Castlepoint Holdings, Ltd. - Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

|X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007

|_| 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.
(Exact name of registrant as specified in its charter)

 Bermuda N/A
 (State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

 Victoria Hall, 11 Victoria Street
 Hamilton HM 11, Bermuda
 (Address of principal executive offices) (Zip code)
 (441) 294-6409
 (Registrant's telephone number, including area code)

 ----------------------

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes |X| No |_|

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

Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes |_| No |X|

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 38,289,430 common shares, par value $0.01 per share, as of November 9, 2007.

TABLE OF CONTENTS

 PAGE

Part I - FINANCIAL INFORMATION...............................................1

Item 1. Financial Statements................................................1

Item 2. Management's Discussion and Analysis of Financial Condition and
 Results of Operations..............................................16

Item 3. Quantitative and Qualitative Disclosures About Market Risk.........32

Item 4T. Controls and Procedures...........................................33

Part II - OTHER INFORMATION.................................................33

Item 1. Legal Proceedings..................................................33

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........33

Item 4. Submission of Matters to a Vote of Security Holders................34

Item 6. Exhibits...........................................................34

EXPLANATORY NOTE

This quarterly report is filed by CastlePoint Holdings, Ltd., a Bermuda company limited by shares (the "Company"). Unless the context requires otherwise or unless stated otherwise, the terms "we", "our" and "us" refer to the Company and its subsidiaries.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CastlePoint Holdings, Ltd.
Consolidated Balance Sheets
(Unaudited)

 September 30, December 31,
 2007 2006
 ------------- -------------
 ($ in thousands, except par
 value and share amounts)
Assets
Fixed-maturity securities, available-for-sale, at fair value (amortized cost $494,769 for
 2007; $293,878 for 2006) $ 494,332 $ 295,527
Equity securities, available-for-sale, at fair value (cost $46,233 for 2007; $0 for 2006) 40,085 --
Short-term investments, available-for-sale, at fair value (amortized cost $0 for 2007; $51,626
 for 2006) -- 51,638
 ------------- -------------
 Total available-for-sale investments 534,417 347,165
Investment in Tower Group, Inc. preferred stock -- 40,000
Investment in partnerships, equity method 9,351 --
Common trust securities - statutory business trusts, equity method 4,022 3,094
 ------------- -------------
 Total investments 547,790 390,259
Cash and cash equivalents 127,576 34,784
Accrued investment income 4,049 2,211
Assumed premiums receivable (primarily with related parties - See note 3 ) 93,111 44,930
Premiums receivable - programs (primarily with related parties - See note 3 ) 2,644 1,295
Prepaid reinsurance premiums 2,343 --
Deferred acquisition costs (primarily with related parties - See note 3) 55,613 30,363
Deferred income taxes 4,067 1,089
Deferred financing fees 3,703 3,084
Funds held by reinsured companies 3,049 577
Other assets 2,085 2,750
 ------------- -------------
 Total Assets $ 846,030 $ 511,342
 ============= =============
Liabilities and Shareholders' Equity
Liabilities
Loss and loss adjustment expenses (primarily with related parties - See note 3) $ 100,810 $ 34,192
Unearned premium (primarily with related parties - See note 3) 164,359 86,181
Assumed losses payable (primarily with related parties - See note 3) 3,798 3,496
Premiums payable-programs (primarily with related parties - See note 3) 5,799 1,072
Accounts payable and accrued expenses 1,658 2,869
Payable for securities 21,703 --
Other liabilities 1,105 725
Subordinated debentures 134,022 103,094
 ------------- -------------
 Total Liabilities 433,254 231,629
 ------------- -------------
Shareholders' Equity
Common shares ($0.01 par value, 100,000,000 shares authorized; 38,289,430 and 29,580,000
 shares issued in 2007 and 2006) 383 296
Additional paid-in-capital 384,492 269,472
Accumulated other comprehensive net (loss) income (5,863) 1,657
Retained earnings 33,764 8,288
 ------------- -------------
 Total Shareholders' Equity 412,776 279,713
 ------------- -------------
 Total Liabilities and Shareholders' Equity $ 846,030 $ 511,342
 ============= =============

See accompanying notes to the consolidated financial statements

CastlePoint Holdings, Ltd.

Consolidated Statements of Income and
Comprehensive Income
(Unaudited)

 Three Months Ended Nine Months Ended
 September 30, September 30,
 2007 2006 2007 2006
 ------------------ --------------- ---------------- ---------------
 ($ in thousands, except share and per share amounts)
Revenues
 Net premiums earned (primarily with related parties - See
 note 3) $ 65,610 $ 27,003 $ 167,146 $ 47,390
 Insurance service revenue (primarily with related parties
 - See note 3) 1,667 854 3,902 1,392
 Net investment income 7,538 3,791 21,417 6,697
 Net realized investment (losses) gains (79) 7 (98) 10
 ------------------ --------------- ---------------- ---------------
 Total revenues 74,736 31,655 192,367 55,489
 ------------------ --------------- ---------------- ---------------
Expenses
 Loss and loss adjustment expenses (primarily with related
 parties - See note 3) 34,482 13,919 87,790 25,297
 Commission and other acquisition expenses (primarily with
 related parties - See note 3) 24,147 9,903 60,110 17,421
 Other operating expenses 4,268 2,448 11,983 8,998
 Interest expense 2,254 -- 6,608 --
 ------------------ --------------- ---------------- ---------------
 Total expenses 65,151 26,270 166,491 51,716
 ------------------ --------------- ---------------- ---------------
Income before income taxes 9,585 5,385 25,876 3,773
Income tax benefit 956 -- 2,254 --
 ------------------ --------------- ---------------- ---------------
Net income $ 10,541 $ 5,385 $ 28,130 $ 3,773
 ================== =============== ================ ===============

Comprehensive Income
 Net income $ 10,541 $ 5,385 $ 28,130 $ 3,773
 Other comprehensive income:
 Gross unrealized investment holding (losses) gains
 arising during period (2,032) 3,471 (7,977) 2,141

 Less: reclassification adjustment for gains included
 in net income 287 7 268 10
 ------------------ --------------- ---------------- ---------------
 (2,319) 3,465 (8,245) 2,131
 Income tax recovery related to items of other
 comprehensive income 140 -- 725 --
 ------------------ --------------- ---------------- ---------------
 Total other comprehensive (loss) income (2,179) 3,465 (7,520) 2,131
 ------------------ --------------- ---------------- ---------------
 Comprehensive Income $ 8,362 $ 8,850 $ 20,610 $ 5,904
 ================== =============== ================ ===============

Earnings Per Share
 Basic earnings per common share $ 0.28 $ 0.18 $ 0.79 $ 0.22
 ================== =============== ================ ===============
 Diluted earnings per common share $ 0.27 $ 0.18 $ 0.78 $ 0.22
 ================== =============== ================ ===============

Weighted Average Common Shares Outstanding:
 Basic 38,277,148 29,580,000 35,658,652 17,075,431
 Diluted 38,549,306 29,780,879 36,008,824 17,075,431

See accompanying notes to the consolidated financial statements

CastlePoint Holdings, Ltd.

Consolidated Statements of Cash Flows
(Unaudited)

 Nine Months Ended September 30,
 2007 2006
 ---------------- ----------------
 ($ in thousands)
Cash flows from operating activities:
 Net income $ 28,130 $ 3,773
 Adjustments to reconcile net income to net cash provided by (used in)
 operations:
 (Gain)/ loss on sale of investments 98 (10)
 Depreciation and amortization 131 9
 Amortization of bond premium or discount (438) (219)
 Equity in limited partnership 499
 Amortization of stock-based compensation expense 1,456 665
 Amortization of deferred financing fees 78 --
 Warrants issued -- 4,605
 Deferred income taxes (2,254) --
(Increase)/decrease in assets:
 Accrued investment income (1,837) (2,145)
 Assumed premiums receivable (48,181) (31,466)
 Premiums receivable - programs (1,350) (1,688)
 Prepaid reinsurance premiums (2,343) --
 Deferred acquisition costs (25,250) (24,200)
 Funds held with reinsured companies (2,472) (309)
 Other assets 246 (306)
Increase in liabilities:
 Loss and loss adjustment expenses 66,618 22,230
 Unearned premium 78,177 69,018
 Assumed losses payable 303 1,655
 Premiums' payable - programs 4,727 2,263
 Accounts payable and accrued expenses (880) 837
 Other liabilities 380 271
 ---------------- ----------------
Net cash flows provided by operations 95,838 44,983
 ---------------- ----------------

Cash flows from investing activities:
Cost of fixed assets purchased (998) (124)
Purchases of investments:
 Cost of fixed-maturity securities purchased (384,713) (357,107)
 Cost of equity securities (46,124) --
Sale of investments:
 Proceeds from sales of fixed-maturity securities 205,966 73,174
 Other investments 40,000 --
Cost of limited partnerships purchased (10,000) --
Net short term investments (purchased)/sold 51,626 (1,771)
 ---------------- ----------------
 Net cash flows used in investing activities (144,243) (285,828)
 ---------------- ----------------

Cash flows from financing activities:
 Net proceeds from Tower Group Inc. -- 15,000
 Net proceeds from initial public offering 114,549 --
 Net proceeds from private offering -- 248,901
 Net proceeds from subordinated debentures 29,302 --
 Dividends to shareholders (2,654) (1,479)
 ---------------- ----------------
 Net cash flows provided by financing activities 141,197 262,422
 ---------------- ----------------

Increase in cash and cash equivalents 92,792 21,577
 Cash and cash equivalents, beginning of period 34,784 --
 ---------------- ----------------
 Cash and cash equivalents, end of period $ 127,576 $ 21,577
 ================ ================
Supplemental disclosures of cash flow information:
 Cash paid for income taxes $ 19 $ --
 Cash paid for interest $ 6,719 $ --

See accompanying notes to the consolidated financial statements

CastlePoint Holdings , Ltd.
Consolidated Statement of Changes in Shareholders' Equity for the period ended September 30, 2007

(Unaudited)

 Additional Accumulated Other Total
 Common Paid-In Comprehensive Retained Shareholders'
 Shares Capital Income Earnings Equity
 ----------- ------------- ----------------- ---------------- ---------------
 ($ in thousands)
 ----------- ------------- ----------------- ---------------- ---------------
Balance at December 31, 2006 $ 296 $ 269,472 $ 1,657 $ 8,288 $ 279,713
 =========== ============= ================= ================ ===============

Initial public offering, net proceeds 87 113,564 113,651
Net income 28,130 28,130
Net unrealized losses (7,520) (7,520)
Stock based compensation 1,456 1,456
Dividends to shareholders (2,654) (2,654)
 ----------- ------------- ----------------- ---------------- ---------------
Balance at September 30, 2007 $ 383 $ 384,492 $ (5,863) $ 33,764 $ 412,776
 =========== ============= ================= ================ ===============

See accompanying notes to the consolidated financial statements

CastlePoint Holdings, Ltd.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 - Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions for Form 10-Q and in conformity with Article 10 of Regulation S-X. Accordingly, the accompanying consolidated financial statements do not include all of the information and footnote disclosures required by generally accepted accounting principles ("GAAP") in the United States of America. These statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2006 and notes thereto included in the Registration Statement on Form S-1 (File No. 333-139939) of the Company relating to the initial public offering of its common shares, initially filed with the Securities and Exchange Commission (the "SEC") on January 11, 2007, as amended (as so amended, the "Registration Statement"). The accompanying consolidated financial statements have not been audited by an independent registered public accounting firm in accordance with standards of the Public Company Accounting Oversight Board (United States), but in the opinion of management such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's financial position and results of operations. The results of operations for the three months and nine months ended September 30, 2007 may not be indicative of the results that may be expected for the year ending December 31, 2007. The consolidated financial statements include the accounts of CastlePoint Holdings, Ltd. (sometimes referred to as "CastlePoint Holdings" or the "Company"), and its wholly owned subsidiaries, CastlePoint Bermuda Holdings Ltd. ("CastlePoint Bermuda Holdings"), CastlePoint Reinsurance Company, Ltd. ("CastlePoint Re"), CastlePoint Management Corp. ("CastlePoint Management") and CastlePoint Insurance Company ("CastlePoint Insurance"). All significant inter-company balances have been eliminated. Business segment results are presented gross of all material inter-segment transactions.

Investments

The Company accounts for its investments generally in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"), which requires that fixed-maturity and equity securities that have readily determinable fair values be segregated into categories based upon the Company's intention for those securities. In accordance with SFAS No. 115, the Company has classified its fixed maturity securities and equity securities as available-for-sale. The Company may sell its available-for-sale securities in response to changes in interest rates, risk/reward characteristics, liquidity needs or other factors. Investments in limited partnerships are accounted for under the equity method, at cost or at fair value, depending upon the nature of the partnership and the Company's ownership interest. See "--Investments in partnerships and other funds" below. Short term investments are securities with a remaining maturity of less than one year at the date of purchase and are classified as available for sale.

Fixed maturity and equity securities: Marketable fixed-maturity securities and equity securities are reported at their estimated fair values based primarily on quoted market prices from a recognized pricing service or a broker- dealer, with unrealized gains and losses, net of tax effects, excluded from net income and reported as a separate component of accumulated other comprehensive income in shareholders' equity. Premiums and discounts on fixed maturity investments are charged or accreted to income over the anticipated life of the investment. Net investment income, consisting of interest and dividends, net of investment expenses, is recognized when earned and included in "Net investment income" in the accompanying statement of income. Realized investment gains and losses on the sale of investments are determined based on the specific identification method and are included in the accompanying statement of income.

Investments in partnerships and other funds: Investments in limited partnerships where the Company has more than a minor interest are accounted for under the equity method of accounting pursuant to SOP 78-9, "Accounting for Investments in Real Estate Ventures," and classified on the balance sheet as "Investments in partnerships, equity method." The Company's share of net income is reported in the Company's net investment income. The Company calculates its share of net income on the basis of the Company's ownership percentage.

Investments in limited partnerships where the Company's interest is considered to be minor and all other fund investments are accounted for at either cost or fair value and classified on the balance sheet as "Equity securities." For these investments, net investment income and realized gains and losses are recognized as related distributions are received. Unrealized gains (losses), net of tax effects, are excluded from net income and reported as a separate component of accumulated other comprehensive income in shareholders' equity. The Company calculates its fair value on the basis of the Company's ownership percentage generally using the net asset value.

Common trust securities--statutory business trusts: The Company's investment in the common trust securities of the trusts are reported as investments in equities separately in the balance sheet. The securities are recorded using the equity basis of accounting, which currently approximates original cost.

Impairment of investment securities and limited partnerships results in a charge to net realized gains or losses on investments when market value decline below cost is deemed to be other-than-temporary. The Company regularly reviews all investments to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. In general, attention is focused on those securities where fair value has been less than 80% of the amortized cost or cost, as appropriate, for six or more consecutive months. In evaluating potential impairment, management considers, among other criteria: the current fair value compared to amortized cost or cost, as appropriate; the length of time the security's fair value has been below amortized cost or cost; management's intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in value; specific credit issues related to the issuer; and current economic conditions. Other-than-temporary impairment losses result in a permanent reduction of the cost basis of the underlying investment. During 2007, the Company did not record any other-than-temporary impairments.

Note 2 - Initial Public Offering

On March 28, 2007, we completed the sale of 8,697,148 common shares at $14.50 in a firm commitment underwritten initial public offering. In addition, 119,500 shares were sold in that offering by selling shareholders who previously purchased such shares in the private offering of our common shares we completed in April 2006. Included in the 8,697,148 shares sold by us were 1,134,410 shares purchased by the underwriters to cover over-allotments. The net proceeds to the Company of the initial public offering were approximately $114 million after the deduction of underwriting discounts and other estimated offering expenses.

The common shares of CastlePoint Holdings are listed on the Nasdaq Global Market under the symbol "CPHL."

On August 6, 2007, the SEC declared effective the Company's Registration Statement on Form S-1, as amended (Registration No. 333-134628) covering the resale by selling shareholders named therein of 26,646,589 common shares originally issued by the Company in the private offering completed in April 2006.

Note 3 - Related Party Transactions

The Company and/or its subsidiaries are parties to a master agreement, certain reinsurance agreements, management agreements and service and expense sharing agreements with Tower Group, Inc., a Delaware corporation that is publicly traded in the U.S. ("Tower"), or its insurance subsidiaries. In addition, CastlePoint Re participates as a reinsurer on Tower's property and excess of loss reinsurance agreements.

Reinsurance Agreements: CastlePoint Re entered into three multi-year quota share reinsurance agreements with Tower's insurance subsidiaries: the brokerage business quota share reinsurance agreement, the traditional program business quota share reinsurance agreement, and the specialty program business and insurance risk-sharing business quota share reinsurance agreement. For the three months ended March 31, 2007 CastlePoint Re assumed 49% of Tower's brokerage business under the brokerage business quota share reinsurance agreement. For the three months ended June 30, 2007, CastlePoint Re's participation in the brokerage business quota share reinsurance agreement was reduced to 40% and CastlePoint Insurance participated in that agreement 9%, keeping the overall percentage participation of CastlePoint at 49%. As of July 1, 2007, Tower began placing brokerage business directly into CastlePoint Insurance and consequently CastlePoint Insurance no longer participated in the brokerage business quota share reinsurance agreement, while CastlePoint Re continued to participate in that agreement at 40%.

There were no changes during the nine months ended September 30, 2007 to our arrangements with Tower pursuant to the traditional program business quota share reinsurance agreement and the specialty program business and insurance risk-sharing business quota share reinsurance agreement.

Premiums receivable from and losses payable to Tower as of September 30, 2007 were $70.5 million and $3.3 million, respectively, compared to $42.4 million and $3.5 million as of December 31, 2006. The unearned premium reserves and loss reserves with Tower as of September 30, 2007 were $137.2 million and $87.1million, respectively, compared to $80.7 million and $33.2 million as of December 31, 2006. Deferred acquisition costs were $46.3 million and $28.0 million as of September 30, 2007 and December 31, 2006, respectively. The total underwriting impact related to our agreements with Tower discussed above is as follows:

 Three Months Ended September 30, Nine Months Ended September 30,
 2007 2006 2007 2006
 -------------- ------------------ --------------- -----------------
 ($ in thousands)
Net premiums earned $ 53,751 $ 26,104 $ 137,526 $ 46,441
Net losses incurred 28,058 13,495 70,907 24,846
Net commission expense 18,768 8,975 48,066 16,075

Management Agreements: The New York State Insurance Department did not approve the pooling agreements and related pool management agreements between Tower and CastlePoint Insurance that were to take effect as of January 1, 2007. Consequently, in June 2007 the Company and Tower withdrew the pooling agreements and related pool management agreements from consideration by the New York State Insurance Department, and the Company filed alternative insurance risk-sharing agreements and related business management agreement for the brokerage business. The New York State Insurance Department has approved the business management agreement, although the two aggregate excess of loss reinsurance agreements for the brokerage business, which are part of the alternative insurance risk-sharing agreements, currently remain subject to regulatory review. The accompanying unaudited consolidated financial statements include the effects of all our agreements, but do not include the effects of the two aggregate excess of loss reinsurance agreements for the brokerage business because they remain subject to further regulatory review.

The business management agreement for brokerage business with Tower Risk Management Corp. that has been approved by the New York State Insurance Department provides that Tower Risk Management Corp., a subsidiary of Tower, is authorized to write brokerage business using CastlePoint Insurance's policies and manage such business for CastlePoint Insurance. For managing such business, Tower Risk Management Corp. is paid a management fee calculated using the sliding-scale formula that was originally intended by the master agreement to be paid to Tower Insurance Company of New York for managing the brokerage business, net of specific aggregate and property catastrophe excess of loss reinsurance costs.

The Company and Tower jointly submitted two aggregate excess of loss reinsurance agreements for the brokerage business for review by the New York State Insurance Department. These agreements remain subject to regulatory review. The purpose of the two aggregate excess of loss reinsurance agreements is to cause the loss ratios for the brokerage business of CastlePoint Insurance and Tower to be approximately equal. Under the first agreement, Tower will reinsure 85% (which percentage will be adjusted to equal Tower's actual percentage of the total brokerage business written by Tower and CastlePoint Insurance) of CastlePoint Insurance's brokerage business losses that are in excess of a specified loss ratio for brokerage business written through Tower Risk Management Corp., net of premiums paid for specific excess reinsurance, property catastrophe reinsurance and facultative reinsurance, if any, which inure to the benefit of the agreement, and before any cessions to quota share reinsurance. Under the second agreement, CastlePoint Insurance will reinsure 15% (which percentage will be adjusted to equal CastlePoint's actual percentage of the total brokerage business written by Tower and CastlePoint) of Tower's brokerage business losses that are in excess of the same specified loss ratio, net of premiums paid for specific excess reinsurance, property catastrophe reinsurance and facultative reinsurance, if any, which inure to the benefit of the agreement, and before any cessions to quota share reinsurance.

CastlePoint Management is a party to program management agreements with Tower, whereby CastlePoint Management was appointed to perform certain underwriting and claims services with respect to program business. Premiums collected and due to Tower for program business at September 30, 2007 were $2.8 million. For the three months and nine months ended September 30, 2007, CastlePoint Management recorded commission revenue of $1.5 million and $3.7 million, respectively, from Tower.

Service and Expense Sharing Agreements: CastlePoint Management is a party to service and expense sharing agreements with Tower and certain of its subsidiaries. Tower charged CastlePoint Management $0.2 million for the three months ended September 30, 2007 and $0.5 million, for the nine months ended September 30, 2007 for services rendered in support of CastlePoint Management's infrastructure as contemplated by the service and expense sharing agreements.

In addition to the services rendered in support of CastlePoint Management's infrastructure, Tower rendered services for CastlePoint Management's program business contemplated by the service and expense sharing agreements. For these services, Tower charged CastlePoint Management $0.1 million for the three months ended September 30, 2007 and $0.3 million for the nine months ended September 30, 2007.

Note 4 - Investments

The amortized cost and fair value of the investments by investment type as of September 30, 2007 and December 31, 2006 are as follows:

 Cost or Gross Gross Estimated
 Amortized Unrealized Unrealized Fair
 Cost Gains Losses Value
 ---------- ----------- ------------ ---------
 ($ in thousands)
September 30, 2007:
Fixed Maturities:
US government and agencies securities $ 30,895 $ 90 $ (11) $ 30,975
Corporate fixed maturities 125,768 801 (768) 125,800
Mortgage and asset-backed securities 338,106 1,537 (2,086) 337,557
 ---------- ----------- ------------ ---------
 Total fixed maturities 494,769 2,428 (2,865) 494,332
Equity Securities 46,233 38 (6,186) 40,085
 ---------- ----------- ------------ ---------
 Total available-for-sale investments $ 541,002 $ 2,466 $ (9,051) $ 534,417
 ========== =========== ============ =========
December 31, 2006:
Fixed Maturities:
US government and agencies securities $ 18,650 $ 19 $ (10) $ 18,659
Corporate fixed maturities 88,785 398 (22) 89,161
Mortgage and asset-backed securities 186,443 1,342 (78) 187,707
 ---------- ----------- ------------ ---------
 Total fixed maturities 293,878 1,759 (110) 295,527
Short term investments 51,626 12 -- 51,638
 ---------- ----------- ------------ ---------
Total available-for-sale investments $ 345,504 $ 1,771 $ (110) $ 347,165
 ========== =========== ============ =========

The Company's invested assets that were in an unrealized loss position at September 30, 2007 and December 31, 2006 had all been held for less than 12 months. In applying its accounting policy, the Company determined that it did not need to record any other than-temporary impairment charges. Management has both the ability and intent to hold securities in an unrealized loss position until recovery in value.

Included in net investment income are the results of the Company's investment in limited partnerships. For the three months ended September 30, 2007, the Company recorded a net investment loss of $0.7 million comprised of net investment income of $0.2 million, realized gains of $0.4 million and an unrealized loss of $1.3 million. For the nine months ended September 30, 2007, the Company recorded a net investment loss of $0.6 million comprised of net investment income of $0.3 million, realized gains of $0.4 million and an unrealized loss of $1.3 million. There were no investments in partnerships in 2006.

Redemption of Tower Non-Cumulative Convertible Redeemable Perpetual Preferred Stock

On December 4, 2006, CastlePoint Management purchased 40,000 shares of Series A non-cumulative convertible redeemable perpetual preferred stock (as subsequently exchanged for a new series of such convertible perpetual preferred stock reflecting substantially similar terms, the "perpetual preferred stock") of Tower, for an aggregate consideration of $40 million. CastlePoint Management completed such purchase pursuant to an assignment by CastlePoint Re of its related obligations under a stock purchase agreement CastlePoint Re entered into with Tower in November 2006.

Tower redeemed all of its perpetual preferred stock held by CastlePoint Management on January 26, 2007, at the redemption price of $40 million in the aggregate plus approximately $0.3 million in interest that was paid in January 2007. We used the proceeds of such redemption to further capitalize CastlePoint Insurance. Although Tower effected such redemption, we retained the right of first refusal from Tower, with respect to any insurance companies Tower may acquire during the term of our master agreement, subject to the receipt of any necessary regulatory approvals, to assume such companies' historical losses pursuant to a loss portfolio transfer agreement (which must be on mutually acceptable market competitive terms) if Tower desires to cause these insurance companies to effect loss portfolio transfers.

Note 5 - Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS No.155, "Accounting for Certain Hybrid Financial Instruments, an amendment of SFAS No.133 and SFAS No.140" (SFAS 155) and Statement 133 Implementation Issue No. B40, "Embedded Derivatives: Application of Paragraph 13 (b) Securitized Interests in Prepayable Financial Assets" ("B40"). SFAS 155 is effective for all financial instruments acquired or issued after January 1, 2007. B40, under specific criteria, is effective July 1, 2007. SFAS 155 provides entities with relief from having to separately determine the fair value of an embedded derivative that would otherwise be required to be bifurcated from its host contract in accordance with SFAS 133. SFAS 155 allows an entity to make an irrevocable election to measure such a hybrid financial instrument at fair value in its entirety, with changes in fair value recognized in earnings. The election may be made on an instrument-by-instrument basis and can be made only when a hybrid financial instrument is initially recognized or when certain events occur that constitute a remeasurement (i.e., new basis) event for a previously recognized hybrid financial instrument. B40 provides a narrow scope exception for certain securitized interests from the tests required under paragraph 13 (b) of SFAS No. 133. Adoption of SFAS 155 and B40 has not had a material impact on the Company's consolidated financial condition or results of operations.

In June 2006, the FASB issued FIN No. 48 ("FIN 48") "Accounting for Uncertainty in Income Taxes," an Interpretation of FASB Statement No. 109 ("SFAS 109"). FIN 48 is effective for fiscal years beginning after December 15, 2006. FIN 48 provides an interpretation to SFAS 109 with respect to the recognition and measurement of tax uncertainties. Specifically, it prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement for uncertain tax positions taken or expected to be taken in income tax returns. The Company is to determine whether it is "more likely than not" (i.e., greater than 50% certain) that our position would be sustained upon examination by tax authorities. Tax positions that meet the "more likely than not" threshold are then measured using a probability weighted approach recognizing the largest amount of tax benefit that has greater than a 50% likelihood of being realized upon ultimate settlement. The adoption of FIN 48 has not had a material impact on the Company's consolidated financial condition or results of operations. Interest on underpayment of taxes will be shown on the Consolidated Statements of Income and Comprehensive Income as "interest expense." Penalties accrued will be classified as "other expense."

In September 2006, the FASB issued SFAS No. 157 ("SFAS 157"), "Fair Value Measurements". The provisions of SFAS 157 are effective for financial statements issued in respect of fiscal years beginning after November 15, 2007. This new standard provides guidance for using fair value to measure assets and liabilities. Under SFAS 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of the principle, SFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data such as the reporting entity's own data. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. The Company is currently reviewing the impact that adoption of SFAS 157 will have on its consolidated financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). The standard is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. This statement permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. The objective is to improve financial reporting by providing the entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This standard also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This statement is expected to expand the use of fair value measurement. The Company is currently reviewing the impact that adoption of SFAS 159 will have on its consolidated financial position and results of operations.

In January 2007, the AICPA issued Statement of Position (SOP) 07-01, Clarification of the Scope of the Audit and Accounting Guide "Investment Companies" and Accounting by Parent Companies and Equity Method Investees for Investments in Investment Companies. In October 2007, the AICPA voted to indefinitely defer the effective date of SOP 07-1 (Investment Company Scope) so that certain implementation issues may be addressed. The decision to defer the SOP will be subject to a 30-day comment period. The guidance provides for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide (AAG), Audits of Investment Companies. In addition, for such entities, SOP 07-1 also provides guidance concerning whether specialized industry accounting principles as set forth in the AAG should be applied by a parent company in consolidation or by an equity method investor in an investment company. The Company is currently reviewing the impact that adoption of SOP 07-1 will have on its consolidated financial position and results of operations.

Note 6 -Dividends Declared

Dividends declared by the Company on its common shares for the three months ended September 30, 2007 were $957,236, or $0.025 per share. For the nine months ended September 30, 2007, dividends declared by the Company on its common shares were $2,653,794 or $0.075 per share. For three months and nine months ended September 30, 2006, the Company declared a quarterly dividend of $0.025 per share and a special dividend of $0.025 per share, in the aggregate amount of $1,479,000.

Note 7 - Earnings Per Share

The following table shows the computation of the Company's earnings per share:

 Income Shares Per Share
 (Numerator) (Denominator) Amount
 -------------------- ---------------- -------------------
 ($ in thousands, except shares and per share amounts)
Three Months Ended
September 30, 2007
Net income $ 10,541
 --------------------
Basic earnings per share 10,541 38,277,148 $ 0.28
 ===================
Effect of dilutive securities:
 Stock options 51,106
 Unvested restricted stock 0
 Warrants 221,051
 -------------------- ---------------- -------------------
Diluted earnings per share $ 10,541 38,549,306 $ 0.27
 ==================== ================ ===================
Three Months Ended
September 30, 2006
Net income $ 5,385
 --------------------
Basic income per share 5,385 29,580,000 $ 0.18
 ===================
Effect of dilutive securities:
 Stock options 98,424
 Unvested restricted stock 0
 Warrants 102,455
 -------------------- ---------------- -------------------
Diluted earnings per share $ 5,385 29,780,879 $ 0.18
 ==================== ================ ===================
Nine Months Ended
September 30, 2007
Net income $ 28,130
 --------------------
Basic earnings per share 28,130 35,658,652 $ 0.79
 ===================
Effect of dilutive securities:
 Stock options 76,960
 Unvested Restricted Stock 0
 Warrants 273,212
 -------------------- ----------------
Diluted earnings per share $ 28,130 36,008,824 $ 0.78
 ==================== ================ ===================
Nine Months Ended
September 30, 2006
Net income $ 3,773
 --------------------
Basic per share 3,773 17,075,431 $ 0.22
 -------------------- ---------------- ===================
Diluted per share $ 3,773 17,075,431 $ 0.22
 ==================== ================ ===================

Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under agreements relating to grants or issuances thereof. For the three months ended September 30, 2007 and September 30, 2006, weighted outstanding stock options of 542,829 and zero and weighted restricted stock of 9,988 and zero, respectively, were not considered in computing diluted earnings per share because they were antidilutive. For the nine months ended September 30, 2007 and September 30, 2006, weighted outstanding stock options of 381,957 and 608,355, weighted outstanding warrants of zero and 1,127,000, and weighted restricted stock of 5,220 and zero, respectively, were not considered in computing diluted earnings per share because they were antidilutive.

Note 8 -Employee Stock Option Plan

The Company adopted the provision of SFAS No. 123-R effective January 1, 2006 and granted all of its stock options after that date. The compensation cost of awards is based on the grant-date value of those awards as calculated under SFAS No. 123-R and amortized over the vesting period. The Company's 2006 Long-Term Equity Compensation Plan (the "Plan") provides for grants of any option, stock appreciation right ("SAR"), restricted share, restricted share unit, performance share, performance unit, dividend equivalent or other share-based award. The total number of shares initially reserved for issuance under the Plan was 1,735,021 common shares, of which 1,126,166 options were issued to senior management and non-employee directors of the Company and its subsidiaries in 2006; 539,447 options were issued to non-employee directors and certain officers and employees of the Company and its subsidiaries during the three months ended March 31, 2007; and an additional 16,807 options were issued to senior management for the three months ended June 30, 2007. The Company did not grant any options during the three months ended September 30, 2007. The Plan is administered by the Compensation Committee of the Board of Directors of the Company. The stock options granted to employees vest in installments over 42 months of service and the stock options and restricted shares granted to non-employee directors vest after 12 months of service. No SARs have been granted to date. Each of the Company's three current non-employee directors received 4,094 restricted common shares during the nine months ended September 30, 2007.

As of September 30, 2007, there was $4.5 million of unrecognized compensation costs related to 1,242,650 non-vested stock options. For employees, the cost is expected to be recognized over the vesting periods of the individual options which extend to 42 months. For non-employee directors, the cost is expected to be recognized over the vesting period of 12 months. For the nine months ended September 30, 2007, the Company recognized $1.5 million of compensation expense related to share-based compensation.

 Nine Months Ended Nine Months Ended
 September 30, 2007 September 30, 2006
 ------------------------------- -------------------------------
 Weighted
 Number of Average Number of Weighted Average
 Shares Exercise Price Shares Exercise Price
 --------------- --------------- -------------- ----------------
Outstanding, beginning of period 1,082,666 $ 10.00 -- $ --
Granted at market value 566,254 14.52 1,126,166 10.00
Forfeitures and expirations (20,137) -- (43,500) --
Exercised -- -- -- --
 --------------- --------------
Outstanding, end of period 1,618,783 10.90 1,082,666 10.00
 =============== ==============
Exercisable, end of period 376,133 10.00 -- --
 =============== ==============
Weighted average fair value per share
 of options granted 4.28 4.09

Options outstanding are shown on the following schedule:

 Options exercisable
 ----------------------
 Average Weighted Weighted
 Remaining Average Average
 Number of Contractual Exercise Number of Exercise
Exercise Prices Shares Life Price Shares Price
--------------------- -------------------------------------- ----------------------
December 31, 2006:
$10.00 1,082,666 9.25 years $ 10.00 -- --
 -------------------------------------- ----------------------
Total Options 1,082,666 9.25 years $ 10.00 -- --
 ====================================== ======================

September 30, 2007:
$10.00 1,082,666 8.50 years $ 10.00 376,133 $ 10.00
$14.50 519,310 9.50 years $ 14.50 -- --
$15.25 16,807 9.60 years $ 15.25 -- --
 -------------------------------------- ----------------------
Total Options 1,618,783 8.83 years $ 10.90 376,133 $ 10.00
 ====================================== ======================

Note 9 -Reserves

The components of the liability for loss and loss adjustment expenses are as follows:

 September 30, 2007 December 31, 2006
 ------------------- -------------------
 ($ in thousands)
Case-basis reserves $ 40,515 $ 11,813
IBNR reserves 60,295 22,379
 ------------------- -------------------
Total $ 100,810 $ 34,192
 =================== ===================

Activity in the liability for loss and loss adjustment expenses is summarized as follows:

 Three Months Three Months Nine Months Nine Months
 Ended Ended Ended Ended
 September 30, 2007 September 30, 2006 September 30, 2007 September 30, 2006
 ------------------ ------------------ ------------------- ------------------
 ($ in thousands)
Balance at beginning of period: $ 73,288 $ 10,764 $ 34,192 $ --

Incurred related to:
Current year 34,861 13,919 88,365 25,297
Prior years (379) -- (575) --
 ------------------ ------------------ ------------------- ------------------
Total incurred 34,482 13,919 87,790 25,297
Loss portfolio transfer -- -- -- 21
Paid and payable related to :
Current year 6,172 2,453 11,172 3,088
Prior years 788 -- 10,000 --
 ------------------ ------------------ ------------------- ------------------
Total paid and payable 6,960 2,453 21,172 3,088
 ------------------ ------------------ ------------------- ------------------

Balance at end of period $ 100,810 $ 22,230 $ 100,810 $ 22,230
 ================== ================== =================== ==================

Prior year favorable development of $379,000 for the three months ended September 30, 2007 is due to favorable experience in the Company's brokerage business quota share reinsurance agreement with Tower and, to a lesser extent, in Tower's property and casualty excess of loss reinsurance agreements, in which CastlePoint Re participates, and in a specialty program.

Prior year favorable development of $575,000 for the nine months ended September 30, 2007 is primarily due to favorable experience in the Company's brokerage business quota share reinsurance agreement with Tower and, to a lesser extent, Tower's property and casualty excess of loss reinsurance agreements, in which CastlePoint Re participates.

Note 10 - Segment Information

The Company reports its results in three business segments: reinsurance, insurance and insurance services. The insurance segment includes the results of CastlePoint Insurance and will include the results of any other U.S. licensed insurance companies that we may acquire and of CastlePoint Re for excess lines written on a primary basis. The reinsurance segment includes the results from the reinsurance business written through CastlePoint Re. The insurance services segment includes the results from managing the program business. The insurance services segment will include results from providing unbundled insurance services to program underwriting agents, although no such services were provided prior to September 30, 2007.

The Company evaluates segment performance based on segment profit, which excludes investment income, realized gains and losses, general corporate expenses, interest expenses, income taxes and any other non-core business income or expenses.

The Company does not allocate assets to segments because assets, which consist primarily of investments, are considered in total by management for decision-making purposes.

Tower is a major customer of the Company. See Note 3 "Related Party Transactions." The breakdown of net earned premiums from Tower by segment is as follows:

 Three Months Three Months Nine Months Nine Months
 Ended Ended Ended Ended
 September 30, September 30, September 30, September 30,
 2007 2006 2007 2006
Reinsurance Segment $ 49,265 $ 26,104 $ 131,709 $ 46,411
Insurance Segment 4,486 -- 5,817 --
Total 53,751 26,104 137,526 46,441

The reinsurance segment's geographic risk spread is concentrated in the northeastern U.S., as Tower represents the largest client of this segment and Tower's writings are concentrated in the Northeast of the U.S. CastlePoint Re is geographically expanding, as (1) non-Tower business continues to grow as a percentage of total business, and (2) Tower pursues its own geographic expansion.

The products provided by the reinsurance segment are predominantly quota share reinsurance and, to a lesser extent, excess of loss reinsurance provided to regional U.S. insurance companies. The products provided by the insurance segment are insurance for programs produced by program underwriting agents and insurance provided for U.S. regional companies on a direct or assumed basis.

All customers of the insurance segment are located in the U.S. The reinsurance segment conducts all of its business in Bermuda, but all of the underlying risks are located in the U.S.

 Three Months Ended Nine Months Ended
 September 30, September 30,
 ---------------------- --------------------
 2007 2006 2007 2006
 ----------- ---------- --------- ----------
 ($ in thousands)
Insurance Segment
Revenues:
Net premiums earned $ 4,644 $ -- $ 5,975 $ --
 ----------- ---------- --------- ----------
Total revenues 4,644 -- 5,975 --
 ----------- ---------- --------- ----------
Expenses:
Net loss and loss adjustment expenses 2,997 -- 3,715 --
Underwriting expenses 2,127 -- 2,697 --
 ----------- ---------- --------- ----------
Total expenses 5,124 -- 6,412 --
 ----------- ---------- --------- ----------
Segment loss $ (480) $ -- $ (437) $ --
 =========== ========== ========= ==========

 Three Months Ended Nine Months Ended
 September 30, September 30,
 ----------------------- ---------------------
 2007 2006 2007 2006
 ------------ ---------- ---------- ----------
 ($ in thousands)
Reinsurance Segment
Revenues:
Net premiums earned $ 60,965 $ 27,003 $ 161,171 $ 47,390
 ------------ ---------- ---------- ----------
Total revenues 60,965 27,003 161,171 47,390
 ------------ ---------- ---------- ----------
Expenses:
Net loss and loss adjustment expenses 31,485 13,919 84,075 25,297
Commission expenses 20,929 9,286 54,634 16,405
Other underwriting expenses 1,125 331 2,614 535
 ------------ ---------- ---------- ----------
Total expenses 53,539 23,537 141,323 42,238
 ------------ ---------- ---------- ----------
Segment profit $ 7,426 $ 3,465 $ 19,848 $ 5,153
 ============ ========== ========== ==========

 Three Months Ended Nine Months Ended
 September 30, September 30,
 ---------------------- --------------------
 2007 2006 2007 2006
 ----------- ---------- ---------- ---------
 ($ in thousands)
Insurance Services Segment
Revenues:
Direct commission revenue from program business $ 1,667 $ 854 $ 3,902 $ 1,392
 ----------- ---------- ---------- ---------
Total revenues 1,667 854 3,902 1,392
 ----------- ---------- ---------- ---------
Expenses:
Direct commission expenses from program business 1,222 617 2,930 1,016
Other insurance services expenses 1,435 1,032 4,566 1,757
 ----------- ---------- ---------- ---------
Total expenses 2,657 1,649 7,496 2,773
 ----------- ---------- ---------- ---------
Segment loss $ (990) $ (795) $ (3,594) $ (1,381)
 =========== ========== ========== =========

 Three Months Nine Months
 Ended September 30, Ended September 30,
 ----------------------- ---------------------
 2007 2006 2007 2006
 ------------ ---------- ----------- ---------
 ($ in thousands)
Revenues:
 Insurance segment $ 4,644 $ -- $ 5,975 $ --
 Reinsurance segment 60,965 27,003 161,171 47,390
 Insurance services segment 1,667 854 3,902 1,392
 ------------ ---------- ----------- ---------
Total segment revenues 67,277 27,857 171,048 48,782
 ------------ ---------- ----------- ---------
Net Investment income 7,538 3,791 21,417 6,697
Net realized capital (losses)/gains (79) 7 (98) 10
 ------------ ---------- ----------- ---------
Consolidated revenues $ 74,735 $ 31,655 $ 192,367 $ 55,489
 ============ ========== =========== =========

 Three Months Nine Months
 Ended September 30, Ended September 30,
 ---------------------- ---------------------
 2007 2006 2007 2006
 ----------- ---------- ---------- ----------
 ($ in thousands)
Insurance segment loss $(480) $-- $(437) $--
Reinsurance segment profit 7,426 3,465 19,848 5,153
Insurance services segment loss (990) (795) (3,594) (1,381)
 ----------- ---------- ---------- ----------
Segment profit 5,957 2,670 15,817 3,772
Net investment income 7,538 3,791 21,417 6,6967
Net realized capital (losses)/gains (79) 7 (98) 10
Corporate expenses (1,576) (1,083) (4,652) (2,100)
Interest expense (2,254) -- (6,608) --
Other expense -- -- -- (4,605)
 ----------- ---------- ---------- ----------
Income before taxes $9,585 $5,385 $25,876 $3,773
 =========== ========== ========== ==========

Note 11 - Trust Agreements

Under the terms of the quota share reinsurance agreements between CastlePoint Re and Tower's insurance companies, CastlePoint Re is required to provide security to Tower's insurance companies to support reinsurance recoverables owed to these reinsureds in a form acceptable to the insurance commissioners of the State of New York and Commonwealth of Massachusetts, the domiciliary states of Tower's insurance companies. These trust arrangements permit Tower's insurance companies to take credit on their statutory financial statements for the reinsurance ceded to CastlePoint Re, either as an additional asset or as a reduction in liability. CastlePoint Re is also required by its reinsurance agreements with its other cedents to collateralize amounts through a letter of credit, cash advance, funds held or a trust account meeting the requirements of the applicable state insurance regulations.

As of September 30, 2007, CastlePoint Re had fixed maturities and cash held in trust accounts for the benefit of its reinsureds totaling approximately $181.9 million, an increase of approximately $84.1 million since December 31, 2006. CastlePoint Re earns and collects the interest on the trust funds.

Note 12 - Subsequent Events

On October 31, 2007, the Board of Directors of CastlePoint Holdings approved a quarterly dividend of $0.025 per share payable December 31, 2007 to the Company's shareholders of record as of December 17, 2007.

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

Note on Forward-Looking Statements

Some of the statements in this quarterly report, including without limitation, in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," including those using words such as "believes," "expects," "intends," "estimates," "projects," "predicts," "assumes," "anticipates," "plans" and "seeks," and comparable terms, are forward-looking statements. Forward-looking statements are not statements of historical fact and reflect our views and assumptions as of the date of this quarterly report regarding future events and operating performance. Because we have a very limited operating history, many statements relating to us and our business, including statements relating to our competitive strengths and business strategies, are forward-looking statements.

All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to, the risk factors identified in our Registration Statement on Form S-1 (File No. 333-139939) relating to the initial public offering, initially filed with the SEC on January 11, 2007 (as amended, the "Registration Statement") and the following:

o our relatively short operating history and our delays in receiving regulatory approval for some of the transactions described in this quarterly report and/or in our other filings with the SEC;

o our heavy dependence on Tower for revenue in our initial years of operation, and possibly beyond, and the continued growth of Tower's business, including as a result of its acquisition of Preserver Group Inc. in April 2007, in the future consistent with Tower's past growth;

o the risk that CastlePoint Bermuda Holdings or CastlePoint Holdings may be deemed to be engaged in a U.S. trade or business, or CastlePoint Re may be considered to be doing business through a permanent establishment in the U.S., either of which would subject these companies to U.S. taxation, which could have a material adverse effect on our business, financial condition and results of operations;

o the terms of our arrangements with Tower may change as a result of the regulatory review and approval process;

o our ability to write premiums with clients other than Tower;

o the possibility that we may need additional capital to further capitalize CastlePoint Re and CastlePoint Insurance for our reinsurance business and insurance business, respectively, as well as at least one additional broadly licensed U.S. insurance company for our insurance business, and to make strategic investments in some of our clients, including Tower, and the risk that we may not be able to obtain future financing on favorable terms or at all;

o our ability to hire, retain and integrate our management team and other personnel;

o the risk that we may not be able to implement our business strategy;

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

o changes in regulation or tax laws applicable to us, our brokers or our customers;

o changes in the availability, cost or quality of insurance business that meets our reinsurance underwriting standards;

o 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 and limits of the products we intend to write;

o inability of any additional U.S. licensed insurance companies that we may acquire to obtain acceptable ratings from A.M. Best;

o possible future downgrade in the rating of CastlePoint Re, CastlePoint Insurance or any additional U.S. licensed insurance companies we may acquire. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations--Ratings";

o changes in rating agency policies or practices;

o changes in accounting policies or practices; and

o changes in general economic conditions, including inflation, foreign currency exchange rates, interest rates and other factors.

This list of factors is not exhaustive and should be read with the other cautionary statements that are included in this quarterly report.

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from our projections. Any forward-looking statements you read in this quarterly report reflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to, among other things, our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph. All investors and potential investors in our common shares should specifically consider the factors identified in this quarterly report and the risk factors identified in our Registration Statement filed with the SEC that could cause actual results to differ from those discussed in the forward-looking statements before making an investment decision. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future events or otherwise.

Critical Accounting Estimates

The Company's consolidated financial statements and the related disclosures included in this quarterly report have been prepared in accordance with U.S. GAAP. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect reported and disclosed amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities as at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. We believe the following accounting policies are critical to our operations, as their application requires management to make the most significant judgments. We believe the items that require the most subjective and complex estimates are:

o premiums;

o losses and loss adjustment expense reserves;

o deferred acquisition costs;

o investments;

o reinsurance accounting;

o deferred taxes; and

o U.S. taxation.

Of the items mentioned above, management believes that a discussion of premiums, losses and loss adjustment expense reserves, deferred tax and U.S. taxation is appropriate in this quarterly report due to the developments that occurred during the third quarter of 2007. More information regarding our other critical accounting estimates is included in the section entitled "Critical Accounting Estimates" in the "Management Discussion and Analysis of Financial Condition and Results of Operations" included in the Registration Statement.

Regarding premium estimates, while we attempt to obtain current assumed premiums written statements from ceding companies, it is common that the most recent month statements are not received from the ceding company until after the period ending and, in some cases, the most recent quarter. Therefore, assumed premiums written from these ceding companies are estimated for the most recent month or, in some cases, for several months. With respect to CastlePoint Re's three quota share reinsurance agreements with Tower's insurance companies, we obtain current monthly statements and record assumed premiums written from Tower on an actual, rather than estimated, basis. For ceding companies from which we have not received current monthly statements and therefore must estimate the most recent period's assumed premiums written, the difference between the estimated assumed premiums written and actual assumed premiums written is reflected in the subsequent accounting period or as soon as the actual assumed premiums written are obtained. For our most recent quarter ended September 30, 2007, approximately 17% of the assumed written premiums and approximately 3% of the corresponding assumed earned premiums are based upon premium estimates. After provision for applicable loss and loss adjustment expenses and commission and other acquisition expenses, the impact of these estimates would not have a material effect on the Company's consolidated financial position or results of operations.

Regarding loss and loss adjustment expense estimates, changes in loss reserve estimates may result from (1) variability in the estimation process itself, and (2) the fact that external factors may cause changes in the future that are not reflected in historical patterns. With respect to the former source of variability, i.e. estimation process variation, we attempt to reduce this source of variation by evaluating the underlying data accuracy from our clients and the impact of underwriting and pricing changes on expected loss ratios. Using all of the information made available to us by our clients, we determine a best estimate of the loss ratio for each client and each program or treaty. With regard to the potential variability in loss reserve estimates due to the fact that future patterns may differ from historical patterns, we measure actual reported claim results by contract as compared to the expected claims results. If reported claims results differ significantly from expected claim results, then we revise our estimated reserves accordingly. Nevertheless, there can be no assurances that our reserves will prove to be adequate, as there may still be variability in the estimation process and future claims may vary significantly from historical patterns.

The deferred tax asset at September 30, 2007 was $4.1 million, which was comprised of the tax effects for cost of stock options, unrealized losses and CastlePoint Management's net loss. In assessing the valuation of deferred tax assets, we consider whether it is more likely than not that some portion or all the deferred tax will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income to offset previous operating losses or during periods in which temporary differences become deductible. Our management currently believes that it is more likely than not that we will recover all of the assets based primarily upon future profitability of our U.S. operations.

Regarding U.S. taxation, if either CastlePoint Bermuda Holdings or CastlePoint Holdings are deemed by the U.S. Internal Revenue Service to be engaged in a U.S. trade or business, or if CastlePoint Re is considered to be doing business through a permanent establishment in the U.S., then these entities would be subject to U.S. taxation. FIN No. 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement for uncertain tax positions taken or expected to be taken in income tax returns. The Company is to determine whether it is "more likely than not" (i.e., greater than 50% certain) that our position would be sustained upon examination by tax authorities. Tax positions that meet the "more likely than not" threshold are then measured using a probability weighted approach recognizing the largest amount of tax benefit that has greater than a 50% likelihood of being realized upon ultimate settlement. The adoption of FIN 48 has not had a material impact on the Company's consolidated financial position or results of operations.

Consolidated Results of Operations

 Three Months Ended September 30, Nine Months Ended September 30,
 2007 2006 2007 2006
 ------------------- ----------------- ----------------- -----------------
 ($ in thousands)
Revenues
Net premiums earned $ 65,610 $ 27,003 $ 167,146 $ 47,390
Commission income 1,667 854 3,902 1,392
Net investment income 7,538 3,791 21,417 6,697
Net realized investment (losses)/gains (79) 7 (98) 10
 ------------------- ----------------- ----------------- -----------------
Total revenues 74,736 31,655 192,367 55,489
 ------------------- ----------------- ----------------- -----------------
Expenses
Net loss and loss adjustment expenses 34,482 13,919 87,790 25,297
Commission and other acquisition expenses 24,147 9,903 60,110 17,421
Other operating expenses 4,268 2,448 11,983 8,998
Interest expenses 2,254 -- 6,608 --
 ------------------- ----------------- ----------------- -----------------
Total expenses 65,151 26,270 166,491 51,716
 ------------------- ----------------- ----------------- -----------------
Income before taxes 9,585 5,385 25,876 3,773
Income tax benefit 956 -- 2,254 --
 ------------------- ----------------- ----------------- -----------------
Net Income $ 10,541 $ 5,385 $ 28,130 $ 3,773
 =================== ================= ================= =================
Key Measures
Return on average equity 10.3% 8.0% 10.7% 2.8%
Consolidated combined ratio 93.3% 94.1% 93.3% 106.2%

We calculate our loss and expense ratios by segment. See "--Insurance Segment Results of Operations," "--Reinsurance Segment Results of Operations" and "--Insurance Services Segment Results of Operations" below.

Consolidated Results of Operations for the Three Months Ended September 30, 2007 and 2006

Summary. Despite softening market conditions reported by some companies in the property and casualty industry, CastlePoint has not yet experienced significant weakening in pricing or a softening in demand for its products. Management believes that this is in large part due to CastlePoint's emphasis on providing solutions to small insurance companies and program underwriting agents, which results in the transfer by such companies and program underwriting agents to CastlePoint of large blocks of business composed of small policies, and a growing industry awareness of CastlePoint's capabilities to provide primary insurance company capacity combined with reinsurance capacity and customized insurance services.

Net income increased 96% to $10.5 million for the three months ended September 30, 2007, compared to $5.4 million for the same period in 2006. Net income excluding realized and unrealized gains (losses) increased 113.0% to $11.5 million for the three months ended September 30, 2007, compared to $5.4 million for the same period in 2006. Net earned premiums increased 143.0% to $65.6 million, based upon growth from Tower, CastlePoint's largest client, as well as growth from other clients. CastlePoint Insurance implemented its alternative insurance risk-sharing solutions with Tower during the third quarter of 2007, and as a result, wrote $23.4 million in direct premiums from Tower.

Total revenues. Total revenues increased by 136.1% to $74.7million for the three months ended September 30, 2007, compared to $31.7 million for the same period in 2006. The increase is primarily due to the increase in net premiums earned and net investment income. Revenues for the three months ended September 30, 2007 consisted of net premiums earned (87.8% of the total revenues), commission income (2.2% of the total revenues) and net investment income and realized losses (10.0% of the total revenues) compared to net premiums earned
(85.3% of the total revenues), commission income (2.7% of the total revenues)
and net investment income (12.0% of the total revenues) for the same period in 2006.

Premiums earned. Net premiums earned increased by 143.0% to $65.6 million for the three months ended September 30, 2007 compared to $27.0 million for the same period in 2006. The business assumed by CastlePoint Re and CastlePoint Insurance under our reinsurance agreements with Tower's insurance companies and the business written directly using CastlePoint Insurance's policies through Tower Risk Management represented 80.2% of net premiums earned for the three months ended September 30, 2007 compared to 96.7% of net premiums earned for the same period in 2006.

Commission income. Commission income increased 95.2% to $1.7 million for the three months ended September 30, 2007 compared to $0.9 million for the three months ended September 30, 2006. We received this commission income as a result of CastlePoint Management's management of the specialty and traditional programs.

Net investment income and realized investment gains/(losses). Net investment income increased by 98.8% to $7.5 million for the three months ended September 30, 2007 compared to $3.8 million for the three months ended September 30, 2006. The growth resulted from an increase in cash and invested assets to $675.4 million as of September 30, 2007 compared to $309.6 million as of September 30, 2006. The increase in invested assets primarily resulted from the proceeds of approximately $114 million after the deduction of underwriting discounts and other estimated offering expenses from our IPO in March 2007 and $100 million of cash received for the issuance of subordinated debentures in connection with the trust preferred securities issued in December 2006. The investment book yield on our invested assets was 4.7% for the three months ended September 30, 2007 compared to 5.5% for the same period in 2006. The decrease in yield is generally due to our investment in a limited partnership where we booked an unrealized loss of $1.3 million offset by a realized gain of $0.4 million in net investment income partially mitigated by an extension in the average duration of our fixed maturity portfolio from 2.27 years at September 2006 to 2.63 years at September 2007, to take advantage of a more normalized yield curve compared with a relatively flat yield curve at September 2006. The partnership invests in highly rated municipal bonds, which were negatively impacted by the recent "flight to quality" and lack of liquidity. We believe this impairment to be temporary.

Realized losses were $0.1 million for the nine months ended September 30, 2007, compared with virtually zero for the nine months ended September 30, 2006.

Loss and loss adjustment expenses. Loss and loss adjustment expenses increased 147.7% to $34.5 million, which produced a 52.6% loss ratio for the three months ended September 30, 2007 compared to $13.9 million which produced a 51.5% loss ratio for the same period in 2006. The calendar year loss ratio includes an accident year loss ratio of 52% and reflects $0.4 million of revised estimates in loss reserves from the prior year. The change in prior year loss reserves resulted mainly from a reduction in the Tower brokerage quota share reinsurance agreement and, to a lesser extent, a reduction in various excess of loss reinsurance agreements assumed from Tower.

Operating expenses. Operating expenses increased 130.1% to $28.4 million for the three months ended September 30, 2007, from $12.4 million for the same period in 2006. Operating expenses are comprised of commission expense and other operating expenses, including corporate expenses (primarily, salaries, audit, legal services and insurance expenses). The increase was due primarily to the increase in commission and other acquisition expenses resulting from the growth in premiums earned and, to a lesser extent, an increase in payroll and payroll related expenses due to increase in staffing.

Interest expense. Our interest expense was $2.3 million for the three months ended September 30, 2007 compared to zero for the three months ended September 30, 2006. Interest expense resulted primarily from the $103.1 million of subordinated debentures issued by us in December 2006 at an average fixed interest rate of 8.6%.

Income tax benefit. Our income tax benefit was $1.0 million for the three months ended September 30, 2007 compared to zero for the three months ended 30, 2006. The effective income tax rate was negative 10.0% for the three months ended September 30, 2007 due to losses generated in our U.S. operations.

Net income and return on average equity. Our net income was $10.5 million for the three months ended September 30, 2007 compared to $5.4 million for the same period in 2006. Our annualized return on average equity was 10.3% for the three months ended September 30, 2007 compared 8.0% for the same period in 2006. The annualized return for the three months ended September 30, 2007 was calculated by dividing annualized net income of $42.2 million by weighted average shareholders' equity of $409.0 million. The annualized return for the three months ended September 30, 2006 was calculated by dividing annualized net income of $21.5 million by weighted average shareholders' equity of $270.0 million. The increase in the average return on equity resulted from the increased earned premiums due to an increased amount of business written in 2007 as well as higher earned premiums from business written in 2006. Also invested assets as a percentage of equity increased, thereby increasing our net income relative to equity.

Consolidated combined ratio. One of our key measures of profitability is what we refer to as our consolidated combined ratio, which is calculated by (i) dividing the total expenses (excluding interest expenses) minus commission income by (ii) net premiums earned. Our consolidated combined ratio for the three months ended September 30, 2007 was 93.3% compared to 94.1% for the same period in 2006.

Consolidated Results of Operations for the Nine Months Ended September 30, 2007 and 2006

CastlePoint Re commenced writing business as of April 6, 2006. Therefore, the nine months ended September 30, 2006 are comprised of operations for the period April 6, 2006 through September 30, 2006. CastlePoint Insurance did not conduct any business in 2006.

Total revenues. Total revenues increased by 246.7% to $192.4 million for the nine months ended September 30, 2007, compared to $55.5 million for the same period in 2006. The increase is primarily due to the increase in net premiums earned and net investment income. Revenues for the nine months ended September 30, 2007 consisted of net premiums earned (86.9% of the total revenues), commission income (2.0% of the total revenues) and net investment income and net realized losses (11.0% of the total revenues) compared to net premiums earned
(85.4% of the total revenues), commission income (2.5% of the total revenues)
and net investment income (12.1% of the total revenues) for the same period in 2006.

Premiums earned. Net premiums earned increased by 252.7% to $167.1 million for the nine months ended September 30, 2007 compared to $47.4 million for the same period in 2006. The business assumed by CastlePoint Re and CastlePoint Insurance under our reinsurance agreements with Tower's insurance companies and the business written directly in CastlePoint Insurance through Tower represented 80.6% of net premiums earned for the nine months ended September 30, 2007 compared to 98% of net premiums earned for the same period in 2006.

Commission income. Commission income increased 180.2% to $3.9 million for the nine months ended September 30, 2007 compared to $1.4 million for the nine months ended September 30, 2006. We received this commission and fee income as a result of CastlePoint Management's management of the specialty and traditional programs. This increase reflects growth in existing programs as well as a full nine months of operations for the current period.

Net investment income and realized investment gains/(losses). Net investment income increased by 219.8% to $21.4 million for the nine months ended September 30, 2007 compared to $6.7 million for the nine months ended September 30, 2006. The growth resulted from an increase in cash and invested assets to $675.4 million as of September 30, 2007 compared to $309.6 million as of September 30, 2006. The increase in invested assets resulted from cash flows provided by operations of $95.8 million as a result of growth in premiums, the proceeds of approximately $114 million after the deduction of underwriting discounts and other estimated offering expenses from our IPO in March 2007 and approximately $100 million of cash received for the issuance of subordinated debentures in connection with the trust preferred securities issued in December 2006. The investment book yield on our invested assets was 5.2% for the nine months ended September 30, 2007 compared to 5.5% for the same period in 2006. The decrease in yield is generally due to our investment in a limited partnership, with respect to which we booked an unrealized loss of $1.3 million offset by a realized gain of $0.4 million in net investment income partially mitigated by an extension in the average duration of our fixed maturity portfolio from 2.27 years at September 2006 to 2.63 years at September 2007, to take advantage of a more normalized yield curve compared with a relatively flat yield curve at September 2006. The partnership invests in highly rated municipal bonds, which were negatively impacted by the recent "flight to quality" and lack of liquidity. We believe this impairment to be temporary.

Realized losses were $0.1 million for the nine months ended September 30, 2007 compared with virtually zero for the nine months ended September 30, 2006.

Loss and loss adjustment expenses. Loss and loss adjustment expenses increased 247.0% to $87.8 million, which produced a 52.5% loss ratio for the nine months ended September 30, 2007 compared to $25.3 million which produced a 53.4% loss ratio for the same period in 2006. The reduction in the loss ratio is primarily due to favorable experience to date on our brokerage business quota share reinsurance agreement with Tower.

Operating expenses. Operating expenses increased 172.9% to $72.1 million for the nine months ended September 30, 2007, from $26.4 million for the same period in 2006. Operating expenses are comprised of commission expense and other operating expenses, including corporate expenses (primarily, salaries, audit, legal services and insurance expenses). The increase was due primarily to the increase in commission and other acquisition expenses resulting from the growth in premiums earned and, to a lesser extent, an increase in payroll and payroll related expenses due to increase in staffing.

Interest expense. Interest expense was $6.6 million for the nine months ended September 30, 2007 compared to zero for the nine months ended September 30, 2006. Interest expense resulted primarily from the $103.1 million of subordinated debentures issued in connection with trust preferred securities issued by us in December 2006 at an average fixed interest rate of 8.6%.

Income tax benefit. Our income tax benefit was $2.3 million for the nine months ended September 30, 2007 compared to zero for the nine months ended 30, 2006. The effective income tax rate was negative 8.7% for the nine months ending September 30, 2007 due to losses generated in our U.S. operations.

Net income and return on average equity. Our net income was $28.1 million for the nine months ended September 30, 2007 compared to $3.8 million for the same period in 2006. Our annualized return on average equity was 10.7% for the nine months ended September 30, 2007. The annualized return was calculated by dividing annualized net income of $37.5 million by weighted average shareholders' equity of $349.1 million.

Consolidated combined ratio. One of our key measures of profitability is what we refer to as our consolidated combined ratio, which is calculated by (i) dividing the total expenses (excluding interest expenses) minus commission income by (ii) net premiums earned. Our consolidated combined ratio for the nine months ended September 30, 2007 was 93.3% compared to 106.2% for the same period in 2006. Included in the 2006 ratio was the cost of the warrants we issued to Tower of $4.6 million.

Insurance Segment Results of Operations

 Three Months Ended Nine Months Ended
 September 30, September 30,
 2007 2006 2007 2006
 ---------------- -------------- ---------------- ---------------
 ($ in thousands)
Revenues
Premiums earned
 Gross premiums earned $ 6,063 $ -- $ 7,394 $ --
 Less: ceded premiums earned (1,419) -- (1,419) --
 ---------------- -------------- ---------------- ---------------
 Net premiums earned 4,644 -- 5,975 --
 ---------------- -------------- ---------------- ---------------
Expenses
Loss and loss adjustment expenses
 Gross loss and loss adjustment
 expenses 3,312 -- 4,030 --
 Less: ceded loss and loss
 adjustment expenses (315) -- (315) --
 ---------------- -------------- ---------------- ---------------
 Net loss and loss adjustment
 expenses 2,997 -- 3,715 --
 ---------------- -------------- ---------------- ---------------
Underwriting expenses
 Commission expense 1,997 -- 2,546 --
 Other underwriting expenses 130 -- 151 --
 ---------------- -------------- ---------------- ---------------
Total underwriting expenses 2,127 -- 2,697 --
 ---------------- -------------- ---------------- ---------------
Underwriting Loss $ (480) $ -- $ (437) $ --
 ================ ============== ================ ===============

Key Measures
Premiums written
Gross premiums written $ 28,696 $ -- $ 42,228 $ --
 Less: ceded premiums written (7,096) -- (7,096) --
 ---------------- -------------- ---------------- ---------------
 Net premiums written $ 21,600 $ -- $ 35,132 $ --
 ================ ============== ================ ===============
Loss Ratios
Gross 54.6% n/a 54.5% n/a
Net 64.5% n/a 62.2% n/a
Accident Year Loss Ratios
Gross 54.6% n/a 54.5% n/a
Net 64.5% n/a 62.2% n/a
Underwriting Expense Ratios
Gross 35.1% n/a 36.5% n/a
Net 45.8% n/a 45.1% n/a
Combined Ratios
Gross 89.7% n/a 91.0% n/a
Net 110.3% n/a 107.3% n/a

Insurance Segment Results of Operations for the Three Months Ended September 30, 2007 and 2006

The insurance segment did not conduct any business and did not have any premium income, obligations relating to insurance policies, employees and operations for the three months ended September 30, 2006.

Summary. The Insurance segment had an underwriting loss for the three months ended September 30, 2007 due to the cost of purchasing property catastrophe reinsurance. However, on a gross of reinsurance basis, the combined ratio was 89.7% which reflects solid underlying profitability, and when the premiums earned increase relative to premiums written the net combined ratio is expected to decrease and be closer to the gross combined ratio. Premiums written in the three month period ended September 30, 2007 increased significantly based upon implementation of the alternative insurance risk-sharing solutions with Tower which generated $23.4 million in premiums written during the period, as well as premiums written of $5.7 million on another risk sharing arrangement with a client other than Tower.

Gross premiums and net premiums. Gross and net premiums written were $28.7 million and $21.6 million, respectively, for the three months ended September 30, 2007. Gross and net premium earned were $6.1 and $4.6 respectively, for the three months ended September 30, 2007. CastlePoint Insurance assumed $5.7 million through a new program managed by CastlePoint Management and wrote approximately $23.4 million of direct business that was produced by Tower Risk Management Corp., a subsidiary of Tower. The ceded premium consisted of excess of loss and catastrophe premium of which approximately 49% was ceded to third party reinsurers and 51% to CastlePoint Re.

Gross and net loss and loss adjustment expenses and loss ratio. Gross loss and loss adjustment expenses were $3.3 million, which produced a 54.6% gross loss ratio for the three months ended September 30, 2007. Net loss and loss adjustment expenses were $3.0 million, which produced a 64.5% net loss ratio for the three months ended September 30, 2007. The net loss ratio was negatively impacted by $0.9 million of ceded catastrophe premium written and earned with a zero percent loss ratio.

Underwriting loss and net combined ratio. The underwriting loss and net combined ratio from the insurance segment was $480,000 and 110.3%, respectively, for the three months ended September 30, 2007.

Insurance Segment Results of Operations for the Nine Months Ended September 30, 2007 and 2006

The insurance segment did not conduct any business and did not have any premium income, obligations relating to insurance policies, employees and operations for the nine months ended September 30, 2006.

Gross premiums and net premiums. Gross and net premiums written were $42.2 million and $35.1 million, respectively, for the nine months ended September 30, 2007. Gross and net premium earned were $7.4 and $6.0 respectively, for the nine months ended September 30, 2007. CastlePoint Insurance assumed $5.7 million through a new program managed by CastlePoint Management, and wrote approximately $23.9 million of direct business that was produced by Tower Risk Management Corp., a subsidiary of Tower, which incepted in the third quarter; CastlePoint Insurance also assumed $12.6 million of Tower's brokerage business during the second quarter. The ceded premium consisted of excess of loss and catastrophe premium, of which approximately 49% was ceded to third party reinsurers and 51% to CastlePoint Re.

Gross and net loss and loss adjustment expenses and loss ratio. Gross loss and loss adjustment expenses were $4.0 million, which produced a 54.5% gross loss ratio for the nine months ended September 30, 2007. Net loss and loss adjustment expenses were $3.7 million, which produced a 62.2% net loss ratio for the nine months ended September 30, 2007. The net loss ratio was negatively impacted by $0.9 million of ceded catastrophe premium written and earned with a zero percent loss ratio.

Underwriting expenses and underwriting expense ratio. Underwriting expenses for the insurance segment are comprised of commission and other underwriting expenses. Commission expense was $2.5 million and other underwriting expenses were minimal for the nine months ended September 30, 2007. The gross underwriting expense ratio was 36.5% and the net underwriting expense ratio were 45.1% for the nine months ended September 30, 2007. The gross commission rate paid on direct business that was produced by Tower Risk Management Corp. and the business assumed from Tower's brokerage business was 36%, which includes a commission slide of 2% based upon profitable loss ratio results.

Underwriting loss and net combined ratio. The underwriting loss and net combined ratio from the insurance segment were $437,000 and 107.3%, respectively, for the nine months ended September 30, 2007.

Reinsurance Segment Results of Operations

 Three Months Ended September 30, Nine Months Ended September 30,
 2007 2006 2007 2006
 ----------------- ----------------- ----------------- -----------------
 ($ in thousands)
Revenues
Premiums earned
 Gross premiums earned $ 60,965 $ 27,003 $ 161,171 $ 47,390
 Less: ceded premiums earned -- -- -- --
 ----------------- ----------------- ----------------- -----------------
 Net premiums earned 60,965 27,003 161,171 47,390
 ----------------- ----------------- ----------------- -----------------
Expenses
Loss and loss adjustment expenses
 Gross loss and loss adjustment expenses 31,485 13,919 84,075 25,297
 Less: ceded loss and loss adjustment expenses -- -- -- --
 ----------------- ----------------- ----------------- -----------------
 Net loss and loss adjustment expenses 31,485 13,919 84,075 25,297
 ----------------- ----------------- ----------------- -----------------
Underwriting expenses
 Ceding commission expense 20,929 9,286 54,634 16,405
 Other underwriting expenses 1,125 331 2,614 535
 ----------------- ----------------- ----------------- -----------------
Total underwriting expenses 22,054 9,618 57,248 16,940
 ----------------- ----------------- ----------------- -----------------
Underwriting Profit $ 7,426 $ 3,465 $ 19,848 $ 5,153
 ================= ================= ================= =================

Key Measures
Premiums written
 Gross premiums written $ 68,975 $ 43,664 $ 207,849 $ 116,406
 Less: ceded premiums written -- -- -- --
 ----------------- ----------------- ----------------- -----------------
 Net premiums written $ 68,975 $ 43,664 $ 207,849 $ 116,406
 ================= ================= ================= =================
Loss Ratios
Gross 51.6% 51.5% 52.2% 53.4%
Net 51.6% 51.5% 52.2% 53.4%
Accident Year Loss Ratios
Gross 52.3% 51.5% 52.5% 53.4%
Net 52.3% 51.5% 52.5% 53.4%
Underwriting Expense Ratios
Gross 36.2% 35.6% 35.5% 35.7%
Net 36.2% 35.6% 35.5% 35.7%
Combined Ratios
Gross 87.8% 87.1% 87.7% 89.1%
Net 87.8% 87.1% 87.7% 89.1%

Reinsurance Segment Results of Operations for the Three Months Ended September 30, 2007 and 2006

Summary. The Reinsurance segment is predominantly quota share reinsurance. The segment had excellent results driven by a significant increase in premiums written and earned and a combined ratio of 87.8%. CastlePoint Re assumed 40% of Tower's brokerage business during the period, and premiums from clients other than Tower were 27% of total premiums written. The loss ratio of 51.6% benefited by 0.7 points from favorable loss development on prior accident years. The expense ratio of 36.2% reflects 36.0% ceding commissions to Tower, which includes 2 points of profit sharing commission to Tower based upon its loss ratios. Ceding commissions to clients other than Tower also included profit sharing commissions.

Gross premiums and net premiums. Gross and net written premiums increased 58.0% to $69.0 million for the three months ended September 30, 2007 from $43.7 million for the three months ended September 30, 2006. Business not originated from Tower and CastlePoint Insurance represents 26.6% or $18.3 million of the total written premiums compared to 9.3% or $4.1 million during the same period last year. The quota share reinsurance agreements originated from third-party clients included a new non-standard automobile U.S. regional insurance company and a U.S. regional insurance company specializing in small workers compensation and commercial automobile. Gross and net premiums earned increased by 125.8% to $61.0 million for the three months ended September 30, 2007 from $27.0 million for the same period in 2006. The increase is attributable to the fact we have a full year of written premium included in our earned premium for the three months ended September 30, 2007 compared to only two quarters of written premium included for the same period in 2006. Further, during the three months ended September 30, 2007, CastlePoint Re added four new quota share reinsurance agreements (resulting in earned premium of $0.7 million) and one new excess of loss reinsurance agreement (resulting in earned premium of $0.2 million).

Loss and loss adjustment expenses and loss ratio. Loss and loss adjustment expenses increased by 126.2% to $31.5 million, which produced a 51.6% loss ratio for the three months ended September 30, 2007 compared to $13.9 million, which produced a 51.5% loss ratio for the same period in 2006.

Underwriting expenses and underwriting expense ratio. Underwriting expenses for the reinsurance segment are comprised of ceding commission paid to insurance companies, which cede business to CastlePoint Re, and other underwriting expenses. Ceding commission expense was $20.9 million and other underwriting expenses were $1.1 million for the three months ended September 30, 2007 compared to $9.3 million and $0.3 million, respectively, for the same period in 2006. Both the gross underwriting expense ratio and the net underwriting expense ratio were 36.2% for the three months ended September 30, 2007 compared to 35.6% for the same period in 2006.

Underwriting profit and combined ratio. The underwriting profit and combined ratio from the reinsurance segment was $7.4 million and 87.8%, respectively, for the three months ended September 30, 2007 compared to $3.5 million and 87.1% for the same period in 2006. The combined ratio increased slightly as a result of higher profit sharing commission due to favorable loss ratios on several treaties.

Reinsurance Segment Results of Operations for the Nine Months Ended September 30, 2007 and 2006

Gross premiums and net premiums. Gross and net written premiums increased 78.6% to $207.8 million for the nine months ended September 30, 2007 from $116.4 million for the nine months ended September 30, 2006. Included in the gross and net premiums of $116.4 million in 2006 was a transfer of unearned written premiums in the amount of $40.9 million. The total amount of net written premiums originated by and assumed from Tower and CastlePoint Insurance by CastlePoint Re for the nine months ended September 30, 2007 was $157.6 million or 75.8% of total written premium compared to $111.1 million or 95% during the same period last year. Gross and net premiums earned increased by 240.1% to $161.2 million for the nine months ended September 30, 2007 from $47.4 million for the same period in 2006. The increase is attributable to the fact we have a full year of written premium included in our earned premium for the three months ended September 30, 2007 compared to only two quarters of written premium included for the same period in 2006. Further, during the third quarter 2007 CastlePoint Re entered into four new quota share reinsurance agreements (resulting in earned premium of $0.7 million) and one new excess of loss reinsurance agreement (resulting in earned premium of $0.2 million). Three reinsurance agreements, out of the five new reinsurance agreements that CastlePoint Re entered into during the third quarter 2007, represent business from clients other than Tower and CastlePoint Insurance.

Loss and loss adjustment expenses and loss ratio. Loss and loss adjustment expenses increased by 232.3% to $84.1 million, which produced a 52.2% loss ratio for the nine months ended September 30, 2007 compared to $25.3 million, which produced a 53.4% loss ratio for the same period in 2006, primarily reflecting favorable development on our brokerage business quota share reinsurance agreement with Tower.

Underwriting expenses and underwriting expense ratio. Underwriting expenses for the reinsurance segment are comprised of ceding commission paid to insurance companies, which cede business to CastlePoint Re, and other underwriting expenses. Ceding commission expense was $54.6 million and other underwriting expenses were $2.6 million for the nine months ended September 30, 2007 compared to $16.4 million and $0.5 million, respectively, for the same period in 2006. Both the gross underwriting expense ratio and the net underwriting expense ratio were 35.5% for the nine months ended September 30, 2007 compared to 35.7% for the nine months ended September 30, 2006.

Underwriting profit and combined ratio. The underwriting profit and combined ratio from the reinsurance segment was $19.9 million and 87.7%, respectively, for the nine months ended September 30, 2007 compared to $5.2 million and 89.1%, respectively, for the nine months ended September 30, 2006. The principal factor that led to the improvement in the underwriting profit and combined ratio for the reinsurance segment was a reduction in the loss ratio attributable to the Tower brokerage quota business.

Insurance Services Segment Results of Operations

 Three Months Ended September 30, Nine Months Ended September 30,
 2007 2006 2007 2006
 ----------------- ----------------- ------------------ -----------------
 ($ in thousands)
Revenues
Direct commission revenue from programs $ 1,667 $ 854 $ 3,902 $ 1,392
 ----------------- ----------------- ------------------ -----------------
Total Revenues 1,667 854 3,902 1,392
 ----------------- ----------------- ------------------ -----------------
Expenses
Direct commissions expense for programs 1,222 617 2,930 1,016
Other insurance services expenses 1,435 1,032 4,567 1,757
 ----------------- ----------------- ------------------ -----------------
Total Expenses 2,657 1,649 7,496 2,773
 ----------------- ----------------- ------------------ -----------------
Insurance Services Loss $ (990) $ (795) $ (3,594) $ (1,381)
 ================= ================= ================== =================

Insurance Services Segment Results of Operations for the Three Months Ended September 30, 2007 and 2006

Direct commission revenue from programs. Direct commission revenue is dependent upon the premiums written during the year with respect to the program business managed by CastlePoint Management. CastlePoint Management receives a 30% commission from CastlePoint Insurance and Tower's insurance companies for program business placed by CastlePoint Management with these companies less boards, bureaus and premium taxes (which we refer to as "BB&T") and less direct commission expenses that are incurred by Tower and CastlePoint Insurance. Direct commission revenue increased 95.2% to $1.7 million for the three months ended September 30, 2007 compared to $0.9 million for the three months ended September 30, 2006. These commission revenues were received for the specialty programs and traditional programs. We also bound two additional programs, which contributed approximately $0.5 million to revenues in the third quarter of 2007.

Direct commission expense for programs. Direct commission expense increased 98.1% to $1.2 million for the three months ended September 30, 2007 from $0.6 million for the three months ended September 30, 2006. Direct commission expense consisted of the commission fees paid by us to producing agents for the placement of program business.

Other insurance services expenses. Other insurance services expenses were $1.4 million for the three months ended September 30, 2007 compared to $1.0 million for the same period in 2006. This amount includes $0.3 million for the three months ended September 30, 2007 and $0.2 million for the three months ended September 30, 2006 of costs incurred and charged by Tower's insurance companies for services provided to us.

Insurance services loss. Insurance services loss was $1.0 million for the three months ended September 30, 2007 compared to $0.8 million for the same period in 2006 due to CastlePoint Management's current incurrence of costs to produce programs that are expected to generate commission revenue in future periods due in part to the lag time associated with launching new programs that require rates and forms to be filed and approved, as well as systems to be implemented.

Insurance Services Segment Results of Operations for the Nine Months Ended September 30, 2007 and 2006

Direct commission revenue from programs. Direct commission revenue is dependent upon the premiums written during the year with respect to the program business managed by CastlePoint Management. CastlePoint Management receives a 30% commission from CastlePoint Insurance and Tower's insurance companies for program business placed by CastlePoint Management with these companies less BB&T and less direct commission expenses that are incurred by these companies. Commission income increased 180.3% to $3.9 million for the nine months ended September 30, 2007 compared to $1.4 million for the nine months ended September 30, 2006. These commission revenues were received for the specialty programs and traditional programs. We also bound two additional programs that began producing revenues in the third quarter of 2007.

Direct commission expense for programs. Direct commission expense increased 188.4% to $2.9 million for the nine months ended September 30, 2007 from $1.0 million for the nine months ended September 30, 2006. Direct commission expense consisted of the commission fees paid by us to producing agents for placement of program business.

Other insurance services expenses. Other insurance services expenses were $4.6 million for the nine months ended September 30, 2007 compared to $1.8 million for the same period in 2006. This amount includes $0.8 million for the nine months ended September 30, 2007 and $0.5 million for the nine months ended September 30, 2006 of costs incurred and charged by Tower's insurance companies for services provided to us. The increase in expenses over the two periods was due in part to the fact we did not start our operations until April of 2006. In addition, the increase in staffing increased the salary and salary related items by approximately $1.9 million.

Insurance services loss. Insurance services loss was $3.6 million for the nine months ended September 30, 2007 compared to $1.4 million for the same period in 2006 primarily due to CastlePoint Management's current incurrence of costs to produce programs that are expected to generate commission revenue in future periods due in part to the lag time associated with launching new programs that require rates and forms to be filed and approved, as well as systems to be implemented.

Liquidity and Capital Resources

CastlePoint Holdings is organized as a Bermuda holding company, and as such, has no direct operations of its own. We expect substantially all of our operations to be conducted by our insurance, reinsurance, and management company subsidiaries. Accordingly, we expect to have continuing cash needs for administrative expenses and the payment of principal and interest on existing and any future borrowings, taxes and dividends. Funds to meet these obligations will come primarily from dividend payments from our operating subsidiaries. There are restrictions on the payment of dividends by our insurance subsidiaries. These restrictions, as well as our liquidity, principal capital requirements and related matters are described in more detail in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Registration Statement filed with the SEC.

Our ongoing principal cash requirements for the Company and its wholly owned subsidiaries are expected to be the capitalization of our existing operating subsidiaries, operating expenses, our acquisition of at least one additional U.S. licensed insurance company in connection with our insurance risk-sharing and program business within the next nine months, subject to receipt of regulatory approvals, net cash settlements under the reinsurance agreements, payment of losses and loss adjustment expenses, commissions paid to program underwriting agents, ceding commissions to insurance companies including Tower, excise taxes, operating expenses, purchases of marketable securities and payments under our service and expense sharing agreements with Tower and certain of its subsidiaries. In addition, we will need cash to enable us to make strategic investments in some of our clients and potential clients, including Tower, as well as to pay dividends to our shareholders and to service the debt on the subordinated debentures of $103.1 million issued by CastlePoint Management in December 2006 and an additional $30.9 million issued by CastlePoint Bermuda Holdings in September 2007. Further, while insurance regulations differ by location, insurers and reinsurers are generally required to maintain certain minimum levels of capital and/or risk-based capital, the calculation of which typically includes numerous factors specified by the respective insurance regulatory authorities and the related insurance regulations. In order to maintain these capital requirements our insurance subsidiaries may need additional capital. In addition, we maintain levels of capital commensurate with standards expected by rating agencies.

On March 28, 2007, we completed the sale of 8,697,148 common shares at $14.50 per share in an initial public offering. In addition, 119,500 shares were sold in that offering by selling shareholders who previously purchased such shares in the private offering of our common shares we completed in April 2006. Included in the 8,697,148 shares sold by us were 1,134,410 shares purchased by the underwriters to cover over-allotments. The net proceeds to the Company of the initial public offering were approximately $114 million after the deduction of underwriting discounts and other offering expenses. We have used approximately $70.0 million of these net proceeds to further capitalize CastlePoint Re, and we intend to use the remaining proceeds of the initial public offering to either further capitalize CastlePoint Re or capitalize any U.S. licensed insurance companies we may acquire in the future, and for general corporate purposes.

As previously reported in the Company's current report on Form 8-K filed with the SEC on October 1, 2007, which is incorporated herein by reference (the "October 2007 Current Report"), in September 2007, our subsidiary CastlePoint Bermuda Holdings borrowed $30.9 million in a trust preferred securities transaction, the proceeds of which are intended to be used for general corporate purposes, including acquisitions. In connection with this transaction, CastlePoint Bermuda Holdings formed a Delaware statutory trust in September 2007.

Sources of Cash

We expect to receive cash from direct and assumed premiums collected, net cash settlements under our reinsurance agreements, fee income for services provided, investment income and proceeds from sales and redemptions of investments. We also expect that we may raise additional funds in the future through additional equity and/or additional debt financings. However there are no assurances that such equity/debt financing will be available on terms acceptable to us or at all.

We, or one or more of our subsidiaries, may also enter into one or more unsecured revolving credit facilities and/or term loan facilities with one or more syndicates of lenders, and we may use any such facilities for strategic acquisitions, general corporate purposes and working capital requirements. We believe that any debt financing or credit facility will require compliance with financial covenants, such as a leverage ratio, a consolidated tangible net worth ratio and maintenance of ratings. Any debt financing or credit facility will likely contain additional covenants that restrict the activities of our operating subsidiaries, such as the incurrence of additional indebtedness and liens and the payment of dividends and other payments. In addition, the terms of any debt financings may require guarantees by CastlePoint Holdings or any of our subsidiaries. We are currently in discussions with a major lender with respect to a credit facility. We cannot assure you that we will be able to obtain a credit facility on terms acceptable to us.

Cash Flows

For the nine months ended September 30, 2007, net cash provided by operating activities was approximately $95.8 million compared to $45.0 million for the nine months ended September 30, 2006. The increase in net cash provided by operations resulted primarily from the increase in collected premiums as a result of the growth in premiums written.

For the nine months ended September 30, 2007 net cash flows used in investing activities was approximately $144.0 million compared to $285.8 million for the same period in 2006, which consisted of purchases and sales of investments.

The net cash flows provided by financing activities for the nine months ended September 30, 2007 were approximately $141.2 million, which primarily consisted of approximately $114.5 million in net proceeds from the IPO after all offering expenses and net proceeds from the issuance of subordinated debentures of approximately $30 million by CastlePoint Bermuda Holdings, less dividends paid to shareholders of $2.7 million, as compared to $262.4 for the same period in 2006, which primarily consisted of approximately $248.9 million in net proceeds from the private offering and $15 million in net proceeds from Tower Group's initial investment in the Company in early 2006, less dividends paid to shareholders of $1.5 million.

The primary sources of cash of our operating subsidiaries are net premiums received, commission income and investment income. Cash is used by our operating subsidiaries to pay dividends to their parent, commissions, claims and operating expenses, as well as to purchase investments and fixed assets, subject to regulatory, contractual, rating agencies and other constraints applicable to us.

Security Requirements

Under the terms of the quota share reinsurance agreements between CastlePoint Re and Tower's insurance companies, CastlePoint Re is required to provide security to Tower's insurance companies to support reinsurance recoverables owed to these reinsureds in a form acceptable to the insurance commissioners of the State of New York and Commonwealth of Massachusetts, the domiciliary states of Tower's insurance companies. The security is provided in the form of trust accounts. These trust arrangements permit Tower's insurance companies to take credit on their statutory financial statements for the reinsurance ceded to CastlePoint Re, either as an additional asset or as a reduction in liability. CastlePoint Re is also required by its reinsurance agreements with its other cedents to collateralize amounts through a letter of credit, cash advance, funds held or a trust account meeting the requirements of the applicable state insurance regulations.

As of September 30, 2007, CastlePoint Re had trust accounts for the benefit of its reinsureds totaling approximately $181.9 million, an increase of approximately $84.1 million since December 31, 2006. The increase is due to larger assumed loss reserves and unearned premium reserves due to the growth in written and earned premiums. CastlePoint Re earns and collects the interest on the trust funds. CastlePoint Insurance had no trust accounts for the benefit of its clients as of September 30, 2007.

Investments

The Company has developed specific investment objectives and guidelines for the management of its investment portfolio. These investment guidelines stress capital preservation and maximization of after tax investment income through the maintenance of liquidity, risk diversification and credit quality. Generally, we invest our assets in relatively liquid, high-grade fixed maturity securities of relatively short duration. We seek to manage our credit risk through issuer and industry diversification and interest rate risk by monitoring the duration and structure of the portfolio. Despite the prudent focus of these objectives and guidelines, the Company's investments are subject to general market risk, as well as to risks inherent to particular securities.

The aggregate fair market value of our available-for-sale investments as of September 30, 2007 was $534.4 million, which excludes our investment in common trust securities of the three statutory business trusts described under "--Off-Balance Sheet Transactions" below and under Note 1 "Investments--Investments in partnerships and other funds" above. Our fixed maturity securities as of this date had a fair market value of $494.3 million and an amortized cost of $494.8 million. Short term investments were carried at fair value of $0 as of September 30, 2007 compared to $51.6 million as of December 31, 2006.

The portfolio duration of the fixed maturity securities at September 30, 2007 was approximately 2.63 years (2.0 years at December 31, 2006) and the average credit rating was AA+ (AA+ at December 31, 2006).

Included in the "Fixed maturity securities" on the balance sheet at September 30, 2007, the Company held $337.6 million ($187.7 million at December 31, 2006), at fair value in mortgage-backed, commercial mortgage-backed and asset backed securities (reflecting primarily assets backed by automobile loans and credit card receivables, with approximately $3.0 million of the asset backed securities being backed by home equity loans at September 30, 2007). Our total exposure to mortgage and asset backed securities at September 30, 2007 represented 50.0% (44.2% at December 31, 2006) of cash and invested assets. Of the total $337.6 million exposure to mortgage and asset backed securities, $159.3 million (47%) was rated Agency and $169.7 million (50%) was rated AAA. The remaining 3% was rated above investment grade. The $3.0 million of assets backed by home equity loans represents subprime exposure and is rated AAA. The remaining asset class at September 30, 2007 and December 31, 2006 consisted primarily of highly rated corporate securities.

Included in "Equity securities" on the balance sheet at September 30, 2007, the Company held an investment in a fund that has subprime mortgage exposure. Our proportional share of the total exposure to subprime mortgages in this fund is approximately $8.0 million. Of this amount, approximately $4.0 million is from mortgages originating in years 2006 and 2007 and all the exposure from mortgages issued in these years is rated investment grade. Of the $4.0 million originating in years 2005 and prior, only $126,000 is rated below investment grade. Of our total exposure of $8.0 million, $6.0 million is rated A or better. We do not believe these securities have suffered significant credit impairment and we believe the lower market prices at September 30, 2007 for these securities are based primarily on the lack of liquidity in this sector of the mortgage backed securities market. Additionally, we have no Alternative A (defined as risks falling between prime and subprime) mortgage exposure in our portfolio or in any of the funds in which we have invested.

At September 30, 2007, we had gross unrealized gains of $2.5 million and gross unrealized losses of $9.1 million. Of the $9.1 million of gross unrealized losses, the majority is attributable to the liquidity problems affecting mortgage and mortgage related securities. The gross unrealized losses are generally attributed to the funds in which we have invested ($3.6 million relates to our investment in a fund consisting of primarily floating rate asset backed securities and mortgage backed securities and $1.4 million relates to publicly traded mortgage real estate investment trusts).

At September 30, 2007, we held $127.6 million of cash and cash equivalents, which include all securities that, at their purchase date, have a maturity of less than 90 days, of which $30 million was uninvested cash resulting from the proceeds from the offering by CastlePoint Bermuda Holdings of trust preferred securities, which we received at the end of September 2007. Of the remaining cash and cash equivalents, the majority is invested in 90 day commercial paper. The average yield on commercial paper purchased during the third quarter was approximately 5.5%. During the third quarter of 2007, our investment manager recommended overweight positions in mortgages, favoring pass-through instruments and high quality collateralized mortgage obligations and commercial mortgage backed securities. Our investment manager recommended underweight positions in virtually all other sectors. However, since we did not wish to increase our exposure to mortgages at this time, we decided to maintain a relatively high amount of cash and cash equivalent balances without sacrificing yield.

The fair value pricing of our fixed maturity securities at September 30, 2007 is generally based on current marks provided by indices and reputable pricing services and, to a lesser extent, established broker-dealers who routinely make a market in the securities being priced. Approximately 77% of the portfolio is priced by indices or pricing services and 23% is priced by broker dealers. To the best of our management's knowledge, substantially all of the prices represent identical or similar securities priced in actively traded markets. No securities have been priced utilizing inputs from unobservable inputs. Our investment in equity securities primarily represents funds in which we have invested and substantially all of the pricing also comes from pricing services and broker-dealers.

Contractual Obligations

There have been no material changes during the period covered by this quarterly report on Form 10-Q, outside of our ordinary course of business, to the contractual obligations specified in the table of contractual obligations in the section "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Registration Statement, except as described below.

As reported in more detail in the October 2007 Current Report, in September 2007, CastlePoint Bermuda Holdings issued $30.9 million in subordinated debentures, which mature on December 15, 2037 and represent payment obligations due more than five years after the end of the period covered by this quarterly report.

Off-Balance Sheet Transactions

We formed two Delaware statutory business trusts of which CastlePoint Management owns all of the common trust securities, in connection with the trust preferred financing completed in December 2006. We also formed another Delaware statutory business trust of which CastlePoint Bermuda Holdings owns all of the common trust securities, in connection with the trust preferred financing completed in September 2007.

Ratings

During the first quarter of 2007, CastlePoint Insurance received a Financial Strength rating of "A-" (Excellent) from A.M. Best Company, Inc., an insurance rating agency, which is the fourth highest of fifteen rating levels and indicates A.M. Best's opinion of our financial strength and ability to meet ongoing obligations to our policyholders. A.M. Best also confirmed the "A-" (Excellent) rating it previously assigned to CastlePoint Re. In June 2007, following the Company's press release announcing a risk sharing arrangement with AequiCap Program Administrators and certain of its subsidiaries, A.M. Best placed the ratings of CastlePoint Re and CastlePoint Insurance, and the issuer credit rating of "bbb-" of CastlePoint Holdings, under review with negative implications. However, the ratings of CastlePoint Re and CastlePoint Insurance were affirmed by A.M. Best in July 2007. The maintenance of the assigned ratings depends, in part, upon CastlePoint Re and CastlePoint Insurance operating in a manner consistent with the business plan presented to A.M. Best. A.M. Best formally evaluates its Financial Strength ratings of insurance companies at least once every twelve months and monitors the performance of rated companies throughout the year.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk relates to changes in the value of financial instruments that arise from adverse movements in factors such as interest rates and equity prices. We are exposed mainly to changes in interest rates that affect the yield on and fair value of our investments in securities.

Sensitivity Analysis

Sensitivity analysis is a measurement of potential loss in future earnings, fair values or cash flows of market sensitive instruments resulting from one or more selected hypothetical changes in interest rates and other market rates or prices over a selected time. In our sensitivity analysis model, we select a hypothetical change in interest rates that reflects what we believe are reasonably possible near-term changes in those rates. The term "near-term" means a period of time going forward up to one year from the date of the consolidated financial statements. Actual results may differ from the hypothetical change in market rates assumed in this disclosure, especially since this sensitivity analysis does not reflect the results of any action that we may take to mitigate such hypothetical losses in fair value.

In this sensitivity analysis model, we use fair values to measure our potential loss. The sensitivity analysis model includes fixed maturities securities and short-term investments.

For fixed maturities securities, we use modified duration modeling to calculate the impact of potential changes in interest rates on fair values. Durations on invested assets are adjusted for any call, put and interest rate reset features. Durations on tax-exempt securities are adjusted for the fact that the yield on such securities is less sensitive to changes in interest rates compared to Treasury securities. Invested asset portfolio durations are calculated on a market value weighted basis, including accrued investment income, using holdings as of September 30, 2007.

The following table summarizes the estimated change in fair value on our fixed maturity portfolio based on specific changes in interest rates as of September 30, 2007:

 Estimated Increase Estimated Percentage
 (Decrease) in Fair Value Increase (Decrease)
Change in Interest Rate ($ in thousands) in Fair Value
--------------------------- -------------------------- ------------------------
300 basis point rise (48,809) (9.8)%
200 basis point rise (32,407) (6.5)%
100 basis point rise (15,740) (3.2)%
100 basis point decline 13,800 2.8%
200 basis point decline 24,787 5.0%
300 basis point decline 34,887 7.0%

The sensitivity analysis model used by us produces a predicted pre-tax loss in fair value of interest-sensitive instruments of $15.7 million or 3.2% based on a 100 basis point increase in interest rates as of September 30, 2007. This loss amount only reflects the impact of an interest rate increase on the fair value of our fixed maturities, which constituted approximately 90.2% of our total investments as of September 30, 2007.

As of September 30, 2007, we had a total of $134.0 million of outstanding debt, all of which are outstanding junior subordinated debentures underlying trust securities issued by our wholly owned statutory business trusts carrying a fixed interest rate during the first five years, after which the interest rate will become floating and equal to the three month LIBOR rate plus 3.5% per annum (calculated quarterly). If LIBOR rates increase, the amount of interest payable by us would also increase.

Item 4T. Controls and Procedures

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to provide reasonable assurance that material information relating to us and our consolidated subsidiaries required to be disclosed in our reports filed with or submitted to the SEC under the Securities Exchange Act of 1934, as amended, is made known to such officers by others within these entities, particularly during the period this quarterly report was prepared, in order to allow timely decisions regarding required disclosure.

In connection with the evaluation described above, we have not identified any change in our internal control over financial reporting that occurred during the three months ended September 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings
We are not a party to any pending or threatened material litigation and are not currently aware of any pending or threatened material litigation, other than in the normal course of business as a reinsurer. We may become involved in various claims and legal proceedings in the normal course of business, as a reinsurer or insurer.

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

(a) As previously reported in the October 2007 Current Report, on September 27, 2007 CastlePoint Bermuda Holdings Statutory Trust I, a financing subsidiary of CastlePoint Bermuda Holdings, issued and sold capital securities of the trust in the aggregate principal amount of $30 million, in a private placement, and issued $0.9 million in common securities to CastlePoint Bermuda Holdings. On the same date, the trust used the proceeds from the sale of all such securities to purchase $30.9 million of CastlePoint Bermuda Holdings' Fixed/Floating Rate Junior Subordinated Interest Debentures due December 15, 2037. CastlePoint Bermuda Holdings also issued a guarantee of the various obligations associated with the trust preferred securities. The issuance of trust preferred securities was exempt from registration under the Securities Act in reliance on Section 4(2) thereof. The placement agent for this transaction was Keefe, Bruyette & Woods, Inc., which was compensated $600,000 in connection with this transaction.

(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. Under this Registration Statement and a related registration statement the Company filed on Form S-1 pursuant to Rule 462(b) (Registration No. 333-141530), the Company registered 8,816,648 common shares, including 1,134,410 shares subject to the over-allotment option we granted to the underwriters. The Company registered 8,697,148 of these shares on its own behalf and 119,500 of these shares on behalf of the selling shareholders, for an aggregate public offering price of approximately $127.8 million. On March 28, 2007, the Company completed the offering at an initial offering price per share of $14.50, in which (i) the Company sold 8,697,148 shares it registered on its own behalf, and (ii) selling shareholders sold 119,500 shares the Company registered on their behalf. The managing underwriters for the initial public offering were Friedman, Billings, Ramsey & Co., Inc., Keefe, Bruyette & Woods, Inc., Cochran Caronia Waller Securities LLC and Piper Jaffray & Co.

The aggregate proceeds of the offering (including sale of the 1,134,410 shares sold pursuant to the underwriters' over-allotment option) were approximately $127.8 million, of which the gross proceeds to the Company were approximately $126.1 million. Net proceeds to the Company, after deducting underwriting discounts of approximately $8.5 million and other estimated offering expenses of approximately $3.6 million, were approximately $114 million. The gross proceeds to the selling shareholders were approximately $1.7 million in the aggregate, and net proceeds to the selling shareholders were approximately $1.6 million in the aggregate. The Company did not receive any of the proceeds of the sale by the selling shareholders.

As of November 9, 2007, we have used approximately $70.0 million of these net proceeds to further capitalize CastlePoint Re, and we intend to use the remaining proceeds of the initial public offering to either further capitalize CastlePoint Re or capitalize any U.S. licensed insurance companies we may acquire in the future and for general corporate purposes.

Item 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of security holders during the quarter ended September 30, 2007. The results of matters submitted to a vote of security holders at the Annual General Meeting of Members of CastlePoint Holdings, Ltd. held on July 30, 2007 were previously reported in the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2007 filed with the SEC on August 14, 2007.

Item 6. Exhibits

3.2 Amended and Restated Bye-Laws of CastlePoint Holdings, Ltd.
10.1 Management Agreement, dated as of July 1, 2007, by and between
 CastlePoint Insurance Company and Tower Risk Management Corp.
10.2 Amendment No. 2 to Amended and Restated Brokerage Business Quota Share
 Reinsurance Agreement, between Tower Insurance Company of New York and
 CastlePoint Reinsurance Company, Ltd.
10.3 Amendment No. 3 to Amended and Restated Brokerage Business Quota Share
 Reinsurance Agreement, among Tower Insurance Company of New York, Tower
 National Insurance Company and CastlePoint Reinsurance Company, Ltd.
31.1 Chief Executive Officer - Certification pursuant to Sarbanes-Oxley Act
 of 2002 Section 302
31.2 Chief Financial Officer - Certification pursuant to Sarbanes-Oxley Act
 of 2002 Section 302
32 Chief Executive Officer and Chief Financial Officer - Certification
 pursuant to Sarbanes-Oxley Act of 2002 Section 906

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CASTLEPOINT HOLDINGS, LTD.
(Registrant)

Date: November 13, 2007 /s/ Michael H. Lee
 ------------------
 Michael H. Lee
 Chairman of the Board and
 Chief Executive Officer

Date: November 13, 2007 /s/ Joel. S. Weiner
 -------------------
 Joel S. Weiner
 Senior Vice President and
 Chief Financial Officer

EXHIBIT INDEX

3.2 Amended and Restated Bye-Laws of CastlePoint Holdings, Ltd.
10.1 Management Agreement, dated as of July 1, 2007, by and between
 CastlePoint Insurance Company and Tower Risk Management Corp.
10.2 Amendment No. 2 to Amended and Restated Brokerage Business Quota Share
 Reinsurance Agreement, between Tower Insurance Company of New York and
 CastlePoint Reinsurance Company, Ltd.
10.3 Amendment No. 3 to Amended and Restated Brokerage Business Quota Share
 Reinsurance Agreement, among Tower Insurance Company of New York, Tower
 National Insurance Company and CastlePoint Reinsurance Company, Ltd.
31.1 Chief Executive Officer - Certification pursuant to Sarbanes-Oxley Act
 of 2002 Section 302
31.2 Chief Financial Officer - Certification pursuant to Sarbanes-Oxley Act
 of 2002 Section 302
32 Chief Executive Officer and Chief Financial Officer - Certification
 pursuant to Sarbanes-Oxley Act of 2002 Section 906

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