CPHL Castlepoint Holdings Ltd (MM)

CastlePoint Holdings, Ltd. (NASDAQ: CPHL) today reported net income of $4.6 million and diluted earnings per share of $0.12 for the fourth quarter of 2007 and $32.7 million and $0.89, respectively, for the full year 2007. Excluding realized and unrealized gains (losses)(a), net income and diluted earnings per share for the fourth quarter were $12.5 million and $0.32 per share, respectively and $41.6 million and $1.14, respectively, for the full year 2007. Key Operating Highlights (all percentage increases compare the fourth quarter and full year results to the same period in 2006): Net income and diluted earnings per share excluding realized and unrealized gains (losses)(a), increased by 84.1% and 39.1%, respectively during the fourth quarter and 296.1% and 142.6%, respectively for the full year. Our return on average equity excluding realized and unrealized gains (losses)(a), increased by 2.2 percentage points to 12.0% in the fourth quarter and by 5.8 percentage points to 10.9% for the full year. Net premiums written for the quarter increased by 173.3% to $133.2 million and by 127.8% to $376.2 million for the full year. Net combined ratio for the total of our reinsurance and insurance segments was 90.0% for the quarter and 88.9% for the full year 2007. (a) Note on Non-GAAP Financial Measures: Net income, earnings per share and return on average equity, all excluding net realized and unrealized gains (losses) is a common performance measurement for property and casualty insurance companies. We believe this presentation enhances the understanding of our results of operations by highlighting the underlying profitability of our insurance business. Additionally, that number is a key internal management performance standard. Financial Summary ($ in thousands, except per share data): � � � � � Three Months Ended December 31, 2007 Three Months Ended December 31, 2006 � Year Ended December 31, 2007 Year Ended December 31, 2006 � Net premiums written 133,244 48,745 376,224 165,151 Net premiums earned 81,218 31,579 248,364 78,970 Net investment income: Net investment income excl Partnership 9,138 4,487 31,462 11,184 Realized and unrealized gains (losses) on investment in Partnership (1) (1,049 ) 0 (1,956 ) 0 Total net investment income 8,089 4,487 29,506 11,184 Net realized gains (losses) on investments (8,138 ) 26 (8,236 ) 35 Total revenues 84,720 37,034 277,087 92,523 Net income 4,610 6,806 32,740 10,543 � Earnings Per Share - Basic $ 0.12 $ 0.23 $ 0.90 $ 0.47 Earnings Per Share - Diluted $ 0.12 $ 0.23 $ 0.89 $ 0.47 Return on Average Equity 4.4 % 9.8 % 8.6 % 5.1 % � � The following table provides information on a non-GAAP basis. Excluding realized and unrealized gains (losses), net of tax: (2) Net Income excluding realized and unrealized gains (losses), net of tax 12,480 6,780 41,615 10,508 Reconciliation to Net Income: Realized and unrealized gains (losses) on investment in Partnership (1) (1,049 ) 0 (1,956 ) 0 Net realized gains (losses) on investments (8,138 ) 26 (8,236 ) 35 Tax effect on realized and unrealized gains (losses) � 1,317 � � 0 � � 1,317 � � 0 � Net Income $ 4,610 $ 6,806 $ 32,740 $ 10,543 Earnings per share - Basic $ 0.33 $ 0.23 $ 1.15 $ 0.47 Earnings per share - Diluted $ 0.32 $ 0.23 $ 1.14 $ 0.47 Return on Average Equity 12.0 % 9.8 % 10.9 % 5.1 % � (1) Realized and unrealized gains and losses from our investment in a limited partnership were recorded as a component of net investment income. � (2) Excluding realized and unrealized gains (losses) on all investments including limited partnerships. Michael H. Lee, Chief Executive Officer of CastlePoint Holdings, Ltd. stated �We are extremely pleased with our operating results for the fourth quarter and the full year 2007, which was our first full year of operation since commencing business in April 2006. During the year, we significantly increased our net premiums written by 127.8% from the same period last year to $376 million by successfully delivering our unique business solutions to respond to the needs of our clients. In addition to providing Tower Group, Inc., our sponsor and largest client, with quota share reinsurance and risk sharing solutions, we were able to develop strong relationships with other clients that provided 25% of our total premium volume production. Since most of our agreements with these clients were established in the latter part of 2007, we anticipate strong production from these clients in 2008. In addition to successfully growing our business, we were able to maintain our underwriting discipline as reflected by an 88.9% combined ratio that we achieved in 2007. With respect to our investments, we took affirmative steps during the quarter to maintain the quality of our investment portfolio by writing down certain investments in anticipation of a sale. In particular, we recorded an other-than-temporarily impaired charge of $9.0 million on certain subprime exposed asset back securities held in a fund and on common stocks investing in REITs. Of the $9.0 million charge reflected in net income, a significant portion had already been reflected in our third quarter Shareholders� Equity as unrealized losses. In February of 2008, we also eliminated all of our exposure to sub-prime mortgages that we wrote down in the fourth quarter by selling all our subprime exposed investments at a nominal additional loss. As a result of these actions, we believe we have prudently responded to the challenges in the investment environment and strengthened our balance sheet to support our growth in 2008.� Net earned premiums increased 157.2% to $81.2 million in the fourth quarter of 2007 as compared to $31.6 million for the same period in 2006. Net premiums earned represented 61.0% of net premiums written for the three months ended December 31, 2007 compared to 64.8% for the same period in 2006. For the full year 2007, net earned premiums increased 214.5% to $248.4 million as compared to $79.0 million for the full year 2006. Net investment income increased by 80.3% to $8.1 million for the three months ended December 31, 2007, compared to $4.5 million for the same period in 2006. For the fourth quarter, net investment income included a realized loss of $0.2 million and an unrealized loss of $0.9 million in a limited partnership accounted for under the equity method. For the full year 2007, net investment income increased by 163.8% to $29.5 million compared to $11.2 million in 2006. For the full year, net investment income included a realized gain of $0.2 million and an unrealized loss of $2.2 million in a limited partnership. The overall yield on our investment portfolio was 5.3% for the full year 2007. The overall investment portfolio at December 31, 2007 is AA+ rated, and the total exposure to subprime mortgages at December 31, 2007 is approximately $8.0 million, all of which was sold in February 2007 for an additional loss of $0.2 million. CastlePoint Re, our Bermuda based reinsurance subsidiary, assumed 40% of Tower�s brokerage business as well as 50% of CastlePoint Insurance Company�s program business in the quarter and 29.8% of its premiums were from external clients other than Tower and CastlePoint Insurance Company. Net premiums written increased by 58.0% to $77.0 million for the three months ended December 31, 2007 compared to $48.7 million for the same period in the prior year. The net combined ratio was 87.0% in the quarter as compared to 86.5% for the same prior year period. For the full year 2007, net premiums written increased by 72.5% to $284.8 million compared to $165.2 million for 2006. The net combined ratio was 87.5% for 2007 as compared to 88.1% for 2006. CastlePoint Insurance Company had net written premiums in the fourth quarter of $56.3 million and $91.4 million for the full year. Gross written premiums for the full year consisted of $97.4 million from Tower and $13.6 million of program business. For the fourth quarter, CastlePoint Management Company managed gross written premiums of $19.4 million of which $11.1 million was written by Tower and $8.3 million was written by CastlePoint Insurance. For the full year, managed gross written premiums were $37.7 million, of which $23.5 million was written by Tower and $14.2 million was written by CastlePoint Insurance. Additional Highlights and Disclosures: Dividend Declaration CastlePoint Holdings, Ltd. Board of Directors has approved a quarterly dividend of $0.025 per share payable March 31, 2008 to stockholders of record as of March 17, 2008. 2008 Guidance For the first quarter of 2008, we project our net income to be in a range between $9.5 million and $12.0 million, and diluted earnings per share to be in a range between $0.25 and $0.31 per share. For the full year our guidance for net income is in a range of $67.5 million to $71.5 million with diluted earnings per share between $1.75 and $1.85. About CastlePoint Holdings, Ltd. CastlePoint, a Bermuda-based holding company, through its subsidiaries, CastlePoint Reinsurance Company, CastlePoint Management Corp., and CastlePoint Insurance Company, provides property and casualty insurance and reinsurance business solutions, products and services to small insurance companies and program underwriting agents in the United States. CPHL-F Cautionary Note Regarding Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This press release or any other written or oral statements made by or on behalf of CastlePoint may include forward-looking statements that reflect CastlePoint�s current views with respect to future events and financial performance. All statements other than statements of historical fact included in this press release are forward-looking statements. Forward-looking statements can generally be identified by the use of forward-looking terminology such as "may," "will," "plan," "expect," �project,� �guide or guidance,� "intend," "estimate," "anticipate," "believe" or "continue" or their negative or variations or similar terminology. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause CastlePoint�s actual results to differ materially from those indicated in these statements. The company believes that these factors include but are not limited to ineffectiveness or obsolescence of its business strategy due to changes in current or future market conditions; increased competition on the basis of pricing, capacity, coverage terms or other factors; greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events, than CastlePoint�s underwriting, reserving or investment practices anticipate based on historical experience or industry data; the ability to obtain necessary governmental licenses; the ability to hire and retain executive officers and other key personnel; the ability to make certain acquisitions in a timely fashion necessary to fulfill the company�s business plan; the effects of acts of terrorism or war; developments in the world's financial and capital markets that adversely affect the performance of the company�s investments; changes in regulations or laws applicable to CastlePoint, its subsidiaries, brokers or customers including tax laws in Bermuda and the United States; acceptance of CastlePoint�s products and services, including new products and services; changes in the availability, cost or quality of reinsurance and failure of CastlePoint�s reinsurers to pay claims timely or at all; decreased demand for the company�s insurance or reinsurance products; the effects of mergers, acquisitions and divestitures; changes in rating agency policies or practices; changes in legal theories of liability under CastlePoint�s insurance policies or the policies that it reinsures; changes in accounting policies or practices; and changes in general economic conditions, including inflation and other factors. Forward-looking statements speak only as of the date on which they are made, and CastlePoint undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. For more information visit CastlePoint�s website at http://www.castlepoint.bm/. CastlePoint Holdings, Ltd. � � Consolidated Balance Sheets ($ in thousands) (Unaudited) � � December 31, � 2007 � � 2006 Assets Fixed-maturity securities, available-for-sale, at fair value (amortized cost $484,523 for 2007; $293,878 for 2006) $ 484,972 $ 295,527 Equity securities, available-for-sale, at fair value (cost $43,927 for 2007; $0 for 2006) 42,402 - 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 527,374 347,165 Investment in Tower preferred stock - 40,000 Investment in Partnership, equity method 8,503 - Common trust securities�statutory business trusts, equity method � 4,022 � � 3,094 Total investments 539,899 390,259 Cash and cash equivalents 153,632 34,784 Accrued investment income 4,064 2,211 Assumed premiums receivable (primarily with related parties) 125,597 44,930 Premiums receivable�programs (primarily with related parties) 9,083 1,295 Prepaid reinsurance premiums 3,475 - Deferred acquisition costs (primarily with related parties) 73,073 30,363 Deferred income taxes 7,051 1,089 Deferred financing fees 3,673 3,084 Other assets � 7,196 � � 3,327 Total Assets $ 926,743 � $ 511,342 � Liabilities and Shareholders' Equity Liabilities Loss and loss adjustment expenses (primarily with related parties) $ 121,426 $ 34,192 Unearned premium (primarily with related parties) 217,518 86,181 Assumed losses payable (primarily with related parties) 8,527 3,496 Premiums payable�programs (primarily with related parties) 16,257 1,072 Accounts payable and accrued expenses 3,592 2,869 Other liabilities 3,595 725 Subordinated debentures � 134,022 � � 103,094 Total Liabilities � 504,937 � � 231,629 Commitments and Contingent Liabilities Shareholders' Equity Common shares ($0.01 par value, 100,000,000 shares authorized, 38,289,430 shares issued as of December 31, 2007 and 29,580,000 shares issued as of December 31, 2006) 383 296 Additional paid-in-capital 385,057 269,472 Accumulated other comprehensive (loss) income (1,051 ) 1,657 Retained earnings � 37,417 � � 8,288 Total Shareholders' Equity � 421,806 � � 279,713 Total Liabilities and Shareholders' Equity $ 926,743 � $ 511,342 � � � � � � CastlePoint Holdings, Ltd. Consolidated Statement of Income and Comprehensive Income ($ in thousands except per share amounts) (Unaudited) � Year Ended December 31, � 2007 � � 2006 � � 2005 � Revenues Net premiums earned (primarily with related parties) $ 248,364 $ 78,970 $ - Insurance service revenue (primarily with related parties) 7,453 2,334 - Net investment income 29,506 11,184 - Net realized (loss) gain on investments � (8,236 ) � 35 � � - � Total Revenues 277,087 92,523 - Expenses Loss and loss adjustment expenses (primarily with related parties) 131,335 40,958 - Commission and other acquisition expenses (primarily with related parties) 91,602 29,405 - Other operating expenses 17,851 12,153 36 Interest expense � 9,416 � � 557 � � - � Total Expenses � 250,204 � � 83,073 � � 36 � Income (loss) before income taxes 26,883 9,450 (36 ) Income tax benefit � 5,857 � � 1,093 � � - � Net Income (loss) $ 32,740 � $ 10,543 � $ (36 ) � Comprehensive Income (loss) Net income (loss) $ 32,740 $ 10,543 $ (36 ) Other comprehensive income (loss): Gross unrealized investment holding (losses) gains arising during period (11,048 ) 1,696 - Less: reclassification adjustment for (losses) gains included in net income � (8,236 ) � 35 � � - � (2,812 ) 1,661 - Income tax benefit (expense) related to items of other comprehensive income (loss) � 104 � � (4 ) � - � Total other comprehensive (loss) income � (2,708 ) � 1,657 � � - � Comprehensive Income (loss) $ 30,032 � $ 12,200 � $ (36 ) � Earnings Per Share Basic earnings per common share $ 0.90 $ 0.47 NM Diluted earnings per common share $ 0.89 $ 0.47 NM � Weighted-average common shares outstanding Basic 36,313 22,336 - Reinsurance Segment Results of Operations (Unaudited) � Three Months Ended December 31, Twelve Months Ended December 31, � 2007 � � � 2006 � � 2007 � � � 2006 � ($ in thousands) Revenues Premiums earned Gross premiums earned $ 68,121 $ 31,580 $ 229,292 $ 78,970 Less: ceded premiums earned � (5 ) � � � � (5 ) � � � Net premiums earned � 68,116 � � 31,580 � � 229,287 � � 78,970 � Expenses Loss and loss adjustment expenses Gross loss and loss adjustment expenses 35,487 15,661 119,562 40,958 Less: ceded loss and loss adjustment expenses � � � � � � � � � � � � Net loss and loss adjustment expenses � 35,487 � � 15,661 � � 119,562 � � 40,958 � Underwriting expenses Ceding commission expense 22,917 10,804 77,551 27,209 Other underwriting expenses � 888 � � 848 � � 3,502 � � 1,383 � Total underwriting expenses � 23,805 � � 11,652 � � 81,053 � � 28,592 � Underwriting Profit $ 8,824 � $ 4,267 � $ 28,672 � $ 9,420 � � Key Measures Premiums Written Gross premiums written $ 76,995 $ 48,745 $ 284,843 $ 165,151 Less: ceded premium written (5 ) -- (5 ) -- Net premium written $ 76,990 $ 48,745 $ 284,838 $ 165,151 � Loss Ratios Gross 52.1 % 49.6 % 52.1 % 51.9 % Net 52.1 % 49.6 % 52.1 % 51.9 % Accident Year Loss Ratios Gross 51.6 % 49.6 % 52.6 % 51.9 % Net 51.6 % 49.9 % 52.6 % 51.9 % Underwriting Expense Ratios Gross 34.9 % 36.9 % 35.3 % 36.2 % Net 34.9 % 36.9 % 35.4 % 36.2 % Combined Ratios Gross 87.0 % 86.5 % 87.4 % 88.1 % Net 87.0 % 86.5 % 87.5 % 88.1 % Insurance Segment Results of Operations (Unaudited) � Three Months Ended December 31, Twelve Months Ended December 31, � 2007 � � � 2006 � 2007 � � � 2006 ($ in thousands) Revenues Premiums earned Gross premiums earned $ 17,667 $ � $ 25,061 $ � Less: ceded premiums earned (4,566 ) � (5,985 ) � Net premiums earned 13,101 � 19,076 � Expenses Loss and loss adjustment expenses Gross loss and loss adjustment expenses 11,189 � 15,219 � Less: ceded loss and loss adjustment expenses � (3,131 ) � � � (3,446 ) � � Net loss and loss adjustment expenses � 8,059 � � � � 11,773 � � Underwriting expenses Ceding commission expense 5,268 � 7,814 � Other underwriting expenses � 445 � � � � 596 � � � Total underwriting expenses � 5,713 � � � � 8,410 � � � Underwriting Loss $ (671 ) $ � $ (1,107 ) $ � � Key Measures Premiums Written Gross premiums written $ 68,729 -- $ 110,957 -- Less: ceded premium written (12,475 ) -- (19,971 ) -- Net premium written $ 56,254 -- $ 91,386 -- � Gross 63.3 % n/a 60.7 % n/a Net 61.5 % n/a 61.7 % n/a Accident Year Loss Ratios Gross 63.3 % n/a 60.7 % n/a Net 61.5 % n/a 61.7 % n/a Underwriting Expense Ratios Gross 32.3 % n/a 33.6 % n/a Net 43.6 % n/a 44.1 % n/a Combined Ratios Gross 95.6 % n/a 94.3 % n/a Net 105.1 % n/a 105.8 % n/a Insurance Services Segment Results of Operations (Unaudited) � Three Months Ended December 31, Twelve Months Ended December 31, � 2007 � � � 2006 � � 2007 � � � 2006 � ($ in thousands) Revenues Direct commission revenue from programs $ 3,551 � $ 942 � $ 7,453 � $ 2,334 � Total Revenues � 3,551 � � 942 � � 7,453 � � 2,334 � Expenses Direct commission expense from programs 3,306 672 6,236 1,688 Other insurance services expenses � 2,158 � � 1,844 � � 6,725 � � 3,601 � Total Expenses � 5,464 � � 2,516 � � 12,961 � � 5,289 � Insurance Services Loss $ (1,913 ) $ (1,574 ) $ (5,508 ) $ (2,955 )