The Quarterly
NAVG Q3 2017 10-Q

Navigators Group Inc (NAVG) SEC Annual Report (10-K) for 2017

NAVG Q1 2018 10-Q
NAVG Q3 2017 10-Q NAVG Q1 2018 10-Q

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, 2017

or

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

For the transition period from ______ to _____.

Commission File number 0-15886

The Navigators Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware

13-3138397

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

400 Atlantic Street, Stamford, Connecticut

06901

(Address of principal executive offices)

(Zip Code)

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

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

Title of each class:

Name of each exchange on which registered:

Common Stock, $.10 Par Value

The NASDAQ Global Select Market

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

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

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

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   ☐

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   ☒     No   ☐

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

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

Large accelerated filer

Non-accelerated filer

Accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

The aggregate market value of voting stock held by non-affiliates as of June 30, 2017 was $1,267,312,917 (Last business day of The Company's most recently completed second fiscal quarter).

The number of common shares outstanding as of January 29, 2018 was 29,531,368 (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 10, 2018  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

Segment Information

3

Products and Distribution

4

Competitive Environment

7

Employees

7

Loss Reserves

7

Investments

10

Regulation

10

Available Information

12

Item 1A.

Risk Factors

12

Item 1B.

Unresolved Staff Comments

22

Item 2.

Properties

22

Item 3.

Legal Proceedings

23

Item 4.

Mine Safety Disclosures

23

PART II

Item 5.

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

23

Item 6.

Selected Financial Data

26

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

27

U.S. GAAP and Non GAAP Financial Performance Metrics

27

Overview

28

Results of Operations

29

Segment Results

34

U.S. Insurance

35

Int'l Insurance

41

GlobalRe

47

Capital Resources and Liquidity

50

Investments

53

Reserves for Losses and LAE for Loss Events

56

Reinsurance Recoverables

60

Critical Accounting Estimates

61

Recent Accounting Pronouncements

65

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

65

Item 8.

Financial Statements and Supplementary Data

66

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

67

Item 9A.

Controls and Procedures

67

Item 9B.

Other Information

69

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

69

Item 11.

Executive Compensation

69

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

69

Item 13.

Certain Relationships and Related Transactions, and Director Independence

69

Item 14.

Principal Accountant Fees and Services

69

PART IV

Item 15.

Exhibits and Financial Statement Schedules

69

Item 16.

Form 10-K Summary

71

Signatures

72

Index to Consolidated Financial Statements and Schedules

F-1

2

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, and 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 term "Parent Company" is used to mean The Navigators Group, Inc. without its subsidiaries.

We are an international insurance company with a long-standing area of specialization in Marine insurance. We also offer Property and Casualty ("P&C") insurance, which consists primarily of 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, as well as assumed reinsurance products.

We operate through various wholly-owned insurance and service companies. Our subsidiaries domiciled in the United States ("U.S.") include two insurance companies, Navigators Insurance Company ("NIC") and Navigators Specialty Insurance Company ("NSIC"), as well as our U.S. underwriting agency, Navigators Management Company, Inc. ("NMC"). NIC includes a branch in the United Kingdom ("U.K."). We also have operations domiciled in the U.K., Hong Kong and Europe. Navigators International Insurance Company Ltd. ("NIIC"), Navigators Management (U.K.) Ltd. ("NMUK") and Navigators Underwriting Ltd. ("NUL") are domiciled in the U.K. and NUL includes European branches. Navigators Underwriting Agency Ltd. ("NUAL"), a Lloyd's of London ("Lloyd's") underwriting agency, manages and provides the capital, through Navigators Corporate Underwriters Ltd. ("NCUL"), for our Lloyd's Syndicate 1221 (the "Syndicate"), and is also domiciled in the U.K. We control 100% of the Syndicate's stamp capacity.

Effective January 1, 2017, we sold our underwriting agency operations in Sweden and Denmark. The transaction represented a 100% disposition of our Sweden and Denmark corporations, NUAL AB and Navigators A/S, respectively. This transaction did not materially impact our results of operation, financial condition or liquidity.

During the first quarter of 2017, our new U.K. based insurance company, NIIC, which is a wholly-owned direct subsidiary of our Parent Company, began writing business.

On December 18, 2017, we entered into a share purchase agreement for the purchase of all of the shares of Assurances Continentales – Continentale Verzekeringen NV ("ASCO") and Bracht, Deckers & Mackelbert NV ("BDM"). ASCO and BDM are both based in Antwerp, Belgium. The proposed acquisition is part of our strategy of expanding our well-established specialty insurance expertise to more brokers and insureds across Europe. As aggregate consideration for the acquisition of ASCO and BDM, we will pay EUR 35 million in cash at the closing of the transaction. The transaction is subject to the satisfaction or waiver of customary closing conditions, including among other things, the receipt of regulatory approval, and is anticipated to close in the first half of 2018.

Segment Information

We report our results of operations consistent with the manner in which our Chief Operating Decision Maker reviews the business to assess performance of our four reporting segments: U.S. Insurance, International Insurance ("Int'l Insurance"), GlobalRe and Corporate. The U.S. Insurance and Int'l Insurance reporting segments are each comprised of three operating segments: Marine, P&C and Professional Liability.

3

For additional information on our 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 Premiums Earned by segment:

Years Ended December 31,

2017 Net Premiums

% of

2016 Net Premiums

% of

2015 Net Premiums

% of

amounts in millions

Earned

Total

Earned

Total

Earned

Total

U.S. Insurance

$

674

56.8

%

$

629

57.2

%

$

556

56.5

%

Int'l Insurance

334

28.2

%

307

27.9

%

260

26.4

%

GlobalRe

178

15.0

%

164

14.9

%

168

17.1

%

Total

$

1,186

100.0

%

$

1,100

100.0

%

$

984

100.0

%

Products and Distribution

Our Company distributes insurance related products through international, national, regional and retail insurance brokers. No customer or broker accounted for more than 10% of consolidated gross premiums written. However, within each of our three reporting segments there are premiums written through individual brokers that represent over 10% of gross premiums written for the reporting segment.

Our on-going operations are organized into distinct divisions, each offering specialized products and services targeted at a specific niche customer segment.

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

Marine – Our Company has been providing insurance protection for global marine clients since 1974. We offer insurance for companies engaged in diverse aspects of shipping, global trade and worldwide transportation.

P&C – Our P&C operating segment brings a unique, specialist orientation to both Excess & Surplus products and to the standard commercial middle market for targeted industries and exposures.

Professional Liability – Our Professional Liability operating segment provides niche insurance solutions for numerous Professional Liability and Management Liability risks.

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

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

U.S. Marine Products

Cargo – We offer all-risk coverage for manufacturing, importers, exporters and freight forwarders with available coverage enhancements including but not limited to: domestic and international inland transit, warehouse storage and exhibition coverage.

Craft – We offer coverage for physical damage and third party liability coverage for tugs, barges, port/harbor vessels and other miscellaneous commercial watercraft.

Inland Marine – Products include builders risk including renovation and repair, installation floaters, contractors' equipment and numerous other inland marine coverages. Tailored products and services for truckers, warehousing and inland shippers, including coverage for commercial transit and legal liability may also be offered.

Marine Liability – Products include coverage for liability to third parties for bodily injury or property damage stemming from marine-related operations, including but not limited to terminals, marinas and stevedoring.  We focus on the associated marine liability exposures of multi-national corporations as well as small to medium sized marine operations.  

Other products offered: Fishing Vessels, Transport, War, Hull and Other Marine.

4

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:

U.S. P&C Products by Division

Excess Casualty – We provide Commercial Retail Excess Casualty and Specialty Wholesale Excess Casualty products for specialties such as manufacturing and wholesale distribution, commercial and residential construction and construction projects.

Primary Casualty – Our Company's Primary Casualty division provides general liability coverage solutions on a non-admitted basis through selected wholesale brokers.

Environmental – We underwrite environmental liability coverage in three main sectors: contractors pollution liability for a wide range of general and trade contractors; site pollution liability for environmental exposures associated with real estate ownership, operation and ownership transfer; and integrated casualty which combine general liability and pollution liability for product manufacturers and distributors, as well as professional liability, for environmental consultants.

Auto – We offer liability and physical damage coverage to commercial enterprises primarily within the distribution, construction fleet and limited for hire trucking sectors. This business is distributed through selected wholesalers on a monoline basis and through selected retailers in support of other products.

Other P&C – Products offered in this division include but are not limited to: Property, Life Sciences, Surety, Media, Arts & Entertainment and Other P&C which includes run-off lines of business.

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

U.S. Professional Liability Products by Division

D&O – We provide D&O insurance to companies for losses resulting from claims alleging breaches of fiduciary duty including stockholder claims, employment related matters and other claims alleging various wrongful acts.

E&O – We underwrite Professional Liability insurance for the following risk types within our E&O division: Architects & Engineers ("A&E"), Accountants, Miscellaneous Professional Liability, Real Estate E&O and Other E&O .

Other Professional Liability – includes run-off lines of business.

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

Int'l Marine Products

Cargo - We offer all-risk coverage for manufacturing, importers, exporters and freight forwarders with available coverage enhancements including but not limited to domestic and international inland transit, warehouse storage and exhibition coverage.

Marine Liability – Products include coverage for liability to third parties for bodily injury or property damage stemming from marine-related operations.  We focus on the associated marine liability exposures of multi-national corporations as well as small to medium sized marine operations.

Protection & Indemnity ("P&I") – We offer fixed-cost P&I coverage for small to medium sized vessels. We protect shipowners, managers and time charterers against liabilities arising out of and/or in connection with the operation of their vessels.

Specie – We offer specie and fine art insurance coverage as well as writing banks and cash in transit risks.

Transport – We provide comprehensive insurance for a full range of operations in the global ports, terminal operators and logistics sector.

Other products offered: Craft, Energy Liability, Hull, War and Other Marine.

5

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

Int'l P&C Products by Division

Energy & Engineering

Onshore Energy – Our insurance offerings include coverage for physical loss or damage to refineries and process plants in the oil, gas and petrochemical industries, with coverage for principal perils including fire, explosion, machinery breakdown and, in some cases, natural perils such as earthquakes and/or flooding.  We focus on owners and investors in refineries, gas processing, and other hydrocarbon processing industries, typically those with mid-sized asset schedules.

Offshore Energy – Policies can cover physical damage to fixed and mobile rigs, land rigs and associated equipment and pipelines plus the risks encountered during the drilling and production phases of wells (both onshore and offshore) and any subsequent re-drill required, along with any consequential seepage and pollution from these incidents. We focus on small to very large companies involved in the exploration and production of hydrocarbons in all areas of the world and those investing in windfarms.

Other products offered: Other Energy & Engineering, which includes power station insurance.

General Liability – We offer primary and excess public, products and pollution liability coverage for a range of industries, including manufacturing, construction, mining, utilities and services.

Property – We provide property insurance coverage for commercial businesses with a focus on standard middle market for targeted industries and exposures for both North American and International risks.

Political Violence & Terrorism ("PV&T") – We provide property damage and business interruption coverage for a broad range of assets worldwide. Clients range from large multinational retail and commercial business to single exposed locations. We also offer extended political violence cover, including war on land insurance, for the more emerging market risk where buyers of the product feel they are exposed to the risk of civil unrest, insurrection or civil war.

Other P&C – Products offered in this division include: Life Sciences, Environmental and Other P&C which includes run-off lines of business.

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

Int'l Professional Liability Products by Division

D&O – We underwrite D&O insurance for public and private companies for losses resulting from alleged breaches of fiduciary duty including stockholder claims, employment related matters and other claims alleging various wrongful acts.

E&O – We underwrite Professional Liability insurance for the following risk types within our E&O division: A&E, Accountants, Miscellaneous Professional Liability, and Other E&O which includes professional liability insurance for lawyers.

Other Professional Liability – We offer a Warranties and Indemnity coverage product which provides coverage for a breach of a warranty or indemnity in a purchase agreement in a merger or acquisition.

6

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

GlobalRe Products

Accident & Health ("A&H") – We underwrite quota share and excess of loss reinsurance covering healthcare benefits, including employer stop loss, fully insured, limited medical benefits, dental benefits, and prescription drug benefits.

Marine – We underwrite international ocean Marine quota share and excess of loss reinsurance covering Cargo, Hull, Specie and Liability portfolios.

P&C – We underwrite quota share, excess of loss and facultative Property and Casualty reinsurance in Latin America and the Caribbean ("LatAm") as well as global Property reinsurance ("Property Treaty") to selected insurance companies in the United States, Europe, Africa and Asia.

Specialty Casualty – We underwrite quota share and excess of loss reinsurance covering Professional, Management Liability, Auto and General Liability portfolios focused in the United States.

Agriculture – We underwrite quota share, excess of loss Agriculture reinsurance globally.

Surety – We underwrite quota share, excess of loss Surety reinsurance in Latin America and the Caribbean ("LatAm")

Other products include: Various Other Reinsurance .

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 in which our Company is engaged is based on 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, insureds tend to favor large, financially strong insurers, and our Company faces the risk that we will lose market share to these larger insurers. Another competitive factor in the industry is the entrance of 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 business.  We strive to offer superior service, which we believe has differentiated us from our competitors. Our Company pursues a specialist strategy and focuses 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, 2017, we had 732 full-time employees of which 555 were located in the United States, 149 in the United Kingdom, 8 in The Netherlands, 6 in Hong Kong, 5 in Italy,  3 in France, 2 in Belgium, 2 in Switzerland, 1 in Singapore and 1 in Spain.

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.

7

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 2007 through 2017. 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 reflects 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.

The table calculates losses and LAE reported and recorded for all prior years starting with the year in which the loss was incurred. For example, assuming that a loss occurred in 2007 but was not reported until 2008, the amount of such loss will appear as a deficiency in both 2007 and 2008. 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.

8

Years Ended December 31,

amounts in thousands

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Net reserves

   for losses and LAE

$

847,303

$

999,871

$

1,112,934

$

1,142,542

$

1,237,234

$

1,216,909

$

1,222,633

$

1,308,136

$

1,393,126

$

1,510,451

$

1,705,380

Reserves for losses

   and LAE re-estimated

   as of:

One year later

796,557

990,930

1,099,132

1,144,687

1,191,943

1,215,643

1,166,821

1,243,467

1,364,598

1,544,761

Two years later

776,845

971,048

1,065,382

1,068,344

1,189,651

1,142,545

1,144,854

1,262,367

1,430,261

Three years later

767,600

943,231

1,037,233

1,084,728

1,167,745

1,165,959

1,196,219

1,324,701

Four years later

749,905

925,756

1,027,551

1,072,849

1,193,950

1,196,157

1,249,756

Five years later

745,489

921,597

1,029,215

1,097,862

1,192,188

1,223,661

Six years later

736,776

925,518

1,041,778

1,098,545

1,212,716

Seven years later

737,514

935,511

1,046,653

1,111,350

Eight years later

742,079

943,450

1,060,053

Nine years later

741,590

953,450

Ten years later

749,363

Net cumulative

   redundancy

   (deficiency)

$

97,940

$

46,421

$

52,881

$

31,192

$

24,518

$

(6,752

)

$

(27,123

)

$

(16,565

)

$

(37,135

)

$

(34,310

)

Net cumulative paid

   as of:

One year later

180,459

263,523

314,565

309,063

407,385

365,479

295,527

320,863

412,544

478,979

Two years later

322,892

460,058

517,125

552,881

620,955

550,747

512,709

620,514

739,944

Three years later

441,267

591,226

682,051

695,054

752,315

703,511

736,360

821,045

Four years later

526,226

688,452

773,261

785,046

862,722

856,240

875,895

Five years later

583,434

745,765

828,269

868,850

949,784

938,370

Six years later

620,507

785,211

872,685

930,327

1,002,026

Seven years later

645,951

819,146

920,319

958,261

Eight years later

663,914

855,320

940,984

Nine years later

679,529

871,078

Ten years later

690,401

Gross liability-end of

   year

1,648,764

1,853,664

1,920,286

1,985,838

2,082,679

2,097,048

2,045,071

2,159,634

2,202,644

2,289,727

2,515,145

Reinsurance

   recoverable

801,461

853,793

807,352

843,296

845,445

880,139

822,438

851,498

809,518

779,276

809,765

Net liability-end of

   year

$

847,303

$

999,871

$

1,112,934

$

1,142,542

$

1,237,234

$

1,216,909

$

1,222,633

$

1,308,136

$

1,393,126

$

1,510,451

$

1,705,380

Gross re-estimated latest

1,490,603

1,731,595

1,795,170

1,876,557

2,035,507

2,052,011

2,060,851

2,124,378

2,213,247

2,308,503

Re-estimated

   recoverable latest

741,240

778,145

735,117

765,207

822,791

828,350

811,095

799,677

782,986

763,742

Net re-estimated

   latest

$

749,363

$

953,450

$

1,060,053

$

1,111,350

$

1,212,716

$

1,223,661

$

1,249,756

$

1,324,701

$

1,430,261

$

1,544,761

Gross cumulative

   redundancy

   (deficiency)

$

158,161

$

122,069

$

125,116

$

109,281

$

47,172

$

45,037

$

(15,780

)

$

35,256

$

(10,603

)

$

(18,776

)

9

Investm ents

The objective of our investment policy, guidelines and strategy is to maximize total investment return in the context of preserving and enhancing stockholder value and the statutory surplus of our regulated insurance companies. As part of our overall investment strategy, we seek to build a tax efficient investment portfolio.

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, 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. The Finance Committee of our Board of Directors approves our overall group asset allocation targets and investment policy to ensure that they are consistent with our overall goals, strategies and objectives.    

Our regulated insurance companies' investments are subject to the oversight of their respective Boards of Directors and the Finance Committee of our 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 our Int'l Insurance business must also comply with the regulations set forth by the PRA in the U.K.  Our investments supporting business at Lloyd's and NIIC are subject to the direction and control of the Boards of Directors and the Investment Committees of NUAL and NIIC, 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 various 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 stockholders. 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 stockholders. 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, 2017, each of our domestic insurance companies' total adjusted capital was significantly in excess of the authorized control level risk-based capital.

The NAIC has developed a set of financial relationships or tests known as the Insurance Regulatory Information System ("IRIS") 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 authorities. Generally, regulators will begin to investigate or monitor an insurance company if its IRIS 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 insurance it can issue. Based on our most recent statutory filings (calculated as of December 31, 2017), none of our U.S. insurance companies are subject to regulatory scrutiny based on these ratios.

10

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. This year we filed our ORSA report with the New York State Department of Financial Services on December 1, 2017, and we believe we have a robust Enterprise Risk Management framework in place that is effective in meeting the ORSA requirements.

The U.S. state insurance regulations also regulate the payment of dividends and other distributions by insurance companies to their stockholders. 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. While New York only requires approval of extraordinary dividends, 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, the Department of Financial Services 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 product offerings.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act makes broad and complex changes to the U.S. tax code and contains various provisions that will affect corporations, including a reduction of the U.S. federal corporate tax rate from a 35% maximum rate to a 21% flat rate, changes to net operating loss carryback and carryforward rules and changes to U.S. taxation of foreign profits. See the risk factor Changes in tax laws could increase our corporate taxes, reduce our deferred tax assets or affect pricing of some of our products in Item 1A – Risk Factors for additional information regarding the impact of the Tax Act.

United Kingdom

Our U.K. branch, NIIC and the Syndicate are all subject to regulation by the PRA (for prudential issues) and the FCA (for conduct of business issues). 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 those 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 required amount of capital to be held by a corporate member of Lloyd's in support of its business ("Funds at Lloyd's") 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 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 U.K. branch, NIIC and the Syndicate are required to meet the requirements of the European Union's ("the E.U.") financial services regulatory regime known as "Solvency II," which is built on a risk-based approach to setting capital requirements for insurers. Solvency II established a revised set of the E.U.-wide capital requirements and risk management standards, which became effective on January 1, 2016, with certain aspects of Solvency II concerning compliance with supervisory reporting and disclosure requirements effective in 2017.  Over the last few years, our Company has undertaken a significant amount of work to ensure that it meets the requirements of Solvency II for all of its affected entities, and will continue its efforts to ensure that it meets such requirements.

11

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:

Annual Reports on Form 10-K

Quarterly Reports on Form 10-Q

Current Reports on Form 8-K

Proxy Statements on Schedule 14A, as well as other filings with 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.

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, as well as reinsurance.  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.

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.

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 Company would likely experience more robust competition from larger competitors.  Furthermore, insureds tend to favor large,

12

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 to transact business would be materially and adversely affected and our results of operations would be adversely affected.

Our Company insures risk around the world and deterioration in the U.S. and global financial markets could have a material adverse effect on our results of operations and financial condition.

In the past years, the U.S. and global financial markets experienced severe disruption and significant volatility. Although our Company continues to monitor market conditions, we cannot predict future market conditions or their impact on our operations, investment portfolio, or stock price. 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 the financial condition of our Company. Volatile economic conditions also could have 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 our insureds, agents, claimants, reinsurers, vendors and competitors. The U.S., European and other foreign governments, including their central banks, may take or have taken measures in response to a variety of economic environments including but not limited to financial market volatility, slow economic growth, or actual or expected inflation, which may impact certain insurance carriers. The U.S., European and other foreign governments may continue to implement monetary and fiscal policies that could affect the insurance industry and its competitive landscape.

The withdrawal of the U.K. from the E.U. could have a material adverse effect on our business, business opportunities, results of operations, financial condition and cash flows.  

Following the referendum vote that took place in June 2016 in favor of leaving the European Union and the U.K. government triggering the relevant withdrawal provision of the E.U. Treaty, formal negotiations on the terms of the U.K.'s withdrawal from the E.U. have commenced. We have significant international operations in the U.K., as well as offices in the E.U. Our operations in the U.K. are able to conduct business throughout the E.U. as a result of the U.K.'s membership in the E.U.  Continuing access to the E.U. market will depend on general trade and services agreements made by the U.K. with the E.U. either during a transitional period or permanently or on specific arrangements made by our U.K. entities and Lloyd's itself to retain access to the E.U. market. The consequence of making such specific arrangements may include an increase in our cost of doing business.  In addition, the overall U.K. withdrawal could, among other outcomes, cause significant volatility in global stock markets, currency exchange rate fluctuations and asset valuations, and disrupt the U.K. market and the E.U. markets in which we operate, by increasing restrictions on the trade and free movement of goods, services and people between the U.K. and the E.U.  The withdrawal could also lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate. The consequences of a withdrawal in the long term are unknown and not quantifiable at this time. However, given the lack of comparable precedent, any of these effects of a withdrawal, among others, could materially adversely affect our business, business opportunities, results of operations, financial condition and cash flows.

Our Company's efforts to expand in targeted international markets, 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. 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:

Political and economic instability;

Burdens of complying with additional foreign laws and regulations;

Difficulties in staffing and managing foreign operations ;

Differing employment practices and laws and labor disruptions;

The imposition of government controls, including currency restrictions;

13

A legal system subject to undue influence or corruption; and

A business culture in which illegal sales practices may be prevalent.

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 may invest in new insurance ventures or acquisitions that may not be successful and presents risks not originally contemplated.

Our Company has invested, and in the future may invest, in new insurance ventures or acquisitions. We cannot assure you that we will be able to identify suitable insurance ventures or acquisition targets, that such transactions will be financed and completed on acceptable terms or that our future insurance ventures or acquisitions will be successful. Even if we do find suitable targets, such endeavors may involve significant risks and uncertainties, including:

Receipt of necessary consents, clearances and approvals to complete any new venture or acquisition;

Distraction of management from current operations and objectives;

Inability to realize the full extent of the benefits or cost savings that we expect to realize as a result of the completion of a new venture or acquisition;

Failure to properly conform and integrate financial reporting, standards, controls, procedures and policies, business cultures and compensation structures;

Greater than expected liabilities and expenses;

Failure to motivate, recruit and retain key employees; and

Unidentified issues not discovered in our Company's due diligence.

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 Int'l P&C operating segment, our U.S. Property insurance division within our U.S. P&C operating segment, and our GlobalRe reporting segment.  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 severe disasters such as an oil rig explosion.  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.  However, we utilize third party modeling tools to assist us in analyzing the potential occurrence and severity of losses from certain catastrophic events. The loss estimates developed by these tools may contain flaws or faulty assumptions or assume various conditions and probability scenarios which may not be known to us or are not within our control.  As a result, the models that we use to manage our exposure to catastrophes may not accurately predict future losses, and we could incur losses that exceed those estimates or are not covered by our reinsurance program, which could have a material adverse effect on the financial condition of our Company and reduce our profitability.

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.

14

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.

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 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.

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, impairment of invested assets, and the valuation of invested assets.

15

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.

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 stockholder 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 at 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.

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. While our principal source of liquidity is cash from our operations, if there are insufficient funds from operations to meet our liquidity needs, we may rely on selling instruments in our investment portfolio. The investment portfolio consists largely of Fixed Maturities and is an additional source of liquidity for our Company.  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.  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 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 of our invested assets associated with changes in interest rates.  Our investment portfolio contains interest rate sensitive instruments, such as Fixed Maturities and certain preferred stock classified as equity for financial reporting purposes, 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 changes in the timing of expected cash flows. 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.  In periods of rising interest rates, the likelihood of mortgage prepayment decreases and Mortgage-Backed securities are prepaid at a slower rate, limiting our Company's ability to capitalize on the higher interest rates because its investments remain invested in Mortgage-Backed securities for a longer period of time.

The Fixed Maturities portfolio is invested in high quality, investment-grade securities.  Our Company has limits on the amount of below investment-grade, high yield fixed income securities that it can hold in its investment portfolio. These securities may pay a higher rate of interest, and also may 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

16

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.

Our Company invests a portion of our portfolio in Common Stock. 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 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 currencies other than the U.S. dollar.  The principal currencies creating foreign currency exchange risk for our portfolio are the GBP and CAD. 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 stockholders 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, NSIC and NIIC 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, the predecessor to the PRA and the FCA. 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

17

those liabilities. 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 our Company to satisfy cash calls to meet claims payment obligations and maintain minimum trust fund amounts.

Any premium levy or cash call would increase the expenses of 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.

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 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.

In addition, as a result of the 2016 U.S. presidential election, a number of new legislative and fiscal initiatives have already been introduced, such as the Tax Act, and may be introduced in the future. Any of those initiatives could cause changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, development and investment in the countries where our Company currently operates, which could adversely affect our business and our financial conditions or results of operations.

Our subsidiaries are subject to the laws and regulations of each country in which they operate, with some jurisdictions imposing comprehensive regulatory requirements and others imposing fewer requirements. Our business in the U.K. is also heavily regulated and must comply with the requirements of the PRA, FCA, Lloyd's and those imposed upon the Lloyd's market by overseas regulators where the Syndicate conducts business. Refer to Business – Regulation – United Kingdom included herein for a discussion of regulations in that jurisdiction.  

Changes in tax laws could increase our corporate taxes, reduce our deferred tax assets or affect pricing of some of our products.

We are subject to U.S. federal and various state and foreign jurisdiction taxes. Our provision for income taxes, our recorded tax liabilities and our net deferred tax assets, including any valuation allowances, are recorded based on estimates. These estimates require us to make significant judgments regarding a number of factors, including, among others, the applicability of various federal and state laws, our interpretation of tax laws and the interpretations given to those tax laws by taxing authorities and courts, the timing of future

18

income and deductions, and our expected levels and sources of future taxable income. Additionally, from time to time there are changes to tax laws and interpretations of tax laws that could cause us to revise our estimates of the amount of tax benefits or deductions expected to be available to us in future periods. In such circumstances, any revisions to our prior estimates would be reflected in the period changed and could have a material and adverse effect on our effective tax rate, financial position, results of operations and cash flows.

In addition, the Tax Act includes a number of provisions, including the lowering of the U.S. corporate tax rate from 35 percent to 21 percent, effective January 1, 2018. The Tax Act has impacted and is expected to continue to impact our Company's operating results, cash flows, and financial condition.  The effect of the international provisions of the Tax Act, which generally establishes a territorial-style system for taxing foreign-source income of domestic multinational corporations, is uncertain. As a result of the Tax Act, our Company has reflected in our financial statements the estimated impact for one-time adjustments for the re-measurement of deferred tax assets (liabilities), future discounting for loss reserves and the deemed repatriation tax on unremitted foreign earnings and profits. In accordance with the SEC's Staff Accounting Bulletin No. 118 ("SAB 118"), provisional amounts for certain income tax effects of the Tax Act were estimated.  Additional tax effects or adjustments may be needed in subsequent periods upon obtaining, preparing, or analyzing additional information about facts and circumstances that existed as of the date the Tax Act was signed into law. These additional tax effects or adjustments could materially impact our results of operations and financial condition.

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 U.K.).

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 and became effective on January 1, 2016.  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.  Over the last few years, our Company has undertaken a significant amount of work to ensure that it meets the requirements for all of the affected entities. There is a risk that if the Solvency II requirements are not met and maintained on an on-going basis, the regulator may increase the capital requirements for our subsidiaries and branch operations that are subject to Solvency II. These new regulations have the potential to adversely affect their profitability and restrict their ability to carry on business as currently conducted. 

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 that are 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.

Compliance 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.

All of our business written 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 it relates to international insurance and reinsurance companies, has become subject to increased scrutiny in many jurisdictions, including the United States, various states within the U.S., the E.U., and various countries within the E.U., and the U.K.  

Increased regulatory focus on our Company 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

19

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 and NIIC, 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.

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

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:

Actual or anticipated variations in the 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;

A downgrade in the credit ratings;

The addition or departure of key personnel; and

Announcements by our Company 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 a recession or interest rate or currency rate fluctuations, could adversely affect the market price of our Parent Company common stock.

The payment of dividends is at the discretion of our Board of Directors, and the reduction or elimination of dividends could cause a decline in the price of our common stock.

We are not obligated to pay dividends on our Common Stock. Any determinations by the Board of Directors to declare and pay cash dividends on our Company's Common Stock will be based primarily upon our Company's financial condition, results of operations, business requirements, regulatory and legal constraints and any other factors the Board of Directors deems relevant. Several of these factors will be subject to general economic, financial, competitive, legislative and regulatory factors beyond our Company's control. Any reduction or elimination of dividends could cause our Company's stock price to decline.

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.

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,

20

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.

Our Company could be adversely affected if we do not maintain effective operating procedures and controls.

Our Company engages in a large number of complex insurance and investment activities on a daily basis. We continually work to enhance our operating procedures and internal controls to effectively support our business and ensure that we are able to assess and monitor operational risks that can result from, among other things, errors, failure to document transactions properly or to obtain proper internal authorization, failure to comply with regulatory requirements, information technology failures, external events or fraud. However, a control system , no matter how well designed and operated, has inherent limitations and can provide only reasonable assurance that the control system's objectives will be met. If our operating procedures and controls are not effective or if we experience difficulties in their implementation, it could lead to financial loss, unanticipated risk exposure (including underwriting, credit and investment risk) or damage to our Company's reputation.

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

Our Company relies heavily on the successful, uninterrupted functioning of our information technology ("IT"), telecommunications and other business 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. Although we have an information technology continuity plan in place to ensure the continuation of essential business operations in the event of a failure of such systems due to security breaches, network failures, or sustained or repeated loss of electricity and while we continue to test and assess our continuity plan, there is no guarantee that essential business operations could be performed upon the occurrence of any such event. A failure of our IT, telecommunication or other business 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 functions. As a result, our Company could experience financial losses and the ability of our Company to conduct business might be adversely affected.

Our Company is dependent upon the security of our information technology systems as well as those of our third party service providers, 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. In addition, we outsource certain business functions to third parties, which may expose us to enhanced risk related to data security. While, to date, our Company has not experienced, nor has any third party service provider notified us of, a material breach of cybersecurity, any administrative and technical controls and other preventive actions we take or require such service providers to take to reduce the risk of cyber-incidents and protect such systems may be insufficient to prevent physical and electronic break-ins, cyber-attacks or other security breaches. 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.

Our business operations may be affected by natural and man-made catastrophes, disasters, severe events, pandemics and crises which could result in an impairment of our ability to conduct business effectively and have a material financial impact on our financial condition.

Severe events could disrupt business operations, including depleting our Company's workforce.  Our Company has a business continuity plan in place to mitigate the impacts from disruptive events and to be ready to restore operations if such an event were to occur. Our business continuity plan is designed to meet the needs of our policyholders, shareholders, business partners, and other constituents, and to assist other insurers in meeting their policyholder needs if requested should such an event occur.  While we continue to test and assess our business continuity plan to ensure it addresses multiple business interruption events, there is no guarantee that essential business operations could be performed upon the occurrence of any such an event. As a result, our Company could experience financial losses and the ability of our Company to conduct business might be adversely affected.

21

Our Company could be materially adversely affected if third parties we utilize to support our business do not comply with underwriting and claims guidelines, procedures and protocols provided by us or expose us to additional underwriting and credit risk.

Our Company utilizes third parties, including brokers, managing general agents and third party administrators, to produce or service a portion of our business. In these arrangements, we may authorize these third parties to write business, settle claims and/or collect premium on our behalf, subject to underwriting guidelines, claims handling procedures, and other contractual restrictions and obligations provided by us. Although we monitor these arrangements on an ongoing basis, these third parties could contravene such guidelines, procedures, restrictions or obligations. As a result, our Company could be exposed to potential liabilities related to policies that exceed or expand on our underwriting intention, claims practices that do not comply with our prescribed policies and procedures or operational deficiencies or misconduct with respect to the collection and handling of premium. In addition, our use of independent agents and brokers exposes our Company to additional credit risk. When policyholders purchase insurance policies from us through these agents and brokers, the premiums are often first received by them, who then pay the premiums to our Company. In many jurisdictions, the premiums are deemed paid to our Company whether or not we receive them. Although we perform due diligence on these third parties prior to our engagement of them and have implemented oversight protocols to monitor these third party arrangements, we cannot guarantee that these control mechanisms will be sufficient to mitigate all of these exposures, and consequently, our results of operations and financial condition could be materially adversely affected.

ITEM 1B. UNRESOLVED STAFF COMMENTS

We have no outstanding, unresolved comments that were received from the SEC staff 180 days or more before the end of our fiscal year at December 31, 2017.

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.  Additionally, we operate in various locations with non-cancelable operating leases including:

U.S.

Alpharetta, GA,

Boston, MA,

Chicago, IL,

Coral Gables, FL,

Danbury, CT,

Ellicott City, MD,

Farmington, CT,

Houston, TX,

Irvine, CA,

Iselin, NJ,

Jericho, NY (1) ,

Los Angeles, CA,

Minneapolis, MN,

New York City, NY,

Philadelphia, PA,

Pittsburgh, PA,

San Francisco, CA,

Schaumburg, IL,

22

Seattle, WA,

Stamford, CT and

Tampa, FL.

International

Antwerp, Belgium,

Hong Kong,

London, England,

Madrid, Spain,

Milan, Italy,

Paris, France,

Rotterdam, The Netherlands and

Zurich, Switzerland.

(1) - Office lease is in force at December 31, 2017, however, service operations will not commence until 2018.

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.

23

The following table reflects the high, low and closing trade prices, as well as dividends declared each quarter for the four quarters of 2017 and 2016 with retroactive effect of the stock split:

2017

2016

High

Low

Close

Dividends Declared

High

Low

Close

Dividends Declared

First Quarter

$

58.73

$

52.27

$

54.12

$

0.045

$

43.81

$

39.78

$

41.94

$

-

Second Quarter

54.88

50.18

54.78

0.06

47.46

40.54

45.99

0.045

Third Quarter

58.78

53.49

58.28

0.06

48.82

43.99

48.46

0.045

Fourth Quarter

60.13

46.35

48.70

0.06

59.10

45.83

58.88

0.045

The declaration and amount of any future dividend will be at the discretion of the Board of Directors, and will depend upon many factors, including financial condition, results of operations, business requirements, regulatory and legal constraints and any other factors the Board of Directors deems relevant.

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.

Information provided to our Company by the transfer agent and proxy solicitor indicates that there are approximately 95 holders of record as of January 30, 2018 and 6,607 beneficial holders of our Common Stock, as of February 2, 2018.

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, 2012 (the "Base Period") and reinvestment of dividends to the extent declared.  Cumulative returns for each year subsequent to 2012 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:

24

Cumulative Indexed Returns

Years Ended December 31,

Base Period

Company / Index

2012

2013

2014

2015

2016

2017

The Navigators Group, Inc.

100.00

123.67

143.61

167.99

231.09

192.04

S&P 500 Index

100.00

132.04

149.89

151.94

169.82

206.49

Insurance Index

100.00

138.13

159.42

174.29

201.30

245.90

Recent Sales of Unregistered Securities

None

Use of Proceeds from Public Offering of Debt Securities

None

Purchases of Equity Securities by the Issuer

None

25

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.

Years Ended December 31,

in thousands, except per share amounts

2017

2016

2015

2014

2013

Operating information:

Gross Written Premiums

$

1,713,265

$

1,568,911

$

1,453,502

$

1,432,353

$

1,370,517

Revenues:

Net Earned Premiums

$

1,186,420

$

1,100,345

$

984,087

$

935,895

$

841,939

Net Investment Income

89,293

79,451

68,718

64,168

56,251

Net Other-Than-Temporary Impairment Losses

   Recognized in Earnings

(2,064

)

(150

)

(1,698

)

-

(2,393

)

Net Realized Gains (Losses)

45,073

9,186

8,373

12,812

22,939

Other Income (Loss)

(4,243

)

8,701

(491

)

10,656

(1,172

)

Total Revenues

$

1,314,479

$

1,197,533

$

1,058,989

$

1,023,531

$

917,564

Expenses:

Net Losses and Loss Adjustment Expenses

$

806,265

$

665,448

$

572,598

$

545,229

$

518,961

Commission Expenses

184,731

165,045

129,977

125,528

113,494

Other Operating Expenses

233,230

234,096

223,516

196,825

164,434

Call Premium on Senior Notes

-

-

-

-

17,895

Interest Expense

15,447

15,435

15,424

15,413

10,507

Total Expenses

$

1,239,673

$

1,080,024

$

941,515

$

882,995

$

825,291

Income Before Income Taxes

74,806

117,509

117,474

140,536

92,273

Income Tax Expense

34,312

34,783

36,417

45,207

28,807

Net Income

$

40,494

$

82,726

$

81,057

$

95,329

$

63,466

Net Income per Share:

Basic

$

1.38

$

2.85

$

2.82

$

3.34

$

2.25

Diluted

$

1.35

$

2.75

$

2.73

$

3.25

$

2.21

Cash Dividends Declared per Common Share

$

0.225

$

0.135

$

-

$

-

$

-

Average Common Shares Outstanding:

Basic

29,441

29,074

28,785

28,520

28,268

Diluted

30,071

30,032

29,651

29,293

28,691

Combined Loss and Expense Ratio (1) :

Loss Ratio

68.0

%

60.5

%

58.2

%

58.3

%

61.6

%

Expense Ratio

35.2

%

36.2

%

35.9

%

34.3

%

33.2

%

Total

103.2

%

96.7

%

94.1

%

92.6

%

94.8

%

Balance Sheet information:

Total Investments

$

3,421,883

$

3,130,523

$

2,937,226

$

2,729,735

$

2,488,077

Total Assets

5,224,622

4,814,037

4,584,012

4,476,185

4,169,452

Gross Losses and LAE Reserves

2,515,145

2,289,727

2,202,644

2,159,634

2,045,071

Net Losses and LAE Reserves

1,705,380

1,510,451

1,393,126

1,308,136

1,222,633

Senior Notes

263,885

263,728

263,580

263,440

263,308

Stockholders' Equity

1,225,965

1,178,188

1,096,148

1,027,224

902,212

Common Shares Outstanding

29,507

29,124

28,862

28,563

28,397

Book Value per Share (2)

$

41.55

$

40.45

$

37.98

$

35.96

$

31.77

(1) - Calculated based on earned premiums.

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

26

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 presentation of Net Income (Loss), Book Value, Book Value per Share, Net Losses and LAE Reserves and Combined Ratio, we show certain non-GAAP financial measures as defined in Regulation G that we believe are valuable in managing our business and drawing comparisons to our peers. These non-GAAP measures are Net Operating Earnings, Underwriting Profit (Loss), and Adjusted Net Losses and LAE Ratio.

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:

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 period being presented.

Net Loss and LAE Reserves

Reserve for Losses and LAE, 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 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.

Combined Ratio

The Combined Ratio is a common insurance industry measure of profitability for any underwriting operation and is calculated in three components. First, the Loss Ratio is represented by Net Losses and LAE divided by Net Earned Premiums. The second component is the Commission Expense Ratio, which is Commission Expenses divided by Net Earned Premiums. The third component is the Other Operating Expense Ratio, which reflects the sum of Other Operating Expenses and Other Underwriting Income (Expense), 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 Ratio, Commission Expense and Other Operating Expense Ratio is the Combined Ratio. The difference between the Combined Ratio and 100% reflects the rate of Underwriting Profit (Loss). For example, a Combined Ratio of 85% implies that for every $100 of premium we earn, we record $15 of Underwriting Profit.

Net Operating Earnings

Net Operating Earnings is a "non-GAAP financial measure" as defined in Regulation G. Net Operating Earnings is comprised of Net Income excluding After-Tax Net Realized Gains (Losses), After-Tax Other than Temporary Impairment ("OTTI") Losses Recognized in Earnings, After-Tax Foreign Exchange Gains (Losses), and the impact of the Tax Act at enactment recognized in our Consolidated Statements of Income. We believe that showing Net Income exclusive of Realized Gains and Losses, Net OTTI Losses Recognized in Earnings, Foreign Exchange Gains and Losses, and the impact of the Tax Act at enactment reflects the underlying fundamentals of our business.

A reconciliation of Net Income (the nearest GAAP financial measure) to Net Operating Earnings can be found in Item 7, Results of Operations . We believe this presentation enhances the understanding of our results of operations by highlighting the underlying profitability of our business and enables investors and other users of our financial information to analyze underlying business performance in a manner similar to management. We also believe this measure follows industry practice and, therefore facilitates comparison of our performance with our peer group.

Underwriting Profit (Loss)

Underwriting Profit (Loss) represents one measure of the pre-tax profitability of our insurance operations and is derived by subtracting the following from Net Earned Premiums: Net Losses and LAE, Commission Expenses, Other Operating Expenses and Other Underwriting Income (Expense). This information is available in total and by segment 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,  OTTI, Net Realized Gains (Losses) on Investments, Interest Expense and Other Income (Loss). While this measure is presented in the footnotes to the Consolidated Financial Statements, it is considered a "non-GAAP financial measure" as defined in Regulation G when presented elsewhere on a consolidated basis.

27

A reconciliation of total Underwriting Profit (Loss) and its components to Income Before Income Taxes (the nearest GAAP financial measure) can be found in the Notes to the Consolidated Financial Statements and in Item 7, Segment Results . We believe that presentation of Underwriting Profit (Loss) provides investors and other users of our financial information with an enhanced understanding of our results of operations, by highlighting the underlying pre-tax profitability of our underwriting activities.

Adjusted Net Losses and LAE Ratio

The Net Losses and LAE ratio is a major component of our Underwriting Profit (Loss). In order to better understand the impact of this ratio on Underwriting Profit (Loss), we present the impact of reinsurance reinstatement premiums ("RRPs"), development on current AY results and development on prior AY results to arrive at our Adjusted Net Losses and LAE Ratio.

A reconciliation of the Net Losses and LAE Ratio (the nearest GAAP financial measure) to the Adjusted Net Losses and LAE ratio can be found in Item 7, Results of Operations and Segment Results . We believe that presentation of the Adjusted Net Losses and LAE Ratio allows investors and other users of our financial information to more easily analyze our Company's results of operations and understand our underlying business performance.

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.

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 term "Parent Company" is 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. We also offer P&C insurance, which consists primarily of 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, as well as assumed reinsurance products.

Effective January 1, 2017, we sold our underwriting agency operations in Sweden and Denmark. The transaction represented a 100% disposition of our Sweden and Denmark corporations, NUAL AB and Navigators A/S, respectively. This transaction did not materially impact our results of operation, financial condition or liquidity.

Additionally, our new U.K. based insurance company, NIIC, which is a wholly-owned direct subsidiary of our Parent Company, began writing business in the first quarter of 2017.

Financial Highlights - Selected Indicators

Years Ended December 31,

amounts in thousands, except per share amounts

2017

2016

2015

Results of Operations Data:

Net Earned Premiums

$

1,186,420

$

1,100,345

$

984,087

Net Investment Income

89,293

79,451

68,718

Underwriting Profit (Loss)

(37,738

)

35,892

58,118

Net Income

40,494

82,726

81,057

Net Income per Diluted Share

$

1.35

$

2.75

$

2.73

Net Cash provided by Operating Activities

$

265,343

$

229,425

$

233,646

As of  December 31,

amounts in thousands, except per share amounts

2017

2016

Balance Sheet Data:

Total Assets

$

5,224,622

$

4,814,037

Total Shareholders' Equity

1,225,965

1,178,188

Book Value per Share

$

41.55

$

40.45

28

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 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.

We report our results of operations consistent with the manner in which our Chief Operating Decision Maker reviews the business to assess performance by our four reportable segments: U.S. Insurance, Int'l Insurance, GlobalRe and Corporate.  

Results of Operations

The following table presents a summary of our consolidated financial results for the years ended December 31, 2017, 2016 and 2015:

Years Ended December 31,

Percentage Change

2017 vs.

2016 vs.

amounts in thousands, except per share amounts

2017

2016

2015

2016

2015

Gross Written Premiums

$

1,713,265

$

1,568,911

$

1,453,502

9.2

%

7.9

%

Ceded Written Premiums

(441,935

)

(382,687

)

(409,642

)

15.5

%

(6.6

%)

Net Written Premiums

1,271,330

1,186,224

1,043,860

7.2

%

13.6

%

Net Earned Premiums

$

1,186,420

$

1,100,345

$

984,087

7.8

%

11.8

%

Net Losses and LAE

(806,265

)

(665,448

)

(572,598

)

21.2

%

16.2

%

Commission Expenses

(184,731

)

(165,045

)

(129,977

)

11.9

%

27.0

%

Other Operating Expenses

(233,230

)

(234,096

)

(223,516

)

(0.4

%)

4.7

%

Other Underwriting Income

68

136

122

(50.0

%)

11.2

%

Underwriting Profit (Loss)

$

(37,738

)

$

35,892

$

58,118

NM

(38.2

%)

Net Investment Income

89,293

79,451

68,718

12.4

%

15.6

%

Net Realized Gains

43,009

9,036

6,675

NM

35.4

%

Interest Expense

(15,447

)

(15,435

)

(15,424

)

0.1

%

0.1

%

Other Income (Loss)

(4,311

)

8,565

(613

)

NM

NM

Income Before Income Taxes

$

74,806

$

117,509

$

117,474

(36.3

%)

0.0

%

Income Tax Expense

(34,312

)

(34,783

)

(36,417

)

(1.4

%)

(4.5

%)

Net Income

$

40,494

$

82,726

$

81,057

(51.1

%)

2.1

%

Net Income  per Basic Share

$

1.38

$

2.85

$

2.82

Net Income per Diluted Share

$

1.35

$

2.75

$

2.73

Effective Tax Rate

45.9

%

29.6

%

31.0

%

Losses and LAE Ratio

68.0

%

60.5

%

58.2

%

Commission Expense Ratio

15.6

%

15.0

%

13.2

%

Other Operating Expense Ratio (1)

19.6

%

21.2

%

22.7

%

Combined Ratio

103.2

%

96.7

%

94.1

%

(1) - Includes Other Operating Expenses and Other Underwriting Income (Expense).

NM - Percentage change not meaningful.

29

The following table calculates our Net Operating Earnings for the years ended December 31, 2017, 2016 and 2015:

Years Ended December 31,

2017

2016

2015

Percentage Change

amounts in thousands, except per share amounts

Pre-Tax

Tax (1)

After-Tax

Pre-Tax

Tax (1)

After-Tax

Pre-Tax

Tax (1)

After-Tax

2017 vs. 2016

2016 vs. 2015

Net Income

$

74,806

$

(34,312

)

$

40,494

$

117,509

$

(34,783

)

$

82,726

$

117,474

$

(36,417

)

$

81,057

(51.1

%)

2.1

%

Adjustments to Net Income:

Realized Losses (Gains)

(43,009

)

15,054

(27,955

)

(9,036

)

3,163

(5,873

)

(6,675

)

2,336

(4,339

)

NM

35.4

%

FX Losses (Gains)

4,213

(1,474

)

2,739

(8,626

)

3,019

(5,607

)

622

(218

)

404

NM

NM

Impact of the Tax Act at Enactment (2)

-

19,694

19,694

-

-

-

-

-

-

NM

NM

Net Operating Earnings

$

36,010

$

(1,038

)

$

34,972

$

99,847

$

(28,601

)

$

71,246

$

111,421

$

(34,299

)

$

77,122

(50.9

%)

(7.6

%)

Average Common Shares Outstanding:

Basic

29,441

29,074

28,785

Diluted

30,071

30,032

29,651

Net Operating Earnings per Common Share:

Basic

$

1.19

$

2.45

$

2.68

Diluted

$

1.16

$

2.37

$

2.60

(1) - Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of any other relevant factors.

(2) - As a result of the enactment of the Tax Act, we revalued our deferred tax assets as of December 31, 2017 resulting in a reduction in our deferred tax assets of $17.1 million and we also anticipate incurring a one-time payment of approximately $2.6 million due to tax on previously untaxed accumulated and current earnings and profits on certain foreign subsidiaries.

NM - Percentage change not meaningful.

Underwriting Profit (Loss)

2017 versus 2016

Underwriting Loss was $37.7 million for the year ended December 31, 2017, which decreased $73.6 million from the same period in 2016. This was driven by $84.8 million of catastrophe events ("CAT"), which includes $67.5 million due to Hurricanes Irma, Maria and Harvey, $34.3 million of Net Prior Accident Year ("AY") Reserve Strengthening, and $31.9 million of Additional Net Current AY Reserve Development, as compared to $26.8 million of CAT events, $35.7 million of Additional Net Current AY Reserve Development, and $28.5 million of Net Prior AY Reserve Release, for the same period in 2016.  This was partially offset by increased production across all of our reporting segments, and net reinsurance reinstatement premium ("RRP") benefit of $2.4 million.

2016 versus 2015

Underwriting profit was $35.9 million for the year ended December 31, 2016, which decreased by $22.2 million from the same period in 2015, driven by $26.8 million of CAT events plus related RRPs of $1.8 million, $35.7 million of Additional Net Current AY Reserve Development due to large loss activity in our Int'l Insurance segment, and an increase in Other Operating Expense as we continued to invest in our European expansion and GlobalRe reporting segment.  These items were partially offset by $28.5 million of Net Prior AY Reserve Release due to favorable loss emergence and increased production.

For additional information on the drivers of Underwriting profit see the U.S. Insurance , Int'l Insurance and GlobalRe reporting segment results sections included herein.

30

A major component of our Underwriting Profit (Loss) is due to Net Losses and LAE.  The following table presents the impact of Net RRPs and Reserve Releases or (Development / Strengthening) on our Net Losses and LAE Ratio for the years ended December 31, 2017, 2016 and 2015 :

Years Ended December 31,

2017

2016

2015

Reported Net Losses and LAE Ratio

68.0%

60.5%

58.2%

Net RRPs

0.1%

(0.1%)

(0.0%)

Additional Net Current AY Release/(Development)

(9.9%)

(5.7%)

(4.9%)

Net Prior AY Reserve Release/(Strengthening)

(2.9%)

2.6%

6.6%

Adjusted Net Losses and LAE Ratio

55.3%

57.3%

59.9%

2017 versus 2016

For the year ended December 31, 2017, our Reported Net Losses and LAE Ratio increased 7.5 points as compared to the same period in 2016 primarily driven by:

$116.8 million of Additional Net Current AY Reserve Development for the year ended December 31, 2017 primarily attributable to CAT losses of $67.5 million from Hurricanes Harvey, Irma and Maria, $4.2 million from Typhoon Hato, $3.5 million from the Puebla, Mexico Earthquake, and $9.6 million of other CAT events.  In addition, we incurred $31.9 million of additional weather-related losses and large loss events. This compares to $62.5 million of Additional Net Current AY Reserve Development for the same period in 2016, which included CAT losses related to the Alberta Wildfires ($11.7 million), Hurricane Matthew ($7.1 million), Ecuador Earthquake ($3.8 million) and Taiwan Earthquake ($3.3 million), as well as large losses in our Int'l Insurance Marine and P&C operating segments.

$34.3 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2017 primarily from our U.S. Professional Liability operating segment, our Int'l Insurance reporting segment and the settlement of a large Accident and Health ("A&H") claim in our GlobalRe reporting segment. This compares to $28.5 million of Net Prior AY Reserve Releases, primarily in our Int'l Insurance reporting segment due to favorable loss emergence for the same period in 2016.

Partially offsetting the impact of the above items on the Reported Net Losses and LAE Ratio are:

Changes in the mix of business and favorable performance within our U.S. P&C operating segment drove the 2.0 point decrease in Adjusted Net Loss and LAE Ratio.

A net $2.4 million RRP benefit consisting of $7.5 million assumed, partially offset by $5.1 million ceded, compared to a net $2.0 million expense for the same period in 2016.

2016 versus 2015

For the year ended December 31, 2016, our Reported Net Losses and LAE Ratio increased 2.3 points as compared to the same period in 2015 primarily driven by:

$62.5 million of Additional Net Current AY Reserve Development for the year ended December 31, 2016 of which $26.8 million was due to CAT losses, including $11.7 million related to the Alberta Wildfires, $7.1 million due to Hurricane Matthew, $3.8 million due to the Ecuador earthquake and $3.3 million due to the Taiwan earthquake. Additionally, we incurred $35.7 million of non-CAT net current AY development, mostly due to large losses in our Int'l Insurance Marine and Int'l Insurance P&C operating segments. This compares to $48.5 million of Additional Net Current AY Reserve Development for the same period in 2015 primarily related to large loss activity.

$28.5 million of Net Prior AY Reserve Releases for the year ended December 31, 2016, due to favorable loss emergence across all reporting segments. This compares to $64.7 million of Net Prior AY Reserve Releases for the same period in 2015, due to favorable loss emergence across all reporting segments.

Partially offsetting the impact of the above items on the Reported Net Losses and LAE Ratio are:

Changes in the mix of business drove the 2.6 point decrease in Adjusted Net Loss and LAE Ratio.

31

Net Investment Income

Our Net Investment Income was derived from the following sources:

Years Ended December 31,

Percentage Change

2017 vs.

2016 vs.

amounts in thousands

2017

2016

2015

2016

2015

Fixed Maturities

$

76,784

$

67,772

$

61,572

13.3

%

10.1

%

Equity Securities

15,108

14,271

9,813

5.9

%

45.4

%

Short-Term Investments

1,064

727

683

46.4

%

6.4

%

Total Investment Income

$

92,956

$

82,770

$

72,068

12.3

%

14.8

%

Investment Expenses

(3,663

)

(3,319

)

(3,350

)

10.4

%

(0.9

%)

Net Investment Income

$

89,293

$

79,451

$

68,718

12.4

%

15.6

%

The increase in total Net Investment Income for all years presented as compared to the prior years was primarily due to growth of invested assets coupled with an increase in pretax yields, which was driven in part by an increased allocation to higher yielding preferred stocks. The annualized pre-tax yields, excluding Net Realized Gains and Losses and OTTI losses recognized in earnings, on a consolidated basis were 2.7%, 2.6% and 2.4%, respectively, for the years ended December 31, 2017, 2016 and 2015.

As part of our overall investment strategy, we seek to build a tax efficient investment portfolio by maintaining an allocation to tax exempt municipal bonds. The tax-exempt portion of our investment portfolio was approximately 22.4% and 17.1% of the Fixed Maturities investment portfolio as of December 31, 2017 and 2016, respectively. Additionally, substantially all of our Equity Securities portfolio is invested in tax efficient securities which qualify for the dividends received deduction.  The tax equivalent yields for the years ended December 31, 2017, 2016 and 2015 on a consolidated basis were 3.1%, 2.9% and 2.7%, respectively.

OTTI Losses Recognized in Earnings

Our Company had four credit related OTTI losses totaling $2.1 million in our Equity Securities portfolio during the year ended December 31, 2017.  Our Company had one credit related OTTI loss of $0.2 million from our Fixed Maturities portfolio during the year ended December 31, 2016.  Our Company had three credit related OTTI losses totaling $1.7 million from our Equity Securities portfolio during the year ended December 31, 2015.

Net Realized Gains and Losses

Net Realized Gains and Losses, excluding OTTI Losses Recognized in Earnings, for the periods indicated were as follows:

Years Ended December 31,

Percentage Change

2017 vs.

2016 vs.

amounts in thousands

2017

2016

2015

2016

2015

Fixed Maturities:

Gains

$

4,041

$

5,681

$

4,756

(28.9

%)

19.4

%

Losses

(3,249

)

(4,271

)

(5,926

)

(23.9

%)

(27.9

%)

Fixed Maturities, Net

$

792

$

1,410

$

(1,170

)

(43.8

%)

NM

Short-Term Investments:

Gains

$

1,631

$

890

$

130

83.3

%

NM

Losses

(612

)

(1,552

)

(383

)

(60.6

%)

NM

Short-Term Investments, Net

$

1,019

$

(662

)

$

(253

)

NM

NM

Equity Securities:

Gains

$

44,783

$

9,096

$

14,331

NM

(36.5

%)

Losses

(1,521

)

(658

)

(4,535

)

131.2

%

(85.5

%)

Equity Securities, Net

$

43,262

$

8,438

$

9,796

NM

(13.9

%)

Net Realized Gains

$

45,073

$

9,186

$

8,373

NM

9.7

%

NM - Percentage change not meaningful.

Net Realized Gains and Losses are generated as part of the normal ongoing management of our investment portfolio. Net Realized Gains of $45.1 million for the year ended December 31, 2017 is primarily due to the liquidation of our actively managed Common Stock Equity Securities portfolio in December 2017 as we reassess our common equity strategy.   The remaining Net Realized Gains and Losses for 2017 relate to the ongoing management of our Fixed Maturities and Short-Term Investments portfolios.   Net Realized

32

Gains of $9.2 million for the year ended December 31, 2016 are primarily due to the sale of Equity Securities.  Realized losses of $4.3 million and $1.6 million for the year ended December 31, 2016 in the Fixed Maturities and Short-Term Investments portfolios, respectively, are primarily due to the foreign exchange losses in our Canadian Dollar ("CAD") and GBP portfolios. Net Realized Gains of $8.4 million for the year ended December 31, 2015 are primarily due to the sale of Equity Securities.  Realized losses of $5.9 million in Fixed Maturities are primarily due to foreign exchange loss on the sale and maturity of Fixed Maturities in our Canadian portfolio.  

Other Income (Loss)

Other Income (Loss) for the years ended December 31, 2017, 2016 and 2015 was ($4.3) million, $8.6 million and ($0.6) million, respectively. Other Income (Loss) primarily consists of realized and unrealized foreign exchange gains and losses.

The losses in 2017 were mostly driven by the re-measurement of net insurance related assets and liabilities impacted by the combined effect of the weakening of the U.S. Dollar against the Great British pound ("GBP"), Canadian Dollar ("CAD) and Euro ("EUR").

The gain in 2016 was mostly driven by the re-measurement of net insurance related liabilities impacted by the strengthening of the USD against the GBP and CAD.

See Note 1 – Organizations & Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements, included herein for additional information regarding the foreign currency adjustment.

Income Taxes

We recorded an effective tax rate of 45.9%, 29.6% and 31.0% for December 31, 2017, 2016 and 2015, respectively.  The net one-time charge related to the Tax Act increased our 2017 effective income tax rate by 26.3 points.  Conversely, the rate for 2017 benefited by 6.7 points from tax related to stock compensation, which is now recorded in earnings as income tax benefit or expense, effective with the 2017 adoption of accounting standards update 2016-09.  In addition, our effective tax rate for each of the years benefitted due to tax-exempt investment income and dividends received deduction by 11.5 points in 2017, 6.1 points in 2016 and 5.1 points in 2015.  While we are able to make a reasonable estimate of the impact of the reduction in corporate rate, it may be affected by other analyses related to the Tax Act, including, but not limited to, our calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal temporary differences.  Our effective tax rate in years after 2017 is expected to benefit materially from the enactment of the Tax Act.  Future changes in tax laws could significantly impact our provision for income taxes, the amount of taxes payable, our deferred tax asset and liability balances, and stockholders' equity. See the risk factor Changes in tax laws could increase our corporate taxes, reduce our deferred tax assets or affect pricing of some of our products in Item 1A – Risk Factors for additional information regarding the impact of the Tax Act.

33

Segment Results

The following tables summarize our Consolidated Financial Results by reporting segment for the years ended December 31, 2017, 2016 and 2015:

Year Ended December 31, 2017

U.S.

Int'l

amounts in thousands

Insurance

Insurance

GlobalRe

Corporate (1)

Total

Net Earned Premiums

$

674,665

$

333,792

$

177,963

$

-

$

1,186,420

Net Losses and LAE

(443,353

)

(229,601

)

(133,311

)

-

(806,265

)

Commission Expenses

(77,729

)

(68,824

)

(39,136

)

958

(184,731

)

Other Operating Expenses

(128,905

)

(83,464

)

(20,861

)

-

(233,230

)

Other Underwriting Income (Expense)

461

-

565

(958

)

68

Underwriting Profit (Loss)

$

25,139

$

(48,097

)

$

(14,780

)

$

-

$

(37,738

)

Net Investment Income

89,293

89,293

Net Realized Gains

43,009

43,009

Interest Expense

(15,447

)

(15,447

)

Other Loss

(4,311

)

(4,311

)

Income (Loss) Before Income Taxes

$

25,139

$

(48,097

)

$

(14,780

)

$

112,544

$

74,806

Income Tax Expense

(34,312

)

(34,312

)

Net Income

$

40,494

Losses and LAE Ratio

65.7

%

68.8

%

74.9

%

68.0

%

Commission Expense Ratio

11.5

%

20.6

%

22.0

%

15.6

%

Other Operating Expense Ratio (2)

19.1

%

25.0

%

11.4

%

19.6

%

Combined Ratio

96.3

%

114.4

%

108.3

%

103.2

%

(1) - Includes Corporate segment intercompany eliminations.

(2) - Includes Other Operating Expenses and Other Underwriting Income (Expense).

Year Ended December 31, 2016

U.S.

Int'l

amounts in thousands

Insurance

Insurance

GlobalRe

Corporate (1)

Total

Net Earned Premiums

$

629,308

$

307,416

$

163,621

$

-

$

1,100,345

Net Losses and LAE

(397,860

)

(178,284

)

(89,304

)

-

(665,448

)

Commission Expenses

(70,812

)

(61,703

)

(34,008

)

1,478

(165,045

)

Other Operating Expenses

(128,108

)

(86,395

)

(19,593

)

-

(234,096

)

Other Underwriting Income (Expense)

1,092

-

522

(1,478

)

136

Underwriting Profit (Loss)

$

33,620

$

(18,966

)

$

21,238

$

-

$

35,892

Net Investment Income

79,451

79,451

Net Realized Gains

9,036

9,036

Interest Expense

(15,435

)

(15,435

)

Other Income

8,565

8,565

Income (Loss) Before Income Taxes

$

33,620

$

(18,966

)

$

21,238

$

81,617

$

117,509

Income Tax Expense

(34,783

)

(34,783

)

Net Income

$

82,726

Losses and LAE Ratio

63.2

%

58.0

%

54.6

%

60.5

%

Commission Expense Ratio

11.3

%

20.1

%

20.8

%

15.0

%

Other Operating Expense Ratio (2)

20.2

%

28.1

%

11.6

%

21.2

%

Combined Ratio

94.7

%

106.2

%

87.0

%

96.7

%

(1) - Includes Corporate segment intercompany eliminations.

(2) - Includes Other Operating Expenses and Other Underwriting Income (Expense).

34

Year Ended December 31, 2015

U.S.

Int'l

amounts in thousands

Insurance

Insurance

GlobalRe

Corporate (1)

Total

Net Earned Premiums

$

555,836

$

259,960

$

168,291

$

-

$

984,087

Net Losses and LAE

(343,497

)

(134,702

)

(94,399

)

-

(572,598

)

Commission Expenses

(56,319

)

(43,676

)

(32,240

)

2,258

(129,977

)

Other Operating Expenses

(131,407

)

(75,867

)

(16,242

)

-

(223,516

)

Other Underwriting Income (Expense)

1,690

-

690

(2,258

)

122

Underwriting Profit

$

26,303

$

5,715

$

26,100

$

-

$

58,118

Net Investment Income

68,718

68,718

Net Realized Gains

6,675

6,675

Interest Expense

(15,424

)

(15,424

)

Other Loss

(613

)

(613

)

Income Before Income Taxes

$

26,303

$

5,715

$

26,100

$

59,356

$

117,474

Income Tax Expense

(36,417

)

(36,417

)

Net Income

$

81,057

Losses and LAE Ratio

61.8

%

51.8

%

56.1

%

58.2

%

Commission Expense Ratio

10.1

%

16.8

%

19.2

%

13.2

%

Other Operating Expense Ratio (2)

23.4

%

29.2

%

9.2

%

22.7

%

Combined Ratio

95.3

%

97.8

%

84.5

%

94.1

%

(1) - Includes Corporate segment intercompany eliminations.

(2) - Includes Other Operating Expenses and Other Underwriting Income (Expense).

U.S. Insurance

The following tables summarize our financial results by operating segment for our U.S. Insurance reporting segment for the years ended December 31, 2017, 2016 and 2015:

U.S. Insurance

Year Ended December 31, 2017

amounts in thousands

Marine

P&C

Professional Liability

Total

% Change 2017 vs. 2016

Gross Written Premiums

$

156,171

$

713,539

$

118,583

$

988,293

7.5

%

Ceded Written Premiums

(72,431

)

(173,501

)

(21,061

)

(266,993

)

13.2

%

Net Written Premiums

83,740

540,038

97,522

721,300

5.5

%

Net Earned Premiums

$

86,605

$

495,260

$

92,800

$

674,665

7.2

%

Net Losses and LAE

(58,099

)

(316,112

)

(69,142

)

(443,353

)

11.4

%

Commission Expenses

(4,932

)

(57,756

)

(15,041

)

(77,729

)

9.8

%

Other Operating Expenses

(25,501

)

(84,433

)

(18,971

)

(128,905

)

0.6

%

Other Underwriting Income

374

61

26

461

(57.8

%)

Underwriting Profit (Loss)

$

(1,553

)

$

37,020

$

(10,328

)

$

25,139

(25.2

%)

Losses and LAE Ratio

67.1

%

63.8

%

74.5

%

65.7

%

Commission Expense Ratio

5.7

%

11.7

%

16.2

%

11.5

%

Other Operating Expense Ratio (1)

29.0

%

17.0

%

20.4

%

19.1

%

Combined Ratio

101.8

%

92.5

%

111.1

%

96.3

%

(1) - Includes Other Operating Expenses and Other Underwriting Income (Expense).

35

U.S. Insurance

Year Ended December 31, 2016

amounts in thousands

Marine

P&C

Professional Liability

Total

% Change 2016 vs. 2015

Gross Written Premiums

$

169,405

$

631,562

$

118,428

$

919,395

6.2

%

Ceded Written Premiums

(70,858

)

(135,888

)

(29,081

)

(235,827

)

(12.3

%)

Net Written Premiums

98,547

495,674

89,347

683,568

14.5

%

Net Earned Premiums

$

100,132

$

453,673

$

75,503

$

629,308

13.2

%

Net Losses and LAE

(50,087

)

(295,877

)

(51,896

)

(397,860

)

15.8

%

Commission Expenses

(8,469

)

(52,483

)

(9,860

)

(70,812

)

25.7

%

Other Operating Expenses

(27,559

)

(81,469

)

(19,080

)

(128,108

)

(2.5

%)

Other Underwriting Income

465

582

45

1,092

(35.4

%)

Underwriting Profit (Loss)

$

14,482

$

24,426

$

(5,288

)

$

33,620

27.8

%

Losses and LAE Ratio

50.0

%

65.2

%

68.7

%

63.2

%

Commission Expense Ratio

8.5

%

11.6

%

13.1

%

11.3

%

Other Operating Expense Ratio (1)

27.0

%

17.8

%

25.2

%

20.2

%

Combined Ratio

85.5

%

94.6

%

107.0

%

94.7

%

(1) - Includes Other Operating Expenses and Other Underwriting Income (Expense).

U.S. Insurance

Year Ended December 31, 2015

amounts in thousands

Marine

P&C

Professional Liability

Total

Gross Written Premiums

$

158,124

$

596,673

$

110,984

$

865,781

Ceded Written Premiums

(61,916

)

(152,168

)

(54,691

)

(268,775

)

Net Written Premiums

96,208

444,505

56,293

597,006

Net Earned Premiums

$

96,082

$

401,408

$

58,346

$

555,836

Net Losses and LAE

(43,553

)

(266,806

)

(33,138

)

(343,497

)

Commission Expenses

(11,606

)

(39,931

)

(4,782

)

(56,319

)

Other Operating Expenses

(27,082

)

(81,866

)

(22,459

)

(131,407

)

Other Underwriting Income

489

1,122

79

1,690

Underwriting Profit (Loss)

$

14,330

$

13,927

$

(1,954

)

$

26,303

Losses and LAE Ratio

45.3

%

66.5

%

56.8

%

61.8

%

Commission Expense Ratio

12.1

%

9.9

%

8.2

%

10.1

%

Other Operating Expense Ratio (1)

27.7

%

20.1

%

38.3

%

23.4

%

Combined Ratio

85.1

%

96.5

%

103.3

%

95.3

%

(1) - Includes Other Operating Expenses and Other Underwriting Income (Expense).

Gross Written Premiums

2017 versus 2016

Gross Written Premiums increased $68.9 million for the year ended December 31, 2017 as compared to the same period in 2016 driven by an $82.0 million increase in our P&C operating segment, partially offset by a decrease in our Marine operating segment of $13.2 million.

The decrease in our Marine operating segment was impacted by our decision to exit certain Hull and War products. Additionally, the renewal of certain business now being managed in our Int'l Insurance reporting segment as well as a transfer of the management of our Custom Bonds product to the Other P&C division impacted the decrease. These decreases were partially offset by an increase in renewals for our Cargo and Inland Marine products.

36

The increase in our P&C operating segment was primarily driven by increases in our Excess Casualty, Other P&C, Auto and Environmental divisions, partially offset by a decrease in our Primary Casualty division. The increase in our Excess Casualty division was primarily attributable to new business resulting from increases in construction project coverage. The increase in our Other P&C division was driven by new business production and an increase in rates in our Property product, as well as the transfer of the management of our Custom Bonds product from the Marine operating segment to our Surety product in our Other P&C division. The increase in our Auto division was due to new business production and strong rates on renewals. The increase in our Environmental division was attributable to new business with increased opportunities in the market. The decrease in our Primary Casualty division was driven by the nonrenewal of underperforming accounts.

Average renewal premium rates for our U.S. Insurance reporting segment for the year ended December 31, 2017 increased 1.2%, driven by increases of 1.7%, 0.6% and 0.2% within our P&C, Marine and Professional Liability operating segments, respectively.

2016 versus 2015

Gross Written Premiums increased $53.6 million for the year ended December 31, 2016 compared to the same period in 2015 due to strong growth across all of our operating segments.  Our P&C operating segment increased $34.9 million driven by new business production from our Auto and Property products of $20.9 million and $13.3 million, respectively.  In addition, our Marine and Professional Liability operating segments increased $11.3 million and $7.4 million, respectively, as compared to the same period in 2015, driven by new business production in our Craft, Cargo and Fishing Vessel products, as well as increased renewal premiums in our E&O and D&O divisions despite a difficult rate environment.  

For the year ended December 31, 2016, average renewal rates decreased 0.1% as compared to the same period in 2015, driven by a 0.5% decrease from our Marine operating segment.

Ceded Written Premiums

2017 versus 2016

For the year ended December 31, 2017, Ceded Written Premiums were $267.0 million, resulting in a retention ratio of 73.0% of Net Written Premiums to Gross Written Premiums. This compares to $235.8 million for the same period in 2016, resulting in a retention ratio of 74.3%. The decrease in the retention ratio was driven by our P&C and Marine operating segments, partially offset by an increase in the retention ratio for our Professional Liability operating segment.

The decrease in our Marine operating segment's retention ratio was driven by changes in the business mix and the impact of an increase in ceded RRP's due in part to Hurricane Irma and other large loss events.

The decrease in our P&C operating segment's retention ratio was primarily the result of increased proportional reinsurance on our Property product purchased during the second quarter of 2017, and to a lesser extent, changes in the mix of business.

The increase in our Professional Liability operating segment's retention ratio was primarily attributable to a reduction in proportional reinsurance coverage that supports our D&O business.

2016 versus 2015

For the year ended December 31, 2016, Ceded Written Premiums were $235.8 million, resulting in a retention ratio of 74.3%. This compares to $268.8 million for the same period in 2015, resulting in a retention ratio of 69.0%. The increase in the retention ratio was mostly due to the reduction in proportional reinsurance coverage that supports our Excess Casualty and Environmental risks within our P&C operating segment, the nonrenewal of our E&O proportional reinsurance treaty in the fourth quarter of 2015 within our Professional Liability segment, and the year over year effect of RRPs. For the year ended December 31, 2016, RRPs decreased $4.6 million to $0.8 million as compared to $5.4 million in the prior year, primarily due to the reduction in large loss activity within our Marine operating segment. These items were partially offset by increases in our proportional reinsurance coverage within our Marine operating segment.

37

Net Earned Premiums

2017 versus 2016

Net Earned Premiums increased $45.4 million for the year ended December 31, 2017 as compared to the same period in 2016 primarily due to growth within our P&C operating segment and recent reductions to the level of proportional reinsurance within our Professional Liability operating segment. These increases to Net Earned Premiums were partially offset by increased proportional reinsurance on our Property product, a decrease in the amount of premium written in our Marine operating segment and an increase in ceded RRPs related to Hurricane Irma and other large loss events.

2016 versus 2015

Net Earned Premiums increased $73.5 million for the year ended December 31, 2016 compared to the same period in 2015, due to growth in Gross Written Premiums, a reduced level of proportional reinsurance within our P&C and Professional Liability operating segments, and a $4.6 million decrease in RRPs from 2015.  

Net Losses and LAE

The Net Losses and LAE Reserves as of December 31, 2017, 2016 and 2015 are as follows:

U.S. Insurance

Year Ended December 31, 2017

amounts in thousands

Marine

P&C

Professional Liability

Total

Case Reserves

$

58,301

$

192,291

$

26,774

$

277,366

IBNR Reserves

45,393

700,264

86,649

832,306

Total

$

103,694

$

892,555

$

113,423

$

1,109,672

U.S. Insurance

Year Ended December 31, 2016

amounts in thousands

Marine

P&C

Professional Liability

Total

Case Reserves

$

56,701

$

201,368

$

24,555

$

282,624

IBNR Reserves

54,259

603,509

70,559

728,327

Total

$

110,960

$

804,877

$

95,114

$

1,010,951

U.S. Insurance

Year Ended December 31, 2015

amounts in thousands

Marine

P&C

Professional Liability

Total

Case Reserves

$

68,677

$

170,988

$

42,546

$

282,211

IBNR Reserves

55,408

514,777

60,528

630,713

Total

$

124,085

$

685,765

$

103,074

$

912,924

The following tables present the impact of Net RRPs and Reserve Releases or (Development / Strengthening) on our Net Losses and LAE Ratio for the years ended December 31, 2017, 2016 and 2015:

U.S. Insurance

Year Ended December 31, 2017

Professional

Marine

P&C

Liability

Total

Reported Net Losses and LAE Ratio

67.1%

63.8%

74.5%

65.7%

Net RRPs

(1.6%)

(0.0%)

0.0%

(0.2%)

Additional Net Current AY Release/(Development)

(6.4%)

(1.8%)

0.0%

(2.1%)

Net Prior AY Reserve Release/(Strengthening)

(1.9%)

(0.3%)

(14.4%)

(2.5%)

Adjusted Net Losses and LAE Ratio

57.2%

61.7%

60.1%

60.9%

U.S. Insurance

Year Ended December 31, 2016

Professional

Marine

P&C

Liability

Total

Reported Net Losses and LAE Ratio

50.0%

65.2%

68.7%

63.2%

Net RRPs

(0.4%)

(0.0%)

0.0%

(0.1%)

Additional Net Current AY Release/(Development)

(1.1%)

(0.4%)

0.0%

(0.5%)

Net Prior AY Reserve Release/(Strengthening)

10.0%

(0.6%)

(7.9%)

0.2%

Adjusted Net Losses and LAE Ratio

58.5%

64.2%

60.8%

62.8%

38

U.S. Insurance

Year Ended December 31, 2015

Professional

Marine

P&C

Liability

Total

Reported Net Losses and LAE Ratio

45.3%

66.5%

56.8%

61.8%

Net RRPs

(1.9%)

(0.2%)

0.0%

(0.6%)

Additional Net Current AY Release/(Development)

(10.0%)

(1.2%)

0.0%

(2.7%)

Net Prior AY Reserve Release/(Strengthening)

24.8%

0.2%

6.5%

5.2%

Adjusted Net Losses and LAE Ratio

58.2%

65.3%

63.3%

63.7%

2017 versus 2016

For the year ended December 31, 2017, our Reported Net Losses and LAE Ratio increased 2.5 points as compared to the same period in 2016 driven by our Marine and Professional Liability operating segments, partially offset by a decrease in our P&C operating segment.

For the year ended December 31, 2017, our Reported Net Losses and LAE Ratio for our Marine operating segment increased 17.1 points as compared to the same period in 2016, primarily driven by:

$1.7 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2017 due to unfavorable development on large loss activity within our Cargo product line, compared to $10.1 million of Net Prior AY reserve releases for the same period in 2016.

$5.6 million of Additional Net Current AY Reserve Development for the year ended December 31, 2017 primarily attributable to a $4.1 million large loss in our Hull product and $1.6 million of CAT loss primarily from Hurricanes Harvey, Maria and Irma.

$2.1 million of ceded RRP expense primarily due to Hurricane Irma and other large loss activity for the year ended December 31, 2017.

Partially offsetting the impact of the above items on the Reported Net Losses and LAE Ratio are favorable performance within certain products driving the decrease in the Adjusted Net Losses and LAE Ratio.

For the year ended December 31, 2017, the Reported Net Losses and LAE Ratio for our P&C operating segment decreased 1.4 points as compared to the same period in 2016. This was primarily driven by:

Favorable performance primarily within our Excess Casualty and Auto divisions, coupled with changes in the mix of business driving the decrease in Adjusted Net Losses and LAE Ratio.

$1.6 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2017, primarily due to large loss activity within our Primary Casualty division, partially offset by ongoing favorable performance within our Excess Casualty, Environmental and Other P&C divisions. This compares to $2.8 million of Net Prior AY Reserve Strengthening for the same period in 2016.

Partially offsetting the impact of the above items on the Reported Net Losses and LAE Ratio are $8.9 million of Additional Net Current AY Reserve Development for the year ended December 31, 2017 primarily attributable to CAT loss of $6.6 million from Hurricanes Harvey and Irma and $2.3 million of large losses primarily in our Property product. This compares to $1.8 million of Additional Net Current AY Reserve Development for the same period in 2016.

For the year ended December 31, 2017, our Reported Net Losses and LAE Ratio for our Professional Liability operating segment increased 5.8 points as compared to the same period in 2016, primarily due to:

$13.4 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2017 mostly related to large loss activity within our D&O division. This compares to $6.0 million of Net Prior AY Reserve Strengthening primarily within our D&O division due to unfavorable development on large claims and bad debt expense due to lower expectation of recoveries from a large reinsurer for the same period in 2016.

Partially offsetting the impact of the above items on the Reported Net Losses and LAE Ratio are changes in the mix of business driving the overall decrease in Adjusted Net Losses and LAE Ratio.

39

2016 versus 2015

For the year ended December 31, 2016, our Reported Net Losses and LAE Ratio increased 1.4 points as compared to the same period in 2015 driven by our Professional Liability and Marine operating segments, partially offset by a decrease in our P&C operating segment.

For the year ended December 31, 2016, our Reported Net Losses and LAE Ratio for our Marine operating segment increased 4.7 points as compared to the same period in 2015, primarily driven by:

$10.1 million of Net Prior AY Reserve Releases for the year ended December 31, 2016 compared to $24.8 million of Net Prior AY Reserve Releases for the same period in 2015, with both periods' releases driven by better than expected large loss emergence.

Partially offsetting the impact of the above items on the Reported Net Losses and LAE Ratio are:

$1.1 million of Additional Net Current AY Reserve Development for the year ended December 31, 2016 compared to $10.0 million of Additional Net Current AY Reserve Development for the same period in 2015 attributable to losses related to Hurricane Joaquin.

$0.8 million of ceded RRP expense for the year ended December 31, 2016, as compared to $4.1 million of ceded RRP expense primarily due to Hurricane Joaquin for the same period in 2015.

For the year ended December 31, 2016, the Reported Net Losses and LAE Ratio for our P&C operating segment decreased 1.3 points as compared to the same period in 2015. This was primarily driven by:

Favorable performance primarily within our Environmental and Other P&C divisions, coupled with changes in the mix of business driving the decrease in Adjusted Net Losses and LAE Ratio.

$1.8 million of Additional Net Current AY Reserve Development for the year ended December 31, 2016 compared to $5.0 million of Additional Net Current AY Reserve Development for the same period in 2015 attributable to losses within our Energy & Engineering product.

Partially offsetting the impact of the above items on the Reported Net Losses and LAE Ratio are $2.8 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2016 driven by unfavorable development on large claims within our Primary Casualty division.

For the year ended December 31, 2016, our Reported Net Losses and LAE Ratio for our Professional Liability operating segment increased 11.9 points as compared to the same period in 2015, primarily due to:

$6.0 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2016 driven by unfavorable development on large claims within our D&O division and bad debt expense due to lower expectation of recoveries from a large reinsurer. This compares to $3.8 million of Net Prior AY Reserve Releases for the same period in 2015 driven by favorable emergence on large loss activity.

Partially offsetting the impact of the above items on the Reported Net Losses and LAE Ratio are changes in the mix of business driving the overall decrease in Adjusted Net Losses and LAE Ratio.

Commission Expenses

2017 versus 2016

Our Commission Expense Ratio for the year ended December 31, 2017 increased 0.2 points as compared to the same period in 2016, mostly driven by our Professional Liability operating segment, partially offset by a decrease in our Marine operating segment.

Our Marine operating segment's Commission Expense Ratio decreased due to changes in business mix, partially offset by the impact of ceded RRPs related to Hurricane Irma and other large loss activity.

Our P&C operating segment's Commission Expense Ratio was relatively flat with changes in the business mix largely offset by greater ceding commission income from the proportional reinsurance on our Property product purchased during the second quarter of 2017.

Our Professional Liability operating segment's Commission Expense Ratio increased due to the reduction in proportional reinsurance and related ceding commission benefits.

40

2016 versus 2015

Our Commission Expense Ratio increased 1.2 percentage points for the year ended December 31, 2016 compared to the same period in 2015, primarily due to the reduction in ceded proportional reinsurance and related ceding commission benefit within our Professional Liability and P&C operating segments, partially offset by the implementation of new proportional reinsurance programs within our Marine operating segment.

Other Operating Expenses

2017 versus 2016

Other Operating Expenses for the year ended December 31, 2017 increased $0.8 million as compared to the same period in 2016, primarily due to an increase in costs associated with new business initiatives and applicable support, partially offset by a reduction in performance-based incentive compensation costs.

2016 versus 2015

Other Operating Expenses decreased $3.3 million for the year ended December 31, 2016 compared to the same period in 2015 due to decreases in project specific information technology and professional fee expenditures.

Int'l Insurance

The following tables summarize our financial results by operating segment for our Int'l Insurance reporting segment for the years ended December 31, 2017, 2016 and 2015:

Int'l Insurance

Year Ended December 31, 2017

amounts in thousands

Marine

P&C

Professional Liability

Total

% Change 2017 vs. 2016

Gross Written Premiums

$

198,241

$

159,123

$

143,766

$

501,130

3.4

%

Ceded Written Premiums

(42,018

)

(85,298

)

(37,962

)

(165,278

)

19.3

%

Net Written Premiums

156,223

73,825

105,804

335,852

(2.9

%)

Net Earned Premiums

$

152,396

$

88,517

$

92,879

$

333,792

8.6

%

Net Losses and LAE

(114,460

)

(61,791

)

(53,350

)

(229,601

)

28.8

%

Commission Expenses

(32,541

)

(13,918

)

(22,365

)

(68,824

)

11.5

%

Other Operating Expenses

(34,878

)

(28,537

)

(20,049

)

(83,464

)

(3.4

%)

Underwriting Loss

$

(29,483

)

$

(15,729

)

$

(2,885

)

$

(48,097

)

NM

Losses and LAE Ratio

75.1

%

69.8

%

57.4

%

68.8

%

Commission Expense Ratio

21.4

%

15.7

%

24.1

%

20.6

%

Other Operating Expense Ratio

22.8

%

32.3

%

21.6

%

25.0

%

Combined Ratio

119.3

%

117.8

%

103.1

%

114.4

%

NM - Percentage change not meaningful .

41

Int'l Insurance

Year Ended December 31, 2016

amounts in thousands

Marine

P&C

Professional Liability

Total

% Change 2016 vs. 2015

Gross Written Premiums

$

183,228

$

181,094

$

120,149

$

484,471

17.6

%

Ceded Written Premiums

(40,092

)

(69,606

)

(28,806

)

(138,504

)

3.4

%

Net Written Premiums

143,136

111,488

91,343

345,967

24.5

%

Net Earned Premiums

$

141,593

$

89,455

$

76,368

$

307,416

18.3

%

Net Losses and LAE

(67,051

)

(68,995

)

(42,238

)

(178,284

)

32.4

%

Commission Expenses

(34,018

)

(14,529

)

(13,156

)

(61,703

)

41.3

%

Other Operating Expenses

(33,170

)

(34,075

)

(19,150

)

(86,395

)

13.9

%

Underwriting Profit (Loss)

$

7,354

$

(28,144

)

$

1,824

$

(18,966

)

NM

Losses and LAE Ratio

47.4

%

77.1

%

55.3

%

58.0

%

Commission Expense Ratio

24.0

%

16.2

%

17.2

%

20.1

%

Other Operating Expense Ratio

23.4

%

38.2

%

25.1

%

28.1

%

Combined Ratio

94.8

%

131.5

%

97.6

%

106.2

%

NM - Percentage change not meaningful.

Int'l Insurance

Year Ended December 31, 2015

amounts in thousands

Marine

P&C

Professional Liability

Total

Gross Written Premiums

$

183,707

$

130,729

$

97,511

$

411,947

Ceded Written Premiums

(36,515

)

(67,722

)

(29,768

)

(134,005

)

Net Written Premiums

147,192

63,007

67,743

277,942

Net Earned Premiums

$

149,256

$

55,320

$

55,384

$

259,960

Net Losses and LAE

(79,737

)

(20,478

)

(34,487

)

(134,702

)

Commission Expenses

(32,187

)

(4,999

)

(6,490

)

(43,676

)

Other Operating Expenses

(30,419

)

(26,294

)

(19,154

)

(75,867

)

Underwriting Profit (Loss)

$

6,913

$

3,549

$

(4,747

)

$

5,715

Losses and LAE Ratio

53.4

%

37.0

%

62.3

%

51.8

%

Commission Expense Ratio

21.6

%

9.0

%

11.7

%

16.8

%

Other Operating Expense Ratio

20.4

%

47.6

%

34.6

%

29.2

%

Combined Ratio

95.4

%

93.6

%

108.6

%

97.8

%

Gross Written Premiums

2017 versus 2016

Gross Written Premiums increased $16.7 million for the year ended December 31, 2017 compared to the same period in 2016, driven by increases in our Professional Liability and Marine operating segments of $23.6 million and $15.0 million, respectively, partially offset by a decline in our P&C operating segment of $22.0 million.

The increase in our Marine operating segment was largely due to growth in our Hull and Protection & Indemnity products driven by new business, an increase in our Craft product related to the renewal of certain business previously managed by our U.S. Insurance reporting segment now managed in our Int'l Insurance reporting segment, and an increase in our Transport product related to increased premium estimates.

The decrease in our P&C operating segment was primarily driven by a decline in our Property division, partially offset by increases in our General Liability division, Political Violence & Terrorism product and Energy & Engineering division. The decrease in our Property division was related to strategic actions taken to exit our North American and International Property business. The increase in our General Liability division was driven by new business, a larger renewal base and increased premium estimates. The increase in our Political Violence & Terrorism product was driven by new business. Our Energy & Engineering division increase was driven by new business production in our Offshore Energy product.

42

The increase in our Professional Liability operating segment was primarily driven by new business production in our E&O division, Financial Institutions business in our D&O division and Other Professional Liability division.

Average renewal premium rates for our Int'l Insurance reporting segment for the year ended December 31, 2017 decreased 2.3% compared to the same period in 2016, driven by decreases of 3.5%, 2.0% and 1.4% in our P&C, Marine and Professional Liability operating segments, respectively.

2016 versus 2015

Gross written premiums increased $72.5 million for the year ended December 31, 2016 compared to the same period in 2015, primarily due to increases in our P&C and Professional Liability operating segments of $50.4 million and $22.6 million, respectively. Our P&C operating segment had growth of $24.6 million in our Property division, mostly driven by our expanded coverage for international exposures, as well as growth of $10.9 million and $6.9 million from our Energy & Engineering and Casualty divisions, and the commencement of the Political Violence & Terrorism product in 2016. The increase in our Professional Liability operating segment was due to new business production across all divisions.

For the year ended December 31, 2016 average renewal premium rates decreased 4.1%, due to decreases of 1.6%, 8.0%, and 3.5% in our Marine, P&C and Professional Liability operating segments, respectively. The impact of this has been offset by new business production and the commencement of the Political Violence & Terrorism product.

Ceded Written Premiums

2017 versus 2016

Ceded Written Premiums were $165.3 million, resulting in a retention ratio of 67.0%, for the year ended December 31, 2017 compared to $138.5 million, resulting in a retention ratio of 71.4%, for the same period in 2016. The decrease in the retention ratio was primarily driven by our P&C operating segment, whereby 100% of the unexpired risk on our North American Property business was ceded effective January 1, 2017 as part of strategic actions taken to exit this book of business. Additionally, the impact of an increase in ceded RRPs related to Hurricanes Irma, Maria and Harvey and an increase in excess of loss reinsurance negatively impacted retention in that operating segment.

2016 versus 2015

Ceded Written Premiums were $138.5 million, resulting in a retention ratio of 71.4%, for the year ended December 31, 2016 compared to $134.0 million, resulting in a retention ratio of 67.5%, for the same period in 2015. The increase in the retention ratio was driven by our Marine and P&C operating segments mostly due to the year on year effect of RRPs. For the year ended December 31, 2016, RRPs of $2.9 million were incurred, compared to a release of $4.0 million in RRPs in 2015. This was partially offset by decreases in proportional reinsurance coverages in our P&C and Professional Liability operating segments.  

Net Earned Premiums

2017 versus 2016

Net Earned Premiums increased $26.4 million for the year ended December 31, 2017 as compared to the same period in 2016 driven by increases in our Professional Liability and Marine operating segments, partially offset by a decrease in our P&C operating segment.

The increase in our Marine operating segment's Net Earned Premium was primarily driven by growth in this segment along with an increased ceded premium estimate booked in the prior year impacting our Protection & Indemnity product. These increases in Net Earned Premiums were partially offset by an increase in ceded RRPs related to Hurricanes Irma and Harvey.

The decrease in our P&C operating segment's Net Earned Premium was primarily due to lower premium volume and increased cessions related to strategic actions taken to exit our North American Property business and an increase in ceded RRPs related to Hurricanes Irma, Maria and Harvey. This decrease was partially offset by growth in our Political Violence & Terrorism and General Liability products.

The increase in our Professional Liability operating segment's Net Earned Premium was driven by growth in our Other Professional Liability division, Financial Institution business in our D&O division, and our E&O division offset by ceded premium adjustments on prior years.

43

2016 versus 2015

Net earned premiums increased $47.5 million for the year ended December 31, 2016 as compared to the same period in 2015. This was driven by growth in our P&C operating segment of $34.1 million, mostly due to increased production from our Property division related to expanded coverage for international exposures, and the newly formed Political Violence & Terrorism product. In addition our Professional Liability operating segment increased $21.0 million, mostly in our Financial Institutions product. These increases were partially offset by a decrease in our Marine operating segment and increased RRPs expense of $2.9 million in 2016 compared to a release of $4.0 million in 2015, which are fully earned when written.

Net Losses and LAE

The Net Losses and LAE Reserves as of December 31, 2017, 2016 and 2015 are as follows:

Int'l Insurance

Year Ended December 31, 2017

amounts in thousands

Marine

P&C

Professional Liability

Total

Case reserves

$

181,369

$

66,412

$

31,463

$

279,244

IBNR reserves

39,949

37,067

87,211

164,227

Total

$

221,318

$

103,479

$

118,674

$

443,471

Int'l Insurance

Year Ended December 31, 2016

amounts in thousands

Marine

P&C

Professional Liability

Total

Case Reserves

$

163,124

$

66,496

$

30,106

$

259,726

IBNR Reserves

36,118

18,192

70,103

124,413

Total

$

199,242

$

84,688

$

100,209

$

384,139

Int'l Insurance

Year Ended December 31, 2015

amounts in thousands

Marine

P&C

Professional Liability

Total

Case Reserves

$

167,157

$

40,313

$

19,583

$

227,053

IBNR Reserves

61,409

19,735

63,229

144,373

Total

$

228,566

$

60,048

$

82,812

$

371,426

The following tables present the impact of Net RRPs and Reserve Releases or (Development / Strengthening) on our Net Losses and LAE Ratio on our Net Losses and LAE Ratio for the years ended December 31, 2017, 2016 and 2015:

Int'l  Insurance

Year Ended December 31, 2017

Professional

Marine

P&C

Liability

Total

Reported Net Losses and LAE Ratio

75.1%

69.8%

57.4%

68.8%

Net RRPs

(0.4%)

(0.4%)

0.0%

(0.3%)

Additional Net Current AY Release/(Development)

(21.2%)

(21.1%)

(5.9%)

(16.9%)

Net Prior AY Reserve Release/(Strengthening)

(4.3%)

(3.5%)

(5.6%)

(4.4%)

Adjusted Net Losses and LAE Ratio

49.2%

44.8%

45.9%

47.2%

Int'l  Insurance

Year Ended December 31, 2016

Professional

Marine

P&C

Liability

Total

Reported Net Losses and LAE Ratio

47.4%

77.1%

55.3%

58.0%

Net RRPs

(0.2%)

(2.0%)

0.0%

(0.5%)

Additional Net Current AY Release/(Development)

(13.2%)

(40.3%)

0.3%

(17.9%)

Net Prior AY Reserve Release/(Strengthening)

15.5%

7.7%

(5.4%)

8.1%

Adjusted Net Losses and LAE Ratio

49.5%

42.5%

50.2%

47.7%

44

Int'l  Insurance

Year Ended December 31, 2015

Professional

Marine

P&C

Liability

Total

Reported Net Losses and LAE Ratio

53.4%

37.0%

62.3%

51.8%

Net RRPs

1.3%

0.3%

0.0%

0.8%

Additional Net Current AY Release/(Development)

(16.0%)

(12.6%)

0.0%

(11.8%)

Net Prior AY Reserve Release/(Strengthening)

15.0%

15.4%

(7.5%)

10.2%

Adjusted Net Losses and LAE Ratio

53.7%

40.1%

54.8%

51.0%

2017 versus 2016

For the year ended December 31, 2017, our Reported Net Losses and LAE Ratio increased 10.8 points as compared to the same period in 2016 driven by increases in our Marine and Professional Liability operating segments, partially offset by a decrease in our P&C operating segment.

For the year ended December 31, 2017, our Reported Net Losses and LAE Ratio for our Marine operating segment increased 27.7 points as compared to the same period in 2016, primarily driven by:

$6.5 million of Net Prior AY Reserve Strengthening due to adverse loss development for the year ended December 31, 2017 primarily related to our Cargo, Specie and Protection & Indemnity products. This compares to $22.1 million of Net Prior AY Reserve Releases due to better than expected loss emergence for the same period in 2016.

$32.6 million of Additional Net Current AY Reserve Development for the year ended December 31, 2017 primarily attributable to CAT losses of $9.8 million from Hurricanes Maria, Harvey and Irma, $4.2 million from Typhoon Hato, and $6.2 million due to large loss activity in our P&I product. This compares to $18.8 million for the same period in 2016, primarily attributable to the Ecuador Earthquake, Hurricane Matthew and a large loss from our Cargo product relating to a satellite loss.

For the year ended December 31, 2017, our Reported Net Losses and LAE Ratio for our P&C operating segment decreased 7.3 points as compared to the same period in 2016, primarily driven by:

$18.8 million of Additional Net Current AY Reserve Development for the year ended December 31, 2017 primarily attributable to CAT losses of $14.9 million from Hurricanes Irma, Maria and Harvey, $1.8 million from the Puebla, Mexico Earthquake and $1.8 million of attritional losses in our International Property product. This compares to $37.1 million for the same period in 2016, consisting of weather-related losses in our Property division and adverse loss emergence from our Energy & Engineering division as well as CAT losses attributable to Hurricane Matthew, the Alberta Wildfires and the Taiwan Earthquake.

A $0.5 million RRP expense primarily due to the CAT losses this year, compared to a $2.4 million expense for the same period in 2016.

Partially offsetting the impact of the above items on the Reported Net Losses and LAE Ratio are:

$3.1 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2017 related to loss development in our Property division, partially offset by favorable loss emergence within our Offshore Energy business. This compares to $7.1 million of Net Prior AY reserve release related to favorable loss emergence.

The impact of additional ceded protection on Net Earned Premiums driving the 2.3 point increase in Adjusted Net Losses and LAE Ratio.

For the year ended December 31, 2017, our Reported Net Losses and LAE Ratio for our Professional Liability operating segment increased 2.1 points as compared to the same period in 2016, primarily driven by:

$5.5 million of Additional Net Current AY Reserve Development for the year ended December 31, 2017 primarily attributable to our E&O and D&O products.

$5.2 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2017 related to large loss development on our D&O and E&O business. This compares to $4.1 million of Net Prior AY Reserve Strengthening related to bad debt expense due to lower expectation of recoveries from a large reinsurer for the same period in 2016.

45

Partially offsetting the impact of the above items on the Reported Net Losses and LAE Ratio are favorable performance across certain key divisions and changes in the mix of business driving the 4.3 point decrease in Adjusted Net Losses and LAE Ratio.

2016 versus 2015

For the year ended December 31, 2016, our Reported Net Losses and LAE Ratio increased 6.2 points as compared to the same period in 2015 driven by an increase in our P&C operating segment, partially offset by decreases in our Professional Liability and Marine operating segments.

For the year ended December 31, 2016, our Reported Net Losses and LAE Ratio for our Marine operating segment decreased 6.0 points as compared to the same period in 2015, primarily driven by:

Changes in the mix of business resulting from the repositioning of certain Hull and Cargo products drove the 4.2 point decrease in Adjusted Net Losses and LAE Ratio.

$18.8 million of Additional Net Current AY Reserve Development for the year ended December 31, 2016 primarily driven by the Ecuador Earthquake, Hurricane Matthew and unfavorable loss emergence relating to a large Cargo loss. This compares to $23.4 million of Additional Net Current AY Reserve Development for the same period in 2015 attributable to large loss activity.

$22.1 million of Net Prior AY Reserve Releases for the year ended December 31, 2016 due to better than expected loss emergence. This compares to $21.9 million of Net Prior AY Reserve Releases due to better than expected loss emergence for the same period in 2015.

For the year ended December 31, 2016, our Reported Net Losses and LAE Ratio for our P&C operating segment increased 40.1 points as compared to the same period in 2015, primarily driven by:

$37.1 million of Additional Net Current AY Reserve Development for the year ended December 31, 2016 consisting of $22.0 million of losses from our Property division due to weather-related losses and adverse loss emergence from our Energy & Engineering division as well as  CAT losses of $15.1 million attributable to Hurricane Matthew, the Alberta Wildfires and the Taiwan Earthquake. This compares to $6.9 million of Additional Net Current AY Reserve Development for the same period in 2015 arising from large loss activity.

$7.1 million of Net Prior AY Reserve Releases for the year ended December 31, 2016 related to favorable loss emergence. This compares to $8.5 million of Net Prior AY Reserve Releases for the same period in 2015.

Changes in the mix of business are driving the 2.4 point increase in Adjusted Net Losses and LAE Ratio from the same period in 2015.

$2.4 million of ceded RRP expense primarily for the year ended December 31, 2016.

For the year ended December 31, 2016, our Reported Net Losses and LAE Ratio for our Professional Liability operating segment decreased 7.0 points as compared to the same period in 2015, primarily driven by:

Repositioning of certain E&O products drove the 4.6 point decrease in Adjusted Net Losses and LAE Ratio.

$4.1 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2016 due to an increase in our reserve for uncollectible reinsurance. This compares to $4.2 million of Net Prior AY Reserve Strengthening for the same period in 2015 due to a large loss.

Commission Expenses

2017 versus 2016

Our Commission Expense Ratio for the year ended December 31, 2017 increased 0.5 points as compared to the same period in 2016. The increase was driven by our Professional Liability operating segment, partially offset by a decrease in our Marine operating segment.

Our Marine operating segment's Commission Expense Ratio decreased due to lower profit commissions compared to the prior year and the Net Earned Premiums impact of RRPs related to Hurricanes Irma and Harvey.

46

The increase in our Professional Liability operating segment's Commission Expense Ratio was due to increased gross costs and changes in the mix of business as a result of increased growth in our Warranties and Indemnity product, which attracts a higher commission rate.

2016 versus 2015

The commission expense ratio for the year ended December 31, 2016 increased 3.3 percentage points as compared to the same period in 2015, mostly due to the mix of business earned, driven by a greater proportion of Property and E&O products, which carry  higher gross commission rates,  less proportional reinsurance, and additional RRP's.

Other Operating Expenses

2017 versus 2016

For the year ended December 31, 2017, Other Operating Expenses decreased $2.9 million as compared to the same period in 2016 due to a reduction in performance-based incentive compensation costs, reduced employee expenses and favorable foreign exchange rates, partially offset by higher Lloyd's charges due to increased volumes of European business attracting higher foreign levies and professional fees.

2016 versus 2015

For the year ended December 31, 2016, Other operating expenses increased $10.5 million as compared to the same period in 2015, due to the growth of our P&C business, specifically our International Property and PV&T businesses. We also incurred higher Lloyd's charges due to increased volumes of European business attracting higher foreign levies. Increased costs also arose relating to additional support staff, costs associated with authorization of NIIC and related startup of operations, offset by favorable foreign exchange rates applied to GBP expenses incurred.

GlobalRe

The following table summarizes our financial results for our GlobalRe reporting segment for the years ended December 31, 2017, 2016 and 2015:

GlobalRe

Years Ended December 31,

% Change

% Change

amounts in thousands

2017

2016

2015

2017 vs 2016

2016 vs.2015

Gross Written Premiums

$

223,842

$

165,045

$

175,774

35.6

%

(6.1

%)

Ceded Written Premiums

(9,664

)

(8,356

)

(6,862

)

15.6

%

21.8

%

Net Written Premiums

214,178

156,689

168,912

36.7

%

(7.2

%)

Net Earned Premiums

$

177,963

$

163,621

$

168,291

8.8

%

(2.8

%)

Net Losses and LAE

(133,311

)

(89,304

)

(94,399

)

49.3

%

(5.4

%)

Commission Expenses

(39,136

)

(34,008

)

(32,240

)

15.1

%

5.5

%

Other Operating Expenses

(20,861

)

(19,593

)

(16,242

)

6.5

%

20.6

%

Other Underwriting Income

565

522

690

8.3

%

(24.4

%)

Other Underwriting Income (Expense)

$

(14,780

)

$

21,238

$

26,100

NM

(18.6

%)

Losses and LAE Ratio

74.9

%

54.6

%

56.1

%

Commission Expense Ratio

22.0

%

20.8

%

19.2

%

Other Operating Expense Ratio (1)

11.4

%

11.6

%

9.2

%

Combined Ratio

108.3

%

87.0

%

84.5

%

(1) - Includes Other Operating Expenses and Other Underwriting Income (Expense).

Gross Written Premiums

2017 versus 2016

Gross Written Premiums increased $58.8 million for the year ended December 31, 2017, compared to the same period in 2016, with growth across all of our segment's products. Our A&H product had significant growth increasing $24.1 million attributable to new business and increased renewal business. Growth was seen in our P&C, Surety and Agriculture business, as well as an increase of $4.9 million in assumed RRPs, primarily attributable to CAT losses from Hurricanes Harvey, Irma and Maria, period over period.  

47

2016 versus 2015

Gross written premiums decreased $10.7 million for the year ended December 31, 2016 compared to the same period in 2015, primarily due to the nonrenewal of a significant excess of loss treaty within our A&H product and to a lesser extent rate reductions in our Marine product. The decline in Gross written premiums was partially offset by new premiums in our P&C, Professional Liability and Agriculture products and to a lesser extent an increase in assumed RRPs in our P&C and Marine products.

Ceded Written Premiums

2017 versus 2016

Ceded Written Premiums were $9.7 million, resulting in a retention ratio of 95.7%, for the year ended December 31, 2017 compared to $8.4 million, resulting in a retention ratio of 94.9%, for the same period in 2016. The increase in the retention ratio was primarily due to changes in the mix of business with proportionately more A&H premium, which had 100% retention. This increase was partially offset by the impact of ceded RRPs resulting from Hurricane Maria.

2016 versus 2015

Ceded Written Premiums were $8.4 million, resulting in a retention ratio of 94.9%, for the year ended December 31, 2016 compared to $6.9 million, resulting in a retention ratio of 96.1%, for the same period in 2015. The decrease was primarily due to an increase in ceded RRPs in our Marine product and an increase in excess of loss costs in our P&C product.

Net Earned Premiums

2017 versus 2016

Net Earned Premiums for the year ended December 31, 2017 increased $14.3 million as compared to the same period in 2016, primarily due to continued growth in our P&C, Agriculture and Specialty Casualty products. In addition, there was an increase in net assumed RRP benefit with a $6.1 million net RRP benefit for the year ended December 31, 2017, compared to a $1.6 million net RRP benefit for the same period in 2016. The net assumed RRP benefit in 2017 was primarily related to RRPs on Hurricanes Irma and Harvey.  Partially offsetting these increases in Net Earned Premiums was the impact from non-renewals in 2016 and late 2015 in our A&H products earning into 2017 as compared to 2016.

2016 versus 2015

Net Earned Premiums decreased $4.7 million for the year ended December 31, 2016 compared to the same period in 2015, primarily due to significant non-renewals in our A&H products, and to a lesser extent, rate reductions in our Marine product.  This decline was partially offset by a change in estimated earnings in our Surety product, growth in our P&C, Agriculture and Professional Liability products, as well as an increase in assumed RRPs in our P&C product.  

Net Losses and LAE

The Net Losses and LAE Reserves as of December 31, 2017, 2016 and 2015 are as follows:

GlobalRe

Years Ended December 31,

amounts in thousands

2017

2016

2015

Case Reserves

$

58,962

$

47,505

$

32,160

IBNR Reserves

93,275

67,856

76,616

Total

$

152,237

$

115,361

$

108,776

48

The following table presents the impact of Net RRPs and Reserve Releases or (Development / Strengthening) on our Net Losses and LAE Ratio for the years ended December 31, 2017, 2016 and 2015:

GlobalRe

Years Ended December 31,

2017

2016

2015

Reported Net Losses and LAE Ratio

74.9%

54.6%

56.1%

Net RRPs

2.7%

0.6%

0.3%

Additional Net Current AY Release/(Development)

(26.4%)

(2.4%)

(2.0%)

Net Prior AY Reserve Release/(Strengthening)

(1.6%)

1.3%

5.5%

Adjusted Net Losses and LAE Ratio

49.6%

54.1%

59.9%

2017 versus 2016

For the year ended December 31, 2017, our Reported Net Losses and LAE Ratio increased 20.3 points as compared to the same period in 2016. This was primarily driven by:

$45.4 million of Additional Net Current AY Reserve Development for the year ended December 31, 2017 primarily attributable to CAT losses of $34.9 million from Hurricanes Maria, Irma and Harvey, $1.8 million from the Puebla, Mexico Earthquake, and $8.7 million from other weather-related losses during the year. This compares to $3.9 million for the same period in 2016, mostly related to CAT losses including the Alberta Wildfires ($5.1 million), the Ecuador Earthquake ($2.7 million) and the Taiwan Earthquake ($0.9 million), partially offset by favorable loss emergence on the current AY, mostly driven by our A&H product.

$2.8 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2017 mostly related to the settlement of a large A&H claim and unfavorable loss emergence within our P&C product, partially offset by favorable loss emergence across our Agriculture and Marine products, compared to $2.2 million of Net Prior AY Reserve Releases for the same period in 2016, related to our A&H product.

Partially offsetting the impact of the above items on the Reported Net Losses and LAE Ratio are:

The Adjusted Net Losses and LAE Ratio decreased 4.5 points year over year due to changes in mix of business with proportionally less earnings coming from our A&H product, which carries a higher loss ratio, and an increase in earnings from our P&C products, which carry lower loss ratios.

A $6.1 million net RRP benefit was primarily due to the CAT losses from Hurricanes Harvey, Irma and Maria consisting of $7.5 million of assumed RRPs, partially offset by $1.4 million of ceded RRPs, compared to a $1.6 million net RRP benefit for the same period in 2016.

2016 versus 2015

For the year ended December 31, 2016, our Reported Net Losses and LAE Ratio decreased 1.5 points as compared to the same period in 2015. This was primarily driven by:

The Adjusted Net Losses and LAE Ratio decreased 5.8 points year over year due to changes in mix of business with proportionally less earnings coming from our A&H product, which carries a higher loss ratio.

Partially offsetting the impact of the above items on the Reported Net Losses and LAE Ratio are:

$2.2 million of Net Prior AY Reserve Releases for the year ended December 31, 2016 driven by favorable loss emergence mostly from our A&H product. This compares to $9.1 million of Net Prior AY Reserve Releases for the same period in 2015 related to our Marine, P&C and A&H products due to lower than expected loss activity.

$3.9 million of Additional Net Current AY Reserve Development for the year ended December 31, 2016, of which $9.3 million was due to CAT losses including $5.1 million related to the Alberta Wildfires, $2.7 million due to the Ecuador Earthquake and $0.9 million due to the Taiwan Earthquake, partially offset by $5.4 million of favorable loss emergence on the current AY, mostly driven by our A&H product. This compares to $1.2 million of Net Current AY Reserve Development for the same period in 2015, mostly related to two large Marine losses.

49

Commission Expenses

2017 versus 2016

Our Commission Expense Ratio for the year ended December 31, 2017 increased 1.2 points compared to the same period in 2016. The increase was attributable to higher profit commission expense particularly on our Surety product and changes in the mix of business, partially offset by the effect of fully earned net RRPs from Hurricanes Irma, Harvey and Maria.

2016 versus 2015

The Commission Expense Ratio increased 1.6 percentage points for the year ended December 31, 2016 compared to the same period in 2015, resulting from an increase in earned premium for our P&C, Agriculture and Professional Liability products that attract higher commission rates, as well as additional profit commission expenses in our A&H and P&C products.

Other Operating Expenses

2017 versus 2016

Other Operating Expenses for the year ended December 31, 2017 increased $1.3 million as compared to the same period in 2016, primarily due to costs associated with new business initiatives.

2016 versus 2015

Other Operating Expenses increased $3.4 million for the year ended December 31, 2016 compared to the same period in 2015, due to growth in our underwriting teams and support staff, as well as increases in the allocation of corporate overhead.

Capital Resources and Liquidity

Capital Resources

Our capital resources consist of funds deployed or available to be deployed to support our business operations.  As of December 31, 2017 and 2016, our capital resources were as follows:

As of  December 31,

amounts in thousands

2017

2016

Senior Notes

$

263,885

$

263,728

Stockholders' Equity

1,225,965

1,178,188

Total Capitalization

$

1,489,850

$

1,441,916

Ratio of Debt to Total Capitalization

17.7

%

18.3

%

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

We primarily rely upon dividends from our subsidiaries to meet our Parent Company's obligations.  Our Parent Company's cash obligations primarily consist of semi-annual (April and October) interest payments of $7.6 million on the Senior notes.  

NIC may pay dividends to our Parent Company out of our statutory earned surplus pursuant to statutory restrictions imposed under the New York insurance law.  As of December 31, 2017, the maximum amount available for the payment of dividends by NIC in 2018 without prior regulatory approval is $105.7 million.

NCUL, our wholly-owned corporate member at Lloyd's, may pay dividends to our Parent Company up to the extent of available profits that have been distributed from the Syndicate.  As of December 31, 2017, there are no profits available for distribution.

NIIC, our wholly-owned UK Insurance company, may pay dividends out of its statutory profits subject to the restrictions imposed under UK Company law and European Insurance regulation (Solvency II).  As of December 31, 2017, the maximum amount available for the payment of dividends by NIIC without prior regulatory approval is $8.4 million. 

50

Senior Notes and Credit Facility

On October 4, 2013, we completed a public debt offering for $265.0 million of 5.75% Senior notes due on October 15, 2023 and received net proceeds of $263.3 million. The effective interest rate related to the net proceeds received from the 5.75% Senior notes is approximately 5.86%.  Interest is payable on the 5.75% Senior notes each April 15 and October 15. The terms of the 5.75% Senior notes contain various restrictive business and financial covenants, including a restriction on indebtedness, and other restrictions typical for debt obligations of this type, including limitations on mergers, liens and dispositions of the common stock of certain subsidiaries.  As of December 31, 2017, our Company was in compliance with all such covenants.

On November 4, 2016, NUAL entered into an Australian Dollar credit facility, which was subsequently amended on October 30, 2017, with Barclays Bank PLC. Letter of Credit commissions are payable under this facility at a rate of 1.55% per annum. The facility may be cancelled by either party after providing written notice.  This credit facility contains customary covenants for facilities of this type, including a restriction on future encumbrances that are outside the ordinary course of business, and a requirement to maintain at least £75.0 million of Funds at Lloyd's. As of December 31, 2017, letters of credit with an aggregate face amount of 24.0 million Australian Dollars were outstanding under the credit facility, and our Company was in compliance with all covenants.

On November 7, 2016, we entered into a credit facility agreement with ING Bank N.V., London Branch, individually and as Administrative Agent for a syndicate of lenders (the "Club Facility"), which is secured by all the common stock of NIC and requires us to maintain at least forty percent of the outstanding amounts under such facility as Funds at Lloyd's. The Club Facility has two tranches with one tranche extending a $140.0 million commitment and the other tranche extending a £60.0 million commitment. In addition, in order to support the increased underwriting capacity of the Syndicate for the 2017 UWY, we amended the $25.0 million credit facility with ING Bank N.V., London Branch dated November 20, 2015, on November 7, 2016 to extend the term for an additional two years (the "Bilateral Facility"). Both of these facilities, as well as the November 4, 2016 facility, are used to fund underwriting obligations at Lloyd's for the 2017 UWY, as well as open prior UWYs.

The Bilateral Facility is a non-committed facility which has an applicable fee rate ranging from 0.85% to 1.20% per annum based upon our Company's S&P rating. For the Club Facility the applicable fee rate payable ranges from 0.95% to 1.60% per annum based on a tiered schedule that is based on our then-current financial strength ratings issued by S&P and A.M. Best and the amount of our own collateral utilized to fund our participation in the Syndicate.  If any letters of credit remain outstanding under these facilities after December 31, 2018, we would be required to post additional collateral to secure the remaining letters of credit.  As of December 31, 2017, letters of credit with an aggregate face amount of $125.0 million and £60.0 million were outstanding under the Club Facility and we had an aggregate of $1.1 million of cash collateral posted.  As of December 31, 2017 there were letters of credit with a face amount of $25.0 million outstanding under the Bilateral Facility.

The Bilateral and Club Facilities contain 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. These credit facilities also provide 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 our Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting our Company and our subsidiaries, the occurrence of certain material judgments, or a change in control of our Company.  As of December 31, 2017, our Company was in compliance with all covenants.

Shelf Registration

We generally maintain the ability to issue certain classes of debt and equity securities via a universal shelf registration statement filed with the SEC, which is renewed every three years. The shelf registration provides us the means to access the debt and equity markets relatively quickly.  Our current shelf registration was filed on April 14, 2015 with the SEC and expires in 2018. We intend to renew our current shelf registration prior to its expiration. 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.

Consolidated Cash Flows

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, our cash flow available 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.

51

We believe that we have adequately managed our cash flow requirements related to reinsurance recoveries from their 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 our Company.  The payment of gross claims and related collections from reinsurers with respect to large losses could significantly impact our liquidity needs.  However, in general, we expect to collect our paid reinsurance recoverables under the terms described above.  

Net cash provided by operating activities was $265.3  million for the year ended December 31, 2017 compared to $229.4 million for the same period in 2016.  Operating cash flows increased from the prior year due to the growth of our business, coupled with increased investment income collections due to growth in invested assets and higher yields. These increases were partially offset by higher federal tax payments and refunds of cash collateral held for certain lines of business.

Net cash used in investing activities was $247.7  million for the year ended December 31, 2017 compared to  $211.4 million for the comparable period in 2016.   The increase in cash used in investing activities is the result of changes in operating cash flows and the associated ongoing management of our investment portfolio.

Net cash used in financing activities was $18.4 million for the year ended December 31, 2017 compared to $7.3 million for the same period in 2016. The increase in cash used in financing activities is primarily related to increased tax withholding payments on vested stock compensation in 2017 as compared with 2016. To a lesser extent 2017 financing cash flows were impacted by the institution of a quarterly stockholder dividend which was paid for the first time in the third quarter of 2016.

Our diversified underwriting portfolio has demonstrated an ability to withstand catastrophic losses. Since 1993, we have generated positive cash flows from operations, notwithstanding the impacts of the global financial crisis and the recognition of significant natural CAT-related losses during these years. Should claim payment obligations accelerate beyond our ability to fund payments from operating cash flows, we would utilize our cash and cash equivalent balances and/or liquidate a portion of our investment portfolio. Our investment portfolio is heavily weighted towards conservative, high quality and highly liquid securities which would be available in two business days under normal market conditions. Unrestricted Cash and Short Term investments, together with Fixed Maturities due in one year or less, total $410.5 million at December 31, 2017.  By comparison, we estimate that the largest exposure to loss from a single 1 in 250 year natural CAT event as of December 31, 2017, results in a probable maximum pre-tax gross and net loss of approximately $182.1 million and $39.9 million, respectively, including the cost of RRPs.

Our Company anticipates closing on the purchase of all of the shares of ASCO and BDM in the first half of 2018. The aggregate consideration for the acquisition of ASCO and BDM is EUR 35 million and will be funded through our Company's existing capital resources. See  Footnote 8, Commitment and Contingencies , in our consolidated financial statements included in this Annual Report on Form 10-K for further information.

Ratings

Our ability to underwrite is dependent upon the financial strength of NIC, NSIC, Lloyd's and NIIC business.  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 important to 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 our 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 our financial strength ratings, including a possible reduction in demand for our products, higher borrowing costs and our ability to access the capital markets.

U.S. insurance companies, NIC and NSIC, utilize the financial strength ratings from A.M. Best and S&P for underwriting purposes. NIC and NSIC are both rated "A" (Excellent – positive outlook) by A.M. Best and "A" (Strong - stable outlook) by S&P.  The Syndicate 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 – negative outlook) by S&P. NIIC utilizes the financial strength ratings from AM Best and S&P for underwriting purposes.  NIIC is rated "A" (Excellent – stable outlook) by AM 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.

52

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

Off –Balance Sheet Transactions

We have no material off-balance sheet transactions with the exception of our letter of credit facilities.

Contractual Obligations

The following table sets forth the best estimate of our known contractual obligations with respect to the items indicated as of December 31, 2017:

Payments Due by Period

amounts in thousands

Total

Less than

1 Year

1-3 Years

3-5 Years

Thereafter

Reserves for Losses and LAE  (1)

$

2,515,145

$

885,113

$

904,458

$

398,164

$

327,410

5.75% Senior Notes (2)

353,251

15,238

30,475

30,475

277,063

Operating Leases (3)

91,204

12,075

22,864

19,969

36,296

Total

$

2,959,600

$

912,426

$

957,797

$

448,608

$

640,769

(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 $809.8 million.  See "Business – Loss Reserves" included herein.

(2)

Includes interest payments.

(3)

Obligation includes rent and rent items.  Rent items are estimates based on the lease agreement due to uncontrollable fluctuations of actual costs.

Due to the uncertainty regarding the timing and amounts related to the Transition Tax that will ultimately be paid has been excluded from the above contractual obligations table. See  Footnote 9, Income Taxes , in our consolidated financial statements included in this Annual Report on Form 10-K for further information.

Investments

Our investment portfolio is invested primarily in publicly traded, investment grade, fixed income securities with an average credit quality of AA-/Aa3 as rated by S&P or Moody's Investors Service ("Moody's").  As of December 31, 2017, our portfolio had a duration of 3.5 years.  Management periodically projects cash flow of the investment portfolio and other sources in order to maintain the appropriate levels of liquidity in an effort to ensure our ability to satisfy claims.  As of December 31, 2017 and December 31, 2016, all Fixed Maturities and Equity Securities held by us were classified as available-for-sale.

Our portfolio is externally managed by independent, professional investment managers and is broadly diversified across geographies, sectors, and issuers. The primary objectives are to maximize total investment return in the context of preserving and enhancing stockholder value and the statutory surplus of our regulated insurance companies.  As part of our overall investment strategy, we seek to build a tax efficient investment portfolio by maintaining an allocation to tax exempt municipal bonds. As of December 31, 2017, the tax-exempt portion of our Fixed Maturities portfolio was approximately 22.4%. Additionally, substantially all of our Equity Securities portfolio is invested in tax efficient securities which qualify for the dividends received deduction. Our investments are subject to the oversight of the respective insurance companies' Boards of Directors and the Finance Committee of the Parent Company's Board of Directors.

We are a specialty insurance company and periods of moderate economic recession or inflation tend not to have a significant direct effect on 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.

53

The following table summarizes the composition of our available-for-sale investments at fair value:

Fair Value as of December 31,

amounts in thousands

2017

2016

% Change

Fixed Maturities:

U.S. Treasury Bonds, Agency Bonds and Foreign Government Bonds

$

393,563

$

273,776

43.8

%

States, Municipalities and Political Subdivisions

814,632

547,415

48.8

%

Mortgage-Backed and Asset-Backed Securities:

Agency Residential Mortgage-Backed Securities

407,619

487,364

(16.4

%)

Residential Mortgage Obligations

54,104

20,530

163.5

%

Asset-Backed Securities

328,753

314,601

4.5

%

Commercial Mortgage-Backed Securities

160,904

154,139

4.4

%

Subtotal

$

951,380

$

976,634

(2.6

%)

Corporate Exposures

897,479

838,057

7.1

%

Total Fixed Maturities

$

3,057,054

$

2,635,882

16.0

%

Equity Securities:

Common Stocks

$

52,439

$

164,087

(68.0

%)

Preferred Stocks

183,542

185,055

(0.8

%)

Total Equity Securities

$

235,981

$

349,142

(32.4

%)

Short-Term Investments

$

127,128

$

143,539

(11.4

%)

Total Investments

$

3,420,163

$

3,128,563

9.3

%

Invested assets increased from December 31, 2016 due to operating cash flows. Operating cash flows were primarily directed to municipal bonds and to a lesser extent Residential Mortgage Obligations, some of which are floating rate securities which protect against interest rate risk in a rising rate environment. The decrease in Common Stocks is due to the liquidation of our Common Stock Equity Securities portfolio in December 2017, the proceeds of which were invested in U.S. Treasuries as we reassess our actively managed common stock equity strategy.

The following table sets forth the amount of our Fixed Maturities as of December 31, 2017 by S&P credit rating or, if an S&P rating is not available, the equivalent Moody's rating.

December 31, 2017

amounts in thousands

Rating

Fair Value

Amortized Cost

Rating Description:

Extremely Strong

AAA

$

427,448

$

424,538

Very Strong

AA

1,365,623

1,356,761

Strong

A

752,369

746,768

Adequate

BBB

385,526

377,802

Speculative

BB & Below

125,646

121,183

Not rated

NR

442

356

Total

AA- (1)

$

3,057,054

$

3,027,408

(1) - The total rating is the weighted average quality rating for the Fixed Maturities portfolio as a whole.

The following table sets forth the composition of the non-government guaranteed Fixed Maturities categorized by asset class and 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, 2017

amounts in thousands

AAA

AA

A

BBB

BB and below

NR

Fair Value

Amortized Cost

Municipal Bonds

$

80,829

$

538,876

$

177,601

$

17,326

$

-

$

-

$

814,632

$

795,919

Agency Residential Mortgage-Backed

-

407,619

-

-

-

-

407,619

410,681

Residential Mortgage-Backed

11,481

4,919

61

33,128

4,073

442

54,104

53,577

Asset-Backed

127,882

60,106

111,344

29,421

-

-

328,753

327,278

Commercial Mortgage-Backed

103,600

29,939

27,365

-

-

-

160,904

159,732

Corporate Exposures

6,742

56,078

407,436

305,651

121,572

-

897,479

886,725

Total

$

330,534

$

1,097,537

$

723,807

$

385,526

$

125,645

$

442

$

2,663,491

$

2,633,912

54

The following table sets forth our U.S. Treasury Bonds, agency bonds and Foreign Government Bonds, as well as our State, Municipality and Political Subdivision Bond holdings by type:

As of December 31, 2017

amounts in thousands

Fair Value

Amortized Cost

U.S. Treasury Bonds, Agency Bonds and Foreign Government Bonds:

U.S. Treasury Bonds

$

178,251

$

177,848

Agency Bonds

85,891

86,124

Foreign Government Bonds

129,421

129,524

Total U.S. Treasury Bonds, Agency Bonds and Foreign Government Bonds

$

393,563

$

393,496

States, Municipalities and Political Subdivisions:

General Obligation

$

208,257

$

203,850

Prerefunded

49,346

47,353

Revenue

427,007

414,801

Taxable

130,022

129,915

Total States, Municipalities and Political Subdivisions

$

814,632

$

795,919

As of December 31, 2017, we own $53.6 million of municipal securities, which are credit enhanced by various financial guarantors which have an average underlying credit rating of AA-.  

The following table sets forth our Agency Residential Mortgage-Backed Securities ("AMBS")  issued by the Government National Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") and the quality category (Prime, Alternative A-paper ("Alt-A") and Other for  Residential Mortgage -Backed Securities ("RMBS") as of December 31, 2017:

As of December 31, 2017

amounts in thousands

Fair Value

Amortized Cost

AMBS:

GNMA

$

43,152

$

42,778

FNMA

257,053

259,835

FHLMC

107,414

108,068

Total Agency Residential Mortgage-Backed Securities

$

407,619

$

410,681

RMBS:

Prime

$

41,735

$

41,235

Alt-A

888

805

Other

11,481

11,537

Total Residential Mortgage-Backed Securities

$

54,104

$

53,577

We analyze our mortgage-backed securities by credit quality of the underlying collateral distinguishing between the securities issued by FNMA, FHLMC and GNMA, which are federal government sponsored entities, and non-FNMA and non-FHLMC securities broken out by prime, Alt-A and other collateral.  The securities issued by FNMA and FHLMC are the obligations of each respective entity.  The U.S. Department of the Treasury has agreed to provide support to FNMA and FHLMC under a Preferred Stock Purchase Agreement by committing to make quarterly payments to these enterprises, if needed, to maintain a zero net worth.

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 greater than prime but less than subprime.  Such prime and Alt-A categories are as defined by S&P.

55

Details of the collateral of our Asset-Backed Securities portfolio as of December 31, 2017 are presented below:

As of December 31, 2017

amounts in thousands

Fair Value

Amortized Cost

Auto Loans

$

26,100

$

26,014

Credit Cards

23,239

23,256

Collateralized Loan Obligations

99,893

99,522

Single Family Rental

45,773

45,485

Time Share

35,079

35,337

Aircraft

20,096

19,401

Consumer Loans

46,000

46,132

Other

32,573

32,131

Total Asset-Backed Securities

$

328,753

$

327,278

Details of our Corporate Exposures portfolio as of December 31, 2017 are presented below:

As of December 31, 2017

amounts in thousands

Fair Value

Amortized Cost

Corporate Exposures:

Corporate Bonds

$

703,664

$

699,092

Hybrid Bonds

161,573

157,075

Redeemable Preferred Stocks

32,242

30,558

Total Corporate Exposures

$

897,479

$

886,725

As of December 31, 2017, the fair value of securities issued in foreign countries was $353.1 million, with an amortized cost of $352.8 million, representing 10.7% of our total Fixed Maturities and Equity Securities. Our largest exposure is Canada with a total of $152.3 million followed by the United Kingdom with a total of $40.2 million.

Our Company did not have gross unrealized investment losses where the fair value was less than 80.0% of amortized cost as of December 31, 2017.

Our Company had four credit related OTTI losses of $2.1 million in our Equity Securities portfolio during the year ended December 31, 2017. During the year ended December 31, 2016, we recognized one credit related OTTI loss of $0.2 million in our Fixed Maturities portfolio. During the year ended December 31, 2015, we recognized three credit related OTTI losses of $1.7 million in our Equity Securities portfolio.  

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 Fixed Maturities in unrealized loss positions that are not other-than-temporarily impaired before recovery. For structured securities, default probability and severity assumptions differ based on property type, vintage and the stress of the collateral.  We do not intend to sell any of these securities and it is more likely than not that, we will not be required to sell these securities before the recovery of the amortized cost basis.  For Equity Securities, we also consider our intent to hold securities as part of the process of evaluating whether a decline in fair value represents an other-than-temporary decline in value.  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 investments for impairment losses could result in a significant change in impairment losses reported in the Consolidated Financial Statements.

Reserves for losses and LAE for loss events

Our Company monitors the development of paid and reported claims activities in relation to the estimate of ultimate losses established for loss events.  Actual losses from such loss events may differ materially from the estimated losses generally due to the receipt of additional information from insureds or brokers, inflation in repair costs due to the limited availability of labor and materials or the attribution of losses to coverages, which our Company assumed we would not have exposure to.

56

Asbestos Liability

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

The reserves for asbestos exposures as of December 31, 2017 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 and (ii) attritional asbestos claims that could be expected to occur over time.  Substantially all of our asbestos liability reserves are included in our U.S. Marine operating segment loss reserves.  

There can be no assurances 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 affect the outcome of the asbestos exposures of our insureds.

The following tables set forth our gross and net losses and LAE reserves, incurred losses and LAE, and payments for our asbestos exposures for the periods indicated:

Years Ended December 31,

amounts in thousands

2017

2016

2015

Gross of Reinsurance

Beginning Gross Reserves

$

15,213

$

15,256

$

15,370

Plus:  Incurred Losses & LAE

78

90

(43

)

Less:  Calendar Year Payments

42

133

71

Ending Gross Reserves

$

15,249

$

15,213

$

15,256

Gross Case Loss Reserves

$

12,984

$

12,948

$

12,991

Gross IBNR Loss Reserves

2,265

2,265

2,265

Ending Gross Reserves

$

15,249

$

15,213

$

15,256

Net of Reinsurance

Beginning Net Reserves

$

10,203

$

10,200

$

10,291

Plus:  Net Incurred Losses & LAE

(40

)

65

(1,092

)

Less:  Calendar Year Payments

(46

)

62

(1,001

)

Ending Net Reserves

$

10,209

$

10,203

$

10,200

Net Case Loss Reserves

$

8,149

$

8,143

$

8,140

Net IBNR Loss Reserves

2,060

2,060

2,060

Ending Net Reserves

$

10,209

$

10,203

$

10,200

Catastrophe Risk Management

Our Company has exposure to losses caused by hurricanes, earthquakes, and other natural and man-made catastrophic events. The frequency and severity of catastrophic events is unpredictable. The extent of covered 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 the concentration of underwriting exposures in catastrophe-exposed areas globally and manage this exposure through individual risk selection and through the purchase of reinsurance.  Our Company also uses modeling and concentration management tools that allow better monitoring and better control of the accumulations of potential losses from catastrophe events.  Despite these efforts, there remains uncertainty about the characteristics, timing and extent of insured losses given the unpredictable nature of catastrophes. The occurrence of one or more catastrophic events could have a material adverse effect on our results of operations, financial condition and/or liquidity.

Our Company has significant natural catastrophe exposures throughout the world. We estimate that the largest exposure to loss from a 1 in 250 year single natural catastrophe event comes from a hurricane on the east coast of the U.S.  As of December 31, 2017, our Company estimates that the probable maximum pre-tax gross and net loss exposure from such a hurricane event would be approximately $182.1 million and $39.9 million, respectively, including the cost of RRPs.

57

Like all catastrophe exposure estimates, the foregoing estimate of the 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 a hurricane, the various types of the insured risks exposed to the event at the time the event occurs and the estimated costs or damages incurred for each insured risk. The composition of the portfolio also makes such estimates challenging due to the non-static nature of the exposures covered under the policies in products such as Cargo and Hull. There can be no assurances that the gross and net loss amounts that our Company could incur in such an event or in any natural catastrophe event would not be materially higher than the estimates discussed above given the significant uncertainties with respect to such an estimate. Moreover, the portfolio of insured risks changes dynamically over time and there can be no assurance that the probable maximum loss will not change materially over time.

The occurrence of large loss events could reduce the reinsurance coverage that is available to our Company and could weaken the financial condition of the reinsurers, which could have a material adverse effect on our results of operations. Although the reinsurance agreements make the reinsurers liable to our Company to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance arrangements do not eliminate the obligation to pay claims to policyholders, as our Company is required to pay the losses if a reinsurer fails to meet its obligations under the reinsurance agreement.

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

Hurricanes Harvey, Irma and Maria, Alberta Wildfires and Hurricane Joaquin

Hurricanes Harvey, Irma and Maria, which occurred in the third quarter of 2017, the Alberta Wildfires, which occurred in the second quarter of 2016 and Hurricane Joaquin, which occurred in the fourth quarter of 2015 generated substantial losses in our U.S. and Int'l Marine and P&C operating segments, as well as in our GlobalRe reporting segment.   As of December 31, 2017, the net reserves for Hurricanes Harvey, Irma and Maria total $40.7 million, the net reserves for the Alberta Wildfires total $1.5 million and the net reserves for Hurricane Joaquin were fully paid. Management believes that should any adverse loss development for gross claims occur from the aforementioned hurricanes and wildfires, it would be contained within the reinsurance program.

Hurricanes Harvey, Irma and Maria

The following table sets forth our gross and net losses and LAE reserves, incurred losses and LAE, and payments for Hurricanes Harvey, Irma and Maria for the year ended December 31, 2017:

Year Ended December 31, 2017

amounts in thousands

Harvey

Irma

Maria

Gross of Reinsurance

Beginning Gross Reserves

$

-

$

-

$

-

Plus:  Incurred Losses & LAE

39,689

65,349

37,808

Less:  Calendar Year Payments

7,147

18,780

8,440

Ending Gross Reserves

$

32,542

$

46,569

$

29,368

Gross Case Loss Reserves

$

15,942

$

27,581

$

9,757

Gross IBNR Loss Reserves

16,600

18,988

19,611

Ending Gross Reserves

$

32,542

$

46,569

$

29,368

Net of Reinsurance

Beginning Net Reserves

$

-

$

-

$

-

Plus:  Net Incurred Losses & LAE

15,780

28,326

23,414

Less:  Calendar Year Payments

2,604

15,816

8,439

Ending Net Reserves

$

13,176

$

12,510

$

14,975

Net Case Loss Reserves

$

5,569

$

12,480

$

8,434

Net IBNR Loss Reserves

7,607

30

6,541

Ending Net Reserves

$

13,176

$

12,510

$

14,975

Hurricanes Harvey, Irma and Maria impacted 2017 with a total estimated net loss for the year of $67.5 million and $0.3 million in additional Net RRPs.

58

Our estimated net losses in relation to these events were derived from ground-up analysis of our in-force contracts providing coverage in the affected regions. These analyses include information from brokers or customers and also consider catastrophe modeling analyses, underwriters' review of certain contracts and industry and/or statistical estimates. Our estimates remain subject to change as additional data becomes available.

The magnitude and complexity of losses arising from these events inherently increases the level of uncertainty as well as management judgment involved in determining our estimated net reserve for loss expenses. As a result, our actual losses from these events may ultimately differ materially from our current estimates.

Alberta Wildfires

The following table sets forth our gross and net losses and LAE reserves, incurred losses and LAE, and payments for the Alberta Wildfires for the years ended December 31, 2017 and 2016:

Years Ended December 31,

amounts in thousands

2017

2016

Gross of Reinsurance

Beginning Gross Reserves

$

13,661

$

-

Plus:  Incurred Losses & LAE

(5,513

)

19,347

Less:  Calendar Year Payments

4,760

5,109

Less:  Foreign Currency Exchange Impact

(373

)

577

Ending Gross Reserves

$

3,761

$

13,661

Gross Case Loss Reserves

$

3,761

$

8,503

Gross IBNR Loss Reserves

-

5,158

Ending Gross Reserves

$

3,761

$

13,661

Net of Reinsurance

Beginning Net Reserves

$

7,263

$

-

Plus:  Net Incurred Losses & LAE

(2,581

)

11,682

Less:  Calendar Year Payments

3,459

4,119

Less:  Foreign Currency Exchange Impact

(255

)

300

Ending Net Reserves

$

1,478

$

7,263

Net Case Loss Reserves

$

1,478

$

5,008

Net IBNR Loss Reserves

-

2,255

Ending Net Reserves

$

1,478

$

7,263

The Alberta wildfires impacted 2016 with a total estimated net loss for the year of $11.7 million and $1.8 million in additional RRPs. During 2017, the net loss decreased by $2.6 million due to favorable development. The RRP decreased by $0.6 million.

59

Hurricane Joaquin

The following table sets forth our gross and net losses and LAE reserves, incurred losses and LAE, and payments for Hurricane Joaquin for the years ended December 31, 2017, 2016 and 2015:

Years Ended December 31,

amounts in thousands

2017

2016

2015

Gross of Reinsurance

Beginning Gross Reserves

$

1,486

$

22,735

$

-

Plus:  Incurred Losses & LAE

3,551

-

31,749

Less:  Calendar Year Payments

4,898

21,249

9,014

Ending Gross Reserves

$

139

$

1,486

$

22,735

Gross Case Loss Reserves

$

77

$

572

$

3,113

Gross IBNR Loss Reserves

62

914

19,622

Ending Gross Reserves

$

139

$

1,486

$

22,735

Net of Reinsurance

Beginning Net Reserves

$

-

$

1,933

$

-

Plus:  Net Incurred Losses & LAE

-

-

10,000

Less:  Calendar Year Payments

-

1,933

8,067

Ending Net Reserves

$

-

$

-

$

1,933

Net Case Loss Reserves

$

-

$

-

$

1,933

Net IBNR Loss Reserves

-

-

-

Ending Net Reserves

$

-

$

-

$

1,933

Hurricane Joaquin impacted 2015 with a total estimated net loss for the year of $10.0 million and $4.0 million in additional RRPs. At December 31, 2016 the RRPs were $2.6 million, reduced by $1.3 million as a result of losses reported not subject to excess of loss reinsurance protection.  At December 31, 2017, there was an overall RRP increase of $0.4 million as a result of a $3.6 million increase in gross losses with no net loss impact.

Reinsurance Recoverables

Reinsurance recoverable includes the balances due to us from reinsurance companies for paid and unpaid losses and loss expenses, based on contracts in force, and are presented net of a reserve for uncollectible reinsurance which is determined based upon a review of the financial condition of the reinsurers and other factors.  We determine the reinsurance recoverable on unpaid losses and loss expenses using actuarial estimates, as well as a determination of our ability to cede unpaid losses and loss expenses under existing reinsurance contracts.  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 the obligation to pay claims to the policyholders.  Accordingly, our Company bears credit risk with respect to the 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 the costs and could have a material adverse effect on our business.

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

Our Company has established a reserve for uncollectible reinsurance in the amount of $12.6 million and $12.1 million as of December 31, 2017 and 2016, respectively. Our reserve is determined by considering reinsurer specific default risk as indicated by their financial strength ratings, as well as additional default risk for asbestos and environmental related recoverables or an individual impairment assessment for certain reinsurers that exhibit additional default risk. Actual uncollectible reinsurance could potentially differ from the estimate.  The increase in our reserves for uncollectible reinsurance as compared to 2016 is driven primarily by one of our reinsurers having been placed in liquidation by the State of California. We continue to monitor the liquidation process and assess our potential exposure.

60

Refer to Note 6, Ceded Reinsurance, in the Notes to Consolidated Financial Statements for additional information.

Critical Accounting Estimates

We prepare our financial statements in accordance with GAAP, which requires the use of estimates and assumptions.  Our consolidated financial statements include amounts that, either by their nature or due to requirements of GAAP, are determined using best estimates and assumptions.  Management has discussed and reviewed the development, selection, and disclosure of critical accounting estimates with our Company's Audit Committee.  While we believe that the amounts included in our consolidated financial statements reflect our best judgment, actual amounts could ultimately materially differ from those currently presented.

We believe the items that require the most subjective and complex estimates involve the reporting of:

Reserves for Losses and LAE (including losses that have occurred but were not reported to us by the financial reporting date);

Reinsurance Recoverables, including a provision for uncollectible reinsurance;

Written and Unearned Premium;

Recoverability of Deferred Tax Assets;

Impairment of investment securities; and

Valuation of invested assets.

Reserves for Losses and LAE

Reserves for losses and LAE represent an estimate of the expected cost of the ultimate settlement and administration of losses, based on facts and circumstances then known less the amount paid to date.  Our actuaries calculate indicated IBNR loss reserves by UWY for major product groupings using standard actuarial methodologies, which are projection or extrapolation techniques, including: (a) the loss ratio method, (b) the loss development method, and (c) the Bornhuetter-Ferguson method.  Each of these methodologies is generally applicable to both long tail and short tail lines of business depending on a variety of circumstances.  Informed subjective judgments as to our ultimate exposure to losses are an integral component of our loss reserving process due to numerous factors that contribute to the inherent uncertainty in the process of establishing loss reserves, including:

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

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

Changes in the frequency and severity of losses;

Changes in the underlying loss exposures of our policies; and

Changes in our claims handling procedures.

A review of the emergence of actual losses relative to expectations for each line of business generally derived from the quarterly and/or semi-annual in depth reserve analyses is conducted 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.  As time passes, estimated loss reserves for an UWY 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.  During the loss settlement period, it often becomes necessary to refine and adjust the estimates of liability on a claim either upward or downward.  No assurance can be given that actual claims made and related payments will not be in excess of the amounts reserved.

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 UWY, 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 our Company's best estimates for each UWY and are generally determined after evaluating a number of factors which include: information derived by underwriters and actuaries in the initial pricing of our business, the ultimate loss ratios established in the prior accounting period and the related judgments applied, the ultimate loss ratios of previous UWYs, premium rate changes, underwriting and coverage changes, changes in terms and conditions, legislative changes, exposure

61

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.

Bornhuetter-Ferguson method

The Bornhuetter-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 UWYs.  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 chain ladder 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 UWYs.

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

Application of Actuarial Methods

Reserves are established separately for each major product.  Our actuaries generally assume that historical loss development patterns are reasonable predictors of future loss patterns and apply a variety of traditional actuarial techniques to develop a reasonable expectation of ultimate losses. However, there are a number of products for which our Company has insufficient experience so as to generate credible actuarial projections.  In those instances, we typically evaluate overall industry experience, rely on the input of underwriting, and claims executives in setting assumptions for our IBNR reserves.  We also attempt to make reasonable provisions for the impact of economic, legal and competitive trends in projecting future loss development.

Our actuarial IBNR estimation approach is based on the nature of the data generated by the lines of business being reviewed.  Each business line can be characterized as either a long or short tailed line of business or, if it is a new business line, the length of the tail would not necessarily be immediately relevant and it would be treated only as a new business line.  

Short tailed lines of business have the least uncertainty of the three groups.  For short tailed lines of business there is typically a mature or close to mature dataset from which to select patterns and estimates.  Thus, the actuaries would generally apply a combination of loss development method and Bornhuetter-Ferguson methods that rely on internal historical patterns and losses.

For long tailed lines of business the uncertainty is greater.  Due to the amount of time it takes a long tailed segment to mature, there is uncertainty with regards to how any line of business or year will settle as well as uncertainty with regards to the path it will take to settle.  Additionally, due to their long tailed nature, many of the lines of business that are not new but are long tailed may not have a mature historical dataset from which to derive credible estimates for reserving.  For these segments, while standard actuarial reserving methods would usually be applied, the loss development method would generally only be applied in the more mature years where the expectation is that they are close to ultimate.  Where internal data on long tailed lines lacks sufficient credibility, overall industry experience would be evaluated and the input of underwriting and claims executives in setting assumptions would be considered.

For new business the assumption is that internal historical data would not be available and the actuaries will typically evaluate based on overall industry experience, and rely on the input of underwriting, and claims executives in setting assumptions for IBNR reserves.  Early on, unless there is a credible industry pattern or internal complementary line of business pattern, the loss ratio method would be applied and patterns would only be applied as the business begins to mature.  If there is a credible complementary or industry pattern Bornhuetter-Ferguson methods might be applied initially as well, particularly if it is a short tailed line of business.

62

The data distribution as of December 31, 2017 as measured by net case reserves outstanding is as follows:

Short Tailed

Long Tailed

New Business

Total

U.S. Insurance:

Marine

61.2

%

38.8

%

0.0

%

100.0

%

P&C

5.5

%

91.0

%

3.5

%

100.0

%

Professional Liability

0.0

%

99.8

%

0.2

%

100.0

%

Int'l Insurance:

Marine

61.8

%

35.2

%

3.0

%

100.0

%

P&C

56.5

%

7.6

%

35.9

%

100.0

%

Professional Liability

0.0

%

99.4

%

0.6

%

100.0

%

GlobalRe

80.2

%

9.8

%

10.0

%

100.0

%

Sensitivity Analysis

The following table provides a sensitivity analysis of our Net Reserves for Losses and LAE as of December 31, 2017:

Reasonably Likely Range of Deviation

Total Net

Strengthening

Release

amounts in thousands

Loss Reserve

Amount

%

Amount

%

U.S. Insurance

Marine

$

103,694

$

3,950

3.8

%

$

3,805

3.7

%

    P&C

892,555

42,856

4.8

%

40,892

4.6

%

Professional Liability

113,423

11,558

10.2

%

10,489

9.2

%

Portfolio Effect (1)

(17,399

)

(15,680

)

Total U.S. Insurance

$

1,109,672

$

40,965

3.7

%

$

39,506

3.6

%

Int'l Insurance

Marine

$

221,318

$

27,075

12.2

%

$

24,124

10.9

%

    P&C

103,479

16,121

15.6

%

13,948

13.5

%

Professional Liability

118,674

41,453

34.9

%

30,722

25.9

%

Portfolio Effect (1)

(32,134

)

(21,839

)

Total Int'l Insurance

$

443,471

$

52,515

11.8

%

$

46,955

10.6

%

GlobalRe

152,237

38,550

25.3

%

30,761

20.2

%

Subtotal

$

1,705,380

$

132,030

$

117,222

Portfolio Effect (1)

-

(79,840

)

(66,582

)

Group Total

$

1,705,380

$

52,190

3.1

%

$

50,640

3.0

%

Increase (Decrease) to Net Income

Amount

$

(41,230

)

$

40,005

Per Share (2)

$

(1.37

)

$

1.33

(1) - The totals for each segment are adjusted for portfolio effect.  The portfolio effect is the reduction in risk which arises out of diversification in the portfolio.

(2) - Calculated using average diluted shares of 30,071 for the year ended December 31, 2017.

A range of reasonable estimates has been developed based on the historical volatility of held reserves versus current estimates for the purposes of this sensitivity analysis. Our Company's lines of business, the market pricing adequacy and our Company's underwriting strategies have changed dynamically over the past ten years.  The impact from the shift on ranges will be greater for lines with longer emergence patterns. The individual lines will also have greater variance than the range for the entire book of business. The statistical variation is expected to have a somewhat higher range of deterioration than savings.  The computation of each range represents the central 50.0% of outcomes.  The movement within our reporting segments in an individual year may not fall within this range. There is a significant risk that the potential volatility of the current reserve estimates could differ in a material manner from the historical trends.  The total reserve variability is not equal to the sum of the segment variability due to the benefit of diversification.

63

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.  We are required to pay losses even if a reinsurer fails to meet its obligations under the applicable reinsurance agreement. 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.

Written and Unearned Premium

Substantially all of our business is placed through agents and brokers.  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 estimate the amount of written premium not yet reported based on judgments relative to current and historical trends of the business being written.  An unearned premium reserve is established to reflect the unexpired portion of each policy at the financial reporting date.  Assumed and ceded RRPs are written and fully earned in the period in which the loss event, which caused the reinstatement premium, occurred.

A portion of our premium is estimated for unreported premium, mostly for our Marine and Energy & Engineering products written by our Int'l Insurance reporting segment, as well as our A&H, Marine, P&C, Specialty Casualty, Agriculture and Surety products written by our GlobalRe reporting segment. Such premium estimates are 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.

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 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.

Recoverability of Deferred Tax Assets

We recognize deferred tax assets and liabilities, which primarily result from temporary differences between the amounts recorded in our Consolidated Financial Statements and the tax basis of our assets and liabilities.  At each balance sheet date, we assess the need to establish a valuation allowance that reduces deferred tax assets when it is more likely than not that all, or some portion, of the deferred tax assets will not be realized.  The valuation allowance is based on all available information including projections of future taxable income from each tax-paying component in each tax jurisdiction, principally derived from available tax planning strategies.  Projections of future taxable income incorporate several assumptions of future business and operations that are apt to differ from actual experience. We regularly review our deferred tax assets for recoverability, taking into consideration our history of earnings, expectations for future earnings, taxable income in carryback years and the expected timing of the reversals of existing temporary differences. When we believe it is more likely than not that a deferred tax asset will not be realized, we establish a valuation allowance for that deferred tax asset.  Our valuation allowance as of December 31, 2017 is $1.8 million.

We have accounted for the tax effects of the Tax Act on a provisional basis. SAB 118 has provided guidance for companies that are still analyzing their accounting for the income  tax effects of the Tax Act in the period of enactment, allowing for a measurement period of up to one year after the enactment date to finalize the recording of the related  tax impacts. As of December 31, 2017, we have made a reasonable estimate of the effects on our deferred  tax balances and the Transition Tax.

Impairment of Investment Securities

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.  Our investment portfolio is the largest component of consolidated assets and a multiple of stockholder's equity.  OTTI could be material to our financial condition and results of operations. Refer to Note 3, Investments, in the Notes to Consolidated Financial Statements for additional information.

64

Valuation of Investments

Fair value is defined as the price in the principal market that would be received for an asset to facilitate an orderly transaction between market participants on the measurement date.  We determine the fair value of certain financial instruments based on their underlying characteristics and relevant transactions in the marketplace.  GAAP guidance requires an entity to maximize the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Refer to Note 4, Fair Value, in the Notes to Consolidated Financial Statements for additional information.

Recent Accounting Pronouncements

Refer to Note 1. Organization & Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements for a discussion of recently issued accounting pronouncements that we have not yet adopted.

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 from 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, 2017.  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, 2017 was $3.4 billion of which 89.4% 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 make direct investments in commodities.

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

There were no significant changes regarding our investment portfolio in our primary market risk exposures or in how those exposures were managed for the year ended December 31, 2017.  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

Interest rate risk is defined as the measurement of potential loss in fair values of market sensitive instruments resulting from one or more selected hypothetical changes in interest rates.  In our sensitivity model, a hypothetical change in interest 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 our Consolidated Financial Statements.  Actual results may differ from the hypothetical change in interest 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 model, we use fair values to measure our potential loss on Fixed Maturities and interest rate sensitive preferred stocks, which are classified as Equity Securities for financial reporting purposes.  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 our comprehensive income and stockholders' equity but will not ordinarily have an immediate effect on our 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 interest rate sensitive securities, modified duration modeling is used to calculate changes in fair values.  Durations on interest rate sensitive securities are adjusted for call, put and interest rate reset features.  Duration on tax-exempt securities is adjusted for the fact that the prices on such securities are less sensitive to changes in interest rates compared to treasury securities.  Average duration is calculated on a market value weighted basis using holdings as of December 31, 2017.

65

The following table summarizes the effect that an immediate, parallel shift in the interest rate yield curve would have on our interest rate sensitive securities as of December 31, 2017 and 2016:

Interest Rate Shift in Basis Points

amounts in thousands

-100

-50

0

+50

+100

December 31, 2017:

Total market value

$

3,354,341

$

3,298,279

$

3,240,596

$

3,181,617

$

3,121,990

Market value change from base

3.5

%

1.8

%

-1.8

%

-3.7

%

Change in unrealized value

$

113,745

$

57,683

$

-

$

(58,979

)

$

(118,606

)

December 31, 2016:

Total market value

$

2,929,824

$

2,877,919

$

2,820,936

$

2,763,389

$

2,705,842

Market value change from base

3.9

%

2.0

%

-2.0

%

-4.1

%

Change in unrealized value

$

108,888

$

56,983

$

-

$

(57,547

)

$

(115,094

)

Common Equity Price Risk

Our portfolio of common equity securities currently valued at $52.4 million, as of December 31, 2017, 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 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

As a global company, we transact business in multiple currencies.  Many of our non-U.S. subsidiaries maintain assets and liabilities in local currencies and write business in currencies that differ from their functional currency. Therefore, foreign currency exchange risk is generally limited to net assets denominated in foreign currencies. Foreign currency exchange rate gains and losses are recognized in our consolidated Statements of Income when net monetary assets or liabilities are denominated in foreign currencies that differ from the functional currency of those subsidiaries. Net monetary assets or liabilities include, but are not limited to, cash and cash equivalents, premiums receivable, reinsurance recoverable and claims payable. While unrealized foreign exchange gains and losses on net monetary balances are reported in earnings, the offsetting unrealized gains and losses on invested assets are recorded as a separate component of stockholders' equity, to the extent that the asset currency does not match that entity's functional currency. We manage our foreign currency exchange rate risk primarily through asset-liability matching. However, locally-required capital levels are invested in local currencies in order to satisfy regulatory requirements and to support local insurance operations and may not always be matched by related liabilities.

The principal currencies creating foreign currency exchange risk for our operations are the GBP, EUR and the CAD. The following table shows the foreign currency denominated net asset position, with elimination of intercompany balances, in USD equivalent at December 31, 2017 and 2016, and the expected dollar change in fair value that would occur if exchange rates changed 10% from exchange rates in effect at those times:

At Years Ended  December 31,

amounts in thousands

2017

2016

2017

2016

Original Currency

Value of Net Assets in USD

10% depreciation of all foreign currency exchange rates against the USD

GBP

$

43,117

$

25,333

$

(4,311

)

$

(2,534

)

EURO

(73,172

)

(29,870

)

7,317

2,987

CAD

82,639

67,992

(8,264

)

(6,799

)

Total (1)

$

52,584

$

63,455

$

(5,258

)

$

(6,346

)

(1) Amount excludes additional currencies where the value of net assets in USD equivalent is less than 1% of total net assets of our Company

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

66

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCO UNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

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

Management's Report on Internal Control Over Financial Reporting

(a)

Management's report on internal control over financial reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).  Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on our evaluation under such framework, our management concluded that our internal control over financial reporting as of December 31, 2017 was effective.

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.

Our Company's independent registered public accounting firm, KPMG LLP, has audited the effectiveness of our Company's internal control over financial reporting as of December 31, 2017, as stated in their report in item (b) below.

(b)

Attestation report of the registered public accounting firm

67

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors
The Navigators Group, Inc.:

Opinion on Internal Control Over Financial Reporting

We have audited The Navigators Group, Inc. 's and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.  

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes and financial statement schedules I to VI collectively, the consolidated financial statements, and our report dated February 21, 2018 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company's 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 in the accompanying 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial reporting 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.

Definition and Limitations of Internal Control Over Financial Reporting

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.

/s/ KPMG LLP

New York, NY
February 21, 2018

(c)

Changes in internal control over financial reporting

There was no further change during the fourth fiscal quarter in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

68

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 definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 10, 2018 (our "Proxy Statement") , which information is incorporated herein by reference.  Information concerning the Audit Committee and the Audit Committee's financial expert of our Company is contained under "Board of Directors and Committees" in our Proxy Statement, which information is incorporated herein by reference.  Information concerning compliance with Section 16(a) is contained under "Section 16(a) Beneficial Ownership Reporting Compliance" in our Proxy Statement.

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

Information concerning change to security holder procedures for recommending board of director nominees is contained under "Board Skills and Director Nominations" in our Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

Information concerning executive compensation will be contained under "Compensation Discussion and Analysis" in our 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 our Company is contained under "Election of Directors" and "Compensation Discussion and Analysis" in our 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 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 Proxy Statement, which information is incorporated herein by reference.  Information concerning director independence is contained under "Board of Directors and Committees" in our Proxy Statement, which information is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Information concerning the principal accountant's fees and services for our Company is contained under "Independent Registered Public Accounting Firm" in our Company's 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 listed in the accompanying Index to Exhibits on the following page 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.

69

Exhibit

No.

Description of Exhibit

Previously filed and Incorporated Herein by

Reference to:

3-1

Restated Certificate of Incorporation

Form S-8 filed July 26, 2002

(File No. 333-97183)

3-2

Certificate of Amendment to the Restated Certificate of Incorporation

Form S-8 filed July 26, 2002

(File No. 333-97183)

3-3

By-laws, as amended

Form S-1 (File No. 33-5667) (P)

3-4

Certificate of Amendment to the Restated Certificate of Incorporation

Form 10-Q for June 30, 2006

4-1

Specimen of Common Stock certificate, par value $0.10 per share

Form S-8 filed June 20, 2003

(File No. 333-106317)

4-2

Second Supplemental Indenture, dated as of October 4, 2013, between the Company and The Bank of New York Mellon

Form 8-K filed October 4, 2013

10-1*

Stock Option Plan

Form S-1 (File No. 33-5667) (P)

10-2*

Non-Qualified Stock Option Plan

Form S-4 (File No. 33-75918) (P)

10-3

Employment Agreement with Stanley A. Galanski effective March 26, 2001

Form 10-Q for March 31, 2001

10-4

Employment Agreement with R. Scott Eisdorfer dated September 1, 1999

Form 10-K for December 31, 2001

10-5*

2002 Stock Incentive Plan

Proxy Statement filed May 29, 2002

10-6*

Employee Stock Purchase Plan

Proxy Statement filed April 30, 2003

10-7*

Executive Performance Incentive Plan

Proxy Statement filed April 7, 2008

10-8

Form of Indemnity Agreement by the Company and the Selling Stockholders (as defined therein)

Amendment No. 2 to Form S-3 dated October 1, 2003 (File No.333-108424)

10-9*

Second Amended and Restated 2005 Stock Incentive Plan

Proxy Statement filed April 12, 2013

10-10

Third Amended and Restated Funds at Lloyd's Letter of Credit Agreement, dated as of November 7, 2016, among the Company, ING Bank N.V., London Branch, individually and as Administrative Agent and Letter of Credit Agent,  JP Morgan Chase Bank N.A., and Barclays Bank PLC

Form 8-K filed November 8, 2016

10-11

Employment Agreement with Colin Sprott dated July 10, 2013

Form 10-K for December 31, 2013

10-12*

Non-Qualified Deferred Compensation Plan

Form 10-Q for March 31, 2015

10-13

Guarantee, dated February 16, 2017, entered into by the Company

Form 10-K for December 31, 2016

10-14

Share Purchase Agreement, dated as of December 15, 2017, by and between the Company and Ackermans & van Haaren NV, SIPEF NV, Mr. Jozef Gielen and Kapimar Comm.V

Form 8-K filed December 18, 2017

11-1

Statement re Computation of Per Share Earnings

**

21-1

Subsidiaries of Registrant

**

23-1

Consent of Independent Registered Public Accounting Firm

**

31-1

Certification of CEO per Section 302 of the Sarbanes-Oxley Act

**

31-2

Certification of CFO per Section 302 of the Sarbanes-Oxley Act

**

70

32-1

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

**

32-2

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

**

101.INS

XBRL Instance Document

**

101.SCH

XBRL Taxonomy Extension Scheme

**

101.CAL

XBRL Taxonomy Extension Calculation Database

**

101.LAB

XBRL Taxonomy Extension Label Linkbase

**

101.PRE

XBRL Taxonomy Extension Presentation Linkbase

**

101.DEF

XBRL Taxonomy Extension Definition Linkbase

**

*     Compensatory Plan

**   Included herein

(P)  Paper filing only

ITEM 16. FORM 10-K SUMMARY

None.

71

SIGNAT URES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, our 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 21, 2018

By:

/s/ Ciro M. DeFalco

Ciro M. DeFalco

Executive 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 our Company and in the capacities and on the dates indicated.

Name

Title

Date

/s/ ROBERT V. MENDELSOHN

Chairman

February 21, 2018

Robert V. Mendelsohn

/s/ STANLEY A. GALANSKI

President and Chief Executive Officer

(Principal Executive Officer)

February 21, 2018

Stanley A. Galanski

/s/ CIRO M. DEFALCO

Executive Vice President and Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

February 21, 2018

Ciro M. DeFalco

/s/ SAUL L. BASCH

Director

February 21, 2018

Saul L. Basch

/s/ TERENCE N. DEEKS

Director

February 21, 2018

Terence N. Deeks

/s/ MERYL D. HARTZBAND

Director

February 21, 2018

Meryl D. Hartzband

/s/ GEOFFREY E. JOHNSON

Director

February 21 2018

Geoffrey E. Johnson

/s/ DAVID M. PLATTER

Director

February 21, 2018

David M. Platter

/s/ PATRICIA H. ROBERTS

Director

February 21, 2018

Patricia H. Roberts

/s/ JANICE C. TOMLINSON

Director

February 21, 2018

Janice C. Tomlinson

/s/ MARC M. TRACT

Director

February 21 2018

Marc M. Tract

72

INDEX TO CONSOLIDATED FINANC IAL STATEMENTS AND SCHEDULES

Page

Report of Independent Registered Public Accounting Firm

F-2

Consolidated Balance Sheets as of December 31, 2017 and 2016

F-3

Consolidated Statements of Income for each of the years ended December 31, 2017, 2016 and 2015

F-4

Consolidated Statements of Comprehensive Income for each of the years ended December 31, 2017, 2016 and 2015

F-5

Consolidated Statements of Stockholders' Equity for each of the years ended December 31, 2017, 2016 and 2015

F-6

Consolidated Statements of Cash Flows for each of the years ended December 31, 2017, 2016 and 2015

F-7

Notes to Consolidated Financial Statements

F-8

SCHEDULES:

Schedule I

Summary of Consolidated Investments-Other Than Investment in Related Parties

S-1

Schedule II

Condensed Financial Information of Registrant

S-2

Schedule III

Supplementary Insurance Information

S-5

Schedule IV

Reinsurance - Written Premiums

S-6

Schedule V

Valuation and Qualifying Accounts

S-7

Schedule VI

Supplementary Information Concerning P&C Insurance Operations

S-8


F-1

Report of Independent Regist ered Public Accounting Firm

To the Stockholders and Board of Directors

The Navigators Group, Inc.:

Opinion on the Financial Statements

We have audited the consolidated financial statements and the related notes and financial statement schedules I to VI (collectively, "the consolidated financial statements") of The Navigators Group, Inc. and subsidiaries (the "Company") as listed in the accompanying index. 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, 2017 and 2016, and the results of their operations and their cash flows for each of the years in the three‑year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The Navigators Group, Inc.'s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 21, 2018 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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 consolidated financial statements are free of material misstatement, whether due to error or fraud. An audit includes performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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.

We have served as the Company's auditor since 1985.

/s/KPMG LLP

New York, New York
February 21, 2018

F-2

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31,

amounts in thousands, except per share amounts

2017

2016

ASSETS

Investments:

Fixed Maturities, available-for-sale, at fair value (amortized cost: 2017: $3,027,408;

   2016: $2,628,225)

$

3,057,054

$

2,635,882

Equity Securities, available-for-sale, at fair value (cost: 2017: $224,159; 2016: $327,911)

235,981

349,142

Other Invested Assets

1,720

1,960

Short-Term Investments, at fair value (amortized cost: 2017: $127,125; 2016: $143,451)

127,128

143,539

Total Investments

$

3,421,883

$

3,130,523

Cash

67,084

64,643

Premiums Receivable

351,393

306,686

Prepaid Reinsurance Premiums

228,569

213,377

Reinsurance Recoverable on Paid Losses

72,494

82,582

Reinsurance Recoverable on Unpaid Losses and Loss Adjustment Expenses

809,765

779,276

Deferred Policy Acquisition Costs

135,249

119,660

Accrued Investment Income

19,480

17,315

Goodwill and Other Intangible Assets

6,596

6,451

Current Income Tax Receivable, Net

16,667

20,556

Deferred Income Tax, Net

22,271

20,938

Other Assets

73,171

52,030

Total Assets

$

5,224,622

$

4,814,037

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:

Reserves for Losses and Loss Adjustment Expenses

$

2,515,145

$

2,289,727

Unearned Premiums

987,681

887,344

Reinsurance Balances Payable

136,192

108,980

Senior Notes

263,885

263,728

Accounts Payable and Other Liabilities

95,754

86,070

Total Liabilities

$

3,998,657

$

3,635,849

Stockholders' Equity:

Preferred Stock, ($.10 par value, authorized 1,000 shares, none issued)

$

-

$

-

Common Stock, ($.10 par value, authorized 50,000 shares, issued 36,530 shares

   for 2017 and 36,147 shares for 2016)

3,650

3,612

Additional Paid-In Capital

376,868

373,983

Treasury Stock, at cost (7,023 shares for 2017 and 2016)

(155,801

)

(155,801

)

Retained Earnings

981,380

947,519

Accumulated Other Comprehensive Income

19,868

8,875

Total Stockholders' Equity

$

1,225,965

$

1,178,188

Total Liabilities and Stockholders' Equity

$

5,224,622

$

4,814,037

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

F-3

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31,

amounts in thousands, except per share amounts

2017

2016

2015

Gross Written Premiums

$

1,713,265

$

1,568,911

$

1,453,502

Revenues:

Net Written Premiums

$

1,271,330

$

1,186,224

$

1,043,860

Change in Net Unearned Premiums

(84,910

)

(85,879

)

(59,773

)

Net Earned Premiums

1,186,420

1,100,345

984,087

Net Investment Income

89,293

79,451

68,718

Total Other-Than-Temporary Impairment Losses

(2,002

)

(227

)

(1,870

)

Portion of Loss Recognized in Other Comprehensive Income

   (Before Tax)

(62

)

77

172

Net Other-Than-Temporary Impairment Losses Recognized

   In Earnings

(2,064

)

(150

)

(1,698

)

Net Realized Gains

45,073

9,186

8,373

Other Income (Loss)

(4,243

)

8,701

(491

)

Total Revenues

$

1,314,479

$

1,197,533

$

1,058,989

Expenses:

Net Losses and Loss Adjustment Expenses

$

806,265

$

665,448

$

572,598

Commission Expenses

184,731

165,045

129,977

Other Operating Expenses

233,230

234,096

223,516

Interest Expense

15,447

15,435

15,424

Total Expenses

$

1,239,673

$

1,080,024

$

941,515

Income Before Income Taxes

74,806

117,509

117,474

Income Tax Expense

34,312

34,783

36,417

Net Income

$

40,494

$

82,726

$

81,057

Net Income Per Common Share:

Basic

$

1.38

$

2.85

$

2.82

Diluted

$

1.35

$

2.75

$

2.73

Average Common Shares Outstanding:

Basic

29,441

29,074

28,785

Diluted

30,071

30,032

29,651

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

F-4

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31,

amounts in thousands

2017

2016

2015

Net Income

$

40,494

$

82,726

$

81,057

Other Comprehensive Income (Loss):

Change in Net Unrealized Gains (Losses) on Investments:

Unrealized Gains (Losses) on Investments arising during the period,

   net of Deferred Tax of $(8,748), $3,730 and $2,624 in 2017, 2016

   and 2015, respectively

$

23,123

$

(6,927

)

$

(5,331

)

Reclassification adjustment for Net Realized Gains included in Net

   Income net of Deferred Tax of $5,335, $(846) and $9,185 in

   2017, 2016 and 2015, respectively

(14,100

)

1,572

(17,058

)

Change in Net Unrealized Gains (Losses) on Investments

$

9,023

$

(5,355

)

$

(22,389

)

Change in Other-Than-Temporary Impairments

Non Credit Other-Than-Temporary Impairments arising during the

   period, net of Deferred Tax of $(16), $27 and $60 in 2017, 2016

   and 2015, respectively

$

40

$

(50

)

$

(112

)

Reclassification Adjustment for Other-Than-Temporary Impairment

   Credit Losses Recognized in Net Income net of Deferred Tax

   of $0, $0 and $(90) in 2017, 2016 and 2015, respectively

-

-

168

Change in Other-Than-Temporary Impairments

$

40

$

(50

)

$

56

Change in Foreign Currency Translation Gains (Losses), net of Deferred

   Tax of $(2,874), $5,017 and $351 in 2017, 2016 and 2015, respectively

$

1,930

$

(9,324

)

$

(622

)

Other Comprehensive Income (Loss)

$

10,993

$

(14,729

)

$

(22,955

)

Comprehensive Income

$

51,487

$

67,997

$

58,102

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

F-5

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Additional

Accumulated Other

Total

Common Stock

Paid-in

Treasury Stock

Retained

Comprehensive

Stockholders'

amounts in thousands

Shares

Amount

Capital

Shares

Amount

Earnings

Income (Loss)

Equity

Balance, December 31, 2014

35,586

$

3,556

$

345,244

7,023

$

(155,801

)

$

787,666

$

46,559

$

1,027,224

Net Income

-

-

-

-

-

81,057

-

81,057

Changes in Comprehensive Income (Loss):

Change in Net Unrealized Gain (Loss) on

   Investments

-

-

-

-

-

-

(22,389

)

(22,389

)

Change in Net Non-Credit Other-Than-

   Temporary Impairment Losses

-

-

-

-

-

-

56

56

Change in Foreign Currency Translation Gain

   (Loss)

-

-

-

-

-

-

(622

)

(622

)

Total Comprehensive Income (Loss)

-

-

-

-

-

-

(22,955

)

(22,955

)

Shares Issued (1)

299

30

(4,205

)

-

-

-

(4,175

)

Share-Based Compensation

-

-

14,997

-

-

-

-

14,997

Balance, December 31, 2015

35,885

$

3,586

$

356,036

7,023

$

(155,801

)

$

868,723

$

23,604

$

1,096,148

Net Income

-

-

-

-

-

82,726

-

82,726

Dividends Declared (2)

-

-

-

-

-

(3,930

)

-

(3,930

)

Changes in Comprehensive Income (Loss):

Change in Net Unrealized Gain (Loss) on

   Investments

-

-

-

-

-

-

(5,355

)

(5,355

)

Change in Net Non-Credit Other-Than-

   Temporary Impairment Losses

-

-

-

-

-

-

(50

)

(50

)

Change in Foreign Currency Translation Gain

   (Loss)

-

-

-

-

-

-

(9,324

)

(9,324

)

Total Comprehensive Income (Loss)

-

-

-

-

-

-

(14,729

)

(14,729

)

Shares Issued (1)

262

26

323

-

-

-

349

Share-Based Compensation

-

-

17,624

-

-

-

17,624

Balance, December 31, 2016

36,147

$

3,612

$

373,983

7,023

$

(155,801

)

$

947,519

$

8,875

$

1,178,188

Net Income

-

-

-

-

-

40,494

-

40,494

Dividends Declared (2)

-

-

-

-

-

(6,633

)

-

(6,633

)

Changes in Comprehensive Income (Loss):

Change in Net Unrealized Gain (Loss) on

   Investments

-

-

-

-

-

-

9,023

9,023

Change in Net Non-Credit Other-Than-

   Temporary Impairment Losses

-

-

-

-

-

-

40

40

Change in Foreign Currency Translation Gain

   (Loss)

-

-

-

-

-

-

1,930

1,930

Total Comprehensive Income (Loss)

-

-

-

-

-

-

10,993

10,993

Shares Issued (1)

383

38

(10,944

)

-

-

-

-

(10,906

)

Share-Based Compensation

-

-

13,829

-

-

-

-

13,829

Balance, December 31, 2017

36,530

$

3,650

$

376,868

7,023

$

(155,801

)

$

981,380

$

19,868

$

1,225,965

(1) Includes shares issued under the Second Amended and Restated 2005 Stock Incentive Plan, to directors and the Employees Stock Purchase Plan.

(2) Dividends Declared were $0.225 per share and $0.135 per share for the years ended December 31, 2017 and 2016, respectively. There were no dividends declared in 2015.

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

F-6

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,

amounts in thousands

2017

2016

2015

Operating Activities:

Net Income

$

40,494

$

82,726

$

81,057

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

Depreciation & Amortization

3,645

5,429

5,386

Share-Based Compensation

13,829

17,624

14,997

Deferred Income Taxes

(8,879

)

(5,755

)

7,004

Net Realized Gains

(45,073

)

(9,186

)

(8,373

)

Net Other-Than-Temporary Impairments Recognized in Earnings

2,064

150

1,698

Changes in Assets And Liabilities:

Reinsurance Recoverable on Paid and Unpaid Losses and Loss Adjustment

   Expenses

(20,399

)

(2,835

)

43,822

Reserves for Losses and Loss Adjustment Expenses

225,132

87,083

43,010

Prepaid Reinsurance Premiums

(15,168

)

19,211

5,264

Unearned Premiums

100,160

66,668

54,509

Premiums Receivable

(45,035

)

(30,070

)

65,863

Deferred Policy Acquisition Costs

(15,552

)

(27,677

)

(12,531

)

Accrued Investment Income

(2,139

)

(1,314

)

(1,210

)

Reinsurance Balances Payable

27,362

1,568

(45,124

)

Current Income Tax Receivable, Net

3,966

(1,988

)

(8,072

)

Other

936

27,791

(13,654

)

Net Cash Provided by Operating Activities

$

265,343

$

229,425

$

233,646

Investing Activities:

Fixed Maturities

Redemptions and Maturities

$

373,380

$

275,706

$

180,876

Sales

225,962

446,666

376,522

Purchases

(1,008,537

)

(962,419

)

(648,059

)

Equity Securities

Sales

207,838

54,798

96,405

Purchases

(62,887

)

(92,329

)

(215,405

)

Change in Net Payable for Securities

2,135

(1,517

)

1,851

Purchase of Other Invested Assets

-

(1,960

)

-

Net Change in Short-Term Investments

17,877

73,541

(38,468

)

Purchase of Property and Equipment

(3,474

)

(3,918

)

(3,577

)

Net Cash Used in Investing Activities

$

(247,706

)

$

(211,432

)

$

(249,855

)

Financing Activities:

Proceeds from Employee Stock Purchase Plan

2,076

1,840

1,352

Proceeds of Stock Issued from Exercise of Stock Options

-

-

29

Payment of Employee Tax Withholding on Stock Compensation

(13,887

)

(5,198

)

(6,022

)

Dividends Paid

(6,633

)

(3,930

)

-

Net Cash Used in Financing Activities

$

(18,444

)

$

(7,288

)

$

(4,641

)

Effect of Exchange Rate on Cash

3,248

(15,963

)

-

Change in Cash

$

2,441

$

(5,258

)

$

(20,850

)

Cash at Beginning of Year

64,643

69,901

90,751

Cash at End of Period

$

67,084

$

64,643

$

69,901

Supplemental Information:

Income Taxes Paid, Net

$

39,689

$

34,830

$

35,447

Interest Paid

$

15,238

$

15,238

$

15,238

Issuance of Stock to Directors

$

578

$

633

$

563

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

F-7

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.  ORGANIZATION & SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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 term "Parent Company" is used to mean The Navigators Group, Inc. without its subsidiaries. The accompanying consolidated financial statements of our Company have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP" or "U.S. GAAP") and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). All significant intercompany transactions and balances have been eliminated in consolidation.  The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods.  Certain amounts for the prior year have been reclassified to conform with the current period presentation.

Organization

We are an international insurance company with a long-standing area of specialization in Marine insurance. We also offer Property and Casualty ("P&C") insurance, which consists primarily of 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, as well as assumed reinsurance products.

We operate through various wholly-owned insurance and service companies. Our subsidiaries domiciled in the United States ("U.S.") include two insurance companies, Navigators Insurance Company ("NIC") and Navigators Specialty Insurance Company ("NSIC"), as well as our U.S. underwriting agency, Navigators Management Company, Inc. ("NMC"). NIC includes a branch in the United Kingdom ("U.K."). We also have operations domiciled in the U.K., Hong Kong and Europe. Navigators International Insurance Company Ltd. ("NIIC"), Navigators Management (U.K.) Ltd. ("NMUK") and Navigators Underwriting Ltd. ("NUL") are domiciled in the U.K. and NUL includes European branches. Navigators Underwriting Agency Ltd. ("NUAL"), a Lloyd's of London ("Lloyd's") underwriting agency, manages and provides the capital, through Navigators Corporate Underwriters Ltd. ("NCUL"), for our Lloyd's Syndicate 1221 ("the Syndicate"), and is also domiciled in the U.K. We control 100% of the Syndicate's stamp capacity.

Effective January 1, 2017, we sold our underwriting agency operations in Sweden and Denmark. The transaction represented a 100% disposition of our Sweden and Denmark corporations, NUAL AB and Navigators A/S, respectively. This transaction did not have a material impact on our financial statements.

Significant Accounting Policies

Cash

Cash includes cash on hand and demand deposits with banks, excluding such amounts held by the Syndicate included as Funds at Lloyd's ("FAL"), which are classified as Short-Term Investments.

Investments

As of December 31, 2017 and 2016, all Fixed Maturity and Equity Securities held by our Company were carried at fair value and classified as available-for-sale.  Available-for-sale securities are debt and equity securities not classified as either held-to-maturity securities or trading securities and are reported at fair value, with unrealized gains and losses excluded from earnings and reported in Accumulated Other Comprehensive Income ("AOCI") as a separate component of Stockholders' Equity. Fixed Maturity securities include bonds, mortgage-backed and asset-backed securities, and redeemable preferred stocks.  Equity Securities consist of common stock, exchange traded funds and preferred stock.  

Other Invested Assets consist of investments our Company made in certain strategic companies which are accounted for using the equity method of accounting.  In applying the equity method, these investments are initially recorded at cost and are subsequently adjusted based on our Company's proportionate share of the net income or loss of the companies.  Changes in the carrying value of such investments are recorded in Other Income.  In applying the equity method, we use the most recently available financial information provided by the companies which is generally three months prior to the end of the reporting period.

F-8

Short-Term Investments are carried at fair value.  Short-Term Investments mature within one year from the purchase date.

All prices for our Fixed Maturities, Equity Securities and Short-Term Investments are classified as Level 1, Level 2 or Level 3 under the fair value hierarchy, as defined in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification 820 ("ASC 820").  

Premiums and discounts on Fixed Maturity securities are amortized into interest income over the life of the security using the interest method.  For Mortgage-Backed and Asset-Backed Securities, anticipated prepayments and expected maturities are utilized in applying the interest rate method.  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.

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.

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 securities.

Our Company reviews the magnitude of a security's unrealized loss compared to its cost/amortized cost and the length of time that the security has been impaired to determine if an unrealized loss is other-than-temporary. If warranted as a result of conditions relating to a particular security, our Company will also review securities with declines in fair value resulting from a headline news event involving the issuer, a headline news event involving the asset class, the advice of our external asset managers, or economic events that may impact the issuer to determine if an unrealized loss is other-than-temporary. The depth of analysis performed is dependent upon the nature and magnitude of the indicators of other-than-temporary impairment present in regards to each impaired security.

For Equity Securities, our Company performs a fundamental analysis of the issuer, including an evaluation of the mean analysts' target price, to assess the likelihood of recovery of our cost basis in the security. Management also assesses the likelihood of future cash flows, dividends and increases to dividends, all of which affect the securities eligible for our equity strategy and therefore our intent to hold the security. 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 Fixed Maturities, our Company assesses the underlying fundamentals of each issuer to determine if there is a change in the amount or timing of expected cash flows. Management compares the amortized cost basis to the present value of the revised cash flows using the historical book yield to determine the credit loss portion of impairment which is recognized in earnings. All non-credit losses where we have the intent and ability to hold the security until recovery are recognized as changes in Other than Temporary Impairment (" OTTI") losses within AOCI.

Specifically for structured Fixed Maturities, our Company analyzes projections provided by our investment managers with respect to an expected principal loss under a range of scenarios and utilizes the most likely outcomes. The analysis relies on actual collateral performance measures such as default rate, prepayment rate and loss severity. These assumptions are applied throughout the remaining term of the deal, incorporating the transaction structure and priority of payments, to generate loss adjusted cash flows. Results of the analysis will indicate whether the security is expected ultimately to incur a loss or whether there is a material impact on yield due to either a projected loss or a change in cash flow timing. A break-even default rate is also calculated. A comparison of the break-even default rate to the actual default rate provides an indication of the level of cushion or coverage to the first dollar principal loss. For securities in which a tranche loss is present and the net present value of loss adjusted cash flows is less than book value, credit impairment is recognized in earnings. The output data also includes a number of additional metrics such as average life remaining, original and current credit support, over 60 day delinquency and security rating. The significant inputs used to measure the amount of credit loss recognized in earnings are actual delinquency rates, default probability, severity and prepayment assumptions.

F-9

Projected losses are a function of both loss severity and probability of default, which differ based on property type, vintage and the stress of the collateral .

Foreign Currency Remeasurement and Translation

The functional currency of each of our operations is generally the currency of the local operating environment, except for our Lloyd's business which is United States Dollar ("USD").  Transactions in currencies other than an operation's functional currency are remeasured into the functional currency and the resulting foreign exchange gains and losses are reflected in net Other Income (Expense) in the Consolidated Statements of Income, with the exception of those related to foreign-denominated available-for-sale investments. For these investments, exchange rate fluctuations represent an unrealized appreciation/depreciation in the value of the securities and are included in the related component of AOCI.

Functional currency assets and liabilities of foreign operations are translated into USD using period end rates of exchange and the related translation adjustments are recorded as a separate component of AOCI.  Consolidated Statements of Income amounts expressed in functional currencies are translated using average exchange rates.

Premium Revenues

Written premium is 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 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.

Substantially all of our business is placed through agents and brokers.  We record estimates for both unreported direct and assumed premiums.  We also record the ceded portion of the estimated Gross Written Premiums and related acquisition costs. These estimates are mostly for our Marine and Energy & Engineering products written by our International Insurance ("Int'l Insurance") reporting segment as well as our GlobalRe reporting segment. 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 earned gross, ceded and net premiums are calculated based on our earning methodology, which is generally pro-rata over the policy period or over the period of risk if the period of risk differs significantly from the contract period.

Reinsurance Ceded

In the normal course of business, we purchase reinsurance from insurers or reinsurers to reduce the amount of loss arising from claims.  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.

Ceded reinsurance premiums net of ceding commissions 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 ("RRPs") 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.  Ceded Unearned Premiums and estimates of amounts recoverable from reinsurers on paid and unpaid losses are reflected as assets.  Provisions are made for estimated unrecoverable reinsurance.

Deferred Policy Acquisition Costs

Costs of acquiring business are deferred and amortized over the period that the related premiums are recognized as revenue.  Such costs (e.g., Commission Expenses, Other Underwriting Expenses and premium taxes) are limited to the incremental direct costs related to the successful acquisition of new or renewal business.  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,

F-10

Loss Adjustment Expense ("LAE"), Commission Expenses and Operating Expenses based on historical and current experience, as well as anticipated Investment Income.

Reserves for Losses and Loss Adjustment Expenses

Unpaid losses and LAE are determined on: (a) individual claims reported on direct business for insureds, (b) from reports received from ceding insurers for assumed business and (c) on estimates based on Company and industry experience for incurred but not reported ("IBNR") claims and LAE.  Indicated IBNR reserves for losses and LAE are calculated by our actuaries using several standard actuarial methodologies, including the paid and incurred loss development and the paid and incurred Bornhuetter-Ferguson loss methods. Frequency/severity analyses are performed for certain books of business.  The Reserve for Losses and LAE has been established to cover the estimated unpaid cost of claims incurred.  Such estimates are regularly compared to indicated reserves and updated and any resulting adjustments are included in the current year's results.  Management believes that the liability recognized for unpaid losses and LAE is a reasonable estimate of the ultimate unpaid claims incurred, however, no representation is made that the ultimate liability will not differ materially from the amounts recorded in the accompanying Consolidated Financial Statements.  Losses and LAE are recorded on an undiscounted basis.

Earnings per Share

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

Share-Based Compensation

Our Company applies a fair value based measurement method in accounting for its share-based payment arrangements with eligible employees and directors. The associated expense is estimated based on the fair value of the award at the grant date and is recognized in Net Income over the requisite service period with a corresponding increase in Shareholder's Equity. Forfeitures of share-based payment awards are recognized as they occur.

Depreciation and Amortization

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

Goodwill and Other Intangible Assets

Goodwill represents the excess of the cost of acquiring a business enterprise over the fair value of the net assets acquired.  Our Company's recorded indefinite lived intangible assets represent acquired stamp capacity in the Syndicate.  Goodwill and indefinite lived intangible assets are reported at carrying value and are tested for impairment at least annually, and when permitted by the applicable accounting guidance, qualitative factors are assessed to determine whether it is necessary to calculate an asset's fair value when testing an asset with an indefinite life for impairment.  Goodwill and indefinite lived intangible assets are considered impaired if the estimated fair value is less than its carrying value and any impairment loss is measured as the difference between the implied fair value and the carrying value.  Our Company did not recognize an impairment of goodwill or the indefinite lived intangible assets for any of the years ended December 31, 2017, 2016 and 2015.

As of December 31, 2017, the carrying value of goodwill and indefinite lived intangible assets was $6.6 million, which is $0.1 million more than the carrying value as of December 31, 2016, $6.5 million.  Changes in the carrying value of the goodwill and indefinite lived intangible assets are due to fluctuations in currency exchange rates between the USD and the GBP.

Income Taxes

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities.  Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  All available evidence, both positive and negative, is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed.  Future realization of the tax benefit of an existing deferred tax asset ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryback/carryforward period available under the tax law.  In determining whether a valuation

F-11

allowance is needed, management considers the timing of the reversal of each deferred tax asset as well as expected future levels of taxable income, amounts of taxable income in carryback years, and tax planning strategies.  

On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the "Tax Act") was enacted into law and the new legislation contains several key tax provisions that affected us, including a one-time mandatory Deemed Repatriation Transition Tax ("Transition Tax") on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the Transition Tax, re-measuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"),  Income Tax Accounting Implications of the Tax Act , which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation is expected over the next 12 months, as of December 31, 2017, we have made a reasonable estimate of the effects on our deferred tax balances and in relation to the Transition Tax; however we will continue to gather additional information to more precisely compute these income tax impacts.  We expect to complete our analysis within the measurement period in accordance with  SAB 118. Additional information can be found in Note 9, Income Taxes .

New Accounting Standards Adopted in 2017

Share-Based Compensation Accounting

Effective January 1, 2017, our Company adopted ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting" issued by the FASB. This guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled, eliminates the requirement that excess tax benefits be realized before companies can recognize them, requires the presentation of excess tax benefits as an operating activity on the statement of cash flows, allows employers to increase the amounts withheld to cover income taxes on share-based compensation awards without requiring liability classification, requires the presentation of employee taxes paid as a financing activity on the statement of cash flows, and requires companies to elect whether they will account for award forfeitures by recognizing forfeitures only as they occur or by estimating the number of awards expected to be forfeited.

The requirement to recognize all income tax effects of awards in the income statement when the awards vest or are settled was adopted on a prospective basis. Previously, these amounts were recorded in Additional Paid-In Capital. This change also prospectively impacts the calculation of potential common shares used to determine Diluted Net Income per Common Share under the treasury stock method. The new standard requires that assumed proceeds under the treasury stock method be modified to exclude the amount of excess tax benefits that previously would have been recognized in Additional Paid-In Capital.

We elected to account for forfeitures of share-based payment awards by recognizing forfeitures of awards as they occur, and upon adoption of this guidance, the payment of employee taxes was retrospectively adjusted on the Consolidated Statements of Cash Flows to be classified as a financing activity. All other changes in the ASU did not result in cumulative-effect or retrospective adjustments.

Transition to Equity Method of Accounting

Effective January 1, 2017, our Company adopted ASU 2016-07, "Simplifying the Transition to the Equity Method of Accounting" issued by the FASB. This guidance eliminates the requirement to retrospectively apply equity method accounting when an investment that had been accounted for by another method initially qualifies for the equity method. Our Company did not have any investments transitioning to the equity method of accounting during 2017. The adoption of this guidance did not impact our results of operations, financial condition or liquidity.

Share-Based Compensation Modification Accounting

During the second quarter of 2017, our Company early adopted ASU 2017-09, "Scope of Modification Accounting" issued by the FASB. This guidance clarifies when changes to the terms or conditions of a share-based award must be accounted for as modifications. Under the new guidance, modification accounting is required if the value, vesting conditions or classification of the award changes. This guidance will be applied prospectively to awards modified on or after the adoption date. The adoption of this guidance did not impact our results of operations, financial condition or liquidity.

F-12

Recently Issued Accounting Standards Not Yet Adopted

Revenue From Contracts With Customers

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)". This guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts are not in scope of the new guidance). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB delayed the effective date by one year through the issuance of ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date". This guidance is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption was permitted for interim and annual reporting periods beginning after December 15, 2016. Substantially all of our revenue is not included in the scope of this guidance. We do generate an insignificant amount of fee income that is in the scope of this guidance, but will not be materially impacted by the adoption of this guidance. The adoption of this guidance will not have a material impact on our results of operations, financial condition or liquidity.

Classification and Measurement of Financial Instruments

In January 2016, the FASB issued ASU 2016-01 "Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities" which requires equity investments (except those accounted for under the equity method of accounting, investments that are consolidated or those that meet a practicability exception) to be measured at fair value with changes in fair value recognized in net income, simplifies the impairment assessment of equity investments without readily determinable values by requiring a qualitative assessment to identify impairment, eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost, requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liabilities in accordance with the fair value option, requires the separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and clarifies that the reporting organization should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the organization's other deferred tax assets. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017 with early adoption permitted for certain of the amendments. The adoption of this guidance will result in a cumulative-effect adjustment of approximately $11.8 million relating to net unrealized gains in accumulated other comprehensive income for available-for-sale Equity Securities that will be measured at fair value with changes in fair value recognized in net income upon adoption of this guidance. The other aspects of this guidance impacting our Company relate to disclosures and will not impact our results of operations, financial condition or liquidity.

Leases

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" which provides a new comprehensive model for lease accounting. The guidance will require a lessee to recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. Our Company's future minimum lease payments, which represent minimum annual rental commitments and will be subject to this new guidance, totaled $91.2 million at December 31, 2017. The calculation of the lease liability and right-of-use asset requires further analysis of the underlying leases. Adoption of this guidance will impact our Company's consolidated balance sheets but is not expected to have a material impact on our Company's results of operations, financial condition and liquidity. Our Company is still evaluating the impact of adopting this standard on our consolidated financial statements.

Credit Losses

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments" which replaces the "incurred loss" impairment methodology with an approach based on "expected losses" to estimate credit losses on certain types of financial instruments and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. Credit losses relating to available-for-sale debt securities will be recor