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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 20142016

or

For the transition period from ______ to. _____.

Commission File number 0-15886

The Navigators Group, Inc.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x☒    No  ¨☐

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

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

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

The aggregate market value of voting stock held by non-affiliates as of June 30, 20142016 was $723,657,575$1,014,101,687 (Last business day of The Company’s most recently completed second fiscal quarter).

The number of common shares outstanding as of January 31, 201527, 2017 was 14,289,97029,155,547 (Last practical business day for the count of shares outstanding).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s  2014definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 25, 2017  are incorporated by reference in Part III, Items 10, 11, 12, 13 and 14 of thisForm 10-K.10‑K.

TABLE OF CONTENTS

NOTE ON FORWARD-LOOKINGFORWARD-LOOKING STATEMENTS

Some of the statements in this Annual Report on Form 10-K are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in or incorporated by reference in this Annual Report are forward-looking statements.  Whenever used in this report, the words “estimate,” “expect,” “believe,” “may,” “will,” “intend,” “continue” or similar expressions or their negative are intended to identify such forward-looking statements.  Forward-looking statements are derived from information that we currently have and assumptions that we make. We cannot assure you that anticipated results will be achieved, since actual results may differ materially because of both known and unknown risks and uncertainties which we face. Factors that could cause actual results to differ materially from our forward-looking statements include, but are not limited to, the factors described in Part I, Item 1A, “Risk Factors”Risk Factors of this report. In light ofDue to these known risks, any unknown risks, uncertainties and assumptions, any forward-looking eventsstatements discussed in this report may not occur. Youoccur and actual results may differ materially, you are therefore cautioned not to place undue reliance on any forward-looking statements, which speak only as of their respective dates.them. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

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 report. They contain forward-looking statements that involve risks and uncertainties. Please refer to the above “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 above and elsewhere in this report.

PART I

ITEM 1. BUSINESS

Overview

The accompanying consolidated financial statements, consisting ofUnless the results ofcontext requires otherwise, the terms “we,” “us,”  “our,” or “our Company” are used to mean The Navigators Group, Inc., a Delaware holding company established in 1982, and its subsidiaries are prepared on the basis of United States (“U.S.”) generally accepted accounting principles (“GAAP” or “U.S. GAAP”). All significant intercompany transactions and balances have been eliminated. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported revenues and expenses during the reporting periods.subsidiaries.  The term  “the Company” as used herein is used to mean The Navigators Group, Inc. and its subsidiaries, unless the context otherwise requires. The terms “Parent” or “Parent Company” areis  used to mean The Navigators Group, Inc. without its subsidiaries. Certain amounts for the prior year have been reclassified to conform to the current year’s presentation.

The Company is

We are an international insurance company focusing on specialty products within the overall property and casualty insurance market. The Company’swith a long-standing area of specialization isin Marine insurance. The Company hasOur Property and Casualty (“P&C”) insurance business primarily offers general liability coverage and umbrella & excess liability coverage to commercial enterprises through our Primary and Excess Casualty divisions. We have also developed niches in Professional Liability insurance, and Property Casualty lines of insurance, such as Primary and Excess casualty coverages offered to commercial enterprises and Assumed Reinsurance.

The Company classifies its business into one Corporate segmentthrough our Directors & Officers (“Corporate”D&O”) and two underwriting segments, the Insurance Companies segment (“Insurance Companies”) and the Lloyd’s Operations segment (“Lloyd’s Operations”) which are separately managed by business line divisions. The Insurance Companies are primarily engaged in underwriting Marine insurance, Primary Casualty insurance with a concentration in contractors’ general liability products, Excess Casualty insurance with a concentration in commercial umbrella products, Assumed Reinsurance, Management Liability insurance and Errors & Omissions (“E&O”) insurance. This segment is comprised ofdivisions. Beginning in 2010, we added reinsurance products through our Global Reinsurance (“GlobalRe”) business.

We operate through various wholly-owned subsidiaries, including Navigators Insurance Company (“NIC”), which includes ainclusive of our United Kingdom Branch (“UK”) branch (“UKU.K. Branch”), and Navigators Specialty Insurance Company (“NSIC”), both of which underwrites business on an excessare U.S. insurance companies, and surplus lines basis. All of the business underwritten by NSIC is fully reinsured by NIC pursuant toNavigators Underwriting Agency Ltd., a 100% quota share reinsurance agreement.

The Lloyd’s Operations are primarily engaged in underwriting Marine insurance; Energy & Engineering insurance with a concentration in offshore energy products and onshore energy construction products, Assumed Reinsurance, Management Liability insurance and E&O insurance at Lloyd’s of London (“Lloyd’s”) throughmanaging agency that manages Lloyd’s Syndicate 1221 (“Syndicate 1221”the Syndicate”) in the United Kingdom (“U.K.”). The Corporate segment consists of the Parent Company’s investment income, interest expense and related income tax.

Revenue is primarily comprised of premiums and investment income. The Company derives premiums predominantly from business written by wholly-owned underwriting management companies, Navigators Management Company (“NMC”) and Navigators Management (UK) Ltd. (“NMUK”) that manage and service insurance and reinsurance business written by the Insurance Companies. The Company’s products are distributed through multiple channels, utilizing global, national and regional retail and wholesale insurance brokers.

Navigators Underwriting Agency Ltd. (“NUAL”) is a Lloyd’s underwriting agency that manages Syndicate 1221. TheOur Company controls 100% of Syndicate 1221’sthe Syndicate’s stamp capacity throughcapacity.

In May 2016, our Company received authorization from the wholly-owned subsidiary,U.K. Prudential Regulation Authority (“PRA”) and the U.K. Financial Conduct Authority (“FCA”) for a new U.K. based insurance company, Navigators Corporate Underwriters Ltd.International Insurance Company Ltd (“NCUL”NIIC”), which is referred to as a corporate namewholly-owned direct subsidiary of our Parent Company, and has been fully capitalized in compliance with the Lloyd’s market. In addition, the Company has also established underwriting agencies in Antwerp, Belgium; Stockholm, Sweden; and Copenhagen, Denmark; as well as branchesterms of the appointed representative, Navigators Underwriting Ltd.authorization from the PRA and FCA.  

Segment Information

We report our results of operations consistent with the manner in which our Chief Operating Decision Maker reviews the business to assess performance of our four reporting segments: U.S. Insurance, International Insurance (“NUL”Int’l Insurance”), in the European Economic Area (“EEA”), in Milan, Italy; Rotterdam,GlobalRe and Corporate. The Netherlands;U.S. Insurance and Paris, France, which underwrite risks pursuant to binding authorities with NUAL into Syndicate 1221. The Company has also established a presence in BrazilInt’l Insurance reporting segments are each comprised of three operating segments: Marine, P&C and China through contractual arrangements with local affiliates of Lloyd’s.Professional Liability.

For additional information on our segment presentation and for financial information concerning our operations by segment, refer tosee Segment Results included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 3,2, Segment Information, in the Notes to the Consolidated Financial Statements, included herein.

While the Company’s management takes into consideration a wide range of factors in planning the business strategy and evaluating results of operations, there are certain factors that management believes are fundamental to understanding how the Company is managed. First, underwriting profit is consistently emphasized as a primary goal, above premium growth. Underwriting profit is a non-GAAP financial measure of performance and underwriting profitability, which is derived from net earned premium less the sum of net losses and Loss Adjustment Expenses (“LAE”), commission expenses, other operating expenses and other underwriting income or loss. Management’s assessment of the trends and potential growth in underwriting profit is the dominant factor in its decisions with respect to whether or not to expand a business line, enter into a new niche, product or territory or, conversely, to contract capacity in any business line. In addition, management focuses on controlling the costs of the operations. Management believes that careful monitoring of the costs of existing operations and assessment of costs of potential growth opportunities are important to the profitability. Access to capital also has a significant impact on management’s outlook for the operations. The Insurance Companies’ operations and ability to grow their business and take advantage of market opportunities are constrained by regulatory capital requirements and rating agency assessments of capital adequacy. Similarly, the ability to grow the Lloyd’s Operations is subject to capital and operating requirements of Lloyd’s and the U.K. regulatory authorities.

Management’s decisions are also greatly influenced by access to specialized underwriting and claims expertise in the Company’s lines of business. The Company has chosen to operate in specialty niches with certain common characteristics, which provides it with the opportunity to use its technical underwriting expertise in order to realize underwriting profit. As a result, the Company has focused on underserved markets for businesses characterized by higher severity and lower frequency of loss where it believes its intellectual capital and financial strength bring meaningful value. In contrast, the Company has avoided niches that it believes have a high frequency of loss activity and/or is subject to a high level of regulatory requirements, such as Workers Compensation and Personal Automobile insurance, because the Company does not believe, its technical underwriting expertise is of as much value in these types of businesses. Examples of niches that have the characteristics the Company looks for include Bluewater Hull which provides coverage for physical damage to highly valued cruise ships, and Directors and Officers Liability insurance (“D&O”) which covers litigation exposure of a corporation’s directors and officers. These types of exposures require substantial technical expertise. The Company attempts to mitigate the financial impact of severe claims on their results through conservative and detailed underwriting, prudent use of reinsurance and a balanced portfolio of risks.

Business Lines

MarineStatements.

The following table presents Net earned premiums by segment:

Products and Distribution

Our Company distributes insurance related products through international, national, regional and retail insurance brokers. Our on-going operations are organized into distinct divisions, each offering specialized products and services targeted at a specific niche customer segment.

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

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

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

A summary of our U.S. Insurance – U.S. P&C operating segment by business line divisionsdivision and primary products within thosethese divisions by underwriting segment:

Insurance Companiesare as follows:

The Insurance Companies’ Marine business consists of a number of different product lines. The largest is Marine Liability, which protects businesses from liability to third parties for bodily injury or property damage stemming from their marine-related operations, such as terminals, marinas and stevedoring. The Insurance Companies also underwrite insurance for Harbor Craft and other small craft such as fishing vessels, providing physical damage and third party liability coverage as well as Customs Bonds. The U.K. Branch underwrites Primary Marine Protection & Indemnity business, which complements the Marine Liability business, which is generally written above the primary layer on an excess basis. The Insurance Companies also underwrite Cargo insurance, which provides coverage for physical damage to goods in the course of transit, whether by water, air or land, as well as Bluewater Hull, which provides coverage to the owners of ocean-going vessels against physical damage. In addition, the Insurance Companies write Inland Marine products including builders’ risk, contractors’ tools and equipment, fine arts, computer equipment and warehouse legal liability.

The Insurance Companies’ Marine business is written from offices located in major insurance or port locations in New York, Seattle, San Francisco, Houston, Chicago, Miami and London.

The Lloyd’s Operations Marine business primarily consists of Cargo, Marine Liability, Transport and Specie. Other key product lines include Marine Energy Liability, Assumed Marine Reinsurance of other marine insurers on an excess-of-loss basis, Bluewater Hull and War.

The Lloyd’s Operations Cargo insurance business is one of the largest products and provides coverage for cargo in transit covering all types of manufacturers, importers and exporters. The largest component part of the Marine Liability account is written on an excess basis with terms that are common with the rest of the Lloyd’s market. Within the Marine Liability account the Company writes a large book of Shipowners’ Liability risks and Charterers’ Liability risks both directly and as reinsurance of various primary providers. The Lloyd’s Operations Transport account predominantly comprises worldwide Property and Liability exposures in respect of ports and terminals and services ancillary to the transportation of marine cargo, such as stevedoring, warehousing, wharfingering and logistics. The Lloyd’s Operations Specie account includes cash in transit, jeweler’s block, fine art, precious metals and securities.

The Energy Liability account is predominantly made up of worldwide upstream Energy Liabilities. The Marine Assumed Reinsurance business is fundamentally Cargo based and contains very little International Hull business and Energy exposure in the Gulf of Mexico and the North Sea. The Hull product line covers a general spread of worldwide Hull business along with shipowners’ interests including loss of hire, increased value, mortgagees’ interest and ship construction. The Lloyd’s Operations War product line includes war physical damage, loss of hire, loss of charter hire, piracy, confiscation and drug seizure.

The Lloyd’s Operations Marine business is written from offices located in London, and in Continental Europe in Antwerp, Stockholm, Rotterdam, Milan and Paris.

Property Casualty

The Property Casualty business focuses on specialty products within the overall Property and Casualty insurance and reinsurance market. A summary of theour U.S. Insurance – U.S. Professional Liability operating segment by business line divisionsdivision and primary products within thosethese divisions by underwriting segment, is as follows.

Insurance Companiesfollows:

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

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

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

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

Competitive Environment

The Insurance Companies’ business consistsOur Company faces competition from both domestic and foreign insurers, many of Assumed Reinsurance, Primary Casualty, Excess Casualty, Environmental Casualty, Other Property & Casualtywhom have longer operating histories and Energy & Engineering Divisions.

The Specialty Assumed Reinsurance business is written by NavRe, an underwriting unit managed by NMC. The specialty products on which the unit currently writes are proportionalgreater financial, marketing and excess-of-loss treaty reinsurance covering medical health care exposures, Agriculture exposures primarily in North America, Property, Casualty, Surety and Financial treaty exposures in Central and South America and the Caribbean as well as Professional Liability exposuresmanagement resources. Competition in the U.S.

The Primary Casualty Division underwrites General Liabilitytypes of insurance policies forin which our Company is engaged is based on many factors, including the perceived overall financial strength ratings as assigned by independent rating agencies, pricing, other terms and conditions of products and services offered, business experience, business infrastructure, global presence, marketing and distribution arrangements, agency and broker relationships, quality of customer service (including speed of claims payments), product differentiation and quality, operating efficiencies and underwriting. Furthermore, insureds tend to favor large, financially strong insurers, and our Company faces the risk that we will lose market share to these larger insurers. Another competitive factor in whatthe industry is termed the Excess and Surplus lines market, which generally consistsentrance of businesses with more complex liability exposures, including contractors, manufacturers, real estate ownersunderwriting organizations and other service businesses. Since 1995,financial services providers, such as banks and brokerage firms, into the Insurance Companies have specialized in providing General Liability insurance business. These efforts pose new challenges to both residentialinsurance companies and commercial contractors, including coverage to both individual businesses and on a project or wrap-up basis that collectively insures all contractorsagents from financial services companies traditionally not involved on a designated construction project. In addition, the Insurance Companies insure other liability to third parties emanating from their premises and operations and products manufactured or distributed. The Company’s underwriters and claims professionals have significant experience in underwriting and settling claims in these niches that serves as the principle competitive advantage and allows for better underwriting results than those achieved by the U.S. insurance industry in the aggregate.insurance business.  We strive to offer superior service, which we believe has differentiated us from our competitors. Our Company pursues a specialist strategy and focuses on market opportunities where we can compete effectively based on service levels and product design, while still achieving an adequate level of profitability. Our Company has grown, in part, from the leveraging of cross-marketing opportunities with our other operations to take advantage of our organization's global presence.

The Excess Casualty division provides Commercial Umbrella and Excess Casualty insurance coverage. Commercial Umbrella policies provide additional limitsEmployees

As of coverageDecember 31, 2016, we had 683 full-time employees of which 510 were located in excess of a businesses’ General Liability and Automobile Liability policies. Excess policies also provide additional limits of liability, but generally provide limits in excess of the Primary policy and Commercial Umbrella policy, and in many instances attaching in excess of other Excess Liability layers. Areas of specialty include manufacturing and wholesale distribution, commercial construction, residential construction, construction project and wrap-up covers, business services, hospitality and real estate and niche programs.

The Environmental Casualty division provides highly specialized liability coverage to a wide variety of businesses and property owners in three broad product segments: Contractors Pollution Liability; Site Pollution Liability for owners and operators of real estate; and Integrated General and Pollution Liability for manufacturers, distributors, and environmental service providers. The division also writes Transactional Site Pollution policies that support the transfer of environmental liabilities between parties to real estate transactions. Environmental Liability policies can cover both first and/or third party legal liability arising out of pollution events or conditions that are generally excluded under Standard Liability and Property insurance policies.

Additional liability insurance is underwritten for select industry niches, including the Life Sciences, or Biotechnology, Medical Device and Environmental businesses. Other Property Casualty products underwritten include Commercial Automobile, which protects a business for third-party liability emanating from automobiles as well as physical damage to owned vehicles; Commercial Property insurance; and an exporter’s policy that provides coverage for third party liability for suits brought outside of the United States, along151 in the United Kingdom, 6 in The Netherlands, 5 in Italy, 4 in Sweden, 3 in France, 2 in Belgium and 2 in Denmark.

Loss Reserves

Loss reserves are estimates of what the insurer or reinsurer expects to pay on claims, based on facts and circumstances then known. It is possible that the ultimate liability may exceed or be less than such estimates. In setting the loss reserve estimates, our Company reviews statistical data covering several years, analyzes patterns by line of business and considers several factors including trends in claims frequency and severity, changes in operations, emerging economic and social trends, inflation and changes in the regulatory

and litigation environment. We also consult with other coverage targeted towardexperienced claims professionals. Based on our analysis, we make a best estimate of our ultimate liability.  During the needsloss settlement period, which, in some cases, may last several years, additional facts regarding individual claims may become known and, accordingly, it often becomes necessary to refine and adjust the estimates of international business ownersliability on a claim upward or downward. Such estimates are regularly reviewed and travelers. In 2012updated and 2013,any resulting adjustments are included in our current period’s earnings. Even then, the Company wrote a limited amount of Commercial Surety Bonds, but discontinued that business because of increased levels of competition that made it difficultultimate liability may exceed or be less than our revised estimates. Our reserving process is intended to achieve scale without sacrificing underwriting discipline.

The Energy & Engineering business is written by Navigators Technical Risk (“NavTech”), underwriting unitprovide implicit recognition of the Insurance Companies. The Offshore Energy insurance principally focuses onimpact of inflation and other factors affecting loss payments by taking into account changes in historical payment patterns and perceived probable trends. There is generally no precise method for the oil and gas, chemical and petrochemical industries, with coverage primarily for property damage and business interruption.

The Lloyd’s Operations Property Casualty business consists of Energy & Engineering written through NavTech, as well as Assumed Reinsurance and Casualty business.

The NavTech underwriting unit writes Offshore Energy, Onshore Energy, Engineering and Construction as well as D&F Property business. The Offshore Energy product lines includes coverage for property and activities such as offshore exploration and production assets, offshore construction projects, operators extra expenses and business interruption.

The Onshore Energy and Engineering business is written through a Lloyd’s consortium led by Navigators. The Onshore Energy portfolio comprises first party insurance damage to refineries and process plants in the oil, gas and petrochemical industries. The Engineering business comprises coverage of construction projects and operational power plants and facilities as well as business interruption insurance. Additionally, D&F Property is written through the NavTech underwriting unit with its core product being Fire and Natural Catastrophe Perils coverage for light commercial business.

The Assumed Reinsurance product lines include Property, Casualty and Surety treaty business focused in Argentina and Brazil. In addition, the Lloyd’s Operations writes Property Treaty business consisting of a portfolio of excess-of-loss contracts excluding exposure in the U.S., Caribbean and Latin America to avoid competition with the Insurance Companies.

In 2015, the Lloyd’s Operations plan to start writing Casualty insurance, which will include General Liability, Environmental Liability and Life Sciences (Product Liability and Clinical Trials business insurance), through the Lloyd’s Operations. The portfolio will cover a broad range of industries with a focus on low to medium hazard sectors, including general manufacturing, retail, and services. The Company intends to limit the exposure to high risk sectors such as transportation, automotive, and mining/utilities.

Professional Liability

A summarysubsequent evaluation of the business line divisions and products within those divisions, by underwriting segment, is as follows:

Insurance Companies

Lloyd’s Operations

The Insurance Companies Management Liability business consists of D&O Liability and related products for publicly traded corporations, privately held companies and not-for-profit organizations. Policies written for U.S. publicly traded companies are largely provided on an excess basis, while the majorityadequacy of the U.S. private company and not-for-profit D&Oconsideration given to inflation, or to any other specific factor, because the eventual strengthening or release of reserves is primary insurance. The E&O business is written on a primary and excess basis to a broad rangeaffected by many factors, some of non-medical professional service providers, ranging from accountants to real estate appraisers. During 2013, the Insurance Companies decided to significantly reduce the underwriting of U.S. law firms, for which they had focused on smaller law firms, as a result of increased competition that precluded them from attaining terms and conditions consistent with profitable underwriting results. Management Liability and Professional Liability policies are generally written on a claims-made basis, for which the claim must be reported during the policy period or a defined extended reporting period following expiration of the policy.interdependent.

The Lloyd’s Operations Management Liability book comprises primary and excess D&O targeting predominantly commercial companies outside of the U.S. The Lloyd’s Operations E&O portfolio is comprised of worldwide commercial E&O business targeting regulated professions and written on either a primary or an excess basis. The focus of this business is on companies domiciled outside of the U.S.

Loss Reserves

TheOur Company maintains reserves for unpaid losses and unpaid LAEloss adjustment expenses (“LAE”) for all lines of business. Loss reserves consist of both reserves for reported claims, known as case reserves, and reserves for losses that have occurred but have not yet been reported, known as incurred but not reported (“IBNR”) losses.  Case reserves are established when notice of a claim is first received. Reserves for such reported claims are established on a case-by-case basis by evaluating several factors, includingIn the type of risk involved, knowledge of the circumstances surrounding such claim, severity of injury or damage, the potential for ultimate exposure, experience with the insured and the broker on the linenormal course of business, our Company cedes a portion of our premium to reinsurers through treaty and the policy provisions relatingfacultative reinsurance agreements.  Although reinsurance does not discharge our Company from liability to the type of claim. Reserves for IBNR are determinedour policyholders, our Company participates in part on the basis of statistical informationreinsurance agreements to limit our loss exposure and in part on the basis of industry experience. To the extent that reserves are strengthened or released, the amount of such strengthening or release is treated as a charge or credit to earnings in the period in which the strengthening or release is identified. These reserves are intended to cover the probable ultimate cost of settling all losses incurred and unpaid, including those incurred but not reported. The determination of reserves for losses and LAE is dependent upon the receipt of information from insureds, brokers and agents.protect us against catastrophic losses.

There is a lag between the time premiums are written and related losses and LAE are incurred, and the time such events are reported to us. The loss reserves include amounts related to short tail and long tail classes of business. Short tail business refers to claims that are generally reported quickly upon occurrence of an event and involve little or no litigation, making estimation of loss reserves less complex. The long tail business includes theour Marine Liability Casualtyproduct as well as various other insurance products in our P&C and Professional Liability insurance products.operating segments. For the long tail lines, significant periods of time, ranging up to several years or more, may elapse between the occurrence of the loss, the reporting of the loss and the settlement of the claim. Generally, the longer the time span between the incidence of a loss and the settlement of the claim, the more likely the ultimate settlement amount will vary from the original estimate. Refer to theCasualty and Professional Liability section below for additional information.

Loss reserves are estimates of what the insurer or reinsurer expects to pay on claims, based on facts and circumstances then known. It is possible that the ultimate liability may exceed or be less than such estimates. In setting the loss reserve estimates, the Company reviews statistical data covering several years, analyzes patterns by line of business and considers several factors including trends in claims frequency and severity, changes in operations, emerging economic and social trends, inflation and changes in the regulatory and litigation environment. The Company also consults with experienced claims professionals. Based on this review, the Company makes a best estimate of its ultimate liability. During the loss settlement period, which, in some cases, may last several years, additional facts regarding individual claims may become known and, accordingly, it often becomes necessary to refine and adjust the estimates of liability on a claim upward or downward. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current period’s earnings. Even then, the ultimate liability may exceed or be less than the revised estimates. The reserving process is intended to provide implicit recognition of the impact of inflation and other factors affecting loss payments by taking into account changes in historical payment patterns and perceived probable trends. There is generally no precise method for the subsequent evaluation of the adequacy of the consideration given to inflation, or to any other specific factor, because the eventual strengthening or release of reserves is affected by many factors, some of which are interdependent.

Another factor related to reserve development is that the estimate of ultimate losses is based on the ratio of ultimate losses to ultimate premiums. For all the segments a certain, relatively stable, percentage of premium is reported after the close of the fiscal year. These amounts relate to the timing of the inception date of policies, lags in reporting of premium, premium audits, endorsements and cancellations. Losses are projected to an ultimate level. The ratio of ultimate loss to ultimate premium is then applied to the booked earned premium to match revenue with expense for GAAP purposes.

As part of the risk management process, the Company purchases reinsurance to limit the liability on individual risks and to protect against catastrophic loss. The Company purchases both quota share reinsurance and excess-of-loss reinsurance in order to limit the net retention per risk and event. Net retention represents the risk that the Company keeps for its own account. Once the initial reserve is established and the net retention is exceeded, any adverse development will directly affect the gross loss reserve, but would generally have no impact on the net retained loss unless the aggregate limits available under the impacted excess-of-loss reinsurance treaty are exhausted. Reinstatement premiums triggered under the excess-of-loss reinsurance by such additional loss development could have a potential impact on the net premiums during the period in which such additional loss development is recognized. Generally, the limits of exposure are known with greater certainty when estimating the net loss versus the gross loss. This situation tends to create greater volatility in the strengthening and releases of the gross reserves as compared to the net reserves.

The following table summarizes the reserve activity for losses and LAE for the years ended December 31, 2014, 2013 and 2012:

The following table presents the development of theour loss and LAE reserves for 20042006 through 2014. The line “Net2016. Net reserves for losses and LAE”LAE reflects theour net reserves at the balance sheet date for each of the indicated years and represents theour estimated amount of losses and LAE arising in all prior years that are unpaid at the balance sheet date. The “ReservesReserves for losses and LAE re-estimated” lines ofre-estimated  in the table reflect theour re-estimated amount of theour previously recorded reserves based on experience as of the end of each succeeding year. TheOur reserve estimates may change as more information becomes known about the frequency and severity of claims for individual years. TheOur net and gross cumulative redundancy (deficiency) lines ofin the table reflect thereflects our cumulative amounts developed as of successive years with respect to the aforementioned reserve liability. TheOur cumulative redundancy (deficiency) represents the aggregate change in the estimates over all prior years.

The table calculates losses and LAE reported and recorded for all prior years starting with the year in which the loss was incurred. For example, assuming that a loss occurred in 20042006 but was not reported until 2005,2007, the amount of such loss will appear as a deficiency in both 20042006 and 2005.2007. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future strengthening or releases based on the table.

A significant portion of theour favorable or adverse development on the gross reserves has been ceded to the excess-of-loss reinsurance treaties.  As a result of these reinsurance arrangements, theour gross losses and related reserve strengthening and releases tend to be more sensitive to favorable or adverse developments such as those described above than theour net losses and related reserve strengthening and releases.

The gross loss reserves include estimated losses related to the 2008 Hurricanes Ike and Gustav and the 2012 Superstorm Sandy totaling approximately 0.6% and 1.6% of gross loss reserves as of December 31, 2014 and 2013, respectively. In addition, 2.3% and 3.4% of the gross loss reserves as of December 31, 2014 and 2013, respectively, include estimated losses related to the Deepwater Horizon loss event. When recording these losses, the Company assesses the reinsurance coverage, potential reinsurance recoverable and the recoverability of those balances.

Refer to “Management’s Discussion of Financial Condition and Results of Operations - Results of Operations - Expenses - Net Losses and Loss Adjustment Expenses” and Note 5,Reserves for Losses and Loss Adjustment Expenses, in the Notes to Consolidated Financial Statements, both of which are included herein, for additional information regarding Hurricanes Ike and Gustav, Superstorm Sandy and the asbestos exposure.

		Year Ended December 31,
In thousands		2004				2005				2006				2007				2008				2009				2010				2011				2012				2013				2014
Net reserves for losses and LAE		$	463,788			$	578,976			$	696,116			$	847,303			$	999,871			$	1,112,934			$	1,142,542			$	1,237,234			$	1,216,909			$	1,222,633			$	1,308,136
Reserves for losses and LAE re-estimated as of:
One year later			460,007				561,762				649,107				796,557				990,930				1,099,132				1,144,687				1,191,943				1,215,643				1,166,821
Two years later			457,769				523,541				589,044				776,845				971,048				1,065,382				1,068,344				1,189,651				1,142,545
Three years later			432,988				481,532				555,448				767,600				943,231				1,037,233				1,084,728				1,167,745
Four years later			401,380				461,563				559,368				749,905				925,756				1,027,551				1,072,849
Five years later			391,766				469,195				539,327				745,489				921,597				1,029,215
Six years later			401,071				451,807				538,086				736,776				925,518
Seven years later			387,613				449,395				530,856				737,514
Eight years later			389,520				444,632				526,515
Nine years later			386,991				440,561
Ten years later			383,626
Net cumulative redundancy (deficiency)			80,162				138,415				169,601				109,789				74,353				83,719				69,693				69,489				74,364				55,812
Net cumulative paid as of:
One year later			96,981				133,337				142,938				180,459				263,523				314,565				309,063				407,385				365,479				295,527
Two years later			180,121				219,125				233,211				322,892				460,058				517,125				552,881				620,955				550,747
Three years later			238,673				264,663				300,328				441,267				591,226				682,051				695,054				752,315
Four years later			262,425				302,273				359,592				526,226				688,452				773,261				785,046
Five years later			283,538				337,559				401,102				583,434				745,765				828,269
Six years later			305,214				356,710				427,282				620,507				785,211
Seven years later			318,539				372,278				451,118				645,951
Eight years later			328,842				385,902				462,648
Nine years later			340,956				392,468
Ten years later			343,444
Gross liability-end of year			966,117				1,557,991				1,607,555				1,648,764				1,853,664				1,920,286				1,985,838				2,082,679				2,097,048				2,045,071				2,159,634
Reinsurance recoverable			502,329				979,015				911,439				801,461				853,793				807,352				843,296				845,445				880,139				822,438				851,498
Net liability-end of year			463,788				578,976				696,116				847,303				999,871				1,112,934				1,142,542				1,237,234				1,216,909				1,222,633				1,308,136
Gross re-estimated latest			849,169				1,323,498				1,315,366				1,473,307				1,690,517				1,753,963				1,817,727				1,939,296				1,950,611				1,963,267
Re-estimated recoverable latest			465,543				882,937				788,851				735,793				764,999				724,748				744,878				771,551				808,066				796,446
Net re-estimated latest			383,626				440,561				526,515				737,514				925,518				1,029,215				1,072,849				1,167,745				1,142,545				1,166,821
Gross cumulative redundancy (deficiency)			116,948				234,493				292,189				175,457				163,147				166,323				168,111				143,383				146,437				81,804

The following tables identify the approximate gross and net cumulative redundancy (deficiency) as of each year-end balance sheet date for the Insurance Companies and Lloyd’s Operations contained in the preceding ten year table: