Edgar Filing: NAVIGATORS GROUP INC

Filed by Bowne Pure Compliance

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2008

Commission file number 0-15886

The Navigators Group, Inc.

(Exact name of Registrant as specified in its charter)


Delaware		13-3138397

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

One Penn Plaza, New York, New York		10119

(Address of principal executive offices)		(Zip Code)

(212) 244-2333

(Registrant’s telephone number, including area code)

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

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

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


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

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

The number of common shares outstanding as of October 17, 2008 was 16,778,692.

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

INDEX


	Page No.

Part I. FINANCIAL INFORMATION:

Item 1. Financial Statements

Consolidated Balance Sheets September 30, 2008 (Unaudited) and December 31, 2007		3

Consolidated Statements of Income (Unaudited) Three Months Ended September 30, 2008 and 2007		4
Nine Months Ended September 30, 2008 and 2007		5

Consolidated Statements of Stockholders’ Equity (Unaudited) September 30, 2008 and 2007		6

Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended September 30, 2008 and 2007		7
Nine Months Ended September 30, 2008 and 2007		8

Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2008 and 2007		9

Notes to Interim Consolidated Financial Statements (Unaudited)		10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25

Item 3. Quantitative and Qualitative Disclosures About Market Risk		79

Item 4. Controls and Procedures		80

Part II. OTHER INFORMATION

Item 1. Legal Proceedings		80

Item 1A. Risk Factors		80

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		80

Item 3. Defaults Upon Senior Securities		81

Item 4. Submissions of Matters to a Vote of Security Holders		81

Item 5. Other Information		81

Item 6. Exhibits		82

Signature		83

Index of Exhibits		84

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

Part I. Financial Information

Item 1. Financial Statements

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

($ in thousands, except share data)


	September 30,			December 31,
	2008			2007
	(Unaudited)
ASSETS
Investments and cash:
Fixed maturities, available-for-sale, at fair value (amortized cost: 2008, $1,673,013; 2007, $1,508,489)	$	1,625,686		$	1,522,320
Equity securities, available-for-sale, at fair value (cost: 2008, $71,835; 2007, $65,492)		68,637			67,240
Short-term investments, at fair value		178,569			170,685
Cash		23,298			7,056

Total investments and cash		1,896,190			1,767,301


Premiums in course of collection		172,285			163,081
Commissions receivable		148			2,381
Prepaid reinsurance premiums		189,093			188,961
Reinsurance receivable on paid losses		60,110			94,818
Reinsurance receivable on unpaid losses and loss adjustment expenses		865,288			801,461
Net deferred income tax benefit		60,155			29,249
Deferred policy acquisition costs		51,852			51,895
Accrued investment income		17,172			15,605
Goodwill and other intangible assets		7,513			8,084
Other assets		20,778			20,935


Total assets	$	3,340,584		$	3,143,771


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses	$	1,847,694		$	1,648,764
Unearned premium		496,852			469,481
Reinsurance balances payable		149,061			161,829
Senior notes		123,762			123,673
Federal income tax payable		7,417			10,868
Payable for securities purchased		2,608			—
Accounts payable and other liabilities		57,629			67,050

Total liabilities		2,685,023			2,481,665


Stockholders’ equity:
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued		—			—
Common stock, $.10 par value, shares authorized: 50,000,000 at 9/30/08 and 12/31/07; issued and outstanding: 16,778,692 (net of treasury shares) at 9/30/08 and 16,873,094 at 12/31/07		1,700			1,687
Additional paid-in capital		296,477			291,616
Retained earnings		396,756			355,084
Treasury stock, at cost (224,754 shares at 9/30/08)		(11,540	)		—
Accumulated other comprehensive income (loss)		(27,832	)		13,719

Total stockholders’ equity		655,561			662,106


Total liabilities and stockholders’ equity	$	3,340,584		$	3,143,771

See accompanying notes to interim consolidated financial statements.

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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


	Three Months Ended
	September 30,
	2008			2007
	(Unaudited)

Gross written premium	$	252,943		$	245,961

Revenues:
Net written premium	$	140,318		$	159,102
Decrease (increase) in unearned premium		13,722			(3,064	)

Net earned premium		154,040			156,038
Commission income		8			117
Net investment income		19,322			17,930
Net realized capital (losses)		(5,516	)		(66	)
Other income (expense)		(119	)		298

Total revenues		167,735			174,317


Operating expenses:
Net losses and loss adjustment expenses incurred		113,269			88,019
Commission expense		22,357			19,676
Other operating expenses		30,601			27,902
Interest expense		2,218			2,216

Total operating expenses		168,445			137,813


Income (loss) before income tax expense		(710	)		36,504


Income tax expense (benefit):
Current		2,069			11,520
Deferred		(3,780	)		(49	)

Total income tax expense (benefit)		(1,711	)		11,471


Net income	$	1,001		$	25,033


Net income per common share:
Basic	$	0.06		$	1.49
Diluted	$	0.06		$	1.47

Average common shares outstanding:
Basic		16,772			16,843
Diluted		16,927			16,996

See accompanying notes to interim consolidated financial statements.

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

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


	Nine Months Ended
	September 30,
	2008			2007
	(Unaudited)

Gross written premium	$	819,302		$	823,371

Revenues:
Net written premium	$	502,327		$	493,471
(Increase) in unearned premium		(29,844	)		(52,770	)

Net earned premium		472,483			440,701
Commission income		736			1,011
Net investment income		56,891			51,476
Net realized capital gains (losses)		(13,568	)		975
Other income (expense)		902			(26	)

Total revenues		517,444			494,137


Operating expenses:
Net losses and loss adjustment expenses incurred		293,578			248,950
Commission expense		66,795			54,425
Other operating expenses		93,594			82,799
Interest expense		6,652			6,646

Total operating expenses		460,619			392,820


Income before income tax expense		56,825			101,317


Income tax expense (benefit):
Current		24,531			34,301
Deferred		(9,378	)		(2,064	)

Total income tax expense		15,153			32,237


Net income	$	41,672		$	69,080


Net income per common share:
Basic	$	2.48		$	4.11
Diluted	$	2.45		$	4.07

Average common shares outstanding:
Basic		16,802			16,796
Diluted		16,980			16,967

See accompanying notes to interim consolidated financial statements.

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

($ in thousands)


	Nine Months Ended
	September 30,
	2008			2007
	(Unaudited)

Preferred Stock
Balance at beginning and end of period	$	—		$	—


Common stock
Balance at beginning of year	$	1,687		$	1,674
Shares issued under stock plans		13			12

Balance at end of period	$	1,700		$	1,686


Additional paid-in capital
Balance at beginning of year	$	291,616		$	286,732
Shares issued under stock plans		4,861			4,223

Balance at end of period	$	296,477		$	290,955


Retained earnings
Balance at beginning of year	$	355,084		$	259,464
Net income		41,672			69,080

Balance at end of period	$	396,756		$	328,544


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

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


Accumulated other comprehensive income (loss)
Net unrealized gains (losses) on securities, net of tax
Balance at beginning of year	$	10,186		$	849
Change in period		(43,423	)		686

Balance at end of period		(33,237	)		1,535

Cumulative translation adjustments, net of tax
Balance at beginning of year		3,533			2,624
Net adjustment for period		1,872			1,132

Balance at end of period		5,405			3,756

Balance at end of period	$	(27,832	)	$	5,291


Total stockholders’ equity at end of period	$	655,561		$	626,476

See accompanying notes to interim consolidated financial statements.

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ in thousands)


	Three Months Ended
	September 30,
	2008			2007
	(Unaudited)

Net income	$	1,001		$	25,033

Other comprehensive income (loss):
Change in net unrealized gains (losses) on securities, net of tax expense (benefit) of ($11,938) and $6,446 in 2008 and 2007, respectively⁽¹⁾		(23,025	)		12,154
Change in foreign currency translation gains, net of tax expense of $958 and $178 in 2008 and 2007, respectively		1,779			331

Other comprehensive income (loss)		(21,246	)		12,485


Comprehensive income (loss)	$	(20,245	)	$	37,518


⁽¹⁾ Disclosure of reclassification amount, net of tax:
Unrealized holding gains (losses) arising during period	$	(26,609	)	$	12,105
Less: reclassification adjustment for net realized capital (losses) included in net income		(3,584	)		(49	)

Change in net unrealized gains (losses) on securities	$	(23,025	)	$	12,154

See accompanying notes to interim consolidated financial statements.

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)


	Nine Months Ended
	September 30,
	2008			2007
	(Unaudited)

Net income	$	41,672		$	69,080

Other comprehensive income (loss):
Change in net unrealized gains (losses) on securities, net of tax expense (benefit) of ($22,680) and $311 in 2008 and 2007, respectively⁽¹⁾		(43,423	)		686
Change in foreign currency translation gains, net of tax expense of $1,008 and $610 in 2008 and 2007, respectively		1,872			1,132

Other comprehensive income (loss)		(41,551	)		1,818


Comprehensive income	$	121		$	70,898


⁽¹⁾ Disclosure of reclassification amount, net of tax:
Unrealized holding gains (losses) arising during period	$	(52,242	)	$	1,312
Less: reclassification adjustment for net realized capital gains (losses) included in net income		(8,819	)		626

Change in net unrealized gains (losses) on securities	$	(43,423	)	$	686

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)


	Nine Months Ended
	September 30,
	2008			2007
	(Unaudited)
Operating activities:
Net income	$	41,672		$	69,080
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation & amortization		3,667			2,532
Net deferred income tax (benefit)		(9,378	)		(2,064	)
Net realized capital (gains) losses		13,568			(975	)
Changes in assets and liabilities:
Reinsurance receivable on paid and unpaid losses and LAE		(35,844	)		111,379
Reserve for losses and LAE		211,119			19,306
Prepaid reinsurance premiums		(1,732	)		(12,558	)
Unearned premium		31,400			63,504
Premiums in course of collection		(12,132	)		(19,151	)
Commissions receivable		2,221			1,247
Deferred policy acquisition costs		(720	)		(12,052	)
Accrued investment income		(1,570	)		(2,650	)
Reinsurance balances payable		(11,266	)		(18,297	)
Federal income tax		(2,122	)		3,193
Other		(12,518	)		28,842

Net cash provided by operating activities		216,365			231,336


Investing activities:
Fixed maturities, available-for-sale
Redemptions and maturities		104,863			127,639
Sales		133,752			136,046
Purchases		(398,972	)		(455,845	)
Equity securities, available-for-sale
Sales		18,514			17,436
Purchases		(38,556	)		(41,294	)
Change in payable for securities		2,643			27,176
Net change in short-term investments		(10,301	)		(34,867	)
Purchase of property and equipment		(2,900	)		(7,149	)

Net cash (used in) investing activities		(190,957	)		(230,858	)


Financing activities:
Purchase of treasury stock		(11,540	)		—
Proceeds of stock issued from employee stock purchase plan		962			606
Proceeds of stock issued from exercise of stock options		1,412			1,406

Net cash provided by (used in) financing activities		(9,166	)		2,012


Effect of exchange rate changes on foreign currency cash		—			12

Increase (decrease) in cash		16,242			2,502
Cash at beginning of year		7,056			2,404

Cash at end of period	$	23,298		$	4,906


Supplemental disclosures of cash flow information:
Federal, state and local income tax paid	$	23,985		$	31,144
Interest paid		4,375			4,375
Issuance of stock to directors		200			181

See accompanying notes to interim consolidated financial statements.

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements
(Unaudited)

Note 1. Accounting Policies

The accompanying interim consolidated financial statements are unaudited but reflect all adjustments which, in the opinion of management, are necessary to provide a fair statement of the results of The Navigators Group, Inc. and its subsidiaries for the interim periods presented on the basis of United States generally accepted accounting principles (“GAAP” or “U.S. GAAP”). All such adjustments are of a normal recurring nature. All significant intercompany transactions and balances have been eliminated. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods. The results of operations for any interim period are not necessarily indicative of results for the full year. The terms “we”, “us”, “our” and “the Company” as used herein are used to mean The Navigators Group, Inc. and its subsidiaries, unless the context otherwise requires. The term “Parent” or “Parent Company” are used to mean The Navigators Group, Inc. without its subsidiaries. These financial statements should be read in conjunction with the consolidated financial statements and notes contained in the Company’s 2007 Annual Report on Form 10-K. Certain amounts for the prior year have been reclassified to conform to the current year’s presentation.

Note 2. Reinsurance Ceded

The Company’s ceded earned premiums were $116.3 million and $102.1 million for the three months ended September 30, 2008 and 2007, respectively, and were $315.4 million and $316.1 million for the nine months ended September 30, 2008 and 2007, respectively. The Company’s ceded incurred losses were $145.7 million and $54.5 million for the three months ended September 30, 2008 and 2007, respectively, and were $227.6 million and $156.9 million for the nine months ended September 30, 2008 and 2007, respectively.

Note 3. Segment Information

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

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

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

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

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

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

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


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

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

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


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

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

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

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

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


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


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

Combined ratio		102.0	%		124.2	%					107.9	%


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

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


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

Gross written premium:
Marine & Energy	$	69,796	$	52,718	$	122,514
Specialty		77,427		—		77,427
Professional Liability		25,706		10,307		36,013
Middle Markets		7,727		—		7,727
Property/Other		1,477		7,785		9,262

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


Net written premium:
Marine & Energy	$	32,643	$	25,459	$	58,102
Specialty		52,094		—		52,094
Professional Liability		15,019		6,055		21,074
Middle Markets		5,216		—		5,216
Property/Other		1,161		2,671		3,832

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


Net earned premium:
Marine & Energy	$	36,203	$	33,185	$	69,388
Specialty		55,309		—		55,309
Professional Liability		14,616		5,111		19,727
Middle Markets		4,488		—		4,488
Property/Other		1,831		3,297		5,128

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


	Three Months Ended September 30, 2007
	Insurance			Lloyd’s
	Companies			Operations			Corporate			Total
	($ in thousands)

Gross written premium	$	178,058		$	67,903					$	245,961
Net written premium		109,677			49,425						159,102

Net earned premium		109,060			46,978						156,038
Net losses and LAE		(59,816	)		(28,203	)					(88,019	)
Commission expense		(13,086	)		(6,590	)					(19,676	)
Other operating expenses		(21,157	)		(6,745	)					(27,902	)
Commission income and other income (expense)		304			111						415


Underwriting profit		15,305			5,551						20,856

Net investment income		14,816			2,609		$	505			17,930
Net realized capital gains (losses)		41			(107	)		—			(66	)
Interest expense		—			—			(2,216	)		(2,216	)

Income (loss) before income taxes		30,162			8,053			(1,711	)		36,504

Income tax expense (benefit)		9,193			2,877			(599	)		11,471

Net income (loss)	$	20,969		$	5,176		$	(1,112	)	$	25,033


Identifiable assets ⁽¹⁾	$	2,292,811		$	793,661		$	65,950		$	3,174,992


Loss and LAE ratio		54.8	%		60.0	%					56.4	%
Commission expense ratio		12.0	%		14.0	%					12.6	%
Other operating expense ratio ⁽²⁾		19.1	%		14.1	%					17.6	%

Combined ratio		85.9	%		88.1	%					86.6	%


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

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


	Three Months Ended September 30, 2007
	Insurance		Lloyd’s
	Companies		Operations		Total
	($ in thousands)

Gross written premium:
Marine & Energy	$	56,630	$	50,060	$	106,690
Specialty		87,985		—		87,985
Professional Liability		24,546		9,639		34,185
Middle Markets		7,642		—		7,642
Property/Other		1,255		8,204		9,459

Total	$	178,058	$	67,903	$	245,961


Net written premium:
Marine & Energy	$	25,606	$	37,373	$	62,979
Specialty		62,905		—		62,905
Professional Liability		14,447		8,692		23,139
Middle Markets		5,536		—		5,536
Property/Other		1,183		3,360		4,543

Total	$	109,677	$	49,425	$	159,102


Net earned premium:
Marine & Energy	$	30,204	$	41,607	$	71,811
Specialty		58,321		—		58,321
Professional Liability		14,184		4,587		18,771
Middle Markets		4,475		—		4,475
Property/Other		1,876		784		2,660

Total	$	109,060	$	46,978	$	156,038


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

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

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


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

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

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

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

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


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


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

Combined ratio		92.6	%		103.9	%					95.7	%


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

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


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

Gross written premium:
Marine & Energy	$	230,327	$	187,543	$	417,870
Specialty		240,322		—		240,322
Professional Liability		71,430		29,376		100,806
Middle Markets		23,485		—		23,485
Property/Other		6,121		30,698		36,819

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


Net written premium:
Marine & Energy	$	127,437	$	116,258	$	243,695
Specialty		164,036		—		164,036
Professional Liability		42,658		17,928		60,586
Middle Markets		18,994		—		18,994
Property/Other		5,500		9,516		15,016

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


Net earned premium:
Marine & Energy	$	105,885	$	104,280	$	210,165
Specialty		168,552		—		168,552
Professional Liability		43,077		16,211		59,288
Middle Markets		16,921		—		16,921
Property/Other		7,692		9,865		17,557

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


	Nine Months Ended September 30, 2007
	Insurance			Lloyd’s
	Companies			Operations			Corporate			Total
	($ in thousands)

Gross written premium	$	585,492		$	237,879					$	823,371
Net written premium		355,798			137,673						493,471

Net earned premium		320,607			120,094						440,701
Net losses and LAE		(184,881	)		(64,069	)					(248,950	)
Commission expense		(38,072	)		(16,353	)					(54,425	)
Other operating expenses		(60,983	)		(21,816	)					(82,799	)
Commission income and other income (expense)		889			96						985


Underwriting profit		37,560			17,952						55,512

Net investment income		42,910			7,167		$	1,399			51,476
Net realized capital gains (losses)		1,118			(143	)		—			975
Interest expense		—			—			(6,646	)		(6,646	)

Income (loss) before income taxes		81,588			24,976			(5,247	)		101,317

Income tax expense (benefit)		25,267			8,806			(1,836	)		32,237

Net income (loss)	$	56,321		$	16,170		$	(3,411	)	$	69,080


Identifiable assets ⁽¹⁾	$	2,292,811		$	793,661		$	65,950		$	3,174,992


Loss and LAE ratio		57.7	%		53.3	%					56.5	%
Commission expense ratio		11.9	%		13.6	%					12.3	%
Other operating expense ratio ⁽²⁾		18.7	%		18.1	%					18.6	%

Combined ratio		88.3	%		85.0	%					87.4	%


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

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


	Nine Months Ended September 30, 2007
	Insurance		Lloyd’s
	Companies		Operations		Total
	($ in thousands)

Gross written premium:
Marine & Energy	$	214,086	$	183,661	$	397,747
Specialty		268,800		—		268,800
Professional Liability		69,379		25,651		95,030
Middle Markets		20,583		—		20,583
Property/Other		12,644		28,567		41,211

Total	$	585,492	$	237,879	$	823,371


Net written premium:
Marine & Energy	$	108,570	$	109,899	$	218,469
Specialty		179,980		—		179,980
Professional Liability		41,406		18,201		59,607
Middle Markets		14,129		—		14,129
Property/Other		11,713		9,573		21,286

Total	$	355,798	$	137,673	$	493,471


Net earned premium:
Marine & Energy	$	97,699	$	103,953	$	201,652
Specialty		161,742		—		161,742
Professional Liability		40,555		9,498		50,053
Middle Markets		13,584		—		13,584
Property/Other		7,027		6,643		13,670

Total	$	320,607	$	120,094	$	440,701

The Insurance Companies’ net earned premium includes $14.2 million and $12.6 million of net earned premium from the U.K. Branch for the three months ended September 30, 2008 and 2007, respectively, and $45.3 million and $45.0 million of net earned premium from the U.K. Branch for the nine months ended September 30, 2008 and 2007, respectively. The 2008 U.K. Branch figures are net of $5.1 million of reinstatement premiums related to Hurricanes Gustav and Ike.

Note 4. Comprehensive Income

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

Note 5. Stock-Based Compensation

Stock-based compensation is expensed as stock awards granted under the Company’s stock plans vest, with the expense being included in other operating expenses for the periods indicated. The amounts charged to expense for stock-based compensation were $2.3 million and $1.6 million for the three months ended September 30, 2008 and 2007, respectively, and $6.7 million and $4.9 million for the nine months ended September 30, 2008 and 2007, respectively.

The Company expensed $62,000 and $45,000 for the three months ended September 30, 2008 and 2007, respectively, and $155,000 and $115,000 for the nine months ended September 30, 2008 and 2007, respectively, for costs related to its Employee Stock Purchase Plan.

In addition, $50,000 was expensed in each of the three month periods ended September 30, 2008 and 2007 and $150,000 was expensed in each of the nine month periods ended September 30, 2008 and 2007 for stock issued annually to non-employee directors as part of their directors’ compensation for serving on the Parent Company’s Board of Directors.

Note 6. Application of New Accounting Standards

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

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

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

In May 2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted Accounting Principles, which identifies the sources of generally accepted accounting principles and provides a framework, or hierarchy, for selecting the principles to be used in preparing U.S. GAAP financial statements for nongovernmental entities. SFAS 162, effective November 15, 2008, makes the hierarchy explicitly and directly applicable to preparers of financial statements, a step that recognizes the preparers’ responsibilities for selecting the accounting principles for their financial statements. The Company does not expect the adoption of SFAS 162 to have a material effect on its financial condition or results of operations.

Note 7. Syndicate 1221

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

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

Syndicate 1221’s stamp capacity is £123.0 million ($239.5 million) for the 2008 underwriting year compared to £140.0 million ($278.2 million) for the 2007 underwriting year. Stamp capacity is a measure of the amount of premium a Lloyd’s syndicate is authorized to write based on a business plan approved by the Council of Lloyd’s. Syndicate 1221’s capacity is expressed net of commission (as is standard at Lloyd’s). The Syndicate 1221 premium recorded in the Company’s financial statements is gross of commission. Navigators provides 100% of Syndicate 1221’s capacity for the 2008 and 2007 underwriting years through Navigators Corporate Underwriters Ltd. in 2008 and through Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. in 2007.

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

Note 8. Income Taxes

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

A tax benefit taken in the tax return but not in the financial statements is known as an unrecognized tax benefit. The Company had no unrecognized tax benefits at either September 30, 2008 or September 30, 2007 and does not anticipate any significant unrecognized tax benefits within the next twelve months. The Company is currently not under examination by any major U.S. or foreign tax authority and is generally subject to U.S. Federal, state or local, or foreign tax examinations by tax authorities for years 2005 and subsequent. The Company’s policy is to record interest and penalties related to unrecognized tax benefits to income tax expense. The Company did not incur any interest or penalties related to unrecognized tax benefits for the three or nine month periods ended September 30, 2008 and 2007.

The Company recorded an income tax benefit of $1.7 million for the 2008 third quarter compared to income tax expense of $11.5 million for the 2007 third quarter, resulting in effective tax rates of 240.7% and 31.4%, respectively. The unusual effective tax rate in the 2008 third quarter resulted from a small pretax loss and a larger taxable loss resulting primarily from tax-exempt investment income. The income tax expense was $15.2 million and $32.2 million for the 2008 and 2007 nine month periods, respectively, resulting in effective tax rates of 26.7% and 31.8%, respectively. The Company’s effective tax rate is less than 35% due to permanent differences between book and tax return income, with the most significant item being tax exempt interest. The effective tax rate on net investment income was 25.8% for the 2008 nine month period compared to 28.0% for the same period in 2007. As of September 30, 2008 and December 31, 2007, the net deferred Federal, foreign, state and local tax assets were $60.2 million and $29.2 million, respectively.

The Company had state and local deferred tax assets amounting to potential future tax benefits of $7.3 million and $6.3 million at September 30, 2008 and December 31, 2007, respectively. Included in the deferred tax assets are state and local net operating loss carryforwards of $1.1 million and $2.5 million at September 30, 2008 and December 31, 2007, respectively. A valuation allowance was established for the full amount of these potential future tax benefits due to the uncertainty associated with their realization. The Company’s state and local tax carryforwards at September 30, 2008 expire in 2025.

Note 9. Commitments and Contingencies

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

(b) Whenever a member of Lloyd’s is unable to pay its debts to policyholders, such debts may be payable by the Lloyd’s Central Fund. If Lloyd’s determines that the Central Fund needs to be increased, it has the power to assess premium levies on current Lloyd’s members up to 3% of a member’s underwriting capacity in any one year. The Company does not believe that any assessment is likely in the foreseeable future and has not provided any allowance for such an assessment. However, based on the Company’s 2008 capacity at Lloyd’s of £123.0 million, the September 30, 2008 exchange rate of £1 equals $1.78 and assuming the maximum 3% assessment, the Company would be assessed approximately $6.6 million.

Note 10. Senior Notes due May 1, 2016

On April 17, 2006, the Company completed a public debt offering of $125 million principal amount of 7% senior unsecured notes due May 1, 2016 (the “Senior Notes”) and received net proceeds of $123.5 million. The interest payment dates on the Senior Notes are each May 1 and November 1. The effective interest rate related to the Senior Notes, based on the proceeds net of discount and all issuance costs, approximates 7.17%. The interest expense on the Senior Notes was $2.2 million for both of the three month periods ended September 30, 2008 and 2007 and $6.7 million and $6.6 million for the nine month periods ended September 30, 2008 and 2007, respectively. The fair value of the Senior Notes, based on quoted market prices, was $117.0 million and $126.7 million at September 30, 2008 and December 31, 2007, respectively.

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

Note 11. Fair Value Measurements

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

•

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

•

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

•

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

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

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


	Quoted Prices		Significant
	In Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	Level 1		Level 2		Level 3		Total
	($ in thousands)

Fixed maturities	$	246,320	$	1,378,757	$	609	$	1,625,686
Equities securities		68,637		—		—		68,637
Short-term investments		49,436		129,133		—		178,569

Total	$	364,393	$	1,507,890	$	609	$	1,872,892

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


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

Level 3 investments as of July 1, 2008	$	986
Unrealized net gains included in other comprehensive income (loss)		—
Purchases, sales, paydowns and amortization		(57	)
Transfer from Level 3		(650	)
Transfer to Level 3		330

Level 3 investments as of September 30, 2008	$	609


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

Level 3 investments as of January 1, 2008	$	2,603
Unrealized net gains included in other comprehensive income (loss)		(1	)
Purchases, sales, paydowns and amortization		(344	)
Transfer from Level 3		(1,979	)
Transfer to Level 3		330

Level 3 investments as of September 30, 2008	$	609

The $0.3 million transfer into level 3 resulted from one security being priced with unobservable inputs that was previously in level 2 priced using observable inputs.

The 2008 third quarter and nine month period net realized capital losses include impairments of $4.7 million and $13.2 million, respectively, for declines in the market value of equity securities which were considered to be other-than-temporary, as further discussed under the caption Investments, included herein. In light of the declines in the fair value of these securities and the related economic circumstances causing such declines, the Company believes that their fair value will not recover in the foreseeable future.

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

FASB Staff Position (“FSP”) FAS 157-2, Effective Date of FASB Statement No. 157, delays the effective date of SFAS 157 for non-financial assets and non-financial liabilities that are not measured at fair value on a recurring basis (at least annually) until fiscal years beginning after November 15, 2008. The Company does not expect the adoption of FSP FAS 157-2 to have a material effect on its financial condition or results of operations.

In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market For That Asset Is Not Active, with an immediate effective date, including prior periods for which financial statements have not been issued. FSP FAS 157-3 amends SFAS 157 to clarify the application of fair value in inactive markets and allows for the use of management’s internal assumptions about cash flows with appropriately risk-adjusted discount rates when relevant observable market data does not exist. The objective of SFAS 157 has not changed and continues to be the determination of the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date. The adoption of FSP FAS 157-3 in the 2008 third quarter did not have a material effect on the Company’s financial condition or results of operations.

Note 12. Share Repurchases

In October 2007 the Parent Company’s Board of Directors adopted a stock repurchase program for up to $30 million of the Parent Company’s common stock. Purchases may be made from time to time at prevailing prices in open market or privately negotiated transactions through December 31, 2008. The timing and amount of purchases under the program will depend on a variety of factors, including the trading price of the stock, market conditions and corporate and regulatory considerations. There were no purchases made in the 2007 fourth quarter. During the first nine months of 2008, the Parent Company purchased 224,754 shares of its common stock in the open market at an average cost of $51.34 per share for a total of $11.5 million. There is $18.5 million remaining to be used in the stock repurchase program.

Note 13. Subsequent Event

The unrealized losses in the Company’s investment portfolio increased by $26.9 million as of October 24, 2008 compared to September 30, 2008 resulting from continuing deterioration of market and economic conditions. While management will continue to analyze the unrealized position and consider tax planning strategies, there may be the need to record additional impairments against investments and possibly valuation allowances against the related deferred tax asset relating to such unrealized losses at December 31, 2008.

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

Note on Forward-Looking Statements

Some of the statements in this Quarterly Report on Form 10-Q are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in or incorporated by reference in this Quarterly Report are forward-looking statements. Whenever used in this report, the words “estimate”, “expect”, “believe”, “may”, “will”, “intend”, “continue” or similar expressions or their negative are intended to identify such forward-looking statements. Forward-looking statements are derived from information that we currently have and assumptions that we make. We cannot assure that anticipated results will be achieved, since actual results may differ materially because of both known and unknown risks and uncertainties which we face. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Factors that could cause actual results to differ materially from our forward-looking statements include, but are not limited to, the factors discussed in the “Risk Factors” section of our 2007 Annual Report on Form 10-K as well as:

•

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

•

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

•

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

•

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

•

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

•

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

•

unexpected turnover of our professional staff;

•

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

•

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

•

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

•

weather-related events and other catastrophes (including acts of terrorism) impacting our insureds and/or reinsurers, including, without limitation, the impact of Hurricanes Katrina, Rita, and Wilma in 2005 and Hurricanes Gustav and Ike in 2008 and the possibility that our estimates of losses from such hurricanes will prove to be materially inaccurate;

•

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

•

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

•

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

•

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

•

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

•

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

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

Overview

The discussion and analysis of our financial condition and results of operations contained herein should be read in conjunction with our consolidated financial statements and accompanying notes which appear elsewhere in this Form 10-Q. It contains forward-looking statements that involve risks and uncertainties. Please see “Note on Forward-Looking Statements” for more information. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Form 10-Q.

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

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

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

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

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

From 2003 through 2006, we experienced generally beneficial market changes in our lines of business. As a result of several large industry losses in the second quarter of 2001, the marine insurance market began to experience diminished capacity and rate increases, initially in the offshore energy line of business. The marine rate increases began to level off in 2004 and into 2005. As a result of the substantial insurance industry losses resulting from Hurricanes Katrina and Rita, the marine insurance market experienced diminished capacity and rate increases through the end of 2006, particularly for the offshore energy risks located in the Gulf of Mexico. Since the end of 2006, competitive market conditions have returned as available capacity has increased. The average renewal premium rates for our Insurance Companies’ marine business decreased approximately 2.5% and 2.6% for the 2008 third quarter and nine month period, respectively, including offshore energy average renewal premium rates which decreased approximately 9.1% and 11.1% for the 2008 third quarter and nine month period, respectively. The average renewal premium rates for our Lloyd’s Operations marine business decreased approximately 4.3% and 4.9% for the 2008 third quarter and nine month period, respectively, including offshore energy average renewal premium rates which decreased approximately 10.5% and 12.1% for the 2008 third quarter and nine month period, respectively.

Specialty liability losses in 2001 to 2003, particularly for the contractors liability business, also resulted in diminished capacity in the market in which we compete, as many former competitors who lacked the expertise to selectively underwrite this business have been forced to withdraw from the market resulting in average renewal premium rate increases of approximately 13.5% in 2004 and 49.1% in 2003. This was followed by a slight decline in rates of approximately 1.0% in 2005. The 2006 year average renewal premium rates for the contractors liability business declined approximately 5.6%, primarily due to additional competition in the marketplace. This decline continued into 2007 with average renewal premium rates declining approximately 10.7%. The average renewal premium rates for the contractors liability business declined approximately 13.5% and 12.9% in the 2008 third quarter and nine month period, respectively. We expect competitive conditions to continue during 2008 resulting in continuing declines in pricing for contractors liability and excess liability business.

In the professional liability market, the enactment of the Sarbanes-Oxley Act of 2002, together with financial and accounting scandals at publicly traded corporations and the increased frequency of securities-related class action litigation, has led to heightened interest in professional liability insurance generally. Professional liability average renewal premium rates decreased approximately 6.6% in 2007 compared to relatively level average renewal premium rates in 2006 and 2005 after decreasing approximately 3% in 2004 which followed substantial average renewal premium rate increases in 2003 and 2002, particularly for D&O insurance. The 2007 D&O insurance average renewal premium rates decreased approximately 7.9% following decreases of approximately 1.7% in 2006, 2.3% in 2005 and 9.5% in 2004. The average renewal premium rates for the professional liability business declined approximately 7.3% and 4.4% in the 2008 third quarter and nine month period, respectively, including D&O insurance average renewal premium rates which declined approximately 7.1% and 8.3% for the 2008 third quarter and nine month period, respectively.

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

Catastrophe Risk Management

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

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

The Company has significant catastrophe exposures throughout the world. The largest catastrophe exposure results from potential hurricane damage to offshore energy risks in the Gulf of Mexico. Based on an assessment made through the end of the 2008 third quarter and taking into account the 2008 reinsurance structure, the Company believes that its estimated probable maximum pre-tax gross and net loss exposure in a so-called or theoretical one in two hundred and fifty year hurricane event in the Gulf of Mexico would be approximately $235 million and $34 million, respectively, including the cost of reinsurance reinstatement premiums. There are a number of significant assumptions and related variables related to such an estimate including the size, force and path of the hurricane, the various types of the insured risks exposed to the event at the time the event occurs and the estimated costs or damages incurred for each insured risk. There can be no assurances that the gross and net loss amounts that the Company could incur in such an event or in any hurricanes that may occur in the Gulf of Mexico would not be materially higher than the estimates discussed above given the significant uncertainties with respect to such an estimate.

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

Critical Accounting Policies

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

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

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

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

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

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

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

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

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

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

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

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

Translation of Foreign Currencies. Financial statements of subsidiaries expressed in foreign currencies are translated into U.S. dollars in accordance with SFAS 52, Foreign Currency Translation, issued by the FASB. Under SFAS 52, functional currency assets and liabilities are translated into U.S. dollars using period end rates of exchange and the related translation adjustments are recorded as a separate component of accumulated other comprehensive income on the Company’s balance sheet. Statement of income amounts expressed in functional currencies are translated using average exchange rates. Realized gains and losses resulting from foreign currency transactions are recorded in other income (expense) in the Company’s Consolidated Statements of Income.

Results of Operations

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

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

Net income for the three months ended September 30, 2008 was $1.0 million or $0.06 per share compared to $25.0 million or $1.47 per share for the three months ended September 30, 2007. Included in these results were net realized capital losses of $0.21 per share and net realized capital gains of $0.00 per share for the three months ended September 30, 2008 and 2007, respectively. The 2008 third quarter’s net realized capital losses include impairments of $4.7 million for declines in the market value of securities which were considered to be other-than-temporary, as further discussed under the caption Investments, included herein. In light of the declines in the fair value of these securities and the related economic circumstances causing such declines, the Company believes that their fair value will not recover in the foreseeable future. The after-tax loss of such impairments was $3.1 million or $0.18 per share. Recording realized capital losses on such securities has no impact on the Company’s stockholders’ equity or book value per share since unrealized gains and losses on the investment portfolio are a component of accumulated other comprehensive income (loss).

Net income for the nine months ended September 30, 2008 was $41.7 million or $2.45 per share compared to $69.1 million or $4.07 per share for the nine months ended September 30, 2007. Included in these results were net realized capital losses of $0.52 per share and net realized capital gains of $0.04 per share for the nine months ended September 30, 2008 and 2007, respectively. The 2008 nine month period’s net realized capital losses include impairments of $13.2 million for declines in the market value of securities which were considered to be other-than-temporary, as further discussed under the caption Investments, included herein. The after-tax loss of such impairments was $8.6 million or $0.51 per share.

Net income for the 2008 third quarter and nine month period was reduced by $18.3 million, or $1.08 per share as a result of the losses caused by Hurricanes Gustav and Ike in September 2008.

The combined ratios, which consist of the sum of the loss and LAE ratio and the expense ratio for each period, for the 2008 third quarter and nine month period were 107.9% and 95.7%, respectively, compared to 86.6% and 87.4% for the comparable periods in 2007. The combined ratios for the 2008 third quarter and nine month period were reduced by 5.2 and 6.8 loss ratio points, respectively, for net loss reserve redundancies of $8.0 million and $32.3 million, respectively, relating to prior years. The combined ratios for the 2007 third quarter and nine month period were reduced by 7.8 and 6.7 loss ratio points, respectively, for net loss reserve redundancies of $12.2 million and $29.6 million, respectively, relating to prior years. The net paid loss and LAE ratios for the 2008 third quarter and nine month period were 38.4% and 33.5%, respectively, compared to 29.6% and 31.1% for the comparable periods in 2007.

The 2008 third quarter and nine month period loss ratios included 17.4 and 5.7 loss ratio points, respectively, in the aggregate, for losses related to Hurricanes Gustav and Ike in the Insurance Companies and Lloyd’s Operations marine and energy lines of business. Hurricanes Gustav and Ike occurred in the 2008 third quarter and caused losses to marine and energy risks in the Gulf of Mexico and surrounding areas.

The 2007 third quarter and nine month period included incurred losses of $2.0 million or 1.3 loss ratio points and $5.6 million or 1.3 loss ratio points for U.K. flood losses. Approximately $4.0 million was recorded for property losses and $1.6 million for cargo losses for the two events that occurred in the 2007 second and third quarters.

Cash flow from operations was $216.4 million for the 2008 nine month period compared to $231.3 million for the comparable period in 2007. The positive cash flow contributed to the growth in invested assets and net investment income.

Consolidated stockholders’ equity decreased 0.9% to $655.6 million or $39.07 per share at September 30, 2008 compared to $662.1 million or $39.24 per share at December 31, 2007. The decrease was due to unrealized investment portfolio losses and treasury stock purchases, partially offset by net income.

Revenues. Gross written premium was $252.9 million and $819.3 million in the 2008 third quarter and nine month period, respectively, compared to $246.0 million and $823.4 million in the 2007 comparable periods, respectively. The increase in the 2008 third quarter gross written premium compared to 2007 generally reflects a combination of selective business expansion in new and existing lines of business, mostly offset by the effect of premium rate changes on renewal policies on certain lines of business and lost or cancelled business.

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

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


	Three Months Ended September 30,
	2008									2007
	Gross					Net		Net		Gross					Net		Net
	Written					Written		Earned		Written					Written		Earned
	Premium		%			Premium		Premium		Premium		%			Premium		Premium
	($ in thousands)
Insurance Companies:

Marine	$	69,796		27.6	%	$	32,643	$	36,203	$	56,630		23.0	%	$	25,606	$	30,204

Specialty		77,427		30.6	%		52,094		55,309		87,985		35.8	%		62,905		58,321

Professional Liability		25,706		10.2	%		15,019		14,616		24,546		10.0	%		14,447		14,184

Middle Markets		7,727		3.1	%		5,216		4,488		7,642		3.1	%		5,536		4,475

Property/Other		1,477		0.5	%		1,161		1,831		1,255		0.5	%		1,183		1,876


Insurance Companies Total		182,133		72.0	%		106,133		112,447		178,058		72.4	%		109,677		109,060


Lloyd’s Operations:

Marine		52,718		20.8	%		25,459		33,185		50,060		20.4	%		37,373		41,607

Professional Liability		10,307		4.1	%		6,055		5,111		9,639		3.9	%		8,692		4,587

Other		7,785		3.1	%		2,671		3,297		8,204		3.3	%		3,360		784


Lloyd’s Operations Total		70,810		28.0	%		34,185		41,593		67,903		27.6	%		49,425		46,978


Total	$	252,943		100.0	%	$	140,318	$	154,040	$	245,961		100.0	%	$	159,102	$	156,038


	Nine Months Ended September 30,
	2008									2007
	Gross					Net		Net		Gross					Net		Net
	Written					Written		Earned		Written					Written		Earned
	Premium		%			Premium		Premium		Premium		%			Premium		Premium
	($ in thousands)
Insurance Companies:

Marine	$	230,327		28.1	%	$	127,437	$	105,885	$	214,086		26.0	%	$	108,570	$	97,699

Specialty		240,322		29.3	%		164,036		168,552		268,800		32.7	%		179,980		161,742

Professional Liability		71,430		8.7	%		42,658		43,077		69,379		8.4	%		41,406		40,555

Middle Markets		23,485		2.9	%		18,994		16,921		20,583		2.5	%		14,129		13,584

Other		6,121		0.8	%		5,500		7,692		12,644		1.5	%		11,713		7,027


Insurance Companies Total		571,685		69.8	%		358,625		342,127		585,492		71.1	%		355,798		320,607


Lloyd’s Operations:

Marine		187,543		22.9	%		116,258		104,280		183,661		22.3	%		109,899		103,953

Professional Liability		29,376		3.6	%		17,928		16,211		25,651		3.1	%		18,201		9,498

Other		30,698		3.7	%		9,516		9,865		28,567		3.5	%		9,573		6,643


Lloyd’s Operations Total		247,617		30.2	%		143,702		130,356		237,879		28.9	%		137,673		120,094


Total	$	819,302		100.0	%	$	502,327	$	472,483	$	823,371		100.0	%	$	493,471	$	440,701

Gross Written Premium

Insurance Companies’ Gross Written Premium

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


	2008			2007

Marine liability		28.0	%		30.0	%
Offshore energy		17.9	%		20.0	%
Cargo		10.9	%		9.2	%
P&I		9.9	%		10.1	%
Transport		8.0	%		7.1	%
Inland marine		7.4	%		4.1	%
Other		6.8	%		6.6	%
Bluewater hull		6.0	%		7.5	%
Craft/Fishing vessel		5.1	%		5.4	%

Total		100.0	%		100.0	%

The marine gross written premium for the 2008 third quarter and nine month period increased 23.2% and 7.6%, respectively, compared to the same periods in 2007. The average renewal premium rates for the 2008 third quarter and nine month period decreased 2.5% and 2.6%, respectively, reflecting competitive market conditions. The recent insurance industry dislocations and storm losses are expected to impact the market, but we are currently unsure what the effect may be.

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


	2008			2007

Construction liability		48.3	%		51.6	%
Commercial umbrella		19.4	%		16.7	%
Programs		14.6	%		11.0	%
Primary E&S		12.1	%		12.4	%
Personal umbrella		2.8	%		2.7	%
Liquor liability		2.0	%		1.2	%
Monarch PAF		0.5	%		0.5	%
Life sciences		0.3	%		0.0	%
Other		0.0	%		3.9	%

Total		100.0	%		100.0	%

The specialty gross written premium for the 2008 third quarter and nine month period decreased 12.0% and 10.6%, respectively, compared to the same periods in 2007, due primarily to weakening economic conditions that have reduced demand for contractors liability insurance. The average renewal premium rates for the contractors liability business decreased approximately 13.5% and 12.9% for the 2008 third quarter and nine month period, respectively. The recent premium rate decreases for the contractors liability business and generally for the specialty lines of business are reflective of softening market conditions which are expected to continue for the remainder of 2008.

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


	2008			2007

D&O (public and private)		65.2	%		66.6	%
Lawyers and other professionals		28.9	%		26.0	%
Architects and engineers		5.9	%		7.4	%

Total		100.0	%		100.0	%

The professional liability gross written premium for the 2008 third quarter and nine month period increased 4.7% and 3.0%, respectively, compared to the same periods in 2007. The average renewal premium rates for the professional liability business decreased by approximately 7.3% and 4.4% in the 2008 third quarter and nine month period, respectively. The recent insurance industry dislocations are expected to impact the market, but we are currently unsure what the effect may be.

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

The gross written premium for the first nine months of 2008 and 2007 consisted of the following:


	2008			2007

General liability		45.2	%		53.4	%
Commercial automobile liability		42.0	%		33.6	%
Property		12.8	%		13.0	%

Total		100.0	%		100.0	%

Despite the softening market conditions, the gross written premium increased 1.1% and 14.1% for the 2008 third quarter and nine month period, respectively, compared to the same periods in 2007, due to geographic and product diversification.

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

Lloyd’s Operations’ Gross Written Premium

We have provided 100% of Syndicate 1221’s stamp capacity since 2006. Stamp capacity is a measure of the amount of premium a Lloyd’s syndicate is authorized to write based on a business plan approved by the Council of Lloyd’s. Syndicate 1221’s stamp capacity is £123.0 million ($239.5 million) in 2008 compared to £140.0 million ($278.2 million) in 2007.

The Lloyd’s Operations gross written premium for the 2008 third quarter and nine month period increased 4.3% and 4.1%, respectively, compared to the same period in 2007, reflecting continued expansion in the professional liability book of business and increases in new business in the marine liability book, partially offset by weakening market conditions in the marine and energy business overall.

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


	2008			2007

Cargo and specie		32.6	%		35.2	%
Marine liability		25.5	%		20.6	%
Offshore energy		23.4	%		25.0	%
Assumed reinsurance		7.8	%		12.4	%
Hull		7.5	%		5.8	%
Other		3.2	%		1.0	%

Total		100.0	%		100.0	%

The marine gross written premium for the 2008 third quarter and nine month period increased 5.3% and 2.1%, respectively, compared to the same periods in 2007. The average renewal premium rates decreased approximately 4.3% and 4.9% for the 2008 third quarter and nine month period, respectively. The recent insurance industry dislocations and storm losses are expected to impact the market, but we are currently unsure what the effect may be.

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


	2008			2007

E&O		66.2	%		54.3	%
D&O (public and private)		33.8	%		45.7	%

Total		100.0	%		100.0	%

The gross written premium for the 2008 third quarter and nine month period increased 6.9% and 14.5%, respectively, compared to the same periods in 2007 primarily due to an increase in errors and omissions liability insurance (“E&O”) premium.

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

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

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


	Three Months Ended September 30,
	2008					2007
			% of					% of
	Ceded		Gross			Ceded		Gross
	Written		Written			Written		Written
	Premium		Premium			Premium		Premium
	($ in thousands)

Insurance Companies:
Marine	$	37,153		53.2	%	$	31,024		54.8	%
Specialty		25,333		32.7	%		25,080		28.5	%
Professional Liability		10,687		41.6	%		10,099		41.1	%
Middle Markets		2,511		32.5	%		2,106		27.6	%
Property/Other		316		21.4	%		72		5.7	%

Subtotal		76,000		41.7	%		68,381		38.4	%


Lloyd’s Operations:
Marine		27,259		51.7	%		12,687		25.3	%
Professional Liability		4,252		41.2	%		947		9.8	%
Property/Other		5,114		65.7	%		4,844		59.0	%

Subtotal		36,625		51.7	%		18,478		27.2	%


Total	$	112,625		44.5	%	$	86,859		35.3	%


	Nine Months Ended September 30,
	2008					2007
			% of					% of
	Ceded		Gross			Ceded		Gross
	Written		Written			Written		Written
	Premium		Premium			Premium		Premium
	($ in thousands)

Insurance Companies:
Marine	$	102,890		44.7	%	$	105,516		49.3	%
Specialty		76,286		31.7	%		88,820		33.0	%
Professional Liability		28,772		40.3	%		27,973		40.3	%
Middle Markets		4,491		19.1	%		6,454		31.4	%
Property/Other		621		10.1	%		931		7.4	%

Subtotal		213,060		37.3	%		229,694		39.2	%


Lloyd’s Operations:
Marine		71,285		38.0	%		73,762		40.2	%
Professional Liability		11,448		39.0	%		7,450		29.0	%
Property/Other		21,182		69.0	%		18,994		66.5	%

Subtotal		103,915		42.0	%		100,206		42.1	%


Total	$	316,975		38.7	%	$	329,900		40.1	%

The percentages of total ceded written premium to gross written premium in the 2008 third quarter and nine month period were 44.5% and 38.7%, respectively, compared to the 2007 third quarter and nine month period ratios of 35.3% and 40.1%, respectively. The percentages of total ceded written premium to gross written premium in the 2008 third quarter and nine month period excluding the reinstatement premium related to Hurricanes Gustav and Ike were 39.6% and 37.2%, respectively. The changes in the percentages of ceded written premium to gross written premium for the three and nine months ended September 30, 2008 compared to the same periods in 2007 was due to a combination of the following factors:

•		Reinstatement premium of $12.6 million related to Hurricanes Gustav and Ike recorded during the third quarter of 2008, consisting of $5.8 million and $6.8 million charged to the marine lines of the Insurance Companies and Lloyd’s Operations, respectively.

•		The 2007 third quarter ceded written premium of the Lloyd’s Operations was reduced by approximately $6.4 million for ceded written premium amounts that were over estimated in prior accounting periods mostly recorded during the six months ended 2007. The estimate change which results in a higher relationship of net premiums retained to gross written premium in the 2007 third quarter was not material to the current and prior quarterly accounting periods.

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

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

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

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

Net Written Premium. Net written premium decreased 11.8% and increased 1.8% in the 2008 third quarter and nine month period, respectively, compared to the same periods in 2007. Excluding the reinstatement premium related to Hurricanes Gustav and Ike, net written premium decreased 3.9% and increased 4.3% in the 2008 third quarter and nine month period, respectively. The nine month increase, excluding the hurricane reinstatements, is primarily due to retaining more of our business as discussed above.

Net Earned Premium. Net earned premium, which generally lags the increase in net written premium, decreased 1.3% and increased 7.2% in the 2008 third quarter and nine month period, respectively, compared to the same periods in 2008, as a result of the changes in net written premium discussed above. Excluding the reinstatement premium related to Hurricanes Gustav and Ike, net earned premium increased 6.8% and increased 10.1% in the 2008 third quarter and nine month period.

Commission Income. Commission income from unaffiliated business decreased 93.2% and 27.2% in the 2008 third quarter and nine month period, respectively, compared to the same periods in 2007. Beginning with the 2006 underwriting year, there was no longer any marine pool unaffiliated insurance companies with the elimination of the marine pool and no longer any unaffiliated participants at Syndicate 1221 with the purchase of the minority interest. Any profit commission would therefore result from the run-off of underwriting years prior to 2006.

Net Investment Income. Net investment income increased 7.8% and 10.5% in the 2008 third quarter and nine month period, respectively, compared to the same periods in 2007, due primarily to the increase in invested assets as a result of the positive cash flow from operations somewhat offset by a modest decline in the portfolio’s book yield.

Net Realized Capital Gains and Losses. Pre-tax net income included net realized capital losses of $5.5 million for the 2008 third quarter compared to net realized capital losses of $66,000 for the 2007 third quarter. On an after-tax basis, the 2008 third quarter net realized capital losses were $3.6 million or $0.21 per share compared to net realized capital losses of $49,000 or $0.00 per share for the 2007 third quarter. Pre-tax net income included net realized capital losses of $13.6 million for the first nine months of 2008 compared to net realized capital gains of $1.0 million for the first nine months of 2007. On an after-tax basis, the net realized capital losses were $8.8 million or $0.52 per share for the first nine months of 2008 compared to net realized capital gains of $0.6 million or $0.04 per share for the first nine months of 2007.

The 2008 third quarter and nine month period net realized capital losses include provisions of $4.7 million and $13.2 million, respectively, for declines in the market value of securities which were considered to be other than temporary. The after-tax effect of such provisions on the 2008 third quarter and nine month period was $3.1 million or $0.18 per share and $8.6 million or $0.51 per share, respectively.

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

Operating Expenses

Net Losses and Loss Adjustment Expenses Incurred. The ratios of net losses and LAE incurred to net earned premium (loss ratios) for the 2008 and 2007 third quarters were 73.5% and 56.4%, respectively, and 62.1% and 56.5% for the first nine months of 2008 and 2007, respectively. The 2008 third quarter and nine month period loss ratios were unfavorably impacted by 14.9 and 4.8 loss ratio points, respectively, due to losses related to Hurricanes Gustav and Ike. The loss ratios for the third quarter of 2008 and 2007 were favorably impacted by 5.2 and 7.8 loss ratio points, respectively, resulting from a redundancy of prior year loss reserves. The loss ratios for the nine months of 2008 and 2007 were favorably impacted by 6.8 and 6.7 loss ratio points, respectively, also resulting from a redundancy of prior year loss reserves.

The 2007 third quarter and nine month loss ratios both included 1.3 loss ratio points for U.K. flood losses in the Insurance Companies property line of business and the Lloyd’s Operations’marine line of business (principally cargo losses).

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

As illustrated in the following table, our overall reinsurance recoverable amounts for paid and unpaid losses have increased during the first nine months of 2008 as the Company recorded reinsurance recoverables for Hurricanes Gustav and Ike, while the reinsurance recoverable amounts for paid have declined as we collected loss payments for the 2005 Hurricanes Katrina and Rita:


	September 30,		December 31,
	2008		2007		Change
	($ in thousands)
Reinsurance recoverables:
Paid losses	$	60,110	$	94,818	$	(34,708	)
Unpaid losses and LAE reserves		865,288		801,461		63,827

Total	$	925,398	$	896,279	$	29,119

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


	September 30,		December 31,
	2008		2007		Change
	($ in thousands)

Gross reserves for losses and LAE	$	1,847,694	$	1,648,764		12.1	%
Less: Reinsurance recoverable on unpaid losses and LAE reserves		865,288		801,461		8.0	%

Net loss and LAE reserves	$	982,406	$	847,303		15.9	%

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


	September 30, 2008
	Net		Net		Total		% of IBNR
	Reported		IBNR		Net Loss		to Total Net
	Reserves		Reserves		Reserves		Loss Reserves
	($ in thousands)

Insurance Companies:
Marine	$	116,141	$	118,442	$	234,583		50.5	%
Specialty
Construction Liability		42,028		223,057		265,085		84.1	%
All other liability		25,165		84,820		109,985		77.1	%

Total Specialty		67,193		307,877		375,070		82.1	%


Professional Liability		23,457		58,701		82,158		71.4	%
Middle Markets		12,784		11,988		24,772		48.4	%
Property/Other		11,372		9,638		21,010		45.9	%


Total Insurance Companies		230,947		506,646		737,593		68.7	%


Lloyd’s Operations:
Marine		108,165		97,167		205,332		47.3	%
Other		12,744		26,737		39,481		67.7	%


Total Lloyd’s Operations		120,909		123,904		244,813		50.6	%


Total Company	$	351,856	$	630,550	$	982,406		64.2	%


	December 31, 2007
	Net		Net		Total		% of IBNR
	Reported		IBNR		Net Loss		to Total Net
	Reserves		Reserves		Reserves		Loss Reserves
	($ in thousands)

Insurance Companies:
Marine	$	93,467	$	103,500	$	196,967		52.5	%
Specialty
Construction Liability		36,137		213,453		249,590		85.5	%
All other liability		17,139		55,032		72,171		76.3	%

Total Specialty		53,276		268,485		321,761		83.4	%


Professional Liability		20,335		50,584		70,919		71.3	%
Middle Markets		11,469		10,329		21,798		47.4	%
Property/Other		12,790		11,446		24,236		47.2	%


Total Insurance Companies		191,337		444,344		635,681		69.9	%


Lloyd’s Operations:
Marine		89,957		93,069		183,026		50.9	%
Other		7,485		21,111		28,596		73.8	%


Total Lloyd’s Operations		97,442		114,180		211,622		54.0	%


Total Company	$	288,779	$	558,524	$	847,303		65.9	%

At September 30, 2008, the IBNR loss reserve was $630.6 million or 64.2% of our total loss reserves compared to $558.5 million or 65.9% at December 31, 2007.

In addition to $15.5 million in additional net reserves for Hurricanes Gustav and Ike, the increase in net loss reserves in all active lines of business is generally a reflection of the growth in net premium volume over the last three years coupled with a changing mix of business to longer tail lines of business such as the specialty lines of business (construction defect, commercial excess, primary excess and personal umbrella), professional liability lines of business and marine liability and transport business in ocean marine. These products, which typically have a longer settlement period compared to the mix of business the Company has historically written, are becoming larger components of our overall business.

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

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

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

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

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

Hurricanes Gustav and Ike. During the 2008 third quarter, the Company recorded gross and net loss estimates of $104.0 million and $15.5 million, respectively, exclusive of $12.6 million for the cost of excess of loss reinstatement premiums related to Hurricanes Gustav and Ike. The pre-tax net loss to the Company as the result of losses caused by Hurricanes Gustav and Ike of approximately $28.1 million, including $12.6 million of reinstatement costs, increased the Company’s 2008 third quarter and nine month period combined ratios by 17.4 and 5.7 ratio points, respectively.

The following table sets forth the impact of Hurricanes Gustav and Ike on the Company’s 2008 financial results:


	Hurricane		Hurricane
	Gustav		Ike		Total
	($ in thousands)
Reduction in net earned premiums for reinstatement costs	$	1,072	$	11,512	$	12,584
Gross losses incurred		19,000		85,000		104,000
Reinsurance recoverable		9,000		79,500		88,500

Net losses incurred		10,000		5,500		15,500

Underwriting loss	$	11,072	$	17,012	$	28,084

After-tax net loss	$	7,197	$	11,058	$	18,255

Reduction in earnings per share	$	0.43	$	0.65	$	1.08


Effect on 2008 third quarter combined ratio:
Loss and LAE ratio						14.9	%
Expense ratio						2.5	%

Combined ratio						17.4	%


Effect on 2008 nine month period combined ratio:
Loss and LAE ratio						4.8	%
Expense ratio						0.9	%

Combined ratio						5.7	%

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

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


	Nine Months Ended			Year Ended
	September 30, 2008			December 31, 2007
	($ in thousands)

Gross of Reinsurance
Beginning gross reserves	$	141,831		$	319,230
Incurred loss & LAE		125			(29,349	)
Calendar year payments		24,213			148,050

Ending gross reserves	$	117,743		$	141,831


Gross case loss reserves	$	73,148		$	94,959
Gross IBNR loss reserves		44,595			46,872

Ending gross reserves	$	117,743		$	141,831


Net of Reinsurance
Beginning net reserves	$	4,519		$	10,003
Incurred loss & LAE		(476	)		(1,909	)
Calendar year payments		(271	)		3,575

Ending net reserves	$	4,314		$	4,519


Net case loss reserves	$	334		$	646
Net IBNR loss reserves		3,980			3,873

Ending net reserves	$	4,314		$	4,519

Approximately $122.6 million and $167.7 million of paid and unpaid losses at September 30, 2008 and December 31, 2007, respectively, were due from reinsurers as a result of the losses from Hurricanes Katrina and Rita.

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


	Number		Average		Average		Average
	of		Gross		Net		Excess
	Claims (1)		Limit		Limit (2)		Attachment
			($ in thousands)
Primary:
D&O Securities/Other Claims		1	$	1,000	$	650		—


Excess:
D&O Securities Claims		4		7,500		4,500	$	37,500
D&O Side A Securities Claims		2		5,000		3,500		137,500
Other Claims		2		10,000		5,500		35,000


Subtotal Excess/Average		8		7,500		4,500


Total		9	$	6,778	$	4,072


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

⁽²⁾		Amounts are net of reinsurance.

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

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

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

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

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


	Nine Months Ended		Year Ended
	September 30, 2008		December 31, 2007
	($ in thousands)

Gross of Reinsurance
Beginning gross reserves	$	23,194	$	37,171
Incurred losses & LAE		670		(780	)
Calendar year payments		2,110		13,197

Ending gross reserves	$	21,754	$	23,194


Gross case loss reserves	$	13,898	$	16,014
Gross IBNR loss reserves		7,856		7,180

Ending gross reserves	$	21,754	$	23,194


Net of Reinsurance
Beginning net reserves	$	16,717	$	21,381
Incurred losses & LAE		587		1,779
Calendar year payments		643		6,443

Ending net reserves	$	16,661	$	16,717


Net case loss reserves	$	9,010	$	9,715
Net IBNR loss reserves		7,651		7,002

Ending net reserves	$	16,661	$	16,717

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

At September 30, 2008, the ceded asbestos paid and unpaid recoverables were $9.4 million compared to $10.5 million at December 31, 2007. Such recoverables increased as a result of an assumed loss portfolio transaction with a former pool member.

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

Prior Year Reserve Redundancies/Deficiencies

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

Prior period reserve redundancies of $8.0 million and $12.2 million, net of reinsurance, were recorded in the 2008 and 2007 third quarters, respectively, and $32.3 million and $29.6 million, net of reinsurance, were recorded in the 2008 and 2007 nine month periods, respectively, as discussed below. The relevant factors that may have a significant impact on the establishment and adjustment of loss and LAE reserves can vary by line of business and from period to period.

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


	Three Months Ended
	September 30,			September 30,
	2008			2007
	($ in thousands)

Insurance Companies:
Marine	$	600		$	(1,447	)
Specialty		(4,000	)		(5,288	)
Professional Liability		(1,600	)		(3,081	)
Middle Markets		(300	)		—
Property/Other		(300	)		(1,164	)

Subtotal Insurance Companies		(5,600	)		(10,980	)
Lloyd’s Operations		(2,420	)		(1,187	)

Total	$	(8,020	)	$	(12,167	)


	Nine Months Ended
	September 30,			September 30,
	2008			2007
	($ in thousands)

Insurance Companies:
Marine	$	(5,379	)	$	(2,898	)
Specialty		(14,436	)		(11,466	)
Professional Liability		(2,811	)		(7,165	)
Middle Markets		400			—
Property/Other		(3,526	)		(642	)

Subtotal Insurance Companies		(25,752	)		(22,171	)
Lloyd’s Operations		(6,528	)		(7,413	)

Total	$	(32,280	)	$	(29,584	)

Following is a discussion of relevant factors related to the $8.0 million prior period net reserve redundancy recorded in the 2008 third quarter:

The Insurance Companies recorded $0.6 million of prior period net reserve deficiencies for marine business which included $1.2 million for increased cargo reserves due to reported claims from 2006 and 2007, $2.0 million on 2006 and 2007 liability business due to large loss activity and a $0.7 million loss on a commutation with a reinsurer, partially offset by $1.2 million of savings from offshore energy business, $1.4 million for transport business across a number of years due to a reduction in the reporting pattern assumptions and $0.5 million in the protection and indemnity (“P&I”) line of business.

The Insurance Companies recorded $4.0 million of prior period net savings for specialty business comprised mostly of $2.8 million of net favorable development in construction liability business due to favorable loss trends for business written from 2002 to 2004, partially offset by unfavorable loss activity for construction business written in 2000 and prior, and $2.4 million of favorable development on commercial umbrella business on business written from 2004 to 2006 due to reported losses less than our expectations, partially offset by $0.2 million of adverse loss development across other lines.

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

The Insurance Companies recorded prior period net savings of $0.3 million for Middle Markets due to loss reserve take downs and $0.3 million for run-off business related to an unanticipated reinsurance recovery.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Commission Expense. Commission expense paid to unaffiliated brokers and agents is generally based on a percentage of the gross written premium and is reduced by ceding commissions the Company may receive on the ceded written premium. Commissions are generally deferred and recorded as deferred policy acquisition costs to the extent that they relate to unearned premium. The percentage of commission expense to net earned premiums in the 2008 third quarter and nine month period were 14.5% and 14.1%, respectively, compared to 12.6% and 12.3% for the same periods in 2007. The increases are mostly attributable to greater retentions, particularly on our marine quota share treaties, which have reduced the ceding commission benefit. Excluding the effects of Hurricanes Gustav and Ike, the percentage of commission expense to net earned premiums in the 2008 third quarter and nine month period were 13.4% and 13.8%, respectively.

Other Operating Expenses. The increases of 9.7% and 13.0% in other operating expenses in the 2008 third quarter and nine month period, respectively, compared to the same periods in 2007, were attributable primarily to employee-related expenses resulting from expansion of the business and investments in technology to support this growth.

Income Taxes. The Company recorded an income tax benefit of $1.7 million for the 2008 third quarter compared to income tax expense of $11.5 million for the 2007 third quarter, resulting in effective tax rates of 240.7% and 31.4%, respectively. The unusual effective tax rate in the 2008 third quarter resulted from a small pretax loss and a larger taxable loss resulting primarily from tax-exempt investment income. The income tax expense was $15.2 million and $32.2 million for the 2008 and 2007 nine month periods, respectively, resulting in effective tax rates of 26.7% and 31.8%, respectively. The Company’s effective tax rate is less than 35% due to permanent differences between book and tax return income, with the most significant item being tax exempt interest. The effective tax rate on net investment income was 25.8% for the 2008 nine month period compared to 28.0% for the same period in 2007. As of September 30, 2008 and December 31, 2007, the net deferred Federal, foreign, state and local tax assets were $60.2 million and $29.2 million, respectively.

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

We have not provided for U.S. deferred income taxes on the undistributed earnings of approximately $42.8 million of our non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the foreign subsidiaries. However, in the future, if such earnings were distributed to the Company, taxes of approximately $3.0 million would be payable on such undistributed earnings and would be reflected in the tax provision for the year in which these earnings are no longer intended to be permanently reinvested in the foreign subsidiary, assuming all foreign tax credits are realized.

The Company had net state and local deferred tax assets amounting to potential future tax benefits of $7.3 million and $6.3 million at September 30, 2008 and December 31, 2007, respectively. Included in the deferred tax assets are state and local net operating loss carryforwards of $1.1 million and $2.5 million at September 30, 2008 and December 31, 2007, respectively. A valuation allowance was established for the full amount of these potential future tax benefits due to the uncertainty associated with their realization. The Company’s state and local tax carryforwards at September 30, 2008 expire in 2025.

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

Segment Information

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

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

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

Insurance Companies

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

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	($ in thousands)

Gross written premium	$	182,133		$	178,058		$	571,685		$	585,492
Net written premium		106,133			109,677			358,625			355,798

Net earned premium		112,447			109,060			342,127			320,607
Net losses and LAE		(78,346	)		(59,816	)		(207,927	)		(184,881	)
Commission expense		(13,823	)		(13,086	)		(41,494	)		(38,072	)
Other operating expenses		(22,802	)		(21,157	)		(69,502	)		(60,983	)
Commission income and other income (expense)		279			304			2,053			889


Underwriting profit (loss)		(2,245	)		15,305			25,257			37,560

Net investment income		15,973			14,816			47,031			42,910
Net realized capital gains (losses)		(5,207	)		41			(13,362	)		1,118

Income before income taxes		8,521			30,162			58,926			81,588

Income tax expense		1,458			9,193			15,767			25,267

Net income	$	7,063		$	20,969		$	43,159		$	56,321


Loss and LAE ratio		69.7	%		54.8	%		60.8	%		57.7	%
Commission expense ratio		12.3	%		12.0	%		12.1	%		11.9	%
Other operating expense ratio ⁽¹⁾		20.0	%		19.1	%		19.7	%		18.7	%

Combined ratio		102.0	%		85.9	%		92.6	%		88.3	%


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

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


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

Marine & Energy	$	36,203	$	34,657	$	11,927	$	(10,381	)		95.7	%		32.9	%		128.6	%
Specialty		55,309		32,699		15,947		6,663			59.1	%		28.8	%		87.9	%
Professional Liability		14,616		8,010		5,184		1,422			54.8	%		35.5	%		90.3	%
Middle Markets		4,488		2,299		2,476		(287	)		51.2	%		55.2	%		106.4	%
Property/Other		1,831		681		812		338			37.2	%		44.3	%		81.5	%

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


	Three Months Ended September 30, 2007
	($ in thousands)
	Net		Losses
	Earned		and LAE		Underwriting		Underwriting			Loss			Expense			Combined
	Premium		Incurred		Expenses		Profit/(Loss)			Ratio			Ratio			Ratio

Marine & Energy	$	30,204	$	19,600	$	10,439	$	165			64.9	%		34.6	%		99.5	%
Specialty		58,321		28,127		15,769		14,425			48.2	%		27.0	%		75.2	%
Professional Liability		14,184		8,764		5,217		203			61.8	%		36.8	%		98.6	%
Middle Markets		4,475		2,026		1,569		880			45.3	%		35.1	%		80.4	%
Property/Other		1,876		1,299		945		(368	)		69.2	%		50.4	%		119.6	%

Total	$	109,060	$	59,816	$	33,939	$	15,305			54.8	%		31.1	%		85.9	%


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

Marine & Energy	$	105,885	$	76,525	$	35,183	$	(5,823	)		72.3	%		33.2	%		105.5	%
Specialty		168,552		95,793		48,130		24,629			56.8	%		28.6	%		85.4	%
Professional Liability		43,077		24,289		15,302		3,486			56.4	%		35.5	%		91.9	%
Middle Markets		16,921		10,302		7,216		(597	)		60.9	%		42.6	%		103.5	%
Property/Other		7,692		1,018		3,112		3,562			13.2	%		40.5	%		53.7	%

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


	Nine Months Ended September 30, 2007
	($ in thousands)
	Net		Losses
	Earned		and LAE		Underwriting		Underwriting			Loss			Expense			Combined
	Premium		Incurred		Expenses		Profit/(Loss)			Ratio			Ratio			Ratio

Marine & Energy	$	97,699	$	57,835	$	30,553	$	9,311			59.2	%		31.3	%		90.5	%
Specialty		161,742		88,415		44,964		28,363			54.7	%		27.8	%		82.5	%
Professional Liability		40,555		24,989		14,870		696			61.6	%		36.6	%		98.2	%
Middle Markets		13,584		6,811		4,905		1,868			50.1	%		36.1	%		86.2	%
Property/Other		7,027		6,831		2,874		(2,678	)		97.2	%		40.9	%		138.1	%

Total	$	320,607	$	184,881	$	98,166	$	37,560			57.7	%		30.6	%		88.3	%

Net earned premium of the Insurance Companies increased 3.1% and 6.7% in the 2008 third quarter and nine month period, respectively, compared to the same periods in 2007, primarily reflecting increased retention of the business written.

During the 2008 third quarter, the Insurance Companies recorded gross and net loss estimates of $50.8 million and $9.1 million, respectively, exclusive of $5.8 million for the cost of excess of loss reinstatement premiums related to Hurricanes Gustav and Ike.The pre-tax net loss to the Insurance Companies as the result of losses caused by Hurricanes Gustav and Ike of approximately $14.9 million, including $5.8 million of reinstatement costs, increased the Insurance Companies 2008 third quarter and nine month period combined ratios by 39.4 and 13.6 ratio points, respectively.

The following table sets forth the impact of Hurricanes Gustav and Ike on the Insurance Companies 2008 financial results:


	Hurricane		Hurricane
	Gustav		Ike		Total
	($ in thousands)

Reduction in net earned premiums for reinstatement costs	$	252	$	5,526	$	5,778
Gross losses incurred		10,000		40,775		50,775
Reinsurance recoverable		3,297		38,375		41,672

Net losses incurred		6,703		2,400		9,103

Underwriting loss	$	6,955	$	7,926	$	14,881

After-tax net loss	$	4,521	$	5,152	$	9,673

Reduction in earnings per share	$	0.27	$	0.30	$	0.57


Effect on 2008 third quarter combined ratio:
Loss and LAE ratio						34.9	%
Expense ratio						4.5	%

Combined ratio						39.4	%


Effect on 2008 nine month period combined ratio:
Loss and LAE ratio						11.9	%
Expense ratio						1.7	%

Combined ratio						13.6	%

The 2008 third quarter and nine month period loss ratios were favorably impacted by prior period loss reserve redundancies of $5.6 million or 5.0 loss ratio points and $25.8 million or 7.5 loss ratio points, respectively. The 2007 third quarter and nine month period loss ratios were favorably impacted by prior period loss reserve redundancies of $11.0 million or 10.1 loss ratio points and $22.2 million or 6.9 loss ratio points, respectively.

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

The approximate annualized pre-tax yields on the Insurance Companies’ investment portfolio, excluding net realized capital gains and losses, were 4.3% for both the 2008 third quarter and nine month period, respectively, compared to 4.5% for both of the comparable 2007 periods. The average durations of the Insurance Companies’ invested assets at September 30, 2008 was 4.9 years compared to 4.6 years at September 30, 2007. Net investment income increased in the 2008 third quarter and nine month period compared to the same periods in 2007 primarily due to the investment of new funds from cash flow, partially offset by the decrease in yields.

Lloyd’s Operations

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

Syndicate 1221’s stamp capacity is £123.0 million ($239.5 million) in 2008 compared to £140.0 million ($278.2 million) in 2007. Stamp capacity is a measure of the amount of premium a Lloyd’s syndicate is authorized to write as determined by the Council of Lloyd’s. Syndicate 1221’s stamp capacity is expressed net of commission (as is standard at Lloyd’s). The Syndicate 1221 premium recorded in the Company’s financial statements is gross of commission. Navigators provides 100% of Syndicate 1221’s capacity for the 2008 and 2007 underwriting years through Navigators Corporate Underwriters Ltd. in 2008 and through Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. in 2007.

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

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

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	($ in thousands)

Gross written premium	$	70,810		$	67,903		$	247,617		$	237,879
Net written premium		34,185			49,425			143,702			137,673

Net earned premium		41,593			46,978			130,356			120,094
Net losses and LAE		(34,923	)		(28,203	)		(85,651	)		(64,069	)
Commission expense		(8,534	)		(6,590	)		(25,301	)		(16,353	)
Other operating expenses		(7,799	)		(6,745	)		(24,092	)		(21,816	)
Commission income and other income (expense)		(390	)		111			(415	)		96


Underwriting profit (loss)		(10,053	)		5,551			(5,103	)		17,952

Net investment income		3,074			2,609			8,927			7,167
Net realized capital gains (losses)		(309	)		(107	)		(206	)		(143	)

Income before income taxes		(7,288	)		8,053			3,618			24,976

Income tax expense (benefit)		(2,489	)		2,877			1,388			8,806

Net income (loss)	$	(4,799	)	$	5,176		$	2,230		$	16,170


Loss and LAE ratio		84.0	%		60.0	%		65.7	%		53.3	%
Commission expense ratio		20.5	%		14.0	%		19.4	%		13.6	%
Other operating expense ratio ⁽¹⁾		19.7	%		14.1	%		18.8	%		18.1	%

Combined ratio		124.2	%		88.1	%		103.9	%		85.0	%


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

Marine and energy premium rate increases occurred in 2005 and continued into 2006 following Hurricanes Katrina and Rita, particularly in the offshore energy business. Market conditions then began to soften and the average renewal premium rates in 2007 decreased approximately 1.2% for the marine and energy business and decreased approximately 3.4% in the professional liability business. The average renewal premium rates for the third quarter of 2008 decreased approximately 4.3% for the marine and energy business and decreased approximately 6.7% for the professional liability business. The average renewal premium rates for the 2008 nine month period decreased approximately 4.9% for the marine and energy business and decreased approximately 6.8% for the professional liability businessThe recent insurance industry dislocations and storm losses are expected to impact the market, but we are currently unsure what the effect may be.

During the 2008 third quarter, the Lloyd’s Operations recorded gross and net loss estimates of $53.2 million and $64 million, respectively, exclusive of $6.8 million for the cost of excess of loss reinstatement premiums related to Hurricanes Gustav and Ike. The pre-tax net loss to the Lloyd’s Operations as the result of losses caused by Hurricanes Gustav and Ike of approximately $13.2 million, including $6.8 million of reinstatement costs, increased the Lloyd’s operations 2008 third quarter and nine month period combined ratios by 30.7 and 9.8 ratio points, respectively.

The following table sets forth the impact of Hurricanes Gustav and Ike on the Lloyd’s Operations 2008 financial results:


	Hurricane		Hurricane
	Gustav		Ike		Total
	($ in thousands)

Reduction in net earned premiums for reinstatement costs	$	820	$	5,986	$	6,806
Gross losses incurred		9,000		44,225		53,225
Reinsurance recoverable		5,703		41,125		46,828

Net losses incurred		3,297		3,100		6,397

Underwriting loss	$	4,117	$	9,086	$	13,203

After-tax net loss	$	2,676	$	5,906	$	8,582

Reduction in earnings per share	$	0.16	$	0.35	$	0.51


Effect on 2008 third quarter combined ratio:
Loss and LAE ratio						25.0	%
Expense ratio						5.7	%

Combined ratio						30.7	%


Effect on 2008 nine month period combined ratio:
Loss and LAE ratio						7.9	%
Expense ratio						1.9	%

Combined ratio						9.8	%

The 2008 nine month earnings in the Lloyd’s Operations excluding the storm losses, reflect the continued favorable loss development trends. The 2008 third quarter loss ratio was favorably impacted by prior period loss reserve redundancies of $2.4 million or 5.8 loss ratio points compared to the 2007 third quarter loss ratio which was favorably impacted by prior period loss reserve redundancies of $1.2 million or 2.5 loss ratio points. The loss ratio for the 2008 nine month period was favorably impacted by prior period loss reserve redundancies of $6.5 million or 5.0 loss ratio points compared to the 2007 nine month period loss ratio which was favorably impacted by prior period loss reserve redundancies of $7.4 million or 6.2 loss ratio points.

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

The approximate annualized pre-tax yields on the Lloyd’s Operations’ investment portfolio, excluding net realized capital gains and losses, were 3.5% for both the 2008 third quarter and nine month period, respectively, compared to 3.6% for both the comparable 2007 periods. The average duration of our Lloyd’s Operations’ invested assets at September 30, 2008 was 1.3 years compared to 1.4 years at September 30, 2007. The increase in the Lloyd’s Operations’ net investment income is reflective of the increased investment portfolio primarily due to positive cash flow. Such yields are net of interest credits to certain reinsurers for funds withheld by our Lloyd’s Operations.

Off-Balance Sheet Transactions

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

Tabular Disclosure of Contractual Obligations

There have been no material changes in the operating lease or capital lease information concerning contractual obligations as stated in the Company’s 2007 Annual Report on Form 10-K. Total reserves for losses and LAE were $1.8 billion at September 30, 2008 compared to $1.6 billion at December 31, 2007. There were no significant changes in the Company’s lines of business or claims handling that would create a material change in the percentage relationship of the projected payments by period to the total reserves.

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


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

7% Senior Notes	$	195,000	$	8,750	$	17,500	$	17,500	$	151,250

Investments

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

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

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

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

At September 30, 2008, the average quality of the investment portfolio was rated “AA” by S&P and “Aa” by Moody’s. All of the Company’s mortgage-backed and asset-backed securities were rated “AAA” by S&P and “Aaa” by Moody’s, except for ten securities approximating $6.1 million, which were all rated investment grade. There are no collateralized debt obligations (CDO’s), collateralized loan obligations (CLO’s), asset backed commercial paper or credit default swaps in the Company’s investment portfolio. At September 30, 2008 and December 31, 2007, all fixed-maturity and equity securities held by us were classified as available-for-sale.

The approximate annualized pre-tax yields of the investment portfolio, excluding net realized capital gains and losses, were 4.1% and 4.3% for the 2008 and 2007 third quarters, respectively. The approximate annualized pre-tax yields of the investment portfolio, excluding net realized capital gains and losses, were 4.1% and 4.4% for the 2008 and 2007 nine month periods, respectively.

Since the beginning of 2008, the Company’s tax-exempt securities portion of its investment portfolio has increased by $78.8 million to approximately 35.9% of the fixed maturities investment portfolio at September 30, 2008 compared to approximately 33.2% at December 31, 2007. As a result, the effective tax rate on net investment income was 25.7% and 25.8% for the 2008 third quarter and nine month period, respectively, compared to 27.5% and 28.0% for the comparable 2007 periods.

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

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

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

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

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

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

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


	Quoted Prices		Significant
	In Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	Level 1		Level 2		Level 3		Total
	($ in thousands)

Fixed maturities	$	246,320	$	1,378,757	$	609	$	1,625,686
Equities securities		68,637		—		—		68,637
Short-term investments		49,436		129,133		—		178,569

Total	$	364,393	$	1,507,890	$	609	$	1,872,892

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

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


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

Level 3 investments as of July 1, 2008	$	986
Unrealized net gains included in other comprehensive income (loss)		—
Purchases, sales, paydowns and amortization		(57	)
Transfer from Level 3		(650	)
Transfer to Level 3		330

Level 3 investments as of September 30, 2008	$	609

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


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

Level 3 investments as of January 1, 2008	$	2,603
Unrealized net gains included in other comprehensive income (loss)		(1	)
Purchases, sales, paydowns and amortization		(344	)
Transfer from Level 3		(1,979	)
Transfer to Level 3		330

Level 3 investments as of September 30, 2008	$	609

The $0.3 million transfer into level 3 resulted from one security being priced with unobservable inputs that was previously in level 2 priced using observable inputs.

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


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
September 30, 2008	Value		Gains		(Losses)			Cost
	($ in thousands)
Fixed maturities:

U.S. Government Treasury and Agency Bonds and foreign government bonds	$	337,382	$	7,994	$	(237	)	$	329,625
States, municipalities and political subdivisions		594,104		2,366		(14,082	)		605,820
Mortgage- and asset-backed securities:
Mortgage-backed securities		281,184		1,904		(1,285	)		280,565
Collateralized mortgage obligations		76,910		—		(17,493	)		94,403
Asset-backed securities		41,795		63		(695	)		42,427
Commercial mortgage-backed securities		102,139		—		(11,623	)		113,762

Subtotal		502,028		1,967		(31,096	)		531,157
Corporate bonds		192,172		796		(15,035	)		206,411


Total fixed maturities		1,625,686		13,123		(60,450	)		1,673,013


Equity securities — common stocks		68,637		3,580		(6,778	)		71,835

Cash		23,298		—		—			23,298

Short-term investments		178,569		—		—			178,569


Total	$	1,896,190	$	16,703	$	(67,228	)	$	1,946,715


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
December 31, 2007	Value		Gains		(Losses)			Cost
	($ in thousands)
Fixed maturities:

U.S. Government Treasury and Agency Bonds and foreign government bonds	$	256,131	$	5,984	$	(63	)	$	250,210
States, municipalities and political subdivisions		515,883		7,050		(657	)		509,490
Mortgage- and asset-backed securities:
Mortgage-backed securities		266,270		2,177		(758	)		264,851
Collateralized mortgage obligations		109,560		253		(822	)		110,129
Asset-backed securities		64,352		533		(79	)		63,898
Commercial mortgage-backed securities		113,488		544		(1,031	)		113,975

Subtotal		553,670		3,507		(2,690	)		552,853
Corporate bonds		196,636		2,504		(1,804	)		195,936


Total fixed maturities		1,522,320		19,045		(5,214	)		1,508,489


Equity securities — common stocks		67,240		6,452		(4,704	)		65,492

Cash		7,056		—		—			7,056

Short-term investments		170,685		—		—			170,685


Total	$	1,767,301	$	25,497	$	(9,918	)	$	1,751,722

The following tables set forth our U.S. Treasury and Agency Bonds and foreign government bonds as of September 30, 2008 and December 31, 2007:


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
September 30, 2008	Value		Gains		(Losses)			Cost
	($ in thousands)

U.S. Treasury Bonds	$	265,002	$	7,318	$	(101	)	$	257,785
Agency Bonds		66,626		676		(125	)		66,075
Foreign Government Bonds		5,754		—		(11	)		5,765

Total	$	337,382	$	7,994	$	(237	)	$	329,625


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
December 31, 2007	Value		Gains		(Losses)			Cost
	($ in thousands)

U.S. Treasury Bonds	$	191,876	$	5,359	$	(27	)	$	186,544
Agency Bonds		55,158		612		(4	)		54,550
Foreign Government Bonds		9,097		13		(32	)		9,116

Total	$	256,131	$	5,984	$	(63	)	$	250,210

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

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

At September 30, 2008, the Company owned two asset-backed securities approximating $0.3 million with subprime mortgage exposures. The securities are rated “AAA” by S&P and “Aaa” by Moody’s, and have an effective maturity of one year. In addition, the Company owned eleven collateralized mortgage obligations and asset-backed securities approximating $13.3 million classified as Alt-A. All the Alt-A bonds are rated “AAA” by S&P and “Aaa” by Moody’s, except for one security approximating $0.3 million, which is rated investment grade. They have an effective maturity of 2.1 years. Such subprime and Alt-A categories are as defined by S&P. The Company is receiving principal and/or interest payments on all of these securities and believes such amounts are fully collectible.

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


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		(Losses)			Cost
	($ in thousands)
Mortgage-backed securities:
GNMA	$	39,524	$	229	$	(439	)	$	39,734
FNMA		174,376		1,243		(573	)		173,706
FHLMC		67,284		432		(273	)		67,125
Prime		—		—		—			—
Alt-A		—		—		—			—
Subprime		—		—		—			—

Total	$	281,184	$	1,904	$	(1,285	)	$	280,565


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		(Losses)			Cost
	($ in thousands)
Collateralized mortgage obligations:
GNMA	$	—	$	—	$	—		$	—
FNMA		—		—		—			—
FHLMC		—		—		—			—
Prime		64,557		—		(12,533	)		77,090
Alt-A		12,353		—		(4,960	)		17,313
Subprime		—		—		—			—

Total	$	76,910	$	—	$	(17,493	)	$	94,403


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		(Losses)			Cost
	($ in thousands)
Asset-backed securities:
GNMA	$	—	$	—	$	—		$	—
FNMA		—		—		—			—
FHLMC		—		—		—			—
Prime		40,569		63		(612	)		41,118
Alt-A		950		—		(24	)		974
Subprime		276		—		(59	)		335

Total	$	41,795	$	63	$	(695	)	$	42,427

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

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


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

Extremely Strong	AAA	$	1,222,878		68	%
Very Strong	AA		269,349		15	%
Strong	A		239,065		13	%
Adequate	BBB		66,857		4	%
Speculative	BB & below		216		0	%
Not Rated	NR		5,890		0	%

Total	AAA⁽¹⁾	$	1,804,255		100	%


⁽¹⁾		Weighted average quality rating.

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


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized
	Value		Gains		(Losses)			Cost
	($ in thousands)
Credit enhanced securities:
States, municipalities and political subdivisions	$	324,445	$	1,252	$	(8,251	)	$	331,444
Mortgage- and asset-backed securities		7,607		—		(321	)		7,928
Corporate bonds		1,605		7		(40	)		1,638

Total	$	333,657	$	1,259	$	(8,612	)	$	341,010


										Average
			Gross		Gross			Cost or		Underlying
	Fair		Unrealized		Unrealized			Amortized		Credit
	Value		Gains		(Losses)			Cost		Rating
	($ in thousands)
Financial guarantors:
AMBAC	$	64,290	$	235	$	(2,423	)	$	66,478		A+
Assured Guaranty LTD		3,808		—		(114	)		3,922		A
FGIC		55,397		157		(855	)		56,095	AA-
Financial Security Assurance		86,881		450		(1,773	)		88,204		A+
MBIA		110,031		391		(3,012	)		112,652	AA-
Radian Group, Inc.		5,413		26		(144	)		5,531		A
XL Capital		7,837		—		(291	)		8,128		A+

Total	$	333,657	$	1,259	$	(8,612	)	$	341,010		AA-

The average underlying credit rating of the insured securities in the above table rated by S&P or Moody’s if such securities did not have the credit enhancing insurance is included in the “Underlying Credit Rating” column. This average rating includes $11 million of prerefunded municipal bonds which have an implied rating of “AAA” but are not otherwise rated by S&P or Moody’s. Such average ratings exclude a total of 32 credit enhanced securities approximating $21 million that do not have an underlying rating consisting of 16 municipal bonds approximating $12 million, 14 asset-backed securities approximating $8 million and 2 corporate bonds approximating $1 million.

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

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


			Gross		Gross			Cost or
	Fair		Unrealized		Unrealized			Amortized		S&P
	Value		Gains		(Losses)			Cost		Rating
	($ in thousands)
Issuers:
Merrill Lynch	$	6,369	$		$	(543	)	$	6,912	A
Citigroup Inc.		6,326		26		(1,085	)		7,385	AA-
European Investment Bank		4,606				(7	)		4,613	AAA
General Electric Co.		4,354				(476	)		4,830	AAA
Goldman Sachs Group		4,216				(1,209	)		5,425	A+
Wachovia Corp		3,873				(1,046	)		4,919	A+
Morgan Stanley		3,372				(1,591	)		4,963	A+
Bank of New York		3,083				(113	)		3,196	AA
Mitsubishi UFJ Financial Group		2,814				(221	)		3,035	A
AT&T Inc.		2,805				(279	)		3,084	A

Total	$	41,818	$	26	$	(6,570	)	$	48,362

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

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

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


	September 30, 2008				December 31, 2007
	Fair		Gross		Fair		Gross
	Value		Unrealized Loss		Value		Unrealized Loss
	($ in thousands)

Fixed Maturities:
U.S. Government Treasury and Agency Bonds and foreign government bonds
0-6 Months	$	53,542	$	237	$	6,316	$	30
7-12 Months		—		—		—		—
> 12 Months		—		—		6,527		33

Subtotal		53,542		237		12,843		63


States, municipalities and political subdivisions
0-6 Months		278,776		8,076		21,853		67
7-12 Months		74,650		4,689		6,045		115
> 12 Months		16,845		1,317		69,671		475

Subtotal		370,271		14,082		97,569		657


Mortgage- and asset-backed securities
0-6 Months		140,687		3,110		59,191		517
7-12 Months		91,291		15,435		48,496		423
> 12 Months		91,158		12,551		134,858		1,750

Subtotal		323,136		31,096		242,545		2,690


Corporate bonds
0-6 Months		111,781		6,904		20,722		255
7-12 Months		20,421		3,052		25,520		974
> 12 Months		23,108		5,079		38,865		575

Subtotal		155,310		15,035		85,107		1,804


Total Fixed Maturities	$	902,259	$	60,450	$	438,064	$	5,214


Equity securities — common stocks
0-6 Months	$	29,720	$	6,537	$	26,257	$	3,494
7-12 Months		3,492		241		4,153		1,209
> 12 Months		—		—		53		1


Total Equity Securities	$	33,212	$	6,778	$	30,463	$	4,704

As of September 30, 2008, the largest single unrealized loss by issuer in the fixed maturities was $3.1 million and the largest single unrealized loss by issuer in the equity securities was a mutual fund investment that had a $4.5 million unrealized loss.

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

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

During the 2008 third quarter, the Company identified 21 common stocks with a fair value of $12.7 million which were considered to be other-than-temporarily impaired. Consequently, the cost of such securities was written down to fair value and the Company recognized realized losses of $4.0 million. Of the 21 common stocks written down in the 2008 third quarter, nine of such securities had also been written down in the 2008 second quarter. During the 2008 nine month period, the Company identified one fixed maturity with a fair value of $0.3 million which was considered to be other-than-temporarily impaired. Consequently, the cost of such security was written down to fair value and the Company recognized realized losses of $0.7 million. During the 2008 nine month period, $13.2 million of other-than-temporary impairments were recorded on securities in the Company’s investment portfolio. There were no impairment losses recorded in our fixed maturity or equity securities portfolios in the first nine months of 2007.

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


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

1	AAA/AA/A	Aaa/Aa/A	$	55,678		92	%	$	842,686		93	%
2	BBB	Baa		4,736		8	%		59,357		7	%
3	BB	Ba		36		0	%		216		0	%
4	B	B		—		—			—		—
5	CCC or lower	Caa or lower		—		—			—		—
6	N/A	N/A		—		—			—		—

	Total		$	60,450		100	%	$	902,259		100	%

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

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


	Gross
	Unrealized Loss					Fair Value
			Percent					Percent
	Amount		to Total			Amount		to Total
	($ in thousands)

Due in one year or less	$	139		0	%	$	20,321		2	%
Due after one year through five years		6,278		10	%		154,610		17	%
Due after five years through ten years		9,432		16	%		197,991		22	%
Due after ten years		13,505		23	%		206,201		23	%
Mortgage- and asset-backed securities		31,096		51	%		323,136		36	%


Total fixed income securities	$	60,450		100	%	$	902,259		100	%

Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Due to the periodic repayment of principal, the aggregate amount of mortgage-backed and asset-backed securities are estimated to have an effective maturity of approximately 4.8 years.

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	($ in thousands)

Fixed maturities:
Gains	$	757		$	23		$	2,283		$	500
(Losses)		(1,718	)		(816	)		(2,153	)		(1,535	)

		(961	)		(793	)		130			(1,035	)


Equity securities:
Gains		166			888			609			2,285
(Losses)		(4,721	)		(161	)		(14,307	)		(275	)

		(4,555	)		727			(13,698	)		2,010


Net realized capital gains (losses)⁽¹⁾	$	(5,516	)	$	(66	)	$	(13,568	)	$	975


⁽¹⁾		The 2008 third quarter includes $4.7 million and the 2008 nine month period includes $13.2 million for other-than-temporary impairments on investment securities.

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


	Date of			Proceeds		Loss on						Fair Value at
Description	Sale			from Sale		Sale			Impairment			September 30, 2008
	($ in thousands)
Nine months ended:
September 30, 2008:
Bank of America Corp.			₍₁₎						$	(421	)	$	875
Bristol -Myers Squibb Co.			₍₁₎							(343	)		953
Citigroup Inc.			₍₁₎							(678	)		446
Keycorp			₍₁₎							(654	)		296
Lennar Corp.			₍₁₎							(140	)		—
Pfizer Inc.			₍₁₎							(480	)		907
Pinnacle West Capital Corp.			₍₁₎							(430	)		1,084
Allied Capital Corp.			₍₁₎							(688	)		499
American International Group Inc.			₍₁₎							(1,496	)		34
Comcast Corp- CL A			₍₁₎							(414	)		1,276
Dell Inc.			₍₁₎							(308	)		438
Dow Chemical			₍₁₎							(419	)		958
General Electric Co.			₍₁₎							(684	)		1,538
Glaxosmithkline PLC-ADR			₍₁₎							(120	)		578
Illinois Tool Works Inc.			₍₁₎							(26	)		80
Ishares MSCI Japan			₍₁₎							(429	)		1,262
Ishares S&P 500 Index Fund			₍₁₎							(186	)		1,086
Legg Mason Inc.			₍₁₎							(610	)		636
Merrill Lynch & Co.			₍₁₎							(262	)		157
Motorola Inc.			₍₁₎							(917	)		597
National City Bank of Pennsylvania			₍₁₎							(748	)		330
Regions Financial Corp.			₍₁₎							(504	)		244
Sanofi-Aventis			₍₁₎							(139	)		408
Time Warner Cable			₍₁₎							(223	)		649
Time Warner Inc.			₍₁₎							(387	)		750
Toyota Motor Corp-SPON ADR			₍₁₎							(93	)		309
UnitedHealth Group Inc.			₍₁₎							(272	)		475
Verizon Communications			₍₁₎							(196	)		1,069
Wachovia Corp.			₍₁₎							(893	)		42
Sprint Nextel Corp. ⁽²⁾		3/19/2008		$	143	$	(347	)
CIT Group Inc. ⁽²⁾		5/14/2008			1,696		(311	)
Legg Mason Inc. ⁽²⁾		6/4/2008			470		(363	)
Sequoia Mortgage Trust ⁽²⁾		9/5/2008			745		(319	)
Lehman Brothers Holdings ⁽²⁾		9/15/2008			325		(616	)


				$	3,379	$	(1,956	)	$	(13,160	)

September 30, 2007:
TIPS ⁽³⁾		3/31/2007		$	5,823	$	(335	)		—			—


⁽¹⁾		Securities for which an other-than-temporary impairment was recorded in 2008.

⁽²⁾		Securities sold due to losses not considered to be recoverable in the foreseeable future.

⁽³⁾		Treasury inflation protection securities (TIPS) were sold during the 2007 first quarter due to the widening breakeven yield spread between TIPS and Treasuries.

The total impairment losses recorded in the 2008 third quarter and nine month period were $4.7 million and $13.2 million, respectively.

Reinsurance Recoverables

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

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

Approximately $88.5 million of the reinsurance recoverable for paid and unpaid losses at September 30, 2008 were due from reinsurers as a result of the losses from Hurricanes Gustav and Ike. In addition, approximately $122.6 million and $167.7 million of the reinsurance recoverables for paid and unpaid losses at September 30, 2008 and December 31, 2007, respectively, were due from reinsurers as a result of the losses from Hurricanes Katrina and Rita.

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

Liquidity and Capital Resources

Cash flows from operations were $216.4 million and $231.3 million for the nine months ended September 30, 2008 and 2007, respectively. The positive operating cash flow was primarily due to the increase in net written premium, collected investment income, decrease in reinsurance recoverable on paid losses and fewer paid losses relating to Hurricanes Katrina and Rita. Operating cash flow was used primarily to acquire additional investment assets.

Investments and cash increased to $1.90 billion at September 30, 2008 from $1.77 billion at December 31, 2007. The increase was due to the positive cash flow from operations. Net investment income was $19.3 million and $17.9 million for the three months ended September 30, 2008 and 2007, respectively, and $56.9 million and $51.5 million for the nine months ended September 30, 2008 and 2007, respectively.

At September 30, 2008, 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 $0.2 million, consists of investment grade bonds. At September 30, 2008, our portfolio had an average maturity of 5.7 years and duration of 4.3 years. Management periodically projects cash flow of the investment portfolio and other sources in order to maintain the appropriate levels of liquidity in an effort to ensure our ability to satisfy claims. As of September 30, 2008 and December 31, 2007, all fixed maturity securities and equity securities held by us were classified as available-for-sale.

The Company has a credit facility provided through a consortium of banks. The credit facility was amended in February 2007 to increase the letters of credit available under the facility from $115 million to $180 million and to increase the line of credit under the facility from $10 million to $20 million. Also, the expiration of the credit facility was extended from June 30, 2007 to March 31, 2009. If, at that time, the bank consortium does not renew the credit facility, we will need to find other sources to provide the letters of credit or other collateral required to continue our participation in Syndicate 1221. The credit facility, which is denominated in U.S. dollars, is utilized primarily by Navigators Corporate Underwriters Ltd. and Millennium Underwriting Ltd. to fund our participation in Syndicate 1221, which is denominated in British pounds. At September 30, 2008, letters of credit with an aggregate face amount of $95.4 million were issued under the credit facility. The line of credit was unused at September 30, 2008.

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

The credit facility is collateralized by all of the common stock of Navigators Insurance Company. The credit agreement contains covenants common to transactions of this type, including restrictions on indebtedness and liens, limitations on dividends, stock buy backs, mergers and the sale of assets, and requirements to maintain certain consolidated tangible net worth, statutory surplus and other financial ratios. We were in compliance with all covenants at September 30, 2008.

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

Time lags do occur in the normal course of business between the time gross loss reserves are paid by the Company and the time such gross paid losses are billed and collected from reinsurers. Reinsurance recoverable amounts related to those gross loss reserves at September 30, 2008 are anticipated to be billed and collected over the next several years as the gross loss reserves are paid by the Company.

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

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

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

At September 30, 2008, ceded asbestos paid and unpaid recoverables were $9.4 million compared to $10.5 million at December 31, 2007. Of such amounts at September 30, 2008, $5.2 million was due from Equitas. The Company generally experiences significant collection delays for a large portion of reinsurance recoverable amounts for asbestos losses given that certain reinsurers are in run-off or otherwise no longer active in the reinsurance business. Such circumstances are considered in the Company’s ongoing assessment of such reinsurance recoverables.

The Company believes that it has adequately managed its cash flow requirements related to reinsurance recoveries from its positive cash flows and the use of available short-term funds when applicable. However, there can be no assurances that the Company will be able to continue to adequately manage such recoveries in the future or that collection disputes or reinsurer insolvencies will not arise that could materially increase the collection time lags or result in recoverable write-offs causing additional incurred losses and liquidity constraints to the Company. The payment of gross claims and related collections from reinsurers with respect to Hurricanes Gustav, Ike, Katrina and Rita could significantly impact the Company’s liquidity needs. However, we expect to continue to pay these hurricane losses over a period of years from cash flow and, if needed, short-term investments. We expect to collect our paid reinsurance recoverables generally under the terms described above.

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

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


	September 30,			December 31,
	2008			2007
	($ in thousands)

Senior debt	$	123,762		$	123,673
Stockholders’ equity		655,561			662,106

Total capitalization	$	779,323		$	785,779

Ratio of debt to total capitalization		15.9	%		15.7	%

The decrease in stockholders’ equity in 2008 was primarily due to unrealized investment portfolio losses and treasury stock purchases, partially offset by net income.

We monitor our capital adequacy to support our business on a regular basis. The future capital requirements of our business will depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. Our ability to underwrite is largely dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. In particular, we require (1) sufficient capital to maintain our financial strength ratings, as issued by several ratings agencies, at a level considered necessary by management to enable our Insurance Companies to compete, (2) sufficient capital to enable our Insurance Companies to meet the capital adequacy tests performed by statutory agencies in the United States and the United Kingdom and (3) letters of credit and other forms of collateral that are necessary to support the business plan of our Lloyd’s Operations.

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

In October, 2007 the Parent Company’s Board of Directors adopted a stock repurchase program for up to $30 million of the Parent Company’s common stock. Purchases may be made from time to time at prevailing prices in open market or privately negotiated transactions through December 31, 2008. The timing and amount of purchases under the program will depend on a variety of factors, including the trading price of the stock, market conditions and corporate and regulatory considerations. Through September 30, 2008, we have purchased 224,754 shares of our common stock at a total cost of $11.5 million.

We primarily rely upon dividends from our subsidiaries to meet our Parent Company’s obligations. Since the issuance of the senior debt in April 2006, the Parent Company’s cash obligations primarily consist of semi-annual interest payments of $4.4 million. Going forward, the interest payments and any stock repurchases may be made from funds currently at the Parent Company, dividends from its subsidiaries or the $20 million line of credit. The dividends have historically been paid by Navigators Insurance Company. Based on the December 31, 2007 surplus of Navigators Insurance Company, the approximate remaining maximum amount available at September 30, 2008 for the payment of dividends by Navigators Insurance Company during 2008 without prior regulatory approval was $42.9 million. Navigators Insurance Company declared and paid a $5.0 million dividend to the Parent Company in each of the first three quarters of 2008.

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


	September 30,		December 31,
	2008		2007
	($ in thousands)

Cash and investments	$	47,112	$	44,146
Investments in subsidiaries		724,515		735,351
Goodwill and other intangible assets		2,534		2,534
Other assets		9,492		6,821

Total assets	$	783,653	$	788,852


Accounts payable and other liabilities	$	684	$	1,615
Accrued interest payable		3,646		1,458
7% Senior Notes due May 1, 2016		123,762		123,673

Total liabilities		128,092		126,746


Stockholders’ equity		655,561		662,106

Total liabilities and stockholders’ equity	$	783,653	$	788,852

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

	(a)		The Chief Executive Officer and Chief Financial Officer of the Company have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this quarterly report. Based on such evaluation, such officers have concluded that as of the end of such period the Company’s disclosure controls and procedures are effective in identifying, on a timely basis, material information required to be disclosed in our reports filed or submitted under the Exchange Act.

	(b)		There have been no changes during our third fiscal quarter in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II — Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

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

The following table summarizes the Parent Company’s purchases of its common stock for the 2008 third quarter and nine month period:

($ in thousands, except per share)


					Number of
					Shares		Dollar Value
	Total				Purchased		of Shares that
	Number		Average		Under Publicly		May Yet Be
	of Shares		Cost Paid		Announced		Purchased Under
	Purchased		Per Share		Program		the Program (1)

January 2008		—		—		—	$	30,000
February 2008		30,202	$	54.66		30,202	$	28,349
March 2008		105,824	$	53.58		105,824	$	22,679

Subtotal first quarter		136,026	$	53.82		136,026

April 2008		50,000	$	49.90		50,000	$	20,184
May 2008		—		—		—	$	20,184
June 2008		—		—		—	$	20,184

Subtotal second quarter		50,000	$	49.90		50,000

July 2008		38,728	$	44.51		38,728	$	18,460
August 2008		—		—		—
September 2008		—		—		—

Subtotal third quarter		38,728	$	44.51		38,728

Nine Months Ending 9/30/08		224,754	$	51.34		224,754	$	18,460


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

Item 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

None

Item 6. Exhibits


Exhibit No.	Description of Exhibit

11-1	Statement re Computation of Per Share Earnings	*
31-1	Certification of CEO per Section 302 of the Sarbanes-Oxley Act	*
31-2	Certification of CFO per Section 302 of the Sarbanes-Oxley Act	*
32-1	Certification of CEO per Section 906 of the Sarbanes-Oxley Act *
	(This exhibit is intended to be furnished in accordance with Regulation S-K item 601(b)(32)(ii) and shall not be deemed to be filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference).
32-2	Certification of CFO per Section 906 of the Sarbanes-Oxley Act	*
	(This exhibit is intended to be furnished in accordance with Regulation S-K item 601(b)(32)(ii) and shall not be deemed to be filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference).


*		Included herein.

SIGNATURE

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


	The Navigators Group, Inc.
	(Registrant)
Date: October 29, 2008	/s/ Francis W. McDonnell
	Francis W. McDonnell
	Senior Vice President and Chief Financial Officer

INDEX OF EXHIBITS


Exhibit No.	Description of Exhibit

11-1	Statement re Computation of Per Share Earnings	*
31-1	Certification of CEO per Section 302 of the Sarbanes-Oxley Act	*
31-2	Certification of CFO per Section 302 of the Sarbanes-Oxley Act *
32-1	Certification of CEO per Section 906 of the Sarbanes-Oxley Act	*
	(This exhibit is intended to be furnished in accordance with Regulation S-K item 601(b)(32)(ii) and shall not be deemed to be filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference).
32-2	Certification of CFO per Section 906 of the Sarbanes-Oxley Act	*
	(This exhibit is intended to be furnished in accordance with Regulation S-K item 601(b)(32)(ii) and shall not be deemed to be filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference).


*		Included herein.