##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the quarterly period ended September 30, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 For the transition period from  to
 Commission File Number: 000-51530
 North Pointe Holdings Corporation
 
 Michigan
    
    38-3615047(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)28819 Franklin Road, Southfield, MI
    
    48034(Address of Principal Executive Offices)
    
    (Zip Code)
 (248) 358-1171
 
  þ o
  o o þ
  o þ




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##### Table of Contents



NORTH POINTE HOLDINGS CORPORATION
FORM 10-Q
  
 TABLE OF CONTENTS
 PagePart I. Financial InformationItem 1. Financial Statements (Unaudited)
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    32Part II. Other InformationItem 1. Legal Proceedings
    
    
    33Item 1A. Risk Factors
    
    
    33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3. Defaults Upon Senior Securities
    
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    33Certificate of the Chief Executive Officer to Section 302Certificate of the Chief Financial Officer to Section 302Certificate of the Chief Executive Officer to Section 906Certificate of the Chief Financial Officer to Section 906
 2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 North Pointe Holdings Corporation and Subsidiaries
 Condensed Consolidated Balance Sheets
As of September 30, 2006 (Unaudited) and December 31, 2005
 2006
    
    
    2005(Dollars in thousands)ASSETSInvestmentsDebt securities, available for sale, at fair value (amortized cost
of $105,668 and $100,337, respectively)
    
    $
    104,086
    
    
    $
    98,018Common stocks, available for sale, at fair value (cost of $9,092 and $8,681, respectively)
    
    
    10,512
    
    
    
    10,001Other investments
    
    
    604
    
    
    
    553Total investments
    
    
    115,202
    
    
    
    108,572Cash and cash equivalents
    
    
    49,760
    
    
    
    34,119Restricted cash
    
    
    200
    
    
    
    200Accrued investment income
    
    
    1,027
    
    
    
    840Premiums and agents balances receivable, net
    
    
    16,787
    
    
    
    21,324Reinsurance recoverables onPaid losses
    
    
    4,839
    
    
    
    11,470Unpaid losses
    
    
    33,505
    
    
    
    65,989Prepaid reinsurance premiums
    
    
    11,679
    
    
    
    7,424Deferred policy acquisition costs
    
    
    8,411
    
    
    
    9,578Deferred federal income taxes, net
    
    
    5,249
    
    
    
    5,843Federal income tax recoverable
    
    
    331
    
    
    
    2,199Fixed assets, net of accumulated depreciation
    
    
    6,122
    
    
    
    4,990Prepaid expenses and other assets
    
    
    3,649
    
    
    
    2,488Total assets
    
    $
    256,761
    
    
    $
    275,036LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesUnpaid losses and loss adjustment expenses
    
    $
    90,699
    
    
    $
    117,778Unearned premiums
    
    
    46,279
    
    
    
    44,701Debt
    
    
    23,153
    
    
    
    5,026Amounts due to reinsurers
    
    
    2,616
    
    
    
    3,048Accrued expenses and other liabilities
    
    
    6,344
    
    
    
    15,160Premiums paid in advance
    
    
    382
    
    
    
    7,096Total liabilities
    
    
    169,473
    
    
    
    192,809Commitments and contingent liabilitiesShareholders equityCommon stock, no par value; 50,000,000 shares authorized; 9,122,687 and 9,116,687 issued
and outstanding in 2006 and 2005, respectively
    
    
    50,480
    
    
    
    50,233Preferred stock, no par value; 5,000,000 shares authorized; 0 issued and
outstanding in 2006 and 2005
    
    
    
    
    
    
    Retained earnings
    
    
    36,915
    
    
    
    32,653Accumulated other comprehensive lossNet unrealized losses on investments, net of deferred federal income
tax benefit of $55 and $340 in 2006 and 2005, respectively
    
    
    (107
    )
    
    
    (659
    )Total shareholders equity
    
    
    87,288
    
    
    
    82,227Total liabilities and shareholders equity
    
    $
    256,761
    
    
    $
    275,036
  3




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##### Table of Contents



North Pointe Holdings Corporation and Subsidiaries
 Unaudited Condensed Consolidated Statements of Income
For the Three Months Ended September 30, 2006 and 2005
 2006
    
    
    2005(Dollars in thousands,except share data)RevenuesDirect premiums written
    
    $
    22,673
    
    
    $
    18,443Assumed premiums written
    
    
    2
    
    
    
    (10
    )Gross premiums written
    
    
    22,675
    
    
    
    18,433Premiums ceded
    
    
    (13,962
    )
    
    
    (5,854
    )Net premiums written
    
    
    8,713
    
    
    
    12,579Decrease in net unearned premiums
    
    
    11,196
    
    
    
    9,073Net premiums earned
    
    
    19,909
    
    
    
    21,652Investment income, net of investment expenses
    
    
    1,755
    
    
    
    1,067Net realized capital gains
    
    
    81
    
    
    
    75Other income
    
    
    404
    
    
    
    695Total revenues
    
    
    22,149
    
    
    
    23,489ExpensesLosses and loss adjustment expenses, net
    
    
    7,295
    
    
    
    11,991Policy acquisition costs
    
    
    5,483
    
    
    
    5,844Other underwriting and operating expenses
    
    
    5,664
    
    
    
    4,686Interest expense
    
    
    496
    
    
    
    390Total expenses
    
    
    18,938
    
    
    
    22,911Income before federal income tax expense
    
    
    3,211
    
    
    
    578Federal income tax expense
    
    
    1,045
    
    
    
    67Net income
    
    $
    2,166
    
    
    $
    511Earnings Per ShareBasic
    
    $
    0.24
    
    
    $
    0.10Diluted
    
    
    0.24
    
    
    
    0.10Weighted average number of common shares outstandingBasic
    
    
    9,114,204
    
    
    
    5,237,013Diluted
    
    
    9,114,915
    
    
    
    5,237,015
  4




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orth Pointe Holdings Corporation and Subsidiaries
 Unaudited Condensed Consolidated Statements of Income
For the Nine Months Ended September 30, 2006 and 2005
 2006
    
    
    2005(Dollars in thousands,except share data)RevenuesDirect premiums written
    
    $
    90,419
    
    
    $
    86,078Assumed premiums written
    
    
    6
    
    
    
    613Gross premiums written
    
    
    90,425
    
    
    
    86,691Premiums ceded
    
    
    (29,687
    )
    
    
    (14,548
    )Net premiums written
    
    
    60,738
    
    
    
    72,143Decrease (increase) in net unearned premiums
    
    
    578
    
    
    
    (5,299
    )Net premiums earned
    
    
    61,316
    
    
    
    66,844Investment income, net of investment expenses
    
    
    4,755
    
    
    
    2,755Net realized capital losses
    
    
    (266
    )
    
    
    (155
    )Other income
    
    
    1,291
    
    
    
    1,474Total revenues
    
    
    67,096
    
    
    
    70,918ExpensesLosses and loss adjustment expenses, net
    
    
    27,317
    
    
    
    30,356Policy acquisition costs
    
    
    16,776
    
    
    
    17,109Other underwriting and operating expenses
    
    
    15,355
    
    
    
    12,379Interest expense
    
    
    1,207
    
    
    
    884Total expenses
    
    
    60,655
    
    
    
    60,728Income before federal income tax expense
    
    
    6,441
    
    
    
    10,190Federal income tax expense
    
    
    2,179
    
    
    
    3,544Net income
    
    $
    4,262
    
    
    $
    6,646Earnings Per ShareBasic
    
    $
    0.47
    
    
    $
    1.33Diluted
    
    
    0.47
    
    
    
    1.33Weighted average number of common shares outstandingBasic
    
    
    9,114,193
    
    
    
    5,006,403Diluted
    
    
    9,114,761
    
    
    
    5,006,404
  5




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orth Pointe Holdings Corporation and Subsidiaries
 Unaudited Condensed Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss)
For the Three Months Ended September 30, 2006 and 2005
 AccumulatedOtherComprehensiveCommon Stock
    
    
    Retained Earnings
    
    
    Income (Loss)
    
    
    Total(Dollars in thousands)Balances, July 1, 2005
    
    $
    5,880
    
    
    $
    34,938
    
    
    $
    385
    
    
    $
    41,203Issuance of common stock
    
    
    41,586
    
    
    
    
    
    
    
    
    
    
    
    41,586Comprehensive lossNet income
    
    
    
    
    
    
    511
    
    
    
    
    
    
    
    511Unrealized losses on investments, net of
deferred federal income tax benefit of $419
    
    
    
    
    
    
    
    
    
    
    (816
    )
    
    
    (816
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (305
    )Balances, September 30, 2005
    
    $
    47,466
    
    
    $
    35,449
    
    
    $
    (431
    )
    
    $
    82,484Balances, July 1, 2006
    
    $
    50,398
    
    
    $
    34,749
    
    
    $
    (1,707
    )
    
    $
    83,440Stock-based compensation
    
    
    82
    
    
    
    
    
    
    
    
    
    
    
    82Comprehensive incomeNet income
    
    
    
    
    
    
    2,166
    
    
    
    
    
    
    
    2,166Unrealized gains on investments, net of
deferred federal income tax expense of $824
    
    
    
    
    
    
    
    
    
    
    1,600
    
    
    
    1,600Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,766Balances, September 30, 2006
    
    $
    50,480
    
    
    $
    36,915
    
    
    $
    (107
    )
    
    $
    87,288
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North Pointe Holdings Corporation and Subsidiaries
 Unaudited Condensed Consolidated Statements of Shareholders Equity and Comprehensive Income
For the Nine Months Ended September 30, 2006 and 2005
 AccumulatedOtherComprehensiveCommon Stock
    
    
    Retained Earnings
    
    
    Income (Loss)
    
    
    Total(Dollars in thousands)Balances, January 1, 2005
    
    $
    5,880
    
    
    $
    28,803
    
    
    $
    9
    
    
    $
    34,692Issuance of common stock
    
    
    41,586
    
    
    
    
    
    
    
    
    
    
    
    41,586Comprehensive incomeNet income
    
    
    
    
    
    
    6,646
    
    
    
    
    
    
    
    6,646Unrealized losses on investments, net of
deferred federal income tax benefit of $226
    
    
    
    
    
    
    
    
    
    
    (440
    )
    
    
    (440
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,206Balances, September 30, 2005
    
    $
    47,466
    
    
    $
    35,449
    
    
    $
    (431
    )
    
    $
    82,484Balances, January 1, 2006
    
    $
    50,233
    
    
    $
    32,653
    
    
    $
    (659
    )
    
    $
    82,227Stock-based compensation
    
    
    247
    
    
    
    
    
    
    
    
    
    
    
    247Comprehensive incomeNet income
    
    
    
    
    
    
    4,262
    
    
    
    
    
    
    
    4,262Unrealized gain on investments, net of
deferred federal income tax expense of $285
    
    
    
    
    
    
    
    
    
    
    552
    
    
    
    552Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,814Balances, September 30, 2006
    
    $
    50,480
    
    
    $
    36,915
    
    
    $
    (107
    )
    
    $
    87,288
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North Pointe Holdings Corporation and Subsidiaries
 Unaudited Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2006 and 2005
 2006
    
    
    2005(Dollars in thousands)Cash flows from operating activitiesNet income
    
    $
    4,262
    
    
    $
    6,646Adjustments to reconcile net income to cash provided by operating activitiesDepreciation and amortization
    
    
    636
    
    
    
    465Net realized losses on sales and other dispositions of investments
    
    
    266
    
    
    
    155Stock-based compensation expense
    
    
    247
    
    
    
    Deferred federal income tax expense
    
    
    310
    
    
    
    (1
    )Change in assets and liabilitiesPremiums and agents balances receivable, net
    
    
    4,537
    
    
    
    (4,503
    )Accrued investment income
    
    
    (187
    )
    
    
    (263
    )Reinsurance recoverable, net
    
    
    38,683
    
    
    
    12,147Prepaid reinsurance premiums
    
    
    (4,255
    )
    
    
    (931
    )Deferred policy acquisition costs
    
    
    1,167
    
    
    
    240Federal income tax recoverable
    
    
    1,868
    
    
    
    (1,648
    )Prepaid expenses and other assets
    
    
    136
    
    
    
    1,488Losses and loss adjustment expenses
    
    
    (27,079
    )
    
    
    (11,751
    )Unearned premiums
    
    
    1,578
    
    
    
    4,590Accrued expenses and other liabilities
    
    
    (8,716
    )
    
    
    1,602Premiums paid in advance
    
    
    (6,714
    )
    
    
    5,002Net cash provided by operating activities
    
    
    6,739
    
    
    
    13,238Cash flows from investing activitiesProceeds from maturities of debt securities
    
    
    7,254
    
    
    
    5,098Proceeds from sales of debt securities
    
    
    27,982
    
    
    
    30,484Proceeds from sales of equity securities
    
    
    3,898
    
    
    
    3,218Purchases of debt securities
    
    
    (41,468
    )
    
    
    (61,562
    )Purchases of equity securities
    
    
    (3,926
    )
    
    
    (3,227
    )Purchases of fixed assets
    
    
    (1,604
    )
    
    
    (519
    )Purchase of other investments
    
    
    (51
    )
    
    
    Purchase of subsidiaries, net of cash acquired of $168
    
    
    
    
    
    
    (1,386
    )Capital contribution to NP Capital Trust I
    
    
    (620
    )
    
    
    Change in restricted cash
    
    
    
    
    
    
    (3,381
    )Net cash used in investing activities
    
    
    (8,535
    )
    
    
    (31,275
    )Cash flows from financing activitiesProceeds from issuance of common stock, net
    
    
    
    
    
    
    41,586Proceeds from issuance of debt (net of $690 of issuance costs paid in 2006)
    
    
    20,661
    
    
    
    37,337Repayments of debt
    
    
    (3,224
    )
    
    
    (55,016
    )Net cash provided by financing activities
    
    
    17,437
    
    
    
    23,907Increase in cash and cash equivalents
    
    
    15,641
    
    
    
    5,870Cash and cash equivalentsBeginning of period
    
    
    34,119
    
    
    
    29,678End of period
    
    $
    49,760
    
    
    $
    35,548Supplemental cash flow information  cash paid during the period forInterest
    
    $
    1,168
    
    
    $
    1,033Federal income taxes
    
    
    1
    
    
    
    5,194Supplemental disclosure of noncash investing activitiesLiabilities assumed in purchase of subsidiaries
    
    
    
    
    
    
    2,663
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North Pointe Holdings Corporation And Subsidiaries
 Notes To Condensed Consolidated Financial Statements
 1. Basis of Financial Presentation and Principles of Consolidation
      Recent Accounting Pronouncements
 Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of
Statement of Financial Accounting Standard (SFAS) No. 109
 Accounting for Income
Taxes
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2. Earnings Per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands, except share data)Net income
    
    $
    2,166
    
    
    $
    511
    
    
    $
    4,262
    
    
    $
    6,646Weighted average shares outstanding
    
    
    9,122,687
    
    
    
    5,237,095
    
    
    
    9,118,907
    
    
    
    5,006,431Unvested restricted stock
    
    
    (8,483
    )
    
    
    (82
    )
    
    
    (4,714
    )
    
    
    (28
    )Weighted average shares outstanding used for basic EPS
    
    
    9,114,204
    
    
    
    5,237,013
    
    
    
    9,114,193
    
    
    
    5,006,403Dilutive effect of restricted stock
    
    
    711
    
    
    
    2
    
    
    
    568
    
    
    
    1Weighted average shares outstanding used for diluted EPS
    
    
    9,114,915
    
    
    
    5,237,015
    
    
    
    9,114,761
    
    
    
    5,006,404Basic earnings per share
    
    $
    0.24
    
    
    $
    0.10
    
    
    $
    0.47
    
    
    $
    1.33Diluted earnings per share
    
    
    0.24
    
    
    
    0.10
    
    
    
    0.47
    
    
    
    1.33
  3. Income Taxes
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands)Current tax expense (benefit)
    
    $
    1,025
    
    
    $
    (84
    )
    
    $
    1,869
    
    
    $
    3,545Deferred tax expense relating toNOL carryforwards
    
    
    
    
    
    
    
    
    
    
    358
    
    
    
    401Other deferred tax expense (benefit)
    
    
    20
    
    
    
    151
    
    
    
    (48
    )
    
    
    (402
    )Total federal income tax expense
    
    $
    1,045
    
    
    $
    67
    
    
    $
    2,179
    
    
    $
    3,544
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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands)Tax provision at the 34% statutory rate
    
    $
    1,092
    
    
    $
    197
    
    
    $
    2,190
    
    
    $
    3,465Tax effect ofDividend received deduction
    
    
    (9
    )
    
    
    (8
    )
    
    
    (27
    )
    
    
    (22
    )Adjustment of acquired NOLs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    262Provision to return variance
    
    
    7
    
    
    
    (124
    )
    
    
    7
    
    
    
    (223
    )Other, net
    
    
    (45
    )
    
    
    2
    
    
    
    9
    
    
    
    62Total federal income tax expense
    
    $
    1,045
    
    
    $
    67
    
    
    $
    2,179
    
    
    $
    3,544
   September 30,
    
    
    December 31,2006
    
    
    2005(Dollars in thousands)Deferred federal income tax assetsLoss and loss adjustment expenses
    
    $
    2,341
    
    
    $
    2,445Unearned premiums
    
    
    2,619
    
    
    
    2,659NOL carryforwards
    
    
    2,271
    
    
    
    2,629Premiums receivable
    
    
    85
    
    
    
    85Lease obligation
    
    
    131
    
    
    
    165Intangible asset
    
    
    315
    
    
    
    340Net unrealized losses on investments
    
    
    55
    
    
    
    340Other
    
    
    501
    
    
    
    575Total deferred tax assets
    
    
    8,318
    
    
    
    9,238Deferred federal income tax liabilitiesDeferred policy acquisition costs
    
    
    2,860
    
    
    
    3,257Other
    
    
    209
    
    
    
    138Total deferred tax liabilities
    
    
    3,069
    
    
    
    3,395Net deferred federal income tax assets
    
    $
    5,249
    
    
    $
    5,843
 4. Stock-based Compensation
  11




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5. Outstanding Debt
 Senior Credit Facility
      
    
    adjusted capital and surplus will be in excess of 215% of authorized control level
risk-based capital as of each fiscal year end;
    
    there shall be no more than four IRIS calculations that result in unusual values at each
fiscal year end;
    
    the ratio of net premiums written to statutory capital and surplus will not exceed more than
4.0 to 1.0 in the case of North Pointe Casualty Insurance Company and Home Pointe Insurance Company
and 2.5 to 1.0 in the case of North Pointe Insurance Company; and
    
    the ratio of gross premiums written to statutory surplus will not exceed more than 10.0 to
1.0 in the case of North Pointe Casualty Insurance Company and Home Pointe Insurance Company and
3.0 to 1.0 in the case of North Pointe Insurance Company.
  Trust Preferred Securities
     12




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(Dollars inYear
    

thousands)2006
    
    $
    222007
    
    
    1222008
    
    
    1302009
    
    
    1382010
    
    
    1462011 and thereafter
    
    
    22,595$
    23,153
 6. Contingencies
    13




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7. Segment Reporting
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands)Total RevenuesCommercial linesLiability
    
    $
    7,392
    
    
    $
    6,019
    
    
    $
    19,266
    
    
    $
    17,918Property
    
    
    1,681
    
    
    
    1,756
    
    
    
    5,207
    
    
    
    5,587Commercial multi-peril
    
    
    2,885
    
    
    
    5,873
    
    
    
    14,879
    
    
    
    17,065Commercial automobile
    
    
    1,481
    
    
    
    1,563
    
    
    
    4,528
    
    
    
    4,668Other
    
    
    947
    
    
    
    602
    
    
    
    2,207
    
    
    
    2,051Total commercial lines
    
    
    14,386
    
    
    
    15,813
    
    
    
    46,087
    
    
    
    47,289Personal linesPersonal automobile
    
    
    
    
    
    
    74
    
    
    
    
    
    
    
    1,460Homeowners
    
    
    5,523
    
    
    
    5,765
    
    
    
    15,229
    
    
    
    18,095Total personal lines
    
    
    5,523
    
    
    
    5,839
    
    
    
    15,229
    
    
    
    19,555Administrative servicesAffiliated companies
    
    
    5,519
    
    
    
    7,024
    
    
    
    24,719
    
    
    
    24,271Non-affiliated companies
    
    
    404
    
    
    
    695
    
    
    
    1,291
    
    
    
    1,474Total administrative services
    
    
    5,923
    
    
    
    7,719
    
    
    
    26,010
    
    
    
    25,745Corporate and eliminationsInvestment activity
    
    
    1,836
    
    
    
    1,142
    
    
    
    4,489
    
    
    
    2,600Eliminations
    
    
    (5,519
    )
    
    
    (7,024
    )
    
    
    (24,719
    )
    
    
    (24,271
    )Total revenues
    
    $
    22,149
    
    
    $
    23,489
    
    
    $
    67,096
    
    
    $
    70,918Income (loss) before federal income tax expenseCommercial linesLiability
    
    $
    1,764
    
    
    $
    1,088
    
    
    $
    8,044
    
    
    $
    1,602Property
    
    
    (133
    )
    
    
    (355
    )
    
    
    (709
    )
    
    
    (450
    )Commercial multi-peril
    
    
    408
    
    
    
    456
    
    
    
    (2,696
    )
    
    
    2,744Commercial automobile
    
    
    426
    
    
    
    545
    
    
    
    (367
    )
    
    
    (11
    )Other
    
    
    358
    
    
    
    451
    
    
    
    108
    
    
    
    622Total commercial lines
    
    
    2,823
    
    
    
    2,185
    
    
    
    4,380
    
    
    
    4,507Personal linesPersonal automobile
    
    
    (835
    )
    
    
    216
    
    
    
    (3,033
    )
    
    
    (257
    )Homeowners
    
    
    738
    
    
    
    (3,268
    )
    
    
    (768
    )
    
    
    (442
    )Total personal lines
    
    
    (97
    )
    
    
    (3,052
    )
    
    
    (3,801
    )
    
    
    (699
    )Administrative services (1)
    
    
    (449
    )
    
    
    1,171
    
    
    
    3,689
    
    
    
    5,429Corporate and eliminationsInvestment activity
    
    
    1,836
    
    
    
    1,142
    
    
    
    4,489
    
    
    
    2,600Other expense, net
    
    
    (902
    )
    
    
    (868
    )
    
    
    (2,316
    )
    
    
    (1,647
    )Income before federal income tax expense
    
    $
    3,211
    
    
    $
    578
    
    
    $
    6,441
    
    
    $
    10,190
 
 (1)
    
    The decrease in administrative services income before federal income taxes in the third quarter
of 2006 is due to cancellations and non-renewals of the Florida small business line which took
place primarily in the third quarter and resulted in a decrease of fee income. The company expects
fee income to return to normal levels going forward. 14




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 The discussion and analysis of our financial condition and results of operations contained
herein should be read in conjunction with our consolidated financial statements and accompanying
notes which appear elsewhere in this report. It contains forward-looking statements that involve
risks and uncertainties. Please see Note on Forward-Looking Statements for more information. Our
actual results could differ materially from those anticipated in these forward-looking statements
as a result of various factors, including those discussed below and elsewhere in this report.
 Note on Forward-Looking Statements
  
    
    our ability to accurately price the risks we underwrite;
    
    existing and future regulations by local, state and federal governments, including regulatory limitations on our
ability to increase rates in any state including Florida in order to absorb increases in reinsurance costs and
catastrophe losses;
    
    the occurrence of severe weather conditions and other catastrophes;
    
    risks associated with high concentration of our business in certain geographic markets;
    
    the availability and pricing of reinsurance and the potential for non-payment or delay in payment by reinsurers;
    
    the establishment of adequate loss and loss adjustment expense reserves;
    
    retention and recruiting of independent agents and the potential loss of key personnel;
    
    failure to pay claims accurately;
    
    inability to implement our growth strategies;
    
    possible assessments for guaranty funds, other insurance-related assessments and mandatory reinsurance arrangements and
our ability to recover such assessments through future surcharges or other rate changes;
    
    the cyclical and seasonal nature of the industries within which we operate;
    
    intense competition with other insurance companies;
    
    our ability to obtain and retain trade association endorsements;
    
    performance of our various operating subsidiaries and restrictions that may limit the ability of our subsidiaries to
pay dividends to North Pointe Holdings;
    
    the compliance of our insurance company subsidiaries with minimum capital and surplus requirements;
    
    ratings of our insurance company subsidiaries by A.M. Best;
    
    the outcome of current industry investigations and potential regulation limiting the use of undisclosed contingent
commission arrangements with independent agents;
    
    adverse market conditions that could negatively impact our investment portfolio;
    
    reliance on information technology and telecommunication systems;
 15




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##### Table of Contents




    
    our limited history writing homeowners insurance policies in Florida;
 
    
    changes in insurance-related laws and regulations;
 
    
    our ability to implement and maintain adequate internal controls in our business;
 
    
    managements ability to effectively manage a public company; and
 
    
    other risks that we identify in past and future filings with the Securities and Exchange Commission, including
without limitation the risks described under the caption Risk Factors in the Prospectus constituting part of our
Registration Statement on Form S-1 (Reg. No. 333-122220) and any past or subsequent filings on Forms 10-K, 10-Q
and 8-K.
  Description of Business
   Critical Accounting Estimates
  16




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##### Table of Contents



Results of Operations for the Three and Nine Months Ended September 30, 2006 and 2005
 Results of Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands)Gross premiums written:Commercial lines
    
    $
    20,903
    
    
    $
    17,295
    
    
    $
    60,453
    
    
    $
    55,261Personal lines
    
    
    1,772
    
    
    
    1,138
    
    
    
    29,972
    
    
    
    31,430Total gross premiums written
    
    
    22,675
    
    
    
    18,433
    
    
    
    90,425
    
    
    
    86,691Net premiums written:Commercial lines
    
    
    9,465
    
    
    
    14,082
    
    
    
    39,352
    
    
    
    46,284Personal lines
    
    
    (752
    )
    
    
    (1,503
    )
    
    
    21,386
    
    
    
    25,859Total net premiums written
    
    
    8,713
    
    
    
    12,579
    
    
    
    60,738
    
    
    
    72,143Revenues:Net premiums earned:Commercial lines
    
    
    14,386
    
    
    
    15,813
    
    
    
    46,087
    
    
    
    47,289Personal lines
    
    
    5,523
    
    
    
    5,839
    
    
    
    15,229
    
    
    
    19,555Total net premiums earned
    
    
    19,909
    
    
    
    21,652
    
    
    
    61,316
    
    
    
    66,844Investment income, net
    
    
    1,755
    
    
    
    1,067
    
    
    
    4,755
    
    
    
    2,755Net realized capital gains (losses)
    
    
    81
    
    
    
    75
    
    
    
    (266
    )
    
    
    (155
    )Other income
    
    
    404
    
    
    
    695
    
    
    
    1,291
    
    
    
    1,474Total revenues
    
    
    22,149
    
    
    
    23,489
    
    
    
    67,096
    
    
    
    70,918Expenses:Losses and loss adjustment expenses, net
    
    
    7,295
    
    
    
    11,991
    
    
    
    27,317
    
    
    
    30,356Policy acquisition costs
    
    
    5,483
    
    
    
    5,844
    
    
    
    16,776
    
    
    
    17,109Other underwriting and operating expenses
    
    
    5,664
    
    
    
    4,686
    
    
    
    15,355
    
    
    
    12,379Interest expense
    
    
    496
    
    
    
    390
    
    
    
    1,207
    
    
    
    884Total expenses
    
    
    18,938
    
    
    
    22,911
    
    
    
    60,655
    
    
    
    60,728Income before federal income tax expense
    
    
    3,211
    
    
    
    578
    
    
    
    6,441
    
    
    
    10,190Federal income tax expense
    
    
    1,045
    
    
    
    67
    
    
    
    2,179
    
    
    
    3,544Net income
    
    $
    2,166
    
    
    $
    511
    
    
    $
    4,262
    
    
    $
    6,646Loss ratio:Commercial lines
    
    
    31.3
    %
    
    
    39.3
    %
    
    
    38.9
    %
    
    
    40.5
    %Personal lines
    
    
    50.5
    
    
    
    98.8
    
    
    
    61.7
    
    
    
    57.3Consolidated
    
    
    35.9
    
    
    
    53.7
    
    
    
    43.6
    
    
    
    44.4Expense ratio
    
    
    54.9
    
    
    
    47.1
    
    
    
    51.3
    
    
    
    43.2Combined ratio
    
    
    90.8
    
    
    
    100.8
    
    
    
    94.9
    
    
    
    87.6
 17




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##### Table of Contents



Overview
    Gross Premiums Written
  Three Months Ended September 30, 2006 as Compared to Three Months Ended September 30, 2005.
    Nine Months Ended September 30, 2006 as Compared to Nine Months Ended September 30, 2005.
  18




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##### Table of Contents



Net Premiums Written
  Three Months Ended September 30, 2006 as Compared to Three Months Ended September 30, 2005.
  Nine Months Ended September 30, 2006 as Compared to Nine Months Ended September 30, 2005.
  Net Premiums Earned
  Three Months Ended September 30, 2006 as Compared to Three Months Ended September 30, 2005
 Nine Months Ended September 30, 2006 as Compared to Nine Months Ended September 30, 2005.
 19




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands)Gross premiums earned:Commercial lines
    
    $
    24,689
    
    
    $
    19,132
    
    
    $
    65,063
    
    
    $
    56,418Personal lines
    
    
    8,056
    
    
    
    8,536
    
    
    
    23,784
    
    
    
    25,682Total
    
    
    32,745
    
    
    
    27,668
    
    
    
    88,847
    
    
    
    82,100Ceded premiums earned:Commercial lines
    
    
    10,303
    
    
    
    3,319
    
    
    
    18,976
    
    
    
    9,129Personal lines
    
    
    2,533
    
    
    
    2,697
    
    
    
    8,555
    
    
    
    6,127Total
    
    
    12,836
    
    
    
    6,016
    
    
    
    27,531
    
    
    
    15,256Net premiums earned:Commercial lines
    
    
    14,386
    
    
    
    15,813
    
    
    
    46,087
    
    
    
    47,289Personal lines
    
    
    5,523
    
    
    
    5,839
    
    
    
    15,229
    
    
    
    19,555Total
    
    $
    19,909
    
    
    $
    21,652
    
    
    $
    61,316
    
    
    $
    66,844
 Net Investment Income
  Three Months Ended September 30, 2006 as Compared to Three Months Ended September 30, 2005.
 Nine Months Ended September 30, 2006 as Compared to Nine Months Ended September 30, 2005.
  Net Realized Gains and Losses on Investments
 Three Months Ended September 30, 2006 as Compared to Three Months Ended September 30, 2005.
 Nine Months Ended September 30, 2006 as Compared to Nine Months Ended September 30, 2005.
 20




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##### Table of Contents



O ther Income
  Three Months Ended September 30, 2006 as Compared to Three Months Ended September 30, 2005.
 Nine Months Ended September 30, 2006 as Compared to Nine Months Ended September 30, 2005.
 Losses and Loss Adjustment Expenses
  Three Months Ended September 30, 2006 as Compared to Three Months Ended September 30, 2005.
   Nine Months Ended September 30, 2006 as Compared to Nine Months Ended September 30, 2005.
 21




---



##### Table of Contents



All Lines
    
    2006
    
    
    2005Current year loss ratios
    
    
    47.5
    %
    
    
    49.5
    %Decrease in loss ratios from prior year reserve development
    
    
    (3.9
    )
    
    
    (5.1
    )Total lines loss ratios
    
    
    43.6
    %
    
    
    44.4
    %
    Commercial Lines
    
    2006
    
    
    2005Current year loss ratios
    
    
    47.6
    %
    
    
    45.0
    %Decrease in loss ratios from prior year reserve development
    
    
    (8.7
    )
    
    
    (4.5
    )Total commercial lines loss ratios
    
    
    38.9
    %
    
    
    40.5
    %
     22




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##### Table of Contents



Personal Lines
    
    2006
    
    
    2005Current year loss ratios
    
    
    51.4
    %
    
    
    64.2
    %Increase (decrease) in loss ratios from prior year reserve development
    
    
    10.3
    
    
    
    (6.9
    )Total personal lines loss ratios
    
    
    61.7
    %
    
    
    57.3
    %
  Policy Acquisition Costs
  Three Months Ended September 30, 2006 as Compared to Three Months Ended September 30, 2005.
 Nine Months Ended September 30, 2006 as Compared to Nine Months Ended September 30, 2005.
 Other Underwriting and Operating Expenses
  Three Months Ended September 30, 2006 as Compared to Three Months Ended September 30, 2005.
 Nine Months Ended September 30, 2006 as Compared to Nine Months Ended September 30, 2005.
 Interest Expense
 Three Months Ended September 30, 2006 as Compared to Three Months Ended September 30, 2005.
 Nine Months Ended September 30, 2006 as Compared to Nine Months Ended September 30, 2005.
 23




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##### Table of Contents



Federal Income Tax Expense
 Three Months Ended September 30, 2006 as Compared to Three Months Ended September 30, 2005.
 Nine Months Ended September 30, 2006 as Compared to Nine Months Ended September 30, 2005.
 Liquidity and Capital Resources
 Sources and Uses of Funds
        24




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##### Table of Contents



Cash Flows
     Contractual Obligations and Commitments
  2011 and2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    thereafter
    
    
    Total(Dollars in thousands)Junior subordinated debt
    
    $
    448
    
    
    $
    1,794
    
    
    $
    1,794
    
    
    $
    1,794
    
    
    $
    1,794
    
    
    $
    65,728
    
    
    $
    73,352Senior credit facility
    
    
    23
    
    
    
    94
    
    
    
    94
    
    
    
    47
    
    
    
    
    
    
    
    
    
    
    
    258$
    471
    
    
    $
    1,888
    
    
    $
    1,888
    
    
    $
    1,841
    
    
    $
    1,794
    
    
    $
    65,728
    
    
    $
    73,610
  Investments
  25




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##### Table of Contents



As of September 30, 2006
    
    
    As of December 31, 2005Amount
    
    

Percentofportfolio
    
    
    Amount
    
    

Percentofportfolio(Dollars in thousands)Fixed Income:U.S. governmental and agency securities
    
    $
    26,197
    
    
    
    15.8
    %
    
    $
    20,672
    
    
    
    14.5
    %Foreign governmental
    
    
    302
    
    
    
    0.2
    
    
    
    561
    
    
    
    0.4Corporate securities
    
    
    28,683
    
    
    
    17.4
    
    
    
    31,509
    
    
    
    22.0Municipal securities
    
    
    7,070
    
    
    
    4.3
    
    
    
    
    
    
    
    0.0Mortgage-backed securities
    
    
    32,486
    
    
    
    19.7
    
    
    
    32,847
    
    
    
    23.0Asset-backed
    
    
    9,348
    
    
    
    5.6
    
    
    
    12,429
    
    
    
    8.7Total fixed-income
    
    
    104,086
    
    
    
    63.0
    
    
    
    98,018
    
    
    
    68.6Cash, cash equivalents and restricted cash
    
    
    49,960
    
    
    
    30.2
    
    
    
    34,319
    
    
    
    24.0Equity securities:Common shares
    
    
    10,512
    
    
    
    6.4
    
    
    
    10,001
    
    
    
    7.0Total equity securities
    
    
    10,512
    
    
    
    6.4
    
    
    
    10,001
    
    
    
    7.0Other investments
    
    
    604
    
    
    
    0.4
    
    
    
    553
    
    
    
    0.4Total
    
    $
    165,162
    
    
    
    100.0
    %
    
    $
    142,891
    
    
    
    100.0
    %
   Less than 12 months
    
    
    12 months or More
    
    
    TotalFairValue
    
    

GrossUnrealizedLoss
    
    

FairValue
    
    

GrossUnrealizedLoss
    
    

FairValue
    
    

GrossUnrealizedLoss(Dollars in thousands)U.S. governmental and agency securities
    
    $
    5,877
    
    
    $
    60
    
    
    $
    10,813
    
    
    $
    223
    
    
    $
    16,690
    
    
    $
    283Foreign governmental
    
    
    
    
    
    
    
    
    
    
    301
    
    
    
    7
    
    
    
    301
    
    
    
    7Corporate securities
    
    
    1,947
    
    
    
    26
    
    
    
    23,189
    
    
    
    725
    
    
    
    25,136
    
    
    
    751Mortgage-backed securities
    
    
    245
    
    
    
    1
    
    
    
    27,545
    
    
    
    840
    
    
    
    27,790
    
    
    
    841Asset-backed
    
    
    192
    
    
    
    
    
    
    
    7,399
    
    
    
    102
    
    
    
    7,591
    
    
    
    102Total debt securities
    
    $
    8,261
    
    
    $
    87
    
    
    $
    69,247
    
    
    $
    1,897
    
    
    $
    77,508
    
    
    $
    1,984Equity securities
    
    $
    746
    
    
    $
    75
    
    
    $
    63
    
    
    $
    3
    
    
    $
    809
    
    
    $
    78
 26




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##### Table of Contents



Unpaid Losses and Loss Adjustment Expenses
      Net Reserves at September 30, 2006
    
    Total NetPersonal
    
    Commercial
    
    
    
    
    
    Reserves atLines
    
    Lines
    
    
    
    
    
    December 31,Segment
    
    Segment
    
    Total
    
    2005(Dollars in thousands)High end of range
    
    $
    7,654
    
    
    $
    55,177
    
    
    $
    62,831
    
    
    $
    60,421Carried reserves
    
    
    7,269
    
    
    
    50,594
    
    
    
    57,863
    
    
    
    57,744Low end of range
    
    
    6,936
    
    
    
    47,716
    
    
    
    54,652
    
    
    
    53,130
  27




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##### Table of Contents



September 30,
    
    
    December 31,2006
    
    
    2005(Dollars in thousands)Case:Commercial lines productsLiability
    
    $
    13,100
    
    
    $
    13,180Property
    
    
    5,049
    
    
    
    8,246Commercial multi-peril
    
    
    16,473
    
    
    
    19,942Commercial automobile
    
    
    3,698
    
    
    
    4,325Other
    
    
    1,223
    
    
    
    772Total commercial lines
    
    
    39,543
    
    
    
    46,465Personal lines productsPersonal automobile
    
    
    5,354
    
    
    
    6,128Homeowners
    
    
    3,015
    
    
    
    8,893Total personal lines
    
    
    8,369
    
    
    
    15,021Total case reserves
    
    $
    47,912
    
    
    $
    61,486IBNR:Commercial lines productsLiability
    
    $
    14,051
    
    
    $
    13,742Property
    
    
    639
    
    
    
    3,868Commercial multi-peril
    
    
    15,530
    
    
    
    14,613Commercial automobile
    
    
    3,255
    
    
    
    2,622Other
    
    
    778
    
    
    
    805Total commercial lines
    
    
    34,253
    
    
    
    35,650Personal lines productsPersonal automobile
    
    
    6,148
    
    
    
    9,451Homeowners
    
    
    2,386
    
    
    
    11,191Total personal lines
    
    
    8,534
    
    
    
    20,642Total IBNR reserves
    
    $
    42,787
    
    
    $
    56,292Gross:Commercial lines productsLiability
    
    $
    27,151
    
    
    $
    26,922Property
    
    
    5,688
    
    
    
    12,114Commercial multi-peril
    
    
    32,003
    
    
    
    34,555Commercial automobile
    
    
    6,953
    
    
    
    6,947Other
    
    
    2,001
    
    
    
    1,577Total commercial lines
    
    
    73,796
    
    
    
    82,115Personal lines productsPersonal automobile
    
    
    11,502
    
    
    
    15,579Homeowners
    
    
    5,401
    
    
    
    20,084Total personal lines
    
    
    16,903
    
    
    
    35,663Total gross reserves
    
    $
    90,699
    
    
    $
    117,778
  28




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands)Gross reserves, beginning of period
    
    $
    96,429
    
    
    $
    86,523
    
    
    $
    117,778
    
    
    $
    96,561Less reinsurance recoverables, excluding Citizens assessment (1)
    
    
    37,010
    
    
    
    26,609
    
    
    
    60,034
    
    
    
    36,544Net balance
    
    
    59,419
    
    
    
    59,914
    
    
    
    57,744
    
    
    
    60,017Incurred related toCurrent year
    
    
    8,225
    
    
    
    13,549
    
    
    
    29,743
    
    
    
    33,856Prior years
    
    
    (930
    )
    
    
    (1,557
    )
    
    
    (2,426
    )
    
    
    (3,499
    )Total incurred
    
    
    7,295
    
    
    
    11,992
    
    
    
    27,317
    
    
    
    30,357Paid related toCurrent year
    
    
    4,854
    
    
    
    6,788
    
    
    
    10,941
    
    
    
    11,967Prior years
    
    
    3,997
    
    
    
    5,018
    
    
    
    16,257
    
    
    
    18,307Total paid
    
    
    8,851
    
    
    
    11,806
    
    
    
    27,198
    
    
    
    30,274Net balance, end of period
    
    
    57,863
    
    
    
    60,100
    
    
    
    57,863
    
    
    
    60,100Plus reinsurance recoverables, excluding Citizens assessment (1)
    
    
    32,836
    
    
    
    24,710
    
    
    
    32,836
    
    
    
    24,710Gross reserves, end of period
    
    $
    90,699
    
    
    $
    84,810
    
    
    $
    90,699
    
    
    $
    84,810
 
 (1)
    
    Reinsurance recoverables exclude a $669,000, $671,000 and $5,955,000 recoverable attributable
to the liability established for the anticipated Citizens assessment at September 30, 2006, June
30, 2006 and December 31, 2005, respectively. The liability for the Citizens assessment is not
included in unpaid losses and loss adjustment expenses, therefore the related recoverable from
reinsurers is also excluded. Reinsurance
    29




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##### Table of Contents



Contingencies
 Citizens Property Insurance Company
   Guaranty Fund Assessments
  30




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  Interest Rate Risk
   Hypothetical PercentageEstimated
    
    
    Increase (Decrease) inHypothetical Change in Interest Rates
    
    Estimated
    
    
    Change in
    
    
    
    
    
    
    ShareholdersAs of September 30, 2006
    
    Fair Value
    
    
    Fair Value
    
    
    Fair Value
    
    
    Equity(Dollars in thousands)200 basis point increase
    
    $
    96,305
    
    
    $
    (7,781
    )
    
    
    (7.5
    )%
    
    
    (5.9
    )%100 basis point increase
    
    
    100,173
    
    
    
    (3,913
    )
    
    
    (3.8
    )
    
    
    (3.0
    )No Change
    
    
    104,086
    
    
    
    
    
    
    
    
    
    
    
    100 basis point decrease
    
    
    107,833
    
    
    
    3,747
    
    
    
    3.6
    
    
    
    2.8200 basis point decrease
    
    
    111,272
    
    
    
    7,186
    
    
    
    6.9
    
    
    
    5.4
 Credit Risk
    Effects of Inflation
  31




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##### Table of Contents



Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Controls over Financial Reporting
  32




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  
 Item 6. Exhibits.
 ExhibitNumber
    
    Exhibit31.1
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.31.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 and Rule 13a-14(b) under the Securities Exchange Act
of 1934.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C
Section 1350 and Rule 13a-14(b) under the Securities Exchange Act
of 1934.
 33




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##### Table of Contents



NORTH POINTE HOLDINGS CORPORATIONDate: November 9, 2006
    By:
    /s/ James G. PetcoffJames G. PetcoffChief Executive Officer, President & Chairman of the BoardDate: November 9, 2006
    By:
    /s/ Brian J. RoneyBrian J. RoneyChief Financial Officer & Vice
President  Finance 34




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Exhibit31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) under the
Securities Exchange Act of 1934.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350 and Rule 13a-14(b) under the
Securities Exchange Act of 1934.
 35