Edgar Filing: NAVIGATORS GROUP INC

10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the Quarterly Period Ended September 30, 2009


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

For the transition period from _____ to _____

Commission file number 0-15886

The Navigators Group, Inc.

(Exact name of Registrant as specified in its charter)


Delaware		13-3138397

(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

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. Yes þ No o

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). Yes o No o

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 filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o

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

The number of common shares outstanding as of October 27, 2009 was 16,985,629.

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

INDEX


	Page No.

Part I. FINANCIAL INFORMATION:

Item 1. Financial Statements

Consolidated Balance Sheets September 30, 2009 (Unaudited) and December 31, 2008		3

Consolidated Statements of Income (Unaudited) Three Months Ended September 30, 2009 and 2008 and Nine Months Ended September 30, 2009 and 2008		4

Consolidated Statements of Stockholders’ Equity (Unaudited) September 30, 2009 and 2008		5

Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended September 30, 2009 and 2008 and Nine Months Ended September 30, 2009 and 2008		6

Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 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		31

Item 3. Quantitative and Qualitative Disclosures About Market Risk		83

Item 4. Controls and Procedures		83

Part II. OTHER INFORMATION

Item 1. Legal Proceedings		83

Item 1A. Risk Factors		83

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		83

Item 3. Defaults Upon Senior Securities		84

Item 4. Submissions of Matters to a Vote of Security Holders		84

Item 5. Other Information		84

Item 6. Exhibits		84

Signature		85

Index of Exhibits		86

Exhibit 11.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Part I. Financial Information

Item 1. Financial Statements

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

($ in thousands, except share data)


	September 30,			December 31,
	2009			2008
	(Unaudited)
ASSETS
Investments and cash:
Fixed maturities, available-for-sale, at fair value (amortized cost: 2009, $1,823,107; 2008, $1,664,755)	$	1,877,786		$	1,643,772
Equity securities, available-for-sale, at fair value (cost: 2009, $45,178; 2008, $52,523)		57,949			51,802
Short-term investments, at cost which approximates fair value		136,935			220,684
Cash		21,692			1,457

Total investments and cash		2,094,362			1,917,715


Premiums receivable		189,378			170,522
Prepaid reinsurance premiums		163,248			188,874
Reinsurance recoverable on paid losses		93,287			67,227
Reinsurance recoverable on unpaid losses and loss adjustment expenses		818,397			853,793
Deferred income tax, net		25,233			54,736
Deferred policy acquisition costs		59,480			47,618
Accrued investment income		16,596			17,411
Goodwill and other intangible assets		7,010			6,622
Other assets		26,306			25,062


Total assets	$	3,493,297		$	3,349,580


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses	$	1,903,204		$	1,853,664
Unearned premiums		491,410			480,665
Reinsurance balances payable		111,494			140,319
Senior notes		113,979			123,794
Federal income taxes payable		6,563			5,874
Accounts payable and other liabilities		55,692			55,947

Total liabilities		2,682,342			2,660,263


Stockholders’ equity:
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued		—			—
Common stock, $.10 par value, authorized 50,000,000 shares, issued 17,197,419 shares as of September 2009 and 17,080,826 shares as of December 2008		1,720			1,708
Additional paid-in capital		304,000			298,872
Retained earnings		463,858			406,776
Treasury stock, at cost (224,754 shares for both 2009 and 2008)		(11,540	)		(11,540	)
Accumulated other comprehensive income (loss)		52,917			(6,499	)

Total stockholders’ equity		810,955			689,317


Total liabilities and stockholders’ equity	$	3,493,297		$	3,349,580

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

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

($ and shares in thousands, except net income per share)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
	(Unaudited)						(Unaudited)

Gross written premiums	$	245,191		$	252,943		$	793,179		$	819,302
Revenues:
Net written premiums	$	156,001		$	140,318		$	539,660		$	502,327
Decrease (increase) in unearned premiums		15,270			13,722			(33,575	)		(29,844	)

Net earned premiums		171,271			154,040			506,085			472,483
Commission income		144			8			179			736
Net investment income		19,110			19,322			56,509			56,891
Total other-than-temporary impairment losses		(22	)		(4,748	)		(28,769	)		(13,160	)
Portion of loss recognized in other comprehensive income (before tax)		(525	)		—			17,053			—

Net other-than-temporary impairment losses recognized in earnings		(547	)		(4,748	)		(11,716	)		(13,160	)
Net realized gains (losses)		6,682			(768	)		7,741			(408	)
Other income (expense)		1,097			(119	)		6,507			902

Total revenues		197,757			167,735			565,305			517,444


Expenses:
Net losses and loss adjustment expenses		107,591			113,269			308,566			293,578
Commission expenses		22,852			22,357			71,578			66,795
Other operating expenses		35,018			30,601			98,572			93,594
Interest expense		2,042			2,218			6,411			6,652

Total expenses		167,503			168,445			485,127			460,619


Income (loss) before income taxes		30,254			(710	)		80,178			56,825


Income tax expense (benefit)		8,822			(1,711	)		23,096			15,153


Net income	$	21,432		$	1,001		$	57,082		$	41,672


Net income per common share:
Basic	$	1.26		$	0.06		$	3.37		$	2.48
Diluted	$	1.24		$	0.06		$	3.30		$	2.45

Average common shares outstanding:
Basic		16,966			16,772			16,929			16,802
Diluted		17,334			16,927			17,277			16,980

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

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

($ in thousands)


	Nine Months Ended
	September 30,
	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		12			13

Balance at end of period	$	1,720		$	1,700


Additional paid-in capital
Balance at beginning of year	$	298,872		$	291,616
Shares issued under stock plans		5,128			4,861

Balance at end of period	$	304,000		$	296,477


Retained earnings
Balance at beginning of year	$	406,776		$	355,084
Net income		57,082			41,672

Balance at end of period	$	463,858		$	396,756


Treasury stock, at cost
Balance at beginning of year	$	(11,540	)	$	—
Treasury stock acquired		—			(11,540	)

Balance at end of period	$	(11,540	)	$	(11,540	)


Accumulated other comprehensive income (loss)
Net unrealized gains (losses) on investments, net of tax
Balance at beginning of year	$	(15,062	)	$	10,186
Change in period		52,037			(43,423	)

Balance at end of period		36,975			(33,237	)

Non-credit other-than-temporary impairment gains (losses), net of tax
Balance at beginning of year		—			—
Change in period		6,762			—

Balance at end of period		6,762			—

Cumulative translation adjustments, net of tax
Balance at beginning of year		8,563			3,533
Net adjustment for period		617			1,872

Balance at end of period		9,180			5,405

Balance at end of period	$	52,917		$	(27,832	)


Total stockholders’ equity at end of period	$	810,955		$	655,561

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

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ in thousands)


	Three Months Ended
	September 30,
	2009			2008
	(Unaudited)

Net income	$	21,432		$	1,001
Other comprehensive income (loss):
Change in net unrealized gains (losses) on investments, net of tax expense (benefit) of $20,627 and ($11,938) in 2009 and 2008, respectively⁽¹⁾		39,046			(23,025	)
Change in foreign currency translation (losses) gains, net of tax (benefit) expense of $884 and $958 in 2009 and 2008, respectively		1,641			1,779

Other comprehensive income (loss)		40,687			(21,246	)


Comprehensive income (loss)	$	62,119		$	(20,245	)


⁽¹⁾ Disclosure of reclassification amount, net of tax:
Unrealized gains (losses) on investments arising during period	$	43,064		$	(26,609	)
Less: reclassification adjustment for net realized gains (losses) included in net income		4,370			(3,584	)
reclassification adjustment for other-than-temporary impairment losses recognized in net income		(352	)		—

Change in net unrealized gains (losses) on investments	$	39,046		$	(23,025	)


	Nine Months Ended
	September 30,
	2009			2008
	(Unaudited)
Net income	$	57,082		$	41,672
Other comprehensive income (loss):
Change in net unrealized gains (losses) on investments, net of tax expense (benefit) of $30,356 and $(22,680) in 2009 and 2008, respectively⁽²⁾		58,799			(43,423	)
Change in foreign currency translation (losses) gains, net of tax (benefit) expense of $332 and $1,008 in 2009 and 2008, respectively		617			1,872

Other comprehensive income (loss)		59,416			(41,551	)


Comprehensive income	$	116,498		$	121


⁽²⁾ Disclosure of reclassification amount, net of tax:
Unrealized gains (losses) on investments arising during period	$	56,006		$	(52,242	)
Less: reclassification adjustment for net realized gains (losses) included in net income		4,933			(8,819	)
reclassification adjustment for other-than-temporary impairment losses recognized in net income		(7,726	)		—

Change in net unrealized gains (losses) on investments	$	58,799		$	(43,423	)

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

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)


	Nine Months Ended
	September 30,
	2009			2008
	(Unaudited)
Operating activities:
Net income	$	57,082		$	41,672
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation & amortization		3,418			3,667
Deferred income taxes		(1,233	)		(9,378	)
Net realized losses		3,975			13,568
Changes in assets and liabilities:
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses		14,509			(35,844	)
Reserves for losses and loss adjustment expenses		38,144			211,119
Prepaid reinsurance premiums		26,787			(1,732	)
Unearned premiums		7,394			31,400
Premiums receivable		(16,406	)		(12,132	)
Commissions receivable		189			2,221
Deferred policy acquisition costs		(11,293	)		(720	)
Accrued investment income		832			(1,570	)
Reinsurance balances payable		(29,870	)		(11,266	)
Federal income taxes		(235	)		(2,122	)
Other		11,879			(12,518	)

Net cash provided by operating activities		105,172			216,365


Investing activities:
Fixed maturities, available-for-sale
Redemptions and maturities		106,210			104,863
Sales		295,524			133,752
Purchases		(565,886	)		(398,972	)
Equity securities, available-for-sale
Sales		17,202			18,514
Purchases		(18,544	)		(38,556	)
Change in payable for securities		(544	)		2,643
Net change in short-term investments		88,215			(10,301	)
Purchase of property and equipment		(1,782	)		(2,900	)

Net cash used in investing activities		(79,605	)		(190,957	)


Financing activities:
Purchase of treasury stock		—			(11,540	)
Principal paydown of Senior notes		(7,000	)		—
Proceeds of stock issued from employee stock purchase plan		727			962
Proceeds of stock issued from exercise of stock options		941			1,412

Net cash used in financing activities		(5,332	)		(9,166	)


Increase in cash		20,235			16,242
Cash at beginning of year		1,457			7,056

Cash at end of period	$	21,692		$	23,298


Supplemental cash information:
Income taxes paid	$	23,906		$	23,985
Interest paid		4,330			4,375
Issuance of stock to directors		210			200

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

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 fairly present the results of The Navigators Group, Inc. and its subsidiaries for the interim periods presented on the basis of United States generally accepted accounting principles (“GAAP” or “U.S. GAAP”). All such adjustments are of a normal recurring nature. All significant intercompany transactions and balances have been eliminated. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods. The results of operations for any interim period are not necessarily indicative of results for the full year. The 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. The Company evaluated subsequent events through November 6, 2009, which is the date the financial statements were issued, and no significant subsequent events were identified.

Note 2. Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. (“SFAS”) 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162. The FASB Accounting Standards Codification (“ASC” or “Codification”) is the single source of authoritative GAAP to be applied by nongovernmental entities. The Codification is not intended to change GAAP but rather reorganize divergent accounting literature into an accessible and user-friendly system. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted this guidance as of the third quarter of 2009. Adoption of this guidance did not have a material effect on the Company’s consolidated financial condition, results of operations or cash flows. Technical references to GAAP included in these Notes to Interim Consolidated Financial Statements are provided under the Codification structure.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which is now part of ASC 855, Subsequent Events. This guidance establishes general standards for the disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance sets forth: 1) The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; 2) The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in the financial statements; and 3) The disclosures that an entity should make about events that occurred after the balance sheet date. This guidance is effective for interim and annual financial periods ending after September 15, 2009. The Company adopted this guidance in the third quarter of 2009. Adoption of this guidance did not have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.

In April 2009, the FASB issued FASB Staff Position No. (“FSP”) 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, which is now part of ASC 820-10-65, Fair Value Measurements and Disclosures. This guidance provides additional guidance for estimating fair value when the volume and level of activity of the asset or liability have significantly decreased and on identifying circumstances that indicate a transaction is not orderly. This guidance is effective for interim and annual reporting periods ending after September 15, 2009, and shall be applied prospectively. Early adoption was permitted for periods ending after March 15, 2009. The Company elected to early adopt this guidance in the first quarter of 2009. Adoption of this guidance did not have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which is now part of ASC 320-10-65, Investments. This guidance 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. This guidance is effective for interim and annual reporting periods ending after September 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company elected to early adopt this guidance in the first quarter of 2009. Adoption of this guidance did not have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.

In April 2009, the FASB issued FSP FAS 107-1 and ABP 28-1, Interim Disclosures about Fair Value of Financial Instruments, which is now part of ASC 825-10-65, Financial Instruments. This guidance requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance is effective for interim reporting periods ending after September 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company elected to early adopt this guidance in the first quarter of 2009. Adoption of this guidance did not have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.

In April 2008, the FASB issued FSP 142-3, Determining the Useful Life of Intangible Assets, which is now part of ASC 350-30-55, Intangibles — Goodwill and Other. This guidance amends the factors to be considered in determining the useful life of intangible assets. Its intent is to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure such asset’s fair value. This guidance is effective for fiscal years beginning after December 15, 2008. The Company adopted this guidance in the first quarter of 2009. Adoption of this guidance did not have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, which is now part of ASC 815, Derivatives and Hedging. This guidance requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. The Company adopted this guidance in the first quarter of 2009. Adoption of this guidance did not have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, which is now part of ASC 805, Business Combinations. This guidance amends the recognition provisions for assets and liabilities acquired in a business combination, including those arising from contractual and non-contractual contingencies. In addition, this guidance also amends the recognition criteria for contingent consideration. This guidance became effective as of January 1, 2009. The Company adopted this guidance in the first quarter of 2009. Adoption of this guidance did not have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.

Recent Accounting Developments

In September 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, “Measuring Liabilities at Fair Value,” which amends the guidance within ASC 820, “Fair Value Measurements and Disclosures.” This guidance provides clarification on the measurement of liabilities when a quoted price in an active market for an identical liability is not available. In addition, the guidance clarifies that the existence of a restriction preventing the transfer of the liability should not be included as a separate input or adjustment to adjustment to other inputs when determining the fair value of a liability. Finally, the guidance clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when trader as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. This guidance is effective for interim and annual periods beginning after August 27, 2009. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial condition, results of operations and cash flows.

In June 2009 the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS 167”). This guidance addresses the effects of eliminating the QSPE concept from existing GAAP and clarifies and amends certain key provisions of consolidation guidance, including the transparency of an enterprise’s involvement with variable interest entities (“VIEs”). This guidance implements the requirement to perform a qualitative rather than a quantitative analysis to determine the primary beneficiary of a VIE, the requirement of continuous assessments as to whether an enterprise is the primary beneficiary of a VIE, amendments to certain guidance in FIN 46(R) related to the determination as to which entities are deemed VIEs, and the amendment of consideration of related party relationships in the determination of the primary beneficiary of a VIE. In addition, this guidance also requires enhanced disclosures to provide more transparent information regarding an enterprise’s involvement with a VIE. This guidance is effective as of January 1, 2010 for calendar year reporting entities and early adoption is not permitted. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial condition, results of operations and cash flows.

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140 (“SFAS 166”). This guidance removes the concept of a qualifying special-purpose entity (“QSPE”) from existing GAAP as well as the removal of the exception from applying ASC 810-10, Consolidation, to QSPEs. This guidance also clarifies the unit of account eligible for sale accounting and requires that a transferor recognize and initially measure at fair value, all financial assets obtained and liabilities incurred as a result of a transfer of an entire financial asset (or group of entire financial assets) accounted for as a sale. Finally, this guidance requires enhanced disclosures to provide greater transparency about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. This guidance is effective as of January 1, 2010 for calendar year reporting entities and early adoption is not permitted. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial condition, results of operations and cash flows.

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

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

The Insurance Companies consist of Navigators Insurance Company, including its branch located in the United Kingdom (the “U.K. Branch”), and its wholly-owned subsidiary, Navigators Specialty Insurance Company. 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. Navigators Specialty Insurance Company is 100% 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 includes Navigators Underwriting Agency Ltd. (“NUAL”), a Lloyd’s underwriting agency which manages Syndicate 1221. We utilize 100% of the stamp 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).

Navigators Management Company, Inc. (“NMC”) is a wholly-owned underwriting management company which produces, manages and underwrites insurance and reinsurance, and provides corporate services for the Company. During the second quarter of 2008, Navigators California Insurance Services, Inc. and Navigators Special Risk, Inc., also wholly-owned underwriting management companies, were merged into NMC. The operating results for the underwriting management companies are allocated to both the Insurance Companies and Lloyd’s Operations.

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

Effective in 2009, the Company has reclassified certain of its business lines which had no effect on the segment classifications of the Insurance Companies and Lloyd’s Operations. Underwriting data for prior periods has been reclassified to reflect these changes.

•

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

•

The marine lines within both the Insurance Companies and Lloyd’s Operations are now presented as “Marine” instead of “Marine and Energy”, since the offshore 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 Operations, 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.

Financial data by segment for the three and nine months ended September 30, 2009 and 2008 follows:


	Three Months Ended September 30, 2009
	Insurance			Lloyd's
	Companies			Operations			Corporate			Total
	($ in thousands)

Gross written premiums	$	180,000		$	65,191		$	—		$	245,191
Net written premiums		116,033			39,968			—			156,001

Net earned premiums		122,804			48,467			—			171,271
Net losses and LAE		(75,838	)		(31,753	)		—			(107,591	)
Commission expenses		(15,346	)		(7,835	)		329			(22,852	)
Other operating expenses		(27,194	)		(7,835	)		—			(35,029	)
Commission income and other income (expense)		1,301			280			(329	)		1,252


Underwriting profit (loss)		5,727			1,324			—			7,051

Net investment income		16,597			2,361			152			19,110
Net realized gains (losses)		5,710			425			—			6,135
Other operating expenses		—			—			11			11
Commission income and other income (expense)		—			—			(11	)		(11	)
Interest expense		—			—			(2,042	)		(2,042	)

Income (loss) before income taxes		28,034			4,110			(1,890	)		30,254

Income tax expense (benefit)		7,973			1,510			(661	)		8,822

Net income (loss)	$	20,061		$	2,600		$	(1,229	)	$	21,432


Identifiable assets ⁽¹⁾	$	2,566,163		$	821,743		$	87,061		$	3,493,297


Loss and LAE ratio		61.8	%		65.5	%					62.8	%
Commission expense ratio		12.5	%		16.2	%					13.3	%
Other operating expense ratio ⁽²⁾		21.1	%		15.6	%					19.8	%

Combined ratio		95.4	%		97.3	%					95.9	%


⁽¹⁾		Includes inter-segment transactions causing the row not to cross foot.

⁽²⁾		Includes Other operating expenses and Commission income and other income (expense).


	Three Months Ended September 30, 2009
	Insurance		Lloyd's
	Companies		Operations		Total
	($ in thousands)

Gross written premiums:
Marine	$	53,129	$	33,960	$	87,089
Property Casualty		93,302		20,024		113,326
Professional Liability		33,569		11,207		44,776

Total	$	180,000	$	65,191	$	245,191


Net written premiums:
Marine	$	39,632	$	23,816	$	63,448
Property Casualty		57,567		11,116		68,683
Professional Liability		18,834		5,036		23,870

Total	$	116,033	$	39,968	$	156,001


Net earned premiums:
Marine	$	42,620	$	33,945	$	76,565
Property Casualty		60,380		9,126		69,506
Professional Liability		19,804		5,396		25,200

Total	$	122,804	$	48,467	$	171,271


	Three Months Ended September 30, 2008
	Insurance			Lloyd's
	Companies			Operations			Corporate			Total
	($ in thousands)

Gross written premiums	$	182,133		$	70,810		$	—		$	252,943
Net written premiums		106,133			34,185			—			140,318

Net earned premiums		112,447			41,593			—			154,040
Net losses and LAE		(78,346	)		(34,923	)		—			(113,269	)
Commission expenses		(13,823	)		(8,534	)		—			(22,357	)
Other operating expenses		(22,802	)		(7,799	)		—			(30,601	)
Commission income and other income (expense)		279			(390	)		—			(111	)


Underwriting profit (loss)		(2,245	)		(10,053	)		—			(12,298	)

Net investment income		15,973			3,074			275			19,322
Net realized gains (losses)		(5,207	)		(309	)		—			(5,516	)
Interest expense		—			—			(2,218	)		(2,218	)

Income (loss) before income taxes		8,521			(7,288	)		(1,943	)		(710	)

Income tax expense (benefit)		1,458			(2,489	)		(680	)		(1,711	)

Net income (loss)	$	7,063		$	(4,799	)	$	(1,263	)	$	1,001


Identifiable assets ⁽¹⁾	$	2,437,909		$	808,768		$	71,608		$	3,340,584


Loss and LAE ratio		69.7	%		84.0	%					73.5	%
Commission expense ratio		12.3	%		20.5	%					14.5	%
Other operating expense ratio ⁽²⁾		20.0	%		19.7	%					19.9	%

Combined ratio		102.0	%		124.2	%					107.9	%


⁽¹⁾		Includes inter-segment transactions causing the row not to cross foot.

⁽²⁾		Includes Other operating expenses and Commission income and other income (expense).


	Three Months Ended September 30, 2008
	Insurance		Lloyd's
	Companies		Operations		Total
	($ in thousands)

Gross written premiums:
Marine	$	53,247	$	34,917	$	88,164
Property Casualty		103,180		25,586		128,766
Professional Liability		25,706		10,307		36,013

Total	$	182,133	$	70,810	$	252,943


Net written premiums:
Marine	$	29,983	$	22,448	$	52,431
Property Casualty		61,131		5,682		66,813
Professional Liability		15,019		6,055		21,074

Total	$	106,133	$	34,185	$	140,318


Net earned premiums:
Marine	$	34,091	$	31,132	$	65,223
Property Casualty		63,740		5,350		69,090
Professional Liability		14,616		5,111		19,727

Total	$	112,447	$	41,593	$	154,040


	Nine Months Ended September 30, 2009
	Insurance			Lloyd's
	Companies			Operations			Corporate			Total
	($ in thousands)

Gross written premiums	$	561,368		$	231,811		$	—		$	793,179
Net written premiums		375,474			164,186			—			539,660

Net earned premiums		359,317			146,768			—			506,085
Net losses and LAE		(214,834	)		(93,732	)		—			(308,566	)
Commission expenses		(45,374	)		(26,533	)		329			(71,578	)
Other operating expenses		(78,660	)		(19,933	)		—			(98,593	)
Commission income and other income (expense)		3,157			879			(329	)		3,707


Underwriting profit		23,606			7,449			—			31,055

Net investment income		49,043			7,060			406			56,509
Net realized gains (losses)		(987	)		(2,988	)		—			(3,975	)
Other operating expenses		—			—			21			21
Commission income and other income (expense)		—			—			2,979			2,979
Interest expense		—			—			(6,411	)		(6,411	)

Income (loss) before income taxes		71,662			11,521			(3,005	)		80,178

Income tax expense (benefit)		19,677			4,470			(1,051	)		23,096

Net income (loss)	$	51,985		$	7,051		$	(1,954	)	$	57,082


Identifiable assets ⁽¹⁾	$	2,566,163		$	821,743		$	87,061		$	3,493,297


Loss and LAE ratio		59.8	%		63.9	%					61.0	%
Commission expense ratio		12.6	%		18.1	%					14.1	%
Other operating expense ratio ⁽²⁾		21.0	%		13.0	%					18.8	%

Combined ratio		93.4	%		95.0	%					93.9	%


⁽¹⁾		Includes inter-segment transactions causing the row not to cross foot.

⁽²⁾		Includes Other operating expenses and Commission income and other income (expense).


	Nine Months Ended September 30, 2009
	Insurance		Lloyd's
	Companies		Operations		Total
	($ in thousands)

Gross written premiums:
Marine	$	187,452	$	140,256	$	327,708
Property Casualty		272,127		59,058		331,185
Professional Liability		101,789		32,497		134,286

Total	$	561,368	$	231,811	$	793,179


Net written premiums:
Marine	$	133,047	$	113,867	$	246,914
Property Casualty		183,247		33,781		217,028
Professional Liability		59,180		16,538		75,718

Total	$	375,474	$	164,186	$	539,660


Net earned premiums:
Marine	$	114,459	$	102,158	$	216,617
Property Casualty		188,860		28,250		217,110
Professional Liability		55,998		16,360		72,358

Total	$	359,317	$	146,768	$	506,085


	Nine Months Ended September 30, 2008
	Insurance			Lloyd's
	Companies			Operations			Corporate			Total
	($ in thousands)

Gross written premiums	$	571,685		$	247,617		$	—		$	819,302
Net written premiums		358,625			143,702			—			502,327

Net earned premiums		342,127			130,356			—			472,483
Net losses and LAE		(207,927	)		(85,651	)		—			(293,578	)
Commission expenses		(41,494	)		(25,301	)		—			(66,795	)
Other operating expenses		(69,502	)		(24,092	)		—			(93,594	)
Commission income and other income (expense)		2,053			(415	)		—			1,638


Underwriting profit (loss)		25,257			(5,103	)		—			20,154

Net investment income		47,031			8,927			933			56,891
Net realized gains (losses)		(13,362	)		(206	)		—			(13,568	)
Interest expense		—			—			(6,652	)		(6,652	)

Income (loss) before income taxes		58,926			3,618			(5,719	)		56,825

Income tax expense (benefit)		15,767			1,388			(2,002	)		15,153

Net income (loss)	$	43,159		$	2,230		$	(3,717	)	$	41,672


Identifiable assets ⁽¹⁾	$	2,437,909		$	808,768		$	71,608		$	3,340,584


Loss and LAE ratio		60.8	%		65.7	%					62.1	%
Commission expense ratio		12.1	%		19.4	%					14.1	%
Other operating expense ratio ⁽²⁾		19.7	%		18.8	%					19.5	%

Combined ratio		92.6	%		103.9	%					95.7	%


⁽¹⁾		Includes inter-segment transactions causing the row not to cross foot.

⁽²⁾		Includes Other operating expenses and Commission income and other income (expense).


	Nine Months Ended September 30, 2008
	Insurance		Lloyd's
	Companies		Operations		Total
	($ in thousands)

Gross written premiums:
Marine & Energy	$	189,202	$	143,570	$	332,772
Property Casualty		311,053		74,671		385,724
Professional Liability		71,430		29,376		100,806

Total	$	571,685	$	247,617	$	819,302


Net written premiums:
Marine & Energy	$	112,439	$	99,627	$	212,066
Property Casualty		203,528		26,147		229,675
Professional Liability		42,658		17,928		60,586

Total	$	358,625	$	143,702	$	502,327


Net earned premiums:
Marine & Energy	$	93,655	$	91,253	$	184,908
Property Casualty		205,395		22,892		228,287
Professional Liability		43,077		16,211		59,288

Total	$	342,127	$	130,356	$	472,483

The Insurance Companies’ net earned premiums includes $22.3 million and $14.2 million of net earned premiums from the U.K. Branch for the three months ended September 30, 2009 and 2008, respectively, and $62.5 million and $45.3 million of net earned premiums from the U.K. Branch for the nine months ended September 30, 2009 and 2008, respectively.

Note 4. Reinsurance Ceded

The Company’s ceded earned premiums were $92.3 million and $116.3 million for the three months ended September 30, 2009 and 2008, respectively, and were $280.6 million and $315.4 million for the nine months ended September 30, 2009 and 2008, respectively. The Company’s ceded incurred losses were $31.1 million and $145.7 million for the three months ended September 30, 2009 and 2008, respectively, and were $167.6 million and $227.6 million for the nine months ended September 30, 2009 and 2008, respectively.

The following table lists our 20 largest reinsurers measured by the amount of reinsurance recoverable for ceded paid and unpaid losses and loss adjustment expense and ceded unearned premium, together with the collateral held by us at September 30, 2009, and the reinsurers’ financial strength rating from the indicated rating agency:


	Reinsurance Recoverables
	Unearned		Unpaid/Paid				Collateral⁽¹⁾		Rating &
Reinsurer	Premium		Losses		Total		Held		Rating Agency
			($ in millions)

Swiss Reinsurance America Corporation	$	9.8	$	107.2	$	117.0	$	8.8	A	AMB ⁽²⁾
White Mountains Reinsurance of America		2.1		91.4		93.5		13.1	A-	AMB
General Reinsurance Corporation		1.6		62.9		64.5		1.1	A++	AMB
Transatlantic Reinsurance Company		21.2		42.1		63.3		9.1	A	AMB
Everest Reinsurance Company		19.0		39.7		58.7		6.8	A+	AMB
Munich Reinsurance America Inc.		21.0		34.1		55.1		13.5	A+	AMB
Munchener Ruckversicherungs-Gesellschaft		5.8		38.0		43.8		10.6	A+	AMB
National Indemnity Company		7.3		27.6		34.9		2.8	A++	AMB
Platinum Underwriters Re		5.0		29.1		34.1		2.2	A	AMB
Swiss Re International SE		1.6		26.2		27.8		6.5	A	AMB
Berkley Insurance Company		9.4		15.5		24.9		2.5	A+	AMB
Scor Holding (Switzerland) AG		6.4		18.2		24.6		7.0	A-	AMB
Lloyd’s Syndicate #2003		3.9		18.4		22.3		2.9	A	AMB
Partner Reinsurance Europe		3.2		17.8		21.0		8.7	AA-	S&P
Allianz Global Corporate & Specialty AG		0.3		18.4		18.7		1.4	A+	AMB
Federal Insurance Co.		0.7		17.5		18.2		1.1	A++	AMB
Arch Reinsurance Company		0.9		17.3		18.2		0.1	A	AMB
Ace Property and Casualty Insurance Company		2.8		14.1		16.9		1.4	A+	AMB
Partner Reinsurance Company of the U.S.		1.1		15.1		16.2		—	A+	AMB
Hannover Ruckversicherung		1.4		13.2		14.6		1.9	A	AMB

Top 20 Total		124.5		663.8		788.3		101.5
All Other		38.7		247.9		286.6		91.6

Total	$	163.2	$	911.7	$	1,074.9	$	193.1


⁽¹⁾		Collateral includes letters of credit, ceded balances payable and other balances held by our Insurance Companies and our Lloyd’s Operations.

⁽²⁾		A.M. Best

Note 5. Stock-Based Compensation

Stock-based compensation granted under the Company’s stock plans is expensed as stock awards vest, with the expense being included in Other operating expenses for the periods indicated. The amounts charged to expense for stock-based compensation were $3.0 million and $2.3 million for the three months ended September 30, 2009 and 2008, respectively, and $6.6 million and $6.7 million for the nine months ended September 30, 2009 and 2008, respectively.

The Company expensed $64,000 and $62,000 for the three months ended September 30, 2009 and 2008, respectively, and $132,000 and $155,000 for the nine months ended September 30, 2009 and 2008, respectively, related to its Employee Stock Purchase Plan. In addition, $30,000 and $50,000 were expensed for the three months ended September 30, 2009 and 2008, respectively, and $135,000 and $150,000 were expensed for the nine months ended September 30, 2009 and 2008, respectively, related to stock compensation to non-employee directors as part of their directors’ compensation for serving on the Parent Company’s Board of Directors.

Note 6. Syndicate 1221

Our Lloyd’s Operations included in the consolidated financial statements represents our participation in Syndicate 1221. Syndicate 1221’s stamp capacity is £123.0 million ($201.8 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 premiums a Lloyd’s syndicate is authorized to write based on a business plan approved by the Council of Lloyd’s. Syndicate 1221’s stamp capacity is expressed net of commission (as is standard at Lloyd’s). The Syndicate 1221 premiums recorded in the Company’s financial statements are gross of commission. Navigators utilized 100% of Syndicate 1221’s stamp capacity for the 2009 and 2008 underwriting years through Navigators Corporate Underwriters Ltd. and through both Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. in 2007.

The Company provides letters of credit and posts cash to Lloyd’s to support its utilization of Syndicate 1221’s stamp capacity. If Syndicate 1221 increases its stamp capacity and the Company utilizes the additional stamp capacity, or if Lloyd’s changes the capital requirements, the Company may be required to supply additional collateral acceptable to Lloyd’s. If the Company is unwilling or unable to provide additional acceptable collateral, we will be required to reduce our utilization of the stamp capacity of Syndicate 1221. The letters of credit are provided through a credit facility with a consortium of banks that expires on April 2, 2010. If the consortium of banks decides not to renew the credit facility, the Company will need to find internal and/or external sources to provide either letters of credit or other collateral in order to continue to participate in Syndicate 1221. The credit facility is collateralized by all of the common stock of Navigators Insurance Company.

Note 7. Income Taxes

We are subject to the tax laws and regulations of the United States (“U.S.”) and foreign countries in which we operate. The Company files a consolidated U.S. federal tax return, which includes all domestic subsidiaries and the U.K. Branch. The income from the foreign operations is designated as either U.S. connected income or non-U.S. connected income. Lloyd’s is required to pay U.S. income tax on U.S. connected income written by Lloyd’s syndicates. Lloyd’s and the 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 Internal Revenue Service (“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 premiums are derived within the U.K. and would therefore be subject to U.S. taxation when the Lloyd’s year of account closes. Taxes are accrued at a 35% rate on 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 includable as Subpart F income in the current year. 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 September 30, 2009 or September 30, 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 2006 and subsequent. The Company’s policy is to record interest and penalties related to unrecognized tax benefits to income tax expense. The Company did not incur any interest or penalties related to unrecognized tax benefits for the three or nine months ended September 30, 2009 and 2008.

The Company recorded an income tax expense of $8.8 million for the 2009 third quarter compared to an income tax benefit of $1.7 million for the 2008 third quarter, resulting in effective tax rates of 29.2% and 240.7%, respectively. The Company’s effective tax rate is typically less than 35% due to permanent differences between book and tax return income, with the most significant item being tax exempt interest. The unusual effective tax rate in the 2008 third quarter resulted from a small pretax loss and a larger taxable loss resulting primarily from tax-exempt investment income. The effective tax rate on net investment income was 25.2% for the 2009 three month period compared to 25.7% for the same period in 2008. As of September 30, 2009 and December 31, 2008, the net deferred federal, foreign, state and local tax assets were $25.2 million and $54.7 million, respectively.

The Company had state and local deferred tax assets amounting to potential future tax benefits of $3.5 million and $6.2 million at September 30, 2009 and December 31, 2008, respectively. Included in the deferred tax assets are state and local net operating loss carryforwards of $1.6 million and $0.5 million at September 30, 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 September 30, 2009 expire in 2029.

Note 8. Senior Notes due May 1, 2016

On April 17, 2006, the Company completed a public debt offering of $125 million principal amount of 7% senior 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 $2.0 million and $2.2 million, respectively, for the three months ended September 30, 2009 and 2008, and $6.4 million for the nine months ended September 30, 2009 and $6.7 million for the nine months ended September 30, 2008. The fair value of the Senior Notes, based on quoted market prices, was $110.3 million and $83.6 million at September 30, 2009 and December 31, 2008, respectively.

The Company may redeem the Senior Notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price. The terms of the Senior Notes contain various restrictive business and financial covenants typical for debt obligations of this type, including limitations on mergers, liens and dispositions of the common stock of certain subsidiaries. As of September 30, 2009, the Company was in compliance with all such covenants.

In April 2009, the Company repurchased $10.0 million aggregate principal amount of the Senior Notes from an unaffiliated noteholder on the open market for $7.0 million, which generated a $2.9 million pretax gain that is reflected in Other income. As a result of this transaction, $115.0 million aggregate principal amount of the Senior Notes remains issued and outstanding.

Note 9. Commitments and Contingencies

The Company is working with various state insurance regulators on a matter involving administrative 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 and forms. 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’ 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. Other operating expenses for the second quarter 2009 include a $1.3 million charge related to this matter. Navigators Insurance Company may be subject to additional fines, refund obligations and other exposure with respect to the past fees charged. The Company cannot at this time reasonably estimate the additional 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.

The Company is subject to litigation and arbitration in the normal course of its business. These lawsuits and arbitrations principally involve, directly or indirectly, claims on policies of insurance and contracts of reinsurance and are typical for the Company and for the property and casualty insurance industry in general. Such legal proceedings are considered in connection with the Company’s loss and loss expense reserves. Reserves in varying amounts may or may not be established in respect of particular claims proceedings based on many factors, including the legal merits thereof. The Company believes that the expected ultimate outcome of all outstanding litigation and arbitration will not have a material adverse effect on its consolidated financial condition, operating results and/or liquidity, although an adverse resolution of one or more of these items could have a material adverse effect on the Company’s results of operations in a particular fiscal quarter or year.

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.

Note 10. Investments

The following tables set forth our cash and investments as of September 30, 2009. The table below includes other-than-temporarily impaired (“OTTI”) securities recognized within other comprehensive income (“OCI”).


			Gross		Gross			Cost or		OTTI
	Fair		Unrealized		Unrealized			Amortized		Recognized
September 30, 2009	Value		Gains		(Losses)			Cost		in OCI
			($ in thousands)

Fixed maturities:
U.S. Government Treasury bonds, agency bonds and foreign government bonds	$	514,158	$	10,855	$	(54	)	$	503,357	$	—
States, municipalities and political subdivisions		679,417		37,072		(570	)		642,915		—
Mortgage- and asset-backed securities
Mortgage-backed securities		308,515		15,142		(10	)		293,383		—
Collateralized mortgage obligations		46,126		—		(12,120	)		58,246		(9,818	)
Asset-backed securities		20,088		793		(119	)		19,414		(48	)
Commercial mortgage-backed securities		106,459		584		(6,458	)		112,333		—

Subtotal		481,188		16,519		(18,707	)		483,376		(9,866	)
Corporate bonds		203,023		10,166		(602	)		193,459		—


Total fixed maturities		1,877,786		74,612		(19,933	)		1,823,107		(9,866	)


Equity securities — common stocks		57,949		12,843		(72	)		45,178		—

Cash		21,692		—		—			21,692		—

Short-term investments		136,935		—		—			136,935		—


Total	$	2,094,362	$	87,455	$	(20,005	)	$	2,026,912	$	(9,866	)

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

The scheduled maturity dates for fixed maturity securities by the number of years until maturity at September 30, 2009 are shown in the following table:


Period from			Cost or
September 30, 2009	Fair		Amortized
to Maturity	Value		Cost
	($ in thousands)

Due in one year or less	$	4,316	$	4,313
Due after one year through five years		694,349		673,116
Due after five years through ten years		377,737		357,728
Due after ten years		320,196		304,574
Mortgage- and asset-backed		481,188		483,376


Total	$	1,877,786	$	1,823,107

The following table summarizes all securities in a gross unrealized loss position at September 30, 2009 showing the aggregate fair value and gross unrealized loss by the length of time those securities have continuously been in a gross unrealized loss position.


	September 30, 2009				December 31, 2008
	Fair		Gross		Fair		Gross
	Value		Unrealized Loss		Value		Unrealized
	($ in thousands)

Fixed Maturities:
U.S. Government Treasury bonds, agency bonds and foreign government bonds
0-6 Months	$	8,367	$	54	$	3,862	$	145
7-12 Months		—		—		—		—
> 12 Months		—		—		—		—

Subtotal		8,367		54		3,862		145


States, municipalities and political subdivisions
0-6 Months		5,962		17		68,727		2,187
7-12 Months		5,150		103		118,910		4,376
> 12 Months		20,406		450		15,918		1,473

Subtotal		31,518		570		203,555		8,036


Mortgage-backed securities
0-6 Months		9,517		10		2,130		6
7-12 Months		—		—		3,471		9
> 12 Months		—		—		962		11

Subtotal		9,517		10		6,563		26


Collateralized mortgage obligations
0-6 Months		4,579		1,102		—		—
7-12 Months		—		—		39,012		20,779
> 12 Months		41,547		11,018		10,315		6,340

Subtotal		46,126		12,120		49,327		27,119


Asset-backed securities
0-6 Months		—		—		22,079		652
7-12 Months		—		—		6,631		551
> 12 Months		702		119		223		86

Subtotal		702		119		28,933		1,289


Commercial mortgage-backed securities
0-6 Months		8,800		546		6,461		280
7-12 Months		—		—		31,505		5,628
> 12 Months		64,941		5,912		54,717		14,442

Subtotal		73,741		6,458		92,683		20,350


Corporate bonds
0-6 Months		3,320		100		57,805		2,445
7-12 Months		801		13		57,971		5,893
> 12 Months		10,675		489		27,873		6,322

Subtotal		14,796		602		143,649		14,660


Total Fixed Maturities	$	184,767	$	19,933	$	528,572	$	71,625


Equity Securities — common stocks
0-6 Months	$	—	$	—	$	8,991	$	1,941
7-12 Months		811		72		351		46
> 12 Months		—		—		—		—


Total Equity Securities	$	811	$	72	$	9,342	$	1,987

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

For both the collateralized mortgage obligations and the commercial mortgage-backed securities, the Company uses the “Stated Assumptions” approach and projects an expected principal loss under a range of scenarios and utilizes the most likely outcomes. The analysis relies on actual collateral performance measures such as default rate, prepayment rate and loss severity. The stated assumptions are applied throughout the remaining term of the deal, incorporating the transaction structure and priority of payments, to generate loss adjusted cash flows. Results of the analysis will indicate whether the security ultimately incurs a loss or whether there is a material impact on yield due to either a projected loss or a change in cash flow timing. A breakeven default rate is also calculated. A comparison to the break even default rate to the actual default rate provides an indication of the level of cushion or coverage to the first dollar principal loss. The analysis applies the stated assumptions throughout the remaining term of the transaction to forecast cash flows, which are then applied through the transaction structure to determine whether there is a loss to the security. For securities in which a tranche loss is present, and the net present value of loss adjusted cash flows is less than book value, an impairment is recognized. The output data also includes a number of additional metrics such as average life remaining, original and current credit support, over 60 day delinquency and security rating.

In the first quarter of 2009, the Company adopted accounting guidance relating to the recognition and presentation of OTTI (see Note 2: Recent Accounting Pronouncements). For debt securities, 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 in relation to the amortized cost basis. Any shortfalls of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered the credit loss portion of OTTI losses and is recognized in earnings. All non-credit losses are recognized as changes in OTTI losses within OCI.

During the three and nine months ended September 30, 2009, the Company recognized in earnings OTTI losses of $0.5 million and $2.4 million, respectively, related to non-agency mortgage and asset-backed securities. The significant inputs used to measure the amount of credit loss recognized in earnings were actual delinquency rates, default probability assumptions, severity assumptions and prepayment assumptions. Projected losses are a function of both loss severity and probability of default. Default probability and severity assumptions differ based on property type, vintage and the stress of the collateral. The Company does not intend to sell any of these securities and it is more likely than not that we will not be required sell these securities before the recovery of the amortized cost basis.

During the three and nine months ended September 30, 2009, the Company recognized in earnings OTTI losses of $0.02 million and $8.7 million on 6 and 56 common stocks, respectively. During the three months ended September 30, 2009, the Company did not recognize in earnings any OTTI losses for corporate bonds. During the nine months ended September 30, 2009, the Company recognized in earnings OTTI losses of $0.6 million on 2 corporate bonds.

For the three months ended September 30, 2009, OTTI losses within OCI decreased $7.7 million primarily as a result of increases in the fair value of securities previously impaired. For the nine months ended September 30, 2009, OTTI losses within OCI were $9.9 million primarily as a result of non-credit losses on non-agency residential mortgage-backed securities.

The following table summarizes the cumulative amounts related to the Company’s credit loss portion of the OTTI losses on debt securities held as of September 30, 2009 that the Company does not intend to sell and it is not more likely than not that the Company will be required to sell the security prior to recovery of the amortized cost basis and for which the non-credit loss portion is included in other comprehensive income:


($ in thousands)

Beginning balance at June 30, 2009	$	2,472
Credit losses on securities not previously impaired as of June 30, 2009		—
Additional credit losses on securities previously impaired as of June 30, 2009		525

Ending balance at September 30, 2009	$	2,997


($ in thousands)

Beginning balance of at January 1, 2009	$	—
Credit losses on securities not previously impaired as of December 31, 2008		2,997
Additional credit losses on securities not previously impaired as of June 30, 2009		—

Ending balance at September 30, 2009	$	2,997

The contractual maturity by the number of years until maturity for fixed maturity securities with a gross unrealized loss at September 30, 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	$	1		0	%	$	399		0	%
Due after one year through five years		339		2	%		15,095		8	%
Due after five years through ten years		248		1	%		20,786		11	%
Due after ten years		638		3	%		18,401		10	%
Mortgage- and asset-backed securities		18,707		94	%		130,086		71	%


Total fixed income securities	$	19,933		100	%	$	184,767		100	%

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


	Three Months Ended Sept. 30,						Nine Months Ended Sept. 30,
	2009			2008			2009			2008
	($ in thousands)

Fixed maturities:
Gains	$	8,739		$	757		$	13,264		$	2,283
(Losses)		(2,057	)		(969	)		(5,555	)		(1,404	)
(Impairments)		(525	)		(749	)		(2,996	)		(749	)

		6,157			(961	)		4,713			130


Equity securities:
Gains		—			166			1,562			609
(Losses)		—			(722	)		(1,530	)		(1,896	)
(Impairments)		(22	)		(3,999	)		(8,720	)		(12,411	)

		(22	)		(4,555	)		(8,688	)		(13,698	)

Net realized gains (losses)	$	6,135		$	(5,516	)	$	(3,975	)	$	(13,568	)

The following table presents, for each of the fair value hierarchy levels as defined in ASC 820, Fair Value Measurements, the Company’s fixed maturities, equity securities and short-term investments that are measured at fair value at September 30, 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	$	349,262	$	1,528,524	$	—	$	1,877,786

Equity securities		57,949		—		—		57,949

Short-term investments		11,234		125,701		—		136,935


Total	$	418,445	$	1,654,225	$	—	$	2,072,670

The Company did not have any Level 3 securities activity for the three months ended September 30, 2009. 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 nine months ended September 30, 2009:


	Nine Months Ended
	September 30, 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		(156	)
Transfer to Level 3		—

Level 3 investments as of September 30, 2009	$	—

Note 11. 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.

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

Note on Forward-Looking Statements

Some of the statements in this Quarterly Report on Form 10-Q for The Navigators Group, Inc. and its subsidiaries (“the Company”, “we”, “us”, and “our”) are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in or incorporated by reference in this Quarterly Report are forward looking statements. Whenever used in this report, the words “estimate,” “expect,” “believe” or similar expressions or their negative are intended to identify such forward-looking statements. Forward-looking statements are derived from information that we currently have and assumptions that we make. We cannot assure that anticipated results will be achieved, since actual results may differ materially because of both known and unknown risks and uncertainties which we face. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Factors that could cause actual results to differ materially from our forward-looking statements include, but are not limited to, the factors discussed in the “Risk Factors” section of our 2008 Annual Report on Form 10-K as well as:

•

continued volatility in the financial markets and the current recession;

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

the effects of competition from banks and other insurers;

•

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

•

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

•

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

•

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

•

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

•

our ability to maintain or improve our 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;

•

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

•

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

•

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

•

weather-related events and other catastrophes (including 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;

•

volatility in the market price of our common stock; and

•

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

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

Overview

The discussion and analysis of our financial condition and results of operations contained herein should be read in conjunction with our consolidated financial statements and accompanying notes which appear elsewhere in this Form 10-Q. It contains forward-looking statements that involve risks and uncertainties. Please 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 this Form 10-Q.

We are an international insurance company focusing on specialty products for niches within the overall property/casualty insurance market. 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.

The Company’s underwriting segments consist of insurance company operations (“Insurance Companies”) and operations at Lloyd’s of London (“Lloyd’s”) through Lloyd’s Syndicate 1221 (“Syndicate 1221”) (“Lloyd’s Operations”). The Insurance Companies consist of Navigators Insurance Company, which includes our branch located in the United Kingdom (the “U.K. Branch”), and Navigators Specialty Insurance Company, which underwrites specialty and professional liability insurance on an excess and surplus lines basis. Navigators Specialty Insurance Company is 100% reinsured by Navigators Insurance Company. Our Lloyd’s Operations include Navigators Underwriting Agency Ltd. (“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 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 third quarter of 2008. We participate in the stamp 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 third quarter of 2008, 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. In October 2009, the Company opened an underwriting office in Copenhagen, Denmark to write professional liability business.

Catastrophe Risk Management

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

The Company has significant natural catastrophe exposures throughout the world. Historically our largest natural catastrophe exposure emanated from offshore energy platforms exposed to hurricanes in the Gulf of Mexico. During the first three quarters of 2009, we have reduced our exposure to that peril. The majority of the offshore energy policies that have historically exposed us to this peril renew in the third quarter of the year. During the quarter we found the available market pricing and policy terms to be unacceptable in most cases, and therefore offered coverage for the peril of windstorm in the Gulf of Mexico on only a very small number of risks. Accordingly, our current exposure to hurricanes in the Gulf of Mexico is materially less than what it was one year ago, and it therefore no longer represents our largest natural catastrophe exposure.

We estimate that our largest exposure to loss from a single natural catastrophe event now comes from an earthquake on the west coast of the United States. As of September 30, 2009, the Company estimates that our probable maximum pre-tax gross and net loss exposure for an earthquake event centered at Los Angeles, CA would be approximately $138 million and $32 million, respectively, including the cost of reinsurance reinstatement premiums.

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

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

Critical Accounting Policies

The Company’s Annual Report on Form 10-K for the year ended December 31, 2008 discloses our critical accounting policies (see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies). Certain of these policies are critical to the portrayal of our financial condition and results since they require management to establish estimates based on complex and subjective judgments, including those related to our estimates for loss 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 and accounting for the Lloyd’s results. For additional information regarding our critical accounting policies, refer to our 2008 Annual Report, pages 43 through 45, except for the Impairment of Invested Assets discussion, which is updated below.

Impairment of Invested Assets. 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.

For structured securities, the Company assesses whether the amortized cost basis of the security will be recovered by comparing the present value of cash flows expected to be collected in relation to the amortized cost basis. Any shortfalls of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered the credit loss portion of OTTI losses and is recognized in earnings. Impairment losses related to other factors are considered non-credit losses and are recognized as changes in OTTI losses within OCI.

For equity and corporate bond securities, in general, we focus our attention on those securities whose fair 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 fair value regardless of the time period involved. Factors considered in evaluating potential impairment include, but are not limited to, the current fair value as compared to cost 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. If an equity or corporate bond security is deemed to be impaired, the amortized cost is written down to fair value with the loss recognized in earnings.

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 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.

Recent Accounting Pronouncements

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

Results of Operations

The following is a discussion and analysis of our consolidated and segment results of operations for the three and nine months ended September 30, 2009 and 2008. Earnings per share data is presented on a per diluted share basis. 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 expenses, other operating expenses, commission income and other income (expense). The combined ratio is derived by dividing the sum of net losses and LAE, commission expenses, 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.

Effective in 2009, the Company has reclassified certain of its business lines which has no effect on the segment classifications of the Insurance Companies and Lloyd’s Operations. Underwriting data for prior periods has been reclassified to reflect these changes.

•

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

•

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

Net income for the three months ended September 30, 2009 was $21.4 million or $1.24 per share compared to $1.0 million or $0.06 per share for the three months ended September 30, 2008. Included in these results were net realized gains of $0.23 per share after-tax and net realized losses of $0.21 per share after-tax for the three months ended September 30, 2009 and 2008, respectively. The 2009 third quarter’s net realized gains included impairments of $0.5 million pre-tax for declines in the fair value of securities which were considered to be other-than-temporary, as further discussed under the caption Investments, included herein. The after-tax loss of such impairments was $0.4 million or $0.02 per share.

Net income for the nine months ended September 30, 2009 was $57.1 million or $3.30 per share compared to $41.7 million or $2.45 per share for the nine months ended September 30, 2008. Included in these results were net realized losses of $0.16 per share and $0.52 per share after-tax for the nine months ended September 30, 2009 and 2008, respectively. The 2009 nine month net realized gains included impairments of $11.7 million pre-tax for declines in the fair value of securities which were considered to be other-than-temporary. The after-tax loss of such impairments was $7.7 million or $0.45 per share.

Net income for the nine month period ended September 30, 2009 included a gain related to the repurchase of $10 million aggregate principal amount of its issued and outstanding 7.00% senior notes (“Senior Notes”) from an unaffiliated note-holder on the open market for $7 million, which, net of amortized costs, resulted in a pre-tax gain of $2.9 million and added $0.11 to earnings per share.

The combined ratios, which consist of the sum of the loss and LAE ratio and the expense ratio for each period, for the three and nine months ended September 30, 2009 were 95.9 % and 93.9% compared to 107.9% and 95.7% for the comparable periods in 2008. The combined ratios for the three and nine months ending September 30, 2009 were reduced by 2.2 and 3.8 loss ratio points, respectively, for net loss reserve redundancies of $3.9 million and $19.1 million, respectively, relating to prior years. The combined ratios for the three and nine months ending September 30, 2008 were reduced by 5.2 and 6.8 loss ratio points, respectively, for net loss reserve redundancies of $8.0 million and $32.3 million, respectively, relating to prior years. The net paid loss and LAE ratios for the three and nine months ending September 30, 2009 were 52.5% and 44.2%, respectively, compared to 38.4% and 33.5% for the comparable periods in 2008.

Net cash provided by operating activities was $105.2 million for the nine months ended September 30, 2009 compared to net cash provided by operating activities of $216.4 million for the nine months ended September 30, 2008, a decrease of $111.2 million. Our loss and LAE payments for the nine months ended September 30, 2009 and 2008 were $223.6 million and $158.5 million, respectively, resulting in a decrease in cash provided by operating activities of $65.2 million. In addition, there was a $47.5 million negative variance in our cash flows related to collections for storm loss recoverables from our reinsurers when comparing the first nine months of 2009 to the same period in 2008. During the first nine months of 2008 we collected $20.2 million of net balances from reinsurers mostly related to gross losses paid during 2007 for Hurricanes Katrina and Rita, while during the first nine months of 2009 our recoverable balances grew by $27.3 million related to gross storm loss payments that we have not yet collected from reinsurers primarily on Hurricanes Gustav and Ike.

Consolidated stockholders’ equity increased 17.6% to $811.0 million or $47.78 per share at September 30, 2009 compared to $689.3 million or $40.89 per share at December 31, 2008. The increase was due to unrealized investment portfolio gains and net income.

REVENUES

Gross written premiums decreased to $245.2 million and $793.2 million in the three and nine months ended September 30, 2009, respectively, compared to $252.9 million and $819.3 million in the 2008 comparable periods. The decrease in the 2009 third quarter gross written premiums 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 business lost or cancelled due to rate decreases.

The average renewal premium rates for our Insurance Companies’ marine business increased 2.4% and 2.9% for the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008. The average renewal premium rates for our Lloyd’s Operations marine business increased 3.7% and 8.6% for the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008.

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 were 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. The average renewal premium rates for the contractors liability business were flat and declined 2.9% for the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008. Offshore energy average renewal premium rates increased 4.6% and 7.6% for the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008.

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 generally heightened interest in professional liability insurance. 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 Directors and Officers (“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 3.1% and 2.8% in the 2009 third quarter and nine month period, respectively, including D&O insurance of Insurance Company average renewal premium rates which increased approximately 2.0% for the 2009 third quarter and approximately 2.1% for the first nine months of 2009.

The average premium rate increases or decreases as noted above for the marine, property casualty and professional liability businesses are calculated primarily by comparing premium amounts on policies that have renewed. The premiums are 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.

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


	Three Months Ended September 30,
	2009									2008
	Gross					Net		Net		Gross					Net		Net
	Written					Written		Earned		Written					Written		Earned
	Premiums		%			Premiums		Premiums		Premiums		%			Premiums		Premiums
	($ in thousands)

Insurance Companies:

Marine	$	53,129		21.6	%	$	39,632	$	42,620	$	53,247		21.0	%	$	29,983	$	34,091

Property Casualty		93,302		38.1	%		57,567		60,380		103,180		40.8	%		61,131		63,740

Professional Liability		33,569		13.7	%		18,834		19,804		25,706		10.2	%		15,019		14,616


Insurance Companies Total		180,000		73.4	%		116,033		122,804		182,133		72.0	%		106,133		112,447


Lloyd’s Operations:

Marine		33,960		13.8	%		23,816		33,945		34,917		13.8	%		22,448		31,132

Property Casualty		20,024		8.2	%		11,116		9,126		25,586		10.1	%		5,682		5,350

Professional Liability		11,207		4.6	%		5,036		5,396		10,307		4.1	%		6,055		5,111


Lloyd’s Operations Total		65,191		26.6	%		39,968		48,467		70,810		28.0	%		34,185		41,593


Total	$	245,191		100.0	%	$	156,001	$	171,271	$	252,943		100.0	%	$	140,318	$	154,040


	Nine Months Ended September 30,
	2009									2008
	Gross					Net		Net		Gross					Net		Net
	Written					Written		Earned		Written					Written		Earned
	Premiums		%			Premiums		Premiums		Premiums		%			Premiums		Premiums
	($ in thousands)

Insurance Companies:

Marine	$	187,452		23.6	%	$	133,047	$	114,459	$	189,202		23.0	%	$	112,439	$	93,655

Property Casualty		272,127		34.3	%		183,247		188,860		311,053		38.1	%		203,528		205,395

Professional Liability		101,789		12.8	%		59,180		55,998		71,430		8.7	%		42,658		43,077


Insurance Companies Total		561,368		70.7	%		375,474		359,317		571,685		69.8	%		358,625		342,127


Lloyd’s Operations:

Marine		140,256		17.8	%		113,867		102,158		143,570		17.5	%		99,627		91,253

Property Casualty		59,058		7.4	%		33,781		28,250		74,671		9.1	%		26,147		22,892

Professional Liability		32,497		4.1	%		16,538		16,360		29,376		3.6	%		17,928		16,211


Lloyd’s Operations Total		231,811		29.3	%		164,186		146,768		247,617		30.2	%		143,702		130,356


Total	$	793,179		100.0	%	$	539,660	$	506,085	$	819,302		100.0	%	$	502,327	$	472,483

Gross Written Premiums

Insurance Companies’ Gross Written Premiums

Marine Premiums. The gross written premiums for the first nine months of 2009 and 2008 consisted of the following:


	2009			2008

Marine liability		35.1	%		34.0	%
P&I		11.0	%		12.0	%
Cargo		11.1	%		13.2	%
Inland marine		11.8	%		9.1	%
Bluewater hull		8.1	%		7.7	%
Transport		8.0	%		9.8	%
Craft/Fishing vessel		7.9	%		6.2	%
Other		7.0	%		8.0	%

Total		100.0	%		100.0	%

The marine gross written premiums for the three and nine months ended September 30, 2009 were flat and decreased 0.9%, respectively, compared to the same periods in 2008. The average renewal premium rates for the 2009 third quarter and nine month periods increased 2.4% and 2.9%, respectively, compared to the same period in 2008.

Property Casualty Premiums. The gross written premiums for the first nine months of 2009 and 2008 consisted of the following:


	2009			2008

Construction liability		26.9	%		37.3	%
Commercial umbrella		21.4	%		15.0	%
Nav Tech		14.0	%		13.2	%
Programs		13.0	%		11.2	%
NavPac		10.2	%		7.6	%
Primary E&S		6.5	%		9.4	%
Personal Umbrella		2.2	%		2.2	%
Other		5.8	%		4.1	%

Total		100.0	%		100.0	%

The property casualty gross written premiums for three and nine months ended September 30, 2009 decreased 9.6% and 12.5%, respectively, compared to the same periods in 2008, due primarily to weakening economic conditions that have reduced demand for construction liability and primary excess and surplus insurance. The average renewal premium rates for the construction liability business was flat and decreased 2.9% for the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008. 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.

Professional Liability Premiums. The gross written premiums for the first nine months of 2009 and 2008 consisted of the following:


	2009			2008

D&O (public and private)		71.2	%		65.2	%
Miscellaneous professional liability		16.1	%		6.1	%
Lawyers professional liability		9.2	%		22.8	%
Architects and engineers		3.5	%		5.9	%

Total		100.0	%		100.0	%

The professional liability gross written premiums for the 2009 third quarter and nine month period increased 30.6% and 42.5%, respectively, compared to the same periods in 2008 as we have hired additional underwriters in both New York and London as there was increased demand for insurers with excellent financial strength as well as market dislocations caused by weakness in other market participants. The premium growth for the 2009 nine month period occurred in our D&O and Miscellaneous professional liability lines, which have historically been the most profitable segments of our professional liability business.

Gross written premiums for our lawyers professional lines have declined as a percentage of total gross written premiums due to an underwriting decision to re-underwrite and refocus our lawyers book as a result of the hiring of a new team of professional liability underwriters and the underperformance of the existing lawyers book. Architects and engineers gross written premiums declined as a percentage of total gross written premiums 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 2.2% and 2.4% for three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008.

Lloyd’s Operations’ Gross Written Premiums

We have utilized 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 ($201.8 million) in 2009 compared to £123.0 million ($228.0 million) in 2008.

The Lloyd’s Operations’ gross written premiums for the three and nine months ended September 30, 2009 decreased 7.9% and 6.4%, respectively, compared to the same periods in 2008. The decreases were attributable to both the impact of the decline in the sterling exchange rate and the closure during 2008 of Syndicate 1221’s UK Property book and underwriting agencies in Manchester and Basingstoke, England.

Marine Premiums. The gross written premiums for the first nine months of 2009 and 2008 consisted of the following:


	2009			2008

Cargo and specie		41.9	%		42.6	%
Marine liability		28.8	%		33.3	%
Assumed reinsurance		12.9	%		10.1	%
Hull		10.8	%		9.8	%
Other		5.6	%		4.2	%

Total		100.0	%		100.0	%

The marine gross written premium for the three and nine months ended September 30, 2009 decreased 2.7% and 2.3%, respectively, compared to the same periods in 2008. The average renewal premium rates increased approximately 3.7% and 8.6% for the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008. The negative impact of foreign exchange movements on gross written premiums was partially offset by the increases in the renewal premium rates. The Marine liability account reduced to 28.8% from 33.3% due to a small number of large accounts that will incept in the fourth quarter of 2009.

Property Casualty Premiums. The gross written premiums for the first nine months of 2009 and 2008 consisted of the following:


	2009			2008

Offshore Energy		47.0	%		59.0	%
Engineering and Construction		22.5	%		18.3	%
Onshore Energy		20.2	%		15.8	%
US Property Casualty		5.4	%		0.6	%
Bloodstock		5.0	%		0.0	%
Property		-0.1	%		6.3	%

Total		100.0	%		100.0	%

The property casualty gross written premiums for the three and nine months ended September 30, 2009 decreased 21.7% and 20.9%, respectively, compared to the same periods in 2008 due to our decision to place the Property book into run-off in 2008 as well as a decline in Gulf of Mexico offshore energy premiums as the market pricing and policy terms were unacceptable in most cases. The average renewal premium rates for offshore energy business increased approximately 13.6% and 13.1% for the 2009 third quarter and nine month periods, respectively, compared to the same period in 2008. The US property casualty business is primarily comprised of non-admitted risks in the state of New York.

Professional Liability Premiums. The gross written premiums for the first nine months of 2009 and 2008 consisted of the following:


	2009			2008

E&O		39.0	%		66.2	%
D&O (public and private)		61.0	%		33.8	%

Total		100.0	%		100.0	%

The gross written premiums for the three and nine months ended September 30, 2009 increased 8.7% and 10.6%, respectively, compared to the same periods in 2008. The increases were due to the addition of a team to underwrite high excess D&O business in late 2008 as there was increased demand for insurers with excellent financial strength as well as market dislocations caused by weakness in other market participants.

Ceded Written Premiums

In the ordinary course of business, we reinsure certain insurance risks with unaffiliated insurance companies for the purpose of limiting our maximum loss exposure, protecting against catastrophic losses, and maintaining desired ratios of net premiums written to statutory surplus. The relationship of ceded to 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.

The following tables set forth our ceded written premiums by segment and major line of business for the periods indicated:


	Three Months Ended September 30,
	2009					2008
			% of					% of
	Ceded		Gross			Ceded		Gross
	Written		Written			Written		Written
	Premium		Premium			Premium		Premium
	($ in thousands)

Insurance Companies:
Marine	$	13,497		25.4	%	$	23,264		43.7	%
Property Casualty		35,735		38.3	%		42,049		40.8	%
Professional Liability		14,735		43.9	%		10,687		41.6	%

Subtotal		63,967		35.5	%		76,000		41.7	%


Lloyd’s Operations:
Marine		10,144		29.9	%		12,469		35.7	%
Property Casualty		8,908		44.5	%		19,904		77.8	%
Professional Liability		6,171		55.1	%		4,252		41.3	%

Subtotal		25,223		38.7	%		36,625		51.7	%


Total	$	89,190		36.4	%	$	112,625		44.5	%


	Nine Months Ended September 30,
	2009					2008
			% of					% of
	Ceded		Gross			Ceded		Gross
	Written		Written			Written		Written
	Premium		Premium			Premium		Premium
	($ in thousands)

Insurance Companies:
Marine	$	54,405		29.0	%	$	76,763		40.6	%
Property Casualty		88,880		32.7	%		107,525		34.6	%
Professional Liability		42,609		41.9	%		28,772		40.3	%

Subtotal		185,894		33.1	%		213,060		37.3	%


Lloyd’s Operations:
Marine		26,389		18.8	%		43,943		30.6	%
Property Casualty		25,277		42.8	%		48,524		65.0	%
Professional Liability		15,959		49.1	%		11,448		39.0	%

Subtotal		67,625		29.2	%		103,915		42.0	%


Total	$	253,519		32.0	%	$	316,975		38.7	%

The decrease in the percentage of total ceded written premiums to total gross written premiums for the three and nine months ended September 30, 2009 compared to the same periods in 2008 was due to the recognition of $12.6 million of reinstatement premiums related to Hurricanes Gustav and Ike in the third quarter of 2008 as well as 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 in 2009.

Net Written Premiums

Net written premiums increased 11.2% and 7.4% in the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008 due to the aforementioned reduction in quota share reinsurance purchased for the Insurance Companies and the Lloyd’s Operations in 2009.

Net Earned Premiums

Net earned premiums increased 11.2% and 7.1% in the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008 and is generally in line with the increase in net written premiums for these periods.

Commission Income

Commission income increased $0.01 million and decreased $0.06 million for the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008.

Net Investment Income

Net investment income decreased 1.1% and 0.7% for the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008, due to lower short-term investment yields.

Net Realized Gains and Losses

Excluding the other-than-temporary impairment losses, the Company generates realized gains and losses as part of the normal ongoing management of its investment portfolio. See Investments below for additional information on the other-than-temporary impairment losses.

Pre-tax net income included net realized gains of $6.1 million for the three months ended September 30, 2009 compared to net realized losses of $5.5 million for the comparable period in 2008. The 2009 third quarter period net realized gains included provisions of $0.5 million for declines in the fair value of securities which were considered to be other-than-temporary credit losses. The 2008 third quarter period net realized losses included provisions of $4.7 million for declines in the fair value of securities which were considered to be other-than-temporary.

Pre-tax net income included net realized losses of $4.0 million for the nine months ended September 30, 2009 compared to net realized losses of $13.6 million for the comparable period of 2008. The 2009 nine month period net realized losses included provisions of $11.7 million for declines in the fair value of securities which were considered to be other-than-temporary credit losses. The 2008 nine month period net realized losses included provisions of $13.2 million for declines in the fair value of securities which were considered to be other-than-temporary.

Other Income/(Expense)

Other income/(expense) primarily includes foreign exchange gains and losses from our Lloyd’s Operations and inspection fees related to our specialty insurance business. In addition, in April 2009, the Company recognized a $2.9 million gain related to the repurchase of $10 million of its Senior Notes from an unaffiliated note-holder on the open market for $7 million.

EXPENSES

Net Losses and Loss Adjustment Expenses

The ratios of net losses and LAE to net earned premiums (“loss ratios”) for the three and nine months ended September 30, 2009 were 62.8% and 61.0%, respectively, compared to 73.5% and 62.1% for the comparable periods in 2008, respectively. The loss ratios for the third quarter of 2009 and 2008 were favorably impacted by 2.2 and 5.2 loss ratio points, respectively, resulting from a redundancy of prior year loss reserves. The loss ratios for the first nine months of 2009 and 2008 were favorably impacted by 3.8 and 6.8 loss ratio points, respectively, also resulting from a redundancy of prior year loss reserves.

In conjunction 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.

As illustrated in the following table, our reinsurance recoverable amounts for paid losses increased during the first nine months of 2009 as the Company recorded paid reinsurance recoverables for Hurricanes Gustav, Ike, Katrina and Rita.


	September 30,		December 31,
	2009		2008		Change
	($ in thousands)
Reinsurance recoverables:
Paid losses	$	93,287	$	67,227	$	26,060
Unpaid losses and LAE reserves		818,397		853,793		(35,396	)

Total	$	911,684	$	921,020	$	(9,336	)

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


	September 30,		December 31,
	2009		2008		Change
	($ in thousands)

Gross reserves for losses and LAE	$	1,903,204	$	1,853,664		2.7	%
Less: Reinsurance recoverable on unpaid losses and LAE reserves		818,397		853,793		-4.1	%

Net loss and LAE reserves	$	1,084,807	$	999,871		8.5	%

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


	September 30, 2009
	Net		Net		Total		% of IBNR
	Reported		IBNR		Net Loss		to Total Net
	Reserves		Reserves		Reserves		Loss Reserves
	($ in thousands)

Insurance Companies:
Marine	$	106,888	$	104,007	$	210,895		49.3	%
Property Casualty		127,427		348,055		475,482		73.2	%
Professional Liability		41,326		64,909		106,235		61.1	%

Total Insurance Companies		275,641		516,971		792,612		65.2	%


Lloyd’s Operations:
Marine		105,102		94,621		199,723		47.4	%
Property Casualty		26,065		26,525		52,590		50.4	%
Professional Liability		8,419		31,463		39,882		78.9	%

Total Lloyd’s Operations		139,586		152,609		292,195		52.2	%

Total Company	$	415,227	$	669,580	$	1,084,807		61.7	%


	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	%

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 lines of business, 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 mix.

Our reserving practices and the establishment of any particular reserve reflect management’s judgment 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. 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. This process requires the substantial use of informed judgment and is inherently uncertain.

There are instances in which facts and circumstances require a deviation from the general process described above. Two such instances relate to the IBNR loss reserve processes for our hurricane losses (Rita, Katrina, Gustav, Ike) and our asbestos exposures, where standard actuarial methodologies 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

For the year ended December 31, 2008, the Company incurred gross and net losses and LAE 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 losses and LAE and payments for Hurricanes Gustav and Ike for the periods indicated:


	Nine Months Ended		Year Ended
	September 30, 2009		December 31, 2008
	($ in thousands)
Gross of Reinsurance
Beginning gross reserves	$	107,399	$	—
Incurred loss & LAE		1,042		114,000
Calendar year payments		42,145		6,601

Ending gross reserves	$	66,296	$	107,399


Gross case loss reserves	$	41,073	$	70,299
Gross IBNR loss reserves		25,223		37,100

Ending gross reserves	$	66,296	$	107,399


Net of Reinsurance
Beginning net reserves	$	12,923	$	—
Incurred loss & LAE		966		17,169
Calendar year payments		10,694		4,246

Ending net reserves	$	3,195	$	12,923


Net case loss reserves	$	2,442	$	11,696
Net IBNR loss reserves		753		1,227

Ending net reserves	$	3,195	$	12,923

Hurricanes Katrina and Rita

During the 2005 third quarter, the Company incurred gross and net losses and LAE 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.

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


	Nine Months Ended		Year Ended
	September 30, 2009		December 31, 2008
	($ in thousands)
Gross of Reinsurance
Beginning gross reserves	$	97,732	$	141,831
Incurred loss & LAE		420		(12,250	)
Calendar year payments		25,080		31,849

Ending gross reserves	$	73,072	$	97,732


Gross case loss reserves	$	53,072	$	62,732
Gross IBNR loss reserves		20,000		35,000

Ending gross reserves	$	73,072	$	97,732


Net of Reinsurance
Beginning net reserves	$	3,667	$	4,519
Incurred loss & LAE		138		(990	)
Calendar year payments		243		(138	)

Ending net reserves	$	3,562	$	3,667


Net case loss reserves	$	208	$	279
Net IBNR loss reserves		3,354		3,388

Ending net reserves	$	3,562	$	3,667

Approximately $76.6 million and $101.7 million of paid and unpaid losses at September 30, 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 September 30, 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.

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


	Nine Months Ended		Year Ended
	September 30, 2009		December 31, 2008
	($ in thousands)
Gross of Reinsurance
Beginning gross reserves	$	21,774	$	23,194
Incurred losses & LAE		136		796
Calendar year payments		403		2,216

Ending gross reserves	$	21,507	$	21,774


Gross case loss reserves	$	13,651	$	13,918
Gross IBNR loss reserves		7,856		7,856

Ending gross reserves	$	21,507	$	21,774


Net of Reinsurance
Beginning net reserves	$	16,683	$	16,717
Incurred losses & LAE		125		263
Calendar year payments		88		297

Ending net reserves	$	16,720	$	16,683


Net case loss reserves	$	9,069	$	9,032
Net IBNR loss reserves		7,651		7,651

Ending net reserves	$	16,720	$	16,683

At September 30, 2009, the ceded asbestos paid and unpaid reinsurance recoverables were $7.8 million compared to $8.9 million at December 31, 2008. 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. To the extent the Company incurs additional gross loss development for its historic asbestos exposure, we do not expect to realize additional reinsurance recoverables.

Environmental Liability

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.

Prior Year Reserve Redundancies/Deficiencies

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. As part of our regular review of prior reserves, management, in consultation with 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, management may make corresponding reserve adjustments.

Prior period reserve redundancies of $3.9 million and $19.1 million, net of reinsurance, were recorded in the three and nine months ended September 30, 2009, respectively, compared with $8.0 million and $32.3 million for the comparable periods in 2008.

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


	Three Months Ended
	September 30,			September 30,
	2009			2008
	($ in thousands)

Insurance Companies:
Marine	$	3,898		$	1,800
Property Casualty		(14,950	)		(5,800	)
Professional Liability		7,832			(1,600	)

Subtotal Insurance Companies		(3,220	)		(5,600	)
Lloyd’s Operations		(630	)		(2,420	)

Total	$	(3,850	)	$	(8,020	)


	Nine Months Ended
	September 30,			September 30,
	2009			2008
	($ in thousands)

Insurance Companies:
Marine	$	8,025		$	(4,179	)
Property Casualty		(39,467	)		(18,762	)
Professional Liability		18,200			(2,811	)

Subtotal Insurance Companies		(13,242	)		(25,752	)
Lloyd’s Operations		(5,853	)		(6,528	)

Total	$	(19,095	)	$	(32,280	)

Following is a discussion of relevant factors related to the $3.9 million prior period net reserve redundancy recorded in the 2009 third quarter:

The Insurance Companies recorded $3.9 million of prior period net reserve deficiencies for marine business resulting primarily from $2.9 million of increased liability reserves due to loss activity that exceeded our expectations, including a large loss from the 2004 underwriting year. The remaining activity nets to $0.9 million of prior period net reserve deficiencies and included $0.6 million of loss development on transport business due to loss activity in the 2006 underwriting year that exceeded our expectations.

The Insurance Companies recorded $15.0 million of prior period net savings for property casualty business comprised mostly of $13.3 million of net favorable development in construction liability business primarily the result of a continuation of lower than expected reported construction liability losses which was supported by an internal actuarial study for the 2006 and prior underwriting years, and $4.1 million of favorable development on primary excess and surplus business written from 2006 to 2007 due to reported losses less than our expectations. These redundancies were partially offset by prior period net reserve deficiencies in the middle markets, specialty program and personal umbrella lines of $1.7 million, $0.8 million and $0.7 million, respectively, due to loss activity in excess of expectations.

The Insurance Companies recorded $7.8 million of net prior period deficiencies for professional liability business that included three large 2006 public directors and officers case reserve increases that accounted for $7.2 million of the total.

The Lloyd’s Operations recorded $0.6 million of prior period net savings that included $1.9 million for marine business due to favorable loss activity in the specie, reinsurance and transport lines and $0.6 million of favorable development on our Nav Tech book. The Nav Tech savings was the net result of favorable development on the energy book of $1.9 million due to lower than expected losses on the 2007 underwriting year, mostly offset by additional development on a 2006 engineering loss These redundancies were partially offset by deficiencies of $1.4 million in our run-off property book due to continued claims development in the quarter emanating from two delegated underwriting authorities and $0.6 million in the international Errors and Omissions (“E&O”) line due to higher reported loss activity.

Following is a discussion of relevant factors related to the $9.5 million prior period net reserve redundancy recorded in the 2009 second quarter:

The Insurance Companies recorded $2.2 million of prior period net reserve deficiencies for marine business resulting from $2.1 million of increased liability reserves due to loss activity that exceeded our expectations and an update of the loss development factors for this business. The remaining activity nets to $0.1 million of prior period net reserve deficiencies and included a $1.9 million marine liability case reserve for a Hurricane Gustav claim that was offset by a reduction in IBNR within the offshore line of business in our property casualty business, and savings of $1.0 million for craft and $0.9 million in the protection and indemnity (“P&I”) line of business both due to favorable loss trends for the 2007 and 2008 underwriting years.

The Insurance Companies recorded $12.8 million of prior period net savings for property casualty business comprised mostly of $15.6 million of net favorable development in construction liability business due to favorable loss trends for business written from 2006 and prior, a $1.9 million reduction in Hurricane Gustav IBNR that was offset by a case reserve in our marine liability line of business, $3.7 million of favorable development on commercial umbrella business on business written from 2004 to 2006 due to reported losses less than our expectations, $2.3 million of favorable development on primary excess and surplus business written from 2006 to 2007 due to reported losses less than our expectations and $1.2 million in the offshore energy lines of business due to generally lower claim activity than expected. These redundancies were partially offset by prior period net reserve deficiencies in the middle markets, liquor liability, personal umbrella and specialty run-off lines of $5.2 million, $3.7 million, $2.5 million and $1.4 million, respectively, due to loss activity in excess of expectations. The middle markets development occurred in the 2005 to 2008 underwriting years resulting from reported loss activity and a detailed study that documented a shift in the mix of business to lines with a higher loss ratio and a longer development pattern.

The Insurance Companies recorded $5.7 million of net prior period deficiencies for professional liability business that included $2.7 million of reserve strengthening in our large lawyers book of business written from 2006 to 2008 due to reported losses being greater than expectations and the incorporation of a reserve study which resulted in higher loss ratio assumptions for those years. Our large lawyers book is in the process of being re-underwritten due to the adverse trends we have observed in the last several quarters and the current economic weakness. We also incurred large loss activity in our D&O book in underwriting years 2005 and 2007 that resulted in $2.7 million of adverse development.

The Lloyd’s Operations recorded $4.6 million of prior period net savings comprised of $5.3 million for marine business due to favorable loss activity in the liability, reinsurance and cargo lines, partially offset by deficiencies of $0.6 million in the international E&O line due to higher reported loss activity. Within the property casualty account, reserves in our run-off property book were strengthened by $1.1 million due to worse than expected claims development in the quarter although this adverse development was partially absorbed by reserve releases of $0.9 million within the rest of the property casualty account.

Following is a discussion of relevant factors related to the $5.8 million prior period net reserve redundancy 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 to reported claims activity, partially offset by $1.8 million of savings in the 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.

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 $8.0 million prior period net reserve redundancy recorded in the 2008 third quarter:

The Insurance Companies recorded $1.8 million of prior period net reserve deficiencies for marine business which included $1.1 million for increased cargo reserves due to reported claims from 2006 and 2007, $2.0 million on 2006 and 2007 liability business due to large loss activity and a $0.7 million loss on a commutation with a reinsurer, partially offset by $1.4 million for transport business across a number of years due to a reduction in the reporting pattern assumptions and $0.5 million in the P&I line of business.

The Insurance Companies recorded $5.8 million of prior period net savings for property casualty business comprised mostly of $2.8 million of net favorable development in construction liability business due to favorable loss trends for business written from 2002 to 2004, partially offset by unfavorable loss activity for construction business written in 2000 and prior, $2.4 million of favorable development on commercial umbrella business on business written from 2004 to 2006 due to reported losses less than our expectations and by $1.2 million of savings from offshore energy business.

The Insurance Companies recorded $1.6 million of net prior period savings for professional liability business mostly emanating from D&O business written in 2006 due to reported losses being less than expectations.

The Lloyd’s Operations recorded $2.4 million of prior period net savings comprised of savings of $2.9 million for liability business due to favorable loss activity, $1.3 million in offshore energy resulting from a reserve study and $0.8 million for specie business, partially offset by deficiencies of $2.4 million in the cargo line due to higher reported loss activity and $0.2 million in both the transport and hull lines of business.

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

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

The Insurance Companies recorded $5.1 million of prior period net savings for property casualty business comprised mostly of $4.3 million of net favorable development in construction liability business due to favorable loss trends for business written from 2001 to 2006.

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

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

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

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

The Insurance Companies recorded $7.9 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 and $0.6 million from program business written in 2007 and 2006. 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 Insurance Companies recorded $0.3 million of prior period net savings for professional liability business.

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 Expenses

Commission expenses paid to brokers and agents are generally based on a percentage of gross written premiums and are partially offset by ceding commissions the Company may receive on ceded written premiums. Commissions are generally deferred and recorded as deferred policy acquisition costs to the extent that they relate to unearned premium. The percentage of commission expenses to net earned premiums for the three and nine months ended September 30, 2009 were 13.3% and 14.1%, respectively, compared to 14.5% and 14.1% for the comparable periods in 2008. The commission expense for the 2008 periods was inflated by the effect of reinstatement premiums and would have been 12.0% and 13.2% for the three and nine months ended September 30, 2008, respectively, excluding that effect. The increase in the net commission ratios in 2009 when compared to 2008 excluding the reinstatement effect was mostly attributable to greater retentions, particularly on our marine quota share treaties, which have reduced the ceding commission benefit.

Other Operating Expenses

Other operating expenses increased $4.4 million and $4.9 million for the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008. The increase in the third quarter 2009 was primarily the net result of a 17% increase in staff count offset by a reduction in our UK-based expenses when measured in US dollars due to a 13% reduction in the average exchange rate for sterling.

INCOME TAXES

The Company recorded an income tax expense of $8.8 million for the three months ended September 30, 2009 compared to an income tax benefit of $1.7 million for the comparable period in 2008, resulting in effective tax rates of 29.2% and 240.7%, respectively. The income tax expense was $23.1 million and $15.2 million for the first nine months of 2009 and 2008, respectively, resulting in effective tax rates of 28.8% and 26.7%, respectively. The Company’s effective tax rate is typically less than 35% due to permanent differences between book and tax return income, with the most significant item being tax exempt interest. The unusual effective tax rate in the 2008 third quarter resulted from a small pretax loss and a larger taxable loss resulting primarily from tax-exempt investment income. The effective tax rate on net investment income was 25.1% for the nine months ended September 30, 2009 compared to 25.8% for the same period in 2008. As of September 30, 2009 and December 31, 2008 the net deferred federal, foreign, state and local tax assets were $25.2 million and $54.7 million, respectively.

We are subject to the tax laws and regulations of the United States and foreign countries in which we operate. The Company files a consolidated federal tax return, which includes all domestic subsidiaries and the U.K. Branch. The income from the foreign operations is designated as either U.S. connected income or non-U.S. connected income. Lloyd’s is required to pay U.S. income tax on U.S. connected income written by Lloyd’s syndicates. Lloyd’s and the IRS have entered into an agreement whereby the amount of tax due on U.S. connected income is calculated by Lloyd’s and remitted directly to the IRS. These amounts are then charged to the corporate members in proportion to their participation in the relevant syndicates. The Company’s corporate members are subject to this agreement and will receive U.K. tax credits for any U.S. income tax incurred up to the U.K. income tax charged on the U.S. income. The non-U.S. connected insurance income would generally constitute taxable income under the Subpart F income section of the Internal Revenue Code since less than 50% of the Company’s premium income 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 includable as Subpart F income in the current year. 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 $55.9 million of our non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the foreign subsidiaries. However, in the future, if such earnings were distributed to the Company, taxes of approximately $3.9 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 $3.5 million and $6.2 million at September 30, 2009 and December 31, 2008, respectively. Included in the deferred tax assets are state and local net operating loss carryforwards of $1.6 million and $0.5 million at September 30, 2009 and December 31, 2008, respectively. A valuation allowance was established for the full amount of these potential future tax benefits due to uncertainty associated with their realization. The Company’s state and local tax carryforwards at September 30, 2009 expire in 2029.

Segment Information

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 the operating expenses of the wholly-owned underwriting management companies and The Navigator’s Group, Inc.’s (the “Parent Company’s”) operating expenses and related income tax amounts. The Corporate segment consists of the Parent Company’s investment income, interest expense and the related tax effect.

We evaluate the performance of each segment based on its underwriting and net income results. The Insurance Companies’ and the Lloyd’s Operations’ results are measured by taking into account net earned premium, net loss and loss adjustment expenses, commission expenses, 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. Navigators Specialty Insurance Company is 100% reinsured by Navigators Insurance Company. NMC and Navigators Management (UK) Ltd. produce, manage and underwrite insurance and reinsurance business for the Insurance Companies.

The following table sets forth the results of operations for the Insurance Companies for the three and nine months ended September 30, 2009 and 2008:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
	($ in thousands)

Gross written premium	$	180,000		$	182,133		$	561,368		$	571,685
Net written premium		116,033			106,133			375,474			358,625

Net earned premium		122,804			112,447			359,317			342,127
Net losses and LAE		(75,838	)		(78,346	)		(214,834	)		(207,927	)
Commission expense		(15,346	)		(13,823	)		(45,374	)		(41,494	)
Other operating expenses		(27,194	)		(22,802	)		(78,660	)		(69,502	)
Commission income and other income (expense)		1,301			279			3,157			2,053


Underwriting profit (loss)		5,727			(2,245	)		23,606			25,257

Net investment income		16,597			15,973			49,043			47,031
Net realized capital gains (losses)		5,710			(5,207	)		(987	)		(13,362	)

Income before income taxes		28,034			8,521			71,662			58,926

Income tax expense		7,973			1,458			19,677			15,767

Net income	$	20,061		$	7,063		$	51,985		$	43,159


Loss and LAE ratio		61.8	%		69.7	%		59.8	%		60.8	%
Commission expense ratio		12.5	%		12.3	%		12.6	%		12.1	%
Other operating expense ratio ⁽¹⁾		21.1	%		20.0	%		21.0	%		19.7	%

Combined ratio		95.4	%		102.0	%		93.4	%		92.6	%


(1)		Includes Other operating expenses and Commission income and other income (expense).

The following tables set forth the underwriting results of the Insurance Companies for the three and nine months ended September 30, 2009 and 2008:


	Three Months Ended September 30, 2009
	($ in thousands)
	Net		Losses
	Earned		and LAE		Underwriting		Underwriting			Loss			Expense			Combined
	Premium		Incurred		Expenses		Profit/(Loss)			Ratio			Ratio			Ratio

Marine	$	42,620	$	31,611	$	13,259	$	(2,250	)		74.2	%		31.1	%		105.3	%
Property Casualty		60,380		23,881		21,330		15,169			39.6	%		35.3	%		74.9	%
Professional Liability		19,804		20,346		6,650		(7,192	)		102.7	%		33.6	%		136.3	%

Total	$	122,804	$	75,838	$	41,239	$	5,727			61.8	%		33.6	%		95.4	%


	Three Months Ended September 30, 2008
	($ in thousands)
	Net		Losses
	Earned		and LAE		Underwriting		Underwriting			Loss			Expense			Combined
	Premium		Incurred		Expenses		Profit/(Loss)			Ratio			Ratio			Ratio

Marine	$	34,091	$	21,910	$	8,588	$	3,593			64.3	%		25.2	%		89.5	%
Property Casualty		63,740		48,426		22,574		(7,260	)		76.0	%		35.4	%		111.4	%
Professional Liability		14,616		8,010		5,184		1,422			54.8	%		35.5	%		90.3	%

Total	$	112,447	$	78,346	$	36,346	$	(2,245	)		69.7	%		32.3	%		102.0	%


	Nine Months Ended September 30, 2009
	($ in thousands)
	Net		Losses
	Earned		and LAE		Underwriting		Underwriting			Loss			Expense			Combined
	Premium		Incurred		Expenses		Profit/(Loss)			Ratio			Ratio			Ratio

Marine	$	114,459	$	83,239	$	35,453	$	(4,233	)		72.7	%		31.0	%		103.7	%
Property Casualty		188,860		80,331		65,642		42,887			42.5	%		34.8	%		77.3	%
Professional Liability		55,998		51,264		19,782		(15,048	)		91.5	%		35.3	%		126.8	%

Total	$	359,317	$	214,834	$	120,877	$	23,606			59.8	%		33.6	%		93.4	%


	Nine Months Ended September 30, 2008
	($ in thousands)
	Net		Losses
	Earned		and LAE		Underwriting		Underwriting		Loss			Expense			Combined
	Premium		Incurred		Expenses		Profit/(Loss)		Ratio			Ratio			Ratio

Marine	$	93,655	$	58,208	$	27,890	$	7,557		62.2	%		29.8	%		92.0	%
Property Casualty		205,395		125,430		65,751		14,214		61.1	%		32.0	%		93.1	%
Professional Liability		43,077		24,289		15,302		3,486		56.4	%		35.5	%		91.9	%

Total	$	342,127	$	207,927	$	108,943	$	25,257		60.8	%		31.8	%		92.6	%

Net earned premiums of the Insurance Companies increased 9.2% and 5.0% for the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008. The increases were primarily due to higher marine retentions and increased professional liability gross premiums, which have led to increased net written premiums, offset by lower gross and net written premiums in the construction and excess and surplus lines in our property casualty business. In addition, the Company recognized reinstatement premiums of $5.8 million related to Hurricanes Gustav and Ike in 2008.

The loss ratio for the three and nine months ended September 30, 2009 was favorably impacted by prior period loss reserve redundancies of $3.2 million, or 2.6 loss ratio points, and $13.2 million, or 3.7 loss ratio points, respectively. Generally, while the Insurance Companies has experienced favorable prior period redundancies, 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 annualized pre-tax yield on the Insurance Companies’ investment portfolio, excluding net realized gains and losses, was 4.1% and 4.2% for the three and nine months ended September 30, 2009, respectively, compared to 4.3% for both of the comparable 2008 periods. The average duration of the Insurance Companies’ invested assets was 4.8 years at September 30, 2009 and 4.9 years at September 30, 2008. Net investment income increased in the three and nine months ended September 30, 2009 compared to the same periods in 2008 primarily due to the investment of new funds from cash flow, partially offset by the decrease in yields on short-term investments.

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 the capital that supports 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. In October 2009, the Company opened an underwriting office in Copenhagen, Denmark to write professional liability business.

Syndicate 1221’s stamp capacity is £123.0 million ($201.8 million) in 2009 compared to £123.0 million ($228.0 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 utilized 100% of Syndicate 1221’s stamp capacity for the 2009 and 2008 underwriting years through Navigators Corporate Underwriters Ltd. and through both Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. in 2007.

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 an underwriting year 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 caption Liquidity and Capital Resources.

The following table sets forth the results of operations of the Lloyd’s Operations for the three and nine months ended September 30, 2009 and 2008:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
	($ in thousands)

Gross written premium	$	65,191		$	70,810		$	231,811		$	247,617
Net written premium		39,968			34,185			164,186			143,702

Net earned premium		48,467			41,593			146,768			130,356
Net losses and LAE		(31,753	)		(34,923	)		(93,732	)		(85,651	)
Commission expense		(7,835	)		(8,534	)		(26,533	)		(25,301	)
Other operating expenses		(7,835	)		(7,799	)		(19,933	)		(24,092	)
Commission income and other income (expense)		280			(390	)		879			(415	)


Underwriting profit (loss)		1,324			(10,053	)		7,449			(5,103	)

Net investment income		2,361			3,074			7,060			8,927
Net realized capital gains (losses)		425			(309	)		(2,988	)		(206	)

Income before income taxes		4,110			(7,288	)		11,521			3,618

Income tax expense (benefit)		1,510			(2,489	)		4,470			1,388

Net income (loss)	$	2,600		$	(4,799	)	$	7,051		$	2,230


Loss and LAE ratio		65.5	%		84.0	%		63.9	%		65.7	%
Commission expense ratio		16.2	%		20.5	%		18.1	%		19.4	%
Other operating expense ratio ⁽¹⁾		15.6	%		19.7	%		13.0	%		18.8	%

Combined ratio		97.3	%		124.2	%		95.0	%		103.9	%


(1)		Includes Other operating expenses and Commission 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 in 2007 and 2008, and the 2008 calendar year rates 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 the three months ended September 30, 2009 increased across all business units as follows: approximately 3.7% for the marine business, approximately 13.6% for the offshore business and approximately 10.2% for the professional liability business compared to the same period in 2008.

The Lloyd’s Operations’ results for the nine months ended September 30, 2009 reflect the continued favorable loss development trends although the third quarter loss ratio was unfavorably impacted by prior period loss reserve deficiencies of $0.6 million or 1.3 loss ratio points. The nine months favorable impact of prior period loss reserve redundancies was $5.9 million or 4.0 loss ratio points. Generally, while the Lloyd’s Operations have experienced favorable prior period net redundancies in calendar years 2009 and 2008, ultimate loss ratios for the more recent underwriting years of 2009 and 2008 have been increasing due to softening market conditions for the business written during those periods.

The annualized pre-tax yield on the Lloyd’s Operations’ investment portfolio, excluding net realized gains and losses, was 2.6% and 2.7% for the three and nine months ended September 30, 2009, respectively, compared to 3.5% for both of the comparable periods in 2008. The average duration of the Lloyd’s Operations’ invested assets at September 30, 2009 was 1.7 years compared to 1.3 years at September 30, 2008. The decrease in the Lloyd’s Operations’ net investment income was reflective of lower short-term investment yields. Such yields are net of interest credits to certain reinsurers for funds withheld by our Lloyd’s Operations.

Tabular Disclosure of Contractual Obligations

There have been no material changes in the operating lease or capital lease information with respect to contractual obligations as stated in the Company’s 2008 Annual Report on Form 10-K. Total gross reserves for losses and LAE were $1.90 billion at September 30, 2009 and $1.85 billion at December 31, 2008. 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 Senior Notes 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	$	171,350	$	8,050	$	16,100	$	16,100	$	131,100

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.

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.

The annualized pre-tax yield of the investment portfolio, excluding net realized gains and losses, was 3.8% for both the three and nine months ended September 30, 2009, respectively, compared to 4.1% for both of the comparable 2008 periods.

Since the third quarter of 2008, the Company’s tax-exempt securities portion of its investment portfolio has increased by $56.9 million to approximately 34.1% of the fixed maturities investment portfolio at September 30, 2009. As a result, the effective tax rate on net investment income was 25.2% for the three months ended September 30, 2009 compared to 25.7% for the comparable 2008 period.

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 categorized as Level 1 or Level 2 in the fair value hierarchy, as defined in the Financial Accounts Standards Board Accounting Standards Codification 820 (“ASC 820”), Fair Value Measurements, 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 ASC 820 pricing hierarchy. Any pricing where the input is based solely on a broker price is deemed to be a level 3 price.

Security pricing is performed on a monthly basis under the oversight of our investment manager’s pricing committee. The Company has reviewed this process and performs additional testing to assess the reasonableness of the prices.

The following table presents, for each of the fair value hierarchy levels, the fair value of the Company’s fixed maturities, equity securities and short-term investments at September 30, 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	$	349,262	$	1,528,524	$	—	$	1,877,786

Equity securities		57,949		—		—		57,949

Short-term investments		11,234		125,701		—		136,935


Total	$	418,445	$	1,654,225	$	—	$	2,072,670


	Nine Months Ended
	September 30, 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		(156	)
Transfer to Level 3		—

Level 3 investments as of September 30, 2009	$	—

The following tables set forth our cash and investments as of September 30, 2009 and December 31, 2008:


			Gross		Gross			Cost or		OTTI
	Fair		Unrealized		Unrealized			Amortized		Recognized
September 30, 2009	Value		Gains		(Losses)			Cost		in OCI
	($ in thousands)

Fixed maturities:
U.S. Government Treasury bonds, agency bonds and foreign government bonds	$	514,158	$	10,855	$	(54	)	$	503,357	$	—
States, municipalities and political subdivisions		679,417		37,072		(570	)		642,915		—
Mortgage- and asset-backed securities
Mortgage-backed securities		308,515		15,142		(10	)		293,383		—
Collateralized mortgage obligations		46,126		—		(12,120	)		58,246		(9,818	)
Asset-backed securities		20,088		793		(119	)		19,414		(48	)
Commercial mortgage-backed securities		106,459		584		(6,458	)		112,333		—

Subtotal		481,188		16,519		(18,707	)		483,376		(9,866	)
Corporate bonds		203,023		10,166		(602	)		193,459		—


Total fixed maturities		1,877,786		74,612		(19,933	)		1,823,107		(9,866	)


Equity securities — common stocks		57,949		12,843		(72	)		45,178		—

Cash		21,692		—		—			21,692		—

Short-term investments		136,935		—		—			136,935		—


Total	$	2,094,362	$	87,455	$	(20,005	)	$	2,026,912	$	(9,866	)


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
December 31, 2008	Value		Gains		(Losses)			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, agency bonds and foreign government bonds as of September 30, 2009 and December 31, 2008:


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
September 30, 2009	Value		Gains		(Losses)			Cost
	($ in thousands)

U.S. Treasury bonds	$	384,097	$	8,118	$	(41	)	$	376,020
Agency bonds		107,882		2,296		—			105,586
Foreign government bonds		22,179		441		(13	)		21,751

Total	$	514,158	$	10,855	$	(54	)	$	503,357


			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.

The following table sets forth the fifteen largest municipal holdings by counterparty as of September 30, 2009:


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized		S&P
	Value		Gains		(Losses)			Cost		Rating
	($ in thousands)
Issuers:
State of Washington	$	17,771	$	1,085	$	—		$	16,686	AA
Texas State Transportation Commission		15,874		130					15,744	AA+
City of San Antonio		11,919		893		—			11,026	AA
Virginia Resources Authority		11,897		1,315		—			10,582	AAA
University of Pittsburgh		11,605		976		—			10,629	AA
Commonwealth of Massachusetts		11,306		758		—			10,548	AA
State of Wisconsin		10,310		813		—			9,497	AA-
State of Louisiana		10,053		553		—			9,500	A+
New York City Transitional Finance Authority		8,465		3		—			8,462	AA
Cypress-Fairbanks Independent School District		8,306		451		—			7,855	AA-
Illinois Finance Authority		8,198		50		(88	)		8,236	BBB+
Fort Bend Independent School District		8,038		584		—			7,454	AA
County of Hamilton		8,020		205		—			7,815	A
State of Ohio		8,004		643		—			7,361	AA
City of New York, NY		7,746		470		—			7,276	AA-

Subtotal	$	157,512	$	8,929	$	(88	)	$	148,671
All Other		521,905		28,143		(482	)		494,244

Total	$	679,417	$	37,072	$	(570	)	$	642,915

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 our securities are rated by both S&P and Moody’s) as of September 30, 2009:


Equivalent		Equivalent
S&P		Moody's					Unrealized
Rating		Rating	Fair Value		Book Value		Gain/(Loss)
	($ in thousands)

AAA/AA/A		Aaa/Aa/A	$	641,184	$	605,276	$	35,908
BBB		Baa		30,265		29,738		527
BB		Ba		1,998		2,018		(20	)
B		B		—		—		—
CCC or lower		Caa or lower		—		—		—
N/A		N/A		5,970		5,883		87

Total			$	679,417	$	642,915	$	36,502

The Company owns $305 million of municipal securities which are credit enhanced by various financial guarantors. As of September 30, 2009, the average underlying credit rating for these securities is A+. There has been no material adverse impact to the Company’s investment portfolio or results of operations as a result of recent downgrades of the credit ratings for several of the financial guarantors.

The following tables set forth our mortgage-backed securities, collateralized mortgage obligations, asset-backed securities and commercial mortgage-backed securities by those issued by the Government National Mortgage Association (“GNMA”), FNMA, FHLMC, and the quality category (prime, Alt-A and subprime) for all other such investments at September 30, 2009:


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		(Losses)			Cost
	($ in thousands)
Mortgage-backed securities:
GNMA	$	46,725	$	1,485	$	(9	)	$	45,249
FNMA		191,824		10,332		(1	)		181,493
FHLMC		69,966		3,325		—			66,641

Total	$	308,515	$	15,142	$	(10	)	$	293,383


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		(Losses)			Cost
	($ in thousands)
Collateralized mortgage obligations:
Prime	$	45,192	$	—	$	(11,736	)	$	56,928
Alt-A		934		—		(384	)		1,318
Subprime		—		—		—			—

Total	$	46,126	$	—	$	(12,120	)	$	58,246

The following table sets forth the fifteen largest collateralized mortgage obligations as of September 30, 2009:


					Cost or		Gross
	Issue		Fair		Amortized		Unrealized			S&P	Moody’s
Security Description	Date		Value		Cost		(Loss)			Rating	Rating
	($ in thousands)

Wells Fargo Mortgage Backed 06 AR8		2006	$	3,968	$	5,357	$	(1,389	)	BBB+	NR
Citigroup Mortgage Loan Trust 06 AR2		2006		3,373		4,473		(1,100	)	NR	B3
MLCC Mortgage Investors Inc 06 2		2006		3,333		3,773		(440	)	AAA	Aa2
GMAC Mortgage Corp Loan Trust 05 AR6		2005		3,327		3,708		(381	)	BB	B3
Merrill Lynch Mortgage Investors 05 A9		2005		3,043		3,710		(667	)	B+	NR
Merrill Lynch Mortgage Investors 07 2		2007		2,926		4,182		(1,256	)	NR	B3
Wells Fargo Mortgage Backed 06 AR5		2006		2,456		2,886		(430	)	NR	Caa1
Wells Fargo Mortgage Backed 05 AR4		2005		1,118		1,195		(77	)	NR	A2
Merrill Lynch Mortgage Investors 05 A9		2005		821		881		(60	)	BBB	NR
Bear Stearns Adjustable Rate 06 1A1		2006		737		857		(120	)	NR	Baa1
Citigroup Mortgage Loan Trust 04-HYB3		2004		660		721		(61	)	AAA	A1
Master Adjustable Rate Mortgage 05 6		2005		637		860		(223	)	B-	Baa2
GSR Mortgage Loan Trust 06 AR 1		2006		636		870		(234	)	BB	NR
JP Morgan Mortgage Trust 06 A4		2006		634		900		(266	)	NR	B3
Wells Fargo Mortgage Backed 06 AR6		2006		625		820		(195	)	NR	B2

Subtotal			$	28,294	$	35,193	$	(6,899	)
All Other				17,832		23,053		(5,221	)

Total			$	46,126	$	58,246	$	(12,120	)

The following tables set forth our 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 September 30, 2009:


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		(Losses)			Cost
	($ in thousands)
Asset-backed securities:
Prime	$	19,956	$	793	$	(70	)	$	19,233
Alt-A		—		—		—			—
Subprime		132		—		(49	)		181

Total	$	20,088	$	793	$	(119	)	$	19,414

Details of the collateral of our asset backed securities portfolio as of September 30, 2009 are presented below:


															Cost or		Net
													Total		Amortized		Unrealized
	AAA		AA		A		BBB		BB		CC		Fair Value		Cost		Gain/(Loss)
	($ in thousands)

Auto Loans	$	9,484	$	4,302	$	604	$	2,044	$	—	$	—	$	16,434	$	15,827	$	607

Credit Cards		—		—		—		—		131		—		131		133		(2	)

Miscellaneous		3,392		2				—		—		129		3,523		3,454		69


Total	$	12,876	$	4,304	$	604	$	2,044	$	131	$	129	$	20,088	$	19,414	$	674

The following tables set forth our commercial mortgage-backed securities by the quality category (prime, Alt-A and subprime) at September 30, 2009:


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		(Losses)			Cost
	($ in thousands)
Commercial mortgage-backed securities:
Prime	$	106,459	$	584	$	(6,458	)	$	112,333
Alt-A		—		—		—			—
Subprime		—		—		—			—

Total	$	106,459	$	584	$	(6,458	)	$	112,333

The commercial mortgage-backed securities are all rated investment grade by S&P or Moody’s. The following table sets forth the fifteen largest commercial mortgage backed securities as of September 30, 2009:


					Cost or		Net			Average
	Issue		Fair		Amortized		Unrealized			Underlying			Delinq.			Subord.			S&P	Moody's
Security Description	Date		Value		Cost		Gain/Loss			LTV%			Rate			Level			Rating	Rating
	($ in thousands)

Wachovia Bank Commercial Mortgage 05 C18		2005	$	6,854	$	6,854	$	—			85.2	%		7.3	%		33.1	%	AAA	Aaa
GS Mortgage Securities Corp II 05 GG4		2005		6,281		6,604		(323	)		72.0	%		4.4	%		30.7	%	AAA	Aaa
LB-UBS Mortgage Commercial Mortgage Trust 06 C6		2006		6,147		6,786		(639	)		63.6	%		2.0	%		30.2	%	AAA	Aaa
LB-UBS Mortgage Commercial Mortgage Trust 06 C7		2006		5,824		6,331		(507	)		65.1	%		6.1	%		30.2	%	AAA	NR
Citigroup/Deutsche Bank Comm 05 CD1		2005		5,769		5,891		(122	)		68.6	%		6.5	%		30.7	%	AAA	Aaa
Four Times Square Trust 06 4TS		2006		5,693		7,029		(1,336	)		39.4	%		0.0	%		7.9	%	AAA	Aa1
Bear Stearns Commercial Mortgage 06 T22		2006		4,767		4,894		(127	)		57.4	%		0.4	%		28.1	%	NR	Aaa
Bear Stearns Commercial Mortgage 07 PW15		2007		4,604		5,136		(532	)		69.7	%		4.5	%		30.3	%	AAA	Aaa
Bank of America Commercial Mortgage 07 1		2007		4,200		4,781		(581	)		74.1	%		9.4	%		30.5	%	NR	Aaa
Morgan Stanley Capital I 07 HQ11		2007		4,058		4,788		(730	)		70.1	%		3.1	%		30.2	%	AAA	Aaa
Merrill Lynch Mortgage Trust 05 CIP1		2005		3,865		4,035		(170	)		68.8	%		14.0	%		30.9	%	NR	Aaa
Commercial Mortgage Pass Throu 05 C6		2005		3,852		4,053		(201	)		72.4	%		9.4	%		30.4	%	AAA	Aaa
Morgan Stanley Capital I 04 T13		2004		3,329		3,326		3			58.8	%		0.0	%		15.4	%	NR	Aaa
Citigroup Commercial Mortgage 06 C5		2006		3,163		3,511		(348	)		68.9	%		13.3	%		30.3	%	NR	Aaa
GE Capital Commercial Mortgage 02 1A		2002		2,651		2,502		149			73.1	%		1.6	%		25.0	%	NR	Aaa

Subtotal			$	71,057	$	76,521	$	(5,464	)
All Other				35,402		35,812		(410	)

Total			$	106,459	$	112,333	$	(5,874	)

The following table shows the amount and percentage of the Company’s fixed maturities and short-term investments at fair value at September 30, 2009 by S&P credit rating or, if an S&P rating is not available, the equivalent Moody’s rating:


			Percent
			to
Rating	Amount		Total
	($ in thousands)

AAA	$	1,184,872		59	%
AA		475,182		24	%
A		245,829		12	%
BBB		68,829		3	%
BB & below		34,039		2	%
NR		5,970		0	%

	$	2,014,721		100	%

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


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized		S&P
	Value		Gains		(Losses)			Cost		Rating
	($ in thousands)
Issuers:
General Electric	$	20,513	$	820	$	(8	)	$	19,701	AA
Bank of America		8,820		251		(35	)		8,604	A-
Transcanada Corp		8,531		414		—			8,117	A-
Citigroup, Inc		7,228		77		(209	)		7,360	BBB+
Statoilhydro ASA		5,946		392		—			5,554	AA-
Wells Fargo		5,803		262		(18	)		5,559	A+
Goldman Sachs Group		5,682		181		—			5,501	A-
Scana Corp		5,291		182		—			5,109	A-
Morgan Stanley		5,116		182		(1	)		4,935	A-
ConocoPhillips		4,862		224		—			4,638	A
Bank of New York		3,670		203		—			3,467	A+
United Technologies Corp		3,585		238		—			3,347	A
Credit Suisse Group AG		3,530		260		—			3,270	A+
Pfizer Inc		3,523		326		—			3,197	AA
Eli Lilly & Co		3,434		186		—			3,248	A+

Subtotal	$	95,534	$	4,198	$	(271	)	$	91,607
All Other		107,489		5,968		(331	)		101,852

Total	$	203,023	$	10,166	$	(602	)	$	193,459

The following table sets forth the fifteen largest equity securities holdings as of September 30, 2009:


			Gross		Gross
	Fair		Unrealized		Unrealized
	Value		Gains		(Losses)			Cost
	($ in thousands)
Issuers:
Vanguard Total Stock Market Index	$	4,398	$	1,132	$	—		$	3,266
Vanguard Pacific Stock Index		3,950		1,132		—			2,818
Vanguard Emerging Market Stock Index		3,883		1,503		—			2,380
Vanguard European Stock Index		3,797		1,351		—			2,446
PPG Industries Inc		1,807		615		—			1,192
Boeing Co		1,719		327		—			1,392
EI Du Pont De Nemours & Co		1,628		327		—			1,301
3M Co		1,601		360		—			1,241
Merck & Co		1,542		222		—			1,320
Vodafone Group PLC		1,508		319					1,189
BP PLC		1,507		372		—			1,135
Unilever NV		1,482		476		—			1,006
HSBC Holdings PLC		1,397		314		—			1,083
Astrazeneca PLC		1,380		292		—			1,088
ConocoPhillips		1,368		125		—			1,243

Subtotal	$	32,967	$	8,867	$	—		$	24,100
All Other		24,982		3,976		(72	)		21,078

Total	$	57,949	$	12,843	$	(72	)	$	45,178

The following table summarizes all securities in a gross unrealized loss position at September 30, 2009 and December 31, 2008, showing the aggregate fair value and gross unrealized loss by the length of time those securities had continuously been in a gross unrealized loss position.


	September 30, 2009				December 31, 2008
	Fair		Gross		Fair		Gross
	Value		Unrealized Loss		Value		Unrealized Loss
	($ in thousands)
Fixed Maturities:
U.S. Government Treasury bonds, agency bonds and foreign government bonds
0-6 Months	$	8,367	$	54	$	3,862	$	145
7-12 Months		—		—		—		—
> 12 Months		—		—		—		—

Subtotal		8,367		54		3,862		145


States, municipalities and political subdivisions
0-6 Months		5,962		17		68,727		2,187
7-12 Months		5,150		103		118,910		4,376
> 12 Months		20,406		450		15,918		1,473

Subtotal		31,518		570		203,555		8,036


Mortgage-backed securities
0-6 Months		9,517		10		2,130		6
7-12 Months		—		—		3,471		9
> 12 Months		—		—		962		11

Subtotal		9,517		10		6,563		26


Collateralized mortgage obligations
0-6 Months		4,579		1,102		—		—
7-12 Months		—		—		39,012		20,779
> 12 Months		41,547		11,018		10,315		6,340

Subtotal		46,126		12,120		49,327		27,119


Asset-backed securities
0-6 Months		—		—		22,079		652
7-12 Months		—		—		6,631		551
> 12 Months		702		119		223		86

Subtotal		702		119		28,933		1,289


Commercial mortgage-backed securities
0-6 Months		8,800		546		6,461		280
7-12 Months		—		—		31,505		5,628
> 12 Months		64,941		5,912		54,717		14,442

Subtotal		73,741		6,458		92,683		20,350


Corporate bonds
0-6 Months		3,320		100		57,805		2,445
7-12 Months		801		13		57,971		5,893
> 12 Months		10,675		489		27,873		6,322

Subtotal		14,796		602		143,649		14,660


Total Fixed Maturities	$	184,767	$	19,933	$	528,572	$	71,625


Equity Securities — common stocks
0-6 Months	$	—	$	—	$	8,991	$	1,941
7-12 Months		811		72		351		46
> 12 Months		—		—		—		—


Total Equity Securities	$	811	$	72	$	9,342	$	1,987

As of September 30, 2009, the largest single unrealized loss by issuer in the fixed maturities was $1.4 million.

The scheduled maturity dates for fixed maturity securities by the number of years until maturity at September 30, 2009 are shown in the following table:


Period from			Cost or
September 30, 2009	Fair		Amortized
to Maturity	Value		Cost
	($ in thousands)

Due in one year or less	$	4,316	$	4,313
Due after one year through five years		694,349		673,116
Due after five years through ten years		377,737		357,728
Due after ten years		320,196		304,574
Mortgage- and asset-backed		481,188		483,376


Total	$	1,877,786	$	1,823,107

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	$	(820	)	$	—	$	—	$	(8,242	)	$	(9,062	)
Equity Securities		—			—		—		—			—

Total	$	(820	)	$	—	$	—	$	(8,242	)	$	(9,062	)

We analyze the unrealized losses quarterly to determine if any are other-than-temporary. The above unrealized losses have been determined to be temporary based on our policies. See Critical Accounting Estimates — Impairment of Invested Assets for additional information on our policies.

In the first quarter of 2009, the Company adopted accounting guidance relating to the recognition and presentation of other-than-temporary impairments (“OTTI”). For debt securities, 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 the credit loss portion of OTTI losses and is recognized in earnings. All non-credit losses are recognized as changes in OTTI losses within OCI.

The following table summarizes the cumulative amounts related to the Company’s credit loss portion of the other-than-temporary impairment losses on debt securities held as of September 30, 2009 that the Company does not intend to sell and it is not more likely than not that the Company will be required to sell the security prior to recovery of the amortized cost basis and for which the non-credit portion is included in other comprehensive income:


($ in thousands)

Beginning balance at June 30, 2009	$	2,472
Credit losses on securities not previously impaired as of June 30, 2009		—
Additional credit losses on securities previously impaired as of June 30, 2009		525
Ending balance at September 30, 2009	$	2,997


($ in thousands)

Beginning balance of at January 1, 2009	$	—
Credit losses on securities not previously impaired as of December 31, 2008		2,997
Additional credit losses on securities not previously impaired as of June 30, 2009		—
Ending balance at September 30, 2009	$	2,997

The following table shows the S&P ratings and equivalent Moody’s ratings of the fixed maturity securities in our portfolio with gross unrealized losses at September 30, 2009. Not all of the securities are rated by S&P and/or Moody’s.


		Gross
	Equivalent	Unrealized Loss					Fair Value
S&P	Moody's			Percent					Percent
Rating	Rating	Amount		to Total			Amount		to Total
		($ in thousands)

AAA/AA/A	Aaa/Aa/A	$	9,147		46	%	$	132,883		73	%
BBB	Baa		1,184		6	%		17,054		9	%
BB	Ba		1,817		9	%		8,130		4	%
B	B		2,401		12	%		10,920		6	%
CCC or lower	Caa or lower		5,358		27	%		14,989		8	%
N/A	N/A		26		0	%		791		0	%

Total		$	19,933		100	%	$	184,767		100	%

At September 30, 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 S&P rating of “BBB-” or higher, or a Moody’s rating of “Baa3” or higher, except for $9.6 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 September 30, 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	$	1		0	%	$	399		0	%
Due after one year through five years		339		2	%		15,095		8	%
Due after five years through ten years		248		1	%		20,786		11	%
Due after ten years		638		3	%		18,401		10	%
Mortgage- and asset-backed securities		18,707		94	%		130,086		71	%


Total fixed income securities	$	19,933		100	%	$	184,767		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 3.4 years.

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


	Three Months Ended Sept. 30,						Nine Months Ended Sept. 30,
	2009			2008			2009			2008
	($ in thousands)

Fixed maturities:
Gains	$	8,739		$	757		$	13,264		$	2,283
(Losses)		(2,057	)		(969	)		(5,555	)		(1,404	)
(Impairments)		(525	)		(749	)		(2,996	)		(749	)

		6,157			(961	)		4,713			130


Equity securities:
Gains		—			166			1,562			609
(Losses)		—			(722	)		(1,530	)		(1,896	)
(Impairments)		(22	)		(3,999	)		(8,720	)		(12,411	)

		(22	)		(4,555	)		(8,688	)		(13,698	)

Net realized gains (losses)	$	6,135		$	(5,516	)	$	(3,975	)	$	(13,568	)

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 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 $81.3 million and $96.8 million of paid and unpaid losses at September 30, 2009 and December 31, 2008, respectively, were due from reinsurers as a result of the losses from Hurricanes Gustav and Ike. Approximately $76.6 million and $101.7 million of paid and unpaid losses at September 30, 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.

Liquidity and Capital Resources

Net cash used in investing activities was $79.6 million for the nine months ended September 30, 2009 compared to net cash used in investing activities of $191.0 million for the nine months ended September 30, 2008. This change is primarily due to the reduction in cash provided by operating activities.

Net cash used in financing activities was $5.3 million for the nine months ended September 30, 2009 compared to net cash used in financing activities of $9.2 million for the nine months ended September 30, 2008. These uses of cash primarily related to a $7 million repurchase of our Senior notes in April 2009 and the repurchase of $11.5 million of the Company’s common stock in 2008 under the Company’s stock repurchase plan.

At September 30, 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 $40.0 million, consists of investment grade bonds. At September 30, 2009, our portfolio had an average maturity of 5.3 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 September 30, 2009 and December 31, 2008, all fixed maturity securities and equity securities held by us were classified as available-for-sale.

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. 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.

The credit facility contains customary covenants for facilities of this type, including restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of assets, and requirements as to maintaining certain consolidated tangible net worth, statutory surplus and other financial ratios. The credit facility also provides for customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, any representation or warranty made by the Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting the Company and its subsidiaries, the occurrence of certain material judgments, or a change in control of the Company. The credit facility expires on April 2, 2010. The letter of credit facility is collateralized by all of the common stock of Navigators Insurance Company and to the extent the aggregate face amount issued under the credit facility exceeds $75 million on account of these fluctuations we are required to post collateral with the lead bank of the consortium, which we have done as of September 30, 2009 in the amount of $5.8 million. The credit agreement contains covenants common to transactions of this type, including restrictions on indebtedness and liens, limitations on dividends, stock buy-backs, mergers and the sale of assets, and requirements to maintain certain consolidated tangible net worth, statutory surplus and other financial ratios. We were in compliance with all covenants at September 30, 2009.

The credit facility, which is denominated in U.S. dollars, is utilized primarily by Navigators Corporate Underwriters Ltd. and Millennium Underwriting Ltd. to fund our participation in Syndicate 1221 through letters of credit. The letters of credit issued under the facility are denominated in British pounds and their aggregate face amount will fluctuate based on exchange rates. At September 30, 2009, letters of credit with an aggregate face amount of $82.9 million were issued under the credit facility.

As a result of the April 3, 2009 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.

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 ($7.7 million) 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 September 30, 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 have historically on average been paid within 45 calendar days.

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

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

At September 30, 2009, ceded asbestos paid and unpaid recoverables were $7.8 million compared to $8.9 million at December 31, 2008. Of such amounts at September 30, 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.

Our capital resources consist of funds deployed or available to be deployed to support our business operations. At September 30, 2009 and December 31, 2008, our capital resources were as follows:


	September 30,			December 31
	2009			2008
	($ in thousands)

Senior debt	$	113,979		$	123,794
Stockholders’ equity		810,955			689,317

Total capitalization	$	924,934		$	813,111

Ratio of debt to total capitalization		12.3	%		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 which are now $4.0 million. Going forward, 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 September 30, 2009 for the payment of dividends by Navigators Insurance Company during 2009 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 nine months of 2009.

Condensed Parent Company balance sheets as of September 30, 2009 (unaudited) and December 31, 2008 are shown in the table below:


	September 30,		December 31,
	2009		2008
	($ in thousands)

Cash and investments	$	58,312	$	52,149
Investments in subsidiaries		860,914		751,864
Goodwill and other intangible assets		2,534		2,534
Other assets		7,222		8,769

Total assets	$	928,982	$	815,316


Accounts payable and other liabilities	$	694	$	747
Accrued interest payable		3,354		1,458
7% Senior Notes due May 1, 2016		113,979		123,794

Total liabilities		118,027		125,999


Stockholders’ equity		810,955		689,317

Total liabilities and stockholders’ equity	$	928,982	$	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 third fiscal quarter in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II — Other Information

Item 1. Legal Proceedings

The Company is working with various state insurance regulators on a matter involving administrative 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 and forms. 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’ 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. The other operating expenses for the second quarter of 2009 include a $1.3 million charge related to this matter. Navigators Insurance Company may be subject to additional fines, refund obligations and other exposure with respect to the past fees charged. The Company cannot at this time reasonably estimate the additional 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.

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

None

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.

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: November 6, 2009	/s/ Francis W. McDonnell
	Francis W. McDonnell
	Senior Vice President and Chief Financial Officer

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.