Edgar Filing: JAMES RIVER GROUP, INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant To Section 14(a) of the
Securities Exchange Act of 1934

Filed by the Registrant

Filed By a Party other than the Registrant

Check the appropriate box:


	Preliminary Proxy Statement


	Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))


	Definitive Proxy Statement


	Definitive Additional Materials


	Soliciting Material Pursuant to §240.14a-12

JAMES RIVER GROUP, INC.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the Appropriate Box):


	No fee required.


	Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1) Title of each class of securities to which transaction applies:

common stock, par value $0.01 per share, of James River Group, Inc.

(2) Aggregate number of securities to which transaction applies:

(a) 15,138,708 shares of common stock, (b) options to purchase 2,133,787 shares of common stock and (c) warrants to purchase 149,625 shares of common stock.

(3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

The maximum aggregate value was determined based upon the sum of: (a) 15,138,708 shares of common stock multiplied by the merger consideration of $34.50 per share, (b) options to purchase 2,133,787 shares of common stock multiplied by $22.12 (which is the difference between the merger consideration of $34.50 per share and the weighted average exercise price of $12.38 per share), and (c) warrants to purchase 149,625 shares of common stock multiplied by $24.50 (which is the difference between the merger consideration of $34.50 per share and the exercise price of $10.00 per share). In accordance with Section 14(g) of the Exchange Act, the filing fee was determined by multiplying 0.00003070 by the sum of the preceding sentence.

(4) Proposed maximum aggregate value of transaction:

$573,150,606.94

(5) Total fee paid:

$18,000.00


	Fee paid previously with preliminary materials.


	Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.


	(1)	Amount Previously Paid:


	(2)	Form, Schedule or Registration Statement No.:


	(3)	Filing Party:


	(4)	Date Filed:

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James River Group, Inc.
300 Meadowmont Village Circle, Suite 333
Chapel Hill, North Carolina 27517

October 2, 2007

Dear Stockholder:

You are cordially invited to attend a special meeting of stockholders of James River Group, Inc., which we refer to as James River, to be held at the Courtyard by Marriott Chapel Hill Hotel, 100 Marriott Way, Chapel Hill, North Carolina 27517, on November 6, 2007 at 10:00 a.m. local time.

At the special meeting, we will ask you to (a) approve the adoption of the Agreement and Plan of Merger, dated as of June 11, 2007, which we refer to as the merger agreement, among Franklin Holdings (Bermuda), Ltd., a Bermuda company, which we refer to as Buyer, Franklin Acquisition Corp., a Delaware corporation and a direct, wholly owned subsidiary of Buyer, and James River, and (b) approve the adjournment of the special meeting, if deemed necessary or appropriate, to solicit additional proxies in the event there are not sufficient votes at the time of the special meeting to approve the adoption of the merger agreement. Buyer is a Bermuda-based holding company and member of the D. E. Shaw group, a global investment management firm.

If the merger is completed, each share of common stock of James River, other than treasury shares and shares as to which appraisal rights have been perfected under Delaware law, will be converted into the right to receive $34.50 in cash, without interest and less any applicable withholding tax, as more fully described in the accompanying proxy statement.

A committee of our board of directors formed to evaluate, among other things, the merger, and consisting entirely of non-management directors, developed the material terms of the merger agreement with the assistance of the board committee’s financial and legal advisors for consideration by our board of directors. Our board of directors has unanimously determined that it is in the best interests of James River and our stockholders to enter into, and approved and declared the advisability of, the merger agreement. Our board of directors unanimously recommends that you vote ‘‘FOR’’ the proposal to approve the adoption of the merger agreement and ‘‘FOR’’ the proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies in the event that there are not sufficient votes in favor of the adoption of the merger agreement at the time of the special meeting.

The merger may not be completed unless the merger agreement is approved by a majority of the votes entitled to be cast by the holders of the outstanding shares of our common stock, voting together as a single class. Stockholders holding approximately 45% of the outstanding shares of our common stock have agreed to vote in favor of the adoption of the merger agreement. The proxy statement accompanying this letter provides you with more specific information concerning the special meeting, the merger agreement and the transactions contemplated by the merger agreement. We encourage you to carefully read the accompanying proxy statement, including the annexes.

Your vote is very important. If you fail to vote by proxy or in person, or fail to instruct your broker on how to vote, it will have the same effect as a vote against the proposal to adopt the merger agreement.

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Whether or not you plan to attend the special meeting, please complete, date, sign and return, as promptly as possible, the enclosed proxy in the accompanying reply envelope, or submit your proxy by telephone or via the Internet. If you have Internet access, we encourage you to record your vote via the Internet. If you attend the special meeting and vote in person, your vote by ballot will revoke any proxy previously submitted. If your shares are held in an account at a broker, bank or other nominee, you should instruct your broker, bank or other nominee how to vote your shares using the separate voting instruction form furnished by your broker, bank or other nominee. The enclosed proxy card contains instructions regarding voting.

Thank you for your cooperation and support.

Sincerely,

Richard W. Wright
Chairman of the Board

Neither the Securities and Exchange Commission nor any state securities regulatory agency has approved or disapproved the merger, passed upon the merits or fairness of the merger or passed upon the adequacy or accuracy of the disclosure in the enclosed documents. Any representation to the contrary is a criminal offense.

The proxy statement is dated October 2, 2007, and is first being mailed to stockholders on or about October 3, 2007.

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James River Group, Inc.
300 Meadowmont Village Circle, Suite 333
Chapel Hill, North Carolina 27517

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held On November 6, 2007

Dear Stockholder:

Notice is hereby given that a special meeting of stockholders of James River Group, Inc., a Delaware corporation, which we refer to as James River or the Company, will be held at the Courtyard by Marriott Chapel Hill Hotel, 100 Marriott Way, Chapel Hill, North Carolina 27517, on November 6, 2007 at 10:00 a.m. local time. The purposes of the special meeting will be:

To consider and vote upon a proposal to approve the adoption of the Agreement and Plan of Merger, dated as of June 11, 2007, which we refer to as the merger agreement, among Franklin Holdings (Bermuda), Ltd., a Bermuda company, which we refer to as Buyer, Franklin Acquisition Corp., a Delaware corporation and a direct, wholly owned subsidiary of Buyer, and the Company. Buyer is a Bermuda-based holding company and member of the D. E. Shaw group, a global investment management firm. Upon completion of the merger, each share of common stock of the Company, other than treasury shares and shares as to which appraisal rights have been perfected under Delaware law, will be converted into the right to receive $34.50 in cash, without interest and less any applicable withholding tax.


2.	To consider and vote upon a proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes at the time of the special meeting to approve the adoption of the merger agreement.


3.	To transact any other business that may properly come before the special meeting or any adjournment thereof.

A committee of our board of directors formed to evaluate, among other things, the merger, and consisting entirely of non-management directors, developed the material terms of the merger agreement with the assistance of the board committee’s financial and legal advisors for consideration by our board of directors. Our board of directors has unanimously determined that it is in the best interests of the Company and its stockholders to enter into, and approved and declared the advisability of, the merger agreement. Our board of directors unanimously recommends that you vote ‘‘FOR’’ the proposal to approve the adoption of the merger agreement and ‘‘FOR’’ the proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies in the event that there are not sufficient votes in favor of the adoption of the merger agreement at the time of the special meeting.

The merger may not be completed unless the merger agreement is approved by a majority of the votes entitled to be cast by the holders of the outstanding shares of common stock of the Company, voting together as a single class. Stockholders holding approximately 45% of the outstanding shares of our common stock have agreed to vote in favor of the adoption of the merger agreement. Only stockholders of record on September 26, 2007 are entitled to notice of and to vote at the special meeting or at any adjournment thereof. A list of James River stockholders eligible to vote at the special meeting will be available at our principal offices at 300 Meadowmont Village Circle, Suite 333,

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Chapel Hill, North Carolina during normal business hours from October 26 through November 5, 2007, and will also be available at the special meeting and at any adjournment thereof.

Please do not send your stock certificates with your proxy. If the merger is completed, you will be sent instructions regarding the surrender of your stock certificates.

Stockholders who do not vote in favor of the proposal to adopt the merger agreement will have the right to seek appraisal of the fair value of their shares if the merger is completed, but only if their appraisal rights are perfected under Delaware law. In order to perfect and exercise appraisal rights, stockholders must give written demand for appraisal of their shares before the taking of the vote on the merger at the special meeting and must not vote in favor of the merger. A copy of the applicable Delaware statutory provisions is included as Annex D to the accompanying proxy statement, and a summary of these provisions can be found under ‘‘Appraisal Rights of Dissenting Stockholders’’ in the accompanying proxy statement.

If you need assistance in submitting your proxy or voting your shares of our common stock, or if you have additional questions about the merger, please call Michael T. Oakes, our Chief Financial Officer, at (919) 883-4171.

The merger agreement and the merger are described in the accompanying proxy statement. A copy of the merger agreement is included as Annex A to the accompanying proxy statement. We urge you to read the entire proxy statement and the annexes thereto carefully.

By Order of the Board of Directors,

Judy D. Young
Secretary

Chapel Hill, North Carolina
October 2, 2007

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ANNEXES
Annex A — Agreement and Plan of Merger
Annex B — Form of Voting Agreement
Annex C — Opinion of J.P. Morgan Securities Inc.
Annex D — Section 262 of the Delaware General Corporation Law

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SUMMARY TERM SHEET

The following summary highlights selected information in this proxy statement and may not contain all the information that may be important to you. In order to fully understand the merger, the merger agreement and all the transactions contemplated thereby, you should carefully read this entire proxy statement, its annexes and the documents referred to in this proxy statement. We have included page references to direct you to a more complete description of the items in this summary.

References to James River, the Company, we, our or us in this proxy statement refer to James River Group, Inc. and its subsidiaries, unless otherwise indicated by the context. References to the merger agreement in this proxy statement refer to the Agreement and Plan of Merger, dated as of June 11, 2007, among Franklin Holdings (Bermuda), Ltd., Franklin Acquisition Corp. and the Company.

The Parties to the Merger (page 12)

James River Group, Inc.

James River Group, Inc. is a Delaware corporation headquartered in Chapel Hill, North Carolina. We are an insurance holding company that primarily owns and manages specialty property/casualty insurance company subsidiaries with the objective of consistently earning underwriting profits. Each of our two insurance company subsidiaries is rated ‘‘A−’’ (Excellent) by A.M. Best Company. Founded in September 2002, James River wrote its first policy in July 2003 and currently underwrites in two specialty areas: excess and surplus lines in 48 states and the District of Columbia; and workers’ compensation, primarily for the residential construction industry in North Carolina and Virginia.

Franklin Holdings (Bermuda), Ltd.

Franklin Holdings (Bermuda), Ltd., which we refer to in this proxy statement as Buyer, is a newly formed Bermuda-based holding company and member of the D. E. Shaw group. The D. E. Shaw group is a global investment and technology development firm with more than 1,200 employees, approximately $35 billion in aggregate investment capital and offices in North America, Europe and Asia. Buyer has not engaged in any business activities except activities incidental to its organization and in connection with the transactions contemplated by the merger agreement.

Franklin Acquisition Corp.

Franklin Acquisition Corp., which we refer to in this proxy statement as Merger Sub, is a newly formed Delaware corporation and a direct, wholly owned subsidiary of Buyer. Merger Sub was organized solely for the purpose of completing the merger. Merger Sub has not engaged in any business except activities incidental to its organization and in connection with the transactions contemplated by the merger agreement.

The Special Meeting (page 13)

Time, Place and Purpose of the Special Meeting

The special meeting will be held on November 6, at 10:00 a.m. local time, at the Courtyard by Marriott Chapel Hill Hotel, 100 Marriott Way, Chapel Hill, North Carolina 27517. The purpose of the special meeting is for our stockholders to consider and vote upon a proposal to approve the adoption of the merger agreement and to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies.

Record Date

You are entitled to vote at the special meeting if you owned shares of our common stock at the close of business on September 26, 2007, the record date for the special meeting. You will have one vote for each share of our common stock that you owned on the record date.

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Vote Required for Approval of the Merger Agreement and Adjournment

The affirmative vote of a majority of the votes entitled to be cast by the holders of the outstanding shares of our common stock, voting together as a single class, is required to approve the adoption of the merger agreement. The affirmative vote of a majority of the holders of our common stock present or represented by proxy at the special meeting and entitled to vote on the proposal, voting together as a single class, is required to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies. As of September 26, 2007, the record date for the special meeting, 15,138,708 shares of our common stock were outstanding. This means that to approve the adoption of the merger agreement, 7,569,355 shares or more must vote in the affirmative at the special meeting.

Concurrently with the execution of the merger agreement, Buyer and Merger Sub entered into separate voting agreements with each of Trident II, L.P., HRWCP 1, L.P. and JRG Seven, LLC, and in each case certain related parties (but none of the individual board members), who we refer to in this proxy statement as the Significant Stockholders. The Significant Stockholders collectively own approximately 45% of the outstanding shares of our common stock. Under the terms of the voting agreements, each of the Significant Stockholders has agreed to vote all of its shares of our common stock in favor of the adoption of the merger agreement. Further, all of our directors and executive officers, who collectively with their respective affiliates, excluding the Significant Stockholders, own an additional approximately 7.8% of the outstanding shares of our common stock, have indicated to us that they intend to vote their shares in favor of the adoption of the merger agreement.

The Merger (page 16)

Background of the Merger

A detailed description of the events which led to the proposed merger, including our discussions with Buyer and other parties, is included in this proxy statement beginning on page 16.

Reasons for the Merger; Recommendation of our Board of Directors

A committee of our board of directors formed to evaluate, among other things, the merger, and consisting entirely of non-management directors, developed the material terms of the merger agreement with the assistance of the board committee’s financial and legal advisors for consideration by our board of directors. Our board of directors has unanimously determined that it is in the best interests of James River and our stockholders to enter into, and approved and declared the advisability of, the merger agreement. A discussion of the factors considered by our board of directors in making such determination is included in this proxy statement beginning on page 37.

Opinion of JPMorgan

Our board of directors and the board committee have received an opinion from J.P. Morgan Securities Inc., which we refer to in this proxy statement as JPMorgan, to the effect that, as of the date of the opinion and based upon and subject to the factors and assumptions set forth therein, the merger consideration to be paid to the holders of our common stock is fair, from a financial point of view, to such holders. JPMorgan provided the opinion for the information and assistance of our board of directors and the board committee in connection with their consideration of the transaction, and the opinion is not a recommendation as to how any of our stockholders should vote or act with respect to the merger. The full text of the opinion of JPMorgan which sets forth the assumptions made, matters considered and limits on the review undertaken in connection with the opinion, is attached as Annex C to this proxy statement. We encourage you to carefully read the full text of the opinion.

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Interests of Our Directors and Executive Officers in the Merger

In considering the recommendation of our board of directors, you should be aware that our directors and executive officers may have interests in the merger that are different from, or in addition to, the interests of our stockholders. These interests may present actual or potential conflicts of interest. Our board of directors was aware of these interests and considered them, among other matters, in approving the merger agreement.

The Merger Agreement (page 56)

The Merger

If the merger is completed, Merger Sub will be merged with and into the Company and the Company will continue as the surviving corporation and a wholly owned subsidiary of Buyer. We encourage you to carefully read the merger agreement attached to this proxy statement as Annex A.

Merger Consideration

Subject to the terms and conditions set forth in the merger agreement, at the effective time of the merger, each outstanding share of our common stock, other than treasury shares and shares as to which appraisal rights may have been perfected under Delaware law, will be canceled and converted into the right to receive $34.50 in cash per share, without interest and less any required withholding taxes, which we refer to in this proxy statement as the merger consideration.

Treatment of Options, Warrants and Notes

Stock Options. Under the terms of the merger agreement, upon the completion of the merger, each outstanding vested or unvested option to purchase our common stock will be canceled and the holder will be entitled to receive in cash an amount equal to the difference between the merger consideration and the exercise price of each applicable stock option, without interest and less any required withholding taxes.

Warrants. Under the terms of the merger agreement, upon the completion of the merger, each outstanding warrant to purchase shares of our common stock will be converted into the right to receive, upon exercise of such warrant the merger consideration the holder of such warrant would have been entitled to receive upon completion of the merger if such holder had been, immediately prior to the merger, the holder of the number of shares of our common stock then issuable upon exercise in full of such warrant or, if the holder and the Company agree, canceled and extinguished, and the holder thereof will be entitled to receive, following cancellation an amount in cash equal to the excess of (a) the product of (1) the number of shares of our common stock subject to the warrant and (2) the merger consideration, minus (b) the aggregate exercise price of the warrant, without interest and less any required withholding taxes.

Notes. If you borrowed funds from the Company to purchase shares of our common stock and any such loan is outstanding, under the terms of the notes evidencing such loans, the outstanding principal amount and accrued and unpaid interest is required to be prepaid in full by wire transfer or certified bank check upon the completion of the merger. However, if the borrower and the Company agree, the borrower may pay such loan by agreeing to reduce the merger consideration otherwise payable to the borrower by the outstanding amount of principal and interest with respect to any such loan.

Conditions to the Merger; Regulatory Approvals

In addition to approval of our stockholders as described in this proxy statement, the merger is subject to regulatory approvals and satisfaction or waiver of other customary closing conditions.

U.S. state insurance laws and regulations generally require that, prior to the direct or indirect acquisition of an insurance company domiciled in that particular jurisdiction, the acquiring company must obtain the approval of the insurance regulatory authority of that jurisdiction. In connection with

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the merger, filings for regulatory approval are required with the insurance regulatory authorities of North Carolina and Ohio, the states in which the Company’s insurance subsidiaries are domiciled. These filings were made with the insurance regulatory authorities of each of North Carolina and Ohio on July 11, 2007 and September 25, 2007.

Although the Company and Buyer do not expect these regulatory authorities to object to the transaction or otherwise withhold their approval, there is no assurance that the Company and Buyer will obtain all necessary regulatory approvals.

Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which we refer to in this proxy statement as the HSR Act, and the rules promulgated thereunder by the Federal Trade Commission, which we refer to in this proxy statement as the FTC, the merger may not be completed until notification and report forms have been filed with the FTC and the Antitrust Division of the Department of Justice, which we refer to in this proxy statement as the DOJ, and the applicable waiting period has expired or been terminated. The Company and Buyer filed notification and report forms under the HSR Act with the FTC and the Antitrust Division of the DOJ on July 11, 2007. On July 20, 2007, the FTC granted early termination of the waiting period under the HSR Act with respect to the merger.

No Financing Condition; Equity Commitment Letter

The merger is not subject to a financing condition. Equity commitments for the full amount of the merger consideration plus funds sufficient to pay all related fees and expenses required to be paid or funded as of or prior to the completion of the merger have been received by Buyer from D. E. Shaw Composite Fund, L.L.C. and D. E. Shaw Oculus Portfolios, L.L.C., which we refer to in this proxy statement as the Investors, each an investment fund and member of the D. E. Shaw group, pursuant to a letter agreement entered into concurrently with the execution of the merger agreement, which we refer to in this proxy statement as the equity commitment letter. Under the terms of the equity commitment letter, the Investors have committed to Buyer, severally and not jointly, each in the amount set forth therein, to fund, or to cause to be funded, the aggregate funds necessary to complete the transactions contemplated by the merger agreement. The obligations of each Investor to Buyer to fund, or to cause to be funded, its equity commitment are subject to the prior satisfaction or waiver of the conditions to Buyer’s and Merger Sub’s obligations to effect the merger, as set forth solely in Sections 7.1 and 7.2 of the merger agreement, and the contemporaneous completion of the merger.

Solicitation of Other Offers during the ‘‘Go-Shop’’ Period

Under the terms of the merger agreement, the Company had the right to actively solicit and engage in discussions and negotiations with respect to competing proposals from, and provide non-public information to, third parties through 11:59 p.m., New York time, on August 5, 2007, which we refer to in this proxy statement as the go-shop period. At any time during the go-shop period, subject to the payment of a termination fee (as described in ‘‘The Merger Agreement — Termination of the Merger Agreement’’ and ‘‘The Merger Agreement — Termination Fees and Expenses’’ beginning on page 68 and 69, respectively), our board of directors was permitted to terminate the merger agreement to accept a ‘‘superior proposal’’ (as defined in ‘‘The Merger Agreement — Solicitation of Other Offers’’ beginning on page 66 of this proxy statement), without any obligation to provide notice to or offer Buyer a right to match the proposal. The Company did not receive any competing proposals during the go-shop period.

No Solicitation of Other Offers during the ‘‘No-Shop’’ Period

Under the terms of the merger agreement, after 11:59 p.m., New York time, on August 5, 2007, the Company has agreed not to, and to cause our representatives not to:


	•	initiate, solicit or knowingly encourage the submission of any inquiries, proposals or offers, provide any non-public information or data to any third party that may initiate a takeover proposal, or knowingly make any other efforts or attempts that constitute or would reasonably be expected to lead to, any takeover proposal or engage in any discussions or negotiations with respect thereto or otherwise cooperate with or assist or participate in, or knowingly facilitate any such inquiries, proposals, discussions or negotiations;

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	•	approve or recommend, or publicly propose to approve or recommend, any takeover proposal;


	•	enter into any merger agreement, letter of intent or other agreement providing for or relating to a takeover proposal;


	•	enter into any agreement requiring us to abandon, terminate or fail to complete the transactions contemplated by the merger agreement; or


	•	agree or publicly propose to do any of the foregoing.

However, if at any time after 11:59 p.m., New York time, on August 5, 2007 and prior to the approval of the merger agreement by our stockholders, which we refer to in this proxy statement as the no-shop period, we receive a bona fide written takeover proposal from any party with whom we were in contact during the go-shop period or an unsolicited takeover proposal from any third party, we are permitted to engage in discussions or negotiations with, or provide any non-public information to, any such party if our board of directors determines in good faith, after consultation with its financial advisor and outside counsel, that such takeover proposal constitutes, or could reasonably be expected to lead to, a superior proposal and the failure to provide non-public information to or engage in discussions or negotiations with, such third party would be inconsistent with our directors’ fiduciary duties under applicable law.

At any time during the no-shop period, subject to the payment of a termination fee and expense reimbursement in certain circumstances (as described in ‘‘The Merger Agreement — Termination of the Merger Agreement’’ and ‘‘The Merger Agreement — Termination Fees and Expenses’’ beginning on page 68 and 69, respectively), our board of directors may (a) effect a recommendation withdrawal (as defined in ‘‘The Merger Agreement — Recommendation Withdrawal; Special Company Termination Rights’’ beginning on page 67) and/or (b) terminate the merger agreement, in either case, if our board of directors determines in good faith, after consultation with its outside counsel, that the failure to take such action would be inconsistent with its fiduciary duties under applicable law, except that our board of directors may not take any such action (1) not in connection with a takeover proposal, unless the taking of such action is based on one or more events, changes, circumstances or effects relating to the Company or any of its subsidiaries that occurs on or after June 11, 2007, the date of the merger agreement, and (2) in connection with a takeover proposal, unless our board of directors prior to taking such action provides Buyer copies of the relevant proposed transaction agreements with the party making the takeover proposal, offers Buyer matching rights and determines in good faith, after consultation with its financial advisor and outside counsel, that such takeover proposal constitutes a superior proposal.

Termination of the Merger Agreement

The Company and Buyer each have certain termination rights under the terms of the merger agreement, including the right of either party to terminate the merger agreement if the merger has not been completed on or before December 15, 2007.

In the event that the merger agreement is terminated under certain circumstances, including by the Company in order to enter into a transaction that is a superior proposal or by Buyer or the Company following the Company effecting a recommendation withdrawal not related to the receipt of a superior proposal, we will be required to pay a fee of $11,463,424 to Buyer, and we could have been obligated to pay Buyer a termination fee of $7,164,640, if a termination had occurred during the go-shop period. In addition, if the termination occurs after the expiration of the go-shop period, the Company will under certain circumstances be required to reimburse Buyer for an amount not to exceed $3,582,320 for transaction fees and expenses incurred by Buyer and its affiliates. In the event that the merger agreement is terminated because Buyer and Merger Sub fail to fund the merger consideration following satisfaction or waiver of the conditions to Buyer’s and Merger Sub’s obligations to effect the merger as set forth in the merger agreement or fail to receive the necessary regulatory approvals for the merger, Buyer will be required to pay to the Company a fee of $11,463,424 and to reimburse the Company for an amount not to exceed $3,582,320 for transaction fees and expenses incurred by the Company and its affiliates.

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The respective payment obligations of the parties for breaches under the merger agreement and related agreements are capped at $15,045,744, plus interest and collection costs if applicable, which we refer to in this proxy statement as the liability cap.

Under the terms of the equity commitment letter, each of the Investors has agreed, severally and not jointly, to pay its proportionate share, based on its respective portion of the equity commitment, of the termination fee and expense reimbursement owed to the Company if Buyer and Merger Sub fail to do so, subject to its respective share of the liability cap.

Appraisal Rights

Under Delaware law, holders of our common stock who do not vote in favor of adoption of the merger agreement will have the right to seek appraisal of the fair value of their shares of our common stock as determined by the Delaware Court of Chancery if the merger is completed, but only if they comply with all requirements of Delaware law, which are summarized in this proxy statement. This appraisal amount could be more than, the same as or less than the amount a stockholder would be entitled to receive under the terms of the merger agreement. Any holder of our common stock intending to exercise appraisal rights, among other things, must submit a written demand for an appraisal to us prior to the vote on the adoption of the merger agreement and must not vote or otherwise submit a proxy in favor of adoption of the merger agreement. Your failure to follow the procedures specified under Delaware law will result in the loss of your appraisal rights. For further information, please see ‘‘Appraisal Rights of Dissenting Stockholders’’ beginning on page 77 and the text of the Delaware appraisal rights statute reproduced in its entirety as Annex D to this proxy statement.

Effects on the Company if the Merger is not Completed

If the merger agreement is not adopted by our stockholders or if the merger is not completed for any other reason, you will not receive any payment for your shares in connection with the merger. Instead, the Company will remain a public company and our common stock will continue to be listed and traded on the NASDAQ Global Market, which we refer to in this proxy statement as NASDAQ. Under specified circumstances described in this proxy statement, we may be required to pay Buyer a termination fee and/or to reimburse Buyer for its out-of-pocket expenses up to an agreed-upon cap. Under other specified circumstances, we may be entitled to receive a termination fee and to reimbursement of our transaction fees and expenses up to the same agreed-upon cap.

Market Price of our Common Stock (page 73)

Our common stock is listed on NASDAQ under the trading symbol ‘‘JRVR’’. On June 8, 2007, which was the last trading day before the Company announced the execution of the merger agreement, our common stock closed at $35.18 per share. On October 1, 2007, which was the most recent practicable trading day prior to the date of this proxy statement, our common stock closed at $32.93 per share. On May 9, 2007 and March 9, 2007, which were the last trading days one month and three months prior to the announcement of the execution of the merger agreement, respectively, our common stock closed at $33.60 and $29.02, respectively.

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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

The following questions and answers are intended to address briefly some commonly asked questions regarding the merger, the merger agreement and the special meeting. These questions and answers may not address all questions that may be important to you as a stockholder. Please refer to the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to in this proxy statement, which we encourage you to read carefully.


Q.	When and where is the special meeting?


A.	The special meeting will be held on November 6, 2007, at 10:00 a.m. local time, at the Courtyard by Marriott Chapel Hill Hotel, 100 Marriott Way, Chapel Hill, North Carolina 27517.


Q.	What am I being asked to vote on at the special meeting?

You are being asked to vote on the adoption of the merger agreement that we have entered into with Buyer and Merger Sub. Pursuant to the merger agreement, Merger Sub will be merged with and into the Company and we will become a wholly owned subsidiary of Buyer. You are also being asked to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there not sufficient votes at the time of the special meeting to approve the adoption of the merger agreement.


Q.	If the merger is completed, what will I receive for each share of my common stock?


A.	If the merger is completed, you will be entitled to receive $34.50 in cash, without interest and less any applicable withholding tax for each share of our common stock that you own, if you do not perfect appraisal rights under Delaware law.


Q.	If the merger is completed and I am an option holder, what will I receive for my options?


A.	If the merger is completed and you hold vested or unvested options to purchase our common stock, your options will be canceled and you will be entitled to receive in cash an amount equal to the difference between $34.50 and the exercise price of each applicable stock option, without interest and less any required withholding taxes.


Q.	How does James River’s board of directors recommend that I vote?

Our board of directors unanimously recommends that you vote ‘‘FOR’’ the proposal to approve the adoption of the merger agreement and ‘‘FOR’’ the proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes at the time of the special meeting to approve the adoption of the merger agreement. See ‘‘The Merger — Reasons for the Merger; Recommendation of Our Board of Directors’’ beginning on page 37 for a discussion of the factors that our board of directors considered in deciding to recommend the adoption of the merger agreement by our stockholders.


Q.	How many votes do I have?


A.	You have one vote for each share of our common stock you own as of September 26, 2007, the record date for the special meeting.


Q.	May I attend the special meeting in person?


A.	Yes. All stockholders, including stockholders of record and stockholders who hold their shares through banks, brokers, nominees or any other holder of record, as of the close of business on September 26, 2007, the record date for the special meeting, may attend the special meeting in person.

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Q.	How do I cast my vote?


A.	You may cast your vote by:


	•	signing and dating each proxy card you receive and returning it in the enclosed prepared envelope;


	•	using the telephone number printed on your proxy card;


	•	using the Internet voting instructions printed on your proxy card; or


	•	if you hold your shares in ‘‘street name,’’ following the procedures provided by your broker, bank or other nominee.

If you return your signed proxy card, but do not mark the boxes showing how you wish to vote, your shares will be voted ‘‘FOR’’ the proposal to approve the adoption of the merger agreement and ‘‘FOR’’ the proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies.


Q.	Can I change or revoke my vote?


A.	You may change or revoke your proxy at any time before the vote is taken at the special meeting:


	•	if you hold your shares in your name as a stockholder of record, by notifying in writing our Secretary, Judy D. Young, at 300 Meadowmont Village Circle, Suite 333, Chapel Hill, North Carolina 27517;


	•	by attending the special meeting and voting in person (your attendance at the meeting will not, by itself, revoke your proxy; you must vote in person at the meeting);


	•	by submitting a later-dated proxy card;


	•	if you voted by telephone or via the Internet, by voting again at a later date by telephone or via the Internet; or


	•	if you have instructed a broker, bank or other nominee to vote your shares, by following the directions received from your broker, bank or other nominee to change those instructions.


Q.	If my shares are held in ‘‘street name’’ by my broker, bank or other nominee, will my broker, bank or other nominee vote my shares for me?

Your broker, bank or other nominee will vote your shares only if you provide instructions to your broker, bank or other nominee on how to vote. You should follow the procedures provided by your broker, bank or other nominee regarding the voting of your shares. If you do not instruct your broker, bank or other nominee to vote your shares, your shares will not be voted and will have the same effect as a vote ‘‘AGAINST’’ the adoption of the merger agreement, but will not have an effect on any vote regarding the adjournment of the special meeting.


Q.	What does it mean if I get more than one proxy card?


A.	If you have shares of our common stock that are registered differently or are in more than one account, you may receive more than one proxy card. Please follow the directions for voting on each of the proxy cards you receive to ensure that all of your shares are voted. These proxy cards should each be voted and returned separately in order to ensure that all of your shares are voted.


Q.	What happens if I sell my shares before the special meeting?

The record date for the special meeting is earlier than the date the special meeting is being held and earlier than the date that the merger is expected to be completed. If you transfer your shares of common stock after the record date but before the special meeting, you will retain your right to vote at the special meeting, but will have transferred the right to receive $34.50 per share in cash to be paid to our stockholders in the merger. In order to receive the $34.50 per share, you must hold your shares through completion of the merger.

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Q.	What do I need to do now?

Even if you plan to attend the special meeting in person, after carefully reading and considering the information contained in this proxy statement, if you hold your shares in your own name as the stockholder of record, please vote your shares by completing, signing, dating and returning the enclosed proxy card; using the telephone number printed on your proxy card; or using the Internet voting instructions printed on your proxy card. If you have Internet access, we encourage you to record your vote via the Internet. You can also attend the special meeting and vote. If you return your signed proxy card, but do not mark the boxes showing how you wish to vote, your shares will be voted ‘‘FOR’’ the proposal to adopt the merger agreement and ‘‘FOR’’ the proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies.


Q.	Should I send in my stock certificates with my proxy?

No. After the merger is completed, you will be sent a letter of transmittal with detailed written instructions for exchanging your common stock certificates for the merger consideration. If your shares are held in ‘‘street name’’ by your broker, bank or other nominee you will receive instructions from your broker, bank or other nominee as to how to effect the surrender of your ‘‘street name’’ shares in exchange for the merger consideration. Please DO NOT send your certificates in now.


Q.	When is the merger expected to be completed?

We are working toward completing the merger and currently expect that the merger will be completed in the fourth quarter of 2007. However, the exact timing of the completion of the merger cannot be predicted. In order to complete the merger, stockholder approval and approvals from the insurance regulatory authorities of North Carolina and Ohio, the domiciliary states of our insurance subsidiaries, must be obtained and other closing conditions must be satisfied or waived.


Q.	Will I owe taxes as a result of the merger?

Yes, if you recognize taxable gain. The merger will be a taxable transaction for U.S. federal income tax purposes to U.S. holders of our common stock, including holders of options or warrants to purchase our common stock. As a result, to the extent you recognize income or taxable gain, the cash you receive in the merger in exchange for your shares of our common stock, or in exchange for options or warrants to purchase shares of our common stock, will be subject to U.S. federal income tax and also may be taxed under applicable state, local and foreign income and other tax laws. See ‘‘The Merger — Material U.S. Federal Income Tax Consequences’’ beginning on page 51.

We strongly encourage you to consult your own tax advisor to determine the particular tax consequences to you, including the application and effect of any state, local or foreign income and other tax laws, of the receipt of cash in exchange for our common stock, including in exchange for options or warrants to purchase shares of our common stock, pursuant to the merger.


Q.	Who can help answer my other questions?


A.	If you need assistance in submitting your proxy or voting your shares of common stock, or if you have additional questions about the merger, please call Michael T. Oakes, our Chief Financial Officer, at (919) 883-4171.


Q.	Where can I find more information about James River?


A.	We file reports, proxy statements and other information with the Securities and Exchange Commission, which we refer to in this proxy statement as the SEC. You may obtain a free copy

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of this proxy statement, as well as all other documents filed by James River with the SEC, at the SEC’s website, http://www.sec.gov or on our website, http://www.james-river-group.com. You may also obtain such documents on request to Michael T. Oakes, Chief Financial Officer, James River Group, Inc., 300 Meadowmont Village Circle, Suite 333, Chapel Hill, North Carolina, telephone: (919) 883-4171.

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION

Certain matters discussed in this proxy statement and the documents we incorporate by reference into this proxy statement are forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. These forward-looking statements are based on expectations, estimates, forecasts and projections of future company or industry performance, based on management’s judgment, beliefs, current trends and market conditions, at the time the statement was made. Actual outcomes and results may differ materially from what is expressed, forecasted or implied in any forward-looking statement as a result of, among other things, risks and uncertainties or if underlying assumptions prove incorrect. Forward-looking statements may be identified by the use of words such as ‘‘will,’’ ‘‘expects,’’ ‘‘intends,’’ ‘‘plans,’’ ‘‘anticipates,’’ ‘‘believes,’’ ‘‘seeks,’’ ‘‘estimates,’’ and similar expressions. There are a number of risks and uncertainties that could cause actual results to differ materially from the forward-looking statements included in this proxy statement. These include, but are not limited to:


	•	regulatory approvals necessary for the merger may not be obtained, or necessary regulatory approvals may delay the merger or result in the imposition of conditions that could have a material adverse effect on the Company or cause the parties not to complete the transaction;


	•	conditions to the closing of the merger may not be satisfied or waived;


	•	the outcome of any legal proceedings initiated against the Company and others following the announcement of the merger cannot be predicted and could delay or prevent the merger;


	•	the business of the Company may suffer as a result of uncertainty surrounding the merger;


	•	the amount of the costs, fees, expenses and charges related to the merger, including if we are required to pay Buyer a termination fee or reimburse Buyer’s transaction expenses under the terms of the merger agreement or relating to any legal proceedings initiated against the Company and others with respect to the proposed merger; and


	•	we may be adversely affected by other economic, business, and/or competitive factors.

Other factors that could cause our actual results to differ materially from those expressed or implied above are discussed under ‘‘Risk Factors’’ in our most recent annual report on Form 10-K and our other filings with the SEC. We undertake no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. Stockholders are cautioned not to place undue reliance on these forward-looking statements.

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THE PARTIES TO THE MERGER

James River Group, Inc.

James River Group, Inc.
300 Meadowmont Village Circle, Suite 333
Chapel Hill, North Carolina 27517
(919) 883-4171

James River is a Delaware corporation headquartered in Chapel Hill, North Carolina. We are an insurance holding company that primarily owns and manages specialty property/casualty insurance company subsidiaries with the objective of consistently earning underwriting profits. Each of our two insurance company subsidiaries is rated ‘‘A−’’ (Excellent) by A.M. Best Company. Founded in September 2002, James River wrote its first policy in July 2003 and currently underwrites in two specialty areas: excess and surplus lines in 48 states and the District of Columbia; and workers’ compensation, primarily for the residential construction industry in North Carolina and Virginia.

For more information about us, please visit our website at http://www.james-river-group.com. The information provided on our website is not part of this proxy statement, and therefore is not incorporated by reference. See also ‘‘Where You Can Find More Information’’ beginning on page 80. Our common stock is publicly traded on NASDAQ under the symbol ‘‘JRVR’’.

Buyer

Franklin Holdings (Bermuda), Ltd.
Clarendon House
2 Church Street
Hamilton HM 11 Bermuda
(441) 295-1422

Buyer is a newly formed Bermuda-based holding company and member of the D. E. Shaw group. The D. E. Shaw group is a global investment and technology development firm with more than 1,200 employees, approximately $35 billion in aggregate investment capital and offices in North America, Europe and Asia. Buyer has not engaged in any business activities except activities incidental to its organization and in connection with the transactions contemplated by the merger agreement.

Merger Sub

Franklin Acquisition Corp.
c/o D. E. Shaw & Co., L.P.
Tower 45, 39^th Floor
120 West 45^th Street,
New York, NY 10036
(212) 478-0000

Merger Sub is a newly formed Delaware corporation and a direct, wholly owned subsidiary of Buyer. Merger Sub was organized solely for the purpose of completing the merger. Merger Sub has not engaged in any business except activities incidental to its organization and in connection with the transactions contemplated by the merger agreement.

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THE SPECIAL MEETING

Time, Place and Purpose of the Special Meeting

This proxy statement is being furnished to our stockholders as part of the solicitation of proxies by our board of directors for use at the special meeting to be held on November 6, 2007, at 10:00 a.m. local time, at the Courtyard by Marriott Chapel Hill Hotel, 100 Marriott Way, Chapel Hill, North Carolina 27517, or at any adjournment thereof. The purpose of the special meeting is for our stockholders to consider and vote upon a proposal to approve the adoption of the merger agreement and to consider and vote upon a proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there not sufficient votes at the time of the special meeting to approve the adoption of the merger agreement. A copy of the merger agreement is attached to this proxy statement as Annex A. This proxy statement and the enclosed form of proxy are first being mailed to our stockholders on or about October 3, 2007.

Record Date and Quorum

The holders of record of our common stock as of the close of business on September 26, 2007, the record date set by our board of directors for the special meeting, are entitled to receive notice of and to vote at the special meeting. As of September 26, 2007, the record date for the special meeting, 15,138,708 shares of our common stock were outstanding.

The holders of a majority of our common stock issued and outstanding and entitled to vote at the special meeting, present in person or represented by proxy, shall constitute a quorum for the purpose of considering the proposals. Shares of our common stock represented at the special meeting but not voted, including shares of our common stock for which proxies have been received but for which stockholders have abstained, will be treated as present at the special meeting for purposes of determining the presence of a quorum. If a new record date is set for the adjourned or postponed special meeting, then a new quorum will have to be established.

Votes cast by proxy or in person at the special meeting will be tabulated by the inspectors of election appointed for the special meeting. The inspectors of election will determine whether a quorum is present at the special meeting. In the event that a quorum is not present, we expect that the meeting will be adjourned or postponed to solicit additional proxies.

Vote Required for Approval of the Merger Agreement

Each outstanding share of our common stock on the record date entitles the holder to one vote at the special meeting. The affirmative vote of a majority of the votes entitled to be cast by the holders of the outstanding shares of our common stock, voting together as a single class, is required to approve the adoption of the merger agreement. This means that to approve the adoption of the merger agreement, 7,569,355 shares or more must vote in the affirmative at the special meeting. If the required vote is not obtained, the merger will not occur. With respect to the proposal to approve the adoption of the merger agreement, you may vote ‘‘FOR’’, ‘‘AGAINST’’ or ‘‘ABSTAIN’’. Abstentions will not be counted as votes cast or shares voting on the proposal to approve the adoption of the merger agreement, but will count for the purpose of determining whether a quorum is present. If you abstain, it will have the same effect as a vote ‘‘AGAINST’’ the adoption of the merger agreement.

Concurrently with the execution of the merger agreement, Buyer and Merger Sub entered into separate voting agreements with each of the Significant Stockholders, who collectively own approximately 45% of the outstanding shares of our common stock. Under the terms of the voting agreements, each of the Significant Stockholders has agreed to vote all of its shares of our common stock in favor of the adoption of the merger agreement. Further, all of our directors and executive officers, who collectively with their respective affiliates, excluding the Significant Stockholders, own an additional approximately 7.8% of the outstanding shares of our common stock, have indicated to us that they intend to vote their shares in favor of the adoption of the merger agreement.

Brokers who hold shares in street name for customers have the authority to vote on ‘‘routine’’ proposals when they have not received instructions from beneficial owners. However, brokers are

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precluded from exercising their voting discretion with respect to approving non-routine matters such as the adoption of the merger agreement and, as a result, absent specific instructions from the beneficial owner of such shares, brokers are not able to vote those shares. These ‘‘broker non-votes’’ will be counted for purposes of determining a quorum, but will have the same effect as a vote ‘‘AGAINST’’ the adoption of the merger agreement.

Proxies and Revocation

If you are a stockholder of record and submit a proxy by telephone or via the Internet or by returning a signed proxy card by mail, your shares will be voted at the special meeting as you indicate on your proxy card or as indicated pursuant to such other method of submission. If you sign your proxy card without indicating your vote, your shares will be voted ‘‘FOR’’ the adoption of the merger agreement and ‘‘FOR’’ the proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies, and in accordance with the recommendations of our board of directors on any other matters properly brought before the special meeting for a vote, except that, unless otherwise indicated on the proxy card:


	•	no proxy voted against adoption of the merger agreement will be voted in favor of any adjournment of the special meeting; and


	•	no proxy voted against adjournment of the special meeting to solicit additional proxies will be voted in favor of adoption of the merger agreement.

If your shares are held in ‘‘street name’’ by your broker, bank or other nominee, you should instruct your broker, bank or other nominee how to vote your shares using the instructions provided by your broker, bank or other nominee. If you have not received such voting instructions or require further information regarding such voting instructions, contact your broker, bank or other nominee for directions on how to vote your shares. Brokers who hold shares in ‘‘street name’’ for customers may not exercise their voting discretion with respect to the approval of non-routine matters such as the merger proposal and thus, absent specific instructions from the beneficial owner of such shares, brokers are not empowered to vote such shares with respect to the adoption of the merger agreement, which we refer to in this proxy statement as broker non-votes. Shares of our common stock held by persons attending the special meeting but not voting, or shares for which we received proxies on which holders have noted an abstention from voting, will be considered abstentions. Abstentions and properly executed broker non-votes, if any, will be treated as shares that are present and entitled to vote at the special meeting for purposes of determining whether a quorum exists but will have the same effect as a vote ‘‘AGAINST’’ adoption of the merger agreement.

Proxies received at any time before the special meeting, and not revoked or superseded before being voted, will be voted at the special meeting. You may change or revoke your proxy at any time before the vote is taken at the special meeting:


	•	if you hold your shares in your name as a stockholder of record, by notifying in writing our Secretary, Judy D. Young, at 300 Meadowmont Village Circle, Suite 333, Chapel Hill, North Carolina 27517;


	•	by attending the special meeting and voting in person (your attendance at the meeting will not, by itself, revoke your proxy; you must vote in person at the meeting);


	•	by submitting a later-dated proxy card;


	•	if you voted by telephone or via the Internet, by voting a second time by telephone or via the Internet; or


	•	if you have instructed a broker, bank or other nominee to vote your shares, by following the directions received from your broker, bank or other nominee to change those instructions.

We do not expect that any matter other than the adoption of the merger agreement (and the approval of the adjournment of the meeting, if necessary or appropriate, to solicit additional proxies) will be brought before the special meeting. If, however, any such other matter is properly presented at the

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special meeting or any adjournment or postponement of the special meeting, the persons appointed as proxies will have discretionary authority to vote the shares represented by duly executed proxies in accordance with their discretion and judgment.

Adjournments and Postponements

Although it is not currently expected, the special meeting may be adjourned or postponed, if necessary or appropriate, for the purpose of soliciting additional proxies if there are not sufficient votes to approve the adoption of the merger agreement at the time of the special meeting. In order to approve such proposal to adjourn the special meeting, the affirmative vote of a majority of the voting power present at the special meeting and entitled to vote thereat is required, whether or not a quorum exists at the special meeting. Any adjournment or postponement of the special meeting for the purpose of soliciting additional proxies will allow our stockholders who have already sent in their proxies to revoke them at any time prior to their use at the special meeting as adjourned or postponed. If the special meeting is adjourned, we are not required to give notice of the time and place of the adjourned meeting unless our board of directors fixes a new record date for the special meeting.

The adjournment proposal relates only to an adjournment of the special meeting occurring for purposes of soliciting additional proxies for the approval of the proposal to adopt the merger agreement. Our board of directors retains full authority to adjourn the special meeting for any other purpose, including the absence of a quorum, or to postpone the special meeting before it is convened, without the consent of any stockholders.

Solicitation of Proxies

This proxy solicitation is being made and paid for by us on behalf of our board of directors. Our directors, officers and employees may solicit proxies by personal contact, mail, e-mail, telephone, facsimile or other means of communication. These persons will not be paid additional remuneration for their efforts. We will also request brokers and other fiduciaries to forward proxy solicitation material to the beneficial owners of shares of our common stock that the brokers and fiduciaries hold of record. Upon request, we will reimburse them for their reasonable out-of-pocket expenses.

Appraisal Rights

Stockholders are entitled to statutory appraisal rights under Delaware law in connection with the merger. This means that if you exercise your appraisal rights properly, you are entitled to have the value of your shares determined by the Delaware Court of Chancery and to receive payment based on that valuation. The ultimate amount you receive as a dissenting stockholder in an appraisal proceeding may be more than, the same as or less than the amount you would have received under the merger agreement.

To exercise your appraisal rights, among other things, you must submit a written demand for appraisal to us before the vote is taken on the merger agreement and you must not vote or otherwise submit a proxy in favor of the adoption of the merger agreement. Your failure to follow the procedures specified under Delaware law will result in the loss of your appraisal rights. See ‘‘Appraisal Rights of Dissenting Stockholders’’ beginning on page 77 and the text of the Delaware appraisal rights statute reproduced in its entirety as Annex D to this proxy statement.

Questions and Additional Information

If you have more questions about the merger or how to submit your proxy, or if you need additional copies of this proxy statement or the enclosed proxy card or voting instructions, please call Michael T. Oakes, our Chief Financial Officer, at (919) 883-4171.

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THE MERGER

This discussion of the merger is qualified in its entirety by reference to the merger agreement, which is attached to this proxy statement as Annex A. You should read the entire merger agreement carefully as it is the legal document that governs the merger.

Introduction

We are seeking approval of the adoption of the merger agreement among Buyer, Merger Sub and the Company. If the merger is completed, Merger Sub will be merged with and into the Company and the Company will continue as the surviving corporation and a wholly owned subsidiary of Buyer. In addition, if the merger is completed, we will cease to be a publicly held company. In connection with the merger, each outstanding share of our common stock, other than treasury shares and shares as to which appraisal rights under Delaware law may have been perfected, will be canceled and converted into the right to receive $34.50 in cash per share, without interest and less any required withholding taxes.

Background of the Merger

The specialty property/casualty insurance business segments in which we compete are subject to increased competition from national and Bermuda-based insurers, Lloyd’s underwriters, specialty insurance companies, underwriting agencies and diversified financial services companies. While we believe we have developed our own competitive advantages, many of our competitors have greater financial resources and market recognition than we do.

Based on our management team’s experience in the industry, their knowledge of our competitors’ businesses and strategies and their evaluation of market conditions, our management team has continually sought to position the Company to compete profitably in the various sub-markets in which we participate. As part of this process, our management has had an ongoing and active dialogue with our board of directors regarding industry developments, the Company’s competitive position in the industry and potential strategic transactions.

Our board of directors, together with management, has from time to time evaluated the Company’s strategic direction and ongoing business plans, with a view towards strengthening the Company’s core businesses and increasing stockholder value. As part of its ongoing evaluation, our board of directors has continually considered the full range of opportunities, including potential acquisitions or business combinations, that might enhance stockholder value. During these discussions and investigations regarding the Company’s strategic alternatives, the policy of the Company has been neither to actively seek nor oppose the sale of the Company, but rather to act at all times in the best interests of the Company and its stockholders.

Beginning in late 2005, our management, with the authorization of our board of directors, engaged in specific discussions with several Bermuda-based reinsurance companies, including the company referenced in the following paragraph, regarding potential business combinations, in each case, structured as a stock-for-stock merger, for the purpose of creating a Bermuda-based specialty insurance and reinsurance company that would have international reach. The Company actively explored three such combinations, none of which led to a transaction, largely, management believes due to the Company’s higher relative value, in terms of stock price to book value or stock price to annualized earnings, as compared to the other company, which would have caused, in each case, the proposed transaction to be dilutive to the tangible book value of the Bermuda companies.

Beginning in early 2007, management initiated conversations with two private equity groups regarding the potential financing of an acquisition of a Bermuda-based reinsurance company, followed by a merger of the acquired company with the Company. One of the private equity groups was the private equity arm of the D. E. Shaw group and the other was a consortium of private equity funds. Each of these two potential financing sources entered into a confidentiality agreement with the Company and conducted due diligence on the Company. In early February 2007, at the urging of the Company, the D. E. Shaw group and the consortium of private equity funds decided to combine their efforts and

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resources and explore a transaction in which they would be co-investors. The Company and these financing sources identified a Bermuda-based reinsurance company and made a non-binding proposal to acquire the potential target in February 2007. The proposal was subsequently rejected by the potential target, also in February 2007.

Thereafter, management of the Company, with the support and encouragement of the board of directors, approached several potential financial and strategic buyers to explore their possible interest in a business combination transaction with the Company. None of such parties expressed an interest in engaging in discussions.

In March 2007, Bryan Martin, the co-head of private equity of the D. E. Shaw group, contacted J. Adam Abram, our chief executive officer, and informed him that the D. E. Shaw group was interested in continuing discussions with the Company about other potential business relationships. At Mr. Martin’s suggestion, Mr. Abram met with him and other representatives of the D. E. Shaw group in person on March 22, 2007. Based on the discussions at this meeting, Mr. Abram believed that the D. E. Shaw group was actively considering making a proposal to acquire the Company. Mr. Abram promptly informed Richard W. Wright, the chairman of our board of directors, and a number of other directors of the discussions and arranged a special meeting of our board of directors on March 28, 2007 to formally update the entire board of directors on the recent discussions with representatives of the D. E. Shaw group.

On March 28, 2007, our board of directors met by telephone conference to discuss the possible proposal by the D. E. Shaw group and related matters. At the invitation of our board of directors, also present at the meeting were representatives of Bryan Cave LLP, which we refer to in this proxy statement as Bryan Cave, outside legal counsel to the Company. At this meeting, Mr. Abram summarized for our board of directors the Company’s previous discussions with representatives of the D. E. Shaw group. In addition, Mr. Abram reported that although he did not know the terms of the possible proposal from the D. E. Shaw group, it was possible that the proposal would include an element providing for the Company’s management to have an interest in the acquiring entity. A representative of Bryan Cave discussed with our board members their legal duties and responsibilities and other related issues in connection with a possible proposal, including a proposal that might contain an element of management participation. Mr. Abram suggested that in anticipation of the possible proposal from the D. E. Shaw group, and in light of the possibility of such a proposal including an element of management participation, our board of directors consider forming a board committee consisting entirely of non-management directors with respect to matters relating to, or arising from, the Company’s strategic alternatives. At this meeting, our board approved the formation of a board committee consisting of Mr. Wright, Matthew Bronfman, James L. Zech and Nicolas D. Zerbib, with Mr. Zerbib serving as chairman, and delegated to the board committee the full power and authority of our board with respect to matters relating to, or arising from, the Company’s strategic alternatives, including the power and authority to:


	•	examine, review and consider any potential transaction that may be proposed to the Company;


	•	explore strategic alternatives available to the Company;


	•	retain counsel and financial and other advisors at the expense of the Company;


	•	solicit proposals for a potential transaction, including competing proposals;


	•	negotiate a potential transaction with any party;


	•	determine whether a potential transaction is fair to and in the best interests of the Company and its stockholders, and make recommendations to our board of directors with respect to any potential transaction to be voted upon by our board of directors; and


	•	take any other actions it may determine to be appropriate in connection with the foregoing.

Also at the March 28 meeting, our board of directors authorized (1) the executive officers of the Company, as they deem appropriate, to engage, on their own behalf, in discussions with

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representatives of the D. E. Shaw group, regarding a potential transaction and (2) the Company to sign a limited conflict waiver, which was requested by the D. E. Shaw group, to allow Ernst & Young LLP to assist the D. E. Shaw group in performing tax, accounting and actuarial due diligence on the Company at the appropriate time, which waiver was requested because Ernst & Young LLP is the Company’s independent registered public accounting firm and had also in the past completed work for the D. E. Shaw group unrelated to the possible proposal to acquire the Company.

Following this board meeting, on March 28, 2007, the general counsel of Stone Point Capital LLC, a private equity firm and the investment manager of Trident II, L.P., a significant stockholder of the Company with which Mr. Zerbib is affiliated, which we refer to in this proxy statement as Stone Point, contacted a representative of Skadden, Arps, Slate, Meagher & Flom LLP, which we refer to in this proxy statement as Skadden Arps, to determine its ability to serve as outside legal counsel to the board committee. During the next several days, Mr. Zerbib and the representative of Stone Point discussed with representatives of Skadden Arps the possible engagement.

On March 30, 2007, Mr. Abram and Michael T. Oakes, our chief financial officer, met in person with representatives of the D. E. Shaw group, including Mr. Martin and Richard Aube, co-head of private equity of the D. E. Shaw group. At this meeting, the representatives of the D. E. Shaw group expressed a continuing interest in potentially making a proposal to acquire the Company. Messrs. Abram and Oakes informed the representatives of the D. E. Shaw group that our board of directors had formed a board committee in anticipation of the possible proposal and that negotiations with regard to any potential transaction would be conducted by the board committee. In addition, at this meeting the representatives of the D. E. Shaw group expressed a desire that the Company’s management remain in place and to explore in due course the possibility of investments by management in the acquiring entity following the consummation of a transaction, in each case subject to agreement by the parties to mutually acceptable terms and conditions. Messrs. Abram and Oakes expressed a general willingness to continue their employment with the Company following any possible transaction. However, the parties agreed at this meeting that the terms of management’s possible continued employment and any possible investment by management in the acquiring entity would not be a condition to a possible transaction. There were no discussions at this meeting about the terms of employment of or compensation for any individuals or of any such investment, and there was no indication from Buyer whether such employment (including any possible change in compensation) or investment opportunities would definitely occur, which members of management would be given any such employment or investment opportunities, or the terms and conditions of any such employment (including any possible change in compensation) or investment opportunities (including with respect to our management as a group or individually).

Over the several days following the March 30, 2007 meeting, Mr. Abram spoke with representatives of the D. E. Shaw group by telephone regarding whether our board of directors would be willing to consider a proposal to acquire the Company. At the instruction of Mr. Zerbib, Mr. Abram expressed to the representatives of the D. E. Shaw group that our board of directors would consider a proposal to acquire the Company on its merits. In addition, Mr. Abram reminded them that all negotiations with the Company should be conducted through the board committee.

On April 2, 2007, members of the board committee met by telephone conference together with, for a portion of the meeting, representatives of Skadden Arps. The purpose of the meeting was to discuss: (1) the scope of the board committee’s authorization granted by our board at its March 28, 2007 meeting; (2) the selection process for the board committee’s legal and financial advisors; and (3) recent discussions between Messrs. Abram and Oakes and representatives of the D. E. Shaw group. At the invitation of Mr. Zerbib, representatives of Skadden Arps discussed, among other matters, their qualifications to serve as legal counsel to the board committee, as well as the board committee’s fiduciary duties in connection with any proposal that might be received from the D. E. Shaw group and the exploration of strategic alternatives for the Company generally. As part of this discussion, representatives of Skadden Arps also discussed the fact that other representatives of Skadden Arps have performed in the past and may continue to perform work for members of the D. E. Shaw group unrelated to the proposed transaction and provided a general description of the nature and extent of the work involved. Following this discussion, at the request of Mr. Zerbib,

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representatives of Skadden Arps departed the telephone conference. The board committee members then discussed the qualifications of Skadden Arps, including its ability to act for the board committee in an objective and disinterested manner. The board committee members, after reviewing the qualifications of Skadden Arps, as well as the board committee’s belief that any work performed by other representatives of Skadden Arps for members of the D. E. Shaw group would not interfere with Skadden Arps’ ability to act for the board committee in an objective and disinterested manner, determined to engage Skadden Arps as legal counsel to the board committee. Skadden Arps obtained a conflict waiver from the D. E. Shaw group with respect to Skadden Arps’ representation of the board committee, and an engagement letter was subsequently executed between the board committee and Skadden Arps.

Also, on April 2, 2007, Messrs. Bronfman, Zech and Zerbib met in person with Messrs. Wright and Abram, with representatives of Skadden Arps participating by telephone, regarding the selection of a financial advisor for the board committee. They held discussions with representatives of JPMorgan and another nationally recognized investment banking firm to review their qualifications to serve as financial advisor to the board committee. During the JPMorgan meeting, representatives of JPMorgan disclosed the general nature of JPMorgan’s business dealings with the D. E. Shaw group. See ‘‘The Merger — Opinion of JPMorgan — Other Matters’’ beginning on page 45 for a more detailed description of JPMorgan’s relationship and business dealings with the D. E. Shaw group. During the JPMorgan meeting, the representatives of JPMorgan also confirmed that the work previously performed for the D. E. Shaw group was unrelated to the proposed assignment. Following these separate meetings, discussions were held among the members of the board committee regarding the qualifications of each firm, including their ability to act for the board committee in an objective and disinterested manner. The board committee members, after reviewing the qualifications of each firm, determined to engage JPMorgan as financial advisor to the board committee, subject to negotiating acceptable engagement terms. An engagement letter was subsequently executed between the board committee and JPMorgan.

On April 4, 2007, members of the board committee, with one member absent, met by telephone conference together with representatives of Skadden Arps and, for a portion of the meeting, representatives of JPMorgan. The purpose of the meeting was for Mr. Zerbib to discuss a telephone call he had received from Mr. Martin with respect to an acquisition proposal that the D. E. Shaw group anticipated delivering to the board committee on or about April 9, 2007. Mr. Zerbib indicated that the anticipated proposal, as summarized by Mr. Martin, would be in the range of $30.00 to $32.00 in cash per share of our common stock and was expected to be conditioned on a 30-day exclusivity period and access to management for purposes of discussing actuarial reports, financial projections, proposed transaction structure and matters relating to possible management participation in the proposed transaction. The members of the board committee and its advisors discussed the anticipated proposal, particularly with respect to if, how and when the board committee should respond to the D. E. Shaw group. It was agreed that Mr. Zerbib would request that Mr. Martin provide any such proposal in writing to the board committee. In the interim, the members of the board committee directed JPMorgan to begin its work regarding the Company, so that JPMorgan would be in a position to provide advice to the board committee following receipt of the anticipated proposal from the D. E. Shaw group. Following the meeting, Mr. Zerbib contacted Mr. Martin by telephone to request that Mr. Martin provide any such proposal in writing to the board committee.

On April 9, 2007, the board committee received a non-binding written proposal from the D. E. Shaw group, which we refer to in this proxy statement as the April 9 proposal.

On April 10, 2007, the board committee members met by telephone conference together with representatives of JPMorgan and Skadden Arps. The purpose of the meeting was to: (1) discuss the terms and conditions of the April 9 proposal; (2) receive feedback on the April 9 proposal from representatives of JPMorgan and Skadden Arps; and (3) commence the exploration of strategies for responding to the April 9 proposal. During the discussion of the terms and conditions of the April 9 proposal, it was noted, among other matters, that the proposal:


	•	was non-binding in nature and could be withdrawn or modified by the D. E. Shaw group at any time;

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	•	set forth a proposed price range of $30.00-$32.00 in cash per share of our common stock;


	•	was subject to due diligence that the D. E. Shaw group described as largely confirmatory in nature;


	•	had been reviewed and was supported, although not formally approved, by members of the D. E. Shaw group’s private equity group’s investment committee;


	•	did not contemplate a financing condition;


	•	requested a period of exclusivity of three weeks; and


	•	contemplated that certain of the Company’s stockholders would enter into voting agreements.

In addition, representatives of JPMorgan noted that they were still working on a preliminary intrinsic valuation analysis of the Company, and, therefore, it was premature to provide feedback, from a financial point of view, on the range of consideration proposed to be paid by the D. E. Shaw group. A representative of JPMorgan went on to discuss and provide feedback on other aspects of the April 9 proposal, including process and timing considerations. A representative of Skadden Arps then discussed the legal duties and responsibilities of the board committee members in considering the April 9 proposal. Following further discussion among the members of the board committee and their advisors, the board committee members agreed that Mr. Zerbib would contact Mr. Martin by telephone to indicate that the board committee was reviewing the proposal and would respond in due course. Following the meeting, Mr. Zerbib so informed Mr. Martin by telephone.

On April 17, 2007, the board committee members met by telephone conference together with representatives of JPMorgan and Skadden Arps and for a portion of the meeting, members of management of the Company. The purpose of the meeting was to: (1) further review the terms and conditions of the April 9 proposal; (2) receive preliminary feedback on the April 9 proposal from the Company’s management; (3) review with management various industry factors potentially affecting the desirability of seeking a sale transaction at this time, including market values, industry consolidation and the insurance cycle, as well as prior discussions with various other third parties from time to time regarding potential strategic transactions; (4) review with JPMorgan and management the financial projections that were being used by JPMorgan for purposes of its preliminary intrinsic valuation analysis; (5) review the preliminary valuation materials disseminated by JPMorgan prior to the meeting; and (6) consider strategies for responding to the April 9 proposal. During management’s review of prior discussions regarding potential strategic transactions, it was noted that, while parties with whom the Company had discussions generally expressed interest in a possible combination with the Company, the other party often indicated that the Company’s stock price was in their view too high in relation to their own market value to move forward with a transaction. Following this discussion, a representative of JPMorgan, with the assistance of Messrs. Abram and Oakes, discussed the financial projections contained in the preliminary valuation materials, including the basis on which they were prepared and the key assumptions utilized. At the end of this discussion, Messrs. Abram and Oakes were excused from the meeting. Representatives of JPMorgan then discussed the remaining portions of the preliminary valuation materials and strategies for responding to the April 9 proposal. At this point, the board committee members agreed to conclude the meeting and schedule the next meeting for April 18, 2007.

On April 18, 2007, the board committee members met by telephone conference together with representatives of JPMorgan and Skadden Arps to resume their discussion of strategies for responding to the April 9 proposal. The board committee members, with the assistance of their advisors, considered and evaluated various potential alternatives, including the desirability of trying to determine whether the D. E. Shaw group would increase its price, as well as the possible advantages and disadvantages of seeking other third party interest at this time. In this regard, the board committee members considered the possible risk of the D. E. Shaw group not participating if the process were to be opened to other parties, as well as the concern that a broad-based solicitation of interest might become public, which could have a destabilizing effect on the Company’s work force. During the course of discussion, it was observed that no decision had been made at this time to seek a sale of the Company and that more information was required, including with respect to the April 9

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proposal, before such a decision could be made. Following further discussion, the board committee members agreed to take steps to enable the D. E. Shaw group to explore further its April 9 proposal to acquire the Company, but not actively seek other potential buyers at this time. In that regard, the board committee members agreed to permit the D. E. Shaw group to conduct limited due diligence primarily focusing on financial and operational related matters, as well as engage in limited discussions with management regarding the business and affairs of the Company, with the process overseen and coordinated by representatives of JPMorgan. The board committee members determined that in light of the proposed price range and preliminary and contingent nature of the April 9 proposal, as well as the granting to the D. E. Shaw group of access to limited due diligence materials with a view to the D. E. Shaw group possibly increasing its valuation of the Company, it was not an appropriate time to consider granting the D. E. Shaw group’s request for exclusivity contained in the April 9 proposal. Following the meeting, Mr. Zerbib contacted Mr. Martin by telephone to inform him of the board committee’s decision.

Also, on April 18, 2007, the D. E. Shaw group executed a non-disclosure agreement with the Company. Thereafter, representatives of JPMorgan and Bryan Cave provided the D. E. Shaw group and its financial and legal advisors access to limited due diligence materials.

During the period from April 19-24, 2007, representatives of JPMorgan and the Company participated in preliminary meetings with representatives of the D. E. Shaw group and representatives of its financial advisor, Wachovia Capital Markets, LLC, which we refer to in this proxy statement as Wachovia, and its legal advisor, Debevoise & Plimpton LLP, which we refer to in this proxy statement as Debevoise, to discuss (1) the D. E. Shaw group’s proposed structure for the transaction, which would include a Bermuda holding company to be newly formed in connection with the transaction and a Bermuda-based reinsurance affiliate, (2) the Company’s business operations by segment, (3) the Company’s 2007 performance to date and (4) other due diligence matters. Due diligence discussions were also held among representatives of the Company and the D. E. Shaw group’s outside tax accounting and actuarial firms.

On April 27, 2007, Messrs. Abram and Oakes, with the authorization of Mr. Zerbib, met with representatives of the A.M. Best Company to discuss generally, on a no-names basis, the possibility that the Company would enter into a sale transaction and the anticipated structure following such a transaction, including a Bermuda-based holding company and a Bermuda-based reinsurance affiliate.

On April 30, 2007, members of the board committee, with one member absent, met by telephone conference together with representatives of JPMorgan and Skadden Arps, to discuss a telephone call Mr. Zerbib received from Mr. Martin during which Mr. Martin indicated that the D. E. Shaw group anticipated sending a revised proposal to the board committee that would include a price in the high-end of the $30.00-$32.00 per share range previously indicated in the April 9 proposal. Mr. Zerbib noted that he had indicated to Mr. Martin his belief that the board committee would not recommend a proposal at that price level and that Mr. Martin had, in response, requested guidance from the board committee regarding a price level at which it might consider recommending a proposal to our board of directors. Mr. Zerbib also indicated that Mr. Martin had noted that if the board committee required the purchase price to be in the mid-to-high $30’s per share, the D. E. Shaw group would not be interested in continuing discussions. Mr. Zerbib reported that Mr. Martin had explained that the D. E. Shaw group believed that the market price of our common stock already reflected the Company’s higher relative value as compared to the stock price of the companies in our peer group and already reflected a measurable increase over the past several months. Mr. Zerbib further noted that Mr. Martin had indicated a possible willingness on the part of the D. E. Shaw group for the Company to conduct a process to explore potential third-party interest for the sale of the Company, subject to the parties’ agreement as to the timing and other terms of such a process.

A representative of JPMorgan next provided the preliminary view of JPMorgan that the high-end of the price range for our common stock that the D. E. Shaw group would consider was between $32.00 and $35.00 per share based on the results of their valuation methodologies and the discussions to date with representatives of the D. E. Shaw group and Wachovia. The members of the board committee, with the assistance of their advisors, then discussed the strategy for responding to the D. E. Shaw

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group’s request for guidance from the board committee regarding a price level at which it would consider recommending a proposal to our board of directors and various merger agreement provisions, such as go-shop and termination provisions, and fiduciary duty issues that should be considered as part of a response to the D. E. Shaw group’s request for guidance, including JPMorgan’s view as to the timing and mechanics of any market check for the Company.

Following this discussion, the members of the board committee determined that, prior to responding, the board committee should receive in writing and review any proposal that the D. E. Shaw group should determine to submit. At the request of the board committee, Mr. Zerbib then contacted Mr. Martin by telephone to request that Mr. Martin provide the revised proposal in writing to the board committee. During that conversation, Mr. Zerbib reiterated the board committee’s concerns regarding the proposed purchase price and asked that the D. E. Shaw group resubmit a proposal at a higher price. Later that evening, the board committee received a revised, non-binding written proposal from the D. E. Shaw group, which we refer to in this proxy statement as the April 30 proposal. Following receipt of the April 30 proposal, representatives of JPMorgan also contacted representatives of Wachovia to obtain any additional guidance that Wachovia representatives might have regarding the April 30 proposal.

On May 1, 2007, the board committee members met by telephone conference together with representatives of JPMorgan and Skadden Arps to discuss the terms and conditions of the April 30 proposal. It was noted, among other matters, that the proposal: (1) was non-binding in nature and could be withdrawn or modified by the D. E. Shaw group at any time; (2) set forth a proposed price of $32.00 in cash per share of our common stock; (3) was subject to due diligence that the D. E. Shaw group described as confirmatory in nature and largely focused on A.M. Best Company rating agency implications; (4) had been reviewed and was supported, although not formally approved, by members of the D. E. Shaw group’s private equity group’s investment committee; (5) did not contemplate a financing condition; (6) requested a period of exclusivity of three weeks; and (7) contemplated that certain of the Company’s stockholders would enter into voting agreements. Representatives of JPMorgan then discussed their views of the April 30 proposal, including that, in JPMorgan’s view, the D. E. Shaw group was serious about its revised proposal and that it would be expected to have available sources of financing to fund and the ability to complete an acquisition of the Company. The board committee members and their advisors next discussed the recent range of trading prices and trading volume of our common stock, including that, as of such date, the 52-week high (intraday trading) was $34.48 per share, and go-shop and termination provisions, as well as fiduciary duty issues that would likely be raised as part of any negotiations with representatives of the D. E. Shaw group with respect to a transaction. The board committee members and their advisors then discussed the D. E. Shaw group’s request for guidance regarding price.

Following this discussion, it was agreed that Mr. Zerbib would contact Mr. Martin by telephone to indicate that the board committee was unwilling to agree to exclusivity, allow further due diligence or otherwise pursue a transaction at a price of $32.00 per share and that, in order for discussions to continue, the D. E. Shaw group would have to resubmit its proposal at a price in the high $34’s per share, and such proposal would have to contain an acceptable go-shop provision. The board committee members noted that this pricing guidance took into account the presentations previously received from JPMorgan regarding valuation and reflected a judgment as to the maximum price that the members of the board committee reasonably believed that the D. E. Shaw group would consider. Following the meeting, Mr. Zerbib contacted Mr. Martin by telephone to inform him of the board committee’s decision.

On May 5, 2007, Mr. Martin contacted Mr. Zerbib by telephone regarding the possibility of the D. E. Shaw group submitting a revised proposal.

On May 8, 2007, the board committee received a further revised, non-binding written proposal from the D. E. Shaw group, which we refer to in this proxy statement as the May 8 proposal, at a price of $34.50 per share in cash. Prior to submitting the revised proposal, Mr. Martin, on May 5, 2007, with the authorization of Mr. Zerbib, had a telephone call with Mr. Abram for the purpose of reviewing certain of the assumptions underlying the Company’s 2007 budget and related matters.

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On May 9, 2007, members of the board committee, with one member absent, met by telephone conference together with representatives of JPMorgan and Skadden Arps to: (1) review the terms and conditions of the May 8 proposal; (2) discuss the board committee’s legal duties and responsibilities in responding to the May 8 proposal; (3) receive feedback from JPMorgan on the financial terms of the May 8 proposal, which advice reflected JPMorgan’s view that the $34.50 in cash per share proposal was very attractive from a financial point of view and compared favorably to the results of their valuation methodologies previously reviewed with the board committee; and (4) consider strategies for responding to the May 8 proposal. During the review of the terms and conditions of the May 8 proposal, it was noted, among other matters, that the proposal:


	•	was at a price of $34.50 in cash per share;


	•	contained a 30-day go-shop period with notice and matching rights;


	•	provided for a termination fee equal to 1.5% of the purchase price during the go-shop period and 3% thereafter, as well as expense reimbursement in the event of termination of the merger agreement during the go-shop period or thereafter;


	•	contemplated expense reimbursement for the D. E. Shaw group (up to $750,000) for 50% of its expenses if for any reason the parties failed to enter into a merger agreement;


	•	would be fully financed from available funds and would not contain a financing condition;


	•	was conditioned on voting agreements from certain of the Company’s stockholders;


	•	was subject to due diligence that the D. E. Shaw group described as confirmatory in nature;


	•	was subject to discussions with A.M. Best Company regarding the validation by the D. E. Shaw group of rating agency implications;


	•	requested a three-week exclusivity period;


	•	contemplated that the D. E. Shaw group would expect, shortly before execution of the merger agreement, to negotiate with key members of management the terms of their continued employment and possible equity participation in the acquiring entity; and


	•	set forth the principal items and activities necessary for the D. E. Shaw group to complete the remainder of its due diligence.

The members of the board committee noted that the May 8 proposal did not state whether the Company’s regular quarterly cash dividend would be permitted to continue to be declared and paid between the execution of a definitive agreement and the closing of a transaction, which the members of the board committee felt was an important point. A representative of JPMorgan then discussed JPMorgan’s view that, given the attractiveness of the price and the D. E. Shaw group’s consistent statements regarding its unwillingness to further increase its proposed price, it would be more productive for the efforts of the board committee to be focused on the negotiation of the non-price terms of the May 8 proposal, rather than on further increasing the price. While it was recognized that the $34.50 price per share might, depending upon the market price of our common stock at the time of the announcement of the transaction, represent little-to-no premium over that market price, the board committee noted that such possibility did not affect the attractiveness of the price based on the results of the valuation methodologies performed by JPMorgan. In addition, given the limited trading volume of our common stock, there would be no assurance that the Company’s stockholders would be able to obtain liquidity at the prevailing market price. It was also noted that representatives of the D. E. Shaw group had confirmed that the anticipated voting agreements would contain customary terms that would expire upon termination of the definitive merger agreement, so that the voting agreements would not interfere with the Company’s ability to accept a superior proposal, should one develop during the go-shop or no-shop period.

The board committee members and their advisors next reviewed the request for a three-week exclusivity period and other aspects of the May 8 proposal, including issues associated with granting notice and matching rights during the go-shop period. Representatives of JPMorgan then discussed

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how the go-shop process would be undertaken by the board committee and the Company and expressed its views as to the terms of the go-shop proposed by the D. E. Shaw group. Following this discussion, JPMorgan recommended responding to the D. E. Shaw group’s proposal by requesting a 45-day go-shop period with no notice and matching rights and a 1.25% termination fee with no expense reimbursement during the go-shop period. The representatives of JPMorgan expressed their view that these terms would provide sufficient flexibility for the Company to undertake an appropriate post-signing market check. The members of the board committee also discussed that it was important that the response to the May 8 proposal clarify that the Company’s regular quarterly cash dividend would be permitted to continue between the execution of a definitive agreement and the closing of a transaction and that the transaction would not be subject to the receipt of any particular rating from A.M. Best Company. It was also the view of those present to grant exclusivity, subject to the concurrence of our board of directors at a meeting scheduled to be held on May 17, 2007, but not to initially offer to provide the requested pre-signing expense reimbursement, although Mr. Zerbib was authorized, on behalf of the board committee, to enter into an expense reimbursement agreement for pre-signing expenses incurred by the D. E. Shaw group substantially consistent with the terms outlined in the May 8 proposal.

In making the determination to proceed with representatives of the D. E. Shaw group in exploring a transaction on the foregoing terms, the members of the board committee considered and discussed:


	•	JPMorgan’s recommendation that the proposed purchase price of $34.50 in cash per share represented an attractive valuation for stockholders based on peer trading, transaction comparables and the intrinsic valuation analysis employed by JPMorgan;


	•	the Company’s prior efforts to explore business combination transactions, which had not led to a transaction;


	•	current insurance market conditions;


	•	the limited opportunity for our stockholders to monetize their shares at the current share price given the limited liquidity of our common stock;


	•	their belief that the D. E. Shaw group was at the high end of its price range;


	•	their view that the May 8 proposal was a bona fide proposal with few contingencies and no financing condition;


	•	the risk that the D. E. Shaw group could withdraw its proposal or reduce its proposed share price;


	•	the Company’s ability to conduct a post-announcement market check of the price through the go-shop provision; and


	•	the possibility that the D. E. Shaw group would not continue with discussions in light of the significant resources and expenses it was incurring in conducting its due diligence review of the Company, preparing the transaction agreements and in other matters relating to the transaction, unless the Company provided expense reimbursement and a reasonable period of exclusivity.

The members of the board committee determined that Mr. Zerbib should update the board committee member who was absent from the meeting and, assuming his concurrence with the views of the other members of the board committee, respond, as planned, to Mr. Martin regarding the May 8 proposal.

Following the meeting, Mr. Zerbib, after receiving the concurrence of the absent board committee member, contacted Mr. Martin by telephone and conveyed the planned response to the May 8 proposal. During this telephone call, Mr. Zerbib noted that the board committee was inclined to support the D. E. Shaw group’s request for exclusivity to facilitate the D. E. Shaw group’s development of the terms of definitive agreements, but that the granting of such request would need to await approval by our board of directors at a meeting that had been previously scheduled for May 17, 2007. Also following the meeting, representatives of JPMorgan contacted representatives of Wachovia by telephone to seek clarification on certain aspects of the May 8 proposal, including

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receiving confirmation that the Company’s regular quarterly cash dividend would be permitted to continue between the execution of a definitive agreement and the closing of a transaction.

On May 10, 2007, Mr. Zerbib had several discussions with Mr. Martin regarding the May 8 proposal, including as to whether there would be notice and matching rights during the go-shop period, the amount of the termination fee during the go-shop period and expense reimbursement if for any reason the parties failed to enter into a merger agreement, as well as expense reimbursement in the event the proposed merger agreement was terminated during the go-shop period or thereafter. During these discussions, Mr. Zerbib reiterated that the board committee would not agree to notice and matching rights during the go-shop period and that the termination fee during the go-shop period should be 1.25% with no expense reimbursement. In response to Mr. Martin’s insistence on reimbursement for expenses incurred prior to the execution of a definitive agreement, as well as the D. E. Shaw group’s concern that our board of directors would not be acting on its request for exclusivity for another week, Mr. Zerbib indicated that the Company would agree to be responsible for out-of-pocket expenses incurred by the D. E. Shaw group relating to a transaction (up to a maximum of $300,000) if our board of directors did not concur on May 17, 2007 with entering into an exclusivity agreement. Mr. Zerbib also noted that if our board of directors were to approve the entering into of an exclusivity agreement on May 17, 2007, the Company would agree to be responsible for 50% of the out-of-pocket expenses incurred by the D. E. Shaw group relating to a transaction (up to $750,000 in the aggregate), except in certain events, such as the D. E. Shaw group’s unwillingness to enter into a definitive agreement on or prior to June 4, 2007 on the terms substantially as set forth in the May 14 proposal discussed below. Also, on May 10, 2007, representatives of JPMorgan contacted representatives of Wachovia to discuss various matters relating to the go-shop and expense reimbursement provisions.

On the evening of May 11, 2007, the D. E. Shaw group delivered a further revised, non-binding written proposal, which we refer to in this proxy statement as the May 11 proposal, as well as drafts of an expense reimbursement agreement and exclusivity agreement.

During the period from May 12-14, 2007, representatives of Skadden Arps and Bryan Cave, in consultation with Mr. Zerbib, negotiated with Debevoise, in consultation with Mr. Martin, principally to finalize the expense reimbursement agreement and related exclusivity agreement. During the period of May 12-17, 2007, the D. E. Shaw group and its advisors continued their due diligence of the Company.

On May 14, 2007, the board committee received a further revised, non-binding written proposal from the D. E. Shaw group, which we refer to in this proxy statement as the May 14 proposal, together with final versions of the expense reimbursement agreement and exclusivity agreement. The May 14 proposal:


	•	was at a cash price of $34.50 per share;


	•	contained a 45-day go-shop period with no notice and matching rights during such period;


	•	provided for a termination fee equal to 1.25% of the purchase price during the go-shop period and 3.00% thereafter;


	•	provided for reimbursement of out-of-pocket expenses subsequent to termination of the go-shop period under customary circumstances up to a reasonable and customary cap;


	•	would be fully financed from available funds and would not contain a financing or rating agency condition;


	•	was conditioned on voting agreements from certain of the Company’s significant stockholders;


	•	contemplated that the D. E. Shaw group would expect, shortly before execution of the merger agreement, to negotiate with key members of management the terms of their continued employment and possible equity participation in the acquiring entity;


	•	permitted the Company to declare and pay its regular quarterly cash dividend in the ordinary course and consistent with past practice between signing and closing of a transaction; and

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	•	set forth the principal items and activities necessary for the D. E. Shaw group to complete the remainder of its due diligence.

The May 14 proposal was substantially similar to the May 11 proposal except that it recognized that the Company’s obligation to reimburse the D. E. Shaw group for its expenses following the termination of the merger agreement would be limited to ‘‘customary circumstances’’, as would be set forth therein. On May 14, 2007, Mr. Zerbib, on behalf of the Company, entered into the expense reimbursement agreement with members of the D. E. Shaw group.

Also, on May 14, 2007, representatives of JPMorgan participated in a telephone conference with representatives of the D. E. Shaw group to: (1) schedule an on-site management meeting with C. Kenneth Mitchell, the president and chief executive officer of Stonewood Insurance Management Company, Inc. and Michael P. Kehoe, the president and chief executive officer of James River Management Company, Inc.; (2) schedule an in-person meeting with representatives of A.M. Best Company; and (3) follow up on open due diligence matters. From May 14-June 11, 2007, representatives of the D. E. Shaw group and its financial, actuarial, accounting and legal advisors were also granted access to additional due diligence materials and thereafter requested further due diligence materials from time to time, which were subsequently provided by the Company in coordination with its financial and legal advisors.

On May 17, 2007, a regularly scheduled meeting of our board of directors was held. In addition to the directors, representatives of Bryan Cave, JPMorgan and Skadden Arps and, for a portion of the meeting, certain members of management of the Company were present. The purpose of the meeting was to: (1) approve the declaration of a quarterly dividend to our stockholders; (2) provide our board members with management reports for each of our insurance subsidiaries; (3) provide our board members with reports from our audit committee, compensation committee and investment committee; (4) update our board members on developments since the last board meeting, including the terms and conditions of the May 14 proposal and the status of negotiations with representatives of the D. E. Shaw group; (5) discuss with our board members their legal duties and responsibilities; (6) provide our board members with an opportunity to receive a full presentation from JPMorgan, including a review of the preliminary valuation materials disseminated by JPMorgan prior to the meeting; (7) discuss with the directors next steps in connection with the potential transaction and various alternatives; and (8) seek our board’s concurrence with the board committee’s recommendation that the D. E. Shaw group be granted a three-week period of exclusivity with a view to finalizing the terms of its proposal for consideration by the board committee and our board of directors.

The members of management of the Company assisted in the review of the projections contained in the JPMorgan preliminary valuation materials, but were excused from the portion of the meeting at which the results of JPMorgan’s preliminary valuation analysis were discussed. In describing the recommendation of the board committee, the members of the board committee advised our board of directors of their belief that the benefits of continued exploration of a transaction outweighed the potential for additional expense reimbursement to members of the D. E. Shaw group. Moreover, the board committee members expressed their view that the go-shop provisions presently proposed, including the 45-day go-shop period with no notice and matching rights and a 1.25% termination fee with no expense reimbursement during the go-shop period, reflected the good faith negotiations of the parties, and after considering the advice of JPMorgan in respect of the following, that these provisions would provide sufficient flexibility for the Company to undertake an appropriate post-signing market check. After considering the recommendation of the board committee, the input from the various advisors and their own deliberations, our board of directors unanimously authorized the board committee to further explore a transaction with members of the D. E. Shaw group on the terms set forth in the May 14 proposal, including by entering into the exclusivity agreement.

On May 17, 2007, Mr. Zerbib, on behalf of the Company, executed the exclusivity agreement with members of the D. E. Shaw group granting a period of exclusivity until June 4, 2007, subject to earlier termination in certain circumstances.

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On May 18, 2007, Debevoise, on behalf of the D. E. Shaw group, delivered an initial draft of the merger agreement. Drafts of the voting agreement and the equity commitment letter were provided at a later date.

On May 21, 2007, Messrs. Abram and Oakes, together with members of the Company’s insurance company subsidiaries’ management, met in person at the offices of Stonewood Insurance Company with representatives of the D. E. Shaw group and representatives of JPMorgan and Wachovia to discuss, among other matters, the insurance company subsidiaries’ businesses and operations and the Company’s reinsurance strategy, as well as to prepare for a meeting with representatives of A.M. Best Company at which possible rating agency implications arising from the transaction would be discussed.

Following the May 21, 2007 meeting at the offices of Stonewood Insurance Management Company, Inc., Messrs. Abram and Oakes, together with a representative of JPMorgan, had a meeting with Messrs. Martin and Aube, at which they discussed, among other things, the D. E. Shaw group’s general philosophy for compensating senior executives, including competitive salaries, performance-based cash bonuses and possibly options or other equity-based incentives for management. However, these discussions were general in nature, and did not address the specific compensation terms of the employees of the Company as a group or individually.

From May 21-31, 2007, representatives of the Company, including Messrs. Abram and Oakes, and representatives of the D. E. Shaw group, including Messrs. Martin and Aube, as well as representatives of their respective advisors, had a number of telephone conferences and in-person meetings regarding due diligence matters, the insurance regulatory filing and approval process and the preparation of presentation materials for the meeting with A.M. Best Company scheduled for May 30, 2007.

During the period from May 23-29, 2007, representatives of Skadden Arps and Bryan Cave, on behalf of the Company, and Debevoise, on behalf of the D. E. Shaw group, exchanged drafts of the various transaction agreements. This was followed by an in-person meeting on May 30, 2007 between representatives of Skadden Arps and Bryan Cave and representatives of Debevoise to discuss and negotiate certain provisions of the latest drafts of the merger agreement, equity commitment letter and the form of voting agreement. The parties discussed, among other provisions in the merger agreement, the following: (1) the ability of our board of directors to effect a recommendation withdrawal not related to the receipt of a superior proposal; (2) triggers for when Buyer and the Company would be permitted to terminate the merger agreement; (3) triggers for when Buyer and the Company would be obligated to pay a termination fee and reimburse expenses and the amounts thereof, including the possibility that Buyer would be required to pay a termination fee and reimburse expenses to the Company in the event that it failed to obtain any of the necessary regulatory approvals; and (4) the specified exceptions to the definition of material adverse effect.

On May 27, 2007, Messrs. Abram and Oakes, representatives of the D. E. Shaw group and representatives of Bryan Cave, Skadden Arps, Debevoise, Wachovia and the Company’s and the D. E. Shaw group’s respective local counsel in the domiciliary states of the insurance company subsidiaries, participated in a telephone conference to discuss the timing and mechanics of, and other issues relating to, the insurance regulatory filing and approval process. On May 29, 2007, Messrs. Abram and Martin and representatives of Bryan Cave and Debevoise participated in a follow-up telephone conference regarding the insurance regulatory filing and approval process.

On May 30, 2007, Messrs. Abram and Oakes and Mr. Martin met in person with representatives of A.M. Best Company to introduce them to representatives of the D. E. Shaw group and inform them on a confidential basis of the potential transaction. The purpose of the meeting was to discuss possible rating agency implications from the announcement of the potential transaction and the implementation of the D. E. Shaw group’s planned Bermuda reinsurance strategy.

On June 1, 2007, the board committee members met by telephone conference together with representatives of JPMorgan and Skadden Arps. The purpose of the meeting was to: (1) receive an update on the status of negotiations with representatives of the D. E. Shaw group; (2) review the principal open issues remaining in the transaction agreements; (3) discuss the triggers for payment and

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the amount of the reverse termination fee payable by Buyer; and (4) receive feedback on the May 30, 2007 meeting with A.M. Best Company. The principal open issues identified in the transaction agreements were:


	•	the ability of our board of directors to withdraw its recommendation and terminate the merger agreement absent a superior proposal;


	•	the possible requirement that the Company may need to facilitate the financing of a transaction through an inter-company dividend prior to the completion of a transaction;


	•	the size of the reverse termination fee and expense reimbursement payable by Buyer and the events that would cause it to be triggered, including the possibility that Buyer would be required to pay a termination fee and reimburse expenses to the Company in the event that it failed to obtain any of the necessary regulatory approvals;


	•	the events that would give rise to a Company obligation to pay a termination fee;


	•	the date after which the parties could unilaterally terminate the merger agreement;


	•	the cap, if any, that would be placed on the Company’s potential liability for monetary damages under the merger agreement for any breach by the Company; and


	•	whether the voting agreements would apply if a majority of the shares not subject to a voting agreement vote against the transaction.

On June 2, 2007, Mr. Martin contacted Mr. Zerbib by telephone to inform him that, particularly in light of our insistence that the Buyer pay a reverse termination fee in the event it failed to obtain any of the necessary regulatory approvals, the D. E. Shaw group required an opportunity to discuss the transaction and its proposed regulatory filings with the insurance regulator in the domiciliary state of Stonewood Insurance Company prior to concluding negotiations of the open issues in the transaction agreements.

On June 2-3, 2007, Messrs. Abram and Martin and a representative from Hunton & Williams LLP, the Company’s local counsel in the domiciliary state of Stonewood Insurance Company, which we refer to in this proxy statement as Hunton & Williams, and representatives of Debevoise and Bryan Cave, participated in numerous telephone conversations regarding the D. E. Shaw group’s request that it be afforded an opportunity to discuss the transaction and related regulatory filings with insurance regulators. It was agreed that a representative of Hunton & Williams would contact a representative of the insurance department of the domiciliary state of Stonewood Insurance Company to arrange the meeting requested by the D. E. Shaw group.

On June 3, 2007, the members of our board of directors met by telephone conference together with representatives of Bryan Cave, JPMorgan and Skadden Arps. The purpose of the meeting was to update our board members on the status of the transaction, including the request by the D. E. Shaw group to discuss the transaction and the related regulatory filings with insurance regulators. During this meeting, Mr. Zerbib expressed his view, which was informed by discussions with Mr. Abram, that the potential opportunity for a representative of the D. E. Shaw group to meet with a representative of the insurance department of the domiciliary state of Stonewood Insurance Company was a positive factor that weighed in favor of continuing to work with representatives of the D. E. Shaw group and its advisors over the next several days. Our board members next affirmed the importance of there being parity in the maximum amount of the termination fees payable by Buyer and the Company and having the reverse termination fee payable if the members of the D. E. Shaw group were not able to obtain, for any reason, any of the necessary regulatory approvals. Following this discussion, our board of directors determined that the Company should continue to work with representatives of the D. E. Shaw group and its advisors over the next several days to facilitate a meeting with the insurance department of the domiciliary state of Stonewood Insurance Company, but that the exclusivity arrangement should be terminated as of the close of business on June 4, 2007, as permitted by the terms of the exclusivity agreement. The board also discussed the possibility of making initial contact with certain select potential buyers once the exclusivity period expired.

On June 4, 2007, Mr. Zerbib confirmed with Mr. Martin by e-mail that the exclusivity period had terminated as of the close of business on that day.

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During the period from June 4-6, 2007, Messrs. Abram and Oakes and a representative from Hunton & Williams participated in numerous telephone conferences with various representatives of the D. E. Shaw group and representatives of Debevoise and Bryan Cave to review and finalize the presentation materials for a meeting with a representative of the insurance department of the domiciliary state of Stonewood Insurance Company scheduled for June 7, 2007.

Following the expiration of the exclusivity period, Mr. Abram, as part of an effort developed with Mr. Zerbib, as chairman of the board committee, and JPMorgan, contacted and then met in person on June 5, 2007 with representatives of a private equity firm, which we refer to in this proxy statement as Party A, to introduce the Company and its management to such firm and to inquire as to such firm’s interest in possibly pursuing an acquisition of the Company. The Company had on prior occasions, following its entry into the exclusivity agreement with the D. E. Shaw group, been contacted by an investment bank representing such firm to indicate that such firm had high regard for the management of the Company. During such meeting, representatives of Party A confirmed their interest in the Company, including their high regard for the Company’s management. Representatives of Party A also indicated their desire to engage in due diligence. To facilitate an open discussion at the meeting, representatives of Party A executed a non-disclosure and standstill agreement with the Company.

In addition, during the period from June 5-7, 2007, as part of an effort to solicit interest in the Company, Mr. Abram and/or other representatives of the Company and JPMorgan initiated preliminary discussions with representatives of several potential strategic acquirors and another private equity firm regarding their interest in possibly pursuing an acquisition of the Company. These discussions took place in person and on the telephone, and Mr. Abram traveled to a meeting outside the United States during this period to engage in discussions with a potential strategic buyer. Although as described below some of these parties entered into non-disclosure and standstill agreements during the go-shop period, none of them submitted any indications of interest or proposals.

On June 7, 2007, Messrs. Abram and Martin and a representative from Hunton & Williams met with a representative of the insurance department of the domiciliary state of Stonewood Insurance Company to discuss the transaction and insurance regulatory filings in that state in respect of an acquisition by the D. E. Shaw group of the Company and indirectly Stonewood Insurance Company. Following the meeting, Mr. Martin informed Mr. Zerbib by telephone that the D. E. Shaw group was ready to proceed to finalize negotiations and, if the open issues in the transaction agreements were resolved, to execute such agreements. During this telephone call, Mr. Zerbib and Mr. Martin agreed to discuss several unresolved issues in the merger agreement that evening, including the amount of the reverse termination and Company termination fees and expense reimbursement provisions. Representatives of Bryan Cave, Skadden Arps and Debevoise discussed unresolved issues over the course of the day in preparation for the discussion between Messrs. Zerbib and Martin.

Also, on June 7, 2007, representatives of Party A’s financial advisor contacted Mr. Zerbib to express its client’s interest in pursuing an acquisition of the Company.

During the period from June 7-10, 2007, the board committee, representatives of the Company and the D. E. Shaw group and their respective advisors worked together to finalize the terms and conditions of the transaction documents, including with respect to the form of voting agreement, having it reviewed by, and receiving the input of, counsel to certain of the Significant Stockholders.

On June 8, 2007, Mr. Abram, in consultation with Mr. Zerbib, had a telephone discussion with representatives of Party A regarding its potential interest in the Company. Also, on June 8, 2007, representatives of JPMorgan had similar discussions with representatives of Party A’s financial advisor. Later in the same day, Party A submitted a non-binding preliminary indication of interest, which we refer to in this proxy statement as the Party A proposal. The Party A proposal did not specify a purchase price or range of prices, and stated that it did not constitute a formal offer but was intended to form the basis of discussions regarding a possible offer for the Company and that any formal offer would be subject to the satisfaction or waiver of the conditions discussed below. Following receipt of the Party A proposal, JPMorgan contacted Party A’s financial advisor in an effort to clarify the terms

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of such proposal, but Party A’s financial advisor indicated that it was not in a position to provide clarity as to the price that Party A might be willing to consider without further guidance from Party A.

During the day on June 8, 2007, Messrs. Zerbib and Martin and their respective advisors continued their discussion of several unresolved issues in the merger agreement.

Later in the day on June 8, 2007, the board committee members met by telephone conference together with representatives of JPMorgan, Skadden Arps and Bryan Cave. The purpose of the meeting was to: (1) discuss the terms and conditions of the Party A proposal; (2) receive feedback on the Party A proposal from representatives of Skadden Arps and JPMorgan; (3) consider appropriate next steps with regard to the Party A proposal; and (4) receive an update on recent developments in negotiating the remaining issues in the transaction agreements with representatives of the D. E. Shaw group. During the discussion of the terms and conditions of the Party A proposal, it was noted, among other matters, that the proposal:


	•	was not a formal offer, was non-binding in nature and could be withdrawn by Party A at any time for any reason;


	•	contemplated a price payable in cash at ‘‘a value meaningfully in excess of $34.39 per share’’ (which was the Company’s closing price on NASDAQ on June 7, 2007, the day preceding the proposal), but did not specify a price or range of prices or further clarify the meaning of ‘‘a value meaningfully in excess of $34.39 per share’’;


	•	was subject to completion of satisfactory due diligence and negotiation of satisfactory definitive documentation;


	•	was subject, among other conditions, to:


	–	confirmation from relevant insurance regulatory authorities that there were no regulatory obstacles to the acquisition;


	–	agreement on satisfactory transaction documentation;


	–	no material adverse change in the Company’s business, trading or financial position or prospects; and


	–	no unusual dividends being declared;


	•	was based on publicly available information and therefore was subject to due diligence; Party A indicated it expected to be able to complete its business due diligence within 30 days;


	•	briefly outlined Party A’s strategy for the Company;


	•	was not conditioned on a grant of exclusivity or expense reimbursement; and


	•	did not give any indication that Party A would not proceed in pursuing an acquisition of the Company if the Company entered into an alternative transaction.

The board committee members next received an update from Mr. Zerbib on his discussions with Mr. Martin and the negotiation of the merger agreement and the voting agreements on June 7-8, 2007. Mr. Zerbib informed the board committee members that during these discussions the amount of the reverse termination and Company termination fees and expense reimbursement provisions in the merger agreement were finalized in parity at 2.00% and up to 0.625%, respectively. Mr. Zerbib also updated the board committee members on the in-person meeting with a representative of the insurance department of the domiciliary state of Stonewood Insurance Company.

The board committee members then carefully discussed and weighed, with the assistance of their advisors, the benefits and risks associated with proceeding to finalize the transaction with members of the D. E. Shaw group, with or without modification of the go-shop and other similar provisions in light of the Party A proposal, and relying on the go-shop provisions to pursue discussions with Party A and determine whether its proposal would materialize into a definitive transaction, versus delaying entering into transaction agreements with members of the D. E. Shaw group so as to explore further

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potential interest from other parties, including Party A. The board committee members also discussed the fact that the $34.50 per share proposed price in the May 14 proposal was below the $35.18 per share closing price of our common stock on NASDAQ on June 8, 2007.

Following this discussion, the board committee determined that before a decision was made with respect to the various alternatives outlined above, Mr. Zerbib should contact Mr. Martin to discuss the fact that the proposed price in the May 14 proposal was below the current market price of our common stock, and the representatives of JPMorgan should follow up with representatives of Party A’s financial advisor to seek clarification of the price being proposed in the Party A proposal. The meeting was then adjourned to allow Mr. Zerbib and the JPMorgan representatives to make the above contacts. The meeting reconvened a short time later.

At the reconvened meeting, Mr. Zerbib updated the board committee on his discussions with Mr. Martin. Mr. Zerbib had indicated to Mr. Martin his concern as to whether the board committee and our board would find merger consideration of $34.50 per share acceptable in light of the fact that the closing price of our common stock on NASDAQ on June 8, 2007 was $35.18 per share, and had requested that Mr. Martin consider improving the proposed per share price. Mr. Zerbib indicated that Mr. Martin would get back to Mr. Zerbib after discussing Mr. Zerbib’s request internally and with the D. E. Shaw group’s advisors. Mr. Zerbib then updated the board committee on the conversation that representatives of JPMorgan had with representatives of Party A’s financial advisor. During this conversation, the JPMorgan representatives were informed that ‘‘a value meaningfully in excess of $34.39 per share’’ meant in the range of $38.00 to $40.00 per share of our common stock, subject to the satisfaction of all of the conditions set forth in the Party A proposal as discussed above. In light of this new information regarding the potential per share value of the Party A proposal, the board committee members, with the assistance of their advisors, discussed and compared in detail the Party A proposal and the May 14 proposal, including the consideration of the following factors:


	•	that the Party A proposal was not a formal offer, was non-binding in nature and could be withdrawn by Party A at any time for any reason;


	•	that the Party A proposal was conditioned on a number of factors as discussed above, many of which were not within the control of the Company, which created significant uncertainty as to whether a definitive transaction would ultimately be proposed and if so what the price and other terms might be;


	•	the fact that the transaction agreements evidencing the May 14 proposal, including equity funding commitments to Buyer from entities that are members of the D. E. Shaw group for all funding necessary to complete the merger, were substantially finalized and ready to be executed and, based on the results of the preliminary valuation analysis previously discussed by JPMorgan, that the $34.50 price per share in the May 14 proposal represented an attractive price;


	•	the advice of JPMorgan that the 45-day go-shop period, 1.25% termination fee with no expense reimbursement and the absence of notice and matching rights for the D. E. Shaw group during the go-shop period would provide sufficient flexibility for the Company to undertake an appropriate post-signing market check, including exploring the Party A proposal;


	•	the fact that the execution of the transaction agreements with Buyer would, upon closing, entitle stockholders to receive a price of $34.50 per share and would not preclude the Company from accepting a superior proposal, subject to the terms of the merger agreement; and


	•	the fact that the Company had no reason to believe that the Party A proposal would be withdrawn or that Party A would not remain interested in pursuing an acquisition of the Company as a result of the Company having entered into an agreement for an alternative transaction.

After considering these factors with the assistance of their advisors, the board committee members determined that it was in the best interests of the Company and its stockholders to pursue finalizing

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the transaction with members of the D. E. Shaw group. In making that determination, the board committee noted that if the Company entered into a merger agreement with members of the D. E. Shaw group, the Company would have in place a definitive agreement providing for (subject to the satisfaction or waiver of closing conditions) a sale at an attractive price, while the go-shop provision would still allow the Company to explore the Party A proposal and solicit interest from other potential parties.

On June 9, 2007, Mr. Martin contacted Mr. Zerbib by telephone in response to Mr. Zerbib’s request that he consider improving the proposed per share price in light of the previous day’s closing price of our common stock on NASDAQ. Mr. Martin indicated that, in the view of representatives of the D. E. Shaw group, the negotiated $34.50 per share merger consideration represented a full and fair price for our common stock, and that the fundamentals of the transaction had not changed as a result of the previous day’s increase in the market price of our common stock on a limited trading volume. He further indicated that the D. E. Shaw group would nevertheless be willing to consider making a proposal to acquire our common stock on the basis of a bifurcated purchase price, with the Significant Stockholders receiving a price of $34.50 per share in cash and the remainder of our stockholders receiving a price of $35.25 per share in cash, assuming that each of the Significant Stockholders would continue to agree to enter into voting agreements supporting the transaction on the terms previously negotiated. We refer to this possible proposal in this proxy statement as the bifurcated approach. Mr. Martin informed Mr. Zerbib that the rationale for the bifurcated approach would be to pay the ‘‘public’’ stockholders more in light of the recent increase in our stock price, but not increase the price payable to the Significant Stockholders, who had previously indicated a willingness to support a transaction, if approved by our board of directors, that provided $34.50 per share to all stockholders. Mr. Martin requested that Mr. Zerbib discuss the bifurcated approach with the Significant Stockholders with a view to determining whether they would support a transaction on such basis. Mr. Zerbib informed Mr. Martin that he would discuss the matter with the other members of the board committee and the Significant Stockholders and expected to be in a position to respond to Mr. Martin later that day.

Also, on June 9, 2007, the board committee members, with one member absent, met by telephone conference together with representatives of JPMorgan, Skadden Arps and Bryan Cave. The purpose of the meeting was to receive an update from Mr. Zerbib on his discussion with Mr. Martin, including the D. E. Shaw group’s rationale for the bifurcated approach and the contemplated terms thereof. The board committee members then discussed that the bifurcated approach, if accepted, would result in the investment funds affiliated with Messrs. Bronfman, Zech and Zerbib receiving a lower price per share than all of the other stockholders. The board committee members, with the advice and assistance of their advisors, entered into an extensive discussion regarding the potential implications of the bifurcated approach, including possible complications for the functioning of an effective sale process during the go-shop period and whether such an approach would be acceptable to some or all of the Significant Stockholders. A representative of Skadden Arps then discussed the legal duties and responsibilities of the board committee members in considering the bifurcated approach. At this time, the board committee members determined that Messrs. Zech and Zerbib would discuss the bifurcated approach with the persons responsible for making investment decisions on behalf of their respective affiliated investment funds and that Mr. Bronfman would do the same when he became available that evening. It was discussed that Messrs. Zech and Zerbib would report to each other on their respective internal investment decisions and, depending on the outcome of those decisions, consult with Mr. Bronfman prior to responding to Mr. Martin. The board committee members agreed to schedule a meeting for that evening to discuss developments occurring during the day regarding the bifurcated approach and related matters.

Following the meeting, Messrs. Zech and Zerbib proceeded to discuss the bifurcated approach with the persons responsible for making investment decisions on behalf of their respective affiliated investment funds. Both of Messrs. Zech and Zerbib were informed that their affiliated investment funds would not agree to enter into voting agreements in support of the bifurcated approach. Mr. Zerbib then had several telephone discussions, one of which was attended by the general counsel of Stone Point, during the day with representatives of Skadden Arps regarding the potential

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implications from a legal point of view regarding the bifurcated approach at that time not being accepted by two of the three Significant Stockholders given the fact that in their individual capacities, Messrs. Zech and Zerbib served as members of the board committee. Later in the day, Mr. Bronfman reported that his affiliated investment funds also would not agree to accept the bifurcated approach and would not agree to enter into a voting agreement in support of the bifurcated approach.

Also on June 9, 2007, Mr. Martin contacted Mr. Abram and expressed his view with regard to the status and course of the negotiation and the D. E. Shaw group’s continuing interest in a transaction with the Company. Messrs. Abram and Martin did not engage in substantive discussions regarding the proposed terms of the transaction, and Mr. Abram promptly reported this conversation to Mr. Zerbib.

Based on his discussions with other board committee members and representatives of his affiliated investment fund regarding the bifurcated approach, Mr. Zerbib, together with Mr. Wright, contacted Messrs. Aube and Martin by telephone to inform them that the bifurcated approach was not acceptable to the Significant Stockholders with whom the board committee was able to consult prior to such call. During the discussion that followed, various alternatives were suggested by Messrs. Wright and Zerbib and discussed in attempting to reach consensus on final terms, including making the higher per share price available to all stockholders or possibly offering a uniform price between $34.50 and the higher per share price to all stockholders. In addition, the parties alternatively considered and discussed possibly increasing the length of the go-shop period. As part of this discussion, Messrs. Wright and Zerbib understood that an extension of the go-shop period from its current 45 days would help to ensure that there was sufficient time during the go-shop period for any interested parties to explore their interest in the Company and possibly reach a definitive agreement with the Company. Following this discussion, Mr. Martin informed Messrs. Wright and Zerbib that he would have to discuss these possible alternatives and possibly others internally to see if any of them were acceptable. Shortly thereafter, Mr. Martin contacted Mr. Zerbib by telephone to inform him that the D. E. Shaw group would not agree to pay a price higher than $34.50 per share to all stockholders, but that it would agree to lengthen the go-shop period from its current agreed upon period of 45 days to 55 days with no notice and matching rights during the additional 10 days of the go-shop period. Based on these discussions, Messrs. Wright and Zerbib believed it was not likely that the D. E. Shaw group would agree to pay a price higher than $34.50 per share to all stockholders. Representatives of JPMorgan also had several discussions during the day with representatives of Wachovia in which the Wachovia representatives reiterated their client’s positions.

Later in the evening on June 9, 2007, the board committee members met again by telephone conference together with representatives of JPMorgan, Skadden Arps and, for a portion of the meeting, Bryan Cave. The purpose of the meeting was to receive an update from Messrs. Wright and Zerbib on their discussions during the day with Messrs. Aube and Martin and on the discussions between representatives of JPMorgan and Wachovia and to report on the latest proposal from the D. E. Shaw group. A representative of JPMorgan then discussed that while, in the view of JPMorgan, the initial 45-day go-shop period would have provided sufficient flexibility for the Company to undertake an appropriate post-signing market check, the lengthening of this period by an additional 10 days clearly was beneficial in helping to ensure that if there was a party willing to pay more than $34.50 per share, such party would have an appropriate opportunity to do so during the go-shop period, a time during which there is a reduced termination fee and no expense reimbursement would be payable. In this regard, it was noted that the addition of an extra 10 days would help ensure that there is sufficient time during the go-shop period for all interested parties to conduct due diligence, participate in management meetings, assess the potential prospects of the Company, submit a bid reflective of that understanding and possibly reach a definitive agreement with the Company, irrespective of the number of third parties that may express an interest in exploring the possibility of a transaction with the Company and the ongoing work required in connection with implementation of the transaction with the D. E. Shaw group. The board committee members also received feedback from representatives of JPMorgan that the $34.50 in cash per share offer in the May 14 proposal remained very attractive and continued to compare favorably to the valuation methodologies previously reviewed with the board committee and that this feedback was not affected by the fact that our common stock closed at $35.18 per share on NASDAQ on June 8, 2007. The board committee

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members then received an update from representatives of Skadden Arps on recent developments in negotiating the remaining issues in the transaction agreements with members of the D. E. Shaw group.

Representatives of Skadden Arps then discussed that in light of each of the Significant Stockholders’ decision not to accept the bifurcated approach, and given the fact that in their individual capacities three of the four members of the board committee were associated with the three Significant Stockholders, it would be advisable for the full board to consider the May 14 proposal, without first receiving a recommendation from the board committee. During the discussion that followed, the board committee members determined, with the assistance of representatives of Skadden Arps, that recent developments should be discussed and reviewed by our board of directors and that a decision on whether to accept the May 14 proposal with a 55-day go-shop period, which we refer to in this proxy statement as the definitive proposal, should be made by the full board after receiving input from each of the board committee members, but without receiving a recommendation from the board committee. It was also agreed during this discussion that Mr. Wright would communicate to Mr. Martin that the definitive proposal would be considered by the full board at a meeting scheduled for June 10, 2007. Following the meeting, Mr. Wright contacted Mr. Martin by telephone to inform him of these developments and timing.

On June 10, 2007, a representative of the D. E. Shaw group and representatives of Debevoise participated in a telephone conference with representatives of Skadden Arps, Bryan Cave and JPMorgan to discuss the financial capability of the relevant D. E. Shaw group entities to perform their obligations under the equity commitment letter. Also on June 10, 2007, prior to the meetings discussed below, representatives of Skadden Arps, Bryan Cave and Debevoise finalized the remaining issues in connection with the transaction agreements.

Thereafter on June 10, 2007, the board committee members met by telephone conference together with representatives of JPMorgan, Skadden Arps and Bryan Cave. The purpose of the meeting was to discuss and evaluate the definitive proposal and receive a briefing from representatives of Skadden Arps on recent developments in negotiating the final remaining issues in the transaction agreements with members of the D. E. Shaw group. Representatives of Skadden Arps began by once again discussing the legal duties and responsibilities of the board committee members. During a portion of the meeting, Mr. Abram was invited to discuss his view of the status of discussions with various parties contacted after the exclusivity period had terminated. Following the departure of Mr. Abram, a representative of Skadden Arps reviewed, and answered questions regarding, the terms and conditions of the proposed definitive transaction agreements with members of the D. E. Shaw group. Following this discussion, representatives of JPMorgan reviewed presentation materials that they had prepared in connection with the preparation of its fairness opinion. After addressing questions from the board committee members, a representative of JPMorgan orally delivered its opinion that, as of June 11, 2007, the date of the merger agreement, and based upon and subject to the factors and assumptions set forth in its written opinion, the price of $34.50 per share to be paid to the holders of shares of our common stock was fair, from a financial point of view, to such holders. See ‘‘The Merger — Opinion of JPMorgan’’ beginning on page 40 and Annex C to this proxy statement.

Later, on June 10, 2007, the members of the compensation committee of our board of directors also met by telephone conference together with representatives of Bryan Cave. The purpose of the meeting was to discuss and consider a modification of the Company’s general policy regarding the payment terms of cash bonuses to employees, including executive officers. The existing policy was that in order to be eligible for a cash bonus payment in any fiscal year, an employee must have been employed on December 31 of the fiscal year immediately preceding the fiscal year in which the applicable cash bonus payment (or portion thereof, as applicable) was actually made. The purpose of the proposed modification was, in anticipation of the execution of the merger agreement, to provide the Company’s employees with some financial protection and to encourage them to remain with the Company through the transition period. After consideration and deliberation, the compensation committee modified the policy as applied to cash bonus payments (or portion thereof, as applicable) to be made in the first quarter of 2008, to provide that if an employee is terminated, other than for cause, following the closing of the transaction with members of the D. E. Shaw group or a similar transaction, such employee will nonetheless be entitled to receive any cash bonus payment (or portion

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thereof, as applicable) that he or she would have been entitled to receive in the first quarter of 2008 had such employee been employed by the Company on December 31, 2007.

Following the compensation committee meeting on June 10, 2007, our board members met by telephone conference together with representatives of Bryan Cave, JPMorgan and Skadden Arps. The purpose of the meeting was to discuss and consider the definitive proposal. Mr. Zerbib began the meeting by summarizing material developments since the last board meeting, including receipt of the Party A proposal and the board committee’s reasons for not pursuing that proposal at this time. A representative of Skadden Arps then discussed the reasons that the board committee felt it was appropriate for the May 14 proposal to be brought before the full board for consideration without the board committee making a recommendation in respect of such proposal. Representatives of Bryan Cave and Skadden Arps then discussed with our board its legal duties and responsibilities in considering these matters.

Representatives of JPMorgan then reviewed the financial terms of the definitive proposal and the status of the Company’s discussions with Party A. Following additional discussion, it was the consensus of our board of directors that:


	•	$34.50 per share was a fair price, a view that, in our board’s judgment was not affected by the fact that our common stock, on limited trading volume, closed at $35.18 on NASDAQ on June 8, 2007, as confirmed by the fairness opinion from JPMorgan delivered to our board of directors as discussed below;


	•	the Party A proposal was not a formal offer, was non-binding in nature and was conditioned on a number of factors as discussed above, many of which were not within the control of the Company;


	•	Party A would not be able to enter into a definitive agreement within the near future, as Party A indicated it expected to need 30 days within which to complete its business due diligence and it had not yet begun to negotiate the transaction documents;


	•	there was a significant risk of losing the fully negotiated definitive proposal with the D. E. Shaw group if the process were to be delayed in order to engage in negotiations with Party A, without Party A providing any commitment that it would be in a position to make an offer for the Company at the end of such due diligence period;


	•	the Company’s termination fees during both the go-shop period and the no-shop period (and in the case of the no-shop period, reimbursement of Buyer’s and Merger Sub’s transaction expenses up to the agreed upon cap) should not preclude another bidder from making a superior proposal in the manner to be permitted by the merger agreement; and


	•	there was no reason to believe that the Party A proposal would be withdrawn or that Party A would not remain interested in pursuing an acquisition as a result of the Company having entered into a definitive agreement with Buyer.

Following this discussion, representatives of JPMorgan then reviewed with our board members presentation materials that they had prepared in connection with the preparation of its fairness opinion. After addressing questions from our board members, a representative of JPMorgan orally delivered its opinion that, as of June 11, 2007, the date of the merger agreement, and based upon and subject to the factors and assumptions set forth in its written opinion, a price of $34.50 per share in cash to be paid to the holders of shares of our common stock was fair, from a financial point of view, to such holders. See ‘‘The Merger — Opinion of JPMorgan’’ beginning on page 40 and Annex C to this proxy statement. Representatives of Skadden Arps and Bryan Cave then reviewed, and answered questions regarding, the terms and conditions of the proposed definitive merger agreement, equity commitment letter and form of voting agreement. As part of this discussion, the resolution of the remaining issues in the merger agreement were reviewed, in particular:


	•	the agreement that there be parity in the maximum amount of the termination fees and expense reimbursement payable by Buyer and the Company;


	•	the requirement that the termination fee be payable by Buyer in the event:

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	–	of the failure of Buyer to obtain necessary regulatory approvals; and


	–	all of the conditions to Buyer and Merger Sub closing, other than necessary regulatory approvals, are satisfied or waived and Buyer fails to fund the merger consideration; and


	•	the ability of the Company to effect a recommendation withdrawal not related to the receipt of a superior proposal, and the survival of the voting agreements for three months following termination of the merger agreement in such event.

The board committee members then discussed the process that the board committee and its advisors had undertaken to evaluate, among other things, the proposed transaction with members of the D. E. Shaw group, and to develop the material terms of the transaction agreements. In addition, the board committee members each expressed his individual support for the transaction based on the reasons previously discussed with our board of directors and set forth under ‘‘The Merger — Reasons for the Merger; Recommendation of Our Board of Directors’’ beginning on page 37. Following additional discussion and deliberation, including consideration of the reasons enumerated in ‘‘The Merger — Reasons for the Merger; Recommendation of Our Board of Directors’’ beginning on page 37, our board of directors approved, by unanimous vote, the merger agreement and the equity commitment letter and the transactions contemplated thereby and resolved to recommend that the Company’s stockholders vote to adopt the merger agreement.

Prior to the opening of trading on June 11, 2007, the Company, Buyer and Merger Sub executed and delivered the merger agreement; the appropriate parties executed and delivered the equity commitment letter, the voting agreements and the ancillary documents; JPMorgan delivered its written fairness opinion as described above; and the Company issued a press release announcing the transaction with members of the D. E. Shaw group.

Under the terms of the merger agreement, the Company had the right during the go-shop period to, directly or indirectly, (i) actively solicit and encourage the submission of competing proposals from third parties, (ii) provide non-public information to third parties subject to entering into qualifying confidentiality agreements and (iii) participate in discussions or negotiations with third parties regarding, and take any other action to facilitate any inquiries or the making of any proposal that constitutes, or could reasonably be expected to lead to, a competing proposal. At its meeting held on June 10, 2007, our board of directors authorized and empowered the board committee to supervise, with the assistance of its financial and legal advisors, management of the Company and the Company’s legal advisors, the solicitation, during the go-shop period, of potential competing proposals from third parties.

At the direction and under the supervision of the board committee, representatives of JPMorgan and certain members of the board committee and management, as appropriate, contacted 43 parties that were viewed as being capable of, and possibly interested in, consummating an acquisition of the Company. The list of parties contacted included 29 domestic and foreign strategic buyers and 14 financial buyers, including Party A and the other parties referenced earlier who had been contacted by the Company shortly prior to the execution of the merger agreement. During the solicitation process, representatives of JPMorgan and certain members of the board committee and management invited such parties to engage in discussions and negotiations with a view to making a competing proposal and indicated a desire to provide non-public information to assist in this process. Of the 43 parties contacted, three parties, including Party A, entered into non-disclosure and standstill agreements with the Company and received non-public information. After engaging in varying degrees of due diligence, two of the three parties informed representatives of JPMorgan that they were not prepared to make a competing proposal. The third party, Party A, continued to receive extensive non-public information, including information in the data room prepared for the D. E. Shaw group, as well as other information requested by Party A, and indicated that it might make a competing proposal once it completed its evaluation of the due diligence information.

Certain members of the board committee and management, representatives of JPMorgan and representatives of Bryan Cave and Skadden Arps had a number of telephone conferences and, in some cases, in-person meetings, regarding due diligence matters, with Party A and its financial, legal and other advisors. Party A engaged outside actuaries and financial, legal, accounting and tax advisors

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to assist in its diligence process, and its diligence teams included these outside professionals as well as various of Party A’s own operating officers. In its diligence process, representatives of Party A visited the Company’s facilities, met with operating management and reviewed, among other things, the Company’s underwriting and claims processes. In discussions, representatives of Party A indicated a desire for management to remain with the Company and suggested that investment opportunities might be available for management. No terms of employment or for potential investment were proposed or discussed.

Representatives of Bryan Cave and Skadden Arps also engaged in discussions and negotiations with members of Party A and its legal advisors with regard to the possible transaction terms and documents. During these discussions and negotiations, at the direction of the board committee, certain members of the board committee and management and representatives of Bryan Cave and Skadden Arps, in order to induce Party A to make a competing proposal, indicated to Party A and its advisors a willingness to consider modifying certain terms in the forms of transaction agreements previously entered into with Buyer and Merger Sub, which terms principally related to fiduciary duty and termination provisions. The possible purchase price, however, was not discussed because Party A informed the Company it was not prepared to disclose or discuss possible merger consideration unless and until Party A formally made a competing proposal.

At the end of this process, Party A acknowledged that it had completed its due diligence and had received all the information that it had required. It further stated that it was prepared to present a competing proposal and complete final negotiations, with the expectation of entering into definitive documentation and announcing a transaction prior to the expiration of the go-shop period. A meeting time was scheduled for this purpose on August 1, 2007. However, shortly before the agreed meeting time, Party A contacted Mr. Abram by telephone to inform him that Party A had determined, following additional internal discussions within Party A, not to make a competing proposal in light of recent adverse changes in the debt and equity markets.

The Company announced on August 6, 2007 that the go-shop period had expired and that the Company had not received any competing proposals during the go-shop period.

Reasons for the Merger; Recommendation of Our Board of Directors

At a meeting held on June 10, 2007, our board of directors, after careful review of the facts and circumstances relating to the merger, unanimously (a) determined that the merger is in the best interests of the Company and its stockholders and declared it advisable to enter into the merger agreement, (b) approved the execution, delivery and performance of the merger agreement and the equity commitment letter, and the consummation of the transactions contemplated thereby, including the merger, (c) resolved, subject to the right of our board of directors to effect a recommendation withdrawal and/or terminate the merger agreement in certain circumstances, to recommend that the stockholders approve the adoption of the merger agreement and directed that such matter be submitted for consideration of the stockholders at the special meeting and (d) took all necessary steps so that the provisions of Section 203 of the Delaware General Corporation Law, which we refer to in this proxy statement as the DGCL, and any ‘‘moratorium’’, ‘‘control share acquisition’’, ‘‘business combination’’, ‘‘fair price’’ or other form of anti-takeover laws or regulations of any jurisdiction that may purport to be applicable to the merger agreement do not apply to the execution and delivery of the merger agreement and the transactions contemplated thereby, including, without limitation, as a result of the entering into of the voting agreements by the parties thereto. Our board of directors unanimously recommends that you vote ‘‘FOR’’ the adoption of the merger agreement and ‘‘FOR’’ the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies in the event that there are not sufficient votes in favor of the proposal to approve the adoption of the merger agreement at the time of the special meeting.

In reaching its determination, our board of directors considered a number of factors that favored our board of directors’ conclusion that the merger and related transactions were in the best interests of the Company and our stockholders, including:

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	•	The opinion received by our board of directors and the board committee from JPMorgan to the effect that, as of the date of the opinion and based upon and subject to the factors and assumptions set forth therein, the merger consideration to be paid to the holders of our common stock is fair, from a financial point of view, to such holders. A summary of JPMorgan’s presentation and analysis is described under ‘‘The Merger — Opinion of JPMorgan’’ beginning on page 40 and the written opinion of JPMorgan is included as Annex C to this proxy statement.


	•	The fact that the merger consideration of $34.50 in cash per share to be paid to our stockholders was higher than the price at which shares of our common stock ever closed prior to June 8, 2007, and represented an approximately 92% premium to the price at which shares of our common stock were first offered to the public in August 2005.


	•	The fact that the merger consideration of $34.50 in cash per share to be paid to our stockholders in the merger:


	–	exceeded or was within the range of the results of the valuation analyses performed by JPMorgan;


	–	represented a price equal to 14.6 times trailing diluted earnings per share for the twelve months ended March 31, 2007; and


	–	represented an 11% premium over the 90-day volume-weighted average price per share at the date of the merger agreement.


	•	The fact that the purchase price to be paid to our stockholders:


	–	represented a price equal to approximately 2.6 times March 31, 2007 GAAP stockholders’ equity; and


	–	represented a price equal to 2.6 times March 31, 2007 GAAP tangible stockholders’ equity.


	•	The presentations made by JPMorgan, including the fact that the merger consideration to be paid to our stockholders was above five of seven ranges of value derived by JPMorgan.


	•	The fact that the material terms of the merger agreement were developed for consideration by our board of directors, by the board committee with the assistance of its and the Company’s advisors, and, as appropriate, senior management of the Company, as well as the belief of the members of our board of directors, after reviewing the matter with the members of the board committee and the board committee’s financial advisor, that the Company would likely not be able to obtain more favorable terms from Buyer.


	•	The view of our board of directors that, at the time the D. E. Shaw group proposal was being voted on by the board, the trading price of our common stock was fully valued in the marketplace, and that there was a risk that our stock price could decrease over time as compared to such value given the uncertainties and cyclicality of the property/casualty insurance marketplace.


	•	The fact that the transaction is not subject to a financing condition and equity commitments for the full amount of the merger consideration were to be received from affiliates of Buyer.


	•	The liquidity that the merger consideration will offer to our stockholders, especially given the limited trading volume of our common stock, and, in particular, the fact that between March 8, 2007 and June 8, 2007, the average trading volume of shares of our common stock on NASDAQ was only approximately 26,000 shares per day.


	•	The view of our board of directors that continuing to operate as a stand alone company was not likely to produce greater value in the near term, if our common stock were to trade consistent with its peers.


	•	The terms of the merger agreement permitting the Company and our board of directors to actively solicit third party interest in the Company during the go-shop period (which period

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		was increased from 45 days to 55 days in response to the board committee’s request for an increase in the proposed purchase price), and thereafter, but prior to the adoption of the merger agreement by our stockholders, to explore, under certain circumstances, unsolicited expressions of interest should they arise.


	•	The fact that, subject to compliance with the terms and conditions of the merger agreement, our board of directors is permitted to change its recommendation to vote in favor of the proposal to approve the adoption of the merger agreement and, prior to the adoption of the merger agreement by stockholders, to terminate the merger agreement in order to enter into a definitive alternative acquisition agreement with respect to a superior proposal, upon the payment to Buyer of the specified termination fee and expense reimbursement.


	•	The view of our board of directors, after consultation with financial and legal advisors, that as a percentage of the merger consideration to be paid in the merger, the termination fee and expense reimbursement provisions were within the range of fees and expenses provided for in similar size transactions.


	•	The fact that the Significant Stockholders subject to the voting agreements are not bound by the voting agreements if the Company terminates the merger agreement with respect to a superior proposal, allowing such stockholders to vote in favor of an alternative transaction, if any, that may be entered into by the Company. See ‘‘The Voting Agreements’’ beginning on page 72.


	•	The fact that Buyer will be required to pay a reverse termination fee of $11,463,424, representing approximately 2% of the total anticipated merger consideration, plus up to $3,582,320 expense reimbursement, representing approximately 0.625% of the total anticipated merger consideration, if the merger agreement is terminated as a result of Buyer’s failure to fund the merger consideration or obtain regulatory approvals.


	•	The fact that the merger agreement permits the Company to continue to declare regular quarterly cash dividends at its current levels before the merger.


	•	The availability of appraisal rights to holders of our common stock, other than the Significant Stockholders subject to the voting agreements, who comply with all of the required procedures under Delaware law, which allows such holders to seek appraisal of the fair value of their shares as determined by the Delaware Court of Chancery.

Our board of directors also considered a number of material risks or potentially adverse factors in making its determination and recommendation, including:


	•	The fact that, following the merger and related transactions, the Company will cease to be a public company and its current stockholders will no longer participate in any of its potential future growth or benefit from any future increase in the Company’s value.


	•	The fact that under two of seven valuation methodologies employed by JPMorgan in preparing its valuation analysis, the comparable publicly traded companies analysis based on 2008 analyst estimates and the dividend discount model based on the ‘‘insurance cycle’’ case, the high ends of the ranges of imputed values were greater than the per share merger consideration, and the per share merger consideration was approximately 109% and 105% of the mid-points of the ranges for the comparable publicly traded companies analysis based on 2008 analyst estimates and the dividend discount model analysis based on the ‘‘insurance cycle’’ case, respectively.


	•	The fact that completion of the merger is subject to regulatory approvals and there can be no assurance that these approvals will be received prior to the outside date under the merger agreement, or at all, or that the regulatory approvals will not contain conditions that may cause the parties not to complete the merger.


	•	The fact that several parties who had been contacted by the Company shortly prior to the execution of the merger agreement had expressed an interest in conducting due diligence and, subject to the results of due diligence, possibly pursuing a transaction with the Company.

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	•	The fact that the Company may be required to pay Buyer certain fees and, in certain circumstances, reimburse expenses in the event that the Company terminates the merger agreement to accept another proposal.


	•	The terms of the merger agreement placing certain limitations on the Company’s ability to consider after the go-shop period alternative proposals and to terminate the merger agreement and accept a superior proposal.


	•	The interests of our directors and executive officers that may be different from, or in addition to, the interests of our stockholders generally. See ‘‘The Merger — Interests of our Directors and Executive Officers in the Merger’’ beginning on page 47 for a discussion of such interests.


	•	The fact that merger consideration of $34.50 per share was below the closing price of $35.18 per share on NASDAQ on the last trading day prior to announcement of the merger and that a limited number of shares of our common stock have been publicly reported as having been traded above the merger consideration of $34.50 per share at various times since our initial public offering and prior to the date of the merger agreement.


	•	The fact that near the end of the transaction negotiations, the D. E. Shaw group informed the board committee chairman that, in light of the concern expressed by the board committee chairman as to whether the board committee and our board of directors would find the merger consideration of $34.50 per share acceptable given the closing price of our common stock on NASDAQ on the last trading day prior to announcement of the merger was $35.18 per share, it would be willing to consider making a proposal to acquire our common stock on the basis of a bifurcated purchase price of $35.25 per share payable to all stockholders other than the Significant Stockholders and $34.50 per share payable to the Significant Stockholders, assuming that each of the Significant Stockholders would continue to agree to enter into voting agreements supporting the transaction on the terms previously negotiated, which each of the Significant Stockholders had separately determined to be unacceptable.


	•	The fact that, if the merger agreement is terminated as a result of the Company effecting a recommendation withdrawal not related to the receipt of a superior proposal, the Significant Stockholders remain bound by the voting provisions under the voting agreements for 90 days after termination of the merger agreement.


	•	The fact that, for U.S. federal income tax purposes, the cash merger consideration will generally be taxable to the stockholders of the Company being paid the consideration.


	•	The possibility of disruption to our operations following the announcement of the merger, and the resulting effect on the Company if the merger is not completed.

This discussion of the information and factors considered by our board of directors in reaching its conclusions and recommendation includes all of the material factors considered by our board of directors but is not intended to be exhaustive. In view of the wide variety of factors considered by our board of directors in evaluating the merger and related transactions and the complexity of these matters, our board of directors did not find it practicable to, and did not attempt to, quantify, rank or otherwise assign relative weight to those factors. In addition, individual members of our board of directors may have accorded greater or lesser relative importance to specific factors considered than did other members of our board of directors. Our board of directors unanimously approved and recommends the merger agreement and the merger based upon the totality of the information presented to and considered by it.

Our board of directors unanimously recommends that you vote ‘‘FOR’’ the adoption of the merger agreement and ‘‘FOR’’ the proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies.

Opinion of JPMorgan

Pursuant to an engagement letter effective as of April 6, 2007, the board committee retained JPMorgan as its financial advisor in connection with the proposed merger. See ‘‘— Engagement Letter’’ beginning on page 45.

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At the meetings of our board of directors and the board committee on June 10, 2007, JPMorgan rendered its oral opinion to our board of directors and the board committee, which opinion was confirmed in writing on June 11, 2007, that, as of the date of such written opinion and based upon and subject to the factors and assumptions set forth therein, the merger consideration to be paid to the holders of our common stock in the merger was fair, from a financial point of view, to such holders.

The full text of the written opinion of JPMorgan dated June 11, 2007, which sets forth the assumptions made, matters considered and limits on the review undertaken, is attached as Annex C to this proxy statement and is incorporated herein by reference. You are urged to read the opinion in its entirety.

JPMorgan’s written opinion is addressed to our board of directors and the board committee, addresses only the consideration to be paid in the merger and does not constitute a recommendation to any stockholder of the Company as to how such stockholder should vote with respect to the merger. The summary of the opinion of JPMorgan set forth in this proxy statement is qualified in its entirety by reference to the full text of the opinion.

In arriving at its opinion, JPMorgan, among other things:


	•	reviewed the June 10, 2007 draft of the merger agreement, which was substantially the form executed by the parties on June 11, 2007;


	•	reviewed certain publicly available business and financial information concerning the Company and the industry in which it operates;


	•	compared the proposed financial terms of the merger with the publicly available financial terms of certain transactions involving companies JPMorgan deemed relevant and the consideration received for such companies;


	•	compared the financial and operating performance of the Company with publicly available information concerning certain other companies JPMorgan deemed relevant, and reviewed the current and historical market prices of the Company’s common stock and certain publicly traded securities of such other companies;


	•	reviewed (a) management reports, (b) Company financial data and (c) financial analyses and forecasts relating to the Company’s business that were approved for use in connection with JPMorgan’s opinion by management of the Company; and


	•	performed such other financial studies and analyses and considered such other information as JPMorgan deemed appropriate for the purposes of its opinion.

JPMorgan also held discussions with the board committee, certain members of the Company’s management and representatives of the D. E. Shaw group with respect to certain aspects of the merger, the past and current business operations of the Company, the financial condition and future prospects and operations of the Company and certain other matters JPMorgan believed necessary or appropriate to its inquiry.

In giving its opinion, JPMorgan relied upon and assumed, without assuming responsibility or liability for independent verification, the accuracy and completeness of all information that was publicly available or was furnished to or discussed with JPMorgan by the Company and the D. E. Shaw group or otherwise reviewed by or for JPMorgan. JPMorgan did not conduct and was not provided with any valuation or appraisal of any assets or liabilities, nor did JPMorgan evaluate the solvency of the Company under any state or federal laws relating to bankruptcy, insolvency or similar matters. In giving its opinion, JPMorgan relied on financial analyses and forecasts which were approved for use in connection with JPMorgan’s opinion by management of the Company. JPMorgan also assumed, with the consent of the Company, that such financial analyses and forecasts have been reasonably prepared based on assumptions that best reflect management’s judgment as to the appropriate ranges of performance metrics for the applicable periods. JPMorgan expresses no view as to such analyses or forecasts or the assumptions on which they were based. JPMorgan also assumed that the merger and the other transactions contemplated by the merger agreement will be consummated as described in the merger agreement, and that the definitive merger agreement would not differ from the draft

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reviewed by JPMorgan in any respects material to its analysis. It also assumed that the representations and warranties made by the Company, Buyer and Merger Sub in the merger agreement are and will be true and correct in all respects that would be material to its analysis. JPMorgan is not a legal, regulatory, actuarial or tax expert and has relied on the assessments made by advisors of the Company with respect to such matters. JPMorgan further assumed that all material governmental, regulatory or other consents and approvals necessary for the consummation of the merger will be obtained without any adverse effect on the Company that would be material to its analysis.

JPMorgan’s opinion is necessarily based on economic, market and other conditions as in effect on, and the information made available to JPMorgan as of, the date of such opinion. Subsequent developments may affect JPMorgan’s opinion, and JPMorgan does not have any obligation to update, revise or reaffirm its opinion. JPMorgan’s opinion is limited to the fairness, from a financial point of view, of the merger consideration to be paid to the holders of the Company’s common stock in the proposed merger, and JPMorgan has expressed no opinion as to the fairness of the merger to, or any consideration received in connection with the merger by, the holders of any other class of securities, creditors or other constituencies of the Company, or the underlying decision by the Company to engage in the merger.

JPMorgan was not authorized to and did not solicit any expressions of interest from any other parties with respect to the sale of all or any part of the Company or any other alternative transaction, except in contemplation of and in connection with the go-shop process. See ‘‘The Merger Agreement — Solicitation of Other Offers’’ beginning on page 66.

Summary of Certain Financial Analyses

In connection with rendering its opinion to our board of directors and the board committee, JPMorgan performed a variety of financial and comparative analyses, including those described below. The summary set forth below does not purport to be a complete description of the analyses or data presented by JPMorgan. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. JPMorgan believes that the summary set forth below and its analyses must be considered as a whole and that selecting portions of such analyses, without considering all of the analyses and their narrative descriptions, could create an incomplete view of the processes underlying JPMorgan’s analyses and opinion. In arriving at its fairness determination, JPMorgan did not attribute any particular weight to any factor or analysis considered by it; rather, JPMorgan arrived at its opinion based on the results of all the analyses undertaken by it and assessed as a whole. JPMorgan’s analyses are not necessarily indicative of actual values or actual future results that might be achieved, which values may be higher or lower than those indicated. Moreover, JPMorgan’s analyses are not and do not purport to be appraisals or otherwise reflective of the prices at which businesses actually could be bought or sold.

JPMorgan’s opinion and financial analyses were only some of the many factors considered by our board of directors and the board committee in their evaluation of the merger and should not be viewed as determinative of the views of our board of directors, the board committee or the Company with respect to the merger or the merger consideration.

Summary of Imputed Share Values

JPMorgan assessed the fairness of the merger consideration to the holders of the Company’s common stock in connection with the merger by assessing the value of the Company using several methodologies, including a comparable publicly traded companies analysis using valuation multiples from selected publicly traded companies, a regression analysis, a comparable acquisitions analysis and a dividend discount model analysis, each of which is described in more detail below. Each of these methodologies was used to generate imputed valuation ranges that were then compared to the $34.50 per share merger consideration.

The following table shows the ranges of imputed valuation per share of the Company’s common stock derived using each of these methodologies. The table should be read together with the more detailed summary of each of the valuation analyses discussed below.

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	Imputed Valuation Per Share of Common Stock
Valuation Methodology	Minimum			Maximum
Comparable Publicly Traded Companies Analysis (2007 analyst estimates)		$	25.86		$	33.02
Comparable Publicly Traded Companies Analysis (2008 analyst estimates)			27.17			35.94
Regression Analysis			28.05			29.52
Comparable Acquisitions Analysis (actual book value multiples)			24.80			25.24
Comparable Acquisitions Analysis (estimated earnings multiples)			25.86			26.37
Dividend Discount Model Analysis (base case)			25.19			33.03
Dividend Discount Model Analysis (insurance cycle case)			28.07			37.50

Comparable Publicly Traded Companies Analysis

JPMorgan compared the financial and operating performance of the Company with publicly available information of selected property and casualty insurance companies. The companies selected were:


	•	Argonaut Group Inc.;


	•	United America Indemnity, Ltd.;


	•	The Midland Company;


	•	The Navigators Group, Inc.; and


	•	ProCentury Corporation.

These companies were selected, among other reasons, for their size, target market, specialty focus and performance. None of the companies utilized in the analysis, however, is identical to the Company. Accordingly, JPMorgan made judgments and assumptions concerning differences in financial and operating characteristics of the selected companies and other factors that could affect their public trading value. First Mercury Financial Corporation also met the criteria for being included in the comparable publicly traded companies analysis but was excluded from the analysis because of its short trading history and reliance on fee income that is not dependent upon underwriting results.

For each selected company, JPMorgan calculated the ratio of its estimated earnings per share for 2007 and 2008, based on First Call consensus estimates, to its stock price as of June 8, 2007. For 2007, JPMorgan calculated earnings multiples of the selected companies as ranging from a low of 10.1x to a high of 12.9x with a median of 10.6x and a mean of 11.0x. For 2008, JPMorgan calculated earnings multiples of the selected companies as ranging from a low of 9.6x to a high of 12.7x with a median of 9.8x and a mean of 10.6x. By applying the derived range of multiples for 2007 of 10.1x to 12.9x to the Company’s 2007 estimated earnings per share of $2.56, based on First Call consensus estimates, JPMorgan derived a range of implied equity values for the Company of between $25.86 and $33.02 per share. By applying the derived range of multiples for 2008 of 9.6x to 12.7x to the Company’s 2008 estimated earnings per share of $2.83, based on First Call consensus estimates, JPMorgan derived a range of implied equity values for the Company of between $27.17 and $35.94 per share.

Regression Analysis

JPMorgan performed a regression analysis, which assesses the relationship between price-to-book ratios and return on average book equity, to review, for comparable companies, the relationship between (a) the ratio of closing stock price as of June 8, 2007 to book value per share at March 31, 2007 and (b) the 2008 estimated return on average book equity, based on First Call consensus estimates.

Based on this analysis, JPMorgan derived a reference range for the implied equity value per share of the Company’s common stock of $28.05 to $29.52.

Precedent Transactions Analysis

Using publicly available information, JPMorgan examined the following selected transactions within the specialty and commercial lines insurance industry since 1997, each of which had a transaction

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equity value over $50 million and which together were considered the most relevant transactions for purposes of JPMorgan’s analysis because they involved companies with a similar business focus relative to the Company:


Announcement Date	Target	Acquirer
12/13/2006	Praetorian Financial Group, Inc.	QBE Holdings Inc.
08/04/2006	Republic Companies Group, Inc.	Delek Capital Ltd.
10/15/2004	Penn-America Group Inc.	United National Group Ltd.
05/07/2001	Front Royal, Inc.	Argonaut Group Inc.

JPMorgan then calculated each transaction’s equity value (a) as a multiple of the earnings of the target company for the last twelve months, or LTM, prior to the transaction, (b) as a multiple of the estimated earnings of the target company for the next twelve months, or NTM, after the transaction and (c) as a multiple of the book value of the target company. No transaction reviewed was directly comparable to the proposed merger. Accordingly, this analysis involved complex considerations and judgments concerning differences in financial and operating characteristics of the Company relative to the targets in the selected transactions and other factors that would affect the acquisition values in the precedent transactions.

JPMorgan calculated the multiples of transaction equity value to the LTM earnings for the target companies as ranging from a low of 14.1x to a high of 14.4x, with a median of 14.3x, the multiples of transaction equity value to the NTM earnings for the target companies as ranging from a low of 10.1x to a high of 10.3x, with a median of 10.2x, and the multiples of transaction equity value to book value for the target companies as ranging from a low of 1.68x to a high of 1.71x, with a median of 1.70x. Based upon the multiples derived from this analysis, JPMorgan derived a range of implied equity values for the Company’s common stock of between $24.80 and $25.24 per share when applying these multiples to the Company’s book value of $14.76 per share at March 31, 2007, and between $25.86 and $26.37 per share when these multiples were applied to the Company’s estimated 2007 earnings per share of $2.56, based on First Call consensus estimates.

Dividend Discount Model Analysis

JPMorgan performed a discounted dividend analysis to estimate a range of present values for the Company’s common stock as of March 31, 2007. The analysis used projected ranges of the Company’s performance metrics for the years 2007 through 2016 that management approved for use in connection with JPMorgan’s analyses. JPMorgan performed two dividend discount model analyses using alternative cases representing two different loss ratio and premium growth scenarios. One analysis used ‘‘base case’’ projections that were based on the current estimate of the Company’s growth and loss ratio performance through the insurance underwriting cycle and excluded development of prior years’ reserves. The other analysis used ‘‘insurance cycle case’’ projections that assumed that (a) the currently anticipated softening of the market for the years 2008 and 2009 would be more modest than current forecasts, (b) the Company’s premium growth and loss ratios would be higher than current forecasts and (c) there would be a strong market in the years 2010 through 2012. The cash flows in each case were modeled assuming that the Company would continue to operate as an independent entity.

The valuation range was determined by adding the present value of (a) cash available for stockholder dividends during the time period March 31, 2007 to December 31, 2016 and (b) the ‘‘terminal value’’ of the Company’s common stock. In calculating the terminal value of the Company’s common stock, JPMorgan applied a range of perpetual dividend growth rates in the terminal year of 2.5% to 3.5% and discounted the future dividends to the terminal date using discount rates ranging from 10% to 12%. The dividend stream and the terminal value were discounted to present value using discount rates ranging from 10% to 12%.

Based on the assumptions set forth above and assuming a 3.0% perpetual dividend growth rate, JPMorgan determined that the present value of the Company’s common stock ranged from $25.19 to $33.03 per share when the calculations were performed using the ‘‘base case’’ projections and $28.07 to $37.50 per share when the calculations were performed using the ‘‘insurance cycle case’’ projections.

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Engagement Letter

Pursuant to the terms of the engagement letter with JPMorgan, we agreed to pay JPMorgan a fee equal to 0.60% of the equity value of the merger (defined therein as the total amount of cash and the fair market value of any property paid to us or our stockholders in connection with the merger), which is currently estimated to be $3.45 million, $750,000 of which was payable upon delivery by JPMorgan of its fairness opinion and the balance of which is payable upon the closing of the merger or another business combination transaction pursuant to an agreement entered into within 12 months of the termination of our engagement of JPMorgan. The fee paid to JPMorgan upon delivery of its opinion is creditable against the fee payable to it upon the closing of the merger. JPMorgan may also receive an additional fee of $1 million payable upon the closing of the merger in the sole discretion of the board committee based on its assessment of the performance of JPMorgan in its role as financial advisor to the board committee. In addition, we have agreed to reimburse JPMorgan for expenses incurred in connection with its services, including the fees and disbursements of counsel, and to indemnify JPMorgan and related persons against certain liabilities, including liabilities arising under the federal securities laws.

Other Matters

As a part of its investment banking business, JPMorgan and its affiliates are engaged continually in the valuation of businesses and their securities in connection with mergers and acquisitions, investments for passive and control purposes, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements, and valuations for estate, corporate and other purposes. The board committee selected JPMorgan as financial advisor with respect to the merger on the basis of such experience.

Other than its engagement as financial advisor to the board committee in connection with the proposed merger, neither JPMorgan nor any of its affiliates has any financial advisory or other commercial or investment banking relationship with us. JPMorgan and its affiliates have longstanding business relationships with, and have performed in the past and may continue to perform, financial advisory and commercial and investment banking services for the D. E. Shaw group, Buyer, Merger Sub and their respective affiliates, all for customary compensation. The revenues JPMorgan and its affiliates received from affiliates of the D. E. Shaw group since January 1, 2005 have been principally derived from trading and brokerage services. Also, in the ordinary course of JPMorgan’s businesses, it and its affiliates may actively trade the debt and equity securities of the Company or affiliates of the D. E. Shaw group for JPMorgan’s own account or for the accounts of customers and, accordingly, JPMorgan may at any time hold long or short positions in such securities. JPMorgan and certain of its affiliates and certain of its and their respective employees and certain private investment funds affiliated or associated with it may from time to time invest in private investment funds managed or advised by the D. E. Shaw group.

Financial Projections

We do not make public forecasts or projections as to our future performance, earnings or other operating metrics beyond the current fiscal year, and we do not place much emphasis on projections for extended periods due to the unpredictability of the underlying assumptions and estimates. However, financial analyses and forecasts as to the future results of operations and financial condition of the Company have been approved for use in connection with JPMorgan’s opinion by management of the Company and were relied upon by JPMorgan in connection with the rendering of its opinion. Buyer and the D. E. Shaw group relied on their own internal forecasts and projections in their analysis of the merger and did not receive, and have no responsibility for, the financial projections presented below. The inclusion of these financial projections in this proxy statement should not be regarded as an indication that the Company, the board of directors, the board committee, JPMorgan or any other recipient of this information considered, or now considers, such financial projections to be a reliable prediction of future results, and they should not be relied on as such.

The financial projections should be read together with the financial statements of the Company that can be obtained from the SEC’s website at http://www.sec.gov. The financial projections were not

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prepared with a view toward compliance with published guidelines of the SEC or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. The financial projections do not reflect any of the effects of the merger or other changes that may in the future be deemed appropriate concerning the Company and its assets, business, operations, properties, policies, corporate structure, capitalization or management in light of the circumstances then existing. Neither our independent registered public accounting firm nor any other independent accountants have compiled, examined or performed any procedures with respect to the prospective financial information contained in the financial projections, nor have they expressed any opinion or given any form of assurance on the financial projections or their achievability, and accordingly assume no responsibility for them. Our independent registered public accounting firm’s report on our historical consolidated financial statements incorporated by reference in this proxy statement does not extend to the financial projections and should not be read to do so.

The financial projections, although presented with numerical specificity, necessarily reflect numerous assumptions and estimates, many of which are subjective, difficult to predict and beyond the Company’s control, and which may prove to have been, or may no longer be, accurate. The financial projections were not when made, and are not, historical statements, but are forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995 and are based on estimates and assumptions that are inherently subject to factors such as industry performance, general business, economic, regulatory, market and financial conditions, and changes to the business, financial condition or results of operations of the Company, including the factors described under ‘‘Cautionary Statement Concerning Forward-Looking Information’’ beginning on page 11 of this proxy statement, which factors may cause the financial projections or the underlying forecasts and assumptions to differ materially from the Company’s actual experience. Since the financial projections cover multiple years, such information by its nature becomes less reliable with each successive year, because the forecasts and assumptions for early periods have a compounding effect on the forecasts and assumptions for later periods. The financial projections do not take into account any circumstances or events occurring after the date they were prepared. You are cautioned not to place undue reliance on this information in making a decision whether to vote for the proposal to adopt the merger agreement.

Set forth below is a summary of the financial projections, including (a) ‘‘base case’’ projections that were based on estimates of the Company’s growth and loss ratio performance through the insurance underwriting cycle and excluded development of prior years’ reserves and (b) ‘‘insurance cycle case’’ projections that assumed that (i) the anticipated softening of the market for the years 2008 and 2009 would be more modest than assumed in the ‘‘base case’’ projections, (ii) the Company’s premium growth would be higher and loss ratios would be more favorable than assumed in the ‘‘base case’’ projections and the Company’s expense ratios would be relatively comparable and (iii) there would be a strong market in the years 2010 through 2012.

‘‘Base Case’’ Projections


	2007E			2008E			2009E			2010E			2011E			2012E			2013E			2014E			2015E			2016E			Compound Average Growth Rate 2007E-2016E
	(Dollars in millions)
Net Premiums Written		$	270		$	277		$	283		$	293		$	305		$	318		$	331		$	345		$	361		$	371		3.6	%
Net Premiums Earned			255			275			281			288			299			311			325			338			353			366		4.1	%
Net Underwriting Income			38			33			29			30			31			33			34			36			37			39		0.2	%
Net Investment Income			25			31			36			40			43			46			49			50			52			53		8.6	%
Pre-Tax Income			58			59			60			65			69			74			78			81			84			87		4.5	%
Net Income			40			40			41			44			47			50			53			55			57			59		4.4	%
Dividends Available to Stockholders (1)			7			29			35			36			39			39			39			41			48			55

(1)	Includes dividends from insurance subsidiaries less debt service and holding company expenses.

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The material assumptions that were used in developing the ‘‘base case’’ projections are as follows:


	2007E			2008E			2009E			2010E			2011E			2012E			2013E			2014E			2015E			2016E			Average
Combined Ratio		85.1	%		87.9	%		89.7	%		89.6	%		89.6	%		89.5	%		89.5	%		89.4	%		89.4	%		89.4	%		88.9	%
Net Premiums Written Growth Rate					2.6	%		2.0	%		3.4	%		4.2	%		4.2	%		4.2	%		4.3	%		4.5	%		2.8	%
Return on Average Equity		17.4	%		16.0	%		15.6	%		16.5	%		17.1	%		17.5	%		17.7	%		17.6	%		17.7	%		17.8	%		17.1	%

‘‘Insurance Cycle Case’’ Projections


	2007E			2008E			2009E			2010E			2011E			2012E			2013E			2014E			2015E			2016E			Compound Average Growth Rate 2007E-2016E
	(Dollars in millions)
Net Premiums Written		$	270		$	284		$	295		$	318		$	348		$	375		$	391		$	407		$	425		$	437		5.5	%
Net Premiums Earned			255			278			290			308			335			363			383			399			417			432		6.0	%
Net Underwriting Income			38			31			31			42			49			51			46			48			50			52		3.5	%
Net Investment Income			25			32			37			41			46			50			53			56			58			60		10.1	%
Pre-Tax Income			58			58			63			78			90			95			94			99			103			107		7.0	%
Net Income			40			39			43			53			61			65			64			67			70			73		6.9	%
Dividends Available to Stockholders (1)			7			22			27			33			32			46			46			48			57			67

(1)	Includes dividends from insurance subsidiaries less debt service and holding company expenses.

The material assumptions that were used in developing the ‘‘insurance cycle case’’ projections are as follows:


	2007E			2008E			2009E			2010E			2011E			2012E			2013E			2014E			2015E			2016E			Average
Combined Ratio		85.1	%		88.7	%		89.2	%		86.4	%		85.3	%		86.1	%		88.1	%		88.0	%		88.0	%		87.9	%		87.3	%
Net Premiums Written Growth Rate					5.2	%		3.8	%		7.6	%		9.6	%		7.6	%		4.2	%		4.3	%		4.5	%		2.8	%
Return on Average Equity		17.4	%		15.4	%		15.7	%		18.3	%		19.4	%		19.2	%		17.9	%		18.0	%		18.1	%		18.3	%		17.8	%

Interests of our Directors and Executive Officers in the Merger

Our directors and executive officers may be deemed to have interests in the merger that are in addition to, or different from, the interests of our stockholders. These interests may present actual or potential conflicts of interest. Our board of directors was aware of these interests and considered them, among other matters, in reaching its decision to approve the merger agreement and the merger and recommend that our stockholders vote in favor of the adoption of the merger agreement.

Treatment of Stock Options

As of September 15, 2007, there were approximately 2,133,787 shares of our common stock issuable pursuant to stock options granted under our equity incentive plans to our directors, officers and employees, including executive officers. Pursuant to the terms of the merger agreement, except as otherwise agreed to by Buyer, each outstanding vested or unvested option to purchase shares of our common stock will be canceled and the holder will be entitled to receive in cash an amount equal to the difference between the merger consideration and the exercise price of each applicable stock option, without interest and less any required withholding taxes.

The following table identifies, for our current directors and executive officers, the aggregate number of shares of our common stock subject to outstanding vested and unvested stock options held as of September 15, 2007, the number of shares of our common stock subject to unvested stock options that will be canceled in exchange for a cash payment in connection with the merger, the cash-out value of such unvested stock options and the cash-out value of vested and unvested stock options.

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Name	Aggregate Shares Subject to Options		Number of Shares Underlying Unvested Options		Aggregate Cash-Out Value of Unvested Options (1)			Aggregate Cash-Out Value of Vested and Unvested Options (2)
Richard W. Wright		12,120		1,000		$	24,500		$	296,940
J. Adam Abram		750,279		158,828			2,813,853			16,226,977
Matthew Bronfman		12,120		1,000			24,500			296,940
Alan N. Colner		12,120		1,000			24,500			296,940
Joel L. Fleishman		12,120		1,000			24,500			296,940
Dallas W. Luby		12,120		1,000			24,500			296,940
John T. Sinnott		12,120		1,000			24,500			296,940
A. Wellford Tabor		—		—			—			—
James L. Zech		12,120		1,000			24,500			296,940
Nicolas D. Zerbib		—		—			—			—
Michael T. Oakes		138,500		47,125			954,563			2,993,250
Gregg T. Davis		45,000		33,750			311,250			415,000
Michael P. Kehoe		263,630		10,000			165,000			6,298,935
C. Kenneth Mitchell		102,583		34,438			633,092			2,205,783

(1)

This column represents the cash-out value of all unvested options that will be canceled in connection with the merger, which is calculated in each case by multiplying the number of shares of our common stock underlying unvested stock options held by each individual by the positive difference between the merger consideration and the exercise price of the unvested stock option.

(2)

This column represents the cash-out value of all options, vested and unvested, to be canceled in connection with the merger, which is calculated in each case by multiplying the aggregate number of shares of our common stock underlying stock options held by each individual by the positive difference between the merger consideration and the exercise price of the stock options.

Termination Payments

The Company previously entered into employment agreements with each of our named executive officers pursuant to which, among other things, the Company agrees to provide post-termination salary, bonus and benefits to the named executive officer for periods ranging from 12 to 36 months depending on the level of the executive and the nature of the termination. In the event that a named executive officer is terminated for cause or disability or the executive elects to terminate his employment without good reason (as defined), then the Company generally offers no post-termination benefits. In the event an executive is terminated without cause or for performance, the executive terminates with good reason (as defined), or the Company permits the agreement to expire at the end of the applicable term, then the Company offers the continuation of certain salary, bonus and benefits. The termination payments do not contemplate any tax gross-ups. The merger will not, by itself, trigger such payments unless the executive is also terminated under such circumstances.

The following table shows (a) the end of the term for each employment agreement and (b) the total potential amount of all termination payments that each named executive officer is entitled to receive under their existing employment agreements with us (including salary, bonus and benefits) as of September 15, 2007. The amounts listed in the table do not include the acceleration of stock options, which is described on page 47. In addition, the amounts listed in the table exclude bonus, if any, related to fiscal 2007, which is described on page 50 and includes any unused vacation paid in the normal course.

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Name	End of Term	Total Potential Termination Payments
J. Adam Abram	November 2008		$	1,733,650
Michael T. Oakes	April 2008			1,060,345
Gregg T. Davis	May 2009			875,864
Michael P. Kehoe	November 2008			772,927	(1)
C. Kenneth Mitchell	October 2009			570,166	(2)
Total			$	5,012,952

(1)	Includes $257,357 related to fiscal 2006 bonus award.

(2)	Includes $33,333 related to fiscal 2006 bonus award.

In addition, under the terms of Mr. Abram’s existing employment agreement, the Company is obligated in certain circumstances to grant Mr. Abram, in connection with equity financing transactions, options to purchase our common stock equal to 5% of the total number of shares of common stock or securities convertible into common stock offered by us, until invested equity capital equals or exceeds $250 million. At the request of Buyer, Mr. Abram executed a letter agreement with the Company concurrently with the execution of the merger agreement, acknowledging that neither the merger nor any financing transactions, agreements or arrangements related thereto will trigger any obligation to grant options to Mr. Abram under the terms of his existing employment agreement.

Arrangements with Executive Officers

Buyer has informed us that, although it is not a condition to closing, it desires that our existing management team remain in place following completion of the merger, subject to agreement to mutually acceptable terms and conditions. Buyer has had preliminary discussions with certain of our executive officers, including our chief executive officer and chief financial officer, regarding a general desire to retain the Company’s management team following completion of the proposed merger, and to explore the possibility of investments by management in Buyer following the completion of the merger. Representatives of Buyer did not indicate during these discussions whether such employment (including any possible change in compensation) or investment opportunities would definitely occur, which members of management would be given any such employment or investment opportunities, or the terms and conditions of any such employment (including any possible change in compensation) or investment opportunities (including with respect to the management as a group or individually). There have been no discussions between members of our management and representatives of Buyer regarding the percentage of shares that might be available for management investment, if any, and there have been no discussions regarding how many members of management, if any, will be given the opportunity to invest in the Company following completion of the proposed merger.

Buyer did inquire of Mr. Abram, solely for informational purposes and not in connection with any specific offer or proposal for a possible investment, whether Mr. Abram would be willing to consider a possible investment if given the opportunity and whether he had considered the amount, if any, he would be willing to consider investing. Mr. Abram informed representatives of Buyer that he would be willing to consider a possible investment opportunity in a particular range of amounts (the high-end of which would in any event be less than 1% of the equity of Buyer immediately following the proposed merger). Mr. Abram has not made a commitment to invest any particular amount, or to invest at all, and any such possible investment is subject to and conditioned upon the structure and terms thereof being satisfactory to him. No structure or terms or suggested investment amount have, as of the date of this proxy statement, been proposed to Mr. Abram by Buyer or any other member of the D. E. Shaw group.

None of our executive officers has had specific discussions with Buyer regarding the terms of employment of or compensation for such individual or any possible investment by such individual in Buyer, or has entered into any agreement, arrangement or understanding with respect thereto, other than their existing employment agreements. No such post-closing agreement, arrangement or

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understanding currently exists, and any such agreement, arrangement or understanding is subject to negotiations and discussions between Buyer and such executive officers. Buyer has informed us that it expects to have further discussions with our executive officers regarding their continued employment and possible investments in Buyer, in which event, unlike our stockholders, our executive officers may have an opportunity to participate in the Company’s potential future growth and benefit from any potential future increase in the Company’s value following the completion of the merger. We cannot presently determine whether such negotiations and discussions will result in agreements between the executive officers and Buyer or its affiliates. While, at some point in the future, there may be additional conversations between Buyer and members of our management regarding employment agreements and opportunities for management to invest in Buyer, there were no promises made by Buyer or members of management, nor were there any agreements, understandings or arrangements between Buyer and members of management regarding suc