The Quarterly

Navigators Group Inc (NAVG) SEC Annual Report (10-K) for 2009

NAVG 2010 10-K
NAVG 2010 10-K
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2009

OR

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

For the transition period from to .

Commission file no. 0-15886

THE NAVIGATORS GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
13-3138397
(I.R.S. Employer Identification No.)
6 International Drive, Rye Brook, New York
(Address of principal executive offices)
10573
(Zip Code)

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

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

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

Securities registered pursuant to Section 12(g) of the Act:
None

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

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

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 ☑ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer ☑ 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 ☑

The aggregate market value of voting stock held by non-affiliates as of June 30, 2009 was $596,076,000

The number of common shares outstanding as of February 6, 2010 was 16,877,628.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's 2010 Proxy Statement are incorporated by reference in Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K.

TABLE OF CONTENTS

Description Page Number

Note on Forward-Looking Statements

3

PART I

ITEM 1. Business

3

Overview

3

Business Lines

5

Ratings

8

Loss Reserves

9

Catastrophe Risk Management

15

Hurricanes Gustav, Ike, Katrina and Rita

16

Reinsurance Recoverables

17

Investments

19

Regulation

21

Competition

24

Employees

25

Available Information

25

ITEM 1A. Risk Factors

26

ITEM 1B. Unresolved Staff Comments

33

ITEM 2. Properties

34

ITEM 3. Legal Proceedings

34

ITEM 4. Submission of Matters to a Vote of Security Holders

34

PART II

ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

35

ITEM 6. Selected Financial Data

39

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

40

Overview

40

Critical Accounting Policies

42

Results of Operations

51

Segment Information

70

Off-Balance Sheet Transactions

77

Tabular Disclosure of Contractual Obligations

77

Investments

78

Liquidity and Capital Resources

93

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

98

ITEM 8. Financial Statements and Supplementary Data

99

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

99

ITEM 9A. Controls and Procedures

99

ITEM 9B. Other Information

102

PART III

ITEM 10. Directors, Executive Officers and Corporate Governance

102

ITEM 11. Executive Compensation

102

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

102

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

102

ITEM 14. Principal Accounting Fees and Services

103

PART IV

ITEM 15. Exhibits, Financial Statement Schedules

103

Signatures

104

Index to Consolidated Financial Statements and Schedules

F-1

Exhibit 11-1
Exhibit 21-1
Exhibit 23-1
Exhibit 31-1
Exhibit 31-2
Exhibit 32-1
Exhibit 32-2

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NOTE ON FORWARD-LOOKING STATEMENTS

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

The discussion and analysis of our financial condition and results of operations contained herein should be read in conjunction with our Consolidated Financial Statements and accompanying notes which appear elsewhere in this report. They contain forward-looking statements that involve risks and uncertainties. Please see the above "Note on Forward-Looking Statements" for more information. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed above and elsewhere in this report.

Part I

Item 1. BUSINESS

Overview

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

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

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

We conduct operations through our Insurance Companies and our Lloyd's Operations segments. The Insurance Companies segment consists of Navigators Insurance Company, which includes a United Kingdom Branch (the "U.K. Branch"), and Navigators Specialty Insurance Company, which underwrites specialty and professional liability insurance on an excess and surplus lines basis. All of the insurance business written by Navigators Specialty Insurance Company is fully reinsured by Navigators Insurance Company pursuant to a 100% quota share reinsurance agreement. Our Lloyd's Operations segment includes Navigators Underwriting Agency Ltd. ("NUAL"), a Lloyd's of London ("Lloyd's") underwriting agency which manages Lloyd's Syndicate 1221 ("Syndicate 1221"). Our Lloyd's Operations primarily underwrite marine and related lines of business along with offshore energy, professional liability insurance and construction coverages for onshore energy business at Lloyd's through Syndicate 1221. We controlled 100% of Syndicate 1221's stamp capacity for the 2009 and 2008 underwriting years through our wholly-owned subsidiary, Navigators Corporate Underwriters Ltd., and through both Millennium Underwriting Ltd., another wholly-owned subsidiary, and Navigators Corporate Underwriters Ltd. in 2007, which are referred to as corporate names in the Lloyd's market. We have also established underwriting agencies in Antwerp, Belgium, Stockholm, Sweden and Copenhagen, Denmark, which underwrite risks pursuant to binding authorities with NUAL into Syndicate 1221. For financial information by segment, see Note 3 to the Consolidated Financial Statements in Item 8 of this report.

During the 2008 second quarter, we closed two small underwriting agencies in Manchester and Basingstoke, England, which did not have a material effect on our financial condition or results of operations.

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

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

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Business Lines

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

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

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

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

The "Middle Markets" business, formerly broken out separately in the Insurance Companies, is now included in the Insurance Companies' "Property Casualty" business.

Marine

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

Marine - Insurance Companies

     Marine liability

     Bluewater hull

     Brownwater hull

     Cargo, specie and logistics

     Protection & indemnity

     Transport

     Builders risk

     War

     Customs bonds

Inland Marine - Insurance Companies

     Transportation

     Construction equipment

     Builders risk

     Jewelry, fine arts & other specialties

     Commercial output policy

Marine - Lloyd's Operations

     Cargo and specie

     Marine liability

     Bluewater hull

     Marine excess-of-loss reinsurance

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Within the Insurance Companies' marine business, there are a number of different product lines. The largest is marine liability, which protects businesses from liability to third parties for bodily injury or property damage stemming from their marine-related operations, such as terminals, marinas and stevedoring. Another significant product line is bluewater hull, which provides coverage to the owners of ocean-going vessels against physical damage to the vessels. We also underwrite insurance for harbor craft and other small craft such as fishing vessels, providing physical damage and third party liability coverage. We underwrite cargo insurance, which provides coverage for physical damage to goods in the course of transit, whether by water, air or land. Our U.K. Branch also underwrites primary marine protection and indemnity ("P&I") business, which complements our marine liability business, which is generally written above the primary layer on an excess basis. In addition, we began to insure customs bonds in 2005. In 2006, we announced the establishment of an Inland Marine division of Navigators Insurance Company focusing on traditional inland marine insurance products including builders' risk, contractors' tools and equipment, fine arts, computer equipment and motor truck cargo.

Navigators Management Company, Inc., a wholly-owned underwriting agent, writes marine business for Navigators Insurance Company from offices located in major insurance or port locations in Chicago, Houston, London, Miami, New York, San Francisco and Seattle. Navigators Management UK Ltd., another wholly-owned underwriting agent, writes marine business in London for the UK Branch.

Prior to the 2006 underwriting year, Navigators Insurance Company obtained marine business through participation with other unaffiliated insurers in a marine insurance pool managed by our wholly-owned insurance agency subsidiaries. Commencing with the 2006 underwriting year, the marine insurance pool was eliminated and, therefore, all of the marine business generated by our underwriting agencies was exclusively for Navigators Insurance Company.

The largest product line within our Lloyd's Operations marine business is currently cargo. Other significant product lines include marine liability, specie, bluewater hull, and assumed reinsurance of other marine insurers on an excess-of-loss basis.

Property Casualty

A summary of our business line divisions and primary products within those divisions, by operating segment, is as follows. All of the Insurance Companies' business line divisions are divisions of Navigators Management Company, Inc.:

Navigators Property and Casualty (NAV PAC) - Insurance Companies

     Multi-Peril

     Commercial automotive

     Liability

     Property

     Umbrella

     Inland marine

     Crime insurance

Primary Casualty - Insurance Companies

     Construction liability

     Construction wrap-up

     Primary casualty

     Environmental liability

     Life sciences liability

Excess Casualty - Insurance Companies

     Excess casualty

     Commercial umbrella

Navigators Technical Risk (NavTech)
- Insurance Companies

     Offshore energy

     Onshore energy

     Operational engineering

     Construction

Casualty - Lloyd's Operations

     Bloodstock

     U.S. Casualty written through Lloyd's

Navigators Technical Risk (NavTech) - Lloyd's Operations

     Offshore energy

     Onshore energy

     Engineering and construction

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NAV PAC writes commercial multi-peril and commercial automobile insurance business for niche sectors such as adaptive driving firms, well drillers and armored cars. Our commercial multi-peril products include general liability and a small amount of property insurance. We do not underwrite workers compensation coverage. NAV PAC generally avoids writing property risks in areas with high exposure to earthquake or windstorm losses, such as California and Florida.

The Primary Casualty division primarily writes general liability insurance focusing on small general and artisan contractors and other targeted commercial risks. We have developed underwriting and claims expertise that we believe has allowed us to minimize our exposure to many of the large losses sustained in the past several years by other insurers, including losses stemming from coverages provided to larger contractors who work on condominiums, cooperative developments and other large housing developments. Consistent with our approach of emphasizing underwriting profit over market share, we direct our capacity to small to medium-size general contractors as well as artisan contractors. Commencing in 2005, we expanded our product line in this area by writing a limited number of construction wrap-up policies that are general liability policies for owners and developers of residential construction projects. In 2008, the Primary Casualty division diversified its industry focus and product capability to include products liability insurance to life sciences firms as well as environmental coverages, including liability insurance for contractors and environmental consultants and site pollution coverage.

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

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

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, which did not have any significant effect on our financial condition or results of operations.

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Professional Liability

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

Navigators Professional Liability (Navigators Pro)
- Insurance Companies

     Accountants professional liability

     Directors & officers liability

     Employment practice liability

     Lawyers professional liability

     Insurance agent errors & omissions

     Miscellaneous professional liability

Navigators Professional Liability (Navigators Pro) - Lloyd's Operations

     Directors & officers liability

     Lawyers professional liability

Navigators Pro, a division of one of our wholly-owned insurance agencies, writes professional liability insurance. Our principal product in this division is directors and officers liability insurance, which we offer for both privately held and publicly traded corporations listed on national exchanges. In addition, we provide fiduciary liability and crime insurance to our directors and officers liability insurance clients.

Navigators Pro writes employment practices liability, lawyers professional liability and miscellaneous professional liability coverages. Our current target market for lawyers' professional liability is small law firms. Our U.K. Branch began writing professional liability coverages for U.K. solicitors in October 2004 and exited this business in 2007. In 2005, we commenced writing professional liability coverages for architects and engineers in our Insurance Companies and international directors and officers liability business in our Lloyd's Operations.

In September 2008, Syndicate 1221 began to underwrite professional and general liability insurance coverage in China through the Navigators Underwriting Division of Lloyd's Reinsurance Company (China) Ltd.

In October 2009, we opened an underwriting office in Copenhagen, Denmark to write professional and management liability business.

Ratings

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

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

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

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

Loss Reserves

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

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

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

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

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

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

Year Ended December 31,
2009 2008 2007
($ in thousands)

Net reserves for losses and LAE at beginning of year

$ 999,871 $ 847,303 $ 696,116

Provision for losses and LAE for claims occurring in the current year

444,939 443,877 387,601

Decrease in estimated losses and LAE for claims occurring in prior years

(8,941 ) (50,746 ) (47,009 )

Incurred losses and LAE

435,998 393,131 340,592

Losses and LAE paid for claims occurring during:

Current year

(59,412 ) (60,104 ) (46,467 )

Prior years

(263,523 ) (180,459 ) (142,938 )

Losses and LAE payments

(322,935 ) (240,563 ) (189,405 )

Net reserves for losses and LAE at end of year

1,112,934 999,871 847,303

Reinsurance recoverables on unpaid losses and LAE

807,352 853,793 801,461

Gross reserves for losses and LAE at end of year

$ 1,920,286 $ 1,853,664 $ 1,648,764

The following table presents the development of the loss and LAE reserves for 1999 through 2009. The line "Net reserves for losses and LAE" reflects the net reserves at the balance sheet date for each of the indicated years and represents the estimated amount of losses and loss adjustment expenses arising in all prior years that are unpaid at the balance sheet date. The "Reserves for losses and LAE re-estimated" lines of the table reflect the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year. The reserve estimates may change as more information becomes known about the frequency and severity of claims for individual years. The net and gross cumulative redundancy (deficiency) lines of the table reflect the cumulative amounts developed as of successive years with respect to the aforementioned reserve liability. The cumulative redundancy or deficiency represents the aggregate change in the estimates over all prior years.

The table allocates losses and loss adjustment expenses reported and recorded in subsequent years to all prior years starting with the year in which the loss was incurred. For example, assuming that a loss occurred in 2000 and was not reported until 2002, the amount of such loss will appear as a deficiency in both 2000 and 2001. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on the table.

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The favorable or adverse development on our gross reserves has mostly been ceded to our excess-of-loss reinsurance treaties. As a result of these reinsurance arrangements, while our gross losses and related reserve deficiencies and redundancies are very sensitive to favorable or adverse developments such as those described above, our net losses and related reserve deficiencies and redundancies tend to be less sensitive to such developments.

Our gross loss reserves include estimated losses related to the 2005 Hurricanes Katrina and Rita and the 2008 Hurricanes Ike and Gustav and were in total approximately 6.6% of the total December 31, 2009 gross loss reserves and 11.1% of the total December 31, 2008 gross loss reserves. In addition, our gross loss reserves include estimated losses related to our historic asbestos exposure and were approximately 1.2% of the total December 31, 2009 and December 31, 2008 gross loss reserves, respectively. When recording these losses, we assess our reinsurance coverage, potential reinsurance recoverable, and the recoverability of those balances.

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

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Year Ended December 31,
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
($ in thousands)

Net reserves for losses and LAE

$ 170,530 $ 174,883 $ 202,759 $ 264,647 $ 374,171 $ 463,788 $ 578,976 $ 696,116 $ 847,303 $ 999,871 $ 1,112,934

Reserves for losses and LAE re-estimated as of:

One year later

165,536 180,268 209,797 323,282 370,335 460,007 561,762 649,107 796,557 990,930

Two years later

160,096 183,344 266,459 328,683 360,964 457,769 523,541 589,044 776,844

Three years later

156,322 232,530 266,097 321,213 377,229 432,988 481,532 555,448

Four years later

194,924 227,554 256,236 334,991 362,227 401,380 461,563

Five years later

190,830 218,982 264,431 325,249 343,182 391,766

Six years later

185,075 225,031 260,264 314,332 333,857

Seven years later

188,055 221,541 257,852 305,051

Eight years later

187,422 220,045 250,021

Nine years later

186,581 213,198

Ten years later

180,431

Net cumulative redundancy (deficiency)

(9,901 ) (38,315 ) (47,262 ) (40,404 ) 40,314 72,022 117,413 140,668 70,458 8,941

Net cumulative paid as of:

One year later

43,301 53,646 64,785 84,385 80,034 96,981 133,337 142,938 180,459 263,523

Two years later

71,535 91,352 112,746 133,911 140,644 180,121 219,125 233,211 322,892

Three years later

88,570 114,449 138,086 170,236 195,961 238,673 264,663 300,328

Four years later

101,667 127,961 159,042 208,266 223,847 262,425 302,273

Five years later

108,146 141,384 185,037 226,798 239,355 283,538

Six years later

116,752 159,389 196,098 234,284 251,006

Seven years later

131,579 171,768 198,760 241,083

Eight years later

142,709 171,744 203,370

Nine years later

142,101 176,876

Ten years later

146,798

Gross liability-end of year

391,094 357,674 401,177 489,642 724,612 966,117 1,557,991 1,607,555 1,648,764 1,853,664 1,920,286

Reinsurance recoverable

220,564 182,791 198,418 224,995 350,441 502,329 979,015 911,439 801,461 853,793 807,352

Net liability-end of year

170,530 174,883 202,759 264,647 374,171 463,788 578,976 696,116 847,303 999,871 1,112,934

Gross re-estimated latest

429,719 463,960 529,707 639,674 698,021 862,260 1,367,835 1,388,088 1,544,672 1,851,667

Re-estimated recoverable latest

249,289 250,763 279,685 334,623 364,164 470,493 906,272 832,640 767,828 860,737

Net re-estimated latest

180,431 213,198 250,021 305,051 333,857 391,766 461,563 555,448 776,844 990,930

Gross cumulative redundancy (deficiency)

(38,625 ) (106,286 ) (128,530 ) (150,032 ) 26,591 103,857 190,156 219,467 104,092 1,997

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

Gross Cumulative Redundancy (Deficiency)

Consolidated Insurance Companies
Year Grand Excluding All Lloyd's
Ended Total Asbestos Total Asbestos Other (1) Operations
($ in thousands)

2008

$ 1,997 $ 2,926 $ (16,517 ) $ (929 ) $ (15,588 ) $ 18,514

2007

104,092 105,817 57,512 (1,725 ) 59,237 46,580

2006

219,467 220,412 131,443 (945 ) 132,388 88,024

2005

190,156 191,347 97,758 (1,191 ) 98,949 92,398

2004

103,857 87,639 84,639 16,218 68,421 19,218

2003

26,591 11,556 20,128 15,035 5,093 6,463

2002

(150,032 ) (87,230 ) (144,804 ) (62,802 ) (82,002 ) (5,228 )

2001

(128,530 ) (65,371 ) (117,136 ) (63,159 ) (53,977 ) (11,394 )

2000

(106,286 ) (42,879 ) (77,340 ) (63,407 ) (13,933 ) (28,946 )

1999

(38,625 ) 24,893 (21,912 ) (63,518 ) 41,606 (16,713 )

Net Cumulative Redundancy (Deficiency)

Consolidated Insurance Companies
Year Grand Excluding All Lloyd's
Ended Total Asbestos Total Asbestos Other (1) Operations
($ in thousands)

2008

$ 8,941 $ 8,916 $ 3,079 $ 25 $ 3,054 $ 5,862

2007

70,458 70,696 54,475 (238 ) 54,713 15,983

2006

140,668 142,685 104,831 (2,017 ) 106,848 35,837

2005

117,413 119,659 85,408 (2,246 ) 87,654 32,005

2004

72,022 74,797 51,083 (2,775 ) 53,858 20,939

2003

40,314 43,494 19,279 (3,180 ) 22,459 21,035

2002

(40,404 ) (5,544 ) (51,720 ) (34,860 ) (16,860 ) 11,316

2001

(47,262 ) (12,254 ) (47,261 ) (35,008 ) (12,253 ) (1 )

2000

(38,315 ) (3,213 ) (28,001 ) (35,102 ) 7,101 (10,314 )

1999

(9,901 ) 25,306 (6,730 ) (35,207 ) 28,477 (3,171 )
(1)

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

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Casualty and Professional Liability. Substantially all of our casualty business involves general liability policies which generate third party liability claims that are long tail in nature. A significant portion of our general liability reserves relate to construction defect claims. Reserves and claim frequency on this business may be impacted by legislation implemented in California, which generally provides consumers who experience construction defects a method other than litigation to obtain construction defect repairs. The law, which became effective July 1, 2002 with a sunset provision effective January 1, 2011, provides for an alternative dispute resolution system that attempts to involve all parties to the claim at an early stage. This legislation may impact claim severity, frequency and length of settlement assumptions underlying our reserves. Accordingly, our ultimate liability may exceed or be less than current estimates due to this variable, among others.

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

Loss development of our professional liability business is relatively immature, as we first began writing the business in late 2001. Accordingly, it will take some time to better understand the reserve trends on this business. Our professional liability loss estimates are based on expected losses, actual reported losses, evaluation of loss trends, industry data, and the legal, regulatory and current risk environment because anticipated loss experience in this area is less predictable due to the small number of claims and/or erratic claim severity patterns. We believe that we have made a reasonable estimate of the required loss reserves for professional liability. The expected ultimate losses may be adjusted up or down as the accident years mature.

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

Catastrophe Risk Management

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

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

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

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We estimate that our largest exposure to loss from a single natural catastrophe event now comes from an earthquake on the west coast of the United States. As of January 1, 2010, we estimate that our probable maximum pre-tax gross and net loss exposure for an earthquake event centered at San Francisco, California would be approximately $127 million and $27 million, respectively, including the cost of reinsurance reinstatement premiums.

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

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

Hurricanes Gustav, Ike, Katrina and Rita

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

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

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

Reinsurance Recoverables

We utilize reinsurance principally to reduce our exposure on individual risks, to protect against catastrophic losses and to stabilize loss ratios and underwriting results. We are protected by various treaty and facultative reinsurance agreements. The reinsurance is placed either directly by us or through reinsurance intermediaries. The reinsurance intermediaries are compensated by the reinsurers.

Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance arrangements do not eliminate our obligation to pay claims to our policyholders. Accordingly, we bear credit risk with respect to our reinsurers. Specifically, our reinsurers may not pay claims made by us on a timely basis, or they may not pay some or all of these claims. Either of these events would increase our costs and could have a material adverse effect on our business. Losses we incurred due to Hurricanes Katrina and Rita in 2005 and Hurricanes Gustav and Ike in 2008 significantly increased our reinsurance recoverables, resulting in an increase to our credit risk exposure to our reinsurers.

We have established a reserve for uncollectible reinsurance in the amount of $13.8 million, which was determined by considering reinsurer specific default risk as indicated by their financial strength ratings.

Our exposure to credit risk from any one reinsurer is managed through diversification by reinsuring with a number of different reinsurers, principally in the United States and European reinsurance markets. When reinsurance is placed, our standards of acceptability generally require that a reinsurer must have a rating from A.M. Best and/or S&P of "A" or better, or an equivalent financial strength if not rated, plus at least $250 million in policyholders' surplus. Our Reinsurance Security Committee, which is included within our Enterprise Risk Management Finance and Credit Sub-Committee, monitors the financial strength of our reinsurers and the related reinsurance recoverables and periodically reviews the list of acceptable reinsurers.

The credit quality distribution of the Company's reinsurance recoverables of $1.05 billion at December 31, 2009 for ceded paid and unpaid losses and loss adjustment expenses and ceded unearned premiums based on insurer financial strength ratings from A.M. Best was as follows:

A.M. Best Rating Recoverable Percent
Rating (1) Description Amounts of Total
($ in millions)

A++, A+

Superior $ 436.7 42 %

A, A-

Excellent 585.2 56 %

B++, B+

Very good 0.8 0 % (2)

NR

Not rated 23.5 2 % (2)

Total

$ 1,046.2 100 %

(1)

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

(2)

The Company holds offsetting collateral of approximately 102.1% for B++ and B+ companies and 71.8% for not rated companies which includes letters of credit, ceded balances payable and other balances held by our Insurance Companies and our Lloyd's Operations.

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The following table lists our 20 largest reinsurers measured by the amount of reinsurance recoverable for ceded paid and unpaid losses and loss adjustment expense and ceded unearned premium (constituting 75.6% of our total recoverables) together with the collateral held by us at December 31, 2009, and the reinsurers' financial strength rating from the indicated rating agency:

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

Swiss Reinsurance America Corporation

$ 9.0 $ 97.8 $ 106.8 $ 9.2 A AMB (2)

Munich Reinsurance America Inc.

26.1 60.3 86.4 16.2 A+ AMB

Transatlantic Reinsurance Company

21.7 49.3 71.0 9.5 A AMB

White Mountains Reinsurance of America

1.2 68.6 69.8 2.3 A- AMB

Everest Reinsurance Company

19.9 49.4 69.3 8.5 A+ AMB

General Reinsurance Corporation

1.5 58.3 59.8 1.7 A++ AMB

Munchener Ruckversicherungs-Gesellschaft

4.9 37.0 41.9 10.2 A+ AMB

National Indemnity Company

7.5 29.8 37.3 3.1 A++ AMB

Platinum Underwriters Re

4.2 26.8 31.0 2.6 A AMB

Berkley Insurance Company

8.1 21.1 29.2 1.5 A+ AMB

Scor Holding (Switzerland) AG

5.9 19.2 25.1 5.9 A- AMB

Swiss Re International SE

1.3 22.2 23.5 6.2 A AMB

Partner Reinsurance Europe

5.6 17.6 23.2 8.7 AA- S&P

Lloyd's Syndicate #2003

3.6 17.9 21.5 3.4 A AMB

Partner Reinsurance Company of the U.S.

1.0 19.6 20.6 0.1 A+ AMB

Arch Reinsurance Company

0.7 15.9 16.6 0.1 A AMB

Hannover Ruckversicherung

1.5 14.8 16.3 2.4 A AMB

Ace Property and Casualty Insurance Company

3.7 12.1 15.8 1.6 A+ AMB

Allianz Global Corporate & Specialty AG

0.2 14.4 14.6 4.2 A+ AMB

Federal Insurance Co.

0.6 10.7 11.3 1.0 A++ AMB

Top 20 Total

128.2 662.8 791.0 98.4

All Other

34.1 221.1 255.2 80.9

Total

$ 162.3 $ 883.9 $ 1,046.2 $ 179.3

(1)

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

(2)

A.M. Best

The largest portion of the collateral held consists of letters of credit obtained from reinsurers in accordance with New York Insurance Department Regulation No. 133. Such regulation requires collateral to be held by the ceding company from reinsurers not licensed in New York State in order for the ceding company to take credit for the reinsurance recoverables on its statutory balance sheet. The specific requirements governing the letters of credit include a clean and unconditional letter of credit and an "evergreen" clause which prevents the expiration of the letter of credit without due notice to the Company. Only banks considered qualified by the National Association of Insurance Commissioners ("NAIC") may be deemed acceptable issuers of letters of credit by the New York Insurance Department. In addition, based on our credit assessment of the reinsurer, there are certain instances where we require collateral from a reinsurer even if the reinsurer is licensed in New York State, generally applying the requirements of Regulation No. 133. The contractual terms of the letters of credit require that access to the collateral is unrestricted. In the event that the counterparty to our collateral would be deemed not qualified by the NAIC, the reinsurer would be required by agreement to replace such collateral with acceptable security under the reinsurance agreement. There is no assurance, however, that the reinsurer would be able to replace the counterparty bank in the event such counterparty bank becomes unqualified and the reinsurer experiences significant financial deterioration. Under such circumstances, we could incur a substantial loss from uncollectible reinsurance from such reinsurer.

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Approximately $69.7 million and $96.8 million of the reinsurance recoverables for paid and unpaid losses at December 31, 2009 and December 31, 2008, respectively, were due from reinsurers as a result of the losses from the 2008 Hurricanes Gustav and Ike. Approximately $68.5 million and $101.7 million of the reinsurance recoverables for paid and unpaid losses at December 31, 2009 and 2008, respectively, were due from reinsurers as a result of the losses from the 2005 Hurricanes Katrina and Rita. In addition, also included in reinsurance recoverable for paid and unpaid losses were approximately $8.9 million at both December 31, 2009 and 2008 due from reinsurers in connection with our asbestos exposures.

See "Business - Regulation - United States" below for information regarding the Terrorism Risk Insurance Act, the Terrorism Risk Insurance Extension Act and the Terrorism Risk Insurance Program Reauthorization Act.

Investments

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

Our investments are managed by outside professional fixed-income and equity portfolio managers. We seek to achieve our investment objectives by investing in cash equivalents and money market funds, municipal bonds, U.S. Government bonds, U.S. Government agency guaranteed and non-guaranteed securities, corporate bonds, mortgage-backed and asset-backed securities and common and preferred stocks.

Our investment guidelines require that the amount of our consolidated fixed-income portfolio rated below "A-" but no lower than "BBB-" by S&P or below "A3" but no lower than "Baa3" by Moody's Investors Service ("Moody's") shall not exceed 10% of our total fixed income and short-term investments. Fixed-income securities rated below "BBB-" by S&P or "Baa3" by Moody's combined with any other investments not specifically permitted under our investment guidelines, cannot exceed 5% of our consolidated stockholders' equity. Investments in equity securities that are actively traded on major U.S. stock exchanges cannot exceed 20% of consolidated stockholders' equity. Finally, our investment guidelines prohibit investments in derivatives other than as a hedge against foreign currency exposures or the writing of covered call options on our equity portfolio.

The Insurance Companies' investments are subject to the oversight of their respective Boards of Directors and our Finance Committee of the Parent Company's Board of Directors. The investment portfolio and the performance of the investment managers are reviewed quarterly. These investments must comply with the insurance laws of New York State, the domiciliary state of Navigators Insurance Company and Navigators Specialty Insurance Company. These laws prescribe the type, quality and concentration of investments which may be made by insurance companies. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred stocks, common stocks, real estate mortgages and real estate. The U.K. Branch's investments must comply with the regulations set forth by the Financial Services Authority ("FSA") in the U.K.

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The Lloyd's Operations' investments are subject to the direction and control of the Board of Directors and the Investment and Capital Committee of NUAL, as well as the Parent Company's Board of Directors and Finance Committee. These investments must comply with the rules and regulations imposed by Lloyd's and the FSA.

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

Year Ended December 31,
2009 2008 2007
($ in thousands)

Invested Assets and Cash

Insurance Companies

$ 1,604,354 $ 1,509,382 $ 1,421,365

Lloyd's Operations

388,556 356,184 301,790

Parent Company

63,677 52,149 44,146

Consolidated

$ 2,056,587 $ 1,917,715 $ 1,767,301

Net Investment Income

Insurance Companies

$ 65,717 $ 63,544 $ 58,261

Lloyd's Operations

9,229 11,655 10,524

Parent Company

566 1,355 1,877

Consolidated

$ 75,512 $ 76,554 $ 70,662

Average Yield (amortized cost basis)

Insurance Companies

4.1 % 4.3 % 4.5 %

Lloyd's Operations

2.7 % 3.4 % 3.9 %

Parent Company

1.0 % 3.1 % 4.9 %

Consolidated

3.8 % 4.1 % 4.4 %

At December 31, 2009, the average quality of the investment portfolio was rated "AA" by S&P and "Aa" by Moody's. All of the Company's mortgage-backed and asset-backed securities were rated "AAA" by S&P and "Aaa" by Moody's except for 77 securities approximating $59.9 million. There were no collateralized debt obligations (CDO's), collateralized loan obligations (CLO's), asset-backed commercial paper or credit default swaps in our investment portfolio. At December 31, 2009 and 2008, all fixed-maturity and equity securities held by us were classified as available-for-sale.

See "Management's Discussion of Financial Condition and Results of Operations - Investments" and Note 4 - Investments in the Notes to Consolidated Financial Statements, both of which are included herein, for additional information regarding investments.

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Regulation

United States

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

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

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

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

As part of its general regulatory oversight process, the New York Insurance Department conducts detailed examinations of the books, records and accounts of New York insurance companies every three to five years. Navigators Insurance Company and Navigators Specialty Insurance Company were examined for the years 2001 through 2004 by the New York Insurance Department. The New York Insurance Department commenced an examination of the years 2005 through 2009 in January 2010.

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

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The Insurance Regulatory Information System, or IRIS, was developed by the NAIC and is intended primarily to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies thirteen industry ratios and specifies "usual values" for each ratio. Departure from the usual values on four or more of the ratios can lead to inquiries from individual state insurance commissioners as to certain aspects of an insurer's business. As of December 31, 2009, the results for both Navigators Insurance Company and Navigators Specialty Insurance Company were within the usual values for all IRIS ratios.

State insurance departments have adopted a methodology developed by the NAIC for assessing the adequacy of statutory surplus of property and casualty insurers which includes a risk-based capital formula that attempts to measure statutory capital and surplus needs based on the risks in a company's mix of products and investment portfolio. The formula is designed to allow state insurance regulators to identify weakly capitalized companies. Under the formula, a company determines its "risk-based capital" by taking into account certain risks related to the insurer's assets (including risks related to its investment portfolio and ceded reinsurance) and the insurer's liabilities (including underwriting risks related to the nature and experience of its insurance business). The risk-based capital rules provide for different levels of regulatory attention depending on the ratio of a company's total adjusted capital to its "authorized control level" of risk-based capital. Based on calculations made by Navigators Insurance Company and Navigators Specialty Insurance Company, their risk-based capital levels exceed the level that would trigger regulatory attention or company action. In their respective 2008 statutory financial statements, Navigators Insurance Company and Navigators Specialty Insurance Company have complied with the NAIC's risk-based capital reporting requirements.

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

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

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

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

United Kingdom

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

We participate in the Lloyd's market through our ownership of NUAL, Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. NUAL is the managing agent for Syndicate 1221. We controlled 100% of Syndicate 1221's stamp capacity for the 2009 and 2008 underwriting years through our wholly-owned subsidiary, Navigators Corporate Underwriters Ltd., and through both Millennium Underwriting Ltd., another wholly-owned subsidiary, and Navigators Corporate Underwriters Ltd. in 2007, which are referred to as corporate names in the Lloyd's market. By entering into a membership agreement with Lloyd's, Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. undertake to comply with all Lloyd's bye-laws and regulations as well as the provisions of the Lloyd's Acts and the Financial Services and Markets Act that are applicable to it. The operation of Syndicate 1221, as well as Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. and their respective directors, is subject to the Lloyd's supervisory regime.

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

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If the managing agency concludes that an appropriate reinsurance to close for a syndicate that it manages cannot be determined or negotiated on commercially acceptable terms in respect of a particular underwriting year, it must determine that the underwriting year remain open and be placed into run-off. During this period there cannot be a release of the Funds at Lloyd's of a corporate member that is a member of that syndicate without the consent of Lloyd's and such consent will only be considered where the member has surplus funds at Lloyd's.

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

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

If a member of Lloyd's is unable to pay its debts to policyholders, such debts may be payable by the Lloyd's Central Fund, which acts similarly to state guaranty funds in the United States. If Lloyd's determines that the Central Fund needs to be increased, it has the power to assess premium levies on current Lloyd's members. The Council of Lloyd's has discretion to call or assess up to 3% of a member's underwriting capacity in any one year as a Central Fund contribution.

Competition

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

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

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Employees

As of December 31, 2009, we had 503 full-time employees of which 408 were located in the United States, 85 in the United Kingdom, 4 in Belgium, 3 in Sweden and 3 in Denmark.

Available Information

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

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Item 1A. RISK FACTORS

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

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

The financial market experienced significant volatility worldwide from the third quarter of 2008 through 2009. Although the U.S. and foreign governments have taken various actions to try to stabilize the financial markets, it is unclear whether those actions will be effective. Therefore, the financial market volatility and the resulting negative economic impact could continue and it is possible that it may be prolonged.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our reinsurers, including the other participants in the marine pool, may not pay on losses in a timely fashion, or at all, which may increase our costs.

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.

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The operations of the marine insurance pool also expose us to reinsurance credit risk from other participants in the marine insurance pool on business written through the 2005 underwriting year. From 1998 through 2005, all business underwritten by the marine insurance pool was written with Navigators Insurance Company as the primary insurer. Navigators Insurance Company then reinsured its exposure in the marine insurance pool to the other participants based on their percentage of participation. From 1983 until 1998, Navigators Insurance Company was the primary insurer for some of the pool business in excess of its participation amount. As a result of these arrangements, we remain primarily liable for claims arising out of those policies written by Navigators Insurance Company on behalf of the marine insurance pool even if one or more of the other participants do not pay the claims they reinsured, which could have a material adverse effect on our business. The marine insurance pool was eliminated beginning with the 2006 underwriting year.

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

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

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

We may be unable to attract and retain qualified employees.

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

Increases in interest rates may cause us to experience losses.

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

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

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

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

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

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

Included in our fixed income securities are asset-backed and mortgage-backed securities. Changes in interest rates can expose us to prepayment risks on these investments. In periods of declining interest rates, mortgage prepayments generally increase and mortgage-backed securities are prepaid more quickly, requiring us to reinvest the proceeds at the then current rates.

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

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

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

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Despite our mitigation efforts, an increase in interest rates could have a material adverse effect on our book value.

Capital may not be available in the future, or available on unfavorable terms.

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

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

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

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

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

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

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

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

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

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

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

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

In recent years, the state insurance regulatory framework has come under increased federal scrutiny, and some state legislatures have considered or enacted laws that may alter or increase state authority to regulate insurance companies and insurance holding companies. Further, the NAIC and state insurance regulators are re-examining existing laws and regulations, specifically focusing on modifications to holding company regulations, interpretations of existing laws and the development of new laws. Any proposed or future legislation or NAIC initiatives may be more restrictive than current regulatory requirements or may result in higher costs.

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

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

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

Catastrophe losses could materially reduce our profitability.

We are exposed to claims arising out of catastrophes, particularly in our marine insurance line of business and our NavTech business. We have experienced, and will experience in the future, catastrophe losses which may materially reduce our profitability or harm our financial condition. Catastrophes can be caused by various natural events, including hurricanes, windstorms, earthquakes, hail, severe winter weather and fires. Catastrophes can also be man-made, such as the World Trade Center attack. The incidence and severity of catastrophes are inherently unpredictable. Although we will attempt to manage our exposure to such events, the frequency and severity of catastrophic events could exceed our estimates, which could have a material adverse effect on our financial condition.

The market price of Navigators common stock may be volatile.

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

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

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

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

issuances of common shares or other securities in the future,

the addition or departure of key personnel, and

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

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

Item 1B. UNRESOLVED STAFF COMMENTS

None.

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Item 2. PROPERTIES

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

Item 3. LEGAL PROCEEDINGS

We are working with various state insurance regulators on a matter involving administrative fees charged by a program administrator on certain personal umbrella insurance policies underwritten by Navigators Insurance Company that were outside of Navigators Insurance Company's filed rates and forms. Following discovery of the issue, Navigators Insurance Company approached regulators in the affected states to resolve these matters, and is currently making refunds to policyholders for policy fees collected from the time of discovery of the issue that did not comply with Navigators' filed rates. In addition, Navigators Insurance Company has terminated its relationship with the program administrator effective August 1, 2009 and has ensured that fees will not be collected on any policies going forward unless such fees are permitted by each state in which they are charged. Other operating expenses for the second quarter 2009 include a $1.3 million charge related to this matter. Navigators Insurance Company may be subject to additional fines, refund obligations and other exposure with respect to the past fees charged. We cannot at this time reasonably estimate the additional cost of resolving this matter. However, we do not expect that it will have a material adverse effect on our financial condition or results of operations.

Our subsidiaries are subject to disputes, including litigation and arbitration, arising in the ordinary course of their insurance businesses, including claims asserting extra contractual obligations in connection with the underwriting of policies and handling of claims. Our estimates of the costs of settling such matters are reflected in its aggregate reserves for losses and loss expenses, and we do not believe that the ultimate outcome of such matters will have a material adverse effect on our financial condition or results of operations.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the fourth quarter of 2009.

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Part II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

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

The high, low and closing trade prices for the four quarters of 2009 and 2008 were as follows:

2009 2008
High Low Close High Low Close

First Quarter

$ 57.58 $ 45.30 $ 47.18 $ 65.01 $ 50.91 $ 54.40

Second Quarter

$ 49.75 $ 42.80 $ 44.43 $ 56.99 $ 47.23 $ 54.05

Third Quarter

$ 56.29 $ 43.59 $ 55.00 $ 66.74 $ 43.46 $ 58.00

Fourth Quarter

$ 57.64 $ 45.83 $ 47.11 $ 60.50 $ 39.29 $ 54.91

Information provided to us by our transfer agent and proxy solicitor indicates that there are approximately 321 holders of record and 4,142 beneficial holders of our common stock.

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Five Year Stock Performance Graph

The Five Year Stock Performance Graph and related Cumulative Indexed Returns table, as presented below, which were prepared with the aid of S&P, reflects the cumulative return on the Company's common stock, the S&P 500 Index and the Insurance Index assuming an original investment in each of $100 on December 31, 2004 (the "Base Period") and reinvestment of dividends to the extent declared. Cumulative returns for each year subsequent to 2004 are measured as a change from this Base Period.

The comparison of five year cumulative returns among the Company, the companies listed in the Standard & Poor's 500 Index ("S&P 500 Index") and the S&P Property & Casualty Insurance Index (the "Insurance Index") is as follows:

Base Cumulative Indexed Returns
Period Years Ending December 31,
Company / Index 2004 2005 2006 2007 2008 2009

The Navigators Group, Inc.

100 144.84 160.01 215.88 182.36 156.45

S&P 500 Index

100 104.91 121.48 128.16 80.74 102.11

S&P 500 Property & Casualty Insurance

100 115.11 129.93 111.79 78.91 88.55

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

Annual Return Percentage
Years Ending December 31,
Company / Index 2005 2006 2007 2008 2009

The Navigators Group, Inc.

44.84 10.48 34.91 -15.52 -14.21

S&P 500 Index

4.91 15.79 5.49 -37.00 26.46

S&P 500 Property & Casualty Insurance

15.11 12.87 -13.96 -29.41 12.21

Dividends

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

Recent Sales of Unregistered Securities

None

Use of Proceeds from Public Offering of Debt Securities

None

Purchases of Equity Securities by the Issuer

In November 2009, the Company's Board of Directors adopted a stock repurchase program for up to $35 million of our common stock through December 31, 2010. Purchases are permitted from time to time at prevailing prices in open market or privately negotiated transactions. The timing and amount of purchases under the program depend on a variety of factors, including the trading price of the stock, market conditions and corporate and regulatory considerations. Through December 31, 2009, we purchased 141,576 shares of our common stock at an aggregate cost of $6.8 million. From January 1, 2010 through February 22, 2010, the Parent Company purchased an additional 300,000 shares of its common stock in the open market at an aggregate cost of $13.0 million.

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

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The following table summarizes the Parent Company's purchases of its common stock during 2008 and 2009:

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)
($ in thousands, except per share)

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

Total December 31, 2008

224,754 $ 51.34 224,754 $ -

(1)

Balance as of the end of the month indicated. The stock repurchase program adopted in October 2007 for up to $30 million expired on December 31, 2008.

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)
($ in thousands, except per share)

October 2009

- - - $ 35,000

November 2009

29,021 $ 47.30 29,021 $ 33,627

December 2009

112,555 $ 47.83 112,555 $ 28,243

Subtotal fourth quarter

141,576 $ 47.72 141,576

Total December 31, 2009

141,576 $ 47.72 141,576

(1)

Balance as of the end of the month indicated.

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Item 6. SELECTED FINANCIAL DATA

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

Year Ended December 31,
2009 2008 2007 2006 2005
($ in thousands, except per share data)

Operating Information:

Gross written premiums

$ 1,044,918 $ 1,084,922 $ 1,070,707 $ 970,790 $ 779,579

Net written premiums

701,255 661,615 645,796 520,807 380,659

Net earned premiums

683,363 643,976 601,977 468,323 338,551

Net investment income

75,512 76,554 70,662 56,895 37,069

Net realized gains (losses) (1)

(2,660 ) (38,299 ) 2,006 (1,026 ) 1,238

Total revenues

762,880 683,666 676,659 526,594 385,219

Income before income taxes

86,848 68,731 139,182 106,617 33,754

Net income

63,158 51,692 95,620 72,563 23,564

Net income per share:

Basic

$ 3.73 $ 3.08 $ 5.69 $ 4.34 $ 1.74

Diluted

$ 3.65 $ 3.04 $ 5.62 $ 4.30 $ 1.73

Average common shares outstanding (000s):

Basic

16,935 16,802 16,812 16,722 13,528

Diluted

17,322 16,992 17,005 16,856 13,657

Combined loss & expense ratio (2) :

Loss ratio

63.8 % 61.0 % 56.6 % 57.7 % 69.6 %

Expense ratio

33.4 % 32.8 % 30.9 % 30.1 % 31.7 %

Total

97.2 % 93.8 % 87.5 % 87.8 % 101.3 %

Balance sheet information (at end of year):

Total investments and cash

$ 2,056,587 $ 1,917,715 $ 1,767,301 $ 1,475,910 $ 1,182,236

Total assets

3,453,994 3,349,580 3,143,771 2,956,686 2,583,249

Gross losses and LAE reserves

1,920,286 1,853,664 1,648,764 1,607,555 1,557,991

Net losses and LAE reserves

1,112,934 999,871 847,303 696,116 578,976

Senior notes

114,010 123,794 123,673 123,560 -

Stockholders' equity

801,519 689,317 662,106 551,343 470,238

Common shares outstanding (000s)

16,846 16,856 16,873 16,736 16,617

Book value per share (3)

$ 47.58 $ 40.89 $ 39.24 $ 32.94 $ 28.30

Statutory surplus of Navigators Insurance Company

$ 645,820 $ 581,166 $ 578,668 $ 524,188 $ 356,484
(1)

Includes Net other-than-temporary impairment losses recognized in earnings.

(2)

Calculated based on earned premiums.

(3)

Calculated as stockholders' equity divided by actual shares outstanding as of the date indicated.

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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Overview

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

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

We conduct operations through our Insurance Companies and our Lloyd's Operations segments. The Insurance Companies segment consists of Navigators Insurance Company, which includes a United Kingdom Branch (the "U.K. Branch"), and Navigators Specialty Insurance Company, which underwrites specialty and professional liability insurance on an excess and surplus lines basis. All of the insurance business written by Navigators Specialty Insurance Company is fully reinsured by Navigators Insurance Company pursuant to a 100% quota share reinsurance agreement. Our Lloyd's Operations segment includes Navigators Underwriting Agency Ltd. ("NUAL"), a Lloyd's of London ("Lloyd's") underwriting agency which manages Lloyd's Syndicate 1221 ("Syndicate 1221"). Our Lloyd's Operations primarily underwrite marine and related lines of business along with offshore energy, professional liability insurance and construction coverages for onshore energy business at Lloyd's through Syndicate 1221. We controlled 100% of Syndicate 1221's stamp capacity for the 2009 and 2008 underwriting years through our wholly-owned subsidiary, Navigators Corporate Underwriters Ltd., and through both Millennium Underwriting Ltd., another wholly-owned subsidiary, and Navigators Corporate Underwriters Ltd. in 2007, which are referred to as corporate names in the Lloyd's market. We have also established underwriting agencies in Antwerp, Belgium, Stockholm, Sweden and Copenhagen, Denmark, which underwrite risks pursuant to binding authorities with NUAL into Syndicate 1221.

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

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

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

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

The "Middle Markets" business, formerly broken out separately in the Insurance Companies, is now included in the Insurance Companies' "Property Casualty" business.

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

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 low frequency of loss where we believe our intellectual capital and financial strength bring meaningful value. In contrast, we have avoided niches that we believe have a high frequency of loss activity and/or are subject to a high level of regulatory requirements, such as workers compensation and personal automobile insurance, because we do not believe our technical 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 ("D&O") insurance which covers litigation exposure of a corporation's directors and officers. These types of exposures require substantial technical expertise. We attempt to mitigate the financial impact of severe claims on our results by conservative and detailed underwriting, prudent use of reinsurance and a balanced portfolio of risks.

Our total gross written premiums declined 4% in 2009 primarily due to several factors:

Our construction liability lines decreased 39% due to both a decline in demand resulting from current economic conditions as well as increased competition due to new entrants into the market.

A 24% decline in our offshore energy lines primarily resulting from a planned reduction in our Gulf of Mexico exposure as market pricing and terms did not meet our underwriting standards.

Partially offsetting these factors were:

A 39% increase in our D&O insurance lines due to continued expansion of this business.

Improved pricing conditions across the majority of our lines of business, resulting in an overall 4% increase in average renewal rates. Pricing conditions have stabilized after experiencing declines across all of our lines in 2008 and were driven by a flight to quality after the market turmoil at the end of 2008.

In 2009, we decreased our use of quota share reinsurance and expanded our use of excess-of-loss reinsurance. This change in the mix of our reinsurance resulted in an increase in our retention in 2009, which translated into higher net written premiums and net earned premiums in 2009 compared to 2008.

Our net investment income declined 1% in 2009. Our pre-tax average investment yield declined to 3.8% from 4.1% in 2008 resulting from lower short-term yields. Our total investment portfolio continued to increase in 2009 and had exceeded $2 billion at the end of 2009. We experienced significantly lower investment impairments in our portfolio in 2009 as the financial markets experienced a period of stability compared to the second half of 2008.

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Our overall loss ratio of 63.8% for 2009 increased compared to 2008 due primarily to a $42 million decline in net prior year savings. Although we continued to realize prior year savings in our contractors liability lines, we experienced unfavorable prior year development in our D&O and lawyers lines relating to unfavorable development in the 2006 and 2005 through 2008 underwriting years, respectively. Additional unfavorable prior year development in our Insurance Company marine liability lines resulted in a 2009 underwriting loss in both the Marine and Professional Liability divisions within the Insurance Companies segment.

The discussions that follow include tables that contain both our consolidated and segment operating results for the last three calendar years. 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 premium. A combined ratio of less than 100% indicates an underwriting profit and over 100% indicates an underwriting loss.

For additional information regarding our business, see "Business-Overview", included herein.

Critical Accounting Policies

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

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

Reserves for Losses and Loss Adjustment Expenses

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

The numerous factors that contribute to the inherent uncertainty in the process of establishing loss reserves include: interpreting loss development activity, emerging economic and social trends, inflation, changes in the regulatory and judicial environment and changes in our operations, including changes in underwriting standards and claims handling procedures. The process of establishing loss reserves is complex and imprecise as it must take into account many variables that are subject to the outcome of future events. As a result, informed subjective judgments as to our ultimate exposure to losses are an integral component of our loss reserving process.

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Our actuaries generally calculate the IBNR loss reserves for each line of business by underwriting year for major products principally using two standard actuarial methodologies which are projection or extrapolation techniques: the loss ratio method and the Bornheutter-Ferguson method. The loss ratio method is used to calculate the IBNR for the two most current underwriting years while the Bornheutter-Ferguson method is used to calculate the IBNR for all prior underwriting years, except as otherwise described below. Such methodologies are supplemented in most instances by the loss development method and the frequency/severity method which are used to analyze and better comprehend loss development patterns and trends in the data when making selections and judgments under the loss ratio method and the Bornheutter-Ferguson method. In utilizing these methodologies, each of which is generally applicable to both long tail and short tail lines of business and all of which are described below, to develop our IBNR loss reserves, a key objective of our actuaries is to identify aberrations and systemic changes occurring within historical experience and accurately adjust for them so that the future can be projected more reliably. 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. Three such instances relate to the IBNR loss reserve processes for our 2008 Hurricanes losses, our 2005 Hurricanes losses and our asbestos exposures, where extrapolation techniques are not applied, except in a limited way, given the unique nature of hurricane losses and limited population of marine excess policies with potential asbestos exposures. In such circumstances, inventories of the policy limits exposed to losses coupled with reported losses are analyzed and evaluated principally by claims personnel and underwriters to establish IBNR loss reserves.

A brief summary of each actuarial method discussed above follows:

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

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

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

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

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

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

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

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

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

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

We have extensive history in the contractors' liability business upon which to perform actuarial analyses and we use the key assumption noted above relating to our own historical experience as a reliable indicator of the future for this product. However, there is inherent uncertainty in the loss reserve estimation process for this line of business given both the long-tail nature of the liability claims and the continuing underwriting and coverage changes, claims handling and reserve changes, and legislative changes that have occurred over a several year period. Such factors are judgmentally taken into account in this line of business in specific periods. The underwriting and coverage changes include the migration to a non-admitted business from admitted business in 2003, which allowed us to exclude certain exposures previously permitted (for example, exposure to construction work performed prior to the policy inception), withdrawals from certain contractor classes previously underwritten and expansion into new states beginning in 2005. Claims changes include bringing the claim handling in-house in 1999 and changes in case reserving practices in 2003 and 2006. A California legislative change with respect to reserves and claim frequency for construction defect repairs, became effective July 1, 2002 with a sunset provision effective January 1, 2011. The law provides for an alternative dispute resolution system that attempts to involve all parties to a claim at an early stage. The legislation may impact claim severity, frequency and the length of settlement which may ultimately be different than historical loss development assumptions employed in our loss reserve process.

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

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

The commercial middle markets or NAV PAC business consists of general liability, auto liability and property exposures for a variety of commercial middle market businesses, principally hospitality, manufacturing and garages. Commencing in 2007, our actuaries are segmenting and analyzing the components of the loss development for this business among the property, liability and auto exposures which had been previously combined.

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Primary casualty insurance provides primary general liability coverage principally to corporations in the construction and manufacturing sector. Excess casualty insurance is purchased by corporations which seek higher limits of liability than are provided in their primary casualty policies. Neither product line has a significant amount of loss activity reported to date. Because we have limited historical experience in these products, the IBNR loss reserves for both of these products currently are established using the loss ratio method primarily based on our underwriters' input and industry loss experience.

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

Professional Liability : The professional liability policies mainly provide coverage on a claims-made basis mostly for a one-year period. The reserves for professional liability are analyzed separately by product with the major products being directors and officers ("D&O") liability coverage and errors and omissions ("E&O") liability coverage for lawyers and other professionals.

The losses for D&O business are generally very large and infrequent, and typically involve securities class actions. D&O claims report reasonably quickly, but may take several years to settle. While we have been writing D&O business since 2001, the limited claim history is generally insufficient to establish IBNR loss reserves using Company data. As a result, we principally employ assumptions based on industry experience coupled with input from its underwriters and its claims staff's assessment of potential exposure to establish IBNR loss reserves. Another key assumption with respect to establishing IBNR loss reserves for D&O business is that such industry experience is representative of our future potential loss development with respect to trends in class action activity, such as the impact of stock option backdating, laddering and, most recently, the subprime mortgage crisis. As time passes, for a given underwriting year, additional weight is given to assumptions relating to our actual experience and claims outstanding.

The E&O IBNR loss reserve process is similar to the process for D&O, with the exception of a particular book of business of the U.K. Branch written from 2004 through 2006. For the U.K. Branch E&O business, we assume the claims, while similar in nature to the claims in the U.S. E&O business, are larger, more frequent and have a longer loss development pattern. The IBNR loss reserves for the U.K. Branch E&O business are determined judgmentally after reviewing recent loss activity relative to the remaining in-force policy count and the loss activity for similar insureds.

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

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

The process for establishing the IBNR loss reserves for the marine and professional liability lines of the Lloyd's Operations, and the assumptions used as part of this process, are similar in nature to the process employed by the Insurance Companies. Other business for the Lloyd's Operations include European property and inland marine products, each of which is a new line of business where we have limited loss history and rely primarily on assumptions based on our underwriters' input and industry loss experience.

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

Sensitivity Analysis

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

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

Set forth below is a sensitivity analysis that estimates the effect on our net loss reserve position of using alternative expected loss ratios for the underwriting years 2002 to 2009 and alternative loss development factors for underwriting years 1997 to 2009 rather than those loss ratios and factors actually used in determining our best estimates at December 31, 2009. The analysis addresses each major line of business and underwriting year for which a material deviation to our overall reserve position is believed reasonably possible, and uses what we believe is a reasonably likely range of potential deviation for each line of business. There can be no assurance, however, that actual reserve development will be materially consistent with either the original or the adjusted expected loss ratios or loss development factor assumptions, or with other assumptions made in the reserving process.

For the selected alternative expected loss ratios, our actuaries observed the range of ultimate loss ratios recorded for the underwriting years 2002 to 2009 for each major line of business at December 31, 2009.

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The reasonably likely ranges of potential deviation in the loss ratios for each line of business for the 2002 to 2009 underwriting years expressed in loss ratio points are as follows:

Reasonably likely loss ratio point variances

Decrease Increase

Insurance Companies:

Marine

5 % 6 %

Property Casualty

7 % 14 %

Professional Liability

13 % 16 %

Lloyd's Operations

7 % 12 %

For the loss development factor variance, our actuaries employed a standard technique which is based on the historical development factors observed for each line of business from the paid and incurred loss development triangles with the latest evaluation at December 31, 2009. The historical factors are used to generate alternative outcomes which could arise in the ultimate development due to the random variability inherent in future development. The alternative outcomes are generated by a stochastic simulation. The ranges may contract or expand if future development deviates from historical experience.

The reasonably likely ranges of potential deviations in the aggregate or overall loss development factors applicable to the total of all underwriting years for each line of business are as follows:

Reasonably likely ultimate loss development factor variances

Decrease Increase

Insurance Companies:

Marine

9 % 12 %

Property Casualty

14 % 16 %

Professional Liability

27 % 30 %

Lloyd's Operations

14 % 15 %

Such sensitivity analysis was performed in the aggregate for all products in each line of business. The use of aggregate data was considered more stable and reliable compared to a product-by-product analysis. We cannot assure, however, that such use of aggregate data will provide a more accurate range of the actual variations in loss development. The sensitivity analysis uses loss ratios for the 2002 to 2009 underwriting years, which are believed to be more representative compared to years prior to 2002 given our evolving mix of business, product changes and other factors. There can be no assurances, however, that the use of such recent history is more predictive of actual development as compared to employing longer periods of history. In addition, while the net loss reserves include the net loss reserves for asbestos exposures, such amounts were excluded from the sensitivity analysis given the nature of how such reserves are established by the Company. While we believe such net reserves are adequate, we cannot assure that material loss development may not arise in the future from asbestos losses given the complex nature of such exposures.

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The total Company range amounts below were determined by aggregating the reasonably likely range amounts for each line of business assuming that the variances in the lines of business are uncorrelated to each other. Such amounts may not be representative of the actual aggregate favorable or unfavorable loss development amounts that may occur over time.

Total Reasonably Likely Range of Deviation
Net Loss Redundancy Deficiency
Reserve Amount % Amount %
($ in thousands)

Insurance Companies

Marine

$ 213,646 $ 8,546 4 % $ 12,819 6 %

Property Casualty

486,412 34,049 7 % 38,913 8 %

Professional Liability

107,217 13,938 13 % 15,010 14 %

Total Insurance Companies

807,275 56,533 7 % 66,742 8 %

Total Lloyd's Operations

305,659 21,396 7 % 21,396 7 %

Total Company

$ 1,112,934 $ 77,929 7 % $ 88,138 8 %

Increase (decrease) to net income

Amount

$ 50,654 $ (57,290 )

Per Share (1)

$ 2.92 $ (3.31 )
(1)

Used 17.3 million average diluted shares outstanding for the year ended December 31, 2009.

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

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

Substantially all of our business is placed through agents and brokers. Since the vast majority of our gross written premiums are primary or direct, as opposed to assumed, the delays in reporting assumed premiums generally do not have a significant effect on our financial statements, since 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.

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

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

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

In the first quarter of 2009, we adopted accounting guidance relating to the recognition and presentation of other-than-temporary impairments ("OTTI") on fixed maturity securities. When assessing whether the amortized cost basis of a fixed maturity security will be recovered, we compare the present value of cash flows expected to be collected to the current book value. Any shortfalls of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered the credit loss portion of OTTI losses and is recognized in earnings. All non-credit losses are recognized as changes in OTTI losses within Other Comprehensive Income ("OCI"). Prior to 2009, when a fixed maturity security in our investment portfolio had an unrealized loss that was deemed to be other-than-temporary, we wrote the security down to fair value through a charge to operations.

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

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

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Day to day management of our investment portfolio is outsourced to third party investment managers. While these investment managers may, at a given point in time, believe that the preferred course of action is to hold securities with unrealized losses that are considered temporary until such losses are recovered, the dynamic nature of the portfolio management may result in a subsequent decision to sell the security and realize the loss based upon a change in market and other factors described above. We believe that subsequent decisions to sell such securities are consistent with the classification of our 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 under U.S. GAAP. 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 account's 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. Additional information regarding our accounting for Lloyd's results can be found in Note 1, Organization and Summary of Significant Accounting Policies , to our consolidated financial statements, included herein.

Results of Operations

The following is a discussion and analysis of our consolidated and segment results of operations for the years ended December 31, 2009, 2008 and 2007. All earnings per share data is presented on a per diluted share basis.

Summary

Net income for 2009, 2008 and 2007 was $63.2 million or $3.65 per diluted share, $51.7 million or $3.04 per diluted share and $95.6 million or $5.62 per diluted share, respectively. The 2008 year was adversely impacted by Hurricanes Gustav and Ike, reducing net income by $19.1 million and diluted earnings per share by $1.12.

Consolidated stockholders' equity increased 16.3% to $801.5 million or $47.58 per share at December 31, 2009 compared to $689.3 million or $40.89 per share at December 31, 2008. The increase was primarily due to 2009 net income of $63.2 million and $46.0 million of after-tax unrealized gains in 2009 within our investment portfolio.

Cash flow from operations was $103.9 million, $245.3 million and $284.6 million in 2009, 2008 and 2007, respectively. The decline in cash flow from operations in 2009 compared to 2008 was primarily a result of an increase in losses and LAE paid for claims of $82.4 million. Net investment income decreased 1.4% in 2009 to $75.5 million compared to 2008 as a result of lower investment yields partially offset by an increase in invested assets. Net investment income increased 8.3% in 2008 to $76.6 million compared to 2007 as the result of the increase in invested assets partially offset by lower investment yields. The pre-tax investment yield was 3.8%, 4.1% and 4.4% in 2009, 2008 and 2007, respectively.

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2009 Results

2009 net income of $63.2 million increased $11.5 million compared to 2008 primarily as a result of a decrease in net other-than-temporary impairment losses recognized in earnings of $25.1 million to $11.9 million in 2009 compared to $37.0 million in 2008. Underwriting profit for 2009 declined by $19.8 million to $19.5 million compared to $39.3 million in 2008. The decline in the underwriting profit was primarily due to the recording of net redundancies of prior year loss reserves of $8.9 million in 2009 versus $50.7 million in 2008, a decline of $41.8 million. In addition, we recorded a $9.3 million offshore energy loss net of reinstatement premiums resulting from a fire at a mobile offshore drilling unit.

2008 Results

The 2008 results of operations were adversely impacted by hurricane activity and net realized losses. Hurricanes Gustav and Ike reduced 2008 net income by $19.1 million and earnings per share by $1.12. The combined loss and expense ratio was increased by an aggregate 4.3 ratio points for such losses and are inclusive of reinsurance recoveries and related costs for reinsurance reinstatement premiums. Excluding these effects, the underwriting results benefited from increased net premium revenues despite continuing softening market conditions, and the recording of a net redundancy of prior years' loss reserves of $50.7 million, or $1.94 per share, which reduced the 2008 combined ratio of 93.8% by 7.9 loss ratio points.

Net realized losses were $38.3 million in 2008 compared to net realized gains of $2.0 million in 2007. The 2008 net realized losses include provisions of $37.0 million for declines in the market value of securities which were considered to be other-than-temporary. These provisions reduced 2008 net income by $24.1 million and earnings per share by $1.42 per share.

2007 Results

The 2007 results of operations reflect improved financial performance compared to 2006 due to a combination of improved underwriting results and growth in investment income. The underwriting results benefited from increased net premium revenues despite continuing softening market conditions, and the recording of a net redundancy of prior years' loss reserves of $47.0 million, or $1.80 per share, which reduced the 2007 combined ratio of 87.5% by 7.8 loss ratio points.

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Revenues

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

Year Ended December 31,
2009 2008 2007
Gross Net Net Gross Net Net Gross Net Net
Written Written Earned Written Written Earned Written Written Earned
Premiums % Premiums Premiums Premiums % Premiums Premiums Premiums % Premiums Premiums
($ in thousands)

Insurance Companies:

Marine

$ 241,438 23.1 % $ 171,289 $ 157,534 $ 248,080 22.9 % $ 147,569 $ 132,005 $ 227,175 21.2 % $ 117,294 $ 112,370

Property Casualty

352,285 33.7 % 227,234 246,143 405,062 37.3 % 261,322 273,977 447,615 41.8 % 301,607 275,937

Professional Liability

137,053 13.1 % 79,150 75,444 109,048 10.1 % 63,797 57,316 99,556 9.3 % 59,117 55,149

Insurance Cos. Total

730,776 69.9 % 477,673 479,121 762,190 70.3 % 472,688 463,298 774,346 72.3 % 478,018 443,456

Lloyd's Operations:

Marine

191,959 18.4 % 156,153 142,958 192,568 17.7 % 132,788 126,126 175,567 16.4 % 110,577 111,380

Property Casualty

78,151 7.5 % 45,097 39,330 91,292 8.4 % 32,735 32,644 86,513 8.1 % 33,852 29,482

Professional Liability

44,032 4.2 % 22,332 21,954 38,872 3.6 % 23,404 21,908 34,281 3.2 % 23,349 17,659

Lloyd's Ops. Total

314,142 30.1 % 223,582 204,242 322,732 29.7 % 188,927 180,678 296,361 27.7 % 167,778 158,521

Total

$ 1,044,918 100.0 % $ 701,255 $ 683,363 $ 1,084,922 100.0 % $ 661,615 $ 643,976 $ 1,070,707 100.0 % $ 645,795 $ 601,977

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Gross Written Premiums

The premium rate increases or decreases as noted below for marine, property casualty and professional liability 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 a pricing trend and are not meant to be a precise analysis. 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 which potentially may be more competitively priced compared to renewal business.

Insurance Companies' Gross Written Premiums

Marine Premiums. The gross written premiums by year, including the line of business' gross written premiums as a percentage of the total gross written premiums, consisted of the following:

2009 2008 2007

Marine liability

$ 83,915 34 % $ 82,991 32 % $ 84,270 37 %

Inland marine

28,573 12 % 23,914 10 % 12,154 5 %

Cargo

26,636 11 % 34,202 14 % 30,282 13 %

P&I

25,361 11 % 28,935 12 % 26,312 12 %

Transport

21,527 9 % 23,013 9 % 19,587 9 %

Bluewater hull

19,691 8 % 17,234 7 % 23,508 10 %

Craft/Fishing vessel

19,758 8 % 16,545 7 % 15,986 7 %

Other

15,977 7 % 21,246 9 % 15,076 7 %

Total

$ 241,438 100 % $ 248,080 100 % $ 227,175 100 %

The marine gross written premiums for 2009 decreased 2.7% to $241.4 million compared to 2008 due to declining premium in our cargo, war and P&I businesses due to increased competitive market conditions. The average marine renewal premium rates during 2009 increased approximately 2%. The marine gross written premiums for 2008 increased 9.2% to $248.1 million compared to 2007 reflecting new business partially offset by flattening or declining premium in several classes of business due to increased competitive market conditions. The average marine renewal premium rates during 2008 were flat.

Property Casualty Premiums. The gross written premiums by year, including the line of business' gross written premiums as a percentage of the total gross written premiums, consisted of the following:

2009 2008 2007

Construction liability

$ 90,627 26 % $ 147,880 36 % $ 179,633 40 %

Commercial umbrella

72,509 21 % 63,977 16 % 57,371 13 %

Offshore energy

47,368 13 % 56,989 14 % 51,627 12 %

Primary E&S

23,783 7 % 35,744 9 % 50,185 11 %

Other

117,998 33 % 100,472 25 % 108,799 24 %

Total

$ 352,285 100 % $ 405,062 100 % $ 447,615 100 %

The 2009 property casualty gross written premiums decreased 13.0% to $352.3 million when compared to 2008 reflecting weakening economic conditions that have significantly reduced demand for construction liability, particularly in the western United States, as well as primary excess and surplus insurance. The construction liability line has also seen significant increases in the level of competition from new entrants. Our offshore energy line declined as we wrote very little Gulf of Mexico wind business in 2009 as the terms and conditions were not sufficient and world wide drilling activity slowed. Partially offsetting these declines was an increase in gross written premiums for our commercial umbrella line and our retail umbrella line which was introduced in 2009. Our NavTech and excess casualty lines saw average renewal rate increases of approximately 8% and 2%, respectively, whereas our contractors' liability and NavPac lines saw average renewal rate decreases of 2% and 4%, respectively. The 2008 property casualty gross written premiums decreased 9.5% to $405.1 million when compared to 2007 reflecting declines across most lines of business due to negative renewal rate changes and the housing market slowdown, which was most pronounced in the construction liability line.

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Professional Liability Premiums. The gross written premiums by year, including the line of business' gross written premiums as a percentage of the total gross written premiums, consisted of the following:

2009 2008 2007

D&O (public and private)

$ 99,601 73 % $ 75,010 69 % $ 67,973 68 %

Errors and omissions

32,129 23 % 28,097 26 % 24,515 25 %

Architects and engineers

5,323 4 % 5,941 5 % 7,068 7 %

Total

$ 137,053 100 % $ 109,048 100 % $ 99,556 100 %

The professional liability gross written premiums increased 25.7% to $137.1 million in 2009 compared to 2008 reflecting continued growth and the expansion of our directors and officers business. Partially offsetting the growth has been a reduction in lawyers business within the errors and omissions classification as we have been in the process of re-underwriting that line and focusing more on other segments, such as miscellaneous professional liability. Average 2009 renewal premium rates for this business increased approximately 2% in 2009 compared to 2008. The professional liability gross written premiums increased 9.5% to $109.0 million in 2008 compared to 2007 due to the expansion of our professional liability business and an emerging flight to quality that occurred in the latter part of the year. Average 2008 renewal premium rates for this business decreased approximately 4% in 2008 compared to 2007.

Lloyd's Operations' Gross Written Premiums

Marine Premiums. The gross written premiums by year, including the line of business' gross written premiums as a percentage of the total gross written premiums, consisted of the following:

2009 2008 2007

Cargo and specie

$ 92,139 48 % $ 92,789 47 % $ 87,412 50 %

Marine liability

51,204 27 % 58,886 31 % 48,172 27 %

Assumed reinsurance

19,756 10 % 17,078 9 % 24,280 14 %

Hull

18,697 10 % 16,416 9 % 13,218 8 %

War

10,163 5 % 7,399 4 % 2,485 1 %

Total

$ 191,959 100 % $ 192,568 100 % $ 175,567 100 %

The overall 2009 Lloyd's marine gross written premiums of $192.0 million were flat compared to 2008. There were increases in most lines of business which were offset by decreases in marine liability and cargo lines. The 2008 increase in Lloyd's marine gross written premiums of 9.7% compared to 2007 resulted from new business, particularly in the marine liability class. The average renewal premium rate increased approximately 8.9% in 2009 and decreased 5.1% in 2008 from the previous year, respectively.

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Property Casualty Premiums. The gross written premiums by year, including the line of business' gross written premiums as a percentage of the total gross written premiums, consisted of the following:

2009 2008 2007

Offshore energy

$ 34,469 43 % $ 51,073 56 % $ 49,649 57 %

Onshore energy

14,055 18 % 12,726 14 % 9,151 11 %

Engineering & construction

18,383 24 % 21,036 23 % 18,551 21 %

Bloodstock

7,726 10 % - 0 % - 0 %

Property

(76 ) 0 % 5,631 6 % 9,162 11 %

US Casualty

3,594 5 % 826 1 % - 0 %

Total

$ 78,151 100 % $ 91,292 100 % $ 86,513 100 %

The 2009 Lloyd's property casualty gross written premiums of $78.2 million decreased 14.4% compared to 2008 due to a decline in our offshore energy and engineering and construction lines as well as the cessation of writing our property line. We began writing Bloodstock (animal mortality) business during 2009 by participating in a facility originated by another Lloyd's syndicate. The 2008 gross written premiums of $91.3 million increased 5.5% compared to 2007 due to increases in all of our NavTech lines. Average premium renewal rates in our NavTech lines were a 10.1% increase in 2009 and a 10.0% decrease in 2008 compared to the previous year, respectively.

Professional Liability Premiums. The gross written premiums by year, including the line of business' gross written premiums as a percentage of the total gross written premiums, consisted of the following:

2009 2008 2007

D&O (public and private)

$ 26,776 61 % $ 15,845 41 % $ 16,511 48 %

E&O

17,256 39 % 23,027 59 % 17,770 52 %

Total

$ 44,032 100 % $ 38,872 100 % $ 34,281 100 %

Our Lloyd's Operations commenced writing professional liability business during the second quarter of 2005. The 2009 and 2008 Lloyd's professional liability gross written premiums increased 13.3% and 13.4% to $44.0 million and $38.9 million, respectively, compared to the respective prior year, due to continued expansion and geographic diversification of the book of business. We added a team at Lloyd's at the end of 2008 to write excess D&O business. In addition, during 2009 we began writing professional liability business from our office in Stockholm, Sweden.

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 premiums varies based upon the types of business written and whether the business is written by the Insurance Companies or the Lloyd's Operations.

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

2009 2008 2007
% of % of % of
Ceded Gross Ceded Gross Ceded Gross
Written Written Written Written Written Written
Premiums Premiums Premiums Premiums Premiums Premiums
($ in thousands)

Insurance Companies

Marine

$ 70,149 29.1 % $ 100,511 40.5 % $ 109,881 48.4 %

Property Casualty

125,051 35.5 % 143,740 35.5 % 146,008 32.6 %

Professional Liability

57,903 42.2 % 45,251 41.5 % 40,439 40.6 %

Subtotal

253,103 34.6 % 289,502 38.0 % 296,328 38.3 %

Lloyd's Operations

Marine

35,806 18.7 % 59,780 31.0 % 64,990 37.0 %

Property Casualty

33,054 42.3 % 58,557 64.1 % 52,661 60.9 %

Professional Liability

21,700 49.3 % 15,468 39.8 % 10,932 31.9 %

Subtotal

90,560 28.8 % 133,805 41.5 % 128,583 43.4 %

Total

$ 343,663 32.9 % $ 423,307 39.0 % $ 424,911 39.7 %

The percentage of total ceded written premiums to total gross written premium in 2009 was 32.9% compared to 39.0% in 2008 and 39.7% in 2007. The Insurance Companies' and Lloyd's Operations 2008 ceded written premiums includes $7.2 million and $5.0 million, respectively, of reinstatement premiums related to the losses from Hurricanes Gustav and Ike. Excluding the effect of reinstatement premiums for the 2008 Hurricanes losses, the ratio of ceded written premium to gross written premium was 38.4%. The declines in the ratio of ceded written premiums to gross written premiums in 2009 compared to 2008 was due to the a reduction in the amount of marine and energy quota share reinsurance purchased for both the Insurance Companies and Lloyd's Operations in 2009 as well as the impact of the $12.2 million of reinstatement premiums recognized in 2008 relating to the 2008 Hurricanes.

Net Written Premiums The 2009 net written premiums increased 6.0% compared to 2008 primarily due to the aforementioned reduction in the amount of marine and energy quota share reinsurance purchased in 2009. The 2009 increase was 4.1% compared to 2008 when excluding the $12.2 million of ceded reinstatement premiums resulting from the 2008 Hurricanes. The 2008 net written premiums increased 2.4% compared to 2007. The 2008 increase was 4.3% compared to 2007 when excluding the $12.2 million of ceded reinstatement premiums resulting from the 2008 Hurricanes.

Net Earned Premiums Net earned premiums increased 6.1% in 2009 compared to 2008 and increased 7.0% in 2008 compared to 2007. The 2009 and 2008 net earned premium increases reflect the changes in written premiums discussed above. The 2008 net earned premium was reduced by $12.2 million of reinstatement premium as a result of the losses from the 2008 Hurricanes. Excluding the effects of ceded reinstatement premiums as a result of the 2008 Hurricanes, net earned premium increased 4.1% in 2009 compared to 2008 and 9.0% in 2008 compared to 2007.

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Commission Income Commission income from unaffiliated business decreased 91.4% to $0.1 million in 2009 compared to 2008 and decreased 42.1% to $1.0 million in 2008 compared to $1.7 million in 2007. Beginning with the 2006 underwriting year, there are no longer any unaffiliated marine pool insurance companies and we purchased the Syndicate 1221 minority interest, therefore any profit commission therefore results from the run-off of underwriting years prior to 2006.

Net Investment Income Net investment income decreased 1.4% in 2009 to $75.5 million compared to 2008 as a result of lower investment yields partially offset by an increase in invested assets resulting from positive cash flow from operations. Net investment income increased 8.3% in 2008 to $76.6 million compared to 2007 as the result of the increase in invested assets resulting from positive cash flow from operations partially offset by lower investment yields. The pre-tax investment yield was 3.8%, 4.1% and 4.4% in 2009, 2008 and 2007, respectively. See the "Investments" section below for additional information regarding our net investment income.

Net Other-Than-Temporary Impairment Losses Recognized in Earnings

Our net other-than-temporary impairment losses recognized in earnings for the periods indicated were as follows:

Year ended December 31,
2009 2008 2007
($ in thousands)

Fixed maturities

$ (3,101 ) $ (8,604 ) $ -

Equity securities

(8,776 ) (28,441 ) (655 )

Net other-than-temporary impairment losses recognized in earnings

$ (11,877 ) $ (37,045 ) $ (655 )

The 2009 other-than-temporary impairments were primarily related to additional impairments on equity securities that were impaired in 2008 as well as impairments on residential mortgage-backed securities. The after-tax effects of net other-than-temporary impairment losses recognized in earnings on the 2009 and 2008 net income were $7.8 million or $0.45 per diluted share and $24.1 million or $1.42 per share, respectively. In 2009, we recognized in earnings OTTI losses of $2.5 million and $0.08 million related to non-agency mortgage and asset-backed securities, respectively. In 2009, we recognized in earnings OTTI losses of $8.8 million on 56 common stocks resulting from additional impairments on equity securities that were impaired in 2008. In addition, in 2009 we recognized in earnings OTTI losses of $0.6 million on 2 corporate bonds.

The 2008 other-than-temporary impairments were primarily due to equity impairments where the market value of the security was less than 80% of the book value for six consecutive months resulting from the significant overall market declines in the second half of 2008. In addition, 2008 also included impairments on residential mortgage-backed securities. During 2008, we identified equity securities with fair value of $34.4 million which were considered to be other-than-temporarily impaired. Consequently, the cost of such securities was written down to fair value and we recognized realized losses of $28.4 million. The equity impairments include $8.6 million in write-downs to fair value for various broad based ETFs and mutual funds where the fair value was less than 80% of the book value. During 2008, we identified fixed maturity securities with fair value of $7.4 million which were considered to be other-than-temporarily impaired. Consequently, the cost of such securities was written down to fair value and we recognized realized losses of $8.6 million.

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

Net Realized Gains (Losses)

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

Year Ended December 31,
2009 2008 2007
($ in thousands)

Fixed maturities:

Gains

$ 18,312 $ 3,650 $ 1,320

(Losses)

(9,676 ) (1,670 ) (1,749 )

8,636 1,980 (429 )

Equity securities:

Gains

2,110 720 3,626

(Losses)

(1,529 ) (3,954 ) (536 )

581 (3,234 ) 3,090

Net realized gains (losses)

$ 9,217 $ (1,254 ) $ 2,661

Pre-tax net income included $9.2 million of net realized gains for 2009 compared to $1.3 million of net realized losses for 2008 and net realized gains of $2.7 million for 2007. On an after-tax basis, the net realized gains for 2009 were $5.9 million or $0.34 per diluted share compared to the net realized losses of $0.8 million or $0.05 per diluted share for 2008 and the net realized gains of $1.7 million or $0.10 per diluted share for 2007. Net realized gains and losses are generated from the sale of securities in the normal course of management of the investment portfolio.

Other Income/(Expense ) Other income/(expense) for 2009, 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 loss adjustment expenses to net earned premiums (loss ratios) were 63.8%, 61.0% and 56.6% in 2009, 2008 and 2007, respectively. The 2009 loss ratio of 63.8% was favorably impacted by 1.3 loss ratio points resulting from an $8.9 million net redundancy of prior years' loss reserves. The 2008 loss ratio of 61.0% was favorably impacted by 7.9 loss ratio points resulting from the $50.7 million net redundancy of prior years' loss reserves and adversely impacted by 3.7 loss ratio points related to the 2008 Hurricanes. The result of underwriting losses caused by Hurricanes Gustav and Ike of approximately $29.3 million, including $12.2 million of reinstatement costs, increased the 2008 combined ratio by 4.3 ratio points. The 2007 loss ratio of 56.6% was favorably impacted by 7.8 loss ratio points resulting from the $47.0 million net redundancy of prior year loss reserves. The 2007 loss ratio also included 0.9 loss ratio points for the U.K. flood losses in the Insurance Companies' U.K. Branch's property business and the Lloyd's marine cargo business.

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During 2008 and 2007, reserve reductions resulting from periodic reviews of the 2005 Hurricanes' exposures reduced gross losses incurred by $12.3 million and $29.3 million, respectively. The reductions to the 2005 Hurricanes gross reserve estimates resulted in reductions of $1.0 million and $1.9 million to our 2008 and 2007 net loss incurred estimates, respectively, and reductions of $0.8 million and $0.7 million to our 2008 and 2007 reinstatement cost estimates, respectively. As a result of these reviews in 2007, we also reallocated our net retention for these events between our Insurance Companies and Lloyd's operations and the result was to increase the Insurance Companies loss incurred by $1.5 million and decrease the Lloyd's loss incurred by $3.4 million. During 2009 there was a minor increase in the gross and net losses incurred for the 2005 Hurricanes of $0.7 million and $0.1 million, respectively.

Prior Year Reserve Redundancies/Deficiencies

As part of our regular review of prior reserves, our actuaries may determine, based on their judgment, that certain assumptions made in the reserving process in prior years 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 year reserve redundancies of $8.9 million, $50.7 million and $47.0 million net of reinsurance were recorded in 2009, 2008 and 2007, 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.

To the extent that reserves are deficient or redundant, the amount of such deficiency or redundancy is recorded as a charge or credit to earnings in the period in which the deficiency or redundancy is identified based on the information that is available at that time.

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

Year Ended December 31,
2009 2008 2007
($ in thousands)

Insurance Companies

Marine

$ 11,893 $ (5,298 ) $ (11,595 )

Property Casualty

(35,658 ) (33,065 ) (11,836 )

Professional Liability

20,686 (3,559 ) (10,365 )

Insurance Companies

$ (3,079 ) $ (41,922 ) $ (33,796 )

Lloyd's Operations

(5,862 ) (8,824 ) (13,213 )

Total

$ (8,941 ) $ (50,746 ) $ (47,009 )

Following is a discussion of relevant factors impacting our 2009 loss reserves:

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

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

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

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

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

Partially offsetting these favorable developments were adverse development of:

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

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

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

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

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

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

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

Following is a discussion of relevant factors impacting our 2008 loss reserves:

The Insurance Companies recorded $5.3 million of net prior year savings for marine business, primarily comprised of $4.7 million of savings in the marine liability business, $2.8 million of savings in the protection and indemnity business, $1.4 million of savings in the transport business and $1.4 million of savings due to a review of reinsurance recoverable in the second quarter of 2008, partially offset by $2.7 million of strengthening in the cargo business, $1.4 million of strengthening in the craft and hull businesses, and $0.7 million recorded for a commutation with a reinsurer. The favorable development for marine liability, protection and indemnity, and transport was primarily due to reduced claims activity for underwriting years 2003 through 2006 as well as IBNR loss reserve reductions that resulted from the reduced claims activity. The adverse development for cargo, craft and hull was primarily due to several large claims in underwriting years 2005 and 2006.

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The Insurance Companies recorded $33.1 million of net prior year savings for property casualty business. This included $31.6 million savings in the contractors liability business, $3.8 million of savings in the offshore energy business, $3.7 million of net prior year savings in the property and aviation run-off business $1.4 million of savings in the commercial umbrella business, $1.0 million of savings in the personal umbrella business, and $0.8 million of savings in the primary E&S business; partially offset by $1.6 million of net adverse development in the middle markets business as a result of an actuarial analysis that indicated that strengthening is required for the automobile coverage due to frequency and severity in excess of our expectations and $7.1 million of strengthening due to greater than expected loss activity in a discontinued liquor liability program and $0.8 million of strengthening in the program business. The favorable development for contractors' liability, commercial umbrella, personal umbrella and primary E&S were primarily due to reduced claims activity in underwriting years 2003 through 2006. The favorable development for the aviation business was as a result of an actuarial analysis that indicated that the losses are substantially reported and the IBNR loss reserves could be reduced. The adverse development for the liquor liability business was due to a discontinued program and the adverse development on the programs business was due to an active program.

The Insurance Companies recorded $3.6 million of net prior year savings for professional liability. This was primarily due to the reduction in case and IBNR reserves for the directors and officers business in underwriting years 2004 through 2006 resulting from reported losses being less than anticipated during 2008.

The Lloyd's Operations recorded $8.8 million of net prior year savings, primarily in the marine liability, energy, specie and reinsurance business for underwriting years 2005 and prior. The favorable development is the result of more extensive analysis of the potential future development which led us to shorten the development patterns.

Following is a discussion of relevant factors impacting our 2007 loss reserves:

The Insurance Companies recorded $11.6 million of net prior years' savings in the marine business primarily comprised of $6.5 million of savings in the transport business, $3.7 million of savings in the marine liability business, $1.6 million of savings in the cargo business, $1.0 million of savings in each of the hull; partially offset by $1.6 million for uncollectible reinsurance recoverables for asbestos losses. The favorable development for the liability, cargo and hull coverages was primarily due to reduced claim activity for the 2005 and 2006 underwriting years. Prior to 2007, because the Company did not have sufficient experience in the transport product line, it instead used its hull and liability products loss development experience as a key assumption in setting the IBNR loss reserves for its transport product. Commencing in 2007, our actuaries determined that the Company's loss development experience for its transport product had become sufficiently credible to begin establishing transport reserves using such experience, which resulted in the prior year savings referred to above recorded for this business.

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The Insurance Companies recorded $11.8 million of net prior years' savings almost entirely for its property casualty business related to the contractors' liability business for the years 1998 through 2006. The prior years' savings recorded for contractors' liability business was due mostly to continued favorable loss frequency and severity trends for 2003 to 2006 compared to expectations. Our actuaries believe that the favorable loss frequency trends result primarily from a number of underwriting and coverage changes since 2002, including the migration to non-admitted business from admitted business in 2003, which allowed the Company to exclude certain previously permitted exposures (for example, exposure to construction work performed prior to the policy inception), and withdrawals from certain contractor classes previously underwritten. Our actuaries believe that the favorable loss severity trends result primarily from improved claim practices coupled with a California legislative change, effective in mid-2002, which provides for an alternative dispute resolution system with respect to construction defect claims and is intended to avoid or mitigate costly litigation and claims settlements. While our actuaries were unable to precisely quantify the impact of each of the foregoing factors, such factors were judgmentally taken into account in recording such prior years' savings for contractors' liability business by evaluating actual loss development compared to expected loss development coupled with a frequency and severity claims analysis conducted in 2007.

The Insurance Companies have historically reserved for the professional liability business using ultimate loss ratios based on industry experience for this line of business given the Company's limited claims history. Such industry experience is heavily influenced by the historical frequency and severity of large securities class action lawsuits. During 2007, the Insurance Companies reduced the net reserves for such claims-made policies compared to year-end 2006 by $10.4 million, mostly related to policies issued in 2004 and 2005. The reductions were made to recognize both the low level of open claim counts and the lack of observed claim severity compared to expectations at the time the reserves were initially established using industry experience.

The Lloyd's Operations recorded $13.2 million of net prior year savings, comprised of $3.4 million due to a review of the 2005 Hurricanes Katrina and Rita loss estimates, a release of approximately $2.0 million following a review of open claim files for the years 1998 to 2001, a $4.6 million reduction in our 2004 underwriting year estimates for the marine liability book due to favorable loss trends, and the remaining $3.2 million was mostly for offshore energy and marine liability business on business underwritten during 2002.

Hurricanes Gustav and Ike

During 2008, we recorded gross and net loss estimates of $114.0 million and $17.2 million, respectively, exclusive of $12.2 million for the cost of excess-of-loss reinstatement premiums, related to the third quarter 2008 Hurricanes Gustav and Ike. Our pre-tax net loss as a result of Hurricanes Gustav and Ike was approximately $29.3 million, which increased our 2008 combined ratio by 4.3 ratio points.

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

Year Ended December 31,
2009 2008
($ in thousands)

Gross of Reinsurance

Beginning gross reserves

$ 107,399 $ -

Incurred loss & LAE

1,039 114,000

Calendar year payments

48,929 6,601

Ending gross reserves

$ 59,509 $ 107,399

Gross case loss reserves

$ 34,015 $ 70,299

Gross IBNR loss reserves

25,494 37,100

Ending gross reserves

$ 59,509 $ 107,399

Net of Reinsurance

Beginning net reserves

$ 12,923 $ -

Incurred loss & LAE

978 17,169

Calendar year payments

11,218 4,246

Ending net reserves

$ 2,683 $ 12,923

Net case loss reserves

$ 1,793 $ 11,696

Net IBNR loss reserves

890 1,227

Ending net reserves

$ 2,683 $ 12,923

Hurricanes Katrina and Rita

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

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

Year Ended December 31,
2009 2008 2007
($ in thousands)

Gross of Reinsurance

Beginning gross reserves

$ 97,732 $ 141,831 $ 319,230

Incurred loss & LAE

671 (12,250 ) (29,349 )

Calendar year payments

31,365 31,849 148,050

Ending gross reserves

$ 67,038 $ 97,732 $ 141,831

Gross case loss reserves

$ 49,291 $ 62,732 $ 94,959

Gross IBNR loss reserves

17,747 35,000 46,872

Ending gross reserves

$ 67,038 $ 97,732 $ 141,831

Net of Reinsurance

Beginning net reserves

$ 3,667 $ 4,519 $ 10,003

Incurred loss & LAE

114 (990 ) (1,909 )

Calendar year payments

245 (138 ) 3,575

Ending net reserves

$ 3,536 $ 3,667 $ 4,519

Net case loss reserves

$ 183 $ 279 $ 646

Net IBNR loss reserves

3,353 3,388 3,873

Ending net reserves

$ 3,536 $ 3,667 $ 4,519

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 December 31, 2009 are for: (i) one large settled claim for excess insurance policy limits exposed to a class action suit against an insured involved in the manufacturing or distribution of asbestos products being paid over several years (two other large settled claims were fully paid in 2007); (ii) other insureds not directly involved in the manufacturing or distribution of asbestos products, but that have more than incidental asbestos exposure for their purchase or use of products that contained asbestos; and (iii) attritional asbestos claims that could be expected to occur over time. Substantially all of our asbestos liability reserves are included in our marine loss reserves.

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

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

Year Ended December 31,
2009 2008 2007
($ in thousands)

Gross of Reinsurance

Beginning gross reserves

$ 21,774 $ 23,194 $ 37,171

Incurred loss & LAE

928 796 (780 )

Calendar year payments

555 2,216 13,197

Ending gross reserves

$ 22,147 $ 21,774 $ 23,194

Gross case loss reserves

$ 14,291 $ 13,918 $ 16,014

Gross IBNR loss reserves

7,856 7,856 7,180

Ending gross reserves

$ 22,147 $ 21,774 $ 23,194

Net of Reinsurance

Beginning net reserves

$ 16,683 $ 16,717 $ 21,381

Incurred loss & LAE

(25 ) 263 1,779

Calendar year payments

(105 ) 297 6,443

Ending net reserves

$ 16,763 $ 16,683 $ 16,717

Net case loss reserves

$ 9,112 $ 9,032 $ 9,715

Net IBNR loss reserves

7,651 7,651 7,002

Ending net reserves

$ 16,763 $ 16,683 $ 16,717

The ceded asbestos paid and unpaid recoverables were $8.9 million at December 31, 2009 and 2008, respectively. During 2007, we increased our provision for uncollectible reinsurance for asbestos losses by $1.6 million which was recorded in incurred losses. In addition, in 2007, we settled demands for arbitration with two asbestos reinsurers. We believe that we will be able to collect reinsurance on the gross portion of its historic gross asbestos exposure in the above table. To the extent we incur additional gross loss development for our historic asbestos exposure, we do not expect to realize additional reinsurance recoverables.

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Loss Reserves

As illustrated in the following table, our overall reinsurance recoverable amounts for paid and unpaid losses have decreased during 2009 as we utilized less reinsurance in 2009 compared to 2008:

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

Reinsurance recoverables:

Paid losses

$ 76,505 $ 67,227 $ 9,278

Unpaid losses and LAE reserves

807,352 853,793 (46,441 )

Total

$ 883,857 $ 921,020 $ (37,163 )

The following table sets forth our 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) for the periods indicated:

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

Gross reserves for losses and LAE

$ 1,920,286 $ 1,853,664 $ 66,622

Less: Reinsurance recoverable on unpaid losses and LAE reserves

807,352 853,793 (46,441 )

Net loss and LAE reserves

$ 1,112,934 $ 999,871 $ 113,063

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The following tables set forth our net case loss and LAE reserves and net IBNR reserves (a non-GAAP measure reconciled above) by segment and line of business for the periods indicated:

December 31, 2009
Net Net Total % of IBNR
Reported IBNR Net Loss to Total Net
Reserves Reserves Reserves Loss Reserves
($ in thousands)

Insurance Companies:

Marine

$ 113,604 $ 100,042 $ 213,646 46.8 %

Property Casualty

134,427 351,985 486,412 72.4 %

Professional liability

38,410 68,807 107,217 64.2 %

Total Insurance Companies

286,441 520,834 807,275 64.5 %

Lloyd's Operations:

Marine

107,800 101,851 209,651 48.6 %

Property Casualty

27,148 25,175 52,323 48.1 %

Professional liability

7,442 36,243 43,685 83.0 %

Total Lloyd's Operations

142,390 163,269 305,659 53.4 %

Total

$ 428,831 $ 684,103 $ 1,112,934 61.5 %

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

Insurance Companies:

Marine

$ 96,244 $ 96,995 $ 193,239 50.2 %

Property Casualty

115,810 358,305 474,115 75.6 %

Professional liability

22,913 58,793 81,706 72.0 %

Total Insurance Companies

234,967 514,093 749,060 68.6 %

Lloyd's Operations:

Marine

99,233 78,293 177,526 44.1 %

Property Casualty

26,218 16,386 42,604 38.5 %

Professional liability

5,822 24,859 30,681 81.0 %

Total Lloyd's Operations

131,273 119,538 250,811 47.7 %

Total

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

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At December 31, 2009, the IBNR loss reserve was $684.1 million or 61.5% of our total loss reserves compared to $633.6 million or 63.4% in 2008.

The increase in net loss reserves in all active lines of business is generally a reflection of the growth in net premium volume over the last three years coupled with a changing mix of business to longer tail lines of business such as the specialty lines of business (construction defect, commercial excess, primary excess), 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 we have historically written, are becoming larger components of our overall business.

Commission Expense. Commission expenses paid to unaffiliated brokers and agents are generally based on a percentage of the gross written premiums and are reduced by ceding commissions we may receive on the ceded written premiums. Commissions are generally deferred and recorded as deferred policy acquisition costs to the extent that they relate to unearned premium. The percentages of commission expenses to net earned premium was 14.5% in 2009, 13.9% in 2008 and 12.9% in 2007. The 2008 commission expense ratio excluding the effects of the 2008 Hurricanes was 13.7%.

Other Operating Expense. The 7.7% and 11.5% increases in other operating expenses when comparing 2009 to 2008 and comparing 2008 to 2007, respectively, were attributable primarily to employee related expenses resulting from expansion of the business.

Interest Expense. The interest expense reflects interest on our Senior notes issued in April 2006.

Income Taxes

The income tax expense was $23.7 million, $17.0 million and $43.6 million for 2009, 2008 and 2007, respectively. The effective tax rates for 2009, 2008 and 2007 were 27.3%, 24.8% and 31.3%, respectively. Our effective tax rate was less than 35% due to permanent differences between book and tax return income, with the most significant item being tax exempt interest. As of December 31, 2009 and 2008, the net deferred federal, foreign, state and local tax assets were $31.2 million and $54.7 million, respectively.

We are subject to the tax regulations of the United States and foreign countries in which we operate. We file 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. Our 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 our 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. Our effective tax rate for Syndicate 1221 taxable income could substantially exceed 35% to the extent we are 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 our 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. A finance bill was enacted in the U.K. on July 19, 2007 that reduces the U.K. corporate tax rate from 30% to 28% effective April 1, 2008. The effect of such tax rate change was not material to our financial statements.

We have not provided for U.S. deferred income taxes on the undistributed earnings of approximately $57.6 million of our non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the foreign subsidiary. However, in the future, if such earnings were distributed to the Company, taxes of approximately $4.0 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 non-U.S. subsidiary assuming all foreign tax credits are realized.

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We had net state and local deferred tax assets amounting to potential future tax benefits of $2.6 million and $6.2 million at December 31, 2009 and 2008, respectively. Included in the deferred tax assets are net operating loss carryforwards of $1.3 million and $0.5 million at December 31, 2009 and 2008, respectively. A valuation allowance was established for the full amount of these potential future tax benefits due to the uncertainty associated with their realization. Our state and local tax carryforwards at December 31, 2009 expire from 2023 to 2025.

Segment Information

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

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

Following are the financial results of our two underwriting segments.

Insurance Companies

The Insurance Companies consist of Navigators Insurance Company, including its 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 and specialty lines of business including contractors general liability insurance, commercial umbrella and primary and excess casualty businesses. Navigators Specialty Insurance Company underwrites specialty and professional liability insurance on an excess and surplus lines basis. Navigators Specialty Insurance Company is 100% reinsured by Navigators Insurance Company.

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The following table sets forth the results of operations for the Insurance Companies for the periods indicated:

Year Ended December 31,
2009 2008 2007
($ in thousands)

Gross written premiums

$ 730,776 $ 762,190 $ 774,346

Net written premiums

477,673 472,688 478,018

Net earned premiums

479,121 463,298 443,456

Net losses and loss adjustment expenses

(304,672 ) (275,767 ) (256,652 )

Commission expenses

(61,949 ) (55,752 ) (52,490 )

Other operating expenses

(104,801 ) (92,297 ) (81,053 )

Commission income and other income (expense)

3,498 2,145 1,510

Underwriting profit

11,197 41,627 54,771

Net investment income

65,717 63,544 58,261

Net realized gains (losses)

533 (37,822 ) 1,973

Income before income tax expense

77,447 67,349 115,005

Income tax expense

19,819 16,401 35,061

Net income

$ 57,628 $ 50,948 $ 79,944

Identifiable assets

$ 2,554,037 $ 2,477,139 $ 2,322,647

Loss and loss expenses ratio

63.6 % 59.5 % 57.9 %

Commission expense ratio

12.9 % 12.0 % 11.8 %

Other operating expenses ratio (1)

21.1 % 19.5 % 17.9 %

Combined ratio

97.6 % 91.0 % 87.6 %

(1)

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

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The following table sets forth the underwriting results for the Insurance Companies for the periods indicated:

Year Ended December 31, 2009
($ in thousands)
Net Losses
Earned and LAE Underwriting Underwriting Loss Expense Combined
Premiums Incurred Expenses Profit (Loss) Ratio Ratio Ratio

Marine

$ 157,534 $ 109,916 $ 50,451 $ (2,833 ) 69.8 % 32.0 % 101.8 %

Property Casualty

246,143 123,775 86,116 36,252 50.3 % 35.0 % 85.3 %

Professional Liability

75,444 70,981 26,685 (22,222 ) 94.1 % 35.4 % 129.5 %

Total

$ 479,121 $ 304,672 $ 163,252 $ 11,197 63.6 % 34.0 % 97.6 %

Year Ended December 31, 2008
($ in thousands)
Net Losses
Earned and LAE Underwriting Underwriting Loss Expense Combined
Premiums Incurred Expenses Profit (Loss) Ratio Ratio Ratio

Marine

$ 132,005 $ 84,099 $ 38,184 $ 9,722 63.7 % 28.9 % 92.6 %

Property Casualty

273,977 158,457 87,310 28,210 57.8 % 31.9 % 89.7 %

Professional Liability

57,316 33,211 20,410 3,695 57.9 % 35.6 % 93.5 %

Total

$ 463,298 $ 275,767 $ 145,904 $ 41,627 59.5 % 31.5 % 91.0 %

Year Ended December 31, 2007
($ in thousands)
Net Losses
Earned and LAE Underwriting Underwriting Loss Expense Combined
Premiums Incurred Expenses Profit (Loss) Ratio Ratio Ratio

Marine

$ 112,370 $ 64,802 $ 31,878 $ 15,690 57.7 % 28.4 % 86.1 %

Property Casualty

275,937 159,248 80,509 36,180 57.7 % 29.2 % 86.9 %

Professional Liability

55,149 32,602 19,646 2,901 59.1 % 35.6 % 94.7 %

Total

$ 443,456 $ 256,652 $ 132,033 $ 54,771 57.9 % 29.7 % 87.6 %

Overall, the net earned premium increased 3.4%, 4.5% and 34.5% in 2009, 2008 and 2007, respectively, reflecting overall increased retention of the business written, higher average renewal rates in 2009 overall business expansion in 2007 and expansion of our professional liability business. These factors were partially offset by a decline in our property casualty business in 2009 as well as overall average renewal rate declines in 2008.

The 2009 underwriting results were favorably impacted by $3.1 million or 0.6 loss ratio points for net prior year savings, which is discussed in the prior year reserve redundancies/deficiencies section. The 2009 net prior year savings declined $38.8 million compared to 2008.

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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

$ (871 ) $ (6,343 ) $ (7,214 )

Gross losses incurred

7,200 53,800 61,000

Reinsurance recoverable

4,377 47,546 51,923

Net losses incurred

2,823 6,254 9,077

Underwriting loss

$ (3,694 ) $ (12,597 ) $ (16,291 )

After-tax net loss

$ (2,401 ) $ (8,188 ) $ (10,589 )

Reduction in earnings per share

$ (0.14 ) $ (0.48 ) $ (0.62 )

Effect on combined ratio:

Loss and LAE ratio

0.7 % 2.1 % 2.8 %

Expense ratio

0.1 % 0.4 % 0.5 %

Combined ratio

0.8 % 2.5 % 3.3 %

The 2008 underwriting results were favorably impacted by $41.9 million or 9.0 loss ratio points for net prior year savings, which is discussed in the prior year reserve redundancies/deficiencies section. The 2008 pre-tax net loss to the Insurance Companies as the result of losses caused by Hurricanes Gustav and Ike of approximately $16.3 million, including $7.2 million of reinstatement costs, increased the Insurance Companies 2008 combined ratio by 10.1 combined ratio points. The after-tax effect reduced net income by $10.6 million.

The 2007 underwriting results were favorably impacted by approximately $33.8 million or 7.6 loss ratio points for net prior year savings across all of our lines of business due to favorable loss development trends.

Reviews of our Insurance Companies Hurricanes Katrina and Rita exposures during 2007 resulted in a reduction to the Insurance Companies pre-tax income by $1.5 million. Much of this impact was the result of reallocating our net retention for these events between our Insurance Companies and Lloyd's Operations.

The approximate annualized pre-tax yields on the Insurance Companies' investment portfolio, excluding net realized capital gains and losses, approximated 4.1%, 4.3% and 4.5% for 2009, 2008 and 2007, respectively. The increase in net investment income in 2009, 2008 and 2007 versus the comparable prior year was primarily due to the investment of new funds from positive cash flow from operations. The portfolio's duration was 4.7 years at December 31, 2009 and 4.8 years at December 31, 2008.

The 2009 and 2008 results included provisions of $10.2 million and $36.4 million, respectively, for declines in the market value of securities which were considered to be other-than-temporary. The after-tax effects of such provisions on the 2009 and 2008 net income were $6.7 million and $23.7 million, respectively.

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Lloyd's Operations

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 through Syndicate 1221. The European property business, written by the Lloyd's Operations and the U.K. Branch beginning in 2006, was discontinued in the 2008 second quarter. Our Lloyd's Operations includes NUAL, a Lloyd's underwriting agency which manages Syndicate 1221.

Syndicate 1221's stamp capacity was £124 million ($194 million) in 2009, £123 million ($228 million) in 2008 and £140 million ($280 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. We controlled 100% of Syndicate 1221's total stamp capacity in 2009, 2008 and 2007 through our wholly-owned Lloyd's corporate member (we utilized two wholly-owned Lloyd's corporate members prior to the 2008 underwriting year). Syndicate 1221's stamp capacity is expressed net of commission (as is standard at Lloyd's). The Syndicate 1221 premium recorded in our financial statements is gross of commission. 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 .

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The following table sets forth the results of operations of the Lloyd's Operations for the following periods:

Year Ended December 31,
2009 2008 2007
($ in thousands)

Gross written premiums

$ 314,142 $ 322,732 $ 296,361

Net written premiums

223,582 188,927 167,778

Net earned premiums

204,242 180,678 158,521

Net losses and loss adjustment expenses

(131,326 ) (117,364 ) (83,940 )

Commission expenses

(37,727 ) (34,033 ) (25,123 )

Other operating expenses

(27,896 ) (30,961 ) (29,356 )

Commission income and other income (expense)

961 (600 ) 504

Underwriting profit (loss)

8,254 (2,280 ) 20,606

Net investment income

9,229 11,655 10,524

Net realized gains (losses)

(3,193 ) (477 ) 33

Income before income tax expense

14,290 8,898 31,163

Income tax expense

5,582 3,269 10,946

Net income

$ 8,708 $ 5,629 $ 20,217

Identifiable assets

$ 799,577 $ 779,800 $ 744,002

Loss and loss expenses ratio

64.3 % 65.0 % 53.0 %

Commission expense ratio

18.5 % 18.8 % 15.8 %

Other operating expenses ratio (1)

13.2 % 17.5 % 18.2 %

Combined ratio

96.0 % 101.3 % 87.0 %

(1)

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

The 2009 earnings in the Lloyd's Operations improved $3.1 million compared to 2008. The Lloyd's Operations utilized less reinsurance in 2009 compared to 2008, resulting in higher net premiums. In addition, 2008 results were impacted by losses caused by Hurricanes Gustav and Ike of approximately $13.1 million, including $5.0 million of reinstatement costs, which increased the 2008 combined ratio by 7.1 combined ratio points and reduced net income by $8.5 million.

The 2009 underwriting results were favorably impacted by approximately $5.9 million or 2.9 loss ratio points for net prior years' savings due to favorable loss development trends which are discussed in the prior year reserve redundancies/deficiencies section. The 2009 net prior years' savings was a decline of $3.0 million compared to 2008.

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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

$ (672 ) $ (4,292 ) $ (4,964 )

Gross losses incurred

6,800 46,200 53,000

Reinsurance recoverable

4,623 40,285 44,908

Net losses incurred

2,177 5,915 8,092

Underwriting loss

$ (2,849 ) $ (10,207 ) $ (13,056 )

After-tax net loss

$ (1,852 ) $ (6,635 ) $ (8,487 )

Reduction in earnings per share

$ (0.11 ) $ (0.39 ) $ (0.50 )

Effect on combined ratio:

Loss and LAE ratio

1.4 % 4.7 % 6.1 %

Expense ratio

0.2 % 0.8 % 1.0 %

Combined ratio

1.6 % 5.5 % 7.1 %

The 2008 earnings in the Lloyd's Operations were impacted by losses caused by Hurricanes Gustav and Ike of approximately $13.1 million, including $5.0 million of reinstatement costs, which increased the 2008 combined ratio by 7.1 combined ratio points. The after tax effect reduced net income by $8.5 million.

The 2008 underwriting results were favorably impacted by approximately $8.8 million or 4.9 loss ratio points for net prior years' savings due to favorable loss development trends, primarily in the liability and offshore energy lines in underwriting years 2006 and prior, which is discussed in the prior year reserve redundancies/deficiencies section. The 2007 earnings in the Lloyd's Operations reflect the continued favorable loss development trends.

The 2007 underwriting results were favorably impacted by approximately $13.2 million or 8.3 loss ratio points for net prior years' savings due to favorable loss development trends, primarily in our 2004 and 2005 underwriting years.

Reviews of our Lloyd's Operations' Hurricanes Katrina and Rita exposures during 2007 resulted in a reduction to the storm loss estimates and increased pre-tax income by $4.1 million consisting of $3.4 million of decreases to incurred losses and a $0.7 million reduction in our reinstatement cost estimates. A portion of this impact was the result of reallocating our net retention for these events between our Insurance Companies and Lloyd's Operations.

The pre-tax yields on the Lloyd's Operations investments, excluding net realized capital gains and losses, approximated 2.7%, 3.4% and 3.9% for 2009, 2008 and 2007, respectively. Such yields are net of interest credits to certain reinsurers for funds withheld by our Lloyd's Operations. Generally, the Lloyd's Operations' investments have been invested with a relatively short average duration, which is reflected in the yield, in order to meet liquidity needs. The decrease in the Lloyd's Operations' net investment income in 2009 was due to lower investment yields. The increase in the Lloyd's Operations' net investment income in 2008 and 2007 is reflective of the increased investment portfolio primarily due to positive cash flow from operations. The average duration of the Lloyd's Operations' investment portfolio was 1.6 years at December 31, 2009 compared to 1.4 years at December 31, 2008.

The 2009 and 2008 results included provisions of $1.6 million and $0.7 million, respectively, for declines in the market value of securities which were considered to be other-than-temporary. The after-tax effects of such provisions on the 2009 and 2008 net income were $1.2 million and $0.5 million, respectively.

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See "Results of Operations and Overview - Income Taxes" for a discussion of the Lloyd's Operations' income taxes, included herein.

Off-Balance Sheet Transactions

We have no material off-balance sheet transactions with the exception of our letter of credit facility. For a discussion of our letter of credit facility, see "- Liquidity and Capital Resources", included herein.

Tabular Disclosure of Contractual Obligations

The following table sets forth the best estimate of our known contractual obligations with respect to the items indicated at December 31, 2009:

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

Reserves for losses and LAE (1)

$ 1,920,286 $ 731,746 $ 668,866 $ 267,634 $ 252,040

7% Senior Notes (2)

167,325 8,050 16,100 16,100 127,075

Operating Leases

54,757 7,379 15,403 13,549 18,426

Total

$ 2,142,368 $ 747,175 $ 700,369 $ 297,283 $ 397,541

(1)

The amounts determined are estimates which are subject to a high degree of variation and uncertainty, and are not subject to any specific payment schedule since the timing of these obligations are not set contractually. The amounts in the above table exclude reinsurance recoveries of $807 million. See "Business - Loss Reserves" included herein.

(2)

Includes interest payments.

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Investments

The following tables set forth our cash and investments as of December 31, 2009 and 2008. The table as of December 31, 2009 includes other-than-temporarily impaired ("OTTI") securities recognized within other comprehensive income ("OCI").

Gross Gross OTTI
Unrealized Unrealized Cost or Recognized
December 31, 2009 Fair Value Gains (Losses) Amortized Cost in OCI
($ in thousands)

U.S. Government Treasury bonds, agency bonds and foreign government bonds

$ 471,598 $ 7,397 $ (597 ) $ 464,798 $ -

States, municipalities and political subdivisions

676,699 25,044 (2,917 ) 654,572 -

Mortgage- and asset-backed securities:

Agency mortgage-backed securities

283,578 12,607 (98 ) 271,069 -

Residential mortgage obligations

31,071 - (7,246 ) 38,317 (5,723 )

Asset-backed securities

16,469 612 (34 ) 15,891 (23 )

Commercial mortgage-backed securities

100,393 594 (5,028 ) 104,827 -

Subtotal

431,511 13,813 (12,406 ) 430,104 (5,746 )

Corporate bonds

236,861 9,111 (759 ) 228,509 -

Total fixed maturities

1,816,669 55,365 (16,679 ) 1,777,983 (5,746 )

Equity securities - common stocks

62,610 15,244 (10 ) 47,376 -

Cash

509 - - 509 -

Short-term investments

176,799 - - 176,799 -

Total

$ 2,056,587 $ 70,609 $ (16,689 ) $ 2,002,667 $ (5,746 )

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

U.S. Government Treasury bonds, agency bonds and foreign government bonds

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

States, municipalities and political subdivisions

614,609 12,568 (8,036 ) 610,077

Mortgage- and asset-backed securities:

Agency mortgage-backed securities

299,775 10,930 (26 ) 288,871

Residential mortgage obligations

56,743 - (27,119 ) 83,862

Asset-backed securities

29,436 5 (1,289 ) 30,720

Commercial mortgage-backed securities

92,684 - (20,350 ) 113,034

Subtotal

478,638 10,935 (48,784 ) 516,487

Corporate bonds

188,869 1,398 (14,660 ) 202,131

Total fixed maturities

1,643,772 50,642 (71,625 ) 1,664,755

Equity securities - common stocks

51,802 1,266 (1,987 ) 52,523

Cash

1,457 - - 1,457

Short-term investments

220,684 - - 220,684

Total

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

Invested assets increased in 2009 compared to 2008 primarily due to cash flows from operations as well as unrealized gains in 2009. Invested assets increased in 2008 compared to 2007 primarily due to positive cash flows from operations partially offset by unrealized losses in 2008. The consolidated average investment yield of the portfolio decreased in 2009 to 3.8% from 4.1% due to the general decline in market yields over the period. The portfolio's duration was 4.2 years and 4.3 years as of December 31, 2009 and 2008, respectively. Since the beginning of 2009, the tax-exempt portion of our investment portfolio has increased by $30.1 million to approximately 34.9% of the fixed maturities investment portfolio at December 31, 2009 compared to approximately 36.8% at December 31, 2008.

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

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

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 fair value hierarchy, as defined in the Financial Accounts Standards Board Accounting Standards Codification 820 ("ASC 820"), Fair Value Measurements , are received from independent pricing services utilized by one of our outside investment managers whom we employ to assist us with investment accounting services. This manager utilizes a pricing committee which approves the use of one or more independent pricing service vendors. The pricing committee consists of five or more members, one from senior management and one from the accounting group with the remainder from the asset class specialists and client strategists. The pricing source of each security is determined in accordance with the pricing source procedures approved by the pricing committee. The investment manager uses supporting documentation received from the independent pricing service vendor detailing the inputs, models and processes used in the independent pricing service vendors' evaluation process to determine the appropriate fair value hierarchy. Any pricing where the input is based solely on a broker price is deemed to be a Level 3 price.

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

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The following table presents, for each of the fair value hierarchy levels, our fixed maturities, equity securities and short-term investments that are measured at fair value as of December 31, 2009:

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

$ 331,925 $ 1,484,744 $ - $ 1,816,669

Equity securities

62,610 - - 62,610

Short-term investments

9,992 166,807 - 176,799

Total

$ 404,527 $ 1,651,551 $ - $ 2,056,078

There were no significant judgments made in classifying instruments in the fair value hierarchy.

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 twelve months ended December 31, 2009:

Twelve Months Ended
($ in thousands) December 31, 2009

Level 3 investments as of January 1

$ 156

Unrealized net gains included in other comprehensive income (loss)

23

Purchases, sales, paydowns and amortization

(23 )

Transfer from Level 3

(156 )

Transfer to Level 3

-

Level 3 investments as of December 31

$ -

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

Gross Gross Cost or
Fair Unrealized Unrealized Amortized
December 31, 2009 Value Gains (Losses) Cost
($ in thousands)

U.S. Treasury bonds

$ 362,614 $ 5,549 $ (560 ) $ 357,625

Agency bonds

82,739 1,489 - 81,250

Foreign government bonds

26,245 359 (37 ) 25,923

Total

$ 471,598 $ 7,397 $ (597 ) $ 464,798

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

U.S. Treasury bonds

$ 290,059 $ 23,243 $ (143 ) $ 266,959

Agency bonds

58,401 2,008 (2 ) 56,395

Foreign government bonds

13,196 490 - 12,706

Total

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

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The following table sets forth the fifteen largest holdings categorized as state, municipalities and political subdivisions by counterparty as of December 31, 2009:

Gross Gross Cost or
Fair Unrealized Unrealized Amortized S&P
Value Gains (Losses) Cost Rating
($ in thousands)

Issuers:

State of Washington

$ 17,428 $ 799 $ (25 ) $ 16,654 AA

Texas State Transportation Commission

15,542 - (163 ) 15,705 AA+

University of Pittsburgh

14,060 574 - 13,486 AA

City of San Antonio

11,581 571 - 11,010 AA

City of Chicago

11,401 377 (32 ) 11,056 A-

Virginia Resources Authority

11,389 826 - 10,563 AAA

County of Fairfax

11,027 - (70 ) 11,097 AAA

State of Louisiana

9,992 518 - 9,474 A+

State of Wisconsin

9,962 479 - 9,483 AA-

Salt River Project Agricultural Improvement

9,931 155 - 9,776 AA

Commonwealth of Massachusetts

9,059 581 (7 ) 8,485 AA

New York City Transitional Finance Authority

8,107 - (343 ) 8,450 AA

City of New York

8,026 288 (20 ) 7,758 AA-

Illinois Finance Authority

8,015 69 (222 ) 8,168 BBB+

Cypress-Fairbanks Independent School Dist

7,985 131 - 7,854 AA-

Subtotal

163,505 5,368 (882 ) 159,019

All Other

513,194 19,676 (2,035 ) 495,553

Total

$ 676,699 $ 25,044 $ (2,917 ) $ 654,572

The following table sets forth the composition of the investments categorized as states, municipalities and political subdivisions in our portfolio by generally equivalent S&P and Moody's ratings (not all securities in our portfolio are rated by both S&P and Moody's) as of December 31, 2009:

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

AAA/AA/A

Aaa/Aa/A $ 639,802 $ 617,620 $ 22,182

BBB

Baa 27,668 27,641 27

BB

Ba 2,000 2,014 (14 )

B

B - - -

CCC or lower

Caa or lower - - -

N/A

N/A 7,229 7,297 (68 )

Total

$ 676,699 $ 654,572 $ 22,127

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We own $282 million of municipal securities which are credit enhanced by various financial guarantors. As of December 31, 2009, the average underlying credit rating is A+. There has been no material adverse impact to our investment portfolio or results of operations as a result of recent downgrades of the credit ratings for several of the financial guarantors.

We analyze our mortgage-backed and asset-backed securities by credit quality of the underlying collateral distinguishing between the securities issued by the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC") which are Federal government sponsored entities, and the non-FNMA and non-FHLMC securities broken out by prime, 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 December 31, 2009, we owned asset-backed securities approximating $0.1 million with subprime mortgage exposures. The securities have an effective maturity of 3.1 years. In addition, we owned residential mortgage obligations approximating $1.5 million classified as Alt-A which is a credit category between prime and subprime. The Alt-A bonds have an effective maturity of 5.6 years. We are receiving principal and/or interest payments on all of these securities and believe such amounts are fully collectible.

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The following tables set forth our mortgage-backed securities, residential mortgage obligations and asset-backed securities by those issued by the Government National Mortgage Association ("GNMA"), FNMA, FHLMC, and the quality category (prime, Alt-A and subprime) for all other such investments as of December 31, 2009:

Gross Gross Cost or
Fair Unrealized Unrealized Amortized
Value Gains (Losses) Cost
($ in thousands)

Agency mortgage-backed securities:

GNMA

$ 44,351 $ 1,300 $ (53 ) $ 43,104

FNMA

173,786 8,716 (11 ) 165,081

FHLMC

65,441 2,591 (34 ) 62,884

Total

$ 283,578 $ 12,607 $ (98 ) $ 271,069

Gross Gross Cost or
Fair Unrealized Unrealized Amortized
Value Gains (Losses) Cost
($ in thousands)

Residential mortgage obligations:

Prime

$ 29,565 $ - $ (6,836 ) $ 36,401

Alt-A

1,506 - (410 ) 1,916

Subprime

- - - -

Total

$ 31,071 $ - $ (7,246 ) $ 38,317

Gross Gross Cost or
Fair Unrealized Unrealized Amortized
Value Gains (Losses) Cost
($ in thousands)

Asset-backed securities:

Prime

$ 16,323 $ 612 $ (10 ) $ 15,721

Alt-A

- - - -

Subprime

146 - (24 ) 170

Total

$ 16,469 $ 612 $ (34 ) $ 15,891

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

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

GMAC Mtg Corp Ln Tr 05 Ar6 2A1

2005 $ 2,907 $ 3,489 $ (582 ) BB B3

Merrill Lynch Mtg Inv Inc 05 A9 2A1E

2005 2,569 3,523 (954 ) B+ NR

Wells Fargo Mtg Bkd Secs Tr 06 Ar5 2A1

2006 2,469 2,725 (256 ) NR Caa1

Wells Fargo Mtg Bkd Secs Tr 05 Ar4 2A2

2005 966 1,102 (136 ) NR A2

Merrill Lynch Mtg Inv Inc 05 A9 2A1

2005 742 780 (38 ) BBB NR

Bear Stearns Adjustable Rate 06 1 A1

2006 712 814 (102 ) NR Baa1

GSR Mortgage Loan Trust 06 Ar1 2A1

2006 662 833 (171 ) BB NR

Wells Fargo Mtg Bkd Secs Tr 06 Ar6 3A

2006 641 773 (132 ) NR B2

JP Morgan Mortgage Trust 06 A4 1A1

2006 628 869 (241 ) NR B3

Master Adj Rate Mtg Tr 05 6 5A1

2005 618 811 (193 ) B- Baa2

Bear Stearns Adjustable Rate 05 3 2A1

2005 610 706 (96 ) BB Ba1

Mortgageit Trust 05 1 2A

2005 605 672 (67 ) AAA Aaa

JP Morgan Mortgage Trust 07-A3 1A1

2007 604 890 (286 ) CCC NR

Wells Fargo Mortgage Backed Se 06-Ar14 2

2006 577 722 (145 ) NR Caa1

JP Morgan Mortgage Trust 05 A4 3A1

2005 556 600 (44 ) AAA Baa1

Subtotal

15,866 19,309 (3,443 )

All Other

15,205 19,008 (3,803 )

Total

$ 31,071 $ 38,317 $ (7,246 )

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

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

Auto Loans

$ 7,331 $ 3,574 $ 461 $ 1,633 $ - $ - $ 12,999 $ 12,556 $ 443

Credit Cards

- - - - 88 - 88 91 (3 )

Miscellaneous

3,235 2 - - - 145 3,382 3,244 138

Total

$ 10,566 $ 3,576 $ 461 $ 1,633 $ 88 $ 145 $ 16,469 $ 15,891 $ 578

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The commercial mortgage-backed securities are all rated investment grade by S&P or by Moody's. The following table sets forth the fifteen largest commercial mortgage-backed securities portfolio as of December 31, 2009:

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

Wachovia Bank Comm Mtg 05 C18 A4

2005 $ 6,806 $ 6,859 72.18 % 8.80 % 32.07 % AAA Aaa

GS Mtg Secs Corp II 05 GG4 A4A

2005 6,487 6,608 71.96 % 7.15 % 30.86 % AAA Aaa

Four Times Square 06-4TS A

2006 5,943 7,029 39.40 % 0.00 % 7.94 % AAA Aa1

Citigroup/Deutsche Bank Comm Mtg 05 CD1 A4

2005 5,840 5,867 68.74 % 8.73 % 30.97 % AAA Aaa

LB-UBS Comm Mtg Trust 06 C7 A3

2006 5,775 6,330 66.98 % 6.06 % 29.99 % AAA NR

Bear Stearns Comm Mtg Secs 06 T22 A4

2006 4,933 4,883 57.39 % 0.41 % 28.20 % NR Aaa

Bear Stearns Comm Mtg Secs 07 PW15 A4

2007 4,414 5,135 69.96 % 17.44 % 30.31 % A+ Aaa

Banc Of America Comm Mtg Inc 07 1 A4

2007 4,189 4,780 74.54 % 13.28 % 30.49 % NR Aaa

Morgan Stanley Capital I 07 HQ11 A4

2007 4,163 4,787 70.94 % 3.67 % 30.23 % A Aaa

Merrill Lynch Mtg Trust 05 CIP1 A4

2005 3,936 4,035 70.86 % 14.00 % 31.01 % NR Aaa

Commercial Mtg Pass Through Cert 05 C6 A5A

2005 3,932 4,053 72.20 % 8.77 % 29.89 % AAA Aaa

Morgan Stanley Capital I 04 T13 A4

2004 3,316 3,327 58.81 % 0.00 % 15.53 % NR Aaa

Citigroup Comm Mtg Trust 06 C5 A4

2006 3,250 3,511 69.00 % 14.80 % 30.37 % NR Aaa

GE Capital Comm Mtg Svcs 02 1A A3

2002 2,634 2,502 72.46 % 2.63 % 25.03 % NR Aaa

CSFB Mtg Secs Corp 03 C3 A5

2003 2,559 2,523 62.03 % 3.49 % 20.69 % AAA Aaa

Subtotal

68,177 72,229

All Other

32,216 32,598

Total

$ 100,393 $ 104,827

The following table shows the amount and percentage of our fixed maturities and short-term investments at December 31, 2009 by S&P credit rating or, if an S&P rating is not available, the equivalent Moody's rating. The table includes fixed maturities and short-term investments at fair value, and the total rating is the weighted average quality rating.

Percent
Rating Fair of
Description Rating Value Total
($ in thousands)

Extremely Strong

AAA $ 1,124,403 57 %

Very Strong

AA 494,764 25 %

Strong

A 275,016 14 %

Adequate

BBB 67,400 3 %

Speculative

BB & below 24,656 1 %

Not Rated

NR 7,229 0 %

Total

AA $ 1,993,468 100 %

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Following is a list of the top fifteen corporate bond holdings for fixed maturities at fair value. All such fixed maturities are rated investment grade by S&P and Moody's. These holdings represent direct obligations of the issuer or its subsidiaries and exclude any government guaranteed or government sponsored organizations, securitized, credit enhanced or collateralized asset-backed or mortgage-backed securities.

Gross Gross Cost or
Fair Unrealized Unrealized Amortized S&P
Value Gains (Losses) Cost Rating
($ in thousands)

Issuers:

General Electric

$ 20,475 $ 777 $ (9 ) $ 19,707 AA

Southern Co

11,797 149 (159 ) 11,807 A

Conoco Phillips

11,428 225 - 11,203 A

Goldman Sachs Group

10,927 258 - 10,669 A-

Bank of America Corp

8,823 248 (33 ) 8,608 A-

Transcanada Corp

8,445 349 - 8,096 A-

Citigroup Inc

6,912 129 (170 ) 6,953 BBB+

JP Morgan Chase & Co

6,345 44 - 6,301 A

Statoilhydro ASA

5,830 277 - 5,553 AA-

Wells Fargo & Co

5,216 243 (25 ) 4,998 A+

Scana Corp

5,206 105 - 5,101 A-

Morgan Stanley

5,112 184 - 4,928 A-

Mead Johnson Nutrition Co

4,943 - (35 ) 4,978 BBB-

Bank of New York

3,658 190 - 3,468 A+

Pfizer Inc

3,623 300 - 3,323 A+

Subtotal

118,740 3,478 (431 ) 115,693

All Other

118,121 5,633 (328 ) 112,816

Total

$ 236,861 $ 9,111 $ (759 ) $ 228,509

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

Gross Gross Cost or
Fair Unrealized Unrealized Amortized
Value Gains (Losses) Cost
($ in thousands)

Issuers:

Vanguard Total Stock Market Index

$ 4,656 $ 1,361 $ - $ 3,295

Vanguard Emerging Market Stock Index

4,207 1,771 - 2,436

Vanguard Pacific Stock Index

3,967 1,041 - 2,926

Vanguard European Stock Index

3,883 1,292 - 2,591

PPG Industries

1,818 626 - 1,192

3M Co

1,794 553 - 1,241

Merck & Co Inc

1,782 462 - 1,320

The Boeing Co

1,719 327 - 1,392

Kraft Foods Inc

1,713 211 - 1,502

Philip Morris International Inc

1,711 352 - 1,359

EI Du Pont De Nemours & Co

1,705 404 - 1,301

Diageo PLC

1,704 512 - 1,192

Unilever NV

1,660 654 - 1,006

BP PLC

1,641 506 - 1,135

Johnson & Johnson

1,617 189 - 1,428

Subtotal

35,577 10,261 - 25,316

All Other

27,033 4,983 (10 ) 22,060

Total

$ 62,610 $ 15,244 $ (10 ) $ 47,376

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

December 31, 2009 December 31, 2008
# of Fair Gross # of Fair Gross
Securities Value Unrealized Loss Securities Value Unrealized Loss
($ in thousands except # of securities)

Fixed Maturities:

U.S. Government Treasury bonds, agency bonds and foreign government bonds

0-6 Months

24 $ 116,566 $ 597 4 $ 3,862 $ 145

7-12 Months

- - - - - -

> 12 Months

- - - - - -

Subtotal

24 116,566 597 4 3,862 145

States, municipalities and political subdivisions

0-6 Months

47 108,290 2,291 72 68,727 2,187

7-12 Months

4 3,534 112 73 118,910 4,376

> 12 Months

23 17,777 514 17 15,918 1,473

Subtotal

74 129,601 2,917 162 203,555 8,036

Agency mortgage-backed securities

0-6 Months

5 18,385 98 3 2,130 6

7-12 Months

- - - 6 3,471 9

> 12 Months

- - - 11 962 11

Subtotal

5 18,385 98 20 6,563 26

Residential mortgage obligations

0-6 Months

- - - - - -

7-12 Months

- - - 65 39,012 20,779

> 12 Months

73 31,071 7,246 14 10,315 6,340

Subtotal

73 31,071 7,246 79 49,327 27,119

Asset-backed securities

0-6 Months

- - - 53 22,079 653

7-12 Months

- - - 10 6,630 550

> 12 Months

4 637 34 2 224 86

Subtotal

4 637 34 65 28,933 1,289

Commercial mortgage-backed securities

0-6 Months

11 28,103 324 6 6,461 280

7-12 Months

- - - 21 31,505 5,628

> 12 Months

21 45,135 4,704 26 54,717 14,442

Subtotal

32 73,238 5,028 53 92,683 20,350

Corporate bonds

0-6 Months

13 33,275 337 75 57,805 2,445

7-12 Months

- - - 89 57,971 5,893

> 12 Months

8 6,325 422 40 27,873 6,322

Subtotal

21 39,600 759 204 143,649 14,660

Total fixed maturities

233 $ 409,098 $ 16,679 587 $ 528,572 $ 71,625

Equity securities - common stocks

0-6 Months

- $ - $ - 17 $ 8,991 $ 1,941

7-12 Months

- - - 2 351 46

> 12 Months

1 872 10 - - -

Total equity securities

1 $ 872 $ 10 19 $ 9,342 $ 1,987

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We analyze the unrealized losses quarterly to determine if any are other-than-temporary. The above unrealized losses have been determined to be temporary based on our policies. See Critical Accounting Estimates - Impairment of Invested Assets for additional information on our policies. The residential mortgage obligation's gross unrealized loss in the above table for the greater than 12 months category consists primarily of residential mortgage-backed securities. Residential mortgage-backed securities are a type of fixed income security in which residential mortgage loans are sold into a trust or special purpose vehicle, thereby securitizing the cash flows of the mortgage loans.

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

As of December 31, 2009, the largest single unrealized loss by an issuer in the fixed maturities category was $1.1 million.

The following table summarizes the gross unrealized investment losses as of December 31, 2009 by length of time where the fair value is less than 80% of amortized cost.

Period for Which Fair Value is Less than 80% of Amortized Cost
6 months
Longer than 3 or longer, less
Less than 3 months, less than 12 12 months
months than 6 months months or longer Total
($ in thousands)

Fixed Maturities

$ - $ - $ - $ (4,520 ) $ (4,520 )

Equity Securities

- - - - -

Total

$ - $ - $ - $ (4,520 ) $ (4,520 )

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

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The following table shows the composition by 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 December 31, 2009. Not all of the securities are rated by S&P and/or Moody's:

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

1

AAA/AA/A Aaa/Aa/A $ 9,979 59 % $ 356,726 87 %

2

BBB Baa 1,050 6 % 24,186 6 %

3

BB Ba 300 2 % 4,156 1 %

4

B B 2,979 18 % 11,630 3 %

5

CCC or lower Caa or lower 2,276 14 % 8,871 2 %

6

N/A N/A 95 1 % 3,529 1 %

Total

$ 16,679 100 % $ 409,098 100 %

At December 31, 2009, the gross unrealized losses in the table directly above are related to fixed maturity securities that are rated investment grade, which is defined by us 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. 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.

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The contractual maturity by the number of years until maturity for fixed maturity securities with unrealized losses at December 31, 2009 are shown in the following table:

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

Due in one year or less

$ 23 0 % $ 4,006 1 %

Due after one year through five years

596 4 % 109,756 27 %

Due after five years through ten years

1,554 9 % 95,386 23 %

Due after ten years

2,100 13 % 76,619 19 %

Mortgage- and asset-backed securities

12,406 74 % 123,331 30 %

Total fixed income securities

$ 16,679 100 % $ 409,098 100 %

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 mortgage-backed and asset-backed securities are estimated to have an effective maturity of approximately 3.5 years.

Liquidity and Capital Resources

Cash flows from operations were $103.9 million, $245.3 million and $284.6 million for 2009, 2008, and 2007, respectively. The decline in cash flow from operations in 2009 compared to 2008 was primarily a result of an increase in losses and LAE paid for claims of $82.4 million. Operating cash flow was used primarily to acquire additional investments of fixed income securities.

Investments and cash increased to $2.06 billion at December 31, 2009 from $1.92 billion at December 31, 2008. The increase was primarily due to the positive cash flow from operations. Net investment income was $75.5 million for 2009, $76.6 million for 2008 and $70.7 million for 2007.

The approximate pre-tax yields of the investment portfolio, excluding net realized gains and losses, were 3.8% for 2009 and 4.1% for 2008 and 4.4% for 2007. The decline in the pre-tax investment yields was due to a decline in yields for our short duration investment holdings.

At December 31, 2009, the weighted average rating of our fixed maturity investments was "AA" by S&P and "Aa" by Moody's. We believe that we have limited exposure to credit risk since the fixed maturity investment portfolio, except for $31.9 million, consists of investment-grade bonds. At December 31, 2009, our investment portfolio had an average maturity of 5.1 years and a duration of 4.2 years. Management periodically projects cash flow of the investment portfolio and other sources in order to maintain the appropriate levels of liquidity to ensure our ability to satisfy claims. As of December 31, 2009 and 2008, all fixed maturity securities and equity securities held by us were classified as available-for-sale.

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On April 3, 2009, we entered into a $75 million credit facility agreement entitled "Fourth Amended and Restated Credit Agreement" with a consortium of banks, and is a letter of credit facility that replaced the credit facility that expired on March 31, 2009. The credit facility expires on April 2, 2010. The credit facility is utilized primarily by Navigators Corporate Underwriters Ltd. and Millennium Underwriting Ltd. to fund our participation in Syndicate 1221 through letters of credit. The letters of credit issued under the facility are denominated in British pounds and their aggregate face amount will fluctuate based on exchange rates. The credit facility had previously been amended in February 2007 to increase the letters of credit available under the credit facility from $115 million to $180 million and to increase the line of credit available under the credit facility from $10 million to $20 million. In addition, the expiration of the credit facility was extended from June 30, 2007 to March 31, 2009.

The credit facility contains customary covenants for facilities of this type, including restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of assets, and requirements as to maintaining certain consolidated tangible net worth, statutory surplus and other financial ratios. The credit facility also provides for customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, any representation or warranty made by the Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting the Company and its subsidiaries, the occurrence of certain material judgments, or a change in control of the Company. The letter of credit facility is collateralized by all of the common stock of Navigators Insurance Company and to the extent the aggregate face amount issued under the credit facility exceeds $75 million on account of these fluctuations we are required to post collateral with the lead bank of the consortium, which we have done as of December 31, 2009 in the amount of $8.6 million. We were in compliance with all covenants at December 31, 2009. At December 31, 2009, letters of credit with an aggregate face amount of $81.5 million were issued under the credit facility.

As a result of the April 3, 2009 amendment, the cost of the letter of credit portion of the credit facility increased to 2.00% from 0.75% for the issued letters of credit and to 0.375% from 0.10% for the unutilized portion of the letter of credit facility. As a result of the 2007 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 our choice of LIBOR or prime for the utilized portion and to 0.10% from 0.125% for the unutilized portion.

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 United Kingdom 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 losses are paid by the Company and the time such gross losses are billed and collected from reinsurers. Reinsurance recoverable amounts related to those gross loss reserves are anticipated to be billed and collected over the next several years as gross losses are paid by the Company.

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

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

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

At December 31, 2009, ceded asbestos paid and unpaid losses recoverable were $8.9 million. We generally experience 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 our ongoing assessment of such reinsurance recoverables.

We believe that we have adequately managed our cash flow requirements related to reinsurance recoveries from our positive cash flows and the use of available short-term funds when applicable. However, there can be no assurances that we will be able to continue to adequately manage such recoveries in the future or that collection disputes or reinsurer insolvencies will not arise that could materially increase the collection time lags or result in recoverable write-offs causing additional incurred losses and liquidity constraints to the Company. The payment of gross claims and related collections from reinsurers with respect to Hurricanes Gustav, Ike, Katrina and Rita could significantly impact our 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 December 31, 2009 and 2008, our capital resources were as follows:

December 31,
2009 2008
($ in thousands)

Senior debt

$ 114,010 $ 123,794

Stockholders' equity

801,519 689,317

Total capitalization

$ 915,529 $ 813,111

Ratio of debt to total capitalization

12.5 % 15.2 %

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The increase in stockholders' equity in 2009 was primarily due to 2009 net income of $63.2 million and $46.0 million of unrealized gains in 2009 within our investment portfolio. The increase in stockholders' equity in 2008 was primarily due to net income of $51.7 million partially offset by $25.2 million of unrealized losses in 2008 within our investment portfolio.

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 shareholders 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 November 2009, the Company's Board of Directors adopted a stock repurchase program for up to $35 million of our common stock through December 31, 2010. Purchases under the program will be made from time to time at prevailing prices in open market or privately negotiated transactions. The timing and amount of purchases under the program to date are dependent on a variety of factors, including the trading price of the stock, market conditions and corporate and regulatory considerations. Through December 31, 2009 we purchased 141,576 shares of our common stock at an aggregate cost of $6.8 million. From January 1, 2010 through February 22, 2010, the Parent Company purchased an additional 300,000 shares of its common stock in the open market at an aggregate cost of $13.0 million.

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

To the extent that our existing capital is insufficient to fund our future operating requirements or maintain such ratings, we may need to raise additional funds through financings or limit our growth. If we are not able to obtain adequate capital, our business, results of operations and financial condition could be adversely affected, which could include, among other things, the following possible outcomes: (1) potential downgrades in the financial strength ratings assigned by ratings agencies to our Insurance Companies which could place the Company at a competitive disadvantage compared to higher-rated competitors; (2) reductions in the amount of business that our Insurance Companies or Lloyd's Operations are able to write in order to meet capital adequacy-based tests enforced by statutory agencies; and (3) any resultant ratings downgrades could, among other things, affect our ability to write business and increase the cost of the credit facility.

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In addition to common share capital, we may need to depend on external sources of finance to support our underwriting activities, which can be in the form (or any combination) of debt securities, preference shares, common equity and bank credit facilities providing loans and/or letters of credit. Any equity or debt financing, if available at all, may be on terms that are unfavorable to us. In the case of equity financings, dilution to our shareholders could result, and, in any case, such securities may have rights, preferences and privileges that are senior to those of our outstanding securities.

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

We primarily rely upon dividends from our subsidiaries to meet our Parent Company's obligations. Since the issuance of the senior debt in April 2006, the Parent Company's cash obligations primarily consist of semi-annual interest payments of $4.0 million. Going forward, the interest payments on our senior debt will be made from one or a combination of funds at the Parent Company or dividends from its subsidiaries. The dividends have historically been paid by Navigators Insurance Company. Based on the December 31, 2009 surplus of Navigators Insurance Company, the approximate maximum amount available for the payment of dividends by Navigators Insurance Company during 2010 without prior regulatory approval was $64.6 million. Dividends of $25.0 million and $20.0 million were paid by Navigators Insurance Company during 2009 and 2008, respectively.

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

December 31,
2009 2008
($ in thousands)

Cash and investments

$ 63,676 $ 52,149

Investments in subsidiaries

846,295 751,864

Goodwill and other intangible assets

2,534 2,534

Other assets

5,213 8,769

Total assets

$ 917,718 $ 815,316

7% Senior Notes

$ 114,010 $ 123,794

Accounts payable and other liabilities

847 747

Accrued interest payable

1,342 1,458

Deferred compensation payable

- -

Total liabilities

116,199 125,999

Stockholders' equity

801,519 689,317

Total liabilities and stockholders' equity

$ 917,718 $ 815,316

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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Sensitive Instruments and Risk Management

Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments. We are exposed to potential loss to various market risks, including changes in interest rates, equity prices and foreign currency exchange rates. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying assets are traded. The following is a discussion of our primary market risk exposures and how those exposures have been managed through December 31, 2009. Our market risk sensitive instruments are entered into for purposes other than trading and speculation.

The carrying value of our investment portfolio as of December 31, 2009 was $2.06 billion of which 88.3% was invested in fixed maturity securities. The primary market risk to our investment portfolio is interest rate risk associated with investments in fixed maturity securities. We do not have any commodity risk exposure.

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

There were no significant changes regarding the investment portfolio in our primary market risk exposures or in how those exposures were managed for the twelve months ended December 31, 2009. We do not currently anticipate significant changes in our primary market risk exposures or in how those exposures are managed in future reporting periods based upon what is known or expected to be in effect in future reporting periods.

Interest Rate Risk Sensitivity Analysis

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

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

For invested assets, modified duration modeling is used to calculate changes in fair values. Durations on invested assets are adjusted for call, put and interest rate reset features. Duration on tax-exempt securities is adjusted for the fact that the yield on such securities is less sensitive to changes in interest rates compared to Treasury securities. Invested asset portfolio durations are calculated on a market value weighted basis, including accrued investment income, using holdings as of December 31, 2009.

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The following table summarizes the effect that an immediate, parallel shift in the interest rate yield curve would have had on our portfolio at December 31, 2009.

Interest Rate Shift in Basis Points
-100 -50 0 +50 +100
($ in thousands)

December 31, 2009:

Total market value

$ 2,087,958 $ 2,040,514 $ 1,993,468 $ 1,946,821 $ 1,900,971

Market value change from base

4.74 % 2.36 % -2.34 % -4.64 %

Change in unrealized value

$ 94,490 $ 47,046 $ - $ (46,647 ) $ (92,497 )

Equity Price Risk

Our portfolio of equity securities currently valued at $62.6 million, which we carry on our balance sheet at fair value, has exposure to price risk. This risk is defined as the potential loss in fair value resulting from adverse changes in stock prices. Our U.S. equity portfolio is benchmarked to the S&P 500 index and changes in that index may approximate the impact on our portfolio.

Foreign currency exchange rate risk

Our Lloyd's Operations maintain both assets and liabilities in certain foreign currencies. Therefore, foreign exchange rate risk is generally limited to net assets denominated in those foreign currencies. The principal currencies creating foreign exchange risk for us are the British pound, the Euro and the Canadian dollar.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange act of 1934, as amended (the "Exchange Act"). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.

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Management's Report on Internal Control over Financial Reporting

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

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control – Integrated Framework , our management concluded that our internal control over financial reporting was effective as of December 31, 2009.

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

The Company's independent registered public accounting firm, KPMG LLP, has audited the effectiveness of the Company's internal control over financial reporting as of December 31, 2009, as stated in their report in item (b) below.

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(b) Attestation report of the registered public accounting firm

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
The Navigators Group, Inc.

We have audited The Navigators Group, Inc. and subsidiaries' internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Navigators Group, Inc. and subsidiaries' management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included under Item 9A, Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

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

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

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

In our opinion, The Navigators Group, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The Navigators Group, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, stockholders' equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2009, and our report dated February 26, 2010 expressed an unqualified opinion on those consolidated financial statements.

KPMG LLP

New York, New York
February 26, 2010

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(c) Changes in internal control over financial reporting

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

Item 9B. OTHER INFORMATION

None.

Part III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information concerning our directors and executive officers is contained under "Election of Directors" in our 2010 Proxy Statement, which information is incorporated herein by reference. Information concerning the Audit Committee and the Audit Committee's financial expert of the Company is contained under "Board of Directors and Committees" in our 2010 Proxy Statement, which information is incorporated herein by reference.

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

Item 11. EXECUTIVE COMPENSATION

Information concerning executive compensation is contained under "Compensation Discussion and Analysis" in our 2010 Proxy Statement, which information is incorporated herein by reference.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information concerning the security ownership of the directors and officers of the Company is contained under "Election of Directors" and "Compensation Discussion and Analysis" in our 2010 Proxy Statement, which information is incorporated herein by reference. Information concerning securities that are available to be issued under our equity compensation plans is contained under "Equity Compensation Plan Information" in our 2010 Proxy Statement, which information is incorporated herein by reference.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information concerning relationships and related transactions of our directors and officers is contained under "Related Party Transactions" in our 2010 Proxy Statement, which information is incorporated herein by reference . Information concerning director independence is contained under "Board of Directors and Committees" in our 2010 Proxy Statement, which information is incorporated herein by reference.

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Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Information concerning the principal accountant's fees and services for the Company is contained under "Independent Registered Public Accounting Firm" in the Company's 2010 Proxy Statement, which information is incorporated herein by reference.

Part IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this report:

a.

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

b.

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

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SIGNATURES

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

The Navigators Group, Inc.
(Company)
Dated: February 26, 2010  By:   /s/ FRANCIS W. MCDONNELL  
Francis W. McDonnell 
Senior Vice President and
Chief Financial Officer 

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

Name Title Date

/s/ TERENCE N. DEEKS

Terence N. Deeks
Chairman  February 26, 2010

/s/ STANLEY A. GALANSKI

Stanley A. Galanski
President and Chief Executive Officer
(Principal Executive Officer)
February 26, 2010

/s/ FRANCIS W. MCDONNELL

Francis W. McDonnell
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
February 26, 2010

/s/ THOMAS C. CONNOLLY

Thomas C. Connolly
Vice President and Treasurer
Navigators Management Company
(Principal Accounting Officer)
February 26, 2010

/s/ H.J. MERVYN BLAKENEY

H.J. Mervyn Blakeney
Director  February 26, 2010

/s/ PETER A. CHENEY

Peter A. Cheney
Director  February 26, 2010

/s/ WILLIAM T. FORRESTER

William T. Forrester
Director  February 26, 2010

/s/ JOHN F. KIRBY

John F. Kirby
Director  February 26, 2010

/s/ MARC M. TRACT

Marc M. Tract
Director  February 26, 2010

/s/ ROBERT F. WRIGHT

Robert F. Wright
Director  February 26, 2010

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

Report of Independent Registered Public Accounting Firm

F-2

Consolidated Balance Sheets at December 31, 2009 and 2008

F-3

Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2009

F-4

Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 2009

F-5

Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 31, 2009

F-6

Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2009

F-7

Notes to Consolidated Financial Statements

F-8

SCHEDULES:

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

S-1

Schedule II Condensed Financial Information of Registrant

S-2

Schedule III Supplementary Insurance Information

S-5

Schedule IV Reinsurance

S-6

Schedule V Valuation and Qualifying Accounts

S-7

Schedule VI Supplementary Information Concerning Property-Casualty Insurance Operations

S-8

Index to Exhibits

F-1

Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
The Navigators Group, Inc.

We have audited the accompanying consolidated balance sheets of The Navigators Group, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, stockholders' equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2009. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Navigators Group, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of evaluating other-than-temporary impairments of debt securities due to the adoption of new accounting requirements issued by the Financial Accounting Standards Board, as of January 1, 2009.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The Navigators Group, Inc. and subsidiaries' internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 26, 2010 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

KPMG LLP

New York, New York
February 26, 2010

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Table of Contents

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

($ in thousands, except share data)

December 31,
2009 2008

ASSETS

Investments and cash:

Fixed maturities, available-for-sale, at fair value (amortized cost: 2009, $1,777,983; 2008, $1,664,755)

$ 1,816,669 $ 1,643,772

Equity securities, available-for-sale, at fair value (cost: 2009, $47,376; 2008, $52,523)

62,610 51,802

Short-term investments, at cost which approximates fair value

176,799 220,684

Cash

509 1,457

Total investments and cash

2,056,587 1,917,715

Premiums receivable

193,460 170,522

Prepaid reinsurance premiums

162,344 188,874

Reinsurance recoverable on paid losses

76,505 67,227

Reinsurance recoverable on unpaid losses and loss adjustment expenses

807,352 853,793

Deferred policy acquisition costs

56,575 47,618

Accrued investment income

17,438 17,411

Goodwill and other intangible assets

7,057 6,622

Current income tax receivable, net

4,854 -

Deferred income tax, net

31,222 54,736

Other assets

40,600 25,062

Total assets

$ 3,453,994 $ 3,349,580

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:

Reserves for losses and loss adjustment expenses

$ 1,920,286 $ 1,853,664

Unearned premiums

475,171 480,665

Reinsurance balances payable

98,555 140,319

Senior notes

114,010 123,794

Federal income taxes payable

- 5,874

Accounts payable and other liabilities

44,453 55,947

Total liabilities

2,652,475 2,660,263

Stockholders' equity:

Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued

$ - $ -

Common stock, $.10 par value, authorized 50,000,000 shares, issued 17,212,814 shares for 2009 and 17,080,826 shares for 2008

1,721 1,708

Additional paid-in capital

304,505 298,872

Treasury stock, at cost (366,330 shares for 2009 and 224,754 shares for 2008)

(18,296 ) (11,540 )

Retained earnings

469,934 406,776

Accumulated other comprehensive income (loss)

43,655 (6,499 )

Total stockholders' equity

801,519 689,317

Total liabilities and stockholders' equity

$ 3,453,994 $ 3,349,580

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

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Table of Contents

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

Year Ended December 31,
2009 2008 2007

Gross written premiums

$ 1,044,918 $ 1,084,922 $ 1,070,707

Revenues:

Net written premiums

$ 701,255 $ 661,615 $ 645,796

Increase in unearned premiums

(17,892 ) (17,639 ) (43,819 )

Net earned premiums

683,363 643,976 601,977

Commission income

87 1,005 1,736

Net investment income

75,512 76,554 70,662

Total other-than-temporary impairment losses

(29,265 ) (37,045 ) (655 )

Portion of loss recognized in other

comprehensive income (before tax)

17,388 - -

Net other-than-temporary impairment losses

recognized in earnings

(11,877 ) (37,045 ) (655 )

Net realized gains (losses)

9,217 (1,254 ) 2,661

Other income

6,578 430 278

Total revenues

762,880 683,666 676,659

Expenses:

Net losses and loss adjustment expenses

435,998 393,131 340,592

Commission expenses

98,908 89,785 77,613

Other operating expenses

132,671 123,148 110,409

Interest expense

8,455 8,871 8,863

Total expenses

676,032 614,935 537,477

Income before income taxes

86,848 68,731 139,182

Income tax expense

23,690 17,039 43,562

Net income

$ 63,158 $ 51,692 $ 95,620

Net income per common share:

Basic

$ 3.73 $ 3.08 $ 5.69

Diluted

$ 3.65 $ 3.04 $ 5.62

Average common shares outstanding:

Basic

16,935 16,802 16,812

Diluted

17,322 16,992 17,005

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

F-4

Table of Contents

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

($ in thousands)

Year Ended December 31,
2009 2008 2007

Preferred Stock

Balance at beginning and end of year

$ - $ - $ -

Common stock

Balance at beginning of year

$ 1,708 $ 1,687 $ 1,674

Shares issued under stock plans

13 21 13

Balance at end of year

$ 1,721 $ 1,708 $ 1,687

Additional paid-in capital

Balance at beginning of year

$ 298,872 $ 291,616 $ 286,732

Shares issued under stock plans

5,633 7,256 4,884

Balance at end of year

$ 304,505 $ 298,872 $ 291,616

Treasury stock held at cost

Balance at beginning of year

$ (11,540 ) $ - $ -

Treasury stock acquired

(6,756 ) (11,540 ) -

Balance at end of year

$ (18,296 ) $ (11,540 ) $ -

Retained earnings

Balance at beginning of year

$ 406,776 $ 355,084 $ 259,464

Net income

63,158 51,692 95,620

Balance at end of year

$ 469,934 $ 406,776 $ 355,084

Accumulated other comprehensive income (loss)

Net unrealized gains (losses) on securities, net of tax

Balance at beginning of year

$ (15,062 ) $ 10,186 $ 849

Change in year

46,020 (25,248 ) 9,337

Balance at end of year

30,958 (15,062 ) 10,186

Non-credit other-than-temporary impairment gains (losses), net of tax

Balance at beginning of year

- - -

Change in period

4,000 - -

Balance at end of period

4,000 - -

Cumulative translation adjustments, net of tax

Balance at beginning of year

8,563 3,533 2,624

Net adjustment

134 5,030 909

Balance at end of year

8,697 8,563 3,533

Balance at end of year

$ 43,655 $ (6,499 ) $ 13,719

Total stockholders' equity at end of year

$ 801,519 $ 689,317 $ 662,106

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

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Table of Contents

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
Year Ended December 31,
2009 2008 2007

Net income

$ 63,158 $ 51,692 $ 95,620

Other comprehensive income (loss):

Change in net unrealized gains (losses) on investments, net of tax expense (benefit) of $25,602, $(12,034) and $4,858 in 2009, 2008 and 2007, respectively (1)

50,020 (25,248 ) 9,337

Change in foreign currency translation gains (losses), net of tax expense of $72, $2,709 and $490 in 2009, 2008 and 2007, respectively

134 5,030 909

Other comprehensive income (loss)

50,154 (20,218 ) 10,246

Comprehensive income

$ 113,312 $ 31,474 $ 105,866

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

Unrealized gains (losses) on investments arising during period

$ 48,068 $ (50,142 ) $ 10,643

Less: reclassification adjustment for net realized gains (losses) included in net income

5,882 (768 ) 1,732

reclassification adjustment for other-than-temporary impairment losses recognized in net income

(7,834 ) (24,126 ) (426 )

Change in net unrealized gains (losses) on securities, net of tax

$ 50,020 $ (25,248 ) $ 9,337

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

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Table of Contents

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)

Year Ended December 31,
2009 2008 2007

Operating activities:

Net income

$ 63,158 $ 51,692 $ 95,620

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation & amortization

4,551 4,761 3,350

Deferred income taxes

(2,285 ) (16,522 ) (4,401 )

Net realized (gains) losses

2,660 38,299 (2,006 )

Changes in assets and liabilities:

Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses

42,781 (48,314 ) 129,314

Reserves for losses and loss adjustment expenses

54,050 237,817 34,844

Prepaid reinsurance premiums

27,788 (3,701 ) (8,410 )

Unearned premium

(8,872 ) 20,183 52,131

Premiums receivable

(20,447 ) (14,369 ) 2,470

Commissions receivable

284 2,020 1,279

Deferred policy acquisition costs

(8,394 ) 2,627 (9,770 )

Accrued investment income

(11 ) (1,822 ) (2,553 )

Reinsurance balances payable

(42,808 ) (10,048 ) (34,342 )

Current income taxes

(12,094 ) (798 ) 6,847

Other

3,549 (16,550 ) 20,270

Net cash provided by operating activities

103,910 245,275 284,643

Investing activities:

Fixed maturities, available-for-sale

Redemptions and maturities

135,374 131,674 156,730

Sales

473,913 186,106 218,044

Purchases

(728,216 ) (473,295 ) (624,092 )

Equity securities, available-for-sale

Sales

18,899 22,041 30,702

Purchases

(21,947 ) (40,746 ) (61,930 )

Change in payable for securities

(15,836 ) (112 ) (428 )

Net change in short-term investments

47,821 (61,431 ) 7,560

Purchase of property and equipment

(2,781 ) (7,548 ) (8,804 )

Net cash used in investing activities

(92,773 ) (243,311 ) (282,218 )

Financing activities:

Purchase of treasury stock

(6,756 ) (11,540 ) -

Purchase of Senior notes

(7,000 ) - -

Proceeds of stock issued from employee stock purchase plan

727 963 606

Proceeds of stock issued from exercise of stock options

944 3,014 1,627

Net cash (used in) provided by financing activities

(12,085 ) (7,563 ) 2,233

Effect of exchange rate changes on foreign currency cash

- - (6 )

Increase (decrease) in cash

(948 ) (5,599 ) 4,652

Cash at beginning of year

1,457 7,056 2,404

Cash at end of year

$ 509 $ 1,457 $ 7,056

Supplemental cash information:

Income taxes paid

$ 37,089 $ 34,990 $ 40,046

Interest paid

8,355 8,750 8,750

Issuance of stock to directors

210 200 181

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

F-7

Table of Contents

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Summary of Significant Accounting Policies

Organization

The accompanying consolidated financial statements, consisting of the accounts of The Navigators Group, Inc., a Delaware holding company established in 1982, and its wholly-owned subsidiaries, are prepared on the basis of U.S. generally accepted accounting principles ("GAAP" or "U.S. GAAP"). The terms "we", "us", "our" and "the Company" as used herein are used to mean The Navigators Group, Inc. and its subsidiaries, unless the context otherwise requires. The terms "Parent" or "Parent Company" are used to mean The Navigators Group, Inc. without its subsidiaries. All significant intercompany transactions and balances have been eliminated. Certain amounts for prior years have been reclassified to conform to the current year's presentation.

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

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

We conduct operations through our Insurance Companies and our Lloyd's Operations segments. The Insurance Companies segment consists of Navigators Insurance Company, which includes a United Kingdom Branch (the "U.K. Branch"), and Navigators Specialty Insurance Company, which underwrites specialty and professional liability insurance on an excess and surplus lines basis. All of the insurance business written by Navigators Specialty Insurance Company is fully reinsured by Navigators Insurance Company pursuant to a 100% quota share reinsurance agreement. Our Lloyd's Operations segment includes Navigators Underwriting Agency Ltd. ("NUAL"), a Lloyd's of London ("Lloyd's") underwriting agency which manages Lloyd's Syndicate 1221 ("Syndicate 1221"). Our Lloyd's Operations primarily underwrite marine and related lines of business along with offshore energy, professional liability insurance and construction coverages for onshore energy business at Lloyd's through Syndicate 1221. We controlled 100% of Syndicate 1221's stamp capacity for the 2009 and 2008 underwriting years through our wholly owned subsidiary, Navigators Corporate Underwriters Ltd., and through both Millennium Underwriting Ltd., another wholly owned subsidiary, and Navigators Corporate Underwriters Ltd. in 2007, which are referred to as corporate names in the Lloyd's market. We have also established underwriting agencies in Antwerp, Belgium, Stockholm, Sweden and Copenhagen, Denmark, which underwrite risks pursuant to binding authorities with NUAL into Syndicate 1221. For financial information by segment, see Note 3: Segment Information to the Consolidated Financial Statements.

F-8

Table of Contents

Significant Accounting Policies

Cash

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

Investments

As of December 31, 2009 and 2008, all fixed maturity and equity securities held by the Company were classified as available-for-sale. Available-for-sale securities are debt and equity securities not classified as either held-to-maturity securities or trading securities and are reported at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income as a separate component of stockholders' equity. Premiums and discounts on fixed maturity securities are amortized into interest income over the life of the security under the interest method. Fixed maturity securities include bonds and mortgage-backed and asset-backed securities. Equity securities consist of common stock.

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 fair value hierarchy, as defined in the Financial Accounts Standards Board Accounting Standards Codification 820 ("ASC 820"), Fair Value Measurements , are received from independent pricing services utilized by one of our outside investment managers whom we employ to assist us with investment accounting services. This manager utilizes a pricing committee which approves the use of one or more independent pricing service vendors. The pricing committee consists of five or more members, one from senior management and one from the accounting group with the remainder from the asset class specialists and client strategists. The pricing source of each security is determined in accordance with the pricing source procedures approved by the pricing committee. The investment manager uses supporting documentation received from the independent pricing service vendor detailing the inputs, models and processes used in the independent pricing service vendors' evaluation process to determine the appropriate fair value hierarchy. Any pricing where the input is based solely on a broker price is deemed to be a Level 3 price. Management has reviewed this process by which the manager determines the prices and has obtained alternative pricing to validate a sampling of the pricing and assess their reasonableness.

For mortgage-backed and asset-backed securities, anticipated prepayments and expected maturities are utilized in applying the interest rate method to our mortgage-backed and asset-backed securities. An effective yield is calculated based on projected principal cash flows at the time of original purchase. The effective yield is used to amortize the purchase price of the security over the security's expected life. Book values are adjusted to reflect the amortization of premium or accretion of discount on a monthly basis.

The projected principal cash flows are based on certain prepayment assumptions which are generated using a prepayment model. The prepayment model uses a number of factors to estimate prepayment activity including the current levels of interest rates, (refinancing incentive) time of year (seasonality), economic activity (including housing turnover) and term and age of the underlying collateral (burnout, seasoning). Prepayment assumptions associated with the mortgage-backed and asset-backed securities are reviewed on a periodic basis. When changes in prepayment assumptions are deemed necessary as the result of actual prepayments differing from anticipated prepayments, securities are revalued based upon the new prepayment assumptions utilizing the retrospective adjustment method, whereby the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The investment in such securities is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the security. Such adjustments, if any, are included in net investment income for the current period being reported.

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

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

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 the first quarter of 2009, we adopted accounting guidance relating to the recognition and presentation of other-than-temporary impairments ("OTTI") on fixed maturity securities. When assessing whether the amortized cost basis of a fixed maturity security will be recovered, we compare the present value of cash flows expected to be collected to the current book value. Any shortfalls of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered the credit loss portion of OTTI losses and is recognized in earnings. All non-credit losses are recognized as changes in OTTI losses within Other Comprehensive Income ("OCI"). Prior to 2009, when a fixed maturity security in our investment portfolio had an unrealized loss that was deemed to be other-than-temporary, we wrote the security down to fair value through a charge to operations.

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

For equity securities, we consider our intent to hold securities as part of the process of evaluating whether a decline in fair value represents an other-than-temporary decline in value. For fixed maturity securities, we consider our intent to sell a security and whether it is more likely than not that we will be required to sell a security before the anticipated recovery as part of the process of evaluating whether a security's unrealized loss represents an other-than-temporary decline. Our ability to hold such securities is 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.

Day to day management of our investment portfolio is outsourced to third party investment managers. While these investment managers may, at a given point in time, believe that the preferred course of action is to hold securities with unrealized losses that are considered temporary until such losses are recovered, the dynamic nature of the portfolio management may result in a subsequent decision to sell the security and realize the loss based upon a change in market and other factors described above. We believe that subsequent decisions to sell such securities are consistent with the classification of our 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.

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Syndicate 1221

We record Syndicate 1221's assets, liabilities, revenues and expenses under U.S. GAAP. 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 ultimate cost of losses incurred. These adjustments to losses are based on actuarial analysis of Syndicate 1221's accounts, including forecasts of expected ultimate losses. At the end of the Lloyd's three year period for determining underwriting results for an account year, Syndicate 1221 will close the account year by reinsuring outstanding claims on that account year with the participants for the account's 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. The ceding participants pay the assuming participants an amount based on the unearned premiums and outstanding claims in the underwriting account at the date of the assumption. The reinsurance to close amounts represents 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 Syndicate 1221 changes, the reinsurance to close amounts vary accordingly.

Translation of Foreign Currencies

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

Premium Revenues

Insurance premiums are recognized as revenue ratably over the period of the insurance contract or over the period of risk if the period of risk differs significantly from the contract period. Written premium is recorded based on the insurance policies that have been reported to us and the policies that have been written by the agents but not yet reported to us. We must estimate the amount of written premium not yet reported based on judgments relative to current and historical trends of the business being written. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year's results. An unearned premium reserve is established to reflect the unexpired portion of each policy at the financial reporting date.

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Commission Income

Commission income consists of commissions and profit commissions from the unaffiliated insurance companies in the marine pool and profit commissions from the unaffiliated participants at Syndicate 1221. Commissions from those unaffiliated insurers are based on gross earned premiums and are recognized as revenue ratably over the same period as the related premiums are recognized as revenue. Profit commission is based on estimated net underwriting income of the unaffiliated parties and is accrued over the period in which the related income is recognized. Changes in prior estimates of commission income are recorded when such changes become known. Beginning with the 2006 underwriting year, there are 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.

Deferred Policy Acquisition Costs

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

Reserves for Losses and Loss Adjustment Expenses

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

Earnings per Share

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

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Reinsurance Ceded

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

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

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

Depreciation and Amortization

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

Goodwill and Other Intangible Assets

Goodwill and other intangible assets were $7.1 million and $6.6 million at December 31, 2009 and 2008, respectively. The goodwill and other intangible assets consist of $2.5 million for the underwriting agencies at both December 31, 2009 and 2008, and $4.6 million and $4.1 million for the Lloyd's Operations at December 31, 2009 and 2008, respectively. The December 31, 2009 goodwill and intangible assets of $7.1 million consists of $4.9 million of goodwill and $2.2 million of other intangible assets. The December 31, 2008 goodwill and other intangible assets of $6.6 million consists of $4.6 million of goodwill and $2.0 million of other intangible assets. Goodwill and other intangible assets on the Company's consolidated balance sheets may fluctuate due to changes in the currency exchange rates between the U.S. dollar and the British pound.

We completed our annual impairment review of goodwill and other intangible assets which resulted in no impairment as of December 31, 2009.

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Stock-Based Compensation

All equity-based awards granted to employees and existing awards modified on or after January 1, 2003 are accounted for at fair value with compensation expense recorded in net income. For equity-based awards that contain a vesting period, compensation expense is generally recorded over the vesting period. In some cases, grants vest over five years with one-third vesting in each of the third, fourth and fifth years.

Income Taxes

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

Use of Estimates

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

Recently Adopted Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board ("FASB") issued new accounting guidance on the Accounting Standards Codification ("ASC" or "Codification"). The Codification is the single source of authoritative GAAP to be applied by nongovernmental entities. The Codification is not intended to change GAAP but rather reorganize divergent accounting literature into an accessible and user-friendly system. The Codification was effective for financial statements issued for interim and annual periods ending after September 15, 2009. We adopted this guidance as of the third quarter of 2009. Adoption of this guidance did not have an effect on our consolidated financial condition, results of operations or cash flows. Technical references to GAAP included in these Notes to Interim Consolidated Financial Statements are provided under the Codification structure.

In September 2009, the FASB issued accounting guidance (Accounting Standards Update ("ASU") 2009-05) for measuring liabilities at fair value (ASC 820-10). This guidance provides clarification on the measurement of liabilities when a quoted price in an active market for an identical liability is not available. In addition, the guidance clarifies that the existence of a restriction preventing the transfer of the liability should not be included as a separate input or adjustment to adjustment to other inputs when determining the fair value of a liability. Finally, the guidance clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when trader as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. This guidance was effective for interim and annual periods beginning after August 27, 2009. We adopted this guidance in the fourth quarter of 2009. Adoption of this guidance did not have a material effect on our consolidated financial condition, results of operations or cash flows.

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In May 2009, the FASB issued accounting guidance for subsequent events (ASC 855-10, as amended by ASU 2010-09). This guidance establishes general standards for the disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance sets forth: 1) The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; 2) The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in the financial statements; and 3) The disclosures that an entity should make about events that occurred after the balance sheet date. This guidance was effective for interim and annual financial periods ending after September 15, 2009. We adopted this guidance in the third quarter of 2009. Adoption of this guidance did not have a material effect on our consolidated financial condition, results of operations or cash flows.

In April 2009, the FASB issued accounting guidance that amends fair value measurements and disclosures (ASC 820-10-65). This guidance provides additional guidance for estimating fair value when the volume and level of activity of the asset or liability have significantly decreased and on identifying circumstances that indicate a transaction is not orderly. This guidance was effective for interim and annual reporting periods ending after September 15, 2009, and shall be applied prospectively. Early adoption was permitted for periods ending after March 15, 2009. We elected to early adopt this guidance in the first quarter of 2009. Adoption of this guidance did not have a material effect on our consolidated financial condition, results of operations or cash flows.

In April 2009, the FASB issued accounting guidance for debt and equity investment securities (ASC 320-10-65). This guidance modifies the requirements for recognizing an other-than-temporary impairment on debt securities, the presentation of other-than-temporary impairment losses and increases the frequency of and expands the required disclosures for debt and equity securities. This guidance was effective for interim and annual reporting periods ending after September 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We elected to early adopt this guidance in the first quarter of 2009. Adoption of this guidance did not have a material effect on our consolidated financial condition, results of operations or cash flows.

In April 2009, the FASB issued accounting guidance for interim disclosures for financial instruments (ASC 825-10-65). This guidance requires disclosures of fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance was effective for interim reporting periods ending after September 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We elected to early adopt this guidance in the first quarter of 2009. Adoption of this guidance did not have a material effect on our consolidated financial condition, results of operations or cash flows.

In April 2008, the FASB issued accounting guidance for the useful life of intangible assets (ASC 350-30-55). This guidance amends the factors to be considered in determining the useful life of intangible assets. Its intent is to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure such asset's fair value. This guidance was effective for fiscal years beginning after December 15, 2008. We adopted this guidance in the first quarter of 2009. Adoption of this guidance did not have a material effect on our consolidated financial condition, results of operations or cash flows.

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In March 2008, the FASB issued accounting guidance for disclosures about derivative instruments and hedging activities (ASC 815-10). This guidance requires enhanced disclosures about an entity's derivative and hedging activities and thereby improves the transparency of financial reporting. This guidance was effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. We adopted this guidance in the first quarter of 2009. Adoption of this guidance did not have a material effect on our consolidated financial condition, results of operations or cash flows.

In December 2007, the FASB issued accounting guidance for business combinations (ASC 805-10). This guidance amends the recognition provisions for assets and liabilities acquired in a business combination, including those arising from contractual and non-contractual contingencies. In addition, this guidance also amends the recognition criteria for contingent consideration. This guidance became effective as of January 1, 2009. We adopted this guidance in the first quarter of 2009. Adoption of this guidance did not have a material effect on our consolidated financial condition, results of operations or cash flows.

Recent Accounting Developments

In January 2010, the FASB issued accounting guidance (ASU 2010-06) which improves disclosures about fair value measurements (ASC 820-10). This guidance adds additional disclosures regarding significant transfers in and out of Levels 1 and 2. This guidance also adds additional disclosures regarding Level 3 purchases, sales, issuances and settlements. In addition, this guidance also adds additional disclosures regarding fair value measurement disclosures for each class of assets and liabilities as well as disclosures about the valuation techniques and inputs used to measure fair value for items classified as Level 2 or Level 3. This guidance is effective as of January 1, 2010 for calendar year reporting entities with the exception of the additional disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements which is effective as of January 1, 2011 for calendar year reporting entities. Early adoption is permitted. We are currently evaluating the potential impact of adopting this guidance on its consolidated financial condition, results of operations and cash flows.

In June 2009, the FASB issued accounting guidance for the transfer of financial assets (ASC 860-10), which was added to the Codification under ASU 2009-16. This guidance removes the concept of a qualifying special-purpose entity ("QSPE") from existing GAAP as well as the removal of the exception from applying ASC 810-10, Consolidation, to QSPEs. This guidance also clarifies the unit of account eligible for sale accounting and requires that a transferor recognize and initially measure at fair value, all financial assets obtained and liabilities incurred as a result of a transfer of an entire financial asset (or group of entire financial assets) accounted for as a sale. Finally, this guidance requires enhanced disclosures to provide greater transparency about transfers of financial assets and a transferor's continuing involvement with transferred financial assets. This guidance is effective as of January 1, 2010 for calendar year reporting entities and early adoption is not permitted. We are currently evaluating the potential impact of adopting this guidance on its consolidated financial condition, results of operations and cash flows.

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Note 2. Earnings Per Share

Following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share ("EPS") computations for the periods indicated:

Year Ended December 31, 2009
Average Net
Net Shares Income
Income Outstanding Per Share
($ and shares in thousands, except net income per share)

Basic EPS:

Income available to common stockholders

$ 63,158 16,935 $ 3.73

Effect of dilutive securities:

Stock options and grants

387

Diluted EPS:

Income available to common stockholders

$ 63,158 17,322 $ 3.65
Year Ended December 31, 2008
Average Net
Net Shares Income
Income Outstanding Per Share
($ and shares in thousands, except net income per share)

Basic EPS:

Income available to common stockholders

$ 51,692 16,802 $ 3.08

Effect of dilutive securities:

Stock options and grants

190

Diluted EPS:

Income available to common stockholders

$ 51,692 16,992 $ 3.04
Year Ended December 31, 2007
Average Net
Net Shares Income
Income Outstanding Per Share
($ and shares in thousands, except net income per share)

Basic EPS:

Income available to common stockholders

$ 95,620 16,812 $ 5.69

Effect of dilutive securities:

Stock options and grants

193

Diluted EPS:

Income available to common stockholders

$ 95,620 17,005 $ 5.62

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Options to purchase common shares are not included in the respective computations of diluted earnings per common share when the options' exercise price is greater than the average market price of the common shares. This situation did not occur for the years presented in the tables directly above.

Note 3. Segment Information

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

We evaluate the performance of each segment based on its underwriting and GAAP results. The Insurance Companies' and the Lloyd's Operations' results are measured by taking into account net earned premiums, net losses and loss adjustment expenses, commission expenses, other operating expenses, commission income and other income (expense). 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.

The Insurance Companies consist of Navigators Insurance Company, including its 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 and specialty lines of business including contractors general liability insurance, commercial umbrella and primary and excess casualty businesses. Navigators Specialty Insurance Company underwrites specialty and professional liability insurance on an excess and surplus lines basis. Navigators Specialty Insurance Company is 100% reinsured by Navigators Insurance Company.

The Lloyd's Operations primarily underwrite marine and related lines of business along with offshore energy, 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 in the 2008 second quarter. Our Lloyd's Operations includes NUAL, a Lloyd's underwriting agency which manages Syndicate 1221.

Syndicate 1221's stamp capacity was £124 million ($194 million) in 2009, £123 million ($228 million) in 2008 and £140 million ($280 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. We controlled 100% of Syndicate 1221's total stamp capacity in 2009, 2008 and 2007 through our wholly-owned Lloyd's corporate member (we utilized two wholly-owned Lloyd's corporate members prior to the 2008 underwriting year). Syndicate 1221's stamp capacity is expressed net of commission (as is standard at Lloyd's). The Syndicate 1221 premium recorded in our financial statements is gross of commission. We provide letters of credit to Lloyd's to support our participation in Syndicate 1221's stamp capacity, see Note 8, Credit Facility.

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

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

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

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

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

The "Middle Markets" business, formerly broken out separately in the Insurance Companies, is now included in the Insurance Companies' "Property Casualty" business.

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Financial data by segment for 2009, 2008 and 2007 was as follows:

Year Ended December 31, 2009
Insurance Lloyd's
Companies Operations Corporate Total
($ in thousands)

Gross written premiums

$ 730,776 $ 314,142 $ - $ 1,044,918

Net written premiums

477,673 223,582 - 701,255

Net earned premiums

479,121 204,242 - 683,363

Net losses and loss adjustment expenses

(304,672 ) (131,326 ) - (435,998 )

Commission expenses

(61,949 ) (37,727 ) 768 (98,908 )

Other operating expenses

(104,801 ) (27,896 ) - (132,697 )

Commission income and other income (expense)

3,498 961 (768 ) 3,691

Underwriting profit

11,197 8,254 - 19,451

Net investment income

65,717 9,229 566 75,512

Net realized gains (losses)

533 (3,193 ) - (2,660 )

Other operating expenses

- - 26 26

Other income (expense)

- - 2,974 2,974

Interest expense

- - (8,455 ) (8,455 )

Income (loss) before income tax expense (benefit)

77,447 14,290 (4,889 ) 86,848

Income tax expense (benefit)

19,819 5,582 (1,711 ) 23,690

Net income (loss)

$ 57,628 $ 8,708 $ (3,178 ) $ 63,158

Identifiable assets (1)

$ 2,554,037 $ 799,577 $ 71,422 $ 3,453,994

Loss and loss expenses ratio

63.6 % 64.3 % 63.8 %

Commission expense ratio

12.9 % 18.5 % 14.5 %

Other operating expenses ratio (2)

21.1 % 13.2 % 18.9 %

Combined ratio

97.6 % 96.0 % 97.2 %

(1)

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

(2)

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

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Year Ended December 31, 2009
Insurance Lloyd's
Companies Operations Total
($ in thousands)

Gross written premiums:

Marine

$ 241,438 $ 191,959 $ 433,397

Property Casualty

352,285 78,151 430,436

Professional Liability

137,053 44,032 181,085

Total

$ 730,776 $ 314,142 $ 1,044,918

Net written premiums:

Marine

$ 171,289 $ 156,153 $ 327,442

Property Casualty

227,234 45,097 272,331

Professional Liability

79,150 22,332 101,482

Total

$ 477,673 $ 223,582 $ 701,255

Net earned premiums:

Marine

$ 157,534 $ 142,958 $ 300,492

Property Casualty

246,143 39,330 285,473

Professional Liability

75,444 21,954 97,398

Total

$ 479,121 $ 204,242 $ 683,363

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Year Ended December 31, 2008
Insurance Lloyd's
Companies Operations Corporate Total
($ in thousands)

Gross written premiums

$ 762,190 $ 322,732 $ - $ 1,084,922

Net written premiums

472,688 188,927 - 661,615

Net earned premiums

463,298 180,678 - 643,976

Net losses and loss adjustment expenses

(275,767 ) (117,364 ) - (393,131 )

Commission expenses

(55,752 ) (34,033 ) - (89,785 )

Other operating expenses

(92,297 ) (30,961 ) 110 (123,148 )

Commission income and other income (expense)

2,145 (600 ) (110 ) 1,435

Underwriting profit (loss)

41,627 (2,280 ) - 39,347

Net investment income

63,544 11,655 1,355 76,554

Net realized gains (losses)

(37,822 ) (477 ) - (38,299 )

Interest expense

- - (8,871 ) (8,871 )

Income (loss) before income tax expense (benefit)

67,349 8,898 (7,516 ) 68,731

Income tax expense (benefit)

16,401 3,269 (2,631 ) 17,039

Net income (loss)

$ 50,948 $ 5,629 $ (4,885 ) $ 51,692

Identifiable assets (1)

$ 2,477,139 $ 779,800 $ 63,452 $ 3,349,580

Loss and loss expenses ratio

59.5 % 65.0 % 61.0 %

Commission expense ratio

12.0 % 18.8 % 13.9 %

Other operating expenses ratio (2)

19.5 % 17.5 % 18.9 %

Combined ratio

91.0 % 101.3 % 93.8 %

(1)

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

(2)

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

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Year Ended December 31, 2008
Insurance Lloyd's
Companies Operations Total
($ in thousands)

Gross written premiums:

Marine

$ 248,080 $ 192,568 $ 440,648

Property Casualty

405,062 91,292 496,354

Professional Liability

109,048 38,872 147,920

Total

$ 762,190 $ 322,732 $ 1,084,922

Net written premiums:

Marine

$ 147,569 $ 132,788 $ 280,357

Property Casualty

261,322 32,735 294,057

Professional Liability

63,797 23,404 87,201

Total

$ 472,688 $ 188,927 $ 661,615

Net earned premiums:

Marine

$ 132,005 $ 126,126 $ 258,131

Property Casualty

273,977 32,644 306,621

Professional Liability

57,316 21,908 79,224

Total

$ 463,298 $ 180,678 $ 643,976

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Year Ended December 31, 2007
Insurance Lloyd's
Companies Operations Corporate Total
($ in thousands)

Gross written premiums

$ 774,346 $ 296,361 $ - $ 1,070,707

Net written premiums

478,018 167,778 - 645,796

Net earned premiums

443,456 158,521 - 601,977

Net losses and loss adjustment expenses

(256,652 ) (83,940 ) - (340,592 )

Commission expenses

(52,490 ) (25,123 ) - (77,613 )

Other operating expenses

(81,053 ) (29,356 ) - (110,409 )

Commission income and other income (expense)

1,510 504 - 2,014

Underwriting profit (loss)

54,771 20,606 - 75,377

Net investment income

58,261 10,524 1,877 70,662

Net realized gains (losses)

1,973 33 - 2,006

Interest expense

- - (8,863 ) (8,863 )

Income before income tax expense (benefit)

115,005 31,163 (6,986 ) 139,182

Income tax expense (benefit)

35,061 10,946 (2,445 ) 43,562

Net income (loss)

$ 79,944 $ 20,217 $ (4,541 ) $ 95,620

Identifiable assets (1)

$ 2,322,647 $ 744,002 $ 53,501 $ 3,143,771

Loss and loss expenses ratio

57.9 % 53.0 % 56.6 %

Commission expense ratio

11.8 % 15.8 % 12.9 %

Other operating expense ratio (2)

17.9 % 18.2 % 18.0 %

Combined ratio

87.6 % 87.0 % 87.5 %

(1)

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

(2)

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

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Year Ended December 31, 2007
Insurance Lloyd's
Companies Operations Total
($ in thousands)

Gross written premium:

Marine

$ 227,175 $ 175,567 $ 402,742

Property Casualty

447,615 86,513 534,128

Professional Liability

99,556 34,281 133,837

Total

$ 774,346 $ 296,361 $ 1,070,707

Net written premium:

Marine

$ 117,294 $ 110,577 $ 227,871

Property Casualty

301,607 33,852 335,459

Professional Liability

59,117 23,349 82,466

Total

$ 478,018 $ 167,778 $ 645,796

Net earned premium:

Marine

$ 112,370 $ 111,380 $ 223,750

Property Casualty

275,937 29,482 305,419

Professional Liability

55,149 17,659 72,808

Total

$ 443,456 $ 158,521 $ 601,977

The Insurance Companies net earned premiums include $85.4 million, $69.0 million and $62.2 million of net earned premiums from the U.K. Branch for 2009, 2008 and 2007, respectively.

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Note 4. Investments

The following tables set forth our cash and investments as of December 31, 2009 and 2008. The table as of December 31, 2009 includes OTTI securities recognized within OCI.

Gross Gross OTTI
Unrealized Unrealized Cost or Recognized
December 31, 2009 Fair Value Gains (Losses) Amortized Cost in OCI
($ in thousands)

U.S. Government Treasury bonds, agency bonds and foreign government bonds

$ 471,598 $ 7,397 $ (597 ) $ 464,798 $ -

States, municipalities and political subdivisions

676,699 25,044 (2,917 ) 654,572 -

Mortgage- and asset-backed securities:

Agency mortgage-backed securities

283,578 12,607 (98 ) 271,069 -

Residential mortgage obligations

31,071 - (7,246 ) 38,317 (5,723 )

Asset-backed securities

16,469 612 (34 ) 15,891 (23 )

Commercial mortgage-backed securities

100,393 594 (5,028 ) 104,827 -

Subtotal

431,511 13,813 (12,406 ) 430,104 (5,746 )

Corporate bonds

236,861 9,111 (759 ) 228,509 -

Total fixed maturities

1,816,669 55,365 (16,679 ) 1,777,983 (5,746 )

Equity securities - common stocks

62,610 15,244 (10 ) 47,376 -

Cash

509 - - 509 -

Short-term investments

176,799 - - 176,799 -

Total

$ 2,056,587 $ 70,609 $ (16,689 ) $ 2,002,667 $ (5,746 )

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

U.S. Government Treasury bonds, agency bonds and foreign government bonds

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

States, municipalities and political subdivisions

614,609 12,568 (8,036 ) 610,077

Mortgage- and asset-backed securities:

Agency mortgage-backed securities

299,775 10,930 (26 ) 288,871

Residential mortgage obligations

56,743 - (27,119 ) 83,862

Asset-backed securities

29,436 5 (1,289 ) 30,720

Commercial mortgage-backed securities

92,684 - (20,350 ) 113,034

Subtotal

478,638 10,935 (48,784 ) 516,487

Corporate bonds

188,869 1,398 (14,660 ) 202,131

Total fixed maturities

1,643,772 50,642 (71,625 ) 1,664,755

Equity securities - common stocks

51,802 1,266 (1,987 ) 52,523

Cash

1,457 - - 1,457

Short-term investments

220,684 - - 220,684

Total

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

The fair value of financial instruments are determined based on the following fair value hierarchy:

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

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

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

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The following table presents the fair value hierarchy for our fixed maturities, equity securities and short-term investments that are measured at fair value as of December 31, 2009 and 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

$ 331,925 $ 1,484,744 $ - $ 1,816,669

Equity securities

62,610 - - 62,610

Short-term investments

9,992 166,807 - 176,799

Total

$ 404,527 $ 1,651,551 $ - $ 2,056,078

December 31, 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

$ 271,392 $ 1,372,224 $ 156 $ 1,643,772

Equity securities

51,802 - - 51,802

Short-term investments

59,957 160,727 - 220,684

Total

$ 383,151 $ 1,532,951 $ 156 $ 1,916,258

There were no significant judgments made in classifying instruments in the fair value hierarchy.

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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 twelve months ended December 31, 2009 and 2008:

Twelve Months Ended
($ in thousands) December 31, 2009

Level 3 investments as of January 1

$ 156

Unrealized net gains included in other comprehensive income (loss)

23

Purchases, sales, paydowns and amortization

(23 )

Transfer from Level 3

(156 )

Transfer to Level 3

-

Level 3 investments as of December 31

$ -

Twelve Months Ended
December 31, 2008
($ in thousands)

Level 3 investments as of January 1

$ 2,603

Unrealized net gains included in other comprehensive income (loss)

(94 )

Purchases, sales, paydowns and amortization

(704 )

Transfer from Level 3

(1,979 )

Transfer to Level 3

330

Level 3 investments as of December 31

$ 156

The following table shows the amount and percentage of our fixed maturities and short-term investments at December 31, 2009 by S&P credit rating or, if an S&P rating is not available, the equivalent Moody's rating. The table includes fixed maturities and short-term investments at fair value, and the total rating is the weighted average quality rating.

Percent
Rating Fair of
Description Rating Value Total
($ in thousands)

Extremely Strong

AAA $ 1,124,403 57 %

Very Strong

AA 494,764 25 %

Strong

A 275,016 14 %

Adequate

BBB 67,400 3 %

Speculative

BB & below 24,656 1 %

Not Rated

NR 7,229 0 %

Total

AA $ 1,993,468 100 %

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The scheduled maturity dates for fixed maturity securities by the number of years until maturity at December 31, 2009 are shown in the following table:

Period from
December 31, 2009 Fair Amortized
to Maturity Value Cost
($ in thousands)

Due in one year or less

$ 135,927 $ 134,614

Due after one year through five years

561,016 542,206

Due after five years through ten years

371,156 359,966

Due after ten years

317,059 311,093

Mortgage- and asset-backed (including GNMAs)

431,511 430,104

Total

$ 1,816,669 $ 1,777,983

Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Due to the periodic repayment of principal, the mortgage-backed and asset-backed securities are estimated to have an effective maturity of approximately 3.5 years.

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

December 31, 2009 December 31, 2008
# of Fair Gross # of Fair Gross
Securities Value Unrealized Loss Securities Value Unrealized Loss
($ in thousands except # of securities)

Fixed Maturities:

U.S. Government Treasury bonds, agency bonds and foreign government bonds

0-6 Months

24 $ 116,566 $ 597 4 $ 3,862 $ 145

7-12 Months

- - - - - -

> 12 Months

- - - - - -

Subtotal

24 116,566 597 4 3,862 145

States, municipalities and political subdivisions

0-6 Months

47 108,290 2,291 72 68,727 2,187

7-12 Months

4 3,534 112 73 118,910 4,376

> 12 Months

23 17,777 514 17 15,918 1,473

Subtotal

74 129,601 2,917 162 203,555 8,036

Agency mortgage-backed securities

0-6 Months

5 18,385 98 3 2,130 6

7-12 Months

- - - 6 3,471 9

> 12 Months

- - - 11 962 11

Subtotal

5 18,385 98 20 6,563 26

Residential mortgage obligations

0-6 Months

- - - - - -

7-12 Months

- - - 65 39,012 20,779

> 12 Months

73 31,071 7,246 14 10,315 6,340

Subtotal

73 31,071 7,246 79 49,327 27,119

Asset-backed securities

0-6 Months

- - - 53 22,079 653

7-12 Months

- - - 10 6,630 550

> 12 Months

4 637 34 2 224 86

Subtotal

4 637 34 65 28,933 1,289

Commercial mortgage-backed securities

0-6 Months

11 28,103 324 6 6,461 280

7-12 Months

- - - 21 31,505 5,628

> 12 Months

21 45,135 4,704 26 54,717 14,442

Subtotal

32 73,238 5,028 53 92,683 20,350

Corporate bonds

0-6 Months

13 33,275 337 75 57,805 2,445

7-12 Months

- - - 89 57,971 5,893

> 12 Months

8 6,325 422 40 27,873 6,322

Subtotal

21 39,600 759 204 143,649 14,660

Total fixed maturities

233 $ 409,098 $ 16,679 587 $ 528,572 $ 71,625

Equity securities - common stocks

0-6 Months

- $ - $ - 17 $ 8,991 $ 1,941

7-12 Months

- - - 2 351 46

> 12 Months

1 872 10 - - -

Total equity securities

1 $ 872 $ 10 19 $ 9,342 $ 1,987

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

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

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

As of December 31, 2009, the largest single unrealized loss by issuer in the fixed maturities was $1.1 million.

The following table summarizes the cumulative amounts related to our credit loss portion of the OTTI losses on debt securities held as of December 31, 2009 that we do not intend to sell and it is more likely than not that we will not be required to sell prior to recovery of the amortized cost basis and for which the non-credit loss portion is included in other comprehensive income:

($ in thousands)

Beginning balance of at January 1, 2009

$ -

Credit losses on securities not previously impaired as of December 31, 2008

3,102

Reductions for securities sold during the period

(579 )

Ending balance at December 31, 2009

$ 2,523

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The following table summarizes the gross unrealized investment losses as of December 31, 2009 by length of time where the fair value is less than 80% of amortized cost.

Period for Which Fair Value is Less than 80% of Amortized Cost
6 months
Longer than 3 or longer, less
Less than 3 months, less than 12 12 months
months than 6 months months or longer Total
($ in thousands)

Fixed Maturities

$ - $ - $ - $ (4,520 ) $ (4,520 )

Equity Securities

- - - - -

Total

$ - $ - $ - $ (4,520 ) $ (4,520 )

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

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

Twelve Months Ended
December 31,
2009 2008 2007
($ in thousands) No. Amount No. Amount No. Amount

Total other-than-temporary impairments

Corporate and other bonds

2 $ 564 1 $ 748 - $ -

Commercial mortgage-backed securities

- - - - - -

Residential mortgage-backed securities

39 19,783 4 7,856 - -

Asset-backed securities

1 143 - - - -

Equities

56 8,775 59 28,441 1 655

Total

98 $ 29,265 64 $ 37,045 1 $ 655

Portion of loss in accumulated other comprehensive income (loss)

Corporate and other bonds

$ - $ - $ -

Commercial mortgage-backed securities

- - -

Residential mortgage-backed securities

17,324 - -

Asset-backed securities

64 - -

Equities

- - -

Total

$ 17,388 $ - $ -

Impairment losses recognized in earnings

Corporate and other bonds

$ 564 $ 748 $ -

Commercial mortgage-backed securities

- - -

Residential mortgage-backed securities

2,459 7,856 -

Asset-backed securities

79 - -

Equities

8,775 28,441 655

Total

$ 11,877 $ 37,045 $ 655

In 2009, we recognized in earnings OTTI losses of $2.5 million related to non-agency mortgage and asset-backed securities. The significant inputs used to measure the amount of credit loss recognized in earnings were actual delinquency rates, default probability assumptions, severity assumptions and prepayment assumptions. Projected losses are a function of both loss severity and probability of default. Default probability and severity assumptions differ based on property type, vintage and the stress of the collateral. We do not intend to sell any of these securities and it is more likely than not that we will not be required sell these securities before the recovery of the amortized cost basis. In 2009, we recognized in earnings OTTI losses of $8.8 million on 56 common stocks resulting from additional impairments on equity securities that were impaired in 2008. In addition, in 2009 we recognized in earnings OTTI losses of $0.6 million on 2 corporate bonds.

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For the twelve months ended December 31, 2009, for securities that we recognized an OTTI in earnings, we initially recorded $17.4 million in OTTI losses in OCI as a result of non-credit losses on non-agency residential mortgage-backed securities. Subsequent declines in unrealized losses related to the value of securities for which an OTTI loss in OCI was initially recorded resulted in a balance of $5.7 million of OTTI losses in OCI as of December 31, 2009.

During 2008, we identified equity securities with fair value of $34.4 million which were considered to be other-than-temporarily impaired. Consequently, the cost of such securities was written down to fair value and we recognized realized losses of $28.4 million. The equity impairments included $8.6 million in write-downs to fair value for various broad based ETFs and mutual funds where the fair value was less than 80% of the book value. During 2008, we identified fixed maturity securities with fair value of $7.4 million which were considered to be other-than-temporarily impaired. Consequently, the cost of such securities was written down to fair value and we recognized realized losses of $8.6 million.

We held common shares of a bond guarantee company in our equity portfolio at December 31, 2007 which were considered to be other-than-temporarily-impaired and recognized a realized loss on such shares amounting to $0.7 million in the 2007 fourth quarter.

The contractual maturity by the number of years until maturity for fixed maturity securities with unrealized losses at December 31, 2009 are shown in the following table:

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

Due in one year or less

$ 23 0 % $ 4,006 1 %

Due after one year through five years

596 4 % 109,756 27 %

Due after five years through ten years

1,554 9 % 95,386 23 %

Due after ten years

2,100 13 % 76,619 19 %

Mortgage- and asset-backed securities

12,406 74 % 123,331 30 %

Total fixed income securities

$ 16,679 100 % $ 409,098 100 %

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Our net investment income was derived from the following sources:

Year Ended December 31,
2009 2008 2007
($ in thousands)

Fixed maturities

$ 74,779 $ 73,493 $ 64,435

Equity securities

2,464 2,359 1,767

Short-term investments

811 3,925 7,363

78,054 79,777 73,565

Investment expenses

(2,542 ) (3,223 ) (2,903 )

Net investment income

$ 75,512 $ 76,554 $ 70,662

Our realized gains and losses were as follows:

Year Ended December 31,
2009 2008 2007
($ in thousands)

Fixed maturities:

Gains

$ 18,312 $ 3,650 $ 1,320

(Losses)

(9,676 ) (1,670 ) (1,749 )

8,636 1,980 (429 )

Equity securities:

Gains

2,110 720 3,626

(Losses)

(1,529 ) (3,954 ) (536 )

581 (3,234 ) 3,090

Net realized gains (losses)

$ 9,217 $ (1,254 ) $ 2,661

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The change in net unrealized gains/(losses) consisted of:

Years ended December 31,
2009 2008 2007

Fixed maturity investments

$ 59,667 $ (34,813 ) $ 18,396

Equity investments

15,955 (2,469 ) (4,201 )

Total

75,622 (37,282 ) 14,195

Deferred income tax (charged) credited

(25,602 ) 12,034 (4,858 )

Change in unrealized gains (losses), net

$ 50,020 $ (25,248 ) $ 9,337

At December 31, 2009 and 2008, fixed maturities with amortized values of $10.6 million and $9.9 million, respectively, were on deposit with various state insurance departments. In addition, at December 31, 2009, investments of $1.2 million were on deposit at a U.K. bank to comply with the regulatory requirements of the Financial Services Authority for Navigators Insurance Company's U.K. Branch. At December 31, 2009, fixed maturities with amortized values of $19.9 million were on deposit at Lloyd's. In addition, at both December 31, 2009 and 2008, $0.3 million of investments were pledged as security under a reinsurance treaty.

At December 31, 2009 and 2008, we did not have a concentration of greater than 5% of invested assets in a single non-U.S. government-backed issuer.

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Note 5. Reserves for Losses and Loss Adjustment Expenses

Insurance companies and Lloyd's syndicates are required to maintain reserves for unpaid losses and unpaid loss adjustment expenses for all lines of business. These reserves are intended to cover the probable ultimate cost of settling all losses incurred and unpaid, including those incurred but not reported. The determination of reserves for losses and loss adjustment expenses ("LAE") for insurance companies such as Navigators Insurance Company and Navigators Specialty Insurance Company, and Lloyd's corporate members such as Navigators Corporate Underwriters Ltd. and Millennium Underwriting Ltd. is dependent upon the receipt of information from the agents and brokers which produce the insurance business for us. Generally, there is a lag between the time premiums are written and related losses and loss adjustment expenses are incurred, and the time such events are reported to the agents and brokers and, subsequently, to Navigators Insurance Company, Navigators Specialty Insurance Company, Navigators Corporate Underwriters Ltd. and Millennium Underwriting Ltd.

Case reserves are established by our Insurance Companies and Syndicate 1221 for reported claims when notice of the claim is first received. Reserves for such reported claims are established on a case-by-case basis by evaluating several factors, including the type of risk involved, knowledge of the circumstances surrounding such claim, severity of injury or damage, the potential for ultimate exposure, experience with the insured and the agent or broker on the line of business, and the policy provisions relating to the type of claim. Reserves for IBNR are determined in part on the basis of statistical information, in part on industry experience and in part on the judgment of our senior corporate officers. They are calculated by our actuaries using several standard actuarial methodologies, including the paid and incurred loss development and the paid and incurred Bornheutter-Ferguson loss methods. Additional analyses, such as frequency/severity analyses, are performed for certain books of business. To the extent that reserves are deficient or redundant, the amount of such deficiency or redundancy is treated as a charge or credit to earnings in the period in which the deficiency or redundancy is recognized.

Loss reserves are estimates of what the insurer or reinsurer expects to pay on claims, based on facts and circumstances then known. It is possible that the ultimate liability may exceed or be less than such estimates. In setting our loss reserve estimates, we review statistical data covering several years, analyze patterns by line of business and consider several factors including trends in claims frequency and severity, changes in operations, emerging economic and social trends, inflation and changes in the regulatory and litigation environment. Using the aforementioned actuarial methods and different underlying assumptions, our actuaries produce a number of point estimates for each class of business. After reviewing the appropriateness of the underlying assumptions, management selects the carried reserve for each class of business. We do not calculate a range of loss reserve estimates. We believe that ranges may not be a true reflection of the potential volatility between carried loss reserves and the ultimate settlement amount of losses incurred prior to the balance sheet date. The numerous factors that contribute to the inherent uncertainty in the process of establishing loss reserves include: interpreting loss development activity, emerging economic and social trends, inflation, changes in the regulatory and judicial environment and changes in our operations, including changes in underwriting standards and claims handling procedures. During the loss settlement period, which, in some cases, may last several years, additional facts regarding individual claims may become known and, accordingly, it often becomes necessary to refine and adjust the estimates of liability on a claim upward or downward. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year's income statement. Even then, the ultimate liability may exceed or be less than the revised estimates. The reserving process is intended to provide implicit recognition of the impact of inflation and other factors affecting loss payments by taking into account changes in historical payment patterns and perceived probable trends. There is generally no precise method for the subsequent evaluation of the adequacy of the consideration given to inflation, or to any other specific factor, because the eventual deficiency or redundancy of reserves is affected by many factors, some of which are interdependent.

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The following table summarizes the activity in our reserve for losses and LAE during the three most recent years:

Year Ended December 31,
2009 2008 2007
($ in thousands)

Net reserves for losses and LAE at beginning of year

$ 999,871 $ 847,303 $ 696,116

Provision for losses and LAE for claims occurring in the current year

444,939 443,877 387,601

Decrease in estimated losses and LAE for claims occurring in prior years

(8,941 ) (50,746 ) (47,009 )

Incurred losses and LAE

435,998 393,131 340,592

Losses and LAE paid for claims occurring during:

Current year

(59,412 ) (60,104 ) (46,467 )

Prior years

(263,523 ) (180,459 ) (142,938 )

Losses and LAE payments

(322,935 ) (240,563 ) (189,405 )

Net reserves for losses and LAE at end of year

1,112,934 999,871 847,303

Reinsurance recoverables on unpaid losses and LAE

807,352 853,793 801,461

Gross reserves for losses and LAE at end of year

$ 1,920,286 $ 1,853,664 $ 1,648,764

The segment breakdown of prior years' net reserve deficiency (redundancy) was as follows:

Year Ended December 31,
2009 2008 2007
($ in thousands)

Insurance Companies

Marine

$ 11,893 $ (5,298 ) $ (11,595 )

Property Casualty

(35,658 ) (33,065 ) (11,836 )

Professional Liability

20,686 (3,559 ) (10,365 )

Insurance Companies

$ (3,079 ) $ (41,922 ) $ (33,796 )

Lloyd's Operations

(5,862 ) (8,824 ) (13,213 )

Total

$ (8,941 ) $ (50,746 ) $ (47,009 )

The 2009 consolidated net redundancy of $8.9 million consisted of prior year savings of $3.0 million from the Insurance Companies and $5.9 million from the Lloyd's Operations.

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The Insurance Companies recorded $11.9 million of net prior year unfavorable development for the marine business primarily due to large loss activity in excess of our prior expectations mostly across underwriting years 2005 to 2008 that we recognized by reserve strengthening. In the property casualty business, the Insurance Companies recorded $35.7 million of net prior year savings primarily due to $36.5 million for contractors' liability due to reduced claims activity in underwriting years 2006 and prior as well as savings in our primary E&S lines, excess casualty lines and offshore energy lines due to favorable loss trends across a number of prior underwriting years. Partially offsetting these favorable developments in the property casualty division were adverse development in our Nav Pac, liquor and personal umbrella books of business. The Insurance Companies recorded $20.7 million of net prior year unfavorable development for professional liability primarily due to $12.4 million of adverse development in the D&O lines, concentrated in the 2006 and prior underwriting years, due to loss activity in excess of our prior expectations as well as adverse development of $8.3 million in the lawyers lines recognizing to reported loss activity in underwriting years 2005 to 2008 in excess of our prior expectations.

The Lloyd's Operations recorded $5.9 million of net favorable development primarily due to marine business concentrated in the liability specie and cargo books due to reported losses being less than our expectations in underwriting years 2004 to 2008 as well as favorable development in our offshore energy business. The net favorable development was partially offset by adverse loss development in the professional liability books due to reported loss activity in excess of our expectations in the lawyers line of business for losses occurring in 2007 and adverse development in the property book due to an extension in the loss development pattern for the 2006 and 2007 underwriting years.

Management believes that the reserves for losses and loss adjustment expenses are adequate to cover the ultimate cost of losses and loss adjustment expenses on reported and unreported claims. We continue to review our reserves on a regular basis.

Note 6. Reinsurance

We utilize reinsurance principally to reduce our exposure on individual risks, to protect against catastrophic losses, and to stabilize loss ratios and underwriting results. Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance arrangements do not eliminate our obligation to pay claims to our policyholders. Accordingly, we bear credit risk with respect to our reinsurers. Specifically, our reinsurers may not pay claims made by us on a timely basis, or they may not pay some or all of these claims. Either of these events would increase our costs and could have a material adverse effect on our business. We are required to pay the losses even if the reinsurer fails to meet its obligations under the reinsurance agreement. Hurricanes Gustav and Ike in 2008 and Hurricanes Katrina and Rita in 2005 significantly increased our reinsurance recoverables which increased our credit risk.

We have established a reserve for uncollectible reinsurance in the amount of $13.8 million, which is determined by considering reinsurer specific default risk as indicated by their financial strength ratings.

We are protected by various treaty and facultative reinsurance agreements. Our exposure to credit risk from any one reinsurer is managed through diversification by reinsuring with a number of different reinsurers, principally in the United States and European reinsurance markets. To meet our standards of acceptability, when the reinsurance is placed, a reinsurer generally must have a rating from A.M. Best Company ("A.M. Best") and/or S&P of "A" or better, or an equivalent financial strength if not rated, plus at least $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.

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The credit quality distribution of our reinsurance recoverables of $1.05 billion at December 31, 2009 for ceded paid and unpaid losses and loss adjustment expenses and ceded unearned premiums based on insurer financial strength ratings from A. M. Best or S&P was as follows:

A.M. Best Rating Recoverable Percent
Rating (1) Description Amounts of Total
($ in millions)

A++, A+

Superior $ 436.7 42 %

A, A-

Excellent 585.2 56 %

B++, B+

Very good 0.8 0 % (2)

NR

Not rated 23.5 2 % (2)

Total

$ 1,046.2 100 %

(1)

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

(2)

The Company holds offsetting collateral of approximately 102.1% for B++ and B+ companies and 71.8% for not rated companies which includes letters of credit, ceded balances payable and other balances held by our Insurance Companies and our Lloyd's Operations.

The following table lists our 20 largest reinsurers measured by the amount of reinsurance recoverable for ceded losses and loss adjustment expense and ceded unearned premium (constituting approximately 75.6% of our total recoverables) together with the reinsurance recoverables and collateral at December 31, 2009, and the reinsurers' rating from the indicated rating agency:

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

Swiss Reinsurance America Corporation

$ 9.0 $ 97.8 $ 106.8 $ 9.2 A AMB (2)

Munich Reinsurance America Inc.

26.1 60.3 86.4 16.2 A+ AMB

Transatlantic Reinsurance Company

21.7 49.3 71.0 9.5 A AMB

White Mountains Reinsurance of America

1.2 68.6 69.8 2.3 A- AMB

Everest Reinsurance Company

19.9 49.4 69.3 8.5 A+ AMB

General Reinsurance Corporation

1.5 58.3 59.8 1.7 A++ AMB

Munchener Ruckversicherungs-Gesellschaft

4.9 37.0 41.9 10.2 A+ AMB

National Indemnity Company

7.5 29.8 37.3