10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-51127

NATIONAL ATLANTIC HOLDINGS CORPORATION

(Exact name of Registrant as specified in its charter)


New Jersey (State or other jurisdiction of incorporation or organization)		22-3316586 (I.R.S. Employer Identification No.)

4 Paragon Way
Freehold, NJ 07728
(732) 665-1100
(Address, including zip code, of
Registrant’s principal executive offices)

Registrant’s telephone number, including area code:
(732) 665-1100

Securities registered pursuant to Section 12(b) of the Act:


Title of Class		Name of Each Exchange on Which Registered

Common Stock, no par value per share		The Nasdaq Stock Market LLC

Securities Registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.


Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No þ

The aggregate market value of common shares held by non-affiliates of the registrant as of June 30, 2007, was 107,122,291 based on the closing sale price of $13.89 per common share on the The Nasdaq Stock Market LLC on that date. For purposes of this computation only, all officers, directors, and 10% beneficial owners of the registrant are deemed to be affiliates.

As of March 17, 2008, there were outstanding 11,007,487 common shares, no par value per share, of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for the 2008 Annual General Meeting of Shareholders are incorporated by reference into Part III of this report.

TABLE OF CONTENTS


PART I
	Item 1. Business
	Item 1A. Risk Factors
	Item 1B. Unresolved Staff Comments
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
PART II
	Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7a. Quantitative and Qualitative Disclosures About Market Risk
	Item 8. Financial Statements and Supplementary Data
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
	Item 9A. Controls and Procedures
	Item 9B. Other Information
PART III
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management
	Item 13. Certain Relationships and Related Transactions
	Item 14. Principal Accountant Fees and Services
PART IV
	Item 15. Exhibit and Financial Statement Schedules
EX-14.1: CODE OF ETHICS
EX-23.1: CONSENT OF BEARD MILLER COMPANY LLP
EX-23.2: CONSENT OF DELOITTE & TOUCHE LLP
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

PART I

The “Company,” “National Atlantic,” “NAHC,” “we,” “us,” and “our” refer to National Atlantic Holdings Corporation and its consolidated subsidiaries, and “Proformance” refers to Proformance Insurance Company, a wholly-owned insurance subsidiary of NAHC.

This Annual Report on Form 10-K (the “Form 10-K”) may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements represent the Company’s expectations or beliefs, including, but not limited to, statements concerning the Company’s operations and financial performance and condition. In particular, statements using words such as “may,” “should,” “estimate,” “expect,” “anticipate,” “intend,” “believe,” “predict,” “potential,” or words of similar import generally involve forward-looking statements. For example, we have included certain forward-looking statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” with regard to trends in results, prices, volumes, operations, investment results, margins, risk management and exchange rates. This Form 10-K also contains forward-looking statements with respect to our business and industry, such as those relating to our strategy and management objectives and trends in market conditions, market standing, product volumes, investment results and pricing conditions. In light of the risks and uncertainties inherent in all future projections, the inclusion of forward-looking statements in this Form 10-K should not be considered as a representation by us or any other person that our objectives or plans will be achieved. Numerous factors could cause our actual results to differ materially from those in forward-looking statements including, but not limited to, those discussed in this Form 10-K, including in “Risk Factors” below. As a consequence, current plans, anticipated actions and future financial condition and results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. Additionally, forward-looking statements speak only as of the date they are made, and we undertake no obligation to release publicly the results of any future revisions or updates we may make to forward-looking statements to reflect new information or circumstances after the date hereof or to reflect the occurrence of future events.

Item 1. Business

Overview

We provide property and casualty insurance and insurance-related services to individuals, families and businesses in the State of New Jersey. Our primary personal insurance product is the packaged High Performance Policy (“HPP”), which includes private passenger automobile, homeowners, and personal excess (“umbrella”) and specialty property liability coverage. We also provide a low-cost monoline automobile insurance product known as BlueStar Car Insurance(SM)_, which is targeted to customers who do not require the more comprehensive coverage offered by our HPP product. For businesses, we offer a range of commercial insurance products, including commercial property, commercial general liability, and business auto, as well as claims administrative services to self-insured corporations. We believe that our competitive edge lies in our extensive knowledge of the New Jersey insurance market and regulatory environment and our business model, which is designed to align our Partner Agents’ interests with management by requiring many of them to retain an ownership stake in the Company.

As of December 31, 2007, our insurance subsidiary, Proformance Insurance Company, which we refer to as Proformance, was the twelfth largest and one of the fastest growing providers of private passenger auto insurance in New Jersey, based on direct written premiums of companies writing more than $5 million of premiums annually over the past three years, according to A.M. Best. From 2003 through 2007, we experienced a 2.3% compound annual growth rate, as our direct written premiums for all lines of business we write, including homeowners and commercial lines, increased from $163.2 million in 2003 to $178.7 million in 2007. As of December 31, 2007, our stockholders’ equity was $144.2 million, up from stockholders’ equity of $49.8 million as of December 31, 2003, reflecting a 30.4% compound annual growth rate. Included in stockholders’ equity is $62.2 million as a result of our initial public offering, which was completed on April 21, 2005.

On March 13, 2008, the Company entered into a merger agreement (the “Merger Agreement”) with Palisades Safety and Insurance Association, an insurance exchange organized under NJSA 17:50-1 et seq. (“Palisades”), and Apollo Holdings, Inc., a New Jersey corporation and a direct wholly owned subsidiary of Palisades (“Merger Sub”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company, with NAHC continuing as the surviving corporation (the “Surviving Corporation”) and a direct wholly owned subsidiary of Palisades (the “Merger”).

At the effective time and as a result of the Merger, in exchange for their shares of issued and outstanding Company common stock, Company shareholders shall receive $6.25 in cash for each of their shares. The closing price of Company’s shares on the NASDAQ on March 11, 2008 was $5.50.

In addition, at or prior to the effective time of the Merger, each outstanding option to purchase Common Stock and each outstanding stock appreciation right (vested or unvested) will be canceled and the holder will be entitled to receive an amount of cash equal to the difference between the Merger Consideration and the exercise price of the applicable stock option, or the difference between the Merger Consideration and the applicable per share base price of the stock appreciation right, as applicable, less any required withholding taxes.

The Merger Agreement provides that the directors and officers of the Merger Sub immediately prior to the effective time of the Merger will be the directors and officers of the Surviving Corporation.

The Company and Palisades have made customary representations, warranties and covenants in the Merger Agreement. The completion of the Merger is subject to approval by the shareholders of the Company, obtaining regulatory approvals, including antitrust approval, and satisfaction or waiver of other conditions.

The Merger is subject to various closing conditions, including the approval of the Company’s shareholders, the obtaining of certain regulatory approvals specified in the Merger Agreement, the maintenance by the Company of certain stockholders’ equity and capital and surplus measures within prescribed levels, the Company obtaining a directors’ and officers’ liability tail policy for a specified cost and level of coverage, and the maintenance of the A.M. Best Financial Strength Rating of Proformance Insurance Company within a prescribed rating.

The Merger Agreement contains certain termination rights for both the Company and Palisades and further provides that, upon termination of the Merger Agreement under specified circumstances, the Company may be required to pay Palisades a termination fee of up to $2,100,000 . Furthermore, the Merger Agreement provides that, upon termination of the Merger Agreement under specified circumstances unrelated to a failure of the closing conditions, Palisades may be required to pay the Company certain liquidated damages based on the circumstances relating to such termination.

Simultaneously with the execution and delivery of the Merger Agreement, Palisades and James V. Gorman, the Chief Executive Officer of the Company entered into a voting agreement (the “Voting Agreement”). In the Voting Agreement, Mr. Gorman thereto agreed to vote, or provide his consent with respect to, all shares of Company capital stock held by such him: (1) in favor of the recommendation of the Board of Directors of the Company to the holders of Common Shares; and (2) against any Acquisition Proposal, or any agreement providing for the consummation of a transaction contemplated by any Acquisition Proposal (other than the Merger and other than following any Change in Recommendation made by the Board of Directors pursuant to the requirements of the Merger Agreement); and (3) in favor of any proposal to adjourn a shareholders’ meeting which the Company, Merger Sub and Parent support.

The foregoing description of the Merger, the Merger Agreement and the Voting Agreement does not purport to be complete and is qualified in its entirety by reference to (i) the complete text of the Merger Agreement, which is attached hereto as Exhibit 2.1 and (ii) the complete text of the Voting Agreement, which is attached hereto as Exhibit 4.1, which Merger Agreement and Voting Agreement are incorporated herein by reference.

The Merger Agreement has been included to provide investors and shareholders with information regarding its terms. It is not intended to provide any other factual information about the Company. The Merger Agreement contains representations and warranties that the parties to the Merger Agreement made to and solely for the benefit of each other. The assertions embodied in such representations and warranties are qualified by information contained in confidential disclosure letters that the parties exchanged in connection with signing the Merger Agreement. Accordingly, investors and shareholders should not rely on such representations and warranties as characterizations of the actual state of facts or circumstances, since they were only made as of the date of the Merger Agreement and are modified in important part by the underlying disclosure letters. Moreover, information concerning the subject matter of such representations and warranties may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in the Company’s public disclosures.

On March 13, 2008, the Company issued a press release announcing the execution of the Merger Agreement. A copy of the press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference. In addition, on March 13, 2008, the Company provided communications to its employees and certain other individuals announcing that it had entered into the Merger Agreement.

We believe the current conditions in the New Jersey property and casualty insurance market represent an attractive opportunity for us. According to the U.S. Census Bureau, 2006 American Community Survey, New Jersey had the

second highest median household incomes of the 50 states. According to A.M. Best, private passenger auto direct written premiums in New Jersey for 2006 were $5.9 billion (ranking seventh among the states and having grown 4% since 2002). Total property and casualty direct written premiums in New Jersey for 2006 were $17.2 billion (ranking seventh among the 50 states.) We believe that these market conditions provide us with the opportunity to profitably grow our business.

As other insurers have reduced their share or withdrawn from the New Jersey private passenger auto insurance market in recent years, as a result of numerous factors that include the regulatory environment, we have expanded our business through organic growth and through replacement carrier transactions. Replacement carrier transactions allow insurers to withdraw from the New Jersey insurance market by finding a replacement carrier, such as Proformance, that will agree to offer insurance coverage upon renewal of the withdrawing carriers’ policies. We have entered into six replacement carrier transactions and intend to opportunistically consider others if they meet our profitability and growth objectives.

We distribute our products exclusively through licensed independent agents, many of whom are Partner Agents who have purchased a minimum of $50,000 of the common stock of NAHC. By reason of their ownership interest in NAHC, we believe that each Partner Agent has an incentive to provide us with more profitable segments of the personal and commercial lines business in New Jersey. We provide Partner Agents with advanced automation tools to reduce expenses, the opportunity to qualify as “Custom Agents” with the ability to perform some of the basic underwriting and claims processing for additional compensation, and eligibility to participate in our contingent commission program which is based upon the volume and the profitability of the business produced by the agent or agency. We believe that the Partner Agent system of distributing our products provides us with a sustainable strategic advantage over our competitors in the areas of underwriting/risk selection and operating expense control.

Proformance provides comprehensive packaged personal lines property and casualty insurance. Our packaged personal lines policy, which we call the “High Proformance Policy” or “HPP,” contains coverages for private passenger automobile, homeowners, personal excess (“umbrella”) liability, and personal specialty property lines insurance covering jewelry, furs, fine arts, cameras, electronic data processing equipment, boats, yachts and other high value items. We believe that our packaged personal lines product provides several advantages over non-packaged alternatives, including administrative expense savings, lower loss ratios, increased customer convenience and higher policyholder retention. Part of our growth strategy is to convert individual policies obtained through replacement carrier transactions or placed by our Partner Agents with other carriers into our HPP product.

In 2007, Proformance launched a low-cost monoline automobile insurance product known as BlueStar Car Insurance (SM), which is targeted to those customers of our Partner Agents who do not require the broader coverage of our HPP product.

Proformance also offers commercial lines products, predominantly commercial automobile liability and physical damage for small to medium-sized “Main Street” businesses, which we regard as high frequency/low severity risks. In 2007, commercial lines business was 20.7% of our direct written premiums. It is part of our long-term strategy to increase our penetration of the “Main Street” commercial market, which in New Jersey is largely controlled by independent agents. Based upon reports given to us by our Partner Agents, we believe that our Partner Agents write an aggregate of approximately $3.1 billion of New Jersey property and casualty premiums per annum, of which approximately $2.0 billion is commercial lines. As of December 31, 2007, we write only 4.56% of the total premiums placed by our Partner Agents. We intend to increase our share of our agents’ total business. In particular, we intend to increase the amount of commercial lines business we write for “Main Street” business policyholders by capturing a larger share of this business placed by our Partner Agents.

Our non-insurance subsidiaries provide Proformance and third parties with a variety of services. Most of the services provided by our non-insurance subsidiaries generate fee-for-service income. Our non-insurance subsidiaries include:

	•		Riverview Professional Services, Inc., which we refer to as Riverview, which provides case management and medical treatment cost containment to ensure cost-efficient service in the treatment of auto accident victims and reduced claims expenses for Proformance. Riverview is also a third party claims administrator providing claims handling services to companies that self insure.

	•		National Atlantic Insurance Agency, Inc., which we refer to as NAIA, which provides services to “orphan” policyholders no longer serviced by their independent agents and policyholders acquired as part of our replacement carrier transactions.

For the years ended December 31, 2007, 2006 and 2005, NAHC, Proformance and our other subsidiaries generated the following net income (loss) and revenues:

Net Income (Loss) and Revenues


	Net Income (Loss)									Revenues
				For the year									For the year
				ended									ended
				December 31,									December 31,
	2007			2006			2005			2007			2006			2005
Proformance Insurance Company	$	(6,295	)	$	15,613		$	8,530		$	183,916		$	174,783		$	186,277
Riverview Professional Services		187			474			485			4,198			5,654			4,713
National Atlantic Insurance Agency		748			910			830			2,078			2,370			2,234
Mayfair Reinsurance Company Limited		286			(114	)		(414	)		1,564			260			152
National Atlantic Holdings Corporation		(1,120	)		(2,501	)		(2,995	)		179			677			541
Less intercompany eliminations		—			—			—			(7,664	)		(7,888	)		(6,576	)

Total	$	(6,194	)	$	14,382		$	6,436		$	184,271		$	175,856		$	187,341

Our principal executive offices are located at 4 Paragon Way, Freehold, NJ 07728. Our telephone number is (732) 665-1100. Our internet address is www.nationalatlantic.com.

Our Growth Strategies

Our goal is to grow our business and maximize shareholder value through the following strategies:

Focusing on the New Jersey Market. We will continue to focus our business in the New Jersey property and casualty insurance market where we believe we are able to achieve a competitive advantage through our knowledge and expertise of the market and regulatory environment. We have expanded our business to include a greater percentage of homeowners and commercial lines, and may consider geographic expansion at the appropriate time. and

Capturing a Larger Share of Our Agents’ Business. We intend to maintain and further develop our strong independent agent relationships by providing our agents with a broader portfolio of insurance products and technology services to enable us to capture a growing share of the total insurance business written by our agents. Based upon reports given to us by our Partner Agents, we believe they write an aggregate of approximately $3.1 billion of New Jersey property and casualty premiums per annum, of which approximately $2.0 billion is commercial lines. As of December 31, 2007, we write only 4.56% of the aggregate business placed by our Partner Agents. We intend to expand that percentage. In particular, we intend to increase the amount of commercial lines business we write for small to medium-sized business “Main Street” policyholders by capturing a larger share of this business written by our Partner Agents.

Converting Single Coverage Policies into Our Packaged Policies and Opportunistically Growing Our Business through Replacement Carrier Transactions. We intend to continue to grow our homeowners and non-auto businesses, principally by endorsing these additional coverages on policies which currently cover only automobile insurance, such as the policies transferred to us as part of the replacement carrier transactions, thereby converting those policies into our packaged High Proformance Policies. In addition, as opportunities arise we will enter into replacement carrier and other transactions which we determine are consistent with our objectives.

Marketing the Services of Our Non-Insurance Subsidiaries to Third Parties. We intend to selectively market and sell to third parties the services provided by Riverview. We believe Riverview provides a unique approach to maintaining cost-efficient medical service and the management of medical treatment to reduce frivolous and potentially fraudulent claims. We believe the services of Riverview are especially marketable to those insurers with small New Jersey books of business who do not have access to these claims and cost-reduction services. We will market the services of NAIA to our agents who, in exchange for NAIA’s services to the designated policyholders of that agent, will receive a commission from Proformance lower than our normal commission. These services will generate fee income to these non-insurance subsidiaries.

Other Subsidiaries

NAHC was formed on July 29, 1994 as a New Jersey corporation to serve as a holding company for Proformance. Proformance was formed as a New Jersey property and casualty insurance company on September 26, 1994. In

addition to Proformance, our other operating subsidiaries are Riverview, NAIA and Mayfair.

Riverview Professional Services, Inc.

In 2002, we formed Riverview to address the problem of sharply increasing costs for medical case management. We believe that appropriate and effective management of personal injury treatment is important to our success in the auto insurance industry. As a result, we created Riverview to provide Proformance with services relating to case management, medical treatment management, bill and code review and pre-certification and decision point review. Riverview is also a third party claims administrator that provides claims handling services.

Riverview deals with auto accident victims’ medical providers and screens requests for medical treatment that it considers to be frivolous, non-compliant or potentially fraudulent. Riverview pre-certifies all medically necessary services related to auto accident insureds through qualified medical professionals and works on containing costs for its clients. We believe Riverview’s approach leads to a more cost-efficient service for the management of medical treatment of auto accident victims and reduces claims expenses for its clients. Riverview also has a staff of eight in-house attorneys, allowing Riverview to handle claims-related litigation more efficiently and cost-effectively. Proformance pays Riverview an agreed upon flat fee per case handled.

We offer Riverview’s claim adjustment services to third parties. In June 2003, Riverview entered into a third party agreement to provide its services to AT&T on a countrywide basis. The agreement provides that Riverview handle AT&T’s auto liability, auto physical damage and general liability claims. The agreement expired on October 15, 2006, was not renewed and is currently in run-off. We believe that the unique and effective nature of Riverview’s services will enable it to selectively expand its business and provide its services to additional third parties on a competitive fee for service basis.

National Atlantic Insurance Agency, Inc.

In 1995, we formed our insurance agency subsidiary, NAIA. NAIA is a full service insurance agency that provides agency services to Proformance’s “orphan” policyholders no longer serviced by their independent agents. In addition, NAIA provides services to agents and/or policyholders acquired as part of our replacement carrier transactions discussed below. NAIA also provides services with respect to policyholders no longer receiving services from their agents of record. NAIA does not solicit new insurance customers except as required by New Jersey insurance laws and regulations.

NAIA receives a standard rate of commission, similar to that received by our Partner Agents, in exchange for the services it provides. As of December 31, 2007, NAIA does not provide agency services with respect to any other property casualty business other than Proformance’s business, although we plan to market NAIA’s services to agents who wish to have NAIA service such agents’ customers.

Mayfair Reinsurance Company Limited

On November 7, 2003 we formed Mayfair in Bermuda to provide reinsurance on certain blocks of business. Mayfair is classified as a Class 3 reinsurer in Bermuda and received its reinsurance license on December 19, 2003 from the Bermuda Monetary Authority. Mayfair does not reinsure business directly from Proformance.

For the year ending December 31, 2007, Mayfair did not issue any policies or assume any reinsurance, and as of December 31, 2007, Mayfair had no policies in force.

Niagara Atlantic Holdings Corporation

We own an 80% interest in Niagara Atlantic Holdings Corporation, which we refer to as Niagara Atlantic, a New York corporation. Niagara Atlantic was formed in December 1995 as a holding company for the purpose of executing a surplus debenture and service agreement with Capital Mutual Insurance Company. On June 5, 2000, Capital Mutual Insurance Company went into liquidation and is currently under the supervision and control of the New York State Insurance Department. Through loan guaranties, we lost approximately $3.0 million in connection with our investment in Niagara Atlantic. As of December 31, 2007, Niagara Atlantic is an inactive subsidiary.

The New Jersey Property and Casualty Insurance Market

Regulatory Environment

Proformance is licensed by the Commissioner of the Department of Banking and Insurance to transact property and casualty insurance in New Jersey. All of Proformance’s business is extensively regulated by the Commissioner, as

described below and elsewhere in this annual report on Form 10-K.

New Jersey Market for Private Passenger Automobile Insurance

Private passenger automobile insurance is heavily regulated in New Jersey, and is in many respects, unique in comparison with other states. Automobile insurers in New Jersey face unusual regulatory conditions such as the “take all comers” requirement and the Automobile Insurance Urban Enterprise Zone (UEZ) Program. For many insurance companies, these factors present substantial challenges, but we believe they give us a competitive advantage because of our thorough understanding of this market and our ability to take advantage of opportunities available under the law.

Recent and Proposed Legislation

In 1990, the New Jersey legislature adopted the Fair Automobile Insurance Reform Act of 1990 (FAIR Act), which restricted the ability of insurance companies to refuse automobile insurance applicants and to non-renew existing policies. In response to the FAIR Act, many insurance companies withdrew from or reduced their market share in the New Jersey automobile insurance market.

By the mid-1990’s, the FAIR Act was deemed insufficient to meet the needs of the marketplace. Auto insurance rates had become a major political issue, and the New Jersey legislature passed the Automobile Insurance Cost Reduction Act of 1998 (AICRA).

AICRA attempted to control consumer costs by cutting auto rates by 15% across the board. The loss of premiums to insurance carriers was to be made up by implementing strict measures to reduce insurance fraud and abuse, especially in the areas of vehicle repair and medical case management. Although the industry noted an increase in the efforts of the state’s law enforcement personnel to combat insurance fraud, the impact of AICRA on the profitability of carriers was viewed by the automobile insurance industry in New Jersey as being largely negative.

Recently, the New Jersey Department of Banking and Insurance (“NJDOBI”) proposed certain amendments to its personal auto insurance regulations. Under the proposed regulations, New Jersey insurance companies, such as Proformance, would be permitted to raise rates for certain drivers above limitations that are currently in place and lower rates for certain other drivers. In addition, the proposed regulations would permit insurance companies to use their own data to develop rating maps. The proposal would permit up to 50 rating territories across New Jersey compared to the 27 territories now recognized in New Jersey. There can be no assurance that the proposed regulations will be adopted, nor can we be certain how these regulations, if adopted, would impact our operations.

New Jersey Automobile Insurance Competition & Choice Act

On June 9, 2003, the New Jersey Automobile Insurance Competition & Choice Act (AICC Act) was signed into law by the Governor of New Jersey to address the issues of auto insurance availability and capacity. The new legislation was designed to attract competition in the New Jersey auto insurance market and to provide consumers with coverage choices. Pursuant to the AICC Act, the following regulatory changes have been adopted.

Rate Increases. The AICC Act improves the ability of private passenger auto insurers to achieve rate increases in a more timely fashion. The AICC Act increases the annual “expedited” rate filing threshold from 3% per annum to 7% per annum. The AICC Act shortens the time periods for the Commissioner to issue a decision with respect to an insurer’s proposal to increase rates by up to 7%. For a proposed rate increase of up to 3%, the Commissioner must issue a decision within 30 days after receipt of the filing. For a proposed rate increase of more than 3%, but not more than 7%, the Commissioner must issue a decision within 45 days after receipt of the filing.

Excess Profits. Each insurer in New Jersey is required to file an annual report which includes a calculation of statutory profits on private passenger automobile business. If the insurer has excess statutory profits as determined by a prescribed formula, the insurer is required to submit a plan for the approval of the Commissioner to refund or credit the excess profits to policyholders. Prior to the AICC Act, the calculation of statutory profits was based on the three-year period immediately prior to the report, and the amount of actuarial gain an insurer could report without being considered to have excess profits was limited to 2.5% of its earned premium, with actuarial gain defined as underwriting income minus 3.5% of earned premium. The AICC Act extended the time period for the calculation of statutory profits from three years to seven years to take into account market fluctuations over a longer period of time. The AICC Act also changed the basis for determining actuarial gains from earned premium to policyholder surplus. The term actuarial gain now means underwriting income minus an allowance for profit and contingencies (which shall not exceed 12% of policyholder surplus). The Commissioner is authorized to adjust this percentage biennially. The calculation of statutory profits for 2007 will not be completed until the second quarter of 2008. Therefore, the

determination as to whether we have exceeded the excess profit threshold for 2007 will not be known until that time. However, based upon our year end 2007 results, management believes that the excess profit threshold has not been exceeded. As of December 31, 2006, we did not exceed the excess profits threshold in respect of any prior look-back period.

“Take All Comers” Requirement. The AICC Act phases out the “take all comers” requirement over five years, to become inoperative on January 1, 2009. The AICC Act also exempts insurers from the “take all comers” requirement in those rating territories in which the insurer has increased its private passenger auto insurance non-fleet exposures by certain amounts. The exemption criteria are applied every six months to determine if the insurer remains exempt. Insurers that increased their private passenger auto insurance non-fleet exposures in a rating territory by 4% during the one-year period ended on January 1, 2005 were exempt from the “take all comers” requirement in that rating territory for the subsequent six-month period, at which time the 4% standard was applied to determine if the insurer remains exempt. Insurers that increase their private passenger auto insurance non-fleet exposures in a rating territory by the following amounts are also exempt from the “take all comers” requirement in that rating territory, subject to review every six months: 3% in the one-year period ended January 1, 2006, 2% in the one-year period ended January 1, 2007, and 1% in the one-year period ending January 1, 2008.

Tier Rating. Under the tier rating system used to determine rates, drivers are assigned to different rating tiers according to driving history and other risk characteristics including, among others, driving record characteristics, experience and type of car. The tier rating system requires insurers to take into account the entire record of the consumer, rather than penalizing drivers for accidents and department of motor vehicle violations. Each insurer creates tiers based on the risk characteristics that are important to it, which vary from insurer to insurer. By establishing tiers, each insurer is able to target the risks which it prefers to underwrite. Proformance’s tiering system seeks to charge low rates to good drivers and higher rates to drivers with poor driving records.

Unsatisfied Claim and Judgment Fund. The Unsatisfied Claim and Judgment Fund was created to pay claims of victims of hit and run or uninsured motor vehicle accidents and to reimburse insurers when medical expense benefits exceed $75,000 per person per accident. The AICC Act eliminates reimbursement to insurers for medical claims in excess of $75,000 for policies issued on or after January 1, 2004. The administration of these claims has been transferred from the Unsatisfied Claim and Judgment Fund to the New Jersey Property-Liability Insurance Guaranty Association, a private, nonprofit entity. This change is beneficial to us as the cost of this facility to Proformance has historically exceeded its benefits to Proformance.

Insurance Fraud Detection Reward Program. In an effort to enable efficient prosecution of fraud against insurance companies, the AICC Act establishes the crime of “insurance fraud” to criminalize the harmful conduct. To provide the public with incentives to come forward regarding reasonable suspicion or knowledge of insurance crimes, the AICC Act also establishes the Insurance Fraud Detection Reward Program to obtain information from the public.

Insurance Scenarios. Starting in 2004, every insurer had to provide each new applicant seeking automobile insurance, and each insured upon request, with three premium scenarios illustrating the effect of different coverage choices. Insurers are required to explain how each choice may affect costs and benefits in the event of an accident.

Automobile Insurance Urban Enterprise Zone Program

The Automobile Insurance Urban Enterprise Zone Program is an effort by the State of New Jersey to increase the availability of insurance and decrease the number of uninsured motorists in urban areas. New Jersey law requires each insurer to have its share of business in designated “urban enterprise zones” across the state equal to its proportionate share of the auto insurance market in the state as a whole. If an insurer does not achieve its quota, it is assigned business by the state to fill the quota. As of December 31, 2007, Proformance satisfies its quota in each urban enterprise zone primarily as a result of voluntary business it writes and the influx of policies from its replacement carrier transactions.

Personal Automobile Insurance Plan

The Personal Automobile Insurance Plan, or PAIP, is a plan designed to provide personal automobile coverage to drivers unable to obtain private passenger auto insurance in the voluntary market and to provide for the equitable assignment of PAIP liabilities to all licensed insurers writing personal automobile insurance in New Jersey. We may be assigned PAIP liabilities by the state in an amount equal to the proportion that our net direct written premiums on personal auto business for the prior calendar year bears to the corresponding net direct written premiums for all personal auto business written in New Jersey for such year. For the years ended December 31, 2007, 2006 and 2005,

we were assigned $4,049,181, $2,125,472 and $12,643,014, respectively, of premium by the State of New Jersey under the PAIP.

The State of New Jersey allows property and casualty companies to enter into Limited Assignment Distribution (LAD) agreements to transfer PAIP assignments to another insurance carrier approved by the State of New Jersey to handle this type of transaction. The LAD carrier is responsible for handling all of the premium and loss transactions arising from the PAIP assignments. In turn, the buy-out company pays the LAD carrier a fee based on a percentage of the buy-out company’s premium quota for a specific year. This transaction is not treated as a reinsurance transaction on the buy-out company’s books but as an expense. In the event the LAD carrier does not perform its responsibilities, we will not have any further liability associated with the assignments.

We have entered into LAD agreements with Clarendon National Insurance Company pursuant to which we transfer to them the PAIP liabilities assigned to us by the state. Clarendon National Insurance Company writes and services the business in exchange for an agreed upon fee. Upon the transfer, we may have to assume that portion of the PAIP assignment obligation in the event no other LAD carrier will perform these responsibilities.

Commercial Automobile Insurance Plan

The Commercial Automobile Insurance Plan, or CAIP, is a plan similar to PAIP, but involving commercial auto insurance rather than private passenger auto insurance. Private passenger vehicles cannot be insured by CAIP if they are eligible for coverage under PAIP or if they are owned by an “eligible person” as defined under New Jersey law. We are assessed an amount in respect of CAIP liabilities equal to the proportion that our net direct written premiums on commercial auto business for the prior calendar year bears to the corresponding net direct written premiums for commercial auto business written in New Jersey for that year.

Proformance records its CAIP assignment on its books as assumed business as required by the State of New Jersey. For the years ended December 31, 2007, 2006 and 2005, Proformance has been assigned $624,315, $992,659 and $1,968,016 of premiums and $1,030,143, $1,331,186 and $1,562,587 of losses, respectively, by the State of New Jersey under the CAIP.

New Jersey Automobile Insurance Risk Exchange

The New Jersey Automobile Insurance Risk Exchange, or NJAIRE, is a plan designed to compensate member companies for claims paid for non-economic losses and claims adjustment expenses which would not have been incurred had the tort limitation option provided under New Jersey insurance law been elected by the injured party filing the claim for non-economic losses. Our participation in NJAIRE is mandated by the NJDOBI. As a member company of NJAIRE, we submit information with respect to the number of claims reported to us that meet the criteria outlined above. NJAIRE compiles the information submitted by all member companies and remits assessments to each member company for this exposure. The assessments we receive from NJAIRE, are calculated by NJAIRE based upon the information submitted by all member companies and represents our percentage of the industry-wide total exposure for a specific reporting period. We have never received compensation from NJAIRE as a result of our participation in the plan. The assessments that we received required payment to NJAIRE for the amounts assessed.

For the years ended December 31, 2007, 2006 and 2005, we have been assessed $1,297,839, $1,490,148 and $1,877,161, respectively, by NJAIRE. These assessments represent amounts to be paid to NJAIRE as it relates to the Company’s participation in its plan. For the years ended December 31, 2007, 2006 and 2005, the Company received additional assessments of prior periods in the amount of $0, $362,499, and $0, respectively. For the years ended December 31, 2007, 2006 and 2005, the Company received reimbursements of prior period assessments in the amount of $1,288,325, $1,231,059 and $1,642,563, respectively.

Summary of Replacement Carrier Transactions

Ohio Casualty Replacement Carrier Transaction

On December 18, 2001, NAHC and Proformance entered into a transaction with Ohio Casualty of New Jersey, which we refer to as OCNJ, pursuant to which OCNJ transferred to Proformance the obligation to renew all of OCNJ’s private passenger automobile business written in New Jersey and OCNJ ceased writing private passenger automobile insurance in the State of New Jersey. As part of the withdrawal, Proformance became the replacement carrier for all of OCNJ’s private passenger auto insurance policies. OCNJ retained all rights and responsibilities related to the policies it

issued. Proformance offered renewal policies to all eligible OCNJ policyholders.

In connection with the transaction, OCNJ paid Proformance $41,100,000, of which $500,000 was paid at the contract date and $40,600,000 was paid in twelve equal monthly installments of $3,383,333, with the first payment due on March 18, 2002. In connection with this transaction, Ohio Casualty Insurance Company, which we refer to as OCIC, acquired a 19.71 percent interest (at the time of the transaction) in NAHC by purchasing 867,955 shares of Class B nonvoting common stock. We valued the stock issued as part of the transaction at $13,500,000, based on a valuation performed for us as of January 1, 2002. The remaining $27,600,000 was earned evenly as replacement carrier revenue over the twelve month period beginning on March 18, 2002. Further, OCNJ was required to pay to Proformance up to an additional $15,600,000 in the aggregate to maintain a premium-to-surplus ratio of 2.5 to 1 on the renewal business. A calculation of the premium-to-surplus ratio was made annually to determine the amount of the additional payment, if any, for such year. The $15,600,000 conditional guaranty expired on December 18, 2004. We received payments of $2,521,000 on June 25, 2004 and $4,299,000 on July 14, 2004 for a total of $6,820,000 from OCNJ pursuant to this requirement. In addition, on February 22, 2005 Proformance notified OCNJ that OCNJ owed Proformance $7,762,000 for the 2004 year in connection with the requirement that a premium-to-surplus ratio of 2.5 to 1 be maintained on the OCNJ renewal business. Pursuant to our agreement, OCNJ had until May 15, 2005 to make payment to us. Subsequent to the notification provided to OCIC and OCNJ, we had several discussions with OCIC relating to certain components of the underlying calculation which supports the amount owed to Proformance for the 2004 year.

As part of these discussions, OCIC had requested additional supporting documentation and raised issues with respect to approximately $2,000,000 of loss adjustment expense, approximately $800,000 of commission expense, and approximately $600,000 of NJAIRE assessments, or a total of $3,412,000, allocated to OCNJ. We recorded $4,350,000 (the difference between the $7,762,000 we notified OCNJ they owed us, and the $3,412,000 as outlined above) as replacement carrier revenue from related parties in our consolidated statement of operationsfor the year ended December 31, 2004 with respect to the OCIC replacement carrier transaction. We recorded $4,350,000 because it was management’s best estimate of the amount for which we believed collectability was reasonably assured based on several factors. First, the calculation to determine the amount owed by OCIC to us is complex and certain elements of the calculation are significantly dependent on management’s estimates and judgment and thus more susceptible to challenge by OCIC. We also noted our experience in the past in negotiating these issues with OCIC. For example, in 2003 we notified OCNJ that OCNJ owed Proformance approximately $10,100,000 for 2003. After negotiations we ultimately received $6,820,000. Accordingly, because of the nature of the calculation, the inherent subjectivity in establishing certain estimates upon which the calculation is based, and our experience from 2003, management’s best estimate of the amount for 2004 for which we believed collectability from OCIC was reasonably assured was $4,350,000. On June 27, 2005, we received $3,654,000 from OCIC in settlement of the amounts due to Proformance, which differs from the $4,350,000 we had recorded as a receivable due from OCIC as outlined above. The difference of $696,000 between the receivable we had recorded ($4,350,000) due from OCIC and the actual settlement payment received from OCIC ($3,654,000) came as a result of a dispute between the Company and OCIC regarding $292,000 of NJAIRE assessments and approximately $404,000 of commission expenses included in the underlying calculation which supported the amounts due to Proformance for the 2004 year, the final year of our three year agreement with OCIC. The $696,000 was recorded as a bad debt expense in the Company’s consolidated statement of operationsfor the year ended December 31, 2005.

As required under the December 18, 2001 agreement, on August 1, 2003, NAHC conducted a private offering of its nonvoting common stock. The offering was made only to former personal automobile agents of OCNJ, who met certain eligibility requirements as determined by NAHC’s Board of Directors. In connection with the offering, NAHC issued nonvoting common stock for an aggregate price of $2,500,000.

As part of the transaction, Proformance issued approximately 67,000 private passenger auto policies to OCNJ policyholders in New Jersey. Based on filings with the NJDOBI at the time of the transaction, we estimated that the Proformance underwriting standards would result in an overall rate increase of 16.8% to the OCNJ policyholders over three years, primarily attributable to increases in the rating factors of the less attractive drivers.

On July 10, 2004, we entered into an agreement with OCNJ and OCIC pursuant to which we agreed to include OCIC as the selling shareholder in our initial public offering and to use commercially reasonable efforts to facilitate the sale by OCIC of shares of common stock of NAHC owned by OCIC that have an aggregate value equal to at least 10% of the aggregate value of all shares of common stock sold by NAHC and OCIC in our initial public offering. In exchange, OCIC agreed to waive any rights it had or may have under the Investor Rights Agreement to require us to

redeem all of its shares of NAHC common stock as provided in that agreement. On December 23, 2005, the Investor Rights Agreement between NAHC and OCIC was terminated.

Sentry Insurance Replacement Carrier Transaction

On October 21, 2003, Proformance consummated a replacement carrier transaction with Sentry Insurance, a Wisconsin mutual company. Sentry Insurance agreed to not renew its personal lines insurance business in New Jersey upon policy expiration dates and Proformance agreed to offer replacement policies with substantially similar coverages and rates to the non-renewed Sentry Insurance policyholders, and to be responsible for any statutory or regulatory obligations that flow from the transfer of the business.

Sentry Insurance also agreed to support the business renewed by Proformance as a result of this transaction by paying Proformance $3,500,000, paid in four equal installments. In addition, in the event that the premium-to-surplus ratio for the Sentry Insurance business written by Proformance exceeds 2.5 to 1 during a specified period, Sentry Insurance was obligated to pay to Proformance such additional sums of money as necessary, up to an aggregate limit of $1,250,000, to reduce the premium-to-surplus ratio for the Sentry Insurance business written by Proformance to not less than 2.5 to 1. On February 22, 2005 Proformance notified Sentry Insurance that Sentry Insurance owed Proformance $1,250,000 for the 2004 year in connection with this requirement. On May 16, 2005, we received $1,250,000 from Sentry in settlement of the amounts owed to us.

As part of the transaction, NAIA agreed to provide general agency services to the transferred Sentry Insurance customers.

Metropolitan Property and Casualty Replacement Carrier Transaction

On December 8, 2003, NAHC and Proformance consummated a replacement carrier transaction with Metropolitan Property and Casualty Insurance Company, which we refer to as Met P&C, pursuant to which Met P&C agreed to not renew its personal lines insurance business (except for the Specialty Vehicle Automobile Program) produced by independent agents in New Jersey upon normal policy expiration dates and Proformance agreed to offer replacement policies with substantially similar coverages and rates to the non-renewed Met P&C policyholders, and to be responsible for any statutory or regulatory obligations that flow from the transfer of the business.

Pursuant to their agreement, Proformance offered all agents terminated by Met P&C as a result of this transaction, full or limited agency contracts with Proformance under terms and conditions no less favorable than the terms and conditions of such agents’ contracts with Met P&C.

As part of this replacement carrier transaction, Proformance agreed, with respect to any Met P&C policy renewed by Proformance pursuant to this transaction, not to impose an overall rate increase greater than 15% per year for three years subject to a maximum aggregate rate increase of 52%. Met P&C agreed to support the business renewed by Proformance by making a payment (on an after-tax basis) to Proformance totaling $6,660,000 which was paid at closing. In addition, at closing Met P&C purchased nonvoting common stock of NAHC for $10,000,000.

The Hartford Financial Services Group, Inc. Replacement Carrier Transaction

On September 27, 2005, the Company announced that Proformance had entered into a replacement carrier transaction with The Hartford Financial Services Group, Inc., which we refer to as The Hartford, whereby certain subsidiaries of The Hartford (Hartford Fire Insurance Company, Hartford Casualty Insurance Company, and Twin City Fire Insurance) would transfer their renewal obligations for New Jersey homeowners, dwelling, fire, and personal excess liabilities policies sold through independent agents to Proformance. Under the terms of the transaction, Proformance has offered renewal policies to approximately 8,500 qualified policyholders of The Hartford. We received final approval of this transaction from the NJDOBI on November 22, 2005, the closing date.

Upon the closing, Proformance was required to pay to The Hartford a one-time fee of $150,000. In addition, on May 15, 2007, Proformance paid a one-time payment to the Hartford in the amount of $253,392, which represented 5% of the written premium of the retained business at the end of the twelve-month non-renewal period.

The Hartford is not liable for any fees and or other amounts to be paid to Proformance and as such Proformance will not recognize any replacement carrier revenue from this transaction. The revenue that will be recognized as part of this transaction will be from the premium generated by the policies that renew with Proformance.

For the years ended December 31, 2007, 2006 and 2005, the direct written premium generated from The Hartford renewal business was $4,724,728, $4,134,877 and $0, respectively.

Hanover Insurance Group Replacement Carrier Transaction

On February 21, 2006 the Company announced that Proformance had entered into a replacement carrier transaction with Hanover Insurance Group, which we refer to as Hanover, whereby Hanover would transfer their renewal obligations for New Jersey automobile, homeowners, dwelling fire, personal excess liability and inland marine policies sold through independent agents to Proformance. Under the terms of the transaction, Proformance offered renewal policies to approximately 16,000 qualified policyholders of Hanover. NAHC and Proformance received approval of this transaction from the NJDOBI on February 16, 2006.

Upon the Closing on February 21, 2006, Proformance paid Hanover a one-time fee of $450,000 in connection with this transaction. In addition, within 30 days of the closing, $100,000 was due to Hanover to reimburse Hanover for its expenses associated with this transaction. In May of 2007, the Company paid $666,129 to Hanover, representing the first of two annual payments equal to 5% of the written premium of the retained business for the preceding twelve months, calculated at the 12 month and 24 month anniversaries and payable to Hanover within 30 days of such anniversary dates.

Hanover is not liable for any fees and or other amounts to be paid to Proformance and as such Proformance will not recognize any replacement carrier revenue from this transaction. The revenue that will be recognized as part of this transaction will be from the premium generated by the policies that renew with Proformance.

For the years ended December 31, 2007 and 2006, the direct written premium generated from Hanover renewal business was $12,491,300 and $11,080,943, respectively.

Products

High Proformance Policy

We attempt to attract and retain policyholders who are better insurance risks with a “packaged” insurance product, which we refer to as the “High Proformance Policy” or “HPP.” HPP is a comprehensive and differentiated policy which may contain the following property and casualty coverages purchased by individuals:

	•		Private passenger automobile insurance, including bodily injury and property damage liability, uninsured motorist coverage, personal injury protection, extended medical payments, comprehensive fire and theft, collision, rental reimbursement, towing and labor, and miscellaneous electronic device and mobile telephone coverages;

	•		Homeowners and condominium insurance coverage, including various endorsements for extended coverage for eligible property and liability exposures;

	•		Personal excess (“umbrella”) liability insurance as an additional line of coverage; and

	•		Personal specialty property lines covering jewelry, furs, fine arts, cameras, electronic data process equipment, boats, yachts and other high value items.

The target market for our HPP is middle income and upper-middle income applicants. We believe customers will continue to be attracted to the convenience of buying all of their personal insurance coverages under one policy from one company, and the benefit of comprehensive coverage designed not to leave gaps or create overlaps in coverage. We believe this design enhances our renewal retention, provides convenient premium payment and improves our loss ratios. Our historical underwriting experience further indicates that the policyholders who purchase their auto and homeowners coverage from the same carrier are better risks than policyholders who purchase only one kind of coverage.

Policyholders may purchase HPP coverage that initially includes only either the private passenger automobile coverage or the homeowners coverage. The policyholder may add the other coverages at their convenience as their existing policies for this other coverage expire. Many of our competitors do not offer a packaged policy and of the few who do, they do not offer the flexibility of sequentially adding coverage during the life of the policy. We believe that others have been slow to introduce packaged policies in New Jersey because they are trying to reduce market share and because it is difficult to convert a policy processing system designed to handle single coverage policies into a system that can handle packaged policies.

Our HPP coverage excludes mold, mildew and pollution.

Other Products

We also offer commercial lines insurance products including commercial automobile, commercial general liability, and commercial excess liability. Specifically, we underwrite commercial automobile liability and physical damage and commercial inland marine for risks insuring up to ten vehicles. In addition, we offer commercial liability, commercial inland marine and commercial excess liability to our commercial automobile policyholders. Predominantly, Proformance underwrites commercial automobile liability and physical damage for small to medium-sized “Main Street” business policyholders, which we regard as high frequency/low severity risks.

During 2005, we initiated the underwriting of a new commercial line of business designed to insure commercial property exposures on a “multi-peril” basis. For the years ended December 31, 2007, 2006 and 2005 we wrote $5.5 million, $3.5 million and $1.7 million of this type of business, respectively.

During 2007, we launched a monoline automobile policy targeted to individuals who do not currently own a home and, therefore, do not require the broader coverage of our HPP product. Salesmarked “Blue Star Car Insurance,” this product is marketed to our Partner Agents’ existing customers who fit into this demographic. For the year ended December 31, 2007, we wrote $8.7 million of this type of business.

The table below shows our direct written premiums in each of our product lines for the periods indicated and the portions of our total direct written premiums each product line represented.


	Years ended December 31,
Direct Written Premium	2007				2006				2005
Private passenger auto	$	104,471	58.5	%	$	111,379	65.1	%	$	152,482	77.0	%
Commercial auto		18,385	10.3	%		17,883	10.5	%		17,921	9.0	%
Homeowners		37,244	20.8	%		29,273	17.1	%		20,925	10.6	%
Other liability		18,579	10.4	%		12,534	7.3	%		6,721	3.4	%

Total	$	178,679	100.0	%	$	171,069	100.0	%	$	198,049	100.0	%

An emerging issue in the insurance industry is mold liability and property coverage under homeowners and similar property-related policies. Property damage as a result of mold is uncommon in New Jersey, unlike in the southern sections of the United States, most notably Texas. Although our High Proformance Policies exclude mold coverage, some of our other products include such coverage. Generally, insurance policies exclude mold coverage unless it is the result of a covered loss. In the prior three years, we are aware of sixteen claims under our policies, totaling less than $265,000, that involve mold liability as a result of a covered loss.

Distribution

Independent Agent Relationships

We distribute our products exclusively through licensed and contracted independent agents. All of our agents have entered into agency agreements. We have two types of independent agents, Partner Agents and Replacement Carrier Service Agents.

Partner Agents

Our Partner Agents are our independent agents who have purchased NAHC common stock with a minimum purchase price of $50,000. As of December 31, 2007, our Partner Agents owned in the aggregate approximately 12.8% of our outstanding common stock on a fully diluted basis. By reason of their ownership interest in NAHC, we believe that each agent has an incentive to provide us with more profitable segments of the personal and commercial lines business in New Jersey. We believe this gives us a competitive advantage in the market. As of December 31, 2007, there are 106 Partner Agents in 145 locations who enjoy the privileges of producing new and renewal insurance business in all of Proformance’s product lines of business and are paid a standard commission. We intend to continue requiring our agents to purchase shares of our common stock prior to selling our insurance products.

Our Partner Agents service their customers through established agencies in their local communities. The majority of the agencies of our Partner Agents have been established for more than 30 years, with the greatest concentration in the 30-50 year range. Based on information provided to us by our Partner Agents, the majority of our Partner Agents have in recent years produced $5 to $70 million of direct written premiums a year for all insurance companies which they represent. In 2007, our Partner Agents generated 74.4% of our total direct written premiums.

We provide Partner Agents with advanced automation tools to enable them to reduce the redundant operations associated with the personal lines policy production and servicing process. In addition, 90 Partner Agents have qualified for the elite “Custom Agent” designation enabling these agents to perform some of the basic underwriting and claims processing for additional compensation, thereby reducing our operating expenses. The Custom Agent’s underwriting activities are subject to review by our underwriting department and our Peer Review Committee.

All Partner Agents are eligible to participate in our Partner Agents’ profit sharing plan providing annual incentives based primarily on profit benchmarks as well as growth and product mix of the business produced by each Partner Agent. We believe that the Partner Agent system of distributing our products provides us with a sustainable strategic advantage as compared to our competitors in the areas of underwriting/risk selection and operating expense control.

Replacement Carrier Service Agents

Replacement Carrier Service Agents are those independent agents who became associated with Proformance through replacement carrier transactions. As of December 31, 2007, there are approximately 487 Replacement Carrier Service Agents located in New Jersey. We converted 50 Replacement Carrier Service Agents who were former OCNJ agents to Partner Agent status in connection with our private offering of NAHC common stock in 2003. We may offer additional Replacement Carrier Service Agents the opportunity to become Partner Agents in the future. In compliance with state regulations, Replacement Carrier Service Agents are paid the same rate of basic commission as they were paid by the ceding carrier. Replacement Carrier Service Agents do not enjoy Proformance’s standard Partner Agent commission levels, nor do they operate with any of the advanced automation tools available to the Partner Agents.

We classify our Replacement Carrier Service Agents as “Active” Replacement Carrier Service Agents, or Active RCS Agents, and Non-Active Replacement Carrier Service Agents, or Non-Active RCS Agents. We have 89 Active RCS Agents and 398 Non-Active RCS Agents located in New Jersey. Generally, we recognize a single location for each of our Replacement Carrier Service Agents. Active RCS Agents have entered into a limited agency agreement with Proformance and are authorized to write renewals and selective endorsements of private passenger auto business. Proformance can discontinue new personal auto business production by any Active RCS Agent, with or without cause, with 90 days advance written notice to the Active RCS Agent. Non-Active RCS Agents are authorized to provide limited agency services to the transferred policyholders, but are not authorized to produce any new business for Proformance.

Agency Agreements

All of our Partner Agents have entered into Partner Agent agency agreements, which define the duties and obligations of Proformance and each Partner Agent. Under the agency agreement, an agent who is a licensed New Jersey insurance agent agrees to purchase shares of NAHC common stock and become an independent contractor selling Proformance’s products in exchange for commissions. The agency agreement can be terminated by either party upon 90 days’ written notice and will automatically terminate if the insurance agent loses its license, sells its business (provided, that Proformance, may at its discretion, offer an agency agreement to the successor if it meets its suitability requirements) or in the event of fraud, insolvency, abandonment, gross negligence or willful misconduct of the agent.

Peer Review Committee

Proformance has established a Peer Review Committee which monitors the underwriting and risk selection activities of Partner Agents. As of December 31, 2007, the Peer Review Committee consists of six Partner Agents. The members of the Committee generally serve for one-year terms and are appointed by Proformance’s senior management team. It is our expectation that all Partner Agents will have the opportunity to serve on the Committee at some point. The Committee evaluates the performance of the Partner Agents to ensure compliance with our underwriting guidelines and marketing plans and can refer any issues to management of Proformance. Management of Proformance further evaluates the issues and can take certain actions regarding the Partner Agent under review, including, but not limited to, terminating the Partner Agent. At each meeting of the Board of Directors of Proformance, the Committee reports any meetings it has held and any actions it has taken. The Committee met four times in 2007 and once in 2006.

Marketing

Strategy

We believe that in the New Jersey personal lines property and casualty insurance industry there is a strong relationship between the policyholder and the independent agent. Therefore, we view the independent agents as our customers. Based on data of A.M. Best, we estimate that more than 60% of the property and casualty insurance direct written premiums in the State of New Jersey in 2006 were written through independent agency channels. As a result, our marketing efforts focus on developing strong interdependent relationships with our Partner Agents and providing them with the resources to write profitable business. We believe that our ability to develop strong and mutually beneficial relationships with our agents is paramount to our success and will enable us to capture a larger portion of our agents’ aggregate business.

Our principal marketing strategies are:

	•		To offer a range of products, which we believe enables our agents to meet the insurance needs of their clients who meet our target criteria;

	•		To price our products competitively, including offering discounts when and where appropriate for policyholders seeking to place all of their primary property and casualty insurance coverage with one carrier;

	•		To offer agents competitive commissions, with incentives for placing their more profitable business with us; and

	•		To provide a level of support and service that enhances the agents’ ability to do business with their clients and with us while reducing operating costs, providing us with an ability to maintain our competitive pricing position.

Agent Commissions and Incentive Plans

We employ several programs designed to compensate and provide incentives to our Partners Agents to produce increasing volumes of profitable business for us.

	•		Agent Commission Rates. We pay agent commissions on new and renewal business, which we believe are competitive in our marketplace.

	•		Partner Agents’ Profit Sharing Plan. Our Partner Agents’ profit sharing plan rewards our Partner Agents by providing annual incentives based primarily on profit benchmarks as well as growth and product mix of the business produced by each Partner Agent.

	•		Custom Agency Plan. Our Custom Agents are our Partner Agents that participate in the Custom Agency Plan. The Custom Agency Plan enables Custom Agents to perform some of the basic underwriting, claims processing and other functions for additional compensation. As of December 31, 2007, 96.2% of our Partner Agents participate in the Custom Agency Plan.

	•		Investment Incentive. All of our Partner Agents are shareholders of NAHC. By reason of their ownership interest in NAHC, we believe that each agent has an incentive to provide us with more profitable segments of the personal and commercial lines business in New Jersey.

Service and Support

We believe that the level and quality of service and support we provide to our agents helps differentiate us from other insurers. As of December 31, 2007, we have two field representatives that monitor and assist our agents. In addition, we provide our agents with software applications along with programs and services designed to strengthen and expand their marketing, sales and service capabilities. Our Custom Agency Plan allows certain agencies to sell new or service existing policyholders in a real-time environment by providing the agents with certain access to our underwriting, claims and policy information. We believe that the array of services we offer to our agents adds significant value to their business and enhances their capabilities. We are an Associate Member of the Professional Insurance Agents Association of New Jersey, and we support the Independent Insurance Agents and Brokers of New Jersey.

Underwriting

General

As of December 31, 2007, our underwriting department consists of 16 underwriters who are supported by underwriting assistants and other policy administration personnel. The underwriting department is responsible for pricing of our policies, management of the risk selection process and monitoring of our various books of business. Our underwriting department has two divisions, one for our personal lines business and one for our commercial lines business. Our personal lines underwriting division consists of 3 teams. Each team services designated independent agencies on a rotating basis.

Agent Underwriting Authority

Our Custom Agents are equipped with advanced automation tools to enable the agency to perform the initial underwriting services. Agents are provided access to an electronic version of our underwriting manuals, which include updated guidelines for acceptable risks, commission levels and product pricing. This process enables our agents to perform certain underwriting and administrative services on our behalf thereby reducing our operating expenses.

The underwriting activities of the Custom Agents are reviewed by our underwriting department on a daily basis. The software employed by our underwriting department identifies for our underwriting personnel any business underwritten by our Custom Agents which does not meet certain criteria predetermined by our underwriting department. Our underwriting department may then take appropriate actions in regards to such business underwritten, including amending or canceling the policies in accordance with applicable laws and regulation.

Use of “Credit Scoring”

As permitted under New Jersey insurance laws and regulations, we employ “insurance scoring” (sometimes referred to as “credit scoring”) in underwriting our homeowners policies and our commercial lines policies. We use credit bureaus to obtain insurance scores for individuals who apply for our homeowners or commercial lines coverage.

An insurance score is a measure of a person’s financial responsibility based on historical credit experience. The theory behind insurance scoring is that individuals with higher scores are less likely to incur insured losses than those with lower credit scores. We do not rely solely on credit scores to determine whether to provide coverage to an applicant or in determining the coverage price. Rather, we use credit scores as an ancillary underwriting tool which assists us in evaluating the underwriting risk of our applicants.

We believe that using credit scores to evaluate the underwriting risk of our applicants in connection with our homeowners and commercial lines coverage improves our underwriting results and increases our profitability.

Claims

Our claims department processes all claims that arise out of our insurance policies. As of December 31, 2007, we have 62 employees in our claims department. Processing automation has streamlined much of our claims function. We receive claims from our policyholders through our agents or directly through our 1-800 toll free telephone number.

Claims received by our agents are forwarded to our claims department through our claims systems. As agents receive calls from claimants, our software permits the agent to immediately send information related to the claims directly to us. Once we receive this information, the claim is directed to the appropriate internal adjuster responsible for investigating the claim to determine liability. We believe this process results in a shorter time period from when the claimant first contacts the agent to when the claimant receives a claim payment, while enabling the agents to build credibility with their clients by responding to claims in a timely and efficient manner.

As required under New Jersey insurance laws and regulations, we have formed a special investigative unit, which employs seven individuals responsible for identifying and investigating potential fraud and misrepresentation by claimants. All of our claims adjusters are carefully trained to identify certain factors in the claims handling process that indicate a potentially fraudulent claim or the presence of misrepresentation in the application or claims process. If a claims adjuster identifies any such factor, he or she is required to notify our investigative unit. A member of our investigative unit investigates the claim further to determine whether the claim is fraudulent or whether the claimant made a misrepresentation in the application or claims process. We believe the effectiveness of our investigative unit enables us to reduce the number of improper claims and produce more profitable underwriting results.

In addition, we rely on Riverview’s case management and medical treatment cost containment to ensure cost-efficient service in the treatment of auto accident victims and reduce our claims expenses. See “Business — Other Subsidiaries — Riverview Professional Services, Inc.”

Reserves

Significant periods of time can elapse between the occurrence of an insured loss, the reporting of the loss to the insurer and the insurer’s final payment of that loss. To recognize liabilities for unpaid losses, insurers establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported losses and the expenses associated with investigating and paying the losses, or loss adjustment expenses. We review our reserves internally on a quarterly basis. We are required by law to annually obtain a certification from a qualified actuary that our loss and loss adjustment expenses reserves are reasonable.

When a claim is reported, claims personnel establish a “case reserve” for the estimated amount of the ultimate payment. The amount of the reserve is primarily based upon an evaluation of the type of claim involved, the circumstances surrounding each claim and the policy provisions relating to the loss. The estimate reflects informed judgment of such personnel based on general insurance reserving practices and on the experience and knowledge of the claims personnel. During the loss adjustment period, these estimates are revised as deemed necessary by our claims department based on subsequent developments and periodic reviews of the cases.

In accordance with industry practice, we also maintain reserves for estimated losses incurred but not yet reported. Incurred but not yet reported reserves are determined in accordance with commonly accepted actuarial reserving techniques on the basis of our historical information and experience. We make adjustments to incurred but not yet reported reserves quarterly to take into account changes in the volume of business written, claims frequency and severity, our mix of business, claims processing and other items that can be expected to affect our liability for losses and loss adjustment expenses over time.

When reviewing reserves, we analyze historical data and estimate the impact of various loss development factors, such as our historical loss experience and that of the industry, legislative enactments, judicial decisions, legal developments in imposition of damages, and changes and trends in general economic conditions, including the effects of inflation. There is no precise method, however, for evaluating the impact of any specific factor on the adequacy of reserves, because the eventual development of reserves is affected by many factors. After taking into account all relevant factors, we believe that our provision for unpaid losses and loss adjustment expenses at December 31, 2007 is adequate to cover the ultimate net cost of losses and claims incurred as of that date. The ultimate liability may be greater or less than reserves. Establishment of appropriate reserves is an inherently uncertain process, and there can be no certainty that currently established reserves will prove adequate in light of subsequent actual experience. To the extent that reserves are inadequate and are strengthened, the amount of such increase is treated as a charge to earnings in the period that the deficiency is recognized.

For the year ended December 31, 2007, we increased reserves for prior years by $19.6 million. This increase was primarily due to increases in the prior year reserves for auto bodily injury coverage which increased by $22.2 million. During the third quarter ended September 30, 2007, it was determined that the Company’s policy related to claims handling procedures and reserving practices had not been applied consistently, primarily within the bodily injury claims unit. As part of the resolution of this matter, the Company retained an independent claims consulting firm. Additionally, the Company restructured the processes of its bodily injury claims unit during the third and fourth quarters of 2007.

The following table presents information on changes in the reserve for losses and loss adjustment expenses of NAHC and its subsidiaries for the years ended December 31, 2007, 2006 and 2005.


	Years ended December 31,
	2007			2006			2005
				(in thousands)
Balance as of beginning of year	$	191,386		$	219,361		$	184,283
Less reinsurance recoverable on unpaid losses		(17,866	)		(28,069	)		(24,936	)

Net balance as of beginning of year		173,520			191,292			159,347

Incurred related to:
Current period		125,483			103,801			122,728
Prior period		19,602			23			10,066

Total incurred		145,085			103,824			132,794

Paid related to:
Current period		49,020			38,009			42,301
Prior period		90,171			83,587			58,548

Total paid		139,191			121,596			100,849

Net balance as of December 31,		179,414			173,520			191,292
Plus reinsurance recoverable on unpaid losses		17,691			17,866			28,069

Balance as of December 31,	$	197,105		$	191,386		$	219,361

For the year ended December 31, 2007, we increased reserves for prior years by $19.6 million. This increase was primarily due to increases in the prior year reserves for auto bodily injury coverage which increased by $22.2 million. This increase was due to an inconsistent implementation of a revised claim reserving policy that was uncovered in the third quarter of 2007. Prior year reserves for other liability increased by $3.6 million. This was offset by favorable development of $4.6 million in no-fault coverages and $1.6 million in commercial auto liability.

For the year ended December 31, 2006, we decreased reserves by $28.0 million primarily due to a decrease in the loss and loss adjustment expense ratio for the same period. This decrease can be attributed to a decline in earned premium, a reduction in claim frequency in private passenger automobile coverage and significant growth in commercial lines business which in 2006, have exhibited lower loss ratios. For the year ended December 31, 2006, prior year reserves increased by $0.02 million. This increase was due to favorable development in bodily injury and no-fault coverages offset by a reduction in ceded loss estimates for prior years.

For the year ended December 31, 2005, we increased reserves for prior years by $10.1 million. This increase was due to increases in average severity for Personal Injury Protection (No-fault) losses of $9.4 million, Commercial Auto Liability projected loss ratios for 2002-2004 due to the fact that actual loss development was higher than expected for those years, resulting in an increase of $1.8 million, Homeowners losses of $0.6 million and Other Liability losses of $1.6 million. This development was partially offset by continued favorable trends in loss development for Property Damage losses ($1.6 million), Auto Physical Damage losses ($1.2 million), and Bodily Injury losses of ($0.5 million), as reported claims frequency has dropped significantly and we reduced our projected loss ratios in recognition of this trend.

The following table represents the development of reserves, net of reinsurance, for calendar years 1998 through 2007. The top line of the table shows the reserves at the balance sheet date for each of the indicated years. This represents the estimated amounts of losses and loss adjustment expenses for claims arising in all years that were unpaid at the balance sheet date, including losses that had been incurred but not yet reported to us. The upper portion of the

table shows the cumulative amounts paid as of the end of each successive year with respect to those claims. The lower portion of the table shows the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year, including cumulative payments made since the end of the respective year. The estimate changes as more information becomes known about the payments, frequency and severity of claims for individual years. Favorable loss development, shown as a cumulative redundancy in the table, exists when the original reserve estimate is greater than the re-estimated reserves at December 31, 2007.

Information with respect to the cumulative development of gross reserves (that is, without deduction for reinsurance ceded) also appears at the bottom portion of the table.

In evaluating the information in the table, it should be noted that each amount entered incorporates the effects of all changes in amounts entered for prior periods. Thus, if the 2000 estimate for a previously incurred loss was $150,000 and the loss was reserved at $100,000 in 1998, the $50,000 deficiency (later estimate minus original estimate) would be included in the cumulative redundancy (deficiency) in each of the years 2001-2004 shown in the table. It should further be noted that the table does not present accident or policy year development data. In addition, conditions and trends that have affected the development of liability in the past may not necessarily recur in the future. Accordingly, it is not appropriate to extrapolate future redundancies or deficiencies from the table.


	As of and for the Year Ended December 31,
	1998		1999		2000		2001		2002		2003		2004		2005		2006		2007
									(in thousands)
As Originally Estimated		14,965		15,484		20,386		30,014		66,041		112,872		159,347		191,292		173,520		179,414
As Re-estimated as of December 31, 2007		22,314		27,613		40,312		45,536		83,403		129,786		183,597		207,451		191,787		179,414

Liability Re-estimated as of:
One Year Later		15,261		17,901		25,588		32,028		74,671		112,200		169,414		191,315		191,787		—
Two Years Later		16,530		21,201		29,484		38,952		74,981		125,591		172,912		207,451		—		—
Three Years Later		18,471		23,740		33,720		40,999		82,583		126,571		183,597		—		—		—
Four Years Later		20,203		25,797		35,905		43,875		81,737		129,786		—		—		—		—
Five Years Later		20,924		26,324		37,614		44,185		83,403		—		—		—		—		—
Six Years Later		21,339		26,880		38,847		46,913		—		—		—		—		—		—
Seven Years Later		21,725		26,637		40,312		—		—		—		—		—		—		—
Eight Years Later		21,730		27,613		—		—		—		—		—		—		—		—
Nine Years Later		22,314		—		—		—		—		—		—		—		—		—
Ten Years Later
Cumulative Deficiency (Redundancy)		7,349		12,129		19,926		15,522		17,362		16,914		24,250		16,159		18,267

Cumulative Amounts Paid as of :
One Year Later		6,770		6,437		11,147		13,819		23,695		44,398		58,562		83,496		90,173		—
Two Years Later		10,554		13,511		19,591		22,766		40,764		72,551		110,637		148,846		—		—
Three Years Later		15,178		18,926		25,518		32,609		55,683		102,585		156,468		—		—		—
Four Years Later		18,050		21,944		30,969		40,054		68,019		122,373		—		—		—		—
Five Years Later		18,722		24,282		34,808		43,364		73,342		—		—		—		—		—
Six Years Later		20,091		25,498		37,196		46,019		—		—		—		—		—		—
Seven Years Later		20,778		26,287		39,209		—		—		—		—		—		—		—
Eight Years Later		21,354		27,446		—		—		—		—		—		—		—		—
Nine Years Later		21,924		—		—		—		—		—		—		—		—		—
Ten Years Later


	As of and for the Year Ended December 31,
	1998			1999			2000			2001			2002			2003			2004			2005			2006			2007

Percentage of intially estimated liability

Liability Re-estimated as of:
One Year Later		102	%		116	%		126	%		107	%		113	%		99	%		106	%		100	%		111	%		—
Two Years Later		110	%		137	%		145	%		130	%		114	%		111	%		109	%		108	%		—			—
Three Years Later		123	%		153	%		165	%		137	%		125	%		112	%		115	%		—			—			—
Four Years Later		135	%		167	%		176	%		146	%		124	%		115	%		—			—			—			—
Five Years Later		140	%		170	%		185	%		147	%		126	%		—			—			—			—			—
Six Years Later		143	%		174	%		191	%		152	%		—			—			—			—			—			—
Seven Years Later		145	%		172	%		198	%		—			—			—			—			—			—			—
Eight Years Later		145	%		178	%		—			—			—			—			—			—			—			—
Nine Years Later		149	%		—			—			—			—			—			—			—			—			—
Ten Years Later		—			—			—			—			—			—			—			—			—			—
Cumulative Deficiency (Redundancy)		45	%		74	%		85	%		46	%		25	%		11	%		6	%		8	%		11	%

Net Loss and Loss Adjustment Cumulative Paid as a Percentage of Initially Estimated Liability

Cumulative Amounts Paid as of :
One Year Later		45	%		42	%		55	%		46	%		36	%		39	%		37	%		44	%		52	%		—
Two Years Later		71	%		87	%		96	%		76	%		62	%		64	%		69	%		78	%		—			—
Three Years Later		101	%		122	%		125	%		109	%		84	%		91	%		98	%		—			—			—
Four Years Later		121	%		142	%		152	%		133	%		103	%		108	%		—			—			—			—
Five Years Later		125	%		157	%		171	%		144	%		111	%		—			—			—			—			—
Six Years Later		134	%		165	%		182	%		153	%		—			—			—			—			—			—
Seven Years Later		139	%		170	%		192	%		—			—			—			—			—			—			—
Eight Years Later		143	%		177	%		—			—			—			—			—			—			—			—
Nine Years Later		147	%		—			—			—			—			—			—			—			—			—
Ten Years Later		—			—			—			—			—			—			—			—			—			—

The following table is a reconciliation of net liability to gross liability for unpaid losses and loss adjustment expenses:


	As of and for the Year Ended December 31,
	1998		1999		2000		2001		2002		2003		2004		2005		2006		2007
									(in thousands)
As Originally Estimated
Net Liability shown above		14,965		15,484		20,386		30,014		66,041		112,872		159,347		191,292		173,520		179,414
Add Reinsurance Recoverables		8,395		11,571		16,962		26,718		19,431		21,329		24,936		28,069		17,866		17,691
Gross Liability		23,360		27,055		37,348		56,732		85,472		134,201		184,283		219,361		191,386		197,105

As Re-estimated as of December 31, 2007
Net Liability Shown Above		22,314		27,613		40,312		38,952		74,671		129,786		183,597		207,451		191,787		179,414
Add Reinsurance Recoverables		17,960		24,609		23,259		34,673		20,548		20,422		17,772		17,860		14,474		17,691
Gross Liability		40,274		52,222		63,571		73,625		95,219		150,208		201,369		225,311		206,261		197,105

As a result of our focus on core business lines since our founding in 1994, we believe we have no exposure to asbestos or environmental pollution liabilities, except for what we believe is a small amount of liability with respect to underground storage tanks pursuant to our homeowners policies.

Reinsurance

Third Party Reinsurance Program

The use of reinsurance has been an important part of our business strategy. As is customary in the industry, we reinsure with other insurance companies a portion of our potential liability under the policies we have underwritten; thereby protecting us against an unexpectedly large loss or a catastrophic occurrence that could produce large losses. Reinsurance involves an insurance company transferring (ceding) a portion of its exposure on insurance underwritten by it to another insurer (reinsurer). The reinsurer assumes a portion of the exposure in return for a share of the premium. Reinsurance does not legally discharge an insurance company from its primary liability for the full amount of the policies, but it does make the reinsurer liable to the company for the reinsured portion of any loss realized.

We are very selective in choosing our reinsurers, seeking only those companies that we consider to be financially stable and adequately capitalized. The collectibility of reinsurance is largely a function of the solvency of the reinsurers. As of December 31, 2007, our largest reinsurance recoverables/receivables were due from the following unaffiliated reinsurers, with their respective A.M. Best rating indicated below (in thousands):


	Reinsurance
	Recoverables/		A.M. Best
	Receivables		Rating (1)
QBE Reinsurance Company	$	7,044		A
Odyssey America Reinsurance	$	3,771		A


(1)		Ratings as of February 14, 2008

Effective December 31, 2002, Proformance entered into a Commutation and Release Agreement with Odyssey America Reinsurance Corporation whereby Proformance received $3,379,500 in full consideration for any past, current and future liabilities under a Multiple Line Loss Ratio Reinsurance Contract effective as of July 1, 2001.

Effective March 26, 2003, Proformance entered into a Commutation and Mutual Release Agreement with Gerling Global Reinsurance Corporation of America whereby Proformance received $6,200,000 in full consideration for any past, current and future liabilities relating to all reinsurance agreements with Gerling.

Effective December 31, 2003, Proformance exercised its right of commutation with Odyssey America Reinsurance Corporation in accordance with the Multiple Line Loss Ratio Excess of Loss Reinsurance Contract effective July 1, 2003 whereby Proformance received $10,050,000 in full consideration for any past, current and future liabilities relating to said treaty.

Effective December 31, 2004, Proformance entered into a Commutation and Release Agreement with Odyssey America Reinsurance Corporation whereby Proformance received $4,750,000 in full consideration of any past, current and future liabilities under the Commercial and Personal Excess Liability Excess of Loss Reinsurance contract effective January 1, 2004.

On January 1, 2005, Proformance entered into an Auto Physical Damage Quota Share Contract with Odyssey America Reinsurance Corporation. On September 15, 2005, Proformance commuted this contract with Odyssey Re. The commutation was initiated in September 2005 and all items previously recorded in connection with the agreement were reversed as of that period.

Mayfair Reinsurance Company Limited

After September 11, 2001, the third party reinsurance market changed dramatically. In renewing our reinsurance program for 2002 and 2003, we faced a market that continued to harden, with reduced availability and coverage limits and increased prices. Due to these and other factors, we concluded that our third party reinsurance program historically had not been maximizing our profits or strengthening our financial position.

In response, on November 7, 2003 we formed Mayfair Reinsurance Company Limited. See “Business — Other Subsidiaries — Mayfair Reinsurance Company Limited.”

Terrorism Risk Insurance Act of 2002

The Terrorism Risk Insurance Act of 2002, initially extended and amended by the Terrorism Risk Insurance Extension Act of 2005, was extended and amended by the Terrorism Risk Insurance Reauthorization Act of 2007, which was signed into law on December 26, 2007 and which we collectively refer to as TRIA. As extended, TRIA will automatically expire at the end of 2014. The intent of this legislation is to provide federal assistance to the insurance industry in order to meet the needs of commercial insurance policyholders with the potential exposure for losses due to acts of terrorism. This law requires insurers writing certain lines of property and casualty insurance to offer coverage against certain acts of terrorism causing damage within the United States or to United States flagged vessels or aircraft. In return, the law requires the federal government to indemnify such insurers for 85% of insured losses for each year through the end of 2014 resulting from covered acts of terrorism subject to certain premium-based deductibles. These premium-based deductibles are 20% for each year until the law expires at the end of 2014. In addition, no federal compensation will be paid under TRIA unless the aggregate industry insured losses resulting from the covered act of terrorism exceed $100.0 million for insured losses occurring for each until TRIA expires.

Investments

We invest according to guidelines devised by an internal investment committee, comprised of management of Proformance and a non-employee director of NAHC, focusing on what we believe are investments that will produce an acceptable rate of return given the risk being assumed. Our investment portfolio is managed by the investment officer at Proformance with oversight from our chief financial officer and the assistance of outside investment advisors.

Our objectives are to seek the highest total investment return consistent with prudent risk level by investing in a portfolio comprised of high quality investments including common stock, convertible securities, bonds and money market funds in accordance with the asset classifications set forth in Proformance’s Investment Policy Statement Guidelines and Objectives.

Proformance’s portfolio must be managed in accordance with New Jersey insurance statutory requirements and guidelines, which restrict our investment options. In addition, the terms of the Ohio Casualty replacement carrier transaction also limited us in our investment of assets through 2004 as specified in the Investment Policy Statement Guidelines and Objectives.

Our Investment Policy Statement Guidelines and Objectives include the following restrictions on investments, unless otherwise approved by the investment committee:

With respect to investments in equity securities, such investments:

	•		Must not exceed 40% of policyholders surplus,

	•		Must not exceed the lower of 20% of total portfolio in convertible securities or the maximum permitted by New Jersey insurance regulations,

	•		Investments in any one sector/industry group of the economy by reference to the S&P 500 Index must be no more than 10% of portfolio, and

	•		Investments in American Depository Receipts or foreign stocks must not exceed a maximum of 5% of portfolio;

	•		All investments must be denominated in U.S. dollars;

	•		All fixed income investments must be rated by the National Association of Insurance Commissioners, which we refer to as the NAIC. In addition (a) average maturity of fixed income portfolio may not exceed 10 years and the weighted average credit quality of the portfolio must be rated at least “A” by Moody’s or at least “A” by Standard & Poor’s Ratings Services, which we refer to as Standard & Poor’s, and (b) the portfolio must have a target duration of 3.5 years, but can range between 3 and 4 years (with the exception that the 10-15 year municipal bonds may have duration of 8.5 years); and

	•		Proformance may not make investments in (a) unincorporated businesses, (b) guaranteed investment contracts or (c) commercial paper rated below “A-1” by Standard & Poor’s or “P-1” by Moody’s.

We have no investments in any collateralized securities collaterized by sub-prime or alternative A, (“ALT-A”) loans. Our investments in this area are either collateralized mortgage obligations, with AAA credit ratings (“CMO”), Mortgage Backed Securities, (“MBS”) with AAA credit ratings and an implicit guarantee by the U.S. Government or Asset Backed Securities that have no exposure to the aforementioned sub-prime or ALT-A loans.

Our aggregate investment in CMO’s and/or MBS is less than 2% of invested assets.

Investment Results

The following table indicates the composition of our fixed income security portfolio (at fair value) by rating as of December 31, 2007:

Composition of Fixed Income Security Portfolio by Rating


	December 31, 2007
	Amount		Percent
	(In thousands)
U.S. Government and Government Agency Fixed Income Securities	$	202,130		64.6	%
Aaa/ Aa		102,452		32.7	%
A		7,170		2.3	%
Baa		1,136		0.4	%
Ba		—		—

Total	$	312,888		100	%

Moody’s rating system utilizes nine symbols to indicate the relative investment quality of a rated bond. “Aaa” rated bonds are judged to be of the best quality and are considered to carry the smallest degree of investment risk. “Aa” rated bonds are also judged to be of high quality by all standards. Together with “Aaa” rated bonds, these bonds comprise what are generally known as high-grade bonds. Bonds rated “A” possess many favorable investment attributes and are considered to be upper medium grade obligations. “Baa” rated bonds are considered as medium grade obligations; they are neither highly protected nor inadequately secured. Bonds rated “Ba” or lower (those rated “B”, “Caa”, “Ca” and “C”) are considered to be too speculative to be of investment quality.

The Securities Valuation Office of the NAIC evaluates all public and private bonds purchased as investments by insurance companies. The Securities Valuation Office assigns one of six investment categories to each security it reviews. Category 1 is the highest quality rating and Category 6 is the lowest. Categories 1 and 2 are the equivalent of investment grade debt as defined by rating agencies such as Standard & Poor’s and Moody’s, while Categories 3-6 are the equivalent of below investment grade securities. Securities Valuation Office ratings are reviewed at least annually. At December 31, 2007, all but one of our fixed maturity investments were rated Category 1, the highest rating assigned by the Securities Valuation Office. The other security was rated Category 2.

The following table indicates the composition of our fixed income security portfolio (at fair value) by time to maturity as of December 31, 2007.

Composition of Fixed Income Security Portfolio by Maturity


	December 31, 2007
	Amount		Percent
	(In thousands)
1 year or less	$	5,902		1.9	%
Over 1 year through 5 years		25,261		8.1	%
Over 5 years through 10 years		190,617		60.9	%
Over 10 years through 20 years		85,857		27.4	%
Over 20 years		223		.1	%
Mortgage-backed securities(1)		5,028		1.6	%

Total	$	312,888		100.0	%


(1)		Actual maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Prepayment rates are determined by a number of factors that cannot be predicted with certainty, including the relative sensitivity of the underlying mortgages or other collateral to changes in interest rates, a variety of economic, geographic and other factors, and the repayment priority of the securities in the overall securitization structures.

Competition

The property and casualty insurance business is highly competitive and most established companies in the field have greater financial resources, larger and more experienced agency organizations, and longer relationships with agency and sales organizations and insureds than we can expect to have for a number of years. As a result, established insurance companies have many competitive advantages over us. We compete with both large national writers and smaller regional companies.

Our competitors include other companies which, like us, serve the independent agency market, as well as companies which sell insurance directly to customers. Based on data of A.M. Best, we estimate that 40% of the property and casualty insurance direct written premiums in the State of New Jersey in 2006 were written through direct marketing channels. Direct writers may have certain competitive advantages over agency writers, including increased name recognition, loyalty of the customer base to the insurers rather than to independent agencies and, potentially, lower cost structures. A material reduction in the amount of business independent agents sell would adversely affect us. In the past, competition in the New Jersey personal auto market has included significant price competition, and there can be no assurance that these conditions will not recur. We and others compete on the basis of product portfolio, product pricing, and the commissions and other cash and non-cash incentives provided to agents. Although a number of national insurers that are much larger than we are do not currently compete in a material way in the New Jersey property and casualty market, if one or more of these companies decide to aggressively enter the market it could have a material adverse effect on us. These companies include some that would be able to sustain significant losses in order to acquire market share, as well as others which use distribution methods that compete with the independent agent channel. There can be no assurance that we will be able to compete effectively against these companies in the future.

Our principal competitor which serves the independent agency market and offers a packaged personal lines property and casualty insurance product, is Encompass Insurance (an affiliate of Allstate Insurance). Other competitors include First Trenton and Palisades Insurance. In addition, we compete with companies such as Chubb Insurance that also offer a packaged personal lines property and casualty insurance product.

The New Jersey private passenger auto insurance market has become more competitive in recent years. In August 2003, Mercury General entered the New Jersey private passenger auto insurance market. In August 2004, GEICO re-entered the New Jersey private passenger auto insurance market and in October 2005, Progressive Casualty Insurance Company entered the New Jersey private passenger auto insurance market. We believe this supports our view that current market conditions in New Jersey for private passenger auto insurance companies have improved. However, competition, especially from larger, more established insurers such as GEICO and Progressive, could cause premium rate reductions, reduced profits or losses, or loss of market share, any of which could have a material adverse effect on our business, results of operations and financial condition. Although we compete with Mercury General, GEICO and Progressive, we believe our packaged High Proformance Policy, which can include auto, home, boat and excess on one policy, provides us with a competitive advantage as Mercury General, GEICO and Progressive do not offer packaged policies.

Ratings

One of the key comparisons between insurers is the relative rating by A.M. Best. A.M. Best, which rates insurance companies based on factors of concern to policyholders, currently assigns Proformance a secure “B++ (Very Good)” rating. Such rating is the fifth highest rating of 15 rating levels that A.M. Best assigns to insurance companies, which currently range from “A++ (Superior)” to “D (Poor).” Publications of A.M. Best indicate that the “B++” rating is assigned to those companies that in A.M. Best’s opinion have a good ability to meet their current obligations to policyholders, but are financially vulnerable to adverse changes in underwriting and economic conditions. In evaluating a company’s financial and operating performance, A.M. Best reviews the company’s profitability, leverage and liquidity, as well as its book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its loss reserves, the adequacy of its surplus, its capital structure, the experience and competence of its management and its market presence. A.M. Best’s ratings reflect its opinion of an insurance company’s financial strength, operating performance and ability to meet its obligations to policyholders and are not evaluations directed to purchasers of an insurance company’s securities.

implications. Concurrently, A.M. Best placed the ICR of “bb” of Proformance’s holding company, National Atlantic Holdings Corporation under review with negative implications. A.M. Best stated that its rating action was based on the ineffectiveness of certain oversight processes with respect to Proformance’s bodily injury claims function and the subsequent deterioration in A.M. Best’s view of risk-adjusted capitalization. During the third quarter of 2007, management determined that Proformance’s procedures related to bodily injury claims handling and reserving were not applied consistently throughout the organization, which resulted in a significant increase in loss reserves for the third quarter of 2007. Consequently, A.M. Best stated that risk-adjusted capitalization declined to a level below the minimum required for Proformance’s ratings.

In addition, Proformance is rated “A” by Demotech, Inc. Demotech provides financial stability ratings of property and casualty insurers. In addition to A.M. Best, Demotech is the only other authorized rating agency recognized by federally insured lending institutions, such as mortgage companies. Mortgage companies, as a condition to issuing a mortgage, generally require borrowers to obtain adequate homeowners insurance. The mortgage companies often refer to Demotech’s financial stability rating prior to issuing a mortgage. We believe the “A” rating assigned by Demotech is beneficial in connection with our homeowners and other lines of business.

Publications of Demotech indicate that its rating process provides an objective baseline for assessing the solvency of an insurer. A Demotech financial stability rating summarizes its opinion as to the insurer’s ability to insulate itself from the business cycle that exists in the general economy as well as the underwriting cycle that exists in the industry.

An “A” rating is Demotech’s third highest rating out of six possible rating classifications for insurers with complete financial data. An “A” rating is assigned to insurers that in Demotech’s opinion possess exceptional financial stability related to maintaining positive surplus as regards policyholders, regardless of the severity of a general economic downturn or deterioration in the insurance cycle.

Our A.M. Best and our Demotech ratings are subject to change and are not recommendations to buy, sell or hold securities. Any future decrease in our ratings could affect our competitive position.

Properties

We are headquartered at 4 Paragon Way, Freehold, New Jersey. NAHC leases approximately 45,000 square feet of office space for a term ending June 1, 2009. NAHC’s subsidiaries share the cost of this space under the cost sharing agreement that they entered into with NAHC. On September 11, 2004, we leased an additional 16,000 square feet of space at 3 Paragon Way, Freehold, New Jersey.

Employees

As of December 31, 2007, we had 248 employees, of which 203 were employed by Proformance, 30 were employed by Riverview, 8 were employed by NAIA and 7 were employed by NAHC. None of our employees are represented by a labor union or are covered by collective bargaining agreements. We have not experienced any labor disputes or work stoppages and we consider our employee relations to be good.

Legal Proceedings

Proformance is party to a number of lawsuits arising in the ordinary course of its insurance business. We believe that the ultimate resolution of these lawsuits will not, individually or in the aggregate, have a material adverse effect on our consolidated financial statements. We believe that the outcomes of most of these lawsuits will be favorable to us. With respect to those lawsuits for which the outcome is not favorable to us, we believe that we have adequate reserves to cover any losses we may incur. Other than these lawsuits, we are not involved in any legal proceedings.

We are subject to regulation by the NJDOBI, and we must obtain prior approval for certain corporate actions. We must comply with laws and regulations involving:

	•		Transactions between an insurance company and any of its affiliates;

	•		The payment of dividends;

	•		The acquisition of an insurance company or of any company controlling an insurance company;

	•		Approval or filing of premium rates and policy forms;

	•		Solvency standards;

	•		Minimum amounts of capital and policyholders’ surplus which must be maintained;

	•		Limitations on types and amounts of investments;

	•		Restrictions on the size of risks which may be insured by a single company;

	•		Limitation of the right to cancel or non-renew policies in some lines;

	•		Regulation of the right to withdraw from markets or terminate involvement with agencies;

	•		Requirements to participate in residual markets;

	•		Licensing of insurers and agents;

	•		Deposits of securities for the benefit of policyholders;

	•		Reporting with respect to our financial condition, including the adequacy of our reserves and provisions for unearned premiums;

	•		Unfair trade and claims practices; and

	•		The type of accounting we must use.

In addition, insurance department examiners from New Jersey perform periodic financial and market conduct examinations of insurance companies. Such regulation is generally intended for the protection of policyholders rather than security holders.

Insurance Holding Company Regulation. Our principal operating subsidiary, Proformance, is an insurance company, and therefore we are subject to certain laws and regulations in New Jersey regulating insurance holding company systems. These laws require that we file annually a registration statement with the Commissioner that discloses the identity, financial condition, capital structure, ownership and management of each entity within our corporate structure and any transactions among the members of our holding company system. In some instances, we must obtain the prior approval of the Commissioner for material transactions between our insurance subsidiary and other members of our holding company system. These holding company statutes also require, among other things, prior approval of the payment of extraordinary dividends or distributions and any acquisition of control of a domestic insurer.

Insurance Regulation Concerning Dividends. We rely on dividends from Proformance for our cash requirements. The insurance holding company law of New Jersey requires notice to the Commissioner of any dividend to the shareholders of an insurance company. Proformance may not make an “extraordinary dividend” until 30 days after the Commissioner has received notice of the intended dividend and has not objected or has approved it in such time. An extraordinary dividend is defined as any dividend or distribution whose fair market value together with that of other distributions made within the preceding 12 months exceeds the greater of 10% of the insurer’s surplus as of the preceding December 31, or the insurer’s net income (excluding realized capital gains) for the 12-month period ending on the preceding December 31, in each case determined in accordance with statutory accounting practices. Under New Jersey law, an insurer may pay dividends that are not considered extraordinary only from its unassigned surplus, also known as its earned surplus. The insurer’s remaining surplus must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs following payment of any dividend or distribution to shareholders. As of December 31, 2007, Proformance is not permitted to pay dividends without the approval of the Commissioner.

Acquisition of Control of a New Jersey Domiciled Insurance Company. New Jersey law requires prior approval by the Commissioner of any acquisition of control of an insurance company that is domiciled in New Jersey. That law presumes that control exists where any person, directly or indirectly, owns, controls, holds the power to vote or holds proxies representing 10% or more of our outstanding voting stock. Even persons who do not acquire beneficial ownership of more than 10% of the outstanding shares of our common stock may be deemed to have acquired control if the Commission determines that control exists in fact. Any purchaser of shares of common stock representing 10% or more of the voting power of our capital stock will be presumed to have acquired control of our New Jersey insurance subsidiary unless, following application by that purchaser, the Commissioner determines that the acquisition

does not constitute a change of control or is otherwise not subject to regulatory review. These requirements may deter, delay, or prevent transactions affecting the control of or the ownership of our common stock, including transactions that could be advantageous to our shareholders.

Protection against Insurer Insolvency. New Jersey law requires that property and casualty insurers licensed to do business in New Jersey participate in the New Jersey Property-Liability Insurance Guaranty Association, which we refer to as NJPLIGA. NJPLIGA must pay any claim up to $300,000 of a policyholder of an insolvent insurer if the claim existed prior to the declaration of insolvency or arose within 90 days after the declaration of insolvency. Members of NJPLIGA are assessed the amount NJPLIGA deems necessary to pay its obligations and its expenses in connection with handling covered claims. Subject to certain exceptions, assessments are made in the proportion that each member’s net direct written premiums for the prior calendar year for all property and casualty lines bear to the corresponding net direct written premiums for NJPLIGA members for the same period. By statute, no insurer in New Jersey may be assessed in any year an amount greater than 2% of that insurer’s net direct written premiums for the calendar year prior to the assessment. In 2007, Proformance was assessed $2.0 million, as our portion of the losses due to insolvencies of certain insurers. We anticipate that there will be additional assessments from time to time relating to insolvencies of various insurance companies. We are allowed to re-coup these assessments from our policyholders over time until we have recovered all such payments.

Risk-Based Capital Requirements. The NAIC has adopted a formula and model law to implement risk-based capital requirements for most property and casualty insurance companies, which are designed to determine minimum capital requirements and to raise the level of protection that statutory surplus provides for policyholder obligations. The risk-based capital formula for property and casualty insurance companies measures three major areas of risk facing property and casualty insurers: (i) underwriting, which encompasses the risk of adverse loss developments and inadequate pricing; (ii) declines in asset values arising from market and/or credit risk; and (iii) off-balance sheet risk arising from adverse experience from non-controlled assets, guarantees for affiliates or other contingent liabilities and reserve and premium growth. Under New Jersey law, insurers having less total adjusted capital than that required by the risk-based capital calculation will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy.

The risk-based capital law provides four levels of regulatory action. The extent of regulatory intervention and action increases as the level of total adjusted capital to risk-based capital falls. The first level, the company action level as defined by the NAIC, requires an insurer to submit a plan of corrective actions to the Commissioner if total adjusted capital falls below 200% of the risk-based capital amount. The regulatory action level as defined by the NAIC requires an insurer to submit a plan containing corrective actions and requires the Commissioner to perform an examination or other analysis and issue a corrective order if total adjusted capital falls below 150% of the risk-based capital amount. The authorized control level, as defined by the NAIC, authorizes the Commissioner to take whatever regulatory actions he or she considers necessary to protect the best interest of the policyholders and creditors of the insurer and the public, which may include the actions necessary to cause the insurer to be placed under regulatory control (i.e., rehabilitation or liquidation) if total adjusted capital falls below 100% of the risk-based capital amount. The fourth action level is the mandatory control level as defined by the NAIC, which requires the Commissioner to place the insurer under regulatory control if total adjusted capital falls below 70% of the risk-based capital amount.

The formulas have not been designed to differentiate among adequately capitalized companies that operate with higher levels of capital. Therefore, it is inappropriate and ineffective to use the formulas to rate or to rank these companies. As of December 31, 2007, Proformance had total adjusted capital in excess of amounts requiring company or regulatory action at any prescribed risk-based capital action level.

NAIC IRIS Ratios. The NAIC has developed a set of financial relationships or “tests” known as the Insurance Regulatory Information System that were designed for early identification of companies which may require special attention or action by insurance regulatory authorities. Insurance companies submit data annually to the NAIC which analyzes the data against defined “usual ranges.” Generally, an insurance company will become subject to regulatory scrutiny if it falls outside the usual ranges of four or more of the ratios. As of December 31, 2007, Proformance did not fall outside of the usual range for any of the ratio tests.

Surplus and Capital Requirements. The Commissioner has the discretionary authority, in connection with the ongoing licensing of Proformance, to limit or prohibit the ability of Proformance to issue new policies if, in the Commissioner’s judgment, Proformance is not maintaining a minimum amount of surplus or is in hazardous financial condition. We do not believe that the current or anticipated levels of statutory surplus of Proformance, present a material risk that the Commissioner would limit the amount of new policies Proformance may issue.

Regulation of Investments. Proformance is subject to laws and regulations that require diversification of its investment portfolio and limit the amount of investments in certain asset categories, such as below investment grade fixed income securities, equity real estate, other equity investments and derivatives. Failure to comply with these laws and regulations would cause investments exceeding regulatory limitations to be treated as non-admitted assets for purposes of measuring surplus, and, in some instances, would require divestiture of such non-complying investments. We believe that investments made by Proformance comply with these laws and regulations.

Bermuda

Bermuda Restrictions on Dividend Payments. Bermuda legislation imposes limitations on the dividends that Mayfair may pay. Under the Bermuda Insurance Act 1978, Mayfair is required to maintain a specified solvency margin and a minimum liquidity ratio and is prohibited from declaring or paying any dividends if doing so would cause Mayfair to fail to meet its solvency margin and its minimum liquidity ratio. Under the Insurance Act, Mayfair is prohibited from paying dividends of more than 25% of its total statutory capital and surplus at the end of the previous fiscal year unless it files an affidavit stating that the declaration of such dividends will not cause it to fail to meet its solvency margin and minimum liquidity ratio. The Insurance Act also prohibits Mayfair from declaring or paying dividends without the approval of the Bermuda Monetary Authority if Mayfair fails to meet its solvency margin and minimum liquidity ratio on the last day of the previous fiscal year. Additionally, under the Bermuda Companies Act 1981, Mayfair may declare or pay a dividend only if it has no reasonable grounds for believing that it is, or would after the payment be, unable to pay its liabilities as they become due, or that the realizable value of its assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts.

Item 1A. Risk Factors

Numerous factors could cause our actual results to differ materially from those in the forward-looking statements set forth in this Form 10-K and in other documents that we file with the Securities and Exchange Commission. Those factors include the following:

Risks Related to Our Business

Because we are primarily a private passenger automobile insurance carrier, negative developments in the economic, regulatory or competitive conditions in this industry could cause us to incur additional costs and limit our flexibility in our underwriting process. This would reduce our profitability and the impact of these changes would have a disproportionate effect on our ability to operate profitably and successfully grow our business as compared to other more diversified insurers.

For the years ended December 31, 2007, 2006 and 2005, approximately 58.5%, 65.1% and 77.0%, respectively, of our direct written premiums were generated from private passenger automobile insurance policies. As a result of our focus on that line of business, negative developments in the economic, competitive or regulatory conditions affecting the private passenger automobile insurance industry could have a material adverse effect on our results of operations and financial condition. For example, in 1998 the New Jersey legislature passed AICRA. AICRA attempted to control consumer costs by cutting automobile insurance rates by 15%. Although AICRA attempted to reduce costs to insurers by implementing strict measures to minimize fraud and abuse, our loss of premiums from the mandated rate reductions was not offset by such measures. Accordingly, the impact of this legislation reduced our profitability.

In addition, any of these or similar developments in the private passenger automobile insurance industry would have a disproportionate effect on us, compared to more diversified insurers that also sell a larger proportion of other types of property and casualty insurance products.

Because we write insurance only in New Jersey, negative developments in the regulatory, economic, demographic, competitive and weather conditions in the New Jersey market could cause us to incur additional costs or limit our flexibility in our underwriting process and the impact of these changes would have a disproportionate effect on us compared to insurers that operate in multiple states.

All of our direct written premiums in 2007 were generated in New Jersey. Our revenues and profitability are therefore subject to prevailing regulatory, economic, demographic, competitive, weather and other conditions in New

Jersey. Changes in any of these conditions could make it more costly or difficult for us to conduct our business. For example, the ability of New Jersey insurers to obtain property and casualty reinsurance at reasonable prices was limited as a result of Hurricane Andrew. Accordingly, it became more costly for insurers to reduce risks through reinsurance. Because of the increased cost of reinsurance, insurers were limited in their ability to operate profitably.

Adverse regulatory developments in New Jersey, such as AICRA, or others which could include fundamental changes in the design or implementation of the New Jersey insurance regulatory framework, could limit our ability to operate profitably by causing us to incur additional costs or limiting our flexibility in our underwriting process. In addition, these developments would have a disproportionate effect on us, compared to insurers which conduct operations in multiple states.

We have historically derived a substantial portion of our revenues from replacement carrier transactions, and we may not be able to enter into those types of transactions in the future.

For the years ended December 31, 2007, 2006 and 2005, we derived no revenue from replacement carrier transactions. Our strategy includes entering into additional replacement carrier transactions as opportunities arise.

However, due to improvements in the New Jersey insurance market since 2005, it is not likely that we will enter into replacement carrier transactions which have as significant an impact on our operations or are comparable in size to those entered into prior to 2005.

We cannot be certain we will identify possible future replacement carrier transactions with terms we view as being acceptable, or that we will be able to consummate any future replacement carrier transactions. If we do enter into future replacement carrier transactions, we cannot be certain as to the terms of those transactions. If we are unable to enter into future replacement carrier transactions on terms acceptable to us, our revenues may decline. We believe that during the current portion of the personal auto insurance cycle, which in our view is one of growth, it may be more difficult than otherwise to identify acceptable replacement carrier transactions.

We have exposure to claims related to severe weather conditions, which may result in an increase in claims frequency and severity.

We are subject to claims arising out of severe weather conditions, such as rainstorms, snowstorms and ice storms, that may have a significant effect on our results of operations and financial condition. The incidence and severity of weather conditions are inherently unpredictable. There is generally an increase in claims frequency and severity under the private passenger automobile insurance we write when severe weather occurs because a higher incidence of vehicular accidents and other insured losses tend to occur in severe weather conditions. In addition, we have exposure to an increase in claims frequency and severity under the homeowners and other property insurance we write because property damage may result from severe weather conditions.

Because some of our insureds live near the New Jersey coastline, we also have a potential exposure to losses from hurricanes and major coastal storms such as Nor’easters. For example, in September 1999 we were impacted by Tropical Storm Floyd. Our direct written premiums in 1999 were approximately $40.2 million, but as a result of Tropical Storm Floyd we paid $1.1 million in claims, of which $0.6 million was for physical damage coverage and $0.5 million was for insured property losses.

Although we purchase catastrophe reinsurance to limit our exposure to these types of natural catastrophes, in the event of a major catastrophe resulting in losses to us in excess of $80 million, our losses would exceed the limits of our reinsurance coverage.

If we are not able to attract and retain independent agents, we would be limited in our ability to sell our insurance products.

We market our insurance solely through independent agents. We do not rely on, nor are we dependent upon, any one particular agent to sell our products. We compete with other insurance carriers for the business of independent agents. Our agents also offer the products of our competitors, some of which offer a larger variety of products, lower prices for insurance coverage or higher commissions. Changes in commissions, services or products offered by our competitors could make it harder for us to attract and retain independent agents to sell our insurance products.

Established competitors with greater resources may make it difficult for us to market our products effectively and

offer our products at a profit.

In the past, competition in the New Jersey personal auto insurance market has included significant price competition and there can be no assurance that these conditions will not recur. Although we believe that price competition has not been as intense as in other states, in 1997 and 1998 price competition in the New Jersey personal lines property casualty insurance market increased dramatically. As a result of the price competition during these periods, our profits were reduced because we wrote policies with lower premiums and on terms less favorable to us. In addition, the New Jersey commercial lines property casualty insurance market faced intense price competition during 1998 and 1999. However, since the New Jersey commercial lines market is not subject to some of the more burdensome regulatory aspects of the personal lines market, such as the “take all comers” requirement and the price reductions mandated by AICRA, our profits on our commercial lines business were not as heavily impacted.

We and other insurance companies also compete on the basis of the commissions and other cash and non-cash incentives provided to agents. Although a number of national insurers that are much larger than we are do not currently compete in a material way in the New Jersey personal auto insurance market, if one or more of these companies decide to aggressively enter the market, it could reduce our market share in New Jersey and thereby have a material adverse effect on us. These companies include some that would be able to sustain significant losses in order to acquire market share, as well as others which use distribution methods that compete with the independent agent channel we utilize.

Our principal competitor which serves the independent agency market and offers a packaged personal lines property and casualty insurance product is Encompass Insurance (an affiliate of Allstate Insurance). Other competitors in the personal lines insurance business include First Trenton and Palisades Insurance. According to the NJDOBI statistics, as of December 31, 2006, based on vehicles in force, the respective share of the personal auto market, excluding policies written in urban enterprise zones, of our principal competitors, Allstate/ Encompass Insurance, Travelers of New Jersey and Palisades Insurance, were 15.71%, 5.07% and 2.75%, respectively. Our share of the personal auto market as of such dates was 1.85%.

Although somewhat less competitive than other markets, the New Jersey private passenger auto insurance market has become more competitive in recent years. We face significant competition from large, well-capitalized national companies and we expect that there may be, from time to time, further competition from market entrants. In August 2003, Mercury General entered the New Jersey private passenger auto insurance market. In addition, in August 2004, GEICO re-entered the New Jersey private passenger auto insurance market and in October 2005, Progressive Casualty Insurance Company entered the New Jersey private passenger auto insurance market. Many of these companies may have greater financial, marketing and management resources than we have. In addition, competitors may offer consumers combinations of auto policies and other insurance products or financial services which we do not offer. We could be adversely affected by a loss of business to competitors offering similar insurance products at lower prices or offering bundled products or services and by other competitor initiatives. Competition, especially from larger, more established insurers such as GEICO and Progressive, could cause premium rate reductions, reduced profits or losses, or loss of market share, any of which could have a material adverse effect on our business, results of operations and financial condition.

Our failure to maintain a commercially acceptable financial strength rating would significantly and negatively affect our ability to implement our business strategies and sell our products.

A.M. Best has currently assigned Proformance a secure “B++ (Very Good)” rating. A “B++” rating is A.M. Best’s fifth highest rating out of 15 possible rating classifications for insurance companies. A “B++” rating is assigned to insurers that in A.M. Best’s opinion have a good ability to meet their current obligations to policyholders, but are financially vulnerable to adverse changes in underwriting and economic conditions. A.M. Best bases its ratings on factors that concern policyholders and not upon factors concerning investor protection. An important factor in an insurer’s ability to compete effectively is its A.M. Best rating. Proformance’s A.M. Best rating is lower than those of some of its competitors.

On November 20, 2007, A.M. Best announced that it has placed the financial strength rating of B++ (Very Good) and the issuer credit rating (ICR) of “bbb” of Proformance Insurance Company under review with negative implications. Concurrently, A.M. Best placed the ICR of “bb” of Proformance’s holding company, National Atlantic Holdings Corporation under review with negative implications. A.M. Best stated that its rating action was based on the ineffectiveness of certain oversight processes with respect to Proformance’s bodily injury claims function and the

subsequent deterioration in A.M. Best’s view of risk-adjusted capitalization. During the third quarter of 2007, management determined that Proformance’s procedures related to bodily injury claims handling and reserving were not applied consistently throughout the organization, which resulted in a significant increase in loss reserves for the third quarter of 2007. Consequently, A.M. Best stated that risk-adjusted capitalization declined to a level below the minimum required for Proformance’s ratings.

A decrease in our rating as assigned by A.M Best could limit our ability to operate profitably and may have a significant effect on our results of operations and financial condition.

Our A.M. Best and our Demotech ratings are subject to change and are not recommendations to buy, sell or hold securities. Any future decrease in our ratings could affect our ability to sell our products. See “Business — Ratings.”

The agreements that we have entered into with our agents do not contain provisions that would permit them to terminate the agreement in the event of a downgrade of our ratings. In addition, our reinsurance agreements with third party reinsurers do not require us to transfer funds into trust or otherwise provide security for the benefit of the reinsurers in the event of a downgrade of our ratings.

If our losses and loss adjustment expenses exceed our reserves, we would have to increase our reserves which would lower our earnings.

The reserves for losses and loss adjustment expenses that we have established are estimates of amounts needed to pay reported and unreported claims and related expenses based on facts and circumstances known to us as of the time we established the reserves. Reserves are based on historical claims information, regulatory change, court decision, industry statistics and other factors. The establishment of appropriate reserves is an inherently uncertain process. If our reserves are inadequate and are increased, we would have to treat the amount of such increase as a charge to our earnings in the period that the deficiency is recognized. As a result of these factors, there can be no assurance that our ultimate liability will not materially exceed our reserves, thereby reducing our profitability.

Due to the inherent uncertainty of estimating reserves, it has been necessary, and may over time continue to be necessary, to revise estimated future liabilities as reflected in our reserves for claims and policy expenses. For the year ended December 31, 2007, we increased reserves for prior years by $19.6 million. This increase was primarily due to increases in the prior year reserves for auto bodily injury coverage which increased by $22.2 million. This increase was due to an inconsistent implementation of a revised claim reserving policy that was uncovered in the third quarter of 2007. Prior year reserves for other liability increased by $3.6 million. This was offset by favorable development of $4.6 million in no-fault coverages and $1.6 million in commercial auto liability. For the year ended December 31, 2006, reserves decreased by $28.0 million primarily due to a decrease in the loss and loss adjustment expense ratio for the same period. This decrease can be attributed to a decline in earned premium, a reduction in claim frequency in private passenger automobile coverage and significant growth in commercial lines business, which in 2006, have exhibited lower loss ratios. For the year ended December 31, 2006, prior year reserves increased by $0.02 million. This increase is due to favorable development in bodily injury and no-fault coverages offset by a reduction in ceded loss estimates for prior years. For the year ended December 31, 2005, we increased reserves for prior years by $10.1 million. This increase was due to (i) increases in average severity for Personal Injury Protection (No-fault) losses

of $9.4 million (ii) higher Commercial Auto Liability projected loss ratios for 2002-2004 due to the fact that actual loss development was higher than expected for those years, resulting in an increase of $1.8 million and (iii) Homeowners losses of $0.6 million and Other Liability losses of $1.6 million. This development was partially offset by continued favorable trends in loss development for Property Damage losses ($1.6 million), Auto Physical Damage losses ($1.2 million), and Bodily Injury losses of ($0.5 million), as reported claims frequency has dropped significantly and we have reduced our projected loss ratios in recognition of this trend. For the year ended December 31, 2004, we reduced reserves for prior years by $0.7 million because our actual loss experience observed during the period, especially during the fourth quarter of 2004, was slightly lower than expected due to a reduction in the frequency of claims reported during the fourth quarter of 2004. Historically, Proformance’s reserves have shown a deficiency in every year from 1995 through 2006.

The historic development of reserves for losses and loss adjustment expenses may not necessarily reflect future trends in the development of these amounts. Accordingly, it is not appropriate to extrapolate redundancies or deficiencies based on historical information. See “Business — Reserves.”

If we lose key current personnel or are unable to recruit new qualified personnel, we could be prevented from implementing our business strategy and our ability to capitalize on market opportunities, grow our business and operate efficiently and profitably could be negatively affected.

Our future success depends significantly upon the efforts of certain key management personnel, including James V. Gorman, Chairman and Chief Executive Officer of NAHC and Proformance, Peter A. Capello, Jr., Chief Financial Officer of Proformance, Frank J. Prudente, Executive Vice President, Treasurer and Chief Financial Officer of NAHC, John E. Scanlan, Senior Vice President of Proformance, Bruce C. Bassman, Chief Operating Officer and Chief Actuarial Officer of NAHC, and Douglas A. Wheeler, Esq. General Counsel of NAHC and Proformance. We maintain a $2.5 million key man life insurance policy on Mr. Gorman, as well as on other of our senior executives, the proceeds of which are payable to us. NAHC has entered into employment agreements with James V. Gorman, Frank J. Prudente, John E. Scanlan, and Bruce C. Bassman. In addition, Proformance has entered into employment agreements with Peter A. Cappello, Jr. and Douglas A. Wheeler, Esq. Although we are not aware of any impending departures or retirements, the loss of key personnel could prevent us from fully implementing our business strategy and could negatively affect our ability to capitalize on market opportunities, grow our business or operate efficiently and profitably. As we continue to grow, we will need to recruit and retain additional qualified management personnel, and our ability to do so will depend upon a number of factors, such as our results of operations and prospects and the level of competition then prevailing in the market for qualified personnel.

Market fluctuations and changes in interest rates could reduce the value of our investment portfolio and our asset base which would limit our ability to underwrite more business.

Our results of operations depend in part on the performance of our invested assets. As of December 31, 2007, 99.7% of our investment portfolio was invested in fixed income securities and 0.3% was invested in equity securities. As of December 31, 2007, approximately 64.6% of our fixed income security portfolio was invested in U.S. government and government agency fixed income securities, approximately 32.7% was invested in fixed income securities rated “Aaa”/“Aa” by Moody’s Investor Service, which we refer to as Moody’s, approximately 2.3% was invested in fixed income securities rated “A” by Moody’s, and approximately 0.4% was invested in fixed income securities rated “Baa” by Moody’s. Certain risks are inherent in connection with fixed income securities including loss upon default and price volatility in reaction to changes in interest rates and general market factors. For example, the fair value of our fixed income securities can fluctuate depending on changes in interest rates. Accordingly, changes in interest rates may result in fluctuations in the income from, and the valuation of, our fixed income investments. Large investments losses would significantly decrease our asset base, thereby affecting our ability to underwrite new business. For the year ended December 31, 2007, 9.4%, or $17.3 million, of our total revenue was derived from our invested assets.

We may not be able to successfully alleviate risk through reinsurance arrangements which could cause us to reduce our premiums written in certain lines or could result in losses and we are subject to credit risk with respect to our reinsurers.

In order to reduce risk and to increase our underwriting capacity, we have previously purchased third party reinsurance. Although we expect to decrease our use of third party reinsurance in the future, we may need to purchase additional third party reinsurance in the future. The availability and the cost of reinsurance protection is subject to

market conditions, which are outside of our control. As a result, we may not be able to successfully alleviate risk through these arrangements. For example, if reinsurance capacity for homeowners risks were reduced as a result of terrorist attacks or other causes, we may seek to reduce the amount of homeowners business we write. In addition, we are subject to credit risk with respect to our reinsurance because the transfer to reinsurers of insurance risks we underwrite does not relieve us of our liability to our policyholders. A significant reinsurer’s insolvency, inability or unwillingness to make payments under the terms of a reinsurance treaty could cause us to incur losses and negatively affect our profits.

For the years ended December 31, 2007, 2006 and 2005 approximately 7.2%, 6.5% and 5.2%, respectively, of our direct written premiums were transferred to third party reinsurers.

As of December 31, 2007, our largest reinsurance recoverables were due from QBE Reinsurance and OdysseyRe. We do not believe we are substantially dependent on any of our third party reinsurers. We have not experienced in the past the failure of a third party reinsurer to pay any material claims that have been presented to the third party reinsurer.

Our agreements with our third party reinsurers do not permit the reinsurer to cancel the reinsurance coverage mid-term in the event of any ratings downgrade of Proformance. Generally, our reinsurance agreements are one-year agreements and are renegotiated annually. However, in the event we were unable to reach an agreement with a current reinsurer of our business or a reinsurer terminates our reinsurance agreement, we may encounter difficulties obtaining or negotiating reinsurance coverage because we operate exclusively in New Jersey, a coastal state, and Proformance is rated “B++” by A.M. Best. If we were unable to maintain or obtain reinsurance coverage adequate for our business, we would not be able to reduce our exposure to insurance risks which could cause us to incur substantial losses and could cause us to write less new business.

Because we continue to reduce our use of third party reinsurance, we will retain more risk, which could result in more losses.

We currently use third party reinsurance primarily to increase our underwriting capacity and to reduce our exposure to losses. See “Business — Reinsurance.” Since we continue to reduce our use of third party reinsurance in addition to using Mayfair, our reinsurance subsidiary, we will retain more gross premiums written over time, but will also retain more of the related losses. Reducing our third-party reinsurance will increase our risk and exposure to losses, which could have a material adverse effect on our financial condition and results of operations.

We rely on our information technology and telecommunication systems, and the failure of these systems could limit our ability to operate efficiently and cause us to lose business.

Our business is highly dependent upon the successful and uninterrupted functioning of our information technology and telecommunication systems. We rely on these systems to support our direct and indirect marketing operations and our agents’ basic underwriting and claim-processing efforts, as well as to process new and renewal business, provide customer service, make claims payments, and facilitate collections and cancellations. These systems also enable us to perform actuarial and other modeling functions necessary for underwriting and rate development. The failure of these systems could interrupt our operations or materially impact our ability to evaluate and write new business. In June of 2007, the Company began development of a new claims system and premium processing system to be used in its workman’s compensation line of business. We anticipate the new system to cost approximately $250,000, of which we have capitalized and recorded as property and equipment, $237,000 as of December 31, 2007. There is no assurance that we will successfully complete this process or that we will not experience additional cost, implementation delay, operation disruption or system failure in connection with this transition. In addition, because our information technology and telecommunications systems interface with and depend on third party systems, we could experience service denials if demand for such service exceeds capacity or such third party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could compromise our ability to write and process new and renewal business, provide customer service or pay claims in a timely manner. This could cause us to lose business. In March, 2007, The Company placed into service its new premium processing and claims system which had been in development since December of 2004. As of December 31, 2007, we have capitalized and recorded as property and equipment, $1,964,209 and recorded depreciation and amortization expense related to the software in the amount of $492,253. For the years ended December 31, 2006 and 2005, we had expensed $0 and $519,105 of the software development costs, respectively.

Risks Related to Our Industry

As a result of cyclical changes, which may include periods of price competition, excess capacity, high premium rates and shortages of underwriting capacity in the personal auto insurance industry, our results may materially fluctuate, affecting our ability to effectively market and price our products.

The personal auto insurance industry is historically cyclical in nature. The industry has been characterized by periods of price competition and excess underwriting capacity followed by periods of high premium rates and shortages of underwriting capacity. During periods of price competition and excess capacity, such as in 1997 and 1998, our profitability is negatively impacted as we are forced to issue insurance policies with lower premiums and on terms less favorable to us. The personal auto insurance industry also experiences periods of higher premium rates during which we may experience growth and increased profitability. During periods of higher premium rates or at other times the New Jersey legislature may take action which negatively impacts our profitability. In 1998, the New Jersey legislature adopted the AICRA in order to curtail the rising costs of automobile insurance to New Jersey insureds. The adoption of AICRA negatively impacted our profitability. Approximately four years ago, the New Jersey market experienced increasing bodily injury loss costs which caused us to incur additional losses, thereby reducing our profitability. The duration of the cycles experienced in the New Jersey personal automobile insurance industry is subject to many variables, but historically have ranged from two to seven years. We believe the New Jersey personal automobile market is currently in a period of growth and new competitors, such as Mercury General, Progressive and GEICO, have entered the market. This market is exhibiting price competition which may hinder our ability to operate profitably as we are forced to write policies at lower premiums and on terms less favorable to us.

We expect that our business will continue to experience the effects of this cyclicality, including periods of price competition, which, over the course of time, could result in material fluctuations in our premium volume, revenues and expenses and make it difficult to effectively market and price our products.

We are subject to comprehensive regulation in the State of New Jersey, particularly by the New Jersey Department of Banking and Insurance, and we must obtain prior approval to take certain actions which may limit our ability to take advantage of profitable opportunities.

General Regulation

We are subject to regulation by the NJDOBI, and we must obtain prior approval for certain corporate actions. We must comply with laws and regulations involving:

	•		Transactions between an insurance company and any of its affiliates;

	•		The payment of dividends;

	•		The acquisition of an insurance company or of any company controlling an insurance company;

	•		Approval or filing of premium rates and policy forms;

	•		Solvency standards;

	•		Minimum amounts of capital and policyholders’ surplus which must be maintained;

	•		Limitations on types and amounts of investments;

	•		Restrictions on the size of risks which may be insured by a single company;

	•		Limitation of the right to cancel or non-renew policies in some lines;

	•		Regulation of the right to withdraw from markets or terminate involvement with agencies;

	•		Requirements to participate in residual markets;

	•		Licensing of insurers and agents;

	•		Deposits of securities for the benefit of policyholders;

	•		Reporting with respect to our financial condition, including the adequacy of our reserves and provisions for unearned premiums;

	•		Unfair trade and claims practices; and

	•		The type of accounting we must use at Proformance in order to comply with statutory reporting requirements.

We are subject to assessments by the New Jersey Property-Liability Insurance Guaranty Association, which assessments would reduce the capital available to us to operate our business.

New Jersey law requires that property and casualty insurers licensed to do business in New Jersey participate in the New Jersey Property-Liability Insurance Guaranty Association, which we refer to as NJPLIGA. NJPLIGA must pay any claim up to $300,000 of a policyholder of an insolvent insurer if the claim existed prior to the declaration of insolvency or arose within 90 days after the declaration of insolvency. Members of NJPLIGA are assessed the amount NJPLIGA deems necessary to pay its obligations and its expenses in connection with handling covered claims. We are able to recoup these assessments from our in-force policyholders. Subject to certain exceptions, assessments are made in the proportion that each member’s net direct written premiums for the prior calendar year for all property and casualty lines bear to the corresponding net direct written premiums for NJPLIGA members for the same period. By statute, no insurer in New Jersey may be assessed in any year an amount greater than 2% of that insurer’s net direct written premiums for the calendar year prior to the assessment. In 2007, Proformance was assessed approximately $2.0 million as its portion of the losses due to insolvencies of certain insurers. We anticipate that there will be additional assessments from time to time relating to insolvencies of various insurance companies. As a result of the timing difference between when we are assessed by NJPILGA and the related funds are able to be collected from the policyholders by us, the difference between the related receivable and payable balance could adversely impact our cash flow.

Our failure to meet risk based capital standards could subject us to examination or corrective action by state regulators.

Proformance is subject to risk-based capital standards and other minimum capital and surplus requirements imposed under the laws of the State of New Jersey. These risk-based capital standards, based upon the Risk-Based Capital Model Act adopted by the NAIC, require Proformance to report its results of risk-based capital calculations to the NJDOBI and the NAIC.

Failure to meet applicable risk-based capital requirements or minimum statutory capital requirements could subject Proformance to further examination or corrective action imposed by state regulators, including limitations on our writing of additional business or engaging in financing activities, state supervision or even liquidation. Any changes in existing risk-based capital requirements or minimum statutory capital requirements may require us to increase our statutory capital levels, which we may be unable to do. As of December 31, 2007, Proformance maintained a risk-based capital level in excess of the amount that would require any corrective actions on our part.

The following table summarizes the risk-based capital of Proformance as of December 31, 2007, 2006 and 2005.

Proformance Insurance Company
Risk-Based Capital(1)


	As of December 31,
	2007		2006		2005
Total Adjusted Capital	$	125,712	$	128,031	$	104,727
Company Action Level = 200% of Authorized Control Level		38,806		36,337		58,985
Regulatory Action Level = 150% of Authorized Control Level		29,105		27,253		44,239
Authorized Control Level = 100% of Authorized Control Level		19,403		18,168		29,493
Mandatory Control Level = 70% of Authorized Control Level	$	13,582	$	12,718	$	20,645


(1)		For a description of the regulatory action that may be taken at each level, see “Business — Supervision and Regulation — Risk Based Capital Requirements.”

If we fail to satisfy a sufficient number of IRIS Ratios, we would be subject to regulatory action which could negatively affect our ability to operate our business efficiently and profitably.

The NAIC has developed a set of financial relationships or “tests” known as the Insurance Regulatory Information System, or IRIS that were designed to assist state insurance regulators in the early identification of companies which may require special attention or action. Insurance companies submit data annually to the NAIC which analyzes the data against defined “usual ranges.” Generally, an insurance company will become subject to regulatory scrutiny if it falls outside the usual ranges of four or more of the ratios. As of December 31, 2007, Proformance did not fall outside of the usual range for any of the ratio tests.

New Jersey Personal Auto Insurance Regulation

We are subject to extensive regulation in the New Jersey personal auto insurance industry which is subject to change, and we can give you no assurance that any changes in the regulations would not significantly limit our ability to operate our business profitably.

We are subject to extensive regulation of the private passenger automobile insurance industry in New Jersey. Such regulation is primarily for the benefit and protection of insurance policyholders rather than shareholders, and could change at any time. Thus, government regulation, which is subject to change, could significantly limit our profitability and may conflict with the interests of our shareholders.

Recently, the NJDOBI proposed certain amendments to its personal auto insurance regulations. Under the proposed regulations, New Jersey insurance companies, such as Proformance, would be permitted to raise rates for certain drivers above limitations that are currently in place and lower rates for certain other drivers. In addition, the proposed regulations would permit insurance companies to use their own data to develop rating maps. The proposal would permit up to 50 rating territories across New Jersey compared to the 27 territories now recognized in New Jersey. There can be no assurance that the proposed regulations will be adopted, nor can we be certain how these regulations, if adopted, would impact our operations.

Recently, a number of governmental entities have launched investigations and filed lawsuits involving certain practices in the insurance and broker industry relating to compensation and other arrangements between brokers and insurers and their dealings with clients and insureds. In addition, the Commissioner of the NJDOBI (whom we refer to as the Commissioner) has announced a probe into the New Jersey insurance industry and broker practices. The

NJDOBI has established a task force which will work with the New Jersey Attorney General’s Office to look into recent allegations of bid-rigging and other sales-related insurance activities. Although we believe that these ongoing governmental investigations will not directly impact us, these investigations could lead to regulatory or legislative changes that could affect the manner in which we conduct our business or our profitability. Such investigations or a change in the regulatory environment could also impact the stock prices of companies in the insurance industry such as NAHC.

The NAIC adopted model legislation in December 2004, implementing new disclosure requirements with respect to compensation of insurance producers. The model legislation requires that insurance producers obtain the consent of the insured and disclose to the insured, where such producers receive any compensation from the insured, the amount of compensation from the insurer. In those cases where the contingent commission is not known, producers would be required to provide a reasonable estimate of the amount and method for calculating such compensation. Producers who represent companies and do not receive compensation from the insured would have a duty to disclose that relationship in certain circumstances. The NAIC directed its task force on broker activities to give further consideration to the development of additional requirements for the model legislation, such as recognition of a fiduciary responsibility of producers, disclosure of all quotes received by a broker, and disclosures relating to agent-owned reinsurance arrangements. There can be no assurance that the model legislation or any other legislation or regulation will be adopted in New Jersey, nor can we be certain how such legislation or regulation, if adopted, would impact our operations or financial condition.

We cannot be certain of the impact that the New Jersey Automobile Insurance Competition & Choice Act or any future legislative initiatives will have on our business and operations.

The New Jersey legislature adopted the Fair Automobile Insurance Reform Act of 1990 which created a difficult insurance market environment and led to many insurers exiting or reducing their auto insurance market share in New Jersey. To curtail the rising costs of automobile insurance to consumers in New Jersey, the New Jersey legislature adopted AICRA which negatively affected the profitability of automobile insurers in New Jersey. On June 9, 2003, the Governor of New Jersey signed into law the New Jersey Automobile Insurance Competition & Choice Act, which we refer to as the AICC Act. The AICC Act was enacted to bring new competition to the New Jersey auto insurance markets and to provide consumers with choices for auto insurance. Regulatory changes adopted under this new legislation include, but are not limited to, establishing a seven-year (replacing a three-year) look-back period for an excess profits determination; phasing out the auto insurance “take all comers” requirement (which required insurers to cover virtually all applicants); increasing the annual “expedited” rate filing statewide average rate change maximum from 3% to 7%; requiring insurers to provide three premium scenarios illustrating the effect of different coverage choices to new applicants; establishing the Special Automobile Insurance Policy for low income individuals; and establishing an Insurance Fraud Detection Reward Program to assist in the prosecution of insurance frauds and permit enhanced cancellation of policies due to frauds. We cannot be certain how these legislative changes or future legislative changes will affect our operations, nor can we be sure whether any additional legislation would reverse the effect of the AICC Act. The impact of these legislative changes and additional legislative changes, if any, could reduce our profitability and limit our ability to grow our business.

We are subject to the New Jersey “excess profits” requirements which require us to refund or credit “excess profits” to our policyholders.

Each insurer in New Jersey is required to file an annual report which includes a calculation of statutory profits on private passenger automobile business. If the insurer has excess statutory profits as determined by a prescribed formula, the insurer is required to submit a plan for the approval of the Commissioner to refund or credit the excess profits to policyholders. Prior to the AICC Act, the calculation of statutory profits was based on the three-year period immediately prior to the report, and the amount of actuarial gain an insurer could report without being considered to have excess profits was limited to 2.5% of its earned premium, with actuarial gain defined as underwriting income minus 3.5% of earned premium. The AICC Act extended the time period for the calculation of statutory profits from three years to seven years to take into account market fluctuations over a longer period of time. The AICC Act also changed the basis for determining actuarial gain from earned premium to policyholder surplus. The term actuarial gain now means underwriting income minus an allowance for profit and contingencies (which shall not exceed 12% of policyholder surplus). The Commissioner is authorized to adjust this percentage no less frequently than biennially. The calculation of statutory profits for 2007 will not be completed until the second quarter of 2008. Therefore, the determination as to whether we have exceeded the excess profit threshold for 2007 will not be known until that time. However, based upon our year end 2007 results, management believes that the excess profit threshold has not been

exceeded. As of December 31, 2006, we did not exceed the excess profit threshold in respect to any prior look-back period.

We are subject to New Jersey’s “Take All Comers” requirements whereby we are not permitted to refuse to issue policies in those rating territories to certain applicants which could negatively impact our underwriting results.

Since 1992, with very few exceptions, auto insurers were not permitted to refuse coverage to an eligible applicant. Under this “take all comers” requirement, insurers could not refuse to issue a policy to an applicant who was deemed to be eligible if that applicant had not been convicted of serious motor vehicle infractions such as driving while intoxicated or vehicular homicide in the past three years. The AICC Act phases out the “take all comers” requirement over five years, to become inoperative on January 1, 2009. Also, the AICC Act provides for an exemption from the “take all comers” requirement for insurers that increase their private passenger auto insurance non-fleet exposures by certain amounts. The exemption criteria are applied every six months to determine if the insurer remains exempt. Insurers that increased their private passenger auto insurance non-fleet exposures by 4% in a rating territory during the one-year period ended on January 1, 2005 are exempt from the “take all comers” requirement in that rating territory for the subsequent six-month period, at which time the 4% standard is applied to determine if the insurer remains exempt. Insurers that increase their private passenger auto insurance non-fleet exposures by the following amounts in a rating territory will also be exempt from the “take all comers” requirement in that rating territory, subject to review every six months, 3% in the one-year period ended January 1, 2006, 2% in the one-year period ended January 1, 2007, and 1% in the one-year period ending January 1, 2008.

We are subject to New Jersey’s “urban enterprise zone” requirements. Unless we write enough business in designated “urban enterprise zones,” we may be assigned business in those zones by the State of New Jersey which could negatively impact our underwriting results.

New Jersey law requires auto insurers to have the same proportionate share of business in designated “urban enterprise zones” across the state as is equal to their proportionate share of the auto insurance market in the state as a whole. If an insurer does not achieve its minimum requirements, it may be assigned business by the state to fill such requirements, which tends to be unprofitable business. As of December 31, 2007, Proformance satisfies its requirements in each urban enterprise zone primarily as a result of voluntary writings and the influx of policies from our replacement carrier transactions. There can be no assurance that Proformance will continue to satisfy its requirements in the future, in which case it may be assigned business by the state, which could have a negative effect on our underwriting results.

Because we are unable to predict with certainty changes in the political, economic or regulatory environments in New Jersey in the future, there can be no assurance that existing insurance-related laws and regulations will not become more restrictive in the future or that new restrictive laws or regulations will not be enacted and, therefore, it is not possible to predict the potential effects of these laws and regulations on us. See “Business — General Regulation.”

The continued threat of terrorism and ongoing military and other actions may result in decreases in our net income, revenue and assets under management and may adversely affect our investment portfolio.

The continued threat of terrorism, both within the United States and abroad, and the ongoing military and other actions and heightened security measures in response to these types of threats, may cause significant volatility and declines in the equity markets in the United States, Europe and elsewhere, loss of life, property damage, additional disruptions to commerce and reduced economic activity. Actual terrorist attacks could cause losses from insurance claims related to the property and casualty insurance operations of Proformance, as well as a decrease in Proformance’s surplus and net income and our consolidated stockholders’ equity, net income and/or revenue. The Terrorism Risk Insurance Act of 2002, which was extended and amended by the Terrorism Risk Insurance Extension Act of 2005, requires that some coverage for terrorist acts be offered by primary property and casualty insurers such as Proformance and provides federal assistance for recovery of claims through 2007.

In addition, some of the assets in our investment portfolio may be adversely affected by declines in the equity markets and economic activity caused by the continued threat of terrorism, ongoing military and other actions and heightened security measures. The assets in our equity portfolio that we believe may be adversely affected based on threats of terrorism and increased security measures are comprised principally of equity securities of companies in the energy, insurance and transportation sectors. As of December 31, 2007, our equity portfolio had a current fair value of $1.0 million. The equity portfolio constituted approximately 0.3% of our total investment portfolio at that date. Our

equity portfolio at December 31, 2007 did not include any insurance, energy or transportation stocks.

We cannot predict at this time whether and the extent to which industry sectors in which we maintain investments may suffer losses as a result of potential decreased commercial and economic activity, or how any such decrease might impact the ability of companies within the affected industry sectors to pay interest or principal on their securities, or how the value of any underlying collateral might be affected.

We cannot assure you that the threats of future terrorist-like events in the United States and abroad or military actions by the United States will not have a material adverse effect on our business, financial condition or results of operations.

Changes in insurance industry practices and regulatory, judicial and consumer conditions and class action litigation are continually emerging in the automobile insurance industry, and these new issues could adversely impact our revenues or our methods of doing business.

As automobile insurance industry practices and regulatory, judicial and consumer conditions change, unexpected and unintended issues related to pricing, claims, coverages, financing and business practices may emerge. The resolution and implication of these issues can have an adverse effect on our business by changing the way we price our products, by extending coverage beyond our underwriting intent, or by increasing the size of claims. For example, one emerging issue in New Jersey relates to the judicial interpretation of New Jersey’s no-fault and uninsured motorist statutes. Since we have underwritten and priced our products based on current judicial interpretations of New Jersey’s no-fault and uninsured motorist statute, any changes in the judicial interpretations may be inconsistent with our underwriting and pricing assumptions which could cause us to incur more losses than we anticipated on those products. For example, on June 14, 2005, the New Jersey Supreme Court in Diprospero v. Penn, et. al. interpreted the State’s No-Fault Law, to allow non-economic “pain and suffering” lawsuits for automobile accident injuries that are permanent but do not have a serious lifestyle impact. Absent a need to demonstrate both serious lifestyle impact and permanent injuries, we expect an increase in the number of lawsuits for minor injuries.

Recent court decisions and legislative activity may increase our exposure for litigation claims. In some cases, substantial non-economic, treble or punitive damages may be sought. The loss of even one claim, if it results in a significant punitive damages award, could significantly worsen our financial condition or results of operations. This risk of potential liability may make reasonable settlements of claims more difficult to obtain.

Risks Related to Our Common Stock

We have principal shareholders who have the ability to exert significant influence over our operations, including controlling the election of directors.

As of December 31, 2007, James V. Gorman beneficially owned approximately 14.13% of the total outstanding common stock of NAHC on a fully diluted basis. Mr. Gorman is also Chairman of the Board of Directors and Chief Executive Officer of NAHC and Proformance. Until such time as Mr. Gorman sells or disposes all or most of the common stock he holds, he would have the ability to exert significant influence over our policies and affairs, including election of our directors and significant corporation transactions. Mr. Gorman’s interests may differ from the interests of our other shareholders.

As a holding company, NAHC is dependent on the results of operations of its operating subsidiaries, particularly Proformance, and the ability of Proformance to pay a dividend to us is limited by the insurance laws and regulations of New Jersey.

NAHC is a company and a legal entity separate and distinct from its subsidiaries, including Proformance. As a holding company without significant operations of its own, the principal sources of NAHC’s funds are dividends and other distributions from its subsidiaries. Our rights, and consequently your rights as shareholders, to participate in any distribution of assets of Proformance are subject to prior claims of policyholders, creditors and preferred shareholders, if any, of Proformance. Consequently, our ability to pay debts, expenses and cash dividends to our shareholders may be limited.

The payment of dividends and other distributions to NAHC by Proformance is regulated by New Jersey insurance law and regulations. In general, dividends in excess of prescribed limits are deemed “extraordinary” and require prior

insurance regulatory approval. See “Business — General Regulation — Insurance Regulation Concerning Dividends.” Under New Jersey law, an insurer may pay dividends that are not considered extraordinary only from its unassigned surplus, also known as its earned surplus. As of December 31, 2007, Proformance is not permitted to pay dividends without the approval of the Commissioner as it has negative unassigned surplus of $1.8 million. Pursuant to statutory accounting principles, net income or loss from operations flows through the line item entitled “unassigned surplus funds” on Proformance’s statutory surplus statement.

We believe that the current level of cash flow from operations provides us with sufficient liquidity to meet our operating needs over the next 12 months. We expect to be able to continue to meet our operating needs after the next 12 months from internally generated funds. Since our ability to meet our obligations in the long term (beyond such 12-month period) is dependent upon such factors as market changes, insurance regulatory changes and economic conditions, we can give you no assurance that the available net cash flow will be sufficient to meet our operating needs.

There are anti-takeover provisions contained in our organizational documents and in laws of the State of New Jersey that could delay or impede the removal of our directors and management and could make a merger, tender offer or proxy contest involving us more difficult, or could discourage a third party from attempting to acquire control of us, even if such a transaction were beneficial to the interest of our shareholders.

Our organizational documents and the New Jersey Business Corporation Act contain certain provisions that could delay or impede the removal of directors and management and could make a merger, tender offer or proxy contest involving us more difficult, or could discourage a third party from attempting to acquire control of us, even if such a transaction were beneficial to the interest of our shareholders. Our organizational documents have authorized 10,000,000 shares of preferred stock, which we could issue without further shareholder approval and upon such terms and conditions, and having such rights, privileges and preferences, as our Board of Directors may determine. The issuance of preferred stock may have the effect of delaying or preventing a change of control. For example, if in the due exercise of its fiduciary obligations, our Board of Directors were to determine that a takeover proposal is not in our best interests, our Board of Directors could cause shares of preferred stock to be issued without shareholder approval in one or more private offerings or other transactions that might dilute the voting or other rights of the proposed acquirer or insurgent shareholder or shareholder group. Such preferred stock could also have the right to vote separately as a class with respect to a merger, takeover or other significant corporate transactions. We have no current plans to issue any preferred stock. In addition, our organizational documents provide for a classified Board of Directors with staggered terms, provide that directors may be removed only for “cause”, prohibit shareholders from taking action by written consent, prohibit shareholders from calling a special meeting of shareholders and require advance notice of nominations for election to the Board of Directors or for proposing business that can be acted upon by shareholders. These provisions could delay or impede the removal of directors and management and could make a merger, tender offer or proxy contest involving us more difficult.

We are also subject to Section 14A:10A-4 of the New Jersey Shareholders Protection Act, which we refer to as the Protection Act, which prohibits certain New Jersey corporations from engaging in business combinations (including mergers, consolidations, significant asset dispositions and certain stock issuances) with any “interested shareholder” (defined to include, among others, any person that becomes a beneficial owner of 10% or more of the affected corporation’s voting power) for five years after such person becomes an interested shareholder, unless the business combination is approved by the Board of Directors of the corporation prior to the date the shareholder became an interested shareholder.

In addition, Section 14A:10A-5 of the Protection Act prohibits any business combination at any time with an interested shareholder other than a transaction (i) that is approved by the Board of Directors of the corporation prior to the date the interested shareholder became an interested shareholder, or (ii) that is approved by the affirmative vote of the holders of two-thirds of the voting stock not beneficially owned by the interested shareholder, or (iii) in which the corporation’s common shareholders receive payment for their shares that meets certain “fair price” standards prescribed in the statute. These provisions could have the effect of delaying, deferring or preventing a change in control of us and prevent our shareholders from receiving the benefit of any premium over the market price of our common stock offered by a bidder in a potential takeover. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.

New Jersey insurance laws prohibit any person from acquiring control of us, and thus indirect control of Proformance, without the prior approval of the Commissioner. Control is presumed to exist when any person, directly

or indirectly, owns, controls, holds the power to vote or holds proxies representing 10% or more of our outstanding voting stock. Even persons who do not acquire beneficial ownership of more than 10% of the outstanding shares of our voting stock may be deemed to have acquired such control if the Commissioner determines that such control exists in fact. Therefore, any person seeking to acquire a controlling interest in us would face regulatory obstacles which could delay, deter or prevent an acquisition that shareholders might consider in their best interests.

We may require additional capital in the future, which may not be available or may only be available on unfavorable terms.

Our future capital requirements depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. Our additional needs for capital will depend on our actual claims experience, especially with respect to any catastrophic or other unusual events.

It is our objective to maintain sufficient capital so that Proformance will have a ratio of direct written premiums to statutory surplus of no more than 3 to 1. As of December 31, 2007, the ratio was 1.42 to 1.0. We believe that the current level of cash flow from operations, as well as the net proceeds from our initial public offering, provides us with sufficient capital to achieve this ratio and to satisfy our operating needs over the next 12 months. We expect to be able to continue to meet these capital needs after the next 12 months from internally generated funds. Since our ability to meet our obligations in the long term (beyond such 12-month period) is dependent upon such factors as market changes, insurance regulatory changes and economic conditions, we can give you no assurance that the available net cash flow will be sufficient to meet these needs. We may need to raise additional capital through equity or debt financing. Any equity or debt financing, if available at all, may be on terms that are not favorable to us. In the case of equity financings, dilution to our shareholders could result, and in any case such securities may have rights, preferences and privileges that are senior to those of our common stock. If we cannot obtain adequate capital on favorable terms or at all, we could be forced to curtail our growth or reduce our assets.

Future sales of shares of our common stock by our existing shareholders, officers or employees in the public market, or the possibility or perception of such future sales, could adversely affect the market price of our stock.

As of December 31, 2007, James V. Gorman owned approximately 14.13% of the total outstanding common stock of NAHC on a fully diluted basis. No prediction can be made as to the effect, if any, that future sales of shares by our existing shareholders, or the availability of shares for future sale, will have on the prevailing market price of our common stock from time to time. For instance, in June 2005, we filed a registration statement on Form S-8 under the Securities Act of 1933, as amended, which we refer to as the Securities Act, to register shares of our common stock issued or reserved for issuance under our 2004 Stock and Incentive Plan. Subject to the exercise of issued and outstanding options, shares registered under the registration statement on Form S-8 will be available for sale into the public markets unless such shares are subject to vesting or legal restrictions. In June 2005, we also filed a registration statement on Form S-8 under the Securities Act to register shares of our Class B Nonvoting Stock issued or reserved for issuance under our Nonstatutory Stock Option Plan. All of the shares reserved for issuance under the Nonstatutory Stock Option Plan are fully vested and are available for sale into the public market.

Because we do not intend to pay dividends, you will not receive funds without selling shares and you will only see a return on your investment if the value of the shares appreciates.

We have never declared or paid any cash dividends on our capital stock and do not intend to pay cash dividends in the foreseeable future. We intend to invest our future earnings, if any, to fund our growth. In addition, our ability to pay dividends is dependent upon, among other things, the availability of dividends from our subsidiaries, including Proformance. The ability of Proformance to pay dividends to us is restricted by New Jersey insurance law. See “Business — General Regulation.” As of December 31, 2007, Proformance is not permitted to pay dividends without the approval of the Commissioner. Accordingly, since we do not anticipate paying dividends, our shareholders will only see a return on their investment if the value of the shares appreciates. We cannot assure our shareholders that they will receive a return on their investment when they sell their shares or that they will not lose all or part of their investment.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Item 3. Legal Proceedings

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of National Atlantic’s shareholders during the fourth quarter of 2007.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common shares are listed on the Nasdaq National Market under the symbol “NAHC.” The Company commenced its initial public offering of its common stock on April 20, 2005. Prior to that time, there was no established trading market for the Company’s common stock. The following table shows the high and low per share sale prices of our common shares, as reported on the NAHC for the periods indicated:

Price Range of Common Shares


	2007				2006
	High		Low		High		Low
First Quarter	$	13.25	$	10.75	$	12.00	$	9.35
Second Quarter	$	14.12	$	11.51	$	10.90	$	8.02
Third Quarter	$	14.45	$	8.70	$	11.90	$	8.68
Fourth Quarter	$	10.34	$	3.66	$	13.70	$	10.86

On March 14, 2008, the last reported sale price for our common shares on the Nasdaq National Market was $5.97 per share.

At March 17, 2008, there were approximately 87 holders of record and approximately 830 beneficial holders of our common shares.

The Company has never declared or paid any cash dividends on its capital stock and does not anticipate paying any cash dividends in the foreseeable future. The Company currently intends to retain future earnings to fund the development and growth of its business. The payment of dividends in the future, if any, will be at the discretion of the Board of Directors. Our ability to pay dividends is dependent upon, among other things, the availability of dividends from our subsidiaries, including our insurance subsidiaries, Proformance and Mayfair. The ability of Proformance to pay dividends to us is restricted by New Jersey insurance law. As of December 31, 2007, Proformance is not permitted to pay dividends without the approval of the Commissioner. In addition, the payment of dividends and other distributions by Mayfair is regulated by Bermuda insurance law and regulations. There are no restrictions on the payment of dividends by our non-insurance subsidiaries other than customary state corporation laws regarding solvency. Dividends from Proformance are subject to restrictions relating to statutory surplus and earnings. See “Business — Supervision and Regulation.”

The following table summarizes the securities authorized for issuance under the Company’s equity compensation plans as of December 31, 2007:

(c)

(a)

Number of Securities

(b)

Remaining Available for

to be Issued

Weighted Average

Issuance Under Equity

Upon Exercise of

Exercise Price of

Compensation Plans

Outstanding Options,

(Excluding Securities

Plan Category

Warrant and Rights

Reflected in Column (a))

Equity compensation plans approved by security holders

174,150

3.19

1,000,000

Equity compensation plans not approved by security holders

—

Total

174,150

3.19

1,000,000

Use of Proceeds

On July 5, 2006, the Board of Directors of the Company authorized the repurchase of a maximum of 1,000,000 shares and a minimum of 200,000 shares of capital stock of the Company within the next twelve months. On May 24, 2007, the Board of Directors of the Company authorized a one year extension of the buy-back program. As of December 31, 2007, the Company had repurchased 418,303 shares with an average price of $10.26. As of December 31, 2007, the Company is authorized to repurchase an additional 581,697 shares. During the three months ended December 31, 2007, the Company repurchased 26,200 shares with an average share price of $4.63.


	Number of Shares				Average
	Maximum		Minimum		Price
Balance at September 30, 2007		607,897		—
Repurchased		—		—		—

Balance at October 31, 2007		607,897		—		—
Repurchased		7,000		—		5.39

Balance at November 30, 2007		600,897		—
Repurchased		19,200		—	$	4.36

Balance at December 31, 2007		581,697		—		—

Item 6. Selected Financial Data

The following table sets forth selected consolidated financial information for the periods ended and as of the dates indicated. We derived the data as of December 31, 2007, 2006, 2005, 2004 and 2003, and for each of the five years in the period ended December 31, 2007, from our consolidated financial statements. These financial statements were audited by Deloitte & Touche LLP, an independent registered public accounting firm, through 2005, and by Beard Miller Company LLP, an independent registered public accounting firm, in 2006 and 2007.

We have prepared the selected historical consolidated financial data, other than the statutory data, in conformity with GAAP. We have derived the statutory data from the annual statements of our insurance subsidiary, Proformance, filed with the NJDOBI prepared in accordance with statutory accounting practices, which vary in certain respects from GAAP. You should read this selected consolidated financial data together with our consolidated financial statements and the related notes and the section of this Form 10-K entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


	Year Ended December 31,
	2007			2006		2005		2004		2003
				($ in thousands, except share data)
Income Statement Data:
Direct written premiums	$	178,679		$	171,069	$	198,049	$	207,320	$	163,179
Net written premiums		166,210			161,125		189,634		193,192		147,045
Net earned premiums		165,220			157,354		172,782		179,667		143,156
Replacement carrier revenue from related party		—			—		—		13,880		13,298
Replacement carrier revenue from unrelated party		—			—		—		4,089		661
Investment income		17,276			16,082		12,403		7,061		4,258
Net realized investment gains		72			979		411		1,931		1,373
Other income		1,703			1,441		1,745		2,044		929

Total income		184,271			175,856		187,341		208,672		163,675

Losses and loss adjustment expenses (1)		145,085			103,824		132,794		134,987		108,123
Underwriting, acquisition and insurance related expenses		49,652			48,275		42,264		46,771		26,055
Other operating and general expenses		539			2,268		3,989		580		484

Total expenses		195,276			154,367		179,047		182,338		134,662

Income (loss) before income taxes		(11,005	)		21,489		8,294		26,334		29,013
Income tax (benefit) expense		(4,811	)		7,107		1,858		8,886		9,945

Net (loss) income	$	(6,194	)	$	14,382	$	6,436	$	17,448	$	19,068

Basic (loss) earnings per share	$	(0.56	)	$	1.28	$	0.70	$	3.53	$	4.29

Diluted (loss) earnings per share	$	(0.56	)	$	1.26	$	0.68	$	3.11	$	3.77


	As of and for the Year Ended December 31,
	2007			2006			2005			2004			2003
							($ in thousands)
Balance Sheet Data:
Total cash & investments	$	342,216		$	345,060		$	339,856		$	252,993		$	179,696
Total assets		449,675			452,830			462,736			347,172			266,748
Unpaid losses and loss adjustment expenses		197,105			191,386			219,361			184,283			134,201
Total liabilities	$	305,499		$	301,942		$	324,527		$	279,333		$	216,961
Total stockholders’ equity (2)	$	144,176		$	150,888		$	138,209		$	67,839		$	49,787

Statutory Data:
Policyholders surplus (at period end) (2)(3)(4)	$	125,712		$	128,031		$	104,727		$	58,754		$	46,325
Loss ratio (1)		90.34	%		69.16	%		79.80	%		75.30	%		82.20	%
Expense ratio (1)		27.13	%		26.93	%		22.30	%		21.80	%		20.40	%

Combined ratio (1)		117.48	%		96.09	%		102.10	%		97.10	%		102.60	%


(1)		The loss ratio, when calculated on a statutory basis, is the ratio of losses and loss adjustment expenses to net earned premiums. The expense ratio, when calculated on a statutory accounting basis, is the ratio of underwriting expenses to net written premiums. The expense ratio, when calculated on a GAAP basis, differs from the statutory method specifically as it related to policy acquisition expenses. Policy acquisition expenses are expensed as incurred under the statutory accounting method. However, for GAAP, policy acquisition expenses are deferred and amortized over the period in which the related premiums are earned. The combined ratio is the sum of the loss ratio and the expense ratio. Management considers the statutory methods for calculating the loss, expense and combined ratios to compare our performance to benchmarks used by rating agencies and regulatory bodies that monitor the insurance industry.


(2)		On April 21, 2005, an initial public offering of 6,650,000 shares of the Company’s common stock (after the 43-for-1 stock split) was completed. The company sold 5,985,000 shares resulting in net proceeds to the Company (after deducting issuance costs and the underwriters’ discount) of $62,198,255. The Company contributed $43,000,000 to Proformance, which increased its statutory surplus.

(3)		On May 8, 2006, the Company contributed $9,000,000 to Proformance, thereby increasing its statutory surplus.

(4)		On May 16, 2007, the Company contributed $4,100,000 to Proformance, thereby increasing its statutory surplus.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of the financial condition, changes in financial condition and results of operations of NAHC should be read in conjunction with the audited Condensed Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K.

Overview

We provide property and casualty insurance and insurance-related services to individuals, families and businesses in the State of New Jersey. We have been able to capitalize upon what we consider an attractive opportunity in the New Jersey insurance market through:

	•		our extensive knowledge of the New Jersey insurance market and regulatory environment;

	•		our business model which is designed to align our Partner Agents’ interests with management by requiring many of them to retain an ownership stake in us;

	•		our packaged product that includes private passenger automobile, homeowners, personal excess (“umbrella”) and specialty property liability coverage; and

	•		our insurance related services businesses.

In 2007, we made significant progress toward carrying out the business strategies we have set out for National Atlantic as a public company. We continued to capture an increasingly larger share of our Partner Agents’ existing customer base and to diversify our business portfolio of automobile, homeowners and commercial lines policies. Our plan for future growth relates to capturing an increasingly larger share of our Partner Agents business and cross-selling our automobile, homeowners and business insurance products to their existing customers. We also plan to capture more of our Partner Agents’ existing customers by reaching out to additional demographics not currently suited to our HPP packaged product. Our new mono-line automobile product, salesmarked BlueStar Car Insurance, was launched in early 2007 and is targeted to our Partner Agents’ customers who do not require the broader coverage of our HPP product. During the third quarter of 2007 it was determined that our policy related to claims handling procedures and reserving practices was not applied consistently, primarily within the bodily injury claims unit. As part of the resolution of this matter, we retained an independent claims consulting firm. As a result, for the year ended December 31, 2007, we increased reserves for prior years by $19.6 million.

As of December 31, 2007, our insurance subsidiary, Proformance Insurance Company (“Proformance”), was the twelfth largest and one of the fastest growing provider of private passenger auto insurance in New Jersey, based on direct written premiums of companies writing more than $5 million of premiums annually over the past three years, according to A.M. Best. From 2003 through 2007, we experienced a 2.3% compound annual growth rate, as our direct written premiums for all lines of business we write, including homeowners and commercial lines, increased from

$163.2 million in 2003 to $178.7 million in 2007. As of December 31, 2007, our stockholders’ equity was $144.2 million, up from stockholders’ equity of $49.8 million as of December 31, 2003, reflecting a 30.4% compound annual growth rate. Included in stockholders’ equity is $62.2 million as a result of our initial public offering, which was completed on April 21, 2005.

Direct written premiums for the year ended December 31, 2007 increased by $7.6 million, or 4.4%, to $178.7 million from $171.1 million in the comparable 2006 period.

For the year ended December 31, 2007, the increase is primarily due to the following: new business generated by our partner agents increased by $3.0 million to $34.4 million from $31.4 million in the comparable 2006 period, including new business from our Blue Star auto insurance product in the amount of $8.7 million. This was offset by attrition of existing business of $9.5 million and $7.3 million, respectively, as well as a $17.3 million decrease in premium as a result of decreases in renewal premiums during the period and a reduction in closed agents business as a result of the continued increase in the competitive nature of the New Jersey auto insurance marketplace.

We manage and report our business as a single segment based upon several factors. Although our insurance subsidiary, Proformance Insurance Company writes private passenger automobile, homeowners and commercial lines insurance, we consider those operating segments as one operating segment due to the fact that the nature of the products are similar, the nature of the production processes are similar, the type of class of customer for the products are similar, the methods used to distribute the products are similar and the nature of the regulatory environment is similar. In addition, these lines of business have historically demonstrated similar economic characteristics and as such are aggregated and reported as a single segment. Also, in addition to Proformance, all other operating segments wholly owned by the Company are aggregated and reported as a single segment due to the fact that the nature of the products are similar, the nature of the production processes are similar, the type of class of customer for the products are similar, the methods used to distribute the products are similar and the nature of the regulatory environment is similar.

As a densely populated state, a coastal state, and a state where automobile insurance has historically been prominent in local politics, New Jersey has historically presented a challenging underwriting environment for automobile and homeowners insurance coverage.

As a result of New Jersey’s “take all comers” requirement, we are obligated to underwrite a broad spectrum of personal automobile insurance risks. To address this potential problem, since 1998 Proformance has utilized a tiered rating system to price its policies, which includes five (5) rating tiers based upon the driving records of the policyholders. The purpose of the rating tiers is to modify the premiums to be charged for each insured vehicle on the personal automobile policy so that the premiums charged accurately reflect the underwriting exposures presented to Proformance.

As of December 31, 2007, the rating tier modifiers and the distribution of risks within the tiers were as follows:


	Premium
	Modifications		Percent of Total
Tier Designation	Factor		Vehicles
Tier A		0.88		33.7	%
Tier One		1.00		58.9	%
Tier Two		1.70		6.6	%
Tier Three		2.25		0.2	%
Tier Four		2.60		0.69	%

Proformance applies the modification factor to each tier to produce a consistent loss ratio across all tiers. Proformance does not segregate its loss reserves by tier, but rather by line of business. Since the actual distribution of risk may vary from the distribution of risk Proformance assumed in developing the modification factors, Proformance cannot be certain that an underwriting profit will be produced collectively or in any tier.

Our financial results may be affected by a variety of external factors that indirectly impact our premiums and/or claims expense. Such factors may include, but are not limited to:

	•		The recent rise in gasoline prices may serve to decrease the number of miles driven by our policyholders and result in lower frequency of automobile claims; and

	•		An evolving set of legal standards by which we are required to pay claims may result in significant variability in our loss reserves over time.

We believe that proper recognition of emerging trends, and an active response to those trends, is essential for our business. In addition, we believe that the recent entrants to the New Jersey personal automobile insurance marketplace, such as Mercury General, GEICO and Progressive, will provide a new level of competition not previously experienced by us or by our long-term competitors, which could have a material effect on our ability to meet sales goals or maintain adequate rates for our insurance products.

Since we operate in a coastal state and we underwrite property insurance, we are subject to catastrophic weather events, which may have significant impact upon our claims expense or our ability to collect the proceeds from our third party reinsurers. We also underwrite commercial insurance business and we expect that the rate increases on those policies that we have experienced over the last three years will moderate and that rate level reductions may ensue, impacting our ability to maintain our underwriting margins on this business.

For the years ended December 31, 2007, 2006 and 2005, we paid $0.0 million, $0.6 million and $0.2 million, respectively, in connection with fees paid in consideration of the acquisition of policy renewal rights. Our strategy includes entering into additional replacement carrier transactions as opportunities arise. However, due to improvements in the New Jersey insurance market during 2005, it is not likely that we will enter into replacement carrier transactions which have as significant an impact on our operations or are comparable in size to those entered into prior to 2005.

As a result of these transactions, we increased the number of independent insurance agencies who are shareholders in NAHC and who, with their aggregate premium volume, provide what we believe are significant growth opportunities for us. Our strategy is to underwrite an increased share of those agencies’ business now underwritten by competing carriers. Successful execution of our intended plan will require an underwriting operation designed to attract and retain more of our agencies’ clientele, and may be affected by lower-priced competing products or enhanced sales incentive compensation plans by our competitors. These factors may require us to increase our new business acquisition expenses from the levels currently experienced to achieve significant new product sales.

In our replacement carrier transactions, we agreed to offer replacement coverage to the subject policyholders at their next nominal policy renewal date. The policyholders are under no obligation to accept our replacement coverage offer. Policyholders who accept our replacement insurance coverage become policyholders of Proformance and enjoy the standard benefits of being a Proformance policyholder. For example, these policyholders enjoy the limitation we provide on our ability to increase annual premiums. We cannot increase the annual premiums paid by these policyholders by more than fifteen percent for three years, unless there is an event causing a change in rating characteristics, such as an auto accident. Those policyholders choosing not to accept the Proformance replacement insurance coverage due to rate or coverage disparities or individual consumer choice must seek replacement coverage with another carrier. Once the Proformance replacement offer has been rejected by a policyholder, Proformance has no further obligation to that policyholder.

Upon the closing, Proformance was required to pay to The Hartford a one-time fee of $150,000. In addition, on May 15, 2007, Proformance paid a one-time payment to The Hartford in the amount $253,392, which represented 5% of the written premium of the retained business at the end of the twelve-month non-renewal period.

For the years ended December 31, 2007, 2006 and 2005, the direct written premium generated from The Hartford renewal business was $4,724,728, $4,134,877 and $0, respectively.

On February 21, 2006 the Company announced that Proformance had entered into a replacement carrier transaction with Hanover Insurance Group, which we refer to as Hanover, whereby Hanover would transfer their renewal obligations for New Jersey automobile, homeowners, dwelling fire, personal excess liability and inland marine policies sold through independent agents to Proformance. Under the terms of the transaction, Proformance is in the process of offering renewal policies to approximately 16,000 qualified policyholders of Hanover. NAHC and Proformance received approval of this transaction from the NJDOBI on February 16, 2006.

Upon the Closing, Proformance was required to pay to Hanover a one-time fee of $450,000, and within 30 days of the closing, $100,000 was due to reimburse Hanover for its expenses associated with this transaction. In May of 2007, the Company paid $666,129 to Hanover, representing the first of two annual payments equal to 5% of the written premium of the retained business for the preceding twelve months, calculated at the 12 month and 24 month anniversaries.

For the years ended December 31, 2007 and 2006, the direct written premium generated from Hanover renewal business was $12,491,300 and $11,080,943, respectively.

With respect to our replacement carrier transaction for the 2004 year with OCIC and OCNJ, on February 22, 2005 Proformance notified OCNJ that OCNJ owed Proformance $7,762,000 for the 2004 year in connection with the requirement that a premium-to-surplus ratio of 2.5 to 1 be maintained on the OCNJ renewal business. Pursuant to our agreement, OCNJ had until May 15, 2005 to make payment to us. Subsequent to the notification provided to OCIC and OCNJ, we had several discussions with OCIC relating to certain components to the underlying calculation which supports the amount owed to Proformance for the 2004 year. As part of these discussions, OCIC had requested additional supporting documentation and raised issues with respect to approximately $2,000,000 of loss adjustment expense, approximately $800,000 of commission expense, and approximately $600,000 of NJAIRE assessments, or a total of $3,412,000, allocated to OCNJ. We recorded $4,350,000 (the difference between the $7,762,000 we notified OCNJ they owed us, and the $3,412,000 as outlined above) as replacement carrier revenue from related party in our consolidated statement of operations for the year ended December 31, 2004 with respect to the OCIC replacement carrier transaction. We recorded $4,350,000 because it was management’s best estimate of the amount for which we believed collectability was reasonably assured based on several factors. First, the calculation to determine the amount owed by OCIC to us is complex and certain elements of the calculation are significantly dependent on management’s estimates and judgment and thus more susceptible to challenge by OCIC. We also note our experience in the past in negotiating these issues with OCIC. For example, in 2003 we notified OCNJ that OCNJ owed Proformance approximately $10,100,000 for 2003. After negotiations we ultimately received $6,820,000. Accordingly, because of the nature of the calculation, the inherent subjectivity in establishing certain estimates upon which the calculation is based, and our experience from 2003, management’s best estimate of the amount for 2004 for which we believed collectability from OCIC was reasonably assured was $4,350,000. On June 27, 2005, we received $3,654,000 from OCIC in settlement of the amounts due to Proformance, which differs from the $4,350,000 we had recorded as a receivable due from OCIC as outlined above. The difference of $696,000 between the receivable we had recorded ($4,350,000) due from OCIC and the actual settlement payment received from OCIC ($3,654,000) came as a result of a dispute between the Company and OCIC regarding $292,000 of NJAIRE assessments and approximately $404,000 of commission expenses included in the underlying calculation which supported the amounts due to Proformance for the 2004 year, the final year of our three year agreement with OCIC. The $696,000 was recorded as a bad debt expense in the Company’s consolidated statement of operations for the year ended December 31, 2005.

With respect to our replacement carrier transaction with Sentry Insurance, in the event that the premium-to-surplus ratio for the Sentry Insurance business written by Proformance exceeded 2.5 to 1 during a specified period, Sentry Insurance was obligated to pay to Proformance such additional sums of money as necessary, up to an aggregate limit of $1,250,000, to reduce the premium-to-surplus ratio for the Sentry Insurance business written by Proformance to not less than 2.5 to 1. On February 22, 2005 Proformance notified Sentry Insurance that Sentry Insurance owed Proformance $1,250,000 for the 2004 year in connection with the requirement. On May 16, 2005, we received $1,250,000 from Sentry Insurance in settlement of the amounts owed to us.

Prior to the Company’s initial public offering, the Company limited the amount of business that Partner Agents could write with Proformance because of its limited capital. However, following the Company’s initial public offering on April 21, 2005, the Company contributed additional capital to Proformance. Accordingly, on June 13, 2005, the Company held a meeting with Partner Agents to inform them that the limitations historically placed on them with respect to placing new business with Proformance were no longer applicable due to Proformance’s enhanced capital adequacy.

In the New Jersey Supreme Court’s decision in June of 2005 in DiProspero v. Penn, et al., the Court eliminated certain restrictions on the ability of plaintiffs to obtain non-economic damages, such as for pain and suffering. As a result of this decision, we have adjusted our reserves to include additional personal injury protection (no-fault) losses and legal defense costs severities because of the potential for an increase in the number of litigated cases.

On March 15, 2005, the Board of Directors of the Company discussed extending the exercise period of stock options to purchase 73,100 shares of the Company’s common stock granted under its Nonstatutory Stock Option Plan (the “Plan”) on June 15, 1995 to three individuals, two of whom are currently executive officers and one of whom is currently a director of the Company. These stock options were scheduled to expire on June 14, 2005, ten years after the date of issuance. The Board of Directors discussed extending the expiration date of these stock options from June 14, 2005 until December 31, 2005, with the effective date of the extension being June 14, 2005. This proposal to extend the exercise period for such stock options was approved by the Board of Directors at its meeting held on June 13, 2005, subject to shareholder approval. The extension of these options was approved by the Company’s shareholders at the Company’s Annual Meeting of Shareholders which was held on September 19, 2005.

F.P. “Skip” Campion, the Company’s former Vice Chairman and the former President of Proformance, passed away on January 25, 2005. Under the terms of the Plan and the applicable stock option agreements, if an optionee dies without having fully exercised any outstanding stock options, the right to exercise such stock options expires ninety days following the optionee’s death. Accordingly, the expiration date of Mr. Campion’s stock options (none of which had previously been exercised) was accelerated to April 25, 2005. Since the estate of Mr. Campion did not exercise these stock options on or prior to April 25, 2005, the stock options were forfeited. On June 13, 2005, the Board of Directors of the Company approved, subject to shareholder approval, a grant of new nonqualified stock options to the estate of Mr. Campion, to preserve the value of Mr. Campion’s stock options that expired on April 25, 2005. The new stock options are subject to the same terms and conditions as the forfeited stock options, including the exercise price and number of shares subject to each option, except that the new stock options would expire on December 31, 2005.

Approval of the extension of the options granted during 1995 and the grant of new stock options to the estate of Mr. Campion was received at the Company’s Annual Meeting of Shareholders on September 19, 2005. The fair market value of the Company’s stock on September 19, 2005 was $11.47; therefore, the Company recognized $749,802 as compensation expense related to the extension of options in its consolidated statement of operations for the year ended December 31, 2005. The Company also recognized $1,937,198 as compensation expense related to the grant of new options in its consolidated statement of operations for the year ended December 31, 2005.

On December 21, 2007, the Board of Directors of NAHC approved the Compensation Committee’s recommendation to grant 60,000 stock appreciation rights (SARS) to certain executive officers under the Company’s 2004 Stock and Incentive Plan. The SARS were granted with a base price of $3.93 per share, which was the closing price of the Company’s common stock on the Nasdaq National Market on the date of grant.

On March 20, 2007, the Board of Directors of NAHC approved the Compensation Committee’s recommendation to grant 345,000 stock appreciation rights (SARS) to the executive officers and other key employees under the Company’s 2004 Stock and Incentive Plan. The SARS were granted with a base price of $12.88 per share, which was the closing price of the Company’s common stock on the Nasdaq National Market on the date of grant.

On March 21, 2006, the Board of Directors of National Atlantic Holdings Corporation (NAHC) approved the Compensation Committee’s recommendation to grant 343,000 stock appreciation rights (SARS) to the executive officers and other key employees under the Company’s 2004 Stock and Incentive Plan. The SARS were granted with a base price of $9.94 per share, which was the closing price of the Company’s common stock on the Nasdaq National Market on the date of grant.

In accordance with SFAS 123R, the Company records share based compensation liabilities at fair value or a portion

thereof (depending upon the percentage of requisite service that has been rendered at the reporting date) based on the Black-Scholes valuation model and will remeasure the liability at each reporting date through the date of settlement; consequently, compensation cost recognized through each period of the vesting period (as well as each period throughout the date of settlement) will vary based on the award’s fair value and the vesting schedule.

The Company has reported, as a component of other liabilities on the consolidated balance sheet, share-based compensation liability at December 31, 2007 and 2006, of $128,285 and $1,066,239, respectively. For the year ended December 31, 2007 and 2006, the Company has reported, as a component of other operating and general expenses on the consolidated statement of income, share-based compensation expense of ($492,864), $1,066,239 and $0, respectively, related to stock appreciation rights.

On January 1, 2005, Proformance entered into an Auto Physical Damage Quota Share Contract with Odyssey America Reinsurance Corporation. Under the terms of this contract, Proformance ceded $1,953,393 of written premiums and $2,047,576 of beginning unearned premium reserves to Odyssey Re with respect to business written between January 1, 2005 and September 15, 2005. Ceded losses and loss adjustment expenses were $374,143 and ceded reserves including incurred but not reported (“IBNR”) reserves was $222,182.

On September 15, 2005, Proformance commuted the Auto Physical Damage Quota Share Contract with Odyssey Re. The commutation was initiated in September 2005 and all items previously recorded in connection with the agreement were reversed as of that period. The transaction was recorded as a decrease of ceded written premium of $4,000,969, a decrease in ceded commissions of $1,200,291 and a decrease in ceded unearned premiums of $2,426,517. The overall net effect of the commutation is a loss of $160,039.

Revenues

We derive our revenues primarily from the net premiums we earn, net investment income we earn on our invested assets and revenue associated with replacement carrier transactions. Net earned premiums is the difference between the premiums we earn from the sales of insurance policies and the portion of those premiums that we cede to our reinsurers.

The revenue we earned from replacement carrier transactions relates to the funds that we received to assume the renewal obligations of those books of business. Revenues from replacement carrier transactions are recognized pro-rata over the period that we complete our obligations under the terms of the agreement, typically ranging from six months to a year, determined by the renewal option period of the policyholders. Certain replacement carrier contracts require additional consideration to be paid to us based on an evaluation of the ratio of premiums written to surplus. The calculation is performed and related revenue is recognized as earned annually, pursuant to the terms of the contract. Certain other transactions, such as the Hanover and Hartford transactions described above, require us to pay additional consideration in the future. We did not record any replacement carrier revenue for the years ended December 31, 2007, 2006 and 2005. Our strategy includes entering into additional replacement carrier transactions as opportunities arise. However, due to improvements in the New Jersey insurance market during 2005, it is not likely that we will enter into replacement carrier transactions which have as significant an impact on the Company’s operations, or are comparable in size to those entered into prior to 2005.

Investment income consists of the income we earn on our fixed income and equity investments as well as short term investments. The “other income” we earn consists of service fees charged to insureds that pay on installment plans, commission received by National Atlantic Insurance Agency from third party business, and revenue from our contract with AT&T under which we provide claims handling and risk data reporting on general liability, automobile liability and physical damage and household move claims.

Expenses

Our expenses consist primarily of three types: losses and loss adjustment expenses, including estimates for losses and loss adjustment expenses incurred during the period and changes in estimates from prior periods, less the portion of those insurance losses and loss adjustment expenses that we cede to our reinsurers; and acquisition expenses, which consist primarily of commissions we pay our agents. In addition, underwriting, acquisition and insurance related expenses include premium taxes and company expenses related to the production and underwriting of insurance policies, less ceding commissions that we receive under the terms of our reinsurance contracts, and other operating and general expenses which include general and administrative expenses.

The provision for unpaid losses and loss adjustment expenses includes: individual case estimates, principally on the basis of reports received from claim adjusters employed by Proformance, losses reported prior to the close of the period, and estimates with respect to incurred but not reported losses and loss adjustment expenses, net of anticipated salvage and subrogation. The method of making such estimates and for establishing the resulting reserves is continually reviewed and updated, and adjustments are reflected in current operations. The estimates are determined by management and are based upon industry data relating to loss and loss adjustment expense ratios as well as Proformance’s historical data.

Underwriting, acquisition and insurance related expenses include policy acquisition expenses which consist of commissions and other underwriting expenses, which are costs that vary with and are directly related to the underwriting of new and renewal policies and are deferred and amortized over the period in which the related premiums are earned. Also included in underwriting, acquisition and related insurance expenses are NJAIRE assessments, professional fees and other expenses relating to insurance operations.

Other operating and general expenses consist primarily of professional fees, stock based compensation expense and other general expenses which are not directly associated with insurance operations and relate primarily to costs incurred by our holding company.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in our consolidated financial statements. As additional information becomes available, these estimates and assumptions are subject to change and thus impact amounts reported in the future. We have identified below two accounting policies that we consider to be critical due to the amount of judgment and uncertainty inherent in the application of these policies.

Unpaid Losses and Loss Adjustment Expenses

Significant periods of time can elapse between the occurrence of an insured loss, the reporting to us of that loss and our final payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities. Our reserves represent actuarially determined best estimates of amounts needed to pay reported and unreported losses and the expenses of investigating and paying those losses, or loss adjustment expenses. Every quarter, we review our previously established reserves and adjust them, if necessary.

When a claim is reported, claims personnel establish a “case reserve” for the estimated amount of ultimate payment. The amount of the reserve is primarily based upon an evaluation of the type of claim involved, the circumstances surrounding each claim and the policy provisions relating to the loss. The estimate reflects informed judgment of such personnel based on general insurance reserving practices and on the experience and knowledge of the claims personnel. During the loss adjustment period, these estimates are revised as deemed necessary by our claims department based on subsequent developments and periodic reviews of the cases.

When reviewing reserves, we analyze historical data and estimate the impact of various loss development factors, such as our historical loss experience and that of the industry, trends in claims frequency and severity, our mix of business, our claims processing procedures, legislative enactments, judicial decisions, legal developments in imposition of damages, and changes and trends in general economic conditions, including the effects of inflation. A change in any of these factors from the assumptions implicit in our estimate can cause our actual loss experience to be better or worse than our reserves, and the difference can be material. There is no precise method, however, for evaluating the impact of any specific factor on the adequacy of reserves, because the eventual development of reserves and currently established reserves may not prove adequate in light of subsequent actual experience. To the extent that reserves are inadequate and are strengthened, the amount of such increase is treated as a charge to earnings in the period that the deficiency is recognized. To the extent that reserves are redundant and are released, the amount of the release is a credit to earnings in the period that redundancy is recognized.

This increase was due to an inconsistent implementation of a revised claim reserving policy that was uncovered in the third quarter of 2007. Prior year reserves for other liability increased by $3.6 million. This was offset by favorable development of $4.6 million in no-fault coverages and $1.6 million in commercial auto liability.

The table below sets forth the types of reserves we maintain for our lines of business and indicates the amount of reserves as of December 31, 2007 for each line of business.

National Atlantic Holdings Corporation
Breakout of Reserves by Line of Business
As of December 31, 2007


	Direct		Assumed						Total Balance
	Case		Case		Direct		Assumed		Sheet
	Reserves		Reserves		IBNR		IBNR		Reserves
	(in thousands)
Line of Business:
Fire	$	—	$	29	$	—	$	—	$	29
Allied		—		3		—		—		3
Homeowners		6,741		—		9,168		—		15,909
Personal Auto		93,000		5		48,634		—		141,639
Commercial Auto		10,437		898		13,176		536		25,047
Other Liability		5,815		—		8,663		—		14,478

Total Reserves	$	115,993	$	935	$	79,641	$	536	$	197,105


Reinsurance Recoverables on Unpaid Losses										(17,691	)


Total Net Reserves									$	179,414

In establishing our net reserves as of December 31, 2007, our Chief Actuarial Officer has determined that the range of reserve estimates on a net basis, at that date, was between $163.8 million and $195.3 million. The amount of net reserves at December 31, 2007, which represents the best estimate of management and our actuaries within that range, was $179.4 million. There are two major factors that could result in ultimate losses below management’s best estimate:

	•		More effective claims processes have recently been put in place. If the improvement in our claims handling process is better than expected, losses could develop less than anticipated,

	•		The rate of claims settlements has increased dramatically over the past year. A continuation of this activity could produce ultimate losses below our current estimate.

There are two major factors that could result in ultimate losses above management’s best estimate:

•

Claims for uninsured motorists generally have a longer development period than other liability losses. If the frequency of uninsured motorist claims increases beyond our current estimated levels, loss emergence could be greater than what we projected in our loss development analysis.

•

We believe that the claims department has improved its claims handling practices with regard to claims reserving and settlement. These improvements, if not effectively implemented, could result in adverse loss development.

Investment Accounting Policy — Impairment

Our principal investments are in fixed maturities, all of which are exposed to at least one of three primary sources of investment risk: credit, interest rate and market valuation. The financial statement risks are those associated with the recognition of impairments and income, as well as the determination of fair values. Recognition of income ceases when a bond goes into default. We evaluate whether impairments have occurred on a case-by-case basis. Management considers a wide range of factors about the security issuer and uses its best judgment in evaluating the cause and amount of decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations we use in the impairment evaluation process include, but are not limited to: (i) the length of time and the extent to which the market value has been below amortized cost; (ii) the potential for impairments of securities when the issuer is experiencing significant financial difficulties; (iii) the potential for impairments in an entire industry sector or subsection; (iv) the potential for impairments in certain economically depressed geographic locations; (v) the potential for impairment of securities where the issuer, series of issuers or industry has a catastrophic type of loss or has exhausted natural resources; (vi) other subjective factors, including concentrations and information obtained from regulators and rating agencies and (vii) management’s intent and ability to hold securities to recovery. In addition, the earnings on certain investments are dependent upon market conditions, which could result in prepayments and changes in amounts to be earned due to changing interest rates or equity markets.

Insurance Ratios

The property and casualty insurance industry uses the combined ratio as a measure of underwriting profitability. The combined ratio is the sum of the loss ratio and the expense ratio. The loss ratio is the ratio of losses and loss adjustment expenses to net earned premiums. The expense ratio, when calculated on a statutory accounting basis, is the ratio of underwriting expenses to net written premiums. The expense ratio, when calculated on a GAAP basis, differs from the statutory method specifically as it relates to policy acquisition expenses. Policy acquisition expenses are expensed as incurred under the statutory accounting method. However, for GAAP, policy acquisition expenses are deferred and amortized over the period in which the related premiums are earned. The combined ratio reflects only underwriting results and does not include fee for service income or investment income. Underwriting profitability is subject to significant fluctuations due to competition, catastrophic events, economic and social conditions and other factors.

Results of Operations

Direct written premiums for the year ended December 31, 2007 increased by $7.6 million, or 4.4%, to $178.7 million from $171.1 million in the comparable 2006 period. For the year ended December 31, 2007, the increase is primarily due to the following: new business generated by our partner agents increased by $3.0 million to $34.4 million from $31.4 million in the comparable 2006 period, including new business from our Blue Star auto insurance product in the amount of $8.7 million. This was offset by attrition of existing business of $9.5 million as well as a $17.3 million decrease in premium as a result of decreases in renewal premiums during the period and a reduction in closed agents business as a result of the continued increase in the competitive nature of the New Jersey auto insurance marketplace.

The table below shows certain of our selected financial results for the years ended December 31, 2007, 2006 and 2005:


	For the year ended December 31,
	2007			2006		2005
Direct written premiums	$	178,679		$	171,069	$	198,049

Net written premiums		166,210			161,125		189,634

Net premiums earned	$	165,220		$	157,354	$	172,782
Investment income		17,276			16,082		12,403
Net realized investment gains (losses)		72			979		411
Other income		1,703			1,441		1,745

Total revenue	$	184,271		$	175,856	$	187,341


Losses and loss adjustment expenses incurred	$	145,085		$	103,824	$	132,794
Underwriting, acquisition and insurance related expenses		49,652			48,275		42,264
Other operating and general expenses		539			2,268		3,989

Total expenses		195,276			154,367		179,047

Income (loss) before income taxes		(11,005	)		21,489		8,294
Income taxes (benefit)		(4,811	)		7,107		1,858

Net (loss) income	$	(6,194	)	$	14,382	$	6,436

For the year ended December 31, 2007, compared to the year ended December 31, 2006

Direct Written Premiums. Direct written premiums for the year ended December 31, 2007 increased by $7.6 million, or 4.4%, to $178.7 million from $171.1 million in the comparable 2006 period.

For the year ended December 31, 2007, the increase is primarily due to the following: new business generated by our partner agents increased by $3.0 million to $34.4 million from $31.4 million in the comparable 2006 period, including new business from our Blue Star auto insurance product in the amount of $8.7 million. This was offset by attrition of existing business of $9.5 million, as well as a $17.3 million decrease in premium as a result of decreases in renewal premiums during the period and a reduction in closed agents business as a result of the continued increase in the competitive nature of the New Jersey auto insurance marketplace.

Net Written Premiums. Net written premiums for the year ended December 31, 2007 increased by $5.1 million, or 3.2%, to $166.2 million from $161.1 million in the comparable 2006 period. Ceded premiums as a percentage of direct written premium for the year ended December 31, 2007 was 7.2%, as compared to 6.5%, in the same period in the prior year. The increase in net written premiums for the year ended December 31, 2007 was due to the increase in direct written premiums for the same period.

Net Premiums Earned. Net premiums earned for the year ended December 31, 2007 increased by $7.8 million, or 5.0%, to $165.2 million from $157.4 million in the comparable 2006 period.

Investment Income. Investment income for the year ended December 31, 2007 increased by $1.2 million, or 7.5%, to $17.3 million from $16.1 million in the comparable 2006 period. The increase was primarily due to an increase in average invested assets. Average invested assets for the year ended December 31, 2007 increased $11.6 million, or 3.7%, to $323.1 million from $311.4 million for the same period in the prior year.

Net Realized Investment Gains. Net realized investment gains for the years ended December 31, 2007 and 2006 were $0.1 million and $1.0 million, respectively.

Other Income. Other income for the year ended December 31, 2007 and 2006 was $1.7 million and $1.4 million, respectively. The increase is primarily related to an increase in finance and service fees charged to those paying on an installment basis. Finance and service fees for the years ended December 31, 2007 and 2006 were $1.6 million and $1.2 million, respectively.

Losses and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses incurred for the year ended December 31, 2007 increased by $41.3 million, or 39.8%, to $145.1 million from $103.8 million in the comparable 2006 period. This increase can be attributed to an increase in claim frequency in private passenger automobile coverage and strengthening of prior year reserves by $19.6 million, due to the inconsistent implementation of a revised claim reserving policy that was uncovered in the third quarter of 2007. As a percentage of net earned premiums, losses and loss adjustment expenses incurred for the year ended December 31, 2007 were 87.8% compared to 66.0% for the year ended December 31, 2006. The ratio of net incurred losses, excluding loss adjustment expenses, to net earned premiums during 2007 was 76.3% compared to 61.5% for the comparable 2006 period.

Underwriting, Acquisition and Insurance Related Expenses. Underwriting, acquisition and insurance related expenses for the year ended December 31, 2007 increased by $1.4 million, or 2.9%, to $49.7 million from $48.3 million in the comparable 2006 period. As a percentage of net written premiums, our underwriting, acquisition and insurance related expense ratio for the year ended December 31, 2007 was 29.9% as compared to 30.0% for the comparable 2006 period. Underwriting, acquisition and insurance related expenses, excluding changes in deferred acquisition costs for the years ended December 31, 2007 and 2006 were $50.0 million and $49.8 million, respectively. The effect of an increase in the deferred acquisition cost asset is recorded as a reduction of underwriting, acquisition and insurance related expenses. For the year ended December 31, 2007, the benefit recorded as a result of the increase in the deferred acquisition cost asset decreased by $1.2 million to $0.3 million from $1.5 million in the comparable 2006 period. For the year ended December 31, 2007, commission expense increased by $2.7 million to $26.6 million from $23.9 million in the comparable 2006 period. Salary expense for year ended December 31, 2007 increased by $0.8 million to $17.6 million from $16.8 million in the comparable 2006 period. In addition, depreciation and amortization expense for the year ended December 31, 2007 increased by $0.7 million to $1.1 million from $0.4 million in the comparable 2006 period as a result of the Diamond 4x software which was placed into service in March of 2007.

Other Operating and General Expenses. Other operating and general expenses for the year ended December 31, 2007 decreased by $1.8 million, or 78.3%, to $0.5 million from $2.3 million in the comparable 2006 period. The decrease in other operating and general expenses for the year ended December 31, 2007 is primarily related to a decrease in share based compensation expense. For the years ended December 31, 2007 and 2006, share based compensation expense was ($0.5) million and $1.1 million, respectively.

Income Tax (Benefit) Expense. Income tax (benefit) expense for the year ended December 31, 2007 and 2006 was ($4.8) million and $7.1 million, respectively. The decrease in tax expense for the year ended December 31, 2007, as compared to the same period in the prior year was due to a decrease in income before income taxes.

Net (Loss) Income. Net (loss) income for the years ended December 31, 2007 and 2006 was ($6.2) million and $14.4 million, respectively. The decrease in net income for the year ended December 31, 2007 as compared to the same period in the prior year is a result of the factors discussed above.

For the year ended December 31, 2006, compared to the year ended December 31, 2005

Direct Written Premiums. Direct written premiums for the year ended December 31, 2006 decreased by $26.9 million, or 13.6%, to $171.1 million from $198.0 million in the comparable 2005 period.

For the year ended December 31, 2006 the decrease is due to the following: our closed agents business that was acquired as part of previous replacement carrier transactions with OCIC, Met P&C and Sentry decreased by $51.0 million as a result of the continued increase in the competitive nature of the New Jersey auto insurance market those agents were able to place that business with other carriers in the New Jersey market. New business generated by our partner agents for the year ended December 31, 2006 was $31.4 million, offset by attrition of existing business of $7.3 million. For the year ended December 31, 2006, direct written premium generated from The Hanover and Hartford renewal business was approximately $11.1 and $4.1 million, respectively.

Net Written Premiums. Net written premiums for the year ended December 31, 2006 decreased by $28.5 million, or 15.0%, to $161.1 million from $189.6 million in the comparable 2005 period. Ceded premiums as a percentage of direct written premium for the year ended December 31, 2006 was 6.5%, as compared to 5.2%, in the same period in the prior year. The decrease in net written premiums for the year ended December 31, 2006 was due to the decrease in direct written premiums for the same period.

Net Premiums Earned. Net premiums earned for the year ended December 31, 2006 decreased by $15.4 million, or 8.9%, to $157.4 million from $172.8 million in the comparable 2005 period.

Investment Income. Investment income for the year ended December 31, 2006 increased by $3.7 million, or 29.8%, to $16.1 million from $12.4 million in the comparable 2005 period. The increase was primarily due to an increase in our average book yield to maturity which was 5.47% and 5.22% at December 31, 2006 and 2005, respectively. The increase in yield was due to the purchase of securities with higher yields. In addition, invested assets increased to $318.8 million at December 31, 2006 from $300.0 million at December 31, 2005.

Net Realized Investment Gains. Net realized investment gains for the year ended December 31, 2006 and 2005 were $1.0 million and $0.4 million, respectively.

Other Income. Other income for the year ended December 31, 2006 and 2005 was $1.4 million and $1.7 million, respectively. The decrease in other income is primarily related to a decrease in revenue related to claims handling services provided by Riverview in connection with the AT&T contract. Claims handling revenue for the year ended December 31, 2006 was $0.3 million, as compared with $0.4 million for the comparable 2005 period.

Losses and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses incurred for the year ended December 31, 2006 decreased by $29.0 million, or 21.8%, to $103.8 million from $132.8 million in the comparable 2005 period. This decrease can be attributed to a decline in earned premium, a reduction in claim frequency in private passenger automobile coverage and significant growth in commercial lines business which exhibit lower loss ratios. As a percentage of net earned premiums, losses and loss adjustment expenses incurred for the year ended December 31, 2006 were 66.0% compared to 76.9% for the year ended December 31, 2005. The ratio of net incurred losses, excluding loss adjustment expenses, to net earned premiums during 2006 was 61.5% compared to 65.6% for the comparable 2005 period.

Underwriting, Acquisition and Insurance Related Expenses. Underwriting, acquisition and insurance related expenses for the year ended December 31, 2006 increased by $6.0 million, or 14.2%, to $48.3 million from $42.3 million in the comparable 2005 period. The increase is due to an increase in salary expense in the amount of $1.3 million and a $4.7 million change in the amortization of deferred acquisition costs in 2006 as compared to the comparable 2005 period. Underwriting, acquisition and insurance related expenses, excluding deferred acquisition costs for the year ended December 31, 2006 were $49.8 million, as compared with $48.5 million, in the comparable 2005 period. For the year ended December 31, 2006, the deferred acquisition cost asset increased by $1.5 million, to $18.6 million as compared to an increase of $6.2 million to $17.1 million in the comparable 2005 period. The effect of the increase in the deferred acquisition cost asset is recorded as a reduction of underwriting, acquisition and insurance related expenses. As a percentage of net written premiums, our underwriting, acquisition and insurance related expense ratio for the year ended December 31, 2006 was 30.0% as compared to 22.4% for the comparable 2005 period. For the year ended December 31, 2006, unearned premiums increased $4.0 million, to $85.5 million from $81.5 million in the comparable 2005 period. Commission expense for the year ended December 31, 2006 decreased by $1.8 million, or 7.0%, to $23.9 million from $25.7 million in the comparable 2005 period. The ratio of commission expense to direct written premiums during 2006 was 14.0% compared to 13.0% for the comparable 2005 period.

Other Operating and General Expenses. Other operating and general expenses for the year ended December 31, 2006 decreased by $1.7 million, or 42.5%, to $2.3 million from $4.0 million in the comparable 2005 period. The decrease in other operating and general expenses for the year ended December 31, 2006 is primarily related to a decrease in stock based compensation expense offset by an increase in deferred compensation expense. For the year ended December 31, 2006, stock based compensation expense was $0.0 million, as compared to $3.1 million for the comparable 2005 period. For the year ended December 31, 2006, share-based compensation expense was $1.1 million as compared to $0.0 million for the comparable 2005 period.

Income Tax Expense. Income tax expense for the year ended December 31, 2006 and 2005 was $7.1 million and $1.9 million, respectively. The increase in tax expense of $5.2 million for the year ended December 31, 2006 as compared to the same period in the prior year was due to the increase in income before income taxes for the same periods.

Net Income. Net income for the year ended December 31, 2006 and 2005 was $14.4 million and $6.4 million, respectively. The increase in net income for the year ended December 31, 2006 as compared to the same period in the prior year is a result of the factors discussed above.

Liquidity and Capital Resources

We are organized as a holding company with all of our operations being conducted by our insurance subsidiaries, which underwrite the risks associated with our insurance policies, and our non-insurance subsidiaries, which provide our policyholders and our insurance subsidiaries a variety of services related to the insurance policies we provide. We have continuing cash needs for taxes and administrative expenses. These ongoing obligations are funded with dividends from our non-insurance subsidiaries. Our taxes are paid by each subsidiary through an inter-company tax allocation agreement. In addition, a portion of the proceeds of our sale of common stock to our Partner Agents had historically been used to pay taxes. We do not expect to sell common stock to our Partner Agents in the future as any purchases subsequent to the initial public offering have been and will continue to be made in the open market.

Proformance’s primary sources of funds are premiums received, investment income and proceeds from the sale and redemption of investment securities. Our non-insurance subsidiaries’ primary source of funds is policy service revenues. Our subsidiaries use funds to pay operating expenses, make payments under the tax allocation agreement, and pay dividends to us. In addition, Proformance uses funds to pay claims and purchase investments.

We have historically received much of our capital in connection with replacement carrier transactions. As discussed more fully in the “Overview” section of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we cannot be certain that replacement carrier transactions on acceptable terms will continue to be available to us. If we are unable to enter into replacement carrier transactions on acceptable terms in the future, we may be forced to seek other sources of capital (including the issuance in either a public offering or a private placement of common stock or other equity or debt securities), which sources could be unavailable to us, or if available, could be more costly to us.

On April 21, 2005, an initial public offering of 6,650,000 shares of the Company’s common stock (after the 43-for-1 stock split) was completed. The Company sold 5,985,000 shares resulting in net proceeds to the Company (after deducting issuance costs and the underwriters’ discount) of $62,198,255. The Company contributed $43,000,000 to Proformance, which increased its statutory surplus. The additional capital will permit the Company to reduce its reinsurance purchases and to retain more of the direct written premiums produced by its Partner Agents. On May 8, 2006 and May 16, 2007, the Company contributed an additional $9,000,000 and $4,100,000, respectively, to Proformance, thereby further increasing its statutory surplus. The remainder of the capital raised will be used for general corporate purposes, including but not limited to possible additional increases to the capitalization of the existing subsidiaries.

For the years ended December 31, 2007, 2006 and 2005, our consolidated cash flows (used in) provided by operations was ($0.2) million, $7.2 million and $28.1 million, respectively. The decrease in cash flows provided by operations for the year ended December 31, 2007 as compared to December 31, 2006 was due primarily to an increase in income taxes recoverable and decrease in income taxes payable offset by increases in unpaid losses and loss adjustment expenses and a decrease in reinsurance recoverables and receivables. For the year ended December 31, 2007, unpaid losses and loss adjustment expenses increased $5.7 million as compared with a decrease of $28.0 million which occurred during the same period in the prior year. For the year ended December 31, 2007 income taxes recoverable increased $8.5 million and income taxes payable decreased $3.0 million. For the year ended December 31, 2006, income taxes recoverable decreased $1.2 million and income taxes payable increased $3.0 million. For the year ended December 31, 2007, the Company made estimated tax payments of $6.9 million as compared with $4.1 million during the same period in the prior year. In addition, reinsurance recoverable and receivables decreased $6.1 million for the year ended December 31, 2007 as compared with a decrease of $14.1 million for the comparable 2006 period. The decrease in cash flows provided by operations for the year ended December 31, 2006 as compared to December 31, 2005 was due primarily to the a decrease in unpaid losses and loss adjustment expenses , partially offset by a decrease in reinsurance recoverables and receivables and increases in unearned premiums and income taxes payable. For the year ended December 31, 2006, unpaid losses and loss adjustment expenses decreased $28.0 million

as compared with an increase of $35.1 million for the same period in 2005. Reinsurance recoverables and receivables for the year ended December 31, 2006 decreased $14.1 million as compared to an increase of $5.9 million for the same period in 2005.

For the years ended December 31, 2007, 2006 and 2005, our consolidated cash flows provided by (used in) investing activities were $4.4 million, ($19.2) million and ($66.5) million, respectively. The increase in cash provided by investing activities for the year ended December 31, 2007 as compared to the same period in the prior year is related primarily to the sale of fixed maturity investments. The decrease in cash used in investing activities for the year ended December 31, 2006 as compared to the same period in the prior year is related primarily due to the conversion of our private passenger automobile business from six month to twelve month policies which began on January 1, 2005. This conversion process led to an increase in premium writings for the year ended December 31, 2005, which was subsequently invested by the Company along with the continued investment of the capital received as part of the initial public offering which was completed on April 21, 2005. Direct written premiums for the year ended December 31, 2006 decreased by $26.9 million, or 13.6%, to $171.1 million from $198.0 million in the comparable 2005 period. In addition, for the year ended December 31, 2006 our consolidated cash flow used in investing activities was in excess of our cash provided by operations as Proformance invested the $9 million which was contributed by the Company during the period.

For the years ended December 31, 2007, 2006 and 2005, our consolidated cash flows (used in) provided by financing activities were ($2.3) million, ($1.6) million and $62.7 million, respectively. The increase in our consolidated cash flows used in financing activities for the year ended December 31, 2007 as compared to December 31, 2006 is primarily related to an increase in the repurchase of capital stock. For the year ended December 31, 2007, the Company invested $2.6 million in common stock held in treasury as compared with $1.7 million in the comparable period in 2006. This was slightly offset by an increase in proceeds received by the Company from the exercise of stock options. For the year ended December 31, 2007, the Company received $0.3 million from the exercise of stock options as compared with $0.1 million in the comparable 2006 period. The decrease in our consolidated cash flows from financing activities for the year ended December 31, 2006 as compared to the year ended December 31, 2005 is related to the repurchase of capital stock as authorized by the board of directors on July 5, 2006 as well as the capital received during 2005 in connection with the Company’s initial public offering which was completed on April 21, 2005

The effective duration of our investment portfolio was 2.91 years as of December 31, 2007. By contrast, our liability duration was approximately 3.5 years as of December 31, 2007. We do not believe this difference in duration adversely affects our ability to meet our current obligations because we believe our cash flows from operations are sufficient to meet those obligations. Pursuant to our tax planning strategy, we invested the $40.6 million received from the OCIC replacement carrier transaction in long-term bonds in accordance with Treasury Ruling Regulation 1.362-2, which allows us to defer the payment of income taxes on the associated replacement carrier revenue until the underlying securities are either sold or mature. The effective duration of our investment portfolio, when excluding these securities, is reduced from 2.91 years to 2.45 years.

Management believes that the current level of cash flow from operations provides us with sufficient liquidity to meet our operating needs over the next 12 months. We expect to be able to continue to meet our operating needs after the next 12 months from internally generated funds. Since our ability to meet our obligations in the long term (beyond such 12-month period) is dependent upon such factors as market changes, insurance regulatory changes and economic conditions, no assurance can be given that the available net cash flow will be sufficient to meet our operating needs.

There are no restrictions on the payment of dividends by our non-insurance subsidiaries other than customary state corporation laws regarding solvency. Dividends from Proformance are subject to restrictions relating to statutory surplus and earnings. Proformance may not make an “extraordinary dividend” until 30 days after the Commissioner of the NJDOBI (which we refer to as the Commissioner) has received notice of the intended dividend and has not objected or has approved it in such time. An extraordinary dividend is defined as any dividend or distribution whose fair market value together with that of other distributions made within the preceding twelve months exceeds the greater of 10% of the insurer’s surplus as of the preceding December 31, or the insurer’s net income (excluding realized capital gains) for the twelve-month period ending on the preceding December 31, in each case determined in accordance with statutory accounting practices. Under New Jersey law, an insurer may pay dividends that are not considered extraordinary only from its unassigned funds, also known as its earned surplus. The insurer’s remaining surplus must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs following payment of any dividend or distribution to stockholders. As of December 31, 2007, Proformance was not permitted to pay dividends without the approval of the Commissioner. Proformance has not paid any dividends in the past and we do not anticipate that Proformance will pay dividends in the foreseeable future because we wish to reduce our reinsurance

purchases in order to retain more of the gross premiums written we generate. We also seek stronger financial strength ratings for Proformance, and both of these objectives require that the capital of Proformance be increased. In addition, the payment of dividends and other distributions by Mayfair is regulated by Bermuda insurance law and regulations.

The table below sets forth the aggregate amount of dividends paid to us by our non-insurance subsidiaries during the years ended December 31, 2007, 2006 and 2005.


	For the years ended December 31,
	2007		2006		2005
NAIA	$	1,110,000	$	714,781	$	1,550,000
Riverview	$	450,000	$	188,760	$	950,000
NAFC	$	1,000,000	$	—	$	—

Because our non-insurance subsidiaries generate revenues, profits and net cash flows that are generally unrestricted as to their availability for the payment of dividends, we expect to use those revenues to service all of our corporate financial obligations, such as shareholder dividends, if declared. The percentage of our total revenues generated by our non-insurance subsidiaries for the years ended December 31, 2007, 2006 and 2005 were 3.4%, 5.1% and 4.1%, respectively.

The Company has entered into a seven-year lease agreement for the use of office space and equipment. The most significant obligations under the lease terms other than the base rent are the reimbursement of the Company’s share of the operating expenses of the premises, which include real estate taxes, repairs and maintenance, utilities, and insurance. Net rent expense for 2007, 2006 and 2005 was $973,655, $958,279 and $945,391, respectively.

The Company entered into a four-year lease agreement for the use of additional office space and equipment commencing on September 11, 2004. Rent expense for 2007, 2006 and 2005 was $212,400, respectively.

Aggregate minimum rental commitments of the Company as of December 31, 2007 are as follows:


Year	Amount
2008	$	796,799
2009		545,999
2010		—
2011		—
2012 and thereafter		—

Total	$	1,342,798

In connection with the lease agreement, the Company obtained a letter of credit in the amount of $300,000 as security for payment of the base rent.

As of December 31, 2007, we did not have any material commitments for capital expenditures.

Proformance’s historic trends of net paid losses compared to net premiums collected for calendar years 2007, 2006 and 2005 reflect ratios of 81.9%, 75.8% and 60.8%, respectively.

The asset/liability match of the revenue generated in the OCIC replacement carrier transaction was contemplated based on the premiums to surplus leverage it was intended to support. We do not anticipate that the payment of claims will be affected by these longer-term investments based on sufficient cash flow provided from the collection of premiums and therefore we do not intend to sell any securities in such surplus funds prior to maturity. Future liquidity and operating income could be impacted if the fixed income securities are sold prior to maturity exposing them to market rate risk.

Investments

As of December 31, 2007 and December 31, 2006, the Company maintained a high quality investment portfolio.

As of December 31, 2007 and December 31, 2006, we did not hold any securities that were not publicly traded, because our investment policy prohibits us from purchasing those securities. In addition, at those dates, we did not have any non-investment grade fixed income securities.

As more fully described above under “— Critical Accounting Policies — Investment Accounting Policy — Impairment”, in accordance with the guidance of paragraph 16 of SFAS 115, should an other-than-temporary impairment be determined, we recognize such loss on the consolidated statement of operations and we write down the value of the security and treat the adjusted value as the new cost basis of the security.

Our gross unrealized losses represented 0.29% of cost or amortized cost of the investment portfolio as of December 31, 2007. Fixed maturities represented 99.7% of the investment portfolio and 99.8% of the unrealized losses as of December 31, 2007.

Unrealized losses on held-to-maturity securities, aged less than and greater than twelve months, as of December 31, 2007 are as follows:


	Less than 12 months					Greater than 12 months					Total
	Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)

Fixed maturities:
State, local government and agencies	$	2,612,228	$	(3,338	)	$	223,182	$	(3,682	)	$	2,835,410	$	(7,020	)
Industrial and miscellaneous		—		—			18,379,026		(585,430	)		18,379,026		(585,430	)

Total Investments - Held-to-Maturity	$	2,612,228	$	(3,338	)	$	18,602,208	$	(589,112	)	$	21,214,436	$	(592,450	)

As of December 31, 2007, the Company has 2 held to maturity securities in the less than twelve month category and 18 held to maturity securities in the twelve months or more categories. The unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. Management believes that the unrealized losses represent temporary impairment of the securities, as the Company has the intent and ability to hold these investments until maturity or market price recovery.

Unrealized losses on available-for-sale securities, aged less than and greater than twelve months, as of December 31, 2007 are as follows:


	Less than 12 months					Greater than 12 months					Total
	Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)

Fixed maturities:
U.S. Government, government agencies and authorities	$	12,677,756	$	(24,009	)	$	8,304,808	$	(93,914	)	$	20,982,564	$	(117,923	)
State, local government and agencies		2,653,290		(4,296	)		9,651,873		(43,239	)		12,305,163		(47,535	)
Industrial and miscellaneous		2,123,989		(50,125	)		2,890,698		(76,522	)		5,014,687		(126,647	)
Mortgage-backed securities		1,638,460		(6,284	)		1,006,540		(1,990	)		2,645,000		(8,274	)

Total fixed maturities		19,093,495		(84,714	)		21,853,919		(215,665	)		40,947,414		(300,379	)

Other Investments:
Equity securities		12,464		(1,386	)		—		—			12,464		(1,386	)

Total Investments - Available-for-Sale	$	19,105,959	$	(86,100	)	$	21,853,919	$	(215,665	)	$	40,959,878	$	(301,765	)

As of December 31, 2007, the Company has 25 available for sale securities in the less than twelve month category

and 57 available for sale securities in the greater than twelve months category. The unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. Management believes that the unrealized losses represent temporary impairment of the securities, as the Company has the intent and ability to hold these investments until maturity or market price recovery.

Unrealized losses on held-to-maturity securities, aged less than and greater than twelve months, as of December 31, 2006 were as follows:


	Less than 12 months					Greater than 12 months					Total
	Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)

Fixed maturities:
U.S. Government, government agencies and authorities	$	645,084	$	(9,978	)	$	5,889,375	$	(243,106	)	$	6,534,459	$	(253,084	)
State, local government and agencies		2,788,654		(57,768	)		—		—			2,788,654		(57,768	)
Industrial and miscellaneous		10,364,364		(159,399	)		20,094,937		(302,849	)		30,459,301		(462,248	)

Total Investments - Held-to-Maturity	$	13,798,102	$	(227,145	)	$	25,984,312	$	(545,955	)	$	39,782,414	$	(773,100	)

As of December 31, 2006, the Company has 15 held to maturity securities in the less than twelve month category and 20 held to maturity securities in the twelve months or more categories. The unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. Management believes that the unrealized losses represent temporary impairment of the securities, as the Company has the intent and ability to hold these investments until maturity or market price recovery.

Unrealized losses on available-for-sale securities, aged less than and greater than twelve months, as of December 31, 2006 were as follows:


	Less than 12 months					Greater than 12 months					Total
	Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)

Fixed maturities:
U.S. Government, government agencies and authorities	$	36,677,390	$	(121,768	)	$	142,710,619	$	(1,738,102	)	$	179,388,009	$	(1,859,870	)
State, local government and agencies		17,505,739		(49,894	)		24,555,792		(241,685	)		42,061,531		(291,579	)
Industrial and miscellaneous		4,230,424		(26,377	)		3,860,237		(130,487	)		8,090,661		(156,864	)
Mortgage-backed securities		488,032		(2,572	)		1,002,400		(12,576	)		1,490,432		(15,148	)

Total fixed maturities		58,901,585		(200,611	)		172,129,048		(2,122,850	)		231,030,633		(2,323,461	)

Other Investments:
Equity securities		—		—			877,488		(111,057	)		877,488		(111,057	)

Total Investments - Available-for-Sale	$	58,901,585	$	(200,611	)	$	173,006,536	$	(2,233,907	)	$	231,908,121	$	(2,434,518	)

As of December 31, 2006, the Company has 132 available-for sale securities in the less than twelve month category and 306 available-for-sale securities in the twelve months or more categories. The unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. Management believes that the unrealized losses represent temporary impairment of the securities, as the Company has the intent and ability to hold these investments until maturity or market price recovery.

Our fixed income securities in an unrealized loss position have an average “AA1” credit rating by Moody’s, with extended maturity dates, which have been adversely impacted by the increase in interest rates after the purchase date. As part of our ongoing security monitoring process by our investment manager and investment committee, it was concluded that no securities in the portfolio were considered to be other-than-temporarily impaired as of December 31, 2007 and 2006. We believe, with the investment committee’s confirmation, that securities that are temporarily impaired that continue to pay principal and interest in accordance with their contractual terms, will continue to do so.

Management considers a number of factors when selling securities. For fixed income securities, management considers realizing a loss if the interest payments are not made on schedule or the credit quality has deteriorated. Management also considers selling a fixed income security in order to increase liquidity. Management considers selling an equity security at a loss if it believes that the fundamentals, i.e ., earnings growth, earnings guidance, prospects of dividends, and management quality have deteriorated. Management considers selling equity securities at a gain for liquidity purposes. Our investment manager is restricted with respect to the sales of all securities in an unrealized loss position. These transactions require the review and approval by senior management prior to execution.

We review our unrealized gains and losses on at least a quarterly basis to determine if the investments are in compliance with our interest rate forecast and the equity modeling process. Specifically, in the current economic environment, we would consider selling securities if we can reallocate the sales proceeds to more suitable investments as it relates to either our interest rate forecast or equity model.

In addition, we conduct a “sensitivity” analysis of our fixed income portfolio on at least a quarterly basis to determine the market value impact on our fixed income portfolio of an increase or decrease in interest rates of 1%. Based on this analysis, we will continue to hold securities in an unrealized gain or loss position if the payments of principal and interest are not delinquent and are being made consistent with the investment’s repayment schedule. The related impact on the investment portfolio is realized should we decide to sell a particular investment at either a gain or a loss.

Furthermore, if we believe that the yield to maturity determined by the price of the fixed income security can be attained or exceeded by an alternative investment that decreases our interest rate risk and/or duration, we may sell the fixed income security. This may initially increase or decrease our investment income and allow us to reallocate the proceeds to other investments. Our decision to purchase and sell investments is also dependent upon the economic conditions at a particular point in time.

Our policy states that if the fair value of a security is less than the amortized cost, the security will be considered impaired. For investments classified as available for sale, we need to consider writing down the investment to its fair value if the impairment is considered other-than-temporary. If a security is considered other-than-temporarily impaired pursuant to this policy, the cost basis of the individual security will be written down to the current fair value. The amount of the write-down will be calculated as the difference between cost and fair value and accounted for as a realized loss for accounting purposes which negatively impacts future earnings.

As of December 31, 2007 and as of December 31, 2006, our fixed income portfolio was 64.9% and 63.5% and respectively, concentrated in U.S. government securities and securities of government agencies and authorities that carry an “Aaa” rating from Moody’s, respectively.

There were no securities that were considered other-than-temporarily impaired as of December 31, 2007 or 2006. The following summarizes our unrealized losses by designated category as of December 31, 2007.

Securities in an Unrealized Loss Position for Less than 12 Months


								% of
	Amortized				Unrealized			Unrealized
	Cost		Fair Value		Losses			Loss
Investment Grade Fixed Income	$	21,793,774	$	21,705,722	$	(88,052	)		(.40)	%
Equities	$	13,850	$	12,464	$	(1,386	)		(10.01)	%

Securities in an Unrealized Loss Position for greater than 12 months


								% of
	Amortized				Unrealized			Unrealized
	Cost		Fair Value		Losses			Loss
Investment Grade Fixed Income	$	41,260,903	$	40,456,126	$	(804,777	)		(1.95)	%

Securities with a Decline in Fair Value Below Carrying Values Less than 20%


								% of
	Amortized				Unrealized			Unrealized
	Cost		Fair Value		Losses			Loss
Investment Grade Fixed Income	$	63,054,677	$	62,161,848	$	(892,829	)		(1.42)	%
Equities	$	13,850	$	12,464	$	(1,386	)		(10.01)	%

Contractual Obligations

The following table summarizes our long-term contractual obligations and credit-related commitments as of December 31, 2007.

Contractual Obligations and Credit-Related Commitments


	Less Than		1 - 3		3 - 5		More Than
	1 Year		Years		Years		5 Years		Total
Loss and Loss Adjustment Expenses(1)	$	102,494,478	$	66,030,096	$	25,623,619	$	2,956,571	$	197,104,764
Operating Lease Obligations(2)	$	796,799	$	545,999	$	—	$	—	$	1,342,798


(1)		As of December 31, 2007 we had unpaid loss and loss adjustment expenses of $197.1 million. The amounts and timing of these obligations are not set contractually. Nonetheless, based on cumulative property and casualty claims paid over the last ten years, we anticipate that approximately 52.0% will be paid within a year, an additional 33.5% between one and three years, 13.0% between three and five years and 1.5% in more than five years. While we believe that historical performance of loss payment patterns is a reasonable source for projecting future claim payments, there is inherent uncertainty in this payment estimate because of the potential impact from changes in:

	•		The legal environment whereby court decisions and changes in backlogs in the court system could influence claim payout patterns.

	•		Our mix of business because property and first-party claims settle more quickly than bodily injury claims.

	•		Claims staffing levels — claims may be settled at a different rate based on the future staffing levels of the claim department.

	•		Reinsurance programs — changes in Proformance’s retention will influence the payout of the liabilities. As Proformance’s net retention increases, the liabilities will take longer to settle than in past years.

	•		Loss cost trends — increases/decreases in inflationary factors (legal and economic) will influence ultimate claim payouts and their timing.



(2)		Represents our minimum rental commitments as of December 31, 2007 pursuant to our seven-year lease agreement for the use of our office space and equipment at 4 Paragon Way, Freehold, NJ 07728 and our four-year lease agreement for the use of our office space and equipment at 3 Paragon Way, Freehold, NJ 07728.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements (as that term is defined in applicable SEC rules) that have had or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, results of operations, revenues or expenses, liquidity, capital expenditures or capital resources.

Adoption of New Accounting Pronouncements

In September 2005, the AICPA issued Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts (SOP 05-1). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs in connection with modifications or exchanges of insurance contracts other than those specifically described in FASB 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. The Company has complied with the requirements of SOP 05-1, which were effective for periods which began after December 15, 2006.

adjustment reported as an adjustment to the opening balance of retained earnings. The Company has determined that the adoption did not have a material impact on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS 157). This statement defines fair value, establishes a framework for measuring fair value, and enhances disclosures about fair value measurements. The provisions of SFAS 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the method of adoption and whether that adoption will have a material impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued proposed FASB Staff Position (FSP) 157-b, “Effective Date of FASB Statement No. 157,” that would permit a one-year deferral in applying the measurement provisions of Statement No. 157 to non-financial assets and non-financial liabilities (non-financial items) that are not recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually). Therefore, if the change in fair value of a non-financial item is not required to be recognized or disclosed in the financial statements on an annual basis or more frequently, the effective date of application of Statement 157 to that item is deferred until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. This deferral does not apply, however, to an entity that applies Statement 157 in interim or annual financial statements before proposed FSP 157-b is finalized. The Company is currently evaluating the impact, if any, that the adoption of FSP 157-b will have on the Company’s operating income or net earnings.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of SFAS 115 (SFAS 159). SFAS 159 permits all entities to choose, at specified election dates, to measure eligible items at fair value. An entity shall report unrealized gains and losses for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option is to be applied on an instrument by instrument basis and is irrevocable unless a new election date occurs and is applied only to an entire instrument. The provisions of SFAS 159 are effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the method of adoption and whether that adoption will have a material impact on the Company’s consolidated financial statements.

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which replaces SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123) and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires all share-based payments to employees, including grants of employee stock options and stock appreciation rights, to be recognized in the financial statements based on their fair values and the recording of such expense in the consolidated statements of operations. In March 2005, the SEC issued Staff Accounting Bulletin (SAB) 107, which expresses views of the SEC staff regarding the application of SFAS 123R. SAB 107 provides interpretive guidance related to the interaction between SFAS 123R and certain SEC rules and regulations, as well as provides the SEC staff’s views regarding the valuation of share-based payment arrangements for public companies. In April 2005, the SEC amended compliance dates for SFAS 123R to allow companies to implement SFAS 123R at the beginning of their next fiscal year, instead of the next fiscal reporting period that began after June 15, 2005. The Company adopted the provisions of SFAS 123R effective January 1, 2006 at which time the pro forma disclosures previously permitted under SFAS 123 were no longer an alternative to financial statement recognition. Under SFAS 123R, the Company was required to determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. For further details, please refer to Note 9 Share-based Compensation.

In November 2005, the FASB issued FASB Staff Position (“FSP”) FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Applications of Certain Investments” (“FSP 115-1”), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and how to measure such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 supersedes Emerging Issues Task Force (“EITF”) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Applications of Certain Investments” (“EITF 03-1”) and EITF Topic D-44, Recognition of Other-Than-Temporary Impairment on the Planned Sale of a Security Whose Cost Exceeds Fair Value (“Topic D-44”) and nullifies the accounting guidance on the determination of whether an investment is other-than-temporarily impaired as set forth in EITF 03-1. FSP 115-1 is required to be applied to reporting periods beginning after December 15, 2005 and management has determined that the effect of adopting FSP 115-1 did not have a material impact on the Company’s

consolidated financial statements. The Company has complied with the disclosure requirements of EITF-03-1, which were effective December 31, 2003 and remain in effect.

In June 2005, the EITF reached consensus on Issue No. 05-6, Determining the Amortization Period for Leasehold Improvements (EITF 05-6). EITF 05-6 provides guidance on determining the amortization period for leasehold improvements acquired in a business combination or acquired subsequent to lease inception. The Company has complied with the requirements of EITF-05-6, which were effective for periods which began after June 29, 2005.

In September 2005, the AICPA issued Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts (SOP 05-1). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs in connection with modifications or exchanges of insurance contracts other than those specifically described in FASB 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. The guidance in SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. The Company has determined that the adoption will not have a material impact on the Company’s consolidated financial statements.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

General

Market risk is the risk that we will incur losses due to adverse changes in market rates and prices. We have exposure to market risk through our investment activities and our financing activities. Our primary market risk exposure is to changes in interest rates. We have not entered, and do not plan to enter, into any derivative financial transactions for trading or speculative purposes.

Interest Rate Risk

Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. Our exposure to interest rate changes primarily results from our significant holdings of fixed rate investments. Our fixed maturity investments include U.S. and foreign government bonds, securities issued by government agencies, obligations of state and local governments and governmental authorities, corporate bonds and mortgage-backed securities, most of which are exposed to changes in prevailing interest rates.

All of our investing is done by our insurance subsidiary, Proformance. We invest according to guidelines devised by an internal investment committee, comprised of management of Proformance and an outside director of NAHC, focusing on investments that we believe will produce an acceptable rate of return given the risks assumed. Our investment portfolio is managed by the investment officer at Proformance with oversight from our Chief Accounting Officer and the assistance of outside investment advisors. Our objectives are to seek the highest total investment return consistent with prudent risk level by investing in a portfolio comprised of high quality investments including common stock, preferred stock, bonds and money market funds in accordance with the asset classifications set forth in Proformance’s Investment Policy Statement Guidelines and Objectives.

The tables below show the interest rate sensitivity of our fixed income and preferred stock financial instruments measured in terms of fair value for the periods indicated.


	Fair Value
	-100 Basis				+100 Basis
	Point		As of		Point
	Change		December 31, 2007		Change
	($ in thousands)
Fixed maturities and preferred stocks	$	323,026	$	313,888	$	304,750
Cash and cash equivalents	$	28,098	$	28,098	$	28,098
Total	$	351,124	$	341,987	$	332,848


	-100 Basis				+100 Basis
	Point		As of		Point
	Change		December 31, 2006		Change
	($ in thousands)
Fixed maturities and preferred stocks	$	328,947	$	316,082	$	303,218
Cash and cash equivalents	$	26,288	$	26,288	$	26,288
Total	$	355,235	$	342,370	$	329,506

Equity Risk

Equity risk is the risk that we will incur economic losses due to adverse changes in the prices of equity securities in our investment portfolio. Our exposure to changes in equity prices primarily result from our holdings of common stocks and other equities. One means of assessing exposure to changes in equity market prices is to estimate the potential changes in market values of our equity investments resulting from a hypothetical broad-based decline in equity market prices of 10%. Under this model, with all other factors constant, we estimate that such a decline in equity market prices would decrease the market value of our equity investments by approximately $101,246 and $242,740 respectively, based on our equity positions as of December 31, 2007 and December 31, 2006.

As of December 31, 2007, approximately 0.3% of our investment portfolio was invested in equity securities. We continuously evaluate market conditions regarding equity securities. We principally manage equity price risk through industry and issuer diversification and asset allocation techniques.

Credit Risk

We have exposure to credit risk as a holder of fixed income securities. We attempt to manage our credit risk through issuer and industry diversification. We regularly monitor our overall investment results and review compliance with our investment objectives and guidelines to reduce our credit risk. As of December 31, 2007, approximately 64.6% of our fixed income security portfolio was invested in U.S. government and government agency fixed income securities, 32.7% was invested in other fixed income securities rated “Aaa”/“Aa” by Moody’s, and 2.3 % was invested in fixed income securities rated “A” by Moody’s, and .4 % was invested in fixed income securities rated “ Baa” by Moody’s. As of December 31, 2007, we had one security with a rating of Baa1.

We are also subject to credit risks with respect to our third-party reinsurers. Although reinsurers are liable to us to the extent we cede risks to them, we are ultimately liable to our policyholders on all these risks. As a result, reinsurance does not limit our ultimate obligation to pay claims to policyholders and we may not be able to recover claims made to our reinsurers.

Effects of Inflation

We do not believe that inflation has had a material effect on our consolidated results of operations, except insofar as inflation may affect interest rates and claim costs.

Item 8. Financial Statements and Supplementary Data

Our consolidated financial statements and independent auditor’s report thereon appear beginning on page F-2. See index to such consolidated financial statements and reports on page F-1.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of disclosure controls and procedures

As of the end of the period covered by this report on form 10-K, we, under the supervision and with the participation of our management, including our Chairman and Chief Executive Officer, our Chief Financial Officer and our Executive Vice President, carried out an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be disclosed in our periodic filings with the Securities and Exchange Commission.

Management’s Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such item is defined in Exchange Act Rule 13a-15(f). During 2007, we restructured the process of our bodily injury claims unit. Under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the Company’s internal control over financial reporting was conducted based upon the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based upon that evaluation, the Company’s internal controls over financial reporting were effective as of December 31, 2007.

Beard Miller Company LLP, an independent registered public accounting firm, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007, which is included herein.

Changes to Internal Control over Financial Reporting

During the fourth quarter of 2007, we continued to restructure the processes of our bodily injury claims unit.

Item 9B. Other Information

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

The information required by this Item relating to our directors and executive officers is incorporated herein by reference to the headings “Information Regarding Nominees and Directors,” “Information Regarding Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance” of our definitive proxy statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2006 Annual General Meeting of Shareholders (“Proxy Statement”). The Company intends to file the Proxy Statement prior to April 29, 2008.

Code of Ethics

The Company has adopted a Code of Business Conduct and Ethics within the meaning of Item 406 of Regulation S-K of the Exchange Act. The Company’s Code of Business Conduct and Ethics applies to its principal executive officer, principal financial and principal accounting officer. A copy of the Company’s Code of Business Conduct and Ethics is posted on our website at www.national-atlantic.com. In the event that the Company makes any amendments to, or grants any waiver from, a provision of the Code of Ethics that requires disclosure under Item 10 of Form 8-K, the Company will post such information on its website. We will provide to any person without charge, upon request, a copy of our Code of Business Conduct and Ethics.

Item 11. Executive Compensation

The information required by this Item relating to executive compensation is incorporated herein by reference to the heading “Executive Compensation Summary” of our Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this Item relating to security ownership of certain beneficial owners and management and related shareholder matters is incorporated herein by reference to the headings “Security Ownership of Certain Beneficial Owners and Management” and “Security Ownership of Management” of our Proxy Statement.

Item 13. Certain Relationships and Related Transactions

The information required by this Item relating to certain relationships and related transactions is incorporated herein by reference to the heading “Certain Related Party Transactions” of our Proxy Statement.

Item 14. Principal Accountant Fees and Services

The information required by this Item relating to principal accountant fees and services is incorporated herein by reference to “Proposal 2 — Ratification of Selection of Independent Registered Public Accounting Firm” of our Proxy Statement.

	10.5		Letter Agreement, dated July 10, 2004, among the Registrant, Proformance Insurance Company and The Ohio Casualty Insurance Company and Ohio Casualty of New Jersey**

	10.6		Replacement Carrier Agreement, dated December 8, 2003, between the Registrant and Metropolitan Property and Casualty Insurance Company**

	10.7		Share Repurchase Agreement, dated December 8, 2003, between the Registrant and Metropolitan Property and Casualty Insurance Company**

	10.8		Replacement Carrier Agreement, dated March 14, 2003, between Proformance Insurance Company and Sentry Insurance**

	10.9		Replacement Carrier Agreement, dated May 6, 2005, between Proformance Insurance Company and The Hartford Financial Services Group, Inc.*****

	10.9.1		First Amendment to the Replacement Carrier Agreement, dated June 28, 2005, between Proformance Insurance Company and The Hartford Financial Services Group, Inc.*****

	10.10		Limited Assignment Distribution Agreement, effective January 1, 2004, between Proformance Insurance Company and The Clarendon National Insurance Company**

	10.11		Limited Assignment Distribution Agreement, effective January 1, 2004, between Proformance Insurance Company and AutoOne Insurance Company**

	10.12		2004 Stock and Incentive Plan of the Registrant**

	10.13		National Atlantic Holdings Corp. Annual Bonus Plan**

	10.14		Form of Employment Agreement between the Registrant and James V. Gorman, Frank J. Prudente, John E. Scanlan and Bruce C. Bassman**

	10.15		Form of Employment Agreement between Proformance Insurance Company and Peter A. Cappello, Jr.**

	10.16		Commutation and Release Agreement, effective as of December 31, 2002, between Odyssey America Reinsurance Corporation and Proformance Insurance Company**

	10.17		Form of Agency Agreements between Proformance Insurance Company and Active Replacement Carrier Service Agents of Proformance Insurance Company**

	10.18		Form of Indemnification Agreement between the Registrant and its directors and officers**

	10.19		Letter Agreement, dated December 7, 2004, among the Registrant, Proformance Insurance Company, The Ohio Casualty Insurance Company and Ohio Casualty of New Jersey**

	10.20		Commutation and Mutual Release Agreement, effective as of March 26, 2003, between Proformance Insurance Company and Gerling Global Reinsurance Corporation of America**

	10.21		Form of Underwriting Agreement among the Company, the Ohio Casualty Insurance Company as Selling Shareholder and the Underwriters named therein**

	10.22		Form of Employee Stock Option Agreement for the Company’s Nonstatutory Stock Option Plan***

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders
National Atlantic Holdings Corporation
Freehold, New Jersey

We have audited the accompanying consolidated balance sheets of National Atlantic Holdings Corporation and subsidiaries (the Company) as of December 31, 2007 and 2006, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity and cash flows for the years then ended. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The 2005 consolidated financial statements were audited by other auditors whose report, dated March 24, 2006, expressed an unqualified opinion on those statements.

We conducted our audits 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the 2007 and 2006 consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Atlantic Holdings Corporation and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 9 to the consolidated financial statements, the Company changed its method of accounting for share-based payments in 2006.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), National Atlantic Holdings Corporation’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 13, 2008 expressed an unqualified opinion.

/s/ Beard Miller Company LLP

Beard Miller Company LLP
Harrisburg, Pennsylvania
March 13, 2008

F-2

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders
National Atlantic Holdings Corporation
Freehold, New Jersey

We have audited National Atlantic Holdings Corporation’s (the Company) internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). National Atlantic Holdings Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, National Atlantic Holdings Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

F-4

NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	For the years ended December 31,
	2007			2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(6,194	)	$	14,382		$	6,436
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,052			413			493
Amortization of premium/discount on bonds		908			875			1,079
Share-based compensation expense		(493	)		1,063			3,050
Payments on exercise of stock appreciation rights		(445	)		—			—
Realized gains on investment sales		(72	)		(979	)		(411	)
Changes in:
Deferred income taxes		(108	)		(1,014	)		(7	)
Premiums receivable		2,223			(50	)		(18,741	)
Reinsurance recoverables and receivables		6,083			14,143			(5,913	)
Receivable from Ohio Casualty		—			—			4,350
Receivable from Sentry		—			—			1,250
Deferred acquisition costs		(333	)		(1,467	)		(6,262	)
Accrued investment income		172			(562	)		(1,475	)
Income taxes recoverable		(8,455	)		1,152			(1,152	)
Other assets		1,776			1,820			(714	)
Unpaid losses and loss adjustment expenses		5,719			(27,975	)		35,078
Accounts payable and accrued expenses		26			(158	)		(4,943	)
Unearned premiums		1,300			3,977			17,376
Income taxes payable		(3,026	)		3,026			(1,601	)
Other liabilities		(385	)		(1,419	)		211

Net cash (used in) provided by operating activities		(252	)		7,227			28,104

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment — net		(2,207	)		(339	)		(537	)
Purchases of fixed maturity securities — available for sale		(150,677	)		(94,749	)		(164,897	)
Sales and maturities of fixed maturity investments — available-for-sale		155,969			56,247			93,460
Purchases of equity securities		(2,828	)		—			(21,366	)
Sales of equity securities		4,128			11,327			21,842
(Purchases) sales of short-term investments — net		(4	)		8,347			5,020

Net cash provided by (used in) investing activities		4,381			(19,167	)		(66,478	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock—net		250			115			62,668
Purchases of common stock held in treasury		(2,569	)		(1,723	)		—

Net cash (used in) provided by financing activities		(2,319	)		(1,608	)		62,668

Net (decrease) increase in cash		1,810			(13,548	)		24,294
Cash and cash equivalents — beginning of year		26,288			39,836			15,542

Cash and cash equivalents — end of year	$	28,098		$	26,288		$	39,836

Cash paid during the year for:
Income taxes	$	6,867		$	3,649		$	4,717

The accompanying notes are an integral part of the consolidated financial statements.

F-10

NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

1. Nature of Operations and Significant Accounting Policies

National Atlantic Holdings Corporation (NAHC) was incorporated in New Jersey, on July 29, 1994, with its subsidiaries referred to as the Company. NAHC is a holding company for Proformance Insurance Company (Proformance), its wholly-owned subsidiary. Proformance is domiciled in the State of New Jersey and writes property and casualty insurance, primarily personal auto. NAHC’s initial capitalization was pursuant to private placement offerings. The initial stockholders paid $1.16 per share for 2,812,200 shares of Class A common stock.

On February 14, 1995 the Board of Directors approved the offering of up to 645,000 shares at $2.33 per share of nonvoting Class B common stock. At the end of 1995, 283,112 shares were issued at $2.33 per share to new agents and at 105% of the net book value to the officers and directors under a one-time stock purchase program. The average per share price for both issuances of this Class B common stock was approximately $2.05 per share. On April 7, 1995, the Certificate of Incorporation was amended to authorize the issuance of up to 4,300,000 shares of nonvoting common stock.

NAHC also has a controlling interest (80 percent) in Niagara Atlantic Holdings Corporation and Subsidiaries (Niagara), which is a New York corporation. Niagara was incorporated on December 29, 1995. The remaining interest (20 percent) is owned by New York agents. Niagara was established as a holding company in order to execute a surplus debenture and service agreement with Capital Mutual Insurance (CMI). As of June 5, 2000, CMI has gone into liquidation and is under the control of the New York State Insurance Department. CMI is no longer writing new business and therefore neither is Niagara. Niagara had $0 equity value as of December 31, 2007 and 2006. NAHC has no remaining obligations as it relates to the agreement.

In addition, NAHC has another wholly owned subsidiary, Riverview Professional Services, Inc., which was established in 2002 for the purpose of providing case management and medical cost containment services to Proformance and other unaffiliated clients.

In December 2001, NAHC established National Atlantic Financial Corporation (NAFC), to offer general financing services to its agents and customers. In November 2003, NAFC established a wholly owned subsidiary, Mayfair Reinsurance Company Limited, for the purpose of providing reinsurance services to unaffiliated clients.

Another wholly owned subsidiary of NAHC is National Atlantic Insurance Agency, Inc. (NAIA), which was incorporated on April 5, 1995. The Company purchased all 1,000 shares of NAIA’s authorized common stock at $1 per share. NAIA obtained its license to operate as an insurance agency in December 1995. The agency commenced operations on March 20, 1996. The primary purpose of this entity is to service any direct business written by Proformance and to provide services to agents and policyholders acquired as part of replacement carrier transactions.

On April 21, 2005, an initial public offering of 6,650,000 shares of the Company’s common stock (after the 43-for-1 stock split) was completed. The Company sold 5,985,000 shares resulting in net proceeds to the Company (after deducting issuance costs and the underwriters’ discount) of $62,198,255. The Company contributed $43,000,000 to Proformance, which increased its statutory surplus. The additional capital allowed the Company to reduce its reinsurance purchases and to retain more of the direct written premiums produced by its Partner Agents. On May 8, 2006 and May 16, 2007, the Company contributed an additional $9,000,000 and $4,100,000, respectively, to Proformance, thereby further increasing its statutory surplus. The remainder of the capital raised will be used for general corporate purposes, including but not limited to possible additional increases to the capitalization of the existing subsidiaries.

The significant accounting policies followed by the Company in the preparation of the accompanying consolidated financial statements are as follows:

Basis of Presentation — The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) which differ materially from statutory accounting practices prescribed or permitted for insurance companies by regulatory agencies. All significant intercompany transactions and balances have been eliminated.

F-11

Segment Disclosure — We manage and report our business as a single segment based upon several factors. Although our insurance subsidiary, Proformance writes private passenger automobile, homeowners and commercial lines insurance, we consider those operating segments as one operating segment due to the fact that the nature of the products are similar, the nature of the production processes are similar, the type of class of customer for the products are similar, the methods used to distribute the products are similar and the nature of the regulatory environment is similar. In addition, these lines of business have historically demonstrated similar economic characteristics and as such are aggregated and reported as a single segment. Also, in addition to Proformance, all other operating segments wholly owned by the Company are aggregated and reported as a single segment due to the fact that the nature of the products are similar, the nature of the production processes are similar, the type of class of customer for the products are similar, the methods used to distribute the products are similar and the nature of the regulatory environment is similar.

A summary of our consolidated revenues is as follows:


						For the years ended December 31,
	2007					2006					2005
Proformance
Personal lines insurance
Personal auto	$	103,717,243		56.28	%	$	109,854,722		62.47	%	$	140,845,822		75.18	%
Homeowners		30,270,618		16.42	%		21,264,484		12.09	%		16,066,193		8.58	%
Commerical lines insurance		31,232,101		16.95	%		26,234,594		14.92	%		15,870,049		8.47	%
Riverview
Medical Case Management		4,178,806		2.27	%		5,638,235		3.21	%		4,704,598		2.51	%
NAIA
Insurance brokerage		2,075,896		1.13	%		2,365,851		1.35	%		2,230,989		1.19	%
Intercompany elimination entries		(7,663,696	)	(4.16	)%		(7,888,461	)	(4.49	)%		(6,576,113	)	(3.51	)%

Subtotal		163,810,968					157,469,425					173,141,538

Net investment income		17,275,953		9.38	%		16,081,895		9.14	%		12,403,235		6.62	%
Net realized investment gains		71,877		0.04	%		979,007		0.56	%		410,635		0.22	%
Other income		3,112,522		1.69	%		1,325,586		0.75	%		1,385,588		0.74	%

Total Consolidated Revenue	$	184,271,320		100.00	%	$	175,855,913		100.00	%	$	187,340,996		100.00	%

Use of Estimates — The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts in our financial statements. As additional information becomes available, these estimates and assumptions are subject to change and thus impact amounts reported in the future. The primary estimates made by management involve the establishment of unpaid loss and loss adjustment expense reserves. Management also employs estimates in the application of its investment accounting policy for other-than-temporary impairment.

Cash and Cash Equivalents — For purposes of the statements of cash flows, the Company considers short-term investments with an initial maturity of three months or less to be cash equivalents.

Property and Equipment — Property and equipment are stated at cost. Depreciation and amortization is provided under the straight-line method based upon the following estimated useful lives:


	Estimated
Description	Life (Years)
Automobiles		5
Furniture and fixtures		7
Computer software and electronic data equipment		3
Leasehold improvements		*


*		Amortized over the remaining life of the lease from the date placed in service.

F-12

Major replacements of, or improvements to, property and equipment are capitalized. Minor replacements, repairs and maintenance are charged to expense as incurred. Upon retirement or sale, the cost of the assets disposed and the related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is recorded in operations. The recoverable value of property and equipment assets are evaluated at least annually.

Investments — Management determines the appropriate classification of securities at the time of purchase. Fixed maturity investments which may be sold in response to, among other things, changes in interest rates, prepayment risk, income tax strategies or liquidity needs, are classified as available-for-sale and are carried at fair value. Equity securities, which are classified as available-for-sale, are also carried at fair value. Changes in fair value for fixed maturity investments and equity securities classified as available-for-sale are credited or charged to stockholders’ equity as other comprehensive income (loss). Fixed maturity investments which management has the positive intent and ability to hold to maturity are classified as held-to-maturity and carried at cost, adjusted for amortization of premiums and accretion of discounts using an effective interest method. Short-term securities are carried at cost, which approximates fair value. Fair values are based on quoted market prices. For mortgage-backed securities for which there is a prepayment risk, prepayment assumptions are evaluated and revised as necessary. Any adjustments required due to the resultant change in effective yields and maturities are recognized on a prospective basis through yield adjustments. Realized investment gains and losses are recorded on the specific identification method. All security transactions are recorded on a trade date basis.

The Company considers a number of factors in the evaluation of whether a decline in value is other-than-temporary including: (a) the financial condition and near term prospects of the issuer; (b) the Company’s ability and intent to retain the investment for a period of time sufficient to allow for an anticipated recovery in value; and (c) the period and degree to which the fair value has been below cost. A fixed maturity security is other-than-temporarily impaired if it is probable that the Company will not be able to collect all the amounts due under the security’s contractual terms. Equity investments are considered to be impaired when it becomes apparent that the Company will not recover its cost after considering the severity and duration of the unrealized loss, compared with general market conditions. These adjustments are recorded as realized investment losses.

Concentration of Credit Risk — Financial instruments which potentially subject the Company to concentrations of credit risk include cash balances and marketable fixed maturity securities. The Company places its temporary cash investments with creditworthy financial institutions. The Company holds bonds and notes issued by the United States government and corporations. By policy, these investments are kept within limits designed to prevent risks caused by concentration. Consequently, as of December 31, 2007 and 2006, the Company does not believe it has significant concentrations of credit risks. The Company is exposed to a concentration of credit risk with respect to amounts due from reinsurers.

Deferred Policy Acquisition Costs — Deferred acquisition costs, which consist of commissions and other underwriting expenses, are costs that vary with and are directly related to the underwriting of new and renewal policies and are deferred and amortized over the period in which the related premiums are earned. Anticipated investment income is considered in the determination of the recoverability of deferred acquisition costs. The Company determines whether acquisition costs are recoverable considering future losses and loss adjustment expenses, maintenance costs and anticipated investment income. To the extent that acquisition costs are not recoverable, the deficiency is charged to income in the period identified.

Amortization of deferred acquisition costs for the years ended December 31, 2007, 2006 and 2005 was $43,893,816, $40,405,621 and $34,505,776, respectively, which is reported as a component of underwriting, acquisition and insurance related expenses.

Insurance Liabilities/Unpaid Losses and Loss Adjustment Expenses — The provision for unpaid losses and loss adjustment expenses includes individual case estimates, principally on the basis of reports received from claim adjusters engaged by the Company for losses reported prior to the close of the year and estimates with respect to incurred but not reported (IBNR) losses and loss adjustment expenses, net of anticipated salvage and subrogation. The method of making such estimates and for establishing the resulting reserves is continually reviewed and updated, and adjustments resulting therefrom are reflected in current operations. The estimates are determined by management and are based upon industry data relating to loss and loss adjustment expense ratios as well as the Company’s historical data. The unpaid losses and unpaid loss adjustment expenses presented in these financial statements have not been discounted

This liability is subject to the impact of changes in claim severity, frequency and other factors which may be outside of the Company’s control. Despite the variability inherent in such estimates, management believes that the liability for unpaid losses and loss adjustment expenses is adequate and represents its best estimate of the ultimate cost of investigating, defending and settling claims. However, the Company’s actual future experience may not conform to the assumptions inherent in the determination of this liability. Accordingly, the ultimate settlement of these losses and the related loss adjustment expenses may vary significantly from the amounts included in the accompanying consolidated financial statements.

F-13

Recognition of Premium Revenues — Premiums written or assumed are earned on either the daily pro-rata basis or mid-month method over the estimated life of the policy or reinsurance contract. Unearned premiums are established and represent the portion of net premiums which is applicable to the unexpired terms of policies in force.

Allowance for Doubtful Accounts — The Company creates a reserve for premium receivables that may become uncollectible. The amount of the reserve is based upon management’s assessment of collectibility in reviewing aging experience.

Replacement Carrier Transaction Fees — The Company accounts for fees paid in consideration for the acquisition of policy renewal rights as intangible assets and amortizes the assets as a charge to income over the related renewal period.

Accounting for Reinsurance — The Company accounts for reinsurance in conformity with Statement of Financial Accounting Standards No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. This standard requires the Company to report assets and liabilities relating to reinsured contracts gross of the effects of reinsurance. The standard also establishes the conditions required for a contract with a reinsurer to be accounted for as reinsurance and prescribes accounting and reporting standards for such contracts.

The Company contracts with insurance companies, which assume portions of the risk undertaken. The Company remains the primary obligor to the extent any reinsurer is unable to meet its obligations under the existing reinsurance agreements. The reinsurance contracts are accounted for on a basis consistent with that used in the accounting of the direct policies issued by the Company.

Capitalization of Costs of Software for Internal Use — We have capitalized certain costs for the development of internal-use software under the guidelines of SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. These capitalized costs are included in the accompanying consolidated balance sheets as a component of property and equipment — net. Capitalized costs, net of amortization, totaled $1,964,209 and $856,202 as of December 31, 2007 and 2006, respectively.

Income Taxes — The Company files a consolidated federal tax return. Under the tax allocation agreement, current federal income tax expense (benefit) is computed on a separate return basis and provides that members shall make payments (receive reimbursements) to the extent that their income (losses and other credit) contributes to (reduces) consolidated federal income tax expense. The member companies are reimbursed for the tax attributes they have generated when utilized in the consolidated return.

The Company recognizes taxes payable or refundable for the current year, and deferred taxes for the future tax consequences of differences between the financial reporting and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes are expected to reverse.

Share-based Compensation — In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which replaces SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123) and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires all share-based payments to employees, including grants of employee stock options and stock appreciation rights, to be recognized in the financial statements based on their fair values and the recording of such expense in the consolidated statements of operations. In March 2005, the SEC issued Staff Accounting Bulletin (SAB) 107, which expresses views of the SEC staff regarding the application of SFAS 123R. SAB 107 provides interpretive guidance related to the interaction between SFAS 123R and certain SEC rules and regulations, as well as provides the SEC staff’s views regarding the valuation of share-based payment arrangements for public companies. In April 2005, the SEC amended compliance dates for SFAS 123R to allow companies to implement SFAS 123R at the beginning of their next fiscal year, instead of the next fiscal reporting period that began after June 15, 2005. The Company adopted the provisions of SFAS 123R effective January 1, 2006 at which time the pro forma disclosures previously permitted under SFAS 123 were no longer an alternative to financial statement recognition. Under SFAS 123R, the Company was required to determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. For further details, please refer to Note 9 — Share-based Compensation.

F-14

Adoption of New Accounting Pronouncements

On July 13, 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) which provides guidance on accounting for a tax position taken or expected to be taken in a tax return. The Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The guidance in FIN 48 is effective for fiscal years beginning after December 15, 2006. The provisions of FIN 48 are to be applied to all tax positions upon initial adoption, with the cumulative effect adjustment reported as an adjustment to the opening balance of retained earnings. The Company adopted, as a change in accounting principle, the provisions of FIN 48, effective January 1, 2007. The Company has determined that the adoption did not have a material impact on the Company’s consolidated financial statements. For further details please refer to Note 6 — Income Taxes.

Retirement Plans — The Company has a contributory savings plan for salaried employees meeting certain service requirements, which qualifies under Section 401(k) of the Internal Revenue Code of 1986. Retirement plan expense for the years ended December 31, 2007, 2006 and 2005 amounted to $390,003, $353,740 and $255,440, respectively.

Guaranty Fund Assessments — As more fully described in Note 10, New Jersey law requires that property and casualty insurers licensed to do business in New Jersey participate in the New Jersey Property-Liability Insurance Guaranty Association (which we refer to as NJPLIGA). Proformance accounts for its participation in the NJPLIGA in accordance with Statement of Position 97-3, Accounting by Insurance and Other Enterprises for Insurance Related Assessments (SOP 97-3). In this regard, Proformance records a liability when writing the premiums, as direct written premiums are the basis for the state assessment and are considered the obligating event that establishes the liability. The percentage of written premium recorded as a liability is equal to the surcharge percentage mandated by the state to be charged to each policyholder. This surcharge percentage is likewise determined based on the relationship between the Company’s direct written premium to that of the industry as a whole as determined by the state. As such, Proformance also records a corresponding receivable from policyholders in recognition of the fact that New Jersey law allows for Proformance to fully recoup amounts assessed through policyholder surcharges. There is no earnings impact because as SOP 97-3 outlines, policyholder surcharges that are required as a pass through to the state regulatory body should be accounted for in a manner such that amounts collected or receivable are not recorded as revenues and amounts due or paid are not expensed.

F-15

Also, as more fully described in Note 10, the Company may be assigned business by the State of New Jersey relating to the Personal Automobile Insurance Plan (PAIP) and the Commercial Automobile Insurance Plan (CAIP). With regard to PAIP, the State of New Jersey allows for the Company to enter into Limited Assignment Distribution (LAD) arrangements whereby for a fee, the Company’s portion of PAIP business is transferred to the LAD carrier such that Proformance has no responsibility for the PAIP business. Proformance records its CAIP liability assignment on its books as assumed business as required by the State of New Jersey.

The New Jersey Automobile Insurance Risk Exchange, or NJAIRE, is a plan designed to compensate member companies for claims paid for non-economic losses and claims adjustment expenses which would not have been incurred had the tort limitation option provided under New Jersey insurance law been elected by the injured party filing the claim for non-economic losses. As a member company of NJAIRE, we submit information with respect to the number of claims reported to us that meet the criteria outlined above. NJAIRE compiles the information submitted by all member companies and remits assessments to each member company for this exposure. The Company, since its inception, has never received compensation from NJAIRE as a result of its participation in the plan. The Company’s participation in NJAIRE is mandated by the New Jersey Department of Banking and Insurance (NJDOBI). The assessments that the Company has received required payment to NJAIRE for the amounts assessed. The Company records the assessments received as underwriting, acquisition and insurance related expenses.

2. Investments

On January 1, 2006, the Company transferred certain fixed income securities previously classified as available-for-sale to held-to-maturity. The Company had previously classified these investments as available-for-sale in accordance with paragraph 6 of SFAS 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115) which states that, “At acquisition, an enterprise shall classify debt and equity securities into one of three categories: held-to-maturity, available-for-sale and trading. At each reporting date, the appropriateness of the classification shall be reassessed.” Management has determined that as of January 1, 2006, the securities should be transferred to the held-to-maturity category as the Company has the positive intent and ability to hold these securities to maturity.

As outlined in paragraph 15 of SFAS 115, the transfer of securities between categories of investments shall be reported at fair value. At the date of transfer, the unrealized holding gain or loss, for a debt security transferred into the held-to-maturity category from the available-for-sale category, shall continue to be reported in a separate component of stockholders’ equity, but shall be amortized over the remaining life of the individual securities.

On January 1, 2006, the Company reduced the cost basis of the transferred securities to the fair value as of that date. The Company recorded, as a component of accumulated other comprehensive loss on the consolidated balance sheet, an unrealized loss on the transfer of securities to held-to-maturity from available-for-sale in the amount of $750,917. On January 1, 2006, the Company began to amortize over the life of the investments as an adjustment of yield, in a manner consistent with the amortization of any premium or discount on the consolidated statement of operations and accumulated other comprehensive loss on the consolidated balance sheet, amortization of the unrealized loss. For each of the years ended December 31, 2007 and 2006, the Company amortized $90,524, respectively, of the unrealized loss.

The amortized cost and estimated fair value of the held-to-maturity investment portfolio, classified by category, as of December 31, 2007 are as follows:


			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
Fixed maturities:
U.S. Government, government agencies and authorities	$	6,783,210	$	231,889	$	—		$	7,015,099
State, local government and agencies		2,842,430		—		(7,020	)		2,835,410
Industrial and miscellaneous		32,504,281		143,341		(585,430	)		32,062,192

Total Investments — Held-to-Maturity	$	42,129,921	$	375,230	$	(592,450	)	$	41,912,701

F-16

Unrealized losses on available-for-sale securities, aged less than and greater than twelve months, as of December 31, 2007 are as follows:


	Less than 12 months					Greater than 12 months					Total
	Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)
Fixed maturities:
U.S. Government, government agencies and authorities	$	12,677,756	$	(24,009	)	$	8,304,808	$	(93,914	)	$	20,982,564	$	(117,923	)
State, local government and agencies		2,653,290		(4,296	)		9,651,873		(43,239	)		12,305,163		(47,535	)
Industrial and miscellaneous		2,123,989		(50,125	)		2,890,698		(76,522	)		5,014,687		(126,647	)
Mortgage-backed securities		1,638,460		(6,284	)		1,006,540		(1,990	)		2,645,000		(8,274	)

Total fixed maturities		19,093,495		(84,714	)		21,853,919		(215,665	)		40,947,414		(300,379	)
Other Investments:
Equity securities		12,464		(1,386	)		—		—			12,464		(1,386	)

Total Investments — Available-for-Sale	$	19,105,959	$	(86,100	)	$	21,853,919	$	(215,665	)	$	40,959,878	$	(301,765	)

As of December 31, 2007, the Company has 25 available-for-sale securities in the less than twelve month category and 57 available-for-sale securities in the greater than twelve months category. The unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. Management believes that the unrealized losses represent temporary impairment of the securities, as the Company has the intent and ability to hold these investments until maturity or market price recovery.

Unrealized losses on held-to-maturity securities, aged less than and greater than twelve months, as of December 31, 2006 were as follows:


	Less than 12 months					Greater than 12 months					Total
	Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)
Fixed maturities:
U.S. Government, government agencies and authorities	$	645,084	$	(9,978	)	$	5,889,375	$	(243,106	)	$	6,534,459	$	(253,084	)
State, local government and agencies		2,788,654		(57,768	)		—		—			2,788,654		(57,768	)
Industrial and miscellaneous		10,364,364		(159,399	)		20,094,937		(302,849	)		30,459,301		(462,248	)

Total Investments — Held-to-Maturity	$	13,798,102	$	(227,145	)	$	25,984,312	$	(545,955	)	$	39,782,414	$	(773,100	)

Unrealized losses on available-for-sale securities, aged less than and greater than twelve months, as of December 31, 2006 were as follows:


	Less than 12 months					Greater than 12 months					Total
	Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)
Fixed maturities:
U.S. Government, government agencies and authorities	$	36,677,390	$	(121,768	)	$	142,710,619	$	(1,738,102	)	$	179,388,009	$	(1,859,870	)
State, local government and agencies		17,505,739		(49,894	)		24,555,792		(241,684	)		42,061,531		(291,578	)
Industrial and miscellaneous		4,230,424		(26,377	)		3,860,237		(130,488	)		8,090,661		(156,865	)
Mortgage-backed securities		488,032		(2,572	)		1,002,400		(12,576	)		1,490,432		(15,148	)

Total fixed maturities		58,901,585		(200,611	)		172,129,048		(2,122,850	)		231,030,633		(2,323,461	)

Other Investments:
Equity securities		—		—			877,488		(111,057	)		877,488		(111,057	)

Total Investments — Available-for-Sale	$	58,901,585	$	(200,611	)	$	173,006,536	$	(2,233,907	)	$	231,908,121	$	(2,434,518	)

F-19

As more fully described above under “— Critical Accounting Policies — Investment Accounting Policy — Impairment”, in accordance with the guidance of paragraph 16 of SFAS 115, should an other-than-temporary impairment be determined, we recognize such loss on the consolidated statement of operations as a component of net realized investment gains and we write down the value of the security and treat the adjusted value as the new cost basis of the security.

There were no securities that were considered to be other-than-temporarily impaired as of December 31, 2007 and 2006.

The amortized cost and fair values of held-to-maturity securities at December 31, 2007 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.


			Estimated
	Amortized Cost		Fair Value
Due in five years through ten years	$	32,229,670	$	32,305,617
Due in ten through twenty years		9,673,388		9,383,902
Due in over twenty years		226,863		223,182

Total	$	42,129,921	$	41,912,701

The amortized cost and fair values of available-for-sale securities at December 31, 2007 by contractual maturity are shown below. Expected maturities of mortgaged-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.


			Estimated
	Amortized Cost		Fair Value
Due in one year or less	$	5,908,832	$	5,902,303
Due in one year through five years		25,293,862		25,261,089
Due in five years through ten years		157,813,032		158,311,666
Due in ten through twenty years		76,203,550		76,472,736
Mortgage-backed securities		5,021,895		5,027,775

Total	$	270,241,171	$	270,975,569

For the years ended December 31, 2007 and 2006, the Company held no investments that were below investment grade or not rated by an independent rating agency.

The Company has placed securities on deposit having a fair value of $200,000 at December 31, 2007 and 2006, respectively, in order to comply with New Jersey insurance regulatory requirements.

Proceeds from sales and maturities of fixed maturity and equity securities and gross realized gains and losses on sales as well as other-than-temporary impairment charges for the years ended December 31, 2007, 2006 and 2005 are shown below:


	For the Years Ended December 31,
	2007			2006			2005
Proceeds	$	160,099,384		$	67,574,328		$	115,302,759
Gross realized gains		328,601			1,091,487			991,807
Gross realized losses		(256,724	)		(112,480	)		(581,172	)

F-20

Replacement Carrier Transactions

Ohio Casualty

On December 18, 2001 the Company entered into a replacement carrier agreement with Ohio Casualty Insurance Company (OCIC) and Ohio Casualty of New Jersey, Inc. (OCNJ) pursuant to which OCNJ transferred to the Company the obligation to offer renewals for all of OCNJ’s New Jersey private passenger automobile business, effective March 18, 2002. In accordance with the agreement, OCNJ ceased issuing private passenger automobile policies in the State of New Jersey. As part of the withdrawal, the Company became the replacement carrier for OCNJ, providing OCNJ’s policyholders with a guaranteed option to renew their policies over a twelve month period. OCNJ retained all rights and responsibilities related to policies issued by OCNJ and was responsible for issuing any endorsements in the ordinary course of business prior to the renewal date. Under the terms of the contract, the offers of renewal were processed over a twelve month period. As part of the transaction, OCNJ paid the Company $41,100,000, of which $500,000 was paid at the contract date and $40,600,000 was paid in twelve equal monthly installments of $3,383,333, with the first payment due on March 18, 2002.

In connection with this transaction, OCIC acquired a 19.71 percent interest (at the time of the transaction) in the Company by purchasing 867,955 shares of Class B nonvoting common stock. The Company valued the stock issued as part of the transaction at $13,500,000, based on a valuation performed for the Company as of January 1, 2002. The remaining $27,600,000 was earned evenly as replacement carrier revenue over the twelve month period beginning on March 18, 2002, consistent with the terms of the contract.

In addition, as part of the agreement, there was also a provisional amount due to the Company pursuant to which OCNJ would pay to the Company up to $15,600,000 of additional consideration as necessary to reduce the premium-to-surplus ratio to 2.5 to 1 on the renewal business for a three year period based on calculations performed at each calendar year-end. As the additional consideration was dependent on factors that did not exist or were not measurable at the inception of the agreement, they were considered contingent and the additional consideration was recognized as actual results reflected a premium-to-surplus ratio of greater than 2.5 to 1.

With respect to our replacement carrier transaction for the 2004 year with Ohio Casualty Insurance Company (OCIC) and Ohio Casualty of New Jersey (OCNJ), on February 22, 2005 the Company notified OCNJ that OCNJ owed the Company $7,762,000 for the 2004 year in connection with the requirement that a premium-to-surplus ratio of 2.5 to 1 be maintained on the OCNJ renewal business. Pursuant to our agreement, OCNJ had until May 15, 2005 to make payment to us. Subsequent to the notification provided to OCIC and OCNJ, we had several discussions with OCIC relating to certain components to the underlying calculation which supports the amount owed to the Company for the 2004 year. As part of these discussions, OCIC had requested additional supporting documentation and raised issues with respect to approximately $2,000,000 of loss adjustment expense, approximately $800,000 of commission expense, and approximately $600,000 of New Jersey Automobile Insurance Risk Exchange (NJAIRE) assessments, or a total of $3,412,000, allocated to OCNJ. We recorded $4,350,000 (the difference between the $7,762,000 we notified OCNJ they owed us, and the $3,412,000 as outlined above) as replacement carrier revenue from related parties in our consolidated statement of operations for the year ended December 31, 2004 with respect to the OCIC replacement carrier transaction. We recorded $4,350,000 because it was management’s best estimate of the amount for which we believed collectability was reasonably assured based on several factors. First, the calculation to determine the amount owed by OCIC to us is complex and certain elements of the calculation are significantly dependent on management’s estimates and judgment and thus more susceptible to challenge by OCIC. We also noted our experience in the past in negotiating these issues with OCIC. For example, in 2003 we notified OCNJ that OCNJ owed the Company approximately $10,100,000 for 2003. After negotiations we ultimately received $6,820,000. Accordingly, because of the nature of the calculation, the inherent subjectivity in establishing certain estimates upon which the calculation is based, and our experience from 2003, management’s best estimate of the amount for 2004 for which we believed collectability from OCIC was reasonably assured was $4,350,000. On June 27, 2005, we received $3,654,000 from OCIC in settlement of the amounts due to the Company, which differs from the $4,350,000 we had recorded as a receivable due from OCIC as outlined above. The difference of $696,000 between the receivable we had recorded ($4,350,000) due from OCIC and the actual settlement payment received from OCIC ($3,654,000) came as a result of a dispute between the Company and OCIC regarding $292,000 of NJAIRE assessments and approximately $404,000 of commission expenses included in the underlying calculation which supported the amounts due to the Company for the 2004 year, the final year of our three year agreement with OCIC. The $696,000 has been recorded as a bad debt expense in the Company’s consolidated statement of operations for the year ended December 31, 2005.

F-22

Sentry Insurance Company

The Company entered into a replacement carrier agreement on March 14, 2003 with Sentry Insurance Mutual Company (Sentry) pursuant to which Sentry would transfer to the Company the obligation to offer renewals for all of Sentry’s New Jersey personal lines business, effective October 24, 2003. In accordance with the agreement, Sentry ceased issuing new personal lines policies in the State of New Jersey. As part of the withdrawal, the Company became the replacement carrier for Sentry, providing Sentry’s policyholders with a guaranteed option to renew their policies over a twelve month period. As part of the transaction, Sentry was required to pay the Company $3,500,000 in four equal quarterly installments of $875,000 with the first payment on October 24, 2003. At December 31, 2003 amounts due from Sentry relating to the transaction amounted to $2,625,000. The Company recognized $661,111 in replacement carrier revenue for the year ended December 31, 2003. In addition, deferred revenue relating to the contract amounted to $2,838,889 at December 31, 2003.

In addition, as part of the agreement, there was also a provisional amount due to the Company pursuant to which Sentry would pay to the Company up to $1,250,000 of additional consideration as necessary to reduce the premium-to-surplus ratio to 2.5 to 1 on the renewal business for a three year period based on calculations preformed at each calendar year-end. As the additional consideration was dependent on factors that did not exist or were not measurable at the inception of the agreement they were considered contingent and the additional consideration was recognized as actual results reflected a premium-to-surplus ratio of greater than 2.5 to 1. For the years ended December 31, 2004 and 2003, the Company recognized additional consideration of $1,250,000 and $0, respectively, as replacement carrier revenue in accordance with the terms of the contract. At December 31, 2004 the amount due from Sentry relating to the transaction was $1,250,000. On February 22, 2005 the Company notified Sentry that Sentry owed the Company $1,250,000 for the 2004 year in connection with the requirements that a premium-to-surplus ratio of 2.5 to 1 be maintained on the Sentry Renewal business, as discussed more fully in “Business — Recent Transactions — Sentry Insurance Replacement Carrier Transaction.” On May 16, 2005, we received $1,250,000 from Sentry in settlement of the amounts owed to us.

The Hartford

On September 27, 2005 the Company announced that it had entered into a replacement carrier transaction with The Hartford Financial Services Group, Inc (“The Hartford”) whereby certain subsidiaries of The Hartford (Hartford Fire Insurance Company, Hartford Casualty Insurance Company, and Twin City Fire Insurance) transferred their renewal obligations for New Jersey homeowners, dwelling fire, and personal excess liabilities policies sold through independent agents to the Company. Under the terms of the transaction, the Company offered renewal policies to approximately 8,500 qualified policyholders of The Hartford. The Company received preliminary approval of this transaction when they received a draft of the final consent order from the New Jersey Department of Banking and Insurance (NJDOBI) on September 27, 2005. Final approval of the transaction was received from the NJDOBI on November 22, 2005.

Upon the Closing, the Company was required to pay to The Hartford a one-time fee of $150,000. In addition, on May 15, 2007, the Company paid a one-time payment to The Hartford in the amount $253,392, which represented 5% of the written premium of the retained business at the end of the twelve-month non-renewal period. Each of these payment types are consideration for the acquisition of the policy renewal rights as stipulated in the replacement carrier agreement, and have been or will be recorded as intangible assets and amortized over the course of the renewal period which began in March 2006. For the years ended December 31, 2007 and 2006, the Company amortized $25,000 and $125,000 of the one-time fee paid to The Hartford. For the years ended December 31, 2007 and 2006, the Company amortized $113,507 and $139,885, respectively of the payment made to The Hartford in May 2007 which was based on 5% of the direct written premium.

The Hartford is not liable for any fees and or other amounts to be paid to the Company and as such the Company will not recognize any Replacement Carrier Revenue from this transaction. The revenue that will be recognized as part of this transaction will be from the premium generated by the policies that renew with the Company.

Hanover Insurance Company

On February 21, 2006 the Company announced that its subsidiary, the Company, had entered into a replacement carrier transaction with Hanover Insurance Company (“Hanover”) whereby Hanover transferred its renewal obligations for New Jersey auto, homeowners, dwelling fire, personal excess liability and inland marine policies sold through independent agents to the Company. Under the terms of the transaction, the Company offered renewal policies to approximately 16,000 qualified policyholders of Hanover. The Company received approval of this transaction from the NJDOBI on February 16, 2006.

F-23

Upon the Closing on February 21, 2006, the Company paid Hanover a one-time fee of $450,000 in connection with this transaction. In addition, within 30 days of the closing, $100,000 was due to Hanover to reimburse Hanover for its expenses associated with this transaction. In May of 2007, the Company paid $666,129 to Hanover, representing the first of two annual payments equal to 5% of the written premium of the retained business for the preceding twelve months, calculated at the 12 month and 24 month anniversaries. Each of these payment types are consideration for the acquisition of the policy renewal rights as stipulated in the replacement carrier agreement, and have been or will be recorded as intangible assets and amortized over the course of the renewal period which began in March 2006. For the years ended December 31, 2007 and 2006, the Company amortized $275,000 and $229,167, respectively of the one-time fee and other expenses paid to Hanover. As of December 31, 2007 and 2006, the Company recorded commissions payable to Hanover in the amount of $512,483 and $666,129, respectively. For the years ended December 31, 2007 and 2006, the Company amortized $805,644 and $143,215, respectively of the payment due Hanover based on 5% of the direct written premium.

Hanover is not liable for any fees and or other amounts to be paid to the Company and as such the Company will not recognize any Replacement Carrier Revenue from this transaction. The revenue that will be recognized as part of this transaction will be from the premium generated by the policies that the Company writes upon renewal.

Reinsurance Activity

In the ordinary course of business, the Company reinsures certain risks with other companies. Such arrangements serve to limit the Company’s maximum loss from catastrophes, large risks and unusually hazardous risks. To the extent that any reinsuring company is unable to meet its obligations, the Company would be liable for its respective participation in such defaulted amounts. The Company does not require or hold any collateral to secure the amounts recoverable. In addition the Company does not have any reinsurance treaties with retroactive adjustments or contingent commissions.

For the years ended December 31, 2007, 2006 and 2005, the Company reinsured its business through various excess of loss reinsurance agreements and catastrophe reinsurance agreements. The various excess of loss agreements provide protection for losses and loss adjustment expenses in excess of $500,000 per occurrence for the years ended December 31, 2007, 2006 and 2005, respectively.

A summary of reinsurance transactions is as follows:


	For the Years Ended December 31,
	2007						2006						2005
	Written			Earned			Written			Earned			Written			Earned
Direct	$	178,678,748		$	177,231,856		$	171,069,389		$	166,785,769		$	198,048,757		$	180,378,535
Assumed		462,998			609,484			1,171,615			1,478,232			1,913,775			2,208,920

Gross		179,141,746			177,841,340			172,241,004			168,264,001			199,962,532			182,587,455
Ceded		(12,931,507	)		(12,621,378	)		(11,115,747	)		(10,910,201	)		(10,328,654	)		(9,805,391	)

Net	$	166,210,239		$	165,219,962		$	161,125,257		$	157,353,800		$	189,633,878		$	172,782,064

F-24

Reinsurance assumed relates to mandated premiums from the New Jersey Commercial Automobile Insurance Plan, (“CAIP’) and the New Jersey Fair Access to Insurance Requirements Plan (“FAIR”).

The Company reported reinsurance recoverables on paid losses and loss adjustment expenses of approximately $2,232,000, $6,367,000 and $11,169,000 at December 31, 2007, 2006 and 2005, respectively, which is recorded as a component of reinsurance recoverables and receivables.

The Company also reported reinsurance recoverables on unpaid losses and loss adjustment expenses of approximately $17,691,000, $17,866,000 and $28,069,000 at December 31, 2007, 2006 and 2005, respectively, which is recorded as a component of reinsurance recoverables and receivables.

The Company also reported prepaid reinsurance amounts of approximately $1,506,000, $1,195,000 and $990,000 at December 31, 2007, 2006 and 2005, respectively, which is recorded as a component of reinsurance recoverables and receivables.

The Company also reported reinsurance (receivable) payable of approximately $(597,000), $1,485,000 and $828,000 at December 31, 2007, 2006 and 2005, respectively, which is recorded as a component of reinsurance recoverables and receivables.

Incurred losses and loss adjustment expenses ceded to reinsurers totaled $1,666,000, $(2,927,000) and $13,239,000 at December 31, 2007, 2006 and 2005, respectively.

Reinsurance recoverables on ceded paid and unpaid losses, loss adjustment expenses and ceded unearned premiums and reinsurance receivable from individual reinsurers in excess of 3 percent of the Company’s equity were as follows (in thousands):


	For the years ended December 31,
	2007		2006		2005
QBE Reinsurance Company	$	7,044	$	5,663	$	—
Odyssey America Reinsurance		3,771		4,115		4,022
Scor Reinsurance Company		—		7,673		10,022
Folksamerica Reinsurance Company		—		2,430		—
American Reinsurance Company		—		1,170		—
Wellington Syndicate		—		1,115		5,756
PMA Capital Insurance Company		—		640		—

On January 1, 2004, Proformance entered into a Commercial and Personal Excess Liability Excess of Loss Reinsurance Contract with Odyssey America Reinsurance Corporation (“OdysseyRe”). Under the terms of this contract, Proformance ceded $5,555,556 of written premiums to OdysseyRe as of December 31, 2004. On January 1, 2004, Mayfair entered into a reinsurance agreement with OdysseyRe whereby Mayfair would accept 100% of OdysseyRe’s share in the interests and liabilities under the contract issued to Proformance. Total assumed written premiums under this contract was $5,000,000 as of December 31, 2004.

On December 31, 2004, Proformance commuted the Commercial and Personal Excess Liability Excess of Loss Reinsurance Contract with OdysseyRe. The commutation was initiated and accrued for in December 2004 and the return premium was received on January 21, 2005 in the amount of $4,750,000. The transaction was recorded as a decrease in ceded written premiums in the amount of $5,555,556 and a decrease in ceded commissions of $555,556. Proformance recognized a loss of $250,000 in connection with this transaction. On December 31, 2004, the reinsurance agreement between OdysseyRe and Mayfair was commuted. The transaction was recorded as a decrease in assumed written premiums in the amount of $5,000,000.

On January 1, 2005, Proformance entered into an Auto Physical Damage Quota Share Contract with OdysseyRe. Under the terms of this contract, Proformance ceded $1,953,000 of written premiums and $2,048,000 of beginning unearned premium reserves to OdysseyRe as of the first quarter 2005. Ceded losses and loss adjustment expenses were $374,000 and ceded reserves including IBNR was $222,000. On September 15, 2005, Proformance commuted the Auto Physical Damage Quota Share Contract with OdysseyRe. The commutation was initiated and accrued for in September 2005 in the amount of $160,000, which represents the reinsurers home office expense. The transaction was recorded as a decrease of ceded written premium of $4,001,000 and a decrease in ceded commissions of $1,200,000.

F-25

Unpaid Losses and Loss Adjustment Expenses

The changes in unpaid losses and loss adjustment expenses are summarized as follows (000’s omitted):


	Years ended December 31,
	2007			2006			2005
Balance as of beginning of year	$	191,386		$	219,361		$	184,283
Less reinsurance recoverable on unpaid losses		(17,866	)		(28,069	)		(24,936	)

Net balance as of beginning of year		173,520			191,292			159,347

Incurred related to:
Current period		125,483			103,801			122,728
Prior period		19,602			23			10,066

Total incurred		145,085			103,824			132,794

Paid related to:
Current period		49,020			38,009			42,301
Prior period		90,171			83,587			58,548

Total paid		139,191			121,596			100,849

Net balance as of December 31,		179,414			173,520			191,292
Plus reinsurance recoverable on unpaid losses		17,691			17,866			28,069

Balance as of December 31,	$	197,105		$	191,386		$	219,361

For the year ended December 31, 2007, we increased reserves for prior years by $19.6 million. This increase was primarily due to increases in the prior year reserves for auto bodily injury coverage which increased by $22.2 million. This increase was due to an inconsistent implementation of a revised claim reserving policy that was uncovered in the third quarter of 2007. Prior year reserves for other liability increased by $3.6 million. This was partially offset by favorable development of $4.6 million in no-fault coverages and $1.6 million in commercial auto liability.

F-26

7. Property and Equipment

A summary of property and equipment is as follows:


	As of December 31,
	2007		2006
Automobiles	$	539,553	$	591,675
Computer Software		3,670,034		1,937,541
Furniture & fixtures		634,374		634,374
Leasehold improvements		143,966		143,966
Electronic data equipment		2,076,373		1,549,454

		7,064,300		4,857,010
Less: Accumulated depreciation		3,920,881		2,868,559

Net property and equipment	$	3,143,419	$	1,988,451

Depreciation and amortization expense amounted to $1,052,322, $413,029 and $492,657 for the years ended December 31, 2007, 2006 and 2005, respectively. For the years ended December 31, 2007, 2006 and 2005, the Company recorded an impairment charge of $0, $0 and $734,000, respectively, related to the development of internal use software.

8. Capital Transactions

As discussed further in Note 3, the Company sold 867,955 shares of Class B Non-voting Common shares to OCIC which was valued by the Company at $13,500,000 at the time of the transaction. This represented 19.71 percent of the outstanding shares of the Company at December 18, 2001.

Pursuant to an investor rights agreement entered into between OCIC and NAHC on December 18, 2001, OCIC had a right to require NAHC to redeem all equity securities of NAHC owned by OCIC for fair market value at any time (i) on or after December 18, 2006 or (ii) prior to December 18, 2006 if NAHC delivers notice of a change in control event as defined in the agreement. On July 10, 2004, OCIC and NAHC entered into an agreement which would facilitate the sale by OCIC of shares of common stock of NAHC owned by OCIC that have an aggregate value of equal to at least 10% of the aggregate value of all shares of common stock sold by NAHC as part of an initial public offering. In exchange for the foregoing, OCIC agreed to waive its redemption right. As such, the related common stock is considered capital.

For the years ended December 31, 2007, 2006 and 2005, 137,600, 86,000 and 275,200 options, respectively, were exercised and converted to the Company’s common stock. The Company received additional consideration of $250,153, $115,154 and $469,109, respectively, from the exercise of the options.

F-30

The above pro forma information has been determined as if the Company had accounted for its employees’ stock options under the fair value method. The fair value of stock options was estimated at the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions:


	2005
Volatility factor		31.1	%
Risk-free interest yield		4.0	%
Dividend yield		0.0	%
Average life	3 years

The following table summarizes information with respect to stock options outstanding as of December 31, 2007:


				Weighted
	Number of			Average
	Options			Exercise Price
Balance Outstanding at January 1, 2005		672,950		$	2.06

Granted		275,200			1.71
Exercised		(275,200	)		(1.71	)
Forfeited		(275,200	)		(1.71	)

Balance Outstanding at December 31, 2005		397,750			2.31

Granted		—			—
Exercised		(86,000	)		(1.34	)
Forfeited		—			—

Balance Outstanding at December 31, 2006		311,750			2.58

Granted		—			—
Exercised		(137,600	)		(1.82	)
Forfeited		—			—

Balance Outstanding at December 31, 2007		174,150		$	3.19

Options Available for Grant		1,000,000			—

During 1995, the Company developed a stock option plan for key management employees and directors. Options are exercisable when the earliest of the following events occur: three years from date of issuance, date of retirement or expiration of the Director’s term, date of change of control, or the date of an offering of its shares through an initial public offering. The options expire 10 years after the date of grant. The options are also nontransferable and contain further restrictions imposed after the options have vested. If options are exercised then the shareholders cannot transfer their shares unless the transfer is permitted by the Company and the Company has first right to purchase all or any of the shares offered for sale. These restrictions have been taken into account when determining the fair value of the stock.

On March 15, 2005, the board of directors of the Company discussed extending the exercise period of stock options to purchase 73,100 shares of the Company’s common stock granted under its Non-statutory Stock Option Plan (the “Plan”) on June 15, 1995 to three individuals, two of whom are currently executive officers and one of whom is currently a director of the Company. These stock options were scheduled to expire on June 14, 2005, ten years after the date of issuance. The board of directors discussed extending the expiration date of these stock options from June 14, 2005 until December 31, 2005, with the effective date of the extension being June 14, 2005. This proposal to extend the exercise period for such stock options was approved by the board of directors at its meeting held on June 13, 2005, subject to shareholder approval. The extension of these options was presented to the Company’s shareholders for shareholder approval at the Company’s annual shareholder meeting which was held on September 19, 2005.

F-32

F.P. “Skip” Campion, the Company’s former Vice Chairman and the former President of Proformance, passed away on January 25, 2005. Under the terms of the Plan and the applicable stock option agreements, if an optionee dies without having fully exercised any outstanding stock options, the right to exercise such stock options expires ninety days following the optionee’s death. Accordingly, the expiration date of Mr. Campion’s stock options (none of which had previously been exercised) was accelerated to April 25, 2005. Since the estate of Mr. Campion did not exercise these stock options on or prior to April 25, 2005, the stock options were forfeited. On June 13, 2005, the board of directors of the Company approved, subject to shareholder approval, a grant of new nonqualified stock options to the estate of Mr. Campion, to preserve the value of Mr. Campion’s stock options that expired on April 25, 2005. The new stock options are subject to the same terms and conditions as the forfeited stock options, including the exercise price and number of shares subject to each option, except that the new stock options would expire on December 31, 2005. As of December 31, 2005, all of the Company’s options were fully vested and the Company did not award any options during the years ended December 31, 2007 and 2006.

Approval of the extension of the options granted during 1995 and the grant of new stock options to the estate of Mr. Campion was received at the Company’s Annual Meeting of Shareholders on September 19, 2005. The fair value of the Company’s stock on September 19, 2005 was $11.47; therefore, the Company recognized $749,802 as compensation expense related to the extension of options in its consolidated statement of operations for the year ended December 31, 2005. The Company also recognized $1,937,198 as compensation expense related to the grant of new options, with a grant price less than a market value, in the money in its consolidated statement of operations for the year ended December 31, 2005. These amounts are reported as a component of underwriting, acquisition and insurance related expenses in the consolidated statement of operations.

The following table summarizes information with respect to stock options outstanding as of December 31, 2007:


Options Outstanding										Options Exercisable
			Weighted Average
Range of	Number of Stock		Contractual Life		Weighted Average		Intrinsic Value			Number of Stock		Weighted Average		Intrinsic Value
Exercise Prices	Options		(in yrs)		Exercise Price		of Options			Options		Exercise Price		of Options
.98 - 1.29		36,550		3.54		0.98		3.45			36,550		0.98		3.45
2.50 - 2.89		94,600		0.80		2.70		1.73			94,600		2.70		1.73
6.14		43,000		5.28		6.14		(1.71	)		43,000		6.14		(1.71	)

		174,150		2.48	$	3.19	$	1.24			174,150	$	3.19	$	1.24

The aggregate intrinsic value of options outstanding at December 31, 2007 was $216,345, based on a fair value of the Company’s stock of $4.43 per share as of December 31, 2007.

The following table summarizes information with respect to stock options outstanding as of December 31, 2006:


Options Outstanding									Options Exercisable
			Weighted Average
Range of	Number of Stock		Contractual Life		Weighted Average		Intrinsic Value		Number of Stock		Weighted Average		Intrinsic Value
Exercise Prices	Options		(in yrs)		Exercise Price		of Options		Options		Exercise Price		of Options
$0.60		43,000		5.44	$	0.60	$	11.06		43,000	$	0.60	$	11.06
.98 - 1.29		47,300		4.54		0.98		10.68		47,300		0.98		10.68
2.50 - 2.89		178,450		1.26		2.63		9.03		178,450		2.63		9.03
6.14		43,000		6.28		6.14		5.52		43,000		6.14		5.52

		311,750		3.28	$	2.58	$	9.08		311,750	$	2.58	$	9.08

F-33

The number of exercisable stock options outstanding at December 31, 2007, 2006 and 2005 were 174,150, 311,750 and 397,750, respectively. The weighted average exercise price of exercisable stock options outstanding at December 31, 2007, 2006 and 2005 was $3.19, $2.58 and $2.31, respectively.

Compensation expense recorded in connection with the options extended during 2005 was $0, $0 and $749,802 for the years ended December 31, 2007, 2006 and 2005, respectively. The unamortized deferred compensation in connection with these options was $0 as of December 31, 2007, 2006 and 2005.

Compensation expense recorded in connection with the options issued during 2005 was $0, $0 and $1,937,198 for the years ended December 31, 2007, 2006 and 2005, respectively. The unamortized deferred compensation in connection with these options was $0 as of December 31, 2007, 2006 and 2005.

Compensation expense recorded in connection with the options issued during 2003 was $0, $0 and $245,340 for the years ended December 31, 2007, 2006 and 2005, respectively. The unamortized deferred compensation in connection with these options was $0, $0 and $61,335 as of December 31, 2007, 2006 and 2005, respectively.

Compensation expense recorded in connection with the options issued during 2002 was $0, $0 and $117,717 for the years ended December 31, 2007, 2006 and 2005, respectively. The unamortized deferred compensation in connection with these options was $0 as of December 31, 2007, 2006 and 2005, respectively.

During the years ended December 31, 2007, 2006 and 2005, 137,600, 86,000 and 275,200 options, respectively, were exercised and converted to the Company’s common stock. The Company received additional consideration of $250,153, $115,154 and $469,109, respectively, from the exercise of the options.

On March 21, 2006, the Board of Directors of National Atlantic Holdings Corporation NAHC) approved the Compensation Committee’s recommendation to grant 343,000 stock appreciation rights (SARS) to the executive officers and other key employees under the Company’s 2004 Stock and Incentive Plan. The SARS were granted with a base price of $9.94 per share, which was the closing price of the Company’s common stock on the Nasdaq National Market on the date of grant and vest in six equal semi-annual installments over a period of three years, commencing on June 30, 2006.

The following table summarizes information with respect to stock appreciation rights outstanding as of December 31, 2007:


				Weighted
	Number of			Average
	SARS			Grant Price
Balance Outstanding at January 1, 2006		—			—

Granted		343,000		$	9.94
Exercised		—			—
Forfeited		(5,000	)		(9.94	)

Balance Outstanding at December 31, 2006		338,000		$	9.94

Granted		405,000		$	11.55
Exercised		(117,664	)		(9.94	)
Forfeited		(83,334	)		(11.70	)

Balance Outstanding at December 31, 2007		542,002		$	10.87

F-34

In accordance with SFAS 123R, the Company records share based compensation liabilities at fair value or a portion thereof (depending upon the percentage of requisite service that has been rendered at the reporting date) based on the Black-Scholes valuation model and will remeasure the liability at each reporting date through the date of settlement; consequently, compensation cost recognized through each period of the vesting period (as well as each period throughout the date of settlement) will vary based on the awards fair value and the accelerated vesting schedule.

The fair-value of stock-based compensation awards (SARS) granted on December 21, 2007 was estimated at the date of grant using the Black-Scholes valuation model, and was re-measured with the following weighted average assumptions as of December 31, 2007:


	As of
	December 31,
	2007
Volatility factor		35.83	%
Risk-free interest yield		3.55	%
Dividend yield		0.00	%
Average life	5.9 years

The fair-value of stock-based compensation awards (SARS) granted on March 20, 2007 was estimated at the date of grant using the Black-Scholes valuation model, and was re-measured with the following weighted average assumptions as of December 31, 2007:


	As of
	December 31,
	2007
Volatility factor		35.83	%
Risk-free interest yield		3.49	%
Dividend yield		0.00	%
Average life	5.0 years

The fair-value of stock-based compensation awards (SARS) granted on March 21, 2006 was estimated at the date of grant using the Black-Scholes valuation model, and was re-measured with the following weighted average assumptions as of December 31, 2007 and 2006:


	As of			As of
	December 31,			December 31,
	2007			2006
Volatility factor		35.83	%		29.56	%
Risk-free interest yield		3.31	%		4.72	%
Dividend yield		0.00	%		0.00	%
Average life	4.0 years			5.0 years

Volatility factor – This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. We use actual historical changes in the market value of our stock weighted with other similar publicly traded companies in the insurance industry to calculate the volatility assumption, as it is management’s belief that this is the best indicator of future volatility.

Risk free interest yield – This is the implied yield currently available on U.S. Treasury zero-coupon issues with equal remaining term.

Dividend yield – The expected dividend yield is based on the Company’s current dividend yield and the best estimate of projected dividend yields for future periods within the expected life of the option.

Average life – This is the expected term, which is based on the simplified method.

F-35

As a result of the adoption of SFAS 123R, the Company has reported, as a component of other liabilities on the consolidated balance sheets, share-based compensation liability at December 31, 2007 and 2006, of $128,285 and $1,066,239, respectively. For the year ended December 31, 2007 and 2006, the Company has reported, as a component of other operating and general expenses on the consolidated statements of operations, share-based compensation expense of ($492,864) and $1,066,239. For the year ended December 31, 2007, this additional share-based compensation decreased pre-tax loss by $492,864, decreased net loss by $320,362, and decreased basic loss per share by $0.03. For the year ended December 31, 2006, this additional share-based compensation lowered pre-tax earnings by $1,066,239, lowered net income by $693,055, respectively, and lowered basic earnings per share by $0.06.

During year ended December 31, 2007, 117,664 were exercised, resulting in payments of $445,091. The aggregate intrinsic value of the exercised SARS was $445,091. No SARS were exercised during the year ended December 31, 2006.

At December 31, 2007, the aggregate fair value of all outstanding SARS was approximately $295,546 with a weighted-average remaining contractual term of 8.96 years. The total compensation cost related to non-vested awards not yet recognized was approximately $167,261 with an expense recognition period of 3 years.

At December 31, 2006, the aggregate fair value of all outstanding SARS was approximately $1,744,283 with a weighted-average remaining contractual term of 9.22 years. The total compensation cost related to non-vested awards not yet recognized was approximately $678,044 with an expense recognition period of 2 years.

10. Contingencies and Commitments

Litigation — The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. The Company accounts for such activity through the establishment of unpaid claims and claim adjustment expense reserves. Management does not believe that the outcome of any of those matters will have a material adverse effect on the Company’s financial position, operating results or cash flows.

Operating Leases — The Company has entered into a seven-year lease agreement for the use of office space and equipment. The most significant obligations under the lease terms other than the base rent are the reimbursement of the Company’s share of the operating expenses of the premises, which include real estate taxes, repairs and maintenance, utilities, and insurance. Net rent expense for 2007, 2006 and 2005 was $973,655, $958,279 and $945,391, respectively.

Aggregate minimum rental commitments of the Company as of December 31, 2007 are as follows:


Year	Amount
2008	$	796,799
2009		545,999
2010		—
2011		—
2012 and thereafter		—

Total	$	1,342,798

In connection with the lease agreement, the Company executed a letter of credit in the amount of $300,000 as security for payment of the base rent.

Guaranty Funds and Assessments — The Company is subject to guaranty fund and other assessments by the State of New Jersey. The Company is also assigned private passenger automobile and commercial automobile risks by the State of New Jersey for those who cannot obtain insurance in the primary market.

F-36

New Jersey law requires that property and casualty insurers licensed to do business in New Jersey participate in the New Jersey Property-Liability Insurance Guaranty Association (which we refer to as NJPLIGA). Members of NJPLIGA are assessed the amount NJPLIGA deems necessary to pay its obligations and its expenses in connection with handling covered claims. Assessments are made in the proportion that each member’s direct written property and casualty premiums for the prior calendar year compared to the corresponding direct written premiums for NJPLIGA members for the same period. NJPLIGA notifies the insurer of the surcharge to the policyholders, which is used to fund the assessment as a percentage of premiums on an annual basis. The Company collects these amounts on behalf of the NJPLIGA and there is no impact to earnings. Historically, requests for remittance of the assessments are levied 12-14 months after the end of a policy year. The Company remits the amount to NJPLIGA within 45 days of the assessment request.

For the years ended December 31, 2007, 2006 and 2005, the Company was assessed $1,963,302, $3,006,527 and $4,886,128, respectively, as its portion of the losses due to insolvencies of certain insurers. We anticipate that there will be additional assessments from time to time relating to insolvencies of various insurance companies. We are allowed to re-coup these assessments from our policyholders over time until we have recovered all such payments. In the event that the required assessment is greater than the amount accrued for via surcharges, the Company has the ability to increase its surcharge percentage to re-coup that amount.

A summary of the activity related to the change in our NJPLIGA recoverable is as follows:


	For the year ended December 31,
	2007		2006
Collected	$	2,810,826	$	2,791,015
Paid		1,963,302		3,006,527
Recoverable		1,364,237		2,211,761

The Board of Directors of the NJPLIGA reviewed the funding needs of the Unsatisfied Claim and Judgment Fund (UCJF) and NJPLIGA and authorized assessments for each entity in 2007, 2006 and 2005. The Board of Directors of NJPLIGA determined it was necessary to assess carriers for the UCJF uninsured motorist and pedestrian personal injury protection responsibilities with a 1.00% assessment of each carrier’s automobile liability net direct written premium. The UCJF, as of January 2004, is responsible for payment of pedestrian PIP claims previously paid directly by auto insurers. These assessments reflect the cost of those claims and will be adjusted accordingly going forward. For the years ended December 31, 2007, 2006 and 2005, the Company was assessed $810,833, $1,009,652 and $1,226,964, respectively. This amount is reflected as reinsurance payable and ceded written premiums and is not recoverable by the Company.

The Personal Automobile Insurance Plan, or PAIP, is a plan designed to provide personal automobile coverage to drivers unable to obtain private passenger auto insurance in the voluntary market and to provide for the equitable assignment of PAIP liabilities to all licensed insurers writing personal automobile insurance in New Jersey. We may be assigned PAIP business by the state in an amount equal to the proportion that our net direct written premiums on personal auto business for the prior calendar year compares to the corresponding net direct written premiums for all personal auto business written in New Jersey for such year.

The State of New Jersey allows property and casualty companies to enter into Limited Assignment Distribution (LAD) agreements to transfer PAIP assignments to another insurance carrier approved by the State of New Jersey to handle this type of transaction. The LAD carrier is responsible for handling all of the premium and loss transactions arising from PAIP assignments. In turn, the buy-out company pays the LAD carrier a fee based on a percentage of the buy-out company’s premium quota for a specific year. This transaction is not treated as a reinsurance transaction on the buy-out company’s book but as an expense. In the event the LAD carrier does not perform its responsibilities, the Company may have to assume that portion of the PAIP assignment obligation in the event no other LAD carrier will perform these responsibilities.

As of December 31, 2006 we have entered into a LAD agreement pursuant to which the PAIP business assigned to us by the State of New Jersey is transferred to Clarendon National Insurance Company (which assigned its rights and obligations under the LAD agreement to Praetorian Insurance Company, effective May 1, 2007) which write and service the business in exchange for an agreed upon fee.

F-37

For the years ended December 31, 2007, 2006 and 2005, the Company was assessed LAD fees of $242,951, $81,496 and $451,500, respectively, in connection with payments to Clarendon National Insurance Company under the LAD agreement. For the years ended December 31, 2007, 2006 and 2005, the Company was assessed an additional $0, $10,713 and $0, respectively, in connection with payments made to Clarendon National Insurance Company during the prior year. For the years ended December 31, 2007, 2006 and 2005, the Company was reimbursed $81,452, $0 and $81,804, respectively, in connection with payments made to Clarendon National Insurance Company during the prior year.

For the years ended December 31, 2007, 2006 and 2005, the Company was assessed LAD fees of $0, $24,778 and $144,521, respectively, in connection with payments to Auto One Insurance Company under the LAD agreement. For the years ended December 31, 2007, 2006 and 2005, the Company was assessed an additional $0, $12,699 and $0, respectively, in connection with payments made to Auto One Insurance Company during the prior year. For the years ended December 31, 2007, 2006 and 2005, the Company received reimbursements of $8,572, $15,636 and $26,141, respectively, in connection with payments made to Auto One Insurance Company. For the years ended December 31, 2007, 2006 and 2005, the Company would have been assigned $4,049,181, $2,125,472 and $12,643,014 of premium, respectively, by the State of New Jersey under PAIP, if not for the LAD agreements that were in place. These amounts served as the basis for the fees to be paid to the LAD carriers.

The Commercial Automobile Insurance Plan, or CAIP, is a plan similar to PAIP, but involving commercial auto insurance rather than private passenger auto insurance. Private passenger vehicles cannot be insured by CAIP if they are eligible for coverage under PAIP or if they are owned by an “eligible person” as defined under New Jersey law. We are assessed an amount in respect of CAIP liabilities equal to the proportion that our net direct written premiums on commercial auto business for the prior calendar year compares to the corresponding direct written premiums for commercial auto business written in New Jersey for such year.

The Company records its CAIP assignment on its books as assumed business as required by the State of New Jersey. For the years ended December 31, 2007, 2006 and 2005 the Company has been assigned $624,315, $992,659 and $1,968,016 of premiums, and $1,030,143, $1,331,186 and $1,562,587 of losses, respectively, by the State of New Jersey under the CAIP. On a quarterly basis, the State of New Jersey remits a member participation report and cash settlement report. The net result of premiums assigned less paid losses, losses and loss adjustment expenses and other expenses plus investment income results in a net cash settlement due to or from the participating member. The reserving related to these assignments is calculated by the State of New Jersey with corresponding entries recorded on the Company’s consolidated financial statements.

New Jersey Automobile Insurance Risk Exchange

The New Jersey Automobile Insurance Risk Exchange, or NJAIRE, is a plan designed to compensate member companies for claims paid for non-economic losses and claims adjustment expenses which would not have been incurred had the tort limitation option provided under New Jersey insurance law been elected by the injured party filing the claim for non-economic losses. As a member company of NJAIRE, we submit information with respect to the number of claims reported to us that meet the criteria outlined above. NJAIRE compiles the information submitted by all member companies and remits assessments to each member company for this exposure. The Company, since its inception, has never received compensation from NJAIRE as a result of its participation in the plan. The Company’s participation in NJAIRE is mandated by the New Jersey Department of Banking and Insurance. The assessments that the Company has received required payment to NJAIRE for the amounts assessed. The Company records the assessments received as underwriting, acquisition and insurance related expenses.

For the years ended December 31, 2007, 2006 and 2005, we have been assessed $1,297,839, $1,490,148 and $1,877,161, respectively, by NJAIRE. These assessments represent amounts to be paid to NJAIRE as it relates to the Company’s participation in its plan. For the years ended December 31, 2007, 2006 and 2005, the Company received additional assessments of prior periods in the amount of $0, $362,499 and $0, respectively. For the years ended December 31, 2007, 2006 and 2005, the Company received reimbursements of prior period assessments in the amount of $1,288,325, $1,231,059 and $1,642,563, respectively.

F-38

12. Statutory Surplus

Proformance, which is domiciled in New Jersey, prepares its statutory financial statements in accordance with accounting principles and practices prescribed or permitted by the NJDOBI, the recognized authority for determining solvency under the New Jersey insurance law. The commissioner of the NJDOBI has the right to permit other practices that may deviate from prescribed practices. Prescribed statutory accounting practices are those practices that are incorporated directly or by reference in state laws, regulations, and general administrative rules applicable to all insurance enterprises domiciled in New Jersey. Permitted statutory accounting practices that are not prescribed may differ from company to company within a state, and may change in the future.

GAAP differs in certain respects from the accounting practices prescribed or permitted by insurance regulatory authorities (statutory basis). Based on amounts included in the original filings of the annual statements for the respective years, statutory surplus was $125,711,839 and $128,031,273 at December 31, 2007 and 2006, respectively.

Proformance’s statutory financial statements are presented on the basis of accounting practices prescribed or permitted by the NJDOBI. New Jersey has adopted the National Association of Insurance Commissioners’ statutory accounting practices as its statutory accounting practices, except that it has retained the prescribed practice of writing off goodwill immediately to statutory surplus in the year of acquisition. In addition, the commissioner of the NJDOBI has the right to permit other specific practices that may deviate from prescribed practices.

13. Dividends from Subsidiaries

The funding of the cash requirements of the Company is primarily provided by cash dividends received from its subsidiaries. Dividends paid by Proformance are restricted by regulatory requirements of the State of New Jersey. Generally, the maximum dividend that may be paid without prior regulatory approval is limited to the greater of 10 percent of statutory surplus (stockholders’ equity on a statutory basis) or 100 percent of net income (excluding realized capital gains) for the prior year. Dividends exceeding these limitations can be made subject to approval by the NJDOBI. In addition, dividends must be paid from unassigned funds which must not reflect a deficit. As of December 31, 2007 Proformance was not permitted to pay any dividends without the approval of the Commissioner as it had negative unassigned surplus of $(1,767,038) as a result of historical underwriting losses. As of December 31, 2006, Proformance was permitted to pay dividends without the approval of the Commissioner as it had unassigned surplus of $3,420,432. No dividends from Proformance were paid for the years ended December 31, 2007 and 2006. In addition, Bermuda legislation imposes limitations on the dividends Mayfair is permitted to pay, based on minimum capital and solvency requirements. In connection with these limitations, Mayfair paid dividends for the years ended December 31, 2007 and 2006 in the amount of $0 and $0, respectively. The non-insurance subsidiaries paid cash dividends to the Company of $2,560,000 and $903,541 in 2007 and 2006, respectively.

F-40

15. Net (Loss) Earnings Per Share

Basic net (loss) earnings per share is computed based on the weighted average number of shares outstanding during the year. Diluted net income per share includes the dilutive effect of outstanding options, using the treasury stock method. Under the treasury stock method, exercise of options is assumed with the proceeds used to purchase common stock at the average price for the period. The difference between the number of shares issued and the number of shares purchased represents the dilutive shares.

The following table sets forth the computation of basic and diluted (loss) earnings per share:


	For the year ended December 31,
	2007			2006		2005
Net (Loss) Income applicable to common stockholders	$	(6,194,001	)	$	14,382,394	$	6,435,950
Weighted average common shares — basic		11,078,064			11,213,463		9,166,683
Effect of dilutive securities:
Options		—			236,623		315,885

Weighted average common shares — diluted		11,078,064			11,450,086		9,482,568

Basic (Loss) Earnings Per Share	$	(0.56	)	$	1.28	$	0.70

Diluted (Loss) Earnings per Share	$	(0.56	)	$	1.26	$	0.68

At December 31, 2007, the effect of 122,942 stock options were excluded from the computation of diluted earnings per share because they would have been anti-dilutive.

16. Related Party Disclosure

In connection with the Ohio Casualty replacement carrier transaction, the Company entered into a non-competition agreement with OCIC which prohibited Proformance from writing commercial lines insurance policies until December 31, 2004 where the expiring policy was issued by Ohio Casualty Group.

The Company cancelled certain outdated shareholder agreements, effective December 23, 2005. These agreements, which included shareholder agreements between the Company and its shareholder agents and also its Chief Executive Officer, were developed in 1994 prior to the formation of the Company and related primarily to voting control of the Company as a privately held organization. In addition, the investor rights agreement between the Company and the Ohio Casualty Insurance Company was terminated. The Board of Directors determined that these agreements were no longer applicable to a public company and voted unanimously to terminate these agreements. Accordingly, the Company has executed the cancellation of these agreements.

The Company has also made payments to insurance agencies affiliated with certain of the Company’s directors. For the years ended December 31, 2007, 2006 and 2005, Proformance paid to Liberty Insurance Associates, Inc. commissions of $197,049, $135,405 and $229,831, respectively. Mr. Andrew Harris, who was a member of our board of directors until June 13, 2005, when he resigned his position and was appointed President of Proformance, is Chief Executive Officer of Liberty Insurance Associates.

Mr. Thomas J. Sharkey, a member of our board of directors, was Chairman of Banc of America Corporate Insurance Agency, LLC (formerly, Fleet Insurance Services) until February 3, 2007. For the period ended February 3, 2007, Proformance paid commissions of $5,557 to Banc of America Corporate Insurance Agency, LLC. For the years ended December 31, 2006 and 2005, Proformance paid to Banc of America Corporate Insurance Agency, LLC commissions of $67,038 and $105,723, respectively.

In connection with the Commercial and Personal Excess Liability Excess of Loss Reinsurance Contract between Proformance and OdysseyRe and the reinsurance agreement between OdysseyRe and Mayfair as outlined in Note 4, these transactions are eliminated for GAAP reporting purposes as part of the Company’s consolidated financial results.

F-42

17. Subsequent Events

The Merger Agreement provides that the directors and officers of the Merger Sub immediately prior to the effective time of the Merger will be the directors and officers of the Surviving Corporation.

18. Quarterly Financial Information (unaudited)


			(In thousands, except per share data)
	First		Second		Third			Fourth
	Quarter		Quarter		Quarter			Quarter

2007
Income Statement Data:
Total revenue	$	44,449	$	45,423	$	47,151		$	47,248
Income before income taxes		5,797		1,821		(14,715	)		(3,908	)
Net income (loss)		3,956		1,175		(9,190	)		(2,135	)

Per Share Data:
Net income (loss) — Basic	$	0.36	$	0.11	$	(0.83	)	$	(0.19	)
Net income (loss) — Diluted	$	0.35	$	0.10	$	(0.83	)	$	(0.19	)

2006
Income Statement Data:
Total revenue	$	43,191	$	42,999	$	44,425		$	45,241
Income before income taxes		5,967		4,598		6,078			4,846
Net income		3,985		3,027		4,381			2,989

Per Share Data:
Net income — Basic	$	0.36	$	0.27	$	0.39		$	0.27
Net income — Diluted	$	0.35	$	0.26	$	0.38		$	0.26

2005
Income Statement Data:
Total revenue	$	50,330	$	45,218	$	47,228		$	44,565
Income before income taxes		6,461		2,315		(2,245	)		1,763
Net income (loss)		4,373		1,565		(1,638	)		2,136

Per Share Data:
Net income (loss) — Basic	$	0.88	$	0.16	$	(0.15	)	$	0.19
Net income (loss) — Diluted	$	0.78	$	0.15	$	(0.15	)	$	0.19

F-43


	2007					2006					2005
			% of					% of					% of
	Amount		Portfolio			Amount		Portfolio			Amount		Portfolio
Fixed Income Securities:
U.S. Treasury securities and obligations of U.S. Government agencies	$	196,413		62.5	%	$	196,900		61.8	%	$	168,893		56.3	%
Obligations of states and political subdivisions		66,618		21.2	%		74,202		23.3	%		69,290		23.1	%
Mortgage-backed securities		5,028		1.6	%		3,417		1.1	%		1,219		0.4	%
Corporate and other securities		45,047		14.4	%		41,826		13.1	%		47,782		15.9	%

Total fixed income securities		313,106		99.7	%		316,345		99.2	%		287,184		95.7	%
Equity Securities:
Preferred stocks		1,000		0.3	%		504		0.2	%		509		0.2	%
Common stocks		12		0.0	%		1,923		0.6	%		12,327		4.1	%

Total equity securities		1,012		0.3	%		2,427		0.8	%		12,836		4.3	%

Total Investments	$	314,118		100.0	%	$	318,772		100.0	%	$	300,020		100.0	%

	3.1		Form of Amended and Restated Certificate of Incorporation of the Registrant**

	3.2		Form of Amended and Restated Bylaws of the Registrant**

	4.1		Form of Stock Certificate for the Common Stock**

	10.1		Form of Agency Agreements between Proformance Insurance Company and Partner Agents of Proformance Insurance Company**

	10.2		Form of Limited Agency Agreements between Proformance Insurance Company and Non-Active Replacement Carrier Service Agents of Proformance Insurance Company**

	10.3		Replacement Carrier Agreement, dated December 18, 2001, among the Registrant, Proformance Insurance Company and Ohio Casualty of New Jersey, Inc.**

	10.4		Non-Competition Agreement, dated December 18, 2001, among the Registrant, Proformance Insurance Company, The Ohio Casualty Insurance Company and Ohio Casualty of New Jersey**

	10.23		Form of Amendment to Employee Stock Option Agreement for Certain Options Granted to Messrs. James V. Gorman, Peter A. Capello, Jr. and Steven V. Stallone***

	10.24		Form of Nonstatutory Stock Option Agreement for Certain Stock Options Granted to the Estate of Mr. Frank Campion***

	10.25		Form of Amendment to Employment Agreement for James V. Gorman, Frank J. Prudente, John E. Scanlan, Bruce C. Bassman and Peter A. Cappello, Jr. ****

	10.26		Replacement Carrier Agreement, dated November 7, 2005, between Proformance Insurance Company and The Hanover Insurance Company.*****

	14.1		Code of Ethics *

	21.1		Subsidiaries of the Registrant**

	23.1		Consent of Beard Miller Company LLP *

	23.2		Consent of Deloitte & Touche LLP*

	31.1		Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended*

	31.2		Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended*

	32.1		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

	32.2		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

	99		Reports of Independent Registered Public Accounting Firms


*		Filed herewith

**		Incorporated by reference to the Registration Statement on Form S-1 (File No. 333-117804). Initially filed July 30, 2004.

***		Incorporated by reference from National Atlantic Holdings Corporation’s Report on Form 8-K, filed with the SEC on September 23, 2005.

****		Incorporated by reference from National Atlantic Holdings Corporation’s Report on Form 8-K, filed with the SEC on September 1, 2006.

*****		Incorporated by reference from National Atlantic Holdings Corporation’s annual report for the year ended December 31, 2006.


	Page(s)
Consolidated Financial Statement:
Reports of Independent Registered Public Accounting Firms		F-2

Consolidated Balance Sheets:		F-3
As of December 31, 2007 and 2006

Consolidated Statements of Operations:
For the years ended December 31, 2007, 2006 and 2005		F-4

Consolidated Statements of Comprehensive Income (Loss):
For the years ended December 31, 2007, 2006 and 2005		F-5

Consolidated Statements of Changes in Stockholders’ Equity:
For the years ended December 31, 2007, 2006 and 2005		F-6

Consolidated Statements of Cash Flows:
For the years ended December 31, 2007, 2006 and 2005		F-7

Notes to Consolidated Financial Statements		F-8


																				Accumulated
	Class A						Class B													Other								Total
	Common Stock						Common Stock						Common Stock				Retained			Comprehensive			Treasury Stock					Stockholders’
	Shares			Amount			Shares			Amount			Shares		Amount		Earnings			Income (Loss)			Shares		Amount			Equity
Balance at December 31, 2004		2,747,743		$	3,002			2,194,247		$	28,738			—	$	—	$	35,917		$	182			—		—		$	67,839
Issuance of Common Stock related to IPO		—			—			—			—			5,985,000		62,198		—			—			—		—			62,198
Conversion of Class A and Class B Common Stock		(2,747,743	)		(3,002	)		(2,194,247	)		(28,738	)		4,941,990		31,740		—			—			—		—			—
Exercise of stock options		—			—			—			—			275,200		470		—			—			—		—			470
Amortization of options		—			—			—			—			—		3,050		—			—			—		—			3,050
Net Income		—			—			—			—			—		—		6,436			—			—		—			6,436
Other comprehensive (loss)		—			—			—			—			—		—		—			(1,784	)		—		—			(1,784	)

Balance at December 31, 2005		—			—			—			—			11,202,190	$	97,458	$	42,353		$	(1,602	)		—				$	138,209
Exercise of stock options		—			—			—			—			86,000		112		—			—			—		—			112
Net Income		—			—			—			—			—		—		14,382			—			—		—			14,382
Other comprehensive (loss)		—			—			—			—			—		—		—			(92	)		—		—			(92	)
Repurchase of common stock		—			—			—			—			—		—		—			—			166,249		(1,723	)		(1,723	)

Balance at December 31, 2006		—			—			—			—			11,288,190	$	97,570	$	56,735			($1,694	)		166,249		($1,723	)	$	150,888
Exercise of stock options		—			—			—			—			137,600		250		—			—			—		—			250
Net loss		—			—			—			—			—		—		(6,194	)		—			—		—			(6,194	)
Other comprehensive income		—			—			—			—			—		—		—			1,801			—		—			1,801
Repurchase of common stock		—			—			—			—			—		—		—			—			252,054		(2,569	)		(2,569	)

Balance at December 31, 2007		—			—			—			—			11,425,790	$	97,820	$	50,541		$	107			418,303		($4,292	)	$	144,176


	Cost/		Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
Fixed maturities:
U.S. Government, government agencies and authorities	$	189,217,646	$	529,936	$	(117,923	)	$	189,629,659
State, local government and agencies		63,368,016		454,957		(47,535	)		63,775,438
Industrial and miscellaneous		12,176,793		35,730		(126,647	)		12,085,876
Mortgage-backed securities		5,021,895		14,154		(8,274	)		5,027,775

Total fixed maturities		269,784,350		1,034,777		(300,379	)		270,518,748

Other Investments:
Short-term investments		456,821		—		—			456,821
Equity securities		1,013,850		—		(1,386	)		1,012,464

Total Investments — Available-for-Sale	$	271,255,021	$	1,034,777	$	(301,765	)	$	271,988,033


	For the year ended
	December 31,
	2005
Net income — as reported	$	6,435,950
Plus: Compensation expense recorded against income		3,050,057
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(3,136,602	)

Pro forma net income	$	6,349,405


Net income per weighted average shareholding
Basic — as reported	$	0.70
Basic — proforma	$	0.69
Diluted — as reported	$	0.68
Diluted — proforma	$	0.67


	Before Tax		Tax			Net of Tax
for the year ended December 31, 2007	Amount		Effect			Amount

Net holding gains arising during the year	$	2,136	$	(748	)	$	1,388
Less: reclassification adjustment for net realized losses included in net loss		544		(190	)		354
Amortization of unrealized loss recorded on transfer of fixed income securities to held-to-maturity		91		(32	)		59

Other comprehensive income	$	2,771	$	(970	)	$	1,801


	As of December 31, 2007
					Amount at
	Amortized				which shown
Type of Investment	Cost		Fair Value		on Balance Sheet
Fixed Maturities
U.S Government, government agencies and authorities	$	6,783,210	$	7,015,099	$	6,783,210
State, local government and agencies		2,842,430		2,835,410		2,842,430
Industrial and miscellaneous		32,504,281		32,062,192		32,504,281

Total fixed maturities		42,129,921		41,912,701		42,129,921

Total Investments — Held-to-Maturity	$	42,129,921	$	41,912,701	$	42,129,921


	As of December 31, 2006
					Amount at
	Amortized				which shown
Type of Investment	Cost		Fair Value		on Balance Sheet
Fixed Maturities
U.S Government, government agencies and authorities	$	6,787,542	$	6,534,458	$	6,787,542
State, local government and agencies		2,846,423		2,788,655		2,846,423
Industrial and miscellaneous		32,533,860		32,077,591		32,533,860

Total fixed maturities		42,167,825		41,400,704		42,167,825

Total Investments — Held-to-Maturity	$	42,167,825	$	41,400,704	$	42,167,825


			Reserves
			for										Amortization
			Unpaid								Losses and		of
			Losses								Losses and		Deferred
	Deferred		and Loss						Net		Adjustment		Policy				Net
	Acquisition		Adjustment		Unearned		Earned		Investment		Expenses		Acquisition		Other		Written
	Costs		Expense		Premiums		Premiums		Income		Incurred		Costs		Expenses		Premiums
at December 31, 2007
Property and Casualty	$	18,934	$	197,105	$	86,823	$	165,220	$	17,276	$	145,085	$	43,894	$	6,297	$	166,210

Consolidated	$	18,934	$	197,105	$	86,823	$	165,220	$	17,276	$	145,085	$	43,894	$	6,297	$	166,210

at December 31, 2006
Property and Casualty	$	18,601	$	191,386	$	85,523	$	157,354	$	16,082	$	103,824	$	40,406	$	10,133	$	161,125

Consolidated	$	18,601	$	191,386	$	85,523	$	157,354	$	16,082	$	103,824	$	40,406	$	10,133	$	161,125

at December 31, 2005
Property and Casualty	$	17,134	$	219,361	$	81,546	$	172,782	$	12,403	$	132,794	$	34,506	$	11,747	$	189,634

Consolidated	$	17,134	$	219,361	$	81,546	$	172,782	$	12,403	$	132,794	$	34,506	$	11,747	$	189,634

at December 31, 2004
Property and Casualty	$	10,872	$	184,283	$	64,170	$	179,667	$	7,061	$	134,987	$	39,586	$	7,766	$	193,192

Consolidated	$	10,872	$	184,283	$	64,170	$	179,667	$	7,061	$	134,987	$	39,586	$	7,766	$	193,192

at December 31, 2003
Property and Casualty	$	9,788	$	134,201	$	51,813	$	143,156	$	4,258	$	108,123	$	25,547	$	992	$	147,045

Consolidated	$	9,788	$	134,201	$	51,813	$	143,156	$	4,258	$	108,123	$	25,547	$	992	$	147,045

at December 31, 2002
Property and Casualty	$	8,778	$	85,472	$	46,018	$	75,654	$	1,593	$	69,491	$	14,887	$	3,605	$	110,626

Consolidated	$	8,778	$	85,472	$	46,018	$	75,654	$	1,593	$	69,491	$	14,887	$	3,605	$	110,626


									Percentage
			Ceded to		Assumed				of Amount
	Gross		Other		From Other		Net		Assumed to
	Amount		Companies		Companies		Amount		Net
For the year ended ended December 31, 2007
Property and casualty insurance premiums	$	177,232	$	12,621	$	609	$	165,220		0.37	%

Total Premiums	$	177,232	$	12,621	$	609	$	165,220		0.37	%


For the year ended ended December 31, 2006
Property and casualty insurance premiums	$	166,786	$	10,910	$	1,478	$	157,354		0.94	%

Total Premiums	$	166,786	$	10,910	$	1,478	$	157,354		0.94	%


For the year ended ended December 31, 2005
Property and casualty insurance premiums	$	180,378	$	9,805	$	2,209	$	172,782		1.28	%

Total Premiums	$	180,378	$	9,805	$	2,209	$	172,782		1.28	%


			Charged to
	Balance at		costs and					Balance at end
Description	beginning of period		expenses		Charged to other accounts -describe	Deductions - describe		of period

Valuation Allowance for State Receivable	$	500	$	—	NY State Receivable	$	—	$	500
Allowance for Doubtful Accounts		34		6	Premiums Receivable		—		40
Valuation Allowance for Reinsurance		—		—	Reinsurance Recoverable		—		—
Valuation Allowance for Notes Receivable		—		—	Notes Receivable				—

	$	534	$	6		$	—	$	540


	Losses and Loss				Paid Losses
	Adjustment Expenses				and Loss
	Incurred Related to:				Adjustment
	Current Year		Prior Years		Expenses
Years ended December 31,
2007	$	125,483	$	19,602	$	139,191
2006	$	103,801	$	23	$	121,596
2005	$	122,728	$	10,066	$	100,849


NATIONAL ATLANTIC HOLDINGS CORPORATION
By:	/s/ James V. Gorman
	Name:	James V. Gorman
	Title:	Chairman of the Board of Directors and Chief Executive Officer


Signature	Title	Date

/s/ James V. Gorman James V. Gorman	Chairman of the Board of Directors and Chief Executive Officer (Principle Executive Officer)	March 17, 2008

/s/ Frank J. Prudente Frank J. Prudente	Executive Vice President , Treasurer and Chief Financial Officer	March 17, 2008

/s/ Peter A. Cappello, Jr. Peter A. Cappello, Jr.	Director	March 17, 2008

/s/ Martin I. Krupnick, Psy. D Martin I. Krupnick, Psy. D	Director	March 17, 2008

/s/ Thomas M. Mulhare Thomas M. Mulhare	Director	March 17, 2008

/s/ Thomas J. Sharkey, Sr. Thomas J. Sharkey, Sr.	Director	March 17, 2008

/s/ Steven V. Stallone Steven V. Stallone	Director	March 17, 2008

/s/ Candace L. Straight Candace L. Straight	Director	March 17, 2008


		/s/ James V. Gorman
		Name: James V. Gorman
		Title: Chief Executive Officer
Dated: March 17, 2008


		/s/ Frank J. Prudente
		Name: Frank J. Prudente
		Title: Executive Vice President, Treasurer and
		Chief Financial Officer
Dated: March 17, 2008


		/s/ James V. Gorman
		Name: James V. Gorman
		Title: Chairman of the Board of Directors and
		Chief Executive Officer
Date: March 17, 2008