Note 1. Organization and Summary of Significant Accounting Policies

Unless the context 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. The terms “Parent” or “Parent Company” are used to mean The Navigators Group, Inc. without its subsidiaries.

Organization

We are an international insurance company with a long-standing area of specialization in Marine insurance. Our 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, through our Management Liability and Errors & Omissions (“E&O”) divisions. Beginning in 2010, we added reinsurance products through our Assumed Reinsurance division.

We operate through various wholly-owned subsidiaries, including Navigators Insurance Company, inclusive of its United Kingdom Branch (“U.K. Branch”), and Navigators Specialty Insurance Company, both of which are U.S. insurance companies, and Navigators Underwriting Agency Ltd., a Lloyd’s of London (“Lloyd’s”) underwriting agency that manages Lloyd’s Syndicate 1221 (“the Syndicate”) in the U.K. Our Company controls 100% of the Syndicate’s stamp capacity.

Basis of Presentation

The accompanying Interim Consolidated Financial Statements are unaudited and reflect all adjustments, which, in the opinion of management, are necessary to fairly present the results of The Navigators Group, Inc. and its subsidiaries for the interim periods presented on the basis of United States generally accepted accounting principles (“GAAP” or “U.S. GAAP”). All significant intercompany transactions and balances have been eliminated in consolidation. The preparation of these Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the Financial Statements and the reported revenues and expenses during the reporting periods. The results of operations for any interim period are not necessarily indicative of results for the full year. The Interim Consolidated Financial Statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014. Certain amounts for the prior year have been reclassified to conform with the current period presentation.

Foreign Exchange Remeasurement and Translation

During the first quarter of 2014, the Syndicate revised its foreign exchange accounting methodology from reporting its financial position and results using three functional currencies (GBP, USD and CAD) to one functional currency (USD). The USD was chosen as the single functional currency as the majority of the Syndicate’s insurance business has been and continues to be transacted in USD. This cumulative change in remeasurement has resulted in an immaterial correction of $10.0 million ($6.6 million after-tax) in Accumulated other comprehensive income (“AOCI”), on the Consolidated Balance Sheets, offset by a gain in Other income (loss) in the Consolidated Statements of Income.

Income Taxes

The income tax provision has been computed based on our estimated annual effective tax rate. Our effective tax rate for the quarter differs from the federal tax rate of 35% principally because of tax-exempt investment income and dividends received deduction.

Current and Pending Accounting Pronouncements

As of January 1, 2015, we did not adopt any new accounting pronouncements. In 2015, the Financial Accounting Standards Board issued the following new pronouncements that may have an impact on our Company and we are assessing the future impact of these updates to our Consolidated Financial Statements:

Accounting Standards Update 2015-03 – Interest – Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs, which will be effective for fiscal years beginning after December 15, 2015. The new pronouncement was issued to simplify presentation of debt issuance costs.

Accounting Standards Update 2015-05 – Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40) Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which will be effective for fiscal years beginning after December 15, 2015. The new pronouncement was issued to provide guidance to customers about whether a cloud computing arrangement includes a software license.

Accounting Standards Update 2015-07 – Fair Value Measurement – (Topic 820) Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or its equivalent) (a consensus of the Emerging Issues Task Force), which will be effective for fiscal years beginning after December 15, 2015. The new pronouncement was issued to ensure that all investments categorized in the fair value hierarchy are classified using a consistent approach.

Accounting Standards Update 2015-09 – Financial Services Insurance – (Topic 944) Disclosures about Short-Duration Contracts, effective for annual periods beginning after December 15, 2015. The new pronouncement was issued to (1) increase the usefulness of the information about a reporting entity’s insurance liabilities, including the nature, amount, timing, and uncertainty of cash flows related to those liabilities and the effect of those cash flows on the Statements of Comprehensive Income and (2) improve comparability between reporting entities, regardless of the type of entity issuing the contract.

Accounting Standards Update 2015-12 – Plan Accounting: Defined Benefit Pension Plans, Defined Contribution Pension Plans, Health and Welfare Plans, effective for annual periods beginning after December 15, 2015. This update was issued to reduce complexity in employee benefit plan accounting. This update designates contract value as the only required measure for fully benefit-responsive investment contracts, which maintains the relevant information while reducing the cost and complexity of reporting for fully benefit-responsive investment contracts.

Accounting Standards Update 2015-14 – Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date, effective for annual periods beginning after December 15, 2017. In response to stakeholders’ request to defer the effective date of the guidance in Update 2014-09 and in consideration of feedback received through extensive outreach with preparers, practitioners, and users of financial statements, the Board issued this proposed update. The amendments in this update defer the effective date of Update 2014-09 for all entities by one year.

Accounting Standards Update 2015-15 – Interest – Imputation of Interest (Subtopic 835-30) – Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, effective for annual periods beginning after December 15, 2015. This update changed the wording in Subtopic 835-30 for the imputation of interest. Given the absence of authoritative guidance within Update 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangements.

There were no additional pending accounting pronouncements that are expected to have a significant impact on the Consolidated Financial Statements upon adoption.