8-K

UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): February 5, 2009

Tower Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction
of incorporation) 000-50990
(Commission File Number) 13-3894120
(I.R.S. Employer
Identification No.)

120 Broadway, 31^st Floor
New York, NY 10271
(Address of principal executive offices)

(212) 655-2000

(Registrant’s telephone number, including area code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act

o Pre-commencement communications pursuant to Rule 14b-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

TABLE OF CONTENTS

EX-23.1: CONSENT OF PRICEWATERHOUSECOOPERS (BERMUDA)

EX-99.1: INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

EX-99.2: ANNUAL CONSOLIDATED FINANCIAL STATEMENTS

EX-99.3: UNAUDITED PRO FORMA FINANCIAL INFORMATION

EX-99.4: PRESS RELEASE

Item 2.01. Completion of Acquisition or Disposition of Assets

On February 5, 2009, Tower Group, Inc. (“Tower” or the “Company”) and Ocean I Corporation, a wholly-owned indirect subsidiary of the Company (“Merger Sub”), completed the acquisition of CastlePoint Holdings, Ltd. (“CastlePoint”), pursuant to the terms and conditions of the Agreement and Plan of Merger dated as of August 4, 2008 by and among Tower, Merger Sub and CastlePoint (the “Agreement”).

CastlePoint is a Bermuda exempted company, incorporated in November 2005, commencing operations in April 2006, and organized to provide, through its subsidiaries, property and casualty insurance and reinsurance solutions, products and services primarily to small insurance companies and program underwriting managers in the United States. CastlePoint provides insurance and reinsurance business solutions to insurance companies and program underwriting managers to enable them to improve their ability to deliver and market their products and services.

As part of the sponsorship and capitalization of CastlePoint in April 2006, Tower invested $15,000,000 and received 2,555,000 CastlePoint common shares, representing at the time of the issuance 100% of the outstanding CastlePoint common shares. CastlePoint also issued effective April 6, 2006, warrants to Tower to purchase an additional 1,127,000 CastlePoint common shares at an exercise price of $10.00 per share. In April 2006, Tower entered into a long-term strategic relationship with CastlePoint that would provide a stable source of traditional quota share reinsurance and insurance risk-sharing capability to support anticipated future growth. CastlePoint and/or its subsidiaries are parties to a master agreement, certain reinsurance agreements, management agreements and service and expense sharing agreements with Tower and/or its subsidiaries. In addition, CastlePoint Re, CastlePoint’s Bermuda reinsurance subsidiary, participates as a reinsurer on certain of Tower’s excess of loss reinsurance agreements. Tower is CastlePoint’s largest customer, from whom it generated approximately 75% of its gross written premiums in the year ended December 31, 2007. Also, CastlePoint has entered into a business management agreement with Tower Risk Management Corp. that provides that a portion of Tower’s brokerage business may be written directly in CastlePoint Insurance Company with Tower Risk Management Corp. as the manager of this business. CastlePoint engages in the insurance risk-sharing business, traditional program business and specialty program business in states other than New York and New Jersey through the issuance of policies written by Tower’s insurance companies pursuant to CastlePoint Management’s program management agreements with Tower’s insurance companies. Michael H. Lee is the chief executive officer and chairman of the board of directors of each of Tower and CastlePoint.

Under the terms of the Agreement, CastlePoint shareholders (including CastlePoint shareholders that did not vote in favor of the merger, but excluding Tower or any wholly-owned subsidiary of Tower, holders of restricted shares and holders of any common shares as to which appraisal rights have been exercised pursuant to Bermuda law) will receive .47 shares of the common stock of Tower (which was based on the volume weighted average price per share of Tower common stock on the NASDAQ Global Select Market during a 15 trading day window immediately preceding the fifth trading day prior to the closing date) and cash consideration of $1.83 for each issued and outstanding common share in the share capital of CastlePoint. In connection with the closing of the transaction, Tower issued an aggregate of 16,802,845 shares of its common stock and cash consideration of $65.4 million to the CastlePoint shareholders.

This description of the Agreement does not purport to be complete and is qualified in its entirety by reference to the Agreement, which is attached as Exhibit 2.1 to this Current Report on Form 8-K and is incorporated herein by reference. A copy of the press release announcing the completion of the merger is attached hereto as Exhibit 99.4 to this Current Report on Form 8-K and is incorporated herein by reference.

Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

(b) Termination of principal operating officer.

On February 5, 2009, the Company terminated the employment of Patrick J. Haveron, Senior Vice President and Chief Operating Officer of the Company, with an effective date of February 27, 2009.

(c) Appointment of new officers.

On February 5, 2009, Richard M. Barrow was appointed to the position of Senior Vice President and Chief Accounting Officer of the Company. Mr. Barrow, age 54, has served as CastlePoint’s Chief Accounting Officer and Senior Vice President since June 2007. Mr. Barrow became an employee of CastlePoint Management Corp. in April 2007. Following receipt of a Bermuda work permit in June 2007 Mr. Barrow became the Senior Vice President and Chief Accounting Officer of each of CastlePoint, CastlePoint Bermuda Holdings Ltd. and CastlePoint Reinsurance Company, Ltd. From June 1996 until April 2007, Mr. Barrow was Senior Vice-President, Treasurer and Chief Financial Officer for Gerling America Insurance Company, a U.S.-based subsidiary of the Talanx Group, a German company that writes property, casualty and ocean marine coverage. Mr. Barrow received his B.S. in Accounting from SUNY Albany. See Item 2.01 above for a description of certain related party transactions between CastlePoint, of which Mr. Barrow is an executive officer, and Tower.

On February 5, 2009, Joel S. Weiner was appointed to the position of Senior Vice President, Strategic Planning and Chief Actuarial Officer of the Company. Mr. Weiner, age 59, has served as CastlePoint’s Vice President since January 2006 and was a director from January 2007 through March 28, 2007. He became Chief Financial Officer and Senior Vice President of CastlePoint in February 2006. Mr. Weiner has also been Chief Financial Officer, Senior Vice President and director of CastlePoint Reinsurance Company, Ltd. since March 2006, and he has held the same positions at CastlePoint Management Corp. since May 2006. Prior to joining CastlePoint, Mr. Weiner served as Senior Vice President of Tower since January 2004. He resigned his prior position at Tower effective April 4, 2006. From January 2002 until December 2003, he was employed as Managing Director at GAB Robins Capital Partners, which provides outsourcing for claim operations. From October 1991 to December 2001, he was employed by the accounting firm PricewaterhouseCoopers LLP, where he led that company’s U.S. middle market insurance consulting practice and advised many property and casualty insurers on strategic issues. He is an associate member of the Casualty Actuarial Society and a member of the American Academy of Actuaries. Mr. Weiner received his B.S. from Drexel University and his M.B.A. from the Wharton School of the University of Pennsylvania. See Item 2.01 above for a description of certain related party transactions between CastlePoint, of which Mr. Weiner is an executive officer, and Tower.

(d) Appointment of new directors.

Pursuant to the Agreement, the board of directors of the Company approved a resolution on January 28, 2009 to fix the size of the Company’s board at nine members effective immediately after the effective time of the merger. In addition, the terms of the Agreement provide that, upon the consummation of the merger, the board of directors of the Company will be comprised of (i) all the members of the board of directors of the Company as constituted on the date of the Agreement designated by the Company and (ii) all members of the board of directors of CastlePoint as constituted on the date of the Agreement who are qualified as independent directors pursuant to the NASDAQ Marketplace Rules in effect on the closing date of the merger. In connection therewith, on January 28, 2009, each of Jan R. Van Gorder, William A. Robbie and Robert S. Smith were appointed as directors of the Company effective as of the effective time of the merger. See Item 2.01 above for a description of certain related party transactions between CastlePoint, of which Messrs. Van Gorder, Robbie and Smith were directors prior to the consummation of the merger, and Tower.

Item 5.03. Amendments to Articles of Incorporation or Bylaws; Changes in Fiscal Year

Pursuant to the Agreement, the amended and restated certificate of incorporation of the Company (the “Certificate of Incorporation”) was amended to increase the maximum number of authorized shares of common stock, par value $0.01 per share, from 40,000,000 shares to 100,000,000 shares. The amendment to the Certificate of Incorporation was approved at a special meeting of stockholders held on January 28, 2009 and was filed with the Secretary of the State of Delaware on February 4, 2009. The Certificate of Incorporation is attached as Exhibit 3.1 to this Current Report on Form 8-K and is incorporated herein by reference.

Item 9.01. Financial Statements and Exhibits

(a) Financial statements of business acquired.

The following financial statements of CastlePoint required by Item 9.01(a) of Form 8-K are attached hereto as Exhibits 99.1 and 99.2, respectively, to this Current Report on Form 8-K.

(i) Interim Unaudited Condensed Consolidated Financial Statements (Exhibit 99.1)

• Unaudited Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007

• Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2008 and 2007

• Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007

• Notes to the Unaudited Condensed Consolidated Financial Statements

(ii) Annual Consolidated Financial Statements (Exhibit 99.2)

• Report of Independent Registered Public Accounting Firm

• Consolidated Balance Sheets as of December 31, 2007 and 2006

• Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2007, 2006 and the period ended 2005

• Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2007, 2006 and the period ended 2005

• Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and the period ended 2005

• Notes to Consolidated Financial Statements

(b) Pro forma financial information

The following unaudited condensed consolidated pro forma financial information required by Item 9.01(b) of Form 8-K is attached as Exhibit 99.3 to this Current Report on Form 8-K.

Unaudited Pro Forma Financial Information (Exhibit 99.3)

• Unaudited Condensed Consolidated Pro Forma Balance Sheet as of September 30, 2008

• Unaudited Condensed Consolidated Pro Forma Statement of Income for the nine months ended September 30, 2008

• Unaudited Condensed Consolidated Pro Forma Statement of Income for the year ended December 31, 2007

• Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

(d) Exhibits

Number	Description
2.1*	Agreement and Plan of Merger, dated as of August 4, 2008, among Tower Group, Inc., Ocean I Corporation and CastlePoint Holdings, Ltd., incorporated by reference to Exhibit 2.1 to Tower’s Current Report on Form 8-K/A filed on August 6, 2008
3.1*	Certificate of Amendment of Amended and Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to Tower’s Registration Statement on Form S-8 filed on February 5, 2009
23.1	Consent of PricewaterhouseCoopers (Bermuda), Independent Registered Public Accounting Firm
99.1	•	Unaudited Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007
	•	Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2008 and September 30, 2007
	•	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and September 30, 2007
	•	Notes to the Unaudited Condensed Consolidated Financial Statements
99.2	•	Report of Independent Registered Public Accounting Firm
	•	Consolidated Balance Sheets as of December 31, 2007 and 2006
	•	Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2007, 2006 and the period ended 2005
	•	Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2007, 2006 and the period ended 2005
	•	Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and the period ended 2005
	•	Notes to Consolidated Financial Statements
99.3	•	Unaudited Condensed Consolidated Pro Forma Balance Sheet as of September 30, 2008
	•	Unaudited Condensed Consolidated Pro Forma Statement of Income for the nine months ended September 30, 2008
	•	Unaudited Condensed Consolidated Pro Forma Statement of Income for the year ended December 31, 2007
	•	Notes to Pro Forma Unaudited Condensed Consolidated Financial Statements
99.4	•	Press Release issued by Tower, dated February 5, 2009, announcing that the acquisition of CastlePoint by Tower has closed

* Previously filed

SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	Tower Group, Inc.
	Registrant
Date: February 5, 2009	/s/ Francis M. Colalucci
	FRANCIS M. COLALUCCI
	Senior Vice President & Chief Financial Officer

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-127730) and Form S-8 (No. 333-120320, 333-151801 and 333-157112) of Tower Group, Inc. of our report dated March 31, 2008 relating to the financial statements of CastlePoint Holdings, Ltd., which appears in the Current Report on Form 8-K of Tower Group, Inc. dated February 5, 2009.

PricewaterhouseCoopers
Hamilton, Bermuda
February 5, 2009

EX-99.1

Exhibit 99.1

CastlePoint Holdings, Ltd.
Consolidated Balance Sheets
(Unaudited)

	September 30,			December 31,
(in thousands, except par value and share amounts)	2008			2007
Assets
Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $548,629 and $484,489)	$	517,557		$	484,972
Equity securities, available-for-sale, at fair value (cost of $45,970 and $44,036)		33,665			42,402
Short-term investments, available-for-sale, at fair value (amortized cost of $10,460 and $0)		10,460			—
Total available-for-sale investments		561,682			527,374
Investment in partnerships, equity method		—			8,503
Common trust securities – statutory business trusts, equity method		4,022			4,022
Total investments		565,704			539,899
Cash and cash equivalents		217,511			153,632
Accrued investment income		4,900			4,064
Premiums receivable (primarily with related parties – See note 3)		169,150			125,597
Premiums receivable – programs (primarily with related parties – See note 3)		33,819			9,083
Prepaid reinsurance premiums		9,100			3,475
Reinsurance recoverable on paid loss & loss adjustment expense		1,544			22
Reinsurance recoverable on unpaid loss & loss adjustment expense		5,571			315
Deferred acquisition costs (primarily with related parties – See note 3)		81,615			73,073
Deferred income taxes		4,933			7,051
Deferred financing fees		3,579			3,673
Other assets		12,476			7,174
Total assets	$	1,109,902		$	927,058
Liabilities and Shareholders’ Equity
Liabilities
Loss and loss adjustment expenses (primarily with related parties – See note 3)	$	222,412		$	121,741
Unearned premium (primarily with related parties – See note 3)		244,789			217,518
Losses payable (primarily with related parties – See note 3)		31,544			8,527
Premiums payable (primarily with related parties – See note 3)		73,723			16,257
Accounts payable and accrued expenses		9,946			3,592
Other liabilities		8,792			3,595
Subordinated debentures		134,022			134,022
Total liabilities		725,228			505,252
Shareholders’ Equity
Common shares ($0.01 par value, 100,000,000 shares authorized; 38,305,735 and 38,289,430 shares outstanding)		383			383
Additional paid-in-capital		386,867			385,057
Accumulated other comprehensive net loss		(41,932	)		(1,051	)
Retained earnings		39,356			37,417
Total shareholders’ equity		384,674			421,806
Total liabilities and shareholders’ equity	$	1,109,902		$	927,058

See accompanying notes to the consolidated financial statements.

1

CastlePoint Holdings, Ltd.
Consolidated Statements of Income and Comprehensive Income
(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
($ in thousands, except share and per share amounts)	2008			2007			2008			2007
Revenues
Net premiums earned (primarily with related parties – See note 3)	$	113,275		$	65,610		$	324,494		$	167,146
Insurance services revenue (primarily with related parties – See note 3)		10,772			1,667			27,121			3,902
Net investment income		9,206			7,538			22,590			21,417
Net realized investment losses		(10,470	)		(79	)		(11,906	)		(98	)
Total revenues		122,783			74,736			362,299			192,367
Expenses
Loss and loss adjustment expenses (primarily with related parties – See note 3)		65,711			34,482			180,906			87,790
Commission and other acquisition expenses (primarily with related parties – See note 3)		46,861			24,147			133,870			60,110
Other operating expenses		16,157			4,268			28,790			11,983
Interest expense		2,874			2,254			8,543			6,608
Total expenses		131,603			65,151			352,109			166,491
Income (loss) before income taxes		(8,820	)		9,585			10,190			25,876
Income tax benefit (expense)		(4,332	)		956			(3,463	)		2,254
Net income (loss)	$	(13,152	)	$	10,541		$	6,727		$	28,130
Comprehensive income (loss)
Net income (loss)	$	(13,152	)	$	10,541		$	6,727		$	28,130
Gross unrealized investment holding losses arising during period		(34,755	)		(2,032	)		(54,132	)		(7,977	)
Reclassification adjustment for losses included in net income		10,470			(287	)		11,906			(268	)
Income tax recovery related to items of other comprehensive loss		75			140			1,345			725
Total other comprehensive loss		(24,210	)		(2,179	)		(40,881	)		(7,520	)
Comprehensive income (loss)	$	(37,362	)	$	8,362		$	(34,154	)	$	20,610
Basic and diluted earnings per share
Basic	$	(0.34	)	$	0.28		$	0.18		$	0.79
Diluted	$	(0.34	)	$	0.27		$	0.18		$	0.78
Weighted average common shares outstanding
Basic		38,282,320			38,277,148			38,280,781			35,658,652
Diluted		38,282,320			38,549,305			38,403,449			36,008,824
Dividends declared and paid per common share
Common stock	$	0.050		$	0.025		$	0.125		$	0.075

See accompanying notes to the consolidated financial statements.

2

CastlePoint Holdings, Ltd.
Consolidated Statements of Cash Flows
(Unaudited)

	Nine Months Ended
	September 30,
($ in thousands)	2008			2007
Cash flows from operating activities:
Net income	$	6,727		$	28,130
Adjustments to reconcile net income to net cash provided by (used in) operations:
Net realized investment losses		11,906			98
Depreciation and amortization		285			131
Amortization of bond premium or discount		(353	)		(438	)
Amortization of stock-based compensation expense		1,810			1,456
Amortization of deferred financing fees		95			78
Equity in limited partnerships		3,584			499
Deferred income taxes		3,463			(2,254	)
(Increase) decrease in assets
Accrued investment income		(836	)		(1,837	)
Premiums receivable		(43,553	)		(48,181	)
Premiums receivable		(24,736	)		(1,350	)
Prepaid reinsurance premiums		(5,626	)		(2,343	)
Reinsurance recoverable on paid loss and loss adjustment expense		(1,522	)		—
Reinsurance recoverable on unpaid loss and loss adjustment expense		(5,256	)		—
Deferred acquisition costs		(8,542	)		(25,250	)
Other assets		(5,378	)		(2,226	)
Increase (decrease) in liabilities
Loss and loss adjustment expenses		100,671			66,618
Unearned premium		27,272			78,177
Losses payable		23,017			303
Premiums’ payable – programs		57,467			4,727
Accounts payable and accrued expenses		6,354			(880	)
Other liabilities		5,197			380
Net cash flows provided by operations		152,046			95,838
Cash flows from investing activities:
Cost of fixed assets purchased		(210	)		(998	)
Purchases of fixed-maturity securities		(365,064	)		(384,713	)
Purchases of equity securities		(27,994	)		(46,124	)
Sales or maturity of fixed-maturity securities		290,536			205,966
Sales of other investments		4,919			40,000
Sales of equity securities		24,894			(10,000	)
Net short-term investments (purchased) sold		(10,460	)		51,626
Net cash flows (used in) investing activities		(83,379	)		(144,243	)
Cash flows from financing activities:
Net proceeds from subordinated debentures		—			29,302
Net proceeds from Initial Public Offering		—			114,549
Dividends to shareholders		(4,788	)		(2,654	)
Net cash flows provided by (used in) financing activities		(4,788	)		141,197
Increase in cash and cash equivalents		63,879			92,792
Cash and cash equivalents, beginning of period		153,632			34,784
Cash and cash equivalents, end of period	$	217,511		$	127,576
Supplemental disclosures of cash flow information
Cash paid for income taxes	$	—		$	19
Cash paid for interest	$	8,600		$	6,719

See accompanying notes to the consolidated financial statements.

3

CastlePoint Holdings, Ltd.
Consolidated Statement of Changes in Shareholders’ Equity
For The Nine Months Ended September 30, 2008
(Unaudited)

					Accumulated
			Additional		Other						Total
			Paid-In		Comprehensive			Retained			Shareholders’
($ in thousands)	Common Stock		Capital		Income (loss)			Earnings			Equity
Balance at December 31, 2007	$	383	$	385,057	$	(1,051	)	$	37,417		$	421,806
Net income									6,727			6,727
Net unrealized losses					$	(40,881	)					(40,881	)
Stock based compensation		—		1,810								1,810
Dividends to shareholders									(4,788	)		(4,788	)
Balance at September 30, 2008	$	383	$	386,867	$	(41,932	)	$	39,356		$	384,674

See accompanying notes to the consolidated financial statements.

4

CastlePoint Holdings, Ltd.
Notes to Consolidated Financial Statements
(Unaudited)

Note 1 – Basis of Presentation – Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions for Form 10-Q and in conformity with Article 10 of Regulation S-X. Accordingly, the accompanying consolidated financial statements do not include all of the information and footnote disclosures required by generally accepted accounting principles (“GAAP”) in the United States of America. These statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2007 and notes thereto included in the Company’s 2007 Annual Report on Form 10-K. The accompanying consolidated financial statements have not been audited by an independent registered public accounting firm in accordance with standards of the Public Company Accounting Oversight Board (United States), but in the opinion of management such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position and results of operations. The results of operations for the three and nine months ended September 30, 2008 may not be indicative of the results that may be expected for the year ending December 31, 2008. The consolidated financial statements include the accounts of CastlePoint Holdings, Ltd. (sometimes referred to as “CastlePoint Holdings” or the “Company”), and its wholly-owned subsidiaries, CastlePoint Bermuda Holdings Ltd. (“CastlePoint Bermuda Holdings”), CastlePoint Reinsurance Company, Ltd. (“CastlePoint Re”), CastlePoint Management Corp. (“CastlePoint Management”) and CastlePoint Insurance Company (“CastlePoint Insurance”). All significant inter-company balances have been eliminated. Business segment results are presented gross of all material inter-segment transactions.

Note 2 – Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This new standard provides guidance for using fair value to measure assets and liabilities. Under SFAS 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity operates. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, SFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data such as the reporting entity’s own data. Under the standard, fair value measurements are separately disclosed by level within the fair value hierarchy. The provisions of SFAS 157 were effective for financial statements issued for years beginning after November 15, 2007. The Company adopted the provisions of SFAS 157 on January 1, 2008. However, pursuant to FSP FAS 157-2, “Effective date of FASB Statement No. 157”, the Company elected to defer the effective date of FAS 157 for one year for non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis.

In October 2008, the FASB issued FASB Staff Position (FSP) FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.” The FSP clarifies the application of SFAS No. 157, “Fair Value Measurements”, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The FSP is effective October 10, 2008, and for prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation technique or its application should be accounted for as a change in accounting estimate following the guidance in SFAS No. 154, “Accounting Changes and Error Corrections.” The requirements of FSB 157-3 did not materially impact the Company’s consolidated financial condition or results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). This standard permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. The objective is to improve financial reporting by providing the entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This standard also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This standard expands the use of fair value measurement. The standard was effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company did not elect to implement the fair value option for eligible financial assets and liabilities as of January 1, 2008.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”). This standard establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS No. 141(R) also provides guidance for recognizing and measuring the goodwill acquired in a business combination and determines what

5

information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of the Company’s first fiscal year that begins after December 15, 2008. On August 5, 2008, the Company and Tower Group, Inc. (“Tower”) announced that they had entered into a definitive agreement for the acquisition of the Company by Tower in a transaction valued at approximately $490 million, but this transaction does not impact the Company based upon SFAS No. 141 (R) because the Company is being acquired and, therefore, the Company has not capitalized its expenses to date related to this transaction. Also, on August 27, 2008 the Company announced an agreement to acquire HIG, Inc. (Hermitage), and the Company has capitalized certain costs related to this acquisition that were $0.8 million for the nine months ended September 30, 2008. If the Hermitage acquisition were to close on or after January 1, 2009, it would be accounted for under SFAS No. 141(R).

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51” (“SFAS No. 160”). This standard establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The Company has not determined the effect that the adoption of SFAS No. 160 will have on its consolidated financial condition or results of operations because the impact of SFAS No. 160 is fact specific and will not be applicable until the Company acquires a noncontrolling interest in a subsidiary or deconsolidates a subsidiary after the effective date of SFAS No. 160.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). This standard will require enhanced disclosures concerning (1) the manner in which an entity uses derivatives, (2) the manner in which derivatives and related hedged items are accounted for under SFAS No. 133 and interpretations thereof, and (3) the effects that derivatives and related hedged items have on an entity’s financial position, financial performance, and cash flows. The guidance will become effective for fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact that the adoption of SFAS No. 161 will have on its consolidated financial position or results of operations.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States (the “GAAP hierarchy”). This statement is effective November 15, 2008, and it will not have a material impact on the Company’s consolidated financial condition or results of operations.

Note 3 – Related Party Transactions

The Company and/or its subsidiaries are parties to a master agreement, certain reinsurance agreements, management agreements and service and expense sharing agreements with Tower, a Delaware corporation that is publicly traded in the U.S.A., or its insurance subsidiaries. In addition, CastlePoint Re participates as a reinsurer on Tower’s property and excess of loss reinsurance agreements. The transactions listed below are classified as related party transactions, as each counterparty may be deemed to be an affiliate of the Company.

The Company sub-leases the space in New York, New York for the headquarters of its subsidiaries, CastlePoint Management and CastlePoint Insurance, from Tower Insurance Company of New York, a subsidiary of Tower, at Tower’s cost.

Reinsurance Agreements: In April 2006, CastlePoint Re entered into three multi-year quota share reinsurance agreements with Tower’s insurance subsidiaries which were extended and will expire on their current terms in April 2010: the brokerage business quota share reinsurance agreement, the traditional program business quota share reinsurance agreement, and the specialty program business and insurance risk-sharing business quota share reinsurance agreement.

For the three months ended September 30, 2008, CastlePoint Re assumed 25% of Tower’s brokerage business under the brokerage business quota share reinsurance agreement as compared to 35% for the three months ended June 30, 2008 and as compared to 40% for the three months ended March 31, 2008. The change to 25% as of July 1, 2008 was on a new, renewal, and in force basis; thus, there was a return of $31.8 million in unearned premiums as of June 30, 2008 representing the difference between the unearned premiums for policies written subject to this agreement in prior periods at 35% and 40% ceding percentages, respectively, and the 25% ceding percentage as of July 1, 2008. This has been reflected as a reduction of written premiums in the three and nine month periods ended September 30, 2008. The ceding commission for this business was 36%, which is the sum of 34% provisional ceding commission and 2% contingent commission based upon loss ratio. Based upon the loss ratio for brokerage business, the Company has expensed the maximum ceding commission under this agreement. The reduction in the ceding percentage on the reinsurance business from Tower to 25% reflected the Company’s overall strategic decision to increase the primary business and moderate growth of its reinsurance business. As part of the implementation of this decision the reinsurance from Tower was reduced and primary business managed by Tower and written in CastlePoint Insurance was increased. In addition, CastlePoint Re allocated approximately $135 million of its assets to purchase Hermitage Insurance Company, which effectively reduces the amount of capital that otherwise would be available in CastlePoint Re to underwrite Tower’s business.

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During the nine months ended September 30, 2008 the ceding percentages from Tower pursuant to the traditional program business quota share reinsurance agreement and the specialty program business and insurance risk-sharing business quota share reinsurance agreement remained unchanged such that CastlePoint Re assumed 50% and 85% of Tower’s premiums and losses in those businesses, respectively. The ceding commissions under these agreements reflect the actual costs of commissions, board, bureaus and taxes, and other fees paid to the program underwriting agencies or risk sharing clients on a program by program basis.

In October 2007, the Company and Tower jointly submitted two aggregate excess of loss reinsurance agreements for the brokerage business for review by the New York State Insurance Department. These agreements remain subject to regulatory review and are deemed approved and in effect. The purpose of the two aggregate excess of loss reinsurance agreements is to cause the loss ratios for the brokerage business of CastlePoint Insurance and Tower to be approximately equal. Under the first agreement, Tower agrees to reinsure 85% (the percentage will be adjusted to equal Tower’s actual percentage of the total brokerage business written by Tower and CastlePoint Insurance) of CastlePoint Insurance’s brokerage business losses that are in excess of a specified loss ratio for brokerage business written through Tower Risk Management Corp., a subsidiary of Tower and its Managing General Agency. Under the second agreement CastlePoint Insurance agrees to reinsure 15% (the percentage will be adjusted to equal CastlePoint’s actual percentage of the total brokerage business written by Tower and CastlePoint) of Tower’s brokerage business losses that are in excess of a specified loss ratio for brokerage business. Under both agreements, the loss ratio is calculated net of premiums paid for and losses recovered from specific excess reinsurance, property catastrophe reinsurance and facultative reinsurance, if any, which inure to the benefit of the agreement, and before any cessions to quota share reinsurance. For the nine months ended September 30, 2008, premiums ceded to Tower for the aggregate excess of loss treaty were $2.25 million and premiums assumed from Tower for the same corresponding aggregate excess of loss treaty were $2.25 million. As of September 30, 2008 based upon the relative loss ratios between CastlePoint and Tower prior to the aggregate excess of loss agreements, CastlePoint Insurance had net losses payable to Tower of $0.7 million under the aggregate excess of loss agreements.

Management Agreements: Tower and CastlePoint have entered into business management agreements with each other for brokerage business and program business; these management agreements have been approved by the New York State Insurance Department.

The business management agreement pertaining to Tower’s brokerage business provides that a portion of Tower’s brokerage business may be written directly in CastlePoint Insurance with Tower Risk Management as the manager of this business. For managing such business, Tower Risk Management Corp. is paid a management fee calculated using the sliding scale formula that was originally intended by the master agreement among the parties to be paid to Tower Insurance Company of New York for managing the brokerage business, net of specific aggregate and property catastrophe excess of loss reinsurance costs. The sliding scale commission provides that Tower Risk Management’s commission for the brokerage business is 31% of net premiums written, which can increase to 33% or decline to 28% depending on the loss ratio. For the nine months ended September 30, 2008 and September 30, 2007 and based upon the estimated loss ratio for brokerage business, CastlePoint Insurance accrued fees amounting to approximately $29.3 million and, $0.8 million, respectively, to Tower Risk Management. The accrued fees for the nine months ended September 30, 2008 were equal to approximately 32% of earned premiums attributed to this business.

The business management agreement pertaining to programs business that is managed by CastlePoint Management provides that a portion of program business may be written directly in Tower’s insurance companies and that CastlePoint Management would receive fees for providing certain underwriting and claims services for this business. As manager of the program and risk sharing business, CastlePoint Management performs certain underwriting and claims services with respect to program business and Tower reimburses CastlePoint Management for its actual costs, which include commissions paid to program underwriting agencies, fees paid to third party administrators to adjust claims, plus an allowance to CastlePoint Management for its actual internal costs, which for the three and nine months ended September 30, 2008 were approximately 5% of gross premiums written for programs business. Premiums payable and due to Tower for program business at September 30, 2008 and December 31, 2007 were $39.3 million and $8.6 million, respectively. For the three months ended September 30, 2008 and September 30, 2007, CastlePoint Management recorded commission revenue of $10.7 million and $1.5 million, respectively, from Tower. For the

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nine months ended September 30, 2008 and September 30, 2007, CastlePoint Management recorded commission revenue of $27.1 million and $3.7 million, respectively, from Tower. The net underwriting impact related to our agreements with Tower discussed above is as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
($ in thousands)	2008		2007		2008		2007
Net premiums earned	$	75,286	$	53,751	$	235,140	$	137,526
Net losses incurred		43,186		28,058		127,525		70,907
Net commission expense		28,611		18,768		88,235		48,066

The following table summarizes balances with Tower:

	September 30,		December 31,
($ in millions)	2008		2007
Premiums receivable	$	98.5	$	105.4
Losses payable		22.6		1.7
Unearned premium reserves		178.8		175.2
Loss reserves		171.1		108.8
Deferred acquisition costs		59.4		61.7

Service and Expense Sharing Agreements: CastlePoint Management is a party to service and expense sharing agreements with Tower and certain of its subsidiaries. For the three and nine months ended September 30, 2008, Tower charged CastlePoint Management $0.4 million and $0.9 million, respectively, compared to $0.2  million and $0.5 million for the same periods in 2007, for services rendered in support of CastlePoint Management’s infrastructure as contemplated by the service and expense sharing agreements.

In addition to the services rendered in support of CastlePoint Management’s infrastructure, Tower rendered services for CastlePoint Management’s program business contemplated by the service and expense sharing agreements. For these services, Tower charged CastlePoint Management $0.2million and $0.5 million, for the three and nine months ended September 30, 2008 compared to $0.1 million and $0.3 million for the same periods in 2007.

Proposed Acquisition: On August 5, 2008, the Company and Tower announced that they had entered into a definitive agreement for the acquisition of the Company by Tower in a transaction valued at approximately $490 million. For details see Note 10 – Proposed Merger with Tower and Agreement to Acquire HIG, Inc. CastlePoint incurred $9.4 million in expenses in the nine month period ended September 30, 2008 related to this transaction.

Note 4 – Investments

The amortized cost and fair value of the investments by investment type as of September 30, 2008 and December 31, 2007 are as follows:

	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
($ in thousands)	Cost		Gains		Losses			Fair Value
September 30, 2008
Fixed Maturities:
US government and agencies securities	$	6,072	$	155	$	—		$	6,227
Corporate fixed maturities		143,094		316		(11,620	)		131,790
Mortgage and asset-backed securities		399,463		505		(20,428	)		379,540
Total fixed maturities		548,629		976		(32,048	)		517,557
Equities		45,970		—		(12,305	)		33,665
Short term investments		10,460		—		—			10,460
Total available-for-sale investments	$	605,059	$	976	$	(44,353	)	$	561,682
December 31, 2007
Fixed Maturities:
US government and agencies securities	$	8,598	$	214	$	—		$	8,812
Corporate fixed maturities		132,268		1,372		(1,370	)		132,270
Mortgage and asset-backed securities		343,623		3,124		(2,857	)		343,890
Total fixed maturities		484,489		4,710		(4,227	)		484,972
Equities		44,036		28		(1,662	)		42,402
Total available-for-sale investments	$	528,525	$	4,738	$	(5,889	)	$	527,374

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On January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), regarding fair value measurements. The valuation technique used to fair value the financial instruments is the market approach which uses prices and other relevant information generated by market transactions involving identical or comparable assets.

In accordance with SFAS 157, the Company has evaluated the various types of securities in its investment portfolio to determine an appropriate SFAS 157 fair value hierarchy level for each security based upon trading activity and the observability of market inputs. Based on this evaluation, each price was classified into Level 1, 2 or 3. Level 1 inputs are quoted prices in active markets for identical securities. Level 2 inputs are other than quoted prices included within Level 1 that are observable for the security, either directly or indirectly. Level 3 inputs are unobservable inputs for the security. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the security at the measurement date. All of the prices represent observable prices, including similar securities in active markets, identical or similar securities in an inactive market or market corroborated inputs.

In accordance with SFAS 157, the Company determined that its investments in publicly-traded equity securities are categorized as Level 1 pricing. Investments in all fixed maturities, including U.S. government securities and preferred stock, are categorized as Level 2 pricing. No securities in the Company’s portfolio were priced using unobservable inputs and, therefore, the Company has not assigned any securities to Level 3.

As of September 30 2008, the Company’s investments are categorized into Levels as follows:

			Quoted Prices in		Significant Other		Significant Other
	Fair Value		Active Markets		Observable Inputs		Unobservable
($ in thousands)	Measurements		(Level 1)		(Level 2)		Inputs (Level 3)
Fixed maturity investments	$	517,557	$	—	$	517,557	$	—
Short-term investments		10,460		—		10,460		—
Equity investments		33,665		886		32,779		—
Total	$	561,682	$	886	$	560,796	$	—

As of September 30, 2008, $32.8 million (74.0%) of the Company’s invested assets that were in an unrealized loss position had been held for less than 12 months. Substantially all of the Company’s invested assets that were in an unrealized loss position at December 31, 2007 had been held for less than 12 months. Unrealized losses are as follows:

			Less than 12 Months					More than 12 Months					Total
	No. of				Unrealized					Unrealized					Unrealized
($ in thousands)	Positions		Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
September 30, 2008
Corporates		70	$	93,188	$	(9,519	)	$	9,131	$	(2,100	)	$	102,319	$	(11,619	)
Mortgage & asset-backed		111		323,163		(13,825	)		5,787		(6,603	)		328,950		(20,428	)
Total fixed maturities		181		416,351		(23,344	)		14,918		(8,703	)		431,269		(32,047	)
Equities		27		29,356		(9,483	)		3,851		(2,823	)		33,207		(12,306	)
Total		208	$	445,707	$	(32,827	)	$	18,769	$	(11,526	)	$	464,476	$	(44,353	)
December 31, 2007
Corporates		17	$	26,836	$	(1,370	)	$	—	$	—		$	26,836	$	(1,370	)
Mortgage & asset-backed		23		74,911		(2,846	)		3,658		(11	)		78,569		(2,857	)
Total fixed maturities		40		101,747		(4,216	)		3,658		(11	)		105,405		(4,227	)
Equities		9		19,721		(1,662	)		—		—			19,721		(1,662	)
Total		49	$	121,468	$	(5,878	)	$	3,658	$	(11	)	$	125,126	$	(5,889	)

As of September 30, 2008, the Company had 208 securities in a gross unrealized loss position amounting to $44.4 million, of which $32.0 million (181 securities) was attributable to fixed maturities and $12.3 million (27 securities) was attributable to equity securities. Of the $32.0 million attributable to fixed maturities, $27.3 million was rated investment grade. The remaining $4.7 million unrealized loss was attributed to four securities rated BB. These are commercial mortgage-backed securities (“CMBS”). These securities, which are discussed below in the Mortgage and Asset-Backed Securities section, have been in an

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unrealized loss position for more than 12 months. The fair value at September 30, 2008 of these securities was 27% of amortized cost.

Corporate Fixed Maturities — The unrealized loss position of $11.6 million as of September 30, 2008 in corporate fixed maturities relates to 70 securities all rated BBB or above; 8 securities having a fair value of $2.1 million had been in an unrealized loss position for more than 12 months, the remaining 62 securities had a loss position totaling $9.5 million as of September 30, 2008. The security with the largest unrealized loss ($1.8 million) in this group is Morgan Stanley, with a coupon of 6.63%, a book yield of 6.625%, and is rated A+. The remaining corporate securities are distributed over the following industries—banks, brokerage, insurance, other finance, media, pipelines and utilities. The impairment on all fixed corporate maturities was considered temporary at September 30, 2008 and is generally the result of continued widening of spreads during the third quarter of 2008. The Company has both the ability and intent to hold these securities until there is a full recovery of fair value to the Company's cost basis, which may be maturity.

Mortgage and Asset-Backed Securities — The unrealized loss in mortgage and asset-backed securities of $20.4 million as of September 30, 2008 relates to 111 issues, with 106 issues rated AAA (fair value of $14.3 million), 1 issue rated BBB- (fair value of $1.3 million) and four issues rated BB (fair value of $4.7 million). All of these securities, except for certain positions with unrealized losses amounting to $6.6 million, had been in an unrealized loss position for less than 12 months as of September 30, 2008. The five securities rated BBB and BB are CMBS. Since all five securities are rated less than AA, a cash flow analysis was performed pursuant to Emerging Issues Task Force Issue 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets” (“EITF 99-20”). None of these securities indicated a reduction in the cash flow on a present value basis from what was originally expected at the date of the purchase. The impairment on all mortgage and asset-backed securities was considered temporary at September 30, 2008 and is due to the market disruptions caused by the significant decline in market liquidity affecting this sector. The Company has both the ability and intent to hold these securities until there is a full recovery of fair value to the Company's cost basis, which may be maturity.

Equity Securities — The unrealized loss in equity securities of $12.3 million as of September 30, 2008 relates to 27 issues. $9.5 million of these securities had been in an unrealized loss position for less than 12 months as of September 30, 2008. The largest single equity security in an unrealized loss position at September 30, 2008 was an investment in a fund comprised primarily of collateralized bank loans with an unrealized loss of $1.8 million. The loans have floating rates. The collateralization makes the loans structurally senior in priority to corporate bonds from the same issuers, providing additional credit protection. This security had been in an unrealized loss position for more than twelve months as of September 30, 2008. The unrealized loss is due to market disruptions caused by the significant decline in market liquidity and the continued spread widening during the third quarter of 2008. The remaining unrealized loss of $1.0 million for more than 12 months is comprised of 6 preferred stock issues. Other than the securities discussed below, after considering the current market dislocations and the magnitude and duration of the current impairment, the Company considered the impairment to be temporary at September 30, 2008.

For the three and nine months ended September 30, 2008, the Company recorded charges for other-than-temporary impairments of $8.0 million and $11.5 million, respectively, relating to investments as follows:

• The Company recorded an impairment charge of $6.2 million on Lehman preferred stock holdings and Lehman corporate debt in the third quarter of 2008. The current fair value of Lehman corporate debt on the Company’s books at September 30, 2008 is $131,000.

• A fund investment with an initial cost basis of $10.0 million was put into run-off by the fund manager during the second quarter of 2008 based on deteriorating conditions in the financial sector. The fund is comprised of primarily investment grade securities with a focus on the financial institutions segment of the credit markets (i.e., primarily trust preferred, subordinated debt and preferred securities). In June 2008, the fund returned $4.9 million leaving a remaining balance of $5.2 million. The Company recorded an other-than-temporary impairment charge of $2.0 million in June 2008, based on the belief that the fund would be liquidated by year end 2008 prior to a full recovery. During the third quarter of 2008, the company reflected an additional impairment charge of $1.5 million based on the fair value at September 30, 2008 of $1.6 million.

• The Company recorded impairment charges of $0.7 million in the first and second quarters of 2008. In September 2008, the company recorded additional charges in the amount of $0.3 million relating to three publicly traded mortgage REITs, whose purpose is to own various mortgage-backed securities, including CMBS and agency and non-agency residential mortgage-backed securities (“MBS”). These investments were negatively impacted by the current real estate crisis and all three have reduced their dividends. The aggregate fair value of these securities at September 30, 2008 was $0.9 million.

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• The Company recorded impairment charges of $0.8 million relating to Fannie Mae and Freddie Mac preferred stock in June of 2008. These securities were subsequently sold in July of 2008.

Management believes the securities that were other-than-temporarily impaired at September 30, 2008 have been identified and are properly reflected in the financial statements.

The following table shows the ratings distribution of our fixed income portfolio as of September 30, 2008 and December 31, 2007:

	September 30, 2008					December 31, 2007
			Percentage of					Percentage of
($ in thousands)	Fair Value		Fair Value			Fair Value		Fair Value
Rating
U.S. Treasury securities	$	6,227		1.2	%	$	3,218		0.7	%
AAA		381,594		73.7	%		352,079		72.6	%
AA		38,491		7.5	%		46,920		9.6	%
A		47,206		9.1	%		50,312		10.4	%
BBB		42,081		8.1	%		30,660		6.3	%
BB		1,958		0.4	%		1,783		0.4	%
Total	$	517,557		100.0	%	$	484,972		100.0	%

Note 5 – Dividends Declared

Dividends declared and paid by the Company on its common shares for the three and nine months ended September 30, 2008 were $1.9 million and $4.8 million, or $0.05 and $0.125 per share, respectively. Dividends declared and paid by the Company on its common shares for the three and nine months ended September 30, 2007 were $1.0 million and $2.7 million, or $0.025 and $0.075 per share, respectively.

On October 30, 2008, the Board of Directors of CastlePoint Holdings approved a quarterly dividend of $0.05 per share payable December 31, 2008 to the Company’s shareholders of record as of December 15, 2008.

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Note 6 – Earnings per Share

The following table shows the computation of the Company’s earnings per share:

	Income			Shares		Per Share
($ in thousands, except share and per share amounts)	(Numerator)			(Denominator)		Amount
Three months ended September 30, 2008
Net Loss	$	(13,152	)
Basic earnings per share	$	(13,152	)		38,282,320	$	(0.34	)
Effect of dilutive securities:
Stock options					—
Unvested restricted stock					—
Warrants					—
Diluted earnings per share	$	(13,152	)		38,282,320	$	(0.34	)
Three months ended September 30, 2007
Net Income	$	10,541
Basic earnings per share	$	10,541			38,277,148	$	0.28
Effect of dilutive securities:
Stock options					51,106
Unvested restricted stock					—
Warrants					221,051
Diluted earnings per share	$	10,541			38,549,305	$	0.27
Nine months ended September 30, 2008
Net Income	$	6,727
Basic earnings per share	$	6,727			38,280,781	$	0.18
Effect of dilutive securities:
Stock options					32,997
Unvested restricted stock					13,977
Warrants					75,694
Diluted earnings per share	$	6,727			38,403,449	$	0.18
Nine months ended September 30, 2007
Net Income	$	28,130
Basic earnings per share	$	28,130			35,658,652	$	0.79
Effect of dilutive securities:
Stock options					76,960
Unvested restricted stock					—
Warrants					273,212
Diluted earnings per share	$	28,130			36,008,824	$	0.78

Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under agreements relating to grants or issuances thereof. Due to the net loss incurred in the three months ended September 30, 2008, SFAS 128 required the Company to use basic weighted average common shares outstanding in the calculation of diluted earnings (loss) per share, since the inclusion of shares for share based compensation plans would have been antidilutive to the earnings per share calculation. For the three months ended September 30, 2007, weighted outstanding stock options of 542,829 and weighted restricted stock of 9,988 were not considered in computing diluted earnings per share because they were antidilutive. For the nine months ended September 30, 2008 and September 30, 2007, weighted outstanding stock options of 908,518 and 381,957 and weighted restricted stock of zero and 5,220, respectively, were not considered in computing diluted earnings per share because they were antidilutive.

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Note 7 – Employee Compensation Plans

Long-Term Equity Compensation Plan

The following table provides an analysis of the stock option activity for the periods set forth below:

	Nine Months Ended September 30,
	2008				2007
			Weighted					Weighted
	Number of		Average		Number of			Average
	Shares		Exercise Price		Shares			Exercise Price
Outstanding at December 31, 2007		1,618,783	$	11.50		1,082,666		$	10.00
Granted at market value		499,518		10.12		556,254			14.52
Forfeitures and expirations		—		—		(20,137	)		14.50
Exercised		—		—		—			—
Outstanding at September 30, 2008		2,118,301		11.18		1,618,783			11.50
Exercisable, end of period		908,105		10.89		376,133			10.00
Weighted average fair value per share of options granted				4.11					4.28

Options outstanding as of the dates set forth below are shown on the following schedule:

	Options Outstanding					Options Exercisable
			Average
			Remaining
	Number of		Contractual	Average		Number of		Average
Range of Exercise Prices	Shares		Life	Exercise Price		Shares		Exercise Price
September 30, 2008
$10.00 - 2006		1,082,666	7.50 years	$	10.00		729,399	$	10.00
$14.50 - 03/22/07		519,310	8.50 years		14.50		173,104		14.50
$15.25 - 04/30/07		16,807	8.58 years		15.25		5,602		15.25
$10.12 - 03/10/08		499,518	9.44 years		10.12		—		10.12
Total options		2,118,301	8.21 years	$	11.18		908,105	$	10.89
December 31, 2007
$10.00 - 2006		1,082,666	8.25 years	$	10.00		376,133	$	10.00
$14.50 - 03/22/07		519,310	9.25 years		14.50		—		—
$15.25 - 04/30/07		16,807	9.33 years		15.25		—		—
Total options		1,618,783	8.58 years	$	11.50		376,133	$	10.00

The Company uses the simplified method outlined in the SEC Staff Accounting Bulletin 110 to estimate expected lives for options granted during the period as historical exercise data is not available and the options meet the requirement set out in the Bulletin.

As of September 30, 2008 and December 31, 2007, there was $4.1 million and $4.0 million of unrecognized compensation costs related to 1,210,196 and 1,242,650 non-vested stock options, respectively. For employees, the cost is expected to be recognized over the vesting periods of the individual options, which extend up to 42 months. For non-employee directors, the cost for grants dated April 4, 2006 was recognized over the vesting period of 12 months following grant, and for grants dated March 22, 2007 the cost is expected to be recognized over the vesting period of 36 months following grant.. For the three months ended September 30, 2008 and the three months ended September 30, 2007, the Company recognized $0.7 million and $0.5 million of compensation expense related to share-based compensation, respectively. For the nine months ended September 30, 2008 and the

13

nine months ended September 30, 2007, the Company recognized $1.8 million and $1.4 million of compensation expense related to share-based compensation, respectively.

During the three months ended September 30, 2008, there were no restricted stock shares granted. During the nine months ended September 30, 2008, 16,305 restricted stock shares were granted to non-employee directors. As of September 30, 2008, there were $0.1 million of unrecognized compensation costs related to 16,305 non-vested restricted stock grants for non-employee directors. Restricted stock shares granted to non-employee directors vest 12 months after the grant date.

Note 8 – Segment Information

The Company reports its results in three business segments: insurance, reinsurance and insurance services. The insurance segment includes the results of CastlePoint Insurance and CastlePoint Re for excess lines written on a primary basis. The reinsurance segment includes the results from the reinsurance business written through CastlePoint Re. The insurance services segment includes the results from managing the specialty and traditional program business and insurance risk-sharing business through CastlePoint Management, as well as results from providing unbundled insurance services to program underwriting managers. The Company evaluates segment profit, which excludes investment income, realized gains and losses, general corporate expenses, interest expense, income taxes and any other non-core business income or expense.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
($ in thousands)	2008			2007			2008			2007
Insurance Segment
Revenues:
Net premiums earned	$	35,794		$	4,644		$	88,763		$	5,975
Total revenues		35,794			4,644			88,763			5,975
Expenses:
Net loss and loss adjustment expenses		19,175			2,997			47,682			3,715
Commission expenses		12,129			1,997			31,614			2,546
Other underwriting expenses		1,705			130			3,637			151
Total expenses		33,009			5,124			82,933			6,412
Segment profit (loss)	$	2,785		$	(480	)	$	5,830		$	(437	)
Reinsurance Segment
Revenues:
Net premiums earned	$	77,482		$	60,965		$	235,731		$	161,171
Total revenues		77,482			60,965			235,731			161,171
Expenses:
Net loss and loss adjustment expenses		46,535			31,485			133,224			84,075
Net Commission expenses		25,524			20,929			78,989			54,634
Other underwriting expenses		1,412			1,125			3,537			2,614
Total expenses		73,471			53,539			215,750			141,323
Segment profit	$	4,011		$	7,426		$	19,981		$	19,848
Insurance Services Segment
Revenues:
Direct commission revenue from program business	$	11,217		$	1,667		$	29,212		$	3,902
Total revenues		11,217			1,667			29,212			3,902
Expenses:
Direct commission expense from program business		9,653			1,222			25,358			2,930
Other insurance services expenses		2,231			1,435			6,234			4,566
Total expenses		11,884			2,657			31,592			7,496
Segment loss	$	(667	)	$	(990	)	$	(2,380	)	$	(3,594	)

14

The following table reconciles revenues by segment to consolidated revenues:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
($ in thousands)	2008			2007			2008			2007
Insurance segment	$	35,794		$	4,644		$	88,763		$	5,975
Reinsurance segment		77,482			60,965			235,731			161,171
Insurance services segment		11,217			1,667			29,212			3,902
Total segment revenues		124,493			67,277			353,706			171,048
Segment revenue elimination		(447	)		—			(2,091	)		—
Net investment income		9,206			7,538			22,590			21,417
Net realized investment gains (losses)		(10,470	)		(79	)		(11,906	)		(98	)
Consolidated revenues	$	122,783		$	74,736		$	362,299		$	192,367

The following table reconciles the results of the Company’s individual segments to consolidated income before taxes:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
($ in thousands)	2008			2007			2008			2007
Insurance segment profit (loss)	$	2,785		$	(480	)	$	5,830		$	(437	)
Reinsurance segment profit (loss)		4,011			7,426			19,981			19,848
Insurance services segment (loss)		(667	)		(990	)		(2,380	)		(3,594	)
Segment profit		6,129			5,956			23,431			15,817
Net investment income		9,206			7,538			22,590			21,417
Net realized investment gains (losses)		(10,470	)		(79	)		(11,906	)		(98	)
Corporate expenses		(10,811	)		(1,576	)		(15,382	)		(4,652	)
Interest expense		(2,875	)		(2,254	)		(8,543	)		(6,608	)
Income (loss) before taxes	$	(8,820	)	$	9,585		$	10,190		$	25,876

Note 9 – Security Requirements

As required by the Company’s reinsurance agreements with its cedents, CastlePoint Re is required to collateralize amounts through a letter of credit, cash advance, funds held or investments in a trust account. The amount of the letter of credit or trust is generally adjusted each calendar quarter, with the required amount at least equal to the sum of the following contract amounts: (i) unearned premium reserve, (ii) paid loss and loss adjustment expense payable, (iii) loss and loss adjustment expenses reserves, (iv) loss incurred but not reported, (v) return and refund premiums, and (vi) less premium receivable. As of September 30, 2008 and December 31, 2007, CastlePoint Re maintained trusts and a letter of credit in the aggregate amount of $312.9 million and $218.1 million, respectively, at a Massachusetts trust company. As of September 30, 2008 and December 31, 2007, CastlePoint Insurance maintained a trust at the same trust company in the amount of $13.4 million and $8.0 million, respectively. Both CastlePoint Re and CastlePoint Insurance earn and collect the interest on the trust funds.

Note 10 – Proposed Merger with Tower and Agreement to Acquire HIG, Inc.

On August 5, 2008, the Company and Tower announced that they have entered into a definitive agreement for the acquisition of the Company by Tower in a transaction valued at approximately $490 million.

Under the terms of that agreement, based on the closing stock price for Tower on August 5, 2008 of $23.09, CastlePoint Holdings shareholders would receive a combination of Tower common stock and cash equal to $12.68 per CastlePoint share. Following the acquisition, Tower will continue to trade on NASDAQ under Tower’s existing ticker symbol, TWGP, and CastlePoint Holdings will be delisted.

Under the terms of the agreement, CastlePoint Holdings shareholders (other than Tower) will receive 0.47 shares of Tower common stock and cash consideration of $1.83 for each share of CastlePoint Holdings common stock. The exchange ratio is subject to adjustment based on Tower’s volume weighted average price per share during a 15 day trading window prior to closing, and will be fixed at 0.47 if the average price of Tower stock during such period is equal to or greater than $20.00 and equal to or less than $26.00. If the average stock price during such period is greater than $26.00, the exchange ratio will be

15

adjusted downward to provide CastlePoint Holdings shareholders with a fixed value per share of $14.05 (including $1.83 of cash per share). If the average stock price during such period is less than $20.00 but equal to or more than $17.50, the exchange ratio will be adjusted upward to provide CastlePoint Holdings shareholders with a fixed value per share of $11.23 (including $1.83 of cash per share). However, if Tower’s average stock price during such period falls below $17.50, the exchange ratio will be fixed at 0.5371, and CastlePoint Holdings will have the right, for a limited period, to terminate the agreement, unless Tower elects to add Tower shares or cash to provide CastlePoint Holdings shareholders with a value per share of $11.23 (including the amount in cash per share).

No external financing for the proposed merger with Tower is required.

The terms of the agreement were negotiated and unanimously approved by the special committees of the boards of Tower and CastlePoint Holdings after considering the analysis and advice of their respective independent advisors. Each special committee consists solely of independent directors. The boards of directors of Tower and CastlePoint Holdings have also approved the agreement and transaction and recommended the agreement and transaction to their respective shareholders.

In connection with the proposed merger, the Company and Tower filed a preliminary registration statement/joint proxy statement with the Securities and Exchange Commission (“S.E.C.”) on September 30, 2008 as well as various forms with federal anti-trust regulators and state insurance regulatory authorities. The Company and Tower received comments from the S.E.C. on October 29, 2008, and responses to these comments and an amended preliminary registration statement/joint proxy statement was filed with the S.E.C. on November 10, 2008. The federal anti-trust regulators have terminated the waiting period under Hart-Scott-Rodino Antitrust Improvements Act. The New York Insurance Department (NYID) has decided that the merger agreement does not require their approval since the Company and Tower had been considered to be affiliates by the NYID. The Company expects to receive approvals from other state insurance authorities and intends to provide a final proxy statement for shareholders to vote in time to close the CastlePoint acquisition in late December 2008, assuming shareholder approval. However, the Company cannot guarantee that insurance regulatory approvals will be received or that the registration statement/joint proxy statement will be approved by the S.E.C. at the expected times, and consequently the closing of the proposed merger with Tower may not occur until early 2009, again assuming shareholder approval.

On August 27, 2008, the Company announced that CastlePoint Re entered into a definitive agreement for the acquisition of HIG, Inc. (“Hermitage”). CastlePoint Re will pay the seller $27 million in cash plus the adjusted closing book value of Hermitage, which includes two operating insurance companies, Hermitage Insurance Company and Kodiak Insurance Company. The transaction is subject to regulatory approvals and other customary closing conditions. The total cash consideration is expected to be approximately $135 million with no external financing required.

If the merger with Tower is not consummated or is delayed until after the acquisition of Hermitage, then CastlePoint Re has agreed to sell the renewal rights for the Hermitage business to Tower for $16 million. Under the renewal rights agreement, CastlePoint Re will retain the surplus, unearned premiums and loss reserves of Hermitage and the master agreement with Tower will be extended for an additional year, subject to certain adjustments, and Tower will acquire the operating assets of Hermitage, including rights to existing insurance policy renewals and producer appointments.

Note 11 – Subsequent Events

Dividends

On October 30, 2008, the Board of Directors of CastlePoint Holdings approved a quarterly dividend of $0.05 per share payable December 31, 2008 to the Company’s shareholders of record as of December 15, 2008.

16

EX-99.2

Exhibit 99.2

Index to Consolidated Financial Statements

	Page
Report of PricewaterhouseCoopers (Bermuda), Independent Registered Public Accounting Firm with respect to audited consolidated financial statements as of and for the years ended December 31, 2007 and 2006		F-2
Consolidated Balance Sheets as of December 31, 2007 and 2006		F-3
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2007, 2006 and the period ended 2005		F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and the period ended 2005		F-5
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2007, 2006 and the period ended 2005		F-6
Consolidated Notes to Financial Statements for the years ended December 31, 2007, 2006 and the period ended 2005		F-7

F-1

PricewaterhouseCoopers

Chartered Accountants

Dorchester House

7 Church Street

Hamilton HM11

Bermuda

Telephone +1 (441) 295 2000

Facsimile +1 (441) 295 1242

www.pwc.com/bermuda

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
of CastlePoint Holdings, Ltd:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of CastlePoint Holdings, Ltd. and its subsidiaries at December 31, 2007 and December 31, 2006, and the results of their operations and their cash flows for each of the years ended December 31, 2007 and 2006 and the period from November 16, 2005 to December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers
Hamilton, Bermuda
March 31, 2008

A list of partners can be obtained from the above address
PricewaterhouseCoopers refers to the members of the worldwide PricewaterhouseCoopers organization

F-2

CastlePoint Holdings, Ltd.

Consolidated Balance Sheets
($ in thousands)

	December 31,
	2007			2006
Assets
Fixed-maturity securities, available-for-sale, at fair value (amortized cost $484,523 for 2007; $293,878 for 2006)	$	484,972		$	295,527
Equity securities, available-for-sale, at fair value (cost $43,927 for 2007; $0 for 2006)		42,402			—
Short-term investments, available-for-sale, at fair value (amortized cost $0 for 2007; $51,626 for 2006)		—			51,638
Total available-for-sale investments		527,374			347,165
Investment in Tower preferred stock		—			40,000
Investment in Partnership, equity method		8,503			—
Common trust securities—statutory business trusts, equity method		4,022			3,094
Total investments		539,899			390,259
Cash and cash equivalents		153,632			34,784
Accrued investment income		4,064			2,211
Assumed premiums receivable (primarily with related parties—See note 3)		125,597			44,930
Premiums receivable—programs (primarily with related parties—See note 3)		9,083			1,295
Prepaid reinsurance premiums		3,475			—
Deferred acquisition costs (primarily with related parties—See note 3)		73,073			30,363
Deferred income taxes		7,051			1,089
Deferred financing fees		3,673			3,084
Other assets		7,196			3,327
Total Assets	$	926,743		$	511,342
Liabilities and Shareholders’ Equity
Liabilities
Loss and loss adjustment expenses (primarily with related parties—See note 3)	$	121,426		$	34,192
Unearned premium (primarily with related parties—See note 3)		217,518			86,181
Assumed losses payable (primarily with related parties—See note 3)		8,527			3,496
Premiums payable—programs (primarily with related parties—See note 3)		16,257			1,072
Accounts payable and accrued expenses		3,592			2,869
Other liabilities		3,595			725
Subordinated debentures		134,022			103,094
Total Liabilities		504,937			231,629
Commitments and Contingent Liabilities (Note 11)
Shareholders’ Equity
Common shares ($0.01 par value, 100,000,000 shares authorized, 38,289,430 shares issued as of December 31, 2007 and 29,580,000 shares issued as of December 31, 2006)		383			296
Additional paid-in-capital		385,057			269,472
Accumulated other comprehensive (loss) income		(1,051	)		1,657
Retained earnings		37,417			8,288
Total Shareholders’ Equity		421,806			279,713
Total Liabilities and Shareholders’ Equity	$	926,743		$	511,342

See accompanying notes to the consolidated financial statements.

F-3

CastlePoint Holdings, Ltd.
Consolidated Statement of Income and Comprehensive Income
($ in thousands except per share amounts)

	Year Ended December 31,
	2007			2006			2005
Revenues
Net premiums earned (primarily with related parties—See note 3)	$	248,364		$	78,970		$	—
Insurance service revenue (primarily with related parties—See note 3)		7,453			2,334			—
Net investment income		29,506			11,184			—
Net realized (loss) gain on investments		(8,236	)		35			—
Total Revenues		277,087			92,523			—
Expenses
Loss and loss adjustment expenses (primarily with related parties—See note 3)		131,335			40,958			—
Commission and other acquisition expenses (primarily with related parties—See note 3)		91,602			29,405			—
Other operating expenses		17,851			12,153			36
Interest expense		9,416			557			—
Total Expenses		250,204			83,073			36
Income (loss) before income taxes		26,883			9,450			(36	)
Income tax benefit		5,857			1,093			—
Net Income (loss)	$	32,740		$	10,543		$	(36	)
Comprehensive Income (loss)
Net income (loss)	$	32,740		$	10,543		$	(36	)
Other comprehensive income (loss):
Gross unrealized investment holding (losses) gains arising during period		(11,048	)		1,696			—
Less: reclassification adjustment for (losses) gains included in net income		(8,236	)		35			—
		(2,812	)		1,661			—
Income tax benefit (expense) related to items of other comprehensive income (loss)		104			(4	)		—
Total other comprehensive (loss) income		(2,708	)		1,657			—
Comprehensive Income (loss)	$	30,032		$	12,200		$	(36	)
Earnings Per Share
Basic earnings per common share	$	0.90		$	0.47		NM
Diluted earnings per common share	$	0.89		$	0.47		NM
Weighted-average common shares outstanding
Basic		36,313			22,336			—
Diluted		36,635			22,336			—

Note: “NM” denotes not meaningful.

See accompanying notes to the consolidated financial statements.

F-4

CastlePoint Holdings, Ltd.
Consolidated Statements of Cash Flows
($ in thousands)

	Year Ended December 31,
	2007			2006
Cash flows from operating activities:
Net income	$	32,740		$	10,543
Adjustments to reconcile net income to net cash provided by (used in) operations:
Loss (Gain) on sale of investments		8,236			(35	)
Depreciation and amortization		220			25
Amortization of bond premium or discount		(586	)		(396	)
Amortization of stock-based compensation expense		2,021			998
Amortization of deferred financing fees		110
Equity in limited partnerships		1,387			—
Deferred income tax		(5,857	)		(1,093	)
Warrants issued		—			4,605
Increase in assets:
Accrued investment income		(1,853	)		(2,211	)
Assumed premiums receivable		(80,667	)		(44,930	)
Premiums receivable—programs		(7,788	)		(1,295	)
Prepaid reinsurance premiums		(3,475	)		—
Deferred acquisition costs		(42,710	)		(30,363	)
Other assets		(3,776	)		(750	)
Increase in liabilities:
Loss and loss adjustment expenses		87,234			34,192
Unearned premium		131,337			86,181
Assumed losses payable		5,031			3,496
Premiums payable—programs		15,185			1,072
Accounts payable and accrued expenses		1,053			2,538
Other liabilities		2,891			41
Net cash flows provided by operations		140,733			62,618
Cash flows from investing activities:
Cost of fixed assets purchased		(1,547	)		(331	)
Purchases of investments:
Cost of fixed-maturity securities purchased		(492,618	)		(418,317	)
Cost of equities securities purchased		(52,867	)		(40,000	)
Cost of purchase of shell company (net of cash acquired)		—			(2,795	)
Sale of investments:
Proceeds from sales of fixed-maturity securities		303,298			127,315
Other Investments		40,000			—
Cost of limited partnerships (purchased)/sold		(10,000	)		—
Net short term investments matured (purchased )		51,626			(51,626	)
Net cash flows used in investing activities		(162,108	)		(385,754	)
Cash flows from financing activities:
Net proceeds from subordinated debentures		29,301			96,916
Net proceeds from Tower Group, Inc.		—			15,000
Net proceeds from Private Offering		—			249,165
Net proceeds from Initial Public Offering		114,533			—
Registration costs paid and deferred		—			(942	)
Dividends to shareholders		(3,611	)		(2,219	)
Net cash flows provided by financing activities		140,223			357,920
Increase in cash and cash equivalents		118,848			34,784
Cash and cash equivalents, beginning of period		34,784			—
Cash and cash equivalents, end of period	$	153,632		$	34,784
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	19		$	—
Cash paid for interest	$	9,446		$	174

* Note: The Company commenced operations in 2006 thus there were no cash flows in 2005.

See accompanying notes to the consolidated financial statements.

F-5

CastlePoint Holdings, Ltd.
Consolidated Statement of Changes in Shareholders’ Equity
($ in thousands)

			Additional		Accumulated Other			Retained			Total
	Common		Paid-in		Comprehensive			Earnings			Shareholders’
	Shares		Capital		Income (loss)			(Deficit)			Equity
Balance at November 16, 2005	$	—	$	—	$	—		$	—		$	—
Net (loss)		—		—		—			(36	)		(36	)
Net unrealized gains		—		—		—			—			—
Stock based compensation		—		—		—			—			—
Dividends to shareholders		—		—		—			—			—
Balance at December 31, 2005		—		—		—			(36	)		(36	)
Tower Group, Inc., proceeds		26		14,974		—			—			15,000
Private offering, net proceeds		270		248,895		—			—			249,165
Warrant to purchase common shares		—		4,605		—			—			4,605
Net income		—		—		—			10,543			10,543
Net unrealized gains		—		—		1,657			—			1,657
Stock based compensation		—		998		—			—			998
Dividends to shareholders		—		—		—			(2,219	)		(2,219	)
Balance at December 31, 2006		296		269,472		1,657			8,288			279,713
Initial public offering, net proceeds		87		113,564		—			—			113,651
Net income		—		—		—			32,740			32,740
Net unrealized loss		—		—		(2,708	)		—			(2,708	)
Stock based compensation		—		2,021		—			—			2,021
Dividends to shareholders		—		—		—			(3,611	)		(3,611	)
Balance at December 31, 2007	$	383	$	385,057	$	(1,051	)	$	37,417		$	421,806

See accompanying notes to the consolidated financial statements.

F-6

CASTLEPOINT HOLDINGS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years, ended December 31, 2007, 2006 and the period ended 2005

Note 1—General

CastlePoint Holdings, Ltd. (the “Company”), a Bermuda holding company incorporated on November 16, 2005, was organized to provide, through its subsidiaries, property and casualty insurance and reinsurance business solutions, products and services primarily to small insurance companies and program underwriting managers in the United States. The Company’s subsidiaries are CastlePoint Bermuda Holdings, Ltd. (“CastlePoint Bermuda Holdings”), another holding company, CastlePoint Reinsurance Company, Ltd. (“CastlePoint Re”) an operating reinsurance subsidiary, CastlePoint Management Corp. (“CastlePoint Management”) an insurance management company and CastlePoint Insurance Company (“CastlePoint Insurance Company”) an operating insurance company licensed in New York and New Jersey.

On February 6, 2006, Tower Group, Inc. (“Tower”), a Delaware corporation that is publicly traded in the U.S. and the Company’s sponsor, invested $15.0 million in the Company in consideration of receiving 2,555,000 shares of the Company’s common shares. At that time, the Company and Tower entered into a master agreement (“Master Agreement”) that set forth the terms and conditions under which the companies would do business with each other over the subsequent three years. References herein to “Tower” refer to Tower Group, Inc. and its subsidiaries, which include Tower Insurance Company of New York (“TICNY”), Tower National Insurance Company (“TNIC”) and its managing general agency, Tower Risk Management (“TRM”).

On April 4 and 5, 2006, the Company issued a total of 27,025,000 common shares in a private offering for net proceeds of $249.2 million. The Company used these proceeds and the $15.0 million Tower invested in the Company prior to the private offering as follows: (1) approximately $250.0 million to capitalize the Company’s reinsurance subsidiary, CastlePoint Re; and (2) approximately $14.0 million to capitalize the Company’s intermediate Bermuda holding company, CastlePoint Bermuda Holdings, which owns CastlePoint Re.

On March 28, 2007, the Company completed its initial public offering at an initial offering price per share of $14.50, in which (i) the Company sold 8,697,148 shares it registered on its own behalf, and (ii) certain selling shareholders sold 119,500 shares the Company registered on their behalf. The managing underwriters for the initial public offering were Friedman, Billings, Ramsey & Co., Inc., Keefe, Bruyette & Woods, Inc., Cochran Caronia Waller Securities LLC and Piper Jaffray & Co. The aggregate proceeds of the offering were approximately $127.8 million, of which the gross proceeds to the Company were approximately $126.1 million. Net proceeds to the Company, after deducting underwriting discounts of approximately $8.5 million and other offering expenses of approximately $3.6 million, were approximately $114 million. The gross proceeds to the selling shareholders were approximately $1.7 million in the aggregate, and net proceeds to the selling shareholders were approximately $1.6 million in the aggregate. The Company did not receive any of the proceeds of the sale by the selling shareholders. Following the initial public offering, the Company filed a second Registration Statement on Form S-1, as amended (Registration No. 333-1346628) covering the resale by selling shareholders named therein of 26,646,589 common shares originally issued by the Company in the private offering completed April 2006. The Company will not receive any proceeds from the sales of selling shareholders pursuant to this registration statement. On March 7th 2008, the Company terminated its shelf registration statement that was filed in August 2007 for the shares purchased in the private offering in April 2006. As a result of modifications to the SEC rules that became effective February 15, 2008, non affiliated shareholders who still own the private offering shares may sell their shares in an open market without the shelf registration.

In November and December 2006, CastlePoint Management formed two statutory business trusts, CastlePoint Management Statutory Trust I and CastlePoint Management Statutory Trust II (“Trust I” and “Trust II”, or collectively, the “Trusts”), of which the Company owns all of the common trust securities. In September 2007, CastlePoint Bermuda Holdings formed a statutory business trust, CastlePoint Bermuda Holdings Statutory Trust I (the “CPBH

F-7

Trust”), of which the Company owns all of the common trust securities. For additional information see Note 17—“Debt”.

On December 4, 2006, CastlePoint Management purchased 40,000 shares of Tower’s Series A non-cumulative convertible redeemable perpetual preferred stock (“the Tower Preferred Stock”) with a $0.01 par value per share and a $1,000 liquidation preference per share for an aggregate amount of $40 million. As part of this agreement, the Company also obtained an extension of the Master Agreement for one year and the right of first refusal on any loss portfolio transfers that Tower might cede during the life of the Master Agreement. The dividends on Tower Preferred Stock were non-cumulative and payable quarterly at a rate of 8.66% per annum. Tower redeemed all of its perpetual preferred stock held by CastlePoint Management on January 26, 2007, at the redemption price of $40 million in the aggregate plus approximately $0.3 million in interest that was paid in January 2007. The proceeds of such redemption were used to further capitalize CastlePoint Insurance. Although Tower effected such redemption, CastlePoint retained the right of first refusal from Tower, with respect to any insurance companies Tower may acquire during the term of the Master Agreement, subject to the receipt of any necessary regulatory approvals, to assume such companies’ historical losses pursuant to a loss portfolio transfer agreement (which must be on mutually acceptable market competitive terms) if Tower desires to cause these insurance companies to effect loss portfolio transfers.

On December 4, 2006, CastlePoint Management purchased from Tower all of the issued and outstanding capital stock of a company known at that time as Tower Indemnity Company of America, subsequently renamed to CastlePoint Insurance in early 2007. As of December 31, 2007, CastlePoint Insurance Company is a licensed insurer in New York and New Jersey. As of July 1, 2007 CastlePoint Insurance Company writes direct and assumed insurance business, on an admitted basis, in New York and will write in New Jersey once it completes further necessary regulatory filings and receives necessary regulatory approvals in New Jersey, as well as in those states in which it subsequently applies to become, and is approved as, a licensed insurer.

Note 2—Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the financial statements of CastlePoint Holdings, Ltd. and its wholly-owned subsidiaries, CastlePoint Bermuda Holdings, CastlePoint Re, CastlePoint Management and CastlePoint Insurance Company and their respective finance subsidiaries. These accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All significant inter-company balances have been eliminated in consolidation. Business segments results are presented gross of all material inter-segment transactions. The accompanying financial statements present the financial position of CastlePoint Holdings, Ltd. and its subsidiaries at December 31, 2007 and 2006 and its operations for the years, ended December 31, 2007, 2006 and the period ended 2005.

Use of Estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Premiums Earned

Premiums on insurance and reinsurance policies issued by the Company’s operating subsidiaries are considered short-duration contracts. Accordingly, premium revenue, including direct writings and reinsurance assumed, net of premiums ceded to reinsurers, is recognized as earned in proportion to the amount of insurance protection provided on a pro-rata basis over the terms of the underlying policies with the unearned portion being reported as unearned premium. Prepaid reinsurance premiums represent the unexpired portion of reinsurance premiums ceded.

Reinsurance Accounting

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Reinsurance arrangements are those that qualify for reinsurance accounting in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 113, “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts.” Management believes the Company’s reinsurance arrangements qualify for reinsurance accounting in accordance with SFAS 113. Management has evaluated its reinsurance arrangements and determined that insurance risk is transferred to the reinsurers. Reinsurance agreements have been determined to be short-duration prospective contracts and are earned in proportion to the amount of reinsurance protection provided on a pro-rata basis over the terms of the underlying policies with the unearned portion being reported as unearned premium. These premiums can be subject to estimates based upon information received from ceding companies and any subsequent differences arising on such estimates are recorded in the period in which they are determined.

Liability for Loss and Loss Adjustment Expenses

The liability for loss and loss adjustment expenses represents management’s best estimate of the ultimate cost of all reported and incurred but not reported losses that are unpaid as of the balance sheet date. The liability for loss and loss adjustment expenses is estimated on an undiscounted basis, using individual case-basis valuation, statistical analyses, and various actuarial procedures. Management believes that the reserves for loss and loss adjustment expenses are adequate to cover the ultimate cost of losses and claims to date; however, because of the uncertainty from various sources, including changes in reporting patterns, claims settlement patterns, judicial decisions, legislation, and economic conditions, actual loss experience may not conform to the assumptions used in determining the estimated amounts for such liability at the balance sheet date. As adjustments to these estimates become necessary, such adjustments are reflected in current operations.

The Company’s losses and loss adjustment expense reserves, for both reported and unreported claims obligations, are maintained to cover the estimated ultimate liability for all of the Company’s insurance and reinsurance obligations. Losses and loss adjustment expense reserves are categorized in one of two ways: (i) case reserves, which represent unpaid losses and loss adjustment expenses as reported by cedents to the Company or as estimated by the Company’s claims adjusters retained by the Company, and (ii) incurred but not reported reserves, or IBNR reserves, which are reserves for losses and loss adjustment expenses that have been incurred, but have not yet been reported to the Company, as well as additional amounts relating to losses already reported, that are in excess of case reserves. IBNR reserves are estimates based on all information currently available to the Company and are reevaluated on a quarterly basis utilizing the most recent information supplied by the Company’s cedents and by the Company’s own claims adjusters.

For insurance business the Company generally reserves separately by line of business. The Company generally reserves for each reinsurance treaty that the Company reinsures separately, so that the Company is able to take into consideration the underlying loss development patterns of each ceding company to the extent supported in the data reported by each ceding company. While ceding companies may report their own estimates of IBNR, the Company independently analyzes the losses for each treaty, and consequently the Company may choose to establish IBNR reserves in an amount different from the amount reported by the ceding company.

Cash and Cash Equivalents

Cash and cash equivalents are carried at cost, which approximates fair value, and include all securities that, at their purchase date, have a maturity of 90 days or less.

Investments

The Company accounts for its investments generally in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”), which requires that fixed-maturity and equity securities that have readily determinable fair values be segregated into categories based upon the Company’s intention for those securities. In accordance with SFAS No. 115, the Company has classified its fixed maturity securities and equity securities as available-for-sale. The Company may sell its available-for-sale securities in response to changes in interest rates, risk/reward characteristics, liquidity needs or other factors. Investments in limited partnerships are accounted for under the equity method, at cost or at fair value, depending upon the nature of the partnership and the Company’s ownership interest. See “—Investments in partnerships and other funds” below. Short term investments are securities with a remaining maturity of less than one year at the date of purchase and are classified as available for sale.

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Fixed maturity and equity securities: Marketable fixed-maturity securities and equity securities are reported at their estimated fair values based primarily on quoted market prices from a recognized pricing service or a broker- dealer, with unrealized gains and losses, net of tax effects, excluded from net income and reported as a separate component of accumulated other comprehensive income in shareholders’ equity. Premiums and discounts on fixed maturity investments are charged or accreted to income over the anticipated life of the investment. Net investment income, consisting of interest and dividends, net of investment expenses, is recognized when earned and included in “Net investment income” in the accompanying statement of income. Realized investment gains and losses on the sale of investments are determined based on the specific identification method and are included in the accompanying statement of income.

Investments in partnerships and other funds: Investments in limited partnerships where the Company has more than a minor interest are accounted for under the equity method of accounting pursuant to Statement of Position (“SOP”) 78-9, “Accounting for Investments in Real Estate Ventures,” and classified on the balance sheet as “Investments in partnerships, equity method.” The Company’s share of net income is reported in the Company’s net investment income. The Company calculates its share of net income on the basis of the Company’s ownership percentage. Investments in limited partnerships where the Company’s interest is considered to be minor and all other fund investments are accounted for at either cost or fair value and classified on the balance sheet as “Equity securities.” For these investments, net investment income and realized gains and losses are recognized as related distributions are received. Unrealized gains (losses), net of tax effects, are excluded from net income and reported as a separate component of accumulated other comprehensive income in shareholders’ equity. The Company calculates its fair value on the basis of the Company’s ownership percentage generally using the net asset value.

Common trust securities—statutory business trusts: The Company’s investment in the common trust securities of the trusts are reported as investments in separately in the balance sheet. The securities are recorded using the equity basis of accounting, which currently approximates original cost.

Impairment of investment securities and limited partnerships results in a charge to net realized gains or losses on investments when market value decline below cost is deemed to be other-than-temporary. The Company regularly reviews all investments to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. In general, attention is focused on those securities where fair value has been less than 80% of the amortized cost or cost, as appropriate, for six or more consecutive months. In evaluating potential impairment, management considers, among other criteria: the current fair value compared to amortized cost or cost, as appropriate; the length of time the security’s fair value has been below amortized cost or cost; management’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in value; specific credit issues related to the issuer; and current economic conditions. Other-than-temporary impairment losses result in a charge to income and a permanent reduction of the cost basis of the underlying investment.

Premiums Receivable/Payable—Programs

For all policies written, CastlePoint Management has the authority and responsibility to collect, account, provide receipt for and remit premiums; and to hold all monies, including premiums, return premiums and monies received in a fiduciary capacity. Program business is currently produced by an agent appointed by CastlePoint Management; therefore premiums are agency billed and are due to CastlePoint Management net of commission. Net premiums due from agents are recorded as premiums receivable on the balance sheet. Premiums payable to insurance companies, after deducting any management fee due to CastlePoint Management, are recorded as premiums payable—programs.

Commission Income/Expenses—Programs

Direct commission revenue from the Company’s insurance services segment is earned as the related insurance policies are placed in relation to the services discussed below, which are provided in performing the Company’s program business. Agency commission expenses are commissions paid to agents, which are calculated as a percentage of premiums placed and recorded as commission expenses. The services provided by the Company include marketing and oversight of the programs. Fees for services such as policy and claims administration and insurance technology are negotiated at market terms. When such services are rendered, the fees for such services are charged either as an amount per policy or per claim or as a percentage of premium. The Company recognizes such

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fees as income over the period in which such services are rendered. In addition, the Company may source these services from Tower pursuant to the service and expense sharing agreement described in Note 3—“Related Party Transactions.”

Assumed Commission Expense

Assumed commission expense on reinsurance premiums assumed is expensed in a manner consistent with the recognition of reinsurance premiums assumed, generally on a pro-rata basis over the terms of the policies reinsured. Certain reinsurance agreements contain provisions where the ceding commission rates vary based on the loss experience under the agreements. The Company records adjustments to the assumed commission expense in the period in which changes in the estimated loss ratio are determined. The Company records such assumed commission expense based on its current estimate of subject losses.

Deferred Acquisition Costs

Acquisition costs represent the costs of writing business that vary with, and are primarily related to, the production of insurance and reinsurance business. Policy and contract acquisition costs, including assumed commissions and other direct operating expenses are deferred and recognized as expense as related premiums are earned. The Company considers anticipated investment income in determining the recoverability of these costs and believes they are fully recoverable.

Debt Issuance Cost

The issuance costs related to the issuance of the junior subordinated debentures by CastlePoint Management and CastlePoint Bermuda Holdings have been recorded as deferred financing fees and are being amortized over the term of the debentures using the effective interest method.

Income Taxes

The Company records taxes on its U.S. subsidiaries in accordance with SFAS No. 109, “Accounting for Income Taxes.” Under SFAS No. 109, income taxes are recognized for tax payable or refundable for the current year and deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In accordance with SFAS No. 109, deferred tax assets and liabilities are determined using enacted tax rates applicable to the period in which the temporary differences are expected to be recovered or settled. Accordingly, the current period income tax provision can be affected by the enactment of new tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

SFAS No. 109 requires that all deferred income tax assets be given full recognition, subject to the possible provision of an allowance when it is determined that this asset is unlikely to be realized. The Financial Accounting Standards Board (“FASB”) developed a threshold by which the valuation is to be measured, the “more-likely-than-not” criterion. The process of evaluating whether a valuation allowance is needed involves the weighing of both positive and negative factors to determine whether, based on the available evidence, it is more likely than not that the deferred tax assets will be realized. Positive factors (those suggesting that an allowance is not necessary) that the Company considers include: evidence of sufficient future taxable income and evidence of the existence of prudent tax planning strategies that would permit realization of the deferred tax asset.

In June 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) , an interpretation of FASB Statement No. 109. FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement for uncertain tax positions taken or expected to be taken in income tax returns. The relevant company has to determine whether it is more likely than not that the position would be sustained upon examination by tax authorities. Tax positions that meet the more likely than not threshold are then measured using a probability weighted approach recognizing the largest amount of tax benefit that has greater than a 50% likelihood of being realized upon ultimate settlement. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company reviewed whether it is more likely than not that its tax positions will be

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sustained upon examination and concluded that it had no uncertain tax positions as of December 31, 2007 that meet the FIN 48 criteria for measurement and disclosure.

Equity Compensation Plans

The Company accounts for its share compensation plans in accordance with SFAS No. 123-R, “Share-Based Payment.” Accordingly, the Company recognizes the compensation expense for awards of stock options and restricted stock, based on the fair value of the award on the date of grant, over the vesting period, which is the requisite service period. The fair value of the awards will amortize ratably over the vesting period as a charge to compensation expense and an increase to additional paid in capital in Shareholders’ Equity.

Earnings Per Share

In accordance with SFAS No. 128, “Earnings Per Share”, the Company measures earnings per share at two levels: basic earnings per share and diluted earnings per share. Basic earnings per share is calculated by dividing income allocable to common shareholders by the weighted average number of shares outstanding during the period, excluding any issued but unvested restricted shares. Diluted earnings per share is calculated by dividing income allocable to common shareholders by the weighted average number of shares outstanding during the period, as adjusted for the potentially dilutive effects of stock options, warrants, unvested restricted shares and/or convertible preferred stock, unless such common equivalent shares are anti-dilutive.

Offerings and Incorporation Expense

Offering expenses incurred in connection with the Company’s initial public offering in March 2007 and the common share offering in April 2006, were recorded as a reduction in paid in capital. Offering expenses incurred in connection with the Company’s registration statement for an offering by selling shareholders in August 2007, were recorded as expense.

Incorporation expenses not related to the raising of capital are expensed as incurred and included in other operating expense.

Intangible Assets

The Company has recorded, as an identifiable intangible asset, state insurance licenses acquired through the purchase of CastlePoint Insurance Company. The Company believes that these licenses have an indefinite useful life. In accounting for such assets, the Company follows SFAS No. 142, “Goodwill and Other Intangible Assets.” In accordance with SFAS No. 142, the Company does not amortize the licenses but evaluates the recoverability of the assets on an annual basis. An impairment loss is recognized if the carrying value of an intangible asset is not recoverable and its carrying value exceeds its fair value. No impairment losses were recognized in 2007.

Fixed Assets

Furniture, computer equipment, leasehold improvements and software are reported at cost less accumulated depreciation and amortization. Depreciation and amortization is provided using the straight line method over the estimated useful lives of the assets. The Company estimates the useful life for computer equipment and software is for three years, servers for five years, furniture for seven years and leasehold improvements for the term of the lease.

Variable Interest Entities

In December 2003, the FASB issued FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (“FIN46 (R)”), which establishes accounting guidance for the identification of a variable interest entity (“VIE”) and the consolidation of a VIE by the party deemed to be the primary beneficiary. The primary beneficiary of a VIE is the party that absorbs a majority of the VIE’s expected losses, receives a majority of the VIE’s expected residual returns, or both, as a result of ownership, controlling interest, contractual relationship or other business relationship

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with a VIE. The Company has applied the guidance in FIN 46(R) in determining that the Trusts meet the definition of a VIE and that the Company is not the primary beneficiary. See Note 17—“Debt.”

Segment Reporting

The Company manages its operations through three reportable segments: insurance, reinsurance and insurance services. See Note 15—“Segment Information.”

Recent Accounting Developments

In February 2006, the FASB issued SFAS No.155, “Accounting for Certain Hybrid Financial Instruments,” an amendment of SFAS No.133 and SFAS No.140. This standard permits fair value re-measurement of an entire hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; narrows the scope exemption applicable to interest-only strips and principal-only strips from SFAS 133 and clarifies that only the simplest separations of interest payments and principal payments qualify as not being subject to the requirements of SFAS 133; establishes a requirement to evaluate interests in securitized financial assets to identify interests that are free standing derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement is intended to require more consistent accounting that eliminates exemption and provides a means to simplify the accounting for hybrid financial instruments. This statement is effective for all financial instruments acquired or issued after January 1, 2007. The implementation of SFAS No. 155 has not had a material impact on the Company’s financial position or operating results.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This new standard provides guidance for using fair value to measure assets and liabilities. Under SFAS 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity operates. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, SFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data such as the reporting entity’s own data. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. The provisions of SFAS 157 are effective for financial statements issued for years beginning after November 15, 2007. The Company has determined the implementation of SFAS 157 will not have a material impact on its consolidated results of operations and financial position.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This statement permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. The objective is to improve financial reporting by providing the entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This standard also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This statement is expected to expand the use of fair value measurement. The standard is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently reviewing the impact SFAS 159 will have on its consolidated results of operations and financial position. The Company did not elect to implement the fair value option for eligible financial assets and liabilities as of January 1, 2008.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”). This standard establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS No. 141(R) also provides guidance for recognizing and measuring the goodwill acquired in the

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business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact that the adoption of SFAS No. 141(R) will have on its consolidated financial position or results of operations.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51” (“SFAS No. 160”). This standard establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact that the adoption of SFAS No. 160 will have on its consolidated financial position or results of operations.

Note 3—Related Party Transactions

The Company and/or its subsidiaries are parties to a Master Agreement, certain reinsurance agreements, management agreements and service and expense sharing agreements with Tower and/or its subsidiaries. In addition, CastlePoint Re participates as a reinsurer on certain of Tower’s excess of loss reinsurance agreements. The transactions listed below are classified as related party transactions, as each counterparty may be deemed to be an affiliate of the Company.

The Company sub-leases the space in New York, New York for the headquarters of its subsidiaries, CastlePoint Management and CastlePoint Insurance Company, from Tower Insurance Company of New York, a subsidiary of Tower, at its cost.

Reinsurance Agreements: In April 2006, CastlePoint Re entered into three multi-year quota share reinsurance agreements with Tower’s insurance subsidiaries which will expire in April 2010: the brokerage business quota share reinsurance agreement, the traditional program business quota share reinsurance agreement, and the specialty program business and insurance risk-sharing business quota share reinsurance agreement. In 2007, under the brokerage business quota share agreement 49% was ceded to CastlePoint Reinsurance Company in the first quarter; 40% to CastlePoint Reinsurance Company and 9% to CastlePoint Insurance Company in the second quarter; and 40% was ceded to CastlePoint Reinsurance Company in the third and fourth quarter. There were no changes during the year ended December 31, 2007 to the arrangements with Tower pursuant to the traditional program business quota share reinsurance agreement and the specialty program business and insurance risk-sharing business quota share reinsurance agreement which ceded 50% and 85% respectively.

The Company and Tower jointly submitted two aggregate excess of loss reinsurance agreements for the brokerage business for review by the New York State Insurance Department. These agreements remain subject to regulatory review and are deemed approved and in effect. The purpose of the two aggregate excess of loss reinsurance agreements is to cause the loss ratios for the brokerage business of CastlePoint Insurance Company and Tower to be approximately equal. Under the first agreement, Tower will reinsure 85% (the percentage will be adjusted to equal Tower’s actual percentage of the total brokerage business written by Tower and CastlePoint Insurance Company) of CastlePoint Insurance Company’s brokerage business losses that are in excess of a specified loss ratio for brokerage business written through Tower Risk Management Corp., and under the second agreement CastlePoint Insurance Company will reinsure 15% (the percentage will be adjusted to equal CastlePoint’s actual percentage of the total brokerage business written by Tower and CastlePoint) of Tower’ brokerage business losses that are in excess of a specified loss ratio for brokerage business. Under both agreements, the loss ratio is calculated net of premiums paid for and losses recovered from specific excess reinsurance, property catastrophe reinsurance and facultative reinsurance, if any, which inure to the benefit of the agreement, and before any cessions to quota share reinsurance. For the three months ended December 31, 2007 premiums ceded to Tower for the aggregate excess of loss treaty were $0.8 million and premiums assumed from Tower for the same corresponding aggregate excess of loss treaty were $0.8 million. Also CastlePoint Insurance Company ceded net $0.3 million incurred losses for the same period.

Premiums receivable from and losses payable to Tower as of December 31, 2007 were $105.4 million and $1.7 million, respectively, compared to $42.4 million and $3.5 million as of December 31, 2006. The unearned premium reserves and loss reserves with Tower as of December 31, 2007 were $175.2 million and $108.8 million, respectively, compared to $80.7 million and $33.2 million as of December 31, 2006. Deferred acquisition costs were

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$61.7 million and $28.0 million as of December 31, 2007 and December 31, 2006, respectively. The total underwriting impact related to the agreements with Tower discussed above is as follows:

The following summarizes the consolidated related party transactions as of December 31, 2007 and 2006:

	December 31,
	2007		2006
	($in thousands)
Net premiums earned	$	201,959	$	76,963
Net losses incurred		103,154		39,940
Net commission expense		72,835		26,534

Management Agreements: In June 2007 the Company and Tower filed alternative insurance risk-sharing agreements and related business management agreements for brokerage business so that Tower’s brokerage business would be written directly in CastlePoint Insurance Company with Tower Risk Management as the program manager of the business for fees which are explained below. The New York State Insurance Department has approved the business management agreement regarding the brokerage business and the aggregate excess of loss agreements in connection with the insurance risk sharing are considered to be deemed approved.

The business management agreement for brokerage business dated July 1, 2007 with Tower Risk Management Corp. has been approved by the New York State Insurance Department and provides that Tower Risk Management Corp., a subsidiary of Tower, is authorized to write brokerage business using CastlePoint Insurance Company ‘s policies and manage such business for CastlePoint Insurance Company. For managing such business, Tower Risk Management Corp. is paid a management fee calculated using the sliding scale formula that was originally intended by the Master Agreement to be paid to Tower Insurance Company of New York for managing the brokerage business, net of specific aggregate and property catastrophe excess of loss reinsurance costs. The sliding scale commission provides that Tower Risk Management’s commission for the brokerage business is 31% of net premiums written which can increase to 33% or decline to 28% depending on the loss ratio.

CastlePoint Management is a party to program management agreements with Tower and certain of its subsidiaries, whereby CastlePoint Management performs certain underwriting and claims services with respect to the traditional program business and specialty program business. Premiums collected and due to Tower for program business at December 31, 2007 and 2006 were $8.6 million and $1.1 million respectively. For years ended December 31, 2007 and 2006, CastlePoint Management recorded commission revenue of $6.3 million and $2.3 million, respectively, from Tower.

Service and Expense Sharing Agreements: CastlePoint Management is a party to service and expense sharing agreements with Tower and certain of its subsidiaries. Tower charged CastlePoint Management $0.7 million and $0.5 million for the years ended December 31, 2007 and 2006 respectively, for services rendered in support of CastlePoint Management’s infrastructure as contemplated by the service and expense sharing agreements.

In addition to the services rendered in support of CastlePoint Management’s infrastructure, Tower rendered services for CastlePoint Management’s program business contemplated by the service and expense sharing agreements. For these services, Tower charged CastlePoint Management $0.5 million and $0.2 million for the years ended December 31, 2007 and 2006 respectively.

Note 4—Investments

The amortized cost and fair value of the total available-for-sale investments as of December 31, 2007 and 2006 were as follows (in 000’s):

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	Cost or		Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	($in thousands)
December 31, 2007:
Bonds:
US Government and agencies securities	$	8,598	$	214	$	—		$	8,812
Corporate fixed maturities		132,268		1,372		(1,370	)		132,270
Mortgage & asset-backed securities		343,623		3,124		(2,857	)		343,890
Total fixed maturities		484,489		4,710		(4,227	)		484,972
Equity Securities		44,036		28		(1,662	)		42,402
Total available-for-sale investments	$	528,525	$	4,738	$	(5,889	)	$	527,374
December 31, 2006:
Bonds:
U.S. Government and agencies securities	$	18,650	$	19	$	(9	)	$	18,660
Corporate fixed maturities		88,785		398		(22	)		89,161
Mortgage & asset-backed securities		186,443		1,342		(78	)		187,707
Total fixed maturities		293,878		1,759		(109	)		295,528
Short term investments		51,626		12		(1	)		51,637
Total available-for-sale investments	$	345,504	$	1,771	$	(110	)	$	347,165

A summary of the amortized cost and fair value of the Company’s investment in fixed-maturity securities as of December 31, 2007, and 2006 by contractual maturity is shown below. Actual maturity may differ from contractual maturity because certain borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.

Amortized cost and fair value of the Company’s investment in fixed-maturity securities as of December 31, 2007 and 2006 is shown below:

	Amortized		Estimated
Years to Maturity	Cost		Fair Value
	($ in thousands)
December 31, 2007
Less than one year	$	25,482	$	25,541
One to five years		73,578		74,646
Five to ten years		15,440		15,507
Due after ten years		26,366		25,388
Mortgage and asset-backed securities		343,657		343,890
Total fixed maturities	$	484,523	$	484,972
December 31, 2006
Less than one year	$	8,557	$	8,558
One to five years		96,622		96,996
Five to ten years		2,256		2,266
Mortgage and asset-backed securities		186,443		187,707
Total fixed maturities	$	293,878	$	295,527

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Major categories of the Company’s net investment income are as follows:

	December 31,
	2007			2006
	($ in thousands)
Income:
Fixed maturity securities:	$	23,843		$	8,908
Short term securities		164			100
Dividends on common stock		2,209			—
Dividends on preferred stock		498			250
Limited Partnerships		(1,497	)		—
Cash and cash equivalents		5,523			2,378
Total	$	30,740		$	11,636
Expenses:
Investment expenses	$	1,234		$	452
Net Investment income	$	29,506		$	11,184

Pursuant to the equity method of accounting, the results of the Company’s investment in a limited partnership (loss of $1.5 million) for the year ended December 31, 2007 was included in net investment income. This loss is comprised of the Company’s equity share of net investment income of $0.5 million, realized gains of $0.2 million and an unrealized loss of $2.2 million. There were no investments in limited partnerships in 2006.

Proceeds from the sale of fixed maturity securities were $302.6 million and $127.3 million as of December 31, 2007 and December 31, 2006, respectively. The Company’s net realized gains/(losses) and the change in net unrealized appreciation/(depreciation) on investments, net of deferred taxes, are as follows:

F-17

	December 31,
	2007			2006
	($ in thousands)
Fixed maturities:
Gross realized gains	$	864		$	41
Gross realized losses		(158	)		(6	)
Net realized gains		706			35
Equities:
Gross realized gains		—			—
Gross realized losses		(8,945	)		—
Net realized losses		(8,945	)		—
Cash equivalents:
Gross realized gains		9			—
Gross realized losses		(6	)		—
Net realized gains		3			—
Total net realized (losses) gains	$	(8,236	)	$	35
Change in net unrealized (depreciation) appreciation on investments:
Fixed maturities—available for sale		(1,167	)		1,661
Equities—available for sale		(1,645	)		—
Total investments	$	(2,812	)	$	1,661
Deferred taxes		104			(4	)
Change in net unrealized (depreciation) appreciation on investments, net of tax		(2,708	)		1,657
Total net realized (losses) gains and change in net unrealized (depreciation) appreciation on investments	$	(10,944	)	$	1,692

Substantially all of the Company’s invested assets that were in an unrealized loss position at December 31, 2007 and 2006 had all been held for less than 12 months and are as follows:

F-18

			Less than 12 Months							More than 12 Months							Total
	Number of						Unrealized							Unrealized							Unrealized
	Positions		Book Value		Fair Value		losses			Book Value		Fair Value		losses			Book Value		Fair Value		losses
	($ in thousands)
As of December 31, 2007
Corporates		17	$	28,206	$	26,836	$	(1,370	)	$	—	$	—	$	—		$	28,206	$	26,836	$	(1,370	)
Mortgage & asset backed		23		77,757		74,911		(2,846	)		3,669		3,658		(11	)		81,426		78,569		(2,857	)
Total fixed maturities		40		105,963		101,747		(4,216	)		3,669		3,658		(11	)		109,632		105,405		(4,227	)
Equities		9		21,383		19,721		(1,662	)		—		—		—			21,383		19,721		(1,662	)
Total		49	$	127,346	$	121,468	$	(5,878	)	$	3,669	$	3,658	$	(11	)	$	131,015	$	125,126	$	(5,889	)
As of December 31, 2006
US Gov’t/Agency		3	$	4,660	$	4,670	$	(10	)	$	—	$	—	$	—		$	4,660	$	4,669	$	(9	)
Corporates		10		11,693		11,671		(22	)		—		—		—			11,693		11,671		(22	)
Mortgage & asset backed		17		31,822		31,744		(78	)		—		—		—			31,822		31,744		(78	)
Total fixed maturities		30		48,175		48,085		(110	)		—		—		—			48,175		48,084		(109	)
Short term		2		1,757		1,757		—			—		—		—			1,757		1,756		(1	)
Total		32	$	49,932	$	49,842	$	(110	)	$	—	$	—	$	—		$	49,932	$	49,840	$	(110	)

At December 31, 2007, the Company had 49 securities in a gross unrealized loss position amounting to $5.9 million of which $4.3 million (40 securities) was attributable to fixed maturities and $1.6 million (9 securities) was attributable to equity securities. Of the $4.3 million attributable to fixed maturities, $3.6 million was rated investment grade. The remaining $0.7 million unrealized loss was attributed to one security rated BB. This is a commercial mortgage backed security (CMBS) that represents the Company’s single largest unrealized loss in a fixed maturity security. This security has been in an unrealized loss position for less than 6 months. The market value at December 31, 2007 of the security is 66% of amortized cost. The largest single unrealized loss in an equity security was $0.7 million, representing an investment in a fund primarily comprised of collateralized bank loans.

Corporate Fixed Maturities — The unrealized loss position of $1.4 million in corporate fixed maturities relates to 17 securities all rated BBB or above and all in an unrealized loss position for less than 12 months as of December 31, 2007. The security with the largest unrealized loss in this group of $0.6 million is Lehman Brothers Holdings, Inc, issued May 17, 2007, with a coupon of 5.86% and a book yield of 6.04%, rated A-. The brokerage sector has been negatively impacted by the general market disruptions caused by the significant decline in market liquidity. The remaining corporate securities are distributed over the following industries — banks, brokerage, insurance, other finance, media, pipelines and utilities. The impairment on all fixed corporate maturities is considered temporary at December 31, 2007 and is generally the result of widening spreads during the fourth quarter. The Company has both the ability and intent to hold these securities until a full recovery of fair value, which may be maturity.

Mortgage and Asset Backed Securities — The unrealized loss in mortgage and asset backed securities of $2.9 million relates to 23 issues, with 18 issues rated AAA ($0.2 million), 4 issues rated BBB ($2.0 million) and 1 issue rated BB ($0.7 million). All of these securities, except for certain positions with unrealized losses amounting to $11,000, had been in an unrealized loss position for less than 12 months as of December 31, 2007.. The five securities rated BBB and BB are CMBS and were purchased after June 30, 2007. Since all five securities are rated less than AA, a cash flow analysis was performed pursuant to Emerging Issues Task Force (“EITF”) 99-20. None of these securities indicated a reduction in cash flow on a present value basis from what was originally expected at the date of purchase. The impairment on all mortgage and asset backed securities, except as discussed below, is considered temporary at December 31, 2007 and is due to the market disruptions caused by the significant decline in market liquidity affecting this sector. The Company has both the ability and intent to hold these securities until a full recovery of fair value, which may be maturity.

F-19

Equity Securities — The unrealized loss in equity securities of $1.7 million relates to 9 issues. These securities are in an unrealized loss position for less than 12 months as of December 31, 2007. The largest single equity security in an unrealized loss position at December 31, 2007 was an investment in a fund comprised primarily of collateralized bank loans with an unrealized loss of $0.7 million. The loans have floating rates. The collateralization makes the loans structurally senior in priority to corporate bonds from the same issuers, providing additional credit protection. This security has been in an unrealized loss position for less than 6 months. The unrealized loss is due to market disruptions caused by the significant decline in market liquidity and the general spread widening during the fourth quarter. The remaining unrealized loss of $1.0 million is comprised of eight preferred stock issues with no one unrealized loss at December 31, 2007 exceeding $0.2 million. Other than the securities discussed below, the Company has both the ability and intent to hold all equity securities in a loss position at year end, until a full recovery of fair value.

At December 31, 2007, the company recorded charges for other-than-temporary impairments of $9.0 million primarily relating to an investment in a fund, an investment in three Asset Backed Securities backed by subprime credit and four equity securities.

• The unrealized loss on the fund was $7.1 million and was in an unrealized loss position for 7 -12 months. The market value at December 31, 2007 was 34% of cost. The fund consists of primarily floating rate mortgage and asset backed securities with 40% of the fund’s assets invested in home equity loans backed by subprime mortgages. The average credit rating of the fund, based on the ratings of the underlying securities, is BBB. We sold our position in the fund on February 1, 2008 and realized a loss of $0.2 million, after recording the other-than-temporary charge at year end.

• The unrealized loss on the three ABS backed by subprime credit was $33,000 at year end and were in an unrealized loss position for less than 6 months. They are rated AAA. We have subsequently sold these 3 securities in February 2008 and recorded a $0.1 million realized loss, after recording the other-than-temporary charge at year end.

• The unrealized loss on the four equity securities, all of which are mortgage real estate investment trusts (“REITs”), was $1.8 million and these securities were in an unrealized loss position for less than 12 months. The market values at December 31, 2007 were 54% of cost. These 4 equity securities are all publicly traded mortgage REITs whose purpose is to own various mortgage backed securities, including CMBS and agency and non-agency residential MBS. To date, these equity securities continue to generate the earnings necessary to continue the dividend payments. However, the biggest risk of not generating earnings and therefore discontinuing dividend payments is if the funds are forced to unwind holdings due to the inability to borrow against current holdings due to market prices that are based on distressed sale levels vs. expected longer term value. Based on the magnitude of the unrealized loss and the time period it may take for full recovery, the Company does not necessarily have the intent to hold these securities until full recovery. Therefore the Company considered them other-than-temporarily impaired at December 31, 2007.

Management believes the securities that are other-than-temporarily impaired at December 31, 2007 have been identified and are properly reflected in the financial statements.

F-20

Note 5—Property-Casualty Insurance Activity

(a) Premiums written, ceded and earned are as follows:

	Direct			Assumed			Ceded			Net
	($ in thousands)
2007
Premiums written	$	86,604		$	297,040		$	(7,419	)	$	376,225
Change in unearned premiums		(71,899	)		(59,437	)		3,475			(127,861	)
Premiums earned	$	14,705		$	237,603		$	(3,944	)	$	248,364
2006
Premiums written	$	—		$	165,151		$	—		$	165,151
Change in unearned premiums		—			(86,181	)		—			(86,181	)
Premiums earned	$	—		$	78,970		$	—		$	78,970
2005
Premiums written	$	—		$	—		$	—		$	—
Change in unearned premiums		—			—			—			—
Premiums earned	$	—		$	—		$	—		$	—

(b) The components of the liability for loss and loss adjustment expenses as of December 31, 2007 and 2006 are as follows:

	Gross		Reinsurance
	Liability		Recoverables
	($ in thousands)
December 31, 2007
Case-basis reserves	$	52,601	$	—
IBNR reserves		68,825		—
Total	$	121,426	$	—
December 31, 2006
Case-basis reserves	$	11,813	$	—
IBNR reserves		22,379		—
Total	$	34,192	$	—

Activity in the liability for loss and loss adjustment expenses for 2007 and 2006 is summarized as follows:

F-21

	2007			2006
	($ in thousands)
Balance at January 1	$	34,192		$	—
Less reinsurance recoverables		—			—
		34,192			—
Incurred related to:
Current year		132,585			40,958
Prior years		(1,250	)		—
Total incurred		131,335			40,958
Loss portfolio transfer		—			21
Paid related to:
Current year		24,348			6,787
Prior years		19,753			—
Total paid		44,101			6,787
Net balance at December 31,		121,426			—
Add reinsurance recoverables		—			—
Balance at December 31	$	121,426		$	34,192

During calendar year 2007, the Company experienced favorable development due to the Company’s brokerage business quota share reinsurance agreement with Tower and, to a lesser extent, to Tower’s property and casualty excess of loss reinsurance agreements, in which CastlePoint Re participates. The favorable development in both treaties was due to lower than expected loss emergence.

The Company’s reserves represent management’s best estimate of the ultimate unpaid cost of all losses and loss adjustment expenses incurred. Actuarial methodologies used to estimate reserves include, but are not limited to, the paid and incurred loss development methods, the loss ratio method, and the paid and incurred Bornhuetter-Ferguson methods. Due to the uncertainty associated with the reserving process, the ultimate liability may differ, perhaps significantly, from the amounts currently reserved by the Company.

The Company does not have exposure to asbestos and environmental claims.

The Company does not discount reserves and books all reserves on an undiscounted basis.

Note 6—Deferred Acquisition Costs

Acquisition costs incurred that have been deferred and amortized to income in 2007 and 2006 are as follows:

	December 31,
	2007			2006
	($ in thousands)
Deferred acquisition costs at January 1,	$	30,363		$	—
Cost paid during period:
Commission and brokerage		133,084			58,794
Other underwriting and acquisition costs		1,228			974
Total cost paid during period		134,312			59,768
Amortization		(91,602	)		(29,405	)
Deferred acquisition costs at December 31,	$	73,073		$	30,363

Note 7—Capital Stock
(a) Authorized and issued

F-22

The Company’s authorized share capital is 100,000,000 common shares with a par value of $0.01 each, of which there were 38,289,430 and 29,580,000 common shares issued and outstanding as of December 31, 2007 and 2006 respectively.

Tower currently holds 6.7% of the Company’s outstanding common shares. The Company also issued ten-year warrants to Tower to purchase an additional 1,127,000 of the Company’s common shares at an exercise price of $10.00 per share, which shares currently represent 2.7% of the common shares outstanding on a fully-diluted basis. The shares held by Tower, together with the shares issuable upon exercise of the Tower warrants, currently represent 9.3% of the Company’s outstanding common shares on a fully-diluted basis.

The holders of the Company’s common shares are entitled to receive dividends and are allocated one vote per share, provided that, if the controlled shares of any shareholder or group of related shareholders constitute more than 9.5% percent of the outstanding common shares of the Company, their voting power will be reduced to 9.5% percent. There are various restrictions on the ability of certain shareholders to dispose of their shares.

(b) Warrants

The warrants were issued to Tower in recognition of the full value received from Tower as the Company’s sponsor, which included the development of the Company’s business strategy, the development of the private offering to raise initial funds for the Company’s operations, and the transfer of certain executives to the Company. In consideration of Tower’s contribution, the Company issued warrants to Tower to purchase up to 1,127,000 common shares of the Company. The 1,127,000 common shares issuable upon exercise of the warrants represent what the company believed would be an acceptable number of common shares to grant to Tower to compensate Tower for its contributions to the Company. The warrants became effective as of April 6, 2006 and will expire on April 6, 2016. The warrants are exercisable at a price per share of $10.00, equal to the price per share paid by investors in the private offering.

The warrants may be settled using either the physical settlement or net-share settlement methods. The warrants have been classified as equity instruments, in accordance with EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” The warrants were initially measured at an aggregate fair value of $4.6 million and recorded as additional paid-in capital with an offsetting charge to other operating expenses in the Statement of Income.

The fair value of the warrants issued was estimated on the date of grant using the Black-Scholes option-pricing model. The volatility assumption used, of 25%, was derived from the historical volatility of the share price of a range of publicly-traded Bermuda reinsurance companies with similar types of business to that of the Company. No allowance was made for any potential illiquidity associated with the absence of public trading of the Company’s shares at that time. The other assumptions in the option pricing model were as follows: risk free interest rate of 5%, expected life of ten years and a dividend yield of 1%.

Note 8—Equity Compensation Plans

2006 Long-Term Equity Compensation Plan

The Company adopted the provision of SFAS No. 123-R effective January 1, 2006 and granted all of its stock compensation after that date. The compensation cost of awards is based on the grant-date value of those awards as calculated under SFAS No. 123-R and amortized over the vesting period. The Company’s 2006 Long-Term Equity Compensation Plan (the “Plan”) provides for grants of any option, stock appreciation right (“SAR”), restricted share, restricted share unit, performance share, performance unit, dividend equivalent or other share-based award. The total number of shares initially reserved for issuance under the Plan was 1,735,021 common shares, of which 1,126,166 options were issued to senior management and non-employee directors of the Company and its subsidiaries in 2006, and 556,254 options were issued to certain officers and employees and non-employee directors of the Company and its subsidiaries in 2007. In 2007, the number of shares authorized under the Plan was increased by 1 million shares,

F-23

to a total of 2,735,021. This increase was approved on February 27, 2007 by the Company’s Board of Directors, and by the shareholders at the Company’s Annual General Meeting of Members on July 30, 2007.

The Plan is administered by the Compensation Committee of the Board of Directors of the Company. The stock options granted to employees vest in three equal installments (14 months) over 42 months of service. For non-employee directors, the cost is expected to be recognized over the vesting period of 12 months for grants dated April 4, 2006 and over the vesting period of 36 months for grants dated March 22, 2007. Each of the Company’s three current non-employee directors received 4,094 restricted common shares during the year ended December 31, 2007, which vest after 12 months of service. No SARs have been granted to date.

The fair value of the options granted in 2006 was estimated using the Black-Scholes pricing model as of April 4, 2006, the date of the initial grant, with the following weighted average assumptions: risk free interest rate of 5.0%, dividend yield of 1.0%, volatility factors of the expected market price of the Company’s common shares of 25.0% and a weighted-average expected life of the options of 10 years. The fair value measurement objective of SFAS No. 123-R is achieved using the Black-Scholes model as the model (a) is applied in a manner consistent with the fair value measurement objective and other requirements of SFAS No.123-R, (b) is based on established principles of financial economic theory and generally applied in that field and (c) reflects all substantive characteristics of the instrument.

The fair value of the options granted in 2007 was estimated using the Black-Scholes pricing model as of March 21, 2007 and April 30, 2007 the date of the grants, respectively with the following weighted average assumptions: risk free interest rate of 5.0%, dividend yield of 1.0%, volatility factors of the expected market price of the Company’s common shares of 25.0% and a weighted-average expected life of the options of 6.2 years. The fair value measurement objective of SFAS No. 123-R is achieved using the Black-Scholes model consistent with the paragraph above.

Stock Options

The following table provides an analysis of stock option activity for the year ended December 31, 2007 and 2006:

	2007					2006
				Weighted					Weighted
				Average					Average
	Number of			Exercise		Number of			Exercise
	Shares			Price		Shares			Price
STOCK OPTIONS
Outstanding, beginning of period		1,082,666		$	10.00		—			—
Granted at market value 3-22-07, 04-04-06 respectively		539,447			14.50		1,126,166			10.00
Granted at market value 4-30-07		16,807			15.25		—			—
Forfeitures and expirations		(20,137	)		14.50		(43,500	)		10.00
Exercised		—			—		—			—
Outstanding, end of period		1,618,783			11.50		1,082,666			10.00
Exercisable, end of period		376,133			10.00		—			—
Weighted average fair value per share of options granted					4.28					4.09

Options outstanding as of December 31, 2007 and 2006 are shown on the following schedules:

F-24

	Options outstanding					Options exercisable
			Average
			Remaining
	Number of		Contractual	Average		Number of		Average
Range of Exercise Prices	Shares		Life	Exercise Price		Shares		Exercise Price
December 31, 2007:
$10 — 2006		1,082,666	8.25 years	$	10.00		376,133	$	10.00
$14.5 — 03/22/07		519,310	9.25 years	$	14.50		—		—
$15.25 — 04/30/07		16,807	9.33 years	$	15.25		—		—
Total Options		1,618,783	8.58 years	$	11.50		376,133	$	10.00
December 31, 2006:
$10.00		1,082,666	9.25 years	$	10.00		—		—
Total Options		1,082,666	9.25 years	$	10.00		—		—

As of December 31, 2007, and 2006 there was $4.0 million and $3.4 million of unrecognized compensation costs related to 1,242,650 and 1,082,666 non-vested stock options, respectively. For employees, the cost is expected to be recognized over the vesting periods of the individual options which extend up to 42 months. For non-employee directors, the cost is expected to be recognized over the vesting period of 12 months for grants dated April 4, 2006 and over the vesting period of 36 months for grants dated March 22, 2007. For the years ended December 31, 2007 and 2006, the Company recognized $2.0 million and $1.0 million of compensation expense related to share-based compensation, respectively.

As of December 31, 2007 there were $0.1 million of unrecognized compensation costs related to 12,282 non-vested restricted stock grants for non-employee directors. These will vest over 12 months.

Note 9 —Taxation

Bermuda

Under current Bermuda law, the Company has received an undertaking from the Bermuda government exempting it from all local income, withholding and capital gains taxes until March 28, 2016. At the present time, no such taxes are levied in Bermuda.

United States

The Company and its non-U.S. subsidiaries believe that they do not “engage in a trade or business” in the United States. Accordingly, the Company and its non-U.S. subsidiaries have not recorded any provision for U.S. taxation.

The Company’s U.S. subsidiaries, CastlePoint Management and CastlePoint Insurance Company, are subject to income taxes and have recorded the appropriate balances for current and deferred income taxes under SFAS No. 109 as follows:

	December 31, 2007			December 31, 2006
	($in thousands)
Current federal income tax expense	$	—		$	2
Current state income tax expense		—			—
Deferred federal and state income tax benefit		(5,857	)		(1,095	)
Income tax benefit	$	(5,857	)	$	(1,093	)

F-25

Deferred tax assets and liabilities are determined using enacted tax rates applicable to the period the temporary differences are expected to be recovered or net operating losses utilized. Accordingly, the current period income tax provision can be affected by the enactment of new tax rates. The net deferred income taxes on the balance sheet reflect temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and income tax purposes, tax affected at a 35% rate for the period.

The component of deferred taxes is as follows:

	December 31, 2007		December 31, 2006
	($in thousands)
Deferred tax assets:
Claims reserve discount	$	488	$	—
Unearned premium		5,061		—
Stock options		653		177
Other		1,834		(4	)
Net operating losses, carried forward		8,230		916
Total deferred tax assets	$	16,266	$	1,089
Deferred tax liabilities:
Deferred acquisition costs	$	9,215	$	—
Total deferred tax liabilities		9,215		—
Net deferred income tax assets	$	7,051	$	1,089

Based upon projections of future taxable income over the periods in which the deferred tax assets are deductible, the Company believes it is more likely than not that it will realize the benefits of these deductible differences and therefore did not establish a valuation allowance for the years ended December 31, 2007 and 2006. In accordance with SFAS No. 109, the Company anticipates that the related deferred tax assets will be realized based on the generation of net commission income by CastlePoint Management and the profitable premium volume written in CastlePoint Insurance Company.

The provision for federal income tax incurred is different from that which would be obtained by applying the federal income tax rate to net income before income taxes. The items causing these differences are as follows:

	December 31, 2007			Effective Tax Rate
	($in thousands)
Income tax expense at the Federal Statutory Rate	$	9,409			35	%
Tax advantaged investments		(137	)		-1	%
State income taxes		(976	)		-4	%
Effect of foreign operations		(14,163	)		-53	%
Other		10			0	%
Income tax benefit	$	(5,857	)		-23	%

	December 31, 2006			Effective Tax Rate
	($in thousands)
Income tax expense at the Federal Statutory Rate	$	3,307			35	%
Effect of foreign operations		(4,407	)		-47	%
Other		7			0	%
Income tax benefit	$	(1,093	)		-12	%

F-26

The Company adopted the provisions of Fin 48 on January 1, 2007. The Company reviewed whether it is more likely than not that its tax positions will be sustained upon examination and concluded that it had no uncertain tax positions as of December 31, 2007 that meet the FIN 48 criteria for measurement and disclosure.

Note 10—Employee Benefit Plans

United States

The Company maintains a defined contribution Employee Pre-tax Savings Plan (the “401(k) Plan”) for its employees. The Company contributes 50% of each participant’s contribution up to 8% of the participant’s compensation.

Bermuda

The Company maintains three separate defined contribution plans for its employees, all of which are managed externally. One plan is for Bermudian employees (the “Bermuda Plan”), one is for non-U.S. and non-Bermudian employees (the “Non-Resident Plan”) and one is for U.S. citizens based in Bermuda (the 401(k) Plan). Employees are only eligible to join these plans on reaching the age of 23. For both the Bermuda and Non-Resident Plans, the Company matches the employees’ contribution at 5% of the participant’s compensation. The Company’s contribution vests over 2 years. For U.S. citizens based in Bermuda, a defined contribution Employee Pre-tax Savings Plan (401(k) Plan) is available. The Company contributes 50% of each participant’s contribution up to 8% of the participant’s compensation.

In 2007 and 2006, the Company expensed $99,395 and $31,042 for its defined contribution retirement plans, respectively. The Company does not provide defined benefit pension plans for its employees.

Note 11—Commitments and Contingencies

(a) Concentrations of credit risk

As of December 31, 2007, the Company’s assets primarily consisted of investments, cash and assumed premium receivable. The Company believes it bears minimal credit risk in its cash on deposit. Although there may be credit risk with respect to its assumed premium receivable from Tower Insurance Company of New York, an insurance company subsidiary of Tower, the Company believes these premiums will be fully collectible.

At December 31, 2007, the Company does not have aggregate investments in a single entity that are in excess of 10% of shareholders equity.

At December 31, 2007, the Company had exposure to real estate related securities in the form of mortgage backed securities (CMBS, RMBS and ABS backed by home equity loans), investment in a fund and investment in common stocks in the amount of $306.0 million or 44% of cash and invested assets. On February 1, 2008, the Company sold its investment in the fund, with an average credit rating, based on the underlying securities in the fund, of BBB, which accounted for $13.9 million of the $306.0 million of exposure at year end. The Company realized a loss of $0.2 million on this sale, after recording an impairment charge of $7.1 million at December 31, 2007. In addition, the Company sold 3 ABS securities backed by home equity loans in February 2008, all rated AAA, which accounted for $2.5 million of the $306.0 million at year end. Of the total year end mortgage related exposure of $306.0 million, $284.0 million is rated AAA, of which $154.9 million is backed by government agencies.

Subsequent to the sale of the securities post year end noted above, the Company had no exposure to subprime securities.

(b) Employment agreements

F-27

The Company has entered into various employment agreements, effective April 4, 2006 and thereafter with certain individuals. The employment agreements provide for option awards, executive benefits and severance payments under certain circumstances.

During the year ended December 31, 2007 the company did not have any accrued severance expense. During the year ended December 31 2006, the Company recorded accrued severance expense in the amount of $0.3 million for one employee.

(c) Operating leases

The Company leases and/or subleases space in Hamilton, Bermuda, Warwick, Bermuda, New York, New York and Lisle, Illinois. CastlePoint Re executed a sublease agreement for premises in Hamilton, Bermuda, as of September 1, 2006, which is expected to expire on June 30, 2012. CastlePoint Holdings, Ltd. entered into two-year sublease agreements (on behalf of two of its employees) for two residential premises in Warwick, Bermuda as of December 22, 2006 and January 1, 2007, respectively. The terms of these sublease agreements will expire December 21, 2008 and December 31, 2008, respectively. Additionally, CastlePoint Holdings, Ltd. entered in a one-year sublease agreement (on behalf of one employee) for one residential premise in Hamilton, Bermuda as of June 1, 2007. The term of this sublease will expire May 30, 2009. CastlePoint Management currently subleases office space in New York, New York from Tower Insurance Company of New York, at its cost, pursuant to an arrangement covered by the service and expense sharing agreement between these parties. CastlePoint Management entered into an agreement to lease office space in Lisle, Illinois, as of October 1, 2006, which has been extended to expire on June 30, 2008. Future minimum lease commitments for 2008 and 2009 are $1.9 million and $0.5 million, respectively and $0.8 million thereafter.

(d) Security Requirements

As required by the Company’s reinsurance agreements with its cedents , CastlePoint Re is required to collateralize amounts through a letter of credit, cash advance, funds held or a trust account. The amount of the letter of credit or trust is to be adjusted each calendar quarter, and the required amount is to be at least equal to the sum of the following contract amounts: (i) unearned premium reserve, (ii) paid loss and loss adjustment expense payable, (iii) loss and loss adjustment expenses reserves, (iv) loss incurred but not reported, (v) return and refund premiums, and (vi) less premium receivable. As of December 31, 2007 and 2006, CastlePoint Re maintained trusts and a letter of credit in the amount of $218.1 million and $97.8 million, respectively, at State Street Bank and Trust Company, a Massachusetts trust company. As of December 31, 2007 CastlePoint Insurance Company maintained a trust at the same trust company in the amount of $8.0 million. Both CastlePoint Re and CastlePoint Insurance Company earn and collect the interest on the trust funds.

Regulatory trusts

At December 31, 2007 and 2006, U.S. Treasury Notes with fair values of approximately $2.6 million and $2.5 million, respectively were on deposit with New York state to comply with the insurance laws of the state of New York, in which CastlePoint Insurance Company is licensed.

Alien Excess or Surplus Lines Insurers

Effective July 31, 2006, CastlePoint Re entered into an “Alien Excess or Surplus Lines” Trust Agreement with State Street Bank and Trust Company, a Massachusetts trust company, to establish a trust fund in the United States as security for U.S. policyholders and third party claimants in connection with seeking to qualify as an eligible or approved excess or surplus lines insurer in certain U.S. jurisdictions. As of December 31, 2007 and 2006, CastlePoint Re maintained an alien excess or surplus lines trust in the amount of $5.8 million and $6.0 million, respectively, at State Street Bank and Trust Company. CastlePoint Re earns and collects the interest on the trust funds. At this time we do not have any policyholders which would benefit from this trust.

(e) Deposit Insurance

F-28

The Company maintains its cash balances at financial institutions in both United States and Bermuda. In the United States, the Federal Deposit Insurance Corporation secures accounts up to $100,000 at these institutions. Bermuda laws do not give similar protection to Bermuda depositors or checking account users or savers. Management monitors balances in excess of insured limits and believes they do not represent a significant credit risk to the Company.

(f) Commitments through guarantees

In December 2006, the Company formed two Trusts, of which the Company owns all of the common trust securities, through CastlePoint Management. CastlePoint Holdings, Ltd. has guaranteed, on a subordinated basis, CastlePoint Management’s obligations under its junior subordinated debentures and distributions and other payments due on the Trusts’ preferred securities. These guarantees, relating to $104 million of outstanding debt, provide a full and unconditional guarantee of amounts due on the Trusts’ preferred securities. See Note 17—“Debt” for additional details.

In September 2007, the Company formed a third Trust, of which the Company owns all of the common trust securities, through CastlePoint Bermuda Holdings. CastlePoint Holdings, Ltd. has guaranteed, on a subordinated basis, CastlePoint Bermuda Holdings’s obligations under its junior subordinated debentures and distributions and other payments due on the Trust’s preferred securities. This guarantee, relating to $31 million of outstanding debt, provides a full and unconditional guarantee of amounts due on the Trust’s preferred securities. See Note 17—“Debt” for additional details.

Note 12—Statutory Financial Information and Accounting Policies

Bermuda

CastlePoint Re is registered as a Class 3 reinsurer under The Insurance Act 1978 (Bermuda), amendments thereto and related regulations (the “Insurance Act”). Under the Insurance Act, CastlePoint Re is required to prepare Statutory Financial Statements and to file a Statutory Financial Return. The Insurance Act also requires CastlePoint Re to maintain a minimum share capital and surplus of $1,000,000 and to meet a minimum solvency margin. To satisfy these requirements, CastlePoint Re was required to maintain a minimum level of statutory capital and surplus of $43.0 and $25.1 million at December 31, 2007 and 2006. CastlePoint Re was also required to maintain a minimum liquidity ratio. All requirements were met by CastlePoint Re throughout the year ended December 31, 2007 and 2006.

The statutory assets were approximately $592.5 million and $367.8 million and statutory capital and surplus was approximately $331.0 million and $243.1 million, as of December 31, 2007 and 2006, respectively.

For Bermuda registered companies, there are some differences between financial statements prepared in accordance with GAAP and those prepared on a statutory basis. Certain assets are non-admitted under Bermuda regulations and deferred policy acquisition costs have been fully expensed to income under Bermuda regulations and prepaid expenses and fixed assets have been removed from the statutory balance sheet under Bermuda regulations.

United States

For regulatory purposes, CastlePoint Insurance Company, domiciled in the state of New York, prepares its statutory basis financial statements in accordance with practices prescribed or permitted by the statutory accounting practices of CastlePoint Insurance Company’s state of domicile, New York, which differ in certain significant respects from GAAP. Prescribed statutory accounting practices (SAP) include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (NAIC). Permitted statutory accounting practices encompass all accounting practices that are not prescribed; such practices differ from state to state, may differ from company to company within a state, and may change in the future.

For the years ended December 31, 2007 and 2006, CastlePoint Insurance Company reported statutory basis surplus with respect to policyholders of $59.6 million and $8.4 million, respectively, and was required to maintain

F-29

minimum capital and surplus of $4.0 million and $4.0 million, respectively, in accordance with New York Insurance Law.

Note 13—Fair Value of Financial Instruments

SFAS No. 107, “Disclosure about Fair Value of Financial Instruments,” requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the balance sheet, for which it is practicable to estimate fair value. The Company’s assets and liabilities in the balance sheet approximate fair value, except for balances relating to reinsurance contracts which are not in the scope of SFAS No. 107. The Company uses the following methods and assumptions in estimating the fair value of the financial instruments presented:

Cash and cash equivalents and short term investments: The carrying amounts approximate fair values.

Investments: Fair value disclosures for investments are included in Note 4—“Investments.”

Subordinated debentures: The carrying values reported in the accompanying balance sheets for these instruments approximate fair value due to the stability in our credit quality and a reduction since issuance in the risk free rate offset by overall credit spread widening due to tighter liquidity in the market place.

Note 14—Earnings Per Share

The following table shows the computation of the Company’s basic and diluted earnings per share:

	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
	($ in thousands, except shares and per share amounts)
December 31, 2007:
Net income	$	32,740		—		—
Basic earnings per share		32,740		36,313,276	$	0.90
Effect of dilutive securities:
Stock options		—		71,929		—
Warrants		—		249,957		—
Diluted earnings per share	$	32,740		36,635,163	$	0.89
December 31, 2006:
Net income	$	10,543		—		—
Basic earnings per share		10,543		22,336,002	$	0.47
Effect of dilutive securities:
Stock options		—		—		—
Warrants		—		—		—
Diluted earnings per share	$	10,543		22,336,002	$	0.47

Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under agreements relating to grants or issuances thereof.

For the year ended December 31, 2007 and 2006, weighted outstanding stock options of 420,497 and 802,977 and weighted restricted stock of 6,986 and zero, respectively, were not considered in computing diluted earnings per share because they were antidilutive. For the year ended December 31, 2007 and 2006, weighted average warrants

F-30

outstanding of zero and 829,597 respectively, were not considered in computing diluted earnings per share because they were antidilutive.

Note 15—Segment Information

The Company reports its business in three segments: insurance, reinsurance and insurance services. The insurance segment includes the results of CastlePoint Insurance Company and CastlePoint Re for excess and surplus lines written on a primary basis. CastlePoint Insurance Company did not conduct any business and did not have any premium income, obligations relating to insurance policies, employees and operations in the year ended December 31, 2006. The reinsurance segment includes the results from the reinsurance business written through CastlePoint Re. The insurance services segment includes the results from managing the specialty and traditional program business and insurance risk-sharing business through CastlePoint Management, as well as results from providing unbundled insurance services to program underwriting managers. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates segment performance based on segment profit, which excludes investment income, realized gains and losses, general corporate expenses, interest expenses, income taxes and any other non-core business income or expenses.

	2007			2006
	($ in thousands)
Insurance Segment Information
Revenues
Net premiums earned	$	19,076		$	—
Expenses
Net loss and loss adjustment expenses		11,773			—
Commission Expense		7,814			—
Other underwriting expenses		596			—
Total expenses		20,183			—
Segment Loss	$	(1,107	)	$	—
Reinsurance Segment Information
Revenues
Net premiums earned	$	229,287		$	78,970
Expenses
Net loss and loss adjustment expenses		119,562			40,958
Commission Expense		77,551			27,209
Other underwriting expenses		3,502			1,383
Total expenses		200,615			69,550
Segment Profit	$	28,672		$	9,420
Insurance Services Segment Information
Revenue
Direct commission revenue from programs business	$	7,453		$	2,334
Expenses
Direct commissions expense from programs		6,236			1,688
Other insurance services expenses		6,725			3,601
Total Expenses		12,961			5,289
Segment (Loss)	$	(5,508	)	$	(2,955	)

F-31

The following table reconciles revenues by segment to consolidated revenues:

	2007			2006
	($ in thousands)
Revenue
Insurance segment	$	19,076		$	—
Reinsurance segment		229,288			78,970
Insurance services segment		7,453			2,334
Total segment revenues		255,817			81,304
Net Investment income		29,506			11,184
Net realized capital (losses) gains		(8,236	)		35
Consolidated revenues	$	277,087		$	92,523

The following table reconciles the results of the Company’s individual segments to consolidated income before taxes:

	2007			2006
	($ in thousands)
Insurance segment (loss)	$	(1,107	)	$	—
Reinsurance segment profit		28,672			9,420
Insurance services segment (loss)		(5,508	)		(2,955	)
Segment Profit		22,057			6,465
Net investment income		29,506			11,184
Net realized investment (losses) gains		(8,236	)		35
Corporate expenses		(7,028	)		(3,072	)
Interest expense		(9,416	)		(557	)
Warrant expense		—			(4,605	)
Income before taxes	$	26,883		$	9,450

Note 16—Dividends Declared

The aggregate amount of dividends declared and paid for the years ended December 31, 2007 and 2006 were $3.6 million and $2.2 million respectively.

Note 17—Debt

Subordinated Debentures

In November and December 2006, CastlePoint Management formed two Trusts, of which CastlePoint Management owns all of the common trust securities. On December 1, 2006 and December 14, 2006, respectively, the Trusts each issued $50.0 million of trust preferred securities for cash at a fixed rate during the first five years (equal to 8.66% and 8.551% per annum, respectively), after which the interest rate will become floating and equal to the three month London Interbank Offered Rate (LIBOR) plus 3.5% per annum (calculated quarterly). The Trusts invested the proceeds thereof and the proceeds received from the issuance of the common trust securities in exchange for approximately $103.1 million of junior subordinated debentures (the “CPM Debentures”) issued by CastlePoint Management, with terms which mirror those of the trust preferred securities. On September 2007, CastlePoint Bermuda Holdings formed a third Trust, of which CastlePoint Bermuda Holdings owns all of the common trust securities. On September 27, 2007, this Trust issued $30.0 million of trust preferred securities for cash at a fixed rate during the first five years (equal to 8.39 % per annum), after which the interest rate will become floating and equal to the three month London Interbank Offered Rate (LIBOR) plus 3.5 % per annum (calculated quarterly). The Trust

F-32

invested the proceeds thereof and the proceeds received from the issuance of the common trust securities in exchange for approximately $30.9 million of junior subordinated debentures (the “CPBH Debentures”) issued by CastlePoint Bermuda Holdings, with terms which mirror those of the trust preferred securities.

The CPM Debentures and the CPBH Debentures are unsecured obligations of CastlePoint Management and CastlePoint Bermuda Holdings, respectively, and are subordinated and junior in right of payment to all present and future senior indebtedness of CastlePoint Management and CastlePoint Bermuda Holdings. The CPM Debentures issued to Trust I for CastlePoint Management bear interest that is fixed at 8.66% until December 1, 2011, and the coupon will float quarterly thereafter at the three months LIBOR rate plus 3.5% per annum calculated quarterly. The CPM Debentures issued to Trust II for CastlePoint Management bear interest that is fixed at 8.551% until December 14, 2011, and the coupon will float quarterly thereafter at the three months LIBOR rate plus 3.5% per annum calculated quarterly. The CPBH Debentures issued to Trust I for CastlePoint Bermuda Holdings bear interest that is fixed at 8.39% until September  , 27 2012, and the coupon will float quarterly thereafter at the three months LIBOR rate plus 3.5% per annum calculated quarterly. All of these subordinated debentures have stated maturities of thirty years. CastlePoint Management and CastlePoint Bermuda Holdings have the option to redeem any or all of the debentures beginning five years from the date of issuance, at the principal amount plus accrued and unpaid interest. If CastlePoint Management or CastlePoint Bermuda Holdings choose to redeem their debentures, the Trusts would then redeem the trust preferred securities at the same time. The issuer of the debentures has the right under the indenture to defer payments of interest on the debentures, so long as no event of default has occurred and is continuing, by deferring the payment of interest on the debentures for up to 20 consecutive quarterly periods (“Extension Period”) at any time and from time to time. During any Extension Period, interest will continue to accrue on the debentures.

The Company has guaranteed, on a subordinated basis, CastlePoint Management’s obligations and CastlePoint Bermuda Holdings’s obligations under the debentures and distributions and other payments due on the Trusts’ preferred securities. These guarantees provided a full and unconditional guarantee of amounts due on the Trusts’ preferred securities. Issuance costs of $1.5 million each for Trust I and Trust II for CastlePoint Management respectively were deferred and are being amortized over the term of the subordinated debentures using the effective interest method. Issuance costs of $0.9 million for Trust I for CastlePoint Bermuda Holdings were deferred and are being amortized over the term of the subordinated debentures using the effective interest method . The proceeds of these issuances of subordinated debentures were used for general corporate purposes, including acquisition and capitalization of CastlePoint Insurance Company.

The Trusts are unconsolidated variable interest entities pursuant to FIN 46(R) because the holders of the equity investment at risk do not have adequate decision making ability over the Trusts’ activities.

Note 18—Business Combination

On December 4, 2006, CastlePoint Management closed on its purchase of the outstanding common stock of a shell property casualty insurance company, Tower Indemnity Company of America (“TICA”) from Tower. TICA was renamed to “CastlePoint Insurance Company” in early 2007. The purchase price was $8.8 million and included $8.5 million of invested assets and two state licenses, from New York and New Jersey. Of the $8.5 million in invested assets, $6.1 million was cash and cash equivalents and $2.4 million was fixed maturity securities deposited with the state of New York to comply with the insurance laws of the state in which the Company is licensed. The Company capitalized $350,000 of the $8.8 million as intangible assets related to state licenses with indefinite useful lives subject to annual impairment test. The primary purpose of this purchase was the acquisition of two state licenses.

Note 19—Subsequent Events

On February 29, 2008, the Board of Directors of CastlePoint Holdings approved a quarterly dividend of $0.025 per share payable March 31, 2007 to the Company’s shareholders of record as of March 17, 2007.

Note 20—Unaudited Quarterly Financial Information

F-33

	2007
	Quarter Ended		Quarter Ended		Quarter Ended		Quarter Ended
	March 31,		June 30,		September 30,		December 31,		Total
	(in thousands, except per share amounts)
Revenues	$	53,954	$	63,677	$	74,736	$	84,720	$	277,087
Segment profit		4,262		5,597		5,957		6,241		22,057
Net income		7,071		10,518		10,541		4,610		32,740
Earnings per share:
Basic		0.23		0.27		0.28		0.12		0.90
Diluted		0.23		0.27		0.27		0.12		0.89

	2006
	Quarter Ended			Quarter Ended			Quarter Ended		Quarter Ended
	March 31,			June 30,			September 30,		December 31,		Total
	(in thousands, except per share amounts)
Revenues	$	—		$	23,834		$	31,654	$	37,035	$	92,523
Segment profit (loss)		(122	)		1,223			2,671		2,693		6,465
Net income (loss)		(472	)		(1,176	)		5,385		6,806		10,543
Earnings per share:
Basic	NM				(0.04	)		0.18		0.23		0.47
Diluted	NM				(0.04	)		0.18		0.23		0.47

NM-not meaningful

F-34

EX-99.3

Exhibit 99.3

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF TOWER

The following unaudited pro forma condensed consolidated financial statements are based on the historical financial statements of Tower, CastlePoint and Hermitage after giving effect to the merger and the Hermitage Acquisition.

The unaudited pro forma condensed consolidated financial information gives effect to the merger and the Hermitage Acquisition as if they had occurred (i) on September 30, 2008 for the purposes of the unaudited pro forma condensed consolidated balance sheet as of September 30, 2008 and (ii) on January 1, 2007 for the purposes of the unaudited pro forma condensed consolidated statements of income for the year ended December 31, 2007 and the nine months ended September 30, 2008. The unaudited pro forma condensed consolidated financial information has been prepared by and is the responsibility of Tower’s management. Certain amounts from CastlePoint’s and Hermitage’s historical consolidated financial statements have been reclassified to conform to the Tower presentation.

The unaudited pro forma condensed consolidated financial statements have been prepared for illustrative purposes only and are not necessarily indicative of the financial condition or results of operations of future periods or the financial condition or results of operations that actually would have been realized had the entities been a single entity as of or for the periods presented. The unaudited pro forma condensed consolidated financial information should be read together with the historical financial statements and related notes of Tower and CastlePoint that each have filed with the SEC and the historical financial statements and related notes of Hermitage that are attached to the joint proxy statement/prospectus as filed with the SEC on December 15, 2008.

Tower Group, Inc.
Unaudited Condensed Consolidated Pro Forma Balance Sheet
Excluding Hermitage
September 30, 2008

							Eliminations
	Historical						TG / CP			Pro Forma						Pro Forma
($ in millions, except par value)	CastlePoint			Tower			Intercompany			Adjustments			Notes			Combined
Assets
Investments & cash	$	783.2		$	660.1		$	—			(65.4	)		2
																	1,377.9
Investment income receivable		4.9			6.9												11.8
Premiums receivable		203.0			130.1			(96.7	)					3 (f), 3	(d)
								(36.5	)					3	(f)
								2.0						3	(f)		201.9
Reinsurance recoverable		7.1			245.5			(21.1	)					3	(f)
								(133.6	)					3 (f), 3	(d)
								0.1						3	(f)		98.0
Prepaid reinsurance premiums		9.1			122.0			(96.9	)					3 (f), 3	(d)		34.3
Deferred acquisition costs, net of		81.6			57.1
ceding commission revenue											(10.2	)		3	(k)		128.5
Deferred income taxes		4.9			34.8						(5.8	)		3	(c)
											(0.9	)		3	(g)
											3.6			3	(k)		36.6
Intangible assets		0.4			20.8						16.4			3	(b)		37.5
Goodwill					19.0						136.9			2, 3	(g)
														3	(c)		155.9
Fixed assets, net		1.6			37.5												39.1
Investment in unconsolidated affiliate					30.3						(30.3	)		2,3	(e)		—
Other assets		14.1			46.8			0.7			(7.0	)		2, 3	(g)(f)		54.6
Total assets	$	1,109.9		$	1,410.8		$	(382.1	)	$	37.2					$	2,175.8
Liabilities
Loss and loss adjustment		222.4			525.1			(133.6	)		—			3 (d), 3	(f)
expenses								(1.1	)		—			3 (d), 3	(f)		612.8
Unearned premium		244.8			306.4			(96.9	)					3 (d), 3	(f)		454.3
Losses payable		31.5						(21.1	)					3	(f)
								1.1						3	(f)		11.6
Reinsurance balances payable		35.4			75.9			(59.3	)					3	(f)
								(4.8	)					3	(f)		47.2
Payable to issuing carriers		38.3			28.1			(37.4	)					3	(f)
								(36.5	)					3	(f)
								0.7						3	(f)
								6.8						3	(f)		—
Funds held under reinsurance agreements		0.4			26.1												26.5
Accounts payable, and other liabilities		18.4			29.9						5.0			2, 3	(a)
											1.8			3	(a)		55.1
Subordinated debentures		134.0			101.0												235.1
Total liabilities		725.2			1,092.6			(382.1	)		6.8						1,442.6
Stockholders’ equity
Common stock ($0.01 par value)		0.4			0.2						0.2			2
											(0.4	)		3	(e)		0.4
Treasury stock		—			(1.1	)											(1.1	)
Paid-in capital		386.9			207.5						426.6			2
											(386.9	)		3	(e)		634.1
Accumulated other comprehensive loss		(41.9	)		(39.3	)					41.9			3	(e)		(39.3	)
Retained earnings		39.4			150.8						(39.4	)		3	(e)
											(6.6	)		3	(k)
											(10.7	)		3	(a)
											5.7			3	(a)		139.2
Total stockholders’ equity		384.7			318.2			—			30.5						733.3
Total liabilities and stockholders’ equity	$	1,109.9		$	1,410.8		$	(382.1	)	$	37.2					$	2,175.8

See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

Tower Group, Inc.
Unaudited Condensed Consolidated Pro Forma Statement of Income
Excluding Hermitage
Nine months ended September 30, 2008

							Eliminations
($ in millions, except share	Historical						TG / CP			Pro Forma						Pro Forma
and per share amounts)	CastlePoint			Tower			Intercompany			Adjustments			Notes			Combined
Revenues
Net premiums earned	$	324.5		$	226.8		$	—		$	—					$	551.3
Ceding commission revenue		—			60.6			(56.5	)					3	(h)		4.1
Insurance services revenue		27.1			41.9			(65.5	)					3	(i)		3.6
Net investment income		22.6			26.3						(2.5	)		3	(j)		46.5
Net realized gains (losses)											4.3			3	(m)		4.3
on investments		(11.9	)		(9.3	)											(21.2	)
Policy billing fees					1.7												1.7
		362.3			348.0			(122.0	)		1.8						590.2
Expenses
Loss and loss adjustment
expenses		180.9			118.1												299.0
Underwriting expenses		162.7			159.0						1.2			3	(b)		322.9
								(56.5	)					3	(h)		(56.5	)
								(65.5	)					3	(i)		(65.5	)
											2.8			3	(k)		2.8
											(9.4	)		3	(a)		(9.4	)
Interest expense		8.5			6.6												15.1
		352.1			283.7			(122.0	)		(5.4	)					508.5
Other Income
Equity income in
unconsolidated affiliate		—			0.7						(0.7	)		3	(1)		—
Income before income taxes		10.2			65.1			—			6.5						81.7
Income tax expense		3.5			23.3						(0.4	)		3	(b)
											6.3			3	(g)
											(0.9	)		3	(j)
											(0.7	)		3	(k)
											(0.2	)		3	(l)
											1.5			3	(m)
											3.3			3	(a)		35.6
Net income	$	6.7		$	41.7		$	—		$	(2.3	)				$	46.1
Basic and diluted earnings
per share
Basic	$	0.18		$	1.81											$	1.16
Diluted	$	0.18		$	1.80											$	1.15
Weighted average common
shares outstanding
Basic		38,280,781			23,029,541												39,832,386
Diluted		38,403,449			23,244,577												40,119,531

See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

Tower Group, Inc.
Unaudited Condensed Consolidated Pro Forma Statement of Income
Excluding Hermitage
Year ended December 31, 2007

							Eliminations
($ in millions, except share	Historical						TG / CP			Pro Forma						Pro Forma
and per share amounts)	CastlePoint			Tower			Intercompany			Adjustments			Notes			Combined
Revenues
Net premiums earned	$	248.4		$	286.1		$	—		$	—					$	534.5
Ceding commission revenue		—			71.0			(65.7	)					3	(h)		5.3
Insurance services revenue		7.5			33.3			(34.9	)					3	(i)		5.8
Net investment income		29.5			36.7						(3.3	)		3	(j)
											5.7						68.6
Net realized gains (losses) on investments		(8.2	)		(17.5	)											(25.7	)
Policy billing fees					2.0												2.0
Total revenues		277.1			411.6			(100.6	)		2.4						590.5
Expenses
Loss and loss adjustment
expenses		131.3			157.9												289.2
Underwriting expenses		109.5			101.0						1.7			3	(b)
					77.3			(65.7	)					3	(h)
								(34.9	)					3	(i)
											7.4			3	(k)		196.2
Interest expense		9.4			9.3												18.7
Total expenses		250.2			345.5			(100.6	)		9.0						504.2
Other Income
Equity income in unconsolidated affiliate		—			2.4						(2.4	)		3	(l)		—
Gain from issuance of common stock by unconsolidated affiliate					2.7						(2.7	)		3	(l)		—
Income before income taxes		26.9			71.2			—			(11.8	)					86.4
Income tax expense		(5.9	)		26.2						(0.6	)		3	(b)
											14.2			3	(g)
											(1.1	)		3	(j)
											(2.6	)		3	(k)
											(1.8	)		3	(l)
											2.0			3	(m)
											1.1			3	(n)		31.4
Net income	$	32.7		$	45.1		$	—		$	(22.9	)				$	54.9
Basic and diluted earnings per share
Basic	$	0.90		$	1.95											$	1.37
Diluted	$	0.89		$	1.93											$	1.36
Weighted average common shares outstanding
Basic		36,313,276			22,714,663												39,517,508
Diluted		36,635,163			22,968,097												39,871,110

(1) Earnings per share (basic and diluted) for Tower historical and pro forma combined include a deduction of $0.7 million for preferred stock dividends.

See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

Tower Group, Inc.
Unaudited Condensed Consolidated Pro Forma Balance Sheet
Including Hermitage
September 30, 2008

																			Eliminations
($ in millions, except	Historical						Pro Forma						Pro Forma			Historical			TG / CP			Pro Forma						Pro Forma
(par value)	CastlePoint			Hermitage			Adjustments			Notes			Combined			Tower			Intercompany			Adjustments			Notes			Combined
Assets
Investments & cash	$	783.2		$	183.2		$	(125.9	)		2					$	660.1		$	—		$	(65.4	)		2
													$	840.5														$	1,435.1
Investment income receivable		4.9			1.1						4	(d)		6.0			6.9												12.9
Premiums receivable		203.0			14.5												130.1			(96.7	)					3 (f), 3	(d)
														217.5						(36.5	)					3	(f)
																				2.0						3	(f)		216.4
Reinsurance recoverable		7.1			17.9						4	(d)		25.0			245.5			(21.1	)					3	(f)
																				(133.6	)					3 (f), 3	(d)
																				0.1						3	(f)		115.9
Prepaid reinsurance premiums		9.1			5.4						4	(d)		14.5			122.0			(96.9	)					3 (f), 3	(d)		39.6
Deferred acquisition costs, net of		81.6			13.2												57.1
ceding commission revenue														94.8									(10.2	)		3	(k)		141.7
Deferred income taxes		4.9			3.2			(6.1	)		4	(c)		2.1			34.8						(5.8	)		3	(c)
																							(0.9	)		3	(g)
																							3.6			3	(k)		33.7
Intangible assets		0.4			0.9			16.5			4	(b)		17.8			20.8						16.4			3	(b)		54.9
Goodwill								16.6			2,4	(c)		16.6			19.0						136.9			2, 3	(g)
																										3	(c)		172.5
Fixed assets, net		1.6			2.2									3.8			37.5												41.3
Investment in unconsolidated affiliate																	30.3						(30.3	)		2,3	(e)		—
Other assets		14.1			0.3						2			14.5			46.8			0.7			(7.0	)		2, 3	(g)(f)		54.9
Total assets	$	1,109.9		$	242.0		$	(98.9	)				$	1,253.0		$	1,410.8		$	(382.1	)	$	37.2					$	2,318.9
Liabilities
Loss and loss adjustment		222.4			87.0			—			4	(d)					525.1			(133.6	)		—			3 (d), 3	(f)
expenses														309.4						(1.1	)		—			3 (d), 3	(f)		699.8
Unearned premium		244.8			46.5						4	(d)		291.2			306.4			(96.9	)					3 (d), 3	(f)		500.8
Losses payable		31.5												31.5						(21.1	)					3	(f)
																				1.1						3	(f)		11.6
Reinsurance balances payable		35.4			5.0												75.9			(59.3	)					3	(f)
														40.4
																				(4.8	)					3	(f)		52.1
Payable to issuing carriers		38.3			—									38.3			28.1			(37.4	)					3	(f)
																				(36.5	)					3	(f)
																				0.7						3	(f)
																				6.8						3	(f)		—
Funds held under reinsurance agreements		0.4			—									0.4			26.1												26.5
Accounts payable, and other liabilities		18.4			4.7			1.3			2, 4	(a)		24.4			29.9						5.0			2, 3	(a)
																							1.8			3	(a)		61.1
Subordinated debentures		134.0			—									134.0			101.0												235.1
Total liabilities		725.2			143.1			1.3						869.6			1,092.6			(382.1	)		6.8						1,586.9
Stockholders’ equity
Common stock ($0.01 par value)		0.4			0.0			(0.0	)		4	(e)		0.4			0.2						0.2			2
																							(0.4	)		3	(e)		0.4
Treasury stock		—												—			(1.1	)											(1.1	)
Paid-in capital		386.9			77.4			(77.4	)		4	(e)					207.5						426.6			2
														386.9									(386.9	)		3	(e)		634.1
Accumulated other comprehensive loss		(41.9	)		(2.3	)		2.3			4	(e)		(41.9	)		(39.3	)					41.9			3	(e)		(39.3	)
Retained earnings		39.4			23.9			(23.9	)		4	(e)					150.8						(39.4	)		3	(e)
								(1.3	)		4	(a)											(6.6	)		3	(k)
																							(10.7	)		3	(a)
														38.0									5.7			3	(a)		137.9
Total stockholders’ equity		384.7			98.9			(100.3	)					383.3			318.2			—			30.5						732.0
Total liabilities and stockholders’ equity	$	1,109.9		$	242.0		$	(98.9	)				$	1,253.0		$	1,410.8		$	(382.1	)	$	37.2					$	2,318.9

See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

Tower Group, Inc.
Unaudited Condensed Consolidated Pro Forma Statement of Income
Including Hermitage
Nine months ended September 30, 2008

																			Eliminations
($ in millions, except share	Historical						Pro Forma						Pro Forma			Historical			TG / CP			Pro Forma						Pro Forma
and per share amounts)	CastlePoint			Hermitage			Adjustments			Notes			Combined			Tower			Intercompany			Adjustments			Notes			Combined
Revenues
Net premiums earned	$	324.5		$	64.4		$	—					$	388.9		$	226.8		$	—		$	—					$	615.7
Ceding commission revenue		—												—			60.6			(56.5	)					3	(h)		4.1
Insurance services revenue		27.1												27.1			41.9			(65.5	)					3	(i)		3.6
Net investment income		22.6			5.6			(4.7	)		4	(f)					26.3						(2.5	)		3	(j)
Net realized gains (losses)														23.5									4.3			3	(m)		51.6
on investments		(11.9	)		(1.0	)								(12.9	)		(9.3	)											(22.2	)
Policy billing fees														—			1.7												1.7
Total revenues		362.3			69.0			(4.7	)					426.6			348.0			(122.0	)		1.8						654.5
Expenses
Loss and loss adjustment expenses		180.9			33.0									213.9			118.1												332.1
Underwriting expenses		162.7			24.0			0.7			4	(b)		187.3			159.0						1.2			3	(b)
																				(56.5	)					3	(h)
																				(65.5	)					3	(i)
																							2.8			3	(k)
																							(9.4)			3	(a)		219.0
Interest expense		8.5												8.5			6.6												15.1
Total expenses		352.1			57.0			0.7						409.8			283.7			(122.0	)		(5.4)						566.2
Other Income
Equity income in unconsolidated affiliate		—												—			0.7						(0.7	)		3	(l)		—
Income before income taxes		10.2			12.0			5.4						16.8			65.1			—			6.5						88.3
Income tax expense		3.5			3.9			(0.2	)		4	(b)					23.3						(0.4	)		3	(b)
								(1.6	)		4	(f)											6.3			3	(g)
								0.7			4	(g)											(0.9	)		3	(j)
																							(0.7	)		3	(k)
																							(0.2	)		3	(l)
																							1.5			3	(m)
														6.2									3.3			3	(a)		38.3
Net income	$	6.7		$	8.1		$	(4.2	)				$	10.6		$	41.7		$	—		$	(2.3	)				$	50.0
Basic and diluted earnings per share
Basic	$	0.18														$	1.81											$	1.26
Diluted	$	0.18														$	1.80											$	1.25
Weighted average common shares outstanding
Basic		38,280,781			1,095												23,029,541												39,832,386
Diluted		38,403,449			1,095												23,244,577												40,119,531

See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

Tower Group, Inc.
Unaudited Condensed Consolidated Pro Forma Statement of Income
Including Hermitage
Year ended December 31, 2007

																			Eliminations
($ in millions, except share	Historical						Pro Forma						Pro Forma			Historical			TG / CP			Pro Forma						Pro Forma
and per share amounts)	CastlePoint			Hermitage			Adjustments			Notes			Combined			Tower			Intercompany			Adjustments			Notes			Combined
Revenues
Net premiums earned	$	248.4		$	53.2		$	—					$	301.5		$	286.1		$	—		$	—					$	587.6
Ceding commission revenue		—												—			71.0			(65.7	)					3	(h)		5.3
Insurance services revenue		7.5												7.5			33.3			(34.9	)					3	(i)		5.8
Net investment income		29.5			7.4			(6.3	)		4	(f)					36.7						(3.3	)		3	(j)
														30.7									5.7			3	(m)		69.8
Net realized gains (losses) on investments		(8.2	)		(0.9	)								(9.1	)		(17.5	)											(26.6	)
Policy billing fees														—			2.0												2.0
Total revenues		277.1			59.7			(6.3	)					330.5			411.6			(100.6	)		2.4						644.0
Expenses
Loss and loss adjustment expenses		131.3			3.2									134.5			157.9												292.4
Underwriting expenses		109.5			22.0			0.9			4	(b)		132.4			101.0						1.7			3	(b)
																	77.3			(65.7	)					3	(h)
																				(34.9	)					3	(i)
																							7.4			3	(k)		219.1
Interest expense		9.4												9.4			9.3												18.7
Total expenses		250.2			25.2			0.9						276.3			345.5			(100.6	)		9.0						530.3
Other Income
Equity income in unconsolidated affiliate		—												—			2.4						(2.4	)		3	(l)
Gain from issuance of common stock by unconsolidated affiliate																	2.7						(2.7	)		3	(l)		—
Income before income taxes		26.9			34.5			(7.2	)					54.2			71.2			—			(11.8	)					113.7
Income tax expense		(5.9	)		12.1												26.2						(0.6	)		3	(b)
								(0.3	)		4	(b)											14.2			3	(g)
								(2.2	)		4	(f)											(1.1	)		3	(j)
																							(2.6	)		3	(k)
																							(1.8	)		3	(l)
																							2.0			3	(m)
																							1.1			3	(n)		41.0
Net income	$	32.7		$	22.4		$	(4.7	)				$	54.2		$	45.1		$	—		$	(22.9	)				$	72.6
Basic and diluted earnings per share
Basic	$	0.90														$	1.95											$	1.82
Diluted	$	0.89														$	1.93											$	1.80
Weighted average common shares outstanding
Basic		36,313,276			1,095												22,714,663												39,517,508
Diluted		36,635,163			1,095												22,968,097												39,871,110

(1) Earnings per share (basic and diluted) for Tower historical and pro forma combined include a deduction of $0.7 million for preferred stock dividends.

See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

Tower Group, Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

1. BASIS OF PRESENTATION

The unaudited pro forma condensed consolidated financial information gives effect to the acquisition of CastlePoint as if it had occurred at September 30, 2008 for the purposes of the unaudited pro forma condensed consolidated balance sheet and at January 1, 2007 for the purposes of the unaudited pro forma condensed consolidated statements of income for the year ended December 31, 2007 and the nine months ended September 30, 2008. The unaudited pro forma condensed consolidated financial information has been prepared by Tower’s management. The Hermitage Acquisition is not subject to a vote of CastlePoint shareholders or Tower stockholders and its consummation is independent of the merger approval on at the CastlePoint special general meeting and the Tower special meeting. Unless the stock purchase agreement relating to the Hermitage Acquisition is terminated or one of the conditions to the closing of the Hermitage Acquisition is not satisfied and not waived, the Hermitage Acquisition is expected to be completed shortly after the time the merger is completed. Assuming that the Hermitage Acquisition is consummated as anticipated, then Tower will in effect acquire both CastlePoint and Hermitage. The unaudited pro forma condensed consolidated financial information excluding Hermitage is presented to give pro forma effect to the merger in the event that the Hermitage Acquisition is not completed. Certain amounts from CastlePoint’s historical consolidated financial statements have been reclassified to conform to the Tower presentation.

Also presented is the unaudited pro forma condensed consolidated financial information giving effect to the acquisition of CastlePoint and its proposed acquisition of Hermitage as if they both had occurred at September 30, 2008 for the purposes of the unaudited pro forma condensed consolidated balance sheet and at January 1, 2007 for the purposes of the unaudited pro forma condensed consolidated statements of income for the year ended December 31, 2007 and the nine months ended September 30, 2008. The unaudited pro forma condensed consolidated financial information has been prepared by Tower’s management. Certain amounts from CastlePoint’s and Hermitage’s historical consolidated financial statements have been reclassified to conform to the Tower presentation.

     General

This unaudited pro forma condensed consolidated financial information has been prepared in conformity with GAAP. The unaudited pro forma condensed consolidated balance sheet as of September 30, 2008 and the unaudited pro forma condensed consolidated statements of income for the year ended December 31, 2007 and the nine months ended September 30, 2008 have been prepared using the following information:

(a)	Unaudited historical consolidated financial statements of Tower as of September 30, 2008 and for the nine months ended September 30, 2008;
(b)	Unaudited historical consolidated financial statements of CastlePoint as of September 30, 2008 and for the nine months ended September 30, 2008;
(c)	Unaudited historical consolidated financial statements of Hermitage as of September 30, 2008 and for the nine months ended September 30, 2008;
(d)	Audited historical consolidated financial statements of Tower for the year ended December 31, 2007;

(e)	Audited historical consolidated financial statements of CastlePoint for the year ended December 31, 2007;
(f)	Audited historical consolidated financial statements of Hermitage for the year ended December 31, 2007; and
(g)	Such other supplementary information as considered necessary to reflect the acquisitions of CastlePoint and Hermitage in the unaudited pro forma condensed consolidated financial information.

The pro forma adjustments reflecting the acquisitions of CastlePoint and Hermitage under the purchase method of accounting are based on certain estimates and assumptions. The unaudited pro forma condensed consolidated adjustments may be revised as additional information becomes available. The actual adjustments upon consummation of the acquisitions and the allocation of the final purchase price of CastlePoint and Hermitage will depend on a number of factors, including additional financial information available at such time, changes in values and changes in CastlePoint’s and Hermitage’s operating results between the date of preparation of this unaudited pro forma condensed consolidated financial information and the effective date of the respective acquisition. Therefore, the actual adjustments will differ from the pro forma adjustments and it is possible that the differences may be material. Tower’s management believes that its assumptions provide a reasonable basis for presenting all of the significant effects of the transactions contemplated and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed consolidated financial information.

The unaudited pro forma condensed consolidated financial information does not include financial benefits or expenses from operating expense efficiencies or revenue enhancements arising from the acquisitions nor does the unaudited pro forma condensed consolidated financial information include the portion of restructuring and integration costs to be incurred by Tower and CastlePoint, except for certain fair value adjustments.

The unaudited pro forma condensed consolidated financial information is not intended to reflect the results of operations or the financial position that would have resulted had the acquisitions been effected on the dates indicated and if the companies had been managed as one entity. The unaudited pro forma condensed consolidated financial information should be read in conjunction with the historical consolidated financial statements of Tower included in Tower’s Annual Report on Form 10-K for the year ended December 31, 2007 and Quarterly Report on Form 10-Q for the nine months ended September 30, 2008, historical consolidated financial statements of CastlePoint included in CastlePoint’s Annual Report on Form 10-K for the year ended December 31, 2007 and Quarterly Report on Form 10-Q for the nine months ended September 30, 2008, as well as the historical consolidated financial statements of Hermitage for the year ended December 31, 2007 and for the nine months ended September 30, 2008 which are included in Annexes H and I to the joint proxy statement/prospectus filed with the SEC on December 15, 2008.

2. PURCHASE PRICE AND FINANCING CONSIDERATIONS

CastlePoint

On August 4, 2008, Tower, Ocean I and CastlePoint entered into the merger agreement which was approved by the CastlePoint shareholders on January 27, 2009 and by the Tower stockholders on January 28, 2009. On the closing date of February 5, 2009, CastlePoint will be merged, and amalgamated, with and into Ocean I upon the terms and subject to the conditions set forth in the merger agreement, and Ocean I will continue as the surviving corporation and will succeed to and assume all the rights and obligations of CastlePoint. Under the terms of the merger agreement, CastlePoint shareholders will receive, subject to adjustment as set forth in the merger agreement, a fraction of a share of Tower common stock, equal to the exchange ratio, and cash consideration of $1.83 for each outstanding CastlePoint common share. The exchange ratio was determined by reference to the average Tower stock price, and is fixed at 0.47.

For purposes of presentation in the unaudited pro forma condensed consolidated financial information in accordance with SFAS No. 141(R), the financing of the CastlePoint acquisition and calculation of goodwill is assumed to be as follows:

($ in thousands)
Purchase Consideration
Purchase consideration (a)	$	489,509
Estimated fair value of outstanding CastlePoint stock options (b)		7,039
Total purchase consideration		496,548
Fair value of investment in Castlepoint (d)		34,673
Total		531,221
Allocation (c)
Total assets		1,109,902
Total liabilities		(725,228	)
Estimated fair value adjustments, net of tax of $6,698		9,653
Estimated fair value of net assets acquired		394,327
Goodwill	$	136,894

(a)	Based on the exchange rate of 0.47 shares of Tower common stock for each CastlePoint common share (except any CastlePoint common shares owned by Tower or any wholly-owned subsidiary of Tower), using a price of $24.98 per share of Tower common stock, the closing price on February 4, 2009. The purchase price consideration will consist of 16,802,845 shares of Tower common stock with an aggregate value of approximately $419.7 million, plus $65.4 million of cash. The purchase consideration also includes the fair value of the warrants held by Tower of approximately $4.4 million which were surrendered unexercised by Tower as part of the merger agreement.
(b)	The purchase price includes the estimated fair value of Tower stock options to be issued as of the closing date of the merger in exchange for share options of CastlePoint. CastlePoint share options will be converted to Tower stock options at the option exchange ratio and the exercise price will be the exercise price of the CastlePoint share options divided by the option exchange ratio. Vested stock options issued by Tower in respect of options held by employees of CastlePoint are considered part of the purchase price. Accordingly, the purchase price includes an estimated fair value of Tower stock options of $7.0 million.
	The fair value of Tower stock options that will be issued in respect of CastlePoint share options was estimated by using the Black-Scholes option pricing model with market assumptions. Option pricing models require the use of highly subjective market assumptions, including expected stock price volatility, which if changed can materially affect fair value estimates. The more significant assumptions used in estimating the fair value of Tower options include volatility of 46%, an expected life of 6 years based on the age of the original award, a dividend yield of 1%, and a risk-free interest rate of 3.7%.
(c)	The purchase price is allocated to balance sheet assets acquired (including identifiable intangible assets arising from the acquisition) and liabilities assumed based on their estimated fair value. The fair value adjustments to the CastlePoint historical consolidated balance sheet in connection with that acquisition are described below in Note 3.
(d)	As a result of the acquisition closing after January 1, 2009, it will be accounted for under SFAS No. 141(R). The following highlights some of the more substantive differences compared to the prior accounting standards:

• Transaction costs of approximately $12 million will be expensed rather than being considered part of the purchase price;

• The purchase consideration will be calculated based on the fair value of Tower’s common stock on the date the acquisition closed rather than being set on the date of the announcement of the acquisition assuming certain criteria are met; and

• The fair value of the CastlePoint common shares currently owned by Tower, and the warrants surrendered by Tower, will be determined on the closing date of the acquisition and a gain of $8.7 million ($5.7 million after tax) will be recognized in Tower’s income statement.

Hermitage

On August 27, 2008, CastlePoint Re entered into a stock purchase agreement, to purchase all of the issued and outstanding shares of the common stock of Hermitage from Brookfield US Corporation.

CastlePoint Re will pay $27 million in cash plus the closing adjusted book value of Hermitage to the seller, a subsidiary of Brookfield Asset Management Inc. The total cash consideration used in the pro forma adjustments is approximately $125.9 million. Hyperion Brookfield Asset Management, Inc., a subsidiary of Brookfield Asset Management, Inc., is an asset management firm that manages Tower’s and Hermitage’s investments.

For purposes of presentation in the unaudited pro forma condensed consolidated financial information, the financing of the Hermitage acquisition and the allocation of purchase price is assumed to be as follows:

($ in thousands)
Purchase Consideration (b)
Purchase price paid	$	125,934
Allocation
Total assets		242,029
Total liabilities		(143,095	)
Estimated fair value adjustments, net of tax of $6,090		10,365
Estimated fair value of net assets acquired		109,299
Goodwill	$	16,635

(a)	The purchase price is allocated to balance sheet assets acquired (including identifiable intangible assets arising from the acquisition) and liabilities assumed based on their estimated fair value. The fair value adjustments to the Hermitage historical consolidated balance sheet in connection with that acquisition are described below in Note 4.
(b)	Since the acquisition will close after January 1, 2009, it will be accounted for under SFAS No. 141(R). Transaction costs of approximately $1.5 million will be expensed rather than being considered part of the purchase price.

3. PRO FORMA ADJUSTMENTS RELATED TO TOWER AND CASTLEPOINT

As discussed above, these pro forma adjustments are based on certain estimates and assumptions made as of the date of the unaudited pro forma condensed consolidated financial information. The actual adjustments will depend on a number of factors, including changes in the estimated fair value of net balance sheet assets and operating results of CastlePoint between September 30, 2008 and the effective date of the merger. Tower expects to make such actual adjustments at the effective date of the merger. These actual adjustments may be different from the adjustments to the unaudited pro forma condensed consolidated financial information and such differences may be material.

(a) The following proforma adjustments are made as a result of accounting for the acquisition under SFAS 141R:

• Transaction costs of $12.0 million consist of primarily of advisory, accounting, actuarial and legal fees. These costs, net of tax effects, have been written off to retained earnings. Final actual costs may vary when finalized. The Unaudited Condensed Consolidated Pro Forma Statement of Income excludes these costs since they are considered nonrecurring.

• A gain on the revaluation in accordance with SFAS No. 141(R) of the CastlePoint shares previously owned by Tower and the fair value of the warrants surrendered by Tower as part of the merger agreement in the combined amount of $8.7 million ($5.7 million after tax) has been recorded. The Unaudited Condensed Consolidated Pro Forma Statement of Income excludes this gain since it is considered non-recurring.

• The write-off of $9.4 million ($6.1 million after tax) of transaction related costs by CastlePoint has been reversed in the Unaudited Condensed Consolidated Pro Forma Statement of Income since they are considered nonrecurring.

(b)	Identifiable intangible assets increased by $16.4 million and are comprised of $16.2 million relating to CastlePoint’s distribution network, and $0.2 million relating to insurance licenses. The intangible asset related to the distribution network acquired will be amortized over approximately 12 years. The intangible asset related to the insurance licenses is indefinite. All intangible assets and goodwill will be tested for recoverability whenever events or change in circumstances indicate that a carrying amount may not be recoverable. Indefinite lived intangible assets and goodwill will be subject to annual impairment testing. The pro forma statements of income reflect amortization expense for intangibles of $1.2 million for the nine months ended September 30, 2008 and $1.7 million for the year ended December 31, 2007.
(c)	Deferred income taxes are adjusted to reflect the income tax effects of the pro forma purchase adjustments. The net effect of such adjustments is a decrease of $5.8 million in deferred tax assets, which relates to the fair value of intangible assets acquired.
(d)	The fair value of CastlePoint’s reserve for losses and loss adjustment expenses and reinsurance recoverables were estimated based on the present value of the underlying cash flows of the loss reserves and reinsurance recoverables. In determining the fair value estimate, Tower’s management estimated a risk premium deemed to be reasonable and consistent with expectations in the marketplace given the nature and the related degree of uncertainty of such reserves. Such risk premium was considered equal to the discount rate Tower’s management would use to determine the present value of the underlying cash flows. Tower’s management analyzes and uses historical loss development patterns to estimate loss reserves. Risks that are not captured in the analysis include new or emerging torts, increases in the rate of inflation, new classes of claimants, payout pattern faster than expected, occurrence policies that do not have a deadline to

	file a claim, and pricing risk in the most recent accident year where a significant portion of the reserves reside. These risks could materially affect recorded reserves.
	The fair value of CastlePoint’s net unearned premium was estimated to be substantially equal to the carried amount of CastlePoint’s deferred acquisition costs. In determining fair value, Tower’s management estimated the combined ratio and discount for premiums receivable related to the net unearned premium.
(e)	Elimination of CastlePoint’s historical equity balances.
(f)	Elimination of the effects of intercompany transactions and balances, including the following:

• Intercompany reinsurance agreements between Tower and CastlePoint.

• Underwriting and claims services performed by both Tower Risk Management Corp. and CastlePoint Management Corp. on behalf of CastlePoint’s and Tower’s respective insurance subsidiaries.

(g) Pro forma income tax adjustments in connection with the merger:

• A net deferred tax liability of $0.9 million is recorded to reflect temporary differences between the carrying amounts of the assets and liabilities for financial reporting and income tax purposes, as if CastlePoint’s Bermuda operation will be treated as a controlled foreign corporation for U.S. tax purposes.

• For pro forma purposes, CastlePoint’s income tax rate was increased to reflect CastlePoint’s Bermuda operations as a foreign-controlled corporation.

(h)	Ceding commission revenue recognized by Tower on business ceded to CastlePoint has been eliminated with a corresponding elimination of CastlePoint’s underwriting expenses.
(i)	Insurance service revenues earned (primarily direct commission revenue) as a result of placing business through Tower Risk Management Corp. or CastlePoint Management Corp. on behalf of CastlePoint’s or Tower’s respective insurance subsidiaries has been eliminated with a corresponding elimination of underwriting expenses.
(j)	Represents the loss of investment income on $65.4 million of cash consideration expected to be paid to CastlePoint shareholders under the merger agreement, at an assumed investment rate of 5.0%, net of tax.
(k)	Deferred acquisition expenses, including related tax effect, were reduced for pro forma purposes as the proposed merger would eliminate certain costs charged by Tower Risk Management Corp. to CastlePoint Insurance Company, which had previously been deferred by CastlePoint Insurance Company.
(l)	Represents the elimination of Tower’s equity income from unconsolidated affiliate (CastlePoint) for the nine months ended September 30, 2008 and the year ended December 31, 2007, the elimination of the gain from issuance of common stock by unconsolidated affiliate (CastlePoint) for the year ended December 31, 2007, and the related income tax effect.
(m)	Net investment income has been increased, net of income tax effect, representing the accretion of an additional estimated purchase discount arising from the fair value of certain of CastlePoint’s fixed maturity investments that is $26.1 million less than amortized cost as of September 30, 2008. The fair value of these investments will be Tower’s cost upon closing of the merger. The additional estimated discount will be amortized over the estimated remaining years to maturity of the identified investments. The additional estimated discount assumes Tower will continue to hold the identified investments and there will be no loss of principal.
(n)	For pro forma statement purposes, CastlePoint’s income tax rate was increased to reflect CastlePoint’s Bermuda operations as a foreign-controlled corporation. See Note 3(c).

4. PRO FORMA ADJUSTMENTS RELATED TO CASTLEPOINT AND HERMITAGE

As discussed above, these pro forma adjustments are based on certain estimates and assumptions made as of the date of the unaudited pro forma condensed consolidated financial information. The actual adjustments will depend on a number of factors, including changes in the estimated fair value of net balance sheet assets and operating results of Hermitage between September 30, 2008 and the effective date of the acquisition. CastlePoint expects to make such actual adjustments at the effective date of a Hermitage acquisition. These actual adjustments may be different from the adjustments to the unaudited pro forma condensed consolidated financial information and such differences may be material.

Balance Sheet

(a) Transaction costs of $1.5 million consist of primarily of advisory, accounting, actuarial and legal fees. These costs, net of tax effects, have been written off to retained earnings. Final actual costs may vary when finalized. The Unaudited Condensed Consolidated Pro Forma Statement of Income excludes these costs since they are considered nonrecurring.

(b)	Identifiable intangible assets increased by $16.4 million and are comprised of $15.5 million relating to Hermitage’s distribution network and $1.3 million relating to insurance licenses, less the write-off of trade names of $0.4 million. The intangible asset related to the distribution network will be amortized over approximately 18 years. The intangible asset related to the insurance licenses is indefinite. All intangible assets and goodwill will be tested for recoverability whenever events or change in circumstances indicate that a carrying amount may not be recoverable. Indefinite lived intangible assets and goodwill will be subject to annual impairment testing. The pro forma statements of income reflect amortization expense for intangibles of $0.7 million for the nine months ended September 30, 2008 and $0.9 million for the year ended December 31, 2007.
(c)	Deferred income taxes are adjusted to reflect the income tax effects of the pro forma purchase adjustments. The net effect of such adjustments is a decrease of $6.1 million in deferred tax assets, which relates to the fair value of intangible assets acquired.
(d)	The fair value of Hermitage’s reserves for losses and loss adjustment expenses and related reinsurance recoverables was estimated based on the present value of the underlying cash flows of the loss reserves and reinsurance recoverables. In determining the fair value estimate, Tower’s management estimated a risk premium deemed to be reasonable and consistent with expectations in the marketplace given the nature and the related degree of uncertainty of such reserves. Such risk premium was considered equal to the discount rate Tower’s management would use to determine the present value of the underlying cash flows. Tower management analyzes and uses historical loss development patterns to estimate loss reserves. Risks that are not captured in the analysis include new or emerging torts, increases in the rate of inflation, new classes of claimants, payout pattern faster than expected, occurrence policies that do not have a deadline to file a claim, and pricing risk in the most recent accident year where a significant portion of the reserves reside. These risks could materially affect recorded reserves.
	The fair value of Hermitage’s net unearned premium was estimated to be substantially equal to the carried amount of Hermitage’s deferred acquisition costs. In determining fair value, Tower’s management estimated the combined ratio and discount for premiums receivable related to the net unearned premium.
(e)	Elimination of Hermitage’s historical equity balances.

Income Statement

(f)	Represents the loss of investment income on $125.9 million of funds used to purchase Hermitage, at an assumed investment rate of 5.0%, net of tax.
(g)	For pro forma statement purposes, Hermitage’s tax rate was increased to Tower’s statutory income tax rate of 35%. See Note 4(c).

5. EARNINGS PER COMMON SHARE

(a)

Pro forma earnings per common share for the nine months ended September 30, 2008 and the year ended December 31, 2007 has been calculated based on the estimated weighted average number of shares of Tower common stock outstanding on a pro forma basis, as described below. The historical weighted average number of shares of Tower common stock outstanding was 23,029,541 and 23,244,577, basic and diluted, respectively, for the nine months ended September 30, 2008 and 22,714,663 and 22,968,097, basic and diluted, respectively, for the year ended December 31, 2007.

(b)

The pro forma weighted average number of shares of Tower common stock outstanding for the nine months ended September 30, 2008, after giving effect to 16,802,845 shares of Tower common stock issued to CastlePoint shareholders and 72,109 shares of Tower common stock for the dilutive effect of as converted share options and restricted shares of CastlePoint employees, is 39,832,386 and 40,119,531, basic and diluted, respectively. The pro forma weighted average number of shares of Tower common stock outstanding for the year ended December 31, 2007, after giving effect to 16,802,845 shares of Tower common stock issued to CastlePoint shareholders and 100,168 shares of Tower common stock for the dilutive effect of as converted share options and restricted shares of CastlePoint employees, is 39,517,508 and 39,871,110, basic and diluted, respectively.

EX-99.4

Exhibit 99.4

Contact Information:
Thomas Song
Managing Vice President
Tower Group, Inc.
212-655-4789
tsong@twrgrp.com

Tower Group, Inc. Completes Acquisition of CastlePoint Holdings, Ltd.

NEW YORK — February 5, 2009 — Tower Group, Inc. (NASDAQ: TWGP) today announced that it has completed its acquisition of CastlePoint Holdings, Ltd. (NASDAQ: CPHL) in a transaction valued at $531 million based on Tower’s current market price. Tower announced a definitive agreement to acquire CastlePoint on August 5, 2008. All closing conditions have been met.

Key Highlights

• Increased Financial Strength. Tower’s stockholders’ equity more than doubles and is estimated to be $733 million on a pro forma basis as of September 30, 2008. The average credit rating of the combined investment portfolios increases from AA- to AA.

• Access to Additional Capital to Support Growth. The additional capital from CastlePoint will support the growth of Tower’s primary insurance business, organically and through acquisitions.

• Revenue Diversification. The combined gross premiums written are projected to be in a range between $1.1 and $1.2 billion for 2009. Tower will continue to focus on brokerage business through its retail and wholesale agents. CastlePoint will continue to aggregate profitable business from managing general agents and small insurance companies.

• Cost Savings and Operational Efficiencies. Tower and CastlePoint will have opportunities to further streamline operations.

Michael H. Lee, President and Chief Executive Officer of Tower, stated, “We are extremely appreciative to the shareholders of Tower and CastlePoint for their overwhelmingly positive support for this transaction and to everyone, including the Special Committees of both companies and outside advisers, who worked diligently on this transaction. The acquisition of CastlePoint uniquely positions Tower to be able to take advantage of current market opportunities by utilizing CastlePoint’s capital to expand our primary business and make acquisitions that will enhance value to our shareholders.”

With the close of the transaction, CastlePoint shares (NASDAQ: CPHL) will be delisted from the NASDAQ.

About Tower Group, Inc.

Tower Group, Inc. offers property and casualty insurance products and services through its operating subsidiaries. Its insurance company subsidiaries offer insurance products to individuals

and small to medium-sized businesses. Tower Group’s insurance services subsidiaries provide underwriting, claims and reinsurance brokerage services to other insurance companies.

For more information visit Tower’s website at

http://www.twrgrp.com/.

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This press release or any other written or oral statements made by or on behalf of Tower may include forward-looking statements that reflect Tower’s current views with respect to future events and financial performance. All statements other than statements of historical fact included in this press release are forward-looking statements. Forward-looking statements can generally be identified by the use of forward-looking terminology such as “may,” “will,” “plan,” “expect,” “project,” “intend,” “estimate,” “anticipate,” “believe” or “continue” or their negative or variations or similar terminology. All forward-looking statements address matters that involve risks and uncertainties. Forward-looking statements speak only as of the date on which they are made, and the assumptions underlying our pro forma projections and/or earnings guidance could prove incorrect, and Tower undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.