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 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 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 primarily 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 property and casualty insurance coverages for certain classes of specialty risks including, but not limited to, construction contractors, pest control operators, small auto dealers, real estate brokers, consultants, 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 property and casualty reinsurance products in the form of treaty and facultative contracts. We provide this coverage on an excess of loss and quota share basis. Our primary focus is our casualty business, which includes general liability, commercial auto, professional liability and workers' compensation. The Company provides both traditional and structured reinsurance targeting 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 and other ancillary product lines.

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

Factors," and our 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 Ended
                                               March 31,
                                           2009             2008     2009 to 2008
                                      (dollars in thousands)
Net premiums written:
Excess and Surplus Lines Segment
Environmental                                 $ 10,112     $  8,927           13.3%
Construction                                     3,723        6,213          (40.1)
Excess                                             256          221            15.8
Products Liability                               1,651        1,080            52.9
Property                                         1,786        1,297            37.7
Surety                                           1,876        1,697            10.6
Healthcare                                       1,952        1,132            72.4
Total Excess & Surplus Lines
    Segment                                     21,356       20,567             3.8
Alternative Risk Transfer Segment
Specialty Programs                               9,490        9,413             1.0
Assumed Reinsurance Segment                      8,884        8,526             4.2

Total net premiums written                    $ 39,730     $ 38,506            3.2%

Net premiums earned:
Excess and Surplus Lines Segment
Environmental                                 $  8,954     $  8,606        4.0%
Construction                                     6,544       10,353          (36.8)
Excess                                             433          179           141.9
Products Liability                               1,382        1,015     36.2
Property                                         1,486          726     104.7
Surety                                           2,002        1,626      23.1
Healthcare                                       2,263           84   2,594.0
Total Excess & Surplus Lines
     Segment                                    23,064       22,589       2.1
Alternative Risk Transfer Segment
Specialty Programs                              10,660        7,766      37.3
Assumed Reinsurance Segment                     10,956        7,694      42.4

Total net premiums earned                     $ 44,680      $38,049       17.4%

Net investment income                            7,790        7,327         6.3%
Net realized gains (losses)                       (44)          504     (108.7)
Fee income                                         933          727       28.3
Other income                                        19           15       26.7

Total revenues                                $ 53,378     $ 46,622        14.5%

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

                                         Three Months Ended
                                             March 31,
                                         2009       2008
Loss & loss adjustment expense ratio       60.6%        57.9%
Expense ratio                           40.5%        42.5%
Combined ratio                         101.1%       100.4%

Net Premiums Earned

Excess and Surplus Lines Segment

Environmental. Net premiums earned increased 4.0% to $8.9 million for the three months ended March 31, 2009, compared to $8.6 million for the same period of 2008. Net premiums written as well as premiums earned have increased as a result of increased retention. The Company cedes approximately 10% less to third parties under the Company's core casualty treaty with an effective date of September 1, 2008.

Construction. Net premiums earned decreased 36.8% to $6.5 million for the three months ended March 31, 2009, compared to $10.4 million for the same period of 2008. The decline was primarily due to lower premium writings driven by reduced renewal retention rates in both its western and non-western states business as the Company continues to exercise underwriting discipline in a more competitive market, the effects of a slowing housing market and the impact of a softening insurance market.

Excess. Net premiums earned increased 141.9% to $0.4 million for the three months ended March 31, 2009, compared to $0.2 million for the same period of 2008 due to increased premium writings. The Company's excess product offering is focused primarily in the construction and products liability areas.

Products Liability. Net premiums earned for the three months ended March 31, 2009 increased 36.2% to $1.4 million compared to $1.0 million for the same period of 2008 due to increased premium writings 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. Net premiums earned for the three months ended March 31, 2009 more than doubled to $1.5 million compared to $0.7 million in the same period of 2008 due to growth in premium writings in this line. In 2007, the Company hired an experienced underwriting team to write property and CMP and we continue to grow that line of business.

Surety. Net premiums earned increased 23.0% to $2.0 million for the three months ended March 31, 2009, compared to $1.6 million for the same period of 2008. The increase is due to growth in premium writings in the Company's specialty, surety, environmental and small contractor books of business.

Healthcare. Net premiums earned for the quarter ended March 31, 2009 were $2.3 million compared to $84 thousand for the same period of 2008, which included net premiums earned on business written subsequent to the acquisition effective date of February 8, 2008.

Alternative Risk Transfer Segment

Specialty Programs. Net premiums earned increased 37.3% to $10.7 million for the three months ended March 31, 2009 compared to $7.8 million for the same period in 2008. Net premiums earned increased primarily due to increased retention levels in our specialty programs, as well as new programs being earned for a full year for the period ended March 31, 2009.

Assumed Reinsurance Segment

Reinsurance. This line of business generated $11.0 million in net premiums earned for the three months ended March 31, 2009 compared to $7.7 million for the same period of 2008, an increase of 42.4%. The increase in premiums earned was attributable to the growth in assumed premiums written in this line of business. The Company entered this line in 2007 and focuses on providing traditional and structured reinsurance solutions to small specialty insurers, reinsurers, risk retention groups and captives.

Fee Income Earned

Fee income earned increased 28.3% to $0.9 million for the three months ended March 31, 2009 as compared to $0.7 million for the same period of 2008. The increase is primarily attributable to growth provided by our healthcare business.

Net Investment Income

Net investment income increased 6.3% to $7.8 million for the three months ended March 31, 2009 compared to $7.3 million for the same period of 2008. This increase was due an increase in invested assets partially offset by lower investment yields. Average invested assets increased to $680.5 million at March 31, 2009 from $611.0 million at March 31, 2008 due primarily to cash flow from operations. The average pre-tax and after-tax investment yields were 4.6% and 3.9% compared to 4.8% and 4.1% for the three months ended March 31, 2009 and 2008, respectively

Net Realized Gains

Net realized gains (losses) from the sale of investments were $(.01) million for the three months ended March 31, 2009 compared to $0.5 million for the same period of 2008. The Company, from time to time, may sell securities in response to market conditions or interest rate fluctuations in accordance with its investment guidelines and/or to fund the cash needs of the Company as well as cash and/or capital needs of its individual operating subsidiaries.

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses totaled $27.1 million, or 60.6% of net premiums earned, for the three months ended March 31, 2009 compared to $22.0 million, or 57.9%, for the same period of 2008. The increase in the loss ratio was due primarily to one reinsurance treaty in our assumed reinsurance

product line that we non-renewed. This treaty incepted in the second quarter of 2008 and was fully earned in the first quarter 2009.

Acquisition Expenses

Policy acquisition expenses are amounts paid to producers of premiums, brokers in our assumed reinsurance business, offset by ceding commissions we receive from our reinsurers. Policy acquisition expenses also include premium taxes paid to states in which we are admitted to conduct business. Policy acquisition expenses increased to $10.2 million for the three months ended March 31, 2009 as compared to $9.1 million for the same period of 2008, and, as a percentage of net premiums earned, decreased to 22.8% for the three months ended March 31, 2009 as compared to 23.9% for the same period of 2008. The percentage decrease is due to lower acquisition costs in the assumed reinsurance business as we shift our focus from quota share to excess of loss treaties.

Payroll and Other Expenses

Payroll and other expenses increased 29.7% to $5.8 million for the three months ended March 31, 2009 compared to $4.5 million for the same period of 2008. The increase is primarily due to higher accruals for bonus, benefits and severance as well as the additional compensation associated with our healthcare business acquired in February 2008.

Income Taxes

Income tax expense for the three months ended March 31, 2009 was $0.2 million or 3.7% of pre-tax income, compared to $0.1 million or 2.4% for the same period of 2008. The lower tax rate in the first quarter of 2008 was due primarily to lower earnings in our U.S. operations as a result of higher acquisition and other underwriting expenses.

Liquidity and Capital Resources

The Company meets its cash requirements and finances its growth principally through cash flows generated from operations. Due to the soft market, the Company has experienced a reduction in premium rates due to the entrance of new insurance competitors and overall market conditions. The Company's primary sources of short-term cash flow are premium writings and investment income. Short-term cash requirements relate to claims payments, ceded reinsurance premiums, commissions, salaries, employee benefits and other operating expenses. Due to the uncertainty regarding the timing and amount of settlements of unpaid claims, the Company's future liquidity requirements may vary; therefore, the Company has structured its investment portfolio maturities to help mitigate the variations in those factors. The Company believes its current cash flows are sufficient for the short-term needs of its business and its invested assets are sufficient for the long-term needs of its insurance business.

Net cash provided by operations was $14.2 million for the three months ended March 31, 2009 compared to net cash used in operations of $1.8 million for the same period of 2008. The cash flow from operations increased in 2009 compared to 2008 primarily due to lower deposit premium payments under its core casualty reinsurance treaty and lower paid claims.

Net cash used in investing activities was $17 million for the three months ended March 31, 2009 compared to net cash provided by investing activities of $3 million for the same period of 2008. Cash flows generated from operations were used to purchase additional investments.

Net cash provided by financing activities was $33 thousand for the three months ended March 31, 2009, compared to net cash used in financing activities of $1.9 million for the same period of 2008 primarily as a result of completing our planned repurchase of stock in 2008.

Our ability to pay future dividends to shareholders will depend, to a significant degree, on the ability of our subsidiaries to generate earnings from which to pay dividends. The jurisdictions in which we and our insurance and reinsurance subsidiaries are domiciled places limitations on the amount of dividends or other distributions payable by insurance companies in order to protect the solvency of insurers. Given our growth and the capital requirements associated with that growth, we do not anticipate paying dividends on the common shares in the near future.

Combined Ratio

Our underwriting results are best indicated by our GAAP combined ratio, which is the sum of (a) the ratio of incurred losses and loss adjustment expenses to net premiums earned (loss ratio) and (b) the ratio of policy acquisition costs and other operating expenses to net premiums earned (expense ratio). A combined ratio below 100% indicates that an insurer has an underwriting profit, and a combined ratio above 100% indicates that an insurer has an underwriting loss.

The combined ratio increased to 101.1% for the three months ended March 31, 2009 from 100.4% for the same period of 2008. The increase was primarily attributable to an increase in the loss ratio of 2.7 percentage points due primarily to one reinsurance treaty in our assumed reinsurance product line that was non-renewed. The expense ratio decreased by 2.0 percentage points due to lower acquisition expenses primarily as a result of the shift from quota share to excess of loss treaties in the assumed reinsurance business.

The expense ratio portion of our reported combined ratio excludes interest expense, fee income and corporate and other expenses. These excluded amounts totaled approximately $2.4 million and $2.1 million for the three months ended March 31, 2009 and 2008, respectively.

Forward Looking Statements

This report contains forward-looking statements. These forward-looking statements reflect the Company's current views with respect to future events and financial performance, including insurance market conditions, premium growth, acquisitions, cash flow, investments, losses, expenses, ratios, reserves, new products and the impact of new accounting standards. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially, including competitive conditions in the insurance industry, levels of new and renewal insurance business, developments in loss trends, adequacy and changes in loss reserves and actuarial assumptions, other than temporary impairments, timing or collectability of reinsurance recoverables, market acceptance of new coverages and enhancements, changes in reinsurance costs and availability, potential adverse decisions in court and arbitration proceedings, the integration and other challenges attendant to acquisitions, and changes in levels of general business activity and economic conditions.

Actual results may differ materially from the results suggested by the forward-looking statements for a number of reasons. We have made these statements based on our plans and analyses of our company, our business and the insurance industry as a whole. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could over time prove to be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will themselves prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of this information should not be regarded as a representation by us or any other person that our objectives will be achieved. We expressly disclaim any obligation to update any forward-looking statement unless required by law.