Navigators (NAVG) 10-Q 2009 Q1 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 Ended March 31, 2009

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	(IRS Employer
incorporation or organization)	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 has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).
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 April 27, 2009 was 16,934,225.

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

INDEX

	Page No.
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets March 31, 2009 (Unaudited) and December 31, 2008		3
Consolidated Statements of Income (Unaudited) Three Months Ended March 31, 2009 and 2008		4
Consolidated Statements of Stockholders’ Equity (Unaudited) March 31, 2009 and 2008		5
Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended March 31, 2009 and 2008		6
Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, 2009 and 2008		7
Notes to Interim Consolidated Financial Statements (Unaudited)		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3. Quantitative and Qualitative Disclosures About Market Risk		71
Item 4. Controls and Procedures		71
Part II. OTHER INFORMATION
Item 1. Legal Proceedings		71
Item 1A. Risk Factors		72
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		72
Item 3. Defaults Upon Senior Securities		72
Item 4. Submissions of Matters to a Vote of Security Holders		72
Item 5. Other Information		72
Item 6. Exhibits		72
Signature		73
Index of Exhibits		74
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)

	March 31,			December 31,
	2009			2008
	(Unaudited)
ASSETS
Investments and cash:
Fixed maturities, available-for-sale, at fair value (amortized cost: 2009, $1,689,179; 2008, $1,664,755)	$	1,676,826		$	1,643,772
Equity securities, available-for-sale, at fair value (cost: 2009, $52,309; 2008, $52,523)		51,735			51,802
Short-term investments, at fair value		206,223			220,684
Cash		16,644			1,457
Total investments and cash		1,951,428			1,917,715
Premiums in course of collection		201,891			170,522
Commissions receivable		313			319
Prepaid reinsurance premiums		167,272			188,874
Reinsurance receivable on paid losses		70,725			67,227
Reinsurance receivable on unpaid losses and loss adjustment expenses		851,703			853,793
Net deferred income tax benefit		53,908			54,736
Deferred policy acquisition costs		57,675			47,618
Accrued investment income		16,114			17,411
Goodwill and other intangible assets		6,532			6,622
Other assets		26,072			24,743
Total assets	$	3,403,633		$	3,349,580
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses	$	1,879,895		$	1,853,664
Unearned premium		494,455			480,665
Reinsurance balances payable		129,296			140,319
Senior notes		123,825			123,794
Federal income tax payable		12,139			5,874
Accounts payable and other liabilities		51,569			55,947
Total liabilities		2,691,179			2,660,263
Stockholders’ equity:
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued		—			—
Common stock, $.10 par value, shares authorized: 50,000,000; issued and outstanding(net of treasury shares): 16,934,225 at 3/31/09 and 16,856,073 at 12/31/08		1,716			1,708
Additional paid-in capital		302,498			298,872
Retained earnings		418,776			406,776
Treasury stock, at cost (224,754 shares for both 2009 and 2008)		(11,540	)		(11,540	)
Accumulated other comprehensive income (loss)		1,004			(6,499	)
Total stockholders’ equity		712,454			689,317
Total liabilities and stockholders’ equity	$	3,403,633		$	3,349,580

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
	March 31,
	2009			2008
	(Unaudited)
Gross written premium	$	275,259		$	287,146
Revenues:
Net written premium	$	200,652		$	187,722
Decrease (increase) in unearned premium		(35,706	)		(31,982	)
Net earned premium		164,946			155,740
Commission income		(20	)		261
Net investment income		18,743			18,838
Total other-than-temporary impairments		(26,871	)		—
Portion of loss recognized in OCI (before tax)		(16,171	)		—
Net impairment loss recognized in earnings		(10,700	)		—
Net realized capital (losses)		(1,537	)		(76	)
Other income (expense)		163			11
Total revenues		171,595			174,774
Operating expenses:
Net losses and loss adjustment expenses incurred		100,247			88,420
Commission expense		22,448			20,948
Other operating expenses		30,535			29,756
Interest expense		2,219			2,217
Total operating expenses		155,449			141,341
Income (loss) before income tax expense		16,146			33,433
Income tax expense (benefit):
Current		6,750			10,306
Deferred		(2,604	)		(123	)
Total income tax expense (benefit)		4,146			10,183
Net income	$	12,000		$	23,250
Net income per common share:
Basic	$	0.71		$	1.38
Diluted	$	0.71		$	1.36
Average common shares outstanding:
Basic		16,882			16,862
Diluted		17,002			17,052

See accompanying notes to interim consolidated financial statements.

4

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

($ in thousands)

	Three Months Ended
	March 31,
	2009			2008
	(Unaudited)
Preferred Stock
Balance at beginning and end of period	$	—		$	—
Common stock
Balance at beginning of year	$	1,708		$	1,687
Shares issued under stock plans		8			6
Balance at end of period	$	1,716		$	1,693
Additional paid-in capital
Balance at beginning of year	$	298,872		$	291,616
Shares issued under stock plans		3,626			2,530
Balance at end of period	$	302,498		$	294,146
Retained earnings
Balance at beginning of year	$	406,776		$	355,084
Net income		12,000			23,250
Balance at end of period	$	418,776		$	378,334
Treasury stock, at cost
Balance at beginning of year	$	(11,540	)	$	—
Treasury stock acquired		—			(7,321	)
Balance at end of period	$	(11,540	)	$	(7,321	)
Accumulated other comprehensive income (loss)
Net unrealized gains (losses) on securities, net of tax
Balance at beginning of year	$	(15,062	)	$	10,186
Change in period		16,494			(3,412	)
Balance at end of period		1,432			6,774
Non-credit Impairment Losses, net of Tax
Balance at beginning of year		—			—
Change in period		(10,511	)		—
Balance at end of period		(10,511	)		—
Cumulative translation adjustments, net of tax
Balance at beginning of year		8,563			3,533
Net adjustment for period		1,520			(282	)
Balance at end of period		10,083			3,251
Balance at end of period	$	1,004		$	10,025
Total stockholders’ equity at end of period	$	712,454		$	676,877

See accompanying notes to interim consolidated financial statements.

5

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ in thousands)

	Three Months Ended
	March 31,
	2009			2008
	(Unaudited)
Net income	$	12,000		$	23,250
Other comprehensive income (loss):
Change in net unrealized gains (losses) on securities, net of tax expense benefit of $2,794 and ($1,813) in 2009 and 2008, respectively(1)		5,983			(3,412	)
Change in foreign currency translation gains, net of tax expense of $818 and ($151) in 2009 and 2008, respectively		1,520			(282	)
Other comprehensive income (loss)		7,503			(3,694	)
Comprehensive income (loss)	$	19,503		$	19,556
(1) Disclosure of reclassification amount, net of tax:
Unrealized holding (losses) arising during period	$	(2,204	)	$	(3,461	)
Less: reclassification adjustment for net realized capital (losses) included in net income		(1,140	)		(49	)
reclassification adjustment for impairment (losses) recognized in net income		(7,047	)		—
Change in net unrealized gains (losses) on securities	$	5,983		$	(3,412	)

See accompanying notes to interim consolidated financial statements.

6

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)

	Three Months Ended
	March 31,
	2009			2008
	(Unaudited)
Operating activities:
Net income	$	12,000		$	23,250
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation & amortization		957			1,222
Net deferred income tax (benefit)		(2,604	)		(123	)
Net realized capital (gains) losses		12,237			76
Changes in assets and liabilities:
Reinsurance receivable on paid and unpaid losses and LA E		(2,916	)		45,418
Reserve for losses and LA E		28,539			12,577
Prepaid reinsurance premiums		21,318			776
Unearned premium		14,492			31,035
Premiums in course of collection		(31,897	)		(35,297	)
Commissions receivable		7			2,109
Deferred policy acquisition costs		(10,169	)		(1,546	)
A ccrued investment income		1,294			(262	)
Reinsurance balances payable		(10,382	)		(22,525	)
Federal income tax		6,719			8,076
Other		3,333			(5,134	)
Net cash provided by operating activities		42,928			59,652
Investing activities:
Fixed maturities, available-for-sale
Redemptions and maturities		32,122			35,146
Sales		91,969			20,644
Purchases		(153,211	)		(103,436	)
Equity securities, available-for-sale
Sales		1,420			5,514
Purchases		(10,713	)		(5,595	)
Change in payable for securities		(1,106	)		1,974
Net change in short-term investments		13,265			(647	)
Purchase of property and equipment		(2,164	)		(1,072	)
Net cash (used in) investing activities		(28,418	)		(47,472	)
Financing activities:
Purchase of treasury stock		—			(7,321	)
Proceeds of stock issued from employee stock purchase plan		344			356
Proceeds of stock issued from exercise of stock options		333			540
Net cash provided by (used in) financing activities		677			(6,425	)
Effect of exchange rate changes on foreign currency cash		—			(1	)
Increase (decrease) in cash		15,187			5,754
Cash at beginning of year		1,457			7,056
Cash at end of period	$	16,644		$	12,810
Supplemental disclosures of cash flow information:
Federal, state and local income tax paid	$	68		$	2,728
Interest paid		—			—
Issuance of stock to directors		210			200

See accompanying notes to interim consolidated financial statements.

7

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)

Note 1. Accounting Policies

The accompanying interim consolidated financial statements are unaudited 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 2008 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 $95.8 million and $100.0 million for the three months ended March 31, 2009 and 2008, respectively. The Company’s ceded incurred losses were $48.8 million and $21.7 million for the three months ended March 31, 2009 and 2008, 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 wholly-owned underwriting 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.

8

The Insurance Companies consist of Navigators Insurance Company, including its branch located in the United Kingdom (the “U.K. Branch”), and its wholly-owned subsidiary, Navigators Specialty Insurance Company. 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 2009, the Company has reclassified certain of its business lines, which has no effect on the segment classifications of the Insurance Company and Lloyd’s.

• The offshore energy business, formerly included in the “Marine and Energy” businesses of the Insurance Companies and Lloyd’s, is now included in the Insurance Companies’ and Lloyd’s “Property Casualty” businesses.

• The marine lines within both the Insurance Company and Lloyd’s are now presented as “Marine” instead of “Marine and Energy,” since the energy business has now been reclassified to “Property Casualty.”

• Engineering and construction, European Property and other run-off business, formerly included in the “Other” category of business within the Insurance Companies and Lloyd’s, are now included under “Property Casualty.”

• The “Middle Markets” business, formerly broken out separately in the Insurance Companies, is now included in the Insurance Companies’ “Property Casualty” business.

Underwriting data for prior periods has been reclassified to reflect these changes.

9

Financial data by segment for the three ended March 31, 2009 and 2008 follows:

	Three Months Ended March 31, 2009
	Insurance			Lloyd’s
	Companies			Operations			Corporate			Total
	($ in thousands)
Gross written premium	$	191,983		$	83,276					$	275,259
Net written premium		137,082			63,570						200,652
Net earned premium		120,290			44,656						164,946
Net losses and LAE		(70,153	)		(30,094	)					(100,247	)
Commission expense		(14,968	)		(7,480	)					(22,448	)
Other operating expenses		(24,560	)		(5,981	)	$	6			(30,535	)
Commission income and other income (expense)		201			(52	)		(6	)		143
Underwriting Income (loss)		10,810			1,049			—			11,859
Net investment income		16,207			2,383			153			18,743
Net realized capital gains (losses)		(8,907	)		(3,330	)		—			(12,237	)
Interest expense		—			—			(2,219	)		(2,219	)
Income (loss) before income taxes		18,110			102			(2,066	)		16,146
Income tax expense (benefit)		4,533			336			(723	)		4,146
Net income (loss)	$	13,577		$	(234	)	$	(1,343	)	$	12,000
��
Identifiable assets(1)	$	2,497,923		$	799,907		$	90,135		$	3,403,633
Loss and LAE ratio		58.3	%		67.4	%					60.8	%
Commission expense ratio		12.4	%		16.8	%					13.6	%
Other operating expense ratio(2)		20.3	%		13.5	%					18.4	%
Combined ratio		91.0	%		97.7	%					92.8	%

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

10

	Three Months Ended March 31, 2009
	Insurance		Lloyd’s
	Companies		Operations		Total
	($ in thousands)
Gross written premium:
Marine	$	77,237	$	59,023	$	136,260
Property Casualty		84,258		13,528		97,786
Professional Liability		30,488		10,725		41,213
Total	$	191,983	$	83,276	$	275,259
Net written premium:
Marine	$	58,459	$	49,974	$	108,433
Property Casualty		59,976		7,595		67,571
Professional Liability		18,647		6,001		24,648
Total	$	137,082	$	63,570	$	200,652
Net earned premium:
Marine	$	37,161	$	31,175	$	68,336
Property Casualty		65,412		7,923		73,335
Professional Liability		17,717		5,558		23,275
Total	$	120,290	$	44,656	$	164,946

11

	Three Months Ended March 31, 2008
	Insurance			Lloyd’s
	Companies			Operations			Corporate			Total
	($ in thousands)
Gross written premium	$	191,596		$	95,550					$	287,146
Net written premium		124,310			63,412						187,722
Net earned premium		112,246			43,494						155,740
Net losses and LAE		(67,356	)		(21,064	)					(88,420	)
Commission expense		(12,948	)		(8,000	)					(20,948	)
Other operating expenses		(22,148	)		(7,608	)					(29,756	)
Commission income and other income (expense)		258			14						272
Underwriting profit		10,052			6,836						16,888
Net investment income		15,465			2,982		$	391			18,838
Net realized capital gains (losses)		(102	)		26			—			(76	)
Interest expense		—			—			(2,217	)		(2,217	)
Income (loss) before income taxes		25,415			9,844			(1,826	)		33,433
Income tax expense (benefit)		7,370			3,452			(639	)		10,183
Net income (loss)	$	18,045		$	6,392		$	(1,187	)	$	23,250
Identifiable assets(1)	$	2,356,343		$	756,100		$	69,520		$	3,182,275
Loss and LAE ratio		60.0	%		48.4	%					56.8	%
Commission expense ratio		11.5	%		18.4	%					13.5	%
Other operating expense ratio(2)		19.5	%		17.5	%					18.9	%
Combined ratio		91.0	%		84.3	%					89.2	%

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

12

	Three Months Ended March 31, 2008
	Insurance		Lloyd’s
	Companies		Operations		Total
	($ in thousands)
Gross written premium:
Marine	$	71,485	$	67,154	$	138,639
Property Casualty		100,824		17,726		118,550
Professional Liability		19,287		10,670		29,957
Total	$	191,596	$	95,550	$	287,146
Net written premium:
Marine	$	43,463	$	48,910	$	92,373
Property Casualty		69,114		7,710		76,824
Professional Liability		11,733		6,792		18,525
Total	$	124,310	$	63,412	$	187,722
Net earned premium:
Marine	$	26,455	$	28,793	$	55,248
Property Casualty		71,718		8,742		80,460
Professional Liability		14,073		5,959		20,032
Total	$	112,246	$	43,494	$	155,740

The Insurance Companies’ net earned premium includes $21.2 million and $14.7 million of net earned premium from the U.K. Branch for the three months ended March 31, 2009 and 2008, 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 $1.8 million and $1.9 million for the three months ended March 31, 2009 and 2008, respectively. The Company expensed $41,000 for both the three months ended March 31, 2009 and 2008 for costs related to its Employee Stock Purchase Plan.

In addition, $52,500 and $50,000 were expensed for the three month periods ended March 31, 2009 and 2008 for stock issued annually to non-employee directors as part of their directors’ compensation for serving on the Parent Company’s Board of Directors.

13

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’s adoption of SFAS 141(R) did not 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, rather than 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’s adoption of SFAS 160 did not 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 fiscal years and interim periods beginning after November 15, 2008. The Company’s adoption of SFAS 161 did not 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, effective November 15, 2008, makes the hierarchy explicitly and directly applicable to preparers of financial statements, a step that recognizes the preparers’ responsibilities for selecting the accounting principles for their financial statements. The Company’s adoption of SFAS 162 did not have a material effect on its financial condition or results of operations.

Note 7. Syndicate 1221

We record 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.

Syndicate 1221’s stamp capacity is £123.0 million ($176.5 million) for the 2009 underwriting year compared to £123.0 million ($228.0 million) for the 2008 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 2009 and 2008 underwriting years through Navigators Corporate Underwriters Ltd. in 2008 and through Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. in 2007.

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The Company provides letters of credit and posts cash 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 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 that expires April 2, 2010. If the banks decide not to renew the credit facility, the Company will need to find either internal or other external 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. 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.

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 March 31, 2009 or March 31, 2008 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 or local, or foreign tax examinations by tax authorities for years 2005 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 month period ended March 31, 2009 and 2008.

The Company recorded an income tax expense of $4.1 million for the 2009 first quarter compared to income tax expense of $10.2 million for the 2008 first quarter, resulting in effective tax rates of 25.7% and 30.5%, 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 24.9% for the 2009 three month period compared to 26.4% for the same period in 2008. As of March 31, 2009 and December 31, 2008, the net deferred Federal, foreign, state and local tax assets were $53.9 million and $54.7 million, respectively.

15

The Company had state and local deferred tax assets amounting to potential future tax benefits of $3.6 million and $6.2 million at March 31, 2009 and December 31, 2008, respectively. Included in the deferred tax assets are state and local net operating loss carryforwards of $2.0 million and $0.5 million at March 31, 2009 and December 31, 2008, 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 March 31, 2009 expire in 2029.

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 2009 capacity at Lloyd’s of £123.0 million, the March 31, 2009 exchange rate of £1 equals $1.43 and assuming the maximum 3% assessment, the Company would be assessed approximately $5.3 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 both of the three month periods ended March 31, 2009 and 2008. The fair value of the Senior Notes, based on quoted market prices, was $85.3 million and $83.6 million at March 31, 2009 and December 31, 2008, 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 March 31, 2009, the Company was in compliance with all such covenants.

In early April, the Company repurchased $10.0 million aggregate principal amount of its issued and outstanding 7% senior notes from an unaffiliated noteholder on the open market, as a result of which, as of the date of this filing, $115.0 million aggregate principal amount of notes remains issued and outstanding.

Note 11. Investments

In April 2009, the FASB issued FSP FAS 157-4,Determining the Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions that are Not Orderly.The FSP is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with FASB 157, Fair Value Measurements, when the volume and level of activity of the asset or liability have significantly decreased and on indentifying circumstances that indicate a transaction is not orderly. The Company elected to early adoption of FSP FAS 157-4 in the 2009 first quarter. The adoption did not have a material effect on the Company’s financial condition or results of operations.

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In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments.The FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. FSP FAS 115-2 and FAS 124-2 modifies the requirements for recognizing other-than-temporarily impaired debt securities, the presentation of other-than-temporary impairment losses and increases the frequency of and expands the required disclosures about other-than-temporary impairment for debt and equity securities. The Company elected to early adopt FSP FAS 115-2 and FAS 124-2 in the 2009 first quarter. The adoption did not have a material effect on the Company’s financial condition or results of operations.

In April 2009, the FASB issued FSP FAS 107-1 and ABP 28-1,Interim Disclosures about Fair Value of Financial Instruments.The FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. FSP FAS 107-1 and APB 28-1 requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The Company elected to early adopt FSP FASB 107-1 and APB 28-1 in the 2009 first quarter. The adoption did not have an impact on the Company’s financial condition or results of operations.

The following tables set forth our cash and investments as of March 31, 2009:

			Gross		Gross			OTTI			Cost or
	Fair		Unrealized		Unrealized			Recognized			Amortized
March 31, 2009	Value		Gains		(Losses)			in OCI			Cost
	($ in thousands)
Fixed maturities:
U.S. Government Treasury Bonds, agency bonds and foreign government bonds	$	398,268	$	19,757	$	(25	)	$	—		$	378,536
States, municipalities and political subdivisions		610,021		19,116		(4,230	)		—			595,135
Mortgage- and asset-backed securities
Mortgage-backed securities		314,432		14,055		(1	)		—			300,378
Collateralized mortgage obligations		43,167		—		(7,188	)		(16,103	)		66,458
Asset-backed securities		29,826		273		(785	)		(68	)		30,406
Commercial mortgage-backed securities		89,648		15		(23,511	)		—			113,144
Subtotal		477,073		14,343		(31,485	)		(16,171	)		510,386
Corporate bonds		191,464		2,259		(15,917	)		—			205,122
Total fixed maturities		1,676,826		55,475		(51,657	)		(16,171	)		1,689,179
Equity securities — common stocks		51,735		609		(1,183	)		—			52,309
Cash		16,644		—		—			—			16,644
Short-term investments		206,223		—		—			—			206,223
Total	$	1,951,428	$	56,084	$	(52,840	)	$	(16,171	)	$	1,964,355

The table above includes fixed maturity securities with unrealized losses of $51.6 million where the fair value has been less than 80% of book value for at least six months. The fair value of these securities as of March 31, 2009 was $117.1 million. These losses consist mainly of non-agency mortgage backed securities, commercial mortgage backed securities and corporate bonds that have not been deemed to be other-than-temporary based on our evaluation of projected cash flows, credit enhancements, cumulative delinquencies and losses, rating agency assessments and other factors. Management believes these securities are trading at depressed levels due to illiquidity in the marketplace and other market based factors rather than the specific credit issues.

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The following table summarizes all securities in an unrealized loss position at March 31, 2009 and December 31, 2008, 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 on future income in the event management later concludes that such declines are considered other-than- temporary.

	March 31, 2009				December 31, 2008
	Fair		Gross		Fair		Gross
	Value		Unrealized Loss		Value		Unrealized Loss
	($ in thousands)
Fixed Maturities:
U.S. Government Treasury and Agency Bonds and foreign government bonds
0-6 Months	$	4,145	$	25	$	3,862	$	145
7-12 Months		—		—		—		—
> 12 Months		—		—		—		—
Subtotal		4,145		25		3,862		145
States, municipalities and political subdivisions
0-6 Months		47,983		704		68,727		2,187
7-12 Months		39,666		1,282		118,910		4,376
> 12 Months		42,095		2,244		15,918		1,473
Subtotal		129,744		4,230		203,555		8,036
Mortgage- and asset-backed securities
0-6 Months		4,623		40		30,670		939
7-12 Months		37,388		4,364		80,618		26,966
> 12 Months		107,162		43,252		66,218		20,879
Subtotal		149,173		47,656		177,506		48,784
Corporate bonds
0-6 Months		22,335		1,733		57,805		2,445
7-12 Months		51,700		4,569		57,971		5,893
> 12 Months		37,345		9,615		27,873		6,322
Subtotal		111,380		15,917		143,649		14,660
Total Fixed Maturities	$	394,442	$	67,828	$	528,572	$	71,625
Equity securities — common stocks
0-6 Months	$	6,934	$	1,175	$	8,991	$	1,941
7-12 Months		173		8		351		46
> 12 Months		—		—		—		—
Total Equity Securities	$	7,107	$	1,183	$	9,342	$	1,987

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During the 2009 first quarter, the Company identified 54 common stocks with a fair value of $35.8 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 realized losses of $8.3 million. During the 2009 three month period, the Company identified two corporate bonds with a fair value of $0.8 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 realized losses of $0.6 million. The company elected to take early adoption of the FASB issued FSP FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments, which considers relevant factors in determining the impairment of a structured security. When assessing whether the amortized cost basis of the security will be recovered, the company compared the present value of cash flows expected to be collected. Any shortfalls of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered a credit loss. The company recognized a credit loss of $1.8 million for 36 structured securities which was recognized in earnings. The company does not intend to sell any of these structured securities and it is more likely than not that we will not be required to sell these securities before recovery of its amortized cost basis.

The following table sets forth the summary of the credit losses recognized on our available for sale debt securities at March 31, 2009:

	March 31, 2009
	($ in thousands)
Beginning Balance at January 1, 2009	$	—
Credit Losses on Securities not previously impaired		1,797
Ending balance at March 31, 2009	$	1,797

The other-than-temporary impairments recognized in earnings were mostly related to credit losses on non-agency residential mortgage backed securities and one subprime home equity line of credit. The significant inputs used to measure the amount of credit loss were actual delinquency rates, default probability assumptions and severity assumptions. Projected losses are a function of both loss severity and probability of default. Default probability and severity assumptions differ based on property type, vintage and the stress of the collateral.

The contractual maturity by the number of years until maturity for fixed maturity securities with unrealized losses at March 31, 2009 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	$	83		0	%	$	5,367		1	%
Due after one year through five years		5,902		9	%		82,747		21	%
Due after five years through ten years		7,726		11	%		68,939		17	%
Due after ten years		6,461		10	%		88,216		22	%
Mortgage- and asset-backed securities		47,656		70	%		149,173		39	%
Total fixed income securities	$	67,828		100	%	$	394,442		100	%

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

	Three Months Ended March 31,
	2009			2008
	($ in thousands)
Fixed maturities:
Gains	$	2,932		$	197
(Losses)		(3,302	)		(9	)
(Impairments)		(2,361	)		—
		(2,731	)		188
Equity securities:
Gains		13			263
(Losses)		(1,180	)		(527	)
(Impairments)		(8,339	)		—
		(9,506	)		(264	)
Net realized capital gains (losses)	$	(12,237	)	$	(76	)

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.

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

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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 March 31, 2009:

	Quoted Prices		Significant
	In Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	($ in thousands)
	Level 1		Level 2		Level 3		Total
Fixed Maturities	$	261,943	$	1,414,727	$	156	$	1,676,826
Equity securities		37,164		14,571		—		51,735
Short-term investments		48,953		157,270		—		206,223
Total	$	348,060	$	1,586,568	$	156	$	1,934,784

The securities classified as Level 3 in the above table consist of structured securities rated “AAA” by Standard and Poor’s (“S&P”) and “Aaa” by Moody’s Investors Service (“Moody’s”), 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 months ended March 31, 2009:

	Three Months Ended
	March 31, 2009
	($ in thousands)
Level 3 investments as of December 31, 2008	$	156
Unrealized net gains included in other comprehensive income (loss)		23
Purchases, sales, paydowns and amortization		(23	)
Transfer from Level 3		—
Transfer to Level 3		—
Level 3 investments as of March 31, 2009	$	156

The 2009 first quarter net realized capital losses include impairments of $10.7 million for declines in the market value of equity and fixed income securities which were considered to be other-than-temporary, as further discussed under the captionInvestments, included herein. In light of the declines in the fair value of these securities and the related economic circumstances causing such declines, the Company believes that their fair value will not 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 and during 2008, the Parent Company purchased 224,754 shares of its common stock in the open market at an average cost of $51.34 per share for a total of $11.5 million. This program expired at December 31, 2008.

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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 2008 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;

• risk that the bank consortium does not renew the credit facility, which would cause us to find other sources to provide the letters of credit or other collateral required to continue our participation in Syndicate 1221;

• 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 in 2005 and Hurricanes Gustav and Ike in 2008 and the possibility that our estimates of losses from such hurricanes 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;

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• 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;

• 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, 2008.

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 was discontinued during the 2008 second quarter. 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. The discontinuance of the European property business and the closing of the underwriting agencies did not have any significant effect on the Company’s financial condition or results of operations. In July 2008, the Company opened an underwriting office in Stockholm, Sweden to write professional liability business. In September 2008, Syndicate 1221 began to underwrite professional and general liability insurance coverage in China through the Navigators Underwriting Division of Lloyd’s Reinsurance Company (China) Ltd.

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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 month period ended March 31, 2009 and 2008. 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.

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 insurance 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. The marine rate increases began to level off in 2004 and into 2005, however 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.

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The average renewal premium rates for our Insurance Companies’ marine business increased approximately 4.2% for the 2009 first quarter. The average renewal premium rates for our Lloyd’s Operations marine business increased approximately 8.1% for the 2009 first quarter period.

Within our Property / Casualty lines, the contractors liability business saw several years of favorable rate changes resulting from 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 and the average renewal premium rate increases were approximately 13.5% in 2004 and 49.1% in 2003. This was followed by declines in rates of approximately 1.0% in 2005 and 5.6% in 2006, primarily due to additional competition in the marketplace. This decline continued into 2007 and 2008 with average renewal premium rates declining approximately 10.7% and 11.9% respectively. We expect competitive conditions to continue during 2009 resulting in continuing declines in pricing for contractors liability and excess liability business and the average renewal premium rates for the contractors liability business declined approximately 4.3% in the 2009 first quarter. Offshore energy average renewal premium rates increased approximately 5.7% for the 2009 first quarter.

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 increased approximately 2.3% in the 2009 first quarter including D&O insurance average renewal premium rates which declined approximately 0.2% for the 2009 first quarter.

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 or liquidity.

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The Company has significant catastrophe exposures throughout the world with the largest catastrophe exposure coming from offshore energy risks exposed to hurricanes in the Gulf of Mexico. Following the 2008 hurricane season, many offshore energy policies that were in-force during Hurricanes Gustav and Ike now have either reduced limits or have used up the entire windstorm limit of the policy. To take account of this in assessing our overall Gulf of Mexico exposure, we have remodeled the offshore energy exposure with these reduced windstorm limits. Based on this assessment, the Company estimates that our probable maximum pre-tax gross and net loss exposure in a theoretical one in two hundred and fifty year hurricane event in the Gulf of Mexico would approximate $147 million and $26 million, respectively, including the cost of reinsurance reinstatement premiums, which emanates from 2008 underwriting year risks that have yet to expire.

We have taken steps to reduce our aggregate exposures and to increase profitability moving forward, and the 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 will be significantly lower in 2009 based on the aggregate exposure to which we are managing, and the reinsurance protection we have purchased. The primary policies that create exposure in the Gulf of Mexico renew largely in April and July. We are evaluating the adequacy of the pricing and terms on these policies and in many cases we are finding that market pricing and terms do not meet our threshold as acceptable. If this continues, our exposure to catastrophic windstorm in the Gulf of Mexico could reduce even further.

There are a number of significant assumptions and 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. We are required to pay the losses even if a reinsurer fails to meet its obligations under the reinsurance agreement. Accordingly, we bear credit risk with respect to our reinsurers. Specifically, our reinsurers may not pay claims made by us on a timely basis, or they may not pay some or all of these claims. Either of these events would increase our costs and could have a material adverse effect on our business.

Critical Accounting 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.

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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.

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. Reinsurance reinstatement premium is earned in the period in which the event occurred which created the need to record the reinstatement premium.

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, as 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.

Equity securities are impaired when the fair value is less than 80% of the cost for at least six months and in other cases where more severe declines occur for less than six months.

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With respect to fixed maturity securities, 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. If warranted as the result of conditions relating to a particular security, we will focus on a significant decline in market value regardless of the time period involved. Factors considered in evaluating potential impairment include, but are not limited to, the current fair value as compared to cost 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 not to sell and more likely than not that we will not be required to sell before the anticipated recovery of its remaining amortized cost basis, 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 not to sell and more likely than not that we will not be required to sell before the anticipated recovery as part of the process of evaluating whether a fixed maturity security’s unrealized loss represents an other-than-temporary decline. The Company’s ability to hold such securities is supported by sufficient cash flow from its operations and from maturities within its investment portfolio in order to meet its claims payment and other disbursement obligations arising from its underwriting operations without selling such investments. With respect to securities where the decline in value is determined to be temporary and the security’s value is not written down, a subsequent decision may be made to sell that security and realize a loss. Subsequent decisions on security sales are made within the context of overall risk monitoring, changing information and market conditions. 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.

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, and receive approval, prior to the execution of a transaction or series of related transactions that may result in a realized loss above a certain threshold. Additionally, investment managers are required to notify management, and receive approval, prior to the execution of a transaction or series of related 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 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 incomeon the Company’s balance sheet. 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.

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Results of Operations

The following is a discussion and analysis of our consolidated and segment results of operations for the three months ended March 31, 2009 and 2008. Earnings per share data is presented on a per diluted share basis.

Effective in 2009, the Company has reclassified certain of its business lines, which has no effect on the segment classifications of the Insurance Company and Lloyd’s.

• The offshore energy business, formerly included in the “Marine and Energy” businesses of the Insurance Companies and Lloyd’s, is now included in the Insurance Companies’ and Lloyd’s “Property Casualty” businesses.

• The marine lines within both the Insurance Company and Lloyd’s are now presented as “Marine” instead of “Marine and Energy,” since the energy business has now been reclassified to “Property Casualty.”

• Engineering and construction, European Property and other run-off business, formerly included in the “Other” category of business within the Insurance Companies and Lloyd’s, are now included under “Property Casualty.”

• The “Middle Markets” business, formerly broken out separately in the Insurance Companies, is now included in the Insurance Companies’ “Property Casualty” business.

Underwriting data for prior periods has been reclassified to reflect these changes.

Net income for the three months ended March 31, 2009 was $12.0 million or $0.71 per share compared to $23.3 million or $1.36 per share for the three months ended March 31, 2008. Included in these results were net realized capital losses of $0.48 per share and net realized capital gains of $0.00 per share for the three months ended March 31, 2009 and 2008, respectively. The 2009 first quarter’s net realized capital losses include impairments of $10.7 million for declines in the market value of securities which were considered to be other-than-temporary, as further discussed under the captionInvestments, included herein. The after-tax loss of such impairments was $7.0 million or $0.41 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 ofaccumulated other comprehensive income (loss).

The combined ratios, which consist of the sum of the loss and LAE ratio and the expense ratio for each period, for the 2009 first quarter period was 92.8 % compared to 89.2% for the comparable period in 2008. The combined ratio for the 2009 first quarter was reduced by 3.5 loss ratio points for net loss reserve redundancies of $5.8 million relating to prior years. The combined ratio for the 2008 first quarter was reduced by 8.8 loss ratio points for net loss reserve redundancies of $13.7 million relating to prior years. The net paid loss and LAE ratio for the 2009 first quarter was 43.6 % compared to 32.7% for the comparable period in 2008.

Cash flow from operations was $42.9 million for the 2009 three month period compared to $59.7 million for the comparable period in 2008.

Consolidated stockholders’ equity increased 3.4% to $ 712.5 million or $ 42.07 per share at March 31, 2009 compared to $689.3 million or $40.89 per share at December 31, 2008. The increase was due to net income.

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Revenues.Gross written premium was $275.3 million in the 2009 first quarter, compared to $287.1 million in the 2008 comparable period. The decrease in the 2009 first quarter gross written premium compared to 2008 generally reflects a combination of selective business expansion in new and existing lines of business, 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, property casualty 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 March 31,
	2009									2008
	Gross					Net		Net		Gross					Net		Net
	Written					Written		Earned		Written					Written		Earned
	Premium		%			Premium		Premium		Premium		%			Premium		Premium
	($ in thousands)
Insurance Companies:
Marine	$	77,237		28.1	%	$	58,459	$	37,161	$	71,485		24.9	%	$	43,463	$	26,455
Property Casualty		84,258		30.6	%		59,976		65,412		100,824		35.1	%		69,114		71,718
Professional Liability		30,488		11.1	%		18,647		17,717		19,287		6.7	%		11,733		14,073
Insurance Companies Total		191,983		69.8	%		137,082		120,290		191,596		66.7	%		124,310		112,246
Lloyd’s Operations:
Marine		59,023		21.4	%		49,974		31,175		67,154		23.4	%		48,910		28,793
Property Casualty		13,528		4.9	%		7,595		7,923		17,726		6.2	%		7,710		8,742
Professional Liability		10,725		3.9	%		6,001		5,558		10,670		3.7	%		6,792		5,959
Lloyd’s Operations Total		83,276		30.2	%		63,570		44,656		95,550		33.3	%		63,412		43,494
Total	$	275,259		100.0	%	$	200,652	$	164,946	$	287,146		100.0	%	$	187,722	$	155,740

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Gross Written Premium

Insurance Companies’ Gross Written Premium

Marine Premium.The gross written premium for the first three months of 2009 and 2008 consisted of the following:

	2009			2008
Marine liability		35.1	%		35.6	%
P&I		16.0	%		15.9	%
Cargo		11.4	%		11.0	%
Inland marine		10.9	%		7.5	%
Bluewater hull		8.0	%		6.6	%
Transport		6.8	%		9.2	%
Craft/Fishing vessel		5.8	%		6.2	%
Other		6.0	%		8.0	%
Total		100.0	%		100.0	%

The marine gross written premium for the 2009 first quarter increased 8.0% compared to the same period in 2008. The average renewal premium rates for the 2009 first quarter increased 4.2%. The recent insurance industry dislocations and storm losses are expected to impact the market, but the outcome of those changes is still uncertain.

Property / Casualty Premium.The gross written premium for the first three months of 2009 and 2008 consisted of the following:

	2009			2008
Construction liability		28.5	%		39.0	%
Commercial umbrella		19.7	%		16.5	%
Programs		12.0	%		10.1	%
Nav Pac		11.2	%		7.9	%
Nav Tech		11.1	%		10.8	%
Primary E&S		8.5	%		10.5	%
Personal Umbrella		1.9	%		2.0	%
Other		7.1	%		3.2	%
Total		100.0	%		100.0	%

The property/casualty gross written premium for the 2009 first quarter decreased 16.4% compared to the same period in 2008, due primarily to weakening economic conditions that have reduced demand for construction liability insurance. The average renewal premium rates for the construction liability business decreased approximately 4.3% for the 2009 first quarter. The recent premium rate decreases for the construction liability business and generally for the specialty lines of business are reflective of softening market conditions which are expected to continue for the remainder of 2009.

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Professional Liability Premium.The gross written premium for the first three months of 2009 and 2008 consisted of the following:

	2009			2008
D&O (public and private)		60.2	%		56.6	%
Lawyers		18.7	%		32.0	%
E&O (MPL)		18.0	%		6.3	%
Architects and engineers		3.1	%		5.1	%
Total		100.0	%		100.0	%

The professional liability gross written premium for the 2009 first quarter increased 58.1% compared to the same period in 2008 as we have hired additional underwriters in both New York and London to expand this business resulting from increased insurer demand for insurers with excellent financial strength and market dislocations caused by weakness in other market participants. The premium growth occurred in our D&O and E&O lines. These have historically been the most profitable segments of our professional liability business. The lawyers professional lines generated an underwriting loss for the quarter due to adverse loss development. Premium writings have declined as a percentage of total premium written due to an underwriting decision to deemphasize this product line due in part to the economic recession. Architects and engineers premiums written declined as a percentage of total premiums written due to a reduction in insured demand resulting from the effects of the economic recession on construction activity. The average renewal premium rates for the professional liability business increased by approximately 2.3% in the 2009 first quarter.

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 ($176.5 million) in 2009 compared to £123.0 million ($228 million) in 2008.

The Lloyd’s Operations gross written premium for the 2009 first quarter decreased 12.8% compared to the same period in 2008. This decrease is attributable to both the adverse impact of the decline in the sterling exchange rate together with the closure during 2008 of the Syndicate’s UK Property book.

Marine Premium.The gross written premium for the first three months of 2009 and 2008 consisted of the following:

	2009			2008
Cargo and specie		36.7	%		34.0	%
Marine liability		35.3	%		42.4	%
Assumed reinsurance		17.5	%		12.9	%
Hull		6.4	%		6.4	%
Other		4.1	%		4.3	%
Total		100.0	%		100.0	%

The marine gross written premium for the 2009 first quarter decreased 12.1% compared to the same period in 2008. The average renewal premium rates increased approximately 8.1% for the 2009 first quarter. These increases have been offset by the negative impact of foreign exchange movements. The Marine liability account reduced from 42.4% to 35.3% due to a small number of large accounts that will now incept later in 2009.

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Property / Casualty Premium.The gross written premium for the first three months of 2009 and 2008 consisted of the following:

	2009			2008
Nav Tech		90.9	%		81.3	%
US Property Casualty		9.5	%		0.0	%
Property		-0.4	%		18.7	%
Total		100.0	%		100.0	%

The property/casualty gross written premium for the 2009 first quarter decreased 23.7% compared to the same period in 2008 due to our decision to place the Property book into run-off in 2008. The average renewal premium rates increased approximately 10.4% for the 2009 first quarter. The US property casualty business is primarily non-admitted risks in the state of New York.

Professional Liability Premium.The gross written premium for the first three months of 2009 and 2008 consisted of the following:

	2009			2008
E&O		61.8	%		78.1	%
D&O (public and private)		38.2	%		21.9	%
Total		100.0	%		100.0	%

The gross written premium for the 2009 first quarter increased 0.5% compared to the same period in 2008.

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 March 31,
	2009					2008
			% of					% of
	Ceded		Gross			Ceded		Gross
	Written		Written			Written		Written
	Premium		Premium			Premium		Premium
	($ in thousands)
Insurance Companies:
Marine	$	18,778		24.3	%	$	28,022		39.2	%
Property Casualty		24,282		28.8	%		31,710		31.5	%
Professional Liability		11,841		38.8	%		7,554		39.2	%
Subtotal		54,901		28.6	%		67,286		35.1	%
Lloyd’s Operations:
Marine		9,049		15.3	%		18,244		27.2	%
Property Casualty		5,933		43.9	%		10,016		56.5	%
Professional Liability		4,724		44.0	%		3,878		36.3	%
Subtotal		19,706		23.7	%		32,138		33.6	%
Total	$	74,607		27.1	%	$	99,424		34.6	%

The percentage of total ceded written premium to gross written premium in the 2009 first quarter was 27.1%, which compares to the 2008 first quarter ratio of 34.6%. The changes in the percentages of ceded written premium to gross written premium for the three months ended March 31, 2009 compared to the same period in 2008 was due to a reduction in the amount of marine and energy (included within Property Casualty) quota share reinsurance purchased for the Insurance Companies and the Lloyd’s Operations that were effective January 1, 2009 resulting in a large reduction in ceded premium.

Net Written Premium.Net written premium increased 6.9% in the 2009 first quarter compared to the same period in 2008 due to the reduction in ceded marine premiums in both the Insurance Company and Lloyd’s Operations.

Net Earned Premium.Net earned premium, which generally lags the increase in net written premium, increased 5.9% in the 2009 first quarter compared to the same period in 2008 due to the increase in net written premium throughout 2008 and in the first quarter of 2009.

Commission Income.Commission income from unaffiliated business decreased $0.3 million in the 2009 first quarter compared to the same period in 2008. Beginning with the 2006 underwriting year, there was 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.

Net Investment Income.Net investment income decreased 0.5% in the 2009 first quarter compared to the same period in 2008, due to lower yields on our short-term balances.

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Net Realized Capital Gains and Losses.Pre-tax net income included net realized capital losses of $12.2 million for the 2009 first quarter compared to net realized capital losses of $0.08 million for the 2008 first quarter. On an after-tax basis, the 2009 first quarter net realized capital losses were $8.2 million or $0.48 per share compared to net realized capital losses of $0.05 million or $0.00 per share for the 2008 first quarter.

The 2009 first quarter net realized capital losses include provisions of $10.7 million for declines in the market value of securities which were considered to be other-than-temporary. The after-tax effect of such provisions on the 2009 first quarter period was $7.0 million or $0.41 per share.

Other Income/(Expense).Other income/(expense) for the first quarters of both 2009 and 2008 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 ratio of net losses and LAE incurred to net earned premium (loss ratios) for the 2009 and 2008 first quarters was 60.8% and 56.8%, respectively. The loss ratio for the three months of 2009 was favorably impacted by 3.5 loss ratio points and 2008 was favorably impacted by 8.8 loss ratio points, also resulting from the effect of prior year loss reserves.

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.

The following table shows overall reinsurance recoverable amounts for paid and unpaid losses. Approximately $95.8 million and $96.8 million of paid and unpaid losses at March 31, 2009 and December 31, 2008, respectively, were due from reinsurers as a result of the losses from Hurricanes Gustav and Ike. Approximately $94.5 million and $101.7 million of paid and unpaid losses at March 31, 2009 and December 31, 2008, respectively, were due from reinsurers as a result of the losses from Hurricanes Katrina and Rita.

	March 31,		December 31,
	2009		2008		Change
	($ in thousands)
Reinsurance recoverables:
Paid losses	$	70,725	$	67,227	$	3,498
Unpaid losses and LAE reserves		851,703		853,793		(2,090	)
Total	$	922,428	$	921,020	$	1,408

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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:

	March 31,		December 31,
	2009		2008		Change
	($ in thousands)
Gross reserves for losses and LAE	$	1,879,895	$	1,853,664		1.4	%
Less: Reinsurance recoverable on unpaid losses and LAE reserves		851,703		853,793		-0.2	%
Net loss and LAE reserves	$	1,028,192	$	999,871		2.8	%

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:

	March 31, 2009
	Net		Net		Total		% of IBNR
	Reported		IBNR		Net Loss		to Total Net
	Reserves		Reserves		Reserves		Loss Reserves
	($ in thousands)
Insurance Companies:
Marine	$	106,949	$	96,636	$	203,585		47.5	%
Property Casualty		116,354		359,035		475,389		75.5	%
Professional Liability		32,443		58,992		91,435		64.5	%
Total Insurance Companies		255,746		514,663		770,409		66.8	%
Lloyd’s Operations:
Marine		97,211		83,218		180,429		46.1	%
Property Casualty		21,788		23,438		45,226		51.8	%
Professional Liability		6,416		25,712		32,128		80.0	%
Total Lloyd’s Operations		125,415		132,368		257,783		51.3	%
Total Company	$	381,161	$	647,031	$	1,028,192		62.9	%

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	December 31, 2008
	Net		Net		Total		% of IBNR
	Reported		IBNR		Net Loss		to Total Net
	Reserves		Reserves		Reserves		Loss Reserves
	($ in thousands)
Insurance Companies:
Marine	$	96,244	$	96,995	$	193,239		50.2	%
Property Casualty		115,810		358,305		474,115		75.6	%
Professional Liability		22,913		58,793		81,706		72.0	%
Total Insurance Companies		234,967		514,093		749,060		68.6	%
Lloyd’s Operations:
Marine		99,233		78,293		177,526		44.1	%
Property Casualty		26,218		16,386		42,604		38.5	%
Professional Liability		5,822		24,859		30,681		81.0	%
Total Lloyd’s Operations		131,273		119,538		250,811		47.7	%
Total Company	$	366,240	$	633,631	$	999,871		63.4	%

At March 31, 2009, the IBNR loss reserve was $647.0 million or 62.9% of our total loss reserves compared to $633.6 million or 63.4% at December 31, 2008.

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.

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.

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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 hurricane losses (Rita, Katrina, Gustav, Ike) and our asbestos exposures, 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.

Hurricanes Gustav and Ike.During 2008, the Company recorded gross and net loss estimates of $114.0 million and $17.2 million, respectively, exclusive of $12.2 million for the cost of excess of loss reinstatement premiums related to Hurricanes Gustav and Ike.

The following table sets forth the Company’s gross and net loss and LAE reserves, incurred loss and LAE, and payments for Hurricanes Gustav and Ike for the periods indicated:

	Three Months Ended		Year Ended
	March 31, 2009		December 31, 2008
	($ in thousands)
Gross of Reinsurance
Beginning gross reserves	$	107,399
Incurred loss & LAE		—	$	114,000
Calendar year payments		11,160		6,601
Ending gross reserves	$	96,239	$	107,399
Gross case loss reserves	$	70,753	$	70,299
Gross IBNR loss reserves		25,486		37,100
Ending gross reserves	$	96,239	$	107,399
Net of Reinsurance
Beginning net reserves	$	12,923
Incurred loss & LAE		449	$	17,169
Calendar year payments		6,637		4,246
Ending net reserves	$	6,735	$	12,923
Net case loss reserves	$	6,075	$	11,696
Net IBNR loss reserves		660		1,227
Ending net reserves	$	6,735	$	12,923

Approximately $95.8 million and $96.8 million of paid and unpaid losses at March 31, 2009 and December 31, 2008, respectively, were due from reinsurers as a result of the losses from Hurricanes Gustav and Ike.

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 the Company’s gross and net loss and LAE reserves, incurred loss and LAE, and payments for Hurricanes Katrina and Rita for the periods indicated:

	Three Months Ended			Year Ended
	March 31, 2009			December 31, 2008
	($ in thousands)
Gross of Reinsurance
Beginning gross reserves	$	97,732		$	141,831
Incurred loss & LAE		(1,849	)		(12,250	)
Calendar year payments		2,840			31,849
Ending gross reserves	$	93,043		$	97,732
Gross case loss reserves	$	62,944		$	62,732
Gross IBNR loss reserves		30,099			35,000
Ending gross reserves	$	93,043		$	97,732
Net of Reinsurance
Beginning net reserves	$	3,667		$	4,519
Incurred loss & LAE		130			(990	)
Calendar year payments		189			(138	)
Ending net reserves	$	3,608		$	3,667
Net case loss reserves	$	213		$	279
Net IBNR loss reserves		3,395			3,388
Ending net reserves	$	3,608		$	3,667

Approximately $94.5 million and $101.7 million of paid and unpaid losses at March 31, 2009 and December 31, 2008, respectively, were due from reinsurers as a result of the losses from Hurricanes Katrina and Rita.

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 March 31, 2009 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.

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:

	Three Months Ended			Year Ended
	March 31, 2009			December 31, 2008
	($ in thousands)
Gross of Reinsurance
Beginning gross reserves	$	21,774		$	23,194
Incurred losses & LAE		11			796
Calendar year payments		53			2,216
Ending gross reserves	$	21,732		$	21,774
Gross case loss reserves	$	13,876		$	13,918
Gross IBNR loss reserves		7,856			7,856
Ending gross reserves	$	21,732		$	21,774
Net of Reinsurance
Beginning net reserves	$	16,683		$	16,717
Incurred losses & LAE		51			263
Calendar year payments		(102	)		297
Ending net reserves	$	16,836		$	16,683
Net case loss reserves	$	9,185		$	9,032
Net IBNR loss reserves		7,651			7,651
Ending net reserves	$	16,836		$	16,683

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 March 31, 2009, the ceded asbestos paid and unpaid recoverables were $8.2 million compared to $8.9 million at December 31, 2008.

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.

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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 $5.8 million and $13.7 million, net of reinsurance, were recorded in the 2009 and 2008 first quarters, 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.

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

	Three Months Ended
	March 31,			March 31,
	2009			2008
	($ in thousands)
Insurance Companies:
Marine	$	1,958		$	(300	)
Property Casualty		(11,713	)		(7,900	)
Professional Liability		4,623			(300	)
Subtotal Insurance Companies		(5,132	)		(8,500	)
Lloyd’s Operations		(635	)		(5,180	)
Total	$	(5,767	)	$	(13,680	)

Following is a discussion of relevant factors related to the $5.8 million prior period net reserve deficiency recorded in the 2009 first quarter:

The Insurance Companies recorded $2.0 million of prior period net reserve deficiencies for marine business which included $1.4 million for increased liability reserves due to large loss activity, and $1.0 million for hull and $0.9 million for transport business due reported claims activity, partially offset by $1.8 million of savings in the protection and indemnity (“P&I”) line of business due to reductions in our loss assumptions for the more recent underwriting years.

The Insurance Companies recorded $11.7 million of prior period net savings for property casualty business comprised mostly of $8.5 million of net favorable development in construction liability business due to favorable loss trends for business written from 2005 to 2007, $2.7 million of favorable development on primary casualty business on business written from 2005 to 2006 due to reported losses less than our expectations, $1.4 million of favorable development on commercial umbrella business on business written from 2004 to 2006 due to reported losses less than our expectations, and $4.9 million in the offshore energy lines of business due to a reduction in the estimate for a large reported claim and generally lower claim activity than expected. These redundancies were partially offset by prior period net reserve deficiencies in the middle markets and specialty run-off lines of $1.6 million and $1.2 million, respectively, due to loss activity in excess of expectations.

The Insurance Companies recorded $4.6 million of net prior period deficiencies for professional liability business mostly emanating from E&O business written in 2006 and 2007 due to reported losses being greater than expectations.

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The Lloyd’s Operations recorded $0.6 million of prior period net savings comprised of savings of $3.1 million for marine business due to favorable loss activity in the liability and cargo lines, partially offset by deficiencies of $1.1 million in the international E&O line due to higher reported loss activity and $0.5 million in our engineering book due to a large reported loss. Reserves for the run off Property book were strengthened by an additional $0.5 million after worse than expected claims development in the quarter.

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 $7.9 million of prior period net savings for property casualty 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 and $2.3 million of favorable development for personal umbrella business written in 2007, partially offset by adverse loss development of $3.3 million from discontinued business. We also 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 and $1.8 million of prior period net savings for run-off business 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. The 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 and reinsurance $2.1 million, partially 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.

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 hurricane 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 2009 first quarter was 13.6% compared to 13.5% for the same period in 2008. The increase is mostly attributable to greater retentions, particularly on our marine quota share treaties, which have reduced the ceding commission benefit.

Other Operating Expenses.The increase of 2.6% in other operating expenses in the 2009 first quarter compared to the same period in 2008, was attributable primarily to employee-related expenses resulting from expansion of the business and investments in technology to support this growth. Partially offsetting these increases was a benefit of approximately $2.0 million from the decline in value of our London based GBP denominated expenses when reported in US dollars compared to the first quarter of 2008.

43

Income Taxes. The Company recorded an income tax expense of $4.1 million for the 2009 first quarter compared to income tax expense of $10.2 million for the 2008 first quarter, resulting in effective tax rates of 25.7% and 30.5%, 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 24.9% for the 2009 three month period compared to 26.4% for the same period in 2008. As of March 31, 2009 and December 31, 2008 the net deferred Federal, foreign, state and local tax assets were $53.9 million and $54.7 million, respectively.

We are subject to the tax regulations of the 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 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.

We have not provided for U.S. deferred income taxes on the undistributed earnings of approximately $48.3 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 $3.4 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 $3.6 million and $6.2 million at March 31, 2009 and December 31, 2008, respectively. Included in the deferred tax assets are state and local net operating loss carryforwards of $2.0 million and $0.5 million at March 31, 2009 and December 31, 2008, 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 March 31, 2009 expire in 2029.

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.

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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 wholly-owned underwriting 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 construction 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. 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 months ended March 31, 2009 and 2008:

	Three Months Ended
	March 31,
	2009			2008
	($ in thousands)
Gross written premium	$	191,983		$	191,596
Net written premium		137,082			124,310
Net earned premium		120,290			112,246
Net losses and LAE		(70,153	)		(67,356	)
Commission expense		(14,968	)		(12,948	)
Other operating expenses		(24,560	)		(22,148	)
Commission income and other income (expense)		201			258
Underwriting profit (loss)		10,810			10,052
Net investment income		16,207			15,465
Net realized capital gains (losses)		(8,907	)		(102	)
Income before income taxes		18,110			25,415
Income tax expense		4,533			7,370
Net income	$	13,577		$	18,045
Loss and LAE ratio		58.3	%		60.0	%
Commission expense ratio		12.4	%		11.5	%
Other operating expense ratio(1)		20.3	%		19.5	%
Combined ratio		91.0	%		91.0	%

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

46

The following tables set forth the underwriting results of the Insurance Companies for the three months ended March 31, 2009 and 2008:

	Three Months Ended March 31, 2009
	($ in thousands)
	Net		Losses
	Earned		and LAE		Underwriting		Underwriting			Loss			Expense			Combined
	Premium		Incurred		Expenses		Profit/(Loss)			Ratio			Ratio			Ratio
Marine	$	37,161	$	26,390	$	11,622	$	(851	)		71.0	%		31.3	%		102.3	%
Property Casualty		65,412		28,004		20,753		16,655			42.8	%		31.7	%		74.5	%
Professional Liability		17,717		15,759		6,952		(4,994	)		89.0	%		39.2	%		128.2	%
Total	$	120,290	$	70,153	$	39,327	$	10,810			58.3	%		32.7	%		91.0	%

	Three Months Ended March 31, 2008
	($ in thousands)
	Net		Losses
	Earned		and LAE		Underwriting		Underwriting			Loss			Expense			Combined
	Premium		Incurred		Expenses		Profit/(Loss)			Ratio			Ratio			Ratio
Marine	$	26,455	$	22,313	$	9,169	$	(5,027	)		84.3	%		34.7	%		119.0	%
Property Casualty		71,718		36,138		20,571		15,009			50.4	%		28.7	%		79.1	%
Professional Liability		14,073		8,905		5,098		70			63.3	%		36.2	%		99.5	%
Total	$	112,246	$	67,356	$	34,838	$	10,052			60.0	%		31.0	%		91.0	%

Net earned premium of the Insurance Companies increased 7.2% in the 2009 first quarter compared to the same period in 2008, primarily reflecting increased net written premiums.

The 2009 first quarter loss ratio was favorably impacted by prior period loss reserve redundancies of $5.1 million or 4.3 loss ratio points.

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 2009 and 2008 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 the 2009 first quarter compared to 4.4 % for the comparable 2008 period. The average durations of the Insurance Companies’ invested assets at March 31, 2009 was 4.8 years compared to 4.7 years at March 31, 2008. Net investment income increased in the 2009 first quarter compared to the same period in 2008 primarily due to the investment of new funds from cash flow, partially offset by the decrease in yields on short term investments.

47

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, which produces business for the U.K. Branch, are subsidiaries of Navigators Holdings (UK) Limited located in the United Kingdom. In September 2008, Syndicate 1221 began to underwrite insurance coverage in China through the Navigators Underwriting Division of Lloyd’s Reinsurance Company (China) Ltd. The Company’s focus in China is on opportunities in professional and general liability lines of business.

Syndicate 1221’s stamp capacity is £123.0 million ($176.5 million) in 2009 compared to £123.0 million ($228 million) in 2008. 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 2009 and 2008 underwriting years through Navigators Corporate Underwriters Ltd. in 2008 and through Navigators Corporate Underwriters Ltd. in 2008.

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. 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 and other collateral 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.

48

The following table sets forth the results of operations of the Lloyd’s Operations for the three months ended March 31, 2009 and 2008:

	Three Months Ended
	March 31,
	2009			2008
	($ in thousands)
Gross written premium	$	83,276		$	95,550
Net written premium		63,570			63,412
Net earned premium		44,656			43,494
Net losses and LAE		(30,094	)		(21,064	)
Commission expense		(7,480	)		(8,000	)
Other operating expenses		(5,981	)		(7,608	)
Commission income and other income (expense)		(52	)		14
Underwriting profit (loss)		1,049			6,836
Net investment income		2,383			2,982
Net realized capital gains (losses)		(3,330	)		26
Income before income taxes		102			9,844
Income tax expense (benefit)		336			3,452
Net income (loss)	$	(234	)	$	6,392
Loss and LAE ratio		67.4	%		48.4	%
Commission expense ratio		16.8	%		18.4	%
Other operating expense ratio(1)		13.5	%		17.5	%
Combined ratio		97.7	%		84.3	%

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

Marine and energy premium rate increases occurred in 2005 and continued into 2006 following Hurricanes Katrina and Rita, particularly in the offshore energy business. Market conditions then began to soften and the average renewal premium rates in 2007 decreased approximately 1.2% for the marine and energy lines and decreased approximately 3.4% in the professional liability business. The average renewal premium rates for 2008 decreased approximately 8.2% for the marine and energy business and decreased approximately 1.3% for the professional liability business. The average renewal premium rates for the first quarter of 2009 increased approximately 8.1% for the marine business, increased approximately 10.3% for the offshore business and increased approximately 1.8% for the professional liability business.

The 2009 three month earnings in the Lloyd’s Operations reflect the continued favorable loss development trends as the loss ratio was favorably impacted by prior period loss reserve redundancies of $0.6 million or 1.4 loss ratio points.

Generally, while the Lloyd’s Operations have experienced favorable prior period net redundancies in calendar years 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.

49

The approximate annualized pre-tax yield on the Lloyd’s Operations’ investment portfolio, excluding net realized capital gains and losses, was 2.8% for the 2009 first quarter compared to 3.7% for the comparable 2008 period. The average duration of our Lloyd’s Operations’ invested assets at March 31, 2009 was 1.7 years compared to 1.5 years at March 31, 2008. The decrease in the Lloyd’s Operations’ net investment income is reflective of the lower yields on short term investments. 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 2008 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 2008 Annual Report on Form 10-K. Total reserves for losses and LAE were $1.88 billion and $1.85 billion at March 31, 2009 and December 31, 2008, respectively. 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	$	175,680	$	8,355	$	16,100	$	16,100	$	135,125

In early April 2009, the Company repurchased $10.0 million aggregate principal amount of its issued and outstanding 7% senior notes from an unaffiliated noteholder on the open market, as a result of which, as of the date of this filing, $115.0 million aggregate principal amount of notes remains issued and outstanding.

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 the 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.

50

The Insurance Companies’ investments are subject to the oversight of each of their respective Board of Directors and the Finance Committee of the Parent Company’s Board of Directors. 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 March 31, 2009, the average quality of the investment portfolio was rated “AA” by S&P and “Aa” by Moody’s. All of the Company’s mortgage-backed and asset-backed securities were rated “AAA” by S&P and “Aaa” by Moody’s, except for forty securities approximating $30.8 million. There are no collateralized debt obligations (“CDO’s”), collateralized loan obligations (“CLO’s”), asset backed commercial paper or credit default swaps in the Company’s investment portfolio. At March 31, 2009 and December 31, 2008, all fixed-maturity and equity securities held by us were classified as available-for-sale.

The approximate annualized pre-tax yields of the investment portfolio, excluding net realized capital gains and losses, were 3.9% and 4.2% for the 2009 and 2008 first quarter, respectively.

Since the first quarter of 2008, the Company’s tax-exempt securities portion of its investment portfolio has increased by $40.6 million to approximately 35.9% of the fixed maturities investment portfolio at March 31, 2009 compared to approximately 35.7% at March 31, 2008. As a result, the effective tax rate on net investment income was 24.9% for the 2009 first quarter compared to 26.4% for the comparable 2008 period.

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 asset-backed and mortgage-backed securities which are similar to other asset-backed or mortgage-backed securities observed in the market.

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

51

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 utilized by one of our outside investment managers. The manager utilizes a pricing committee which approves the use of one or more independent pricing service vendors. The pricing committee consists of five or more members, one from senior management and one from the accounting group with the remainder from the asset class specialists and client strategists. The pricing source of each security is determined in accordance with the pricing source procedures approved by the pricing committee. The investment manager uses supporting documentation received from the independent pricing service vendor detailing the inputs, models and processes used in the independent pricing service vendors’ evaluation process to determine the appropriate SFAS 157 pricing hierarchy. Any pricing where the input is based solely on a broker price is deemed to be a Level 3 price.

Monthly, each asset class specialist at the investment manager reviews the pricing blotter spreadsheet displaying securities priced beyond a certain tolerance level and securities with negative yields to affirm that the valuations are appropriate or to provide the rationale and supporting documentation for a change. The pricing committee reviews the pricing blotter at the pricing committee meeting.

Management has reviewed this process by which the manager determines the prices and has obtained alternative pricing to validate a sampling of the pricing and assess their reasonableness.

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 March 31, 2009:

	Quoted Prices		Significant
	In Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	($ in thousands)
	Level 1		Level 2		Level 3		Total
Fixed Maturities	$	261,943	$	1,414,727	$	156	$	1,676,826
Equity securities		37,164		14,571		—		51,735
Short-term investments		48,953		157,270		—		206,223
Total	$	348,060	$	1,586,568	$	156	$	1,934,784

The securities classified as Level 3 in the above table consist of one security rated investment grade by both S&P and Moody’s, with unobservable inputs included in the Company’s fixed maturities portfolio for which price quotes from brokers were used to indicate fair value.

52

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 March 31, 2009:

	Three Months Ended
	March 31, 2009
	($ in thousands)
Level 3 investments as of December 31, 2008	$	156
Unrealized net gains included in other comprehensive income (loss)		23
Purchases, sales, paydowns and amortization		(23	)
Transfer from Level 3		—
Transfer to Level 3		—
Level 3 investments as of March 31, 2009	$	156

The following tables set forth our cash and investments as of March 31, 2009 and December 31, 2008:

			Gross		Gross			OTTI			Cost or
	Fair		Unrealized		Unrealized			Recognized			Amortized
March 31, 2009	Value		Gains		(Losses)			in OCI			Cost
	($ in thousands)
Fixed maturities:
U.S. Government Treasury Bonds, agency bonds and foreign government bonds	$	398,268	$	19,757	$	(25	)	$	—		$	378,536
States, municipalities and political subdivisions		610,021		19,116		(4,230	)		—			595,135
Mortgage- and asset-backed securities
Mortgage-backed securities		314,432		14,055		(1	)		—			300,378
Collateralized mortgage obligations		43,167		—		(7,188	)		(16,103	)		66,458
Asset-backed securities		29,826		273		(785	)		(68	)		30,406
Commercial mortgage-backed securities		89,648		15		(23,511	)		—			113,144
Subtotal		477,073		14,343		(31,485	)		(16,171	)		510,386
Corporate bonds		191,464		2,259		(15,917	)		—			205,122
Total fixed maturities		1,676,826		55,475		(51,657	)		(16,171	)		1,689,179
Equity securities — common stocks		51,735		609		(1,183	)		—			52,309
Cash		16,644		—		—			—			16,644
Short-term investments		206,223		—		—			—			206,223
Total	$	1,951,428	$	56,084	$	(52,840	)	$	(16,171	)	$	1,964,355

53

			Gross		Gross			OTTI		Cost or
	Fair		Unrealized		Unrealized			Recognized		Amortized
December 31, 2008	Value		Gains		(Losses)			in OCI		Cost
	($ in thousands)
Fixed maturities:
U.S. Government Treasury Bonds, agency bonds and foreign government bonds	$	361,656	$	25,741	$	(145	)	$	—	$	336,060
States, municipalities and political subdivisions		614,609		12,568		(8,036	)		—		610,077
Mortgage- and asset-backed securities:
Mortgage-backed securities		299,775		10,930		(26	)		—		288,871
Collateralized mortgage obligations		56,743		—		(27,119	)		—		83,862
Asset-backed securities		29,436		5		(1,289	)		—		30,720
Commercial mortgage-backed securities		92,684		—		(20,350	)		—		113,034
Subtotal		478,638		10,935		(48,784	)		—		516,487
Corporate bonds		188,869		1,398		(14,660	)		—		202,131
Total fixed maturities		1,643,772		50,642		(71,625	)		—		1,664,755
Equity securities — common stocks		51,802		1,266		(1,987	)		—		52,523
Cash		1,457		—		—			—		1,457
Short-term investments		220,684		—		—			—		220,684
Total	$	1,917,715	$	51,908	$	(73,612	)	$	—	$	1,939,419

The following tables set forth our U.S. Treasury and Agency Bonds and foreign government bonds as of March 31, 2009 and December 31, 2008:

			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
March 31, 2009	Value		Gains		(Losses)			Cost
	($ in thousands)
U.S. Treasury Bonds	$	310,020	$	17,448	$	(2	)	$	292,574
Agency Bonds		77,234		2,163		(3	)		75,074
Foreign Government Bonds		11,014		146		(20	)		10,888
Total	$	398,268	$	19,757	$	(25	)	$	378,536

54

			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
December 31, 2008	Value		Gains		(Losses)			Cost
	($ in thousands)
U.S. Treasury Bonds	$	290,059	$	23,243	$	(143	)	$	266,959
Agency Bonds		58,401		2,008		(2	)		56,395
Foreign Government Bonds		13,196		490		—			12,706
Total	$	361,656	$	25,741	$	(145	)	$	336,060

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 the obligations of each respective entity. Recent legislation has provided for guarantees by the U.S. Government of up to $100 billion each for FNMA and FHLMC.

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

At March 31, 2009, the Company owned two asset-backed securities approximating $0.2 million with subprime mortgage exposures. The securities have an effective maturity of 1.7 years. In addition, the Company owned five collateralized mortgage obligations and asset-backed securities approximating $1.5 million classified as Alt-A. They have an effective maturity of 5.2 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.

55

The following table sets forth the fifteen largest municipal holdings by counterparty as of March 31, 2009:

			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized		S&P
	Value		Gains		(Losses)			Cost		Rating
	($ in thousands)
Issuers:
Commonwealth of Massachusetts	$	15,572	$	829	$	(15	)	$	14,758	AA
State of Wisconsin		9,757		232		—			9,525	AA-
State of Louisiana		9,593		61		(20	)		9,552	A+
State of Washington		9,355		508		—			8,847	AA
State of California		9,116		68		(550	)		9,598	A
Commonwealth of Pennsylvania		8,361		435		—			7,926	AA
State of North Carolina		8,131		534		—			7,597	AAA
Virginia Resources Authority		7,819		418		—			7,401	AAA
State of Ohio		7,785		394		—			7,391	AA+
Illinois Finance Authority		7,642		24		(304	)		7,922	BBB+
Delaware Transportation Authority		6,906		553		—			6,353	AA-
Adams County School District		6,866		—		(72	)		6,938	BBB+
New York Local Government Assistance		6,772		120		—			6,652	AA-
City of Chicago		6,711		340		—			6,371	A-
State of Maine		6,349		522		—			5,827	AA-
Subtotal	$	126,735	$	5,038	$	(961	)	$	122,658
All Other		483,286		14,078		(3,269	)		472,477
Total	$	610,021	$	19,116	$	(4,230	)	$	595,135

The following table sets forth the composition of the municipal bonds in our portfolio by generally equivalent S&P and Moody’s ratings (not all of the securities in our portfolio are rated by both S&P and Moody’s) as of March 31, 2009:

Equivalent	Equivalent
S&P	Moody’s					Unrealized
Rating	Rating	Fair Value		Book Value		Gain/(Loss
		($ in thousands)
AAA/AA/A	Aaa/Aa/A	$	572,717	$	556,779	$	15,938
BBB	Baa		34,008		34,901		(893	)
BB	Ba		1,413		1,435		(22	)
B	B		—		—		—
CCC or lower	Caa or lower		—		—		—
N/A	N/A		1,883		2,020		(137	)
Total		$	610,021	$	595,135	$	14,886

56

The following tables set forth our mortgage-backed securities, collateralized mortgage obligations, and asset-backed securities by those issued by GNMA, FNMA, FHLMC, and the quality category (prime, Alt-A and subprime) for all other such investments at March 31, 2009:

			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		(Losses)			Cost
	($ in thousands)
Mortgage-backed securities:
GNMA	$	41,227	$	1,424	$	—		$	39,803
FNMA		202,042		9,235		(1	)		192,808
FHLMC		71,163		3,396		—			67,767
Prime		—		—		—			—
Alt-A		—		—		—			—
Subprime		—		—		—			—
Total	$	314,432	$	14,055	$	(1	)	$	300,378

	Gross		Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		(Losses)			Cost
	($ in thousands)
Collateralized mortgage obligations:
GNMA	$	—	$	—	$	—		$	—
FNMA		—		—		—			—
FHLMC		—		—		—			—
Prime		42,250		—		(22,772	)		65,022
Alt-A		917		—		(519	)		1,436
Subprime		—		—		—			—
Total	$	43,167	$	—	$	(23,291	)	$	66,458

57

The following table sets forth the fifteen largest collateralized mortgage obligations as of March 31, 2009:

	Issue		Fair		Book		Unrealized			S&P	Moody’s
Security Description	Date		Value		Value		(Loss)			Rating	Rating
	($ in thousands)
MLCC Mortgage Investors Inc 06 2		2006	$	3,586	$	4,415	$	(829	)	AAA	Aaa
Wells Fargo Mortgage Backed 06 AR8		2006		3,348		5,867		(2,519	)	AAA	NR
Citigroup Mortgage Loan Trust 06 AR2		2006		3,299		4,926		(1,627	)	N/A	A3
Merrill Lynch Mortgage Backed 07 2		2007		2,773		4,591		(1,818	)		Aa3
GMAC Mortgage Corp Loan Trust 05 AR6		2005		2,753		4,243		(1,490	)	AAA	Aaa
Merrill Lynch Mortgage Investors 05 A9		2005		2,669		4,170		(1,501	)	AAA	N/A
Wells Fargo Mortgage Backed 06 AR5		2006		2,098		3,439		(1,341	)	N/A	Baa1
Wells Fargo Mortgage Backed 05 AR4		2005		1,084		1,455		(371	)	N/A	Aaa
Bank of America Mortgage 04 F		2004		976		995		(19	)	AAA	Aaa
Merrill Lynch Mortgage Investors 05 A9		2005		931		1,165		(234	)	AAA
Bear Stearns Adjustable Rate 06 1		2006		702		950		(248	)		Aa1
Master Adjustable Rate Mortage 05 6		2005		699		934		(235	)	AAA	Baa2
Bank of America Funding Corp 06 D		2006		628		894		(266	)	AAA	N/A
JP Morgan Mortgage Trust 05 A4		2005		588		773		(185	)	AAA	Aaa
Mortgageit Trust 05 1		2005		570		838		(268	)	AAA	Aaa
Subtotal			$	26,704	$	39,655	$	(12,951	)
All Other				16,463		26,803		(10,340	)
Total			$	43,167	$	66,458	$	(23,291	)

	Gross		Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		(Losses)			Cost
	($ in thousands)
Asset-backed securities:
GNMA	$	—	$		$	—		$	—
FNMA		—		—		—			—
FHLMC		—		—		—			—
Prime		29,117		273		(648	)		29,492
Alt-A		545		—		(136	)		681
Subprime		164		—		(69	)		233
Total	$	29,826	$	273	$	(853	)	$	30,406

58

Details of the collateral of our asset-backed securities portfolio as of March 31, 2009 are presented below:

											Total		Amortized		Unrealized
	AAA		AA		A		BBB		CCC		Fair Value		Cost		Gain/(Loss)
	($ in thousands)
Auto Loans	$	13,500	$	4,731	$	906	$	2,846	$	—	$	21,983	$	22,429	$	(446	)
Credit Cards		548		—		—		269		—		817		825		(8	)
Miscellaneous		6,320		—		545		—		161		7,026		7,152		(126	)
Total	$	20,368	$	4,731	$	1,451	$	3,115	$	161	$	29,826	$	30,406	$	(580	)

The commercial mortgage-backed securities are all rated investment grade. The following table sets forth the fifteen largest commercial mortgage backed securities portfolio as of March 31, 2009:

										Average
	Issue		Fair		Book		Unrealized			Underlying			Delinq.			Subord.			S&P	Moody’s
Security Description	Date		Value		Value		Loss			LTV%			Rate			Level			Rating	Rating
	($ in thousands)
Wachovia Bank Commercial Mortgage 05 C18		2005	$	5,454	$	6,844	$	(1,390	)		72.1	%		0.8	%		31.2	%	AAA	Aaa
GS Mortgage Securities Corp II 05 GG4		2005		4,956		6,597		(1,641	)		72.0	%		0.2	%		30.6	%	AAA	Aaa
LB-UBS Mortgage Commercial Mortgage Trust 06 C6		2006		4,858		6,789		(1,931	)		63.6	%		0.9	%		30.2	%	AAA	Aaa
Four Times Square Trust 06 4TS		2006		4,756		7,030		(2,274	)		39.4	%		0.0	%		7.9	%	AA+	Aa1
Citigroup/Deutsche Bank Comm 05 CD1		2005		4,700		5,873		(1,173	)		68.4	%		0.9	%		30.6	%	AAA	Aaa
LB-UBS Mortgage Commercial Mortgage Trust 06 C7		2006		4,499		6,333		(1,834	)		63.8	%		1.2	%		30.1	%	AAA	N/A
Bear Stearns Commercial Mortgage 06 T22		2006		4,223		4,883		(660	)		57.4	%		0.0	%		27.9	%	N/A	Aaa
Bear Stearns Commercial Mortgage 07 PW15		2007		3,728		5,137		(1,409	)		67.6	%		0.1	%		30.2	%	AAA	Aaa
Banc of America Commercial Mortgage 07 1		2007		3,496		4,783		(1,287	)		70.1	%		1.0	%		30.4	%	N/A	Aaa
Morgan Stanley Capital I 07 HQ11		2007		3,327		4,791		(1,464	)		69.6	%		1.4	%		30.1	%	AAA	Aaa
Commercial Mortgage Pass Throu 05 C6		2005		3,129		4,054		(925	)		71.3	%		4.0	%		30.3	%	AAA	Aaa
Merrill Lynch Mortgage Trust 05 CIP1		2005		3,099		4,034		(935	)		68.8	%		1.0	%		30.8	%	N/A	Aaa
Morgan Stanley Capital I 04 T13		2004		2,655		3,324		(669	)		58.8	%		0.0	%		15.2	%	N/A	Aaa
Citigroup Cmmercial Mortgage 06 C5		2006		2,423		3,513		(1,090	)		68.6	%		1.6	%		30.2	%	N/A	Aaa
GE Capital Commercial Mortgage 02 1A		2002		2,417		2,504		(87	)		72.1	%		1.5	%		24.1	%	N/A	Aaa
Subtotal			$	57,720	$	76,489	$	(18,769	)
All Other				31,928		36,655		(4,727	)
Total			$	89,648	$	113,144	$	(23,496	)

59

The following table shows the amount and percentage of the Company’s fixed maturities and short-term investments at fair value at March 31, 2009 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	$	1,179,106		63	%
Very Strong	AA		360,571		19	%
Strong	A		236,168		13	%
Adequate	BBB		100,120		5	%
Speculative	BB & below		5,201		0	%
Not Rated	NR		1,883		0	%
Total		$	1,883,049		100	%

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 March 31, 2009, 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	$	319,932	$	8,953	$	(2,485	)	$	313,464
Mortgage- and asset-backed securities		8,484		4		(366	)		8,846
Corporate bonds		1,556		—		(57	)		1,613
Total	$	329,972	$	8,957	$	(2,908	)	$	323,923

										Average
			Gross		Gross			Cost or		Underlying
	Fair		Unrealized		Unrealized			Amortized		Credit
	Value		Gains		(Losses)			Cost		Rating
	($ in thousands)
Financial guarantors:
AMBAC	$	66,286	$	1,623	$	(672	)	$	65,335	A+
Assured Guaranty LTD		3,821		2		(93	)		3,912	A
FGIC		51,893		1,326		(495	)		51,062	AA-
Financial Security Assurance		91,036		3,163		(383	)		88,256	AA-
MBIA		104,560		2,621		(732	)		102,671	AA-
Radian Group, Inc.		5,170		55		(400	)		5,515	A
XL Capital		7,206		167		(133	)		7,172	A+
Total	$	329,972	$	8,957	$	(2,908	)	$	323,923	AA-

60

The average underlying credit rating of the insured securities in the above table 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. This average rating includes $11.5 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 30 credit enhanced securities approximating $21.5 million that do not have an underlying rating consisting of 17 municipal bonds approximating $11.8 million, 11 asset-backed securities approximating $8.5 million and 2 corporate bonds approximating $1.3 million.

If all or some of the companies providing the credit enhancing insurance were no longer viable entities, management believes that the 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 fair values would decrease to reflect such lower ratings.

61

The following table sets forth the fair value of the Company’s fifteen largest corporate bonds and their individual rating:

			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized		S&P
	Value		Gains		(Losses)			Cost		Rating
	($ in thousands)
Issuers:
Bank of America Corp.	$	6,774	$	—	$	(1,269	)	$	8,043	A-
Citigroup, Inc.		6,292		—		(1,081	)		7,373	BBB+
Wells Fargo & Co.		5,195		—		(385	)		5,580	A+
Morgan Stanley		4,679		—		(270	)		4,949	A-
Goldman Sachs Group		4,638		—		(782	)		5,420	A-
General Electric		4,459		—		(371	)		4,830	AA
Pfizer Inc.		3,387		191		—			3,196	AA
Eli Lilly & Co.		3,343		95		—			3,248	A+
Pepsi Bottling Group Inc.		3,268		155		—			3,113	A
Bank of New York		3,248		70		(19	)		3,197	A+
AT&T, Inc.		2,932		22		(172	)		3,082	A
Cargill, Inc.		2,778		—		(46	)		2,824	A
Verizon Communications Inc.		2,721		28		—			2,693	BBB
Conoco Phillips		2,645		113		—			2,532	A
Progress Energy, Inc.		2,529		25		—			2,504	BBB
Subtotal	$	58,888	$	699	$	(4,395	)	$	62,584
All Other		132,576		1,560		(11,522	)		142,538
Total	$	191,464	$	2,259	$	(15,917	)	$	205,122

Equity securities are impaired when the fair value is less than 80% of the cost for at least six months and in other cases where more severe declines occur for less than six months.

With respect to fixed maturity securities, 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. If warranted as the result of conditions relating to a particular security, we will focus on a significant decline in market value regardless of the time period involved. Factors considered in evaluating potential impairment include, but are not limited to, the current fair value as compared to cost 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 not to sell and more likely than not that we will not be required to sell before the anticipated recovery of its remaining amortized cost basis, 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 not to sell and it is more likely than not that we will not be required to sell before the anticipated recovery as part of the process of evaluating whether a security’s unrealized loss represents an other-than-temporary decline. The Company’s ability to hold such securities is supported by sufficient cash flow from its operations and from maturities within its investment portfolio in order to meet its claims payment and other disbursement obligations arising from its underwriting operations without selling such investments. With respect to securities where the decline in value is determined to be temporary and the security’s value is not written down, a subsequent decision may be made to sell that security and realize a loss. Subsequent decisions on security sales are made within the context of overall risk monitoring, changing information, 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.

62

The following table sets forth the fifteen largest equity securities holdings as of March 31, 2009:

			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		(Losses)			Cost
	($ in thousands)
Issuers:
Vanguard Total Stock Market Index	$	3,228	$	—	$	—		$	3,228
Vanguard Pacific Stock Index		2,818		—		—			2,818
Vanguard European Stock Index		2,446		—		—			2,446
Vanguard Emerging Market Stock Inde		2,388		8		—			2,380
Chevron Corp		1,822		176		—			1,646
Johnson & Johnson		1,683		—		(201	)		1,884
Barclays PLC		1,647		—		—			1,647
State Street Corp.		1,311		46		—			1,265
Bristol-Myers Squibb Co.		1,238		89		—			1,149
Altria Group		1,190		46		—			1,144
BP PLC		1,135		—		—			1,135
Nolia OYJ		1,126		—		—			1,126
ConocoPhillips		1,104		—		—			1,104
FPL Group Inc.		1,103		127		—			976
AT&T Inc.		1,093		13		—			1,080
Subtotal	$	25,332	$	505	$	(201	)	$	25,028
All Other		26,403		104		(982	)		27,281
Total	$	51,735	$	609	$	(1,183	)	$	52,309

63

The following table summarizes all securities in an unrealized loss position at March 31, 2009 and December 31, 2008, 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 on future income in the event management later concludes that such declines are considered other-than- temporary.

	March 31, 2009				December 31, 2008
	Fair		Gross		Fair		Gross
	Value		Unrealized Loss		Value		Unrealized Loss
	($ in thousands)
Fixed Maturities:
U.S. Government Treasury and Agency Bonds and foreign government bonds
0-6 Months	$	4,145	$	25	$	3,862	$	145
7-12 Months		—		—		—		—
> 12 Months		—		—		—		—
Subtotal		4,145		25		3,862		145
States, municipalities and political subdivisions
0-6 Months		47,983		704	��	68,727		2,187
7-12 Months		39,666		1,282		118,910		4,376
> 12 Months		42,095		2,244		15,918		1,473
Subtotal		129,744		4,230		203,555		8,036
Mortgage- and asset-backed securities
0-6 Months		4,623		40		30,670		939
7-12 Months		37,388		4,364		80,618		26,966
> 12 Months		107,162		43,252		66,218		20,879
Subtotal		149,173		47,656		177,506		48,784
Corporate bonds
0-6 Months		22,335		1,733		57,805		2,445
7-12 Months		51,700		4,569		57,971		5,893
> 12 Months		37,345		9,615		27,873		6,322
Subtotal		111,380		15,917		143,649		14,660
Total Fixed Maturities	$	394,442	$	67,828	$	528,572	$	71,625
Equity securities — common stocks
0-6 Months	$	6,934	$	1,175	$	8,991	$	1,941
7-12 Months		173		8		351		46
> 12 Months		—		—		—		—
Total Equity Securities	$	7,107	$	1,183	$	9,342	$	1,987

As of March 31, 2009, the largest single unrealized loss by issuer in the fixed maturities was $2.5 million and the largest single unrealized loss by issuer in the equity securities was $0.3 million.

64

The following table summarizes the gross unrealized investment losses by length of time where the fair value is less than 80% of amortized cost.

							6 months
				Longer than 3			or longer, less
	Less than 3			months, less			than 12			12 months
	months			than 6 months			months			or longer			Total
	($ in thousands)
Fixed Maturities	$	(282	)	$	(712	)	$	(4,008	)	$	(47,636	)	$	(52,638	)
Equity Securities		(622	)		—			—			—			(622	)
Total	$	(904	)	$	(712	)	$	(4,008	)	$	(47,636	)	$	(53,260	)

The table above includes fixed maturity securities with unrealized losses of $51.6 million where the fair value has been less than 80% of book value for at least six months. The fair value of these securities as of March 31, 2009 was $117.1 million. These losses consist mainly of non-agency mortgage backed securities, commerical mortgage backed securities and corporate bonds that have not been deemed to be other-than-temporary based on our evaluation of projected cash flows, credit enhancements, cumulative delinquencies and losses, rating agency assessments and other factors. Management believes these securities are trading at depressed levels due to illiquidity in the marketplace and other market based factors rather than the specific credit issues.

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 2009 first quarter, the Company identified 54 common stocks with a fair value of $35.8 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 realized losses of $8.3 million. During the 2009 first quarter, the Company identified two corporate bonds with a fair value of $0.8 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 realized losses of $0.6 million. The Company elected to take early adoption of the new FASB proposal, which considers relevant factors in determining the impairment of a structured security. When assessing whether the amortized cost basis of the security will be recovered, the Company compared the present value of cash flows expected to be collected. Any shortfalls of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered a credit loss. The Company recognized a credit loss of $1.8 million for 36 structured securities which was recognized in earnings. The Company does not intend to sell any of these structured securities and it is more likely than not that we will not be required to sell these securities before recovery of its amortized cost basis.

The following table sets forth the summary of the credit losses recognized on our available for sale debt securities at March 31, 2009:

	March 31, 2009
	($ in thousands)
Beginning Balance at January 1, 2009	$	—
Credit Losses on Securities not previously impaired		1,797
Ending balance at March 31,2009	$	1,797

65

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 March 31, 2009. 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	$	53,610		80	%	$	310,743		80	%
2	BBB	Baa		12,341		18	%		76,615		19	%
3	BB	Ba		1,246		2	%		4,332		1	%
4	B	B		426		—			708		—
5	CCC or lower	Caa or lower		68		—			161		—
6	N/A	N/A		137		—			1,883		—
	Total		$	67,828		100	%	$	394,442		100	%

At March 31, 2009, 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 $1.7 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.

The contractual maturity by the number of years until maturity for fixed maturity securities with unrealized losses at March 31, 2009 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	$	83		0	%	$	5,367		1	%
Due after one year through five years		5,902		9	%		82,747		21	%
Due after five years through ten years		7,726		11	%		68,939		17	%
Due after ten years		6,461		10	%		88,216		22	%
Mortgage- and asset-backed securities		47,656		70	%		149,173		39	%
Total fixed income securities	$	67,828		100	%	$	394,442		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 is estimated to have an effective maturity of approximately 2.8 years.

66

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

	Three Months Ended March 31,
	2009			2008
	($ in thousands)
Fixed maturities:
Gains	$	2,932		$	197
(Losses)		(3,302	)		(9	)
(Impairments)		(2,361	)		—
		(2,731	)		188
Equity securities:
Gains		13			263
(Losses)		(1,180	)		(527	)
(Impairments)		(8,339	)		—
		(9,506	)		(264	)
Net realized capital gains (losses)	$	(12,237	)	$	(76	)

The total impairment losses recorded in the 2009 first quarter period were $10.7 million.

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.

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 $95.8 million and $96.8 million of paid and unpaid losses at March 31, 2009 and December 31, 2008, respectively, were due from reinsurers as a result of the losses from Hurricanes Gustav and Ike. Approximately $94.5 million and $101.7 million of paid and unpaid losses at March 31, 2009 and December 31, 2008, 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.

67

Liquidity and Capital Resources

Cash flows from operations were $42.9 million and $59.7 million for the three months ended March 31, 2009 and 2008, 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 $33.7 million to $1.95 billion at March 31, 2009 from December 31, 2008. The increase was due to the positive cash flow from operations, partially offset by declines in market value.

Net investment income was $18.7 million and $18.8 million for the three months ended March 31, 2009 and 2008, respectively. The decline results from lower yields on our short-term balances.

At March 31, 2009, the weighted average rating of our fixed maturity investments was “AA” by S&P and “Aa” by Moody’s. The entire fixed maturity investment portfolio, except for $7.1 million, consists of investment grade bonds. At March 31, 2009, our portfolio had an average maturity of 5.6 years and duration of 4.3 years. Management periodically projects cash flow of the investment portfolio and other sources in order to maintain the appropriate levels of liquidity in an effort to ensure our ability to satisfy claims. As of March 31, 2009 and December 31, 2008, all fixed maturity securities and equity securities held by us were classified as available-for-sale.

The Company has a credit facility provided through a consortium of banks. Through March 31, 2009, the credit facility made available to the Company letters of credit up to $180 million and a line of credit of $20 million. At March 31, 2009, letters of credit with an aggregate face amount of $91.2 million were issued under the credit facility. The line of credit was unused at March 31, 2009. This credit facility expired on March 31, 2009.

On April 3, 2009, the Company entered into a $75 million credit facility agreement entitled “Fourth Amended and Restated Credit Agreement” with JPMorgan Chase Bank, N.A., as Administrative Agent, and a syndicate of lenders. As amended, the credit facility is a letter of credit facility and replaces the $200 million credit facility that expired by its terms on March 31, 2009. The credit facility will continue to be used primarily to support the Company’s capacity at its Lloyd’s of London operations. As a result of this amendment, the cost of the letter of credit portion of the credit facility increased to 2.00% from 0.75% for the issued letters of credit and to 0.375% from 0.10% for the unutilized portion of the letter of credit facility. The credit facility expires on April 2, 2010.

Each of the above mentioned credit facilities contain or contained customary covenants for facilities of this type, including restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of assets, and requirements as to maintaining certain consolidated tangible net worth, statutory surplus and other financial ratios. Each of the credit facilities also provides or provided for customary events of defaults, including failure to pay principal, interest or fees when due, failure to comply with covenants, any representation or warranty made by the Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting the Company and its subsidiaries, the occurrence of certain material judgments, or a change in control of the Company. The Company is or was in compliance with all the covenants of the applicable credit facility at the date of this filing and at March 31, 2009, respectively.

The credit facility is collateralized by all of the common stock of Navigators Insurance Company. The credit facility, which is denominated in U.S. dollars, is utilized primarily by Navigators Corporate Underwriters Ltd. and Millenium Underwriting Ltd. to fund our participation in Syndicate 1221, which is denominated in British pounds.

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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 March 31, 2009 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.

March 31, 2009, ceded asbestos paid and unpaid recoverables were $8.2 million compared to $8.9 million at December 31, 2008. Of such amounts at March 31, 2009, $4.5 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.

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 Gustav, Ike, 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.

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Our capital resources consist of funds deployed or available to be deployed to support our business operations. At March 31, 2009 and December 31, 2008, our capital resources were as follows:

		March 31,			December 31,
		2009			2008
		($ in thousands)
Senior debt		$	123,825		$	123,794
Stockholders’ equity			712,454			689,317
Total capitalization		$	836,279		$	813,111
	��
Ratio of debt to total capitalization			14.8	%		15.2	%

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.

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 and during 2008, the Parent Company purchased 224,754 shares of its common stock in the open market at an average cost of $51.34 per share for a total of $11.5 million. This program expired at December 31, 2008.

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 semi-annual interest payment will be $4.0 million when adjusting for the recent debt repurchase of $10.0 million in April 2009, the interest payments and any stock repurchases may be made from funds currently at the Parent Company or dividends from its subsidiaries. The dividends have historically been paid by Navigators Insurance Company. Based on the December 31, 2008 surplus of Navigators Insurance Company, the approximate remaining maximum amount available at March 31, 2009 for the payment of dividends by Navigators Insurance Company during 2008 without prior regulatory approval was $48.1 million. Navigators Insurance Company declared and paid a $10.0 million dividend to the Parent Company in the first quarter of 2009.

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Condensed Parent Company balance sheets as of March 31, 2009 (unaudited) and December 31, 2008 are shown in the table below:

	March 31,			December 31,
	2009			2008
	($ in thousands)
Cash and investments	$	80,257		$	52,149
Investments in subsidiaries		762,898			751,864
Goodwill and other intangible assets		2,534			2,534
Other assets		(5,269	)		8,769
Total assets	$	840,420		$	815,316
Accounts payable and other liabilities	$	495		$	747
Accrued interest payable		3,646			1,458
7% Senior Notes due May 1, 2016		123,825			123,794
Total liabilities		127,966			125,999
Stockholders’ equity		712,454			689,317
Total liabilities and stockholders’ equity	$	840,420		$	815,316

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 2008 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 first 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.

Part II — Other Information

Item 1.Legal Proceedings

The Company is working with various state insurance regulators on a matter involving policy fees charged by a program administrator on certain personal umbrella insurance policies underwritten by Navigators Insurance Company that were outside of Navigators Insurance Company’s filed rates. Following discovery of the issue, Navigators Insurance Company approached regulators in the affected states to resolve these matters, and is currently making refunds to policyholders for policy fees collected from the time of discovery of the issue that did not comply with Navigators Insurance Company’s filed rates. In addition, Navigators Insurance Company has terminated its relationship with the program administrator effective August 1, 2009 and has ensured that fees will not be collected on any policies going forward unless such fees are permitted by each state in which they are charged. Navigators Insurance Company may be subject to fines, additional refund obligations and other exposure with respect to the past fees charged. The Company cannot at this time reasonably estimate the cost of resolving this matter. However, we do not expect that it will have a material adverse effect on the Company’s financial condition or results of operations.

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The Company is not a party to, or the subject of, any other 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 2008 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. During 2008, the Parent Company purchased 224,754 shares of its common stock in the open market at an average cost of $51.34 per share for a total of $11.5 million. The program expired at December 31, 2008.

Item 3.Defaults Upon Senior Securities

None

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

None

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: May 1, 2009	/s/ Francis W. McDonnell
	Francis W. McDonnell
	Senior 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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