Edgar Filing: NAVIGATORS GROUP INC

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file no. 0-15886

THE NAVIGATORS GROUP, INC.

(Exact name of registrant as specified in its charter)


Delaware		13-3138397
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

6 International Drive, Rye Brook, New York		10573
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (914) 934-8999

Securities registered pursuant to section 12(b) of the Act:


Title of each class:		Name of each exchange on which registered:
Common Stock, $.10 Par Value		The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate 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 such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

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

The aggregate market value of voting stock held by non-affiliates as of June 30, 2011 was $536,421,998

The number of common shares outstanding as of February 13, 2012 was 13,964,780.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s 2012 Proxy Statement are incorporated by reference in Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K.

TABLE OF CONTENTS


Description		Page Number

Note on Forward-Looking Statements			3

PART I

Item 1.	Business		3
	Overview		3
	Business Lines		5
	Loss Reserves		9
	Catastrophe Risk Management		14
	Hurricanes Gustav, Ike, Katrina and Rita		15
	Reinsurance Recoverables		15
	Investments		18
	Regulation		19
	Competition		23
	Employees		23
	Available Information		24

Item 1A.	Risk Factors		25
Item 1B.	Unresolved Staff Comments		32
Item 2.	Properties		32
Item 3.	Legal Proceedings		32
Item 4.	Mine Safety Disclosures		33

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		33
Item 6.	Selected Financial Data		36
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		37
	Overview		37
	Ratings		38
	Critical Accounting Policies		38
	Results of Operations		47
	Segment Information		61
	Off-Balance Sheet Transactions		68
	Tabular Disclosure of Contractual Obligations		68
	Capital Resources		68
	Liquidity		71
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		82
Item 8.	Financial Statements and Supplementary Data		83
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		83
Item 9A.	Controls and Procedures		84
Item 9B.	Other Information		86

PART III

Item 10.	Directors, Executive Officers and Corporate Governance		86
Item 11.	Executive Compensation		86
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		86
Item 13.	Certain Relationships and Related Transactions, and Director Independence		86
Item 14.	Principal Accounting Fees and Services		86

PART IV

Item 15.	Exhibits, Financial Statement Schedules		87

Signatures			88
Index to Consolidated Financial Statements and Schedules			F-1

NOTE ON FORWARD-LOOKING STATEMENTS

Some of the statements in this Annual Report on Form 10-K are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in or incorporated by reference in this Annual Report are forward-looking statements. Whenever used in this report, the words “estimate”, “expect”, “believe”, “may”, “will”, “intend”, “continue” or similar expressions or their negative are intended to identify such forward-looking statements. Forward-looking statements are derived from information that we currently have and assumptions that we make. We cannot assure you that anticipated results will be achieved, since actual results may differ materially because of both known and unknown risks and uncertainties which we face. Factors that could cause actual results to differ materially from our forward-looking statements include, but are not limited to, the factors described in Part I, Item 1A, “Risk Factors” of this report. In light of these risks, uncertainties and assumptions, any forward-looking events discussed in this report may not occur. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of their respective dates. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

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 report. They contain forward-looking statements that involve risks and uncertainties. Please refer to the above “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 above and elsewhere in this report.

PART I

Item 1. Business

Overview

The accompanying Consolidated Financial Statements, consisting of the accounts of The Navigators Group, Inc., a Delaware holding company established in 1982, and its wholly-owned subsidiaries, are prepared on the basis of U.S. generally accepted accounting principles (“GAAP” or “U.S. GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods along with related disclosures. The terms “we”, “us”, “our” and “the Company” as used herein are used to mean The Navigators Group, Inc. and its wholly-owned subsidiaries, unless the context otherwise requires. The terms “Parent” or “Parent Company” as used herein are used to mean The Navigators Group, Inc. without its subsidiaries.

We are an international insurance company focusing on specialty products within the overall property casualty insurance market. Our largest product line and most long-standing area of specialization is ocean marine insurance. We have also developed other specialty insurance lines such as commercial primary and excess liability as well as specialty niches in professional liability, and have expanded our specialty reinsurance business since launching Navigators Re in the fourth quarter of 2010.

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

We conduct operations through our Insurance Companies and our Lloyd’s Operations underwriting segments. The Insurance Companies’ segment consists of Navigators Insurance Company, which includes a United Kingdom Branch (the “U.K. Branch”), and Navigators Specialty Insurance Company, which underwrites specialty and professional liability insurance on an excess and surplus lines basis. All of the insurance business written by Navigators Specialty Insurance Company is fully reinsured by Navigators Insurance Company pursuant to a 100% quota share reinsurance agreement. The insurance and reinsurance business written by our Insurance Companies is underwritten through our wholly-owned underwriting management companies, Navigators Management Company, Inc. (“NMC”) and Navigators Management (UK) Ltd. (“NMUK”).

Our Lloyd’s Operations segment includes Navigators Underwriting Agency Ltd. (“NUAL”), a Lloyd’s of London (“Lloyd’s”) underwriting agency which manages Lloyd’s Syndicate 1221 (“Syndicate 1221”). Our Lloyd’s Operations primarily underwrite marine and related lines of business along with offshore energy, professional liability insurance and construction coverages for onshore energy business at Lloyd’s through Syndicate 1221. We controlled 100% of Syndicate 1221’s stamp capacity for the 2011, 2010 and 2009 underwriting years through our wholly-owned subsidiary, Navigators Corporate Underwriters Ltd. which is referred to as a corporate name in the Lloyd’s market. We have also established underwriting agencies in Antwerp, Belgium, Stockholm, Sweden, and Copenhagen, Denmark, which underwrite risks pursuant to binding authorities with NUAL into Syndicate 1221. We have also established a presence in Brazil and China through contractual arrangements with local affiliates of Lloyd’s. For financial information by segment, refer to Note 3, Segment Information, in the Notes to Consolidated Financial Statements, included herein.

While management takes into consideration a wide range of factors in planning our business strategy and evaluating results of operations, there are certain factors that management believes are fundamental to understanding how we are 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 controlling 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 their business and take advantage of market opportunities are constrained by regulatory capital requirements and rating agency assessments of capital adequacy. Similarly, the ability to grow our operations at Lloyd’s is subject to capital and operating requirements of Lloyd’s and the U.K. regulatory authorities.

Management’s decisions are also greatly influenced by access to specialized underwriting and claims expertise in our lines of business. We have chosen to operate in specialty niches with certain common characteristics which we believe provide us with the opportunity to use our technical underwriting expertise in order to realize underwriting profit. As a result, we have focused on underserved markets for businesses characterized by higher severity and lower frequency of loss where we believe our intellectual capital and financial strength bring meaningful value. In contrast, we have avoided niches that we believe have a high frequency of loss activity and/or are subject to a high level of regulatory requirements, such as workers compensation and personal automobile insurance, because we do not believe our technical underwriting 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.

Business Lines

Marine

A summary of our business line divisions and primary products within those divisions, by underwriting segment, is as follows:

Insurance Companies

Marine

•

Marine liability

•

Cargo

•

Transport

•

Craft/fishing vessel

•

Bluewater hull

•

Protection & indemnity

•

Energy

•

War

•

Customs bonds

•

Brownwater hull

Inland Marine

•

Commercial output policy

•

Construction

•

Transportation

•

Specialty

Lloyd’s Operations

Marine

•

Marine liability

•

Cargo

•

Specie

•

Energy liability

•

War

•

Marine excess-of-loss reinsurance

•

Bluewater hull

Our Insurance Companies’ Marine business consists of a number of different product lines. The largest is marine liability, which protects businesses from liability to third parties for bodily injury or property damage stemming from their marine-related operations, such as terminals, marinas and stevedoring. Another significant product line is bluewater hull, which provides coverage to the owners of ocean-going vessels against physical damage to the vessels. We also underwrite insurance for harbor craft and other small craft such as fishing vessels, providing physical damage and third party liability coverage as well as customs bonds. We underwrite cargo insurance, which provides coverage for physical damage to goods in the course of transit, whether by water, air or land. Our U.K. Branch also underwrites primary marine protection and indemnity (“P&I”) business, which complements our marine liability business, which is generally written above the primary layer on an excess basis.

NMC, a wholly-owned underwriting agent, writes Marine business for Navigators Insurance Company from offices located in major insurance or port locations in Chicago, Houston, Miami, New York, San Francisco and Seattle. NMUK, another wholly-owned underwriting agent, writes Marine business in London for the U.K. Branch.

Our Inland Marine division focuses on traditional inland marine insurance products including builders’ risk, contractors’ tools and equipment, fine arts, computer equipment and motor truck cargo.

Our Lloyd’s Operations Marine business primarily consists of cargo, marine liability, and specie. Other key product lines include bluewater hull, and assumed reinsurance of other marine insurers on an excess-of-loss basis.

Property Casualty

A summary of our business line divisions and primary products within those divisions, by underwriting segment, is as follows. All of the Insurance Companies’ property casualty business line divisions are divisions of NMC:

Insurance Companies

Primary Casualty

•

General liability

•

Environmental liability

Excess Casualty

•

Umbrella & excess liability (wholesale brokerage and retail agency)

Navigators Technical Risk (NavTech)

•

Offshore energy

•

Onshore energy

•

Operational engineering

•

Construction

Property Casualty

•

Life Sciences

•

Exporters package liability

Navigators Re (Nav Re)

•

Accident and health reinsurance

•

Latin America property and casualty reinsurance

•

Agriculture reinsurance

•

Professional liability reinsurance (commencing 2012)

Lloyd’s Operations

NavTech

•

Offshore energy

•

Onshore energy

•

Engineering and construction

Casualty

•

Bloodstock

•

U.S. Casualty written through Lloyd’s

The Primary Casualty division primarily writes general liability insurance focusing on small general and artisan contractors and other targeted commercial risks. We have developed underwriting and claims expertise that we believe has allowed us to minimize our exposure to many of the large losses sustained in the past several years by other insurers, including losses stemming from coverages provided to larger contractors who work on condominiums, cooperative developments and other large housing developments. Consistent with our approach of emphasizing underwriting profit over market share, we direct our capacity to small to medium-size general contractors as well as artisan contractors. In addition, we write a limited number of construction wrap-up policies that are general liability policies for owners and developers of residential construction projects. The Primary Casualty division also includes products liability insurance to life sciences firms as well as environmental coverages, including liability insurance for contractors and environmental consultants and site pollution coverage.

The Excess Casualty division provides commercial umbrella and excess casualty insurance coverage. Areas of specialty include manufacturing and wholesale distribution, commercial construction, residential construction, construction project and wrap-up covers, business services, hospitality and real estate and niche programs.

In 2009, we reorganized our offshore energy, onshore energy, engineering and construction businesses under our NavTech division, which primarily underwrites through our Lloyd’s Operations. Our engineering and construction business consists of coverage for construction projects including damage to machinery and equipment and loss of use due to delays. Our onshore and offshore energy insurance principally focuses on the oil and gas, chemical and petrochemical industries, with coverages primarily for property damage and business interruption. In 2010, our NavTech division established an underwriting presence in Brazil through an affiliate of Lloyd’s.

The Property Casualty division primarily writes life sciences and exporters package liability products. In the first quarter of 2011, we entered into a transaction for the sale of the renewal rights for our middle market commercial package and commercial automobile businesses since we did not believe we could achieve sufficient scale to become profitable in these businesses due to the current soft market conditions.

In the fourth quarter of 2010 we established Navigators Re, a division focused on specialty assumed reinsurance business. The specialty products on which the unit is currently focused are proportional and excess-of-loss treaty reinsurance covering medical health care exposures, property treaty exposures in Central and South America and the Caribbean and agriculture exposures in the U.S. and Canada. We had established our Agriculture reinsurance line in 2009 under the Property and Casualty division, but reclassified the line under the Navigators Re division in the fourth quarter of 2010. In the first quarter of 2012, we also began to offer reinsurance of U.S. professional liability exposures.

Professional Liability

A summary of our business line divisions and products within those divisions, by underwriting segment, is as follows:

Insurance Companies

Navigators Professional Liability (Navigators Pro)

•

Directors & officers liability

•

Employment practices liability

•

Fiduciary liability

•

Crime liability

•

Accountants professional liability

•

Lawyers professional liability

•

Insurance agent errors & omissions

•

Miscellaneous professional liability

•

Technology & media liability

•

Design professionals liability

•

Real estate agent liability

Lloyd’s Operations

Navigators Pro

•

Directors & officers liability

•

Lawyers professional liability

•

Miscellaneous professional liability

Navigators Pro, a division of our wholly-owned underwriting agencies, primarily writes professional and management liability insurance. Our professional liability insurance consists of employment practices liability, lawyers professional liability and miscellaneous professional liability coverages. Our current target market for lawyers professional liability is smaller law firms. Our management liability insurance consists of directors and officers liability insurance, which we offer for both privately held and publicly traded corporations listed on national exchanges. In addition, we provide fiduciary liability and crime insurance to our directors and officers liability insurance clients.

In 2005, we commenced writing professional liability coverages for architects and engineers in our Insurance Companies and international directors and officers liability business in our Lloyd’s Operations.

In September 2008, Syndicate 1221 began to underwrite professional and general liability insurance coverage in China through the Lloyd’s Reinsurance Company (China) Ltd in Shanghai.

In July 2008 and October 2009, we opened underwriting offices in Stockholm, Sweden and Copenhagen, Denmark, respectively, to write professional and management liability business.

Loss Reserves

We maintain reserves for unpaid losses and unpaid loss adjustment expenses (“LAE”) for all lines of business. Loss reserves consists of both reserves for reported claims, known as case reserves, and reserves for losses that have occurred but have not yet been reported, known as incurred but not reported losses (“IBNR”). Case reserves are established when notice of a claim is first received. Reserves for such reported claims are established on a case-by-case basis by evaluating several factors, including the type of risk involved, knowledge of the circumstances surrounding such claim, severity of injury or damage, the potential for ultimate exposure, experience with the insured and the broker on the line of business, and the policy provisions relating to the type of claim. Reserves for IBNR are determined in part on the basis of statistical information and in part on the basis of industry experience. 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. These reserves are intended to cover the probable ultimate cost of settling all losses incurred and unpaid, including those incurred but not reported. The determination of reserves for LAE is dependent upon the receipt of information from insureds, brokers and agents.

Generally, there is a lag between the time premiums are written and related losses and loss adjustment expenses are incurred, and the time such events are reported to us. Our loss reserves include amounts related to short tail and long tail classes of business. Short tail business refers to claims that are generally reported quickly upon occurrence of an event, making estimation of loss reserves less complex. Our long tail business includes our marine liability, casualty and professional liability insurance products. For the long tail lines, significant periods of time, ranging up to several years or more, may elapse between the occurrence of the loss, the reporting of the loss and the settlement of the claim. Generally, the longer the time span between the incidence of a loss and the settlement of the claim, the more likely the ultimate settlement amount will vary from the original estimate. Refer to the Casualty and Professional Liability section below for additional information.

Loss reserves are estimates of what the insurer or reinsurer expects to pay on claims, based on facts and circumstances then known. It is possible that the ultimate liability may exceed or be less than such estimates. In setting our loss reserve estimates, we review statistical data covering several years, analyze patterns by line of business and consider several factors including trends in claims frequency and severity, changes in operations, emerging economic and social trends, inflation and changes in the regulatory and litigation environment. We also consult closely with experienced claims professionals. Based on this review, we make a best estimate of our ultimate liability. We do not establish a range of reasonable loss estimates around the best estimate we use to establish our reserves and loss adjustment expenses. During the loss settlement period, which, in some cases, may last several years, additional facts regarding individual claims may become known and, accordingly, it often becomes necessary to refine and adjust the estimates of liability on a claim upward or downward. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current period’s earnings. Even then, the ultimate liability may exceed or be less than the revised estimates. The reserving process is intended to provide implicit recognition of the impact of inflation and other factors affecting loss payments by taking into account changes in historical payment patterns and perceived probable trends. There is generally no precise method for the subsequent evaluation of the adequacy of the consideration given to inflation, or to any other specific factor, because the eventual deficiency or redundancy of reserves is affected by many factors, some of which are interdependent.

Another factor related to reserve development is that we record those premiums which are reported to us through the end of each calendar year and accrue estimates for premiums and loss reserves where there is a time lag between when the policy is bound and the recording of the policy. A substantial portion of the estimated premium is from international business where there can be significant time lags. To the extent that the actual premium varies from estimates, the difference, along with the related loss reserves and underwriting expenses, is recorded in current earnings.

As part of our risk management process, we purchase reinsurance to limit our liability on individual risks and to protect against catastrophic loss. We purchase both quota share reinsurance and excess-of-loss reinsurance. Quota share reinsurance is often utilized on the lower layers of risk and excess-of-loss reinsurance is used above the quota share reinsurance to limit our net retention per risk. Net retention represents the risk that we keep for our own account. Once our initial reserve is established and our net retention is exceeded, any adverse development will directly affect the gross loss reserve, but would generally have no impact on our net retained loss unless the aggregate limits available under the impacted excess-of-loss reinsurance treaty are exhausted. Reinstatement premiums triggered under our excess-of-loss reinsurance by such additional loss development could have a potential impact on our net premiums during the period in which such additional loss development is recognized. Generally, our limits of exposure are known with greater certainty when estimating our net loss versus our gross loss. This situation tends to create greater volatility in the deficiencies and redundancies of the gross reserves as compared to the net reserves.

The following table presents an analysis of losses and loss adjustment expenses for each of the last three calendar years:


	Year Ended December 31,
In thousands	2011			2010			2009
Net reserves for losses and LAE at beginning of year	$	1,142,542		$	1,112,934		$	999,871
Provision for losses and LAE for claims occurring in the current year		474,852			434,957			444,939
Increase (decrease) in estimated losses and LAE for claims occurring in prior years		2,145			(13,802	)		(8,941	)

Incurred losses and LAE		476,997			421,155			435,998
Losses and LAE paid for claims occurring during:
Current year		(73,242	)		(76,982	)		(59,412	)
Prior years		(309,063	)		(314,565	)		(263,523	)

Losses and LAE payments		(382,305	)		(391,547	)		(322,935	)

Net reserves for losses and LAE at end of year		1,237,234			1,142,542			1,112,934
Reinsurance recoverables on unpaid losses and LAE		845,445			843,296			807,352

Gross reserves for losses and LAE at end of year	$	2,082,679		$	1,985,838		$	1,920,286

The following table presents the development of the loss and LAE reserves for 2001 through 2011. The line “Net reserves for losses and LAE” reflects the net reserves at the balance sheet date for each of the indicated years and represents the estimated amount of losses and loss adjustment expenses arising in all prior years that are unpaid at the balance sheet date. The “Reserves for losses and LAE re-estimated” lines of the table reflect the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year. The reserve estimates may change as more information becomes known about the frequency and severity of claims for individual years. The net and gross cumulative redundancy (deficiency) lines of the table reflect the cumulative amounts developed as of successive years with respect to the aforementioned reserve liability. The cumulative redundancy or deficiency represents the aggregate change in the estimates over all prior years.

The table calculates losses and loss adjustment expenses reported and recorded in subsequent years for all prior years starting with the year in which the loss was incurred. For example, assuming that a loss occurred in 2001 and was not reported until 2002, the amount of such loss will appear as a deficiency in both 2001 and 2002. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on the table.

A significant portion of the favorable or adverse development on our gross reserves has been ceded to our excess-of-loss reinsurance treaties. As a result of these reinsurance arrangements, our gross losses and related reserve deficiencies and redundancies tend to be more sensitive to favorable or adverse developments such as those described above than our net losses and related reserve deficiencies and redundancies.

Our gross loss reserves include estimated losses related to the 2005 Hurricanes Katrina and Rita and the 2008 Hurricanes Ike and Gustav and were in total approximately 2.4% and 3.2% of gross loss reserves as of December 31, 2011 and 2010, respectively. In addition, 3.7% and 3.8% of our gross loss reserves as of December 31, 2011 and 2010, respectively, include estimated losses related to the Deepwater Horizon loss event. When recording these losses, we assess our reinsurance coverage, potential reinsurance recoverable and the recoverability of those balances.

Losses incurred on business recently written are primarily covered by reinsurance agreements written by companies with whom we are currently doing reinsurance business and whose credit we continue to assess in the normal course of business. Refer to “Management’s Discussion of Financial Condition and Results of Operations—Results of Operations—Expenses—Net Losses and Loss Adjustment Expenses” and Note 5, Reserves for Losses and Loss Adjustment Expenses, in the Notes to Consolidated Financial Statements, both of which are included herein, for additional information regarding Hurricanes Katrina, Rita, Ike and Gustav and our asbestos exposure.


	Year Ended December 31,
In thousands	2001			2002			2003		2004		2005		2006		2007		2008		2009		2010			2011
Net reserves for losses and LAE	$	202,759		$	264,647		$	374,171	$	463,788	$	578,976	$	696,116	$	847,303	$	999,871	$	1,112,934	$	1,142,542		$	1,237,234
Reserves for losses and LAE re-estimated as of:
One year later		209,797			323,282			370,335		460,007		561,762		649,107		796,557		990,930		1,099,132	$	1,144,687
Two years later		266,459			328,683			360,964		457,769		523,541		589,044		776,845		971,048		1,065,382
Three years later		266,097			321,213			377,229		432,988		481,532		555,448		767,600		943,231
Four years later		256,236			334,991			362,227		401,380		461,563		559,368		749,905
Five years later		264,431			325,249			343,182		391,766		469,195		539,327
Six years later		260,264			314,332			333,857		401,071		451,807
Seven years later		257,852			305,051			336,790		387,613
Eight years later		250,021			308,593			323,608
Nine years later		256,615			301,868
Ten years later		248,430

Net cumulative redundancy (deficiency)		(45,671	)		(37,221	)		50,563		76,175		127,169		156,789		97,398		56,640		47,552		(2,145	)
Net cumulative paid as of:
One year later		64,785			84,385			80,034		96,981		133,337		142,938		180,459		263,523		314,565		309,063
Two years later		112,746			133,911			140,644		180,121		219,125		233,211		322,892		460,058		517,125
Three years later		138,086			170,236			195,961		238,673		264,663		300,328		441,267		591,226
Four years later		159,042			208,266			223,847		262,425		302,273		359,592		526,226
Five years later		185,037			226,798			239,355		283,538		337,559		401,102
Six years later		196,098			234,284			251,006		305,214		356,710
Seven years later		198,760			241,083			263,072		318,539
Eight years later		203,370			248,850			266,355
Nine years later		208,150			253,852
Ten years later		210,225

Gross liability-end of year		401,177			489,642			724,612		966,117		1,557,991		1,607,555		1,648,764		1,853,664		1,920,286		1,985,838			2,082,679
Reinsurance recoverable		198,418			224,995			350,441		502,329		979,015		911,439		801,461		853,793		807,352		843,296			845,445

Net liability-end of year		202,759			264,647			374,171		463,788		578,976		696,116		847,303		999,871		1,112,934		1,142,542			1,237,234

Gross re-estimated latest		523,573			630,125			680,572		853,712		1,342,394		1,351,471		1,529,488		1,781,647		1,842,471		1,965,225
Re-estimated recoverable latest		275,143			328,257			356,964		466,099		890,587		812,144		779,583		838,416		777,089		820,538

Net re-estimated latest		248,430			301,868			323,608		387,613		451,807		539,327		749,905		943,231		1,065,382		1,144,687

Gross cumulative redundancy (deficiency)		(122,396	)		(140,483	)		44,040		112,405		215,597		256,084		119,276		72,018		77,815		20,613

The following tables identify the approximate gross and net cumulative redundancy (deficiency) as of each year-end balance sheet date for the Insurance Companies and Lloyd’s Operations contained in the preceding ten year table:


	Gross Cumulative Redundancy (Deficiency)
	Consolidated						Insurance Companies									Lloyd’s Operations
In thousands	Grand Total			Excluding Asbestos			Total			Asbestos			All Other ⁽¹⁾			Total
2010		20,613			20,741			(9,656	)		(128	)		(9,528	)		30,269
2009		77,815			78,581			(4,073	)		(766	)		(3,307	)		81,888
2008		72,018			73,713			(6,985	)		(1,695	)		(5,290	)		79,003
2007		119,276			121,767			36,655			(2,491	)		39,146			82,621
2006		256,084			257,795			118,736			(1,711	)		120,447			137,348
2005		215,597			217,554			98,810			(1,957	)		100,767			116,787
2004		112,405			96,953			85,885			15,452			70,433			26,520
2003		44,040			29,771			23,902			14,269			9,633			20,138
2002		(140,483	)		(76,915	)		(141,770	)		(63,568	)		(78,202	)		1,287
2001		(122,396	)		(58,471	)		(113,446	)		(63,925	)		(49,521	)		(8,950	)

(1)	Contains cumulative loss development for all active and run-off lines of business exclusive of asbestos losses.


	Net Cumulative Redundancy (Deficiency)
	Consolidated						Insurance Companies									Lloyd’s Operations
In thousands	Grand Total			Excluding Asbestos			Total			Asbestos			All Other ⁽¹⁾			Total
2010		(2,145	)		(2,925	)		(12,102	)		780			(12,882	)		9,957
2009		47,552			47,050			654			502			152			46,898
2008		56,640			56,113			14,348			527			13,821			42,292
2007		97,398			97,134			47,202			264			46,938			50,196
2006		156,789			158,304			96,763			(1,515	)		98,278			60,026
2005		127,169			128,913			84,556			(1,744	)		86,300			42,613
2004		76,175			78,448			50,195			(2,273	)		52,468			25,980
2003		50,563			53,241			19,395			(2,678	)		22,073			31,168
2002		(37,221	)		(2,863	)		(51,466	)		(34,358	)		(17,108	)		14,245
2001		(45,671	)		(11,165	)		(46,844	)		(34,506	)		(12,338	)		1,173

(1) - Contains cumulative loss development for all active and run-off lines of business exclusive of asbestos losses.

Casualty and Professional Liability. Substantially all of our Casualty business involves general liability policies which generate third party liability claims that are long tail in nature. A significant portion of our general liability reserves relate to construction defect claims.

The Professional Liability business generates third party claims, which are also longer tail in nature. The professional liability policies mainly provide coverage on a claims-made basis, whereby coverage is generally provided only for those claims that are made during the policy period. The substantial majority of our claims-made policies provide coverage for one year periods. We have also issued a limited number of multi-year claims-made professional liability policies known as “tail coverage” that provide for insurance protection for wrongful acts prior to the run-off date. Such multi-year policies provide insurance protection for several years.

Our professional liability loss estimates are based on expected losses, an assessment of the characteristics of reported losses at the claim level, evaluation of loss trends, industry data, and the legal, regulatory and current risk environment because anticipated loss experience in this area is less predictable due to the small number of claims and/or erratic claim severity patterns. We believe that we have made a reasonable estimate of the required loss reserves for professional liability. The expected ultimate losses may be adjusted up or down as the accident years mature.

Additional information regarding our loss and loss adjustment expenses incurred and loss reserves can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Expenses—Net Losses and Loss Adjustment Expenses” and Note 5, Reserves for Losses and Loss Adjustment Expenses, in the Notes to Consolidated Financial Statements, both of which are included herein.

Catastrophe Risk Management

We have exposure to losses caused by hurricanes and other natural and man-made catastrophic events. The frequency and severity of catastrophes are unpredictable.

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

We have significant natural catastrophe exposures throughout the world. We estimate that our largest exposure to loss from a single natural catastrophe event comes from an earthquake on the west coast of the United States. As of December 31, 2011, we estimate that our probable maximum pre-tax gross and net loss exposure from such an earthquake event would be approximately $174.2 million and $28.8 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 we could incur in such an event or in any natural catastrophe event would not be materially higher than the estimates discussed above given the significant uncertainties with respect to such an estimate. Moreover, our portfolio of insured risks changes dynamically over time and there can be no assurance that our probable maximum loss will not change materially over time.

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

Hurricanes Gustav, Ike, Katrina and Rita

Hurricanes Gustav and Ike (the “2008 Hurricanes”) which occurred in the 2008 third quarter and Hurricanes Katrina and Rita (the “2005 Hurricanes”) which occurred in the 2005 third quarter generated substantial losses in our marine and energy lines of business, due principally to offshore energy losses. There were no significant hurricane losses in 2011, 2010, 2009, 2007 or 2006 that impacted our marine and energy lines of business.

We monitor the development of paid and reported claims activities in relation to the estimate of ultimate losses established for the 2008 Hurricanes and the 2005 Hurricanes. Management believes that should any adverse loss development for gross claims occur from the 2008 Hurricanes or the 2005 Hurricanes, it would be contained within our reinsurance program. Our actual losses from such hurricanes may differ materially from our estimated losses as a result of, among other things, the receipt of additional information from insureds or brokers, the attribution of losses to coverages that, for the purposes of our estimates, we assumed would not be exposed and inflation in repair costs due to the limited availability of labor and materials. In particular, in developing our loss estimate, we have assumed that the wreckage of certain oil rigs damaged by Hurricane Rita will not be required to be removed as a result of the federal “Rigs To Reef” program. If our actual losses from the 2008 Hurricanes or the 2005 Hurricanes are materially greater than our estimated losses, our business, results of operations and financial condition could be materially adversely affected.

Refer to “Management’s Discussion of Financial Condition and Results of Operations—Results of Operations and Overview—Operating Expenses—Net Losses and Loss Adjustment Expenses Incurred” and Note 5, Reserves for Losses and Loss Adjustment Expenses, in the Notes to Consolidated Financial Statements, both of which are included herein, for additional information regarding Hurricanes Katrina, Rita, Ike and Gustav.

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. We are protected by various treaty and facultative reinsurance agreements. The reinsurance is placed either directly by us or through reinsurance intermediaries. The reinsurance intermediaries are compensated by the reinsurers.

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. Our credit risk exposure to our reinsurers has significantly increased over the past couple of years as a result of reinsurance recoverables for significant offshore energy losses incurred during 2011 and 2010.

We have established a reserve for uncollectible reinsurance in the amount of $13.0 million, which was determined by considering reinsurer specific default risk as indicated by their financial strength ratings. Actual uncollectible reinsurance could potentially exceed our estimates.

Our exposure to credit risk from any one reinsurer is managed through diversification by reinsuring with a number of different reinsurers, principally in the United States and European reinsurance markets. When reinsurance is placed, our standards of acceptability generally require that a reinsurer must have a rating from A.M. Best and/or S&P of “A” or better, or an equivalent financial strength if not rated, plus at least $500 million in policyholders’ surplus. Our Reinsurance Security Committee, which is included within our Enterprise Risk Management Finance and Credit Sub-Committee, monitors the financial strength of our reinsurers and the related reinsurance recoverables and periodically reviews the list of acceptable reinsurers.

The credit quality distribution of the Company’s reinsurance recoverables of $1.05 billion as of December 31, 2011 for ceded paid and unpaid losses and LAE and ceded unearned premiums based on insurer financial strength ratings from A.M. Best was as follows:


In thousands	Rating		Fair Value⁽²⁾		Percent of Total⁽³⁾
A.M. Best Rating description ⁽¹⁾:
Superior		A++, A+	$	535,060		51	%
Excellent		A, A-		505,314		48	%
Very good		B++, B+		552		0	%
Not rated		NR		12,472		1	%

Total			$	1,053,398		100	%

(1)—	Equivalent S&P rating used for certain companies when an A.M. Best rating was unavailable.

(2)—	Net of reserve for uncollectible reinsurance of approximately $13.0 million. The fair value consists of reinsurance recoverables on paid losses due within 30-45 days and reinsurance on unpaid losses which by nature of our reserving process is our best estimate of the value as of December 31, 2011.

(3)—	The Company holds offsetting collateral of approximately 16.8%, including 50.5% for B++ and B+ companies and 62.5% for not rated companies which includes letters of credit, ceded balances payable and other balances held by our Insurance Companies and our Lloyd’s Operations.

The following table lists our 20 largest reinsurers measured by the amount of reinsurance recoverable for ceded paid and unpaid losses and LAE and ceded unearned premium (constituting 74.7% of our total recoverables) together with the collateral held by us as of December 31, 2011, and the reinsurers’ financial strength rating from the indicated rating agency:


	Reinsurance Recoverables
In thousands	Unearned Premium		Paid/Unpaid Losses		Total⁽¹⁾		Collateral Held⁽²⁾		AMB	S&P
Munich Reinsurance America Inc.	$	11,286	$	78,562	$	89,848	$	386	A+	AA-
Everest Reinsurance Company		14,528		75,094		89,622		6,634	A+	A+
Swiss Reinsurance America Corporation		4,730		84,343		89,073		8,041	A+	AA-
Transatlantic Reinsurance Company		15,177		71,530		86,707		6,416	A	A+
National Indemnity Company		15,591		37,251		52,842		5,774	A++	AA+
Partner Reinsurance Europe		7,227		32,682		39,909		20,272	A+	AA-
Berkley Insurance Company		1,755		31,278		33,033		243	A+	A+
Scor Holding (Switzerland) AG		2,234		29,822		32,056		7,754	A	A
Lloyd’s Syndicate #2003		5,581		25,380		30,961		6,481	A	A+
General Reinsurance Corporation		703		27,630		28,333		852	A++	AA+
Allied World Reinsurance		6,773		20,291		27,064		2,293	A	A
Munchener Ruckversicherungs-Gesellschaft		858		25,815		26,673		6,614	A+	AA-
Ace Property and Casualty Insurance Company		1,525		22,339		23,864		—	A+	AA-
Platinum Underwriters Re		800		22,186		22,986		2,829	A	A-
White Mountains Reinsurance of America		117		22,544		22,661		96	A	A-
AXIS Re Europe		6,188		15,853		22,041		5,434	A	A+
Tower Insurance Company		8,191		12,980		21,171		1,798	A-	NR
Scor Global P&C SE		10,871		5,911		16,782		6,002	A	A
Lloyd’s Syndicate #4000		1,999		13,571		15,570		1,814	A	A+
Validus Reinsurance Ltd.		3,004		12,457		15,461		9,981	A-	A-

Top 20 Total	$	119,138	$	667,519	$	786,657	$	99,714
All Others		45,024		221,717		266,741		77,717

Total	$	164,162	$	889,236	$	1,053,398	$	177,431

(1)—	Net of reserve for uncollectible reinsurance of approximately $13.0 million.

(2)—	Collateral includes letter of credit, ceded balances payable and other balances held by the Company’s Insurance Companies and Lloyd’s Operations.

The largest portion of the collateral held consists of letters of credit obtained from reinsurers in accordance with New York Insurance Regulation Nos. 20 and 133. Regulation 20 requires collateral to be held by the ceding company from reinsurers not licensed in New York State in order for the ceding company to take credit for the reinsurance recoverables on its statutory balance sheet. The specific requirements governing the letters of credit are contained in Regulation 133 and include a clean and unconditional letter of credit and an “evergreen” clause which prevents the expiration of the letter of credit without due notice to the Company. Only banks considered qualified by the National Association of Insurance Commissioners (“NAIC”) may be deemed acceptable issuers of letters. In addition, based on our credit assessment of the reinsurer, there are certain instances where we require collateral from a reinsurer even if the reinsurer is licensed in New York State, generally applying the requirements of Regulation No. 133. The contractual terms of the letters of credit require that access to the collateral is unrestricted. In the event that the counterparty to our collateral would be deemed not qualified by the NAIC, the reinsurer would be required by agreement to replace such collateral with acceptable security under the reinsurance agreement. There is no assurance, however, that the reinsurer would be able to replace the counterparty bank in the event such counterparty bank becomes unqualified and the reinsurer experiences significant financial deterioration. Under such circumstances, we could incur a substantial loss from uncollectible reinsurance from such reinsurer. In November 2010, Regulation 20 was amended to provide the New York Superintendent of Financial Services (the “New York Superintendent”) discretion to allow a reduction in collateral that qualifying reinsurers must post in order for New York domestic ceding insurers such as Navigators Insurance Company and Navigators Specialty Insurance Company to receive full financial statement credit. The “collateral required” percentages range from 0% – 100%, are based upon the New York Superintendent’s evaluation of a number of factors, including the reinsurer’s financial

strength ratings, and apply to contracts entered into, renewed or having an anniversary date on or after January 1, 2011. In November 2011, the NAIC adopted similar amendments to its Credit for Reinsurance Model Act that would apply to certain non-U.S. reinsurers. States will have the option to retain a 100% funding requirement if they so choose and it remains to be seen whether and when states will amend their credit for reinsurance laws and regulations in accordance with such model act.

Approximately $50.9 million of the reinsurance recoverables for paid and unpaid losses as of December 31, 2011 was due from reinsurers as a result of the losses from the 2008 and 2005 Hurricanes. In addition, as of December 31, 2011, reinsurance recoverables for paid and unpaid losses of approximately $80.9 million was due from reinsurers in connection with the Deepwater Horizon incident.

Investments

The objective of our investment policy, guidelines and strategy is to maximize total investment return in the context of preserving and enhancing shareholder value and statutory surplus of the Insurance Companies. Secondarily, we seek to optimize after-tax investment income.

Our investments are managed by outside professional fixed-income and equity portfolio managers. We seek to achieve our 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 our 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 Investors Service (“Moody’s”) shall not exceed 10% of our total fixed income and short-term investments. Fixed-income securities rated below “BBB-” by S&P or “Baa3” by Moody’s combined with any other investments not specifically permitted under our investment guidelines, cannot exceed 5% of our consolidated stockholders’ equity. Investments in equity securities that are actively traded on major U.S. stock exchanges cannot exceed 20% of consolidated stockholders’ equity. Finally, our investment guidelines prohibit investments in derivatives other than as a hedge against foreign currency exposures or the writing of covered call options on our equity portfolio.

The Insurance Companies’ investments are subject to the oversight of their respective Boards of Directors and our 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, real estate mortgages and real estate. The U.K. Branch’s investments must also comply with the regulations set forth by the Financial Services Authority (“FSA”) in the U.K.

The Lloyd’s Operations’ investments are subject to the direction and control of the Board of Directors and the Investment Capital 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 the FSA.

The table set forth below reflects our total investment balances, net investment income earned thereon and the related average yield for the last three calendar years:


	Year Ended December 31,
In thousands	2011			2010			2009
Invested Assets and Cash:
Insurance Companies	$	1,767,190		$	1,675,725		$	1,604,354
Lloyd’s Operations		457,994			425,386			388,556
Parent Company		8,314			53,217			63,677

Consolidated	$	2,233,498		$	2,154,328		$	2,056,587

Net Investment Income:
Insurance Companies	$	54,164		$	62,792		$	65,717
Lloyd’s Operations		8,955			8,286			9,229
Parent Company		381			584			566

Consolidated	$	63,500		$	71,662		$	75,512

Average Yield (amortized cost basis):
Insurance Companies		3.2	%		3.8	%		4.1	%
Lloyd’s Operations		2.2	%		2.2	%		2.7	%
Parent Company		1.4	%		1.2	%		1.0	%
Consolidated		3.0	%		3.5	%		3.8	%

As of December 31, 2011, 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 investment grade by S&P and by Moody’s except for 45 securities approximating $11.7 million. There was no collateralized debt obligations (“CDO’s”), collateralized loan obligations (“CLO’s”), asset-backed commercial paper or credit default swaps in our investment portfolio. As of December 31, 2011 and 2010, all fixed-maturity and equity securities held by us were classified as available-for-sale.

Refer to “Management’s Discussion of Financial Condition and Results of Operations—Investments” and Note 4, Investments, in the Notes to Consolidated Financial Statements, both of which are included herein, for additional information regarding investments.

Regulation

United States

We are subject to regulation under the insurance statutes, including holding company statutes, of various states and applicable regulatory authorities in the United States. These regulations vary but generally require insurance holding companies, and insurers that are subsidiaries of holding companies, to register and file reports concerning their capital structure, ownership, financial condition and general business operations. Such regulations also generally require prior regulatory agency approval of changes in control of an insurer and of certain transactions within the holding company structure. The regulatory agencies have statutory authorization to enforce their laws and regulations through various administrative orders and enforcement proceedings.

Navigators Insurance Company is licensed to engage in the insurance and reinsurance business in 50 states, the District of Columbia and Puerto Rico. Navigators Specialty Insurance Company is licensed to engage in the insurance and reinsurance business in the State of New York and is an approved surplus lines insurer or meets the financial requirements where there is not a formal approval process in all other states and the District of Columbia.

The State of New York Department of Financial Services (the “New York Department”) is our principal regulatory agency. New York insurance law provides that no corporation or other person may acquire control of us, and thus indirect control of our insurance company subsidiaries, unless it has given notice to our insurance company subsidiaries and obtained prior written approval from the New York Superintendent for such acquisition. Any purchaser of 10% or more of the outstanding shares of our common stock would be presumed to have acquired control of us, unless such presumption is rebutted.

Under New York insurance law, Navigators Insurance Company and Navigators Specialty Insurance Company may only pay dividends out of their statutory earned surplus. Generally, the maximum amount of dividends Navigators Insurance Company and Navigators Specialty Insurance Company may pay without regulatory approval in any twelve-month period is the lesser of adjusted net investment income or 10% of statutory surplus. For a discussion of our current dividend capacity, refer to “Management’s Discussion of Financial Condition and Results of Operations—Capital Resources” in Item 7 of this report.

Under insolvency or guaranty laws in most states in which Navigators Insurance Company and Navigators Specialty Insurance Company operate, insurers doing business in those states can be assessed up to prescribed limits for policyholder losses of insolvent insurance companies. Neither Navigators Insurance Company nor Navigators Specialty Insurance Company was subject to any material assessments under state insolvency or guaranty laws in the last three years.

The Insurance Regulatory Information System, or IRIS, was developed by the NAIC and is intended primarily to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies thirteen industry ratios and specifies “usual values” for each ratio. Departure from the usual values on four or more of the ratios can lead to inquiries from individual state insurance commissioners as to certain aspects of an insurer’s business. As of December 31, 2011, the results for Navigators Insurance Company were within the usual values for all IRIS ratios except for one, and the results for Navigators Specialty Insurance Company were within the usual values for all IRIS ratios. The one ratio outside the usual values for Navigators Insurance Company was the investment yield at 3.0%, which was lower than otherwise expected due to a $4.7 million accrual of estimated interest expense reflecting the summary judgment order entered against the Company in its dispute with Resolute in which the Court awarded $4.7 million in interest to Resolute on previously paid balances that were allegedly overdue under certain reinsurance agreements. The Company is appealing the Court’s ruling. For information on the Equitas legal proceedings refer to Note 12, Commitments and contingencies, in the Notes to Consolidated Financial Statements included herein.

State insurance departments have adopted a methodology developed by the NAIC for assessing the adequacy of statutory surplus of property and casualty insurers which includes a risk-based capital formula that attempts to measure statutory capital and surplus needs based on the risks in a company’s mix of products and investment portfolio. The formula is designed to allow state insurance regulators to identify weakly capitalized companies. Under the formula, a company determines its “risk-based capital” by taking into account certain risks related to the insurer’s assets (including risks related to its investment portfolio and ceded reinsurance) and the insurer’s liabilities (including underwriting risks related to the nature and experience of its insurance business). The risk-based capital rules provide for different levels of regulatory attention depending on the ratio of a company’s total adjusted capital to its “authorized control level” of risk-based capital. Based on calculations made by Navigators Insurance Company and Navigators Specialty Insurance Company, their risk-based capital levels exceed the level that would trigger regulatory attention or company action. In their respective 2011 statutory financial statements, Navigators Insurance Company and Navigators Specialty Insurance Company have complied with the NAIC’s risk-based capital reporting requirements.

Both the NAIC and the New York Department have increased their focus on risks within an insurer’s holding company system that may pose enterprise risk to the insurer. “Enterprise risk” is defined as any activity, circumstance, event or series of events involving one or more affiliates of an insurer that, if not remedied promptly, is likely to have a material adverse effect upon the financial condition or the liquidity of the insurer or its insurance holding company system as a whole. The New York Department recently issued a circular letter announcing its expectations for the establishment and maintenance of an enterprise risk management (ERM) function by New York domestic insurers, while the NAIC recently adopted amendments to its Model Insurance Holding Company System Regulatory Act and Regulations, which include, among other amendments, a requirement for the ultimate controlling person to file an enterprise risk report. The NAIC is also continuing to work towards establishing a legal requirement for insurers to conduct an Own Risk and Solvency Assessment (ORSA) in accordance with its recently adopted ORSA Guidance Manual.

In addition to regulations applicable to insurance agents generally, NMC is subject to managing general agents’ acts in its state of domicile and in certain other jurisdictions where it does business.

In 2002, in response to the tightening of supply in certain insurance and reinsurance markets resulting from, among other things, the September 11, 2001 terrorist attacks, the Terrorism Risk Insurance Act, or TRIA, was enacted. TRIA was intended to ensure the availability of insurance coverage for “acts of terrorism” (as defined) in the United States of America committed by or on behalf of foreign persons or interests. This law established a federal program through the end of 2005 to help the commercial property and casualty insurance industry cover claims related to future losses resulting from acts of terrorism and requires insurers to offer coverage for acts of terrorism in all commercial property and casualty policies. As a result, we are prohibited from adding certain terrorism exclusions to those policies written by insurers in our group that write business in the U.S. On December 22, 2005, the Terrorism Risk Insurance Extension Act of 2005, or TRIEA, was enacted. TRIEA extended TRIA through December 31, 2007 and made several changes in the program, including the elimination of several previously covered lines. The deductible for each insurer was increased to 17.5% and 20% of direct earned premiums in 2006 and 2007, respectively. For losses in excess of an insurer’s deductible, the Insurance Companies will retain an additional 10% and 15% of the excess losses in 2006 and 2007, respectively, with the balance to be covered by the Federal government up to an aggregate cap of insured losses of $25 billion in 2006 and $27.5 billion in 2007. Also, TRIEA established a new program trigger under which Federal compensation will become available only if aggregate insured losses sustained by all insurers exceed $50 million from a certified act of terrorism occurring after March 31, 2006 and $100 million for certified acts occurring on or after January 1, 2007. On December 26, 2007, the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) was enacted. TRIPRA, among other provisions, extends for seven years the program established under TRIA, as amended. The imposition of these TRIA deductibles could have an adverse effect on our results of operations. Potential future changes to TRIA, including the increases in deductibles and co-pays and elimination of domestic terrorism coverage proposed by the current administration, could also adversely affect us by causing our reinsurers to increase prices or withdraw from certain markets where terrorism coverage is required. As a result of TRIA, we are required to offer coverage for certain terrorism risks that we may normally exclude. Occasionally in our marine business, such coverage falls outside of our normal reinsurance program. In such cases, our only reinsurance would be the protection afforded by TRIA.

Our Lloyd’s Operations are subject to regulation in the United States in addition to being regulated in the United Kingdom, as discussed below. The Lloyd’s market is licensed to engage in insurance business in Illinois, Kentucky and the U.S. Virgin Islands and operates as an eligible excess and surplus lines insurer in all states and territories except Kentucky and the U.S. Virgin Islands. Lloyd’s is also an accredited reinsurer in all states and territories of the United States. Lloyd’s maintains various trust funds in the state of New York to protect its United States business and is therefore subject to regulation by the New York Department, which acts as the domiciliary department for Lloyd’s U.S. trust funds. There are deposit trust funds in other states to support Lloyd’s reinsurance and excess and surplus lines insurance business.

From time to time, various regulatory and legislative changes have been proposed in the insurance and reinsurance industry. Among the proposals that have in the past been or are at present being considered are the possible introduction of federal regulation in addition to, or in lieu of, the current system of state regulation of insurers and proposals in various state legislatures (some of which have been enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the NAIC. We are unable to predict whether any of these laws and regulations will be adopted, the form in which any such laws and regulations would be adopted, or the effect, if any, these developments would have on our operations and financial condition.

United Kingdom

Our United Kingdom subsidiaries and our Lloyd’s Operations are subject to regulation by the FSA, as established by the Financial Services and Markets Act 2000. Our Lloyd’s Operations are also subject to supervision by the Council of Lloyd’s. The FSA has been granted broad authorization and intervention powers as they relate to the operations of all insurers, including Lloyd’s syndicates, operating in the United Kingdom. Lloyd’s is authorized by the FSA and is required to implement certain rules prescribed by the FSA, which it does by the powers it has under the Lloyd’s Act 1982 relating to the operation of the Lloyd’s market. Lloyd’s prescribes, in respect of its managing agents and corporate members, certain minimum standards relating to their management and control, solvency and various other requirements. The FSA directly monitors Lloyd’s managing agents’ compliance with the systems and controls prescribed by Lloyd’s. If it appears to the FSA that either Lloyd’s is not fulfilling its delegated regulatory responsibilities, or that managing agents are not complying with the applicable regulatory rules and guidance, the FSA may intervene at its discretion.

The United Kingdom coalition government has introduced detailed proposals for a restructuring of the regulatory regime for financial services in the United Kingdom, including amendments to the Financial Services and Markets Act 2000. These amendments are intended to become effective at the end of 2012, to coincide with the planned implementation of Solvency II. Seen as a response to the financial crisis, the proposals involve the abolition of the FSA and the establishment in its place of a new system based on the following components: a new macro prudential regulator, the Financial Policy Committee, to be established within the Bank of England, responsible for setting macro financial services policy and monitoring systemic risks; a new prudential regulator, the Prudential Regulation Authority (“PRA”), to be established as a subsidiary of the Bank of England with the intention that it can draw on the financial sector expertise of the Bank but remain operationally independent; a new conduct of business regulator, called the Financial Conduct Authority (“FCA”) to focus on ensuring confidence on the wholesale and retail financial markets with particular focus on protection of consumers; and the creation of a new single agency responsible for tackling serious economic crime. The division of responsibilities between these new organizations has yet to be finalized; however, it is expected that insurers and reinsurers will be regulated both by the PRA (for prudential issues) and the FCA (for conduct of business issues). Consistent with this, it is expected that The Society of Lloyd’s and Lloyd’s managing agents will be regulated both by the PRA and the FCA.

We participate in the Lloyd’s market through our ownership of NUAL, Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. NUAL is the managing agent for Syndicate 1221. We controlled 100% of Syndicate 1221’s stamp capacity for the 2011, 2010 and 2009 underwriting years through our wholly-owned subsidiary, Navigators Corporate Underwriters Ltd., which is referred to as a corporate name in the Lloyd’s market. By entering into a membership agreement with Lloyd’s, Navigators Corporate Underwriters Ltd. undertakes to comply with all Lloyd’s by-laws and regulations as well as the provisions of the Lloyd’s Acts and the Financial Services and Markets Act that are applicable to it. The operation of Syndicate 1221, as well as Navigators Corporate Underwriters Ltd. and their respective directors, is subject to the Lloyd’s supervisory regime.

Underwriting capacity of a member of Lloyd’s must be supported by providing a deposit (referred to as “Funds at Lloyd’s”) in the form of cash, securities or letters of credit in an amount determined by Lloyd’s equal to a specified percentage of the member’s underwriting capacity. The amount of such deposit is calculated by each member through the completion of an annual capital adequacy exercise. The results of this exercise are submitted to Lloyd’s for approval. Lloyd’s then advises the member of the amount of deposit that is required. The consent of the Council of Lloyd’s may be required when a managing agent of a syndicate proposes to increase underwriting capacity for the following underwriting year.

The Council of Lloyd’s has wide discretionary powers to regulate members’ underwriting at Lloyd’s. It may, for instance, change the basis on which syndicate expenses are allocated or vary the Funds at Lloyd’s ratio or the investment criteria applicable to the provision of Funds at Lloyd’s. Exercising any of these powers might affect the return on an investment of the corporate member in a given underwriting year. Further, it should be noted that the annual business plans of a syndicate are subject to the review and approval of the Lloyd’s Franchise Board. The Lloyd’s Franchise Board was formally constituted on January 1, 2003. The Franchise Board is responsible for setting risk management and profitability targets for the Lloyd’s market and operates a business planning and monitoring process for all syndicates.

Corporate members continue to have insurance obligations even after all their underwriting years have been closed by reinsurance to close. In order to continue to perform these obligations, corporate members are required to stay in existence; accordingly, there continues to be an administrative and financial burden for corporate members between the time their memberships have ceased and the time their insurance obligations are extinguished, including the completion of financial accounts in accordance with the Companies Act 1985.

If a member of Lloyd’s is unable to pay its debts to policyholders, such debts may be payable by the Lloyd’s Central Fund, which acts similarly to state guaranty funds in the United States. 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. The Council of Lloyd’s has discretion to call or assess up to 3% of a member’s underwriting capacity in any one year as a Central Fund contribution.

A European Union (“E.U.”) directive covering the capital adequacy, risk management and regulatory reporting for insurers, known as Solvency II, was adopted by the European Parliament in April 2009. Solvency II will introduce a new system of regulation for insurers operating in the E.U. (including the United Kingdom) and presents a number of risks to us. Although Solvency II was originally stated to have become effective by October 31, 2012, a European Commission official has stated publicly that there seems to be an agreement that member states must now implement all the rules to introduce Solvency II by December 31, 2012, but firms will not be required to comply with it in full until January 1, 2014. During the year 2013, firms must demonstrate to the supervisors that they will be ready to operate under Solvency II from January 1, 2014. In addition, Omnibus II is expected (among other things) to introduce a series of transitional provisions in specific areas that may extend beyond January 1, 2014. The detail of the Solvency II project will be set out in so-called “delegated acts” and binding technical standards which will be issued by the European Commission and will be legally binding. No official drafts for any of these measures have been released. Consequently the Company’s implementation plans are based on its current understanding of the Solvency II requirements, which may change. During the next few years, we expect to undertake a significant amount of work to ensure that we meet the new requirements, which may divert finite resources from other business related tasks. Although the details of how Solvency II will apply to Navigators Insurance Company, NUAL and Syndicate 1221 are not yet fully known, it is clear that Solvency II will impose new requirements with respect to capital structure, technical provisions, solvency calculations, governance, disclosure and risk management. There is also a risk that Solvency II may increase our capital requirements for our U.K. Branch and Syndicate 1221. These new regulations have the potential to adversely affect the profitability of Navigators Insurance Company, NUAL and Syndicate 1221, and to restrict their ability to carry on their businesses as currently conducted. A significant unanswered question about how Solvency II will be implemented is whether the new regulations will apply only to Navigators Insurance Company’s U.K. Branch or to all of its operations, both within and outside of the United Kingdom and the other E.U. countries in which it operates. If the regulations are applied to Navigators Insurance Company in its entirety, we could be subject to even more onerous requirements under the new regulations. Such requirements could have a significant adverse effect on our ability to operate profitably and could impose other significant restrictions on our ability to carry on our insurance business in the E.U. (including the United Kingdom) as it is now conducted.

Competition

The property and casualty insurance industry is highly competitive. We face competition from both domestic and foreign insurers, many of whom have longer operating histories and greater financial, marketing and management resources. Competition in the types of insurance in which we are engaged is based on many factors, including our perceived overall financial strength, pricing, other terms and conditions of products and services offered, business experience, marketing and distribution arrangements, agency and broker relationships, levels of customer service (including speed of claims payments), product differentiation and quality, operating efficiencies and underwriting. Furthermore, insureds tend to favor large, financially strong insurers, and we face the risk that we will lose market share to higher rated insurers.

Another competitive factor in the industry is the entrance of other financial services providers such as banks and brokerage firms into the insurance business. These efforts pose new challenges to insurance companies and agents from financial services companies traditionally not involved in the insurance business.

Employees

As of December 31, 2011, we had 522 full-time employees of which 423 were located in the United States, 91 in the United Kingdom, 1 in Belgium, 1 in Brazil, 4 in Sweden and 2 in Denmark.

Available Information

This report and all other filings made by the Company with the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available to the public by the SEC. All filings can be read and copied at the SEC Public Reference Room, located at 100 F Street, NE, Washington, DC 20549. Information pertaining to the operation of the Public Reference Room can be obtained by calling 1-800-SEC-0330. We are an electronic filer, so all reports, proxy and information statements, and other information can be found at the SEC website, www.sec.gov. Our website address is http://www.navg.com. Through our website at http://www.navg.com/Pages/sec-filings.aspx, we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The annual report to stockholders, press releases and recordings of our earnings release conference calls are also provided on our website.

Item 1A. Risk Factors

You should carefully consider each of the risks and uncertainties described below and elsewhere in this Annual Report on Form 10-K, as well as any amendments or updates reflected in subsequent filings with the SEC. We believe these risks and uncertainties, individually or in the aggregate, could cause our actual results to differ materially from expected and historical results and could materially and adversely affect our business operations. Further, additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our results and business operations.

The continuing volatility in the financial markets and the current recession could have a material adverse effect on our results of operations and financial condition.

The financial market experienced significant volatility worldwide from the third quarter of 2008 through 2011. Although the U.S., European and other foreign governments have taken various actions to try to stabilize the financial markets, it is unclear whether those actions will be effective. Therefore, the financial market volatility and the resulting negative economic impact could continue and it is possible that it may be prolonged.

Although we continue to monitor market conditions, we cannot predict future market conditions or their impact on our stock price or investment portfolio. Depending on market conditions, we could incur future additional realized and unrealized losses, which could have a material adverse effect on our results of operations and financial condition. These economic conditions have had an adverse impact on the availability and cost of credit resources generally, which could negatively affect our ability to obtain letters of credit utilized by our Lloyd’s Operations to support business written through Lloyd’s.

In addition, the continuing financial market volatility and economic downturn could have a material adverse effect on our insureds, agents, claimants, reinsurers, vendors and competitors. Certain of the actions U.S., European and other foreign governments have taken or may take in response to the financial market crisis have impacted certain property and casualty insurance carriers. The U.S., European and other foreign governments are actively taking steps to implement additional measures to stabilize the financial markets and stimulate the economy, and it is possible that these measures could further affect the property and casualty insurance industry and its competitive landscape.

Our business is concentrated in marine and energy, specialty liability and professional liability insurance, and if market conditions change adversely, or we experience large losses in these lines, it could have a material adverse effect on our business.

As a result of our strategy to focus on specialty products in niches where we have underwriting and claims handling expertise and to decline business where pricing does not afford what we consider to be acceptable returns, our business is concentrated in the marine and energy, specialty liability and professional liability lines of business. If our results of operations from any of these lines are less favorable for any reason, including lower demand for our products on terms and conditions that we find appropriate, flat or decreased rates for our products or increased competition, the reduction could have a material adverse effect on our business.

We are exposed to cyclicality in our business that may cause material fluctuations in our results.

The property and casualty insurance business generally, and the marine insurance business specifically, have historically been characterized by periods of intense price competition due to excess underwriting capacity as well as periods when shortages of underwriting capacity have permitted attractive premium levels. We have reduced business during periods of severe competition and price declines and grown when pricing allowed an acceptable return. We expect that our business will continue to experience the effects of this cyclicality which, over the course of time, could result in material fluctuations in our premium volume, revenues or expenses.

We may not be successful in developing our new specialty lines which could cause us to experience losses.

Since 2001, we have entered into a number of new specialty lines of business, primarily professional liability, excess casualty, primary casualty, inland marine, property catastrophe, and accident and health reinsurance. We continue to look for appropriate opportunities to diversify our business portfolio by offering new lines of insurance in which we believe we have sufficient underwriting and claims expertise. However, because of our limited history in these new lines, there is limited financial information available to help us estimate sufficient reserve amounts for these lines and to help evaluate whether we will be able to successfully develop these new lines or the likely ultimate losses and expenses associated with these new lines. Due to our limited history in these lines, we may have less experience managing their development and growth than some of our competitors. Additionally, there is a risk that the lines of business into which we expand will not perform at the levels we anticipate.

We may be unable to manage effectively our rapid growth in our lines of business, which may adversely affect our results.

To control our growth effectively, we must successfully manage our new and existing lines of business. This process will require substantial management attention and additional financial resources. In addition, our growth is subject to, among other risks, the risk that we may experience difficulties and incur expenses related to hiring and retaining a technically proficient workforce. Accordingly, we may fail to realize the intended benefits of expanding into new specialty lines and we may fail to realize value from such lines relative to the resources that we invest in them. Any difficulties associated with expanding our current and future lines of business could adversely affect our results of operations.

We may incur additional losses if our loss reserves are insufficient.

We maintain loss reserves to cover our estimated ultimate unpaid liability for losses and LAE with respect to reported and unreported claims incurred as of the end of each accounting period. Reserves do not represent an exact calculation of liability, but instead represent estimates, generally utilizing actuarial projection techniques and judgment at a given accounting date. These reserve estimates are expectations of what the ultimate settlement and administration of claims will cost based on our assessment of facts and circumstances then known, review of historical settlement patterns, estimates of trends in claims severity, frequency, legal theories of liability and other factors. Both internal and external events, including changes in claims handling procedures, economic inflation, legal trends and legislative changes, may affect the reserve estimation process. Many of these items are not directly quantifiable, particularly on a prospective basis. Additionally, there may be significant lags between the occurrence of the insured event and the time it is actually reported to us. We continually refine reserve estimates in a regular ongoing process as historical loss experience develops and additional claims are reported and settled. Adjustments to reserves are reflected in the results of the periods in which the estimates are changed. Because establishment of reserves is an inherently uncertain process involving estimates, currently established reserves may not be sufficient. If estimated reserves are insufficient, we will incur additional charges to earnings which could have a material adverse effect on future results of operations, financial position or cash flows.

Our loss reserves include amounts related to short tail and long tail classes of business. Short tail business means that claims are generally reported quickly upon occurrence of an event, making estimation of loss reserves less complex. For the long tail lines, significant periods of time, ranging up to several years or more, may elapse between the occurrence of the loss, the reporting of the loss and the settlement of the claim. The longer the time span between the incidence of a loss and the settlement of the claim, the more likely the ultimate settlement amount will vary. Our longer tail business includes general liability, including construction defect claims, as well as historical claims for asbestos exposures through our marine and aviation businesses and claims relating to our run-off businesses. Our professional liability business, though long tail with respect to settlement period, is produced on a claims-made basis (which means that the policy in-force at the time the claim is filed, rather than the policy in-force at the time the loss occurred, provides coverage) and is therefore, we believe, less likely to result in a significant time lag between the occurrence of the loss and the reporting of the loss. There can be no assurance, however, that we will not suffer substantial adverse prior period development in our business in the future.

In addition to loss reserves, preparation of our financial statements requires us to make many estimates and judgments.

In addition to loss reserves discussed above, the Consolidated Financial Statements contain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. On an ongoing basis we evaluate our estimates based on historical experience and other assumptions that we believe to be reasonable under the circumstances. Any significant change in these estimates could adversely affect our results of operations and/or our financial condition.

We may not have access to adequate reinsurance to protect us against losses.

We purchase reinsurance by transferring part of the risk we have assumed to a reinsurance company in exchange for part of the premium we receive in connection with the risk. The availability and cost of reinsurance are subject to prevailing market conditions, both in terms of price and available capacity, which can affect our business volume and profitability. Our reinsurance programs are generally subject to renewal on an annual basis. If we are unable to renew our expiring facilities or to obtain new reinsurance facilities, either our net exposures would increase, which could increase our costs, or, if we were unwilling to bear an increase in net exposures, we would have to reduce the level of our underwriting commitments, especially catastrophe exposed risks, which would reduce our revenues and possibly net income.

Our reinsurers may not pay on losses in a timely fashion, or at all, which may increase our costs.

Intense competition for our products could harm our ability to maintain or increase our profitability and premium volume.

The property and casualty insurance industry is highly competitive. We face competition from both domestic and foreign insurers, many of whom have longer operating histories and greater financial, marketing and management resources. Competition in the types of insurance in which we are engaged is based on many factors, including our perceived overall financial strength, pricing and other terms and conditions of products and services offered, business experience, marketing and distribution arrangements, agency and broker relationships, levels of customer service (including speed of claims payments), product differentiation and quality, operating efficiencies and underwriting. Furthermore, insureds tend to favor large, financially strong insurers, and we face the risk that we will lose market share to higher rated insurers.

We may have difficulty in continuing to compete successfully on any of these bases in the future. If competition limits our ability to write new business at adequate rates, our ability to transact business would be materially and adversely affected and our results of operations would be adversely affected.

We may be unable to attract and retain qualified employees.

We depend on our ability to attract and retain qualified executive officers, experienced underwriters, claims professionals and other skilled employees who are knowledgeable about our specialty lines of business. If the quality of our executive officers, underwriting or claims team and other personnel decreases, we may be unable to maintain our current competitive position in the specialty markets in which we operate and be unable to expand our operations into new specialty markets.

Increases in interest rates may cause us to experience losses.

Because of the unpredictable nature of losses that may arise under insurance policies, we may require substantial liquidity at any time. Our investment portfolio, which consists largely of fixed-income investments, is our principal source of liquidity. The market value of our fixed-income investments is subject to fluctuation depending on changes in prevailing interest rates and various other factors. We do not hedge our investment portfolio against interest rate risk. Increases in interest rates during periods when we must sell fixed-income securities to satisfy liquidity needs may result in realized investment losses.

Our investment portfolio is subject to certain risks that could adversely affect our results of operations, financial condition or cash flows.

Although our investment policy guidelines emphasize total investment return in the context of preserving and enhancing shareholder value and statutory surplus of the insurance subsidiaries, our investments are subject to market-wide risks and fluctuations, as well as to risks inherent in particular types of securities. Due to these risks we may not be able to realize our investment objectives. In addition, we may be forced to liquidate investments at times and prices that are not optimal, which could have an adverse effect on our results of operations. Investment losses could significantly decrease our asset base, thereby adversely affecting our ability to conduct business and pay claims.

We are exposed 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.

We are exposed to significant capital markets risk related to changes in interest rates, credit spreads, equity prices and foreign currency exchange rates. If significant, declines in equity prices, changes in interest rates, changes in credit spreads and the strengthening or weakening of foreign currencies against the U.S. dollar, individually or in tandem, could have a material adverse effect on our consolidated results of operations, financial condition or cash flows.

Our exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest rates. Our investment portfolio contains interest rate sensitive instruments, such as fixed income securities, which may be adversely affected by changes in interest rates from governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. A rise in interest rates would reduce the fair value of our investment portfolio. It would also provide the opportunity to earn higher rates of return on funds reinvested. Conversely, a decline in interest rates would increase the fair value of our investment portfolio. We would then presumably earn lower rates of return on assets reinvested. We may be forced to liquidate investments prior to maturity at a loss in order to cover liabilities. Although we take measures to manage the economic risks of investing in a changing interest rate environment, we may not be able to mitigate the interest rate risk of our assets relative to our liabilities. Included in our fixed income securities are asset-backed and mortgage-backed securities. Changes in interest rates can expose us to prepayment risks on these investments. In periods of declining interest rates, mortgage prepayments generally increase and mortgage-backed securities are prepaid more quickly, requiring us to reinvest the proceeds at the then current rates.

Our fixed income portfolio is invested in high quality, investment-grade securities. However, we are generally permitted to invest up to 5% of our stockholders’ equity in below investment-grade high yield fixed income securities. These securities, which pay a higher rate of interest, also have a higher degree of credit or default risk. These securities may also be less liquid in times of economic weakness or market disruptions. While we have put in place procedures to monitor the credit risk and liquidity of our invested assets, it is possible that, in periods of economic weakness, we may experience default losses in our portfolio. This may result in a reduction of net income, capital and cash flows.

We invest a portion of our portfolio in common stock or preferred stocks. The value of these assets fluctuates with the equity markets. In times of economic weakness, the market value and liquidity of these assets may decline, and may impact net income, capital and cash flows.

The functional currencies of the Company’s principal insurance and reinsurance subsidiaries are the U.S. dollar, U.K. pound and the Canadian dollar. Exchange rate fluctuations relative to the functional currencies may materially impact our financial position. Certain of our subsidiaries maintain both assets and liabilities in currencies different than their functional currency, which exposes us to changes in currency exchange rates. In addition, locally-required capital levels are invested in local currencies in order to satisfy regulatory requirements and to support local insurance operations regardless of currency fluctuations.

Despite our mitigation efforts, an increase in interest rates could have a material adverse effect on our results of operations, financial position and cash flows.

Capital may not be available to us in the future or may only be available on unfavorable terms.

The capital needs of our business are dependent on several factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover our losses. If our current capital becomes insufficient for our future plans, we may need to raise additional capital through the issuance of stock or debt. Otherwise, in the case of insufficient capital, we may need to limit our growth. The terms of an equity or debt offering could be unfavorable, for example, causing dilution to our current shareholders or such securities may have rights, preferences and privileges that are senior to our existing securities. If we were in a situation of having inadequate capital and if we were not able to obtain additional capital, our business, results of operations and financial condition could be adversely affected to a material extent.

A downgrade in our ratings could adversely impact the competitive positions of our operating businesses.

Ratings are a critical factor in establishing the competitive position of insurance companies. The Insurance Companies are rated by A.M. Best and S&P. A.M. Best’s and S&P’s ratings reflect their opinions of an insurance company’s financial strength, operating performance, strategic position and ability to meet its obligations to policyholders, and are not evaluations directed to investors. Our ratings are subject to periodic review by A.M. Best and S&P. Because these ratings have become an increasingly important factor in establishing the competitive position of insurance companies, if these ratings are reduced, our competitive position in the industry, and therefore our business, could be adversely affected in a material manner. A significant downgrade could result in a substantial loss of business as policyholders might move to other companies with higher ratings. There can be no assurance that our current ratings will continue for any given period of time. For a further discussion of our ratings, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Ratings” included herein.

Continued or increased premium levies by Lloyd’s for the Lloyd’s Central Fund and cash calls for trust fund deposits or a significant downgrade of Lloyd’s A.M. Best rating could materially and adversely affect us.

The Lloyd’s Central Fund protects Lloyd’s policyholders against the failure of a member of Lloyd’s to meet its obligations. The Central Fund is a mechanism which in effect mutualizes unpaid liabilities among all members, whether individual or corporate. The fund is available to back Lloyd’s policies issued after 1992. Lloyd’s requires members to contribute to the Central Fund, normally in the form of an annual contribution, although a special contribution may be levied. The Council of Lloyd’s has discretion to call up to 3% of underwriting capacity in any one year.

Policies issued before 1993 have been reinsured by Equitas Insurance Limited (“Equitas”), an independent insurance company authorized by the Financial Services Authority. However, if Equitas were to fail or otherwise be unable to meet all of its obligations, Lloyd’s may take the view that it is appropriate to apply the Central Fund to discharge those liabilities Equitas failed to meet. In that case, the Council of Lloyd’s may resolve to impose a special or additional levy on the existing members, including Lloyd’s corporate members, to satisfy those liabilities.

Additionally, Lloyd’s insurance and reinsurance business is subject to local regulation, and regulators in the United States require Lloyd’s to maintain certain minimum deposits in trust funds as protection for policyholders in the United States. These deposits may be used to cover liabilities in the event of a major claim arising in the United States and Lloyd’s may require us to satisfy cash calls to meet claims payment obligations and maintain minimum trust fund amounts.

Any premium levy or cash call would increase the expenses of Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd., our corporate members, without providing compensating revenues, and could have a material adverse effect on our results.

We believe that in the event that Lloyd’s rating is downgraded, the downgrade could have a material adverse effect on our ability to underwrite business through our Lloyd’s Operations and therefore on our financial condition or results of operations.

Our businesses are heavily regulated, and changes in regulation may reduce our profitability and limit our growth.

Our insurance subsidiaries are subject to extensive regulation and supervision in the jurisdictions in which they conduct business. This regulation is generally designed to protect the interests of policyholders, as opposed to insurers and their stockholders and other investors, and relates to authorization for lines of business, capital and surplus requirements, investment limitations, underwriting limitations, transactions with affiliates, dividend limitations, changes in control, premium rates and a variety of other financial and non-financial components of an insurance company’s business.

Virtually all states require insurers licensed to do business in that state to bear a portion of the loss suffered by some insureds as the result of impaired or insolvent insurance companies through the operation of guaranty funds. The effect of these arrangements could reduce our profitability in any given period or limit our ability to grow our business.

In recent years, the state insurance regulatory framework has come under increased federal scrutiny, and some state legislatures have considered or enacted laws that may alter or increase state authority to regulate insurance companies and insurance holding companies. Further, the NAIC and state insurance regulators are re-examining existing laws and regulations, specifically focusing on modifications to holding company regulations, interpretations of existing laws and the development of new laws. Additionally, the Dodd-Frank Wall Street Reform and Consumer Protection Act, which became effective on July 21, 2010, established a Federal Insurance Office to, among other responsibilities, identify issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or the United States financial system. Any proposed or future legislation or NAIC initiatives may be more restrictive than current regulatory requirements or may result in higher costs.

In response to the September 11, 2001 terrorist attacks, the United States Congress has enacted legislation designed to ensure, among other things, the availability of insurance coverage for terrorist acts, including the requirement that insurers provide such coverage in certain circumstances. Refer to “Business—Regulation – United States” included herein for a discussion of the TRIA, TRIEA and TRIPRA legislation.

Extensive changes to the regulatory regime for financial services in the United Kingdom have been proposed. Refer to “Business – Regulation – United Kingdom” included herein for a discussion of such proposals.

The E.U. Directive on Solvency II may affect how we manage our business, subject us to higher capital requirements and cause us to incur additional costs to conduct our business in the E.U. (including the United Kingdom) and possibly elsewhere.

An E.U. directive covering the capital adequacy, risk management and regulatory reporting for insurers, known as Solvency II, was adopted by the European Parliament in April 2009. Solvency II will introduce a new system of regulation for insurers operating in the E.U. (including the United Kingdom) and presents a number of risks to us. Although Solvency II was originally stated to have become effective by October 31, 2012, a Europe Commission official has stated publicly that there seems to be an agreement that member states must now implement all the rules to introduce Solvency II by December 31, 2012, but firms will not be required to comply with it in full until January 1, 2014. During the year 2013, firms must demonstrate to the supervisors that they will be ready to operate under Solvency II from January 1, 2014. In addition, Omnibus II is expected (among other things) to introduce a series of transitional provisions in specific areas that may extend beyond January 1, 2014. The detail of the Solvency II project will be set out in so-called “delegated acts” and binding technical standards which will be issued by the European Commission and will be legally binding. No official drafts for any of these measures have been released. Consequently the Company’s implementation plans are based on its current understanding of the Solvency II requirements, which may change. During the next few years, we expect to undertake a significant amount of work to ensure that we meet the new requirements, which may divert finite resources from other business related tasks. Although the details of how Solvency II will apply to Navigators Insurance Company, NUAL and Syndicate 1221 are not yet fully known, it is clear that Solvency II will impose new requirements with respect to capital structure, technical provisions, solvency calculations, governance, disclosure and risk management. There is also a risk that Solvency II may increase our capital requirements for our U.K. Branch and Syndicate 1221. These new regulations have the potential to adversely affect the profitability of Navigators Insurance Company, NUAL and Syndicate 1221, and to restrict their ability to carry on their businesses as currently conducted. A significant unanswered question about how Solvency II will be implemented is whether the new regulations will apply only to Navigators Insurance Company’s U.K. Branch or to all of its operations, both within and outside of the United

Kingdom and the other E.U. countries in which it operates. If the regulations are applied to Navigators Insurance Company in its entirety, we could be subject to even more onerous requirements under the new regulations. Such requirements could have a significant adverse effect on our ability to operate profitably and could impose other significant restrictions on our ability to carry on our insurance business in the E.U. (including the United Kingdom) as it is now conducted.

The inability of our subsidiaries to pay dividends to us in sufficient amounts would harm our ability to meet our obligations.

The Parent Company is a holding company and relies primarily on dividends from our subsidiaries to meet our obligations for payment of interest and principal on outstanding debt obligations and corporate expenses. The ability of our insurance subsidiaries to pay dividends to the Parent Company in the future will depend on their statutory surplus, on earnings and on regulatory restrictions. For a discussion of our insurance subsidiaries’ current dividend-paying ability, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources”, included herein. The Parent Company, as an insurance holding company, and our underwriting subsidiaries are subject to regulation by some states. Such regulation generally provides that transactions between companies within our consolidated group must be fair and equitable. Transfers of assets among affiliated companies, certain dividend payments from underwriting subsidiaries and certain material transactions between companies within our consolidated group may be subject to prior notice to, or prior approval by, state regulatory authorities. Our underwriting subsidiaries are also subject to licensing and supervision by government regulatory agencies in the jurisdictions in which they do business. These regulations may set standards of solvency that must be met and maintained, such as the nature of and limitations on investments, the nature of and limitations on dividends to policyholders and stockholders and the nature and extent of required participation in insurance guaranty funds. These regulations may affect our subsidiaries’ ability to provide us with dividends.

Catastrophe losses could materially reduce our profitability.

We are exposed to claims arising out of catastrophes, particularly in our marine insurance line of business and our NavTech and Nav Re businesses. We have experienced, and will experience in the future, catastrophe losses which may materially reduce our profitability or harm our financial condition. Catastrophes can be caused by various natural events, including hurricanes, windstorms, earthquakes, hail, severe winter weather and fires. Catastrophes can also be man-made, such as the World Trade Center attack, or caused by fortuitous events such as the Deepwater Horizon oil rig disaster. 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.

The market price of Navigators common stock may be volatile.

There has been significant volatility in the market for equity securities. The price of Navigators common stock may not remain at or exceed current levels. In addition to the other risk factors detailed herein, the following factors may have an adverse impact on the market price of Navigators common stock:

•

actual or anticipated variations in our quarterly results of operations, including the result of catastrophes,

•

changes in market valuations of companies in the insurance and reinsurance industry,

•

changes in expectations of future financial performance or changes in estimates of securities analysts,

•

issuances of common shares or other securities in the future,

•

the addition or departure of key personnel, and

•

announcements by us or our competitors of acquisitions, investments or strategic alliances.

Stock markets in the United States often experience price and volume fluctuations. Market fluctuations, as well as general political and economic conditions such as recession or interest rate or currency rate fluctuations, could adversely affect the market price of Navigators common stock.

There is a risk that we may be directly or indirectly exposed to recent uncertainties with regard to European sovereign debt holdings.

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 United States and European reinsurance markets. Consequently, we may be indirectly exposed to recent uncertainties with regard to European sovereign debt holdings through certain of our reinsurers. A table of our 20 largest reinsurers by the amount of reinsurance recoverable for ceded losses and loss adjustment expense and ceded unearned premium is presented in “Business” along with their rating from two rating agencies. The 20 largest reinsurers from the United States and Europe represent 74.7% of our Reinsurance Recoverables at December 31, 2011.

In addition, we invest primarily in non-sovereign fixed maturities in the European Union, principally related to our Lloyd’s business. As of December 31, 2011, the fair value of such securities was $64.9 million, with an amortized cost of $65.6 million representing 3.3% of our total fixed income and equity portfolio. Our largest exposure is in France with a total of $28.8 million followed by Netherlands with a total of $26.6 million. We have no exposure to Greece, Portugal, Italy or Spain.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our executive and administrative office is located at 6 International Drive in Rye Brook, NY. Our lease for this space expires in February 2014. Our underwriting operations are in various locations with non-cancelable operating leases including Charlotte, NC, Chicago, IL, Coral Gables, FL, Danbury, CT, Ellicott City, MD, Exton, PA, Houston, TX, Irvine, CA, Los Angeles, CA, New York City, NY, Parsippany, NJ, Philadelphia, PA, Pittsburgh, PA, San Francisco, CA, Schaumburg, IL, Seattle, WA, London, England, Manchester, England, Antwerp, Belgium, Stockholm, Sweden and Copenhagen, Denmark.

Item 3. Legal Proceedings

In the ordinary course of conducting business, our subsidiaries are involved in various legal proceedings, either indirectly as insurers for parties or directly as defendants. Most of the these proceedings consist of claims litigation involving our subsidiaries as either (a) liability insurers defending or providing indemnity for third party claims brought against insureds or (b) insurers defending first party coverage claims brought against them. We account for such activity through the establishment of unpaid loss and loss adjustment reserves. Our management believes that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and cost of defense, will not be material to our consolidated financial condition, results of operations, or cash flows.

Our subsidiaries are also from time to time involved with other legal actions, some of which assert claims for substantial amounts. These actions include claims asserting extra contractual obligations, such as claims involving allegations of bad faith in the handling of claims or the underwriting of policies. In general, we believe we have valid defenses to these cases. Our management expects that the ultimate liability, if any, with respect to such extra-contractual matters will not be material to our consolidated financial position. Nonetheless, given the large or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of litigation, an adverse outcome in such matters could, from time to time, have a material adverse outcome on our consolidated results of operations or cash flows in a particular fiscal quarter or year.

In October 2010, Equitas represented by Resolute Management Services Limited (“Resolute”), commenced a lawsuit in the Supreme Court of the State of New York (the “Court Proceeding”) and separate arbitration proceedings (the “Arbitration” and collectively with the Court Proceeding, the “Resolute Proceedings”) against Navigators Management Company, Inc. (“NMC”) a wholly-owned subsidiary of the Company. The arbitration demand and complaint in the Resolute Proceedings allege that NMC failed to make timely payments to Resolute under certain reinsurance agreements in connection with subrogation recoveries received by NMC with respect to several catastrophe losses that occurred in the late 1980’s and early 1990’s. Resolute alleges that it suffered damages of approximately $7.5 million as a result of the alleged delays in payment. The relative proportion of total damages sought in the Court Proceeding and Arbitration are approximately 55% and 45%, respectively. The Company believes that the claims of Resolute are without merit and it intends to vigorously contest the claims.

On October 25, 2011, an order was issued in the Court Proceeding denying NMC’s motion for summary judgment and granting Resolute’s cross-motion for partial summary judgment (the “Partial Summary Judgment Order”). The Partial Summary Judgment Order found that NMC had breached its obligations under the reinsurance agreements at issue in the Court Proceeding and further found that Resolute was entitled to damages for unpaid interest at the statutory rate of 9%. On December 2, 2011, a Stipulation and Order was entered with the Court in favor of Resolute in the amount of $4.7 million with respect to the Partial Summary Judgment Order. Navigators disagrees with and is appealing the Partial Summary Judgment Order. As a result of the entry of the Partial Summary Judgment Order on December 2, 2011, however, Navigators established an interest expense accrual of $4.7 million pending the resolution of the appeal.

The Arbitration is in the dispositive motion phase and involves contracts and/or factual situations that are distinct from those in the Court Proceeding. Navigators intends to continue to vigorously contest the claims in the Arbitration.

While it is too early to predict with any certainty the ultimate outcome of the Resolute Proceedings, the Company believes that the ultimate outcome would not be expected to have a significant adverse effect on its results of operations, financial condition or liquidity, although an adverse resolution of the Resolute Proceedings could have a material adverse effect on the Company’s results of operations in a particular fiscal quarter or year.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

The Company’s common stock is traded over-the-counter on NASDAQ under the symbol NAVG. Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.

The high, low and closing trade prices for the four quarters of 2011 and 2010 were as follows:


	2011						2010
	High		Low		Close		High		Low		Close
First Quarter	$	54.59	$	48.13	$	51.50	$	47.99	$	36.93	$	39.33
Second Quarter	$	52.90	$	44.73	$	47.00	$	43.85	$	36.86	$	41.13
Third Quarter	$	50.03	$	38.36	$	43.21	$	45.00	$	40.92	$	44.63
Fourth Quarter	$	49.20	$	40.71	$	47.68	$	52.35	$	42.82	$	50.35

Information provided to us by our transfer agent and proxy solicitor indicates that there are approximately 170 holders of record and 3,044 beneficial holders of our common stock.

Five Year Stock Performance Graph

The Five Year Stock Performance Graph and related Cumulative Indexed Returns table, as presented below, which were prepared with the aid of S&P, reflects the cumulative return on the Company’s common stock, the Standard & Poor’s 500 Index (“S&P 500 Index”) and S&P Property and Casualty Insurance Index (the “Insurance Index”) assuming an original investment in each of $100 on December 31, 2006 (the “Base Period”) and reinvestment of dividends to the extent declared. Cumulative returns for each year subsequent to 2006 are measured as a change from this Base Period.

The comparison of five year cumulative returns among the Company, the companies listed in the S&P 500 Index and the Insurance Index are as follows:

LOGO


	Cumulative Indexed Returns Year Ended December 31 ,
Company / Index	Base Period 2006		2007		2008		2009		2010		2011
The Navigators Group, Inc.		100.00		134.91		113.97		97.77		104.50		96.84
S&P 500 Index		100.00		105.49		66.46		84.05		96.71		98.75
S&P 500 Property & Casualty Insurance		100.00		86.04		60.73		68.15		74.44		74.24

The following Annual Return Percentage table reflects the annual return on the Company’s common stock, the S&P 500 Index and the Insurance Index including reinvestment of dividends to the extent declared.


	Annual Return Percentage Year Ended December 31,
Company / Index	2007		2008		2009		2010		2011
The Navigators Group, Inc.		34.91		-15.52		-14.21		6.88		-7.33
S&P 500 Index		5.49		-37.00		26.46		15.06		2.11
S&P 500 Property & Casualty Insurance		-13.96		-29.41		12.21		9.23		-0.26

Dividends

We have not paid or declared any cash dividends on our common stock. While there presently is no intention to pay cash dividends on the common stock, future declarations, if any, are at the discretion of our Board of Directors and the amounts of such dividends will be dependent upon, among other factors, our results of operations and cash flow, financial condition and business needs, restrictive covenants under our credit facility, the capital and surplus requirements of our subsidiaries and applicable government regulations.

Recent Sales of Unregistered Securities

None

Use of Proceeds from Public Offering of Debt Securities

None

Purchases of Equity Securities by the Issuer

In May 2011, the Parent Company’s Board of Directors authorized an additional $50 million under the existing share repurchase program of the Company’s common stock, which increased the size of the program to $150 million. This repurchase program was initially authorized in November 2009. The share repurchase program authorized by the Parent Company’s Board of Directors expired December 31, 2011.

The following table summarizes the Parent Company’s purchases of its common stock in each month during the fourth quarter of 2011.


	Total Number of Shares Purchased		Average Cost Paid Per Share
October 2011		31,680	$	42.89
November 2011		93,229	$	43.06
December 2011		252,002	$	46.89

Item 6. Selected Financial Data

The following table sets forth selected consolidated financial data including consolidated financial information of the Company for each of the last five calendar years, derived from the Company’s audited Consolidated Financial Statements. You should read the table in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and Item 8, “Financial Statements and Supplementary Data”, included herein.


	Year Ended December 31,
In thousands, except share and per share amounts	2011			2010			2009			2008			2007
Operating Information:
Gross written premiums	$	1,108,216		$	987,201		$	1,044,918		$	1,084,922		$	1,070,707
Net written premiums		753,798			653,938			701,255			661,615			645,796
Net earned premiums		691,645			659,931			683,363			643,976			601,977
Net investment income		63,500			71,662			75,512			76,554			70,662
Net other-than-temporary impairment losses		(1,985	)		(1,080	)		(11,876	)		(37,045	)		(655	)
Net realized gains (losses)		11,996			41,319			9,216			(1,254	)		2,661
Total revenues		766,385			776,975			762,880			683,666			676,659
Income (loss) before income taxes		32,734			98,829			86,848			68,731			139,182
Net income (loss)		25,597			69,578			63,158			51,692			95,620
Net income per share:
Basic	$	1.71		$	4.33		$	3.73		$	3.08		$	5.69
Diluted	$	1.69		$	4.24		$	3.65		$	3.04		$	5.62

Average common shares outstanding:
Basic		14,980,429			16,064,770			16,935,488			16,801,713			16,812,451
Diluted		15,183,285			16,415,266			17,322,020			16,991,711			17,004,849

Combined loss & expense ratio ⁽¹⁾:
Loss ratio		69.0	%		63.8	%		63.8	%		61.0	%		56.6	%
Expense ratio		35.7	%		36.9	%		33.4	%		32.8	%		30.9	%

Total		104.7	%		100.7	%		97.2	%		93.8	%		87.5	%


Balance sheet information:
Total investments and cash	$	2,233,498		$	2,154,328		$	2,056,587		$	1,917,715		$	1,767,301
Total assets		3,670,007			3,531,459			3,453,994			3,349,580			3,143,771
Gross losses and LAE reserves		2,082,679			1,985,838			1,920,286			1,853,664			1,648,764
Net losses and LAE reserves		1,237,234			1,142,542			1,112,934			999,871			847,303
Senior notes		114,276			114,138			114,010			123,794			123,673
Stockholders' equity		803,435			829,354			801,519			689,317			662,106
Common shares outstanding		13,956,235			15,743,511			16,846,484			16,856,073			16,873,094
Book value per share ⁽²⁾	$	57.57		$	52.68		$	47.58		$	40.89		$	39.24
Statutory surplus of Navigators
Insurance Company	$	662,162		$	686,919		$	645,820		$	581,166		$	578,668

(1) — Calculated based on earned premiums.

(2) — Calculated as stockholders’ equity divided by actual shares outstanding as of the date indicated.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and accompanying notes which appear elsewhere in this Form 10-K. It contains forward-looking statements that involve risks and uncertainties. Please refer to “Note on Forward-Looking Statements” and “Risk Factors” 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-K.

Overview

We are an international insurance company focusing on specialty products within the overall property and casualty insurance market. Our largest product line and most long-standing area of specialization is ocean marine insurance. We have also developed specialty niches in professional liability insurance and in specialty liability insurance primarily consisting of contractors’ liability and commercial primary and excess casualty coverages.

We conduct operations through our Insurance Companies and our Lloyd’s Operations segments. The Insurance Companies segment consists of Navigators Insurance Company, which includes a United Kingdom Branch (the “U.K. Branch”), and Navigators Specialty Insurance Company, which underwrites specialty and professional liability insurance on an excess and surplus lines basis. All of the insurance business written by Navigators Specialty Insurance Company is fully reinsured by Navigators Insurance Company pursuant to a 100% quota share reinsurance agreement. Our Lloyd’s Operations segment includes Navigators Underwriting Agency Ltd. (“NUAL”), a Lloyd’s of London (“Lloyd’s”) underwriting agency which manages Lloyd’s Syndicate 1221 (“Syndicate 1221”). Our Lloyd’s Operations primarily underwrite marine and related lines of business along with offshore energy, professional liability insurance and construction coverages for onshore energy business at Lloyd’s through Syndicate 1221. We controlled 100% of Syndicate 1221’s stamp capacity for the 2011, 2010 and 2009 underwriting years through our wholly-owned subsidiary, Navigators Corporate Underwriters Ltd. which is referred to as a corporate name in the Lloyd’s market. We have also established underwriting agencies in Antwerp, Belgium, Stockholm, Sweden, and Copenhagen, Denmark, which underwrite risks pursuant to binding authorities with NUAL into Syndicate 1221.

Management’s decisions are also greatly influenced by access to specialized underwriting and claims expertise in our lines of business. We have chosen to operate in specialty niches with certain common characteristics which we believe provide us with the opportunity to use our technical underwriting expertise in order to realize underwriting profit. As a result, we have focused on underserved markets for businesses characterized by higher severity and lower frequency of loss where we believe our intellectual capital and financial strength bring meaningful value. In contrast, we have avoided niches that we believe have a high frequency of loss activity and/or are subject to a high level of regulatory requirements, such as workers compensation and personal automobile insurance, because we do not believe our technical underwriting 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 (“D&O”) insurance 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.

For additional information regarding our business, refer to “Business—Overview”, included herein.

Ratings

Our ability to underwrite business is dependent upon the financial strength of the Insurance Companies and Lloyd’s. Financial strength ratings represent the opinions of the rating agencies on the financial strength of a company and its capacity to meet the obligations of insurance policies. Independent ratings are one of the important factors that establish our competitive position in the insurance markets. The rating agencies consider many factors in determining the financial strength rating of an insurance company, including the relative level of statutory surplus necessary to support the business operations of the company. These ratings are based upon factors relevant to policyholders, agents and intermediaries and are not directed toward the protection of investors. Such ratings are not recommendations to buy, sell or hold securities. We could be adversely impacted by a downgrade in the Insurance Companies’ or Lloyd’s financial strength ratings, including a possible reduction in demand for our products, higher borrowing costs and our ability to access the capital markets.

For the Insurance Companies, Navigators Insurance Company and Navigators Specialty Insurance Company utilize the financial strength ratings from A.M. Best Company (“A.M. Best”) and Standard and Poor’s Rating Services (“S&P”) for underwriting purposes. Navigators Insurance Company and Navigators Specialty Insurance Company are both rated “A” (Excellent – stable outlook) by A.M. Best and “A” (Strong—negative outlook) by S&P. Syndicate 1221 utilizes the ratings from A.M. Best and S&P for underwriting purposes which apply to all Lloyd’s syndicates. Lloyd’s is rated “A” (Excellent – stable outlook) by A.M. Best and A+ (Strong – stable outlook) by S&P.

Debt ratings apply to short-term and long-term debt as well as preferred stock. These ratings are assessments of the likelihood that we will make timely payments of the principal and interest for our senior debt. It is possible that, in the future, one or more of the rating agencies may reduce our existing debt ratings. If one or more of our debt ratings were downgraded, we could incur higher borrowing costs and our ability to access the capital markets could be impacted.

We utilize the senior debt ratings from S&P. Our senior debt is rated BBB (Adequate – negative outlook) by S&P.

Critical Accounting Policies

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

Our most critical accounting policies involve the reporting of the reserves for losses and LAE (including losses that have occurred but were not reported to us by the financial reporting date), reinsurance recoverables, written and unearned premium, the recoverability of deferred tax assets, the impairment of investment securities and accounting for Lloyd’s results.

Reserves for Losses and Loss Adjustment Expenses

Reserves for losses and LAE represent an estimate of the expected cost of the ultimate settlement and administration of losses, based on facts and circumstances then known. Actuarial methodologies are employed to assist in establishing such estimates and include judgments relative to estimates of future claims severity and frequency, length of time to develop to ultimate, judicial theories of liability and other third party factors which are often beyond our control. No assurance can be given that actual claims made and related payments will not be in excess of the amounts reserved. During the loss settlement period, it often becomes necessary to refine and adjust the estimates of liability on a claim either upward or downward. Even after such adjustments, ultimate liability may exceed or be less than the revised estimates.

The numerous factors that contribute to the inherent uncertainty in the process of establishing loss reserves include: interpreting loss development activity, emerging economic and social trends, inflation, changes in the regulatory and judicial environment and changes in our operations, including changes in underwriting standards and claims handling procedures. 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.

Our actuaries calculate indicated IBNR loss reserves for each line of business by underwriting year for major products principally using two standard actuarial methodologies which are projection or extrapolation techniques: the loss ratio method and the Bornheutter-Ferguson method. In general the loss ratio method is used to calculate the IBNR for more recent underwriting years while the Bornheutter-Ferguson method is used to calculate the IBNR for more mature underwriting years. When appropriate such methodologies are supplemented by the loss development method and the frequency/severity method, which are used to analyze and better comprehend loss development patterns and trends in the data when making selections and judgments. Each of these methodologies, which are described below, are generally applicable to both long tail and short tail lines of business depending on a variety of circumstances. In utilizing these methodologies to develop our IBNR loss reserves, a key objective of management in making their final selections is to deliberate with our actuaries to identify aberrations and systemic changes occurring within historical experience and accurately adjust for them. This process requires the substantial use of informed judgment and is inherently uncertain as it can be influenced by numerous factors including:

•

Inflationary pressures (medical and economic) that affect the size of losses;

•

Judicial, regulatory, legislative, and legal decisions that affect insurers’ liabilities;

•

Changes in the frequency and severity of losses;

•

Changes in the underlying loss exposures of our policies;

•

Changes in our claims handling procedures.

There are instances in which facts and circumstances require a deviation from the general process described above. Three such instances relate to the IBNR loss reserve processes for our 2008 Hurricanes losses, our 2005 Hurricanes losses 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.

A brief summary of each actuarial method discussed above follows:

Loss ratio method: This method is based on the assumption that ultimate losses vary proportionately with premiums. Pursuant to the loss ratio method, IBNR loss reserves are calculated by multiplying the earned premium by an expected ultimate loss ratio to estimate the ultimate losses for each underwriting year, then subtracting the reported losses, consisting of paid losses and case loss reserves, to determine the IBNR loss reserve amount. The ultimate loss ratios applied are the Company’s best estimates for each underwriting year and are generally determined after evaluating a number of factors which include: information derived by underwriters and actuaries in the initial pricing of the business, the ultimate loss ratios established in the prior accounting period and the related judgments applied, the ultimate loss ratios of previous underwriting years, premium rate changes, underwriting and coverage changes, changes in terms and conditions, legislative changes, exposure trends, loss development trends, claim frequency and severity trends, paid claims activity, remaining open case reserves and industry data where deemed appropriate. Such factors are also evaluated when selecting ultimate loss ratios and/or loss development factors in the methods described below.

Bornheutter-Ferguson method: The Bornheutter-Ferguson method calculates the IBNR loss reserves as the product of the earned premium, an expected ultimate loss ratio, and a loss development factor that represents the expected percentage of the ultimate losses that have been incurred but not yet reported. The loss development factor equals one hundred percent less the expected percentage of losses that have thus far been reported, which is generally calculated as an average of the percentage of losses reported for comparable reporting periods of prior underwriting years. The expected ultimate loss ratio is generally determined in the same manner as in the loss ratio method.

Loss development method: The loss development method, also known as the chainladder or the link-ratio method, develops the IBNR loss reserves by multiplying the paid or reported losses by a loss development factor to estimate the ultimate losses, then subtracting the reported losses, consisting of paid losses and case loss reserves, to determine the IBNR loss reserves. The loss development factor is the reciprocal of the expected percentage of losses that have thus far been reported, which is generally calculated as an average of the percentage of losses reported for comparable reporting periods of prior underwriting years.

Frequency/severity method: The frequency/severity method calculates the IBNR loss reserves by separately projecting claim count and average cost per claim data on either a paid or incurred basis. It estimates the expected ultimate losses as the product of the ultimate number of claims that are expected to be reported and the expected average amount of these claims.

Annual actuarial loss studies are conducted by the Company’s actuaries at various times throughout the year for major lines of business employing the methodologies as described above. Additionally, a review of the emergence of actual losses relative to expectations for each line of business, generally derived from the annual loss studies, is conducted each quarter to determine whether the assumptions used in the reserving process continue to form a reasonable basis for the projection of liabilities for each product line. Such reviews may result in maintaining or revising assumptions regarding future loss development based on various quantitative and qualitative considerations. If actual loss activity differs from expectations, an upward or downward adjustment to loss reserves may occur. As time passes, estimated loss reserves for an underwriting year will be based more on historical loss activity and loss development patterns rather than on assumptions based on underwriters’ input, pricing assumptions or industry experience.

The following discusses the method used for calculating the IBNR for each line of business and key assumptions used in applying the actuarial methods described.

Marine: Generally, two key assumptions are used by our actuaries in setting IBNR loss reserves for major products in this line of business. The first assumption is that our historical experience regarding paid and reported losses for each product where we have sufficient history can be relied on to predict future loss activity. The second assumption is that our underwriters’ assessments as to potential loss exposures are reliable indicators of the level of our expected loss activity. The specific loss reserves for marine are then analyzed separately by product based on such assumptions, except where noted below, with the major products including marine liability, cargo, P&I, transport and bluewater hull.

The claims emergence patterns for various marine product lines vary substantially. Our largest marine product line is marine liability, which has one of the longer loss development patterns. Marine liability protects an insured’s business from liability to third parties stemming from their marine-related operations, such as terminal operations, stevedoring and marina operations. Since marine liability claims generally involve a dispute as to the extent and amount of legal liability that our insured has to a third party, these claims tend to take a longer time to develop and settle. Other longer-tail marine product lines include P&I insurance, which provides coverage for third party liability as well as injury to crew for vessel operators, and transport insurance, which provides both property and third party liability on a primary basis to businesses such as port authorities, marine terminal operators and others engaged in the infrastructure of international transportation. Other marine product lines have considerably shorter periods in which losses develop and settle. Ocean cargo insurance, for example, provides physical damage coverage to goods in the course of transit by water, air or land. By their nature, cargo claims tend to be reported quickly as losses typically result from an obvious peril such as fire, theft or weather. Similarly, bluewater hull insurance provides coverage against physical damage to ocean-going vessels. Such claims for physical damage generally are discovered, reported and settled quickly. The Company currently has extensive experience for all of these products and thus the IBNR loss reserves for all of the marine products are determined using the key assumptions and actuarial methodologies described above. Prior to 2007, however, as discussed below, the Company did not have sufficient experience in the transport product line and instead used its hull and liability products loss development experience as a key assumption in setting the IBNR loss reserves for its transport product.

Property Casualty: The reserves for property and casualty are established separately by product with the major product being contractors’ liability insurance. Other products include offshore energy, commercial middle markets, primary casualty, excess casualty and specialty reinsurance. Our actuaries generally utilize two key assumptions in this line of business: first, that our historical loss development patterns are reasonable predictors of future loss patterns and second, that our claims personnel’s assessment of our claims exposures and our underwriters’ assessment of our expected losses are reliable indicators of our loss exposure. However, this line of business includes a number of newer products where there is insufficient Company historical experience to project loss reserves and/or loss development is sparse or erratic, which makes extrapolation techniques for those products extremely difficult to apply, and in those circumstances we typically rely more on industry data and our underwriters’ input in setting assumptions for our IBNR loss reserves as opposed to historical loss development patterns. In addition, as discussed in more detail below with respect to construction defect reserves, our actuaries may take other market trends or events into account in setting IBNR loss reserves.

The substantial majority of the property and casualty loss reserves are for the contractors’ liability business, which insures mostly general and artisan contractors. Contractor liability claims are categorized into two claim types: construction defect and other general liability. Other general liability claims typically derive from workplace accidents or from negligence alleged by third parties, and frequently take a long time to report and settle. Construction defect claims involve the discovery of damage to buildings that was caused by latent construction defects. These claims take a very long time to report and to settle compared to other general liability claims. Since construction defect claims report much later than other contractor liability claims, they are analyzed separately in an annual actuarial loss study.

We have extensive history in the contractors’ liability business upon which to perform actuarial analyses and we use the key assumption noted above relating to our own historical experience as a reliable indicator of the future for this product. However, there is inherent uncertainty in the loss reserve estimation process for this line of business given both the long-tail nature of the liability claims and the continuing underwriting and coverage changes, claims handling and reserve changes, and legislative changes that have occurred over a several year period. Such factors are judgmentally taken into account in this line of business in specific periods. The underwriting and coverage changes include the migration to a non-admitted business from admitted business in 2003, which allowed us to exclude certain exposures previously permitted (for example, exposure to construction work performed prior to the policy inception), withdrawals from certain contractor classes previously underwritten and expansion into new states beginning in 2005. Claims changes include bringing the claim handling in-house in 1999 and changes in case reserving practices in 2003, 2006 and 2011.

Most recently, in setting the IBNR loss reserves for construction defect claims, our actuaries have begun to consider a new qualitative factor based on their evolving concern with the recent decline in home values caused by the subprime home mortgage crisis and its possible impact on the frequency and severity of construction defect claims. As a result, our actuaries acknowledge this uncertainty and anticipate claims arising from alleged construction defects contributing to housing value declines on policies written on newly constructed homes in our portfolio. We believe our reserves remain adequate to address such potential exposure, but we can give no assurances with respect thereto.

Offshore energy provides physical damage coverage to offshore oil platforms along with offshore operations related to oil exploration and production. The significant offshore energy claims are generally caused by fire or storms, and thus tend to be large, infrequent, quickly reported, but occasionally not quickly settled because the damage is often extensive but not always immediately known.

Our commercial middle markets or Nav Pac business consists of general liability, auto liability and property exposures for a variety of commercial middle market businesses, principally hospitality, manufacturing and garages. Commencing in 2007, our actuaries are segmenting and analyzing the components of the loss development for this business among the property, liability and auto exposures which had been previously combined. As mentioned in Part I, on January 14, 2011, we announced that we entered into a transaction for the sale of the renewal rights for our middle market commercial package and commercial automobile businesses underwritten through our Nav Pac division. This transaction did not include our Life sciences and exporters package liability products.

Primary casualty insurance provides primary general liability coverage principally to corporations in the construction and manufacturing sector. Excess casualty insurance is purchased by corporations which seek higher limits of liability than are provided in their primary casualty policies. Our specialty reinsurance provides proportional and excess-of-loss treaty reinsurance covering medical health care exposures, property treaty exposures in Central and South America and the Caribbean and agriculture exposures in the U.S. and Canada. Neither of the product lines has a significant amount of loss activity reported to date. Because we have limited historical experience in these products, the IBNR loss reserves for these products are primarily established using the loss ratio method primarily based on our underwriters’ input and industry loss experience.

Loss reserves include our European property business written by the U.K. Branch which was discontinued in 2008. We have limited loss history and rely primarily on assumptions based on underwriters’ input and industry experience. In addition, loss reserves for aviation, property and assumed reinsurance business, in run-off since 1999, are periodically monitored and evaluated by claims and actuarial personnel.

Professional Liability: The professional liability policies mainly provide coverage on a claims-made basis mostly for a one-year period. The reserves for professional liability are analyzed separately by product. The major products are D&O liability coverage and E&O liability coverage for lawyers and other professionals.

The losses for D&O business are generally very large and infrequent, and often involve securities class actions. D&O claims report reasonably quickly, but may take several years to settle. Our loss estimates are based on expected losses, an assessment of the characteristics of reported losses at the claim level, evaluation of loss trends, industry data, and the legal, regulatory and current risk environment. Significant judgment is involved because anticipated loss experience in this area is less predictable due to the small number of claims and/or erratic claim severity patterns. As time passes for a given underwriting year, we place additional weight on assumptions relating to our actual experience and claims outstanding. The expected ultimate losses may be adjusted up or down as the underwriting years mature. The E&O IBNR loss reserve process is similar to the process for D&O, with the exception of a particular book of business of the U.K. Branch written from 2004 through 2006. For the U.K Branch E&O business, we assume the claims, while similar in nature to the claims in the U.S. E&O business, are larger, more frequent and have a longer loss development pattern. The IBNR loss reserves for the U.K. Branch E&O business are determined judgmentally after reviewing recent loss activity relative to the remaining in-force policy count and the loss activity for similar insureds.

Lloyd’s Operations: Reserves for the Company’s Lloyd’s Operations are reviewed separately for the marine and professional liability lines by product. The major marine products are marine liability, offshore energy, cargo, specie and marine reinsurance, and the major products for professional liability are international D&O and international E&O.

The marine liability, offshore energy and cargo products and related loss exposures are similar in nature to that described for marine business above. Specie insurance provides property coverage for chattel, such as jewelry, fine art and cash in transit. Claims tend to be from theft or damage, quick to report and, in most cases, quick to settle. Marine reinsurance is a diversified global book of reinsurance, the majority of which consists of excess-of-loss reinsurance policies for which claims activity tends to be large and infrequent with loss development somewhat longer than for such products written on a direct basis. Marine reinsurance reinsures liability, cargo, hull and offshore energy exposures that are similar in nature to the marine business described above.

The process for establishing the IBNR loss reserves for the marine and professional liability lines of the Lloyd’s Operations, and the assumptions used as part of this process, are similar in nature to the process employed by the Insurance Companies.

The Lloyd’s Operations products also include property coverages for engineering and construction projects and onshore energy business, which are substantially reinsured. Losses from engineering and construction projects tend to result from loss of use due to construction delays while losses from onshore energy business are usually caused by fires or explosions. Large losses tend to be catastrophic in nature and are heavily reinsured. IBNR loss reserves for attritional losses are established based on the Syndicate’s extensive loss experience.

Sensitivity Analysis

We do not calculate a range of reasonable loss reserve estimates. We believe that ranges may not be a true reflection of the potential volatility between carried loss reserves and the ultimate settlement amount of losses incurred prior to the balance sheet date.

The actual losses may not emerge as expected, which would cause the ranges to expand or contract from year to year. The impact of these shifts in the ranges will be greater in lines with longer emergence patterns. The individual lines will also have greater variance than the range for the entire book of business. The boundaries of the reasonably likely ranges do not have a symmetrical relationship with our carried reserves and intentionally reflect a wider variation in the increases than for the decreases and, correspondingly, a wider deviation in the deficiency than in the redundancy.

Set forth below is a sensitivity analysis that estimates the effect on our net loss reserve position of using alternative expected loss ratios for the underwriting years 2003 to 2011 and alternative loss development factors for underwriting years beginning in the late 1990’s to 2011 rather than those loss ratios and factors actually used in determining our best estimates as of December 31, 2011. The analysis addresses each major line of business and underwriting year for which a material deviation to our overall reserve position is believed reasonably possible, and uses what we believe is a reasonably likely range of potential deviation for each line of business. There can be no assurance, however, that actual reserve development will be materially consistent with either the original or the adjusted expected loss ratios or loss development factor assumptions, or with other assumptions made in the reserving process.

For the selected alternative expected loss ratios, our actuaries observed the range of ultimate loss ratios recorded for the underwriting years 2003 to 2011 for each major line of business as of December 31, 2011.

The reasonably likely ranges of potential deviation in the loss ratios for each line of business for the 2003 to 2011 underwriting years expressed in loss ratio points are as follows:


Reasonably likely loss ratio point variances
	Decrease			Increase
Insurance Companies:
Marine		5	%		7	%
Property Casualty		6	%		8	%
Professional Liability		13	%		16	%
Lloyd’s Operations		6	%		8	%

For the loss development factor variance, our actuaries employed a standard technique which is based on the historical development factors observed for each line of business from the paid and incurred loss development triangles with the latest evaluation as of December 31, 2011. The historical factors are used to generate alternative outcomes which could arise in the ultimate development due to the random variability inherent in future development. The alternative outcomes are generated by a stochastic simulation. The ranges may contract or expand if future development deviates from historical experience. The reasonably likely ranges of potential deviations in the aggregate or overall loss development factors applicable to the total of all underwriting years for each line of business are as follows:


Reasonably likely ultimate loss development factor ratios
	Decrease			Increase
Insurance Companies:
Marine		9	%		11	%
Property Casualty		7	%		11	%
Professional Liability		27	%		36	%
Lloyd’s Operations		10	%		14	%

Such sensitivity analysis was performed in the aggregate for all products within each line of business. The use of aggregate data was considered more stable and reliable compared to a product-by-product analysis. We cannot assure, however, that such use of aggregate data will provide a more accurate range of the actual variations in loss development. The loss ratio sensitivity analysis uses loss ratios for the 2003 to 2011 underwriting years, which are believed to be more representative compared to years prior to 2003 given our evolving mix of business, product changes and other factors. There can be no assurances, however, that the use of such recent history is more predictive of actual development as compared to employing longer periods of history. In addition, while the net loss reserves include the net loss reserves for asbestos exposures, such amounts were excluded from the sensitivity analysis given the nature of how such reserves are established by the Company. While we believe such net reserves are adequate, we cannot assure that material loss development may not arise in the future from asbestos losses given the complex nature of such exposures.

The total Company range amounts below were determined by combining the simulated results for each line of business into one analysis which estimates a company-wide range reflecting the fact that the individual lines of business are not perfectly correlated. This calculation reflects the reduced volatility benefit from a diversified portfolio of loss exposures. Such amounts may not be representative of the actual aggregate favorable or unfavorable loss development amounts that may occur over time.


			Reasonably Likely Range of Deviation
	Total Net		Redundancy						Deficiency
In thousands, except per share amounts	Loss Reserve		Amount			%			Amount			%
Insurance Companies:
Marine	$	249,787	$	22,481			9	%	$	27,477			11	%
Property Casualty		481,999		33,740			7	%		53,020			11	%
Professional Liability		140,443		37,920			27	%		50,559			36	%

Total Insurance Companies		872,229		94,141						131,056
Total Lloyd’s Operations		365,005		36,501			10	%		51,101			14	%

Subtotal		1,237,234		130,642						182,157
Portfolio effect		—		(56,408	)					(83,178	)

Total Company	$	1,237,234	$	74,234			6	%	$	98,979			8	%

Increase (decrease) to net income
Amount			$	48,252					$	(64,336	)
Per Share ⁽¹⁾			$	3.18					$	(4.24	)

(1)—Calculated using average diluted shares of 15,183,285 for the year ended December 31, 2011.

Reinsurance Recoverable

Reinsurance recoverables are established for the portion of the loss reserves that are ceded to reinsurers. Reinsurance recoverables are determined based upon the terms and conditions of reinsurance contracts which could be subject to interpretations that differ from our own based on judicial theories of liability. In addition, we bear credit risk with respect to our reinsurers which can be significant considering that certain of the reserves remain outstanding for an extended period of time. We are required to pay losses even if a reinsurer fails to meet its obligations under the applicable reinsurance agreement. Additional information regarding our reinsurance recoverables can be found in the “Business—Reinsurance Recoverables” section and Note 6, Reinsurance, to our consolidated financial statements, both included herein.

Written and Unearned Premium

Written premium is recorded based on the insurance policies that have been reported to us and the policies that have been written by agents but not yet reported to us. We must estimate the amount of written premium not yet reported based on judgments relative to current and historical trends of the business being written. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year’s results. An unearned premium reserve is established to reflect the unexpired portion of each policy at the financial reporting date. Reinsurance reinstatement premium is earned in the period in which the event occurred which created the need to record the reinstatement premium. Additional information regarding our written and unearned premium can be found in Note 1, Organization and Summary of Significant Accounting Policies, and Note 6, Reinsurance, in the Notes to Consolidated Financial Statements, both included herein.

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

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

Deferred Tax Assets

We apply the asset and liability method of accounting for income taxes whereby deferred assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that the deferred tax assets will be realized. Additional information regarding our deferred tax assets can be found in Note 1, Organization and Summary of Significant Accounting Policies, and Note 7, Income Taxes, in the Notes to Consolidated Financial Statements, both included herein.

Impairment of Invested Assets

Management regularly reviews our fixed maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments.

For fixed maturity securities, we consider our intent to sell a security and whether it is more likely than not that we will be required to sell a security before the anticipated recovery as part of the process of evaluating whether a security’s unrealized loss represents an other-than-temporary decline. We assess whether the amortized cost basis of a fixed maturity security will be recovered by comparing the present value of cash flows expected to be collected to the current book value. Any shortfalls of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered the credit loss portion of other-than-temporary impairment (“OTTI”) losses and is recognized in earnings. All non-credit losses are recognized as changes in OTTI losses within Other Comprehensive Income (“OCI”).

For equity securities, in general, we focus our attention on those securities whose fair value was less than 80% of their cost for six or more consecutive months. If warranted as the result of conditions relating to a particular security, we will focus on a significant decline in fair value regardless of the time period involved. Factors considered in evaluating potential impairment include, but are not limited to, the current fair value as compared to cost of the security, the length of time the investment has been below cost and the impact of the amount. If an equity security is deemed to be other-than-temporarily impaired, the cost is written down to fair value with the loss recognized in earnings.

For equity securities, we also consider our intent to hold securities as part of the process of evaluating whether a decline in fair value represents an other-than-temporary decline in value. For fixed maturity securities, we consider our intent to sell a security and whether it is more likely than not that we will be required to sell a security before the anticipated recovery as part of the process of evaluating whether a security’s unrealized loss represents an other-than-temporary decline. Our ability to hold such securities is evaluated by the Company and is based on whether there is sufficient cash flow from operations and from maturities within our investment portfolio in order to meet claims payment and other disbursement obligations arising from our 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.

The day to day management of our 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 the market and other factors described above. 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, management monitors the execution of a transaction or series of related transactions that may result in any realized loss up until a certain period beyond the close of a quarterly accounting period.

Accounting for Lloyd’s Results

We record Syndicate 1221’s assets, liabilities, revenues and expenses under U.S. GAAP. Additional information regarding our accounting for Lloyd’s results can be found in Note 1, Organization and Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements, included herein.

Results of Operations

The following is a discussion and analysis of our consolidated and segment results of operations for the years ended December 31, 2011, 2010 and 2009. In presenting our financial results, we discuss our performance with reference to operating earnings, book value per share, underwriting profit or loss, and the combined ratio, all of which are non-GAAP financial measures of performance and/or underwriting profitability. Operating earnings is calculated as net income less after-tax net realized gains (losses) and net other-than-temporary impairment losses recognized in earnings. Book value per share is calculated by dividing shareholders’ equity by the number of outstanding shares at any period end. Underwriting profit or loss is calculated from net earned premiums, less the sum of net losses and LAE, commission expenses, other operating expenses and other income (expense). The combined ratio is derived by dividing the sum of net losses and LAE, commission expenses, other operating expenses 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. We consider such measures, which may be defined differently by other companies, to be important in the understanding of our overall results of operations by highlighting the underlying profitability of our insurance business.

Summary of Consolidated Results

The following table presents a summary of our consolidated financial results for the years ended December 31, 2011, 2010 and 2009:


	Year Ended December 31,						Percentage Change
In thousands, except for per share amounts	2011		2010		2009		2011 vs. 2010			2010 vs. 2009
Gross written premiums	$	1,108,216	$	987,201	$	1,044,918		12.3	%		-5.5	%
Net written premiums		753,798		653,938		701,255		15.3	%		-6.7	%

Total revenues		766,385		776,975		762,880		-1.4	%		1.8	%
Total expenses		733,651		678,146		676,032		8.2	%		0.3	%

Pre-tax income (loss)	$	32,734	$	98,829	$	86,848		-66.9	%		13.8	%
Provision (benefit) for income taxes		7,137		29,251		23,690		-75.6	%		23.5	%

Net income (loss)	$	25,597	$	69,578	$	63,158		-63.2	%		10.2	%

Net income (loss) per common share:
Basic	$	1.71	$	4.33	$	3.73
Diluted	$	1.69	$	4.24	$	3.65

Net income for the year ended December 31, 2011 was $25.6 million or $1.69 per diluted share compared to net income of $69.6 million or $4.24 per diluted share for the year ended December 31, 2010. Operating earnings for the year ended December 31, 2011 were $19.1 million or $1.26 per diluted share compared to $43.4 million or $2.65 per diluted for the comparable period in 2010. In comparison to net income, operating earnings excludes after-tax net realized gains of $7.8 million and $26.9 million and after-tax other-than-temporary impairment losses of $1.3 million and $0.7 million for the years ended December 31, 2011 and 2010, respectively. The decrease in our operating earnings was largely attributable to unfavorable underwriting results related to large loss activity from our energy business and significant current year loss emergence from our Professional Liability division, and to a lesser extent a decrease in net investment income.

Net income for the year ended December 31, 2010 was $69.6 million or $4.24 per diluted share compared to net income of $63.2 million or $3.65 per diluted share for the year ended December 31, 2009. Operating earnings for the year ended December 31, 2010 were $43.4 million or $2.65 per diluted share compared to $65.2 million or $3.76 per diluted share for the comparable period in 2009. In comparison to net income, operating earnings excludes after-tax net realized gains of $26.9 million and $5.8 million and after-tax other-than-temporary impairment losses recognized in earnings of $0.7 million and $7.8 million for the years ended December 31, 2010 and 2009, respectively. The decrease in our operating earnings was largely attributable to unfavorable underwriting results related to large loss activity from our energy business in connection with the Deepwater Horizon and West Atlas events.

Our book value per share as of December 31, 2011 was $57.57, increasing 9% from $52.68 as of December 31, 2010. The increase in book value per share primarily resulted from an improvement in the value of our consolidated investment portfolio as well as the repurchase of 1,979,107 shares of our common stock at an aggregate purchase price of $90.9 million and an average share price of $45.91 during 2011, which represented 3% of the increase. Primarily because of the share repurchases, our consolidated stockholders’ equity decreased 3% to $803.4 million as of December 31, 2011 compared to $829.4 million as of December 31, 2010.

Cash flow from operations was $118.3 million, $118.2 million and $103.9 million for the years ended December 31, 2011, 2010 and 2009, respectively. The increase in cash flow from operations was due to improved collections on reinsurance recoverables as well as premium receivables.

The following table presents our consolidated underwriting results and provides a reconciliation of our underwriting profit or loss to GAAP net income for the years ended December 31, 2011, 2010 and 2009:


	Year Ended December 31,									Percentage Change
In thousands	2011			2010			2009			2011 vs. 2010			2010 vs. 2009
Gross written premiums	$	1,108,216		$	987,201		$	1,044,918			12.3	%		-5.5	%
Net written premiums		753,798			653,938			701,255			15.3	%		-6.7	%

Net earned premiums		691,645			659,931			683,363			4.8	%		-3.4	%
Net losses and loss adjustment expenses		(476,997	)		(421,155	)		(435,998	)		13.3	%		-3.4	%
Commission expenses		(110,437	)		(109,113	)		(98,908	)		1.2	%		10.3	%
Other operating expenses		(138,029	)		(139,743	)		(132,671	)		-1.2	%		5.3	%
Other income (expenses) ⁽²⁾		1,229			5,186			3,665			-76.3	%		41.5	%

Underwriting profit (loss)	$	(32,589	)	$	(4,894	)	$	19,451			NM			NM

Net investment income		63,500			71,662			75,512			-11.4	%		-5.1	%
Net other-than-temporary impairment losses recognized in earnings		(1,985	)		(1,080	)		(11,877	)		83.8	%		-90.9	%
Net realized gains (losses)		11,996			41,319			9,217			-71.0	%		NM
Gain on debt repurchase ⁽²⁾		—			—			3,000			NM			NM
Interest expense		(8,188	)		(8,178	)		(8,455	)		0.1	%		-3.3	%

Income (loss) before income taxes	$	32,734		$	98,829		$	86,848			-66.9	%		13.8	%

Income tax expense (benefit)		7,137			29,251			23,690			-75.6	%		23.5	%

Net income (loss)	$	25,597		$	69,578		$	63,158			-63.2	%		10.2	%


Losses and loss adjustment expenses ratio		69.0	%		63.8	%		63.8	%
Commission expense ratio		16.0	%		16.5	%		14.5	%
Other operating expense ratio ⁽¹⁾		19.7	%		20.4	%		18.9	%

Combined ratio		104.7	%		100.7	%		97.2	%

(1) — Includes Other operating expenses & Other income (expense)

(2) — Reported within “Other income (expense)” on the Consolidated Statements of Income

NM—Percentage change not meaningful

The combined ratio for the year ended December 31, 2011 was 104.7% compared to 100.7% for the comparable period in 2010. Our pre-tax underwriting loss increased by $27.7 million to $32.6 million for the year ended December 31, 2011 compared to a $4.9 million loss for the same period in 2010. The increase in pre-tax underwriting loss includes the following adverse activity:

•

Large current accident year energy losses with a net adverse impact of $25.6 million, inclusive of $8.2 million in reinsurance reinstatement premiums, related to drilling operations in the North Sea, Gulf of Mexico and Russia, as well as an onshore industrial site.

•

Current accident year loss emergence of approximately $11.0 million related to our Professional Liability business, of which approximately $8.0 million was specific to our D&O liability insurance for both publicly and privately held corporations. The remaining $3.0 million of emergence was specific to our small lawyers and miscellaneous professional liability coverages.

•

An increase in our reinsurance reinstatement premium accrual of $5.2 million. This accrual was driven by the recognition of the effect of a shift in our Marine reinsurance protections to an excess of loss program from a quota share program. As a result of this shift and the increased frequency of severity losses in recent periods, a greater portion of our IBNR was attributable to marine and energy losses that are or will be ceded to our Marine Excess-of-Loss Reinsurance program and such cession will trigger additional reinstatement premiums.

•

Net adverse loss development of $2.1 million driven by significant loss emergence in our Professional Liability business mostly offset by redundancies from our Property Casualty business.

In addition to the net adverse impacts noted above, the increase in our pre-tax underwriting loss in 2011 and 2010 was affected by the mix of business and loss trends, partially offset by $8.7 million of net adverse activity recorded in 2010. The net adverse activity recorded in 2010 primarily relates to a combined $22.5 million in reinstatement premiums related to the Deepwater Horizon and West Atlas losses, respectively, partially offset by net prior period reserve redundancies of $13.8 million. The net prior period reserve redundancies were driven by significant redundancies from our Property Casualty business partially offset by loss emergence from our Professional Liability business.

The combined ratio for the year ended December 31, 2010 was 100.7% compared to 97.2% for the comparable period in 2009. Our pre-tax underwriting profit declined by $24.4 million to a $4.9 million underwriting loss for the year ended December 31, 2010 compared to $19.5 million of underwriting profit for the same period in 2009. The decrease in pre-tax underwriting profit was primarily attributable to large loss activity, namely Deepwater Horizon and West Atlas, as well as reduced rates across all lines due to the soft market conditions, partially offset by net prior period redundancies.

Revenues

The following tables set forth our gross written premiums, net written premiums and net earned premiums by segment and line of business for the years ended December 31, 2011, 2010, and 2009:

		228,500		228,500			228,500		228,500		228,500		228,500			228,500		228,500		228,500		228,500			228,500		228,500
	Year Ended December 31,
	2011									2010									2009
In thousands	Gross Written Premiums		%			Net Written Premiums		Net Earned Premiums		Gross Written Premiums		%			Net Written Premiums		Net Earned Premiums		Gross Written Premiums		%			Net Written Premiums		Net Earned Premiums
Insurance Companies:
Marine	$	228,500		21	%	$	170,642	$	169,018	$	223,061		23	%	$	151,059	$	155,846	$	241,438		23	%	$	171,289	$	157,534
Property Casualty		445,287		40	%		293,758		231,297		312,651		31	%		197,845		200,741		352,285		34	%		227,234		246,143
Professional Liability		114,632		10	%		77,991		72,148		129,793		13	%		80,451		82,264		137,053		13	%		79,150		75,444

Insurance Companies Total		788,419		71	%		542,391		472,463		665,505		67	%		429,355		438,851		730,776		70	%		477,673		479,121

Lloyd’s Operations:
Marine		167,562		16	%		137,206		145,659		182,723		19	%		149,340		149,225		191,959		19	%		156,153		142,958
Property Casualty		115,138		10	%		56,249		55,903		94,799		10	%		54,049		49,852		78,151		7	%		45,097		39,330
Professional Liability		37,097		3	%		17,952		17,620		44,174		4	%		21,194		22,003		44,032		4	%		22,332		21,954

Lloyd’s Operations Total		319,797		29	%		211,407		219,182		321,696		33	%		224,583		221,080		314,142		30	%		223,582		204,242

Total	$	1,108,216		100	%	$	753,798	$	691,645	$	987,201		100	%	$	653,938	$	659,931	$	1,044,918		100	%	$	701,255	$	683,363

Gross Written Premiums

Gross written premiums increased $121.0 million, or 12.3%, to $1.11 billion for the year ended December 31, 2011 compared to $987.2 million for the same period in 2010. The increase in gross written premiums were primarily attributed growth in our Property Casualty business, which includes $101.5 million related to our newly established Nav Re division which writes Accident & Health, Agriculture and Latin American reinsurance lines of business. The increase within Property Casualty is also attributable to growth of $34.2 million and $22.1 million Excess and Primary Casualty business, respectively, resulting from strong production, partially offset by the run-off of our middle market commercial package business. The increase in gross written premiums was offset by a $22.2 million decrease in our Professional Liability business attributable to our Directors and Officer Liability lines. This decrease reflects a change in our underwriting strategy that focuses on a planned shift toward underwriting excess layers.

Gross written premiums decreased 5.5% to $987.2 million for the year ended December 31, 2010 compared to $1.04 billion for the same period in 2009. The decreases in gross written premiums were primarily attributable to our Marine and Property Casualty businesses. The decline in Marine gross written premiums is attributed to significant competition in this line of business coupled with excess capacity. Property Casualty gross written premiums declined primarily due to weak economic conditions that had reduced demand for construction liability insurance.

Our Marine division saw increases in the average renewal premium rates in our Inland Marine and Lloyd’s lines of approximately 7.3% and 0.9%, respectively, for the year ended December 31, 2011 compared to the same period in 2010. U.S. Marine premiums rates decreased 0.3% while U.K. Branch Marine premiums rates increased 1.9% for the year ended December 31, 2011 compared to the same period in 2010. For our Navigators Technical Risk (“NavTech”) and Primary Casualty lines we experienced an average renewal premium rate increases of approximately 4.2% and 7.4% for the year ended December 31, 2011 compared to the same period in 2010, which was offset by a decline in our Excess Casualty lines of 1.2%, respectively. The Insurance Companies and Lloyd’s Professional Liability division overall experienced approximately a 1.5% decrease in average renewal premium rates for the year ended December 31, 2011 compared to 2010.

Our Marine division saw increases in the average renewal premium rates in our U.S. Marine, U.K. Branch Marine and Lloyd’s lines of approximately 0.1%, and 2.4%, respectively, for the year ended December 31, 2010 compared to the same period in 2009. For our Property Casualty division, we experienced an average renewal premium rate increase in our NavTech line of approximately 3.6% for the year ended December 31, 2010 compared to the same period in 2009, which was offset by declines in our Primary and Excess Casualty lines of 0.5% and 3.1%, respectively. The Insurance Companies and Lloyd’s Professional Liability division overall experienced approximately 3.0% decrease in average renewal premium rates for the year ended December 31, 2010 compared to 2009.

The average premium rate increases or decreases as noted above for the Marine, Property Casualty and Professional Liability businesses are calculated primarily by comparing premium amounts on policies that have renewed. The premiums are judgmentally adjusted for exposure factors when deemed significant and sometimes represent an aggregation of several lines of business. The rate change calculations provide an indicated pricing trend and are not meant to be a precise analysis of the numerous factors that affect premium rates or the adequacy of such rates to cover all underwriting costs and generate an underwriting profit. The calculation can also be affected quarter by quarter depending on the particular policies and the number of policies that renew during that period. Due to market conditions, these rate changes may or may not apply to new business that generally would be more competitively priced compared to renewal business. The calculation does not reflect the rate on business that we are unwilling or unable to renew due to loss experience or competition.

Ceded Written Premiums

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

Our reinsurance program includes contracts for proportional reinsurance, per risk and whole account excess-of-loss reinsurance for both property and casualty risks and property catastrophe excess-of-loss reinsurance. In recent years we have increased our utilization of excess-of-loss reinsurance for marine, property and casualty risks. Our excess-of-loss reinsurance contracts generally provide for a specific amount of coverage in excess of an attachment point and sometimes provides for reinstatement of the coverage to the extent the limit has been exhausted for payment of additional premium (referred to as reinstatement premiums). The number of reinstatements available varies by contract.

We record an estimate of the expected reinstatement premiums for losses ceded to excess-of-loss agreements where this feature applies.

The following table sets forth our ceded written premiums by segment and major line of business for the years ended December 31, 2011, 2010 and 2009:


	Year Ended December 31,
	2011					2010					2009
In thousands	Ceded Written Premiums		% of Gross Written Premiums			Ceded Written Premiums		% of Gross Written Premiums			Ceded Written Premiums		% of Gross Written Premiums
Insurance Companies:
Marine	$	57,858		25	%	$	72,002		32	%	$	70,149		29	%
Property Casualty		151,529		34	%		114,806		37	%		125,051		36	%
Professional Liability		36,641		32	%		49,342		38	%		57,903		42	%

Total Insurance Companies		246,028		31	%		236,150		36	%		253,103		35	%


Lloyd’s Operations:
Marine		30,356		18	%		33,383		18	%		35,806		19	%
Property Casualty		58,889		51	%		40,750		43	%		33,054		42	%
Professional Liability		19,145		52	%		22,980		52	%		21,700		49	%

Total Lloyd’s		108,390		34	%		97,113		30	%		90,560		29	%

Total	$	354,418		32	%	$	333,263		34	%	$	343,663		33	%

The decrease in the percentage of total ceded written premiums to total gross written premiums for the year ended December 31, 2011 compared to the same period of 2010 was primarily due to a change in the mix of business resulting from new business within our recently established Nav Re division, a reduction in reinsurance reinstatement premiums in 2011 compared to 2010 related to large loss activity for each year and, to a lesser extent, the expansion of products offered by our Professional liability business where our retention ratios are higher, partially offset by a reduction in the retention of our Lloyd’s Property Casualty business.

The increase in the percentage of total ceded written premiums to total gross written premiums for the year ended December 31, 2010 compared to the same period in 2009 was primarily due to the shift in business mix toward lines with lower cessions, offset by the impact of reinsurance reinstatement costs of $19.0 million and $3.5 million resulting from the Deepwater Horizon and West Atlas losses, respectively.

Net Written Premiums

Net written premiums increased 15.3% for the year ended December 31, 2011 compared to the same period in 2010. The increase is due to the impact of higher gross written premiums for the year ended December 31, 2011, and to a lesser extent lower premium cessions, as discussed above. Net written premiums decreased 6.7% for the year ended December 30, 2010 compared to the same period in 2009 due to the reduction in gross written premiums partially offset by the decline in ceded written premiums discussed above.

Net Earned Premiums

Net earned premiums increased 4.8% for the year ended December 31, 2011 compared to the same period in 2010 primarily as a result of significant ceded reinstatement premiums associated with large losses in 2010. As noted above, we recorded approximately $22.5 million in reinstatement premiums associated with large losses in 2010 compared to $8.2 million in 2011. The impact of reinstatement premiums was partially offset by a change in the mix of business in 2011 written by Nav Re, specifically the Accident and Health lines, which are recognized in earnings over a longer exposure period that our other lines of business. Net earned premiums decreased 3.4% for the year ended December 31, 2010 compared to the same period in 2009 primarily due to the changes reflected in written premiums discussed above.

Net Investment Income

Our net investment income was derived from the following sources:


	Year Ended December 31,									Percentage Change
In thousands	2011			2010			2009			2011 vs. 2010			2010 vs. 2009
Fixed maturities	$	65,060		$	69,996		$	74,779			-7.1	%		-6.4	%
Equity securities		5,071			3,028			2,464			67.5	%		22.9	%
Short-term investments		964			965			811			-0.1	%		19.0	%

Total investment income	$	71,095		$	73,989		$	78,054			-3.9	%		-5.2	%
Investment expenses		(7,595	)		(2,327	)		(2,542	)		226.4	%		-8.5	%

Net investment income	$	63,500		$	71,662		$	75,512			-11.4	%		-5.1	%

The decrease in total investment income before investment expenses for all years presented was primarily due to lower investment yields and shorter portfolio duration. The annualized pre-tax investment yield, excluding net realized gains and losses and net other-than-temporary impairment losses recognized in earnings, was 3.0%, 3.5% and 3.8% for the years ended December 31, 2011, 2010 and 2009, respectively. The portfolio duration was 3.6 years, 4.4 years and 4.2 years for the years ended December 31, 2011, 2010 and 2009.

Investment expenses for the year ended December 31, 2011 of $7.6 million included $4.7 million accrual of estimated interest expense reflecting the summary judgment order entered against the Company in its dispute with Resolute in which the Court awarded $4.7 million in interest to Resolute on previously paid balances that were allegedly overdue under certain reinsurance agreements. The Company is appealing the Court’s ruling. For information on the Equitas legal proceedings refer to Note 12, Commitments and Contingencies, in the Notes to Consolidated Financial Statements, included herein. Excluding the impact of the Resolute interest award, investment expenses for the year ended December 31, 2011, 2010 and 2009 were relative to the increased fair value of total invested assets through December 31, 2011.

Net Other-Than-Temporary Impairment Losses Recognized In Earnings

Our net other-than-temporary impairment (“OTTI”) losses recognized in earnings for the periods indicated were as follows:


	Year Ended December 31,									Percentage Change
In thousands	2011			2010			2009			2011 vs. 2010			2010 vs. 2009
Fixed maturities	$	(1,093	)	$	(693	)	$	(3,102	)		57.7	%		-77.7	%
Equity securities		(892	)		(387	)		(8,775	)		130.5	%		-95.6	%

OTTI recognized in earnings	$	(1,985	)	$	(1,080	)	$	(11,877	)		83.8	%		-90.9	%

Net OTTI losses for the year ended December 31, 2011 consisted of $1.0 million of additional impairments for residential mortgage-backed securities that were previously impaired and $0.9 million for two securities for which fair value was less than 80% of amortized cost for at least six months.

Net OTTI losses for the year ended December 31, 2010 were primarily related to residential mortgage-backed securities.

Net OTTI losses for the year ended December 31, 2009 of $8.8 million primarily related to additional impairments on a total of 56 equity securities that were previously impaired in 2008, as well as impairments on non-agency mortgage and asset backed securities and corporate bonds.

The significant inputs used to measure the amount of credit loss recognized in earnings were actual delinquency rates, default probability assumptions, severity assumptions and prepayment assumptions. Projected losses are a function of both loss severity and probability of default. Default probability and severity assumptions differ based on property type, vintage and the stress of the collateral. We do not intend to sell any of these securities and it is more likely than not that we will not be required to sell these securities before the recovery of the amortized cost basis.

Net Realized Gains and Losses

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


	Year Ended December 31,									Percentage Change
In thousands	2011			2010			2009			2011 vs. 2010			2010 vs. 2009
Fixed maturities:
Gains	$	11,678		$	42,932		$	18,312			-72.8	%		134.4	%
Losses		(7,044	)		(3,239	)		(9,676	)		117.5	%		-66.5	%

Fixed maturities, net	$	4,634		$	39,693		$	8,636			-88.3	%		359.6	%

Equity securities:
Gains	$	9,319		$	1,867		$	2,110			NM			-11.5	%
Losses		(1,957	)		(241	)		(1,529	)		NM			-84.2	%

Equity securities, net	$	7,362		$	1,626		$	581			NM			179.9	%

Net realized gains (losses)	$	11,996		$	41,319		$	9,217			-71.0	%		348.3	%

NM – Percentage change not meaningful.

We generate realized gains and losses as part of the normal ongoing management of our investment portfolio. Net realized gains for the year ended December 31, 2011 primarily included the sale of corporate bonds and equity mutual funds. Net realized gains for the year ended December 31, 2010 included the sale of the majority of our general obligation municipal bond obligations, the proceeds of which were reinvested in corporate bonds and agency mortgage-backed securities.

Other Income (Expense)

Total other income for the years ended December 31, 2011, 2010 and 2009 was $1.2 million, $5.1 million, and $6.7 million, respectively, and primarily includes foreign exchange gains and losses from our Lloyd’s Operations, commission income and inspection fees related to our specialty insurance business. For the year ended December 31, 2009, other income also included an approximate $3.0 million gain on the $10.0 million repurchase of our Senior Notes.

Expenses

Net Losses and Loss Adjustment Expenses

The ratio of net losses and LAE to net earned premiums (“loss ratios”) for the years ended December 31, 2011, 2010 and 2009 is presented in the following table:


	Year Ended December 31,
Net Loss and LAE Ratio	2011			2010			2009
Net Loss and LAE Payments		55.3	%		59.3	%		47.3	%
Current year reserves		13.4	%		6.6	%		17.8	%

Subtotal—current year loss ratio		68.7	%		65.9	%		65.1	%
Prior year deficiencies (redundancies)		0.3	%		-2.1	%		-1.3	%

Net loss and LAE ratio		69.0	%		63.8	%		63.8	%

The net loss and LAE ratio for the year ended December 31, 2011 increased 5.2 percentage points to 69.0% from 63.8% for both the years ended December 31, 2010 and 2009. The increase for the current year was primarily due to current accident year loss emergence of approximately $11.0 million related to our Professional Liability business of which approximately $8.0 million was specific to our D&O liability insurance for both publicly and privately held corporations. The remaining $3.0 million was specific to our small lawyers and miscellaneous professional liability coverages. In addition, the increase for the current year included net losses of $17.4 million related to four energy events compared to net losses of $11.0 million in 2010 related to Deepwater Horizon and West Atlas.

The segment and line of business breakdown of the net loss and LAE ratios for the years ended December 31, 2011, 2010 and 2009 are as follows:


	Year Ended December 31,
In thousands	2011			2010			2009
Insurance Companies:
Marine		65.8	%		64.5	%		69.8	%
Property Casualty		65.7	%		55.2	%		50.3	%
Professional Liability		108.8	%		83.4	%		94.1	%

Insurance Companies		72.3	%		63.8	%		63.6	%
Lloyd’s Operations		61.8	%		63.8	%		64.3	%

Net loss and LAE ratio		69.0	%		63.8	%		63.8	%

Prior Year Reserve Deficiencies/Redundancies

The relevant factors that may have a significant impact on the establishment and adjustment of losses and LAE reserves can vary by line of business and from period to period. As part of our regular review of prior reserves, management, in consultation with our actuaries, may determine, based on their judgment that certain assumptions made in the reserving process in prior year periods may need to be revised to reflect various factors, likely including the availability of additional information. Based on their reserve analyses, management may make corresponding reserve adjustments.

The segment and line of business breakdowns of prior period net reserve deficiencies (redundancies) for the years ended December 31, 2011, 2010 and 2009 are as follows:


	Year Ended December 31,
In thousands	2011			2010			2009
Insurance Companies:
Marine	$	1,348		$	(4,155	)	$	11,893
Property Casualty		(6,828	)		(14,923	)		(35,658	)
Professional Liability		17,582			13,623			20,686

Subtotal Insurance Companies	$	12,102		$	(5,455	)	$	(3,079	)
Lloyd's Operations		(9,957	)		(8,347	)		(5,862	)

Total deficiencies (redundancies)	$	2,145		$	(13,802	)	$	(8,941	)

The following is a discussion of relevant factors impacting our $2.1 million net reserve deficiency for the year ended December 31, 2011:

The adverse development of $1.3 million for our Insurance Companies Marine business was driven by $4.0 million of unfavorable loss emergence in Inland Marine in accident years 2009 and 2010 which was offset by $2.7 million favorable development in Ocean Marine. The Ocean Marine development was driven by $5.8 million of favorable development in accident years 2008 to 2010 and was partially offset by $3.2 million of adverse development for accident years 2007 and prior. Ocean Marine’s favorable development was driven by the Craft, P&I and Transport classes with partial offsets from the Specie and Liability classes.

Our Insurance Companies Property Casualty business experienced $6.8 million of favorable development overall which was driven by favorable development of $8.4 million from Offshore Energy across several accident years and was partially offset by adverse development from runoff Liquor Liability in accident years 2008 and 2009.

Our Insurance Companies Professional Liability business had overall adverse development of $17.6 million, which consisted of adverse development of $14.5 million and $3.1 million from Management Liability and Errors and Omissions, respectively. The Management Liability development was primarily driven by liability coverage of Public Company directors and officers for accident years 2009 and 2010. The Errors and Omissions development was driven by Small Lawyers Professional Liability and Miscellaneous Professional Liability classes for accident year 2010.

Our Lloyd’s operations experienced $10.0 million of favorable development. This was driven by favorable development of $10.3 million and $5.5 million from the Marine and Nav Tech divisions respectively, which was partially offset by $5.8 million of unfavorable development from Professional Liability. The favorable development in Marine was primarily from the Cargo, Liability and Specie classes for accident years 2008 and prior. The favorable development in Nav Tech was from Offshore Energy primarily in accident years 2007 to 2009. The adverse development in Professional Liability was mostly from Errors and Omissions in accident years 2006 to 2008.

The following is a discussion of relevant factors impacting our $13.8 million net reserve redundancies for the year ended December 31, 2010:

The Insurance Companies recorded $4.2 million of net prior year favorable development for the marine business, of which $2.6 million arose in the marine liability business due to favorable loss emergence relative to our expectations and $1.4 million in Hull as we eliminated IBNR in older underwriting years where we determined the year had been fully reported and saw case reserve reductions on a number of claims.

The Insurance Companies recorded $14.9 million of net prior year savings for Property Casualty business in total. The favorable development included:

•

$29.2 million for West Coast contractors’ liability due to an internal actuarial review conducted in 2010 which indicated that loss development on underwriting years 2006 to 2008 has been more favorable than our prior expectations with a partial offset for underwriting years 2004 and prior. This internal review includes a more detailed analysis than is included in our regular quarterly reserving process.

•

$2.9 million of favorable development on our offshore energy (NavTech) book due to favorable claims trends across a number of prior underwriting years.

•

$1.8 million of favorable development on the Somerset Re run-off book of business where we concluded the IBNR was no longer required and $1.5 million on our Agriculture reinsurance book where the reported activity was lower than our initial estimate for the 2009 treaty year.

Partially offsetting these favorable developments were adverse development of:

•

$16.5 million in our Specialty run-off books of business, including $13.3 million in our personal umbrella lines across multiple underwriting years where loss activity has exceeded our expectations and $2.0 million of adverse development in our Liquor business due to reported claim activity.

•

$1.7 million for New York construction liability due to unfavorable loss emergence.

The Insurance Companies recorded $13.6 million of net prior year unfavorable development for professional liability:

•

The directors and officers liability book of business had $15.7 million of adverse development, which was primarily attributable to a severity study of our open claims completed during the fourth quarter. This study showed our IBNR to be significantly deficient if current trends continued and we raised our loss estimates for underwriting years 2002 to 2009. This was partially offset by $1.4 million of favorable development on a run-off lawyers book of business written from London where we saw favorable settlements of outstanding claims and $0.7 million of favorable development on other lawyers business mostly due to a favorable claim reserve settlement.

The Lloyd’s Operations recorded $8.3 million in favorable loss development for prior years during 2010. This included favorable development of $3.2 million in Marine, $4.8 million in NavTech, and $0.5 million in all other areas. The Marine favorable development was primarily from the 2007 and 2008 underwriting years and was driven by loss development on these underwriting years being more favorable than our expectations, particularly in marine liability, assumed reinsurance, and specie classes. NavTech’s favorable development was mostly from the 2006 through 2008 underwriting years driven by favorable claims trends in the offshore energy.

The following is a discussion of relevant factors impacting our $8.9 million net reserve redundancies for the year ended December 31, 2009:

The Insurance Companies recorded $11.9 million of net prior year unfavorable development for the marine business, of which $10.6 million arose in the marine liability business due to large loss activity in excess of our prior expectations mostly across underwriting years 2005 to 2008 that we recognized by reserve strengthening.

The Insurance Companies recorded $35.7 million of net prior year savings for property casualty business in total. The favorable development included:

•

$36.5 million for contractors’ liability due to an actuarial review conducted in 2009 which indicated that loss development on the 2006 and prior underwriting years has been more favorable than our prior expectations for those underwriting years

•

$9.3 million from our primary E&S lines and $6.2 million in excess casualty business due to favorable loss trends in underwriting years 2007 and prior

•

$8.0 million of favorable development on our offshore energy (NavTech) book due to favorable claims trends across a number of prior underwriting years

Partially offsetting these favorable developments were adverse development of:

•

$12.0 million in our Nav Pac business due to reported loss activity in excess of our prior expectations from most underwriting years resulting from reviews of open claims in the auto and liability lines of business

•

$6.4 million from our liquor business, which is now in run-off

•

$5.9 million in our personal umbrella books of business across most underwriting years where large loss activity has exceeded our expectations

The Insurance Companies recorded $20.7 million of net prior year unfavorable development for professional liability:

•

The directors and officers liability book of business had $12.4 million of adverse development, which was primarily attributable to the unexpected development of previously reported claims in the 2006 and prior underwriting years. This loss activity was inconsistent with the loss emergence trends that we observed in calendar years 2007 and 2008 and it caused us to increase our ultimate loss projections in the 2006 and prior underwriting years, as well as those in the more current underwriting years.

•

The lawyers’ liability book of business had adverse development of $8.3 million due to reported loss activity in underwriting years 2005 to 2008 in excess of our prior expectations.

The Lloyd’s Operations recorded $5.9 million of net favorable development which included $11.0 million on Marine business concentrated in the liability, specie and cargo books due to reported losses being less than our expectations in underwriting years 2004 to 2008 and $2.5 million on offshore energy business due to favorable loss trends in several years, partially offset by $4.7 million of adverse loss development in the professional liability books due to reported loss activity in excess of our expectations in the lawyers liability book of business for losses occurring in 2007 and $3.0 million in the property book due to an extension in the loss development pattern for the 2006 and 2007 underwriting years.

Hurricanes Gustav and Ike

The following table sets forth our gross and net loss and LAE reserves, incurred loss and LAE, and payments for the 2008 Hurricanes Gustav and Ike for the periods indicated:


	Year Ended December 31,
In thousands	2011			2010			2009
Gross of Reinsurance
Beginning gross reserves	$	40,095		$	59,509		$	107,399
Incurred loss & LAE		(77	)		(1,997	)		1,039
Calendar year payments		8,848			17,417			48,929

Ending gross reserves	$	31,170		$	40,095		$	59,509


Gross case loss reserves	$	7,317		$	17,987		$	34,015
Gross IBNR loss reserves		23,853			22,108			25,494

Ending gross reserves	$	31,170		$	40,095		$	59,509


Net of Reinsurance
Beginning net reserves	$	569		$	2,683		$	12,923
Incurred loss & LAE		141			1,257			978
Calendar year payments		(440	)		3,371			11,218

Ending net reserves	$	1,150		$	569		$	2,683


Net case loss reserves	$	951		$	569		$	1,793
Net IBNR loss reserves		199			—			890

Ending net reserves	$	1,150		$	569		$	2,683

Hurricanes Katrina and Rita

The following tables set forth our gross and net loss and LAE reserves, incurred loss and LAE, and payments for the 2005 Hurricanes Katrina and Rita for the periods indicated:


	Year Ended December 31,
In thousands	2011			2010			2009
Gross of Reinsurance
Beginning gross reserves	$	22,599		$	67,038		$	97,732
Incurred loss & LAE		(1,102	)		(2,300	)		671
Calendar year payments		1,970			42,139			31,365

Ending gross reserves	$	19,527		$	22,599		$	67,038


Gross case loss reserves	$	19,105		$	19,164		$	49,291
Gross IBNR loss reserves		422			3,435			17,747

Ending gross reserves	$	19,527		$	22,599		$	67,038


Net of Reinsurance
Beginning net reserves	$	90		$	3,536		$	3,667
Incurred loss & LAE		(148	)		(3,559	)		114
Calendar year payments		(98	)		(113	)		245

Ending net reserves	$	40		$	90		$	3,536


Net case loss reserves	$	4		$	44		$	183
Net IBNR loss reserves		36			46			3,353

Ending net reserves	$	40		$	90		$	3,536

The reduction in net incurred loss and LAE shown for the 2005 Hurricanes was due to the release of a reinsurance bad debt reserve established when the events occurred due to the large ceded balances. As those balances have run off and the amounts were fully realized the bad debt reserve has been released back into our general reserve with no change to the overall balance, it has just been reclassified.

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 as of December 31, 2011 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.

We believe that there are no remaining known claims where we 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 tables set forth our gross and net loss and LAE reserves for our asbestos exposures for the periods indicated:


	Year Ended December 31,
In thousands	2011			2010		2009
Gross of Reinsurance
Beginning gross reserves	$	20,513		$	20,556	$	21,774
Incurred loss & LAE		128			638		(663	)
Calendar year payments		811			681		555

Ending gross reserves	$	19,830		$	20,513	$	20,556


Gross case loss reserves	$	13,565		$	14,248	$	14,291
Gross IBNR loss reserves		6,265			6,265		6,265

Ending gross reserves	$	19,830		$	20,513	$	20,556


Net of Reinsurance
Beginning net reserves	$	15,161		$	15,172	$	16,683
Incurred loss & LAE		(780	)		278		(1,616	)
Calendar year payments		(708	)		289		(105	)

Ending net reserves	$	15,089		$	15,161	$	15,172


Net case loss reserves	$	9,029		$	9,101	$	9,112
Net IBNR loss reserves		6,060			6,060		6,060

Ending net reserves	$	15,089		$	15,161	$	15,172

Commission Expenses

Commission expenses paid to brokers and agents are generally based on a percentage of gross written premiums and are partially offset by ceding commissions we may receive on ceded written premiums. Commissions are generally deferred and recorded as deferred policy acquisition costs to the extent that they relate to unearned premium. The percentage of commission expenses to net earned premiums (“commission expense ratio”) for the years ended December 31, 2011, 2010 and 2009 were 16.0%, 16.5% and 14.5%, respectively. The slight decrease in the commission expense ratio for the year ended December 31, 2011 when compared to the same period in 2010 can be attributed to the impact of reinsurance reinstatement premiums recorded in 2010, which reduce net earned premiums and in turn increase the commission expense ratio in 2010. The increase in commission expense ratio for the year ended December 31, 2010 when compared to the same period in 2009 was mostly attributable to greater retentions for net premiums earned in 2010 for the 2009 underwriting year, particularly on our marine quota share treaties, which have reduced the ceding commission benefit, as well as the impact of reinsurance reinstatement premiums related to large loss activity in 2010.

Other Operating Expenses

Other operating expenses were $138.0 million for the year ended December 31, 2011 compared to $139.7 million for the same period in 2010. The decrease was primarily due to a reduction in stock grant expense related to performance based awards that are not expected to vest partially offset by increased expenses for continued investments in new underwriting teams. Other operating expenses for the year ended December 31, 2010 increased 5.3%, or $7.0 million compared to 2009 due to investments in new underwriting teams, additional letter of credit fees due to the increased size of our facility, higher Lloyd’s charges due to greater capacity and higher compliance costs due to Solvency II.

Interest Expense

Interest expense relates to our Senior Notes due May 1, 2016. Interest on these Senior Notes is due each May 1 and November 1 and the effective interest rate, based on the proceeds net of discount and all issuance costs, is approximately 7.17%. Interest expense for the years ended December 31, 2011 and 2010 was $8.2 million, a $0.3 million decrease from the same period in 2009. The decrease is directly related to the $10.0 million of repurchases that were made in 2009.

Income Taxes

We recorded income tax expense of $7.1 million, $29.3 million and $23.7 million for the years ended December 31, 2011, 2010 and 2009 respectively. The effective tax rates were 21.8%, 29.6% and 27.3% for the years ended December 31, 2011, 2010 and 2009, respectively. The effective tax rate on net investment income was 27.6%, 27.0% and 25.0% for the years ended December 31, 2011, 2010 and 2009 respectively. As of December 31, 2011, the net deferred federal, foreign, state and local tax liabilities were $6.3 million, compared to net deferred tax assets of $15.1 million as of December 31, 2010 with the change primarily due to the increase in the deferred tax liability for net unrealized gains on securities. Refer to Footnote 7, Income Taxes, included herein, for further detail on the temporary differences that give rise to federal, foreign, state and local deferred tax assets or liabilities.

We had net state and local deferred tax assets amounting to potential future tax benefits of $0.2 million and $2.2 million as of December 31, 2011 and 2010, respectively. Included in the deferred tax assets are state and local net operating loss carry-forwards of $0.2 million and $1.4 million as of December 31, 2011 and 2010, respectively. A valuation allowance was established for the full amount of these potential future tax benefits due to uncertainty associated with their realization. Our state and local tax carry-forwards as of December 31, 2011 expire from 2024 to 2030.

Segment Information

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

We evaluate the performance of each segment based on its underwriting and GAAP results. The Insurance Companies’ and the Lloyd’s Operations’ results are measured by taking into account net earned premium, net loss and loss adjustment expenses, commission expenses, other operating expenses and 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 our two underwriting segments.

Insurance Companies

The Insurance Companies consist of Navigators Insurance, including its U.K. Branch, and its wholly-owned subsidiary, Navigators Specialty. They are primarily engaged in underwriting marine insurance and related lines of business, professional liability insurance and specialty lines of business including contractors general liability insurance, commercial umbrella and primary and excess casualty businesses. Navigators Specialty underwrites specialty and professional liability insurance on an excess and surplus lines basis. Navigators Specialty is 100% reinsured by Navigators Insurance.

The following table sets forth the results of operations for the Insurance Companies for the years ended December 31, 2011, 2010 and 2009:


	Year Ended December 31,									Percentage Change
In thousands	2011			2010			2009			2011 vs. 2010			2010 vs. 2009
Gross written premiums	$	788,419		$	665,505		$	730,776			18.5	%		-8.9	%
Net written premiums		542,391			429,355			477,673			26.3	%		-10.1	%

Net earned premiums		472,463			438,851			479,121			7.7	%		-8.4	%
Net losses and loss adjustment expenses		(341,625	)		(280,120	)		(304,672	)		22.0	%		-8.1	%
Commission expenses		(64,165	)		(59,122	)		(61,949	)		8.5	%		-4.6	%
Other operating expenses		(101,517	)		(106,631	)		(104,801	)		-4.8	%		1.7	%
Other income (expense)		3,955			1,698			3,498			132.9	%		-51.5	%


Underwriting profit (loss)	$	(30,889	)	$	(5,324	)	$	11,197			NM			-147.5	%

Net investment income		54,164			62,792			65,717			-13.7	%		-4.5	%
Net realized gains (losses)		12,151			36,057			533			-66.3	%		NM

Income (loss) before income taxes	$	35,426		$	93,525		$	77,447			-62.1	%		20.8	%

Income tax expense (benefit)		8,271			27,219			19,819			-69.6	%		37.3	%

Net income (loss)	$	27,155		$	66,306		$	57,628			-59.0	%		15.1	%


Losses and loss adjustment expenses ratio		72.3	%		63.8	%		63.6	%
Commission expense ratio		13.6	%		13.5	%		12.9	%
Other operating expense ratio ⁽¹⁾		20.6	%		23.9	%		21.1	%

Combined ratio		106.5	%		101.2	%		97.6	%

(1) — Includes Other operating expenses & Other income (expense)

NM — Percentage change not meaningful

Our Insurance Companies reported net income of $27.2 million, $66.3 million and $57.6 million for the years ended December 31, 2011, 2010 and 2009, respectively. The decrease in net income for the year ended December 31, 2011 as compared to the same period in 2010 was largely attributable to an increase in our underwriting loss and a reduction in net realized gains. The increase in net income for the year ended December 31, 2010 as compared to the same period in 2009 was primarily as a result of significant net realized gains partially offset by unfavorable underwriting results.

Our Insurance Companies’ combined ratio for the year ended December 31, 2011 was 106.5% compared to 101.2% for the same period in 2010. Our Insurance Companies’ pre-tax underwriting loss increased by $25.6 million to $30.9 million as of December 31 2011 compared to $5.3 million for the same period 2010. The increase in pre-tax underwriting loss includes the following adverse activity:

•

Large current accident year energy losses with a net adverse impact of $16.1 million, inclusive of $5.5 million in reinsurance reinstatement premiums, related to drilling operations in the North Sea, Gulf of Mexico and Russia

•

Prior period net reserve deficiencies of $12.1 million largely attributable to significant emergence in our Profession Liability business, partially offset by redundancies from our Property Casualty business.

•

Current accident year loss emergence of approximately $11.0 million related to our Professional Liability business, of which approximately $8.0 million was specific to our Directors and Officers liability insurance for both publicly and privately held corporations. The remaining $3.0 million of emergence was specific to our small lawyers and miscellaneous professional liability coverages.

In addition to the net adverse impacts noted above, the increase in our Insurance Companies’ pre-tax underwriting loss in 2011 over 2010 was affected by the mix of business and loss trends, partially offset by $7.6 million of net adverse activity recorded in 2010. The net adverse activity recorded in 2010 is primarily related to a combined $13.1 million in reinstatement premiums related to the Deepwater Horizon and West Atlas losses, respectively, partially offset by net prior period reserve redundancies of $5.5 million driven by significant redundancies from our Property Casualty business partially offset by loss emergence from our Professional Liability business.

Our Insurance Companies’ combined ratio for the year ended December 31, 2010 was 101.2% compared to 97.6% for the same period in 2009. Our Insurance Companies’ pre-tax underwriting profit decreased $16.5 million to a $5.3 million pretax underwriting loss for the year ended December 31 2010 compared to $11.2 million of pre-tax underwriting profit for the same period in 2009. The decrease in pre-tax underwriting profit was primarily attributable to large loss activity, namely Deepwater Horizon and West Atlas, as well as reduced rates across all lines due to the soft market conditions, partially offset by net prior period redundancies.

Insurance Companies’ Gross Written Premiums

Marine Premiums. The gross written premiums for the years ended December 31, 2011, 2010 and 2009 consisted of the following:


	Year Ended December 31,						Percentage Change
In thousands	2011		2010		2009		2011 vs. 2010			2010 vs. 2009
Marine liability	$	74,429	$	77,066	$	83,915		-3.4	%		-8.2	%
Inland marine		33,120		29,986		28,573		10.5	%		4.9	%
Cargo		23,333		23,179		26,636		0.7	%		-13.0	%
Craft/fishing vessel		21,714		19,948		19,758		8.9	%		1.0	%
P&I		20,496		17,479		25,361		17.3	%		-31.1	%
Transport		19,932		17,876		21,527		11.5	%		-17.0	%
Bluewater hull		18,695		18,610		19,691		0.5	%		-5.5	%
Other		16,781		18,917		15,977		-11.3	%		18.4	%

Total Marine	$	228,500	$	223,061	$	241,438		2.4	%		-7.6	%

The Insurance Companies’ Marine gross written premiums for the year ended December 31, 2011 increased 2.4% to $228.5 million compared to 2010 primarily due to Inland Marine which increased by 10.5% as a result of new business and a 7.3% increase on renewal rates, and the P&I product which increased by 17.3%, benefiting from reduced competition as a major competitor had stopped writing P&I business. The Transport business also grew from prior year by 11.5% due to an unexpected increase in global trade in 2011. The increases were offset by the reduction of our Customs Bonds business, reported within Other in the table above, which decreased 39.8% from prior year due to the termination of an agency agreement as well as the current economy’s impact on the shipping industry. The 2011 Insurance Company Marine average renewal rate increased 1.3% from prior year.

The Insurance Companies’ Marine gross written premiums for the year ended December 31, 2010 decreased 7.6% compared to 2009 due to reductions in our P&I, Marine Liability, Transport and Cargo businesses. The competition in this sector remains significant and excess capacity continued to exist. The weak economy had also led to reduced exposure bases which reduced premiums. In addition, the average Marine renewal premium rates during 2009 increased approximately 2% from prior year.

Property Casualty Premiums. The gross written premiums for the years ended December 31, 2011, 2010 and 2009 consisted of the following:


	Year Ended December 31,						Percentage Change
In thousands	2011		2010		2009		2011 vs. 2010			2010 vs. 2009
Excess Casualty	$	130,166	$	96,015	$	81,405		35.6	%		17.9	%
Nav Re		106,496		5,031		6,230		NM			-19.2	%
Primary Casualty:
Construction liability		84,622		88,296		108,744		-4.2	%		-18.8	%
Environmental		20,323		8,832		2,932		130.1	%		201.2	%
Other Primary Casualty		24,413		10,122		5,666		141.2	%		78.7	%

Total Primary Casualty		129,358		107,250		117,342		20.6	%		-8.6	%
Offshore energy		57,482		52,148		47,368		10.2	%		10.1	%
Other		21,785		52,207		99,940		-58.3	%		-47.8	%

Total Property Casualty	$	445,287	$	312,651	$	352,285		42.4	%		-11.3	%

NM—Percentage change not meaningful

The Insurance Companies’ Property Casualty gross written premiums for the year ended December 31, 2011 increased by 42.4% to $445.3 million compared to the same period in 2010. The increase was primarily driven by our recently established Nav Re division which produced $106.5 million in gross written premiums for the year ended December 31, 2011. Additionally, we saw growth in our Excess Casualty and Primary Casualty lines due to an increase in underwriting activity resulting from an expansion of our underwriting team and competition dislocation in Excess Casualty. The increases were offset by activity within our Specialty Run-off division, reported within Other in the table above, which decreased as a result of the sale of our NavPac business to Tower Insurance Company of New York via a renewal rights transaction.

The Insurance Companies’ Property Casualty gross written premiums for the year ended December 31, 2010 decreased 11.3% to $312.7 million when compared to 2009 due primarily to the run-off of our personal umbrella line as well as continuing weak economic conditions that have reduced demand for construction liability insurance. Our Offshore energy line increased by 10.1% due to greater demand as well as an improved pricing environment resulting from the Deepwater Horizon incident. Finally, our commercial umbrella business line experienced growth in 2010 due to the investments we made in 2008 and 2009 in new underwriters. Our Offshore energy line saw average renewal rate increases of approximately 4%, whereas our contractors’ liability and Excess Casualty saw average renewal rate decreases of approximately 5% and 3%, respectively. Our Primary Casualty line saw a slight average renewal rate decline from 2009.

Professional Liability Premiums. The gross written premiums for the years ended December 31, 2011, 2010 and 2009 consisted of the following:


	Year Ended December 31,						Percentage Change
In thousands	2011		2010		2009		2011 vs. 2010			2010 vs. 2009
E&O	$	68,368	$	49,694	$	37,304		37.6	%		33.2	%
D&O		43,451		65,269		89,017		-33.4	%		-26.7	%
Other		2,813		14,830		10,732		-81.0	%		38.2	%

Total Professional Liability	$	114,632	$	129,793	$	137,053		-11.7	%		-5.3	%

The Insurance Companies’ Professional Liability gross written premiums for the year ended December 31, 2011 decreased by 11.7% to $114.6 million compared to prior year primarily due to the reduction in our D&O business as we have implemented a revised underwriting strategy exiting areas that have been identified as having greater volatility and shifted our public company book by underwriting higher excess layers. Our Noodle business, reported within Other in the table above, decreased by 97.4% from the prior year due to the termination of the agency relationship in 2010. The decreases were offset by the E&O business, which increased 37.6% from the prior year due to the success of the Real Estate product which was established in the third quarter of 2011 and wrote $8.9 million in gross written premium for the year ended December 31, 2011. The average 2011 Professional Liability renewal rate declined 1.4% from prior year.

The Insurance Companies’ professional liability gross written premiums decreased 5.3% to $129.8 million in 2010 compared to 2009. The decline in the D&O gross written premiums was driven by the soft market conditions. The D&O market rates have declined to a level that made it difficult to write new business and a challenge to retain renewal policies while maintaining our pricing discipline in adherence to our underwriting guidelines. Average 2010 renewal premium rates for professional liability decreased approximately 4% in 2010 compared to 2009.

Lloyd’s Operations

The Lloyd’s Operations primarily underwrites Marine and related lines of business along with Professional Liability insurance, and construction coverage for onshore energy business at Lloyd’s through Syndicate 1221. Our Lloyd’s Operations includes NUAL, a Lloyd’s underwriting agency which manages Syndicate 1221.

The following table sets forth the results of operations of the Lloyd’s Operations for the years ended December 31, 2011, 2010 and 2009:


	Year Ended December 31,									Percentage Change
In thousands	2011			2010			2009			2011 vs. 2010			2010 vs. 2009
Gross written premiums	$	319,797		$	321,696		$	314,142			-0.6	%		2.4	%
Net written premiums		211,407			224,583			223,582			-5.9	%		0.4	%

Net earned premiums		219,182			221,080			204,242			-0.9	%		8.2	%
Net losses and loss adjustment expenses		(135,372	)		(141,035	)		(131,326	)		-4.0	%		7.4	%
Commission expenses		(48,341	)		(49,991	)		(37,727	)		-3.3	%		32.5	%
Other operating expenses		(36,512	)		(33,112	)		(27,896	)		10.3	%		18.7	%
Other income (expense)		(657	)		3,488			961			NM			NM


Underwriting profit (loss)	$	(1,700	)	$	430		$	8,254			NM			-94.8	%

Net investment income		8,955			8,286			9,229			8.1	%		-10.2	%
Net realized gains (losses)		(2,354	)		3,323			(3,193	)		NM			NM

Income (loss) before income taxes	$	4,901		$	12,039		$	14,290			-59.3	%		-15.8	%

Income tax expense (benefit)		1,523			4,389			5,582			-65.3	%		-21.4	%

Net income (loss)	$	3,378		$	7,650		$	8,708			-55.8	%		-12.1	%


Losses and loss adjustment expenses ratio		61.8	%		63.8	%		64.3	%
Commission expense ratio		22.1	%		22.6	%		18.5	%
Other operating expense ratio ⁽¹⁾		16.9	%		13.4	%		13.2	%

Combined ratio		100.8	%		99.8	%		96.0	%

(1)—Includes Other operating expenses & Other income (expense)

NM—Percentage change not meaningful.

Our Lloyd’s Operations reported net income of $3.4 million, $7.7 million and $8.7 million for the years ended December 31, 2011, 2010 and 2009, respectively. The decrease in net income for the year ended December 31, 2011 as compared to the same period in 2010 was largely attributable to adverse underwriting activity and current year net realized losses. The decrease in net income for the year ended December 31, 2010 as compared to the same period in 2009 was primarily as a result adverse underwriting activity, specifically due to large losses such as Deepwater Horizon, partially offset by net realized gains.

Our Lloyd’s Operations combined ratio for the year ended December 31, 2011 was 100.8% compared to 99.8% for the same period in 2010. Our Lloyd’s Operations pre-tax underwriting profit decreased by $2.1 million to a $1.7 million pre-tax underwriting loss for the year ended December 31, 2011 compared to $0.4 million of underwriting profit for the same period in 2010. The decrease in pre-tax underwriting profit includes the following adverse activity:

•

Large current accident year energy losses with a net adverse impact of $9.5 million, inclusive of $2.7 million in reinsurance reinstatement premiums, related to drilling operations in the North Sea, Gulf of Mexico and Russia, as well as an onshore industrial site.

•

Sliding scale commission adjustments of $3.3 million related to large loss activity that has reduced our ceding commission benefit on a large loss quota share treaty.

In addition to the net adverse impacts noted above, the decrease in our Lloyd’s Operations pre-tax underwriting profit in 2011 over 2010 was affected by mix of business and loss trends, partially offset by $9.4 million of net adverse activity recorded in 2010 related to the Deepwater Horizon and West Atlas loses.

Our Lloyd’s Operations combined ratio for the year ended December 31, 2010 was 99.8% compared to 96.0% for the comparable period in 2009. Our Lloyd’s Operations pre-tax underwriting profit declined by $7.9 million to a $0.4 million underwriting profit compared to $8.3 million for the same period in 2009. The decrease in pre-tax underwriting profit was primarily attributable to large loss activity, namely Deepwater Horizon and West Atlas, partially offset by net prior period redundancies.

Lloyd’s Operations Gross Written Premiums

We have controlled 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 was £175 million ($271 million) in 2011, £168 million ($264 million) in 2010, £124 million ($194 million) in 2009.

Marine Premiums. The gross written premiums for the years ended December 31, 2011, 2010 and 2009 consisted of the following:


	Year Ended December 31,						Percentage Change
In thousands	2011		2010		2009		2011 vs. 2010			2010 vs. 2009
Cargo and specie	$	67,507	$	78,515	$	92,139		-14.0	%		-14.8	%
Marine and energy liability		60,433		61,230		51,204		-1.3	%		19.6	%
Assumed reinsurance		16,730		14,380		19,756		16.3	%		-27.2	%
War		12,856		9,965		10,163		29.0	%		-1.9	%
Hull		10,036		18,633		18,697		-46.1	%		-0.3	%

Total Marine	$	167,562	$	182,723	$	191,959		-8.3	%		-4.8	%

The 2011 Lloyd’s Operations Marine gross written premiums decreased 8.3% to $167.6 million compared to the same period in 2010. The reduction is attributed to a decrease in Cargo and Hull production. Cargo production has decreased as a result of depressed activity and a reduction in commodity prices due to an unfavorable economic environment. Hull gross written premium declined by 46.1% from prior year as we continue our strategy to reduce the book. Partially offsetting the decrease in activity was the War business which produced $12.9 million in gross written premium for the year ended December 31, 2011 due to the widening of hazardous war zones. Average renewal premium rates for 2011 increased approximately 0.9% compared to the same period in 2010, with larger increases on our marine and energy liability products.

The 2010 Lloyd’s Operations Marine gross written premiums decreased 4.8% to $182.7 million compared to 2009 due to declines mostly in Cargo and specie lines as a result of the global economic slowdown. Our marine liability lines experienced a 19.6% increase due to improved energy liability activity. The average renewal premium rates increased approximately 3% in 2010 compared to the previous year.

Property Casualty Premiums. The gross written premiums for the years ended December 31, 2011, 2010 and 2009 consisted of the following:


	Year Ended December 31,						Percentage Change
In thousands	2011		2010		2009		2011 vs. 2010			2010 vs. 2009
Offshore energy	$	46,212	$	43,479	$	34,469		6.3	%		26.1	%
Engineering and construction		32,292		23,411		18,383		37.9	%		27.4	%
Onshore energy		30,247		17,349		14,055		74.3	%		23.4	%
Other		6,387		10,560		11,244		-39.5	%		-6.1	%

Total Property Casualty	$	115,138	$	94,799	$	78,151		21.5	%		21.3	%

The 2011 Lloyd’s Operations Property Casualty gross written premiums increased 21.5% compared to the same period in 2010. The increase is primarily due to greater Onshore Energy premiums as a result of steady production and renewal rate increases resulting from reduced competition that has occurred due to recent loss activity. Engineering & Construction has also increased production from prior year primarily due to rate increases prompted by a contraction in the market.

The 2010 Lloyd’s Operations Property Casualty gross written premiums of $94.8 million increased 21.3% compared to 2009 due to increases in our offshore energy, onshore energy and engineering and construction lines. The significant increase in our offshore energy lines was due to an increase in demand as well as an improved pricing environment as a result of the Deepwater Horizon incident. We began writing Bloodstock (animal mortality) business during 2009 by participating in a facility originated by another Lloyd’s syndicate. Average premium renewal rates in our NavTech lines increased approximately 1% and 10% in 2010 and 2009 compared to the previous years, respectively.

Professional Liability Premiums. The gross written premiums for the years ended December 31, 2011, 2010 and 2009 consisted of the following:


	Year Ended December 31,						Percentage Change
In thousands	2011		2010		2009		2011 vs. 2010			2010 vs. 2009
D&O (public and private)	$	27,895	$	30,777	$	26,776		-9.4	%		14.9	%
E&O		9,202		13,397		17,256		-31.3	%		-22.4	%

Total Professional Liability	$	37,097	$	44,174	$	44,032		-16.0	%		0.3	%

The 2011 Lloyd’s Operations Professional Liability gross written premiums decreased 16.0% compared to the same period in 2010, due to restructuring the E&O and D&O businesses. E&O gross written premium declined 31.3% from the prior year due to exiting areas of business that were deemed unprofitable as well as reducing our number of underwriters. We had also restructured the D&O business by reducing our exposure to certain areas and non-renewing business that no longer fit our underwriting strategy. The 2011 average renewal premium rates for the Professional Liability division decreased approximately 1.8% compared to the same periods in 2010.

The 2010 Lloyd’s Operations professional liability gross written premiums increased 0.3% compared to the same period in 2009. We added a team at Lloyd’s at the end of 2008 to write excess D&O business. During 2008 and 2009 we began writing professional liability business from our offices in Stockholm, Sweden and Copenhagen, Denmark, respectively.

Off-Balance Sheet Transactions

We have no material off-balance sheet transactions with the exception of our letter of credit facility. For a discussion of our letter of credit facility, refer to “Capital Resources”.

Tabular Disclosure of Contractual Obligations

The following table sets forth the best estimate of our known contractual obligations with respect to the items indicated as of December 31, 2011:


	Payments Due by Period
In thousands	Total		Less than 1 Year		1-3 Years		3-5 Years		Thereafter
Reserves for losses and LAE⁽¹⁾	$	2,082,679	$	616,122	$	768,161	$	370,449	$	327,947
7% Senior Notes ⁽²⁾		151,225		8,050		16,100		127,075		—
Operating Leases		49,253		9,243		17,008		13,935		9,067

Total	$	2,283,157	$	633,415	$	801,269	$	511,459	$	337,014

(1)

The amounts determined are estimates which are subject to a high degree of variation and uncertainty, and are not subject to any specific payment schedule since the timing of these obligations are not set contractually. The amount in the above table excludes reinsurance recoveries of $845.4 million. See “Business—Loss Reserves” included herein.

(2)	Includes interest payments

Capital Resources

We monitor our capital adequacy to support our business on a regular basis. The future capital requirements of our business will depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. Our ability to underwrite is largely dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. In particular, we require (1) sufficient capital to maintain our financial strength ratings, as issued by 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.

Our capital resources consist of funds deployed or available to be deployed to support our business operations. As of December 31, 2011 and 2010, our capital resources were as follows:


	December 31,
In thousands	2011			2010
Senior debt	$	114,276		$	114,138
Stockholders’ equity		803,435			829,354

Total capitalization	$	917,711		$	943,492


Ratio of debt to total capitalization		12.5	%		12.1	%

As part of our capital management program, we may seek to raise additional capital or may seek to return capital to our stockholders through share repurchases, cash dividends or other methods (or a combination of such methods). Any such determination will be at the discretion of the Parent Company’s Board of Directors and will be dependent upon our profits, financial requirements and other factors, including legal restrictions, rating agency requirements, credit facility limitations and such other factors as our Board of Directors deems relevant.

For 2011, the Company repurchased 1,979,107 shares of the Parent Company’s common stock at an aggregate purchase price of $90.9 million and a weighted average price per share of $45.91 pursuant to the share repurchase program. Since 2007, the Company has repurchased 3,609,721 shares of the Parent Company’s common stock at an aggregate purchase price of $161.1 million and a weighted average price per share of $44.64. As of December 31, 2011, authorization for the share repurchase program has expired.

In July 2009, we filed a universal shelf registration statement with the Securities and Exchange Commission. This registration statement, which expires in July 2012, allows for the future possible offer and sale by the Company of up to $500 million in the aggregate of various types of securities including common stock, preferred stock, debt securities, depositary shares, warrants, units or stock purchase contracts, stock purchase units and trust preferred securities guaranteed by the Parent Company. The shelf registration statement enables us to efficiently access the public equity or debt markets in order to meet future capital needs, if necessary. This report is not an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such state.

We primarily rely upon dividends from our subsidiaries to meet our Parent Company’s obligations. 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 share 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, 2011 surplus of Navigators Insurance Company, the approximate maximum amount available for the payment of dividends by Navigators Insurance Company during 2012 without prior regulatory approval is $59.2 million. During 2011 Navigators Insurance Company declared and paid $45.0 million of dividends to the Parent Company.

Condensed Parent Company balance sheets as of December 31, 2011 and 2010 are shown in the table below:


	December 31,		December 31,
In thousands	2011		2010
Cash and investments	$	8,315	$	53,217
Investments in subsidiaries		895,047		877,999
Goodwill and other intangible assets		2,534		2,534
Other assets		13,806		12,028

Total assets	$	919,702	$	945,778


Senior notes	$	114,276	$	114,138
Accounts payable and other liabilities		649		946
Accrued interest payable		1,342		1,340

Total liabilities	$	116,267	$	116,424


Stockholders’ equity	$	803,435	$	829,354

Total liabilities and stockholders’ equity	$	919,702	$	945,778

On April 1, 2011, we entered into a $165 million credit facility agreement with ING Bank N.V., London Branch, individually and as Administrative Agent, and a syndicate of lenders. The credit facility is a letter of credit facility and replaces a $140 million credit facility agreement that expired March 31, 2011. The credit facility, which is denominated in U.S. dollars, will be utilized to fund our participation in Syndicate 1221 through letters of credit for the 2011 and 2012 underwriting years, as well as open prior years. The letters of credit issued under the facility are denominated in British pounds and their aggregate face amount will fluctuate based on exchange rates. The ability to issue new letters of credit expired on December 31, 2011. If any letters of credit remain outstanding under the facility after December 31, 2012, we would be required to post additional collateral to secure the remaining letters of credit. As of December 31, 2011, letters of credit with an aggregate face amount of $149.6 million were outstanding under the credit facility.

This credit facility contains customary covenants for facilities of this type, including restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of assets, and requirements as to maintaining certain consolidated tangible net worth, statutory surplus and other financial ratios. The credit facility also provides for customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, any representation or warranty made by the Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting the Company and its subsidiaries, the occurrence of certain material judgments, or a change in control of the Company. The letter of credit facility is secured by a pledge of the stock of certain insurance subsidiaries of the Company. To the extent the aggregate face amount issued under the credit facility exceeds the commitment amount, we are required to post collateral with the lead bank of the consortium. We were in compliance with all covenants under the credit facility as of December 31, 2011.

As a result of the April 1, 2011 replacement of the expiring credit facility, the applicable margin and applicable fee rate payable under the letter of credit facility are now based on a tiered schedule that is based on the Company’s then-current ratings issued by S&P and Moody’s with respect to the Company’s senior unsecured long-term debt securities, without third-party credit enhancement, and the amount of the Company’s own ‘Funds at Lloyd’s’ collateral.

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 as of December 31, 2011 are anticipated to be billed and collected over the next several years as the gross loss reserves are paid by the Company.

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

Generally, for excess of loss reinsurers we pay 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.

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

Liquidity

Consolidated Cash Flows

Cash flow from operations was $118.3 million, $118.2 million and $103.9 million for the years ended December 31, 2011, 2010, and 2009, respectively. The increase in cash flow from operations was due to improved collections on reinsurance recoverable as well as premium receivable.

Net cash provided by investing activities was $66.0 million for the year ended December 31, 2011 primarily due to the sale of securities from the ongoing management of our investment portfolio. For the years ended December 31, 2010 and 2009 we reported net cash used by investing activities of $36.5 million and $92.8 million, respectively. The decrease in net cash used in investing activities is primarily related to the repurchase of the Parent Company’s common stock under our share repurchase program.

Net cash used in financing activities was $88.8 million, $50.5 million and $12.1 million for the years ended December 31, 2011, 2010 and 2009. The increase in the use of cash is primarily related to the repurchase of the Parent Company’s common stock under our share repurchase program.

We believe that the cash flow generated by the operating activities of our subsidiaries will provide sufficient funds for us to meet our liquidity needs over the next twelve months. Beyond the next twelve months, cash flow available to us may be influenced by a variety of factors, including general economic conditions and conditions in the insurance and reinsurance markets, as well as fluctuations from year to year in claims experience.

We believe that we have adequately managed our cash flow requirements related to reinsurance recoveries from its positive cash flows and the use of available short-term funds when applicable. However, there can be no assurances that we will be able to continue to adequately manage such recoveries in the future or that collection disputes or reinsurer insolvencies will not arise that could materially increase the collection time lags or result in recoverable write-offs causing additional incurred losses and liquidity constraints to the Company. The payment of gross claims and related collections from reinsurers with respect to large losses could significantly impact our liquidity needs. However, we expect to collect our paid reinsurance recoverables generally under the terms described above.

Investments

As of December 31, 2011, 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 investments with a fair value of $16.5 million, consists of investment grade bonds. As of December 31, 2011, our portfolio had a duration of 3.6 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 December 31, 2011 and 2010, all fixed maturity securities and equity securities held by us were classified as available-for-sale.

The following tables set forth our cash and investments as of December 31, 2011 and 2010:


	December 31, 2011
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Amortized Cost		OTTI Recognized in OCI
Fixed maturities:
U.S. Government Treasury bonds, agency bonds, and foreign government bonds	$	336,070	$	8,979	$	(383	)	$	327,474	$	—
States, municipalities and political subdivisions		410,836		28,887		(108	)		382,057		—
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		395,860		17,321		(3	)		378,542		—
Residential mortgage obligations		23,148		8		(2,848	)		25,988		(1,682	)
Asset-backed securities		48,934		695		(75	)		48,314		—
Commercial mortgage-backed securities		216,034		10,508		(593	)		206,119		—

Subtotal	$	683,976	$	28,532	$	(3,519	)	$	658,963	$	(1,682	)
Corporate bonds		457,187		15,743		(6,772	)		448,216		—

Total fixed-maturities	$	1,888,069	$	82,141	$	(10,782	)	$	1,816,710	$	(1,682	)
Equity securities—common stocks		95,849		23,240		(958	)		73,567		—
Short-term investments		122,220		—		—			122,220		—
Cash		127,360		—		—			127,360

Total	$	2,233,498	$	105,381	$	(11,740	)	$	2,139,857	$	(1,682	)


	December 31, 2010
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Amortized Cost		OTTI Recognized in OCI
Fixed-maturities:
U.S. Government Treasury bonds, agency bonds, and foreign government bonds	$	324,145	$	5,229	$	(4,499	)	$	323,415	$	—
States, municipalities and political subdivisions		392,250		11,903		(3,805	)		384,152		—
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		382,628		10,127		(2,434	)		374,935		—
Residential mortgage obligations		20,463		24		(2,393	)		22,832		(1,646	)
Asset-backed securities		46,093		247		(292	)		46,138		—
Commercial mortgage-backed securities		190,015		4,804		(1,794	)		187,005		—

Subtotal	$	639,199	$	15,202	$	(6,913	)	$	630,910	$	(1,646	)
Corporate bonds		526,651		15,075		(5,545	)		517,121		—

Total fixed-maturities	$	1,882,245	$	47,409	$	(20,762	)	$	1,855,598	$	(1,646	)
Equity securities—common stocks		87,258		22,475		(10	)		64,793		—
Short-term investments		153,057		—		—			153,057		—
Cash		31,768		—		—			31,768		—

Total	$	2,154,328	$	69,884	$	(20,772	)	$	2,105,216	$	(1,646	)

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

Invested assets increased over the last year primarily due to unrealized gains in 2011. The consolidated average investment yield of the portfolio for 2011, 2010 and 2009 was 3.0%, 3.5% and 3.8%, respectively due to the general decline in market yields over the period. The tax equivalent yields for 2011, 2010 and 2009 on a consolidated basis were 3.5%, 4.0% and 4.6%, respectively. The portfolio’s duration was 3.6 years and 4.4 years as of December 31, 2011 and 2010, respectively. Since the beginning of 2011, the tax-exempt portion of our investment portfolio has increased by $31.0 million to approximately 19.7% of the fixed maturities investment portfolio at December 31, 2011 compared to approximately 18.1% at December 31, 2010.

We are a specialty insurance company and periods of moderate economic recession or inflation tend not to have a significant direct effect on our underwriting operations. They do, however, impact our investment portfolio. A decrease in interest rates will tend to decrease our yield and have a positive effect on the fair value of our invested assets. An increase in interest rates will tend to increase our yield and have a negative effect on the fair value of our invested assets.

The contractual maturity dates for fixed maturity securities categorized by the number of years until maturity as of December 31, 2011 are shown in the following table:


	December 31, 2011
In thousands	Fair Value		Amortized Cost
Due in one year or less	$	65,454	$	64,925
Due after one year through five years		551,225		542,238
Due after five years through ten years		372,275		349,061
Due after ten years		215,139		201,523
Mortgage- and asset-backed securities		683,976		658,963

Total	$	1,888,069	$	1,816,710

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 3.6 years.

The following table shows the amount and percentage of our fixed maturities as of December 31, 2011 by S&P credit rating or, if an S&P rating is not available, the equivalent Moody’s rating. The table includes fixed maturities at fair value, and the total rating is the weighted average quality rating.


	December 31, 2011
In thousands	Rating	Fair Value		Percent of Total
Rating description:
Extremely strong	AAA	$	291,600		15	%
Very strong	AA		1,048,922		56	%
Strong	A		422,777		22	%
Adequate	BBB		108,299		6	%
Speculative	BB & Below		11,665		1	%
Not rated	NR		4,806		0	%

Total	AA	$	1,888,069		100	%

The following table sets forth our U.S. Treasury bonds, Agency bonds, and Foreign government bonds as of December 31, 2011 and 2010:


	December 31, 2011
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized (Losses)			Cost or Amortized Cost
U.S. Treasury bonds	$	137,228	$	5,422	$	—		$	131,806
Agency bonds		136,506		2,870		(133	)		133,769
Foreign government bonds		62,336		687		(250	)		61,899

Total	$	336,070	$	8,979	$	(383	)	$	327,474


	December 31, 2010
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized (Losses)			Cost or Amortized Cost
U.S. Treasury bonds	$	213,544	$	3,552	$	(3,554	)	$	213,546
Agency bonds		77,229		1,311		(604	)		76,522
Foreign government bonds		33,372		366		(341	)		33,347

Total	$	324,145	$	5,229	$	(4,499	)	$	323,415

The following table sets forth the composition of the investments categorized as states, municipalities and political subdivisions in our portfolio by generally equivalent S&P and Moody’s ratings (not all securities in our portfolio are rated by both S&P and Moody’s) as of December 31, 2011. The securities that are not rated in the table below are primarily state bonds.


In thousands		December 31, 2011
Equivalent S&P Rating	Equivalent Moody’s Rating	Fair Value		Book Value		Net Unrealized Gain (Loss)
AAA/AA/A	Aaa/Aa/A	$	389,598	$	361,431	$	28,167
BBB	Baa		16,434		15,913		521
BB	Ba		—		—		—
B	B		—		—		—
CCC or lower	Caa or lower		—		—		—
NR	NR		4,804		4,713		91

		$	410,836	$	382,057	$	28,779

The following table sets forth the municipal bond holdings by sectors as of December 31, 2011 and 2010:


	December 31, 2011					December 31, 2010
In thousands	Fair Value		Percent of Total			Fair Value		Percent of Total
Municipal Sector:
General obligation	$	43,195		10	%	$	13,249		3	%
Prerefunded		18,636		5	%		14,122		4	%
Revenue		309,659		75	%		313,166		80	%
Taxable		39,346		10	%		51,713		13	%

	$	410,836		100	%	$	392,250		100	%

We own $135.4 million of municipal securities which are credit enhanced by various financial guarantors. As of December 31, 2011, the average underlying credit rating for these securities is AA-. There has been no material adverse impact to our investment portfolio or results of operations as a result of downgrades of the credit ratings for several of the financial guarantors.

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

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

The following table sets forth our agency mortgage-backed securities and residential mortgage obligations by those issued by the Government National Mortgage Association (“GNMA”), FNMA, and FHLMC, and the quality category (prime, Alt-A and subprime) for all other such investments as of December 31, 2011:


	December 31, 2011
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Amortized Cost
Agency mortgage-backed securities:
GNMA	$	124,612	$	7,113	$	—		$	117,499
FNMA		191,197		8,072		(3	)		183,128
FHLMC		80,051		2,136		—			77,915

Total agency mortgage-backed securities	$	395,860	$	17,321	$	(3	)	$	378,542


Residential mortgage-backed securities:
Prime	$	12,831	$	8	$	(2,279	)	$	15,102
Alt-A		1,926		—		(527	)		2,453
Subprime		—		—		—			—
Non-US RMBS		8,391		—		(42	)		8,433

Total residential mortgage-backed securities	$	23,148	$	8	$	(2,848	)	$	25,988

The following table sets forth the composition of the investments categorized as residential mortgage obligations in our portfolio by generally equivalent S&P and Moody’s ratings (not all securities in our portfolio are rated by both S&P and Moody’s) as of December 31, 2011.


In thousands		December 31, 2011
Equivalent S&P Rating	Equivalent Moody’s Rating	Fair Value		Book Value		Net Unrealized Gain (Loss)
AAA/AA/A	Aaa/Aa/A	$	10,675	$	11,099	$	(424	)
BBB	Baa		810		929		(119	)
BB	Ba		2,181		2,418		(237	)
B	B		1,957		2,380		(423	)
CCC or lower	Caa or lower		7,525		9,162		(1,637	)
NR	NR		—		—		—

		$	23,148	$	25,988	$	(2,840	)

Details of the collateral of our asset-backed securities portfolio as of December 31, 2011 are presented below:

		$00000		$00000		$00000		$00000		$00000		$00000		$00000		$00000		$00000
In thousands	AAA		AA		A		BBB		BB		CCC		Fair Value		Amortized Cost		Unrealized Gain (Loss)
Auto loans	$	—	$	5,763	$	3,762	$	—	$	—	$	—	$	9,525	$	9,376	$	149
Credit cards		13,905		—		—		—		—		—		13,905		13,597		308
Time Share		—		—		15,723		—		—		—		15,723		15,554		169
Student Loans		5,018		2,868		—		—		—		—		7,886		7,933		(47	)
Miscellaneous		1,893		—		—		—		—		2		1,895		1,854		41

Total	$	20,816	$	8,631	$	19,485	$	—	$	—	$	2	$	48,934	$	48,314	$	620

The following table sets forth the composition of the investments categorized as commercial mortgage-backed securities in our portfolio by generally equivalent S&P and Moody’s ratings (not all securities in our portfolio are rated by both S&P and Moody’s) as of December 31, 2011.


In thousands		December 31, 2011
Equivalent S&P Rating	Equivalent Moody’s Rating	Fair Value		Book Value		Net Unrealized Gain (Loss)
AAA/AA/A	Aaa/Aa/A	$	216,034	$	206,119	$	9,915
BBB	Baa		—		—		—
BB	Ba		—		—		—
B	B		—		—		—
CCC or lower	Caa or lower		—		—		—
NR	NR		—		—		—

		$	216,034	$	206,119	$	9,915

The following table sets forth the composition of the investments categorized as corporate bonds in our portfolio by generally equivalent S&P and Moody’s ratings (not all securities in our portfolio are rated by both S&P and Moody’s) as of December 31, 2011.


In thousands		December 31, 2011
Equivalent S&P Rating	Equivalent Moody’s Rating	Fair Value		Book Value		Net Unrealized Gain (Loss)
AAA/AA/A	Aaa/Aa/A	$	366,132	$	357,462	$	8,670
BBB	Baa		91,055		90,754		301
BB	Ba		—		—		—
B	B		—		—		—
CCC or lower	Caa or lower		—		—		—
NR	NR		—		—		—

		$	457,187	$	448,216	$	8,971

The company holds securities of $64.9 million at fair value and $65.6 million at amortized cost primarily in non-sovereign fixed maturities in the European Union. This represents 3.3% of our total fixed income and equity portfolio. Our largest exposure is in France with a total of $28.8 million followed by the Netherlands with a total of $26.6 million. We have no exposure to Greece, Portugal, Italy or Spain.

The following table summarizes all securities in a gross unrealized loss position as of December 31, 2011 and 2010, showing the aggregate fair value and gross unrealized loss by the length of time those securities had continuously been in a gross unrealized loss position as well as the number of securities:


	December 31, 2011						December 31, 2010
In thousands, except # of securities	Number of Securities		Fair Value		Gross Unrealized Loss		Number of Securities		Fair Value		Gross Unrealized Loss
Fixed maturities:
U.S. Government Treasury bonds, agency bonds, and foreign government bonds
0-6 months		7	$	58,587	$	98		36	$	163,253	$	4,499
7-12 months				—		—		—		—		—
> 12 months		2		6,883		285		—		—		—

Subtotal		9	$	65,470	$	383		36	$	163,253	$	4,499
States, municipalities and political subdivisions
0-6 months		7	$	5,894	$	72		57	$	112,291	$	3,749
7-12 months		1		216		1		1		1,004		20
> 12 months		5		2,420		35		4		1,317		36

Subtotal		13	$	8,530	$	108		62	$	114,612	$	3,805
Agency mortgage-backed securities
0-6 months		3	$	5,087	$	3		36	$	139,226	$	2,434
7-12 months				—		—		—		—		—
> 12 months				—		—		—		—		—

Subtotal		3	$	5,087	$	3		36	$	139,226	$	2,434
Residential mortgage obligations
0-6 months		6	$	6,672	$	184		3	$	3,215	$	20
7-12 months		7		5,250		313		—		—		—
> 12 months		47		10,749		2,351		52		15,939		2,373

Subtotal		60	$	22,671	$	2,848		55	$	19,154	$	2,393
Asset-backed securities
0-6 months		2	$	4,933	$	12		7	$	28,175	$	292
7-12 months		5		6,645		63		—		—		—
> 12 months		1		2		—		1		2		—

Subtotal		8	$	11,580	$	75		8	$	28,177	$	292
Commercial mortgage-backed securities
0-6 months		6	$	5,465	$	29		16	$	78,212	$	1,755
7-12 months		3		6,840		550		—		—		—
> 12 months		3		1,503		14		2		491		39

Subtotal		12	$	13,808	$	593		18	$	78,703	$	1,794
Corporate bonds
0-6 months		52	$	135,516	$	4,539		98	$	214,180	$	5,545
7-12 months		18		27,561		1,457		—		—		—
> 12 months		8		14,898		776		—		—		—

Subtotal		78	$	177,975	$	6,772		98	$	214,180	$	5,545

Total fixed maturities		183	$	305,121	$	10,782		313	$	757,305	$	20,762


Equity securities - common stocks
0-6 months		4	$	3,320	$	587		1	$	322	$	10
7-12 months		1		1,629		371		—		—		—
> 12 months		—		—		—		—		—		—

Total equity securities		5	$	4,949	$	958		1	$	322	$	10

We analyze the unrealized losses quarterly to determine if any are other-than-temporary. The above unrealized losses have been determined to be temporary based on our policies.

In the above table the gross unrealized loss for the greater than 12 months category consists primarily of residential mortgage-backed securities. Residential mortgage-backed securities are 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.

To determine whether the unrealized loss on structured securities is other-than-temporary, we project an expected principal loss under a range of scenarios and utilize the most likely outcomes. The analysis relies on actual collateral performance measures such as default rate, prepayment rate and loss severity. These assumptions are applied throughout the remaining term of the deal, incorporating the transaction structure and priority of payments, to generate loss adjusted cash flows. Results of the analysis will indicate whether the security 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 break even default rate is also calculated. A comparison of the break even default rate to the actual default rate provides an indication of the level of cushion or coverage to the first dollar principal loss. The analysis applies the stated assumptions throughout the remaining term of the transaction to forecast cash flows, which are then applied through the transaction structure to determine whether there is a loss to the security. For securities in which a tranche loss is present, and the net present value of loss adjusted cash flows is less than book value, an impairment is recognized. The output data also includes a number of additional metrics such as average life remaining, original and current credit support, over 60 day delinquency and security rating.

Prepayment assumptions associated with the mortgage-based and asset-backed securities are reviewed on a periodic basis. When changes in prepayment assumptions are deemed necessary as the result of actual prepayments differing from anticipated prepayments, securities are revalued based upon the new prepayment assumptions utilizing the retrospective accounting method.

As of December 31, 2011, the largest single unrealized loss by issuer in the fixed maturities was $1.4 million.

The following table shows the S&P ratings and equivalent Moody’s ratings of the fixed maturity securities in our portfolio with gross unrealized losses as of December 31, 2011. Not all of the securities are rated by S&P and/or Moody’s.


		December 31, 2011
In thousands		Gross Unrealized Loss					Fair Value
Equivalent S&P Rating	Equivalent Moody’s Rating	Amount		Percent of Total			Amount		Percent of Total
AAA/AA/A	Aaa/Aa/A	$	6,573		61	%	$	245,941		81	%
BBB	Baa		1,901		18	%		47,561		15	%
BB	Ba		245		2	%		1,703		1	%
B	B		423		4	%		1,957		1	%
CCC or lower	Caa or lower		1,637		15	%		7,527		2	%
NR	NR		3		0	%		432		0	%

		$	10,782		100	%	$	305,121		100	%

As of December 31, 2011, the gross unrealized losses in the table directly above were related to fixed maturity securities that are rated investment grade, which is defined as a security having an S&P rating of “BBB–” or higher, or a Moody’s rating of “Baa3” or higher, except for $2.3 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.

The contractual maturity by the number of years until maturity for fixed maturity securities with unrealized losses as of December 31, 2011 is shown in the following table:


	December 31, 2011
	Gross Unrealized Losses					Fair Value
In thousands	Amount		Percent of Total			Amount		Percent of Total
Due in one year or less	$	8		0	%	$	5,570		2	%
Due after one year through five years		4,992		46	%		190,234		62	%
Due after five years through ten years		1,786		17	%		42,649		14	%
Due after ten years		477		4	%		13,522		4	%
Mortgage- and asset-backed securities		3,519		33	%		53,146		18	%

Total	$	10,782		100	%	$	305,121		100	%

The following table summarizes the gross unrealized investment losses by length of time where the fair value is less than 80% of amortized cost as of December 31, 2011.


	December 31, 2011
In thousands	Fixed Maturities		Equity Securities		Total
Less than three months	$	—	$	243	$	243
Longer than three months and less than six months				103		103
Longer than six months and less than twelve months		—		—		—
Longer than twelve months		1,039		—		1,039

Total	$	1,039	$	346	$	1,385

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


	Year Ended December 31,
	2011				2010				2009
In thousands, except # of securities	Number of Securities		Amount		Number of Securities		Amount		Number of Securities		Amount
Total other than temporary impairment losses:
Corporate and other bonds		1	$	109		—	$	—		2	$	564
Commercial mortgage-backed securities		—		—		—		—		—		—
Residential mortgage-backed securities		19		2,616		18		1,835		39		19,783
Asset-backed securities		—		—		—		—		1		143
Equities		2		892		2		387		56		8,775

Total		22	$	3,617		20	$	2,222		98	$	29,265
Less: Portion of loss in accumulated other comprehensive income (loss):
Corporate and other bonds			$	—			$	—			$	—
Commercial mortgage-backed securities				—				—				—
Residential mortgage-backed securities				1,632				1,142				17,324
Asset-backed securities				—				—				64
Equities				—				—				—

Total			$	1,632			$	1,142			$	17,388
Impairment losses recognized in earnings:
Corporate and other bonds			$	109			$	—			$	564
Commercial mortgage-backed securities				—				—				—
Residential mortgage-backed securities				984				693				2,458
Asset-backed securities				—				—				80
Equities				892				387				8,775

Total			$	1,985			$	1,080			$	11,877

During 2011, we recognized OTTI losses of $2.0 million related to non-agency mortgage-backed securities, two equity securities and one corporate bond. During the comparable periods in 2010 and 2009, we recognized OTTI losses of $1.1 million and $11.9 million, respectively, related to residential mortgage-backed securities and equity securities. The significant inputs used to measure the amount of credit loss recognized in earnings were actual delinquency rates, default probability assumptions, severity assumptions and prepayment assumptions. Projected losses are a function of both loss severity and probability of default. Default probability and severity assumptions differ based on property type, vintage and the stress of the collateral. We do not intend to sell any of these securities and it is more likely than not that we will not be required to sell these securities before the recovery of the amortized cost basis.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Market Sensitive Instruments and Risk Management

Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments. We are exposed to potential loss to various market risks, including changes in interest rates, equity prices and foreign currency exchange rates. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying assets are traded. The following is a discussion of our primary market risk exposures and how those exposures have been managed through December 31, 2011. Our market risk sensitive instruments are entered into for purposes other than trading and speculation.

The carrying value of our investment portfolio as of December 31, 2011 was $2.2 billion of which 84.5% was invested in fixed maturity securities. The primary market risk to our investment portfolio is interest rate risk associated with investments in fixed maturity securities. We do not have any commodity risk exposure.

For fixed maturity securities, short-term liquidity needs and the potential liquidity needs of the business are key factors in managing the portfolio. The portfolio duration relative to the liabilities’ duration is primarily managed through investment transactions.

There were no significant changes regarding the investment portfolio in our primary market risk exposures or in how those exposures were managed for the year ended December 31, 2011. We do not currently anticipate significant changes in our primary market risk exposures or in how those exposures are managed in future reporting periods based upon what is known or expected to be in effect in future reporting periods.

Interest Rate Risk Sensitivity Analysis

Sensitivity analysis is defined as the measurement of potential loss in future earnings, fair values or cash flows of market sensitive instruments resulting from one or more selected hypothetical changes in interest rates and other market rates or prices over a selected time. In our sensitivity analysis model, a hypothetical change in market rates is selected that is expected to reflect reasonably possible near-term changes in those rates. “Near-term” means a period of time going forward up to one year from the date of the Consolidated Financial Statements. Actual results may differ from the hypothetical change in market rates assumed in this disclosure, especially since this sensitivity analysis does not reflect the results of any actions that would be taken by us to mitigate such hypothetical losses in fair value.

In this sensitivity analysis model, we use fair values to measure our potential loss. The sensitivity analysis model includes fixed maturities and short-term investments. The primary market risk to our market-sensitive instruments is interest rate risk. The sensitivity analysis model uses a 50 and 100 basis points change in interest rates to measure the hypothetical change in fair value of financial instruments included in the model. Changes in interest rates will have an immediate effect on comprehensive income and shareholders’ equity but will not ordinarily have an immediate effect on net income. As interest rates rise, the market value of our interest rate sensitive securities will decrease. Conversely, as interest rates fall, the market value of our interest rate sensitive securities will increase.

For invested assets, modified duration modeling is used to calculate changes in fair values. Durations on invested assets are adjusted for call, put and interest rate reset features. Duration on tax-exempt securities is adjusted for the fact that the yield on such securities is less sensitive to changes in interest rates compared to Treasury securities. Invested asset portfolio durations are calculated on a market value weighted basis, including accrued investment income, using holdings as of December 31, 2011.

The following table summarizes the effect that an immediate, parallel shift in the interest rate yield curve would have had on our portfolio as of December 31, 2011.


	Interest Rate Shift in Basis Points
In thousands	-100			-50			0		+50			+100
December 31, 2011:
Total market value	$	2,079,845		$	2,044,665		$	2,010,289	$	1,975,712		$	1,939,326
Market value change from base		3.46	%		1.71	%				-1.72	%		-3.53	%
Change in unrealized value	$	69,556		$	34,376		$	—	$	(34,577	)	$	(70,963	)

December 31, 2010:
Total market value	$	2,132,182		$	2,084,353		$	2,035,302	$	1,986,455		$	1,938,625
Market value change from base		4.76	%		2.41	%				-2.40	%		-4.75	%
Change in unrealized value	$	96,880		$	49,051		$	—	$	(48,847	)	$	(96,677	)

Equity Price Risk

Our portfolio of equity securities currently valued at $95.8 million, which we carry on our balance sheet at fair value, has exposure to price risk. This risk is defined as the potential loss in fair value resulting from adverse changes in stock prices. Our U.S. equity portfolio is benchmarked to the S&P 500 index and changes in that index may approximate the impact on our portfolio.

Foreign currency exchange rate risk

Our Lloyd’s Operations are exposed to foreign currency exchange rate risk primarily related to foreign-denominated cash, cash equivalents and marketable securities, premiums receivable, reinsurance recoverables on paid and unpaid losses and loss adjustment expenses as well as reserves for losses and loss adjustment expenses. The principal currencies creating foreign currency exchange risk for the Lloyd’s Operations are the British pound, the Euro and the Canadian dollar. The Lloyd’s Operations manages its foreign currency exchange rate risk primarily through asset-liability matching.

Based on the primary foreign-denominated balances within the Lloyd’s Operations as of December 31, 2011, an assumed 5%, 10% and 15% negative currency movement would result in changes as follows:

		000,000		000,000			000,000			000,000
	December 31, 2011
			Negative Currency Movement of
In thousands	USD Equivalent		5%			10%			15%
Cash, cash equivalents and marketable securities at fair value	$	85.8	$	(4.3	)	$	(8.6	)	$	(12.9	)
Premiums receivable	$	22.3	$	(1.1	)	$	(2.2	)	$	(3.3	)
Reinsurance recoverables on paid, unpaid losses and LAE	$	58.4	$	(2.9	)	$	(5.8	)	$	(8.8	)
Reserves for losses and loss adjustment expenses	$	154.0	$	7.7		$	15.4		$	23.1

Item 8. Financial Statements and Supplementary Data

The Consolidated Financial Statements required in response to this section are submitted as part of Item 15(a) of this report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.

Management’s Report on Internal Control over Financial Reporting

(a) Management’s annual report on internal control over financial reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2011.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.

The Company’s independent registered public accounting firm, KPMG LLP, has audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011, as stated in their report in item (b) below.

(b)

Attestation report of the registered public accounting firm

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

The Navigators Group, Inc.

We have audited The Navigators Group, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Navigators Group, Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included under Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, The Navigators Group, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The Navigators Group, Inc. and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of income, stockholders’ equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2011, and our report dated February 17, 2012 expressed an unqualified opinion on those consolidated financial statements.

KPMG LLP

New York, New York

February 17, 2012

(b) Changes in internal control over financial reporting

There have been no changes during our fourth fiscal quarter in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Information concerning our directors and executive officers is contained under “Election of Directors” in our 2012 Proxy Statement, which information is incorporated herein by reference. Information concerning the Audit Committee and the Audit Committee’s financial expert of the Company is contained under “Board of Directors and Committees” in our 2012 Proxy Statement, which information is incorporated herein by reference.

We have adopted a Code of Ethics for our Chief Executive Officer and Senior Financial Officers, which is applicable to our Chief Executive Officer, Chief Financial Officer, Treasurer, Controller and all other persons performing similar functions. A copy of such Code is available on our website at www.navg.com under the Corporate Governance link. Any amendments to, or waivers of, such Code which apply to any of the financial professionals listed above will be disclosed on our website under the same link promptly following the date of such amendment or waiver.

Item 11. Executive Compensation

Information concerning executive compensation will be contained under “Compensation Discussion and Analysis” in our 2012 Proxy Statement, which information is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information concerning the security ownership of the directors and officers of the Company is contained under “Election of Directors” and “Compensation Discussion and Analysis” in our 2012 Proxy Statement, which information is incorporated herein by reference. Information concerning securities that are available to be issued under our equity compensation plans is contained under “Equity Compensation Plan Information” in our 2011 Proxy Statement, which information is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information concerning relationships and related transactions of our directors and officers is contained under “Related Party Transactions” in our 2012 Proxy Statement, which information is incorporated herein by reference. Information concerning director independence is contained under “Board of Directors and Committees” in our 2012 Proxy Statement, which information is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

Information concerning the principal accountant’s fees and services for the Company is contained under “Independent Registered Public Accounting Firm” in the Company’s 2012 Proxy Statement, which information is incorporated herein by reference.

PART IV

Item 15. Exhibits, Financial Statement Schedules

The following documents are filed as part of this report:

a. Financial Statements and Schedules: The financial statements and schedules that are listed in the accompanying Index to Consolidated Financial Statements and Schedules on page F-1.

b. Exhibits: The exhibits that are listed in the accompanying Index to Exhibits on the page which immediately follows page S-8. The exhibits include the management contracts and compensatory plans or arrangements required to be filed as exhibits to this Form 10-K by Item 601(a)(10)(iii) of Regulation S-K.

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	The Navigators Group, Inc.
	(Company)

Dated: February 17, 2012	By:	/s/ Ciro M. DeFalco
		Ciro M. DeFalco
		Senior Vice President and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.


Name	Title	Date

/s/ TERENCE N. DEEKS Terence N. Deeks	Chairman	February 17, 2012

/s/ STANLEY A. GALANSKI Stanley A. Galanski	President and Chief Executive Officer (Principal Executive Officer)	February 17, 2012

/s/ CIRO M. DEFALCO Ciro M. DeFalco	Senior Vice President and Chief Financial Officer (Principal Financial Officer)	February 17, 2012

/s/ H.J. MERVYN BLAKENEY H.J. Mervyn Blakeney	Director	February 17, 2012

/s/ W. THOMAS FORRESTER W. Thomas Forrester	Director	February 17, 2012

/s/ GEOFFREY E. JOHNSON Geoffrey E. Johnson	Director	February 17, 2012

/s/ JOHN F. KIRBY John F. Kirby	Director	February 17, 2012

/s/ ROBERT V. MENDELSOHN Robert V. Mendelsohn	Director	February 17, 2012

/s/ MARJORIE D. RAINES Marjorie D. Raines	Director	February 17, 2012

/s/ JANICE C. TOMLINSON Janice C. Tomlinson	Director	February 17, 2012

/s/ MARC M. TRACT Marc M. Tract	Director	February 17, 2012

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES


		Page

Report of Independent Registered Public Accounting Firm			F-2

Consolidated Balance Sheets as of December 31, 2011 and 2010			F-3

Consolidated Statements of Income for each of the years ended December 31, 2011, 2010 and 2009			F-4

Consolidated Statements of Stockholders’ Equity for each of the years ended December 31, 2011, 2010 and 2009			F-5

Consolidated Statements of Comprehensive Income for each of the years ended December 31, 2011, 2010 and 2009			F-6

Consolidated Statements of Cash Flows for each of the years ended December 31, 2011, 2010 and 2009			F-7

Notes to Consolidated Financial Statements			F-8

SCHEDULES:

Schedule I	Summary of Consolidated Investments-Other Than Investment in Related Parties		S-1

Schedule II	Condensed Financial Information of Registrant		S-2

Schedule III	Supplementary Insurance Information		S-5

Schedule IV	Reinsurance		S-6

Schedule V	Valuation and Qualifying Accounts		S-7

Schedule VI	Supplementary Information Concerning Property-Casualty Insurance Operations		S-8

Index to Exhibits

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

The Navigators Group, Inc.

We have audited the accompanying consolidated balance sheets of The Navigators Group, Inc. and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of income, stockholders’ equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2011. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Navigators Group, Inc. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The Navigators Group, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 17, 2012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

KPMG LLP

New York, New York

February 17, 2012

F-2

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

		September 30,			September 30,
	December 31,
	2011			2010
ASSETS
Investments and cash:
Fixed maturities, available-for-sale, at fair value (amortized cost: 2011, $1,816,710; 2010, $1,855,598)	$	1,888,069		$	1,882,245
Equity securities, available-for-sale, at fair value (cost: 2011, $73,567; 2010, $64,793)		95,849			87,258
Short-term investments, at cost which approximates fair value		122,220			153,057
Cash		127,360			31,768

Total investments and cash		2,233,498			2,154,328

Premiums receivable		255,725			188,368
Prepaid reinsurance premiums		164,162			156,869
Reinsurance recoverable on paid losses		43,791			56,658
Reinsurance recoverable on unpaid losses and loss adjustment expenses		845,445			843,296
Deferred policy acquisition costs		63,984			55,201
Accrued investment income		14,492			15,590
Goodwill and other intangible assets		6,869			6,925
Current income tax receivable, net		15,391			1,054
Deferred income tax, net		—			15,141
Other assets		26,650			38,029

Total assets	$	3,670,007		$	3,531,459

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses	$	2,082,679		$	1,985,838
Unearned premiums		532,628			463,515
Reinsurance balances payable		108,699			105,904
Senior notes		114,276			114,138
Deferred income tax, net		6,291			—
Accounts payable and other liabilities		21,999			32,710

Total liabilities		2,866,572			2,702,105

Stockholders’ equity:
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued	$	—		$	—
Common stock, $.10 par value, authorized 50,000,000 shares, issued 17,467,615 shares for 2011 and 17,274,440 shares for 2010		1,746			1,728
Additional paid-in capital		322,133			312,588
Treasury stock, at cost (3,511,380 shares for 2011 and 1,532,273 shares for 2010)		(155,801	)		(64,935	)
Retained earnings		565,109			539,512
Accumulated other comprehensive income		70,248			40,461

Total stockholders’ equity		803,435			829,354

Total liabilities and stockholders’ equity	$	3,670,007		$	3,531,459

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

F-3

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share amounts)

		September 30,			September 30,			September 30,
	Year Ended December 31,
	2011			2010			2009

Gross written premiums	$	1,108,216		$	987,201		$	1,044,918

Revenues:
Net written premiums	$	753,798		$	653,938		$	701,255
Change in unearned premiums		(62,153	)		5,993			(17,892	)

Net earned premiums		691,645			659,931			683,363
Net investment income		63,500			71,662			75,512
Total other-than-temporary impairment losses		(3,617	)		(2,222	)		(29,265	)
Portion of loss recognized in other comprehensive income (before tax)		1,632			1,142			17,388

Net other-than-temporary impairment losses recognized in earnings		(1,985	)		(1,080	)		(11,877	)
Net realized gains (losses)		11,996			41,319			9,217
Other income (expense)		1,229			5,143			6,665

Total revenues		766,385			776,975			762,880


Expenses:
Net losses and loss adjustment expenses		476,997			421,155			435,998
Commission expenses		110,437			109,113			98,908
Other operating expenses		138,029			139,700			132,671
Interest expense		8,188			8,178			8,455

Total expenses		733,651			678,146			676,032


Income (loss) before income taxes		32,734			98,829			86,848


Income tax expense (benefit)		7,137			29,251			23,690


Net income (loss)	$	25,597		$	69,578		$	63,158


Net income per common share:
Basic	$	1.71		$	4.33		$	3.73
Diluted	$	1.69		$	4.24		$	3.65

Average common shares outstanding:
Basic		14,980,429			16,064,770			16,935,488
Diluted		15,183,285			16,415,266			17,322,020

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

F-4

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

		September 30,			September 30,			September 30,
	Year Ended December 31,
	2011			2010			2009
Preferred stock
Balance at beginning and end of period	$	—		$	—		$	—


Common stock
Balance at beginning of year	$	1,728		$	1,721		$	1,708
Shares issued under stock plan		18			7			13

Balance at end of period	$	1,746		$	1,728		$	1,721


Additional paid-in capital
Balance at beginning of year	$	312,588		$	304,505		$	298,872
Share-based compensation		9,545			8,083			5,633

Balance at end of period	$	322,133		$	312,588		$	304,505


Treasury stock, at cost
Balance at beginning of year	$	(64,935	)	$	(18,296	)	$	(11,540	)
Treasury stock acquired		(90,866	)		(51,980	)		(6,756	)
Issuance related to share-based compensation		—			5,341			—

Balance at end of period	$	(155,801	)	$	(64,935	)	$	(18,296	)


Retained earnings
Balance at beginning of year	$	539,512		$	469,934		$	406,776
Net income (loss)		25,597			69,578			63,158

Balance at end of period	$	565,109		$	539,512		$	469,934


Accumulated other comprehensive income, net of tax
Balance at beginning of year	$	40,461		$	43,655		$	(6,499	)
Change in net unrealized gains on securities		29,469			(660	)		46,020
Change in net non-credit other-than-temporary impairment losses		(83	)		(2,824	)		4,000
Change in net cumulative translation adjustments		401			290			134

Balance at end of period	$	70,248		$	40,461		$	43,655


Total stockholders’ equity at end of period	$	803,435		$	829,354		$	801,519

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

F-5

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

		September 30,		September 30,			September 30,
	Year Ended December 31,
	2011		2010			2009
Net income (loss)	$	25,597	$	69,578		$	63,158

Other comprehensive income (loss):
Change in net unrealized gains (losses) on investments, net of deferred tax of $15,143, $1,324 and $25,602 in 2011, 2010 and 2009, respectively ⁽¹⁾		29,386		(3,484	)		50,020
Change in foreign currency translation gains (losses), net of deferred tax of $192, $157 and $72 in 2011, 2010 and 2009, respectively		401		290			134

Other comprehensive income (loss)		29,787		(3,194	)		50,154

Comprehensive income (loss)	$	55,384	$	66,384		$	113,312

⁽¹⁾	Disclosure of reclassification amount, net of tax:

		September 30,			September 30,			September 30,
Unrealized gains (losses) on investments arising during period	$	34,348		$	12,339		$	33,910
Reclassification adjustment for net realized gains (losses) included in net income		(4,807	)		(16,797	)		1,624
Reclassification adjustment for other-than-temporary impairment losses recognized in net income		(155	)		974			14,486

Change in net unrealized gains (losses) on investments, net of tax	$	29,386		$	(3,484	)	$	50,020

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

F-6

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

		September 30,			September 30,			September 30,
	Year Ended December 31,
	2011			2010			2009
Operating activities:
Net income (loss)	$	25,597		$	69,578		$	63,158
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation & amortization		4,059			4,362			4,551
Deferred income taxes		6,224			17,189			(2,285	)
Net realized (gains) losses		(11,996	)		(41,319	)		(9,217	)
Net other-than-temporary losses recognized in earnings		1,985			1,080			11,877
Changes in assets and liabilities:
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses		10,084			(17,359	)		42,781
Reserves for losses and loss adjustment expenses		98,879			67,701			54,050
Prepaid reinsurance premiums		(7,477	)		5,298			27,788
Unearned premiums		69,602			(10,990	)		(8,872	)
Premiums receivable		(75,973	)		4,415			(20,447	)
Deferred policy acquisition costs		(8,815	)		1,212			(8,394	)
Accrued investment income		961			1,856			(11	)
Reinsurance balances payable		2,865			7,450			(42,808	)
Current income taxes		(17,226	)		3,092			(12,094	)
Other		19,569			4,656			3,833

Net cash provided by (used in) operating activities		118,338			118,221			103,910


Investing activities:
Fixed maturities
Redemptions and maturities		166,657			206,461			135,374
Sales		666,976			1,191,796			473,913
Purchases		(803,568	)		(1,439,725	)		(728,216	)
Equity securities
Sales		73,590			6,942			18,899
Purchases		(75,894	)		(23,123	)		(21,947	)
Change in payable for securities		12,432			1,043			(15,836	)
Net change in short-term investments		30,384			22,713			47,821
Purchase of property and equipment		(4,571	)		(2,568	)		(2,781	)

Net cash provided by (used in) investing activities		66,006			(36,461	)		(92,773	)


Financing activities:
Purchase of treasury stock		(90,866	)		(51,980	)		(6,756	)
Purchase of Senior notes		—			—			(7,000	)
Proceeds of stock issued from employee stock purchase plan		945			868			727
Proceeds of stock issued from exercise of stock options		1,169			611			944

Net cash provided by (used in) financing activities		(88,752	)		(50,501	)		(12,085	)


Increase (decrease) in cash		95,592			31,259			(948	)
Cash at beginning of year		31,768			509			1,457

Cash at end of period	$	127,360		$	31,768		$	509


Supplemental cash information:
Income taxes paid, net	$	14,145		$	6,398		$	37,089
Interest paid	$	8,050		$	8,050		$	8,355
Issuance of stock to directors	$	210		$	190		$	210

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

F-7

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Summary of Significant Accounting Policies

Organization

The accompanying consolidated financial statements, consisting of the accounts of The Navigators Group, Inc., a Delaware holding company established in 1982, and its wholly-owned subsidiaries, are prepared on the basis of U.S. generally accepted accounting principles (“GAAP” or “U.S. GAAP”). 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 terms “Parent” or “Parent Company” are used to mean The Navigators Group, Inc. without its subsidiaries. All significant intercompany transactions and balances have been eliminated. Certain amounts for prior years have been reclassified to conform to the current year’s presentation. Commission income, previously disclosed as a separate line item in the Consolidated Statements of Income, is now included in Other income (expense).

We are an international insurance company focusing on specialty products within the overall property and casualty insurance market. Our largest product line and most long-standing area of specialization is ocean marine insurance. We have also developed specialty niches in professional liability insurance as well as other specialty insurance lines such as contractors’ liability and commercial primary and excess liability coverages.

We conduct operations through our Insurance Companies and our Lloyd’s Operations segments. The Insurance Companies segment consists of Navigators Insurance Company, which includes a United Kingdom Branch (the “U.K. Branch”), and Navigators Specialty Insurance Company, which underwrites specialty and professional liability insurance on an excess and surplus lines basis. All of the insurance business written by Navigators Specialty Insurance Company is fully reinsured by Navigators Insurance Company pursuant to a 100% quota share reinsurance agreement. Our Lloyd’s Operations segment includes Navigators Underwriting Agency Ltd. (“NUAL”), a Lloyd’s of London (“Lloyd’s”) underwriting agency which manages Lloyd’s Syndicate 1221 (“Syndicate 1221”). Our Lloyd’s Operations primarily underwrite marine and related lines of business along with offshore energy, professional liability insurance and construction coverages for onshore energy business at Lloyd’s through Syndicate 1221. We controlled 100% of Syndicate 1221’s stamp capacity for the 2011, 2010 and 2009 underwriting years through our wholly owned subsidiary, Navigators Corporate Underwriters Ltd., which is referred to as a corporate name in the Lloyd’s market. We have also established underwriting agencies in Antwerp, Belgium, Stockholm, Sweden and Copenhagen, Denmark, which underwrite risks pursuant to binding authorities with NUAL into Syndicate 1221. For financial information by segment, refer to Note 3, Segment Information, to the Consolidated Financial Statements.

F-8

Significant Accounting Policies

Cash

Cash includes cash on hand, demand deposits with banks and treasury bills with original maturities of less than 90 days.

Investments

As of December 31, 2011 and 2010, all fixed maturity and equity securities held by the Company were carried at fair value and classified as available-for-sale. Available-for-sale securities are debt and equity securities not classified as either held-to-maturity securities or trading securities and are reported at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income as a separate component of stockholders’ equity. Fixed maturity securities include bonds, mortgage-backed and asset-backed securities. Equity securities consist of common stock.

Short-term investments are carried at cost, which approximates fair value. Short-term investments mature within one year from the purchase date.

All prices for our fixed maturities, equity securities and short-term investments valued as Level 1, Level 2 or Level 3 in the fair value hierarchy, as defined in the Financial Accounts Standards Board (“FASB”) Accounting Standards Codification 820 (“ASC 820”), Fair Value Measurements, are received from independent pricing services utilized by one of our outside investment managers whom we employ to assist us with investment accounting services. This 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 of the investment management firm, 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 fair value hierarchy. Any pricing where the input is based solely on a broker price is deemed to be a Level 3 price. Management has reviewed this process by which the manager determines the prices and has obtained alternative pricing to validate a sample of the prices and assess their reasonableness.

Premiums and discounts on fixed maturity securities are amortized into interest income over the life of the security under the interest method. For mortgage-backed and asset-backed securities, anticipated prepayments and expected maturities are utilized in applying the interest rate method to our mortgage-backed and asset-backed securities. An effective yield is calculated based on projected principal cash flows at the time of original purchase. The effective yield is used to amortize the purchase price of the security over the security’s expected life. Book values are adjusted to reflect the amortization of premium or accretion of discount on a monthly basis. The projected principal cash flows are based on certain prepayment assumptions which are generated using a prepayment model. The prepayment model uses a number of factors to estimate prepayment activity including the current levels of interest rates (refinancing incentive), time of year (seasonality), economic activity (including housing turnover) and term and age of the underlying collateral (burnout, seasoning). Prepayment assumptions associated with the mortgage-backed and asset-backed securities are reviewed on a periodic basis. When changes in prepayment assumptions are deemed necessary as the result of actual prepayments differing from anticipated prepayments, securities are revalued based upon the new prepayment assumptions utilizing the retrospective adjustment method, whereby the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The investment in such securities is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the security. Such adjustments, if any, are included in net investment income for the current period being reported.

Realized gains and losses on sales of investments are recognized when the related trades are executed and are determined on the basis of the specific identification method.

F-9

Impairment of Invested Assets

Syndicate 1221

We record Syndicate 1221’s assets, liabilities, revenues and expenses under U.S. GAAP. We record adjustments to recognize underwriting results as incurred, including the ultimate cost of losses incurred. These adjustments to losses are based on actuarial analysis of Syndicate 1221’s accounts, including forecasts of expected ultimate losses.

Translation of Foreign Currencies

Functional currency assets and liabilities are translated into U.S. dollars using period end rates of exchange and the related translation adjustments are recorded as a separate component of Accumulated other comprehensive income. Statement of income amounts expressed in functional currencies are translated using average exchange rates. Realized gains and losses resulting from foreign currency transactions are recorded in Other income (expense) in our Consolidated Statements of Income.

F-10

Premium Revenues

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

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

Reinsurance Ceded

In the normal course of business, reinsurance is purchased by us from insurers or reinsurers to reduce the amount of loss arising from claims. In order to determine the proper accounting for the reinsurance, management analyzes the reinsurance agreements to determine whether the reinsurance should be classified as prospective or retroactive based upon the terms of the reinsurance agreement and whether the reinsurer has assumed significant insurance risk to the extent that the reinsurer may realize a significant loss from the transaction.

Prospective reinsurance is reinsurance in which an assuming company agrees to reimburse the ceding company for losses that may be incurred as a result of future insurable events covered under contracts subject to the reinsurance. Retroactive reinsurance is reinsurance in which an assuming company agrees to reimburse a ceding company for liabilities incurred as a result of past insurable events covered under contracts subject to the reinsurance. The analysis of the reinsurance contract terms has determined that all of our reinsurance is prospective reinsurance with adequate transfer of insurance risk to the reinsurer to qualify for reinsurance accounting treatment.

Ceded reinsurance premiums and any related ceding commission and ceded losses are reflected as reductions of the respective income or expense accounts over the terms of the reinsurance contracts. Prepaid reinsurance premiums represent the portion of premiums ceded to reinsurers applicable to the unexpired terms of the reinsurance contracts in force. Reinsurance reinstatement premiums are recognized in the same period as the loss event that gave rise to the reinstatement premiums. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Unearned premiums ceded and estimates of amounts recoverable from reinsurers on paid and unpaid losses are reflected as assets. Provisions are made for estimated unrecoverable reinsurance.

Deferred Policy Acquisition Costs

Costs of acquiring business which vary with and are directly related to the production of business are deferred and amortized ratably over the period that the related premiums are recognized as revenue. Such costs primarily include commission expense, other underwriting expenses and premium taxes. The method of computing deferred policy acquisition costs limits the deferral to their estimated net realizable value based on the related unearned premiums and takes into account anticipated losses and loss adjustment expenses, commission expense and operating expenses based on historical and current experience as well as anticipated investment income.

F-11

Reserves for Losses and Loss Adjustment Expenses

Unpaid losses and loss adjustment expenses are determined on an individual basis for claims reported on direct business for insureds, from reports received from ceding insurers for insurance assumed from such insurers and on estimates based on Company and industry experience for IBNR claims and loss adjustment expenses. Indicated IBNR loss reserves are calculated by our actuaries using several standard actuarial methodologies, including the paid and incurred loss development and the paid and incurred Bornheutter-Ferguson loss methods. Additional analyses, such as frequency/severity analyses, are performed for certain books of business. The provision for unpaid losses and loss adjustment expenses has been established to cover the estimated unpaid cost of claims incurred. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year’s results. Management believes that the liability it has recognized for unpaid losses and loss adjustment expenses is a reasonable estimate of the ultimate unpaid claims incurred, however, such provisions are necessarily based on estimates and, accordingly, no representation is made that the ultimate liability will not differ materially from the amounts recorded in the accompanying consolidated financial statements. Losses and loss adjustment expenses are recorded on an undiscounted basis.

Earnings per Share

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the basic earnings per share adjusted for the potential dilution that would occur if all issued stock options were exercised and all stock grants were fully vested.

Depreciation and Amortization

Depreciation of furniture and fixtures, electronic data processing equipment and computer software is provided over the estimated useful lives of the respective assets, ranging from three to seven years, using the straight-line method. Amortization of leasehold improvements is provided over the shorter of the useful lives of those improvements or the contractual terms of the leases using the straight-line method.

Goodwill and Other Intangible Assets

Goodwill and other intangible assets were $6.9 million as of December 31, 2011 and 2010, respectively. The goodwill and other intangible assets consist of $2.5 million for the underwriting agencies as of December 31, 2011 and 2010, respectively and $4.3 million and $4.4 million for the Lloyd’s Operations as of December 31, 2011 and 2010, respectively. The December 31, 2011 and 2010 goodwill and other intangible assets of $6.9 million consisted of $4.8 million of goodwill and $2.1 million of indefinite lived intangible assets, respectively. Goodwill and other intangible assets on the Company’s Consolidated Balance Sheets are not amortized and may fluctuate due to changes in the currency exchange rates between the U.S. dollar and the British pound.

We completed our annual impairment review of goodwill and other intangible assets which did not result in an impairment as of December 31, 2011.

Income Taxes

We apply the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In addition to all of our reserves for losses and loss adjustment expenses being an estimate, a portion of our premiums are estimated for unreported premiums, mostly for the marine business written by our U.K. Branch and Lloyd’s Operations. We generally do not experience any significant backlog in processing premiums. Such premium estimates are generally based on submission data received from brokers and agents and recorded when the insurance policy or reinsurance contract is bound and written. The estimates are regularly reviewed and updated taking into account the premium received to date versus the estimate and the age of the estimate. To the extent that the actual premium varies from the estimates, the difference, along with the related loss reserves and underwriting expenses, is recorded in current operations.

F-12

Recently Adopted Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued accounting guidance (Accounting Standards Update (“ASU”) 2010-06) which improves disclosures about fair value measurements (Accounting Standards Codification (“ASC” or “Codification”) 820-10). This guidance requires additional disclosures regarding significant transfers in and out of Levels 1 and 2 and additional disclosures regarding Level 3 purchases, sales, issuances and settlements. In addition, this guidance also requires fair value measurement disclosures for each class of assets and liabilities as well as disclosures about the valuation techniques and inputs used to measure fair value for items classified as Level 2 or Level 3. This guidance was effective as of January 1, 2010 for calendar year reporting entities with the exception of the additional disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements which became effective as of January 1, 2011 for calendar year reporting entities. Early adoption was permitted. The Company adopted this guidance in the first quarter of 2010 with the exception of the additional disclosures about purchases, sales, issuances and settlement in the roll forward of activity in Level 3 fair value measurements, which the Company adopted in the first quarter of 2011. Adoption of this guidance did not have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.

Recent Accounting Developments

In September 2011, the FASB issued ASU 2011-08 amending Codification topic 350 – Intangibles – Goodwill and Other. The amendment simplifies how goodwill is tested for impairment by permitting entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether it is necessary to perform the two step goodwill impairment test. The amendment is effective for the interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, but the Company did not early adopt. Adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.

In June 2011, the FASB issued ASU 2011-05 amending Codification Topic 220—Comprehensive Income. The amendment requires that other comprehensive income be either presented in a single continuous statement or two separate but consecutive statements. In addition, the amendment requires the disclosure of reclassification adjustments for items reclassified from other comprehensive income to net income on the face of the financial statements. The amendment is effective for the interim and annual periods beginning after December 15, 2011 and should be applied retrospectively. This standard will only affect the Company’s presentation of comprehensive income and will not affect the Company’s financial position, results of operations, and cash flows.

In May 2011, the FASB issued ASU 2011-04 amending Codification Topic 820—Fair Value Measurements and Disclosures. The amendments were intended to result in common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). The amendment expands and enhances current disclosures about fair value measurement and clarifies the FASB’s intent regarding the application of existing fair value measurement requirements in certain circumstances. The amendments are effective for the interim and annual periods beginning after December 15, 2011 and should be applied prospectively. We are currently evaluating the impact of this amendment on the Company’s consolidated financial position, results of operations and cash flows.

In October 2010, the FASB issued ASU 2010-26 amending Codification Topic 944 – Financial Services – Insurance; Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. The amendment clarifies which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. In addition, the amendment limits deferrable costs that can be capitalized to those that are incremental direct costs related to the successful acquisition of new or renewal insurance contracts. The amendment is effective for fiscal years and interim periods within a fiscal year, beginning after December 15, 2011. The guidance is to be applied prospectively upon effectiveness of the amendment, with retrospective application permitted, but not required. The Company did not early adopt. The Company will adopt this guidance prospectively in the first quarter of 2012. Adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.

F-13

Note 2. Earnings Per Share

The following is a reconciliation of the basic and diluted EPS computations for the years ended December 31, 2011, 2010 and 2009:

		September 30,		September 30,		September 30,
	Year Ended December 31,
In thousands, except share and per share amounts	2011		2010		2009
Net income (loss)	$	25,597	$	69,578	$	63,158
Basic weighted average shares		14,980,429		16,064,770		16,935,488
Effect of common stock equivalents:
Assumed exercise of stock options and vesting of stock grants		202,856		350,496		386,532

Diluted weighted average shares		15,183,285		16,415,266		17,322,020
Net income (loss) per common share:
Basic	$	1.71	$	4.33	$	3.73

Diluted	$	1.69	$	4.24	$	3.65

Note 3. Segment Information

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

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

The 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 (“Navigators Specialty”). They are primarily engaged in underwriting marine insurance and related lines of business, professional liability insurance and specialty lines of business including contractors general liability insurance, commercial umbrella and primary and excess casualty businesses. Navigators Specialty underwrites specialty and professional liability insurance on an excess and surplus lines basis. Navigators Specialty is 100% reinsured by Navigators Insurance Company.

The Lloyd’s Operations primarily underwrite marine and related lines of business along with offshore energy, professional liability insurance and construction coverages for onshore energy business at Lloyd’s through Syndicate 1221. Our Lloyd’s Operations includes NUAL, a Lloyd’s underwriting agency which manages Syndicate 1221.

Navigators Management Company, Inc. (“NMC”) is a wholly-owned underwriting management company which produces, manages and underwrites insurance and reinsurance, and provides corporate services for the Company. The operating results for the underwriting management company are allocated to both the Insurance Companies and Lloyd’s Operations.

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

F-14

Financial data by segment for 2011, 2010, and 2009 was as follows:

		September 30,			September 30,			September 30,			September 30,
	Year Ended December 31, 2011
	Insurance			Lloyd’s
In thousands	Companies			Operations			Corporate⁽¹⁾			Total
Gross written premiums	$	788,419		$	319,797		$	—		$	1,108,216
Net written premiums		542,391			211,407			—			753,798

Net earned premiums		472,463			219,182			—			691,645
Net losses and loss adjustment expenses		(341,625	)		(135,372	)		—			(476,997	)
Commission expenses		(64,165	)		(48,341	)		2,069			(110,437	)
Other operating expenses		(101,517	)		(36,512	)		—			(138,029	)
Other income (expense)		3,955			(657	)		(2,069	)		1,229

Underwriting profit (loss)	$	(30,889	)	$	(1,700	)	$	—		$	(32,589	)

Net investment income		54,164			8,955			381			63,500
Net realized gains (losses)		12,151			(2,354	)		214			10,011
Interest expense		—			—			(8,188	)		(8,188	)

Income (loss) before income taxes	$	35,426		$	4,901		$	(7,593	)	$	32,734

Income tax expense (benefit)		8,271			1,523			(2,657	)		7,137

Net income (loss)	$	27,155		$	3,378		$	(4,936	)	$	25,597


Identifiable assets	$	2,768,930		$	865,230		$	35,847		$	3,670,007


Losses and loss adjustment expenses ratio		72.3	%		61.8	%					69.0	%
Commission expense ratio		13.6	%		22.1	%					16.0	%
Other operating expense ratio ⁽²⁾		20.6	%		16.9	%					19.7	%

Combined ratio		106.5	%		100.8	%					104.7	%

(1) — Includes Corporate segment intercompany eliminations.

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

F-15

		September 30,			September 30,			September 30,			September 30,
	Year Ended December 31, 2010
	Insurance			Lloyd’s
In thousands	Companies			Operations			Corporate⁽¹⁾			Total
Gross written premiums	$	665,505		$	321,696		$	—		$	987,201
Net written premiums		429,355			224,583			—			653,938

Net earned premiums		438,851			221,080			—			659,931
Net losses and loss adjustment expenses		(280,120	)		(141,035	)		—			(421,155	)
Commission expenses		(59,122	)		(49,991	)		—			(109,113	)
Other operating expenses		(106,631	)		(33,112	)		—			(139,743	)
Other income (expense)		1,698			3,488			—			5,186


Underwriting profit (loss)	$	(5,324	)	$	430		$	—		$	(4,894	)

Net investment income		62,792			8,286			584			71,662
Net realized gains (losses)		36,057			3,323			859			40,239
Interest expense		—			—			(8,178	)		(8,178	)

Income (loss) before income taxes	$	93,525		$	12,039		$	(6,735	)	$	98,829

Income tax expense (benefit)		27,219			4,389			(2,357	)		29,251

Net income (loss)	$	66,306		$	7,650		$	(4,378	)	$	69,578


Identifiable assets	$	2,623,871		$	838,047		$	69,541		$	3,531,459


Losses and loss adjustment expenses ratio		63.8	%		63.8	%					63.8	%
Commission expense ratio		13.5	%		22.6	%					16.5	%
Other operating expense ratio ⁽²⁾		23.9	%		13.4	%					20.4	%

Combined ratio		101.2	%		99.8	%					100.7	%

(1) — Includes Corporate segment intercompany eliminations.

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

F-16

		September 30,			September 30,			September 30,			September 30,
	Year Ended December 31, 2009
	Insurance			Lloyd’s
In thousands	Companies			Operations			Corporate⁽¹⁾			Total
Gross written premiums	$	730,776		$	314,142		$	—		$	1,044,918
Net written premiums		477,673			223,582			—			701,255

Net earned premiums		479,121			204,242			—			683,363
Net losses and loss adjustment expenses		(304,672	)		(131,326	)		—			(435,998	)
Commission expenses		(61,949	)		(37,727	)		768			(98,908	)
Other operating expenses		(104,801	)		(27,896	)		—			(132,697	)
Other income (expense)		3,498			961			(768	)		3,691


Underwriting profit (loss)	$	11,197		$	8,254		$	—		$	19,451

Net investment income		65,717			9,229			566			75,512
Net realized gains (losses)		533			(3,193	)		—			(2,660	)
Gain on debt repurchase								3,000			3,000
Interest expense		—			—			(8,455	)		(8,455	)

Income (loss) before income taxes	$	77,447		$	14,290		$	(4,889	)	$	86,848

Income tax expense (benefit)		19,819			5,582			(1,711	)		23,690

Net income (loss)	$	57,628		$	8,708		$	(3,178	)	$	63,158


Identifiable assets	$	2,576,643		$	791,143		$	86,208		$	3,453,994


Losses and loss adjustment expenses ratio		63.6	%		64.3	%					63.8	%
Commission expense ratio		12.9	%		18.5	%					14.5	%
Other operating expense ratio ⁽²⁾		21.1	%		13.2	%					18.9	%

Combined ratio		97.6	%		96.0	%					97.2	%

(1) — Includes Corporate segment intercompany eliminations.

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

F-17

The following tables provide additional financial data by segment for the years ended December 31, 2011, 2010 and 2009:

		September 30,		September 30,		September 30,
	Year Ended December 31, 2011
	Insurance		Lloyd’s
In thousands	Companies		Operations		Total
Gross written premiums:
Marine	$	228,500	$	167,562	$	396,062
Property casualty		445,287		115,138		560,425
Professional liability		114,632		37,097		151,729

Total	$	788,419	$	319,797	$	1,108,216


Net written premiums :
Marine	$	170,642	$	137,206	$	307,848
Property casualty		293,758		56,249		350,007
Professional liability		77,991		17,952		95,943

Total	$	542,391	$	211,407	$	753,798

Net earned premiums:
Marine	$	169,018	$	145,659	$	314,677
Property casualty		231,297		55,903		287,200
Professional liability		72,148		17,620		89,768

Total	$	472,463	$	219,182	$	691,645


	Year Ended December 31, 2010
	Insurance		Lloyd’s
In thousands	Companies		Operations		Total
Gross written premiums:
Marine	$	223,061	$	182,723	$	405,784
Property casualty		312,651		94,799		407,450
Professional liability		129,793		44,174		173,967

Total	$	665,505	$	321,696	$	987,201


Net written premiums :
Marine	$	151,059	$	149,340	$	300,399
Property casualty		197,845		54,049		251,894
Professional liability		80,451		21,194		101,645

Total	$	429,355	$	224,583	$	653,938


Net earned premiums:
Marine	$	155,846	$	149,225	$	305,071
Property casualty		200,741		49,852		250,593
Professional liability		82,264		22,003		104,267

Total	$	438,851	$	221,080	$	659,931

F-18

		September 30,		September 30,		September 30,
	Year Ended December 31, 2009
	Insurance		Lloyd’s
In thousands	Companies		Operations		Total
Gross written premiums:
Marine	$	241,438	$	191,959	$	433,397
Property casualty		352,285		78,151		430,436
Professional liability		137,053		44,032		181,085

Total	$	730,776	$	314,142	$	1,044,918


Net written premiums :
Marine	$	171,289	$	156,153	$	327,442
Property casualty		227,234		45,097		272,331
Professional liability		79,150		22,332		101,482

Total	$	477,673	$	223,582	$	701,255


Net earned premiums:
Marine	$	157,534	$	142,958	$	300,492
Property casualty		246,143		39,330		285,473
Professional liability		75,444		21,954		97,398

Total	$	479,121	$	204,242	$	683,363

The Insurance Companies net earned premiums include $88.3 million, $86.1 million and $85.4 million of net earned premiums from the U.K. Branch for 2011, 2010 and 2009, respectively.

Note 4. Investments

The following tables set forth the Company’s cash and investments as of December 31, 2011 and 2010. The table below includes other-than-temporarily impaired (“OTTI”) securities recognized within other comprehensive income (“OCI”).

		September 30,		September 30,		September 30,			September 30,		September 30,
	December 31, 2011
			Gross		Gross					OTTI
			Unrealized		Unrealized			Amortized		Recognized
In thousands	Fair Value		Gains		Losses			Cost		in OCI
Fixed maturities:
U.S. Government Treasury bonds, agency bonds, and foreign government bonds	$	336,070	$	8,979	$	(383	)	$	327,474	$	—
States, municipalities and political subdivisions		410,836		28,887		(108	)		382,057		—
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		395,860		17,321		(3	)		378,542		—
Residential mortgage obligations		23,148		8		(2,848	)		25,988		(1,682	)
Asset-backed securities		48,934		695		(75	)		48,314		—
Commercial mortgage-backed securities		216,034		10,508		(593	)		206,119		—

Subtotal	$	683,976	$	28,532	$	(3,519	)	$	658,963	$	(1,682	)
Corporate bonds		457,187		15,743		(6,772	)		448,216		—

Total fixed-maturities	$	1,888,069	$	82,141	$	(10,782	)	$	1,816,710	$	(1,682	)
Equity securities - common stocks		95,849		23,240		(958	)		73,567		—
Short-term investments		122,220		—		—			122,220		—
Cash		127,360		—		—			127,360

Total	$	2,233,498	$	105,381	$	(11,740	)	$	2,139,857	$	(1,682	)

F-19

		September 30,		September 30,		September 30,			September 30,		September 30,
	December 31, 2010
			Gross		Gross					OTTI
			Unrealized		Unrealized			Amortized		Recognized
In thousands	Fair Value		Gains		Losses			Cost		in OCI
Fixed-maturities:
U.S. Government Treasury bonds, agency bonds, and foreign government bonds	$	324,145	$	5,229	$	(4,499	)	$	323,415	$	—
States, municipalities and political subdivisions		392,250		11,903		(3,805	)		384,152		—
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		382,628		10,127		(2,434	)		374,935		—
Residential mortgage obligations		20,463		24		(2,393	)		22,832		(1,646	)
Asset-backed securities		46,093		247		(292	)		46,138		—
Commercial mortgage-backed securities		190,015		4,804		(1,794	)		187,005		—

Subtotal	$	639,199	$	15,202	$	(6,913	)	$	630,910	$	(1,646	)
Corporate bonds		526,651		15,075		(5,545	)		517,121		—

Total fixed-maturities	$	1,882,245	$	47,409	$	(20,762	)	$	1,855,598	$	(1,646	)
Equity securities - common stocks		87,258		22,475		(10	)		64,793		—
Short-term investments		153,057		—		—			153,057		—
Cash		31,768		—		—			31,768		—

Total	$	2,154,328	$	69,884	$	(20,772	)	$	2,105,216	$	(1,646	)

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

The contractual maturity dates for fixed maturity securities categorized by the number of years until maturity as of December 31, 2011 are shown in the following table:

		September 30,		September 30,
	December 31, 2011
			Amortized
In thousands	Fair Value		Cost
Due in one year or less	$	65,454	$	64,925
Due after one year through five years		551,225		542,238
Due after five years through ten years		372,275		349,061
Due after ten years		215,139		201,523
Mortgage- and asset-backed securities		683,976		658,963

Total	$	1,888,069	$	1,816,710

Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Due to the periodic repayment of principal, the mortgage-backed and asset-backed securities are estimated to have an effective maturity of approximately 3.6 years.

F-20

The following table shows the amount and percentage of the Company’s fixed maturities and short-term investments at December 31, 2011 by S&P credit rating or, if an S&P rating is not available, the equivalent Moody’s rating. The table includes fixed maturities and short-term investments at fair value, and the total rating is the weighted average quality rating.

	September 30,		September 30,		September 30,
	December 31, 2011
				Percent of
In thousands	Rating	Fair Value		Total
Rating description:
Extremely strong	AAA	$	291,600		15	%
Very strong	AA		1,048,922		56	%
Strong	A		422,777		22	%
Adequate	BBB		108,299		6	%
Speculative	BB & Below		11,665		1	%
Not rated	NR		4,806		0	%

Total	AA	$	1,888,069		100	%

F-21

		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
	December 31, 2011						December 31, 2010
In thousands, except # of securities	Number of Securities		Fair Value		Gross Unrealized Loss		Number of Securities		Fair Value		Gross Unrealized Loss
Fixed maturities:
U.S. Government Treasury bonds, agency bonds, and foreign government bonds
0-6 months		7	$	58,587	$	98		36	$	163,253	$	4,499
7-12 months				—		—		—		—		—
> 12 months		2		6,883		285		—		—		—

Subtotal		9	$	65,470	$	383		36	$	163,253	$	4,499
States, municipalities and political subdivisions
0-6 months		7	$	5,894	$	72		57	$	112,291	$	3,749
7-12 months		1		216		1		1		1,004		20
> 12 months		5		2,420		35		4		1,317		36

Subtotal		13	$	8,530	$	108		62	$	114,612	$	3,805
Agency mortgage-backed securities
0-6 months		3	$	5,087	$	3		36	$	139,226	$	2,434
7-12 months				—		—		—		—		—
> 12 months				—		—		—		—		—

Subtotal		3	$	5,087	$	3		36	$	139,226	$	2,434
Residential mortgage obligations
0-6 months		6	$	6,672	$	184		3	$	3,215	$	20
7-12 months		7		5,250		313		—		—		—
> 12 months		47		10,749		2,351		52		15,939		2,373

Subtotal		60	$	22,671	$	2,848		55	$	19,154	$	2,393
Asset-backed securities
0-6 months		2	$	4,933	$	12		7	$	28,175	$	292
7-12 months		5		6,645		63		—		—		—
> 12 months		1		2		—		1		2		—

Subtotal		8	$	11,580	$	75		8	$	28,177	$	292
Commercial mortgage-backed securities
0-6 months		6	$	5,465	$	29		16	$	78,212	$	1,755
7-12 months		3		6,840		550		—		—		—
> 12 months		3		1,503		14		2		491		39

Subtotal		12	$	13,808	$	593		18	$	78,703	$	1,794
Corporate bonds
0-6 months		52	$	135,516	$	4,539		98	$	214,180	$	5,545
7-12 months		18		27,561		1,457		—		—		—
> 12 months		8		14,898		776		—		—		—

Subtotal		78	$	177,975	$	6,772		98	$	214,180	$	5,545

Total fixed maturities		183	$	305,121	$	10,782		313	$	757,305	$	20,762


Equity securities - common stocks
0-6 months		4	$	3,320	$	587		1	$	322	$	10
7-12 months		1		1,629		371		—		—		—
> 12 months		—		—		—		—		—		—

Total equity securities		5	$	4,949	$	958		1	$	322	$	10

F-22

As of December 31, 2011 and 2010, the largest single unrealized loss by a non-government backed issuer in the fixed maturities was $1.4 million and $0.7 million, respectively.

We analyze the unrealized losses quarterly to determine if any are other-than-temporary. The above unrealized losses have been determined to be temporary based on our policies.

For debt securities, when assessing whether the amortized cost basis of the security will be recovered, the Company compares the present value of cash flows expected to be collected in relation to the current book value. Any shortfalls of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered the credit loss portion of OTTI losses and is recognized in earnings. All non-credit losses are recognized as changes in OTTI losses within OCI.

To determine whether the unrealized loss on structured securities is other-than-temporary, the Company analyzes the projections provided by its investment managers with respect to an expected principal loss under a range of scenarios and utilizes the most likely outcomes. The analysis relies on actual collateral performance measures such as default rate, prepayment rate and loss severity. These assumptions are applied throughout the remaining term of the deal, incorporating the transaction structure and priority of payments, to generate loss adjusted cash flows. Results of the analysis will indicate whether the security 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 break even default rate is also calculated. A comparison of the break even default rate to the actual default rate provides an indication of the level of cushion or coverage to the first dollar principal loss. The analysis applies the stated assumptions throughout the remaining term of the transaction to forecast cash flows, which are then applied through the transaction structure to determine whether there is a loss to the security. For securities in which a tranche loss is present, and the net present value of loss adjusted cash flows is less than book value, impairment is recognized. The output data also includes a number of additional metrics such as average life remaining, original and current credit support, over 60 day delinquency and security rating.

The significant inputs used to measure the amount of credit loss recognized in earnings were actual delinquency rates, default probability assumptions, severity assumptions and prepayment assumptions. Projected losses are a function of both loss severity and probability of default. Default probability and severity assumptions differ based on property type, vintage and the stress of the collateral. The Company does not intend to sell any of these securities and it is more likely than not that it will not be required to sell these securities before the recovery of the amortized cost basis.

For equity securities, in general, the Company focuses its attention on those securities with a fair value less than 80% of their cost for six or more consecutive months. If warranted as the result of conditions relating to a particular security, the Company will focus on a significant decline in fair value regardless of the time period involved. Factors considered in evaluating potential impairment include, but are not limited to, the current fair value as compared to cost of the security, the length of time the investment has been below cost and by how much. If an equity security is deemed to be other-than-temporarily impaired, the cost is written down to fair value with the loss recognized in earnings.

For equity securities, the Company also considers its intent to hold securities as part of the process of evaluating whether a decline in fair value represents an other-than-temporary decline in value. For fixed maturity securities, the Company considers its intent to sell a security and whether it is more likely than not that the Company will be required to sell a security 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.

F-23

The following table summarizes the gross unrealized investment losses as of December 31, 2011 by length of time where the fair value is less than 80% of amortized cost.

		September 30,			September 30,			September 30,		September 30,			September 30,
	Period for Which Fair Value is Less than 80% of Amortized Cost
In thousands	Less than 3 months			Longer than 3 months, less than 6 months			6 months or longer, less than 12 months		12 months or longer			Total
Fixed maturities	$	—		$	—		$	—	$	(1,039	)	$	(1,039	)
Equity securities		(243	)		(103	)		—		—			(346	)

Total	$	(243	)	$	(103	)	$	—	$	(1,039	)	$	(1,385	)

The table below summarizes the Company’s activity related to OTTI losses for the periods indicated:

		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
	Year Ended December 31,
	2011				2010				2009
In thousands, except # of securities	Number of Securities		Amount		Number of Securities		Amount		Number of Securities		Amount
Total other than temporary impairment losses:
Corporate and other bonds		1	$	109		—	$	—		2	$	564
Commercial mortgage-backed securities		—		—		—		—		—		—
Residential mortgage-backed securities		19		2,616		18		1,835		39		19,783
Asset-backed securities		—		—		—		—		1		143
Equities		2		892		2		387		56		8,775

Total		22	$	3,617		20	$	2,222		98	$	29,265

Less: Portion of loss in accumulated other comprehensive income (loss):
Corporate and other bonds			$	—			$	—			$	—
Commercial mortgage-backed securities				—				—				—
Residential mortgage-backed securities				1,632				1,142				17,324
Asset-backed securities				—				—				64
Equities				—				—				—

Total			$	1,632			$	1,142			$	17,388

Impairment losses recognized in earnings:
Corporate and other bonds			$	109			$	—			$	564
Commercial mortgage-backed securities				—				—				—
Residential mortgage-backed securities				984				693				2,458
Asset-backed securities				—				—				80
Equities				892				387				8,775

Total			$	1,985			$	1,080			$	11,877

F-24

The following table summarizes the cumulative amounts related to the Company’s credit loss portion of the OTTI losses on debt securities for the periods ended December 31, 2011, 2010 and 2009. The Company does not intend to sell and it is more likely than not that it will not be required to sell the securities prior to recovery of the amortized cost basis and for which the non-credit loss portion is included in other comprehensive income:

		September 30,		September 30,			September 30,
	Year Ended December 31,
In thousands	2011		2010			2009
Beginning balance	$	2,228	$	2,523		$	—
Additions for credit loss impairments recognized in the current period on securities not previously impaired		109		271			3,102
Additions for credit loss impairments recognized in the current period on securities previously impaired		984		422			—
Reductions for credit loss impairments previously recognized on securities sold during the period		—		(988	)		(579	)

Ending balance	$	3,321	$	2,228		$	2,523

The contractual maturity dates for fixed maturity securities categorized by the number of years until maturity, with a gross unrealized loss as of December 31, 2011 is presented in the following table:

		September 30,		September 30,			September 30,		September 30,
	December 31, 2011
	Gross Unrealized Losses					Fair Value
In thousands	Amount		Percent of Total			Amount		Percent of Total
Due in one year or less	$	8		0	%	$	5,570		2	%
Due after one year through five years		4,992		46	%		190,234		62	%
Due after five years through ten years		1,786		17	%		42,649		14	%
Due after ten years		477		4	%		13,522		4	%
Mortgage- and asset-backed securities		3,519		33	%		53,146		18	%

Total	$	10,782		100	%	$	305,121		100	%

The Company’s net investment income was derived from the following sources:

		September 30,			September 30,			September 30,
	Year Ended December 31,
In thousands	2011			2010			2009
Fixed maturities	$	65,060		$	69,996		$	74,779
Equity securities		5,071			3,028			2,464
Short-term investments		964			965			811

		71,095			73,989			78,054
Investment expenses		(7,595	)		(2,327	)		(2,542	)

Net investment income	$	63,500		$	71,662		$	75,512

Investment expenses in 2011 included $4.7 million of estimated interest expense related to a summary judgment order entered against the Company in its dispute with Resolute in which the Court awarded $4.7 million in interest to Resolute on previously paid balances that were allegedly overdue under certain reinsurance agreements. The Company is appealing the Court’s ruling. Refer to Note 12, Commitments and Contingencies.

F-25

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

		September 30,			September 30,			September 30,
	Year Ended December 31,
In thousands	2011			2010			2009
Fixed maturities	$	44,712		$	(12,039	)	$	59,667
Equity securities		(183	)		7,231			15,955

Gross unrealized gains (losses)		44,529			(4,808	)		75,622
Deferred income tax		15,143			(1,324	)		25,602

Change in net unrealized gains (losses), net	$	29,386		$	(3,484	)	$	50,020

Realized gains/(losses), excluding net other-than-temporary impairment losses recognized in earnings, for the periods indicated were as follows:

		September 30,			September 30,			September 30,
	Year Ended December 31,
In thousands	2011			2010			2009
Fixed maturities:
Gains	$	11,678		$	42,932		$	18,312
Losses		(7,044	)		(3,239	)		(9,676	)

Fixed maturities, net	$	4,634		$	39,693		$	8,636
Equity securities:
Gains	$	9,319		$	1,867		$	2,110
Losses		(1,957	)		(241	)		(1,529	)

Equity securities, net	$	7,362		$	1,626		$	581

Net realized gains (losses)	$	11,996		$	41,319		$	9,217

The following tables present, for each of the fair value hierarchy levels as defined in ASC 820, Fair Value Measurements, the Company’s fixed maturities and equity securities by asset class that are measured at fair value as of December 31, 2011 and 2010:

		September 30,		September 30,		September 30,		September 30,
	December 31, 2011
In thousands	Level 1		Level 2		Level 3		Total
Fixed-maturities:
U.S. Government Treasury bonds, agency bonds, and foreign government bonds	$	136,625	$	199,445	$	—	$	336,070
States, municipalities and political subdivisions		—		410,836		—		410,836
Mortgage-backed and asset-backed securities:								—
Agency mortgage-backed securities		—		395,860		—		395,860
Residential mortgage obligations		—		23,148		—		23,148
Asset-backed securities		—		48,934		—		48,934
Commercial mortgage-backed securities		—		216,034		—		216,034

Subtotal	$	—	$	683,976	$	—	$	683,976
Corporate bonds		—		457,187		—		457,187

Total fixed-maturities	$	136,625	$	1,751,444	$	—	$	1,888,069
Equity securities - common stocks		95,849		—		—		95,849

Total	$	232,474	$	1,751,444	$	—	$	1,983,918

F-26

		September 30,		September 30,		September 30,		September 30,
	December 31, 2010
In thousands	Level 1		Level 2		Level 3		Total
Fixed-maturities:
U.S. Government Treasury bonds, agency bonds, and foreign government bonds	$	212,933	$	111,212	$	—	$	324,145
States, municipalities and political subdivisions		—		392,250		—		392,250
Mortgage-backed and asset-backed securities:								—
Agency mortgage-backed securities		—		382,628		—		382,628
Residential mortgage obligations		—		20,463		—		20,463
Asset-backed securities		—		46,093		—		46,093
Commercial mortgage-backed securities		—		188,178		1,837		190,015

Subtotal	$	—	$	637,362	$	1,837	$	639,199
Corporate bonds		—		526,651		—		526,651

Total fixed-maturities	$	212,933	$	1,667,475	$	1,837	$	1,882,245
Equity securities - common stocks		87,258		—		—		87,258

Total	$	300,191	$	1,667,475	$	1,837	$	1,969,503

The fair value of financial instruments is determined based on the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets. Examples are listed equity and fixed income securities traded on an exchange. 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.

The Company did not have any significant transfers between Level 1 and 2 for the years ended December 31, 2011 and 2010.

There were no significant judgments made in classifying instruments in the fair value hierarchy.

As of December 31, 2011, the company did not have any Level 3 assets. Any pricing where the input is based solely on a broker price is deemed to be a Level 3 price.

F-27

The following tables present a reconciliation of the beginning and ending balances for all investments measured at fair value using Level 3 inputs for the years ended December 31, 2011, 2010, and 2009.

		xxxxxx		xxxxxx		xxxxxx			xxxxxx		xxxxxx			xxxxxx		xxxxxx		xxxxxx			xxxxxx
	Year Ended December 31, 2011
			Realized		Unrealized										Transfers		Transfers
	Beginning		Gains		Gains										into		out of			Ending
In thousands	Balance		(Losses)		(Losses)			Purchases		Sales			Settlements		Level 3		Level 3			Balance
Assets:
Commercial
Mortgage Obligations	$	1,837	$	—	$	94		$	—	$	—		$	—	$	—	$	(1,931	)	$	—

Total assets	$	1,837	$	—	$	94		$	—	$	—		$	—	$	—	$	(1,931	)	$	—


	Year Ended December 31, 2010
	Beginning		Realized Gains		Unrealized Gains										Transfers into		Transfers out of			Ending
In thousands	Balance		(Losses)		(Losses)			Purchases		Sales			Settlements		Level 3		Level 3			Balance
Assets:
Commercial
Mortgage Obligations	$	—	$	—	$	(19	)	$	1,856	$	—		$	—	$	—	$	—		$	1,837

Total assets	$	—	$	—	$	(19	)	$	1,856	$	—		$	—	$	—	$	—		$	1,837


	Year Ended December 31, 2009
	Beginning		Realized Gains		Unrealized Gains										Transfers into		Transfers out of			Ending
In thousands	Balance		(Losses)		(Losses)			Purchases		Sales			Settlements		Level 3		Level 3			Balance
Assets:
Commercial
Mortgage Obligations	$	156	$	—	$	23		$	—	$	(23	)	$	—	$	—	$	(156	)	$	—

Total assets	$	156	$	—	$	23		$	—	$	(23	)	$	—	$	—	$	(156	)	$	—

As of December 31, 2011 and 2010, fixed maturities with amortized values of $10.2 million and $10.9 million, respectively, were on deposit with various state insurance departments. In addition, at December 31, 2011, investments of $1.2 million were on deposit at a U.K. bank to comply with the regulatory requirements of the Financial Services Authority for Navigators Insurance Company’s U.K. Branch. In addition, at both December 31, 2011 and 2010, $0.3 million of investments were pledged as security under a reinsurance treaty.

As of December 31, 2011 and 2010, the Company did not have a concentration of greater than 5% of invested assets in a single non-U.S. government-backed issuer.

F-28

Note 5. Reserves for Losses and Loss Adjustment Expenses

Insurance companies and Lloyd’s syndicates are required to maintain reserves for unpaid losses and unpaid loss adjustment expenses for all lines of business. These reserves are intended to cover the probable ultimate cost of settling all losses incurred and unpaid, including those incurred but not reported. The determination of reserves for losses and LAE for insurance companies such as Navigators Insurance Company and Navigators Specialty Insurance Company, and Lloyd’s corporate members such as Navigators Corporate Underwriters Ltd. is dependent upon the receipt of information from the agents and brokers which produce the insurance business for us. Generally, there is a lag between the time premiums are written and related losses and loss adjustment expenses are incurred, and the time such events are reported to the agents and brokers and, subsequently, to Navigators Insurance Company, Navigators Specialty Insurance Company, Navigators Corporate Underwriters Ltd. and Millennium Underwriting Ltd.

Case reserves are established by our Insurance Companies and Syndicate 1221 for reported claims when notice of the claim is first received. Reserves for such reported claims are established on a case-by-case basis by evaluating several factors, including the type of risk involved, knowledge of the circumstances surrounding such claim, severity of injury or damage, the potential for ultimate exposure, experience with the line of business, and the policy provisions relating to the type of claim. Reserves for IBNR are determined in part on the basis of statistical information, in part on industry experience and in part on the judgment of our senior corporate officers. Indicated reserves are calculated by our actuaries using several standard actuarial methodologies, including the paid and incurred loss development and the paid and incurred Bornheutter-Ferguson loss methods. Additional analyses, such as frequency/severity analyses, are performed for certain books of business. 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 recognized.

Total loss reserves are estimates of what the insurer or reinsurer expects to pay on claims, based on facts and circumstances then known. It is possible that the ultimate liability may exceed or be less than such estimates. In setting our loss reserve estimates, we review statistical data covering several years, analyze patterns by line of business and consider several factors including trends in claims frequency and severity, changes in operations, emerging economic and social trends, inflation and changes in the regulatory and litigation environment. Using the aforementioned actuarial methods and different underlying assumptions, our actuaries produce a number of point estimates for each class of business. After reviewing the appropriateness of the underlying assumptions, management selects the carried reserve for each class of business. We do not calculate a range of loss reserve estimates. We believe that ranges may not be a true reflection of the potential volatility between carried loss reserves and the ultimate settlement amount of losses incurred prior to the balance sheet date. The numerous factors that contribute to the inherent uncertainty in the process of establishing loss reserves include: interpreting loss development activity, emerging economic and social trends, inflation, changes in the regulatory and judicial environment and changes in our operations, including changes in underwriting standards and claims handling procedures. During the loss settlement period, which, in some cases, may last several years, additional facts regarding individual claims may become known and, accordingly, it often becomes necessary to refine and adjust the estimates of liability on a claim upward or downward. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year’s income statement. Even then, the ultimate liability may exceed or be less than the revised estimates. The reserving process is intended to provide implicit recognition of the impact of inflation and other factors affecting loss payments by taking into account changes in historical payment patterns and perceived probable trends. There is generally no precise method for the subsequent evaluation of the adequacy of the consideration given to inflation, or to any other specific factor, because the eventual deficiency or redundancy of reserves is affected by many factors, some of which are interdependent. 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 recognized.

F-29

The following table summarizes the activity in our reserve for losses and LAE during the three most recent years:

		September 30,			September 30,			September 30,
	Year Ended December 31,
In thousands	2011			2010			2009
Net reserves for losses and LAE at beginning of year	$	1,142,542		$	1,112,934		$	999,871
Provision for losses and LAE for claims occurring in the current year		474,852			434,957			444,939
Increase (decrease) in estimated losses and LAE for claims occurring in prior years		2,145			(13,802	)		(8,941	)

Incurred losses and LAE		476,997			421,155			435,998
Losses and LAE paid for claims occurring during:
Current year		(73,242	)		(76,982	)		(59,412	)
Prior years		(309,063	)		(314,565	)		(263,523	)

Losses and LAE payments		(382,305	)		(391,547	)		(322,935	)

Net reserves for losses and LAE at end of year		1,237,234			1,142,542			1,112,934
Reinsurance recoverables on unpaid losses and LAE		845,445			843,296			807,352

Gross reserves for losses and LAE at end of year	$	2,082,679		$	1,985,838		$	1,920,286

The segment break down of prior years’ net reserve deficiency (redundancy) was as follows:

		September 30,			September 30,			September 30,
	Year Ended December 31,
In thousands	2011			2010			2009
Insurance Companies:
Marine	$	1,348		$	(4,155	)	$	11,893
Property Casualty		(6,828	)		(14,923	)		(35,658	)
Professional Liability		17,582			13,623			20,686

Subtotal Insurance Companies	$	12,102		$	(5,455	)	$	(3,079	)
Lloyd’s Operations		(9,957	)		(8,347	)		(5,862	)

Total deficiencies (redundancies)	$	2,145		$	(13,802	)	$	(8,941	)

The following is a discussion of relevant factors impacting our $2.1 million net reserve deficiencies for the year ended December 31, 2011:

The adverse development of $1.3 million for our Insurance Companies Marine business was driven by $4.0 million of unfavorable loss emergence in Inland Marine in accident years 2009 and 2010 which was offset by $2.7 million favorable development in Ocean Marine. The Ocean Marine development was driven by $5.8 million of favorable development in accident years 2008 to 2010 and was partially offset by $3.2 million of adverse development for accident years 2007 and prior. Ocean Marine’s favorable development was driven by the Craft, P&I, and Transport classes with partial offsets from the Specie and Liability classes.

Our Insurance Companies Professional Liability business had overall adverse development of $17.6 million, which consisted of adverse development of $14.5 million and $3.1 million from Management Liability and Errors and Omissions, respectively. The Management Liability development was primarily driven by coverage of Public companies for accident years 2009 and 2010. The Errors and Omissions development was driven by Small Lawyer Professional Liability and Miscellaneous Professional Liability classes for accident year 2010.

F-30

The following is a discussion of relevant factors impacting our $13.8 million net reserve redundancies for the year ended December 31, 2010:

The Insurance Companies recorded $14.9 million of net prior year savings for property casualty business in total. The favorable development included:

•

$2.9 million of favorable development on our offshore energy (NavTech) book due to favorable claims trends across a number of prior underwriting years.

•

Partially offsetting these favorable developments were adverse development of:

•

$1.7 million for New York construction liability due to unfavorable loss emergence.

The Insurance Companies recorded $13.6 million of net prior year unfavorable development for professional liability:

•

Management believes that the reserves for losses and loss adjustment expenses are adequate to cover the ultimate cost of losses and loss adjustment expenses on reported and unreported claims. We continue to review our reserves on a regular basis.

F-31

Note 6. Reinsurance

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. Hurricanes Gustav and Ike in 2008 and Hurricanes Katrina and Rita in 2005 significantly increased our reinsurance recoverables which increased our credit risk.

We have established a reserve for uncollectible reinsurance in the amount of $13.0 million, which is determined by considering reinsurer specific default risk as indicated by their financial strength ratings.

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 United States and European reinsurance markets. To meet our standards of acceptability, when the reinsurance is placed, a reinsurer generally must have a rating from A.M. Best Company (“A.M. Best”) and/or S&P of “A” or better, or an equivalent financial strength if not rated, plus at least $500 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.

The credit quality distribution of our reinsurance recoverables of $1.05 billion as of December 31, 2011 for ceded paid and unpaid losses and loss adjustment expenses and ceded unearned premiums based on insurer financial strength ratings from A. M. Best or S&P was as follows:

	September 30,		September 30,		September 30,
				Percent of
In thousands	Rating	Fair Value⁽²⁾		Total⁽³⁾
A.M. Best Rating description ⁽¹⁾:
Superior	A++, A+	$	535,060		51	%
Excellent	A, A-		505,314		48	%
Very good	B++, B+		552		0	%
Not rated	NR		12,472		1	%

Total		$	1,053,398		100	%

(1)	— Equivalent S&P rating used for certain companies when an A.M. Best rating was unavailable.

(2)

— Net of reserve for uncollectible reinsurance of approximately $13.0 million. The fair value consists of reinsurance recoverables on paid losses due within 30-45 days and reinsurance on unpaid losses which by nature of our reserving process is our best estimate of the value as of December 31, 2011.

(3)	— The Company holds offsetting collateral of approximately 16.8%, including 50.5% for B++ and B+ companies and 62.5% for not rated companies which includes letters of credit, ceded balances payable and other balances held by our Insurance Companies and our Lloyd’s Operations.

F-32

The following table lists our 20 largest reinsurers measured by the amount of reinsurance recoverable for ceded losses and loss adjustment expense and ceded unearned premium (constituting approximately 74.7% of the total recoverable), together with the reinsurance recoverable and collateral as of December 31, 2011, and the reinsurers’ rating from the indicated rating agency:

		September 30,		September 30,		September 30,		September 30,	September 30,	September 30,
	Reinsurance Recoverables
In thousands	Unearned Premium		Paid/Unpaid Losses		Total⁽¹⁾		Collateral Held⁽²⁾		AMB	S&P
Munich Reinsurance America Inc.	$	11,286	$	78,562	$	89,848	$	386	A+	AA-
Everest Reinsurance Company		14,528		75,094		89,622		6,634	A+	A+
Swiss Reinsurance America Corporation		4,730		84,343		89,073		8,041	A+	AA-
Transatlantic Reinsurance Company		15,177		71,530		86,707		6,416	A	A+
National Indemnity Company		15,591		37,251		52,842		5,774	A++	AA+
Partner Reinsurance Europe		7,227		32,682		39,909		20,272	A+	AA-
Berkley Insurance Company		1,755		31,278		33,033		243	A+	A+
Scor Holding (Switzerland) AG		2,234		29,822		32,056		7,754	A	A
Lloyd's Syndicate #2003		5,581		25,380		30,961		6,481	A	A+
General Reinsurance Corporation		703		27,630		28,333		852	A++	AA+
Allied World Reinsurance		6,773		20,291		27,064		2,293	A	A
Munchener Ruckversicherungs-Gesellschaft		858		25,815		26,673		6,614	A+	AA-
Ace Property and Casualty Insurance Company		1,525		22,339		23,864		—	A+	AA-
Platinum Underwriters Re		800		22,186		22,986		2,829	A	A-
White Mountains Reinsurance of America		117		22,544		22,661		96	A	A-
AXIS Re Europe		6,188		15,853		22,041		5,434	A	A+
Tower Insurance Company		8,191		12,980		21,171		1,798	A-	NR
Scor Global P&C SE		10,871		5,911		16,782		6,002	A	A
Lloyd's Syndicate #4000		1,999		13,571		15,570		1,814	A	A+
Validus Reinsurance Ltd.		3,004		12,457		15,461		9,981	A-	A-

Top 20 Total	$	119,138	$	667,519	$	786,657	$	99,714
All Others		45,024		221,717		266,741		77,717

Total	$	164,162	$	889,236	$	1,053,398	$	177,431

(1)	— Net of reserve for uncollectible reinsurance of approximately $13.0 million.

(2)	— Collateral includes letter of credit, ceded balances payable and other balances held by the Company's Insurance Companies and Lloyd’s Operations.

The largest portion of our collateral consists of letters of credit obtained from reinsurers in accordance with New York Insurance Department Regulation No. 133. This regulation requires collateral to be held by the ceding company from assuming companies not licensed in New York State in order for the ceding company to take credit for the reinsurance recoverables on its statutory balance sheet. The specific requirements governing the letters of credit include a clean and unconditional letter of credit and an “evergreen” clause which prevents the expiration of the letter of credit without due notice to the Company. Only banks considered qualified by the NAIC may be deemed acceptable issuers of letters of credit by the New York Insurance Department. In addition, based on our credit assessment of the reinsurer, there are certain instances where we require collateral from a reinsurer even if the reinsurer is licensed in New York State, generally applying the requirements of Regulation No. 133. The contractual terms of the letters of credit require that access to the collateral is unrestricted. In the event that the counter-party to our collateral would be deemed not qualified by the NAIC, the reinsurer would be required by agreement to replace such collateral with acceptable security under the reinsurance agreement. There is no assurance, however, that the reinsurer would be able to replace the counter-party bank in the event such counter-party bank becomes unqualified and the reinsurer experiences significant financial deterioration or becomes insolvent. Under such circumstances, we could incur a substantial loss from uncollectible reinsurance from such reinsurer.

F-33

The following table summarizes written premium:

		September 30,			September 30,			September 30,
	Year Ended December 31,
In thousands	2011			2010			2009
Direct	$	929,778		$	916,817		$	966,251
Assumed		178,438			70,384			78,667
Ceded		(354,418	)		(333,263	)		(343,663	)

Net	$	753,798		$	653,938		$	701,255

The following table summarizes earned premium:

		September 30,			September 30,			September 30,
	Year Ended December 31,
In thousands	2011			2010			2009
Direct	$	912,020		$	925,935		$	977,170
Assumed		125,797			72,643			78,932
Ceded		(346,172	)		(338,647	)		(372,739	)

Net	$	691,645		$	659,931		$	683,363

The following table summarizes losses and loss adjustment expenses incurred:

		September 30,			September 30,			September 30,
	Year Ended December 31,
In thousands	2011			2010			2009
Direct	$	608,445		$	669,949		$	625,558
Assumed		81,945			32,505			44,318
Ceded		(213,393	)		(281,299	)		(233,878	)

Net	$	476,997		$	421,155		$	435,998

We are required to pay losses in the event the assuming reinsurers are unable to meet their obligations under their reinsurance agreements. Charges for uncollectible reinsurance amounts, all of which were recorded to incurred losses, were $.05 million, $(0.8) million, and $2.0 million for 2011, 2010 and 2009, respectively.

Note 7. Income Taxes

The Company is subject to the tax laws and regulations of the United States (“U.S.”) and foreign countries in which it operates. The Company files a consolidated U.S. federal tax return, which includes all domestic subsidiaries and the United Kingdom (“U.K.”) Branch. The income from the foreign operations is designated as either U.S. connected income or non-U.S. connected income. Lloyd’s is required to pay U.S. income tax on U.S. connected income written by Lloyd’s syndicates. Lloyd’s and the Internal Revenue Service (“IRS”) have entered into an agreement whereby the amount of tax due on U.S. connected income is calculated by Lloyd’s and remitted directly to the IRS. These amounts are then charged to the corporate 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. connected income. The non-U.S. connected insurance income would generally constitute taxable income under the Subpart F income section of the Internal Revenue Code (“Subpart F”) since less than 50% of Syndicate 1221’s premiums are derived within the U.K. and would therefore be subject to U.S. taxation when the Lloyd’s year of account closes. Taxes are accrued at a 35% rate on the Company’s foreign source insurance income and foreign tax credits, where available, are utilized to offset U.S. tax as permitted. The Company’s effective tax rate for Syndicate 1221 taxable income could substantially exceed 35% to the extent the Company is unable to offset U.S. taxes paid under Subpart F tax regulations with U.K. tax credits on future underwriting year distributions. U.S. taxes 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 through March 31, 2011. A finance bill was enacted in the U.K. that reduces the U.K. corporate tax rate from 28% to 26% effective April 2011. The effect of such tax rate change was not material.

F-34

The components of current and deferred income tax expense (benefit) are as follows:

		September 30,		September 30,		September 30,
	Year Ended December 31,
In thousands	2011		2010		2009
Current income tax expense:
Federal and foreign	$	573	$	11,965	$	25,833
State and local		340		97		142

Subtotal		913		12,062		25,975

Deferred income tax expense (benefit):
Federal and foreign		6,224		17,189		(2,285	)
State and local		—		—		—

Subtotal		6,224		17,189		(2,285	)

Total income tax expense	$	7,137	$	29,251	$	23,690

A reconciliation of total income taxes applicable to pre-tax operating income and the amounts computed by applying the federal statutory income tax rate to the pre-tax operating income was as follows:

		September 30,		September 30,			September 30,		September 30,			September 30,		September 30,
	Year Ended December 31,
In thousands	2011					2010					2009
Computed expected tax expense	$	11,457		35.0	%	$	34,590		35.0	%	$	30,397		35.0	%
Tax-exempt interest		(4,437	)	-13.6	%		(5,992	)	-6.1	%		(8,295	)	-9.6	%
Dividends received deduction		(1,065	)	-3.3	%		(718	)	-0.7	%		(598	)	-0.7	%
Proration		825		2.5	%		1,006		1.0	%		1,334		1.5	%
Current state and local income taxes,net of federal income tax		221		0.7	%		63		0.1	%		93		0.1	%
Other		136		0.4	%		302		0.3	%		759		0.9	%

Actual tax expense and rate	$	7,137		21.8	%	$	29,251		29.6	%	$	23,690		27.3	%

The tax effects of temporary differences that give rise to federal, foreign, state and local deferred tax assets and deferred tax liabilities were as follows:

		September 30,			September 30,
	December 31,
In thousands	2011			2010
Deferred tax assets:
Loss reserve discount	$	31,687		$	30,190
Unearned premiums		19,253			14,358
Compensation related		2,695			5,149
State and local net deferred tax assets		242			2,185
Other		664			3,872

Total gross deferred tax assets		54,541			55,754
Less: Valuation allowance		(242	)		(2,185	)

Total deferred tax assets		54,299			53,569

Deferred tax liabilities:
Deferred acquisition costs		(16,939	)		(11,645	)
Net unrealized gains on securities		(32,782	)		(17,638	)
Other		(10,869	)		(9,145	)

Total deferred tax liabilities		(60,590	)		(38,428	)

Net deferred income tax asset (liability)	$	(6,291	)	$	15,141

F-35

The Company has not provided for U.S. deferred income taxes on the undistributed earnings of approximately $60.9 million of its non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the non-U.S. subsidiaries. However, in the future, if such earnings were distributed to the Company, taxes of approximately $1.2 million, assuming all foreign tax credits are realized, 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.

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, tax planning strategies and anticipated future taxable income in making this assessment and believes it is more likely than not that we will realize the benefits of its deductible differences as of December 31, 2011, net of any valuation allowance.

The Company had state and local deferred tax assets amounting to potential future tax benefits of $0.2 million and $2.2 million as of December 31, 2011 and 2010, respectively. Included in the deferred tax assets are state and local net operating loss carry-forwards of $0.2 million and $1.4 million as of December 31, 2011 and 2010, 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 carry-forwards as of December 31, 2011 expire from 2024 to 2030.

Unrecognized tax benefits are differences between tax positions taken in the tax returns and benefits recognized in the financial statements. The Company has no unrecognized tax benefits as of December 31, 2011 and 2010. The Company did not incur any interest or penalties related to unrecognized tax benefits for the years ended December 31, 2011 and 2010. 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 2008 and subsequent years.

Note 8. Credit Facility

On April 1, 2011, the Company entered into a $165 million credit facility agreement with ING Bank N.V., London Branch, individually and as Administrative Agent, and a syndicate of lenders. The credit facility is a letter of credit facility and replaces a $140 million credit facility agreement that expired March 31, 2011. The credit facility, which is denominated in U.S. dollars, will be utilized to fund the Company’s participation in Syndicate 1221 through letters of credit for the 2011 and 2012 underwriting years, as well as open prior years. The letters of credit issued under the facility are denominated in British pounds and their aggregate face amount will fluctuate based on exchange rates. The ability to issue new letters of credit expired on December 31, 2011. If any letters of credit remain outstanding under the facility after December 31, 2012, the Company would be required to post additional collateral to secure the remaining letters of credit. As of December 31, 2011, letters of credit with an aggregate face amount of $149.6 million were outstanding under the credit facility.

This credit facility contains customary covenants for facilities of this type, including restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of assets, and requirements as to maintaining certain consolidated tangible net worth, statutory surplus and other financial ratios. The credit facility also provides for customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, any representation or warranty made by the Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting the Company and its subsidiaries, the occurrence of certain material judgments, or a change in control of the Company. The letter of credit facility is secured by a pledge of the stock of certain insurance subsidiaries of the Company. To the extent the aggregate face amount issued under the credit facility exceeds the commitment amount, the Company is required to post collateral with the lead bank of the consortium. The Company was in compliance with all covenants under the credit facility as of December 31, 2011.

As a result of the April 1, 2011 replacement of the expiring credit facility, the applicable margin and applicable fee rate payable under the letter of credit facility are now based on a tiered schedule that is based on the Company’s then-current ratings issued by S&P and Moody’s Investors Service (“Moody’s”) with respect to the Company’s senior unsecured long-term debt securities, without third-party credit enhancement, and the amount of the Company’s own ‘Funds at Lloyd’s’ collateral.

F-36

Note 9. Senior Note due May 1, 2016

On April 17, 2006, we completed a public debt offering of $125 million principal amount of 7% senior unsecured notes (the “Senior Notes”) and received net proceeds of $123.5 million. The Principal amount of the 7% Senior Notes is payable in a single installment on May 1, 2016. In April 2009, the Company repurchased $10.0 million aggregate principal amount of the Senior Notes from an unaffiliated note holder on the open market for $7.0 million, which generated a $3.0 million pre-tax gain that was reflected in Other income. The Senior Notes liability at December 31, 2011 was $114.3 million. The unamortized discount at December 31, 2011 was $0.7 million. The aggregate principal amount of the Senior Notes that will be repaid on May 1, 2016, as a result of these transactions, is $115.0 million.

Interest is payable on the Senior Notes 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%. Interest expense on the Senior Notes for the years ended December 31, 2011 and 2010 was $8.2 million, respectively.

The Senior Notes, our 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 December 31, 2011, the Company was in compliance with all such covenants.

Note 10. Lloyd’s Syndicate 1221

The Company’s Lloyd’s Operations included in the consolidated financial statements represents its participation in Syndicate 1221. Syndicate 1221’s stamp capacity is £175 million ($271 million) for the 2011 underwriting year compared to £168 million ($264 million) for the 2010 underwriting year. Stamp capacity is a measure of the amount of premiums a Lloyd’s syndicate is authorized to write based on a business plan approved by the Council of Lloyd’s. Syndicate 1221’s stamp capacity is expressed net of commission (as is standard at Lloyd’s). The Syndicate 1221 premiums recorded in the Company’s financial statements are gross of commission. The Company controlled 100% of Syndicate 1221’s stamp capacity for the 2011, 2010 and 2009 underwriting years through its wholly-owned Lloyd’s corporate member.

The Company provides letters of credit and posts cash to Lloyd’s to support its participation in Syndicate 1221’s stamp capacity. As of December 31, 2011, the Company had provided letters of credit of $149.6 million and did not have any cash collateral posted. If Syndicate 1221 increases its stamp capacity and the Company participates in the additional stamp capacity, or if Lloyd’s changes the capital requirements, the Company may be required to supply additional collateral acceptable to Lloyd’s. If the Company is unwilling or unable to provide additional acceptable collateral, the Company will be required to reduce its participation in the stamp capacity of Syndicate 1221. The letters of credit are provided through a credit facility with a consortium of banks which provides the Company with the ability to have letters of credit issued to support Syndicate 1221’s stamp capacity at Lloyd’s for the 2011 and 2012 underwriting years. The ability to issue new letters of credit expires on December 31, 2011. If any letters of credit remain outstanding under the facility after December 31, 2012, we would be required to post additional collateral to secure the remaining letters of credit. If the credit facility is not renewed prior to December 31, 2012, the Company will need to find internal and/or external sources to provide either letters of credit or other collateral in order to continue to participate in Syndicate 1221. The credit facility is collateralized by all of the common stock of Navigators Insurance Company. Refer to Note 8, Credit Facility, for additional information.

Note 11. Fiduciary Funds

Prior to 2006, the underwriting agencies managed insurance pools in which Navigators Insurance Company participated. Functions performed by the underwriting agencies included underwriting business, collecting premiums from the insured, paying claims, collecting paid recoverables from reinsurers, paying reinsurance premiums to reinsurers and remitting net account balances to member insurance companies. Funds received by the Company belonging to non-related participants in the former insurance pools are not material. They are held in a fiduciary capacity and are included in the accompanying consolidated balance sheets.

F-37

Note 12. Commitments and Contingencies

Future minimum annual rental commitments as of December 31, 2011 under various noncancellable operating leases for our office facilities, which expire at various dates through 2020, are as follows:

		September 30,
	Year Ended
In thousands	December 31,
2012	$	9,243
2013		9,163
2014		7,845
2015		7,741
2016		6,194
Thereafter		9,067

Total minimum operating lease payments	$	49,253

We are also liable for additional payments to the landlords for certain annual cost increases. Rent expense for the years ended December 31, 2011, 2010 and 2009 was $10.4 million, $9.3 million and $8.6 million, respectively.

In the ordinary course of conducting business, the Company’s subsidiaries are involved in various legal proceedings, either indirectly as insurers for parties or directly as defendants. Most of these proceedings consist of claims litigation involving the Company’s subsidiaries as either (a) liability insurers defending or providing indemnity for third party claims brought against insureds or (b) insurers defending first party coverage claims brought against them. The Company accounts for such activity through the establishment of unpaid loss and loss adjustment reserves. The Company’s management believes that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and cost of defense, will not be material to the Company’s consolidated financial condition, results of operations, or cash flows.

The Company’s subsidiaries are also from time to time involved with other legal actions, some of which assert claims for substantial amounts. These actions include claims asserting extra contractual obligations, such as claims involving allegations of bad faith in the handling of claims or the underwriting of policies. In general, the Company believes it has valid defenses to these cases. The Company’s management expects that the ultimate liability, if any, with respect to future extra-contractual matters will not be material to its consolidated financial position. Nonetheless, given the large or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of litigation, an adverse outcome in such matters could, from time to time, have a material adverse outcome on the Company’s consolidated results of operations or cash flows in a particular fiscal quarter or year.

F-38

Wherever 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. We do not believe that any assessment is likely in the foreseeable future and, therefore, have not provided any allowance for such an assessment.

Note 13. Share Capital and Share Repurchases

Our authorized share capital consists of 50,000,000 common shares with a par value of $0.10 per share and 1,000,000 preferred shares with a par value of $0.10 per share. The Company has not issued any preferred shares as of December 31, 2011.

The following table represents changes in the Company’s issued and outstanding common shares for the periods indicated:

		September 30,			September 30,			September 30,
	Year Ended December 31,
In thousands	2011			2010			2009
Beginning balance		15,742			16,846			16,856
Vested stock grants		178			109			74
Employee stock purchase plan		19			22			17
Stock options exercised		52			29			41
Treasury shares purchased		(1,979	)		(1,264	)		(142	)

Ending balance		14,012			15,742			16,846

In May 2011, the Parent Company’s Board of Directors authorized an additional $50 million under the existing share repurchase program of the Company’s common stock, which increased the size of the program to $150 million. This repurchase program was initially authorized in November 2009. The share repurchase program as originally approved was scheduled to expire on December 31, 2010, however, prior to its expiration, the Parent Company’s Board of Directors approved an extension to December 31, 2011.

Purchases were permitted from time to time at prevailing prices in open market or privately negotiated transactions through December 31, 2011. The timing and amount of purchases under the program depend on a variety of factors, including the trading price of the stock, market conditions and corporate and regulatory considerations.

F-39

The following presents our share repurchases under the aforementioned programs for the periods indicated:

		September 30,		September 30,
	Total
	Number of		Average
	Shares		Cost Paid
	Purchased		Per Share
Fourth quarter 2009 activity		141,576	$	47.72

Total 2009 activity		141,576	$	47.72


First quarter 2010 activity		573,600	$	41.27
Second quarter 2010 activity		558,003		40.32
Third quarter 2010 activity		97,115		42.25
Fourth quarter 2010 activity		35,566		48.04

Total 2010 activity		1,264,284	$	41.11


First quarter 2011 activity		256,094	$	50.96
Second quarter 2011 activity		597,026		47.55
Third quarter 2011 activity		749,076		43.03
Fourth quarter 2011 activity		376,911		45.61

Total 2011 activity		1,979,107	$	45.91

Note 14. Dividends from Subsidiaries and Statutory Financial Information

Navigators Insurance Company may pay dividends to the Parent Company out of its statutory earned surplus pursuant to statutory restrictions imposed under the New York insurance law. As of December 31, 2011, the maximum amount available for the payment of dividends by Navigators Insurance Company during 2011 without prior regulatory approval is $59.2 million. Navigators Insurance Company paid $45.0 million, $40.0 million, and $25.0 million in dividends to the Parent Company in 2011, 2010 and 2009, respectively.

The Insurance Companies’ statutory net income as filed with the regulatory authorities for 2011 (unaudited), 2010 and 2009 was $16.3 million, $85.7 million and $44.5 million, respectively. The statutory surplus as filed with the regulatory authorities was $662.2 million and $686.9 million as of December 31, 2011 (unaudited) and 2010 , respectively.

The NAIC has codified statutory accounting practices for insurance enterprises. As a result of this process, the NAIC issued a revised statutory Accounting Practices and Procedures Manual that became effective January 1, 2001, and is updated each year. We prepare our statutory basis financial statements in accordance with the most recently updated statutory manual subject to any deviations prescribed or permitted by the New York Insurance Commissioner. The significant differences between SAP and GAAP, as they relate to our operations, are as follows: (1) acquisition and commission costs are expensed when incurred, while under GAAP these costs are deferred and amortized as the related premium is earned; (2) bonds are stated at amortized cost, while under GAAP bonds are classified as available-for-sale and reported at fair value, with unrealized gains and losses recognized in other comprehensive income as a separate component of stockholders’ equity; (3) certain deferred tax assets are not permitted to be included in statutory surplus, while under GAAP deferred taxes are provided to reflect all temporary differences between the carrying values and tax basis of assets and liabilities; (4) unearned premiums and loss reserves are reflected net of ceded amounts, while under GAAP the unearned premiums and loss reserves are reflected gross of ceded amounts; (5) agents’ balances over ninety days due are excluded from the balance sheet, and uncollateralized amounts due from unauthorized reinsurers are deducted from surplus, while under GAAP they are restored to the balance sheet, subject to the usual tests regarding recoverability.

As part of its general regulatory oversight process, the New York Department conducts detailed examinations of the books, records and accounts of New York insurance companies every three to five years. In 2011, the New York Department conducted an examination of Navigators Insurance Company and Navigators Specialty Insurance Company for the years 2005 through 2009. The U.K. Branch is required to maintain certain capital requirements under U.K. regulations and subject to examination by the U.K. Financial Services Authority.

F-40

Note 15. Stock Option Plans, Stock Grants, Stock Appreciation Rights and Employee Stock Purchase Plan

At our May 2005 Annual Meeting, the stockholders approved the 2005 Stock Incentive Plan. The 2005 Stock Incentive Plan authorizes the issuance in the aggregate of 1,000,000 incentive stock options, non-incentive stock options, restricted shares and stock appreciation rights for our common stock. In April 2009, the stockholders approved an amendment to the 2005 Stock Incentive Plan increasing the available number of incentive stock options, non-incentive stock options, restricted shares and stock appreciation rights from 1,000,000 to 1,500,000. Stockholders further amended and restated the 2005 Stock Incentive Plan in 2010. Now, known as the 2005 Amended and Restated Stock Incentive Plan, but no additional shares authorized for issuance. As of December 31, 2011, 1,073,825 of such awards were issued leaving 426,175 awards available to be issued in subsequent periods. Upon the approval of the 2005 Amended and Restated Stock Incentive Plan, no further awards are being issued under any of our other stock plans or the stock appreciation rights plan. All stock options issued under the 2005 Amended and Restated Stock Incentive Plan are exercisable upon vesting for one share of our common stock and are granted at exercise prices no less than the fair market value of our common stock on the date of grant.

The amounts charged to expense for stock-based compensation for the years ended December 31, 2011, 2010 and 2009 is presented in the following table:

		September 30,			September 30,			September 30,
	Year Ended December 31,
In thousands	2011			2010			2009
Restricted stock units ⁽¹⁾	$	139		$	5,551		$	8,793
Directors restricted stock grants ⁽²⁾		248			210			180
Employee stock purchase plan		173			221			178
Stock appreciation rights ⁽³⁾		(100	)		(77	)		(420	)
Stock options		—			—			—

Total stock based compensation	$	460		$	5,905		$	8,731

(1)	— The reduction in stock grant expense includes the reversal of previously recognized expense related to performance based awards that are not expected to vest.

(2)	— Relates to non-employee directors serving on the Parent Company’s Board of Directors, all who have been elected by the Company's shareholders, as well as NUAL’s Board of Directors.

(3)	— All issued stock appreciation rights were exercised during 2011. The Company will no longer issue awards from the Stock Appreciation Rights Plan as a result of the 2005 Amended and Restated Stock Incentive Plan.

Stock-based compensation granted under the Company’s stock plans is expensed in tranches over the vesting period. Options and non-performance based grants generally vest equally over a four year period and the options have a maximum term of ten years. Certain non-performance based grants vest over five years with one-third vesting in each of the third, fourth and fifth years. The Company’s performance based share grants generally consist of two types of awards. The restricted stock units issued in 2011 will cliff vest in three years, generally with 50% vesting in full, while the vesting of the remaining 50% will be dependent on the compound annual growth in book value per share for the three years immediately prior to the vesting date, with actual shares that vest ranging between 150% to 0% of that portion of the original award. Those issued prior to 2011 generally vest over five years with one-third vesting in each of the third, fourth and fifth years, dependent on the rolling three-year average return on equity based on the three years prior to the year in which the vesting occurs, with actual shares that vest ranging between 150% to 0% of the original award.

Unvested restricted stock grants outstanding as of December 31, 2011, 2010 and 2009 are as follows:

		September 30,			September 30,			September 30,
	December 31,
	2011			2010			2009
Beginning balance		590,661			619,739			558,049
Granted		184,758			169,134			202,731
Vested		(172,731	)		(156,723	)		(104,677	)
Forfeited		(75,716	)		(41,489	)		(36,364	)

Ending balance		526,972			590,661			619,739

F-41

Stock options outstanding as of December 31, 2011, 2010 and 2009 are as follows:

		September 30,			September 30,		September 30,			September 30,		September 30,			September 30,
	December 31,
	2011					2010					2009
	# of Shares			Average Exercise Price		# of Shares			Average Exercise Price		# of Shares			Average Exercise Price
Beginning balance		157,500		$	27.13		191,000		$	26.21		231,750		$	25.62
Granted		—			—		—					—			—
Exercised		(52,250	)	$	22.35		(29,000	)	$	21.12		(40,750	)	$	23.16
Expired or forfeited		—			—		(4,500	)	$	26.69		—			—

Ending balance		105,250		$	29.50		157,500		$	27.13		191,000		$	26.21

Number of options exercisable		105,250		$	29.50		157,500		$	27.13		191,000		$	26.21

The following table summarizes information about options outstanding as of December 31, 2011:

		September 30,		September 30,		September 30,		September 30,		September 30,
Price Range	Outstanding Options		Average Remaining Contract Life		Average Exercise Price		Exercisable Options		Average Exercise Price
$21 to $30		83,750		2.0	$	28.51		83,750	$	28.51
$31 to $37		21,500		3.2	$	33.39		21,500	$	33.39

Total		105,250						105,250

The Company has a Stock Appreciation Rights Plan which allows for the grant of up to 300,000 stock appreciation rights (“SARs”) at prices of no less than 90% of the fair market value of the common stock. As a result of the approval of the 2005 Amended and Restated Stock Incentive Plan, no further awards will be issued from the Stock Appreciation Rights Plan. SARs outstanding as of December 31, 2011, 2010 and 2009 are as follows:

		September 30,			September 30,		September 30,			September 30,		September 30,			September 30,
	December 31,
	2011					2010					2009
	SARs			Average Exercise Prices		SARs			Average Exercise Prices		SARs			Average Exercise Prices
Beginning balance		16,500		$	18.74		52,000		$	14.05		59,250		$	13.89
Granted		—			—		—			—		—			—
Exercised		(16,500	)	$	18.74		(35,500	)	$	11.86		(7,250	)	$	12.76
Expired or forfeited		—			—		—			—		—			—

Ending balance		—			—		16,500		$	18.74		52,000		$	14.05

Number of SARs exercisable		—			—		16,500		$	18.74		52,000		$	14.05

We offer an Employee Stock Purchase Plan (the “ESPP”) to all of our eligible employees. Employees are offered the opportunity to purchase the Company’s common stock at 90% of fair market value at the lower of the price at the beginning or the end of each six month offering period. Employees can invest up to 10% of their base compensation through payroll withholding towards the purchase of our common stock subject to the lesser of 1,000 shares or total market value of $25,000. There will be approximately 7,346 shares purchased in 2012 from funds withheld during the July 1, 2011 to December 31, 2011 offering period. There were 19,074 shares purchased in 2011 in the aggregate from funds withheld during the offering periods of July 1, 2010 to December 31, 2010 and January 1, 2011 to June 30, 2011.

We expense both the value of the 10% discount and the “look-back” option which provides for the more favorable price at either the beginning or end of the offering period.

F-42

Note 16. Retirement Plans

We sponsor a defined contribution plan covering substantially all of the Company’s U.S. employees. For 2011 and 2010, Company contributions were equal to 7.5% of each eligible employee’s gross pay (plus bonus of up to $2,500), up to the amount permitted by certain Federal regulations. Employees’ accounts vest at 20% per year for six years with vesting beginning in an employee’s second year of service. For any employee hired prior to January 1, 2008, vesting is calculated based on hours of service and vesting commences on January 1 following an employee’s first full year of service. For employees hired after January 1, 2008, vesting is calculated based on elapsed time and vesting commences on the employees anniversary date. The expense recorded for the defined contribution plan was $2.8 million, $2.9 million and $2.7 million for 2011, 2010 and 2009, respectively. The Company sponsors a similar defined contribution plan under U.K. regulations for the Company’s U.K. employees. Contributions, which are fully vested when made, are equal to 15% of each eligible employee’s gross base salary. The expense recorded for the U.K. defined contribution plan was $1.7 million, $1.5 million and $1.4 million for 2011, 2010 and 2009, respectively. Such expenses are included in Other operating expenses.

We have a 401(k) plan for all U.S. eligible employees. Each eligible employee can contribute a portion of their salary, limited by certain Federal regulations. Beginning in 2008, we matched 100% of employee contributions on eligible compensation, up to a maximum of 4% each pay period; our contribution vests immediately. In addition, beginning in 2008, we have the discretion of contributing up to 4% of eligible compensation to each eligible employee’s 401(k) plan irrespective of the employees’ contribution amount which also vests immediately. The expense recorded for such plan was $1.6 million, $1.7 million and $1.2 million for 2011, 2010 and 2009, respectively.

Note 17. Quarterly Financial Data (Unaudited)

The following is a summary of quarterly financial data for the periods indicated:

		September 30,			September 30,			September 30,			September 30,
In thousands, except per share amounts	March 31, 2011			June 30, 2011			September 30, 2011			December 31, 2011
Gross written premiums	$	296,283		$	278,714		$	255,318		$	277,901
Net written premiums		193,076			183,363			175,357			202,002
Revenues:
Net earned premiums		152,478			173,777			173,633			191,757
Net investment income		17,384			17,429			16,259			12,428
Total other-than-temporary impairment losses		(263	)		(833	)		(1,241	)		(1,280	)
Portion of loss recognized in other comprehensive income (before tax)		22			301			618			691

Net other-than-temporary impairment losses recognized in earnings		(241	)		(532	)		(623	)		(589	)
Net realized gains (losses)		(1,389	)		3,006			3,238			7,141
Other income (expense)		991			573			(921	)		586

Total revenues		169,223			194,253			191,586			211,323

Expenses:
Net losses and loss adjustment expenses		116,788			113,863			110,242			136,104
Commission expenses		26,200			28,030			25,934			30,273
Other operating expenses		36,575			35,777			34,989			30,688
Interest expense		2,046			2,047			2,047			2,048

Total expenses		181,609			179,717			173,212			199,113
Income (loss) before income taxes		(12,386	)		14,536			18,374			12,210

Income tax expense (benefit)		(4,493	)		5,032			4,476			2,122

Net income (loss)	$	(7,893	)	$	9,504		$	13,898		$	10,088


Comprehensive income (loss)	$	(6,924	)	$	26,329		$	12,686		$	23,293

Combined ratio		117.1	%		101.9	%		99.1	%		102.5	%
Net income (loss) per common share:
Basic	$	(0.50	)	$	0.62		$	0.94		$	0.71
Diluted	$	(0.50	)	$	0.60		$	0.92		$	0.70

F-43

		September 30,			September 30,			September 30,			September 30,
In thousands, except per share amounts	March 31, 2010			June 30, 2010			September 30, 2010			December 31, 2010
Gross written premiums	$	270,145		$	253,568		$	233,638		$	229,850
Net written premiums		189,317			165,005			157,807			141,809
Revenues:
Net earned premiums		164,069			161,471			168,233			166,158
Net investment income		17,972			17,853			17,839			17,998
Total other-than-temporary impairment losses		(251	)		(489	)		(1,034	)		(448	)
Portion of loss recognized in other comprehensive income (before tax)		170			334			365			273

Net other-than-temporary impairment losses recognized in earnings		(81	)		(155	)		(669	)		(175	)
Net realized gains (losses)		6,113			11,020			4,521			19,665
Other income (expense)		1,070			(899	)		2,767			2,205

Total revenues		189,143			189,290			192,691			205,851

Expenses:
Net losses and loss adjustment expenses		103,807			99,863			107,463			110,022
Commission expenses		25,316			25,677			25,185			32,935
Other operating expenses		34,586			34,513			34,682			35,919
Interest expense		2,044			2,044			2,045			2,045

Total expenses		165,753			162,097			169,375			180,921
Income (loss) before income taxes		23,390			27,193			23,316			24,930

Income tax expense (benefit)		6,345			8,223			7,091			7,592

Net income (loss)	$	17,045		$	18,970		$	16,225		$	17,338


Comprehensive income (loss)	$	24,505		$	26,164		$	40,023		$	(24,308	)

Combined ratio		99.1	%		99.7	%		97.8	%		106.3	%
Net income per common share:
Basic	$	1.02		$	1.18		$	1.03		$	1.10
Diluted	$	1.00		$	1.16		$	1.00		$	1.07

F-44

SCHEDULE I

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

SUMMARY OF CONSOLIDATED INVESTMENTS-OTHER THAN INVESTMENTS

IN RELATED PARTIES

December 31, 2011

		September 30,		September 30,		September 30,			September 30,		September 30,
	December 31, 2011
			Gross		Gross					OTTI
			Unrealized		Unrealized			Amortized		Recognized
In thousands	Fair Value		Gains		Losses			Cost		in OCI
Fixed maturities:
U.S. Government Treasury bonds, agency bonds, and foreign government bonds	$	336,070	$	8,979	$	(383	)	$	327,474	$	—
States, municipalities and political subdivisions		410,836		28,887		(108	)		382,057		—
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		395,860		17,321		(3	)		378,542		—
Residential mortgage obligations		23,148		8		(2,848	)		25,988		(1,682	)
Asset-backed securities		48,934		695		(75	)		48,314		—
Commercial mortgage-backed securities		216,034		10,508		(593	)		206,119		—

Subtotal	$	683,976	$	28,532	$	(3,519	)	$	658,963	$	(1,682	)
Corporate bonds		457,187		15,743		(6,772	)		448,216		—

Total fixed-maturities	$	1,888,069	$	82,141	$	(10,782	)	$	1,816,710	$	(1,682	)
Equity securities - common stocks		95,849		23,240		(958	)		73,567		—
Short-term investments		122,220		—		—			122,220		—
Cash		127,360		—		—			127,360

Total	$	2,233,498	$	105,381	$	(11,740	)	$	2,139,857	$	(1,682	)

S-1

SCHEDULE II

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

THE NAVIGATORS GROUP, INC.

BALANCE SHEETS

(Parent Company)

(In thousands, except share data)

		September 30,			September 30,
	December 31,
	2011			2010
ASSETS
Cash and investments	$	8,315		$	53,217
Investments in subsidiaries		895,047			877,999
Goodwill and other intangible assets		2,534			2,534
Other assets		13,806			12,028

Total assets	$	919,702		$	945,778


LIABILITIES AND STOCKHOLDERS’ EQUITY

Senior Notes	$	114,276		$	114,138
Accounts payable and other liabilities		649			946
Accrued interest payable		1,342			1,340

Total liabilities		116,267			116,424


Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued		—			—
Common stock, $.10 par value, authorized 50,000,000 shares, issued 17,467,615 shares for 2011 and 17,274,440 shares for 2010		1,746			1,728
Additional paid-in capital		322,133			312,588
Treasury stock, at cost (3,511,380 shares for 2011 and 1,532,273 shares for 2010)		(155,801	)		(64,935	)
Retained earnings		565,109			539,512
Accumulated other comprehensive income:
Net unrealized gains (losses) on securities available-for-sale, net of tax		60,860			31,474
Foreign currency translation adjustment, net of tax		9,388			8,987

Total stockholders’ equity		803,435			829,354

Total liabilities and stockholders' equity	$	919,702		$	945,778

S-2

SCHEDULE II

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

THE NAVIGATORS GROUP, INC.

STATEMENTS OF INCOME

(Parent Company)

(In thousands)

		September 30,			September 30,			September 30,
	Year Ended December 31,
	2011			2010			2009

Revenues:
Net investment income	$	595		$	630		$	583
Dividends received from wholly-owned subsidiaries		45,000			40,000			25,000

Total revenues		45,595			40,630			25,583

Expenses:
Interest expense		8,188			8,178			8,455
Other (income) expense		2,969			634			(1,482	)

Total expenses		11,157			8,812			6,973


Income before income tax benefit		34,438			31,818			18,610
Income tax expense (benefit)		(3,635	)		(2,846	)		(2,174	)

Income before equity in undistributed net income of wholly owned subsidiaries		38,073			34,664			20,784
Equity in undistributed net income of wholly-owned subsidiaries		(12,476	)		34,914			42,374


Net income	$	25,597		$	69,578		$	63,158

S-3

SCHEDULE II

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

THE NAVIGATORS GROUP, INC.

STATEMENTS OF CASH FLOWS

(Parent Company)

(In thousands)

		September 30,			September 30,			September 30,
	Year Ended December 31,
	2011			2010			2009
Operating activities:
Net income	$	25,597		$	69,578		$	63,158
Adjustments to reconcile net income to net cash provided by (used in) operations:
Equity in undistributed net income of wholly-owned subsidiaries		(32,524	)		(74,914	)		(67,374	)
Dividends received from subsidiaries		45,000			40,000			25,000
Other		5,831			4,543			4,682

Net cash provided by (used in) operating activities		43,904			39,207			25,466


Investing activities:
Fixed maturities, available-for-sale
Sales		45,716			26,313			9,103
Purchases		(9,253	)		(28,213	)		(34,932	)
Equity securities
Sales		—			2,995			—
Purchases		—			(2,367	)		—
Net increase in short-term investments		10,064			5,122			13,863

Net cash provided by (used in) investing activities		46,527			3,850			(11,966	)


Financing activities:
Capital contribution		—			—			(2,000	)
Purchase of treasury stock		(90,866	)		(51,980	)		(6,756	)
Purchase of Senior Notes		—			—			(7,000	)
Proceeds of stock issued from employee stock purchase plan		945			868			727
Proceeds of stock issued from exercise of stock options		1,169			611			944

Net cash provided by (used in) financing activities		(88,752	)		(50,501	)		(14,085	)


Increase (decrease) in cash		1,679			(7,444	)		(585	)
Cash at beginning of year		1,646			9,090			9,675

Cash at end of year	$	3,325		$	1,646		$	9,090

S-4

SCHEDULE III

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

SUPPLEMENTARY INSURANCE INFORMATION

		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
In thousands	Deferred policy acquisition costs		Reserve for losses and loss adjustment expenses		Unearned premiums		Other policy claims and benefits payable		Net earned premiums		Net investment income ⁽¹⁾		Losses and loss adjustment expenses incurred		Amortization of deferred policy acquisition costs ⁽²⁾		Other operating expenses ⁽¹⁾		Net written premiums
Year ended December 31, 2011
Insurance Companies	$	47,298	$	1,517,331	$	384,596	$	—	$	472,463	$	54,164	$	341,625	$	64,165	$	101,517	$	542,391
Lloyd's Operations		16,686		565,348	$	148,032		—		219,182		8,955		135,372		48,341		36,512		211,407

	$	63,984	$	2,082,679	$	532,628	$	—	$	691,645	$	63,119	$	476,997	$	112,506	$	138,029	$	753,798

Year ended December 31, 2010
Insurance Companies	$	33,273	$	1,433,556	$	318,119	$	—	$	438,851	$	62,792	$	280,120	$	59,122	$	106,631	$	429,355
Lloyd's Operations		21,928		552,282		145,396		—		221,080	$	8,286	$	141,035	$	49,991	$	33,112	$	224,583

	$	55,201	$	1,985,838	$	463,515	$	—	$	659,931	$	71,078	$	421,155	$	109,113	$	139,743	$	653,938

Year ended December 31, 2009
Insurance Companies	$	34,872	$	1,395,876	$	334,798	$	—	$	479,121	$	65,717	$	304,672	$	61,949	$	104,801	$	477,673
Lloyd's Operations		21,703		524,410		140,373		—		204,242		9,229		131,326		37,727		27,896		223,582

	$	56,575	$	1,920,286	$	475,171	$	—	$	683,363	$	74,946	$	435,998	$	99,676	$	132,697	$	701,255

(1)	— Net investment income and Other operating expenses reflect only such amounts attributable to the Company’s insurance operations.

(2)	— Amortization of deferred policy acquisition costs reflects only such amounts attributable to the Company’s insurance operations.

A portion of these costs is eliminated in consolidation.

S-5

SCHEDULE IV

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

REINSURANCE

Written Premium

		September 30,		September 30,		September 30,		September 30,		September 30,
In thousands	Direct Amount		Ceded to other companies		Assumed from other companies		Net amount		Percentage of amount assumed to net
Year ended December 31, 2011
Property-Casualty	$	929,778	$	354,418	$	178,438	$	753,798		24	%

Year ended December 31, 2010
Property-Casualty	$	916,817	$	333,263	$	70,384	$	653,938		11	%

Year ended December 31, 2009
Property-Casualty	$	966,251	$	343,663	$	78,667	$	701,255		11	%

S-6

SCHEDULE V

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

		September 30,		September 30,			September 30,		September 30,		September 30,
In thousands	Balance at January 1, 2011		Charged (Credited) to Costs and Expenses			Charged to Other Accounts		Deductions (Describe)		Balance at December 31, 2011
Description:
Allowance for uncollectable reinsurance	$	12,970	$	50		$	—	$	—	$	13,020

Valuation allowance in deferred taxes	$	2,185	$	(1,943	)	$	—	$	—	$	242

S-7

SCHEDULE VI

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

SUPPLEMENTARY INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS

(In thousands)

		000		000		000		000		000		000		000		000			000		000		000
	Deferred policy		Reserve for losses and loss		Discount,				Net		Net		Losses and loss adjustment expenses incurred related to					Amortization of deferred policy		Other		Net
Affiliation with Registrant	acquisition costs		adjustment expenses		if any, deducted		Unearned premiums		earned premiums		investment income ⁽¹⁾		Current year		Prior years			acquisition costs ⁽²⁾		operating expenses ⁽¹⁾		written premiums
Consolidated Subsidiaries
Year ended December 31, 2011	$	63,984	$	2,082,679	$	—	$	532,628	$	691,645	$	63,119	$	474,852	$	2,145		$	112,506	$	138,029	$	753,798

Year ended December 31, 2010	$	55,201	$	1,985,838	$	—	$	463,515	$	659,931	$	71,078	$	434,957	$	(13,802	)	$	109,113	$	139,743	$	653,938

Year ended December 31, 2009	$	56,575	$	1,920,286	$	—	$	475,171	$	683,363	$	74,946	$	444,939	$	(8,941	)	$	99,676	$	132,697	$	701,255

(1)	— Net investment income and Other operating expenses reflect only such amounts attributable to the Company's insurance operations.

(2)	— Amortization of deferred policy acquisition costs reflects only such amounts attributable to the Company's insurance operations.

A portion of these costs is eliminated in consolidation.

S-8

INDEX TO EXHIBITS


Exhibit No.	Description of Exhibit	Previously filed and Incorporated Herein by Reference to:

3-1	Restated Certificate of Incorporation	Form S-8 filed July 26, 2002 (File No. 333-97183)

3-2	Certificate of Amendment to the Restated Certificate of Incorporation	Form S-8 filed July 26, 2002 (File No. 333-97183)

3-3	By-laws, as amended	Form S-1 (File No. 33-5667)

3-4	Certificate of Amendment to the Restated Certificate of Incorporation	Form 10-Q for June 30, 2006

4-1	Specimen of Common Stock certificate, par value $0.10 per share	Form S-8 filed June 20, 2003 (File No. 333-106317)

10-1*	Stock Option Plan

10-2*	Non-Qualified Stock Option Plan	Form S-4 (File No. 33-75918)

10-3	Employment Agreement with Stanley A. Galanski effective March 26, 2001	Form 10-Q for March 31, 2001

10-4	Employment Agreement with R. Scott Eisdorfer dated September 1, 1999	Form 10-K for December 31, 2002

10-5*	2002 Stock Incentive Plan	Proxy Statement filed May 30, 2002

10-6*	Employee Stock Purchase Plan	Proxy Statement filed May 29, 2003

10-7*	Executive Performance Incentive Plan	Proxy Statement filed May 29, 2003

10-8	Form of Indemnity Agreement by the Company and the Selling Stockholders (as defined therein)	Amendment No. 2 to Form S-3 dated October 1, 2003 (File No.333-108424)

10-9	Common Stock Grant Award to Stanley A. Galanski under the 2002 Stock Incentive Plan	Form 8-K filed December 14, 2004

10-10	Commutation Agreement between Navigators Insurance Company and Somerset Insurance Limited	Form 8-K filed January 18, 2005

10-11*	2005 Stock Incentive Plan	Proxy Statement filed May 20, 2005

10-12	Third Amended and Restated Credit Agreement among the Company and the Lenders dated February 2, 2007	Form 8-K filed February 7, 2007

10-13	Agreement with Francis W. McDonnell	Form 8-K filed July 29, 2008

10-14	Fourth Amended and Restated Credit Agreement among the Company and the Lender dated April 3, 2009	Form 8-K filed April 7, 2009

10-15*	Amended 2005 Stock Incentive Plan	Proxy Statement filed April 29, 2009

10-16	Agreement with Bruce J. Byrnes	Form 8-K filed June 16, 2009

10-17*	Amended and Restated 2005 Stock Incentive Plan	Proxy Statement filed April 4, 2010

10-18	Funds at Lloyds Letter of Credit Agreement among the Company, ING Bank N.V., London Branch, individually and as Administrative Agent, and Letter of Credit Agent JP Morgan Chase Bank N.A., and Barclays Bank	Form 8-K filed April 1, 2011

11-1	Statement re Computation of Per Share Earnings	**

21-1	Subsidiaries of Registrant	**


Exhibit No.	Description of Exhibit	Previously filed and Incorporated Herein by Reference to:

23-1	Consent of Independent Registered Public Accounting Firm	**

31-1	Certification of CEO per Section 302 of the Sarbanes-Oxley Act	**

31-2	Certification of CFO per Section 302 of the Sarbanes-Oxley Act	**

32-1	Certification of CEO per Section 906 of the Sarbanes-Oxley Act (This exhibit is intended to be furnished in accordance with regulation S-K item 601(b)(32)(ii) and shall not be deemed to be filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference).	**

32-2	Certification of CFO per Section 906 of the Sarbanes-Oxley Act (This exhibit is intended to be furnished in accordance with regulation S-K item 601(b)(32)(ii) and shall not be deemed to be filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference).	**

101.INS	XBRL Instance Document	**

101.SCH	XBRL Taxonomy Extension Scheme	**

101.CAL	XBRL Taxonomy Extension Calculation Database	**

101.LAB	XBRL Taxonomy Extension Label Linkbase	**

101.PRE	XBRL Taxonomy Extension Presentation Linkbase	**

101.DEF	XBRL Taxonomy Extension Definition Linkbase

*	Compensatory Plan

**	Included herein