Navigators (NAVG) 10-Q 2014 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, 2014

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.)
400 Atlantic Street, Stamford, Connecticut	06901
(Address of principal executive offices)	(Zip Code)

(203) 905-6090

(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 28, 2014 was 14,274,520.

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

INDEX

		Page Number
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets September 30, 2014 (Unaudited) and December 31, 2013		3
	Consolidated Statements of Income (Unaudited) Three and Nine Months Ended September 30, 2014 and 2013		4
	Consolidated Statements of Comprehensive Income (Unaudited) Three and Nine Months Ended September 30, 2014 and 2013		5
	Consolidated Statements of Stockholders’ Equity (Unaudited) Nine Months Ended September 30, 2014		6
	Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2014 and 2013		7
	Notes to Interim Consolidated Financial Statements (Unaudited)		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		62
Item 4.	Controls and Procedures		62
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		63
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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

	September 30,			December 31,
	2014			2013
	(Unaudited)
ASSETS
Investments and cash:
Fixed maturities, available-for-sale, at fair value (amortized cost: 2014, $2,277,384; 2013, $2,036,999)	$	2,310,195		$	2,047,873
Equity securities, available-for-sale, at fair value (cost: 2014, $136,762; 2013, $118,804)		163,473			143,954
Short-term investments, at fair value (amortized cost: 2014: $255,434; 2013: $296,250)		255,445			296,250
Cash		74,408			86,509
Total investments and cash	$	2,803,521		$	2,574,586
Premiums receivable	$	363,053		$	325,025
Prepaid reinsurance premiums		237,094			247,822
Reinsurance recoverable on paid losses		49,327			38,384
Reinsurance recoverable on unpaid losses and loss adjustment expenses		850,582			822,438
Deferred policy acquisition costs		76,268			67,007
Accrued investment income		15,075			13,866
Goodwill and other intangible assets		7,089			7,177
Current income tax receivable, net		2,506			9,918
Deferred income tax, net		14,531			28,187
Other assets		44,267			35,042
Total assets	$	4,463,313		$	4,169,452
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses	$	2,168,974		$	2,045,071
Unearned premiums		772,755			714,606
Reinsurance balances payable		157,900			167,252
Senior Notes		263,406			263,308
Payable for investments purchased		35,757			7,624
Accounts payable and other liabilities		67,928			69,379
Total liabilities	$	3,466,720		$	3,267,240
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 17,778,131 shares for 2014 and 17,709,876 shares for 2013		1,777			1,770
Additional paid-in capital		343,407			335,546
Treasury stock, at cost (3,511,380 shares for 2014 and 2013)		(155,801	)		(155,801	)
Retained earnings		768,391			692,337
Accumulated other comprehensive income		38,819			28,360
Total stockholders’ equity	$	996,593		$	902,212
Total liabilities and stockholders’ equity	$	4,463,313		$	4,169,452

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,
	2014			2013			2014			2013
Gross written premiums	$	327,469		$	312,076		$	1,099,054		$	1,037,426
Revenues:
Net written premiums	$	228,417		$	196,556		$	772,131		$	664,477
Change in unearned premiums		16,950			17,339			(70,408	)		(42,440	)
Net earned premiums		245,367			213,895			701,723			622,037
Net investment income		15,839			14,094			48,097			41,997
Total other-than-temporary impairment losses		(41	)		(1,821	)		158			(1,863	)
Portion of loss recognized in other comprehensive income (before tax)		41			—			(158	)		—
Net other-than-temporary impairment losses recognized in earnings		—			(1,821	)		—			(1,863	)
Net realized gains (losses)		6,718			(988	)		12,024			7,171
Other income (expense)		1,336			(210	)		10,070			(507	)
Total revenues	$	269,260		$	224,970		$	771,914		$	668,835
Expenses:
Net losses and loss adjustment expenses	$	135,284		$	125,086		$	410,571		$	387,576
Commission expenses		33,943			27,685			91,820			82,631
Other operating expenses		50,388			39,056			145,526			120,608
Interest expense		3,388			2,053			11,559			6,156
Total expenses		223,003			193,880			659,476			596,971
Income before income taxes		46,257			31,090			112,438			71,864
Income tax expense		15,032			9,804			36,384			22,731
Net income	$	31,225		$	21,286		$	76,054		$	49,133
Net income per common share:
Basic	$	2.19		$	1.50		$	5.34		$	3.48
Diluted	$	2.14		$	1.48		$	5.22		$	3.42
Average common shares outstanding:
Basic		14,265,260			14,144,478			14,252,910			14,120,788
Diluted		14,613,744			14,408,413			14,577,297			14,379,943

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,
	2014			2013
Net income (loss)	$	31,225		$	21,286
Other comprehensive income (loss):
Change in net unrealized gains (losses) on investments:
Unrealized gains (losses) on investments arising during the period, net of deferred tax of $8,231 and $2,676 in 2014 and 2013, respectively	$	(15,405	)	$	5,003
Reclassification adjustment for net realized (gains) losses included in net income net of deferred tax of $2,581 and $322 in 2014 and 2013, respectively		4,794			598
Change in net unrealized gains (losses) on investments	$	(10,611	)	$	5,601
Change in other-than-temporary impairments:
Non credit other-than-temporary impairments arising during the period, net of deferred tax of $14 and $30 in 2014 and 2013, respectively	$	(27	)	$	(55	)
Reclassification adjustment for non credit other-than-temporary impairment losses recognized in net income net of deferred tax of $0 in 2014 and 2013, respectively		—			—
Change in other-than-temporary impairments	$	(27	)	$	(55	)
Change in foreign currency translation gains (losses), net of deferred tax of $0 and $867 in 2014 and 2013, respectively		41			(1,370	)
Other comprehensive income (loss)	$	(10,597	)	$	4,176
Comprehensive income (loss)	$	20,628		$	25,462
	Nine Months Ended September 30,
	2014			2013
Net income	$	76,054		$	49,133
Other comprehensive income:
Change in net unrealized gains (losses) on investments:
Unrealized gains (losses) on investments arising during the period, net of deferred tax of $4,951 and $14,988 in 2014 and 2013, respectively	$	9,576		$	(27,780	)
Reclassification adjustment for net realized (gains) losses included in net income net of deferred tax of $3,088 and $3,442 in 2014 and 2013, respectively		5,736			(6,392	)
Change in net unrealized gains (losses) on investments	$	15,312		$	(34,172	)
Change in other-than-temporary impairments:
Non credit other-than-temporary impairments arising during the period, net of deferred tax of $55 and $134 in 2014 and 2013, respectively	$	103		$	248
Reclassification adjustment for non credit other-than-temporary impairment losses recognized in net income net of deferred tax of $0 in 2014 and 2013, respectively		—			—
Change in other-than-temporary impairments	$	103		$	248
Change in foreign currency translation gains (losses), net of tax of $2,800 and $108 in 2014 and 2013, respectively		(4,956	)		209
Other comprehensive income	$	10,459		$	(33,715	)
Comprehensive income	$	86,513		$	15,418

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)

(In thousands, except share amounts)

					Additional Paid-in Capital										Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Common Stock							Treasury Stock					Retained Earnings
	Shares		Amount					Shares		Amount
Balance, December 31, 2013		17,709,876	$	1,770	$	335,546			3,511,380	$	(155,801	)	$	692,337	$	28,360		$	902,212
Net income														76,054		—			76,054
Changes in other comprehensive income:
Change in net unrealized gain (loss) on investments		—		—		—			—		—			—		15,312			15,312
Change in net non-credit other-than-temporary impairment losses		—		—		—			—		—			—		103			103
Change in foreign currency translation gain (loss)		—		—		—			—		—			—		(4,956	)		(4,956	)
Total other comprehensive income		—		—		—			—		—			—		10,459			10,459
Shares issued under stock plan		68,255		7		(589	)		—		—			—		—			(582	)
Share-based compensation		—		—		8,450			—		—			—		—			8,450
Balance, September 30, 2014		17,778,131	$	1,777	$	343,407			3,511,380	$	(155,801	)	$	768,391	$	38,819		$	996,593

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,
	2014			2013
Operating activities:
Net income	$	76,054		$	49,133
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation & amortization		3,544			3,076
Deferred income taxes		8,500			(1,256	)
Net realized (gains) losses		(12,024	)		(7,171	)
Net other-than-temporary losses recognized in earnings		—			1,863
Changes in assets and liabilities:
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses		(39,087	)		88,177
Reserves for losses and loss adjustment expenses		123,903			(46,328	)
Prepaid reinsurance premiums		11,089			(32,420	)
Unearned premiums		58,920			73,829
Premiums receivable		(38,028	)		(35,396	)
Deferred policy acquisition costs		(9,261	)		(2,166	)
Accrued investment income		(1,209	)		(1,159	)
Reinsurance balances payable		(9,941	)		14,750
Current income tax payable, net		7,080			3,316
Other		1,841			21,748
Net cash provided by (used in) operating activities	$	181,381		$	129,996
Investing activities:
Fixed maturities
Redemptions and maturities	$	162,931		$	143,591
Sales		313,218			637,176
Purchases		(718,693	)		(713,450	)
Equity securities
Sales		54,828			11,439
Purchases		(65,691	)		(53,919	)
Change in payable for securities		24,231			(64,633	)
Net change in short-term investments		40,610			801
Purchase of property and equipment		(5,522	)		(7,771	)
Net cash provided by (used in) investing activities	$	(194,088	)	$	(46,766	)
Financing activities:
Proceeds of stock issued from employee stock purchase plan	$	453		$	821
Proceeds of stock issued from exercise of stock options		153			1,126
Net cash provided by (used in) financing activities	$	606		$	1,947
Increase (decrease) in cash	$	(12,101	)	$	85,177
Cash at beginning of year		86,509			45,336
Cash at end of period	$	74,408		$	130,513
Supplemental cash information:
Income taxes paid, net	$	19,864		$	20,425
Interest paid	$	8,084		$	4,025
Issuance of stock to directors	$	438		$	400

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. Organization & Summary of Significant 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 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 2013 Annual Report on Form 10-K. Certain amounts for the prior year have been reclassified to conform to the current year’s presentation.

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

Revenue is primarily comprised of premiums and investment income. The Company derives premiums primarily from business written by wholly-owned underwriting management companies which produce, manage, and service insurance and reinsurance business. The Company’s products are distributed through multiple channels, utilizing global, national and regional retail and wholesale insurance brokers.

Navigators Management Company (“NMC”) and Navigators Management (UK) Limited (“NMUKL”) manage and service insurance and reinsurance for Navigators Insurance Company (“NIC”), which includes a United Kingdom Branch (“U.K. Branch”), and Navigators Specialty Insurance Company (“NSIC”), which underwrites specialty and professional liability insurance on an excess and surplus lines basis. All of the insurance business written by NSIC is fully reinsured by NIC pursuant to a 100% quota share reinsurance agreement.

Navigators Underwriting Agency Ltd. (“NUAL”), a Lloyd’s of London (“Lloyd’s”) underwriting agency manages Lloyd’s Syndicate 1221 (“Syndicate 1221”). Through participation in Syndicate 1221, the Company primarily underwrites marine and related lines of business along with offshore energy, construction coverage for onshore energy businesses, specialty assumed reinsurance, and professional liability insurance. The Company controlled 100% of Syndicate 1221’s stamp capacity for the 2014, 2013, and 2012 underwriting years through a wholly-owned subsidiary, Navigators Corporate Underwriters Ltd. (“NCUL”), which is referred to as a corporate name in the Lloyd’s market. In addition, the Company has established underwriting agencies in Antwerp, Belgium, Stockholm, Sweden, and Copenhagen, Denmark, as well as branches of its UK underwriting agency in Milan, Italy, Rotterdam, The Netherlands, and Paris, France, which underwrite risks pursuant to binding authorities with NUAL into Syndicate 1221.

Note 2. 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 by division and aggregated into each underwriting segment, 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, interest expense and the related tax effect.

8

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

The Lloyd’s Operations are primarily engaged in underwriting marine and related lines of business along with offshore energy, construction coverages for onshore energy business, specialty assumed reinsurance, and professional liability insurance at Lloyd’s through Syndicate 1221.

The Company evaluates the performance of each underwriting segment based on its underwriting and GAAP results. 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 loss adjustment expenses (“LAE”), commission expenses, other operating expenses and other underwriting income (expense). The combined ratio is derived by dividing the sum of net losses and LAE, commission expenses, other operating expenses and other underwriting 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. 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.

Financial data by segment for the three and nine months ended September 30, 2014 and 2013 were as follows:

	Three Months Ended September 30, 2014
	Insurance			Lloyd’s
In thousands	Companies			Operations			Corporate (1)			Total
Gross written premiums	$	242,482		$	84,987		$	—		$	327,469
Net written premiums		172,484			55,933			—			228,417
Net earned premiums		182,051			63,316			—			245,367
Net losses and loss adjustment expenses		(108,425	)		(26,859	)		—			(135,284	)
Commission expenses		(22,705	)		(11,788	)		550			(33,943	)
Other operating expenses		(35,161	)		(15,227	)		—			(50,388	)
Other underwriting income (expense)		656			1			(550	)		107
Underwriting profit (loss)	$	16,416		$	9,443			—		$	25,859
Net investment income		13,971			1,849			19			15,839
Net realized gains (losses)		6,673			45			—			6,718
Interest expense		—			—			(3,388	)		(3,388	)
Other income		(1,100	)		2,329			—			1,229
Income (loss) before income taxes	$	35,960		$	13,666		$	(3,369	)	$	46,257
Income tax expense (benefit)		11,489			4,787			(1,244	)		15,032
Net income (loss)	$	24,471		$	8,879		$	(2,125	)	$	31,225
Identifiable assets	$	3,332,172		$	969,834		$	161,307		$	4,463,313
Losses and loss adjustment expenses ratio		59.6	%		42.4	%					55.1	%
Commission expense ratio		12.5	%		18.6	%					13.8	%
Other operating expense ratio(2)		18.9	%		24.1	%					20.6	%
Combined ratio		91.0	%		85.1	%					89.5	%

(1) - Includes Corporate segment intercompany eliminations.

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

9

	Three Months Ended September 30, 2013
	Insurance			Lloyd’s
In thousands	Companies			Operations			Corporate (1)			Total
Gross written premiums	$	227,609		$	84,467		$	—		$	312,076
Net written premiums		149,290			47,266			—			196,556
Net earned premiums		162,962			50,933			—			213,895
Net losses and loss adjustment expenses		(95,315	)		(29,771	)		—			(125,086	)
Commission expenses		(20,039	)		(8,289	)		643			(27,685	)
Other operating expenses		(28,510	)		(10,546	)		—			(39,056	)
Other income (expense)		955			(522	)		(643	)		(210	)
Underwriting profit (loss)	$	20,053		$	1,805		$	—		$	21,858
Net investment income		12,285			1,807			2			14,094
Net realized gains (losses)		(1,890	)		(919	)		—			(2,809	)
Interest expense		—			—			(2,053	)		(2,053	)
Income (loss) before income taxes	$	30,448		$	2,693		$	(2,051	)	$	31,090
Income tax expense (benefit)		9,355			878			(429	)		9,804
Net income (loss)	$	21,093		$	1,815		$	(1,622	)	$	21,286
Identifiable assets	$	3,018,100		$	983,382		$	73,094		$	4,074,576
Losses and loss adjustment expenses ratio		58.5	%		58.5	%					58.5	%
Commission expense ratio		12.3	%		16.3	%					12.9	%
Other operating expense ratio(2)		16.9	%		21.7	%					18.4	%
Combined ratio		87.7	%		96.5	%					89.8	%

(1) - Includes Corporate segment intercompany eliminations.

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

10

		Nine Months Ended September 30, 2014
		Insurance			Lloyd’s
In thousands		Companies			Operations			Corporate (1)			Total
Gross written premiums		$	798,009		$	301,045		$	—		$	1,099,054
Net written premiums			580,476			191,655			—			772,131
Net earned premiums			526,347			175,376			—			701,723
Net losses and loss adjustment expenses			(323,354	)		(87,217	)		—			(410,571	)
Commission expenses			(62,436	)		(30,989	)		1,605			(91,820	)
Other operating expenses			(102,963	)		(42,563	)		—			(145,526	)
Other underwriting income (expense)			2,082			20			(1,605	)		497
Underwriting profit (loss)		$	39,676		$	14,627		$	—		$	54,303
Net investment income			42,553			5,488			56			48,097
Net realized gains (losses)			12,368			(344	)		—			12,024
Interest expense			—			—			(11,559	)		(11,559	)
Other income			(1,119	)		10,692			—			9,573
Income (loss) before income taxes		$	93,478		$	30,463		$	(11,503	)	$	112,438
Income tax expense (benefit)			29,650			10,753			(4,019	)		36,384
Net income (loss)		$	63,828		$	19,710		$	(7,484	)	$	76,054
Identifiable assets	��	$	3,332,172		$	969,834		$	161,307		$	4,463,313
Losses and loss adjustment expenses ratio			61.4	%		49.7	%					58.5	%
Commission expense ratio			11.9	%		17.7	%					13.1	%
Other operating expense ratio(2)			19.2	%		24.3	%					20.7	%
Combined ratio			92.5	%		91.7	%					92.3	%

(1) - Includes Corporate segment intercompany eliminations.

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

11

	Nine Months Ended September 30, 2013
	Insurance			Lloyd’s
In thousands	Companies			Operations			Corporate (1)			Total
Gross written premiums	$	757,802		$	279,624		$	—		$	1,037,426
Net written premiums		508,989			155,488			—			664,477
Net earned premiums		473,840			148,197			—			622,037
Net losses and loss adjustment expenses		(308,968	)		(78,608	)		—			(387,576	)
Commission expenses		(59,129	)		(25,245	)		1,743			(82,631	)
Other operating expenses		(87,682	)		(32,926	)		—			(120,608	)
Other income (expense)		2,303			(1,067	)		(1,743	)		(507	)
Underwriting profit (loss)	$	20,364		$	10,351		$	—		$	30,715
Net investment income		36,751			5,237			9			41,997
Net realized gains (losses)		6,001			(697	)		4			5,308
Interest expense		—			—			(6,156	)		(6,156	)
Income (loss) before income taxes	$	63,116		$	14,891		$	(6,143	)	$	71,864
Income tax expense (benefit)		19,554			5,120			(1,943	)		22,731
Net income (loss)	$	43,562		$	9,771		$	(4,200	)	$	49,133
Identifiable assets	$	3,018,100		$	983,382		$	73,094		$	4,074,576
Losses and loss adjustment expenses ratio		65.2	%		53.0	%					62.3	%
Commission expense ratio		12.5	%		17.0	%					13.3	%
Other operating expense ratio(2)		18.0	%		23.0	%					19.5	%
Combined ratio		95.7	%		93.0	%					95.1	%

(1) - Includes Corporate segment intercompany eliminations.

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

12

The following tables provide additional financial data by segment for the three and nine months ended September 30, 2014 and 2013:

	Three Months ended Sept. 30,							Nine Months ended Sept. 30,
In thousands	2014		2013		Change			2014		2013		Change
Gross Written Premiums:
Insurance Companies:
Marine	$	38,726	$	38,912		-0.5	%	$	139,078	$	132,836		4.7	%
Property Casualty		174,868		156,228		11.9	%		572,821		527,287		8.6	%
Professional Liability		28,888		32,469		-11.0	%		86,110		97,679		-11.8	%
		242,482		227,609		6.5	%		798,009		757,802		5.3	%
Lloyd’s Operations:
Marine		38,568		36,009		7.1	%		147,530		135,546		8.8	%
Property Casualty		31,172		35,869		-13.1	%		101,413		102,144		-0.7	%
Professional Liability		15,247		12,589		21.1	%		52,102		41,934		24.2	%
		84,987		84,467		0.6	%		301,045		279,624		7.7	%
Total	$	327,469	$	312,076		4.9	%	$	1,099,054	$	1,037,426		5.9	%
	Three Months ended Sept. 30,							Nine Months ended Sept. 30,
	2014		2013		Change			2014		2013		Change
Net Written Premiums:
Insurance Companies:
Marine	$	24,166	$	26,437		-8.6	%	$	100,647	$	94,944		6.0	%
Property Casualty		126,665		97,553		29.8	%		418,659		338,215		23.8	%
Professional Liability		21,653		25,300		-14.4	%		61,170		75,830		-19.3	%
		172,484		149,290		15.5	%		580,476		508,989		14.0	%
Lloyd’s Operations:
Marine		32,245		26,795		20.3	%		113,938		100,413		13.5	%
Property Casualty		13,758		13,761		0.0	%		44,684		33,254		34.4	%
Professional Liability		9,930		6,710		48.0	%		33,033		21,821		51.4	%
		55,933		47,266		18.3	%		191,655		155,488		23.3	%
Total	$	228,417	$	196,556		16.2	%	$	772,131	$	664,477		16.2	%
	Three Months ended Sept. 30,							Nine Months ended Sept. 30,
	2014		2013		Change			2014		2013		Change
Net Earned Premiums:
Insurance Companies:
Marine	$	31,123	$	31,490		-1.2	%	$	95,635	$	100,013		-4.4	%
Property Casualty		129,547		105,759		22.5	%		365,068		297,954		22.5	%
Professional Liability		21,381		25,713		-16.8	%		65,644		75,873		-13.5	%
		182,051		162,962		11.7	%		526,347		473,840		11.1	%
Lloyd’s Operations:
Marine		39,368		34,264		14.9	%		110,468		102,932		7.3	%
Property Casualty		12,980		10,472		23.9	%		37,401		26,913		39.0	%
Professional Liability		10,968		6,197		77.0	%		27,507		18,352		49.9	%
		63,316		50,933		24.3	%		175,376		148,197		18.3	%
Total	$	245,367	$	213,895		14.7	%	$	701,723	$	622,037		12.8	%

The Insurance Companies net earned premiums include $8.9 million and $13.9 million of net earned premiums from the U.K. Branch for the three months ended September 30, 2014 and 2013, respectively, and $31.0 million and $36.7 million of net earned premiums from the U.K. Branch for the nine months ended September 30, 2014 and 2013, respectively.

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Note 3. Reinsurance Ceded

The Company’s ceded earned premiums were $107.6 million and $114.2 million for the three months ended September 30, 2014 and 2013 and $336.7 million and $340.5 million for the nine months ended September 30, 2014 and 2013, respectively.

The Company’s ceded incurred losses were $58.7 million and $(37.0) million for the three months ended September 30, 2014 and 2013 and $170.4 million and $94.1 million for the nine months ended September 30, 2014 and 2013, respectively.

The following table lists the Company’s 20 largest reinsurers measured by the amount of reinsurance recoverable for ceded losses, LAE and ceded unearned premium (constituting 76.6% of the total recoverable), together with the reinsurance recoverable and collateral as of September 30, 2014, and the reinsurers’ ratings from A.M. Best Company (“A.M. Best”) or Standard & Poor’s (“S&P”):

	Reinsurance Recoverables
	Unearned		Paid/Unpaid				Collateral
In thousands	Premium		Losses		Total(1)		Held(2)		A.M. Best	S&P
National Indemnity Company		32,242	$	121,079	$	153,321	$	25,254	A++	AA+
Everest Reinsurance Company		21,240		75,201		96,441		7,014	A+	A+
Transatlantic Reinsurance Company		13,544		77,611		91,155		4,616	A	A+
Swiss Reinsurance America Corporation		19,776		63,823		83,599		13,336	A+	AA-
Munich Reinsurance America Inc.		9,810		65,695		75,505		6,074	A+	AA-
Allied World Reinsurance		9,804		36,819		46,623		1,834	A	A
Lloyd’s Syndicate #2003		3,869		39,976		43,845		5,030	A	A+
Partner Reinsurance Europe		10,123		29,508		39,631		19,146	A+	A+
Employers Mutual Casualty Company		11,848		20,187		32,035		11,298	A	NR
Scor Global P&C SE		10,030		19,711		29,741		7,483	A	A+
Tower Insurance Company		—		20,923		20,923		2,408	B-	NR
Ironshore Indemnity Inc.		7,242		13,313		20,555		9,793	A	NR
Ace Property and Casualty Insurance Company		10,900		9,562		20,462		2,717	A++	AA
Atlantic Specialty Insurance		3,085		16,714		19,799		—	A	A-
QBE Reinsurance Corp		3,466		15,322		18,788		—	A	A+
Aspen Insurance UK Ltd.		8,100		9,475		17,575		4,944	A	A
Validus Reinsurance Ltd.		2,164		14,887		17,051		13,456	A	A
Odyssey American Reinsurance Corporation		3,106		12,580		15,686		1,916	A	A-
Endurance Reinsurance Corporation		5,529		9,625		15,154		1,814	A	A
Lloyd’s Syndicate #4000		19		14,579		14,598		98	A	A+
Top 20 Reinsurers	$	185,897	$	686,590	$	872,487	$	138,231
Others		51,197		213,319		264,516		78,930
Total	$	237,094	$	899,909	$	1,137,003	$	217,161

(1) - Net of reserve for uncollectible reinsurance of approximately $11.3 million.

(2) - Collateral of $217.2 million consists of $157.9 million in ceded balances payable, $53.4 million in letters of credit, and $5.9 million of other balances held by the Company’s Insurance Companies and Lloyd’s Operations.

Note 4. 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 three types of awards. The restricted stock units issued in 2014 and after will cliff vest on the third anniversary of the date of the grant with 100% dependent on the rate of cumulative annual growth in tangible book value for the three years immediately prior to the vesting date, with actual shares that vest ranging between 150% to 50% of that portion of the original award. The restricted stock units issued between 2011 - 2013 will cliff vest on the third anniversary of the date of grant, 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. The 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, with 100% 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.

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The amounts charged to expense for stock-based compensation for the three and nine months ended September 30, 2014 and 2013 are presented in the following table:

	Three Months Ended Sept. 30,				Nine Months Ended Sept. 30,
In thousands	2014		2013		2014		2013
Restricted stock units	$	4,081	$	17	$	8,450	$	3,491
Directors restricted stock grants(1)		100		103		300		309
Employee stock purchase plan		86		55		160		102
Total stock based compensation	$	4,267	$	175	$	8,910	$	3,902

(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 .

Note 5. 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 £215 million for the 2014 underwriting year compared to £195 million for the 2013 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 (Lloyd’s standard). 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 2014, 2013, and 2012 underwriting years through its wholly-owned Lloyd’s corporate member.

During the first quarter, the Syndicate revised its foreign exchange accounting methodology from reporting the Syndicate’s financial position and results using three functional currencies (GBP, USD and CAD) to one functional currency (USD). The USD was chosen as the single functional currency as the majority of the Syndicate’s insurance business has been and continues to be transacted in USD. This cumulative change in re-measurement has resulted in an immaterial correction of $10.0 million ($6.6 million, after-tax) reducing Accumulated Other Comprehensive Income in the consolidated balance sheet, offset by a gain in Other Income in the consolidated statement of income. The impact of the correction is not material to the previously issued interim and annual financial statements for 2013 and 2012.

The Company provides letters of credit and posts cash to Lloyd’s to support its participation in Syndicate 1221’s stamp capacity. 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. Refer to Note 10,Credit Facilities, for additional information.

Note 6. 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 United Kingdom (“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 receives U.K. tax credits in the 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 were not accrued on the earnings of the Company’s foreign agencies in previous years as these earnings were subject to the active financing exception and were not includable as Subpart F income. Certain provisions of Subpart F expired for years after December 31, 2013; therefore, since January 1, 2014 these earnings have been taxable in the U.S. at the 35% tax rate. The impact of this change has been calculated and properly considered for the period ended September 30, 2014.

15

The Company has not provided for U.S. income taxes on approximately $21.2 million of undistributed earnings of its non-U.S. subsidiaries since it is intended that those earnings will be reinvested indefinitely in those subsidiaries. If a future determination is made that those earnings no longer are intended to be reinvested indefinitely in those subsidiaries, U.S. income taxes of approximately $2.2 million, assuming all foreign tax credits are realized, would be included in the tax provision at that time and would be payable if those earnings were distributed to the Company.

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, 2014 and 2013. The Company did not incur any interest or penalties related to unrecognized tax benefits for the three and nine months ended September 30, 2014 and 2013. The Company currently is under examination by the Internal Revenue Service for taxable years 2010, 2011, and 2012 and generally is 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 $15.0 million and $36.4 million for the three and nine months ended September 30, 2014 compared to $9.8 million and $22.7 million for the same period in 2013, resulting in an effective tax rate of 32.5% and 32.4% for the three and nine months ended September 30, 2014 and 31.5% and 31.6% for the comparable periods in 2013.

The Company had state and local deferred tax assets amounting to potential future tax benefits of $0.4 million and $0.6 million as of September 30, 2014 and December 31, 2013, respectively. Included in the deferred tax assets are state and local net operating loss carry-forwards of $0.1 million as of September 30, 2014 and December 31, 2013. 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, 2014 expire from 2024 to 2032.

Note 7. Senior Notes due October 15, 2023

On October 4, 2013, the Company completed a public debt offering of $265 million principal amount of 5.75% Senior Notes (“5.75% Senior Notes”) and received net proceeds of $263 million. The principal amount of the Senior Notes is payable in one single installment on October 15, 2023. The Company used a portion of the proceeds of the 5.75% Senior Notes for the redemption of the 7.0% Senior Notes due May 1, 2016 (“7.0% Senior Notes”). The Company incurred a charge of $17.9 million for the payment of call premium in connection with the redemption of the 7.0% Senior Notes. The 5.75% Senior Notes liability as of September 30, 2014 and December 31, 2013 was $263.4 million and $263.3 million, respectively. The unamortized discount as of September 30, 2014 was $1.6 million.

The fair value of the 5.75% Senior Notes as of September 30, 2014 and December 31, 2013 was $290.4 million and $277.6 million, respectively. 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 5.75% Senior Notes each April 15 and October 15. The effective interest rate related to the 5.75% Senior Notes, based on the proceeds net of discount and all issuance costs, is approximately 5.86%. Interest expense on the 5.75% Senior Notes totaled $3.4 million and $11.6 million for the three and nine months ended September 30, 2014, respectively. Interest expense on the 7.0% Senior Notes for the three and nine months ended September 30, 2013 was approximately $2.1 million and $6.1 million, respectively.

16

The interest rate payable on the 5.75% Senior Notes is subject to a tiered adjustment based on defined changes in the Company’s debt ratings. The Company may redeem the 5.75% Senior Notes in whole at any time or in part from time to time at a make-whole redemption price. The 5.75% Senior Notes are the Company’s only senior unsecured obligation and will rank equally with future senior unsecured indebtedness.

The terms of the 5.75% Senior Notes contain various restrictive business and financial covenants, including a restriction on indebtedness, and other restrictions 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, 2014, the Company was in compliance with all such covenants.

Note 8. Commitments and Contingencies

The State of Connecticut (“the State”) awarded the Company up to $11.5 million ($8.0 million in loans and $3.5 million in grants) as an incentive to move its corporate headquarters to Stamford, Connecticut. The loan is non-interest bearing, has a term of 10 years and is subject to forgiveness under conditions of the agreement with the State. The amount of the assistance to be received is dependent on the Company reaching certain milestones for creation of new jobs over a five-year period, and the funds are to be used to offset certain equipment purchases, facility costs, training of employees and other eligible project-related costs. The Company completed the move to Stamford in September 2013 and received $7.5 million for reaching the first job milestone. Earning of the grant and forgiveness of the loan is subject to certain conditions, including maintaining the required jobs for an extended period of time. As of September 30, 2014, the length of time commitment has not been met. However, the Company expects to meet all the conditions to keep the amount of assistance received to date, and accordingly, is recognizing the assistance received over the period in which the Company recognizes the expenses for which the assistance is intended to compensate as a reduction of such expenses. The Company recognized $0.3 million and $0.8 million of the assistance for the three and nine months ended September 30, 2014, respectively. As of September 30, 2014 and December 31, 2013, the Company has deferred revenue of $6.4 million and $7.2 million, respectively, which is included in other liabilities.

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 expense 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. 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.

Note 9. Investments

The following tables set forth the Company’s cash and investments as of September 30, 2014 and December 31, 2013. The table below includes other-than-temporarily impaired (“OTTI”) securities recognized within accumulated other comprehensive income (“AOCI”).

17

	September 30, 2014
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized (Losses)			Cost or Amortized Cost
Fixed maturities:
U.S. Treasury bonds, agency bonds and foreign government bonds	$	414,348	$	2,712	$	(6,215	)	$	417,851
States, municipalities and political subdivisions		550,327		16,585		(1,360	)		535,102
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		296,198		7,201		(2,363	)		291,360
Residential mortgage obligations		34,738		1,238		(133	)		33,633
Asset-backed securities		195,180		414		(519	)		195,285
Commercial mortgage-backed securities		210,712		6,244		(588	)		205,056
Subtotal	$	736,828	$	15,097	$	(3,603	)	$	725,334
Corporate bonds		608,692		11,945		(2,350	)		599,097
Total fixed maturities	$	2,310,195	$	46,339	$	(13,528	)	$	2,277,384
Equity securities - common stocks		113,250		26,251		(772	)		87,771
Equity securities - Preferred stocks		50,223		1,481		(249	)		48,991
Short-term investments		255,445		11		—			255,434
Cash		74,408		—		—			74,408
Total	$	2,803,521	$	74,082	$	(14,549	)	$	2,743,988

	December 31, 2013
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized (Losses)			Cost or Amortized Cost
Fixed maturities:
U.S. Treasury bonds, agency bonds and foreign government bonds	$	441,685	$	2,854	$	(8,855	)	$	447,686
States, municipalities and political subdivisions		460,422		9,298		(13,651	)		464,775
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		301,274		6,779		(6,016	)		300,511
Residential mortgage obligations		41,755		1,212		(161	)		40,704
Asset-backed securities		125,133		653		(480	)		124,960
Commercial mortgage-backed securities		172,750		7,656		(374	)		165,468
Subtotal	$	640,912	$	16,300	$	(7,031	)	$	631,643
Corporate bonds		504,854		15,402		(3,443	)		492,895
Total fixed maturities	$	2,047,873	$	43,854	$	(32,980	)	$	2,036,999
Equity securities - common stocks		143,954		25,700		(550	)		118,804
Short-term investments		296,250		—		—			296,250
Cash		86,509		—		—			86,509
Total	$	2,574,586	$	69,554	$	(33,530	)	$	2,538,562

As of September 30, 2014 and December 31, 2013, fixed maturities for which non-credit OTTI was previously recognized and included in other accumulated comprehensive income are now in an unrealized gains position of $0.7 million and $0.5 million, respectively.

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 fixed maturities in unrealized loss positions that are not other-than-temporarily impaired before recovery. For structured securities, 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 the Company will not be required to sell these securities before the recovery of the amortized cost basis. 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. 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.

18

The contractual maturity dates for fixed maturities categorized by the number of years until maturity as of September 30, 2014 are shown in the following table:

	September 30, 2014
	Fair		Amortized
In thousands	Value		Cost
Due in one year or less	$	57,455	$	57,822
Due after one year through five years		768,839		761,771
Due after five years through ten years		376,070		370,373
Due after ten years		371,003		362,084
Mortgage- and asset-backed securities		736,828		725,334
Total	$	2,310,195	$	2,277,384

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 4.5 years.

The following table shows the amount and percentage of the Company’s fixed maturities as of September 30, 2014 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.

	September 30, 2014
In thousands	Rating	Fair Value		Percent of Total
Rating description:
Extremely strong	AAA	$	446,347		19	%
Very strong	AA		1,067,305		46	%
Strong	A		623,183		27	%
Adequate	BBB		159,354		7	%
Speculative	BB & Below		13,534		1	%
Not rated	NR		472		0	%
Total	AA	$	2,310,195		100	%

The following table summarizes all securities in a gross unrealized loss position as of September 30, 2014 and December 31, 2013, 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.

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	September 30, 2014						December 31, 2013
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. Treasury bonds, agency bonds, and foreign government bonds
0-6 months		19	$	110,580	$	608		27	$	136,360	$	1,096
7-12 months		9		21,694		727		26		149,370		7,759
> 12 months		36		131,073		4,880		—		—		—
Subtotal		64	$	263,347	$	6,215		53	$	285,730	$	8,855
States, municipalities and political subdivisions
0-6 months		18	$	31,874	$	189		28	$	40,132	$	297
7-12 months		1		3,137		78		104		205,152		12,100
> 12 months		39		85,851		1,093		6		12,357		1,254
Subtotal		58	$	120,862	$	1,360		138	$	257,641	$	13,651
Agency mortgage-backed securities
0-6 months		5	$	42,373	$	230		39	$	39,458	$	434
7-12 months		2		1,636		12		64		77,860		3,768
> 12 months		61		74,476		2,121		9		22,784		1,814
Subtotal		68	$	118,485	$	2,363		112	$	140,102	$	6,016
Residential mortgage obligations
0-6 months		6	$	5,295	$	43		3	$	431	$	2
7-12 months		—		—		—		7		950		29
> 12 months		14		1,816		90		15		2,467		130
Subtotal		20	$	7,111	$	133		25	$	3,848	$	161
Asset-backed securities
0-6 months		16	$	93,871	$	200		14	$	75,887	$	479
7-12 months		3		9,930		28		1		203		1
> 12 months		2		31,663		291		—		—		—
Subtotal		21	$	135,464	$	519		15	$	76,090	$	480
Commercial mortgage-backed securities
0-6 months		9	$	48,884	$	408		4	$	6,712	$	31
7-12 months		—		—		—		2		15,098		322
> 12 months		4		15,539		180		4		774		21
Subtotal		13	$	64,423	$	588		10	$	22,584	$	374
Corporate bonds
0-6 months		59	$	218,185	$	1,016		34	$	93,591	$	717
7-12 months		6		8,006		124		18		55,021		2,726
> 12 months		11		36,689		1,210		—		—		—
Subtotal		76	$	262,880	$	2,350		52	$	148,612	$	3,443
Total fixed maturities		320	$	972,572	$	13,528		405	$	934,607	$	32,980
Equity securities - common stocks
0-6 months		5	$	15,496	$	309		5	$	7,387	$	422
7-12 months		1		3,940		433		2		3,538		128
> 12 months		1		214		30		—		—		—
Total common Stocks		7	$	19,650	$	772		7	$	10,925	$	550
Equity securities - preferred stocks
0-6 months		19	$	21,383	$	249		—	$	—	$	—
7-12 months		—		—		—		—		—		—
> 12 months		—		—		—		—		—		—
Total Preferred Stocks		19	$	21,383	$	249		—	$	—	$	—

As of September 30, 2014 and December 31, 2013, the largest unrealized loss by a non-government backed issuer in the investment portfolio was $0.6 million and $1.1 million, respectively.

The Company analyzes impaired securities quarterly to determine if any are other-than-temporary. The above securities with unrealized losses have been determined to be temporarily impaired based on the evaluation described below.

20

For fixed maturities, 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 AOCI.

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.

The Company’s ability to hold 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 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,
	2014				2013				2014					2013
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		—	$	—		1	$	1,821		—	$	—			1	$	1,821
Commercial mortgage-backed securities		—		—		—		—		—		—			—		—
Residential mortgage-backed securities		31		41		—		—		31		(158	)		—		—
Asset-backed securities		—		—		—		—		—		—			—		—
Equities		—		—		—		—		—		—			2		42
Total		31	$	41		1	$	1,821		31	$	(158	)		3	$	1,863
Less: Portion of loss in accumulated other comprehensive income (loss):
Corporate and other bonds			$	—			$	—			$	—				$	—
Commercial mortgage-backed securities				—				—				—					—
Residential mortgage-backed securities				41				—				(158	)				—
Asset-backed securities				—				—				—					—
Equities				—				—				—					—
Total			$	41			$	—			$	(158	)			$	—
Impairment losses recognized in earnings:
Corporate and other bonds			$	—			$	1,821			$	—				$	1,821
Commercial mortgage-backed securities				—				—				—					—
Residential mortgage-backed securities				—				—				—					—
Asset-backed securities				—				—				—					—
Equities				—				—				—					42
Total			$	—			$	1,821			$	—				$	1,863

The following table summarizes the cumulative amounts related to the Company’s credit loss portion of the OTTI losses on fixed maturities for the three and nine months ended September 30, 2014 and 2013. 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 AOCI.

	Three Months Ended September 30,					Nine Months Ended September 30,
In thousands	2014			2013		2014			2013
Beginning balance	$	4,183		$	2,362	$	4,183		$	2,362
Additions for credit loss impairments recognized in the current period on securities not previously impaired		—			1,821		—			1,821
Additions for credit loss impairments recognized in the current period on securities previously impaired		—			—		—			—
Reductions for credit loss impairments previously recognized on securities sold during the period		(1,457	)		—		(1,457	)		—
Ending balance	$	2,726		$	4,183	$	2,726		$	4,183

As of September 30, 2014, there were no investments with a fair value of less than 80% of amortized cost.

22

The contractual maturity dates for fixed maturities categorized by the number of years until maturity, with a gross unrealized loss as of September 30, 2014 is presented in the following table:

	September 30, 2014
	Gross Unrealized Losses					Fair Value
In thousands	Amount		Percent of Total			Amount		Percent of Total
Due in one year or less	$	836		6	%	$	11,737		1	%
Due after one year through five years		4,374		32	%		370,199		38	%
Due after five years through ten years		3,723		28	%		162,429		17	%
Due after ten years		992		7	%		102,724		11	%
Mortgage- and asset-backed securities		3,603		27	%		325,483		33	%
Total	$	13,528		100	%	$	972,572		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	2014			2013			2014			2013
Fixed maturities	$	14,401		$	13,399		$	42,540		$	40,142
Equity securities		1,956			1,315			7,160			3,603
Short-term investments		225			187			686			575
Total investment income	$	16,582		$	14,901		$	50,386		$	44,320
Investment expenses		(743	)		(807	)		(2,289	)		(2,323	)
Net investment income	$	15,839		$	14,094		$	48,097		$	41,997

The change in net unrealized gains and losses, inclusive of the change in the non-credit portion of other-than-temporary impairment losses, consisted of:

	Nine Months Ended September 30,
In thousands	2014		2013
Fixed maturities	$	21,948	$	(63,771	)
Equity securities		1,561		11,551
Gross unrealized gains (losses)	$	23,509	$	(52,220	)
Deferred income tax		8,094		(18,296	)
Change in net unrealized gains (losses), net	$	15,415	$	(33,924	)

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	2014			2013			2014			2013
Fixed maturities:
Gains	$	3,702		$	1,099		$	8,682		$	6,035
Losses		(1,645	)		(2,087	)		(3,752	)		(2,470	)
Fixed maturities, net	$	2,057		$	(988	)	$	4,930		$	3,565
Equity securities:
Gains	$	6,109		$	—		$	9,445		$	3,733
Losses		(1,448	)		—			(2,351	)		(127	)
Equity securities, net	$	4,661		$	—		$	7,094		$	3,606
Net realized gains (losses)	$	6,718		$	(988	)	$	12,024		$	7,171

23

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, 2014 and December 31, 2013:

	September 30, 2014
In thousands	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. Treasury bonds, agency bonds and foreign government bonds	$	177,933	$	236,415	$	—	$	414,348
States, municipalities and political subdivisions		—		550,327		—		550,327
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		—		296,198		—		296,198
Residential mortgage obligations		—		34,738		—		34,738
Asset-backed securities		—		195,180		—		195,180
Commercial mortgage-backed securities		—		210,712		—		210,712
Subtotal	$	—	$	736,828	$	—	$	736,828
Corporate bonds		—		608,692		—		608,692
Total fixed maturities	$	177,933	$	2,132,262	$	—	$	2,310,195
Equity securities - common stocks		113,250		—		—		113,250
Equity securities - preferred stocks		—		50,223		—		50,223
Total	$	291,183	$	2,182,485	$	—	$	2,473,668
	December 31, 2013
In thousands	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. Treasury bonds, agency bonds and foreign government bonds	$	242,379	$	199,306	$	—	$	441,685
States, municipalities and political subdivisions		—		460,422		—		460,422
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		—		301,274		—		301,274
Residential mortgage obligations		—		41,755		—		41,755
Asset-backed securities		—		125,133		—		125,133
Commercial mortgage-backed securities		—		172,750		—		172,750
Subtotal	$	—	$	640,912	$	—	$	640,912
Corporate bonds		—		500,447		4,407		504,854
Total fixed maturities	$	242,379	$	1,801,087	$	4,407	$	2,047,873
Equity securities - common stocks		143,954		—		—		143,954
Total	$	386,333	$	1,801,087	$	4,407	$	2,191,827

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. U.S. Treasury securities are reported as Level 1 and are valued based on unadjusted quoted prices for identical assets in active markets that the Company can access.

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. U.S. government agency securities are reported as Level 2 and are valued using yields and spreads that are observable in active markets.

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 significant transfers between Level 1 and 2 as of September 30, 2014 and September 30, 2013.

24

As of September 30, 2014, the Company did not have any Level 3 assets.

The following tables present a reconciliation of the beginning and ending balances of all investments measured at fair value using Level 3 inputs during the nine months ended September 30, 2014.

	Nine Months Ended September 30, 2014
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:
Corporate Bonds	$	4,407	$	—	$	—	$	—	$	—	$	—	$	—	$	(4,407	)	$	—
Total assets	$	4,407	$	—	$	—	$	—	$	—	$	—	$	—	$	(4,407	)	$	—

During 2014 one security was transferred from Level 3 to Level 2 as the Company was able to obtain a valuation in which all significant inputs to the model are observable in active markets.

The following tables present a reconciliation of the beginning and ending balances of all investments measured at fair value using Level 3 inputs during the three and nine months ended September 30, 2013.

	Three Months Ended September 30, 2013
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:
Corporate Bonds	$	—	$	—	$	(15	)	$	4,661	$	(84	)	$	—	$	—	$	—	$	4,562
Total assets	$	—	$	—	$	(15	)	$	4,661	$	(84	)	$	—	$	—	$	—	$	4,562
	Nine Months Ended September 30, 2013
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:
Corporate Bonds	$	—	$	—	$	(15	)	$	4,661	$	(84	)	$	—	$	—	$	—	$	4,562
Total assets	$	—	$	—	$	(15	)	$	4,661	$	(84	)	$	—	$	—	$	—	$	4,562

The level 3 security was valued using unobservable inputs based on a proxy of a security of similar duration in which market quotations are available.

As of September 30, 2014 and December 31, 2013, the Company did not have a concentration of greater than 5% of invested assets in a single non-U.S. government-backed issuer.

Note 10. Credit Facilities

On November 22, 2012, 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 new credit facility amended and restated a $165 million letter of credit facility entered into by the parties on March 28, 2011. The credit facility, which is denominated in U.S. dollars, is utilized to fund participation in Syndicate 1221 through letters of credit for the 2014 and 2013 underwriting years, as well as open prior years. The letters of credit issued under the facility can be 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, 2014, the Company would be required to post additional collateral to secure the remaining letters of credit. As of September 30, 2014, letters of credit with an aggregate face amount of $150.8 million were outstanding under the credit facility and the Company had $1.0 million of cash collateral posted.

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, 2014.

25

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 A.M. Best 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.

On November 6, 2014 Navigators Underwriting Agency Limited entered into a second credit facility for $8.0 million Australian Dollars with Barclays Bank PLC to fund its participation in Syndicate 1221. The facility is used to fund Australian underwriting obligations for the 2014 and prior underwriting years. The facility contains customary covenants for facilities of this type, including a restriction on future encumbrances that are outside the ordinary course of business, and a requirement to maintain at least £75 million of Funds at Lloyd’s. As of November 6, 2014 the Company was in compliance with all covenants. Interest is payable on the facility at a rate of 2% per annum above a floating rate tied to the average mid-rate for Australian bills of exchange administered by the Australian Financial Markets Association. The facility may be cancelled by either party after providing written notice.

26

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 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 Annual Report are forward-looking statements. Whenever used in this report, the words “estimate”, “expect”, “believe”, “may”, “will”, “intend”, “continue” 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 you 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 statement, 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 2013 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”);

• changes in the laws, rules and regulations that apply to our U.S. Insurance Companies;

27

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

• 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;

• the determination of the impairments taken on our investments is subjective and could materially impact our financial position or results of operations;

• if we experience difficulties with our information technology and telecommunications systems and/or data security, our ability to conduct our business might be adversely affected;

• compliance by our Marine business with the legal and regulatory requirements to which they are subject is evolving and unpredictable. In addition, compliance with new sanctions and embargo laws could have a material adverse effect on our business; 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 and reinsurance company focusing on specialty products within the overall property and casualty market. Our largest product line and most long-standing area of specialization is ocean marine insurance. We have also developed other specialty insurance and reinsurance lines within our property casualty business, such as commercial primary and excess liability, as well as specialty niches in professional liability.

Our revenue is primarily comprised of premiums and investment income. We derive our premiums primarily from business written by wholly-owned underwriting management companies which produce, manage, and service insurance and reinsurance business. Our products are distributed through multiple channels, utilizing global, national and regional retail and wholesale insurance brokers.

Navigators Management Company (“NMC”) and Navigators Management (UK) Limited (“NMUKL”) manage and service insurance and reinsurance for Navigators Insurance Company (“NIC”), which includes a United Kingdom Branch (“U.K. Branch”), and Navigators Specialty Insurance Company (“NSIC”), which underwrites specialty and professional liability insurance on an excess and surplus lines basis. All of the insurance business written by NSIC is fully reinsured by NIC pursuant to a 100% quota share reinsurance agreement.

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Navigators Underwriting Agency Ltd. (“NUAL”), a Lloyd’s of London (“Lloyd’s”) underwriting agency manages Syndicate 1221. Through our participation in Syndicate 1221, we primarily underwrite marine and related lines of business along with offshore energy, construction coverage for onshore energy businesses, specialty assumed reinsurance, and professional liability insurance. We have controlled 100% of Syndicate 1221’s stamp capacity for the 2014, 2013, and 2012 underwriting years through our wholly-owned subsidiary, Navigators Corporate Underwriters Ltd. (“NCUL”), which is referred to as a corporate name in the Lloyd’s market. In addition, we have also established underwriting agencies in Antwerp, Belgium, Stockholm, Sweden, and Copenhagen, Denmark, as well as branches of our UK underwriting agency in Milan, Italy, Rotterdam, The Netherlands, and Paris, France, which underwrite risks pursuant to binding authorities with NUAL into Syndicate 1221.

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 by division and aggregated in to each underwriting segment, 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, interest expense and the related tax effect.

The Insurance Companies are primarily engaged in underwriting marine insurance and related lines of business, specialty insurance lines of business, including contractors general liability insurance, commercial umbrella and primary and excess casualty businesses, specialty assumed reinsurance business, and professional liability insurance. NSIC underwrites specialty and professional liability insurance on an excess and surplus lines basis.

The Lloyd’s Operations are primarily engaged in underwriting marine and related lines of business along with offshore energy, construction coverages for onshore energy business, specialty assumed reinsurance, and professional liability insurance at Lloyd’s through Syndicate 1221.

Catastrophe Risk Management

We have exposure to losses caused by hurricanes, earthquakes, and other natural and man-made catastrophic events. The frequency and severity of catastrophic events is unpredictable. The extent of covered 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 a hurricane on the east coast of the United States. As of September 30, 2014, we estimate that our probable maximum pre-tax gross and net loss exposure from such a hurricane event would be approximately $101.6 million and $38.5 million, respectively, including the cost of reinsurance reinstatement premiums (“RRPs”).

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 and location of the hurricane, 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.

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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.

CRITICAL ACCOUNTING ESTIMATES

The Company’s Annual Report on Form 10-K for the year ended December 31, 2013 discloses our critical accounting estimates (refer to Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates). Certain estimates are critical to the portrayal of our financial condition and results since they require management to establish estimates based on complex and subject judgments, including those related to our estimates of 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.

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, 2014 and 2013. Our financial results are presented on the basis of U.S. 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), net OTTI losses recognized in earnings, and after-tax foreign exchange gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity’s functional currency) and translation adjustments (translation of foreign currency denominated assets and liabilities into the entity’s functional currency). 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 underwriting income (expense). The combined ratio is derived by dividing the sum of net losses and LAE, commission expenses, other operating expenses and other underwriting 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, 2014 and 2013:

	Three Months Ended September 30,				Nine Months Ended September 30,				Percentage Change
In thousands, except for per share amounts	2014		2013		2014		2013		QTD			YTD
Gross written premiums	$	327,469	$	312,076	$	1,099,054	$	1,037,426		4.9	%		5.9	%
Net written premiums		228,417		196,556		772,131		664,477		16.2	%		16.2	%
Total revenues		269,260		224,970		771,914		668,835		19.7	%		15.4	%
Total expenses		223,003		193,880		659,476		596,971		15.0	%		10.5	%
Pre-tax income (loss)	$	46,257	$	31,090	$	112,438	$	71,864		48.8	%		56.5	%
Provision (benefit) for income taxes		15,032		9,804		36,384		22,731		53.3	%		60.1	%
Net income (loss)	$	31,225	$	21,286	$	76,054	$	49,133		46.7	%		54.8	%
Net income (loss) per common share:
Basic	$	2.19	$	1.50	$	5.34	$	3.48
Diluted	$	2.14	$	1.48	$	5.22	$	3.42

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Net income for the three months ended September 30, 2014 was $31.2 million or $2.14 per diluted share compared to $21.3 million or $1.48 per diluted share for the three months ended September 30, 2013. Operating earnings for the three months ended September 30, 2014 were $26.1 million or $1.79 per diluted share compared to $23.1 million or $1.60 per diluted share for the comparable period in 2013. The increase in our operating earnings was largely attributable to stronger underwriting results and to a lesser extent an increase in net investment income due to the growth in invested assets, partially offset by an increase in interest expense.

Net income for the nine months ended September 30, 2014 was $76.1 million or $5.22 per diluted share compared to $49.1 million or $3.42 per diluted share for the nine months ended September 30, 2013. Operating earnings for the nine months ended September 30, 2014 were $62.0 million or $4.25 per diluted share compared to $45.7 million or $3.18 per diluted share for the comparable period in 2013. The increase in our operating earnings was primarily attributable to stronger underwriting results and to a lesser extent an increase in net investment income due to the growth in invested assets, partially offset by an increase in interest expense.

The following table presents our operating earnings for the three and nine months ended September 30, 2014 and 2013:

	Three Months Ended September 30,					Nine Months Ended September 30,						Percentage Change
	2014			2013		2014			2013			QTD			YTD
Net income	$	31,225		$	21,286	$	76,054		$	49,133			46.7	%		54.8	%
Less: after-tax realized (gains) losses		(4,367	)		643		(7,816	)		(4,661	)		NM			67.7	%
Less: after-tax other (income) expense		(760	)		—		(6,222	)		—			NM			NM
Add: after-tax OTTI		—			1,183		—			1,211			NM			NM
Net operating earnings	$	26,098		$	23,112	$	62,016		$	45,683			12.9	%		35.8	%
Net operating earnings per common share:
Basic		1.83			1.63		4.35			3.24
Diluted		1.79			1.60		4.25			3.18

NM - Percentage change not meaningful

Our book value per share as of September 30, 2014 was $69.85, increasing 9.9% from $63.54 as of December 31, 2013. The growth in our book value per share is primarily driven by $76.1 million of net income for the nine months ended September 30, 2014, and to a lesser extent, a $15.4 million after-tax increase in unrealized gains on our investment portfolio in connection with our investment in longer dated fixed income securities. Our consolidated stockholders’ equity increased 10.5% to $996.6 million as of September 30, 2014 compared to $902.2 million as of December 31, 2013.

Cash flow from operations was $181.4 million for the nine months ended September 30, 2014 compared to $130.0 million for the comparable period in 2013. The increase in cash flow from operations for 2014 is largely attributable to a reduction in net losses paid as well as an increase in premium collection due to growth, offset by higher operating expenses resulting from increased headcount associated with growth in our business.

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The following table presents our consolidated underwriting results and provides a reconciliation of our underwriting profit or loss to GAAP net income or loss for the three and nine months ended September 30, 2014 and 2013:

	Three Months Ended September 30,						Nine Months Ended September 30,						Percentage Change
In thousands	2014			2013			2014			2013			QTD			YTD
Gross written premiums	$	327,469		$	312,076		$	1,099,054		$	1,037,426			4.9	%		5.9	%
Net written premiums		228,417			196,556			772,131			664,477			16.2	%		16.2	%
Net earned premiums		245,367			213,895			701,723			622,037			14.7	%		12.8	%
Net losses and loss adjustment expenses		(135,284	)		(125,086	)		(410,571	)		(387,576	)		8.2	%		5.9	%
Commission expenses		(33,943	)		(27,685	)		(91,820	)		(82,631	)		22.6	%		11.1	%
Other operating expenses		(50,388	)		(39,056	)		(145,526	)		(120,608	)		29.0	%		20.7	%
Other underwriting income (expenses)		107			(210	)		497			(507	)		NM			NM
Underwriting profit (loss)	$	25,859		$	21,858		$	54,303		$	30,715			18.3	%		76.8	%
Net investment income		15,839			14,094			48,097			41,997			12.4	%		14.5	%
Net other-than-temporary impairment losses recognized in earnings		—			(1,821	)		—			(1,863	)		NM			NM
Net realized gains (losses)		6,718			(988	)		12,024			7,171			NM			67.7	%
Interest expense		(3,388	)		(2,053	)		(11,559	)		(6,156	)		65.0	%		87.8	%
Other income		1,229			—			9,573			—			NM			NM
Income (loss) before income taxes	$	46,257		$	31,090		$	112,438		$	71,864			48.8	%		56.5	%
Income tax expense (benefit)		15,032			9,804			36,384			22,731			53.3	%		60.1	%
Net income (loss)	$	31,225		$	21,286		$	76,054		$	49,133			46.7	%		54.8	%
Losses and loss adjustment expenses ratio		55.1	%		58.5	%		58.5	%		62.3	%
Commission expense ratio		13.8	%		12.9	%		13.1	%		13.3	%
Other operating expense ratio(1)		20.6	%		18.4	%		20.7	%		19.5	%
Combined ratio		89.5	%		89.8	%		92.3	%		95.1	%

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

NM - Percentage change not meaningful

The combined ratio for the three months ended September 30, 2014 was 89.5% compared to 89.8% for the same period in 2013. Our underwriting profit increased by $4.0 million to $25.9 million for the three months ended September 30, 2014 compared to $21.9 million for the same period in 2013.

Our underwriting profit for the three months ended September 30, 2014 is due to strong underwriting results from our Insurance Companies and Lloyd’s Operations. Our Insurance Companies reported an underwriting profit of $16.4 million inclusive of $6.0 million from our Marine business driven by favorable loss emergence from prior accident years for certain product lines, as well as $4.3 million from our Assumed Reinsurance business mostly driven by the continued growth and favorable current accident year loss trends from our Latin American and Caribbean property casualty (“LatAm”) product lines. In addition, our Insurance Companies underwriting profit includes $2.6 million and $2.3 million from our Primary and Excess Casualty business, respectively, as a result of growth and expansion, driven by favorable market conditions and the continued dislocation of certain competitors. Our Lloyd’s Operations underwriting profit of $9.4 million includes $7.4 million from our Lloyd’s Marine business that was driven by favorable loss emergence from prior accident years for Specie and Transport product lines, as well as favorable current accident year loss trends across all products, and to a lesser extent, $1.5 million of underwriting profit from our Lloyd’s Energy and Engineering business due to favorable loss emergence from prior accident years.

Our underwriting results for the three months ended September 30, 2013 was mostly driven by $20.1 million of underwriting profit from our Insurance Companies in connection with favorable underwriting performance from all of our businesses. Specifically, our Insurance Companies Energy & Engineering and Marine businesses produced a net underwriting profit of $7.4 million and $5.8 million, respectively, mostly driven by favorable loss emergence for underwriting years (“UYs”) 2011 and prior. In addition, our Primary Casualty business produced an underwriting profit of $4.4 million due in part to the continued strong production attributable to the expansion of those underwriting teams and the dislocation of certain competitors.

The combined ratio for the nine months ended September 30, 2014 was 92.3% compared to 95.1% for the same period in 2013. Our underwriting profit increased by $23.6 million to $54.3 million for the nine months ended September 30, 2014 compared to $30.7 million for the same period in 2013.

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Our underwriting profit for the nine months ended September 30, 2014 is due to strong underwriting results for our Insurance Companies and Lloyd’s Operations. Our Insurance Companies reported an underwriting profit of $39.7 million inclusive of $19.0 million from our Marine business due to growth as well as favorable loss emergence from prior accident years for certain products, as well as $8.7 million from our Assumed Reinsurance business mostly driven by the continued growth and favorable current accident year loss trends from our LatAm property casualty lines. In addition, our Insurance Companies underwriting profit includes $5.7 million from our Excess Casualty business as a result of growth and expansion due to favorable market conditions and the continued dislocation of certain competitors, and to a lesser extent, $3.8 million of underwriting profit from our Professional Liability business due in part to recovery of prior period losses coming from a cash settlement of a contract dispute with a former third party administrator. Our Lloyd’s Operations reported an underwriting profit of $14.6 million which includes $5.7 million from our Lloyd’s Energy and Engineering business driven by favorable current accident year loss trends, and to a lesser extent, prior year reserve releases from our offshore energy product line. Our Lloyd’s Operations also includes an underwriting profit of $3.4 million from our Professional Liability business driven by favorable loss emergence. In addition, our Lloyd’s Marine business reported an underwriting profit of $4.9 million driven by prior year reserve releases which were offset by an $8.9 million net loss, inclusive of $3.9 million of RRPs, related to a Marine Liability loss which involved the sinking of a vessel in South Korean waters.

Our underwriting results for the nine months ended September 30, 2013 included an underwriting profit of $20.4 million from our Insurance Companies, inclusive of $10.8 million and $7.6 million of underwriting profit from our Energy & Engineering and Marine businesses, respectively, in connection with favorable loss emergence for UY’s 2011 and prior. In addition, our Primary Casualty and Excess Casualty businesses recorded an underwriting profit of $7.5 million and $3.4 million, respectively, due in part to the continued strong production attributable to the expansion of those underwriting teams and the dislocation of certain competitors, partially offset by an underwriting loss of $5.8 million from our D&O business driven by net prior period reserve deficiencies from UYs 2010 and prior. Our underwriting results also included $10.4 million of underwriting profit from our Lloyd’s Operations due to continued favorable loss emergence from UYs 2011 and prior, partially offset by large current accident year losses from our Lloyd’s Marine and Lloyd’s Energy & Engineering businesses.

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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, 2014 and 2013.

	Three Months Ended September 30,
	2014									2013
	Gross					Net		Net		Gross					Net		Net
	Written					Written		Earned		Written					Written		Earned
In thousands	Premiums		%			Premiums		Premiums		Premiums		%			Premiums		Premiums
Insurance Companies:
Marine	$	38,726		12	%	$	24,166	$	31,123	$	38,912		12	%	$	26,437	$	31,490
Property Casualty		174,868		53	%		126,665		129,547		156,228		51	%		97,553		105,759
Professional Liability		28,888		9	%		21,653		21,381		32,469		10	%		25,300		25,713
Insurance Companies Total	$	242,482		74	%	$	172,484	$	182,051	$	227,609		73	%	$	149,290	$	162,962
Lloyd’s Operations:
Marine	$	38,568		11	%	$	32,245	$	39,368	$	36,009		12	%	$	26,795	$	34,264
Property Casualty		31,172		10	%		13,758		12,980		35,869		11	%		13,761		10,472
Professional Liability		15,247		5	%		9,930		10,968		12,589		4	%		6,710		6,197
Lloyd’s Operations Total	$	84,987		26	%	$	55,933	$	63,316	$	84,467		27	%	$	47,266	$	50,933
Total	$	327,469		100	%	$	228,417	$	245,367	$	312,076		100	%	$	196,556	$	213,895

	Nine Months Ended September 30,
	2014									2013
	Gross					Net		Net		Gross					Net		Net
	Written					Written		Earned		Written					Written		Earned
In thousands	Premiums		%			Premiums		Premiums		Premiums		%			Premiums		Premiums
Insurance Companies
Marine	$	139,078		13	%	$	100,647	$	95,635	$	132,836		13	%	$	94,944	$	100,013
Property Casualty		572,821		52	%		418,659		365,068		527,287		51	%		338,215		297,954
Professional Liability		86,110		8	%		61,170		65,644		97,679		9	%		75,830		75,873
Total Insurance Companies	$	798,009		73	%	$	580,476	$	526,347	$	757,802		73	%	$	508,989	$	473,840
Lloyd’s Operations
Marine	$	147,530		13	%	$	113,938	$	110,468	$	135,546		13	%	$	100,413	$	102,932
Property Casualty		101,413		9	%		44,684		37,401		102,144		10	%		33,254		26,913
Professional Liability		52,102		5	%		33,033		27,507		41,934		4	%		21,821		18,352
Total Lloyd’s Operations	$	301,045		27	%	$	191,655	$	175,376	$	279,624		27	%	$	155,488	$	148,197
Total	$	1,099,054		100	%	$	772,131	$	701,723	$	1,037,426		100	%	$	664,477	$	622,037

Gross written premiums increased $15.4 million, or 4.9%, to $327.5 million for the three months ended September 30, 2014 compared to $312.1 million for the same period in 2013. The increase in gross written premium is primarily driven by growth from our Insurance Companies Property Casualty business, which includes a $7.1 million increase from our Primary Casualty business driven mostly by strong production from an improvement in the non-residential construction market. Additionally there was a $7.0 million increase from our Assumed Reinsurance business due to new business growth from our LatAm business, including Assumed Reinsurance reinstatement premiums of $1.2 million. In addition, our Insurance Companies Property Casualty business includes a $5.4 million increase from our Excess Casualty business due to improved market conditions and the dislocation of certain competitors that partially is offset by a $3.7 million decrease from our Insurance Company Energy & Engineering business due to difficult market conditions and an unfavorable rating environment.

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Average renewal premium rates for our Insurance Companies segment for the three months ended September 30, 2014 increased 0.6% as compared to the same period in 2013 across all of our businesses within each segment. Our Insurance Companies Marine business realized a 1.0% average increase in rates across all significant product lines. Our Insurance Companies Property Casualty business realized a 1.2% increase in rates that is mostly driven by a 4.6% increase for the Excess Casualty division and a 0.4% increase in the Primary Casualty division, partially offset by a 10.4% decrease from our Energy & Engineering division. Our Insurance Companies Professional Liability business has experienced an overall decrease in its renewal rates of 2.6%, inclusive of a 4.8% decrease in D&O. For the three months ended September 30, 2014, average renewal premium rates for our Lloyd’s Operations decreased 3.8% compared to the same period in 2013, driven by a 0.9% decrease from Lloyd’s Marine, as well as decreases of 7.6% and 2.8% for Lloyd’s Property Casualty and Lloyd’s Professional Liability, respectively.

Gross written premiums increased $61.6 million, or 5.9%, to $1.10 billion for the nine months ended September 30, 2014 compared to $1.04 billion for the same period in 2013. The increase in gross written premiums is primarily driven by growth from our Insurance Companies Property Casualty businesses, which includes a $32.0 million increase from our Primary Casualty business driven by strong production from the continued improvement of the overall construction market, an $11.3 million increase from our Environmental business due to our continued investment in those underwriting teams, and a $7.3 million increase in our Excess Casualty business due to improved market conditions and the dislocation of certain competitors, all of which are partially offset by a $10.9 million decrease from our Insurance Company Energy & Engineering business due to difficult market conditions and an unfavorable rating environment. The increase in gross written premiums for the nine months ended September 30, 2014 is also due to growth from our Lloyd’s Operations, which includes a $12.0 million increase from Lloyd’s Marine primarily driven by new business from our Cargo and Marine Liability product lines, a $10.1 million increase from Lloyd’s Professional Liability driven by the continued expansion of our Lloyd’s E&O business, and a $8.3 million increase in new business from our Lloyd’s Assumed Property business that we began writing in 2014, partially offset by a $10.7 million decrease in our Lloyd’s Energy & Engineering business due to difficult market conditions and an unfavorable rating environment. The aforementioned net increases in gross written premiums are partially offset by a net $11.6 million decrease from our Insurance Companies Professional Liability business due to our decision to exit the small lawyers professional liability business in the fourth quarter of 2013, as well as a decrease in renewal premium on our real estate agents liability products.

Average renewal premium rates for our Insurance Companies segment for the nine months ended September 30, 2014 increased 1.2% as compared to the same period in 2013, driven by a 2.3% increase for Marine and a 1.4% increase for Property Casualty, offset by a 1.2% decrease in Professional Liability. Average renewal premium rates for our Lloyd’s Operations for the nine months ended September 30, 2014 decreased 2.4% as compared to the same period in 2013, driven by a 0.6% increase for Marine, offset by a 6.5% and 3.7% decrease for Property Casualty and Professional Liability, respectively.

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.

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Our ceded 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 certain 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. The number of reinsurance reinstatements available varies by contract, and we record an estimate of the expected RRPs for losses ceded to excess-of-loss agreements where this feature applies.

For the three and nine months ended September 30, 2014, we reported approximately $0.3 million and $7.8 million of RRPs primarily due to large loss activity from our Marine business. For the three months ended September 30, 2013, we incurred $1.3 million in RRPs from our Marine business as a result of large loss activity that were equally offset by a $1.3 million reversal of estimated RRPs in connection with favorable loss development on specific large losses from our Energy & Engineering business. For the nine months ended September 30, 2013 we incurred net RRPs of $5.0 million primarily driven by large losses from our Marine business.

The following table sets forth our ceded written premiums by segment and line of business for the three and nine months ended September 30, 2014 and 2013:

	Three Months Ended September 30,										Nine Months Ended September 30,
	2014					2013					2014					2013
	Ceded		% of Gross			Ceded		% of Gross			Ceded		% of Gross			Ceded		% of Gross
	Written		Written			Written		Written			Written		Written			Written		Written
In thousands	Premiums		Premiums			Premiums		Premiums			Premiums		Premiums			Premiums		Premiums
Insurance Companies
Marine	$	14,560		38	%	$	12,475		32	%	$	38,431		28	%	$	37,892		29	%
Property Casualty		48,203		28	%		58,675		38	%		154,162		27	%		189,072		36	%
Professional Liability		7,235		25	%		7,169		22	%		24,940		29	%		21,849		22	%
Total Insurance Companies	$	69,998		29	%	$	78,319		34	%	$	217,533		27	%	$	248,813		33	%
Lloyd’s Operations
Marine	$	6,323		16	%	$	9,214		26	%	$	33,592		23	%	$	35,133		26	%
Property Casualty		17,414		56	%		22,108		62	%		56,729		56	%		68,890		67	%
Professional Liability		5,317		35	%		5,879		47	%		19,069		37	%		20,113		48	%
Total Lloyd’s Operations	$	29,054		34	%	$	37,201		44	%	$	109,390		36	%	$	124,136		44	%
Total	$	99,052		30	%	$	115,520		37	%	$	326,923		30	%	$	372,949		36	%

Overall, the percentage of total ceded written premiums to total gross written premiums for the three months ended September 30, 2014 decreased by 7% compared to the same period in 2013. For the nine months ended September 30, 2014, the percentage decreased by 6% compared to the same period in 2013. These decreases are indicative of key changes to our reinsurance program and mix of business.

The decrease in the percentage for our Insurance Companies total ceded written premium for the three and nine months ended September 30, 2014 is due to a change in the Property Casualty reinsurance program supporting certain casualty risks. Effective in the first quarter 2014, we increased our retention through a new program combining a reduced level of proportional reinsurance combined with an excess-of-loss cover. The decrease in the Property Casualty line for the nine months ended September 30, 2014 is also the result of a higher retention on our Energy and Engineering business as a result of a change in our offshore energy quota share program. The increase in the percentage of our Insurance Companies Professional Liability business is due to an additional contract for proportional reinsurance, signed in the fourth quarter of 2013, allowing us to cede 100% of our small lawyers’ professional liability E&O business to the carrier that has assumed the renewal rights, indicative of our decision to exit this business. This treaty expired on March 31, 2014. For the three months ended September 30, 2014, the increase in the Professional Liability line is the result of an increase in facultative cessions on this business, while the increase in the Marine percentage is the result of new proportional reinsurance programs covering our Craft business.

36

For the three and nine months ended September 30, 2014, the decrease in the percentage for our Lloyd’s Operations total ceded written premium is due to a change in the mix of business. This is driven by the growth of our Assumed Reinsurance business, which includes new business growth from our LatAm Assumed Reinsurance business and our Property Treaty business, reported through Lloyd’s Property Casualty. Additionally, the decrease in the Lloyd’s Professional Liability business is driven by a reduction in the use of proportional reinsurance for our Management Liability product lines. The decrease in the Lloyd’s Marine ceded written premium for the three months ended September 30, 2014 is the result of a reduction in a Marine 2007 UY loss which generated a reduction in ceded reinstatement premiums of $0.8 million. In addition, Lloyd’s War business has a 54.3% retention rate compared to 5.3% for the same period in 2013 due to a reduction in the use of proportional reinsurance.

Net Written Premiums

Net written premiums increased 16.2% for the three and nine months ended September 30, 2014 compared to the same periods in 2013. The increase in both periods is due to certain changes in our reinsurance program that have increased our retention as described above, as well as growth in gross written premiums resulting from new business for certain product lines and the renewal rate changes described above. Together these changes have resulted in growth in net written premium which outpaces the growth in gross written premium.

Net Earned Premiums

Net earned premiums increased 14.7% and 12.8% for the three and nine months ended September 30, 2014 compared to the same periods in 2013. The increase in net earned premiums is due to increased retention resulting from changes in our reinsurance programs as well as the recent growth of our business over the past twelve months, which includes significant new business from our Excess and Primary Casualty divisions, which continue to grow due to the dislocation of certain competitors. To a lesser extent, the increase is also driven by the recent expansion of our Assumed Reinsurance and Professional Liability business written by our Lloyd’s Operations, offset by a reduction in Professional Liability business written by our Insurance Companies.

Net Investment Income

Our net investment income was derived from the following sources:

	Three Months Ended September 30,						Nine Months Ended September 30,						Percentage Change
In thousands	2014			2013			2014			2013			QTD			YTD
Fixed maturities	$	14,401		$	13,399		$	42,540		$	40,142			7.5	%		6.0	%
Equity securities		1,956			1,315			7,160			3,603			48.7	%		98.7	%
Short-term investments		225			187			686			575			20.3	%		19.3	%
Total investment income	$	16,582		$	14,901		$	50,386		$	44,320			11.3	%		13.7	%
Investment expenses		(743	)		(807	)		(2,289	)		(2,323	)		-7.9	%		-1.5	%
Net investment income	$	15,839		$	14,094		$	48,097		$	41,997			12.4	%		14.5	%

The increase in total investment income for the three and nine months ended September 30, 2014 was primarily due to growth of invested assets, as well as a $1.6 million one time special dividend received in the first quarter in the equity portfolio. The annualized pre-tax investment yield, excluding net realized gains and losses and net other-than-temporary impairment (“OTTI”) losses recognized in earnings, was 2.2% and 2.4% for the three and nine months ended September 30, 2014, respectively, compared to 2.4% for each of the comparable periods in 2013.

The portfolio duration was 3.7 years and 3.9 years at September 30, 2014 and 2013, respectively.

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Other-Than-Temporary Impairment Losses Recognized In Earnings

The Company did not have any OTTI losses for the three and nine months ended September 30, 2014. OTTI losses were $1.8 million and $1.9 million for the three and nine months ended September 30, 2013, respectively.

	Three Months Ended September 30,				Nine Months Ended September 30,				Percentage Change
In thousands	2014		2013		2014		2013		QTD		YTD
Fixed maturities	$	—	$	1,821	$	—	$	1,821		NM		NM
Equity securities		—		—		—		42		NM		NM
OTTI recognized in earnings	$	—	$	1,821	$	—	$	1,863		NM		NM

NM - Percentage change not meaningful

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,						Percentage Change
In thousands	2014			2013			2014			2013			QTD			YTD
Fixed maturities:
Gains	$	3,702		$	1,099		$	8,682		$	6,035			NM			43.9	%
Losses		(1,645	)		(2,087	)		(3,752	)		(2,470	)		-21.2	%		51.9	%
Fixed maturities, net	$	2,057		$	(988	)	$	4,930		$	3,565			NM			38.3	%
Equity securities:
Gains	$	6,109		$	—		$	9,445		$	3,733			NM			NM
Losses		(1,448	)		—			(2,351	)		(127	)		NM			NM
Equity securities, net	$	4,661		$	—		$	7,094		$	3,606			NM			96.7	%
Net realized gains (losses)	$	6,718		$	(988	)	$	12,024		$	7,171			NM			67.7	%

NM - Percentage change not meaningful

Net realized gains and losses are generated as part of the normal ongoing management of our investment portfolio. Net realized gains of $6.7 million and $12.0 million for the three and nine months ended September 30, 2014 are primarily due to the sale of corporate bonds and equity securities. Net realized losses of $1.0 million and net realized gains of $7.2 million for the three and nine months ended September 30, 2013 were due to the sale of Treasury bonds

Other Income (Expense)

Other income (expense) is comprised of unrealized and realized foreign exchange gains and losses, commission income, and inspection fees. Total other income for the three months ended September 30, 2014 was $1.3 million, as compared to total other expense of $0.2 million in the prior year, and is primarily driven by unrealized foreign exchange gains due to the movement of the British Pound against the US Dollar in the quarter. Total other income for the nine months ended September 30, 2014 was $10.1 million, as compared to total other expense of $0.5 million for the nine months ended September 30, 2013, and is primarily driven by a $10.0 million foreign currency transaction gain in the first quarter in connection with a change in the functional currency of our Lloyd’s Operations.

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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, 2014 and 2013 is presented in the following table:

	Three Months Ended September 30,						Nine Months Ended September 30,
Net Loss and LAE Ratio	2014			2013			2014			2013
Net Loss and LAE Payments		44.0	%		51.5	%		44.5	%		56.1	%
Change in reserves		17.4	%		10.5	%		19.1	%		6.5	%
Subtotal - current year loss ratio		61.4	%		62.0	%		63.6	%		62.6	%
Prior year deficiencies (redundancies)		-6.3	%		-3.5	%		-5.1	%		-0.3	%
Net loss and LAE ratio		55.1	%		58.5	%		58.5	%		62.3	%

The changes in current accident year loss ratios, as noted above, are driven by mix of business and loss trends.

The Company’s ceded incurred losses were $58.7 million and $(37.0) million for the three months ended September 30, 2014 and 2013 and $170.4 million and $94.1 million for the nine months ended September 30, 2014 and 2013, respectively. The Company’s ceded incurred losses for the three months ended September 30, 2013 reflect a $69.1 million reduction of ceded incurred losses due to a refinement of loss factors, resulting in a reduction in both gross and ceded IBNR, caused by a continuing pattern of lower large loss activity.

The segment and line of business breakdown of the net loss and LAE ratios for the three and nine months ended September 30, 2014 and 2013 are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Insurance Companies:
Marine		42.0	%		46.8	%		43.6	%		55.4	%
Property Casualty		63.1	%		60.7	%		66.9	%		65.8	%
Professional Liability		63.9	%		63.8	%		57.1	%		75.6	%
Total Insurance Companies		59.6	%		58.5	%		61.4	%		65.2	%
Lloyd’s Operations:
Marine		41.6	%		64.6	%		54.3	%		57.5	%
Property Casualty		32.8	%		35.0	%		37.5	%		41.6	%
Professional Liability		56.6	%		64.3	%		47.9	%		44.8	%
Total Lloyd’s Operations		42.4	%		58.5	%		49.7	%		53.0	%
Net loss and LAE ratio		55.1	%		58.5	%		58.5	%		62.3	%

The changes in the net loss and LAE ratios by reportable segment and line of business, as presented above, are primarily driven by prior year reserve strengthening or releases, as discussed below, and to a lesser extent changes in our mix of business.

Prior Year Reserve Strengthening (Releases)

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 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 updated data and new information. Based on their reserve analyses, management may make corresponding reserve adjustments.

39

The segment and line of business breakdowns of prior period net reserve strengthening (releases) for the three and nine months ended September 30, 2014 and 2013 are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
In thousands	2014			2013			2014			2013
Insurance Companies
Marine	$	(7,380	)	$	(3,573	)	$	(26,225	)	$	(4,851	)
Property Casualty		(2,589	)		135			6,711			7,290
Professional Liability		(1	)		344			(3,760	)		9,944
Total Insurance Companies	$	(9,970	)	$	(3,094	)	$	(23,274	)	$	12,383
Lloyd’s Operations
Marine	$	(4,500	)	$	(1,389	)	$	(9,086	)	$	(4,369	)
Property Casualty		(1,000	)		(3,389	)		(1,000	)		(5,057	)
Professional Liability		—			187			(2,663	)		(4,646	)
Total Lloyd’s Operations	$	(5,500	)	$	(4,591	)	$	(12,749	)	$	(14,072	)
Total strengthening (releases)	$	(15,470	)	$	(7,685	)	$	(36,023	)	$	(1,689	)

The following is a discussion of relevant factors related to the net prior period reserve releases recorded for the three months ended September 30, 2014:

Our Insurance Companies recorded $10.0 million of net prior year reserve releases primarily driven by $7.4 million from our Marine business in connection with favorable loss emergence across all product lines, inclusive of $2.3 million from Craft, $1.9 million from Protection & Indemnity, $1.2 million from Cargo, and $1.1 million from Bluewater Hull. The net prior year reserve releases from our Insurance Property Casualty business of $2.6 million is primarily driven by $2.9 million favorable loss emergence from our offshore energy product lines written by our Energy and Engineering business and $0.4 million of favorable loss emergence from our Environmental business, partially offset by $0.7 million of unfavorable loss emergence from our Primary Casualty business specific to construction liability issued to contractors operating in California and other western states.

Our Lloyd’s Operations recorded $5.5 million of net prior period reserve releases primarily driven by our Lloyd’s Marine and Property Casualty lines business. Within our Lloyd’s Marine business we experienced prior period reserve releases of $4.5 million on the Marine Assumed, Transport, and Specie books for UYs 2012 and prior. Lloyd’s Property Casualty business had a total of $1.0 million of favorable emergence which relates to Onshore Energy.

The following is a discussion of relevant factors related to the $7.7 million prior period net reserve redundancies recorded for the three months ended September 30, 2013:

The Insurance Companies recorded $3.1 million of net prior period reserve redundancies primarily driven by $3.6 million of favorable emergence from all product lines within our Marine business for UYs 2012 and prior. Included within the $0.1 million of net prior period deficiencies from our Property Casualty business is $3.1 million of reserve strengthening from our A&H excess-of-loss product lines from UYs 2012 and prior, partially offset by net prior period reserve redundancies from favorable emergence from our Energy & Engineering and Primary Casualty businesses.

Our Lloyd’s Operations recorded $4.6 million of net prior period reserve redundancies primarily driven by our Lloyd’s Property Casualty and Marine businesses. Within our Lloyd’s Property Casualty business we reported prior period reserve redundancies of $3.4 million in connection with continued favorable emergence from our Lloyd’s Energy & Engineering business. In addition, our Lloyd’s Marine business reported prior period reserve redundancies of $1.4 million related to the favorable settlement of specific claims from Marine Liability lines for UYs 2012 and prior, offset by deficiencies in our Specie line from UY 2010.

40

The following is a discussion of relevant factors related to the net prior period reserve releases recorded for the nine months ended September 30, 2014:

The Insurance Companies recorded $23.3 million of net prior year reserve releases primarily driven by $26.2 million from our Marine business in connection with favorable loss emergence across all product lines, inclusive of $6.9 million from Craft, $5.4 million from Protection & Indemnity, $4.4 million from Inland Marine, $4.3 million from Marine Liability, and $4.2 million from Cargo. Additionally, the Insurance Companies Marine business includes $1.0 million favorable loss emergence from Bluewater Hull product lines.

The Insurance Companies Property Casualty business recorded $6.7 million of net prior year reserve strengthening, which includes $5.0 million of prior year reserve strengthening from our Primary Casualty business primarily due to large loss activity from general liability policies issued to contractors in California and other western states and unfavorable loss emergence from general liability policies issued for construction premises. In addition, the net reserve strengthening from our Insurance Companies Property Casualty business includes $2.5 million of net reserve strengthening from our Assumed Reinsurance business in connection with large loss activity from our Agriculture business for UY 2013 and to a lesser extent, unfavorable loss emergence on our excess-of-loss A&H treaty business for UY 2012, partially offset by favorable loss emergence from our LatAm business.

The Professional Liability business recorded $3.8 million of net prior year reserve releases primarily driven by $4.8 million of favorable loss emergence from our D&O business due to a cash settlement of a contract dispute with a former third party administrator, partially offset by $0.9 million of net prior year reserve strengthening from our E&O business due to unfavorable loss emergence on our small lawyers business, which is in run-off.

Our Lloyd’s Operations recorded $12.7 million of net prior period reserve releases primarily driven by our Lloyd’s Marine and Professional Liability lines of business. Within our Lloyd’s Marine business we reported prior period reserve releases of $8.5 million on the Specie, Marine Assumed, Transport and Marine and Energy Liability books for UYs 2012 and prior. Additionally there is $1.0 million of reserve releases on the UY 2013 for Specie business as a result of favorable emergence. Favorable loss emergence from our Marine business was partially offset by $0.4 million of reserve strengthening in our Cargo business. Lloyd’s Professional Liability business has a total of $2.7 million of favorable emergence with $1.0 million coming from the E&O business and $1.7 million from D&O.

The following is a discussion of relevant factors related to the $1.7 million net prior period reserve redundancies recorded for the nine months ended September 30, 2013:

The Insurance Companies recorded $12.4 million of net prior period reserve deficiencies, primarily driven by our Professional Liability and Property Casualty business. Within the Professional Liability business, we reported net prior period reserve deficiencies of $5.6 million from the D&O division related to specific large claims from our public and private sectors D&O liability lines for UYs 2010 and prior. In addition, we reported net prior period reserve deficiencies of $4.0 million from the E&O division related to specific large claims from our insurance agents, miscellaneous professional liability, and small lawyer lines from UYs 2011 and prior. Within the Property Casualty business we reported net prior period reserve deficiencies of $7.3 million, which included $10.5 million of prior period reserve deficiencies from our A&H business in connection with excess-of-loss reinsurance for UYs 2012 and prior, partially offset by net prior period reserve redundancies from favorable emergence from our Energy & Engineering and Primary Casualty businesses.

Our Lloyd’s Operations recorded $14.1 million of net prior period reserve redundancies across all businesses. Within our Lloyd’s Property Casualty business we reported net prior period reserve redundancies of $5.1 million primarily from our Energy & Engineering division due to the favorable settlement of two claims from our onshore lines from UY 2011 as well as favorable development on our Offshore Energy line from UYs 2011 and prior. Within our Lloyd’s Professional Liability business we reported prior period reserve redundancies of $5.1 million in connection with continued favorable emergence from our Lloyd’s D&O business, partially offset by $0.5 of million strengthening in our Lloyd’s E&O business. In addition, we reported $4.4 million of prior period reserve redundancies from our Lloyd’s Marine business related to the favorable settlement of specific claims from our Ocean Marine Liability lines from UYs 2012 and prior.

41

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 that they relate to unearned premium. The percentage of commission expenses to net earned premiums (“commission expense ratio”) for the three and nine months ended September 30, 2014 was 13.8% and 13.1%, respectively, compared to 12.9% and 13.3% for the comparable periods during 2013. The change in the commission expense ratio for the three and nine months ended September 30, 2014 compared to the same periods in 2013 is attributed to the changes in the mix of business, as well as a change in one of our proportional reinsurance programs in the first quarter of 2014, which resulted in less ceding commission.

Other Operating Expenses

Other operating expenses were $50.4 million and $145.5 million for the three and nine months ended September 30, 2014 compared to $39.1 million and $120.6 million for the same periods during 2013. The increase is primarily due to continued investment in our employee base, resulting in increased salary and related costs, designed to closely align with business growth, the expansion of our European operations and an increase in incentive compensation driven by stronger underwriting results. To a lesser extent, other operating expenses have been adversely affected by exchange rate movement when converting expenses denominated in British Pounds to U.S. dollars.

Interest Expense

Interest expense of $3.4 million and $11.6 million for the three and nine months ended September 30, 2014 relates to our $265 million principal amount of the 5.75% Senior Notes. Interest expense of $2.1 million and $6.1 million for the three and nine months ended September 30, 2013 related to the $115 million 7.0% Senior Notes due May 1, 2016, which were redeemed in the fourth quarter of 2013 subsequent to the issuance of the 5.75% Senior Notes. The effective interest rate related to the 5.75% Senior Notes for the three and nine months ended September 30, 2014 was 5.86%. The effective interest rate related to the 7.0% Senior Notes for the three and nine months ended September 30, 3013 was 7.17%.

Income Taxes

We recorded income tax expense of $15.0 million and $36.4 million for the three and nine months ended September 30, 2014 compared to $9.8 million and $22.7 million for the comparable period in 2013, resulting in an effective tax rate of 32.5% and 32.4% for the three and nine months ended September 30, 2014 compared to 31.5% and 31.6% for the same periods in 2013. The effective tax rate on net investment income was 27.5% for the three and nine months ended September 30, 2014 compared to 27.5% and 27.9% for the same periods in 2013.

As of September 30, 2014, the net deferred federal, foreign, state and local tax assets were $14.5 million, compared to $28.2 million as of December 31, 2013. The decrease in deferred tax is primarily due to increased unearned premium reserves resulting from growth in our business partially offset by increased unrealized gains on our investment portfolio and adjustment for year of account earnings in foreign subsidiaries. Refer to Footnote 6,Income Taxes,included herein, for further detail on the IRS and Lloyd’s tax agreement and Subpart F tax regulation.

We had net state and local deferred tax assets amounting to potential future tax benefits of $0.4 million and $0.6 million as of September 30, 2014 and December 31, 2013, respectively. Included in the deferred tax assets are state and local net operating loss carry-forwards of $0.1 million as of September 30, 2014 and December 31, 2013. 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, 2014 expire from 2024 to 2032. Refer to Footnote 6,Income Taxes,included herein, for further detail on the temporary differences that give rise to federal, foreign, state and local deferred tax assets or liabilities.

The Company has not provided for U.S. income taxes on approximately $21.2 million of undistributed earnings of its non-U.S. subsidiaries since it is intended that those earnings will be reinvested indefinitely in those subsidiaries. If a future determination is made that those earnings no longer are intended to be reinvested indefinitely in those subsidiaries, U.S. income taxes of approximately $2.2 million, assuming all foreign tax credits are realized, would be included in the tax provision at that time and would be payable if those earnings were distributed to the Company.

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Segment Information

The Company evaluates the performance of each underwriting segment based on its underwriting and GAAP results. 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 underwriting income (expense). The combined ratio is derived by dividing the sum of net losses and LAE, commission expenses, other operating expenses and other underwriting 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. 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 following is a discussion of the financial results for each of our two underwriting segments.

Insurance Companies

The following table sets forth the results of operations for the Insurance Companies for the three and nine months ended September 30, 2014 and 2013:

	Three Months Ended September 30,						Nine Months Ended September 30,						Percentage Change
In thousands	2014			2013			2014			2013			QTD			YTD
Gross written premiums	$	242,482		$	227,609		$	798,009		$	757,802			6.5	%		5.3	%
Net written premiums		172,484			149,290			580,476			508,989			15.5	%		14.0	%
Net earned premiums		182,051			162,962			526,347			473,840			11.7	%		11.1	%
Net losses and loss adjustment expenses		(108,425	)		(95,315	)		(323,354	)		(308,968	)		13.8	%		4.7	%
Commission expenses		(22,705	)		(20,039	)		(62,436	)		(59,129	)		13.3	%		5.6	%
Other operating expenses		(35,161	)		(28,510	)		(102,963	)		(87,682	)		23.3	%		17.4	%
Other underwriting income (expense)		656			955			2,082			2,303			-31.3	%		-9.6	%
Underwriting profit (loss)	$	16,416		$	20,053		$	39,676		$	20,364			-18.1	%		94.8	%
Net investment income		13,971			12,285			42,553			36,751			13.7	%		15.8	%
Net realized gains (losses)		6,673			(1,890	)		12,368			6,001			NM			106.1	%
Other income (expense)		(1,100	)		—			(1,119	)		—			NM			NM
Income (loss) before income taxes	$	35,960		$	30,448		$	93,478		$	63,116			18.1	%		48.1	%
Income tax expense (benefit)		11,489			9,355			29,650			19,554			22.8	%		51.6	%
Net income (loss)	$	24,471		$	21,093		$	63,828		$	43,562			16.0	%		46.5	%
Losses and loss adjustment expenses ratio		59.6	%		58.5	%		61.4	%		65.2	%
Commission expense ratio		12.5	%		12.3	%		11.9	%		12.5	%
Other operating expense ratio(1)		18.9	%		16.9	%		19.2	%		18.0	%
Combined ratio		91.0	%		87.7	%		92.5	%		95.7	%

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

NM - Percentage change not meaningful

Our Insurance Companies reported net income of $24.5 million for the three months ended September 30, 2014 compared to $21.1 million for the same period in 2013. The increase in net income for the three months ended September 30, 2014 compared to the same period in 2013 is related to an improvement in net investment income and net realized gains due to the ongoing management of our investment portfolio, offset by lower underwriting profits.

Our Insurance Companies combined ratio for the three months ended September 30, 2014 was 91.0% compared to 87.7% for the same period in 2013. Our Insurance Companies net underwriting profit of $16.4 million decreased by $3.7 million from the prior year of $20.1 million, mostly due to additional other operating expenses and mix of business earned.

43

Our Insurance Companies reported an underwriting profit of $16.4 million inclusive of $6.0 million of underwriting profit from our Marine business driven by favorable loss emergence from prior accident years for certain product lines, as well as $4.3 million of underwriting profit from our Assumed Reinsurance business mostly driven by continued growth and favorable current accident year loss trends from our LatAm product lines. In addition, our Insurance Companies’ underwriting profit includes $2.6 million and $2.3 million of underwriting profit from our Primary and Excess Casualty business, respectively, as a result of the growth and expansion of those businesses driven by favorable market conditions and the continued dislocation of certain competitors.

Our Insurance Companies underwriting profit of $20.1 million for the three months ended September 30, 2013 was due to favorable underwriting performance from all of our businesses. Specifically, our Insurance Companies Energy & Engineering and Marine businesses produced a net underwriting profit of $7.4 million and $5.8 million, respectively, mostly driven by favorable loss emergence for UYs 2011 and prior. In addition, our Primary Casualty business produced an underwriting profit of $4.4 million due in part to the continued strong production attributable to the expansion of those underwriting teams and the dislocation of certain competitors.

Our Insurance Companies reported net income of $63.8 million for the nine months ended September 30, 2014 compared to $43.6 million for the same period in 2013. This increase in net income is due to stronger underwriting results, as well as increases in net investment income and net realized gains, due to growth in our investment portfolio and strong operating cash flows and the associated ongoing management of our portfolio.

Our Insurance Companies combined ratio for the nine months ended September 30, 2014 was 92.5% compared to 95.7% for the same period in 2013. Our Insurance Companies underwriting results increased by $19.3 million to an underwriting profit of $39.7 million compared to $20.4 million for the same period in 2013.

Our Insurance Companies reported an underwriting profit of $39.7 million inclusive of $19.0 million from our Marine business due to growth as well as favorable loss emergence from prior accident years, as well as $8.7 million from our Assumed Reinsurance business mostly driven by continued growth and favorable current accident year loss trends from our LatAm property casualty lines. In addition, our Insurance Companies underwriting profit includes $5.7 million from our Excess Casualty business as a result of its growth and expansion due to favorable market conditions and the continued dislocation of certain competitors, and to a lesser extent, $3.8 million of underwriting profit from our Professional Liability business due in part to recovery of prior period losses coming from a cash settlement of a contract dispute with a former third party administrator.

Our Insurance Companies underwriting profit of $20.4 million for the nine months ended September 30, 2013 included $10.8 million and $7.6 million of underwriting profit from our Energy & Engineering and Marine businesses, respectively, in connection with favorable loss emergency for UY’s 2011 and prior. In addition, our Primary Casualty and Excess Casualty businesses recorded an underwriting profit of $7.5 million and $3.4 million, respectively, due in part to the continued strong production attributable to the expansion of those underwriting teams and the dislocation of certain competitors, partially offset by an underwriting loss of $5.8 million from our D&O business driven by net prior period reserve deficiencies from UYs 2010 and prior.

44

Insurance Companies Gross Written Premiums

Marine: The gross written premiums for our Marine business for the three and nine months ended September 30, 2014 and 2013 consisted of the following:

	Three Months Ended September 30,				Nine Months Ended September 30,				Percentage Change
In thousands	2014		2013		2014		2013		QTD			YTD
Marine Liability	$	15,311		14,153	$	49,132	$	45,909		8.2	%		7.0	%
Craft/Fishing Vessels		8,739		7,506		29,960		25,462		16.4	%		17.7	%
Cargo		4,298		3,701		14,815		14,911		16.1	%		-0.6	%
Bluewater Hull		2,267		3,544		10,642		9,299		-36.0	%		14.4	%
Inland Marine		2,435		2,602		9,131		11,986		-6.4	%		-23.8	%
Protection & Indemnity		1,765		2,542		11,596		12,790		-30.6	%		-9.3	%
Other Marine:
Energy liability		594		592		4,828		3,398		0.4	%		42.1	%
War		876		1,791		3,027		4,937		-51.1	%		-38.7	%
Transport		797		862		2,099		1,359		-7.6	%		54.5	%
Specie		910		1,329		2,127		2,092		-31.6	%		1.7	%
Customs bonds		734		290		1,721		693		NM			148.3	%
Other Marine	$	3,911	$	4,864	$	13,802	$	12,479		-19.6	%		10.6	%
Total Marine	$	38,726	$	38,912	$	139,078	$	132,836		-0.5	%		4.7	%

NM - Percentage change not meaningful.

Insurance Company Marine gross written premiums for the three and nine months ended September 30, 2014 decreased 0.5% and increased 4.7% compared to the same periods in 2013. The decrease for the three months ended September 30, 2014 is primarily due to decreases in our Blue Water Hull and Protection & Indemnity product lines driven by deteriorating market conditions, partially offset by new business growth in our Marine Liability and Craft/Fishing Vessels product lines. The increase for the nine months ended September 30, 2014 is primarily driven by new business growth as previously referenced.

Insurance Company Marine business experienced a 1.0% and 2.3% increase in renewal rates for the three and nine months ended September 30, 2014.

Property Casualty: The gross written premiums for our Property Casualty business for the three and nine months ended September 30, 2014 and 2013 consisted of the following:

	Three Months Ended September 30,				Nine Months Ended September 30,				Percentage Change
In thousands	2014		2013		2014		2013		QTD			YTD
Excess Casualty	$	73,261	$	67,814	$	209,659	$	202,402		8.0	%		3.6	%
Primary Casualty		43,260		36,190		129,681		97,659		19.5	%		32.8	%
Energy & Engineering		14,222		17,906		48,845		59,798		-20.6	%		-18.3	%
Assumed Reinsurance		26,689		19,653		133,092		127,225		35.8	%		4.6	%
Environmental Liability		10,311		7,896		32,304		20,971		30.6	%		54.0	%
Other Property & Casualty		7,125		6,769		19,240		19,232		5.3	%		0.0	%
Total Property Casualty	$	174,868	$	156,228	$	572,821	$	527,287		11.9	%		8.6	%

Insurance Company Property Casualty gross written premiums for the three and nine months ended September 30, 2014 increased 11.9% and 8.6% compared to the same periods in 2013. The increases were primarily driven by our Primary Casualty business due to by strong production from an improvement in the non-residential construction market, as well as an increase from our Assumed Reinsurance businesses due to new business growth from our LatAm business. In addition, there was an increase from our Excess Casualty business due to improved market conditions and the dislocation of certain competitors. The aforementioned increases were offset by a decrease in our Energy & Engineering business driven by difficult market conditions and an unfavorable rating environment.

Insurance Company Property Casualty included renewal rate increases for the three months ended September 30, 2014 of 1.2% driven by a 4.6% and 0.4% increase in our Excess Casualty and Primary Casualty businesses respectively, partially offset by a decrease of 10.4% in our Energy & Engineering business.

45

Professional Liability: The gross written premiums for our Professional Liability business for the three and nine months ended September 30, 2014 and 2013 consisted of the following:

	Three Months Ended September 30,				Nine Months Ended September 30,				Percentage Change
In thousands	2014		2013		2014		2013		QTD			YTD
Errors & Omissions	$	16,555	$	21,790	$	52,437	$	65,917		-24.0	%		-20.4	%
Management Liability		12,333		10,679		33,673		31,762		15.5	%		6.0	%
Total Professional Liability	$	28,888	$	32,469	$	86,110	$	97,679		-11.0	%		-11.8	%

Insurance Company Professional Liability gross written premiums for the three and nine months ended September 30, 2014 decreased 11.0% and 11.8%, respectively, compared to the same periods in 2013, primarily driven by a reduction in our E&O business due to our decision to exit the small lawyers professional liability business in the fourth quarter of 2013, as well as a decrease in our real estate agents liability product line as a result of program termination, partially offset by new business growth within Management Liability.

Insurance Companies Commission Expenses

The commission expenses ratios for the three and nine months ended September 30, 2014 were 12.5% and 11.9%, respectively, compared to 12.3% and 12.5% for the same periods in 2013. The change in the commission expense ratio for the three and nine months ended September 30, 2014 compared to the same periods in 2013 is attributed to the changes in the mix of business, as well as a change in one of our proportional reinsurance programs in the first quarter of 2014, which resulted in less ceding commission.

Insurance Companies Other Operating Expenses

Other operating expenses for the Insurance Companies were $35.2 million and $103.0 million for the three and nine months ended September 30, 2014 compared to $28.5 million and $87.7 million for the same periods in 2013. The increase in operating expenses is due to continued investments in new underwriting teams and support staff closely aligned with business growth and an increase in incentive compensation driven by stronger underwriting results.

Lloyd’s Operations

The following table sets forth the results of operations of the Lloyd’s Operations for the three and nine months ended September 30, 2014 and 2013:

	Three Months Ended September 30,						Nine Months Ended September 30,						Percentage Change
In thousands	2014			2013			2014			2013			QTD			YTD
Gross written premiums	$	84,987		$	84,467		$	301,045		$	279,624			0.6	%		7.7	%
Net written premiums		55,933			47,266			191,655			155,488			18.3	%		23.3	%
Net earned premiums		63,316			50,933			175,376			148,197			24.3	%		18.3	%
Net losses and loss adjustment expenses		(26,859	)		(29,771	)		(87,217	)		(78,608	)		-9.8	%		11.0	%
Commission expenses		(11,788	)		(8,289	)		(30,989	)		(25,245	)		42.2	%		22.8	%
Other operating expenses		(15,227	)		(10,546	)		(42,563	)		(32,926	)		44.4	%		29.3	%
Other underwriting income (expense)		1			(522	)		20			(1,067	)		NM			NM
Underwriting profit (loss)	$	9,443		$	1,805		$	14,627		$	10,351			NM			41.3	%
Net investment income		1,849			1,807			5,488			5,237			2.3	%		4.8	%
Net realized gains (losses)		45			(919	)		(344	)		(697	)		NM			-50.7	%
Other income (expense)		2,329			—			10,692			—			NM			NM
Income (loss) before income taxes	$	13,666		$	2,693		$	30,463		$	14,891			NM			104.6	%
Income tax expense (benefit)		4,787			878			10,753			5,120			NM			110.0	%
Net income (loss)	$	8,879		$	1,815		$	19,710		$	9,771			NM			101.7	%
Losses and loss adjustment expenses ratio		42.4	%		58.5	%		49.7	%		53.0	%
Commission expense ratio		18.6	%		16.3	%		17.7	%		17.0	%
Other operating expense ratio(1)		24.1	%		21.7	%		24.3	%		23.0	%
Combined ratio		85.1	%		96.5	%		91.7	%		93.0	%

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

NM - Percentage change not meaningful.

46

Our Lloyd’s Operations reported net income of $8.9 million for the three months ended September 30, 2014 compared to net income of $1.8 million for the same period in 2013. The increase in net income for the three months ended September 30, 2014 as compared to the same period in 2013 was largely attributable to increased underwriting profit due to lack of catastrophes in the current year, as well as additional prior year reserve releases and fewer reinstatement premiums when compared with the same period last year.

Our Lloyd’s Operations combined ratio for the three months ended September 30, 2014 was 85.1% compared to 96.5% for the same period in 2013. Our Lloyd’s Operations underwriting profit increased $7.6 million to $9.4 million for the three months ended September 30, 2014 compared to a profit of $1.8 million for the same period in 2013.

Our Lloyd’s Operations underwriting profit of $9.4 million includes $7.4 million of underwriting profit from our Lloyd’s Marine business that was driven by favorable loss emergence from prior accident years for Specie and Transport product lines, as well as favorable current accident year loss trends across all products, and to a lesser extent, $1.5 million of underwriting profit from our Lloyd’s Energy and Engineering business due to favorable loss emergence from prior accident years.

Our Lloyd’s Operations underwriting profit for the three months ended September 30, 2013 included $4.6 million of net prior period reserve releases in connection with continued favorable emergence from our Lloyd’s Property Casualty business and to a lesser extent the favorable settlement of specific claims from our Lloyd’s Marine business, partially offset by large current accident year losses from our Lloyd’s Marine and Energy & Engineering businesses, as well as a $0.5 million foreign exchange loss on the remeasurement of certain deposits required by Lloyd’s.

Our Lloyd’s Operations reported net income of $19.7 million for the nine months ended September 30, 2014 compared to $9.8 million for the same period in 2013. The increase in net income for the nine months ended September 30, 2014 as compared to the same period in 2013 was largely attributable to an increase in other income primarily due to a one-time $6.6 million after-tax foreign exchange gain in connection with a change in the functional currency of our Lloyd’s Operations. To a lesser extent the increase in net income was driven by increased underwriting profits in our Marine and Property Casualty business.

Our Lloyd’s Operations combined ratio for the nine months ended September 30, 2014 was 91.7% compared to 93.0% for the same period in 2013. Our Lloyd’s Operations underwriting profit increased $4.3 million to $14.6 million for the nine months ended September 30, 2014 compared to $10.4 million for the same period in 2013.

Our Lloyd’s Operations reported an underwriting profit of $14.6 million which includes an underwriting profit of $5.7 million from our Lloyd’s Energy and Engineering business driven by favorable current accident year loss trends, and to a lesser extent, prior year reserve releases from our offshore energy product line. Our Lloyd’s Operations also includes an underwriting profit of $3.4 million from Professional Liability driven by favorable loss emergence. In addition, our Lloyd’s Marine business reported an underwriting profit of $4.9 million driven by prior year reserve releases which were offset by an $8.9 million net loss, inclusive of $3.9 million of RRPs, related to a Marine Liability loss which involved the sinking of a vessel in South Korean waters.

Our Lloyd’s Operations underwriting profit for the nine months ended September 30, 2013 included $14.1 million of net prior period reserve releases in connection with continued favorable emergence from our Lloyd’s D&O, Energy & Engineering and Marine businesses, partially offset by large current accident year losses from our Lloyd’s Marine and Energy & Engineering businesses, as well as a $1.1 million foreign exchange loss on the remeasurement of certain deposits required by Lloyd’s.

47

Lloyd’s Operations Gross Written Premiums

Marine Premiums: The gross written premiums for our Marine business for the three and nine months ended September 30, 2014 and 2013 consisted of the following:

	Three Months Ended September 30,				Nine Months Ended September 30,				Percentage Change
In thousands	2014		2013		2014		2013		QTD			YTD
Marine Liability	$	7,490	$	6,072	$	35,172	$	32,729		23.3	%		7.5	%
Cargo		12,653		10,491		38,128		34,215		20.6	%		11.4	%
Marine Excess-of-Loss Reinsurance		1,124		1,074		15,351		11,638		4.6	%		31.9	%
Specie		4,719		6,252		15,497		17,583		-24.5	%		-11.9	%
Energy Liability		3,207		3,129		14,448		13,286		2.5	%		8.7	%
Transport		6,633		6,260		20,000		16,239		6.0	%		23.2	%
War		87		1,539		2,239		5,503		-94.4	%		-59.3	%
Bluewater Hull		2,655		1,192		6,695		4,353		122.7	%		53.8	%
Total Marine	$	38,568	$	36,009	$	147,530	$	135,546		7.1	%		8.8	%

The Lloyd’s Operations Marine gross written premiums increased 7.1% and 8.8% for the three and nine months ended September 30, 2014 compared to the same periods in 2013, driven by new business growth from the Marine Liability and Cargo product lines offset by reduced growth in our War and Specie product lines. For the nine months ended September 30, 2014 the increase is driven by Marine Excess-of-Loss Assumed Reinsurance product line, inclusive of $2.5 million of assumed RRPs recognized year to date. The increase is also due to new business growth in Transport, Marine Liability and Cargo.

The Lloyd’s Operation Marine business experienced average renewal rates decreases of 0.9% and renewal rate increases of 0.6% for the three and nine months ended September 30, 2014.

Property Casualty Premiums: The gross written premiums for our Property Casualty business for the three and nine months ended September 30, 2014 and 2013 consisted of the following:

	Three Months Ended September 30,				Nine Months Ended September 30,				Percentage Change
In thousands	2014		2013		2014		2013		QTD			YTD
Energy & Engineering:
Offshore Energy	$	10,877	$	14,168	$	40,814	$	42,703		-23.2	%		-4.4	%
Onshore Energy		3,800		7,844		18,894		24,598		-51.5	%		-23.2	%
Engineering and Construction		8,002		9,343		19,050		24,015		-14.4	%		-20.7	%
U.S. Direct and Facultative Property		2,580		2,347		9,606		7,716		9.9	%		24.5	%
Energy & Engineering	$	25,259	$	33,702	$	88,364	$	99,032		-25.1	%		-10.8	%
Assumed Reinsurance:
Property	$	3,246	$	—	$	8,267	$	—		NM			NM
Latin American		2,527		2,011		3,485		2,011		25.7	%		73.3	%
Assumed Reinsurance	$	5,773	$	2,011	$	11,752	$	2,011		NM			NM
Other Property Casualty	$	140	$	156	$	1,297	$	1,101		10.3	%		17.8	%
Total Property Casualty	$	31,172	$	35,869	$	101,413	$	102,144		-13.1	%		-0.7	%

NM - Percentage change not meaningful

The Lloyd’s Operations Property Casualty gross written premiums decreased 13.1% and 0.7% for the three and nine months ended September 30, 2014 compared to the same periods in 2013. Tough market conditions and an unfavorable rating environment have led to reduced premium in our Offshore Energy, Onshore Energy and Engineering and Construction product lines for the three and nine months ended September 30, 2014. This has been offset by an increase in new business growth, specifically from our Assumed Reinsurance business product lines.

The Lloyd’s Operations Property Casualty business showed decreases of 7.6% and 6.5% on renewal rates for the three and nine months ended September 30, 2014.

48

Professional Liability Premiums: The gross written premiums for our Professional Liability business for the three and nine months ended September 30, 2014 and 2013 consisted of the following:

	Three Months Ended September 30,				Nine Months Ended September 30,				Percentage Change
In thousands	2014		2013		2014		2013		QTD			YTD
Management Liability	$	10,562	$	8,891	$	34,679	$	30,389		18.8	%		14.1	%
Errors & Omissions		4,685		3,698		17,423		11,545		26.7	%		50.9	%
Total Professional Liability	$	15,247	$	12,589	$	52,102	$	41,934		21.1	%		24.2	%

The Lloyd’s Operations Professional Liability gross written premiums increased 21.1% and 24.2% for the three and nine months ended September 30, 2014 compared to the same period in 2013, as a result of new business growth, partially offset by decreases in renewal rates of 2.8% and 3.7% for the three and nine months ended September 30, 2014.

Lloyd’s Operations Commission Expenses

The commission expenses ratios for the three and nine months ended September 30, 2014 were 18.6% and 17.7%, respectively, compared to 16.3% and 17.0% for the same periods in 2013. The increase in the commission expense ratio for the three months ended September 30, 2014 is driven by a reduction in our proportional reinsurance premiums which generate ceding commission.

Lloyd’s Operations Other Operating Expenses

Lloyd’s Operations other operating expenses were $15.2 million and $42.6 million for the three and nine months ended September 30, 2014 compared to $10.5 million and $32.9 million for the same periods in 2013, primarily due to an increase in employee costs associated with growth initiatives for our business as well as an increase in certain information technology charges assessed by Lloyd’s. Other operating expenses for the three and nine months ended September 30, 2014 were also affected by adverse exchange rate movement between the British Pound and the US Dollar which resulted in British Pound denominated expenses to increase more when expressed in US Dollar terms.

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, 2014 and December 31, 2013, our capital resources were as follows:

In thousands	September 30, 2014			December 31, 2013
Senior Notes	$	263,406		$	263,308
Stockholders’ equity		996,593			902,212
Total capitalization	$	1,259,999		$	1,165,520
Ratio of debt to total capitalization		20.9	%		22.6	%

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.

49

In July 2012, we filed a universal shelf registration statement with the SEC. This registration statement, which expires in July 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.

We primarily rely upon dividends from our subsidiaries to meet our Parent Company’s obligations. The Parent Company’s cash obligations primarily consist of semi-annual interest payments on the senior debt, which are currently $7.6 million. Going forward, the interest payments may be made from funds currently at the Parent Company or dividends from its subsidiaries.

NIC may pay dividends to the Parent Company out of its statutory earned surplus pursuant to statutory restrictions imposed under the New York insurance law. As of September 30, 2014, the maximum amount available for the payment of dividends by NIC in 2014 without prior regulatory approval is $87.4 million.

NCUL may pay dividends to the Parent Company up to the extent of available profits that have been distributed from Syndicate 1221 and as of September 30, 2014 that amount was $12.0 million (£7.4 million).

Condensed Parent Company balance sheets as of September 30, 2014 and December 31, 2013 are shown in the table below:

In thousands	September 30, 2014		December 31, 2013
Cash and investments	$	104,645	$	100,676
Investments in subsidiaries		1,134,210		1,040,214
Goodwill and other intangible assets		2,534		2,534
Other assets		26,603		26,538
Total assets	$	1,267,992	$	1,169,962
Senior Notes	$	263,406	$	263,308
Accounts payable and other liabilities		1,009		802
Accrued interest payable		6,984		3,640
Total liabilities	$	271,399	$	267,750
Stockholders’ equity	$	996,593	$	902,212
Total liabilities and stockholders’ equity	$	1,267,992	$	1,169,962

On October 4, 2013, we completed a public debt offering of $265 million principal amount of the 5.75% Senior Notes and received net proceeds of $263 million. We used the proceeds of the 5.75% Senior Notes for general corporate purposes including the redemption of our 7.0% Senior Notes. We incurred a charge of $17.9 million for the payment of call premium in connection with the redemption of the 7.0% Senior Notes. The effective interest rate related to the net proceeds received from the 5.75% Senior Notes is approximately 5.86%. Interest is payable on the 5.75% Senior Notes each April 15 and October 15.

On November 22, 2012, 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 new credit facility amended and restated a $165 million letter of credit facility entered into by the parties on March 28, 2011. 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 2013 and 2014 underwriting years, as well as open prior years. The letters of credit issued under the facility can be 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, 2014, we would be required to post additional collateral to secure the remaining letters of credit. As of September 30, 2014, letters of credit with an aggregate face amount of $150.8 million were outstanding under the credit facility and we have $1.0 million of cash collateral posted.

50

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, 2014.

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 A.M. Best 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.

On November 6, 2014 we entered into a second credit facility for $8.0 million Australian Dollars with Barclays Bank PLC to fund our participation in Syndicate 1221.The facility is used to fund Australian underwriting obligations for the 2014 and prior underwriting years. The facility contains customary covenants for facilities of this type, including a restriction on future encumbrances that are outside the ordinary course of business, and a requirement to maintain at least £75 million of Funds at Lloyd’s. As of November 6, 2014 we were in compliance with all covenants. Interest is payable on the facility at a rate of 2% per annum above a floating rate tied to the average mid-rate for Australian bills of exchange administered by the Australian Financial Markets Association. The facility may be cancelled by either party after providing written notice.

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, 2014 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 30-45 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 7 to 15 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 the same time period.

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.

51

LIQUIDITY

Consolidated Cash Flows

Net cash provided by operating activities was $181.4 million for the nine months ended September 30, 2014 compared to $130.0 million for the same period in 2013. The increase in cash flow from operations for 2014 is largely attributable to a reduction in net losses paid as well as an increase in premium collection due to growth, offset by higher operating expenses resulting from increased headcount associated with growth in our business.

Net cash used in investing activities was $194.1 million for the nine months ended September 30, 2014 compared to $46.8 million for the comparable period in 2013. Fluctuations in cash provided by, or used in, investing activities is primarily due changes in operating cash flows and the associated ongoing management of our investment portfolio.

Net cash provided by financing activities was $0.6 million for the nine months ended September 30, 2014 compared to $1.9 million for the same period in 2013. The decrease in cash provided by financing activities relates to a reduction in proceeds from exercise of stock options.

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 in general, we expect to collect our paid reinsurance recoverables under the terms described above.

Investments

As of September 30, 2014, the weighted average rating of our fixed maturities was “AA” by S&P and “Aa” by Moody’s. The entire fixed maturity investment portfolio, except for investments with a fair value of $14.0 million, consists of investment grade bonds. As of September 30, 2014, our portfolio had a duration of 3.7 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, 2014 and December 31, 2013, all fixed maturities and equity securities held by us were classified as available-for-sale.

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The following tables set forth the Company’s cash and investments as of September 30, 2014 and December 31, 2013. The tables below include OTTI securities recognized within AOCI:

	September 30, 2014
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized (Losses)			Cost or Amortized Cost
Fixed maturities:
U.S. Treasury bonds, agency bonds and foreign government bonds	$	414,348	$	2,712	$	(6,215	)	$	417,851
States, municipalities and political subdivisions		550,327		16,585		(1,360	)		535,102
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		296,198		7,201		(2,363	)		291,360
Residential mortgage obligations		34,738		1,238		(133	)		33,633
Asset-backed securities		195,180		414		(519	)		195,285
Commercial mortgage-backed securities		210,712		6,244		(588	)		205,056
Subtotal	$	736,828	$	15,097	$	(3,603	)	$	725,334
Corporate bonds		608,692		11,945		(2,350	)		599,097
Total fixed maturities	$	2,310,195	$	46,339	$	(13,528	)	$	2,277,384
Equity securities - common stocks		113,250		26,251		(772	)		87,771
Equity securities - Preferred stocks		50,223		1,481		(249	)		48,991
Short-term investments		255,445		11		—			255,434
Cash		74,408		—		—			74,408
Total	$	2,803,521	$	74,082	$	(14,549	)	$	2,743,988

	December 31, 2013
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized (Losses)			Cost or Amortized Cost
Fixed maturities:
U.S. Treasury bonds, agency bonds and foreign government bonds	$	441,685	$	2,854	$	(8,855	)	$	447,686
States, municipalities and political subdivisions		460,422		9,298		(13,651	)		464,775
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		301,274		6,779		(6,016	)		300,511
Residential mortgage obligations		41,755		1,212		(161	)		40,704
Asset-backed securities		125,133		653		(480	)		124,960
Commercial mortgage-backed securities		172,750		7,656		(374	)		165,468
Subtotal	$	640,912	$	16,300	$	(7,031	)	$	631,643
Corporate bonds		504,854		15,402		(3,443	)		492,895
Total fixed maturities	$	2,047,873	$	43,854	$	(32,980	)	$	2,036,999
Equity securities - common stocks		143,954		25,700		(550	)		118,804
Short-term investments		296,250		—		—			296,250
Cash		86,509		—		—			86,509
Total	$	2,574,586	$	69,554	$	(33,530	)	$	2,538,562

As of September 30, 2014 and December 31, 2013, fixed maturities for which non-credit OTTI was previously recognized and included in other comprehensive income are now in an unrealized gains position of $0.7 million and $0.5 million, respectively.

53

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 fixed maturities in unrealized loss positions that are not other-than-temporarily impaired before recovery. For structured securities, 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. 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. 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 investments for impairment losses could result in a significant change in impairment losses reported in the consolidated financial statements.

Invested assets increased from 2013 primarily due to positive cash flow from operations. The annualized pre-tax yield, excluding net realized gains and losses and net OTTI losses recognized in earnings, was 2.2% and 2.4% for the three and nine months ended September 30, 2014 compared to 2.4% for the three and nine months ended September 30, 2013.

The tax equivalent yields for the three months and nine months ended September 30, 2014 on a consolidated basis were 2.4% and 2.6%, respectively, compared to 2.6% for both periods during 2013. The portfolio duration was 3.7 years and 3.9 years at September 30, 2014 and September 30, 2013 respectively. During 2014, the tax-exempt portion of our investment portfolio has increased by $97.0 million to approximately 22.0% of the fixed maturities investment portfolio as of September 30, 2014 compared to approximately 20.1% at December 31, 2013.

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, 2014 are shown in the following table:

	September 30, 2014
In thousands	Fair Value		Amortized Cost
Due in one year or less	$	57,455	$	57,822
Due after one year through five years		768,839		761,771
Due after five years through ten years		376,070		370,373
Due after ten years		371,003		362,084
Mortgage- and asset-backed securities		736,828		725,334
Total	$	2,310,195	$	2,277,384

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 4.5 years.

54

The following table sets forth the amount and percentage of our fixed maturities as of September 30, 2014 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:

	September 30, 2014
In thousands	Rating	Fair Value		Percent of Total
Rating description:
Extremely strong	AAA	$	446,347		19	%
Very strong	AA		1,067,305		46	%
Strong	A		623,183		27	%
Adequate	BBB		159,354		7	%
Speculative	BB & Below		13,534		1	%
Not rated	NR		472		0	%
Total	AA	$	2,310,195		100	%

The following table sets forth our U.S. Treasury bonds, agency bonds, and foreign government bonds as of September 30, 2014 and December 31, 2013:

	September 30, 2014
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized (Losses)			Amortized Cost
U.S. Treasury bonds	$	177,933	$	1,596	$	(2,361	)	$	178,698
Agency bonds		159,921		1,050		(540	)		159,411
Foreign government bonds		76,494		66		(3,314	)		79,742
Total	$	414,348	$	2,712	$	(6,215	)	$	417,851

	December 31, 2013
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized (Losses)			Amortized Cost
U.S. Treasury bonds	$	242,379	$	1,565	$	(7,480	)	$	248,294
Agency bonds		143,063		1,002		(1,198	)		143,259
Foreign government bonds		56,243		287		(177	)		56,133
Total	$	441,685	$	2,854	$	(8,855	)	$	447,686

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, 2014 . The securities that are not rated in the table below are primarily state bonds.

In thousands		September 30, 2014
Equivalent S&P Rating	Equivalent Moody’s Rating	Fair Value		Amortized Cost		Net Unrealized Gain (Loss)
AAA/AA/A	Aaa/Aa/A	$	540,860	$	526,015	$	14,845
BBB	Baa		8,258		7,986		272
BB	Ba		—		—		—
B	B		737		630		107
CCC or lower	Caa or lower		—		—		—
NR	NR		472		471		1
Total		$	550,327	$	535,102	$	15,225

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The following table sets forth the municipal bond holdings by sectors as of September 30, 2014 and December 31, 2013:

	September 30, 2014					December 31, 2013
	Fair		Percent			Fair		Percent
In thousands	Value		of Total			Value		of Total
Municipal Sector:
General obligation	$	164,158		30	%	$	125,063		27	%
Prerefunded		17,112		3	%		15,835		3	%
Revenue		326,625		59	%		270,016		59	%
Taxable		42,432		8	%		49,508		11	%
Total	$	550,327		100	%	$	460,422		100	%

We own $80.6 million of municipal securities which are credit enhanced by various financial guarantors. As of September 30, 2014, 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. The U.S. Department of the Treasury has agreed to provide support to FNMA and FHLMC under the Preferred Stock Purchase Agreement by committing to make quarterly payments to these enterprises, if needed, to maintain a zero net worth.

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-backed 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, 2014:

	September 30, 2014
			Gross		Gross
	Fair		Unrealized		Unrealized			Amortized
In thousands	Value		Gains		Losses			Cost
Agency mortgage-backed securities:
GNMA	$	87,953	$	2,917	$	(1,341	)	$	86,377
FNMA		150,283		3,144		(953	)		148,092
FHLMC		57,962		1,140		(69	)		56,891
Total agency mortgage-backed securities	$	296,198	$	7,201	$	(2,363	)	$	291,360
Residential mortgage-backed securities:
Prime	$	13,970	$	574	$	(112	)	$	13,508
Alt-A		1,777		115		(21	)		1,683
Subprime		429		15		—			414
Non-U.S. RMBS		18,562		534		—			18,028
Total residential mortgage-backed securities	$	34,738	$	1,238	$	(133	)	$	33,633

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The following table sets forth the composition of the investments categorized as RMBS 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, 2014:

In thousands		September 30, 2014
Equivalent S&P Rating	Equivalent Moody’s Rating	Fair Value		Amortized Cost		Net Unrealized Gain (Loss)
AAA/AA/A	Aaa/Aa/A	$	23,435	$	22,906	$	529
BBB	Baa		1,780		1,795		(15	)
BB	Ba		1,185		1,206		(21	)
B	B		1,833		1,800		33
CCC or lower	Caa or lower		6,505		5,926		579
NR	NR		—		—		—
Total		$	34,738	$	33,633	$	1,105

Details of the collateral of our asset-backed securities portfolio as of September 30, 2014 are presented below:

In thousands	AAA		AA		A		BBB		BB		CCC		Fair Value		Amortized Cost		Unrealized Gain (Loss)
Auto loans	$	14,661	$	1,504	$	9,680	$	—	$	—	$	—	$	25,845	$	25,768	$	77
Credit cards		50,031		—		5,981		—		—		—		56,012		55,907		105
Collateralized Loan Obligations		70,834		6,823		—		—		—		—		77,657		78,081		(424	)
Time Share		—		—		17,180		—		—		—		17,180		17,076		104
Student Loans		1,035		—		—		—		—		—		1,035		1,013		22
Miscellaneous		6,677		—		10,774		—		—		—		17,451		17,440		11
Total	$	143,238	$	8,327	$	43,615	$	—	$	—	$	—	$	195,180	$	195,285	$	(105	)

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, 2014:

In thousands		September 30, 2014
Equivalent S&P Rating	Equivalent Moody’s Rating	Fair Value		Amortized Cost		Net Unrealized Gain (Loss)
AAA/AA/A	Aaa/Aa/A	$	210,712	$	205,056	$	5,656
BBB	Baa		—		—		—
BB	Ba		—		—		—
B	B		—		—		—
CCC or lower	Caa or lower		—		—		—
NR	NR		—		—		—
Total		$	210,712	$	205,056	$	5,656

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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, 2014:

In thousands		September 30, 2014
Equivalent S&P Rating	Equivalent Moody’s Rating	Fair Value		Amortized Cost		Net Unrealized Gain (Loss)
AAA/AA/A	Aaa/Aa/A	$	456,102	$	450,576	$	5,526
BBB	Baa		149,316		145,302		4,014
BB	Ba		3,274		3,219		55
B	B		—		—		—
CCC or lower	Caa or lower		—		—		—
NR	NR		—		—		—
Total		$	608,692	$	599,097	$	9,595

The company holds non-sovereign securities, where the issuer is located in the Euro Area, an economic and monetary union of certain member states within the European Union that have adopted the Euro as their common currency. As of September 30, 2014, the fair value of such securities was $95.8 million, with an amortized cost of $95.0 million representing 3.9% of our total fixed income and equity portfolio. Our largest exposure is in France with a total of $43.6 million followed by the Netherlands with a total of $40.9 million. We have no direct exposure to Greece, Portugal, Italy, Spain, Ukraine or Russia at September 30, 2014.

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The following table summarizes all securities in a gross unrealized loss position as of September 30, 2014 and December, 31, 2013, 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, 2014						December 31, 2013
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. Treasury bonds, agency bonds, and foreign government bonds
0-6 months		19	$	110,580	$	608		27	$	136,360		$	1,096
7-12 months		9		21,694		727		26		149,370			7,759
> 12 months		36		131,073		4,880		—		—			—
Subtotal		64	$	263,347	$	6,215		53	$	285,730		$	8,855
States, municipalities and political subdivisions
0-6 months		18	$	31,874	$	189		28	$	40,132		$	297
7-12 months		1		3,137		78		104		205,152			12,100
> 12 months		39		85,851		1,093		6		12,357			1,254
Subtotal		58	$	120,862	$	1,360		138	$	257,641		$	13,651
Agency mortgage-backed securities
0-6 months		5	$	42,373	$	230		39	$	39,458		$	434
7-12 months		2		1,636		12		64		77,860			3,768
> 12 months		61		74,476		2,121		9		22,784			1,814
Subtotal		68	$	118,485	$	2,363		112	$	140,102		$	6,016
Residential mortgage obligations
0-6 months		6	$	5,295	$	43		3	$	431		$	2
7-12 months		—		—		—		7		950			29
> 12 months		14		1,816		90		15		2,467			130
Subtotal		20	$	7,111	$	133		25	$	3,848		$	161
Asset-backed securities
0-6 months		16	$	93,871	$	200		14	$	75,887		$	479
7-12 months		3		9,930		28		1		203			1
> 12 months		2		31,663		291		—		—			—
Subtotal		21	$	135,464	$	519		15	$	76,090		$	480
Commercial mortgage-backed securities
0-6 months		9	$	48,884	$	408		4	$	6,712		$	31
7-12 months		—		—		—		2		15,098			322
> 12 months		4		15,539		180		4		774			21
Subtotal		13	$	64,423	$	588		10	$	22,584		$	374
Corporate bonds
0-6 months		59	$	218,185	$	1,016		34	$	93,591		$	717
7-12 months		6		8,006		124		18		55,021			2,726
> 12 months		11		36,689		1,210		—		—			—
Subtotal		76	$	262,880	$	2,350		52	$	148,612		$	3,443
Total fixed maturities		320	$	972,572	$	13,528		405	$	934,607		$	32,980
Equity securities - common stocks
0-6 months		5	$	15,496	$	309		5	$	7,387		$	422
7-12 months		1		3,940		433		2		3,538			128
> 12 months		1		214		30		—		—			—
Total common Stocks		7	$	19,650	$	772		7	$	10,925		$	550
Equity securities - preferred stocks
0-6 months		19	$	21,383	$	249		—	$	—		$	—
7-12 months		—		—		—		—		—			—
> 12 months		—		—		—		—		—			—
Total Preferred Stocks		19	$	21,383	$	249		—	$	—		$	—

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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 Treasury and agency bonds and agency mortgage backed securities primarily due to an increase in interest rates.

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, 2014 and December 31, 2013, the largest unrealized loss by a non-government backed issuer in the investment portfolio was $0.6 million and $1.1 million, respectively.

The following table sets forth the composition of the investments categorized as fixed maturities in our investment 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, 2014:

		September 30, 2014
In thousands		Gross Unrealized Loss					Fair Value
Equivalent S&P Rating	Equivalent Moody’s Rating	Amount		Percent of Total			Amount		Percent of Total
AAA/AA/A	Aaa/Aa/A	$	12,907		96	%	$	928,189		96	%
BBB	Baa		557		4	%		42,689		4	%
BB	Ba		34		0	%		716		0	%
B	B		16		0	%		751		0	%
CCC or lower	Caa or lower		14		0	%		227		0	%
NR	NR		—		0	%		—		0	%
Total		$	13,528		100	%	$	972,572		100	%

As of September 30, 2014, the gross unrealized losses in the table above were related to fixed maturities 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 $0.06 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.

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The contractual maturity for fixed maturities categorized by the number of years until maturity, with a gross unrealized loss as of September 30, 2014 is presented in the following table:

	September 30, 2014
	Gross Unrealized Losses					Fair Value
			Percent					Percent
In thousands	Amount		of Total			Amount		of Total
Due in one year or less	$	836		6	%	$	11,737		1	%
Due after one year through five years		4,374		32	%		370,199		38	%
Due after five years through ten years		3,723		28	%		162,429		17	%
Due after ten years		992		7	%		102,724		11	%
Mortgage- and asset-backed securities		3,603		27	%		325,483		33	%
Total	$	13,528		100	%	$	972,572		100	%

As of September 30, 2014, there were no investments with a fair value that was less than 80% of amortized cost.

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

	Three Months Ended September 30,								Nine Months Ended September 30,
	2014				2013				2014					2013
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		—	$	—		1	$	1,821		—	$	—			1	$	1,821
Commercial mortgage-backed securities		—		—		—		—		—		—			—		—
Residential mortgage-backed securities		31		41		—		—		31		(158	)		—		—
Asset-backed securities		—		—		—		—		—		—			—		—
Equities		—		—		—		—		—		—			2		42
												��
Total		31	$	41		1	$	1,821		31	$	(158	)		3	$	1,863
Less: Portion of loss in accumulated other comprehensive income (loss):
Corporate and other bonds			$	—			$	—			$	—				$	—
Commercial mortgage-backed securities				—				—				—					—
Residential mortgage-backed securities				41				—				(158	)				—
Asset-backed securities				—				—				—					—
Equities				—				—				—					—
Total			$	41			$	—			$	(158	)			$	—
Impairment losses recognized in earnings:
Corporate and other bonds			$	—			$	1,821			$	—				$	1,821
Commercial mortgage-backed securities				—				—				—					—
Residential mortgage-backed securities				—				—				—					—
Asset-backed securities				—				—				—					—
Equities				—				—				—					42
Total			$	—			$	1,821			$	—				$	1,863

The Company did not have OTTI losses during the three and nine months ended September 30, 2014. Net OTTI losses of $1.8 million for the three months ended September 30, 2013 consisted of one municipal bond. Net OTTI losses of $1.9 million for the nine months ended September 30, 2013 consisted of one municipal bond and two 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.

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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 2013 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 our Lloyd’s Operations are the British pound, the Euro and the Canadian dollar. Our Lloyd’s Operations manages its foreign currency exchange rate risk primarily through asset-liability matching.

Based on the primary foreign-denominated balances within our Lloyd’s Operations as of September 30, 2014, an assumed 5%, 10% and 15% negative currency movement would result in changes as follows:

	September 30, 2014
			Negative Currency Movement of
In millions	USD Equivalent		5%			10%			15%
Cash, cash equivalents and marketable securities at fair value	$	107.7	$	(2.3	)	$	(4.5	)	$	(6.8	)
Premiums receivable	$	35.0	$	(1.7	)	$	(3.4	)	$	(5.0	)
Reinsurance recoverables on paid, unpaid losses and LAE	$	46.7	$	(2.0	)	$	(4.0	)	$	(5.9	)
Reserves for losses and loss adjustment expenses	$	130.1	$	5.6		$	11.2		$	16.8
Total			$	(0.4	)	$	(0.7	)	$	(0.9	)

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.

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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 the 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 such 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.

Item 1A. Risk Factors

There have been no material changes from the risk factors as previously disclosed in the Company’s 2013 Annual Report onForm 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

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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 Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		The Navigators Group, Inc.
		(Company)
Dated: November 7, 2014		By:	/s/ Ciro M. DeFalco
			Ciro M. DeFalco
	Senior Vice President and Chief Financial Officer

65

INDEX TOEXHIBITS

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