##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2008
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File No. 001-33374
 CastlePoint Holdings, Ltd.
  Bermuda
    
    N/A(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 Victoria Hall, 11 Victoria Street
Hamilton HM 11, Bermuda
(Address of principal executive offices) (Zip code)
 (441) 294-6400
 (Registrants telephone number, including area code)
 
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer   þ
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



TABLE OF CONTENTS
 PAGEPart I  FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 4T. Controls and Procedures
    
    
    37Part II  OTHER INFORMATION
    
    
    37Item 1. Legal Proceedings
    
    
    37Item 1A. Risk Factors
    
    
    37Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 6. Exhibits
    
    
    39EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32: CERTIFICATION
    i




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 CastlePoint Holdings, Ltd.
Consolidated Balance Sheets
(Unaudited)
 September 30,
    
    
    December 31,(in thousands, except par value and share amounts)
    
    2008
    
    
    2007AssetsFixed-maturity securities, available-for-sale, at fair value (amortized cost of $548,629
and $484,489)
    
    $
    517,557
    
    
    $
    484,972Equity securities, available-for-sale, at fair value (cost of $45,970 and $44,036)
    
    
    33,665
    
    
    
    42,402Short-term investments, available-for-sale, at fair value (amortized cost of $10,460 and $0)
    
    
    10,460
    
    
    
    Total available-for-sale investments
    
    
    561,682
    
    
    
    527,374Investment in partnerships, equity method
    
    
    
    
    
    
    8,503Common trust securities  statutory business trusts, equity method
    
    
    4,022
    
    
    
    4,022Total investments
    
    
    565,704
    
    
    
    539,899Cash and cash equivalents
    
    
    217,511
    
    
    
    153,632Accrued investment income
    
    
    4,900
    
    
    
    4,064Premiums receivable (primarily with related parties  See note 3)
    
    
    169,150
    
    
    
    125,597Premiums receivable  programs (primarily with related parties  See note 3)
    
    
    33,819
    
    
    
    9,083Prepaid reinsurance premiums
    
    
    9,100
    
    
    
    3,475Reinsurance recoverable on paid loss & loss adjustment expense
    
    
    1,544
    
    
    
    22Reinsurance recoverable on unpaid loss & loss adjustment expense
    
    
    5,571
    
    
    
    315Deferred acquisition costs (primarily with related parties  See note 3)
    
    
    81,615
    
    
    
    73,073Deferred income taxes
    
    
    4,933
    
    
    
    7,051Deferred financing fees
    
    
    3,579
    
    
    
    3,673Other assets
    
    
    12,476
    
    
    
    7,174Total assets
    
    $
    1,109,902
    
    
    $
    927,058Liabilities and Shareholders EquityLiabilitiesLoss and loss adjustment expenses (primarily with related parties  See note 3)
    
    $
    222,412
    
    
    $
    121,741Unearned premium (primarily with related parties  See note 3)
    
    
    244,789
    
    
    
    217,518Losses payable (primarily with related parties  See note 3)
    
    
    31,544
    
    
    
    8,527Premiums payable (primarily with related parties  See note 3)
    
    
    73,723
    
    
    
    16,257Accounts payable and accrued expenses
    
    
    9,946
    
    
    
    3,592Other liabilities
    
    
    8,792
    
    
    
    3,595Subordinated debentures
    
    
    134,022
    
    
    
    134,022Total liabilities
    
    
    725,228
    
    
    
    505,252Shareholders EquityCommon shares ($0.01 par value, 100,000,000 shares authorized; 38,305,735
and 38,289,430 shares outstanding)
    
    
    383
    
    
    
    383Additional paid-in-capital
    
    
    386,867
    
    
    
    385,057Accumulated other comprehensive net loss
    
    
    (41,932
    )
    
    
    (1,051
    )Retained earnings
    
    
    39,356
    
    
    
    37,417Total shareholders equity
    
    
    384,674
    
    
    
    421,806Total liabilities and shareholders equity
    
    $
    1,109,902
    
    
    $
    927,058
  1




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##### Table of Contents



CastlePoint Holdings, Ltd.
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,($ in thousands, except share and per share amounts)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007RevenuesNet premiums earned (primarily with related
parties  See note 3)
    
    $
    113,275
    
    
    $
    65,610
    
    
    $
    324,494
    
    
    $
    167,146Insurance services revenue (primarily with related
parties  See note 3)
    
    
    10,772
    
    
    
    1,667
    
    
    
    27,121
    
    
    
    3,902Net investment income
    
    
    9,206
    
    
    
    7,538
    
    
    
    22,590
    
    
    
    21,417Net realized investment losses
    
    
    (10,470
    )
    
    
    (79
    )
    
    
    (11,906
    )
    
    
    (98
    )Total revenues
    
    
    122,783
    
    
    
    74,736
    
    
    
    362,299
    
    
    
    192,367ExpensesLoss and loss adjustment expenses (primarily with
related parties  See note 3)
    
    
    65,711
    
    
    
    34,482
    
    
    
    180,906
    
    
    
    87,790Commission and other acquisition expenses (primarily
with related parties  See note 3)
    
    
    46,861
    
    
    
    24,147
    
    
    
    133,870
    
    
    
    60,110Other operating expenses
    
    
    16,157
    
    
    
    4,268
    
    
    
    28,790
    
    
    
    11,983Interest expense
    
    
    2,874
    
    
    
    2,254
    
    
    
    8,543
    
    
    
    6,608Total expenses
    
    
    131,603
    
    
    
    65,151
    
    
    
    352,109
    
    
    
    166,491Income (loss) before income taxes
    
    
    (8,820
    )
    
    
    9,585
    
    
    
    10,190
    
    
    
    25,876Income tax benefit (expense)
    
    
    (4,332
    )
    
    
    956
    
    
    
    (3,463
    )
    
    
    2,254Net income (loss)
    
    $
    (13,152
    )
    
    $
    10,541
    
    
    $
    6,727
    
    
    $
    28,130Comprehensive income (loss)Net income (loss)
    
    $
    (13,152
    )
    
    $
    10,541
    
    
    $
    6,727
    
    
    $
    28,130Gross unrealized investment holding losses arising
during period
    
    
    (34,755
    )
    
    
    (2,032
    )
    
    
    (54,132
    )
    
    
    (7,977
    )Reclassification adjustment for losses included
in net income
    
    
    10,470
    
    
    
    (287
    )
    
    
    11,906
    
    
    
    (268
    )Income tax recovery related to items of other
comprehensive loss
    
    
    75
    
    
    
    140
    
    
    
    1,345
    
    
    
    725Total other comprehensive loss
    
    
    (24,210
    )
    
    
    (2,179
    )
    
    
    (40,881
    )
    
    
    (7,520
    )Comprehensive income (loss)
    
    $
    (37,362
    )
    
    $
    8,362
    
    
    $
    (34,154
    )
    
    $
    20,610Basic and diluted earnings per shareBasic
    
    $
    (0.34
    )
    
    $
    0.28
    
    
    $
    0.18
    
    
    $
    0.79Diluted
    
    $
    (0.34
    )
    
    $
    0.27
    
    
    $
    0.18
    
    
    $
    0.78Weighted average common shares outstandingBasic
    
    
    38,282,320
    
    
    
    38,277,148
    
    
    
    38,280,781
    
    
    
    35,658,652Diluted
    
    
    38,282,320
    
    
    
    38,549,305
    
    
    
    38,403,449
    
    
    
    36,008,824Dividends declared and paid per common shareCommon stock
    
    $
    0.050
    
    
    $
    0.025
    
    
    $
    0.125
    
    
    $
    0.075
  2




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CastlePoint Holdings, Ltd.
Consolidated Statements of Cash Flows
(Unaudited)
 Nine Months EndedSeptember 30,($ in thousands)
    
    2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    6,727
    
    
    $
    28,130Adjustments to reconcile net income to net cash provided by
(used in) operations:Net realized investment losses
    
    
    11,906
    
    
    
    98Depreciation and amortization
    
    
    285
    
    
    
    131Amortization of bond premium or discount
    
    
    (353
    )
    
    
    (438
    )Amortization of stock-based compensation expense
    
    
    1,810
    
    
    
    1,456Amortization of deferred financing fees
    
    
    95
    
    
    
    78Equity in limited partnerships
    
    
    3,584
    
    
    
    499Deferred income taxes
    
    
    3,463
    
    
    
    (2,254
    )(Increase) decrease in assetsAccrued investment income
    
    
    (836
    )
    
    
    (1,837
    )Premiums receivable
    
    
    (43,553
    )
    
    
    (48,181
    )Premiums receivable
    
    
    (24,736
    )
    
    
    (1,350
    )Prepaid reinsurance premiums
    
    
    (5,626
    )
    
    
    (2,343
    )Reinsurance recoverable on paid loss and loss adjustment expense
    
    
    (1,522
    )
    
    
    Reinsurance recoverable on unpaid loss and loss adjustment
expense
    
    
    (5,256
    )
    
    
    Deferred acquisition costs
    
    
    (8,542
    )
    
    
    (25,250
    )Other assets
    
    
    (5,378
    )
    
    
    (2,226
    )Increase (decrease) in liabilitiesLoss and loss adjustment expenses
    
    
    100,671
    
    
    
    66,618Unearned premium
    
    
    27,272
    
    
    
    78,177Losses payable
    
    
    23,017
    
    
    
    303Premiums payable  programs
    
    
    57,467
    
    
    
    4,727Accounts payable and accrued expenses
    
    
    6,354
    
    
    
    (880
    )Other liabilities
    
    
    5,197
    
    
    
    380Net cash flows provided by operations
    
    
    152,046
    
    
    
    95,838Cash flows from investing activities:Cost of fixed assets purchased
    
    
    (210
    )
    
    
    (998
    )Purchases of fixed-maturity securities
    
    
    (365,064
    )
    
    
    (384,713
    )Purchases of equity securities
    
    
    (27,994
    )
    
    
    (46,124
    )Sales or maturity of fixed-maturity securities
    
    
    290,536
    
    
    
    205,966Sales of other investments
    
    
    4,919
    
    
    
    40,000Sales of equity securities
    
    
    24,894
    
    
    
    (10,000
    )Net short-term investments (purchased) sold
    
    
    (10,460
    )
    
    
    51,626Net cash flows (used in) investing activities
    
    
    (83,379
    )
    
    
    (144,243
    )Cash flows from financing activities:Net proceeds from
subordinated debentures
    
    
    
    
    
    
    29,302Net proceeds from Initial Public Offering
    
    
    
    
    
    
    114,549Dividends to shareholders
    
    
    (4,788
    )
    
    
    (2,654
    )Net cash flows provided by (used in) financing activities
    
    
    (4,788
    )
    
    
    141,197Increase in cash and cash equivalents
    
    
    63,879
    
    
    
    92,792Cash and cash equivalents, beginning of period
    
    
    153,632
    
    
    
    34,784Cash and cash equivalents, end of period
    
    $
    217,511
    
    
    $
    127,576Supplemental disclosures of cash flow informationCash paid for income taxes
    
    $
    
    
    
    $
    19Cash paid for interest
    
    $
    8,600
    
    
    $
    6,719
  3




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CastlePoint Holdings, Ltd.
Consolidated Statement of Changes in Shareholders Equity
For The Nine Months Ended September 30, 2008
(Unaudited)
 AccumulatedAdditional
    
    
    Other
    
    
    
    
    
    TotalPaid-In
    
    
    Comprehensive
    
    
    Retained
    
    
    Shareholders($ in thousands)
    
    Common Stock
    
    
    Capital
    
    
    Income (loss)
    
    
    Earnings
    
    
    EquityBalance at December 31, 2007
    
    $
    383
    
    
    $
    385,057
    
    
    $
    (1,051
    )
    
    $
    37,417
    
    
    $
    421,806Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,727
    
    
    
    6,727Net unrealized losses
    
    
    
    
    
    
    
    
    
    $
    (40,881
    )
    
    
    
    
    
    
    (40,881
    )Stock based compensation
    
    
    
    
    
    
    1,810
    
    
    
    
    
    
    
    
    
    
    
    1,810Dividends to shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,788
    )
    
    
    (4,788
    )Balance at September 30, 2008
    
    $
    383
    
    
    $
    386,867
    
    
    $
    (41,932
    )
    
    $
    39,356
    
    
    $
    384,674
  4




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##### Table of Contents



CastlePoint Holdings, Ltd.
Notes to Consolidated Financial Statements
(Unaudited)
 Note 1  Basis of Presentation  Summary of Significant Accounting Policies
  Note 2  Accounting Pronouncements
 Fair
Value Measurements Effective date of FASB Statement No. 157
 Determining the Fair Value
of a Financial Asset When the Market for That Asset Is Not Active. Fair Value Measurements Accounting Changes and Error
Corrections.
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Business Combinations
 5




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##### Table of Contents



Noncontrolling Interests in Consolidated Financial
Statements-an amendment of ARB No. 51
 Disclosures about Derivative Instruments and Hedging
Activities
 The Hierarchy of Generally Accepted Accounting
Principles
 Note 3  Related Party Transactions
   Reinsurance Agreements:
  6




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Management Agreements:
   7




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in thousands)
    
    2008
    
    2007
    
    2008
    
    2007Net premiums earned
    
    $
    75,286
    
    
    $
    53,751
    
    
    $
    235,140
    
    
    $
    137,526Net losses incurred
    
    
    43,186
    
    
    
    28,058
    
    
    
    127,525
    
    
    
    70,907Net commission expense
    
    
    28,611
    
    
    
    18,768
    
    
    
    88,235
    
    
    
    48,066
  September 30,
    
    December 31,($ in millions)
    
    2008
    
    2007Premiums receivable
    
    $
    98.5
    
    
    $
    105.4Losses payable
    
    
    22.6
    
    
    
    1.7Unearned premium reserves
    
    
    178.8
    
    
    
    175.2Loss reserves
    
    
    171.1
    
    
    
    108.8Deferred acquisition costs
    
    
    59.4
    
    
    
    61.7
 Service and Expense Sharing Agreements:
  Proposed Acquisition:
 Note 4  Investments
  Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Estimated($ in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueSeptember 30, 2008Fixed Maturities:US government and agencies securities
    
    $
    6,072
    
    
    $
    155
    
    
    $
    
    
    
    $
    6,227Corporate fixed maturities
    
    
    143,094
    
    
    
    316
    
    
    
    (11,620
    )
    
    
    131,790Mortgage and asset-backed securities
    
    
    399,463
    
    
    
    505
    
    
    
    (20,428
    )
    
    
    379,540Total fixed maturities
    
    
    548,629
    
    
    
    976
    
    
    
    (32,048
    )
    
    
    517,557Equities
    
    
    45,970
    
    
    
    
    
    
    
    (12,305
    )
    
    
    33,665Short term investments
    
    
    10,460
    
    
    
    
    
    
    
    
    
    
    
    10,460Total available-for-sale investments
    
    $
    605,059
    
    
    $
    976
    
    
    $
    (44,353
    )
    
    $
    561,682December 31, 2007Fixed Maturities:US government and agencies securities
    
    $
    8,598
    
    
    $
    214
    
    
    $
    
    
    
    $
    8,812Corporate fixed maturities
    
    
    132,268
    
    
    
    1,372
    
    
    
    (1,370
    )
    
    
    132,270Mortgage and asset-backed securities
    
    
    343,623
    
    
    
    3,124
    
    
    
    (2,857
    )
    
    
    343,890Total fixed maturities
    
    
    484,489
    
    
    
    4,710
    
    
    
    (4,227
    )
    
    
    484,972Equities
    
    
    44,036
    
    
    
    28
    
    
    
    (1,662
    )
    
    
    42,402Total available-for-sale investments
    
    $
    528,525
    
    
    $
    4,738
    
    
    $
    (5,889
    )
    
    $
    527,374
 8




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Quoted Prices in
    
    
    Significant Other
    
    
    Significant OtherFair Value
    
    
    Active Markets
    
    
    Observable Inputs
    
    
    Unobservable($ in thousands)
    
    Measurements
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    Inputs (Level 3)Fixed maturity investments
    
    $
    517,557
    
    
    $
    
    
    
    $
    517,557
    
    
    $
    Short-term investments
    
    
    10,460
    
    
    
    
    
    
    
    10,460
    
    
    
    Equity investments
    
    
    33,665
    
    
    
    886
    
    
    
    32,779
    
    
    
    Total
    
    $
    561,682
    
    
    $
    886
    
    
    $
    560,796
    
    
    $
    
  Less than 12 Months
    
    
    More than 12 Months
    
    
    TotalNo. of
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized($ in thousands)
    
    Positions
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesSeptember 30, 2008Corporates
    
    
    70
    
    
    $
    93,188
    
    
    $
    (9,519
    )
    
    $
    9,131
    
    
    $
    (2,100
    )
    
    $
    102,319
    
    
    $
    (11,619
    )Mortgage &
asset-backed
    
    
    111
    
    
    
    323,163
    
    
    
    (13,825
    )
    
    
    5,787
    
    
    
    (6,603
    )
    
    
    328,950
    
    
    
    (20,428
    )Total fixed maturities
    
    
    181
    
    
    
    416,351
    
    
    
    (23,344
    )
    
    
    14,918
    
    
    
    (8,703
    )
    
    
    431,269
    
    
    
    (32,047
    )Equities
    
    
    27
    
    
    
    29,356
    
    
    
    (9,483
    )
    
    
    3,851
    
    
    
    (2,823
    )
    
    
    33,207
    
    
    
    (12,306
    )Total
    
    
    208
    
    
    $
    445,707
    
    
    $
    (32,827
    )
    
    $
    18,769
    
    
    $
    (11,526
    )
    
    $
    464,476
    
    
    $
    (44,353
    )December 31, 2007Corporates
    
    
    17
    
    
    $
    26,836
    
    
    $
    (1,370
    )
    
    $
    
    
    
    $
    
    
    
    $
    26,836
    
    
    $
    (1,370
    )Mortgage &
asset-backed
    
    
    23
    
    
    
    74,911
    
    
    
    (2,846
    )
    
    
    3,658
    
    
    
    (11
    )
    
    
    78,569
    
    
    
    (2,857
    )Total fixed maturities
    
    
    40
    
    
    
    101,747
    
    
    
    (4,216
    )
    
    
    3,658
    
    
    
    (11
    )
    
    
    105,405
    
    
    
    (4,227
    )Equities
    
    
    9
    
    
    
    19,721
    
    
    
    (1,662
    )
    
    
    
    
    
    
    
    
    
    
    19,721
    
    
    
    (1,662
    )Total
    
    
    49
    
    
    $
    121,468
    
    
    $
    (5,878
    )
    
    $
    3,658
    
    
    $
    (11
    )
    
    $
    125,126
    
    
    $
    (5,889
    )
  9




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##### Table of Contents



Corporate Fixed Maturities
 Mortgage and Asset-Backed Securities Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets
 Equity Securities
  
    
    The Company recorded an impairment charge of $6.2 million on Lehman preferred stock
holdings and Lehman corporate debt in the third quarter of 2008. The current fair value of
Lehman corporate debt on the Companys books at September 30, 2008 is $131,000.
    
    A fund investment with an initial cost basis of $10.0 million was put into run-off by
the fund manager during the second quarter of 2008 based on deteriorating conditions in the
financial sector. The fund is comprised of primarily investment grade securities with a
focus on the financial institutions segment of the credit markets (i.e., primarily trust
preferred, subordinated debt and preferred securities). In June 2008, the fund returned
$4.9 million leaving a remaining balance of $5.2 million. The Company recorded an
other-than-temporary impairment charge of $2.0 million in June 2008, based on the belief
that the fund would be liquidated by year end 2008 prior to a full recovery. During the
third quarter of 2008, the company reflected an additional impairment charge of $1.5
million based on the fair value at September 30, 2008 of $1.6 million.
    
    The Company recorded impairment charges of $0.7 million in the first and second quarters
of 2008. In September 2008, the company recorded additional charges in the amount of $0.3
million relating to three publicly traded mortgage REITs, whose purpose is to own various
mortgage-backed securities, including CMBS and agency and non-agency residential
mortgage-backed securities (MBS). These investments were negatively impacted by the
current real estate crisis and all three have reduced their dividends. The aggregate fair
value of these securities at September 30, 2008 was $0.9 million.
 10




---



##### Table of Contents




    
    The Company recorded impairment charges of $0.8 million relating to Fannie Mae and
Freddie Mac preferred stock in June of 2008. These securities were subsequently sold in
July of 2008.
   September 30, 2008
    
    
    December 31, 2007Percentage of
    
    
    
    
    
    
    Percentage of($ in thousands)
    
    Fair Value
    
    
    Fair Value
    
    
    Fair Value
    
    
    Fair ValueRatingU.S. Treasury securities
    
    $
    6,227
    
    
    
    1.2
    %
    
    $
    3,218
    
    
    
    0.7
    %AAA
    
    
    381,594
    
    
    
    73.7
    %
    
    
    352,079
    
    
    
    72.6
    %AA
    
    
    38,491
    
    
    
    7.5
    %
    
    
    46,920
    
    
    
    9.6
    %A
    
    
    47,206
    
    
    
    9.1
    %
    
    
    50,312
    
    
    
    10.4
    %BBB
    
    
    42,081
    
    
    
    8.1
    %
    
    
    30,660
    
    
    
    6.3
    %BB
    
    
    1,958
    
    
    
    0.4
    %
    
    
    1,783
    
    
    
    0.4
    %Total
    
    $
    517,557
    
    
    
    100.0
    %
    
    $
    484,972
    
    
    
    100.0
    %
 Note 5  Dividends Declared
   11




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##### Table of Contents



Note 6  Earnings per Share
  Income
    
    
    Shares
    
    
    Per Share($ in thousands, except share and per share amounts)
    
    (Numerator)
    
    
    (Denominator)
    
    
    AmountThree months ended September 30, 2008Net Loss
    
    $
    (13,152
    )Basic earnings per share
    
    $
    (13,152
    )
    
    
    38,282,320
    
    
    $
    (0.34
    )Effect of dilutive securities:Stock options
    
    
    
    
    
    
    Unvested restricted stock
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    Diluted earnings per share
    
    $
    (13,152
    )
    
    
    38,282,320
    
    
    $
    (0.34
    )Three months ended September 30, 2007Net Income
    
    $
    10,541Basic earnings per share
    
    $
    10,541
    
    
    
    38,277,148
    
    
    $
    0.28Effect of dilutive securities:Stock options
    
    
    
    
    
    
    51,106Unvested restricted stock
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    221,051Diluted earnings per share
    
    $
    10,541
    
    
    
    38,549,305
    
    
    $
    0.27Nine months ended September 30, 2008Net Income
    
    $
    6,727Basic earnings per share
    
    $
    6,727
    
    
    
    38,280,781
    
    
    $
    0.18Effect of dilutive securities:Stock options
    
    
    
    
    
    
    32,997Unvested restricted stock
    
    
    
    
    
    
    13,977Warrants
    
    
    
    
    
    
    75,694Diluted earnings per share
    
    $
    6,727
    
    
    
    38,403,449
    
    
    $
    0.18Nine months ended September 30, 2007Net Income
    
    $
    28,130Basic earnings per share
    
    $
    28,130
    
    
    
    35,658,652
    
    
    $
    0.79Effect of dilutive securities:Stock options
    
    
    
    
    
    
    76,960Unvested restricted stock
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    273,212Diluted earnings per share
    
    $
    28,130
    
    
    
    36,008,824
    
    
    $
    0.78
  12




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##### Table of Contents



Note 7
 Employee Compensation Plans
 Long-Term Equity Compensation Plan
  Nine Months Ended September 30,2008
    
    
    2007Weighted
    
    
    
    
    
    
    WeightedNumber of
    
    
    Average
    
    
    Number of
    
    
    AverageShares
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise PriceOutstanding at December 31, 2007
    
    
    1,618,783
    
    
    $
    11.50
    
    
    
    1,082,666
    
    
    $
    10.00Granted at market value
    
    
    499,518
    
    
    
    10.12
    
    
    
    556,254
    
    
    
    14.52Forfeitures and expirations
    
    
    
    
    
    
    
    
    
    
    (20,137
    )
    
    
    14.50Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at September 30, 2008
    
    
    2,118,301
    
    
    
    11.18
    
    
    
    1,618,783
    
    
    
    11.50Exercisable, end of period
    
    
    908,105
    
    
    
    10.89
    
    
    
    376,133
    
    
    
    10.00Weighted average fair value per share of
options granted
    
    
    
    
    
    
    4.11
    
    
    
    
    
    
    
    4.28
  Options Outstanding
    
    
    Options ExercisableAverageRemainingNumber of
    
    
    Contractual
    
    
    Average
    
    
    Number of
    
    
    AverageRange of Exercise Prices
    
    Shares
    
    
    Life
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise PriceSeptember 30, 2008$10.00 - 2006
    
    
    1,082,666
    
    
    7.50 years
    
    $
    10.00
    
    
    
    729,399
    
    
    $
    10.00$14.50 - 03/22/07
    
    
    519,310
    
    
    8.50 years
    
    
    14.50
    
    
    
    173,104
    
    
    
    14.50$15.25 - 04/30/07
    
    
    16,807
    
    
    8.58 years
    
    
    15.25
    
    
    
    5,602
    
    
    
    15.25$10.12 - 03/10/08
    
    
    499,518
    
    
    9.44 years
    
    
    10.12
    
    
    
    
    
    
    
    10.12Total options
    
    
    2,118,301
    
    
    8.21 years
    
    $
    11.18
    
    
    
    908,105
    
    
    $
    10.89December 31, 2007$10.00 - 2006
    
    
    1,082,666
    
    
    8.25 years
    
    $
    10.00
    
    
    
    376,133
    
    
    $
    10.00$14.50 - 03/22/07
    
    
    519,310
    
    
    9.25 years
    
    
    14.50
    
    
    
    
    
    
    
    $15.25 - 04/30/07
    
    
    16,807
    
    
    9.33 years
    
    
    15.25
    
    
    
    
    
    
    
    Total options
    
    
    1,618,783
    
    
    8.58 years
    
    $
    11.50
    
    
    
    376,133
    
    
    $
    10.00
   13




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##### Table of Contents



Note 8
 Segment Information
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,($ in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Insurance SegmentRevenues:Net premiums earned
    
    $
    35,794
    
    
    $
    4,644
    
    
    $
    88,763
    
    
    $
    5,975Total revenues
    
    
    35,794
    
    
    
    4,644
    
    
    
    88,763
    
    
    
    5,975Expenses:Net loss and loss adjustment expenses
    
    
    19,175
    
    
    
    2,997
    
    
    
    47,682
    
    
    
    3,715Commission expenses
    
    
    12,129
    
    
    
    1,997
    
    
    
    31,614
    
    
    
    2,546Other underwriting expenses
    
    
    1,705
    
    
    
    130
    
    
    
    3,637
    
    
    
    151Total expenses
    
    
    33,009
    
    
    
    5,124
    
    
    
    82,933
    
    
    
    6,412Segment profit (loss)
    
    $
    2,785
    
    
    $
    (480
    )
    
    $
    5,830
    
    
    $
    (437
    )Reinsurance SegmentRevenues:Net premiums earned
    
    $
    77,482
    
    
    $
    60,965
    
    
    $
    235,731
    
    
    $
    161,171Total revenues
    
    
    77,482
    
    
    
    60,965
    
    
    
    235,731
    
    
    
    161,171Expenses:Net loss and loss adjustment expenses
    
    
    46,535
    
    
    
    31,485
    
    
    
    133,224
    
    
    
    84,075Net Commission expenses
    
    
    25,524
    
    
    
    20,929
    
    
    
    78,989
    
    
    
    54,634Other underwriting expenses
    
    
    1,412
    
    
    
    1,125
    
    
    
    3,537
    
    
    
    2,614Total expenses
    
    
    73,471
    
    
    
    53,539
    
    
    
    215,750
    
    
    
    141,323Segment profit
    
    $
    4,011
    
    
    $
    7,426
    
    
    $
    19,981
    
    
    $
    19,848Insurance Services SegmentRevenues:Direct commission revenue from
program business
    
    $
    11,217
    
    
    $
    1,667
    
    
    $
    29,212
    
    
    $
    3,902Total revenues
    
    
    11,217
    
    
    
    1,667
    
    
    
    29,212
    
    
    
    3,902Expenses:Direct commission expense from
program business
    
    
    9,653
    
    
    
    1,222
    
    
    
    25,358
    
    
    
    2,930Other insurance services expenses
    
    
    2,231
    
    
    
    1,435
    
    
    
    6,234
    
    
    
    4,566Total expenses
    
    
    11,884
    
    
    
    2,657
    
    
    
    31,592
    
    
    
    7,496Segment loss
    
    $
    (667
    )
    
    $
    (990
    )
    
    $
    (2,380
    )
    
    $
    (3,594
    )
 14




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,($ in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Insurance segment
    
    $
    35,794
    
    
    $
    4,644
    
    
    $
    88,763
    
    
    $
    5,975Reinsurance segment
    
    
    77,482
    
    
    
    60,965
    
    
    
    235,731
    
    
    
    161,171Insurance services segment
    
    
    11,217
    
    
    
    1,667
    
    
    
    29,212
    
    
    
    3,902Total segment revenues
    
    
    124,493
    
    
    
    67,277
    
    
    
    353,706
    
    
    
    171,048Segment revenue elimination
    
    
    (447
    )
    
    
    
    
    
    
    (2,091
    )
    
    
    Net investment income
    
    
    9,206
    
    
    
    7,538
    
    
    
    22,590
    
    
    
    21,417Net realized investment gains (losses)
    
    
    (10,470
    )
    
    
    (79
    )
    
    
    (11,906
    )
    
    
    (98
    )Consolidated revenues
    
    $
    122,783
    
    
    $
    74,736
    
    
    $
    362,299
    
    
    $
    192,367
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,($ in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Insurance segment profit (loss)
    
    $
    2,785
    
    
    $
    (480
    )
    
    $
    5,830
    
    
    $
    (437
    )Reinsurance segment profit (loss)
    
    
    4,011
    
    
    
    7,426
    
    
    
    19,981
    
    
    
    19,848Insurance services segment (loss)
    
    
    (667
    )
    
    
    (990
    )
    
    
    (2,380
    )
    
    
    (3,594
    )Segment profit
    
    
    6,129
    
    
    
    5,956
    
    
    
    23,431
    
    
    
    15,817Net investment income
    
    
    9,206
    
    
    
    7,538
    
    
    
    22,590
    
    
    
    21,417Net realized investment gains (losses)
    
    
    (10,470
    )
    
    
    (79
    )
    
    
    (11,906
    )
    
    
    (98
    )Corporate expenses
    
    
    (10,811
    )
    
    
    (1,576
    )
    
    
    (15,382
    )
    
    
    (4,652
    )Interest expense
    
    
    (2,875
    )
    
    
    (2,254
    )
    
    
    (8,543
    )
    
    
    (6,608
    )Income (loss) before taxes
    
    $
    (8,820
    )
    
    $
    9,585
    
    
    $
    10,190
    
    
    $
    25,876
 Note 9  Security Requirements
  Note 10  Proposed Merger with Tower and Agreement to Acquire HIG, Inc.
    15




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##### Table of Contents



Note 11  Subsequent Events
 Dividends
  16




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Note on Forward-Looking Statements
   
    
    our lack of extensive operating history;
 
    
    our significant dependence on Tower for revenue, which is subject to change as a result of changes in Towers core business
growth and ability to raise capital or Towers choice to reinsure its business with us at the same volume levels;
 
    
    the possibility that the acquisition of the Company by Tower will not be approved by Tower or CastlePoint Holdings
Shareholders or certain regulatory authorities, or will otherwise fail to be consummated;
 
    
    the possibility that the acquisition of the HIG, Inc. (Hermitage) will not receive regulatory approval or otherwise fail to
be consummated;
 
    
    if the acquisition of the Company by Tower is consummated, the transaction will result in the Company being a controlled
foreign corporation (CFC) subject to U.S. tax;
 
    
    in the event the acquisition of the Company by Tower is not consummated, there is the risk that CastlePoint Bermuda
Holdings or CastlePoint Holdings may be deemed to be engaged in a U.S. trade or business, or that CastlePoint Re may be
considered to be doing business through a permanent establishment in the United States, either of which would subject these
companies to U.S. taxation;
 
    
    changes in regulation or tax laws applicable to us, our brokers or our customers;
 
    
    the terms of our arrangements with Tower may change as a result of the regulatory review and approval process;
 
    
    we may be unable to write premiums with clients other than Tower at favorable terms and conditions in view of the
competition in the reinsurance market;
 
    
    we may need additional capital for our reinsurance and insurance businesses, as well as to acquire at least one additional
broadly-licensed U.S. insurance company for our insurance business, and to make strategic investments in some of our
clients, and, that we may not be able to obtain such capital on favorable terms or at all in light of the market price of
our stock in relation to book value, as well as the current state of the capital markets and the insurance industry;
 
    
    the ineffectiveness or obsolescence of our planned business strategy due to changes in current or future market conditions;
for example, due to the current competitive reinsurance market conditions, it may be appropriate to shift more of our
capital from our reinsurance operations in Bermuda to write insurance business in the U.S., which may require us to seek
acquisitions of distribution sources as well as depend more on Tower to provide us with business. Such a change in
business strategy would increase our tax liability by generating more business in the U.S.;
 
    
    changes in the availability, cost or quality of insurance business that meets our reinsurance underwriting standards;
 
    
    actual results, changes in market conditions, the occurrence of catastrophic losses and other factors outside our control
that may require us to alter our anticipated methods of conducting our business, such as the nature, amount and types of
risk we assume and the terms, limits or other characteristics of the products we write or intend to write;
 
    
    possible future downgrade in the A.M. Best rating of some or all of our insurance or reinsurance subsidiaries, or any that
we may acquire. A.M Best recently placed Tower and CastlePoints rating under review with negative implications in
response to our announcement regarding Towers acquisition of CastlePoint. Please refer to Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations-Ratings for additional information.
 
    
    changes in rating agency policies or practices; and
 17




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##### Table of Contents




    
    changes in general economic conditions, including inflation, foreign currency exchange rates, interest rates, valuation of
investments, and other factors, such as political conditions affecting the financial environment, extended national or
regional recessions, changes in liquidity in the capital markets, further contraction of credit markets, or changes in
volatility in interest rates or consumer confidence.
   Overview
  Tower
     18




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##### Table of Contents



HIG, Inc.
  Critical Accounting Estimates
  
    
    premiums;
 19




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##### Table of Contents




    
    losses and loss adjustment expense reserves;
 
    
    deferred acquisition costs;
 
    
    investments including other-than-temporary impairments;
 
    
    reinsurance accounting;
 
    
    deferred taxes; and
 
    
    U.S. taxation.
   i.e.
  20




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##### Table of Contents



i.e
 Non-GAAP Measures
  Consolidated combined ratio
 Operating net income and operating return on average equity.
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,($ in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Operating net income, net of tax, excluding expenses
relating to the merger with Tower
    
    $
    10,345
    
    
    $
    11,528
    
    
    $
    34,954
    
    
    $
    29,136Reconciliation to net income:Expenses related to the merger with Tower
    
    
    (9,049
    )
    
    
    
    
    
    
    (9,382
    )
    
    
    Realized and unrealized gains (losses) on
investment in Partnership (1)
    
    
    (54
    )
    
    
    (908
    )
    
    
    (3,584
    )
    
    
    (908
    )Net realized gains (losses) on investments
    
    
    (10,470
    )
    
    
    (79
    )
    
    
    (11,906
    )
    
    
    (98
    )Tax effect on realized and unrealized gains (losses) (2)
    
    
    (3,924
    )
    
    
    
    
    
    
    (3,355
    )
    
    
    Net income (loss)
    
    $
    (13,152
    )
    
    $
    10,541
    
    
    $
    6,727
    
    
    $
    28,130
 
 (1)
    
    Realized and unrealized gains and losses from our investment in a limited partnership were
recorded as a component of net investment income.(2)
    
    Difference between tax benefit on a pro forma basis for operating income and actual tax
expense recorded. 21




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##### Table of Contents



Consolidated Results of Operations
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,($ in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007RevenuesNet premiums earned
    
    $
    113,275
    
    
    $
    65,610
    
    
    $
    324,494
    
    
    $
    167,146Commission income
    
    
    10,772
    
    
    
    1,667
    
    
    
    27,121
    
    
    
    3,902Net investment income
    
    
    9,206
    
    
    
    7,538
    
    
    
    22,590
    
    
    
    21,417Net realized investment gains (losses)
    
    
    (10,470
    )
    
    
    (79
    )
    
    
    (11,906
    )
    
    
    (98
    )Total revenues
    
    
    122,783
    
    
    
    74,736
    
    
    
    362,299
    
    
    
    192,367ExpensesNet loss and loss adjustment expenses
    
    
    65,711
    
    
    
    34,482
    
    
    
    180,906
    
    
    
    87,790Commission and
other acquisition
expenses
    
    
    46,861
    
    
    
    24,147
    
    
    
    133,870
    
    
    
    60,110Other operating expenses
    
    
    16,157
    
    
    
    4,268
    
    
    
    28,790
    
    
    
    11,983Interest Expense
    
    
    2,874
    
    
    
    2,254
    
    
    
    8,543
    
    
    
    6,608Total expenses
    
    
    131,603
    
    
    
    65,151
    
    
    
    352,109
    
    
    
    166,491Income (loss) before taxes
    
    
    (8,820
    )
    
    
    9,585
    
    
    
    10,190
    
    
    
    25,876Income tax benefit (expense)
    
    
    (4,332
    )
    
    
    956
    
    
    
    (3,463
    )
    
    
    2,254Net income (loss)
    
    $
    (13,152
    )
    
    $
    10,541
    
    
    $
    6,727
    
    
    $
    28,130Key Measures:Return on equity
    
    
    (13.0
    %)
    
    
    10.3
    %
    
    
    2.2
    %
    
    
    10.7
    %Consolidated combined ratio
    
    
    104.1
    %
    
    
    93.3
    %
    
    
    97.5
    %
    
    
    93.3
    %
  Consolidated Results of Operations for the Three Months Ended September 30, 2008 and 2007
 Summary .
    22




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##### Table of Contents



Total revenues and premiums earned .
 Commission income .
 Net investment income and net realized investment losses .
  Loss and loss adjustment expenses .
 Operating expenses .
  Income tax (expense) benefit .
 23




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##### Table of Contents



Net income (loss) and return on average equity .
 Consolidated combined ratio .
 Consolidated Results of Operations for the Nine months Ended September 30, 2008 and 2007
 Summary
 Total revenues and premiums earned .
 Commission income .
 Net investment income and net realized investment losses .
  24




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##### Table of Contents



Loss and loss adjustment expenses .
 Operating expenses .
 Interest expense .
 Income tax (expense) benefit .
 Net income and return on average equity .
 Consolidated combined ratio .
 25




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Insurance Segment Results of Operations
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,($ in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007RevenuesPremiums earnedGross premiums earned
    
    $
    50,463
    
    
    $
    6,063
    
    
    $
    120,364
    
    
    $
    7,394Less: ceded premiums earned
    
    
    (14,669
    )
    
    
    (1,419
    )
    
    
    (31,601
    )
    
    
    (1,419
    )Net premiums earned
    
    
    35,794
    
    
    
    4,644
    
    
    
    88,763
    
    
    
    5,975Ceding commision revenue
    
    
    3,404
    
    
    
    
    
    
    
    5,812
    
    
    
    Total revenues
    
    
    39,198
    
    
    
    4,644
    
    
    
    94,575
    
    
    
    5,975ExpensesLoss and loss adjustment expensesGross loss and loss adjustment expenses
    
    
    22,976
    
    
    
    3,312
    
    
    
    58,578
    
    
    
    4,030Less: ceded loss and loss adjustment expenses
    
    
    (3,801
    )
    
    
    (315
    )
    
    
    (10,896
    )
    
    
    (315
    )Net loss and loss adjustment expenses
    
    
    19,175
    
    
    
    2,997
    
    
    
    47,682
    
    
    
    3,715Underwriting expensesCeding commission expense
    
    
    15,533
    
    
    
    1,997
    
    
    
    37,426
    
    
    
    2,546Other underwriting expenses
    
    
    1,705
    
    
    
    130
    
    
    
    3,637
    
    
    
    151Total underwriting expenses
    
    
    17,238
    
    
    
    2,127
    
    
    
    41,063
    
    
    
    2,697Underwriting profit (loss)
    
    $
    2,785
    
    
    $
    (480
    )
    
    $
    5,830
    
    
    $
    (437
    )Key MeasuresPremiums WrittenGross premiums written
    
    $
    56,708
    
    
    $
    28,696
    
    
    $
    134,060
    
    
    $
    42,229Less: Ceded premiums written
    
    
    (33,820
    )
    
    
    (7,096
    )
    
    
    54,944
    
    
    
    (7,096
    )Net premiums written
    
    $
    22,888
    
    
    $
    21,600
    
    
    $
    79,116
    
    
    $
    35,133Loss RatiosGross
    
    
    45.5
    %
    
    
    54.6
    %
    
    
    48.7
    %
    
    
    54.5
    %Net
    
    
    53.6
    %
    
    
    64.5
    %
    
    
    53.7
    %
    
    
    62.2
    %Accident Year Loss RatiosGross
    
    
    45.2
    %
    
    
    54.6
    %
    
    
    48.7
    %
    
    
    54.5
    %Net
    
    
    51.8
    %
    
    
    64.5
    %
    
    
    53.4
    %
    
    
    62.2
    %Underwriting Expense RatiosGross
    
    
    34.2
    %
    
    
    35.1
    %
    
    
    34.1
    %
    
    
    36.5
    %Net
    
    
    38.6
    %
    
    
    45.8
    %
    
    
    39.7
    %
    
    
    45.1
    %Combined RatiosGross
    
    
    79.7
    %
    
    
    89.7
    %
    
    
    82.8
    %
    
    
    91.0
    %Net
    
    
    92.2
    %
    
    
    110.3
    %
    
    
    93.4
    %
    
    
    107.3
    %
 26




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##### Table of Contents



Insurance Segment Results of Operations for the Three Months Ended September 30, 2008 and 2007
 Gross premiums and net premiums .
  Gross and net loss and loss adjustment expenses and loss ratio .
 Underwriting expenses and underwriting expense ratio .
 Underwriting profit and net combined ratio .
 Insurance Segment Results of Operations for the Nine months Ended September 30, 2008 and 2007
 Gross premiums and net premiums .
  Gross and net loss and loss adjustment expenses and loss ratio .
 27




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Underwriting expenses and underwriting expense ratio .
 Underwriting profit and net combined ratio .
 28




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##### Table of Contents



Reinsurance Segment Results of Operations
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,($ in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007RevenuesPremiums earnedGross premiums earned
    
    $
    77,475
    
    
    $
    60,965
    
    
    $
    235,758
    
    
    $
    161,171Less: ceded premiums earned
    
    
    7
    
    
    
    
    
    
    
    (27
    )
    
    
    Net premiums earned
    
    
    77,482
    
    
    
    60,965
    
    
    
    235,731
    
    
    
    161,171ExpensesLoss and loss adjustment expensesGross loss and loss adjustment expenses
    
    
    46,535
    
    
    
    31,485
    
    
    
    133,224
    
    
    
    84,075Less: ceded loss and loss adjustment expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss and loss adjustment expenses
    
    
    46,535
    
    
    
    31,485
    
    
    
    133,224
    
    
    
    84,075Underwriting expensesCeding commissions expenses
    
    
    25,524
    
    
    
    20,929
    
    
    
    78,989
    
    
    
    54,634Other underwriting expenses
    
    
    1,412
    
    
    
    1,125
    
    
    
    3,537
    
    
    
    2,614Total underwriting expenses
    
    
    26,936
    
    
    
    22,054
    
    
    
    82,526
    
    
    
    57,248Underwriting profit
    
    $
    4,011
    
    
    $
    7,426
    
    
    $
    19,981
    
    
    $
    19,848Key MeasuresPremiums WrittenGross premiums written
    
    $
    77,083
    
    
    $
    68,975
    
    
    $
    267,050
    
    
    $
    207,849Less: ceded premiums written
    
    
    6
    
    
    
    
    
    
    
    (27
    )
    
    
    Net premiums written
    
    $
    77,089
    
    
    $
    68,975
    
    
    $
    267,023
    
    
    $
    207,849Loss RatiosGross
    
    
    60.1
    %
    
    
    51.6
    %
    
    
    56.5
    %
    
    
    52.2
    %Net
    
    
    60.1
    %
    
    
    51.6
    %
    
    
    56.5
    %
    
    
    52.2
    %Accident Year Loss RatiosGross
    
    
    59.9
    %
    
    
    52.3
    %
    
    
    56.7
    %
    
    
    52.5
    %Net
    
    
    59.9
    %
    
    
    52.3
    %
    
    
    56.7
    %
    
    
    52.5
    %Underwriting Expense RatiosGross
    
    
    34.8
    %
    
    
    36.2
    %
    
    
    35.0
    %
    
    
    35.5
    %Net
    
    
    34.8
    %
    
    
    36.2
    %
    
    
    35.0
    %
    
    
    35.5
    %Combined RatiosGross
    
    
    94.9
    %
    
    
    87.8
    %
    
    
    91.5
    %
    
    
    87.7
    %Net
    
    
    94.9
    %
    
    
    87.8
    %
    
    
    91.5
    %
    
    
    87.7
    %
 Reinsurance Segment Results of Operations for the Three Months Ended September 30, 2008 and 2007
 Gross premiums and net premiums .
 29




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##### Table of Contents



Loss and loss adjustment expenses and loss ratio .
 Underwriting expenses and underwriting expense ratio .
 Underwriting profit and combined ratio .
 Reinsurance Segment Results of Operations for the Nine Months Ended September 30, 2008 and 2007
 Gross premiums and net premiums .
  Loss and loss adjustment expenses and loss ratio.
  Underwriting expenses and underwriting expense ratio.
 30




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Underwriting profit and combined ratio .
 Insurance Services Segment Results of Operations
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,($ in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007RevenueDirect commission revenue from programs
    
    $
    11,217
    
    
    $
    1,667
    
    
    $
    29,212
    
    
    $
    3,902Total revenues
    
    
    11,217
    
    
    
    1,667
    
    
    
    29,212
    
    
    
    3,902ExpensesDirect commissions expense from programs
    
    
    9,653
    
    
    
    1,222
    
    
    
    25,358
    
    
    
    2,930Other insurance services expenses
    
    
    2,231
    
    
    
    1,435
    
    
    
    6,234
    
    
    
    4,566Total expenses
    
    
    11,884
    
    
    
    2,657
    
    
    
    31,592
    
    
    
    7,496Insurance Services loss
    
    $
    (667
    )
    
    $
    (990
    )
    
    $
    (2,380
    )
    
    $
    (3,594
    )
 Insurance Services Segment Results of Operations for the Three Months Ended September 30, 2008 and
2007
 Direct commission revenue from programs .
 Direct commission expense for programs .
 Other insurance services expenses .
 Insurance services loss .
 Insurance Services Segment Results of Operations for the Nine months Ended September 30, 2008 and
2007
 Direct commission revenue from programs .
 31




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##### Table of Contents



Direct commission expense for programs .
 Other insurance services expenses .
 Insurance services loss .
 Liquidity and Capital Resources
       32




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##### Table of Contents



Sources and Uses of Cash and Cash Flows
       Cash Flows
  33




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##### Table of Contents



Nine Months EndedSeptember 30,($ in thousands)
    
    2008
    
    
    2007Cash provided by (used in):Operating activities
    
    $
    152,046
    
    
    $
    95,838Investing activities
    
    
    (83,379
    )
    
    
    (144,243
    )Financing activities
    
    
    (4,788
    )
    
    
    141,197Net increase (decrease) in cash and cash equivalents
    
    $
    63,879
    
    
    $
    92,792
     Security Requirements
  Investments
   34




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##### Table of Contents



Contractual Obligations
  35




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##### Table of Contents



Off-Balance Sheet Transactions
  Ratings
   
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Sensitivity Analysis
     36




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##### Table of Contents



Estimated Increase (Decrease)
    
    Estimated Percentagein Fair Value
    
    Increase (Decrease)Change in Interest Rate
    
    ($ in thousands)
    
    in Fair Value300 basis point rise
    
    
    (61,116
    )
    
    
    (11.1
    )%200 basis point rise
    
    
    (40,328
    )
    
    
    (7.3
    )%100 basis point rise
    
    
    (18,739
    )
    
    
    (3.4
    )%100 basis point decline
    
    
    21,952
    
    
    
    4.0
    %200 basis point decline
    
    
    38,214
    
    
    
    7.0
    %300 basis point decline
    
    
    49,471
    
    
    
    9.0
    %
   
 Item 4T. Controls and Procedures
   
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  37




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##### Table of Contents



We are dependent on Tower and its subsidiaries for a substantial portion of our business.
   The proposed acquisition of the Company by Tower may not be consummated.
  §
    
    approval by Towers stockholders of an amendment to its certificate of incorporation to
increase the number of authorized shares of common stock;§
    
    approval by our shareholders of the merger;§
    
    approvals by regulatory authorities, including the Bermuda Monetary Authority;§
    
    the absence of laws and regulatory actions by governmental authorities that impose
conditions or restrictions upon us that would reasonably be expected to have a material
adverse effect on our financial condition, properties, assets, liabilities, obligations,
businesses or results of operations or on our ability to perform our obligations under the
merger agreement or to consummate the merger on a timely basis; and§
    
    other customary closing conditions.
  The proposed acquisition of the Hermitage may not be consummated.
  Our operating results may be adversely affected by the current worldwide economic conditions.
  38




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
    
    Not applicable(b)
    
    On March 22, 2007, the SEC declared effective the Companys Registration Statement on Form
S-1, as amended (Registration No. 333-139939), filed in connection with the initial public
offering of its common shares, par value $0.01 per share.
   (c)
    
    Not applicable.
 
 Item 6. Exhibits
 2.1
    
    Agreement and Plan of Merger dated August 4, 2008 between Tower Group, Inc., Ocean I and
CastlePoint Holdings, Ltd., filed as Exhibit 2.1 to the Companys Current Report on Form
8-K filed on August 7, 20082.2
    
    Stock Purchase Agreement dated August 27, 2008 between CastlePoint Reinsurance Company,
Ltd., HIG, Inc. and Brookfield US Corporation, filed as Exhibit 2.1 to the Companys
Current Report on Form 8-K filed on September 2, 20082.3
    
    Asset Purchase Agreement dated August 26, 2008 between and among CastlePoint Reinsurance
Company, Ltd., Tower Insurance Company of New York, Tower National Insurance Company,
Preserver Insurance Company, Mountain Valley Insurance Company and Tower Risk Management
Corp., filed as Exhibit 2.2 to the Companys Current Report on Form 8-K filed on
September 2, 200831.1
    
    Chief Executive Officer  Certification pursuant to Sarbanes-Oxley Act of 2002 Section 30231.2
    
    Chief Financial Officer  Certification pursuant to Sarbanes-Oxley Act of 2002 Section 30232
    
    Chief Executive Officer and Chief Financial Officer  Certification pursuant to
Sarbanes-Oxley Act of 2002 Section 906
 
 SIGNATURES
  CASTLEPOINT HOLDINGS, LTD.
                     (Registrant)Date:  November 14, 2008
    /s/ Michael H. LeeMichael H. LeeChairman of the Board and
Chief Executive OfficerDate:  November 14, 2008
    /s/ Joel. S. WeinerJoel S. WeinerSenior Vice President and
Chief Financial Officer 39




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##### Table of Contents



EXHIBIT INDEX
 2.1
    
    Agreement and Plan of Merger dated August 4, 2008 between Tower Group, Inc., Ocean I and
CastlePoint Holdings, Ltd., filed as Exhibit 2.1 to the Companys Current Report on Form
8-K filed on August 7, 20082.2
    
    Stock Purchase Agreement dated August 27, 2008 between CastlePoint Reinsurance Company,
Ltd., HIG, Inc. and Brookfield US Corporation, filed as Exhibit 2.1 to the Companys
Current Report on Form 8-K filed on September 2, 20082.3
    
    Asset Purchase Agreement dated August 26, 2008 between and among CastlePoint Reinsurance
Company, Ltd., Tower Insurance Company of New York, Tower National Insurance Company,
Preserver Insurance Company, Mountain Valley Insurance Company and Tower Risk Management
Corp., filed as Exhibit 2.2 to the Companys Current Report on Form 8-K filed on
September 2, 200831.1
    
    Chief Executive Officer  Certification pursuant to Sarbanes-Oxley Act of 2002 Section 30231.2
    
    Chief Financial Officer  Certification pursuant to Sarbanes-Oxley Act of 2002 Section 30232
    
    Chief Executive Officer and Chief Financial Officer  Certification pursuant to
Sarbanes-Oxley Act of 2002 Section 906
 40