##### 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 Ended September 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)
 
  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 
September 30, 2008 (Unaudited) and December 31, 2007
    
    
    3Consolidated Statements of Income (Unaudited)
Three Months Ended September 30, 2008 and 2007
    
    
    4Nine Months Ended September 30, 2008 and 2007
    
    
    5Consolidated Statements of Stockholders Equity (Unaudited)
September 30, 2008 and 2007
    
    
    6Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended September 30, 2008 and 2007
    
    
    7Nine Months Ended September 30, 2008 and 2007
    
    
    8Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 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
    
    
    79Item 4. Controls and Procedures
    
    
    80Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    80Item 1A. Risk Factors
    
    
    80Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    80Item 3. Defaults Upon Senior Securities
    
    
    81Item 4. Submissions of Matters to a Vote of Security Holders
    
    
    81Item 5. Other Information
    
    
    81Item 6. Exhibits
    
    
    82Signature
    
    
    83Index of Exhibits
    
    
    84Exhibit 11-1Exhibit 31-1Exhibit 31-2Exhibit 32-1Exhibit 32-2
   2




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##### Table of Contents



Part I. Financial Information
 
 Item 1. Financial Statements
 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 ($ in thousands, except share data)
 September 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSInvestments and cash:Fixed maturities, available-for-sale, at fair value (amortized cost: 2008, $1,673,013; 2007, $1,508,489)
    
    $
    1,625,686
    
    
    $
    1,522,320Equity securities, available-for-sale, at fair value (cost: 2008, $71,835; 2007, $65,492)
    
    
    68,637
    
    
    
    67,240Short-term investments, at fair value
    
    
    178,569
    
    
    
    170,685Cash
    
    
    23,298
    
    
    
    7,056Total investments and cash
    
    
    1,896,190
    
    
    
    1,767,301Premiums in course of collection
    
    
    172,285
    
    
    
    163,081Commissions receivable
    
    
    148
    
    
    
    2,381Prepaid reinsurance premiums
    
    
    189,093
    
    
    
    188,961Reinsurance receivable on paid losses
    
    
    60,110
    
    
    
    94,818Reinsurance receivable on unpaid losses and loss adjustment expenses
    
    
    865,288
    
    
    
    801,461Net deferred income tax benefit
    
    
    60,155
    
    
    
    29,249Deferred policy acquisition costs
    
    
    51,852
    
    
    
    51,895Accrued investment income
    
    
    17,172
    
    
    
    15,605Goodwill and other intangible assets
    
    
    7,513
    
    
    
    8,084Other assets
    
    
    20,778
    
    
    
    20,935Total assets
    
    $
    3,340,584
    
    
    $
    3,143,771LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Reserves for losses and loss adjustment expenses
    
    $
    1,847,694
    
    
    $
    1,648,764Unearned premium
    
    
    496,852
    
    
    
    469,481Reinsurance balances payable
    
    
    149,061
    
    
    
    161,829Senior notes
    
    
    123,762
    
    
    
    123,673Federal income tax payable
    
    
    7,417
    
    
    
    10,868Payable for securities purchased
    
    
    2,608
    
    
    
    Accounts payable and other liabilities
    
    
    57,629
    
    
    
    67,050Total liabilities
    
    
    2,685,023
    
    
    
    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 9/30/08 and
12/31/07; issued and outstanding: 16,778,692 (net of treasury shares) at 9/30/08
and 16,873,094 at 12/31/07
    
    
    1,700
    
    
    
    1,687Additional paid-in capital
    
    
    296,477
    
    
    
    291,616Retained earnings
    
    
    396,756
    
    
    
    355,084Treasury stock, at cost (224,754 shares at 9/30/08)
    
    
    (11,540
    )
    
    
    Accumulated other comprehensive income (loss)
    
    
    (27,832
    )
    
    
    13,719Total stockholders equity
    
    
    655,561
    
    
    
    662,106Total liabilities and stockholders equity
    
    $
    3,340,584
    
    
    $
    3,143,771
   3




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THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME
 ($ and shares in thousands, except net income per share)
 Three Months EndedSeptember 30,2008
    
    
    2007(Unaudited)Gross written premium
    
    $
    252,943
    
    
    $
    245,961Revenues:Net written premium
    
    $
    140,318
    
    
    $
    159,102Decrease (increase) in unearned premium
    
    
    13,722
    
    
    
    (3,064
    )Net earned premium
    
    
    154,040
    
    
    
    156,038Commission income
    
    
    8
    
    
    
    117Net investment income
    
    
    19,322
    
    
    
    17,930Net realized capital (losses)
    
    
    (5,516
    )
    
    
    (66
    )Other income (expense)
    
    
    (119
    )
    
    
    298Total revenues
    
    
    167,735
    
    
    
    174,317Operating expenses:Net losses and loss adjustment expenses incurred
    
    
    113,269
    
    
    
    88,019Commission expense
    
    
    22,357
    
    
    
    19,676Other operating expenses
    
    
    30,601
    
    
    
    27,902Interest expense
    
    
    2,218
    
    
    
    2,216Total operating expenses
    
    
    168,445
    
    
    
    137,813Income (loss) before income tax expense
    
    
    (710
    )
    
    
    36,504Income tax expense (benefit):Current
    
    
    2,069
    
    
    
    11,520Deferred
    
    
    (3,780
    )
    
    
    (49
    )Total income tax expense (benefit)
    
    
    (1,711
    )
    
    
    11,471Net income
    
    $
    1,001
    
    
    $
    25,033Net income per common share:Basic
    
    $
    0.06
    
    
    $
    1.49Diluted
    
    $
    0.06
    
    
    $
    1.47Average common shares outstanding:Basic
    
    
    16,772
    
    
    
    16,843Diluted
    
    
    16,927
    
    
    
    16,996
   4




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THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME  ($ and shares in thousands, except net income per share)
 Nine Months EndedSeptember 30,2008
    
    
    2007(Unaudited)Gross written premium
    
    $
    819,302
    
    
    $
    823,371Revenues:Net written premium
    
    $
    502,327
    
    
    $
    493,471(Increase) in unearned premium
    
    
    (29,844
    )
    
    
    (52,770
    )Net earned premium
    
    
    472,483
    
    
    
    440,701Commission income
    
    
    736
    
    
    
    1,011Net investment income
    
    
    56,891
    
    
    
    51,476Net realized capital gains (losses)
    
    
    (13,568
    )
    
    
    975Other income (expense)
    
    
    902
    
    
    
    (26
    )Total revenues
    
    
    517,444
    
    
    
    494,137Operating expenses:Net losses and loss adjustment expenses incurred
    
    
    293,578
    
    
    
    248,950Commission expense
    
    
    66,795
    
    
    
    54,425Other operating expenses
    
    
    93,594
    
    
    
    82,799Interest expense
    
    
    6,652
    
    
    
    6,646Total operating expenses
    
    
    460,619
    
    
    
    392,820Income before income tax expense
    
    
    56,825
    
    
    
    101,317Income tax expense (benefit):Current
    
    
    24,531
    
    
    
    34,301Deferred
    
    
    (9,378
    )
    
    
    (2,064
    )Total income tax expense
    
    
    15,153
    
    
    
    32,237Net income
    
    $
    41,672
    
    
    $
    69,080Net income per common share:Basic
    
    $
    2.48
    
    
    $
    4.11Diluted
    
    $
    2.45
    
    
    $
    4.07Average common shares outstanding:Basic
    
    
    16,802
    
    
    
    16,796Diluted
    
    
    16,980
    
    
    
    16,967
   5




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THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 ($ in thousands)
 Nine Months EndedSeptember 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
    
    
    
    12Balance at end of period
    
    $
    1,700
    
    
    $
    1,686Additional paid-in capitalBalance at beginning of year
    
    $
    291,616
    
    
    $
    286,732Shares issued under stock plans
    
    
    4,861
    
    
    
    4,223Balance at end of period
    
    $
    296,477
    
    
    $
    290,955Retained earningsBalance at beginning of year
    
    $
    355,084
    
    
    $
    259,464Net income
    
    
    41,672
    
    
    
    69,080Balance at end of period
    
    $
    396,756
    
    
    $
    328,544Treasury stock, at costBalance at beginning of year
    
    $
    
    
    
    $
    Treasury stock acquired
    
    
    (11,540
    )
    
    
    Balance at end of period
    
    $
    (11,540
    )
    
    $
    Accumulated other comprehensive income (loss)Net unrealized gains (losses) on securities, net of taxBalance at beginning of year
    
    $
    10,186
    
    
    $
    849Change in period
    
    
    (43,423
    )
    
    
    686Balance at end of period
    
    
    (33,237
    )
    
    
    1,535Cumulative translation adjustments, net of taxBalance at beginning of year
    
    
    3,533
    
    
    
    2,624Net adjustment for period
    
    
    1,872
    
    
    
    1,132Balance at end of period
    
    
    5,405
    
    
    
    3,756Balance at end of period
    
    $
    (27,832
    )
    
    $
    5,291Total stockholders equity at end of period
    
    $
    655,561
    
    
    $
    626,476
   6




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THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 ($ in thousands)
 Three Months EndedSeptember 30,2008
    
    
    2007(Unaudited)Net income
    
    $
    1,001
    
    
    $
    25,033Other comprehensive income (loss):Change in net unrealized gains (losses) on securities,
net of tax expense (benefit) of ($11,938) and $6,446
in 2008 and 2007, respectively(1)
    
    
    (23,025
    )
    
    
    12,154Change in foreign
currency
translation gains,
net of tax expense of $958 and $178
in 2008 and 2007, respectively
    
    
    1,779
    
    
    
    331Other comprehensive income (loss)
    
    
    (21,246
    )
    
    
    12,485Comprehensive income (loss)
    
    $
    (20,245
    )
    
    $
    37,518(1) Disclosure of reclassification amount, net of tax:Unrealized holding gains (losses) arising
during period
    
    $
    (26,609
    )
    
    $
    12,105Less: reclassification adjustment for net realized
capital (losses) included in net income
    
    
    (3,584
    )
    
    
    (49
    )Change in net unrealized gains (losses) on securities
    
    $
    (23,025
    )
    
    $
    12,154
   7




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THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  ($ in thousands)
 Nine Months EndedSeptember 30,2008
    
    
    2007(Unaudited)Net income
    
    $
    41,672
    
    
    $
    69,080Other comprehensive income (loss):Change in net unrealized gains (losses) on securities,
net of tax expense (benefit) of ($22,680) and $311
in 2008 and 2007, respectively(1)
    
    
    (43,423
    )
    
    
    686Change in foreign currency translation gains,
net of tax expense of $1,008 and $610
in 2008 and 2007, respectively
    
    
    1,872
    
    
    
    1,132Other comprehensive income (loss)
    
    
    (41,551
    )
    
    
    1,818Comprehensive income
    
    $
    121
    
    
    $
    70,898(1) Disclosure of reclassification amount, net of tax:Unrealized holding gains (losses) arising
during period
    
    $
    (52,242
    )
    
    $
    1,312Less: reclassification adjustment for net realized
capital gains (losses) included in net income
    
    
    (8,819
    )
    
    
    626Change in net unrealized gains (losses) on
securities
    
    $
    (43,423
    )
    
    $
    686
  8




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##### Table of Contents



THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 ($ in thousands)
 Nine Months EndedSeptember 30,2008
    
    
    2007(Unaudited)Operating activities:Net income
    
    $
    41,672
    
    
    $
    69,080Adjustments to reconcile net income to net
cash provided by (used in) operating activities:Depreciation & amortization
    
    
    3,667
    
    
    
    2,532Net deferred income tax (benefit)
    
    
    (9,378
    )
    
    
    (2,064
    )Net realized capital (gains) losses
    
    
    13,568
    
    
    
    (975
    )Changes in assets and liabilities:Reinsurance receivable on paid and unpaid losses and LAE
    
    
    (35,844
    )
    
    
    111,379Reserve for losses and LAE
    
    
    211,119
    
    
    
    19,306Prepaid reinsurance premiums
    
    
    (1,732
    )
    
    
    (12,558
    )Unearned premium
    
    
    31,400
    
    
    
    63,504Premiums in course of collection
    
    
    (12,132
    )
    
    
    (19,151
    )Commissions receivable
    
    
    2,221
    
    
    
    1,247Deferred policy acquisition costs
    
    
    (720
    )
    
    
    (12,052
    )Accrued investment income
    
    
    (1,570
    )
    
    
    (2,650
    )Reinsurance balances payable
    
    
    (11,266
    )
    
    
    (18,297
    )Federal income tax
    
    
    (2,122
    )
    
    
    3,193Other
    
    
    (12,518
    )
    
    
    28,842Net cash provided by operating activities
    
    
    216,365
    
    
    
    231,336Investing activities:Fixed maturities, available-for-saleRedemptions and maturities
    
    
    104,863
    
    
    
    127,639Sales
    
    
    133,752
    
    
    
    136,046Purchases
    
    
    (398,972
    )
    
    
    (455,845
    )Equity securities, available-for-saleSales
    
    
    18,514
    
    
    
    17,436Purchases
    
    
    (38,556
    )
    
    
    (41,294
    )Change in payable for securities
    
    
    2,643
    
    
    
    27,176Net change in short-term investments
    
    
    (10,301
    )
    
    
    (34,867
    )Purchase of property and equipment
    
    
    (2,900
    )
    
    
    (7,149
    )Net cash (used in) investing activities
    
    
    (190,957
    )
    
    
    (230,858
    )Financing activities:Purchase of treasury stock
    
    
    (11,540
    )
    
    
    Proceeds of stock issued from employee stock purchase plan
    
    
    962
    
    
    
    606Proceeds of stock issued from exercise of stock options
    
    
    1,412
    
    
    
    1,406Net cash provided by (used in) financing activities
    
    
    (9,166
    )
    
    
    2,012Effect of exchange rate changes on foreign currency cash
    
    
    
    
    
    
    12Increase (decrease) in cash
    
    
    16,242
    
    
    
    2,502Cash at beginning of year
    
    
    7,056
    
    
    
    2,404Cash at end of period
    
    $
    23,298
    
    
    $
    4,906Supplemental disclosures of cash flow information:Federal, state and local income tax paid
    
    $
    23,985
    
    
    $
    31,144Interest 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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##### Table of Contents



Three Months Ended September 30, 2008Insurance
    
    
    LloydsCompanies
    
    
    Operations
    
    
    Corporate
    
    
    Total($ in thousands)Gross written premium
    
    $
    182,133
    
    
    $
    70,810
    
    
    
    
    
    
    $
    252,943Net written premium
    
    
    106,133
    
    
    
    34,185
    
    
    
    
    
    
    
    140,318Net earned premium
    
    
    112,447
    
    
    
    41,593
    
    
    
    
    
    
    
    154,040Net losses and LAE
    
    
    (78,346
    )
    
    
    (34,923
    )
    
    
    
    
    
    
    (113,269
    )Commission expense
    
    
    (13,823
    )
    
    
    (8,534
    )
    
    
    
    
    
    
    (22,357
    )Other operating expenses
    
    
    (22,802
    )
    
    
    (7,799
    )
    
    
    
    
    
    
    (30,601
    )Commission income and other income (expense)
    
    
    279
    
    
    
    (390
    )
    
    
    
    
    
    
    (111
    )Underwriting (loss)
    
    
    (2,245
    )
    
    
    (10,053
    )
    
    
    
    
    
    
    (12,298
    )Net investment income
    
    
    15,973
    
    
    
    3,074
    
    
    $
    275
    
    
    
    19,322Net realized capital gains (losses)
    
    
    (5,207
    )
    
    
    (309
    )
    
    
    
    
    
    
    (5,516
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (2,218
    )
    
    
    (2,218
    )Income (loss) before income taxes
    
    
    8,521
    
    
    
    (7,288
    )
    
    
    (1,943
    )
    
    
    (710
    )Income tax expense (benefit)
    
    
    1,458
    
    
    
    (2,489
    )
    
    
    (680
    )
    
    
    (1,711
    )Net income (loss)
    
    $
    7,063
    
    
    $
    (4,799
    )
    
    $
    (1,263
    )
    
    $
    1,001Identifiable assets (1)
    
    $
    2,437,909
    
    
    $
    808,768
    
    
    $
    71,608
    
    
    $
    3,340,584Loss and LAE ratio
    
    
    69.7
    %
    
    
    84.0
    %
    
    
    
    
    
    
    73.5
    %Commission expense ratio
    
    
    12.3
    %
    
    
    20.5
    %
    
    
    
    
    
    
    14.5
    %Other operating expense ratio (2)
    
    
    20.0
    %
    
    
    19.7
    %
    
    
    
    
    
    
    19.9
    %Combined ratio
    
    
    102.0
    %
    
    
    124.2
    %
    
    
    
    
    
    
    107.9
    %
 (1)
    
    Includes inter-segment transactions causing the row not to crossfoot.(2)
    
    Includes other operating expenses and commission income and other income (expense).  12




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##### Table of Contents



Three Months Ended September 30, 2008Insurance
    
    
    LloydsCompanies
    
    
    Operations
    
    
    Total($ in thousands)Gross written premium:Marine & Energy
    
    $
    69,796
    
    
    $
    52,718
    
    
    $
    122,514Specialty
    
    
    77,427
    
    
    
    
    
    
    
    77,427Professional Liability
    
    
    25,706
    
    
    
    10,307
    
    
    
    36,013Middle Markets
    
    
    7,727
    
    
    
    
    
    
    
    7,727Property/Other
    
    
    1,477
    
    
    
    7,785
    
    
    
    9,262Total
    
    $
    182,133
    
    
    $
    70,810
    
    
    $
    252,943Net written premium:Marine & Energy
    
    $
    32,643
    
    
    $
    25,459
    
    
    $
    58,102Specialty
    
    
    52,094
    
    
    
    
    
    
    
    52,094Professional Liability
    
    
    15,019
    
    
    
    6,055
    
    
    
    21,074Middle Markets
    
    
    5,216
    
    
    
    
    
    
    
    5,216Property/Other
    
    
    1,161
    
    
    
    2,671
    
    
    
    3,832Total
    
    $
    106,133
    
    
    $
    34,185
    
    
    $
    140,318Net earned premium:Marine & Energy
    
    $
    36,203
    
    
    $
    33,185
    
    
    $
    69,388Specialty
    
    
    55,309
    
    
    
    
    
    
    
    55,309Professional Liability
    
    
    14,616
    
    
    
    5,111
    
    
    
    19,727Middle Markets
    
    
    4,488
    
    
    
    
    
    
    
    4,488Property/Other
    
    
    1,831
    
    
    
    3,297
    
    
    
    5,128Total
    
    $
    112,447
    
    
    $
    41,593
    
    
    $
    154,040
  13




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##### Table of Contents



Three Months Ended September 30, 2007Insurance
    
    
    LloydsCompanies
    
    
    Operations
    
    
    Corporate
    
    
    Total($ in thousands)Gross written premium
    
    $
    178,058
    
    
    $
    67,903
    
    
    
    
    
    
    $
    245,961Net written premium
    
    
    109,677
    
    
    
    49,425
    
    
    
    
    
    
    
    159,102Net earned premium
    
    
    109,060
    
    
    
    46,978
    
    
    
    
    
    
    
    156,038Net losses and LAE
    
    
    (59,816
    )
    
    
    (28,203
    )
    
    
    
    
    
    
    (88,019
    )Commission expense
    
    
    (13,086
    )
    
    
    (6,590
    )
    
    
    
    
    
    
    (19,676
    )Other operating expenses
    
    
    (21,157
    )
    
    
    (6,745
    )
    
    
    
    
    
    
    (27,902
    )Commission income and other income (expense)
    
    
    304
    
    
    
    111
    
    
    
    
    
    
    
    415Underwriting profit
    
    
    15,305
    
    
    
    5,551
    
    
    
    
    
    
    
    20,856Net investment income
    
    
    14,816
    
    
    
    2,609
    
    
    $
    505
    
    
    
    17,930Net realized capital gains (losses)
    
    
    41
    
    
    
    (107
    )
    
    
    
    
    
    
    (66
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (2,216
    )
    
    
    (2,216
    )Income (loss) before income taxes
    
    
    30,162
    
    
    
    8,053
    
    
    
    (1,711
    )
    
    
    36,504Income tax expense (benefit)
    
    
    9,193
    
    
    
    2,877
    
    
    
    (599
    )
    
    
    11,471Net income (loss)
    
    $
    20,969
    
    
    $
    5,176
    
    
    $
    (1,112
    )
    
    $
    25,033Identifiable assets (1)
    
    $
    2,292,811
    
    
    $
    793,661
    
    
    $
    65,950
    
    
    $
    3,174,992Loss and LAE ratio
    
    
    54.8
    %
    
    
    60.0
    %
    
    
    
    
    
    
    56.4
    %Commission expense ratio
    
    
    12.0
    %
    
    
    14.0
    %
    
    
    
    
    
    
    12.6
    %Other operating expense ratio (2)
    
    
    19.1
    %
    
    
    14.1
    %
    
    
    
    
    
    
    17.6
    %Combined ratio
    
    
    85.9
    %
    
    
    88.1
    %
    
    
    
    
    
    
    86.6
    %
 (1)
    
    Includes inter-segment transactions causing the row not to crossfoot.(2)
    
    Includes other operating expenses and commission income and other income (expense).  14




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##### Table of Contents



Three Months Ended September 30, 2007Insurance
    
    
    LloydsCompanies
    
    
    Operations
    
    
    Total($ in thousands)Gross written premium:Marine & Energy
    
    $
    56,630
    
    
    $
    50,060
    
    
    $
    106,690Specialty
    
    
    87,985
    
    
    
    
    
    
    
    87,985Professional Liability
    
    
    24,546
    
    
    
    9,639
    
    
    
    34,185Middle Markets
    
    
    7,642
    
    
    
    
    
    
    
    7,642Property/Other
    
    
    1,255
    
    
    
    8,204
    
    
    
    9,459Total
    
    $
    178,058
    
    
    $
    67,903
    
    
    $
    245,961Net written premium:Marine & Energy
    
    $
    25,606
    
    
    $
    37,373
    
    
    $
    62,979Specialty
    
    
    62,905
    
    
    
    
    
    
    
    62,905Professional Liability
    
    
    14,447
    
    
    
    8,692
    
    
    
    23,139Middle Markets
    
    
    5,536
    
    
    
    
    
    
    
    5,536Property/Other
    
    
    1,183
    
    
    
    3,360
    
    
    
    4,543Total
    
    $
    109,677
    
    
    $
    49,425
    
    
    $
    159,102Net earned premium:Marine & Energy
    
    $
    30,204
    
    
    $
    41,607
    
    
    $
    71,811Specialty
    
    
    58,321
    
    
    
    
    
    
    
    58,321Professional Liability
    
    
    14,184
    
    
    
    4,587
    
    
    
    18,771Middle Markets
    
    
    4,475
    
    
    
    
    
    
    
    4,475Property/Other
    
    
    1,876
    
    
    
    784
    
    
    
    2,660Total
    
    $
    109,060
    
    
    $
    46,978
    
    
    $
    156,038
  15




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##### Table of Contents



Nine Months Ended September 30, 2008Insurance
    
    
    LloydsCompanies
    
    
    Operations
    
    
    Corporate
    
    
    Total($ in thousands)Gross written premium
    
    $
    571,685
    
    
    $
    247,617
    
    
    
    
    
    
    $
    819,302Net written premium
    
    
    358,625
    
    
    
    143,702
    
    
    
    
    
    
    
    502,327Net earned premium
    
    
    342,127
    
    
    
    130,356
    
    
    
    
    
    
    
    472,483Net losses and LAE
    
    
    (207,927
    )
    
    
    (85,651
    )
    
    
    
    
    
    
    (293,578
    )Commission expense
    
    
    (41,494
    )
    
    
    (25,301
    )
    
    
    
    
    
    
    (66,795
    )Other operating expenses
    
    
    (69,502
    )
    
    
    (24,092
    )
    
    
    
    
    
    
    (93,594
    )Commission income and other income (expense)
    
    
    2,053
    
    
    
    (415
    )
    
    
    
    
    
    
    1,638Underwriting profit
    
    
    25,257
    
    
    
    (5,103
    )
    
    
    
    
    
    
    20,154Net investment income
    
    
    47,031
    
    
    
    8,927
    
    
    $
    933
    
    
    
    56,891Net realized capital gains (losses)
    
    
    (13,362
    )
    
    
    (206
    )
    
    
    
    
    
    
    (13,568
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (6,652
    )
    
    
    (6,652
    )Income (loss) before income taxes
    
    
    58,926
    
    
    
    3,618
    
    
    
    (5,719
    )
    
    
    56,825Income tax expense (benefit)
    
    
    15,767
    
    
    
    1,388
    
    
    
    (2,002
    )
    
    
    15,153Net income (loss)
    
    $
    43,159
    
    
    $
    2,230
    
    
    $
    (3,717
    )
    
    $
    41,672Identifiable assets (1)
    
    $
    2,437,909
    
    
    $
    808,768
    
    
    $
    71,608
    
    
    $
    3,340,584Loss and LAE ratio
    
    
    60.8
    %
    
    
    65.7
    %
    
    
    
    
    
    
    62.1
    %Commission expense ratio
    
    
    12.1
    %
    
    
    19.4
    %
    
    
    
    
    
    
    14.1
    %Other operating expense ratio (2)
    
    
    19.7
    %
    
    
    18.8
    %
    
    
    
    
    
    
    19.5
    %Combined ratio
    
    
    92.6
    %
    
    
    103.9
    %
    
    
    
    
    
    
    95.7
    %
 (1)
    
    Includes inter-segment transactions causing the row not to crossfoot.(2)
    
    Includes other operating expenses and commission income and other income (expense).  16




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##### Table of Contents



Nine Months Ended September 30, 2008Insurance
    
    
    LloydsCompanies
    
    
    Operations
    
    
    Total($ in thousands)Gross written premium:Marine & Energy
    
    $
    230,327
    
    
    $
    187,543
    
    
    $
    417,870Specialty
    
    
    240,322
    
    
    
    
    
    
    
    240,322Professional Liability
    
    
    71,430
    
    
    
    29,376
    
    
    
    100,806Middle Markets
    
    
    23,485
    
    
    
    
    
    
    
    23,485Property/Other
    
    
    6,121
    
    
    
    30,698
    
    
    
    36,819Total
    
    $
    571,685
    
    
    $
    247,617
    
    
    $
    819,302Net written premium:Marine & Energy
    
    $
    127,437
    
    
    $
    116,258
    
    
    $
    243,695Specialty
    
    
    164,036
    
    
    
    
    
    
    
    164,036Professional Liability
    
    
    42,658
    
    
    
    17,928
    
    
    
    60,586Middle Markets
    
    
    18,994
    
    
    
    
    
    
    
    18,994Property/Other
    
    
    5,500
    
    
    
    9,516
    
    
    
    15,016Total
    
    $
    358,625
    
    
    $
    143,702
    
    
    $
    502,327Net earned premium:Marine & Energy
    
    $
    105,885
    
    
    $
    104,280
    
    
    $
    210,165Specialty
    
    
    168,552
    
    
    
    
    
    
    
    168,552Professional Liability
    
    
    43,077
    
    
    
    16,211
    
    
    
    59,288Middle Markets
    
    
    16,921
    
    
    
    
    
    
    
    16,921Property/Other
    
    
    7,692
    
    
    
    9,865
    
    
    
    17,557Total
    
    $
    342,127
    
    
    $
    130,356
    
    
    $
    472,483
  17




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##### Table of Contents



Nine Months Ended September 30, 2007Insurance
    
    
    LloydsCompanies
    
    
    Operations
    
    
    Corporate
    
    
    Total($ in thousands)Gross written premium
    
    $
    585,492
    
    
    $
    237,879
    
    
    
    
    
    
    $
    823,371Net written premium
    
    
    355,798
    
    
    
    137,673
    
    
    
    
    
    
    
    493,471Net earned premium
    
    
    320,607
    
    
    
    120,094
    
    
    
    
    
    
    
    440,701Net losses and LAE
    
    
    (184,881
    )
    
    
    (64,069
    )
    
    
    
    
    
    
    (248,950
    )Commission expense
    
    
    (38,072
    )
    
    
    (16,353
    )
    
    
    
    
    
    
    (54,425
    )Other operating expenses
    
    
    (60,983
    )
    
    
    (21,816
    )
    
    
    
    
    
    
    (82,799
    )Commission income and other income (expense)
    
    
    889
    
    
    
    96
    
    
    
    
    
    
    
    985Underwriting profit
    
    
    37,560
    
    
    
    17,952
    
    
    
    
    
    
    
    55,512Net investment income
    
    
    42,910
    
    
    
    7,167
    
    
    $
    1,399
    
    
    
    51,476Net realized capital gains (losses)
    
    
    1,118
    
    
    
    (143
    )
    
    
    
    
    
    
    975Interest expense
    
    
    
    
    
    
    
    
    
    
    (6,646
    )
    
    
    (6,646
    )Income (loss) before income taxes
    
    
    81,588
    
    
    
    24,976
    
    
    
    (5,247
    )
    
    
    101,317Income tax expense (benefit)
    
    
    25,267
    
    
    
    8,806
    
    
    
    (1,836
    )
    
    
    32,237Net income (loss)
    
    $
    56,321
    
    
    $
    16,170
    
    
    $
    (3,411
    )
    
    $
    69,080Identifiable assets (1)
    
    $
    2,292,811
    
    
    $
    793,661
    
    
    $
    65,950
    
    
    $
    3,174,992Loss and LAE ratio
    
    
    57.7
    %
    
    
    53.3
    %
    
    
    
    
    
    
    56.5
    %Commission expense ratio
    
    
    11.9
    %
    
    
    13.6
    %
    
    
    
    
    
    
    12.3
    %Other operating expense ratio (2)
    
    
    18.7
    %
    
    
    18.1
    %
    
    
    
    
    
    
    18.6
    %Combined ratio
    
    
    88.3
    %
    
    
    85.0
    %
    
    
    
    
    
    
    87.4
    %
 (1)
    
    Includes inter-segment transactions causing the row not to crossfoot.(2)
    
    Includes other operating expenses and commission income and other income (expense).  18




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##### Table of Contents



Nine Months Ended September 30, 2007Insurance
    
    
    LloydsCompanies
    
    
    Operations
    
    
    Total($ in thousands)Gross written premium:Marine & Energy
    
    $
    214,086
    
    
    $
    183,661
    
    
    $
    397,747Specialty
    
    
    268,800
    
    
    
    
    
    
    
    268,800Professional Liability
    
    
    69,379
    
    
    
    25,651
    
    
    
    95,030Middle Markets
    
    
    20,583
    
    
    
    
    
    
    
    20,583Property/Other
    
    
    12,644
    
    
    
    28,567
    
    
    
    41,211Total
    
    $
    585,492
    
    
    $
    237,879
    
    
    $
    823,371Net written premium:Marine & Energy
    
    $
    108,570
    
    
    $
    109,899
    
    
    $
    218,469Specialty
    
    
    179,980
    
    
    
    
    
    
    
    179,980Professional Liability
    
    
    41,406
    
    
    
    18,201
    
    
    
    59,607Middle Markets
    
    
    14,129
    
    
    
    
    
    
    
    14,129Property/Other
    
    
    11,713
    
    
    
    9,573
    
    
    
    21,286Total
    
    $
    355,798
    
    
    $
    137,673
    
    
    $
    493,471Net earned premium:Marine & Energy
    
    $
    97,699
    
    
    $
    103,953
    
    
    $
    201,652Specialty
    
    
    161,742
    
    
    
    
    
    
    
    161,742Professional Liability
    
    
    40,555
    
    
    
    9,498
    
    
    
    50,053Middle Markets
    
    
    13,584
    
    
    
    
    
    
    
    13,584Property/Other
    
    
    7,027
    
    
    
    6,643
    
    
    
    13,670Total
    
    $
    320,607
    
    
    $
    120,094
    
    
    $
    440,701
  Note 4. Comprehensive Income
 Consolidated Statements of Stockholders Equity Consolidated
Statements of Comprehensive Income accumulated other
comprehensive income (loss) comprehensive income (loss)
  19




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##### Table of Contents



Note 5. Stock-Based Compensation
 other operating expenses
   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
  20




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##### Table of Contents



Note 7. Syndicate 1221
     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
    22




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##### Table of Contents



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.
   Quoted Prices
    
    
    SignificantIn Active
    
    
    Other
    
    
    SignificantMarkets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    InputsLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total($ in thousands)Fixed maturities
    
    $
    246,320
    
    
    $
    1,378,757
    
    
    $
    609
    
    
    $
    1,625,686Equities securities
    
    
    68,637
    
    
    
    
    
    
    
    
    
    
    
    68,637Short-term investments
    
    
    49,436
    
    
    
    129,133
    
    
    
    
    
    
    
    178,569Total
    
    $
    364,393
    
    
    $
    1,507,890
    
    
    $
    609
    
    
    $
    1,872,892
  23




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##### Table of Contents



Three Months EndedSeptember 30, 2008($ in thousands)Level 3 investments as of July 1, 2008
    
    $
    986Unrealized net gains included in other comprehensive income (loss)
    
    
    Purchases, sales, paydowns and amortization
    
    
    (57
    )Transfer from Level 3
    
    
    (650
    )Transfer to Level 3
    
    
    330Level 3 investments as of September 30, 2008
    
    $
    609
 Nine Months EndedSeptember 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
    
    
    (344
    )Transfer from Level 3
    
    
    (1,979
    )Transfer to Level 3
    
    
    330Level 3 investments as of September 30, 2008
    
    $
    609
  Investments
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Effective Date of FASB Statement No. 157
 Determining the Fair Value of a Financial
Asset When the Market For That Asset Is Not Active
  24




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Note 12. Share Repurchases
  Note 13. Subsequent Event
  
 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;
 
    
    risk that the bank consortium does not renew the credit facility, which would
cause us to find other sources to provide the letters of credit or other collateral
required to continue our participation in Syndicate 1221;
  25




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##### Table of Contents




    
    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 in
2005 and Hurricanes Gustav and Ike in 2008 and the possibility that our estimates of losses
from such hurricanes 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;
 
    
    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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27




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28




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Catastrophe Risk Management
      29




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Critical Accounting Policies
   Reserves for Losses and LAE.
 Reinsurance Recoverables.
 Written and Unearned Premium.
   Deferred Tax Assets.
  30




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




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Results of Operations
   Investments accumulated other comprehensive income (loss)
 Investments
    32




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Revenues .
   33




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Three Months Ended September 30,2008
    
    
    2007Gross
    
    
    
    
    
    
    Net
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    Net
    
    
    NetWritten
    
    
    
    
    
    
    Written
    
    
    Earned
    
    
    Written
    
    
    
    
    
    
    Written
    
    
    EarnedPremium
    
    
    %
    
    
    Premium
    
    
    Premium
    
    
    Premium
    
    
    %
    
    
    Premium
    
    
    Premium($ in thousands)Insurance Companies:Marine
    
    $
    69,796
    
    
    
    27.6
    %
    
    $
    32,643
    
    
    $
    36,203
    
    
    $
    56,630
    
    
    
    23.0
    %
    
    $
    25,606
    
    
    $
    30,204Specialty
    
    
    77,427
    
    
    
    30.6
    %
    
    
    52,094
    
    
    
    55,309
    
    
    
    87,985
    
    
    
    35.8
    %
    
    
    62,905
    
    
    
    58,321Professional Liability
    
    
    25,706
    
    
    
    10.2
    %
    
    
    15,019
    
    
    
    14,616
    
    
    
    24,546
    
    
    
    10.0
    %
    
    
    14,447
    
    
    
    14,184Middle Markets
    
    
    7,727
    
    
    
    3.1
    %
    
    
    5,216
    
    
    
    4,488
    
    
    
    7,642
    
    
    
    3.1
    %
    
    
    5,536
    
    
    
    4,475Property/Other
    
    
    1,477
    
    
    
    0.5
    %
    
    
    1,161
    
    
    
    1,831
    
    
    
    1,255
    
    
    
    0.5
    %
    
    
    1,183
    
    
    
    1,876Insurance Companies Total
    
    
    182,133
    
    
    
    72.0
    %
    
    
    106,133
    
    
    
    112,447
    
    
    
    178,058
    
    
    
    72.4
    %
    
    
    109,677
    
    
    
    109,060Lloyds Operations:Marine
    
    
    52,718
    
    
    
    20.8
    %
    
    
    25,459
    
    
    
    33,185
    
    
    
    50,060
    
    
    
    20.4
    %
    
    
    37,373
    
    
    
    41,607Professional Liability
    
    
    10,307
    
    
    
    4.1
    %
    
    
    6,055
    
    
    
    5,111
    
    
    
    9,639
    
    
    
    3.9
    %
    
    
    8,692
    
    
    
    4,587Other
    
    
    7,785
    
    
    
    3.1
    %
    
    
    2,671
    
    
    
    3,297
    
    
    
    8,204
    
    
    
    3.3
    %
    
    
    3,360
    
    
    
    784Lloyds Operations Total
    
    
    70,810
    
    
    
    28.0
    %
    
    
    34,185
    
    
    
    41,593
    
    
    
    67,903
    
    
    
    27.6
    %
    
    
    49,425
    
    
    
    46,978Total
    
    $
    252,943
    
    
    
    100.0
    %
    
    $
    140,318
    
    
    $
    154,040
    
    
    $
    245,961
    
    
    
    100.0
    %
    
    $
    159,102
    
    
    $
    156,038
  34




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##### Table of Contents



Nine Months Ended September 30,2008
    
    
    2007Gross
    
    
    
    
    
    
    Net
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    Net
    
    
    NetWritten
    
    
    
    
    
    
    Written
    
    
    Earned
    
    
    Written
    
    
    
    
    
    
    Written
    
    
    EarnedPremium
    
    
    %
    
    
    Premium
    
    
    Premium
    
    
    Premium
    
    
    %
    
    
    Premium
    
    
    Premium($ in thousands)Insurance Companies:Marine
    
    $
    230,327
    
    
    
    28.1
    %
    
    $
    127,437
    
    
    $
    105,885
    
    
    $
    214,086
    
    
    
    26.0
    %
    
    $
    108,570
    
    
    $
    97,699Specialty
    
    
    240,322
    
    
    
    29.3
    %
    
    
    164,036
    
    
    
    168,552
    
    
    
    268,800
    
    
    
    32.7
    %
    
    
    179,980
    
    
    
    161,742Professional Liability
    
    
    71,430
    
    
    
    8.7
    %
    
    
    42,658
    
    
    
    43,077
    
    
    
    69,379
    
    
    
    8.4
    %
    
    
    41,406
    
    
    
    40,555Middle Markets
    
    
    23,485
    
    
    
    2.9
    %
    
    
    18,994
    
    
    
    16,921
    
    
    
    20,583
    
    
    
    2.5
    %
    
    
    14,129
    
    
    
    13,584Other
    
    
    6,121
    
    
    
    0.8
    %
    
    
    5,500
    
    
    
    7,692
    
    
    
    12,644
    
    
    
    1.5
    %
    
    
    11,713
    
    
    
    7,027Insurance Companies Total
    
    
    571,685
    
    
    
    69.8
    %
    
    
    358,625
    
    
    
    342,127
    
    
    
    585,492
    
    
    
    71.1
    %
    
    
    355,798
    
    
    
    320,607Lloyds Operations:Marine
    
    
    187,543
    
    
    
    22.9
    %
    
    
    116,258
    
    
    
    104,280
    
    
    
    183,661
    
    
    
    22.3
    %
    
    
    109,899
    
    
    
    103,953Professional Liability
    
    
    29,376
    
    
    
    3.6
    %
    
    
    17,928
    
    
    
    16,211
    
    
    
    25,651
    
    
    
    3.1
    %
    
    
    18,201
    
    
    
    9,498Other
    
    
    30,698
    
    
    
    3.7
    %
    
    
    9,516
    
    
    
    9,865
    
    
    
    28,567
    
    
    
    3.5
    %
    
    
    9,573
    
    
    
    6,643Lloyds Operations Total
    
    
    247,617
    
    
    
    30.2
    %
    
    
    143,702
    
    
    
    130,356
    
    
    
    237,879
    
    
    
    28.9
    %
    
    
    137,673
    
    
    
    120,094Total
    
    $
    819,302
    
    
    
    100.0
    %
    
    $
    502,327
    
    
    $
    472,483
    
    
    $
    823,371
    
    
    
    100.0
    %
    
    $
    493,471
    
    
    $
    440,701
  35




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##### Table of Contents



Gross Written Premium
 Insurance Companies Gross Written Premium
 Marine Premium.
 2008
    
    
    2007Marine liability
    
    
    28.0
    %
    
    
    30.0
    %Offshore energy
    
    
    17.9
    %
    
    
    20.0
    %Cargo
    
    
    10.9
    %
    
    
    9.2
    %P&I
    
    
    9.9
    %
    
    
    10.1
    %Transport
    
    
    8.0
    %
    
    
    7.1
    %Inland marine
    
    
    7.4
    %
    
    
    4.1
    %Other
    
    
    6.8
    %
    
    
    6.6
    %Bluewater hull
    
    
    6.0
    %
    
    
    7.5
    %Craft/Fishing vessel
    
    
    5.1
    %
    
    
    5.4
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
  Specialty Premium.
 2008
    
    
    2007Construction liability
    
    
    48.3
    %
    
    
    51.6
    %Commercial umbrella
    
    
    19.4
    %
    
    
    16.7
    %Programs
    
    
    14.6
    %
    
    
    11.0
    %Primary E&S
    
    
    12.1
    %
    
    
    12.4
    %Personal umbrella
    
    
    2.8
    %
    
    
    2.7
    %Liquor liability
    
    
    2.0
    %
    
    
    1.2
    %Monarch PAF
    
    
    0.5
    %
    
    
    0.5
    %Life sciences
    
    
    0.3
    %
    
    
    0.0
    %Other
    
    
    0.0
    %
    
    
    3.9
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
   36




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##### Table of Contents



Professional Liability Premium.
 2008
    
    
    2007D&O (public and private)
    
    
    65.2
    %
    
    
    66.6
    %Lawyers and other professionals
    
    
    28.9
    %
    
    
    26.0
    %Architects and engineers
    
    
    5.9
    %
    
    
    7.4
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
  Middle Markets Premium.
  2008
    
    
    2007General liability
    
    
    45.2
    %
    
    
    53.4
    %Commercial automobile liability
    
    
    42.0
    %
    
    
    33.6
    %Property
    
    
    12.8
    %
    
    
    13.0
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
  Property/Other Premium.
 Lloyds Operations Gross Written Premium
    37




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##### Table of Contents



Marine Premium.
 2008
    
    
    2007Cargo and specie
    
    
    32.6
    %
    
    
    35.2
    %Marine liability
    
    
    25.5
    %
    
    
    20.6
    %Offshore energy
    
    
    23.4
    %
    
    
    25.0
    %Assumed reinsurance
    
    
    7.8
    %
    
    
    12.4
    %Hull
    
    
    7.5
    %
    
    
    5.8
    %Other
    
    
    3.2
    %
    
    
    1.0
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
  Professional Liability Premium.
 2008
    
    
    2007E&O
    
    
    66.2
    %
    
    
    54.3
    %D&O (public and private)
    
    
    33.8
    %
    
    
    45.7
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
  Property/Other Premium.
 Ceded Written Premium .
  38




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##### Table of Contents



Three Months Ended September 30,2008
    
    
    2007% of
    
    
    
    
    
    
    % ofCeded
    
    
    Gross
    
    
    Ceded
    
    
    GrossWritten
    
    
    Written
    
    
    Written
    
    
    WrittenPremium
    
    
    Premium
    
    
    Premium
    
    
    Premium($ in thousands)Insurance Companies:Marine
    
    $
    37,153
    
    
    
    53.2
    %
    
    $
    31,024
    
    
    
    54.8
    %Specialty
    
    
    25,333
    
    
    
    32.7
    %
    
    
    25,080
    
    
    
    28.5
    %Professional Liability
    
    
    10,687
    
    
    
    41.6
    %
    
    
    10,099
    
    
    
    41.1
    %Middle Markets
    
    
    2,511
    
    
    
    32.5
    %
    
    
    2,106
    
    
    
    27.6
    %Property/Other
    
    
    316
    
    
    
    21.4
    %
    
    
    72
    
    
    
    5.7
    %Subtotal
    
    
    76,000
    
    
    
    41.7
    %
    
    
    68,381
    
    
    
    38.4
    %Lloyds Operations:Marine
    
    
    27,259
    
    
    
    51.7
    %
    
    
    12,687
    
    
    
    25.3
    %Professional Liability
    
    
    4,252
    
    
    
    41.2
    %
    
    
    947
    
    
    
    9.8
    %Property/Other
    
    
    5,114
    
    
    
    65.7
    %
    
    
    4,844
    
    
    
    59.0
    %Subtotal
    
    
    36,625
    
    
    
    51.7
    %
    
    
    18,478
    
    
    
    27.2
    %Total
    
    $
    112,625
    
    
    
    44.5
    %
    
    $
    86,859
    
    
    
    35.3
    %
  39




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##### Table of Contents



Nine Months Ended September 30,2008
    
    
    2007% of
    
    
    
    
    
    
    % ofCeded
    
    
    Gross
    
    
    Ceded
    
    
    GrossWritten
    
    
    Written
    
    
    Written
    
    
    WrittenPremium
    
    
    Premium
    
    
    Premium
    
    
    Premium($ in thousands)Insurance Companies:Marine
    
    $
    102,890
    
    
    
    44.7
    %
    
    $
    105,516
    
    
    
    49.3
    %Specialty
    
    
    76,286
    
    
    
    31.7
    %
    
    
    88,820
    
    
    
    33.0
    %Professional Liability
    
    
    28,772
    
    
    
    40.3
    %
    
    
    27,973
    
    
    
    40.3
    %Middle Markets
    
    
    4,491
    
    
    
    19.1
    %
    
    
    6,454
    
    
    
    31.4
    %Property/Other
    
    
    621
    
    
    
    10.1
    %
    
    
    931
    
    
    
    7.4
    %Subtotal
    
    
    213,060
    
    
    
    37.3
    %
    
    
    229,694
    
    
    
    39.2
    %Lloyds Operations:Marine
    
    
    71,285
    
    
    
    38.0
    %
    
    
    73,762
    
    
    
    40.2
    %Professional Liability
    
    
    11,448
    
    
    
    39.0
    %
    
    
    7,450
    
    
    
    29.0
    %Property/Other
    
    
    21,182
    
    
    
    69.0
    %
    
    
    18,994
    
    
    
    66.5
    %Subtotal
    
    
    103,915
    
    
    
    42.0
    %
    
    
    100,206
    
    
    
    42.1
    %Total
    
    $
    316,975
    
    
    
    38.7
    %
    
    $
    329,900
    
    
    
    40.1
    %
  
    
    Reinstatement premium of $12.6 million related to Hurricanes Gustav and Ike recorded during
the third quarter of 2008, consisting of $5.8 million and $6.8 million charged to the marine
lines of the Insurance Companies and Lloyds Operations, respectively.
    
    The 2007 third quarter ceded written premium of the Lloyds Operations was reduced by
approximately $6.4 million for ceded written premium amounts that were over estimated in prior
accounting periods mostly recorded during the six months ended 2007. The estimate change
which results in a higher relationship of net premiums retained to gross written premium in
the 2007 third quarter was not material to the current and prior quarterly accounting periods.
    
    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 the 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.
  40




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##### Table of Contents



Net Written Premium .
 Net Earned Premium .
 Commission Income .
 Net Investment Income .
 Net Realized Capital Gains and Losses .
  Other Income/(Expense) .
 Operating Expenses
 Net Losses and Loss Adjustment Expenses Incurred
   41




---



##### Table of Contents



September 30,
    
    
    December 31,2008
    
    
    2007
    
    
    Change($ in thousands)Reinsurance recoverables:Paid losses
    
    $
    60,110
    
    
    $
    94,818
    
    
    $
    (34,708
    )Unpaid losses and LAE reserves
    
    
    865,288
    
    
    
    801,461
    
    
    
    63,827Total
    
    $
    925,398
    
    
    $
    896,279
    
    
    $
    29,119
  September 30,
    
    
    December 31,2008
    
    
    2007
    
    
    Change($ in thousands)Gross reserves for losses and LAE
    
    $
    1,847,694
    
    
    $
    1,648,764
    
    
    
    12.1
    %Less: Reinsurance recoverable on unpaid
losses and LAE reserves
    
    
    865,288
    
    
    
    801,461
    
    
    
    8.0
    %Net loss and LAE reserves
    
    $
    982,406
    
    
    $
    847,303
    
    
    
    15.9
    %
  42




---



##### Table of Contents







September 30, 2008Net
    
    
    Net
    
    
    Total
    
    
    % of IBNRReported
    
    
    IBNR
    
    
    Net Loss
    
    
    to Total NetReserves
    
    
    Reserves
    
    
    Reserves
    
    
    Loss Reserves($ in thousands)Insurance Companies:Marine
    
    $
    116,141
    
    
    $
    118,442
    
    
    $
    234,583
    
    
    
    50.5
    %SpecialtyConstruction Liability
    
    
    42,028
    
    
    
    223,057
    
    
    
    265,085
    
    
    
    84.1
    %All other liability
    
    
    25,165
    
    
    
    84,820
    
    
    
    109,985
    
    
    
    77.1
    %Total Specialty
    
    
    67,193
    
    
    
    307,877
    
    
    
    375,070
    
    
    
    82.1
    %Professional Liability
    
    
    23,457
    
    
    
    58,701
    
    
    
    82,158
    
    
    
    71.4
    %Middle Markets
    
    
    12,784
    
    
    
    11,988
    
    
    
    24,772
    
    
    
    48.4
    %Property/Other
    
    
    11,372
    
    
    
    9,638
    
    
    
    21,010
    
    
    
    45.9
    %Total Insurance Companies
    
    
    230,947
    
    
    
    506,646
    
    
    
    737,593
    
    
    
    68.7
    %Lloyds Operations:Marine
    
    
    108,165
    
    
    
    97,167
    
    
    
    205,332
    
    
    
    47.3
    %Other
    
    
    12,744
    
    
    
    26,737
    
    
    
    39,481
    
    
    
    67.7
    %Total Lloyds Operations
    
    
    120,909
    
    
    
    123,904
    
    
    
    244,813
    
    
    
    50.6
    %Total Company
    
    $
    351,856
    
    
    $
    630,550
    
    
    $
    982,406
    
    
    
    64.2
    %




43



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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
    %
      44




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##### Table of Contents



Hurricanes Gustav and Ike.
  45




---



##### Table of Contents



Hurricane
    
    
    HurricaneGustav
    
    
    Ike
    
    
    Total($ in thousands)Reduction in net earned premiums for
reinstatement costs
    
    $
    1,072
    
    
    $
    11,512
    
    
    $
    12,584Gross losses incurred
    
    
    19,000
    
    
    
    85,000
    
    
    
    104,000Reinsurance recoverable
    
    
    9,000
    
    
    
    79,500
    
    
    
    88,500Net losses incurred
    
    
    10,000
    
    
    
    5,500
    
    
    
    15,500Underwriting loss
    
    $
    11,072
    
    
    $
    17,012
    
    
    $
    28,084After-tax net loss
    
    $
    7,197
    
    
    $
    11,058
    
    
    $
    18,255Reduction in earnings per share
    
    $
    0.43
    
    
    $
    0.65
    
    
    $
    1.08Effect on 2008 third quarter combined ratio:Loss and LAE ratio
    
    
    
    
    
    
    
    
    
    
    14.9
    %Expense ratio
    
    
    
    
    
    
    
    
    
    
    2.5
    %Combined ratio
    
    
    
    
    
    
    
    
    
    
    17.4
    %Effect on 2008 nine month period combined ratio:Loss and LAE ratio
    
    
    
    
    
    
    
    
    
    
    4.8
    %Expense ratio
    
    
    
    
    
    
    
    
    
    
    0.9
    %Combined ratio
    
    
    
    
    
    
    
    
    
    
    5.7
    %
 Hurricanes Katrina and Rita.
  46




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##### Table of Contents



Nine Months Ended
    
    
    Year EndedSeptember 30, 2008
    
    
    December 31, 2007($ in thousands)Gross of ReinsuranceBeginning gross reserves
    
    $
    141,831
    
    
    $
    319,230Incurred loss & LAE
    
    
    125
    
    
    
    (29,349
    )Calendar year payments
    
    
    24,213
    
    
    
    148,050Ending gross reserves
    
    $
    117,743
    
    
    $
    141,831Gross case loss reserves
    
    $
    73,148
    
    
    $
    94,959Gross IBNR loss reserves
    
    
    44,595
    
    
    
    46,872Ending gross reserves
    
    $
    117,743
    
    
    $
    141,831Net of ReinsuranceBeginning net reserves
    
    $
    4,519
    
    
    $
    10,003Incurred loss & LAE
    
    
    (476
    )
    
    
    (1,909
    )Calendar year payments
    
    
    (271
    )
    
    
    3,575Ending net reserves
    
    $
    4,314
    
    
    $
    4,519Net case loss reserves
    
    $
    334
    
    
    $
    646Net IBNR loss reserves
    
    
    3,980
    
    
    
    3,873Ending net reserves
    
    $
    4,314
    
    
    $
    4,519
   47




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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
    
    
    $
    650
    
    
    
    Excess: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 are from 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
nine months ended September 30, 2008.(2)
    
    Amounts are net of reinsurance. Asbestos Liability.
    48




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##### Table of Contents



Nine Months Ended
    
    
    Year EndedSeptember 30, 2008
    
    
    December 31, 2007($ in thousands)Gross of ReinsuranceBeginning gross reserves
    
    $
    23,194
    
    
    $
    37,171Incurred losses & LAE
    
    
    670
    
    
    
    (780
    )Calendar year payments
    
    
    2,110
    
    
    
    13,197Ending gross reserves
    
    $
    21,754
    
    
    $
    23,194Gross case loss reserves
    
    $
    13,898
    
    
    $
    16,014Gross IBNR loss reserves
    
    
    7,856
    
    
    
    7,180Ending gross reserves
    
    $
    21,754
    
    
    $
    23,194Net of ReinsuranceBeginning net reserves
    
    $
    16,717
    
    
    $
    21,381Incurred losses & LAE
    
    
    587
    
    
    
    1,779Calendar year payments
    
    
    643
    
    
    
    6,443Ending net reserves
    
    $
    16,661
    
    
    $
    16,717Net case loss reserves
    
    $
    9,010
    
    
    $
    9,715Net IBNR loss reserves
    
    
    7,651
    
    
    
    7,002Ending net reserves
    
    $
    16,661
    
    
    $
    16,717
    Prior Year Reserve Redundancies/Deficiencies
   49




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##### Table of Contents



Three Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007($ in thousands)Insurance Companies:Marine
    
    $
    600
    
    
    $
    (1,447
    )Specialty
    
    
    (4,000
    )
    
    
    (5,288
    )Professional Liability
    
    
    (1,600
    )
    
    
    (3,081
    )Middle Markets
    
    
    (300
    )
    
    
    Property/Other
    
    
    (300
    )
    
    
    (1,164
    )Subtotal Insurance Companies
    
    
    (5,600
    )
    
    
    (10,980
    )Lloyds Operations
    
    
    (2,420
    )
    
    
    (1,187
    )Total
    
    $
    (8,020
    )
    
    $
    (12,167
    )
 Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007($ in thousands)Insurance Companies:Marine
    
    $
    (5,379
    )
    
    $
    (2,898
    )Specialty
    
    
    (14,436
    )
    
    
    (11,466
    )Professional Liability
    
    
    (2,811
    )
    
    
    (7,165
    )Middle Markets
    
    
    400
    
    
    
    Property/Other
    
    
    (3,526
    )
    
    
    (642
    )Subtotal Insurance Companies
    
    
    (25,752
    )
    
    
    (22,171
    )Lloyds Operations
    
    
    (6,528
    )
    
    
    (7,413
    )Total
    
    $
    (32,280
    )
    
    $
    (29,584
    )
    50




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##### Table of Contents



51




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##### Table of Contents



Commission Expense.
 Other Operating Expenses.
  52




---



##### Table of Contents



Income Taxes
    Accounting for Uncertainty in Income
Taxes
  53




---



##### Table of Contents



Segment Information
     Insurance Companies
   54




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007($ in thousands)Gross written premium
    
    $
    182,133
    
    
    $
    178,058
    
    
    $
    571,685
    
    
    $
    585,492Net written premium
    
    
    106,133
    
    
    
    109,677
    
    
    
    358,625
    
    
    
    355,798Net earned premium
    
    
    112,447
    
    
    
    109,060
    
    
    
    342,127
    
    
    
    320,607Net losses and LAE
    
    
    (78,346
    )
    
    
    (59,816
    )
    
    
    (207,927
    )
    
    
    (184,881
    )Commission expense
    
    
    (13,823
    )
    
    
    (13,086
    )
    
    
    (41,494
    )
    
    
    (38,072
    )Other operating expenses
    
    
    (22,802
    )
    
    
    (21,157
    )
    
    
    (69,502
    )
    
    
    (60,983
    )Commission income and other income (expense)
    
    
    279
    
    
    
    304
    
    
    
    2,053
    
    
    
    889Underwriting profit (loss)
    
    
    (2,245
    )
    
    
    15,305
    
    
    
    25,257
    
    
    
    37,560Net investment income
    
    
    15,973
    
    
    
    14,816
    
    
    
    47,031
    
    
    
    42,910Net realized capital gains (losses)
    
    
    (5,207
    )
    
    
    41
    
    
    
    (13,362
    )
    
    
    1,118Income before income taxes
    
    
    8,521
    
    
    
    30,162
    
    
    
    58,926
    
    
    
    81,588Income tax expense
    
    
    1,458
    
    
    
    9,193
    
    
    
    15,767
    
    
    
    25,267Net income
    
    $
    7,063
    
    
    $
    20,969
    
    
    $
    43,159
    
    
    $
    56,321Loss and LAE ratio
    
    
    69.7
    %
    
    
    54.8
    %
    
    
    60.8
    %
    
    
    57.7
    %Commission expense ratio
    
    
    12.3
    %
    
    
    12.0
    %
    
    
    12.1
    %
    
    
    11.9
    %Other operating expense ratio (1)
    
    
    20.0
    %
    
    
    19.1
    %
    
    
    19.7
    %
    
    
    18.7
    %Combined ratio
    
    
    102.0
    %
    
    
    85.9
    %
    
    
    92.6
    %
    
    
    88.3
    %
 (1)
    
    Includes other operating expenses and commission income and other income
(expense).  55




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##### Table of Contents



Three Months Ended September 30, 2008($ in thousands)Net
    
    
    LossesEarned
    
    
    and LAE
    
    
    Underwriting
    
    
    Underwriting
    
    
    Loss
    
    
    Expense
    
    
    CombinedPremium
    
    
    Incurred
    
    
    Expenses
    
    
    Profit/(Loss)
    
    
    Ratio
    
    
    Ratio
    
    
    RatioMarine & Energy
    
    $
    36,203
    
    
    $
    34,657
    
    
    $
    11,927
    
    
    $
    (10,381
    )
    
    
    95.7
    %
    
    
    32.9
    %
    
    
    128.6
    %Specialty
    
    
    55,309
    
    
    
    32,699
    
    
    
    15,947
    
    
    
    6,663
    
    
    
    59.1
    %
    
    
    28.8
    %
    
    
    87.9
    %Professional Liability
    
    
    14,616
    
    
    
    8,010
    
    
    
    5,184
    
    
    
    1,422
    
    
    
    54.8
    %
    
    
    35.5
    %
    
    
    90.3
    %Middle Markets
    
    
    4,488
    
    
    
    2,299
    
    
    
    2,476
    
    
    
    (287
    )
    
    
    51.2
    %
    
    
    55.2
    %
    
    
    106.4
    %Property/Other
    
    
    1,831
    
    
    
    681
    
    
    
    812
    
    
    
    338
    
    
    
    37.2
    %
    
    
    44.3
    %
    
    
    81.5
    %Total
    
    $
    112,447
    
    
    $
    78,346
    
    
    $
    36,346
    
    
    $
    (2,245
    )
    
    
    69.7
    %
    
    
    32.3
    %
    
    
    102.0
    %
 Three Months Ended September 30, 2007($ in thousands)Net
    
    
    LossesEarned
    
    
    and LAE
    
    
    Underwriting
    
    
    Underwriting
    
    
    Loss
    
    
    Expense
    
    
    CombinedPremium
    
    
    Incurred
    
    
    Expenses
    
    
    Profit/(Loss)
    
    
    Ratio
    
    
    Ratio
    
    
    RatioMarine & Energy
    
    $
    30,204
    
    
    $
    19,600
    
    
    $
    10,439
    
    
    $
    165
    
    
    
    64.9
    %
    
    
    34.6
    %
    
    
    99.5
    %Specialty
    
    
    58,321
    
    
    
    28,127
    
    
    
    15,769
    
    
    
    14,425
    
    
    
    48.2
    %
    
    
    27.0
    %
    
    
    75.2
    %Professional Liability
    
    
    14,184
    
    
    
    8,764
    
    
    
    5,217
    
    
    
    203
    
    
    
    61.8
    %
    
    
    36.8
    %
    
    
    98.6
    %Middle Markets
    
    
    4,475
    
    
    
    2,026
    
    
    
    1,569
    
    
    
    880
    
    
    
    45.3
    %
    
    
    35.1
    %
    
    
    80.4
    %Property/Other
    
    
    1,876
    
    
    
    1,299
    
    
    
    945
    
    
    
    (368
    )
    
    
    69.2
    %
    
    
    50.4
    %
    
    
    119.6
    %Total
    
    $
    109,060
    
    
    $
    59,816
    
    
    $
    33,939
    
    
    $
    15,305
    
    
    
    54.8
    %
    
    
    31.1
    %
    
    
    85.9
    %
  56




---



##### Table of Contents



Nine Months Ended September 30, 2008($ in thousands)Net
    
    
    LossesEarned
    
    
    and LAE
    
    
    Underwriting
    
    
    Underwriting
    
    
    Loss
    
    
    Expense
    
    
    CombinedPremium
    
    
    Incurred
    
    
    Expenses
    
    
    Profit/(Loss)
    
    
    Ratio
    
    
    Ratio
    
    
    RatioMarine & Energy
    
    $
    105,885
    
    
    $
    76,525
    
    
    $
    35,183
    
    
    $
    (5,823
    )
    
    
    72.3
    %
    
    
    33.2
    %
    
    
    105.5
    %Specialty
    
    
    168,552
    
    
    
    95,793
    
    
    
    48,130
    
    
    
    24,629
    
    
    
    56.8
    %
    
    
    28.6
    %
    
    
    85.4
    %Professional Liability
    
    
    43,077
    
    
    
    24,289
    
    
    
    15,302
    
    
    
    3,486
    
    
    
    56.4
    %
    
    
    35.5
    %
    
    
    91.9
    %Middle Markets
    
    
    16,921
    
    
    
    10,302
    
    
    
    7,216
    
    
    
    (597
    )
    
    
    60.9
    %
    
    
    42.6
    %
    
    
    103.5
    %Property/Other
    
    
    7,692
    
    
    
    1,018
    
    
    
    3,112
    
    
    
    3,562
    
    
    
    13.2
    %
    
    
    40.5
    %
    
    
    53.7
    %Total
    
    $
    342,127
    
    
    $
    207,927
    
    
    $
    108,943
    
    
    $
    25,257
    
    
    
    60.8
    %
    
    
    31.8
    %
    
    
    92.6
    %
 Nine Months Ended September 30, 2007($ in thousands)Net
    
    
    LossesEarned
    
    
    and LAE
    
    
    Underwriting
    
    
    Underwriting
    
    
    Loss
    
    
    Expense
    
    
    CombinedPremium
    
    
    Incurred
    
    
    Expenses
    
    
    Profit/(Loss)
    
    
    Ratio
    
    
    Ratio
    
    
    RatioMarine & Energy
    
    $
    97,699
    
    
    $
    57,835
    
    
    $
    30,553
    
    
    $
    9,311
    
    
    
    59.2
    %
    
    
    31.3
    %
    
    
    90.5
    %Specialty
    
    
    161,742
    
    
    
    88,415
    
    
    
    44,964
    
    
    
    28,363
    
    
    
    54.7
    %
    
    
    27.8
    %
    
    
    82.5
    %Professional
Liability
    
    
    40,555
    
    
    
    24,989
    
    
    
    14,870
    
    
    
    696
    
    
    
    61.6
    %
    
    
    36.6
    %
    
    
    98.2
    %Middle Markets
    
    
    13,584
    
    
    
    6,811
    
    
    
    4,905
    
    
    
    1,868
    
    
    
    50.1
    %
    
    
    36.1
    %
    
    
    86.2
    %Property/Other
    
    
    7,027
    
    
    
    6,831
    
    
    
    2,874
    
    
    
    (2,678
    )
    
    
    97.2
    %
    
    
    40.9
    %
    
    
    138.1
    %Total
    
    $
    320,607
    
    
    $
    184,881
    
    
    $
    98,166
    
    
    $
    37,560
    
    
    
    57.7
    %
    
    
    30.6
    %
    
    
    88.3
    %
    57




---



##### Table of Contents



Hurricane
    
    
    HurricaneGustav
    
    
    Ike
    
    
    Total($ in thousands)Reduction in net earned premiums for reinstatement costs
    
    $
    252
    
    
    $
    5,526
    
    
    $
    5,778Gross losses incurred
    
    
    10,000
    
    
    
    40,775
    
    
    
    50,775Reinsurance recoverable
    
    
    3,297
    
    
    
    38,375
    
    
    
    41,672Net losses incurred
    
    
    6,703
    
    
    
    2,400
    
    
    
    9,103Underwriting loss
    
    $
    6,955
    
    
    $
    7,926
    
    
    $
    14,881After-tax net loss
    
    $
    4,521
    
    
    $
    5,152
    
    
    $
    9,673Reduction in earnings per share
    
    $
    0.27
    
    
    $
    0.30
    
    
    $
    0.57Effect on 2008 third quarter combined ratio:Loss and LAE ratio
    
    
    
    
    
    
    
    
    
    
    34.9
    %Expense ratio
    
    
    
    
    
    
    
    
    
    
    4.5
    %Combined ratio
    
    
    
    
    
    
    
    
    
    
    39.4
    %Effect on 2008 nine month period combined ratio:Loss and LAE ratio
    
    
    
    
    
    
    
    
    
    
    11.9
    %Expense ratio
    
    
    
    
    
    
    
    
    
    
    1.7
    %Combined ratio
    
    
    
    
    
    
    
    
    
    
    13.6
    %
     58




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##### Table of Contents



Lloyds Operations
    Liquidity and Capital Resources
   59




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007($ in thousands)Gross written premium
    
    $
    70,810
    
    
    $
    67,903
    
    
    $
    247,617
    
    
    $
    237,879Net written premium
    
    
    34,185
    
    
    
    49,425
    
    
    
    143,702
    
    
    
    137,673Net earned premium
    
    
    41,593
    
    
    
    46,978
    
    
    
    130,356
    
    
    
    120,094Net losses and LAE
    
    
    (34,923
    )
    
    
    (28,203
    )
    
    
    (85,651
    )
    
    
    (64,069
    )Commission expense
    
    
    (8,534
    )
    
    
    (6,590
    )
    
    
    (25,301
    )
    
    
    (16,353
    )Other operating expenses
    
    
    (7,799
    )
    
    
    (6,745
    )
    
    
    (24,092
    )
    
    
    (21,816
    )Commission income and other income (expense)
    
    
    (390
    )
    
    
    111
    
    
    
    (415
    )
    
    
    96Underwriting profit (loss)
    
    
    (10,053
    )
    
    
    5,551
    
    
    
    (5,103
    )
    
    
    17,952Net investment income
    
    
    3,074
    
    
    
    2,609
    
    
    
    8,927
    
    
    
    7,167Net realized capital gains (losses)
    
    
    (309
    )
    
    
    (107
    )
    
    
    (206
    )
    
    
    (143
    )Income before income taxes
    
    
    (7,288
    )
    
    
    8,053
    
    
    
    3,618
    
    
    
    24,976Income tax expense (benefit)
    
    
    (2,489
    )
    
    
    2,877
    
    
    
    1,388
    
    
    
    8,806Net income (loss)
    
    $
    (4,799
    )
    
    $
    5,176
    
    
    $
    2,230
    
    
    $
    16,170Loss and LAE ratio
    
    
    84.0
    %
    
    
    60.0
    %
    
    
    65.7
    %
    
    
    53.3
    %Commission expense ratio
    
    
    20.5
    %
    
    
    14.0
    %
    
    
    19.4
    %
    
    
    13.6
    %Other operating expense ratio (1)
    
    
    19.7
    %
    
    
    14.1
    %
    
    
    18.8
    %
    
    
    18.1
    %Combined ratio
    
    
    124.2
    %
    
    
    88.1
    %
    
    
    103.9
    %
    
    
    85.0
    %
 (1)
    
    Includes other operating expenses and commission income and other income
(expense)    60




---



##### Table of Contents



Hurricane
    
    
    HurricaneGustav
    
    
    Ike
    
    
    Total($ in thousands)Reduction in net earned premiums for reinstatement costs
    
    $
    820
    
    
    $
    5,986
    
    
    $
    6,806Gross losses incurred
    
    
    9,000
    
    
    
    44,225
    
    
    
    53,225Reinsurance recoverable
    
    
    5,703
    
    
    
    41,125
    
    
    
    46,828Net losses incurred
    
    
    3,297
    
    
    
    3,100
    
    
    
    6,397Underwriting loss
    
    $
    4,117
    
    
    $
    9,086
    
    
    $
    13,203After-tax net loss
    
    $
    2,676
    
    
    $
    5,906
    
    
    $
    8,582Reduction in earnings per share
    
    $
    0.16
    
    
    $
    0.35
    
    
    $
    0.51Effect on 2008 third quarter combined ratio:Loss and LAE ratio
    
    
    
    
    
    
    
    
    
    
    25.0
    %Expense ratio
    
    
    
    
    
    
    
    
    
    
    5.7
    %Combined ratio
    
    
    
    
    
    
    
    
    
    
    30.7
    %Effect on 2008 nine month period combined ratio:Loss and LAE ratio
    
    
    
    
    
    
    
    
    
    
    7.9
    %Expense ratio
    
    
    
    
    
    
    
    
    
    
    1.9
    %Combined ratio
    
    
    
    
    
    
    
    
    
    
    9.8
    %
     61




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##### 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
     62




---



##### 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 asset-backed and
mortgage-backed securities which are similar to other asset-backed or
mortgage-backed securities observed in the market.
    
    Level 3  Valuations derived from valuation techniques in which one or more
significant inputs or significant value drivers are unobservable. An example would be
a private placement with minimal liquidity.
   63




---



##### 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
    
    $
    246,320
    
    
    $
    1,378,757
    
    
    $
    609
    
    
    $
    1,625,686Equities securities
    
    
    68,637
    
    
    
    
    
    
    
    
    
    
    
    68,637Short-term investments
    
    
    49,436
    
    
    
    129,133
    
    
    
    
    
    
    
    178,569Total
    
    $
    364,393
    
    
    $
    1,507,890
    
    
    $
    609
    
    
    $
    1,872,892
   Three Months EndedSeptember 30, 2008($ in thousands)Level 3 investments as of July 1, 2008
    
    $
    986Unrealized net gains included in other comprehensive income (loss)
    
    
    Purchases, sales, paydowns and amortization
    
    
    (57
    )Transfer from Level 3
    
    
    (650
    )Transfer to Level 3
    
    
    330Level 3 investments as of September 30, 2008
    
    $
    609
  64




---



##### Table of Contents



Nine Months EndedSeptember 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
    
    
    (344
    )Transfer from Level 3
    
    
    (1,979
    )Transfer to Level 3
    
    
    330Level 3 investments as of September 30, 2008
    
    $
    609
   65




---



##### Table of Contents



Gross
    
    
    Gross
    
    
    Cost orFair
    
    
    Unrealized
    
    
    Unrealized
    
    
    AmortizedSeptember 30, 2008
    
    Value
    
    
    Gains
    
    
    (Losses)
    
    
    Cost($ in thousands)Fixed maturities:U.S. Government Treasury and Agency
Bonds and foreign government bonds
    
    $
    337,382
    
    
    $
    7,994
    
    
    $
    (237
    )
    
    $
    329,625States, municipalities and political
subdivisions
    
    
    594,104
    
    
    
    2,366
    
    
    
    (14,082
    )
    
    
    605,820Mortgage- and asset-backed securities:Mortgage-backed securities
    
    
    281,184
    
    
    
    1,904
    
    
    
    (1,285
    )
    
    
    280,565Collateralized mortgage obligations
    
    
    76,910
    
    
    
    
    
    
    
    (17,493
    )
    
    
    94,403Asset-backed securities
    
    
    41,795
    
    
    
    63
    
    
    
    (695
    )
    
    
    42,427Commercial mortgage-backed securities
    
    
    102,139
    
    
    
    
    
    
    
    (11,623
    )
    
    
    113,762Subtotal
    
    
    502,028
    
    
    
    1,967
    
    
    
    (31,096
    )
    
    
    531,157Corporate bonds
    
    
    192,172
    
    
    
    796
    
    
    
    (15,035
    )
    
    
    206,411Total fixed maturities
    
    
    1,625,686
    
    
    
    13,123
    
    
    
    (60,450
    )
    
    
    1,673,013Equity securities  common stocks
    
    
    68,637
    
    
    
    3,580
    
    
    
    (6,778
    )
    
    
    71,835Cash
    
    
    23,298
    
    
    
    
    
    
    
    
    
    
    
    23,298Short-term investments
    
    
    178,569
    
    
    
    
    
    
    
    
    
    
    
    178,569Total
    
    $
    1,896,190
    
    
    $
    16,703
    
    
    $
    (67,228
    )
    
    $
    1,946,715
 Gross
    
    
    Gross
    
    
    Cost orFair
    
    
    Unrealized
    
    
    Unrealized
    
    
    AmortizedDecember 31, 2007
    
    Value
    
    
    Gains
    
    
    (Losses)
    
    
    Cost($ in thousands)Fixed maturities:U.S. Government Treasury and Agency
Bonds and foreign government bonds
    
    $
    256,131
    
    
    $
    5,984
    
    
    $
    (63
    )
    
    $
    250,210States, municipalities and political
subdivisions
    
    
    515,883
    
    
    
    7,050
    
    
    
    (657
    )
    
    
    509,490Mortgage- and asset-backed securities:Mortgage-backed securities
    
    
    266,270
    
    
    
    2,177
    
    
    
    (758
    )
    
    
    264,851Collateralized mortgage obligations
    
    
    109,560
    
    
    
    253
    
    
    
    (822
    )
    
    
    110,129Asset-backed securities
    
    
    64,352
    
    
    
    533
    
    
    
    (79
    )
    
    
    63,898Commercial mortgage-backed securities
    
    
    113,488
    
    
    
    544
    
    
    
    (1,031
    )
    
    
    113,975Subtotal
    
    
    553,670
    
    
    
    3,507
    
    
    
    (2,690
    )
    
    
    552,853Corporate 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
 66




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##### Table of Contents



Gross
    
    
    Gross
    
    
    Cost orFair
    
    
    Unrealized
    
    
    Unrealized
    
    
    AmortizedSeptember 30, 2008
    
    Value
    
    
    Gains
    
    
    (Losses)
    
    
    Cost($ in thousands)U.S. Treasury Bonds
    
    $
    265,002
    
    
    $
    7,318
    
    
    $
    (101
    )
    
    $
    257,785Agency Bonds
    
    
    66,626
    
    
    
    676
    
    
    
    (125
    )
    
    
    66,075Foreign Government Bonds
    
    
    5,754
    
    
    
    
    
    
    
    (11
    )
    
    
    5,765Total
    
    $
    337,382
    
    
    $
    7,994
    
    
    $
    (237
    )
    
    $
    329,625
 Gross
    
    
    Gross
    
    
    Cost orFair
    
    
    Unrealized
    
    
    Unrealized
    
    
    AmortizedDecember 31, 2007
    
    Value
    
    
    Gains
    
    
    (Losses)
    
    
    Cost($ in thousands)U.S. Treasury Bonds
    
    $
    191,876
    
    
    $
    5,359
    
    
    $
    (27
    )
    
    $
    186,544Agency Bonds
    
    
    55,158
    
    
    
    612
    
    
    
    (4
    )
    
    
    54,550Foreign Government Bonds
    
    
    9,097
    
    
    
    13
    
    
    
    (32
    )
    
    
    9,116Total
    
    $
    256,131
    
    
    $
    5,984
    
    
    $
    (63
    )
    
    $
    250,210
     67




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##### Table of Contents



Gross
    
    
    Gross
    
    
    Cost orFair
    
    
    Unrealized
    
    
    Unrealized
    
    
    AmortizedValue
    
    
    Gains
    
    
    (Losses)
    
    
    Cost($ in thousands)Mortgage-backed securities:GNMA
    
    $
    39,524
    
    
    $
    229
    
    
    $
    (439
    )
    
    $
    39,734FNMA
    
    
    174,376
    
    
    
    1,243
    
    
    
    (573
    )
    
    
    173,706FHLMC
    
    
    67,284
    
    
    
    432
    
    
    
    (273
    )
    
    
    67,125Prime
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Alt-A
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subprime
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    281,184
    
    
    $
    1,904
    
    
    $
    (1,285
    )
    
    $
    280,565
 Gross
    
    
    Gross
    
    
    Cost orFair
    
    
    Unrealized
    
    
    Unrealized
    
    
    AmortizedValue
    
    
    Gains
    
    
    (Losses)
    
    
    Cost($ in thousands)Collateralized
mortgage
obligations:GNMA
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    FNMA
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    FHLMC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Prime
    
    
    64,557
    
    
    
    
    
    
    
    (12,533
    )
    
    
    77,090Alt-A
    
    
    12,353
    
    
    
    
    
    
    
    (4,960
    )
    
    
    17,313Subprime
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    76,910
    
    
    $
    
    
    
    $
    (17,493
    )
    
    $
    94,403
  68




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##### Table of Contents



Gross
    
    
    Gross
    
    
    Cost orFair
    
    
    Unrealized
    
    
    Unrealized
    
    
    AmortizedValue
    
    
    Gains
    
    
    (Losses)
    
    
    Cost($ in thousands)Asset-backed
securities:GNMA
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    FNMA
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    FHLMC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Prime
    
    
    40,569
    
    
    
    63
    
    
    
    (612
    )
    
    
    41,118Alt-A
    
    
    950
    
    
    
    
    
    
    
    (24
    )
    
    
    974Subprime
    
    
    276
    
    
    
    
    
    
    
    (59
    )
    
    
    335Total
    
    $
    41,795
    
    
    $
    63
    
    
    $
    (695
    )
    
    $
    42,427
   PercenttoRating
    
    Rating
    
    Amount
    
    
    TotalDescription
    
    ($ in thousands)Extremely Strong
    
    AAA
    
    $
    1,222,878
    
    
    
    68
    %Very Strong
    
    AA
    
    
    269,349
    
    
    
    15
    %Strong
    
    A
    
    
    239,065
    
    
    
    13
    %Adequate
    
    BBB
    
    
    66,857
    
    
    
    4
    %Speculative
    
    BB & below
    
    
    216
    
    
    
    0
    %Not Rated
    
    NR
    
    
    5,890
    
    
    
    0
    %Total
    
    AAA(1)
    
    $
    1,804,255
    
    
    
    100
    %
 (1)
    
    Weighted average quality rating.  69




---



##### Table of Contents



Gross
    
    
    Gross
    
    
    Cost orFair
    
    
    Unrealized
    
    
    Unrealized
    
    
    AmortizedValue
    
    
    Gains
    
    
    (Losses)
    
    
    Cost($ in thousands)Credit enhanced securities:States, municipalities and political
subdivisions
    
    $
    324,445
    
    
    $
    1,252
    
    
    $
    (8,251
    )
    
    $
    331,444Mortgage- and asset-backed securities
    
    
    7,607
    
    
    
    
    
    
    
    (321
    )
    
    
    7,928Corporate bonds
    
    
    1,605
    
    
    
    7
    
    
    
    (40
    )
    
    
    1,638Total
    
    $
    333,657
    
    
    $
    1,259
    
    
    $
    (8,612
    )
    
    $
    341,010
 AverageGross
    
    
    Gross
    
    
    Cost or
    
    
    UnderlyingFair
    
    
    Unrealized
    
    
    Unrealized
    
    
    Amortized
    
    
    CreditValue
    
    
    Gains
    
    
    (Losses)
    
    
    Cost
    
    
    Rating($ in thousands)Financial guarantors:AMBAC
    
    $
    64,290
    
    
    $
    235
    
    
    $
    (2,423
    )
    
    $
    66,478
    
    
    
    A+Assured Guaranty LTD
    
    
    3,808
    
    
    
    
    
    
    
    (114
    )
    
    
    3,922
    
    
    
    AFGIC
    
    
    55,397
    
    
    
    157
    
    
    
    (855
    )
    
    
    56,095
    
    
    AA-Financial Security Assurance
    
    
    86,881
    
    
    
    450
    
    
    
    (1,773
    )
    
    
    88,204
    
    
    
    A+MBIA
    
    
    110,031
    
    
    
    391
    
    
    
    (3,012
    )
    
    
    112,652
    
    
    AA-Radian Group, Inc.
    
    
    5,413
    
    
    
    26
    
    
    
    (144
    )
    
    
    5,531
    
    
    
    AXL Capital
    
    
    7,837
    
    
    
    
    
    
    
    (291
    )
    
    
    8,128
    
    
    
    A+Total
    
    $
    333,657
    
    
    $
    1,259
    
    
    $
    (8,612
    )
    
    $
    341,010
    
    
    
    AA-
    70




---



##### Table of Contents



Gross
    
    
    Gross
    
    
    Cost orFair
    
    
    Unrealized
    
    
    Unrealized
    
    
    Amortized
    
    
    S&PValue
    
    
    Gains
    
    
    (Losses)
    
    
    Cost
    
    
    Rating($ in thousands)Issuers:Merrill Lynch
    
    $
    6,369
    
    
    $
    
    
    
    $
    (543
    )
    
    $
    6,912
    
    
    ACitigroup Inc.
    
    
    6,326
    
    
    
    26
    
    
    
    (1,085
    )
    
    
    7,385
    
    
    AA-European Investment Bank
    
    
    4,606
    
    
    
    
    
    
    
    (7
    )
    
    
    4,613
    
    
    AAAGeneral Electric Co.
    
    
    4,354
    
    
    
    
    
    
    
    (476
    )
    
    
    4,830
    
    
    AAAGoldman Sachs Group
    
    
    4,216
    
    
    
    
    
    
    
    (1,209
    )
    
    
    5,425
    
    
    A+Wachovia Corp
    
    
    3,873
    
    
    
    
    
    
    
    (1,046
    )
    
    
    4,919
    
    
    A+Morgan Stanley
    
    
    3,372
    
    
    
    
    
    
    
    (1,591
    )
    
    
    4,963
    
    
    A+Bank of New York
    
    
    3,083
    
    
    
    
    
    
    
    (113
    )
    
    
    3,196
    
    
    AAMitsubishi UFJ Financial Group
    
    
    2,814
    
    
    
    
    
    
    
    (221
    )
    
    
    3,035
    
    
    AAT&T Inc.
    
    
    2,805
    
    
    
    
    
    
    
    (279
    )
    
    
    3,084
    
    
    ATotal
    
    $
    41,818
    
    
    $
    26
    
    
    $
    (6,570
    )
    
    $
    48,362
    71




---



##### Table of Contents



September 30, 2008
    
    
    December 31, 2007Fair
    
    
    Gross
    
    
    Fair
    
    
    GrossValue
    
    
    Unrealized Loss
    
    
    Value
    
    
    Unrealized Loss($ in thousands)Fixed Maturities:U.S. Government Treasury and Agency
Bonds and foreign government bonds0-6 Months
    
    $
    53,542
    
    
    $
    237
    
    
    $
    6,316
    
    
    $
    307-12 Months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    > 12 Months
    
    
    
    
    
    
    
    
    
    
    6,527
    
    
    
    33Subtotal
    
    
    53,542
    
    
    
    237
    
    
    
    12,843
    
    
    
    63States, municipalities and
political subdivisions0-6 Months
    
    
    278,776
    
    
    
    8,076
    
    
    
    21,853
    
    
    
    677-12 Months
    
    
    74,650
    
    
    
    4,689
    
    
    
    6,045
    
    
    
    115> 12 Months
    
    
    16,845
    
    
    
    1,317
    
    
    
    69,671
    
    
    
    475Subtotal
    
    
    370,271
    
    
    
    14,082
    
    
    
    97,569
    
    
    
    657Mortgage- and asset-backed securities0-6 Months
    
    
    140,687
    
    
    
    3,110
    
    
    
    59,191
    
    
    
    5177-12 Months
    
    
    91,291
    
    
    
    15,435
    
    
    
    48,496
    
    
    
    423> 12 Months
    
    
    91,158
    
    
    
    12,551
    
    
    
    134,858
    
    
    
    1,750Subtotal
    
    
    323,136
    
    
    
    31,096
    
    
    
    242,545
    
    
    
    2,690Corporate bonds0-6 Months
    
    
    111,781
    
    
    
    6,904
    
    
    
    20,722
    
    
    
    2557-12 Months
    
    
    20,421
    
    
    
    3,052
    
    
    
    25,520
    
    
    
    974> 12 Months
    
    
    23,108
    
    
    
    5,079
    
    
    
    38,865
    
    
    
    575Subtotal
    
    
    155,310
    
    
    
    15,035
    
    
    
    85,107
    
    
    
    1,804Total Fixed Maturities
    
    $
    902,259
    
    
    $
    60,450
    
    
    $
    438,064
    
    
    $
    5,214Equity securities  common stocks0-6 Months
    
    $
    29,720
    
    
    $
    6,537
    
    
    $
    26,257
    
    
    $
    3,4947-12 Months
    
    
    3,492
    
    
    
    241
    
    
    
    4,153
    
    
    
    1,209> 12 Months
    
    
    
    
    
    
    
    
    
    
    53
    
    
    
    1Total Equity Securities
    
    $
    33,212
    
    
    $
    6,778
    
    
    $
    30,463
    
    
    $
    4,704
   72




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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
    
    $
    55,678
    
    
    
    92
    %
    
    $
    842,686
    
    
    
    93
    %2
    
    BBB
    
    Baa
    
    
    4,736
    
    
    
    8
    %
    
    
    59,357
    
    
    
    7
    %3
    
    BB
    
    Ba
    
    
    36
    
    
    
    0
    %
    
    
    216
    
    
    
    0
    %4
    
    B
    
    B
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    CCC or lower
    
    Caa or lower
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    N/A
    
    N/A
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    $
    60,450
    
    
    
    100
    %
    
    $
    902,259
    
    
    
    100
    %
   73




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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
    
    $
    139
    
    
    
    0
    %
    
    $
    20,321
    
    
    
    2
    %Due after one year through five years
    
    
    6,278
    
    
    
    10
    %
    
    
    154,610
    
    
    
    17
    %Due after five years through ten years
    
    
    9,432
    
    
    
    16
    %
    
    
    197,991
    
    
    
    22
    %Due after ten years
    
    
    13,505
    
    
    
    23
    %
    
    
    206,201
    
    
    
    23
    %Mortgage- and asset-backed securities
    
    
    31,096
    
    
    
    51
    %
    
    
    323,136
    
    
    
    36
    %Total fixed income securities
    
    $
    60,450
    
    
    
    100
    %
    
    $
    902,259
    
    
    
    100
    %
 mortgage-backed
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007($ in thousands)Fixed maturities:Gains
    
    $
    757
    
    
    $
    23
    
    
    $
    2,283
    
    
    $
    500(Losses)
    
    
    (1,718
    )
    
    
    (816
    )
    
    
    (2,153
    )
    
    
    (1,535
    )(961
    )
    
    
    (793
    )
    
    
    130
    
    
    
    (1,035
    )Equity securities:Gains
    
    
    166
    
    
    
    888
    
    
    
    609
    
    
    
    2,285(Losses)
    
    
    (4,721
    )
    
    
    (161
    )
    
    
    (14,307
    )
    
    
    (275
    )(4,555
    )
    
    
    727
    
    
    
    (13,698
    )
    
    
    2,010Net realized capital
gains
(losses)(1)
    
    $
    (5,516
    )
    
    $
    (66
    )
    
    $
    (13,568
    )
    
    $
    975
 (1)
    
    The 2008 third quarter includes $4.7 million and the 2008 nine month period includes
$13.2 million for other-than-temporary impairments on investment securities.  74




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##### Table of Contents



Date of
    
    
    Proceeds
    
    
    Loss on
    
    
    
    
    
    
    Fair Value atDescription
    
    Sale
    
    
    from Sale
    
    
    Sale
    
    
    Impairment
    
    
    September 30, 2008($ in thousands)Nine months ended:September 30, 2008:Bank of America Corp.
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    $
    (421
    )
    
    $
    875Bristol -Myers Squibb Co.
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (343
    )
    
    
    953Citigroup Inc.
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (678
    )
    
    
    446Keycorp
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (654
    )
    
    
    296Lennar Corp.
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (140
    )
    
    
    Pfizer Inc.
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (480
    )
    
    
    907Pinnacle West Capital Corp.
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (430
    )
    
    
    1,084Allied Capital Corp.
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (688
    )
    
    
    499American International Group Inc.
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (1,496
    )
    
    
    34Comcast Corp- CL A
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (414
    )
    
    
    1,276Dell Inc.
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (308
    )
    
    
    438Dow Chemical
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (419
    )
    
    
    958General Electric Co.
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (684
    )
    
    
    1,538Glaxosmithkline PLC-ADR
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (120
    )
    
    
    578Illinois Tool Works Inc.
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (26
    )
    
    
    80Ishares MSCI Japan
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (429
    )
    
    
    1,262Ishares S&P 500 Index Fund
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (186
    )
    
    
    1,086Legg Mason Inc.
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (610
    )
    
    
    636Merrill Lynch & Co.
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (262
    )
    
    
    157Motorola Inc.
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (917
    )
    
    
    597National City Bank of Pennsylvania
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (748
    )
    
    
    330Regions Financial Corp.
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (504
    )
    
    
    244Sanofi-Aventis
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (139
    )
    
    
    408Time Warner Cable
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (223
    )
    
    
    649Time Warner Inc.
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (387
    )
    
    
    750Toyota Motor Corp-SPON ADR
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (93
    )
    
    
    309UnitedHealth Group Inc.
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (272
    )
    
    
    475Verizon Communications
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (196
    )
    
    
    1,069Wachovia Corp.
    
    
    
    (1)

    
    
    
    
    
    
    
    
    
    
    (893
    )
    
    
    42Sprint Nextel Corp. (2)
    
    
    3/19/2008
    
    
    $
    143
    
    
    $
    (347
    )CIT Group Inc. (2)
    
    
    5/14/2008
    
    
    
    1,696
    
    
    
    (311
    )Legg Mason Inc. (2)
    
    
    6/4/2008
    
    
    
    470
    
    
    
    (363
    )Sequoia Mortgage Trust (2)
    
    
    9/5/2008
    
    
    
    745
    
    
    
    (319
    )Lehman Brothers Holdings (2)
    
    
    9/15/2008
    
    
    
    325
    
    
    
    (616
    )$
    3,379
    
    
    $
    (1,956
    )
    
    $
    (13,160
    )September 30, 2007:TIPS (3)
    
    
    3/31/2007
    
    
    $
    5,823
    
    
    $
    (335
    )
    
    
    
    
    
    
    
 (1)
    
    Securities for which an other-than-temporary impairment was recorded in 2008.(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.  75




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##### Table of Contents



Reinsurance Recoverables
     Liquidity and Capital Resources
     76




---



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77




---



##### Table of Contents



September 30,
    
    
    December 31,2008
    
    
    2007($ in thousands)Senior debt
    
    $
    123,762
    
    
    $
    123,673Stockholders equity
    
    
    655,561
    
    
    
    662,106Total capitalization
    
    $
    779,323
    
    
    $
    785,779Ratio of debt to total capitalization
    
    
    15.9
    %
    
    
    15.7
    %
     78




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##### Table of Contents



September 30,
    
    
    December 31,2008
    
    
    2007($ in thousands)Cash and investments
    
    $
    47,112
    
    
    $
    44,146Investments in subsidiaries
    
    
    724,515
    
    
    
    735,351Goodwill and other intangible assets
    
    
    2,534
    
    
    
    2,534Other assets
    
    
    9,492
    
    
    
    6,821Total assets
    
    $
    783,653
    
    
    $
    788,852Accounts payable and other liabilities
    
    $
    684
    
    
    $
    1,615Accrued interest payable
    
    
    3,646
    
    
    
    1,4587% Senior Notes due May 1, 2016
    
    
    123,762
    
    
    
    123,673Total liabilities
    
    
    128,092
    
    
    
    126,746Stockholders equity
    
    
    655,561
    
    
    
    662,106Total liabilities and stockholders equity
    
    $
    783,653
    
    
    $
    788,852
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
   79




---



##### Table of Contents



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 third fiscal quarter in our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting.
 
 Part II  Other Information
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   80




---



##### Table of Contents



($ 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
    
    
    
    50,000July 2008
    
    
    38,728
    
    
    $
    44.51
    
    
    
    38,728
    
    
    $
    18,460August 2008
    
    
    
    
    
    
    
    
    
    
    September 2008
    
    
    
    
    
    
    
    
    
    
    Subtotal third quarter
    
    
    38,728
    
    
    $
    44.51
    
    
    
    38,728Nine Months Ending 9/30/08
    
    
    224,754
    
    
    $
    51.34
    
    
    
    224,754
    
    
    $
    18,460
 (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
  
 Item 5. Other Information
   81




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##### Table of Contents



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.  82




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##### Table of Contents



SIGNATURE
  The Navigators Group, Inc.(Registrant)Date:  October 29, 2008
    /s/ Francis W. McDonnellFrancis W. McDonnellSenior Vice President
and Chief Financial Officer  83




---



##### Table of Contents



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.  84