##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 For the Quarterly Period EndedJune 30, 2008
 Commission file number 0-15886
 The Navigators Group, Inc.
  Delaware
    
    13-3138397(State or other jurisdiction of 
incorporation or organization)
    
    (IRS Employer
Identification No.)One Penn Plaza, New York, New York
    
    10119(Address of principal executive offices)
    
    (Zip Code)
  (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report.)
 þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o
 o þ




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##### 



THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
 INDEX
 Page No.Part I. FINANCIAL INFORMATION:Item 1. Financial StatementsConsolidated Balance Sheets 
June 30, 2008 (Unaudited) and December 31, 2007
    
    
    3Consolidated Statements of Income (Unaudited)
Three Months Ended June 30, 2008 and 2007
    
    
    4Six Months Ended June 30, 2008 and 2007
    
    
    5Consolidated Statements of Stockholders Equity (Unaudited)
June 30, 2008 and 2007
    
    
    6Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended June 30, 2008 and 2007
    
    
    7Six Months Ended June 30, 2008 and 2007
    
    
    8Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2008 and 2007
    
    
    9Notes to Interim Consolidated Financial Statements (Unaudited)
    
    
    10Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    25Item 3. Quantitative and Qualitative Disclosures
About Market Risk
    
    
    72Item 4. Controls and Procedures
    
    
    72Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    73Item 1A. Risk Factors
    
    
    73Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    73Item 3. Defaults Upon Senior Securities
    
    
    74Item 4. Submissions of Matters to a Vote of Security Holders
    
    
    74Item 5. Other Information
    
    
    75Item 6. Exhibits
    
    
    75Signature
    
    
    76Index of Exhibits
    
    
    77Exhibit 11-1Exhibit 31-1Exhibit 31-2Exhibit 32-1Exhibit 32-2
   2




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##### Table of Contents



Part 1. Financial Information
 
 Item 1. Financial Statements
 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS  ($ in thousands, except share data)
 June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSInvestments and cash:Fixed maturities, available-for-sale, at fair value
(amortized cost: 2008, $1,604,039; 2007, $1,508,489)
    
    $
    1,590,566
    
    
    $
    1,522,320Equity securities, available-for-sale, at fair value (cost: 2008, $70,178; 2007, $65,492)
    
    
    68,089
    
    
    
    67,240Short-term investments, at fair value
    
    
    174,874
    
    
    
    170,685Cash
    
    
    14,499
    
    
    
    7,056Total investments and cash
    
    
    1,848,028
    
    
    
    1,767,301Premiums in course of collection
    
    
    197,490
    
    
    
    163,081Commissions receivable
    
    
    444
    
    
    
    2,381Prepaid reinsurance premiums
    
    
    194,195
    
    
    
    188,961Reinsurance receivable on paid losses
    
    
    78,087
    
    
    
    94,818Reinsurance receivable on unpaid losses and loss adjustment expenses
    
    
    778,715
    
    
    
    801,461Net deferred income tax benefit
    
    
    45,412
    
    
    
    29,249Deferred policy acquisition costs
    
    
    55,100
    
    
    
    51,895Accrued investment income
    
    
    16,870
    
    
    
    15,605Goodwill and other intangible assets
    
    
    8,101
    
    
    
    8,084Other assets
    
    
    23,058
    
    
    
    20,935Total assets
    
    $
    3,245,500
    
    
    $
    3,143,771LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Reserves for losses and loss adjustment expenses
    
    $
    1,707,101
    
    
    $
    1,648,764Unearned premium
    
    
    518,354
    
    
    
    469,481Reinsurance balances payable
    
    
    148,632
    
    
    
    161,829Senior notes
    
    
    123,732
    
    
    
    123,673Federal income tax payable
    
    
    16,279
    
    
    
    10,868Accounts payable and other liabilities
    
    
    55,045
    
    
    
    67,050Total liabilities
    
    
    2,569,143
    
    
    
    2,481,665Stockholders equity:Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued
    
    
    
    
    
    
    Common stock, $.10 par value, shares authorized: 50,000,000 at 6/30/08 and
12/31/07; issued and outstanding: 16,788,446 (net of treasury stock) at 6/30/08
and 16,873,094 at 12/31/07
    
    
    1,700
    
    
    
    1,687Additional paid-in capital
    
    
    295,304
    
    
    
    291,616Retained earnings
    
    
    395,755
    
    
    
    355,084Treasury stock, at cost (186,026 shares at 6/30/08)
    
    
    (9,816
    )
    
    
    Accumulated other comprehensive income (loss)
    
    
    (6,586
    )
    
    
    13,719Total stockholders equity
    
    
    676,357
    
    
    
    662,106Total liabilities and stockholders equity
    
    $
    3,245,500
    
    
    $
    3,143,771
   3




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##### Table of Contents



THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME  ($ and shares in thousands, except net income per share)
 Three Months EndedJune 30,2008
    
    
    2007(Unaudited)Gross written premium
    
    $
    279,213
    
    
    $
    276,549Revenues:Net written premium
    
    $
    174,287
    
    
    $
    161,350(Increase) in unearned premium
    
    
    (11,584
    )
    
    
    (15,733
    )Net earned premium
    
    
    162,703
    
    
    
    145,617Commission income
    
    
    467
    
    
    
    486Net investment income
    
    
    18,731
    
    
    
    17,330Net realized capital gains (losses)
    
    
    (7,976
    )
    
    
    840Other income (expense)
    
    
    1,010
    
    
    
    (253
    )Total revenues
    
    
    174,935
    
    
    
    164,020Operating expenses:Net losses and loss adjustment expenses incurred
    
    
    91,889
    
    
    
    79,739Commission expense
    
    
    23,490
    
    
    
    17,650Other operating expenses
    
    
    33,237
    
    
    
    28,608Interest expense
    
    
    2,217
    
    
    
    2,215Total operating expenses
    
    
    150,833
    
    
    
    128,212Income before income tax expense
    
    
    24,102
    
    
    
    35,808Income tax expense (benefit):Current
    
    
    12,156
    
    
    
    13,505Deferred
    
    
    (5,475
    )
    
    
    (2,072
    )Total income tax expense
    
    
    6,681
    
    
    
    11,433Net income
    
    $
    17,421
    
    
    $
    24,375Net income per common share:Basic
    
    $
    1.04
    
    
    $
    1.45Diluted
    
    $
    1.03
    
    
    $
    1.44Average common shares outstanding:Basic
    
    
    16,773
    
    
    
    16,786Diluted
    
    
    16,912
    
    
    
    16,919
   4




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THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME  ($ and shares in thousands, except net income per share)
 Six Months EndedJune 30,2008
    
    
    2007(Unaudited)Gross written premium
    
    $
    566,359
    
    
    $
    577,410Revenues:Net written premium
    
    $
    362,009
    
    
    $
    334,369(Increase) in unearned premium
    
    
    (43,566
    )
    
    
    (49,706
    )Net earned premium
    
    
    318,443
    
    
    
    284,663Commission income
    
    
    728
    
    
    
    894Net investment income
    
    
    37,569
    
    
    
    33,546Net realized capital gains (losses)
    
    
    (8,052
    )
    
    
    1,041Other income (expense)
    
    
    1,021
    
    
    
    (324
    )Total revenues
    
    
    349,709
    
    
    
    319,820Operating expenses:Net losses and loss adjustment expenses incurred
    
    
    180,309
    
    
    
    160,931Commission expense
    
    
    44,438
    
    
    
    34,749Other operating expenses
    
    
    62,993
    
    
    
    54,897Interest expense
    
    
    4,434
    
    
    
    4,430Total operating expenses
    
    
    292,174
    
    
    
    255,007Income before income tax expense
    
    
    57,535
    
    
    
    64,813Income tax expense (benefit):Current
    
    
    22,462
    
    
    
    22,781Deferred
    
    
    (5,598
    )
    
    
    (2,015
    )Total income tax expense
    
    
    16,864
    
    
    
    20,766Net income
    
    $
    40,671
    
    
    $
    44,047Net income per common share:Basic
    
    $
    2.42
    
    
    $
    2.63Diluted
    
    $
    2.39
    
    
    $
    2.60Average common shares outstanding:Basic
    
    
    16,817
    
    
    
    16,771Diluted
    
    
    17,002
    
    
    
    16,947
   5




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THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY  ($ in thousands)
 Six Months EndedJune 30,2008
    
    
    2007(Unaudited)Preferred StockBalance at beginning and end of period
    
    $
    
    
    
    $
    Common stockBalance at beginning of year
    
    $
    1,687
    
    
    $
    1,674Shares issued under stock plans
    
    
    13
    
    
    
    9Balance at end of period
    
    $
    1,700
    
    
    $
    1,683Additional paid-in capitalBalance at beginning of year
    
    $
    291,616
    
    
    $
    286,732Shares issued under stock plans
    
    
    3,688
    
    
    
    3,301Balance at end of period
    
    $
    295,304
    
    
    $
    290,033Retained earningsBalance at beginning of year
    
    $
    355,084
    
    
    $
    259,464Net income
    
    
    40,671
    
    
    
    44,047Balance at end of period
    
    $
    395,755
    
    
    $
    303,511Treasury stock, at costBalance at beginning of year
    
    $
    
    
    
    $
    Treasury stock acquired
    
    
    (9,816
    )
    
    
    Balance at end of period
    
    $
    (9,816
    )
    
    $
    Accumulated other comprehensive income (loss)Net unrealized gains (losses) on securities, net of taxBalance at beginning of year
    
    $
    10,186
    
    
    $
    849Change in period
    
    
    (20,398
    )
    
    
    (11,468
    )Balance at end of period
    
    
    (10,212
    )
    
    
    (10,619
    )Cumulative translation adjustments, net of taxBalance at beginning of year
    
    
    3,533
    
    
    
    2,624Net adjustment for period
    
    
    93
    
    
    
    801Balance at end of period
    
    
    3,626
    
    
    
    3,425Balance at end of period
    
    $
    (6,586
    )
    
    $
    (7,194
    )Total stockholders equity at end of period
    
    $
    676,357
    
    
    $
    588,033
   6




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THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  ($ in thousands)
 Three Months EndedJune 30,2008
    
    
    2007(Unaudited)Net income
    
    $
    17,421
    
    
    $
    24,375Other comprehensive (loss):Change in net unrealized gains (losses) on securities,
net of tax (benefit) of ($9,337) and ($6,906)
in 2008 and 2007, respectively(1)
    
    
    (16,986
    )
    
    
    (12,964
    )Change in foreign currency translation gains,
net of tax expense of $909 and $376
in 2008 and 2007, respectively
    
    
    375
    
    
    
    696Other comprehensive loss
    
    
    (16,611
    )
    
    
    (12,268
    )Comprehensive income
    
    $
    810
    
    
    $
    12,107(1) Disclosure of reclassification amount, net of tax:Unrealized holding (losses) arising
during period
    
    $
    (22,171
    )
    
    $
    (12,418
    )Less: reclassification adjustment for net realized
capital gains (losses) included in net income
    
    
    (5,185
    )
    
    
    546Change in net unrealized gains (losses) on securities
    
    $
    (16,986
    )
    
    $
    (12,964
    )
   7




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##### Table of Contents



THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  ($ in thousands)
 Six Months EndedJune 30,2008
    
    
    2007(Unaudited)Net income
    
    $
    40,671
    
    
    $
    44,047Other comprehensive (loss):Change in net unrealized gains (losses) on securities,
net of tax (benefit) of ($10,742) and ($6,135)
in 2008 and 2007, respectively(1)
    
    
    (20,398
    )
    
    
    (11,468
    )Change in foreign currency translation gains,
net of tax expense of $50 and $432
in 2008 and 2007, respectively
    
    
    93
    
    
    
    801Other comprehensive loss
    
    
    (20,305
    )
    
    
    (10,667
    )Comprehensive income
    
    $
    20,366
    
    
    $
    33,380(1) Disclosure of reclassification amount, net of tax:Unrealized holding (losses) arising
during period
    
    $
    (25,633
    )
    
    $
    (10,793
    )Less: reclassification adjustment for net realized capital
capital gains (losses) included in net income
    
    
    (5,235
    )
    
    
    675Change in net unrealized gains (losses) on securities
    
    $
    (20,398
    )
    
    $
    (11,468
    )
  8




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THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS  ($ in thousands)
 Six Months EndedJune 30,2008
    
    
    2007(Unaudited)Operating activities:Net income
    
    $
    40,671
    
    
    $
    44,047Adjustments to reconcile net income to net
cash provided by (used in) operating activities:Depreciation & amortization
    
    
    2,422
    
    
    
    1,566Net deferred income tax expense (benefit)
    
    
    (5,598
    )
    
    
    (2,015
    )Net realized capital (gains) losses
    
    
    8,052
    
    
    
    (1,041
    )Changes in assets and liabilities:Reinsurance receivable on paid and unpaid losses and LAE
    
    
    40,156
    
    
    
    83,662Reserve for losses and LAE
    
    
    56,873
    
    
    
    (15,197
    )Prepaid reinsurance premiums
    
    
    (5,019
    )
    
    
    (28,036
    )Unearned premium
    
    
    48,311
    
    
    
    76,641Premiums in course of collection
    
    
    (34,052
    )
    
    
    (59,036
    )Commissions receivable
    
    
    1,933
    
    
    
    948Deferred policy acquisition costs
    
    
    (3,143
    )
    
    
    (11,076
    )Accrued investment income
    
    
    (1,342
    )
    
    
    (944
    )Reinsurance balances payable
    
    
    (13,331
    )
    
    
    5,565Federal income tax
    
    
    5,354
    
    
    
    5,783Other
    
    
    (7,887
    )
    
    
    10,800Net cash provided by operating activities
    
    
    133,400
    
    
    
    111,667Investing activities:Fixed maturities, available-for-saleRedemptions and maturities
    
    
    72,764
    
    
    
    91,547Sales
    
    
    84,562
    
    
    
    99,425Purchases
    
    
    (253,945
    )
    
    
    (278,382
    )Equity securities, available-for-saleSales
    
    
    12,063
    
    
    
    11,071Purchases
    
    
    (25,893
    )
    
    
    (26,092
    )Change in payable for securities
    
    
    (2,046
    )
    
    
    (361
    )Net change in short-term investments
    
    
    (3,736
    )
    
    
    (8,126
    )Purchase of property and equipment
    
    
    (1,618
    )
    
    
    (4,353
    )Net cash (used in) investing activities
    
    
    (117,849
    )
    
    
    (115,271
    )Financing activities:Purchase of treasury stock
    
    
    (9,816
    )
    
    
    Proceeds of stock issued from employee stock purchase plan
    
    
    520
    
    
    
    301Proceeds of stock issued from exercise of stock options
    
    
    1,188
    
    
    
    1,113Net cash provided by (used in) financing activities
    
    
    (8,108
    )
    
    
    1,414Effect of exchange rate changes on foreign currency cash
    
    
    
    
    
    
    4Increase (decrease) in cash
    
    
    7,443
    
    
    
    (2,186
    )Cash at beginning of year
    
    
    7,056
    
    
    
    2,404Cash at end of period
    
    $
    14,499
    
    
    $
    218Supplemental disclosures of cash flow information:Federal, state and local income tax paid
    
    $
    15,430
    
    
    $
    16,028Interest paid
    
    
    4,375
    
    
    
    4,375Issuance of stock to directors
    
    
    200
    
    
    
    181
   9




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THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
 
 Notes to Interim Consolidated Financial Statements  (Unaudited)
 Note 1. Accounting Policies
  Note 2. Reinsurance Ceded
  Note 3. Segment Information
     10




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11




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Three Months Ended June 30, 2008Insurance
    
    
    LloydsCompanies
    
    
    Operations
    
    
    Corporate
    
    
    Total($ in thousands)Gross written premium
    
    $
    197,956
    
    
    $
    81,257
    
    
    
    
    
    
    $
    279,213Net written premium
    
    
    128,182
    
    
    
    46,105
    
    
    
    
    
    
    
    174,287Net earned premium
    
    
    117,434
    
    
    
    45,269
    
    
    
    
    
    
    
    162,703Net losses and LAE
    
    
    (62,225
    )
    
    
    (29,664
    )
    
    
    
    
    
    
    (91,889
    )Commission expense
    
    
    (14,723
    )
    
    
    (8,767
    )
    
    
    
    
    
    
    (23,490
    )Other operating expenses
    
    
    (24,552
    )
    
    
    (8,685
    )
    
    
    
    
    
    
    (33,237
    )Commission income and other income (expense)
    
    
    1,516
    
    
    
    (39
    )
    
    
    
    
    
    
    1,477Underwriting profit
    
    
    17,450
    
    
    
    (1,886
    )
    
    
    
    
    
    
    15,564Net investment income
    
    
    15,593
    
    
    
    2,871
    
    
    $
    267
    
    
    
    18,731Net realized capital gains (losses)
    
    
    (8,053
    )
    
    
    77
    
    
    
    
    
    
    
    (7,976
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (2,217
    )
    
    
    (2,217
    )Income (loss) before income taxes
    
    
    24,990
    
    
    
    1,062
    
    
    
    (1,950
    )
    
    
    24,102Income tax expense (benefit)
    
    
    6,939
    
    
    
    425
    
    
    
    (683
    )
    
    
    6,681Net income (loss)
    
    $
    18,051
    
    
    $
    637
    
    
    $
    (1,267
    )
    
    $
    17,421Identifiable assets (1)
    
    $
    2,383,898
    
    
    $
    773,572
    
    
    $
    68,413
    
    
    $
    3,245,500Loss and LAE ratio
    
    
    53.0
    %
    
    
    65.5
    %
    
    
    
    
    
    
    56.5
    %Commission expense ratio
    
    
    12.5
    %
    
    
    19.4
    %
    
    
    
    
    
    
    14.4
    %Other operating expense ratio (2)
    
    
    19.6
    %
    
    
    19.3
    %
    
    
    
    
    
    
    19.5
    %Combined ratio
    
    
    85.1
    %
    
    
    104.2
    %
    
    
    
    
    
    
    90.4
    %
 (1)
    
    Includes inter-segment transactions causing the row not to crossfoot.(2)
    
    Includes other operating expensesand commission income and other income (expense).  12




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##### Table of Contents



Three Months Ended June 30, 2008Insurance
    
    
    LloydsCompanies
    
    
    Operations
    
    
    Total($ in thousands)Gross written premium:Marine & Energy
    
    $
    77,996
    
    
    $
    59,872
    
    
    $
    137,868Specialty
    
    
    84,013
    
    
    
    
    
    
    
    84,013Professional Liability
    
    
    26,437
    
    
    
    8,399
    
    
    
    34,836Middle Markets
    
    
    7,744
    
    
    
    
    
    
    
    7,744Property/Other
    
    
    1,766
    
    
    
    12,986
    
    
    
    14,752Total
    
    $
    197,956
    
    
    $
    81,257
    
    
    $
    279,213Net written premium:Marine & Energy
    
    $
    45,123
    
    
    $
    38,297
    
    
    $
    83,420Specialty
    
    
    57,998
    
    
    
    
    
    
    
    57,998Professional Liability
    
    
    15,906
    
    
    
    5,081
    
    
    
    20,987Middle Markets
    
    
    7,252
    
    
    
    
    
    
    
    7,252Property/Other
    
    
    1,903
    
    
    
    2,727
    
    
    
    4,630Total
    
    $
    128,182
    
    
    $
    46,105
    
    
    $
    174,287Net earned premium:Marine & Energy
    
    $
    36,456
    
    
    $
    37,103
    
    
    $
    73,559Specialty
    
    
    56,574
    
    
    
    
    
    
    
    56,574Professional Liability
    
    
    14,388
    
    
    
    5,141
    
    
    
    19,529Middle Markets
    
    
    6,736
    
    
    
    
    
    
    
    6,736Property/Other
    
    
    3,280
    
    
    
    3,025
    
    
    
    6,305Total
    
    $
    117,434
    
    
    $
    45,269
    
    
    $
    162,703
  13




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##### Table of Contents



Three Months Ended June 30, 2007Insurance
    
    
    LloydsCompanies
    
    
    Operations
    
    
    Corporate
    
    
    Total($ in thousands)Gross written premium
    
    $
    198,560
    
    
    $
    77,989
    
    
    
    
    
    
    $
    276,549Net written premium
    
    
    124,073
    
    
    
    37,277
    
    
    
    
    
    
    
    161,350Net earned premium
    
    
    109,735
    
    
    
    35,882
    
    
    
    
    
    
    
    145,617Net losses and LAE
    
    
    (63,725
    )
    
    
    (16,014
    )
    
    
    
    
    
    
    (79,739
    )Commission expense
    
    
    (13,903
    )
    
    
    (3,747
    )
    
    
    
    
    
    
    (17,650
    )Other operating expenses
    
    
    (21,057
    )
    
    
    (7,551
    )
    
    
    
    
    
    
    (28,608
    )Commission income and other income (expense)
    
    
    96
    
    
    
    137
    
    
    
    
    
    
    
    233Underwriting profit
    
    
    11,146
    
    
    
    8,707
    
    
    
    
    
    
    
    19,853Net investment income
    
    
    14,440
    
    
    
    2,407
    
    
    $
    483
    
    
    
    17,330Net realized capital gains
    
    
    834
    
    
    
    6
    
    
    
    
    
    
    
    840Interest expense
    
    
    
    
    
    
    
    
    
    
    (2,215
    )
    
    
    (2,215
    )Income (loss) before income taxes
    
    
    26,420
    
    
    
    11,120
    
    
    
    (1,732
    )
    
    
    35,808Income tax expense (benefit)
    
    
    8,163
    
    
    
    3,875
    
    
    
    (605
    )
    
    
    11,433Net income (loss)
    
    $
    18,257
    
    
    $
    7,245
    
    
    $
    (1,127
    )
    
    $
    24,375Identifiable assets (1)
    
    $
    2,240,321
    
    
    $
    774,796
    
    
    $
    63,374
    
    
    $
    3,092,963Loss and LAE ratio
    
    
    58.1
    %
    
    
    44.6
    %
    
    
    
    
    
    
    54.8
    %Commission expense ratio
    
    
    12.7
    %
    
    
    10.4
    %
    
    
    
    
    
    
    12.1
    %Other operating expense ratio (2)
    
    
    19.0
    %
    
    
    20.6
    %
    
    
    
    
    
    
    19.5
    %Combined ratio
    
    
    89.8
    %
    
    
    75.6
    %
    
    
    
    
    
    
    86.4
    %
 (1)
    
    Includes inter-segment transactions causing the row not to crossfoot.(2)
    
    Includes other operating expensesand commission income and other income (expense).  14




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##### Table of Contents



Three Months Ended June 30, 2007Insurance
    
    
    LloydsCompanies
    
    
    Operations
    
    
    Total($ in thousands)Gross written premium:Marine & Energy
    
    $
    70,601
    
    
    $
    55,922
    
    
    $
    126,523Specialty
    
    
    91,398
    
    
    
    
    
    
    
    91,398Professional Liability
    
    
    24,351
    
    
    
    10,534
    
    
    
    34,885Middle Markets
    
    
    6,637
    
    
    
    
    
    
    
    6,637Property/Other
    
    
    5,573
    
    
    
    11,533
    
    
    
    17,106Total
    
    $
    198,560
    
    
    $
    77,989
    
    
    $
    276,549Net written premium:Marine & Energy
    
    $
    37,229
    
    
    $
    27,038
    
    
    $
    64,267Specialty
    
    
    62,490
    
    
    
    
    
    
    
    62,490Professional Liability
    
    
    14,767
    
    
    
    6,126
    
    
    
    20,893Middle Markets
    
    
    4,624
    
    
    
    
    
    
    
    4,624Property/Other
    
    
    4,963
    
    
    
    4,113
    
    
    
    9,076Total
    
    $
    124,073
    
    
    $
    37,277
    
    
    $
    161,350Net earned premium:Marine & Energy
    
    $
    34,005
    
    
    $
    30,005
    
    
    $
    64,010Specialty
    
    
    54,378
    
    
    
    
    
    
    
    54,378Professional Liability
    
    
    13,334
    
    
    
    1,954
    
    
    
    15,288Middle Markets
    
    
    4,539
    
    
    
    
    
    
    
    4,539Property/Other
    
    
    3,479
    
    
    
    3,923
    
    
    
    7,402Total
    
    $
    109,735
    
    
    $
    35,882
    
    
    $
    145,617
  15




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##### Table of Contents



Six Months Ended June 30, 2008Insurance
    
    
    LloydsCompanies
    
    
    Operations
    
    
    Corporate
    
    
    Total($ in thousands)Gross written premium
    
    $
    389,552
    
    
    $
    176,807
    
    
    
    
    
    
    $
    566,359Net written premium
    
    
    252,492
    
    
    
    109,517
    
    
    
    
    
    
    
    362,009Net earned premium
    
    
    229,680
    
    
    
    88,763
    
    
    
    
    
    
    
    318,443Net losses and LAE
    
    
    (129,581
    )
    
    
    (50,728
    )
    
    
    
    
    
    
    (180,309
    )Commission expense
    
    
    (27,671
    )
    
    
    (16,767
    )
    
    
    
    
    
    
    (44,438
    )Other operating expenses
    
    
    (46,700
    )
    
    
    (16,293
    )
    
    
    
    
    
    
    (62,993
    )Commission income and other income (expense)
    
    
    1,774
    
    
    
    (25
    )
    
    
    
    
    
    
    1,749Underwriting profit
    
    
    27,502
    
    
    
    4,950
    
    
    
    
    
    
    
    32,452Net investment income
    
    
    31,058
    
    
    
    5,853
    
    
    $
    658
    
    
    
    37,569Net realized capital gains (losses)
    
    
    (8,155
    )
    
    
    103
    
    
    
    
    
    
    
    (8,052
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (4,434
    )
    
    
    (4,434
    )Income (loss) before income taxes
    
    
    50,405
    
    
    
    10,906
    
    
    
    (3,776
    )
    
    
    57,535Income tax expense (benefit)
    
    
    14,309
    
    
    
    3,877
    
    
    
    (1,322
    )
    
    
    16,864Net income (loss)
    
    $
    36,096
    
    
    $
    7,029
    
    
    $
    (2,454
    )
    
    $
    40,671Identifiable assets (1)
    
    $
    2,383,898
    
    
    $
    773,572
    
    
    $
    68,413
    
    
    $
    3,245,500Loss and LAE ratio
    
    
    56.4
    %
    
    
    57.1
    %
    
    
    
    
    
    
    56.6
    %Commission expense ratio
    
    
    12.0
    %
    
    
    18.9
    %
    
    
    
    
    
    
    14.0
    %Other operating expense ratio (2)
    
    
    19.6
    %
    
    
    18.4
    %
    
    
    
    
    
    
    19.2
    %Combined ratio
    
    
    88.0
    %
    
    
    94.4
    %
    
    
    
    
    
    
    89.8
    %
 (1)
    
    Includes inter-segment transactions causing the row not to crossfoot.(2)
    
    Includes other operating expensesand commission income and other income (expense).  16




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##### Table of Contents



Six Months Ended June 30, 2008Insurance
    
    
    LloydsCompanies
    
    
    Operations
    
    
    Total($ in thousands)Gross written premium:Marine & Energy
    
    $
    160,531
    
    
    $
    134,825
    
    
    $
    295,356Specialty
    
    
    162,895
    
    
    
    
    
    
    
    162,895Professional Liability
    
    
    45,724
    
    
    
    19,069
    
    
    
    64,793Middle Markets
    
    
    15,758
    
    
    
    
    
    
    
    15,758Property/Other
    
    
    4,644
    
    
    
    22,913
    
    
    
    27,557Total
    
    $
    389,552
    
    
    $
    176,807
    
    
    $
    566,359Net written premium:Marine & Energy
    
    $
    94,794
    
    
    $
    90,799
    
    
    $
    185,593Specialty
    
    
    111,942
    
    
    
    
    
    
    
    111,942Professional Liability
    
    
    27,639
    
    
    
    11,873
    
    
    
    39,512Middle Markets
    
    
    13,778
    
    
    
    
    
    
    
    13,778Property/Other
    
    
    4,339
    
    
    
    6,845
    
    
    
    11,184Total
    
    $
    252,492
    
    
    $
    109,517
    
    
    $
    362,009Net earned premium:Marine & Energy
    
    $
    69,682
    
    
    $
    71,095
    
    
    $
    140,777Specialty
    
    
    113,243
    
    
    
    
    
    
    
    113,243Professional Liability
    
    
    28,461
    
    
    
    11,100
    
    
    
    39,561Middle Markets
    
    
    12,433
    
    
    
    
    
    
    
    12,433Property/Other
    
    
    5,861
    
    
    
    6,568
    
    
    
    12,429Total
    
    $
    229,680
    
    
    $
    88,763
    
    
    $
    318,443
  17




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##### Table of Contents



Six Months Ended June 30, 2007Insurance
    
    
    LloydsCompanies
    
    
    Operations
    
    
    Corporate
    
    
    Total($ in thousands)Gross written premium
    
    $
    407,434
    
    
    $
    169,976
    
    
    
    
    
    
    $
    577,410Net written premium
    
    
    246,121
    
    
    
    88,248
    
    
    
    
    
    
    
    334,369Net earned premium
    
    
    211,547
    
    
    
    73,116
    
    
    
    
    
    
    
    284,663Net losses and LAE
    
    
    (125,065
    )
    
    
    (35,866
    )
    
    
    
    
    
    
    (160,931
    )Commission expense
    
    
    (24,986
    )
    
    
    (9,763
    )
    
    
    
    
    
    
    (34,749
    )Other operating expenses
    
    
    (39,826
    )
    
    
    (15,071
    )
    
    
    
    
    
    
    (54,897
    )Commission income and other income (expense)
    
    
    585
    
    
    
    (15
    )
    
    
    
    
    
    
    570Underwriting profit
    
    
    22,255
    
    
    
    12,401
    
    
    
    
    
    
    
    34,656Net investment income
    
    
    28,094
    
    
    
    4,558
    
    
    $
    894
    
    
    
    33,546Net realized capital (losses)
    
    
    1,077
    
    
    
    (36
    )
    
    
    
    
    
    
    1,041Interest expense
    
    
    
    
    
    
    
    
    
    
    (4,430
    )
    
    
    (4,430
    )Income (loss) before income taxes
    
    
    51,426
    
    
    
    16,923
    
    
    
    (3,536
    )
    
    
    64,813Income tax expense (benefit)
    
    
    16,074
    
    
    
    5,929
    
    
    
    (1,237
    )
    
    
    20,766Net income (loss)
    
    $
    35,352
    
    
    $
    10,994
    
    
    $
    (2,299
    )
    
    $
    44,047Identifiable assets (1)
    
    $
    2,240,321
    
    
    $
    774,796
    
    
    $
    63,374
    
    
    $
    3,092,963Loss and LAE ratio
    
    
    59.1
    %
    
    
    49.1
    %
    
    
    
    
    
    
    56.5
    %Commission expense ratio
    
    
    11.8
    %
    
    
    13.4
    %
    
    
    
    
    
    
    12.2
    %Other operating expense ratio (2)
    
    
    18.6
    %
    
    
    20.5
    %
    
    
    
    
    
    
    19.1
    %Combined ratio
    
    
    89.5
    %
    
    
    83.0
    %
    
    
    
    
    
    
    87.8
    %
 (1)
    
    Includes inter-segment transactions causing the row not to crossfoot.(2)
    
    Includes other operating expensesand commission income and other income (expense).  18




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##### Table of Contents



Six Months Ended June 30, 2007Insurance
    
    
    LloydsCompanies
    
    
    Operations
    
    
    Total($ in thousands)Gross written premium:Marine & Energy
    
    $
    157,457
    
    
    $
    133,601
    
    
    $
    291,058Specialty
    
    
    180,815
    
    
    
    
    
    
    
    180,815Professional Liability
    
    
    44,833
    
    
    
    16,012
    
    
    
    60,845Middle Markets
    
    
    12,941
    
    
    
    
    
    
    
    12,941Property/Other
    
    
    11,388
    
    
    
    20,363
    
    
    
    31,751Total
    
    $
    407,434
    
    
    $
    169,976
    
    
    $
    577,410Net written premium:Marine & Energy
    
    $
    82,964
    
    
    $
    72,526
    
    
    $
    155,490Specialty
    
    
    117,076
    
    
    
    
    
    
    
    117,076Professional Liability
    
    
    26,959
    
    
    
    9,509
    
    
    
    36,468Middle Markets
    
    
    8,593
    
    
    
    
    
    
    
    8,593Property/Other
    
    
    10,529
    
    
    
    6,213
    
    
    
    16,742Total
    
    $
    246,121
    
    
    $
    88,248
    
    
    $
    334,369Net earned premium:Marine & Energy
    
    $
    67,494
    
    
    $
    62,346
    
    
    $
    129,840Specialty
    
    
    103,421
    
    
    
    
    
    
    
    103,421Professional Liability
    
    
    26,371
    
    
    
    4,911
    
    
    
    31,282Middle Markets
    
    
    9,109
    
    
    
    
    
    
    
    9,109Property/Other
    
    
    5,152
    
    
    
    5,859
    
    
    
    11,011Total
    
    $
    211,547
    
    
    $
    73,116
    
    
    $
    284,663
  Note 4. Comprehensive Income
 Consolidated Statements of Stockholders Equity Consolidated
Statements of Comprehensive Income accumulated other
comprehensive income (loss) comprehensive income (loss)
 Note 5. Stock-Based Compensation
 other operating expenses
  19




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##### Table of Contents



Note 6. Application of New Accounting Standards
 Business Combinations Business Combinations
 Noncontrolling Interests in Consolidated Financial
Statements
 Disclosures about Derivative Instruments and Hedging
Activities Accounting for Derivative Instruments and Hedging Activities
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles
 Note 7. Syndicate 1221
    20




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##### Table of Contents



Note 8. Income Taxes
     21




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##### Table of Contents



Note 9. Commitments and Contingencies
   Note 10. Senior Notes due May 1, 2016
   Note 11. Fair Value Measurements
 Fair Value Measurements
 
    
    Level 1  Quoted prices for identical instruments in active markets.
 
    
    Level 2  Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations in which all significant inputs and significant value
drivers are observable in active markets.
 
    
    Level 3  Valuations derived from valuation techniques in which one or more
significant inputs or significant value drivers are unobservable.
  22




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##### Table of Contents



Quoted Prices
    
    
    SignificantIn Active
    
    
    Other
    
    
    SignificantMarkets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    InputsLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total($ in thousands)Fixed maturities
    
    $
    177,161
    
    
    $
    1,412,419
    
    
    $
    986
    
    
    $
    1,590,566Equities securities
    
    
    68,089
    
    
    
    
    
    
    
    
    
    
    
    68,089Short-term investments
    
    
    143,631
    
    
    
    31,243
    
    
    
    
    
    
    
    174,874Total
    
    $
    388,881
    
    
    $
    1,443,662
    
    
    $
    986
    
    
    $
    1,833,529
  Three Months EndedJune 30, 2008($ in thousands)Level 3 investments as of April 1, 2008
    
    $
    2,073Unrealized net gains included in other comprehensive income (loss)
    
    
    (18
    )Purchases, sales, paydowns and amortization
    
    
    (134
    )Transfer to Level 2
    
    
    (935
    )Level 3 investments as of June 30, 2008
    
    $
    986
  23




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##### Table of Contents



Six Months EndedJune 30, 2008($ in thousands)Level 3 investments as of January 1, 2008
    
    $
    2,603Unrealized net gains included in other comprehensive income (loss)
    
    
    (1
    )Purchases, sales, paydowns and amortization
    
    
    (287
    )Transfer to Level 2
    
    
    (1,329
    )Level 3 investments as of June 30, 2008
    
    $
    986
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Investments
 Note 12. Share Repurchases
   24




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Note on Forward-Looking Statements
  
    
    the effects of domestic and foreign economic conditions, and conditions which
affect the market for property and casualty insurance;
 
    
    changes in the laws, rules and regulations which apply to our insurance
companies;
 
    
    the effects of emerging claim and coverage issues on our business, including
adverse judicial or regulatory decisions and rulings;
 
    
    the effects of competition from banks and other insurers and the trend toward
self-insurance;
 
    
    risks that we face in entering new markets and diversifying the products and
services we offer;
 
    
    unexpected turnover of our professional staff;
 
    
    changing legal and social trends and inherent uncertainties in the loss
estimation process that can adversely impact the adequacy of loss reserves and the
allowance for reinsurance recoverables, including our estimates relating to ultimate
asbestos liabilities and related reinsurance recoverables;
 
    
    risks inherent in the collection of reinsurance recoverable amounts from our
reinsurers over many years into the future based on the reinsurers financial ability
and intent to meet such obligations to the Company;
 
    
    risks associated with our continuing ability to obtain reinsurance covering our
exposures at appropriate prices and/or in sufficient amounts and the related
recoverability of our reinsured losses;
 
    
    weather-related events and other catastrophes (including acts of terrorism)
impacting our insureds and/or reinsurers, including, without limitation, the impact of
Hurricanes Katrina, Rita, and Wilma and the possibility that our estimates of losses
from Hurricanes Katrina, Rita and Wilma will prove to be materially inaccurate;
 
    
    our ability to attain adequate prices, obtain new business and retain existing
business consistent with our expectations and to successfully implement our business
strategy during soft as well as hard markets;
 
    
    our ability to maintain or improve our ratings to avoid the possibility of
downgrades in our claims-paying and financial strength ratings significantly adversely
affecting us, including reducing the number
of insurance policies we write generally, or causing clients who require an insurer with a
certain rating level to use higher-rated insurers;
  25




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##### Table of Contents




    
    the inability of our internal control framework to provide absolute assurance
that all incidents of fraud or unintended material errors will be detected and
prevented;
 
    
    changes in accounting principles or policies or in our application of such
accounting principles or policies;
 
    
    the risk that our investment portfolio suffers reduced returns or investment
losses which could reduce our profitability; and
 
    
    other risks that we identify in future filings with the Securities and Exchange
Commission (the SEC), including without limitation the risks described under the
caption Risk Factors in our Annual Report on Form 10-K for the year ended December
31, 2007.
  Overview
 The discussion and analysis of our financial condition and results of operations contained
herein should be read in conjunction with our consolidated financial statements and accompanying
notes which appear elsewhere in this Form 10-Q . It contains forward-looking statements that
involve risks and uncertainties. Please see Note on Forward-Looking Statements for more
information. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those discussed below and
elsewhere in this Form 10-Q .
   26




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##### Table of Contents



27




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##### Table of Contents



Catastrophe Risk Management
    28




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##### Table of Contents



Critical Accounting Policies
   Reserves for Losses and LAE.
 Reinsurance Recoverables.
  29




---



##### Table of Contents



Written and Unearned Premium.
   Deferred Tax Assets.
 Impairment of Invested Assets.
   30




---



##### Table of Contents



Accounting for Lloyds Results.
 Translation of Foreign Currencies . Foreign Currency
Translation, accumulated other comprehensive income
 other
income (expense)
 Results of Operations
   Investments
  31




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##### Table of Contents



Revenues .
   32




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##### Table of Contents



Three Months Ended June 30,2008
    
    
    2007Gross
    
    
    
    
    
    
    Net
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    Net
    
    
    NetWritten
    
    
    
    
    
    
    Written
    
    
    Earned
    
    
    Written
    
    
    
    
    
    
    Written
    
    
    EarnedPremium
    
    
    %
    
    
    Premium
    
    
    Premium
    
    
    Premium
    
    
    %
    
    
    Premium
    
    
    Premium($ in thousands)Insurance Companies:Marine
    
    $
    77,996
    
    
    
    27.9
    %
    
    $
    45,123
    
    
    $
    36,456
    
    
    $
    70,601
    
    
    
    25.5
    %
    
    $
    37,229
    
    
    $
    34,005Specialty
    
    
    84,013
    
    
    
    30.1
    %
    
    
    57,998
    
    
    
    56,574
    
    
    
    91,398
    
    
    
    33.1
    %
    
    
    62,490
    
    
    
    54,378Professional
Liability
    
    
    26,437
    
    
    
    9.5
    %
    
    
    15,906
    
    
    
    14,388
    
    
    
    24,351
    
    
    
    8.8
    %
    
    
    14,767
    
    
    
    13,334Middle Markets
    
    
    7,744
    
    
    
    2.8
    %
    
    
    7,252
    
    
    
    6,736
    
    
    
    6,637
    
    
    
    2.4
    %
    
    
    4,624
    
    
    
    4,539Property/Other
    
    
    1,766
    
    
    
    0.6
    %
    
    
    1,903
    
    
    
    3,280
    
    
    
    5,573
    
    
    
    2.0
    %
    
    
    4,963
    
    
    
    3,479Insurance
Companies
Total
    
    
    197,956
    
    
    
    70.9
    %
    
    
    128,182
    
    
    
    117,434
    
    
    
    198,560
    
    
    
    71.8
    %
    
    
    124,073
    
    
    
    109,735Lloyds Operations:Marine
    
    
    59,872
    
    
    
    21.4
    %
    
    
    38,297
    
    
    
    37,103
    
    
    
    55,922
    
    
    
    20.1
    %
    
    
    27,038
    
    
    
    30,005Professional
Liability
    
    
    8,399
    
    
    
    3.0
    %
    
    
    5,081
    
    
    
    5,141
    
    
    
    10,534
    
    
    
    3.8
    %
    
    
    6,126
    
    
    
    1,954Other
    
    
    12,986
    
    
    
    4.7
    %
    
    
    2,727
    
    
    
    3,025
    
    
    
    11,533
    
    
    
    4.3
    %
    
    
    4,113
    
    
    
    3,923Lloyds
Operations
Total
    
    
    81,257
    
    
    
    29.1
    %
    
    
    46,105
    
    
    
    45,269
    
    
    
    77,989
    
    
    
    28.2
    %
    
    
    37,277
    
    
    
    35,882Total
    
    $
    279,213
    
    
    
    100.0
    %
    
    $
    174,287
    
    
    $
    162,703
    
    
    $
    276,549
    
    
    
    100.0
    %
    
    $
    161,350
    
    
    $
    145,617
  33




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Six Months Ended June 30,2008
    
    
    2007Gross
    
    
    
    
    
    
    Net
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    Net
    
    
    NetWritten
    
    
    
    
    
    
    Written
    
    
    Earned
    
    
    Written
    
    
    
    
    
    
    Written
    
    
    EarnedPremium
    
    
    %
    
    
    Premium
    
    
    Premium
    
    
    Premium
    
    
    %
    
    
    Premium
    
    
    Premium($ in thousands)Insurance Companies:Marine
    
    $
    160,531
    
    
    
    28.3
    %
    
    $
    94,794
    
    
    $
    69,682
    
    
    $
    157,457
    
    
    
    27.3
    %
    
    $
    82,964
    
    
    $
    67,494Specialty
    
    
    162,895
    
    
    
    28.8
    %
    
    
    111,942
    
    
    
    113,243
    
    
    
    180,815
    
    
    
    31.3
    %
    
    
    117,076
    
    
    
    103,421Professional
Liability
    
    
    45,724
    
    
    
    8.1
    %
    
    
    27,639
    
    
    
    28,461
    
    
    
    44,833
    
    
    
    7.8
    %
    
    
    26,959
    
    
    
    26,371Middle Markets
    
    
    15,758
    
    
    
    2.8
    %
    
    
    13,778
    
    
    
    12,433
    
    
    
    12,941
    
    
    
    2.2
    %
    
    
    8,593
    
    
    
    9,109Other
    
    
    4,644
    
    
    
    0.8
    %
    
    
    4,339
    
    
    
    5,861
    
    
    
    11,388
    
    
    
    2.0
    %
    
    
    10,529
    
    
    
    5,152Insurance
Companies
Total
    
    
    389,552
    
    
    
    68.8
    %
    
    
    252,492
    
    
    
    229,680
    
    
    
    407,434
    
    
    
    70.6
    %
    
    
    246,121
    
    
    
    211,547Lloyds Operations:Marine
    
    
    134,825
    
    
    
    23.8
    %
    
    
    90,799
    
    
    
    71,095
    
    
    
    133,601
    
    
    
    23.1
    %
    
    
    72,526
    
    
    
    62,346Professional
Liability
    
    
    19,069
    
    
    
    3.4
    %
    
    
    11,873
    
    
    
    11,100
    
    
    
    16,012
    
    
    
    2.8
    %
    
    
    9,509
    
    
    
    4,911Other
    
    
    22,913
    
    
    
    4.0
    %
    
    
    6,845
    
    
    
    6,568
    
    
    
    20,363
    
    
    
    3.5
    %
    
    
    6,213
    
    
    
    5,859Lloyds
Operations
Total
    
    
    176,807
    
    
    
    31.2
    %
    
    
    109,517
    
    
    
    88,763
    
    
    
    169,976
    
    
    
    29.4
    %
    
    
    88,248
    
    
    
    73,116Total
    
    $
    566,359
    
    
    
    100.0
    %
    
    $
    362,009
    
    
    $
    318,443
    
    
    $
    577,410
    
    
    
    100.0
    %
    
    $
    334,369
    
    
    $
    284,663
  34




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##### Table of Contents



Gross Written Premium
 Insurance Companies Gross Written Premium
 Marine Premium.
 2008
    
    
    2007Marine liability
    
    
    30.0
    %
    
    
    30.5
    %Offshore energy
    
    
    15.3
    %
    
    
    20.3
    %P&I
    
    
    11.5
    %
    
    
    11.0
    %Cargo
    
    
    10.3
    %
    
    
    9.1
    %Transport
    
    
    7.7
    %
    
    
    7.3
    %Inland marine
    
    
    7.2
    %
    
    
    3.3
    %Other
    
    
    6.9
    %
    
    
    6.4
    %Bluewater hull
    
    
    5.8
    %
    
    
    6.7
    %Craft/Fishing vessel
    
    
    5.3
    %
    
    
    5.4
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
  Specialty Premium.
 2008
    
    
    2007Construction liability
    
    
    49.0
    %
    
    
    50.6
    %Commercial umbrella
    
    
    20.6
    %
    
    
    18.7
    %Programs
    
    
    13.5
    %
    
    
    10.2
    %Primary E&S
    
    
    11.6
    %
    
    
    11.8
    %Personal umbrella
    
    
    2.7
    %
    
    
    2.6
    %Liquor liability
    
    
    2.1
    %
    
    
    1.0
    %Monarch PAF
    
    
    0.5
    %
    
    
    0.6
    %Other
    
    
    0.0
    %
    
    
    4.5
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
   35




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##### Table of Contents



Professional Liability Premium.
 2008
    
    
    2007D&O (public and private)
    
    
    62.7
    %
    
    
    64.6
    %Lawyers and other professionals
    
    
    32.0
    %
    
    
    28.6
    %Architects and engineers
    
    
    5.3
    %
    
    
    6.8
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
  Middle Markets Premium.
  2008
    
    
    2007General liability
    
    
    48.4
    %
    
    
    55.1
    %Commercial automobile liability
    
    
    39.9
    %
    
    
    32.4
    %Property
    
    
    11.7
    %
    
    
    12.5
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
 Property/Other Premium.
 Lloyds Operations Gross Written Premium
    36




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##### Table of Contents



Marine Premium.
 2008
    
    
    2007Cargo and specie
    
    
    31.8
    %
    
    
    34.1
    %Marine liability
    
    
    29.5
    %
    
    
    21.8
    %Offshore energy
    
    
    19.4
    %
    
    
    24.0
    %Assumed reinsurance
    
    
    8.6
    %
    
    
    14.1
    %Hull
    
    
    7.6
    %
    
    
    5.2
    %Other
    
    
    3.1
    %
    
    
    0.8
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
  Professional Liability Premium.
 2008
    
    
    2007E&O
    
    
    67.8
    %
    
    
    54.3
    %D&O (public and private)
    
    
    32.2
    %
    
    
    45.7
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
  Property/Other Premium.
 Ceded Written Premium .
  37




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##### Table of Contents



Three Months Ended June 30,2008
    
    
    2007% of
    
    
    
    
    
    
    % ofCeded
    
    
    Gross
    
    
    Ceded
    
    
    GrossWritten
    
    
    Written
    
    
    Written
    
    
    WrittenPremium
    
    
    Premium
    
    
    Premium
    
    
    Premium($ in thousands)Insurance Companies:Marine
    
    $
    32,873
    
    
    
    42.1
    %
    
    $
    33,372
    
    
    
    47.3
    %Specialty
    
    
    26,015
    
    
    
    31.0
    %
    
    
    28,908
    
    
    
    31.6
    %Professional Liability
    
    
    10,531
    
    
    
    39.8
    %
    
    
    9,584
    
    
    
    39.4
    %Middle Markets
    
    
    492
    
    
    
    6.4
    %
    
    
    2,013
    
    
    
    30.3
    %Property/Other
    
    
    (137
    )
    
    
    -7.8
    %
    
    
    610
    
    
    
    10.9
    %Subtotal
    
    
    69,774
    
    
    
    35.2
    %
    
    
    74,487
    
    
    
    37.5
    %Lloyds Operations:Marine
    
    
    21,575
    
    
    
    36.0
    %
    
    
    28,884
    
    
    
    51.7
    %Professional Liability
    
    
    3,318
    
    
    
    39.5
    %
    
    
    4,408
    
    
    
    41.8
    %Property/Other
    
    
    10,259
    
    
    
    79.0
    %
    
    
    7,420
    
    
    
    64.3
    %Subtotal
    
    
    35,152
    
    
    
    43.3
    %
    
    
    40,712
    
    
    
    52.2
    %Total
    
    $
    104,926
    
    
    
    37.6
    %
    
    $
    115,199
    
    
    
    41.7
    %
  38




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##### Table of Contents



Six Months Ended June 30,2008
    
    
    2007% of
    
    
    
    
    
    
    % ofCeded
    
    
    Gross
    
    
    Ceded
    
    
    GrossWritten
    
    
    Written
    
    
    Written
    
    
    WrittenPremium
    
    
    Premium
    
    
    Premium
    
    
    Premium($ in thousands)Insurance Companies:Marine
    
    $
    65,737
    
    
    
    40.9
    %
    
    $
    74,493
    
    
    
    47.3
    %Specialty
    
    
    50,953
    
    
    
    31.3
    %
    
    
    63,739
    
    
    
    35.3
    %Professional Liability
    
    
    18,085
    
    
    
    39.6
    %
    
    
    17,874
    
    
    
    39.9
    %Middle Markets
    
    
    1,980
    
    
    
    12.6
    %
    
    
    4,348
    
    
    
    33.6
    %Property/Other
    
    
    305
    
    
    
    6.6
    %
    
    
    859
    
    
    
    7.5
    %Subtotal
    
    
    137,060
    
    
    
    35.2
    %
    
    
    161,313
    
    
    
    39.6
    %Lloyds Operations:Marine
    
    
    44,026
    
    
    
    32.7
    %
    
    
    61,075
    
    
    
    45.7
    %Professional Liability
    
    
    7,196
    
    
    
    37.7
    %
    
    
    6,503
    
    
    
    40.6
    %Property/Other
    
    
    16,068
    
    
    
    70.1
    %
    
    
    14,150
    
    
    
    69.5
    %Subtotal
    
    
    67,290
    
    
    
    38.1
    %
    
    
    81,728
    
    
    
    48.1
    %Total
    
    $
    204,350
    
    
    
    36.1
    %
    
    $
    243,041
    
    
    
    42.1
    %
  
    
    Restructuring of the marine quota share treaties for the Insurance Companies and the
Lloyds Operations resulting in a large reduction in ceded premium.
 
    
    An increased retention from $0.5 million to $1.0 million effective April 1, 2007 for the
contractors liability business which reduced the amount of premium ceded.
 
    
    A reduction of $1.4 million of ceded written premium in the 2008 second quarter as a result
of a rescission of a reinsurers participation on an excess of loss treaty for middle markets
business.
 
    
    The elimination of a 5% reinsurer participation in our Syndicate 1221 2008 stamp capacity.
 Net Written Premium .
 Net Earned Premium .
 Commission Income .
  39




---



##### Table of Contents



Net Investment Income .
 Net Realized Capital Gains and Losses .
 Other Income/(Expense) .
 Operating Expenses
 Net Losses and Loss Adjustment Expenses Incurred
     40




---



##### Table of Contents



June 30,
    
    
    December 31,2008
    
    
    2007
    
    
    Change($ in thousands)Reinsurance recoverables:Paid losses
    
    $
    78,087
    
    
    $
    94,818
    
    
    $
    (16,731
    )Unpaid losses and LAE reserves
    
    
    778,715
    
    
    
    801,461
    
    
    
    (22,746
    )Total
    
    $
    856,802
    
    
    $
    896,279
    
    
    $
    (39,477
    )
  June 30,
    
    
    December 31,2008
    
    
    2007
    
    
    Change($ in thousands)Gross reserves for losses and LAE
    
    $
    1,707,101
    
    
    $
    1,648,764
    
    
    
    3.5
    %Less: Reinsurance recoverable on unpaid
losses and LAE reserves
    
    
    778,715
    
    
    
    801,461
    
    
    
    -2.8
    %Net loss and LAE reserves
    
    $
    928,386
    
    
    $
    847,303
    
    
    
    9.6
    %
   41




---



##### Table of Contents



June 30, 2008Net
    
    
    Net
    
    
    Total
    
    
    % of IBNRReported
    
    
    IBNR
    
    
    Net Loss
    
    
    to Total NetReserves
    
    
    Reserves
    
    
    Reserves
    
    
    Loss Reserves($ in thousands)Insurance Companies:Marine
    
    $
    104,796
    
    
    $
    108,502
    
    
    $
    213,298
    
    
    
    50.9
    %SpecialtyConstruction
Liability
    
    
    42,028
    
    
    
    223,057
    
    
    
    265,085
    
    
    
    84.1
    %All other
liability
    
    
    22,496
    
    
    
    71,545
    
    
    
    94,041
    
    
    
    76.1
    %Total
Specialty
    
    
    64,524
    
    
    
    294,602
    
    
    
    359,126
    
    
    
    82.0
    %Professional
Liability
    
    
    22,383
    
    
    
    55,936
    
    
    
    78,319
    
    
    
    71.4
    %Middle Markets
    
    
    12,055
    
    
    
    12,681
    
    
    
    24,736
    
    
    
    51.3
    %Property/Other
    
    
    10,870
    
    
    
    9,827
    
    
    
    20,697
    
    
    
    47.5
    %Total
Insurance
Companies
    
    
    214,628
    
    
    
    481,548
    
    
    
    696,176
    
    
    
    69.2
    %Lloyds Operations:Marine
    
    
    104,679
    
    
    
    89,886
    
    
    
    194,565
    
    
    
    46.2
    %Other
    
    
    12,238
    
    
    
    25,407
    
    
    
    37,645
    
    
    
    67.5
    %Total
Lloyds
Operations
    
    
    116,917
    
    
    
    115,293
    
    
    
    232,210
    
    
    
    49.7
    %Total
Company
    
    $
    331,545
    
    
    $
    596,841
    
    
    $
    928,386
    
    
    
    64.3
    %
  42




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##### Table of Contents



December 31, 2007Net
    
    
    Net
    
    
    Total
    
    
    % of IBNRReported
    
    
    IBNR
    
    
    Net Loss
    
    
    to Total NetReserves
    
    
    Reserves
    
    
    Reserves
    
    
    Loss Reserves($ in thousands)Insurance Companies:Marine
    
    $
    93,467
    
    
    $
    103,500
    
    
    $
    196,967
    
    
    
    52.5
    %SpecialtyConstruction Liability
    
    
    36,137
    
    
    
    213,453
    
    
    
    249,590
    
    
    
    85.5
    %All other liability
    
    
    17,139
    
    
    
    55,032
    
    
    
    72,171
    
    
    
    76.3
    %Total Specialty
    
    
    53,276
    
    
    
    268,485
    
    
    
    321,761
    
    
    
    83.4
    %Professional Liability
    
    
    20,335
    
    
    
    50,584
    
    
    
    70,919
    
    
    
    71.3
    %Middle Markets
    
    
    11,469
    
    
    
    10,329
    
    
    
    21,798
    
    
    
    47.4
    %Property/Other
    
    
    12,790
    
    
    
    11,446
    
    
    
    24,236
    
    
    
    47.2
    %Total Insurance Companies
    
    
    191,337
    
    
    
    444,344
    
    
    
    635,681
    
    
    
    69.9
    %Lloyds Operations:Marine
    
    
    89,957
    
    
    
    93,069
    
    
    
    183,026
    
    
    
    50.9
    %Other
    
    
    7,485
    
    
    
    21,111
    
    
    
    28,596
    
    
    
    73.8
    %Total Lloyds Operations
    
    
    97,442
    
    
    
    114,180
    
    
    
    211,622
    
    
    
    54.0
    %Total Company
    
    $
    288,779
    
    
    $
    558,524
    
    
    $
    847,303
    
    
    
    65.9
    %
      43




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##### Table of Contents



Asbestos Liability.
     44




---



##### Table of Contents



Six Months Ended
    
    
    Year EndedJune 30, 2008
    
    
    December 31, 2007($ in thousands)Gross of ReinsuranceBeginning gross reserves
    
    $
    23,194
    
    
    $
    37,171Incurred losses & LAE
    
    
    594
    
    
    
    (780
    )Calendar year payments
    
    
    (2,238
    )
    
    
    13,197Ending gross reserves
    
    $
    26,026
    
    
    $
    23,194Gross case loss reserves
    
    $
    18,170
    
    
    $
    16,014Gross IBNR loss reserves
    
    
    7,856
    
    
    
    7,180Ending gross reserves
    
    $
    26,026
    
    
    $
    23,194Net of ReinsuranceBeginning net reserves
    
    $
    16,717
    
    
    $
    21,381Incurred losses & LAE
    
    
    570
    
    
    
    1,779Calendar year payments
    
    
    (1,350
    )
    
    
    6,443Ending net reserves
    
    $
    18,637
    
    
    $
    16,717Net case loss reserves
    
    $
    10,986
    
    
    $
    9,715Net IBNR loss reserves
    
    
    7,651
    
    
    
    7,002Ending net reserves
    
    $
    18,637
    
    
    $
    16,717
    Hurricanes Katrina and Rita.
  45




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##### Table of Contents



Six Months Ended
    
    
    Year EndedJune 30, 2008
    
    
    December 31, 2007($ in thousands)Gross of ReinsuranceBeginning gross reserves
    
    $
    141,831
    
    
    $
    319,230Incurred loss & LAE
    
    
    125
    
    
    
    (29,349
    )Calendar year payments
    
    
    12,929
    
    
    
    148,050Ending gross reserves
    
    $
    129,027
    
    
    $
    141,831Gross case loss reserves
    
    $
    82,669
    
    
    $
    94,959Gross IBNR loss reserves
    
    
    46,358
    
    
    
    46,872Ending gross reserves
    
    $
    129,027
    
    
    $
    141,831Net of ReinsuranceBeginning net reserves
    
    $
    4,519
    
    
    $
    10,003Incurred loss & LAE
    
    
    (476
    )
    
    
    (1,909
    )Calendar year payments
    
    
    (373
    )
    
    
    3,575Ending net reserves
    
    $
    4,416
    
    
    $
    4,519Net case loss reserves
    
    $
    340
    
    
    $
    646Net IBNR loss reserves
    
    
    4,076
    
    
    
    3,873Ending net reserves
    
    $
    4,416
    
    
    $
    4,519
   46




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##### Table of Contents



Professional Liability Subprime Exposure.
 Number
    
    
    Average
    
    
    Average
    
    
    Averageof
    
    
    Gross
    
    
    Net
    
    
    ExcessClaims (1)
    
    
    Limit
    
    
    Limit (2)
    
    
    Attachment($ in thousands)Primary:D&O
Securities/Other
Claims
    
    
    1
    
    
    $
    1,000
    
    
    $
    650Excess:D&O Securities
Claims
    
    
    4
    
    
    
    7,500
    
    
    
    4,500
    
    
    $
    37,500D&O Side A
Securities Claims
    
    
    2
    
    
    
    5,000
    
    
    
    3,500
    
    
    
    137,500Other Claims
    
    
    2
    
    
    
    10,000
    
    
    
    5,500
    
    
    
    35,000Subtotal
Excess/Average
    
    
    8
    
    
    
    7,500
    
    
    
    4,500Total
    
    
    9
    
    
    $
    6,778
    
    
    $
    4,072
 (1)
    
    Claims include all professional liability policies written by the Insurance
Companies. There are no reported claims or notices of potential claims reported for the
Lloyds Operations. All policies are claims made. Defense costs are included within the
limits of liability. There was one new claim/ notice of potential claim reported for the
six months ended June 30, 2008.(2)
    
    Amounts are net of reinsurance. Prior Year Reserve Redundancies/Deficiencies
    47




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##### Table of Contents



Three Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007($ in thousands)Insurance Companies:Marine
    
    $
    (5,679
    )
    
    $
    49Specialty
    
    
    (3,136
    )
    
    
    (3,978
    )Professional Liability
    
    
    (911
    )
    
    
    (2,084
    )Middle Markets
    
    
    (500
    )
    
    
    Property/Other
    
    
    (1,426
    )
    
    
    522Subtotal Insurance Companies
    
    
    (11,652
    )
    
    
    (5,491
    )Lloyds Operations
    
    
    1,072
    
    
    
    (5,126
    )Total
    
    $
    (10,580
    )
    
    $
    (10,617
    )
 Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007($ in thousands)Insurance Companies:Marine
    
    $
    (5,979
    )
    
    $
    (1,451
    )Specialty
    
    
    (10,436
    )
    
    
    (6,178
    )Professional Liability
    
    
    (1,211
    )
    
    
    (4,084
    )Middle Markets
    
    
    700
    
    
    
    Property/Other
    
    
    (3,226
    )
    
    
    522Subtotal Insurance Companies
    
    
    (20,152
    )
    
    
    (11,191
    )Lloyds Operations
    
    
    (4,108
    )
    
    
    (6,226
    )Total
    
    $
    (24,260
    )
    
    $
    (17,417
    )
     48




---



##### Table of Contents



49




---



##### Table of Contents



Commission Expense.
 Other Operating Expenses.
 Income Taxes
   50




---



##### Table of Contents



Accounting for Uncertainty in Income
Taxes
 Segment Information
     Insurance Companies
   51




---



##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007($ in thousands)Gross written
premium
    
    $
    197,956
    
    
    $
    198,560
    
    
    $
    389,552
    
    
    $
    407,434Net written premium
    
    
    128,182
    
    
    
    124,073
    
    
    
    252,492
    
    
    
    246,121Net earned premium
    
    
    117,434
    
    
    
    109,735
    
    
    
    229,680
    
    
    
    211,547Net losses and LAE
    
    
    (62,225
    )
    
    
    (63,725
    )
    
    
    (129,581
    )
    
    
    (125,065
    )Commission expense
    
    
    (14,723
    )
    
    
    (13,903
    )
    
    
    (27,671
    )
    
    
    (24,986
    )Other operating
expenses
    
    
    (24,552
    )
    
    
    (21,057
    )
    
    
    (46,700
    )
    
    
    (39,826
    )Commission income
and other income
(expense)
    
    
    1,516
    
    
    
    96
    
    
    
    1,774
    
    
    
    585Underwriting profit
    
    
    17,450
    
    
    
    11,146
    
    
    
    27,502
    
    
    
    22,255Net investment
income
    
    
    15,593
    
    
    
    14,440
    
    
    
    31,058
    
    
    
    28,094Net realized
capital gains
(losses)
    
    
    (8,053
    )
    
    
    834
    
    
    
    (8,155
    )
    
    
    1,077Income before
income taxes
    
    
    24,990
    
    
    
    26,420
    
    
    
    50,405
    
    
    
    51,426Income tax expense
    
    
    6,939
    
    
    
    8,163
    
    
    
    14,309
    
    
    
    16,074Net income
    
    $
    18,051
    
    
    $
    18,257
    
    
    $
    36,096
    
    
    $
    35,352Loss and LAE ratio
    
    
    53.0
    %
    
    
    58.1
    %
    
    
    56.4
    %
    
    
    59.1
    %Commission expense
ratio
    
    
    12.5
    %
    
    
    12.7
    %
    
    
    12.0
    %
    
    
    11.8
    %Other operating
expense ratio
(1)
    
    
    19.6
    %
    
    
    19.0
    %
    
    
    19.6
    %
    
    
    18.6
    %Combined ratio
    
    
    85.1
    %
    
    
    89.8
    %
    
    
    88.0
    %
    
    
    89.5
    %
 (1)
    
    Includes other operating expenses and commission income and other income
(expense).  52




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##### Table of Contents



Three Months Ended June 30, 2008($ in thousands)Net
    
    
    LossesEarned
    
    
    and LAE
    
    
    Underwriting
    
    
    Underwriting
    
    
    Loss
    
    
    Expense
    
    
    CombinedPremium
    
    
    Incurred
    
    
    Expenses
    
    
    Profit/(Loss)
    
    
    Ratio
    
    
    Ratio
    
    
    RatioMarine & Energy
    
    $
    36,456
    
    
    $
    17,497
    
    
    $
    12,194
    
    
    $
    6,765
    
    
    
    48.0
    %
    
    
    33.4
    %
    
    
    81.4
    %Specialty
    
    
    56,574
    
    
    
    33,614
    
    
    
    16,685
    
    
    
    6,275
    
    
    
    59.4
    %
    
    
    29.5
    %
    
    
    88.9
    %Professional
Liability
    
    
    14,388
    
    
    
    7,374
    
    
    
    5,020
    
    
    
    1,994
    
    
    
    51.3
    %
    
    
    34.9
    %
    
    
    86.2
    %Middle Markets
    
    
    6,736
    
    
    
    3,719
    
    
    
    2,751
    
    
    
    266
    
    
    
    55.2
    %
    
    
    40.8
    %
    
    
    96.0
    %Property/Other
    
    
    3,280
    
    
    
    21
    
    
    
    1,109
    
    
    
    2,150
    
    
    
    0.6
    %
    
    
    33.8
    %
    
    
    34.4
    %Total
    
    $
    117,434
    
    
    $
    62,225
    
    
    $
    37,759
    
    
    $
    17,450
    
    
    
    53.0
    %
    
    
    32.1
    %
    
    
    85.1
    %
 Three Months Ended June 30, 2007($ in thousands)Net
    
    
    LossesEarned
    
    
    and LAE
    
    
    Underwriting
    
    
    Underwriting
    
    
    Loss
    
    
    Expense
    
    
    CombinedPremium
    
    
    Incurred
    
    
    Expenses
    
    
    Profit/(Loss)
    
    
    Ratio
    
    
    Ratio
    
    
    RatioMarine & Energy
    
    $
    34,005
    
    
    $
    17,913
    
    
    $
    12,340
    
    
    $
    3,752
    
    
    
    52.7
    %
    
    
    36.3
    %
    
    
    89.0
    %Specialty
    
    
    54,378
    
    
    
    31,261
    
    
    
    14,317
    
    
    
    8,800
    
    
    
    57.5
    %
    
    
    26.3
    %
    
    
    83.8
    %Professional
Liability
    
    
    13,334
    
    
    
    7,741
    
    
    
    5,330
    
    
    
    263
    
    
    
    58.1
    %
    
    
    39.9
    %
    
    
    98.0
    %Middle Markets
    
    
    4,539
    
    
    
    2,045
    
    
    
    1,723
    
    
    
    771
    
    
    
    45.1
    %
    
    
    38.0
    %
    
    
    83.1
    %Property/Other
    
    
    3,479
    
    
    
    4,765
    
    
    
    1,154
    
    
    
    (2,440
    )
    
    
    137.0
    %
    
    
    33.2
    %
    
    
    170.2
    %Total
    
    $
    109,735
    
    
    $
    63,725
    
    
    $
    34,864
    
    
    $
    11,146
    
    
    
    58.1
    %
    
    
    31.7
    %
    
    
    89.8
    %
  53




---



##### Table of Contents



Six Months Ended June 30, 2008($ in thousands)Net
    
    
    LossesEarned
    
    
    and LAE
    
    
    Underwriting
    
    
    Underwriting
    
    
    Loss
    
    
    Expense
    
    
    CombinedPremium
    
    
    Incurred
    
    
    Expenses
    
    
    Profit/(Loss)
    
    
    Ratio
    
    
    Ratio
    
    
    RatioMarine & Energy
    
    $
    69,682
    
    
    $
    41,868
    
    
    $
    23,256
    
    
    $
    4,558
    
    
    
    60.1
    %
    
    
    33.4
    %
    
    
    93.5
    %Specialty
    
    
    113,243
    
    
    
    63,094
    
    
    
    32,183
    
    
    
    17,966
    
    
    
    55.7
    %
    
    
    28.4
    %
    
    
    84.1
    %Professional Liability
    
    
    28,461
    
    
    
    16,279
    
    
    
    10,118
    
    
    
    2,064
    
    
    
    57.2
    %
    
    
    35.6
    %
    
    
    92.8
    %Middle Markets
    
    
    12,433
    
    
    
    8,003
    
    
    
    4,740
    
    
    
    (310
    )
    
    
    64.4
    %
    
    
    38.1
    %
    
    
    102.5
    %Property/Other
    
    
    5,861
    
    
    
    337
    
    
    
    2,300
    
    
    
    3,224
    
    
    
    5.8
    %
    
    
    39.2
    %
    
    
    45.0
    %Total
    
    $
    229,680
    
    
    $
    129,581
    
    
    $
    72,597
    
    
    $
    27,502
    
    
    
    56.4
    %
    
    
    31.6
    %
    
    
    88.0
    %
 Six Months Ended June 30, 2007($ in thousands)Net
    
    
    LossesEarned
    
    
    and LAE
    
    
    Underwriting
    
    
    Underwriting
    
    
    Loss
    
    
    Expense
    
    
    CombinedPremium
    
    
    Incurred
    
    
    Expenses
    
    
    Profit/(Loss)
    
    
    Ratio
    
    
    Ratio
    
    
    RatioMarine & Energy
    
    $
    67,494
    
    
    $
    38,235
    
    
    $
    20,114
    
    
    $
    9,145
    
    
    
    56.6
    %
    
    
    29.8
    %
    
    
    86.4
    %Specialty
    
    
    103,421
    
    
    
    60,288
    
    
    
    29,195
    
    
    
    13,938
    
    
    
    58.3
    %
    
    
    28.2
    %
    
    
    86.5
    %Professional Liability
    
    
    26,371
    
    
    
    16,225
    
    
    
    9,653
    
    
    
    493
    
    
    
    61.5
    %
    
    
    36.5
    %
    
    
    98.0
    %Middle Markets
    
    
    9,109
    
    
    
    4,785
    
    
    
    3,336
    
    
    
    988
    
    
    
    52.5
    %
    
    
    36.6
    %
    
    
    89.1
    %Property/Other
    
    
    5,152
    
    
    
    5,532
    
    
    
    1,929
    
    
    
    (2,309
    )
    
    
    107.4
    %
    
    
    37.4
    %
    
    
    144.8
    %Total
    
    $
    211,547
    
    
    $
    125,065
    
    
    $
    64,227
    
    
    $
    22,255
    
    
    
    59.1
    %
    
    
    30.4
    %
    
    
    89.5
    %
      54




---



##### Table of Contents



Lloyds Operations
    Liquidity and Capital
Resources
   55




---



##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007($ in thousands)Gross written premium
    
    $
    81,257
    
    
    $
    77,989
    
    
    $
    176,807
    
    
    $
    169,976Net written premium
    
    
    46,105
    
    
    
    37,277
    
    
    
    109,517
    
    
    
    88,248Net earned premium
    
    
    45,269
    
    
    
    35,882
    
    
    
    88,763
    
    
    
    73,116Net losses and LAE
    
    
    (29,664
    )
    
    
    (16,014
    )
    
    
    (50,728
    )
    
    
    (35,866
    )Commission expense
    
    
    (8,767
    )
    
    
    (3,747
    )
    
    
    (16,767
    )
    
    
    (9,763
    )Other operating expenses
    
    
    (8,685
    )
    
    
    (7,551
    )
    
    
    (16,293
    )
    
    
    (15,071
    )Commission income and other income (expense)
    
    
    (39
    )
    
    
    137
    
    
    
    (25
    )
    
    
    (15
    )Underwriting profit
    
    
    (1,886
    )
    
    
    8,707
    
    
    
    4,950
    
    
    
    12,401Net investment income
    
    
    2,871
    
    
    
    2,407
    
    
    
    5,853
    
    
    
    4,558Net realized capital gains (losses)
    
    
    77
    
    
    
    6
    
    
    
    103
    
    
    
    (36
    )Income before income taxes
    
    
    1,062
    
    
    
    11,120
    
    
    
    10,906
    
    
    
    16,923Income tax expense
    
    
    425
    
    
    
    3,875
    
    
    
    3,877
    
    
    
    5,929Net income
    
    $
    637
    
    
    $
    7,245
    
    
    $
    7,029
    
    
    $
    10,994Loss and LAE ratio
    
    
    65.5
    %
    
    
    44.6
    %
    
    
    57.1
    %
    
    
    49.1
    %Commission expense ratio
    
    
    19.4
    %
    
    
    10.4
    %
    
    
    18.9
    %
    
    
    13.4
    %Other operating expense ratio (1)
    
    
    19.3
    %
    
    
    20.6
    %
    
    
    18.4
    %
    
    
    20.5
    %Combined ratio
    
    
    104.2
    %
    
    
    75.6
    %
    
    
    94.4
    %
    
    
    83.0
    %
 (1)
    
    Includes other operating expensesand commission income and other income
(expense).    56




---



##### Table of Contents



Off-Balance Sheet Transactions
  Tabular Disclosure of Contractual Obligations
   Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 Years($ in thousands)7% Senior Notes
    
    $
    195,000
    
    
    $
    8,750
    
    
    $
    17,500
    
    
    $
    17,500
    
    
    $
    151,250
 Investments
    57




---



##### Table of Contents




    
    Level 1  Quoted prices for identical instruments in active markets. Examples
are listed equity and fixed income securities traded on an exchange. Treasury
securities would generally be considered level 1.
 
    
    Level 2  Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations in which all significant inputs and significant value
drivers are observable in active markets. Examples are ABS and MBS securities which
are similar to other ABS or MBS securities observed in the market.
 
    
    Level 3  Valuations derived from valuation techniques in which one or more
significant inputs or significant value drivers are unobservable. An example would
be a private placement with minimal liquidity.
   58




---



##### Table of Contents



Quoted Prices
    
    
    SignificantIn Active
    
    
    Other
    
    
    SignificantMarkets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    InputsLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total($ in thousands)Fixed maturities
    
    $
    177,161
    
    
    $
    1,412,419
    
    
    $
    986
    
    
    $
    1,590,566Equities securities
    
    
    68,089
    
    
    
    
    
    
    
    
    
    
    
    68,089Short-term investments
    
    
    143,631
    
    
    
    31,243
    
    
    
    
    
    
    
    174,874Total
    
    $
    388,881
    
    
    $
    1,443,662
    
    
    $
    986
    
    
    $
    1,833,529
   Three Months EndedJune 30, 2008($ in thousands)Level 3 investments as of April 1, 2008
    
    $
    2,073Unrealized net gains included in other comprehensive income (loss)
    
    
    (18
    )Purchases, sales, paydowns and amortization
    
    
    (134
    )Transfer to Level 2
    
    
    (935
    )Level 3 investments as of June 30, 2008
    
    $
    986
  Six Months EndedJune 30, 2008($ in thousands)Level 3 investments as of January 1, 2008
    
    $
    2,603Unrealized net gains included in other comprehensive income (loss)
    
    
    (1
    )Purchases, sales, paydowns and amortization
    
    
    (287
    )Transfer to Level 2
    
    
    (1,329
    )Level 3 investments as of June 30, 2008
    
    $
    986
  59




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##### Table of Contents



Gross
    
    
    Gross
    
    
    Cost orFair
    
    
    Unrealized
    
    
    Unrealized
    
    
    AmortizedJune 30, 2008
    
    Value
    
    
    Gains
    
    
    (Losses)
    
    
    Cost($ in thousands)Fixed maturities:U.S. Government Treasury Bonds,
GNMAs and foreign government bonds
    
    $
    237,360
    
    
    $
    5,444
    
    
    $
    (471
    )
    
    $
    232,387States, municipalities and political
subdivisions
    
    
    612,577
    
    
    
    4,007
    
    
    
    (4,952
    )
    
    
    613,522Mortgage- and asset-backed securities:Non-guaranteed government agency bonds
    
    
    28,711
    
    
    
    373
    
    
    
    (58
    )
    
    
    28,396Mortgage-backed securities
    
    
    235,304
    
    
    
    709
    
    
    
    (1,955
    )
    
    
    236,550Collateralized mortgage obligations
    
    
    114,005
    
    
    
    404
    
    
    
    (8,074
    )
    
    
    121,675Asset-backed securities
    
    
    51,868
    
    
    
    504
    
    
    
    (249
    )
    
    
    51,613Commercial mortgage-backed securities
    
    
    108,168
    
    
    
    67
    
    
    
    (5,229
    )
    
    
    113,330Subtotal
    
    
    538,056
    
    
    
    2,057
    
    
    
    (15,565
    )
    
    
    551,564Corporate bonds
    
    
    202,573
    
    
    
    1,210
    
    
    
    (5,203
    )
    
    
    206,566Total fixed maturities
    
    
    1,590,566
    
    
    
    12,718
    
    
    
    (26,191
    )
    
    
    1,604,039Equity securities  common stocks
    
    
    68,089
    
    
    
    3,407
    
    
    
    (5,496
    )
    
    
    70,178Cash
    
    
    14,499
    
    
    
    
    
    
    
    
    
    
    
    14,499Short-term investments
    
    
    174,874
    
    
    
    
    
    
    
    
    
    
    
    174,874Total
    
    $
    1,848,028
    
    
    $
    16,125
    
    
    $
    (31,687
    )
    
    $
    1,863,590
 Gross
    
    
    Gross
    
    
    Cost orFair
    
    
    Unrealized
    
    
    Unrealized
    
    
    AmortizedDecember 31, 2007
    
    Value
    
    
    Gains
    
    
    (Losses)
    
    
    Cost($ in thousands)Fixed maturities:U.S. Government Treasury Bonds,
GNMAs and foreign government bonds
    
    $
    234,375
    
    
    $
    5,724
    
    
    $
    (337
    )
    
    $
    228,988States, municipalities and political
subdivisions
    
    
    515,883
    
    
    
    7,050
    
    
    
    (657
    )
    
    
    509,490Mortgage- and asset-backed securities:Non-guaranteed government agency bonds
    
    
    29,818
    
    
    
    342
    
    
    
    (4
    )
    
    
    29,480Mortgage-backed securities
    
    
    232,869
    
    
    
    1,824
    
    
    
    (479
    )
    
    
    231,524Collateralized mortgage obligations
    
    
    134,899
    
    
    
    524
    
    
    
    (823
    )
    
    
    135,198Asset-backed securities
    
    
    64,352
    
    
    
    533
    
    
    
    (79
    )
    
    
    63,898Commercial mortgage-backed securities
    
    
    113,488
    
    
    
    544
    
    
    
    (1,031
    )
    
    
    113,975Subtotal
    
    
    575,426
    
    
    
    3,767
    
    
    
    (2,416
    )
    
    
    574,075Corporate bonds
    
    
    196,636
    
    
    
    2,504
    
    
    
    (1,804
    )
    
    
    195,936Total fixed maturities
    
    
    1,522,320
    
    
    
    19,045
    
    
    
    (5,214
    )
    
    
    1,508,489Equity securities  common stocks
    
    
    67,240
    
    
    
    6,452
    
    
    
    (4,704
    )
    
    
    65,492Cash
    
    
    7,056
    
    
    
    
    
    
    
    
    
    
    
    7,056Short-term investments
    
    
    170,685
    
    
    
    
    
    
    
    
    
    
    
    170,685Total
    
    $
    1,767,301
    
    
    $
    25,497
    
    
    $
    (9,918
    )
    
    $
    1,751,722
   60




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##### Table of Contents



Gross
    
    
    Gross
    
    
    Cost orFair
    
    
    Unrealized
    
    
    Unrealized
    
    
    AmortizedValue
    
    
    Gains
    
    
    (Losses)
    
    
    Cost($ in thousands)Mortgage-backed securities:FNMA
    
    $
    181,321
    
    
    $
    573
    
    
    $
    (1,303
    )
    
    $
    182,051FHLMC
    
    
    53,983
    
    
    
    136
    
    
    
    (652
    )
    
    
    54,499Prime
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Alt-A
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subprime
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    235,304
    
    
    $
    709
    
    
    $
    (1,955
    )
    
    $
    236,550
 Gross
    
    
    Gross
    
    
    Cost orFair
    
    
    Unrealized
    
    
    Unrealized
    
    
    AmortizedValue
    
    
    Gains
    
    
    (Losses)
    
    
    Cost($ in thousands)Collateralized mortgage obligations:GNMA
    
    $
    440
    
    
    $
    7
    
    
    $
    
    
    
    $
    433FNMA
    
    
    9,861
    
    
    
    171
    
    
    
    
    
    
    
    9,690FHLMC
    
    
    12,156
    
    
    
    226
    
    
    
    
    
    
    
    11,930Prime
    
    
    76,096
    
    
    
    
    
    
    
    (5,589
    )
    
    
    81,685Alt-A
    
    
    15,452
    
    
    
    
    
    
    
    (2,485
    )
    
    
    17,937Subprime
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    114,005
    
    
    $
    404
    
    
    $
    (8,074
    )
    
    $
    121,675
  61




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##### Table of Contents



Gross
    
    
    Gross
    
    
    Cost orFair
    
    
    Unrealized
    
    
    Unrealized
    
    
    AmortizedValue
    
    
    Gains
    
    
    (Losses)
    
    
    Cost($ in thousands)Asset-backed securities:GNMA
    
    $
    2,657
    
    
    $
    89
    
    
    $
    
    
    
    $
    2,568FNMA
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    FHLMC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Prime
    
    
    47,724
    
    
    
    415
    
    
    
    (215
    )
    
    
    47,524Alt-A
    
    
    1,131
    
    
    
    
    
    
    
    (21
    )
    
    
    1,152Subprime
    
    
    356
    
    
    
    
    
    
    
    (13
    )
    
    
    369Total
    
    $
    51,868
    
    
    $
    504
    
    
    $
    (249
    )
    
    $
    51,613
   PercentRating
    
    
    
    
    
    
    
    toDescription
    
    Rating
    
    Amount
    
    
    Total($ in thousands)Extremely Strong
    
    AAA
    
    $
    1,176,137
    
    
    
    67
    %Very Strong
    
    AA
    
    
    275,958
    
    
    
    16
    %Strong
    
    A
    
    
    239,874
    
    
    
    13
    %Adequate
    
    BBB
    
    
    71,820
    
    
    
    4
    %Speculative
    
    BB & below
    
    
    217
    
    
    
    0
    %Not Rated
    
    NR
    
    
    1,435
    
    
    
    0
    %Total
    
    AAA(1)
    
    $
    1,765,441
    
    
    
    100
    %
 (1)
    
    Weighted average quality rating.  62




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##### Table of Contents



Gross
    
    
    Gross
    
    
    Cost orFair
    
    
    Unrealized
    
    
    Unrealized
    
    
    AmortizedValue
    
    
    Gains
    
    
    (Losses)
    
    
    Cost($ in thousands)Credit enhanced securities:States, municipalities and political
subdivisions
    
    $
    346,179
    
    
    $
    2,019
    
    
    $
    (3,319
    )
    
    $
    347,479Mortgage- and asset-backed securities
    
    
    9,119
    
    
    
    15
    
    
    
    (191
    )
    
    
    9,295Corporate bonds
    
    
    1,645
    
    
    
    3
    
    
    
    (41
    )
    
    
    1,683Total
    
    $
    356,943
    
    
    $
    2,037
    
    
    $
    (3,551
    )
    
    $
    358,457
 AverageGross
    
    
    Gross
    
    
    Cost or
    
    
    UnderlyingFair
    
    
    Unrealized
    
    
    Unrealized
    
    
    Amortized
    
    
    CreditValue
    
    
    Gains
    
    
    (Losses)
    
    
    Cost
    
    
    Rating($ in thousands)Financial guarantors:AMBAC
    
    $
    70,463
    
    
    $
    344
    
    
    $
    (886
    )
    
    $
    71,005
    
    
    
    A+Assured Guaranty LTD
    
    
    3,923
    
    
    
    
    
    
    
    (4
    )
    
    
    3,927
    
    
    
    AFGIC
    
    
    55,378
    
    
    
    215
    
    
    
    (452
    )
    
    
    55,615
    
    
    AA-Financial Security Assurance
    
    
    91,881
    
    
    
    898
    
    
    
    (574
    )
    
    
    91,557
    
    
    
    A+MBIA
    
    
    117,351
    
    
    
    514
    
    
    
    (1,403
    )
    
    
    118,240
    
    
    AA-Radian
Group, Inc.
    
    
    7,652
    
    
    
    66
    
    
    
    (41
    )
    
    
    7,627
    
    
    
    A+XL Capital
    
    
    10,295
    
    
    
    
    
    
    
    (191
    )
    
    
    10,486
    
    
    
    ATotal
    
    $
    356,943
    
    
    $
    2,037
    
    
    $
    (3,551
    )
    
    $
    358,457
    
    
    AA-
    63




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64




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##### Table of Contents



June 30, 2008
    
    
    December 31, 2007Fair
    
    
    Gross
    
    
    Fair
    
    
    GrossValue
    
    
    Unrealized Loss
    
    
    Value
    
    
    Unrealized Loss($ in thousands)Fixed Maturities:U.S. Government Treasury
Bonds, GNMAs and foreign
government bonds0-6 Months
    
    $
    16,545
    
    
    $
    219
    
    
    $
    4,119
    
    
    $
    327-12 Months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    > 12 Months
    
    
    6,093
    
    
    
    253
    
    
    
    19,587
    
    
    
    305Subtotal
    
    
    22,638
    
    
    
    472
    
    
    
    23,706
    
    
    
    337States, municipalities and
political subdivisions0-6 Months
    
    
    255,431
    
    
    
    4,123
    
    
    
    21,853
    
    
    
    677-12 Months
    
    
    9,522
    
    
    
    384
    
    
    
    6,045
    
    
    
    115> 12 Months
    
    
    11,798
    
    
    
    445
    
    
    
    69,671
    
    
    
    475Subtotal
    
    
    276,751
    
    
    
    4,952
    
    
    
    97,569
    
    
    
    657Mortgage- and asset-backed securities
(excluding GNMAs)0-6 Months
    
    
    263,656
    
    
    
    7,300
    
    
    
    61,388
    
    
    
    5157-12 Months
    
    
    17,553
    
    
    
    2,400
    
    
    
    48,496
    
    
    
    423> 12 Months
    
    
    92,204
    
    
    
    5,865
    
    
    
    121,798
    
    
    
    1,478Subtotal
    
    
    373,413
    
    
    
    15,565
    
    
    
    231,682
    
    
    
    2,416Corporate bonds0-6 Months
    
    
    93,253
    
    
    
    1,878
    
    
    
    20,722
    
    
    
    2557-12 Months
    
    
    8,457
    
    
    
    698
    
    
    
    25,520
    
    
    
    974> 12 Months
    
    
    27,181
    
    
    
    2,626
    
    
    
    38,865
    
    
    
    575Subtotal
    
    
    128,891
    
    
    
    5,202
    
    
    
    85,107
    
    
    
    1,804Total Fixed Maturities
    
    $
    801,693
    
    
    $
    26,191
    
    
    $
    438,064
    
    
    $
    5,214Equity securities  common stocks0-6 Months
    
    $
    29,789
    
    
    $
    3,090
    
    
    $
    26,257
    
    
    $
    3,4947-12 Months
    
    
    9,493
    
    
    
    2,138
    
    
    
    4,153
    
    
    
    1,209> 12 Months
    
    
    640
    
    
    
    268
    
    
    
    53
    
    
    
    1Total Equity Securities
    
    $
    39,922
    
    
    $
    5,496
    
    
    $
    30,463
    
    
    $
    4,704
  65




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##### Table of Contents



GrossEquivalent
    
    Equivalent
    
    Unrealized Loss
    
    
    Fair ValueNAIC
    
    S&P
    
    Moodys
    
    
    
    
    
    Percent
    
    
    
    
    
    
    PercentRating
    
    Rating
    
    Rating
    
    Amount
    
    
    to Total
    
    
    Amount
    
    
    to Total($ in thousands)1
    
    AAA/AA/A
    
    Aaa/Aa/A
    
    $
    24,108
    
    
    
    92
    %
    
    $
    747,089
    
    
    
    93
    %2
    
    BBB
    
    Baa
    
    
    2,048
    
    
    
    8
    %
    
    
    54,387
    
    
    
    7
    %3
    
    BB
    
    Ba
    
    
    35
    
    
    
    0
    %
    
    
    217
    
    
    
    0
    %4
    
    B
    
    B
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    CCC or lower
    
    Caa or lower
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    N/A
    
    N/A
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    $
    26,191
    
    
    
    100
    %
    
    $
    801,693
    
    
    
    100
    %
   66




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##### Table of Contents



GrossUnrealized Loss
    
    
    Fair ValuePercent
    
    
    
    
    
    
    PercentAmount
    
    
    to Total
    
    
    Amount
    
    
    to Total($ in thousands)Due in one year or less
    
    $
    18
    
    
    
    0
    %
    
    $
    7,650
    
    
    
    1
    %Due after one year through five years
    
    
    1,633
    
    
    
    6
    %
    
    
    102,553
    
    
    
    13
    %Due after five years through ten years
    
    
    3,849
    
    
    
    15
    %
    
    
    138,302
    
    
    
    17
    %Due after ten years
    
    
    5,126
    
    
    
    20
    %
    
    
    179,775
    
    
    
    22
    %Mortgage- and asset-backed securities
    
    
    15,565
    
    
    
    59
    %
    
    
    373,413
    
    
    
    47
    %Total fixed income securities
    
    $
    26,191
    
    
    
    100
    %
    
    $
    801,693
    
    
    
    100
    %
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007($ in thousands)Fixed maturities:Gains
    
    $
    1,329
    
    
    $
    27
    
    
    $
    1,526
    
    
    $
    477(Losses)
    
    
    (426
    )
    
    
    (281
    )
    
    
    (435
    )
    
    
    (719
    )903
    
    
    
    (254
    )
    
    
    1,091
    
    
    
    (242
    )Equity securities:Gains
    
    
    180
    
    
    
    1,147
    
    
    
    443
    
    
    
    1,397(Losses) (1)
    
    
    (9,059
    )
    
    
    (53
    )
    
    
    (9,586
    )
    
    
    (114
    )(8,879
    )
    
    
    1,094
    
    
    
    (9,143
    )
    
    
    1,283Net realized capital gains (losses)
    
    $
    (7,976
    )
    
    $
    840
    
    
    $
    (8,052
    )
    
    $
    1,041
 (1)
    
    Includes $8,412,000 for other-than-temporary impairments on common stock for the
2008 second quarter and six month period.  67




---



##### Table of Contents



# of MonthsUnrealized LossNet
    
    
    Exceeded 20%Date of
    
    
    Proceeds
    
    
    Loss on
    
    
    Impairment
    
    
    Holdings at
    
    
    Unrealized
    
    
    of Cost orDescription
    
    Sale
    
    
    from Sale
    
    
    Sale
    
    
    Loss
    
    
    June 30, 2008
    
    
    Loss
    
    
    Amortized Cost($ in thousands)Six months ended:June 30, 2008:Allied Capital Corporation
    
    
    (1)
    
    
    
    
    
    
    
    
    
    
    $
    (546
    )
    
    $
    642
    
    
    
    
    
    
    
    10American
International Group, Inc.
    
    
    (1)
    
    
    
    
    
    
    
    
    
    
    
    (1,262
    )
    
    
    804
    
    
    
    
    
    
    
    12Bank of America Corporation
    
    
    (1)
    
    
    
    
    
    
    
    
    
    
    
    (421
    )
    
    
    597
    
    
    
    
    
    
    
    9Bristol-Myers Squibb Co.
    
    
    (1)
    
    
    
    
    
    
    
    
    
    
    
    (343
    )
    
    
    938
    
    
    
    
    
    
    
    12Citigroup
Inc.
    
    
    (1)
    
    
    
    
    
    
    
    
    
    
    
    (678
    )
    
    
    365
    
    
    
    
    
    
    
    13Dow Chemical
Co.
    
    
    (1)
    
    
    
    
    
    
    
    
    
    
    
    (325
    )
    
    
    1,052
    
    
    
    
    
    
    
    15KeyCorp.
    
    
    (1)
    
    
    
    
    
    
    
    
    
    
    
    (653
    )
    
    
    272
    
    
    
    
    
    
    
    15Legg Mason
Inc.
    
    
    (1)
    
    
    
    
    
    
    
    
    
    
    
    (537
    )
    
    
    575
    
    
    
    
    
    
    
    12Lennar Corporation
    
    
    (1)
    
    
    
    
    
    
    
    
    
    
    
    (140
    )
    
    
    202
    
    
    
    
    
    
    
    8Merrill
Lynch & Co., Inc.
    
    
    (1)
    
    
    
    
    
    
    
    
    
    
    
    (222
    )
    
    
    197
    
    
    
    
    
    
    
    9Motorola Inc.
    
    
    (1)
    
    
    
    
    
    
    
    
    
    
    
    (900
    )
    
    
    637
    
    
    
    
    
    
    
    8Pfizer Inc.
    
    
    (1)
    
    
    
    
    
    
    
    
    
    
    
    (480
    )
    
    
    860
    
    
    
    
    
    
    
    13Pinnacle West Capital Corporation
    
    
    (1)
    
    
    
    
    
    
    
    
    
    
    
    (430
    )
    
    
    969
    
    
    
    
    
    
    
    14Regions Financial Corporation
    
    
    (1)
    
    
    
    
    
    
    
    
    
    
    
    (471
    )
    
    
    277
    
    
    
    
    
    
    
    10UnitedHealth
Group, Inc.
    
    
    (1)
    
    
    
    
    
    
    
    
    
    
    
    (256
    )
    
    
    491
    
    
    
    
    
    
    
    6Wachovia Corporation
    
    
    (1)
    
    
    
    
    
    
    
    
    
    
    
    (748
    )
    
    
    367
    
    
    
    
    
    
    
    12Sprint Nextel Corporation (2)
    
    
    3/19/2008
    
    
    $
    143
    
    
    $
    (347
    )
    
    
    
    
    
    
    
    
    
    
    Legg Mason Inc. (2)
    
    
    6/4/2008
    
    
    
    470
    
    
    
    (363
    )
    
    
    
    
    
    
    
    
    
    
    $
    613
    
    
    $
    (710
    )
    
    $
    (8,412
    )
    
    $
    9,245June 30, 2007:TIPS (3)
    
    
    3/31/2007
    
    
    $
    5,823
    
    
    $
    (335
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 (1)
    
    Securities owned at June 30, 2008 which had an impairment loss.(2)
    
    Securities sold due to losses not considered to be recoverable in the foreseeable
future.(3)
    
    Treasury inflation protection securities (TIPS) were sold during the 2007 first quarter
due to the widening breakeven yield spread between TIPS and Treasuries.  Reinsurance Recoverables
   68




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Liquidity and Capital Resources
       69




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June 30,
    
    
    December 31,2008
    
    
    2007($ in thousands)Senior debt
    
    $
    123,732
    
    
    $
    123,673Stockholders equity
    
    
    676,357
    
    
    
    662,106Total capitalization
    
    $
    800,089
    
    
    $
    785,779Ratio of debt to total capitalization
    
    
    15.5
    %
    
    
    15.7
    %
     71




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June 30,
    
    
    December 31,2008
    
    
    2007($ in thousands)Cash and investments
    
    $
    43,881
    
    
    $
    44,146Investments in subsidiaries
    
    
    748,595
    
    
    
    735,351Goodwill and other intangible assets
    
    
    2,534
    
    
    
    2,534Other assets
    
    
    7,510
    
    
    
    6,821Total assets
    
    $
    802,520
    
    
    $
    788,852Accounts payable and other liabilities
    
    $
    973
    
    
    $
    1,615Accrued interest payable
    
    
    1,458
    
    
    
    1,4587% Senior Notes due May 1, 2016
    
    
    123,732
    
    
    
    123,673Total liabilities
    
    
    126,163
    
    
    
    126,746Stockholders equity
    
    
    676,357
    
    
    
    662,106Total liabilities and stockholders equity
    
    $
    802,520
    
    
    $
    788,852
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 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.
  72




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Part II  Other Information
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   73




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($ in thousands, except per share)
 Number ofShares
    
    
    Dollar ValueTotal
    
    
    
    
    
    
    Purchased
    
    
    of Shares thatNumber
    
    
    Average
    
    
    Under Publicly
    
    
    May Yet Beof Shares
    
    
    Cost Paid
    
    
    Announced
    
    
    Purchased UnderPurchased
    
    
    Per Share
    
    
    Program
    
    
    the Program (1)January 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    30,000February 2008
    
    
    30,202
    
    
    $
    54.66
    
    
    
    30,202
    
    
    $
    28,349March 2008
    
    
    105,824
    
    
    $
    53.58
    
    
    
    105,824
    
    
    $
    22,679Subtotal first quarter
    
    
    136,026
    
    
    $
    53.82
    
    
    
    136,026April 2008
    
    
    50,000
    
    
    $
    49.90
    
    
    
    50,000
    
    
    $
    20,184May 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    20,184June 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    20,184Subtotal second quarter
    
    
    50,000
    
    
    $
    49.90
    
    
    
    50,000Total Six Months
    
    
    186,026
    
    
    $
    52.77
    
    
    
    186,026
 (1)
    
    Balance as of the end of the month indicated. 
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submissions of Matters to a Vote of Security Holders
  a)
    
    The election of all nine (9) directors of the Parent Company to serve
until the 2009 Annual Meeting of Stockholders or until their respective successors
have been duly elected and qualified. The results of the voting were as follows:
 Name
    
    Votes For
    
    
    Votes WithheldH. J. Mervyn Blakeney
    
    
    14,504,698
    
    
    
    1,556,292Peter A. Cheney
    
    
    15,649,671
    
    
    
    411,319Terence N. Deeks
    
    
    15,224,049
    
    
    
    836,941W. Thomas Forrester
    
    
    15,649,671
    
    
    
    411,319Stanley A. Galanski
    
    
    15,219,689
    
    
    
    841,301Leandro S. Galban, Jr.
    
    
    15,423,793
    
    
    
    637,197John F. Kirby
    
    
    15,260,032
    
    
    
    800,958Marc M. Tract
    
    
    14,885,342
    
    
    
    1,175,648Robert F. Wright
    
    
    15,172,492
    
    
    
    888,498
 b)
    
    The Companys Employee Stock Purchase Plan was approved with
14,942,622 votes cast for, 54,906 votes cast against and 332,163 votes
abstaining.
  74




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c)
    
    The Companys Executive Performance Incentive Plan was approved with
15,243,516 votes cast for, 475,481 votes cast against and 341,993 votes abstaining.d)
    
    The appointment of KPMG LLP as the Companys independent auditors for
2008 was ratified with 15,806,027 votes cast for, 254,588 votes cast against and 375
votes abstaining.
 
 Item 5. Other Information
  
 Item 6. Exhibits
 Exhibit No.
    
    Description of Exhibit11-1
    
    Statement re Computation of Per Share Earnings
    
    *31-1
    
    Certification of CEO per Section 302 of the Sarbanes-Oxley Act
    
    *31-2
    
    Certification of CFO per Section 302 of the Sarbanes-Oxley Act
    
    *32-1
    
    Certification of CEO per Section 906 of the Sarbanes-Oxley Act
(This exhibit is intended to be furnished in accordance
with Regulation S-K item 601(b)(32)(ii) and shall not be
deemed to be filed for purposes of section 18 of the
Securities Exchange Act of 1934, as amended, or
incorporated by reference into any filing under the
Securities Act of 1933, except as shall be expressly set
forth by specific reference).
    
    *32-2
    
    Certification of CFO per Section 906 of the
Sarbanes-Oxley Act
(This exhibit is intended to be furnished in accordance
with Regulation S-K item 601(b)(32)(ii) and shall not be
deemed to be filed for purposes of section 18 of the
Securities Exchange Act of 1934, as amended, or
incorporated by reference into any filing under the
Securities Act of 1933, except as shall be expressly set
forth by specific reference).
    
    *
 *
    
    Included herein.  75




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The Navigators Group, Inc.(Registrant)Date:  July 30, 2008
    /s/ Paul J. MalvasioPaul J. MalvasioExecutive Vice President
and Chief Financial Officer  76




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INDEX OF EXHIBITS
 Exhibit No.
    
    Description of Exhibit11-1
    
    Statement re Computation of Per Share Earnings
    
    *31-1
    
    Certification of CEO per Section 302 of the Sarbanes-Oxley Act
    
    *31-2
    
    Certification of CFO per Section 302 of the Sarbanes-Oxley Act
    
    *32-1
    
    Certification of CEO per Section 906 of the Sarbanes-Oxley Act
(This exhibit is intended to be furnished in accordance
with Regulation S-K item 601(b)(32)(ii) and shall not be
deemed to be filed for purposes of section 18 of the
Securities Exchange Act of 1934, as amended, or
incorporated by reference into any filing under the
Securities Act of 1933, except as shall be expressly set
forth by specific reference).
    
    *32-2
    
    Certification of CFO per Section 906 of the Sarbanes-Oxley Act
(This exhibit is intended to be furnished in accordance
with Regulation S-K item 601(b)(32)(ii) and shall not be
deemed to be filed for purposes of section 18 of the
Securities Exchange Act of 1934, as amended, or
incorporated by reference into any filing under the
Securities Act of 1933, except as shall be expressly set
forth by specific reference).
    
    *
 
 *
    
    Included herein.  77