UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the quarterly period ended March 31, 2008
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the transition period from
to
Commission File No. 001-33374
CastlePoint Holdings, Ltd.
(Exact name of registrant as specified in its charter)
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Bermuda
(State or other jurisdiction of
incorporation or organization)
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N/A
(I.R.S. Employer
Identification No.)
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Victoria Hall, 11 Victoria Street
Hamilton HM 11, Bermuda
(Address of principal executive offices) (Zip code)
(441) 294-6400
(Registrants 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
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
þ
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
o
No
þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: 38,305,735 common shares, par value $0.01 per share, as of May 2,
2008.
TABLE OF CONTENTS
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.
i
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CastlePoint Holdings, Ltd.
Consolidated Balance Sheets
(Unaudited)
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March 31,
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December 31,
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2008
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2007
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( in thousands, except par value
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and share amounts)
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Assets
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Fixed-maturity securities, available-for-sale, at fair value (amortized cost
$524,532 for 2008; $484,489 for 2007)
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$
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516,791
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$
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484,972
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Equity securities, available-for-sale, at fair value (cost $42,623 for 2008;
$44,036 for 2007)
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37,397
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42,402
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Short-term investments, available-for-sale, at fair value (amortized cost
$39,102 for 2008; $0 for 2007)
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39,102
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Total available-for-sale investments
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593,290
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527,374
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Investment in partnerships, equity method
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5,525
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8,503
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Common trust securities statutory business trusts, equity method
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4,022
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4,022
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Total investments
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602,837
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539,899
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Cash and cash equivalents
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193,714
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153,632
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Accrued investment income
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3,834
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4,064
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Premiums receivable (primarily with related parties See note 3)
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168,562
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125,597
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Premiums receivable programs (primarily with related parties See note 3)
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21,203
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9,083
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Prepaid reinsurance premiums
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7,480
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3,475
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Deferred acquisition costs (primarily with related parties See note 3)
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78,405
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73,073
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Deferred income taxes
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7,825
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7,051
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Deferred financing fees
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3,642
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3,673
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Other assets
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10,258
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7,196
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Total Assets
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$
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1,097,760
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$
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926,743
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Liabilities and Shareholders Equity
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Liabilities
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Loss and loss adjustment expenses (primarily with related parties See note 3)
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$
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151,817
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$
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121,426
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Unearned premium (primarily with related parties See note 3)
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239,209
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217,518
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Losses payable (primarily with related parties See note 3)
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21,334
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8,527
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Premiums payable-programs (primarily with related parties See note 3)
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37,028
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16,257
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Accounts payable and accrued expenses
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3,060
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3,592
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Payable for securities
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86,402
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Other liabilities
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5,050
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3,595
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Subordinated debentures
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134,022
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134,022
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Total Liabilities
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677,922
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504,937
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Shareholders Equity
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Common shares ($0.01 par value, 100,000,000 shares authorized; and 38,305,735
and 38,289,430 shares issued in 2008 and 2007)
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383
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383
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Additional paid-in-capital
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385,524
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385,057
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Accumulated other comprehensive net (loss) income
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(12,093
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)
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(1,051
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)
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Retained earnings
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46,024
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37,417
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Total Shareholders Equity
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419,838
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421,806
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Total Liabilities and Shareholders Equity
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$
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1,097,760
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$
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926,743
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See accompanying notes to the consolidated financial statements.
1
CastlePoint Holdings, Ltd.
Consolidated Statements of Income and
Comprehensive Income
(Unaudited)
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Three Months Ended
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March 31,
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2008
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2007
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($ in thousands, except par value and
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share amounts)
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Revenues
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Net premiums earned (primarily with
related parties See note 3)
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$
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100,404
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$
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46,596
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Insurance service revenue (primarily with
related parties See note 3)
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7,978
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1,561
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Net investment income
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5,157
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5,791
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Net realized investment gains
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1,365
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6
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Total revenues
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114,904
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53,954
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Expenses
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Loss and loss adjustment expenses
(primarily with related parties See note
3)
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54,535
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25,326
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Commission and other acquisition expenses
(primarily with related parties See note
3)
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41,524
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16,573
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Other operating expenses
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6,437
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3,336
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Interest expense
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2,843
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2,201
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Total expenses
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105,339
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47,436
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Income before income taxes
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9,565
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6,518
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Income tax benefit
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553
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Net income
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$
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9,565
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$
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7,071
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Comprehensive income
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Net income
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$
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9,565
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$
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7,071
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Other comprehensive income:
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Gross unrealized investment holding
(losses) gains arising during period
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(10,451
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)
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715
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Less: reclassification adjustment for
gain included in net income
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1,365
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6
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(11,816
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)
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709
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Income tax recovery related to items
of other comprehensive income
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774
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(28
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)
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Total other comprehensive (loss) income
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(11,042
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)
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681
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Comprehensive (loss) income
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$
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(1,477
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)
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$
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7,752
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Earnings Per Share
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Basic earnings per common share
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$
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0.25
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$
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0.23
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Diluted earnings per common share
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$
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0.25
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$
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0.23
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Weighted Average Common Shares Outstanding:
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Basic
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38,277,704
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30,421,659
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Diluted
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38,494,609
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30,570,021
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See accompanying notes to the consolidated financial statements.
2
CastlePoint Holdings, Ltd.
Consolidated Statements of Cash Flows
(Unaudited)
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Three Months Ended March 31,
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2008
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2007
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($ in thousands)
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Cash flows from operating activities:
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Net income
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$
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9,565
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$
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7,071
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Adjustments to reconcile net income to net cash provided
by (used in) operations:
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(Gain)/ loss on sale of investments
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(1,365
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)
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(6
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)
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Depreciation and amortization
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86
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23
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Amortization of bond premium or discount
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(45
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)
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(123
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)
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Amortization of stock-based compensation expense
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467
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356
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Amortization of deferred financing fees
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31
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26
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Equity in limited partnerships
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2,979
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Deferred income taxes
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(553
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)
|
(Increase)/decrease in assets:
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Accrued investment income
|
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230
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(662
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)
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Premiums receivable
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(42,966
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)
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(7,604
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)
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Premiums receivable programs
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(12,120
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)
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(699
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)
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Prepaid reinsurance premiums
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Deferred acquisition costs
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(4,006
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)
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(8,243
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)
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Funds held with reinsured companies
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(5,332
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)
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Other assets
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(3,043
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)
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(3,237
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)
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Increase in liabilities:
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Loss and loss adjustment expenses
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30,390
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19,921
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Unearned premium
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21,692
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25,300
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Losses payable
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|
12,807
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1,897
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Premiums payable programs
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20,771
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|
729
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|
Accounts payable and accrued expenses
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|
(532
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)
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(509
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)
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Other liabilities
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1,454
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340
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Net cash flows provided by operations
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31,603
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34,027
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Cash flows from investing activities:
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Cost of fixed assets purchased
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(105
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)
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(98
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)
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Purchases of investments:
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Cost of fixed-maturity securities purchased
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(146,186
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)
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|
(212,164
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)
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Cost of equity securities
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(13,220
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)
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Sale of investments:
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Proceeds from sales of fixed-maturity securities
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194,655
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|
97,818
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Other investments
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40,000
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|
Proceeds from sales of equities
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|
13,877
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|
|
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Net short term investments (purchased)/sold
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(39,044
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)
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|
49,887
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|
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|
|
|
|
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Net cash flows provided/(used) in investing activities
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|
9,976
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|
|
|
(24,557
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cash flows from financing activities:
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|
|
|
|
|
|
|
Net proceeds from Initial Public Offering
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|
|
|
|
|
|
114,866
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|
Deferred financing fees
|
|
|
|
|
|
|
(34
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)
|
Dividends to shareholders
|
|
|
(958
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)
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|
|
(740
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)
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|
|
|
|
|
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|
Net cash flows (used)/provided by financing activities
|
|
|
(958
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)
|
|
|
114,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
40,082
|
|
|
|
123,596
|
|
Cash and cash equivalents, beginning of period
|
|
|
153,632
|
|
|
|
34,784
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
193,714
|
|
|
$
|
158,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
|
|
|
$
|
|
|
Cash paid for interest
|
|
$
|
2,867
|
|
|
$
|
1,836
|
|
See accompanying notes to the consolidated financial statements.
3
CastlePoint Holdings , Ltd.
Consolidated Statement of Changes in Shareholders Equity
for the period ended March 31, 2008
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
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Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
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Additional
|
|
|
Other
|
|
|
|
|
|
|
Total
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Capital
|
|
|
Income(Loss)
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
383
|
|
|
$
|
385,057
|
|
|
$
|
(1,051
|
)
|
|
$
|
37,417
|
|
|
$
|
421,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,565
|
|
|
|
9,565
|
|
Net unrealized losses
|
|
|
|
|
|
|
|
|
|
|
(11,042
|
)
|
|
|
|
|
|
|
(11,042
|
)
|
Stock based compensation
|
|
|
|
|
|
|
467
|
|
|
|
|
|
|
|
|
|
|
|
467
|
|
Dividends to shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(958
|
)
|
|
|
(958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008
|
|
$
|
383
|
|
|
$
|
385,524
|
|
|
$
|
(12,093
|
)
|
|
$
|
46,024
|
|
|
$
|
419,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
4
CastlePoint Holdings, Ltd.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1
Basis of Presentation Summary of Significant Accounting Policies
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, 2007 and notes thereto included in the
Companys 2007 Annual Report on Form 10-K. 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 Companys financial position and results of operations.
The results of operations for the three months ended March 31, 2008 may not be indicative of the
results that may be expected for the year ending December 31, 2008. 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.
Note 2
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. 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
operates. 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 this
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 entitys own
data. Under the standard, fair value measurements would be separately disclosed by level within the
fair value hierarchy. The provisions of SFAS 157 are effective for financial statements issued for
years beginning after November 15, 2007. The Company adopted the provisions of SFAS 157 on January
1, 2008.
However, pursuant to FSP FAS 157-2, Effective date of FASB Statement No. 157 (FSP FAS 157-2), the Company elected
to defer the effective date of FAS 157 for one year for non-financial assets and non-financial liabilities that are recognized
or disclosed at fair value in the financial statements on a non-recurring basis.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities. This standard 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 standard is expected to
expand the use of fair value measurement. The standard is effective as of the beginning of an
entitys first fiscal year that begins after November 15, 2007. The Company did not elect to
implement the fair value option for eligible financial assets and liabilities as of January 1,
2008.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS No.
141(R)). This standard establishes principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree. SFAS No. 141(R) also provides
guidance for recognizing and measuring the goodwill acquired in the business combination and
determines what information to disclose to enable users of the financial statements to evaluate the
nature and financial effects of the business combination. The guidance will become effective for
fiscal
5
years beginning after December 15, 2008. The Company is currently evaluating the impact that
the adoption of SFAS No. 141(R) will have on its consolidated financial position or results of
operations.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements-an amendment of ARB No. 51 (SFAS No. 160). This standard establishes
accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. The guidance will become effective for fiscal years beginning
after December 15, 2008. The Company is currently evaluating the impact that the adoption of SFAS
No. 160 will have on its consolidated financial position or results of operations.
In March 2008, FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities. This standard will require enhanced disclosures concerning (1) the manner in which an
entity uses derivatives, (2) the manner in which derivatives and related hedged items are accounted
for under SFAS No. 133 and interpretations thereof, and (3) the effects that derivatives and
related hedged items have on an entitys financial position, financial performance, and cash flows.
The guidance will become effective for fiscal years beginning after November 15, 2008. The Company
is currently evaluating the impact that the adoption of SFAS No. 161 will have on its consolidated
financial position or results of operations.
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 Towers property and
excess of loss reinsurance agreements. The transactions listed below are classified as related
party transactions, as each counterparty may be deemed to be an affiliate of the Company.
The Company sub-leases the space in New York, New York for the headquarters of its
subsidiaries, CastlePoint Management and CastlePoint Insurance Company, from Tower Insurance
Company of New York, a subsidiary of Tower, at Towers cost.
Reinsurance Agreements:
In April 2006, CastlePoint Re entered into three multi-year quota
share reinsurance agreements with Towers insurance subsidiaries which will expire in April 2010:
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, 2008 and March 31, 2007
CastlePoint Re assumed 40% of Towers brokerage business under the brokerage business quota share
reinsurance agreement.
There were no changes during the three months ended March 31, 2008 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,
pursuant to which CastlePoint Re assumed 50% and 85% of Towers premiums and losses in those
businesses, respectively.
In October 2007, 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 and are deemed approved and in
effect. The purpose of the two aggregate excess of loss reinsurance agreements is to cause the loss
ratios for the brokerage business of CastlePoint Insurance Company and Tower to be approximately
equal. Under the first agreement, Tower will reinsure 85% (the percentage will be adjusted to equal
Towers actual percentage of the total brokerage business written by Tower and CastlePoint
Insurance Company) of CastlePoint Insurance Companys brokerage business losses that are in excess
of a specified loss ratio for brokerage business written through Tower Risk Management Corp. Under
the second agreement CastlePoint Insurance Company will reinsure 15% (the percentage will be
adjusted to equal CastlePoints actual percentage of the total brokerage business written by Tower
and CastlePoint) of Tower brokerage business losses that are in excess of a specified loss ratio
for brokerage business. Under both agreements, the loss ratio is calculated
6
net of premiums paid for and losses recovered from 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. For the three months ended March 31,
2008 premiums ceded to Tower for the aggregate excess of loss treaty were $0.8 million and premiums
assumed from Tower for the same corresponding aggregate excess of loss treaty were $0.8 million.
Also CastlePoint Insurance Company ceded net $0.3 million incurred losses for the same period.
Premiums receivable from and losses payable to Tower as of March 31, 2008 were $114.9 million
and $16.5 million, respectively, compared to $105.4 million and $1.7 million as of December 31,
2007. The unearned premium reserves and loss reserves with Tower as of March 31, 2008
were $184.4
million and $125.6 million, respectively, compared to $175.2 million and $108.8 million as of
December 31, 2007. Deferred acquisition costs were $59.9 million and $61.7 million as of March 31,
2008 and December 31, 2007, respectively. The net underwriting impact related to our agreements
with Tower discussed above is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2008
|
|
2007
|
|
Net premiums earned
|
|
$
|
75,627
|
|
|
$
|
38,533
|
|
Net losses incurred
|
|
|
39,340
|
|
|
|
20,554
|
|
Net commission expense
|
|
|
27,984
|
|
|
|
13,218
|
|
Management Agreements:
Tower and CastlePoint have entered into business management agreements
with each other for brokerage business and program business; these management agreements have been
approved by the New York State Insurance Department. The business management agreement pertaining
to Towers brokerage business provides that a portion of Towers brokerage business would be
written directly in CastlePoint Insurance Company with Tower Risk Management as the manager of this
business for fees which are explained below. The business management agreement pertaining to
programs business that is managed by CastlePoint Management provides that a portion of program
business would be written directly in Towers insurance companies and that CastlePoint Management
would receive fees for providing certain underwriting and claims services for this business. The
business management agreement for brokerage business dated July 1, 2007 with Tower Risk Management
Corp. has been approved by the New York State Insurance Department and provides that Tower Risk
Management Corp., a subsidiary of Tower, is authorized to write brokerage business using
CastlePoint Insurance Companys policies and manage such business for CastlePoint Insurance
Company. 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 sliding scale commission
provides that Tower Risk Managements commission for the brokerage business is 31% of net premiums
written which can increase to 33% or decline to 28% depending on the loss ratio. For the three
months ended March 31, 2008 and March 31, 2007 and based upon the estimated loss ratio for
brokerage business, CastlePoint Insurance Company accrued fees amounting to approximately $6.9
million and zero, respectively, to Tower Risk Management. The accrued fees for the period ended
March 31, 2008 were equal to approximately 33% of earned premiums attributed to this business.
CastlePoint Management is a party to a program management agreement with Tower and certain of
its subsidiaries, also approved by the New York Insurance Department, whereby CastlePoint
Management performs certain underwriting and claims services with respect to program business and
Tower reimburses CastlePoint Management for its actual costs, which includes commissions paid to
program underwriting agencies, fees paid to third party administrators to adjust claims, plus an
allowance to CastlePoint Management for its actual internal costs, which for the three months ended
March 31, 2008 were approximately 5% of gross premiums written for programs business. Premiums
collected and due to Tower for program business at March 31, 2008 and December 31, 2007 were $25.9
million and $8.6 million, respectively. For the three months ended March 31, 2008 and March 31,
2007, CastlePoint Management recorded commission revenue of $7.6 million and $1.6 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. For the three months ended
March 31, 2008 and
7
2007, Tower charged CastlePoint Management $0.2 million and $0.1 million respectively, for
services rendered in support of CastlePoint Managements infrastructure as contemplated by the
service and expense sharing agreements.
In addition to the services rendered in support of CastlePoint Managements infrastructure,
Tower rendered services for CastlePoint Managements program business contemplated by the service
and expense sharing agreements. For these services, Tower charged CastlePoint Management $0.2
million for the three months ended March 31, 2008 and $0.1 million for the same period in 2007.
Note 4 Investments
The amortized cost and fair value of the investments by investment type as of March 31, 2008
and December 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
($ in thousands)
|
|
March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US government and agencies
securities
|
|
$
|
5,048
|
|
|
$
|
307
|
|
|
$
|
|
|
|
$
|
5,355
|
|
Corporate fixed maturities
|
|
|
140,775
|
|
|
|
2,003
|
|
|
|
(3,875
|
)
|
|
|
138,903
|
|
Mortgage and asset-backed securities
|
|
|
378,709
|
|
|
|
1,755
|
|
|
|
(7,931
|
)
|
|
|
372,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
524,532
|
|
|
|
4,065
|
|
|
|
(11,806
|
)
|
|
|
516,791
|
|
Equities
|
|
|
42,623
|
|
|
|
92
|
|
|
|
(5,318
|
)
|
|
|
37,397
|
|
Short term investments
|
|
|
39,102
|
|
|
|
|
|
|
|
|
|
|
|
39,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale investments
|
|
$
|
606,257
|
|
|
$
|
4,157
|
|
|
$
|
(17,124
|
)
|
|
$
|
593,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US government and agencies
securities
|
|
$
|
8,598
|
|
|
$
|
214
|
|
|
$
|
|
|
|
$
|
8,812
|
|
Corporate fixed maturities
|
|
|
132,268
|
|
|
|
1,372
|
|
|
|
(1,370
|
)
|
|
|
132,270
|
|
Mortgage and asset-backed securities
|
|
|
343,623
|
|
|
|
3,124
|
|
|
|
(2,857
|
)
|
|
|
343,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
484,489
|
|
|
|
4,710
|
|
|
|
(4,227
|
)
|
|
|
484,972
|
|
Equities
|
|
|
44,036
|
|
|
|
28
|
|
|
|
(1,662
|
)
|
|
|
42,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale investments
|
|
$
|
528,525
|
|
|
$
|
4,738
|
|
|
$
|
(5,889
|
)
|
|
$
|
527,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS 157),
regarding fair value measurements. The valuation technique used to fair value the financial
instruments is the market approach which uses prices and other relevant information generated by
market transactions involving identical or comparable assets.
In accordance with SFAS 157, the Company has analyzed the independent broker and third-party
pricing services valuation methodologies and has also evaluated the various types of securities in
its investment portfolio to determine an appropriate SFAS 157 fair value hierarchy level based upon
trading activity and the observability of market inputs. Based on this, each price was classified
into Level 1, 2 or 3. Level 1 inputs are quoted prices in active markets for identical securities.
Level 2 inputs are other than quoted prices included within Level 1 that are observable for the
security, either directly or indirectly. Level 3 inputs are unobservable inputs for the security.
Unobservable inputs shall be used to measure fair value to the extent that observable inputs are
not available, thereby allowing for situations in which there is little, if any, market activity
for the security at the measurement date. The fair value pricing of our fixed maturity and equity
securities at March 31, 2008 is generally based on current marks provided by indices, established
broker-dealers who routinely make a market in the securities being priced and, to a lesser extent,
reputable pricing services. To the best of managements knowledge, substantially all
8
of the prices represent observable prices, including similar securities in active markets,
identical or similar securities in an inactive market or market corroborated inputs.
In accordance with FAS 157, the Company determined that its investments in publicly-traded
equity securities and cash are categorized as Level 1 pricing. Investments in all fixed
maturities, including U.S. government securities, are categorized as Level 2 pricing. All
non-Level 1 securities in the Companys portfolio were priced by either independent brokers or
third-party pricing services and utilize observable inputs. No securities in the Companys
portfolio were priced using unobservable inputs and, therefore, the Company has not assigned any
securities to Level 3.
As of March 31 2008, the Companys investments are categorized into Levels as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant Other
|
|
|
|
Fair Value
|
|
|
Active Markets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
|
Measurements
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
(in thousands)
|
Fixed maturity-securities
|
|
$
|
516,791
|
|
|
$
|
|
|
|
$
|
516,791
|
|
|
$
|
|
|
Equity securities
|
|
|
37,397
|
|
|
|
1,553
|
|
|
|
35,844
|
|
|
|
|
|
Short-term investments
|
|
|
39,102
|
|
|
|
|
|
|
|
39,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
593,290
|
|
|
$
|
1,553
|
|
|
$
|
591,737
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substantially all of the Companys invested assets that were in an unrealized loss position at
March 31, 2008 and December 31, 2007 had been held for less than 12 months and are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Less than 12 Months
|
|
|
More than 12 Months
|
|
|
Total
|
|
|
|
of
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
Positions
|
|
|
Book Value
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Book Value
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Book Value
|
|
|
Fair Value
|
|
|
losses
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporates
|
|
|
25
|
|
|
$
|
35,413
|
|
|
$
|
31,538
|
|
|
$
|
(3,875
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
35,413
|
|
|
$
|
31,538
|
|
|
$
|
(3,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage & asset backed
|
|
|
52
|
|
|
|
187,274
|
|
|
|
179,568
|
|
|
|
(7,706
|
)
|
|
|
4,605
|
|
|
|
4,380
|
|
|
|
(225
|
)
|
|
|
191,879
|
|
|
|
183,948
|
|
|
|
(7,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
77
|
|
|
|
222,687
|
|
|
|
211,106
|
|
|
|
(11,581
|
)
|
|
|
4,605
|
|
|
|
4,380
|
|
|
|
(225
|
)
|
|
|
227,292
|
|
|
|
215,486
|
|
|
|
(11,806
|
)
|
Equities
|
|
|
22
|
|
|
|
39,591
|
|
|
|
34,273
|
|
|
|
(5,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,591
|
|
|
|
34,273
|
|
|
|
(5,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
99
|
|
|
$
|
262,278
|
|
|
$
|
245,379
|
|
|
$
|
(16,899
|
)
|
|
$
|
4,605
|
|
|
$
|
4,380
|
|
|
$
|
(225
|
)
|
|
$
|
266,883
|
|
|
$
|
249,759
|
|
|
$
|
(17,124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporates
|
|
|
17
|
|
|
$
|
28,206
|
|
|
$
|
26,836
|
|
|
|
(1,370
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
28,206
|
|
|
$
|
26,836
|
|
|
$
|
(1,370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage & asset backed
|
|
|
23
|
|
|
|
77,757
|
|
|
|
74,911
|
|
|
|
(2,846
|
)
|
|
|
3,669
|
|
|
|
3,658
|
|
|
|
(11
|
)
|
|
|
81,426
|
|
|
|
78,569
|
|
|
|
(2,857
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
40
|
|
|
|
105,963
|
|
|
|
101,747
|
|
|
|
(4,216
|
)
|
|
|
3,669
|
|
|
|
3,658
|
|
|
|
(11
|
)
|
|
|
109,632
|
|
|
|
105,405
|
|
|
|
(4,227
|
)
|
Equities
|
|
|
9
|
|
|
|
21,383
|
|
|
|
19,721
|
|
|
|
(1,662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,383
|
|
|
|
19,721
|
|
|
|
(1,662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
49
|
|
|
$
|
127,346
|
|
|
$
|
121,468
|
|
|
$
|
(5,878
|
)
|
|
$
|
3,669
|
|
|
$
|
3,658
|
|
|
$
|
(11
|
)
|
|
$
|
131,015
|
|
|
$
|
125,126
|
|
|
$
|
(5,889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2008, the Company had 99 securities in a gross unrealized loss position amounting
to $17.1 million, of which $11.8 million (77 securities) was attributable to fixed maturities and
$5.3 million (22
9
securities) was attributable to equity securities. Of the $11.8 million
attributable to fixed maturities, $10.5 million was rated investment grade. The remaining $1.3 million unrealized loss was attributed to one security
rated BB. This is a commercial mortgage backed security (CMBS). This security has been in an
unrealized loss position for less than 12 months. The market value at March 31, 2008 of the
security is 38.2% of amortized cost.
Corporate Fixed Maturities
The unrealized loss position of $3.9 million as of March
31, 2008 in corporate fixed maturities relates to 25 securities all rated BBB or above and all had
been in an unrealized loss position for less than 12 months as of March 31, 2008. The security with
the largest unrealized loss in this group of $2.0 million is Lehman Brothers Holdings, Inc., issued
May 17, 2007, with a coupon of 5.86% and a book yield of 6.04%, rated A-. The remaining corporate
securities are distributed over the following industriesbanks, brokerage, insurance, other
finance, media, pipelines and utilities. The impairment on all fixed corporate maturities is
considered temporary at March 31, 2008 and is generally the result of continued widening of spreads
during the first quarter of 2008. The Company has both the ability and intent to hold these
securities until a full recovery of fair value, which may be maturity.
Mortgage and Asset Backed Securities
The unrealized loss in mortgage and asset
backed securities of $7.9 million as of March 31, 2008 relates to 52 issues, with 47 issues rated
AAA ($2.9 million), four issues rated BBB ($3.7 million) and one issue rated BB ($1.3 million). All
of these securities, except for certain positions with unrealized losses amounting to $0.2 million,
had been in an unrealized loss position for less than 12 months as of March 31, 2008. The five
securities rated BBB and BB are CMBS and were purchased after June 30, 2007. Since all five
securities are rated less than AA, a cash flow analysis was performed pursuant to Emerging Issues
Task Force (EITF) 99-20. None of these securities indicated a reduction in cash flow on a present
value basis from what was originally expected at the date of purchase. The impairment on all
mortgage and asset backed securities is considered temporary at March 31, 2008 and is due to the
market disruptions caused by the significant decline in market liquidity affecting this sector. The
Company has both the ability and intent to hold these securities until a full recovery of fair
value, which may be maturity.
Equity Securities
The unrealized loss in equity securities of $5.3 million as of
March 31, 2008 relates to 22 issues. These securities had been in an unrealized loss position for
less than 12 months as of March 31, 2008. The largest single equity security in an unrealized loss
position at March 31, 2008 was an investment in a fund comprised primarily of collateralized bank
loans with an unrealized loss of $1.5 million. The loans have floating rates. The collateralization
makes the loans structurally senior in priority to corporate bonds from the same issuers, providing
additional credit protection. This security had been in an unrealized loss position for more than
six months as of March 31, 2008. The unrealized loss is due to market disruptions caused by the
significant decline in market liquidity and the continued spread widening during the first quarter
of 2008. The remaining unrealized loss of $3.8 million is comprised of 17 preferred stock issues,
three common stock issues and one fund investment with no one unrealized loss at March 31, 2008
exceeding $0.6 million. Other than the common stock security discussed below, the Company has both
the ability and intent to hold all equity securities in a loss position at March 31, 2008, until a
full recovery of fair value.
At March 31, 2008, the Company recorded charges for other-than-temporary impairments of $0.2
million relating to an investment in a common stock. This security is a publicly traded mortgage
REIT whose purpose is to own various mortgage backed securities, including CMBS and agency and
non-agency residential MBS. The market value of this security at March 31, 2008 was 64% of
adjusted cost. At year end, the company recorded a charge for other-than-temporary impairment of
$0.5 million relating to this investment.
Management believes the securities that are other-than-temporarily impaired at March 31, 2008
have been identified and are properly reflected in the financial statements.
The following table shows the ratings distribution of our fixed income portfolio as of March
31, 2008 and December 31, 2007:
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
Percentage
|
|
($ in thousands)
|
|
Fair Value
|
|
|
of Fair Value
|
|
|
Fair Value
|
|
|
of Fair Value
|
|
Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
2,644
|
|
|
|
0.51
|
%
|
|
$
|
3,218
|
|
|
|
0.66
|
%
|
AAA
|
|
|
378,487
|
|
|
|
73.24
|
%
|
|
|
352,079
|
|
|
|
72.60
|
%
|
AA
|
|
|
49,916
|
|
|
|
9.66
|
%
|
|
|
46,920
|
|
|
|
9.67
|
%
|
A
|
|
|
39,121
|
|
|
|
7.57
|
%
|
|
|
50,312
|
|
|
|
10.37
|
%
|
BBB
|
|
|
45,428
|
|
|
|
8.79
|
%
|
|
|
30,660
|
|
|
|
6.32
|
%
|
BB
|
|
|
1,195
|
|
|
|
0.23
|
%
|
|
|
1,783
|
|
|
|
0.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
516,791
|
|
|
|
100.00
|
%
|
|
$
|
484,972
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5
Dividends Declared
Dividends declared and paid by the Company on its common shares for the three months ended
March 31, 2008 were $957,236, or $0.025 per share. For three months March 31, 2007, the Company
declared a quarterly dividend of $0.025 per share, in the aggregate amount of $739,500.
On March 17, 2008, the Board of Directors of CastlePoint Holdings approved a quarterly
dividend of $0.05 per share payable June 30, 2008 to the Companys shareholders of record as of
June 16, 2007.
Note 6
Earnings Per Share
The following table shows the computation of the Companys earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
|
(in thousands, except shares and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
9,565
|
|
|
|
38,277,704
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
56,623
|
|
|
|
|
|
Unvested restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
160,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
9,565
|
|
|
|
38,494,609
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
|
7,071
|
|
|
|
30,421,659
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
148,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
7,071
|
|
|
|
30,570,021
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
11
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 March 31, 2008 and March 31, 2007, weighted
outstanding stock options of 654,283 and 1,136,611 and weighted restricted stock of 15,583 and
zero, respectively, were not considered in computing diluted earnings per share because they were
antidilutive.
Note 7
Employee Compensation Plans
2006 Long-Term Equity Compensation Plan
The following table provides an analysis of the stock option activity for the periods set forth
below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31, 2008
|
|
|
|
|
|
|
Weighted
|
|
|
Number of
|
|
Average Exercise
|
|
|
Shares
|
|
Price
|
Outstanding at December 31, 2007
|
|
|
1,618,783
|
|
|
$
|
11.50
|
|
Granted at market value
|
|
|
499,518
|
|
|
|
10.12
|
|
Forfeitures and expirations
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008
|
|
|
2,118,301
|
|
|
|
11.17
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
|
376,133
|
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value per
share of options granted
|
|
|
|
|
|
|
4.07
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31, 2007
|
|
|
|
|
|
|
Weighted
|
|
|
Number of
|
|
Average Exercise
|
|
|
Shares
|
|
Price
|
Outstanding at December 31, 2006
|
|
|
1,082,666
|
|
|
$
|
10.00
|
|
Granted at market value
|
|
|
539,447
|
|
|
|
14.50
|
|
Forfeitures and expirations
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007
|
|
|
1,622,113
|
|
|
|
11.50
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
|
|
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value per
share of options granted
|
|
|
|
|
|
|
4.81
|
|
12
Options outstanding as of the dates set forth below are shown on the following schedule:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
|
Options exercisable
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Contractual
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
Range of Exercise Prices
|
|
Shares
|
|
|
Life
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$10.00 2006
|
|
|
1,082,666
|
|
|
8.00 years
|
|
$
|
10.00
|
|
|
|
376,133
|
|
|
$
|
10.00
|
|
$14.50 03/22/07
|
|
|
519,310
|
|
|
9.00 years
|
|
$
|
14.50
|
|
|
|
|
|
|
|
|
|
$15.25 04/30/07
|
|
|
16,807
|
|
|
9.08 years
|
|
$
|
15.25
|
|
|
|
|
|
|
|
|
|
$10.12 03/10/08
|
|
|
499,518
|
|
|
9.94 years
|
|
$
|
10.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Options
|
|
|
2,118,301
|
|
|
8.71 years
|
|
$
|
11.17
|
|
|
|
376,133
|
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$10.00 2006
|
|
|
1,082,666
|
|
|
8.25 years
|
|
$
|
10.00
|
|
|
|
376,133
|
|
|
$
|
10.00
|
|
$14.50 03/22/07
|
|
|
519,310
|
|
|
9.25 years
|
|
$
|
14.50
|
|
|
|
|
|
|
|
|
|
$15.25 04/30/07
|
|
|
16,807
|
|
|
9.33 years
|
|
$
|
15.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Options
|
|
|
1,618,783
|
|
|
8.58 years
|
|
$
|
11.50
|
|
|
|
376,133
|
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The company uses the simplified method outlined in the SEC Staff Accounting Bulletin 110 to
estimate expected lives for options granted during the period as historical exercise data is not
available and the options meet the requirement set out in the Bulletin.
As of March 31, 2008 and December 31, 2007 there was $5.4 million and $4.0 million of
unrecognized compensation costs related to 1,742,168 and 1,242,650 non-vested stock options,
respectively. For employees, the cost is expected to be recognized over the vesting periods of the
individual options, which extend up to 42 months. For non-employee directors, the cost is expected
to be recognized over the vesting period of 12 months for grants dated April 4, 2006 and over the
vesting period of 36 months for grants dated March 22, 2007. For the three months ended March 31,
2008 and the three months ended March 31, 2007, the Company recognized $0.5 million and
$0.4 million of compensation expense related to share-based compensation, respectively.
During the three months ended March 31, 2008, 16,305 restricted stock shares were granted to
non-employee directors. As of March 31, 2008, there were $0.2 million of unrecognized compensation
costs related to 23,415 non-vested restricted stock grants for non-employee directors. Restricted
stock shares granted to non-employee directors vest over 12 months.
13
Note 8
Segment Information
The Company reports its results in three business segments: insurance, reinsurance and
insurance services. The insurance segment includes the results of CastlePoint Insurance and
CastlePoint Re for excess lines written on a primary basis. The reinsurance segment includes the
results from the reinsurance business written through CastlePoint Re. The insurance services
segment includes the results from managing the specialty and traditional program business and
insurance risk-sharing business through CastlePoint Management, as well as results from providing
unbundled insurance services to program underwriting managers. The Company evaluates segment
profit, which excludes investment income, realized gains and losses, general corporate expenses,
interest expense, income taxes and any other non-core business income or expense.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
Insurance Segment
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
23,960
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
23,960
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Net loss and loss adjustment expenses
|
|
|
13,195
|
|
|
|
|
|
Commission expense
|
|
|
8,949
|
|
|
|
|
|
Other underwriting expenses
|
|
|
736
|
|
|
|
2
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
22,880
|
|
|
|
2
|
|
|
|
|
|
|
|
|
Segment profit/(loss)
|
|
$
|
1,080
|
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
Reinsurance Segment
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
76,443
|
|
|
$
|
46,596
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
76,443
|
|
|
|
46,596
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Net loss and loss adjustment expenses
|
|
|
41,341
|
|
|
|
25,326
|
|
Commission expenses
|
|
|
25,653
|
|
|
|
15,357
|
|
Other underwriting expenses
|
|
|
1,091
|
|
|
|
650
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
68,085
|
|
|
|
41,333
|
|
|
|
|
|
|
|
|
Segment profit
|
|
$
|
8,358
|
|
|
$
|
5,263
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
Insurance Services Segment
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Direct commission revenue from program business
|
|
$
|
8,709
|
|
|
$
|
1,561
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
8,709
|
|
|
|
1,561
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Direct commission expenses from program business
|
|
|
7,653
|
|
|
|
1,216
|
|
Other insurance services expenses
|
|
|
1,980
|
|
|
|
1,344
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
9,633
|
|
|
|
2,560
|
|
|
|
|
|
|
|
|
Segment loss
|
|
$
|
(924
|
)
|
|
$
|
(999
|
)
|
|
|
|
|
|
|
|
The following table reconciles revenues by segment to consolidated revenues:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Insurance segment
|
|
$
|
23,960
|
|
|
$
|
|
|
Reinsurance segment
|
|
|
76,443
|
|
|
|
46,596
|
|
Insurance services segment
|
|
|
8,709
|
|
|
|
1,561
|
|
|
|
|
|
|
|
|
Total segment revenues
|
|
|
109,112
|
|
|
|
48,157
|
|
Segment revenue elimination
|
|
|
(730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment income
|
|
|
5,157
|
|
|
|
5,791
|
|
Net realized capital gains
|
|
|
1,365
|
|
|
|
6
|
|
|
|
|
|
|
|
|
Consolidated revenues
|
|
$
|
114,904
|
|
|
$
|
53,954
|
|
|
|
|
|
|
|
|
The following table reconciles the results of the Companys individual segments to
consolidated income before taxes:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
Insurance segment profit/(loss)
|
|
$
|
1,080
|
|
|
$
|
(2
|
)
|
Reinsurance segment profit
|
|
|
8,358
|
|
|
|
5,263
|
|
Insurance services segment loss
|
|
|
(924
|
)
|
|
|
(999
|
)
|
|
|
|
|
|
|
|
Segment profit
|
|
|
8,514
|
|
|
|
4,262
|
|
Net investment income
|
|
|
5,157
|
|
|
|
5,791
|
|
Net realized capital gains
|
|
|
1,365
|
|
|
|
6
|
|
Corporate expenses
|
|
|
(2,628
|
)
|
|
|
(1,340
|
)
|
Interest expense
|
|
|
(2,843
|
)
|
|
|
(2,201
|
)
|
|
|
|
|
|
|
|
Income before taxes
|
|
$
|
9,565
|
|
|
$
|
6,518
|
|
|
|
|
|
|
|
|
15
Note 9
Security Requirements
As required by the Companys reinsurance agreements with its cedents, CastlePoint Re is
required to collateralize amounts through a letter of credit, cash advance, funds held or a trust
account. The amount of the letter of credit or trust is to be adjusted each calendar quarter, and
the required amount is to be at least equal to the sum of the following contract amounts: (i)
unearned premium reserve, (ii) paid loss and loss adjustment expense payable, (iii) loss and loss
adjustment expenses reserves, (iv) loss incurred but not reported, (v) return and refund premiums,
and (vi) less premium receivable. As of March 31, 2008 and December 31, 2007, CastlePoint Re
maintained trusts and a letter of credit in the aggregate amount of $266.5 million and $218.1
million, respectively, at State Street Bank and Trust Company, a Massachusetts trust company. As
of March 31, 2008 and December 31, 2007 CastlePoint Insurance Company maintained a trust at the
same trust company in the amount of $8.0 million. Both CastlePoint Re and CastlePoint Insurance
Company earn and collect the interest on the trust funds.
Item 2. Managements 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 Managements 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.
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 Item 1A: Risk Factors of our 2007 Annual Report on
Form 10-K and include the following:
|
|
|
our lack of extensive operating history;
|
|
|
|
|
our heavy dependence on Tower for revenue, which is expected to continue, and
the continued growth of Towers business;
|
|
|
|
|
the risk that CastlePoint Bermuda Holdings or CastlePoint Holdings may be
deemed to be engaged in a U.S. trade or business, or that CastlePoint Re may be
considered to be doing business through a permanent establishment in the United States,
either of which would subject these companies to U.S. taxation;
|
|
|
|
|
changes in regulation or tax laws applicable to us, our brokers or our
customers;
|
|
|
|
|
the terms of our arrangements with Tower may change as a result of the
regulatory review and approval process;
|
|
|
|
|
our ability to write premiums with clients other than Tower;
|
|
|
|
|
the possibility that we will need additional capital for our reinsurance and
insurance businesses, as well as to acquire at least one additional broadly-licensed
U.S. insurance company for our insurance business, and to make strategic investments in
some of our clients, including Tower, and the risk that we may not be able to obtain
future additional financing on favorable terms or at all;
|
|
|
|
|
the ineffectiveness or obsolescence of our planned business strategy due to
changes in current or future market conditions;
|
16
|
|
|
changes in the availability, cost or quality of insurance business that meets
our reinsurance underwriting standards;
|
|
|
|
|
actual results, changes in market conditions, the occurrence of catastrophic
losses and other factors outside our control that may require us to alter our
anticipated methods of conducting our business, such as the nature, amount and types of
risk we assume and the terms, limits or other characteristics of the products we write
or intend to write;
|
|
|
|
|
possible future downgrade in the A.M. Best rating of some or all of our
insurance or reinsurance subsidiaries, or any that we may acquire;
|
|
|
|
|
changes in rating agency policies or practices; and
|
|
|
|
|
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. You should specifically
consider the factors identified in this quarterly report and the risk factors identified in our
2007 Annual Report on Form 10-K 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.
Overview
We provide a broad range of products and services to the insurance industry. We offer our
products through our operating subsidiaries domiciled in Bermuda and in the United States. We
offer our reinsurance products and insurance risk-sharing products to Tower and its subsidiaries as
well as to other small insurance companies located in the United States with surplus of less than
$100 million. We also conduct business with other insurance companies that are seeking to
efficiently manage their capital as well as limit their concentration of risk in certain geographic
areas through our insurance risk-sharing and quota share reinsurance solutions. In addition, we
offer our insurance and unbundled insurance company services to program underwriting managers
located in the United States. In order to form a close and continuing relationship with our
clients or to enable clients to expand their business and therefore the amount of business they do
with us, we may on occasion, make strategic investments in some of our clients, including Tower.
We do not currently hold such investments.
At March 31, 2008 our total investments and cash and cash equivalents are comprised primarily
of fixed maturities, equity securities and cash and a $5.5 million investment in a limited
partnership investing primarily in AAA rated municipal bonds. The overall rating of our cash and
fixed maturity portfolio is AA and the duration is 2.8 years. We currently do not have subprime or
alternative A exposure in our portfolio. The average credit rating of all mortgage backed
securities held is AAA. We have the ability and intent to hold all fixed maturities, including
mortgages, until maturity, if necessary. Given the current state of the investment marketplace, we
have provided substantial information regarding our portfolio in this section of the report and in
our 2007 Annual Report on Form 10-K, to which you are referred.
17
Tower
. In April 2006 we entered into a master agreement, certain reinsurance
agreements, program management agreements and a service and expense sharing agreement with Tower
and/or its subsidiaries. We and Tower have subsequently modified certain of these arrangements.
All of our agreements with Tower, including the alternative insurance risk-sharing agreements,
are generally subject to review, approval and requests for modification by the New York State
Insurance Department and may be subject to review by the insurance departments of the other
domiciliary states of Towers domestic insurance companies. All of our agreements with Tower are
also subject to the review and approval of the domiciliary states of the U.S. licensed insurance
companies we own, to the extent such companies participate in these agreements.
Our revenues and underwriting results are affected by Towers growth and loss ratios. We
believe that Towers ability to grow its direct premiums written through its existing brokerage
distribution network, to expand its brokerage distribution to new territories and to make
acquisitions, such as Towers acquisition of Preserver in April 2007, will affect the magnitude and
profitability of the business that will be subject to the arrangements with CastlePoint Insurance
Company and that will be ceded to CastlePoint Re. Although we are a relatively new Company, our
relationship with Tower provides us with a steady, predictable flow of profitable and seasoned
business.
Other Customers
.
We also underwrite reinsurance contracts with primary insurance
companies other than Tower, insurance policies written under insurance risk-sharing agreements with
insurance companies other than Tower, and premiums produced by program underwriting managers. From
customers other than Tower we had net written premiums in the three months ended March 31, 2008 of
$38.1 million (32% of booked net premiums written).
Critical Accounting Estimates
The Companys 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:
|
|
|
premiums;
|
|
|
|
|
losses and loss adjustment expense reserves;
|
|
|
|
|
deferred acquisition costs;
|
|
|
|
|
investments;
|
|
|
|
|
reinsurance accounting;
|
|
|
|
|
deferred taxes; and
|
|
|
|
|
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 first quarter of 2008. 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 our 2007 Annual Report on Form 10-K filed with the SEC.
18
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 Res three quota
share reinsurance agreements with Towers insurance companies, we obtain current monthly statements
and 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 periods 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 March 31, 2008, approximately 10% of the assumed written premiums and approximately 2% 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 Companys consolidated financial
position or results of operations.
Regarding loss and loss adjustment expense estimates, changes in loss reserves 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 believe that a
reasonably likely range for the loss reserves can be represented by a standard utilized by
professional, independent actuaries as part of their certification of an insurers reserves. That
standard contemplates that the companys loss reserves must be in a range from minus 5% to plus 10%
of the independent actuarys best estimate. Utilizing this standard as a guide, we believe that
most professional actuaries, assuming they are presented with the same information, would determine
that the loss reserves can be certified if they fall within a range of minus 5% to plus 10%.
Therefore, it is reasonably likely that these professional actuaries, assuming they are presented
with the same information relating to our company, would determine a best estimate of our loss
reserves to be between $144.2 million and $167.0 million as of March 31, 2008, as compared to our
own best estimate of the loss reserves, which is $151.8 million as of that date. No assurance can
be given that outcomes outside of the above range cannot occur, as outcomes outside of such range
are possible. In addition, the above range assumes that future patterns are similar to historical
patterns, as to which there can be no assurance. With regard to the potential variability in loss
reserves estimates due to the fact that future patterns may differ from historical patterns, we
believe there is additional potential variability that cannot be estimated.
The deferred tax asset at March 31, 2008 was $7.8 million, which was comprised of the tax
effects for cost of stock options, unrealized losses, the combined loss of CastlePoint Insurance
Company and CastlePoint Management Company for Federal income tax purposes and CastlePoint
Managements loss for New York State income tax purposes. 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 Companys consolidated
financial position or the results of operations.
Non-GAAP Measures
19
We use the following non-GAAP financial measures to evaluate our profitability.
Consolidated combined ratio
. One of our key measures of profitability is what we refer to as
our consolidated combined ratio, which is calculated by dividing (i) the total expenses (excluding
interest expenses) minus commission income by (ii) net premiums earned
Operating net income and operating return on average equity.
Each of these terms exclude
realized and unrealized gains and losses, and if subject to U.S. taxation, tax at a rate of 35%.
This is a common 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, these measures are a key internal
management performance standard.
The following table provides a reconciliation of operating net income to net income on a GAAP
basis. The operating net income is used to calculate the operating return on average equity.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
Operating net income
|
|
|
11,043
|
|
|
|
7,065
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to Net Income:
|
|
|
|
|
|
|
|
|
Realized and unrealized gains (losses) on
investment in Partnership (1)
|
|
|
(2,979
|
)
|
|
|
0
|
|
Net realized gains (losses) on investments
|
|
|
1,365
|
|
|
|
6
|
|
Tax effect on realized and unrealized gains (losses)
|
|
|
136
|
|
|
|
0
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
9,565
|
|
|
$
|
7.071
|
|
|
|
|
(1)
|
|
Realized and unrealized gains and losses from
our investment in a limited partnership were
recorded as a component of net investment income
|
20
Consolidated Results of Operations
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
Revenues
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
100,404
|
|
|
$
|
46,596
|
|
Commission income
|
|
|
7,978
|
|
|
|
1,561
|
|
Net investment income
|
|
|
5,157
|
|
|
|
5,791
|
|
Net realized investment gains
|
|
|
1,365
|
|
|
|
6
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
114,904
|
|
|
|
53,954
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Net loss and loss adjustment expenses
|
|
|
54,535
|
|
|
|
25,326
|
|
Commission and other acquisition expenses
|
|
|
41,524
|
|
|
|
16,573
|
|
Other operating expenses
|
|
|
6,437
|
|
|
|
3,336
|
|
Interest expenses
|
|
|
2,843
|
|
|
|
2,201
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
105,339
|
|
|
|
47,436
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
9,565
|
|
|
|
6,518
|
|
Income tax benefit
|
|
|
|
|
|
|
553
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
9,565
|
|
|
$
|
7,071
|
|
|
|
|
|
|
|
|
Key Measures
|
|
|
|
|
|
|
|
|
Return on average equity
|
|
|
9.1
|
%
|
|
|
9.6
|
%
|
Consolidated combined ratio
|
|
|
94.1
|
%
|
|
|
93.7
|
%
|
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 March 31, 2008 and 2007
Summary
.
Our business approach focuses on accumulating profitable, established, low
hazard books of business. The company had strong production during the quarter from Tower and
other clients. Most of the clients other than Tower began transferring their business to us last
year, and so over the course of 2008 we expect to record a full year of their business, adding to
our growth. In the first quarter, we also added a new client relationship for quota share
reinsurance.
Our primary risk sharing business solution is a key differentiator for CastlePoint. The
company has two risk sharing clients that we signed up last year, writing business on Tower
policies and also utilizing CastlePoint Insurance. The first client writes small, workers
compensation policies very similar to the type of business that Tower writes. This client
generates this business in the Midwestern and Western states. The second client writes similar
workers compensation policies, as well as, commercial automobile business primarily in Florida.
In both cases, these risk sharing clients participate in the business by assuming reinsurance on a
portion of their risks into their own insurance companies.
The company now also has five program business clients, and the company added one new quota
share reinsurance client bringing the total number of quota share reinsurance clients 12 as
compared to 8 clients at this time last year.
The company monitors the underwriting results of all of our business by continually reviewing
our clients results to ensure that it meets our expected profitability standards as well as
underwriting and pricing guidelines. On many of our contracts, there is a sliding scale
commission that within a small range of loss ratios shares some of the risk with our clients.
Net income increased 35.3% to $9.5 million for the three months ended March 31, 2008, compared
to $7.1 million for the same period in 2007. Net income was adversely impacted by $3.0 million
unrealized losses that are included in net investment income from our investment in a limited
partnership comprised of primarily AAA tax
21
free bonds. Net income also was adversely impacted by an other-than-temporary impairment charge at
March 31, 2008 in the amount of $0.2 million included in net realized gains on investments.
Operating net income, a non-GAAP measure, increased 56.3% to $11.0 million for the three months
ended March 31, 2008, compared to $7.1 million for the three months ended March 31, 2007. Net
earned premiums increased 115.5% to $100.4 million, based upon growth from Tower, CastlePoints
largest client, as well as growth from other clients.
Total revenues
.
Total revenues increased by 113.0% to $114.9 million for the three
months ended March 31, 2008, compared to $54.0 million for the same period in 2007. The increase is
primarily due to the increase in net premiums earned by Castle Point Re and CastlePoint Insurance
and to commission received by CastlePoint Management. Revenues for the three months ended March 31,
2008 consisted of net premiums earned (87.4% of the total revenues), commission income (6.9% of the
total revenues) and net investment income and realized gains (5.7% of the total revenues) compared
to net premiums earned (86.4% of the total revenues), commission income (2.9% of the total
revenues) and net investment income (10.7% of the total revenues) for the same period in 2007.
Premiums earned
.
Net premiums earned increased by 115.5% to $110.4 million for the
three months ended March 31, 2008 compared to $46.6 million for the same period in 2007. The
business assumed by CastlePoint Re and CastlePoint Insurance under our reinsurance agreements with
Towers insurance companies and the business written directly using CastlePoint Insurances
policies through Tower Risk Management represented 75.3% of net premiums earned for the three
months ended March 31, 2008 compared to 81.0% of net premiums earned for the same period in 2007.
Commission income
.
Commission income increased 411.2% to $8.0 million for the three
months ended March 31, 2008 compared to $1.5 million for the three months ended March 31, 2007. We
received this commission income as a result of CastlePoint Managements management of the specialty
and traditional programs. The increase in the first quarter of 2008 was a result of adding two
workers compensation programs, one commercial auto program and one program that writes workers
compensation and commercial auto during the third and fourth quarters of 2007.
Net investment income and realized investment gains
.
Net investment income decreased
by 11.0% to $5.2 million for the three months ended March 31, 2008 compared to $5.8 million for the
three months ended March 31, 2007. The decrease of $0.6 million resulted from a $3.0 million loss
reflected in net investment income on our investment in a limited partnership comprised of
primarily AAA tax free bonds. The loss was the result of illiquidity and poor performance in this
sector due to a continued flight to quality and general market concerns regarding the overall
financial health of financial guaranty insurers and their ability to pay future claims. The
limited partnership is in the process of liquidating its assets and will be returning capital to
the partners by end of the second quarter in 2008. This loss was largely offset by the growth in
cash and invested assets (net of payables for securities of $86.4 million and zero at March 31,
2008 and 2007, respectively). Cash and invested assets increased to $710.1 million as of March 31,
2008 compared to $574.0 million as of March 31, 2007. The increase in invested assets primarily
resulted from our cash flow from operations, principally from growth in premiums written, which was
$140.7 million in 2007 compared with $62.6 million in 2006 and the proceeds of approximately $114.5
million, from our IPO, in March 2007 after the deduction of underwriting discounts and other
offering expenses and $30 million of cash received for the issuance of subordinated debentures in
connection with the trust preferred securities issued in September 2007. The investment book yield
on our cash and invested assets was 3.17% for the three months ended March 31, 2008 compared to
5.41% for the same period in 2007. The decrease in yield is generally due to the limited
partnership loss of $3.0 million recorded in the first quarter of 2008 compared with a zero loss
recorded in the same period last year, which accounted for the 1.7% decline in the yield, coupled
with lower yields on cash and cash equivalents in the first quarter of 2008 (3.6%) compared with
the same period in 2007 (5.1%).
Net realized investment gains increased to $1.4 million for the three months ended March 31,
2008 compared to virtually zero for the three months ended March 31, 2007. The gains in the first
quarter of 2008 were, in part, the result of selling AAA rated agency mortgage securities with an
average duration of 3.4 years and buying corporate bonds, rated between AAA and BBB, with an
average duration of 5.7 years, to take advantage of the recent widening of spreads on corporate
bonds.
22
Loss and loss adjustment expenses
.
Loss and loss adjustment expenses increased
115.3% to $54.5 million, which produced a 54.3% loss ratio for the three months ended March 31,
2008 compared to $25.3 million which produced a 54.4% loss ratio for the same period in 2007.
Operating expenses
.
Operating expenses increased 140.9% to $48.0 million for the
three months ended March 31, 2008, from $19.9 million for the same period in 2007. 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 increase in commissions as a result of our increased premiums. The increase in our
other operating expenses resulted in an increase in our salaries and audit fees.
Interest expense
.
Our interest expense was $2.8 million for the three months ended
March 31, 2008 compared to $2.2 million for the three months ended March 31, 2007. Interest expense
resulted primarily from the $100 million of subordinated debentures issued by us in December 2006
at an average fixed interest rate of 8.6%, and the $30.0 million of subordinated debentures issued
by us in September 2007 at an average fixed interest rate of 8.39%.
Income tax benefit
.
Our income tax benefit was zero for the three months ended March
31, 2008 compared to a tax benefit of $0.6 million for the three months ended March 31, 2007. The
effective income tax rate was zero percent for the three months ended March 31, 2008 compared with
negative 8.5% for the three months ended March 31, 2007. The zero rate for the three months ended
March 31, 2008 reflects our 2008 year end projections for CastlePoint Insurance and CastlePoint
Management to be breakeven, even though these operations had net losses before income taxes for the
three months ended March 31, 2008 of $3.3 million.
Net income and return on average equity
.
Our net income was $9.6 million for the
three months ended March 31, 2008 compared to $7.1 million for the same period in 2007. Our
annualized return on average equity was 9.1% for the three months ended March 31, 2008 compared
9.6% for the same period in 2007. Our annualized operating return on equity for the three months
ended March 31, 2008 was 10.5% compared to 9.6% for the same period in 2007. The annualized return
for the three months ended March 31, 2008 was calculated by dividing annualized net income of $38.3
million by weighted average shareholders equity of $420.8 million. The annualized return for the
three months ended March 31, 2007 was calculated by dividing annualized net income of $28.3 million
by weighted average shareholders equity of $294.8 million. The decrease in the average return on
equity resulted from a greater increase in our average equity compared to our net income. The
operating return on average equity was determined similarly but utilizing operating income which
excludes realized gains/(losses) as well as unrealized losses that are included in net investment
income.
Consolidated combined ratio
.
Our consolidated combined ratio for the three months
ended March 31, 2008 was 94.1% compared to 93.7% for the same period in 2007. The increase in
combined ratio results from the inclusion of CastlePoint Insurance Company in 2008, which did not
have operations in the 2007 period, and the fact that as a startup CastlePoint Insurance Companys
costs to purchase property catastrophe protection are a relatively high percentage of its net
earned premiums. The corporate expenses contributed 2.6% to the combined ratio for the three
months ended March 31, 2008, which compares favorably to 2.9% for this portion of the expense ratio
included in the combined ratio for the prior year period.
23
Insurance Segment Results of Operations
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
Revenues
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
|
|
|
|
|
|
|
Gross premiums earned
|
|
$
|
31,594
|
|
|
$
|
|
|
Less: ceded premiums earned
|
|
|
(7,634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
|
23,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses
|
|
|
|
|
|
|
|
|
Gross loss and loss adjustment expenses
|
|
|
16,479
|
|
|
|
|
|
Less: ceded loss and loss adjustment expenses
|
|
|
(3,284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss adjustment expenses
|
|
|
13,195
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting expenses
|
|
|
|
|
|
|
|
|
Commission expense
|
|
|
8,949
|
|
|
|
|
|
Other underwriting expenses
|
|
|
736
|
|
|
|
2
|
|
|
|
|
|
|
|
|
Total underwriting expenses
|
|
|
9,685
|
|
|
|
2
|
|
|
|
|
|
|
|
|
Underwriting profit/(loss)
|
|
$
|
1,080
|
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key Measures
|
|
|
|
|
|
|
|
|
Premiums written
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
34,949
|
|
|
$
|
|
|
Less: ceded premiums written
|
|
|
(11,017
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
23,932
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Ratios
|
|
|
|
|
|
|
|
|
Gross
|
|
|
52.2
|
%
|
|
|
n/a
|
|
Net
|
|
|
55.1
|
%
|
|
|
n/a
|
|
Accident Year Loss Ratios
|
|
|
|
|
|
|
|
|
Gross
|
|
|
50.6
|
%
|
|
|
n/a
|
|
Net
|
|
|
53.5
|
%
|
|
|
n/a
|
|
Underwriting Expense Ratios
|
|
|
|
|
|
|
|
|
Gross
|
|
|
30.7
|
%
|
|
|
n/a
|
|
Net
|
|
|
40.4
|
%
|
|
|
n/a
|
|
Combined Ratios
|
|
|
|
|
|
|
|
|
Gross
|
|
|
82.9
|
%
|
|
|
n/a
|
|
Net
|
|
|
95.5
|
%
|
|
|
n/a
|
|
24
Insurance Segment Results of Operations for the Three Months Ended March 31, 2008 and 2007
The insurance segment did not conduct any business and did not have any premium income,
obligations relating to insurance policies, employees or operations for the three months ended
March 31, 2007.
Summary
.
The Insurance segment had an underwriting gain for the three months ended
March 31, 2008 due to strong growth combined with our excellent underwriting results. Premiums
written and earned were mostly comprised from Tower Brokerage business and the net combined ratio
was 95.5%.
Gross premiums and net premiums
.
Gross and net premiums written were $34.9 million
and $23.9 million, respectively, for the three months ended March 31, 2008. Gross and net premium
earned were $31.6 million and $24.0 million respectively, for the three months ended March 31,
2008. CastlePoint Insurance assumed or wrote directly $12.5 million through programs managed by
CastlePoint Management and wrote approximately $21.7 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 65% was ceded to third-party reinsurers and
35% to CastlePoint Re.
Gross and net loss and loss adjustment expenses and loss ratio
.
Gross loss and loss
adjustment expenses were $16.5 million, which produced a 52.2% gross loss ratio for the three
months ended March 31, 2008. Net loss and loss adjustment expenses were $13.2 million, which
produced a 55.1% net loss ratio for the three months ended March 31, 2008. The net loss ratio was
negatively affected by 1.3 million of ceded catastrophe premium written and earned at a zero loss
ratio. For the Tower brokerage, accident year 2007 reserve strengthening of $0.3 million was
recorded in the first quarter. We increased the loss ratios on property lines of business based
upon reported losses during the first quarter that occurred late in 2007 and for which we did not
carry reserves for the losses incurred but not reported.
Underwriting expenses and underwriting expense ratio
.
Underwriting expenses for the
insurance segment are comprised of commission and other underwriting expenses. Commission expense
was $8.9 million and other underwriting expenses were $0.7 million of which $0.6 million was
boards, bureaus and taxes for the three months ended March 31, 2008. The gross underwriting expense
ratio was 30.7% and the net underwriting expense ratio was 40.4% for the three months ended March
31, 2008. The net expense ratio was negatively affected by 1.3 million of ceded catastrophe
premium written and earned.
Underwriting loss and net combined ratio
.
The underwriting profit and net combined
ratio from the insurance segment was $1.1 million and 95.5%, respectively, for the three months
ended March 31, 2008.
Reinsurance Segment Results of Operations
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
Revenues
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
|
|
|
|
|
|
|
Gross premiums earned
|
|
$
|
76,452
|
|
|
$
|
46,596
|
|
Less: ceded premiums earned
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
|
76,443
|
|
|
|
46,596
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses
|
|
|
|
|
|
|
|
|
Gross loss and loss adjustment expenses
|
|
|
41,341
|
|
|
|
25,326
|
|
Less: ceded loss and loss adjustment expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss adjustment expenses
|
|
|
41,341
|
|
|
|
25,326
|
|
|
|
|
|
|
|
|
Underwriting expenses
|
|
|
|
|
|
|
|
|
Ceding commission expense
|
|
|
25,653
|
|
|
|
15,357
|
|
Other underwriting expenses
|
|
|
1,091
|
|
|
|
650
|
|
|
|
|
|
|
|
|
Total underwriting expenses
|
|
|
26,744
|
|
|
|
16,007
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
Underwriting Profit
|
|
$
|
8,358
|
|
|
$
|
5,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key Measures
|
|
|
|
|
|
|
|
|
Premiums written
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
94,167
|
|
|
$
|
71,896
|
|
Less: ceded premiums written
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
94,158
|
|
|
$
|
71,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Ratios
|
|
|
|
|
|
|
|
|
Gross
|
|
|
54.1
|
%
|
|
|
54.3
|
%
|
Net
|
|
|
54.1
|
%
|
|
|
54.3
|
%
|
Accident Year Loss Ratios
|
|
|
|
|
|
|
|
|
Gross
|
|
|
54.7
|
%
|
|
|
53.2
|
%
|
Net
|
|
|
54.7
|
%
|
|
|
53.2
|
%
|
Underwriting Expense Ratios
|
|
|
|
|
|
|
|
|
Gross
|
|
|
35.0
|
%
|
|
|
34.4
|
%
|
Net
|
|
|
35.0
|
%
|
|
|
34.4
|
%
|
Combined Ratios
|
|
|
|
|
|
|
|
|
Gross
|
|
|
89.1
|
%
|
|
|
88.7
|
%
|
Net
|
|
|
89.1
|
%
|
|
|
88.7
|
%
|
Reinsurance Segment Results of Operations for the Three Months Ended March 31, 2008 and 2007
Summary
.
The Reinsurance segment is predominantly quota share reinsurance. The
segment had excellent results driven by the calendar year loss ratio of 54.1% which includes a
benefit of 0.6 points from favorable loss development on prior accident years. CastlePoint Re
assumed 40% of Towers brokerage business during the period as opposed to 49% in the same period in
2007. The overall expense ratio of 35.0% indicates a 36.0% ceding commission to Tower for its
brokerage business, which includes 2.0 points of profit sharing commission to Tower based upon its
loss ratios.
Gross premiums and net premiums
.
Gross and net written premiums increased 31% to
$94.2 million for the three months ended March 31, 2008 from $71.9 million for the three months
ended March 31, 2007. The quota share reinsurance agreements originated from third-party clients
during the first quarter of 2008 includes a new relationship with a client that specializes in the
restaurant niche. Additionally, since the first quarter of 2007, new third party business includes
two workers compensation treaties and six non-standard automobile treaties. Net premiums earned
increased by 64.1% to $76.4 million for the three months ended March 31, 2008 from $46.6 million
for the same period in 2007. The risks covered are consistent with 2007 with 99.4% of written
premiums being derived from quota share reinsurance, as compared to 97.2% of the business from
quota share reinsurance in the same period in 2007.
Loss and loss adjustment expenses and loss ratio
.
Loss and loss adjustment expenses
increased by 63% to $41.3 million, which produced a 54.1% loss ratio for the three months ended
March 31, 2008 compared to $25.3 million, which produced a 54.3% loss ratio for the same period in
2007. The calendar year loss ratio included a 0.6 point benefit from favorable development on
prior years, attributable mainly to experience on contracts with Tower. The current accident year
loss and loss adjustment expense ratio increased to 54.7% for the three months ended March 31, 2008
compared with 53.2% for the same period in 2007. The increase of 1.5 points is due to the higher
percentage of third-party earned premiums in the first quarter of 2008 compared with the first
quarter of 2007, which generally carries a higher expected loss ratio than the business ceded to us
by 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,
26
and other underwriting expenses. Ceding commission expense was $25.7 million and other
underwriting expenses were $1.1 million for the three months ended March 31, 2008 compared to $15.4
million and $0.7 million, respectively, for the same period in 2007. Both the gross underwriting
expense ratio and the net underwriting expense ratio were 35.0% for the three months ended March
31, 2008 compared to 34.4% for the same period in 2007. The gross and net underwriting expense
ratios increased principally as a result of profit commissions on the Tower brokerage quota share
treaty and increased staff and related costs from the build out of the reinsurance operations.
Underwriting profit and combined ratio
.
The underwriting profit and combined ratio
from the reinsurance segment was $8.4 million and 89.1%, respectively, for the three months ended
March 31, 2008 compared to $5.3 million and 88.7% for the same period in 2007. The increase in the
combined ratio is due to a higher expense ratio slightly offset by a lower loss ratio.
Insurance Services Segment Results of Operations
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
Revenues
|
|
|
|
|
|
|
|
|
Direct commission revenue from programs
|
|
$
|
8,709
|
|
|
$
|
1,561
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
8,709
|
|
|
|
1,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Direct commissions expense for programs
|
|
|
7,653
|
|
|
|
1,216
|
|
Other insurance services expenses
|
|
|
1,980
|
|
|
|
1,344
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
9,633
|
|
|
|
2,560
|
|
|
|
|
|
|
|
|
Insurance Services Loss
|
|
$
|
(924
|
)
|
|
$
|
(999
|
)
|
|
|
|
|
|
|
|
Insurance Services Segment Results of Operations for the Three Months Ended March 31, 2008 and 2007
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 commissions from CastlePoint Insurance and Towers
insurance companies for program business placed by CastlePoint Management with these companies.
Direct commission revenue increased to $8.7 million for the three months ended March 31, 2008
compared to $1.6 million for the three months ended March 31, 2007. These commission revenues were
received for the specialty programs and traditional programs. The increase in direct commission
revenue is due to an increase in the number of programs managed by CastlePoint Management in the
first quarter of 2008 compared with the first quarter of 2007. During the third and fourth
quarters of 2007, CastlePoint Management managed two workers compensation programs, one commercial
auto program and one program that writes workers compensation and commercial auto.
Direct commission expense for programs
.
Direct commission expense increased to $7.7
million for the three months ended March 31, 2008 from $1.2 million for the three months ended
March 31, 2007. 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 $2.0
million for the three months ended March 31, 2008 compared to $1.3 million for the same period in
2007. This amount includes $0.3 million for the three months ended March 31, 2008 and $0.2 million
for the three months ended March 31, 2007 of costs incurred and charged by Towers insurance
companies for services provided to us.
Insurance services loss
.
Insurance services loss was $0.9 million for the three
months ended March 31, 2008 compared to a loss of $1.0 million for the same period in 2007 due to
current incurrence of costs to produce programs that are expected to generate commission revenue in
the future periods due to in part to the lag time
27
associated with launching new programs that require rates and forms to be filed and approved,
as well as systems implemented.
Liquidity and Capital Resources
CastlePoint Holdings is a 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, dividends and the payment of principal and interest on current and any
future borrowings, and to make strategic investments. Funds to meet these obligations will come
primarily from dividend payments from our operating subsidiaries; however, 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 Managements Discussion and Analysis of Financial Condition and Results of
Operations included in our 2007 Annual Report on Form 10-K filed with the SEC.
In our operating subsidiaries, we seek to maintain sufficient liquidity to pay claims,
operating expenses and meet our other obligations. On a consolidated basis, we held $107.3 million
(net of payable for securities purchased at the end of the first quarter) and $153.6 million of
cash and cash equivalents at March 31, 2008 and December 31, 2007, respectively. We monitor our
expected claim payment needs and try to maintain a sufficient portion of our invested assets in
cash and cash equivalents to enable us to fund our claim payments without having to sell
longer-duration investments prior to maturity. The average weighted yield on cash and cash
equivalents at March 31, 2008 was 3.5%. We expect that the majority of these cash funds will be
reinvested in longer term investments over the next few months to take advantage of the recent
steepening of the yield curve. We expect our portfolio duration to increase from 2.8 years at March
31, 2008 to approximately 3.2 years within the next several months. We believe a target of 3.2
years provides adequate matching of our portfolio assets with expected claim payouts. We also
expect our cash flow from operations to continue to be strong throughout 2008 as we expect our
premiums written to continue to increase.
Dividends and other permitted distributions from our operating subsidiaries are our primary
source of funds to pay dividends to shareholders and meet ongoing cash requirements, including debt
service payments, if any, and other expenses. Bermuda law and regulations, including, but not
limited to, Bermuda insurance regulations, restrict the declaration and payment of dividends and
the making of distributions by CastlePoint Re, unless specific regulatory requirements are met. In
addition, CastlePoint Insurance Company is, and any other U.S. licensed insurance companies that we
may acquire or form and capitalize will be, subject to significant regulatory restrictions limiting
their ability to declare and pay dividends. Furthermore, any dividends paid by CastlePoint
Insurance Company or such other U.S. licensed insurance companies will be subject to a 30%
withholding tax. Therefore, we intend that any dividends or other permitted distributions we expect
to receive will be paid or otherwise made by CastlePoint Re, which is subject to Bermuda regulatory
restrictions and any applicable contractual restrictions on any such payments. If we cannot receive
dividends or other permitted distributions from our subsidiaries as a result of such restrictions,
we will be unable to pay dividends as currently contemplated by our board of directors. However,
cash and invested assets at CastlePoint Bermuda Holdings at March 31, 2008, currently available to
pay dividends to CastlePoint Holdings was $70.9 million.
On April 2, 2008, the Company announced that the quarterly dividend payable on June 30, 2008
would be increased from $0.025 to $0.05 per share.
Sources and Uses of Cash and Cash Flows
The primary sources of cash of our operating subsidiaries are net premiums received,
investment income and commission income. In addition, at the holding company, we may raise cash
from public offerings and at the holding company or at the operating subsidiaries, we may raise
cash from the issuance of debt.
Our principal ongoing cash requirements in our holding companies are expected to be the
further capitalization of our existing operating subsidiaries, our operating expenses, our possible
acquisition or formation of one or more additional U.S. licensed insurance companies, subject to
receipt of regulatory approvals. In addition, we will need cash to enable us to make strategic
investments in some of our clients and potential clients, including
28
Tower, as well as to pay dividends to our shareholders and to service the debt on the
subordinated debentures of $30.9 million issued by CastlePoint Bermuda Holdings in September 2007.
The principal ongoing cash requirements in our operating companies are expected to be our possible
acquisition or formation of one or more additional U.S. licensed insurance companies, subject to
receipt of regulatory approvals, net cash settlements under insurance risk-sharing and reinsurance
agreements, payment of losses and loss adjustment expenses, commissions paid to program
underwriting managers, ceding commissions to insurance companies including Tower, excise taxes,
operating expenses and payments under our service and expense sharing agreements with Tower. 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 holding company and to
service the debt on the subordinated debentures of $103.1 million issued by CastlePoint Management
in December 2006.
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. We may acquire or form and capitalize one or
more additional U.S. licensed insurance companies in 2008. We anticipate that the purchase price
for any additional U.S. licensed insurance companies that we may acquire would consist of the
amount to be paid for the value of the target companys insurance licenses (in our experience,
typically no more than $200,000 per state license, depending upon lines of authority) and the
amount of its statutory capital and surplus, as well as the value of the business if an ongoing
operating insurance company is purchased. We expect to file an application with the Florida Office
of Insurance Regulation in the immediate future to establish a Florida domestic property and
casualty company which we expect to initially capitalize at $10 million.
In 2008 we have received and expect to receive cash, from direct and assumed premiums
collected, net cash settlements under our insurance risk-sharing and reinsurance agreements, fee
income for services provided, investment income and proceeds from sales and redemptions of
investments. We also expect that we will raise additional funds in the future through additional
equity and/or additional debt financings.
We or one of our subsidiaries may also enter into an unsecured revolving credit facility and a
term loan facility with one or more syndicates of lenders, and we expect to use any such facilities
for general corporate purposes, working capital requirements and issuances of letters of credit. 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
currently have no commitment from any 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.
We continuously monitor and review our internal capital allocation, the performance of our
investment portfolio, the need for new debt and or new capital raises and potential acquisitions.
Cash Flows
For the three months ended March 31, 2008, net cash provided by operating activities was
approximately $31.1 million compared to $34.0 million for the three months ended March 31, 2007.
The net cash provided by operations decreased slightly from the prior year primarily as a result of
increased collected premiums offset by a greater increase in losses payable and premium payable
programs.
For the three months ended March 31, 2008 net cash flows provided in investing activities was
approximately $10.0 million compared to net cash flows used in investing activities was $24.6
million for the same period in 2007, which consisted of purchases and sales of investments.
The net cash flows used by financing activities for the three months ended March 31, 2008 were
approximately $1.0 million, which consisted of dividend to shareholders, as compared to net cash
flows provided by financing activities were $114.1 million for the same period in 2007, which
primarily consisted of approximately $114.9 million in net proceeds after offering costs less
dividends paid to shareholders of $0.7 million.
29
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
As required by the Companys reinsurance agreements with its cedents, CastlePoint Re and
CastlePoint Insurance, where it is a non-admitted or non-accredited reinsurer, are required to
collateralize amounts through a letter of credit, cash advance, funds held or a trust account. The
amount of the letter of credit or trust is to be adjusted each calendar quarter, and the required
amount is to be at least equal to the sum of the following contract amounts: (i) unearned premium
reserve, (ii) paid loss and loss adjustment expense payable, (iii) loss and loss adjustment
expenses reserves, (iv) loss incurred but not reported, (v) return and refund premiums, and (vi)
less premium receivable. As of March 31, 2008 and December 31, 2007, CastlePoint Re maintained
trusts and a letter of credit in the amount of $266.5 million and $218.1 million, respectively, at
State Street Bank and Trust Company, a Massachusetts trust company. As of March 31, 2008 and
December 31, 2007 CastlePoint Insurance Company maintained a trust at the same trust company in the
amount of $8.0 million and 8.4 million, respectively. Both CastlePoint Re and CastlePoint Insurance
Company earn and collect the interest on the trust funds.
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 Companys investments
are subject to general market risk, as well as to risks inherent to particular securities.
The fair value for fixed maturity, short-term, and equity securities, available-for-sale, is
determined by management after considering one of three primary sources of information: independent
broker quotations, third-party pricing services, or pricing matrices. Security pricing is applied
using a waterfall approach whereby publicly available prices are first sought from third-party
pricing services (Level 1), the remaining non-exchange traded securities are then submitted to
independent brokers or third-party pricing services for prices (Level 2), or, if prices from these
sources are not available, the securities are priced using a pricing matrix based on unobservable
inputs (Level 3, see below). Typical inputs used by these three pricing methods include, but are
not limited to, reported trades, benchmark yields, issuer spreads, bids, offers, and/or estimated
cash flows and prepayments speeds. Based on the typical trading volumes and the lack of quoted
market prices for fixed maturities, third party pricing services will normally derive the security
prices through recent reported trades for identical or similar securities making adjustments
through the reporting date based upon available market observable information as outlined above.
Included in the pricing of asset-backed securities (ABS), collateralized mortgage obligations
(CMOs), and mortgage-backed securities (MBS) are estimates of the rate of future prepayments of
principal over the remaining life of the securities. Such estimates are derived based on the
characteristics of the underlying structure and prepayment speeds previously experienced at the
interest rate levels projected for the underlying collateral. Actual prepayment experience may vary
from these estimates.
Although generally not the case for the types of securities we purchase, prices from
independent brokers and third-party pricing services are, at times, unavailable for securities that
are rarely traded or are traded only in privately negotiated transactions. As a result, certain
securities are priced via independent broker quotations which utilize inputs that may be difficult
to corroborate with observable market based data (Level 3). Additionally, the majority of these
independent broker quotations are non-binding. A pricing matrix is used to price securities for
which the Company is unable to obtain either a price from a third-party pricing service or an
independent broker quotation. The pricing matrix begins with current spread levels to determine the
market price for the security. The credit spreads, as assigned by a knowledgeable private placement
broker, incorporate the issuers credit rating and a risk premium, if warranted, due to the
issuers industry and the securitys time to maturity. The issuer-specific yield adjustments are
intended to adjust security prices for issuer-specific factors.
30
The aggregate fair market value of our available-for-sale investments as of March 31, 2008 was
$593.3 million. Our fixed maturity securities as of March 31, 2008 had a fair market value of
$516.8 million and an amortized cost of $524.5 million. Our equity securities as of March 31, 2008
had a fair market value of $37.4 million and a cost of $42.6 million. Short-term investments as of
March 31, 2008 were carried at fair value of $39.1 million and had an amortized cost of $39.1
million.
At March 31, 2008 we held $107.3 million of cash and cash equivalents, net of payable for
securities of $86.4 million, which included all securities that, at their purchase date, had a
maturity of 90 days or less. The average yield on cash and cash equivalents held at March 31, 2008
was approximately 3.5%. During 2007 and the first quarter of 2008, our investment manager
recommended overweight positions in mortgages, favoring pass-through instruments and AAA rated
collateralized mortgage obligations and commercial mortgage backed securities and adjustable rate
mortgages. Our investment manager recommended underweight positions in virtually all other
sectors. However, they did add corporate bonds selectively in the new issue calendar. Since we did
not wish to materially increase our exposure to mortgages at that time, we decided to maintain a
relatively high amount of cash and cash equivalent balances. We expect that these balances will be
substantially reduced in the next few months.
The portfolio duration of the fixed maturity securities at March 31, 2008 was approximately
2.84 years (2.24 years at December 31, 2007) and the average credit rating was AA (AA at December
31, 2007).
The Company held in Fixed maturity securities on the balance sheet at March 31, 2008, $372.5
million ($343.9 million at December 31, 2007), at fair value, in residential mortgage-backed
(RMBS), commercial mortgage-backed (CMBS) and asset backed securities (ABS) (reflecting
assets backed by automobile loans and credit card receivables, with no exposure to assets backed by
home equity loans). RMBS and CMBS, excluding ABS, amounted to $323.2 million at March 31, 2008.
Of this amount, $236.6 million were RMBS and $86.6 million were CMBS. Approximately $175.3 million
of the RMBS were backed by the U.S. government or government charted agencies. All RMBS and CMBS
are rated AAA, with the exception of $3.6 million rated BBB and BB.
Included in Equity securities on the balance sheet at March 31, 2008 is an investment of
$9.4 million in a fund comprised of primarily investment grade securities with a focus on the
financial institutions segment of the credit markets (i.e., primarily trust preferred, subordinated
debt and preferred securities). We also hold a $1.5 million investment in a fund investing
primarily in securitized bank loans and we hold $1.6 million of publicly traded common stocks whose
purpose is to own various mortgage backed securities, including CMBS, non-agency RMBS, and RMBS
backed by the U.S. government or government chartered agencies. We recorded an other-than-temporary
impairment charge on these common stock securities at March 31, 2008 in the amount of $0.2 million
because we do not necessarily have the intent to hold these securities until full recovery. The
remaining investments in this category are preferred stocks in the finance and banking industries
in the amount of $24.9 million
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 Managements Discussion and Analysis of Financial
Condition and Results of Operations included in our 2007 Annual Report on Form 10-K.
Off-Balance Sheet Transactions
In 2006, we formed two Delaware statutory business trusts of which CastlePoint Management owns
all of the common trust securities, to facilitate the trust preferred financing completed in
December 2006. In 2007 we formed a third Delaware statutory business trust of which CastlePoint
Bermuda Holdings owns all of the common trust securities, to facilitate the trust preferred
financing completed in September 2007.
31
Ratings
The maintenance of the ratings assigned by A.M.Best 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 March 31, 2008.
The following table summarizes the estimated change in fair value on our fixed maturity
portfolio based on specific changes in interest rates as of March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
Estimated Increase
|
|
|
|
|
(Decrease)
|
|
Estimated Percentage
|
|
|
in Fair Value
|
|
Increase (Decrease)
|
Change in Interest Rate
|
|
($ in thousands)
|
|
in Fair Value
|
300 basis point rise
|
|
|
(58,238
|
)
|
|
|
(10.8
|
)%
|
200 basis point rise
|
|
|
(38,380
|
)
|
|
|
(7.1
|
)%
|
100 basis point rise
|
|
|
(18,205
|
)
|
|
|
(3.4
|
)%
|
100 basis point decline
|
|
|
17,866
|
|
|
|
3.3
|
%
|
200 basis point decline
|
|
|
30,566
|
|
|
|
5.7
|
%
|
300 basis point decline
|
|
|
39,181
|
|
|
|
7.3
|
%
|
The sensitivity analysis model used by us produces a predicted pre-tax loss in fair value of
interest-sensitive instruments of $18.2 million or 3.4% based on a 100 basis point increase in
interest rates as of March 31, 2008. This loss amount only reflects the impact of an interest rate
increase on the fair value of our fixed maturities, which constituted approximately 85.7% of our
total investments as of March 31, 2008.
32
As of March 31, 2008, 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 March 31,
2008 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, to our knowledge, any threatened material litigation and
are not currently aware of any pending or threatened material litigation, other than in the normal
course of business as an insurer or a reinsurer. We may become involved in various claims and legal
proceedings in the normal course of business, as a reinsurer or insurer.
Item 1A. Risk Factors
Our results of operations and financial condition are subject to numerous risks and
uncertainties described in Item 1A of Part I of our 2007 Annual Report on Form 10-K, filed with the
SEC on March 31, 2008. The risk factors identified therein have not materially changed.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Not applicable
(b) On March 22, 2007, the SEC declared effective the Companys 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.
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.
As of March 31, 2008, 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.
33
(c) Not applicable.
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 March 31,
2008.
Item 6. Exhibits
|
|
|
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
|
34
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.
|
|
|
|
|
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CASTLEPOINT HOLDINGS, LTD.
(Registrant)
|
|
Date: May 9, 2008
|
/s/ Michael H. Lee
|
|
|
Michael H. Lee
|
|
|
Chairman of the Board and
Chief Executive Officer
|
|
|
|
|
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Date: May 9, 2008
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/s/ Joel. S. Weiner
|
|
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Joel S. Weiner
|
|
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Senior Vice President and
Chief Financial Officer
|
|
35
EXHIBIT INDEX
|
|
|
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
|
36
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