Edgar Filing: NAVIGATORS GROUP INC

Form 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 June 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		(IRS Employer
incorporation or organization)		Identification No.)

One Penn Plaza, New York, New York		10119

(Address of principal executive offices)		(Zip Code)

(212) 244-2333

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 þ 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 July 27, 2009 was 16,948,497.

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

INDEX


			Page No.

Part I. FINANCIAL INFORMATION:

Item 1. Financial Statements

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

Consolidated Statements of Income (Unaudited)
Three Months Ended June 30, 2009 and 2008			4
Six Months Ended June 30, 2009 and 2008			5

Consolidated Statements of Stockholders’ Equity (Unaudited) June 30, 2009 and 2008			6

Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended June 30, 2009 and 2008			7
Six Months Ended June 30, 2009 and 2008			8

Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2009 and 2008			9

Notes to Interim Consolidated Financial Statements (Unaudited)			10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			31

Item 3. Quantitative and Qualitative Disclosures About Market Risk			84

Item 4. Controls and Procedures			84

Part II. OTHER INFORMATION

Item 1. Legal Proceedings			84

Item 1A. Risk Factors			85

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			85

Item 3. Defaults Upon Senior Securities			85

Item 4. Submissions of Matters to a Vote of Security Holders			85

Item 5. Other Information			85

Item 6. Exhibits			86

Signature			87

Index of Exhibits			88

Exhibit 11-1
Exhibit 31-1
Exhibit 31-2
Exhibit 32-1
Exhibit 32-2

Part 1. Financial Information

Item 1. Financial Statements

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

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


	June 30,			December 31,
	2009			2008
	(Unaudited)
ASSETS
Investments and cash:
Fixed maturities, available-for-sale, at fair value (amortized cost: 2009, $1,752,828; 2008, $1,664,755)	$	1,754,770		$	1,643,772
Equity securities, available-for-sale, at fair value (cost: 2009, $41,944; 2008, $52,523)		47,781			51,802
Short-term investments, at fair value		191,616			220,684
Cash		14,401			1,457

Total investments and cash		2,008,568			1,917,715


Premiums in course of collection		210,815			170,522
Commissions receivable		313			319
Prepaid reinsurance premiums		166,539			188,874
Reinsurance receivable on paid losses		79,857			67,227
Reinsurance receivable on unpaid losses and loss adjustment expenses		875,809			853,793
Net deferred income tax asset		48,231			54,736
Deferred policy acquisition costs		60,032			47,618
Accrued investment income		17,397			17,411
Goodwill and other intangible assets		7,135			6,622
Other assets		25,407			24,743


Total assets	$	3,500,103		$	3,349,580


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses	$	1,942,976		$	1,853,664
Unearned premium		510,282			480,665
Reinsurance balances payable		125,167			140,319
Senior notes		113,949			123,794
Federal income tax payable		14,033			5,874
Payable for securities		11,075			—
Accounts payable and other liabilities		34,824			55,947

Total liabilities		2,752,306			2,660,263


Stockholders’ equity:
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued		—			—
Common stock, $.10 par value, shares authorized: 50,000,000; issued and outstanding (net of treasury shares): 16,948,497 at 6/30/09 and 16,856,073 at 12/31/08		1,717			1,708
Additional paid-in capital		302,964			298,872
Retained earnings		442,426			406,776
Treasury stock, at cost (224,754 shares for both 2009 and 2008)		(11,540	)		(11,540	)
Accumulated other comprehensive income (loss)		12,230			(6,499	)

Total stockholders’ equity		747,797			689,317


Total liabilities and stockholders’ equity	$	3,500,103		$	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
	June 30,
	2009			2008
	(Unaudited)

Gross written premium	$	272,729		$	$279,213

Revenues:
Net written premium	$	183,007		$	174,287
Increase in unearned premium		(13,139	)		(11,584	)

Net earned premium		169,868			162,703
Commission income		55			467
Net investment income		18,656			18,731
Total other-than-temporary impairments		(1,876	)		(8,412	)
Portion of loss recognized in OCI (before tax)		(1,407	)		—

Net impairment loss recognized in earnings		(469	)		(8,412	)
Net realized capital gains (losses)		2,596			436
Other income		5,247			1,010

Total revenues		195,953			174,935


Operating expenses:
Net losses and loss adjustment expenses incurred		100,728			91,889
Commission expense		26,278			23,490
Other operating expenses		33,019			33,237
Interest expense		2,150			2,217

Total operating expenses		162,175			150,833


Income before income tax expense		33,778			24,102


Income tax expense:
Current		10,440			12,156
Deferred		(312	)		(5,475	)

Total income tax expense		10,128			6,681


Net income	$	23,650		$	17,421


Net income per common share:
Basic	$	1.40		$	1.04
Diluted	$	1.39		$	1.03

Average common shares outstanding:
Basic		16,938			16,773
Diluted		16,993			16,912

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)


	Six Months Ended
	June 30,
	2009			2008
	(Unaudited)

Gross written premium	$	547,988		$	566,359

Revenues:
Net written premium	$	383,659		$	362,009
Increase in unearned premium		(48,845	)		(43,566	)

Net earned premium		334,814			318,443
Commission income		35			728
Net investment income		37,399			37,569
Total other-than-temporary impairments		(28,747	)		(8,412	)
Portion of loss recognized in OCI (before tax)		(17,578	)		—

Net impairment loss recognized in earnings		(11,169	)		(8,412	)
Net realized capital gains (losses)		1,059			360
Other income		5,410			1,021

Total revenues		367,548			349,709


Operating expenses:
Net losses and loss adjustment expenses incurred		200,975			180,309
Commission expense		48,726			44,438
Other operating expenses		63,554			62,993
Interest expense		4,369			4,434

Total operating expenses		317,624			292,174


Income before income tax expense		49,924			57,535


Income tax expense:
Current		17,190			22,462
Deferred		(2,916	)		(5,598	)

Total income tax expense		14,274			16,864


Net income	$	35,650		$	40,671


Net income per common share:
Basic	$	2.11		$	2.42
Diluted	$	2.10		$	2.39

Average common shares outstanding:
Basic		16,910			16,817
Diluted		17,010			17,002

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)


	Six Months Ended
	June 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		9			13

Balance at end of period	$	1,717		$	1,700


Additional paid-in capital
Balance at beginning of year	$	298,872		$	291,616
Shares issued under stock plans		4,092			3,688

Balance at end of period	$	302,964		$	295,304


Retained earnings
Balance at beginning of year	$	406,776		$	355,084
Net income		35,650			40,671

Balance at end of period	$	442,426		$	395,755


Treasury stock, at cost
Balance at beginning of year	$	(11,540	)	$	—
Treasury stock acquired		—			(9,816	)

Balance at end of period	$	(11,540	)	$	(9,816	)


Accumulated other comprehensive income (loss)
Net unrealized gains (losses) on securities, net of tax
Balance at beginning of year	$	(15,062	)	$	10,186
Change in period		31,179			(20,398	)

Balance at end of period		16,117			(10,212	)

Non-credit Impairment Losses, net of tax
Balance at beginning of year		—			—
Change in period		(11,426	)		—

Balance at end of period		(11,426	)		—

Cumulative translation adjustments, net of tax
Balance at beginning of year		8,563			3,533
Net adjustment for period		(1,024	)		93

Balance at end of period		7,539			3,626

Balance at end of period	$	12,230		$	(6,586	)


Total stockholders’ equity at end of period	$	747,797		$	676,357

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
	June 30,
	2009			2008
	(Unaudited)

Net income	$	23,650		$	17,421

Other comprehensive income:
Change in net unrealized gains (losses) on securities, net of tax expense (benefit) of $6,935 and ($9,337) in 2009 and 2008, respectively⁽¹⁾		13,770			(16,986	)
Change in foreign currency translation (losses) gains, net of tax (benefit) expense of ($1,369) and $909 in 2009 and 2008, respectively		(2,544	)		375

Other comprehensive income (loss)		11,226			(16,611	)


Comprehensive income	$	34,876		$	810


⁽¹⁾ Disclosure of reclassification amount, net of tax:
Unrealized holding gains (losses) arising during period	$	15,146		$	(22,171	)
Less: reclassification adjustment for net realized capital gains (losses) included in net income		1,703			(5,185	)
reclassification adjustment for impairment losses recognized in net income		(327	)		—

Change in net unrealized gains (losses) on securities	$	13,770		$	(16,986	)

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)


	Six Months Ended
	June 30,
	2009			2008
	(Unaudited)

Net income	$	35,650		$	40,671

Other comprehensive income:
Change in net unrealized gains (losses) on securities, net of tax expense (benefit) of $9,729 and $ (10,742) in 2009 and 2008, respectively⁽¹⁾		19,753			(20,398	)
Change in foreign currency translation (losses) gains, net of tax (benefit) expense of $(551) and $50 in 2009 and 2008, respectively		(1,024	)		93

Other comprehensive income (loss)		18,729			(20,305	)


Comprehensive income	$	54,379		$	20,366


⁽¹⁾ Disclosure of reclassification amount, net of tax:
Unrealized holding gains (losses) arising during period	$	12,942		$	(25,633	)
Less: reclassification adjustment for net realized capital gains (losses) included in net income		563			(5,235	)
reclassification adjustment for impairment losses recognized in net income		(7,374	)		—

Change in net unrealized gains (losses) on securities	$	19,753		$	(20,398	)

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)


	Six Months Ended
	June 30,
	2009			2008
	(Unaudited)
Operating activities:
Net income	$	35,650		$	40,671
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation & amortization		2,263			2,422
Net deferred income tax benefit		(2,916	)		(5,598	)
Net realized capital losses		10,110			8,052
Changes in assets and liabilities:
Reinsurance receivable on paid and unpaid losses and LAE		(28,447	)		40,156
Reserve for losses and LAE		75,937			56,873
Prepaid reinsurance premiums		23,527			(5,019	)
Unearned premium		25,508			48,311
Premiums in course of collection		(37,060	)		(34,052	)
Commissions receivable		7			1,933
Deferred policy acquisition costs		(11,597	)		(3,143	)
Accrued investment income		18			(1,342	)
Reinsurance balances payable		(16,287	)		(13,331	)
Federal income tax		6,635			5,354
Other		(13,867	)		(7,887	)

Net cash provided by operating activities		69,481			133,400


Investing activities:
Fixed maturities, available-for-sale
Redemptions and maturities		65,094			72,764
Sales		98,650			84,562
Purchases		(260,161	)		(253,945	)
Equity securities, available-for-sale
Sales		17,201			12,063
Purchases		(15,287	)		(25,893	)
Change in payable for securities		11,223			(2,046	)
Net change in short-term investments		34,148			(3,736	)
Purchase of property and equipment		(1,306	)		(1,618	)

Net cash used in investing activities		(50,438	)		(117,849	)


Financing activities:
Purchase of treasury stock		—			(9,816	)
Repurchase of Senior Notes		(7,000	)		—
Proceeds of stock issued from employee stock purchase plan		344			520
Proceeds of stock issued from exercise of stock options		557			1,188

Net cash used in financing activities		(6,099	)		(8,108	)


Increase in cash		12,944			7,443
Cash at beginning of year		1,457			7,056

Cash at end of period	$	14,401		$	14,499


Supplemental cash information:
Federal, state and local income tax paid	$	9,688		$	15,430
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 evaluates subsequent events through August 7, 2009.

Note 2. Reinsurance Ceded

The Company’s ceded earned premiums were $92.5 million and $99.0 million for the three months ended June 30, 2009 and 2008, respectively, and were $188.3 million and $199.1 million for the six months ended June 30, 2009 and 2008, respectively. The Company’s ceded incurred losses were $87.7 million and $60.3 million for the three months ended June 30, 2009 and 2008, respectively, and were $136.5 million and $82.0 million for the six months ended June 30, 2009 and 2008, respectively.

Note 3. Segment Information

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

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

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

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

The Lloyd’s Operations primarily underwrite marine and related lines of business along with professional liability insurance, and construction coverages for onshore energy business at Lloyd’s of London (“Lloyd’s”) through Lloyd’s Syndicate 1221 (“Syndicate 1221”). The European property business, written by the Lloyd’s Operations and the U.K. Branch beginning in 2006, was discontinued in the 2008 second quarter. Our Lloyd’s Operations include Navigators Underwriting Agency Ltd. (“NUAL”), a Lloyd’s underwriting agency which manages Syndicate 1221. We participate in the capacity of Syndicate 1221 through two wholly-owned Lloyd’s corporate members.

Navigators Management Company, Inc. (“NMC”) is a wholly-owned underwriting management company which produces, manages and underwrites insurance and reinsurance for the Company. During the 2008 second quarter, Navigators California Insurance Services, Inc. and Navigators Special Risk, Inc., also wholly-owned underwriting management companies, were merged into NMC.

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

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

	•		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 Company 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”.

	•		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.

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

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


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

Gross written premium	$	189,385		$	83,344					$	272,729
Net written premium		122,359			60,648						183,007

Net earned premium		116,223			53,645						169,868
Net losses and LAE		(68,843	)		(31,885	)					(100,728	)
Commission expense		(15,060	)		(11,218	)					(26,278	)
Other operating expenses		(26,906	)		(6,117	)	$	4			(33,019	)
Commission income and other income (expense)		1,655			651			2,996			5,302


Underwriting Income (loss)		7,069			5,076			3,000			15,145

Net investment income		16,239			2,316			101			18,656
Net realized capital gains (losses)		2,210			(83	)		—			2,127
Interest expense		—			—			(2,150	)		(2,150	)

Income (loss) before income taxes		25,518			7,309			951			33,778

Income tax expense (benefit)		7,171			2,624			333			10,128

Net income (loss)	$	18,347		$	4,685		$	618		$	23,650


Identifiable assets ⁽¹⁾	$	2,571,787		$	832,751		$	80,000		$	3,500,103


Loss and LAE ratio		59.2	%		59.4	%					59.3	%
Commission expense ratio		13.0	%		20.9	%					15.5	%
Other operating expense ratio ⁽²⁾		21.7	%		10.2	%					18.1	%

Combined ratio		93.9	%		90.5	%					92.9	%


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

⁽²⁾		Includes other operating expenses and commission income and other income (expense).


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

Gross written premium:
Marine	$	57,086	$	47,273	$	104,359
Property Casualty		94,567		25,506		120,073
Professional Liability		37,732		10,565		48,297

Total	$	189,385	$	83,344	$	272,729


Net written premium:
Marine	$	34,956	$	40,077	$	75,033
Property Casualty		65,704		15,070		80,774
Professional Liability		21,699		5,501		27,200

Total	$	122,359	$	60,648	$	183,007


Net earned premium:
Marine	$	34,678	$	37,038	$	71,716
Property Casualty		63,068		11,201		74,269
Professional Liability		18,477		5,406		23,883

Total	$	116,223	$	53,645	$	169,868


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

Gross written premium	$	197,956		$	81,257					$	279,213
Net written premium		128,182			46,105						174,287

Net earned premium		117,434			45,269						162,703
Net losses and LAE		(62,225	)		(29,664	)					(91,889	)
Commission expense		(14,723	)		(8,767	)					(23,490	)
Other operating expenses		(24,552	)		(8,685	)					(33,237	)
Commission income and other income (expense)		1,516			(39	)					1,477


Underwriting profit		17,450			(1,886	)					15,564

Net investment income		15,593			2,871		$	267			18,731
Net realized capital gains (losses)		(8,053	)		77			—			(7,976	)
Interest expense		—			—			(2,217	)		(2,217	)

Income (loss) before income taxes		24,990			1,062			(1,950	)		24,102

Income tax expense (benefit)		6,939			425			(683	)		6,681

Net income (loss)	$	18,051		$	637		$	(1,267	)	$	17,421


Identifiable assets ⁽¹⁾	$	2,383,898		$	773,572		$	68,413		$	3,245,500


Loss and LAE ratio		53.0	%		65.5	%					56.5	%
Commission expense ratio		12.5	%		19.4	%					14.4	%
Other operating expense ratio ⁽²⁾		19.6	%		19.3	%					19.5	%

Combined ratio		85.1	%		104.2	%					90.4	%


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

⁽²⁾		Includes other operating expenses and commission income and other income (expense).


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

Gross written premium:
Marine	$	64,339	$	41,499	$	105,838
Property Casualty		107,180		31,359		138,539
Professional Liability		26,437		8,399		34,836

Total	$	197,956	$	81,257	$	279,213


Net written premium:
Marine	$	38,982	$	28,269	$	67,251
Property Casualty		73,294		12,755		86,049
Professional Liability		15,906		5,081		20,987

Total	$	128,182	$	46,105	$	174,287


Net earned premium:
Marine	$	33,095	$	31,328	$	64,423
Property Casualty		69,951		8,800		78,751
Professional Liability		14,388		5,141		19,529

Total	$	117,434	$	45,269	$	162,703


	Six Months Ended June 30, 2009
	Insurance			Lloyd’s
	Companies			Operations			Corporate			Total
				($ in thousands)

Gross written premium	$	381,368		$	166,620					$	547,988
Net written premium		259,441			124,218						383,659

Net earned premium		236,513			98,301						334,814
Net losses and LAE		(138,996	)		(61,979	)					(200,975	)
Commission expense		(30,028	)		(18,698	)					(48,726	)
Other operating expenses		(51,466	)		(12,098	)	$	10			(63,554	)
Commission income and other income (expense)		1,856			599			2,990			5,445


Underwriting profit		17,879			6,125			3,000			27,004

Net investment income		32,446			4,699			254			37,399
Net realized capital gains (losses)		(6,697	)		(3,413	)		—			(10,110	)
Interest expense		—			—			(4,369	)		(4,369	)

Income (loss) before income taxes		43,628			7,411			(1,115	)		49,924

Income tax expense (benefit)		11,704			2,960			(390	)		14,274

Net income (loss)	$	31,924		$	4,451		$	(725	)	$	35,650


Identifiable assets ⁽¹⁾	$	2,571,787		$	832,751		$	80,000		$	3,500,103


Loss and LAE ratio		58.8	%		63.0	%					60.0	%
Commission expense ratio		12.7	%		19.0	%					14.6	%
Other operating expense ratio ⁽²⁾		21.0	%		11.7	%					18.2	%

Combined ratio		92.5	%		93.7	%					92.8	%


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

⁽²⁾		Includes other operating expenses and commission income and other income (expense).


	Six Months Ended June 30, 2009
	Insurance		Lloyd’s
	Companies		Operations		Total
			($ in thousands)

Gross written premium:
Marine	$	134,323	$	106,296	$	240,619
Property Casualty		178,825		39,034		217,859
Professional Liability		68,220		21,290		89,510

Total	$	381,368	$	166,620	$	547,988


Net written premium:
Marine	$	93,415	$	90,051	$	183,466
Property Casualty		125,680		22,665		148,345
Professional Liability		40,346		11,502		51,848

Total	$	259,441	$	124,218	$	383,659


Net earned premium:
Marine	$	71,839	$	68,213	$	140,052
Property Casualty		128,480		19,124		147,604
Professional Liability		36,194		10,964		47,158

Total	$	236,513	$	98,301	$	334,814


	Six Months Ended June 30, 2008
	Insurance			Lloyd’s
	Companies			Operations			Corporate			Total
				($ in thousands)

Gross written premium	$	389,552		$	176,807					$	566,359
Net written premium		252,492			109,517						362,009

Net earned premium		229,680			88,763						318,443
Net losses and LAE		(129,581	)		(50,728	)					(180,309	)
Commission expense		(27,671	)		(16,767	)					(44,438	)
Other operating expenses		(46,700	)		(16,293	)					(62,993	)
Commission income and other income (expense)		1,774			(25	)					1,749


Underwriting profit		27,502			4,950						32,452

Net investment income		31,058			5,853		$	658			37,569
Net realized capital gains (losses)		(8,155	)		103			—			(8,052	)
Interest expense		—			—			(4,434	)		(4,434	)

Income (loss) before income taxes		50,405			10,906			(3,776	)		57,535

Income tax expense (benefit)		14,309			3,877			(1,322	)		16,864

Net income (loss)	$	36,096		$	7,029		$	(2,454	)	$	40,671


Identifiable assets ⁽¹⁾	$	2,383,898		$	773,572		$	68,413		$	3,245,500


Loss and LAE ratio		56.4	%		57.1	%					56.6	%
Commission expense ratio		12.0	%		18.9	%					14.0	%
Other operating expense ratio ⁽²⁾		19.6	%		18.4	%					19.2	%

Combined ratio		88.0	%		94.4	%					89.8	%


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

⁽²⁾		Includes other operating expenses and commission income and other income (expense).


	Six Months Ended June 30, 2008
	Insurance		Lloyd’s
	Companies		Operations		Total
	($ in thousands)

Gross written premium:
Marine & Energy	$	135,955	$	108,653	$	244,608
Property Casualty		207,873		49,085		256,958
Professional Liability		45,724		19,069		64,793

Total	$	389,552	$	176,807	$	566,359


Net written premium:
Marine & Energy	$	82,456	$	77,179	$	159,635
Property Casualty		142,397		20,465		162,862
Professional Liability		27,639		11,873		39,512

Total	$	252,492	$	109,517	$	362,009


Net earned premium:
Marine & Energy	$	59,564	$	60,121	$	119,685
Property Casualty		141,655		17,542		159,197
Professional Liability		28,461		11,100		39,561

Total	$	229,680	$	88,763	$	318,443

The Insurance Companies’ net earned premium includes $19.0 million and $16.4 million of net earned premium from the U.K. Branch for the three months ended June 30, 2009 and 2008, respectively, and $40.2 million and $31.1 million of net earned premium from the U.K. Branch for the six months ended June 30, 2009 and 2008, respectively.

Note 4. Comprehensive Income

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

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 $1.8 million and $2.5 million for the three months ended June 30, 2009 and 2008, respectively, and $3.6 million and $4.4 million for the six months ended June 30, 2009 and 2008, respectively.

The Company expensed $27,000 and $52,000 for the three months ended June 30, 2009 and 2008, respectively, and $68,000 and $93,000 for the six months ended June 30, 2009 and 2008, respectively, related to its Employee Stock Purchase Plan.

In addition, $52,500 and $50,000 were expensed for the three month periods ended June 30, 2009 and 2008, respectively, and $105,000 and $100,000 were expensed for the six month periods ended June 30, 2009 and 2008, respectively, for stock issued annually to non-employee directors as part of their directors’ compensation for serving on the Parent Company’s Board of Directors.

Note 6. Recently Adopted Accounting Pronouncements

SFAS No. 141(R): In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”). SFAS 141(R) replaces SFAS 141, Business Combinations. SFAS 141(R) retains the fundamental requirements in SFAS 141 that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141(R) amends the recognition provisions for assets and liabilities acquired in a business combination, including those arising from contractual and non-contractual contingencies. SFAS 141(R) also amends the recognition criteria for contingent consideration. SFAS 141(R) was effective as of January 1, 2009. The adoption of SFAS 141(R) did not have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.

SFAS No. 160: In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in Consolidated Financial Statements—an amendment to ARB No. 51 (“SFAS 160”). SFAS 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest of the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 also requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of operations, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS 160 was effective as of January 1, 2009. The adoption of SFAS 160 did not have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.

SFAS No. 161: In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”). SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, as amended, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”) and its related interpretations and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flow. SFAS 161 became effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. The adoption of SFAS 161 did not have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.

FASB Staff Position (“FSP”) No. 142-3: In April 2008, the FASB issued FSP 142-3, Determining the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 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. FSP 142-3 became effective for fiscal years beginning after December 15, 2008. The adoption of FSP 142-3 did not have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.

EITF No. 07-5: In June 2008, the EITF reached consensus on Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF 07-5”), which provides guidance about whether an instrument should be classified as equity and not marked to market for accounting purposes. EITF 07-5 became effective for fiscal years beginning after December 15, 2008. The adoption of EITF 07-5 did not have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.

FASB Staff Position No. 157-4: In April 2009, the FASB issued FSP FAS 157-4, Determining the Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions that are Not Orderly (“FSP FAS 157-4”). The FSP became effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption was permitted for periods ending after March 15, 2009. FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with FASB 157, Fair Value Measurements, when the volume and level of activity of the asset or liability have significantly decreased and on identifying circumstances that indicate a transaction is not orderly. The Company elected to early adopt FSP FAS 157-4 in the 2009 first quarter. The adoption of FSP FAS 157-4 did not have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.

FASB Staff Position No. 115-2: In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP FAS 115-2 and FAS 124-2”). The FSP became effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. FSP FAS 115-2 and FAS 124-2 modify the requirements for recognizing other-than-temporarily impaired debt securities, the presentation of other-than-temporary impairment losses and increase the frequency of and expand the required disclosures about other-than-temporary impairment for debt and equity securities. The Company elected to early adopt FSP FAS 115-2 and FAS 124-2 in the 2009 first quarter. The adoption did not have a material effect on the Company’s consolidated financial condition, results of operations or cash flow.

FASB Staff Position No. 107-1: In April 2009, the FASB issued FSP FAS 107-1 and ABP 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1 and ABP 28-1”). The FSP became effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. FSP FAS 107-1 and APB 28-1 require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The Company elected to early adopt FSP FASB 107-1 and APB 28-1 in the 2009 first quarter. The adoption did not have a material effect on the Company’s consolidated financial condition, results of operations or cash flow.

SFAS No. 165: In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”). This statement 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. SFAS 165 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. SFAS 165 is effective for interim and annual financial periods ending after June 15, 2009. The adoption of SFAS 165 did not have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.

SFAS No. 166: In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140 (“SFAS 166”). The key amendments resulting from SFAS 166 are the removal of the concept of a qualifying special-purpose entity (QSPE) from Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”) and the elimination of the exception for QSPEs from the consolidation guidance of FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities (“FIN 46(R)”). SFAS 166 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. In addition SFAS 166 requires enhanced disclosures to provide greater transparency about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. SFAS 166 is effective as of January 1, 2010 for calendar year reporting entities. Early adoption is not permitted. The Company is currently evaluating the potential impact of adopting SFAS 166 on its consolidated financial statements.

SFAS No. 167: In June 2009 the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS 167”). SFAS 167 addresses the effects of eliminating the QSPE concept from SFAS 140 and clarifies and amends certain key provisions of FIN 46(R), including the transparency of an enterprise’s involvement with variable interest entities (VIEs). The key changes resulting from SFAS 167 are the requirement of 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 FIN 46(R)’s consideration of related party relationships in the determination of the primary beneficiary of a VIE. SFAS 167 also requires enhanced disclosures to provide more transparent information regarding an enterprise’s involvement with a VIE. SFAS 167 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 SFAS 167 on its consolidated financial statements.

SFAS No. 168: In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162 (“SFAS 168”). SFAS 168 establishes the FAS Accounting Standards Codification (Codification) as the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretative releases of the Securities and Exchange Commission (“SEC”) under federal securities laws are also sources of authoritative GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company does not expect the adoption of SFAS 168 to have a material effect on its consolidated financial condition, results of operations or cash flows.

Note 7. Syndicate 1221

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

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

Syndicate 1221’s stamp capacity is £123.0 million ($190.5 million) for the 2009 underwriting year compared to £123.0 million ($228.0 million) for the 2008 underwriting year. Stamp capacity is a measure of the amount of premium a Lloyd’s syndicate is authorized to write based on a business plan approved by the Council of Lloyd’s. Syndicate 1221’s capacity is expressed net of commission (as is standard at Lloyd’s). The Syndicate 1221 premium recorded in the Company’s financial statements is gross of commission. Navigators provides 100% of Syndicate 1221’s capacity for the 2009 and 2008 underwriting years through Navigators Corporate Underwriters Ltd. in 2008 and through Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. in 2007.

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

Note 8. Income Taxes

We are subject to the tax laws and regulations of the United States (“U.S.”) and foreign countries in which we operate. The Company files a consolidated federal tax return, which includes all domestic subsidiaries and the U.K. Branch. The income from the foreign operations is designated as either U.S. connected income or non-U.S. connected income. Lloyd’s is required to pay U.S. income tax on U.S. connected income written by Lloyd’s syndicates. Lloyd’s and the IRS have entered into an agreement whereby the amount of tax due on U.S. connected income is calculated by Lloyd’s and remitted directly to the 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 premium is derived within the U.K. and would therefore be subject to U.S. taxation when the Lloyd’s year of account closes. Taxes are accrued at a 35% rate on our foreign source insurance income and foreign tax credits, where available, are utilized to offset U.S. tax as permitted. The Company’s effective tax rate for Syndicate 1221 taxable income could substantially exceed 35% to the extent the Company is unable to offset U.S. taxes paid under Subpart F tax regulations with U.K. tax credits on future underwriting year distributions. U.S. taxes are not accrued on the earnings of the Company’s foreign agencies as these earnings are not 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 June 30, 2009 or June 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 2005 and subsequent. The Company’s policy is to record interest and penalties related to unrecognized tax benefits to income tax expense. The Company did not incur any interest or penalties related to unrecognized tax benefits for the three or six month periods ended June 30, 2009 and 2008.

The Company recorded income tax expense of $10.1 million for the 2009 second quarter compared to income tax expense of $6.7 million for the 2008 second quarter, resulting in effective tax rates of 30.0% and 27.7%, respectively. The Company’s effective tax rate is less than 35% due to permanent differences between book and tax return income, with the most significant item being tax exempt interest. The effective tax rate on net investment income was 25.2% for the 2009 three month period compared to 25.4% for the same period in 2008. As of June 30, 2009 and December 31, 2008, the net deferred Federal, foreign, state and local tax assets were $48.2 million and $54.7 million, respectively.

The Company had state and local deferred tax assets amounting to potential future tax benefits of $3.7 million and $6.2 million at June 30, 2009 and December 31, 2008, respectively. Included in the deferred tax assets are state and local net operating loss carryforwards of $1.8 million and $0.5 million at June 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 June 30, 2009 expire in 2029.

Note 9. Commitments and Contingencies

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

(b) Whenever a member of Lloyd’s is unable to pay its debts to policyholders, such debts may be payable by the Lloyd’s Central Fund. If Lloyd’s determines that the Central Fund needs to be increased, it has the power to assess premium levies on current Lloyd’s members up to 3% of a member’s underwriting capacity in any one year. The Company does not believe that any assessment is likely in the foreseeable future and has not provided any allowance for such an assessment. However, based on the Company’s 2009 capacity at Lloyd’s of £123.0 million, the June 30, 2009 exchange rate of £1 equals $1.64 and assuming the maximum 3% assessment, the Company would be assessed approximately $6.1 million.

Note 10. Senior Notes due May 1, 2016

On April 17, 2006, the Company completed a public debt offering of $125 million principal amount of 7% senior 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 $2.1 million and $2.2 million, respectively, for the three months ended June 30, 2009 and 2008, and $4.4 million for both of the six months ended June 30, 2009 and 2008. The fair value of the Senior Notes, based on quoted market prices, was $87.1 million and $83.6 million at June 30, 2009 and December 31, 2008, respectively.

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

In April 2009, the Company repurchased $10.0 million aggregate principal amount of its issued and outstanding 7% senior notes from an unaffiliated noteholder on the open market for $7.0 million, which generated a $2.9 million pretax gain that is reflected in other income and added $0.11 to the second quarter earnings per share. As a result of this transaction $115.0 million aggregate principal amount of notes remains issued and outstanding.

Note 11. Investments

The following tables set forth our cash and investments as of June 30, 2009:


			Gross		Gross			OTTI			Cost or
	Fair		Unrealized		Unrealized			Recognized			Amortized
June 30, 2009	Value		Gains		(Losses)			in OCI			Cost
					($ in thousands)
Fixed maturities:
U.S. Government Treasury Bonds, agency bonds and foreign government bonds	$	402,071	$	11,555	$	(249	)	$	—		$	390,765
States, municipalities and political subdivisions		642,861		18,069		(3,719	)		—			628,511
Mortgage- and asset-backed securities
Mortgage-backed securities		309,097		11,607		(170	)		—			297,660
Collateralized mortgage obligations		43,230		—		(1,359	)		(17,505	)		62,094
Asset-backed securities		24,773		721		(197	)		(73	)		24,322
Commercial mortgage-backed securities		96,417		119		(16,763	)		—			113,061

Subtotal		473,517		12,447		(18,489	)		(17,578	)		497,137
Corporate bonds		236,321		6,184		(6,278	)		—			236,415


Total fixed maturities		1,754,770		48,255		(28,735	)		(17,578	)		1,752,828


Equity securities — common stocks		47,781		6,103		(266	)		—			41,944

Cash		14,401		—		—			—			14,401

Short-term investments		191,616		—		—			—			191,616


Total	$	2,008,568	$	54,358	$	(29,001	)	$	(17,578	)	$	2,000,789

The market value of the Company’s investment portfolio may fluctuate significantly in response to changes in interest rates, investment quality ratings 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. It 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.

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


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

Fixed Maturities:
U.S. Government Treasury and Agency
Bonds and foreign government bonds
0-6 Months	$	43,336	$	249	$	3,862	$	145
7-12 Months		—		—		—		—
> 12 Months		—		—		—		—

Subtotal		43,336		249		3,862		145


States, municipalities and political subdivisions
0-6 Months		67,665		886		68,727		2,187
7-12 Months		10,221		570		118,910		4,376
> 12 Months		46,759		2,263		15,918		1,473

Subtotal		124,645		3,719		203,555		8,036


Mortgage- and asset-backed securities
0-6 Months		23,219		170		30,670		939
7-12 Months		1,812		137		80,618		26,966
> 12 Months		133,750		35,760		66,218		20,879

Subtotal		158,781		36,067		177,506		48,784


Corporate bonds
0-6 Months		12,237		201		57,805		2,445
7-12 Months		9,272		384		57,971		5,893
> 12 Months		54,868		5,693		27,873		6,322

Subtotal		76,377		6,278		143,649		14,660


Total Fixed Maturities	$	403,139	$	46,313	$	528,572	$	71,625


Equity securities — common stocks
0-6 Months	$	2,746	$	111	$	8,991	$	1,941
7-12 Months		728		155		351		46
> 12 Months		—		—		—		—


Total Equity Securities	$	3,474	$	266	$	9,342	$	1,987

The Mortgage- and asset-backed securities’ 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. 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, 60+ delinquency and security rating.

During the 2009 second quarter, the Company identified 7 common stocks with a fair value of $3.6 million which were considered to be other-than-temporarily impaired. Consequently, the cost of such securities was written down to fair value and the Company recognized realized losses of $0.4 million.

The Company elected to take early adoption of the new FASB proposal, which considers relevant factors in determining the impairment of a structured security. When assessing whether the amortized cost basis of the security will be recovered, the Company compared the present value of cash flows expected to be collected. Any shortfalls of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered a credit loss. During the 2009 second quarter, the Company recognized a credit loss of $0.1 million for 7 structured securities which was recognized in earnings. The Company does not intend to sell any of these structured securities and it is more likely than not that we will not be required to sell these securities before recovery of its amortized cost basis.

The following table 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 June 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:


	June 30, 2009
	($ in thousands)

Beginning Balance at January 1, 2009	$	—
Credit Losses on Securities not previously impaired as of December 31, 2008		1,881
Additional Credit Losses on Securities not previously impaired as of March 31, 2009		26

Ending balance at June 30, 2009	$	1,907

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

The contractual maturity by the number of years until maturity for fixed maturity securities with unrealized losses at June 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	$	7		0	%	$	1,630		0	%
Due after one year through five years		1,785		4	%		74,263		18	%
Due after five years through ten years		3,589		8	%		76,724		19	%
Due after ten years		4,865		11	%		91,741		23	%
Mortgage- and asset-backed securities		36,067		77	%		158,781		40	%


Total fixed income securities	$	46,313		100	%	$	403,139		100	%

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


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

Fixed maturities:
Gains	$	1,593		$	1,329		$	4,525		$	1,526
(Losses)		(196	)		(426	)		(3,498	)		(435	)
(Impairments)		(110	)		—			(2,471	)		—

		1,287			903			(1,444	)		1,091


Equity securities:
Gains		1,549			180			1,562			443
(Losses)		(350	)		(647	)		(1,530	)		(1,174	)
(Impairments)		(359	)		(8,412	)		(8,698	)		(8,412	)

		840			(8,879	)		(8,666	)		(9,143	)

Net realized capital gains (losses)	$	2,127		$	(7,976	)	$	(10,110	)	$	(8,052	)

The 2009 second quarter net realized capital gains include impairments of $0.5 million for declines in the market value of equity and fixed income securities which were considered to be other-than-temporary, as further discussed under the caption Investments, included herein. In light of the declines in the fair value of these securities and the related economic circumstances causing such declines, the Company believes that their fair value will not recover in the foreseeable future.

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

•

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

•

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

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

The following table presents, for each of the fair value hierarchy levels, the Company’s fixed maturities, equity securities and short-term investments that are measured at fair value at June 30, 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	$	274,353	$	1,480,417	$	—	$	1,754,770

Equity securities		47,781		—		—		47,781

Short-term investments		55,495		136,121		—		191,616


Total	$	377,629	$	1,616,538	$	—	$	1,994,167

The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value using Level 3 inputs during the three and six months ended June 30, 2009:


	Three Months Ended
	June 30, 2009
	($ in thousands)

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

Level 3 investments as of June 30, 2009	$	—


	Six Months Ended
	June 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 June 30, 2009	$	—

Note 12. Share Repurchases

In October 2007, the Parent Company’s Board of Directors adopted a stock repurchase program for up to $30 million of the Parent Company’s common stock and during 2008, the Parent Company purchased 224,754 shares of its common stock in the open market at an average cost of $51.34 per share for a total of $11.5 million. This program expired at December 31, 2008.

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

Note on Forward-Looking Statements

Some of the statements in this Quarterly Report on Form 10-Q are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in or incorporated by reference in this Quarterly Report are forward looking statements. Whenever used in this report, the words “estimate,” “expect,” “believe” 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 SEC, including without limitation the risks described under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008.

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

Overview

The discussion and analysis of our financial condition and results of operations contained herein should be read in conjunction with our consolidated financial statements and accompanying notes which appear elsewhere in 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 holding company focusing on specialty products for niches within the overall property/casualty insurance market. The Company’s underwriting segments consist of insurance company operations and operations at Lloyd’s of London. Our largest product line and most long-standing area of specialization is ocean marine insurance. We have also developed specialty niches in professional liability insurance and in specialty liability insurance primarily consisting of contractors liability and primary and excess liability coverages. We conduct operations through our Insurance Companies and our Lloyd’s Operations. The Insurance Companies consist of Navigators Insurance Company, which includes our U.K. Branch, and Navigators Specialty Insurance Company, which underwrites specialty and professional liability insurance on an excess and surplus lines basis fully reinsured by Navigators Insurance Company. Our Lloyd’s Operations include NUAL, a wholly-owned Lloyd’s underwriting agency which manages Syndicate 1221. Our Lloyd’s Operations primarily underwrite marine and related lines of business, professional liability insurance, and construction coverages for onshore energy business at Lloyd’s through Syndicate 1221. The European property business written by the Lloyd’s Operations and the U.K. Branch beginning in 2006 was discontinued during the 2008 second quarter. We participate in the capacity of Syndicate 1221 through our wholly-owned Lloyd’s corporate member (we utilized two wholly-owned Lloyd’s corporate members prior to the 2008 underwriting year). During the 2008 second quarter the Company closed two small underwriting agencies in Manchester and Basingstoke, England. The discontinuance of the European property business and the closing of the underwriting agencies did not have any significant effect on the Company’s financial condition or results of operations. In July 2008, the Company opened an underwriting office in Stockholm, Sweden to write professional liability business. In September 2008, Syndicate 1221 began to underwrite professional and general liability insurance coverage in China through the Navigators Underwriting Division of Lloyd’s Reinsurance Company (China) Ltd.

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

The discussions that follow include tables that contain both our consolidated and segment operating results for the three and six month periods ended June 30, 2009 and 2008. In presenting our financial results we have discussed our performance with reference to underwriting profit or loss and the related combined ratio, both of which are non-GAAP measures of underwriting profitability. We consider such measures, which may be defined differently by other companies, to be important in the understanding of our overall results of operations. Underwriting profit or loss is calculated from net earned premium, less the sum of net losses and LAE, commission expense, other operating expenses and commission income and other income (expense). The combined ratio is derived by dividing the sum of net losses and LAE, commission expense, other operating expenses and commission income and other income (expense) by net earned premiums. A combined ratio of less than 100% indicates an underwriting profit and over 100% indicates an underwriting loss.

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

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

From 2003 through 2006, we experienced generally beneficial market changes in our lines of business. The marine rate increases began to level off in 2004 and into 2005; however, as a result of the substantial insurance industry losses resulting from Hurricanes Katrina and Rita, the marine insurance market experienced diminished capacity and rate increases through the end of 2006, particularly for the offshore energy risks located in the Gulf of Mexico. Since the end of 2006, competitive market conditions have returned as available capacity has increased.

The average renewal premium rates for our Insurance Companies’ marine business increased approximately 1.1% for the 2009 second quarter compared to the 2008 second quarter. The average renewal premium rates for our Lloyd’s Operations marine business increased approximately 8.1% for the 2009 second quarter compared to the 2008 second quarter.

Within our Property / Casualty lines, the contractors liability business saw several years of favorable rate changes resulting from diminished capacity in the market in which we compete, as many former competitors who lacked the expertise to selectively underwrite this business have been forced to withdraw from the market and the average renewal premium rate increases were approximately 13.5% in 2004 and 49.1% in 2003. This was followed by declines in rates of approximately 1.0% in 2005 and 5.6% in 2006, primarily due to additional competition in the marketplace. This decline continued into 2007 and 2008 with average renewal premium rates declining approximately 10.7% and 11.9% respectively. We expect competitive conditions to continue during 2009 resulting in continuing declines in pricing for contractors liability and excess liability business. The average renewal premium rates for the contractors liability business declined approximately 4.6% in the 2009 second quarter compared to the 2008 second quarter. Offshore energy average renewal premium rates increased approximately 10.4% for the 2009 second quarter compared to the 2008 second quarter.

In the professional liability market, the enactment of the Sarbanes-Oxley Act of 2002, together with financial and accounting scandals at publicly traded corporations and the increased frequency of securities-related class action litigation, has led to 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 D&O insurance. The 2007 D&O insurance average renewal premium rates decreased approximately 7.9% following decreases of approximately 1.7% in 2006, 2.3% in 2005 and 9.5% in 2004. The average renewal premium rates for the professional liability business increased approximately 2.6% and 2.6% in the 2009 second quarter and six month period, respectively, including D&O insurance of Insurance Company average renewal premium rates which increased approximately 3.0% for the 2009 second quarter and approximately 2.1% for the first six months of 2009.

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

Catastrophe Risk Management

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

The extent of losses from a catastrophe is a function of both the total amount of insured exposure in an area affected by the event and the severity of the event. We continually assess our concentration of underwriting exposures in catastrophe exposed areas globally and 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 severe 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 risks exposed to hurricanes in the Gulf of Mexico. During the first two 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 second quarter of the year. During this last 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 exposure to hurricanes in the Gulf of Mexico as of July 1, 2009 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 June 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 $144 million and $26 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. We are required to pay the losses even if a reinsurer fails to meet its obligations under the reinsurance agreement. Accordingly, we bear credit risk with respect to our reinsurers. Specifically, our reinsurers may not pay claims made by us on a timely basis, or they may not pay some or all of these claims. Either of these events would increase our costs and could have a material adverse effect on our business.

Critical Accounting Policies

The Company’s Annual Report on Form 10-K for the year ended December 31, 2008 contains a discussion concerning critical accounting policy disclosures (See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008). We disclose our significant accounting policies in the notes to the Consolidated Financial Statements which should be read in conjunction with the notes to the interim Consolidated Financial Statements and the 2008 audited Consolidated Financial Statements and notes. Certain of these policies are critical to the portrayal of our financial condition and results since they require management to establish estimates based on complex and subjective judgments, including those related to our estimates for losses and LAE (including losses that have occurred but were not reported to us by the financial reporting date), reinsurance recoverables, written and unearned premium, the recoverability of deferred tax assets, the impairment of invested assets, accounting for the Lloyd’s results and the translation of foreign currencies. For additional information regarding our critical accounting policies, refer to our 2008 Annual Report, pages 43 through 45, except for the other-than-temporary-impairment (“OTTI”) discussion, which is updated below.

Impairment of Invested Assets. Impairment of invested assets results in a charge to operations when a market decline below cost is other-than-temporary. Management regularly reviews our fixed maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. In general, we focus our attention on those securities whose market value was less than 80% of their cost or amortized cost, as appropriate, for six or more consecutive months. If warranted as the result of conditions relating to a particular security, we will focus on a significant decline in market value regardless of the time period involved. Factors considered in evaluating potential impairment include, but are not limited to, the current fair value as compared to cost or amortized cost of the security, as appropriate, the length of time the investment has been below cost or amortized cost and by how much. For debt securities, we also consider whether or not we have the intent to sell and if it is more likely than not that we will be required to sell before the anticipated recovery of its remaining amortized cost basis. For equity securities, we consider the ability and intent to hold the security for a period of time sufficient to allow any anticipated recovery in market value when evaluating whether a security’s unrealized loss presents an other-than-temporary decline. Other-than-temporary impairment losses result in a permanent reduction of the cost basis of the underlying investment. Significant changes in the factors we consider when evaluating investments for impairment losses could result in a significant change in impairment losses reported in the consolidated financial statements.

As mentioned above, the Company considers its intent not to sell and more likely than not that we will not be required to sell before the anticipated recovery as part of the process of evaluating whether a 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.

Results of Operations

The following is a discussion and analysis of our consolidated and segment results of operations for the three months ended June 30, 2009 and 2008. Earnings per share data is presented on a per diluted share basis.

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

•

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

•

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

•

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

•

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

•

The inland marine business, formerly included in other business, is now included in marine business.

•

Middle markets business, formerly included in the specialty business, is now broken out separately.

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

Net income for the three months ended June 30, 2009 was $23.7 million or $1.39 per share compared to $17.4 million or $1.03 per share for the three months ended June 30, 2008. Included in these results were net realized capital gains of $0.08 per share and net realized capital losses of $0.31 per share for the three months ended June 30, 2009 and 2008, respectively. The 2009 second quarter’s net realized capital gains include impairments of $0.5 million for declines in the market 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 $0.3 million or $0.02 per share. Recording realized capital losses on such securities has no impact on the Company’s stockholders’ equity or book value per share since unrealized gains and losses on the investment portfolio are a component of accumulated other comprehensive income (loss).

Net income for the six months ended June 30, 2009 was $35.7 million or $2.10 per share compared to $40.7 million or $2.39 per share for the six months ended June 30, 2008. Included in these results were net realized capital losses of $0.40 per share and $0.31 per share for the six months ended June 30, 2009 and 2008, respectively.

Net income for the three and six month periods ended June 30, 2009 includes a gain related to the repurchase of $10 million aggregate principal amount of its issued and outstanding 7.00% 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 2009 second quarter and six month period were 92.9 % and 92.8% compared to 90.4% and 89.8% for the comparable periods in 2008. The combined ratios for the 2009 second quarter and six month period were reduced by 5.6 and 4.6 loss ratio points, for net loss reserve redundancies of $9.5 million and $15.2 million, respectively, relating to prior years. The combined ratios for the 2008 second quarter and six month period were reduced by 6.5 and 7.6 loss ratio points, respectively, for net loss reserve redundancies of $10.6 million and $24.3 million, respectively, relating to prior years. The net paid loss and LAE ratios for the 2009 second quarter and six month period were 36.4% and 39.9%, respectively, compared to 29.7% for the 2008 second quarter and 31.2% for the first six months of 2008.

Cash flow from operations was $69.5 million for the first six months of 2009 compared to $133.4 million for the comparable period in 2008. This decrease included a $43.5 million negative variance in our cash flows related to collections for storm loss recoverables from our reinsurers. During the first six months of 2008 we collected $21.3 million of net balances from reinsurers mostly related to gross losses paid during 2007 for Hurricanes Katrina and Rita, while during the first six months of 2009 our recoverable balances grew by $22.2 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 8.4% to $747.8 million or $44.12 per share at June 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 premium decreased to $272.7 million and $548.0 million in the second quarter and first six months of 2009, compared to $279.2 million and $566.4 million in the 2008 comparable periods. The decrease in the 2009 second quarter gross written premium compared to 2008 generally reflects a combination of selective business expansion in new and existing lines of business, offset by the effect of premium rate changes on renewal policies on certain lines of business and business lost or cancelled due to rate decreases.

The average premium rate increases or decreases as noted elsewhere in this document for the marine, property casualty and professional liability businesses are calculated primarily by comparing premium amounts on policies that have renewed. The premiums are judgmentally adjusted for exposure factors when deemed significant and sometimes represent an aggregation of several lines of business. The rate change calculations provide an indicated pricing trend and are not meant to be a precise analysis of the numerous factors that affect premium rates or the adequacy of such rates to cover all underwriting costs and generate an underwriting profit. The calculation can also be affected quarter by quarter depending on the particular policies and the number of policies that renew during that period. Due to market conditions, these rate changes may or may not apply to new business that generally would be more competitively priced compared to renewal business.

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


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

Insurance Companies:

Marine	$	57,086		20.9	%	$	34,956	$	34,678	$	64,339		23.0	%	$	38,982	$	33,095

Property Casualty		94,567		34.8	%		65,704		63,068		107,180		38.4	%		73,294		69,951

Professional Liability		37,732		13.8	%		21,699		18,477		26,437		9.5	%		15,906		14,388


Insurance Companies Total		189,385		69.5	%		122,359		116,223		197,956		70.9	%		128,182		117,434


Lloyd’s Operations:

Marine		47,273		17.2	%		40,077		37,038		41,499		14.9	%		28,269		31,328

Property Casualty		25,506		9.4	%		15,070		11,201		31,359		11.2	%		12,755		8,800

Professional Liability		10,565		3.9	%		5,501		5,406		8,399		3.0	%		5,081		5,141


Lloyd’s Operations Total		83,344		30.5	%		60,648		53,645		81,257		29.1	%		46,105		45,269


Total	$	272,729		100.0	%	$	183,007	$	169,868	$	279,213		100.0	%	$	174,287	$	162,703


	Six Months Ended June 30,
	2009									2008
	Gross					Net		Net		Gross					Net		Net
	Written					Written		Earned		Written					Written		Earned
	Premium		%			Premium		Premium		Premium		%			Premium		Premium
	($ in thousands)

Insurance Companies:

Marine	$	134,323		24.5	%	$	93,415	$	71,839	$	135,955		23.9	%	$	82,456	$	59,564

Property Casualty		178,825		32.6	%		125,680		128,480		207,873		36.8	%		142,397		141,655

Professional Liability		68,220		12.4	%		40,346		36,194		45,724		8.1	%		27,639		28,461


Insurance Companies Total		381,368		69.5	%		259,441		236,513		389,552		68.8	%		252,492		229,680


Lloyd’s Operations:

Marine		106,296		19.5	%		90,051		68,213		108,653		19.1	%		77,179		60,121

Property Casualty		39,034		7.1	%		22,665		19,124		49,085		8.7	%		20,465		17,542

Professional Liability		21,290		3.9	%		11,502		10,964		19,069		3.4	%		11,873		11,100


Lloyd’s Operations Total		166,620		30.5	%		124,218		98,301		176,807		31.2	%		109,517		88,763


Total	$	547,988		100.0	%	$	383,659	$	334,814	$	566,359		100.0	%	$	362,009	$	318,443

Gross Written Premium

Insurance Companies’ Gross Written Premium

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


	2009			2008

Marine liability		36.4	%		35.5	%
P&I		13.4	%		13.5	%
Cargo		10.7	%		12.1	%
Inland marine		11.8	%		8.4	%
Bluewater hull		8.1	%		6.9	%
Transport		5.7	%		9.0	%
Craft/Fishing vessel		7.0	%		6.2	%
Other		6.9	%		8.4	%

Total		100.0	%		100.0	%

The marine gross written premium for the 2009 second quarter and six month decreased 11.3% and 1.2%, respectively, compared to the same period in 2008. The average renewal premium rates for the 2009 second quarter and six month periods increased 1.1% and 3.0%, respectively, compared to the same period in 2008. The recent insurance industry dislocations and storm losses are expected to impact the market, but the outcome of those changes is still uncertain.

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


	2009			2008

Construction liability		27.2	%		38.3	%
Commercial umbrella		21.5	%		16.2	%
Nav Tech		13.3	%		11.9	%
Programs		12.4	%		10.5	%
NavPac		10.5	%		7.6	%
Primary E&S		6.4	%		9.1	%
Personal Umbrella		2.2	%		2.2	%
Other		6.5	%		4.2	%

Total		100.0	%		100.0	%

The property/casualty gross written premium for the 2009 second quarter and six month periods decreased 11.8% and 14.0%, respectively, compared to the same periods in 2008, due primarily to weakening economic conditions that have reduced demand for construction liability insurance. The average renewal premium rates for the construction liability business decreased approximately 4.6% and 4.4% for the 2009 second quarter and six month period, respectively, compared to the same period 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 Premium. The gross written premium for the first six months of 2009 and 2008 consisted of the following:


	2009			2008

D&O (public and private)		70.0	%		63.1	%
Miscellaneous professional liability		15.6	%		5.5	%
Lawyers professional liability		11.4	%		26.1	%
Architects and engineers		3.0	%		5.3	%

Total		100.0	%		100.0	%

The professional liability gross written premium for the 2009 second quarter and six month period increased 42.7% and 49.2%, respectively, compared to the same period in 2008 as we have hired additional underwriters in both New York and London to expand this business resulting from increased insurer demand for insurers with excellent financial strength and market dislocations caused by weakness in other market participants. The premium growth for the 2009 six month period occurred in our D&O and E&O lines, which have historically been the most profitable segments of our professional liability business.

Premium writings for our lawyers professional lines have declined as a percentage of total premium written 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. Architects and engineers premiums written declined as a percentage of total premiums written due to a reduction in insured demand resulting from the effects of the economic recession on construction activity. The average renewal premium rates for the professional liability business increased by approximately 2.5% and 2.4% for 2009 second quarter and six month periods, respectively, compared to the same periods in 2008.

Lloyd’s Operations’ Gross Written Premium

We have provided 100% of Syndicate 1221’s stamp capacity since 2006. Stamp capacity is a measure of the amount of premium a Lloyd’s syndicate is authorized to write based on a business plan approved by the Council of Lloyd’s. Syndicate 1221’s stamp capacity is £123.0 million ($190.5 million) in 2009 compared to £123.0 million ($228.0 million) in 2008.

The Lloyd’s Operations gross written premium for the 2009 second quarter and six month period increased 2.6% and decreased 5.8%, respectively, compared to the same periods in 2008. This year-to-date decrease is attributable to both the adverse impact of the decline in the sterling exchange rate together with the closure during 2008 of the Syndicate’s UK Property book and underwriting agencies in Manchester and Basingstoke, England.

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


	2009			2008

Cargo and specie		40.5	%		39.4	%
Marine liability		30.9	%		36.6	%
Assumed reinsurance		14.8	%		10.7	%
Hull		9.8	%		9.5	%
Other		4.0	%		3.8	%

Total		100.0	%		100.0	%

The marine gross written premium for the 2009 second quarter and six month period increased 13.9% and decreased 2.2%, respectively, compared to the same periods in 2008. The average renewal premium rates increased approximately 8.1% and 8.6% for the 2009 second quarter and six month period, respectively, compared to the same period in 2008. These increases have been somewhat offset by the negative impact of foreign exchange movements. The Marine liability account reduced to 30.9% to 36.6% due to a small number of large accounts that will now incept later in 2009.

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


	2009			2008

Offshore Energy		46.9	%		53.4	%
Engineering and Construction		21.4	%		19.4	%
Onshore Energy		23.8	%		18.5	%
US Property Casualty		7.0	%		1.0	%
Bloodstock		1.1	%		0.0	%
Property		-0.2	%		7.7	%

Total		100.0	%		100.0	%

The property/casualty gross written premium for the 2009 second quarter and six month period decreased 18.7% and 20.5%, respectively, compared to the same periods in 2008 due to our decision to place the Property book into run-off in 2008 and a decline in Gulf of Mexico offshore energy premiums as the market has not met our terms and conditions. The average renewal premium rates for offshore energy business increased approximately 13.3% and 12.1% for the 2009 second quarter and six month periods, respectively, compared to the same period in 2008. The US property casualty business is primarily non-admitted risks in the state of New York.

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


	2009			2008

E&O		50.2	%		67.8	%
D&O (public and private)		49.8	%		32.2	%

Total		100.0	%		100.0	%

The gross written premium for the 2009 second quarter and six month periods increased 25.8% and 11.6%, respectively, compared to the same periods in 2008 due to the addition of a team to underwrite high excess D&O business in late 2008.

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

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


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

Insurance Companies:
Marine	$	22,130		38.8	%	$	25,357		39.4	%
Property Casualty		28,863		30.5	%		33,886		31.6	%
Professional Liability		16,033		42.5	%		10,531		39.8	%

Subtotal		67,026		35.4	%		69,774		35.2	%


Lloyd’s Operations:
Marine		7,196		15.2	%		13,230		31.9	%
Property Casualty		10,436		40.9	%		18,604		59.3	%
Professional Liability		5,064		47.9	%		3,318		39.5	%

Subtotal		22,696		27.2	%		35,152		43.3	%


Total	$	89,722		32.9	%	$	104,926		37.6	%


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

Insurance Companies:
Marine	$	40,908		30.5	%	$	53,499		39.4	%
Property Casualty		53,145		29.7	%		65,476		31.5	%
Professional Liability		27,874		40.9	%		18,085		39.6	%

Subtotal		121,927		32.0	%		137,060		35.2	%


Lloyd’s Operations:
Marine		16,245		15.3	%		31,474		29.0	%
Property Casualty		16,369		41.9	%		28,620		58.3	%
Professional Liability		9,788		46.0	%		7,196		37.7	%

Subtotal		42,402		25.4	%		67,290		38.1	%


Total	$	164,329		30.0	%	$	204,350		36.1	%

The percentage of total ceded written premium to gross written premium in the 2009 second quarter and six month period were 32.9% and 30.0%, respectively, which compares to the 2008 second quarter and six month ratio of 37.6% and 36.1%, respectively. The changes in the percentages of ceded written premium to gross written premium for the three months ended June 30, 2009 compared to the same period in 2008 were due to a reduction in the amount of marine and energy (included within Property Casualty) quota share reinsurance purchased for the Insurance Companies and the Lloyd’s Operations that were effective January 1, 2009 resulting in a large reduction in ceded premium.

Net Written Premium. Net written premium increased 5.0% and 6.0% in the 2009 second quarter and six month periods, respectively, compared to the same periods in 2008 due to the reduction in ceded marine premiums in our Lloyd’s operations.

Net Earned Premium. Net earned premium, which generally lags the increase in net written premium, increased 4.4% and 5.1% in the 2009 second quarter and six month periods, respectively, compared to the same periods in 2008 due to the increase in net written premium throughout 2008 and in the second quarter of 2009.

Commission Income. Commission income from unaffiliated business decreased $0.06 million and $0.04 million in the 2009 second quarter and six month periods, respectively, compared to the same periods in 2008. Beginning with the 2006 underwriting year, there was no longer any marine pool unaffiliated insurance companies with the elimination of the marine pool and no longer any unaffiliated participants at Syndicate 1221 with the purchase of the minority interest. Any profit commission would therefore result from the run-off of underwriting years prior to 2006.

Net Investment Income. Net investment income decreased 0.4% and 0.5% in the 2009 second quarter and six month periods, respectively, compared to the same periods in 2008, due to lower yields on our short-term balances.

Net Realized Capital Gains and Losses. Pre-tax net income included net realized capital gains of $2.1 million for the 2009 second quarter compared to net realized capital losses of $8.0 million for the 2008 second quarter. On an after-tax basis, the 2009 second quarter net realized capital gains were $1.4 million or $0.08 per share compared net realized capital losses of $5.2 million or $0.31 per share for the 2008 second quarter. Pre-tax net income included net realized capital losses of $10.1 million for the first six months of 2009 compared to net realized capital losses of $8.1 million for the first six months of 2008. On an after-tax basis, the net realized capital losses were $6.8 million or $0.40 per share for the first six months of 2009 compared to net realized capital losses of $5.2 million or $0.31 per share for the first six months of 2008.

The 2009 second quarter net realized capital losses include provisions of $0.5 million for declines in the market value of securities which were considered to be other-than-temporary compared to $8.4 million in the 2008 second quarter. The after-tax effect of such provisions on the 2009 second quarter period was $0.3 million or $0.02 per share compared to $5.5 million or $0.32 per share in the 2008 second quarter..

Other Income/(Expense). Other income/(expense) generally consists primarily of foreign exchange gains and losses from our Lloyd’s Operations and inspection fees related to our specialty insurance business. However, the second quarter of 2009 also includes a $2.9 million gain related to the repurchase of $10 million aggregate principal amount of its issued and outstanding 7.00% senior notes from an unaffiliated note-holder on the open market for $7 million.

Operating Expenses

Net Losses and Loss Adjustment Expenses Incurred. The ratios of net losses and LAE incurred to net earned premium (loss ratios) for the 2009 and 2008 second quarters were 59.3% and 56.5%, respectively, and 60.0% and 56.6% for the first six months of 2009 and 2008, respectively. The loss ratios for the second quarter of 2009 and 2008 were favorably impacted by 5.6 and 6.5 loss ratio points, respectively, resulting from a redundancy of prior year loss reserves. The loss ratios for the first six months of 2009 and 2008 were favorably impacted by 4.6 and 7.6 loss ratio points, respectively, also resulting from a redundancy of prior year loss reserves.

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

As illustrated in the following table, our reinsurance recoverable amounts for paid losses have increased during the first six months of 2009 as the Company recorded paid reinsurance recoverables for Hurricanes Gustav and Ike; and our unpaid losses have increased due to the changing mix of business to longer-tail lines which typically have a longer settlement period.


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

Reinsurance recoverables:
Paid losses	$	79,857	$	67,227	$	12,630
Unpaid losses and LAE reserves		875,809		853,793		22,016

Total	$	955,666	$	921,020	$	34,646

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


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

Gross reserves for losses and LAE	$	1,942,976	$	1,853,664		4.8	%
Less: Reinsurance recoverable on unpaid losses and LAE reserves		875,809		853,793		2.6	%

Net loss and LAE reserves	$	1,067,167	$	999,871		6.7	%

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


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

Insurance Companies:
Marine	$	109,472	$	97,777	$	207,249		47.2	%
Property Casualty		120,666		360,070		480,736		74.9	%
Professional Liability		40,267		57,737		98,004		58.9	%

Total Insurance Companies		270,405		515,584		785,989		65.6	%


Lloyd’s Operations:
Marine		104,252		89,553		193,805		46.2	%
Property Casualty		23,354		27,627		50,981		54.2	%
Professional Liability		7,843		28,549		36,392		78.4	%

Total Lloyd’s Operations		135,449		145,729		281,178		51.8	%


Total Company	$	405,854	$	661,313	$	1,067,167		62.0	%


	December 31, 2008
	Net		Net		Total		% of IBNR
	Reported		IBNR		Net Loss		to Total Net
	Reserves		Reserves		Reserves		Loss Reserves
	($ in thousands)

Insurance Companies:
Marine	$	96,244	$	96,995	$	193,239		50.2	%
Property Casualty		115,810		358,305		474,115		75.6	%
Professional Liability		22,913		58,793		81,706		72.0	%

Total Insurance Companies		234,967		514,093		749,060		68.6	%


Lloyd’s Operations:
Marine		99,233		78,293		177,526		44.1	%
Property Casualty		26,218		16,386		42,604		38.5	%
Professional Liability		5,822		24,859		30,681		81.0	%

Total Lloyd’s Operations		131,273		119,538		250,811		47.7	%


Total Company	$	366,240	$	633,631	$	999,871		63.4	%

At June 30, 2009, the IBNR loss reserve was $661.3 million or 62.0% of our total loss reserves compared to $633.6 million or 63.4% at December 31, 2008.

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

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

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

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

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

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

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

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


	Six Months Ended		Year Ended
	June 30, 2009		December 31, 2008
	($ in thousands)

Gross of Reinsurance
Beginning gross reserves	$	107,399
Incurred loss & LAE		299	$	114,000
Calendar year payments		28,269		6,601

Ending gross reserves	$	79,429	$	107,399


Gross case loss reserves	$	56,271	$	70,299
Gross IBNR loss reserves		23,158		37,100

Ending gross reserves	$	79,429	$	107,399


Net of Reinsurance
Beginning net reserves	$	12,923
Incurred loss & LAE		836	$	17,169
Calendar year payments		9,194		4,246

Ending net reserves	$	4,565	$	12,923


Net case loss reserves	$	4,101	$	11,696
Net IBNR loss reserves		464		1,227

Ending net reserves	$	4,565	$	12,923

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

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


	Six Months Ended			Year Ended
	June 30, 2009			December 31, 2008
	($ in thousands)

Gross of Reinsurance
Beginning gross reserves	$	97,732		$	141,831
Incurred loss & LAE		(1,849	)		(12,250	)
Calendar year payments		16,469			31,849

Ending gross reserves	$	79,414		$	97,732


Gross case loss reserves	$	51,779		$	62,732
Gross IBNR loss reserves		27,635			35,000

Ending gross reserves	$	79,414		$	97,732


Net of Reinsurance
Beginning net reserves	$	3,667		$	4,519
Incurred loss & LAE		146			(990	)
Calendar year payments		186			(138	)

Ending net reserves	$	3,627		$	3,667


Net case loss reserves	$	212		$	279
Net IBNR loss reserves		3,415			3,388

Ending net reserves	$	3,627		$	3,667

Approximately $82.8 million and $101.7 million of paid and unpaid losses at June 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 June 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:


	Six Months Ended		Year Ended
	June 30, 2009		December 31, 2008
	($ in thousands)

Gross of Reinsurance
Beginning gross reserves	$	21,774	$	23,194
Incurred losses & LAE		91		796
Calendar year payments		239		2,216

Ending gross reserves	$	21,626	$	21,774


Gross case loss reserves	$	13,770	$	13,918
Gross IBNR loss reserves		7,856		7,856

Ending gross reserves	$	21,626	$	21,774


Net of Reinsurance
Beginning net reserves	$	16,683	$	16,717
Incurred losses & LAE		222		263
Calendar year payments		116		297

Ending net reserves	$	16,789	$	16,683


Net case loss reserves	$	9,138	$	9,032
Net IBNR loss reserves		7,651		7,651

Ending net reserves	$	16,789	$	16,683

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

At June 30, 2009, the ceded asbestos paid and unpaid recoverables were $8.0 million compared to $8.9 million at December 31, 2008.

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

Prior Year Reserve Redundancies/Deficiencies

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 $9.5 million and $10.6 million, net of reinsurance, were recorded in the 2009 and 2008 second quarters, respectively, and $15.2 million and $24.3 million, net of reinsurance, were recorded in the first six months of 2009 and 2008, respectively, as discussed below. The relevant factors that may have a significant impact on the establishment and adjustment of loss and LAE reserves can vary by line of business and from period to period.

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


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

Insurance Companies:
Marine	$	2,169		$	(5,679	)
Property Casualty		(12,804	)		(5,062	)
Professional Liability		5,745			(911	)

Subtotal Insurance Companies		(4,890	)		(11,652	)
Lloyd’s Operations		(4,588	)		1,072

Total	$	(9,478	)	$	(10,580	)


	Six Months Ended
	June 30,			June 30,
	2009			2008
	($ in thousands)

Insurance Companies:
Marine	$	4,127		$	(5,979	)
Property Casualty		(24,517	)		(12,962	)
Professional Liability		10,368			(1,211	)

Subtotal Insurance Companies		(10,022	)		(20,152	)
Lloyd’s Operations		(5,223	)		(4,108	)

Total	$	(15,245	)	$	(24,260	)

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 protection and indemnity (“P&I”) line of business due to reductions in our loss assumptions for the more recent underwriting years.

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

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

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 $10.6 million prior period net reserve redundancy recorded in the 2008 second quarter:

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

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

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

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

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

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

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

The Insurance Companies recorded $7.3 million of prior period net savings for 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 Lloyd’s Operations recorded $5.2 million of prior period net savings mostly emanating from refinements to the actuarial methodology employed to project ultimate loss estimates by line of business. The methodology employed in the 2008 first quarter separately determined ultimate losses on a gross and ceded basis to establish net IBNR estimates. The prior methodology used net loss amounts to determine such estimates. The net result of the 2008 first quarter analysis was to reduce ultimate loss estimates by approximately $9.7 million for short tail classes of business mostly related to 2005 and prior years (cargo $3.2 million, energy $4.6 million and reinsurance $2.1 million, partially offset by $0.2 million of loss development for other lines of business). Such prior year savings were offset by strengthening reserves of approximately $4.5 million for business written in 2007 and 2006 for liability business ($2.3 million) and energy business ($2.1 million) and various other classes of business ($0.1 million). Such strengthening has taken into effect the changes in the reinsurance program for increased net retentions that have occurred in 2007 and 2006 compared to prior years.

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

Commission Expense. Commission expense paid to unaffiliated brokers and agents is generally based on a percentage of the gross written premium and is reduced by ceding commissions the Company may receive on the ceded written premium. Commissions are generally deferred and recorded as deferred policy acquisition costs to the extent that they relate to unearned premium. The percentage of commission expense to net earned premiums in the 2009 second quarter and six month periods were 15.5% and 14.6%, respectively, compared to 14.4% and 14.0% for the comparable periods in 2008. The increase is mostly attributable to greater retentions, particularly on our marine quota share treaties, which have reduced the ceding commission benefit.

Other Operating Expenses. The decrease of $0.2 million or 0.7% compared to the 2008 second quarter was primarily the net result of a 13% increase in staff count offset by a reduction in our UK-based expenses when measured in US dollars due to a 21% reduction in the average exchange rate for sterling. The other operating expenses for the second quarter of 2009 also included a $1.3 million charge related to the ongoing personal umbrella program matter described under Legal Proceedings.

Income Taxes. The Company recorded an income tax expense of $10.1 million for the 2009 second quarter compared to an income tax expense of $6.7 million for the 2008 second quarter, resulting in effective tax rates of 30.0% and 27.7%, respectively. The income tax expense was $14.3 million and $16.9 million for the first six months of 2009 and 2008, respectively, resulting in effective tax rates of 28.6% and 29.3%, respectively. The Company’s effective tax rate is less than 35% due to permanent differences between book and tax return income, with the most significant item being tax exempt interest. The effective tax rate on net investment income was 25.1% for the 2009 six month period compared to 25.9% for the same period in 2008. As of June 30, 2009 and December 31, 2008 the net deferred federal, foreign, state and local tax assets were $48.2 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 $53.0 million of our non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the foreign subsidiaries. However, in the future, if such earnings were distributed to the Company, taxes of approximately $3.7 million would be payable on such undistributed earnings and would be reflected in the tax provision for the year in which these earnings are no longer intended to be permanently reinvested in the foreign subsidiary, assuming all foreign tax credits are realized.

The Company had net state and local deferred tax assets amounting to potential future tax benefits of $3.7 million and $6.2 million at June 30, 2009 and December 31, 2008, respectively. Included in the deferred tax assets are state and local net operating loss carryforwards of $1.8 million and $0.5 million at June 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 June 30, 2009 expire in 2029.

Segment Information

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

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

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

Insurance Companies

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

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


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

Gross written premium	$	189,385		$	197,956		$	381,368		$	389,552
Net written premium		122,359			128,182			259,441			252,492

Net earned premium		116,223			117,434			236,513			229,680
Net losses and LAE		(68,843	)		(62,225	)		(138,996	)		(129,581	)
Commission expense		(15,060	)		(14,723	)		(30,028	)		(27,671	)
Other operating expenses		(26,906	)		(24,552	)		(51,466	)		(46,700	)
Commission income and other income (expense)		1,655			1,516			1,856			1,774


Underwriting profit (loss)		7,069			17,450			17,879			27,502

Net investment income		16,239			15,593			32,446			31,058
Net realized capital gains (losses)		2,210			(8,053	)		(6,697	)		(8,155	)

Income before income taxes		25,518			24,990			43,628			50,405

Income tax expense		7,171			6,939			11,704			14,309

Net income	$	18,347		$	18,051		$	31,924		$	36,096


Loss and LAE ratio		59.2	%		53.0	%		58.8	%		56.4	%
Commission expense ratio		13.0	%		12.5	%		12.7	%		12.0	%
Other operating expense ratio ⁽¹⁾		21.7	%		19.6	%		21.0	%		19.6	%

Combined ratio		93.9	%		85.1	%		92.5	%		88.0	%


⁽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 six months ended June 30, 2009 and 2008:


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

Marine	$	34,678	$	25,238	$	10,904	$	(1,464	)		72.8	%		31.4	%		104.2	%
Property Casualty		63,068		28,446		23,227		11,395			45.1	%		36.8	%		81.9	%
Professional Liability		18,477		15,159		6,180		(2,862	)		82.0	%		33.4	%		115.4	%

Total	$	116,223	$	68,843	$	40,311	$	7,069			59.2	%		34.7	%		93.9	%


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

Marine	$	33,095	$	13,976	$	10,092	$	9,027		42.2	%		30.5	%		72.7	%
Property Casualty		69,951		40,875		22,647		6,429		58.4	%		32.4	%		90.8	%
Professional Liability		14,388		7,374		5,020		1,994		51.3	%		34.9	%		86.2	%

Total	$	117,434	$	62,225	$	37,759	$	17,450		53.0	%		32.1	%		85.1	%


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

Marine	$	71,839	$	51,628	$	22,194	$	(1,983	)		71.9	%		30.9	%		102.8	%
Property Casualty		128,480		56,450		44,312		27,718			43.9	%		34.5	%		78.4	%
Professional Liability		36,194		30,918		13,132		(7,856	)		85.4	%		36.3	%		121.7	%

Total	$	236,513	$	138,996	$	79,638	$	17,879			58.8	%		33.7	%		92.5	%


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

Marine	$	59,564	$	36,298	$	19,301	$	3,965		60.9	%		32.4	%		93.3	%
Property Casualty		141,655		77,004		43,178		21,473		54.4	%		30.4	%		84.8	%
Professional Liability		28,461		16,279		10,118		2,064		57.2	%		35.6	%		92.8	%

Total	$	229,680	$	129,581	$	72,597	$	27,502		56.4	%		31.6	%		88.0	%

Net earned premium of the Insurance Companies decreased 1.0% and increased 3.0% in the 2009 second quarter and six month period, respectively, compared to the same periods in 2008, primarily the net result of 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.

The 2009 second quarter and six month period loss ratio was favorably impacted by prior period loss reserve redundancies of $4.9 million or 4.2 loss ratio points and $10.0 million or 4.2 loss ratio points, respectively.

Generally, while the Insurance Companies have experienced favorable prior period redundancies in 2008 and 2007, the ultimate loss ratios for the most recent underwriting years of 2009 and 2008 have been increasing due to softening market conditions for the business written during those periods.

The approximate annualized pre-tax yields on the Insurance Companies’ investment portfolio, excluding net realized capital gains and losses, were 4.1% for the 2009 second quarter and and 4.2% for the six month period, 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 for both June 30, 2009 and 2008. Net investment income increased in the 2009 second quarter and six month period 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 capacity to Syndicate 1221. NUAL owns Navigators Underwriting Ltd., an underwriting managing agency that underwrites cargo and engineering business for Syndicate 1221. In January 2005, we formed Navigators NV in Antwerp, Belgium, a wholly-owned subsidiary of NUAL. Navigators NV produces transport liability, cargo and marine liability premium for Syndicate 1221. In July 2008, we opened an underwriting office in Stockholm, Sweden to write professional liability business for Syndicate 1221. The Lloyd’s Operations and Navigators Management (UK) Limited, which produces business for the U.K. Branch, are subsidiaries of Navigators Holdings (UK) Limited located in the United Kingdom. In September 2008, Syndicate 1221 began to underwrite insurance coverage in China through the Navigators Underwriting Division of Lloyd’s Reinsurance Company (China) Ltd. The Company’s focus in China is on opportunities in professional and general liability lines of business.

Syndicate 1221’s stamp capacity is £123.0 million ($190.5 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 provides 100% of Syndicate 1221’s capacity for the 2009 and 2008 underwriting years through Navigators Corporate Underwriters Ltd. in 2008 and through Navigators Corporate Underwriters Ltd. in 2008.

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

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

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


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

Gross written premium	$	83,344		$	81,257		$	166,620		$	176,807
Net written premium		60,648			46,105			124,218			109,517

Net earned premium		53,645			45,269			98,301			88,763
Net losses and LAE		(31,885	)		(29,664	)		(61,979	)		(50,728	)
Commission expense		(11,218	)		(8,767	)		(18,698	)		(16,767	)
Other operating expenses		(6,117	)		(8,685	)		(12,098	)		(16,293	)
Commission income and other income (expense)		651			(39	)		599			(25	)


Underwriting profit (loss)		5,076			(1,886	)		6,125			4,950

Net investment income		2,316			2,871			4,699			5,853
Net realized capital gains (losses)		(83	)		77			(3,413	)		103

Income before income taxes		7,309			1,062			7,411			10,906

Income tax expense (benefit)		2,624			425			2,960			3,877

Net income (loss)	$	4,685		$	637		$	4,451		$	7,029


Loss and LAE ratio		59.4	%		65.5	%		63.0	%		57.1	%
Commission expense ratio		20.9	%		19.4	%		19.0	%		18.9	%
Other operating expense ratio ⁽¹⁾		10.2	%		19.3	%		11.7	%		18.4	%

Combined ratio		90.5	%		104.2	%		93.7	%		94.4	%


(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 second quarter of 2009 increased across all business units as follows: approximately 8.1% for the marine business, approximately 13.6% for the offshore business and approximately 2.9% for the professional liability business compared to the same period in 2008.

The 2009 six month earnings in the Lloyd’s Operations reflect the continued favorable loss development trends as the second quarter loss ratio was favorably impacted by prior period loss reserve redundancies of $4.6 million or 8.6 loss ratio points and for the six months of $5.2 million or 5.3 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 approximate annualized pre-tax yields on the Lloyd’s Operations’ investment portfolio, excluding net realized capital gains and losses, were 2.6% and 2.7% for the 2009 second quarter and six month period, respectively, compared to 3.5% and 3.6% for the comparable 2008 periods. The average duration of our Lloyd’s Operations’ invested assets at June 30, 2009 was 1.6 years compared to 1.4 years at June 30, 2008. The decrease in the Lloyd’s Operations’ net investment income is reflective of the lower yields on short term investments. Such yields are net of interest credits to certain reinsurers for funds withheld by our Lloyd’s Operations.

Off-Balance Sheet Transactions

There have been no material changes in the information concerning off-balance sheet transactions as stated in the Company’s 2008 Annual Report on Form 10-K.

Tabular Disclosure of Contractual Obligations

There have been no material changes in the operating lease or capital lease information concerning contractual obligations as stated in the Company’s 2008 Annual Report on Form 10-K. Total reserves for losses and LAE were $1.94 billion at June 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 7% senior unsecured notes due May 1, 2016 discussed in the Notes to Interim Consolidated Financial Statements, included herein:


	Payments Due by Period
			Less than						More than
	Total		1 Year		1-3 Years		3-5 Years		5 Years
	($ in thousands)

7% Senior Notes	$	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.

At June 30, 2009, the average quality of the investment portfolio was rated “AA” by S&P and “Aa” by Moody’s. All of the Company’s mortgage-backed and asset-backed securities were rated “AAA” by S&P and “Aaa” by Moody’s, except for 64 securities approximating $50.8 million. There are no collateralized debt obligations (CDO’s), collateralized loan obligations (CLO’s), asset backed commercial paper or credit default swaps in the Company’s investment portfolio. At June 30, 2009 and December 31, 2008, all fixed-maturity and equity securities held by us were classified as available-for-sale.

The approximate annualized pre-tax yields of the investment portfolio, excluding net realized capital gains and losses, were 3.8% and 3.9% for the 2009 second quarter and six month period, respectively, compared to 4.1% and 4.2% for the comparable 2008 periods.

Since the second quarter of 2008, the Company’s tax-exempt securities portion of its investment portfolio has increased by $31.8 million to approximately 36.1% of the fixed maturities investment portfolio at June 30, 2009 compared to approximately 37.8% at June 30, 2008. As a result, the effective tax rate on net investment income was 25.2% for the 2009 second quarter compared to 25.4% for the comparable 2008 period.

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

•

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

•

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

•

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

All fixed maturities, short-term investments and equity securities are carried at fair value. All prices for our fixed maturities, short-term investments and equity securities valued as level 1 or level 2 in the SFAS 157 fair value hierarchy are received from independent pricing services utilized by one of our outside investment managers. The manager utilizes a pricing committee which approves the use of one or more independent pricing service vendors. The pricing committee consists of five or more members, one from senior management and one from the accounting group with the remainder from the asset class specialists and client strategists. The pricing source of each security is determined in accordance with the pricing source procedures approved by the pricing committee. The investment manager uses supporting documentation received from the independent pricing service vendor detailing the inputs, models and processes used in the independent pricing service vendors’ evaluation process to determine the appropriate SFAS 157 pricing hierarchy. Any pricing where the input is based solely on a broker price is deemed to be a level 3 price.

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

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


	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	$	274,353	$	1,480,417	$	—	$	1,754,770

Equity securities		47,781		—		—		47,781

Short-term investments		55,495		136,121		—		191,616


Total	$	377,629	$	1,616,538	$	—	$	1,994,167

The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value using level 3 inputs during the three and six months ended June 30, 2009:


	Three Months Ended
	June 30, 2009
	($ in thousands)

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

Level 3 investments as of June 30, 2009	$	—


	Six Months Ended
	June 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 June 30, 2009	$	—

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


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

Fixed maturities:
U.S. Government Treasury Bonds, agency bonds and foreign government bonds	$	402,071	$	11,555	$	(249	)	$	—		$	390,765
States, municipalities and political subdivisions		642,861		18,069		(3,719	)		—			628,511
Mortgage- and asset-backed securities
Mortgage-backed securities		309,097		11,607		(170	)		—			297,660
Collateralized mortgage obligations		43,230		—		(1,359	)		(17,505	)		62,094
Asset-backed securities		24,773		721		(197	)		(73	)		24,322
Commercial mortgage-backed securities		96,417		119		(16,763	)		—			113,061

Subtotal		473,517		12,447		(18,489	)		(17,578	)		497,137
Corporate bonds		236,321		6,184		(6,278	)		—			236,415


Total fixed maturities		1,754,770		48,255		(28,735	)		(17,578	)		1,752,828


Equity securities — common stocks		47,781		6,103		(266	)		—			41,944

Cash		14,401		—		—			—			14,401

Short-term investments		191,616		—		—			—			191,616


Total	$	2,008,568	$	54,358	$	(29,001	)	$	(17,578	)	$	2,000,789


			Gross		Gross			OTTI		Cost or
	Fair		Unrealized		Unrealized			Recognized		Amortized
December 31, 2008	Value		Gains		(Losses)			in OCI		Cost
	($ in thousands)
Fixed maturities:
U.S. Government Treasury Bonds, agency bonds and foreign government bonds	$	361,656	$	25,741	$	(145	)	$	—	$	336,060

States, municipalities and political subdivisions		614,609		12,568		(8,036	)		—		610,077
Mortgage- and asset-backed securities:
Mortgage-backed securities		299,775		10,930		(26	)		—		288,871
Collateralized mortgage obligations		56,743		—		(27,119	)		—		83,862
Asset-backed securities		29,436		5		(1,289	)		—		30,720
Commercial mortgage-backed securities		92,684		—		(20,350	)		—		113,034

Subtotal		478,638		10,935		(48,784	)		—		516,487
Corporate bonds		188,869		1,398		(14,660	)		—		202,131


Total fixed maturities		1,643,772		50,642		(71,625	)		—		1,664,755


Equity securities — common stocks		51,802		1,266		(1,987	)		—		52,523

Cash		1,457		—		—			—		1,457

Short-term investments		220,684		—		—			—		220,684


Total	$	1,917,715	$	51,908	$	(73,612	)	$	—	$	1,939,419

The following tables set forth our U.S. Treasury and Agency Bonds and foreign government bonds as of June 30, 2009 and December 31, 2008:


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

U.S. Treasury Bonds	$	310,176	$	9,508	$	(193	)	$	300,861
Agency Bonds		70,125		1,610		(32	)		68,547
Foreign Government Bonds		21,770		437		(24	)		21,357

Total	$	402,071	$	11,555	$	(249	)	$	390,765


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
December 31, 2008	Value		Gains		(Losses)			Cost
	($ in thousands)

U.S. Treasury Bonds	$	290,059	$	23,243	$	(143	)	$	266,959
Agency Bonds		58,401		2,008		(2	)		56,395
Foreign Government Bonds		13,196		490		—			12,706

Total	$	361,656	$	25,741	$	(145	)	$	336,060

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

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

At June 30, 2009, the Company owned two asset-backed securities approximating $0.1 million with subprime mortgage exposures. The securities have an effective maturity of 1.5 years. In addition, the Company owned five collateralized mortgage obligations and asset-backed securities approximating $1.3 million classified as Alt-A. They have an effective maturity of 5.3 years. Such subprime and Alt-A categories are as defined by S&P. The Company is receiving principal and/or interest payments on all of these securities and believes such amounts are fully collectible.

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


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized		S&P
	Value		Gains		(Losses)			Cost		Rating
					($ in thousands)
Issuers:
Commonwealth of Massachusetts	$	15,424	$	734	$	(35	)	$	14,725		AA
City of San Antonio		11,103		61		—			11,042	AA
Virginia Resources Authority		11,024		424		—			10,600	AAA
University of Pittsburgh		10,674		34		—			10,640	AA
State of Wisconsin		9,743		232		—			9,511		AA-
State of Louisiana		9,720		194		—			9,526		A+
State of Washington		9,265		435		—			8,830	AA
City of New York, NY		8,356		122		(77	)		8,311		AA-
Commonwealth of Pennsylvania		8,318		407		—			7,911	AA
State of North Carolina		8,102		521		—			7,581	AAA
State of Ohio		7,708		332		—			7,376	AA
Illinois Finance Authority		7,568		23		(364	)		7,909		BBB+
Adams County School District		6,926		—		(2	)		6,928		BBB+
State of California		6,852		8		(668	)		7,512		A-
Delaware Transportation Authority		6,834		492		—			6,342		AA-

Subtotal	$	137,617	$	4,019	$	(1,146	)	$	134,744
All Other		505,244		14,050		(2,573	)		493,767

Total	$	642,861	$	18,069	$	(3,719	)	$	628,511

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 June 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	$	611,448	$	596,344	$	15,104
BBB	Baa		28,061		28,717		(656	)
BB	Ba		1,433		1,432		1
B	B		—		—		—
CCC or lower	Caa or lower		—		—		—
N/A	N/A		1,919		2,018		(99	)

Total		$	642,861	$	628,511	$	14,350

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


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		(Losses)			Cost
	($ in thousands)
Mortgage-backed securities:
GNMA	$	38,508	$	978	$	(1	)	$	37,531
FNMA		197,285		7,973		(108	)		189,420
FHLMC		73,304		2,656		(61	)		70,709
Prime		—		—		—			—
Alt-A		—		—		—			—
Subprime		—		—		—			—

Total	$	309,097	$	11,607	$	(170	)	$	297,660


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		(Losses)			Cost
	($ in thousands)
Collateralized mortgage obligations:
GNMA	$	—	$	—	$	—		$	—
FNMA		—		—		—			—
FHLMC		—		—		—			—
Prime		42,386		—		(18,337	)		60,723
Alt-A		844		—		(527	)		1,371
Subprime		—		—		—			—

Total	$	43,230	$	—	$	(18,864	)	$	62,094

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


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

Wells Fargo Mortgage Backed 06 AR8		2006	$	3,712	$	5,607	$	(1,895	)	AAA	NR
MLCC Mortgage Investors Inc 06 2		2006		3,498		4,162		(664	)	AAA	Aa2
Citigroup Mortgage Loan Trust 06 AR2		2006		3,254		4,740		(1,486	)	N/A	B3
Merrill Lynch Mortgage Investors 05 A9		2005		2,823		3,929		(1,106	)	AAA	N/A
GMAC Mortgage Corp Loan Trust 05 AR6		2005		2,805		4,032		(1,227	)	AAA	B3
Merrill Lynch Mortgage Investors 07 2		2007		2,560		4,380		(1,820	)		B3
Wells Fargo Mortgage Backed 06 AR5		2006		2,216		3,296		(1,080	)	N/A	Caa1
Wells Fargo Mortgage Backed 05 AR4		2005		1,119		1,308		(189	)	N/A	A2
Merrill Lynch Mortgage Investors 05 A9		2005		869		1,018		(149	)	AAA
Bear Stearns Adjustable Rate 06 1		2006		665		904		(239	)		Baa1
GSR Mortgage Loan Trust 06 AR 1		2006		647		910		(263	)	BBB	N/A
JP Morgan Mortgage Trust 06 A4		2006		642		936		(294	)	N/A	B3
Wells Fargo Mortgage Backed 06 AR6		2006		620		851		(231	)		B2
Master Adjustable Rate Mortgage 05 6		2005		619		896		(277	)	B	Baa2
Citigroup Mortgage Loan Trust 04-HYB3		2004		604		744		(140	)	AAA	Aaa

Subtotal			$	26,653	$	37,713	$	(11,060	)
All Other				16,577		24,381		(7,804	)

Total			$	43,230	$	62,094	$	(18,864	)


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		(Losses)			Cost
	($ in thousands)
Asset-backed securities:
GNMA	$	—	$	—	$	—		$	—
FNMA		—		—		—			—
FHLMC		—		—		—			—
Prime		24,184		721		(147	)		23,610
Alt-A		450		—		(59	)		509
Subprime		139		—		(64	)		203

Total	$	24,773	$	721	$	(270	)	$	24,322

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


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

Auto Loans	$	11,716	$	4,718	$	771	$	2,604	$	—	$	—	$	19,809	$	19,240	$	569

Credit Cards		551		—		—		—		216		—		767		793		(26	)

Miscellaneous		3,610		—		450		—		—		137		4,197		4,289		(92	)


Total	$	15,877	$	4,718	$	1,221	$	2,604	$	216	$	137	$	24,773	$	24,322	$	451

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 portfolio as of June 30, 2009:


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

Wachovia Bank Commercial Mortgage 05 C18	2005	$	5,979	$	6,849	$	(870	)		72.1	%		0.8	%		31.5	%	AAA	Aaa
GS Mortgage Securities Corp II 05 GG4	2005		5,688		6,601		(913	)		72.0	%		4.1	%		30.6	%	AAA	Aaa
LB-UBS Mortgage Commercial Mortgage Trust 06 C6	2006		5,473		6,787		(1,314	)		63.6	%		1.3	%		30.2	%	AAA
Citigroup/Deutsche Bank Comm 05 CD1	2005		5,187		5,892		(705	)		68.4	%		6.5	%		30.7	%	AAA	Aaa
LB-UBS Mortgage Commercial Mortgage Trust 06 C7	2006		5,008		6,332		(1,324	)		64.0	%		6.3	%		30.1	%	AA+	Aa1
Four Times Square Trust 06 4TS	2006		4,674		7,030		(2,356	)		39.4	%		0.0	%		7.9	%	AAA	Aa1
Bear Stearns Commercial Mortgage 06 T22	2006		4,335		4,893		(558	)		57.4	%		0.4	%		28.0	%	AAA	N/A
Bear Stearns Commercial Mortgage 07 PW15	2007		4,140		5,136		(996	)		67.6	%		0.5	%		30.2	%	AAA	Aaa
Morgan Stanley Capital I 07 HQ11	2007		3,629		4,790		(1,161	)		69.9	%		2.2	%		30.2	%	AAA	Aaa
Bank of America Commercial Mortgage 07 1	2007		3,543		4,782		(1,239	)		70.3	%		9.3	%		30.4	%	N/A	Aaa
Merrill Lynch Mortgage Trust 05 CIP1	2005		3,483		4,035		(552	)		68.8	%		13.4	%		30.9	%	N/A	Aaa
Commercial Mortgage Pass Throu 05 C6	2005		3,300		4,053		(753	)		72.0	%		9.1	%		30.4	%	AAA	Aaa
Morgan Stanley Capital I 04 T13	2004		2,966		3,325		(359	)		58.8	%		0.0	%		15.3	%	N/A	Aaa
Citigroup Commercial Mortgage 06 C5	2006		2,799		3,512		(713	)		68.7	%		11.8	%		30.3	%	N/A	Aaa
GE Capital Commercial Mortgage 02 1A	2002		2,549		2,503		46			73.1	%		1.6	%		24.9	%	N/A	Aaa

Subtotal		$	62,753	$	76,520	$	(13,767	)
All Other			33,664		36,541		(2,877	)

Total		$	96,417	$	113,061	$	(16,644	)

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


				Percent
Rating				to
Description	Rating	Amount		Total
	($ in thousands)

Extremely Strong	AAA	$	1,150,205		59	%
Very Strong	AA		402,143		21	%
Strong	A		272,042		14	%
Adequate	BBB		94,924		5	%
Speculative	BB & below		25,153		1	%
Not Rated	NR		1,919		0	%

Total		$	1,946,386		100	%

The Company owns securities credit enhanced by financial guarantors. The following tables set forth the amount of credit enhanced securities in the fixed maturities portfolio by category at June 30, 2009, identify the amount insured by each financial guarantor and identify the average underlying credit rating of such credit enhanced securities:


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		(Losses)			Cost
	($ in thousands)
Credit enhanced securities:
States, municipalities and political subdivisions	$	315,394	$	8,365	$	(2,123	)	$	309,152
Mortgage- and asset-backed securities		8,093		412		(22	)		7,703
Corporate bonds		672		—		(40	)		712

Total	$	324,159	$	8,777	$	(2,185	)	$	317,567


										Average
			Gross		Gross			Cost or		Underlying
	Fair		Unrealized		Unrealized			Amortized		Credit
	Value		Gains		(Losses)			Cost		Rating
	($ in thousands)
Financial guarantors:
AMBAC	$	64,667	$	1,410	$	(607	)	$	63,864	A+
Assured Guaranty LTD		96,192		3,250		(611	)		93,553	A+
FGIC		48,883		1,178		(298	)		48,003	AA-
MBIA		103,442		2,741		(338	)		101,039	AA-
Radian Group, Inc.		4,138		49		(255	)		4,344	A
XL Capital		6,837		149		(76	)		6,764	A+

Total	$	324,159	$	8,777	$	(2,185	)	$	317,567

The average underlying credit rating of the insured securities in the above table rated by S&P or Moody’s if such securities did not have the credit enhancing insurance is included in the “Underlying Credit Rating” column. This average rating includes $11.2 million of prerefunded municipal bonds which have an implied rating of “AAA” but are not otherwise rated by S&P or Moody’s. Such average ratings exclude a total of 27 credit enhanced securities approximating $19.5 million that do not have an underlying rating consisting of 14 municipal bonds approximating $10.7 million, 11 asset-backed securities approximating $8.1 million and 2 corporate bonds approximating $0.7 million.

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

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


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized		S&P
	Value		Gains		(Losses)			Cost		Rating
	($ in thousands)
Issuers:
Bank of America Corp	$	8,395	$	90	$	(294	)	$	8,599	A-
Transcanada Corp		8,211		106		(32	)		8,137	A-
General Electric		8,129		43		(108	)		8,194	AA
Citigroup, Inc		6,735		14		(645	)		7,366	BBB+
Statoilhydro ASA		5,660		105		—			5,555	AA-
Wells Fargo		5,647		147		(70	)		5,570	A+
Goldman Sachs Group		5,431		91		(163	)		5,503	A-
Scana Corp		5,262		148		(2	)		5,116	A-
Morgan Stanley		4,959		91		(74	)		4,942	A-
Bank of New York		3,608		141		—			3,467	A+
United Technologies Corp		3,508		156		—			3,352	A
Conoco Phillips		3,454		148		—			3,306	A
Pfizer Inc		3,441		245		—			3,196	AA
Credit Suisse Group AG		3,411		144		—			3,267	A+
Eli Lilly & Co		3,352		104		—			3,248	A+

Subtotal	$	79,203	$	1,773	$	(1,388	)	$	78,818
All Other		157,118		4,411		(4,890	)		157,597

Total	$	236,321	$	6,184	$	(6,278	)	$	236,415

We regularly review our fixed maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. In general, we focus our attention on those securities whose market value was less than 80% of their cost or amortized cost, as appropriate, for six or more consecutive months. If warranted as the result of conditions relating to a particular security, we will focus on a significant decline in market value regardless of the time period involved. Other factors considered in evaluating potential impairment include the current fair value as compared to cost or amortized cost, as appropriate, our intent not to sell and more likely than not we will not be required to sell before the anticipated recovery of its remaining amortized cost basis, specific credit issues related to the issuer and current economic conditions.

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

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


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		(Losses)			Cost
	($ in thousands)
Issuers:
Vanguard Total Stock Market Index	$	3,775	$	530	$	—		$	3,245
Vanguard Pacific Stock Index		3,496		678		—			2,818
Vanguard Emerging Market Stock Index		3,204		824		—			2,380
Vanguard European Stock Index		3,093		647		—			2,446
Astrazeneca PLC		1,355		267		—			1,088
BP PLC		1,349		214		—			1,135
3M Co		1,304		63		—			1,241
Nokia OYJ		1,260		251		—			1,009
Chevron Corp		1,252		163		—			1,089
Microsoft Corp		1,249		230		—			1,019
Unilever NV		1,241		235		—			1,006
FPL Group Inc		1,237		260		—			977
Altria Group		1,218		74		—			1,144
Philip Morris International Inc		1,217		224		—			993
Kimberly Clark Corp		1,195		128		—			1,067

Subtotal	$	27,445	$	4,788	$	—		$	22,657
All Other		20,336		1,315		(266	)		19,287

Total	$	47,781	$	6,103	$	(266	)	$	41,944


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

Fixed Maturities:
U.S. Government Treasury and Agency
Bonds and foreign government bonds
0-6 Months	$	43,336	$	249	$	$3,862	$	145
7-12 Months		—		—		—		—
> 12 Months		—		—		—		—

Subtotal		43,336		249		3,862		145


States, municipalities and political subdivisions
0-6 Months		67,665		886		68,727		2,187
7-12 Months		10,221		570		118,910		4,376
> 12 Months		46,759		2,263		15,918		1,473

Subtotal		124,645		3,719		203,555		8,036


Mortgage- and asset-backed securities
0-6 Months		23,219		170		30,670		939
7-12 Months		1,812		137		80,618		26,966
> 12 Months		133,750		35,760		66,218		20,879

Subtotal		158,781		36,067		177,506		48,784


Corporate bonds
0-6 Months		12,237		201		57,805		2,445
7-12 Months		9,272		384		57,971		5,893
> 12 Months		54,868		5,693		27,873		6,322

Subtotal		76,377		6,278		143,649		14,660


Total Fixed Maturities	$	403,139	$	46,313	$	528,572	$	71,625


Equity securities — common stocks
0-6 Months	$	2,746	$	111	$	8,991	$	1,941
7-12 Months		728		155		351		46
> 12 Months		—		—		—		—


Total Equity Securities	$	3,474	$	266	$	9,342	$	1,987

As of June 30, 2009, the largest single unrealized loss by issuer in the fixed maturities was $2.4 million and the largest single unrealized loss by issuer in the equity securities was $0.1 million.

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


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

Due in one year or less	$	20,770	$	20,714
Due after one year through five years		646,139		630,022
Due after five years through ten years		353,772		345,533
Due after ten years		260,572		259,422
Mortgage- and asset-backed (including GNMAs)		473,517		497,137


Total	$	1,754,770	$	1,752,828

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	$	—	$	—	$	(96	)	$	(25,909	)	$	(26,005	)
Equity Securities		—		—		—			—			—

Total	$	—	$	—	$	(96	)	$	(25,909	)	$	(26,005	)

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

When a security in our investment portfolio has an unrealized loss that is deemed to be other-than-temporary, we write the security down to fair value through a charge to operations. Significant changes in the factors we consider when evaluating investments for impairment losses could result in a significant change in impairment losses reported in the consolidated financial statements.

The Company elected to take early adoption of the new FASB proposal, which considers relevant factors in determining the impairment of a structured security. When assessing whether the amortized cost basis of the security will be recovered, the company compared the present value of cash flows expected to be collected. Any shortfalls of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered a credit loss. During the 2009 second quarter, the Company recognized a credit loss of $0.1 million for 7 structured securities which was recognized in earnings. The Company does not intend to sell any of these structured securities and it is more likely than not that we will not be required to sell these securities before recovery of its amortized cost basis.


	June 30, 2009
	($ in thousands)

Beginning Balance at January 1, 2009	$	—
Credit Losses on Securities not previously impaired as of December 31, 2008		1,881
Additional Credit Losses on Securities not previously impaired as of March 31, 2009		26

Ending balance at June 30, 2009	$	1,907

The following table shows the composition by National Association of Insurance Commissioners (“NAIC”) rating and the generally equivalent S&P and Moody’s ratings of the fixed maturity securities in our portfolio with gross unrealized losses at June 30, 2009. Not all of the securities are rated by S&P and/or Moody’s.


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

1	AAA/AA/A	Aaa/Aa/A	$	30,374		65	%	$	322,395		80	%
2	BBB	Baa		4,902		11	%		55,106		14	%
3	BB	Ba		2,568		6	%		7,450		2	%
4	B	B		6,292		14	%		12,373		3	%
5	CCC or lower	Caa or lower		2,078		4	%		3,896		1	%
6	N/A	N/A		99		0	%		1,919		0	%

	Total		$	46,313		100	%	$	403,139		100	%

At June 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 NAIC rating of 1 or 2, an S&P rating of “BBB—” or higher, or a Moody’s rating of “Baa3” or higher, except for $10.9 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 June 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	$	7		0	%	$	1,630		0	%
Due after one year through five years		1,785		4	%		74,263		18	%
Due after five years through ten years		3,589		8	%		76,724		19	%
Due after ten years		4,865		11	%		91,741		23	%
Mortgage- and asset-backed securities		36,067		77	%		158,781		40	%


Total fixed income securities	$	46,313		100	%	$	403,139		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 3.9 years.

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
	($ in thousands)
Fixed maturities:
Gains	$	1,593		$	1,329		$	4,525		$	1,526
(Losses)		(196	)		(426	)		(3,498	)		(435	)
(Impairments)		(110	)		—			(2,471	)		—

		1,287			903			(1,444	)		1,091


Equity securities:
Gains		1,549			180			1,562			443
(Losses)		(350	)		(647	)		(1,530	)		(1,174	)
(Impairments)		(359	)		(8,412	)		(8,698	)		(8,412	)

		840			(8,879	)		(8,666	)		(9,143	)

Net realized capital gains (losses)	$	2,127		$	(7,976	)	$	(10,110	)	$	(8,052	)

The total impairment losses recorded in the 2009 second quarter period were $0.5 million.

Reinsurance Recoverables

We utilize reinsurance principally to reduce our exposure on individual risks, to protect against catastrophic losses, and to stabilize loss ratios and underwriting results. Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance arrangements do not eliminate our obligation to pay claims to our policyholders. Accordingly, we bear credit risk with respect to our reinsurers. Specifically, our reinsurers may not pay claims made by us on a timely basis, or they may not pay some or all of these claims. Either of these events would increase our costs and could have a material adverse effect on our business. We are required to pay the losses even if the reinsurer fails to meet its obligations under the reinsurance agreement.

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

Approximately $85.9 million and $96.8 million of paid and unpaid losses at June 30, 2009 and December 31, 2008, respectively, were due from reinsurers as a result of the losses from Hurricanes Gustav and Ike. Approximately $82.8 million and $101.7 million of paid and unpaid losses at June 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 provided by operating activities was $69.5 million for the six months ended June 30, 2009 compared to net cash provided by operating activities of $133.4 million for the six months ended June 30, 2008, a decrease of $63.9 million. This included a $43.5 million negative variance in our cash flows related to collections for storm loss recoverables from our reinsurers when comparing the first six months of 2009 to the same period in 2008. During the first six months of 2008 we collected $21.3 million of net balances from reinsurers mostly related to gross losses paid during 2007 for Hurricanes Katrina and Rita, while during the first six months of 2009 our recoverable balances grew by $22.2 million related to gross storm loss payments that we have not yet collected from reinsurers primarily on Hurricanes Gustav and Ike. Other factors contributing to the reduction in cash flows included a $10 million reduction in our funds held balances and a $3 million increase in the change in premiums in course of collection.

Net cash used in investing activities was $50.4 million for the six months ended June 30, 2009 as compared to net cash used in investing activities of $117.8 million for the six months ended June 30, 2008, a decrease or positive cash flow of $67.4 million. This change is primarily due to the reduction in operating cash flow.

Net cash used in financing activities was $6.1 million for the six months ended June 30, 2009 as compared to net cash used in investing activities of $8.1 million for the six months ended June 30, 2008, a decrease or positive cash flow of $2 million. These amounts were related to a $7 million purchase of our senior notes in 2009 and an aggregate $9.8 million of purchases of the Company’s common stock in 2008.

In early April, the Company repurchased $10 million aggregate principal amount of its issued and outstanding 7.00% senior notes from an unaffiliated note-holder on the open market for $7 million, as a result of which, as of the date of this filing, $115 million aggregate principal amount of notes remains issued and outstanding.

At June 31, 2009, the weighted average rating of our fixed maturity investments was “AA” by S&P and “Aa” by Moody’s. The entire fixed maturity investment portfolio, except for $27.1 million, consists of investment grade bonds. At June 30, 2009, our portfolio had an average maturity of 5.5 years and duration of 4.2 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 June 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 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 June 30, 2009, letters of credit with an aggregate face amount of $82.9 million were issued under the credit facility. 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 June 30, 2009 in the amount of $7.9 million.

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.

The letter of credit facility is collateralized by all of the common stock of Navigators Insurance Company. The credit agreement contains covenants common to transactions of this type, including restrictions on indebtedness and liens, limitations on dividends, stock buy-backs, mergers and the sale of assets, and requirements to maintain certain consolidated tangible net worth, statutory surplus and other financial ratios. We were in compliance with all covenants at June 30, 2009.

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

Time lags do occur in the normal course of business between the time gross loss reserves are paid by the Company and the time such gross paid losses are billed and collected from reinsurers. Reinsurance recoverable amounts related to those gross loss reserves at June 30, 2009 are anticipated to be billed and collected over the next several years as the gross loss reserves are paid by the Company.

Generally, for pro rata or quota share reinsurers, including pool participants, the Company issues quarterly settlement statements for premiums less commissions and paid loss activity, which are expected to be settled by the end of the subsequent quarter. The Company has the ability to issue “cash calls” requiring such reinsurers to pay losses whenever paid loss activity for a claim ceded to a particular reinsurance treaty exceeds a predetermined amount (generally $1.0 million) as set forth in the pro rata treaty. For the Insurance Companies, cash calls must generally be paid within 30 calendar days. There is generally no specific settlement period for the Lloyd’s Operations cash call provisions, but such billings are usually paid within 45 calendar days.

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

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

At June 30, 2009, ceded asbestos paid and unpaid recoverables were $8.0 million compared to $8.9 million at December 31, 2008. Of such amounts at June 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 June 30, 2009 and December 31, 2008, our capital resources were as follows:


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

Senior debt	$	113,949		$	123,794
Stockholders’ equity		747,797			689,317

Total capitalization	$	861,746		$	813,111

Ratio of debt to total capitalization		13.2	%		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.

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 June 30, 2009 for the payment of dividends by Navigators Insurance Company during 2008 without prior regulatory approval was $48.1 million. Navigators Insurance Company declared and paid a $10.0 million dividend to the Parent Company in the first six months of 2009.

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


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

Cash and investments	$	54,765	$	52,149
Investments in subsidiaries		797,382		751,864
Goodwill and other intangible assets		2,534		2,534
Other assets		8,881		8,769

Total assets	$	863,562	$	815,316


Accounts payable and other liabilities	$	474	$	747
Accrued interest payable		1,342		1,458
7% Senior Notes due May 1, 2016		113,949		123,794

Total liabilities		115,765		125,999


Stockholders’ equity		747,797		689,317

Total liabilities and stockholders’ equity	$	863,562	$	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 second fiscal quarter in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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.

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


Item 1A.		Risk Factors

There have been no material changes from the risk factors as previously disclosed in the Company’s 2008 Annual Report on Form 10-K.


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

In early April 2009, the Company repurchased $10,000,000 aggregate principal amount of its issued and outstanding 7.00% senior notes from an unaffiliated noteholder on the open market, as a result of which, as of the date of this filing, $115,000,000 aggregate principal amount of notes remains issued and outstanding.


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: August 7, 2009	/s/ Francis W. McDonnell
	Francis W. McDonnell
	Senior Vice President and Chief Financial Officer

INDEX OF EXHIBITS


Exhibit No.	Description of Exhibit

4-1	Form of Indenture for Subordinated Debt Securities, between The Navigators Group Inc. and The Bank of New York Mellon, as Trustee.	**
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.

**		Incorporated by reference to Exhibit 4.2 of our Form S-3 filed July 17, 2009 (File No. 333-160647).