10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended March 31, 2006


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 (Address of Registrant’s principal executive offices)		07728 (Zip Code)

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

None
(Former name, former address and former fiscal year, if changed since last report)

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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer þ

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

As of May 15, 2006, there were outstanding 11,223,690 Common Shares, no par value per share, of the Registrant.

PART I

Item 1. Financial Statements.

NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)


	March 31,			December 31,
	2006			2005
	(Unaudited)			(Unaudited)
Investments: (Note 4)
Fixed maturities held-to-maturity (fair value at March 31, 2006 and December 31, 2005 was $40,996 and $0, respectively)		42,170		$	—
Fixed maturities available-for-sale (amortized cost at March 31, 2006 and December 31, 2005 was $251,046 and $281,010, respectively)		247,434			278,384
Equity securities (cost at March 31, 2006 and December 31, 2005 was $11,809 and $12,636, respectively)		12,620			12,836
Short-term investments (cost at March 31, 2006 and December 31, 2005, was $450 and $8,800, respectively)		450			8,800

Total investments		302,674			300,020
Cash and cash equivalents		38,384			39,836
Accrued investment income		3,840			3,560
Premiums receivable — net (allowance for doubtful accounts at March 31, 2006 and December 31, 2005 was $35 and $19, respectively)		46,507			49,926
Reinsurance recoverables and receivables		39,310			41,057
Deferred acquisition costs		16,011			17,134
Property and equipment — Net		2,072			2,062
Taxes recoverable		—			1,152
Other assets		8,896			7,989

Total assets	$	457,694		$	462,736

Liabilities and Stockholders’ Equity:
Liabilities:
Unpaid losses and loss adjustment expenses	$	214,789		$	219,361
Unearned premiums		77,901			81,546
Accounts payable and accrued expenses		2,009			2,578
Deferred income taxes		11,064			11,069
Taxes payable		241			—
Other liabilities		10,449			9,973

Total liabilities		316,453			324,527

Commitments and Contingencies		—			—

Stockholders’ equity:
Common Stock, $0.01 par value (50,000,000 shares authorized; 11,223,690, and 11,202,190 shares issued as of March 31, 2006 and December 31, 2005, respectively)		97,480			97,458
Retained earnings		46,338			42,353
Accumulated other comprehensive loss		(2,577	)		(1,602	)

Total stockholders’ equity		141,241			138,209

Total liabilities and stockholders’ equity	$	457,694		$	462,736

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

NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the periods ended March 31, 2006 and 2005

(in thousands, except share data)


																Accumulated
																Other			Total
	Class A Common Stock				Class B Common Stock				Common Stock					Retained		Comprehensive			Stockholders’
	Shares		Amount		Shares		Amount		Shares		Amount			Earnings		Income (Loss)			Equity
Balance at December 31, 2004		2,747,743	$	3,002		2,194,247	$	28,738						$	35,917	$	182		$	67,839
Amortization of 2002 and 2003 options								127												127
Net Income															4,373					4,373
Other comprehensive loss																	(1.978	)		(1,978	)

Balance at March 31, 2005 (unaudited)		2,747,743		3,002		2,194,247		28,865		—		—		$	40,290		($1,796	)	$	70,361

Balance at December 31, 2005		—		—		—		—		11,202,190	$	97,458		$	42,353		($1,602	)	$	138,209

Execution of stock options										21,500		25								25
Amortization of options												(3	)							(3	)
Net Income															3,985					3,985
Other comprehensive loss																	(247	)		(247	)
Unrealized loss on transfer to held-to-maturity																	(751	)		(751	)
Amortization of Unrealized loss																	23			23

Balance at March 31, 2006 (unaudited)		—		—		—		—		11,223,690	$	97,480		$	46,338		($2,577	)	$	141,241

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

NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)


	For the three months ended March 31,
	2006 (Unaudited)			2005 (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	3,985		$	4,373
Adjustment to reconcile net income to net cash provided (used in) operating activities:
Depreciation and amortization		129			126
Amortization of premium/discount on bonds		255			244
Realized (gains) on investment sales		(184	)		(392	)
Changes in:
Deferred income taxes		123			(361	)
Premiums receivable		3,419			(13,124	)
Reinsurance recoverables and receivables		1,748			(695	)
Receivable from Ohio Casualty					(2,520	)
Deferred acquisition costs		1,123			(684	)
Accrued interest income		(280	)		(555	)
Income taxes recoverable		1,152			—
Other assets		(908	)		(1,436	)
Unpaid losses and loss adjustment expenses		(4,573	)		7,640
Stock options		(3	)		127
Accounts payable and accrued expenses		(570	)		(380	)
Unearned premiums		(3,644	)		11,936
Income taxes payable		241			1,352
Payable for securities		—			7,273
Other liabilities		475			962

Net cash provided by operating activities		2,488			13,886

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(139	)		(380	)
Purchases of fixed maturity securities — available for sale		(21,496	)		(61,498	)
Sales and maturities of fixed maturity investments - available-for-sale		8,306			54,813
Purchases of equity securities		—			(16,476	)
Sales of equity securities		1,014			5,962
Purchases of short-term investments — net		8,350			(7,677	)

Net cash (used in) investing activities		(3,965	)		(25,256	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock-net		25			—
Net cash provided by financing activities		25			—
Net increase in cash		(1,452	)		(11,370	)
Cash and cash equivalents — beginning of period		39,836			15,542

Cash and cash equivalents — end of period	$	38,384		$	4,172

Cash paid during the period for:
Income taxes		—			1,095

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

NATIONAL ATLANTIC HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005

1. Nature of Operations

National Atlantic Holdings Corporation (NAHC) and Subsidiaries (the Company) was incorporated in New Jersey, on July 29, 1994. The Company 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 went 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 March 31, 2006 and December 31, 2005. 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 (Mayfair), for the purpose of assuming reinsurance business as a retrocessionaire from third party reinsurers of Proformance and 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 will permit the Company to reduce its reinsurance purchases and to retain more of the direct written premiums produced by its Partner Agents. In addition, the Company intends to increase the capital of the other operating subsidiaries by approximately $10,000,000 to facilitate the execution of its business plans. 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.

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.

2. Basis of Presentation

The unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments necessary for a fair presentation of the interim periods presented have been made. Operating results for the three months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. These unaudited financial statements and the notes thereto should be read in conjunction with the Company’s audited financial statements and accompanying notes included in the Company’s form 10-K/A (File No. 000-51127) filed by the Company with the Securities and Exchange Commission on April 11, 2006.

Certain reclassifications of prior period balances were made to allow for comparability with current period presentation.

3. Adoption of New Accounting Pronouncements

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. The adoption of SFAS 123R did not have a material effect on the Company’s interim condensed consolidated financial statements for the three months ended March 31, 2006. For further details, please refer to Note 6 Share-based Compensation.

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. The Company has complied with the disclosure requirements of FSP-115, which were effective for periods which began after December 15, 2005. The Company’s adoption of FSP 115-1 did not have a material impact on the Company’s consolidated financial statements.

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. We are currently evaluating the method of adoption and whether that adoption will have a material impact on the Company’s consolidated financial statements.

4. 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 FAS 115, Accounting for Certain Investments in Debt and Equity Securities (FAS 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 FAS 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 shareholders’ 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 balance sheet, an unrealized loss on the transfer of securities to held-to-maturity from available-for-sale in the amount of $750,917. For the three month period 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 statement of income and accumulated other comprehensive loss on the balance sheet, amortization of the unrealized loss in the amount of $22,631.

The amortized cost and estimated market value of the available-for-sale investment portfolio, classified by category, as of March 31, 2006 are as follows:


	Cost/		Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		(Losses)			Market Value
Fixed maturities:
U.S. Government, government agencies and authorities	$	6,783,469	$	11	$	(89,773	)	$	6,693,706
State, local government and agencies		2,850,729		—		(103,032	)		2,747,697
Industrial and miscellaneous		32,535,446		—		(980,780	)		31,554,666
Mortgage-backed securities		—		—		—			—

Total fixed maturities		42,169,644		11		(1,173,585	)		40,996,069

Total Investments — Held-to-Maturity	$	42,169,644	$	11	$	(1,173,585	)	$	40,996,069

The amortized cost and estimated market value of the available-for-sale investment portfolio, classified by category, as of March 31, 2006 are as follows:


			Gross		Gross
	Cost/ Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		(Losses)			Market Value
Fixed maturities:
U.S. Government, government agencies and authorities	$	177,500,599	$	889	$	(2,830,537	)	$	174,670,951
State, local government and agencies		65,808,734		94,138		(730,443	)		65,172,429
Industrial and miscellaneous		6,513,760		—		(126,892	)		6,386,868
Mortgage-backed securities		1,222,460		3,838		(22,391	)		1,203,907

Total fixed maturities		251,045,553		98,865		(3,710,263	)		247,434,155
Other Investments:
Short-term investments		450,000		—		—			450,000
Equity securities		11,809,045		1,096,130		(284,994	)		12,620,181

Total Investments — Available-for-Sale	$	263,304,598	$	1,194,995	$	(3,995,257	)	$	260,504,336

The amortized cost and estimated market value of the investment portfolio, classified by category, as of December 31, 2005 are as follows:


			Gross		Gross
	Cost/ Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		(Losses)			Market Value
Fixed maturities:
U.S. Government, government agencies and authorities	$	170,627,486	$	21,928	$	(1,756,164	)	$	168,893,250
State, local government and agencies		69,462,854		283,797		(456,673	)		69,289,978
Industrial and miscellaneous		39,691,216		124,113		(834,448	)		38,980,881
Mortgage-backed securities		1,228,665		5,157		(14,430	)		1,219,392

Total fixed maturities		281,010,221		434,995		(3,061,715	)		278,383,501
Other Investments:
Short-term investments		8,800,000		—		—			8,800,000
Equity securities		12,636,230		525,887		(325,820	)		12,836,297

Total Investments	$	302,446,451	$	960,882	$	(3,387,535	)		300,019,798

The amortized cost and fair value of held-to-maturity securities at March 31, 2006 by contractual maturity, are shown below.


	Amortized value		Estimated Fair Value
	(Unaudited)		(Unaudited)
Due in one year or less		—		—
Due in one year through five years		—		—
Due in five years through ten years	$	29,479,437	$	28,659,498
Due in ten through twenty years		12,462,758		12,122,344
Due in over twenty years		227,449		214,227

Total	$	42,169,644	$	40,996,069

The amortized cost and fair value of available-for-sale securities at March 31, 2006 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.


	Amortized value		Estimated Fair Value
	(Unaudited)		(Unaudited)
Due in one year or less	$	7,105,477	$	7,071,578
Due in one year through five years		57,613,417		56,934,377
Due in five years through ten years		130,763,167		128,644,307
Due in ten through twenty years		53,827,199		53,066,132
Due in over twenty years		513,833		513,854
Mortgage-Backed securities		1,222,460		1,203,907

Total	$	251,045,553	$	247,434,155

For the three months ended March 31, 2006, the Company held no investments that were rated below investment grade or not rated by an independent rating agency. For the three months ended March 31, 2006 the Company held no investments below an “A” rating.

Proceeds from sales of fixed maturity and equity securities and gross realized gains and losses on sales as well as other-than-temporary impairment charges are shown below:


	Three Months Ended March 31
	2006			2005
	(Unaudited)
Proceeds		9,319,355			60,775,296
Gross realized gains — available for sale		193,825			473,622
Gross realized losses — available for sale		(9,376	)		(81,522	)

There were no securities that were considered to be other-than-temporarily impaired as of March 31, 2005 or December 31, 2005. No other than temporary impairments were recognized for the three months ended March 31, 2006 and 2005.

There are two equity securities having an unrealized loss of $62,637, a fair value of $1,360,137 and an amortized cost of $1,422,774 as of March 31, 2006 which have been in a continuous unrealized loss position for less than six months.

There is one equity security having an unrealized loss of $50,000, a fair value of $950,000 and an amortized value of $1,000,000 as of March 31, 2006 which have been in a continuous unrealized loss position between six and twelve months.

There are three equity and preferred securities having an unrealized loss of $172,357, a fair value of $1,159,883 and an amortized cost of $1,332,240 as of March 31, 2006 which have been in a continuous unrealized loss position for greater than twelve months

There are one hundred forty-six available-for-sale fixed maturity securities having an unrealized loss of $614,519, a fair value of $66,148,046 and an amortized cost of $66,762,565 as of March 31, 2006 which have been in a continuous unrealized loss position for less than six months.

There are two hundred three available-for-sale fixed maturity securities having an unrealized loss of $2,234,426, a fair value of $117,765,816 and an amortized cost of $120,000,242 as of March 31, 2006 which have been in a continuous unrealized loss position between six and twelve months.

There are one hundred nine available-for-sale fixed maturity securities having an unrealized loss of $861,318, a fair value of $46,445,946 and an amortized cost of $47,307,264 as of March 31, 2006 which have been in a continuous unrealized loss position for greater than twelve months.

There are eighteen held-to-maturity fixed maturity securities having an unrealized loss of $612,839, a fair value of $18,946,231 and an amortized cost of $19,559,070 as of March 31, 2006 which have been in a continuous unrealized loss position for less than six months.

There are eight held-to-maturity fixed maturity securities having an unrealized loss of $295,778, a fair value of $9,967,161 and an amortized cost of $10,262,939 as of March 31, 2006 which have been in a continuous unrealized loss position between six and twelve months.

There are nine held-to-maturity fixed maturity securities having an unrealized loss of $264,968, a fair value of $12,029,321 and an amortized cost of $12,294,289 as of March 31, 2006 which have been in a continuous unrealized loss position for greater than twelve months.

The components of net investment income earned were as follows:


	Three Months Ended March 31
	2006			2005
Investment income:
Interest income	$	3,729,578		$	2,119,000
Dividend income		102,615		$	206,575

Interest income		3,832,193			2,325,575
Interest expenses		(42,774	)		(43,549	)

Net investment income	$	3,789,419		$	2,282,026

5. Reserves for Losses and Loss Adjustment Expenses

The changes in unpaid losses and loss adjustment expense reserves are summarized as follows (in thousands):


							For the year
	For the three months						ended
	ended March 31,						December 31,
	2006			2005			2005
Balance as of beginning of year	$	219,361		$	184,283		$	184,283
Less reinsurance recoverable on unpaid losses		(28,069	)		(24,936	)		(24,936	)

Net balance as of beginning of period		191,292			159,347			159,347

Incurred related to:
Current period		25,042			33,283			122,728
Prior period		104			(456	)		10,066

Total incurred		25,146			32,827			132,794

Paid related to:
Current period		2,458			5,270			42,301
Prior period		26,350			20,204			58,548

Total paid		28,808			25,474			100,849

Net balance as of period end		187,630			166,700			191,292
Plus reinsurance recoverable on unpaid losses		27,159			25,223			28,069

Balance as of period end	$	214,789		$	191,923		$	219,361

For the three months ended March 31, 2006, we increased reserves for prior years by $0.1 million. This increase is due to a re-evaluation of ceded loss recoveries on certain claims. For the three months ended March 31, 2005, we reduced reserves for prior years by $0.5 million because actual loss experience, especially no-fault coverage was lower than expected due to reduced claims frequency. 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.

6. Share-based Compensation

Effective January 1, 2006, using the modified prospective method, the Company adopted Statement of Financial Accounting Standards No. 123R, Share Based Payment (SFAS 123R) to account for its share-based compensation plans. SFAS 123R requires share-based compensation expense recognized since January 1, 2006, to be based on the following: a) grant date fair value estimated in accordance with the original provisions of SFAS 123 for unvested options granted prior to the adoption date; and b) grant date fair value estimated in accordance with the provisions of SFAS 123R for unvested options granted subsequent to the adoption date. Prior to January 1, 2006, the Company accounted for share-based payments using the intrinsic-value-based recognition method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) as permitted by Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), which the Company had adopted in 1996.

The following table presents the Company’s pro forma net income (loss) for the three months ended March 31, 2005, assuming the Company had used the fair value method (SFAS No. 123) to recognize compensation expense with respect to its options:


	Three Months
	Ended March 31,
	2005
Net income — as reported	$	4,372,626
Plus: Stock-based employee compensation expense recorded against income		126,733
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(128,042	)
Pro forma net income	$	4,371,317
Net income per weighted average shareholding
Basic — as reported	$	0.88
Basic — proforma	$	0.88
Diluted — as reported	$	0.78
Diluted — proforma	$	0.78

The adoption of SFAS 123R’s fair value method has not resulted in additional share-based expense (a component of other operating and general expenses) in relation to stock options for the quarter ended March 31, 2006 as all outstanding options were fully vested as of January 1, 2006. Therefore, for the three months ended March 31, 2006, the adoption of SFAS 123R in relation to stock options has not effected net income or earnings per share.

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 employee stock-options was estimated at the date of grant using the Black-Scholes valuation model with the following weighted average assumptions:


	For the three months
	ended March 31,
	2005
Volatility factor		0.0%
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 March 31, 2006:


				Weighted Average
	Number of 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		$	.31

Granted		—			—
Exercised		(21,500	)	$	(1.17	)
Forfeited		—			—

Balance Outstanding at March 31, 2006		376,250		$	2.38

The following table summarizes information about stock options outstanding at March 31, 2006:


Options Outstanding							Options Exercisable
			Weighted Average
Range of	Number of Stock		Contractual Life		Weighted Average		Number of Stock		Weighted Average
Exercise Prices	Options		(in yrs)		Exercise Price		Options		Exercise Price
0.60		43,000		6.20		0.60		43,000		0.60
.98 — 1.29		107,500		2.44		1.16		107,500		1.16
2.5 — 2.89		182,750		2.04		2.63		182,750		2.63
6.14		43,000		7.04		6.14		43,000		6.14

		376,250		3.20		2.38		376,250		2.38

As of December 31, 2005, all of the Company’s options were fully vested and the Company did not award any options during the three months ended March 31, 2006.

During the three months ended March 31, 2006, 21,500 share options were exercised for the Company’s common stock. The Company received additional consideration of approximately $25,000 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 grant.

The following table summarizes information with respect to stock appreciation rights outstanding as of March 31, 2006:


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

Granted		343,000	$	9.94
Exercised		—		—
Forfeited		—		—

Balance Outstanding at March 31, 2006		343,000	$	9.94

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 during the three months ended March 31, 2006 was estimated at the date of grant using the Black-Scholes valuation model with the following weighted average assumptions:


	For the three
	months ended
	March 31,
	2006
Volatility factor		30.7%
Risk-free interest yield		4.8%
Dividend yield		0.0%
Average life	5.8 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.

As a result of the adoption of SFAS 123R, the Company has reported, as a component of other liabilities on the balance sheet and other operating and general expenses on the statement of income, share-based compensation liability of approximately $45,000 at March 31, 2006. For the three months ended March 31, 2006, this additional share-based compensation lowered pre-tax earnings by $45,000, lowered net income by $30,460, and had no effect on basic earnings per share.

At March 31, 2006, the aggregate fair value of all outstanding SARS was approximately $1,389,000 with a weighted average remaining contractual term of 9.97 years. The total compensation cost related to non-vested awards not yet recognized was approximately $1,344,000 with an expense recognition period of 2 years and 9 months.

7. Contingencies and Commitments

In the course of pursuing its normal business activities, the Company is involved in various legal proceedings and claims. Management does not expect that amounts, if any, which may be required to be paid by reason of such proceedings or claims will have a material effect on the Company’s financial position or statement of operations.

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, statement of operations 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 the three months ended March 31, 2006 and 2005 was $229,370 and $229,738, 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 the three months ended March 31, 2006 and 2005 was $53,100 and $53,100, respectively.

Aggregate minimum rental commitments of the Company as of March 31, 2006 are as follows:


Year	Amount
2006		650,699
2007		867,599
2008		796,799
2009 and thereafter		545,999

Total	$	2,861,096

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 Fund and Assessment — 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.

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 proportion to 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 income statement impact. 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 three months ended March 31, 2006 and 2005, Proformance was assessed $0 and $0, 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 NJPLIGA balances and amounts as of and for the three months ending March 31, 2006 and 2005 is as follows:


	2006		2005
Payable	$	3,573,563	$	2,980,240
Paid		—		2,370,085

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 proportion to our net direct written premiums on personal auto business for the prior calendar year compared 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 March 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 writes and services the business in exchange for an agreed upon fee. For the comparable period in the prior year we had entered into LAD agreements with Clarendon National Insurance Company and Auto One Insurance Company. For the three months ended March 31, 2006 and 2005 the Company was assessed LAD fees of $30,348 and $140,413, respectively, in connection with payments to Clarendon National Insurance Company under the LAD agreement. For the three months ended March 31, 2006, the Company received a reimbursement from Auto One Insurance Company in the amount $15,636 related to the 2005 year. For the three months ended March 31, 2005 the Company was assessed LAD fees $37,090 in connection with payments made to Auto One Insurance Company, under the LAD agreement. For the three months ended March 31, 2006 and 2005, the Company would have been assigned $606,958 and $3,937,153 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 in proportion to our net direct written premiums on commercial auto business for the prior calendar year compared to the corresponding direct written premiums for commercial auto business written in New Jersey for such year.

Proformance records its CAIP assignment on its books as assumed business as required by the State of New Jersey. For the three months ended March 31, 2006 and 2005, the Company has been assigned $276,771, and $470,261 of premiums, and $383,949 and $330,341 of losses, respectively, by the State of New Jersey under the CAIP. On a quarterly basis, the State of New Jersey remits a member a participation report and a 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 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 other underwriting, acquisition and insurance related expenses. For the three months ended March 31, 2006 and 2005, we have been assessed $389,243 and $547,545, 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 three months ended March 31, 2006 and 2005, the Company received reimbursements in the amount of $269,258 and $351,110.

8. Net Earnings Per Share

Basic net income 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 share 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 earnings per share:


	For the three months ended March 31,
	2006		2005
	(Unaudited)
Net Income applicable to common stockholders		3,984,694		4,372,626
Weighted average common shares — basic		11,207,302		4,941,990
Effect of dilutive securities:
Options		288,005		672,950

Weighted average common shares — diluted		11,494,925		5,614,940

Basic Earnings Per Share	$	0.36	$	0.88

Diluted Earnings per Share	$	0.35	$	0.78

For the three months ended March 31, 2005, the amount of “Effect of dilutive securities: Options” represents the total amount of options outstanding without using the treasury stock method.

9. Initial Public Offering and Stock Split

Management announced plans for the sale of the Company’s common shares in a proposed initial public offering (the “IPO”) in 2004. In conjunction with the IPO, the Board of Directors of the Company declared a 43-for-1 common share split which became effective on January 14, 2005, immediately after the time the Company filed its amended and restated articles of incorporation. All earnings per share and other share amounts for the periods presented in the condensed consolidated financial statements have been adjusted retroactively for the share split.

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. In addition, the Company intends to increase the capital of the other operating subsidiaries by approximately $10,000,000 to facilitate the execution of its business plans. 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.

10. Replacement Carrier Transactions

Hanover Insurance Company

On February 21, 2006 the Company announced that its subsidiary, Proformance Insurance Company, had entered into a replacement carrier transaction with Hanover Insurance Company (‘Hanover”) whereby Hanover will transfer its renewal obligations for New Jersey auto, homeowners, dwelling fire, personal excess liability and inland marine policies sold through independent agents to Proformance. Under the terms of the transaction, Proformance will offer renewal policies to approximately 16,000 qualified policyholders of Hanover. The Company and Proformance received approval of this transaction from the New Jersey Department of Banking and Insurance (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 addition, the Company will make 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 begins in June 2006.

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 Proformance writes upon renewal.

The Hartford

On September 27, 2005 the Company announced that its subsidiary, Proformance Insurance Company, 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) will 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 will offer renewal policies to approximately 8,500 qualified policyholders of The Hartford. The Company and Proformance 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, Proformance was required to pay to The Hartford a one-time fee of $150,000. In addition, a one-time payment equal to 5% of the written premium of the retained business will be paid to The Hartford within 45 days of 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.

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.

11. Subsequent Events

On May 8, 2006, the Company contributed $9,000,000 to Proformance, thereby increasing its statutory surplus. The additional capital will further enhance the Company’s ability to reduce its reinsurance purchases and retain more of the direct written premiums produced by its Partner Agents.

Item 2. 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 the Company should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-Q.

Safe Harbor Statement Regarding Forward-Looking Statements

Management believes certain statements in this Form 10-Q may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as “may,” “should,” “estimate,” “expect,” “anticipate,” “intend,” “believe,” “predict,” “potential,” or words of similar import. Forward- looking statements are necessarily based on estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and risks, many of which are subject to change. These uncertainties and risks include, but are not limited to, economic, regulatory or competitive conditions in the private passenger automobile insurance carrier industry; regulatory, economic, demographic, competitive and weather conditions in the New Jersey market; significant weather-related or other natural or man-made disasters over which we have no control; the effectiveness of our efforts to manage and develop our subsidiaries; our ability to attract and retain independent agents; our ability to maintain our A.M. Best rating; the adequacy of the our reserves for unpaid losses and loss adjustment expenses; our ability to maintain an effective system of internal controls over financial reporting; market fluctuations and changes in interest rates; the ability of our subsidiaries to dividend funds to us; and our ability to obtain additional capital in the future. 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 us. 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.

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.

During the first three months of 2006, the highly competitive nature of the New Jersey auto insurance market continued to increase as it did in 2005. In response to this continued increase in the competitive landscape of the New Jersey auto insurance market we filed for and received approval for various rate changes designed so that our rates remained competitive for the segment of the New Jersey auto insurance market that we focus on. In addition, our plan for future growth relates to capturing a larger share of our Partner Agents business and cross-selling our automobile, homeowners and business insurance products to their existing customers. This is evidenced by a 55.7% increase in commercial insurance business written during the first three months of 2006 compared to the comparable period in 2005, as well as the fact that our package percentage continued to increase indicating that we have continued our success in packaging the mono-line auto business with the related homeowners policy.

2005 was a transitional year for National Atlantic. The $62 million in net proceeds raised through our IPO in April 2005 strengthened our Company’s financial position, which we believe put us in a position to become a much more aggressive competitor in the New Jersey marketplace. We perceive that the New Jersey auto insurance market migrated from an essentially non-competitive to a highly competitive environment during 2005. In addition, personal lines automobile business has historically made up the largest percentage of our overall business, however we began a transition in 2005 from writing predominantly mono-line automobile business to writing increasing amounts of package personal lines policies that include homeowners, umbrella, boat and specialty coverages in addition to the automobile coverage.

For the three months ended March 31, 2006 our direct written premium decreased by $23 million to $37.3 million from $60.3 million in the comparable 2005 period. This 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 $27.2 million due to the fact that 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. In addition, new business generated by our partner agents was $6.1 million, offset by attrition of existing business of $1.9 million.

As of March 31, 2006, our shareholders’ equity was $141.2 million, up from shareholders’ equity of $138.2 million as of December 31, 2005, reflecting an 8.97% compound annual growth rate. Included in shareholders’ equity is $62.2 million as a result of our initial public offering, which was completed on April 21, 2005.

On April 28, 2006 A.M. Best Co. upgraded the financial strength rating of The Proformance Insurance Company to B+ (Very Good) from B (Fair). Concurrently, A.M. Best upgraded the issuer credit ratings (ICR) to “bbb-“from “bb” of Proformance and to “bb-” from “b-” of its holding company, National Atlantic Holdings Corporation. All ratings were issued with a stable outlook. Ratings are based on factors that concern policyholders and agents and not upon factors concerning investors.

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 which are 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 March 31, 2006, 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		21.8	%
Tier One		1.00		68.4	%
Tier Two		1.70		8.6	%
Tier Three		2.25		.4	%
Tier Four		2.60		.8	%

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 and GEICO, 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.

As a result of our replacement carrier 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 the occurrence of 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.

On September 27, 2005, Proformance consummated 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) have transferred 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 will offer renewal policies to approximately 8,500 qualified policyholders of The Hartford. We received final approval of this transaction from the New Jersey Department of Banking and Insurance (“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, a one-time payment equal to 5% of the written premium of the retained business will be paid to The Hartford within 45 days of 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.

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 will 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 will offer 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 Hanover to reimburse the Hanover for its expenses associated with this transaction. In addition, the Company will make two annual payments equal to 5% of the written premium on renewed business for the preceding twelve months, calculated at the 12 month and 24 month anniversaries, 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.

The change in the structure of the replacement carrier transactions with Hanover and Hartford as compared to historical replacement carrier transactions with OCIC, Met and Sentry, where we are paying fees as opposed to receiving funds to take on this business is related to several factors including the changing conditions in the New Jersey auto insurance market (including, increased competition), as well as the increased capitalization of Proformance mainly as a result of our successful initial public offering. Prior to our initial public offering and related increased capitalization of Proformance, the New Jersey Department of Banking and Insurance required the companies transferring renewal rights to Proformance to pay fees to Proformance to provide additional capital to support those books of business. Proformance now has the capital to support the renewals of the Hartford and Hanover books of business.

During the first three months of 2006, the highly competitive nature of the New Jersey auto insurance market continued to increase as it did in 2005. Our plan for future growth relates to capturing a larger share of our Partner Agents business and cross-selling our automobile, homeowners and business insurance products to their existing customers.

The Company reported, as a component of other liabilities on the balance sheet and other operating and general expenses in the statement of income, share-based compensation liability of approximately $45,000 at March 31, 2006.

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.

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 NAIA from third party business and revenue from our contract with AT&T in 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 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 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.

Loss and Loss Adjustment Expenses Reserves

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.

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 review incurred but not yet reported reserves quarterly and make adjustments if necessary.

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.

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 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.

We have made a change in a key assumption to the estimates of liabilities for loss and loss adjustment expenses for the three months ended March 31, 2006. Changes in reserve estimates evolve over a period of time and we make reserve adjustments in the period that we consider relevant factors to be present which represent what we consider to be reliable trends on which to base such adjustments. As such, during the first three months of 2006, there was a change in the loss reserving procedures implemented by our claims department. Higher initial (factor) reserves are being posted for new liability claims and the timeframes for establishing an ultimate value of liability has been accelerated. As a result, we placed more reliance on paid loss methods than on incurred loss development techniques.

The table below sets forth the types of reserves we maintain for our lines of business and indicates the amount of reserves as of March 31, 2006 for each line of business.

National Atlantic Holdings Corporation
Breakout of Reserves by Line of Business
As of March 31, 2006


			Assumed						Total Balance
	Direct Case		Case				Assumed		Sheet
	Reserves		Reserves		Direct IBNR		IBNR		Reserves
	($ in thousands)
Line of Business:
Fire	$	—	$	26	$	51	$	—	$	77
Allied		—		3		—		—		3
Homeowners		3,127		—		6,191		—		9,318
Personal Auto		81,849		6		88,415		—		170,270
Commercial Auto		11,375		1,276		16,911		1,269		30,831
Other Liability		470		—		3,818		—		4,289


Total Reserves	$	96,821	$	1,310	$	115,388	$	1,269	$	214,789


Reinsurance Recoverables on Unpaid Losses										(27,159	)


Total Net Reserves									$	187,630

In establishing our net reserves as of March 31, 2006, our actuaries determined that the range of reserve estimates at that date was between $172.2 million and $200.7 million. The amount of net reserves at March 31, 2006, which represents the best estimate of management and our actuaries within that range, was $187.6 million. There are two major factors that could result in ultimate losses below management’s best estimate:

	•		The volume of reported losses and reported claim frequency for the accident year 2005 are at a lower rate than prior periods, especially for personal auto liability. If this development continues, reserves for accident year 2005 could be redundant.

	•		We believe that the claims department has improved its claims handling practices during the past two years with regard to claims reserving and settlement. These improvements could result in lower loss development factors than those which currently underlie our actuarial estimates.

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

•

Loss trends (both frequency and severity) have been declining in recent years in the New Jersey personal auto insurance market. If loss trends become unfavorable, our reserves could be deficient. In addition, the DiProspero v. Penn decision of the New Jersey Supreme Court, discussed above, which potentially increases a claimant’s right to sue for serious injury, could impact future claims frequency.

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.

Investment Accounting Policy — Impairment

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. The Company has complied with the disclosure requirements of FSP-115, which were effective for periods which began after December 15, 2005. The Company’s adoption of FSP 115-1 did not have a material impact on the Company’s consolidated financial statements.

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. Underwriting profitability is subject to significant fluctuations due to competition, catastrophic events, economic and social conditions and other factors.

Results of Operations

decreased by $27.2 million due to the fact that 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. In addition, new business generated by our partner agents was $6.1 million, offset by attrition of existing business of $1.9 million.

The table below shows certain of our selected financial results for the three months ended March 31, 2006 and 2005:


	For the three months
	ended March 31,
	2006		2005
Direct written premiums	$	37,332	$	60,270
Net written premiums		35,241		56,786
Net earned premiums		38,846		47,370
Investment income		3,789		2,282
Net realized investment gains (losses)		184		392
Other income		372		286

Total revenue	$	43,191	$	50,330


	For the three months
	ended March 31,
	2006		2005
Losses and loss adjustment expenses	$	25,146	$	32,827
Underwriting, acquisition and insurance related		11,660		10,708
Other operating and general expenses		418		335

Total expenses		37,224		43,870
Income before income taxes		5,967		6,461
Income taxes		1,982		2,088

Net income	$	3,985	$	4,373

For the three months ended March 31, 2006 compared to the three months ended March 31, 2005

Direct Written Premiums. Direct written premiums for the three months ended March 31, 2006 decreased by $23.0 million, or 38.1%, to $37.3 million from $60.3 million in the comparable 2005 period. This 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 $27.2 million due to the fact that 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. In addition, new business generated by our partner agents was $6.1 million, offset by attrition of existing business of $1.9 million.

Net Written Premiums. Net written premiums for the three months ended March 31, 2006 decreased by $21.6 million, or 38.0%, to $35.2 million from $56.8 million in the comparable 2005 period. The decrease in net written premiums for the three months ended March 31, 2006 was due to the decrease in direct written premiums for the same period. The Company ceded 6.4% and 6.6% of its direct written premium for the three months ended March 31, 2006 and 2005, respectively.

Net Earned Premiums. Net earned premiums for the three months ended March 31, 2006 decreased by $8.6 million, or 18.1%, to $38.8 million from $47.4 million in the comparable 2005 period. The decline in net earned premiums for the three months ended March 31, 2006 as compared to the same period in the prior year is related to the decline in direct written premium for the three months ended March 31, 2006. Net earned premiums for the three months ended March 31, 2006 is greater than net written premiums in the same period as a result of the decrease in direct written premium during the period offset by the increase in direct written premium which occurred in the comparable 2005 period as a result of the conversion of personal lines policies from six month to twelve month policies.

Investment Income. Investment income for the three months ended March 31, 2006 increased by $1.5 million, or 65.2%, to $3.8 million from $2.3 million in the comparable 2005 period. The increase was due primarily to an increase in invested assets to $302.0 million at March 31, 2006 from $242.4 million at March 31, 2005. The increase in invested assets was primarily due to the capital raised in connection with our initial public offering completed on April 21, 2005. Our average book yield to maturity at March 31, 2006 and 2005 was 5.49% and 5.05%, respectively. The increase in yield was due to the purchase of securities with higher investment yields.

Net Realized Investment Gain (Loss). Net realized investment gain (loss) for the three months ended March 31, 2006 and 2005 were $0.2 million and $0.4 million, respectively.

Other Income. Other income for the three months ended March 31, 2006 and 2005 was $0.4 million and $0.3 million, respectively.

Losses and Loss Adjustment Expenses. Loss and loss adjustment expenses for the three months ended March 31, 2006 decreased by $7.7 million, or 23.5%, to $25.1 million from $32.8 million in the comparable 2005 period. As a percentage of net earned premiums, losses and loss adjustment expenses incurred for the three months ended March 31, 2006 was 64.7% compared to 69.2% for the three months ended March 31, 2005. The ratio of net incurred losses, excluding loss adjustment expenses, to net earned premiums during 2006 was 63.4% compared to 59.5% for the comparable 2005 period. For the three months ended March 31, 2006, we increased reserves for prior years by $0.1 million. This increase is due to a minor re-evaluation of ceded loss recoveries on certain claims.

Underwriting, Acquisition and Insurance Related Expenses. Underwriting, acquisition and insurance related expenses for the three months ended March 31, 2006 increased by $1.0 million, or 9.3%, to $11.7 million from $10.7 million in the comparable 2005 period. As a percentage of net written premiums, our underwriting, acquisition and insurance related expense ratio for the three months ended March 31, 2006 was 33.3% as compared to 18.9% for the comparable 2005 period. The increase in underwriting, acquisition and insurance related expenses is primarily due to a $1.9 million increase in the amortization of deferred acquisition costs. During the three months ended March 31, 2005, unearned premiums increased $11.9 million as a result of the conversion of six to twelve month policies and the related commission expense was $5.9 million, resulting in an increase in the deferred acquisition cost asset of $0.7 million. For the three months ended March 31, 2006, unearned premiums declined $3.6 million, as a result of the decrease in direct written premium and commission expense for the period was $4.2 million, which resulted in the amortization of $1.2 million of the deferred acquisition cost asset.

Other Operating and General Expenses. Other operating and general expenses for the three months ended March 31, 2006 increased by $0.1 million, or 33.3%, to $0.4 million from $0.3 million in the comparable 2005 period. The increase in other operating and general expenses of $0.2 million is primarily related to an increase in professional fees of $0.1 million.

Income Tax (Benefit) Expense. Income tax expense for the three months ended March 31, 2006 and 2005 was $2.0 million and $2.1 million, respectively. The decrease of $0.1 million in income tax expense for the year ended March 31, 2006 from the same period in the prior year was due to the decrease in income before tax for the same period.

Net (Loss) Income. Net income after tax for the three months ended March 31, 2006 and 2005 was $4.0 million and $4.4 million, respectively. The decrease in net income after tax 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 write. 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 has historically been used to pay taxes.

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.

Our consolidated cash flow provided by operations was $2.5 million and $13.9 million for each of the three months ended March 31, 2006 and 2005, respectively. The cash flow provided by operations for the three months ended March 31, 2006 as compared to the three months ended March 31, 2005 decreased primarily due to a decrease in direct written premiums during the comparable period. In addition, the specific factors that led to the decline are as follows: a decrease in unpaid losses and loss adjustment expenses in the amount of $12.2 million and a decrease in the payable for securities in the amount of $7.3 million. Additionally, as a result of the conversion of six to twelve month policies and the decline in direct written premiums during the three months ended March 31, 2006, the change in cash flow related to premiums receivable was an increase of $16.5 million, partially offset by a decrease in unearned premiums in the amount of $15.6 million.

For the three months ended March 31, 2006 and 2005, our consolidated cash flow used for investing activities was $3.9 million and $25.3 million, respectively. The decrease in cash used in investing activities for the three months ended March 31, 2006 as compared to the same period in the prior year is related primarily to the conversion of six month to twelve month policies which began on January 1, 2005. This conversion process led to an increase in premium writings for the period ended March 31, 2005 in the amount of $12.4 million which was subsequently invested by the Company. For the three months ended March 31, 2006 our direct written premiums decreased by $23 million to $37.3 million from $60.3 million in the comparable 2005 period.

We had no cash flow from financing activities for each of the three months ended March 31, 2006 and 2005.

The effective duration of our investment portfolio was 5.9 years as of March 31, 2006. By contrast, our liability duration was approximately 3.5 years as of March 31, 2006. 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 and investing activities are sufficient to meet those obligations. Pursuant to our tax planning strategy, we invested the $40.6 million received from the Ohio Casualty 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 6.3 years to 3.5 years.

Management believes that the current level of cash flow from operations and investing activities 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.

On April 21, 2005, an initial public offering of 6,650,000 shares of our common stock (after the aforementioned 43-for-1 stock split) was completed. We sold 5,985,000 shares resulting in net proceeds (after deducting issuance costs and the underwriters discount) of $63,406,361. We contributed $43,000,000 to Proformance, which increased its statutory surplus. The additional capital will permit us to reduce our reinsurance purchases and to retain more of the direct written premiums produced by our partner agents. In addition, we intend to increase the capital of our other operating subsidiaries by approximately $10,000,000 to facilitate the execution of their business plans. The remainder of the capital raised by us will be used for general corporate purposes, including but not limited to possible additional increases to the capitalization of our existing subsidiaries.

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 New Jersey Department of Banking and Insurance (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 the date hereof, Proformance is not permitted to pay any dividends without the approval of the Commissioner as it has negative unassigned surplus as a result of historical underwriting losses.

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 and seek stronger financial strength ratings for Proformance, both of which 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 Company 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 the three months ended March 31, 2006 and 2005 was $229,370 and $229,738, respectively.

Aggregate minimum rental commitments of the Company as of March 31, 2006 are as follows:


Year	Amount
2006		650,699
2007		867,599
2008		796,799
2009 and thereafter		545,999

Total	$	2,861,096

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.

Investments

As of March 31, 2006 and December 31, 2005, Proformance maintained a high quality investment portfolio.

As of March 31, 2006 and December 31, 2005, 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 of December 31, 2005, fixed maturity securities having an unrealized loss of $1,773,955 a fair value of $184,473,102 and an amortized cost of $186,247,057 were in a continuous unrealized loss position for less than twelve months. As of March 31, 2006, available-for-sale fixed maturity securities having an unrealized loss of $2,848,945 a fair value of $183,913,862 and an amortized cost of $186,762,807 were in a continuous unrealized loss position for less than twelve months. As of March 31, 2006, held-to-maturity fixed maturity securities having an unrealized loss of $908,617 a fair value of $28,913,392 and an amortized cost of $29,822,009 were in a continuous unrealized loss position for less than twelve months

As of December 31, 2005, equity and preferred securities having an unrealized loss of $255,490 a fair value of $2,902,740 and an amortized cost of $3,158,230 were in a continuous unrealized loss position for less than twelve months. As of March 31, 2006, equity and preferred securities having an unrealized loss of $112,637 a fair value of $2,310,137 and an amortized cost of $2,422,774 were in a continuous unrealized loss position for less than twelve months.

As March 31, 2006, gross unrealized losses for available-for-sale totaled $3,995,257. This amount was calculated using the following data: $2,830,537 of unrealized losses related to securities of the U.S. Government, government agencies and authorities, $730,443 related to state, local and government agencies, $126,892 related to industrial and miscellaneous, $22,391 related to mortgage backed securities and $284,994 related to equity securities.

As March 31, 2006, gross unrealized losses for held-to-maturity securities totaled $1,173,585. This amount was calculated using the following data: $ 89,773 of unrealized losses related to securities of the U.S. Government, government agencies and authorities, $103,032 related to state, local and government agencies and $980,780 related to industrial and miscellaneous.

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 income statement 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 1.69% of cost or amortized cost of the investment portfolio as of March 31, 2006. Fixed maturities represented 95.9% of the investment portfolio and 94.5% of the unrealized losses as of March 31, 2006.

There are three equity and preferred securities having an unrealized loss of $172,357, a fair value of $1,159,883 and an amortized cost of $1,332,240 as of March 31, 2006 which has been in a continuous unrealized loss position for greater than 12 months. There were one hundred and nine available-for-sale fixed maturity securities having an unrealized loss of $861,318, a fair value of $46,445,946 and an amortized cost of $47,307,264 as of March 31, 2006 which have been in a continuous unrealized loss position for greater than 12 months. There were nine held-to-maturity fixed maturity securities having an unrealized loss of $264,968, a fair value of $12,029,321 and an amortized cost of $12,294,289 as of March 31, 2006 which have been in a continuous unrealized loss position for greater than 12 months.

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 March 31, 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 either held-to-maturity or 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 market value. The amount of the write-down will be calculated as the difference between cost and fair market value and accounted for as a realized loss for accounting purposes which negatively impacts future earnings.

As of March 31, 2006 and as of December 31, 2005, our fixed income portfolio was 63.2% and 62.3%, respectively, concentrated in U.S. government securities and securities of government agencies and authorities that carry an average rating of “Aaa” from Moody’s, respectively.

The following summarizes our unrealized losses by designated category as of March 31, 2006.

Securities in an Unrealized Loss Position for Less than 6 Months


					Unrealized			% of Unrealized
	Amortized Cost		Fair Value		Losses			Loss
Investment Grade Fixed Income	$	86,321,634	$	85,094,277	$	(1,227,357	)		(1.42	)%
Equities	$	1,422,774	$	1,360,137	$	(62,637	)		(4.40	)%

Securities in an Unrealized Loss Position for 6 to 12 Months


					Unrealized			% of Unrealized
	Amortized Cost		Fair Value		Losses			Loss
Investment Grade Fixed Income	$	130,263,181	$	127,732,917	$	(2,530,264	)		(1.94	)%
Equities	$	1,000,000	$	950,000	$	(50,000	)		(5.0	)%

Securities in an Unrealized Loss Position for 12 to 24 Months


					Unrealized			% of Unrealized
	Amortized Cost		Fair Value		Losses			Loss
Investment Grade Fixed Income	$	59,601,553	$	58,475,327	$	(1,126,226	)		(1.89	)%
Equities	$	1,332,240	$	1,159,883	$	(172,357	)		(12.94	)%

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


					Unrealized			% of Unrealized
	Amortized Cost		Fair Value		Losses			Loss
Investment Grade Fixed Income	$	276,186,369	$	271,302,521	$	(4,883,848	)		(1.77	)%
Equities	$	3,309,969	$	3,141,220	$	(168,749	)		(5.10	)%

Contractual Obligations

The following table summarizes our long-term contractual obligations and credit-related commitments as of March 31, 2006.


	Less than 1						More than 5
	Year		1-3 Years		3-5 Years		Years		Total
Loss and Loss Adjustment Expenses (1)	$	62,668,141	$	91,000,144	$	30,958,812	$	3,002,067	$	187,629,164
Operating Lease Obligations (2)	$	867,599	$	1,611,298	$	382,199	$	––	$	2,861,096


(1)		As of March 31, 2006 we had property and casualty reserves of $187.6 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 33.4% will be paid within a year, an additional 48.5% between one and three years, 16.5% between three and five years and 1.6% 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 March 31, 2006 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 effect on our financial condition, changes in financial condition, results of operations, revenues or expenses, liquidity, capital expenditures or capital resources.

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.

Adoption of New Accounting Pronouncements

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. The adoption of SFAS 123R did not have a material effect on the Company’s interim condensed consolidated financial statements for the three months ended March 31, 2006. For further details, please refer to Note 6 Share-based Compensation of our unaudited financial statements as of and for the three months ended March 31, 2006.

Item 3. 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 instruments 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, convertible securities, 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 (which is equal to the book value for all our securities) for the periods indicated.


	Fair Value
	-100 Basis Point		As of		+100 Basis Point
	Change		3/31/2006		Change
			($ in thousands)
Fixed maturities and preferred stocks	$	307,342	$	290,109	$	272,877
Cash and cash equivalents		38,384		38,384		38,384

Total	$	345,726	$	328,493	$	311,261


	Fair Value
	-100 Basis Point		As of		+100 Basis Point
	Change		12/31/2005		Change
			($ in thousands)
Fixed maturities and preferred stocks	$	295,709	$	278,892	$	262,075
Cash and cash equivalents		39,837		39,837		39,837

Total	$	335,546	$	318,729	$	301,912

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 $1,262,018 and $1,283,629 respectively, based on our equity positions as of March 31, 2006 and December 31, 2005.

As of March 31, 2006, approximately 4.1 % of our investment portfolio were 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 March 31, 2006, approximately 63.2% of our fixed income security portfolio was invested in U.S. government and government agency fixed income securities, 34.3% was invested in other fixed income securities rated “Aaa”/“Aa” by Moody’s, and 2.5% was invested in fixed income securities rated “A” by Moody’s. As of March 31, 2006, we do not own any securities with a rating of less than “A.”

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.

Item 4. Controls and Procedures.

Evaluation of disclosure controls and procedures

As of the end of the period covered by this report and pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”), our management, including our Chief Executive Officer and Chief Accounting Officer, conducted an evaluation of the effectiveness and design of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Accounting Officer concluded, as of the end of the period covered by this report, that because of the material weaknesses in internal control over financial reporting previously identified by management that are still in the process of being remediated, as described below, our disclosure controls and procedures were not effective as of March 31, 2006.

Changes in Internal Control over Financial Reporting

Except as set forth below, there was no change in our internal control over financial reporting during the three months ended March 31, 2006, that materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

Our management and independent registered public accounting firm previously determined that there were material weaknesses in our internal controls over financial reporting. In 2003, we recognized a need to enhance our financial reporting resources and processes, in particular as we prepared for our initial public offering. Accordingly, we took and will continue to take steps to enhance our financial reporting resources and processes, including, among others, hiring Frank J. Prudente as Executive Vice President, Treasurer and Chief Accounting Officer (Principal Financial Officer).

During their audit of our financial statements for the nine months ended September 30, 2004, on which they have issued their report dated December 20, 2004, our independent registered public accounting firm identified certain reportable conditions that constitute material weaknesses in our internal controls over financial reporting, including weaknesses (i) in our ability to report elements of our financial statements processed at the end of reporting periods, such as loss and loss adjustment expenses, deferred acquisition costs and expense accruals, (ii) in our ability to account for and report unique transactions or events, such as revenue recognition for our replacement carrier transactions and (iii) in the quality of data supporting certain of our financial statement elements because of our reliance on manual and other in-house information tracking systems. Our independent registered public accounting firm also identified material weaknesses in our internal controls in that we did not have an actuarial expert on our management team and we had not identified and designated a chief accounting officer.

Our audit committee and our management team reviewed our independent registered public accounting firm’s findings and acknowledged and agreed with the matters identified as material weaknesses. In response, we initiated corrective actions to address these control deficiencies and will continue to evaluate the effectiveness of our

internal controls and procedures on an ongoing basis, taking corrective action as appropriate. These actions were designed to strengthen our internal control over financial reporting and address the material weaknesses identified. Our corrective actions to address the control deficiencies identified by us and our independent registered public accounting firm, including the following:

	•		we designated Frank J. Prudente as our Chief Accounting Officer and gave him authority and responsibility with respect to all accounting matters to enhance proper end-of-period reporting and data quality issues;

	•		we hired Bruce C. Bassman as Senior Vice President and Chief Actuarial Officer, which we believe has enhanced our ability to report end-of-period balances;

	•		we hired an internal audit manager;

	•		we replaced our director of GAAP financial reporting;

	•		during the period ended September 30, 2005, we hired a new director of information technology reporting directly to Bruce C. Bassman;

	•		we are in the process of completing the implementation of a new reinsurance accounting system which is addressing the material weaknesses in our reinsurance accounting by eliminating our use of manual spreadsheets; and which is expected to be operational by the end of the second quarter of 2006;

	•		we have upgraded our systems for accounting for premiums receivable by working with the vendor for that system, who has performed a diagnostic on that system, which has enhanced our ability to properly record premium receivable balances at the end of reporting periods;

	•		On December 19. 2005, we engaged KPMG, a registered public accounting firm to provide the Company with accounting and financial reporting advisory services.

We believe these actions and our previously implemented enhancements to our financial reporting resources and processes have strengthened and will continue to strengthen our internal controls over financial reporting and addressed and will continue to address the material weaknesses identified by our independent registered public accounting firm. For example, we believe that the hiring of a Chief Actuarial Officer aided in remedying the material weaknesses regarding end-of-period reporting.

Although the full benefits of these changes will be fully realized over time, we believe that the major benefits of these changes, such as the hiring of our Chief Accounting Officer and designation of a Chief Accounting Officer, has assisted in and will continue to aid in remedying our material weaknesses and enhance our financial reporting. We do not believe that the material weaknesses had a material impact on our reported financial results. In addition, we do not expect the potential financial costs of these actions to be material.

PART II

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors

Not Applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On April 21, 2005, we sold 6,650,000 shares of our common stock at $12.00 per share in our initial public officering (IPO). Of this amount, 665,000 shares of our common stock were sold in the IPO by a selling shareholder, for which we received no proceeds. Citigroup Global Markets Inc. acted as the sole bookrunning manager of the IPO, and, together with Cochran, Caronia Securities LLC, Dowling & Partners Securities, LLC, Fox-Pitt, Kelton Inc. and Sandler O’Neill & Partners, L.P., acted as representatives of the underwriters. Total offering proceeds to us were approximately $72 million, less the underwriting discount of approximately $5 million and total fees and expenses of the IPO of approximately $5 million. Accordingly, we received net proceeds of approximately $62 million.

We used the proceeds to contribute $52,000,000 to Proformance, which increased 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.

A summary of the terms of the IPO can be found in our Registration Statement on Form S-1, as amended (File No. 333-117804), which was declared effective by the SEC on July 30, 2004.

Item 3. Defaults Upon Senior Securities.

None.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits

The following documents are filed as part of this report:

11.1		Statement re computation of per share earnings*

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*


*		Filed herewith


	For the three months ended March 31,
	2006			2005
	(Unaudited)			(Unaudited)
Net Income	$	3,985		$	4,373

Other comprehensive income — net of tax:
Net holding losses gains arising during the period		(711	)		(1,998	)
Reclassification adjustment for realized losses included in net income		464			20
Reclassification adjustment for unrealized losses on transfer to held-to-maturity — net		(728	)		—


Total other comprehensive loss		(975	)		(1,978	)

Comprehensive Income	$	3,010		$	2,395


	NATIONAL ATLANTIC HOLDINGS CORPORATION
	By:	/s/ James V. Gorman
		James V. Gorman
		Chairman of the Board of Directors and Chief Executive Officer


	By:	/s/ Frank J. Prudente
		Frank J. Prudente
		Executive Vice President, Chief Accounting Officer and Treasurer (Principal Financial and Accounting Officer)


		Page
		Number
PART I

Item 1.	Financial Statements		1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		36
Item 4.	Controls and Procedures		38

PART II

Item 1.	Legal Proceedings		40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		40
Item 3.	Defaults Upon Senior Securities		40
Item 4.	Submission of Matters to a Vote of Security Holders		40
Item 5.	Other Information		40
Item 6.	Exhibits		40
EX-11.1: STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION