CastlePoint Reports Third Quarter 2008 Results

Share Name	Share Symbol	Market	Type
Castlepoint Holdings Ltd (MM)	NASDAQ:CPHL	NASDAQ	Common Stock

Castlepoint Holdings Ltd (MM) (NASDAQ:CPHL)
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CastlePoint Holdings, Ltd. (NASDAQ: CPHL) today reported a net loss of $13.2 million and basic and diluted loss per share of $0.34 for the third quarter of 2008 as compared to third quarter 2007 net income of $10.5 million and diluted earnings per share of $0.27. Third quarter earnings was impacted negatively by several extraordinary items described below: Expenses relating to the merger with Tower Group, Inc. (�Tower�) were $9.0 million, as previously reported. The merger with Tower was previously announced on August 5, 2008 and is further reported in a preliminary joint proxy statement/prospectus filed by Tower and the Registrant with the Securities and Exchange Commission on September 30, 2008. In anticipation of the merger we accumulated cash and cash equivalents, which amounted to $218 million as of September 30, 2008. As a result, net investment income was reduced by approximately $2 million in the quarter as compared to a fully invested portfolio. Net realized investment losses were $10.5 million, which included the sale of Fannie Mae and Freddie Mac preferred stock at a realized loss of $2.5 million and other-than-temporary-impairment charges of $8.0 million, relating primarily to hybrid securities and bonds of Lehman Brothers Holdings, Inc. Deferred tax assets were reduced by $4.7 million as a charge to income since the generation of future capital gains to offset these losses over the next five years is not assured. CastlePoint�s investment portfolio as of September 30, 2008 had a fair value of $783 million including cash and cash equivalents. Our investments are comprised of highly rated securities with an average credit rating of AA+. The overall book yield on the investment portfolio was 4.8% as of September 30, 2008 including cash and cash equivalents and was 5.7% excluding cash and cash equivalents. Book value as of September 30, 2008 was $384.7 million, which was $10.04 per share. Net premiums written were $100.0 million in the third quarter as compared to $90.6 million in the same period in 2007. Net earned premiums were $113.3 million in the third quarter of 2008 which was an increase of 72.6% from $65.6 million for the same period in 2007. CastlePoint Re, our Bermuda based reinsurance subsidiary, had a net combined ratio of 94.8% in the third quarter as compared to 87.8% for the same period in 2007. CastlePoint Insurance Company, our U.S. based primary insurance company, had a net combined ratio of 92.2% in the third quarter as compared to 110.3% for the same period in 2007. Financial Summary ($ in thousands, except per share data): � Three Months Ended Sept. 30, 2008 � Three Months Ended Sept. 30, 2007 � Nine Months Ended Sept. 30, 2008 � Nine Months Ended Sept. 30, 2007 Net premiums written 99,977 � 90,574 � 346,139 � 242,981 Net premiums earned 113,275 65,610 324,494 167,146 Net investment income: Net investment income excl Partnership 9,260 8,446 26,175 22,325 Realized and unrealized gains (losses) on investment in Partnership (1) � (54 ) � (908 ) � (3,584 ) � (908 ) Total net investment income 9,206 7,538 22,591 21,417 � Net realized gains (losses) on investments (10,470 ) (79 ) (11,906 ) (98 ) � Total revenues 122,783 74,736 362,299 192,367 Net income (loss) (13,151 ) 10,541 6,727 28,130 � Earnings (Loss) Per Share - Basic $ (0.34 ) $ 0.28 $ 0.18 $ 0.79 Earnings (Loss) Per Share - Diluted $ (0.34 ) $ 0.27 $ 0.18 $ 0.78 � Operating Income and Operating Income excluding expenses relating to the merger with Tower (1): Operating income, net of tax, excluding expenses relating to the merger with Tower (2) 10,345 11,528 34,954 29,136 Reconciliation to Net Income: Expenses relating to the merger with Tower � (9,049 ) � 0 � � (9,382 ) � 0 � Operating Income, net of tax 1,296 11,528 25,572 29,136 Realized and unrealized gains (losses) on investment in Partnership included in net income (1) (54 ) (908 ) (3,584 ) (908 ) Net realized gains (losses) on investments (10,469 ) (79 ) (11,906 ) (98 ) Tax effect on realized and unrealized gains (losses) (3) � (3,924 ) � 0 � � (3,355 ) � 0 � Net (Loss) Income ($13,151 ) $ 10,541 $ 6,727 $ 28,130 � Earnings Per Share � Operating income excluding expenses relating to the merger with Tower: Per Share - Basic $ 0.27 $ 0.30 $ 0.91 $ 0.82 Per Share - Diluted $ 0.27 $ 0.30 $ 0.91 $ 0.81 � (1) Realized and unrealized gains and losses from our investment in a limited partnership were recorded as a component of net investment income. (2) Note on Non-GAAP Financial Measures: Operating income excludes net realized gains (losses) and unrealized gains (losses) included in net investment income. Operating income, operating earnings per share and operating return on average equity are common performance measurements for property and casualty insurance companies and are key internal management performance measures. We believe this presentation enhances the understanding of our results of operations by highlighting the underlying profitability of our insurance business. Additionally, operating income excluding expenses relating to the merger with Tower is shown, since these expenses are non-recurring after the merger is consummated. (3) Difference between tax benefit on a pro-forma basis for operating income and actual tax expense booked. Additional Highlights and Disclosures: Dividend Declaration CastlePoint Holdings, Ltd. Board of Directors previously had approved a quarterly dividend of $0.05 per share payable December 31, 2008 to stockholders of record as of December 15, 2008. About CastlePoint Holdings, Ltd. CastlePoint, a Bermuda-based holding company, through its subsidiaries, CastlePoint Reinsurance Company, CastlePoint Management Corp., and CastlePoint Insurance Company, provides property and casualty insurance and reinsurance business solutions, products and services to small insurance companies and program underwriting agents in the United States. CPHL-F Cautionary Note Regarding Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 provides a �safe harbor� for forward-looking statements. This press release or any other written or oral statements made by or on behalf of CastlePoint may include forward-looking statements that reflect CastlePoint�s current views with respect to future events and financial performance. All statements other than statements of historical fact included in this press release are forward-looking statements. Forward-looking statements can generally be identified by the use of forward-looking terminology such as �may,� �will,� �plan,� �expect,� �project,� �guide or guidance,� �intend,� �estimate,� �anticipate,� �believe� or �continue� or their negative or variations or similar terminology. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause CastlePoint�s actual results to differ materially from those indicated in these statements. The company believes that these factors include but are not limited to ineffectiveness or obsolescence of its business strategy due to changes in current or future market conditions; increased competition on the basis of pricing, capacity, coverage terms or other factors; greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events, than CastlePoint�s underwriting, reserving or investment practices anticipate based on historical experience or industry data; the ability to obtain necessary governmental licenses; the ability to hire and retain executive officers and other key personnel; the ability to make certain acquisitions in a timely fashion necessary to fulfill the company�s business plan; the effects of acts of terrorism or war; developments in the world's financial and capital markets that adversely affect the performance of the company�s investments; changes in regulations or laws applicable to CastlePoint, its subsidiaries, brokers or customers including tax laws in Bermuda and the United States; acceptance of CastlePoint�s products and services, including new products and services; changes in the availability, cost or quality of reinsurance and failure of CastlePoint�s reinsurers to pay claims timely or at all; decreased demand for the company�s insurance or reinsurance products; the effects of mergers, acquisitions and divestitures; changes in rating agency policies or practices; changes in legal theories of liability under CastlePoint�s insurance policies or the policies that it reinsures; changes in accounting policies or practices; and changes in general economic conditions, including inflation and other factors. Forward-looking statements speak only as of the date on which they are made, and CastlePoint undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. For more information visit CastlePoint�s website at http://www.castlepoint.bm/. CASTLEPOINT HOLDINGS, LTD.CONSOLIDATED BALANCE SHEETS(Unaudited) � � September 30, December 31, 2008 2007 ($ in thousands share except per share amounts) Assets � Fixed-maturity securities, available-for-sale, at fair value $ 517,557 $ 484,972 (amortized cost $548,629 for 2008; $484,523 for 2007) Equity securities, available-for-sale, at fair value 33,665 42,402 (cost $45,970 for 2008; $44,036 for 2007) Short-term investments, available-for-sale, at fair value (amortized cost $10,460 for 2008; $0 for 2007) � 10,460 � � - � Total available-for-sale investments 561,682 527,374 Investment in Partnerships, equity method - 8,503 Common trust securities - statutory business trusts, equity method � 4,022 � � 4,022 � Total investments 565,704 539,899 � Cash and cash equivalents 217,511 153,632 Accrued investment income 4,900 4,064 Premiums receivable 169,150 125,597 Premiums receivable - programs 33,819 9,083 Prepaid reinsurance premiums 9,100 3,475 Reinsurance recoverable on paid loss & loss adjustment expense 1,544 22 Reinsurance recoverable on unpaid loss & loss adjustment expense 5,571 315 Deferred acquisition costs 81,615 73,073 Deferred income taxes 4,933 7,051 Deferred financing fees 3,579 3,673 Other assets � 12,476 � � 7,174 � Total Assets $ 1,109,902 � $ 927,058 � � Liabilities and Shareholders' Equity � Liabilities Loss and loss adjustment expenses $ 222,412 $ 121,741 Unearned premium 244,788 217,518 Losses payable 31,544 8,527 Premiums payable - programs 73,722 16,257 Accounts payable and accrued expenses 9,946 3,592 Other liabilities 8,792 3,595 Subordinated debentures � 134,022 � � 134,022 � Total Liabilities � 725,225 � � 505,252 � � Shareholders� Equity Common shares ($0.01 par value, 100,000,000 shares authorized, 38,305,735 shares issued as of September 30, 2008 and 38,289,430 shares issued as of December 31, 2007) 383 383 Additional paid-in-capital 386,867 385,057 Accumulated other comprehensive net loss (41,931 ) (1,051 ) Retained earnings � 39,357 � � 37,417 � Total Shareholders' Equity � 384,676 � � 421,806 � Total Liabilities and Shareholders' Equity $ 1,109,902 � $ 927,058 � � CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(Unaudited) � � � � Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 ($ in thousands share except per share amounts) Revenues Net premiums earned $ 113,275 $ 65,610 $ 324,494 $ 167,146 Insurance services revenue 10,771 1,667 27,121 3,902 Net investment income 9,207 7,538 22,590 21,417 Net realized loss on investments � (10,470 ) � (79 ) � (11,906 ) � (98 ) Total Revenues � 122,783 � � 74,734 � � 362,299 � � 192,367 � � Expenses Loss and loss adjustment expenses 65,711 34,482 180,906 87,790 Commission and other acquisition expenses 46,861 24,147 133,870 60,110 Other operating expenses 16,157 4,268 28,790 11,983 Interest expense � 2,874 � � 2,254 � � 8,543 � � 6,608 � Total Expenses � 131,603 � � 65,151 � � 352,109 � � 166,491 � � (Loss) income before income taxes (8,820 ) 9,585 10,190 25,876 � Income tax (expense) benefit (4,332 ) 956 (3,463 ) 2,254 � � � � Net (Loss) Income $ (13,152 ) $ 10,541 � $ 6,727 � $ 28,130 � � Comprehensive (Loss) Income Net (loss) income $ (13,152 ) $ 10,541 $ 6,727 $ 28,130 Other comprehensive income (loss): Gross unrealized investment holding losses arising during period (34,755 ) (2,032 ) (54,132 ) (7,977 ) Less: reclassification adjustment for (losses) gains incl. in net income � (10,470 ) � 287 � � (11,906 ) � 268 � Other comprehensive loss (24,285 ) (2,319 ) (42,226 ) (8,245 ) � Income tax recovery related to items of other comprehensive income � 75 � � 140 � � 1,345 � � 725 � Total other comprehensive loss � (24,210 ) � (2,179 ) � (40,881 ) � (7,520 ) � Comprehensive (Loss) Income $ (37,362 ) $ 8,362 � $ (34,154 ) $ 20,610 � � � Earnings Per Share Basic earnings per common share $ (0.34 ) $ 0.28 $ 0.18 $ 0.79 Diluted earnings per common share $ (0.34 ) $ 0.27 $ 0.18 $ 0.78 � � Weighted-Average Common Shares Outstanding: Basic 38,282,320 38,277,148 38,280,781 35,658,652 Diluted estimated 38,384,159 38,549,306 38,403,450 36,008,824 � Reinsurance Segment Results of OperationsUnaudited � � � � � Three Months Ended Sept. 30 Nine Months Ended Sept. 30 ($ in thousands share except per share amounts) Revenues: 2008 2007 2008 2007 Premiums earned Gross premiums earned $ 77,475 $ 60,965 $ 235,758 $ 161,171 Less: Ceded premiums earned � 7 � � - � � (27 ) � - � Net premiums earned $ 77,482 60,965 235,731 161,171 � � Expenses: Loss and loss adjustment expenses Gross loss and loss adjustment expenses $ 46,535 31,485 $ 133,224 84,075 Less: Ceded loss and loss adjustment expenses � - � � - � � - � � - � Net loss and loss adjustment expenses $ 46,535 31,485 $ 133,224 84,075 Underwriting expenses Ceding commissions expenses $ 25,524 $ 20,929 $ 78,989 $ 54,634 Other underwriting expenses � 1,412 � � 1,125 � � 3,537 � � 2,614 � Total underwriting expenses $ 26,936 $ 22,054 $ 82,526 $ 57,248 � Underwriting Profit $ 4,011 � $ 7,426 � $ 19,981 � $ 19,848 � � � Loss Ratios Gross 60.1 % 51.6 % 56.5 % 52.2 % Net 60.1 % 51.6 % 56.5 % 52.2 % Underwriting Expense Ratios Gross 34.8 % 36.2 % 35.0 % 35.5 % Net 34.8 % 36.2 % 35.0 % 35.5 % Combined Ratios Gross 94.9 % 87.8 % 91.5 % 87.7 % Net 94.9 % 87.8 % 91.5 % 87.7 % � � Key Measures Premiums Written Gross premiums written $ 77,083 $ 68,975 $ 267,050 $ 207,849 Less: Ceded premiums written � 6 � � - � � (27 ) � - � Net premiums written $ 77,089 � $ 68,975 � $ 267,023 � $ 207,849 � � Insurance Segment Results of OperationsUnaudited � � � � � Three Months Ended Sept. 30 Nine Months Ended Sept. 30 ($ in thousands share except per share amounts) Revenues: 2008 2007 2008 2007 Premiums Earned Gross premiums earned $ 50,463 $ 6,063 $ 120,364 $ 7,394 Less: Ceded premiums earned � (14,669 ) � (1,419 ) � (31,601 ) � (1,419 ) Net premiums earned � 35,794 � � 4,644 � � 88,763 � � 5,975 � Ceding commission revenue 3,404 - 5,812 - � � � � - � Total � 39,198 � � 4,644 � � 94,575 � � 5,975 � � Expenses: Loss and Loss Adjustment Expenses Gross loss and loss adjustment expenses 22,976 3,312 58,578 4,030 Less: Ceded loss and loss adjustment expenses � (3,801 ) � (315 ) � (10,896 ) � (315 ) Net loss and loss adjustment expenses 19,175 2,997 47,682 3,715 Underwriting expenses Commissions expenses 15,533 1,997 37,426 2,546 Other underwriting expenses � 1,705 � � 130 � � 3,637 � � 151 � Total underwriting expenses $ 17,238 � � 2,127 � � 41,063 � � 2,697 � � Underwriting Profit / (Loss) $ 2,785 � $ (480 ) $ 5,830 � $ (437 ) � � Loss Ratios Gross 45.5 % 54.6 % 48.7 % 54.5 % Net 53.6 % 64.5 % 53.7 % 62.2 % Underwriting Expense Ratios Gross 34.2 % 35.1 % 34.1 % 36.5 % Net 38.6 % 45.8 % 39.7 % 45.1 % Combined Ratios Gross 79.7 % 89.7 % 82.8 % 91.0 % Net 92.2 % 110.3 % 93.4 % 107.3 % � � Key Measures Premiums Written Gross premiums written $ 56,708 $ 28,696 $ 134,060 $ 42,228 Less: Ceded premiums written � (33,820 ) � (7,096 ) � (54,944 ) � (7,096 ) Net premiums written � 22,888 � � 21,600 � � 79,116 � � 35,132 � � Insurance Services Segment Results of OperationsUnaudited � � � � � Three Months Ended Sept. 30 Nine Months Ended Sept. 30 ($ in thousands share except per share amounts) 2008 2007 2008 2007 � Revenue Direct commission revenue from programs $ 11,217 � $ 1,667 � $ 29,212 � $ 3,902 � Total Revenues � 11,217 � � 1,667 � � 29,212 � � 3,902 � � Expenses Direct commissions expense from programs 9,653 1,222 25,358 2,930 Other insurance services expenses � 2,231 � � 1,435 � � 6,234 � � 4,567 � Total Expenses � 11,884 � � 2,657 � � 31,592 � � 7,496 � � Insurance Services Loss $ (667 ) $ (990 ) $ (2,380 ) $ (3,594 ) �

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CPHL Castlepoint Holdings Ltd (MM)