Navigators Group Inc (NAVG) SEC Annual Report (10-K) for 2015

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2015

or

For the transition period from ______ to _____.

Commission File number 0-15886

The Navigators Group, Inc.

(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code:  (203) 905-6090

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

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   x

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

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

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

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

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

The aggregate market value of voting stock held by non-affiliates as of June 30, 2015 was $843,496,877 (Last business day of The Company's most recently completed second fiscal quarter).

The number of common shares outstanding as of January 28, 2016 was 14,441,411 (Last practical business day for the count of shares outstanding).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's  definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 26, 2016  are incorporated by reference in Part III, Items 10, 11, 12, 13 and 14 of this Form 10‑K.

TABLE OF CONTENTS

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FORWARD-LOOKI NG 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. 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. Due to these known risks, any unknown risks, uncertainties and assumptions, forward-looking statements discussed in this report may not occur and actual results may differ materially, you are therefore cautioned not to place undue reliance on them. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

PART I

ITEM 1. BUSINESS

Overview

Unless the context requires otherwise, the terms "we," "us,"  "our," or "our Company" are used to mean The Navigators Group, Inc., a Delaware holding company established in 1982, and its subsidiaries.  The terms "Parent" or "Parent Company" are used to mean The Navigators Group, Inc. without our subsidiaries.

We are an international insurance company with a long-standing area of specialization in Marine insurance. Our Property and Casualty ("P&C") insurance business primarily offers general liability coverage and umbrella & excess liability coverage to commercial enterprises through our Primary and Excess Casualty divisions. We have also developed niches in Professional Liability insurance, through our Directors & Officers ("D&O") and Errors & Omissions ("E&O") divisions. Beginning in 2010, we added reinsurance products through our Global Reinsurance ("GlobalRe") business .

We operate through various wholly-owned subsidiaries, including Navigators Insurance Company ("NIC"), inclusive of our United Kingdom Branch ("U.K. Branch"), and Navigators Specialty Insurance Company ("NSIC"), both of which are U.S. insurance companies, and Navigators Underwriting Agency Ltd., a Lloyd's of London ("Lloyd's") underwriting agency that manages Lloyd's Syndicate 1221 ("the Syndicate") in the United Kingdom ("U.K."). Our Company controls 100% of the Syndicate's stamp capacity.

Segment Information

During the first quarter of 2015, we realigned our reporting segments from Insurance Companies, Lloyd's Operations and Corporate to U.S. Insurance, International Insurance ("Int'l Insurance"), GlobalRe and Corporate.  Our previously reported segments were consistent with our legal entity structure; however, our new reporting segments are now primarily reflective of where our business is written. Our new segment presentation reflects an increase in the level of importance that our Chief Operating Decision Maker now places on the results of the underlying operating segments when aggregated and reported in alignment with the products and services offered to the marketplace versus when aggregated and reported in alignment with our legal entity structure.

For additional information on our new segment presentation and for financial information concerning our operations by segment, see Segment Results included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 2, Segment Information , in the Notes to the Consolidated Financial Statements.

The following table presents Net earned premiums by segment:

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Products and Distribution

Our Company distributes our products through international, national, and regional, retail and wholesale insurance brokers. Our Company's on-going operations are organized into distinct divisions and products each offering specialized services targeted at specific niche markets.

Our U.S. Insurance, Int'l Insurance and GlobalRe reporting segments are considered our underwriting segments. Both the U.S. Insurance and Int'l Insurance reporting segments are comprised of three operating segments:

Our underwriting segments and operating segments noted above are comprised of business divisions and/or products.

A summary of our U.S. Insurance – U.S. Marine operating segment by product is as follows:

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A summary of our U.S. Insurance – U.S. P&C operating segment by business division and primary products within these divisions are as follows:

A summary of our U.S. Insurance – U.S. Professional Liability operating segment by business division and primary products within these divisions are as follows:

A summary of our Int'l Insurance – Int'l Marine operating segment by product is as follows:

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A summary of our Int'l Insurance – Int'l P&C operating segment by business division and primary products within these divisions are as follows:

A summary of our Int'l Insurance – Int'l Professional Liability operating segment by business division and primary products within these divisions are as follows:

A summary of our GlobalRe reporting segment by business products is as follows:

Competitive Environment

Our Company faces 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 which our Company is engaged in is based on

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many factors, including the perceived overall financial strength ratings as assigned by independent rating agencies, pricing, other terms and conditions of products and services offered, business experience, business infrastructure , global presence, marketing and distribution arrangements, agency and broker relationships, quality of customer service (including speed of claims payments), product differentiation and quality, operating efficiencies and underwriting. Furthermore, insure ds tend to favor large, financially strong insurers, and our Company faces the risk that we will lose market share to these larger, financially strong insurers. Another competitive factor in the industry is the entrance of other underwriting organizations and 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 busine ss.  We strive to offer superior service, which we believe has differentiated us from our competitors. Our Company pursues a specialist strategy and focus es on market opportunities where we can compete effectively based on service levels and product design , while still achieving an adequate level of profitability. Our Company has grown, in part, from the leveraging of cross-marketing opportunities with our other operations to take advantage of our organization's global presence.

Employees

As of December 31, 2015, we had 675 full-time employees of which 506 were located in the United States, 143 in the United Kingdom, 7 in the Netherlands, 5 in Italy, 5 in Sweden, 4 in France, 2 in Belgium, 2 in Denmark, and 1 in Brazil.

Loss Reserves

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 the loss reserve estimates, our Company reviews statistical data covering several years, analyzes patterns by line of business and considers several factors including trends in claims frequency and severity, changes in operations, emerging economic and social trends, inflation and changes in the regulatory and litigation environment. We also consult with experienced claims professionals. Based on our analysis, we make a best estimate of our ultimate liability.  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 our current period's earnings. Even then, the ultimate liability may exceed or be less than our revised estimates. Our 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 strengthening or release of reserves is affected by many factors, some of which are interdependent.

Our Company maintains reserves for unpaid losses and unpaid loss adjustment expenses ("LAE") 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 ("IBNR") losses.  In the normal course of business, our Company cedes a portion of our premium to reinsurers through treaty and facultative reinsurance agreements.  Although reinsurance does not discharge our Company from liability to our policyholders, our Company participates in reinsurance agreements to limit our loss exposure and to protect us against catastrophic losses.

There is a lag between the time premiums are written and related losses and LAE are incurred, and the time such events are reported to us. The 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 and involve little or no litigation, making estimation of loss reserves less complex. The long tail business includes our Marine Liability product as well as various other insurance products in our P&C and Professional Liability operating segments. 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.

The following table presents the development of our loss and LAE reserves for 2005 through 2015. Net reserves for losses and LAE reflects our net reserves at the balance sheet date for each of the indicated years and represents our estimated amount of losses and LAE arising in all prior years that are unpaid at the balance sheet date. Reserves for losses and LAE re-estimated  in the table reflect our re-estimated amount of our previously recorded reserves based on experience as of the end of each succeeding year. Our reserve estimates may change as more information becomes known about the frequency and severity of claims for individual years. Our net and gross cumulative redundancy (deficiency) in the table reflect our cumulative amounts developed as of successive years with respect to the aforementioned reserve liability. Our cumulative redundancy (deficiency) represents the aggregate change in the estimates over all prior years.

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The table calculates losses and LAE reported and recorded for all prior years starting wi th the year in which the loss was incurred. For example, assuming that a loss occurred in 200 5 but was not reported until 200 6 , the amount of such loss will appear as a deficiency in both 200 5 and 200 6 . 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 strengthening or releases based on the table.

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

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Investm ents

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 our regulated insurance companies. Secondarily, we seek to optimize after-tax investment income.

The 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, sovereign bonds,  government agency guaranteed and non-guaranteed securities, corporate bonds, mortgage-backed and asset-backed securities,  common and preferred stocks, and exchange traded funds.

Our investment guidelines require that the amount of the consolidated fixed maturities 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 investment portfolio.  Fixed maturities securities rated below "BBB-" by S&P or "Baa3" by Moody's combined with any other investments not specifically permitted under the investment guidelines, cannot exceed 2% of our total investment portfolio.  Investments in equity securities that are actively traded on major U.S. stock exchanges cannot exceed 15% of our total investment portfolio.  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.

Our regulated insurance companies' investments are subject to the oversight of their respective Boards of Directors and the Finance Committee of the Parent Company's Board of Directors.  Our investment portfolio and the performance of the investment managers are reviewed quarterly.  Our investments within NIC and NSIC must comply with the insurance laws of New York State, the domiciliary state of NIC and NSIC.  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, structured securities, preferred stocks, common stocks, real estate mortgages and real estate.

Our investments supporting Int'l Insurance business must also comply with the regulations set forth by the Prudential Regulation Authority ("PRA") in the U.K.  Our investments supporting business at Lloyd's are subject to the direction and control of the Board of Directors and the Investment Committee of Navigators Underwriting Agency Ltd. ("NUAL"), as well as our Parent Company's Board of Directors and Finance Committee.

Refer to Management's Discussion of Financial Condition and Results of Operations - Investments and Note 3, Investments, in the Notes to Consolidated Financial Statements, both of which are included herein, for additional information regarding investments.

Regulation

United States

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

State insurance regulations are intended primarily for the protection of policyholders rather than shareholders. The state insurance departments monitor compliance with regulations through periodic reporting procedures and examinations. The quarterly and annual financial reports to the state insurance regulators utilize statutory accounting principles, which are different from generally accepted accounting principles ("GAAP") that we use in our reports to shareholders. Statutory accounting principles, in keeping with the intent to assure the protection of policyholders, are generally based on a solvency concept, while GAAP is based on a going-concern concept.

The state insurance regulators utilize risk-based capital measurements, developed by the National Association of Insurance Commissioners ("NAIC"), to identify insurance companies that potentially are inadequately capitalized. The NAIC's risk-based capital model is intended to establish minimum capital thresholds that vary with the size and mix of an insurance company's business and assets. It is designed to identify companies with capital levels that may require regulatory attention. At December 31, 2015, each of our domestic insurance companies' total adjusted capital was significantly in excess of the authorized control level risk-based capital.

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The NAIC has developed a set of financial relations hips or tests known as the Insurance Regulatory Information System to assist state regulators in monitoring the financial condition of U.S. insurance companies and identifying companies that require special attention or action by insurance regulatory autho rities. Generally, regulators will begin to investigate or monitor an insurance company if its ratios fall outside usual ranges for four or more of the ratios. If an insurance company has insufficient capital, regulators may act to reduce the amount of ins urance it can issue. Based on our most recent statutory filings (as of December 31, 2014), none of our U.S. insurance companies are subject to regulatory scrutiny based on these ratios.

In 2012, the NAIC adopted the Risk Management and Own Risk and Solvency Assessment ("ORSA") Model Act, which, following enactment at the state level, became effective in 2015. ORSA requires U.S. insurance companies and their groups to regularly, but no less than annually: 1) conduct an assessment of the adequacy of its risk management framework and current and estimated future solvency position, 2) internally document the process and results of such assessment and 3) provide a confidential, high level summary of such assessment to certain state regulatory authorities. We filed our initial Own Risk and Solvency Assessment Enterprise Risk Report with the New York Department of Financial Services on December 1, 2015, and we believe we have an Enterprise Risk Management framework in place that is effective in meeting the ORSA requirements.

The U.S. state insurance regulations also affect the payment of dividends and other distributions by insurance companies to their shareholders. Generally, insurance companies are limited by these regulations in the payment of dividends above a specified level. Dividends in excess of those thresholds are "extraordinary dividends" and are subject to prior regulatory approval. Some states require prior regulatory approval for all dividends.

Because we are an insurance holding company, we are subject to the insurance holding company system regulatory requirements of a number of states. Under these regulations, we are required to report information regarding our capital structure, financial condition and management. We are also required to provide prior notice to, or seek the prior approval of, insurance regulatory authorities of certain agreements and transactions between our affiliated companies. These agreements and transactions must satisfy certain regulatory requirements.

Government intervention has also occurred in the insurance and reinsurance markets in relation to terrorism coverage in the U.S. (and through industry initiatives in other countries). The U.S. Terrorism Risk Insurance Act (TRIA), which was enacted in 2002 to ensure the availability of insurance coverage for certain terrorist acts in the U.S., was extended in 2015 for six years, through December 31, 2020, and applies to certain of our operations.

United Kingdom

Our U.K. subsidiaries and the Syndicate are subject to regulation by the PRA (for prudential issues) and the Financial Conduct Authority ("FCA") (for conduct of business issues), the successors to the Financial Services Authority, as established by the Financial Services and Markets Act 2012.  The Syndicate is also subject to supervision by the Council of Lloyd's.  The PRA and FCA have been granted broad authorization and intervention powers as they relate to the operations of all insurers, including Lloyd's syndicates, operating in the U.K.  Lloyd's is regulated by the PRA and FCA and is required to implement certain rules prescribed by them, 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 PRA and FCA also monitor Lloyd's managing agents' compliance with the systems and controls. If it appears to the PRA and or the FCA that either Lloyd's is not fulfilling its regulatory responsibilities, or that managing agents are not complying with the applicable regulatory rules and guidance, the PRA and or FCA may intervene at their discretion.

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 ("UWY").  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 Lloyd's 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.  The Council of Lloyd's also has discretion to call or assess up to 3% of a member's underwriting capacity in any one year as a Central Fund contribution in the event a member of Lloyd's is unable to pay its debts to policyholders.

The U.K. insurance companies are required to meet the requirements of the European Union's ("EU") new financial services regulatory regime known as "Solvency II," which is built on a risk-based approach to setting capital requirements for insurers. Solvency II establishes a revised set of EU-wide capital requirements and risk management standards, which became effective on January 1, 2016.

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Available I nformation

Our corporate website is http://www.navg.com. We make available free of charge, through the Investor Relations section of our corporate website, the following reports (and related amendments as filed with the SEC) as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the SEC:

Also available through our website, are our corporate governance guidelines, corporate code of ethics and conduct, and charters for the committees of our Board of Directors.  The information found on our website is not part of this or any other report filed with or furnished to the SEC.

ITEM 1A. RISK FACTORS

Factors that could have a material impact on our results of operations or financial condition are outlined below. Additional risks not presently known to us or which we currently deem insignificant may also impair our business or results of operations as they become known facts or as facts and circumstances change. Any of the risks described below could result in a material adverse effect on our results of operations or financial condition.

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

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

In addition, financial market volatility or an economic downturn could have a material adverse effect on the insureds, agents, claimants, reinsurers, vendors and competitors. Certain of the actions of the U.S., European and other foreign governments have taken or may take in response to the financial market volatility have impacted, or may impact, certain insurance carriers. The U.S., European and other foreign governments continue to take active steps to implement measures to stabilize the financial markets and stimulate the economy, and it is possible that any measures taken by U.S. or foreign governments to stimulate or stabilize the economy could affect the insurance industry and its competitive landscape.

Our Company's business is concentrated in Marine, P&C and Professional Liability insurance as well as reinsurance, and if market conditions change adversely, or our Company experiences 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 our Company has underwriting and claims handling expertise and to decrease our business in areas where pricing does not afford what it considers to be acceptable returns, our business is concentrated in the Marine, P&C 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 our Company finds appropriate, flat or decreased rates for our products or increased competition, the impact of a reduction could have a material adverse effect on our business.

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Our Company's efforts to expand in targeted international markets, including Europe, may not be successful and may expose us to additional risks which could cause a material adverse effect on our business, financial position and results of operations.

A number of our Company's planned business initiatives involve expanding existing products in targeted international markets, including Europe. To develop new markets, our Company may need to make substantial capital and operating expenditures, which may negatively impact our results in the near term. In addition, the demand in new markets may not meet our Company's expectations. This, in turn, could lead to losses in excess of expectations. Moreover, to the extent our Company is able to expand in new international markets, our Company may be exposed to certain additional risks including but not limited to:

The occurrence of any of these risks could negatively affect our Company's international business and consequently our financial position and results of operations.

Our Company is exposed to cyclicality in our business that may cause material fluctuations in our results.

The P&C 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 allowed for attractive premium levels.  Our Company has reduced business during periods of severe competition and price declines and has grown when pricing allowed an acceptable return.  The cyclical trends in the P&C insurance and reinsurance industries and the profitability of these industries can also be significantly affected by volatile and unpredictable developments, including natural and man-made disasters, fluctuations in interest rates, changes in the investment environment that affect market prices of investments and inflationary pressures that may tend to affect the size of losses experienced by insureds. Our Company cannot predict with accuracy whether market conditions will remain constant, improve or deteriorate. Our Company expects that the business will continue to experience the effects of this cyclicality, which, over the course of time, could result in material fluctuations in premium volume, revenues or expenses.

Catastrophe losses could materially reduce our profitability.

Our Company is exposed to claims arising out of catastrophes, particularly in our U.S. and Int'l Marine operating segments, our Energy and Engineering division within our U.S. and Int'l P&C operating segments and our GlobalRe reporting segment.  Our Company has experienced, and will experience in the future, catastrophe losses, which may materially reduce profitability or harm the financial condition of our Company.  Catastrophes can be caused by various natural events, including, but not limited to, hurricanes, windstorms, earthquakes, tornadoes, floods, hail, severe winter weather and fires.  Catastrophes can also be man-made, such as war, explosions or terrorism, or caused by unfortunate events such as an oil rig disaster or the grounding of a cruise ship.  In addition, changing climate conditions could result in an increase in the frequency or severity of natural catastrophes, which could increase exposure to such losses. The incidence and severity of catastrophes are inherently unpredictable.  Although our Company will attempt to manage exposure to such events, the frequency and severity of catastrophic events could exceed estimates, which could have a material adverse effect on the financial condition of our Company.

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

The P&C insurance industry is highly competitive.  Our Company faces 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 our Company is engaged is based on many factors, including the 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. In addition, insurance industry participants may seek to consolidate through mergers and acquisitions. Continued consolidation within the insurance industry will increase the already competitive underwriting environment, as our

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Company would likely experience more robust competition from larger competitors. Furthermore, insureds tend to favor large, financially strong insurers, and our Company faces the risk that it will lose market share to larger or higher rated insurers. Our Company may have difficulty in continuing to compete successfully on any of these bases in the future.  If competition limits the ability to write new business at adequate rates, the ability t o transact business would be materially and adversely affected and our results of operations would be adversely affected.

Our Company may incur additional losses if our losses and LAE reserves are insufficient.

Our Company maintains loss reserves representing our estimated ultimate unpaid liability for losses and LAE with respect to reported and unreported claims incurred as of the end of each accounting period.  Our Company utilizes actuarial projection techniques and judgment in determining our estimated reserves.  Our estimates require analysis of facts and circumstances then known, historical settlement patterns, 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 our reserve estimation process.  Many of these items are not directly quantifiable, particularly on a prospective basis.  Our Company continually refines our 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, our currently established reserves may not be sufficient.  If our estimated reserves are insufficient, our Company will incur additional charges to earnings, which could have a material adverse effect on our future results of operations, financial position or cash flows.

Our loss reserves include amounts related to short tail and long tail classes of business.  Short tail business means that claims are generally reported quickly upon occurrence of an event, making estimation of loss reserves less complex.  For the long tail lines, significant periods of time, ranging up to several years or more, may elapse between the occurrence of the loss, the reporting of the loss and the settlement of the claim.  The longer the time span between the incidence of a loss and the settlement of the claim, the more likely the ultimate settlement amount will vary.  There can be no assurance that our Company will not suffer substantial adverse prior period development in the business in the future.

The effects of emerging claim and coverage issues on our business are uncertain.

As industry practices and legislative, regulatory, judicial, social, financial, and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect the business by either extending coverage beyond the underwriting intent or by increasing the frequency and severity of claims. In some instances, these changes may not become apparent until after our Company has issued insurance or reinsurance contracts impacted. As a result, the full extent of liability under the insurance or reinsurance contracts may not be known for many years after a contract is issued.

In addition to losses and LAE reserves, preparation of our financial statements requires our Company to make estimates and judgments.

In addition to loss reserves discussed above, our consolidated financial statements contain accounting estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures.  On an ongoing basis, our Company evaluates our estimates based on historical experience and other assumptions that our Company believes to be reasonable.  Any significant change in our estimates could adversely affect our results of operations and/or financial condition. Our accounting estimates that are viewed by our management as critical are those in connection with reserves for losses and LAE, reinsurance recoverables, written and unearned premiums, the recoverability of deferred tax assets and impairment of invested assets.

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

Our Company purchases reinsurance by transferring part of our risk to a reinsurance company in exchange for part of the premium it receives in connection with the risk.  The availability and cost of reinsurance are subject to prevailing market conditions which can affect our business volume and profitability.  Reinsurance programs are generally subject to renewal on an annual basis.  If our Company were unable to renew the expiring facilities or to obtain new reinsurance facilities, our net exposures would increase.  If our Company was 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 revenues and possibly net income.

Our reinsurance operations are largely dependent upon ceding companies' evaluation of risk.

Our Company, like other companies that write reinsurance, generally does not evaluate separately individual insurance risks assumed under our reinsurance contracts.  As such, our Company is largely dependent upon the ceding companies' original underwriting decisions. Our Company is subject to the risk that the ceding companies may not have adequately or accurately evaluated risks that

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they have insured, and it has reinsured, and that the premiums ceded may not adequately compensate it for the risks it assumes. If the reserves are insufficient to cover the unpaid losses and LAE arising from the reinsurance business, our Company would have to strengthen the reserves and incur charges to our earnings, which could adversely affect future results of operations, financial position or cash flows.

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

Although reinsurance makes the reinsurer liable to our Company to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance arrangements do not eliminate our Company's obligation to pay claims to our policyholders.  Accordingly, our Company bears credit risk with respect to our reinsurers.  Specifically, the reinsurers may not pay claims made by our Company on a timely basis, or they may not pay some or all of these claims.  Either of these events would increase our Company's costs and could have a material adverse effect on our business.

Increases in interest rates may cause our Company to experience losses.

Because of the unpredictable nature of losses that may arise under insurance policies, our Company may require substantial liquidity at any time. The investment portfolio, which consists largely of fixed maturities, is our Company's principal source of liquidity.  The market value of the fixed maturities is subject to fluctuation depending on changes in prevailing interest rates and various other factors.  Our Company does not hedge the investment portfolio against interest rate risk.  Interest rates are at or are close to historic lows. Increases in interest rates during periods when our Company must sell fixed maturities securities to satisfy liquidity needs may result in substantial realized investment losses.

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

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

Our Company is 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.

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 together, 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 maturities, 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 the control of our Company.  A rise in interest rates would reduce the fair value of our investment portfolio.  It would also provide us 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.  Our Company would then presumably earn lower rates of return on assets reinvested.  Our Company may be forced to liquidate investments prior to maturity at a loss in order to cover liabilities.  Although our Company takes 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 the fixed maturities are asset-backed and mortgage-backed securities.  Changes in interest rates can expose our Company 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 our Company to reinvest the proceeds at the then current rates.

The fixed maturities portfolio is invested in high quality, investment-grade securities.  However, our Company is generally permitted to hold up to 2% of the total investment portfolio 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 our Company has put in place procedures to monitor the credit risk and liquidity of our invested assets, it is possible that, in periods of economic weakness, our Company may experience default losses in the portfolio.  This may result in a reduction of net income, capital and cash flows.

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

The functional currency of our Company's principal insurance and reinsurance subsidiaries is the U.S. dollar. Exchange rate fluctuations relative to the functional currency may materially impact our financial position, as our Company conducts business in several non-U.S. currencies.  In addition, locally-required capital levels are invested in local currencies in order to satisfy regulatory requirements and to support local insurance operations regardless of currency fluctuations.    

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

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

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

A downgrade in our ratings could adversely impact the competitive positions of our operating businesses or negatively affect the ability to implement our business strategy successfully.

Ratings are a critical factor in establishing the competitive position of insurance companies.  NIC and NSIC, 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 our obligations to policyholders, and are not evaluations directed to investors.  The 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 the business, could be adversely affected in a material manner.  A significant downgrade could result in a substantial loss of business as policyholders might move to other companies with higher ratings. In addition, a significant downgrade could subject our Company to higher borrowing costs and our ability to access the capital markets could be negatively impacted. If our Company were to be downgraded below an "A-", we would be required to provide additional collateral under the letter of credit facility with ING Bank, N.V., London Branch, as Administrative Agent and Letter of Credit Agent. Further, a downgrade below BBB- by S&P would subject our Company to higher interest rates payable on the 5.75% Senior Notes due October 15, 2023.  Refer to Note 7, Debt , in the Notes to Consolidated Financial Statements for additional information regarding such credit facility and 5.75% Senior Notes due October 15, 2023, respectively.

There can be no assurance that our current ratings will continue for any given period of time.  For a further discussion of our ratings, refer to Management's Discussion and Analysis of Financial Condition and Results of Operations – Ratings included herein.

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

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

Policies issued before 1993 have been reinsured by Equitas Insurance Limited ("Equitas"), an independent insurance company authorized by the Financial Services Authority.  However, if Equitas were to fail or otherwise be unable to meet all of its obligations, Lloyd's may take the view that it is appropriate to apply the Lloyd's 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

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be used to cover liabilities in the event of a major claim arising in the United States and Lloyd's may require our Company to satisfy cash calls to meet claims payment obligations and maintain minimu m trust fund amounts.

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

Our Company believes 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 Lloyd's and on our financial condition or results of operations.

The market price of our Parent Company common stock may be volatile.

There has been significant volatility in the market for equity securities.  The price of our Parent Company 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 our Parent Company common stock:

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

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

Our Company is protected by various treaty and facultative reinsurance agreements.  Our exposure to credit risk from any one reinsurer is managed through diversification by reinsuring with a number of different reinsurers, principally in the United States and European reinsurance markets.  Consequently, our Company may be indirectly exposed to recent uncertainties with regard to European sovereign debt holdings through certain of our reinsurers.  Refer to Note 6, Ceded Reinsurance, in the Notes to Consolidated Financial Statements for a table of the 10 largest reinsurers by the amount of reinsurance recoverable for ceded losses and LAE and ceded unearned premium along with their rating from two rating agencies

In addition, our Company invests in non-sovereign fixed maturities where the issuer is located in the Euro Area, an economic and monetary union of certain member states within the European Union that have adopted the Euro as their common currency.  As of December 31, 2015, the fair value of such securities was $83.2 million, with an amortized cost of $83.3 million, representing 3.1% of our total fixed maturities and equity portfolio.  Of this amount, approximately 40.9% represent securities issued by financial institutions domiciled or operating in the Euro area.   Our largest exposure is the Netherlands with a total of $30.9 million followed by France with a total of $28.5 million.  Globally our Company has no direct exposure to Greece, Portugal, Italy or Spain within the Euro area or, Ukraine or Russia as of December 31, 2015.

Nonetheless, the failure of the European Union member states to successfully resolve a fiscal or political crisis could result in the devaluation of the Euro, the abandonment of the Euro by one or more members of the European Union or the dissolution of the European Union and it is impossible to predict all of the consequences that this could have on the global economy in general or more specifically on our business.  Any or all of these events could have a material adverse effect on the results of operations, liquidity and financial condition of our Company.

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

NIC and NSIC are subject to extensive regulation and supervision in the jurisdictions in which we conduct business.  This regulation is generally designed to protect the interests of policyholders, as opposed to insurers and their stockholders and other investors, and

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relates to authorization for lines of business, capital and surplus requirements, investment limitations, underwriting limitations, transactions with affiliates, dividend limitations, changes in control, premium rates and a variety of other financial and non-financial components of an insurance company's business.

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

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

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

Our business in the U.K. is also heavily regulated, refer to Business – Regulation – United Kingdom included herein for a discussion of such proposals.

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

An E.U. directive covering the capital adequacy, risk management and regulatory reporting for insurers, known as Solvency II, was adopted by the European Parliament in April 2009.  Solvency II has introduced a new system of regulation for insurers operating in the E.U. (including the United Kingdom) and presented a number of risks to us.  Although Solvency II was originally stated to have become effective by October 31, 2012, implementation has been delayed several times.  On January 31, 2014, European Insurance and Occupational Pensions Authority set up the timeline for the delivery of the Solvency II Implementing Technical Standards and Guidelines. It was stated that the overall goal was to deliver the regulatory and supervisory framework for the technical implementation of the Solvency II regime from the first day of application, January 1, 2016.  In 2015 the Solvency II requirements for third-country branches were finalized, with the regime only applying to our U.K. Branch and not to NIC in its entirety. An implementation program was established and delivered in 2015 to ensure that our U.K. Branch met the relevant requirements for third-country branches under the Solvency II requirements. Over the last few years, our Company has undertaken a significant amount of work to ensure that it meets the new requirements, with further embedding work planned for 2016. There is a risk that if the Solvency II requirements are not met on an on-going basis they may impact the capital requirements for our U.K. Branch and the Syndicate.  These new regulations have the potential to adversely affect the profitability of NIC, NUAL and the Syndicate, and restrict their ability to carry on their businesses as currently conducted. 

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

Our 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 our Parent Company in the future will depend on their statutory surplus, on earnings and on regulatory restrictions.  For a discussion of our insurance subsidiaries' current dividend-paying ability, please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources , included herein.  Our Parent Company, as an insurance holding company, and our insurance subsidiaries are subject to regulation by some states.  Such regulation generally provides that transactions between companies within the 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 the consolidated group may be subject to prior notice to, or prior approval by, state regulatory authorities.  Our insurance subsidiaries are also subject to licensing and supervision by government regulatory agencies in the jurisdictions in which we 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 our Parent Company with dividends.

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The determination of the impairments taken on our investments is subjective and could materially impact our financial position or results of operations.

The determination of the impairments taken on our investments varies by investment type and is based upon the periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Management updates our evaluations regularly and reflects impairments in operations as such evaluations are revised. Our Company cannot be certain that we have accurately assessed the level of impairments taken in our financial statements. Furthermore, additional impairments may need to be taken in the future, which could materially impact our financial position or results of operations. Historical trends may not be indicative of future impairments.

Compliance by our marine business with the legal and regulatory requirements to which we are subject is evolving and unpredictable.  In addition, compliance with new sanctions and embargo laws could have a material adverse effect on our business.

The marine business, like other business lines, is required to comply with a wide variety of laws and regulations, including economic sanctions and embargo laws and regulations, applicable to insurance or reinsurance companies, both in the jurisdictions in which the business is organized and where the business sells their insurance and reinsurance products, and that implicate the conduct of insureds. The insurance industry, in particular as relates to international insurance and reinsurance companies, has become subject to increased scrutiny in many jurisdictions, including the United States, various states within the United States, the E.U., and various countries within the E.U., and the United Kingdom.  For example, in 2012, President Obama signed into law the Iran Threat Reduction and Syria Human Rights Act of 2012 which created new sanctions and strengthened existing sanctions against Iran. Among other things, it intensifies existing sanctions regarding the provision of goods, services, infrastructure or technology to Iran's petroleum or petrochemical sector, and included provisions relating to persons that engage in certain insurance or reinsurance activities.

Increased regulatory focus on our Company, such as in connection with the matters discussed above, may result in costly compliance burdens and/or may otherwise increase costs, which could materially and adversely impact our financial performance.  The introduction of new or expanded economic sanctions applicable to marine insurance could also force our Company to exit certain geographic areas or product lines, which could have an adverse impact on our profitability.

Although our Company intends to maintain compliance with all applicable sanctions and embargo laws and regulations, and have established protocols, policies and procedures reasonably tailored to ensure compliance with all applicable embargo laws and regulations, there can be no assurance that our Company will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations. Any such violation could result in fines, penalties or other sanctions that could severely impact our ability to access U.S. capital markets and conduct our business, and could result in some investors deciding, or being required, to divest their interest, or not to invest, in our Company.  In addition, certain institutional investors may have investment policies or restrictions that prevent them from holding securities of companies that have contracts with countries identified by the U.S. government as state sponsors of terrorism. The determination by these investors not to invest in, or to divest from, investing in the common stock of our Company may adversely affect the price at which our common stock trades.

Moreover, our non-U.S. subsidiaries, such as NUAL, may be subject to different sanctions and embargo laws and regulations. The reputation and the market for the securities of our Company may be adversely affected if any such subsidiary engages in certain activities, even though such activities are lawful under applicable sanctions and embargo laws and regulations.

Our Company may be unable to attract and retain qualified employees.

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

If our Company experiences difficulties with the efficient functioning of information technology and telecommunications systems, the ability to conduct our business might be adversely affected.

Our Company relies heavily on the successful, uninterrupted functioning of our information technology ("IT") and telecommunications systems. Our business and continued expansion is highly dependent upon the ability to perform, in an efficient and uninterrupted fashion, necessary business functions, such as pricing, quoting and processing policies, paying claims, performing actuarial and other modeling functions.  A failure of our IT and telecommunication systems or the termination of third-party software licenses our Company relies on in order to maintain such systems could materially impact our ability to write and process business, provide customer service, pay claims in a timely manner or perform other necessary actuarial, legal, financial and other business

18

functions. If our Company does not maintain adequate IT and telecommunications systems, we could experience adverse consequences, including inadequate information on which to base critical decisions, the loss of existing customers, difficulty in attracting new customers, litigation exposures, damage to business reputation and increased administrative expenses. As a result, our Company could experience financial losses and the ability of our Company to conduct busi ness might be adversely affected.

Our Company is dependent upon the security of our information technology systems, and a breach of the security of such systems could result in an impairment of our ability to conduct business effectively.

Our Company retains confidential and proprietary information on our IT systems and relies on sophisticated technologies to maintain the security of that information. While, to date, our Company has not experienced a material breach of cybersecurity, any administrative and technical controls and other preventive actions we take to reduce the risk of cyber-incidents and protect our IT systems may be insufficient to prevent physical and electronic break-ins, cyber-attacks or other security breaches to our IT systems. The failure to maintain the security, confidentiality or privacy of sensitive data could harm our Company's reputation, subject us to legal claims, lead to a loss of customers and revenues and otherwise adversely affect our business and financial results. While our Company maintains cyber liability insurance that provides both third-party liability and first party liability coverages, our insurance may not be sufficient to protect us against all losses.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

Our executive and administrative office is located at 400 Atlantic Street, Stamford, CT.  The lease for this space expires in October 2023.  Our underwriting operations are in various locations with non-cancelable operating leases including:

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ITEM 3. LEGAL PROCEEDINGS

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

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

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

PART II

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

Market Information

Our Parent 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 2015 and 2014 were as follows:

Information provided to our Company by the transfer agent and proxy solicitor indicates that there are approximately 498 holders of record and 5,049 beneficial holders of our common stock, as of January 20, 2016.

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Five Year Stock Performance Graph

The Five Year Stock Performance Graph and related Cumulative Indexed Returns table, as presented below, reflects the cumulative return on our Company's common stock, the Standard & Poor's 500 Index ("S&P 500 Index") and the S&P Property and Casualty Insurance Index (the "Insurance Index") assuming an original investment in each of $100 on December 31, 2010 (the "Base Period") and reinvestment of dividends to the extent declared.  Cumulative returns for each year subsequent to 2010 are measured as a change from this Base Period.

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

Dividends

Our Company has not paid or declared any cash dividends on our common stock. While there presently is no intention to pay cash dividends on our 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 facilities, our capital and surplus requirements of our subsidiaries and applicable government regulations.

Refer to Note 10, Stockholders' Equity, in the Notes to Consolidated Financial Statements for additional information regarding dividends, including dividend restrictions and net assets available for dividend distribution.

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Recent Sales of Unregistered Securities

None

Use of Proceeds from Public Offering of Debt Securities

None

Purchases of Equity Securities by the Issuer

None

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ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial data including consolidated financial information of our Company for each of the last five calendar years, derived from our Company's audited Consolidated Financial Statements.  The table should be read 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.

(1) - Calculated based on earned premiums.

(2) - 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

U.S. GAAP and Non-GAAP Financial Performance Metrics

Throughout this Annual Report, we present our operations in the way we believe will be most meaningful, useful and transparent to anyone using this financial information to evaluate our performance. In addition to the GAAP presentation of Net income, we show certain non-GAAP financial measures that we believe are valuable in managing our business and drawing comparisons to our peers. These measures are Underwriting profit (loss), Combined ratio, Net operating earnings, Net losses and LAE reserves and Book value and Book value per share.

The following is a list of GAAP and non-GAAP measures found throughout this report with their definitions, relationships to GAAP measures and explanations of their importance to our operations:

Underwriting Profit (Loss)

Underwriting profit (loss) represents one measure of the pretax profitability of our insurance operations and is derived by subtracting Net losses and LAE, Commission expenses and Other operating expenses from Net earned premiums and Other underwriting income (expense).  This information is available in total and by segment in Note 2 – Segment Information in the Notes to Consolidated Financial Statements.  The nearest comparable GAAP measure is Income before income taxes which, in addition to Underwriting profit (loss), includes Net investment income, Other than temporary impairment ("OTTI") loss, Net realized gains (losses) on investments, Interest expense and Other income (loss).

Combined Ratio

The Combined ratio is a common insurance industry measure of profitability for any underwriting operation and is calculated in two components. First, the loss ratio is Net losses and LAE divided by Net earned premiums. The second component, the expense ratio, reflects the sum of Commission expenses and insurance operating expenses, divided by Net earned premiums. All items included in these components of the Combined ratio are presented in our GAAP Consolidated Financial Statements. The sum of the loss and expense ratios is the Combined ratio. The difference between the Combined ratio and 100 percent reflects the rate of Underwriting profit (loss). For example, a Combined ratio of 85 percent implies that for every $100 of premium we earn, we record $15 of Underwriting profit.

Net Operating Earnings

Net operating earnings is calculated as Net income before after-tax Net realized gains (losses), after-tax OTTI losses recognized in earnings, and after-tax net realized and unrealized foreign exchange gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity's functional currency) and translation adjustments (translation of foreign currency denominated assets and liabilities into U.S.dollars ("USD")).

Net Losses and LAE Reserves

Net losses and LAE reserves, as shown in the liabilities section of our Consolidated Balance Sheets, represents the total obligations to claimants for both estimates of known claims and estimates for IBNR claims. The related asset item, Reinsurance balances recoverable on unpaid losses and LAE, is the estimate of both known claims and IBNR that we expect to recover from reinsurers. The net of these two items is generally referred to as Net losses and LAE reserves and is commonly used in our disclosures regarding the process of establishing these various estimated amounts.

Book Value and Book Value Per Share

Book value is equivalent to Stockholders' equity and book value per share is calculated by dividing Stockholders' equity by the number of outstanding shares at the end of the interim period.

Overview

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

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Unless the context requires otherwise, the term s "we," "us,"  "our," or "our Company" are used to mean The Navigators Group, Inc., a Delaware holding company established in 1982, and its subsidiaries.  The terms "Parent" or "Parent Company" are used to mean The Navigators Group, Inc. without our subsid iaries.

We are an international insurance company with a long-standing area of specialization in Marine insurance.  Our P&C insurance business primarily offers General Liability coverage and Umbrella & Excess Liability coverage to commercial enterprises through our Primary and Excess Casualty divisions.  We have also developed niches in Professional Liability insurance, through our D&O and E&O divisions.  Beginning in 2010, we added reinsurance products through our GlobalRe reporting segment.

Financial Highlights - Selected Indicators

Our revenue is primarily comprised of premiums and investment income.  Cash flow is generated from premiums collected and investment income received less paid losses and loss expenses, Commission expenses and administrative expenses as well as the timing of reinsurance receipts and payments.  Our products are distributed through multiple channels, utilizing global, national and regional retail and wholesale insurance brokers.

During the first quarter of 2015, we realigned our reporting segments from Insurance Companies, Lloyd's Operations and Corporate to U.S. Insurance, Int'l Insurance, GlobalRe and Corporate.  The new segment presentation reflects an increase in the level of importance that our Chief Operating Decision Maker now places on the results of the underlying operating segments when aggregated and reported in alignment with the products and services offered to the marketplace versus when aggregated and reported in alignment with our legal entity structure.  Over the past few years, we have been monitoring the growth and stability of our assumed reinsurance business and in 2015 determined that assumed reinsurance has become a stable and significant component of our Company.  We are also increasing our focus on additional international insurance markets by establishing underwriting offices in Continental Europe.  The offices were fully operational during our January 2015 renewal season. These changes were all considered in conjunction with establishing our operating and reportable segments.

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Results of Operations

The following table presents a summary of our consolidated financial results for the years ended December 31 2015, 2014 and 2013: