classification error and is not considered material to the previously issued quarterly financial statements.

In the first quarter of 2012, the Company recorded an out of period adjustment that decreased income tax expense by $7.1 million. The adjustment increased consolidated net income by $7.1 million and increased net income available to common shareholders by $2.6 million for the six months ended June 30, 2012. This out of period adjustment had no effect on tax expense or consolidated net income for the three months ended June 30, 2012. The adjustment corrected our deferred income tax liability as reported at December 31, 2011. Management concluded this adjustment is not material to previously issued annual and quarterly consolidated financial statements.

Accounting Pronouncements

Accounting guidance adopted in 2012

In May 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance concerning fair value measurement and disclosure. This new guidance requires additional disclosure about fair value measurements categorized as Level 3. This guidance had no effect on the Company’s financial position, results of operations or cash flows. The Company’s fair value disclosures have been revised effective January 1, 2012 to comply with this guidance.

In June 2011 (and as amended in December 2011), the FASB issued new guidance concerning the presentation of comprehensive income. The Company adopted this new guidance retrospectively on January 1, 2012 and now reports its comprehensive income in a separate consolidated financial statement immediately following the statement of operations.

In September 2011, the FASB issued amended guidance on testing goodwill for impairment. This guidance was intended to reduce the cost and complexity of the annual goodwill impairment test by allowing an entity to utilize more qualitative factors. The Company will consider this guidance when it performs its goodwill impairment test, which is done annually as of September 30. This guidance will not affect the Company’s financial position, result of operations or cash flows.

Accounting guidance not yet effective

In July 2012, the FASB issued amended guidance on testing indefinite lived intangible assets for impairment. This guidance is intended to reduce the cost and complexity of the annual impairment test by allowing an entity to utilize more qualitative factors. This guidance will not affect the Company’s financial position, result of operations or cash flows.

Note 3—Variable Interest Entities (“VIEs”)

Through its management companies, Tower is the attorney-in-fact for the Reciprocal Exchanges and has the ability to direct their activities. The Reciprocal Exchanges are policyholder-owned insurance carriers organized as unincorporated associations. Each policyholder insured by the Reciprocal Exchanges shares risk with the other policyholders.

In the event of dissolution, policyholders would share any residual unassigned surplus in the same proportion as the amount of insurance purchased but are not subject to assessment for any deficit in unassigned surplus of the Reciprocal Exchanges. Tower receives management fee income for the services provided to the Reciprocal Exchanges. The assets of the Reciprocal Exchanges can be used only to settle the obligations of the Reciprocal Exchanges and general creditors to their liabilities have no recourse to Tower as the primary beneficiary.

7

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

In addition, Tower holds the surplus notes issued by the Reciprocal Exchanges when they were originally capitalized. The obligation to repay principal and interest on the surplus notes is subordinated to the Reciprocal Exchanges’ other liabilities including obligations to policyholders and claimants for benefits under insurance policies. Principal and interest on the surplus notes are payable only with regulatory approval. The Company has no ownership interest in the Reciprocal Exchanges.

The Company determined that each of the Reciprocal Exchanges qualifies as a VIE and that the Company is the primary beneficiary as it has both the power to direct the activities of the Reciprocal Exchanges that most significantly impact their economic performance and the risk of economic loss through its ownership of the surplus notes. Accordingly, the Company consolidates these Reciprocal Exchanges and eliminates all intercompany balances and transactions with Tower.

For the three months ended June 30, 2012, the Reciprocal Exchanges recognized total revenues, total expenses and net loss of $47.4 million, $50.6 million and $(3.2) million, respectively. For the three months ended June 30, 2011, the Reciprocal Exchanges recognized total revenues, total expenses and net income of $56.0 million, $51.8 million and $4.2 million, respectively.

For the six months ended June 30, 2012, the Reciprocal Exchanges recognized total revenues, total expenses and net income of $99.4 million, $93.6 million and $5.8 million, respectively. For the six months ended June 30, 2011, the Reciprocal Exchanges recognized total revenues, total expenses and net income of $105.3 million, $100.3 million and $5.0 million, respectively.

Note 4—Investments

The cost or amortized cost and fair value of the Company’s investments in fixed maturity and equity securities, gross unrealized gains and losses, and other-than-temporary impairment losses as of June 30, 2012 and December 31, 2011 are summarized as follows:

8

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

($ in thousands)	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Unrealized OTTI Losses (1)
June 30, 2012
U.S. Treasury securities	$	120,783	$	1,591	$	(7	)	$	122,367	$	-
U.S. Agency securities		77,690		3,592		-			81,282		-
Municipal bonds		742,736		54,076		(435	)		796,377		-
Corporate and other bonds
Finance		263,167		16,167		(215	)		279,119		-
Industrial		389,693		22,394		(1,181	)		410,906		-
Utilities		28,254		2,637		(26	)		30,865		-
Commercial mortgage-backed securities		223,358		27,643		(576	)		250,425		(365	)
Residential mortgage-backed securities
Agency backed securities		313,648		14,760		(135	)		328,273		-
Non-agency backed securities		17,100		1,147		(123	)		18,124		(73	)
Asset-backed securities		41,588		810		(162	)		42,236		-
Total fixed-maturity securities		2,218,017		144,817		(2,860	)		2,359,974		(438	)
Preferred stocks, principally financial sector		33,803		2,656		(157	)		36,302		-
Common stocks, principally financial and industrial sectors		99,722		3,607		(3,238	)		100,091		-
Total, June 30, 2012	$	2,351,542	$	151,080	$	(6,255	)	$	2,496,367	$	(438	)
Tower	$	2,063,859	$	131,351	$	(5,918	)	$	2,189,292	$	(412	)
Reciprocal Exchanges		287,683		19,729		(337	)		307,075		(26	)
Total, June 30, 2012	$	2,351,542	$	151,080	$	(6,255	)	$	2,496,367	$	(438	)
December 31, 2011
U.S. Treasury securities	$	154,430	$	1,725	$	(13	)	$	156,142	$	-
U.S. Agency securities		114,411		2,779		-			117,190		-
Municipal bonds		688,192		48,777		(255	)		736,714		-
Corporate and other bonds
Finance		331,917		9,201		(4,615	)		336,503		-
Industrial		388,139		22,198		(2,287	)		408,050		-
Utilities		30,164		3,067		(61	)		33,170		-
Commercial mortgage-backed securities		232,877		22,854		(2,564	)		253,167		(483	)
Residential mortgage-backed securities
Agency backed securities		304,876		15,401		(1	)		320,276		-
Non-agency backed securities		29,907		2,603		(901	)		31,609		(695	)
Asset-backed securities		60,199		1,309		(655	)		60,853		-
Total fixed-maturity securities		2,335,112		129,914		(11,352	)		2,453,674		(1,178	)
Preferred stocks, principally financial sector		24,083		317		(890	)		23,510		-
Common stocks, principally industrial and financial sectors		68,951		1,078		(4,194	)		65,835		-
Total, December 31, 2011	$	2,428,146	$	131,309	$	(16,436	)	$	2,543,019	$	(1,178	)
Tower	$	2,138,001	$	118,173	$	(15,075	)	$	2,241,099	$	(1,178	)
Reciprocal Exchanges		290,145		13,136		(1,361	)		301,920		-
Total, December 31, 2011	$	2,428,146	$	131,309	$	(16,436	)	$	2,543,019	$	(1,178	)

(1) Represents the gross unrealized loss on other-than-temporarily impaired securities recognized in accumulated other comprehensive income (loss).

As at June 30, 2012 and December 31, 2011, U.S. Treasury Notes and other securities with carrying values of $395.9 million and $226.8 million, respectively, were on deposit with various states to comply with the insurance laws in which the Company is licensed.

In addition, the Company had $324.3 million and $340.8 million of investments as of June 30, 2012 and December 31, 2011, respectively, held by counterparties as collateral or in trusts to support letters of credit issued on Tower’s behalf, reinsurance liabilities on certain assumed reinsurance treaties, collateral posted for certain leases and other purposes.

9

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Major categories of net investment income are summarized as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2012			2011			2012			2011
Income
Fixed-maturity securities	$	24,511		$	26,154		$	49,924		$	55,264
Equity securities		6,603			6,565			14,239			10,977
Cash and cash equivalents		448			216			738			347
Other, primarily from other invested assets		1,573			117			3,555			248
Total		33,135			33,052			68,456			66,836
Expenses
Investment expenses		(1,354	)		(1,254	)		(2,732	)		(2,660	)
Net investment income	$	31,781		$	31,798		$	65,724		$	64,176
Tower		30,267			30,401			62,525			61,106
Reciprocal Exchanges		3,177			3,051			6,526			6,396
Elimination of interest on Reciprocal Exchange surplus notes		(1,663	)		(1,654	)		(3,327	)		(3,326	)
Net investment income	$	31,781		$	31,798		$	65,724		$	64,176

Proceeds from the sale of fixed-maturity securities were $980.0 million and $911.8 million for the six months ended June 30, 2012 and 2011, respectively. Proceeds from the sale of equity securities were $745.6 million and $285.3 million for the six months ended June 30, 2012 and 2011, respectively.

Gross realized gains, losses and impairment write-downs on investments are summarized as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2012			2011			2012			2011
Fixed-maturity securities
Gross realized gains	$	12,354		$	4,551		$	25,162		$	19,657
Gross realized losses		(609	)		(1,326	)		(2,551	)		(7,333	)
		11,745			3,225			22,611			12,324
Equity securities
Gross realized gains		2,685			2,228			4,179			4,570
Gross realized losses		(9,808	)		(7,557	)		(16,160	)		(11,494	)
		(7,123	)		(5,329	)		(11,981	)		(6,924	)
Other
Gross realized gains		555			-			1,790			-
Gross realized losses		(3,174	)		-			(4,113	)		-
		(2,619	)		-			(2,323	)		-
Net realized gains (losses) on investments		2,003			(2,104	)		8,307			5,400
Other-than-temporary impairment losses:
Fixed-maturity securities		(765	)		(210	)		(882	)		(354	)
Equity securities		(1,474	)		-			(4,078	)		-
Total other-than-temporary impairment losses recognized in earnings		(2,239	)		(210	)		(4,960	)		(354	)
Total net realized investment gains (losses)	$	(236	)	$	(2,314	)	$	3,347		$	5,046
Tower	$	1,421		$	(2,857	)	$	1,028		$	5,380
Reciprocal Exchanges		(1,657	)		543			2,319			(334	)
Total net realized investment gains (losses)	$	(236	)	$	(2,314	)	$	3,347		$	5,046

Management may dispose of a particular security due to changes in facts and circumstances related to the invested asset that have arisen since the last analysis supporting management’s determination whether or not it intended to sell the security, and if not, whether it is more likely than not that the Company would be required to sell the security before recovery of its amortized cost basis.

10

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Impairment Review

Management regularly reviews the Company’s fixed-maturity and equity security portfolios in accordance with its impairment policy to evaluate the necessity of recording impairment losses for OTTI. The determination of OTTI is a subjective process and different judgments and assumptions could affect the timing of loss realization.

Management, in conjunction with its outside portfolio managers, analyzes its non-agency residential mortgage-backed securities (“RMBS”) using default loss models based on the performance of the underlying loans. Performance metrics include delinquencies, defaults, foreclosures, anticipated cash flow prepayments and cumulative losses incurred. The expected losses for a mortgage pool are compared to the break-even loss, which represents the point at which the Company’s tranche begins to experience losses.

The commercial mortgage-backed securities (“CMBS”) holdings are evaluated using analytical techniques and various metrics including the level of subordination, debt-service-coverage ratios, loan-to-value ratios, delinquencies, defaults and foreclosures.

For the non-structured fixed-maturity securities (U.S. Treasury and Agency securities, municipal bonds, and corporate debt), unrealized losses are reviewed to determine whether full recovery of principal and interest will be received. The estimate of expected cash flows is determined by projecting a recovery value and a recovery time frame and assessing whether further principal and interest will be received. The determination of recovery value incorporates an issuer valuation assumption utilizing one or a combination of valuation methods as deemed appropriate by management. The present value of the cash flows is determined by applying the effective yield of the security at the date of acquisition (or the most recent implied rate used to accrete the security if the implied rate has changed as a result of a previous impairment) and an estimated recovery time frame. For securities for which the issuer is financially troubled but not in bankruptcy, that time frame is generally longer. Included in the present value calculation are expected principal and interest payments; however, for securities for which the issuer is classified as bankrupt or in default, the present value calculation assumes no interest payments and a single recovery amount. In situations for which a present value of cash flows cannot be estimated, a write-down to fair value is recorded.

In estimating the recovery value, significant judgment is involved in the development of assumptions relating to a number of factors related to the issuer including, but not limited to, revenue, margin and earnings projections, the likely market or liquidation values of assets, potential additional debt to be incurred pre- or post- bankruptcy/restructuring, the ability to shift existing or new debt to different priority layers, the amount of restructuring/bankruptcy expenses, the size and priority of unfunded pension obligations, litigation or other contingent claims, the treatment of intercompany claims and the likely outcome with respect to inter-creditor conflicts.

The evaluation of equity securities includes management’s intent and ability to hold the security to recovery. Management will record OTTI in those situations where it does not intend to hold the security to recovery or if the security is not expected to recover in value in a period that is other-than-temporary.

The following table shows the amount of fixed-maturity and equity securities that were OTTI for the three and six months ended June 30, 2012 and 2011. This resulted in recording impairment write-downs included in net realized investment gains (losses), and reduced the unrealized loss in other comprehensive net income:

11

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2012			2011			2012			2011
Corporate and other bonds	$	(648	)	$	-		$	(737	)	$	-
Commercial mortgage-backed securities		(403	)		(66	)		(403	)		(163	)
Residential mortgage-backed securities		-			-			(28	)		(71	)
Asset-backed securities		-			(144	)		-			(144	)
Equities		(1,474	)		-			(4,078	)		-
Other-than-temporary-impairments		(2,525	)		(210	)		(5,246	)		(378	)
Portion of loss recognized in accumulated other comprehensive income (loss)		286			-			286			24
Impairment losses recognized in earnings	$	(2,239	)	$	(210	)	$	(4,960	)	$	(354	)
Tower	$	(2,239	)	$	(210	)	$	(4,960	)	$	(354	)
Reciprocal Exchanges		-			-			-			-
Impairment losses recognized in earnings	$	(2,239	)	$	(210	)	$	(4,960	)	$	(354	)

The following table provides a rollforward of the cumulative amounts of credit OTTI for securities still held showing the amounts that have been included in earnings on a pretax basis for the three months ended June 30, 2012 and 2011:

	Three Months Ended June 30,
($ in thousands)	2012			2011
Balance, April 1,	$	6,084		$	15,124
Additional credit losses recognized during the period, related to securities for which:
No OTTI has been previously recognized		765			44
OTTI has been previously recognized		-			166
Reductions due to:
Securities sold during the period (realized)		(730	)		(1,888	)
Balance, June 30,	$	6,119		$	13,446

The following table provides a rollforward of the cumulative amounts of credit OTTI for securities still held showing the amounts that have been included in earnings on a pretax basis for the six months ended June 30, 2012 and 2011:

	Six Months  Ended June 30,
($ in thousands)	2012			2011
Balance, January 1,	$	12,666		$	18,075
Additional credit losses recognized during the period, related to securities for which:
No OTTI has been previously recognized		854			44
OTTI has been previously recognized		28			310
Reductions due to:
Securities sold during the period (realized)		(7,429	)		(4,983	)
Balance, June 30,	$	6,119		$	13,446

12

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Unrealized Losses

There are 249 securities at June 30, 2012, including fixed maturities and equity securities, which account for the gross unrealized loss, none of which is deemed by management to be OTTI. Temporary losses on corporate and other bonds result from purchases made in a lower yield spread environment. In addition, there have been some ratings downgrades on certain of these securities. After analyzing the credit quality, balance sheet strength and company outlook, management believes these securities will recover in value. The structured securities that had significant unrealized losses resulted primarily from declines in both residential and commercial real estate prices. To the extent projected cash flows on structured securities change adversely, they would be considered OTTI, and an impairment loss would be recognized in the current period. Management considered all relevant factors, including expected recoverability of cash flows, in assessing whether a loss was other-than-temporary. The Company does not intend to sell these fixed maturity securities, and it is not more likely than not that these securities will be sold before recovering their cost basis.

For all fixed-maturity securities in an unrealized loss position at June 30, 2012, the Company has received all contractual interest payments (and principal if applicable). Based on the continuing receipt of cash flow and the foregoing analyses, management expects continued timely payments of principal and interest and considers the losses to be temporary.

The unrealized loss position associated with the fixed-maturity portfolio was $2.9 million as of June 30, 2012, consisting primarily of corporate bonds and mortgage-backed securities of $2.3 million. The total fixed-maturity portfolio of gross unrealized losses included 228 securities which were, in aggregate, approximately 1.1% below amortized cost. Of the 228 fixed maturity investments identified, 42 have been in an unrealized loss position for more than 12 months. The total unrealized loss on these investments at June 30, 2012 was $0.8 million. Management does not consider these investments to be other-than-temporarily impaired.

For common stocks, there were 15 securities in a loss position at June 30, 2012 totaling $3.2 million. Management evaluated the financial condition of the common stock issuers, the severity and duration of the impairment, and our ability and intent to hold to recovery. The evaluation consisted of a detailed review, including but not limited to some or all of the following factors for each security: the current S&P rating, analysts’ reports, past earnings trends and analysts’ earnings expectations for the next 12 months, liquidity, near-term financing risk, and whether the company was currently paying dividends on its equity securities. Management does not consider these investments to be other-than-temporarily impaired.

The following table presents information regarding invested assets that were in an unrealized loss position at June 30, 2012 and December 31, 2011 by amount of time in a continuous unrealized loss position:

13

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

	Less than 12 Months					12 Months or Longer					Total
($ in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Aggregate Fair Value		Unrealized Losses
June 30, 2012
U.S. Treasury securities	$	65,714	$	(7	)	$	-	$	-		$	65,714	$	(7	)
Municipal bonds		41,456		(431	)		990		(4	)		42,446		(435	)
Corporate and other bonds
Finance		22,784		(169	)		752		(46	)		23,536		(215	)
Industrial		46,687		(990	)		6,465		(191	)		53,152		(1,181	)
Utilities		3,425		(24	)		394		(2	)		3,819		(26	)
Commercial mortgage-backed securities		16,036		(138	)		16,053		(438	)		32,089		(576	)
Residential mortgage-backed securities
Agency backed		21,134		(134	)		21		-			21,155		(134	)
Non-agency backed		6		(3	)		2,666		(121	)		2,672		(124	)
Asset-backed securities		12,333		(117	)		1,680		(45	)		14,013		(162	)
Total fixed-maturity securities		229,575		(2,013	)		29,021		(847	)		258,596		(2,860	)
Preferred stocks		6,263		(45	)		6,019		(112	)		12,282		(157	)
Common stocks		39,868		(3,183	)		913		(55	)		40,781		(3,238	)
Total, June 30, 2012	$	275,706	$	(5,241	)	$	35,953	$	(1,014	)	$	311,659	$	(6,255	)
Tower	$	254,853	$	(4,959	)	$	34,232	$	(959	)	$	289,085	$	(5,918	)
Reciprocal Exchanges		20,853		(282	)		1,721		(55	)		22,574		(337	)
Total, June 30, 2012	$	275,706	$	(5,241	)	$	35,953	$	(1,014	)	$	311,659	$	(6,255	)
December 31, 2011
U.S. Treasury securities	$	92,001	$	(13	)	$	-	$	-		$	92,001	$	(13	)
Municipal bonds		13,449		(255	)		-		-			13,449		(255	)
Corporate and other bonds
Finance		138,986		(4,610	)		251		(5	)		139,237		(4,615	)
Industrial		57,357		(2,141	)		3,519		(145	)		60,876		(2,286	)
Utilities		1,902		(61	)		-		-			1,902		(61	)
Commercial mortgage-backed securities		26,130		(2,564	)		-		-			26,130		(2,564	)
Residential mortgage-backed securities
Agency backed		19		(1	)		12		-			31		(1	)
Non-agency backed		13,294		(318	)		4,609		(583	)		17,903		(901	)
Asset-backed securities		29,624		(647	)		610		(9	)		30,234		(656	)
Total fixed-maturity securities		372,762		(10,610	)		9,001		(742	)		381,763		(11,352	)
Preferred stocks		17,773		(644	)		1,303		(246	)		19,076		(890	)
Common stocks		44,132		(4,194	)		-		-			44,132		(4,194	)
Total, December 31, 2011	$	434,667	$	(15,448	)	$	10,304	$	(988	)	$	444,971	$	(16,436	)
Tower	$	398,989	$	(14,160	)	$	8,264	$	(915	)	$	407,253	$	(15,075	)
Reciprocal Exchanges		35,678		(1,288	)		2,040		(73	)		37,718		(1,361	)
Total, December 31, 2011	$	434,667	$	(15,448	)	$	10,304	$	(988	)	$	444,971	$	(16,436	)

Management evaluated the severity of the impairment in relation to the carrying values for the securities referred to above and considered all relevant factors in assessing whether the loss was other-than-temporary. Management does not intend to sell its fixed-maturity securities, and it is not more likely than not that fixed maturity and equity securities will be sold until there is a recovery of fair value to the original cost basis; which may be at maturity for the fixed income securities.

Fixed-Maturity Investment—Time to Maturity

The following table shows the amortized cost and fair value of the fixed-maturity portfolio by contractual time to maturity at June 30, 2012 and December 31, 2011:

14

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

	Tower				Reciprocal Exchanges				Total
($ in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
June 30, 2012
Remaining Time to Maturity
Less than one year	$	41,638	$	42,094	$	2,000	$	2,080	$	43,638	$	44,174
One to five years		413,347		429,544		30,452		31,722		443,799		461,266
Five to ten years		536,091		572,698		64,358		68,066		600,449		640,764
More than 10 years		434,622		468,693		99,816		106,020		534,438		574,713
Mortgage and asset-backed securities		511,476		547,773		84,217		91,284		595,693		639,057
Total, June 30, 2012	$	1,937,174	$	2,060,802	$	280,843	$	299,172	$	2,218,017	$	2,359,974
December 31, 2011
Remaining Time to Maturity
Less than one year	$	40,201	$	40,529	$	44,238	$	44,942	$	84,439	$	85,471
One to five years		479,721		491,904		81,566		83,743		561,287		575,647
Five to ten years		563,830		593,838		21,522		22,797		585,352		616,635
More than 10 years		427,357		458,536		48,818		51,480		476,175		510,016
Mortgage and asset-backed securities		535,823		568,813		92,036		97,092		627,859		665,905
Total, December 31, 2011	$	2,046,932	$	2,153,620	$	288,180	$	300,054	$	2,335,112	$	2,453,674

Other Invested Assets

The following table shows the composition of the other invested assets as of June 30, 2012 and December 31, 2011:

($ in thousands)	June 30, 2012		December 31, 2011
Limited partnerships, equity method	$	19,279	$	12,459
Real estate, amortized cost		8,054		6,888
Securities reported under the fair value option		25,000		25,000
Total	$	52,333	$	44,347

In December 2011, the Company purchased two securities for which it elected the fair value option. This election was made to simplify the accounting for these instruments which contain embedded derivatives and other features.

The fair value of the limited partnerships in the table above approximates their carrying value under the equity method of accounting. The significant inputs used to determine fair value of these limited partnerships are considered Level 3 pursuant to the fair value hierarchy. See “Note 5 – Fair Value Measurements” below. As of June 30, 2012, the Company had future funding commitments of $25.9 million to these limited partnerships.

15

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 5—Fair Value Measurements

GAAP establishes a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets or liabilities fall within different levels of the hierarchy, the classification is based on the lowest level input that is significant to the fair value measurement of the asset or liability. Classification of assets and liabilities within the hierarchy considers the markets in which the assets and liabilities are traded, including during periods of market disruption, and the reliability and transparency of the assumptions used to determine fair value. The hierarchy requires the use of observable market data when available. The levels of the hierarchy are as follows:

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

Level 2 — Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs. Included are investments in U.S. Treasury and Agency securities and, together with municipal bonds, corporate debt securities, commercial mortgages, residential mortgage-backed securities and asset-backed securities. Additionally, interest-rate swap contracts utilize Level 2 inputs in deriving fair values.

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

The availability of observable inputs varies and is affected by a wide variety of factors. When the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment. The degree of judgment exercised by management in determining fair value is greatest for investments categorized as Level 3. For investments in this category, management considers prices and inputs that are current as of the measurement date. In periods of market dislocation, as characterized by current market conditions, the ability to observe stable prices and inputs may be reduced for many instruments. This condition could cause a security to be reclassified between levels.

As at June 30, 2012 and December 31, 2011, the Company’s financial instruments carried at fair value are allocated among levels as follows:

16

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

($ in thousands)	Level 1		Level 2			Level 3		Total
June 30, 2012
Fixed-maturity securities
U.S. Treasury securities	$	-	$	122,367		$	-	$	122,367
U.S. Agency securities		-		81,282			-		81,282
Municipal bonds		-		796,377			-		796,377
Corporate and other bonds		-		720,890			-		720,890
Commercial mortgage-backed securities		-		250,425			-		250,425
Residential mortgage-backed securities
Agency		-		328,273			-		328,273
Non-agency		-		18,124			-		18,124
Asset-backed securities		-		42,236			-		42,236
Total fixed-maturities		-		2,359,974			-		2,359,974
Equity securities		136,393		-			-		136,393
Total investments at fair value		136,393		2,359,974			-		2,496,367
Other invested assets (1)		-		-			25,000		25,000
Other liabilities									-
Interest rate swap contracts		-		(8,775	)		-		(8,775	)
Foreign currency forward contract		-		(2,042	)		-		(2,042	)
Debt and equity securities sold, not yet purchased		-		(17,506	)		-		(17,506	)
Total, June 30, 2012	$	136,393	$	2,331,651		$	25,000	$	2,493,044
Tower	$	128,490	$	2,032,479		$	25,000	$	2,185,969
Reciprocal Exchanges		7,903		299,172			-		307,075
Total, June 30, 2012	$	136,393	$	2,331,651		$	25,000	$	2,493,044
December 31, 2011
Fixed-maturity securities
U.S. Treasury securities	$	-	$	156,142		$	-	$	156,142
U.S. Agency securities		-		117,190			-		117,190
Municipal bonds		-		736,714			-		736,714
Corporate and other bonds		-		777,723			-		777,723
Commercial mortgage-backed securities		-		253,167			-		253,167
Residential mortgage-backed securities
Agency		-		320,276			-		320,276
Non-agency		-		31,609			-		31,609
Asset-backed securities		-		60,853			-		60,853
Total fixed-maturities		-		2,453,674			-		2,453,674
Equity securities		89,345		-			-		89,345
Total investments		89,345		2,453,674			-		2,543,019
Other invested assets (2)		-		-			25,000		25,000
Interest rate swap contracts		-		(7,384	)		-		(7,384	)
Total, December 31, 2011	$	89,345	$	2,446,290		$	25,000	$	2,560,635
Tower	$	87,479	$	2,146,236		$	25,000	$	2,258,715
Reciprocal Exchanges		1,866		300,054			-		301,920
Total, December 31, 2011	$	89,345	$	2,446,290		$	25,000	$	2,560,635

(1) $25.0 million of the Other invested assets balance at June 30, 2012 is reported at fair value. $27.3 million of Other invested assets is reported under the equity method of accounting or at amortized cost.

(2) $25.0 million of the Other invested assets balance at December 31, 2011 is reported at fair value. $19.3 million of Other invested assets is reported under the equity method of accounting or at amortized cost.

The fair values of the fixed-maturity, equity securities and short-term investments are determined by management after taking into consideration available sources of data. Various factors are considered that may indicate an inactive market, including levels of activity, source and timeliness of quotes, abnormal liquidity risk premiums, unusually wide bid-ask spreads, and lack of correlation between fair value of assets and relevant indices. If management believes that the price provided from the pricing source is distressed, management will use a valuation method that reflects an orderly transaction between market participants, generally a discounted cash flow method that incorporates relevant interest rate, risk and liquidity factors.

17

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Substantially all of the portfolio valuations at June 30, 2012 classified as Level 1 or Level 2 in the above table is priced by utilizing the services of several independent pricing services that provide the Company with a price quote for each security. There were no adjustments made to the prices obtained from the independent pricing sources and dealers on securities classified as Level 1 or Level 2.

In 2012, there were no transfers of investments between Level 1 and Level 2 or between Level 2 and Level 3.

The fair values of the interest rate swaps were derived by using an industry standard swap valuation model with market based inputs for swaps having similar characteristics.

The fair value of the foreign currency forward contract was derived by multiplying the notional amount of the contract by the difference between the forward exchange rate at the anticipated settlement date of the contract and the spot rate as of June 30, 2012. The Company entered into the foreign currency forward contract as protection against currency risk on its expected purchase of 10.7 percent of Canopius Group, Ltd. This purchase is expected to close in the third quarter 2012 with the majority of purchase price denominated in British pound sterling. The Company recorded in net realized gains (losses) a $2.0 million loss in fair value on this contract.

The fair values of the debt and equity securities sold, not yet purchased were derived by using quoted prices for similar securities in active markets. These instruments resulted in net realized gains (losses) of $(2.6) million and $(0.3) million for the three and six months ended June 30, 2012, respectively.

In December 2011, the Company purchased two securities which are reported in other invested assets and have been classified as Level 3 of the fair value hierarchy. Management utilizes a discounted flow analysis to derive the fair values. For one security, which matures in 2015 and whose cash flows are supported by underlying short-term loans, the significant unobservable inputs include the underlying short-term loans’ probability of default and loss severity, and a discount for the security’s lack of marketability. Increases in the probability of default and loss severity assumptions (which generally move directionally with each other) would have the effect of decreasing the fair value of this security. The Company obtains credit ratings on the underlying short-term loans quarterly and considers these ratings when updating its assumptions. The second security is an equity instrument which entitles the Company to residual interests of a finite life special purpose vehicle. The significant unobservable inputs include the estimated losses to be incurred by the vehicle and the equity instrument’s lack of marketability. The Company obtains quarterly financial data from the vehicle and evaluates the estimated incurred loss figure. An increase in the vehicle’s estimated incurred losses would have the effect of decreasing the instrument’s fair value.

Management is responsible for the determination of the value of the investments carried at fair value and the supporting methodologies and assumptions. Management has reviewed the pricing techniques and methodologies of the independent pricing sources and believes that their policies adequately consider market activity, either based on specific transactions for the issue valued or based on modeling of securities with similar credit quality, duration, yield and structure that were recently traded. Management monitors security-specific valuation trends and discusses material changes or the absence of expected changes with the portfolio managers to understand the underlying factors and inputs and to validate the reasonableness of pricing. Management also back-tests the prices on numerous sales of securities during the year to validate the previous pricing provided as well as utilizes other pricing sources to validate the pricing provided by our primary provider of the majority of the non-U.S. Treasury securities and non-agency securities included in Level 2.

The following table summarizes changes in Level 3 assets measured at fair value for the three months ended June 30, 2012 and 2011 for Tower (the Reciprocal Exchanges have no Level 3 assets):

	Three Months Ended June 30,
($ in thousands)	2012		2011
Beginning balance, April 1,	$	24,914	$	-
Total gains (losses)-realized / unrealized
Included in net income		86		-
Included in other comprehensive income (loss)		-		-
Purchases, issuances and settlements		-		-
Net transfers into (out of) Level 3		-		-
Ending balance, June 30,	$	25,000	$	-

The following table summarizes the changes in Level 3 assets measured at fair value for the six months ended June 30, 2012 and 2011:

18

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

	Six Months Ended June 30,
($ in thousands)	2012		2011
Beginning balance, January 1	$	25,000	$	2,058
Total gains (losses)-realized / unrealized
Included in net income		-		(1,067	)
Included in other comprehensive income (loss)		-		-
Purchases, issuances and settlements		-		-
Net transfers into (out of) Level 3		-		(991	)
Ending balance, June 30,	$	25,000	$	-

Note 6 – Loss and Loss Adjustment Expense

The following table provides a reconciliation of the beginning and ending consolidated balances for unpaid losses and loss adjustment expense (“LAE”) for the six months ended June 30, 2012 and 2011:

	Six Months Ended June 30,
	2012									2011
($ in thousands)	Tower			Reciprocal Exchanges			Total			Tower			Reciprocal Exchanges			Total
Balance at January 1,	$	1,495,839		$	136,274		$	1,632,113		$	1,439,106		$	171,315		$	1,610,421
Less reinsurance recoverables on unpaid losses		(308,411	)		(11,253	)		(319,664	)		(271,298	)		(11,384	)		(282,682	)
		1,187,428			125,021			1,312,449			1,167,808			159,931			1,327,739
Incurred related to:
Current year		487,837			57,430			545,267			422,866			61,404			484,270
Prior years unfavorable/(favorable) development		78,254			(6,253	)		72,001			7,551			(10,799	)		(3,248	)
Total incurred		566,091			51,177			617,268			430,417			50,605			481,022
Paid related to:
Current year		153,792			31,369			185,161			173,061			30,347			203,408
Prior years		313,400			30,943			344,343			271,247			28,285			299,532
Total paid		467,192			62,312			529,504			444,308			58,632			502,940
Net balance at end of period		1,286,327			113,886			1,400,213			1,153,917			151,904			1,305,821
Add reinsurance recoverables on unpaid losses		281,959			19,661			301,620			263,619			15,259			278,878
Balance at June 30,	$	1,568,286		$	133,547		$	1,701,833		$	1,417,536		$	167,163		$	1,584,699

Incurred losses and LAE for the six months ended June 30, 2012 attributable to events of prior years were $72.0 million. Excluding the Reciprocal Exchanges, the incurred losses and LAE from prior accident years were $78.3 million, comprised of net adverse loss development of $74.0 million in Commercial Insurance and $4.3 million in Personal Insurance for the six months ended June 30, 2012. During the quarter, the Company performed a comprehensive reserve study to respond to higher than expected reported losses observed in the first and second quarters of 2012, resulting in increases in ultimate loss estimates primarily for accident years 2009, 2010 and 2011 within Commercial Insurance. The Commercial Insurance adverse development of $62 million during the quarter is comprised of approximately $39 million in Workers Compensation, $22 million in Commercial Automobile Liability, and smaller changes in other lines. Approximately $51 million of the adverse development pertains to various programs, many of which have been terminated.

The Reciprocal Exchanges reported favorable development on prior accident years of $6.3 million during the six months ended June 30, 2012.

The consolidated net loss ratio, which includes the Reciprocal Exchanges, was 70.1% and 62.2% for the six months ended June 30, 2012 and 2011, respectively. Excluding the Reciprocal Exchanges, the net loss ratio was 71.1% and 63.5% for the six months ended June 30, 2012 and 2011, respectively. The Reciprocal Exchanges’ net loss ratio was 60.9% and 52.7% for the six months ended June 30, 2012 and 2011, respectively.

Prior year development is based upon numerous estimates by line of business and accident year. No additional premiums or return premiums have been accrued as a result of the prior year effects, although we recorded changes in ceding commissions on reinsurance treaties that we purchase where commissions are adjustable based on loss experience. The Company’s management continually monitors claims activity to assess the appropriateness of carried case and incurred but not reported (“IBNR”) reserves, giving consideration to Company and industry trends.

19

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

As of June 30, 2012, unamortized reserve for risk premium of $3.6 million and $1.3 million related to Tower and the Reciprocal Exchanges, respectively, were included in unpaid losses and LAE. As of December 31, 2011, unamortized reserve for risk premium of $7.2 million and $2.5 million related to Tower and the Reciprocal Exchanges, respectively, were included in unpaid losses and LAE.

Loss and loss adjustment expense reserves. The reserving process for loss and LAE reserves provides for the Company’s best estimate at a particular point in time of the ultimate unpaid cost of all losses and LAE incurred, including settlement and administration of losses, and is based on facts and circumstances then known and including losses that have been incurred but not yet reported. The process includes using actuarial methodologies to assist in establishing these estimates, judgments relative to estimates of future claims severity and frequency, the length of time before losses will develop to their ultimate level and the changes in the law and other external factors that are often beyond the Company’s control. The actuarial methods include loss ratio projections, loss development projections, and Bornhuetter-Ferguson (“B-F”) method projections. The actuaries’ best estimates are the result of numerous analyses made by line of business, accident year, and for loss, allocated loss adjustment expense (“ALAE”) and unallocated loss adjustment expense (“ULAE”), and the actuarial analyses also consider input from underwriting and claims managements about the nature of the underlying risks, claims and other trends in the business.

Management sets the Company’s carried reserves based upon the actuaries’ best estimates and other considerations, and the difference between the Company’s estimates of loss and LAE and reported losses is recorded in IBNR. The amount of loss and LAE reserves for reported claims is based primarily upon a case-by-case evaluation of coverage, liability, injury severity, and any other information considered pertinent to estimating the exposure presented by the claim. The amounts of loss and LAE reserves for unreported claims are determined using historical information by line of insurance as adjusted to current conditions.

Included in the reserves for the loss and LAE reserves at June 30, 2012 and December 31, 2011 is $8.6 million and $3.7 million, respectively, of tabular reserve discount for workers’ compensation and excess workers’ compensation claims.

The Company has long defended third-party liability claims utilizing attorneys who are employees of the Company and has realized significant savings in defense costs as compared with claims defended by outside attorneys. For third-party liability claims defended by employed attorneys, the Company allocates to each of these litigated claims 50% of the fixed fee when litigation on a particular claim begins and 50% of the fee when the litigation is closed. The standard fee is calculated based upon the projected number of litigated claims and expected closing patterns at the beginning of each year, as well as the projected budget for the Company’s in-house attorneys, and these amounts are subject to adjustment each quarter based upon actual experience. Because of the cost advantage for ALAE utilizing employed attorneys, the Company has been increasing the number of employed attorneys. Currently, the Company is handling over 85% of new litigated third-party claims utilizing attorneys who are employees of the Company.

Due to the inherent uncertainty associated with the reserving process, the ultimate liability for losses and LAE may differ, perhaps substantially, from the Company’s estimate. Loss and LAE reserve estimates are regularly reviewed and updated and any resulting adjustments are included in the current year’s results. Loss and LAE reserves are closely monitored and are recomputed periodically using the most recent information on reported claims and a variety of statistical techniques. Specifically, on at least a quarterly basis, the Company reviews, by line of business, existing reserves, new claims, changes to existing case reserves and paid losses with respect to the current and prior accident years.

The Company segregates data for estimating loss and LAE reserves into lines of business. Property lines include Fire, Homeowners, CMP Property, Multi-Family Dwellings, Fire and Allied Lines, Inland Marine and Automobile Physical Damage Casualty lines include CMP Liability, Other Liability, Workers’ Compensation, Commercial Automobile Liability, and Personal Automobile Liability. The Company also analyzes and records loss and LAE reserves separately for Commercial Insurance and Personal Insurance.

Two key assumptions that materially impact the estimate of loss and LAE reserves are the loss ratio estimate for the current accident year and the loss development factor selections for all accident years. The loss ratio estimate for the current accident year is selected after reviewing historical accident year loss ratios adjusted for rate changes, trend, and mix of business. As an accident year matures, the ultimate loss and LAE is estimated by giving more weight to reported loss and LAE by utilizing the B-F method or loss development methods.

Note 7—Stockholders’ Equity

Shares of Common Stock Issued

For the three and six months ended June 30, 2012, no new common shares were issued as the result of employee stock option exercises. For the three and six months ended June 30, 2012, 0 and 321,178 new common shares, respectively, were issued as the

20

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

result of restricted stock grants. For the three and six months ended June 30, 2011, 7,612 and 31,112 new common shares, respectively, were issued as the result of employee stock option exercises and 7,498 and 621,000 new common shares, respectively, were issued as the result of restricted stock grants.

For the three and six months ended June 30, 2012, 495 and 97,356 shares, respectively, of common stock were purchased from employees in connection with the vesting of restricted stock issued under the 2004 Long Term Equity Compensation Plan (the “Plan”). For the three and six months ended June 30, 2011, 10,897 and 69,315 shares, respectively, of common stock were purchased from employees in connection with the vesting of restricted stock issued under the Plan. The shares were withheld at the direction of employees as permitted under the Plan in order to pay the expected amount of tax liability owed by the employees from the vesting of those shares. In addition, for the three and six months ended June 30, 2012, 4,432 and 8,715 shares, respectively, of common stock were surrendered as a result of restricted stock forfeitures. For the three and six months ended June 30, 2011, 1,596 and 2,914 shares, respectively, of common stock were surrendered as a result of restricted stock forfeitures.

Share Repurchase Program

The Board of Directors of Tower approved a $100 million share repurchase program on March 3, 2011. This authorization is in addition to the $100 million share repurchase program approved on February 26, 2010. Purchases under both programs can be made from time to time in the open market or in privately negotiated transactions in accordance with applicable laws and regulations. The new share repurchase program will expire on March 4, 2013. In the six months ended June 30, 2012 and 2011, 1.1 million and 0.8 million shares, respectively, of common stock were purchased under these programs at an aggregate consideration of $21.0 million and $20.0 million, respectively. As of June 30, 2012, the original $100 million share purchase program had been fully utilized and $26.4 million remained available for future share repurchases under the new program.

Dividends Declared

Dividends on common stock of $7.3 million and $7.7 million for the three months ended June 30, 2012 and 2011, respectively, were declared. Dividends on common stock of $14.7 million and $12.9 million for the six months ended June 30, 2012 and 2011, respectively, were declared.

On August 1, 2012, the Board of Directors approved a quarterly dividend of $0.1875 per share payable on September 21, 2012 to stockholders of record as of September 10, 2012.

Note 8—Debt

The Company’s borrowings consisted of the following at June 30, 2012 and December 31, 2011:

	June 30, 2012				December 31, 2011
($ in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Credit facility	$	70,000	$	70,000	$	50,000	$	50,000
Convertible senior notes		143,233		157,875		141,843		150,743
Subordinated debentures		235,058		236,478		235,058		234,550
Total	$	448,291	$	464,353	$	426,901	$	435,293

The fair value of the convertible senior notes in the table above are determined utilizing pricing for similar instruments in active markets and the fair value of the subordinated debentures in the table above are based on discounted cash flow analysis. The significant inputs used for fair value are considered Level 2 in the fair value hierarchy.

Total interest expense incurred, including interest expense on the funds held liabilities was $7.9 million and $8.3 million for the three months ended June 30, 2012 and 2011, respectively, and was $15.5 million and $16.4 million for the six months ended June 30, 2012 and 2011, respectively.

Subordinated Debentures

The Company and its wholly-owned subsidiaries have issued trust preferred securities through wholly-owned Delaware statutory business trusts. The trusts use the proceeds of the sale of the trust preferred securities and common securities that the Company acquired from the trusts to purchase junior subordinated debentures from the Company with terms that match the terms of the trust preferred securities. Interest on the junior subordinated debentures and the trust preferred securities is payable quarterly. In

21

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

some cases, the interest rate is fixed for an initial period of five years after issuance and then floats with changes in the London Interbank Offered Rate (“LIBOR”) and in other cases the interest rate floats with LIBOR without any initial fixed-rate period. As of June 30, 2012, The Company had outstanding par of $235.1 million relating to the subordinated debentures.

Interest Rate Swaps

In October 2010, the Company entered into interest rate swap contracts (the “Swaps”) with $190 million notional value to manage interest costs and cash flows associated with the floating rate subordinated debentures. The Swaps have terms of five years. The Swaps convert the subordinated debentures to rates ranging from 5.1% to 5.9%. As of June 30, 2012 and December 31, 2011, the Swaps had a fair value of $8.8 million and $7.4 million in a liability position, respectively, and are reported in Other Liabilities.

The Company has designated and accounts for the Swaps as cash flow hedges. The Swaps are considered to have no ineffectiveness and changes in their fair values will be recorded in Accumulated other comprehensive income (“AOCI”), net of tax. For the six months ended June 30, 2012 and 2011, $0.8 million and $0.1 million, respectively, was reclassified from AOCI to interest expense for the effects of the hedges. As of June 30, 2012, the Company had collateral on deposit with the counterparty amounting to $8.7 million pursuant to a Credit Support Annex.

Credit Facility

On February 15, 2012, the Company amended its $125.0 million credit facility by increasing borrowing capacity up to $150 million, extending the maturity date to February 15, 2016, and resetting borrowing fees to more favorable current market terms. The credit facility is used for general corporate purposes. The original credit facility was entered into on May 14, 2010 and had an expiration date of May 14, 2013.

The Company may request that the facility be increased by an amount not to exceed $50 million. The credit facility contains customary covenants for facilities of this type, including restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of assets, and requirements to maintain certain consolidated net worth, debt to capitalization ratios, minimum risk-based capital and minimum statutory surplus. The credit facility also provides for customary events of default, including failure to pay principal when due, failure to pay interest or fees within three days after becoming due, failure to comply with covenants, any representation or warranty made by the Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting the Company and its material subsidiaries, the occurrence of certain material judgments, or a change in control of the Company, and upon an event of default, the administrative agent (subject to the consent of the requisite percentage of the lenders) may immediately terminate the obligations to make loans and to issue letters of credit, declare the Company’s obligations under the credit facility to become immediately due and payable, and require the Company to deposit in a collateral account cash collateral with a value equal to the then outstanding amount of the aggregate face amount of any outstanding letters of credit. The Company was in compliance with all covenants under the credit facility at June 30, 2012.

The Company had $70.0 million and $50.0 million outstanding as of June 30, 2012 and December 31, 2011, respectively. The weighted average interest rate on the amount outstanding as of June 30, 2012 was 2.0%.

Convertible Senior Notes

In September 2010, the Company issued $150.0 million principal amount of 5.0% convertible senior notes (“the Notes”), which mature on September 15, 2014. Interest on the Notes is payable semi-annually in arrears on March 15 and September 15 of each year, commencing March 15, 2011. Holders may convert their Notes into cash or common shares, at the Company’s option, at any time on or after March 15, 2014 or earlier under certain circumstances determined by: (i) the market price of the Company’s stock, (ii) the trading price of the Notes, or (iii) the occurrence of specified corporate transactions. Upon conversion, the Company intends to settle its obligation either entirely or partially in cash. The conversion rate at June 30, 2012 is 36.9105 shares of common stock per $1,000 principal amount of the Notes (equivalent to a conversion price of $27.09 per share), subject to adjustment upon the occurrence of certain events. Additionally, in the event of a fundamental change, the holders may require the Company to repurchase the Notes for a cash price equal to 100% of the principal plus any accrued and unpaid interest.

The proceeds from the issuance of the Notes were allocated to the liability component and the embedded conversion option, or equity component. The equity component was reported as an adjustment to paid-in-capital, net of tax, and is reflected as an original issue discount (“OID”). The OID of $11.5 million and $5.0 million of deferred origination costs relating to the liability component are being amortized into interest expense over the term of the Notes. After considering the contractual interest payments and amortization of the original issue discount, the Notes’ effective interest rate is 7.2%. Transaction costs of $0.4 million associated with the equity component were netted with the equity component in paid-in-capital. Interest expense,

22

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

including amortization of deferred origination costs, recognized on the Notes was $5.7 million for the six months ended June 30, 2012.

The following table shows the amounts recorded for the Notes as of June 30, 2012 and December 31, 2011:

($ in thousands)	June 30, 2012			December 31, 2011
Liability component
Outstanding principal	$	150,000		$	150,000
Unamortized OID		(6,767	)		(8,157	)
Liability component		143,233			141,843
Equity component, net of tax	$	7,469		$	7,469

To the extent the market value per share of the Company’s common stock exceeds the conversion price, the Company will use the “treasury stock” method in calculating the dilutive effect on earnings per share.

Convertible Senior Notes Hedge and Warrant Transactions

In connection with the offering of the Notes, the Company also entered into convertible senior notes hedge transactions (the “Note Hedges” or “purchased call options”) and warrant transactions (the “Warrants”) with respect to its common stock with financial institutions. The Note Hedges and Warrants are intended generally to reduce the potential dilution of the Company’s common stock and to offset potential cash payments in excess of the principal of the Notes upon conversion. The Note Hedges and Warrants are separate transactions, entered into by the Company with the financial institutions, and are not part of the terms of the Notes.

In September 2010, the Company paid $15.3 million for the Note Hedges which cover 5.5 million shares of common stock at a strike price of $27.09 per share at June 30, 2012, subject to anti-dilution provisions, and are exercisable upon conversion of the Notes. The Note Hedges have been accounted for as an adjustment to the Company’s paid-in-capital, net of deferred taxes.

In September 2010, the Company received $3.8 million for Warrants sold to the financial institutions. The Warrants provide for the acquisition of 5.5 million shares of common stock at a strike price of $32.94 per share at June 30, 2012, subject to anti-dilution adjustments. The Warrants have been accounted for as an adjustment to the Company’s paid-in-capital.

To the extent the Company’s common stock price is above $27.09 but below the Warrant strike price of $32.94, there is no dilutive effect to common stockholders’ equity because the Note Hedge offsets any shares to be issued under the Notes. If the market value per share of the Company’s common stock exceeds the strike price of the Warrants, the Warrants will have a dilutive effect on the Company’s net income per share.

Note 9—Stock Based Compensation

2004 Long-Term Equity Compensation Plan

In 2004, the Company’s Board of Directors adopted and its stockholders approved a long-term incentive plan (the “Plan”).

The plan provides for the granting of non-qualified stock options, incentive stock options (within the meaning of Section 422 of the Code), stock appreciation rights (“SARs”), restricted stock and restricted stock unit awards, performance shares and other cash or share-based awards.

Restricted Stock

The following table provides an analysis of restricted stock activity for the six months ended June 30, 2012 and 2011:

23

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

	Six Months Ended June 30,
	2012					2011
	Number of Shares			Weighted Average Grant Date Fair Value		Number of Shares			Weighted Average Grant Date Fair Value
Outstanding, January 1		988,607		$	23.44		591,675		$	23.10
Granted		321,178			23.08		621,000			23.90
Vested		(388,115	)		23.87		(227,580	)		23.59
Forfeitures		(8,715	)		23.60		(2,914	)		22.88
Outstanding, June 30,		912,955		$	23.09		982,181		$	23.49

Stock Options

The following table provides an analysis of stock option activity for the six months ended June 30, 2012 and 2011:

	Six Months Ended June 30,
	2012				2011
	Number of Shares		Average     Exercise     Price		Number of Shares			Average Exercise Price
Outstanding, January 1		855,530	$	20.14		917,155		$	19.62
Exercised		-		-		(31,112	)		10.99
Forfeitures and expirations		-		-		(22,981	)		26.48
Outstanding, June 30		855,530	$	20.14		863,062		$	20.16
Exercisable, June 30		855,530	$	20.14		808,115		$	20.26

Stock Based Compensation Expense

The following table provides an analysis of stock based compensation expense for the six months ended June 30, 2012 and 2011:

	Six Months Ended June 30,
($ in thousands)	2012		2011
Restricted stock
Expense, net of tax	$	896	$	3,035
Value of shares vested		8,576		5,391
Value of unvested shares		19,257		23,396
Stock options
Intrinsic value of outstanding options		1,632		3,715
Intrinsic value of vested outstanding options		1,632		3,432
Unrecognized compensation expense
Non-vested stock options, net of tax		-		42
Unvested restricted stock, net of tax		12,791		19,150
Weighted average years over which expense will be recognized		2.5		2.6

Note 10—Earnings (Loss) per Share

In accordance with the two-class method, undistributed net earnings (net income less dividends declared during the period) are allocated to both common stock and unvested share-based payment awards (“unvested restricted stock”). Because the common shareholders and unvested restricted stock holders share in dividends on a 1:1 basis, the earnings per share on undistributed earnings is equivalent. Undistributed earnings are allocated to all outstanding share-based payment awards, including those for which the requisite service period is not expected to be rendered.

The following table shows the computation of the earnings per share pursuant to the two-class method:

24

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
(in thousands, except per share amounts)	2012			2011		2012			2011
Numerator
Net income (loss) attributable to Tower Group, Inc.	$	(15,113	)	$	24,121	$	5,521		$	49,806
Denominator
Weighted average common shares outstanding		39,117			41,303		39,206			41,404
Effect of dilutive securities:
Stock options		-			88		62			111
Other		-			4		-			3
Weighted average common and potential dilutive shares outstanding		39,117			41,395		39,268			41,518
Earnings (loss) per share attributable to Tower stockholders - basic
Common stock:
Distributed earnings	$	0.19		$	0.19	$	0.38		$	0.32
Undistributed earnings		(0.58	)		0.39		(0.24	)		0.88
Total		(0.39	)		0.58		0.14			1.20
Earnings (loss) per share attributable to Tower stockholders - diluted	$	(0.39	)	$	0.58	$	0.14		$	1.20

The computation of diluted earnings per share excludes outstanding options and other common stock equivalents in periods where inclusion of such potential common stock instruments would be anti-dilutive. For the three and six months ended June 30, 2012 855,500 and, 168,100, respectively, options and other common stock equivalents to purchase Tower shares were excluded from the computation of diluted earnings per share because the exercise price of the options was greater than the average market price. For the three and six months ended June 30, 2011 170,800 and, 170,800, respectively, options and other common stock equivalents to purchase Tower shares were excluded from the computation of diluted earnings per share because the exercise price of the options was greater than the average market price.

25

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 11—Segment Information

The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Annual Report on Form 10-K for the year ended December 31, 2011.

The Personal Insurance segment includes revenues and expenses associated with the Reciprocal Exchanges, including fees paid to Tower for underwriting, claims, investment management and other services provided pursuant to management services agreements with the Reciprocal Exchanges. The Insurance Services segment reports revenues earned by Tower from the Reciprocal Exchanges as management fee income, which is calculated as a percentage of the Reciprocal Exchanges’ gross written premiums. The effects of these management services agreements between Tower and the Reciprocal Exchanges are eliminated in consolidation to derive consolidated net income. However, the management fee income is reported in net income attributable to Tower Group, Inc. and included in basic and diluted earnings per share.

Segment performance is evaluated based on segment profit, which excludes investment income, realized gains and losses, interest expense, income taxes and incidental corporate expenses. Assets, other than intangibles and goodwill, are not allocated to segments because investments and assets other than intangibles and goodwill are considered in total by management for decision-making purposes.

26

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Business segment results are as follows:

	Three Months Ended June  30,						Six Months Ended June  30,
($ in thousands)	2012			2011			2012			2011
Commercial Insurance Segment
Revenues
Premiums earned	$	337,650		$	263,735		$	635,485		$	515,503
Ceding commission revenue		3,894			4,710			3,904			8,728
Policy billing fees		1,390			1,114			2,903			1,878
Total revenues		342,934			269,559			642,292			526,109
Expenses
Loss and loss adjustment expenses		281,209			166,597			482,647			331,087
Underwriting expenses		113,954			86,633			217,750			173,861
Total expenses		395,163			253,230			700,397			504,948
Underwriting profit (loss)	$	(52,229	)	$	16,329		$	(58,105	)	$	21,161
Personal Insurance Segment
Revenues
Premiums earned	$	122,503		$	129,795		$	244,826		$	257,822
Ceding commission revenue		6,186			5,945			11,339			10,108
Policy billing fees		1,610			1,545			3,231			2,959
Total revenues		130,299			137,285			259,396			270,889
Expenses
Loss and loss adjustment expenses		68,566			74,249			134,621			149,935
Underwriting expenses		59,059			59,250			113,457			113,523
Total expenses		127,625			133,499			248,078			263,458
Underwriting profit (loss)	$	2,674		$	3,786		$	11,318		$	7,431
Tower	$	6,481		$	(650	)	$	15,373		$	2,564
Reciprocal Exchanges		(3,807	)		4,436			(4,055	)		4,867
Total underwriting profit (loss)	$	2,674		$	3,786		$	11,318		$	7,431
Insurance Services Segment
Revenues
Management fee income	$	7,965		$	7,704		$	14,827		$	14,399
Other revenue		1,359			(73	)		1,856			529
Total revenues		9,324			7,631			16,683			14,928
Expenses
Other expenses		5,079			4,977			9,542			10,018
Total expenses		5,079			4,977			9,542			10,018
Insurance services pretax income	$	4,245		$	2,654		$	7,141		$	4,910

27

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The following table reconciles revenue by segment to consolidated revenues:

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2012			2011			2012			2011
Commercial insurance segment	$	342,934		$	269,559		$	642,292		$	526,109
Personal insurance segment		130,299			137,285			259,396			270,889
Insurance services segment		9,324			7,631			16,683			14,928
Total segment revenues		482,557			414,475			918,371			811,926
Elimination of management fee income		(7,965	)		(7,704	)		(14,827	)		(14,399	)
Net investment income		31,781			31,798			65,724			64,176
Net realized gains (losses) on investments, including other-than-temporary impairments		(236	)		(2,314	)		3,347			5,046
Consolidated revenues	$	506,137		$	436,255		$	972,615		$	866,749

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

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2012			2011			2012			2011
Commercial insurance segment underwriting profit (loss)	$	(52,229	)	$	16,329		$	(58,105	)	$	21,161
Personal insurance segment underwriting profit		2,674			3,786			11,318			7,431
Insurance services segment pretax income		4,245			2,654			7,141			4,910
Net investment income		31,781			31,798			65,724			64,176
Net realized gains on investments, including other-than-temporary impairments		(236	)		(2,314	)		3,347			5,046
Corporate expenses		(3,159	)		(2,803	)		(6,020	)		(5,898	)
Acquisition-related transaction costs		(720	)		-			(1,982	)		(12	)
Interest expense		(7,902	)		(8,257	)		(15,478	)		(16,357	)
Income before income taxes	$	(25,546	)	$	41,193		$	5,945		$	80,457

Note 12—Contingencies

Legal Proceedings

On May 28, 2009, Munich Reinsurance America, Inc. (“Munich”) commenced an action against Tower Insurance Company of New York (“TICNY”), a wholly-owned subsidiary of Tower Group, Inc., in the United States District Court for the District of New Jersey seeking, inter alia, to recover $6.1 million under various retrocessional contracts pursuant to which TICNY reinsures Munich. On June 22, 2009, TICNY filed its answer, in which it, inter alia, asserted two separate counterclaims seeking to recover $2.8 million under various reinsurance contracts pursuant to which Munich reinsures TICNY. (A separate action commenced by Munich against TICNY on June 17, 2009 in the United States District Court for the District of New Jersey seeking a declaratory judgment that Munich is entitled to access to TICNY’s books and records pertaining to various quota share agreements, to which TICNY filed its answer on July 7, 2009, was subsequently dismissed pursuant to the stipulation of the parties on March 17, 2010). The parties have now concluded discovery. On July 15, 2011, TICNY paid $3.3 million to Munich to resolve a portion of the dispute. On December 22, 2011, the court granted partial summary judgment with respect to certain of the claims and defenses in the litigation. On March 23, 2012, the Court ruled that Munich was entitled to approximately $168,000, which was expensed in the first quarter of 2012. Trial has now been set for October 15, 2012. The Company is unable to estimate a possible loss or range of loss.

Note 13—Subsequent Event

As announced on April 25, 2012, Tower agreed to invest approximately $75 million to acquire a 10.7% stake in Canopius Group Limited (“Canopius Group”), a privately owned Lloyd’s insurance holding company domiciled in Guernsey, Channel Islands, subject to the closing of Canopius Group’s acquisition of Omega Insurance Holdings Limited (“Omega”). Tower also entered into an agreement dated April 25, 2012 (the “Master Transaction Agreement”) under which Canopius Group committed to assist Tower with the establishment of a presence at Lloyd’s of London (subject to required approvals) and granted Tower an option (the “Option”) to combine with Canopius Holdings Bermuda Limited (“Canopius Bermuda”). On July 30, 2012, Tower

28

Tower Group, Inc.

Notes to Consolidated Financial Statements (Unaudited)

announced that it has exercised the Option and executed an Agreement and Plan of Merger (the “Merger Agreement”) with Canopius Bermuda pursuant to which Canopius Bermuda will acquire all of Tower’s common stock; under applicable accounting principles Tower will be regarded as the acquiring entity. Tower paid Canopius Group a fee of $1,000,000 to exercise the Option.

Under the Merger Agreement, Tower stockholders will receive, in exchange for each share of Tower’s common stock, (1) a certain number of Canopius Bermuda shares equal to a Stock Conversion Number (defined below) and (2) $ 1.25 in cash. Canopius Group expects to sell its shares in Canopius Bermuda prior to the consummation of the merger in a private placement of those shares (the “Canopius Secondary Offering”) to third party investors. The Stock Conversion Number will equal the quotient obtained by dividing (X) the price per share of Tower common stock (reduced by the $1.25 per share that Tower shareholders will be paid in the merger) at the market close on the date of the pricing of the Canopius Secondary Offering by (Y) the Adjusted Canopius Bermuda Price Per Share (as defined in the Merger Agreement).

The Adjusted Canopius Bermuda Price Per Share will reflect Canopius Bermuda’s net tangible asset value at the closing after giving effect to a restructuring of Canopius Bermuda contemplated by the Master Transaction Agreement (the “Restructuring”), the placement fees paid to the placement agents in the Canopius Secondary Offering, any economic concessions made to the purchasers of the Canopius Bermuda shares in the Canopius Secondary Offering and the value of Canopius Bermuda’s retained business. Because neither the Restructuring nor the Canopius Secondary Offering is likely to occur until the fourth quarter of this year at the earliest, no assurances can be given as to Canopius Bermuda’s net tangible asset value at closing or the Adjusted Canopius Bermuda Price Per Share. Based on information currently available to Tower, Tower believes that Canopius Bermuda’s net tangible asset value should range between $240 million and $290 million. This range could be materially affected by a number of factors, including among others, (1) the fact that the Restructuring has not been implemented and its terms are subject to negotiation between Tower and Canopius Group and (2) Canopius Bermuda’s loss experience and loss development between signing and closing of the merger. Accordingly, the Adjusted Canopius Bermuda Price Per Share, the Stock Conversion Number and, in turn, the number of Canopius Bermuda shares that Tower stockholders will receive in connection with the merger, could be materially affected by such factors and by other factors, including, without limitation, the terms of the Canopius Secondary Offering.

The Merger Agreement may be terminated by Tower at any time prior to the closing of the merger for any reason. Without limiting the generality of the foregoing, Tower currently anticipates that it would likely not proceed with the merger in the event (1) that Canopius Group’s acquisition of Omega does not close, (2) that the Canopius Secondary Offering cannot be effected, or can only be effected on terms that would make the Stock Conversion Number, and therefore the merger, unattractive to Tower, (3) that the Adjusted Canopius Bermuda Price Per Share declines to a point that Canopius Bermuda shareholders own 20% or less of the merged entity’s outstanding shares immediately after the closing of the merger, (4) of failure to obtain regulatory approvals on terms acceptable to Tower, (5) of failure to obtain the approval of Tower’s shareholders, and (6) of failure of Tower’s Board of Directors to approve certain of the transactions contemplated by the Merger Agreement, including without limitation, the Canopius Secondary Offering. In the event that Tower exercises its right to terminate the Merger Agreement, it will nonetheless be obligated to reimburse affiliates of Canopius Bermuda for costs actually incurred in connection with negotiating, documenting and implementing the Merger Agreement and the transactions contemplated thereby to the extent that such costs exceed the $1,000,000 Option exercise fee paid by Tower.

29

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

Note on Forward-Looking Statements

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

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

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

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

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

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

• the effects of acts of terrorism or war;

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

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

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

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

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

• decreased demand for our insurance or reinsurance products;

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

• the effects of mergers, acquisitions or divestitures;

• changes in rating agency policies or practices;

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

• changes in accounting policies or practices;

• changes in general economic conditions, including inflation, interest rates and other factors;

• disruptions in Tower’s business arising from the integration of acquired businesses into Tower and the anticipation of potential or pending acquisitions or mergers; and

• currently pending or future litigation or governmental proceedings.

The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Form 10-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.

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

30

Overview

Tower, through its subsidiaries, offers a broad range of commercial, specialty and personal property and casualty insurance products and services to businesses in various industries and to individuals throughout the United States. We provide coverage for many different market sectors, including non-standard risks that do not fit the underwriting criteria of standard risk carriers due to factors such as type of business, location and premium per policy. We provide these products on both an admitted and excess and surplus (“E&S”) basis (under NAIC rules).

The Company operates three business segments: Commercial Insurance, Personal Insurance and Insurance Services. Each of these segments is described below.

Our Commercial Insurance segment offers property and casualty insurance products through several business units that serve customers in general commercial and specialty markets. Our commercial lines products include commercial multiple-peril (provides both property and liability insurance), monoline general liability (insures bodily injury or property damage liability), commercial umbrella, monoline property (insures buildings, contents or business income), workers’ compensation, fire and allied lines, inland marine, commercial automobile policies and assumed reinsurance.

Our Personal Insurance segment offers a broad range of products designed to fit the insurance needs of most personal lines customers. This segment includes the business written in the Reciprocal Exchanges. Our personal lines products consist of homeowners, personal automobile and umbrella policies. In the first quarter of 2012, Tower sold one of its insurance subsidiaries to the Reciprocal Exchanges. As a result, the Reciprocal Exchanges have expanded their licensing and increased their capacity to write business.

In our Insurance Services segment, we generate management fees primarily from the services provided by management companies to the Reciprocal Exchanges and other fees generated by the managing general agencies.

Operating Income

Operating income excludes realized gains and losses and acquisition-related transaction costs, net of tax. This is a common measurement for property and casualty insurance companies. We believe this presentation enhances the understanding of our results of operations by highlighting the underlying profitability of our insurance business. Additionally, these measures are a key internal management performance standard.

The following table provides a reconciliation of operating income to net income on a GAAP basis. The operating income is used to calculate operating earnings per share and operating return on average equity:

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2012			2011			2012			2011
Operating income	$	(15,451	)	$	25,978		$	6,470		$	46,320
Net realized gains (losses) on investments, excluding gains (losses) attributable to Reciprocal Exchanges		1,421			(2,857	)		1,028			5,380
Acquisition-related transaction costs		(720	)		-			(1,982	)		(12	)
Income tax		(363	)		1,000			5			(1,882	)
Net income attributable to Tower Group, Inc.	$	(15,113	)	$	24,121		$	5,521		$	49,806

Critical Accounting Estimates

As of June 30, 2012, there were no material changes to our critical accounting estimates; refer to the Company’s 2011 Annual Report on Form 10-K for a complete discussion of critical accounting estimates.

Critical Accounting Policies

See “Note 2—Accounting Policies and Basis of Presentation” for information related to updated accounting policies.

31

Consolidating Supplemental Information

The following tables present the consolidating financial statements as of June 30, 2012 and December 31, 2011 and for the three and six months ended June 30, 2012 and 2011:

	June 30, 2012
				Reciprocal		Elimin-
($ in thousands)	Tower			Exchanges		ations			Total
Assets
Investments
Available-for-sale investments, at fair value:
Fixed-maturity securities	$	2,060,802		$	299,172	$	-		$	2,359,974
Equity securities		128,490			7,903		-			136,393
Short-term investments		-			-		-			-
Other invested assets		129,533			-		(77,200	)		52,333
Total investments		2,318,825			307,075		(77,200	)		2,548,700
Cash and cash equivalents		192,099			6,906		-			199,005
Investment income receivable		37,519			3,078		(13,364	)		27,233
Premiums receivable		343,321			39,470		(808	)		381,983
Reinsurance recoverable on paid losses		21,503			1,799		(4,226	)		19,076
Reinsurance recoverable on unpaid losses		281,959			28,979		(9,318	)		301,620
Prepaid reinsurance premiums		39,272			16,611		(192	)		55,691
Deferred acquisition costs, net		172,749			12,758		-			185,507
Deferred income taxes		-			-		-			-
Intangible assets		103,772			7,146		-			110,918
Goodwill		250,103			-		-			250,103
Funds held by reinsured companies		133,968			-		-			133,968
Other assets		282,161			4,021		(16,344	)		269,838
Total assets	$	4,177,251		$	427,843	$	(121,452	)	$	4,483,642
Liabilities		-			-		-			-
Loss and loss adjustment expenses	$	1,568,286		$	142,865	$	(9,318	)	$	1,701,833
Unearned premium		823,048			103,600		(192	)		926,456
Reinsurance balances payable		9,543			9,909		(5,034	)		14,418
Funds held under reinsurance agreements		91,142			-		-			91,142
Other liabilities		187,201			37,608		(29,908	)		194,901
Deferred income taxes		29,666			3,392		-			33,058
Debt		448,291			77,000		(77,000	)		448,291
Total liabilities		3,157,177			374,374		(121,452	)		3,410,099
Stockholders’ equity
Common stock		468			-		-			468
Treasury stock		(181,324	)		-		-			(181,324	)
Paid-in-capital		775,542			27,628		(27,628	)		775,542
Accumulated other comprehensive income		75,866			12,799		(12,799	)		75,866
Retained earnings		347,521			13,042		(13,042	)		347,521
Noncontrolling interests		2,001			-		53,469			55,470
Total stockholders’ equity		1,020,074			53,469		-			1,073,543
Total liabilities and stockholders’ equity	$	4,177,251		$	427,843	$	(121,452	)	$	4,483,642

32

	December 31, 2011
				Reciprocal		Elimin-
($ in thousands)	Tower			Exchanges		ations			Total
Assets
Investments
Available-for-sale investments, at fair value:
Fixed-maturity securities	$	2,153,620		$	300,054	$	-		$	2,453,674
Equity securities		87,479			1,866		-			89,345
Short-term investments		-			-		-			-
Other invested assets		121,547			-		(77,200	)		44,347
Total investments		2,362,646			301,920		(77,200	)		2,587,366
Cash and cash equivalents		113,432			666		-			114,098
Investment income receivable		33,842			2,978		(10,038	)		26,782
Premiums receivable		367,336			41,290		-			408,626
Reinsurance recoverable on paid losses		18,233			6,326		(656	)		23,903
Reinsurance recoverable on unpaid losses		308,411			20,134		(8,881	)		319,664
Prepaid reinsurance premiums		39,352			14,685		-			54,037
Deferred acquisition costs, net		156,992			11,866		-			168,858
Intangible assets		110,081			4,839		-			114,920
Goodwill		250,103			-		-			250,103
Other assets		386,928			2,485		(15,575	)		373,838
Total assets	$	4,147,356		$	407,189	$	(112,350	)	$	4,442,195
Liabilities					-		-			-
Loss and loss adjustment expenses	$	1,495,839		$	145,155	$	(8,881	)	$	1,632,113
Unearned premium		790,185			102,991		-			893,176
Reinsurance balances payable		17,328			4,122		(656	)		20,794
Funds held under reinsurance agreements		96,726			-		-			96,726
Other liabilities		259,408			32,560		(25,813	)		266,155
Deferred income taxes		24,826			4,511		-			29,337
Debt		426,901			77,000		(77,000	)		426,901
Total liabilities		3,111,213			366,339		(112,350	)		3,365,202
Stockholders’ equity
Common stock		465			-		-			465
Treasury stock		(158,185	)		-		-			(158,185	)
Paid-in-capital		772,938			25,851		(25,851	)		772,938
Accumulated other comprehensive income		62,244			7,771		(7,771	)		62,244
Retained earnings		356,680			7,228		(7,228	)		356,680
Noncontrolling interests		2,001			-		40,850			42,851
Total stockholders’ equity		1,036,143			40,850		-			1,076,993
Total liabilities and stockholders’ equity	$	4,147,356		$	407,189	$	(112,350	)	$	4,442,195

33

	Three Months Ended June 30,
	2012												2011
($ in thousands)	Tower			Reciprocal Exchanges			Elimina- tions			Total			Tower			Reciprocal Exchanges			Elimina- tions			Total
Revenues
Net premiums earned	$	417,612		$	42,541		$	-		$	460,153		$	342,789		$	50,741		$	-		$	393,530
Ceding commission revenue		6,855			3,225			-			10,080			9,107			1,548			-			10,655
Insurance services revenue		9,324			-			(7,965	)		1,359			7,631			-			(7,704	)		(73	)
Policy billing fees		2,871			129			-			3,000			2,512			147			-			2,659
Net investment income		30,268			3,177			(1,664	)		31,781			30,419			3,051			(1,672	)		31,798
Total net realized investment gains (losses)		1,421			(1,657	)		-			(236	)		(2,857	)		543			-			(2,314	)
Total revenues		468,351			47,415			(9,629	)		506,137			389,601			56,030			(9,376	)		436,255
Expenses
Loss and loss adjustment expenses		322,842			26,933			-			349,775			213,970			26,876			-			240,846
Direct and ceding commission expense		87,024			8,162			-			95,186			69,726			6,484			-			76,210
Other operating expenses		71,459			14,606			(7,965	)		78,100			62,812			14,641			(7,704	)		69,749
Acquisition-related transaction costs		720			-			-			720			-			-			-			-
Interest expense		7,902			1,664			(1,664	)		7,902			8,257			1,672			(1,672	)		8,257
Total expenses		489,947			51,365			(9,629	)		531,683			354,765			49,673			(9,376	)		395,062
Income (loss) before income taxes		(21,596	)		(3,950	)		-			(25,546	)		34,836			6,357			-			41,193
Income tax expense (benefit)		(6,483	)		(756	)		-			(7,239	)		10,715			2,162			-			12,877
Net income (loss)	$	(15,113	)	$	(3,194	)	$	-		$	(18,307	)	$	24,121		$	4,195		$	-		$	28,316
Ratios
Net calendar year loss and LAE		77.3	%		63.3	%					76.0	%		62.4	%		53.0	%					61.2	%
Net underwriting expenses		33.6	%		45.6	%					34.8	%		33.0	%		38.3	%					33.7	%
Net Combined		110.9	%		108.9	%					110.8	%		95.4	%		91.3	%					94.9	%
Return on Average Equity		-5.8	%											9.2	%

34

	Six Months Ended June 30,
	2012												2011
($ in thousands)	Tower			Reciprocal Exchanges			Elimina- tions			Total			Tower			Reciprocal Exchanges			Elimina- tions			Total
Revenues
Net premiums earned	$	796,281		$	84,030		$	-		$	880,311		$	677,326		$	95,999		$	-		$	773,325
Ceding commission revenue		8,933			6,310			-			15,243			15,924			2,912			-			18,836
Insurance services revenue		16,683			-			(14,827	)		1,856			14,928			-			(14,399	)		529
Policy billing fees		5,873			261			-			6,134			4,546			291			-			4,837
Net investment income		62,525			6,526			(3,327	)		65,724			61,107			6,395			(3,326	)		64,176
Total net realized investment gains (losses)		1,028			2,319			-			3,347			5,380			(334	)		-			5,046
Total revenues		891,323			99,446			(18,154	)		972,615			779,211			105,263			(17,725	)		866,749
Expenses
Loss and loss adjustment expenses		566,091			51,177			-			617,268			430,418			50,604			-			481,022
Direct and ceding commission expense		158,936			15,935			-			174,871			135,755			17,058			-			152,813
Other operating expenses		144,355			27,543			(14,827	)		157,071			123,814			26,673			(14,399	)		136,088
Acquisition-related transaction costs		1,982			-			-			1,982			12			-			-			12
Interest expense		15,478			3,327			(3,327	)		15,478			16,357			3,326			(3,326	)		16,357
Total expenses		886,842			97,982			(18,154	)		966,670			706,356			97,661			(17,725	)		786,292
Income (loss) before income taxes		4,481			1,464			-			5,945			72,855			7,602			-			80,457
Income tax expense (benefit)		(1,040	)		(4,349	)		-			(5,389	)		23,049			2,586			-			25,635
Net income (loss)	$	5,521		$	5,813		$	-		$	11,334		$	49,806		$	5,016		$	-		$	54,822
Ratios
Net calendar year loss and LAE		71.1	%		60.9	%					70.1	%		63.5	%		52.7	%					62.2	%
Net underwriting expenses		34.3	%		43.9	%					35.2	%		33.0	%		42.2	%					34.1	%
Net Combined		105.4	%		104.8	%					105.3	%		96.5	%		94.9	%					96.3	%
Return on Average Equity		1.1	%											9.5	%

Consolidated Results of Operations

Our results of operations are discussed below in two parts, consolidated results of operations and the results of each of our three segments.

Consolidated Results of Operations for the Three and Six Months Ended June 30, 2012 and 2011

Total revenues. Total revenues increased by 16.0% and 12.2%, respectively for the three and six months ended June 30, 2012 compared to the same periods in 2011. This increase is primarily attributed to the increases in earned premiums.

Premiums earned. Gross premiums earned for the three and six months ended June 30, 2012 were $508.6 million and $971.7 million, respectively, and $445.8 million and $869.8 million for the same periods in 2011, respectively. These increases of 14.1 % and 11.7 %, respectively, for the three and six month periods are primarily a result of increased business in Tower’s continuing programs and assumed reinsurance lines in the Commercial Insurance segment.

Ceded premiums earned declined $3.9 million to $48.4 million for the three months ended June 30, 2012 from $52.3 million in 2011. For the six months ended June 30, 2012, ceded premiums earned were $91.4 million compared to $96.4 million for the same period in the prior year. Ceded premiums earned declined from the prior year as Tower elected to not renew its liability quota share reinsurance treaty in 2011. In 2011, we recorded earnings on the business ceded in 2010. This decrease was offset by an increase in the percentage of homeowners business ceded pursuant to the Company’s homeowners quota share reinsurance treaty in 2012. We also purchase excess per risk and catastrophe reinsurance for all property lines.

Overall, net premiums earned increased $66.6 million and $107.0 million, respectively for the three and six months ended June 30, 2012 compared to the same period in 2011.

Commission and fee income. Commission and fee income, comprised of ceding commission revenue, insurance services revenue and policy billing fees, increased by $1.2 million and decreased by $1.0 million in the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. The increase for the three months ended June 30, 2012 is due to additional fees earned by our managing general agencies. The decrease for the six months ended June 30, 2012 is attributed to a reduction in the ceding commission revenue in the first quarter 2012 resulting from a change in loss ratio on a prior year’s quota share treaties. The change in loss ratio resulted in a $2.9 million reduction in our ceding commission revenue.

35

Net investment income and net realized gains (losses). For the three months ended June 30, 2012, net investment income remained relatively constant when compared with the same period in 2011. For the six-month period ended June 30, 2012, net investment income increased $1.5 million, or 2.4%, due to an increase in average cash and invested assets from the comparative period in 2011. Operating cash invested in fixed income securities in 2012 and in 2011 has been affected by an extended low interest rate environment. Investments in high-yield securities and dividend paying equity securities continue to be made to help maintain overall portfolio yield and to partially mitigate the impact of the lower interest rate environment.

For the three months ended June 30, 2012 and 2011, the net realized investment gains (losses) included OTTI of $2.2 million and $0.2 million, respectively. The OTTI in the second quarter of 2012 is driven primarily from the impairment of one equity security for $1.5 million and one fixed-maturity security for $0.7 million. Net realized investment gains for the three months ended June 30, 2012 and 2011 also include net gains (losses) on the sale of securities for $2.0 million and $(2.1) million respectively. These gains and losses are a function of individual securities selected for sale when cash needs arise in the ordinary course of business or when market dictates disposals pursuant to our investment policy.

For the six months ended June 30, 2012 and 2011, the net realized investment gains (losses) included OTTI of $5.0 million and $0.4 million, respectively. The OTTI for the six months ended June 30, 2012 is related mostly to securities in the Company’s equity security portfolio. Net realized investment gains for the six months ended June 30, 2012 and 2011 included net gains on the sale of securities for $8.3 million and $5.4 million respectively.

Loss and loss adjustment expenses. The consolidated net loss ratio, which includes the Reciprocal Exchanges, was 76.0% and 61.2% for the three months ended June 30, 2012 and 2011, respectively. Excluding the Reciprocal Exchanges, the net loss ratio was 77.3% and 62.4% for the three months ended June 30, 2012 and 2011, respectively. The Reciprocal Exchanges’ net loss ratio was 63.3% and 53.0% for the three months ended June 30, 2012 and 2011, respectively.

Incurred losses and LAE for the three months ended June 30, 2012 attributable to insured events of prior years were $59.0 million. Excluding the Reciprocal Exchanges, the incurred losses and LAE from prior accident years were $65.0 million. Excluding the Reciprocal Exchanges, there was net adverse loss development of $62.1 million in the Commercial Insurance segment and $2.9 million in the Personal Insurance segment for the three months ended June 30, 2012.

The increase in estimates of prior years’ loss and loss expenses was the result of a comprehensive review of its loss reserves in the second quarter and strengthened prior accident year reserves by $65 million following an analysis of recent loss emergence that occurred during the first and second quarters of 2012. The reserve strengthening in the second quarter represents 4% of the company’s consolidated loss reserves (excluding the reserves that are carried by the Reciprocal Exchanges).

The reserve strengthening relates primarily to unfavorable development in the company’s Commercial Insurance segment arising from changes in estimated ultimate losses for accident years 2011 and prior. During the quarter Tower conducted detailed reserve studies for all lines using loss data through the first quarter of 2012 as well as reported claims during the second quarter, including analysis of the source of unusually high reported loss emergence for certain casualty lines, primarily workers’ compensation and commercial automobile, observed during the first quarter of 2012.

The Reciprocal Exchanges reported favorable development on prior accident years of $6.0 million during the three months ended June 30, 2012.

Commission and Operating expenses. Operating expenses, which include direct and ceding commission expenses and other operating expenses, were $173.3 million for the three months ended June 30, 2012, an increase of 18.7% over the prior year, primarily due to increased business production and our ongoing efforts to build-out our information technology infrastructure to support our policy administration and claims processing needs. The net underwriting expense ratio increased to 34.8% for the three months ended June 30, 2012 from 33.7% in 2011.

The consolidated gross underwriting expense ratio increased to 33.4% for the three months ended June 30, 2012 from 32.1% in the same period in 2011. The commission portion of the gross underwriting expense ratio increased to 18.7% for the three month period June 30, 2012 compared to 17.2% in 2011. This increase is attributed to the increase in assumed reinsurance business written, which charges a higher commission rate. In addition, in 2012 management revised its estimates in the allocation of operating expenses between unallocated loss adjustment expense and other underwriting expenses (“OUE”) which resulted in a greater percentage assigned to OUE. The gross OUE ratio, which includes boards, bureaus and taxes (“BB&T”), was 14.7% for the three months ended June 30, 2012 compared to 15.0% in the prior year.

For the six months ended June 30, 2012, operating expenses were $331.9 million compared to $288.9 million for the six months ended June 30, 2011, for an increase of $43.0 million or 14.9%. This change is due to increased business production and our

36

ongoing efforts to build-out our information technology infrastructure to support our policy administration and claims processing needs. The net underwriting expense ratio increased to 35.2% for the six months ended June 30, 2012 from 34.1% in 2011.

The consolidated gross underwriting expense ratio increased to 33.5% for the six months ended June 30, 2012 from 32.5% in the same period in 2011. The commission portion of the gross underwriting expense ratio increased to 18.0% for the three month period June 30, 2012 compared to 17.6% in 2011. This increase is attributed to the increase in assumed reinsurance business written, which charges a higher commission rate. In addition, in 2012 management revised its estimates in the allocation of operating expenses between unallocated loss adjustment expense and OUE which resulted in a greater percentage assigned to OUE. The gross OUE ratio was 15.5% for the three months ended June 30, 2012 compared to 14.9% in the prior year.

Acquisition-related transaction costs. Acquisition-related transaction costs for the three and six months ended June 30, 2012 were $0.7 and $2.0 million, respectively. These costs were negligible for the same periods in 2011.

Interest expense. Interest expense decreased by $0.4 million and $0.9 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011.

Income tax expense. Tower uses the effective tax rate method in computing its interim tax provision. For the three months ended June 30, 2012, the effective tax rate on net income (loss) before income taxes was 28.3%, which resulted in an income tax benefit for the period of $7.2 million, compared to an income tax expense of $12.9 million and related effective tax rate of 31.3% for the same period in 2011.

In the six months ended June 30, 2012, the income tax benefit of $5.4 million includes a $7.1 million out-of-period adjustment in the first quarter of 2012. This adjustment corrected the Company’s deferred income tax liability as reported at December 31, 2011. Excluding the out-of-period adjustment, the consolidated effective tax rate for the six months ended June 30, 2012 would have been 28.4% compared to 31.9% for the same period in 2011. The change in effective tax rate from 2011 to 2012 is due to the Reciprocal Exchanges which have certain permanent tax differences, but little pre-tax income for the six months ended June 30, 2012. The Tower stand-alone effective tax rate, excluding the Reciprocal Exchanges and the out-of-period adjustment, was 34.3%.

Net income (loss) and return on average equity. Net (loss) attributable to Tower Group, Inc. and annualized return on average equity were $(15.1) million and (5.8)% for the three months ended June 30, 2012 compared to net income of $24.1 million and annualized return on average equity of 9.2% for the same period in 2011. The return on average equity is calculated by dividing net income by average stockholders’ equity. Average stockholders’ equity was $1,039.3 million and $1,049.6 million at June 30, 2012 and 2011, respectively. The net loss and decline in annualized return on equity for the three months ended June 30, 2012 is primarily due to reserve strengthening in the second quarter of 2012.

Net income attributable to Tower Group, Inc. and annualized return on average equity were $5.5 million and 1.1% for the six months ended June 30, 2012 compared to net income of $49.8 million and annualized return on average equity of 9.5% for the six months ended June 30, 2011. The decline in net income and annualized return on equity is primarily due to reserve strengthening of $78.3 million recorded for Tower Group, Inc. in 2012 compared to prior year strengthening of $7.6 million recorded in 2011.

37

Commercial Insurance Segment Results of Operations

	Three Months Ended June 30,												Six Months Ended June 30,
($ in thousands)	2012			2011			Change			Percent			2012			2011			Change			Percent
Net premiums written	$	343,748		$	295,521		$	48,227			16.3	%	$	663,953		$	546,642		$	117,311			21.5	%
Revenues
Net premiums earned	$	337,650		$	263,735		$	73,915			28.0	%	$	635,485		$	515,503		$	119,982			23.3	%
Ceding commission revenue		3,894			4,710			(816	)		-17.3	%		3,904			8,728			(4,824	)		-55.3	%
Policy billing fees		1,390			1,114			276			24.8	%		2,903			1,878			1,025			54.6	%
Total revenue		342,934			269,559			73,375			27.2	%		642,292			526,109			116,183			22.1	%
Expenses
Net loss and loss adjustment expenses		281,209			166,597			114,612			68.8	%		482,647			331,087			151,560			45.8	%
Underwriting expenses
Direct commission expenses		66,539			49,770			16,769			33.7	%		122,088			100,248			21,840			21.8	%
Other underwriting expenses		47,415			36,863			10,552			28.6	%		95,662			73,613			22,049			30.0	%
Total underwriting expenses		113,954			86,633			27,321			31.5	%		217,750			173,861			43,889			25.2	%
Underwriting profit (loss)	$	(52,229	)	$	16,329		$	(68,558	)		-419.9	%	$	(58,105	)	$	21,161		$	(79,266	)		-374.6	%
Ratios
Net calendar year loss and LAE		83.3	%		63.2	%								75.9	%		64.2	%
Net underwriting expenses		32.2	%		30.6	%								33.2	%		31.7	%
Net combined		115.5	%		93.8	%								109.1	%		95.9	%

Commercial Insurance Segment Results of Operations for the Three and Six Months Ended June 30, 2012 and 2011

Premiums. Gross premiums written for the three months ended June 30, 2012 were $369.8 million compared to $315.9 million during the same period in 2011. The increase in the three months ended June 30, 2012 of $53.9 million is primarily attributable to growth in our assumed reinsurance business which accounted for $27.0 million of the increase compared to the same period in 2011. Gross premiums earned were $358.6 million for the three month period ended June 30, 2012 as compared to $286.0 million during the same period 2011. The increase in gross premiums earned is a result of the increased writings in our assumed reinsurance and customized solutions products over the last twelve months.

Gross premiums written for the six months ended June 30, 2012 were $706.8 million compared to $578.9 million during the same period in 2011. The increase in the six months ended June 30, 2012 of $127.9 million is primarily attributed to growth in our continuing programs and assumed reinsurance which accounted for $51.0 million and $68.8 million of the increase compared to the same period 2011. Gross premiums earned were $674.6 million for the six month period ended June 30, 2012 as compared to $562.5 million during the same period 2011.

Ceded premiums written for the three months ended June 30, 2012 increased slightly to $26.0 million from $20.3 million for the three months ended June 31, 2011. The Company reinsures through quota share treaties premiums written on certain of its program business. In addition, we also purchase excess per risk and catastrophe reinsurance for all property lines. Ceded earned premiums were $20.9 million and $22.2 million for the three month periods ended June 30, 2012 and 2011, respectively.

Ceded premiums written for the six months ended June 30, 2012 were $42.8 million compared to $32.2 million for the six months ended June 30, 2011. Ceded premiums earned were $39.1 million compared to $47.0 million for the six month periods ended June 30, 2012. The Company reinsures through quota share treaties premiums written on certain of its program business. In addition, we also purchase excess per risk and catastrophe reinsurance for all property lines.

The increases in net premiums written and earned for the three and six months ended June 30, 2012 compared to the same periods in 2011 are attributable to both the increase in gross written premiums offset set slightly by the effects in ceded premiums, as discussed above.

Renewal retention rate excluding programs was 78.4% and 77.9% for the three and six months ended June 30, 2012 compared to 77.4% and 77.4% during the same period in 2011. Premiums on renewed commercial business, other than programs, increased 4.2% and 3.5% for the three and six months ended June 30, 2012. Excluding programs, policies-in-force for our commercial business, which is predominantly small business, increased 1.3% as of June 30, 2012.

Ceding commission revenue. Ceding commission revenue decreased for the three and six months ended June 30, 2012 by $0.8 million and $4.8 million compared to the same period in 2011, primarily due to the non-renewal of the liability quota share program in 2011. The three and six month periods in 2011 had earned ceded commission revenue on some of the business ceded in 2010 under this treaty. There were no such ceded commissions earned in 2012. In addition, we recognized a change in loss ratio on a prior year’s quota share treaty which reduced ceding commission revenue by $2.4 million during the six month period

38

ended June 30, 2012 compared to an unfavorable ceded commission revenue adjustment of $0.9 million during the same period in 2011.

Net loss and loss adjustment expenses. The net calendar year loss ratios were 83.3% and 63.2% for the three months ended June 30, 2012 and 2011, respectively. The accident year loss ratios for the three months ended June 30, 2012 and 2011 were 64.9% and 61.4%, respectively.

The net calendar year loss ratios were 75.9% and 64.2% for the six months ended June 30, 2012 and 2011, respectively. The accident year loss ratios for the six months ended June 30, 2012 and 2011 were 64.3% and 61.7%, respectively.

Management’s estimates of prior years’ loss and loss expenses were increased by $62.1 million for the three months and $74.0 million for the six months ended June 30, 2012. The increase in prior accident year loss and LAE in the quarter was the result of a comprehensive review of its loss reserves in the first and second quarters of 2012 and strengthened prior accident year reserves following an analysis of recent loss emergence that occurred during the quarter.

The reserve strengthening relates primarily to unfavorable development in the company’s Commercial Insurance segment arising from changes in estimated ultimate losses for accident years 2011 and prior. During the quarter Tower conducted detailed reserve studies for all lines using loss data through the first quarter of 2012 as well as reported claims during the second quarter, including analysis of the source of unusually high reported loss emergence for certain casualty lines, primarily workers’ compensation and commercial automobile, observed during the first quarter of 2012. The increase in prior accident year ultimate loss and LAE was comprised of $39 million in workers compensation and $22 million in commercial automobile liability. The reserve development was attributable mostly to programs, many of which are terminated and in runoff.

Underwriting expenses. Underwriting expenses, which include direct commissions and other underwriting expenses, increased by $27.3 million and $43.9 million, or 31.5% and 25.2%, for the three and six months ended June 30, 2012, respectively, compared to the same period in 2011. The net underwriting expense ratio increased 1.5 percentage points for the three and six months ended June 30, 2012 and 2011.

The gross underwriting expense ratio was 31.4% and 31.8% for the three and six months ended June 30, 2012 compared to 29.9% and 30.6% in the same periods in 2011. The commission portion of the gross underwriting expense ratio, which is expressed as a percentage of gross premiums earned, was 18.6% and 18.1% for the three and six months ended June 30, 2012 compared to 17.4% and 17.8% for the same periods in 2011. The increase is primarily due to the assumed reinsurance business which has a higher commission ratio. The OUE ratio, including BB&T, was 12.8% and 13.8% for the three and six months ended June 30, 2012 compared to 12.5% and 12.8% for the same periods in 2011. The increase in the OUE ratio is primarily a result of ongoing efforts by us to build-out our information technology infrastructure to support our policy administration and claims processing needs.

Underwriting loss and combined ratio. The underwriting loss and combined ratio for the three and six months ended June 30, 2012 moved unfavorably from the underwriting gain and combined ratio in the same periods in the prior year. These changes are due primarily to the increase in loss and loss adjustment expenses described above.

39

Personal Insurance Segment Results of Operations

	Three Months Ended June 30,
	2012									2011
($ in thousands)	Tower			Reciprocal Exchanges			Total			Tower			Reciprocal Exchanges			Total			Change			Percent
Net premiums written	$	97,865		$	44,620		$	142,485		$	88,344		$	45,130		$	133,474		$	9,011			6.8	%
Revenues
Net premiums earned	$	79,962		$	42,541		$	122,503		$	79,055		$	50,740		$	129,795		$	(7,292	)		-5.6	%
Ceding commission revenue		2,961			3,225			6,186			4,414			1,531			5,945			241			4.1	%
Policy billing fees		1,481			129			1,610			1,398			147			1,545			65			4.2	%
Total revenue		84,404			45,895			130,299			84,867			52,418			137,285			(6,986	)		-5.1	%
Expenses
Net loss and loss adjustment expenses		41,633			26,933			68,566			47,373			26,876			74,249			(5,683	)		-7.7	%
Underwriting expenses
Direct commission expenses		20,486			8,162			28,648			20,333			6,465			26,798			1,850			6.9	%
Other underwriting expenses		15,804			14,607			30,411			17,811			14,641			32,452			(2,041	)		-6.3	%
Total underwriting expenses		36,290			22,769			59,059			38,144			21,106			59,250			(191	)		-0.3	%
Underwriting profit (loss)	$	6,481		$	(3,807	)	$	2,674		$	(650	)	$	4,436		$	3,786		$	(1,112	)		-29.4	%
Ratios
Net calendar year loss and LAE		52.1	%		63.3	%		56.0	%		59.9	%		53.0	%		57.2	%
Net underwriting expenses		39.8	%		45.6	%		41.8	%		40.9	%		38.3	%		39.9	%
Net combined		91.9	%		108.9	%		97.8	%		100.8	%		91.3	%		97.1	%

40

Personal Insurance Segment Results of Operations (continued)

	Six Months Ended June 30,
	2012									2011
($ in millions)	Tower			Reciprocal Exchanges			Total			Tower			Reciprocal Exchanges			Total			Change			Percent
Net premiums written	$	165,251		$	82,713		$	247,964		$	156,613		$	85,758		$	242,371			5,593			2.3	%
Revenues
Net premiums earned	$	160,796		$	84,030		$	244,826		$	161,824		$	95,998		$	257,822			(12,996	)		-5.0	%
Ceding commission revenue		5,029			6,310			11,339			7,214			2,894			10,108			1,231			12.2	%
Policy billing fees		2,970			261			3,231			2,668			291			2,959			272			9.2	%
Total revenue		168,795			90,601			259,396			171,706			99,183			270,889			(11,493	)		-4.2	%
Expenses
Net loss and loss adjustment expenses		83,444			51,177			134,621			99,331			50,604			149,935			(15,314	)		-10.2	%
Underwriting expenses
Direct commission expenses		36,848			15,935			52,783			35,629			17,039			52,668			115			0.2	%
Other underwriting expenses		33,130			27,544			60,674			34,182			26,673			60,855			(181	)		-0.3	%
Total underwriting expenses		69,978			43,479			113,457			69,811			43,712			113,523			(66	)		-0.1	%
Underwriting profit (loss)	$	15,373		$	(4,055	)	$	11,318		$	2,564		$	4,867		$	7,431		$	3,887			52.3	%
Ratios
Net calendar year loss and LAE		51.9	%		60.9	%		55.0	%		61.4	%		52.7	%		58.2	%
Net underwriting expenses		38.5	%		43.9	%		40.4	%		37.0	%		42.2	%		39.0	%
Net combined		90.4	%		104.8	%		95.4	%		98.4	%		94.9	%		97.2	%

Personal Insurance Segment Results of Operations for the Three and Six Months Ended June 30, 2012 and 2011

Premiums. Gross premiums written for the three months ended June 30, 2012 were $167.9 million compared to $152.1 million in 2011, an increase of $15.8 million, or 10.4%. This increase is primarily attributed to the acquisition of personal lines renewal rights resulting in $15.2 million of written premium in the second quarter of 2012 and an increase in homeowners business offset by a decline in monoline automobile policies. Gross premiums earned declined $9.9 million to $150.0 million for the three months ended June 30, 2012 from $159.9 million for the same period in the prior year. This decline is due primarily to the reduction from certain monoline automobile policies the Company has elected to not renew during the last year. This decline was offset by earnings of $2.5 million from the renewal rights premiums discussed above.

Gross premiums written for the six months ended June 30, 2012 were $298.2 million compared to $278.7 million in 2011, for an increase of $19.5 million, or 7.0%. This increase is primarily attributed to the acquisition of personal lines renewal rights resulting in $15.2 million of written premium in the second quarter of 2012 and an increase in homeowners business offset by a decline in monoline automobile policies. Gross premiums earned declined $10.1 million to $297.1 million for the six months ended June 30, 2012 from $307.2 million for the same period in the prior year. This decline is due primarily to the reduction certain monoline automobile policies the Company has elected to not renew during the last year. This decline was offset by earnings of $2.5 million of the renewal rights premiums discussed above.

Ceded premiums written for the three months ended June 30, 2012 were $25.4 million, an increase of $6.8 million compared to $18.6 million in 2011. The Company reinsures a portion of its homeowners and umbrella business through quota share reinsurance treaties. The Company also purchased catastrophe reinsurance for certain property business. The increase in 2012 is attributed to increasing the percentage of business ceded pursuant to the homeowners quota share treaty. Ceded premiums earned decreased $2.5 million to $27.5 million for the three months ended June 30, 2012 from $30.1 million for the same period in the prior year.

Ceded premiums written for the six months ended June 30, 2012 were $50.2 million, an increase of $13.9 million compared to $36.3 million in 2011. The Company reinsures the majority of its homeowners and umbrella business through quota share reinsurance treaties. The Company also purchased catastrophe reinsurance for certain property business. The increase in 2012 is attributed to increasing the percentage of business ceded pursuant to the homeowners quota share treaty. Ceded premiums earned increased $2.9 million to $52.3 million for the six months ended June 30, 2012 from $49.4 million for the same period in the prior year.

Net premiums written for the three and six months ended June 30, 2012 increased $9.0 million and $5.6 million net premiums earned for the three and six months ended June 30, 2012 decreased $7.3 million and $13.0 million compared to the same periods in 2011. These changes are attributed to the gross and ceded premium changes discussed above.

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Our personal lines renewal retention was 92.0% and 86.5% for the three months ended June 30, 2012 and 2011, respectively. Personal lines renewal retention was 91.0% and 84.2% for the six months ended June 30, 2012 and 2011, respectively. Written premiums on renewed business increased by 2.6% and 2.8% during the three and six months ended June 30, 2012, respectively. Policies-in-force remained relatively constant from December 31, 2011 to June 30, 2012, decreasing by only 0.5%.

Ceding commission revenue. Ceding commission revenue remained stable from the three and six months ended June 30, 2011 to the three months ended June 30, 2012, increasing only $0.2 million and $1.2 million, respectively.

Net loss and loss adjustment expenses. For Personal Insurance, the net calendar year loss ratios were 56.0% and 57.2% for the three months ended June 30, 2012 and 2011, respectively. The accident year loss ratios for the three months ended June 30, 2012 and 2011 were 58.5% and 64.7%, respectively. The net calendar year loss ratios were 55.0% and 58.2% for the six months ended June 30, 2012 and 2011, respectively. The accident year loss ratios for the six months ended June 30, 2012 and 2011 were 55.8% and 64.5%, respectively. Estimates of prior accident year loss and loss adjustment expenses decreased by $3.0 million and $2.0 million for the three and six months ended June 30, 2012, respectively.

For Tower personal lines, excluding the Reciprocal Exchanges, the net calendar year loss ratios were 52.1% and 59.9% for the three months ended June 30, 2012 and 2011, respectively. The accident year loss ratios for the three months ended June 30, 2012 and 2011 were 48.4% and 66.5%, respectively. The net calendar year loss ratios were 51.9% and 61.4% for the six months ended June 30, 2012 and 2011, respectively. The accident year loss ratios for the six months ended June 30, 2012 and 2011 were 49.2% and 64.9%, respectively. There was net adverse loss development of $2.9 million and $4.3 million for the three and six months ended June 30, 2012, respectively. The adverse development for the six months ended June 30, 2012 was comprised of $3.6 million in Homeowners, and $0.3 million in Private Passenger Automobile.

The Reciprocal Exchanges’ net calendar year loss ratios were 63.3% and 53.0% for the three months ended June 30, 2012 and 2011, respectively. The accident year loss ratios for the three months ended June 30, 2012 and 2011 were 77.3% and 62.0%, respectively. The net calendar year loss ratios were 60.9% and 52.7% for the six months ended June 30, 2012 and 2011, respectively. The accident year loss ratios for the six months ended June 30, 2012 and 2011 were 68.3% and 64.0%, respectively. Estimates of prior accident year loss and loss adjustment expenses decreased by $6.0 million and $6.3 million for the three and six months ended June 30, 2012, respectively.

Underwriting expenses. Underwriting expenses, which include direct commissions and other underwriting expenses, decreased $0.2 million and $0.1 million, or 0.3% and 0.1%, for the three and six months ended ending June 30, 2012, respectively, compared to the same period in 2011. The net underwriting expense ratio increased 1.9 percentage points from the three month period ended June 30, 2011 to 2012. The net underwriting expense ratio increased 1.4 percentage points from the six month period ended June 30, 2011 to 2012.

The gross underwriting expense ratio was 38.3% and 36.1% for the three months ended June 30, 2012 and 2011, respectively. The commission portion of the gross underwriting expense ratio was 19.1% and 16.8% for the three months ended June 30, 2012 and 2011, respectively. The gross OUE ratio, which includes BB&T, was 19.2% and 19.3% for the three months ended June 30, 2012 and 2011, respectively.

The gross underwriting expense ratio was 37.1% and 36.0% for the six months ended June 30, 2012 and 2011, respectively. The commission portion of the gross underwriting expense ratio was 17.8% and 17.1% for the six months ended June 30, 2012 and 2011, respectively. The gross OUE ratio, which includes BB&T, was 19.3% and 18.9% for the six months ended June 30, 2012 and 2011, respectively.

Underwriting profit and combined ratio. Personal Insurance segment underwriting profit declined $1.1 million and the combined ratio increased by 0.7 percentage points for the three months ended June 30, 2012 compared to June 30, 2011 due to reserve strengthening in the second quarter of 2012.

Underwriting profit increased $3.9 million and the combined ratio improved 1.8 percentage points from the six months ended June 30, 2011 to June 30, 2012 due to 2011 severe storms.

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Insurance Services Segment Results of Operations

	Three Months Ended June 30,										Six Months Ended June 30,
($ in thousands)	2012		2011			Change		Percent			2012		2011		Change			Percent
Revenue
Management fee income	$	7,965	$	7,704		$	261		3.4	%	$	14,827	$	14,399	$	428			3.0	%
Other revenue		1,359		(73	)		1,432		NM			1,856		529		1,327			250.9	%
Total revenue		9,324		7,631			1,693		22.2	%		16,683		14,928		1,755			11.8	%
Expenses												-
Other expenses		5,079		4,977			102		2.0	%		9,542		10,018		(476	)		-4.8	%
Total expenses		5,079		4,977			102		2.0	%		9,542		10,018		(476	)		-4.8	%
Insurance services pre-tax income	$	4,245	$	2,654		$	1,591		59.9	%	$	7,141	$	4,910	$	2,231			45.4	%

NM is shown where percentage change exceeds 500%

Insurance Services Segment Results of Operations for the Three and Six Months Ended June 30, 2012 and 2011

Total revenue. Total revenues for the three months ended June 30, 2012 increased $1.7 million, or 22.2%, from the Insurance Services revenues compared to the same period in the prior year. This increase is primarily related to certain fee income earned by our managing general agencies for business placed with other insurers. The management fee income for the six months ended June 30, 2012 was consistent with the revenues earned for the six months ended June 30, 2011.

Total expenses. Insurance Services segment expenses for the three and six months ended June 30, 2012 remained relatively constant compared to the expenses for the same period ended June 30, 2011. Most of these expenses are associated with providing services pursuant to the management services agreement between Tower and the Reciprocal Exchanges.

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Investments

Portfolio Summary

The following table presents a breakdown of the amortized cost, aggregate fair value and unrealized gains and losses by investment type as of June 30, 2012 and December 31, 2011:

	Cost or		Gross		Gross Unrealized Losses								% of
($ in thousands)	Amortized Cost		Unrealized Gains		Less than 12 Months			More than 12 Months			Fair Value		Fair Value
June 30, 2012
U.S. Treasury securities	$	120,783	$	1,591	$	(7	)	$	-		$	122,367		4.9	%
U.S. Agency securities		77,690		3,592		-			-			81,282		3.3	%
Municipal bonds		742,736		54,076		(431	)		(4	)		796,377		31.8	%
Corporate and other bonds		681,114		41,198		(1,183	)		(239	)		720,890		28.9	%
Commercial, residential and asset-backed securities		595,694		44,360		(392	)		(604	)		639,058		25.6	%
Total fixed-maturity securities		2,218,017		144,817		(2,013	)		(847	)		2,359,974		94.5	%
Equity securities		133,525		6,263		(3,228	)		(167	)		136,393		5.5	%
Total, June 30, 2012	$	2,351,542	$	151,080	$	(5,241	)	$	(1,014	)	$	2,496,367		100.0	%
Tower	$	2,063,859	$	131,351	$	(4,959	)	$	(959	)	$	2,189,292
Reciprocal Exchanges		287,683		19,729		(282	)		(55	)		307,075
Total, June 30, 2012	$	2,351,542	$	151,080	$	(5,241	)	$	(1,014	)	$	2,496,367
December 31, 2011
U.S. Treasury securities	$	154,430	$	1,725	$	(13	)	$	-		$	156,142		6.1	%
U.S. Agency securities		114,411		2,779		-			-			117,190		4.6	%
Municipal bonds		688,192		48,777		(255	)		-			736,714		29.0	%
Corporate and other bonds		750,220		34,466		(6,813	)		(150	)		777,723		30.6	%
Commercial, residential and asset-backed securities		627,859		42,167		(3,529	)		(592	)		665,905		26.2	%
Total fixed-maturity securities		2,335,112		129,914		(10,610	)		(742	)		2,453,674		96.5	%
Equity securities		93,034		1,395		(4,838	)		(246	)		89,345		3.5	%
Total	$	2,428,146	$	131,309	$	(15,448	)	$	(988	)	$	2,543,019		100.0	%
Tower	$	2,138,001	$	118,173	$	(14,160	)	$	(915	)	$	2,241,099
Reciprocal Exchanges		290,145		13,136		(1,288	)		(73	)		301,920
Total, December 31, 2011	$	2,428,146	$	131,309	$	(15,448	)	$	(988	)	$	2,543,019

Credit Rating of Fixed-Maturity Securities

The average credit rating of our fixed-maturity securities, using ratings assigned to securities by Standard & Poor’s, was A+ at June 30, 2012 and December 31, 2011. The following table shows the ratings distribution of our fixed-maturity portfolio:

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	Tower					Reciprocal Exchanges
($ in thousands)	Fair Value		Percentage of Fair Value			Fair Value		Percentage of Fair Value
June 30, 2012
Rating
U.S. Treasury securities	$	113,905		5.5	%	$	8,462		2.8	%
AAA		190,072		9.2	%		47,907		16.0	%
AA		934,512		45.5	%		95,042		31.8	%
A		412,453		20.0	%		94,596		31.6	%
BBB		190,418		9.2	%		25,109		8.4	%
Below BBB		219,442		10.6	%		28,056		9.4	%
Total	$	2,060,802		100.0	%	$	299,172		100.0	%
December 31, 2011
Rating
U.S. Treasury securities	$	151,621		7.0	%	$	4,521		1.5	%
AAA		189,431		8.8	%		49,316		16.4	%
AA		930,436		43.3	%		98,017		32.8	%
A		459,353		21.3	%		105,696		35.2	%
BBB		208,552		9.7	%		12,728		4.2	%
Below BBB		214,227		9.9	%		29,776		9.9	%
Total	$	2,153,620		100.0	%	$	300,054		100.0	%

Fixed-Maturity Investments with Third Party Guarantees

At June 30, 2012, $214.6 million of our municipal bonds, at fair value, were guaranteed by third parties from a total of $2.4 billion, at fair value, of all fixed-maturity securities held by us. The amount of securities guaranteed by third parties along with the credit rating with and without the guarantee is as follows:

($ in thousands)	With Guarantee		Without   Guarantee
AA	$	164,954	$	147,310
A		40,485		56,000
BBB		8,436		3,398
BB		677		3,098
No underlying rating		-		4,746
Total	$	214,552		214,552
Tower	$	208,662	$	208,662
Reciprocal Exchanges		5,890		5,890
Total	$	214,552	$	214,552

The guaranteed securities, by guarantor, are as follows:

($ in thousands)	Guaranteed Amount		Percent of Total
National Public Finance Guarantee Corp	$	83,124		38.7	%
Assured Guaranty Municipal Corp		77,853		36.3	%
Ambac Financial Corp		38,294		17.8	%
Berkshire Hathaway Assurance Corp		6,701		3.1	%
Others		8,580		4.1	%
Total	$	214,552		100.0	%
Tower	$	208,662		97.3	%
Reciprocal Exchanges		5,890		2.7	%
Total	$	214,552		100.0	%

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Municipal Bonds

As of June 30, 2012, our municipal bonds consisted of state general obligations, municipal general obligations and special revenue bonds. Municipal bonds by state at June 30, 2012 are as follows:

	State General Obligations				Municipal General Obligations				Special Revenue Bonds				Total
($ in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Texas	$	25,010	$	26,557	$	7,013	$	7,853	$	99,006	$	106,335	$	131,029	$	140,745
New York		11,553		12,608		7,758		8,318		63,908		68,557		83,219		89,483
California		7,614		8,091		1,800		1,807		36,013		39,416		45,427		49,314
Florida		14,827		16,129		7,600		8,058		17,258		18,075		39,685		42,262
Washington		11,888		13,103		5,823		6,179		15,031		16,239		32,742		35,521
Arizona		4,867		5,436		-		-		25,597		27,230		30,464		32,666
Indiana		2,966		3,330		1,760		1,771		25,695		27,298		30,421		32,399
Massachusetts		-		-		1,009		1,020		27,331		29,785		28,340		30,805
Illinois		10,399		11,231		3,350		3,611		10,802		11,824		24,551		26,666
Wisconsin		11,955		12,309		5,195		5,704		5,338		6,128		22,488		24,141
Other		62,205		65,611		28,722		30,378		183,443		196,386		274,370		292,375
Total	$	163,284	$	174,405	$	70,030	$	74,699	$	509,422	$	547,273	$	742,736	$	796,377

No one jurisdiction within “Other” in the table above exceeded 3% of the total fair value of municipal bonds. As of June 30, 2012, the special revenue bonds are supported primarily by water and sewer utilities, electric utilities, college revenues and highway tolls.

Fair Value Consideration

Under GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an “exit price”). GAAP establishes a fair value hierarchy that distinguishes between inputs based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data are limited or unavailable (“unobservable inputs”). The fair value hierarchy in GAAP prioritizes fair value measurements into three levels based on the nature of the inputs. Quoted prices in active markets for identical assets have the highest priority (“Level 1”), followed by observable inputs other than quoted prices including prices for similar but not identical assets or liabilities (“Level 2”), and unobservable inputs, including the reporting entity’s estimates of the assumption that market participants would use, having the lowest priority (“Level 3”).

As of June 30, 2012, substantially all of the investment portfolio recorded at fair value was priced based upon quoted market prices or other observable inputs. For investments in active markets, we used the quoted market prices provided by the outside pricing services to determine fair value. In circumstances where quoted market prices were unavailable, we used fair value estimates based upon other observable inputs including matrix pricing, benchmark interest rates, market comparables and other relevant inputs. When observable inputs were adjusted to reflect management’s best estimate of fair value, such fair value measurements are considered a lower level measurement in the GAAP fair value hierarchy.

Our process to validate the market prices obtained from the outside pricing sources includes, but is not limited to, periodic evaluation of model pricing methodologies and analytical reviews of certain prices. We also periodically perform testing of the market to determine trading activity, or lack of trading activity, as well as market prices. Several securities sold during the quarter were “back-tested” (i.e., the sales price is compared to the previous month end reported market price to determine reasonableness of the reported market price).

The ability to observe stable prices and inputs may be reduced for highly-customized and illiquid instruments which had been the case for certain non-agency residential and commercial mortgage-backed securities and asset-backed securities in previous periods. At June 30, 2012, two securities included in other invested assets were priced in Level 3 with a fair value of $25.0 million.

As more fully described in “Note 4 – Investments” to our consolidated financial statements, “Investments—Impairment Review,” we completed a detailed review of all our securities in a continuous loss position, including but not limited to residential and

46

commercial mortgage-backed securities, and concluded that the unrealized losses in these asset classes are the result of a decrease in value due to technical spread widening and broader market sentiment.

“Note 5 – Fair Value Measurements” to the consolidated financial statements provides a description of the valuation methodology utilized to value Level 3 assets, how the valuation methodology is validated and an analysis of the change in fair value of Level 3 assets. As of June 30, 2012, the fair value of Tower Level 3 assets as a percentage of Tower’s total assets carried at fair value was as follows (the Reciprocal Exchanges had no Level 3 assets):

($ in thousands)	Assets Carried at Fair Value at June 30, 2012		Fair Value of Level 3 Assets		Level 3 Assets as a Percentage of Total Assets Carried at Fair Value
Fixed-maturity investments	$	2,359,974	$	-		0	%
Equity investments		136,393		-		0	%
Total investments available for sale	$	2,496,367	$	-		0	%
Other invested assets		25,000		25,000		100	%
Cash and cash equivalents		199,005		-		0	%
Total	$	2,720,372	$	25,000		0.9	%

Unrealized Losses

The fair value of our fixed maturity portfolio is directly affected by changes in interest rates and credit spreads. 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.

For those fixed-maturity investments deemed not to be in an OTTI position, we believe that the gross unrealized investment loss was primarily caused by purchases made in a lower yield environment. We expect cash flows from operations to be sufficient to meet our liquidity requirements and, therefore, we do not intend to sell these fixed maturity securities and we do not believe that we will be required to sell these securities before recovering their cost basis. For equity securities not considered OTTI, we believe we have the ability to hold these investments until a recovery of fair value to our cost basis.

The following table presents information regarding our invested assets that were in an unrealized loss position at June 30, 2012 and December 31, 2011 by amount of time in a continuous unrealized loss position:

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	Less than 12 Months					12 Months or Longer					Total
($ in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Aggregate Fair Value		Unrealized Losses
June 30, 2012
U.S. Treasury securities	$	65,714	$	(7	)	$	-	$	-		$	65,714	$	(7	)
Municipal bonds		41,456		(431	)		990		(4	)		42,446		(435	)
Corporate and other bonds
Finance		22,784		(169	)		752		(46	)		23,536		(215	)
Industrial		46,687		(990	)		6,465		(191	)		53,152		(1,181	)
Utilities		3,425		(24	)		394		(2	)		3,819		(26	)
Commercial mortgage-backed securities		16,036		(138	)		16,053		(438	)		32,089		(576	)
Residential mortgage-backed securities
Agency backed		21,134		(134	)		21		-			21,155		(134	)
Non-agency backed		6		(3	)		2,666		(121	)		2,672		(124	)
Asset-backed securities		12,333		(117	)		1,680		(45	)		14,013		(162	)
Total fixed-maturity securities		229,575		(2,013	)		29,021		(847	)		258,596		(2,860	)
Preferred stocks		6,263		(45	)		6,019		(112	)		12,282		(157	)
Common stocks		39,868		(3,183	)		913		(55	)		40,781		(3,238	)
Total, June 30, 2012	$	275,706	$	(5,241	)	$	35,953	$	(1,014	)	$	311,659	$	(6,255	)
Tower	$	254,853	$	(4,959	)	$	34,232	$	(959	)	$	289,085	$	(5,918	)
Reciprocal Exchanges		20,853		(282	)		1,721		(55	)		22,574		(337	)
Total, June 30, 2012	$	275,706	$	(5,241	)	$	35,953	$	(1,014	)	$	311,659	$	(6,255	)
December 31, 2011
U.S. Treasury securities	$	92,001	$	(13	)	$	-	$	-		$	92,001	$	(13	)
Municipal bonds		13,449		(255	)		-		-			13,449		(255	)
Corporate and other bonds
Finance		138,986		(4,610	)		251		(5	)		139,237		(4,615	)
Industrial		57,357		(2,141	)		3,519		(145	)		60,876		(2,286	)
Utilities		1,902		(61	)		-		-			1,902		(61	)
Commercial mortgage-backed securities		26,130		(2,564	)		-		-			26,130		(2,564	)
Residential mortgage-backed securities
Agency backed		19		(1	)		12		-			31		(1	)
Non-agency backed		13,294		(318	)		4,609		(583	)		17,903		(901	)
Asset-backed securities		29,624		(647	)		610		(9	)		30,234		(656	)
Total fixed-maturity securities		372,762		(10,610	)		9,001		(742	)		381,763		(11,352	)
Preferred stocks		17,773		(644	)		1,303		(246	)		19,076		(890	)
Common stocks		44,132		(4,194	)		-		-			44,132		(4,194	)
Total, December 31, 2011	$	434,667	$	(15,448	)	$	10,304	$	(988	)	$	444,971	$	(16,436	)
Tower	$	398,989	$	(14,160	)	$	8,264	$	(915	)	$	407,253	$	(15,075	)
Reciprocal Exchanges		35,678		(1,288	)		2,040		(73	)		37,718		(1,361	)
Total, December 31, 2011	$	434,667	$	(15,448	)	$	10,304	$	(988	)	$	444,971	$	(16,436	)

The following table shows the fair value, unrealized loss amount and percentage below amortized cost and the ratio of fair value by security rating as of June 30, 2012:

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			Unrealized Loss
						Percent of Amortized Cost			Fair Value by Security Rating
($ in thousands)	Fair Value		Amount						AAA		AA			A			BBB			BB or Lower
U.S. Treasury securities	$	65,714	$	(7	)		0	%		0%		100	%		0	%		0	%		0	%
Municipal bonds		42,446		(435	)		-1	%		27%		68	%		3	%		1	%		1	%
Corporate and other bonds		80,507		(1,422	)		-2	%		1%		0	%		15	%		26	%		58	%
Commercial mortgage-backed securities		32,089		(576	)		-2	%		17%		17	%		37	%		14	%		15	%
Residential mortgage-backed securities		23,827		(258	)		-1	%		5%		90	%		1	%		0	%		4	%
Asset-backed securities		14,013		(162	)		-1	%		4%		96	%		0	%		0	%		0	%
Equities		53,063		(3,395	)		-7	%		NR

NR indicates that equity securities are not rated

See “Note 4 – Investments” in our consolidated financial statements for further information about impairment testing and other-than-temporary impairments.

Liquidity and Capital Resources

Tower is organized as a holding company (the “Holding Company”) with multiple intermediate holding companies, 12 insurance subsidiaries and several management companies. The Holding Company’s principal liquidity needs include interest on debt, stockholder dividends and share repurchases under its share repurchase program. The Holding Company’s principal sources of liquidity include dividends and other permitted payments from our subsidiaries, as well as financing through borrowings under our bank credit facility and sales of securities. Cash flows from the management companies are not subject to restrictions.

As of June 30, 2012, the amount of distributions that our Insurance Subsidiaries could pay to Tower without approval of their domiciliary Insurance Departments was $25.9 million. In addition, we can return capital of $63.5 million from CastlePoint Re without permission from the Bermuda Monetary Authority. No dividends were paid from the Insurance Subsidiaries during the six months ended June 30, 2012. CastlePoint Re made no payments to the Holding Company during the six month period ended June 30, 2012.

The management companies are not subject to any statutory limitations on their dividends to the Holding Company. The management companies paid no dividends to the Holding Company during the six month period ended June 30, 2012.

We believe that the cash flow generated by the operating activities of our subsidiaries, combined with other available capital sources, will provide sufficient funds for us to meet our liquidity needs over the next twelve months. Beyond the next twelve months, cash flow available to us may be influenced by a variety of factors, including general economic conditions and conditions in the insurance and reinsurance markets, as well as fluctuations from year-to-year in claims experience.

We have the intent and ability to hold any temporarily impaired fixed maturity securities until the anticipated date that these temporary impairments are recovered.

Book Value per Common Share

Book value per common share represents Tower Group Inc. stockholders’ equity divided by the number of common shares outstanding. Management uses growth in book value per common share as a key measure of the value generated for our common shareholders each period and believes that book value per common share is a key driver of TWGP’s share price over time. Book value per common share is impacted by, among other factors, our underwriting results, investment returns and share repurchase activity, which has an accretive or dilutive impact on book value per common share depending on the purchase price.

(in thousands, except per share data)	June 30, 2012		December 31, 2011
Calculation of book value per common share:
Tower Group, Inc. stockholders’ equity	$	1,018,073	$	1,034,142
Common shares outstanding		38,377		39,221
Book value per common share	$	26.53	$	26.37

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Capital

Our capital resources consist of funds deployed or available to be deployed to support our business operations. At June 30, 2012 and December 31, 2011, our capital resources were as follows:

($ in thousands)	June 30, 2012			December 31, 2011
Outstanding under credit facility	$	70,000		$	50,000
Convertible Senior Notes		143,233			141,843
Subordinated debentures		235,058			235,058
Tower Group, Inc. stockholders’ equity		1,018,073			1,034,142
Total capitalization	$	1,466,364		$	1,461,043
Ratio of debt to total capitalization		30.6	%		29.2	%

We monitor our capital adequacy to support our business on a regular basis. The future capital requirements of our business will depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. Our ability to underwrite is largely dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. In particular, we require (1) sufficient capital to maintain our financial strength ratings, at a level considered necessary by management to enable our insurance subsidiaries to compete, and (2) sufficient capital to enable our insurance subsidiaries to meet the capital adequacy tests performed by statutory agencies in the United States and Bermuda.

On February 15, 2012, we amended our $125.0 million credit facility by increasing borrowing capacity up to $150 million, extending the maturity date out to February 15, 2016, and resetting borrowing fees to more favorable current market terms. The credit facility is used for general corporate purposes. The original credit facility was entered into on May 14, 2010 and had an expiration date of May 14, 2013

As part of Tower’s capital management strategy, the Board of Directors of Tower approved a $100 million share repurchase program on March 3, 2011. This authorization is in addition to the $100 million share repurchase program approved on February 26, 2010. Purchases under both programs can be made from time to time in the open market or in privately negotiated transactions in accordance with applicable laws and regulations. The new share repurchase program will expire on March 4, 2013. The timing and amount of purchases under the programs depend on a variety of factors, including the trading price of the stock, market conditions and corporate and regulatory considerations. For the three months ended June 30, 2012, there were 1.1 million shares of common stock purchased under this program. As of 2012, $26.4 million remained available for future share repurchases under the new program.

We may seek to raise additional capital or may seek to return additional capital to our stockholders through share repurchases, cash dividends or other methods (or a combination of such methods). Any such determination will be at the discretion of our Board of Directors and will be dependent upon our profits, financial requirements and other factors, including legal restrictions, rating agency requirements, credit facility limitations and such other factors as our Board of Directors deems relevant.

Cash Flows

The primary sources of consolidated cash flows are from the insurance subsidiaries’ gross premiums collected, ceding commissions from quota share reinsurers, loss payments by reinsurers, investment income and proceeds from the sale or maturity of investments. Funds are used by the insurance subsidiaries for loss payments and loss adjustment expenses. The insurance subsidiaries also use funds for ceded premium payments to reinsurers, which are paid on a net basis after subtracting losses paid on reinsured claims and reinsurance commissions on our net business, commissions to producers, salaries and other underwriting expenses as well as to purchase investments, fixed assets and to pay dividends to the Holding Company. The management companies’ primary sources of cash are management fees for acting as the attorneys-in-fact for the Reciprocal Exchanges.

The reconciliation of net income to cash provided from operations is generally influenced by the collection of premiums in advance of paid losses, the timing of reinsurance, issuing company settlements and loss payments.

Cash flow and liquidity are categorized into three sources: (1) operating activities; (2) investing activities; and (3) financing activities, which are shown in the following table:

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	Six Months Ended June  30,
($ in thousands)	2012			2011
Cash provided by (used in):
Operating activities	$	72,437		$	53,462
Investing activities		30,058			(46,043	)
Financing activities		(17,588	)		(34,289	)
Net increase (decrease) in cash and cash equivalents		84,907			(26,870	)
Cash and cash equivalents, beginning of year		114,098			140,221
Cash and cash equivalents, end of period	$	199,005		$	113,351

Comparison of Six Months Ended June 30, 2012 and 2011

For the six months ended June 30, 2012, net cash inflows provided by operating activities were $72.4 million compared to $53.5 million for 2011. The increase in cash flow for the six months ended June 30, 2012 is primarily due to operating cash flow in 2011 being unusually low because of increased claim payments resulting from the Northeast winter storms in the first quarter of 2011.

Net cash flows provided by investing activities were $30.1 million for the six months ended June 30, 2012 compared to $46.0 million used for the six months ended June 30, 2011. The increase in investing cash flows of $76.1 million is almost entirely related to the liquidation of securities in anticipation of our investment in Canopius Group, Ltd. of approximately $75 million. Additionally, the six months ended June 30, 2012 and 2011 include an increase to fixed assets of $19.4 million and $11.7 million, respectively, primarily related to the build out of new systems. Other cash inflows and outflows in both years relates to purchases and sales and maturities of fixed-maturity and equity securities.

The net cash flows used in financing activities for the six months ended June 30, 2012 are primarily the result of use of cash for dividends of $14.7 million and the repurchase of common stock of $21.0 million, offset by increased borrowings on our credit facility of $20.0 million. In 2011, we used cash for the repurchase of common stock and dividend payments of $20.0 million and $12.9 million, respectively.

Cash flow needs at the holding company level are primarily for dividends to our stockholders, interest and principal payments on our outstanding debt and payments under the credit facility.

Insurance Subsidiaries

The insurance subsidiaries maintain sufficient liquidity to pay claims, operating expenses and meet other obligations. We monitor the expected claims payment needs and maintain a sufficient portion of our invested assets in cash and cash equivalents to enable us to fund the claims payments without having to sell longer-duration investments. As necessary, we adjust the holdings of short-term investments and cash and cash equivalents to provide sufficient liquidity to respond to changes in the anticipated pattern of claims payments.

The insurance subsidiaries are required by law to maintain a certain minimum level of policyholders’ surplus on a statutory basis. Policyholders’ surplus is calculated by subtracting total liabilities from total assets. The NAIC maintains risk-based capital (“RBC”) requirements for property and casualty insurance companies. RBC is a formula that attempts to evaluate the adequacy of statutory capital and surplus in relation to investments and insurance risks. The formula is designed to allow the state Insurance Departments to identify potential weakly capitalized companies. Under the formula, a company determines its risk-based capital by taking into account certain risks related to the insurer’s assets (including risks related to its investment portfolio and ceded reinsurance) and the insurer’s liabilities (including underwriting risks related to the nature and experience of its insurance business). Applying the RBC requirements as of June 30, 2012, the insurance subsidiaries’ risk-based capital exceeded the minimum level that would trigger regulatory attention.

Inflation

Property and casualty loss and loss adjustment expense reserves are established before we know the amount of losses and loss adjustment expenses or the extent to which inflation may affect such amounts. We attempt to anticipate the potential impact of inflation in establishing our loss and LAE reserves. Inflation in excess of the levels we have assumed could cause loss and LAE expenses to be higher than we anticipated.

Substantial future increases in inflation could also result in future increases in interest rates, which in turn are likely to result in a decline in the market value of the investment portfolio and cause unrealized losses or reductions in stockholders’ equity.

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Adoption of New Accounting Pronouncements

For a discussion of accounting standards, see “Note 2 – Accounting Policies and Basis of Presentation” of Notes to Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk that we will incur losses in our investments due to adverse changes in market rates and prices. Market risk is directly influenced by the volatility and liquidity in the market in which the related underlying assets are invested. We believe that we are principally exposed to three types of market risk: changes in interest rates, changes in credit quality of issuers of investment securities, and changes in equity prices.

Interest Rate Risk

Interest rate risk is the risk that we may incur economic losses due to adverse changes in interest rates. The primary market risk to the investment portfolio is interest rate risk associated with investments in fixed-maturity securities, although conditions affecting particular asset classes (such as conditions in the commercial and housing markets that affect commercial and residential mortgage-backed securities) can also be significant sources of market risk. Fluctuations in interest rates have a direct impact on the market valuation of these securities. The fair value of our fixed-maturity securities as of June 30, 2012 was $2.4 billion.

For fixed-maturity securities, short-term liquidity needs and potential liquidity needs for our business are key factors in managing our portfolio. We use modified duration analysis to measure the sensitivity of the fixed income portfolio to changes in interest rates as discussed more fully below under sensitivity analysis.

As of June 30, 2012, we had a total of $204.2 million of outstanding floating rate subordinated debentures underlying our trust preferred securities issued by the statutory business trusts and carrying an interest rate that is determined by reference to market interest rates. An additional $30.9 million of subordinated debentures will convert from fixed rate to floating rate in 2012. In order to reduce the interest rate risk on the subordinated debentures, the Company has effective interest rate swap contracts with Keybank National Association that are designed to convert $160.0 million of these outstanding borrowings from their respective floating rates to fixed rates ranging from 5.1% to 5.9%. These swaps mature in 2015. Another $30.0 million of interest rate swap contracts will become effective in December 2012.

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 losses in fair value.

In this sensitivity analysis model, we use fair values to measure our potential loss. The sensitivity analysis model includes fixed-maturities, preferred stocks 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 generally 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 June 30, 2012.

The following table summarizes the estimated change in fair value on our fixed-maturity portfolio including preferred stocks and short-term investments based on specific changes in interest rates as of June 30, 2012:

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Change in interest rate	Estimated Increase (Decrease) in Fair Value (in thousands)			Estimated Percentage Increase (Decrease) in Fair Value
300 basis point rise	$	(351,294	)		-14.7	%
200 basis point rise		(237,950	)		-9.9	%
100 basis point rise		(118,136	)		-4.9	%
As of 6/30/12		-			0.0	%
100 basis point decline		109,989			4.6	%

The sensitivity analysis model used by us produces a predicted pre-tax loss in fair value of market-sensitive instruments of $118.1 million or (4.9%) based on a 100 basis point increase in interest rates as of June 30, 2012. This loss amount only reflects the impact of an interest rate increase on the fair value of our fixed-maturity investments.

Interest expense would also be affected by a hypothetical change in interest rates. As of June 30, 2012, we had $204.2 million of floating rate debt obligations, of which $160.0 million are hedged through our interest rate swaps. A 100 basis point increase in interest rates would increase annual interest expense by $0.4 million, a 200 basis point increase would increase interest expense by $0.9 million, and a 300 basis point increase would increase interest expense by $1.3 million on the $44.2 million of non-hedged floating rate debt obligations.

With respect to investment income, the most significant assessment of the effects of hypothetical changes in interest rates on investment income would be an adjustment to amortization for mortgage-backed securities. The rates at which the mortgages underlying mortgage-backed securities are prepaid, and therefore the average life of mortgage-backed securities, can vary depending on changes in interest rates (for example, mortgages are prepaid faster and the average life of mortgage-backed securities falls when interest rates decline). The adjustments for changes in amortization, which are based on revised average life assumptions, would have an impact on investment income if a significant portion of our mortgage-backed securities holdings had been purchased at significant discounts or premiums to par value. As of June 30, 2012, the par value of our residential mortgage-backed securities holdings was $329.6 million and the amortized cost of our residential mortgage-backed securities holdings was $330.7 million. This equates to an average price of 100.3% of par, thus an adjustment in accordance with this GAAP guidance would not have a significant effect on investment income.

Credit Risk

Our credit risk is the potential loss in principal resulting from an adverse change in the counter-party’s ability to repay its obligations. We seek to manage credit risk through regular review and analysis of the creditworthiness of all investments and potential investments. However, no assurance can be given that we will achieve our investment goals.

We bear credit risk on our reinsurance recoverables and premiums ceded to reinsurers. To mitigate the credit risk associated with reinsurance recoverables, we secure certain of our reinsurance recoverables by withholding ceded premium and requiring funds to be placed in trust as well as monitoring our reinsurers’ financial condition and rating agency ratings and outlook.

We also bear credit risk on the premium deposits paid by our policyholders to our producers. Producers collect such premiums and remit them to us within prescribed periods. After receiving a deposit, the insurance subsidiaries’ premiums are directly billed to insureds. In New York State and other jurisdictions, premiums paid to producers by an insured may be considered to have been paid under applicable insurance laws and regulations, and the insured will no longer be liable to us for those amounts, whether or not we have actually received the premium payment from the producer. Consequently, we assume a degree of credit risk associated with producers. Due to the unsettled and fact specific nature of the law, we are unable to quantify our exposure to this risk.

Our interest rate swap contracts contain credit support annex provisions which require Keybank National Association to post collateral if the swap fair values exceed $5 million (asset position). As of June 30, 2012 and 2011, the swaps had a fair value of $8.8 million (liability position) and $0.6 million (liability position), respectively. As of June 30, 2012, $8.7 million collateral had been posted.

Equity Risk

Equity risk is the risk that we may incur economic losses due to adverse changes in equity prices. Our equity investment securities are classified as available for sale in accordance with GAAP and carried on the balance sheet at fair value. Our outside investment managers are constantly reviewing the financial health of these issuers. In addition, we perform periodic reviews of these issuers.

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Item 4. Controls and Procedures

(a) Disclosure Controls and Procedures

The Company’s principal executive officer and its principal financial officer, based on their evaluation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)), concluded that the Company’s disclosure controls and procedures were effective for the purposes set forth in the definition thereof in Exchange Act Rule 13a-15(e) as of June 30, 2012.

Because of its inherent limitations, our disclosure controls and procedures and our internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.

Part II – OTHER INFORMATION

Item 1. Legal Proceedings

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

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

On May 28, 2009, Munich Reinsurance America, Inc. (“Munich”) commenced an action against Tower Insurance Company of New York (“TICNY”), a wholly-owned subsidiary of Tower Group, Inc., in the United States District Court for the District of New Jersey seeking, inter alia, to recover $6.1 million under various retrocessional contracts pursuant to which TICNY reinsures Munich. On June 22, 2009, TICNY filed its answer, in which it, inter alia, asserted two separate counterclaims seeking to recover $2.8 million under various reinsurance contracts pursuant to which Munich reinsures TICNY. (A separate action commenced by Munich against TICNY on June 17, 2009 in the United States District Court for the District of New Jersey seeking a declaratory judgment that Munich is entitled to access to TICNY’s books and records pertaining to various quota share agreements, to which TICNY filed its answer on July 7, 2009, was subsequently dismissed pursuant to the stipulation of the parties on March 17, 2010.) The parties have now concluded discovery. On July 15, 2011, TICNY paid $3.3 million to Munich to resolve a portion of the dispute. On December 22, 2011, the court granted partial summary judgment with respect to certain of the claims and defenses in the litigation. On March 23, 2012, the Court ruled that Munich was entitled to approximately $168,000 from TICNY in pre-judgment interest on the amount of $3.3 million that TICNY had paid to Munich on July 15, 2011. Trial has now been set for October  15, 2012. The Company is unable to estimate a possible loss or range of loss.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In 2012, the Company purchased 495 shares of its common stock from employees in connection with the vesting of restricted stock issued in connection with its 2004 Long Term Equity Compensation Plan (the “Plan”). The shares were withheld at the direction of the employees as permitted under the Plan in order to pay the minimum amount of tax liability owed by the employee from the vesting of those shares.

The Board of Directors of Tower approved a $100 million share repurchase program on March 3, 2011. This authorization is in addition to the $100 million share repurchase program approved on February 26, 2010. Purchases under both programs can be made from time to time in the open market or in privately negotiated transactions in accordance with applicable laws and regulations. The new share repurchase program will expire on March 4, 2013. The original share repurchase program has no expiration date. In the three months ended June 30, 2012, the Company purchased 1,059,118 shares of common stock were

54

purchased under these programs. As of June 30, 2012, 8.0 million shares were purchased under this program at an aggregate consideration of $173.6 million. As of December 31, 2011, the original $100 million share purchase program had been fully utilized and $26.4 million remained available for future share repurchases under the new program.

The following table summarizes the Company’s stock repurchases for the three months ended June 30, 2012:

Period	Total Number of Shares Purchased (1)		Average Price Paid per Share (2)		Total Number of Shares Purchased as Part of Publically Announced Repurchase Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Repurchase Plans
Second quarter
April 1 -30, 2012		70		21.89		-	$	47,393,984
May 1 -31, 2012		469,581		19.61		469,445		38,190,455
June 1 -30, 2012		589,962		19.98		589,673		26,407,074
Total second quarter		1,059,613		19.82		1,059,118

(1) Includes 495 shares withheld to satisfy tax withholding amounts due from employees upon the receipt of previously restricted shares.

(2) Including commissions.

Item 6. Exhibits

Exhibit 31.1	Chief Executive Officer - Certification pursuant to Sarbanes-Oxley Act of 2002 Section 302
Exhibit 31.2	Chief Financial Officer - Certification pursuant to Sarbanes-Oxley Act of 2002 Section 302
Exhibit 32	Chief Executive Officer and Chief  Financial Officer - Certification pursuant to Sarbanes-Oxley Act of 2002 Section 906
EX-101	INSTANCE  DOCUMENT
EX-101	SCHEMA  DOCUMENT
EX-101	CALCULATION  LINKBASE  DOCUMENT
EX-101	LABELS  LINKBASE  DOCUMENT
EX-101	PRESENTATION  LINKBASE  DOCUMENT
EX-101	DEFINITION  LINKBASE  DOCUMENT

55

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: August 8, 2012	/s/ Michael H. Lee
	Michael H. Lee Chairman of the Board, President and Chief Executive Officer
Date: August 8, 2012	/s/ William E. Hitselberger
	Executive Vice President and Chief Financial Officer

56

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 June 30, 2012 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 second quarter of 2012 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.

August 8, 2012	/s/ Michael H. Lee
	Michael H. Lee
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, William E. Hitselberger, certify that:

1. I have reviewed the Quarterly Report of Tower Group, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2012 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 second quarter of 2012 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.

August 8, 2012	/s/ William E. Hitselberger
	William E. Hitselberger
	Chief Financial Officer

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 June 30, 2012, 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 William E. Hitselberger, Executive Vice President and Chief Financial Officer 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.

August 8, 2012	/s/ Michael H. Lee
	Michael H. Lee
	President and Chief Executive Officer
August 8, 2012	/s/ William E. Hitselberger
	William E. Hitselberger
	Executive Vice President and Chief Financial Officer

XML

Amortized Cost and Fair Value of Fixed-Maturity Portfolio by Contractual Time to Maturity (Detail) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Schedule of Available-for-sale Securities [Line Items]
Less than one year, amortized cost	$ 43,638	$ 84,439
One to five years, amortized cost	443,799	561,287
Five to ten years, amortized cost	600,449	585,352
More than 10 years, amortized cost	534,438	476,175
Mortgage and asset-backed securities, amortized cost	595,693	627,859
Total at end of period, amortized cost	2,218,017	2,335,112
Less than one year, fair value	44,174	85,471
One to five years, fair value	461,266	575,647
Five to ten years, fair value	640,764	616,635
More than 10 years, fair value	574,713	510,016
Mortgage and asset-backed securities, fair value	639,057	665,905
Total at end of period, fair value	2,359,974	2,453,674
Tower
Schedule of Available-for-sale Securities [Line Items]
Less than one year, amortized cost	41,638	40,201
One to five years, amortized cost	413,347	479,721
Five to ten years, amortized cost	536,091	563,830
More than 10 years, amortized cost	434,622	427,357
Mortgage and asset-backed securities, amortized cost	511,476	535,823
Total at end of period, amortized cost	1,937,174	2,046,932
Less than one year, fair value	42,094	40,529
One to five years, fair value	429,544	491,904
Five to ten years, fair value	572,698	593,838
More than 10 years, fair value	468,693	458,536
Mortgage and asset-backed securities, fair value	547,773	568,813
Total at end of period, fair value	2,060,802	2,153,620
Reciprocal Exchanges
Schedule of Available-for-sale Securities [Line Items]
Less than one year, amortized cost	2,000	44,238
One to five years, amortized cost	30,452	81,566
Five to ten years, amortized cost	64,358	21,522
More than 10 years, amortized cost	99,816	48,818
Mortgage and asset-backed securities, amortized cost	84,217	92,036
Total at end of period, amortized cost	280,843	288,180
Less than one year, fair value	2,080	44,942
One to five years, fair value	31,722	83,743
Five to ten years, fair value	68,066	22,797
More than 10 years, fair value	106,020	51,480
Mortgage and asset-backed securities, fair value	91,284	97,092
Total at end of period, fair value	$ 299,172	$ 300,054

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Computation of Earnings Per Share Pursuant to Two-Class Method (Detail) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Numerator
Net income (loss) attributable to Tower Group, Inc.	$ (15,113)	$ 24,121	$ 5,521	$ 49,806
Denominator
Weighted average common shares outstanding	39,117	41,303	39,206	41,404
Effect of dilutive securities:
Stock options		88	62	111
Other		4		3
Weighted average common and potential dilutive shares outstanding	39,117	41,395	39,268	41,518
Common stock:
Distributed earnings	$ 0.19	$ 0.19	$ 0.38	$ 0.32
Undistributed earnings	$ (0.58)	$ 0.39	$ (0.24)	$ 0.88
Earnings per share attributable to Tower stockholders-basic	$ (0.39)	$ 0.58	$ 0.14	$ 1.20
Earnings (loss) per share attributable to Tower stockholders-diluted	$ (0.39)	$ 0.58	$ 0.14	$ 1.20

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Borrowings (Detail) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Debt Instrument [Line Items]
Credit facility, carrying value	$ 70,000	$ 50,000
Subordinated debentures, carrying value	235,058	235,058
Total, carrying value	448,291	426,901
Credit facility, fair value	70,000	50,000
Subordinated debentures, fair value	236,478	234,550
Total, fair value	464,353	435,293
Convertible senior notes
Debt Instrument [Line Items]
Convertible senior notes, carrying value	143,233	141,843
Convertible senior notes, fair value	$ 157,875	$ 150,743

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Earnings (Loss) per Share - Additional Information (Detail)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Earnings Per Share Disclosure [Line Items]
Options and other common stock equivalents excluded from computation of diluted earnings per share	855,500	170,800	168,100	170,800

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Loss and Loss Adjustment Expense - Additional Information (Detail) (USD $)	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Prior years unfavorable/(favorable) development	$ 72,001,000	$ (3,248,000)
Unfavorable/(favorable) development during the period	617,268,000	481,022,000
Loss and loss adjustment expenses ratio	70.10%	62.20%
Worker compensation discount amount	8,600,000		3,700,000
New litigated third-party commercial claims handled in Northeast, percentage	85.00%
Tower
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Prior years unfavorable/(favorable) development	78,254,000	7,551,000
Unfavorable/(favorable) development during the period	566,091,000	430,417,000
Loss and loss adjustment expenses ratio	71.10%	63.50%
Unamortized reserve for risk premium	3,600,000		7,200,000
Tower | Commercial Insurance Segment
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Prior years unfavorable/(favorable) development	74,000,000
Unfavorable/(favorable) development during the period	62,000,000
Tower | Personal Insurance Segment
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Prior years unfavorable/(favorable) development	4,300,000
Tower | Workers' Compensation
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Unfavorable/(favorable) development during the period	39,000,000
Tower | Commercial automobile
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Unfavorable/(favorable) development during the period	22,000,000
Tower | Terminated Programs
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Unfavorable/(favorable) development during the period	51,000,000
Reciprocal Exchanges
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Prior years unfavorable/(favorable) development	(6,253,000)	(10,799,000)
Unfavorable/(favorable) development during the period	51,177,000	50,605,000
Loss and loss adjustment expenses ratio	60.90%	52.70%
Unamortized reserve for risk premium	$ 1,300,000		$ 2,500,000
Allocated Loss Adjustment Expenses | Claims Opened
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Allocation percentage of fixed fee per in-house litigation claim	50.00%
Allocated Loss Adjustment Expenses | Claims Closed
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Allocation percentage of fixed fee per in-house litigation claim	50.00%

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Investments - Additional Information (Detail) (USD $)	6 Months Ended					1 Months Ended
	Jun. 30, 2012 Investment	Jun. 30, 2011	Dec. 31, 2011	Jun. 30, 2012 Tower	Dec. 31, 2011 Tower	Dec. 31, 2011 Tower Other invested assets Investment	Jun. 30, 2012 US Treasury Notes and Other Securities Deposit to Comply with Insurance Laws	Dec. 31, 2011 US Treasury Notes and Other Securities Deposit to Comply with Insurance Laws	Jun. 30, 2012 US Treasury Notes and Other Securities Held by Counterparties	Dec. 31, 2011 US Treasury Notes and Other Securities Held by Counterparties	Jun. 30, 2012 Fixed-maturity securities Investment	Jun. 30, 2012 Fixed-maturity securities Corporate bonds and mortgage-backed securities	Jun. 30, 2012 Common stocks Investment
Schedule of Available-for-sale Securities [Line Items]
Investment, carrying values	$ 2,351,542,000		$ 2,428,146,000	$ 2,063,859,000	$ 2,138,001,000		$ 395,900,000	$ 226,800,000	$ 324,300,000	$ 340,800,000
Proceeds from sale of fixed maturity securities	980,000,000	911,800,000
Proceeds from sale of equity securities	745,618,000	285,322,000
Number of securities in unrealized loss position not deemed OTTI	249										228		15
Unrealized losses	6,255,000		16,436,000	5,918,000	15,075,000						2,900,000	2,300,000	3,200,000
Percentage of fixed maturity securities in unrealized loss position below amortized cost											1.10%
Number of securities in unrealized loss position for more than 12 months											42
Unrealized losses related to securities in loss position for more than 12 months	1,014,000		988,000	959,000	915,000						800,000
Number of securities purchased						2
Future funding commitments to limited partnerships	$ 25,900,000

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Reconciliation of Revenue by Segment to Consolidated Revenues (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Segment Reporting, Revenue Reconciling Item [Line Items]
Total segment revenues	$ 482,557	$ 414,475	$ 918,371	$ 811,926
Net investment income	31,781	31,798	65,724	64,176
Net realized gains (losses) on investments, including other-than-temporary impairments	(236)	(2,314)	3,347	5,046
Total revenues	506,137	436,255	972,615	866,749
Reciprocal Exchanges
Segment Reporting, Revenue Reconciling Item [Line Items]
Net investment income	3,177	3,051	6,526	6,396
Total revenues	47,400	56,000	99,400	105,300
Commercial Insurance Segment
Segment Reporting, Revenue Reconciling Item [Line Items]
Total segment revenues	342,934	269,559	642,292	526,109
Personal Insurance Segment
Segment Reporting, Revenue Reconciling Item [Line Items]
Total segment revenues	130,299	137,285	259,396	270,889
Insurance Services Segment
Segment Reporting, Revenue Reconciling Item [Line Items]
Total segment revenues	9,324	7,631	16,683	14,928
Insurance Services Segment | Reciprocal Exchanges
Segment Reporting, Revenue Reconciling Item [Line Items]
Management fee income	7,965	7,704	14,827	14,399
Elimination | Reciprocal Exchanges
Segment Reporting, Revenue Reconciling Item [Line Items]
Management fee income	$ (7,965)	$ (7,704)	$ (14,827)	$ (14,399)

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Debt (Tables)

6 Months Ended

Jun. 30, 2012

Borrowings

The Company’s borrowings consisted of the following at June 30, 2012 and December 31, 2011:

	June 30, 2012				December 31, 2011
($ in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Credit facility	$	70,000	$	70,000	$	50,000	$	50,000
Convertible senior notes		143,233		157,875		141,843		150,743
Subordinated debentures		235,058		236,478		235,058		234,550
Total	$	448,291	$	464,353	$	426,901	$	435,293

Amounts Recorded for Notes

The following table shows the amounts recorded for the Notes as of June 30, 2012 and December 31, 2011:

($ in thousands)	June 30, 2012			December 31, 2011
Liability component
Outstanding principal	$	150,000		$	150,000
Unamortized OID		(6,767	)		(8,157	)
Liability component		143,233			141,843
Equity component, net of tax	$	7,469		$	7,469

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Amounts Recorded for Notes (Detail) (Convertible senior notes, USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011	Sep. 30, 2010
Convertible senior notes
Liability component
Outstanding principal	$ 150,000	$ 150,000
Unamortized OID	(6,767)	(8,157)	(11,500)
Liability component	143,233	141,843
Equity component, net of tax	$ 7,469	$ 7,469

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Financial Instruments at Fair Value among Levels (Parenthetical) (Detail) (USD $)	Jun. 30, 2012		Dec. 31, 2011
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Other invested assets	$ 25,000,000	[1]	$ 25,000,000	[2]
Other invested assets, amortized cost	$ 27,300,000		$ 19,300,000

[1] $25.0 million of the Other invested assets balance at June 30, 2012 is reported at fair value. $27.3 million of Other invested assets is reported under the equity method of accounting or at amortized cost.

[2] $25.0 million of the Other invested assets balance at December 31, 2011 is reported at fair value. $19.3 million of Other invested assets is reported under the equity method of accounting or at amortized cost.

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Rollforward of Cumulative Amount of Other-Than-Temporary Impairment for Securities Still Held Showing Amounts that have been Included in Earnings on Pretax Basis (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Other than Temporary Impairment, Credit Losses Recognized in Earnings [Line Items]
Balance at beginning of period	$ 6,084	$ 15,124	$ 12,666	$ 18,075
Additional credit losses recognized during the period, related to securities for which No OTTI has been previously recognized	765	44	854	44
Additional credit losses recognized during the period, related to securities for which OTTI has been previously recognized		166	28	310
Reductions due to Securities sold during the period (realized)	(730)	(1,888)	(7,429)	(4,983)
Balance at end of period	$ 6,119	$ 13,446	$ 6,119	$ 13,446

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Analysis of Stock Option Activity (Detail) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Number of Shares
Number of Shares Outstanding, Beginning Balance			855,530	917,155
Number of Shares, Exercised		(7,612)		(31,112)
Number of Shares, Forfeitures and expirations				(22,981)
Number of Shares Outstanding, Ending Balance	855,530	863,062	855,530	863,062
Number of Shares Exercisable, Ending Balance	855,530	808,115	855,530	808,115
Average Exercise Price
Average Exercise Price Outstanding, Beginning Balance			$ 20.14	$ 19.62
Average Exercise Price, Exercised				$ 10.99
Average Exercise Price, Forfeitures and expirations				$ 26.48
Average Exercise Price Outstanding, Ending Balance	$ 20.14	$ 20.16	$ 20.14	$ 20.16
Average Exercise Price Exercisable, Ending Balance	$ 20.14	$ 20.26	$ 20.14	$ 20.26

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Stockholders' Equity - Additional Information (Detail) (USD $)	1 Months Ended	3 Months Ended		6 Months Ended		1 Months Ended	3 Months Ended		6 Months Ended		1 Months Ended
	Mar. 03, 2011	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Aug. 01, 2012 Dividend Declared	Jun. 30, 2012 Restricted Stock	Jun. 30, 2011 Restricted Stock	Jun. 30, 2012 Restricted Stock	Jun. 30, 2011 Restricted Stock	Feb. 26, 2010 Share Repurchase Program, 2010
Stockholders Equity Note [Line Items]
Employee stock option exercises			7,612		31,112
Number of Shares, Granted							0	7,498	321,178	621,000
Common stock purchased from employees to pay expected amount of tax liability		495	10,897	97,356	69,315
Number of Shares, Forfeitures							4,432	1,596	8,715	2,914
Stock repurchase program authorized amount	$ 100,000,000										$ 100,000,000
Share repurchase program expiration date	Mar. 04, 2013
Share repurchase program authorization date	Mar. 03, 2011										Feb. 26, 2010
Repurchase of common stock, shares				1,100,000	800,000
Repurchase of common stock				20,987,000	19,990,000
Stock repurchase program remaining authorized amount				26,400,000
Dividends declared		$ 7,300,000	$ 7,700,000	$ 14,680,000	$ 12,855,000
Dividend approved/declared date						Aug. 01, 2012
Dividend per share						$ 0.1875
Dividend payable date						Sep. 21, 2012
Dividend record date						Sep. 10, 2012

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Accounting Policies and Basis of Presentation

6 Months Ended

Jun. 30, 2012

Accounting Policies and Basis of Presentation

Note 2—Accounting Policies and Basis of Presentation

Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Tower and its insurance subsidiaries, managing general agencies and management companies. The unaudited consolidated financial statements also include the accounts of Adirondack Insurance Exchange, a New York reciprocal insurer, and New Jersey Skylands Insurance Association, a New Jersey reciprocal insurer (together, the “Reciprocal Exchanges”). The Company does not own the Reciprocal Exchanges but manages their business operations through its wholly owned management companies.

The accompanying unaudited consolidated financial statements included in this report have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. The principles for condensed interim financial information do not require the inclusion of all the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2011 and notes thereto included in the Annual Report on Form 10-K filed on February 29, 2012. 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, results of operations and cash flows. All inter-company transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Moreover, the results of operations for the six months ended June 30, 2012 may not be indicative of the results that may be expected for the year ending December 31, 2012.

Intercompany transactions

In the first quarter 2012, Tower transferred a licensed insurance subsidiary shell to the Reciprocal Exchanges and received cash for its statutory book value. At the date of the transfer, Tower’s GAAP carrying basis in this subsidiary exceeded the statutory book value and the transfer resulted in a loss to Tower of $1.8 million. Since this was a non-recurring transaction between entities under common control, assets are transferred at historical book value. Any difference in the consideration paid and the book value of the assets transferred is treated as an adjustment to equity. This transaction had no effect on consolidated stockholders’ equity.

Reclassifications and Adjustments

Certain reclassifications have been made to prior years’ financial information to conform to the current year presentation.

Cash amounts presented on the consolidated statements of cash flows for the six months ended June 30, 2011 have been revised to present book overdrafts representing outstanding checks in excess of funds on deposit with individual financial institutions within Other liabilities. These balances have previously been reported in Cash and cash equivalents. This revision increased Cash and cash equivalents and Other liabilities by $52.9 million as of June 30, 2011 and Net cash flows provided by operations by $15.6 million for the six months ended June 30, 2011. Management concluded this adjustment is not material to previously issued annual and quarterly consolidated financial statements.

Comprehensive income attributable to Noncontrolling interests and Comprehensive income attributable to Tower Group, Inc. for the three and six months ended June 30, 2011 have been revised. The revision increased Comprehensive income attributable to Noncontrolling interests and decreased Comprehensive income attributable to Tower Group, Inc. for the three and six months ended June 30, 2011 by $4.2 million and $5.0 million, respectively. This revision had no effect on consolidated Comprehensive income. The change corrected a classification error and is not considered material to the previously issued quarterly financial statements.

In the first quarter of 2012, the Company recorded an out of period adjustment that decreased income tax expense by $7.1 million. The adjustment increased consolidated net income by $7.1 million and increased net income available to common shareholders by $2.6 million for the six months ended June 30, 2012. This out of period adjustment had no effect on tax expense or consolidated net income for the three months ended June 30, 2012. The adjustment corrected our deferred income tax liability as reported at December 31, 2011. Management concluded this adjustment is not material to previously issued annual and quarterly consolidated financial statements.

Accounting Pronouncements

Accounting guidance adopted in 2012

In May 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance concerning fair value measurement and disclosure. This new guidance requires additional disclosure about fair value measurements categorized as Level 3. This guidance had no effect on the Company’s financial position, results of operations or cash flows. The Company’s fair value disclosures have been revised effective January 1, 2012 to comply with this guidance.

In June 2011 (and as amended in December 2011), the FASB issued new guidance concerning the presentation of comprehensive income. The Company adopted this new guidance retrospectively on January 1, 2012 and now reports its comprehensive income in a separate consolidated financial statement immediately following the statement of operations.

In September 2011, the FASB issued amended guidance on testing goodwill for impairment. This guidance was intended to reduce the cost and complexity of the annual goodwill impairment test by allowing an entity to utilize more qualitative factors. The Company will consider this guidance when it performs its goodwill impairment test, which is done annually as of September 30. This guidance will not affect the Company’s financial position, result of operations or cash flows.

Accounting guidance not yet effective

In July 2012, the FASB issued amended guidance on testing indefinite lived intangible assets for impairment. This guidance is intended to reduce the cost and complexity of the annual impairment test by allowing an entity to utilize more qualitative factors. This guidance will not affect the Company’s financial position, result of operations or cash flows.

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Fair Value Measurements - Additional Information (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2012	Jun. 30, 2012 Canopius Group Limited	Apr. 25, 2012 Canopius Group Limited
Fair Value [Line Items]
Percentage of ownership interest			10.70%	10.70%
Net realized gains (losses) from foreign currency forward contract		$ (2)
Net realized gains (losses) from fair value of debt and equity securities sold, not yet purchased	$ (2.6)	$ (0.3)

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Nature of Business - Additional Information (Detail)	6 Months Ended
	Jun. 30, 2012 Segment
Nature Of Business [Line Items]
Number of business segments	3

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Segment Information (Tables)

6 Months Ended

Jun. 30, 2012

Business Segments Results

Business segment results are as follows:

	Three Months Ended June  30,						Six Months Ended June  30,
($ in thousands)	2012			2011			2012			2011
Commercial Insurance Segment
Revenues
Premiums earned	$	337,650		$	263,735		$	635,485		$	515,503
Ceding commission revenue		3,894			4,710			3,904			8,728
Policy billing fees		1,390			1,114			2,903			1,878
Total revenues		342,934			269,559			642,292			526,109
Expenses
Loss and loss adjustment expenses		281,209			166,597			482,647			331,087
Underwriting expenses		113,954			86,633			217,750			173,861
Total expenses		395,163			253,230			700,397			504,948
Underwriting profit (loss)	$	(52,229	)	$	16,329		$	(58,105	)	$	21,161
Personal Insurance Segment
Revenues
Premiums earned	$	122,503		$	129,795		$	244,826		$	257,822
Ceding commission revenue		6,186			5,945			11,339			10,108
Policy billing fees		1,610			1,545			3,231			2,959
Total revenues		130,299			137,285			259,396			270,889
Expenses
Loss and loss adjustment expenses		68,566			74,249			134,621			149,935
Underwriting expenses		59,059			59,250			113,457			113,523
Total expenses		127,625			133,499			248,078			263,458
Underwriting profit (loss)	$	2,674		$	3,786		$	11,318		$	7,431
Tower	$	6,481		$	(650	)	$	15,373		$	2,564
Reciprocal Exchanges		(3,807	)		4,436			(4,055	)		4,867
Total underwriting profit (loss)	$	2,674		$	3,786		$	11,318		$	7,431
Insurance Services Segment
Revenues
Management fee income	$	7,965		$	7,704		$	14,827		$	14,399
Other revenue		1,359			(73	)		1,856			529
Total revenues		9,324			7,631			16,683			14,928
Expenses
Other expenses		5,079			4,977			9,542			10,018
Total expenses		5,079			4,977			9,542			10,018
Insurance services pretax income	$	4,245		$	2,654		$	7,141		$	4,910

Reconciliation of Revenue by Segment to Consolidated Revenues

The following table reconciles revenue by segment to consolidated revenues:

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2012			2011			2012			2011
Commercial insurance segment	$	342,934		$	269,559		$	642,292		$	526,109
Personal insurance segment		130,299			137,285			259,396			270,889
Insurance services segment		9,324			7,631			16,683			14,928
Total segment revenues		482,557			414,475			918,371			811,926
Elimination of management fee income		(7,965	)		(7,704	)		(14,827	)		(14,399	)
Net investment income		31,781			31,798			65,724			64,176
Net realized gains (losses) on investments, including other-than-temporary impairments		(236	)		(2,314	)		3,347			5,046
Consolidated revenues	$	506,137		$	436,255		$	972,615		$	866,749

Reconciliation of Results of Individual Segments to Consolidated Income Before Income Taxes

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

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2012			2011			2012			2011
Commercial insurance segment underwriting profit (loss)	$	(52,229	)	$	16,329		$	(58,105	)	$	21,161
Personal insurance segment underwriting profit		2,674			3,786			11,318			7,431
Insurance services segment pretax income		4,245			2,654			7,141			4,910
Net investment income		31,781			31,798			65,724			64,176
Net realized gains on investments, including other-than-temporary impairments		(236	)		(2,314	)		3,347			5,046
Corporate expenses		(3,159	)		(2,803	)		(6,020	)		(5,898	)
Acquisition-related transaction costs		(720	)		-			(1,982	)		(12	)
Interest expense		(7,902	)		(8,257	)		(15,478	)		(16,357	)
Income before income taxes	$	(25,546	)	$	41,193		$	5,945		$	80,457

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Business Segments Results (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Revenues
Premiums earned	$ 460,153	$ 393,530	$ 880,311	$ 773,325
Ceding commission revenue	10,080	10,655	15,243	18,836
Policy billing fees	3,000	2,659	6,134	4,837
Total segment revenues	482,557	414,475	918,371	811,926
Expenses
Loss and loss adjustment expenses	349,775	240,846	617,268	481,022
Total expenses	531,683	395,062	966,670	786,292
Reciprocal Exchanges
Expenses
Total expenses	50,600	51,800	93,600	100,300
Commercial Insurance Segment
Revenues
Premiums earned	337,650	263,735	635,485	515,503
Ceding commission revenue	3,894	4,710	3,904	8,728
Policy billing fees	1,390	1,114	2,903	1,878
Total segment revenues	342,934	269,559	642,292	526,109
Expenses
Loss and loss adjustment expenses	281,209	166,597	482,647	331,087
Underwriting expenses	113,954	86,633	217,750	173,861
Total expenses	395,163	253,230	700,397	504,948
Underwriting profit (loss)	(52,229)	16,329	(58,105)	21,161
Personal Insurance Segment
Revenues
Premiums earned	122,503	129,795	244,826	257,822
Ceding commission revenue	6,186	5,945	11,339	10,108
Policy billing fees	1,610	1,545	3,231	2,959
Total segment revenues	130,299	137,285	259,396	270,889
Expenses
Loss and loss adjustment expenses	68,566	74,249	134,621	149,935
Underwriting expenses	59,059	59,250	113,457	113,523
Total expenses	127,625	133,499	248,078	263,458
Underwriting profit (loss)	2,674	3,786	11,318	7,431
Personal Insurance Segment | Tower
Expenses
Underwriting profit (loss)	6,481	(650)	15,373	2,564
Personal Insurance Segment | Reciprocal Exchanges
Expenses
Underwriting profit (loss)	(3,807)	4,436	(4,055)	4,867
Insurance Services Segment
Revenues
Other revenue	1,359	(73)	1,856	529
Total segment revenues	9,324	7,631	16,683	14,928
Expenses
Other expenses	5,079	4,977	9,542	10,018
Total expenses	5,079	4,977	9,542	10,018
Segment pretax income	4,245	2,654	7,141	4,910
Insurance Services Segment | Reciprocal Exchanges
Revenues
Management fee income	$ 7,965	$ 7,704	$ 14,827	$ 14,399

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Summary of Changes in Level Three Assets Measured at Fair Value (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Beginning balance	$ 24,914		$ 25,000	$ 2,058
Total gains (losses)-realized / unrealized
Included in net income	86			(1,067)
Included in other comprehensive income (loss)
Purchases, issuances and settlements
Net transfers into (out of) Level 3				(991)
Ending balance	$ 25,000		$ 25,000

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Accounting Policies and Basis of Presentation - Additional Information (Detail) (USD $)	3 Months Ended		6 Months Ended			3 Months Ended	6 Months Ended	3 Months Ended	6 Months Ended	3 Months Ended	6 Months Ended
	Mar. 31, 2012 Reciprocal Exchanges	Mar. 31, 2012 Tower	Jun. 30, 2011 Cash and cash equivalents	Jun. 30, 2011 Other liability	Jun. 30, 2011 Net cash flows provided by operations	Jun. 30, 2011 Comprehensive Income Reciprocal Exchanges	Jun. 30, 2011 Comprehensive Income Reciprocal Exchanges	Jun. 30, 2011 Comprehensive Income Tower	Jun. 30, 2011 Comprehensive Income Tower	Mar. 31, 2012 Income Tax Expense Benefit Member	Jun. 30, 2012 Net Income	Jun. 30, 2012 Net Income Tower
Significant Accounting Policies [Line Items]
Transfer of assets	$ 1,778,000	$ 1,778,000
Prior period reclassifications and adjustments, amount			$ 52,900,000	$ 52,900,000	$ 15,600,000	$ 4,200,000	$ 5,000,000	$ (4,200,000)	$ (5,000,000)	$ (7,100,000)	$ 7,100,000	$ 2,600,000

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Variable Interest Entities ("VIEs") - Additional Information (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Variable Interest Entity [Line Items]
Total revenues	$ 506,137	$ 436,255	$ 972,615	$ 866,749
Total expenses	531,683	395,062	966,670	786,292
Net income (loss)	(3,194)	4,195	5,813	5,016
Reciprocal Exchanges
Variable Interest Entity [Line Items]
Total revenues	47,400	56,000	99,400	105,300
Total expenses	50,600	51,800	93,600	100,300
Net income (loss)	$ (3,200)	$ 4,200	$ 5,800	$ 5,000

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Nature of Business

6 Months Ended

Jun. 30, 2012

Nature of Business

Note 1—Nature of Business

Tower Group, Inc. (the “Company” or “Tower”) offers a broad range of commercial, specialty and personal specialty property and casualty insurance products and services through its subsidiaries to businesses in various industries and to individuals. The Company’s common stock is publicly traded on the NASDAQ Global Select Market under the symbol “TWGP”.

The Company operates three business segments as follows:

• Commercial Insurance (“Commercial”) Segment offers a broad range of standard and specialty commercial lines property and casualty insurance products to businesses distributed through a network of retail and wholesale agents and program underwriting agents on both an admitted and non-admitted basis. This segment also includes assumed reinsurance;

• Personal Insurance (“Personal”) Segment offers a broad range of personal lines property and casualty insurance products to individuals distributed through a network of retail and wholesale agents; and

• Insurance Services (“Services”) Segment provides underwriting, claims and reinsurance brokerage services to insurance companies.

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Summary of Cost or Amortized Cost and Fair Value of Investments in Fixed Maturity and Equity Securities, Gross Unrealized Gains and Losses, and Other-Than-Temporary Impairment Losses (Detail) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012		Dec. 31, 2011
Schedule of Available-for-sale Securities [Line Items]
Cost or Amortized Cost	$ 2,351,542		$ 2,428,146
Gross Unrealized Gains	151,080		131,309
Gross Unrealized Losses	(6,255)		(16,436)
Investments	2,496,367		2,543,019
Unrealized OTTI Losses	(438)	[1]	(1,178)	[1]
Tower
Schedule of Available-for-sale Securities [Line Items]
Cost or Amortized Cost	2,063,859		2,138,001
Gross Unrealized Gains	131,351		118,173
Gross Unrealized Losses	(5,918)		(15,075)
Investments	2,189,292		2,241,099
Unrealized OTTI Losses	(412)	[1]	(1,178)	[1]
Reciprocal Exchanges
Schedule of Available-for-sale Securities [Line Items]
Cost or Amortized Cost	287,683		290,145
Gross Unrealized Gains	19,729		13,136
Gross Unrealized Losses	(337)		(1,361)
Investments	307,075		301,920
Unrealized OTTI Losses	(26)	[1]
Fixed-maturity securities
Schedule of Available-for-sale Securities [Line Items]
Cost or Amortized Cost	2,218,017		2,335,112
Gross Unrealized Gains	144,817		129,914
Gross Unrealized Losses	(2,860)		(11,352)
Investments	2,359,974		2,453,674
Unrealized OTTI Losses	(438)	[1]	(1,178)	[1]
Fixed-maturity securities | U.S. Treasury securities
Schedule of Available-for-sale Securities [Line Items]
Cost or Amortized Cost	120,783		154,430
Gross Unrealized Gains	1,591		1,725
Gross Unrealized Losses	(7)		(13)
Investments	122,367		156,142
Fixed-maturity securities | U.S. Agency securities
Schedule of Available-for-sale Securities [Line Items]
Cost or Amortized Cost	77,690		114,411
Gross Unrealized Gains	3,592		2,779
Investments	81,282		117,190
Fixed-maturity securities | Municipal bonds
Schedule of Available-for-sale Securities [Line Items]
Cost or Amortized Cost	742,736		688,192
Gross Unrealized Gains	54,076		48,777
Gross Unrealized Losses	(435)		(255)
Investments	796,377		736,714
Fixed-maturity securities | Corporate and other bonds
Schedule of Available-for-sale Securities [Line Items]
Investments	720,890		777,723
Fixed-maturity securities | Corporate and other bonds | Finance
Schedule of Available-for-sale Securities [Line Items]
Cost or Amortized Cost	263,167		331,917
Gross Unrealized Gains	16,167		9,201
Gross Unrealized Losses	(215)		(4,615)
Investments	279,119		336,503
Fixed-maturity securities | Corporate and other bonds | Industrial
Schedule of Available-for-sale Securities [Line Items]
Cost or Amortized Cost	389,693		388,139
Gross Unrealized Gains	22,394		22,198
Gross Unrealized Losses	(1,181)		(2,287)
Investments	410,906		408,050
Fixed-maturity securities | Corporate and other bonds | Utilities
Schedule of Available-for-sale Securities [Line Items]
Cost or Amortized Cost	28,254		30,164
Gross Unrealized Gains	2,637		3,067
Gross Unrealized Losses	(26)		(61)
Investments	30,865		33,170
Fixed-maturity securities | Commercial mortgage-backed securities
Schedule of Available-for-sale Securities [Line Items]
Cost or Amortized Cost	223,358		232,877
Gross Unrealized Gains	27,643		22,854
Gross Unrealized Losses	(576)		(2,564)
Investments	250,425		253,167
Unrealized OTTI Losses	(365)	[1]	(483)	[1]
Fixed-maturity securities | Residential mortgage-backed securities, Agency backed securities
Schedule of Available-for-sale Securities [Line Items]
Cost or Amortized Cost	313,648		304,876
Gross Unrealized Gains	14,760		15,401
Gross Unrealized Losses	(135)		(1)
Investments	328,273		320,276
Fixed-maturity securities | Residential mortgage-backed securities, Non-agency backed securities
Schedule of Available-for-sale Securities [Line Items]
Cost or Amortized Cost	17,100		29,907
Gross Unrealized Gains	1,147		2,603
Gross Unrealized Losses	(123)		(901)
Investments	18,124		31,609
Unrealized OTTI Losses	(73)	[1]	(695)	[1]
Fixed-maturity securities | Asset-backed securities
Schedule of Available-for-sale Securities [Line Items]
Cost or Amortized Cost	41,588		60,199
Gross Unrealized Gains	810		1,309
Gross Unrealized Losses	(162)		(655)
Investments	42,236		60,853
Preferred stocks
Schedule of Available-for-sale Securities [Line Items]
Cost or Amortized Cost	33,803		24,083
Gross Unrealized Gains	2,656		317
Gross Unrealized Losses	(157)		(890)
Investments	36,302		23,510
Common stocks
Schedule of Available-for-sale Securities [Line Items]
Cost or Amortized Cost	99,722		68,951
Gross Unrealized Gains	3,607		1,078
Gross Unrealized Losses	(3,238)		(4,194)
Investments	$ 100,091		$ 65,835

[1] Represents the gross unrealized loss on other-than-temporarily impaired securities recognized in accumulated other comprehensive income (loss).

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Composition of Other Invested Assets (Detail) (Tower, USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Schedule of Investments [Line Items]
Other invested assets	$ 52,333	$ 44,347
Limited partnerships
Schedule of Investments [Line Items]
Other invested assets	19,279	12,459
Real estate
Schedule of Investments [Line Items]
Other invested assets	8,054	6,888
Securities reported under the fair value option
Schedule of Investments [Line Items]
Other invested assets	$ 25,000	$ 25,000

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Analysis of Stock Based Compensation Expense (Detail) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Weighted average years expense will be recognized	2 years 183 days	2 years 219 days
Restricted Stock
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expense, net of tax	896	3,035
Value of shares vested	8,576	5,391
Value of unvested shares	19,257	23,396
Unrecognized compensation expense	12,791	19,150
Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Intrinsic value of outstanding options	1,632	3,715
Intrinsic value of vested outstanding options	1,632	3,432
Unrecognized compensation expense		42

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Available-for-sale investments, at fair value:
Fixed-maturity securities	$ 2,359,974	$ 2,453,674
Total investments	2,548,700	2,587,366
Cash and cash equivalents	199,005	114,098
Investment income receivable	27,233	26,782
Premiums receivable	381,983	408,626
Reinsurance recoverable on paid losses	19,076	23,903
Reinsurance recoverable on unpaid losses	301,620	319,664
Prepaid reinsurance premiums	55,691	54,037
Deferred acquisition costs, net	185,507	168,858
Intangible assets	110,918	114,920
Goodwill	250,103	250,103
Funds held by reinsured companies	133,968	69,755
Other assets	269,838	304,083
Total assets	4,483,642	4,442,195
Liabilities
Loss and loss adjustment expenses	1,701,833	1,632,113
Unearned premium	926,456	893,176
Reinsurance balances payable	14,418	20,794
Funds held under reinsurance agreements	91,142	96,726
Other liabilities	194,901	266,155
Deferred income taxes	33,058	29,337
Debt	448,291	426,901
Total liabilities	3,410,099	3,365,202
Contingencies (Note 12)
Stockholders' equity
Common stock ($0.01 par value; 100,000,000 shares authorized, 46,769,519 and 46,448,341 shares issued, and 38,377,091 and 39,221,102 shares outstanding)	468	465
Treasury stock (8,392,428 and 7,227,239 shares)	(181,324)	(158,185)
Paid-in-capital	775,542	772,938
Accumulated other comprehensive income	75,866	62,244
Retained earnings	347,521	356,680
Tower Group, Inc. stockholders' equity	1,018,073	1,034,142
Noncontrolling interests	55,470	42,851
Total stockholders' equity	1,073,543	1,076,993
Total liabilities and stockholders' equity	4,483,642	4,442,195
Tower
Available-for-sale investments, at fair value:
Fixed-maturity securities	2,060,802	2,153,620
Equity securities	128,490	87,479
Other invested assets	52,333	44,347
Liabilities
Loss and loss adjustment expenses	1,568,286	1,495,839
Reciprocal Exchanges
Available-for-sale investments, at fair value:
Fixed-maturity securities	299,172	300,054
Equity securities	7,903	1,866
Cash and cash equivalents	6,906	666
Investment income receivable	3,078	2,978
Premiums receivable	38,662	41,290
Reinsurance recoverable on paid losses	1,799	5,670
Reinsurance recoverable on unpaid losses	19,661	11,253
Prepaid reinsurance premiums	16,419	14,685
Deferred acquisition costs, net	12,758	11,866
Intangible assets	7,146	4,839
Other assets	4,021	2,685
Liabilities
Loss and loss adjustment expenses	133,547	136,274
Unearned premium	103,408	102,991
Reinsurance balances payable	4,875	3,466
Other liabilities	7,700	7,154
Deferred income taxes	$ 3,392	$ 4,511

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Reconciliation of Beginning and Ending Consolidated Balances for Unpaid Losses and Loss Adjustment Expense (Detail) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Balance at beginning of period	$ 1,632,113	$ 1,610,421
Less reinsurance recoverables on unpaid losses	(319,664)	(282,682)
Liability for Unpaid Claims and Claims Adjustment Expense, Net	1,312,449	1,327,739
Incurred related to:
Current year	545,267	484,270
Prior years unfavorable/(favorable) development	72,001	(3,248)
Total incurred	617,268	481,022
Paid related to:
Current year	185,161	203,408
Prior years	344,343	299,532
Total paid	529,504	502,940
Net balance at end of period	1,400,213	1,305,821
Add reinsurance recoverables on unpaid losses	301,620	278,878
Balance at end of period	1,701,833	1,584,699
Tower
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Balance at beginning of period	1,495,839	1,439,106
Less reinsurance recoverables on unpaid losses	(308,411)	(271,298)
Liability for Unpaid Claims and Claims Adjustment Expense, Net	1,187,428	1,167,808
Incurred related to:
Current year	487,837	422,866
Prior years unfavorable/(favorable) development	78,254	7,551
Total incurred	566,091	430,417
Paid related to:
Current year	153,792	173,061
Prior years	313,400	271,247
Total paid	467,192	444,308
Net balance at end of period	1,286,327	1,153,917
Add reinsurance recoverables on unpaid losses	281,959	263,619
Balance at end of period	1,568,286	1,417,536
Reciprocal Exchanges
Causes of Increase (Decrease) in Liability for Unpaid Claims and Claims Adjustment Expense [Line Items]
Balance at beginning of period	136,274	171,315
Less reinsurance recoverables on unpaid losses	(11,253)	(11,384)
Liability for Unpaid Claims and Claims Adjustment Expense, Net	125,021	159,931
Incurred related to:
Current year	57,430	61,404
Prior years unfavorable/(favorable) development	(6,253)	(10,799)
Total incurred	51,177	50,605
Paid related to:
Current year	31,369	30,347
Prior years	30,943	28,285
Total paid	62,312	58,632
Net balance at end of period	113,886	151,904
Add reinsurance recoverables on unpaid losses	19,661	15,259
Balance at end of period	$ 133,547	$ 167,163

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Consolidated Statements of Changes in Stockholders' Equity (USD $) In Thousands	Total	Common Stock	Treasury Stock	Paid-in Capital	Accumulated Other Comprehensive Income (loss)	Retained Earnings	Noncontrolling Interests
Balance at beginning of period at Dec. 31, 2010	$ 1,067,838	$ 457	$ (91,779)	$ 763,064	$ 48,883	$ 324,376	$ 22,837
Balance at beginning of period (in shares) at Dec. 31, 2010		45,742
Dividends declared	(12,855)					(12,855)
Stock based compensation (in shares)		656
Stock based compensation	3,744	7	(1,640)	5,377
Repurchase of common stock	(19,990)		(19,990)
Net income	54,822					49,806	5,016
Other comprehensive income	10,256				6,861		3,395
Balance at end of period at Jun. 30, 2011	1,103,815	464	(113,409)	768,441	55,744	361,327	31,248
Balance at end of period (in shares) at Jun. 30, 2011		46,398
Balance at beginning of period at Dec. 31, 2011	1,076,993	465	(158,185)	772,938	62,244	356,680	42,851
Balance at beginning of period (in shares) at Dec. 31, 2011		46,448
Dividends declared	(14,680)					(14,680)
Stock based compensation (in shares)		321
Stock based compensation	2,233	3	(2,152)	4,382
Repurchase of common stock	(20,987)		(20,987)
Net income	11,334					5,521	5,813
Transfer of assets to Reciprocal Exchanges				(1,778)			1,778
Other comprehensive income	18,650				13,622		5,028
Balance at end of period at Jun. 30, 2012	$ 1,073,543	$ 468	$ (181,324)	$ 775,542	$ 75,866	$ 347,521	$ 55,470
Balance at end of period (in shares) at Jun. 30, 2012		46,769

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Contingencies - Additional Information (Detail) (Munich Reinsurance America, Inc. Legal Proceedings, USD $)	1 Months Ended
	Jul. 15, 2011	Jun. 22, 2009 LegalMatter	May 28, 2009	Mar. 23, 2012
Munich Reinsurance America, Inc. Legal Proceedings
Commitments and Contingencies Disclosure [Line Items]
Damages sought by Plaintiff, values			$ 6,100,000
Counterclaims recovery sought		2,800,000
Number of Counterclaims		2
Cash paid to resolve portion of dispute	3,300,000
Pre-judgment interest imposed by court				$ 168,000

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Summary of Gross Realized Gains, Losses and Impairment Write-Downs on Investments (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Gain (Loss) on Investments [Line Items]
Net realized gains (losses) on investments	$ 2,003	$ (2,104)	$ 8,307	$ 5,400
Other-than-temporary impairment losses	(2,239)	(210)	(4,960)	(354)
Total net realized investment gains (losses)	(236)	(2,314)	3,347	5,046
Tower
Gain (Loss) on Investments [Line Items]
Other-than-temporary impairment losses	(2,239)	(210)	(4,960)	(354)
Total net realized investment gains (losses)	1,421	(2,857)	1,028	5,380
Reciprocal Exchanges
Gain (Loss) on Investments [Line Items]
Total net realized investment gains (losses)	(1,657)	543	2,319	(334)
Fixed-maturity securities
Gain (Loss) on Investments [Line Items]
Gross realized gains	12,354	4,551	25,162	19,657
Gross realized losses	(609)	(1,326)	(2,551)	(7,333)
Net realized gains (losses) on investments	11,745	3,225	22,611	12,324
Other-than-temporary impairment losses	(765)	(210)	(882)	(354)
Equity securities
Gain (Loss) on Investments [Line Items]
Gross realized gains	2,685	2,228	4,179	4,570
Gross realized losses	(9,808)	(7,557)	(16,160)	(11,494)
Net realized gains (losses) on investments	(7,123)	(5,329)	(11,981)	(6,924)
Other-than-temporary impairment losses	(1,474)		(4,078)
Other
Gain (Loss) on Investments [Line Items]
Gross realized gains	555		1,790
Gross realized losses	(3,174)		(4,113)
Net realized gains (losses) on investments	$ (2,619)		$ (2,323)

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Investments (Tables)

6 Months Ended

Jun. 30, 2012

Summary of Cost or Amortized Cost and Fair Value of Investments in Fixed Maturity and Equity Securities, Gross Unrealized Gains and Losses, and Other-Than-Temporary Impairment Losses

The cost or amortized cost and fair value of the Company’s investments in fixed maturity and equity securities, gross unrealized gains and losses, and other-than-temporary impairment losses as of June 30, 2012 and December 31, 2011 are summarized as follows:

($ in thousands)	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Unrealized OTTI Losses (1)
June 30, 2012
U.S. Treasury securities	$	120,783	$	1,591	$	(7	)	$	122,367	$	-
U.S. Agency securities		77,690		3,592		-			81,282		-
Municipal bonds		742,736		54,076		(435	)		796,377		-
Corporate and other bonds
Finance		263,167		16,167		(215	)		279,119		-
Industrial		389,693		22,394		(1,181	)		410,906		-
Utilities		28,254		2,637		(26	)		30,865		-
Commercial mortgage-backed securities		223,358		27,643		(576	)		250,425		(365	)
Residential mortgage-backed securities
Agency backed securities		313,648		14,760		(135	)		328,273		-
Non-agency backed securities		17,100		1,147		(123	)		18,124		(73	)
Asset-backed securities		41,588		810		(162	)		42,236		-
Total fixed-maturity securities		2,218,017		144,817		(2,860	)		2,359,974		(438	)
Preferred stocks, principally financial sector		33,803		2,656		(157	)		36,302		-
Common stocks, principally financial and industrial sectors		99,722		3,607		(3,238	)		100,091		-
Total, June 30, 2012	$	2,351,542	$	151,080	$	(6,255	)	$	2,496,367	$	(438	)
Tower	$	2,063,859	$	131,351	$	(5,918	)	$	2,189,292	$	(412	)
Reciprocal Exchanges		287,683		19,729		(337	)		307,075		(26	)
Total, June 30, 2012	$	2,351,542	$	151,080	$	(6,255	)	$	2,496,367	$	(438	)
December 31, 2011
U.S. Treasury securities	$	154,430	$	1,725	$	(13	)	$	156,142	$	-
U.S. Agency securities		114,411		2,779		-			117,190		-
Municipal bonds		688,192		48,777		(255	)		736,714		-
Corporate and other bonds
Finance		331,917		9,201		(4,615	)		336,503		-
Industrial		388,139		22,198		(2,287	)		408,050		-
Utilities		30,164		3,067		(61	)		33,170		-
Commercial mortgage-backed securities		232,877		22,854		(2,564	)		253,167		(483	)
Residential mortgage-backed securities
Agency backed securities		304,876		15,401		(1	)		320,276		-
Non-agency backed securities		29,907		2,603		(901	)		31,609		(695	)
Asset-backed securities		60,199		1,309		(655	)		60,853		-
Total fixed-maturity securities		2,335,112		129,914		(11,352	)		2,453,674		(1,178	)
Preferred stocks, principally financial sector		24,083		317		(890	)		23,510		-
Common stocks, principally industrial and financial sectors		68,951		1,078		(4,194	)		65,835		-
Total, December 31, 2011	$	2,428,146	$	131,309	$	(16,436	)	$	2,543,019	$	(1,178	)
Tower	$	2,138,001	$	118,173	$	(15,075	)	$	2,241,099	$	(1,178	)
Reciprocal Exchanges		290,145		13,136		(1,361	)		301,920		-
Total, December 31, 2011	$	2,428,146	$	131,309	$	(16,436	)	$	2,543,019	$	(1,178	)

(1) Represents the gross unrealized loss on other-than-temporarily impaired securities recognized in accumulated other comprehensive income (loss).

Summary of Major Categories of Net Investment Income

Major categories of net investment income are summarized as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2012			2011			2012			2011
Income
Fixed-maturity securities	$	24,511		$	26,154		$	49,924		$	55,264
Equity securities		6,603			6,565			14,239			10,977
Cash and cash equivalents		448			216			738			347
Other, primarily from other invested assets		1,573			117			3,555			248
Total		33,135			33,052			68,456			66,836
Expenses
Investment expenses		(1,354	)		(1,254	)		(2,732	)		(2,660	)
Net investment income	$	31,781		$	31,798		$	65,724		$	64,176
Tower		30,267			30,401			62,525			61,106
Reciprocal Exchanges		3,177			3,051			6,526			6,396
Elimination of interest on Reciprocal Exchange surplus notes		(1,663	)		(1,654	)		(3,327	)		(3,326	)
Net investment income	$	31,781		$	31,798		$	65,724		$	64,176

Summary of Gross Realized Gains, Losses and Impairment Write-Downs on Investments

Gross realized gains, losses and impairment write-downs on investments are summarized as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2012			2011			2012			2011
Fixed-maturity securities
Gross realized gains	$	12,354		$	4,551		$	25,162		$	19,657
Gross realized losses		(609	)		(1,326	)		(2,551	)		(7,333	)
		11,745			3,225			22,611			12,324
Equity securities
Gross realized gains		2,685			2,228			4,179			4,570
Gross realized losses		(9,808	)		(7,557	)		(16,160	)		(11,494	)
		(7,123	)		(5,329	)		(11,981	)		(6,924	)
Other
Gross realized gains		555			-			1,790			-
Gross realized losses		(3,174	)		-			(4,113	)		-
		(2,619	)		-			(2,323	)		-
Net realized gains (losses) on investments		2,003			(2,104	)		8,307			5,400
Other-than-temporary impairment losses:
Fixed-maturity securities		(765	)		(210	)		(882	)		(354	)
Equity securities		(1,474	)		-			(4,078	)		-
Total other-than-temporary impairment losses recognized in earnings		(2,239	)		(210	)		(4,960	)		(354	)
Total net realized investment gains (losses)	$	(236	)	$	(2,314	)	$	3,347		$	5,046
Tower	$	1,421		$	(2,857	)	$	1,028		$	5,380
Reciprocal Exchanges		(1,657	)		543			2,319			(334	)
Total net realized investment gains (losses)	$	(236	)	$	(2,314	)	$	3,347		$	5,046

Amount of Fixed-Maturity and Equity Securities that were Other-Than-Temporary Impairment

The following table shows the amount of fixed-maturity and equity securities that were OTTI for the three and six months ended June 30, 2012 and 2011. This resulted in recording impairment write-downs included in net realized investment gains (losses), and reduced the unrealized loss in other comprehensive net income:

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2012			2011			2012			2011
Corporate and other bonds	$	(648	)	$	-		$	(737	)	$	-
Commercial mortgage-backed securities		(403	)		(66	)		(403	)		(163	)
Residential mortgage-backed securities		-			-			(28	)		(71	)
Asset-backed securities		-			(144	)		-			(144	)
Equities		(1,474	)		-			(4,078	)		-
Other-than-temporary-impairments		(2,525	)		(210	)		(5,246	)		(378	)
Portion of loss recognized in accumulated other comprehensive income (loss)		286			-			286			24
Impairment losses recognized in earnings	$	(2,239	)	$	(210	)	$	(4,960	)	$	(354	)
Tower	$	(2,239	)	$	(210	)	$	(4,960	)	$	(354	)
Reciprocal Exchanges		-			-			-			-
Impairment losses recognized in earnings	$	(2,239	)	$	(210	)	$	(4,960	)	$	(354	)

Rollforward of Cumulative Amount of Other-Than-Temporary Impairment for Securities Still Held Showing Amounts that have been Included in Earnings on Pretax Basis

The following table provides a rollforward of the cumulative amounts of credit OTTI for securities still held showing the amounts that have been included in earnings on a pretax basis for the three months ended June 30, 2012 and 2011:

	Three Months Ended June 30,
($ in thousands)	2012			2011
Balance, April 1,	$	6,084		$	15,124
Additional credit losses recognized during the period, related to securities for which:
No OTTI has been previously recognized		765			44
OTTI has been previously recognized		-			166
Reductions due to:
Securities sold during the period (realized)		(730	)		(1,888	)
Balance, June 30,	$	6,119		$	13,446

The following table provides a rollforward of the cumulative amounts of credit OTTI for securities still held showing the amounts that have been included in earnings on a pretax basis for the six months ended June 30, 2012 and 2011:

	Six Months  Ended June 30,
($ in thousands)	2012			2011
Balance, January 1,	$	12,666		$	18,075
Additional credit losses recognized during the period, related to securities for which:
No OTTI has been previously recognized		854			44
OTTI has been previously recognized		28			310
Reductions due to:
Securities sold during the period (realized)		(7,429	)		(4,983	)
Balance, June 30,	$	6,119		$	13,446

Information Regarding Invested Assets that were in Unrealized Loss Position

The following table presents information regarding invested assets that were in an unrealized loss position at June 30, 2012 and December 31, 2011 by amount of time in a continuous unrealized loss position:

	Less than 12 Months					12 Months or Longer					Total
($ in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Aggregate Fair Value		Unrealized Losses
June 30, 2012
U.S. Treasury securities	$	65,714	$	(7	)	$	-	$	-		$	65,714	$	(7	)
Municipal bonds		41,456		(431	)		990		(4	)		42,446		(435	)
Corporate and other bonds
Finance		22,784		(169	)		752		(46	)		23,536		(215	)
Industrial		46,687		(990	)		6,465		(191	)		53,152		(1,181	)
Utilities		3,425		(24	)		394		(2	)		3,819		(26	)
Commercial mortgage-backed securities		16,036		(138	)		16,053		(438	)		32,089		(576	)
Residential mortgage-backed securities
Agency backed		21,134		(134	)		21		-			21,155		(134	)
Non-agency backed		6		(3	)		2,666		(121	)		2,672		(124	)
Asset-backed securities		12,333		(117	)		1,680		(45	)		14,013		(162	)
Total fixed-maturity securities		229,575		(2,013	)		29,021		(847	)		258,596		(2,860	)
Preferred stocks		6,263		(45	)		6,019		(112	)		12,282		(157	)
Common stocks		39,868		(3,183	)		913		(55	)		40,781		(3,238	)
Total, June 30, 2012	$	275,706	$	(5,241	)	$	35,953	$	(1,014	)	$	311,659	$	(6,255	)
Tower	$	254,853	$	(4,959	)	$	34,232	$	(959	)	$	289,085	$	(5,918	)
Reciprocal Exchanges		20,853		(282	)		1,721		(55	)		22,574		(337	)
Total, June 30, 2012	$	275,706	$	(5,241	)	$	35,953	$	(1,014	)	$	311,659	$	(6,255	)
December 31, 2011
U.S. Treasury securities	$	92,001	$	(13	)	$	-	$	-		$	92,001	$	(13	)
Municipal bonds		13,449		(255	)		-		-			13,449		(255	)
Corporate and other bonds
Finance		138,986		(4,610	)		251		(5	)		139,237		(4,615	)
Industrial		57,357		(2,141	)		3,519		(145	)		60,876		(2,286	)
Utilities		1,902		(61	)		-		-			1,902		(61	)
Commercial mortgage-backed securities		26,130		(2,564	)		-		-			26,130		(2,564	)
Residential mortgage-backed securities
Agency backed		19		(1	)		12		-			31		(1	)
Non-agency backed		13,294		(318	)		4,609		(583	)		17,903		(901	)
Asset-backed securities		29,624		(647	)		610		(9	)		30,234		(656	)
Total fixed-maturity securities		372,762		(10,610	)		9,001		(742	)		381,763		(11,352	)
Preferred stocks		17,773		(644	)		1,303		(246	)		19,076		(890	)
Common stocks		44,132		(4,194	)		-		-			44,132		(4,194	)
Total, December 31, 2011	$	434,667	$	(15,448	)	$	10,304	$	(988	)	$	444,971	$	(16,436	)
Tower	$	398,989	$	(14,160	)	$	8,264	$	(915	)	$	407,253	$	(15,075	)
Reciprocal Exchanges		35,678		(1,288	)		2,040		(73	)		37,718		(1,361	)
Total, December 31, 2011	$	434,667	$	(15,448	)	$	10,304	$	(988	)	$	444,971	$	(16,436	)

Amortized Cost and Fair Value of Fixed-Maturity Portfolio by Contracrual Time to Maturity

The following table shows the amortized cost and fair value of the fixed-maturity portfolio by contractual time to maturity at June 30, 2012 and December 31, 2011:

	Tower				Reciprocal Exchanges				Total
($ in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
June 30, 2012
Remaining Time to Maturity
Less than one year	$	41,638	$	42,094	$	2,000	$	2,080	$	43,638	$	44,174
One to five years		413,347		429,544		30,452		31,722		443,799		461,266
Five to ten years		536,091		572,698		64,358		68,066		600,449		640,764
More than 10 years		434,622		468,693		99,816		106,020		534,438		574,713
Mortgage and asset-backed securities		511,476		547,773		84,217		91,284		595,693		639,057
Total, June 30, 2012	$	1,937,174	$	2,060,802	$	280,843	$	299,172	$	2,218,017	$	2,359,974
December 31, 2011
Remaining Time to Maturity
Less than one year	$	40,201	$	40,529	$	44,238	$	44,942	$	84,439	$	85,471
One to five years		479,721		491,904		81,566		83,743		561,287		575,647
Five to ten years		563,830		593,838		21,522		22,797		585,352		616,635
More than 10 years		427,357		458,536		48,818		51,480		476,175		510,016
Mortgage and asset-backed securities		535,823		568,813		92,036		97,092		627,859		665,905
Total, December 31, 2011	$	2,046,932	$	2,153,620	$	288,180	$	300,054	$	2,335,112	$	2,453,674

Composition of Other Invested Assets

The following table shows the composition of the other invested assets as of June 30, 2012 and December 31, 2011:

($ in thousands)	June 30, 2012		December 31, 2011
Limited partnerships, equity method	$	19,279	$	12,459
Real estate, amortized cost		8,054		6,888
Securities reported under the fair value option		25,000		25,000
Total	$	52,333	$	44,347

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Amount of Fixed-Maturity and Equity Securities that were Other-Than-Temporary Impairment (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Other than Temporary Impairment, Credit Losses Recognized in Earnings [Line Items]
Other-than-temporary impairments	$ (2,525)	$ (210)	$ (5,246)	$ (378)
Portion of loss recognized in accumulated other comprehensive income (loss)	286		286	24
Other-than-temporary impairment losses	2,239	210	4,960	354
Tower
Other than Temporary Impairment, Credit Losses Recognized in Earnings [Line Items]
Other-than-temporary impairment losses	2,239	210	4,960	354
Corporate and other bonds
Other than Temporary Impairment, Credit Losses Recognized in Earnings [Line Items]
Other-than-temporary impairments	(648)		(737)
Commercial mortgage-backed securities
Other than Temporary Impairment, Credit Losses Recognized in Earnings [Line Items]
Other-than-temporary impairments	(403)	(66)	(403)	(163)
Residential mortgage-backed securities
Other than Temporary Impairment, Credit Losses Recognized in Earnings [Line Items]
Other-than-temporary impairments			(28)	(71)
Asset-backed securities
Other than Temporary Impairment, Credit Losses Recognized in Earnings [Line Items]
Other-than-temporary impairments		(144)		(144)
Equity securities
Other than Temporary Impairment, Credit Losses Recognized in Earnings [Line Items]
Other-than-temporary impairments	$ (1,474)		$ (4,078)

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Loss and Loss Adjustment Expense (Tables)

6 Months Ended

Jun. 30, 2012

Reconciliation of Beginning and Ending Consolidated Balances for Unpaid Losses and Loss Adjustment Expense

The following table provides a reconciliation of the beginning and ending consolidated balances for unpaid losses and loss adjustment expense (“LAE”) for the six months ended June 30, 2012 and 2011:

	Six Months Ended June 30,
	2012									2011
($ in thousands)	Tower			Reciprocal Exchanges			Total			Tower			Reciprocal Exchanges			Total
Balance at January 1,	$	1,495,839		$	136,274		$	1,632,113		$	1,439,106		$	171,315		$	1,610,421
Less reinsurance recoverables on unpaid losses		(308,411	)		(11,253	)		(319,664	)		(271,298	)		(11,384	)		(282,682	)
		1,187,428			125,021			1,312,449			1,167,808			159,931			1,327,739
Incurred related to:
Current year		487,837			57,430			545,267			422,866			61,404			484,270
Prior years unfavorable/(favorable) development		78,254			(6,253	)		72,001			7,551			(10,799	)		(3,248	)
Total incurred		566,091			51,177			617,268			430,417			50,605			481,022
Paid related to:
Current year		153,792			31,369			185,161			173,061			30,347			203,408
Prior years		313,400			30,943			344,343			271,247			28,285			299,532
Total paid		467,192			62,312			529,504			444,308			58,632			502,940
Net balance at end of period		1,286,327			113,886			1,400,213			1,153,917			151,904			1,305,821
Add reinsurance recoverables on unpaid losses		281,959			19,661			301,620			263,619			15,259			278,878
Balance at June 30,	$	1,568,286		$	133,547		$	1,701,833		$	1,417,536		$	167,163		$	1,584,699

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Cash flows provided by operating activities:
Net income	$ 11,334	$ 54,822
Adjustments to reconcile net income to net cash provided by (used in) operations:
Net realized investment (gains) losses	(3,347)	(5,046)
Depreciation and amortization	15,985	13,145
Amortization of bond and debt premium or discount	5,377	3,124
Amortization of restricted stock	4,382	5,041
Deferred income taxes	(7,481)	9,010
Changes in operating assets and liabilities:
Investment income receivable	(451)	(2,296)
Premiums receivable	26,643	1,762
Reinsurance recoverable	22,871	(4,421)
Prepaid reinsurance premiums	(1,654)	27,916
Deferred acquisition costs, net	(16,649)	(3,373)
Other assets	(68,724)	(21,746)
Loss and loss adjustment expenses	69,720	(25,722)
Unearned premium	33,280	(12,228)
Reinsurance balances payable	(6,376)	(15,250)
Funds held under reinsurance agreements	(5,584)	8,395
Other liabilities	(6,889)	20,329
Net cash flows provided by operations	72,437	53,462
Cash flows (used in) investing activities:
Purchase of fixed assets	(19,426)	(11,705)
Purchase - fixed-maturity securities	(997,657)	(965,648)
Purchase - equity securities	(802,154)	(296,441)
Short-term investments, net		(3,438)
Change in other invested assets	(7,986)
Sale or maturity - fixed-maturity securities	1,111,663	945,867
Sale - equity securities	745,618	285,322
Net cash flows provided by (used in) investing activities	30,058	(46,043)
Cash flows (used in) financing activities:
Proceeds from credit facility borrowings	20,000	17,000
Repayment of credit facility borrowings		(17,000)
Issuance of common stock under stock-based compensation programs	3	343
Excess tax benefits from share-based payment arrangements	228	(147)
Treasury stock acquired-net employee share-based compensation	(2,152)	(1,640)
Repurchase of Common Stock	(20,987)	(19,990)
Dividends paid	(14,680)	(12,855)
Net cash flows (used in) financing activities	(17,588)	(34,289)
Increase (decrease) in cash and cash equivalents	84,907	(26,870)
Cash and cash equivalents, beginning of period	114,098	140,221
Cash and cash equivalents, end of period	$ 199,005	$ 113,351

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Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Fixed-maturity securities, amortized cost	$ 2,218,017	$ 2,335,112
Cash and cash equivalents	199,005	114,098
Investment income receivable	27,233	26,782
Premiums receivable	381,983	408,626
Reinsurance recoverable on paid losses	19,076	23,903
Reinsurance recoverable on unpaid losses	301,620	319,664
Prepaid reinsurance premiums	55,691	54,037
Deferred acquisition costs, net	185,507	168,858
Intangible assets	110,918	114,920
Other assets	269,838	304,083
Loss and loss adjustment expenses	1,701,833	1,632,113
Unearned premium	926,456	893,176
Reinsurance balances payable	14,418	20,794
Other liabilities	194,901	266,155
Deferred income taxes	33,058	29,337
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	100,000,000	100,000,000
Common stock, shares issued	46,769,519	46,448,341
Common stock, shares outstanding	38,377,091	39,221,102
Treasury stock, shares	8,392,428	7,227,239
Tower
Fixed-maturity securities, amortized cost	1,937,174	2,046,932
Equity securities, cost	126,685	91,069
Loss and loss adjustment expenses	1,568,286	1,495,839
Reciprocal Exchanges
Fixed-maturity securities, amortized cost	280,843	288,180
Equity securities, cost	6,840	1,965
Cash and cash equivalents	6,906	666
Investment income receivable	3,078	2,978
Premiums receivable	38,662	41,290
Reinsurance recoverable on paid losses	1,799	5,670
Reinsurance recoverable on unpaid losses	19,661	11,253
Prepaid reinsurance premiums	16,419	14,685
Deferred acquisition costs, net	12,758	11,866
Intangible assets	7,146	4,839
Other assets	4,021	2,685
Loss and loss adjustment expenses	133,547	136,274
Unearned premium	103,408	102,991
Reinsurance balances payable	4,875	3,466
Other liabilities	7,700	7,154
Deferred income taxes	$ 3,392	$ 4,511

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Earnings (Loss) per Share

6 Months Ended

Jun. 30, 2012

Earnings (Loss) per Share

Note 10—Earnings (Loss) per Share

In accordance with the two-class method, undistributed net earnings (net income less dividends declared during the period) are allocated to both common stock and unvested share-based payment awards (“unvested restricted stock”). Because the common shareholders and unvested restricted stock holders share in dividends on a 1:1 basis, the earnings per share on undistributed earnings is equivalent. Undistributed earnings are allocated to all outstanding share-based payment awards, including those for which the requisite service period is not expected to be rendered.

The following table shows the computation of the earnings per share pursuant to the two-class method:

	Three Months Ended June 30,					Six Months Ended June 30,
(in thousands, except per share amounts)	2012			2011		2012			2011
Numerator
Net income (loss) attributable to Tower Group, Inc.	$	(15,113	)	$	24,121	$	5,521		$	49,806
Denominator
Weighted average common shares outstanding		39,117			41,303		39,206			41,404
Effect of dilutive securities:
Stock options		-			88		62			111
Other		-			4		-			3
Weighted average common and potential dilutive shares outstanding		39,117			41,395		39,268			41,518
Earnings (loss) per share attributable to Tower stockholders - basic
Common stock:
Distributed earnings	$	0.19		$	0.19	$	0.38		$	0.32
Undistributed earnings		(0.58	)		0.39		(0.24	)		0.88
Total		(0.39	)		0.58		0.14			1.20
Earnings (loss) per share attributable to Tower stockholders - diluted	$	(0.39	)	$	0.58	$	0.14		$	1.20

The computation of diluted earnings per share excludes outstanding options and other common stock equivalents in periods where inclusion of such potential common stock instruments would be anti-dilutive. For the three and six months ended June 30, 2012 855,500 and, 168,100, respectively, options and other common stock equivalents to purchase Tower shares were excluded from the computation of diluted earnings per share because the exercise price of the options was greater than the average market price. For the three and six months ended June 30, 2011 170,800 and, 170,800, respectively, options and other common stock equivalents to purchase Tower shares were excluded from the computation of diluted earnings per share because the exercise price of the options was greater than the average market price.

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Document and Entity Information	6 Months Ended
	Jun. 30, 2012	Aug. 01, 2012
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2012
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q2
Trading Symbol	TWGP
Entity Registrant Name	Tower Group, Inc.
Entity Central Index Key	0001289592
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		38,377,091

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Segment Information

6 Months Ended

Jun. 30, 2012

Segment Information

Note 11—Segment Information

The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Annual Report on Form 10-K for the year ended December 31, 2011.

The Personal Insurance segment includes revenues and expenses associated with the Reciprocal Exchanges, including fees paid to Tower for underwriting, claims, investment management and other services provided pursuant to management services agreements with the Reciprocal Exchanges. The Insurance Services segment reports revenues earned by Tower from the Reciprocal Exchanges as management fee income, which is calculated as a percentage of the Reciprocal Exchanges’ gross written premiums. The effects of these management services agreements between Tower and the Reciprocal Exchanges are eliminated in consolidation to derive consolidated net income. However, the management fee income is reported in net income attributable to Tower Group, Inc. and included in basic and diluted earnings per share.

Segment performance is evaluated based on segment profit, which excludes investment income, realized gains and losses, interest expense, income taxes and incidental corporate expenses. Assets, other than intangibles and goodwill, are not allocated to segments because investments and assets other than intangibles and goodwill are considered in total by management for decision-making purposes.

Business segment results are as follows:

	Three Months Ended June  30,						Six Months Ended June  30,
($ in thousands)	2012			2011			2012			2011
Commercial Insurance Segment
Revenues
Premiums earned	$	337,650		$	263,735		$	635,485		$	515,503
Ceding commission revenue		3,894			4,710			3,904			8,728
Policy billing fees		1,390			1,114			2,903			1,878
Total revenues		342,934			269,559			642,292			526,109
Expenses
Loss and loss adjustment expenses		281,209			166,597			482,647			331,087
Underwriting expenses		113,954			86,633			217,750			173,861
Total expenses		395,163			253,230			700,397			504,948
Underwriting profit (loss)	$	(52,229	)	$	16,329		$	(58,105	)	$	21,161
Personal Insurance Segment
Revenues
Premiums earned	$	122,503		$	129,795		$	244,826		$	257,822
Ceding commission revenue		6,186			5,945			11,339			10,108
Policy billing fees		1,610			1,545			3,231			2,959
Total revenues		130,299			137,285			259,396			270,889
Expenses
Loss and loss adjustment expenses		68,566			74,249			134,621			149,935
Underwriting expenses		59,059			59,250			113,457			113,523
Total expenses		127,625			133,499			248,078			263,458
Underwriting profit (loss)	$	2,674		$	3,786		$	11,318		$	7,431
Tower	$	6,481		$	(650	)	$	15,373		$	2,564
Reciprocal Exchanges		(3,807	)		4,436			(4,055	)		4,867
Total underwriting profit (loss)	$	2,674		$	3,786		$	11,318		$	7,431
Insurance Services Segment
Revenues
Management fee income	$	7,965		$	7,704		$	14,827		$	14,399
Other revenue		1,359			(73	)		1,856			529
Total revenues		9,324			7,631			16,683			14,928
Expenses
Other expenses		5,079			4,977			9,542			10,018
Total expenses		5,079			4,977			9,542			10,018
Insurance services pretax income	$	4,245		$	2,654		$	7,141		$	4,910

The following table reconciles revenue by segment to consolidated revenues:

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2012			2011			2012			2011
Commercial insurance segment	$	342,934		$	269,559		$	642,292		$	526,109
Personal insurance segment		130,299			137,285			259,396			270,889
Insurance services segment		9,324			7,631			16,683			14,928
Total segment revenues		482,557			414,475			918,371			811,926
Elimination of management fee income		(7,965	)		(7,704	)		(14,827	)		(14,399	)
Net investment income		31,781			31,798			65,724			64,176
Net realized gains (losses) on investments, including other-than-temporary impairments		(236	)		(2,314	)		3,347			5,046
Consolidated revenues	$	506,137		$	436,255		$	972,615		$	866,749

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

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2012			2011			2012			2011
Commercial insurance segment underwriting profit (loss)	$	(52,229	)	$	16,329		$	(58,105	)	$	21,161
Personal insurance segment underwriting profit		2,674			3,786			11,318			7,431
Insurance services segment pretax income		4,245			2,654			7,141			4,910
Net investment income		31,781			31,798			65,724			64,176
Net realized gains on investments, including other-than-temporary impairments		(236	)		(2,314	)		3,347			5,046
Corporate expenses		(3,159	)		(2,803	)		(6,020	)		(5,898	)
Acquisition-related transaction costs		(720	)		-			(1,982	)		(12	)
Interest expense		(7,902	)		(8,257	)		(15,478	)		(16,357	)
Income before income taxes	$	(25,546	)	$	41,193		$	5,945		$	80,457

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Consolidated Statements of Operations (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Revenues
Net premiums earned	$ 460,153	$ 393,530	$ 880,311	$ 773,325
Ceding commission revenue	10,080	10,655	15,243	18,836
Insurance services revenue	1,359	(73)	1,856	529
Policy billing fees	3,000	2,659	6,134	4,837
Net investment income	31,781	31,798	65,724	64,176
Net realized investment gains (losses):
Other-than-temporary impairments	(2,525)	(210)	(5,246)	(378)
Portion of loss recognized in other comprehensive income	286		286	24
Other net realized investment gains	2,003	(2,104)	8,307	5,400
Total net realized investment gains (losses)	(236)	(2,314)	3,347	5,046
Total revenues	506,137	436,255	972,615	866,749
Expenses
Loss and loss adjustment expenses	349,775	240,846	617,268	481,022
Direct and ceding commission expense	95,186	76,210	174,871	152,813
Other operating expenses	78,100	69,749	157,071	136,088
Acquisition-related transaction costs	720		1,982	12
Interest expense	7,902	8,257	15,478	16,357
Total expenses	531,683	395,062	966,670	786,292
Income (loss) before income taxes	(25,546)	41,193	5,945	80,457
Income tax expense (benefit)	(7,239)	12,877	(5,389)	25,635
Net income (loss)	(18,307)	28,316	11,334	54,822
Less: Net income (loss) attributable to Noncontrolling interests	(3,194)	4,195	5,813	5,016
Net income (loss) attributable to Tower Group, Inc.	$ (15,113)	$ 24,121	$ 5,521	$ 49,806
Earnings (loss) per share attributable to Tower Group, Inc. stockholders:
Basic	$ (0.39)	$ 0.58	$ 0.14	$ 1.20
Diluted	$ (0.39)	$ 0.58	$ 0.14	$ 1.20
Weighted average common shares outstanding:
Basic	39,117	41,303	39,206	41,404
Diluted	39,117	41,395	39,268	41,518
Dividends declared and paid per common share	$ 0.19	$ 0.19	$ 0.38	$ 0.32

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Fair Value Measurements

6 Months Ended

Jun. 30, 2012

Fair Value Measurements

Note 5—Fair Value Measurements

GAAP establishes a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets or liabilities fall within different levels of the hierarchy, the classification is based on the lowest level input that is significant to the fair value measurement of the asset or liability. Classification of assets and liabilities within the hierarchy considers the markets in which the assets and liabilities are traded, including during periods of market disruption, and the reliability and transparency of the assumptions used to determine fair value. The hierarchy requires the use of observable market data when available. The levels of the hierarchy are as follows:

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

Level 2 — Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs. Included are investments in U.S. Treasury and Agency securities and, together with municipal bonds, corporate debt securities, commercial mortgages, residential mortgage-backed securities and asset-backed securities. Additionally, interest-rate swap contracts utilize Level 2 inputs in deriving fair values.

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

The availability of observable inputs varies and is affected by a wide variety of factors. When the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment. The degree of judgment exercised by management in determining fair value is greatest for investments categorized as Level 3. For investments in this category, management considers prices and inputs that are current as of the measurement date. In periods of market dislocation, as characterized by current market conditions, the ability to observe stable prices and inputs may be reduced for many instruments. This condition could cause a security to be reclassified between levels.

As at June 30, 2012 and December 31, 2011, the Company’s financial instruments carried at fair value are allocated among levels as follows:

($ in thousands)	Level 1		Level 2			Level 3		Total
June 30, 2012
Fixed-maturity securities
U.S. Treasury securities	$	-	$	122,367		$	-	$	122,367
U.S. Agency securities		-		81,282			-		81,282
Municipal bonds		-		796,377			-		796,377
Corporate and other bonds		-		720,890			-		720,890
Commercial mortgage-backed securities		-		250,425			-		250,425
Residential mortgage-backed securities
Agency		-		328,273			-		328,273
Non-agency		-		18,124			-		18,124
Asset-backed securities		-		42,236			-		42,236
Total fixed-maturities		-		2,359,974			-		2,359,974
Equity securities		136,393		-			-		136,393
Total investments at fair value		136,393		2,359,974			-		2,496,367
Other invested assets (1)		-		-			25,000		25,000
Other liabilities									-
Interest rate swap contracts		-		(8,775	)		-		(8,775	)
Foreign currency forward contract		-		(2,042	)		-		(2,042	)
Debt and equity securities sold, not yet purchased		-		(17,506	)		-		(17,506	)
Total, June 30, 2012	$	136,393	$	2,331,651		$	25,000	$	2,493,044
Tower	$	128,490	$	2,032,479		$	25,000	$	2,185,969
Reciprocal Exchanges		7,903		299,172			-		307,075
Total, June 30, 2012	$	136,393	$	2,331,651		$	25,000	$	2,493,044
December 31, 2011
Fixed-maturity securities
U.S. Treasury securities	$	-	$	156,142		$	-	$	156,142
U.S. Agency securities		-		117,190			-		117,190
Municipal bonds		-		736,714			-		736,714
Corporate and other bonds		-		777,723			-		777,723
Commercial mortgage-backed securities		-		253,167			-		253,167
Residential mortgage-backed securities
Agency		-		320,276			-		320,276
Non-agency		-		31,609			-		31,609
Asset-backed securities		-		60,853			-		60,853
Total fixed-maturities		-		2,453,674			-		2,453,674
Equity securities		89,345		-			-		89,345
Total investments		89,345		2,453,674			-		2,543,019
Other invested assets (2)		-		-			25,000		25,000
Interest rate swap contracts		-		(7,384	)		-		(7,384	)
Total, December 31, 2011	$	89,345	$	2,446,290		$	25,000	$	2,560,635
Tower	$	87,479	$	2,146,236		$	25,000	$	2,258,715
Reciprocal Exchanges		1,866		300,054			-		301,920
Total, December 31, 2011	$	89,345	$	2,446,290		$	25,000	$	2,560,635

(1) $25.0 million of the Other invested assets balance at June 30, 2012 is reported at fair value. $27.3 million of Other invested assets is reported under the equity method of accounting or at amortized cost.

(2) $25.0 million of the Other invested assets balance at December 31, 2011 is reported at fair value. $19.3 million of Other invested assets is reported under the equity method of accounting or at amortized cost.

The fair values of the fixed-maturity, equity securities and short-term investments are determined by management after taking into consideration available sources of data. Various factors are considered that may indicate an inactive market, including levels of activity, source and timeliness of quotes, abnormal liquidity risk premiums, unusually wide bid-ask spreads, and lack of correlation between fair value of assets and relevant indices. If management believes that the price provided from the pricing source is distressed, management will use a valuation method that reflects an orderly transaction between market participants, generally a discounted cash flow method that incorporates relevant interest rate, risk and liquidity factors.

Substantially all of the portfolio valuations at June 30, 2012 classified as Level 1 or Level 2 in the above table is priced by utilizing the services of several independent pricing services that provide the Company with a price quote for each security. There were no adjustments made to the prices obtained from the independent pricing sources and dealers on securities classified as Level 1 or Level 2.

In 2012, there were no transfers of investments between Level 1 and Level 2 or between Level 2 and Level 3.

The fair values of the interest rate swaps were derived by using an industry standard swap valuation model with market based inputs for swaps having similar characteristics.

The fair value of the foreign currency forward contract was derived by multiplying the notional amount of the contract by the difference between the forward exchange rate at the anticipated settlement date of the contract and the spot rate as of June 30, 2012. The Company entered into the foreign currency forward contract as protection against currency risk on its expected purchase of 10.7 percent of Canopius Group, Ltd. This purchase is expected to close in the third quarter 2012 with the majority of purchase price denominated in British pound sterling. The Company recorded in net realized gains (losses) a $2.0 million loss in fair value on this contract.

The fair values of the debt and equity securities sold, not yet purchased were derived by using quoted prices for similar securities in active markets. These instruments resulted in net realized gains (losses) of $(2.6) million and $(0.3) million for the three and six months ended June 30, 2012, respectively.

In December 2011, the Company purchased two securities which are reported in other invested assets and have been classified as Level 3 of the fair value hierarchy. Management utilizes a discounted flow analysis to derive the fair values. For one security, which matures in 2015 and whose cash flows are supported by underlying short-term loans, the significant unobservable inputs include the underlying short-term loans’ probability of default and loss severity, and a discount for the security’s lack of marketability. Increases in the probability of default and loss severity assumptions (which generally move directionally with each other) would have the effect of decreasing the fair value of this security. The Company obtains credit ratings on the underlying short-term loans quarterly and considers these ratings when updating its assumptions. The second security is an equity instrument which entitles the Company to residual interests of a finite life special purpose vehicle. The significant unobservable inputs include the estimated losses to be incurred by the vehicle and the equity instrument’s lack of marketability. The Company obtains quarterly financial data from the vehicle and evaluates the estimated incurred loss figure. An increase in the vehicle’s estimated incurred losses would have the effect of decreasing the instrument’s fair value.

Management is responsible for the determination of the value of the investments carried at fair value and the supporting methodologies and assumptions. Management has reviewed the pricing techniques and methodologies of the independent pricing sources and believes that their policies adequately consider market activity, either based on specific transactions for the issue valued or based on modeling of securities with similar credit quality, duration, yield and structure that were recently traded. Management monitors security-specific valuation trends and discusses material changes or the absence of expected changes with the portfolio managers to understand the underlying factors and inputs and to validate the reasonableness of pricing. Management also back-tests the prices on numerous sales of securities during the year to validate the previous pricing provided as well as utilizes other pricing sources to validate the pricing provided by our primary provider of the majority of the non-U.S. Treasury securities and non-agency securities included in Level 2.

The following table summarizes changes in Level 3 assets measured at fair value for the three months ended June 30, 2012 and 2011 for Tower (the Reciprocal Exchanges have no Level 3 assets):

	Three Months Ended June 30,
($ in thousands)	2012		2011
Beginning balance, April 1,	$	24,914	$	-
Total gains (losses)-realized / unrealized
Included in net income		86		-
Included in other comprehensive income (loss)		-		-
Purchases, issuances and settlements		-		-
Net transfers into (out of) Level 3		-		-
Ending balance, June 30,	$	25,000	$	-

The following table summarizes the changes in Level 3 assets measured at fair value for the six months ended June 30, 2012 and 2011:

	Six Months Ended June 30,
($ in thousands)	2012		2011
Beginning balance, January 1	$	25,000	$	2,058
Total gains (losses)-realized / unrealized
Included in net income		-		(1,067	)
Included in other comprehensive income (loss)		-		-
Purchases, issuances and settlements		-		-
Net transfers into (out of) Level 3		-		(991	)
Ending balance, June 30,	$	25,000	$	-

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Investments

6 Months Ended

Jun. 30, 2012

Investments

Note 4—Investments

The cost or amortized cost and fair value of the Company’s investments in fixed maturity and equity securities, gross unrealized gains and losses, and other-than-temporary impairment losses as of June 30, 2012 and December 31, 2011 are summarized as follows:

($ in thousands)	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Unrealized OTTI Losses (1)
June 30, 2012
U.S. Treasury securities	$	120,783	$	1,591	$	(7	)	$	122,367	$	-
U.S. Agency securities		77,690		3,592		-			81,282		-
Municipal bonds		742,736		54,076		(435	)		796,377		-
Corporate and other bonds
Finance		263,167		16,167		(215	)		279,119		-
Industrial		389,693		22,394		(1,181	)		410,906		-
Utilities		28,254		2,637		(26	)		30,865		-
Commercial mortgage-backed securities		223,358		27,643		(576	)		250,425		(365	)
Residential mortgage-backed securities
Agency backed securities		313,648		14,760		(135	)		328,273		-
Non-agency backed securities		17,100		1,147		(123	)		18,124		(73	)
Asset-backed securities		41,588		810		(162	)		42,236		-
Total fixed-maturity securities		2,218,017		144,817		(2,860	)		2,359,974		(438	)
Preferred stocks, principally financial sector		33,803		2,656		(157	)		36,302		-
Common stocks, principally financial and industrial sectors		99,722		3,607		(3,238	)		100,091		-
Total, June 30, 2012	$	2,351,542	$	151,080	$	(6,255	)	$	2,496,367	$	(438	)
Tower	$	2,063,859	$	131,351	$	(5,918	)	$	2,189,292	$	(412	)
Reciprocal Exchanges		287,683		19,729		(337	)		307,075		(26	)
Total, June 30, 2012	$	2,351,542	$	151,080	$	(6,255	)	$	2,496,367	$	(438	)
December 31, 2011
U.S. Treasury securities	$	154,430	$	1,725	$	(13	)	$	156,142	$	-
U.S. Agency securities		114,411		2,779		-			117,190		-
Municipal bonds		688,192		48,777		(255	)		736,714		-
Corporate and other bonds
Finance		331,917		9,201		(4,615	)		336,503		-
Industrial		388,139		22,198		(2,287	)		408,050		-
Utilities		30,164		3,067		(61	)		33,170		-
Commercial mortgage-backed securities		232,877		22,854		(2,564	)		253,167		(483	)
Residential mortgage-backed securities
Agency backed securities		304,876		15,401		(1	)		320,276		-
Non-agency backed securities		29,907		2,603		(901	)		31,609		(695	)
Asset-backed securities		60,199		1,309		(655	)		60,853		-
Total fixed-maturity securities		2,335,112		129,914		(11,352	)		2,453,674		(1,178	)
Preferred stocks, principally financial sector		24,083		317		(890	)		23,510		-
Common stocks, principally industrial and financial sectors		68,951		1,078		(4,194	)		65,835		-
Total, December 31, 2011	$	2,428,146	$	131,309	$	(16,436	)	$	2,543,019	$	(1,178	)
Tower	$	2,138,001	$	118,173	$	(15,075	)	$	2,241,099	$	(1,178	)
Reciprocal Exchanges		290,145		13,136		(1,361	)		301,920		-
Total, December 31, 2011	$	2,428,146	$	131,309	$	(16,436	)	$	2,543,019	$	(1,178	)

(1) Represents the gross unrealized loss on other-than-temporarily impaired securities recognized in accumulated other comprehensive income (loss).

As at June 30, 2012 and December 31, 2011, U.S. Treasury Notes and other securities with carrying values of $395.9 million and $226.8 million, respectively, were on deposit with various states to comply with the insurance laws in which the Company is licensed.

In addition, the Company had $324.3 million and $340.8 million of investments as of June 30, 2012 and December 31, 2011, respectively, held by counterparties as collateral or in trusts to support letters of credit issued on Tower’s behalf, reinsurance liabilities on certain assumed reinsurance treaties, collateral posted for certain leases and other purposes.

Major categories of net investment income are summarized as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2012			2011			2012			2011
Income
Fixed-maturity securities	$	24,511		$	26,154		$	49,924		$	55,264
Equity securities		6,603			6,565			14,239			10,977
Cash and cash equivalents		448			216			738			347
Other, primarily from other invested assets		1,573			117			3,555			248
Total		33,135			33,052			68,456			66,836
Expenses
Investment expenses		(1,354	)		(1,254	)		(2,732	)		(2,660	)
Net investment income	$	31,781		$	31,798		$	65,724		$	64,176
Tower		30,267			30,401			62,525			61,106
Reciprocal Exchanges		3,177			3,051			6,526			6,396
Elimination of interest on Reciprocal Exchange surplus notes		(1,663	)		(1,654	)		(3,327	)		(3,326	)
Net investment income	$	31,781		$	31,798		$	65,724		$	64,176

Proceeds from the sale of fixed-maturity securities were $980.0 million and $911.8 million for the six months ended June 30, 2012 and 2011, respectively. Proceeds from the sale of equity securities were $745.6 million and $285.3 million for the six months ended June 30, 2012 and 2011, respectively.

Gross realized gains, losses and impairment write-downs on investments are summarized as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2012			2011			2012			2011
Fixed-maturity securities
Gross realized gains	$	12,354		$	4,551		$	25,162		$	19,657
Gross realized losses		(609	)		(1,326	)		(2,551	)		(7,333	)
		11,745			3,225			22,611			12,324
Equity securities
Gross realized gains		2,685			2,228			4,179			4,570
Gross realized losses		(9,808	)		(7,557	)		(16,160	)		(11,494	)
		(7,123	)		(5,329	)		(11,981	)		(6,924	)
Other
Gross realized gains		555			-			1,790			-
Gross realized losses		(3,174	)		-			(4,113	)		-
		(2,619	)		-			(2,323	)		-
Net realized gains (losses) on investments		2,003			(2,104	)		8,307			5,400
Other-than-temporary impairment losses:
Fixed-maturity securities		(765	)		(210	)		(882	)		(354	)
Equity securities		(1,474	)		-			(4,078	)		-
Total other-than-temporary impairment losses recognized in earnings		(2,239	)		(210	)		(4,960	)		(354	)
Total net realized investment gains (losses)	$	(236	)	$	(2,314	)	$	3,347		$	5,046
Tower	$	1,421		$	(2,857	)	$	1,028		$	5,380
Reciprocal Exchanges		(1,657	)		543			2,319			(334	)
Total net realized investment gains (losses)	$	(236	)	$	(2,314	)	$	3,347		$	5,046

Management may dispose of a particular security due to changes in facts and circumstances related to the invested asset that have arisen since the last analysis supporting management’s determination whether or not it intended to sell the security, and if not, whether it is more likely than not that the Company would be required to sell the security before recovery of its amortized cost basis.

Impairment Review

Management regularly reviews the Company’s fixed-maturity and equity security portfolios in accordance with its impairment policy to evaluate the necessity of recording impairment losses for OTTI. The determination of OTTI is a subjective process and different judgments and assumptions could affect the timing of loss realization.

Management, in conjunction with its outside portfolio managers, analyzes its non-agency residential mortgage-backed securities (“RMBS”) using default loss models based on the performance of the underlying loans. Performance metrics include delinquencies, defaults, foreclosures, anticipated cash flow prepayments and cumulative losses incurred. The expected losses for a mortgage pool are compared to the break-even loss, which represents the point at which the Company’s tranche begins to experience losses.

The commercial mortgage-backed securities (“CMBS”) holdings are evaluated using analytical techniques and various metrics including the level of subordination, debt-service-coverage ratios, loan-to-value ratios, delinquencies, defaults and foreclosures.

For the non-structured fixed-maturity securities (U.S. Treasury and Agency securities, municipal bonds, and corporate debt), unrealized losses are reviewed to determine whether full recovery of principal and interest will be received. The estimate of expected cash flows is determined by projecting a recovery value and a recovery time frame and assessing whether further principal and interest will be received. The determination of recovery value incorporates an issuer valuation assumption utilizing one or a combination of valuation methods as deemed appropriate by management. The present value of the cash flows is determined by applying the effective yield of the security at the date of acquisition (or the most recent implied rate used to accrete the security if the implied rate has changed as a result of a previous impairment) and an estimated recovery time frame. For securities for which the issuer is financially troubled but not in bankruptcy, that time frame is generally longer. Included in the present value calculation are expected principal and interest payments; however, for securities for which the issuer is classified as bankrupt or in default, the present value calculation assumes no interest payments and a single recovery amount. In situations for which a present value of cash flows cannot be estimated, a write-down to fair value is recorded.

In estimating the recovery value, significant judgment is involved in the development of assumptions relating to a number of factors related to the issuer including, but not limited to, revenue, margin and earnings projections, the likely market or liquidation values of assets, potential additional debt to be incurred pre- or post- bankruptcy/restructuring, the ability to shift existing or new debt to different priority layers, the amount of restructuring/bankruptcy expenses, the size and priority of unfunded pension obligations, litigation or other contingent claims, the treatment of intercompany claims and the likely outcome with respect to inter-creditor conflicts.

The evaluation of equity securities includes management’s intent and ability to hold the security to recovery. Management will record OTTI in those situations where it does not intend to hold the security to recovery or if the security is not expected to recover in value in a period that is other-than-temporary.

The following table shows the amount of fixed-maturity and equity securities that were OTTI for the three and six months ended June 30, 2012 and 2011. This resulted in recording impairment write-downs included in net realized investment gains (losses), and reduced the unrealized loss in other comprehensive net income:

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2012			2011			2012			2011
Corporate and other bonds	$	(648	)	$	-		$	(737	)	$	-
Commercial mortgage-backed securities		(403	)		(66	)		(403	)		(163	)
Residential mortgage-backed securities		-			-			(28	)		(71	)
Asset-backed securities		-			(144	)		-			(144	)
Equities		(1,474	)		-			(4,078	)		-
Other-than-temporary-impairments		(2,525	)		(210	)		(5,246	)		(378	)
Portion of loss recognized in accumulated other comprehensive income (loss)		286			-			286			24
Impairment losses recognized in earnings	$	(2,239	)	$	(210	)	$	(4,960	)	$	(354	)
Tower	$	(2,239	)	$	(210	)	$	(4,960	)	$	(354	)
Reciprocal Exchanges		-			-			-			-
Impairment losses recognized in earnings	$	(2,239	)	$	(210	)	$	(4,960	)	$	(354	)

The following table provides a rollforward of the cumulative amounts of credit OTTI for securities still held showing the amounts that have been included in earnings on a pretax basis for the three months ended June 30, 2012 and 2011:

	Three Months Ended June 30,
($ in thousands)	2012			2011
Balance, April 1,	$	6,084		$	15,124
Additional credit losses recognized during the period, related to securities for which:
No OTTI has been previously recognized		765			44
OTTI has been previously recognized		-			166
Reductions due to:
Securities sold during the period (realized)		(730	)		(1,888	)
Balance, June 30,	$	6,119		$	13,446

The following table provides a rollforward of the cumulative amounts of credit OTTI for securities still held showing the amounts that have been included in earnings on a pretax basis for the six months ended June 30, 2012 and 2011:

	Six Months  Ended June 30,
($ in thousands)	2012			2011
Balance, January 1,	$	12,666		$	18,075
Additional credit losses recognized during the period, related to securities for which:
No OTTI has been previously recognized		854			44
OTTI has been previously recognized		28			310
Reductions due to:
Securities sold during the period (realized)		(7,429	)		(4,983	)
Balance, June 30,	$	6,119		$	13,446

Unrealized Losses

There are 249 securities at June 30, 2012, including fixed maturities and equity securities, which account for the gross unrealized loss, none of which is deemed by management to be OTTI. Temporary losses on corporate and other bonds result from purchases made in a lower yield spread environment. In addition, there have been some ratings downgrades on certain of these securities. After analyzing the credit quality, balance sheet strength and company outlook, management believes these securities will recover in value. The structured securities that had significant unrealized losses resulted primarily from declines in both residential and commercial real estate prices. To the extent projected cash flows on structured securities change adversely, they would be considered OTTI, and an impairment loss would be recognized in the current period. Management considered all relevant factors, including expected recoverability of cash flows, in assessing whether a loss was other-than-temporary. The Company does not intend to sell these fixed maturity securities, and it is not more likely than not that these securities will be sold before recovering their cost basis.

For all fixed-maturity securities in an unrealized loss position at June 30, 2012, the Company has received all contractual interest payments (and principal if applicable). Based on the continuing receipt of cash flow and the foregoing analyses, management expects continued timely payments of principal and interest and considers the losses to be temporary.

The unrealized loss position associated with the fixed-maturity portfolio was $2.9 million as of June 30, 2012, consisting primarily of corporate bonds and mortgage-backed securities of $2.3 million. The total fixed-maturity portfolio of gross unrealized losses included 228 securities which were, in aggregate, approximately 1.1% below amortized cost. Of the 228 fixed maturity investments identified, 42 have been in an unrealized loss position for more than 12 months. The total unrealized loss on these investments at June 30, 2012 was $0.8 million. Management does not consider these investments to be other-than-temporarily impaired.

For common stocks, there were 15 securities in a loss position at June 30, 2012 totaling $3.2 million. Management evaluated the financial condition of the common stock issuers, the severity and duration of the impairment, and our ability and intent to hold to recovery. The evaluation consisted of a detailed review, including but not limited to some or all of the following factors for each security: the current S&P rating, analysts’ reports, past earnings trends and analysts’ earnings expectations for the next 12 months, liquidity, near-term financing risk, and whether the company was currently paying dividends on its equity securities. Management does not consider these investments to be other-than-temporarily impaired.

The following table presents information regarding invested assets that were in an unrealized loss position at June 30, 2012 and December 31, 2011 by amount of time in a continuous unrealized loss position:

	Less than 12 Months					12 Months or Longer					Total
($ in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Aggregate Fair Value		Unrealized Losses
June 30, 2012
U.S. Treasury securities	$	65,714	$	(7	)	$	-	$	-		$	65,714	$	(7	)
Municipal bonds		41,456		(431	)		990		(4	)		42,446		(435	)
Corporate and other bonds
Finance		22,784		(169	)		752		(46	)		23,536		(215	)
Industrial		46,687		(990	)		6,465		(191	)		53,152		(1,181	)
Utilities		3,425		(24	)		394		(2	)		3,819		(26	)
Commercial mortgage-backed securities		16,036		(138	)		16,053		(438	)		32,089		(576	)
Residential mortgage-backed securities
Agency backed		21,134		(134	)		21		-			21,155		(134	)
Non-agency backed		6		(3	)		2,666		(121	)		2,672		(124	)
Asset-backed securities		12,333		(117	)		1,680		(45	)		14,013		(162	)
Total fixed-maturity securities		229,575		(2,013	)		29,021		(847	)		258,596		(2,860	)
Preferred stocks		6,263		(45	)		6,019		(112	)		12,282		(157	)
Common stocks		39,868		(3,183	)		913		(55	)		40,781		(3,238	)
Total, June 30, 2012	$	275,706	$	(5,241	)	$	35,953	$	(1,014	)	$	311,659	$	(6,255	)
Tower	$	254,853	$	(4,959	)	$	34,232	$	(959	)	$	289,085	$	(5,918	)
Reciprocal Exchanges		20,853		(282	)		1,721		(55	)		22,574		(337	)
Total, June 30, 2012	$	275,706	$	(5,241	)	$	35,953	$	(1,014	)	$	311,659	$	(6,255	)
December 31, 2011
U.S. Treasury securities	$	92,001	$	(13	)	$	-	$	-		$	92,001	$	(13	)
Municipal bonds		13,449		(255	)		-		-			13,449		(255	)
Corporate and other bonds
Finance		138,986		(4,610	)		251		(5	)		139,237		(4,615	)
Industrial		57,357		(2,141	)		3,519		(145	)		60,876		(2,286	)
Utilities		1,902		(61	)		-		-			1,902		(61	)
Commercial mortgage-backed securities		26,130		(2,564	)		-		-			26,130		(2,564	)
Residential mortgage-backed securities
Agency backed		19		(1	)		12		-			31		(1	)
Non-agency backed		13,294		(318	)		4,609		(583	)		17,903		(901	)
Asset-backed securities		29,624		(647	)		610		(9	)		30,234		(656	)
Total fixed-maturity securities		372,762		(10,610	)		9,001		(742	)		381,763		(11,352	)
Preferred stocks		17,773		(644	)		1,303		(246	)		19,076		(890	)
Common stocks		44,132		(4,194	)		-		-			44,132		(4,194	)
Total, December 31, 2011	$	434,667	$	(15,448	)	$	10,304	$	(988	)	$	444,971	$	(16,436	)
Tower	$	398,989	$	(14,160	)	$	8,264	$	(915	)	$	407,253	$	(15,075	)
Reciprocal Exchanges		35,678		(1,288	)		2,040		(73	)		37,718		(1,361	)
Total, December 31, 2011	$	434,667	$	(15,448	)	$	10,304	$	(988	)	$	444,971	$	(16,436	)

Management evaluated the severity of the impairment in relation to the carrying values for the securities referred to above and considered all relevant factors in assessing whether the loss was other-than-temporary. Management does not intend to sell its fixed-maturity securities, and it is not more likely than not that fixed maturity and equity securities will be sold until there is a recovery of fair value to the original cost basis; which may be at maturity for the fixed income securities.

Fixed-Maturity Investment—Time to Maturity

The following table shows the amortized cost and fair value of the fixed-maturity portfolio by contractual time to maturity at June 30, 2012 and December 31, 2011:

	Tower				Reciprocal Exchanges				Total
($ in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
June 30, 2012
Remaining Time to Maturity
Less than one year	$	41,638	$	42,094	$	2,000	$	2,080	$	43,638	$	44,174
One to five years		413,347		429,544		30,452		31,722		443,799		461,266
Five to ten years		536,091		572,698		64,358		68,066		600,449		640,764
More than 10 years		434,622		468,693		99,816		106,020		534,438		574,713
Mortgage and asset-backed securities		511,476		547,773		84,217		91,284		595,693		639,057
Total, June 30, 2012	$	1,937,174	$	2,060,802	$	280,843	$	299,172	$	2,218,017	$	2,359,974
December 31, 2011
Remaining Time to Maturity
Less than one year	$	40,201	$	40,529	$	44,238	$	44,942	$	84,439	$	85,471
One to five years		479,721		491,904		81,566		83,743		561,287		575,647
Five to ten years		563,830		593,838		21,522		22,797		585,352		616,635
More than 10 years		427,357		458,536		48,818		51,480		476,175		510,016
Mortgage and asset-backed securities		535,823		568,813		92,036		97,092		627,859		665,905
Total, December 31, 2011	$	2,046,932	$	2,153,620	$	288,180	$	300,054	$	2,335,112	$	2,453,674

Other Invested Assets

The following table shows the composition of the other invested assets as of June 30, 2012 and December 31, 2011:

($ in thousands)	June 30, 2012		December 31, 2011
Limited partnerships, equity method	$	19,279	$	12,459
Real estate, amortized cost		8,054		6,888
Securities reported under the fair value option		25,000		25,000
Total	$	52,333	$	44,347

In December 2011, the Company purchased two securities for which it elected the fair value option. This election was made to simplify the accounting for these instruments which contain embedded derivatives and other features.

The fair value of the limited partnerships in the table above approximates their carrying value under the equity method of accounting. The significant inputs used to determine fair value of these limited partnerships are considered Level 3 pursuant to the fair value hierarchy. See “Note 5 – Fair Value Measurements” below. As of June 30, 2012, the Company had future funding commitments of $25.9 million to these limited partnerships.

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Fair Value Measurements (Tables)

6 Months Ended

Jun. 30, 2012

Financial Instruments at Fair Value among Levels

As at June 30, 2012 and December 31, 2011, the Company’s financial instruments carried at fair value are allocated among levels as follows:

($ in thousands)	Level 1		Level 2			Level 3		Total
June 30, 2012
Fixed-maturity securities
U.S. Treasury securities	$	-	$	122,367		$	-	$	122,367
U.S. Agency securities		-		81,282			-		81,282
Municipal bonds		-		796,377			-		796,377
Corporate and other bonds		-		720,890			-		720,890
Commercial mortgage-backed securities		-		250,425			-		250,425
Residential mortgage-backed securities
Agency		-		328,273			-		328,273
Non-agency		-		18,124			-		18,124
Asset-backed securities		-		42,236			-		42,236
Total fixed-maturities		-		2,359,974			-		2,359,974
Equity securities		136,393		-			-		136,393
Total investments at fair value		136,393		2,359,974			-		2,496,367
Other invested assets (1)		-		-			25,000		25,000
Other liabilities									-
Interest rate swap contracts		-		(8,775	)		-		(8,775	)
Foreign currency forward contract		-		(2,042	)		-		(2,042	)
Debt and equity securities sold, not yet purchased		-		(17,506	)		-		(17,506	)
Total, June 30, 2012	$	136,393	$	2,331,651		$	25,000	$	2,493,044
Tower	$	128,490	$	2,032,479		$	25,000	$	2,185,969
Reciprocal Exchanges		7,903		299,172			-		307,075
Total, June 30, 2012	$	136,393	$	2,331,651		$	25,000	$	2,493,044
December 31, 2011
Fixed-maturity securities
U.S. Treasury securities	$	-	$	156,142		$	-	$	156,142
U.S. Agency securities		-		117,190			-		117,190
Municipal bonds		-		736,714			-		736,714
Corporate and other bonds		-		777,723			-		777,723
Commercial mortgage-backed securities		-		253,167			-		253,167
Residential mortgage-backed securities
Agency		-		320,276			-		320,276
Non-agency		-		31,609			-		31,609
Asset-backed securities		-		60,853			-		60,853
Total fixed-maturities		-		2,453,674			-		2,453,674
Equity securities		89,345		-			-		89,345
Total investments		89,345		2,453,674			-		2,543,019
Other invested assets (2)		-		-			25,000		25,000
Interest rate swap contracts		-		(7,384	)		-		(7,384	)
Total, December 31, 2011	$	89,345	$	2,446,290		$	25,000	$	2,560,635
Tower	$	87,479	$	2,146,236		$	25,000	$	2,258,715
Reciprocal Exchanges		1,866		300,054			-		301,920
Total, December 31, 2011	$	89,345	$	2,446,290		$	25,000	$	2,560,635

(1) $25.0 million of the Other invested assets balance at June 30, 2012 is reported at fair value. $27.3 million of Other invested assets is reported under the equity method of accounting or at amortized cost.

(2) $25.0 million of the Other invested assets balance at December 31, 2011 is reported at fair value. $19.3 million of Other invested assets is reported under the equity method of accounting or at amortized cost.

Summary of Changes in Level Three Assets Measured at Fair Value

The following table summarizes changes in Level 3 assets measured at fair value for the three months ended June 30, 2012 and 2011 for Tower (the Reciprocal Exchanges have no Level 3 assets):

	Three Months Ended June 30,
($ in thousands)	2012		2011
Beginning balance, April 1,	$	24,914	$	-
Total gains (losses)-realized / unrealized
Included in net income		86		-
Included in other comprehensive income (loss)		-		-
Purchases, issuances and settlements		-		-
Net transfers into (out of) Level 3		-		-
Ending balance, June 30,	$	25,000	$	-

The following table summarizes the changes in Level 3 assets measured at fair value for the six months ended June 30, 2012 and 2011:

	Six Months Ended June 30,
($ in thousands)	2012		2011
Beginning balance, January 1	$	25,000	$	2,058
Total gains (losses)-realized / unrealized
Included in net income		-		(1,067	)
Included in other comprehensive income (loss)		-		-
Purchases, issuances and settlements		-		-
Net transfers into (out of) Level 3		-		(991	)
Ending balance, June 30,	$	25,000	$	-

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Contingencies

6 Months Ended

Jun. 30, 2012

Contingencies

Note 12—Contingencies

Legal Proceedings

On May 28, 2009, Munich Reinsurance America, Inc. (“Munich”) commenced an action against Tower Insurance Company of New York (“TICNY”), a wholly-owned subsidiary of Tower Group, Inc., in the United States District Court for the District of New Jersey seeking, inter alia, to recover $6.1 million under various retrocessional contracts pursuant to which TICNY reinsures Munich. On June 22, 2009, TICNY filed its answer, in which it, inter alia, asserted two separate counterclaims seeking to recover $2.8 million under various reinsurance contracts pursuant to which Munich reinsures TICNY. (A separate action commenced by Munich against TICNY on June 17, 2009 in the United States District Court for the District of New Jersey seeking a declaratory judgment that Munich is entitled to access to TICNY’s books and records pertaining to various quota share agreements, to which TICNY filed its answer on July 7, 2009, was subsequently dismissed pursuant to the stipulation of the parties on March 17, 2010). The parties have now concluded discovery. On July 15, 2011, TICNY paid $3.3 million to Munich to resolve a portion of the dispute. On December 22, 2011, the court granted partial summary judgment with respect to certain of the claims and defenses in the litigation. On March 23, 2012, the Court ruled that Munich was entitled to approximately $168,000, which was expensed in the first quarter of 2012. Trial has now been set for October 15, 2012. The Company is unable to estimate a possible loss or range of loss.

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Debt

6 Months Ended

Jun. 30, 2012

Debt

Note 8—Debt

The Company’s borrowings consisted of the following at June 30, 2012 and December 31, 2011:

	June 30, 2012				December 31, 2011
($ in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Credit facility	$	70,000	$	70,000	$	50,000	$	50,000
Convertible senior notes		143,233		157,875		141,843		150,743
Subordinated debentures		235,058		236,478		235,058		234,550
Total	$	448,291	$	464,353	$	426,901	$	435,293

The fair value of the convertible senior notes in the table above are determined utilizing pricing for similar instruments in active markets and the fair value of the subordinated debentures in the table above are based on discounted cash flow analysis. The significant inputs used for fair value are considered Level 2 in the fair value hierarchy.

Total interest expense incurred, including interest expense on the funds held liabilities was $7.9 million and $8.3 million for the three months ended June 30, 2012 and 2011, respectively, and was $15.5 million and $16.4 million for the six months ended June 30, 2012 and 2011, respectively.

Subordinated Debentures

The Company and its wholly-owned subsidiaries have issued trust preferred securities through wholly-owned Delaware statutory business trusts. The trusts use the proceeds of the sale of the trust preferred securities and common securities that the Company acquired from the trusts to purchase junior subordinated debentures from the Company with terms that match the terms of the trust preferred securities. Interest on the junior subordinated debentures and the trust preferred securities is payable quarterly. In some cases, the interest rate is fixed for an initial period of five years after issuance and then floats with changes in the London Interbank Offered Rate (“LIBOR”) and in other cases the interest rate floats with LIBOR without any initial fixed-rate period. As of June 30, 2012, The Company had outstanding par of $235.1 million relating to the subordinated debentures.

Interest Rate Swaps

In October 2010, the Company entered into interest rate swap contracts (the “Swaps”) with $190 million notional value to manage interest costs and cash flows associated with the floating rate subordinated debentures. The Swaps have terms of five years. The Swaps convert the subordinated debentures to rates ranging from 5.1% to 5.9%. As of June 30, 2012 and December 31, 2011, the Swaps had a fair value of $8.8 million and $7.4 million in a liability position, respectively, and are reported in Other Liabilities.

The Company has designated and accounts for the Swaps as cash flow hedges. The Swaps are considered to have no ineffectiveness and changes in their fair values will be recorded in Accumulated other comprehensive income (“AOCI”), net of tax. For the six months ended June 30, 2012 and 2011, $0.8 million and $0.1 million, respectively, was reclassified from AOCI to interest expense for the effects of the hedges. As of June 30, 2012, the Company had collateral on deposit with the counterparty amounting to $8.7 million pursuant to a Credit Support Annex.

Credit Facility

On February 15, 2012, the Company amended its $125.0 million credit facility by increasing borrowing capacity up to $150 million, extending the maturity date to February 15, 2016, and resetting borrowing fees to more favorable current market terms. The credit facility is used for general corporate purposes. The original credit facility was entered into on May 14, 2010 and had an expiration date of May 14, 2013.

The Company may request that the facility be increased by an amount not to exceed $50 million. The credit facility contains customary covenants for facilities of this type, including restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of assets, and requirements to maintain certain consolidated net worth, debt to capitalization ratios, minimum risk-based capital and minimum statutory surplus. The credit facility also provides for customary events of default, including failure to pay principal when due, failure to pay interest or fees within three days after becoming due, failure to comply with covenants, any representation or warranty made by the Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting the Company and its material subsidiaries, the occurrence of certain material judgments, or a change in control of the Company, and upon an event of default, the administrative agent (subject to the consent of the requisite percentage of the lenders) may immediately terminate the obligations to make loans and to issue letters of credit, declare the Company’s obligations under the credit facility to become immediately due and payable, and require the Company to deposit in a collateral account cash collateral with a value equal to the then outstanding amount of the aggregate face amount of any outstanding letters of credit. The Company was in compliance with all covenants under the credit facility at June 30, 2012.

The Company had $70.0 million and $50.0 million outstanding as of June 30, 2012 and December 31, 2011, respectively. The weighted average interest rate on the amount outstanding as of June 30, 2012 was 2.0%.

Convertible Senior Notes

In September 2010, the Company issued $150.0 million principal amount of 5.0% convertible senior notes (“the Notes”), which mature on September 15, 2014. Interest on the Notes is payable semi-annually in arrears on March 15 and September 15 of each year, commencing March 15, 2011. Holders may convert their Notes into cash or common shares, at the Company’s option, at any time on or after March 15, 2014 or earlier under certain circumstances determined by: (i) the market price of the Company’s stock, (ii) the trading price of the Notes, or (iii) the occurrence of specified corporate transactions. Upon conversion, the Company intends to settle its obligation either entirely or partially in cash. The conversion rate at June 30, 2012 is 36.9105 shares of common stock per $1,000 principal amount of the Notes (equivalent to a conversion price of $27.09 per share), subject to adjustment upon the occurrence of certain events. Additionally, in the event of a fundamental change, the holders may require the Company to repurchase the Notes for a cash price equal to 100% of the principal plus any accrued and unpaid interest.

The proceeds from the issuance of the Notes were allocated to the liability component and the embedded conversion option, or equity component. The equity component was reported as an adjustment to paid-in-capital, net of tax, and is reflected as an original issue discount (“OID”). The OID of $11.5 million and $5.0 million of deferred origination costs relating to the liability component are being amortized into interest expense over the term of the Notes. After considering the contractual interest payments and amortization of the original issue discount, the Notes’ effective interest rate is 7.2%. Transaction costs of $0.4 million associated with the equity component were netted with the equity component in paid-in-capital. Interest expense, including amortization of deferred origination costs, recognized on the Notes was $5.7 million for the six months ended June 30, 2012.

The following table shows the amounts recorded for the Notes as of June 30, 2012 and December 31, 2011:

($ in thousands)	June 30, 2012			December 31, 2011
Liability component
Outstanding principal	$	150,000		$	150,000
Unamortized OID		(6,767	)		(8,157	)
Liability component		143,233			141,843
Equity component, net of tax	$	7,469		$	7,469

To the extent the market value per share of the Company’s common stock exceeds the conversion price, the Company will use the “treasury stock” method in calculating the dilutive effect on earnings per share.

Convertible Senior Notes Hedge and Warrant Transactions

In connection with the offering of the Notes, the Company also entered into convertible senior notes hedge transactions (the “Note Hedges” or “purchased call options”) and warrant transactions (the “Warrants”) with respect to its common stock with financial institutions. The Note Hedges and Warrants are intended generally to reduce the potential dilution of the Company’s common stock and to offset potential cash payments in excess of the principal of the Notes upon conversion. The Note Hedges and Warrants are separate transactions, entered into by the Company with the financial institutions, and are not part of the terms of the Notes.

In September 2010, the Company paid $15.3 million for the Note Hedges which cover 5.5 million shares of common stock at a strike price of $27.09 per share at June 30, 2012, subject to anti-dilution provisions, and are exercisable upon conversion of the Notes. The Note Hedges have been accounted for as an adjustment to the Company’s paid-in-capital, net of deferred taxes.

In September 2010, the Company received $3.8 million for Warrants sold to the financial institutions. The Warrants provide for the acquisition of 5.5 million shares of common stock at a strike price of $32.94 per share at June 30, 2012, subject to anti-dilution adjustments. The Warrants have been accounted for as an adjustment to the Company’s paid-in-capital.

To the extent the Company’s common stock price is above $27.09 but below the Warrant strike price of $32.94, there is no dilutive effect to common stockholders’ equity because the Note Hedge offsets any shares to be issued under the Notes. If the market value per share of the Company’s common stock exceeds the strike price of the Warrants, the Warrants will have a dilutive effect on the Company’s net income per share.

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Subsequent Event - Additional Information (Detail) (Canopius Group Limited, USD $)			1 Months Ended
	Jun. 30, 2012	Apr. 25, 2012	Jul. 30, 2012 Merger	Jul. 30, 2012 Merger Minimum	Jul. 30, 2012 Merger Maximum
Subsequent Event [Line Items]
Amounts committed to investment		$ 75,000,000
Percentage of ownership interest	10.70%	10.70%
Payment to exercise merger option			1,000,000
Cash per share to be paid for Tower stockholders			$ 1.25
Net tangible asset value				$ 240,000,000	$ 290,000,000

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Loss and Loss Adjustment Expense

6 Months Ended

Jun. 30, 2012

Loss and Loss Adjustment Expense

Note 6 – Loss and Loss Adjustment Expense

The following table provides a reconciliation of the beginning and ending consolidated balances for unpaid losses and loss adjustment expense (“LAE”) for the six months ended June 30, 2012 and 2011:

	Six Months Ended June 30,
	2012									2011
($ in thousands)	Tower			Reciprocal Exchanges			Total			Tower			Reciprocal Exchanges			Total
Balance at January 1,	$	1,495,839		$	136,274		$	1,632,113		$	1,439,106		$	171,315		$	1,610,421
Less reinsurance recoverables on unpaid losses		(308,411	)		(11,253	)		(319,664	)		(271,298	)		(11,384	)		(282,682	)
		1,187,428			125,021			1,312,449			1,167,808			159,931			1,327,739
Incurred related to:
Current year		487,837			57,430			545,267			422,866			61,404			484,270
Prior years unfavorable/(favorable) development		78,254			(6,253	)		72,001			7,551			(10,799	)		(3,248	)
Total incurred		566,091			51,177			617,268			430,417			50,605			481,022
Paid related to:
Current year		153,792			31,369			185,161			173,061			30,347			203,408
Prior years		313,400			30,943			344,343			271,247			28,285			299,532
Total paid		467,192			62,312			529,504			444,308			58,632			502,940
Net balance at end of period		1,286,327			113,886			1,400,213			1,153,917			151,904			1,305,821
Add reinsurance recoverables on unpaid losses		281,959			19,661			301,620			263,619			15,259			278,878
Balance at June 30,	$	1,568,286		$	133,547		$	1,701,833		$	1,417,536		$	167,163		$	1,584,699

Incurred losses and LAE for the six months ended June 30, 2012 attributable to events of prior years were $72.0 million. Excluding the Reciprocal Exchanges, the incurred losses and LAE from prior accident years were $78.3 million, comprised of net adverse loss development of $74.0 million in Commercial Insurance and $4.3 million in Personal Insurance for the six months ended June 30, 2012. During the quarter, the Company performed a comprehensive reserve study to respond to higher than expected reported losses observed in the first and second quarters of 2012, resulting in increases in ultimate loss estimates primarily for accident years 2009, 2010 and 2011 within Commercial Insurance. The Commercial Insurance adverse development of $62 million during the quarter is comprised of approximately $39 million in Workers Compensation, $22 million in Commercial Automobile Liability, and smaller changes in other lines. Approximately $51 million of the adverse development pertains to various programs, many of which have been terminated.

The Reciprocal Exchanges reported favorable development on prior accident years of $6.3 million during the six months ended June 30, 2012.

The consolidated net loss ratio, which includes the Reciprocal Exchanges, was 70.1% and 62.2% for the six months ended June 30, 2012 and 2011, respectively. Excluding the Reciprocal Exchanges, the net loss ratio was 71.1% and 63.5% for the six months ended June 30, 2012 and 2011, respectively. The Reciprocal Exchanges’ net loss ratio was 60.9% and 52.7% for the six months ended June 30, 2012 and 2011, respectively.

Prior year development is based upon numerous estimates by line of business and accident year. No additional premiums or return premiums have been accrued as a result of the prior year effects, although we recorded changes in ceding commissions on reinsurance treaties that we purchase where commissions are adjustable based on loss experience. The Company’s management continually monitors claims activity to assess the appropriateness of carried case and incurred but not reported (“IBNR”) reserves, giving consideration to Company and industry trends.

As of June 30, 2012, unamortized reserve for risk premium of $3.6 million and $1.3 million related to Tower and the Reciprocal Exchanges, respectively, were included in unpaid losses and LAE. As of December 31, 2011, unamortized reserve for risk premium of $7.2 million and $2.5 million related to Tower and the Reciprocal Exchanges, respectively, were included in unpaid losses and LAE.

Loss and loss adjustment expense reserves. The reserving process for loss and LAE reserves provides for the Company’s best estimate at a particular point in time of the ultimate unpaid cost of all losses and LAE incurred, including settlement and administration of losses, and is based on facts and circumstances then known and including losses that have been incurred but not yet reported. The process includes using actuarial methodologies to assist in establishing these estimates, judgments relative to estimates of future claims severity and frequency, the length of time before losses will develop to their ultimate level and the changes in the law and other external factors that are often beyond the Company’s control. The actuarial methods include loss ratio projections, loss development projections, and Bornhuetter-Ferguson (“B-F”) method projections. The actuaries’ best estimates are the result of numerous analyses made by line of business, accident year, and for loss, allocated loss adjustment expense (“ALAE”) and unallocated loss adjustment expense (“ULAE”), and the actuarial analyses also consider input from underwriting and claims managements about the nature of the underlying risks, claims and other trends in the business.

Management sets the Company’s carried reserves based upon the actuaries’ best estimates and other considerations, and the difference between the Company’s estimates of loss and LAE and reported losses is recorded in IBNR. The amount of loss and LAE reserves for reported claims is based primarily upon a case-by-case evaluation of coverage, liability, injury severity, and any other information considered pertinent to estimating the exposure presented by the claim. The amounts of loss and LAE reserves for unreported claims are determined using historical information by line of insurance as adjusted to current conditions.

Included in the reserves for the loss and LAE reserves at June 30, 2012 and December 31, 2011 is $8.6 million and $3.7 million, respectively, of tabular reserve discount for workers’ compensation and excess workers’ compensation claims.

The Company has long defended third-party liability claims utilizing attorneys who are employees of the Company and has realized significant savings in defense costs as compared with claims defended by outside attorneys. For third-party liability claims defended by employed attorneys, the Company allocates to each of these litigated claims 50% of the fixed fee when litigation on a particular claim begins and 50% of the fee when the litigation is closed. The standard fee is calculated based upon the projected number of litigated claims and expected closing patterns at the beginning of each year, as well as the projected budget for the Company’s in-house attorneys, and these amounts are subject to adjustment each quarter based upon actual experience. Because of the cost advantage for ALAE utilizing employed attorneys, the Company has been increasing the number of employed attorneys. Currently, the Company is handling over 85% of new litigated third-party claims utilizing attorneys who are employees of the Company.

Due to the inherent uncertainty associated with the reserving process, the ultimate liability for losses and LAE may differ, perhaps substantially, from the Company’s estimate. Loss and LAE reserve estimates are regularly reviewed and updated and any resulting adjustments are included in the current year’s results. Loss and LAE reserves are closely monitored and are recomputed periodically using the most recent information on reported claims and a variety of statistical techniques. Specifically, on at least a quarterly basis, the Company reviews, by line of business, existing reserves, new claims, changes to existing case reserves and paid losses with respect to the current and prior accident years.

The Company segregates data for estimating loss and LAE reserves into lines of business. Property lines include Fire, Homeowners, CMP Property, Multi-Family Dwellings, Fire and Allied Lines, Inland Marine and Automobile Physical Damage Casualty lines include CMP Liability, Other Liability, Workers’ Compensation, Commercial Automobile Liability, and Personal Automobile Liability. The Company also analyzes and records loss and LAE reserves separately for Commercial Insurance and Personal Insurance.

Two key assumptions that materially impact the estimate of loss and LAE reserves are the loss ratio estimate for the current accident year and the loss development factor selections for all accident years. The loss ratio estimate for the current accident year is selected after reviewing historical accident year loss ratios adjusted for rate changes, trend, and mix of business. As an accident year matures, the ultimate loss and LAE is estimated by giving more weight to reported loss and LAE by utilizing the B-F method or loss development methods.

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Stockholders' Equity

6 Months Ended

Jun. 30, 2012

Stockholders' Equity

Note 7—Stockholders’ Equity

Shares of Common Stock Issued

For the three and six months ended June 30, 2012, no new common shares were issued as the result of employee stock option exercises. For the three and six months ended June 30, 2012, 0 and 321,178 new common shares, respectively, were issued as the result of restricted stock grants. For the three and six months ended June 30, 2011, 7,612 and 31,112 new common shares, respectively, were issued as the result of employee stock option exercises and 7,498 and 621,000 new common shares, respectively, were issued as the result of restricted stock grants.

For the three and six months ended June 30, 2012, 495 and 97,356 shares, respectively, of common stock were purchased from employees in connection with the vesting of restricted stock issued under the 2004 Long Term Equity Compensation Plan (the “Plan”). For the three and six months ended June 30, 2011, 10,897 and 69,315 shares, respectively, of common stock were purchased from employees in connection with the vesting of restricted stock issued under the Plan. The shares were withheld at the direction of employees as permitted under the Plan in order to pay the expected amount of tax liability owed by the employees from the vesting of those shares. In addition, for the three and six months ended June 30, 2012, 4,432 and 8,715 shares, respectively, of common stock were surrendered as a result of restricted stock forfeitures. For the three and six months ended June 30, 2011, 1,596 and 2,914 shares, respectively, of common stock were surrendered as a result of restricted stock forfeitures.

Share Repurchase Program

The Board of Directors of Tower approved a $100 million share repurchase program on March 3, 2011. This authorization is in addition to the $100 million share repurchase program approved on February 26, 2010. Purchases under both programs can be made from time to time in the open market or in privately negotiated transactions in accordance with applicable laws and regulations. The new share repurchase program will expire on March 4, 2013. In the six months ended June 30, 2012 and 2011, 1.1 million and 0.8 million shares, respectively, of common stock were purchased under these programs at an aggregate consideration of $21.0 million and $20.0 million, respectively. As of June 30, 2012, the original $100 million share purchase program had been fully utilized and $26.4 million remained available for future share repurchases under the new program.

Dividends Declared

Dividends on common stock of $7.3 million and $7.7 million for the three months ended June 30, 2012 and 2011, respectively, were declared. Dividends on common stock of $14.7 million and $12.9 million for the six months ended June 30, 2012 and 2011, respectively, were declared.

On August 1, 2012, the Board of Directors approved a quarterly dividend of $0.1875 per share payable on September 21, 2012 to stockholders of record as of September 10, 2012.

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Stock Based Compensation

6 Months Ended

Jun. 30, 2012

Stock Based Compensation

Note 9—Stock Based Compensation

2004 Long-Term Equity Compensation Plan

In 2004, the Company’s Board of Directors adopted and its stockholders approved a long-term incentive plan (the “Plan”).

The plan provides for the granting of non-qualified stock options, incentive stock options (within the meaning of Section 422 of the Code), stock appreciation rights (“SARs”), restricted stock and restricted stock unit awards, performance shares and other cash or share-based awards.

Restricted Stock

The following table provides an analysis of restricted stock activity for the six months ended June 30, 2012 and 2011:

	Six Months Ended June 30,
	2012					2011
	Number of Shares			Weighted Average Grant Date Fair Value		Number of Shares			Weighted Average Grant Date Fair Value
Outstanding, January 1		988,607		$	23.44		591,675		$	23.10
Granted		321,178			23.08		621,000			23.90
Vested		(388,115	)		23.87		(227,580	)		23.59
Forfeitures		(8,715	)		23.60		(2,914	)		22.88
Outstanding, June 30,		912,955		$	23.09		982,181		$	23.49

Stock Options

The following table provides an analysis of stock option activity for the six months ended June 30, 2012 and 2011:

	Six Months Ended June 30,
	2012				2011
	Number of Shares		Average     Exercise     Price		Number of Shares			Average Exercise Price
Outstanding, January 1		855,530	$	20.14		917,155		$	19.62
Exercised		-		-		(31,112	)		10.99
Forfeitures and expirations		-		-		(22,981	)		26.48
Outstanding, June 30		855,530	$	20.14		863,062		$	20.16
Exercisable, June 30		855,530	$	20.14		808,115		$	20.26

Stock Based Compensation Expense

The following table provides an analysis of stock based compensation expense for the six months ended June 30, 2012 and 2011:

	Six Months Ended June 30,
($ in thousands)	2012		2011
Restricted stock
Expense, net of tax	$	896	$	3,035
Value of shares vested		8,576		5,391
Value of unvested shares		19,257		23,396
Stock options
Intrinsic value of outstanding options		1,632		3,715
Intrinsic value of vested outstanding options		1,632		3,432
Unrecognized compensation expense
Non-vested stock options, net of tax		-		42
Unvested restricted stock, net of tax		12,791		19,150
Weighted average years over which expense will be recognized		2.5		2.6

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Summary of Major Categories of Net Investment Income (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Summary of Investments, Other than Investments in Related Parties, Reportable Data [Line Items]
Income	$ 33,135	$ 33,052	$ 68,456	$ 66,836
Investment expenses	(1,354)	(1,254)	(2,732)	(2,660)
Net investment income	31,781	31,798	65,724	64,176
Tower
Summary of Investments, Other than Investments in Related Parties, Reportable Data [Line Items]
Net investment income	30,267	30,401	62,525	61,106
Reciprocal Exchanges
Summary of Investments, Other than Investments in Related Parties, Reportable Data [Line Items]
Net investment income	3,177	3,051	6,526	6,396
Consolidation, Eliminations
Summary of Investments, Other than Investments in Related Parties, Reportable Data [Line Items]
Net investment income	(1,663)	(1,654)	(3,327)	(3,326)
Fixed-maturity securities
Summary of Investments, Other than Investments in Related Parties, Reportable Data [Line Items]
Income	24,511	26,154	49,924	55,264
Equity securities
Summary of Investments, Other than Investments in Related Parties, Reportable Data [Line Items]
Income	6,603	6,565	14,239	10,977
Cash and cash equivalents
Summary of Investments, Other than Investments in Related Parties, Reportable Data [Line Items]
Income	448	216	738	347
Other invested assets
Summary of Investments, Other than Investments in Related Parties, Reportable Data [Line Items]
Income	$ 1,573	$ 117	$ 3,555	$ 248

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Analysis of Restricted Stock Activity (Detail) (Restricted Stock, USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Restricted Stock
Number of Shares
Number of Shares, Beginning Balance			988,607	591,675
Number of Shares, Granted	0	7,498	321,178	621,000
Number of Shares, Vested			(388,115)	(227,580)
Number of Shares, Forfeitures	(4,432)	(1,596)	(8,715)	(2,914)
Number of Shares, Ending Balance	912,955	982,181	912,955	982,181
Weighted Average Grant Date Fair Value
Weighted Average Grant Date Fair Value, Beginning Balance			$ 23.44	$ 23.10
Weighted Average Grant Date Fair Value, Granted			$ 23.08	$ 23.90
Weighted Average Grant Date Fair Value, Vested			$ 23.87	$ 23.59
Weighted Average Grant Date Fair Value, Forfeitures			$ 23.60	$ 22.88
Weighted Average Grant Date Fair Value, Ending Balance	$ 23.09	$ 23.49	$ 23.09	$ 23.49

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Accounting Policies and Basis of Presentation (Policies)

6 Months Ended

Jun. 30, 2012

Basis of Presentation

Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Tower and its insurance subsidiaries, managing general agencies and management companies. The unaudited consolidated financial statements also include the accounts of Adirondack Insurance Exchange, a New York reciprocal insurer, and New Jersey Skylands Insurance Association, a New Jersey reciprocal insurer (together, the “Reciprocal Exchanges”). The Company does not own the Reciprocal Exchanges but manages their business operations through its wholly owned management companies.

The accompanying unaudited consolidated financial statements included in this report have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. The principles for condensed interim financial information do not require the inclusion of all the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2011 and notes thereto included in the Annual Report on Form 10-K filed on February 29, 2012. 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, results of operations and cash flows. All inter-company transactions have been eliminated in consolidation.

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Moreover, the results of operations for the six months ended June 30, 2012 may not be indicative of the results that may be expected for the year ending December 31, 2012.

Intercompany transactions

Intercompany transactions

In the first quarter 2012, Tower transferred a licensed insurance subsidiary shell to the Reciprocal Exchanges and received cash for its statutory book value. At the date of the transfer, Tower’s GAAP carrying basis in this subsidiary exceeded the statutory book value and the transfer resulted in a loss to Tower of $1.8 million. Since this was a non-recurring transaction between entities under common control, assets are transferred at historical book value. Any difference in the consideration paid and the book value of the assets transferred is treated as an adjustment to equity. This transaction had no effect on consolidated stockholders’ equity.

Reclassifications and Adjustments

Reclassifications and Adjustments

Certain reclassifications have been made to prior years’ financial information to conform to the current year presentation.

Cash amounts presented on the consolidated statements of cash flows for the six months ended June 30, 2011 have been revised to present book overdrafts representing outstanding checks in excess of funds on deposit with individual financial institutions within Other liabilities. These balances have previously been reported in Cash and cash equivalents. This revision increased Cash and cash equivalents and Other liabilities by $52.9 million as of June 30, 2011 and Net cash flows provided by operations by $15.6 million for the six months ended June 30, 2011. Management concluded this adjustment is not material to previously issued annual and quarterly consolidated financial statements.

Comprehensive income attributable to Noncontrolling interests and Comprehensive income attributable to Tower Group, Inc. for the three and six months ended June 30, 2011 have been revised. The revision increased Comprehensive income attributable to Noncontrolling interests and decreased Comprehensive income attributable to Tower Group, Inc. for the three and six months ended June 30, 2011 by $4.2 million and $5.0 million, respectively. This revision had no effect on consolidated Comprehensive income. The change corrected a classification error and is not considered material to the previously issued quarterly financial statements.

In the first quarter of 2012, the Company recorded an out of period adjustment that decreased income tax expense by $7.1 million. The adjustment increased consolidated net income by $7.1 million and increased net income available to common shareholders by $2.6 million for the six months ended June 30, 2012. This out of period adjustment had no effect on tax expense or consolidated net income for the three months ended June 30, 2012. The adjustment corrected our deferred income tax liability as reported at December 31, 2011. Management concluded this adjustment is not material to previously issued annual and quarterly consolidated financial statements.

Accounting Pronouncements

Accounting Pronouncements

Accounting guidance adopted in 2012

In May 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance concerning fair value measurement and disclosure. This new guidance requires additional disclosure about fair value measurements categorized as Level 3. This guidance had no effect on the Company’s financial position, results of operations or cash flows. The Company’s fair value disclosures have been revised effective January 1, 2012 to comply with this guidance.

In June 2011 (and as amended in December 2011), the FASB issued new guidance concerning the presentation of comprehensive income. The Company adopted this new guidance retrospectively on January 1, 2012 and now reports its comprehensive income in a separate consolidated financial statement immediately following the statement of operations.

In September 2011, the FASB issued amended guidance on testing goodwill for impairment. This guidance was intended to reduce the cost and complexity of the annual goodwill impairment test by allowing an entity to utilize more qualitative factors. The Company will consider this guidance when it performs its goodwill impairment test, which is done annually as of September 30. This guidance will not affect the Company’s financial position, result of operations or cash flows.

Accounting guidance not yet effective

In July 2012, the FASB issued amended guidance on testing indefinite lived intangible assets for impairment. This guidance is intended to reduce the cost and complexity of the annual impairment test by allowing an entity to utilize more qualitative factors. This guidance will not affect the Company’s financial position, result of operations or cash flows.

Variable Interest Entities

The Company determined that each of the Reciprocal Exchanges qualifies as a VIE and that the Company is the primary beneficiary as it has both the power to direct the activities of the Reciprocal Exchanges that most significantly impact their economic performance and the risk of economic loss through its ownership of the surplus notes. Accordingly, the Company consolidates these Reciprocal Exchanges and eliminates all intercompany balances and transactions with Tower.

Impairment Review

Impairment Review

Management regularly reviews the Company’s fixed-maturity and equity security portfolios in accordance with its impairment policy to evaluate the necessity of recording impairment losses for OTTI. The determination of OTTI is a subjective process and different judgments and assumptions could affect the timing of loss realization.

Management, in conjunction with its outside portfolio managers, analyzes its non-agency residential mortgage-backed securities (“RMBS”) using default loss models based on the performance of the underlying loans. Performance metrics include delinquencies, defaults, foreclosures, anticipated cash flow prepayments and cumulative losses incurred. The expected losses for a mortgage pool are compared to the break-even loss, which represents the point at which the Company’s tranche begins to experience losses.

The commercial mortgage-backed securities (“CMBS”) holdings are evaluated using analytical techniques and various metrics including the level of subordination, debt-service-coverage ratios, loan-to-value ratios, delinquencies, defaults and foreclosures.

For the non-structured fixed-maturity securities (U.S. Treasury and Agency securities, municipal bonds, and corporate debt), unrealized losses are reviewed to determine whether full recovery of principal and interest will be received. The estimate of expected cash flows is determined by projecting a recovery value and a recovery time frame and assessing whether further principal and interest will be received. The determination of recovery value incorporates an issuer valuation assumption utilizing one or a combination of valuation methods as deemed appropriate by management. The present value of the cash flows is determined by applying the effective yield of the security at the date of acquisition (or the most recent implied rate used to accrete the security if the implied rate has changed as a result of a previous impairment) and an estimated recovery time frame. For securities for which the issuer is financially troubled but not in bankruptcy, that time frame is generally longer. Included in the present value calculation are expected principal and interest payments; however, for securities for which the issuer is classified as bankrupt or in default, the present value calculation assumes no interest payments and a single recovery amount. In situations for which a present value of cash flows cannot be estimated, a write-down to fair value is recorded.

In estimating the recovery value, significant judgment is involved in the development of assumptions relating to a number of factors related to the issuer including, but not limited to, revenue, margin and earnings projections, the likely market or liquidation values of assets, potential additional debt to be incurred pre- or post- bankruptcy/restructuring, the ability to shift existing or new debt to different priority layers, the amount of restructuring/bankruptcy expenses, the size and priority of unfunded pension obligations, litigation or other contingent claims, the treatment of intercompany claims and the likely outcome with respect to inter-creditor conflicts.

The evaluation of equity securities includes management’s intent and ability to hold the security to recovery. Management will record OTTI in those situations where it does not intend to hold the security to recovery or if the security is not expected to recover in value in a period that is other-than-temporary.

Fair Value Measurements

GAAP establishes a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets or liabilities fall within different levels of the hierarchy, the classification is based on the lowest level input that is significant to the fair value measurement of the asset or liability. Classification of assets and liabilities within the hierarchy considers the markets in which the assets and liabilities are traded, including during periods of market disruption, and the reliability and transparency of the assumptions used to determine fair value. The hierarchy requires the use of observable market data when available. The levels of the hierarchy are as follows:

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

Level 2 — Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs. Included are investments in U.S. Treasury and Agency securities and, together with municipal bonds, corporate debt securities, commercial mortgages, residential mortgage-backed securities and asset-backed securities. Additionally, interest-rate swap contracts utilize Level 2 inputs in deriving fair values.

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

Loss and loss adjustment expense reserves

Loss and loss adjustment expense reserves. The reserving process for loss and LAE reserves provides for the Company’s best estimate at a particular point in time of the ultimate unpaid cost of all losses and LAE incurred, including settlement and administration of losses, and is based on facts and circumstances then known and including losses that have been incurred but not yet reported. The process includes using actuarial methodologies to assist in establishing these estimates, judgments relative to estimates of future claims severity and frequency, the length of time before losses will develop to their ultimate level and the changes in the law and other external factors that are often beyond the Company’s control. The actuarial methods include loss ratio projections, loss development projections, and Bornhuetter-Ferguson (“B-F”) method projections. The actuaries’ best estimates are the result of numerous analyses made by line of business, accident year, and for loss, allocated loss adjustment expense (“ALAE”) and unallocated loss adjustment expense (“ULAE”), and the actuarial analyses also consider input from underwriting and claims managements about the nature of the underlying risks, claims and other trends in the business.

Management sets the Company’s carried reserves based upon the actuaries’ best estimates and other considerations, and the difference between the Company’s estimates of loss and LAE and reported losses is recorded in IBNR. The amount of loss and LAE reserves for reported claims is based primarily upon a case-by-case evaluation of coverage, liability, injury severity, and any other information considered pertinent to estimating the exposure presented by the claim. The amounts of loss and LAE reserves for unreported claims are determined using historical information by line of insurance as adjusted to current conditions.

Earnings (Loss) per Share

In accordance with the two-class method, undistributed net earnings (net income less dividends declared during the period) are allocated to both common stock and unvested share-based payment awards (“unvested restricted stock”). Because the common shareholders and unvested restricted stock holders share in dividends on a 1:1 basis, the earnings per share on undistributed earnings is equivalent. Undistributed earnings are allocated to all outstanding share-based payment awards, including those for which the requisite service period is not expected to be rendered.

Segment Information

The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Annual Report on Form 10-K for the year ended December 31, 2011.

The Personal Insurance segment includes revenues and expenses associated with the Reciprocal Exchanges, including fees paid to Tower for underwriting, claims, investment management and other services provided pursuant to management services agreements with the Reciprocal Exchanges. The Insurance Services segment reports revenues earned by Tower from the Reciprocal Exchanges as management fee income, which is calculated as a percentage of the Reciprocal Exchanges’ gross written premiums. The effects of these management services agreements between Tower and the Reciprocal Exchanges are eliminated in consolidation to derive consolidated net income. However, the management fee income is reported in net income attributable to Tower Group, Inc. and included in basic and diluted earnings per share.

Segment performance is evaluated based on segment profit, which excludes investment income, realized gains and losses, interest expense, income taxes and incidental corporate expenses. Assets, other than intangibles and goodwill, are not allocated to segments because investments and assets other than intangibles and goodwill are considered in total by management for decision-making purposes.

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Stock Based Compensation (Tables)

6 Months Ended

Jun. 30, 2012

Analysis of Restricted Stock Activity

The following table provides an analysis of restricted stock activity for the six months ended June 30, 2012 and 2011:

	Six Months Ended June 30,
	2012					2011
	Number of Shares			Weighted Average Grant Date Fair Value		Number of Shares			Weighted Average Grant Date Fair Value
Outstanding, January 1		988,607		$	23.44		591,675		$	23.10
Granted		321,178			23.08		621,000			23.90
Vested		(388,115	)		23.87		(227,580	)		23.59
Forfeitures		(8,715	)		23.60		(2,914	)		22.88
Outstanding, June 30,		912,955		$	23.09		982,181		$	23.49

Analysis of Stock Option Activity

The following table provides an analysis of stock option activity for the six months ended June 30, 2012 and 2011:

	Six Months Ended June 30,
	2012				2011
	Number of Shares		Average     Exercise     Price		Number of Shares			Average Exercise Price
Outstanding, January 1		855,530	$	20.14		917,155		$	19.62
Exercised		-		-		(31,112	)		10.99
Forfeitures and expirations		-		-		(22,981	)		26.48
Outstanding, June 30		855,530	$	20.14		863,062		$	20.16
Exercisable, June 30		855,530	$	20.14		808,115		$	20.26

Analysis of Stock Based Compensation Expense

The following table provides an analysis of stock based compensation expense for the six months ended June 30, 2012 and 2011:

	Six Months Ended June 30,
($ in thousands)	2012		2011
Restricted stock
Expense, net of tax	$	896	$	3,035
Value of shares vested		8,576		5,391
Value of unvested shares		19,257		23,396
Stock options
Intrinsic value of outstanding options		1,632		3,715
Intrinsic value of vested outstanding options		1,632		3,432
Unrecognized compensation expense
Non-vested stock options, net of tax		-		42
Unvested restricted stock, net of tax		12,791		19,150
Weighted average years over which expense will be recognized		2.5		2.6

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Debt - Additional Information (Detail) (USD $)	1 Months Ended		3 Months Ended		6 Months Ended		12 Months Ended						1 Months Ended		6 Months Ended
	Sep. 30, 2010	May 14, 2010	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2010	Dec. 31, 2011	Jun. 30, 2012 Maximum	Oct. 31, 2010 Interest Rate Swaps	Jun. 30, 2012 Other liability Interest Rate Swaps	Dec. 31, 2011 Other liability Interest Rate Swaps	Feb. 15, 2012 Amended Line of Credit Facility	Sep. 30, 2010 Convertible senior notes	Jun. 30, 2012 Convertible senior notes	Dec. 31, 2011 Convertible senior notes
Debt Instrument [Line Items]
Interest expense			$ 7,902,000	$ 8,257,000	$ 15,478,000	$ 16,357,000									$ 5,700,000
Subordinated debentures, carrying value			235,058,000		235,058,000			235,058,000
Notional amount, interest rate swap contracts										190,000,000
Interest rate swap contracts, terms										5 years
Interest rate range on swaps, minimum										5.10%
Interest rate range on swaps, maximum										5.90%
Interest rate swap contracts liabilities, fair value			8,775,000		8,775,000			7,384,000			8,800,000	7,400,000
Gain (loss) on Swaps designated as cash flow hedges reclassified from AOCI to interest expense					800,000	100,000
Collateral on deposit with the counterparty			8,700,000		8,700,000
Credit facility agreement, borrowing capacity		125,000,000											150,000,000
Credit facility agreement, expiration date		May 14, 2013											Feb. 15, 2016
Credit facility additional capacity to be increased									50,000,000
Outstanding credit facility amount			70,000,000		70,000,000			50,000,000
Weighted average interest rate			2.00%		2.00%
Convertible senior notes principal amount														150,000,000
Interest rate on convertible senior note, percentage														5.00%
Maturity date of convertible senior notes														Sep. 15, 2014
Frequency of interest payment, term														Interest on the Notes is payable semi-annually in arrears on March 15 and September 15 of each year, commencing March 15, 2011.
First interest payment date														Mar. 15, 2011
Earliest conversion date for notes														Mar. 15, 2014
Conversion rate of shares of common stock per principal amount of notes															36.9105
Principal amount of Notes															1,000
Initial conversion price															$ 27.09
Notes repurchase price, percentage															100.00%
Unamortized OID														11,500,000	6,767,000	8,157,000
Deferred origination costs relating to liability component														5,000,000
Effective interest rate on convertible senior note														7.20%
Transaction costs associated with equity component															400,000
Payments for convertible senior notes hedge							15,300,000
Note Hedges, shares of common stock upon conversion							5,500,000
Proceeds from issuance of warrants	$ 3,800,000
Warrants issued, shares			5,500,000
Common stock strike price for warrants sold			$ 32.94		$ 32.94

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Financial Instruments at Fair Value among Levels (Detail) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012		Dec. 31, 2011
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	$ 2,496,367		$ 2,543,019
Other invested assets	25,000	[1]	25,000	[2]
Interest rate swap contracts	(8,775)		(7,384)
Foreign currency forward contract	(2,042)
Debt and equity securities sold, not yet purchased	(17,506)
Total investments and Other liabilities	2,493,044		2,560,635
Tower
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	2,189,292		2,241,099
Total investments and Other liabilities	2,185,969		2,258,715
Reciprocal Exchanges
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	307,075		301,920
Total investments and Other liabilities	307,075		301,920
Fixed-maturity securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	2,359,974		2,453,674
Fixed-maturity securities | U.S. Treasury securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	122,367		156,142
Fixed-maturity securities | U.S. Agency securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	81,282		117,190
Fixed-maturity securities | Municipal bonds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	796,377		736,714
Fixed-maturity securities | Corporate and other bonds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	720,890		777,723
Fixed-maturity securities | Commercial mortgage-backed securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	250,425		253,167
Fixed-maturity securities | Residential mortgage-backed securities, Agency backed securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	328,273		320,276
Fixed-maturity securities | Residential mortgage-backed securities, Non-agency backed securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	18,124		31,609
Fixed-maturity securities | Asset-backed securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	42,236		60,853
Equity securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	136,393		89,345
Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	136,393		89,345
Total investments and Other liabilities	136,393		89,345
Level 1 | Tower
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total investments and Other liabilities	128,490		87,479
Level 1 | Reciprocal Exchanges
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total investments and Other liabilities	7,903		1,866
Level 1 | Equity securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	136,393		89,345
Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	2,359,974		2,453,674
Interest rate swap contracts	(8,775)		(7,384)
Foreign currency forward contract	(2,042)
Debt and equity securities sold, not yet purchased	(17,506)
Total investments and Other liabilities	2,331,651		2,446,290
Level 2 | Tower
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total investments and Other liabilities	2,032,479		2,146,236
Level 2 | Reciprocal Exchanges
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total investments and Other liabilities	299,172		300,054
Level 2 | Fixed-maturity securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	2,359,974		2,453,674
Level 2 | Fixed-maturity securities | U.S. Treasury securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	122,367		156,142
Level 2 | Fixed-maturity securities | U.S. Agency securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	81,282		117,190
Level 2 | Fixed-maturity securities | Municipal bonds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	796,377		736,714
Level 2 | Fixed-maturity securities | Corporate and other bonds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	720,890		777,723
Level 2 | Fixed-maturity securities | Commercial mortgage-backed securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	250,425		253,167
Level 2 | Fixed-maturity securities | Residential mortgage-backed securities, Agency backed securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	328,273		320,276
Level 2 | Fixed-maturity securities | Residential mortgage-backed securities, Non-agency backed securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	18,124		31,609
Level 2 | Fixed-maturity securities | Asset-backed securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments	42,236		60,853
Level 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Other invested assets	25,000	[1]	25,000	[2]
Total investments and Other liabilities	25,000		25,000
Level 3 | Tower
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total investments and Other liabilities	$ 25,000		$ 25,000

[1] $25.0 million of the Other invested assets balance at June 30, 2012 is reported at fair value. $27.3 million of Other invested assets is reported under the equity method of accounting or at amortized cost.

[2] $25.0 million of the Other invested assets balance at December 31, 2011 is reported at fair value. $19.3 million of Other invested assets is reported under the equity method of accounting or at amortized cost.

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Consolidated Statements of Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Net income (loss)	$ (18,307)	$ 28,316	$ 11,334	$ 54,822
Other comprehensive income (loss) before tax
Gross unrealized investment holding gains arising during periods	8,524	25,755	33,585	24,430
Less: Reclassification adjustment for investment (gains) losses included in net income	236	2,290	(3,347)	(5,046)
Portion of other-than-temporary impairment losses recognized in other comprehensive income	(286)		(286)	(24)
Deferred gain (loss) on cash flow hedge	(1,160)	(4,583)	(1,391)	(3,645)
Other comprehensive income before tax	7,314	23,462	28,561	15,715
Income tax benefit (expense) related to items of other comprehensive income (loss)	(2,629)	(8,218)	(9,911)	(5,459)
Other comprehensive income, net of income tax	4,685	15,244	18,650	10,256
Comprehensive income (loss)	(13,622)	43,560	29,984	65,078
Less: Comprehensive income (loss) attributable to Noncontrolling interests	(1,006)	6,775	10,841	8,411
Comprehensive income (loss) attributable to Tower Group, Inc.	$ (12,616)	$ 36,785	$ 19,143	$ 56,667

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Variable Interest Entities ("VIEs")

6 Months Ended

Jun. 30, 2012

Variable Interest Entities ("VIEs")

Note 3—Variable Interest Entities (“VIEs”)

Through its management companies, Tower is the attorney-in-fact for the Reciprocal Exchanges and has the ability to direct their activities. The Reciprocal Exchanges are policyholder-owned insurance carriers organized as unincorporated associations. Each policyholder insured by the Reciprocal Exchanges shares risk with the other policyholders.

In the event of dissolution, policyholders would share any residual unassigned surplus in the same proportion as the amount of insurance purchased but are not subject to assessment for any deficit in unassigned surplus of the Reciprocal Exchanges. Tower receives management fee income for the services provided to the Reciprocal Exchanges. The assets of the Reciprocal Exchanges can be used only to settle the obligations of the Reciprocal Exchanges and general creditors to their liabilities have no recourse to Tower as the primary beneficiary.

In addition, Tower holds the surplus notes issued by the Reciprocal Exchanges when they were originally capitalized. The obligation to repay principal and interest on the surplus notes is subordinated to the Reciprocal Exchanges’ other liabilities including obligations to policyholders and claimants for benefits under insurance policies. Principal and interest on the surplus notes are payable only with regulatory approval. The Company has no ownership interest in the Reciprocal Exchanges.

The Company determined that each of the Reciprocal Exchanges qualifies as a VIE and that the Company is the primary beneficiary as it has both the power to direct the activities of the Reciprocal Exchanges that most significantly impact their economic performance and the risk of economic loss through its ownership of the surplus notes. Accordingly, the Company consolidates these Reciprocal Exchanges and eliminates all intercompany balances and transactions with Tower.

For the three months ended June 30, 2012, the Reciprocal Exchanges recognized total revenues, total expenses and net loss of $47.4 million, $50.6 million and $(3.2) million, respectively. For the three months ended June 30, 2011, the Reciprocal Exchanges recognized total revenues, total expenses and net income of $56.0 million, $51.8 million and $4.2 million, respectively.

For the six months ended June 30, 2012, the Reciprocal Exchanges recognized total revenues, total expenses and net income of $99.4 million, $93.6 million and $5.8 million, respectively. For the six months ended June 30, 2011, the Reciprocal Exchanges recognized total revenues, total expenses and net income of $105.3 million, $100.3 million and $5.0 million, respectively.

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Reconciliation of Results of Individual Segments to Consolidated Income Before Income Taxes (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Segment Reporting, Reconciling Item for Operating Profit (Loss) from Segment to Consolidated [Line Items]
Net investment income	$ 31,781	$ 31,798	$ 65,724	$ 64,176
Net realized gains on investments, including other-than-temporary impairments	(236)	(2,314)	3,347	5,046
Corporate expenses	(3,159)	(2,803)	(6,020)	(5,898)
Acquisition-related transaction costs	(720)		(1,982)	(12)
Interest expense	(7,902)	(8,257)	(15,478)	(16,357)
Income before income taxes	(25,546)	41,193	5,945	80,457
Commercial Insurance Segment
Segment Reporting, Reconciling Item for Operating Profit (Loss) from Segment to Consolidated [Line Items]
Underwriting profit (loss)	(52,229)	16,329	(58,105)	21,161
Personal Insurance Segment
Segment Reporting, Reconciling Item for Operating Profit (Loss) from Segment to Consolidated [Line Items]
Underwriting profit (loss)	2,674	3,786	11,318	7,431
Insurance Services Segment
Segment Reporting, Reconciling Item for Operating Profit (Loss) from Segment to Consolidated [Line Items]
Segment pretax income	$ 4,245	$ 2,654	$ 7,141	$ 4,910

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Earnings (Loss) per Share (Tables)

6 Months Ended

Jun. 30, 2012

Computation of Earnings Per Share Pursuant to Two-class Method

The following table shows the computation of the earnings per share pursuant to the two-class method:

	Three Months Ended June 30,					Six Months Ended June 30,
(in thousands, except per share amounts)	2012			2011		2012			2011
Numerator
Net income (loss) attributable to Tower Group, Inc.	$	(15,113	)	$	24,121	$	5,521		$	49,806
Denominator
Weighted average common shares outstanding		39,117			41,303		39,206			41,404
Effect of dilutive securities:
Stock options		-			88		62			111
Other		-			4		-			3
Weighted average common and potential dilutive shares outstanding		39,117			41,395		39,268			41,518
Earnings (loss) per share attributable to Tower stockholders - basic
Common stock:
Distributed earnings	$	0.19		$	0.19	$	0.38		$	0.32
Undistributed earnings		(0.58	)		0.39		(0.24	)		0.88
Total		(0.39	)		0.58		0.14			1.20
Earnings (loss) per share attributable to Tower stockholders - diluted	$	(0.39	)	$	0.58	$	0.14		$	1.20

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Invested Assets that were in Unrealized Loss Position (Detail) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Investments, Unrealized Loss Position [Line Items]
Less than 12 Months, Fair Value	$ 275,706	$ 434,667
Less than 12 Months, Unrealized Losses	(5,241)	(15,448)
12 Months or Longer, Fair Value	35,953	10,304
12 Months or Longer, Unrealized Losses	(1,014)	(988)
Total, Aggregate Fair Value	311,659	444,971
Total, Unrealized Losses	(6,255)	(16,436)
Tower
Investments, Unrealized Loss Position [Line Items]
Less than 12 Months, Fair Value	254,853	398,989
Less than 12 Months, Unrealized Losses	(4,959)	(14,160)
12 Months or Longer, Fair Value	34,232	8,264
12 Months or Longer, Unrealized Losses	(959)	(915)
Total, Aggregate Fair Value	289,085	407,253
Total, Unrealized Losses	(5,918)	(15,075)
Reciprocal Exchanges
Investments, Unrealized Loss Position [Line Items]
Less than 12 Months, Fair Value	20,853	35,678
Less than 12 Months, Unrealized Losses	(282)	(1,288)
12 Months or Longer, Fair Value	1,721	2,040
12 Months or Longer, Unrealized Losses	(55)	(73)
Total, Aggregate Fair Value	22,574	37,718
Total, Unrealized Losses	(337)	(1,361)
Fixed-maturity securities
Investments, Unrealized Loss Position [Line Items]
Less than 12 Months, Fair Value	229,575	372,762
Less than 12 Months, Unrealized Losses	(2,013)	(10,610)
12 Months or Longer, Fair Value	29,021	9,001
12 Months or Longer, Unrealized Losses	(847)	(742)
Total, Aggregate Fair Value	258,596	381,763
Total, Unrealized Losses	(2,860)	(11,352)
Fixed-maturity securities | U.S. Treasury securities
Investments, Unrealized Loss Position [Line Items]
Less than 12 Months, Fair Value	65,714	92,001
Less than 12 Months, Unrealized Losses	(7)	(13)
Total, Aggregate Fair Value	65,714	92,001
Total, Unrealized Losses	(7)	(13)
Fixed-maturity securities | Municipal bonds
Investments, Unrealized Loss Position [Line Items]
Less than 12 Months, Fair Value	41,456	13,449
Less than 12 Months, Unrealized Losses	(431)	(255)
12 Months or Longer, Fair Value	990
12 Months or Longer, Unrealized Losses	(4)
Total, Aggregate Fair Value	42,446	13,449
Total, Unrealized Losses	(435)	(255)
Fixed-maturity securities | Corporate and other bonds | Finance
Investments, Unrealized Loss Position [Line Items]
Less than 12 Months, Fair Value	22,784	138,986
Less than 12 Months, Unrealized Losses	(169)	(4,610)
12 Months or Longer, Fair Value	752	251
12 Months or Longer, Unrealized Losses	(46)	(5)
Total, Aggregate Fair Value	23,536	139,237
Total, Unrealized Losses	(215)	(4,615)
Fixed-maturity securities | Corporate and other bonds | Industrial
Investments, Unrealized Loss Position [Line Items]
Less than 12 Months, Fair Value	46,687	57,357
Less than 12 Months, Unrealized Losses	(990)	(2,141)
12 Months or Longer, Fair Value	6,465	3,519
12 Months or Longer, Unrealized Losses	(191)	(145)
Total, Aggregate Fair Value	53,152	60,876
Total, Unrealized Losses	(1,181)	(2,286)
Fixed-maturity securities | Corporate and other bonds | Utilities
Investments, Unrealized Loss Position [Line Items]
Less than 12 Months, Fair Value	3,425	1,902
Less than 12 Months, Unrealized Losses	(24)	(61)
12 Months or Longer, Fair Value	394
12 Months or Longer, Unrealized Losses	(2)
Total, Aggregate Fair Value	3,819	1,902
Total, Unrealized Losses	(26)	(61)
Fixed-maturity securities | Commercial mortgage-backed securities
Investments, Unrealized Loss Position [Line Items]
Less than 12 Months, Fair Value	16,036	26,130
Less than 12 Months, Unrealized Losses	(138)	(2,564)
12 Months or Longer, Fair Value	16,053
12 Months or Longer, Unrealized Losses	(438)
Total, Aggregate Fair Value	32,089	26,130
Total, Unrealized Losses	(576)	(2,564)
Fixed-maturity securities | Residential mortgage-backed securities, Agency backed securities
Investments, Unrealized Loss Position [Line Items]
Less than 12 Months, Fair Value	21,134	19
Less than 12 Months, Unrealized Losses	(134)	(1)
12 Months or Longer, Fair Value	21	12
Total, Aggregate Fair Value	21,155	31
Total, Unrealized Losses	(134)	(1)
Fixed-maturity securities | Residential mortgage-backed securities, Non-agency backed securities
Investments, Unrealized Loss Position [Line Items]
Less than 12 Months, Fair Value	6	13,294
Less than 12 Months, Unrealized Losses	(3)	(318)
12 Months or Longer, Fair Value	2,666	4,609
12 Months or Longer, Unrealized Losses	(121)	(583)
Total, Aggregate Fair Value	2,672	17,903
Total, Unrealized Losses	(124)	(901)
Fixed-maturity securities | Asset-backed securities
Investments, Unrealized Loss Position [Line Items]
Less than 12 Months, Fair Value	12,333	29,624
Less than 12 Months, Unrealized Losses	(117)	(647)
12 Months or Longer, Fair Value	1,680	610
12 Months or Longer, Unrealized Losses	(45)	(9)
Total, Aggregate Fair Value	14,013	30,234
Total, Unrealized Losses	(162)	(656)
Preferred stocks
Investments, Unrealized Loss Position [Line Items]
Less than 12 Months, Fair Value	6,263	17,773
Less than 12 Months, Unrealized Losses	(45)	(644)
12 Months or Longer, Fair Value	6,019	1,303
12 Months or Longer, Unrealized Losses	(112)	(246)
Total, Aggregate Fair Value	12,282	19,076
Total, Unrealized Losses	(157)	(890)
Common stocks
Investments, Unrealized Loss Position [Line Items]
Less than 12 Months, Fair Value	39,868	44,132
Less than 12 Months, Unrealized Losses	(3,183)	(4,194)
12 Months or Longer, Fair Value	913
12 Months or Longer, Unrealized Losses	(55)
Total, Aggregate Fair Value	40,781	44,132
Total, Unrealized Losses	$ (3,238)	$ (4,194)

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Subsequent Event

6 Months Ended

Jun. 30, 2012

Subsequent Event

Note 13—Subsequent Event

As announced on April 25, 2012, Tower agreed to invest approximately $75 million to acquire a 10.7% stake in Canopius Group Limited (“Canopius Group”), a privately owned Lloyd’s insurance holding company domiciled in Guernsey, Channel Islands, subject to the closing of Canopius Group’s acquisition of Omega Insurance Holdings Limited (“Omega”). Tower also entered into an agreement dated April 25, 2012 (the “Master Transaction Agreement”) under which Canopius Group committed to assist Tower with the establishment of a presence at Lloyd’s of London (subject to required approvals) and granted Tower an option (the “Option”) to combine with Canopius Holdings Bermuda Limited (“Canopius Bermuda”). On July 30, 2012, Tower announced that it has exercised the Option and executed an Agreement and Plan of Merger (the “Merger Agreement”) with Canopius Bermuda pursuant to which Canopius Bermuda will acquire all of Tower’s common stock; under applicable accounting principles Tower will be regarded as the acquiring entity. Tower paid Canopius Group a fee of $1,000,000 to exercise the Option.

Under the Merger Agreement, Tower stockholders will receive, in exchange for each share of Tower’s common stock, (1) a certain number of Canopius Bermuda shares equal to a Stock Conversion Number (defined below) and (2) $ 1.25 in cash. Canopius Group expects to sell its shares in Canopius Bermuda prior to the consummation of the merger in a private placement of those shares (the “Canopius Secondary Offering”) to third party investors. The Stock Conversion Number will equal the quotient obtained by dividing (X) the price per share of Tower common stock (reduced by the $1.25 per share that Tower shareholders will be paid in the merger) at the market close on the date of the pricing of the Canopius Secondary Offering by (Y) the Adjusted Canopius Bermuda Price Per Share (as defined in the Merger Agreement).

The Adjusted Canopius Bermuda Price Per Share will reflect Canopius Bermuda’s net tangible asset value at the closing after giving effect to a restructuring of Canopius Bermuda contemplated by the Master Transaction Agreement (the “Restructuring”), the placement fees paid to the placement agents in the Canopius Secondary Offering, any economic concessions made to the purchasers of the Canopius Bermuda shares in the Canopius Secondary Offering and the value of Canopius Bermuda’s retained business. Because neither the Restructuring nor the Canopius Secondary Offering is likely to occur until the fourth quarter of this year at the earliest, no assurances can be given as to Canopius Bermuda’s net tangible asset value at closing or the Adjusted Canopius Bermuda Price Per Share. Based on information currently available to Tower, Tower believes that Canopius Bermuda’s net tangible asset value should range between $240 million and $290 million. This range could be materially affected by a number of factors, including among others, (1) the fact that the Restructuring has not been implemented and its terms are subject to negotiation between Tower and Canopius Group and (2) Canopius Bermuda’s loss experience and loss development between signing and closing of the merger. Accordingly, the Adjusted Canopius Bermuda Price Per Share, the Stock Conversion Number and, in turn, the number of Canopius Bermuda shares that Tower stockholders will receive in connection with the merger, could be materially affected by such factors and by other factors, including, without limitation, the terms of the Canopius Secondary Offering.

The Merger Agreement may be terminated by Tower at any time prior to the closing of the merger for any reason. Without limiting the generality of the foregoing, Tower currently anticipates that it would likely not proceed with the merger in the event (1) that Canopius Group’s acquisition of Omega does not close, (2) that the Canopius Secondary Offering cannot be effected, or can only be effected on terms that would make the Stock Conversion Number, and therefore the merger, unattractive to Tower, (3) that the Adjusted Canopius Bermuda Price Per Share declines to a point that Canopius Bermuda shareholders own 20% or less of the merged entity’s outstanding shares immediately after the closing of the merger, (4) of failure to obtain regulatory approvals on terms acceptable to Tower, (5) of failure to obtain the approval of Tower’s shareholders, and (6) of failure of Tower’s Board of Directors to approve certain of the transactions contemplated by the Merger Agreement, including without limitation, the Canopius Secondary Offering. In the event that Tower exercises its right to terminate the Merger Agreement, it will nonetheless be obligated to reimburse affiliates of Canopius Bermuda for costs actually incurred in connection with negotiating, documenting and implementing the Merger Agreement and the transactions contemplated thereby to the extent that such costs exceed the $1,000,000 Option exercise fee paid by Tower.