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 being further classified into four segments: excess and surplus lines (E&S), alternative risk transfer (ART), assumed reinsurance (Assumed Re) and runoff. E&S is further classified into seven business lines:
environmental, construction, products liability, excess, property, surety and healthcare. ART is further classified into two business lines: specialty programs and fully funded. In our Assumed Re segment, the Company assumes specialty property and casualty business from affiliated and unaffiliated insurers and reinsurers. Run-off includes lines of business that we no longer write.

Within the E&S sub segment, our environmental insurance coverages protect against general liability and environmental exposures for contractors and consultants in the environmental remediation industry and property owners. Construction provides commercial general liability insurance, generally for residential and commercial contractors. Products liability offers general liability and product liability coverages for smaller manufacturers and distributors, non-habitational real estate and certain real property owner, landlord and tenant risks. Excess provides excess and umbrella liability coverages over our own and other carriers' primary casualty polices, with a focus on construction risks. Our property coverage encompasses non-standard, surplus lines commercial property business and commercial multi-peril (CMP) policies. The casualty focus of our CMP products is premises liability. Surety provides payment and performance bonds primarily to the environmental remediation and construction industries. Our healthcare line provides customized liability insurance solutions for long-term care facilities.

In our ART segment, Specialty Programs facilitate the offering of insurance to homogeneous niche groups of risks and we receive a fee for arranging this type of transaction. Our specialty programs consist primarily of casualty insurance coverages for construction contractors, pest control operators, small auto dealers, real estate brokers, restaurant and tavern owners, bail bondsmen and parent/teacher associations. Fully funded policies give our insureds the ability to fund their liability exposure via a self-insurance vehicle. We write fully funded general and professional liability for businesses operating primarily in the healthcare and construction industries.

Our assumed reinsurance segment offers primarily casualty reinsurance products in the form of treaty and facultative contracts. We provide this coverage on an excess of loss and quota share basis. Casualty business includes general casualty, commercial auto, professional liability and workers' compensation. The Company's primary focus is traditional and structured reinsurance for small specialty insurers, risk retention groups and captives.

Our runoff segment includes lines of business that we have placed in run-off, such as workers' compensation, excess liability insurance for municipalities and commercial lines.

The other segment consists of amounts associated with realized gains and losses on investments, certain corporate expenses and real estate operations that were completed in 2005.

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 "Business" and "Risk

The following table sets forth the Company's consolidated premium and total revenue information:

                                               Years Ended December 31,
                                2008         2007        2006    2008 to 2007 2007 to 2006
                                   (dollars in thousands)
Net premiums written:

Excess and Surplus:
Environmental                     $34,372     $31,444   $ 37,746         9.3%       (16.7)%
Construction                       26,649      50,502     92,530       (47.2)       (45.4)
Products Liability                  5,549       3,746      1,524         48.3         145.8
Excess                              1,088         578        670         88.2        (13.7)
Property                            5,900       2,145          -        175.1             -
Surety                              8,333       6,084      3,042         37.0         100.0
Healthcare                          7,955           -          -            -
                                   89,846      94,499    135,512        (4.9)        (30.3)
Alternative Risk Transfer:
Specialty Programs               43,849      34,260     21,756        26.9         57.5
                                                                                      -
Assumed Re                       45,913      21,242          -       116.14           -
Runoff                            257             -          -            -           -

Total Net Premiums Written   $ 179,865      $150,001   $157,268       19.9%        (4.6)%

Net premiums earned:
Excess and Surplus:
Environmental                   $34,026      $36,356   $ 35,138       (6.4)%         3.5%
Construction                     37,358       66,450     88,612     (43.8)        (25.0)
Products Liability                4,954        2,382        653      108.0         264.8
Excess                              789          527        532      49.7           (.9)
Property                         4,905           520          -      830.7             -
Surety                            7,355        5,469      2,566      34.5         113.1
Healthcare                        3,588           -           -          -             -
                                 92,975      111,704    127,501    (16.8)         (12.4)
Alternative Risk Transfer:
Specialty Programs               38,695       27,737     19,255      39.5          44.1

Assumed Re                       42,544        9,352          -     354.9                 -

Runoff                              257            -          -          -                -

Total Net Premiums
Earned                         $174,471     $148,793   $146,756        17.3%         1.4%

Fee Income Earned                 2,632        2,145      1,685       22.7          27.3
Net investment income            29,591       30,268     21,766      (2.2)          39.1
Net (losses) realized gains    (14,348)        (311)      1,190   (4,513.5)     (126.1)
Other income                       (24)         66           42     (136.4)         54.8

Total Revenues                $192,322       $180,961  $171,439         6.2%          5.6%

                                            Years Ended December 31,

                                                                     2008    2007
                                                                      to      to
                                  2008        2007         2006      2007    2006
                                      (dollars in thousands)

  Total Expenses:
  Loss and loss adjustment
  expenses incurred               $110,146    $ 91,184     $ 92,329 19.9%   (1.2)%
  Acquisition expenses              43,484      28,872       27,378 50.6    5.5
  Payroll expenses                  20,667      17,268       14,896 19.7    15.9
  Interest expense                   3,163       3,283        3,376 (3.7)   (2.8)
  Other expenses                    13,215       9,684       10,147 33.4    1.9
  Minority interest                  1,153     (1,245)      (1,873) 1,337.0 33.5
  Corporate and other expenses         153       2,986        2,340 (94.9)  27.6
  Income taxes                       31         737       2,314     (92.7)  (68.1)
  Total expenses                  $192,012    $152,769     $150,907 25.0%   1.2%

The following table sets forth the components of the Company's insurance operations GAAP combined ratio for the periods indicated:

                                               Years Ended December 31,
                                              ---------------------------
                                                2008      2007     2006
         Insurance operations:
         Loss & loss adjustment expense ratio 63.1%     61.3%    62.9%
         Expense ratio                        42.9      36.1     34.6
         Combined ratio                       106.0%    97.4%    97.5%

Year Ended December 31, 2008 compared to Year Ended December 31, 2007

Net earnings for the year ended December 31, 2008 were $0.3 million, or $0.03 per diluted share, compared to net earnings of $28.2 million, or $2.56 per diluted share, for 2007. Net earnings for 2008 were negatively impacted by $14.3 million of net realized losses on investments, $5.4 million of prior year adverse reserve development, $1.6 million reinsurance reinstatement premium and a $2.5 million provision to increase the valuation allowance on reinsurance recoverables. The 2007 results were negatively impacted by $2.2 million of prior year reserve development and $2.3 million of additional ceded reinsurance.

Revenues for the year were $192.3 million, an increase of 6.3% over 2007. Excluding net realized losses on investments, revenues for the year were $206.7 million, an increase of $25.4 million, or 14.0%, over 2007, due to increased net premiums earned. Net premiums earned from our lines of business entered since 2006 from our diversification efforts totaled $56.8 million, an increase of $44.0 million over 2007. The increase from the newer lines was partially offset by a decrease in other lines, including a $29.1 million decrease in our construction line

The 2008 combined ratio was 106.0%, composed of a loss ratio of 63.1% and an expense ratio of 42.9% compared to the 2007 combined ratio of 97.4% comprised of a 61.3% loss ratio and 36.1% expense ratio. The adjustments for the reinsurance reinstatement premiums, the adverse prior year reserve development and the increase in the allowance for reinsurance recoverables increased the combined ratio by

The property and casualty insurance market has softened significantly and the number of insurers competing for premium in the excess and surplus lines market has increased. These competitors include several start-up companies as well as larger excess and surplus lines and standard market insurers looking to capture market share by moving from the admitted market to the excess and surplus lines market. This increased competition has caused rates to decline in our targeted markets, in some cases, significantly. Despite this softening trend, we believe there are profitable business opportunities from which we can benefit resulting from our diversification into new geographic locations and lines of business.

Net Premiums Earned

Net premiums earned totaled $174.5 million in 2008, compared to $148.8 million in 2007, an increase of 17.3%. Net premiums earned by line of business are described below:

Excess and Surplus Lines

Environmental. Net premiums earned decreased 6.4% to $34.0 million for the year ended December 31, 2008 compared to $36.4 million for 2007. As part of the detailed actuarial and underwriting review of the markets and lines of business in the environmental segment, the Company ceased writing contractor business in New York, reduced its focus on the more competitive middle market segment and has increased its efforts in the ProStar market. Net premiums earned for 2008 and 2007 were negatively affected by $1.6 million and $2.3 million, respectively, of additional premiums ceded to reinsurers as a result of large losses, primarily related to New York contractor business.

Construction. Net premiums earned decreased 43.8% to $37.4 million for the year ended December 31, 2008 compared to $66.5 million for 2007, primarily due to our exercise of underwriting discipline in a soft insurance market, coupled with the softening in the housing market and lower revenue of insureds. The housing market has been negatively impacted by the credit crisis and economy resulting in very little new construction activity throughout the country.

Products Liability. The Company's products liability line began production in July 2006 producing $5.0 million of net premiums earned in 2008 compared to $2.4 million in 2007. The products liability business is offered to small and middle market accounts. The Company does not intend to write certain high severity classes of risks such as invasive medical products, pharmaceuticals and nutraceuticals.

Excess. Net premiums earned increased to $0.8 million for the year ended December 31, 2008 from $0.5 million for the same period in 2007. The Company's excess product offering is focused primarily in the construction and products liability area. During 2006, we expanded our product to write over other carriers' primary policies and to offer umbrella liability coverage. In 2007, the Company increased the available policy limits to $10 million.

Property. In 2007, the Company hired an experienced underwriting team to write property and CMP liability coverage with a focus on fire exposed premises liability risks with limited catastrophe exposure, primarily in the eastern United States. For the year ended December 31, 2008, net premiums earned from the property business line was $4.9 million compared to $0.5 million in 2007.

Surety. Net premiums earned increased 34.5% to $7.4 million for the year ended December 31, 2008 compared to $5.5 million for 2007. The increase in surety premiums is due to the Company continuing to

Healthcare. The Company continued its diversification strategy in 2008 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 period ended December 31, 2008 were $3.6 million.

Alternative Risk Transfer

Specialty Programs. Net premiums earned increased 39.5% to $38.7 million for the year ended December 31, 2008 compared to $27.7 million for 2007. Net premiums earned increased primarily due to the full year impact of the July 1, 2007 casualty reinsurance treaty that increased retention levels on selected programs increasing its earnings potential from underwriting profits. During 2008, the Company added four (4) new programs and had fifteen (15) active programs as of December 31, 2008 compared to twelve (12) active programs at December 31, 2007. The Company's focus on its specialty programs business line is on insurance programs that allow the Company to participate in underwriting profits, while also earning fee income as the policy issuer.

Assumed Reinsurance

The Company began writing third party assumed reinsurance in 2007. Net premiums earned for the year ended December 31, 2008 totaled $42.5 million compared to $9.4 million in 2007 due to increased assumed reinsurance premiums written as the Company builds this line of business. The Company's primary focus is on traditional and structured casualty reinsurance for small specialty insurers, risk retention groups and captives. For the year ended December 31, 2008, gross premiums written as a percentage of total assumed reinsurance gross premiums written were 1.6%, 20.6% and 77.8% for facultative, excess of loss and quota share, respectively.

Fee Income Earned

Fee income earned increased 22.7% to $2.6 million for the year ended December 31, 2008 compared to $2.1 million for 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 from the ASI Healthcare acquisition. Partially offsetting the increase, the Company has experienced an adverse impact on fees received from its fully funded products due to the overall market softening as declining traditional insurance pricing provides a cost effective alternative to self-insurance.

Net Investment Income

Net investment income decreased 2.2% to $29.6 million for the year ended December 31, 2008, from $30.3 million for 2007 due to lower investment yields, despite increases in the Company's invested assets. Average invested assets increased to $645.5 million as of December 31, 2008 from $584.2 million as of December 31, 2007. The increase in invested assets was due primarily to $101.0 million of cash flow from operations. The average pre-tax investment yield decreased from 5.2% for 2007 to 4.6% for 2008.

The $14.3 million net realized losses in 2008 includes other-than-temporary-impairment charges of $13.7 million and realized losses of $1.4 million from the sale of investments due to credit concerns about the financial services sector partially offset by net realized gains of $0.8 million. All but $0.4 million of the impairment relates to securities issued by companies in the financial services sector. Net realized losses in 2007 totaled $0.3 million.

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 (described under "Business-Investments") and/or to fund its cash needs or the cash needs of individual operating subsidiaries.

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses totaled $110.1 million or 63.1% of net premiums earned for the year ended December 31, 2008 compared to $91.2 million and 61.3% in 2007. The $18.9 million increase in losses and LAE is due to higher net earned premiums and $5.4 million of prior year adverse reserve development.

The table below sets forth the prior year reserve development by the Company for the years ended December 31, 2008 and 2007 (dollars in thousands):

                              Years Ended December 31,
                                   2008             2007
Excess & Surplus lines
Environmental                   $ 5,202          $ 4,066
Construction                        -             (728)
Surety                              -             (267)
                                  5,202            3,071
Alternative Risk Transfer
Programs                       (1,913)            (115)
Runoff                            2,105           (744)
Total                           $ 5,394          $ 2,212

The 2008 prior year adverse reserve development primarily relates to increased paid and case reserves related to accident years 2002 through 2006 for environmental contractor business written in New York. In 2008, the Company decided to exit the New York contractor business by non-renewing policies. The adverse development in the runoff line relates to increased estimates of workers' compensation claims related to site cleanup activities following the terrorist attack in New York on 9/11. The adverse development is partially offset by decreases in special programs primarily related to the pest control program.

The 2007 prior year adverse reserve development for the environmental line primarily relates to increased case reserves on 2004 claims for environmental contractors in New York. This development was partially offset by decreases in construction, surety and runoff business lines reserves.

See "Business-Losses and Loss Adjustment Expenses Reserves" and Note 13 to the Company's consolidated financial statements for additional information regarding the Company's reserves for unpaid losses and loss adjustment expenses.

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

Payroll and Other Underwriting Expenses

Payroll and other underwriting expenses increased 25.6% to $33.9 million for 2008, compared to $27.0 million for 2007. The increase is due to normal salary increases, increased headcount primarily from the addition of new product lines and acquisitions added with the Company's product diversification strategy, the increase in the allowance established for reinsurance recoverables and higher depreciation, amortization and software maintenance expenses.

Interest Expense

Interest expenses decreased to $3.2 million for the year ended December 31, 2008 from $3.3 million for 2007. The decrease was primarily related to lower interest rates experienced in 2008.

Corporate and Other Expenses

Corporate and other expenses were $0.2 million and $3.0 million for the periods ended December 31, 2008 and 2007, respectively. The decrease was due to the $2.8 million reversal of an accrued warranty liability established in 2004 in connection with our former real estate project in Florida, which was essentially completed in 2005.

Minority Interest

Minority interest expense was $1.2 million for the year ended December 31, 2008 compared to a negative expense of $1.2 million at December 31, 2007. Our minority interest expense relates to the net earnings of our non subsidiary affiliate, American Safety RRG. In 2008, American Safety RRG had net earnings of $1.2 million compared to a net loss of $1.2 million in 2007, due to adverse prior year reserve development.

Income taxes

Income tax expense totaled $0.03 million or 9.1% and $0.7 million, or 2.5% of pre-tax earnings for the years ended December 31, 2008 and 2007, respectively. The reduction in income tax expense is primarily the result of the prior year reserve development and the allowance for reinsurance recoverables, which reduced taxable income in our U.S. subsidiaries. During the year ended December 31, 2008, the Company established a deferred tax asset of $2.6 million related to realized losses on securities held and established a valuation allowance for the same amount 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.

The Company operates through its subsidiaries in the U.S. and Bermuda. Significant differences exist in the regulatory environment in each country. The table below describes the Company's operations by geographic segment for the years ended December 31, 2008 and 2007 (dollars in thousands):

December 31, 2008        U.S.             Bermuda               Total
Income Tax        $       31          $      -             $      31
Net earnings       $  (6,920)        $   7,230             $     310
Assets             $ 597,725         $ 428,639            $1,026,364
Equity             $  80,422         $ 136,608         $    217,030

December 31, 2007       U.S.             Bermuda            Total
Income Tax         $    737         $      -           $    737
Net earnings      $   2,009         $  26,183         $  28,192
Assets             $550,485          $383,524          $934,009
Equity            $  72,900          $157,500         $230,400

Net Earnings. Net earnings from Bermuda operations decreased to $7.2 million for the year ended December 31, 2008, compared to $26.2 million for 2007, due to an increase of $6.8 million related to net realized losses on investments, as well as lower gross underwriting profit of $17.6 million due to higher loss and loss adjustment expenses along with higher acquisition expense. The U.S. operations incurred a net loss of $6.9 million for the year ended December 31, 2008, compared to net earnings of $2.0 million for 2007, primarily due to an increase of $7.3 million related to net realized losses on investments and an increase of $2.2 million from prior year adverse reserve development.

Assets. Assets from Bermuda operations increased to $428.6 million at the end of 2008 compared to $383.5 million at the end of 2007. This increase is primarily due to the 2008 net earnings, along with the increased cash flow from operations due to the increase in net premiums written. Assets from U.S. operations at the end of 2008 increased to $597.7 million as compared to $550.5 million at the end of 2007 due to higher cash flow from operations due primarily to the increase in net premiums written.

. . .