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. 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 products for insureds with certain environmental, products liability, construction, healthcare and property needs, as well as developing programs for other specialty lines of business and providing third party reinsurance.

Our business segments are classified into insurance operations and other, with the insurance operations consisting of three segments: excess and surplus lines (E&S), alternative risk transfer (ART) and assumed reinsurance (Assumed Re). E&S includes seven business lines: environmental, construction, products liability, excess, property, surety and healthcare. ART includes two business lines:
specialty programs and fully funded. In our Assumed Re segment, the Company assumes specialty property and casualty business from unaffiliated insurers and reinsurers.

Within the E&S segment, our environmental insurance products provide general pollution and professional liability coverage for contractors and consultants in the environmental remediation industry and property owners. Construction provides general liability insurance for residential and commercial contractors. Products liability provides 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 surplus lines commercial property business and commercial multi-peril (CMP) policies. Surety provides payment and performance bonds primarily to the environmental remediation and construction industries. Healthcare provides customized liability insurance solutions primarily for long-term care facilities.

In our ART segment, specialty programs provide insurance to homogeneous niche groups through third party program managers. 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 casualty business, which includes general liability, commercial auto, professional liability and workers' compensation. The Company provides traditional reinsurance targeting small specialty insurers, risk retention groups and captives.

Our Other segment includes lines of business that we have placed in run-off, such as workers' compensation, excess liability insurance for municipalities, other commercial lines and real estate 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 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
                                                                                  September        September
                           Three Months Ended           Nine Months Ended            30,              30,
                             September 30,                September 30,           2009/2008        2009/2008
                           2009          2008          2009          2008
                             (in thousands)              (in thousands)
Net premiums written:
Excess and Surplus
Lines Segment
Environmental           $    7,325     $   9,048     $  26,149     $  27,669            -19.0 %           -5.5 %
Construction                 4,836         7,019        13,814        21,921            -31.1 %          -37.0 %
Products Liability           1,251         1,134         4,781         3,625             10.3 %           31.9 %
Excess                         177           935           676         1,566            -81.1 %          -56.8 %
Property                     1,260         1,351         5,471         4,363             -6.7 %           25.4 %
Surety                       2,914         2,506         6,982         6,183             16.3 %           12.9 %
Healthcare                   1,904         2,028         6,054         5,345             -6.1 %           13.3 %

Total Excess &
Surplus Lines
Segment                     19,667        24,021        63,927        70,672            -18.1 %           -9.5 %

Alternative Risk
Transfer Segment
Specialty Programs          11,262        10,551        30,995        31,020              6.7 %           -0.1 %

Assumed Reinsurance
Segment                      7,134         5,975        25,776        34,603             19.4 %          -25.5 %

Total net premiums
written                 $   38,063     $  40,547     $ 120,698     $ 136,295             -6.1 %          -11.4 %

Net premiums earned:
Excess and Surplus
Lines Segment
Environmental           $    8,804     $   8,576     $  27,204     $  26,404              2.7 %            3.0 %
Construction                 5,350         8,550        17,946        29,239            -37.4 %          -38.6 %
Products Liability           1,528         1,280         4,391         3,463             19.4 %           26.8 %
Excess                         215           550           856           913            -61.0 %           -6.8 %
Property                     1,636         1,622         4,769         3,377              0.9 %           41.2 %
Surety                       2,473         1,907         6,707         5,259             29.7 %           27.5 %
Healthcare                   2,019         1,060         6,578         1,781             90.3 %          269.3 %
Total Excess &
Surplus Lines
Segment                     22,025        23,545        68,451        70,436             -6.5 %           -2.8 %

Alternative Risk
Transfer Segment
Specialty Programs          11,261        10,239        31,758        27,427             10.0 %           15.8 %

Assumed Reinsurance
Segment                      6,695         7,908        26,041        30,020            -15.3 %          -13.3 %

Total net premiums
earned                  $   39,981     $  41,692     $ 126,250     $ 127,883             -4.1 %           -1.3 %

Net investment income        7,331         7,497        22,850        22,141             -2.2 %            3.2 %
Net realized gains
(losses)                        61        (9,153 )         298        (8,358 )            N/A              N/A
Fee income                   1,250           499         3,368         2,017            150.5 %           67.0 %
Other income                   (41 )         (37 )          44            (7 )           10.8 %         -728.6 %

Total revenues          $   48,582     $  40,498     $ 152,810     $ 143,676             20.0 %            6.4 %

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

                                         Three Months Ended          Nine Months Ended
                                            September 30,              September 30,
                                             2009         2008          2009             2008

Loss & loss adjustment expense ratio         57.7 %       60.1 %        58.9 %       60.6 %
Expense ratio                                42.5 %       43.1 %        40.6 %       41.9 %
Combined ratio                              100.2 %      103.2 %        99.5 %      102.5 %

Three Months Ended September 30, 2009 compared to Three Months Ended September 30, 2008

Net Earnings

Net earnings increased $9.3 million to $5.0 million, or $0.47 per diluted share, for the three months ended September 30, 2009, compared to a net loss of $4.3 million, or $(0.42) per diluted share, for the same period of 2008. The increase in net earnings was primarily due to net realized gains from investments of $61 thousand for the 2009 quarter compared to $9.2 million in net realized losses for the same period in 2008. See discussion below for more information regarding the various components of net earnings.

Net Premiums Earned

Excess and Surplus Lines

Environmental. Net premiums earned increased 2.7% to $8.8 million for the three months ended September 30, 2009, compared to $8.6 million for the same period of 2008. Net premiums earned have increased primarily as a result of the Company's reinsurance program that changed in the third quarter of 2008. The Company increased its retention in September 2008 as compared to the prior program by increasing our retention earned premium quarter over quarter.

Construction. Net premiums earned decreased 37.4% to $5.4 million for the three months ended September 30, 2009, compared to $8.6 million for the same period of 2008. The decline was primarily due to soft market conditions, our exercise of underwriting discipline and the housing markets that reduced renewal retention rates and new business.

Products Liability. The Company's products liability line produced $1.5 million of net premiums earned for the three months ended September 30, 2009 compared to $1.3 million for the same period of 2008. This line continues to experience modest growth as the Company establishes this product offering with its distribution partners. The products are offered to small and middle market accounts including manufacturers, distributors, non-habitational real estate and certain owner, landlord and tenant risks.

Excess. Net premiums earned decreased to $0.2 million for the three months ended September 30, 2009, compared to $0.6 million for the comparable period of 2008. The Company's excess product offering is focused primarily in the construction and products liability areas.

Property. The Company's property and commercial multi-peril line remained constant with net premiums earned of $1.6 million for each of the three months ended September 30, 2009 and 2008.

Surety. Net premiums earned increased 29.7% to $2.5 million for the three months ended September 30, 2009, compared to $1.9 million for the same period of 2008. The increase is due to growth in premium writings in the Company's existing specialty surety, environmental and small contractor books of business.

Healthcare. Net premiums earned increased to $2.0 million for the three months ended September 30, 2009 compared to $1.1 million for the same period of 2008. This product line was acquired through the acquisition of the LTC Companies in February 2008. The premiums and policies in force were not acquired, resulting in the lower earned premiums in the 2008 quarter.

Alternative Risk Transfer Segment

Specialty Programs. Net premiums earned increased 10.0% to $11.3 million for the three months ended September 30, 2009 compared to $10.2 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 written in 2008 and 2009.

Assumed Reinsurance Segment

This line of business generated $6.7 million in net premiums earned for the three months ended September 30, 2009 compared to $7.9 million for the same period of 2008, a decrease of 15.3%. The decrease is primarily due to the cancellation of a treaty written in 2008 and a shift in business from quota share to excess of loss.

Fee Income Earned

Fee income earned increased to $1.3 million for the three months ended September 30, 2009 as compared to $0.5 million for the same period of 2008. The increase is primarily attributable to the fee income associated with the fully funded line of business in our alternative risk transfer segment.

Net Investment Income

Net investment income decreased 2.2% to $7.3 million for the three months ended September 30, 2009 compared to $7.5 million for the same period of 2008 due to a decline in the portfolio's overall investment yield.

Net Realized Gains (Losses)

Net realized gains from the sale of investments were $61 thousand for the three months ended September 30, 2009 compared to net realized losses of $9.2 million for the same period of 2008, which included a charge of $7.7 million for other-than-temporary-impairment of debt and equity securities.

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses totaled $23.1 million, or 57.7% of net premiums earned, for the three months ended September 30, 2009 compared to $25.1 million, or 60.1%, for the same period of 2008. The decrease in the loss ratio was primarily due to prior year adverse reserve development of $1.5 million in the 2008 quarter. There was no prior year development in the 2009 quarter.

Acquisition Expenses

Policy acquisition expenses are commissions paid to producers, offset by ceding commissions we receive from reinsurers. Policy acquisition expenses also include premium taxes paid to states in which we are admitted to conduct business. Policy acquisition expenses decreased to $7.8 million for the three months ended September 30, 2009 as compared to $9.7 million for the same period of 2008. The decrease is due to lower acquisition costs in our assumed reinsurance business due to a shift in business mix and the cancellation of a treaty to inception.

Payroll, Corporate and Other Underwriting Expenses

Payroll, corporate and other underwriting expenses increased 16.4% to $11.0 million for the three months ended September 30, 2009, compared to $9.5 million for the same 2008 period, primarily due to the write-off of a receivable totaling $1.6 million related to a legacy program.

Income Taxes

Income tax expense for the three months ended September 30, 2009 was $0.4 million, or 7.7%, of pre-tax income, compared to $0.2 million on a loss of $4.4 million in 2008. The taxes attributable to the 2008 loss are due to the establishment of a valuation allowance of $1.3 million for realized losses not deductible for tax purposes.

Combined Ratio

Our underwriting results are measured by our 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 decreased to 100.2% for the three months ended September 30, 2009 from 103.2% for the same period of 2008. The decrease was primarily attributable to a reduction in the loss ratio which was a combination of changes in the mix of business as compared to the 2008 quarter and $1.5 million in adverse reserve development in the 2008 quarter. The expense ratio for the 2009 period was impacted by the Company's write off of a $1.6 million recoverable from a legacy program. Partially offsetting the writeoff in our assumed reinsurance segment, we canceled a treaty during the quarter back to inception and reversed the associated revenue and expense.

Nine Months Ended September 30, 2009 compared to Nine Months Ended September 30, 2008

Net Earnings

Net earnings increased 104.5% to $17.4 million, or $1.65 per diluted share, for the nine months ended September 30, 2009, compared to $8.5 million, or $0.79 per diluted share, for the same period of 2008. See explanations below for the various components of net earnings.

Net Premiums Earned

Excess and Surplus Line

Environmental. Net premiums earned increased 3.0% to $27.2 million for the nine months ended September 30, 2009, as compared to $26.4 million for the same period of 2008, due to a change in the reinsurance program resulting in increased retentions as discussed in the three month management discussion.

Construction. Net premiums earned decreased 38.6% to $17.9 million for the nine months ended September 30, 2009 as compared to $29.2 million for the same period in 2008. The decline was primarily due to soft market conditions, our exercise of underwriting discipline and the housing markets that reduced renewal retention rates and new business.

Products Liability. Net premiums earned increased to $4.4 million for the nine months ended September 30, 2009, an increase of 26.8% as compared to $3.5 million for the same period of 2008. This line continues to experience modest growth as the Company establishes this product offering with its distribution partners. The products are offered to small and middle market accounts including manufacturers, distributors, non-habitational real estate and certain owner, landlord and tenant risks.

Excess. Net premiums earned were $0.9 million for the nine months ended September 30, 2009 and 2008,. The Company's excess product offering is focused primarily in the construction and product liability areas.

Property. The Company's property and commercial multi-peril line produced net premiums earned of $4.8 million for the nine months ended September 30, 2009 as compared to $3.4 million in net premiums earned for the nine months ended September 30, 2008. 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 27.5% to $6.7 million for the nine months ended September 30, 2009 as compared to $5.3 million for the same period of 2008. The increase in surety premiums is attributable to the growth in written premiums in the Company's specialty surety, environmental and small contractors books of business.

Healthcare. Net premiums earned for the nine months ended September 30, 2009 were $6.6 million compared to $1.8 million for the same period of 2008. This product line was acquired in February 2008. The policies in force were not acquired, resulting in the lower earned premiums in the nine months ended September 30, 2008.

Alternative Risk Transfer

Specialty Programs. Net premiums earned increased 15.8% to $31.8 million for the nine months ended September 30, 2009 as compared to $27.4 million for the same period of 2008. Net premiums earned increased due primarily to increased retention levels in our specialty programs, as well as the impact of new programs added in 2008 and 2009.

Assumed Reinsurance

This line of business generated $26.0 million in net premiums earned for the nine months ended September 30, 2009, a decrease of 13.3% as compared to $30.0 million for the same period of 2008. The decrease is primarily due to the impact of a transaction with gross written premiums of $12.4 million recognized in the second quarter of 2008 that was not renewed in 2009. In addition, the business mix has changed to excess of loss from quota share. This business shift resulted in less premium as compared to the 2008 period. The decrease is due to the cancellation of a treaty written in 2008 and a shift in business from quota share to excess of loss.

Fee Income Earned

Fee income earned increased to $3.4 million for the nine months ended September 30, 2009 as compared to $2.0 million for the same period of 2008. The increase is primarily attributable to growth in our fully funded business.

Net Investment Income

Net investment income increased 3.2% to $22.9 million for the nine months ended September 30, 2009 as compared to $22.1 million for the same period of 2008. The increase is due to an increase in average invested assets resulting from cash flow from operations, offset in part by lower average investment yields due to lower market interest rates.

Net Realized Gains (Losses)

Net realized gains from the sale of investments totaled $0.3 million for the nine months ended September 30, 2009, compared to a loss of $8.4 million for the same period of 2008. The 2008 loss included $7.7 million of other-than-temporary-impairment on debt and equity securities. During May, 2009 the Company terminated an interest rate swap resulting in a realized gain of $2.3 million. The Company reallocated the portfolio during the second quarter of 2009. As part of the reallocation, we sold $71 million of fixed maturity securities and $7 million of equity securities, resulting in a realized loss of $2.1 million.

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses totaled $74.3 million, or 58.9% of net premiums earned, for the nine months ended September 30, 2009, compared to $77.5 million, or 60.6%, for the same 2008 period. The decrease is primarily attributable to prior year adverse reserve development of $1.5 million in the 2008 period. There was no prior year development in the 2009 period.

Acquisition Expenses

Policy acquisition expenses are commissions paid to our agency plant, 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 decreased to $26.9 million for the nine months ended September 30, 2009 as compared to $30.7 million for the same period of 2008, and, as a percentage of net premiums earned, decreased to 21.3% for the nine months ended September 30, 2009 compared to 24.0% for the same period of 2008. The decrease is due to lower acquisition costs in our assumed reinsurance business due to a shift in business mix and the cancellation of a treaty to inception in the reinsurance segment.

Payroll, Corporate and Other Underwriting Expenses

Payroll, corporate and other underwriting expenses increased 22.6% to $29.8 million for the nine months ended September 30, 2009, compared to $24.3 million for the same 2008 period. Salary increased due to normal salary increases. Other underwriting expenses increased due to an expense of $1.6 million from a bad debt write-off related to a legacy program and corporate and other expenses increasing to $2.1 million for the nine months ended September 30, 2009, compared to $(0.6) million for the same 2008 period. This increase was due to an adjustment made in the 2008 quarter for $2.8 million, reducing the accrued warranty liability established in 2004 associated with our former real estate project in Florida, which was substantially completed in 2005.

Income Taxes

Income tax expense for the first nine months of 2009 was $1.4 million or 7.3% of pre-tax income, compared to $0.4 million or 4.8% of pre-tax income for the same period of 2008. The higher tax rate is due to increased earnings in the U.S. operations.

We are incorporated under the laws of Bermuda and, under current Bermuda law, are not obligated to pay taxes in Bermuda based upon income or capital gains. We have received an undertaking from the Minister of Finance in Bermuda pursuant to the provisions of The Exempted Undertakings Tax Protection Act 1966, which exempts us and our shareholders, other than shareholders ordinarily resident in Bermuda, from any Bermuda taxes computed on profits, income or any capital asset, gain or appreciation, or any tax in the nature of estate, duty or inheritance until March 28, 2016. Exclusive of our United States subsidiaries, we do not consider ourselves to be engaged in a trade or business in the United States and accordingly, do not expect to be subject to direct United States income taxation. Our U.S. subsidiaries are subject to taxation in the United States.

Combined Ratio

Our underwriting results are measured by our 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 decreased to 99.5% for the nine months ended September 30, 2009 from 102.5% for the same period of 2008. The decrease was attributable to a reduction in the loss ratio of 1.7% due to prior year adverse development in the 2008 period.

The expense ratio portion of our combined ratio excludes interest expense, fee income and corporate and other expenses. These excluded amounts totaled approximately $ 2.7 million and $1.9 million for the three months ended September 30, 2009 and 2008, respectively, and $7.8 million and $3.8 million for the nine months ended September 30, 2009 and 2008, respectively.

Liquidity and Capital Resources

The Company meets its cash requirements and finances its growth principally through cash flows generated from operations. Due to market conditions, 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 $40.2 million for the nine months ended September 30, 2009 compared to net cash provided by operations of $70.2 million for the same period of 2008. The cash flow from operations decreased in 2009 compared to 2008 primarily due to reduced cash flow from unpaid losses and loss adjustment expenses of $9.0 million, and reduced cash flow from ceded premiums payable of $22.1 million. Ceded premiums payable was up in 2008 due to treaty . . .