Navigators (NAVG) 10-Q 2008 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period EndedJune 30, 2008

Commission file number0-15886

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.)
One Penn Plaza, New York, New York	10119
(Address of principal executive offices)	(Zip Code)

(212) 244-2333

(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. Yesþ Noo

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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filerþ Accelerated filero Non-accelerated filero Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

The number of common shares outstanding as of July 18, 2008 was 16,788,446.

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

INDEX

	Page No.
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets June 30, 2008 (Unaudited) and December 31, 2007		3
Consolidated Statements of Income (Unaudited) Three Months Ended June 30, 2008 and 2007		4
Six Months Ended June 30, 2008 and 2007		5
Consolidated Statements of Stockholders’ Equity (Unaudited) June 30, 2008 and 2007		6
Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended June 30, 2008 and 2007		7
Six Months Ended June 30, 2008 and 2007		8
Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2008 and 2007		9
Notes to Interim Consolidated Financial Statements (Unaudited)		10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3. Quantitative and Qualitative Disclosures About Market Risk		72
Item 4. Controls and Procedures		72
Part II. OTHER INFORMATION
Item 1. Legal Proceedings		73
Item 1A. Risk Factors		73
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		73
Item 3. Defaults Upon Senior Securities		74
Item 4. Submissions of Matters to a Vote of Security Holders		74
Item 5. Other Information		75
Item 6. Exhibits		75
Signature		76
Index of Exhibits		77
Exhibit 11-1
Exhibit 31-1
Exhibit 31-2
Exhibit 32-1
Exhibit 32-2

2

Part 1. Financial Information

Item 1. Financial Statements

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)

	June 30,			December 31,
	2008			2007
	(Unaudited)
ASSETS
Investments and cash:
Fixed maturities, available-for-sale, at fair value (amortized cost: 2008, $1,604,039; 2007, $1,508,489)	$	1,590,566		$	1,522,320
Equity securities, available-for-sale, at fair value (cost: 2008, $70,178; 2007, $65,492)		68,089			67,240
Short-term investments, at fair value		174,874			170,685
Cash		14,499			7,056
Total investments and cash		1,848,028			1,767,301
Premiums in course of collection		197,490			163,081
Commissions receivable		444			2,381
Prepaid reinsurance premiums		194,195			188,961
Reinsurance receivable on paid losses		78,087			94,818
Reinsurance receivable on unpaid losses and loss adjustment expenses		778,715			801,461
Net deferred income tax benefit		45,412			29,249
Deferred policy acquisition costs		55,100			51,895
Accrued investment income		16,870			15,605
Goodwill and other intangible assets		8,101			8,084
Other assets		23,058			20,935
Total assets	$	3,245,500		$	3,143,771
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses	$	1,707,101		$	1,648,764
Unearned premium		518,354			469,481
Reinsurance balances payable		148,632			161,829
Senior notes		123,732			123,673
Federal income tax payable		16,279			10,868
Accounts payable and other liabilities		55,045			67,050
Total liabilities		2,569,143			2,481,665
Stockholders’ equity:
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued		—			—
Common stock, $.10 par value, shares authorized: 50,000,000 at 6/30/08 and 12/31/07; issued and outstanding: 16,788,446 (net of treasury stock) at 6/30/08 and 16,873,094 at 12/31/07		1,700			1,687
Additional paid-in capital		295,304			291,616
Retained earnings		395,755			355,084
Treasury stock, at cost (186,026 shares at 6/30/08)		(9,816	)		—
Accumulated other comprehensive income (loss)		(6,586	)		13,719
Total stockholders’ equity		676,357			662,106
Total liabilities and stockholders’ equity	$	3,245,500		$	3,143,771

See accompanying notes to interim consolidated financial statements.

3

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
($ and shares in thousands, except net income per share)

	Three Months Ended
	June 30,
	2008			2007
	(Unaudited)
Gross written premium	$	279,213		$	276,549
Revenues:
Net written premium	$	174,287		$	161,350
(Increase) in unearned premium		(11,584	)		(15,733	)
Net earned premium		162,703			145,617
Commission income		467			486
Net investment income		18,731			17,330
Net realized capital gains (losses)		(7,976	)		840
Other income (expense)		1,010			(253	)
Total revenues		174,935			164,020
Operating expenses:
Net losses and loss adjustment expenses incurred		91,889			79,739
Commission expense		23,490			17,650
Other operating expenses		33,237			28,608
Interest expense		2,217			2,215
Total operating expenses		150,833			128,212
Income before income tax expense		24,102			35,808
Income tax expense (benefit):
Current		12,156			13,505
Deferred		(5,475	)		(2,072	)
Total income tax expense		6,681			11,433
Net income	$	17,421		$	24,375
Net income per common share:
Basic	$	1.04		$	1.45
Diluted	$	1.03		$	1.44
Average common shares outstanding:
Basic		16,773			16,786
Diluted		16,912			16,919

See accompanying notes to interim consolidated financial statements.

4

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
($ and shares in thousands, except net income per share)

	Six Months Ended
	June 30,
	2008			2007
	(Unaudited)
Gross written premium	$	566,359		$	577,410
Revenues:
Net written premium	$	362,009		$	334,369
(Increase) in unearned premium		(43,566	)		(49,706	)
Net earned premium		318,443			284,663
Commission income		728			894
Net investment income		37,569			33,546
Net realized capital gains (losses)		(8,052	)		1,041
Other income (expense)		1,021			(324	)
Total revenues		349,709			319,820
Operating expenses:
Net losses and loss adjustment expenses incurred		180,309			160,931
Commission expense		44,438			34,749
Other operating expenses		62,993			54,897
Interest expense		4,434			4,430
Total operating expenses		292,174			255,007
Income before income tax expense		57,535			64,813
Income tax expense (benefit):
Current		22,462			22,781
Deferred		(5,598	)		(2,015	)
Total income tax expense		16,864			20,766
Net income	$	40,671		$	44,047
Net income per common share:
Basic	$	2.42		$	2.63
Diluted	$	2.39		$	2.60
Average common shares outstanding:
Basic		16,817			16,771
Diluted		17,002			16,947

See accompanying notes to interim consolidated financial statements.

5

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
($ in thousands)

	Six Months Ended
	June 30,
	2008			2007
	(Unaudited)
Preferred Stock
Balance at beginning and end of period	$	—		$	—
Common stock
Balance at beginning of year	$	1,687		$	1,674
Shares issued under stock plans		13			9
Balance at end of period	$	1,700		$	1,683
Additional paid-in capital
Balance at beginning of year	$	291,616		$	286,732
Shares issued under stock plans		3,688			3,301
Balance at end of period	$	295,304		$	290,033
Retained earnings
Balance at beginning of year	$	355,084		$	259,464
Net income		40,671			44,047
Balance at end of period	$	395,755		$	303,511
Treasury stock, at cost
Balance at beginning of year	$	—		$	—
Treasury stock acquired		(9,816	)		—
Balance at end of period	$	(9,816	)	$	—
Accumulated other comprehensive income (loss)
Net unrealized gains (losses) on securities, net of tax
Balance at beginning of year	$	10,186		$	849
Change in period		(20,398	)		(11,468	)
Balance at end of period		(10,212	)		(10,619	)
Cumulative translation adjustments, net of tax
Balance at beginning of year		3,533			2,624
Net adjustment for period		93			801
Balance at end of period		3,626			3,425
Balance at end of period	$	(6,586	)	$	(7,194	)
Total stockholders’ equity at end of period	$	676,357		$	588,033

See accompanying notes to interim consolidated financial statements.

6

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)

	Three Months Ended
	June 30,
	2008			2007
	(Unaudited)
Net income	$	17,421		$	24,375
Other comprehensive (loss):
Change in net unrealized gains (losses) on securities, net of tax (benefit) of ($9,337) and ($6,906) in 2008 and 2007, respectively(1)		(16,986	)		(12,964	)
Change in foreign currency translation gains, net of tax expense of $909 and $376 in 2008 and 2007, respectively		375			696
Other comprehensive loss		(16,611	)		(12,268	)
Comprehensive income	$	810		$	12,107
(1) Disclosure of reclassification amount, net of tax:
Unrealized holding (losses) arising during period	$	(22,171	)	$	(12,418	)
Less: reclassification adjustment for net realized capital gains (losses) included in net income		(5,185	)		546
Change in net unrealized gains (losses) on securities	$	(16,986	)	$	(12,964	)

See accompanying notes to interim consolidated financial statements.

7

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)

	Six Months Ended
	June 30,
	2008			2007
	(Unaudited)
Net income	$	40,671		$	44,047
Other comprehensive (loss):
Change in net unrealized gains (losses) on securities, net of tax (benefit) of ($10,742) and ($6,135) in 2008 and 2007, respectively(1)		(20,398	)		(11,468	)
Change in foreign currency translation gains, net of tax expense of $50 and $432 in 2008 and 2007, respectively		93			801
Other comprehensive loss		(20,305	)		(10,667	)
Comprehensive income	$	20,366		$	33,380
(1) Disclosure of reclassification amount, net of tax:
Unrealized holding (losses) arising during period	$	(25,633	)	$	(10,793	)
Less: reclassification adjustment for net realized capital capital gains (losses) included in net income		(5,235	)		675
Change in net unrealized gains (losses) on securities	$	(20,398	)	$	(11,468	)

8

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)

	Six Months Ended
	June 30,
	2008			2007
	(Unaudited)
Operating activities:
Net income	$	40,671		$	44,047
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation & amortization		2,422			1,566
Net deferred income tax expense (benefit)		(5,598	)		(2,015	)
Net realized capital (gains) losses		8,052			(1,041	)
Changes in assets and liabilities:
Reinsurance receivable on paid and unpaid losses and LAE		40,156			83,662
Reserve for losses and LAE		56,873			(15,197	)
Prepaid reinsurance premiums		(5,019	)		(28,036	)
Unearned premium		48,311			76,641
Premiums in course of collection		(34,052	)		(59,036	)
Commissions receivable		1,933			948
Deferred policy acquisition costs		(3,143	)		(11,076	)
Accrued investment income		(1,342	)		(944	)
Reinsurance balances payable		(13,331	)		5,565
Federal income tax		5,354			5,783
Other		(7,887	)		10,800
Net cash provided by operating activities		133,400			111,667
Investing activities:
Fixed maturities, available-for-sale
Redemptions and maturities		72,764			91,547
Sales		84,562			99,425
Purchases		(253,945	)		(278,382	)
Equity securities, available-for-sale
Sales		12,063			11,071
Purchases		(25,893	)		(26,092	)
Change in payable for securities		(2,046	)		(361	)
Net change in short-term investments		(3,736	)		(8,126	)
Purchase of property and equipment		(1,618	)		(4,353	)
Net cash (used in) investing activities		(117,849	)		(115,271	)
Financing activities:
Purchase of treasury stock		(9,816	)		—
Proceeds of stock issued from employee stock purchase plan		520			301
Proceeds of stock issued from exercise of stock options		1,188			1,113
Net cash provided by (used in) financing activities		(8,108	)		1,414
Effect of exchange rate changes on foreign currency cash		—			4
Increase (decrease) in cash		7,443			(2,186	)
Cash at beginning of year		7,056			2,404
Cash at end of period	$	14,499		$	218
Supplemental disclosures of cash flow information:
Federal, state and local income tax paid	$	15,430		$	16,028
Interest paid		4,375			4,375
Issuance of stock to directors		200			181

See accompanying notes to interim consolidated financial statements.

9

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements
(Unaudited)

Note 1. Accounting Policies

The accompanying interim consolidated financial statements are unaudited but reflect all adjustments which, in the opinion of management, are necessary to provide a fair statement of the results of The Navigators Group, Inc. and its subsidiaries for the interim periods presented on the basis of United States generally accepted accounting principles (“GAAP” or “U.S. GAAP”). All such adjustments are of a normal recurring nature. All significant intercompany transactions and balances have been eliminated. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods. The results of operations for any interim period are not necessarily indicative of results for the full year. The terms “we”, “us”, “our” and “the Company” as used herein are used to mean The Navigators Group, Inc. and its subsidiaries, unless the context otherwise requires. The term “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 2007 Annual Report on Form 10-K. Certain amounts for the prior year have been reclassified to conform to the current year’s presentation.

Note 2. Reinsurance Ceded

The Company’s ceded earned premiums were $99.0 million and $106.1 million for the three months ended June 30, 2008 and 2007, respectively, and were $199.1 million and $214.0 million for the six months ended June 30, 2008 and 2007, respectively. The Company’s ceded incurred losses were $60.3 million and $38.8 million for the three months ended June 30, 2008 and 2007, respectively, and were $82.0 million and $102.4 million for the six months ended June 30, 2008 and 2007, respectively.

Note 3. Segment Information

The Company’s subsidiaries are primarily engaged in the underwriting and management of property and casualty insurance.

The Company classifies its business into two underwriting segments consisting of the Insurance Companies and the Lloyd’s Operations, which are separately managed, and a Corporate segment. Segment data for each of the two underwriting segments include allocations of revenues and expenses of the Navigators Agencies’ and the Parent Company’s expenses and related income tax amounts.

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

10

The Insurance Companies consist of Navigators Insurance Company, including it’s branch located in the United Kingdom (the “U.K. Branch”), and its wholly-owned subsidiary, Navigators Specialty Insurance Company. They are primarily engaged in underwriting marine insurance and related lines of business, professional liability insurance, specialty lines of business including contractors general liability insurance, commercial and personal umbrella and primary and excess casualty businesses, and middle markets business consisting of general liability, commercial automobile liability and property insurance for a variety of commercial middle markets businesses. Navigators Specialty Insurance Company underwrites specialty and professional liability insurance on an excess and surplus lines basis fully reinsured by Navigators Insurance Company. The Lloyd’s Operations primarily underwrite marine and related lines of business along with professional liability insurance, and construction coverages for onshore energy business at Lloyd’s of London (“Lloyd’s”) through Lloyd’s Syndicate 1221 (“Syndicate 1221”). The European property business, written by the Lloyd’s Operations and the U.K. Branch beginning in 2006, was discontinued in the 2008 second quarter. Our Lloyd’s Operations include Navigators Underwriting Agency Ltd. (“NUAL”), a Lloyd’s underwriting agency which manages Syndicate 1221. We participate in the capacity of Syndicate 1221 through two wholly-owned Lloyd’s corporate members. Navigators Management Company, Inc. (“NMC”) is a wholly-owned underwriting management company which produces, manages and underwrites insurance and reinsurance for the Company. During the 2008 second quarter, Navigators California Insurance Services, Inc. and Navigators Special Risk, Inc., also wholly-owned underwriting management companies, were merged into NMC.

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

Effective in 2008, the Company has reclassified certain of its business which had no effect on its segment classifications. The inland marine business, formerly included in other business of the Insurance Companies, is now included in the Insurance Companies’ marine business. Middle markets business, formerly included in the specialty business of the Insurance Companies, is now broken out separately. Underwriting data for prior periods has been reclassified to reflect these changes.

11

Financial data by segment for the three and six months ended June 30, 2008 and 2007 follows:

	Three Months Ended June 30, 2008
	Insurance			Lloyd’s
	Companies			Operations			Corporate			Total
	($ in thousands)
Gross written premium	$	197,956		$	81,257					$	279,213
Net written premium		128,182			46,105						174,287
Net earned premium		117,434			45,269						162,703
Net losses and LAE		(62,225	)		(29,664	)					(91,889	)
Commission expense		(14,723	)		(8,767	)					(23,490	)
Other operating expenses		(24,552	)		(8,685	)					(33,237	)
Commission income and other income (expense)		1,516			(39	)					1,477
Underwriting profit		17,450			(1,886	)					15,564
Net investment income		15,593			2,871		$	267			18,731
Net realized capital gains (losses)		(8,053	)		77			—			(7,976	)
Interest expense		—			—			(2,217	)		(2,217	)
Income (loss) before income taxes		24,990			1,062			(1,950	)		24,102
Income tax expense (benefit)		6,939			425			(683	)		6,681
Net income (loss)	$	18,051		$	637		$	(1,267	)	$	17,421
Identifiable assets(1)	$	2,383,898		$	773,572		$	68,413		$	3,245,500
Loss and LAE ratio		53.0	%		65.5	%					56.5	%
Commission expense ratio		12.5	%		19.4	%					14.4	%
Other operating expense ratio(2)		19.6	%		19.3	%					19.5	%
Combined ratio		85.1	%		104.2	%					90.4	%

(1)	Includes inter-segment transactions causing the row not to crossfoot.
(2)	Includesother operating expensesandcommission income and other income (expense).

12

	Three Months Ended June 30, 2008
	Insurance		Lloyd’s
	Companies		Operations		Total
	($ in thousands)
Gross written premium:
Marine & Energy	$	77,996	$	59,872	$	137,868
Specialty		84,013		—		84,013
Professional Liability		26,437		8,399		34,836
Middle Markets		7,744		—		7,744
Property/Other		1,766		12,986		14,752
Total	$	197,956	$	81,257	$	279,213
Net written premium:
Marine & Energy	$	45,123	$	38,297	$	83,420
Specialty		57,998		—		57,998
Professional Liability		15,906		5,081		20,987
Middle Markets		7,252		—		7,252
Property/Other		1,903		2,727		4,630
Total	$	128,182	$	46,105	$	174,287
Net earned premium:
Marine & Energy	$	36,456	$	37,103	$	73,559
Specialty		56,574		—		56,574
Professional Liability		14,388		5,141		19,529
Middle Markets		6,736		—		6,736
Property/Other		3,280		3,025		6,305
Total	$	117,434	$	45,269	$	162,703

13

	Three Months Ended June 30, 2007
	Insurance			Lloyd’s
	Companies			Operations			Corporate			Total
	($ in thousands)
Gross written premium	$	198,560		$	77,989					$	276,549
Net written premium		124,073			37,277						161,350
Net earned premium		109,735			35,882						145,617
Net losses and LAE		(63,725	)		(16,014	)					(79,739	)
Commission expense		(13,903	)		(3,747	)					(17,650	)
Other operating expenses		(21,057	)		(7,551	)					(28,608	)
Commission income and other income (expense)		96			137						233
Underwriting profit		11,146			8,707						19,853
Net investment income		14,440			2,407		$	483			17,330
Net realized capital gains		834			6			—			840
Interest expense		—			—			(2,215	)		(2,215	)
Income (loss) before income taxes		26,420			11,120			(1,732	)		35,808
Income tax expense (benefit)		8,163			3,875			(605	)		11,433
Net income (loss)	$	18,257		$	7,245		$	(1,127	)	$	24,375
Identifiable assets(1)	$	2,240,321		$	774,796		$	63,374		$	3,092,963
Loss and LAE ratio		58.1	%		44.6	%					54.8	%
Commission expense ratio		12.7	%		10.4	%					12.1	%
Other operating expense ratio(2)		19.0	%		20.6	%					19.5	%
Combined ratio		89.8	%		75.6	%					86.4	%

(1)	Includes inter-segment transactions causing the row not to crossfoot.
(2)	Includesother operating expensesandcommission income and other income (expense).

14

	Three Months Ended June 30, 2007
	Insurance		Lloyd’s
	Companies		Operations		Total
	($ in thousands)
Gross written premium:
Marine & Energy	$	70,601	$	55,922	$	126,523
Specialty		91,398		—		91,398
Professional Liability		24,351		10,534		34,885
Middle Markets		6,637		—		6,637
Property/Other		5,573		11,533		17,106
Total	$	198,560	$	77,989	$	276,549
Net written premium:
Marine & Energy	$	37,229	$	27,038	$	64,267
Specialty		62,490		—		62,490
Professional Liability		14,767		6,126		20,893
Middle Markets		4,624		—		4,624
Property/Other		4,963		4,113		9,076
Total	$	124,073	$	37,277	$	161,350
Net earned premium:
Marine & Energy	$	34,005	$	30,005	$	64,010
Specialty		54,378		—		54,378
Professional Liability		13,334		1,954		15,288
Middle Markets		4,539		—		4,539
Property/Other		3,479		3,923		7,402
Total	$	109,735	$	35,882	$	145,617

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	Six Months Ended June 30, 2008
	Insurance			Lloyd’s
	Companies			Operations			Corporate			Total
	($ in thousands)
Gross written premium	$	389,552		$	176,807					$	566,359
Net written premium		252,492			109,517						362,009
Net earned premium		229,680			88,763						318,443
Net losses and LAE		(129,581	)		(50,728	)					(180,309	)
Commission expense		(27,671	)		(16,767	)					(44,438	)
Other operating expenses		(46,700	)		(16,293	)					(62,993	)
Commission income and other income (expense)		1,774			(25	)					1,749
Underwriting profit		27,502			4,950						32,452
Net investment income		31,058			5,853		$	658			37,569
Net realized capital gains (losses)		(8,155	)		103			—			(8,052	)
Interest expense		—			—			(4,434	)		(4,434	)
Income (loss) before income taxes		50,405			10,906			(3,776	)		57,535
Income tax expense (benefit)		14,309			3,877			(1,322	)		16,864
Net income (loss)	$	36,096		$	7,029		$	(2,454	)	$	40,671
Identifiable assets(1)	$	2,383,898		$	773,572		$	68,413		$	3,245,500
Loss and LAE ratio		56.4	%		57.1	%					56.6	%
Commission expense ratio		12.0	%		18.9	%					14.0	%
Other operating expense ratio(2)		19.6	%		18.4	%					19.2	%
Combined ratio		88.0	%		94.4	%					89.8	%

(1)	Includes inter-segment transactions causing the row not to crossfoot.
(2)	Includesother operating expensesandcommission income and other income (expense).

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	Six Months Ended June 30, 2008
	Insurance		Lloyd’s
	Companies		Operations		Total
	($ in thousands)
Gross written premium:
Marine & Energy	$	160,531	$	134,825	$	295,356
Specialty		162,895		—		162,895
Professional Liability		45,724		19,069		64,793
Middle Markets		15,758		—		15,758
Property/Other		4,644		22,913		27,557
Total	$	389,552	$	176,807	$	566,359
Net written premium:
Marine & Energy	$	94,794	$	90,799	$	185,593
Specialty		111,942		—		111,942
Professional Liability		27,639		11,873		39,512
Middle Markets		13,778		—		13,778
Property/Other		4,339		6,845		11,184
Total	$	252,492	$	109,517	$	362,009
Net earned premium:
Marine & Energy	$	69,682	$	71,095	$	140,777
Specialty		113,243		—		113,243
Professional Liability		28,461		11,100		39,561
Middle Markets		12,433		—		12,433
Property/Other		5,861		6,568		12,429
Total	$	229,680	$	88,763	$	318,443

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	Six Months Ended June 30, 2007
	Insurance			Lloyd’s
	Companies			Operations			Corporate			Total
	($ in thousands)
Gross written premium	$	407,434		$	169,976					$	577,410
Net written premium		246,121			88,248						334,369
Net earned premium		211,547			73,116						284,663
Net losses and LAE		(125,065	)		(35,866	)					(160,931	)
Commission expense		(24,986	)		(9,763	)					(34,749	)
Other operating expenses		(39,826	)		(15,071	)					(54,897	)
Commission income and other income (expense)		585			(15	)					570
Underwriting profit		22,255			12,401						34,656
Net investment income		28,094			4,558		$	894			33,546
Net realized capital (losses)		1,077			(36	)		—			1,041
Interest expense		—			—			(4,430	)		(4,430	)
Income (loss) before income taxes		51,426			16,923			(3,536	)		64,813
Income tax expense (benefit)		16,074			5,929			(1,237	)		20,766
Net income (loss)	$	35,352		$	10,994		$	(2,299	)	$	44,047
Identifiable assets(1)	$	2,240,321		$	774,796		$	63,374		$	3,092,963
Loss and LAE ratio		59.1	%		49.1	%					56.5	%
Commission expense ratio		11.8	%		13.4	%					12.2	%
Other operating expense ratio(2)		18.6	%		20.5	%					19.1	%
Combined ratio		89.5	%		83.0	%					87.8	%

(1)	Includes inter-segment transactions causing the row not to crossfoot.
(2)	Includesother operating expensesandcommission income and other income (expense).

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	Six Months Ended June 30, 2007
	Insurance		Lloyd’s
	Companies		Operations		Total
	($ in thousands)
Gross written premium:
Marine & Energy	$	157,457	$	133,601	$	291,058
Specialty		180,815		—		180,815
Professional Liability		44,833		16,012		60,845
Middle Markets		12,941		—		12,941
Property/Other		11,388		20,363		31,751
Total	$	407,434	$	169,976	$	577,410
Net written premium:
Marine & Energy	$	82,964	$	72,526	$	155,490
Specialty		117,076		—		117,076
Professional Liability		26,959		9,509		36,468
Middle Markets		8,593		—		8,593
Property/Other		10,529		6,213		16,742
Total	$	246,121	$	88,248	$	334,369
Net earned premium:
Marine & Energy	$	67,494	$	62,346	$	129,840
Specialty		103,421		—		103,421
Professional Liability		26,371		4,911		31,282
Middle Markets		9,109		—		9,109
Property/Other		5,152		5,859		11,011
Total	$	211,547	$	73,116	$	284,663

The Insurance Companies’ net earned premium includes $16.4 million and $17.0 million of net earned premium from the U.K. Branch for the three months ended June 30, 2008 and 2007, respectively, and $31.1 million and $32.4 million of net earned premium from the U.K. Branch for the six months ended June 30, 2008 and 2007, respectively.

Note 4. Comprehensive Income

Comprehensive income encompasses net income, net unrealized capital gains and losses on available for sale securities, and foreign currency translation adjustments, all of which are net of tax. Please refer to theConsolidated Statements of Stockholders’ Equityand theConsolidated Statements of Comprehensive Income, included herein, for the components ofaccumulated other comprehensive income (loss)and ofcomprehensive income (loss), respectively.

Note 5. Stock-Based Compensation

Stock-based compensation is expensed as stock awards granted under the Company’s stock plans vest, with the expense being included inother operating expensesfor the periods indicated. The amounts charged to expense for stock-based compensation were $2.5 million and $1.9 million for the three months ended June 30, 2008 and 2007, respectively, and $4.4 million and $3.5 million for the six months ended June 30, 2008 and 2007, respectively.

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The Company expensed $52,000 and $35,000 for the three months ended June 30, 2008 and 2007, respectively, and $93,000 and $70,000 for the six months ended June 30, 2008 and 2007, respectively, related to its Employee Stock Purchase Plan.

In addition, $50,000 was expensed in each of the three month periods ended June 30, 2008 and 2007 and $100,000 was expensed in each of the six month periods ended June 30, 2008 and 2007 for stock issued annually to non-employee directors as part of their directors’ compensation for serving on the Parent Company’s Board of Directors.

Note 6. Application of New Accounting Standards

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 141(R),Business Combinations, which requires most identifiable assets, liabilities, non-controlling interests, and goodwill acquired in a business combination to be recorded at full fair value. Under SFAS 141(R), all business combinations will be accounted for by applying the acquisition method (referred to as the purchase method in SFAS 141,Business Combinations). SFAS 141(R) is effective for fiscal years beginning on or after December 15, 2008 and is to be applied to business combinations occurring after the effective date. The Company does not expect the adoption of SFAS 141(R) to have a material effect on its financial condition or results of operations.

In December 2007, the FASB issued SFAS 160,Noncontrolling Interests in Consolidated Financial Statements, which requires noncontrolling interests (previously referred to as minority interests) to be treated as a separate component of equity, not as a liability or other item outside of permanent equity. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The Company does not expect the adoption of SFAS 160 to have a material effect on its financial condition or results of operations.

In March 2008, the FASB issued SFAS 161,Disclosures about Derivative Instruments and Hedging Activities, which amends SFAS 133,Accounting for Derivative Instruments and Hedging Activities. SFAS 161 enhances the current disclosure framework in SFAS 133 and requires companies with derivative instruments to disclose information about how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133, and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. SFAS 161 is effective prospectively for periods beginning on or after November 15, 2008. Early adoption is encouraged. The Company does not expect the adoption of SFAS 161 to have a material effect on its financial condition or results of operations.

In May 2008, the FASB issued SFAS 162,The Hierarchy of Generally Accepted Accounting Principles, which identifies the sources of generally accepted accounting principles and provides a framework, or hierarchy, for selecting the principles to be used in preparing U.S. GAAP financial statements for nongovernmental entities. SFAS 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board’s related amendments to AU Section 411,The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles, to remove the GAAP hierarchy from its auditing standards. The Company does not expect the adoption of SFAS 162 to have a material effect on its financial condition or results of operations.

Note 7. Syndicate 1221

We record our pro rata share of Syndicate 1221’s assets, liabilities, revenues and expenses, after making adjustments to convert Lloyd’s accounting to U.S. GAAP. The most significant U.S. GAAP adjustments relate to income recognition. Our participation in Syndicate 1221 is represented by and recorded as our proportionate share of the underlying assets and liabilities and results of operations of the syndicate, since (a) we hold an undivided interest in each asset, (b) we are proportionately liable for each liability and (c) Syndicate 1221 is not a separate legal entity.

Lloyd’s presents its results on an underwriting year basis, generally closing each underwriting year after three years. We make estimates for each underwriting year and timely accrue the expected results. Our Lloyd’s Operations included in the consolidated financial statements represent our participation in Syndicate 1221.

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Syndicate 1221’s stamp capacity is £123.0 million ($239.2 million) for the 2008 underwriting year compared to £140.0 million ($280.2 million) for the 2007 underwriting year. Stamp capacity is a measure of the amount of premium a Lloyd’s syndicate is authorized to write based on a business plan approved by the Council of Lloyd’s. Syndicate 1221’s capacity is expressed net of commission (as is standard at Lloyd’s). The Syndicate 1221 premium recorded in the Company’s financial statements is gross of commission. Navigators provides 100% of Syndicate 1221’s capacity for the 2008 and 2007 underwriting years through Navigators Corporate Underwriters Ltd. in 2008 and through Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. in 2007.

The Company provides letters of credit to Lloyd’s to support its Syndicate 1221 capacity. If the Company increases its participation or if Lloyd’s changes the capital requirements, the Company may be required to supply additional letters of credit or other collateral acceptable to Lloyd’s, or reduce the capacity of Syndicate 1221. The letters of credit are provided through a credit facility with a consortium of banks which expires March 31, 2009. If the banks decide not to renew the credit facility, the Company will need to find other sources to provide the letters of credit or other collateral in order to continue to participate in Syndicate 1221. The bank facility is collateralized by all of the common stock of Navigators Insurance Company.

Note 8. Income Taxes

We are subject to the tax regulations of the United States (“U.S.”) and foreign countries in which we operate. The Company files a consolidated federal tax return, which includes all domestic subsidiaries and the U.K. Branch. The income from the foreign operations is designated as either U.S. connected income or non-U.S. connected income. Lloyd’s is required to pay U.S. income tax on U.S. connected income written by Lloyd’s syndicates. Lloyd’s and the 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 members in proportion to their participation in the relevant syndicates. The Company’s corporate members are subject to this agreement and will receive United Kingdom (“U.K.”) tax credits 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 Internal Revenue Code (“Subpart F”) since less than 50% of Syndicate 1221’s premium is 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 our foreign source insurance income and foreign tax credits, where available, are utilized to offset U.S. tax as permitted. The Company’s effective tax rate for Syndicate 1221 taxable income could substantially exceed 35% to the extent the Company is unable to offset U.S. taxes paid under Subpart F tax regulations with U.K. tax credits on future underwriting year distributions. U.S. taxes are not accrued on the earnings of the Company’s foreign agencies as these earnings are not subject to the Subpart F tax regulations. These earnings are subject to taxes under U.K. tax regulations at a 28% rate effective April 1, 2008. The effective rate prior to April 1, 2008 was 30%. We have not provided for U.S. deferred income taxes on the undistributed earnings of our non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in our non-U.S. subsidiaries. The effect of the tax rate change was not material to the Company’s financial statements.

A tax benefit taken in the tax return but not in the financial statements is known as an unrecognized tax benefit. The Company had no unrecognized tax benefits at either June 30, 2008 or June 30, 2007 and does not anticipate any significant unrecognized tax benefits within the next twelve months. The Company is currently not under examination by any major U.S. or foreign tax authority and is generally subject to U.S. Federal, state, local, or foreign tax examinations by tax authorities for years 2004 and subsequent. The Company’s policy is to record interest and penalties related to unrecognized tax benefits to income tax expense. The Company did not incur any interest or penalties related to unrecognized tax benefits for the three or six month periods ended June 30, 2008 and 2007.

The Company had state and local deferred tax assets amounting to potential future tax benefits of $7.6 million and $6.3 million at June 30, 2008 and December 31, 2007, respectively. Included in the deferred tax assets are state and local net operating loss carryforwards of $1.2 million and $2.5 million at June 30, 2008 and December 31, 2007, respectively. 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 carryforwards at June 30, 2008 expire in 2025.

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Note 9. Commitments and Contingencies

(a) The Company is not a party to, or the subject of, any material pending legal proceedings that depart from the routine litigation incidental to the kinds of business it conducts.

(b) Whenever a member of Lloyd’s is unable to pay its debts to policyholders, such debts may be payable by the Lloyd’s Central Fund. If Lloyd’s determines that the Central Fund needs to be increased, it has the power to assess premium levies on current Lloyd’s members up to 3% of a member’s underwriting capacity in any one year. The Company does not believe that any assessment is likely in the foreseeable future and has not provided any allowance for such an assessment. However, based on the Company’s 2008 capacity at Lloyd’s of £123.0 million, the June 30, 2008 exchange rate of £1 equals $1.99 and assuming the maximum 3% assessment, the Company would be assessed approximately $7.3 million.

Note 10. Senior Notes due May 1, 2016

On April 17, 2006, the Company completed a public debt offering of $125 million principal amount of 7% senior unsecured notes due May 1, 2016 (the “Senior Notes”) and received net proceeds of $123.5 million. The interest payment dates on the Senior Notes are each May 1 and November 1. The effective interest rate related to the Senior Notes, based on the proceeds net of discount and all issuance costs, approximates 7.17%. The interest expense on the Senior Notes was $2.2 million for each of the three months ended June 30, 2008 and 2007 and $4.4 million for each of the six months ended June 30, 2008 and 2007. The fair value of the Senior Notes, based on quoted market prices, was $119.8 million and $126.7 million at June 30, 2008 and December 31, 2007, respectively.

The Senior Notes, the Company’s only senior unsecured obligation, will rank equally with future senior unsecured indebtedness. The Company may redeem the Senior Notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price. The terms of the Senior Notes contain various restrictive business and financial covenants typical for debt obligations of this type, including limitations on mergers, liens and dispositions of the common stock of certain subsidiaries. As of June 30, 2008, the Company was in compliance with all such covenants.

Note 11. Fair Value Measurements

In September 2006, the FASB issued SFAS 157,Fair Value Measurements, which was adopted by the Company on January 1, 2008. SFAS 157 defines fair value, expands disclosure requirements around fair value and specifies a hierarchy of valuation techniques based on whether the input to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:

• Level 1 — Quoted prices for identical instruments in active markets.

• 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.

• Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

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This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

The following table presents, for each of the fair value hierarchy levels, the Company’s fixed maturities, equity securities and short-term investments that are measured at fair value at June 30, 2008:

	Quoted Prices		Significant
	In Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	Level 1		Level 2		Level 3		Total
	($ in thousands)
Fixed maturities	$	177,161	$	1,412,419	$	986	$	1,590,566
Equities securities		68,089		—		—		68,089
Short-term investments		143,631		31,243		—		174,874
Total	$	388,881	$	1,443,662	$	986	$	1,833,529

The securities classified as Level 3 in the above table consist of structured securities rated “AAA/Aaa” by Standard and Poor’s (“S&P”) and Moody’s Investors Service (“Moody’s”), respectively, with unobservable inputs included in the Company’s fixed maturities portfolio for which price quotes from brokers were used to indicate fair value. The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value using Level 3 inputs during the three and six months ended June 30, 2008:

	Three Months Ended
	June 30, 2008
	($ in thousands)
Level 3 investments as of April 1, 2008	$	2,073
Unrealized net gains included in other comprehensive income (loss)		(18	)
Purchases, sales, paydowns and amortization		(134	)
Transfer to Level 2		(935	)
Level 3 investments as of June 30, 2008	$	986

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	Six Months Ended
	June 30, 2008
	($ in thousands)
Level 3 investments as of January 1, 2008	$	2,603
Unrealized net gains included in other comprehensive income (loss)		(1	)
Purchases, sales, paydowns and amortization		(287	)
Transfer to Level 2		(1,329	)
Level 3 investments as of June 30, 2008	$	986

In February 2007, the FASB issued SFAS 159,The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value with changes in fair value reported in earnings. The Company adopted SFAS 159 on January 1, 2008 and did not elect to apply fair value accounting to any financial instruments with future changes in value reported in earnings.

The 2008 second quarter’s net realized capital losses include a provision of $8.4 million for declines in market value of equity securities which were considered to be other-than-temporary, as further discussed under the caption Investments, included herein. In light of the continuing decline in the fair value of these securities during the quarter, the Company no longer believes that their values will recover in the foreseeable future.

Note 12. Share Repurchases

In October 2007 the Parent Company’s Board of Directors adopted a stock repurchase program for up to $30 million of the Parent Company’s common stock. Purchases may be made from time to time at prevailing prices in open market or privately negotiated transactions through December 31, 2008. The timing and amount of purchases under the program will depend on a variety of factors, including the trading price of the stock, market conditions and corporate and regulatory considerations. There were no purchases made in the 2007 fourth quarter. During the first six months of 2008, the Parent Company purchased 186,026 shares of its common stock in the open market at an average cost of $52.77 per share which approximates $9.8 million in total. There is approximately $20.2 million remaining to be used in the stock repurchase program.

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

Note on Forward-Looking Statements

Some of the statements in this Quarterly Report on Form 10-Q are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in or incorporated by reference in this Quarterly Report are forward-looking statements. Whenever used in this report, the words “estimate”, “expect”, “believe”, “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 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 2007 Annual Report on Form 10-K as well as:

• the effects of domestic and foreign economic conditions, and conditions which affect the market for property and casualty insurance;

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

• the effects of emerging claim and coverage issues on our business, including adverse judicial or regulatory decisions and rulings;

• the effects of competition from banks and other insurers and the trend toward self-insurance;

• risks that we face in entering new markets and diversifying the products and services we offer;

• unexpected turnover of our professional staff;

• changing legal and social trends and inherent uncertainties in the loss estimation process that can adversely impact the adequacy of loss reserves and the allowance for reinsurance recoverables, including our estimates relating to ultimate asbestos liabilities and related reinsurance recoverables;

• risks inherent in the collection of reinsurance recoverable amounts from our reinsurers over many years into the future based on the reinsurers’ financial ability and intent to meet such obligations to the Company;

• risks associated with our continuing ability to obtain reinsurance covering our exposures at appropriate prices and/or in sufficient amounts and the related recoverability of our reinsured losses;

• weather-related events and other catastrophes (including acts of terrorism) impacting our insureds and/or reinsurers, including, without limitation, the impact of Hurricanes Katrina, Rita, and Wilma and the possibility that our estimates of losses from Hurricanes Katrina, Rita and Wilma will prove to be materially inaccurate;

• our ability to attain adequate prices, obtain new business and retain existing business consistent with our expectations and to successfully implement our business strategy during “soft” as well as “hard” markets;

• our ability to maintain or improve our ratings to avoid the possibility of downgrades in our claims-paying and financial strength ratings significantly adversely affecting us, including reducing the number of insurance policies we write generally, or causing clients who require an insurer with a certain rating level to use higher-rated insurers;

25

• the inability of our internal control framework to provide absolute assurance that all incidents of fraud or unintended material errors will be detected and prevented;

• changes in accounting principles or policies or in our application of such accounting principles or policies;

• the risk that our investment portfolio suffers reduced returns or investment losses which could reduce our profitability; and

• other risks that we identify in future filings with the Securities and Exchange Commission (the “SEC”), including without limitation the risks described under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007.

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 thisForm 10-Q. It contains forward-looking statements that involve risks and uncertainties. Please see “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 thisForm 10-Q.

We are an international insurance holding company focusing on specialty products for niches within the overall property/casualty insurance market. The Company’s underwriting segments consist of insurance company operations and operations at Lloyd’s of London. Our largest product line and most long-standing area of specialization is ocean marine insurance. We have also developed specialty niches in professional liability insurance and in specialty liability insurance primarily consisting of contractors liability and primary and excess liability coverages. We conduct operations through our Insurance Companies and our Lloyd’s Operations. The Insurance Companies consist of Navigators Insurance Company, which includes our U.K. Branch, and Navigators Specialty Insurance Company, which underwrites specialty and professional liability insurance on an excess and surplus lines basis fully reinsured by Navigators Insurance Company. Our Lloyd’s Operations include NUAL, a wholly-owned Lloyd’s underwriting agency which manages Syndicate 1221. Our Lloyd’s Operations primarily underwrite marine and related lines of business, professional liability insurance, and construction coverages for onshore energy business at Lloyd’s through Syndicate 1221. The European property business written by the Lloyd’s Operations and the U.K. Branch beginning in 2006 will no longer be produced after the 2008 second quarter which is not expected to have any significant effect on the Company’s financial condition or results of operations. We participate in the capacity of Syndicate 1221 through our wholly-owned Lloyd’s corporate member (we utilized two wholly-owned Lloyd’s corporate members prior to the 2008 underwriting year). During the 2008 second quarter the Company closed two small underwriting agencies in Manchester and Basingstoke, England. In July 2008, the Company opened an underwriting office in Stockholm, Sweden to write professional liability business.

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While management takes into consideration a wide range of factors in planning the Company’s business strategy and evaluating results of operations, there are certain factors that management believes are fundamental to understanding how the Company is managed. First, underwriting profit is consistently emphasized as a primary goal, above premium growth. Management’s assessment of our trends and potential growth in underwriting profit is the dominant factor in its decisions with respect to whether or not to expand a business line, enter into a new niche, product or territory or, conversely, to contract capacity in any business line. In addition, management focuses on managing the costs of our operations. Management believes that careful monitoring of the costs of existing operations and assessment of costs of potential growth opportunities are important to our profitability. Access to capital also has a significant impact on management’s outlook for our operations. The Insurance Companies’ operations and ability to grow the business and take advantage of market opportunities must take into account regulatory capital requirements and rating agency assessments of capital adequacy.

The discussions that follow include tables that contain both our consolidated and segment operating results for the three and six month periods ended June 30, 2008 and 2007. In presenting our financial results we have discussed our performance with reference to underwriting profit or loss and the related combined ratio, both of which are non-GAAP measures of underwriting profitability. We consider such measures, which may be defined differently by other companies, to be important in the understanding of our overall results of operations. Underwriting profit or loss is calculated from net earned premium, less the sum of net losses and LAE, commission expense, other operating expenses and commission income and other income (expense). The combined ratio is derived by dividing the sum of net losses and LAE, commission expense, other operating expenses and commission income and other income (expense) by net earned premiums. A combined ratio of less than 100% indicates an underwriting profit and over 100% indicates an underwriting loss.

Although not a financial measure, management’s decisions are also greatly influenced by access to specialized underwriting and claims expertise in our lines of business. We have chosen to operate in specialty niches with certain common characteristics which we believe provide us with the opportunity to use our technical underwriting expertise in order to realize underwriting profit. As a result, we have focused on underserved markets for businesses characterized by higher severity and lower frequency of loss where we believe our intellectual capital and financial strength bring meaningful value. In contrast, we have avoided niches that we believe have a high frequency of loss activity and/or are subject to a high level of regulatory requirements, such as workers compensation and personal automobile insurance, because we do not believe our technical expertise is of as much value in these types of businesses. Examples of niches that have the characteristics we look for include bluewater hull, which provides coverage for physical damage to, for example, highly valued cruise ships, and directors and officers liability insurance (“D&O”), which covers litigation exposure of a corporation’s directors and officers. These types of exposures require substantial technical expertise. We attempt to mitigate the financial impact of severe claims on our results by conservative and detailed underwriting, prudent use of reinsurance and a balanced portfolio of risks.

Our revenue is primarily comprised of premiums and investment income. The Insurance Companies derive their premiums primarily from business written by Navigators Management Company, Inc. (“NMC”), a wholly-owned underwriting management company which produces, manages and underwrites insurance and reinsurance for the Company. During the 2008 second quarter, Navigators California Insurance Services, Inc. and Navigators Special Risk, Inc., also wholly-owned underwriting management companies, were merged into NMC. Navigators Management (UK) Ltd. produces, manages and underwrites insurance and reinsurance for the U.K. Branch. Both NMC and Navigators Management (UK) Ltd. are reimbursed for their actual costs. The Lloyd’s Operations derive their premiums from business written by NUAL which is reimbursed for its actual costs and, where applicable, profit commissions on the business produced for Syndicate 1221.

From 2003 through 2006, we experienced generally beneficial market changes in our lines of business. As a result of several large industry losses in the second quarter of 2001, the marine insurance market began to experience diminished capacity and rate increases, initially in the offshore energy line of business. The marine rate increases began to level off in 2004 and into 2005. As a result of the substantial insurance industry losses resulting from Hurricanes Katrina and Rita, the marine insurance market experienced diminished capacity and rate increases through the end of 2006, particularly for the offshore energy risks located in the Gulf of Mexico. Since the end of 2006, competitive market conditions have returned as available capacity has increased. The average renewal premium rates for our Insurance Companies’ marine business decreased approximately 4.8% and 2.6% for the 2008 second quarter and six month period, respectively, including offshore energy average renewal premium rates which decreased approximately 13.6% for the second quarter of 2008 and approximately 11.8% for the first six months of 2008. The average renewal premium rates for our Lloyd’s Operations marine business decreased approximately 6.0% and 5.0% for the 2008 second quarter and six month period, respectively, including offshore energy average renewal premium rates which decreased approximately 14.6% for the second quarter of 2008 and approximately 12.7% for the first six months of 2008. We expect continuing overall declines in 2008 pricing for marine lines of business, including offshore energy, as additional capacity continues to re-enter the marine market.

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Specialty liability losses in 2001 to 2003, particularly for the contractors liability business, also resulted in diminished capacity in the market in which we compete, as many former competitors who lacked the expertise to selectively underwrite this business have been forced to withdraw from the market resulting in average renewal premium rate increases of approximately 13.5% in 2004 and 49.1% in 2003. This was followed by a slight decline in rates of approximately 1.0% in 2005. The 2006 year average renewal premium rates for the contractors liability business declined approximately 5.6%, primarily due to additional competition in the marketplace. This decline continued into 2007 with average renewal premium rates declining approximately 10.7%. The average renewal premium rates for the contractors liability business declined approximately 14.4% in the 2008 second quarter and approximately 12.6% for the first six months of 2008. We expect competitive conditions to continue during 2008 resulting in continuing declines in pricing for contractors liability and excess liability business.

In the professional liability market, the enactment of the Sarbanes-Oxley Act of 2002, together with financial and accounting scandals at publicly traded corporations and the increased frequency of securities-related class action litigation, has led to heightened interest in professional liability insurance generally. Professional liability average renewal premium rates decreased approximately 6.6% in 2007 compared to relatively level average renewal premium rates in 2006 and 2005 after decreasing approximately 3% in 2004 which followed substantial average renewal premium rate increases in 2003 and 2002, particularly for D&O insurance. The 2007 D&O insurance average renewal premium rates decreased approximately 7.9% following decreases of approximately 1.7% in 2006, 2.3% in 2005 and 9.5% in 2004. The average renewal premium rates for the professional liability business declined approximately 3.6% and 2.7% in the 2008 second quarter and six month period, respectively, including D&O insurance average renewal premium rates which declined approximately 2.5% for the 2008 second quarter and approximately 4.8% for the first six months of 2008. We anticipate continuing declines in 2008 pricing given the overall favorable industry underwriting results since 2002 for the professional liability lines of business.

Our business is cyclical and influenced by many factors. These factors include price competition, economic conditions, interest rates, weather-related events and other catastrophes including natural and man-made disasters (for example hurricanes and terrorism), state regulations, court decisions and changes in the law. The incidence and severity of catastrophes are inherently unpredictable. Although we will attempt to manage our exposure to such events, the frequency and severity of catastrophic events could exceed our estimates, which could have a material adverse effect on our financial condition. Additionally, because our insurance products must be priced, and premiums charged, before costs have fully developed, our liabilities are required to be estimated and recorded in recognition of future loss and settlement obligations. Due to the inherent uncertainty in estimating these liabilities, we cannot assure you that our actual liabilities will not exceed our recorded amounts.

Catastrophe Risk Management

Our Insurance Companies and Lloyd’s Operations have exposure to losses caused by hurricanes and other natural and man-made catastrophic events. The frequency and severity of catastrophes are unpredictable.

The extent of losses from a catastrophe is a function of both the total amount of insured exposure in an area affected by the event and the severity of the event. We continually assess our concentration of underwriting exposures in catastrophe exposed areas globally and attempt to 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 exposures. Despite these efforts, there remains uncertainty about the characteristics, timing and extent of insured losses given the nature of catastrophes. The occurrence of one or more severe catastrophic events could have a material adverse effect on the Company’s results of operations, financial condition and liquidity.

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The Company has significant catastrophe exposures throughout the world. The largest catastrophe exposure results from potential hurricane damage to offshore energy risks in the Gulf of Mexico. Based on an assessment made through the end of the 2008 second quarter and taking into account the 2008 reinsurance structure, the Company believes that its estimated probable maximum pre-tax gross and net loss exposure in a so-called or theoretical one in two hundred and fifty year hurricane event in the Gulf of Mexico would be approximately $208 million and $33 million, respectively, including the cost of reinsurance reinstatement premiums. There are a number of significant assumptions and related variables related to such an estimate including the size, force and path 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. There can be no assurances that the gross and net loss amounts that the Company could incur in such an event or in any hurricanes that may occur in the Gulf of Mexico would not be materially higher than the estimates discussed above given the significant uncertainties with respect to such an estimate.

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. 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. We are required to pay the losses even if a reinsurer fails to meet its obligations under the reinsurance agreement.

Critical Accounting Policies

It is important to understand our accounting policies in order to understand our financial statements. Management considers certain of these policies to be critical to the presentation of the financial results, since they require management to make significant estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the financial reporting date and throughout the reporting period. Certain of the estimates result from judgments that can be subjective and complex and consequently actual results may differ from these estimates, which would be reflected in future periods.

Our most critical accounting policies involve the reporting of the reserves for losses and 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 invested assets, accounting for Lloyd’s results and the translation of foreign currencies.

Reserves for Losses and LAE.Reserves for losses and LAE represent an estimate of the expected cost of the ultimate settlement and administration of losses, based on facts and circumstances then known. Actuarial methodologies are employed to assist in establishing such estimates and include judgments relative to estimates of future claims severity and frequency, length of time to develop to ultimate, judicial theories of liability and other third party factors which are often beyond our control. Due to the inherent uncertainty associated with the reserving process, the ultimate liability may be different from the original estimate. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year’s results.

Reinsurance Recoverables.The most significant reinsurance recoverables are established for the portion of the loss reserves that are ceded to reinsurers. Reinsurance recoverables are determined based upon the terms and conditions of reinsurance contracts which could be subject to interpretations that differ from our own based on judicial theories of liability. In addition, we bear credit risk with respect to our reinsurers that can be significant considering that certain of the reserves remain outstanding for an extended period of time. We are required to pay losses even if a reinsurer fails to meet its obligations under the applicable reinsurance agreement.

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Written and Unearned Premium.Written premium is recorded based on the insurance policies that have been reported to us and the policies that have been written by agents and brokers but not yet reported to us. We must estimate the amount of written premium not yet reported based on judgments relative to current and historical trends of the business being written. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year’s results. An unearned premium reserve is established to reflect the unexpired portion of each policy at the financial reporting date.

Substantially all of our business is placed through agents and brokers. Since the vast majority of the Company’s gross written premium is primary or direct as opposed to assumed, the delays in reporting assumed premium generally do not have a significant effect on the Company’s financial statements, since we record estimates for both unreported direct and assumed premium. We also record the ceded portion of the estimated gross written premium and related acquisition costs. The earned gross, ceded and net premiums are calculated based on our earning methodology which is generally pro-rata over the policy period. Losses are also recorded in relation to the earned premium. The estimate for losses incurred on the estimated premium is based on an actuarial calculation consistent with the methodology used to determine incurred but not reported loss reserves for reported premiums.

The portion of the Company’s premium that is estimated is mostly for the marine business written by our U.K. Branch and Lloyd’s Operations. We generally do not experience any significant backlog in processing premiums. Such premium estimates are generally based on submission data received from agents and brokers and recorded when the insurance policy or reinsurance contract is written or bound. The estimates are regularly reviewed and updated taking into account the premium received to date versus the estimate and the age of the estimate. To the extent that the actual premium varies from the estimates, the difference, along with the related loss reserves and underwriting expenses, is recorded in current operations.

Deferred Tax Assets.We apply the asset and liability method of accounting for income taxes whereby deferred assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that the deferred tax assets will be realized.

Impairment of Invested Assets.Impairment of invested assets results in a charge to operations when a market decline below cost is other-than-temporary. Management regularly reviews our fixed maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. In general, we focus our attention on those securities whose market value was less than 80% of their cost or amortized cost, as appropriate, for six or more consecutive months. Factors considered in evaluating potential impairment include, but are not limited to, the current fair value as compared to cost or amortized cost of the security, as appropriate, the length of time the investment has been below cost or amortized cost and by how much, our intent and ability to retain the investment for a period of time sufficient to allow for an anticipated recovery in value, specific credit issues related to the issuer and current economic conditions. Other-than-temporary impairment losses result in a permanent reduction of the cost basis of the underlying investment. 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.

As mentioned above, the Company considers its intent and ability to hold a security until the value recovers as part of the process of evaluating whether a security’s unrealized loss represents an other-than-temporary decline. The Company’s ability to hold such securities is supported by sufficient cash flow from its operations and from maturities within its investment portfolio in order to meet its claims payment and other disbursement obligations arising from its underwriting operations without selling such investments. With respect to securities where the decline in value is determined to be temporary and the security’s value is not written down, a subsequent decision may be made to sell that security and realize a loss. Subsequent decisions on security sales are made within the context of overall risk monitoring, changing information, market conditions and assessing value relative to other comparable securities. Management of the Company’s investment portfolio is outsourced to third party investment managers. While these investment managers may, at a given point in time, believe that the preferred course of action is to hold securities with unrealized losses that are considered temporary until such losses are recovered, the dynamic nature of the portfolio management may result in a subsequent decision to sell the security and realize the loss, based upon a change in market and other factors described above. The Company believes that subsequent decisions to sell such securities are consistent with the classification of the Company’s portfolio as available for sale.

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Investment managers are required to notify management of rating agency downgrades of securities in their portfolios as well as any potential investment valuation issues at the end of each quarter. Investment managers are also required to notify management prior to the execution of a transaction to the extent the investment manager is contemplating a transaction or transactions that may result in a realized loss above a certain threshold. Additionally, investment managers are required to notify management if they are contemplating a transaction or transactions that may result in any realized loss up until a certain period beyond the close of a quarterly accounting period.

Accounting for Lloyd’s Results.We record our pro rata share of Syndicate 1221’s assets, liabilities, revenues and expenses after making adjustments to convert Lloyd’s accounting to U.S. GAAP. The most significant GAAP adjustments relate to income recognition. Lloyd’s syndicates determine underwriting results by year of account at the end of three years. We record adjustments to recognize underwriting results as incurred, including the expected ultimate cost of losses incurred. These adjustments to losses are based on actuarial analysis of syndicate accounts, including forecasts of expected ultimate losses provided by the syndicate. At the end of the Lloyd’s three-year period for determining underwriting results for an account year, the syndicate will close the account year by reinsuring outstanding claims on that account year with the participants for the next underwriting year. The amount to close an underwriting year into the next year is referred to as the reinsurance to close (“RITC”). The RITC transaction, recorded in the fourth quarter, does not result in any gain or loss.

Translation of Foreign Currencies.Financial statements of subsidiaries expressed in foreign currencies are translated into U.S. dollars in accordance with SFAS 52,Foreign Currency Translation,issued by the FASB. Under SFAS 52, functional currency assets and liabilities are translated into U.S. dollars using period end rates of exchange and the related translation adjustments are recorded as a separate component ofaccumulated other comprehensive income. Statement of income amounts expressed in functional currencies are translated using average exchange rates.

Realized gains and losses resulting from foreign currency transactions are recorded inother income (expense)in the Company’s Consolidated Statements of Income.

Results of Operations

The following is a discussion and analysis of our consolidated and segment results of operations for the three and six month periods ended June 30, 2008 and 2007. Earnings per share data is presented on a per diluted share basis.

Effective in 2008, the Company has reclassified certain of its business for this Management’s Discussion and Analysis of Financial Condition and Results of Operations. The inland marine business, formerly included in other business, is now included in marine business. Middle markets business, formerly included in the specialty business, is now broken out separately. Underwriting data for prior periods has been reclassified to reflect these changes.

Net income for the three months ended June 30, 2008 was $17.4 million or $1.03 per share compared to $24.4 million or $1.44 per share for the three months ended June 30, 2007. Included in these results were net realized capital losses of $0.31 per share and net realized capital gains of $0.03 per share for the three months ended June 30, 2008 and 2007, respectively. The 2008 second quarter’s net realized capital losses include a provision of $8.4 million for declines in the market value of equity securities which were considered to be other-than-temporary, as further discussed under the captionInvestments, included herein. In light of the continuing decline in the fair value of these securities during the quarter, the Company no longer believes that their values will recover in the foreseeable future. The after-tax loss of such provision was $5.5 million or $0.32 per share. Recording realized capital losses on such securities has no impact on the Company’s stockholders’ equity or book value per share since unrealized gains and losses on the investment portfolio are a component of accumulated other comprehensive income (loss).

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Net income for the six months ended June 30, 2008 was $40.7 million or $2.39 per share compared to $44.0 million or $2.60 per share for the six months ended June 30, 2007. Included in these results were net realized capital losses of $0.31 per share and net realized capital gains of $0.04 per share for the six months ended June 30, 2008 and 2007, respectively.

The combined ratios, which consist of the sum of the loss and LAE ratio and the expense ratio for each period, for the 2008 second quarter and six month period were 90.4% and 89.8%, respectively, compared to 86.4% for the 2007 second quarter and 87.8% for the first six months of 2007. The combined ratios for the 2008 second quarter and six month period were reduced by 6.5 and 7.6 loss ratio points, respectively, for net loss reserve redundancies of $10.6 million and $24.3 million, respectively, relating to prior years. The combined ratios for the 2007 second quarter and six month period were reduced by 7.3 and 6.1 loss ratio points, respectively, for net loss reserve redundancies of $10.6 million and $17.4 million, respectively, relating to prior years. The net paid loss and LAE ratios for the 2008 second quarter and six month period were 29.7% and 31.2%, respectively, compared to 32.6% for the 2007 second quarter and 31.9% for the first six months of 2007.

The 2007 second quarter and six month loss ratios included 2.4 and 1.3 loss ratio points, respectively, in the aggregate, for U.K. flood losses in the Insurance Companies property line of business and Lloyd’s marine line of business (principally cargo losses).

Cash flow from operations was $133.4 million for the first six months of 2008 compared to $111.7 million for the comparable period in 2007. The positive cash flow contributed to the growth in invested assets and net investment income.

Consolidated stockholders’ equity increased 2.2% to $676.4 million or $40.29 per share at June 30, 2008 compared to $662.1 million or $39.24 per share at December 31, 2007. The increase was primarily due to net income of $40.7 million for the first six months of 2008 which was partially offset by an other comprehensive loss of $20.3 million mostly due to unrealized depreciation of investments, and treasury stock purchases of $9.8 million.

Revenues.Gross written premium increased to $279.2 million and decreased to $566.4 million in the second quarter and first six months of 2008, respectively, from $276.5 million and $577.4 million in the second quarter and first six months of 2007, respectively, an increase of 1.0% and a decrease of 1.9%, respectively. The 2008 gross written premium is flat when compared to 2007 and generally reflects a combination of selective business expansion in new and existing lines of business, mostly offset by the effect of premium rate changes on renewal policies on certain lines of business and lost or cancelled business.

The average premium rate increases or decreases as noted elsewhere in this document for the marine, specialty and professional liability businesses are calculated primarily by comparing premium amounts on policies that have renewed. The premiums are judgmentally adjusted for exposure factors when deemed significant 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.

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The following tables set forth our gross and net written premium and net earned premium by segment and line of business for the periods indicated:

	Three Months Ended June 30,
	2008									2007
	Gross					Net		Net		Gross					Net		Net
	Written					Written		Earned		Written					Written		Earned
	Premium		%			Premium		Premium		Premium		%			Premium		Premium
	($ in thousands)
Insurance Companies:
Marine	$	77,996		27.9	%	$	45,123	$	36,456	$	70,601		25.5	%	$	37,229	$	34,005
Specialty		84,013		30.1	%		57,998		56,574		91,398		33.1	%		62,490		54,378
Professional Liability		26,437		9.5	%		15,906		14,388		24,351		8.8	%		14,767		13,334
Middle Markets		7,744		2.8	%		7,252		6,736		6,637		2.4	%		4,624		4,539
Property/Other		1,766		0.6	%		1,903		3,280		5,573		2.0	%		4,963		3,479
Insurance Companies Total		197,956		70.9	%		128,182		117,434		198,560		71.8	%		124,073		109,735
Lloyd’s Operations:
Marine		59,872		21.4	%		38,297		37,103		55,922		20.1	%		27,038		30,005
Professional Liability		8,399		3.0	%		5,081		5,141		10,534		3.8	%		6,126		1,954
Other		12,986		4.7	%		2,727		3,025		11,533		4.3	%		4,113		3,923
Lloyd’s Operations Total		81,257		29.1	%		46,105		45,269		77,989		28.2	%		37,277		35,882
Total	$	279,213		100.0	%	$	174,287	$	162,703	$	276,549		100.0	%	$	161,350	$	145,617

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	Six Months Ended June 30,
	2008									2007
	Gross					Net		Net		Gross						Net		Net
	Written					Written		Earned		Written						Written		Earned
	Premium		%			Premium		Premium		Premium		%				Premium		Premium
	($ in thousands)
Insurance Companies:
Marine	$	160,531		28.3	%	$	94,794	$	69,682	$	157,457		27.3	%		$	82,964	$	67,494
Specialty		162,895		28.8	%		111,942		113,243		180,815		31.3	%			117,076		103,421
Professional Liability		45,724		8.1	%		27,639		28,461		44,833		7.8	%			26,959		26,371
Middle Markets		15,758		2.8	%		13,778		12,433		12,941		2.2	%			8,593		9,109
Other		4,644		0.8	%		4,339		5,861		11,388		2.0	%			10,529		5,152
Insurance Companies Total		389,552		68.8	%		252,492		229,680		407,434		70.6	%	��		246,121		211,547
Lloyd’s Operations:
Marine		134,825		23.8	%		90,799		71,095		133,601		23.1	%			72,526		62,346
Professional Liability		19,069		3.4	%		11,873		11,100		16,012		2.8	%			9,509		4,911
Other		22,913		4.0	%		6,845		6,568		20,363		3.5	%			6,213		5,859
Lloyd’s Operations Total		176,807		31.2	%		109,517		88,763		169,976		29.4	%			88,248		73,116
Total	$	566,359		100.0	%	$	362,009	$	318,443	$	577,410		100.0	%		$	334,369	$	284,663

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Gross Written Premium

Insurance Companies’ Gross Written Premium

Marine Premium.The gross written premium for the first six months of 2008 and 2007 consisted of the following:

	2008			2007
Marine liability		30.0	%		30.5	%
Offshore energy		15.3	%		20.3	%
P&I		11.5	%		11.0	%
Cargo		10.3	%		9.1	%
Transport		7.7	%		7.3	%
Inland marine		7.2	%		3.3	%
Other		6.9	%		6.4	%
Bluewater hull		5.8	%		6.7	%
Craft/Fishing vessel		5.3	%		5.4	%
Total		100.0	%		100.0	%

The marine gross written premium for the 2008 second quarter and six month period increased 10.5% and 2.0%, respectively, compared to the same periods in 2007. The average renewal premium rates for the 2008 second quarter and six month period decreased 4.8% and 2.6%, respectively, reflecting increased market conditions. We expect continuing overall declines in 2008 pricing for marine lines of business, including offshore energy, as additional capacity continues to re-enter the marine market.

Specialty Premium.The gross written premium for the first six months of 2008 and 2007 consisted of the following:

	2008			2007
Construction liability		49.0	%		50.6	%
Commercial umbrella		20.6	%		18.7	%
Programs		13.5	%		10.2	%
Primary E&S		11.6	%		11.8	%
Personal umbrella		2.7	%		2.6	%
Liquor liability		2.1	%		1.0	%
Monarch PAF		0.5	%		0.6	%
Other		0.0	%		4.5	%
Total		100.0	%		100.0	%

The specialty gross written premium for the 2008 second quarter and six month period decreased 8.1% and 9.9%, respectively, compared to the same periods in 2007 due primarily to weakening economic conditions that have reduced demand for contractors liability insurance. The average renewal premium rates for the contractors liability business decreased approximately 14.4% and 12.6% for the 2008 second quarter and six month period, respectively. The recent premium rate decreases for the contractors liability business and generally for the specialty lines of business are reflective of softening market conditions which are expected to continue throughout 2008.

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Professional Liability Premium.The gross written premium for the first six months of 2008 and 2007 consisted of the following:

	2008			2007
D&O (public and private)		62.7	%		64.6	%
Lawyers and other professionals		32.0	%		28.6	%
Architects and engineers		5.3	%		6.8	%
Total		100.0	%		100.0	%

The professional liability gross written premium for the 2008 second quarter and six month period increased 8.6% and 2.0%, respectively, compared to the same periods in 2007. The average renewal premium rates for the professional liability business including D&O renewal premium rates decreased by approximately 2.5% and 4.8%, in the 2008 first quarter and six month period, respectively. We anticipate continuing declines in 2008 pricing given the overall favorable industry underwriting results since 2002 for the professional liability lines of business.

Middle Markets Premium.Middle markets premium consists of general liability, auto liability and property insurance for a variety of commercial middle markets businesses engaged in contracting, light manufacturing, garage services, hospitality and real estate.

Despite the softening market conditions, the gross written premium increased 16.7% and 21.8% for the 2008 second quarter and the first six months of 2008, respectively, compared to the same periods in 2007, due to geographic and product diversification and consisted of the following:

	2008			2007
General liability		48.4	%		55.1	%
Commercial automobile liability		39.9	%		32.4	%
Property		11.7	%		12.5	%
Total		100.0	%		100.0	%

Property/Other Premium.Property/Other premium includes European property business written by the U.K. Branch beginning in 2006 and run-off business. The European property business written by the U.K. Branch was discontinued in the 2008 second quarter. Such action is not expected to have a material impact on the U.K. Branch.

Lloyd’s Operations’ Gross Written Premium

We have provided 100% of Syndicate 1221’s stamp capacity since 2006. Stamp capacity is a measure of the amount of premium a Lloyd’s syndicate is authorized to write based on a business plan approved by the Council of Lloyd’s. Syndicate 1221’s stamp capacity is £123.0 million ($239.2 million) in 2008 compared to £140.0 million ($280.2 million) in 2007.

The Lloyd’s Operations gross written premium for the 2008 second quarter and six month period increased 4.2% and 4.0%, respectively, compared to the same period in 2007, reflecting continued expansion in the professional liability book of business and increases in new business in the marine liability book, partially offset by weakening market conditions in the marine and energy business overall.

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Marine Premium.The gross written premium for the first six months of 2008 and 2007 consisted of the following:

	2008			2007
Cargo and specie		31.8	%		34.1	%
Marine liability		29.5	%		21.8	%
Offshore energy		19.4	%		24.0	%
Assumed reinsurance		8.6	%		14.1	%
Hull		7.6	%		5.2	%
Other		3.1	%		0.8	%
Total		100.0	%		100.0	%

The marine gross written premium for the 2008 second quarter and six month period increased 7.1% and 0.9%, respectively, compared to the same periods in 2007. The average renewal premium rates decreased approximately 5.6% and 4.7% for the 2008 second quarter and six month period, respectively. We expect continuing overall declines in 2008 pricing for marine lines of business, including offshore energy, as additional capacity continues to re-enter the marine market.

Professional Liability Premium.The gross written premium for the first six months of 2008 and 2007 consisted of the following:

	2008			2007
E&O		67.8	%		54.3	%
D&O (public and private)		32.2	%		45.7	%
Total		100.0	%		100.0	%

Syndicate 1221 commenced writing professional liability business during the second quarter of 2005. The gross written premium for the 2008 second quarter and six month period decreased 20.3% and increased 19.1%, respectively, compared to the same periods in 2007. The decrease in the second quarter was due to lower D&O premium partially offset by increased E&O premium over the six months.

Property/Other Premium.Property/Other premium consists of gross written premium for engineering and construction business, onshore energy business and European property business,. The engineering and construction business provides coverage for construction projects including machinery, equipment and loss of use due to delays. The onshore energy business principally focuses on the oil and gas, chemical and petrochemical industries with coverages primarily for property damage and business interruption. The European property business written by the Lloyd’s Operations was discontinued in the 2008 second quarter. Such action is not expected to have a material impact on the Lloyd’s Operations.

Ceded Written Premium.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 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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The following tables set forth our ceded written premium by segment and major line of business for the periods indicated:

	Three Months Ended June 30,
	2008						2007
				% of					% of
	Ceded			Gross			Ceded		Gross
	Written			Written			Written		Written
	Premium			Premium			Premium		Premium
	($ in thousands)
Insurance Companies:
Marine	$	32,873			42.1	%	$	33,372		47.3	%
Specialty		26,015			31.0	%		28,908		31.6	%
Professional Liability		10,531			39.8	%		9,584		39.4	%
Middle Markets		492			6.4	%		2,013		30.3	%
Property/Other		(137	)		-7.8	%		610		10.9	%
Subtotal		69,774			35.2	%		74,487		37.5	%
Lloyd’s Operations:
Marine		21,575			36.0	%		28,884		51.7	%
Professional Liability		3,318			39.5	%		4,408		41.8	%
Property/Other		10,259			79.0	%		7,420		64.3	%
Subtotal		35,152			43.3	%		40,712		52.2	%
Total	$	104,926			37.6	%	$	115,199		41.7	%

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	Six Months Ended June 30,
	2008					2007
			% of					% of
	Ceded		Gross			Ceded		Gross
	Written		Written			Written		Written
	Premium		Premium			Premium		Premium
	($ in thousands)
Insurance Companies:
Marine	$	65,737		40.9	%	$	74,493		47.3	%
Specialty		50,953		31.3	%		63,739		35.3	%
Professional Liability		18,085		39.6	%		17,874		39.9	%
Middle Markets		1,980		12.6	%		4,348		33.6	%
Property/Other		305		6.6	%		859		7.5	%
Subtotal		137,060		35.2	%		161,313		39.6	%
Lloyd’s Operations:
Marine		44,026		32.7	%		61,075		45.7	%
Professional Liability		7,196		37.7	%		6,503		40.6	%
Property/Other		16,068		70.1	%		14,150		69.5	%
Subtotal		67,290		38.1	%		81,728		48.1	%
Total	$	204,350		36.1	%	$	243,041		42.1	%

The ratios of total ceded written premium to gross written premium in the 2008 second quarter and six month period were 37.6% and 36.1%, respectively, compared to the 2007 second quarter and six month period ratios of 41.7% and 42.1%, respectively. The decrease in the ratio of ceded written premium to gross written premium for the three and six months ended June 30, 2008 compared to the same periods in 2007 was due to a combination of the following factors:

• Restructuring of the marine quota share treaties for the Insurance Companies and the Lloyd’s Operations resulting in a large reduction in ceded premium.

• An increased retention from $0.5 million to $1.0 million effective April 1, 2007 for the contractors liability business which reduced the amount of premium ceded.

• A reduction of $1.4 million of ceded written premium in the 2008 second quarter as a result of a rescission of a reinsurer’s participation on an excess of loss treaty for middle markets business.

• The elimination of a 5% reinsurer participation in our Syndicate 1221 2008 stamp capacity.

Net Written Premium.Net written premium increased 8.0% and 8.3% in the 2008 second quarter and six month period, respectively, compared to the same periods in 2007, primarily due to retaining more of our business as discussed above.

Net Earned Premium.Net earned premium, which generally lags the increase in net written premium, increased 11.7% and 11.9% in the 2008 second quarter and six month period, respectively, compared to the same periods in 2008, as a result of the increased net written premium discussed above.

Commission Income.Commission income from unaffiliated business decreased 3.9% and 18.6% in the 2008 second quarter and six month period, respectively, compared to the same periods in 2007. Beginning with the 2006 underwriting year, there are no longer any marine pool unaffiliated insurance companies with the elimination of the marine pool and no longer any unaffiliated participants at Syndicate 1221 with the purchase of the minority interest. Any profit commission would therefore result from the run-off of underwriting years prior to 2006.

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Net Investment Income.Net investment income increased 8.1% and 12.0% in the 2008 second quarter and six month period compared to the same periods in 2007, due primarily to the increase in invested assets as a result of the positive cash flow from operations somewhat offset by a modest decline in the portfolio’s book yield.

Net Realized Capital Gains and Losses.Pre-tax net income included net realized capital losses of $8.0 million for the 2008 second quarter compared to net realized capital gains of $0.8 million for the 2007 second quarter. On an after-tax basis, the 2008 second quarter net realized capital losses were $5.2 million or $0.31 per share compared to net realized capital gains of $0.5 million or $0.03 per share for the 2007 second quarter. Pre-tax net income included net realized capital losses of $8.1 million for the first six months of 2008 compared to net realized capital gains of $1.0 million for the first six months of 2007. On an after-tax basis, the net realized capital losses were $5.2 million or $0.31 per share for the first six months of 2008 compared to net realized capital gains of $0.7 million or $0.04 per share for the first six months of 2007.

Other Income/(Expense).Other income/(expense) for the second quarters and six month periods of both 2008 and 2007 consisted primarily of foreign exchange gains and losses from our Lloyd’s Operations and inspection fees related to our specialty insurance business.

Operating Expenses

Net Losses and Loss Adjustment Expenses Incurred. The ratios of net losses and LAE incurred to net earned premium (loss ratios) for the 2008 and 2007 second quarters were 56.5% and 54.8%, respectively, and 56.6% and 56.5% for the first six months of 2008 and 2007, respectively. The loss ratios for the second quarter of 2008 and 2007 were favorably impacted by 6.5 and 7.3 loss ratio points, respectively, resulting from a redundancy of prior year loss reserves. The loss ratios for the first six months of 2008 and 2007 were favorably impacted by 7.6 and 6.1 loss ratio points, respectively, also resulting from a redundancy of prior year loss reserves.

The 2008 six month loss ratio included 2.3 loss ratio points for first quarter losses consisting of two 2008 accident year losses for the Insurance Companies amounting to $7.2 million related to fishing vessels and $0.9 million for 2008 flood losses in Selsey, England for the Lloyd’s Operations.

The 2007 second quarter and six month loss ratios included 2.4 and 1.3 loss ratio points, respectively, for U.K. flood losses in the Insurance Companies property line of business and the Lloyd’s marine line of business (principally cargo losses).

With the recording of gross losses, the Company assesses its reinsurance coverage, potential receivables, and the recoverability of the receivables. Losses incurred on business recently written are primarily covered by reinsurance agreements written by companies with whom the Company is currently doing reinsurance business and whose credit the Company continues to assess in the normal course of business.

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As illustrated in the following table, our overall reinsurance recoverable amounts for paid and unpaid losses have declined during the first six months of 2008 as the Company continues to bill and collect its recoverables for Hurricanes Katrina and Rita loss payments and retains more of its business:

	June 30,		December 31,
	2008		2007		Change
	($ in thousands)
Reinsurance recoverables:
Paid losses	$	78,087	$	94,818	$	(16,731	)
Unpaid losses and LAE reserves		778,715		801,461		(22,746	)
Total	$	856,802	$	896,279	$	(39,477	)

The following table sets forth gross reserves for losses and LAE reduced for reinsurance recoverable on such amounts resulting in net loss and LAE reserves (a non-GAAP measure reconciled in the following table) as of the dates indicated:

	June 30,		December 31,
	2008		2007		Change
	($ in thousands)
Gross reserves for losses and LAE	$	1,707,101	$	1,648,764		3.5	%
Less: Reinsurance recoverable on unpaid losses and LAE reserves		778,715		801,461		-2.8	%
Net loss and LAE reserves	$	928,386	$	847,303		9.6	%

During the 2008 second quarter, the Company assumed approximately $2.9 million of gross reserves for losses and LAE and related reinsurance recoverables for paid and unpaid losses of $0.8 million and $1.4 million, respectively, from a former pool member on a loss portfolio transaction. Such run-off business was previously underwritten by the Company in 1998 and prior years. The Company is also settling such run-off claims. The transaction was not material to the 2008 second quarter net income.

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The following tables set forth our net reported loss and LAE reserves and net incurred but not reported (“IBNR”) reserves (non-GAAP measures reconciled above) by segment and line of business as of the dates indicated:

	June 30, 2008
	Net		Net		Total		% of IBNR
	Reported		IBNR		Net Loss		to Total Net
	Reserves		Reserves		Reserves		Loss Reserves
	($ in thousands)
Insurance Companies:
Marine	$	104,796	$	108,502	$	213,298		50.9	%
Specialty
Construction Liability		42,028		223,057		265,085		84.1	%
All other liability		22,496		71,545		94,041		76.1	%
Total Specialty		64,524		294,602		359,126		82.0	%
Professional Liability		22,383		55,936		78,319		71.4	%
Middle Markets		12,055		12,681		24,736		51.3	%
Property/Other		10,870		9,827		20,697		47.5	%
Total Insurance Companies		214,628		481,548		696,176		69.2	%
Lloyd’s Operations:
Marine		104,679		89,886		194,565		46.2	%
Other		12,238		25,407		37,645		67.5	%
Total Lloyd’s Operations		116,917		115,293		232,210		49.7	%
Total Company	$	331,545	$	596,841	$	928,386		64.3	%

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	December 31, 2007
	Net		Net		Total		% of IBNR
	Reported		IBNR		Net Loss		to Total Net
	Reserves		Reserves		Reserves		Loss Reserves
	($ in thousands)
Insurance Companies:
Marine	$	93,467	$	103,500	$	196,967		52.5	%
Specialty
Construction Liability		36,137		213,453		249,590		85.5	%
All other liability		17,139		55,032		72,171		76.3	%
Total Specialty		53,276		268,485		321,761		83.4	%
Professional Liability		20,335		50,584		70,919		71.3	%
Middle Markets		11,469		10,329		21,798		47.4	%
Property/Other		12,790		11,446		24,236		47.2	%
Total Insurance Companies		191,337		444,344		635,681		69.9	%
Lloyd’s Operations:
Marine		89,957		93,069		183,026		50.9	%
Other		7,485		21,111		28,596		73.8	%
Total Lloyd’s Operations		97,442		114,180		211,622		54.0	%
Total Company	$	288,779	$	558,524	$	847,303		65.9	%

At June 30, 2008, the IBNR loss reserve was $596.8 million or 64.3% of our total loss reserves compared to $558.5 million or 65.9% at December 31, 2007.

The increase in net loss reserves in all active lines of business is generally a reflection of the growth in net premium volume over the last three years coupled with a changing mix of business to longer tail lines of business such as the specialty lines of business (construction defect, commercial excess, primary excess and personal umbrella), professional liability lines of business and marine liability and transport business in ocean marine. These products, which typically have a longer settlement period compared to the mix of business the Company has historically written, are becoming larger components of our overall business.

Our reserving practices and the establishment of any particular reserve reflect management’s judgment concerning sound financial practice and do not represent any admission of liability with respect to any claims made against us. No assurance can be given that actual claims made and related payments will not be in excess of the amounts reserved. During the loss settlement period, it often becomes necessary to refine and adjust the estimates of liability on a claim either upward or downward. Even after such adjustments, ultimate liability may exceed or be less than the revised estimates.

There are a number of factors that could cause actual losses and LAE to differ materially from the amount that we have reserved for losses and LAE.

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The process of establishing loss reserves is complex and imprecise as it must take into account many variables that are subject to the outcome of future events. As a result, informed subjective judgments as to our ultimate exposure to losses are an integral component of our loss reserving process.

The Company’s actuaries generally calculate the IBNR loss reserves for each line of business by underwriting year for major products using standard actuarial methodologies which are projection or extrapolation techniques. This process requires the substantial use of informed judgment and is inherently uncertain.

There are instances in which facts and circumstances require a deviation from the general process described above. Two such instances relate to the IBNR loss reserve processes for our asbestos exposures and our Hurricanes Katrina and Rita losses, where extrapolation techniques are not applied, except in a limited way, given the unique nature of hurricane losses and limited population of marine excess policies with potential asbestos exposures. In such circumstances, inventories of the policy limits exposed to losses coupled with reported losses are analyzed and evaluated principally by claims personnel and underwriters to establish IBNR loss reserves.

Asbestos Liability.Our exposure to asbestos liability principally stems from marine liability insurance written on an occurrence basis during the mid-1980s. In general, our participation on such risks is in the excess layers, which requires the underlying coverage to be exhausted prior to coverage being triggered in our layer. In many instances we are one of many insurers who participate in the defense and ultimate settlement of these claims, and we are generally a minor participant in the overall insurance coverage and settlement.

The reserves for asbestos exposures at June 30, 2008 are for: (i) one large settled claim for excess insurance policy limits exposed to a class action suit against an insured involved in the manufacturing or distribution of asbestos products being paid over several years (two other large settled claims were fully paid in 2007); (ii) other insureds not directly involved in the manufacturing or distribution of asbestos products, but that have more than incidental asbestos exposure for their purchase or use of products that contained asbestos; and (iii) attritional asbestos claims that could be expected to occur over time. Substantially all of our asbestos liability reserves are included in our marine loss reserves.

Gross and net reserves for losses and LAE related to asbestos exposures increased $2.4 million and $1.3 million, respectively, in the 2008 second quarter as a result of an assumed loss portfolio transaction with a former pool member discussed above.

The Company believes that there are no remaining known claims where it would suffer a material loss as a result of excess policy limits being exposed to class action suits for insureds involved in the manufacturing or distribution of asbestos products. There can be no assurances, however, that material loss development may not arise in the future from existing asbestos claims or new claims given the evolving and complex legal environment that may directly impact the outcome of the asbestos exposures of our insureds.

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The following table sets forth our gross and net loss and LAE reserves for our asbestos exposures for the periods indicated:

	Six Months Ended			Year Ended
	June 30, 2008			December 31, 2007
	($ in thousands)
Gross of Reinsurance
Beginning gross reserves	$	23,194		$	37,171
Incurred losses & LAE		594			(780	)
Calendar year payments		(2,238	)		13,197
Ending gross reserves	$	26,026		$	23,194
Gross case loss reserves	$	18,170		$	16,014
Gross IBNR loss reserves		7,856			7,180
Ending gross reserves	$	26,026		$	23,194
Net of Reinsurance
Beginning net reserves	$	16,717		$	21,381
Incurred losses & LAE		570			1,779
Calendar year payments		(1,350	)		6,443
Ending net reserves	$	18,637		$	16,717
Net case loss reserves	$	10,986		$	9,715
Net IBNR loss reserves		7,651			7,002
Ending net reserves	$	18,637		$	16,717

To the extent the Company incurs additional gross loss development for its historic asbestos exposure, the allowance for uncollectible reinsurance would increase for the reinsurers that are insolvent, in run-off or otherwise no longer active in the reinsurance business. The Company continues to believe that it will be able to collect reinsurance on the gross portion of its historic gross asbestos exposure in the above table.

At June 30, 2008, the ceded asbestos paid and unpaid recoverables were $10.6 million compared to $10.5 million at December 31, 2007. Such recoverables increased as a result of an assumed loss portfolio transaction with a former pool member.

Loss reserves for environmental losses generally consist of oil spill claims on marine liability policies written in the ordinary course of business. Net loss reserves for such exposures are included in our marine loss reserves and are not separately identified.

Hurricanes Katrina and Rita.During the 2005 third quarter, the Company recorded gross and net loss estimates of $471.0 million and $22.3 million, respectively, exclusive of $14.5 million for the cost of excess of loss reinstatement premiums related to Hurricanes Katrina and Rita.

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The following table sets forth our gross and net loss and LAE reserves, incurred loss and LAE, and payments for Hurricanes Katrina and Rita for the periods indicated:

	Six Months Ended			Year Ended
	June 30, 2008			December 31, 2007
	($ in thousands)
Gross of Reinsurance
Beginning gross reserves	$	141,831		$	319,230
Incurred loss & LAE		125			(29,349	)
Calendar year payments		12,929			148,050
Ending gross reserves	$	129,027		$	141,831
Gross case loss reserves	$	82,669		$	94,959
Gross IBNR loss reserves		46,358			46,872
Ending gross reserves	$	129,027		$	141,831
Net of Reinsurance
Beginning net reserves	$	4,519		$	10,003
Incurred loss & LAE		(476	)		(1,909	)
Calendar year payments		(373	)		3,575
Ending net reserves	$	4,416		$	4,519
Net case loss reserves	$	340		$	646
Net IBNR loss reserves		4,076			3,873
Ending net reserves	$	4,416		$	4,519

Approximately $133.7 million and $167.7 million of paid and unpaid losses at June 30, 2008 and December 31, 2007, respectively, were due from reinsurers as a result of the losses from Hurricanes Katrina and Rita.

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Professional Liability Subprime Exposure.The following table sets forth reported claims and notices of potential claims, the average gross and net limits by policy and the average amount where our policy attaches related to subprime exposure for our professional liability business at June 30, 2008. The Company’s management believes that the reserves for losses and LAE are adequate to cover the ultimate costs for such loss contingencies related to subprime exposure for the professional liability business.

	Number		Average		Average		Average
	of		Gross		Net		Excess
	Claims (1)		Limit		Limit (2)		Attachment
			($ in thousands)
Primary:
D&O Securities/Other Claims		1	$	1,000	$	650
Excess:
D&O Securities Claims		4		7,500		4,500	$	37,500
D&O Side A Securities Claims		2		5,000		3,500		137,500
Other Claims		2		10,000		5,500		35,000
Subtotal Excess/Average		8		7,500		4,500
Total		9	$	6,778	$	4,072

(1)	Claims include all professional liability policies written by the Insurance Companies. There are no reported claims or notices of potential claims reported for the Lloyd’s Operations. All policies are claims made. Defense costs are included within the limits of liability. There was one new claim/ notice of potential claim reported for the six months ended June 30, 2008.
(2)	Amounts are net of reinsurance.

Prior Year Reserve Redundancies/Deficiencies

As part of our regular review of prior reserves, the Company’s actuaries may determine, based on their judgment, that certain assumptions made in the reserving process in prior periods may need to be revised to reflect various factors, likely including the availability of additional information. Based on their reserve analyses, our actuaries may make corresponding reserve adjustments.

Prior period reserve redundancies of $10.6 million and $10.6 million, net of reinsurance, were recorded in the 2008 and 2007 second quarters, respectively, and $24.3 million and $17.4 million, net of reinsurance, were recorded in the first six months of 2008 and 2007, respectively, as discussed below. The relevant factors that may have a significant impact on the establishment and adjustment of loss and LAE reserves can vary by line of business and from period to period.

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The segment and line of business breakdowns of prior period net reserve deficiencies (redundancies) were as follows:

	Three Months Ended
	June 30,			June 30,
	2008			2007
	($ in thousands)
Insurance Companies:
Marine	$	(5,679	)	$	49
Specialty		(3,136	)		(3,978	)
Professional Liability		(911	)		(2,084	)
Middle Markets		(500	)		—
Property/Other		(1,426	)		522
Subtotal Insurance Companies		(11,652	)		(5,491	)
Lloyd’s Operations		1,072			(5,126	)
Total	$	(10,580	)	$	(10,617	)

	Six Months Ended
	June 30,			June 30,
	2008			2007
	($ in thousands)
Insurance Companies:
Marine	$	(5,979	)	$	(1,451	)
Specialty		(10,436	)		(6,178	)
Professional Liability		(1,211	)		(4,084	)
Middle Markets		700			—
Property/Other		(3,226	)		522
Subtotal Insurance Companies		(20,152	)		(11,191	)
Lloyd’s Operations		(4,108	)		(6,226	)
Total	$	(24,260	)	$	(17,417	)

Following is a discussion of relevant factors related to the $10.6 million prior period net reserve redundancy recorded in the 2008 second quarter:

The Insurance Companies recorded $5.7 million of prior period net savings for marine business comprised of $0.5 million for reductions of cargo claims, $2.2 million on 2006 and 2007 liability business, $1.4 million for 2006 P&I business of which $0.6 million was due to case reserve reductions, $1.7 million due to reinsurance recoveries on balances previously written off for business written prior to 1998 offset by $0.1 million of net adverse loss development on other lines of business.

The Insurance Companies recorded $3.1 million of prior period net savings for specialty business comprised mostly of $7.4 million of net favorable development in construction liability business due to favorable loss trends for business written from 2001 to 2006 offset by approximately $0.7 million of unfavorable loss activity for construction business written in 1997 and 1998, and $3.6 million of adverse loss development from discontinued business.

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The Insurance Companies recorded $0.9 million of net prior period savings for professional liability business mostly emanating from $0.3 million of favorable development on E&O business written for law firms, $0.2 million from D&O business and $0.4 million from UK solicitors business run-off.

The Insurance Companies recorded prior period net savings of $1.0 million for European property business due to loss reserve take downs and $0.4 million for run-off business mostly related to aviation and space business discontinued in 1999.

The Lloyd’s Operations recorded $1.1 million of prior period net reserve deficiencies comprised of $2.2 million for offshore energy losses (including $2.7 million for a 2005 loss less $0.5 million of savings in other energy losses), $0.5 million for European property business written in 2006 and 2007, offset by $1.6 million of favorable development across other lines of business: liability ($0.6 million), assumed reinsurance ($0.6 million) and professional liability ($0.4 million).

Following is a discussion of relevant factors related to the $13.7 million prior period net reserve redundancy recorded in the 2008 first quarter:

The Insurance Companies recorded $0.3 million of prior period net savings for marine business comprised of $2.5 million of favorable development in marine liability business from 2006 and prior years offset by adverse loss development of $2.2 million from other lines of business of which $1.7 million was for cargo losses consisting mostly of loss activity related to three cargo claims.

The Insurance Companies recorded $7.3 million of prior period net savings for specialty business comprised of $8.9 million of favorable development in construction liability business due to favorable loss trends for business written from 2003 to 2006, $2.3 million of favorable development for personal umbrella business written in 2007, offset by adverse loss development of $3.3 million from discontinued business and $0.6 million from program business written in 2007 and 2006.

The Insurance Companies recorded $1.2 million of prior period net deficiencies for middle markets business principally for business written in 2004 and 2003 of which $0.5 million was for one large claim on a policy written in 2003.

The Insurance Companies recorded $1.8 million of prior period net savings for run-off business, included in property/other in the above table, principally due to the lack of loss activity for aviation and space business discontinued in 1999.

The Lloyd’s Operations recorded $5.2 million of prior period net savings mostly emanating from refinements to the actuarial methodology employed to project ultimate loss estimates by line of business. The methodology employed in the 2008 first quarter separately determined ultimate losses on a gross and ceded basis to establish net IBNR estimates. Prior methodology used net loss amounts to determine such estimates. The net result of the 2008 first quarter analysis was to reduce ultimate loss estimates by approximately $9.7 million for short tail classes of business mostly related to 2005 and prior years (cargo $3.2 million, energy $4.6 million, reinsurance $2.1 million, offset by $0.2 million of loss development for other lines of business). Such prior year savings were offset by strengthening reserves of approximately $4.5 million for business written in 2007 and 2006 for liability business ($2.3 million) and energy business ($2.1 million) and various other classes of business ($0.1 million). Such strengthening has taken into effect the changes in the reinsurance program for increased net retentions that have occurred in 2007 and 2006 compared to prior years.

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Our management believes that the estimates for the reserves for losses and LAE are adequate to cover the ultimate cost of losses and loss adjustment expenses on reported and unreported claims. However, it is possible that the ultimate liability may exceed or be less than such estimates. To the extent that reserves are deficient or redundant, the amount of such deficiency or redundancy is treated as a charge or credit to earnings in the period in which the deficiency or redundancy is identified. We continue to review all of our loss reserves, including our asbestos reserves and Hurricanes Katrina and Rita reserves, on a regular basis.

Commission Expense.Commission expense paid to unaffiliated brokers and agents is generally based on a percentage of the gross written premium and is reduced by ceding commissions the Company may receive on the ceded written premium. Commissions are generally deferred and recorded as deferred policy acquisition costs to the extent that they relate to unearned premium. The percentage of commission expense to net earned premiums in the 2008 second quarter and six month period were 14.4% and 13.9%, respectively, compared to 12.1% and 12.2% for the comparable periods in 2007. The increases are mostly attributable to greater retentions, particularly on our marine quota share treaties, which have reduced the ceding commission benefit. The Lloyd’s Operations commission expense also increased in the 2008 second quarter and decreased in the 2007 second quarter due to refinements in amounts recorded in prior periods for ceding commission due from reinsurers.

Other Operating Expenses.The increases of 16.2% and 14.7% in other operating expenses in the 2008 second quarter and six month period, compared to the same periods in 2007, were attributable primarily to employee-related expenses resulting from expansion of the business and investments in technology to support this growth. In addition, effective June 30, 2008, the Company closed regional U.K. offices in Manchester and Basingstoke and entered into a renewal rights transaction with a U.K. insurer to provide for an orderly closure of the offices. Additionally, the Company discontinued underwriting U.K. small commercial property business and eliminated six operations positions in the U.S. Severance and other costs associated with those actions contributed one point to the 2008 second quarter expense ratio.

Income Taxes. The income tax expense was $6.7 million and $11.4 million for the second quarters of 2008 and 2007, respectively, resulting in effective tax rates of 27.7% and 31.9%, respectively. The income tax expense was $16.9 million and $20.8 million for the first six months of 2008 and 2007, respectively, resulting in effective tax rates of 29.3% and 32.0%, respectively. The Company’s effective tax rate is less than 35% due to permanent differences between book and tax return income, with the most significant item being tax exempt interest. The effective tax rate on net investment income was 25.9% for the first six months of 2008 compared to 28.3% for the comparable 2007 period. As of June 30, 2008 and December 31, 2007, the net deferred Federal, foreign, state and local tax assets were $45.4 million and $29.2 million, respectively.

We are subject to the tax regulations of the United States and foreign countries in which we operate. The Company files a consolidated federal tax return, which includes all domestic subsidiaries and the U.K. Branch. The income from the foreign operations is designated as either U.S. connected income or non-U.S. connected income. Lloyd’s is required to pay U.S. income tax on U.S. connected income written by Lloyd’s syndicates. Lloyd’s and the 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 members in proportion to their participation in the relevant syndicates. The Company’s corporate members are subject to this agreement and will receive U.K. tax credits for any U.S. income tax incurred up to the U.K. income tax charged on the U.S. income. The non-U.S. connected insurance income would generally constitute taxable income under the Subpart F income section of the Internal Revenue Code since less than 50% of the Company’s premium is 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 our foreign source insurance income and foreign tax credits, where available, are utilized to offset U.S. tax as permitted. The Company’s effective tax rate for Syndicate 1221 taxable income could substantially exceed 35% to the extent the Company is unable to offset U.S. taxes paid under Subpart F tax regulations with U.K. tax credits on future underwriting year distributions. U.S. taxes are not accrued on the earnings of the Company’s foreign agencies as these earnings are not subject to the Subpart F tax regulations. These earnings are subject to taxes under U.K. tax regulations at a 28% rate effective April 1, 2008. The effective rate prior to April 1, 2008 was 30%. The effect of the tax rate change was not material to the Company’s financial statements.

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We have not provided for U.S. deferred income taxes on the undistributed earnings of approximately $52.9 million of our non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the foreign subsidiaries. However, in the future, if such earnings were distributed to the Company, taxes of approximately $3.7 million would be payable on such undistributed earnings and would be reflected in the tax provision for the year in which these earnings are no longer intended to be permanently reinvested in the foreign subsidiary, assuming all foreign tax credits are realized.

The Company had net state and local deferred tax assets amounting to potential future tax benefits of $7.6 million and $6.3 million at June 30, 2008 and December 31, 2007, respectively. Included in the deferred tax assets are state and local net operating loss carryforwards of $1.2 million and $2.5 million at June 30, 2008 and December 31, 2007, respectively. 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 carryforwards at June 30, 2008 expire in 2025.

In July 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes(“FIN 48”), an interpretation of SFAS 109. FIN 48, which became effective in 2007, establishes the threshold for recognizing the benefits of tax-return positions in the financial statements as more-likely-than-not to be sustained by the taxing authorities, and prescribes a measurement methodology for those positions meeting the recognition threshold. The Company’s adoption of FIN 48 at January 1, 2007 did not have a material effect on its financial condition or results of operations.

Segment Information

The Company’s subsidiaries are primarily engaged in the underwriting and management of property and casualty insurance.

The Company classifies its business into two underwriting segments consisting of the Insurance Companies and the Lloyd’s Operations, which are separately managed, and a Corporate segment. Segment data for each of the two underwriting segments include allocations of revenues and expenses of the Navigators Agencies and the Parent Company’s expenses and related income tax amounts.

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

Following are the financial results of the Company’s two underwriting segments.

Insurance Companies

The Insurance Companies consist of Navigators Insurance Company, including its U.K. Branch, and its wholly-owned subsidiary, Navigators Specialty Insurance Company. Navigators Insurance Company is our largest insurance subsidiary and has been active since 1983. It is primarily engaged in underwriting marine insurance and related lines of business, professional liability insurance, specialty lines of business including contractors general liability insurance, commercial and personal umbrella and primary and excess casualty businesses, and middle markets business consisting of general liability, commercial automobile liability and property insurance for a variety of commercial middle markets businesses. Navigators Specialty Insurance Company, which began operations in 1990, underwrites specialty and professional liability insurance on an excess and surplus lines basis fully reinsured by Navigators Insurance Company. NMC and Navigators Management (UK) Ltd. produce, manage and underwrite insurance and reinsurance business for the Insurance Companies.

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The following table sets forth the results of operations for the Insurance Companies for the three and six months ended June 30, 2008 and 2007:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
	($ in thousands)
Gross written premium	$	197,956		$	198,560		$	389,552		$	407,434
Net written premium		128,182			124,073			252,492			246,121
Net earned premium		117,434			109,735			229,680			211,547
Net losses and LAE		(62,225	)		(63,725	)		(129,581	)		(125,065	)
Commission expense		(14,723	)		(13,903	)		(27,671	)		(24,986	)
Other operating expenses		(24,552	)		(21,057	)		(46,700	)		(39,826	)
Commission income and other income (expense)		1,516			96			1,774			585
Underwriting profit		17,450			11,146			27,502			22,255
Net investment income		15,593			14,440			31,058			28,094
Net realized capital gains (losses)		(8,053	)		834			(8,155	)		1,077
Income before income taxes		24,990			26,420			50,405			51,426
Income tax expense		6,939			8,163			14,309			16,074
Net income	$	18,051		$	18,257		$	36,096		$	35,352
Loss and LAE ratio		53.0	%		58.1	%		56.4	%		59.1	%
Commission expense ratio		12.5	%		12.7	%		12.0	%		11.8	%
Other operating expense ratio(1)		19.6	%		19.0	%		19.6	%		18.6	%
Combined ratio		85.1	%		89.8	%		88.0	%		89.5	%

(1) Includes other operating expenses and commission income and other income (expense).

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The following tables set forth the underwriting results of the Insurance Companies for the three and six months ended June 30, 2008 and 2007:

	Three Months Ended June 30, 2008
	($ in thousands)
	Net		Losses
	Earned		and LAE		Underwriting		Underwriting		Loss			Expense			Combined
	Premium		Incurred		Expenses		Profit/(Loss)		Ratio			Ratio			Ratio
Marine & Energy	$	36,456	$	17,497	$	12,194	$	6,765		48.0	%		33.4	%		81.4	%
Specialty		56,574		33,614		16,685		6,275		59.4	%		29.5	%		88.9	%
Professional Liability		14,388		7,374		5,020		1,994		51.3	%		34.9	%		86.2	%
Middle Markets		6,736		3,719		2,751		266		55.2	%		40.8	%		96.0	%
Property/Other		3,280		21		1,109		2,150		0.6	%		33.8	%		34.4	%
Total	$	117,434	$	62,225	$	37,759	$	17,450		53.0	%		32.1	%		85.1	%

	Three Months Ended June 30, 2007
	($ in thousands)
	Net		Losses
	Earned		and LAE		Underwriting		Underwriting			Loss			Expense			Combined
	Premium		Incurred		Expenses		Profit/(Loss)			Ratio			Ratio			Ratio
Marine & Energy	$	34,005	$	17,913	$	12,340	$	3,752			52.7	%		36.3	%		89.0	%
Specialty		54,378		31,261		14,317		8,800			57.5	%		26.3	%		83.8	%
Professional Liability		13,334		7,741		5,330		263			58.1	%		39.9	%		98.0	%
Middle Markets		4,539		2,045		1,723		771			45.1	%		38.0	%		83.1	%
Property/Other		3,479		4,765		1,154		(2,440	)		137.0	%		33.2	%		170.2	%
Total	$	109,735	$	63,725	$	34,864	$	11,146			58.1	%		31.7	%		89.8	%

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	Six Months Ended June 30, 2008
	($ in thousands)
	Net		Losses
	Earned		and LAE		Underwriting		Underwriting			Loss			Expense			Combined
	Premium		Incurred		Expenses		Profit/(Loss)			Ratio			Ratio			Ratio
Marine & Energy	$	69,682	$	41,868	$	23,256	$	4,558			60.1	%		33.4	%		93.5	%
Specialty		113,243		63,094		32,183		17,966			55.7	%		28.4	%		84.1	%
Professional Liability		28,461		16,279		10,118		2,064			57.2	%		35.6	%		92.8	%
Middle Markets		12,433		8,003		4,740		(310	)		64.4	%		38.1	%		102.5	%
Property/Other		5,861		337		2,300		3,224			5.8	%		39.2	%		45.0	%
Total	$	229,680	$	129,581	$	72,597	$	27,502			56.4	%		31.6	%		88.0	%

	Six Months Ended June 30, 2007
	($ in thousands)
	Net		Losses
	Earned		and LAE		Underwriting		Underwriting			Loss			Expense			Combined
	Premium		Incurred		Expenses		Profit/(Loss)			Ratio			Ratio			Ratio
Marine & Energy	$	67,494	$	38,235	$	20,114	$	9,145			56.6	%		29.8	%		86.4	%
Specialty		103,421		60,288		29,195		13,938			58.3	%		28.2	%		86.5	%
Professional Liability		26,371		16,225		9,653		493			61.5	%		36.5	%		98.0	%
Middle Markets		9,109		4,785		3,336		988			52.5	%		36.6	%		89.1	%
Property/Other		5,152		5,532		1,929		(2,309	)		107.4	%		37.4	%		144.8	%
Total	$	211,547	$	125,065	$	64,227	$	22,255			59.1	%		30.4	%		89.5	%

Net earned premium of the Insurance Companies increased 7.0% and 8.6% in the 2008 second quarter and six month period, respectively, compared to the same periods in 2007, primarily reflecting increased retention of the business written.

Underwriting results generally reflect the favorable industry market conditions up until 2006 (excluding the 2005 losses from Hurricanes Katrina and Rita) coupled with satisfactory loss trends in the aforementioned periods. The 2008 second quarter and six month period loss ratios were favorably impacted by prior period loss reserve redundancies of $11.7 million or 9.9 loss ratio points and $20.2 million or 8.8 loss ratio points, respectively. The 2007 second quarter and six month period loss ratios were favorably impacted by prior period loss reserve redundancies of $5.5 million or 5.0 loss ratio points and $11.2 million or 5.3 loss ratio points, respectively.

Generally, while the Insurance Companies have experienced favorable prior period redundancies in 2008 and 2007, the ultimate loss ratios for the most recent underwriting years of 2008 and 2007 have been increasing due to softening market conditions for the business written during those periods.

The approximate annualized pre-tax yields on the Insurance Companies’ investment portfolio, excluding net realized capital gains and losses, were 4.3% for both the 2008 second quarter and six month period, respectively, compared to 4.6% for both of the comparable 2007 periods. The average durations of the Insurance Companies’ invested assets at June 30, 2008 was 4.8 years compared to 4.3 years at June 30, 2007. Net investment income increased in the 2008 second quarter and six month period compared to the same periods in 2007 primarily due to the investment of new funds from cash flow, partially offset by the decrease in yields.

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Lloyd’s Operations

The Lloyd’s Operations consist of NUAL, which manages Syndicate 1221, Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. Both Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. are Lloyd’s corporate members with limited liability and provide capacity to Syndicate 1221. NUAL owns Navigators Underwriting Ltd., an underwriting managing agency that underwrites cargo and engineering business for Syndicate 1221. In January 2005, we formed Navigators NV in Antwerp, Belgium, a wholly-owned subsidiary of NUAL. Navigators NV produces transport liability, cargo and marine liability premium for Syndicate 1221. In July 2008, we opened an underwriting office in Stockholm, Sweden to write professional liability business for Syndicate 1221. The Lloyd’s Operations and Navigators Management (UK) Limited, a Navigators Agency which produces business for the U.K. Branch, are subsidiaries of Navigators Holdings (UK) Limited located in the United Kingdom.

Syndicate 1221’s stamp capacity is £123.0 million ($239.2 million) in 2008 compared to £140.0 million ($280.2 million) in 2007. Stamp capacity is a measure of the amount of premium a Lloyd’s syndicate is authorized to write as determined by the Council of Lloyd’s. Syndicate 1221’s stamp capacity is expressed net of commission (as is standard at Lloyd’s). The Syndicate 1221 premium recorded in the Company’s financial statements is gross of commission. Navigators provides 100% of Syndicate 1221’s capacity for the 2008 and 2007 underwriting years through Navigators Corporate Underwriters Ltd. in 2008 and through Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. in 2007.

Lloyd’s presents its results on an underwriting year basis, generally closing each underwriting year after three years. We make estimates for each underwriting year and timely accrue the expected results. Our Lloyd’s Operations included in the consolidated financial statements represent our participation in Syndicate 1221.

Lloyd’s syndicates report the amounts of premiums, claims, and expenses recorded in an underwriting account for a particular year to the companies or individuals that participate in the syndicates. The syndicates generally keep accounts open for three years. Traditionally, three years have been necessary to report substantially all premiums associated with an underwriting year and to report most related claims, although claims may remain unsettled after the underwriting year is closed. A Lloyd’s syndicate typically closes an underwriting year by reinsuring outstanding claims on that underwriting year with the participants for the next underwriting year. The ceding participants pay the assuming participants an amount based on the unearned premiums and outstanding claims in the underwriting year at the date of the assumption. Our participation in Syndicate 1221 is represented by and recorded as our proportionate share of the underlying assets and liabilities and results of operations of the syndicate since (i) we hold an undivided interest in each asset, (ii) we are proportionately liable for each liability and (iii) Syndicate 1221 is not a separate legal entity. At Lloyd’s, the amount to close an underwriting year into the next year is referred to as the reinsurance to close (“RITC”) transaction. The RITC amounts represent the transfer of the assets and liabilities from the participants of a closing underwriting year to the participants of the next underwriting year. To the extent our participation in the syndicate changes, the RITC amounts vary accordingly. The RITC transaction, recorded in the fourth quarter, does not result in any gain or loss. We provide letters of credit to Lloyd’s to support our participation in Syndicate 1221’s stamp capacity as discussed below under the captionLiquidity and Capital Resources.

Whenever a member of Lloyd’s is unable to pay its debts to policyholders, such debts may be payable by the Lloyd’s Central Fund. If Lloyd’s determines that the Central Fund needs to be increased, it has the power to assess premium levies on current Lloyd’s members up to 3% of a member’s underwriting capacity in any one year. The Company does not believe that any assessment is likely in the foreseeable future and has not provided any allowance for such an assessment.

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The following table sets forth the results of operations of the Lloyd’s Operations for the three and six months ended June 30, 2008 and 2007:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
				($ in thousands)
Gross written premium	$	81,257		$	77,989		$	176,807		$	169,976
Net written premium		46,105			37,277			109,517			88,248
Net earned premium		45,269			35,882			88,763			73,116
Net losses and LAE		(29,664	)		(16,014	)		(50,728	)		(35,866	)
Commission expense		(8,767	)		(3,747	)		(16,767	)		(9,763	)
Other operating expenses		(8,685	)		(7,551	)		(16,293	)		(15,071	)
Commission income and other income (expense)		(39	)		137			(25	)		(15	)
Underwriting profit		(1,886	)		8,707			4,950			12,401
Net investment income		2,871			2,407			5,853			4,558
Net realized capital gains (losses)		77			6			103			(36	)
Income before income taxes		1,062			11,120			10,906			16,923
Income tax expense		425			3,875			3,877			5,929
Net income	$	637		$	7,245		$	7,029		$	10,994
Loss and LAE ratio		65.5	%		44.6	%		57.1	%		49.1	%
Commission expense ratio		19.4	%		10.4	%		18.9	%		13.4	%
Other operating expense ratio(1)		19.3	%		20.6	%		18.4	%		20.5	%
Combined ratio		104.2	%		75.6	%		94.4	%		83.0	%

(1) Includesother operating expensesandcommission income and other income (expense).

The Lloyd’s Operations had been experiencing business expansion coupled with improving underwriting results as a result of the generally favorable market conditions for marine and energy business from late 2001 through 2003, and continuing to a lesser extent in 2004. Marine and energy premium rate increases occurred in 2005 and continued into 2006 following Hurricanes Katrina and Rita, particularly in the offshore energy business, while the average renewal premium rates in 2007 decreased approximately 1.2% for the marine and energy business and decreased approximately 3.4% in our professional liability business. The average renewal premium rates for the second quarter of 2008 decreased approximately 6.0% for the marine and energy business and decreased approximately 3.6% for the professional liability business. The average renewal premium rates for the first six months of 2008 decreased approximately 5.0% for the marine and energy business and decreased approximately 2.7% for the professional liability business.

The 2008 six month earnings in the Lloyd’s Operations reflect the continued favorable loss development trends. The 2008 second quarter loss ratio was adversely impacted by prior period loss reserve deficiencies of $1.1 million or 2.4 loss ratio points compared to the 2007 second quarter loss ratio which was favorably impacted by prior period loss reserve redundancies of $5.1 million or 14.3 loss ratio points. The loss ratio for the first six months of 2008 was favorably impacted by prior period loss reserve redundancies of $4.1 million or 4.6 loss ratio points compared to the loss ratio for the first six months of 2007 which was favorably impacted by prior period loss reserve redundancies of $6.2 million or 8.5 loss ratio points.

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Generally, while the Lloyd’s Operations has experienced favorable prior period net redundancies in 2008 and 2007, ultimate loss ratios for the more recent underwriting years of 2008 and 2007 have been increasing due to softening market conditions for the business written during those periods.

The approximate annualized pre-tax yields on the Lloyd’s Operations’ investment portfolio, excluding net realized capital gains and losses, were 3.5% and 3.6% for the 2008 second quarter and six month period, respectively, compared to 3.8% and 3.7% for the comparable 2007 periods. The average duration of our Lloyd’s Operations’ invested assets at June 30, 2008 was 1.4 years compared to 1.5 years at June 30, 2007. The increase in the Lloyd’s Operations’ net investment income is reflective of the increased investment portfolio primarily due to positive cash flow. Such yields are net of interest credits to certain reinsurers for funds withheld by our Lloyd’s Operations.

Off-Balance Sheet Transactions

There have been no material changes in the information concerning off-balance sheet transactions as stated in the Company’s 2007 Annual Report on Form 10-K.

Tabular Disclosure of Contractual Obligations

There have been no material changes in the operating lease or capital lease information concerning contractual obligations as stated in the Company’s 2007 Annual Report on Form 10-K. Total reserves for losses and LAE were $1.7 billion at June 30, 2008 compared to $1.6 billion at December 31, 2007. There were no significant changes in the Company’s lines of business or claims handling that would create a material change in the percentage relationship of the projected payments by period to the total reserves.

The following table sets forth our contractual obligations with respect to the 7% senior unsecured notes due May 1, 2016 discussed in the Notes to Interim Consolidated Financial Statements, included herein:

	Payments Due by Period
			Less than						More than
	Total		1 Year		1-3 Years		3-5 Years		5 Years
	($ in thousands)
7% Senior Notes	$	195,000	$	8,750	$	17,500	$	17,500	$	151,250

Investments

The objective of the Company’s investment policy, guidelines and strategy is to maximize total investment return in the context of preserving and enhancing stockholder value and statutory surplus of the Insurance Companies. Secondarily, an important consideration is to optimize the after-tax book income.

The investments are managed by outside professional fixed-income and equity portfolio managers. The Company seeks to achieve its investment objectives by investing in cash equivalents and money market funds, municipal bonds, U.S. Government bonds, U.S. Government agency guaranteed and non-guaranteed securities, corporate bonds, mortgage-backed and asset-backed securities and common and preferred stocks. Our investment guidelines require that the amount of the consolidated fixed income portfolio rated below “A-” but no lower than “BBB-” by S&P or below “A3” but no lower than “Baa3” by Moody’s shall not exceed 10% of the total fixed income and short-term investments. Securities rated below “BBB-” by S&P or below “Baa3” by Moody’s combined with any other investments not specifically permitted under the investment guidelines, can not exceed 5% of consolidated stockholders’ equity. Investments in equity securities that are actively traded on major U.S. stock exchanges can not exceed 20% of consolidated stockholders’ equity. Our investment guidelines prohibit investments in derivatives other than as a hedge against foreign currency exposures or the writing of covered call options on the equity portfolio.

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The Insurance Companies’ investments are subject to the oversight of each of their respective Board of Directors and our Finance Committee. The investment portfolio and the performance of the investment managers are reviewed quarterly. These investments must comply with the insurance laws of New York State, the domiciliary state of Navigators Insurance Company and Navigators Specialty Insurance Company. These laws prescribe the type, quality and concentration of investments which may be made by insurance companies. In general, these laws permit investments, within specified limits and subject to certain qualifications, in Federal, state and municipal obligations, corporate bonds, preferred stocks, common stocks, mortgages and real estate.

The Lloyd’s Operations’ investments are subject to the oversight of the Board of Directors and the Investment Committee of NUAL, as well as the Parent Company’s Board of Directors and Finance Committee. These investments must comply with the rules and regulations imposed by Lloyd’s and by certain overseas regulators. The investment portfolio and the performance of the investment managers are reviewed quarterly.

At June 30, 2008, the average quality of the investment portfolio as rated by S&P and Moody’s was “AA/Aa”, respectively, with an average duration of 4.3 years. All of the Company’s mortgage-backed and asset-backed securities are rated “AAA/Aaa” by S&P and Moody’s, respectively, except for ten securities approximating $6.3 million, which are all rated investment grade. The Company does not own any collateralized debt obligations (CDO’s), collateralized loan obligations (CLO’s) or asset backed commercial paper.

At June 30, 2008 and December 31, 2007, all fixed-maturity and equity securities held by us were classified as available-for-sale.

Effective January 1, 2008, the Company adopted SFAS 157 which defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. SFAS 157, among other things, requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A hierarchy of valuation techniques is specified in SFAS 157 based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market data obtained from investment managers or brokers. These two types of inputs have created the following fair value hierarchy:

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

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

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

All fixed maturities, short-term investments and equity securities are carried at fair value. All prices for our fixed maturities, short-term investments and equity securities valued as level 1 or level 2 in the SFAS 157 fair value hierarchy are received from independent pricing services. Prices for any securities derived from level 3 criteria in the fair value hierarchy are developed by one of our outside investment managers.

58

The following table presents, for each of the fair value hierarchy levels, the Company’s fixed maturities, equity securities and short-term investments that are measured at fair value at June 30, 2008:

	Quoted Prices		Significant
	In Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	Level 1		Level 2		Level 3		Total
	($ in thousands)
Fixed maturities	$	177,161	$	1,412,419	$	986	$	1,590,566
Equities securities		68,089		—		—		68,089
Short-term investments		143,631		31,243		—		174,874
Total	$	388,881	$	1,443,662	$	986	$	1,833,529

The securities classified as Level 3 in the above table consist of two structured securities rated “AAA/Aaa” by S&P and Moody’s, respectively, with unobservable inputs included in the Company’s fixed maturities portfolio for which price quotes from brokers were used to indicate fair value.

The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value using level 3 inputs during the quarter ended June 30, 2008:

	Three Months Ended
	June 30, 2008
	($ in thousands)
Level 3 investments as of April 1, 2008	$	2,073
Unrealized net gains included in other comprehensive income (loss)		(18	)
Purchases, sales, paydowns and amortization		(134	)
Transfer to Level 2		(935	)
Level 3 investments as of June 30, 2008	$	986

The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value using Level 3 inputs during the six months ended June 30, 2008:

	Six Months Ended
	June 30, 2008
	($ in thousands)
Level 3 investments as of January 1, 2008	$	2,603
Unrealized net gains included in other comprehensive income (loss)		(1	)
Purchases, sales, paydowns and amortization		(287	)
Transfer to Level 2		(1,329	)
Level 3 investments as of June 30, 2008	$	986

59

The following tables set forth our cash and investments as of June 30, 2008 and December 31, 2007:

			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
June 30, 2008	Value		Gains		(Losses)			Cost
	($ in thousands)
Fixed maturities:
U.S. Government Treasury Bonds, GNMAs and foreign government bonds	$	237,360	$	5,444	$	(471	)	$	232,387
States, municipalities and political subdivisions		612,577		4,007		(4,952	)		613,522
Mortgage- and asset-backed securities:
Non-guaranteed government agency bonds		28,711		373		(58	)		28,396
Mortgage-backed securities		235,304		709		(1,955	)		236,550
Collateralized mortgage obligations		114,005		404		(8,074	)		121,675
Asset-backed securities		51,868		504		(249	)		51,613
Commercial mortgage-backed securities		108,168		67		(5,229	)		113,330
Subtotal	��	538,056		2,057		(15,565	)		551,564
Corporate bonds		202,573		1,210		(5,203	)		206,566
Total fixed maturities		1,590,566		12,718		(26,191	)		1,604,039
Equity securities — common stocks		68,089		3,407		(5,496	)		70,178
Cash		14,499		—		—			14,499
Short-term investments		174,874		—		—			174,874
Total	$	1,848,028	$	16,125	$	(31,687	)	$	1,863,590

			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
December 31, 2007	Value		Gains		(Losses)			Cost
	($ in thousands)
Fixed maturities:
U.S. Government Treasury Bonds, GNMAs and foreign government bonds	$	234,375	$	5,724	$	(337	)	$	228,988
States, municipalities and political subdivisions		515,883		7,050		(657	)		509,490
Mortgage- and asset-backed securities:
Non-guaranteed government agency bonds		29,818		342		(4	)		29,480
Mortgage-backed securities		232,869		1,824		(479	)		231,524
Collateralized mortgage obligations		134,899		524		(823	)		135,198
Asset-backed securities		64,352		533		(79	)		63,898
Commercial mortgage-backed securities		113,488		544		(1,031	)		113,975
Subtotal		575,426		3,767		(2,416	)		574,075
Corporate bonds		196,636		2,504		(1,804	)		195,936
Total fixed maturities		1,522,320		19,045		(5,214	)		1,508,489
Equity securities — common stocks		67,240		6,452		(4,704	)		65,492
Cash		7,056		—		—			7,056
Short-term investments		170,685		—		—			170,685
Total	$	1,767,301	$	25,497	$	(9,918	)	$	1,751,722

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”) and the Federal Home Loan Mortgage Corporation (“FHLMC”) which are Federal government sponsored entities, and the non-FNMA and FHLMC securities broken out by prime, Alt-A and subprime collateral. The securities issued by FNMA and FHLMC are guaranteed by each respective entity but are not guaranteed by the Federal government.

60

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.

At June 30, 2008, the Company owned two asset-backed securities approximating $0.4 million with subprime mortgage exposures. The securities are rated “AAA/Aaa” by S&P and Moody’s, respectively, and have an effective maturity of 0.9 years. In addition, the Company owned eleven collateralized mortgage obligations and asset-backed securities approximating $16.6 million classified as Alt-A, which is a credit category between prime and subprime. The Alt-A bonds, also rated “AAA/Aaa”, have an effective maturity of 2.1 years. Such subprime and Alt-A categories are as defined by S&P. The Company is receiving principal and/or interest payments on all of these securities and believes such amounts are fully collectible.

The following tables set forth our mortgage-backed securities, collateralized mortgage obligations, and asset-backed securities by those issued by FNMA, FHLMC and certain GNMA securities, and the quality category (prime, Alt-A and subprime) for all other such investments at June 30, 2008:

			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		(Losses)			Cost
	($ in thousands)
Mortgage-backed securities:
FNMA	$	181,321	$	573	$	(1,303	)	$	182,051
FHLMC		53,983		136		(652	)		54,499
Prime		—		—		—			—
Alt-A		—		—		—			—
Subprime		—		—		—			—
Total	$	235,304	$	709	$	(1,955	)	$	236,550

			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		(Losses)			Cost
	($ in thousands)
Collateralized mortgage obligations:
GNMA	$	440	$	7	$	—		$	433
FNMA		9,861		171		—			9,690
FHLMC		12,156		226		—			11,930
Prime		76,096		—		(5,589	)		81,685
Alt-A		15,452		—		(2,485	)		17,937
Subprime		—		—		—			—
Total	$	114,005	$	404	$	(8,074	)	$	121,675

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			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		(Losses)			Cost
	($ in thousands)
Asset-backed securities:
GNMA	$	2,657	$	89	$	—		$	2,568
FNMA		—		—		—			—
FHLMC		—		—		—			—
Prime		47,724		415		(215	)		47,524
Alt-A		1,131		—		(21	)		1,152
Subprime		356		—		(13	)		369
Total	$	51,868	$	504	$	(249	)	$	51,613

The commercial mortgage-backed securities are all rated “AAA” by S&P or “Aaa” by Moody’s.

The following table shows the amount and percentage of the Company’s fixed maturities and short-term investments at fair value at June 30, 2008 by S&P credit rating or, if an S&P rating is not available, the equivalent Moody’s rating:

				Percent
Rating				to
Description	Rating	Amount		Total
	($ in thousands)
Extremely Strong	AAA	$	1,176,137		67	%
Very Strong	AA		275,958		16	%
Strong	A		239,874		13	%
Adequate	BBB		71,820		4	%
Speculative	BB & below		217		0	%
Not Rated	NR		1,435		0	%
Total	AAA(1)	$	1,765,441		100	%

(1) Weighted average quality rating.

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The Company owns securities credit enhanced by financial guarantors. The following tables set forth the amount of credit enhanced securities in the fixed maturities portfolio by category at June 30, 2008, identify the amount insured by each financial guarantor and identify the average underlying credit rating of such credit enhanced securities:

			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		(Losses)			Cost
	($ in thousands)
Credit enhanced securities:
States, municipalities and political subdivisions	$	346,179	$	2,019	$	(3,319	)	$	347,479
Mortgage- and asset-backed securities		9,119		15		(191	)		9,295
Corporate bonds		1,645		3		(41	)		1,683
Total	$	356,943	$	2,037	$	(3,551	)	$	358,457

										Average
			Gross		Gross			Cost or		Underlying
	Fair		Unrealized		Unrealized			Amortized		Credit
	Value		Gains		(Losses)			Cost		Rating
	($ in thousands)
Financial guarantors:
AMBAC	$	70,463	$	344	$	(886	)	$	71,005		A+
Assured Guaranty LTD		3,923		—		(4	)		3,927		A
FGIC		55,378		215		(452	)		55,615	AA-
Financial Security Assurance		91,881		898		(574	)		91,557		A+
MBIA		117,351		514		(1,403	)		118,240	AA-
Radian Group, Inc.		7,652		66		(41	)		7,627		A+
XL Capital		10,295		—		(191	)		10,486		A
Total	$	356,943	$	2,037	$	(3,551	)	$	358,457	AA-

The average underlying credit rating by bond insurer of the insured securities rated by S&P or Moody’s if such securities did not have the credit enhancing insurance is included in the “Underlying Credit Rating” column in the above table. This average rating includes $16.5 million of prerefunded municipal bonds which have an implied rating of “AAA” but are not otherwise rated by S&P or Moody’s. Such average ratings exclude a total of 35 credit enhanced securities approximating $23 million that do not have an underlying rating consisting of 17 municipal bonds approximating $12 million, 15 asset-backed securities approximating $9 million and 3 corporate bonds approximating $2 million.

If all or some of the companies providing the credit enhancing insurance were no longer viable entities, management believes that the credit enhanced securities are of sufficient quality to not default, or if some of the securities did default, they would not have a material adverse effect on the Company’s financial condition or results of operations. However, since the ratings would be reduced, it is likely that the market values would decrease to reflect such lower ratings.

63

We regularly review our fixed maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. In general, we focus our attention on those securities whose market value was less than 80% of their cost or amortized cost, as appropriate, for six or more consecutive months. Other factors considered in evaluating potential impairment include the current fair value as compared to cost or amortized cost, as appropriate, our intent and ability to retain the investment for a period of time sufficient to allow for an anticipated recovery in value, specific credit issues related to the issuer and current economic conditions.

As mentioned above, the Company considers its intent and ability to hold a security until the value recovers as part of the process of evaluating whether a security’s unrealized loss represents an other-than-temporary decline. The Company’s ability to hold such securities is supported by sufficient cash flow from its operations and from maturities within its investment portfolio in order to meet its claims payment and other disbursement obligations arising from its underwriting operations without selling such investments. With respect to securities where the decline in value is determined to be temporary and the security’s value is not written down, a subsequent decision may be made to sell that security and realize a loss. Subsequent decisions on security sales are made within the context of overall risk monitoring, changing information, market conditions and assessing value relative to other comparable securities. Management of the Company’s investment portfolio is outsourced to third party investment managers. While these investment managers may, at a given point in time, believe that the preferred course of action is to hold securities with unrealized losses that are considered temporary until such losses are recovered, the dynamic nature of the portfolio management may result in a subsequent decision to sell the security and realize the loss, based upon a change in market and other factors described above. The Company believes that subsequent decisions to sell such securities are consistent with the classification of the Company’s portfolio as available for sale.

64

The following table summarizes all securities in an unrealized loss position at June 30, 2008 and December 31, 2007, showing the aggregate fair value and gross unrealized loss by the length of time those securities have continuously been in an unrealized loss position. The information below indicates the potential effect upon future income in the event management later concludes that such declines are considered other-than- temporary.

	June 30, 2008				December 31, 2007
	Fair		Gross		Fair		Gross
	Value		Unrealized Loss		Value		Unrealized Loss
			($ in thousands)
Fixed Maturities:
U.S. Government Treasury Bonds, GNMAs and foreign government bonds
0-6 Months	$	16,545	$	219	$	4,119	$	32
7-12 Months		—		—		—		—
> 12 Months		6,093		253		19,587		305
Subtotal		22,638		472		23,706		337
States, municipalities and political subdivisions
0-6 Months		255,431		4,123		21,853		67
7-12 Months		9,522		384		6,045		115
> 12 Months		11,798		445		69,671		475
Subtotal		276,751		4,952		97,569		657
Mortgage- and asset-backed securities (excluding GNMAs)
0-6 Months		263,656		7,300		61,388		515
7-12 Months		17,553		2,400		48,496		423
> 12 Months		92,204		5,865		121,798		1,478
Subtotal		373,413		15,565		231,682		2,416
Corporate bonds
0-6 Months		93,253		1,878		20,722		255
7-12 Months		8,457		698		25,520		974
> 12 Months		27,181		2,626		38,865		575
Subtotal		128,891		5,202		85,107		1,804
Total Fixed Maturities	$	801,693	$	26,191	$	438,064	$	5,214
Equity securities — common stocks
0-6 Months	$	29,789	$	3,090	$	26,257	$	3,494
7-12 Months		9,493		2,138		4,153		1,209
> 12 Months		640		268		53		1
Total Equity Securities	$	39,922	$	5,496	$	30,463	$	4,704

65

As of June 30, 2008, there were 776 fixed maturities out of a total of 1,418 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $1.2 million. There were 40 equity securities out of a total of 76 equity securities in an unrealized loss position. The largest single unrealized loss in the equity securities was $0.6 million.

We analyze the unrealized losses quarterly to determine if any are other-than-temporary. The above unrealized losses have been determined to be temporary and resulted from changes in market conditions.

When a security in our investment portfolio has an unrealized loss that is deemed to be other-than-temporary, we write the security down to fair value through a charge to operations. 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.

During the 2008 second quarter, the Company identified 16 common stocks with a fair value of $9.2 million which were considered to be other-than-temporarily impaired. Consequently, the cost of such securities was written down to fair value and the Company recognized a realized loss of $8.4 million. There were no impairment losses recorded in our fixed maturity or equity securities portfolios in the first six months of 2007.

The following table shows the composition by National Association of Insurance Commissioners (“NAIC”) rating and the generally equivalent S&P and Moody’s ratings of the fixed maturity securities in our portfolio with gross unrealized losses at June 30, 2008. Not all of the securities are rated by S&P and/or Moody’s.

			Gross
	Equivalent	Equivalent	Unrealized Loss					Fair Value
NAIC	S&P	Moody’s			Percent					Percent
Rating	Rating	Rating	Amount		to Total			Amount		to Total
			($ in thousands)
1	AAA/AA/A	Aaa/Aa/A	$	24,108		92	%	$	747,089		93	%
2	BBB	Baa		2,048		8	%		54,387		7	%
3	BB	Ba		35		0	%		217		0	%
4	B	B		—		—			—		—
5	CCC or lower	Caa or lower		—		—			—		—
6	N/A	N/A		—		—			—		—
	Total		$	26,191		100	%	$	801,693		100	%

At June 30, 2008, the gross unrealized losses in the table directly above are related to fixed maturity securities that are rated investment grade, which is defined as a security having an NAIC rating of 1 or 2, an S&P rating of “BBB-” or higher, or a Moody’s rating of “Baa3” or higher, except for $0.2 million which is rated below investment grade. 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. Any such unrealized losses are recognized in income, if the securities are sold, or if the decline in fair value is deemed other-than-temporary.

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The contractual maturity by the number of years until maturity for fixed maturity securities with unrealized losses at June 30, 2008 are shown in the following table:

	Gross
	Unrealized Loss					Fair Value
			Percent					Percent
	Amount		to Total			Amount		to Total
	($ in thousands)
Due in one year or less	$	18		0	%	$	7,650		1	%
Due after one year through five years		1,633		6	%		102,553		13	%
Due after five years through ten years		3,849		15	%		138,302		17	%
Due after ten years		5,126		20	%		179,775		22	%
Mortgage- and asset-backed securities		15,565		59	%		373,413		47	%
Total fixed income securities	$	26,191		100	%	$	801,693		100	%

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 are estimated to have an effective maturity of approximately 4.7 years.

Our realized capital gains and losses for the periods indicated were as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
	($ in thousands)
Fixed maturities:
Gains	$	1,329		$	27		$	1,526		$	477
(Losses)		(426	)		(281	)		(435	)		(719	)
		903			(254	)		1,091			(242	)
Equity securities:
Gains		180			1,147			443			1,397
(Losses)(1)		(9,059	)		(53	)		(9,586	)		(114	)
		(8,879	)		1,094			(9,143	)		1,283
Net realized capital gains (losses)	$	(7,976	)	$	840		$	(8,052	)	$	1,041

(1) Includes $8,412,000 for other-than-temporary impairments on common stock for the 2008 second quarter and six month period.

67

The following table details realized losses in excess of $250,000 from sales, and all impairments recorded during the first six months of 2008 and 2007 and the related circumstances giving rise to the loss:

															# of Months
															Unrealized Loss
													Net		Exceeded 20%
	Date of		Proceeds		Loss on			Impairment			Holdings at		Unrealized		of Cost or
Description	Sale		from Sale		Sale			Loss			June 30, 2008		Loss		Amortized Cost
	($ in thousands)
Six months ended:
June 30, 2008:
Allied Capital Corporation		(1)		—		—		$	(546	)	$	642		—		10
American International Group, Inc.		(1)		—		—			(1,262	)		804		—		12
Bank of America Corporation		(1)		—		—			(421	)		597		—		9
Bristol-Myers Squibb Co.		(1)		—		—			(343	)		938		—		12
Citigroup Inc.		(1)		—		—			(678	)		365		—		13
Dow Chemical Co.		(1)		—		—			(325	)		1,052		—		15
KeyCorp.		(1)		—		—			(653	)		272		—		15
Legg Mason Inc.		(1)		—		—			(537	)		575		—		12
Lennar Corporation		(1)		—		—			(140	)		202		—		8
Merrill Lynch & Co., Inc.		(1)		—		—			(222	)		197		—		9
Motorola Inc.		(1)		—		—			(900	)		637		—		8
Pfizer Inc.		(1)		—		—			(480	)		860		—		13
Pinnacle West Capital Corporation		(1)		—		—			(430	)		969		—		14
Regions Financial Corporation		(1)		—		—			(471	)		277		—		10
UnitedHealth Group, Inc.		(1)		—		—			(256	)		491		—		6
Wachovia Corporation		(1)		—		—			(748	)		367		—		12
Sprint Nextel Corporation(2)		3/19/2008	$	143	$	(347	)		—			—		—
Legg Mason Inc.(2)		6/4/2008		470		(363	)		—			—		—
			$	613	$	(710	)	$	(8,412	)	$	9,245
June 30, 2007:
TIPS(3)		3/31/2007	$	5,823	$	(335	)		—			—		—		—

(1)	Securities owned at June 30, 2008 which had an impairment loss.
(2)	Securities sold due to losses not considered to be recoverable in the foreseeable future.
(3)	Treasury inflation protection securities (TIPS) were sold during the 2007 first quarter due to the widening breakeven yield spread between TIPS and Treasuries.

The total impairment loss recorded in the second quarter was $8.4 million. We continue to hold all of the securities with other-than-temporary impairments.

Reinsurance Recoverables

We utilize reinsurance principally to reduce our exposure on individual risks, to protect against catastrophic losses, and to stabilize loss ratios and underwriting results. Although reinsurance makes the reinsurer 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. 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. We are required to pay the losses even if the reinsurer fails to meet its obligations under the reinsurance agreement.

68

We are protected by various treaty and facultative reinsurance agreements. Our exposure to credit risk from any one reinsurer is managed through diversification by reinsuring with a number of different reinsurers, principally in the U.S. and European reinsurance markets. To meet our standards of acceptability, when the reinsurance is placed, a reinsurer generally must have an A.M. Best Company and/or S&P rating of “A” or better, or equivalent financial strength if not rated, plus at least $250 million in policyholders’ surplus. Our Reinsurance Security Committee, which is part of our Enterprise Risk Management Reinsurance Sub-Committee, monitors the financial strength of our reinsurers and the related reinsurance receivables and periodically reviews the list of acceptable reinsurers. The reinsurance is placed either directly by us or through reinsurance intermediaries. The reinsurance intermediaries are compensated by the reinsurers.

Approximately $133.7 million and $167.7 million of the reinsurance recoverables for paid and unpaid losses at June 30, 2008 and December 31, 2007, respectively, were due from reinsurers as a result of the losses from Hurricanes Katrina and Rita.

The Company continues to periodically monitor the financial condition and ongoing activities of its reinsurers, in order to assess the adequacy of its allowance for uncollectible reinsurance.

Liquidity and Capital Resources

Cash flows from operations were $133.4 million and $111.7 million for the six months ended June 30, 2008 and 2007, respectively. The positive operating cash flow was primarily due to the increase in net written premium, collected investment income, decrease in reinsurance recoverable on paid losses and fewer paid losses relating to Hurricanes Katrina and Rita. Operating cash flow was used primarily to acquire additional investment assets.

Investments and cash increased to $1.85 billion at June 30, 2008 from $1.77 billion at December 31, 2007. The increase was due to the positive cash flow from operations. Net investment income was $18.7 million and $17.3 million for the three months ended June 30, 2008 and 2007, respectively, and $37.6 million and $33.5 million for the six months ended June 30, 2008 and 2007, respectively.

The approximate annualized pre-tax yields of the investment portfolio, excluding net realized capital gains and losses, were 4.1 and 4.5% for the 2008 and 2007 second quarters, respectively. The approximate annualized pre-tax yields of the investment portfolio, excluding net realized capital gains and losses, were 4.2% and 4.4% for the 2008 and 2007 six month periods, respectively. As of June 30, 2008 and December 31, 2007, all fixed maturity securities and equity securities held by us were classified as available-for-sale.

Since the beginning of 2008, the Company has allocated approximately $104 million to high quality tax-exempt securities which approximate 39% of the fixed maturities investment portfolio at June 30, 2008 compared to approximately 34% at December 31, 2008. As a result, the effective tax rate on net investment income was 25.4% and 25.9% for the 2008 second quarter and six month period, respectively, compared to 28.2% and 28.3% for the comparable 2007 periods.

At June 30, 2008, the weighted average rating of our fixed maturity investments was “AA” by S&P and “Aa” by Moody’s. We believe that we have limited exposure to credit risk since the entire fixed maturity investment portfolio, except for $0.2 million, consists of investment grade bonds. At June 30, 2008, our portfolio had an average maturity of 5.6 years and duration of 4.3 years. Management continually monitors the composition and cash flow of the investment portfolio in order to maintain the appropriate levels of liquidity in an effort to ensure our ability to satisfy claims.

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The Company has a credit facility provided through a consortium of banks. The credit facility was amended in February 2007 to increase the letters of credit available under the facility from $115 million to $180 million and to increase the line of credit under the facility from $10 million to $20 million. Also, the expiration of the credit facility was extended from June 30, 2007 to March 31, 2009. If, at that time, the bank consortium does not renew the credit facility, we will need to find other sources to provide the letters of credit or other collateral required to continue our participation in Syndicate 1221. The credit facility, which is denominated in U.S. dollars, is utilized primarily by Navigators Corporate Underwriters Ltd. and Millennium Underwriting Ltd. to fund our participation in Syndicate 1221, which is denominated in British pounds. At June 30, 2008, letters of credit with an aggregate face amount of $106.7 million were issued under the credit facility. The line of credit was unused at June 30, 2008.

As a result of the amendment, the cost of the letter of credit portion of the credit facility was reduced to 0.75% from 1.00% for the issued letters of credit and to 0.10% from 0.125% for the unutilized portion of the letter of credit facility. The cost of the line of credit portion of the credit facility was also reduced to 0.75% from 1.00% over the Company’s choice of LIBOR or prime for the utilized portion and to 0.10% from 0.125% for the unutilized portion.

The credit facility is collateralized by all of the common stock of Navigators Insurance Company. The credit agreement contains covenants common to transactions of this type, including restrictions on indebtedness and liens, limitations on dividends, stock buy backs, mergers and the sale of assets, and requirements to maintain certain consolidated tangible net worth, statutory surplus and other financial ratios. No dividends have been declared or paid by the Company through June 30, 2008. We were in compliance with all covenants at June 30, 2008.

Our reinsurance has been placed with various U.S. and foreign insurance companies and with selected syndicates at Lloyd’s. Pursuant to the implementation of Lloyd’s Plan of Reconstruction and Renewal, a portion of our recoverables are now reinsured by Equitas (a separate U.K. authorized reinsurance company established to reinsure outstanding liabilities of all Lloyd’s members for all risks written in the 1992 or prior years of account).

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 those gross loss reserves at June 30, 2008 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, including pool participants, the Company issues quarterly settlement statements for premiums less commissions and paid loss activity, which are expected to be settled by the end of the subsequent quarter. The Company has 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 $1.0 million) as set forth in the pro-rata treaty. For the Insurance Companies, cash calls must generally be paid within 30 calendar days. There is generally no specific settlement period for the Lloyd’s Operations cash call provisions, but such billings are usually paid within 45 calendar days.

Generally, for excess of loss reinsurers the Company pays monthly or 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.

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

At June 30, 2008, ceded asbestos paid and unpaid recoverables were $10.6 million compared to $10.5 million at December 31, 2007. Of such amounts at June 30, 2008, $6.2 million was due from Equitas. The Company generally experiences significant collection delays for a large portion of reinsurance recoverable amounts for asbestos losses given that certain reinsurers are in run-off or otherwise no longer active in the reinsurance business. Such circumstances are considered in the Company’s ongoing assessment of such reinsurance recoverables.

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The Company believes that it has adequately managed its cash flow requirements related to reinsurance recoveries from its positive cash flows and the use of available short-term funds when applicable. However, there can be no assurances that the Company 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 Hurricanes Katrina and Rita could significantly impact the Company’s liquidity needs. However, we expect to continue to pay these hurricane losses over a period of years from cash flow and, if needed, short-term investments. We expect to collect our paid reinsurance recoverables generally under the terms described above.

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.

Our capital resources consist of funds deployed or available to be deployed to support our business operations. At June 30, 2008 and December 31, 2007, our capital resources were as follows:

	June 30,			December 31,
	2008			2007
	($ in thousands)
Senior debt	$	123,732		$	123,673
Stockholders’ equity		676,357			662,106
Total capitalization	$	800,089		$	785,779
Ratio of debt to total capitalization		15.5	%		15.7	%

The increase in stockholders’ equity in 2008 was primarily due to 2008 net income partially offset by the other comprehensive loss mostly due to unrealized depreciation of investments, and treasury stock purchases.

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 several 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.

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 our 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.

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In October, 2007 the Parent Company’s Board of Directors adopted a stock repurchase program for up to $30 million of the Parent Company’s common stock. Purchases may be made from time to time at prevailing prices in open market or privately negotiated transactions through December 31, 2008. The timing and amount of purchases under the program will depend on a variety of factors, including the trading price of the stock, market conditions and corporate and regulatory considerations. Through June 30, 2008, we have purchased 186,026 shares of our common stock at a total cost of $9.8 million.

We primarily rely upon dividends from our subsidiaries to meet our Parent Company’s obligations. Since the issuance of the senior debt in April 2006, the Parent Company’s cash obligations primarily consist of semi-annual interest payments of $4.4 million. Going forward, the interest payments and any stock repurchases will be made from a combination of funds currently at the Parent Company, dividends from its subsidiaries and the $20 million line of credit. The dividends have historically been paid by Navigators Insurance Company. Based on the December 31, 2007 surplus of Navigators Insurance Company, the approximate remaining maximum amount available at June 30, 2008 for the payment of dividends by Navigators Insurance Company during 2008 without prior regulatory approval was $47.9 million. Navigators Insurance Company declared and paid a $5.0 million dividend to the Parent Company in each of the first and second quarters of 2008.

Condensed Parent Company balance sheets as of June 30, 2008 (unaudited) and December 31, 2007 are shown in the table below:

	June 30,		December 31,
	2008		2007
	($ in thousands)
Cash and investments	$	43,881	$	44,146
Investments in subsidiaries		748,595		735,351
Goodwill and other intangible assets		2,534		2,534
Other assets		7,510		6,821
Total assets	$	802,520	$	788,852
Accounts payable and other liabilities	$	973	$	1,615
Accrued interest payable		1,458		1,458
7% Senior Notes due May 1, 2016		123,732		123,673
Total liabilities		126,163		126,746
Stockholders’ equity		676,357		662,106
Total liabilities and stockholders’ equity	$	802,520	$	788,852

Item 3.Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in the information concerning market risk as stated in the Company’s 2007 Annual Report on Form 10-K.

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 second 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

The Company is not a party to, or the subject of, any material pending legal proceedings that depart from the routine litigation incidental to the kinds of business it conducts.

Item 1A.Risk Factors

There have been no material changes from the risk factors as previously disclosed in the Company’s 2007 Annual Report on Form 10-K.

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

In October, 2007 the Parent Company’s Board of Directors adopted a stock repurchase program for up to $30 million of the parent Company’s common stock. Purchases may be made from time to time at prevailing prices in open market or privately negotiated transactions through December 31, 2008. The timing and amount of purchases under the program will depend on a variety of factors, including the trading price of the stock, market conditions and corporate and regulatory considerations.

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The following table summarizes the Parent Company’s purchases of its common stock for the 2008 second quarter:

($ in thousands, except per share)

					Number of
					Shares			Dollar Value
	Total				Purchased			of Shares that
	Number		Average		Under Publicly			May Yet Be
	of Shares		Cost Paid		Announced			Purchased Under
	Purchased		Per Share		Program			the Program (1)
January 2008		—		—		—		$	30,000
February 2008		30,202	$	54.66		30,202		$	28,349
March 2008		105,824	$	53.58		105,824		$	22,679
Subtotal first quarter		136,026	$	53.82		136,026
April 2008		50,000	$	49.90		50,000		$	20,184
May 2008		—		—		—		$	20,184
June 2008		—		—		—		$	20,184
Subtotal second quarter		50,000	$	49.90		50,000
							��
Total Six Months		186,026	$	52.77		186,026

(1) Balance as of the end of the month indicated.

Item 3.Defaults Upon Senior Securities

None.

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

On May 28, 2008, the Company’s stockholders voted for the following matters at the annual stockholders’ meeting:

a) The election of all nine (9) directors of the Parent Company to serve until the 2009 Annual Meeting of Stockholders or until their respective successors have been duly elected and qualified. The results of the voting were as follows:

Name	Votes For		Votes Withheld
H. J. Mervyn Blakeney		14,504,698		1,556,292
Peter A. Cheney		15,649,671		411,319
Terence N. Deeks		15,224,049		836,941
W. Thomas Forrester		15,649,671		411,319
Stanley A. Galanski		15,219,689		841,301
Leandro S. Galban, Jr.		15,423,793		637,197
John F. Kirby		15,260,032		800,958
Marc M. Tract		14,885,342		1,175,648
Robert F. Wright		15,172,492		888,498

b) The Company’s Employee Stock Purchase Plan was approved with 14,942,622 votes cast for, 54,906 votes cast against and 332,163 votes abstaining.

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c)	The Company’s Executive Performance Incentive Plan was approved with 15,243,516 votes cast for, 475,481 votes cast against and 341,993 votes abstaining.
d)	The appointment of KPMG LLP as the Company’s independent auditors for 2008 was ratified with 15,806,027 votes cast for, 254,588 votes cast against and 375 votes abstaining.

Item 5.Other Information

None

Item 6.Exhibits

Exhibit No.	Description of Exhibit
11-1	Statement re 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).	*

* Included herein.

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SIGNATURE

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

	The Navigators Group, Inc.
	(Registrant)
Date: July 30, 2008	/s/ Paul J. Malvasio
	Paul J. Malvasio
	Executive Vice President and Chief Financial Officer

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INDEX OF EXHIBITS

Exhibit No.	Description of Exhibit
11-1	Statement re 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).	*

* Included herein.

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