We are a Bermuda-based specialty insurance and reinsurance company that provides customized products and solutions to small and medium-sized businesses in industries that we believe are underserved by the standard market. For over twenty years, we have developed specialized coverages and alternative risk transfer products not generally available to our customers in the standard market because of the unique characteristics of the risks involved and the associated needs of the insureds. We specialize in underwriting these products for insureds with certain environmental, products liability, construction, healthcare and property risks, as well as developing programs for other specialty classes of risks and providing third party reinsurance. .

We segregate our business into insurance operations and other, with the insurance operations segment being further classified into four segments: excess and surplus lines (E&S), alternative risk transfer (ART), assumed reinsurance (Assumed Re) and other. E&S is further classified into seven business lines:
property, environmental, construction, products liability, excess, surety and healthcare. ART is further classified into two business lines: specialty programs and fully funded. Assumed Re consists of specialty property and casualty business assumed from unaffiliated specialty insurers and reinsurers, and began operations in the first quarter of 2007. Other includes lines of business that we no longer write (run off) as well as real estate and other ancillary product lines. Prior year amounts have been reclassified to conform to the current year presentation.

The following information is presented on the basis of accounting principles generally accepted in the United States of America ("GAAP") and should be read in conjunction with our unaudited consolidated financial statements and the related notes included elsewhere in this report. All amounts and percentages are rounded.

The table below summarizes the Company's net premiums written and net premiums earned by business line, consolidated revenues and percentage change year over year:

                                                                             Three
                                                                            Months    Nine Months
                                                                             Ended       Ended
                            Three Months Ended       Nine Months Ended     September   September
                              September 30,            September 30,          30,         30,
                            2008          2007       2008         2007     2008/2007   2008/2007
                         (in thousands)           (in thousands)
Net premiums written:
Excess and Surplus
Lines Segment
Environmental               $  9,048     $  6,195  $  27,669   $   26,305      46.1 %        5.2%
Construction                   7,019        9,382     21,921       41,896     (25.2)%     (47.7)%
Excess                           935          192      1,566          608     387.0 %      157.6%
Healthcare                     2,028            -      5,345            -         - %          -%
Products Liability             1,134          730      3,625        2,159      55.3 %       67.9%
Property                       1,351          862      4,363        1,018      56.7 %      328.6%
Surety                         2,506        1,633      6,183        4,370      53.5 %       41.5%
Total Excess & Surplus
Lines
Segment                       24,021       18,994     70,672       76,356      26.5 %      (7.4)%

Alternative Risk
Transfer Segment
Specialty Programs            10,551        8,938     31,020       23,372      18.0 %       32.7%

Assumed Reinsurance
Segment                        5,975        4,188     34,603       15,699      42.7 %      120.4%

Total net premiums
written                    $  40,547     $ 32,120  $ 136,295    $ 115,427      26.2 %       18.1%

Net premiums earned:
Excess and Surplus
Lines Segment
Environmental              $  8,575    $   9,558  $  26,404    $  29,108      (10.3)%   (9.3)%
Construction                  8,550       14,339     29,240       53,600      (40.4)%     (45.4)%
Excess                          551          188        913          598      193.1 %       52.7%
Healthcare                    1,061            -      1,781            -          - %      - %
Products Liability            1,280          626      3,463        1,569      104.5 %   120.7%
Property                      1,622          223      3,377          229      627.4 % 1,374.7%
Surety                        1,907        1,697      5,259        3,768       12.4 %    39.6%
Total Excess & Surplus
Lines
Segment                      23,546       26,631     70,437       88,872      (11.6)%   (20.7)%

Alternative Risk
Transfer Segment
Specialty Programs           10,238        7,568     27,426       19,930       35.2 %     37.6%

Assumed Reinsurance
Segment                       7,908        2,373     30,020        5,538      233.2 %    442.1%

Total net premiums
earned                     $ 41,692     $ 36,572   $127,883    $ 114,340       14.0 %     11.8%

Net investment income         7,497        7,791     22,140       22,497       (3.8)%     (1.6)%
Net realized (losses)
/ gains                      (9,153)         (81)    (8,358)         (89) (11,200.0)% (9,291.0)%
Fee income                      499          411      2,017        1,675       21.4 %     20.4%
Other (loss) income             (37)          18         (7)          50     (305.6)%   (114.0)%

Total revenues             $ 40,498     $ 44,711   $143,675     $138,473       (9.4)%      3.8%

The following table sets forth the components of our GAAP combined ratio for the periods indicated:

                                      Three Months Ended       Nine Months Ended
                                        September 30,            September 30,
                                          2008      2007         2008            2007
Loss & loss adjustment expense ratio       60.1%    57.5%             60.6%      60.0%
Expense ratio                            43.1%      37.8%        41.9%          35.1%
Combined ratio                          103.2%      95.3%       102.5%          95.1%

compared to Three Months Ended September 30, 2007

Net (Loss) Earnings

For the three months ended September 30, 2008, the Company had a net loss of $4.3 million, or $(0.42) per diluted share, compared to net earnings of $7.0 million, or $0.64 per diluted share, for the same period of 2007. The 2008 net loss is a result of net realized losses on our investments of $9.2 million, which includes the $7.7 million other than temporary impairment of investments issued by Freddie Mac, Fannie Mae and Lehman Brothers and realized losses of $1.4 million from the sale of other fixed maturity securities due to credit concerns about certain financial services companies. Without the net realized losses, the Company's net earnings would have been $4.9 million. See explanations below for the various components of net (loss) earnings.

Net Premiums Earned

Excess and Surplus Lines

Environmental. Net premiums earned decreased 10.3% to $8.6 million for the three months ended September 30, 2008, compared to $9.6 million for the same period of 2007. The decline was primarily attributable to lower audit premiums, together with an increase in our environmental impairment liability writings during the quarter, which tend to have longer than twelve month policy durations.

Construction. Net premiums earned decreased 40.4% to $8.6 million for the three months ended September 30, 2008, compared to $14.3 million for the same period of 2007. The principal reason for the decline was a 25.2% decline in gross written premium driven by lower renewal retention rates in as the Company continues to exercise underwriting discipline in a more competitive market. In addition, the effects of a slow housing market translated into lower average premiums per account and a reduction in audit premiums.

Excess. Net premiums earned increased 193.1% to $0.6 million for the three months ended September 30, 2008, compared to $0.2 million for the same period of 2007. The Company's excess product offering is focused primarily in the construction and products liability areas.

Healthcare. During 2008, the Company continued its diversification strategy through the acquisition of 100% of the membership interests of LTC Risk Management, LLC and LTC Insurance Services, LLC ("LTC Group"). The LTC Group, now known as ASI Healthcare, provides insurance and risk

management solutions for the long-term care industry. Net premiums earned for the three months ended September 30, 2008 were approximately $1.1 million and represent net premiums earned on business written subsequent to the acquisition effective date.

Products Liability. The Company's products liability line began production in the second half of 2006. Net premiums earned increased 104.5% to $1.3 million for the three months ended September 30, 2008 compared to $0.6 million for the same period of 2007. This line has experienced growth in 2008 as compared to the same period in 2007 as the Company continues to build this book of business. The products are offered to small and middle market accounts including smaller manufacturers, distributors, non-habitational real estate and certain owner, landlord and tenant risks. The Company does not intend to write certain high severity classes of risks such as invasive medical products, pharmaceuticals and nutraceuticals.

Property. The Company's property and commercial multi-peril line began production in June 2007. Net premiums earned increased 627.4% to $1.6 million for the three months ended September 30, 2008 as compared to $0.2 million in net premiums earned for the three months ended September 30, 2007. Net premiums earned increased due to the growth in gross premiums written as the Company continues to build this book of business.

Surety.Net premiums earned increased 12.4% to $1.9 million for the three months ended September 30, 2008, compared to $1.7 million for the same period of 2007. The increase in surety premiums is due to the Company continuing to focus its growth efforts in the environmental contractor surety market because of the lack of capacity serving this segment of the market. During 2007, the Company expanded its offerings to include non-environmental contractor bonds by entering into an agreement with a small specialty carrier to provide contract surety to small non-environmental contractors that do not fit the standard surety market.

Alternative Risk Transfer

Specialty Programs. Net premiums earned increased 35.2% to $10.2 million for the three months ended September 30, 2008 compared to $7.6 million for the same period in 2007. Net premiums earned increased due to increases in premiums written as well as higher retention levels in our specialty programs, thereby allowing the Company the opportunity to increase its earnings potential from underwriting profits. The impact of $14.1 million in premiums from a specialty program written during the third quarter 2008 has no net effect on net earned premium, as the premium is ceded 100% to an unrelated insurance company. The increased retention levels in 2008 compared to the same period in 2007 were primarily due to the impact of the July 1, 2007 casualty reinsurance treaty, which changed the reinsurance structure for this line of business from quota share to excess of loss.

Assumed Reinsurance

The Company began writing third party assumed reinsurance during the first quarter of 2007. Net earned premiums increased 233.2% to $7.9 million for the three months ended September 30, 2008 from $2.4 million for the same period of 2007 due to increased assumed reinsurance premiums written as the Company builds this line of business. The Company's primary focus is traditional and structured reinsurance for small specialty insurers, risk retention groups and captives.

Fee Income Earned

Fee income earned increased 21.4% to $0.5 million for the three months ended September 30, 2008 as compared to $0.4 million for the same period of 2007. The increase is primarily attributable to consulting fees earned through Ordinance Holdings, Limited (Ordinance), a subsidiary which was acquired during the third quarter of 2007, as well as brokerage fees earned through the ASI Healthcare acquisition.

Partially offsetting the increase, the Company has seen some adverse impact on fees received from its fully funded products due to the overall market softening as traditional insurance pricing begins to provide a cost effective alternative to self-insurance.

Net Investment Income

Net investment income decreased 3.8% to $7.5 million for the three months ended September 30, 2008 compared to $7.8 million for the same period of 2007. This decrease was the result of lower investment yields due to the investment of funds at lower market interest rates, partially offset by an increase in average invested assets. Average invested assets increased to $615.8 million at September 30, 2008 from $580.9 million at September 30, 2007 due primarily to cash flows from operations. The average pre-tax and after-tax investment yields were 4.9% and 4.2% compared to 5.4% and 4.5% for the three months ended September 30, 2008 and 2007, respectively.

Net Realized Losses

Net realized losses increased to $9.2 million for the three months ended September 30, 2008 compared to a $0.1 million for the same period of 2007. The 2008 net realized losses includes a charge of $7.7 million for other than temporary impairment of debt and equity securities issued by Lehman Brothers, Freddie Mac and Fannie Mae and realized losses of $1.4 million from the sale of other fixed maturity securities due to credit concerns about certain financial services companies. The Company, from time to time, may sell securities in response to market conditions, interest rate fluctuations or credit concerns in accordance with its investment guidelines and/or to fund the cash needs of the Company as well as individual operating subsidiaries.

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses totaled $25.1 million, or 60.1% of net premiums earned, for the three months ended September 30, 2008 compared to $21.0 million, or 57.5%, for the same period of 2007. The increase is primarily attributable to a 14.0% increase in net premiums earned and $0.7 million of additional current accident year reserves from two specialty programs. There was no prior year adverse reserve development in the 2008 or 2007 quarters.

Acquisition Expenses

Policy acquisition expenses are the cost of acquiring policies including commissions, premium taxes paid to states in which we are admitted to conduct business and excise taxes, offset by ceding commissions we receive from our reinsurers. Policy acquisition expenses increased to $9.7 million for the three months ended September 30, 2008 as compared to $7.2 million for the same period of 2007, and policy acquisition expenses as a percentage of net premiums earned, increased to 23.3% for the three months ended September 30, 2008 compared to 19.6% for the same period of 2007. The increase is due in part to the increase in the proportion of premiums generated by our assumed reinsurance segment which is currently comprised primarily of quota share reinsurance treaties that carry higher acquisition expenses, resulting in an increase in acquisition expenses of $1.2 million. The specialty program acquisition expense increased to $2.2 million, or 21.1% of net premiums earned for the three months ended September 30, 2008, from $0.4 million, or 4.8% of net premiums earned for the three months ended September 30, 2007, primarily due to the impact of the July 1, 2007 treaty which changed the reinsurance structure from quota share, where a ceding commission is received, to excess of loss, where are no ceding commissions are received.

Payroll and Other Underwriting Expenses

Payroll and other underwriting expenses increased 23.7% to $8.8 million for the three months ended September 30, 2008, compared to $7.1 million for the same 2007 period. The increase is due to normal salary increases, increased headcount primarily from the addition of new product lines added in conjunction with the Company's product diversification strategy, as well as increased depreciation and professional fee expenses.

Corporate and Other Expenses

Corporate and other expenses were $0.7 million for the three months ended September 30, 2008 and 2007.

Minority Interest Expense

Minority interest expense is associated with the Company's non-subsidiary affiliate, American Safety Risk Retention Group, Inc. ("RRG"). Minority interest expense was negative $0.3 million for the three months ended September 30, 2008 compared to minority interest expense of $26,000 for the same period of 2007. RRG incurred net realized losses on its investment portfolio of $0.3 million.

Income Taxes

Income tax expense for the three months ended September 30, 2008 was $0.2 million, compared to $0.8 million for the same period of 2007. The lower tax rate in the third quarter of 2008 was due primarily to lower earnings in our U.S. operations as a result of lower net earned premiums in the U.S., together with the net realized losses on the Company's investment portfolio and higher acquisition and other underwriting expenses. During the quarter ended September 30, 2008, the Company established a deferred tax asset of $1.3 million related to realized losses on securities held. Additionally, the Company established a valuation allowance of $1.3 million as it determined that it is not more likely than not that all of the deferred tax asset related to realized losses on securities held will be realized.

Nine Months Ended September 30, 2008 compared to

Net Earnings

Net earnings decreased 60.2% to $8.5 million, or $0.79 per diluted share, for the nine months ended September 30, 2008, compared to $21.4 million, or $1.95 per diluted share, for the same period of 2007. The 2008 net earnings are negatively impacted by net realized losses on our investments of $8.4 million, which includes the $7.7 million other-than-temporary impairment of investments issue by Freddie Mac, Fannie Mae and Lehman Brothers and net realized losses of $.7 million from the sale of other investment securities.

Net Premiums Earned

Excess and Surplus Line

Environmental. Net premiums earned decreased 9.3% to $26.4 million for the nine months ended September 30, 2008, as compared to $29.1 million for the same period of 2007. The Company continues to experience rate declines averaging in the 5% to 15% range for 2008, as compared to 2007.

Construction. Net premiums earned decreased 45.4% to $29.2 million for the nine months ended September 30, 2008 as compared to $53.6 million for the same period in 2007. The Company has seen a significant decline in its western states book of business, partially offset by geographic diversification efforts. The principal reason for the decrease was a 40.4% decline in gross premiums written, driven by lower renewal retention rates in the western states as the Company continues to exercise underwriting discipline in a more competitive market. The effects of a slowing housing market translated into lower average premiums per account and a reduction in audit premiums. Contributing further to the decrease in net premiums earned is the July 1, 2007 casualty reinsurance treaty, resulting in lower premium retention rates for 2008 compared to 2007.

Excess. Net premiums earned increased 52.7% to $0.9 million for the nine months ended September 30, 2008 compared to $0.6 million for the same period of 2007. The Company's excess product offering is focused primarily in the construction and product liability areas. The addition of the underwriting team in New Jersey in 2006 has allowed the Company to expand its excess liability products to write over other carriers' primary policies and to offer umbrella liability coverage.

Healthcare. The Company continued its diversification strategy through the acquisition of 100% of the membership interests of LTC Risk Management, LLC and LTC Insurance Services, LLC ("LTC Group"). The LTC Group, now known as ASI Healthcare, provides insurance and risk management solutions for the long-term care industry. Net premiums earned for the nine months ended September 30, 2008 were approximately $1.8 million and represent net premiums earned on business written subsequent to the acquisition effective date.

Products Liability. The Company's products liability line began production in the second half of 2006. Net premiums earned increased 120.7% to $3.5 million for the nine months ended September 30, 2008 compared to $1.6 million for the same period of 2007. This line has experienced growth in 2008 as compared to the same period in 2007 as the Company continued to build this book of business. The products are offered to small and middle markets accounts including smaller manufacturers, distributors, non-habitational real estate and certain owner, landlord and tenant risks. The Company does not intend to write certain high severity classes of risks such as invasive medical products, pharmaceuticals and nutraceuticals.

Property. The Company's property and commercial multi-peril line began production in June 2007. Net premiums earned increased 1,374.7% to $3.4 million for the nine months ended September 30, 2008 as compared to $0.2 million in net premiums earned for the nine months ended September 30, 2007. Net premiums earned increased due to the growth in gross premiums written as the Company continues to build this book of business.

Surety. Net premiums earned increased 39.6% to $5.3 million for the nine months ended September 30, 2008 as compared to $3.8 million for the same period of 2007. The increase in surety premiums is attributable to the growth in written premiums due to the Company continuing to focus its growth efforts in the environmental contractor surety market because of the lack of capacity serving this segment in the general market. During 2007, the Company expanded its offerings to include non-environmental contractor bonds by entering into an agreement with a small specialty carrier to provide contract surety to small non-environmental contractors that do not fit the standard surety market.

Alternative Risk Transfer

Specialty Programs. Net premiums earned increased 37.6% to $27.4 million for the nine months ended September 30, 2008 as compared to $20.0 million for the same period of 2007. Net premiums earned increased due to increases in premiums written as well as higher retention levels in our specialty programs, thereby allowing the Company the opportunity to increase its earnings potential from underwriting profits. The impact of $14.1 million in premiums from a specialty program written during the third quarter 2008 has no net effect on net earned premium, as the premium is ceded 100% to an unrelated insurance company. The increased retention levels in 2008 compared to the same period in 2007 were primarily due to the impact of the July 1, 2007 casualty reinsurance treaty, which changed the reinsurance structure for this line of business from quota share to excess of loss.

Net premiums earned increased 442.1% to $30.0 million for the nine months ended September 30, 2008 from to $5.5 million for the same period of 2007 due to increased reinsurance premiums written as the Company builds this line of business. Beginning in 2007, the Company, through its Bermuda based reinsurance operation, began to assume specialty property and casualty business from unaffiliated insurers and reinsurers. The Company's primary focus is traditional and structured reinsurance for small specialty insurers, risk retention groups and captives, combined with structured reinsurance capabilities, produced increased writings in 2008 compared to the same period in 2007, when the Company first entered the market.

Fee Income Earned

Fee income earned increased 20.4% to $2.0 million for the nine months ended September 30, 2008 as compared to $1.7 million for the same period of 2007. The increase is primarily attributable to consulting fees earned through our Ordinance subsidiary, which was acquired during the third quarter of 2007, as well as brokerage fees earned resulting from the ASI Healthcare acquisition. Partially offsetting the increase, the Company has seen some adverse impact on fees received from its fully funded products due to the overall market softening as declining traditional insurance pricing begins to provide a cost effective alternative to self-insurance.

Net Investment Income

Net investment income decreased 1.6% to $22.1 million for the nine months ended September 30, 2008 as compared to $22.5 million for the same period of 2007. The decrease is the result of lower investment yields due to lower market interest rates, partially offset by an increase in average invested assets. Average invested assets increased to $625.7 million at September 30, 2008 from $571.2 million at September 30, 2007, reflecting positive cash flow from operations. The average pre-tax and after-tax investment yields were 4.7% and 4.0%, respectively for the nine months ended September 30, 2008, compared to 5.3% and 4.4%, respectively, for the nine months ended September 30, 2007.

Net Realized Losses

Net realized losses from the sale and other than temporary impairment of investments totaled $8.4 million for the nine months ended September 30, 2008, compared to net realized losses of $0.1 million for the same period of 2007. The 2008 net realized losses include a charge of $7.7 million for other-than-temporary impairment of debt and equity securities issued by Lehman Brothers, Freddie Mac and Fannie Mae and realized losses of $0.7 million from the sale of other securities. The Company, from time to time, may sell securities to fund its cash needs or the cash needs of individual operating subsidiaries or in response to market conditions, interest rate fluctuations or credit concerns in accordance with its investment guidelines.

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses totaled $77.5 million, or 60.6% of net premiums earned, for the nine months ended September 30, 2008, compared to $68.6 million, or 60.0%, for the same 2007 period. The dollar increase is attributable to an 11.8% increase in net earned premiums, changes in the mix of

business, $0.7 million of additional current accident year reserves from two specialty programs as well as prior year reserve development in the second . . .