NAVIGATORS GROUP INC – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations

OTTI recognized in earnings $ (42 ) $ (154 )

-72.7 %

    Net OTTI losses for the three months ended March 31, 2013 primarily consist of $0.04 million for equity securities previously impaired. Net OTTI losses for the three months ended March 31, 2012 consisted of one non-agency mortgage backed security and one equity security.  

Net Realized Gains and Losses

Our realized gains and losses for the periods indicated were as follows:

                                                                             Percentage                                   Three Months Ended March 31,              Change  In thousands                      2013                  2012            2013 vs. 2012  Fixed maturities:  Gains                         $      3,206$        3,142                  2.0 %  Losses                                (310 )               (1,300 )              -76.2 %   Fixed maturities, net         $      2,896$        1,842                 57.2 %  Equity securities:  Gains                         $      1,918         $           -                    NM  Losses                                  -                      -                    NM   Equity securities, net        $      1,918         $           -                    NM 

Net realized gains (losses) $ 4,814$ 1,842

         NM     

NM - Percentage change not meaningful

   Net realized gains and losses are generated as part of the normal ongoing management of our investment portfolio. Net realized gains of $4.8 million for the three months ended March 31, 2013 are due to the sale of commercial mortgage backed securities and equity securities. Net realized gains of $1.8 million for the three months ended March 31, 2012 are due to the sale of corporate bonds and municipal bonds.  Other Income/Expense  Total other income for the three months ended March 31, 2013 and 2012 was $0.6 million and $0.9 million, respectively, and consists of foreign exchange gains and losses from our Lloyd's Operations, commission income and inspection fees related to our specialty insurance business.                                           36

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Expenses

Net Losses and Loss Adjustment Expenses

The ratio of net losses and LAE to net earned premiums ("loss ratios") for the three months ended March 31, 2013 and 2012 is presented in the following table:

                                                    Three Months Ended March 31,    Net Loss and LAE Ratio                       2013                    

2012

    Net Loss and LAE Payments                         54.5 %                 

64.6 %

    Change in reserves                                 8.4 %                 

3.5 %

     Subtotal-current year loss ratio                  62.9 %                 

68.1 %

    Prior year deficiencies (redundancies)             2.0 %                  -3.7 %     Net loss and LAE ratio                            64.9 %                  64.4 %    The net loss and LAE ratio for the three months ended March 31, 2013 increased 0.5 percentage points to 64.9% from 64.4% for the three months ended March 31, 2012. The increase in the loss ratio reflects the net prior period reserve deficiencies driven by adverse development from our Professional Liability business. The 64.4% loss ratio for the three months ended March 31, 2012 includes our net loss related to the grounding of the cruise ship Costa Concordia off the coast of Italy, which was offset by net reserve redundancies from our Energy & Engineering business written by NavTech.  

The segment and line of business breakdown of the net loss and LAE ratios for the three months ended March 31, 2013 and 2012 are as follows:

                                           Three Months Ended March 31,            In thousands                 2013                    2012            Insurance Companies:            Marine                            63.7 %                  78.7 %            Property Casualty                 66.0 %                  64.7 %            Professional Liability            89.9 %                  69.7 %             Insurance Companies               69.3 %                  69.3 %            Lloyd's Operations            Marine                            55.3 %                  64.8 %            Property Casualty                  9.5 %                  27.9 %            Professional Liability            78.5 %                  31.6 %             Lloyd's Operations                50.7 %                  52.0 %             Net loss and LAE ratio            64.9 %                  64.4 %    The changes in the net loss and LAE ratios by segment and line of business, as noted above, are primarily related to prior year reserve deficiencies and or redundancies, as described below.                                           37

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Prior Year Reserve Deficiencies/Redundancies

  The relevant factors that may have a significant impact on the establishment and adjustment of losses and LAE reserves can vary by line of business and from period to period. As part of our regular review of prior reserves, management, in consultation with our actuaries, may determine, based on their judgment that certain assumptions made in the reserving process in prior year periods may need to be revised to reflect various factors, likely including the availability of additional information. Based on their reserve analyses, management may make corresponding reserve adjustments.  The segment and line of business breakdowns of prior period net reserve deficiencies (redundancies) for the three months ended March 31, 2013 and 2012 is as follows:                                                  Three Months Ended March 31,        In thousands                            2013                  2012        Insurance Companies:        Marine                              $       1,193$        (495 )        Property Casualty                            (156 )              (3,296 )        Professional Liability                      6,693                 1,075         Insurance Companies                 $       7,730$      (2,716 )        Lloyd's Operations:        Marine                                     (1,627 )                  55        Property Casualty                          (2,030 )              (2,738 )        Professional Liability                         10                (1,467 )         Lloyd's Operations                  $      (3,647 )$      (4,150 )

Total deficiencies (redundancies) $ 4,083$ (6,866 )

The following is a discussion of relevant factors related to the $4.1 million prior period net reserve deficiencies recorded in the first quarter of the 2013:

  The Insurance Companies recorded $7.7 million of net prior period reserve deficiencies, of which $6.7 million was related to the Professional Liability business. Within the Professional Liability business, we reported prior period reserve deficiencies of $3.7 million from the Management Liability division related to specific large claims from our public and private sector directors and officers liability lines for underwriting years ("UY") 2010 and prior. In addition, we reported prior period reserve deficiencies of $3.0 million from the E&O division related to specific large claims from our insurance agents and miscellaneous professional liability lines from UY 2011 and prior. The $1.1 million of net prior period reserve deficiencies from our Marine business is due to adverse development related to one claim from our Inland Marine division for UY 2012.  Our Lloyd's Operations recorded $3.6 million of net prior period reserve redundancies. Within the Lloyd's Operations Property Casualty business, we reported prior period reserve redundancies of $2.0 million from the Energy & Engineering division related to the favorable settlement of two claims from our onshore lines for UY 2011. The $1.6 million of prior period reserve redundancies from our Lloyd's Marine business is related to the favorable settlement of specific claims from our marine liability lines for UYs 2007 and 2004.  

The following is a discussion of relevant factors related to the $6.9 million prior period net reserve redundancies recorded in the first quarter of 2012:

  The Insurance Companies recorded $2.7 million of net prior period reserve redundancies driven by net favorable development from our Property Casualty business. The Property Casualty business reported net favorable development of $2.4 million and $2.2 million from the NavTech and Primary Casualty divisions, respectively, across multiple lines and underwriting years, partially offset by $1.6 million of net prior period reserve deficiencies from our Assumed Reinsurance business.  Our Lloyd's Operations recorded $4.2 million of net prior period reserve redundancies driven by the Property Casualty business, namely Lloyd's NavTech, and the Professional Liability business, across all classes of business for UYs 2009 and prior.                                           38 

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Commission Expenses

  Commission expenses paid to brokers and agents are generally based on a percentage of gross written premiums and are partially offset by ceding commissions we may receive on ceded written premiums. Commissions are generally deferred and recorded as deferred policy acquisition costs to the extent that they relate to unearned premium. The percentage of commission expenses to net earned premiums ("commission expense ratio") for the three months ended March 31, 2013, and 2012 were 13.1% and 16.1%, respectively. The decrease in the commission expense ratio for the three months ended March 31, 2013 when compared to the same period in 2012 is attributed to changes in the mix of business, mostly driven by an increase in the ceding commission on the new quota share program for our offshore energy business, and to a lesser extent RRPs recorded in 2012 in connection with loss events from our Marine business.  

Other Operating Expenses

  Other operating expenses were $40.9 million for the three months ended March 31, 2013 compared to $36.3 million for the same period in 2012. The increase in operating expenses is primarily due to an increase in incentive compensation as well as increase in overall headcount due to continued investments in new underwriting teams and related support staff, closely aligned with business growth.  

Interest Expense

  Interest expense relates to our Senior Notes due May 1, 2016. Interest on these Senior Notes is due each May 1 and November 1 and the effective interest rate, based on the proceeds net of discount and all issuance costs, is approximately 7.17%. Interest expense for both the three months ended March 31, 2013 and 2012 was approximately $2 million.  

Income Taxes

  We recorded income tax expense of $6.6 million for the three months ended March 31, 2013 compared to $3.3 million for the comparable period in 2012, resulting in effective tax rates of 32.3% and 29.3%, respectively. The effective tax rate on net investment income was 28.5% and 25.2% for the three months ended March 31, 2013 and 2012, respectively.  As of March 31, 2013, the net deferred federal, foreign, state and local tax assets were $4.0 million compared to $3.2 million as of December 31, 2012 with the change primarily due to the increase in the deferred tax asset for unearned premium reserve, in line with the growth of our business.  We had net state and local deferred tax assets amounting to potential future tax benefits of $0.4 million and $0.5 million as of March 31, 2013 and December 31, 2012, respectively. Included in the deferred tax assets are state and local net operating loss carry-forwards of $0.2 million for both March 31, 2013 and December 31, 2012. A valuation allowance was established for the full amount of these potential future tax benefits due to uncertainty associated with their realization. Our state and local tax carry-forwards as of March 31, 2013 expire from 2023 to 2031.  The Company has not provided for U.S. income taxes on approximately $18.0 million of undistributed earnings of its non-U.S. subsidiaries since it is intended that those earnings will be reinvested indefinitely in those subsidiaries. If a future determination is made that those earnings no longer are intended to be reinvested indefinitely in those subsidiaries, U.S. income taxes of approximately $1.9 million, assuming all foreign tax credits are realized, would be included in the tax provision at that time and would be payable if those earnings were distributed to the Company.  

Segment Information

  We classify our business into two underwriting segments consisting of the Insurance Companies and the Lloyd's Operations, which are separately managed, and a Corporate segment. Segment data for each of the two underwriting segments include allocations of the operating expenses of the wholly-owned underwriting management companies and The Navigators Group, Inc.'s (the "Parent Company's") operating expenses and related income tax amounts. The Corporate segment consists of the Parent Company's investment income, interest expense and the related tax effect.                                           39 

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  We evaluate the performance of each segment based on its underwriting and GAAP results. The underwriting results of the Insurance Companies and the Lloyd's Operations are measured by taking into account net earned premium, net loss and LAE, commission expenses, other operating expenses and other income (expense). Each segment also maintains its own investments, on which it earns income and realizes capital gains or losses. Our underwriting performance is evaluated separately from the performance of our investment portfolios.  

Following are the financial results of our two underwriting segments.

Insurance Companies

  The Insurance Companies consist of Navigators Insurance Company, including its U.K. Branch, and its wholly-owned subsidiary, Navigators Specialty. They are primarily engaged in underwriting marine insurance and related lines of business, specialty insurance lines of business, including contractors general liability insurance, commercial umbrella and primary and excess casualty businesses, specialty assumed reinsurance business, and professional liability insurance. Navigators Specialty underwrites specialty and professional liability insurance on an excess and surplus lines basis. Navigators Specialty is 100% reinsured by Navigators Insurance Company.  

The following table sets forth the results of operations for the Insurance Companies for the three months ended March 31, 2013 and 2012:

                                                                                                Percentage                                                   Three Months Ended March 31,                 Change In thousands                                        2013                   2012             2013 vs. 2012

Gross written premiums                         $       301,628$  248,338                    21.5 % Net written premiums                                   216,319             181,250                    19.3 % Net earned premiums                                    154,331             131,548                    17.3 % Net losses and loss adjustment expenses               (106,985 )           (91,177 )                  17.3 % Commission expenses                                    (18,517 )           (19,301 )                  -4.1 % Other operating expenses                               (29,343 )           (25,345 )                  15.8 % Other income (expense)                                     659               1,642                   -59.9 %  Underwriting profit (loss)                     $           145          $   (2,633 )                    NM Net investment income                                   11,951               8,935                    33.8 % Net realized gains (losses)                              4,792               1,875                      NM  Income (loss) before income taxes              $        16,888$    8,177                   106.5 % Income tax expense (benefit)                             5,404               2,258                   139.3 %  Net income (loss)                              $        11,484$    5,919                    94.0 %  Losses and loss adjustment expenses ratio                 69.3 %              69.3 % Commission expense ratio                                  12.0 %              14.7 % Other operating expense ratio (1)                         18.6 %              18.0 %  Combined ratio                                            99.9 %             102.0 %     

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

NM - Percentage change not meaningful

   Our Insurance Companies reported net income of $11.5 million for the three months ended March 31, 2013 compared to $5.9 million for the same period in 2012. The increase in net income for the three months ended March 31, 2013 as compared to the same period in 2012 was largely related to an increase in net realized gains, net investment income on our investment portfolio and an improvement in underwriting results.  Our Insurance Companies combined ratio for the three months ended March 31, 2013 was 99.9% compared to 102.0% for the same period in 2012. Our Insurance Companies pre-tax underwriting results increased by $2.7 million to a $0.1 million pre-tax underwriting profit for the three months ended March 31, 2013 compared to an underwriting loss of $2.6 million for the same period in 2012.                                           40 

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  The Insurance Companies pre-tax underwriting results for the three months ended March 31, 2013 includes $4.4 million of underwriting profit from our Excess Casualty and Primary Casualty businesses due in part to strong production attributable to the expansion of those underwriting teams and the continued dislocation of certain competitors, as well as $6.7 million of net prior period reserve deficiencies from our Professional Liability business.  

Our underwriting results for the three months ended March 31, 2012 reflects a net loss of $5.5 million related to the grounding of the cruise ship, Costa Concordia. This loss was partially offset by net prior period reserve redundancies of $3.3 million primarily related to our Property Casualty business.

Insurance Companies Gross Written Premiums

Marine Premiums. The gross written premiums for our Marine business for the three months ended March 31, 2013 and 2012 consisted of the following:

                                                                          Percentage                                 Three Months Ended March 31,             Change     In thousands                  2013                 2012           2013 vs. 2012     Marine Liability         $       14,805$       18,241               -18.8 %     Craft/Fishing Vessels            10,779                8,244                30.8 %     Cargo                             8,420                8,458                -0.5 %     Protection & Indemnity            6,150                6,616                -7.0 %     Inland Marine                     4,882               11,838               -58.8 %     Bluewater Hull                    2,600                3,559               -26.9 %     Other Marine                      3,211                4,909               -34.6 %      Total Marine             $       50,847$       61,865               -17.8 %    The Insurance Companies Marine gross written premiums for the three months ended March 31, 2013 decreased 17.8% to $50.8 million compared to the same period during 2012 primarily due to the re-underwriting of our Inland Marine business, as well as reduction in our marine liability lines is due to the non-renewal of certain policies.  

The Insurance Companies Marine business achieved a 4.0% increase on renewal rates for the three months ended March 31, 2013.

  Property Casualty Premiums. The gross written premiums for our Property Casualty business for the three months ended March 31, 2013 and 2012 consisted of the following:                                                                             Percentage                                   Three Months Ended March 31,             Change    In thousands                     2013                 2012           2013 vs. 2012    Assumed Reinsurance         $       92,136$       73,422                25.5 %    Excess Casualty                     70,281               37,654                86.6 %    Primary Casualty                    26,436               23,925                10.5 %    Energy & Engineering                20,064               13,201                52.0 %    Environmental Liability              5,536                5,210                 6.3 %    Other Property & Casualty            4,511                2,507                79.9 %     Total Property Casualty     $      218,964$      155,919                40.4 %    The Insurance Companies Property Casualty gross written premiums for the three months ended March 31, 2013 increased 40.4% to $219.0 million compared to the same period in 2012, driven by growth from our Excess Casualty division as a result of strong production attributable to an expansion of our underwriting teams and continued dislocation among certain competitors, as well as the continued growth from our Assumed Reinsurance division.  Within our Insurance Companies Property Casualty business we have realized a 1.8% increase in rates for the Excess Casualty division, a 1.4% increase in the Primary Casualty division, and a slight 0.3% decrease from our Energy & Engineering division.                                           41 

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  Professional Liability Premiums. The gross written premiums for the Professional Liability business for the three months ended March 31, 2013 and 2012 consisted of the following:                                                                              Percentage                                    Three Months Ended March 31,             Change  In thousands                        2013                 2012           2013 vs. 2012  Errors & Omissions             $       22,653$       21,932                 3.3 %  Management Liability                    9,164                8,622                 6.3 %   Total Professional Liability   $       31,817$       30,554                 4.1 %   

Our Insurance Companies Professional Liability business has experienced an overall increase in its renewal rates of 6.1%, consisting of 13.2% and 3.8% for the Management Liability and E&O divisions, respectively.

Insurance Companies Commission Expenses

  The commission expenses ratios for the three months ended March 31, 2013, and 2012 was 12.0% and 14.7%, respectively. The decrease in the commission expense ratio is attributable to changes in the mix of business, mostly driven by an increase in the ceding commission received on the new quota share program for our offshore energy business, and to a lesser extent $9.7 million in RRPs recorded in 2012 in connection with loss events from our Marine business.  

Insurance Companies Other Operating Expenses

  Insurance Companies other operating expenses were $29.3 million for the three months ended March 31, 2013 compared to $25.3 million for the same period in 2012. The increase in operating expenses is due to an increase in incentive compensation as well as an increase in overall headcount due to continued investments in new underwriting teams and related support staff, closely aligned with business growth.                                           42 

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Lloyd's Operations

  Our Lloyd's Operations primarily underwrite marine and related lines of business along with offshore energy, construction coverages for onshore energy business and professional liability insurance at Lloyd's through Syndicate 1221. Our Lloyd's Operations segment includes NUAL, a Lloyd's underwriting agency which manages Syndicate 1221.  

The following table sets forth the results of operations for the Lloyd's Operations for the three months ended March 31, 2013 and 2012:

                                                                                                Percentage                                                   Three Months Ended March 31,                 Change In thousands                                       2013                   2012              2013 vs. 2012

Gross written premiums                        $       91,594$       94,811                   -3.4 % Net written premiums                                  53,133                 61,795                  -14.0 % Net earned premiums                                   47,997                 51,571                   -6.9 % Net losses and loss adjustment expenses              (24,357 )              (26,808 )                 -9.1 % Commission expenses                                   (8,621 )              (10,886 )                -20.8 % Other operating expenses                             (11,531 )              (10,962 )                  5.2 % Other income (expense)                                   542                      6                     NM  Underwriting profit (loss)                    $        4,030$        2,921                   38.0 % Net investment income                                  1,702                  2,283                  -25.4 % Net realized gains (losses)                              (20 )                 (187 )                -89.3 %  Income (loss) before income taxes             $        5,712$        5,017                   13.9 % Income tax expense (benefit)                           2,046                  1,726                   18.5 %  Net income (loss)                             $        3,666$        3,291                   11.4 %  Losses and loss adjustment expenses ratio               50.7 %                 52.0 % Commission expense ratio                                18.0 %                 21.1 % Other operating expense ratio (1)                       22.9 %                 21.2 %  Combined ratio                                          91.6 %                 94.3 %     

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

NM - Percentage change not meaningful.

   Our Lloyd's Operations reported net income of $3.7 million for the three months ended March 31, 2013 compared to $3.3 million for the same period in 2012. The increase in net income for the three months ended March 31, 2013 as compared to the same period in 2012 was largely attributable to stronger underwriting results, partially offset by a decrease in net investment income due to lower investment yields. The annualized pre-tax investment yield, excluding net realized gains and losses and net OTTI losses recognized in earnings, was 1.5% and 2.1% for the three months ended March 31, 2013 and 2012, respectively.  Our Lloyd's Operations combined ratio for the three months ended March 31, 2013 was 91.6% compared to 94.3% for the same period in 2012. Our Lloyd's Operations pre-tax underwriting profit increased $1.1 million to a $4.0 million for the three months ended March 31, 2013 compared to $2.9 million for the same period in 2012, and is largely due to continued favorable loss emergence for UYs 2011 and prior.  

Our Lloyd's Operations underwriting results for the first quarter of 2012 reflected a net loss of $1.0 million related to the grounding of the cruise ship, Costa Concordia. This loss was partially offset by net prior period reserve redundancies of $4.2 million related to our Property Casualty and Professional Liability businesses.

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Lloyd's Operations Gross Written Premiums

  We have controlled 100% of Syndicate 1221's stamp capacity since 2006. Stamp capacity is a measure of the amount of premium a Lloyd's syndicate is authorized to write based on a business plan approved by the Council of Lloyd's. Syndicate 1221's stamp capacity is £195 million ($296 million) in 2013 compared to £184 million ($300 million) in 2012.  

Marine Premiums. The gross written premiums for our Marine business for the three months ended March 31, 2013 and 2012 consisted of the following:

                                                                                             Percentage                                                 Three Months Ended March 31,               Change In thousands                                     2013                  2012             2013 vs. 2012 Marine Liability                            $       17,815$       18,944                  -6.0 % Cargo                                               10,004                13,678                 -26.9 % Specie                                               6,455                 6,296                   2.5 % Energy Liability                                     5,856                 6,102                  -4.0 % Marine Excess-of-Loss Reinsurance                    5,738                 7,073                 -18.9 % Transport                                            3,891                 3,888                   0.1 % War                                                  2,482                 3,286                 -24.5 % Bluewater Hull                                       1,403                 2,508                 -44.1 %  Total Marine                                $       53,644$       61,775                 -13.2 %   

The Lloyd's Operations Marine gross written premiums decreased 13.2% for the three months ended March 31, 2013 compared to the same period in 2012. The decrease is driven by reduction on retention in renewed business partially offset by an increase in renewal rates of 5.0%.

  Property Casualty Premiums. The gross written premiums for our Property Casualty business for the three months ended March 31, 2013 and 2012 consisted of the following:                                                                                             Percentage                                                 Three Months Ended March 31,               Change In thousands                                    2013                   2012             2013 vs. 2012 Energy & Engineering: Offshore Energy                             $      13,268$      11,319                  17.2 % Onshore Energy                                      5,269                  4,226                  24.7 % Engineering and Construction                        5,008                  8,196                 -38.9 % U.S. Direct and Facultative Property                1,528                    -                      NM  Energy & Engineering                        $      25,073$      23,741                   5.6 % Other Property Casualty                               (15 )                  555                    NM  Total Property Casualty                     $      25,058$      24,296                   3.1 %     

NM - Percentage change not meaningful

   The Lloyd's Operations Property Casualty gross written premiums increased 3.1% for the three months ended March 31, 2013 compared to the same period in 2012. The increase is primarily due to new business growth within the offshore energy lines as well as $1.5 million in new business from our U.S. direct and facultative property lines that we began writing this quarter, partially offset by a reduction from our engineering and construction lines.  

The Lloyd's Operations Property Casualty business achieved a 1.6% increase on renewal rates for the three months ended March 31, 2013.

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  Professional Liability Premiums. The gross written premiums for the Professional Liability business for the three months ended March 31, 2013 and 2012 consisted of the following:                                                                              Percentage                                    Three Months Ended March 31,             Change  In thousands                        2013                 2012           2013 vs. 2012  Management Liability           $        10,242$       6,430                59.3 %  Errors & Omissions                       2,650               2,310                14.7 %   Total Professional Liability   $        12,892$       8,740                47.5 %    The Lloyd's Operations Professional Liability gross written premiums increased 47.5%, or $4.2 million, for the three months ended March 31, 2013 compared to the same period in 2012, as a result of new business, partially offset by a 4.5% decrease in rate on renewed business.  

Lloyd's Operations Commission Expenses

  The commission expenses ratios for the three months ended March 31, 2013, and 2012 was 18.0% and 21.1%, respectively. The decrease in the commission expense ratio for the three months ended March 31, 2013 when compared to the same period in 2012 is attributed to changes in the mix of business, mostly driven by the increase in the ceding commission received on the new quota share program for our offshore energy business.  

Lloyd's Other Operating Expenses

  Lloyd's Operations other operating expenses were $11.5 million for the three months ended March 31, 2013 compared to $11.0 million for the same period in 2012. The increase in operating expenses is primarily due to an increase in incentive compensation.  

Capital Resources

  We monitor our capital adequacy to support our business on a regular basis. The future requirements of our business will depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. Our ability to underwrite is largely dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. In particular, we require (1) sufficient capital to maintain our financial strength ratings, as issued by various ratings agencies, at a level considered necessary by management to enable our Insurance Companies to compete, (2) sufficient capital to enable our Insurance Companies to meet the capital adequacy tests performed by statutory agencies in the United States and the United Kingdom and (3) letters of credit and other forms of collateral that are necessary to support the business plan of our Lloyd's Operations.  Our capital resources consist of funds deployed or available to be deployed to support our business operations. As of March 31, 2013 and December 31, 2012, our capital resources were as follows:                                                    March 31,        December 31,        In thousands                               2013               2012        Senior Notes                            $   114,462$      114,424        Stockholders' equity                        896,758             879,485         Total capitalization                    $ 1,011,220$      993,909</money>

       Ratio of debt to total capitalization          11.3 %             

11.5 %                                            45 

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  As part of our capital management program, we may seek to raise additional capital or may seek to return capital to our stockholders through share repurchases, cash dividends or other methods (or a combination of such methods). Any such determination will be at the discretion of the Parent Company's Board of Directors and will be dependent upon our profits, financial requirements and other factors, including legal restrictions, rating agency requirements, credit facility limitations and such other factors as our Board of Directors deems relevant.  In July 2012, we filed a universal shelf registration statement with the SEC. This registration statement, which expires in July 2015, allows for the future possible offer and sale by the Company of up to $500 million in the aggregate of various types of securities including common stock, preferred stock, debt securities, depositary shares, warrants, units or stock purchase contracts and stock purchase units. The shelf registration statement enables us to efficiently access the public equity or debt markets in order to meet future capital needs, if necessary. This report is not an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such state.  We primarily rely upon dividends from our subsidiaries to meet our Parent Company's obligations. Since the issuance of the senior debt in April 2006, the Parent Company's cash obligations primarily consist of semi-annual interest payments on the senior debt, which are currently $4.0 million. Going forward, the interest payments may be made from funds currently at the Parent Company or dividends from its subsidiaries.  Navigators Insurance Company may pay dividends to the Parent Company out of its statutory earned surplus pursuant to statutory restrictions imposed under the New York insurance law. As of March 31, 2013, the maximum amount available for the payment of dividends by Navigators Insurance Company in 2013 without prior regulatory approval is $69.4 million. During the preceding 12 month period Navigators Insurance Company declared and paid $5.0 million in dividends to the Parent Company, none of which were declared and paid in the first quarter of 2013.  Navigators Corporate Underwriters Ltd. ("NCUL") may pay dividends to the Parent Company up to the extent of available profits that have been distributed from Syndicate 1221 and as of March 31, 2013 that amount was $8.0 million (£5.3 million).  

Condensed Parent Company balance sheets as of March 31, 2013 (unaudited) and December 31, 2012 are shown in the table below:

                                                      March 31,       December 31,      In thousands                                    2013              2012      Cash and investments                         $    16,976$       15,026      Investments in subsidiaries                      971,680            

955,024

     Goodwill and other intangible assets               2,534             

2,534      Other assets                                      24,328             23,219       Total assets                                 $ 1,015,518$      995,803       Senior Notes                                 $   114,462$      114,424

     Accounts payable and other liabilities               944              

 552      Accrued interest payable                           3,354              1,342       Total liabilities                            $   118,760$      116,318       Stockholders' equity                         $   896,758$      879,485

Total liabilities and stockholders' equity $ 1,015,518$ 995,803

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  On November 22, 2012, we entered into a $165 million credit facility agreement with ING Bank N.V., London Branch, individually and as Administrative Agent, and a syndicate of lenders. The new credit facility amended and restated a $165 million letter of credit facility entered into by the parties on March 28, 2011. The credit facility, which is denominated in U.S. dollars, is utilized to fund our participation in Syndicate 1221 through letters of credit for the 2013 and 2014 underwriting years, as well as open prior years. The letters of credit issued under the facility are denominated in British pounds and their aggregate face amount will fluctuate based on exchange rates. If any letters of credit remain outstanding under the facility after December 31, 2014, we would be required to post additional collateral to secure the remaining letters of credit. As of March 31, 2013, letters of credit with an aggregate face amount of $145.9 million were outstanding under the credit facility and we have $0.8 million of cash collateral posted.  This credit facility contains customary covenants for facilities of this type, including restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of assets, and requirements as to maintaining certain consolidated tangible net worth, statutory surplus and other financial ratios. The credit facility also provides for customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, any representation or warranty made by the Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting the Company and its subsidiaries, the occurrence of certain material judgments, or a change in control of the Company. The letter of credit facility is secured by a pledge of the stock of certain insurance subsidiaries of the Company. To the extent the aggregate face amount issued under the credit facility exceeds the commitment amount, we are required to post collateral with the lead bank of the consortium. We were in compliance with all covenants under the credit facility as of March 31, 2013.  The applicable margin and applicable fee rate payable under the credit facility are based on a tiered schedule that is based on the Company's then-current ratings issued by S&P and Moody's with respect to the Company's Senior Notes without third-party credit enhancement, and the amount of the Company's own collateral utilized to fund its participation in Syndicate 1221.  Time lags do occur in the normal course of business between the time gross loss reserves are paid by the Company and the time such gross paid losses are billed and collected from reinsurers. Reinsurance recoverable amounts related to gross loss reserves as of March 31, 2013 are anticipated to be billed and collected over the next several years as the gross loss reserves are paid by the Company.  Generally, for pro rata or quota share reinsurers, we issue quarterly settlement statements for premiums less commissions and paid loss activity, which are expected to be settled within 30-45 days. We have the ability to issue "cash calls" requiring such reinsurers to pay losses whenever paid loss activity for a claim ceded to a particular reinsurance treaty exceeds a predetermined amount (generally $0.5 million to $1.0 million) as set forth in the pro rata treaty. For the Insurance Companies, cash calls must generally be paid within 30 calendar days. There is generally no specific settlement period for the Lloyd's Operations cash call provisions, but such billings have historically on average been paid within 45 calendar days.  Generally, for excess-of-loss reinsurers we pay quarterly deposit premiums based on the estimated subject premiums over the contract period (usually one year) that are subsequently adjusted based on actual premiums determined after the expiration of the applicable reinsurance treaty. Paid losses subject to excess-of-loss recoveries are generally billed as they occur and are usually settled by reinsurers within 30 calendar days for the Insurance Companies and 30 business days for the Lloyd's Operations.  

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

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  Table of Contents  Liquidity  Consolidated Cash Flows  Cash flow provided by operations was $4.3 million for the three months ended March 31, 2013 compared to $16.4 million for the comparable period in 2012. The decrease in cash flow from operations was due to the timing of payments to our reinsurers in connection with the increased use of proportional reinsurance to support our offshore energy business in 2013.  Net cash provided by investing activities was $7.4 million for the three months ended March 31, 2013 compared to net cash used in investing activities of $98.5 million for the same period in 2012. The increase in cash provided by investing activities is driven by the on-going management of our investment portfolio.  Net cash provided by financing activities was $1.5 million for the three months ended March 31, 2013 compared to $0.3 million for the comparable period in 2012. The increase in cash provided by financing activities relates to the exercise of employee stock options.  We believe that the cash flow generated by the operating activities of our subsidiaries will provide sufficient funds for us to meet our liquidity needs over the next twelve months. Beyond the next twelve months, cash flow available to us may be influenced by a variety of factors, including general economic conditions and conditions in the insurance and reinsurance markets, as well as fluctuations from year to year in claims experience.  We believe that we have adequately managed our cash flow requirements related to reinsurance recoveries from their positive cash flows and the use of available short-term funds when applicable. However, there can be no assurances that we will be able to continue to adequately manage such recoveries in the future or that collection disputes or reinsurer insolvencies will not arise that could materially increase the collection time lags or result in recoverable write-offs causing additional incurred losses and liquidity constraints to the Company. The payment of gross claims and related collections from reinsurers with respect to large losses could significantly impact our liquidity needs. However, we expect to collect our paid reinsurance recoverables generally under the terms described above.                                           48 

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Investments

  As of March 31, 2013, the weighted average rating of our fixed maturity investments was "AA" by S&P and "Aa" by Moody's. The entire fixed maturity investment portfolio, except for investments with a fair value of $21.7 million, consists of investment grade bonds. As of March 31, 2013, our portfolio had a duration of 4.0 years. Management periodically projects cash flow of the investment portfolio and other sources in order to maintain the appropriate levels of liquidity in an effort to ensure our ability to satisfy claims. As of March 31, 2013 and December 31, 2012, all fixed maturity securities and equity securities held by us were classified as available-for-sale.  The following tables set forth the Company's cash and investments as of March 31, 2013 and December 31, 2012. The tables below include OTTI securities recognized within OCI.                                                                      March 31, 2013                                                              Gross             Gross             Cost or                                             Fair           Unrealized        Unrealized         Amortized In thousands                                Value            Gains            (Losses)            Cost Fixed maturities: U.S. Treasury bonds, agency bonds and foreign government bonds                 $   531,463$      7,988$        (31 )$   523,506 States, municipalities and political subdivisions                                 449,387            17,619            (1,744 )         433,512 Mortgage-backed and asset-backed securities: Agency mortgage-backed securities            346,829            11,842              (640 )         335,627 Residential mortgage obligations              38,350             1,223              (187 )          37,314 Asset-backed securities                       47,092             1,110               (29 )          46,011 Commercial mortgage-backed securities        180,939            13,170               (29 )         167,798  Subtotal                                 $   613,210$     27,345$       (885 )$   586,750 Corporate bonds                              483,943            25,970              (124 )         458,097  Total fixed maturities                   $ 2,078,003$     78,922$     (2,784 )$ 2,001,865 Equity securities-common stocks              116,482            24,712              (247 )          92,017 Short-term investments                       129,475                -                 -            129,475 Cash                                          58,576                -                 -             58,576  Total                                    $ 2,382,536$    103,634$     (3,031 )$ 2,281,933                                                                       December 31, 2012                                                              Gross             Gross             Cost or                                             Fair           Unrealized        Unrealized         Amortized In thousands                                Value            Gains            (Losses)            Cost Fixed maturities: U.S. Treasury bonds, agency bonds and foreign government bonds                 $   649,692$      8,654$        (36 )$   641,074 States, municipalities and political subdivisions                                 322,947            18,712              (380 )         304,615 Mortgage-backed and asset-backed securities: Agency mortgage-backed securities            384,445            13,652              (204 )         370,997 Residential mortgage obligations              38,692             1,053              (549 )          38,188 Asset-backed securities                       50,382             1,133               (49 )          49,298 Commercial mortgage-backed securities        204,821            17,996               (18 )         186,843  Subtotal                                 $   678,340$     33,834$       (820 )$   645,326 Corporate bonds                              470,854            27,129               (25 )         443,750  Total fixed maturities                   $ 2,121,833$     88,329$     (1,261 )$ 2,034,765 Equity securities-common stocks              101,297            16,919              (626 )          85,004 Short-term investments                       153,788                -                 -            153,788 Cash                                          45,336                -                 -             45,336  Total                                    $ 2,422,254$    105,248$     (1,887 )$ 2,318,893    As of March 31, 2013 and December 31, 2012, debt securities for which non-credit OTTI was previously recognized and included in other comprehensive income, are now in an unrealized gains position of $0.4 million and $20 thousand, respectively.                                           49 

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  The fair value of our investment portfolio may fluctuate significantly in response to various factors such as changes in interest rates, investment quality ratings, equity prices, foreign exchange rates and credit spreads. We do not have the intent to sell nor is it more likely than not that we will have to sell debt securities in unrealized loss positions that are not other-than-temporarily impaired before recovery. For structured securities, default probability and severity assumptions differ based on property type, vintage and the stress of the collateral. We do not intend to sell any of these securities and it is more likely than not that we will not be required to sell these securities before the recovery of the amortized cost basis. For equity securities, the Company also considers its intent to hold securities as part of the process of evaluating whether a decline in fair value represents an other-than-temporary decline in value. We may realize investment losses to the extent our liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate, liquidity or credit spread environments. Significant changes in the factors we consider when evaluating investments for impairment losses could result in a significant change in impairment losses reported in the consolidated financial statements.  Invested assets increased from the prior comparable period in 2012 primarily due to unrealized gains and cash flow from operations. The annualized pre-tax investment yield, excluding net realized gains and losses and net OTTI losses recognized in earnings, was 2.3% and 2.0% for the three months ended March 31, 2013 and 2012, respectively.  The tax equivalent yields for the three months ended March 31, 2013 and 2012 on a consolidated basis were 2.5% and 3.4%, respectively. The portfolio duration was 4.0 years and 3.7 years for the three months ended March 31, 2013 and 2012, respectively. Since the beginning of 2013, the tax-exempt portion of our investment portfolio has increased by $111.1 million to approximately 19% of the fixed maturities investment portfolio at March 31, 2013 compared to approximately 13.2% at December 31, 2012.  We are a specialty insurance company and periods of moderate economic recession or inflation tend not to have a significant direct effect on our underwriting operations. They do, however, impact our investment portfolio. A decrease in interest rates will tend to decrease our yield and have a positive effect on the fair value of our invested assets. An increase in interest rates will tend to increase our yield and have a negative effect on the fair value of our invested assets.  The contractual maturity dates for fixed maturity securities categorized by the number of years until maturity as of March 31, 2013 are shown in the following table:                                                            March 31, 2013                                                                    Amortized          In thousands                             Fair Value         Cost          Due in one year or less                  $   109,496$   108,751          Due after one year through five years        636,433         616,510          Due after five years through ten years       480,898         459,528          Due after ten years                          237,966         230,326          Mortgage- and asset-backed securities        613,210         586,750           Total                                    $ 2,078,003$ 2,001,865    Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Due to the periodic repayment of principal, the aggregate amount of mortgage-backed and asset-backed securities is estimated to have an effective maturity of approximately 4.3 years.                                           50

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  The following table sets forth the amount and percentage of our fixed maturities as of March 31, 2013 by S&P credit rating or, if an S&P rating is not available, the equivalent Moody's rating. The table includes fixed maturities at fair value, and the total rating is the weighted average quality rating.                                                   March 31, 2013                                                                 Percent of             In thousands            Rating     Fair Value         Total             Rating description:             Extremely strong      AAA          $   293,623               14 %             Very strong           AA             1,157,811               56 %             Strong                A                445,757               21 %             Adequate              BBB              159,109                8 %             Speculative           BB & Below        17,967                1 %             Not rated             NR                 3,736                0 %              Total                 AA           $ 2,078,003              100 %   

The following table sets forth our U.S. Treasury bonds, agency bonds, and foreign government bonds as of March 31, 2013 and December 31, 2012:

                                                        March 31, 2013                                                 Gross            Gross                                  Fair         Unrealized       Unrealized       Amortized     In thousands                 Value          Gains           (Losses)           Cost     U.S. Treasury bonds        $ 470,037$      5,540$        (30 )$  464,527     Agency bonds                  53,617            2,195               (1 )        51,423     Foreign government bonds       7,809              253               -            7,556      Total                      $ 531,463$      7,988$        (31 )$  523,506                                                       December 31, 2012                                                 Gross            Gross                                  Fair         Unrealized       Unrealized       Amortized     In thousands                 Value          Gains           (Losses)           Cost     U.S. Treasury bonds        $ 414,503$      4,441$        (10 )$  410,072     Agency bonds                 155,465            3,331              (11 )       152,145     Foreign government bonds      79,724              882              (15 )        78,857      Total                      $ 649,692$      8,654$        (36 )$  641,074    The following table sets forth the composition of the investments categorized as states, municipalities and political subdivisions in our portfolio by generally equivalent S&P and Moody's ratings (not all securities in our portfolio are rated by both S&P and Moody's) as of March 31, 2013. The securities that are not rated in the table below are primarily state bonds.                                                              March 31, 2013                               Equivalent                                      Net      In thousands              Moody's        Fair        Amortized       Unrealized      Equivalent S&P Rating      Rating        Value          Cost         Gain (Loss)      AAA/AA/A                Aaa/Aa/A       $ 423,751$  408,604$      15,147      BBB                     Baa               19,654         19,267               387      BB                      Ba                 2,246          2,013               233      B                       B                     -              -                 -      CCC or lower            Caa or lower          -              -                 -      NR                      NR                 3,736          3,628               108       Total                                  $ 449,387$  433,512$      15,875                                             51 

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The following table sets forth the municipal bond holdings by sectors as of March 31, 2013 and December 31, 2012:

                                   March 31, 2013                    December 31, 2012                                            Percent of                         Percent of     In thousands          Fair Value         Total           Fair Value         Total     Municipal Sector:     General obligation   $    114,926               26 %    $     73,642               23 %     Prerefunded                23,555                5 %          22,692                7 %     Revenue                   252,037               56 %         183,096               57 %     Taxable                    58,869               13 %          43,517               13 %      Total                $    449,387              100 %    $    322,947              100 %   

We own $113.2 million of municipal securities which are credit enhanced by various financial guarantors. As of March 31, 2013, the average underlying credit rating for these securities is A+. There has been no material adverse impact to our investment portfolio or results of operations as a result of downgrades of the credit ratings for several of the financial guarantors.

  We analyze our mortgage-backed and asset-backed securities by credit quality of the underlying collateral distinguishing between the securities issued by the Federal National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") and the Government National Mortgage Association ("GNMA") which are Federal government sponsored entities, and the non-FNMA and non-FHLMC securities broken out by prime, Alternative A-paper ("Alt-A") and subprime collateral. The securities issued by FNMA and FHLMC are the obligations of each respective entity. Legislation has provided for guarantees by the U.S. Government of up to $100 billion each for FNMA and FHLMC.  Prime collateral consists of mortgages or other collateral from the most creditworthy borrowers. Alt-A collateral consists of mortgages or other collateral from borrowers which have a risk potential that is greater than prime but less than subprime. The subprime collateral consists of mortgages or other collateral from borrowers with low credit ratings. Such subprime and Alt-A categories are as defined by S&P.  The following table sets forth our agency mortgage-backed securities and residential mortgage-backed securities ("RMBS") by those issued by GNMA, FNMA, and FHLMC, and the quality category (prime, Alt-A and subprime) for all other such investments as of March 31, 2013:                                                                       March 31, 2013                                                                Gross             Gross                                                              Unrealized       Unrealized        Amortized In thousands                               Fair Value          Gains            Losses             Cost Agency mortgage-backed securities: GNMA                                      $    126,391$      4,074$      (556 )$  122,873 FNMA                                           169,045             6,294              (62 )        162,813 FHLMC                                           51,393             1,474              (22 )         49,941  Total agency mortgage-backed securities                                $    346,829$     11,842

$ (640 )$ 335,627

  Residential mortgage-backed securities: Prime                                     $     12,507$        417$      (141 )$   12,231 Alt-A                                            2,139                81              (46 )          2,104 Subprime                                           668                28               -               640 Non-U.S. RMBS                                   23,036               697               -            22,339  Total residential mortgage-backed securities                                $     38,350$      1,223$      (187 )$   37,314                                             52 

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  The following table sets forth the composition of the investments categorized as RMBS in our portfolio by generally equivalent S&P and Moody's ratings (not all securities in our portfolio are rated by both S&P and Moody's) as of March 31, 2013:                                                              March 31, 2013                             Equivalent                                          Net    In thousands              Moody's                        Amortized       Unrealized    Equivalent S&P Rating      Rating       Fair Value         Cost          Gain (Loss)    AAA/AA/A                Aaa/Aa/A       $     23,983$    23,252     $         731    BBB                     Baa                   2,203           2,220               (17 )    BB                      Ba                    1,438           1,467               (29 )    B                       B                     2,768           2,742                26    CCC or lower            Caa or lower          7,958           7,633               325    NR                      NR                       -               -                 -     Total                                  $     38,350$    37,314$       1,036

Details of the collateral of our asset-backed securities portfolio as of March 31, 2013 are presented below:

                                                                                                                      Unrealized                                                                                                    Amortized          Gain In thousands      AAA          AA           A         BBB       BB      CCC       Fair Value         Cost            (Loss)

Auto loans      $  4,705$ 3,536     $     -      $ -      $ -      $ -      $      8,241$     8,056$        185 Credit cards      13,930          -            -        -        -        -            13,930          13,485              445 Time Share            -           -        16,035       -        -        -            16,035          15,640              395 Student Loans      5,255       3,253           -        -        -        -             8,508           8,461               47 Miscellaneous        378          -            -        -        -        -               378             369                9  Total           $ 24,268$ 6,789$ 16,035     $ -      $ -      $ -      $     47,092$    46,011$      1,081    The following table sets forth the composition of the investments categorized as commercial mortgage-backed securities in our portfolio by generally equivalent S&P and Moody's ratings (not all securities in our portfolio are rated by both S&P and Moody's) as of March 31, 2013:                                                              March 31, 2013                              Equivalent                                         Net     In thousands              Moody's                       Amortized       Unrealized     Equivalent S&P Rating      Rating       Fair Value         Cost         Gain (Loss)     AAA/AA/A                Aaa/Aa/A       $    180,939$  167,798$      13,141     BBB                     Baa                      -              -                 -     BB                      Ba                       -              -                 -     B                       B                        -              -                 -     CCC or lower            Caa or lower             -              -                 -     NR                      NR                       -              -                 -      Total                                  $    180,939$  167,798$      13,141                                             53 

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  The following table sets forth the composition of the investments categorized as corporate bonds in our portfolio by generally equivalent S&P and Moody's ratings (not all securities in our portfolio are rated by both S&P and Moody's) as of March 31, 2013:                                                              March 31, 2013                              Equivalent                                         Net     In thousands              Moody's                       Amortized       Unrealized     Equivalent S&P Rating      Rating       Fair Value         Cost         Gain (Loss)     AAA/AA/A                Aaa/Aa/A       $    343,134$  324,330$      18,804     BBB                     Baa                 137,252        130,367             6,885     BB                      Ba                    3,557          3,400               157     B                       B                        -              -                 -     CCC or lower            Caa or lower             -              -                 -     NR                      NR                       -              -                 -      Total                                  $    483,943$  458,097$      25,846    The company holds non-sovereign European securities of $78.1 million at fair value and $76.0 million at amortized cost, primarily in the investment portfolio. This represents 3.6% of our total fixed income and equity portfolio. Our largest exposure is in France with a total of $32.6 million followed by the Netherlands with a total of $30.7 million. We have no direct material exposure to Greece, Portugal, Italy or Spain as of March 31, 2013.                                           54

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  The following table summarizes all securities in a gross unrealized loss position as of March 31, 2013 and December 31, 2012, showing the aggregate fair value and gross unrealized loss by the length of time those securities had continuously been in a gross unrealized loss position as well as the number of securities:                                                                         March 31, 2013                                      December 31, 2012                                                                                            Gross                                                 Gross                                                      Number of                           Unrealized        Number of                           Unrealized In thousands, except # of securities                 Securities        Fair Value           Loss           Securities        Fair Value           Loss Fixed maturities: U.S. Treasury bonds, agency bonds, and foreign government bonds 0-6 months                                                     8      $     40,455      $         31                 8      $     23,760      $         22 7-12 months                                                   -                 -                 -                  3            14,118                11 > 12 months                                                   -                 -                 -                  1             4,652                 3  Subtotal                                                       8      $     40,455      $         31                12      $     42,530      $         36 States, municipalities and political subdivisions 0-6 months                                                    58      $    129,906$      1,682                10      $     21,299$        325 7-12 months                                                   -                 -                 -                 -                 -                 - > 12 months                                                    4             2,852                62                 4             2,908                55  Subtotal                                                      62      $    132,758$      1,744                14      $     24,207$        380 Agency mortgage-backed securities 0-6 months                                                    22      $     46,654$        512                10      $     62,516$        174 7-12 months                                                    3             7,921               128                 2             1,671                30 > 12 months                                                   -                 -                 -                 -                 -                 -  Subtotal                                                      25      $     54,575$        640                12      $     64,187$        204 Residential mortgage obligations 0-6 months                                                     5      $      1,673      $          2                 6      $      1,825      $         22 7-12 months                                                   -                 -                 -                 -                 -                 - > 12 months                                                   24             4,653               185                35             7,252               527  Subtotal                                                      29      $      6,326$        187                41      $      9,077$        549 Asset-backed securities 0-6 months                                                     1      $        631      $          2                -       $         -       $         - 7-12 months                                                   -                 -                 -                 -                 -                 - > 12 months                                                    1             1,743                27                 2             2,369                49  Subtotal                                                       2      $      2,374      $         29                 2      $      2,369      $         49 Commercial mortgage-backed securities 0-6 months                                                     1      $      1,149      $          5                 7      $      2,639      $          7 7-12 months                                                    2               802                11                -                 -                 - > 12 months                                                    4               717                13                 5               845                11  Subtotal                                                       7      $      2,668      $         29                12      $      3,484      $         18 Corporate bonds 0-6 months                                                    10      $     15,648$        121                 2      $      3,528      $          6 7-12 months                                                   -                 -                 -                 -                 -                 - > 12 months                                                    1             1,497                 3                 4             6,689                19  Subtotal                                                      11      $     17,145$        124                 6      $     10,217      $         25  Total fixed maturities                                       144      $    256,301$      2,784                99      $    156,071$      1,261  Equity securities-common stocks 0-6 months                                                     4      $      8,011$        247                13      $     23,345$        522 7-12 months                                                   -                 -                 -                  1             1,943               104 > 12 months                                                   -                 -                 -                 -                 -                 -  Total equity securities                                        4      $      8,011$        247                14      $     25,288$        626                                             55 

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

In the above table the gross unrealized loss for the greater than 12 months category consists primarily of residential mortgage-backed securities. Residential mortgage-backed securities are a type of fixed income security in which residential mortgage loans are sold into a trust or special purpose vehicle, thereby securitizing the cash flows of the mortgage loans.

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

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

As of March 31, 2013 and December 31, 2012, the largest single unrealized loss by issuer in the investment portfolio was $0.3 million and $0.2 million.

The following table sets forth the composition of the investments categorized as fixed maturity securities in our investment portfolio with gross unrealized losses by generally equivalent S&P and Moody's ratings (not all of the securities are rated by S&P and Moody's) as of March 31, 2013: March 31, 2013 Equivalent Gross Unrealized Loss Fair Value In thousands Moody's Percent of Percent of Equivalent S&P Rating Rating Amount Total Amount Total AAA/AA/A Aaa/Aa/A $ 2,379 85 % $ 236,052 92 % BBB Baa 247 9 % 15,563 6 % BB Ba 47 2 % 577 0 % B B 49 2 % 1,619 1 % CCC or lower Caa or lower 62 2 % 2,490 1 % NR NR - 0 % - 0 % Total $ 2,784 100 % $ 256,301 100 % As of March 31, 2013, the gross unrealized losses in the table above were related to fixed maturity securities that are rated investment grade, which is defined as a security having an S&P rating of "BBB-" or higher, or a Moody's rating of "Baa3" or higher, except for $0.2 million which is rated below investment grade or not rated. Unrealized losses on investment grade securities principally relate to changes in interest rates or changes in sector-related credit spreads since the securities were acquired. 56

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  The contractual maturity for fixed maturity securities categorized by the number of years until maturity, with a gross unrealized loss as of March 31, 2013 is presented in the following table:                                                                          March 31, 2013                                                 Gross Unrealized Losses                      Fair Value                                                                  Percent of                          Percent of In thousands                                  Amount               Total             Amount            Total Due in one year or less                    $           3                   0 %      $   1,505                  0 % Due after one year through five years                 63                   2 %         26,313                 10 % Due after five years through ten years               446                  16 %         76,159                 30 % Due after ten years                                1,387                  50 %         86,381                 34 % Mortgage- and asset-backed securities                885                  32 %         65,943                 26 %  Total                                      $       2,784                 100 %      $ 256,301                100 %   

As of March 31, 2013, there were no investments that had a gross unrealized loss that was less than 80% of amortized cost.

  The table below summarizes our activity related to OTTI losses for the periods indicated:                                                                   Three Months Ended March 31,                                                          2013                                2012                                               Number of                            Number of In thousands, except # of securities          Securities          Amount          Securities          Amount Total OTTI losses: Corporate and other bonds                              -         $     -                    -        $     - Commercial mortgage-backed securities                  -               -                    -              - Residential mortgage-backed securities                 -               -                     1             55 Asset-backed securities                                -               -                    -              - Equities                                                2              42                    2            143  Total                                                   2        $     42                    3       $    198 Less: Portion of loss in accumulated other comprehensive income (loss): Corporate and other bonds                                        $     -                             $     - Commercial mortgage-backed securities                                  -                                   - Residential mortgage-backed securities                                 -                                   44 Asset-backed securities                                                -                                   - Equities                                                               -                                   -  Total                                                            $     -                             $     44 Impairment losses recognized in earnings: Corporate and other bonds                                        $     -                             $     - Commercial mortgage-backed securities                                  -                                   - Residential mortgage-backed securities                                 -                                   11 Asset-backed securities                                                -                                   - Equities                                                               42                                 143  Total                                                            $     42$    154    During the three months ended March 31 2013, we recognized OTTI losses of $0.04 million related to two equity securities. During the comparable period in 2012, we recognized OTTI losses of $0.2 million related to one non-agency mortgage-backed security and two equity securities.                                           57

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