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Article by DailyStocks_admin    (08-19-08 06:17 AM)

Filed with the SEC from Aug 11 to Aug 15:

CastlePoint Holdings (CPHL)
Hedge-fund manager Leon Cooperman is opposing the company's $490 million acquisition by Tower Group (TWGP). Cooperman wants the company to share its analysis showing how this transaction is fair to CPHL shareholders. "Just show me I am wrong, and I will go along with the transaction quietly," Cooperman says, suggesting that the Tower Group sweeten the package with a warrant that adds some $2 a share in value. Cooperman owns 2,750,500 shares (7.2% of the total outstanding).

BUSINESS OVERVIEW

Business.
Changes in market conditions and other factors outside our control may alter our current or anticipated methods of conducting our business, such as the nature, amount and types of risks we assume and the terms, limits or other characteristics of the products we write or intend to write. In addition, as discussed elsewhere in this report, while we write policies through CastlePoint Insurance Company, a U.S. licensed insurance company, and are considering acquiring or creating other companies to enable us to conduct our insurance business in states where CastlePoint Insurance Company is not currently licensed, we currently generate the majority of our revenues through our reinsurance business as described herein.
Overview
We are a Bermuda holding company limited by shares, incorporated in November 2005, commencing operations in April 2006, and organized to provide property and casualty insurance and reinsurance solutions, products and services primarily to small insurance companies and program underwriting managers in the United States.
We provide insurance and reinsurance business solutions to insurance companies and program underwriting managers to enable them to improve their ability to deliver and market their products and services.
The Company and/or its subsidiaries are parties to a master agreement, certain reinsurance agreements, management agreements and service and expense sharing agreements with Tower and/or its subsidiaries. In addition, CastlePoint Re participates as a reinsurer on certain of Tower’s excess of loss reinsurance agreements. Tower is our largest customer, from whom we generated approximately 75.0% of our total written premiums in 2007.
Our insurance company clients, including Tower, underwrite relatively small commercial and personal lines policies with low to moderate hazard risks that we believe produce consistently profitable underwriting results. Other than Tower, our insurance company clients generally have surpluses of less than $100 million. Many of these companies have encountered difficulty in growing their operations due to such factors as limited capital, lack of adequate ratings or limited licensing. We believe we can help these insurance companies in overcoming these limitations by entering into quota share reinsurance and insurance risk-sharing arrangements with them, thereby allowing them to access our surplus, higher rating, broad-based licensing and other capabilities.
We also focus on program underwriting managers that write program business in various profitable market segments that we believe are underserved by other insurance companies. We refer to program business as narrowly defined classes of business that are underwritten on an individual policy basis by program underwriting managers on behalf of insurance companies. We provide comprehensive business solutions, products and services to program underwriting managers that write program business. By providing these reinsurance and insurance solutions, products and services to these program underwriting managers, we believe we improve their ability to deliver and market their products and services, and that this, in turn, should allow us access to established, profitable books of business, while leveraging their product knowledge and existing infrastructure.
We offer reinsurance products to insurance companies through CastlePoint Re, our Bermuda reinsurance subsidiary. We also offer primary insurance in the states of New York and New Jersey through CastlePoint Insurance Company, and we plan to establish a Florida domiciled company in 2008, as well as acquire or capitalize one or more additional more broadly licensed U.S. licensed insurance companies, subject to receipt of regulatory approvals. Our U.S. licensed insurance companies have or may enter into insurance risk-sharing arrangements, thereby effectively sharing premiums, losses and expenses on certain business which they and other insurance companies write. In addition to entering into these insurance risk-sharing arrangements, we write traditional program business and specialty program business. Unless and until we acquire licenses in additional U.S. jurisdictions, we intend to engage in the insurance risk-sharing business, traditional program business and specialty program business in states other than New York and New Jersey through the issuance of policies written by Tower’s insurance companies pursuant to CastlePoint Management’s program management agreements with Tower’s insurance companies.
Each of CastlePoint Re and CastlePoint Insurance Company has received a Financial Strength rating of “A-” (Excellent — Assigned to companies that have, in their opinion, an excellent ability to meet their ongoing obligations to policyholders) from A.M. Best, which is the fourth highest of fifteen rating levels. This rating indicates A.M. Best’s opinion of our financial strength and our ability to meet ongoing obligations to our future policyholders. In addition, we expect that any additional U.S. licensed insurance companies that we may acquire, upon our acquisition and capitalization of such companies, will have a rating of “A-” (Excellent). There is no assurance however, that any additional U.S. licensed insurance companies that we may acquire will receive such rating.
Our Business Solutions, Products and Services

For information related to the segments in which we report our business, see Note 15 “Segment Information” in the notes to our audited financial statements included elsewhere in this report.
Reinsurance Solutions
Reinsurance can be written either through treaty or facultative reinsurance arrangements. Treaty reinsurance is a contractual arrangement that provides for automatic reinsuring of a type or category of risk underwritten by the ceding company. In facultative reinsurance, the ceding company cedes, and the reinsurer assumes, all or part of a specific risk or risks. Facultative reinsurance provides protection to ceding companies for losses relating to individual insurance contracts issued to individual insureds. We write most of our reinsurance business on a treaty basis.
Our treaty reinsurance contracts can be written on either a quota share basis, also known as proportional or pro-rata, or on an excess of loss basis. Under quota share reinsurance, we generally share the premiums as well as the losses and expenses in an agreed proportion with our client, the cedent. Under excess of loss reinsurance, we generally receive a specified premium for the risk assumed and indemnify the cedent against all or a specified portion of losses and expenses in excess of a specified dollar or percentage amount up to a specific amount. In both types of contracts, we may provide a ceding commission to the client. Our reinsurance business mainly focuses on quota share reinsurance.
When we write treaty reinsurance contracts, we do not separately evaluate each of the individual risks assumed under the contracts. Instead we largely depend on the individual underwriting decisions made by the reinsured. Accordingly, we carefully review and analyze the reinsured’s risk management and underwriting practices in deciding whether to provide treaty reinsurance and in appropriately pricing the treaty. We also audit the reinsured periodically during the term of the treaty to determine if it follows the agreed underwriting and claims practices as specified in the treaty.
Our reinsurance subsidiary, CastlePoint Re, entered into quota share reinsurance agreements with Tower’s insurance companies and the reinsurance written under those agreements comprises a substantial source of revenue. The quota share reinsurance agreements have a term of four years and expire March 31, 2010, subject to certain early termination provisions, which we and Tower have agreed not to allow our respective subsidiaries to exercise. In addition, CastlePoint Re participates, along with other third-party reinsurers, as a reinsurer of Tower under Tower’s ceded property and casualty excess of loss reinsurance treaties. We believe the reinsurance agreements should secure for us a stable source of reinsurance premium revenue through at least March 31, 2010 from the historically profitable property and casualty business conducted by Tower. See “—Description of Our Business Relationships with Tower.” As a result of these agreements, we derive a substantial portion of our gross premiums written from Tower’s insurance companies and expect to continue to do so over the next several years.

We also are primarily targeting, as additional reinsurance customers, small, primary insurance companies in the United States with surplus of less than $100 million that write commercial and personal lines policies with a low to medium hazard risk, generating average premiums of less than $25,000 per policy. In addition, we are targeting insurance companies that write program business and that reinsure a substantial amount of their business, as well as captive insurance companies established by program underwriting managers. We also plan to reinsure insurance companies that, although they have a sufficient level of capital, are seeking to manage their capital more effectively by accessing our reinsurance solutions to improve their profitability.
Our reinsurance operations offer the following reinsurance solutions:
Quota Share Reinsurance
This type of reinsurance provides proportional sharing of premiums and losses between the ceding company and the reinsurer and is typically purchased by companies needing to bring their ratio of written premium to surplus in line with regulatory or rating agency requirements as a method of limiting the ceding company’s net retained losses.
We offer this product, on a treaty basis, for our target market. We typically pay ceding commissions to the ceding company which reimburses it for its primary expenses consisting of retail commissions, premium taxes and policy administration. We base the ceding commissions we are willing to pay upon our projections of the ceding company’s loss ratios. The ceding commission often adjusts within a small range, so that our combined ratio (calculated as a percentage equal to the sum of an insurer’s loss ratio and its ceding commission ratio) is relatively more stable. These quota share reinsurance treaties sometimes include catastrophe loss exposure; however, we generally seek occurrence limitations (as part of the contract terms) to limit this potential, and seek to avoid writing in catastrophe prone areas.
Property and Casualty Per Risk Excess of Loss Reinsurance
This type of reinsurance limits a ceding company’s exposure to loss from any one risk in any one event. We write this type of reinsurance on a treaty basis, excess of a retention held by the ceding company. Our target market for this type of reinsurance are the companies for whom we also provide quota share reinsurance, although in some situations we may offer this type of reinsurance to similar client companies who have not yet purchased quota share reinsurance from us. We write working layers with lower retentions and higher frequency (generally below $1 million per risk limit). To a more limited extent, we write layers above $1 million per risk limit. In all cases, we limit our exposure to loss from any single risk, or any single event, to no more than 1% of our surplus.
The property and casualty per risk excess of loss reinsurance treaties are typically written separately for property lines of business and for casualty lines of business and are offered to smaller regional and multi-regional companies writing exposures in non-hazardous classes. For property per risk excess of loss reinsurance treaties, the subject property generally consists of portfolios of personal and commercial lines business principally covering buildings, structures, equipment, contents and time element; and the principal loss exposures include the perils of fire, wind, hail and tornado. For casualty per risk excess of loss reinsurance treaties, the exposures include general liability, automobile liability, comprehensive personal liability, umbrella liability and workers’ compensation.
CastlePoint Re participates, along with other third-party reinsurers, as a reinsurer of Tower under Tower’s ceded property and casualty excess of loss reinsurance treaties. See “—Description of Our Business Relationships with Tower.”
Property Catastrophe Excess of Loss Reinsurance
This type of reinsurance is occurrence-based protection that limits a ceding company’s exposure, across its entire property portfolio, in any single, catastrophic event. We write property catastrophe excess of loss reinsurance, on a treaty basis, excess of a retention held by the ceding company. Our target market for this product consists of regional and multi-regional insurance companies that purchase quota share reinsurance from us and that we have determined do not have exposures in catastrophe prone areas. The subject property generally consists of portfolios of personal and commercial lines business principally covering buildings, structures, equipment, contents and time element. The principal loss exposures are expected to include the perils of wind, hail and tornado.
For all classes and all treaties that we write regarding property, we limit our net probable 100 year event to no more than 10% of our surplus and will purchase property retrocessional protection to maintain this percentage when and if necessary.
CastlePoint Insurance Company purchases property catastrophe reinsurance protection as part of our risk-sharing agreement with Tower. Our risk sharing agreement with Tower currently exposes CastlePoint Insurance Company to a maximum loss of 30% of $50 million retained limits, or a $15 million maximum loss for the business that Tower underwrites on its behalf and in CastlePoint Insurance Company. CastlePoint pays 30% of the costs of property catastrophe reinsurance protection purchased by Tower for the protection of Tower and CastlePoint Insurance Company for the brokerage business. Currently, the costs of the property catastrophe reinsurance protection are paid by CastlePoint Insurance Company, although prior to October 1, 2007 these costs were shared by CastlePoint Reinsurance Company and CastlePoint Insurance Company as part of the quota share agreement with Tower for brokerage business.
When offering property catastrophe reinsurance to other insurers, we expect to offer coverage in layers similar to the structure of our property catastrophe reinsurance agreement with Tower.
Property Aggregate Excess of Loss Reinsurance
This type of reinsurance provides loss ratio protection for the ceding company and covers the ceding company’s annual aggregate losses for the covered classes, excess of a specified loss ratio retention held net by the ceding company. We utilize this type of reinsurance as part of our risk-sharing solutions. We will typically write this type of reinsurance in combination with quota share and/or per risk excess of loss reinsurance treaties for a particular client. In all cases, we set the retention in such a way that the ceding company has a significant stake in the arrangement, so that the ceding company underwriter is highly motivated to generate good loss ratio results.
Property Surplus Share Reinsurance
Similar to our quota share reinsurance products, the property surplus share reinsurance we offer is a proportional sharing of premium and losses between the ceding company and the reinsurer, but only after the total insured value of the covered property exceeds the retention selected by the ceding company. It is generally purchased by the ceding company not only for surplus relief, but also to provide additional property capacity for higher valued properties. We write this type of reinsurance on a treaty basis, for the same target markets, property exposures and subject properties as described above under “—Quota Share Reinsurance.” In all cases, we require that the ceding company retain a meaningful retention and we structure the overall treaty limit in such a way as to obtain proper balance between ceded premium and the treaty limit.
Insurance Solutions
We offer various insurance risk-sharing solutions to insurance companies and program underwriting managers as a source of underwriting capacity in addition to, or as an alternative to, quota share reinsurance. We also offer risk-sharing arrangements to enhance our ability to write program business.
The insurance risk-sharing arrangements that we offer to small insurance companies are an alternative to quota share reinsurance or can be utilized in conjunction with quota share reinsurance to allow an insurance company to better manage its surplus, rating and licensing limitations and improve its ability to expand the amount of premium it writes. We believe these insurance companies are able to address their limitations through the U.S. licensed insurance company we own which has an “A-” A. M. Best rating. When we utilize an insurance risk-sharing agreement, the underwriting risk is shared based upon the risk-sharing partners’ respective percentage participation. In risk-sharing arrangements, we appoint the risk-sharing insurance companies as our program underwriting managers and they are required to assume risk by reinsuring a part of the business they produce on a quota share basis.
Our first risk-sharing arrangements were with Tower through alternative insurance risk-sharing agreements for brokerage business that Tower manages and for traditional program business and specialty program business that we manage, as described in “—Description of Our Business Relationships with Tower.”
Program Business
We write program business that has a minimum premium volume potential of at least $5 million annually. We offer the following comprehensive solutions and capabilities to facilitate program business:

• Broad product line platform. We offer a broad range of commercial and personal lines of business which expands the range of program opportunities available in the marketplace.
• Competitive commissions . We offer what we believe to be attractive commissions paid to program underwriting managers based upon our efficient infrastructure and platform. We base our commissions upon the loss ratio track record of the program business and offer profit commissions when loss ratios develop better than expected.
• Reinsured program business. We offer, on a fee basis, issuing company capability to reinsurers desiring to write program business, while retaining a limited percentage of the underwriting risk.
• Insurance and reinsurance risk assumption. In addition to providing primary underwriting capacity to retain most or all of the underwriting risk as an insurance company, we facilitate program business transactions by providing reinsurance products through our reinsurance subsidiary.
• Alternative risk transfer. We offer alternative risk-transfer transactions that provide program underwriting managers with the opportunity to increase their profit margin by participating in underwriting risk on the business they produce. We also offer management services to manage captives and facilitate “rent-a-captive transactions” both in the United States and in Bermuda. Captives are insurance companies that are formed and owned by non-insurance companies, their affiliates, or their member organizations, the main purpose of which is to insure the risks of the non-insurance company parent organizations. Rent-a-captives are captive insurance companies that allow parent organizations, such as program underwriting managers, to receive the benefit of captives without owning them.
• Unbundled insurance company services. Through our relationship with Tower, we offer comprehensive insurance company services on an unbundled basis to attract program underwriting managers with large and profitable books of business that need or desire to access such services. See “—Unbundled Insurance Services” below.
Product Lines
Our reinsurance and insurance solutions primarily include the following lines of business.

• Commercial Package. Coverage offered under our commercial package and business owners’ policies combines property, liability (including general liability and products and completed operations), business interruption, equipment breakdown, fidelity and inland marine coverages tailored for commercial businesses and enterprises.
• Fire and Allied Lines. We write fire and allied lines policies, which consist of dwelling policies, including personal property and liability optional coverage, providing an alternative to the homeowner’s policy for the personal lines customer. Commercial fire and allied lines policies provide protection for damage to commercial buildings and their contents, and these policies may be utilized in selected circumstances as an alternative to a commercial package policy.
• Commercial General Liability. We write other liability products in personal and commercial lines including monoline commercial, general liability (for risks that do not have property exposure or whose property exposure is insured elsewhere) and commercial umbrella policies.
• Workers’ Compensation. We write workers’ compensation policies, which are a statutory coverage requirement in almost every state to protect employees in case of injury on the job, and the employer from liability for an accident involving an employee.
• Homeowner’s and Personal Dwellings. Our homeowner’s policy is a multiple-peril policy, providing property and liability coverages for one and two-family, owner-occupied residences or additional coverage to the homeowner for personal umbrella and personal inland marine.
• Professional Liability. We offer professional liability and errors and omissions insurance for commercial enterprises that may face liability as a result of their performance or failure to perform professional services. Coverage can be designed to respond to customer needs including employment practices, fidelity or crime-related loss and fiduciary liabilities.
• Commercial and Personal Inland Marine. We write inland marine insurance protection for the property of businesses that is not at a fixed location and for items of personal property that are easily transportable, typically including builders risk, contractors’ equipment and installation, domestic transit and transportation, fine arts, property floaters and leased property.
• Commercial and Personal Automobile. We write coverage for automobile policies by providing automobile liability, collision and comprehensive insurance including commercial and personal automobile policies for both fleet and non-fleet risks.

CEO BACKGROUND

Gregory T. Doyle —President and Director of each of CastlePoint Holdings, CastlePoint Management Corp. and CastlePoint Insurance Company, and a Director of CastlePoint Re —Mr. Doyle has been a member of our Board of Directors since April 2006. Mr. Doyle became our President, and the Chief Executive Officer and a director of CastlePoint Re in October 2006. He relinquished only the position of Chief Executive Officer of CastlePoint Re in December 2006. Mr. Doyle became a director of CastlePoint Insurance Company in December 2006 and he became its President, as well as the President and a director of CastlePoint Management Corp. ('CastlePoint Management") in January 2007. Mr. Doyle previously served on the Board of Directors of Tower commencing in September 2004, and resigned from the Board of Directors of Tower when he joined our Board of Directors. Mr. Doyle served as the Executive Chairman of the reinsurance brokerage firm, BMS Vision Re, from June 2004 to October 2006. Prior to that, between January 2003 and May 2004, he was President and Chief Executive Officer of Presidential Re, a consulting firm Mr. Doyle founded. From November 2000 to January 2003, Mr. Doyle served as Executive Vice-president for Guy Carpenter & Co., a reinsurance brokerage firm. From 1985 to 2000, Mr. Doyle held senior positions at American Re-Insurance Company, ultimately as Corporate Executive Vice-president and President of Domestic Insurance Company Operations. He was also a member of American Re-Insurance's Board of Management and directed their largest division, with annual revenues in excess of $2 billion. Mr. Doyle is a Chartered Property and Casualty Underwriter and attended the Advanced Executive Education Program at the University of Pennsylvania's Wharton School of Business.

William A. Robbie — Director— Mr. Robbie has served as a member of our Board of Directors since January 2006. He has been the chairman of our Audit Committee since February 2006. Since December 2004, he has provided financial advisory services to the insurance industry through his own consulting firm. From November 2002 to November 2004, Mr. Robbie was Chief Financial Officer of Platinum Underwriters Reinsurance Ltd., a property and casualty reinsurance company in Bermuda. From August 2002 to November 2002, Mr. Robbie held the same position at St. Paul Reinsurance, a reinsurance operation of The St. Paul Companies, Inc. From September 1997 to August 2002, Mr. Robbie held various positions at XL Capital Ltd., a Bermuda-based insurance, reinsurance and financial risk company, and its subsidiaries, including Executive Vice-president—Global Services, Corporate Treasurer and Chief Financial Officer of XL Re, Ltd. Prior to that, he held a variety of central and senior positions in the insurance industry, including roles as Chief Financial Officer of Prudential AARP Operations, Chief Accounting Officer at Continental Insurance Companies, Treasurer of Monarch Life Insurance Company and various positions at Aetna Life and Casualty Company. From 2005 to January 2008, Mr. Robbie was a director and chairman of the Audit Committee of American Safety Insurance Company. Mr. Robbie is a Certified Public Accountant.

Michael H. Lee —Chairman of the Board and Chief Executive Officer of CastlePoint Holdings, Chief Executive Officer and Director of each of CastlePoint Management and CastlePoint Insurance Company —Mr. Lee has been a director of CastlePoint Holdings since January 2006. He was our Chairman of the Board, President and Chief Executive Officer between February 2006 and October 2006 when he relinquished the position of the President. Mr. Lee also became the Chief Executive Officer of CastlePoint Management in November 2006 and the Chief Executive Officer of CastlePoint Insurance Company in January 2007. He is also a director of CastlePoint Management and CastlePoint Insurance Company. In addition, Mr. Lee is the Chairman of the Board, President and Chief Executive Officer of Tower Group, Inc. and founder of its primary insurance company operation, Tower Insurance Company of New York, or TICNY, in 1989. Mr. Lee is responsible for the overall management of Tower and its subsidiary operations. Mr. Lee maintains his positions with Tower and, as such, does not serve our Company on a full-time basis. Prior to founding TICNY, Mr. Lee was an attorney in private practice specializing in advising entrepreneurs on the acquisition, sale and formation of businesses in various industries.

Robert S. Smith — Director —Mr. Smith has served as a member of our Board of Directors since January 2006. He has been the chairman of our Compensation Committee since January 2006 and has served as the acting chairman of our Nominating and Corporate Governance committee when that position was vacant. Mr. Smith is currently a principal of Sherier Capital LLC, a business advisory firm that he founded in 2005. He was previously Chief Operating Officer (from December 1999 to April 2004) and Executive Vice-president (from April 2004 to August 2004) of Friedman, Billings, Ramsey Group, Inc., where he was instrumental, among other things, in growing Friedman, Billings, Ramsey Group, Inc. from a privately-held securities boutique to a nationally recognized investment bank, helping accomplish its 1997 initial public offering and the creation of an affiliated public company, FBR Asset Investment Corporation and the merger of the two companies in 2003. Before joining Friedman, Billings, Ramsey Group, Inc. as its General Counsel, Mr. Smith was an attorney with the law firm of McGuireWoods LLP from 1986 to 1996. Mr. Smith currently serves on the Boards of Asset Capital Corporation and the Washington Performing Arts Society.

Jan R. Van Gorder — Director— Mr. Van Gorder became a director of CastlePoint Holdings effective immediately after our IPO in March 2007. He became chairman of our Nominating and Corporate Governance Committee on May 1, 2007. Mr. Van Gorder was employed by Erie Insurance Group from November 1981 through December 2006. He held a variety of positions at that company, including his most recent position as Senior Executive Vice-president, Secretary and General Counsel from December 1990 through December 2006. He served as a consultant and acting Secretary and General Counsel at Erie Insurance Group during the period January 1, 2007 through May 12, 2007. Mr. Van Gorder served as a member of the Board of Directors of Erie Indemnity Company, Erie Pennsylvania, from 1990 to 2004. Mr. Van Gorder has also served as a Director and Chairman of the Insurance Federation of Pennsylvania.

Joel S. Weiner — Chief Financial Officer, Senior Vice-president and Director of, CastlePoint Re, CastlePoint Management, and CastlePoint Insurance Company— Mr. Weiner has been our Vice-president since January 2006 and was a director from January 2007 through March 28, 2007. He became our Chief Financial Officer ("CFO") and Senior Vice-president in February 2006. Mr. Weiner has also been Chief Financial Officer, Senior Vice-president and director of CastlePoint Re since March 2006, and he has held the same positions at CastlePoint Management since May 2006. Prior to joining the Company, Mr. Weiner served as Senior Vice-president of Tower Group, Inc. since January 2004. He resigned his position at Tower effective April 4, 2006. From January 2002 until December 2003, he was employed as Managing Director at GAB Robins Capital Partners, which provides outsourcing for claim operations. From October 1991 to December 2001, he was employed by the accounting firm PricewaterhouseCoopers LLP, where he led that company's U.S. middle market insurance consulting practice and advised many property and casualty insurers on strategic issues. He is an Associate member of the Casualty Actuarial Society and a member of the American Academy of Actuaries.

Joseph P. Beitz —President and Director of CastlePoint Re, and Director of CastlePoint Insurance Company— Mr. Beitz has served as a director of CastlePoint Re since March 2006. From February 2006 to May 2006, he served as the President and director of CastlePoint Management. From May 2006 to October 2006, he served as the Executive Vice-President and Acting President of CastlePoint Re. Since November 2006, he has served as President of CastlePoint Re, and since December 2006, he has served as a director of CastlePoint Insurance Company. Prior to joining CastlePoint, Mr. Beitz served as Tower's Managing Vice-President, Program Underwriting since joining that company in March 2005. He resigned his position at Tower effective April 4, 2006. Mr. Beitz's primary responsibilities at Tower were the production and management of new program opportunities. With 25 years of experience in the insurance and reinsurance industry, prior to joining Tower, Mr. Beitz served as President and Chief Operating Officer of NOVA Casualty Company, a property and casualty insurance company, in Buffalo, New York, from November 2001 to September 2004. In his role at NOVA Casualty Company, Mr. Beitz managed their program division through a subsidiary, NOVA Alternative Risk. Prior to that, Mr. Beitz served as Vice-president, Non-Traditional Treaty Underwriting with Odyssey America Reinsurance Corporation in its Stamford, Connecticut and New York City offices. He also has six years of property and casualty experience in the Bermuda market.

Richard M. Barrow — Senior Vice-president and Chief Accounting Officer of each of CastlePoint Holdings, CastlePoint Re, CastlePoint Management and CastlePoint Insurance Company, and a director of CastlePoint Management and CastlePoint Insurance Company —Mr. Barrow became an employee of CastlePoint Management on April 30, 2007. Following receipt of a Bermuda work permit in June, 2007 Mr. Barrow became the Senior Vice-president and Chief Accounting Officer ("CAO") of each of CastlePoint Holdings, CastlePoint Bermuda Holdings and CastlePoint Re. From June 1996 until April 2007, Mr. Barrow was Senior Vice-President, Treasurer and Chief Financial Officer for Gerling America Insurance Company, a U.S.-based subsidiary of the Talanx Group, a German company that writes property, casualty and ocean marine coverage.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview
We provide a broad range of products and services to the insurance industry. See “Item 1: Business.” We offer our products through our operating subsidiaries domiciled in Bermuda and in the United States. We offer our reinsurance products and insurance risk-sharing products to Tower and its subsidiaries as well as to other small insurance companies located in the United States with surplus of less than $100 million. We also conduct business with other insurance companies that are seeking to efficiently manage their capital as well as limit their concentration of risk in certain geographic areas through our insurance risk-sharing and quota share reinsurance solutions. In addition, we offer our insurance and unbundled insurance company services to program underwriting managers located in the United States. In order to form a close and continuing relationship with our clients or to enable clients to expand their business and therefore the amount of business they do with us, we may on occasion, make strategic investments in some of our clients, including Tower. See “Item a: Business—Strategic Investments, Including Investment in Tower.” We do not currently hold such investments.
2007 completes our first full year of operations. We have in place a knowledgeable and experienced senior management team and we continue to build our internal information systems. In 2007, we wrote 1) reinsurance business, both from Tower and third parties, in CastlePoint Re, 2) brokerage business managed by Tower in CastlePoint Insurance and 3) traditional and specialty program business through CastlePoint Management using both Tower and CastlePoint Insurance policies. CastlePoint Management earns fee revenues from Tower on the program business it manages.

At December 31, 2007 our total investments and cash and cash equivalents are comprised primarily of fixed maturities (70%), equity securities (6%) and cash (22 %) and an $8.5 million investment in a limited partnership investing primarily in AAA rated municipal bonds. The overall rating of our cash and fixed maturity portfolio is AA and the duration is 2.24 years. As of the filing date of this report, we sold an investment in a fund (classified in “Equity securities”) that had subprime exposure and we sold 3 individual asset backed securities that were backed by subprime home equity loans. We currently do not have subprime or alternative A exposure in our portfolio. The average credit rating of all mortgages held is AAA. We have the ability and intent to hold all fixed maturities, including mortgages until maturity, if necessary. Given the current state of the investment marketplace, we have provided substantial information regarding our portfolio in this section of the report.
Tower . In April 2006 we entered into a master agreement, certain reinsurance agreements, a program management agreement and a service and expense sharing agreement with Tower and/or its subsidiaries. We and Tower have subsequently modified certain of these arrangements. Our relationship with Tower and its subsidiaries, including the master agreement and other agreements we entered into with such companies, is described under “Item 1: Business—Description of Our Business Relationships with Tower.”
All of our agreements with Tower, including the alternative insurance risk-sharing agreements, are generally subject to review, approval and requests for modification by the New York State Insurance Department and may be subject to review by the insurance departments of the other domiciliary states of Tower’s domestic insurance companies. All of our agreements with Tower are also subject to the review and approval of the domiciliary states of the U.S. licensed insurance companies we own, to the extent such companies participate in these agreements.
Our revenues and underwriting results are impacted by Tower’s growth and loss ratios. We believe that Tower’s ability to grow its direct premiums written through its existing brokerage distribution network, to expand its brokerage distribution to new territories and to make acquisitions, such as Tower’s acquisition of Preserver in April 2007, will affect the magnitude and profitability of the business that will be subject to the arrangements with CastlePoint Insurance Company and that will be ceded to CastlePoint Re. Although we are a new Company, our relationship with Tower provides us with a steady, predictable flow of profitable and seasoned business.
Other Customers. We also underwrite reinsurance contracts with primary insurance companies other than Tower, insurance policies written under insurance risk-sharing agreements with insurance companies other than Tower, and premiums produced by program underwriting managers. We originated substantial third party business in 2007 (approximating 25% of managed premiums) that will be reflected in revenues in 2008, and expect to maintain or exceed 30% in 2008.
Our Business Segments . We report our business in three segments: insurance, reinsurance and insurance services. The insurance segment includes all of the results of CastlePoint Insurance Company and the results from CastlePoint Re for excess and surplus lines written on a primary basis. The reinsurance segment includes the results from the reinsurance business written through CastlePoint Re. Our insurance services segment includes the results from managing the specialty program business and insurance risk-sharing business through CastlePoint Management, as well as results from providing our unbundled insurance services to program underwriting managers.

Results of Operations
Critical Accounting Estimates
Our consolidated financial statements and the related disclosures included in this report have been prepared in accordance with U.S. GAAP. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect reported and disclosed amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Our consolidated financial statements contain certain amounts that are inherently subjective and require management to make assumptions and estimates to determine the reported values. If factors, including those described in “Item 1A: Risk Factors” in this report, cause actual events or results to differ materially from management’s underlying assumptions or estimates, actual results may differ, perhaps substantially, from the estimates.
Estimates are made primarily for unreported written premiums and losses. Differences between estimated and actual unreported written premiums generally do not have a material impact on our financial results, because the unreported written premiums are usually estimated for only the most recent month(s), and the amount of written premiums for the most recent month that is earned as of the end of a given calendar quarter is approximately 1/24 of the written premiums for that month. However, these differences in the estimation of unreported and unpaid losses can have a material impact on our financial results, since the loss reserves accumulate for many years until all losses are paid.
The critical accounting policies and estimates set forth below involve, among others, the reporting of premiums written and earned, reserves for losses and loss adjustment expenses (including reserves for losses that have occurred but had not been reported or paid by the financial statement date), the reporting of deferred acquisition costs and the recording of other-than-temporarily impaired investments.
Premiums . Premiums on insurance and reinsurance policies issued by our operating subsidiaries are usually considered short-duration contracts. Accordingly, premium revenue, including direct writings and reinsurance assumed, net of premiums ceded to reinsurers, is recognized as earned in proportion to the amount of insurance protection provided on a pro-rata basis over the terms of the underlying policies with the unearned portion being reported as unearned premium. Prepaid reinsurance premiums represent the unexpired portion of reinsurance premiums ceded.
Premiums written on assumed reinsurance (generally quota share reinsurance) are expected to be written primarily on a “policies attaching” basis and cover losses which attach to the underlying insurance policies written during the terms of the contracts. Premiums earned on a “policies attaching” basis usually extend beyond the calendar year in which the reinsurance contract is written, typically resulting in recognition of premiums earned over a 24 month period; this is because most policies have a term of 12 months, and policies written with an effective date in December, for instance, are not fully earned until December of the following year. We may also assume premiums on contracts and policies written on a losses occurring basis, generally on catastrophe treaties, which cover losses that occur during the term of the contract or policy, typically 12 months, and the premium is earned evenly over the term.
Assumed premiums written and ceded may include estimates based on information received from brokers and ceding companies, and any subsequent differences arising on such estimates are recorded in the periods in which they are determined. Our management estimates premiums on our excess of loss reinsurance contracts when the business is underwritten. For such contracts, the deposit premium, as defined in the contract, is generally considered to be the best estimate of the contract’s written premium at inception. This amount is determined by the underwriters based upon analysis of the prior written premium experience of the ceding companies, plans for growth in the current year as stated by the ceding companies, and our proportion of the ceding companies’ written premiums based upon the terms of the reinsurance contracts. Accordingly, we generally record this amount as written premium in the period in which the underlying risks begin. As actual premiums are reported by brokers or ceding companies, management evaluates the appropriateness of the premium estimate and any adjustment to this estimate is recorded in the period in which it becomes known, which, in some cases, involves reducing premiums to the minimum specified in the contract. In addition, if estimates of unreported written premiums are required for a particular ceding company at the end of an accounting period, the monthly trend in written premiums and historical seasonality of written premiums for these ceding companies are analyzed to determine a best estimate of the unreported written premiums. See Note 2 “Summary of Significant Accounting Policies—Premiums Earned” and “Summary of Significant Accounting Policies—Reinsurance Accounting” to the audited financial statements included elsewhere in this report for a discussion of related accounting policies.
While we attempt to obtain current assumed premiums written statements from ceding companies, it is common that the most recent month statements are not received on a timely basis from the ceding company. Therefore, assumed premiums written from these ceding companies are estimated for the most recent month or, in some cases, for several months. With respect to CastlePoint Re’s three quota share reinsurance agreements with Tower’s insurance companies, we obtain current quarterly statements and record assumed premiums written from Tower on an actual, rather than estimated, basis. For ceding companies from which we have not received current, monthly statements and therefore must estimate the most recent period’s assumed premiums written, the difference between the estimated assumed premiums written and actual assumed premiums written is reflected in the subsequent accounting period or as soon as the actual assumed premiums written are obtained. For the year ended December 31, 2007, approximately 3% of the assumed written premiums are based on estimates.
Deposit premiums are generally not changed throughout the term of a reinsurance contract, although this has no impact on final booked net written premiums since the deposit premiums only affect cash receipts.
Reinstatement premiums are written at the time a loss event occurs where coverage limits for the remaining life of the contract are reinstated under pre-defined contract terms. Depending on the terms of the reinstatement premiums, they are earned over the remaining risk period or immediately. Reinstatement premiums are not expected to be a significant portion of our net written premiums, since we do not write significant amounts of property catastrophe excess of loss treaties where reinstatement premiums are common, and in cases where we write such reinsurance, we do not underwrite it in property catastrophe prone areas where reinstatement premiums are more common.
In addition to the assumptions disclosed under “—Critical Accounting Policies and Estimates” regarding premium and revenue recognition, data received from Tower has a significant impact on our results of operations. As of December 31, 2007, the premiums assumed from Tower’s contracts were updated to reflect the actual written premiums in 2007 and, therefore, no significant estimates were made. If Tower discloses the impact of any changes in its estimates on its direct book of business, this would affect our results of operations. At that time, we would be required to disclose the affect on our results of operations.
Losses and Loss Adjustment Expense Reserves . Our losses and loss adjustment expense reserves, for both reported and unreported claims obligations, are maintained to cover the estimated ultimate liability for all of our insurance and reinsurance obligations. Losses and loss adjustment expense reserves are categorized in one of two ways: (i) case reserves, which represent unpaid losses and loss adjustment expenses as reported by cedents to us or as estimated by our claims adjusters retained by us, and (ii) incurred but not reported reserves, or IBNR reserves, which are reserves for losses and loss adjustment expenses that have been incurred, but have not yet been reported to us, as well as additional amounts relating to losses already reported, that are in excess of case reserves. IBNR reserves are estimates based on all information currently available to us and are reevaluated on a quarterly basis utilizing the most recent information supplied by our cedents and by our own claims adjusters.
We rely on initial and subsequent claims reports received from the program underwriting agencies administering our programs or risk sharing in our insurance segment or from the ceding companies for whom we provide reinsurance in our reinsurance segment to establish our estimate of losses and loss adjustment expenses. For direct policies generated from our insurance programs, we rely on initial and subsequent claims reports as estimated by claims adjusters retained by us or by the program underwriting managers. For insurance risk sharing, we rely on initial and subsequent claims reports received from the insurance companies with which we do business. For reinsurance we rely on initial and subsequent claims reports received from the companies with which we do business.
The types of information that we receive from program underwriting agencies, from companies for whom we are providing risk sharing, or from ceding companies generally vary by the type of contract. Our programs and risk-sharing business is either reported at the detail transaction level when our system is being utilized to administer the business, or reported on a monthly basis if the client is utilizing its own system to administer the business. In reinsurance, proportional, or quota share, contracts are typically reported on a monthly or quarterly basis, providing premium and loss activity as estimated by the ceding company. Reporting for excess of loss contracts includes detailed individual claim information, including a description of the loss, confirmation of liability by the cedent and the cedent’s current estimate of the ultimate liability under the claim. Generally, ceding companies are obligated to notify the reinsurer within a limited amount of time about any claim that is reported to them, which has characteristics making it probable that the claim will be covered by the excess reinsurance. Upon receipt of claims notices from program underwriting managers, risk-sharing clients, or cedents, we review the nature of the claim against the scope of coverage provided under the contract. Questions arise from time to time regarding the interpretation of the characteristics of a particular claim measured against the scope of contract terms and conditions. Reinsurance contracts under which we assume business generally contain specific dispute resolution provisions in the event that there is a coverage dispute with the ceding company. The resolution of any individual dispute may impact estimates of ultimate claim liabilities.
Reported claims are in various stages of the settlement process. Each claim is settled individually based on its merits, and certain claims may take several years to settle, particularly where legal action is involved. During this period, additional facts may be revealed, and as these factors become apparent, case reserves will be adjusted, sometimes requiring an increase in our overall reserves, including our IBNR reserves.
In our insurance segment, we generally establish reserves separately by line of business. In our reinsurance segment, we generally reserve for each treaty that we reinsure separately, so that we are able to take into consideration the underlying experience reported by each ceding company. While ceding companies may report their own estimate of IBNR, we independently analyze the losses for each treaty, and consequently we may choose to establish IBNR reserves in an amount different from the amount reported by the ceding company.
We may aggregate similar types of treaties and the claim information provided by our ceding companies or insurance companies with which we do business for analysis purposes by the year in which each treaty is written and the type of business included in the treaties. We also supplement this information with claims and underwriting audits of specific contracts, internally developed pricing trends, as well as loss trend data developed from industry sources. We audit both the underwriting and the claims practices of our ceding companies. As part of our underwriting audits, we seek to confirm that the ceding company is insuring the types of risks and achieving the level of pricing that we assumed in our underwriting of the treaty from that ceding company. As part of our claims audits, we seek to confirm the data accuracy of the claim information that we have received from the ceding company, and learn about changes in case reserving approach by the ceding company and any particular information about specific claims that may have a significant impact on the results reinsured in our treaty with the ceding company.
The reserve methodologies employed by us are dependent on the data that we collect from ceding companies and insurance companies with which we do business. This data primarily consists of loss amounts estimated by the claims adjusters handling the claims, loss payments made by the ceding companies or insurance companies with which we do business, and premiums written and earned reported by the ceding companies and insurance companies with which we do business.
Reserves for losses and loss adjustment expenses are also based in part upon the estimation of losses resulting from catastrophic events. Estimation of the losses and loss adjustment expenses resulting from catastrophic events is inherently difficult because of the possible severity of catastrophe claims, difficulties physically inspecting catastrophe hit areas to estimate claim amounts, and delays in receiving information about claims from program administrators or ceding companies. Therefore, we supplement the methods described above by utilizing commercially available models for purposes of evaluating and providing an estimate of ultimate claims costs.
This information is used to develop point estimates of carried reserves for each business segment and line of business. These individual point estimates, when aggregated, represent the total carried losses and loss adjustment expense reserves reflected in our consolidated financial statements. While we analyze our reserves estimates utilizing different methods, we do not attempt to produce a range around our point estimate of loss. Also, we do not include a specific provision in our loss reserves for adverse deviation. See Note 2 “Summary of Significant Accounting Policies—Liability for Loss and Loss Adjustment Expenses” to our audited financial statements included elsewhere in this report for a discussion of related accounting policies.
Since we are a recently formed company and have a limited operating history, we do not have sufficient historical experience that reflects how our loss reserves estimates will likely develop. Moreover, past experience of how loss reserves estimates develop may not be indicative of future development of loss reserves estimates.
In order to better understand the underlying loss characteristics and further improve our best estimates of loss reserves, our estimate of ultimate loss is determined based on a review of the results of several commonly accepted actuarial projection methodologies. Our estimate of ultimate loss also incorporates qualitative information, such as changes in the claims department, business mix, pricing and knowledge about specific large claims. The specific methodologies we utilize in our loss reserve review process may include, but are not limited to, (i) incurred and paid loss development methods; (ii) incurred and paid Bornhuetter Ferguson, or BF, methods and (iii) loss ratio methods. Due to the nature of our business, any of these methods may not be practical in particular circumstances based upon the information provided by the ceding company for each treaty. Also, various methodologies are actuarially more appropriate given the line of business, the maturity of the treaty, the limits insured or reinsured, the type of treaty, and other considerations. Generally, we rely on BF and loss ratio methods for estimating ultimate loss liabilities for more recent treaty years. These methodologies, at least in part, apply a loss ratio, determined from aggregated analyses of internally developed pricing trends, to premiums earned on that business. Adjustments to premium estimates generate related adjustments to ultimate loss estimates in the quarter in which they occur. To estimate losses for more mature treaty years, we generally rely on the incurred loss development methodology. This methodology relies on loss emergence analyses determined from cedent supplied claim information or industry patterns. For property catastrophe losses, we may utilize vendor catastrophe models to estimate ultimate loss soon after a loss occurs, where loss information is not yet reported to us from cedents. IBNR is determined by subtracting the total of paid loss and reported reserves from the estimated ultimate loss. The adequacy of our booked loss reserves at CastlePoint Re and CastlePoint Insurance Company are opined upon annually by an independent actuary pursuant to Bermuda and U.S. statutory regulations.
Any future impact to income as a result of changes in losses and loss adjustment expense estimates may vary considerably from historical experience. Our estimates of ultimate loss exposures are based upon the information we have available at any given point in time and our assumptions based upon that information. Changes in estimates of losses and loss adjustment expenses are reflected as adjustments to income in the period in which the estimate is revised. Under U.S. GAAP, we are not permitted to establish loss reserves until the occurrence of an actual loss event, whether reported or unreported. As a result, only loss reserves applicable to losses incurred up to the reporting date may be recorded, with no allowance for the provision of a contingency reserve to account for expected future losses. Losses arising from future events, which could be substantial, are estimated and recognized at the time the loss is incurred.
Estimates of reserves for unpaid losses and loss adjustment expenses also may be impacted by legislative, regulatory, social, economic and legal events and trends that may or may not occur or develop in the future, thereby affecting assumptions in the actuarial projections.
Changes in loss reserves estimates may result from (1) variability in the estimation process itself, and (2) the fact that external factors may cause changes in the future that are not reflected in historical patterns. With respect to the former source of variability, i.e. estimation process variation, we believe that a reasonably likely range for the loss reserves can be represented by a standard utilized by some professional, independent actuaries as part of their certification of an insurer’s reserves. That standard contemplates the number of years of the expected loss payout period ( i.e ., the longer expected payout period, the more variability inherent in the estimation process and the larger the reasonable range). In considering the business mix between property and casualty lines of business that we write, we believe that a reasonable range surrounding our actuary’s best estimate of loss reserves is from minus 5% to plus 10%. Utilizing this standard as a guide, we believe that most professional actuaries, assuming they are presented with the same information, would determine that the loss reserves can be certified if they fall within a range of minus 5% to plus 10%. Therefore, it is reasonably likely that some professional actuaries, assuming they are presented with the same information relating to our company, would determine a best estimate of our loss reserves to be between $115.4 million and $133.6 million as of December 31, 2007, as compared to our own best estimate of the loss reserves, which is $121.4 million as of that date. If we were to book loss reserves at minus 5% of our actuary’s best estimate, the impact would be an increase of income before income taxes of $6.0 million. Conversely, if we were to book loss reserves at plus 10% of our actuary’s best estimate, the impact would be a reduction of income before taxes of $12.2 million. No assurance can be given that outcomes outside of the above range cannot occur, as outcomes outside of such range are possible. In addition, the above range assumes that future patterns are similar to historical patterns, as to which there can be no assurance. With regard to the potential variability in loss reserves estimates due to the fact that future patterns may differ from historical patterns, we believe there is additional potential variability that cannot be estimated.

The following table summarizes our results of operations for the years ended December 31, 2007 and 2006.

We also calculate our loss and expense ratios, underwriting expense ratios and combined ratios by segment. See “—Insurance Segment Results of Operations,” “—Reinsurance Segment Results of Operations” and “—Insurance Services Segment Results of Operations” below.
Summary . Despite softening market conditions in the property and casualty industry, we have not experienced significant weakening in pricing or a softening in demand for our products. Management believes that this is in large part due to our emphasis on providing solutions to small insurance companies and program underwriting managers, which results in the transfer by such companies and program underwriting managers to us of large blocks of business composed of small policies. We believe there is a growing industry awareness of our capabilities to provide primary insurance company capacity combined with reinsurance capacity and customized insurance services. We believe this segment of the market is generally underserved by the larger insurers. We target existing profitable, measurable books of business with an actuarial track record. Our senior management is involved in the underwriting assessment of our business.
Net income increased 210.5% to $32.7 million for the year ended December 31, 2007, compared to $10.5 million for the year ended December 31, 2006. Net earned premiums increased 214.5% to $248.4 million, based upon growth from Tower, CastlePoint’s largest client, as well as growth from other clients. CastlePoint Insurance Company implemented its alternative insurance risk-sharing solutions with Tower during 2007, and as a result, wrote $84.2 million in direct premiums from Tower which contributed to $14.4 million of earned premium.
Net income was adversely impacted by an other-than-temporary impairment charge at December 31, 2007 in the amount of $9.0 million included in net realized (loss) gain on investments. See discussion below under “Net investment income and realized gains/(losses).” Operating net income, a non-GAAP measure, increased 296.2% to $41.6 million for the year ended December 31, 2007, compared to $10.5 million for the year ended December 31, 2006.
CastlePoint Re commenced writing business as of April 6, 2006. Therefore, the results for the year ended December 31, 2006 are comprised of operations for the period April 6, 2006 through December 31, 2006. CastlePoint Insurance Company did not conduct any business in 2006.
Total revenues . Total revenues increased by 199.5% to $277.1 million for the year ended December 31, 2007, compared to $92.5 million for the year ended December 31, 2006. The increase is primarily due to the increase in net premiums earned and net investment income.

Revenues for the year ended December 31, 2007 consisted of net premiums earned (89.6% of the total revenues), commission income (2.7% of the total revenues) and net investment income and realized losses (7.7% of the total revenues) compared to net premiums earned (85.4% of the total revenues), commission income (2.5% of the total revenues) and net investment income (12.1% of the total revenues) for the year ended December 31, 2006.
Premiums earned. Net premiums earned increased by 214.5% to $248.4 million for the year ended December 31, 2007 compared to $79.0 million for the year ended December 31, 2006. The increase is due to higher premiums written in 2007 due to our start up in April 2006 and the normal lag between written and earned premiums. The chart shows the percentage of earned premiums related to written premiums.

The business assumed by CastlePoint Re and CastlePoint Insurance Company under our reinsurance agreements with Tower’s insurance companies and the business written directly using CastlePoint Insurance Company’s policies through Tower Risk Management represented 79.3% of net premiums earned for the year ended December 31, 2007 compared to 96.2% of net premiums earned for the year ended December 31, 2006.
Commission income . Commission income increased 219.3% to $7.5 million for the year ended December 31, 2007 compared to $2.3 million for the year ended December 31, 2006. We received this commission income from Tower and to a lesser extent from other companies as a result of CastlePoint Management’s management of the specialty and traditional programs. The higher fees are the result of binding three additional programs in 2007.
Net investment income and realized gains/(losses) . Net investment income increased by 163.8% to $29.5 million for the year ended December 31, 2007 compared to $11.2 million for the year ended December 31, 2006. The growth resulted from an increase in cash and invested assets to $693.5 million as of December 31, 2007 compared to $425.0 million as of December 31, 2006. The increase in invested assets primarily resulted from our cash flow from operations, principally from growth in premiums written, which was $140.7 million in 2007 compared with $62.6 million in 2006 and the proceeds of approximately $114.5 million, from our IPO, in March 2007 after the deduction of underwriting discounts and other offering expenses and $30 million of cash received for the issuance of subordinated debentures in connection with the trust preferred securities issued in September 2007. The book yield on our invested assets was 5.3% for the year ended December 31, 2007 compared to 5.3% for the year ended December 31, 2006. Our book yield in 2007 was negatively impacted by the recording of an unrealized loss of $2.2 million as a component of net investment income on our investment in a limited partnership. Excluding the unrealized loss, the increase in yield during a generally declining interest rate environment in 2007 is primarily due to an extension in the average duration of our fixed maturity portfolio from 1.97 years at December 2006 to 2.24 years at December 2007, to take advantage of a more normalized yield curve compared with a relatively flat yield curve throughout December 2006 and a slight decrease in the average credit quality of our portfolio from AA+ at December 31, 2006 to AA at December 31, 2007.
Net realized investment losses were $8.2 million for the year ended December 31, 2007, compared with a small gain of $35,000 for the year ended December 31, 2006. We recorded an other-than-temporary impairment charge at December 31, 2007 in the amount of $9.0 million recorded in realized losses. This charge primarily relates to an investment in a fund which was subsequently sold in February 2007 and investments in four mortgage real estate investment trust (“REIT”) equity securities.
Loss and loss adjustment expenses . Loss and loss adjustment expenses increased 220.7% to $131.3 million, which produced a 52.9% loss ratio for the year ended December 31, 2007 compared to $41.0 million which produced a 51.9% loss ratio for the year ended December 31, 2006. The 2007 calendar year loss ratio includes an accident year loss ratio of 53.4% and reflects $1.3 million of favorable revised estimates in loss reserves from the prior year. The change in prior year loss reserves resulted mainly from a reduction in the estimated ultimate losses on the Tower brokerage quota share reinsurance agreement and, to a lesser extent, a reduction in the estimated ultimate losses on various excess of loss reinsurance agreements assumed from Tower.
Expenses. Operating expenses increased 163.4% to $109.5 million for the year ended December 31, 2007, from $41.6 million for the year ended December 31, 2006. Operating expenses are comprised of commission expense and other operating expenses, including corporate expenses (primarily, salaries, audit, legal services and insurance expenses). The increase was due primarily to the increase in commission and other acquisition expenses resulting from the growth in premiums earned. In 2006 we recorded an expense of $4.6 million relating to warrants to purchase 1,127,000 of our common shares that we issued to Tower.
Interest Expense. Our interest expense was $9.4 million for the year ended December 31, 2007 compared to $0.6 for the year ended December 31, 2006. Interest expense resulted primarily from the $100 million of subordinated debentures issued by us in December 2006 at an average fixed interest rate of 8.6%, and $30 million of subordinated debentures issued by us in September 2007 at a fixed interest rate of 8.39%.
Income tax benefit . Our income tax benefit was $5.9 million for the year ended December 31, 2007 compared to $1.1 million for the year ended December 31, 2006. The effective income tax rate was negative 21.8% for the year ended December 31, 2007 compared to negative 11.6% for the same period in 2006. The realized loss of $8.2 million (including $9.0 million of impairment losses) and our equity share of the unrealized loss of $2.2 million on the limited partnership which was included in net investment income, accounted for negative 9.5 percentage points of the negative 21.8% effective tax rate in 2007, compared with the effective rate of negative 11.6% for 2006. The negative effective rates in both years are due to the losses generated in our U.S. operations, which we believe are recoverable from future taxable income.
Net income and return on average equity . Our net income was $32.7 million for the year ended December 31, 2007 compared to $10.5 million for the year ended December 31, 2006. 2007 operating net income, a non-GAAP measure, was $41.6 million. Our return on average equity was 8.6% for the year ended December 31, 2007 compared to 5.1% for the year ended December 31, 2006. The 2007 operating return on average equity was 10.9%. The return for the year ended December 31, 2007 was calculated by dividing net income of $32.7 million by weighted average shareholders’ equity of $382.1 million. The return for the year ended December 31, 2006 was calculated by dividing net income of $10.5 million by weighted average shareholders’ equity of $207.3 million. The increase in the return on average equity resulted primarily from improved underwriting results. Our consolidated combined ratio improved to 93.9% in 2007 from 101.5% on 2006 primarily from an improvement in the underwriting expense ratio component (see below).
Consolidated combined ratio . Our consolidated combined ratio for the year ended December 31, 2007 was 93.9% compared to 101.5% for the same period in 2006. The improved combined ratio in 2007 was primarily the result of a lower underwriting expense ratio of 41.1% in 2007 compared with 49.6% in 2006. The improvement is the result of increased earned premiums in 2007 due to an increased amount of business written in 2007, as well as higher earned premiums from business written in 2006.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview
We provide a broad range of products and services to the insurance industry. We offer our products through our operating subsidiaries domiciled in Bermuda and in the United States. We offer our reinsurance products and insurance risk-sharing products to Tower and its subsidiaries as well as to other small insurance companies located in the United States with surplus of less than $100 million. We also conduct business with other insurance companies that are seeking to efficiently manage their capital as well as limit their concentration of risk in certain geographic areas through our insurance risk-sharing and quota share reinsurance solutions. In addition, we offer our insurance and unbundled insurance Company services to program underwriting managers located in the United States. In order to form a close and continuing relationship with our clients or to enable clients to expand their business and therefore the amount of business they do with us, we may on occasion, make strategic investments in some of our clients. We do not currently hold such investments.
Tower . In April 2006, we entered into certain reinsurance agreements, primary risk sharing, program management agreements and a service and expense sharing agreement with Tower and/or its subsidiaries. We and Tower have subsequently modified certain of these arrangements, which expire on their currents terms in April 2010.
All of our agreements with Tower are generally subject to review, approval and requests for modification by the New York State Insurance Department and may be subject to review by the insurance departments of the other domiciliary states of Tower’s domestic insurance companies. All of our agreements with Tower are also subject to the review and approval of the domiciliary states of the U.S. licensed insurance companies we own, to the extent such companies participate in these agreements.
Our revenues and underwriting results are affected by Tower’s growth and loss ratios and the amount of business Tower chooses to cede to us subject to the requirements of our arrangements. We believe that Tower’s ability to grow its direct premiums written through its existing brokerage distribution network, to expand its brokerage distribution to new territories and to make acquisitions will affect the magnitude and profitability of the business that will be subject to the arrangements with CastlePoint Insurance and that will be ceded to CastlePoint Re. In addition, the amount of business that Tower cedes to us depends on the availability of other reinsurers and insurance companies that may offer similar products. Tower has recently entered into an agreement with another reinsurer that provides quota share reinsurance terms and conditions that in certain aspects are more favorable than those existing under our current agreement. This may lead Tower to reduce the amount of business that it cedes to us under the current quota share reinsurance agreement or not to renew or extend this agreement prior to 2010. We also may improve the terms and conditions of that arrangement to Tower to reflect current market conditions, which have softened considerably in recent months, with the likely result that it would lower our profit margins in the future for this business.
Other Customers . We also generate revenue from clients other than Tower by providing reinsurance and insurance risk sharing solutions to insurance companies and program business to program underwriting agents. .During the six months ended June 30, 2008, we generated net written premiums of $72.4 million, representing 29.4% of the total net premiums written generated from all clients, including Tower.
Critical Accounting Estimates
The Company’s consolidated financial statements and the related disclosures included in this quarterly report have been prepared in accordance with U.S. GAAP, except to the extent certain footnote disclosures and other information are not required pursuant to the Securities and Exchange Act of 1934 and the rules and Regulations promulgated there under. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect reported and disclosed amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. We believe the following accounting policies are critical to our operations, as their application requires management to make the most significant judgments. We believe the items that require the most subjective and complex estimates are:
• premiums;

• losses and loss adjustment expense reserves;

• deferred acquisition costs;

• investments;

• reinsurance accounting;

• deferred taxes; and

• U.S. taxation.

Of the items mentioned above, management believes that a discussion of premiums, losses and loss adjustment expense reserves, deferred tax and U.S. taxation is appropriate in this quarterly report due to the developments that occurred during the first six months of 2008. More information regarding our other critical accounting estimates is included in the section entitled “Critical Accounting Estimates” in “Item 7: Management Discussion and Analysis of Financial Condition and Results of Operations” included in our 2007 Annual Report on Form 10-K filed with the SEC.
Regarding premium estimates, while we attempt to obtain current assumed premiums written statements from ceding companies, it is common that the most recent month statements are not received from the ceding company until after the period ending and, in some cases, the most recent quarter. Therefore, assumed premiums written from these ceding companies are estimated for the most recent month or, in some cases, for several months. With respect to CastlePoint Re’s three quota share reinsurance agreements with Tower’s insurance companies, we obtain current monthly statements and assumed premiums written from Tower on an actual, rather than estimated, basis. For ceding companies from which we have not received current monthly statements and therefore must estimate the most recent period’s assumed premiums written, the difference between the estimated assumed premiums written and actual assumed premiums written is reflected in the subsequent accounting period or as soon as the actual assumed premiums written are obtained. For our most recent quarter ended June 30, 2008, approximately 23% of the assumed written premiums and approximately 3% of the corresponding assumed earned premiums are based upon premium estimates. After provision for applicable loss and loss adjustment expenses and commission and other acquisition expenses, the impact of these estimates would not have a material effect on the Company’s consolidated financial position or results of operations.
Regarding loss and loss adjustment expense estimates, changes in loss reserves estimates may result from (1) variability in the estimation process itself, and (2) the fact that external factors may cause changes in the future that are not reflected in historical patterns. With respect to the former source of variability, i.e. estimation process variation, we believe that a reasonably likely range for the loss reserves can be represented by a standard utilized by professional, independent actuaries as part of their certification of an insurer’s reserves. That standard contemplates that the Company’s loss reserves must be in a range from minus 5% to plus 10% of the independent actuary’s best estimate. Utilizing this standard as a guide, we believe that most professional actuaries, assuming they are presented with the same information, would determine that the loss reserves can be certified if they fall within a range of minus 5% to plus 10%. Therefore, it is reasonably likely that these professional actuaries, assuming they are presented with the same information relating to our Company, would determine a best estimate of our net loss reserves to be between $177.5 million and $205.5 million as of June 30, 2008, as compared to our own best estimate of the net loss reserves, which is $186.8 million as of that date. No assurance can be given that outcomes outside of the above range will not occur, as outcomes outside of such range are possible. In addition, the above range assumes that future patterns are similar to historical patterns, as to which there can be no assurance. With regard to the potential variability in loss reserves estimates due to the fact that future patterns may differ from historical patterns, we believe there is additional potential variability that cannot be estimated.
The deferred tax asset at June 30, 2008 was $9.2 million, net of a valuation allowance of $0.5 million, representing CastlePoint Management’s recoverability of New York State taxes on its loss before income taxes of $6.1 million for the six months ended June 30, 2008. The net asset was comprised of the tax effects for cost of stock options, unrealized losses, the combined loss of CastlePoint Insurance and CastlePoint Management for Federal income tax purposes and CastlePoint Management’s loss for New York State income tax purposes prior to January 1, 2008. In assessing the valuation of deferred tax assets, we consider whether it is more likely than not that some portion or all the deferred tax will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income to offset previous operating losses or during periods in which temporary differences become deductible. Our management currently believes that it is more likely than not that we will recover all of the net assets based primarily upon future profitability of our U.S. operations.
Regarding U.S. taxation, if either CastlePoint Bermuda Holdings or CastlePoint Holdings are deemed by the U.S. Internal Revenue Service to be engaged in a U.S. trade or business, or if CastlePoint Re is considered to be doing business through a permanent establishment in the U.S., then these entities would be subject to U.S. taxation. FIN No. 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement for uncertain tax positions taken or expected to be taken in income tax returns. The Company is to determine whether it is “more likely than not” ( i.e ., greater than 50% certain) that our position would be sustained upon examination by tax authorities. Tax positions that meet the “more likely than not” threshold are then measured using a probability weighted approach recognizing the largest amount of tax benefit that has greater than a 50% likelihood of being realized upon ultimate settlement. The adoption of FIN 48 has not had a material impact on the Company’s consolidated financial position or the results of operations. If the acquisition of the Company by Tower is consummated, the transaction will result in the Company being a CFC subject to U.S. taxation.
Non-GAAP Measures
We use the following non-GAAP financial measures to evaluate our profitability.
Consolidated combined ratio . One of our key measures of profitability is what we refer to as our consolidated combined ratio, which is calculated by dividing (i) the total expenses (excluding interest expenses) minus commission income by (ii) net premiums earned.
Operating net income and operating return on average equity. Each of these terms exclude realized losses and unrealized gains and losses included in net investment income, and if subject to U.S. taxation, tax at a rate of 35%. 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.

CONF CALL

Joel Weiner

Thank you, operator. Good afternoon and welcome everyone. During this call, CastlePoint Holdings Chairman and CEO, Michael Lee will discuss highlights of the quarter; Gregory Doyle, President of CastlePoint Holdings will review the progress in our profit centers; and I'll provide details on our financial performance during the quarter.

We'll end the earnings call with a Q&A session. Before I turn the call over to Michael, I want to remind you that some of the statements that will be made during this call will be forward-looking statements as defined in the Securities and Exchange Commission Act of 1934. In particular, statements about projected levels of growth, net premiums written and earned, the percentage of net premiums written that will be earned, the volume of premiums produced, operating and net income, combined ratios and expense ratios, loss ratios, insurance services income, investment income, amount of invested assets, operating leverage, investment leverage and any other statements containing information that is not strictly historical in nature constitute forward-looking statements.

Actual results could differ materially from those projected in these forward-looking statements. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the Company with the SEC from time to time. I also want to remind everyone that this call is being broadcast over the Internet in the Investor Relations' section of CastlePoint's Web site. A replay will be available on that website.

Now I would like to turn the call over to Michael.

Michael Lee

Thank you, Joel and good afternoon everyone. I would like to thank all of you for joining us this afternoon to discuss our first quarter 2008 results. I'm pleased to report that CastlePoint once again produced excellent operating results this past quarter, excluding realized investment gains and losses, our net income increased by 56% for the first quarter to $11 million from $7.1 million during the same period last year. And our EPS increased by 26% to $0.29 per share, compared with $0.23 per share for the same period last year.

Including investment gains and losses, our net income was $9.6 million and $0.25 per share for the first quarter. The first quarter results are typically lower than other quarters during the year due to the general seasonality of our business and the fact that we commenced operations in the second quarter of 2006. Therefore, premium volume ramps up throughout the remaining quarters from the first quarter. Gregg and Joel will provide further details regarding how premiums and earnings are expected to grow throughout the year during their portions of the presentation.

During the quarter, we had an investment loss of $3 million or $0.08 per share from an investment in a limited partnership that invests in municipal bonds. This limited partnership is in the process of being liquidated. While this loss is a distraction to our strong operating results for the quarter, I would like to put it in proper context. The losses from this partnership and impairment charges last quarter and this quarter were isolated to a small portion of our investment portfolio that contains several funds and partnerships with a current carry value of approximately $23 million.

Due to the limited carrying value of these investments and the corrective actions that we have already taken with regard to these few investments, we are confident that, despite the $3 million investment loss from the one limited partnership that we experienced this quarter, our overall results in 2008 will not be adversely affected in a meaningful way due to our investment portfolio.

The remaining portfolio totaling $687 million or approximately 97% of our total cash and invested assets is comprised of highly rated investments with an average credit rating of AA plus. On this portion of the portfolio, our unrealized losses are approximately $5 million.

Turning our attention back to our first quarter operating results, I would like to provide further details on the market conditions and the progress that we are making in delivering our solutions to our clients. Despite the competitive market environment, we continue to experience strong demand for our solutions from Tower as well as other clients. This is reflected in our net premiums written during the quarter, which increased by 64.3% to $118 million from approximately $72 million during the same period last year. Our production from Tower grew by 52% to $80 million from about $53 million during the same period last year.

Our growth from clients other than Tower grew by 99% to $38 million from last year, representing 32% of the total production in the quarter. We are seeing strong demand for risk-sharing solutions due to our unique ability to provide capital as well as access to A minus rated insurance companies.

As a result, the client that we signed up last year are having a meaningful affect on our production in the first quarter and our pipeline for new clients remains strong. We are seeing strong growth from program underwriting agents due to our ability to offer broad product line platform as well as flexibility in addressing their needs.

Finally, despite the general softening in the reinsurance market, we are getting growth from our risk-sharing clients that see business from their own company to CastlePoint Re. Gregg will describe this in further detail later, but in summary we continue to achieve strong growth without being adversely affected by softening market conditions.

Despite our strong premium growth, we continue to maintain our underwriting discipline as reflected in the 90.6% combined ratio during the first quarter for the total of our reinsurance and insurance segments comprised of 54.3% loss ratio, and 36.3% expense ratio. We are confident about our underwriting profitability due to our focus on accumulating profitable, low hazard, established books of business with credible actuarial loss data from small insurance companies and managing general agents.

Before I turn the call over to Gregg, I would like to point out that April 2008 marked our two year anniversary since we commenced business. Since that time, we have substantially met all of our financial objectives that we communicated to our investors when we commenced business in April 2006.

We wrote approximately $237 million net premiums written during our first 12 months of operations and about $307 million in the second 12 months while net income grew to $17.2 million during the first 12 months and $35.2 million during the second 12 months.

Our book value grew by 59% from $263 million and $8.92 per share when we commenced business to approximately $420 million and about $11 per share at the end of the first quarter. We have also successfully established our infrastructure that is capable of delivering program risk sharing and reinsurance business and we have achieved a significant flow of business from clients other than Tower, exceeding our target of 30% during the first quarter of this year.

More importantly, during our third year of operations commencing in April 2008, we believe we will continue to make progress to come close to our target of 15% ROE by successfully deploying the $385 million of capital that we have raised by increasing net premiums written to approximately $500 million to $550 million by the end of this year.

As the first quarter operating results demonstrated, we believe we are on track to continue to build our business franchise and create value for our shareholders.

With that overview, I would like to turn the call over to Greg for further details regarding our business solutions. Greg?

Greg Doyle

Thank you, Michael. During my portion of the presentation, I will provide further detail on the sources of production and how we are able to grow profitably, given the overall soft market conditions in our industry. We had strong production during the quarter from clients other than Tower, particularly in the primary risk-sharing and program areas due to clients moving their business to us.

Most of these clients began transferring their business to us last year, and so over the course of 2008 we will record a full year of their business adding to our growth. In the first quarter, we also added a new client relationship for quota share reinsurance and we finalized our due diligence in order to commence program business with a couple of additional clients that will begin in the second quarter.

Our primary risk-sharing business solution is a key differentiator for CastlePoint and we have established a regular flow of risk-sharing opportunities in our pipeline. We have two risk-sharing clients that we signed up last year, writing business on Tower policies and also utilizing CastlePoint Insurance Company.

The first client writes small workers' compensation policies, very similar to the type of business that Tower writes with average premium per policy of less than $10,000. This client generates this business in the Midwestern and Western states. The second client writes similar workers' compensation policies, as well as commercial automobile business, primarily in Florida. In the both cases, these risk-sharing clients participate in the business through reinsurance, which creates an alignment of our collective interests.

As I mentioned earlier, during 2008, we will have the benefit of a full year's worth of their business, and as a result we will see strong growth from these existing clients year over year. We expect to retain approximately $50 million to $75 million this year in net written premiums from these clients. We are also currently assessing risk-sharing opportunities in other lines of business and other geographic territories that will complement our existing business mix.

With respect to our program business solutions, we also are now realizing a steady flow of business from the clients that we developed in 2007. These clients are program underwriting agents who each control very profitable, established books of business and they are interested in our broad product platform and responsiveness in customizing solutions for them, including our ability to provide insurance company services. We now have five program business clients with an average annualized premium production per program of approximately $12 million.

Our net written premiums participation from these programs for 2008 is expected to be approximately $25 million. In addition, we have a strong pipeline of program opportunities that we are assessing for 2008. Most of the business that we are writing with our program clients is from small underlying policies that present low to medium hazard risks. Our underwriting guidelines were developed from those at Tower and our due diligence for all programs and risk sharing opportunities before we accept them is comprehensive.

We also are growing our reinsurance business through CastlePoint Re by focusing on providing quota share reinsurance solutions to small insurance companies. We currently have approximately 12 quota share reinsurance clients that compares to eight in the prior year period.

Our quota share business includes commercial property, commercial package, workers' compensation and personal automobile, similar to the types of business that we write in the primary risk sharing and programs area.

Despite softening in the reinsurance market, CastlePoint Re sees continuing demand for its quota share reinsurance products, especially from clients who are already accessing or are interested in accessing our primary risk sharing capabilities. We believe we are less vulnerable to the soft market conditions because our clients position themselves in profitable niche markets with a reduced level of competition.

We also carefully monitor the underwriting results of all of our business by continually reviewing our clients' results to ensure that it meets our expected profitability standards as well as underwriting and pricing guidelines. Finally, on many of our contracts, we've a sliding scale of commission that within a small range of loss ratios is projected to deliver our target combined ratio.

In summary, we are seeing strong production, particularly from existing clients, that we believe will enable us to meet our production targets for the year. We also believe we will achieve the level of underwriting profitability that we are seeking due to our business approach that focuses on accumulating profitable, established, low hazard books of business rather than competing for individual policies in the open market.

I'll now turn the call back to Joel, who will provide further details on our financial results.

Joel Weiner

Thank you, Greg. I'll begin with a discussion of our consolidated results for the first quarter, including a review of the financial results of our reinsurance and insurance segments. Then I will go over in some detail our investment portfolio and also go over the earnings guidance for the second quarter and for the full year 2008.

As Michael mentioned earlier, first quarter operating results again were excellent. For the quarter, our operating earnings which excludes realized and unrealized gains and losses, increased by 56% to $11 million, which was $0.29 per share and an increase of 26% from the prior year period.

Net income in the quarter was impacted by $3 million loss on a limited partnership that is included in that investment income. This limited partnership invests primarily in AAA municipal bonds and it was significantly impacted by market illiquidity. Even though none of the underlying municipal bonds in this partnership suffered defaults, the manager is in the process of liquidating the partnership.

We expect to receive our current market value for the fund, which is $5.5 million as the partnership expects to be liquidated by the end of June. Our book value per share as of March 2008 was $10.96. In CastlePoint Re we had $94.2 million in net written premiums. This is up 31% from the prior year.

In the quarter, 36% of the business in CP Re came from clients other than Tower. The combined ratio in our reinsurance segment was 89.1%, comprised of 54.1% loss ratio and 35% expense ratio. These results are similar to last year. Based upon the excellent combined ratio and the increase in premiums, underwriting profit in CP Re was $8.4 million for the quarter, representing 58.8% increase over the prior year period. CP Re continues to operate well with premiums and underwriting results meeting our plans.

In our insurance segment through CastlePoint Insurance Company or CPIC, we had net written premiums in the first quarter of $23.9 million, compared to zero last year. This business was comprised of $20.2 million of risk sharing business with Tower and $3.7 million of programs and risk sharing business from other clients.

CPIC had a gross combined ratio, meaning before reinsurance is seeded of 82.9% for the quarter, including 52.2% loss ratio and 30.7% expense ratio. The net combined ratio, which is after seeded reinsurance, was 95.5%. Since the net combined ratio reflects costs that are seeded to purchase property catastrophe protection. As earned premiums in CPIC grow, the ratio of seeded property catastrophe reinsurance costs relative to earned premiums will decline and therefore spread between the gross and net combined ratios will narrow significantly, improving CPIC's overall results.

Now let's turn to our investment portfolio. Our invested assets increased 2.4% since year end to $710.1 million. Invested assets, net of amounts payable for recent securities purchased, includes $107 million in cash and cash equivalents, which is in the process of being invested. We expect to deploy the majority of our cash balances by the end of June. As of March 31, 2008, we had $13 million in unrealized losses, representing less than 2% of the cash in invested assets.

Unrealized losses usually do not pose problems for us, and that our investments are comprised of conservative, highly rated fixed income investments that we can hold to maturity. Since we are able to hold these investments to maturity, we are not significantly affected by the fluctuation in the price of these bonds. However, there can be temporary impacts on our book value but as the bonds approach maturity the unrealized losses will diminish, restoring the lost book value.

During the first quarter, we sold all of the subprime assets and we no longer have any subprime or Alt-A exposure in our portfolio. The average credit quality of our investment portfolio was AA, 73% of our investments are rated in AAA. All of our investments are investment grade with the exception of two bonds, which are rated BB for a total of $1.2 million. Our book yield as of quarter end was 5.65%, excluding cash and cash equivalents.

Before I summarize the earnings guidance, there are several factors that you should understand that affect how our earnings by quarter will ramp up during this year. First, there is a natural progression of earnings increases by quarter that should be expected, based upon our growth in invested assets and written premiums as compared to last year. The written premiums growth is followed by a ramp-up in our earned premiums since premiums are earned generally over a 12- month period. Since the business from clients other than Tower for the most part is still ramping up, particularly from programs and risk sharing, the growth in earned premiums from these sources will accelerate through the year. For the same reason our invested assets are growing throughout the year, based especially upon the cash flow from these additional clients.

With that in mind, you will note that in our press release for the second quarter of 2008, we project our net income to be in a range between $13.5 million and $15.8 million, and diluted earnings per share to be in a range between $0.35 and $0.41 per share.

For the full year, we are maintaining our guidance for net income to be in a range of $67.5 million to $71.5 million with diluted earnings per share between $1.75 and $1.85. The quarterly and full year earnings guidance assumes no further realized investment losses.

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