NAVIGATORS GROUP INC - FORM 10-Q

NAVIGATORS GROUP INC - FORM 10-Q - August 8, 2014

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EX-32.1 - EX-32-1 - NAVIGATORS GROUP INC	d751529dex321.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2014

¨	Transitional 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)		(IRS Employer Identification No.)

400 Atlantic Street, Stamford, Connecticut		06901
(Address of principal executive offices)		(Zip Code)

(203) 905-6090

(Registrant’s telephone number, including area code)

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

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

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

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

The number of common shares outstanding as of July 23, 2014 was 14,262,204.

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

INDEX


		Page Number
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements		3
	Consolidated Balance Sheets June 30, 2014 (Unaudited) and December 31, 2013		3
	Consolidated Statements of Income (Unaudited) Three and Six Months Ended June 30, 2014 and 2013		4
	Consolidated Statements of Comprehensive Income (Unaudited) Three and Six Months Ended June 30, 2014 and 2013		5
	Consolidated Statements of Stockholders’ Equity (Unaudited) Six Months Ended June 30, 2014		6
	Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2014 and 2013		7
	Notes to Interim Consolidated Financial Statements (Unaudited)		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		59
Item 4.	Controls and Procedures		60

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		60
Item 1A.	Risk Factors		60
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		60
Item 3.	Defaults Upon Senior Securities		60
Item 4.	Mine Safety Disclosures		61
Item 5.	Other Information		61
Item 6.	Exhibits		62
Signatures			63
Index to Exhibits			64

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)


	June 30, 2014			December 31, 2013
	(Unaudited)
ASSETS
Investments and cash:
Fixed maturities, available-for-sale, at fair value (amortized cost: 2014, $2,177,094; 2013, $2,036,999)	$	2,220,855		$	2,047,873
Equity securities, available-for-sale, at fair value (cost: 2014, $148,412; 2013, $118,804)		180,486			143,954
Short-term investments, at cost which approximates fair value		226,237			296,250
Cash		72,604			86,509

Total investments and cash	$	2,700,182		$	2,574,586

Premiums receivable	$	417,122		$	325,025
Prepaid reinsurance premiums		246,699			247,822
Reinsurance recoverable on paid losses		42,074			38,384
Reinsurance recoverable on unpaid losses and loss adjustment expenses		841,981			822,438
Deferred policy acquisition costs		76,975			67,007
Accrued investment income		14,579			13,866
Goodwill and other intangible assets		7,218			7,177
Current income tax receivable, net		7,149			9,918
Deferred income tax, net		17,307			28,187
Other assets		44,445			35,042

Total assets	$	4,415,731		$	4,169,452

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses	$	2,137,802		$	2,045,071
Unearned premiums		801,302			714,606
Reinsurance balances payable		159,261			167,252
Senior Notes		263,373			263,308
Payable for investments purchased		18,615			7,624
Accounts payable and other liabilities		63,298			69,379

Total liabilities	$	3,443,651		$	3,267,240

Stockholders’ equity:
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued	$	—		$	—
Common stock, $.10 par value, authorized 50,000,000 shares, issued 17,772,359 shares for 2014 and 17,709,876 shares for 2013		1,776			1,770
Additional paid-in capital		339,523			335,546
Treasury stock, at cost (3,511,380 shares for 2014 and 2013)		(155,801	)		(155,801	)
Retained earnings		737,166			692,337
Accumulated other comprehensive income		49,416			28,360

Total stockholders’ equity	$	972,080		$	902,212

Total liabilities and stockholders’ equity	$	4,415,731		$	4,169,452

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

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(In thousands, except share and per share amounts)


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Gross written premiums	$	348,795		$	332,128		$	771,585		$	725,350

Revenues:
Net written premiums	$	231,864		$	198,469		$	543,714		$	467,921
Change in unearned premiums		(780	)		7,345			(87,358	)		(59,779	)

Net earned premiums		231,084			205,814			456,356			408,142
Net investment income		15,648			14,246			32,258			27,903
Total other-than-temporary impairment losses		—			—			—			(42	)
Portion of loss recognized in other comprehensive income (before tax)		—			—			—			—

Net other-than-temporary impairment losses recognized in earnings		—			—			—			(42	)
Net realized gains (losses)		4,473			3,345			5,306			8,159
Other income (expense)		(1,665	)		(915	)		8,734			(297	)

Total revenues	$	249,540		$	222,490		$	502,654		$	443,865

Expenses:
Net losses and loss adjustment expenses	$	140,220		$	131,148		$	275,287		$	262,490
Commission expenses		32,150			28,391			57,877			54,946
Other operating expenses		47,992			40,678			95,138			81,552
Interest expense		4,319			2,052			8,171			4,103

Total expenses		224,681			202,269			436,473			403,091

Income before income taxes		24,859			20,221			66,181			40,774

Income tax expense (benefit)		7,998			6,284			21,352			12,927

Net income	$	16,861		$	13,937		$	44,829		$	27,847

Net income per common share:
Basic	$	1.18		$	0.99		$	3.15		$	1.97
Diluted	$	1.17		$	0.97		$	3.11		$	1.93
Average common shares outstanding:
Basic		14,259,753			14,131,422			14,246,701			14,108,747
Diluted		14,377,476			14,428,117			14,401,740			14,434,232

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

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(In thousands)


	Three Months Ended June 30,
	2014			2013
Net income (loss)	$	16,861		$	13,937

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 $5,686 and $(19,404) in 2014 and 2013, respectively	$	10,769		$	(36,123	)
Reclassification adjustment for net realized (gains) losses included in net income net of deferred tax of $1,357 and $(870) in 2014 and 2013, respectively		2,520			(1,616	)

Change in net unrealized gains (losses) on investments	$	13,289		$	(37,739	)
Change in other-than-temporary impairments:
Non credit other-than-temporary impairments arising during the period, net of deferred tax of $40 and $13 in 2014 and 2013, respectively	$	73		$	24
Reclassification adjustment for non credit other-than-temporary impairment losses recognized in net income net of deferred tax of $0 in 2014 and 2013, respectively		—			—

Change in other-than-temporary impairments	$	73		$	24
Change in foreign currency translation gains (losses), net of deferred tax of $785 and $566 in 2014 and 2013, respectively		2,742			(1,051	)

Other comprehensive income (loss)	$	16,104		$	(38,766	)

Comprehensive income (loss)	$	32,965		$	(24,829	)


	Six Months Ended June 30,
	2014			2013
Net income	$	44,829		$	27,847

Other comprehensive income:
Change in net unrealized gains (losses) on investments:
Unrealized gains (losses) on investments arising during the period, net of deferred tax of $12,810 and $(19,037) in 2014 and 2013, respectively	$	24,290		$	(35,335	)
Reclassification adjustment for net realized (gains) losses included in net income net of deferred tax of $879 and $(2,390) in 2014 and 2013, respectively		1,633			(4,438	)

Change in net unrealized gains (losses) on investments	$	25,923		$	(39,773	)
Change in other-than-temporary impairments:
Non credit other-than-temporary impairments arising during the period, net of deferred tax of $69 and $163 in 2014 and 2013, respectively	$	130		$	303
Reclassification adjustment for non credit other-than-temporary impairment losses recognized in net income net of deferred tax of $0 in 2014 and 2013, respectively		—			—

Change in other-than-temporary impairments	$	130		$	303
Change in foreign currency translation gains (losses), net of tax of $2,800 and $975 in 2014 and 2013, respectively		(4,997	)		1,579

Other comprehensive income	$	21,056		$	(37,891	)

Comprehensive income	$	65,885		$	(10,044	)

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

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

(In thousands, except share amounts)


	Common Stock				Additional Paid-in Capital			Treasury Stock					Retained Earning		Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Shares		Amount		Additional Paid-in Capital			Shares		Amount			Retained Earning		Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance, December 31, 2013		17,709,876	$	1,770	$	335,546			3,511,380	$	(155,801	)	$	692,337	$	28,360		$	902,212
Net income														44,829		—			44,829
Changes in other comprehensive income:
Change in net unrealized gain (loss) on investments		—		—		—			—		—			—		25,923			25,923
Change in net non-credit other- than-temporary impairment losses		—		—		—			—		—			—		130			130
Change in foreign currency translation gain (loss)		—		—		—			—		—			—		(4,997	)		(4,997	)

Total other comprehensive income		—		—		—			—		—			—		21,056			21,056
Shares issued under stock plan		62,483		6		(392	)		—		—			—		—			(386	)
Share-based compensation		—		—		4,369			—		—			—		—			4,369

Balance, June 30, 2014		17,772,359	$	1,776	$	339,523			3,511,380	$	(155,801	)	$	737,166	$	49,416		$	972,080

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

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)


	Six Months Ended June 30,
	2014			2013
Operating activities:
Net income	$	44,829		$	27,847
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation & amortization		2,482			1,953
Deferred income taxes		49			(2,457	)
Net realized (gains) losses		(5,306	)		(8,159	)
Net other-than-temporary losses recognized in earnings		—			42
Changes in assets and liabilities:
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses		(23,233	)		(5,110	)
Reserves for losses and loss adjustment expenses		92,731			19,336
Prepaid reinsurance premiums		1,518			(30,031	)
Unearned premiums		87,547			87,161
Premiums receivable		(92,097	)		(74,213	)
Deferred policy acquisition costs		(9,968	)		(4,104	)
Accrued investment income		(713	)		(1,104	)
Reinsurance balances payable		(7,991	)		17,870
Current income tax payable, net		2,437			4,191
Other		(14,137	)		15,263

Net cash provided by (used in) operating activities	$	78,148		$	48,485

Investing activities:
Fixed maturities
Redemptions and maturities	$	103,838		$	121,340
Sales		200,325			411,634
Purchases		(445,533	)		(491,255	)
Equity securities
Sales		10,832			11,439
Purchases		(38,007	)		(38,094	)
Change in payable for securities		10,991			(32,632	)
Net change in short-term investments		69,881			29,062
Purchase of property and equipment		(4,986	)		(4,855	)

Net cash provided by (used in) investing activities	$	(92,659	)	$	6,639

Financing activities:
Proceeds of stock issued from employee stock purchase plan	$	453		$	374
Proceeds of stock issued from exercise of stock options		153			1,126

Net cash provided by (used in) financing activities	$	606		$	1,500

Increase (decrease) in cash	$	(13,905	)	$	56,624
Cash at beginning of year		86,509			45,336

Cash at end of period	$	72,604		$	101,960

Supplemental cash information:
Income taxes paid, net	$	18,918		$	9,223
Interest paid	$	8,084		$	4,025
Issuance of stock to directors	$	438		$	400

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

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)

Note 1. Organization & Summary of Significant Accounting Policies

The accompanying interim consolidated financial statements are unaudited and reflect all adjustments which, in the opinion of management, are necessary to fairly present the results of The Navigators Group, Inc. and its subsidiaries for the interim periods presented on the basis of United States generally accepted accounting principles (“GAAP” or “U.S. GAAP”). All significant intercompany transactions and balances have been eliminated. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods. The results of operations for any interim period are not necessarily indicative of results for the full year. The term “the Company” as used herein is used to mean The Navigators Group, Inc. and its subsidiaries, unless the context otherwise requires. The terms “Parent” or “Parent Company” are used to mean The Navigators Group, Inc. without its subsidiaries. These financial statements should be read in conjunction with the consolidated financial statements and notes contained in the Company’s 2013 Annual Report on Form 10-K. Certain amounts for the prior year have been reclassified to conform to the current year’s presentation.

The Company is an international insurance and reinsurance company focusing on specialty products within the overall property and casualty market. The largest product line and most long-standing area of specialization is ocean marine insurance. The Company has also developed other specialty insurance and reinsurance lines within property casualty, such as commercial primary and excess liability as well as specialty niches in professional liability.

Revenue is primarily comprised of premiums and investment income. The Company derives premiums primarily from business written by wholly-owned underwriting management companies which produce, manage, and service insurance and reinsurance business. The Company’s products are distributed through multiple channels, utilizing global, national and regional retail and wholesale insurance brokers.

Navigators Management Company (“NMC”) and Navigators Management (UK) Limited (“NMUKL”) manage and service insurance and reinsurance for Navigators Insurance Company (“NIC”), which includes a United Kingdom Branch (“U.K. Branch”), and Navigators Specialty Insurance Company (“NSIC”), which underwrites specialty and professional liability insurance on an excess and surplus lines basis. All of the insurance business written by NSIC is fully reinsured by NIC pursuant to a 100% quota share reinsurance agreement.

Navigators Underwriting Agency Ltd. (“NUAL”), a Lloyd’s of London (“Lloyd’s”) underwriting agency manages Lloyd’s Syndicate 1221 (“Syndicate 1221”). Through participation in Syndicate 1221, the Company primarily underwrites marine and related lines of business along with offshore energy, construction coverage for onshore energy businesses, specialty assumed reinsurance, and professional liability insurance. The Company controlled 100% of Syndicate 1221’s stamp capacity for the 2014, 2013, and 2012 underwriting years through a wholly-owned subsidiary, Navigators Corporate Underwriters Ltd. (“NCUL”), which is referred to as a corporate name in the Lloyd’s market. In addition, the Company has established underwriting agencies in Antwerp, Belgium, Stockholm, Sweden, and Copenhagen, Denmark, which underwrite risks pursuant to binding authorities with NUAL into Syndicate 1221.

Note 2. Segment Information

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

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

The Lloyd’s Operations are primarily engaged in underwriting marine and related lines of business along with offshore energy, construction coverages for onshore energy business, specialty assumed reinsurance, and professional liability insurance at Lloyd’s through Syndicate 1221.

The Company evaluates the performance of each underwriting segment based on its underwriting and GAAP results. Underwriting results are measured based on underwriting profit or loss and the related combined ratio, which are both non-GAAP measures of underwriting profitability. Underwriting profit or loss is calculated from net earned premiums, less the sum of net losses and loss adjustment expenses (“LAE”), commission expenses, other operating expenses and other underwriting income (expense). The combined ratio is derived by dividing the sum of net losses and LAE, commission expenses, other operating expenses and other underwriting income (expense) by net earned premiums. A combined ratio of less than 100% indicates an underwriting profit and greater than 100% indicates an underwriting loss. Each segment maintains its own investments on which it earns income and realizes capital gains or losses. The Company’s underwriting performance is evaluated separately from the performance of its investment portfolios.

Financial data by segment for the three and six months ended June 30, 2014 and 2013 were as follows:


	Three Months Ended June 30, 2014
In thousands	Insurance Companies			Lloyd’s Operations			Corporate ⁽¹⁾			Total
Gross written premiums	$	243,729		$	105,066		$	—		$	348,795
Net written premiums		174,041			57,823			—			231,864
Net earned premiums		178,412			52,672			—			231,084
Net losses and loss adjustment expenses		(108,502	)		(31,718	)		—			(140,220	)
Commission expenses		(23,021	)		(9,675	)		546			(32,150	)
Other operating expenses		(34,415	)		(13,577	)		—			(47,992	)
Other underwriting income (expense)		768			13			(546	)		235

Underwriting profit (loss)	$	13,242		$	(2,285	)		—		$	10,957
Net investment income		13,805			1,824			19			15,648
Net realized gains (losses)		4,458			15			—			4,473
Interest expense		—			—			(4,319	)		(4,319	)
Other income		(68	)		(1,832	)		—			(1,900	)

Income (loss) before income taxes	$	31,437		$	(2,278	)	$	(4,300	)	$	24,859
Income tax expense (benefit)		10,049			(672	)		(1,379	)		7,998

Net income (loss)	$	21,388		$	(1,606	)	$	(2,921	)	$	16,861

Identifiable assets	$	3,280,303		$	985,181		$	150,247		$	4,415,731

Losses and loss adjustment expenses ratio		60.8	%		60.2	%					60.7	%
Commission expense ratio		12.9	%		18.4	%					13.9	%
Other operating expense ratio ⁽²⁾		18.9	%		25.7	%					20.7	%

Combined ratio		92.6	%		104.3	%					95.3	%

(1) - Includes Corporate segment intercompany eliminations.

(2) - Includes Other operating expenses and Other underwriting income.


	Three Months Ended June 30, 2013
In thousands	Insurance Companies			Lloyd’s Operations			Corporate ⁽¹⁾			Total
Gross written premiums	$	228,565		$	103,563		$	—		$	332,128
Net written premiums		143,380			55,089			—			198,469
Net earned premiums		156,547			49,267			—			205,814
Net losses and loss adjustment expenses		(106,668	)		(24,480	)		—			(131,148	)
Commission expenses		(20,573	)		(8,335	)		517			(28,391	)
Other operating expenses		(29,829	)		(10,849	)		—			(40,678	)
Other income (expense)		689			(1,087	)		(517	)		(915	)

Underwriting profit (loss)	$	166		$	4,516		$	—		$	4,682
Net investment income		12,515			1,728			3			14,246
Net realized gains (losses)		3,099			242			4			3,345
Interest expense		—			—			(2,052	)		(2,052	)

Income (loss) before income taxes	$	15,780		$	6,486		$	(2,045	)	$	20,221
Income tax expense (benefit)		4,785			2,206			(707	)		6,284

Net income (loss)	$	10,995		$	4,280		$	(1,338	)	$	13,937

Identifiable assets	$	3,097,754		$	947,736		$	51,020		$	4,096,510

Losses and loss adjustment expenses ratio		68.1	%		49.7	%					63.7	%
Commission expense ratio		13.1	%		16.9	%					13.8	%
Other operating expense ratio ⁽²⁾		18.7	%		24.2	%					20.2	%

Combined ratio		99.9	%		90.8	%					97.7	%

(1) - Includes Corporate segment intercompany eliminations.

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


	Six Months Ended June 30, 2014
In thousands	Insurance Companies			Lloyd’s Operations			Corporate⁽¹⁾			Total
Gross written premiums	$	555,527		$	216,058		$	—		$	771,585
Net written premiums		407,992			135,722			—			543,714

Net earned premiums		344,296			112,060			—			456,356
Net losses and loss adjustment expenses		(214,929	)		(60,358	)		—			(275,287	)
Commission expenses		(39,731	)		(19,201	)		1,055			(57,877	)
Other operating expenses		(67,802	)		(27,336	)		—			(95,138	)
Other underwriting income (expense)		1,426			19			(1,055	)		390

Underwriting profit (loss)	$	23,260		$	5,184		$	—		$	28,444

Net investment income		28,582			3,639			37			32,258
Net realized gains (losses)		5,695			(389	)		—			5,306
Interest expense		—			—			(8,171	)		(8,171	)
Other income		(19	)		8,363			—			8,344

Income (loss) before income taxes	$	57,518		$	16,797		$	(8,134	)	$	66,181

Income tax expense (benefit)		18,161			5,966			(2,775	)		21,352

Net income (loss)	$	39,357		$	10,831		$	(5,359	)	$	44,829

Identifiable assets	$	3,280,303		$	985,181		$	150,247		$	4,415,731

Losses and loss adjustment expenses ratio		62.4	%		53.9	%					60.3	%
Commission expense ratio		11.5	%		17.1	%					12.7	%
Other operating expense ratio ⁽²⁾		19.3	%		24.4	%					20.8	%

Combined ratio		93.2	%		95.4	%					93.8	%

(1) - Includes Corporate segment intercompany eliminations.

(2) - Includes Other operating expenses and Other underwriting income.


	Six Months Ended June 30, 2013
In thousands	Insurance Companies			Lloyd’s Operations			Corporate⁽¹⁾			Total
Gross written premiums	$	530,193		$	195,157		$	—		$	725,350
Net written premiums		359,699			108,222			—			467,921

Net earned premiums		310,878			97,264			—			408,142
Net losses and loss adjustment expenses		(213,653	)		(48,837	)		—			(262,490	)
Commission expenses		(39,090	)		(16,956	)		1,100			(54,946	)
Other operating expenses		(59,172	)		(22,380	)		—			(81,552	)
Other income (expense)		1,348			(545	)		(1,100	)		(297	)

Underwriting profit (loss)	$	311		$	8,546		$	—		$	8,857

Net investment income		24,466			3,430			7			27,903
Net realized gains (losses)		7,891			222			4			8,117
Interest expense		—			—			(4,103	)		(4,103	)

Income (loss) before income taxes	$	32,668		$	12,198		$	(4,092	)	$	40,774

Income tax expense (benefit)		10,199			4,242			(1,514	)		12,927

Net income (loss)	$	22,469		$	7,956		$	(2,578	)	$	27,847

Identifiable assets	$	3,097,754		$	947,736		$	51,020		$	4,096,510

Losses and loss adjustment expenses ratio		68.7	%		50.2	%					64.3	%
Commission expense ratio		12.6	%		17.4	%					13.5	%
Other operating expense ratio ⁽²⁾		18.6	%		23.6	%					20.0	%

Combined ratio		99.9	%		91.2	%					97.8	%

(1) - Includes Corporate segment intercompany eliminations.

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

The following tables provide additional financial data by segment for the three and six months ended June 30, 2014 and 2013:

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

Comparative Premium Data


	Three Months ended June 30,							Six Months ended June 30,
In thousands	2014		2013		Change			2014		2013		Change
Gross Written Premiums:
Insurance Companies:
Marine	$	48,119	$	43,077		11.7	%	$	100,352	$	93,924		6.8	%
Property Casualty		168,597		152,095		10.8	%		397,953		371,059		7.2	%
Professional Liability		27,013		33,393		-19.1	%		57,222		65,210		-12.2	%

		243,729		228,565		6.6	%		555,527		530,193		4.8	%
Lloyd’s Operations:
Marine		46,005		45,893		0.2	%		108,962		99,537		9.5	%
Property Casualty		37,162		41,217		-9.8	%		70,241		66,275		6.0	%
Professional Liability		21,899		16,453		33.1	%		36,855		29,345		25.6	%

		105,066		103,563		1.5	%		216,058		195,157		10.7	%

Total	$	348,795	$	332,128		5.0	%	$	771,585	$	725,350		6.4	%


	Three Months ended June 30,							Six Months ended June 30,
	2014		2013		Change			2014		2013		Change
Net Written Premiums:
Insurance Companies:
Marine	$	35,357	$	27,366		29.2	%	$	76,481	$	68,507		11.6	%
Property Casualty		119,633		90,711		31.9	%		291,994		240,662		21.3	%
Professional Liability		19,051		25,303		-24.7	%		39,517		50,530		-21.8	%

		174,041		143,380		21.4	%		407,992		359,699		13.4	%
Lloyd’s Operations:
Marine		29,562		34,060		-13.2	%		81,693		73,618		11.0	%
Property Casualty		14,392		12,181		18.2	%		30,926		19,493		58.7	%
Professional Liability		13,869		8,848		56.7	%		23,103		15,111		52.9	%

		57,823		55,089		5.0	%		135,722		108,222		25.4	%

Total	$	231,864	$	198,469		16.8	%	$	543,714	$	467,921		16.2	%


	Three Months ended June 30,							Six Months ended June 30,
	2014		2013		Change			2014		2013		Change
Net Earned Premiums:
Insurance Companies:
Marine	$	31,752	$	31,798		-0.1	%	$	64,512	$	68,523		-5.9	%
Property Casualty		124,695		99,477		25.4	%		235,521		192,195		22.5	%
Professional Liability		21,965		25,272		-13.1	%		44,263		50,160		-11.8	%

		178,412		156,547		14.0	%		344,296		310,878		10.7	%
Lloyd’s Operations:
Marine		32,213		34,623		-7.0	%		71,100		68,668		3.5	%
Property Casualty		11,463		8,562		33.9	%		24,421		16,441		48.5	%
Professional Liability		8,996		6,082		47.9	%		16,539		12,155		36.1	%

		52,672		49,267		6.9	%		112,060		97,264		15.2	%

Total	$	231,084	$	205,814		12.3	%	$	456,356	$	408,142		11.8	%

The Insurance Companies net earned premiums include $10.5 million and $12.7 million of net earned premiums from the U.K. Branch for the three months ended June 30, 2014 and 2013, respectively, and $22.1 million and $22.8 million of net earned premiums from the U.K. Branch for the six months ended June 30, 2014 and 2013, respectively.

Note 3. Reinsurance Ceded

The Company’s ceded earned premiums were $115.5 million and $115.3 million for the three months ended June 30, 2014 and 2013 and $229.1 million and $226.3 million for the six months ended June 30, 2014 and 2013, respectively.

The Company’s ceded incurred losses were $57.9 million and $77.6 million for the three months ended June 30, 2014 and 2013 and $111.8 million and $131.1 million for the six months ended June 30, 2014 and 2013, respectively.

The following table lists the Company’s 20 largest reinsurers measured by the amount of reinsurance recoverable for ceded losses, LAE and ceded unearned premium (constituting 76.6% of the total recoverable), together with the reinsurance recoverable and collateral as of June 30, 2014, and the reinsurers’ ratings from A.M. Best Company (“A.M. Best”) or Standard & Poor’s (“S&P”):


	Reinsurance Recoverables
In thousands	Unearned Premium		Paid/Unpaid Losses		Total ⁽¹⁾		Collateral Held ⁽²⁾		A.M. Best	S&P
National Indemnity Company	$	40,640	$	114,646	$	155,286	$	24,453	A++	AA+
Everest Reinsurance Company		21,201		72,994		94,195		7,206	A+	A+
Transatlantic Reinsurance Company		16,038		75,395		91,433		4,930	A	A+
Swiss Reinsurance America Corporation		15,471		65,276		80,747		13,413	A+	AA-
Munich Reinsurance America Inc.		8,095		66,415		74,510		6,269	A+	AA-
Allied World Reinsurance		11,159		35,260		46,419		1,924	A	A
Lloyd’s Syndicate #2003		4,911		39,768		44,679		5,501	A	A+
Partner Reinsurance Europe		9,945		28,708		38,653		18,380	A+	A+
Scor Global P&C SE		10,652		20,547		31,199		8,061	A	A+
Employers Mutual Casualty Company		12,432		18,628		31,060		11,306	A	NR
Tower Insurance Company		—		20,916		20,916		1,922	C++	NR
Atlantic Specialty Insurance		4,494		16,260		20,754		—	A	A-
Ironshore Indemnity Inc.		7,743		12,789		20,532		9,643	A	NR
Ace Property and Casualty Insurance Company		11,127		8,020		19,147		2,988	A++	AA
QBE Reinsurance Corp		4,696		14,139		18,835		—	A	A+
Validus Reinsurance Ltd.		2,297		16,030		18,327		13,675	A	A
Odyssey American Reinsurance Corporation		3,800		11,889		15,689		1,726	A	A-
Aspen Insurance UK Ltd.		7,179		8,428		15,607		5,020	A	A
Lloyd’s Syndicate #4000		51		14,181		14,232		92	A	A+
Endurance Reinsurance Corporation		5,432		8,411		13,843		2,047	A	A

Top 20 Reinsurers	$	197,363	$	668,700	$	866,063	$	138,556
Others		49,336		215,355		264,691		80,111

Total	$	246,699	$	884,055	$	1,130,754	$	218,667

(1) - Net of reserve for uncollectible reinsurance of approximately $11.3 million.

(2) - Collateral of $218.7 million consists of $159.3 million in ceded balances payable, $53.4 million in letters of credit, and $6.0 million of other balances held by the Company’s Insurance Companies and Lloyd’s Operations.

Note 4. Stock-Based Compensation

Stock-based compensation granted under the Company’s stock plans is expensed in tranches over the vesting period. Options and non-performance based grants generally vest equally over a three or four year period and the options have a maximum term of ten years. Certain non-performance based grants vest over five years with one-third vesting in each of the third, fourth and fifth years. The Company’s performance based share grants generally consist of three types of awards. The restricted stock units issued in 2014 and after will cliff vest on the third anniversary of the date of the grant with 100% dependent on the rate of cumulative annual growth in tangible book value for the three years immediately prior to the vesting date, with actual shares that vest ranging between 150% to 50% of that portion of the original award. The restricted stock units issued between 2011 - 2013 will cliff vest on the third anniversary of the date of grant, with 50% vesting in full, and 50% dependent on the rate of compound annual growth in book value per share for the three years immediately prior to the vesting date, with actual shares that vest ranging between 150% to 0% of that portion of the original award. The performance based restricted stock units issued prior to 2011 generally vest over five years with one-third vesting in each of the third, fourth and fifth years, with 100% dependent on the rolling three-year average return on equity based on the three years prior to the year in which the vesting occurs, with actual shares that vest ranging between 150% to 0% of the original award.

The amounts charged to expense for stock-based compensation for the three and six months ended June 30, 2014 and 2013 are presented in the following table:


	Three Months Ended June 30,				Six Months Ended June 30,
In thousands	2014		2013		2014		2013
Restricted stock units	$	2,484	$	2,116	$	4,369	$	3,474
Directors restricted stock grants⁽¹⁾		100		106		200		206
Employee stock purchase plan		—		38		74		47

Total stock based compensation	$	2,584	$	2,260	$	4,643	$	3,727

(1) - Relates to non-employee directors serving on the Parent Company’s Board of Directors, all of whom have been elected by the Company’s stockholders, as well as non-employee directors serving on NUAL’s Board of Directors.

Note 5. Lloyd’s Syndicate 1221

The Company’s Lloyd’s Operations included in the consolidated financial statements represents its participation in Syndicate 1221. Syndicate 1221’s stamp capacity is £215 million for the 2014 underwriting year compared to £195 million for the 2013 underwriting year. Stamp capacity is a measure of the amount of premiums a Lloyd’s syndicate is authorized to write based on a business plan approved by the Council of Lloyd’s. Syndicate 1221’s stamp capacity is expressed net of commission (Lloyd’s standard). The Syndicate 1221 premiums recorded in the Company’s financial statements are gross of commission. The Company controlled 100% of Syndicate 1221’s stamp capacity for the 2014, 2013, and 2012 underwriting years through its wholly-owned Lloyd’s corporate member.

During the first quarter, the Syndicate revised its foreign exchange accounting methodology from reporting the Syndicate’s financial position and results using three functional currencies (GBP, USD and CAD) to one functional currency (USD). The USD was chosen as the single functional currency as the majority of the Syndicate’s insurance business has been and continues to be transacted in USD. This cumulative change in re-measurement has resulted in an immaterial correction of $10.0 million ($6.6 million, after-tax) reducing Accumulated Other Comprehensive Income in the consolidated balance sheet, offset by a gain in Other Income in the consolidated statement of income. The impact of the correction is not material to the previously issued interim and annual financial statements for 2013 and 2012.

The Company provides letters of credit and posts cash to Lloyd’s to support its participation in Syndicate 1221’s stamp capacity. As of June 30, 2014, the Company had provided letters of credit of $153.2 million and has $1.0 million of cash collateral posted. If Syndicate 1221 increases its stamp capacity and the Company participates in the additional stamp capacity, or if Lloyd’s changes the capital requirements, the Company may be required to supply additional collateral acceptable to Lloyd’s. If the Company is unwilling or unable to provide additional acceptable collateral, the Company will be required to reduce its participation in the stamp capacity of Syndicate 1221. The letters of credit are provided through a credit facility with a consortium of banks which provides the Company with the ability to have letters of credit issued to support Syndicate 1221’s stamp capacity at Lloyd’s for the 2013 and 2014 underwriting years, as well as open prior years. If any letters of credit remain outstanding under the facility after December 31, 2014, the Company would be required to post additional collateral to secure the remaining letters of credit. If the credit facility is not renewed prior to December 31, 2014, the Company will need to find internal and/or external sources to provide either letters of credit or other collateral in order to continue to participate in Syndicate 1221. The credit facility is collateralized by all of the common stock of NIC. Refer to Note 10, Credit Facility, for additional information.

Note 6. Income Taxes

The Company is subject to the tax laws and regulations of the United States (“U.S.”) and the foreign countries in which it operates. The Company files a consolidated U.S. Federal tax return, which includes all domestic subsidiaries and the United Kingdom (“U.K.”) Branch. The income from the foreign operations is designated as either U.S. connected income or non-U.S. connected income. Lloyd’s is required to pay U.S. income tax on U.S. connected income written by Lloyd’s syndicates. Lloyd’s and the Internal Revenue Service (“IRS”) have entered into an agreement whereby the amount of tax due on U.S. connected income is calculated by Lloyd’s and remitted directly to the IRS. These amounts are then charged to the corporate member in proportion to its participation in the relevant syndicates. The Company’s corporate member is subject to this agreement and receives U.K. tax credits in the U.K. for any U.S. income tax incurred up to the U.K. income tax charged on the U.S. connected income. The non-U.S. connected insurance income would generally constitute taxable income under the Subpart F income section of the U.S. Internal Revenue Code (“Subpart F”) since less than 50% of Syndicate 1221’s premiums are derived within the U.K. and would therefore be subject to U.S. taxation when the Lloyd’s year of account closes. Taxes are accrued at a 35% rate on the Company’s foreign source insurance income and foreign tax credits, where available, are utilized to offset U.S. tax as permitted. The Company’s effective tax rate for Syndicate 1221 taxable

income could substantially exceed 35% to the extent the Company is unable to offset U.S. taxes paid under Subpart F tax regulations with U.K. tax credits on future underwriting year distributions. U.S. taxes were not accrued on the earnings of the Company’s foreign agencies in previous years as these earnings were subject to the active financing exception and were not includable as Subpart F income. Certain provisions of Subpart F expired for years after December 31, 2013; therefore, these earnings will be taxable in the U.S. at the 35% tax rate beginning January 1, 2014. The impact of this change has been calculated and properly considered for the period ended June 30, 2014.

The Company has not provided for U.S. income taxes on approximately $20.8 million of undistributed earnings of its non-U.S. subsidiaries since it is intended that those earnings will be reinvested indefinitely in those subsidiaries. If a future determination is made that those earnings no longer are intended to be reinvested indefinitely in those subsidiaries, U.S. income taxes of approximately $2.2 million, assuming all foreign tax credits are realized, would be included in the tax provision at that time and would be payable if those earnings were distributed to the Company.

Unrecognized tax benefits are differences between tax positions taken in the tax returns and benefits recognized in the financial statements. The Company has no unrecognized tax benefits as of June 30, 2014 and 2013. The Company did not incur any interest or penalties related to unrecognized tax benefits for the three and six months ended June 30, 2014 and 2013. The Company currently is under examination by the Internal Revenue Service for taxable years 2010, 2011, and 2012 and generally is subject to U.S. Federal, state or local or foreign tax examinations by tax authorities for 2009 and subsequent years.

The Company recorded income tax expense of $8.0 million and $21.4 million for the three and six months ended June 30, 2014 compared to $6.3 million and $12.9 million for the same period in 2013, resulting in an effective tax rate of 32.2% and 32.3% for the three and six months ended June 30, 2014 and 31.1% and 31.7% for the comparable periods in 2013.

The Company had state and local deferred tax assets amounting to potential future tax benefits of $0.5 million and $0.6 million as of June 30, 2014 and December 31, 2013, respectively. Included in the deferred tax assets are state and local net operating loss carry-forwards of $0.1 million as of June 30, 2014 and December 31, 2013. A valuation allowance was established for the full amount of these potential future tax benefits due to the uncertainty associated with their realization. The Company’s state and local tax carry-forwards as of June 30, 2014 expire from 2024 to 2032.

Note 7. Senior Notes due May 1, 2016

On October 4, 2013, the Company completed a public debt offering of $265 million principal amount of 5.75% Senior Notes (“5.75% Senior Notes”) and received net proceeds of $263 million. The principal amount of the Senior Notes is payable in one single installment on October 15, 2023. The Company used a portion of the proceeds of the 5.75% Senior Notes for the redemption of the 7.0% Senior Notes due May 1, 2016 (“7.0% Senior Notes”). The Company incurred a charge of $17.9 million for the payment of call premium in connection with the redemption of the 7.0% Senior Notes. The 5.75% Senior Notes liability as of June 30, 2014 was $263.4 million. The unamortized discount as of June 30, 2014 was $1.6 million.

The fair value of the 5.75% Senior Notes as of June 30, 2014 was $291 million. The fair value was determined using quoted prices for similar instruments in active markets and is classified as Level 2 within the fair value hierarchy as defined by the accounting guidance for fair value measurements.

Interest is payable on the 5.75% Senior Notes each April 15 and October 15. The effective interest rate related to the 5.75% Senior Notes, based on the proceeds net of discount and all issuance costs, is approximately 5.86%. Interest expense on the 5.75% Senior Notes totaled $4.3 million and $8.2 million for the three and six months ended June 30, 2014, respectively. Interest expense on the 7.0% Senior Notes for the three and six months ended June 30, 2013 was approximately $2.1 million and $4.1 million, respectively.

The interest rate payable on the 5.75% Senior Notes is subject to a tiered adjustment based on defined changes in the Company’s debt ratings. The Company may redeem the 5.75% Senior Notes in whole at any time or in part from time to time at a make-whole redemption price. The 5.75% Senior Notes are the Company’s only senior unsecured obligation and will rank equally with future senior unsecured indebtedness.

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 June 30, 2014, the Company was in compliance with all such covenants.

Note 8. Commitments and Contingencies

The State of Connecticut (“the State”) awarded the Company up to $11.5 million ($8.0 million in loans and $3.5 million in grants) as an incentive to move its corporate headquarters to Stamford, Connecticut. The loan is non-interest bearing, has a term of 10 years and is subject to forgiveness under conditions of the agreement with the State. The amount of the assistance to be received is dependent on the Company reaching certain milestones for creation of new jobs over a five-year period, and the funds are to be used to offset certain equipment purchases, facility costs, training of employees and other eligible project-related costs. The Company completed the move to Stamford in September 2013 and received $7.5 million for reaching the first job milestone. Earning of the grant and forgiveness of the loan is subject to certain conditions, including maintaining the required jobs for an extended period of time. As of June 30, 2014, the length of time commitment has not been met. However, the Company expects to meet all the conditions to keep the amount of assistance received to date, and accordingly, is recognizing the assistance received over the period in which the Company recognizes the expenses for which the assistance is intended to compensate as a reduction of such expenses. The Company recognized $0.2 million and $0.5 million of the assistance for the three and six months ended June 30, 2014, respectively. As of June 30, 2014 and December 31, 2013, the Company has deferred revenue of $6.6 million and $7.2 million, respectively, which is included in other liabilities.

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

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

Note 9. Investments

The following tables set forth the Company’s cash and investments as of June 30, 2014 and December 31, 2013. The table below includes other-than-temporarily impaired (“OTTI”) securities recognized within accumulated other comprehensive income (“AOCI”).


	June 30, 2014
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized (Losses)			Cost or Amortized Cost
Fixed maturities:
U.S. Treasury bonds, agency bonds and foreign government bonds	$	421,891	$	4,313	$	(4,339	)	$	421,917
States, municipalities and political subdivisions		564,782		15,833		(2,883	)		551,832
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		256,407		8,289		(1,753	)		249,871
Residential mortgage obligations		60,867		1,832		(101	)		59,136
Asset-backed securities		162,529		598		(381	)		162,312
Commercial mortgage-backed securities		184,946		8,071		(131	)		177,006

Subtotal	$	664,749	$	18,790	$	(2,366	)	$	648,325
Corporate bonds		569,433		15,572		(1,159	)		555,020

Total fixed maturities	$	2,220,855	$	54,508	$	(10,747	)	$	2,177,094
Equity securities - common stocks		144,977		31,262		(964	)		114,679
Equity securities - Preferred stocks		35,509		1,799		(23	)		33,733
Short-term investments		226,237		—		—			226,237
Cash		72,604		—		—			72,604

Total	$	2,700,182	$	87,569	$	(11,734	)	$	2,624,347


	December 31, 2013
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized (Losses)			Cost or Amortized Cost
Fixed maturities:
U.S. Treasury bonds, agency bonds and foreign government bonds	$	441,685	$	2,854	$	(8,855	)	$	447,686
States, municipalities and political subdivisions		460,422		9,298		(13,651	)		464,775
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		301,274		6,779		(6,016	)		300,511
Residential mortgage obligations		41,755		1,212		(161	)		40,704
Asset-backed securities		125,133		653		(480	)		124,960
Commercial mortgage-backed securities		172,750		7,656		(374	)		165,468

Subtotal	$	640,912	$	16,300	$	(7,031	)	$	631,643
Corporate bonds		504,854		15,402		(3,443	)		492,895

Total fixed maturities	$	2,047,873	$	43,854	$	(32,980	)	$	2,036,999
Equity securities - common stocks		143,954		25,700		(550	)		118,804
Short-term investments		296,250		—		—			296,250
Cash		86,509		—		—			86,509

Total	$	2,574,586	$	69,554	$	(33,530	)	$	2,538,562

As of June 30, 2014 and December 31, 2013, fixed maturities for which non-credit OTTI was previously recognized and included in other accumulated comprehensive income are now in an unrealized gains position of $0.7 million and $0.5 million, respectively.

The fair value of the Company’s investment portfolio may fluctuate significantly in response to various factors such as changes in interest rates, investment quality ratings, equity prices, foreign exchange rates and credit spreads. The Company does not have the intent to sell nor is it more likely than not that it will have to sell 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. The Company does not intend to sell any of these securities and it is more likely than not that the Company will not be required to sell these securities before the recovery of the amortized cost basis. For equity securities, the Company also considers its intent to hold securities as part of the process of evaluating whether a decline in fair value represents an other-than-temporary decline in value. The Company may realize investment losses to the extent its liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate, liquidity or credit spread environments. Significant changes in the factors the Company considers when evaluating investments for impairment losses could result in a significant change in impairment losses reported in the consolidated financial statements.

The contractual maturity dates for fixed maturities categorized by the number of years until maturity as of June 30, 2014 are shown in the following table:


	June 30, 2014
In thousands	Fair Value		Amortized Cost
Due in one year or less	$	61,556	$	61,457
Due after one year through five years		751,955		737,324
Due after five years through ten years		379,451		373,226
Due after ten years		363,144		356,762
Mortgage- and asset-backed securities		664,749		648,325

Total	$	2,220,855	$	2,177,094

Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Due to the periodic repayment of principal, the mortgage-backed and asset-backed securities are estimated to have an effective maturity of approximately 3.9 years.

The following table shows the amount and percentage of the Company’s fixed maturities as of June 30, 2014 by S&P credit rating or, if an S&P rating is not available, the equivalent Moody’s Investor Services (“Moody’s”) rating. The table includes fixed maturities at fair value, and the total rating is the weighted average quality rating.


	June 30, 2014
In thousands	Rating	Fair Value		Percent of Total
Rating description:
Extremely strong	AAA	$	396,295		18	%
Very strong	AA		1,041,052		47	%
Strong	A		584,921		26	%
Adequate	BBB		178,196		8	%
Speculative	BB & Below		16,907		1	%
Not rated	NR		3,484		0	%

Total	AA	$	2,220,855		100	%

The following table summarizes all securities in a gross unrealized loss position as of June 30, 2014 and December 31, 2013, showing the aggregate fair value and gross unrealized loss by the length of time those securities had continuously been in a gross unrealized loss position as well as the relevant number of securities.


	June 30, 2014						December 31, 2013
In thousands, except # of securities	Number of Securities		Fair Value		Gross Unrealized Loss		Number of Securities		Fair Value		Gross Unrealized Loss
Fixed maturities:
U.S. Treasury bonds, agency bonds, and foreign government bonds
0-6 months		4	$	15,576	$	13		27	$	136,360	$	1,096
7-12 months		9		22,215		171		26		149,370		7,759
> 12 months		38		154,222		4,155		—		—		—

Subtotal		51	$	192,013	$	4,339		53	$	285,730	$	8,855
States, municipalities and political subdivisions
0-6 months		17	$	25,239	$	158		28	$	40,132	$	297
7-12 months		3		3,897		59		104		205,152		12,100
> 12 months		71		155,079		2,666		6		12,357		1,254

Subtotal		91	$	184,215	$	2,883		138	$	257,641	$	13,651
Agency mortgage-backed securities
0-6 months		2	$	1,778	$	7		39	$	39,458	$	434
7-12 months		—		—		—		64		77,860		3,768
> 12 months		61		77,105		1,746		9		22,784		1,814

Subtotal		63	$	78,883	$	1,753		112	$	140,102	$	6,016
Residential mortgage obligations
0-6 months		5	$	1,192	$	6		3	$	431	$	2
7-12 months		—		—		—		7		950		29
> 12 months		16		2,504		95		15		2,467		130

Subtotal		21	$	3,696	$	101		25	$	3,848	$	161
Asset-backed securities
0-6 months		4	$	20,791	$	24		14	$	75,887	$	479
7-12 months		4		34,907		357		1		203		1
> 12 months		—		—		—		—		—		—

Subtotal		8	$	55,698	$	381		15	$	76,090	$	480
Commercial mortgage-backed securities
0-6 months		2	$	1,504	$	1		4	$	6,712	$	31
7-12 months		—		—		—		2		15,098		322
> 12 months		4		15,631		130		4		774		21

Subtotal		6	$	17,135	$	131		10	$	22,584	$	374
Corporate bonds
0-6 months		14	$	67,019	$	197		34	$	93,591	$	717
7-12 months		5		6,192		33		18		55,021		2,726
> 12 months		12		40,248		929		—		—		—

Subtotal		31	$	113,459	$	1,159		52	$	148,612	$	3,443

Total fixed maturities		271	$	645,099	$	10,747		405	$	934,607	$	32,980

Equity securities - common stocks
0-6 months		5	$	13,762	$	929		5	$	7,387	$	422
7-12 months		2		376		35		2		3,538		128
> 12 months		—		—		—		—		—		—

Total common Stocks		7	$	14,138	$	964		7	$	10,925	$	550

Equity securities - preferred stocks
0-6 months		4	$	3,294	$	23		—	$	—	$	—
7-12 months		—		—		—		—		—		—
> 12 months		—		—		—		—		—		—

Total Preferred Stocks		4	$	3,294	$	23		—	$	—	$	—

As of June 30, 2014 and December 31, 2013, the largest unrealized loss by a non-government backed issuer in the investment portfolio was $0.5 million and $1.1 million, respectively.

The Company analyzes impaired securities quarterly to determine if any are other-than-temporary. The above securities with unrealized losses have been determined to be temporarily impaired based on the evaluation described below.

For fixed maturities, when assessing whether the amortized cost basis of the security will be recovered, the Company compares the present value of cash flows expected to be collected in relation to the current book value. Any shortfalls of the present value of the cash flows expected to be collected to the amortized cost basis is considered the credit loss portion of OTTI losses and is recognized in earnings. All non-credit losses are recognized as changes in OTTI losses within AOCI.

To determine whether the unrealized loss on structured securities is other-than-temporary, the Company analyzes the projections provided by its investment managers with respect to an expected principal loss under a range of scenarios and utilizes the most likely outcomes. The analysis relies on actual collateral performance measures such as default rate, prepayment rate and loss severity. These assumptions are applied throughout the remaining term of the deal, incorporating the transaction structure and priority of payments, to generate loss adjusted cash flows. Results of the analysis will indicate whether the security 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. The analysis applies the stated assumptions throughout the remaining term of the transaction to forecast cash flows, which are then applied through the transaction structure to determine whether there is a loss to the security. For securities in which a tranche loss is present, and the net present value of loss adjusted cash flows is less than book value, impairment is recognized. The output data also includes a number of additional metrics such as average life remaining, original and current credit support, over 60 day delinquency and security rating.

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

For equity securities, in general, the Company focuses its attention on those securities with a fair value less than 80% of their cost for six or more consecutive months. If warranted as the result of conditions relating to a particular security, the Company will focus on a significant decline in fair value regardless of the time period involved. Factors considered in evaluating potential impairment include, but are not limited to, the current fair value as compared to cost of the security, the length of time the investment has been below cost and by how much the investment is below cost. 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.

The Company’s ability to hold securities is supported by sufficient cash flow from its operations and from maturities within its investment portfolio in order to meet its claims payment and other disbursement obligations arising from its underwriting operations without selling such investments. With respect to securities where the decline in value is determined to be temporary and the security’s value is not written down, a subsequent decision may be made to sell that security and realize a loss. Subsequent decisions on security sales are made within the context of overall risk monitoring, changing information and market conditions.

The table below summarizes the Company’s activity related to OTTI losses for the periods indicated:


	Three Months Ended June 30,								Six Months Ended June 30,
	2014				2013				2014				2013
In thousands, except # of securities	Number of Securities		Amount		Number of Securities		Amount		Number of Securities		Amount		Number of Securities		Amount

Total OTTI losses:
Corporate and other bonds		—	$	—		—	$	—		—	$	—		—	$	—
Commercial mortgage-backed securities		—		—		—		—		—		—		—		—
Residential mortgage-backed securities		—		—		—		—		—		—		—		—
Asset-backed securities		—		—		—		—		—		—		—		—
Equities		—		—		—		—		—		—		2		42

Total		—	$	—		—	$	—		—	$	—		2	$	42

Less: Portion of loss in accumulated other comprehensive income (loss):
Corporate and other bonds			$	—			$	—			$	—			$	—
Commercial mortgage-backed securities				—				—				—				—
Residential mortgage-backed securities				—				—				—				—
Asset-backed securities				—				—				—				—
Equities				—				—				—				—

Total			$	—			$	—			$	—			$	—

Impairment losses recognized in earnings:
Corporate and other bonds			$	—			$	—			$	—			$	—
Commercial mortgage-backed securities				—				—				—				—
Residential mortgage-backed securities				—				—				—				—
Asset-backed securities				—				—				—				—
Equities				—				—				—				42

Total			$	—			$	—			$	—			$	42

The following table summarizes the cumulative amounts related to the Company’s credit loss portion of the OTTI losses on fixed maturities for the three and six months ended June 30, 2014 and 2013. The Company does not intend to sell and it is more likely than not that it will not be required to sell the securities, prior to recovery of the amortized cost basis and for which the non-credit loss portion is included in AOCI.


	Three Months Ended June 30,				Six Months Ended June 30,
In thousands	2014		2013		2014		2013
Beginning balance	$	4,183	$	2,362	$	4,183	$	2,362
Additions for credit loss impairments recognized in the current period on securities not previously impaired		—		—		—		—
Additions for credit loss impairments recognized in the current period on securities previously impaired		—		—		—		—
Reductions for credit loss impairments previously recognized on securities sold during the period		—		—		—		—

Ending balance	$	4,183	$	2,362	$	4,183	$	2,362

The following table summarizes the gross unrealized losses as of June 30, 2014 by length of time where the fair value is less than 80% of amortized cost:


	June 30, 2014
In thousands	Fixed Maturities		Equity Securities		Total
Less than three months	$	—	$	—	$	—
Longer than three months and less than six months		—		465		465
Longer than six months and less than twelve months		—		—		—
Longer than twelve months		—		—		—

Total	$	—	$	465	$	465

The contractual maturity dates for fixed maturities categorized by the number of years until maturity, with a gross unrealized loss as of June 30, 2014 is presented in the following table:


	June 30, 2014
	Gross Unrealized Losses					Fair Value
In thousands	Amount		Percent of Total			Amount		Percent of Total
Due in one year or less	$	417		4	%	$	8,486		1	%
Due after one year through five years		2,009		19	%		157,888		25	%
Due after five years through ten years		3,877		36	%		182,500		28	%
Due after ten years		2,078		19	%		140,813		22	%
Mortgage- and asset-backed securities		2,366		22	%		155,412		24	%

Total	$	10,747		100	%	$	645,099		100	%

The Company’s net investment income was derived from the following sources:


	Three Months Ended June 30,						Six Months Ended June 30,
In thousands	2014			2013			2014			2013
Fixed maturities	$	14,188		$	13,578		$	28,142		$	26,743
Equity securities		1,971			1,257			5,204			2,288
Short-term investments		242			198			459			388

Total investment income	$	16,401		$	15,033		$	33,805		$	29,419
Investment expenses		(753	)		(787	)		(1,547	)		(1,516	)

Net investment income	$	15,648		$	14,246		$	32,258		$	27,903

The change in net unrealized gains and losses, inclusive of the change in the non-credit portion of other-than-temporary impairment losses, consisted of:


	Six Months Ended June 30,
In thousands	2014		2013
Fixed maturities	$	32,887	$	(67,769	)
Equity securities		6,924		7,035

Gross unrealized gains (losses)	$	39,811	$	(60,734	)
Deferred income tax		13,758		(21,264	)

Change in net unrealized gains (losses), net	$	26,053	$	(39,470	)

Realized gains and losses, excluding net OTTI losses recognized in earnings, for the periods indicated were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
In thousands	2014			2013			2014			2013
Fixed maturities:
Gains	$	3,113		$	1,730		$	4,979		$	4,936
Losses		(56	)		(73	)		(2,106	)		(383	)

Fixed maturities, net	$	3,057		$	1,657		$	2,873		$	4,553
Equity securities:
Gains	$	1,416		$	1,815		$	3,336		$	3,733
Losses		—			(127	)		(903	)		(127	)

Equity securities, net	$	1,416		$	1,688		$	2,433		$	3,606

Net realized gains (losses)	$	4,473		$	3,345		$	5,306		$	8,159

The following tables present, for each of the fair value hierarchy levels as defined by the accounting guidance for fair value measurements and described below, the Company’s fixed maturities and equity securities by asset class that are measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013:


	June 30, 2014
In thousands	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. Treasury bonds, agency bonds and foreign government bonds	$	214,454	$	207,437	$	—	$	421,891
States, municipalities and political subdivisions		—		564,782		—		564,782
Mortgage-backed and asset-backed securities: Agency mortgage-backed securities		—		256,407		—		— 256,407
Residential mortgage obligations		—		60,867		—		60,867
Asset-backed securities		—		162,529		—		162,529
Commercial mortgage-backed securities		—		184,946		—		184,946

Subtotal	$	—	$	664,749	$	—	$	664,749
Corporate bonds		—		569,433		—		569,433

Total fixed maturities	$	214,454	$	2,006,401	$	—	$	2,220,855
Equity securities - common stocks		144,977		—		—		144,977
Equity securities - preferred stocks				35,509				35,509

Total	$	359,431	$	2,041,910	$	—	$	2,401,341


	December 31, 2013
In thousands	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. Treasury bonds, agency bonds and foreign government bonds	$	242,379	$	199,306	$	—	$	441,685
States, municipalities and political subdivisions		—		460,422		—		460,422
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		—		301,274		—		301,274
Residential mortgage obligations		—		41,755		—		41,755
Asset-backed securities		—		125,133		—		125,133
Commercial mortgage-backed securities		—		172,750		—		172,750

Subtotal	$	—	$	640,912	$	—	$	640,912
Corporate bonds		—		500,447		4,407		504,854

Total fixed maturities	$	242,379	$	1,801,087	$	4,407	$	2,047,873
Equity securities—common stocks		143,954		—		—		143,954

Total	$	386,333	$	1,801,087	$	4,407	$	2,191,827

The fair value of financial instruments is determined based on the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets. Examples are listed equity and fixed income securities traded on an exchange. U.S. Treasury securities are reported as Level 1 and are valued based on unadjusted quoted prices for identical assets in active markets that the Company can access.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Examples are asset-backed and mortgage-backed securities that are similar to other asset-backed or mortgage-backed securities observed in the market. U.S. government agency securities are reported as Level 2 and are valued using yields and spreads that are observable in active markets.

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

The Company did not have any significant transfers between Level 1 and 2 as of June 30, 2014 and June 30, 2013.

The following tables present a reconciliation of the beginning and ending balances of all investments measured at fair value using Level 3 inputs during the six months ended June 30, 2014.


	Six Months Ended June 30, 2014
In thousands	Beginning Balance		Realized Gains (Losses)		Unrealized Gains (Losses)		Purchases		Sales		Settlements		Transfers into Level 3		Transfers out of Level 3			Ending Balance
Assets:
Corporate Bonds	$	4,407	$	—	$	—	$	—	$	—	$	—	$	—	$	(4,407	)	$	—

Total assets	$	4,407	$	—	$	—	$	—	$	—	$	—	$	—	$	(4,407	)	$	—

As of June 30, 2013 and 2014, the Company did not have any Level 3 assets. During 2014 one security was transferred from Level 3 to Level 2 as the Company was able to obtain a valuation in which all significant inputs to the model are observable in active markets.

As of June 30, 2014 and December 31, 2013, the Company did not have a concentration of greater than 5% of invested assets in a single non-U.S. government-backed issuer.

Note 10. Credit Facility

On November 22, 2012, the Company entered into a $165 million credit facility agreement with ING Bank N.V., London Branch, individually and as Administrative Agent, and a syndicate of lenders. The new credit facility amended and restated a $165 million letter of credit facility entered into by the parties on March 28, 2011. The credit facility, which is denominated in U.S. dollars, is utilized to fund participation in Syndicate 1221 through letters of credit for the 2014 and 2013 underwriting years, as well as open prior years. The letters of credit issued under the facility can be denominated in British pounds and their aggregate face amount will fluctuate based on exchange rates. If any letters of credit remain outstanding under the facility after December 31, 2014, the Company would be required to post additional collateral to secure the remaining letters of credit. As of June 30, 2014, letters of credit with an aggregate face amount of $153.2 million were outstanding under the credit facility and the Company had $1.0 million of cash collateral posted.

This credit facility contains customary covenants for facilities of this type, including restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of assets, and requirements as to maintaining certain consolidated tangible net worth, statutory surplus and other financial ratios. The credit facility also provides for customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, any representation or warranty made by the Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting the Company and its subsidiaries, the occurrence of certain material judgments, or a change in control of the Company. The letter of credit facility is secured by a pledge of the stock of certain insurance subsidiaries of the Company. To the extent the aggregate face amount issued under the credit facility exceeds the commitment amount, the Company is required to post collateral with the lead bank of the consortium. The Company was in compliance with all covenants under the credit facility as of June 30, 2014.

The applicable margin and applicable fee rate payable under the credit facility are based on a tiered schedule that is based on the Company’s then-current ratings issued by S&P and Moody’s with respect to the Company’s Senior Notes without third-party credit enhancement, and the amount of the Company’s own collateral utilized to fund its participation in Syndicate 1221.

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

NOTE ON FORWARD-LOOKING STATEMENTS

Some of the statements in this Quarterly Report on Form 10-Q are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in or incorporated by reference in this Annual Report are forward-looking statements. Whenever used in this report, the words “estimate”, “expect”, “believe”, “may”, “will”, “intend”, “continue” or similar expressions or their negative are intended to identify such forward-looking statements. Forward-looking statements are derived from information that we currently have and assumptions that we make. We cannot assure you that anticipated results will be achieved, since actual results may differ materially because of both known and unknown risks and uncertainties which we face. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Factors that could cause actual results to differ materially from our forward-looking statements include, but are not limited to, the factors discussed in the “Risk Factors” section of our 2013 Annual Report on Form 10-K as well as:

•

continued volatility in the financial markets and the current recession;

•

risks arising from the concentration of our business in marine and energy, general liability and professional liability insurance, including the risk that market conditions for these lines could change adversely or that we could experience large losses in these lines;

•

cyclicality in the property and casualty insurance business generally, and the marine insurance business specifically;

•

risks that we face in entering new markets and diversifying the products and services that we offer, including risks arising from the development of our new specialty lines or our ability to manage effectively the rapid growth in our lines of business;

•

changing legal, social and economic trends and inherent uncertainties in the loss estimation process, which could adversely impact the adequacy of loss reserves and the allowance for reinsurance recoverables;

•

risks inherent in the preparation of our financial statements, which require us to make many estimates and judgments;

•

our ability to continue to obtain reinsurance covering our exposures at appropriate prices and/or in sufficient amounts;

•

the counterparty credit risk of our reinsurers, including risks associated with the collection of reinsurance recoverable amounts from our reinsurers, who may not pay losses in a timely fashion, or at all;

•

the effects of competition from other insurers;

•

unexpected turnover of our professional staff and our ability to attract and retain qualified employees;

•

increases in interest rates during periods in which we must sell fixed-income securities to satisfy liquidity needs may result in realized investment losses;

•

our investment portfolio is exposed to market-wide risks and fluctuations, as well as to risks inherent in particular types of securities;

•

exposure 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;

•

capital may not be available in the future, or may not be available on favorable terms;

•

our ability to maintain or improve our insurance company ratings, as downgrades could significantly adversely affect us, including reducing our competitive position in the industry, or causing clients to choose an insurer with a certain rating level to use higher-rated insurers;

•

risks associated with continued or increased premium levies by Lloyd’s of London (“Lloyd’s) for the Lloyd’s Central Fund and cash calls for trust fund deposits, or a significant downgrade of Lloyd’s rating by the A.M. Best Company (“A.M. Best”);

•

changes in the laws, rules and regulations that apply to our U.S. Insurance Companies;

•

the effect of the European Union Directive on Solvency II on how we manage our business, capital requirements and costs associated with conducting business;

•

the inability of our subsidiaries to pay dividends to us in sufficient amounts, which would harm our ability to meet our obligations;

•

weather-related events and other catastrophes (including man-made catastrophes) impacting our insureds and/or reinsurers;

•

volatility in the market price of our common stock;

•

exposure to recent uncertainties with regard to European sovereign debt holdings;

•

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

•

if we experience difficulties with our information technology and telecommunications systems and/or data security, our ability to conduct our business might be adversely affected;

•

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

•

other risks that we identify in current and future filings with the Securities and Exchange Commission (“SEC”).

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

OVERVIEW

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

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

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

Navigators Underwriting Agency Ltd. (“NUAL”), a Lloyd’s of London (“Lloyd’s”) underwriting agency manages Syndicate 1221. Through our participation in Syndicate 1221, we primarily underwrite marine and related lines of business along with offshore energy, construction coverage for onshore energy businesses, specialty assumed reinsurance, and professional liability insurance. We have controlled 100% of Syndicate 1221’s stamp capacity for the 2014, 2013, and 2012 underwriting years through our wholly-owned subsidiary, Navigators Corporate Underwriters Ltd. (“NCUL”), which is referred to as a corporate name in the Lloyd’s market. In addition, we have also established underwriting agencies in Antwerp, Belgium, Stockholm, Sweden, and Copenhagen, Denmark, which underwrite risks pursuant to binding authorities with NUAL into Syndicate 1221.

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

The Insurance Companies are primarily engaged in underwriting marine insurance and related lines of business, specialty insurance lines of business, including contractors general liability insurance, commercial umbrella and primary and excess casualty businesses, specialty assumed reinsurance business, and professional liability insurance. NSIC underwrites specialty and professional liability insurance on an excess and surplus lines basis.

Catastrophe Risk Management

We have 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 our concentration of underwriting exposures in catastrophe exposed areas globally and manage this exposure through individual risk selection and through the purchase of reinsurance. We also use modeling and concentration management tools that allow us to better monitor and control our accumulations of potential losses from catastrophe 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.

We have significant natural catastrophe exposures throughout the world. We estimate that our largest exposure to loss from a single natural catastrophe event comes from a hurricane on the east coast of the United States. As of June 30, 2014, we estimate that our probable maximum pre-tax gross and net loss exposure from such a hurricane event would be approximately $86.4 million and $35.3 million, respectively, including the cost of reinsurance reinstatement premiums (“RRPs”).

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

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

CRITICAL ACCOUNTING ESTIMATES

The Company’s Annual Report on Form 10-K for the year ended December 31, 2013 discloses our critical accounting estimates (refer to Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates). Certain estimates are critical to the portrayal of our financial condition and results since they require management to establish estimates based on complex and subject judgments, including those related to our estimates of losses and loss adjustment expenses (“LAE”) (including losses that have occurred but were not reported to us by the financial reporting date), reinsurance recoverables, written and unearned premium, the recoverability of deferred tax assets, the impairment of investment securities and accounting for Lloyd’s results.

RESULTS OF OPERATIONS

The following is a discussion and analysis of our consolidated and segment results of operations for the three and six months ended June 30, 2014 and 2013. Our financial results are presented on the basis of U.S. GAAP. However, in presenting our financial results, we discuss our performance with reference to operating earnings, book value per share, underwriting profit or loss, and the combined ratio, all of which are non-GAAP financial measures of performance and/or underwriting profitability. Operating earnings is calculated as net income less after-tax net realized gains (losses), net OTTI losses recognized in earnings, and after-tax foreign exchange gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity’s functional currency) and translation adjustments (translation of foreign currency denominated assets and liabilities into the entity’s functional currency). Book value per share is calculated by dividing stockholders’ equity by the number of outstanding shares at any period end. Underwriting profit or loss is calculated from net earned premiums, less the sum of net losses and LAE, commission expenses, other operating expenses and other underwriting income (expense). The combined ratio is derived by dividing the sum of net losses and LAE, commission expenses, other operating expenses and other underwriting income (expense) by net earned premiums. A combined ratio of less than 100% indicates an underwriting profit and greater than 100% indicates an underwriting loss. We consider such measures, which may be defined differently by other companies, to be important in the understanding of our overall results of operations by highlighting the underlying profitability of our insurance business.

Summary of Consolidated Results

The following table presents a summary of our consolidated financial results for the three and six months ended June 30, 2014 and 2013:


	Three Months Ended June 30,				Six Months Ended June 30,				Percentage Change
In thousands, except for per share amounts	2014		2013		2014		2013		QTD			YTD
Gross written premiums	$	348,795	$	332,128	$	771,585	$	725,350		5.0	%		6.4	%
Net written premiums		231,864		198,469		543,714		467,921		16.8	%		16.2	%
Total revenues		249,540		222,490		502,654		443,865		12.2	%		13.2	%
Total expenses		224,681		202,269		436,473		403,091		11.1	%		8.3	%

Pre-tax income (loss)	$	24,859	$	20,221	$	66,181	$	40,774		22.9	%		62.3	%
Provision (benefit) for income taxes		7,998		6,284		21,352		12,927		27.3	%		65.2	%

Net income (loss)	$	16,861	$	13,937	$	44,829	$	27,847		21.0	%		61.0	%

Net income (loss) per common share:
Basic	$	1.18	$	0.99	$	3.15	$	1.97
Diluted	$	1.17	$	0.97	$	3.11	$	1.93

Net income for the three months ended June 30, 2014 was $16.9 million or $1.17 per diluted share compared to $13.9 million or $0.97 per diluted share for the three months ended June 30, 2013. Operating earnings for the three months ended June 30, 2014 were $15.0 million or $1.04 per diluted share compared to $11.8 million or $0.82 per diluted share for the comparable period in 2013. In comparison to net income, our operating earnings for the three months ended June 30, 2014 excluded after-tax net realized foreign exchange losses of $1.0 million and after-tax net realized gains of $2.9 million. For the three months ended June 30, 2013, operating earnings excluded after-tax net realized gains of $2.2 million. The increase in our operating earnings was largely attributable to stronger underwriting results from our Insurance Companies partially offset by a reduction in underwriting results from our Lloyd’s Operations.

Net income for the six months ended June 30, 2014 was $44.8 million or $3.11 per diluted share compared to $27.8 million or $1.93 per diluted share for the six months ended June 30, 2013. Operating earnings for the six months ended June 30, 2014 were $35.9 million or $2.49 per diluted share compared to $22.6 million or $1.56 per diluted share for the comparable period in 2013. In comparison to net income, our operating earnings for the six months ended June 30, 2014 excluded net after-tax foreign exchange gains of $5.5 million, $6.6 million of which was driven by a one-time change in the functional currency of our Lloyd’s Operations, and after-tax net realized gains of $3.5 million. For the six months ended June 30, 2013, operating earnings excluded after-tax net realized gains of $5.3 million and other-than-temporary impairment losses of $0.03 million. The increase in our operating earnings was largely attributable to stronger underwriting results from our Insurance Companies offset by a reduction in underwriting results from our Lloyd’s Operations.

Our book value per share as of June 30, 2014 was $68.16, increasing 7.3% from $63.54 as of December 31, 2013. The growth in our book value per share is driven by stronger underwriting results from our Insurance Companies, as well as an increase in our unrealized gains on our investment portfolio primarily from longer dated fixed income securities and equities, offset by a reduction in underwriting results for our Lloyd’s Operations. Our consolidated stockholders’ equity increased 7.7% to $972.1 million as of June 30, 2014 compared to $902.2 million as of December 31, 2013.

Cash flow from operations was $78.1 million for the six months ended June 30, 2014 compared to $48.5 million for the comparable period in 2013. The increase in cash flow from operations for 2014 is largely attributable to a reduction in losses paid as well as the continued improvement of collections of premiums receivable, offset by increased net payments to reinsurers.

The following table presents our consolidated underwriting results and provides a reconciliation of our underwriting profit or loss to GAAP net income or loss for the three and six months ended June 30, 2014 and 2013:


	Three Months Ended June 30,						Six Months Ended June 30,						Percentage Change
In thousands	2014			2013			2014			2013			QTD			YTD
Gross written premiums	$	348,795		$	332,128		$	771,585		$	725,350			5.0	%		6.4	%
Net written premiums		231,864			198,469			543,714			467,921			16.8	%		16.2	%
Net earned premiums		231,084			205,814			456,356			408,142			12.3	%		11.8	%
Net losses and loss adjustment expenses		(140,220	)		(131,148	)		(275,287	)		(262,490	)		6.9	%		4.9	%
Commission expenses		(32,150	)		(28,391	)		(57,877	)		(54,946	)		13.2	%		5.3	%
Other operating expenses		(47,992	)		(40,678	)		(95,138	)		(81,552	)		18.0	%		16.7	%
Other underwriting income (expenses)		235			(915	)		390			(297	)		NM			NM

Underwriting profit (loss)	$	10,957		$	4,682		$	28,444		$	8,857			134.0	%		NM
Net investment income		15,648			14,246			32,258			27,903			9.8	%		15.6	%
Net other-than-temporary impairment losses recognized in earnings		—			—			—			(42	)		NM			NM
Net realized gains (losses)		4,473			3,345			5,306			8,159			33.7	%		-35.0	%
Interest expense		(4,319	)		(2,052	)		(8,171	)		(4,103	)		110.5	%		99.1	%
Other income		(1,900	)					8,344						NM			NM

Income (loss) before income taxes	$	24,859		$	20,221		$	66,181		$	40,774			22.9	%		62.3	%
Income tax expense (benefit)		7,998			6,284			21,352			12,927			27.3	%		65.2	%

Net income (loss)	$	16,861		$	13,937		$	44,829		$	27,847			21.0	%		61.0	%

Losses and loss adjustment expenses ratio		60.7	%		63.7	%		60.3	%		64.3	%
Commission expense ratio		13.9	%		13.8	%		12.7	%		13.5	%
Other operating expense ratio ⁽¹⁾		20.7	%		20.2	%		20.8	%		20.0	%

Combined ratio		95.3	%		97.7	%		93.8	%		97.8	%

(1) - Includes Other operating expenses & Other underwriting income (expense)

NM - Percentage change not meaningful

The combined ratio for the three months ended June 30, 2014 was 95.3% compared to 97.7% for the same period in 2013. Our underwriting profit increased by $6.3 million to $11.0 million for the three months ended June 30, 2014 compared to $4.7 million for the same period in 2013.

Our underwriting profit for the three months ended June 30, 2014 is due to strong underwriting results from our Insurance Companies driven by $8.1 million of underwriting profit from our Marine business in connection with favorable loss emergence across certain key product lines, as well as $4.7 million of underwriting profit from our D&O business due to recovery of prior period losses coming from settlement of a contract dispute with a former third party administrator. In addition, our underwriting profit is partially offset by an $8.9 million net loss, inclusive of $3.9 million of RRPs, related to a Marine Liability loss in our Lloyd’s Operations which involved the sinking of a vessel in South Korean waters, as well as other unfavorable RRP adjustments for both our Insurance Companies and Lloyd’s Operations of $2.7 million, including $1.3 million relating to the grounding of the cruise ship Costa Concordia off the coast of Italy.

Our underwriting results for the three months ended June 30, 2013 included $4.5 million of underwriting profit from our Lloyd’s Operations due to continued favorable loss emergence for underwriting years (“UYs”) 2011 and prior. Our underwriting results also included a slight underwriting profit from our Insurance Companies, inclusive of $2.0 million of underwriting profit from our Excess Casualty and Primary Casualty businesses due in part to strong production attributable to the expansion of those underwriting teams and the dislocation of certain competitors, mostly offset by a net underwriting loss of $1.9 million from our Management Liability (“D&O”) and Errors & Omissions (“E&O”) business driven by net prior period reserve strengthening for UYs 2010 and prior.

The combined ratio for the six months ended June 30, 2014 was 93.8% compared to 97.8% for the same period in 2013. Our underwriting profit increased by $19.6 million to $28.4 million for the six months ended June 30, 2014 compared to $8.9 million for the same period in 2013.

Our underwriting profit for the six months ended June 30, 2014 is due to strong underwriting results for our Insurance Companies and Lloyd’s Operations. Our Insurance Companies reported an underwriting profit of $23.3 million inclusive of $13.0 million of underwriting profit from our Marine business due to growth as well as favorable loss emergence from prior accident years, as well as $5.1 million of underwriting profit from our D&O business due in part to recovery of prior period losses coming from settlement of a contract dispute with a former third party administrator. In addition, our Assumed Reinsurance business reported $4.5 million underwriting profit driven by strong production from Latin America. Our Lloyd’s Operations reported an underwriting profit of $5.2 million which includes an underwriting profit of $4.7 million from Property Casualty driven by favorable claim experience coming from lack of catastrophes in the current accident year, and to a lesser extent profit commission recognized on our proportional reinsurance treaty. Our Lloyd’s Operations reported an underwriting profit of $2.9 million from Professional Liability driven by favorable loss emergence. Underwriting profit for our Lloyd’s Operations is partially offset by an $8.9 million net loss, inclusive of $3.9 million of RRPs, related to a Marine Liability loss which involved the sinking of a vessel in South Korean waters, as well as other unfavorable RRP adjustments for both our Insurance Companies and Lloyd’s Operations of $3.6 million, including $1.3 million relating to the grounding of the cruise ship Costa Concordia off the coast of Italy.

Our underwriting results for the six months ended June 30, 2013 included $8.5 million of underwriting profit from our Lloyd’s Operations due to continued favorable loss emergence for UYs 2011 and prior. Our underwriting results also included a slight underwriting profit from our Insurance Companies, inclusive of $6.4 million of underwriting profit from our Excess Casualty and Primary Casualty businesses due in part to strong production attributable to the expansion of those underwriting teams and the dislocation of certain competitors, mostly offset by a net underwriting loss of $5.5 million from our D&O business driven by net prior period reserve strengthening from UYs 2010 and prior.

Revenues

Gross Written Premiums

The following tables set forth our gross written premiums, net written premiums and net earned premiums by segment and line of business for the three and six months ended June 30, 2014 and 2013.


	Three Months Ended June 30,
	2014									2013
In thousands	Gross Written Premiums		%			Net Written Premiums		Net Earned Premiums		Gross Written Premiums		%			Net Written Premiums		Net Earned Premiums
Insurance Companies:
Marine	$	48,119		14	%	$	35,357	$	31,752	$	43,077		13	%	$	27,366	$	31,798
Property Casualty		168,597		48	%		119,633		124,695		152,095		46	%		90,711		99,477
Professional Liability		27,013		8	%		19,051		21,965		33,393		10	%		25,303		25,272

Insurance Companies Total	$	243,729		70	%	$	174,041	$	178,412	$	228,565		69	%	$	143,380	$	156,547

Lloyd’s Operations:
Marine	$	46,005		13	%	$	29,562	$	32,213	$	45,893		14	%	$	34,060	$	34,623
Property Casualty		37,162		11	%		14,392		11,463		41,217		12	%		12,181		8,562
Professional Liability		21,899		6	%		13,869		8,996		16,453		5	%		8,848		6,082

Lloyd’s Operations Total	$	105,066		30	%	$	57,823	$	52,672	$	103,563		31	%	$	55,089	$	49,267

Total	$	348,795		100	%	$	231,864	$	231,084	$	332,128		100	%	$	198,469	$	205,814


	Six Months Ended June 30,
	2014									2013
In thousands	Gross Written Premiums		%			Net Written Premiums		Net Earned Premiums		Gross Written Premiums		%			Net Written Premiums		Net Earned Premiums
Insurance Companies
Marine	$	100,352		13	%	$	76,481	$	64,512	$	93,924		13	%	$	68,507	$	68,523
Property Casualty		397,953		52	%		291,994		235,521		371,059		51	%		240,662		192,195
Professional Liability		57,222		7	%		39,517		44,263		65,210		9	%		50,530		50,160

Total Insurance Companies	$	555,527		72	%	$	407,992	$	344,296	$	530,193		73	%	$	359,699	$	310,878

Lloyd’s Operations
Marine	$	108,962		14	%	$	81,693	$	71,100	$	99,537		14	%	$	73,618	$	68,668
Property Casualty		70,241		9	%		30,926		24,421		66,275		9	%		19,493		16,441
Professional Liability		36,855		5	%		23,103		16,539		29,345		4	%		15,111		12,155

Total Lloyd’s Operations	$	216,058		28	%	$	135,722	$	112,060	$	195,157		27	%	$	108,222	$	97,264

Total	$	771,585		100	%	$	543,714	$	456,356	$	725,350		100	%	$	467,921	$	408,142

Gross written premiums increased $16.7 million, or 5.0%, to $348.8 million for the three months ended June 30, 2014 compared to $332.1 million for the same period in 2013. The increase in gross written premium is primarily driven by growth from our Insurance Companies Primary Casualty division in connection with new business as well as an increase in renewal premium. The increase is also driven by strong production from our Environmental Liability division and growth in new business and increased renewal premium from our Excess Casualty division. In addition, the Insurance Companies Marine gross written premiums increased due to new business growth, as well as the timing of specific policy renewals written on an eighteen month cycle. Gross written premium decreased for the Insurance Companies Professional Liability division due to our decision to exit the small lawyers professional liability E&O business in the fourth quarter of 2013, as well as decreased renewals on our real estate agents liability product line. In addition, we have experienced growth from our Professional Liability business across all product lines written by our Lloyd’s Operations, offset by a reduction in Property Casualty business due to tough market conditions and an unfavorable rating environment.

Average renewal premium rates for our Insurance Companies segment for the three months ended June 30, 2014 increased 0.6% as compared to the same period in 2013 across all of our businesses within each segment. Our Insurance Companies Marine business has realized a 2.3% average increase in rates across all significant product lines. Our Insurance Companies Property Casualty business realized a 0.5% increase in rates that is mostly driven by a 2.4% increase for the Excess Casualty division and a 1.3% increase in the Primary Casualty division, partially offset by a 9.2% decrease from our Energy & Engineering division. Our Insurance Companies Professional Liability business has experienced an overall decrease in its renewal rates of 2.1%, inclusive of a 3.3% decrease in D&O. For the three months ended June 30, 2014, average renewal premium rates for our Lloyd’s Operations decreased 2.4% compared to the same period in 2013, driven by a 0.9% increase from Lloyd’s Marine, offset by decreases of 4.7% and 5.0% for Lloyd’s Property Casualty and Lloyd’s Professional Liability, respectively.

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

Gross written premiums increased $46.2 million, or 6.4%, to $771.6 million for the six months ended June 30, 2014 compared to $725.4 million for the same period in 2013. The Insurance Companies Property Casualty gross written premiums for the six months ended June 30, 2014 increased primarily due to growth from our Primary Casualty division in connection with new business, as well as an increase in renewal premium. In addition, the increase is also driven by strong production from our Environmental Liability division. The Insurance Companies Marine gross written premiums increased primarily due to new business growth, as well as the timing of specific policy renewals written on an eighteen month cycle. Gross written premiums decreased for the Insurance Companies Professional Liability division due to our decision to exit the small lawyers professional liability E&O business in the fourth quarter of 2013, as well as a decrease in renewal premium on our real estate agents liability product line. The Lloyd’s Operations gross written premiums for the six months ended June 30, 2014 increased due to growth from our Assumed Reinsurance business, specifically new business growth from Marine Excess-of-Loss Assumed Reinsurance, coupled with growth from Professional Liability lines as a result of new business growth.

Average renewal premium rates for our Insurance Companies segment for the six months ended June 30, 2014 increased 1.2% as compared to the same period in 2013, driven by a 2.8% increase for Marine and a 1.0% increase for Property Casualty, offset by a 0.5% decrease in Professional Liability. Average renewal premium rates for our Lloyd’s Operations for the six months ended June 30, 2014 decreased 0.6% as compared to the same period in 2013, driven by a 2.3% increase for Marine, offset by a 3.8% and 4.1% decrease for Property Casualty and Professional Liability, respectively.

Ceded Written Premiums

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

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

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

For the three and six months ended June 30, 2014, we reported approximately $6.6 million and $7.6 million of RRPs and for the three and six months ended June 30, 2013, we incurred $4.3 million and $5.0 million of RRPs. In all periods, RRPs were primarily driven by large losses from our Marine business.

The following table sets forth our ceded written premiums by segment and line of business for the three and six months ended June 30, 2014 and 2013:


	Three Months Ended June 30,										Six Months Ended June 30,
	2014					2013					2014					2013
In thousands	Ceded Written Premiums		% of Gross Written Premiums			Ceded Written Premiums		% of Gross Written Premiums			Ceded Written Premiums		% of Gross Written Premiums			Ceded Written Premiums		% of Gross Written Premiums
Insurance Companies
Marine	$	12,762		27	%	$	15,711		36	%	$	23,871		24	%	$	25,417		27	%
Property Casualty		48,964		29	%		61,384		40	%		105,959		27	%		130,397		35	%
Professional Liability		7,962		29	%		8,090		24	%		17,705		31	%		14,680		23	%

Total Insurance Companies	$	69,688		29	%	$	85,185		37	%	$	147,535		27	%	$	170,494		32	%

Lloyd’s Operations
Marine	$	16,443		36	%	$	11,833		26	%	$	27,269		25	%	$	25,919		26	%
Property Casualty		22,770		61	%		29,036		70	%		39,315		56	%		46,782		71	%
Professional Liability		8,030		37	%		7,605		46	%		13,752		37	%		14,234		49	%

Total Lloyd’s Operations	$	47,243		45	%	$	48,474		47	%	$	80,336		37	%	$	86,935		45	%

Total	$	116,931		34	%	$	133,659		40	%	$	227,871		30	%	$	257,429		35	%

Overall, the percentage of total ceded written premiums to total gross written premiums for the three months ended June 30, 2014 decreased by 6% compared to the same period in 2013. For the six months ended June 30, 2014, the percentage decreased by 5% compared to the same period in 2013. These decreases are indicative of key changes to our reinsurance program and mix of business.

Both quarter and year to date, the decrease in the percentage for our Insurance Companies total ceded written premium is due to a change in the Property Casualty reinsurance program supporting certain casualty risks. Effective in the first quarter 2014, we increased our retention through a new program combining a reduced level of proportional reinsurance combined with an excess-of-loss cover. Year to date, the decrease in the Property Casualty line is also the result of a higher retention on our NavTech business as a result of a change in our offshore energy quota share program. The decrease in the Marine percentage is the result of a higher retention on our Marine quota share programs compared to the prior year, slightly offset by RRPs incurred, as mentioned above. The increase in the percentage of our Insurance Companies Professional Liability business is due to an additional contract for proportional reinsurance, signed in the fourth quarter of 2013, allowing us to cede 100% of our small lawyers’ professional liability E&O business to the carrier that has assumed the renewal rights, indicative of our decision to exit this business.

Both quarter and year to date, the decrease in the percentage of our Lloyd’s total ceded written premium is due to a change in the mix of business. This is driven by the growth of our Assumed Reinsurance business which includes new business growth from our Latin American Assumed Reinsurance business and our Property Treaty business, reported through Lloyd’s Property Casualty. Additionally, the decrease in the Lloyd’s Professional Liability business is driven by a reduction in the use of proportional reinsurance for our Management Liability product lines. The decreases seen in the Lloyd’s Property Casualty and Professional Liability businesses are offset by an increase in the Lloyd’s Marine business due to RRPs incurred in the second quarter of $5.2 million primarily driven by large losses from our Marine business.

Net Written Premiums

Net written premiums increased 16.8% for the three months ended June 30, 2014 compared to the same period in 2013. Net written premiums increased 16.2% for the six months ended June 30, 2014 compared to the same period in 2013. The increase in both periods is due to the mix of business coupled with certain changes in our reinsurance program that have increased our retention, as described above.

Net Earned Premiums

Net earned premiums increased 12.3% and 11.8% for the three and six months ended June 30, 2014 compared to the same periods in 2013, due to the recent growth of our business over the past twelve months, which includes significant new business from our Excess and Primary Casualty divisions, which continue to grow due to the dislocation of certain competitors. To a lesser extent, the increase is also driven by the recent expansion of our Assumed Reinsurance and Professional Liability business written by our Lloyd’s Operations. The RRPs incurred in the quarter have offset some of the growth in our Marine business.

Net Investment Income

Our net investment income was derived from the following sources:


	Three Months Ended June 30						Six Months Ended June 30						Percentage Change
In thousands	2014			2013			2014			2013			QTD			YTD
Fixed maturities	$	14,188		$	13,578		$	28,142		$	26,743			4.5	%		5.2	%
Equity securities		1,971			1,257			5,204			2,288			56.8	%		127.4	%
Short-term investments		242			198			459			388			22.2	%		18.3	%

Total investment income	$	16,401		$	15,033		$	33,805		$	29,419			9.1	%		14.9	%
Investment expenses		(753	)		(787	)		(1,547	)		(1,516	)		-4.3	%		2.0	%

Net investment income	$	15,648		$	14,246		$	32,258		$	27,903			9.8	%		15.6	%

The increase in total investment income for the three and six months ended June 30, 2014 was primarily due to growth of invested assets, as well as a $1.6 million one time special dividend received in the first quarter in the equity portfolio. The annualized pre-tax investment yield, excluding net realized gains and losses and net other-than-temporary impairment (“OTTI”) losses recognized in earnings, was 2.5% and 2.6% for the three and six months ended June 30, 2014 compared to 2.4% for both comparable periods in 2013, respectively. Excluding the impact of the one- time special dividend, the pre-tax investment yield for the six months ended June 30, 2014 was 2.5%.

The portfolio duration was 3.8 years and 4.0 years for the six months ended June 30, 2014 and 2013, respectively.

Other-Than-Temporary Impairment Losses Recognized In Earnings

The Company did not have any OTTI losses for the three and six months ended June 30, 2014. There were no OTTI losses for the three months ended June 30, 2013. OTTI losses for the six months ended June 30, 2013 primarily consisted of $0.04 million for equity securities which were previously impaired.

Net Realized Gains and Losses

Realized gains and losses, excluding net OTTI losses recognized in earnings, for the periods indicated were as follows:


	Three Months Ended June 30						Six Months Ended June 30						Percentage Change
In thousands	2014			2013			2014			2013			QTD			YTD
Fixed maturities:
Gains	$	3,113		$	1,730		$	4,979		$	4,936			79.9	%		0.9	%
Losses		(56	)		(73	)		(2,106	)		(383	)		-23.3	%		NM

Fixed maturities, net	$	3,057		$	1,657		$	2,873		$	4,553			84.5	%		-36.9	%

Equity securities:
Gains	$	1,416		$	1,815		$	3,336		$	3,733			-22.0	%		-10.6	%
Losses		—			(127	)		(903	)		(127	)		NM			NM

Equity securities, net	$	1,416		$	1,688		$	2,433		$	3,606			-16.1	%		-32.5	%

Net realized gains (losses)	$	4,473		$	3,345		$	5,306		$	8,159			33.7	%		-35.0	%

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 $4.5 million and $5.3 million for the three and six months ended June 30, 2014 are primarily due to the sale of corporate bonds and equity securities. Net realized gains of $3.3 million and $8.2 million for the three and six months ended June 30, 2013 are due to the sale of municipal bonds, commercial mortgage backed securities and equity securities.

Other Income (Expense)

Other income (expense) includes the net of all gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity’s functional currency), commission income, and inspection fees related to our specialty insurance business. Total other expense was $1.7 million and total other income was $8.7 million for the three and six months ended June 30, 2014 as compared to total expense of $0.9 million and $0.3 million for the three and six months ended June 30, 2013, respectively. The other expense in the quarter is primarily driven by a foreign exchange loss due to the movement of the British Pound and Canadian Dollar against the US Dollar in the quarter. The other income for the six months ended June 30, 2014 is primarily driven by a $10.0 million foreign currency transaction gain in the first quarter in connection with a change in the functional currency of our Lloyd’s Operations, offset by the currency translation loss recognized in the second quarter.

Expenses

Net Losses and Loss Adjustment Expenses

The ratio of net losses and LAE to net earned premiums (“loss ratios”) for the three and six months ended June 30, 2014 and 2013 is presented in the following table:


	Three Months Ended June 30						Six Months Ended June 30
Net Loss and LAE Ratio	2014			2013			2014			2013
Net Loss and LAE Payments		44.9	%		62.3	%		44.7	%		58.5	%
Change in reserves		24.7	%		0.4	%		20.1	%		4.3	%

Subtotal - current year loss ratio		69.6	%		62.7	%		64.8	%		62.8	%
Prior year deficiencies (redundancies)		-8.9	%		1.0	%		-4.5	%		1.5	%

Net loss and LAE ratio		60.7	%		63.7	%		60.3	%		64.3	%

The increase in the current accident year loss ratio, as presented above, is driven by large loss activity from our Insurance Companies and Lloyd’s Marine business, as well as by mix of business and loss trends.

The segment and line of business breakdown of the net loss and LAE ratios for the three and six months ended June 30, 2014 and 2013 are as follows:


	Three Months Ended June 30						Six Months Ended June 30
	2014			2013			2014			2013
Insurance Companies:
Marine		35.2	%		54.4	%		44.3	%		59.4	%
Property Casualty		70.1	%		71.1	%		69.0	%		68.7	%
Professional Liability		45.2	%		73.7	%		53.8	%		81.7	%

Total Insurance Companies		60.8	%		68.1	%		62.4	%		68.7	%
Lloyd’s Operations:
Marine		75.2	%		52.6	%		61.4	%		54.0	%
Property Casualty		44.7	%		79.4	%		39.9	%		45.9	%
Professional Liability		26.4	%		-8.8	%		42.1	%		34.9	%

Total Lloyd’s Operations		60.2	%		49.7	%		53.9	%		50.2	%

Net loss and LAE ratio		60.7	%		63.7	%		60.3	%		64.3	%

The changes in the net loss and LAE ratios by reportable segment and line of business, as presented above, are primarily driven by prior year reserve strengthening or releases, as discussed below, and to a lesser extent changes in our mix of business. Improvement in the Lloyd’s Operations Property Casualty loss ratio is driven by lack of catastrophes for both the three and six months ended June 3, 2014, as well as a lack of large claims as compared to the three months ended June 30, 2013. Our Insurance Companies Marine business includes $7.8 million of large loss activity from P&I and Craft and our Lloyd’s Marine business includes $5.0 million from a Marine Liability loss which involved the sinking of a vessel in South Korean waters.

Prior Year Reserve Strengthening (Releases)

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

The segment and line of business breakdowns of prior period net reserve strengthening (releases) for the three and six months ended June 30, 2014 and 2013 are as follows:


	Three Months Ended June 30						Six Months Ended June 30
In thousands	2014			2013			2014			2013
Insurance Companies
Marine	$	(16,904	)	$	(2,469	)	$	(18,845	)	$	(1,276	)
Property Casualty		7,102			7,311			9,300			7,155
Professional Liability		(4,050	)		2,905			(3,759	)		9,598

Total Insurance Companies	$	(13,852	)	$	7,747		$	(13,304	)	$	15,477
Lloyd’s Operations
Marine	$	(4,000	)	$	(1,352	)	$	(4,586	)	$	(2,979	)
Property Casualty		—			361			—			(1,669	)
Professional Liability		(2,663	)		(4,843	)		(2,663	)		(4,833	)

Total Lloyd’s Operations	$	(6,663	)	$	(5,834	)	$	(7,249	)	$	(9,481	)

Total strengthening (releases)	$	(20,515	)	$	1,913		$	(20,553	)	$	5,996

The following is a discussion of relevant factors related to the net prior period reserve releases recorded for the three months ended June 30, 2014:

Our Insurance Companies recorded $13.9 million of net prior year reserve releases primarily driven by $16.9 million recorded in our Marine business in connection with favorable loss emergence across certain product lines, specifically $4.4 million from both Inland Marine and Craft, as well as $2.0 million from Marine Liability. Additionally, the Insurance Companies Marine business includes $3.6 million and $1.8 million of favorable loss development from the P&I and Specie lines, respectively. The Insurance Companies Property Casualty business recorded $7.1 million of net prior year reserve strengthening, which includes $4.1 million of prior year reserve strengthening from our Primary Casualty business primarily due to large loss activity from general liability policies issued to contractors in California and other western states and unfavorable loss emergence from general liability policies issued for construction premises. In addition, the net reserve strengthening from our Insurance Property Casualty business includes $2.4 million of net reserve strengthening from our assumed reinsurance businesses in connection with large loss activity from our Agriculture business for UY 2013 and to a lesser extent, unfavorable loss emergence on our excess-of-loss A&H treaty business for UY 2012, partially offset by favorable loss emergence from our Latin American business. Finally, the Insurance Companies Property Casualty division includes $2.0 million of unfavorable development related to our Offshore Energy book, offset by smaller reserve releases in other lines within Property Casualty. The Professional Liability business recorded $4.1 million of net prior year reserve releases primarily driven by $4.8 million of favorable loss emergence from our D&O business due to settlement of a contract dispute with a former third party administrator, partially offset by $0.8 million of net prior year reserve strengthening from our E&O business due to unfavorable loss emergence on our small lawyers business, which is in run-off.

Our Lloyd’s Operations recorded $6.7 million of net prior period reserve releases primarily driven by our Lloyd’s Marine and Professional Liability lines business. Within our Lloyd’s Marine business we experienced prior period reserve releases of $3.0 million on the Marine and Energy Liability book for UYs 2012 and prior. Additionally there is $1.0 million of reserve releases on the UY 2013 for Specie business as a result of favorable emergence. Lloyd’s Professional Liability business has a total of $2.6 million of favorable emergence, with $1.0 million coming from the E&O business and $1.6 million from D&O.

The following is a discussion of relevant factors related to the $1.9 million prior period net reserve strengthening recorded for the three months ended June 30, 2013:

The Insurance Companies recorded $7.7 million of net prior period reserve strengthening primarily driven by our Property Casualty business. Within the Property Casualty business we reported prior period reserve strengthening of $4.8 million from our Assumed Reinsurance business mostly related to several large losses from our A&H business, $1.4 million from our Primary Casualty business in connection with increased loss activity across all product lines, and $1.1 million in losses from Commercial Auto and Liquor Liability lines which are in run-off. In addition, we reported prior period reserve strengthening of $2.9 million from our Professional Liability business, which included $1.9 million of reserve strengthening directly related to our D&O division in connection with specific large losses from our D&O liability lines for UYs 2010 and prior, as well as $1.0 million of reserve strengthening from our E&O division also related to specific large losses from our small lawyers lines from UYs 2011 and prior. The aforementioned strengthening was partially offset by $2.5 million of prior period reserve releases from our Marine business related to favorable emergence from our Cargo and Marine Liability lines from UYs 2008 and prior.

Our Lloyd’s Operations recorded $5.8 million of net prior period reserve releases primarily driven by our Lloyd’s Professional Liability business. Within our Lloyd’s Professional Liability business we reported prior period reserve releases of $5.8 million in connection with continued favorable emergence from our Lloyd’s D&O business, partially offset by $1.0 million of strengthening on our Lloyd’s E&O business. In addition, our Lloyd’s Operations recorded $1.4 million of prior period reserve releases from our Lloyd’s Marine business and is related to the favorable settlement of specific claims from our Marine Liability lines for UYs 2012 and prior.

The following is a discussion of relevant factors related to the net prior period reserve releases recorded for the six months ended June 30, 2014:

The Insurance Companies recorded $13.3 million of net prior year reserve releases primarily driven by $18.8 million recorded by our Marine business in connection with favorable loss emergence across certain product lines, primarily driven by $4.4 million from both Inland Marine and Craft, as well as $3.8 million from Marine Energy Liability. Additionally, the Insurance Companies Marine business includes $3.5 million and $3.9 million of favorable loss development from the P&I and Specie lines, respectively. The Insurance Companies Property Casualty business recorded $9.3 million of net prior year reserve strengthening, which includes $4.3 million of prior year reserve strengthening from our Primary Casualty business primarily due to large loss activity from general liability policies issued to contractors in California and other western states and unfavorable loss emergence from general liability policies issued for construction premises. The net reserve strengthening from our Insurance Companies Property Casualty business includes $2.5 million of net reserve strengthening from our Assumed Reinsurance business in connection with large loss activity from our Agriculture business for UY 2013 and to a lesser extent, unfavorable loss emergence on our excess-of-loss A&H treaty business for UY 2012, partially offset by favorable loss emergence from our Latin American business. Finally, the Insurance Companies Property Casualty division includes $2.0 million of unfavorable development related to our Offshore Energy book, offset by smaller reserve releases in other lines within Property Casualty. The Professional Liability business recorded $3.8 million of net prior year reserve releases primarily driven by $4.8 million of favorable loss emergence from our D&O business due to settlement of a contract dispute with a former third party administrator, partially offset by $1.0 million of net prior year reserve strengthening from our E&O business due to unfavorable loss emergence on our small lawyers business, which is in run-off.

Our Lloyd’s Operations recorded $7.2 million of net prior period reserve releases primarily driven by our Lloyd’s Marine and Professional Liability lines business. Within our Lloyd’s Marine business we reported prior period reserve releases of $4.0 million on the Marine and Energy Liability book for UYs 2012 and prior. Additionally there is $1.0 million of reserve releases on the UY 2013 for Specie business as a result of favorable emergence. Favorable loss emergence from our Marine business was partially offset by $0.4 million of reserve strengthening in our Cargo business. Lloyd’s Professional Liability business has a total of $2.7 million of favorable emergence with $1.0 million coming from the E&O business and $1.6 million from D&O.

The following is a discussion of relevant factors related to the $6.0 million net prior period reserve strengthening recorded for the six months ended June 30, 2013:

The Insurance Companies recorded $15.5 million of net prior period reserve strengthening, primarily driven by our Professional Liability and Property Casualty businesses. Within the Professional Liability business, we reported prior period net reserve strengthening of $5.6 million from the D&O division related to specific large claims from our public and private sectors D&O lines for UYs 2010 and prior. In addition, we reported prior period net reserve strengthening of $4.0 million from the E&O division related to specific large claims from our insurance agents, miscellaneous professional liability, and small lawyers lines from UYs 2011 and prior. Within the Property Casualty business we reported prior period reserve strengthening of $7.4 million from our NavRe division mostly related to several large losses from our A&H business and $2.2 million in losses from commercial auto and liquor liability lines which are in run-off, partially offset by $2.6 million of prior period loss releases from our Energy & Engineering business related to favorable emergence from our Offshore Energy lines for UYs 2011 and prior. The aforementioned net strengthening was partially offset by $1.3 million of net prior period reserve releases from our Marine business primarily related to $3.1 million of favorable emergence from our Cargo and Marine Liability lines from UYs 2008 and prior, partially offset by $1.8 million of prior period reserve strengthening from our Inland Marine business across all product lines.

Our Lloyd’s Operations recorded $9.5 million of net prior period reserve releases across all businesses. Within our Lloyd’s Professional Liability business we reported prior period reserve releases of $5.4 million in connection with continued favorable emergence from our Lloyd’s D&O business, partially offset by $0.6 million of strengthening on our Lloyd’s E&O business. Within the Lloyd’s Marine business we reported prior period reserve releases of $3.0 million related to the favorable settlement of specific claims from our Ocean Marine liability lines from UYs 2012 and prior. In addition, our Lloyd’s Property Casualty business also reported net prior period reserve releases of $1.6 million from the Energy & Engineering division due in part to the favorable settlement of two claims from our onshore lines from UY 2011.

Commission Expenses

Commission expenses paid to brokers and agents are generally based on a percentage of gross written premiums and are partially offset by ceding commissions we may receive on ceded written premiums. Commissions are generally deferred and recorded as deferred policy acquisition costs to the extent that they relate to unearned premium. The percentage of commission expenses to net earned premiums (“commission expense ratio”) for the three and six months ended June 30, 2014 was 13.9% and 12.7%, respectively, compared to 13.8% and 13.5% for the comparable periods during 2013. The change in the commission expense ratio for the three and six months ended June 30, 2014 compared to the same periods in 2013 is attributed to the changes in the mix of business, inclusive of a $2.5 million estimated profit commission receivable for the six months ended June 30, 2014 for UY 2012 based on the contract terms of our proportional reinsurance program on our offshore energy business.

Other Operating Expenses

Other operating expenses were $48.0 million and $95.1 million for the three and six months ended June 30, 2014 compared to $40.7 million and $81.6 million for the same periods during 2013. The increase is primarily due to continued investments in our underwriting teams closely aligned with business growth, an increase in incentive compensation driven by stronger underwriting results, and an increase in premium tax expense and certain charges assessed by Lloyd’s in connection with the recent growth in business from both our Insurance Companies and Lloyd’s Operations. To a lesser extent other operating expenses have been adversely affected by exchange rate movement between the British Pound and the US Dollar which resulted in British Pound denominated expenses to increase more when expressed in US Dollar terms.

Interest Expense

Interest expense of $4.3 million and $8.2 million for the three and six months ended June 30, 2014 relates to our $265 million principal amount of the 5.75% Senior Notes. Interest expense of $2.1 million and $4.1 million for the three and six months ended June 30, 2013 related to the $115 million 7.0% Senior Notes due May 1, 2016, which were redeemed in the fourth quarter of 2013 subsequent to the issuance of the 5.75% Senior Notes. The effective interest rate related to the 5.75% Senior Notes for the three and six months ended June 30, 2014 was 5.86%. The effective interest rate related to the 7.0% Senior Notes for the three and six months ended June 30, 3013 was 7.17%.

Income Taxes

We recorded income tax expense of $8.0 million and $21.4 million for the three and six months ended June 30, 2014 compared to $6.3 million and $12.9 million for the comparable period in 2013, resulting in an effective tax rate of 32.2% and 32.3% for the three and six months ended June 30, 2014 compared to 31.1% and 31.7% for the same periods in 2013. The effective tax rate on net investment income was 27.0% and 27.5% for the three and six months ended June 30, 2014 compared to 27.6% and 28.0% for the same periods in 2013.

As of June 30, 2014, the net deferred federal, foreign, state and local tax assets were $17.3 million, compared to $28.2 million as of December 31, 2013. The decrease in deferred tax is primarily due to increased unearned premium reserves resulting from growth in our business partially offset by increased unrealized gains on our investment portfolio.

We had net state and local deferred tax assets amounting to potential future tax benefits of $0.5 million and $0.6 million as of June 30, 2014 and December 31, 2013, respectively. Included in the deferred tax assets are state and local net operating loss carry-forwards of $0.1 million as of June 30, 2014 and December 31, 2013. A valuation allowance was established for the full amount of these potential future tax benefits due to uncertainty associated with their realization. Our state and local tax carry-forwards as of June 30, 2014 expire from 2024 to 2032. Refer to Footnote 6, Income Taxes, included herein, for further detail on the temporary differences that give rise to federal, foreign, state and local deferred tax assets or liabilities.

Segment Information

The Company evaluates the performance of each underwriting segment based on its underwriting and GAAP results. Underwriting results are measured based on underwriting profit or loss and the related combined ratio, which are both non-GAAP measures of underwriting profitability. Underwriting profit or loss is calculated from net earned premiums, less the sum of net losses and LAE, commission expenses, other operating expenses and other underwriting income (expense). The combined ratio is derived by dividing the sum of net losses and LAE, commission expenses, other operating expenses and other underwriting income (expense) by net earned premiums. A combined ratio of less than 100% indicates an underwriting profit and greater than 100% indicates an underwriting loss. Each segment maintains its own investments on which it earns income and realizes capital gains or losses. The Company’s underwriting performance is evaluated separately from the performance of its investment portfolios.

The following is a discussion of the financial results for each of our two underwriting segments.

Insurance Companies

The following table sets forth the results of operations for the Insurance Companies for the three and six months ended June 30, 2014 and 2013:


	Three Months Ended June 30						Six Months Ended June 30						Percentage Change
In thousands	2014			2013			2014			2013			QTD			YTD
Gross written premiums	$	243,729		$	228,565		$	555,527		$	530,193			6.6	%		4.8	%
Net written premiums		174,041			143,380			407,992			359,699			21.4	%		13.4	%
Net earned premiums		178,412			156,547			344,296			310,878			14.0	%		10.7	%
Net losses and loss adjustment expenses		(108,502	)		(106,668	)		(214,929	)		(213,653	)		1.7	%		0.6	%
Commission expenses		(23,021	)		(20,573	)		(39,731	)		(39,090	)		11.9	%		1.6	%
Other operating expenses		(34,415	)		(29,829	)		(67,802	)		(59,172	)		15.4	%		14.6	%
Other underwriting income (expense)		768			689			1,426			1,348			11.4	%		5.7	%

Underwriting profit (loss)	$	13,242		$	166		$	23,260		$	311			NM			NM

Net investment income		13,805			12,515			28,582			24,466			10.3	%		16.8	%
Net realized gains (losses)		4,458			3,099			5,695			7,891			43.8	%		-27.8	%
Other income (expense)		(68	)					(19	)		0			NM			NM

Income (loss) before income taxes	$	31,437		$	15,780		$	57,518		$	32,668			99.2	%		76.1	%
Income tax expense (benefit)		10,049			4,785			18,161			10,199			110.0	%		78.1	%

Net income (loss)	$	21,388		$	10,995		$	39,357		$	22,469			94.5	%		75.2	%

Losses and loss adjustment expenses ratio		60.8	%		68.1	%		62.4	%		68.7	%
Commission expense ratio		12.9	%		13.1	%		11.5	%		12.6	%
Other operating expense ratio ⁽¹⁾		18.9	%		18.7	%		19.3	%		18.6	%

Combined ratio		92.6	%		99.9	%		93.2	%		99.9	%

(1) - Includes Other operating expenses & Other underwriting income (expense)

NM - Percentage change not meaningful

Our Insurance Companies reported net income of $21.4 million for the three months ended June 30, 2014 compared to $11.0 million for the same period in 2013. The increase in net income for the three months ended June 30, 2014 compared to the same period in 2013 is largely related to an improvement in underwriting results, and to a lesser extent, increases in net investment income and net realized gains due to the ongoing management of our investment portfolio.

Our Insurance Companies combined ratio for the three months ended June 30, 2014 was 92.6% compared to 99.9% for the same period in 2013. Our Insurance Companies underwriting results increased by $13.0 million to an underwriting profit of $13.2 million compared to $0.2 million for the same period in 2013.

Our Insurance Companies reported an underwriting profit of $13.2 million inclusive of $8.1 million of underwriting profit from our Marine business in connection with favorable loss emergence across certain key product lines, as well as $4.7 million of underwriting profit from our D&O business due to recovery of prior period losses coming from settlement of a contract dispute with a former third party administrator.

Our Insurance Companies underwriting results for the three months ended June 30, 2013 included $2.0 million of underwriting profit from our Excess Casualty and Primary Casualty businesses due in part to strong production attributable to the expansion of those underwriting teams and the continued dislocation of certain competitors, mostly offset by a net underwriting loss of $1.9 million from our D&O and E&O businesses driven by net prior period reserve strengthening from UYs 2010 and prior.

Our Insurance Companies reported net income of $39.4 million for the six months ended June 30, 2014 compared to $22.5 million for the same period in 2013. The increase in net income for the six months ended June 30, 2014 compared to the same period in 2013 is due to stronger underwriting results, and to a lesser extent, increases in net investment income offset by a reduction in net realized gains due to the ongoing management of our investment portfolio.

Our Insurance Companies combined ratio for the six months ended June 30, 2014 was 93.2% compared to 99.9% for the same period in 2013. Our Insurance Companies underwriting results increased by $23.0 million to an underwriting profit of $23.3 million compared to $0.3 million for the same period in 2013.

Our Insurance Companies reported an underwriting profit of $23.3 million inclusive of $13.0 million of underwriting profit from our Marine business due to growth as well as favorable loss emergence from prior accident years, as well as $5.1 million of underwriting profit from our D&O business due to recovery of prior period losses coming from settlement of a contract dispute with a former third party administrator. In addition, our Assumed Reinsurance business reported $4.5 million underwriting profit driven by strong production from Latin America.

Our Insurance Companies underwriting results for the six months ended June 30, 2013 included $6.4 million of underwriting profit from our Excess Casualty and Primary Casualty businesses due in part to strong production attributable to the expansion of those underwriting teams and the continued dislocation of certain competitors, mostly offset by an underwriting loss of $5.5 million from our D&O business driven by net prior period reserve strengthening from UYs 2010 and prior.

Insurance Companies Gross Written Premiums

Marine: The gross written premiums for our Marine business for the three and six months ended June 30, 2014 and 2013 consisted of the following:


	Three Months Ended June 30				Six Months Ended June 30				Percentage Change
In thousands	2014		2013		2014		2013		QTD			YTD
Marine Liability	$	16,783	$	16,951	$	33,821	$	31,756		-1.0	%		6.5	%
Craft/Fishing Vessels		8,438		7,176		21,221		17,956		17.6	%		18.2	%
Cargo		5,999		2,399		10,517		9,939		NM			5.8	%
Bluewater Hull		5,365		3,327		8,374		6,010		61.3	%		39.3	%
Inland Marine		3,937		4,503		6,696		9,384		-12.6	%		-28.6	%
Protection & Indemnity		3,107		4,097		9,831		10,248		-24.2	%		-4.1	%
Other Marine:
Energy liability		1,422		1,632		4,234		2,805		-12.9	%		50.9	%
War		889		1,237		2,151		2,893		-28.1	%		-25.7	%
Transport		888		399		1,302		497		122.4	%		NM
Specie		703		1,154		1,218		2,033		-39.1	%		-40.1	%
Customs bonds		588		202		987		403		NM			144.9	%

Other Marine	$	4,490	$	4,624	$	9,892	$	8,631		-2.9	%		14.6	%

Total Marine	$	48,119	$	43,077	$	100,352	$	93,924		11.7	%		6.8	%

NM – Percentage change not meaningful

Insurance Company Marine gross written premiums for the three and six months ended June 30, 2014 increased 11.7% and 6.8% compared to the same periods in 2013 primarily due to new business growth in Marine Liability, Craft/Fishing Vessels, and Bluewater Hull product lines, partially offset by a decrease in Inland Marine due to the continued re-underwriting of those product lines. Additionally the Cargo product line experienced strong new business growth in the second quarter.

Insurance Company Marine business experienced a 2.3% and 2.8% increase in renewal rates for the three and six months ended June 30, 2014.

Property Casualty: The gross written premiums for our Property Casualty business for the three and six months ended June 30, 2014 and 2013 consisted of the following:


	Three Months Ended June 30				Six Months Ended June 30				Percentage Change
In thousands	2014		2013		2014		2013		QTD			YTD
Excess Casualty	$	68,483	$	64,306	$	136,399	$	134,588		6.5	%		1.3	%
Primary Casualty		43,850		35,034		86,422		61,469		25.2	%		40.6	%
Energy & Engineering		20,061		21,745		34,622		41,613		-7.7	%		-16.8	%
Assumed Reinsurance		16,569		15,436		106,403		107,572		7.3	%		-1.1	%
Environmental Liability		12,604		7,539		21,993		13,075		67.2	%		68.2	%
Other Property & Casualty		7,030		8,035		12,114		12,742		-12.5	%		-4.9	%

Total Property Casualty	$	168,597	$	152,095	$	397,953	$	371,059		10.8	%		7.2	%

Insurance Company Property Casualty gross written premiums for the three and six months ended June 30, 2014 increased 10.8% and 7.2% compared to the same periods in 2013. The increases were primarily driven by the growth from our Primary Casualty and Environmental Liability divisions as a result of strong production attributable to an expansion of our underwriting teams, an improving economy, and continued dislocation among certain competitors. The aforementioned increases were offset by a decrease in our Energy & Engineering business driven by difficult market conditions.

Insurance Company Property Casualty included renewal rate increases for the three months ended June 30, 2014 of 2.4% and 1.3% on our Excess Casualty and Primary Casualty businesses respectively, partially offset by a decrease of 9.2% on our Energy & Engineering business.

Professional Liability: The gross written premiums for our Professional Liability business for the three and six months ended June 30, 2014 and 2013 consisted of the following:


	Three Months Ended June 30				Six Months Ended June 30				Percentage Change
In thousands	2014		2013		2014		2013		QTD			YTD
Errors & Omissions	$	14,892	$	21,474	$	35,881	$	44,127		-30.6	%		-18.7	%
Management Liability		12,121		11,919		21,341		21,083		1.7	%		1.2	%

Total Professional Liability	$	27,013	$	33,393	$	57,222	$	65,210		-19.1	%		-12.2	%

Insurance Company Professional Liability gross written premiums for the three and six months ended June 30, 2014 decreased 19.1% and 12.2%, respectively, compared to the same periods in 2013, primarily driven by a reduction in our E&O business due to our decision to exit the small lawyers professional liability business in the fourth quarter of 2013, as well as a decrease in renewal premium on our real estate agents liability product line.

Insurance Companies Commission Expenses

The commission expenses ratios for the three and six months ended June 30, 2014 were 12.9% and 11.5%, respectively, compared to 13.1% and 12.6% for the same periods in 2013.

Insurance Companies Other Operating Expenses

Other operating expenses for the Insurance Companies were $34.4 million and $67.8 million for the three and six months ended June 30, 2014 compared to $29.8 million and $59.2 million for the same periods in 2013. The increase in operating expenses is due to continued investments in new underwriting teams and support staff closely aligned with business growth, an increase in incentive compensation driven by stronger underwriting results, and an increase in premium tax in connection with recent growth in new business.

Lloyd’s Operations

The following table sets forth the results of operations of the Lloyd’s Operations for the three and six months ended June 30, 2014 and 2013:


	Three Months Ended June 30						Six Months Ended June 30						Percentage Change
In thousands	2014			2013			2014			2013			QTD			YTD
Gross written premiums	$	105,066		$	103,563		$	216,058		$	195,157			1.5	%		10.7	%
Net written premiums		57,823			55,089			135,722			108,222			5.0	%		25.4	%
Net earned premiums		52,672			49,267			112,060			97,264			6.9	%		15.2	%
Net losses and loss adjustment expenses		(31,718	)		(24,480	)		(60,358	)		(48,837	)		29.6	%		23.6	%
Commission expenses		(9,675	)		(8,335	)		(19,201	)		(16,956	)		16.1	%		13.2	%
Other operating expenses		(13,577	)		(10,849	)		(27,336	)		(22,380	)		25.1	%		22.1	%
Other underwriting income (expense)		13			(1,087	)		19			(545	)		NM			NM

Underwriting profit (loss)	$	(2,285	)	$	4,516		$	5,184		$	8,546			NM			-39.3	%

Net investment income		1,824			1,728			3,639			3,430			5.5	%		6.1	%
Net realized gains (losses)		15			242			(389	)		222			-93.6	%		NM
Other income (expense)		(1,832	)					8,363			0			NM			NM

Income (loss) before income taxes	$	(2,278	)	$	6,486		$	16,797		$	12,198			NM			37.7	%
Income tax expense (benefit)		(672	)		2,206			5,966			4,242			NM			40.6	%

Net income (loss)	$	(1,606	)	$	4,280		$	10,831		$	7,956			NM			36.1	%
Losses and loss adjustment expenses ratio		60.2	%		49.7	%		53.9	%		50.2	%
Commission expense ratio		18.4	%		16.9	%		17.1	%		17.4	%
Other operating expense ratio ⁽¹⁾		25.7	%		24.2	%		24.4	%		23.6	%

Combined ratio		104.3	%		90.8	%		95.4	%		91.2	%

(1) - Includes Other operating expenses & Other underwriting income (expense)

NM - Percentage change not meaningful.

Our Lloyd’s Operations reported net loss of $1.6 million for the three months ended June 30, 2014 compared to net income of $4.3 million for the same period in 2013. The decrease in net income for the three months ended June 30, 2014 as compared to the same period in 2013 was largely attributable to less underwriting profit due to an increase in Marine losses.

Our Lloyd’s Operations combined ratio for the three months ended June 30, 2014 was 104.3% compared to 90.8% for the same period in 2013. Our Lloyd’s Operations underwriting profit decreased $6.8 million to a loss of $2.3 million for the three months ended June 30, 2014 compared to a profit of $4.5 million for the same period in 2013.

Our Lloyd’s Operations underwriting loss of $2.3 million includes $6.7 million of underwriting loss from our Lloyd’s Marine business that was driven by an $8.9 million net loss, inclusive of $3.9 million of RRPs, related to a Marine Liability loss which involved the sinking of a vessel in South Korean waters. Our Lloyd’s Property Casualty business reported an underwriting profit of $1.1 million, while our Professional Liability business reported an underwriting profit of $3.3 million driven by favorable loss development coming from older UYs.

Our Lloyd’s Operations underwriting profit for the three months ended June 30, 2013 included $5.8 million of net prior period reserve releases in connection with continued favorable emergence from our Lloyd’s D&O business and to a lesser extent the favorable settlement of specific claims from our Lloyd’s Marine business, partially offset by a $1.2 million foreign exchange loss on the remeasurement of certain deposits required by Lloyd’s.

Our Lloyd’s Operations reported net income of $10.8 million for the six months ended June 30, 2014 compared to $8.0 million for the same period in 2013. The increase in net income for the six months ended June 30, 2014 as compared to the same period in 2013 was attributable to an increase in other income primarily due to a one-time $6.6 million after-tax foreign exchange gain in connection with a change in the functional currency of our Lloyd’s Operations and increased underwriting profit from our Property Casualty business, partially offset by less underwriting profit from our Marine business.

Our Lloyd’s Operations combined ratio for the six months ended June 30, 2014 was 95.4% compared to 91.2% for the same period in 2013. Our Lloyd’s Operations underwriting profit decreased $3.4 million to $5.2 million for the six months ended June 30, 2014 compared to $8.5 million for the same period in 2013.

Our Lloyd’s Operations reported an underwriting profit of $5.2 million which includes an underwriting profit of $4.7 million from Property Casualty driven by favorable claim experience coming from lack of catastrophes in the current accident year, and to a lesser extent profit commission recognized on our proportional reinsurance treaty. Our Lloyd’s Operations reported an underwriting profit of $2.9 million from Professional Liability driven by favorable loss emergence. In addition, underwriting profit is partially offset by a $2.4 million loss from our Marine business, which includes an $8.9 million net loss, inclusive of $3.9 million of RRPs, related to a Marine Liability loss which involved the sinking of a vessel in South Korean waters.

Our Lloyd’s Operations underwriting profit for the six months ended June 30, 2013 included $9.5 million of net prior period reserve releases in connection with continued favorable emergence from our Lloyd’s D&O business and the favorable settlement of specific claims from our Lloyd’s Marine business, partially offset by a $1.2 million foreign exchange loss on the remeasurement of certain deposits required by Lloyd’s.

Lloyd’s Operations Gross Written Premiums

Marine Premiums: The gross written premiums for our Marine business for the three and six months ended June 30, 2014 and 2013 consisted of the following:


	Three Months Ended June 30				Six Months Ended June 30				Percentage			Change
In thousands	2014		2013		2014		2013		QTD			YTD
Cargo	$	13,989	$	13,720	$	25,475	$	23,724		2.0	%		7.4	%
Marine Liability		7,432		8,842		27,682		26,657		-16.0	%		3.8	%
Transport		7,212		6,088		13,367		9,979		18.5	%		33.9	%
Energy Liability		5,709		4,301		11,241		10,157		32.7	%		10.7	%
Marine Excess-of-Loss Reinsurance		4,043		4,826		14,227		10,564		-16.2	%		34.7	%
Specie		3,968		4,876		10,778		11,331		-18.6	%		-4.9	%
Bluewater Hull		2,303		1,758		4,040		3,161		31.0	%		27.8	%
War		1,349		1,482		2,152		3,964		-9.0	%		-45.7	%

Total Marine	$	46,005	$	45,893	$	108,962	$	99,537		0.2	%		9.5	%

The Lloyd’s Operations Marine gross written premiums increased 0.2% and 9.5% for the three and six months ended June 30, 2014 compared to the same periods in 2013, driven by new business growth from the Transport and Energy Liability product lines offset by reduced growth in our Marine Liability and Specie product lines. For the six months ended June 30, 2014 the increase is driven by Marine Excess-of-Loss Assumed Reinsurance product line, inclusive of $2.4 million of assumed RRPs recognized in the first quarter. The increase is also due to new business growth in Transport, Marine Liability and Cargo.

The Lloyd’s Operation Marine business experienced average renewal rates of 0.9% and 2.3% for the three and six months ended June 30, 2014.

Property Casualty Premiums: The gross written premiums for our Property Casualty business for the three and six months ended June 30, 2014 and 2013 consisted of the following:


	Three Months Ended June 30				Six Months Ended June 30					Percentage			Change
In thousands	2014		2013		2014		2013			QTD			YTD
Energy & Engineering:
Offshore Energy	$	13,522	$	15,266	$	29,937	$	28,534			-11.4	%		4.9	%
Onshore Energy		10,619		11,485		15,094		16,754			-7.5	%		-9.9	%
Engineering and Construction		6,702		9,665		11,048		14,673			-30.7	%		-24.7	%
U.S. Direct and Facultative Property		4,542		3,846		7,026		5,374			18.1	%		30.7	%

Energy & Engineering	$	35,385	$	40,262	$	63,105	$	65,335			-12.1	%		-3.4	%
Other Property Casualty:
Bloodstock		5		3		5		(19	)		80.9	%		NM
Other Casualty		1,772		952		7,131		959			86.1	%		NM

Other Property Casualty	$	1,777	$	955	$	7,136	$	940			86.1	%		NM

Total Property Casualty	$	37,162	$	41,217	$	70,241	$	66,275			-9.8	%		6.0	%

NM - Percentage change not meaningful

The Lloyd’s Operations Property Casualty gross written premiums decreased 9.8% and increased 6.0% for the three and six months ended June 30, 2014 compared to the same periods in 2013. Tough market conditions and an unfavorable rating environment in the second quarter have led to reduced premium in our Offshore Energy, Onshore Energy and Engineering and Construction product lines. For the six months ended June 30, 2014 the increase is due to new business growth, specifically from our Assumed Reinsurance business’ Intellectual Property and Surety product lines that we began writing in September of 2013, reported through Other Casualty in the table above.

The Lloyd’s Operations Property Casualty business showed decreases of 4.7% and 3.8% on renewal rates for the three and six months ended June 30, 2014.

Professional Liability Premiums: The gross written premiums for our Professional Liability business for the three and six months ended June 30, 2014 and 2013 consisted of the following:


	Three Months Ended June 30				Six Months Ended June 30				Percentage Change
In thousands	2014		2013		2014		2013		QTD			YTD
Management Liability	$	13,825	$	11,257	$	24,117	$	21,498		22.8	%		12.2	%
Errors & Omissions		8,074		5,196		12,738		7,847		55.4	%		62.3	%

Total Professional Liability	$	21,899	$	16,453	$	36,855	$	29,345		33.1	%		25.6	%

The Lloyd’s Operations Professional Liability gross written premiums increased 33.1% and 25.6% for the three and six months ended June 30, 2014 compared to the same period in 2013, as a result of new business growth, partially offset by decreases in renewal rates of 5.0% and 4.1% for the three and six months ended June 30, 2014.

Lloyd’s Operations Commission Expenses

The commission expenses ratios for the three and six months ended June 30, 2014 were 18.4% and 17.1%, respectively, compared to 16.9% and 17.4% for the same periods in 2013. The increase in the commission expense ratio for the three months ended June 30, 2014 is driven by the Lloyd’s Marine business due to RRPs incurred in the quarter of $5.2 million primarily driven by large losses from our Marine business.

Lloyd’s Operations Other Operating Expenses

Lloyd’s Operations other operating expenses were $13.6 million and $27.3 million for the three and six months ended June 30, 2014 compared to $10.8 million and $22.4 million for the same periods in 2013, primarily due to an increase in employee costs associated with growth initiatives for our business as well as an increase in certain information technology charges assessed by Lloyd’s. Other operating expenses for the three and six months ended June 30, 2014 were also affected by adverse exchange rate movement between the British Pound and the US Dollar which resulted in British Pound denominated expenses to increase more when expressed in US Dollar terms.

CAPITAL RESOURCES

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

Our capital resources consist of funds deployed or available to be deployed to support our business operations. As of June 30, 2014 and December 31, 2013, our capital resources were as follows:


In thousands	June 30, 2014			December 31, 2013
Senior Notes	$	263,373		$	263,308
Stockholders’ equity		972,080			902,212
Total capitalization	$	1,235,453		$	1,165,520

Ratio of debt to total capitalization		21.3	%		22.6	%

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

In July 2012, we filed a universal shelf registration statement with the SEC. This registration statement, which expires in July 2015, allows for the future possible offer and sale by the Company of up to $500 million in the aggregate of various types of securities including common stock, preferred stock, debt securities, depositary shares, warrants, units or stock purchase contracts and stock purchase units. The shelf registration statement enables us to efficiently access the public equity or debt markets in order to meet future capital needs, if necessary. This report is not an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such state.

We primarily rely upon dividends from our subsidiaries to meet our Parent Company’s obligations. The Parent Company’s cash obligations primarily consist of semi-annual interest payments on the senior debt, which are currently $7.6 million. Going forward, the interest payments may be made from funds currently at the Parent Company or dividends from its subsidiaries.

NIC may pay dividends to the Parent Company out of its statutory earned surplus pursuant to statutory restrictions imposed under the New York insurance law. As of June 30, 2014, the maximum amount available for the payment of dividends by NIC in 2014 without prior regulatory approval is $84.8 million.

NCUL may pay dividends to the Parent Company up to the extent of available profits that have been distributed from Syndicate 1221 and as of June 30, 2014 that amount was $12.6 million (£7.4 million).

Condensed Parent Company balance sheets as of June 30, 2014 and December 31, 2013 are shown in the table below:


In thousands	June 30, 2014		December 31, 2013
Cash and investments	$	102,141	$	100,676
Investments in subsidiaries		1,111,471		1,040,214
Goodwill and other intangible assets		2,534		2,534
Other assets		23,460		26,538

Total assets	$	1,239,606	$	1,169,962

Senior Notes	$	263,373	$	263,308
Accounts payable and other liabilities		513		802
Accrued interest payable		3,640		3,640

Total liabilities	$	267,526	$	267,750

Stockholders’ equity	$	972,080	$	902,212

Total liabilities and stockholders’ equity	$	1,239,606	$	1,169,962

On October 4, 2013, we completed a public debt offering of $265 million principal amount of the 5.75% Senior Notes and received net proceeds of $263 million. We used the proceeds of the 5.75% Senior Notes for general corporate purposes including the redemption of our 7.0% Senior Notes. We incurred a charge of $17.9 million for the payment of call premium in connection with the redemption of the 7.0% Senior Notes. 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.

On November 22, 2012, we entered into a $165 million credit facility agreement with ING Bank N.V., London Branch, individually and as Administrative Agent, and a syndicate of lenders. The new credit facility amended and restated a $165 million letter of credit facility entered into by the parties on March 28, 2011. The credit facility, which is denominated in U.S. dollars, is utilized to fund our participation in Syndicate 1221 through letters of credit for the 2013 and 2014 underwriting years, as well as open prior years. The letters of credit issued under the facility can be denominated in British pounds and their aggregate face amount will fluctuate based on exchange rates. If any letters of credit remain outstanding under the facility after December 31, 2014, we would be required to post additional collateral to secure the remaining letters of credit. As of June 30, 2014, letters of credit with an aggregate face amount of $153.2 million were outstanding under the credit facility and we have $1.0 million of cash collateral posted.

This credit facility contains customary covenants for facilities of this type, including restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of assets, and requirements as to maintaining certain consolidated tangible net worth, statutory surplus and other financial ratios. The credit facility also provides for customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, any representation or warranty made by the Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting the Company and its subsidiaries, the occurrence of certain material judgments, or a change in control of the Company. The letter of credit facility is secured by a pledge of the stock of certain insurance subsidiaries of the Company. To the extent the aggregate face amount issued under the credit facility exceeds the commitment amount, we are required to post collateral with the lead bank of the consortium. We were in compliance with all covenants under the credit facility as of June 30, 2014.

Time lags do occur in the normal course of business between the time gross loss reserves are paid by the Company and the time such gross paid losses are billed and collected from reinsurers. Reinsurance recoverable amounts related to gross loss reserves as of June 30, 2014 are anticipated to be billed and collected over the next several years as the gross loss reserves are paid by the Company.

Generally, for pro rata or quota share reinsurers, we issue quarterly settlement statements for premiums less commissions and paid loss activity, which are expected to be settled within 30-45 days. We have the ability to issue “cash calls” requiring such reinsurers to pay losses whenever paid loss activity for a claim ceded to a particular reinsurance treaty exceeds a predetermined amount (generally $0.5 million to $1.0 million) as set forth in the pro rata treaty. For the Insurance Companies, cash calls must generally be paid within 7 to 15 calendar days. There is generally no specific settlement period for the Lloyd’s Operations cash call provisions, but such billings have historically on average been paid within the same time period.

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

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

LIQUIDITY

Consolidated Cash Flows

Net cash provided by operating activities was $78.1 million for the six months ended June 30, 2014 compared to $48.5 million for the same period in 2013. The increase in cash flow from operations is largely attributable to a reduction in losses paid as well as the continued improvement in collections of premiums receivable, offset by increased net payments to reinsurers.

Net cash used in investing activities was $92.7 million for the six months ended June 30, 2014 compared to net cash provided by investing activities of $6.6 million for the comparable period in 2013. Fluctuations in cash provided by, or used in, investing activities is primarily due to the ongoing management of our investment portfolio.

Net cash provided by financing activities was $0.6 million for the six months ended June 30, 2014 compared to $1.5 million for the same period in 2013. The decrease in cash provided by financing activities relates to a reduction in proceeds from exercise of stock options.

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

We believe that we have adequately managed our cash flow requirements related to reinsurance recoveries from 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 the 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.

Investments

As of June 30, 2014, the weighted average rating of our fixed maturities was “AA” by S&P and “Aa” by Moody’s. The entire fixed maturity investment portfolio, except for investments with a fair value of $20.4 million, consists of investment grade bonds. As of June 30, 2014, our portfolio had a duration of 3.8 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 June 30, 2014 and December 31, 2013, all fixed maturities and equity securities held by us were classified as available-for-sale.

The following tables set forth the Company’s cash and investments as of June 30, 2014 and December 31, 2013. The tables below include OTTI securities recognized within AOCI:


	June 30, 2014
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized (Losses)			Cost or Amortized Cost
Fixed maturities:
U.S. Treasury bonds, agency bonds and foreign government bonds	$	421,891	$	4,313	$	(4,339	)	$	421,917
States, municipalities and political subdivisions		564,782		15,833		(2,883	)		551,832
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		256,407		8,289		(1,753	)		249,871
Residential mortgage obligations		60,867		1,832		(101	)		59,136
Asset-backed securities		162,529		598		(381	)		162,312
Commercial mortgage-backed securities		184,946		8,071		(131	)		177,006

Subtotal	$	664,749	$	18,790	$	(2,366	)	$	648,325
Corporate bonds		569,433		15,572		(1,159	)		555,020

Total fixed maturities	$	2,220,855	$	54,508	$	(10,747	)	$	2,177,094
Equity securities - common stocks		144,977		31,262		(964	)		114,679
Equity securities - Preferred stocks		35,509		1,799		(23	)		33,733
Short-term investments		226,237		—		—			226,237
Cash		72,604		—		—			72,604

Total	$	2,700,182	$	87,569	$	(11,734	)	$	2,624,347


	December 31, 2013
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized (Losses)			Cost or Amortized Cost
Fixed maturities:
U.S. Treasury bonds, agency bonds and foreign government bonds	$	441,685	$	2,854	$	(8,855	)	$	447,686
States, municipalities and political subdivisions		460,422		9,298		(13,651	)		464,775
Mortgage-backed and asset-backed securities:
Agency mortgage-backed securities		301,274		6,779		(6,016	)		300,511
Residential mortgage obligations		41,755		1,212		(161	)		40,704
Asset-backed securities		125,133		653		(480	)		124,960
Commercial mortgage-backed securities		172,750		7,656		(374	)		165,468

Subtotal	$	640,912	$	16,300	$	(7,031	)	$	631,643
Corporate bonds		504,854		15,402		(3,443	)		492,895

Total fixed maturities	$	2,047,873	$	43,854	$	(32,980	)	$	2,036,999
Equity securities - common stocks		143,954		25,700		(550	)		118,804
Short-term investments		296,250		—		—			296,250
Cash		86,509		—		—			86,509

Total	$	2,574,586	$	69,554	$	(33,530	)	$	2,538,562

As of June 30, 2014 and December 31, 2013, fixed maturities for which non-credit OTTI was previously recognized and included in other comprehensive income are now in an unrealized gains position of $0.7 million and $0.5 million, respectively.

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, the Company also considers its intent to hold securities as part of the process of evaluating whether a decline in fair value represents an other-than-temporary decline in value. 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.

Invested assets increased from 2013 primarily due to positive cash flow from operations. The annualized pre-tax yield, excluding net realized gains and losses and net OTTI losses recognized in earnings, was 2.5% and 2.6% for the three and six months ended June 30, 2014 compared to 2.4% for the three and six months ended June 2013.

The tax equivalent yields for the three months and six months ended June 30, 2014 on a consolidated basis were 2.7% and 2.8%, respectively, compared to 2.5% and 2.6% for the same periods during 2013. The portfolio duration was 3.8 years and 4.0 years at June 30, 2014 and June 30, 2013 respectively. Since the beginning of 2014, the tax-exempt portion of our investment portfolio has increased by $98.3 million to approximately 22.9% of the fixed maturities investment portfolio as of June 30, 2014 compared to approximately 20.1% at December 31, 2013.

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

The contractual maturity dates for fixed maturity securities categorized by the number of years until maturity as of June 30, 2014 are shown in the following table:


	June 30, 2014
In thousands	Fair Value		Amortized Cost
Due in one year or less	$	61,556	$	61,457
Due after one year through five years		751,955		737,324
Due after five years through ten years		379,451		373,226
Due after ten years		363,144		356,762
Mortgage- and asset-backed securities		664,749		648,325

Total	$	2,220,855	$	2,177,094

Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Due to the periodic repayment of principal, the aggregate amount of mortgage-backed and asset-backed securities is estimated to have an effective maturity of approximately 3.9 years.

The following table sets forth the amount and percentage of our fixed maturities as of June 30, 2014 by S&P credit rating or, if an S&P rating is not available, the equivalent Moody’s rating. The table includes fixed maturities at fair value, and the total rating is the weighted average quality rating:


	June 30, 2014
In thousands	Rating	Fair Value		Percent of Total
Rating description:
Extremely strong	AAA	$	396,295		18	%
Very strong	AA		1,041,052		47	%
Strong	A		584,921		26	%
Adequate	BBB		178,196		8	%
Speculative	BB & Below		16,907		1	%
Not rated	NR		3,484		0	%

Total	AA	$	2,220,855		100	%

The following table sets forth our U.S. Treasury bonds, agency bonds, and foreign government bonds as of June 30, 2014 and December 31, 2013:


	June 30, 2014
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized (Losses)			Amortized Cost
U.S. Treasury bonds	$	214,455	$	2,044	$	(2,467	)	$	214,878
Agency bonds		131,220		1,582		(232	)		129,870
Foreign government bonds		76,216		687		(1,640	)		77,169

Total	$	421,891	$	4,313	$	(4,339	)	$	421,917


	December 31, 2013
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized (Losses)			Amortized Cost
U.S. Treasury bonds	$	242,379	$	1,565	$	(7,480	)	$	248,294
Agency bonds		143,063		1,002		(1,198	)		143,259
Foreign government bonds		56,243		287		(177	)		56,133

Total	$	441,685	$	2,854	$	(8,855	)	$	447,686

The following table sets forth the composition of the investments categorized as states, municipalities and political subdivisions in our portfolio by generally equivalent S&P and Moody’s ratings (not all securities in our portfolio are rated by both S&P and Moody’s) as of June 30, 2014 . The securities that are not rated in the table below are primarily state bonds.


In thousands		June 30, 2014
Equivalent S&P Rating	Equivalent Moody’s Rating	Fair Value		Amortized Cost		Net Unrealized Gain (Loss)
AAA/AA/A	Aaa/Aa/A	$	549,357	$	537,193	$	12,164
BBB	Baa		8,328		8,007		321
BB	Ba		3,613		3,151		462
B	B		—		—		—
CCC or lower	Caa or lower		—		—		—
NR	NR		3,484		3,481		3

Total		$	564,782	$	551,832	$	12,950

The following table sets forth the municipal bond holdings by sectors as of June 30, 2014 and December 31, 2013:


	June 30, 2014					December 31, 2013
In thousands	Fair Value		Percent of Total			Fair Value		Percent of Total
Municipal Sector:
General obligation	$	160,075		28	%	$	125,063		27	%
Prerefunded		13,150		2	%		15,835		3	%
Revenue		336,028		60	%		270,016		59	%
Taxable		55,529		10	%		49,508		11	%

Total	$	564,782		100	%	$	460,422		100	%

We own $90.6 million of municipal securities which are credit enhanced by various financial guarantors. As of June 30, 2014, the average underlying credit rating for these securities is A+ There has been no material adverse impact to our investment portfolio or results of operations as a result of downgrades of the credit ratings for several of the financial guarantors.

We analyze our mortgage-backed and asset-backed securities by credit quality of the underlying collateral distinguishing between the securities issued by the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”) and the Government National Mortgage Association (“GNMA”) which are Federal government sponsored entities, and the non-FNMA and non-FHLMC securities broken out by prime, Alternative A-paper (“Alt-A”) and subprime collateral. The securities issued by FNMA and FHLMC are the obligations of each respective entity. The U.S. Department of the Treasury has agreed to provide support to FNMA and FHLMC under the 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 that is greater than prime but less than subprime. The subprime collateral consists of mortgages or other collateral from borrowers with low credit ratings. Such subprime and Alt-A categories are as defined by S&P.

The following table sets forth our agency mortgage-backed securities and residential mortgage-backed securities (“RMBS”) by those issued by GNMA, FNMA, and FHLMC, and the quality category (prime, Alt-A and subprime) for all other such investments as of June 30, 2014:


	June 30, 2014
In thousands	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Amortized Cost
Agency mortgage-backed securities:
GNMA	$	93,447	$	3,219	$	(1,233	)	$	91,461
FNMA		118,923		3,731		(486	)		115,678
FHLMC		44,037		1,339		(34	)		42,732

Total agency mortgage-backed securities	$	256,407	$	8,289	$	(1,753	)	$	249,871


Residential mortgage-backed securities:
Prime	$	38,041	$	1,106	$	(78	)	$	37,013
Alt-A		1,845		117		(23	)		1,751
Subprime		465		16		—			449
Non-U.S. RMBS		20,516		593		—			19,923

Total residential mortgage-backed securities	$	60,867	$	1,832	$	(101	)	$	59,136

The following table sets forth the composition of the investments categorized as RMBS in our portfolio by generally equivalent S&P and Moody’s ratings (not all securities in our portfolio are rated by both S&P and Moody’s) as of June 30, 2014:


In thousands		June 30, 2014
Equivalent S&P Rating	Equivalent Moody’s Rating	Fair Value		Amortized Cost		Net Unrealized Gain (Loss)
AAA/AA/A	Aaa/Aa/A	$	25,568	$	24,934	$	634
BBB	Baa		25,306		24,841		465
BB	Ba		1,249		1,272		(23	)
B	B		1,943		1,894		49
CCC or lower	Caa or lower		6,801		6,195		606
NR	NR		—		—		—

Total		$	60,867	$	59,136	$	1,731

Details of the collateral of our asset-backed securities portfolio as of June 30, 2014 are presented below:


In thousands	AAA		AA		A		BBB		BB		CCC		Fair Value		Amortized Cost		Unrealized Gain (Loss)
Auto loans	$	14,698	$	—	$	5,762	$	—	$	—	$	—	$	20,460	$	20,361	$	99
Credit cards		50,166		—		6,000		—		—		—		56,166		55,907		259
Collateralized Loan Obligations		51,733		6,815		—		—		—		—		58,548		58,915		(367	)
Time Share		—		—		14,506		—		—		—		14,506		14,318		188
Student Loans		1,329		—		—		—		—		—		1,329		1,311		18
Miscellaneous		5,020		—		6,500		—		—		—		11,520		11,500		20

Total	$	122,946	$	6,815	$	32,768	$	—	$	—	$	—	$	162,529	$	162,312	$	217

The following table sets forth the composition of the investments categorized as commercial mortgage-backed securities in our portfolio by generally equivalent S&P and Moody’s ratings (not all securities in our portfolio are rated by both S&P and Moody’s) as of June 30, 2014:


In thousands	Equivalent Moody’s Rating	June 30, 2014
Equivalent S&P Rating	Equivalent Moody’s Rating	Fair Value		Amortized Cost		Net Unrealized Gain (Loss)
AAA/AA/A	Aaa/Aa/A	$	184,946	$	177,006	$	7,940
BBB	Baa		—		—		—
BB	Ba		—		—		—
B	B		—		—		—
CCC or lower	Caa or lower		—		—		—
NR	NR		—		—		—

Total		$	184,946	$	177,006	$	7,940

The following table sets forth the composition of the investments categorized as corporate bonds in our portfolio by generally equivalent S&P and Moody’s ratings (not all securities in our portfolio are rated by both S&P and Moody’s) as of June 30, 2014:


In thousands	Equivalent Moody’s Rating	June 30, 2014
Equivalent S&P Rating	Equivalent Moody’s Rating	Fair Value		Amortized Cost		Net Unrealized Gain (Loss)
AAA/AA/A	Aaa/Aa/A	$	421,569	$	413,335	$	8,234
BBB	Baa		144,562		138,456		6,106
BB	Ba		3,302		3,229		73
B	B		—		—		—
CCC or lower	Caa or lower		—		—		—
NR	NR		—		—		—

Total		$	569,433	$	555,020	$	14,413

The company holds non-sovereign securities, where the issuer is located in the Euro Area, an economic and monetary union of certain member states within the European Union that have adopted the Euro as their common currency. As of June 30, 2014, the fair value of such securities was $77.8 million, with an amortized cost of $76.2 million representing 3.2% of our total fixed income and equity portfolio. Our largest exposure is in France with a total of $44.2 million followed by the Netherlands with a total of $20.8 million. We have no direct material exposure to Greece, Portugal, Italy or Spain, and no direct exposure to Ukraine or Russia, for the six months ended June 30, 2014.

The following table summarizes all securities in a gross unrealized loss position as of June 30, 2014 and December, 31, 2013, showing the aggregate fair value and gross unrealized loss by the length of time those securities had continuously been in a gross unrealized loss position as well as the number of securities:


	June 30, 2014						December 31, 2013
In thousands, except # of securities	Number of Securities		Fair Value		Gross Unrealized Loss		Number of Securities		Fair Value		Gross Unrealized Loss
Fixed maturities:
U.S. Treasury bonds, agency bonds, and foreign government bonds 0-6 months		4	$	15,576	$	13		27	$	136,360	$	1,096
7-12 months		9		22,215		171		26		149,370		7,759
> 12 months		38		154,222		4,155		—		—		—

Subtotal		51	$	192,013	$	4,339		53	$	285,730	$	8,855
States, municipalities and political subdivisions 0-6 months		17	$	25,239	$	158		28	$	40,132	$	297
7-12 months		3		3,897		59		104		205,152		12,100
> 12 months		71		155,079		2,666		6		12,357		1,254

Subtotal		91	$	184,215	$	2,883		138	$	257,641	$	13,651
Agency mortgage-backed securities 0-6 months		2	$	1,778	$	7		39	$	39,458	$	434
7-12 months		—		—		—		64		77,860		3,768
> 12 months		61		77,105		1,746		9		22,784		1,814

Subtotal		63	$	78,883	$	1,753		112	$	140,102	$	6,016
Residential mortgage obligations 0-6 months		5	$	1,192	$	6		3	$	431	$	2
7-12 months		—		—		—		7		950		29
> 12 months		16		2,504		95		15		2,467		130

Subtotal		21	$	3,696	$	101		25	$	3,848	$	161
Asset-backed securities 0-6 months		4	$	20,791	$	24		14	$	75,887	$	479
7-12 months		4		34,907		357		1		203		1
> 12 months		—		—		—		—		—		—

Subtotal		8	$	55,698	$	381		15	$	76,090	$	480
Commercial mortgage-backed securities 0-6 months		2	$	1,504	$	1		4	$	6,712	$	31
7-12 months		—		—		—		2		15,098		322
> 12 months		4		15,631		130		4		774		21

Subtotal		6	$	17,135	$	131		10	$	22,584	$	374
Corporate bonds 0-6 months		14	$	67,019	$	197		34	$	93,591	$	717
7-12 months		5		6,192		33		18		55,021		2,726
> 12 months		12		40,248		929		—		—		—

Subtotal		31	$	113,459	$	1,159		52	$	148,612	$	3,443

Total fixed maturities		271	$	645,099	$	10,747		405	$	934,607	$	32,980

Equity securities - common stocks 0-6 months		5	$	13,762	$	929		5	$	7,387	$	422
7-12 months		2		376		35		2		3,538		128
> 12 months		—		—		—		—		—		—

Total common Stocks		7	$	14,138	$	964		7	$	10,925	$	550

Equity securities - preferred stocks 0-6 months		4	$	3,294	$	23		—	$	—	$	—
7-12 months		—		—		—		—		—		—
> 12 months		—		—		—		—		—		—

Total Preferred Stocks		4	$	3,294	$	23		—	$	—	$	—

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

In the above table the gross unrealized loss for the greater than 12 months category consists primarily of Treasury and agency bonds, municipal bonds and agency mortgage backed securities primarily due to an increase in interest rates.

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

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

As of June 30, 2014 and December 31, 2013, the largest unrealized loss by a non-government backed issuer in the investment portfolio was $0.5 million and $1.1 million, respectively.

The following table sets forth the composition of the investments categorized as fixed maturities in our investment portfolio with gross unrealized losses by generally equivalent S&P and Moody’s ratings (not all of the securities are rated by S&P and Moody’s) as of June 30, 2014:


		June 30, 2014
In thousands	Equivalent Moody’s Rating	Gross Unrealized Loss					Fair Value
Equivalent S&P Rating	Equivalent Moody’s Rating	Amount		Percent of Total			Amount		Percent of Total
AAA/AA/A	Aaa/Aa/A	$	10,491		98	%	$	630,350		98	%
BBB	Baa		187		2	%		12,399		2	%
BB	Ba		37		0	%		758		0	%
B	B		13		0	%		761		0	%
CCC or lower	Caa or lower		19		0	%		831		0	%
NR	NR		—		0	%		—		0	%

Total		$	10,747		100	%	$	645,099		100	%

As of June 30, 2014, the gross unrealized losses in the table above were related to fixed maturities that are rated investment grade, which is defined as a security having an S&P rating of “BBB–” or higher, or a Moody’s rating of “Baa3” or higher, except for $0.07 million which is rated below investment grade or not rated. Unrealized losses on investment grade securities principally relate to changes in interest rates or changes in sector-related credit spreads since the securities were acquired.

The contractual maturity for fixed maturities categorized by the number of years until maturity, with a gross unrealized loss as of June 30, 2014 is presented in the following table:


	June 30, 2014
	Gross Unrealized Losses					Fair Value
In thousands	Amount		Percent of Total			Amount		Percent of Total
Due in one year or less	$	417		4	%	$	8,486		1	%
Due after one year through five years		2,009		19	%		157,888		25	%
Due after five years through ten years		3,877		36	%		182,500		28	%
Due after ten years		2,078		19	%		140,813		22	%
Mortgage- and asset-backed securities		2,366		22	%		155,412		24	%

Total	$	10,747		100	%	$	645,099		100	%

The following table summarizes the gross unrealized losses as of June 30, 2014 by length of time where the fair value is less than 80% of amortized cost:


	June 30, 2014
In thousands	Fixed Maturities		Equity Securities		Total
Less than three months	$	—	$	—	$	—
Longer than three months and less than six months		—		465		465
Longer than six months and less than twelve months		—		—		—
Longer than twelve months		—		—		—

Total	$	—	$	465	$	465

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


	Three Months Ended June 30,								Six Months Ended June 30,
	2014				2013				2014				2013
In thousands, except # of securities	Number of Securities		Amount		Number of Securities		Amount		Number of Securities		Amount		Number of Securities		Amount
Total OTTI losses:
Corporate and other bonds		—	$	—		—	$	—		—	$	—		—	$	—
Commercial mortgage-backed securities		—		—		—		—		—		—		—		—
Residential mortgage-backed securities		—		—		—		—		—		—		—		—
Asset-backed securities		—		—		—		—		—		—		—		—
Equities		—		—		—		—		—		—		2		42

Total		—	$	—		—	$	—		—	$	—		2	$	42

Less: Portion of loss in accumulated other comprehensive income (loss):
Corporate and other bonds			$	—			$	—			$	—			$	—
Commercial mortgage-backed securities				—				—				—				—
Residential mortgage-backed securities				—				—				—				—
Asset-backed securities				—				—				—				—
Equities				—				—				—				—

Total			$	—			$	—			$	—			$	—
Impairment losses recognized in earnings:
Corporate and other bonds			$	—			$	—			$	—			$	—
Commercial mortgage-backed securities				—				—				—				—
Residential mortgage-backed securities				—				—				—				—
Asset-backed securities				—				—				—				—
Equities				—				—				—				42

Total			$	—			$	—			$	—			$	42

The Company did not have OTTI losses during the three and six months ended June 30, 2014. During the six months ended June 30, 2013, we recognized OTTI losses of $0.04 million related to two equity securities. The significant inputs used to measure the amount of credit loss recognized in earnings were actual delinquency rates, default probability assumptions, severity assumptions and prepayment assumptions. Projected losses are a function of both loss severity and probability of default. Default probability and severity assumptions differ based on property type, vintage and the stress of the collateral. We do not intend to sell any of these securities and it is more likely than not that we will not be required to sell these securities before the recovery of the amortized cost basis.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The following updates our disclosure regarding foreign currency exchange rate risk as previously stated in the Company’s 2013 Annual Report on Form 10-K.

FOREIGN CURRENCY EXCHANGE RATE RISK

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

Based on the primary foreign-denominated balances within our Lloyd’s Operations as of June 30, 2014, an assumed 5%, 10% and 15% negative currency movement would result in changes as follows:


	June 30, 2014
	USD Equivalent		Negative Currency Movement of
In millions	USD Equivalent		5%			10%			15%
Cash, cash equivalents and marketable securities at fair value	$	110.2	$	(2.3	)	$	(4.6	)	$	(6.9	)
Premiums receivable	$	39.0	$	(1.8	)	$	(3.6	)	$	(5.5	)
Reinsurance recoverables on paid, unpaid losses and LAE	$	47.1	$	(2.0	)	$	(3.9	)	$	(5.9	)
Reserves for losses and loss adjustment expenses	$	130.8	$	5.5		$	11.0		$	16.5

Total			$	(0.6	)	$	(1.1	)	$	(1.8	)

Item 4. Controls and Procedures

(a)

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

(b)

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

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

Item 1A. Risk Factors

There have been no material changes from the risk factors as previously disclosed in the Company’s 2013 Annual Report on Form 10-K.

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

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

Item 6. Exhibits


Exhibit No.	Description of Exhibit
11-1	Computation of Per Share Earnings	*

31-1	Certification of CEO per Section 302 of the Sarbanes-Oxley Act	*

31-2	Certification of CFO per Section 302 of the Sarbanes-Oxley Act	*

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

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

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	*

*	Included herein

Signatures

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


	The Navigators Group, Inc.
	(Company)

Dated: August 8, 2014	By:	/s/ Ciro M. DeFalco
		Ciro M. DeFalco
		Senior Vice President and Chief Financial Officer

INDEX TO EXHIBITS


Exhibit No.	Description of Exhibit
11-1	Computation of Per Share Earnings	*

31-1	Certification of CEO per Section 302 of the Sarbanes-Oxley Act	*

31-2	Certification of CFO per Section 302 of the Sarbanes-Oxley Act	*

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

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

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	*

* Included herein

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company