Navigators (NAVG) 10-Q 2012 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2012

or

¨ Transitional Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from         to        

Commission file number 0-15886

The Navigators Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware	13-3138397
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
6 International Drive, Rye Brook, New York	10573
(Address of principal executive offices)	(Zip Code)

(914) 934-8999

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report.)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller reporting company	¨

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

The number of common shares outstanding as of October 21, 2012 was 14,037,651.

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

INDEX

	Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets September 30, 2012 (Unaudited) and December 31, 2011		3
Consolidated Statements of Income (Unaudited) Three and Nine Months Ended September 30, 2012 and 2011		4
Consolidated Statements of Comprehensive Income (Unaudited) Three and Nine Months Ended September 30, 2012 and 2011		5
Consolidated Statements of Stockholders’ Equity (Unaudited) Nine Months Ended September 30, 2012		6
Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2012 and 2011		7
Notes to Interim Consolidated Financial Statements (Unaudited)		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Item 3. Quantitative and Qualitative Disclosures About Market Risk		61
Item 4. Controls and Procedures		61
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		62
Item 1A. Risk Factors		63
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		63
Item 3. Defaults Upon Senior Securities		63
Item 4. Mine Safety Disclosures		63
Item 5. Other Information		63
Item 6. Exhibits		64
Signatures		65
Index to Exhibits		66

2

Item 1. Financial Statements

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

	September 30,			December 31,
	2012			2011
	(Unaudited)
ASSETS
Investments and cash:
Fixed maturities, available-for-sale, at fair value (amortized cost: 2012, $1,975,534; 2011, $1,816,710)	$	2,085,058		$	1,888,069
Equity securities, available-for-sale, at fair value (cost: 2012, $74,831; 2011, $73,567)		105,930			95,849
Short-term investments, at cost which approximates fair value		187,445			122,220
Cash		36,252			127,360
Total investments and cash		2,414,685			2,233,498
Premiums receivable		351,060			255,725
Prepaid reinsurance premiums		224,851			164,162
Reinsurance recoverable on paid losses		41,819			43,791
Reinsurance recoverable on unpaid losses and loss adjustment expenses		834,604			845,445
Deferred policy acquisition costs		61,281			63,984
Accrued investment income		14,175			14,492
Goodwill and other intangible assets		7,037			6,869
Current income tax receivable, net		10,325			15,391
Other assets		34,860			26,650
Total assets	$	3,994,697		$	3,670,007
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses	$	2,079,956		$	2,082,679
Unearned premiums		635,241			532,628
Reinsurance balances payable		169,540			108,699
Senior Notes		114,386			114,276
Deferred income tax, net		11,199			6,291
Accounts payable and other liabilities		109,564			21,999
Total liabilities		3,119,886			2,866,572
Stockholders’ equity:
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued	$	—		$	—
Common stock, $.10 par value, authorized 50,000,000 shares, issued 17,548,112 shares for 2012 and 17,467,615 shares for 2011		1,754			1,746
Additional paid-in capital		327,197			322,133
Treasury stock, at cost (3,511,380 shares for 2012 and 2011)		(155,801	)		(155,801	)
Retained earnings		600,827			565,109
Accumulated other comprehensive income		100,834			70,248
Total stockholders’ equity		874,811			803,435
Total liabilities and stockholders’ equity	$	3,994,697		$	3,670,007

The accompanying Notes to Interim Consolidated Financial Statements are an integral part of these financial statements.

3

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(In thousands, except share and per share amounts)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2012		2011			2012			2011
Gross written premiums	$	298,742	$	255,318		$	964,878		$	830,315
Revenues:
Net written premiums	$	188,046	$	175,357		$	621,343		$	551,796
Change in unearned premiums		13,216		(1,724	)		(40,945	)		(51,908	)
Net earned premiums		201,262		173,633			580,398			499,888
Net investment income		13,597		16,259			40,632			51,072
Total other-than-temporary impairment losses		—		(1,241	)		(693	)		(2,338	)
Portion of loss recognized in other comprehensive income (pretax)		—		618			43			941
Net other-than-temporary impairment losses recognized in earnings		—		(623	)		(650	)		(1,397	)
Net realized gains (losses)		4,761		3,238			10,820			4,856
Other income (expense)		789		(921	)		2,087			643
Total revenues		220,409		191,586			633,287			555,062
Expenses:
Net losses and loss adjustment expenses		128,850		110,242			370,242			340,893
Commission expenses		31,258		25,934			90,211			80,164
Other operating expenses		40,112		34,989			116,238			107,341
Interest expense		2,049		2,047			6,147			6,140
Total expenses		202,269		173,212			582,838			534,538
Income (loss) before income taxes		18,140		18,374			50,449			20,524
Income tax expense (benefit)		5,225		4,476			14,731			5,015
Net income (loss)	$	12,915	$	13,898		$	35,718		$	15,509
Net income (loss) per common share:
Basic	$	0.92	$	0.94		$	2.55		$	1.02
Diluted	$	0.90	$	0.92		$	2.51		$	1.00
Average common shares outstanding:
Basic		14,026,855		14,796,309			14,004,302			15,243,603
Diluted		14,272,477		15,104,424			14,255,301			15,569,370

The accompanying Notes to Interim Consolidated Financial Statements are an integral part of these financial statements.

4

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(In thousands)

	Three Months Ended September 30,
	2012			2011
Net income (loss)	$	12,915		$	13,898
Other comprehensive income (loss):
Change in net unrealized gains (losses) on investments, net of deferred tax of $7,906 and $(322) in 2012 and 2011, respectively(1)		14,727			(511	)
Change in foreign currency translation gains (losses), net of deferred tax of $1,679 and $(273) in 2012 and 2011, respectively		3,118			(701	)
Other comprehensive income (loss)		17,845			(1,212	)
Comprehensive income (loss)	$	30,760		$	12,686
(1) Disclosure of reclassification amount, net of tax:
Unrealized gains (losses) on investments arising during period	$	16,866		$	411
Reclassification adjustment for net realized gains (losses) included in net income		(2,139	)		(1,025	)
Reclassification adjustment for other-than-temporary impairment losses recognized in net income		—			103
Change in net unrealized gains (losses) on investments, net of tax	$	14,727		$	(511	)
	Nine Months Ended September 30,
	2012			2011
Net income (loss)	$	35,718		$	15,509
Other comprehensive income (loss):
Change in net unrealized gains (losses) on investments, net of deferred tax of $15,702 and $8,251 in 2012 and 2011, respectively (2)		31,280			16,360
Change in foreign currency translation gains (losses), net of deferred tax of $172 and $86 in 2012 and 2011, respectively		(694	)		222
Other comprehensive income (loss)		30,586			16,582
Comprehensive income (loss)	$	66,304		$	32,091
(2) Disclosure of reclassification amount, net of tax:
Unrealized gains (losses) on investments arising during period	$	33,456		$	15,986
Reclassification adjustment for net realized gains (losses) included in net income		(2,513	)		264
Reclassification adjustment for other-than-temporary impairment losses recognized in net income		337			110
Change in net unrealized gains (losses) on investments, net of tax	$	31,280		$	16,360

The accompanying Notes to Interim Consolidated Financial Statements are an integral part of these financial statements.

5

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)

For the Nine Months Ended September 30, 2012

(In thousands, except share amounts)

					Additional									Accumulated Other			Total
	Common Stock				Paid-in		Treasury Stock					Retained		Comprehensive			Stockholders’
	Shares		Amount		Capital		Shares		Amount			Earnings		Income (Loss)			Equity
Balance, December 31, 2011		17,467,615	$	1,746	$	322,133		3,511,380	$	(155,801	)	$	565,109	$	70,248		$	803,435
Net income		—		—		—		—		—			35,718		—			35,718
Changes in comprehensive income:		—		—		—		—		—			—		—
Change in net unrealized gain (loss) on investments		—		—		—		—		—			—		30,368			30,368
Change in net non-credit other-than-temporary impairment losses		—		—		—		—		—			—		912			912
Change in foreign currency translation gain (loss)		—		—		—		—		—			—		(694	)		(694	)
Total comprehensive income		—		—		—		—		—			—		30,586			30,586
Shares issued under stock plan		80,497		8		60		—		—			—		—			68
Share-based compensation		—		—		5,004		—		—			—		—			5,004
Balance, September 30, 2012		17,548,112	$	1,754	$	327,197		3,511,380	$	(155,801	)	$	600,827	$	100,834		$	874,811

The accompanying Notes to Interim Consolidated Financial Statements are an integral part of these financial statements.

6

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

	Nine Months Ended September 30,
	2012			2011
Operating activities:
Net income (loss)	$	35,718		$	15,509
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation & amortization		3,635			2,978
Deferred income taxes		(9,313	)		2,534
Net realized (gains) losses		(10,820	)		(4,856	)
Net other-than-temporary losses recognized in earnings		650			1,397
Changes in assets and liabilities:
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses		12,813			6,618
Reserves for losses and loss adjustment expenses		(2,723	)		60,681
Prepaid reinsurance premiums		(60,689	)		(13,496	)
Unearned premiums		102,613			65,408
Premiums receivable		(95,335	)		(61,570	)
Deferred policy acquisition costs		2,703			(6,802	)
Accrued investment income		317			700
Reinsurance balances payable		60,841			7,306
Current income taxes		5,066			(6,755	)
Other		23,647			16,670
Net cash provided by (used in) operating activities		69,123			86,322
Investing activities:
Fixed maturities
Redemptions and maturities		134,050			80,296
Sales		905,450			464,580
Purchases		(1,196,729	)		(464,685	)
Equity securities
Sales		4,346			2,107
Purchases		(5,553	)		(70,636	)
Change in payable for securities		65,299			10,223
Net change in short-term investments		(65,225	)		(6,661	)
Purchase of property and equipment		(2,872	)		(2,624	)
Net cash provided by (used in) investing activities		(161,234	)		12,600
Financing activities:
Purchase of treasury stock		—			(73,676	)
Proceeds of stock issued from employee stock purchase plan		672			822
Proceeds of stock issued from exercise of stock options		331			1,099
Net cash provided by (used in) financing activities		1,003			(71,755	)
Increase (decrease) in cash		(91,108	)		27,167
Cash at beginning of year		127,360			31,768
Cash at end of period	$	36,252		$	58,935
Supplemental cash information:
Income taxes paid, net	$	16,734		$	6,565
Interest paid	$	4,025		$	4,025
Issuance of stock to directors	$	242		$	210

The accompanying Notes to Interim Consolidated Financial Statements are an integral part of these financial statements.

7

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)

Note 1. Accounting Policies

The accompanying interim consolidated financial statements are unaudited and reflect all adjustments which, in the opinion of management, are necessary to fairly present the results of The Navigators Group, Inc. and its subsidiaries for the interim periods presented on the basis of United States generally accepted accounting principles (“GAAP” or “U.S. GAAP”). All such adjustments are of a normal recurring nature. All significant intercompany transactions and balances have been eliminated. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods. The results of operations for any interim period are not necessarily indicative of results for the full year. The term “the Company” as used herein is used to mean The Navigators Group, Inc. and its subsidiaries, unless the context otherwise requires. The terms “Parent” or “Parent Company” are used to mean The Navigators Group, Inc. without its subsidiaries. These financial statements should be read in conjunction with the consolidated financial statements and notes contained in the Company’s 2011 Annual Report on Form 10-K. Certain amounts for the prior year have been reclassified to conform to the current year’s presentation.

Note 2. Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2012-02 amending Codification topic 350 – Intangibles – Goodwill and Other. The amendment is intended to reduce cost and complexity, in addition to enhancing consistency of impairment testing guidance among long-lived asset categories by permitting entities to assess qualitative factors to determine whether it is necessary to calculate an asset’s fair value when testing an indefinite-lived asset for impairment. The amendment is effective for fiscal years beginning after September 15, 2012. The Company is currently evaluating the impact of this amendment on the Company’s consolidated financial position, results of operating or cash flows.

In September 2011, the FASB issued ASU 2011-08 amending Codification topic 350 – Intangibles – Goodwill and Other. The amendment simplifies how goodwill is tested for impairment by permitting entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether it is necessary to perform the two step goodwill impairment test. The amendment is effective for the interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Adoption of this amendment had no impact on the Company’s consolidated financial condition, results of operations or cash flows.

In June 2011, the FASB issued ASU 2011-05 amending Codification Topic 220 – Comprehensive Income. The amendment requires that other comprehensive income be either presented in a single continuous statement or two separate but consecutive statements. In addition, the amendment requires the disclosure of reclassification adjustments for items reclassified from other comprehensive income to net income on the face of the financial statements. The amendment is effective for the interim and annual periods beginning after December 15, 2011 and should be applied retrospectively. This standard only affected the Company’s presentation of comprehensive income and did not affect the Company’s consolidated financial position, results of operations, or cash flows.

In May 2011, the FASB issued ASU 2011-04 amending Codification Topic 820 – Fair Value Measurements and Disclosures. The amendments were intended to result in common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). The amendment expands and enhances current disclosures about fair value measurement and clarifies the FASB’s intent regarding the application of existing fair value measurement requirements in certain circumstances. The amendments are effective for the interim and annual periods beginning after December 15, 2011 and should be applied prospectively. Adoption of the amendment had no impact on the Company’s consolidated financial position, results of operations or cash flows.

8

In October 2010, the FASB issued ASU 2010-26 amending Codification Topic 944 – Financial Services – Insurance; Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. The amendment clarifies which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. In addition, the amendment limits deferrable costs that can be capitalized to those that are incremental direct costs related to the successful acquisition of new or renewal insurance contracts. The amendment is effective for fiscal years and interim periods within a fiscal year, beginning after December 15, 2011. The guidance is to be applied prospectively upon effectiveness of the amendment, with retrospective application permitted, but not required. The Company adopted this guidance prospectively in the first quarter of 2012. The amount of acquisition costs capitalized during the current year under the adopted guidance compared with the amount of acquisition costs that would have been capitalized during the year if the entity’s previous policy had been applied resulted in decreases in amounts capitalized of $1.2 million and $2.9 million for the three and nine months ended September 30, 2012, respectively.

Note 3. Segment Information

The Company classifies its business into two underwriting segments consisting of the Insurance Companies segment (“Insurance Companies”) and the Lloyd’s Operations segment (“Lloyd’s Operations”), which are separately managed, and a Corporate segment (“Corporate”). Segment data for each of the two underwriting segments include allocations of the operating expenses of the wholly-owned underwriting management companies and the Parent Company’s operating expenses and related income tax amounts. The Corporate segment consists of the Parent Company’s investment income and interest expense and the related tax effect.

The Company evaluates the performance of each underwriting segment based on its underwriting and GAAP results. The Insurance Companies’ and the Lloyd’s Operations’ results are measured by taking into account net earned premiums, net losses and loss adjustment expenses (“LAE”), commission expenses, other operating expenses and other income (expense). Each segment maintains its own investments on which it earns income and realizes capital gains or losses. The Company’s underwriting performance is evaluated separately from the performance of its investment portfolios.

The Insurance Companies consist of Navigators Insurance Company, including its branch located in the United Kingdom (the “U.K. Branch”), and its wholly-owned subsidiary, Navigators Specialty Insurance Company (“Navigators Specialty”). They are primarily engaged in underwriting marine insurance and related lines of business, professional liability insurance and specialty lines of business, including contractors general liability insurance, commercial umbrella and primary and excess casualty businesses. Navigators Specialty underwrites specialty and professional liability insurance on an excess and surplus lines basis. Navigators Specialty is 100% reinsured by Navigators Insurance Company.

The Lloyd’s Operations primarily underwrite marine and related lines of business along with offshore energy, professional liability insurance and construction coverages for onshore energy business at Lloyd’s of London (“Lloyd’s”) through Syndicate 1221. The Lloyd’s Operations includes Navigators Underwriting Agency Ltd. (“NUAL”), a Lloyd’s underwriting agency which manages Syndicate 1221.

Navigators Management Company, Inc. (“NMC”) is a wholly-owned underwriting management company that produces, manages and underwrites insurance and reinsurance, and provides corporate services for the Company. The operating results for NMC are allocated to both the Insurance Companies and Lloyd’s Operations as appropriate.

The Insurance Companies’ and the Lloyd’s Operations’ underwriting results are measured based on underwriting profit or loss and the related combined ratio, which are both non-GAAP measures of underwriting profitability. Underwriting profit or loss is calculated from net earned premiums, less the sum of net losses and LAE, commission expenses, other operating expenses and other income (expense). The combined ratio is derived by dividing the sum of net losses and LAE, commission expenses, other operating expenses and other income (expense) by net earned premiums. A combined ratio of less than 100% indicates an underwriting profit and greater than 100% indicates an underwriting loss.

9

Financial data by segment for the three and nine months ended September 30, 2012 and 2011 were as follows:

	Three Months Ended September 30, 2012
In thousands	Insurance Companies			Lloyd’s Operations			Corporate(1)			Total
Gross written premiums	$	218,361		$	80,381		$	—		$	298,742
Net written premiums		142,148			45,898			—			188,046
Net earned premiums		149,090			52,172			—			201,262
Net losses and loss adjustment expenses		(113,303	)		(15,547	)		—			(128,850	)
Commission expenses		(20,827	)		(10,911	)		480			(31,258	)
Other operating expenses		(29,387	)		(10,725	)		—			(40,112	)
Other income (expense)		1,229			40			(480	)		789
Underwriting profit (loss)	$	(13,198	)	$	15,029		$	—		$	1,831
Net investment income		12,004			1,552			41			13,597
Net realized gains (losses)		2,609			2,152			—			4,761
Interest expense		—			—			(2,049	)		(2,049	)
Income (loss) before income taxes	$	1,415		$	18,733		$	(2,008	)	$	18,140
Income tax expense (benefit)		(377	)		6,525			(923	)		5,225
Net income (loss)	$	1,792		$	12,208		$	(1,085	)	$	12,915
Identifiable assets	$	2,995,530		$	958,238		$	40,929		$	3,994,697
Losses and loss adjustment expenses ratio		76.0	%		29.8	%					64.0	%
Commission expense ratio		14.0	%		20.9	%					15.5	%
Other operating expense ratio(2)		18.9	%		20.5	%					19.6	%
Combined ratio		108.9	%		71.2	%					99.1	%

(1) - Includes Corporate segment intercompany eliminations.

(2) - Includes Other operating expenses and Other income.

10

	Three Months Ended September 30, 2011
In thousands	Insurance Companies			Lloyd’s Operations			Corporate(1)			Total
Gross written premiums	$	191,175		$	64,143		$	—		$	255,318
Net written premiums		135,292			40,065			—			175,357
Net earned premiums		119,332			54,301			—			173,633
Net losses and loss adjustment expenses		(76,755	)		(33,487	)		—			(110,242	)
Commission expenses		(16,514	)		(9,953	)		533			(25,934	)
Other operating expenses		(25,735	)		(9,254	)		—			(34,989	)
Other income (expense)		554			(942	)		(533	)		(921	)
Underwriting profit (loss)	$	882		$	665		$	—		$	1,547
Net investment income		14,037			2,158			64			16,259
Net realized gains (losses)		2,809			(226	)		32			2,615
Interest expense		—			—			(2,047	)		(2,047	)
Income (loss) before income taxes	$	17,728		$	2,597		$	(1,951	)	$	18,374
Income tax expense (benefit)		4,379			780			(683	)		4,476
Net income (loss)	$	13,349		$	1,817		$	(1,268	)	$	13,898
Identifiable assets	$	2,692,597		$	887,401		$	43,377		$	3,623,375
Losses and loss adjustment expenses ratio		64.3	%		61.7	%					63.5	%
Commission expense ratio		13.8	%		18.3	%					14.9	%
Other operating expense ratio(2)		21.2	%		18.8	%					20.7	%
Combined ratio		99.3	%		98.8	%					99.1	%

(1) - Includes Corporate segment intercompany eliminations.

(2) - Includes Other operating expenses and Other income.

11

	Nine Months Ended September 30, 2012
In thousands	Insurance Companies			Lloyd’s Operations			Corporate(1)			Total
Gross written premiums	$	680,763		$	284,115		$	—		$	964,878
Net written premiums		457,463			163,880			—			621,343
Net earned premiums		422,215			158,183			—			580,398
Net losses and loss adjustment expenses		(304,483	)		(65,759	)		—			(370,242	)
Commission expenses		(61,245	)		(30,735	)		1,769			(90,211	)
Other operating expenses		(83,646	)		(32,592	)		—			(116,238	)
Other income (expense)		3,750			106			(1,769	)		2,087
Underwriting profit (loss)	$	(23,409	)	$	29,203		$	—		$	5,794
Net investment income		34,225			6,289			118			40,632
Net realized gains (losses)		6,809			3,361			—			10,170
Interest expense		—			—			(6,147	)		(6,147	)
Income (loss) before income taxes	$	17,625		$	38,853		$	(6,029	)	$	50,449
Income tax expense (benefit)		3,603			13,458			(2,330	)		14,731
Net income (loss)	$	14,022		$	25,395		$	(3,699	)	$	35,718
Identifiable assets	$	2,995,530		$	958,238		$	40,929		$	3,994,697
Losses and loss adjustment expenses ratio		72.1	%		41.6	%					63.8	%
Commission expense ratio		14.5	%		19.4	%					15.5	%
Other operating expense ratio(2)		18.9	%		20.5	%					19.7	%
Combined ratio		105.5	%		81.5	%					99.0	%

(1) - Includes Corporate segment intercompany eliminations.

(2) - Includes Other operating expenses and Other income.

12

	Nine Months Ended September 30, 2011
In thousands	Insurance Companies			Lloyd’s Operations			Corporate(1)			Total
Gross written premiums	$	584,718		$	245,597		$	—		$	830,315
Net written premiums		389,236			162,560			—			551,796
Net earned premiums		333,139			166,749			—			499,888
Net losses and loss adjustment expenses		(228,882	)		(112,011	)		—			(340,893	)
Commission expenses		(45,256	)		(36,402	)		1,494			(80,164	)
Other operating expenses		(79,050	)		(28,291	)		—			(107,341	)
Other income (expense)		2,871			(734	)		(1,494	)		643
Underwriting profit (loss)	$	(17,178	)	$	(10,689	)	$	—		$	(27,867	)
Net investment income		44,009			6,733			330			51,072
Net realized gains (losses)		5,664			(2,409	)		204			3,459
Interest expense		—			—			(6,140	)		(6,140	)
Income (loss) before income taxes	$	32,495		$	(6,365	)	$	(5,606	)	$	20,524
Income tax expense (benefit)		9,224			(2,247	)		(1,962	)		5,015
Net income (loss)	$	23,271		$	(4,118	)	$	(3,644	)	$	15,509
Identifiable assets	$	2,692,597		$	887,401		$	43,377		$	3,623,375
Losses and loss adjustment expenses ratio		68.7	%		67.2	%					68.2	%
Commission expense ratio		13.6	%		21.8	%					16.0	%
Other operating expense ratio(2)		22.9	%		17.4	%					21.4	%
Combined ratio		105.2	%		106.4	%					105.6	%

(1) - Includes Corporate segment intercompany eliminations.

(2) - Includes Other operating expenses and Other income.

13

The following tables provide additional financial data by segment for the three and nine months ended September 30, 2012 and 2011:

	Three Months Ended September 30, 2012
In thousands	Insurance Companies		Lloyd’s Operations		Total
Gross written premiums:
Marine	$	44,879	$	37,716	$	82,595
Property casualty		139,948		32,789		172,737
Professional liability		33,534		9,876		43,410
Total	$	218,361	$	80,381	$	298,742
Net written premiums:
Marine	$	32,615	$	27,939	$	60,554
Property casualty		83,449		11,633		95,082
Professional liability		26,084		6,326		32,410
Total	$	142,148	$	45,898	$	188,046
Net earned premiums:
Marine	$	40,592	$	34,002	$	74,594
Property casualty		83,993		11,870		95,863
Professional liability		24,505		6,300		30,805
Total	$	149,090	$	52,172	$	201,262

	Three Months Ended September 30, 2011
In thousands	Insurance Companies		Lloyd’s Operations		Total
Gross written premiums:
Marine	$	47,141	$	26,979	$	74,120
Property casualty		110,975		29,682		140,657
Professional liability		33,059		7,482		40,541
Total	$	191,175	$	64,143	$	255,318
Net written premiums:
Marine	$	34,180	$	20,649	$	54,829
Property casualty		77,056		16,296		93,352
Professional liability		24,056		3,120		27,176
Total	$	135,292	$	40,065	$	175,357
Net earned premiums:
Marine	$	41,951	$	34,510	$	76,461
Property casualty		58,585		15,952		74,537
Professional liability		18,796		3,839		22,635
Total	$	119,332	$	54,301	$	173,633

14

	Nine Months Ended September 30, 2012
In thousands	Insurance Companies		Lloyd’s Operations		Total
Gross written premiums:
Marine	$	156,640	$	146,528	$	303,168
Property casualty		426,494		106,063		532,557
Professional liability		97,629		31,524		129,153
Total	$	680,763	$	284,115	$	964,878
Net written premiums:
Marine	$	107,266	$	109,489	$	216,755
Property casualty		274,823		36,693		311,516
Professional liability		75,374		17,698		93,072
Total	$	457,463	$	163,880	$	621,343
Net earned premiums:
Marine	$	111,402	$	101,538	$	212,940
Property casualty		240,536		41,644		282,180
Professional liability		70,277		15,001		85,278
Total	$	422,215	$	158,183	$	580,398

	Nine Months Ended September 30, 2011
In thousands	Insurance Companies		Lloyd’s Operations		Total
Gross written premiums:
Marine	$	175,812	$	127,585	$	303,397
Property casualty		323,994		91,106		415,100
Professional liability		84,912		26,906		111,818
Total	$	584,718	$	245,597	$	830,315
Net written premiums:
Marine	$	130,200	$	102,362	$	232,562
Property casualty		201,978		47,364		249,342
Professional liability		57,058		12,834		69,892
Total	$	389,236	$	162,560	$	551,796
Net earned premiums:
Marine	$	124,387	$	109,222	$	233,609
Property casualty		156,871		44,105		200,976
Professional liability		51,881		13,422		65,303
Total	$	333,139	$	166,749	$	499,888

The Insurance Companies’ net earned premiums include $16.9 million and $21.2 million of net earned premiums from the U.K. Branch for the three months ended September 30, 2012 and 2011 and $56.0 million and $64.1 million of net earned premiums from the U.K. Branch for the nine months ended September 30, 2012 and 2011, respectively.

15

Note 4. Reinsurance Ceded

The Company’s ceded earned premiums were $97.4 million and $85.5 million for the three months ended September 30, 2012 and 2011 and $283.4 million and $261.9 million for the nine months ended September 30, 2012 and 2011, respectively. The Company’s ceded incurred losses were $31.2 million and $39.8 million for the three months ended September 30, 2012 and 2011 and $154.4 million and $165.6 million for the nine months ended September 30, 2012 and 2011, respectively.

During the three months ended September 30, 2012, the Company recorded corrections to reinsurance treaty retentions from 2007 Marine occurrences. The claims in question had been settled and ceded amounts paid, however after discussion with reinsurers it was determined that two separate retentions should have been applied for each occurrence for Navigators Insurance Companies and Navigators Lloyds Syndicate. As a result, the amount of the losses retained in the current quarter increased by $5.3 million and the related reinstatement premiums paid were reduced by $1.9 million. The net pre-tax and after tax impact of these corrections was $3.4 million and $2.2 million, respectively.

The following table lists the Company’s 20 largest reinsurers measured by the amount of reinsurance recoverable for ceded losses and LAE and ceded unearned premium (constituting approximately 73.9% of the total recoverable), together with the reinsurance recoverable and collateral as of September 30, 2012, and the reinsurers’ ratings from the A.M. Best Company (“AMB”) or Standard & Poor’s (“S&P”):

	Reinsurance Recoverables
In thousands	Unearned Premium		Paid/Unpaid Losses		Total		Collateral Held(1)		AMB	S&P
Swiss Reinsurance America Corporation	$	5,017	$	91,035	$	96,052	$	7,152	A+	AA-
Munich Reinsurance America Inc.		10,356		85,215		95,571		1,235	A+	AA-
Transatlantic Reinsurance Company		17,445		72,832		90,277		12,848	A	A+
Everest Reinsurance Company		18,256		71,308		89,564		8,209	A+	A+
National Indemnity Company		41,244		34,388		75,632		22,746	A++	AA+
Partner Reinsurance Europe		10,053		36,191		46,244		19,814	A+	A+
Lloyd’s Syndicate #2003		8,622		33,044		41,666		10,232	A	A+
Allied World Reinsurance		9,500		20,987		30,487		4,085	A	A
Berkley Insurance Company		1,795		26,003		27,798		3,147	A+	A+
Tower Insurance Company		10,844		15,038		25,882		4,129	A-	NR
General Reinsurance Corporation		590		25,129		25,719		1,006	A++	AA+
Scor Global P&C SE		13,158		12,287		25,445		7,452	A	A+
Ace Property and Casualty Insurance Company		971		20,919		21,890		-	A+	AA-
Validus Reinsurance Ltd.		2,866		18,706		21,572		9,490	A	A
Scor Holding (Switzerland) AG		1,128		17,177		18,305		4,254	A	A+
Sirius America Insurance Company		75		18,086		18,161		2,455	A	A-
Platinum Underwriters Re		472		17,488		17,960		1,552	A	A-
Lloyd’s Syndicate #4000		2,657		14,177		16,834		2,254	A	A+
Munchener Ruckversicherungs-Gesellschaft		387		14,331		14,718		6,115	A+	AA-
AXIS Re Europe		3,563		10,904		14,467		2,083	A	A+
Top 20 Total	$	158,999	$	655,245	$	814,244	$	130,258
All Others		65,852		221,178		287,030		106,826
Total	$	224,851	$	876,423	$	1,101,274	$	237,084

(1)    -  Collateral includes letter of credit, balances payable and other balances held by the Company’s Insurance Companies and Lloyd’s Operations.

16

Note 5. Stock-Based Compensation

Stock-based compensation granted under the Company’s stock plans is expensed in tranches over the vesting period. Options and non-performance based grants generally vest equally over a three or four year period and the options have a maximum term of ten years. Certain non-performance based grants vest over five years with one-third vesting in each of the third, fourth and fifth years. The Company’s performance based share grants generally consist of two types of awards. The restricted stock units issued in 2011 and after will cliff vest over a three year period, with 50% vesting in full, and 50% dependent on the rate of compound annual growth in book value per share for the three years immediately prior to the vesting date, with actual shares that vest ranging between 150% to 0% of that portion of the original award. Those performance based restricted stock units issued prior to 2011 generally vest over five years with one-third vesting in each of the third, fourth and fifth years, dependent on the rolling three-year average return on equity based on the three years prior to the year in which the vesting occurs, with actual shares that vest ranging between 150% to 0% of the original award.

The amounts charged to expense for stock-based compensation for the three and nine months ended September 30, 2012 and 2011 are presented in the following table:

	Three Months Ended September 30,					Nine Months Ended September 30,
In thousands	2012		2011			2012		2011
Restricted stock units	$	1,818	$	775		$	5,004	$	2,254
Directors restricted stock grants(1)		170		64			290		184
Employee stock purchase plan		27		1			42		124
Stock appreciation rights(2)		—		(47	)		—		(100	)
Stock options		—		—			—		—
Total stock-based compensation	$	2,015	$	793		$	5,336	$	2,462

(1)   ��-	Relates to non-employee directors serving on the Parent Company’s Board of Directors, all of whom have been elected by the Company’s stockholders, as well as non-employee directors serving on NUAL’s Board of Directors.
(2)    -	All outstanding stock appreciation rights were exercised during 2011. The Company has no current plans to issue stock appreciation rights under the 2005 Amended and Restated Stock Incentive Plan.

Note 6. Lloyd’s Syndicate 1221

The Company’s Lloyd’s Operations included in the consolidated financial statements represents its participation in Syndicate 1221. Syndicate 1221’s stamp capacity is £184 million ($296 million) for the 2012 underwriting year compared to £175 million ($280 million) for the 2011 underwriting year. Stamp capacity is a measure of the amount of premiums a Lloyd’s syndicate is authorized to write based on a business plan approved by the Council of Lloyd’s. Syndicate 1221’s stamp capacity is expressed net of commission (as is standard at Lloyd’s). The Syndicate 1221 premiums recorded in the Company’s financial statements are gross of commission. The Company controlled 100% of Syndicate 1221’s stamp capacity for the 2012 and 2011 underwriting years through its wholly-owned Lloyd’s corporate member.

The Company provides letters of credit and posts cash to Lloyd’s to support its participation in Syndicate 1221’s stamp capacity. As of September 30, 2012, the Company had provided letters of credit of $150.0 million and did not have any cash collateral posted. If Syndicate 1221 increases its stamp capacity and the Company participates in the additional stamp capacity, or if Lloyd’s changes the capital requirements, the Company may be required to supply additional collateral acceptable to Lloyd’s. If the Company is unwilling or unable to provide additional acceptable collateral, the Company will be required to reduce its participation in the stamp capacity of Syndicate 1221. The letters of credit are provided through a credit facility with a consortium of banks which provides the Company with the ability to have letters of credit issued to support Syndicate 1221’s stamp capacity at Lloyd’s for the 2012 and 2011 underwriting years. If any letters of credit remain outstanding under the facility after December 31, 2012, the Company would be required to post additional collateral to secure the remaining letters of credit. If the credit facility is not renewed prior to December 31, 2012, the Company will need to find internal and/or external sources to provide either letters of credit or other collateral in order to continue to participate in Syndicate 1221. The credit facility is collateralized by all of the common stock of Navigators Insurance Company. Refer to Note 11,Credit Facility, for additional information.

17

Note 7. Income Taxes

The Company is subject to the tax laws and regulations of the United States (“U.S.”) and the foreign countries in which it operates. The Company files a consolidated U.S. Federal tax return, which includes all domestic subsidiaries and the U.K. Branch. The income from the foreign operations is designated as either U.S. connected income or non-U.S. connected income. Lloyd’s is required to pay U.S. income tax on U.S. connected income written by Lloyd’s syndicates. Lloyd’s and the Internal Revenue Service (“IRS”) have entered into an agreement whereby the amount of tax due on U.S. connected income is calculated by Lloyd’s and remitted directly to the IRS. These amounts are then charged to the corporate member in proportion to its participation in the relevant syndicates. The Company’s corporate member is subject to this agreement and will receive U.K. tax credits in the United Kingdom (“U.K.”) for any U.S. income tax incurred up to the U.K. income tax charged on the U.S. connected income. The non-U.S. connected insurance income would generally constitute taxable income under the Subpart F income section of the U.S. Internal Revenue Code (“Subpart F”) since less than 50% of Syndicate 1221’s premiums are derived within the U.K. and would therefore be subject to U.S. taxation when the Lloyd’s year of account closes. Taxes are accrued at a 35% rate on the Company’s foreign source insurance income and foreign tax credits, where available, are utilized to offset U.S. tax as permitted. The Company’s effective tax rate for Syndicate 1221 taxable income could substantially exceed 35% to the extent the Company is unable to offset U.S. taxes paid under Subpart F tax regulations with U.K. tax credits on future underwriting year distributions. U.S. taxes are not accrued on the earnings of the Company’s foreign agencies as these earnings are not includable as Subpart F income in the current year. These earnings are subject to taxes under U.K. tax regulations at a 26% rate through March 31, 2012. A finance bill was enacted in the U.K. that reduced the U.K. corporate tax rate from 26% to 24% effective April 2012. The effect of such tax rate change was not material.

The Company has not provided for U.S. deferred income taxes on the undistributed earnings of approximately $94.4 million of its non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the non-U.S. subsidiaries. However, in the future, if such earnings were distributed to the Company, taxes of approximately $1.7 million, assuming all foreign tax credits are realized, would be payable on such undistributed earnings and would be reflected in the tax provision for the year in which these earnings are no longer intended to be permanently reinvested in the foreign subsidiary.

Unrecognized tax benefits are differences between tax positions taken in the tax returns and benefits recognized in the financial statements. The Company has no unrecognized tax benefits as of September 30, 2012 and 2011. The Company did not incur any interest or penalties related to unrecognized tax benefits for the three and nine months ended September 30, 2012 and 2011. The Company is currently not under examination by any major U.S. or foreign tax authority and is generally subject to U.S. Federal, state or local, or foreign tax examinations by tax authorities for 2009 and subsequent years.

The Company recorded income tax expense of $5.2 million and $14.7 million for the three and nine months ended September 30, 2012 compared to $4.5 million and $5.0 million for the same periods in 2011, resulting in an effective tax rate of 28.8% and 29.2% for the three and nine months ended September 30, 2012 and 24.4% for both periods in 2011. The effective tax rate on net investment income was 26.6% and 26.8% for the three and nine months ended September 30, 2012 compared to 28.6% for both periods in 2011.

The Company had state and local deferred tax assets amounting to potential future tax benefits of $0.2 million as of both September 30, 2012 and December 31, 2011, respectively. Included in the deferred tax assets are state and local net operating loss carry-forwards of $0.1 million and $0.2 million as of September 30, 2012 and December 31, 2011. A valuation allowance was established for the full amount of these potential future tax benefits due to the uncertainty associated with their realization. The Company’s state and local tax carry-forwards as of September 30, 2012 expire from 2024 to 2032.

18

Note 8. Senior Notes due May 1, 2016

On April 17, 2006, the Company completed a public debt offering of $125 million principal amount of 7% senior unsecured notes (the “Senior Notes”) and received net proceeds of $123.5 million. The principal amount of the Senior Notes is payable in a single installment on May 1, 2016. In April 2009, the Company repurchased $10.0 million aggregate principal amount of the Senior Notes from an unaffiliated note holder on the open market for $7.0 million, which generated a $3.0 million pre-tax gain that was reflected in Other income. The Senior Notes liability at September 30, 2012 was $114.4 million. The unamortized discount at September 30, 2012 was $0.6 million. The aggregate principal amount of the Senior Notes that will be repaid on May 1, 2016 as a result of these transactions is $115.0 million.

The fair value of the Senior Notes was $121.0 million and $119.3 million as of September 30, 2012 and December 31, 2011. The fair value was determined using quoted prices for similar instruments in active markets and is classified as Level 2 within the fair value hierarchy as defined by the accounting guidance for fair value measurements.

Interest is payable on the Senior Notes each May 1 and November 1. The effective interest rate related to the Senior Notes, based on the proceeds net of discount and all issuance costs, is approximately 7.17%. Interest expense on the Senior Notes for the three and nine months ended each of September 30, 2012 and 2011 was $2.1 million and $6.1 million, respectively.

The Senior Notes, the Company’s only senior unsecured obligation, will rank equally with any future senior unsecured indebtedness. The Company may redeem the Senior Notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price. The terms of the Senior Notes contain various restrictive business and financial covenants typical for debt obligations of this type, including limitations on mergers, liens and dispositions of the common stock of certain subsidiaries. As of September 30, 2012, the Company was in compliance with all such covenants.

Note 9. Commitments and Contingencies

In the ordinary course of conducting business, the Company’s subsidiaries are involved in various legal proceedings, either indirectly as insurers for parties or directly as defendants. Most of these proceedings consist of claims litigation involving the Company’s subsidiaries as either (a) liability insurers defending or providing indemnity for third party claims brought against insureds or (b) insurers defending first party coverage claims brought against them. The Company accounts for such activity through the establishment of unpaid loss and loss adjustment reserves. The Company’s management believes that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and cost of defense, will not be material to the Company’s consolidated financial condition, results of operations or cash flows.

The Company’s subsidiaries are also from time to time involved with other legal actions, some of which assert claims for substantial amounts. These actions include claims asserting extra-contractual obligations, such as claims involving allegations of bad faith in the handling of claims or the underwriting of policies. In general, the Company believes it has valid defenses to these cases. The Company’s management expects that the ultimate liability, if any, with respect to future extra-contractual matters will not be material to its consolidated financial position, results of operations or cash flows. Nonetheless, given the large or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of litigation, an adverse outcome in such matters could, from time to time, have a material adverse outcome on the Company’s consolidated results of operations or cash flows in a particular fiscal quarter or year.

19

Note 10. Investments

The following tables set forth the Company’s cash and investments as of September 30, 2012 and December 31, 2011. The tables below include other-than-temporarily impaired (“OTTI”) securities recognized within other comprehensive income (“OCI”).

	September 30, 2012
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Amortized Cost		OTTI Recognized in OCI
Fixed maturities:
U.S. Treasury bonds, agency bonds, and foreign government bonds	$	465,215	$	11,881	$	(55	)	$	453,389	$	—
States, municipalities and political subdivisions		443,994		34,451		(66	)		409,609		—
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		405,229		17,582		(56	)		387,703		—
Residential mortgage obligations		39,095		711		(837	)		39,221		(278	)
Asset-backed securities		50,897		1,069		(72	)		49,900		—
Commercial mortgage-backed securities		208,742		18,126		(50	)		190,666		—
Subtotal	$	703,963	$	37,488	$	(1,015	)	$	667,490	$	(278	)
Corporate bonds		471,886		26,941		(101	)		445,046		—
Total fixed maturities	$	2,085,058	$	110,761	$	(1,237	)	$	1,975,534	$	(278	)
Equity securities - common stocks		105,930		31,377		(278	)		74,831		—
Short-term investments		187,445		—		—			187,445		—
Cash		36,252		—		—			36,252		—
Total	$	2,414,685	$	142,138	$	(1,515	)	$	2,274,062	$	(278	)

	December 31, 2011
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Amortized Cost		OTTI Recognized in OCI
Fixed maturities:
U.S. Treasury bonds, agency bonds, and foreign government bonds	$	336,070	$	8,979	$	(383	)	$	327,474	$	—
States, municipalities and political subdivisions		410,836		28,887		(108	)		382,057		—
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		395,860		17,321		(3	)		378,542		—
Residential mortgage obligations		23,148		8		(2,848	)		25,988		(1,682	)
Asset-backed securities		48,934		695		(75	)		48,314		—
Commercial mortgage-backed securities		216,034		10,508		(593	)		206,119		—
Subtotal	$	683,976	$	28,532	$	(3,519	)	$	658,963	$	(1,682	)
Corporate bonds		457,187		15,743		(6,772	)		448,216		—
Total fixed maturities	$	1,888,069	$	82,141	$	(10,782	)	$	1,816,710	$	(1,682	)
Equity securities - common stocks		95,849		23,240		(958	)		73,567		—
Short-term investments		122,220		—		—			122,220		—
Cash		127,360		—		—			127,360
Total	$	2,233,498	$	105,381	$	(11,740	)	$	2,139,857	$	(1,682	)

20

The fair value of the Company’s investment portfolio may fluctuate significantly in response to various factors such as changes in interest rates, investment quality ratings, equity prices, foreign exchange rates and credit spreads. The Company does not have the intent to sell nor is it more likely than not that it will have to sell debt securities in unrealized loss positions that are not other-than-temporarily impaired before recovery. The Company may realize investment losses to the extent its liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate, liquidity or credit spread environments. Significant changes in the factors the Company considers when evaluating investments for impairment losses could result in a significant change in impairment losses reported in the consolidated financial statements.

The contractual maturity dates for fixed maturity securities categorized by the number of years until maturity as of September 30, 2012 are shown in the following table:

	September 30, 2012
In thousands	Fair Value		Amortized Cost
Due in one year or less	$	80,858	$	80,272
Due after one year through five years		641,625		618,478
Due after five years through ten years		429,575		397,999
Due after ten years		229,037		211,295
Mortgage- and asset-backed securities		703,963		667,490
Total	$	2,085,058	$	1,975,534

Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Due to the periodic repayment of principal, the mortgage-backed and asset-backed securities are estimated to have an effective maturity of approximately 3.9 years.

The following table shows the amount and percentage of the Company’s fixed maturities as of September 30, 2012 by S&P credit rating or, if an S&P rating is not available, the equivalent Moody’s Investor Services (“Moody’s”) rating. The table includes fixed maturities at fair value, and the total rating is the weighted average quality rating.

In thousands	Rating	Fair Value		Percent of Total
Rating description:
Extremely strong	AAA	$	348,008		17	%
Very strong	AA		1,177,602		56	%
Strong	A		380,992		18	%
Adequate	BBB		146,910		7	%
Speculative	BB & Below		14,508		1	%
Not rated	NR		17,038		1	%
Total		$	2,085,058		100	%

21

The following table summarizes all securities in a gross unrealized loss position as of September 30, 2012 and December 31, 2011, showing the aggregate fair value and gross unrealized loss by the length of time those securities had continuously been in a gross unrealized loss position as well as the relevant number of securities.

	September 30, 2012						December 31, 2011
In thousands, except # of securities	Number of Securities		Fair Value		Gross Unrealized Loss		Number of Securities		Fair Value		Gross Unrealized Loss
Fixed maturities:
U.S. Government Treasury bonds, agency bonds, and foreign government bonds
0-6 months		4	$	16,736	$	34		7	$	58,587	$	98
7-12 months		4		4,682		3		—		—		—
> 12 months		1		4,644		18		2		6,883		285
Subtotal		9	$	26,062	$	55		9	$	65,470	$	383
States, municipalities and political subdivisions
0-6 months		1	$	401	$	2		7	$	5,894	$	72
7-12 months		2		1,473		40		1		216		1
> 12 months		3		2,297		24		5		2,420		35
Subtotal		6	$	4,171	$	66		13	$	8,530	$	108
Agency mortgage-backed securities
0-6 months		5	$	18,901	$	56		3	$	5,087	$	3
7-12 months		—		—		—		—		—		—
> 12 months		—		—		—		—		—		—
Subtotal		5	$	18,901	$	56		3	$	5,087	$	3
Residential mortgage obligations
0-6 months		2	$	550	$	19		6	$	6,672	$	184
7-12 months		—		—		—		7		5,250		313
> 12 months		41		10,356		818		47		10,749		2,351
Subtotal		43	$	10,906	$	837		60	$	22,671	$	2,848
Asset-backed securities
0-6 months		—	$	—	$	—		2	$	4,933	$	12
7-12 months		—		—		—		5		6,645		63
> 12 months		2		2,504		72		1		2		—
Subtotal		2	$	2,504	$	72		8	$	11,580	$	75
Commercial mortgage-backed securities
0-6 months		5	$	2,772	$	8		6	$	5,465	$	29
7-12 months		4		3,777		36		3		6,840		550
> 12 months		4		943		6		3		1,503		14
Subtotal		13	$	7,492	$	50		12	$	13,808	$	593
Corporate bonds
0-6 months		3	$	6,357	$	51		52	$	135,516	$	4,539
7-12 months		—		—		—		18		27,561		1,457
> 12 months		8		14,776		50		8		14,898		776
Subtotal		11	$	21,133	$	101		78	$	177,975	$	6,772
Total fixed maturities		89	$	91,169	$	1,237		183	$	305,121	$	10,782
Equity securities - common stocks
0-6 months		1	$	2,144	$	4		4	$	3,320	$	587
7-12 months		1		1,789		259		1		1,629		371
> 12 months		1		490		15		—		—		—
Total equity securities		3	$	4,423	$	278		5	$	4,949	$	958

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As of September 30, 2012 and December 31, 2011, the largest single unrealized loss by a non-government backed issuer in the investment portfolio was $0.1 million and $1.4 million, respectively.

The Company analyzes the unrealized losses quarterly to determine if any are other-than-temporary. The above unrealized losses have been determined to be temporary based on our analysis.

For debt securities, when assessing whether the amortized cost basis of the security will be recovered, the Company compares the present value of cash flows expected to be collected in relation to the current book value. Any shortfalls of the present value of the cash flows expected to be collected to the amortized cost basis is considered the credit loss portion of OTTI losses and is recognized in earnings. All non-credit losses are recognized as changes in OTTI losses within OCI.

To determine whether the unrealized loss on structured securities is other-than-temporary, the Company analyzes the projections provided by its investment managers with respect to an expected principal loss under a range of scenarios and utilizes the most likely outcomes. The analysis relies on actual collateral performance measures such as default rate, prepayment rate and loss severity. These assumptions are applied throughout the remaining term of the deal, incorporating the transaction structure and priority of payments, to generate loss adjusted cash flows. Results of the analysis will indicate whether the security is expected ultimately to incur a loss or whether there is a material impact on yield due to either a projected loss or a change in cash flow timing. A break even default rate is also calculated. A comparison of the break even default rate to the actual default rate provides an indication of the level of cushion or coverage to the first dollar principal loss. The analysis applies the stated assumptions throughout the remaining term of the transaction to forecast cash flows, which are then applied through the transaction structure to determine whether there is a loss to the security. For securities in which a tranche loss is present, and the net present value of loss adjusted cash flows is less than book value, impairment is recognized. The output data also includes a number of additional metrics such as average life remaining, original and current credit support, over 60 day delinquency and security rating.

The significant inputs used to measure the amount of credit loss recognized in earnings were actual delinquency rates, default probability assumptions, severity assumptions and prepayment assumptions. Projected losses are a function of both loss severity and probability of default. Default probability and severity assumptions differ based on property type, vintage and the stress of the collateral. The Company does not intend to sell any of these securities and it is more likely than not that it will not be required to sell these securities before the recovery of the amortized cost basis.

For equity securities, in general, the Company focuses its attention on those securities with a fair value less than 80% of their cost for six or more consecutive months. If warranted as the result of conditions relating to a particular security, the Company will focus on a significant decline in fair value regardless of the time period involved. Factors considered in evaluating potential impairment include, but are not limited to, the current fair value as compared to cost of the security, the length of time the investment has been below cost and by how much the investment is below cost. If an equity security is deemed to be other-than-temporarily impaired, the cost is written down to fair value with the loss recognized in earnings.

For equity securities, the Company also considers its intent to hold securities as part of the process of evaluating whether a decline in fair value represents an other-than-temporary decline in value. For fixed maturity securities, the Company considers its intent to sell a security and whether it is more likely than not that the Company will be required to sell a security before the anticipated recovery as part of the process of evaluating whether a security’s unrealized loss represents an other-than-temporary decline. The Company’s ability to hold such securities is supported by sufficient cash flow from its operations and from maturities within its investment portfolio in order to meet its claims payment and other disbursement obligations arising from its underwriting operations without selling such investments. With respect to securities where the decline in value is determined to be temporary and the security’s value is not written down, a subsequent decision may be made to sell that security and realize a loss. Subsequent decisions on security sales are made within the context of overall risk monitoring, changing information and market conditions.

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The following table summarizes the gross unrealized investment losses as of September 30, 2012 by the length of time that the fair value continues to be less than 80% of amortized cost:

	September 30, 2012
In thousands	Fixed Maturities		Equity Securities		Total
Less than three months	$	—	$	—	$	—
Longer than three months and less than six months		—		—		—
Longer than six months and less than twelve months		—		—		—
Longer than twelve months		164		—		164
Total	$	164	$	—	$	164

The table below summarizes the Company’s activity related to OTTI losses for the periods indicated:

	Three Months Ended September 30,								Nine Months Ended September 30,
	2012				2011				2012				2011
In thousands, except # of securities	Number of Securities		Amount		Number of Securities		Amount		Number of Securities		Amount		Number of Securities		Amount
Total OTTI losses:
Corporate and other bonds		—	$	—		—	$	—		—	$	—		—	$	—
Commercial mortgage-backed securities		—		—		—		—		—		—		—		—
Residential mortgage-backed securities		—		—		10		1,241		1		54		15		1,791
Asset-backed securities		—		—		—		—		—		—		—		—
Equities		—		—		—		—		3		639		1		547
Total		—	$	—		10	$	1,241		4	$	693		16	$	2,338
Less: Portion of loss in accumulated other comprehensive income (loss):
Corporate and other bonds			$	—			$	—			$	—			$	—
Commercial mortgage-backed securities				—				—				—				—
Residential mortgage-backed securities				—				618				43				941
Asset-backed securities				—				—				—				—
Equities				—				—				—				—
Total			$	—			$	618			$	43			$	941
Impairment losses recognized in earnings
Corporate and other bonds			$	—			$	—			$	—			$	—
Commercial mortgage-backed securities				—				—				—				—
Residential mortgage-backed securities				—				623				11				850
Asset-backed securities				—				—				—				—
Equities				—				—				639				547
Total			$	—			$	623			$	650			$	1,397

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The following table summarizes the cumulative amounts related to the Company’s credit loss portion of the OTTI losses on debt securities for the three and nine months ended September 30, 2012 and 2011. The Company does not intend to sell and it is more likely than not that it will not be required to sell, the securities prior to recovery of the amortized cost basis and for which the non-credit loss portion is included in other comprehensive income:

	Three Months  Ended September 30,				Nine Months  Ended September 30,
In thousands	2012		2011		2012		2011
Beginning balance	$	3,332	$	1,885	$	3,321	$	1,658
Additions for credit loss impairments recognized in the current period on securities not previously impaired		—		623		—		850
Additions for credit loss impairments recognized in the current period on securities previously impaired		—		—		11		—
Reductions for credit loss impairments previously recognized on securities sold during the period		—		—		—		—
Ending balance	$	3,332	$	2,508	$	3,332	$	2,508

The contractual maturity dates for fixed maturity securities categorized by the number of years until maturity, with a gross unrealized loss as of September 30, 2012 is presented in the following table:

	September 30, 2012
	Gross Unrealized Losses					Fair Value
In thousands	Amount		Percent of Total			Amount		Percent of Total
Due in one year or less	$	25		2	%	$	11,387		12	%
Due after one year through five years		112		9	%		19,473		21	%
Due after five years through ten years		27		2	%		5,532		6	%
Due after ten years		58		5	%		14,974		16	%
Mortgage- and asset-backed securities		1,015		82	%		39,803		45	%
Total	$	1,237		100	%	$	91,169		100	%

The Company’s net investment income was derived from the following sources:

	Three Months Ended September 30,						Nine Months Ended September 30,
In thousands	2012			2011			2012			2011
Fixed maturities	$	14,364		$	15,856		$	44,779		$	49,892
Equity securities		989			942			2,930			2,584
Short-term investments		437			205			1,452			745
Total investment income		15,790			17,003			49,161			53,221
Investment expenses		(2,193	)		(744	)		(8,529	)		(2,149	)
Net investment income	$	13,597		$	16,259		$	40,632		$	51,072

Investment expenses for the nine months ended September 30, 2012 include $4.5 million of interest expense related to the settlement of a dispute with Equitas over foregone interest on amounts that were due on certain reinsurance contracts. In the dispute Equitas alleged that we failed to make timely payments to them under certain reinsurance agreements in connection with subrogation recoveries received by the Company with respect to several catastrophe losses that occurred in the late 1980’s and early 1990’s.

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The change in net unrealized gains and losses, inclusive of the change in the non-credit portion of OTTI losses, consisted of:

	Nine Months Ended September 30,
In thousands	2012		2011
Fixed maturities	$	38,165	$	32,898
Equity securities		8,817		(8,287	)
Gross unrealized gains (losses)		46,982		24,611
Deferred income tax		15,702		8,251
Change in unrealized gains (losses), net	$	31,280	$	16,360

Realized gains and losses, excluding net OTTI losses recognized in earnings, for the periods indicated were as follows:

	Three Months  Ended September 30,						Nine Months  Ended September 30,
In thousands	2012			2011			2012			2011
Fixed maturities:
Gains	$	4,011		$	3,315		$	11,868		$	10,625
Losses		(216	)		(77	)		(1,746	)		(6,610	)
Fixed maturities, net	$	3,795		$	3,238		$	10,122		$	4,015
Equity securities:
Gains	$	966		$	—		$	1,171		$	841
Losses		—			—			(473	)		—
Equity securities, net	$	966		$	—		$	698		$	841
Net realized gains (losses)	$	4,761		$	3,238		$	10,820		$	4,856

The following tables present, for each of the fair value hierarchy levels as defined by the accounting guidance for fair value measurements and described below, the Company’s fixed maturities and equity securities by asset class that are measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011:

	September 30, 2012
In thousands	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. Treasury bonds, agency bonds, and foreign government bonds	$	225,747	$	239,468	$	—	$	465,215
States, municipalities and political subdivisions		—		443,994		—		443,994
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		—		405,229		—		405,229
Residential mortgage obligations		—		39,095		—		39,095
Asset-backed securities		—		50,897		—		50,897
Commercial mortgage-backed securities		—		208,742		—		208,742
Subtotal	$	—	$	703,963	$	—	$	703,963
Corporate bonds		—		471,886		—		471,886
Total fixed maturities	$	225,747	$	1,859,311	$	—	$	2,085,058
Equity securities - common stocks		105,930		—		—		105,930
Total	$	331,677	$	1,859,311	$	—	$	2,190,988

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	December 31, 2011
In thousands	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. Treasury bonds, agency bonds, and foreign government bonds	$	136,625	$	199,445	$	—	$	336,070
States, municipalities and political subdivisions		—		410,836		—		410,836
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		—		395,860		—		395,860
Residential mortgage obligations		—		23,148		—		23,148
Asset-backed securities		—		48,934		—		48,934
Commercial mortgage-backed securities		—		216,034		—		216,034
Subtotal	$	—	$	683,976	$	—	$	683,976
Corporate bonds		—		457,187		—		457,187
Total fixed maturities	$	136,625	$	1,751,444	$	—	$	1,888,069
Equity securities - common stocks		95,849		—		—		95,849
Total	$	232,474	$	1,751,444	$	—	$	1,983,918

The fair value of financial instruments is determined based on the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets. Examples are listed equity and fixed income securities traded on an exchange. Treasury securities would generally be considered Level 1.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Examples are asset-backed and mortgage-backed securities that are similar to other asset-backed or mortgage-backed securities observed in the market.

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. An example would be a private placement with minimal liquidity.

The Company did not have any transfers between Levels 1 and 2 as of September 30, 2012 and December 31, 2011.

There were no significant judgments made in classifying instruments in the fair value hierarchy.

As of September 30, 2012, the Company did not have any Level 3 assets. Any pricing where the input is based solely on a broker price is deemed to be a Level 3 price.

The following tables present a reconciliation of the beginning and ending balances for all investments measured at fair value using Level 3 inputs during the three and nine months ended September 30, 2011:

	For The Three Months Ended September 30, 2011
In thousands	Beginning Balance		Realized Gains (Losses)		Unrealized Gains (Losses)		Purchases		Sales		Settlements		Transfers into Level 3		Transfers out of Level 3			Ending Balance
Assets:
Commercial Mortgage Obligations	$	4,821	$	—	$	—	$	—	$	—	$	—	$	—	$	(4,821	)	$	—
Total assets	$	4,821	$	—	$	—	$	—	$	—	$	—	$	—	$	(4,821	)	$	—

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	For The Nine Months Ended September 30, 2011
In thousands	Beginning Balance		Realized Gains (Losses)		Unrealized Gains (Losses)		Purchases		Sales		Settlements		Transfers into Level 3		Transfers out of Level 3			Ending Balance
Assets:
Commercial Mortgage Obligations	$	1,837	$	—	$	—	$	4,821	$	—	$	—	$	—	$	(6,658	)	$	—
Total assets	$	1,837	$	—	$	—	$	4,821	$	—	$	—	$	—	$	(6,658	)	$	—

As of September 30, 2012 and December 31, 2011, fixed maturities with amortized values of $9.6 million and $10.2 million, respectively, were on deposit with various state insurance departments. In addition, as of September 30, 2012, investments of $1.2 million were on deposit with a U.K. bank to comply with the regulatory requirements of the Financial Services Authority for Navigators Insurance Company’s U.K. Branch. In addition, $0.3 million of investments were pledged as security under a reinsurance treaty for both September 30, 2012 and December 31, 2011.

As of September 30, 2012 and December 31, 2011, the Company did not have a concentration of greater than 5% of invested assets in a single non-U.S. government-backed issuer.

Note 11. Credit Facility

On April 1, 2011, the Company entered into a $165 million credit facility agreement with ING Bank N.V., London Branch, individually and as Administrative Agent, and a syndicate of lenders. The credit facility, which is denominated in U.S. dollars, is utilized to fund the Company’s participation in Syndicate 1221 through letters of credit for the 2012 and 2011 underwriting years, as well as open prior years. The letters of credit issued under the facility are denominated in British pounds and their aggregate face amount will fluctuate based on exchange rates. If any letters of credit remain outstanding under the facility after December 31, 2012, the Company would be required to post additional collateral to secure the remaining letters of credit. As of September 30, 2012, letters of credit with an aggregate face amount of $150.0 million were outstanding under the credit facility.

This credit facility contains customary covenants for facilities of this type, including restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of assets, and requirements as to maintaining certain consolidated tangible net worth, statutory surplus and other financial ratios. The credit facility also provides for customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, any representation or warranty made by the Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting the Company and its subsidiaries, the occurrence of certain material judgments, or a change in control of the Company. The letter of credit facility is secured by a pledge of the stock of certain insurance subsidiaries of the Company. To the extent the aggregate face amount issued under the credit facility exceeds the commitment amount, the Company is required to post collateral with the lead bank of the consortium. The Company was in compliance with all covenants under the credit facility as of September 30, 2012.

The applicable margin and applicable fee rate payable under the credit facility are based on a tiered schedule that is based on the Company’s then-current ratings issued by S&P and Moody’s with respect to the Company’s Senior Notes without third-party credit enhancement, and the amount of the Company’s own collateral utilized to fund its participation in Syndicate 1221.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

NOTE ON FORWARD-LOOKING STATEMENTS

Some of the statements in this Quarterly Report on Form 10-Q for The Navigators Group, Inc. and its subsidiaries (“the Company,” “we,” “us,” and “our”) are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in or incorporated by reference in this Quarterly Report are forward-looking statements. Whenever used in this report, the words “estimate,” “expect,” “believe” or similar expressions or their negative are intended to identify such forward-looking statements. Forward-looking statements are derived from information that we currently have and assumptions that we make. We cannot assure that anticipated results will be achieved, since actual results may differ materially because of both known and unknown risks and uncertainties which we face. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Factors that could cause actual results to differ materially from our forward-looking statements include, but are not limited to, the factors discussed in the “Risk Factors” section of our 2011 Annual Report on Form 10-K as well as:

• continued volatility in the financial markets and the current recession;

• risks arising from the concentration of our business in marine and energy, general liability and professional liability insurance, including the risk that market conditions for these lines could change adversely or that we could experience large losses in these lines;

• cyclicality in the property and casualty insurance business generally, and the marine insurance business specifically;

• risks that we face in entering new markets and diversifying the products and services that we offer, including risks arising from the development of our new specialty lines or our ability to manage effectively the rapid growth in our lines of business;

• changing legal, social and economic trends and inherent uncertainties in the loss estimation process, which could adversely impact the adequacy of loss reserves and the allowance for reinsurance recoverables;

• risks inherent in the preparation of our financial statements, which require us to make many estimates and judgments;

• our ability to continue to obtain reinsurance covering our exposures at appropriate prices and/or in sufficient amounts;

• the counterparty credit risk of our reinsurers, including risks associated with the collection of reinsurance recoverable amounts from our reinsurers, who may not pay losses in a timely fashion, or at all;

• the effects of competition from other insurers;

• unexpected turnover of our professional staff and our ability to attract and retain qualified employees;

• increases in interest rates during periods in which we must sell fixed-income securities to satisfy liquidity needs may result in realized investment losses;

• our investment portfolio is exposed to market-wide risks and fluctuations, as well as to risks inherent in particular types of securities;

• exposure to significant capital market risks related to changes in interest rates, credit spreads, equity prices and foreign exchange rates which may adversely affect our results of operations, financial condition or cash flows;

• capital may not be available in the future, or may not be available on favorable terms;

• our ability to maintain or improve our insurance company ratings, as downgrades could significantly adversely affect us, including reducing our competitive position in the industry, or causing clients to choose an insurer with a certain rating level to use higher-rated insurers;

• risks associated with continued or increased premium levies by Lloyd’s of London (“Lloyd’s) for the Lloyd’s Central Fund and cash calls for trust fund deposits, or a significant downgrade of Lloyd’s rating by the A.M. Best Company (“A.M. Best”);

29

• changes in the laws, rules and regulations that apply to our insurance companies;

• the effect of the European Union Directive on Solvency II on how we manage our business, capital requirements and costs associated with conducting business, including the impact of the delay in the implementation of Solvency II;

• the inability of our subsidiaries to pay dividends to us in sufficient amounts, which would harm our ability to meet our obligations;

• weather-related events and other catastrophes (including man-made catastrophes) impacting our insureds and/or reinsurers;

• volatility in the market price of our common stock;

• exposure to recent uncertainties with regard to European sovereign debt holdings; and

• other risks that we identify in current and future filings with the Securities and Exchange Commission (“SEC”).

In light of these risks, uncertainties and assumptions, any forward-looking events discussed in this Form 10-Q may not occur. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of their respective dates.

OVERVIEW

The discussion and analysis of our financial condition and results of operations contained herein should be read in conjunction with our consolidated financial statements and accompanying notes which appear elsewhere in this Form 10-Q. It contains forward-looking statements that involve risks and uncertainties. Please refer to “Note on Forward-Looking Statements” for more information. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Form 10-Q.

We are an international insurance company focusing on specialty products within the overall property and casualty insurance market. Our largest product line and most long-standing area of specialization is ocean marine insurance. We have also developed other specialty insurance lines, such as commercial primary and excess liability as well as specialty niches in professional liability, and have recently expanded our specialty reinsurance business.

We conduct operations through our Insurance Companies and our Lloyd’s Operations segments. The Insurance Companies segment consists of Navigators Insurance Company, which includes a United Kingdom Branch (the “U.K. Branch”), and Navigators Specialty Insurance Company (“Navigators Specialty”), which underwrites specialty and professional liability insurance on an excess and surplus lines basis. All of the insurance business written by Navigators Specialty is fully reinsured by Navigators Insurance Company pursuant to a 100% quota share reinsurance agreement. The insurance and reinsurance business written by our Insurance Companies is underwritten through our wholly-owned underwriting management companies, Navigators Management Company, Inc. (“NMC”) and Navigators Management (UK) Ltd. (“NMUK”).

Our Lloyd’s Operations segment includes Navigators Underwriting Agency Ltd. (“NUAL”), a Lloyd’s underwriting agency which manages Navigators Syndicate 1221 at Lloyd’s (“Syndicate 1221”). Our Lloyd’s Operations primarily underwrite marine and related lines of business along with offshore energy insurance, professional liability insurance and construction coverages for onshore energy business at Lloyd’s through Syndicate 1221. We controlled 100% of Syndicate 1221’s stamp capacity for the 2012 and 2011 underwriting years through our wholly-owned subsidiary, Navigators Corporate Underwriters Ltd., which is referred to as a corporate name in the Lloyd’s market. We have also established underwriting agencies in Antwerp, Belgium, Stockholm, Sweden, and Copenhagen, Denmark, which underwrite risks pursuant to binding authorities with NUAL into Syndicate 1221. We also maintain an underwriting presence in Brazil and China through contractual arrangements with local affiliates of Lloyd’s.

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Catastrophe Risk Management

We have exposure to losses caused by hurricanes and other natural man-made catastrophic events. The frequency and severity of catastrophic events is unpredictable.

Our Insurance Companies and Lloyd’s Operations have exposure to losses caused by natural and man-made catastrophic events. The frequency and severity of catastrophes are unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in an area affected by the event and the severity of the event. We continually assess our concentration of underwriting exposures in catastrophe exposed areas globally and manage this exposure through individual risk selection and through the purchase of reinsurance. We also use modeling and concentration management tools that allow us to better monitor and control our accumulations of potential losses from catastrophe events. Despite these efforts, there remains uncertainty about the characteristics, timing and extent of insured losses given the unpredictable nature of catastrophes. The occurrence of one or more catastrophic events could have a material adverse effect on our results of operations, financial condition and/or liquidity.

We have significant natural catastrophe exposures throughout the world. We estimate that our largest exposure to loss from a single natural catastrophe event comes from an earthquake on the west coast of the United States. As of September 30, 2012 we estimate that our probable maximum pre-tax gross and net loss exposure from such an earthquake event would be approximately $170.6 million and $29.6 million, respectively, including the cost of reinsurance reinstatement premiums.

Like all catastrophe exposure estimates, the foregoing estimate of our probable maximum loss is inherently uncertain. This estimate is highly dependent upon numerous assumptions and subjective underwriting judgments. Examples of significant assumptions and judgments related to such an estimate include the intensity, depth and location of the earthquake, the various types of the insured risks exposed to the event at the time the event occurs and the estimated costs or damages incurred for each insured risk. The composition of our portfolio also makes such estimates challenging due to the non-static nature of the exposures covered under our policies in lines of business such as cargo and hull. There can be no assurances that the gross and net loss amounts that we could incur in such an event or in any natural catastrophe event would not be materially higher than the estimates discussed above given the significant uncertainties with respect to such an estimate. Moreover, our portfolio of insured risks changes dynamically over time and there can be no assurance that our probable maximum loss will not change materially over time.

The occurrence of large loss events could reduce the reinsurance coverage that is available to us and could weaken the financial condition of our reinsurers, which could have a material adverse effect on our results of operations. Although the reinsurance agreements make the reinsurers liable to us to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance arrangements do not eliminate our obligation to pay claims to our policyholders as we are required to pay the losses if a reinsurer fails to meet its obligations under the reinsurance agreement. Accordingly, we bear credit risk with respect to our reinsurers. Specifically, our reinsurers may not pay claims made by us on a timely basis, or they may not pay some or all of these claims. Either of these events would increase our costs and could have a material adverse effect on our business.

31

CRITICAL ACCOUNTING POLICIES

The Company’s Annual Report on Form 10-K for the year ended December 31, 2011 discloses our critical accounting policies (refer to Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies). Certain of these policies are critical to the portrayal of our financial condition and results since they require management to establish estimates based on complex and subjective judgments, including those related to our estimates for losses and loss adjustment expenses (“LAE”) (including losses that have occurred but were not reported to us by the financial reporting date), reinsurance recoverables, written and unearned premium, the recoverability of deferred tax assets, the impairment of investment securities and accounting for Lloyd’s results. For additional information regarding our critical accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2011.

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 2,Recent Accounting Pronouncements, in the Notes to Interim Consolidated Financial Statements included herein for a discussion about accounting standards recently adopted by the Company, as well as recent accounting developments relating to standards not yet adopted by the Company.

RESULTS OF OPERATIONS

The following is a discussion and analysis of our consolidated and segment results of operations for the three and nine months ended September 30, 2012 and 2011. Our financial results are presented on the basis of United States generally accepted accounting principles (“GAAP”). However, in presenting our financial results, we discuss our performance with reference to operating earnings, book value per share, underwriting profit or loss, and the combined ratio, all of which are non-GAAP financial measures of performance and/or underwriting profitability. Operating earnings is calculated as net income less after-tax net realized gains (losses) and net other-than-temporary impairment (“OTTI”) losses recognized in earnings. Book value per share is calculated by dividing stockholders’ equity by the number of outstanding shares at any period end. Underwriting profit or loss is calculated from net earned premiums, less the sum of net losses and LAE, commission expenses, other operating expenses and other income (expense). The combined ratio is derived by dividing the sum of net losses and LAE, commission expenses, other operating expenses and other income (expense) by net earned premiums. A combined ratio of less than 100% indicates an underwriting profit and greater than 100% indicates an underwriting loss. We consider such measures, which may be defined differently by other companies, to be important in the understanding of our overall results of operations by highlighting the underlying profitability of our insurance business.

Summary of Consolidated Results

The following table presents a summary of our consolidated financial results for the three and nine months ended September 30, 2012 and 2011:

		Three Months Ended				Nine Months Ended
		September 30,				September 30,				Percentage Change
In thousands, except per share amounts		2012		2011		2012		2011		QTD			YTD
Gross written premiums		$	298,742	$	255,318	$	964,878	$	830,315		17.0	%		16.2	%
Net written premiums			188,046		175,357		621,343		551,796		7.2	%		12.6	%
Total revenues	��		220,409		191,586		633,287		555,062		15.0	%		14.1	%
Total expenses			202,269		173,212		582,838		534,538		16.8	%		9.0	%
Pre-tax income (loss)		$	18,140	$	18,374	$	50,449	$	20,524		-1.3	%		145.8	%
Provision (benefit) for income taxes			5,225		4,476		14,731		5,015		16.7	%		NM
Net income (loss)		$	12,915	$	13,898	$	35,718	$	15,509		-7.1	%		130.3	%
Net income (loss) per common share:
Basic		$	0.92	$	0.94	$	2.55	$	1.02
Diluted		$	0.90	$	0.92	$	2.51	$	1.00

NM - Percentage change not meaningful

32

Net income for the three months ended September 30, 2012 was $12.9 million or $0.90 per diluted share compared to $13.9 million or $0.92 per diluted share for the three months ended September 30, 2011. Operating earnings for the three months ended September 30, 2012 were $9.8 million or $0.69 per diluted share compared to $12.0 million or $0.80 per diluted share for the comparable period in 2011. In comparison to net income, operating earnings excludes after-tax net realized gains of $3.1 million for the three months ended September 30, 2012. For the three months ended September 30, 2011 operating earnings excluded after tax net realized gains of $2.2 million and after-tax OTTI losses of $0.4 million. The decrease in our operating earnings for the three months ended September 30, 2012 was largely attributable to a reduction in net investment income due to lower investment yields.

Net income for the nine months ended September 30, 2012 was $35.7 million or $2.51 per diluted share compared to $15.5 million or $1.00 per diluted share for the nine months ended September 30, 2011. Operating earnings for the nine months ended September 30, 2012 were $29.1 million or $2.04 per diluted share compared to $13.3 million or $0.85 per diluted share for the comparable period in 2011. In comparison to net income, operating earnings excludes after-tax net realized gains of $7.0 million and after-tax OTTI losses of $0.4 million for the nine months ended September 30, 2012. For the nine months ended September 30, 2011 operating earnings excluded after-tax net realized gains of $3.2 million and after-tax OTTI losses of $0.9 million. The increase in our operating earnings for the nine months ended September 30, 2012 was largely attributable to stronger underwriting results, partially offset by a decrease in net investment income driven by lower investment yields and $4.5 million of investment expenses related to the settlement of a dispute with Equitas over foregone interest on amounts that were due on certain reinsurance contracts. The results for the first nine months of the year include net losses of $12.9 million related to significant large losses from our marine business, including the grounding of the cruise ship Costa Concordia off the coast of Italy.

Our book value per share as of September 30, 2012 was $62.32, increasing from $57.57 as of December 31, 2011. The increase in book value per share primarily resulted from our increased results of operations and improvements in the value of our consolidated investment portfolio. Our consolidated stockholders’ equity increased 8.9% to $874.8 million as of September 30, 2012 compared to $803.4 million as of December 31, 2011.

Cash flow from operations was $69.1 million for the nine months ended September 30, 2012 compared to $86.3 million for the comparable period in 2011. The decrease in cash flow from operations was due to increases in paid losses and current income taxes paid, partially offset by improved collections on premium receivables and reinsurance recoverables.

33

The following table presents our consolidated underwriting results and provides a reconciliation of our underwriting profit or loss to GAAP net income or net loss for the three and nine months ended September 30, 2012 and 2011:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,						Percentage Change
In thousands	2012			2011			2012			2011			QTD			YTD
Gross written premiums	$	298,742		$	255,318		$	964,878		$	830,315			17.0	%		16.2	%
Net written premiums		188,046			175,357			621,343			551,796			7.2	%		12.6	%
Net earned premiums		201,262			173,633			580,398			499,888			15.9	%		16.1	%
Net losses and loss adjustment expenses		(128,850	)		(110,242	)		(370,242	)		(340,893	)		16.9	%		8.6	%
Commission expenses		(31,258	)		(25,934	)		(90,211	)		(80,164	)		20.5	%		12.5	%
Other operating expenses		(40,112	)		(34,989	)		(116,238	)		(107,341	)		14.6	%		8.3	%
Other income (expense)		789			(921	)		2,087			643			NM			NM
Underwriting profit (loss)	$	1,831		$	1,547		$	5,794		$	(27,867	)		18.4	%		NM
Net investment income		13,597			16,259			40,632			51,072			-16.4	%		-20.4	%
Net other-than-temporary impairment losses recognized in earnings		—			(623	)		(650	)		(1,397	)		NM			-53.5	%
Net realized gains (losses)		4,761			3,238			10,820			4,856			47.0	%		122.8	%
Interest expense		(2,049	)		(2,047	)		(6,147	)		(6,140	)		0.1	%		0.1	%
Income (loss) before income taxes	$	18,140		$	18,374		$	50,449		$	20,524			-1.3	%		145.8	%
Income tax expense (benefit)		5,225			4,476			14,731			5,015			16.7	%		NM
Net income (loss)	$	12,915		$	13,898		$	35,718		$	15,509			-7.1	%		130.3	%
Losses and loss adjustment expenses ratio		64.0	%		63.5	%		63.8	%		68.2	%
Commission expense ratio		15.5	%		14.9	%		15.5	%		16.0	%
Other operating expense ratio(1)		19.6	%		20.7	%		19.7	%		21.4	%
Combined ratio		99.1	%		99.1	%		99.0	%		105.6	%

(1) - Includes Other operating expenses & Other income (expense)

NM - Percentage change not meaningful

The combined ratio for the three months ended September 30, 2012 and 2011 was 99.1%. Our pre-tax underwriting profit increased $0.3 million to $1.8 million for the three months ended September 30, 2012 and included $11.0 million of current accident year loss emergence from our Agriculture reinsurance business that was driven by significant drought related crop losses across the U.S. We also had net prior period reserve redundancies of $9.1 million from our Lloyd’s Operations.

The combined ratio for the nine months ended September 30, 2012 was 99.0% compared to 105.6% for the same period in 2011. Our pre-tax underwriting results increased $33.7 million to a $5.8 million underwriting profit for the nine months ended September 30, 2012 compared to an underwriting loss of $27.9 million for the same period in 2011.

Our underwriting results for the nine months ended September 30, 2012 reflect net losses of $12.9 million, inclusive of $10.8 million of reinsurance reinstatement premiums, related to several large losses from our Marine business including the grounding of the cruise ship Costa Concordia off the coast of Italy. The results also include $11.0 million of current accident year loss emergence from our Agriculture reinsurance business as well as net prior period reserve redundancies of $19.2 million from our Lloyd’s Operations.

Our underwriting results for the nine months ended September 30, 2011 included net losses of $18.2 million, inclusive of $7.9 million in reinsurance reinstatement premiums, related to large losses from our energy business, as well as an increase in our reinsurance reinstatement premium accrual of $5.2 million reflecting our shift to excess-of-loss reinsurance protection in our Marine business.

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Revenues

Gross Written Premiums

The following tables set forth our gross written premiums, net written premiums and net earned premiums by segment and line of business for the three and nine months ended September 30, 2012 and 2011:

	Three Months Ended September 30,
	2012									2011
In thousands	Gross Written Premiums		%			Net Written Premiums		Net Earned Premiums		Gross Written Premiums		%			Net Written Premiums		Net Earned Premiums
Insurance Companies:
Marine	$	44,879		15	%	$	32,615	$	40,592	$	47,141		18	%	$	34,180	$	41,951
Property Casualty		139,948		47	%		83,449		83,993		110,975		43	%		77,056		58,585
Professional Liability		33,534		11	%		26,084		24,505		33,059		14	%		24,056		18,796
Insurance Companies Total		218,361		73	%		142,148		149,090		191,175		75	%		135,292		119,332
Lloyd’s Operations:
Marine		37,716		13	%		27,939		34,002		26,979		11	%		20,649		34,510
Property Casualty		32,789		11	%		11,633		11,870		29,682		11	%		16,296		15,952
Professional Liability		9,876		3	%		6,326		6,300		7,482		3	%		3,120		3,839
Lloyd’s Operations Total		80,381		27	%		45,898		52,172		64,143		25	%		40,065		54,301
Total	$	298,742		100	%	$	188,046	$	201,262	$	255,318		100	%	$	175,357	$	173,633

	Nine Months Ended September 30,
	2012									2011
In thousands	Gross Written Premiums		%			Net Written Premiums		Net Earned Premiums		Gross Written Premiums		%			Net Written Premiums		Net Earned Premiums
Insurance Companies:
Marine	$	156,640		17	%	$	107,266	$	111,402	$	175,812		21	%	$	130,200	$	124,387
Property Casualty		426,494		44	%		274,823		240,536		323,994		39	%		201,978		156,871
Professional Liability		97,629		10	%		75,374		70,277		84,912		10	%		57,058		51,881
Insurance Companies Total		680,763		71	%		457,463		422,215		584,718		70	%		389,236		333,139
Lloyd’s Operations:
Marine		146,528		15	%		109,489		101,538		127,585		15	%		102,362		109,222
Property Casualty		106,063		11	%		36,693		41,644		91,106		11	%		47,364		44,105
Professional Liability		31,524		3	%		17,698		15,001		26,906		4	%		12,834		13,422
Lloyd’s Operations Total		284,115		29	%		163,880		158,183		245,597		30	%		162,560		166,749
Total	$	964,878		100	%	$	621,343	$	580,398	$	830,315		100	%	$	551,796	$	499,888

Gross written premiums increased $43.4 million, or 17.0%, to $298.7 million for the three months ended September 30, 2012 compared to $255.3 million for the same period in 2011. Gross written premiums increased $134.6 million, or 16.2%, to $964.9 million for the nine months ended September 30, 2012 compared to $830.3 million for the same period in 2011. The increases in gross written premiums are primarily attributed to growth within our Property Casualty business, specifically our Nav Re division, which writes Accident & Health (“A&H”), Agriculture, Latin American and Professional Liability reinsurance lines of business, as the division continues to achieve successful growth since its establishment in late 2010. The increase within Property Casualty is also attributable to growth within our Excess Casualty division resulting from strong production attributable to an expansion of our underwriting team and dislocation among certain competitors.

35

Average renewal premium rates for our Insurance Companies segment increased for the three months ended September 30, 2012 as compared to the same period in 2011 across all segments. Our Marine business has realized a 2.4% and 6.0% increase in rates for the marine liability and inland marine divisions, respectively. Within our Property Casualty business we have realized a 4.3% increase in rates for the NavTech division, a 2.3% increase for the Excess Casualty division and an increase of 3.9% in the Primary Casualty division. Our Professional Liability business has experienced an overall increase in renewal rates of 5.3%, consisting of 5.6% and 4.9% for the Errors & Omissions (“E&O”) and the Management Liability divisions, respectively.

For the three months ended September 30, 2012 average renewal premium rates for our Lloyd’s Operations segment include increases for Lloyd’s Marine and Lloyd’s NavTech of approximately 1.4% and 7.5%, respectively. Our Lloyd’s Professional Liability business experienced an average decrease of 1.5%.

Average renewal premium rates for our Insurance Companies segment also increased for the nine months ended September 30, 2012 as compared to the same period in 2011 across all segments. Our Marine business has realized a 4.1% and 4.7% increase in rates for the marine liability and inland marine divisions, respectively. Within our Property Casualty business we have realized a 3.4% increase in rates for the NavTech division, a 1.4% increase for the Excess Casualty division, and a 1.0% increase in the Primary Casualty division. Our Professional Liability business has experienced an overall increase in renewal rates of 4.4%, consisting of 5.3% and 3.1% for the E&O and the Management Liability divisions, respectively.

For the nine months ended September 30, 2012 average renewal premium rates for our Lloyd’s segment include increases for Lloyd’s Marine and Lloyd’s NavTech of approximately 4.3% and 6.7%, respectively. Our Lloyd’s Professional Liability business experienced an average decrease of 1.5%.

The average premium rate increases or decreases as noted above for the Marine, Property Casualty and Professional Liability businesses are calculated primarily by comparing premium amounts on policies that have renewed. The premiums are adjusted for changes in exposures and sometimes represent an aggregation of several lines of business. The rate change calculations provide an indicated pricing trend and are not meant to be a precise analysis of the numerous factors that affect premium rates or the adequacy of such rates to cover all underwriting costs and generate an underwriting profit. The calculation can also be affected quarter by quarter depending on the particular policies and the number of policies that renew during that period. Due to market conditions, these rate changes may or may not apply to new business that generally would be more competitively priced compared to renewal business. The calculation does not reflect the rate on business that we are unwilling or unable to renew due to loss experience or competition.

Ceded Written Premiums

In the ordinary course of business, we reinsure certain insurance risks with unaffiliated insurance companies for the purpose of limiting our maximum loss exposure, protecting against catastrophic losses, and maintaining desired ratios of net premiums written to statutory surplus. The relationship of ceded to gross written premium varies based upon the types of business written and whether the business is written by the Insurance Companies or the Lloyd’s Operations.

Our reinsurance program includes contracts for proportional reinsurance, per risk and whole account excess-of-loss reinsurance for both property and casualty risks and property catastrophe excess-of-loss reinsurance. In recent years we have increased our utilization of excess-of-loss reinsurance for marine, property and casualty risks. Our excess-of-loss reinsurance contracts generally provide for a specific amount of coverage in excess of an attachment point and sometimes provides for reinstatement of the coverage to the extent the limit has been exhausted for payment of additional premium (referred to as reinsurance reinstatement premiums). The number of reinsurance reinstatements available varies by contract.

We record an estimate of the expected reinsurance reinstatement premiums for losses ceded to excess-of-loss agreements where this feature applies.

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We incurred $0.6 million and $16.9 million in reinsurance reinstatement premiums for the three and nine months ended September 30, 2012, respectively. The reinsurance reinstatement premiums for the first nine months of 2012 are due to several large losses on our marine business, including the grounding of the cruise ship Costa Concordia off the coast of Italy. The net amount recorded for the three and nine months ended September 30, 2011 was $1.0 million and $14.1 million, respectively. The reinsurance reinstatement premiums for the first nine months of 2011 are due to the large energy losses from our NavTech business and the establishment of our reinstatement premium accrual reflective of our shift to excess-of-loss protection in our Marine business.

The following table sets forth our ceded written premiums by segment and major line of business for the three and nine months ended September 30, 2012 and 2011:

	Three Months Ended September 30,										Nine Months Ended September 30,
	2012					2011					2012					2011
In thousands	Ceded Written Premiums		% of Gross Written Premiums			Ceded Written Premiums		% of Gross Written Premiums			Ceded Written Premiums		% of Gross Written Premiums			Ceded Written Premiums		% of Gross Written Premiums
Insurance Companies:
Marine	$	12,264		27	%	$	12,961		27	%	$	49,374		32	%	$	45,612		26	%
Property Casualty		56,499		40	%		33,919		31	%		151,671		36	%		122,016		38	%
Professional Liability		7,450		22	%		9,003		27	%		22,255		23	%		27,854		33	%
Total Insurance Companies		76,213		35	%		55,883		29	%		223,300		33	%		195,482		33	%
Lloyd’s Operations:
Marine		9,777		26	%		6,330		23	%		37,039		25	%		25,223		20	%
Property Casualty		21,156		65	%		13,386		45	%		69,370		65	%		43,742		48	%
Professional Liability		3,550		36	%		4,362		58	%		13,826		44	%		14,072		52	%
Total Lloyd’s		34,483		43	%		24,078		38	%		120,235		42	%		83,037		34	%
Total	$	110,696		37	%	$	79,961		31	%	$	343,535		36	%	$	278,519		34	%

The increase in percentage of total ceded written premiums to total gross written premiums for the three months ended September 30, 2012 compared to the same period of 2011 was primarily due to a lower retention ratio on our NavTech business as a result of a new quota share program for the offshore energy book, partially offset by a change in the mix of business resulting in the growth of our assumed reinsurance business written by Nav Re and, to a lesser extent, the expansion of products offered by our Professional Liability division where our retention ratios are higher.

The increase in percentage of total ceded written premiums to total gross written premiums for the nine months ended September 30, 2012 compared to the same period of 2011 was primarily due to a lower retention ratio on our NavTech business as a result of a new quota share program for the offshore energy book and the reinsurance reinstatement premiums recognized in our Marine business as a result of significant large loss activity, partially offset by a change in the mix of business resulting in the growth of our assumed reinsurance business written by Nav Re, the reinsurance reinstatement premiums recorded in 2011 related to our NavTech business, and to a lesser extent, the expansion of products offered by our Professional Liability division where our retention ratios are higher.

Net Written Premiums

Net written premiums increased 7.2% and 12.6% for the three and nine months ended September 30, 2012 compared to the same periods in 2011. The increases are due to the impact of higher gross written premiums for the three and nine months ended September 30, 2012, partially offset by higher premium cessions as a result of mix changes in business, as discussed above.

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Net Earned Premiums

Net earned premiums increased 15.9% and 16.1% for the three and nine months ended September 30, 2012 compared to the same periods in 2011 as a result of growth in our Nav Re division, specifically the A&H lines, which are recognized in earnings over a longer exposure period than our other lines of business, and to a lesser extent, the expansion of products offered by our Professional Liability division where our retention ratios are higher.

Net Investment Income

Our net investment income was derived from the following sources:

	Three Months Ended September 30,						Nine Months Ended September 30,
In thousands	2012			2011			2012			2011
Fixed maturities	$	14,364		$	15,856		$	44,779		$	49,892
Equity securities		989			942			2,930			2,584
Short-term investments		437			205			1,452			745
Total investment income		15,790			17,003			49,161			53,221
Investment expenses		(2,193	)		(744	)		(8,529	)		(2,149	)
Net investment income	$	13,597		$	16,259		$	40,632		$	51,072

The total investment income before investment expenses decreased 7.1% and 7.6% for the three and nine months ended September 30, 2012, respectively, primarily due to lower investment yields. The annualized pre-tax investment yield, excluding net realized gains and losses and net OTTI losses recognized in earnings, was 2.4% for both the three and nine months ended September 30, 2012 compared to 3.1% and 3.2% for the same periods in 2011. The portfolio duration was 3.8 years for the nine months ended September 30, 2012 compared to 3.6 years for the comparable period during 2011.

The 2.4% annualized pre-tax yield for the nine months ended September 30, 2012 includes investment expenses of $4.5 million for interest expense related to the settlement of a dispute with Equitas over foregone interest on amounts that were due on certain reinsurance contracts. In the dispute Equitas alleged that we failed to make timely payments to them under certain reinsurance agreements in connection with subrogation recoveries received by us with respect to several catastrophe losses that occurred in the late 1980’s and early 1990’s. Excluding the impact of the aforementioned interest expense, the annualized pre-tax yield for the nine months ended September 30, 2012 would have been 2.7%, reflective of the general decline in market yields.

Net Other-Than-Temporary Impairment Losses Recognized In Earnings

Our net OTTI losses recognized in earnings for the periods indicated were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
In thousands	2012		2011		2012		2011
Fixed maturities	$	—	$	623	$	11	$	850
Equity securities		—		—		639		547
OTTI recognized in earnings	$	—	$	623	$	650	$	1,397

The significant inputs used to measure the amount of credit loss recognized in earnings were actual delinquency rates, default probability assumptions, severity assumptions and prepayment assumptions. Projected losses are a function of both loss severity and probability of default. Default probability and severity assumptions differ based on property type, vintage and the stress of the collateral. We do not intend to sell any of these securities and it is more likely than not that we will not be required to sell these securities before the recovery of the amortized cost basis.

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Net Realized Gains and Losses

Realized gains and losses, excluding net OTTI losses recognized in earnings, for the periods indicated were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
In thousands	2012			2011			2012			2011
Fixed maturities:
Gains	$	4,011		$	3,315		$	11,868		$	10,625
Losses		(216	)		(77	)		(1,746	)		(6,610	)
Fixed maturities, net	$	3,795		$	3,238		$	10,122		$	4,015
Equity securities:
Gains	$	966		$	—		$	1,171		$	841
Losses		—			—			(473	)		—
Equity securities, net	$	966		$	—		$	698		$	841
Net realized gains (losses)	$	4,761		$	3,238		$	10,820		$	4,856

Net realized gains and losses are generated as part of the normal ongoing management of our investment portfolio. Net realized gains of $4.8 million and $10.8 million for the three and nine months ended September 30, 2012, respectively, are due to the sale of corporate bonds and Treasury bonds. Net realized gains of $3.2 million and $4.9 million for the three and nine months ended September 30, 2011 are related to the sale of corporate bonds.

Other Income/Expense

Other income (expense) for the three and nine months ended September 30, 2012 and 2011 consists of foreign exchange gains and losses from our Lloyd’s Operations, commission income and inspection fees related to our specialty insurance business.

Expenses

Net Losses and Loss Adjustment Expenses

The ratio of net losses and LAE to net earned premiums (“loss ratios”) for the three and nine months ended September 30, 2012 and 2011 is presented in the following table:

	Three Months Ended September 30,						Nine Months Ended September 30,
Net Loss and LAE Ratio	2012			2011			2012			2011
Net Loss and LAE Payments		61.0	%		51.6	%		62.4	%		56.5	%
Change in reserves		5.7	%		12.8	%		4.5	%		11.2	%
Subtotal - current year loss ratio		66.7	%		64.4	%		66.9	%		67.7	%
Prior year deficiencies (redundancies)		-2.7	%		-0.9	%		-3.1	%		0.5	%
Net loss and LAE ratio		64.0	%		63.5	%		63.8	%		68.2	%

The net loss and LAE ratio for the three months ended September 30, 2012 increased 0.5 percentage points to 64.0% from 63.5% for the three months ended September 30, 2011. The increase in the loss ratio is driven by $11.0 million of current accident year loss emergence from our Agriculture reinsurance business that was driven by significant drought related crop losses across the U.S. We also had net prior period reserve redundancies of $5.5 million that were primarily driven by net reserve redundancies from our Lloyd’s Operations, partially offset by $5.3 million in corrections to reinsurance treaty retentions from 2007 Marine occurrences discovered during the current quarter. The claims in question had been settled and ceded amounts paid, however after discussion with reinsurers it was determined that two separate retentions should have been applied for each occurrence for Navigators Insurance Companies and Navigators Lloyds Syndicate. As a result, the amount of the losses retained in the current quarter increased by $5.3 million and the related reinstatement premiums paid were reduced by $1.9 million. The pre-tax and after tax impact of these corrections was $3.4 million and $2.2 million, respectively. The loss ratio is further affected by the mix of business and current loss trends.

39

The net loss and LAE ratio for the nine months ended September 30, 2012 decreased 4.4 percentage points to 63.8% from 68.2% for the nine months ended September 30, 2011. The decrease in the loss ratio reflects improved loss experience due to the lack of large energy losses in our NavTech business and $19.2 million of net prior year reserve redundancies from our Lloyd’s Operations. The improvements in the loss ratio were partially offset by current accident year loss emergence from our Agriculture reinsurance business and several large losses from our Marine business, including the grounding of the cruise ship Costa Concordia off the coast of Italy.

The segment and line of business breakdown of the net loss and LAE ratios for the three and nine months ended September 30, 2012 and 2011 are as follows:

	Three Months  Ended September 30,						Nine Months  Ended September 30,
Net Loss and LAE Ratio	2012			2011			2012			2011
Insurance Companies:
Marine		71.9	%		66.9	%		78.3	%		66.6	%
Property Casualty		80.3	%		61.9	%		68.7	%		70.5	%
Professional Liability		67.9	%		66.0	%		73.8	%		68.2	%
Insurance Companies		76.0	%		64.3	%		72.1	%		68.7	%
Lloyd’s Operations:
Marine		32.2	%		66.1	%		44.5	%		67.1	%
Property Casualty		45.8	%		47.6	%		41.3	%		52.1	%
Professional Liability		-13.2	%		80.0	%		22.1	%		117.7	%
Lloyd’s		29.8	%		61.7	%		41.6	%		67.2	%
Net loss and LAE ratio		64.0	%		63.5	%		63.8	%		68.2	%

Prior Year Reserve Deficiencies/Redundancies

The relevant factors that may have a significant impact on the establishment and adjustment of losses and LAE reserves can vary by line of business and from period to period. As part of our regular review of prior period reserves, management, in consultation with our actuaries, may determine, based on their judgment, that certain assumptions made in the reserving process in prior year periods may need to be revised to reflect various factors, likely including the availability of additional information. Based on their reserve analyses, management may make corresponding reserve adjustments.

The segment and line of business breakdowns of prior period net reserve deficiencies (redundancies) for the three months ended September 30, 2012 and 2011 are as follows:

	Three Months  Ended September 30,
In thousands	2012			2011
Insurance Companies:
Marine	$	(947	)	$	(38	)
Property Casualty		4,132			(1,846	)
Professional Liability		422			(260	)
Insurance Companies	$	3,607		$	(2,144	)
Lloyd’s Operations:
Marine	$	(4,741	)	$	2,635
Property Casualty		988			(2,179	)
Professional Liability		(5,331	)		75
Lloyd’s	$	(9,084	)	$	531
Total deficiencies (redundancies)	$	(5,477	)	$	(1,613	)

The following is a discussion of relevant factors related to the $5.5 million prior period net reserve redundancies recorded for the three months ended September 30, 2012:

40

The Insurance Companies recorded $3.6 million of net prior period reserve deficiencies driven by $4.1 million of adverse development from our Property Casualty businesses, including $3.7 million from our A&H reinsurance division related to underwriting year 2011, partially offset by net reserve redundancies across multiple products within our Marine business.

Our Lloyd’s Operations recorded $9.1 million of net prior period reserve redundancies driven by the Professional Liability and Marine Businesses, partially offset by unfavorable development in our Lloyd’s NavTech business.

41

For the three months ended September 30, 2011, we recorded a prior period net reserve redundancy of $1.6 million primarily attributed to a favorable ruling on an old property claim within our Property Casualty division, and to a lesser extent, favorable foreign exchange across all of our divisions.

The segment and line of business breakdowns of prior period net reserve deficiencies (redundancies) for the nine months ended September 30, 2012 and 2011 are as follows:

	Nine Months Ended September 30,
In thousands	2012			2011
Insurance Companies:
Marine	$	(1,535	)	$	539
Property Casualty		(2,148	)		(863	)
Professional Liability		5,200			(735	)
Insurance Companies	$	1,517		$	(1,059	)
Lloyd’s Operations:
Marine	$	(8,712	)	$	422
Property Casualty		(3,022	)		(2,210	)
Professional Liability		(7,498	)		5,482
Lloyd’s	$	(19,232	)	$	3,694
Total deficiencies (redundancies)	$	(17,715	)	$	2,635

The following is a discussion of relevant factors related to the $17.7 million prior period net reserve redundancies recorded for the nine months ended September 30, 2012:

The Insurance Companies recorded $1.5 million of net prior period reserve deficiencies driven by adverse development from our Professional Liability business across multiple products within Management Liability and E&O divisions, partially offset by net redundancies from our Property Casualty and Marine business. The net redundancies in our Property Casualty business include favorable development related to our NavTech, Marine and Primary Casualty divisions, partially offset by adverse development from our A&H reinsurance division.

Our Lloyd’s Operations recorded $19.2 million of net prior period reserve redundancies across all businesses and divisions.

For the nine months ended September 30, 2011 we recorded a prior period net reserve deficiency of $2.6 million primarily related to our Lloyd’s Operations, partially offset by reserve redundancies within our Property Casualty division. Our Lloyd’s Operations recorded $3.7 million of prior period net reserve deficiencies resulting from adverse development in Professional Liability driven by adverse claim movements for prior underwriting years in the E&O business. Our Property Casualty division recorded $0.9 million of prior period net reserve redundancies due to a favorable ruling on an old property, partially offset by adverse development on our Personal Umbrella and Liquor Liability businesses, both of which are in run-off.

Commission Expenses

Commission expenses paid to brokers and agents are generally based on a percentage of gross written premiums and are partially offset by ceding commissions we may receive on ceded written premiums. Commissions are generally deferred and recorded as deferred policy acquisition costs to the extent they relate to unearned premium. The percentage of commission expenses to net earned premiums (“commission expense ratio”) for both the three and nine months ended September 30, 2012 was 15.5% compared to 14.9% and 16.0%, respectively, for the comparable periods during 2011. Fluctuations in the commission expense ratio for the three and nine months ended September 30, 2012 when compared to the same periods in 2011 can be attributed to changes in the mix of business.

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Other Operating Expenses

Other operating expenses increased 14.6% and 8.3% for the three and nine months ended September 30, 2012 compared to the same periods in 2011 primarily due to increases in expected payout percentages of stock-based compensation driven by projected growth in book value per share. As a percentage of net earned premiums, operating expenses decreased 0.3 and 1.5 percentage points for the three and nine months ended September 30, 2012, respectively.

Interest Expense

Interest expense relates to our Senior Notes due May 1, 2016. Interest on these Senior Notes is due each May 1 and November 1 and the effective interest rate, based on the proceeds net of discount and all issuance costs, is approximately 7.17%. Interest expense for the three and nine months ended September 30, 2012 was $2.1 million and $6.1 million, respectively, and remained flat with the same periods in 2011.

Income Taxes

We recorded income tax expense of $5.2 million and $14.7 million for the three and nine months ended September 30, 2012, respectively, compared to $4.5 million and $5.0 million for the comparable periods in 2011, resulting in effective tax rates of 28.8% and 29.2%, respectively. The effective tax rate on net investment income was 26.6% and 26.8% for the three and nine months ended September 30, 2012, respectively, compared to 28.6% for both periods in 2011.

As of September 30, 2012, the net deferred Federal, foreign, state and local tax liabilities were $11.2 million, compared to net deferred tax liabilities of $6.3 million as of December 31, 2011, with the change primarily due to fluctuations in the value of our investment portfolio.

We had net state and local deferred tax assets amounting to potential future tax benefits of $0.2 million as of both September 30, 2012 and December 31, 2011, respectively. Included in the deferred tax assets are state and local net operating loss carry-forwards of $0.1 million and $0.2 million as of September 30, 2012 and December 31, 2011, respectively. A valuation allowance was established for the full amount of these potential future tax benefits due to uncertainty associated with their realization. Our state and local tax carry-forwards as of September 30, 2012 expire from 2024 to 2032.

Segment Information

We classify our business into two underwriting segments consisting of the Insurance Companies and the Lloyd’s Operations, which are separately managed, and a Corporate segment. Segment data for each of the two underwriting segments include allocations of the operating expenses of the wholly-owned underwriting management companies and The Navigators Group, Inc.’s (the “Parent Company’s”) operating expenses and related income tax amounts. The Corporate segment consists of the Parent Company’s investment income, interest expense and the related tax effect.

We evaluate the performance of each segment based on its underwriting and GAAP results. The underwriting results of the Insurance Companies and the Lloyd’s Operations are measured by taking into account net earned premium, net loss and LAE, commission expenses, other operating expenses and other income (expense). Each segment also maintains its own investments, on which it earns income and realizes capital gains or losses. Our underwriting performance is evaluated separately from the performance of our investment portfolios.

Following are the financial results of our two underwriting segments.

Insurance Companies

The Insurance Companies consist of Navigators Insurance Company, including its U.K. Branch, and its wholly-owned subsidiary, Navigators Specialty. They are primarily engaged in underwriting marine insurance and related lines of business, specialty lines of business, including contractors general liability insurance, commercial umbrella and primary and excess casualty businesses, specialty reinsurance, and professional liability insurance. Navigators Specialty underwrites specialty and professional liability insurance on an excess and surplus lines basis. Navigators Specialty is 100% reinsured by Navigators Insurance Company.

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The following table sets forth the results of operations for the Insurance Companies for the three and nine months ended September 30, 2012 and 2011:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,						Percentage Change
In thousands	2012			2011			2012			2011			QTD			YTD
Gross written premiums	$	218,361		$	191,175		$	680,763		$	584,718			14.2	%		16.4	%
Net written premiums		142,148			135,292			457,463			389,236			5.1	%		17.5	%
Net earned premiums		149,090			119,332			422,215			333,139			24.9	%		26.7	%
Net losses and loss adjustment expenses		(113,303	)		(76,755	)		(304,483	)		(228,882	)		47.6	%		33.0	%
Commission expenses		(20,827	)		(16,514	)		(61,245	)		(45,256	)		26.1	%		35.3	%
Other operating expenses		(29,387	)		(25,735	)		(83,646	)		(79,050	)		14.2	%		5.8	%
Other income (expense)		1,229			554			3,750			2,871			121.8	%		30.6	%
Underwriting profit (loss)	$	(13,198	)	$	882		$	(23,409	)	$	(17,178	)		NM			36.3	%
Net investment income		12,004			14,037			34,225			44,009			-14.5	%		-22.2	%
Net realized gains (losses)		2,609			2,809			6,809			5,664			-7.1	%		20.2	%
Income (loss) before income taxes	$	1,415		$	17,728		$	17,625		$	32,495			-92.0	%		-45.8	%
Income tax expense (benefit)		(377	)		4,379			3,603			9,224			NM			-60.9	%
				��
Net income (loss)	$	1,792		$	13,349		$	14,022		$	23,271			-86.6	%		-39.7	%
Losses and loss adjustment expenses ratio		76.0	%		64.3	%		72.1	%		68.7	%
Commission expense ratio		14.0	%		13.8	%		14.5	%		13.6	%
Other operating expense ratio(1)		18.9	%		21.2	%		18.9	%		22.9	%
Combined ratio		108.9	%		99.3	%		105.5	%		105.2	%

(1) - Includes Other operating expenses & Other income (expense)

NM - Percentage change not meaningful

Our Insurance Companies reported net income of $1.8 million for the three months ended September 30, 2012 compared to $13.3 million for the same period in 2011. The decrease in net income for the three months ended September 30, 2012 as compared to the same period in 2011 was largely driven by unfavorable underwriting results for the quarter and a decrease in net investment income due to lower investment yields.

Our Insurance Companies combined ratio for the three months ended September 30, 2012 was 108.9% compared to 99.3% for the same period in 2011. Our Insurance Companies pre-tax underwriting results decreased by $14.1 million to a $13.2 million pre-tax underwriting loss for the three months ended September 30, 2012 compared to an underwriting profit of $0.9 million for the same period in 2011.

Our Insurance Companies underwriting results for the current quarter include $11.0 million of current accident year emergence from our Agriculture reinsurance business that was driven by significant drought related crop losses across the U.S. We also had $3.6 million of net reserve deficiencies mostly driven by adverse development in our A&H reinsurance division related to underwriting year 2011, partially offset by net reserve redundancies from multiple products within our Marine business. Our underwriting results for the same period in 2011 were primarily attributable to net reserve redundancies from our Property Casualty and Professional Liability businesses.

Our Insurance Companies reported net income of $14.0 million for the nine months ended September 30, 2012 compared to $23.3 million for the same period in 2011. The decrease in net income for the nine months ended September 30, 2012 as compared to the same period in 2011 was largely related to unfavorable underwriting results and a reduction in net investment income driven by lower investment yields and $4.5 million of investment expenses related to the settlement of a dispute with Equitas over foregone interest on amounts that were due on certain reinsurance contracts.

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Our Insurance Companies combined ratio for the nine months ended September 30, 2012 was 105.5% compared to 105.2% for the same period in 2011. Our Insurance Companies pre-tax underwriting results decreased by $6.2 million to a $23.4 million pre-tax underwriting loss for the nine months ended September 30, 2012 compared to an underwriting loss of $17.2 million for the same period in 2011.

Our Insurance Companies underwriting results for the nine months ended September 30, 2012 reflect $11.0 million of current accident year loss emergence from our Agriculture reinsurance business as well as net losses of $10.0 million related to several large losses from our Marine business, including the grounding of the cruise ship Costa Concordia off the coast of Italy.

Our Insurance Companies underwriting results for the nine months ended September 30, 2011 included net losses of 11.6 million, inclusive of reinsurance reinstatement premiums, related to large losses from our energy business, as well as an increase in our reinsurance reinstatement premium accrual of $2.7 million reflecting our shift to excess-of-loss reinsurance protection in our Marine business.

Insurance Companies Gross Written Premiums

Marine Premiums. The gross written premiums for our Marine business for the three and nine months ended September 30, 2012 and 2011 consisted of the following:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,				Percentage Change
In thousands	2012		2011		2012		2011		QTD			YTD
Marine liability	$	13,092	$	13,426	$	47,896	$	56,881		-2.5	%		-15.8	%
Inland marine		6,893		7,391		28,135		25,747		-6.7	%		9.3	%
Cargo		7,200		6,073		20,646		18,458		18.6	%		11.9	%
Craft/fishing vessel		5,751		4,618		19,995		16,979		24.5	%		17.8	%
P&I		3,535		2,887		13,990		15,250		22.4	%		-8.3	%
Bluewater hull		4,730		4,535		12,991		14,727		4.3	%		-11.8	%
Transport		448		4,778		1,779		14,617		-90.6	%		-87.8	%
Other		3,230		3,433		11,208		13,153		-5.9	%		-14.8	%
Total Marine	$	44,879	$	47,141	$	156,640	$	175,812		-4.8	%		-10.9	%

The Insurance Companies Marine gross written premiums for the three and nine months ended September 30, 2012 decreased by 4.8% and 10.9%, respectively, compared to the same periods during 2011 primarily due to the Transport and Marine liability products previously written by our U.K. Branch that effective this year are being written through our Lloyd’s Operations. The aforementioned decreases were slightly offset by growth across multiple products driven by an overall 2.4% increase in renewal rates, which includes a 6.0% increase in Inland Marine.

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Property Casualty Premiums.The gross written premiums for our Property Casualty business for the three and nine months ended September 30, 2012 and 2011 consisted of the following:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,				Percentage Change
In thousands	2012		2011		2012		2011		QTD			YTD
Excess casualty	$	53,951	$	35,178	$	143,030	$	97,070		53.4	%		47.3	%
Nav Re		34,879		22,670		128,675		71,245		53.9	%		80.6	%
Primary casualty:
Construction liability		15,938		19,277		46,904		60,480		-17.3	%		-22.4	%
Other primary casualty		9,837		7,191		29,347		17,739		36.8	%		65.4	%
Environmental		6,362		5,004		17,882		15,630		27.1	%		14.4	%
Total primary casualty		32,137		31,472		94,133		93,849		2.1	%		0.3	%
Offshore energy		16,213		17,635		49,601		43,265		-8.1	%		14.6	%
Other		2,768		4,020		11,055		18,565		-31.1	%		-40.5	%
Total Property Casualty	$	139,948	$	110,975	$	426,494	$	323,994		26.1	%		31.6	%

The Insurance Companies Property Casualty gross written premiums for the three and nine months ended September 30, 2012 increased by 26.1% and 31.6%, respectively, compared to the same periods during 2011. The increases were primarily driven by our Nav Re division as the division continues to achieve successful growth since its establishment in late 2010. Additionally, we saw growth in our Excess Casualty division resulting from strong production attributable to the expansion of our underwriting team and dislocation among certain competitors.

Professional Liability Premiums. The gross written premiums for our Professional Liability business for the three and nine months ended September 30, 2012 and 2011 consisted of the following:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,					Percentage Change
In thousands	2012		2011		2012			2011		QTD			YTD
E&O	$	22,991	$	21,441	$	67,153		$	51,014		7.2	%		31.6	%
D&O (public and private)		10,543		11,571		30,477			32,997		-8.9	%		-7.6	%
Other		—		47		(1	)		901		NM			NM
Total Professional Liability	$	33,534	$	33,059	$	97,629		$	84,912		1.4	%		15.0	%

NM - Percentage change not meaningful

The Insurance Companies Professional Liability gross written premiums for the three and nine months ended September 30, 2012 increased by 1.4% and 15.0%, respectively, compared to the same periods during 2011. The increases are related to our E&O division and they are driven by our real estate program which was established in the third quarter of 2011 and wrote $4.7 million and $14.5 million in gross written premium for the three and nine months ended September 30, 2012. Additionally, the increase in E&O is also attributed to an overall 5.6% and 5.3% increase in average renewal rates for the three and nine months ended September 30, 2012.

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Lloyd’s Operations

The Lloyd’s Operations primarily underwrite marine and related lines of business along with professional liability insurance, and construction coverage for onshore energy business at Lloyd’s through Syndicate 1221. Our Lloyd’s Operations includes NUAL, a Lloyd’s underwriting agency that manages Syndicate 1221.

The following table sets forth the results of operations of the Lloyd’s Operations for the three and nine months ended September 30, 2012 and 2011:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,						Percentage Change
In thousands	2012			2011			2012			2011			QTD			YTD
Gross written premiums	$	80,381		$	64,143		$	284,115		$	245,597			25.3	%		15.7	%
Net written premiums		45,898			40,065			163,880			162,560			14.6	%		0.8	%
Net earned premiums		52,172			54,301			158,183			166,749			-3.9	%		-5.1	%
Net losses and loss adjustment expenses		(15,547	)		(33,487	)		(65,759	)		(112,011	)		-53.6	%		-41.3	%
Commission expenses		(10,911	)		(9,953	)		(30,735	)		(36,402	)		9.6	%		-15.6	%
Other operating expenses		(10,725	)		(9,254	)		(32,592	)		(28,291	)		15.9	%		15.2	%
Other income (expense)		40			(942	)		106			(734	)		NM			NM
Underwriting profit (loss)	$	15,029		$	665		$	29,203		$	(10,689	)		NM			NM
Net investment income		1,552			2,158			6,289			6,733			-28.1	%		-6.6	%
Net realized gains (losses)		2,152			(226	)		3,361			(2,409	)		NM			NM
Income (loss) before income taxes	$	18,733		$	2,597		$	38,853		$	(6,365	)		NM			NM
Income tax expense (benefit)		6,525			780			13,458			(2,247	)		NM			NM
Net income (loss)	$	12,208		$	1,817		$	25,395		$	(4,118	)		NM			NM
Losses and loss adjustment expenses ratio		29.8	%		61.7	%		41.6	%		67.2	%
Commission expense ratio		20.9	%		18.3	%		19.4	%		21.8	%
Other operating expense ratio(1)		20.5	%		18.8	%		20.5	%		17.4	%
Combined ratio		71.2	%		98.8	%		81.5	%		106.4	%

(1) - Includes Other operating expenses & Other income (expense)

NM - Percentage change not meaningful

Our Lloyd’s Operations reported net income of $12.2 million for the three months ended September 30, 2012 compared to $1.8 million for the same period in 2011. The increase in net income was largely attributable to stronger underwriting results.

Our Lloyd’s Operations combined ratio for the three months ended September 30, 2012 was 71.2% compared to 98.8% for the same period in 2011. Our Lloyd’s Operations pre-tax underwriting results increased by $14.3 million to a $15.0 million pre-tax underwriting profit for the three months ended September 30, 2012 compared to underwriting profit of $0.7 million for the same period in 2011. The increase in pre-tax underwriting results is primarily related to $9.1 million of net prior period reserve redundancies mostly driven by the Professional Liability and Marine business.

Our Lloyd’s Operations reported net income of $25.3 million for the nine months ended September 30, 2012 compared to a net loss of $4.1 million for the same period in 2011. The increase in net income was largely attributable to stronger underwriting results.

47

Our Lloyd’s Operations combined ratio for the nine months ended September 30, 2012 was 81.5% compared to 106.4% for the same period in 2011. Our Lloyd’s Operations pre-tax underwriting results increased by $39.9 million to a $29.2 million pre-tax underwriting profit for the nine months ended September 30, 2012 compared to underwriting loss of $10.7 million for the same period in 2011. The increase in pre-tax underwriting results is primarily related to $19.2 million of net prior period reserve redundancies across all businesses.

Lloyd’s Operations Gross Written Premiums

We have controlled 100% of Syndicate 1221’s stamp capacity since 2006. Stamp capacity is a measure of the amount of premium a Lloyd’s syndicate is authorized to write based on a business plan approved by the Council of Lloyd’s. Syndicate 1221’s stamp capacity is £184 million ($296 million) in 2012 compared to £175 million ($280 million) in 2011.

Marine Premiums.The gross written premiums for our Marine business for the three and nine months ended September 30, 2012 and 2011 consisted of the following:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,				Percentage Change
In thousands	2012		2011		2012		2011		QTD			YTD
Cargo and specie	$	18,490	$	8,822	$	55,469	$	44,904		109.6	%		23.5	%
Marine and energy liability		6,679		11,153		47,426		51,074		-40.1	%		-7.1	%
Transport		8,078		—		18,012		—		NM			NM
Assumed reinsurance		1,340		2,019		12,479		14,133		-33.7	%		-11.7	%
War		2,141		3,520		8,113		9,895		-39.2	%		-18.0	%
Hull		988		1,465		5,029		7,579		-32.5	%		-33.6	%
Total Marine	$	37,716	$	26,979	$	146,528	$	127,585		39.8	%		14.8	%

NM - Percentage change not meaningful

The Lloyd’s Operations Marine gross written premiums for the three and nine months ended September 30, 2012 increased by 39.8% and 14.8%, respectively, compared to the same periods during 2011. The increase in Lloyd’s Marine is primarily related to growth within Cargo and Specie and the transfer of the Transport business to Lloyd’s Syndicate from U.K. Branch.

Property Casualty Premiums.The gross written premiums for our Property Casualty business for the three and nine months ended September 30, 2012 and 2011 consisted of the following:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,				Percentage Change
In thousands	2012		2011		2012		2011		QTD			YTD
Offshore energy	$	14,428	$	12,864	$	46,159	$	40,450		12.2	%		14.1	%
Engineering and construction		8,674		8,122		29,271		21,868		6.8	%		33.9	%
Onshore energy		6,240		6,010		25,160		24,657		3.8	%		2.0	%
Other		3,447		2,686		5,473		4,131		28.3	%		32.5	%
Total Property Casualty	$	32,789	$	29,682	$	106,063	$	91,106		10.5	%		16.4	%

The Lloyd’s Operations Property Casualty gross written premiums for the three and nine months ended September 30, 2012 increased by 10.5% and 16.4%, respectively, compared to the same periods in 2011. The increases are primarily due to growth within the Offshore Energy book due to new business opportunities. In addition, Property Casualty benefited from increases in average renewal rates of 7.5% and 6.7% for the three and nine months ended September 30, 2012.

48

Professional Liability Premiums. The gross written premiums for our Professional Liability business for the three and nine months ended September 30, 2012 and 2011 consisted of the following:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,				Percentage Change
In thousands	2012		2011		2012		2011		QTD			YTD
D&O (public and private)	$	7,201	$	5,747	$	22,940	$	20,001		25.3	%		14.7	%
E&O		2,675		1,735		8,584		6,905		54.2	%		24.3	%
Total Professional Liability	$	9,876	$	7,482	$	31,524	$	26,906		32.0	%		17.2	%

The Lloyd’s Operations Professional Liability gross written premiums for the three and nine months ended September 30, 2012 increased by 32.0% and 17.2%, respectively, compared to the same periods in 2011 primarily as a result of new business in both lines.

Capital Resources

We monitor our capital adequacy to support our business on a regular basis. The future capital requirements of our business will depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. Our ability to underwrite is largely dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. In particular, we require (1) sufficient capital to maintain our financial strength ratings, as issued by various ratings agencies, at a level considered necessary by management to enable our Insurance Companies to compete, (2) sufficient capital to enable our Insurance Companies to meet the capital adequacy tests performed by statutory agencies in the United States and the United Kingdom and (3) letters of credit and other forms of collateral that are necessary to support the business plan of our Lloyd’s Operations.

Our capital resources consist of funds deployed or available to be deployed to support our business operations. As of September 30, 2012 and December 31, 2011, our capital resources were as follows:

	September 30,			December 31,
In thousands	2012			2011
Senior Notes	$	114,386		$	114,276
Stockholders’ equity		874,811			803,435
Total capitalization	$	989,197		$	917,711
Ratio of debt to total capitalization		11.6	%		12.5	%

As part of our capital management program, we may seek to raise additional capital or may seek to return capital to our stockholders through share repurchases, cash dividends or other methods (or a combination of such methods). Any such determination will be at the discretion of the Parent Company’s Board of Directors and will be dependent upon our profits, financial requirements and other factors, including legal restrictions, rating agency requirements, credit facility limitations and such other factors as our Board of Directors deems relevant.

In June 2012, we filed a universal shelf registration statement with the SEC. This registration statement, which expires in June 2015, allows for the future possible offer and sale by the Company of up to $500 million in the aggregate of various types of securities including common stock, preferred stock, debt securities, depositary shares, warrants, units or stock purchase contracts and stock purchase units. The shelf registration statement enables us to efficiently access the public equity or debt markets in order to meet future capital needs, if necessary. This report is not an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such state.

49

We primarily rely upon dividends from our subsidiaries to meet our Parent Company’s obligations. Since the issuance of the senior debt in April 2006, the Parent Company’s cash obligations primarily consist of semi-annual interest payments on the senior debt, which are currently $4.0 million. Going forward, the interest payments and any share repurchases may be made from funds currently at the Parent Company or dividends from its subsidiaries. The dividends have historically been paid by Navigators Insurance Company. Based on the September 30, 2012 surplus of Navigators Insurance Company, the approximate maximum amount available for the payment of dividends by Navigators Insurance Company during the preceding 12 month period without prior regulatory approval is $67.9 million. During the preceding 12 month period Navigators Insurance Company declared and paid $10.0 million of dividends to the Parent Company, $10.0 million of which were declared and paid in the first quarter of 2012.

Condensed Parent Company balance sheets as of September 30, 2012 (unaudited) and December 31, 2011 are shown in the table below:

	September 30,		December 31,
In thousands	2012		2011
Cash and investments	$	13,905	$	8,315
Investments in subsidiaries		956,175		895,047
Goodwill and other intangible assets		2,534		2,534
Other assets		20,534		13,806
Total assets	$	993,148	$	919,702
Senior Notes	$	114,386	$	114,276
Accounts payable and other liabilities		597		649
Accrued interest payable		3,354		1,342
Total liabilities	$	118,337	$	116,267
Stockholders' equity	$	874,811	$	803,435
Total liabilities and stockholders’ equity	$	993,148	$	919,702

On April 1, 2011, we entered into a $165 million credit facility agreement with ING Bank N.V., London Branch, individually and as Administrative Agent, and a syndicate of lenders. The credit facility, which is denominated in U.S. dollars, is utilized to fund our participation in Syndicate 1221 through letters of credit for the 2012 and 2011 underwriting years, as well as open prior years. The letters of credit issued under the facility are denominated in British pounds and their aggregate face amount will fluctuate based on exchange rates. If any letters of credit remain outstanding under the facility after December 31, 2012, we would be required to post additional collateral to secure the remaining letters of credit. As of September 30, 2012, letters of credit with an aggregate face amount of $150.0 million were outstanding under the credit facility.

This credit facility contains customary covenants for facilities of this type, including restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of assets, and requirements as to maintaining certain consolidated tangible net worth, statutory surplus and other financial ratios. The credit facility also provides for customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, any representation or warranty made by the Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting the Company and its subsidiaries, the occurrence of certain material judgments, or a change in control of the Company. The letter of credit facility is secured by a pledge of the stock of certain insurance subsidiaries of the Company. To the extent the aggregate face amount issued under the credit facility exceeds the commitment amount, we are required to post collateral with the lead bank of the consortium. We were in compliance with all covenants under the credit facility as of September 30, 2012.

The applicable margin and applicable fee rate payable under the credit facility are based on a tiered schedule that is based on the Company’s then-current ratings issued by Standard & Poor’s (“S&P”) and Moody’s Investor Services (“Moody’s”) with respect to the Company’s Senior Notes without third-party credit enhancement, and the amount of the Company’s own collateral utilized to fund its participation in Syndicate 1221.

50

Time lags do occur in the normal course of business between the time gross loss reserves are paid by the Company and the time such gross paid losses are billed and collected from reinsurers. Reinsurance recoverable amounts related to gross loss reserves as of September 30, 2012 are anticipated to be billed and collected over the next several years as the gross loss reserves are paid by the Company.

Generally, for pro rata or quota share reinsurers, we issue quarterly settlement statements for premiums less commissions and paid loss activity, which are expected to be settled within 45 days. We have the ability to issue “cash calls” requiring such reinsurers to pay losses whenever paid loss activity for a claim ceded to a particular reinsurance treaty exceeds a predetermined amount (generally $0.5 million to $1.0 million) as set forth in the pro rata treaty. For the Insurance Companies, cash calls must generally be paid within 30 calendar days. There is generally no specific settlement period for the Lloyd’s Operations cash call provisions, but such billings have historically on average been paid within 45 calendar days.

Generally, for excess-of-loss reinsurers we pay quarterly deposit premiums based on the estimated subject premiums over the contract period (usually one year) that are subsequently adjusted based on actual premiums determined after the expiration of the applicable reinsurance treaty. Paid losses subject to excess-of-loss recoveries are generally billed as they occur and are usually settled by reinsurers within 30 calendar days for the Insurance Companies and 30 business days for the Lloyd’s Operations.

We sometimes withhold funds from reinsurers and may apply ceded loss billings against such funds in accordance with the applicable reinsurance agreements.

Liquidity

Consolidated Cash Flows

Net cash provided by operating activities was $69.1 million for the nine months ended September 30, 2012 compared to $86.3 million for the same period in 2011. The decrease in cash flow from operations was due to increases in paid losses and current income taxes paid, partially offset by improved collections on premium receivables and reinsurance recoverables.

Net cash used in investing activities was $161.2 million for the nine months ended September 30, 2012 compared to net cash provided by investing activities of $12.6 million for the same period in 2011. The increase in cash used by investing activities is primarily due to the ongoing management of our investment portfolio.

Net cash provided by financing activities was $1.0 million for the nine months ended September 30, 2012 compared to net cash used in financing activities of $71.8 million for the comparable period in 2011. The reduction in cash used by financing activities relates to our share repurchase program, which expired at the end of 2011.

We believe that the cash flow generated by the operating activities of our subsidiaries will provide sufficient funds for us to meet our liquidity needs over the next twelve months. Beyond the next twelve months, cash flow available to us may be influenced by a variety of factors, including general economic conditions and conditions in the insurance and reinsurance markets, as well as fluctuations from year to year in claims experience.

We believe that we have adequately managed our cash flow requirements related to reinsurance recoveries from their positive cash flows and the use of available short-term funds when applicable. However, there can be no assurances that we will be able to continue to adequately manage such recoveries in the future or that collection disputes or reinsurer insolvencies will not arise that could materially increase the collection time lags or result in recoverable write-offs causing additional incurred losses and liquidity constraints to the Company. The payment of gross claims and related collections from reinsurers with respect to large losses could significantly impact our liquidity needs. However, we expect to collect our paid reinsurance recoverables generally under the terms described above.

51

Investments

As of September 30, 2012, the weighted average rating of our fixed maturity investments was “AA” by S&P and “Aa” by Moody’s. The entire fixed maturity investment portfolio, except for investments with a fair value of $31.5 million, consists of investment grade bonds. As of September 30, 2012, our portfolio had a duration of 3.8 years. Management periodically projects cash flow of the investment portfolio and other sources in order to maintain the appropriate levels of liquidity in an effort to ensure our ability to satisfy claims. As of September 30, 2012 and December 31, 2011, all fixed maturity securities and equity securities held by us were classified as available-for-sale.

The following tables set forth the Company’s cash and investments as of September 30, 2012 and December 31, 2011. The tables below include OTTI securities recognized within other comprehensive income (“OCI”).

	September 30, 2012
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Amortized Cost		OTTI Recognized in OCI
Fixed maturities:
U.S. Treasury bonds, agency bonds, and foreign government bonds	$	465,215	$	11,881	$	(55	)	$	453,389	$	—
States, municipalities and political subdivisions		443,994		34,451		(66	)		409,609		—
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		405,229		17,582		(56	)		387,703		—
Residential mortgage obligations		39,095		711		(837	)		39,221		(278	)
Asset-backed securities		50,897		1,069		(72	)		49,900		—
Commercial mortgage-backed securities		208,742		18,126		(50	)		190,666		—
Subtotal	$	703,963	$	37,488	$	(1,015	)	$	667,490	$	(278	)
Corporate bonds		471,886		26,941		(101	)		445,046		—
Total fixed maturities	$	2,085,058	$	110,761	$	(1,237	)	$	1,975,534	$	(278	)
Equity securities - common stocks		105,930		31,377		(278	)		74,831		—
Short-term investments		187,445		—		—			187,445		—
Cash		36,252		—		—			36,252		—
Total	$	2,414,685	$	142,138	$	(1,515	)	$	2,274,062	$	(278	)
		December 31, 2011
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Amortized Cost		OTTI Recognized in OCI
Fixed maturities:
U.S. Treasury bonds, agency bonds, and foreign government bonds	$	336,070	$	8,979	$	(383	)	$	327,474	$	—
States, municipalities and political subdivisions		410,836		28,887		(108	)		382,057		—
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		395,860		17,321		(3	)		378,542		—
Residential mortgage obligations		23,148		8		(2,848	)		25,988		(1,682	)
Asset-backed securities		48,934		695		(75	)		48,314		—
Commercial mortgage-backed securities		216,034		10,508		(593	)		206,119		—
Subtotal	$	683,976	$	28,532	$	(3,519	)	$	658,963	$	(1,682	)
Corporate bonds		457,187		15,743		(6,772	)		448,216		—
Total fixed maturities	$	1,888,069	$	82,141	$	(10,782	)	$	1,816,710	$	(1,682	)
Equity securities - common stocks		95,849		23,240		(958	)		73,567		—
Short-term investments		122,220		—		—			122,220		—
Cash		127,360		—		—			127,360
Total	$	2,233,498	$	105,381	$	(11,740	)	$	2,139,857	$	(1,682	)

52

The fair value of our investment portfolio may fluctuate significantly in response to various factors such as changes in interest rates, investment quality ratings, equity prices, foreign exchange rates and credit spreads. We do not have the intent to sell nor is it more likely than not that we will have to sell debt securities in unrealized loss positions that are not other-than-temporarily impaired before recovery. We may realize investment losses to the extent our liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate, liquidity or credit spread environments. Significant changes in the factors we consider when evaluating investment for impairment losses could result in a significant change in impairment losses reported in the consolidated financial statements.

Invested assets increased in 2012 since the prior comparable period for 2011 primarily due to unrealized gains and cash flow from operations. The annualized pre-tax investment yield, excluding net realized gains and losses and net OTTI losses recognized in earnings, was 2.4% for both the three and nine months ended September 30, 2012, respectively, compared to 3.1% and 3.2% for the three and nine months ended September 30, 2011. The 2.4% annualized pre-tax yield for the nine months ended September 30, 2012 includes investment expenses of $4.5 million for interest expense related to the settlement of a dispute with Equitas over foregone interest on amounts that were due on certain reinsurance contracts. In the dispute Equitas alleged that we failed to make timely payments to them under certain reinsurance agreements in connection with subrogation recoveries received by us with respect to several catastrophe losses that occurred in the late 1980’s and early 1990’s. Excluding the impact of the aforementioned interest expense, the annualized pre-tax yield for the nine month ended September 30, 2012 would have been 2.7%, reflective of the general decline in market yields.

The tax equivalent yields for the three and nine months ended September 30, 2012 on a consolidated basis were 2.6% and 2.6%, respectively, compared to 3.3% and 3.4% for the same periods during 2011. The portfolio duration was 3.8 years for the nine months ended September 30, 2012 and 3.6 years for the same period during 2011, respectively. Since the beginning of 2012, the tax-exempt portion of our investment portfolio has increased by $28.6 million to approximately 19.2% of the fixed maturities investment portfolio as of September 30, 2012 compared to approximately 19.7% at December 31, 2011.

We are a specialty insurance company and periods of moderate economic recession or inflation tend not to have a significant direct effect on our underwriting operations. They do, however, impact our investment portfolio. A decrease in interest rates will tend to decrease our yield and have a positive effect on the fair value of our invested assets. An increase in interest rates will tend to increase our yield and have a negative effect on the fair value of our invested assets.

The contractual maturity dates for fixed maturity securities categorized by the number of years until maturity as of September 30, 2012 are shown in the following table:

	September 30, 2012
In thousands	Fair Value		Amortized Cost
Due in one year or less	$	80,858	$	80,272
Due after one year through five years		641,625		618,478
Due after five years through ten years		429,575		397,999
Due after ten years		229,037		211,295
Mortgage- and asset-backed securities		703,963		667,490
Total	$	2,085,058	$	1,975,534

Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Due to the periodic repayment of principal, the aggregate amount of mortgage-backed and asset-backed securities is estimated to have an effective maturity of approximately 3.9 years.

53

The following table sets forth the amount and percentage of our fixed maturities as of September 30, 2012 by S&P credit rating or, if an S&P rating is not available, the equivalent Moody’s rating. The table includes fixed maturities at fair value, and the total rating is the weighted average quality rating.

In thousands	Rating	Fair Value		Percent of Total
Rating description:
Extremely strong	AAA	$	348,008		17	%
Very strong	AA		1,177,602		56	%
Strong	A		380,992		18	%
Adequate	BBB		146,910		7	%
Speculative	BB & Below		14,508		1	%
Not rated	NR		17,038		1	%
Total		$	2,085,058		100	%

The following table sets forth our U.S. Treasury bonds, agency bonds and foreign government bonds as of September 30, 2012 and December 31, 2011:

	September 30, 2012
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Amortized Cost
U.S. Treasury bonds	$	225,584	$	7,118	$	—		$	218,466
Agency bonds		163,816		3,749		(29	)		160,096
Foreign government bonds		75,815		1,014		(26	)		74,827
Total	$	465,215	$	11,881	$	(55	)	$	453,389
	December 31, 2011
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Amortized Cost
U.S. Treasury bonds	$	137,228	$	5,422	$	—		$	131,806
Agency bonds		136,506		2,870		(133	)		133,769
Foreign government bonds		62,336		687		(250	)		61,899
Total	$	336,070	$	8,979	$	(383	)	$	327,474

The following table sets forth the composition of the investments categorized as states, municipalities and political subdivisions in our portfolio by generally equivalent S&P and Moody’s ratings (not all securities in our portfolio are rated by both S&P and Moody’s) as of September 30, 2012. The securities that are not rated in the table below are primarily state bonds.

In thousands
Equivalent S&P Rating	Equivalent Moody’s Rating	Fair Value		Book Value		Net Unrealized Gain (Loss)
AAA/AA/A	Aaa/Aa/A	$	417,232	$	383,934	$	33,298
BBB	Baa		22,922		21,985		937
BB	Ba		—		—		—
B	B		—		—		—
CCC or lower	Caa or lower		—		—		—
NR	NR		3,840		3,690		150
Total		$	443,994	$	409,609	$	34,385

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The following table sets forth the municipal bond holdings by sectors as of September 30, 2012 and December 31, 2011:

	September 30, 2012					December 31, 2011
In thousands	Fair Value		Percent of Total			Fair Value		Percent of Total
Municipal Sector:
General obligation	$	90,321		20	%	$	43,195		10	%
Prerefunded		19,440		4	%		18,636		5	%
Revenue		290,060		66	%		309,659		75	%
Taxable		44,173		10	%		39,346		10	%
Total	$	443,994		100	%	$	410,836		100	%

We own $120 million of municipal securities which are credit enhanced by various financial guarantors. As of September 30, 2012, the average underlying credit rating for these securities is A+. There has been no material adverse impact to our investment portfolio or results of operations as a result of downgrades of the credit ratings for several of the financial guarantors.

We analyze our mortgage-backed and asset-backed securities by credit quality of the underlying collateral distinguishing between the securities issued by the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”) and the Government National Mortgage Association (“GNMA”) which are Federal government sponsored entities, and the non-FNMA and non-FHLMC securities broken out by prime, Alternative A-paper (“Alt-A”) and subprime collateral. The securities issued by FNMA and FHLMC are the obligations of each respective entity. Legislation has provided for guarantees by the U.S. Government of up to $100 billion each for FNMA and FHLMC.

Prime collateral consists of mortgages or other collateral from the most creditworthy borrowers. Alt-A collateral consists of mortgages or other collateral from borrowers which have a risk potential that is greater than prime but less than subprime. The subprime collateral consists of mortgages or other collateral from borrowers with low credit ratings. Such subprime and Alt-A categories are as defined by S&P.

The following table sets forth our agency mortgage-backed securities and residential mortgage securities (“RMBS”) by those issued by GNMA, FNMA, and FHLMC, and the quality category (prime, Alt-A and subprime) for all other such investments as of September 30, 2012:

	September 30, 2012
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Amortized Cost
Agency mortgage-backed securities:
GNMA	$	126,642	$	6,416	$	(45	)	$	120,271
FNMA		210,396		8,705		(11	)		201,702
FHLMC		68,191		2,461		—			65,730
Total agency mortgage-backed securities	$	405,229	$	17,582	$	(56	)	$	387,703
Residential mortgage-backed securities:
Prime	$	12,709	$	126	$	(658	)	$	13,241
Alt-A		2,102		24		(179	)		2,257
Subprime		721		21		—			700
Non-U.S. RMBS		23,563		540		—			23,023
Total residential mortgage-backed securities	$	39,095	$	711	$	(837	)	$	39,221

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The following table sets forth the composition of the investments categorized as residential mortgage obligations in our portfolio by generally equivalent S&P and Moody’s ratings (not all securities in our portfolio are rated by both S&P and Moody’s) as of September 30, 2012:

In thousands		September 30, 2012
Equivalent S&P Rating	Equivalent Moody’s Rating	Fair Value		Book Value		Net Unrealized Gain (Loss)
AAA/AA/A	Aaa/Aa/A	$	25,616	$	25,065	$	551
BBB	Baa		1,658		1,779		(121	)
BB	Ba		1,595		1,646		(51	)
B	B		2,340		2,453		(113	)
CCC or lower	Caa or lower		7,886		8,278		(392	)
NR	NR		—		—		—
Total		$	39,095	$	39,221	$	(126	)

Details of the collateral of our asset-backed securities portfolio as of September 30, 2012 are presented below:

In thousands	AAA		AA		A		BBB		BB		CCC		Fair Value		Amortized Cost		Unrealized Gain (Loss)
Auto loans	$	—	$	9,575	$	—	$	—	$	—	$	—	$	9,575	$	9,370	$	205
Credit cards		14,040		—		—		—		—		—		14,040		13,522		518
Time share		—		—		16,856		—		—		—		16,856		16,598		258
Student loans		5,958		3,882		—		—		—		—		9,840		9,847		(7	)
Miscellaneous		586		—		—		—		—		—		586		563		23
Total	$	20,584	$	13,457	$	16,856	$	—	$	—	$	—	$	50,897	$	49,900	$	997

The following table sets forth the composition of the investments categorized as commercial mortgage-backed securities in our portfolio by generally equivalent S&P and Moody’s ratings (not all securities in our portfolio are rated by both S&P and Moody’s) as of September 30, 2012:

In thousands		September 30, 2012
Equivalent S&P Rating	Equivalent Moody’s Rating	Fair Value		Book Value		Net Unrealized Gain (Loss)
AAA/AA/A	Aaa/Aa/A	$	208,742	$	190,666	$	18,076
BBB	Baa		—		—		—
BB	Ba		—		—		—
B	B		—		—		—
CCC or lower	Caa or lower		—		—		—
NR	NR		—		—		—
Total		$	208,742	$	190,666	$	18,076

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The following table sets forth the composition of the investments categorized as corporate bonds in our portfolio by generally equivalent S&P and Moody’s ratings (not all securities in our portfolio are rated by both S&P and Moody’s) as of September 30, 2012:

In thousands		September 30, 2012
Equivalent S&P Rating	Equivalent Moody’s Rating	Fair Value		Book Value		Net Unrealized Gain (Loss)
AAA/AA/A	Aaa/Aa/A	$	346,868	$	326,582	$	20,286
BBB	Baa		122,330		115,914		6,416
BB	Ba		2,688		2,550		138
B	B		—		—		—
CCC or lower	Caa or lower		—		—		—
NR	NR		—		—		—
Total		$	471,886	$	445,046	$	26,840

The company holds non-sovereign European securities of $77.3 million at fair value and $75.1 million at amortized cost, primarily in the investment portfolio. This represents 3.7% of our total fixed income and equity portfolio. Our largest exposure is in France with a total of $37.4 million followed by the Netherlands with a total of $30.7 million. We have no exposure to Greece, Portugal, Italy or Spain.

57

The following table summarizes all securities in a gross unrealized loss position as of September 30, 2012 and December 31, 2011, showing the aggregate fair value and gross unrealized loss by the length of time those securities had continuously been in a gross unrealized loss position as well as the number of securities:

	September 30, 2012						December 31, 2011
In thousands, except # of securities	Number of Securities		Fair Value		Gross Unrealized Loss		Number of Securities		Fair Value		Gross Unrealized Loss
Fixed maturities:
U.S. Government Treasury bonds, agency bonds, and foreign government bonds
0-6 months		4	$	16,736	$	34		7	$	58,587	$	98
7-12 months		4		4,682		3		—		—		—
> 12 months		1		4,644		18		2		6,883		285
Subtotal		9	$	26,062	$	55		9	$	65,470	$	383
States, municipalities and political subdivisions
0-6 months		1	$	401	$	2		7	$	5,894	$	72
7-12 months		2		1,473		40		1		216		1
> 12 months		3		2,297		24		5		2,420		35
Subtotal		6	$	4,171	$	66		13	$	8,530	$	108
Agency mortgage-backed securities
0-6 months		5	$	18,901	$	56		3	$	5,087	$	3
7-12 months		—		—		—		—		—		—
> 12 months		—		—		—		—		—		—
Subtotal		5	$	18,901	$	56		3	$	5,087	$	3
Residential mortgage obligations
0-6 months		2	$	550	$	19		6	$	6,672	$	184
7-12 months		—		—		—		7		5,250		313
> 12 months		41		10,356		818		47		10,749		2,351
Subtotal		43	$	10,906	$	837		60	$	22,671	$	2,848
Asset-backed securities
0-6 months		—	$	—	$	—		2	$	4,933	$	12
7-12 months		—		—		—		5		6,645		63
> 12 months		2		2,504		72		1		2		—
Subtotal		2	$	2,504	$	72		8	$	11,580	$	75
Commercial mortgage-backed securities
0-6 months		5	$	2,772	$	8		6	$	5,465	$	29
7-12 months		4		3,777		36		3		6,840		550
> 12 months		4		943		6		3		1,503		14
Subtotal		13	$	7,492	$	50		12	$	13,808	$	593
Corporate bonds
0-6 months		3	$	6,357	$	51		52	$	135,516	$	4,539
7-12 months		—		—		—		18		27,561		1,457
> 12 months		8		14,776		50		8		14,898		776
Subtotal		11	$	21,133	$	101		78	$	177,975	$	6,772
Total fixed maturities		89	$	91,169	$	1,237		183	$	305,121	$	10,782
Equity securities - common stocks
0-6 months		1	$	2,144	$	4		4	$	3,320	$	587
7-12 months		1		1,789		259		1		1,629		371
> 12 months		1		490		15		—		—		—
Total equity securities		3	$	4,423	$	278		5	$	4,949	$	958

58

We analyze the unrealized losses quarterly to determine if any are other-than-temporary. The above unrealized losses have been determined to be temporary based on our policies.

In the above table the gross unrealized loss for the greater than 12 months category consists primarily of residential mortgage-backed securities. Residential mortgage-backed securities are a type of fixed income security in which residential mortgage loans are sold into a trust or special purpose vehicle, thereby securitizing the cash flows of the mortgage loans.

To determine whether the unrealized loss on structured securities is other-than-temporary, we analyze the projections provided by our investment managers with respect to an expected principal loss under a range of scenarios and utilize the most likely outcomes. The analysis relies on actual collateral performance measures such as default rate, prepayment rate and loss severity. These assumptions are applied throughout the remaining term of the deal, incorporating the transaction structure and priority of payments, to generate loss adjusted cash flows. Results of the analysis will indicate whether the security is expected ultimately to incur a loss or whether there is a material impact on yield due to either a projected loss or a change in cash flow timing. A break even default rate is also calculated. A comparison of the break even default rate to the actual default rate provides an indication of the level of cushion or coverage to the first dollar principal loss. The analysis applies the stated assumptions throughout the remaining term of the transaction to forecast cash flows, which are then applied through the transaction structure to determine whether there is a loss to the security. For securities in which a tranche loss is present, and the net present value of loss adjusted cash flows is less than book value, an impairment is recognized. The output data also includes a number of additional metrics such as average life remaining, original and current credit support, over 60 day delinquency and security rating.

Prepayment assumptions associated with the mortgage-backed and asset-backed securities are reviewed on a periodic basis. When changes in prepayment assumptions are deemed necessary as the result of actual prepayments differing from anticipated prepayments, securities are revalued based upon the new prepayment assumptions utilizing the retrospective accounting method.

As of September 30, 2012 and December 31, 2011, the largest single unrealized loss by a non-government backed issuer in the investment portfolio was $0.1 million and $1.4 million, respectively.

The following table sets forth the composition of the investments categorized as fixed maturity securities in our portfolio with gross unrealized losses by generally equivalent S&P and Moody’s ratings (not all of the securities are rated by S&P and Moody’s ) as of September 30, 2012:

In thousands		Equivalent	Gross Unrealized Loss					Fair Value
NAIC Rating	Equivalent S&P Rating	Moody’s Rating	Amount		Percent of Total			Amount		Percent of Total
1	AAA/AA/A	Aaa/Aa/A	$	588		47	%	$	78,047		85	%
2	BBB	Baa		87		7	%		6,124		7	%
3	BB	Ba		20		2	%		728		1	%
4	B	B		190		15	%		1,686		2	%
5	CCC or lower	Caa or lower		144		12	%		1,833		2	%
6	NR	NR		208		17	%		2,751		3	%
Total			$	1,237		100	%	$	91,169		100	%

As of September 30, 2012, the gross unrealized losses in the table above were related to fixed maturity securities that are rated investment grade, which is defined as a security having an S&P rating of “BBB–” or higher, or a Moody’s rating of “Baa3” or higher, except for $0.6 million which is rated below investment grade or not rated. Unrealized losses on investment grade securities principally relate to changes in interest rates or changes in sector-related credit spreads since the securities were acquired.

59

The contractual maturity for fixed maturity securities categorized by the number of years until maturity, with a gross unrealized loss as of September 30, 2012 is presented in the following table:

	September 30, 2012
	Gross Unrealized Losses					Fair Value
In thousands	Amount		Percent of Total			Amount		Percent of Total
Due in one year or less	$	25		2	%	$	11,387		12	%
Due after one year through five years		112		9	%		19,473		21	%
Due after five years through ten years		27		2	%		5,532		6	%
Due after ten years		58		5	%		14,974		16	%
Mortgage- and asset-backed securities		1,015		82	%		39,803		45	%
Total	$	1,237		100	%	$	91,169		100	%

The following table summarizes the gross unrealized investment losses by the length of time that the fair value continues to be less than 80% of amortized cost as of September 30, 2012:

	September 30, 2012
In thousands	Fixed Maturities		Equity Securities		Total
Less than three months	$	—	$	—	$	—
Longer than three months and less than six months		—		—		—
Longer than six months and less than twelve months		—		—		—
Longer than twelve months		164		—		164
Total	$	164	$	—	$	164

The table below summarizes our activity related to OTTI losses for the periods indicated:

	Three Months Ended September 30,								Nine Months Ended September 30,
	2012				2011				2012				2011
In thousands, except # of securities	Number  of Securities		Amount		Number  of Securities		Amount		Number  of Securities		Amount		Number  of Securities		Amount
Total OTTI losses:
Corporate and other bonds		—	$	—		—	$	—		—	$	—		—	$	—
Commercial mortgage-backed securities		—		—		—		—		—		—		—		—
Residential mortgage-backed securities		—		—		10		1,241		1		54		15		1,791
Asset-backed securities		—		—		—		—		—		—		—		—
Equities		—		—		—		—		3		639		1		547
Total		—	$	—		10	$	1,241		4	$	693		16	$	2,338
Less: Portion of loss in accumulated other comprehensive income (loss):
Corporate and other bonds			$	—			$	—			$	—			$	—
Commercial mortgage-backed securities				—				—				—				—
Residential mortgage-backed securities				—				618				43				941
Asset-backed securities				—				—				—				—
Equities				—				—				—				—
Total			$	—			$	618			$	43			$	941
Impairment losses recognized in earnings
Corporate and other bonds			$	—			$	—			$	—			$	—
Commercial mortgage-backed securities				—				—				—				—
Residential mortgage-backed securities				—				623				11				850
Asset-backed securities				—				—				—				—
Equities				—				—				639				547
Total			$	—			$	623			$	650			$	1,397

60

During the three months ended September 30, 2012, we did not recognize any OTTI losses. During the nine months ended September 30, 2012, we recognized OTTI losses of $0.7 million related to one non-agency mortgage-backed security and three equity securities. During the comparable periods in 2011, we recognized OTTI losses of $0.6 million and $1.4 million related to residential mortgage backed securities and equity securities. The significant inputs used to measure the amount of credit loss recognized in earnings were actual delinquency rates, default probability assumptions, severity assumptions and prepayment assumptions. Projected losses are a function of both loss severity and probability of default. Default probability and severity assumptions differ based on property type, vintage and the stress of the collateral. We do not intend to sell any of these securities and it is more likely than not that we will not be required to sell these securities before the recovery of the amortized cost basis.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The following updates our disclosure regarding foreign currency exchange rate risk as previously stated in the Company’s 2011 Annual Report on Form 10-K.

Foreign Currency Exchange Rate Risk

Our Lloyd’s Operations are exposed to foreign currency exchange rate risk primarily related to foreign-denominated cash, cash equivalents and marketable securities (“foreign funds”), premiums receivable, reinsurance recoverables on paid and unpaid losses and loss adjustment expenses as well as reserves for losses and loss adjustment expenses. The principal currencies creating foreign currency exchange risk for the Lloyd’s Operations are the British pound, the Euro and the Canadian dollar. The Lloyd’s Operations manages its foreign currency exchange rate risk primarily through asset-liability matching.

Based on the primary foreign-denominated balances within the Lloyd’s Operations as of September 30, 2012 an assumed 5%, 10% and 15% negative currency movement would result in changes as follows:

	September 30, 2012
			Negative Currency Movement of
In millions	USD Equivalent		5%			10%			15%
Cash, cash equivalents and marketable securities at fair value	$	87.5	$	(4.4	)	$	(8.7	)	$	(13.1	)
Premiums receivable	$	36.8	$	(1.8	)	$	(3.7	)	$	(5.5	)
Reinsurance recoverables on paid, unpaid losses and LAE	$	67.1	$	(3.4	)	$	(6.7	)	$	(10.1	)
Reserves for losses and loss adjustment expenses	$	169.3	$	8.5		$	16.9		$	25.4

Item 4. Controls and Procedures

(a) The Chief Executive Officer and Chief Financial Officer of the Company have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this quarterly report. Based on such evaluation, such officers have concluded that as of the end of such period the Company’s disclosure controls and procedures are effective in identifying, on a timely basis, material information required to be disclosed in our reports filed or submitted under the Exchange Act.

(b) There have been no changes during our third fiscal quarter in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

61

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of conducting business, our subsidiaries are involved in various legal proceedings, either indirectly as insurers for parties or directly as defendants. Most of these proceedings consist of claims litigation involving our subsidiaries as either (a) liability insurers defending or providing indemnity for third party claims brought against insureds or (b) insurers defending first party coverage claims brought against them. We account for such activity through the establishment of unpaid loss and loss adjustment reserves. Our management believes that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and cost of defense, will not be material to our consolidated financial condition, results of operations or cash flows.

Our subsidiaries are also from time to time involved with other legal actions, some of which assert claims for substantial amounts. These actions include claims asserting extra contractual obligations, such as claims involving allegations of bad faith in the handling of claims or the underwriting of policies. In general, we believe we have valid defenses to these cases. Our management expects that the ultimate liability, if any, with respect to future extra-contractual matters will not be material to our consolidated financial position. Nonetheless, given the large or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of litigation, an adverse outcome in such matters could, from time to time, have a material adverse outcome on our consolidated results of operations or cash flows in a particular fiscal quarter or year.

62

Item 1A. Risk Factors

There have been no material changes from the risk factors as previously disclosed in the Company’s 2011 Annual Report on Form 10-K.

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

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

63

Item 6. Exhibits

Exhibit No.	Description of Exhibit
11-1	Computation of Per Share Earnings	*
31-1	Certification of CEO per Section 302 of the Sarbanes-Oxley Act	*
31-2	Certification of CFO per Section 302 of the Sarbanes-Oxley Act	*
32-1	Certification of CEO per Section 906 of the Sarbanes-Oxley Act (This exhibit is intended to be furnished in accordance with Regulation S-K item 601(b)(32)(ii) and shall not be deemed to be filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference).	*
32-2	Certification of CFO per Section 906 of the Sarbanes-Oxley Act (This exhibit is intended to be furnished in accordance with Regulation S-K item 601(b)(32)(ii) and shall not be deemed to be filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference).	*
101.INS	XBRL Instance Document	*
101.SCH	XBRL Taxonomy Extension Scheme	*
101.CAL	XBRL Taxonomy Extension Calculation Database	*
101.LAB	XBRL Taxonomy Extension Label Linkbase	*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase	*
101.DEF	XBRL Taxonomy Extension Definition Linkbase	*

* Included herein

64

Signatures

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

	The Navigators Group, Inc.
	(Registrant)
Date: November 2, 2012	/s/ Ciro M. DeFalco
	Ciro M. DeFalco
	Senior Vice President and Chief Financial Officer

65

INDEX TO EXHIBITS

Exhibit No.	Description of Exhibit
11-1	Computation of Per Share Earnings	*
31-1	Certification of CEO per Section 302 of the Sarbanes-Oxley Act	*
31-2	Certification of CFO per Section 302 of the Sarbanes-Oxley Act	*
32-1	Certification of CEO per Section 906 of the Sarbanes-Oxley Act (This exhibit is intended to be furnished in accordance with Regulation S-K item 601(b)(32)(ii) and shall not be deemed to be filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference).	*
32-2	Certification of CFO per Section 906 of the Sarbanes-Oxley Act (This exhibit is intended to be furnished in accordance with Regulation S-K item 601(b)(32)(ii) and shall not be deemed to be filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference).	*
101.INS	XBRL Instance Document	*
101.SCH	XBRL Taxonomy Extension Scheme	*
101.CAL	XBRL Taxonomy Extension Calculation Database	*
101.LAB	XBRL Taxonomy Extension Label Linkbase	*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase	*
101.DEF	XBRL Taxonomy Extension Definition Linkbase	*

* Included herein

66