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LOGO

SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
December 31, 2002

Commission File No. 0-15886

THE NAVIGATORS GROUP, INC.(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction of
incorporation or organization)                  |  | 13-3138397(I.R.S. employer identification no.)
|--------------------------------------------------------------------------------------- |  | ----------------------------------------------
|One Penn Plaza, New York, New York(Address of principal executive offices)              |  | 10119(Zip code)                               
|Registrant's telephone number, including area code:(212) 244-2333                      
|Securities registered pursuant to Section 12(b) of the Act:None                        
|Securities registered pursuant to Section 12(g) of the Act:Common Stock, $.10 Par Value
|                                                                                        |  | (Title of Class)                              

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 ý    No o

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
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 o

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes ý    No o

The
aggregate market value of voting stock held by non-affiliates as of June 28, 2002 was $113,016,000.

The
number of common shares outstanding as of March 21, 2003 was 8,492,535.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's 2003 Proxy Statement are incorporated by reference in Part III, Items 10, 11, 12 and 13 of this Form 10-K.

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Forward-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 Act
of 1995. We derive forward-looking information from information which we currently have and assumptions which we make. We cannot assure that results which we anticipate will be achieved, since results
may differ materially because of both known and unknown risks and uncertainties which we face. The Company undertakes no obligation to publicly update or revise any forward-looking statement. Factors
which could cause actual results to differ materially from our forward looking statements include, but are not limited to:



Part I

Item 1. BUSINESS

General

The accompanying consolidated financial statements consisting of the accounts of The Navigators Group, Inc., a Delaware holding company, and its twelve
active wholly owned subsidiaries are prepared on the basis of accounting principles generally accepted in the United States of America ("GAAP"). The Company consists of insurance company operations,
insurance underwriting agencies and
operations at Lloyd's of London. Unless the context otherwise requires, the term "Company" as used herein means The Navigators Group, Inc. and its subsidiaries. The term "Parent Company" is
used to

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mean the Company without its subsidiaries. All significant intercompany transactions and balances have been eliminated.

The
Company's two insurance company subsidiaries are Navigators Insurance Company ("Navigators Insurance"), which includes a United Kingdom Branch ("UK Branch"), and NIC Insurance
Company ("NIC"). Navigators Insurance is the Company's largest insurance subsidiary and has been active since 1983. It specializes principally in underwriting marine insurance and related lines of
business, contractors' general liability insurance, and professional liability insurance. NIC, a wholly owned subsidiary of Navigators Insurance, began operations in 1990. NIC is a surplus lines
insurance company fully reinsured by Navigators Insurance. Surplus lines insurance companies operate on a non-admitted basis, and are not subject to state regulation of rates and forms.
Navigators Insurance and NIC are collectively referred to herein as the "Insurance Companies".

Five
of the Company's wholly owned insurance underwriting agencies (the "Navigators Agencies"), produce business for the Insurance Companies. They specialize in writing marine and
related lines of business, general liability insurance and professional liability coverages.

Each
of the Navigators Agencies write marine and related business for Navigators Insurance which is pooled with four unaffiliated insurance companies. The five insurance companies
comprise a marine insurance pool. Marine insurance policies are issued by Navigators Insurance with the business shared through the pool. Navigators Insurance had a 75% net participation in the pool.

Navigators
Specialty, a division of a Navigators Agency located in San Francisco, California, produces business exclusively for the Insurance Companies. It specializes in underwriting
general liability insurance coverage for general contractors and small artisans as well as small commercial risks with the majority of the business located on the west coast of the U.S.

Navigators
Pro, a division of a Navigators Agency located in New York, specializes in underwriting professional liability insurance and began producing directors & officers
liability insurance exclusively for the Insurance Companies in the fourth quarter of 2001. In late 2002, Navigators Pro introduced additional products to complement its directors & officers
liability coverage. The products include employment practices liability, lawyers professional liability and miscellaneous professional liability coverages.

Navigators
Holdings (UK) Limited is a holding company for the Company's UK subsidiaries consisting of the Lloyd's Operations and Navigators Management (UK) Limited, a Navigators Agency,
which produces business for the UK Branch of Navigators Insurance. The Lloyd's Operations consist of
Navigators Underwriting Agency Ltd. ("NUAL"), a Lloyd's of London ("Lloyd's") marine underwriting managing agency which manages Lloyd's Syndicate 1221, Millennium
Underwriting Ltd. ("Millennium") and Navigators Corporate Underwriters Ltd. ("NCUL"). Both Millennium and NCUL are Lloyd's corporate members with limited liability and
provide capacity to Lloyd's Syndicate 1221. NUAL owns Pennine Underwriting Ltd., an underwriting managing agency with offices in Manchester and Leeds, England, which underwrites cargo and
engineering business for Lloyd's Syndicate 1221.

The
Company's revenue is primarily comprised of premiums, commissions and investment income. The Insurance Companies derive their premium primarily from business written by the
Navigators Agencies. The Lloyd's Operations derive their premium from business written by NUAL. The Navigators Agencies and NUAL receive commissions and, in some cases, profit commissions and service
fees on the business produced.

Property
and casualty insurance premiums historically have been cyclical in nature and, accordingly, during a "hard market" demand for property and casualty insurance exceeds supply or
capacity and, as a result, premiums and commissions may increase. On the downturn of the property and casualty cycle, which is referred to as a "soft market", supply exceeds demand and, as a result,
premiums and commissions may decrease.

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Lines of Business

The Company's two largest lines of business are marine and general liability insurance. It also writes professional liability insurance, onshore energy,
engineering and construction insurance. In 2002, the Company began to write surety, commercial multiple peril and commercial automobile from its midwest office and personal umbrella insurance from its
California office. Marine insurance includes hull, offshore energy, liability and cargo; general liability insurance is primarily contractors' liability; onshore energy insurance focuses on the oil
and gas, chemical and petrochemical industries with coverages primarily for property damage and business interruption; and engineering and construction insurance consists of coverage for construction
projects including machinery, equipment and loss of use due to delays. In November 2001, the Company formed a new division, Navigators Pro, specializing in professional liability insurance,
primarily directors and officers coverages.

Marine Insurance

Navigators Insurance obtains marine business through participation in the marine pool managed by the Navigators Agencies. The composition of the pool and the
level of participation of each member changes from time to time. Navigators Insurance's net participation in the marine pool for 2002, 2001 and 2000 was 75%. The Navigators Agencies generally receive
commissions equal to 7.5% of the gross
premium earned on marine insurance and are entitled to receive a 20% profit commission on the net underwriting profits of the pool.

The
Lloyd's marine premium is generated as a result of NCUL and Millennium providing capacity to Lloyd's Syndicate 1221. The Company's share of the premiums, losses and expenses from
Lloyd's Syndicate 1221 are included in the Company's consolidated results.

Engineering and Construction

The Lloyd's Operations write engineering and construction business consisting of coverage for construction projects including machinery, equipment and loss of use
due to delays.

Onshore Energy

The Lloyd's Operations also write onshore energy insurance which principally focuses on the oil and gas, chemical and petrochemical industries with coverages
primarily for property damage and business interruption.

General Liability

Navigators Specialty writes primary general liability and excess liability/umbrella insurance for general contractors and small artisans and other small
commercial risks.

Professional Liability

In late 2001, the Insurance Companies began to write professional liability insurance through Navigators Pro, a division of one of the Navigators Agencies.
Navigators Pro primarily offers directors and officers liability insurance for privately held and publicly traded corporations. More recently, Navigators Pro began offering employment practices
liability, lawyers professional liability and miscellaneous professional liability coverages.

Surety

Beginning in the third quarter of 2002, the Company began producing surety business from its midwest office with a focus on the small to medium contractor market
as well as the small general commercial surety risks.

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Other Property/Casualty Insurance

In late 2002, the Company began to write commercial multiple peril and commercial automobile from its midwest office and personal umbrella insurance from its
California office.

Reinsurance Ceded

The Company utilizes reinsurance principally to reduce its exposure on individual risks, to protect against catastrophic losses, to maintain desired ratios of net
premium written to statutory surplus and to stabilize loss ratios.

Reinsurance
does not discharge the original insurer from its primary liability to the policyholder. The ceding company is required to pay the losses even if the assuming company fails to
meet its obligations under the reinsurance agreement.

Reinsurance
is generally written under treaty contracts in which coverage is either on a proportional basis, where the reinsurer shares proportionately in premiums and losses, or on an
excess of loss basis, where only losses above a fixed amount are reinsured.

The
Company is protected by various treaty and facultative reinsurance agreements. The Company's exposure to credit risk from any one reinsurer is managed through diversification by
reinsuring with a number of different reinsurers, principally in the United States and European reinsurance markets. To meet our standards of acceptability, when the reinsurance is placed, a reinsurer
must have an A.M. Best and/or Standard & Poor's ("S&P") rating of A or better, or equivalent financial strength if not rated, plus at least $150 million in policyholders' surplus. The
list of acceptable reinsurers is reviewed periodically by the Reinsurance Security Committee. The reinsurance is placed either directly by the Company or through reinsurance intermediaries. The
reinsurance intermediaries are compensated by the reinsurers. The Company's Reinsurance Security Committee monitors the financial strength of its
reinsurers and the amounts of reinsurance receivables from those reinsurers. SeeManagement's Discussion and Analysis of Financial Condition and Results of
OperationsOperating ExpensesNet Loss and LAE Incurredfor a discussion of the reinsurance recoverables from and financial strength ratings of the
Company's primary reinsurers.

Reserves

Insurance companies and Lloyd's syndicates are required to maintain reserves for unpaid losses and unpaid loss adjustment expenses ("LAE") for all lines of
business. 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 for insurance companies such as Navigators Insurance and NIC, and Lloyd's corporate members such as NCUL and Millennium is dependent upon the receipt of information from the pools and
syndicates in which such companies participate. Generally, 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 the
pools and syndicates and, subsequently, to Navigators Insurance, NIC, NCUL and Millennium.

Reserves
are established for the Insurance Companies and Lloyd's Syndicate 1221 for reported claims when notice of the claim is first received. Reserves for such reported claims are
established on a case-by-case basis by evaluating several factors, including 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 line of business, and the policy provisions relating to the type of claim. Reserves for
incurred but not reported losses (which are referred to as IBNR) are determined in part on the basis of statistical information and in part on industry experience.

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

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such estimates. In setting its 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. Based on this review, the
Company makes a best estimate of its ultimate liability. The Company does not establish a range of loss estimates around the best estimate it uses to establish its reserves and LAE. 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 year's income statement. 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 deficiency or redundancy of reserves is affected by many factors, some of which are interdependent.

Our
loss reserves include amounts related to short tail and long tail classes of business. Short tail business means that claims are generally reported quickly upon occurrence of an
event, making estimation of loss reserves less complex. Our long tail business includes contractors' liability and professional liability insurance. We are also exposed to some asbestos and
environmental liability primarily through our marine line of business. Management believes that its reserves for such claims are adequate because the Company's participation in such risks is generally
in the higher excess layers and, based on a continuing review of such claims, it believes that a majority of these claims will be unlikely to penetrate such high excess layers of coverage; however,
due to significant assumptions inherent in estimating these exposures, actual liabilities could differ from current estimates. 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. The longer the time span between the incidence of a loss and the
settlement of the claim, the more likely the ultimate settlement amount can vary. For the long tail liability classes, a relatively small proportion of net losses in the more recent accident years are
reported claims and an even smaller proportion are paid losses. Therefore, a relatively large proportion of our net losses for these classes are reserves for IBNR losses. In fact, approximately 76% of
our construction liability net loss reserves at December 31, 2002 were for IBNR. Virtually all of the professional liability net loss reserves at December 31, 2002 were for IBNR. Where
anticipated loss experience is less predictable because of the small number of claims and/or erratic claim severity patterns, our loss estimates are based on expected losses, actual reported losses,
evaluation of loss trends, and the legal, regulatory and current risk environment. The expected ultimate losses are adjusted as the accident years mature. As of December 31, 2002, there were
495 open claims for construction defect liability insurance and seven open claims for professional liability coverage. Additional information regarding the complexity of estimating asbestos and
environmental reserves is discussed below underEnvironmental Pollution and Asbestos Related Claims. The Company does not discount any of its reserves.

The
Company records those premiums which are reported to it through the end of each calendar year and accrues estimates for amounts where there is a time lag between when the policy is
bound and the recording of the policy. A substantial portion of the estimated premiums is from international business where there can be significant time lags. To the extent that the actual premiums
vary from estimates, the difference is recorded in current operations.

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The
following table presents an analysis of losses and LAE:

|                                                                                    |              | Year Ended December 31, |        
|----------------------------------------------------------------------------------- | ------------ | ----------------------- | -------
|
|
|Net reserves for losses and LAE at beginning of year                                |              | $                       | 202,759
|                                                                                    |              |                         |        
|Provision for losses and LAE for claims occurring in the current year               |              |                         | 134,721
|Lloyd's Operationsreinsurance to close                                             |              |                         | 1,641  
|Increase (decrease) in estimated losses and LAE for claims occurring in prior years |              |                         | 7,038  
|                                                                                    |              |                         |        
|Incurred losses and LAE                                                             |              |                         | 143,400
|                                                                                    |              |                         |        
|Losses and LAE payments for claims occurring during:                                |              |                         |        
|                                                                                    | Current year |                         |        
|                                                                                    | Prior years  |                         |        
|                                                                                    |              |                         |        
|Losses and LAE payments                                                             |              |                         | (81,512
|                                                                                    |              |                         |        
|Net reserves for losses and LAE at end of year                                      |              |                         | 264,647
|                                                                                    |              |                         |        
|Reinsurance receivables on unpaid losses and LAE                                    |              |                         | 224,995
|                                                                                    |              |                         |        
|Gross reserves for losses and LAE at end of year                                    |              | $                       | 489,642
|                                                                                    |              |                         |        

The
following table presents the development of the loss and LAE reserves for 1992 through 2002. The line "Net reserves for losses and LAE" reflects the net reserves at
the balance sheet date for each of
the indicated years and represents the estimated amount of losses and LAE arising in all prior years that are unpaid at the balance sheet date. The "Reserves re-estimated" lines of the
table reflect the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year. The estimate changes as more information becomes known
about the frequency and severity of claims for individual years. The "Cumulative redundancy (deficiency)" lines of the table reflect the cumulative amounts developed as of successive years with
respect to the aforementioned reserve liability. The cumulative redundancy or deficiency represents the aggregate change in the estimates over all prior years.

The
table allocates losses and LAE reported and recorded in subsequent years to all prior years starting with the year in which the loss was incurred. For example, assume that a loss
occurred in 1994 and was not reported until 1996, the amount of such loss will appear as a deficiency in both 1994 and 1995. 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 redundancies or deficiencies based on the table.

As
part of our risk management process, we purchase reinsurance to limit our liability on individual risks and to protect against catastrophic loss. We purchase both quota share
reinsurance and excess of loss reinsurance. Quota share reinsurance is often times utilized on the lower layers of risk and excess of loss reinsurance is used above the quota share reinsurance to
limit our net retention per risk. Net retention means the amount of losses that we keep for our own account. Once our initial reserve is established and our net retention is exceeded, any adverse
development will directly affect the gross loss reserve, but would generally have no impact on our net retained loss. Generally our limits of exposure are known with greater certainty when estimating
our net loss versus our gross loss. This situation tends to create greater volatility in the deficiencies and redundancies of the gross reserves as compared to the net reserves.

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|                                                |                                        | Year Ended December 31,
|----------------------------------------------- | -------------------------------------- | -----------------------
|
|
|Net reserves for losses and LAE                 |                                        | $                      
|Reserves for losses and LAE re-estimated as of: |                                        |                        
|                                                | One year later                         |                        
|                                                | Two years later                        |                        
|                                                | Three years later                      |                        
|                                                | Four years later                       |                        
|                                                | Five years later                       |                        
|                                                | Six years later                        |                        
|                                                | Seven years later                      |                        
|                                                | Eight years later                      |                        
|                                                | Nine years later                       |                        
|                                                | Ten years later                        |                        
|                                                | Net cumulative redundancy (deficiency) |                        
|Net cumulative paid as of:                      |                                        |                        
|                                                | One year later                         |                        
|                                                | Two years later                        |                        
|                                                | Three years later                      |                        
|                                                | Four years later                       |                        
|                                                | Five years later                       |                        
|                                                | Six years later                        |                        
|                                                | Seven years later                      |                        
|                                                | Eight years later                      |                        
|                                                | Nine years later                       |                        
|                                                | Ten years later                        |                        
|Gross liability-end of year                     |                                        |                        
|Reinsurance recoverable                         |                                        |                        
|                                                |                                        |                        
|Net liability-end of year                       |                                        |                        
|Gross re-estimated latest                       |                                        |                        
|Re-estimated recoverable latest                 |                                        |                        
|                                                |                                        |                        
|Net re-estimated latest                         |                                        |                        
|Gross cumulative (deficiency)                   |                                        |                        

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The net cumulative deficiency for the year ended December 31, 1992 resulted from adverse development in certain lines of business. The 1992 and 1993 gross cumulative deficiencies
resulted primarily from the 1989 Exxon Valdez loss. The gross cumulative deficiencies for 1994 and 1995 resulted primarily from the 1994 Northridge Earthquake loss, the 1989 Exxon Valdez loss and a
large marine liability claim reported in 1999 affecting years 1994 through 1998. The 1996 gross cumulative deficiency resulted from adverse development in several lines of business. The 1997 gross
cumulative deficiency resulted from adverse development in the onshore energy business and from one large 1989 claim from a run-off book of business which also adversely affected years prior to 1997.
The gross deficiency in 1998 resulted from the two marine liability claims mentioned, a large energy claim incurred in 1998 and reported in 1999 and reserve strengthening in the Company's Lloyd's
Operations. The 2000 gross and net adverse development resulted from the Company's Lloyd's Operations establishing reserves against premiums from prior years' which were received in excess of the
Company's original premium estimates and strengthening the Lloyd's reserves related to the 1999 underwriting year. The net reserve deficiency for 2001 year resulted primarily from adverse
development in the general liability line of business. The gross deficiency in the 2001 year resulted primarily from the adverse development in the general liability and marine lines of
business. The adverse development on the Company's gross reserves has been mostly reinsured through excess of loss reinsurance treaties. As a result of these reinsurance arrangements, while the
Company's gross losses and related reserve deficiencies and redundancies are very sensitive to adverse developments such as those described above, our net losses and related reserve deficiencies and
redundancies tend to be less sensitive to such developments.

Management
believes that the reserves for losses and LAE are adequate to cover the ultimate cost of losses and LAE on reported and unreported claims.

Environmental Pollution and Asbestos Related Claims

Establishing net loss reserves for asbestos, environmental and other mass tort claims is subject to uncertainties that are greater than those presented by other
types of claims. Among the complications are lack of historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure, unresolved legal issues
regarding policy coverage, and availability and collectibility of recoveries from reinsurers, and estimating the extent and timing of any contractual liability.

In
2002, 2001 and 2000, the Company recorded net paid losses and LAE of $262,000, $86,000 and $173,000, respectively, for environmental pollution and asbestos related claims. As of
December 31, 2002
and 2001, the Company carried net reserves of $1,513,000 and $1,185,000, respectively, for the potential exposure to such claims. Management believes that its reserves for such claims are adequate
because the Company's participation in such risks is generally in the higher excess layers and, based on a continuing review of such claims, it believes that a majority of these claims will be
unlikely to penetrate such high excess layers of coverage; however, due to significant assumptions inherent in estimating these exposures, actual liabilities could differ from current estimates.
Moreover, due to the uncertainties and factors described above, management believes it is not presently practicable to develop a meaningful range for any such additional net loss reserve that may
eventually be required. At December 31, 2002, there were 477 open claims on 304 policies with environmental pollution or asbestos exposures. Management will continue to review its exposure to
and reserves for such claims. Any potential exposure to these claims exists predominantly in connection with the marine business.

Investments

The investments of the Insurance Companies must comply with the insurance laws of New York State, the domiciliary state of Navigators Insurance and NIC. These
laws prescribe the type, quality and concentration of investments which may be made by insurance companies. In general, these laws permit

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investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred stocks, common stocks, real estate mortgages and
real estate. The Insurance Companies' investment guidelines prohibit investments in derivatives other than as a hedge against a foreign currency.

The
Insurance Companies' investments are subject to the direction and control of its Board of Directors and are reviewed on a quarterly basis. The investments are managed by outside
professional fixed income and equity portfolio managers. Current investment objectives are to maximize annual after tax income in the context of preserving and enhancing capital and statutory surplus.
The Insurance Companies seek to attain these objectives by investing in municipal bonds, U.S. Government obligations, corporate bonds and common stocks. The Insurance Companies' investment guidelines
require that at least 90% of the fixed income portfolio be rated "A-" or better by a nationally recognized rating organization. Up to 25% of the total portfolio may be invested in equity
securities that are actively traded on major U.S. stock exchanges. At December 31, 2002 and 2001, all fixed maturity and equity securities held by the Company were classified as
available-for-sale.

The
majority of the investment income of the Navigators Agencies is derived from fiduciary funds invested in accordance with the guidelines of various state insurance departments. These
guidelines typically require investments in short-term instruments. This investment income is paid to the pool members, including Navigators Insurance.

The
table set forth below reflects investments and income earned thereon for the Company on a consolidated basis and for the Insurance Companies for each of the years in the three year
period ended December 31, 2002:

|                         |  | Year Ended December 31, |        
|------------------------ |  | ----------------------- | -------
|
|
|The Company Consolidated |  |                         |        
|Average investments      |  | $                       | 378,059
|Net investment income    |  |                         | 18,058 
|Average yield            |  |                         | 4.78   
|Insurance Companies      |  |                         |        
|Average investments      |  | $                       | 310,368
|Net investment income    |  |                         | 15,489 
|Average yield            |  |                         | 4.99   

The
following table shows the cash and investments of the Company as of December 31, 2002:

|                                             |  | Carrying Value |         | Percent
of Total |      
|-------------------------------------------- |  | -------------- | ------- | ---------------- | -----
|
|                                             |  |                |         |                  |      
|Cash and short-term investments              |  | $              | 74,535  |                  | 16.5 
|U.S. Treasury Bonds and GNMAs                |  |                | 166,842 |                  | 36.8 
|Municipal bonds                              |  |                | 50,127  |                  | 11.1 
|Mortgage backed securities (excluding GNMAs) |  |                | 50,489  |                  | 11.1 
|Asset backed securities                      |  |                | 14,998  |                  | 3.3  
|Corporate bonds                              |  |                | 84,220  |                  | 18.6 
|Common stocks                                |  |                | 11,674  |                  | 2.6  
|                                             |  |                |         |                  |      
|Total                                        |  | $              | 452,885 |                  | 100.0
|                                             |  |                |         |                  |      

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Fixed
maturity securities include bonds and mortgage and asset backed securities. All fixed maturity and equity securities are carried at fair value. The fair value is based on quoted
market prices or dealer quotes provided by independent pricing services.

The
following table presents the amortized cost or cost, as applicable, gross unrealized gains and losses and fair value for all fixed maturity and equity securities:

|December 31, 2002                                 |  | Amortized
Cost or Cost |         | Gross
Unrealized
Gains |   | Gross
Unrealized
(Losses) |  | Fair
Value
|------------------------------------------------- |  | ---------------------- | ------- | ---------------------- | - | ------------------------- |  | ----------
|
|Fixed maturities:                                 |  |                        |         |                        |   |                           |  |           
|U.S. Government Treasury Bonds and GNMAs          |  | $                      | 159,729 |                        | $ | 7,113                     |  | $         
|States, municipalities and political subdivisions |  |                        | 47,709  |                        |   | 2,463                     |  |           
|Mortgage and asset backed (excluding GNMAs)       |  |                        | 63,830  |                        |   | 1,664                     |  |           
|Corporate bonds                                   |  |                        | 80,553  |                        |   | 4,017                     |  |           
|                                                  |  |                        |         |                        |   |                           |  |           
|Total fixed maturities                            |  | $                      | 351,821 |                        | $ | 15,257                    |  | $         
|                                                  |  |                        |         |                        |   |                           |  |           
|Equity securitiescommon stocks                   |  | $                      | 12,286  |                        | $ | 245                       |  | $         
|                                                  |  |                        |         |                        |   |                           |  |           

|December 31, 2001 |                                                   | Amortized
Cost or Cost |   | Gross
Unrealized
Gains |         | Gross
Unrealized
(Losses) |       | Fair
Value
|----------------- | ------------------------------------------------- | ---------------------- | - | ---------------------- | ------- | ------------------------- | ----- | ----------
|
|Fixed maturities: |                                                   |                        |   |                        |         |                           |       |           
|                  | U.S. Government Treasury Bonds and GNMAs          |                        | $ | 96,626                 |         | $                         | 1,840 |           
|                  | States, municipalities and political subdivisions |                        |   | 44,538                 |         |                           | 1,372 |           
|                  | Mortgage and asset backed (excluding GNMAs)       |                        |   | 63,513                 |         |                           | 2,952 |           
|                  | Corporate bonds                                   |                        |   | 83,030                 |         |                           | 2,193 |           
|                  |                                                   |                        |   |                        |         |                           |       |           
|                  |                                                   | Total fixed maturities |   | $                      | 287,707 |                           | $     | 8,357     
|                  |                                                   |                        |   |                        |         |                           |       |           
|                  | Equity securitiescommon stocks                   |                        | $ | 7,225                  |         | $                         | 715   |           
|                  |                                                   |                        |   |                        |         |                           |       |           

The
Company regularly reviews its fixed maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for
other-than-temporary declines in the fair value of investments. In general, we focus our attention on those securities whose market value was less than 80% of their amortized
cost or cost, as appropriate, for six or more consecutive months. Other factors considered in evaluating potential impairment include the current fair value as compared to amortized
cost or cost, as appropriate, the Company's intent and ability to retain the investment for a period of time sufficient to allow for an anticipated recovery in value, specific credit issues related to
the issuer and current economic conditions.

When
a security in the Company's investment portfolio has an unrealized loss that is deemed to be other-than-temporary, the Company writes the security down to
fair value through a charge to operations. Significant changes in the factors the Company considers when evaluating investments for impairment losses could result in a significant change in impairment
losses reported in the consolidated financial statements.

11

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The
following table shows the Company's other-than-temporary losses recorded in its fixed maturity and equity portfolios for the periods indicated:

|(In thousands)               |                  | Total
Write-downs |   | Write-downs
On Securities
Sold During
Period |       | Write-downs
On Securities
Held at
Period End
|---------------------------- | ---------------- | ----------------- | - | -------------------------------------------- | ----- | --------------------------------------------
|Year ended December 31, 2002 |                  |                   |   |                                              |       |                                             
|                             | Fixed maturities |                   | $ | 2,905                                        |       | $                                           
|                             | Equities         |                   |   |                                             |       |                                             
|                            
|                             |                  | Total Portfolio   |   | $                                            | 2,905 |                                             
|                             |                  |                   |   |                                              |       |                                             
|Year ended December 31, 2001 |                  |                   |   |                                              |       |                                             
|                             | Fixed maturities |                   | $ | 1,618                                        |       | $                                           
|                             | Equities         |                   |   |                                             |       |                                             
|                            
|                             |                  | Total Portfolio   |   | $                                            | 1,618 |                                             
|                             |                  |                   |   |                                              |       |                                             
|Year ended December 31, 2000 |                  |                   |   |                                              |       |                                             
|                             | Fixed maturities |                   | $ |                                             |       | $                                           
|                             | Equities         |                   |   |                                             |       |                                             
|                            
|                             |                  | Total Portfolio   |   | $                                            |      |                                             
|                             |                  |                   |   |                                              |       |                                             

As
of December 31, 2002, the Company's total portfolio had $15.5 million in gross unrealized gains and $1.3 million in gross unrealized losses, compared to
$9.1 million in gross unrealized gains and $4.3 million in gross unrealized losses at December 31, 2001. The increase in the net unrealized gains during 2002 was the result of
lower interest rates.

The
following table summarizes all securities in an unrealized loss position at December 31, 2002 and December 31, 2001, the aggregate fair value and gross unrealized loss
by the length of time those securities have continuously been in an unrealized loss position:

|(In thousands)                                    |  | 2002 |       | 2001
|------------------------------------------------- |  | ---- | ----- | ----
|
|Fixed Maturities:                                 |  |      |       |     
|U.S. Government Treasury Bonds and GNMAs          |  |      |       |     
|0-6 Months                                        |  | $    |      |     
|7-12 Months                                       |  |      |      |     
|> 12 Months                                       |  |      |      |     
|                                                  |  |      |       |     
|Subtotal                                          |  |      |      |     
|                                                  |  |      |       |     
|States, municipalities and political subdivisions |  |      |       |     
|0-6 Months                                        |  |      | 1,144 |     
|7-12 Months                                       |  |      |      |     
|> 12 Months                                       |  |      | 894   |     
|                                                  |  |      |       |     
|Subtotal                                          |  |      | 2,038 |     
|                                                  |  |      |       |     

12

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|Mortgage and asset backed (excluding GNMAs)
0-6 Months |  |   | 221   |  |   | 1   |  |   | 6,666  |  |   | 489  
|------------------------------------------------------ |  | - | ----- |  | - | --- |  | - | ------ |  | - | -----
|7-12 Months                                            |  |   |      |  |   |    |  |   | 4,382  |  |   | 9    
|> 12 Months                                            |  |   | 218   |  |   | 6   |  |   | 7,782  |  |   | 1,761
|                                                       |  |   |       |  |   |     |  |  
|Subtotal                                               |  |   | 439   |  |   | 7   |  |   | 18,830 |  |   | 2,259
|                                                       |  |   |       |  |   |     |  |  
|Corporate bonds                                        |  |   |       |  |   |     |  |   |        |  |   |      
|0-6 Months                                             |  |   | 2,037 |  |   | 72  |  |   | 6,112  |  |   | 729  
|7-12 Months                                            |  |   | 515   |  |   | 7   |  |   | 954    |  |   | 23   
|> 12 Months                                            |  |   | 1,841 |  |   | 271 |  |   | 4,706  |  |   | 223  
|                                                       |  |   |       |  |   |     |  |  
|Subtotal                                               |  |   | 4,393 |  |   | 350 |  |   | 11,772 |  |   | 975  
|                                                       |  |   |       |  |   |     |  |  
|Total Fixed Maturities                                 |  | $ | 6,870 |  | $ | 402 |  | $ | 60,486 |  | $ | 3,999
|                                                       |  |   |       |  |   |     |  |  
|Equity securitiescommon stocks                        |  |   |       |  |   |     |  |   |        |  |   |      
|0-6 Months                                             |  | $ | 3,378 |  | $ | 254 |  | $ | 1,322  |  | $ | 39   
|7-12 Months                                            |  |   | 2,736 |  |   | 446 |  |   | 1,130  |  |   | 185  
|> 12 Months                                            |  |   | 987   |  |   | 157 |  |   | 296    |  |   | 41   
|                                                       |  |   |       |  |   |     |  |  
|Total Equity Securities                                |  | $ | 7,101 |  | $ | 857 |  | $ | 2,748  |  | $ | 265  
|                                                       |  |   |       |  |   |     |  |  

The
above unrealized losses have been determined to be temporary and resulted from changes in market conditions. We will continue to analyze the unrealized losses quarterly to determine
if any of them are other-than-temporary.

The
following table shows the composition by NAIC rating and the generally equivalent S&P and Moody's ratings of the fixed maturity securities in the Company's portfolio with gross
unrealized losses at December 31, 2002. Not all of the securities are rated by S&P and/or Moody's:

|(Dollars in thousands) |  |              |  |              |  |   |     |  |       |   |  
|---------------------- |  | ------------ |  | ------------ |  | - | --- |  | ----- | - | -
|
|1                      |  | AAA/AA/A     |  | Aaa/Aa/A     |  | $ | 305 |  | 75.9  | % | $
|2                      |  | BBB          |  | Baa          |  |   | 97  |  | 24.1  |   |  
|3                      |  | BB           |  | Ba           |  |   |    |  |      |   |  
|4                      |  | B            |  | B            |  |   |    |  |      |   |  
|5                      |  | CCC or lower |  | Caa or lower |  |   |    |  |      |   |  
|6                      |  |             |  |             |  |   |    |  |      |   |  
|                       | 
|                       |  |              |  | Total        |  | $ | 402 |  | 100.0 | % | $
|                       |  |              |  |              |  |   |     |  |       |   |  

At
December 31, 2002, all of the gross unrealized losses are on fixed maturity securities that are rated investment grade, which is defined by the Company as a security having a
National Association of Insurance Commissioners ("NAIC") rating of 1 or 2, a S&P rating of BBB- or higher, or a Moody's rating of Baa3, or higher. 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. Any such unrealized losses are recognized in income, if the
securities are sold, or if the decline in fair value is deemed other-than-temporary.

13

---

The
scheduled maturity dates for fixed maturity securities in an unrealized loss position at December 31, 2002 are shown below.

|                                        |                               | Unrealized
Loss |     | Percent
to Total |      | Fair Value |   | Percent
to Total |      
|--------------------------------------- | ----------------------------- | --------------- | --- | ---------------- | ---- | ---------- | - | ---------------- | -----
|
|Due in one year or less                 |                               | $               |    |                  |     | %          | $ |                 |      
|Due after one year through five years   |                               |                 | 25  |                  | 6.2  |            |   | 1,868            |      
|Due after five years through ten years  |                               |                 | 19  |                  | 4.7  |            |   | 1,495            |      
|Due after ten years                     |                               |                 | 351 |                  | 87.3 |            |   | 3,067            |      
|Mortgage and asset backed securities(1) |                               |                 | 7   |                  | 1.8  |            |   | 440              |      
|                                        |                               |                 |     |                  |      |            |   |                  |      
|                                        | Total fixed income securities |                 | $   | 402              |      | 100.0      | % | $                | 6,870
|                                        |                               |                 |     |                  |      |            |   |                  |      

---

Regulation

The Parent Company, the Insurance Companies and the Lloyd's Operations are subject to regulation under the insurance statutes including holding company statutes
of various states, the UK regulatory authorities and Lloyd's. These regulations vary but generally require insurance holding companies, and insurers that are subsidiaries of holding companies, to
register and file reports concerning their capital structure, ownership, financial condition and general business operations. Such regulations also generally require prior regulatory agency approval
of changes in control of an insurer and of transactions within the holding company structure. The regulatory agencies have statutory authorization to enforce their laws and regulations through various
administrative orders and enforcement proceedings.

The
State of New York Insurance Department (the "Department") is the Company's principal regulatory agency. The New York insurance law provides that no corporation or other person may
acquire control of the Company, and thus indirect control of the Insurance Companies, unless it has given notice to the Insurance Companies, and obtained prior written approval from the Superintendent
of Insurance of the State of New York for such acquisition. In New York, any purchaser of 10% or more of the outstanding shares of the Company's common stock would be presumed to have acquired control
of the Company, unless such presumption is rebutted. The UK authorities and Lloyd's also have regulatory requirements concerning change in control.

14

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Navigators Insurance and NIC may only pay dividends out of their statutory earned surplus under New York insurance law. Generally, the maximum amount of dividends Navigators Insurance
and NIC may pay without regulatory approval in any twelve-month period is the lesser of adjusted net investment income or 10% of statutory surplus.

Under
insolvency or guaranty laws in most states in which Navigators Insurance and NIC operate, insurers doing business in those states can be assessed up to prescribed limits for
policyholder losses of insolvent insurance companies. During 2002, the Company was assessed by the California Insurance Guaranty Association and paid an amount of $798,000. This amount is allowed to
be recovered by a surcharge on policies written in California during 2003. The Company expects to fully recover this amount and has recorded it as an asset.

Navigators
Insurance is licensed to engage in the insurance and reinsurance business in 50 states, the District of Columbia and Puerto Rico. NIC is licensed to engage in the insurance
and reinsurance business in the State of New York and is an approved surplus lines insurer, or meets the financial requirements where there is not a formal approval process, in 41 states and the
District of Columbia.

As
part of its general regulatory oversight process, the Department conducts detailed examinations of the books, records and accounts of New York insurance companies every three to five
years. The Insurance Companies are currently being examined for the years 1996 through 2000 by the Department. The audit work has been completed but a report has not yet been issued. No material
adjustments are expected to the previously filed statutory financial statements.

The
Insurance Regulatory Information System ("IRIS") was developed by the National Association of Insurance Commissioners ("NAIC") and is intended primarily to assist state insurance
departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies twelve industry ratios and specifies
"usual values" for each ratio. Departure from the usual values on four or more of the ratios can lead to inquiries from individual state insurance commissioners as to certain aspects of an insurer's
business. As of December 31, 2002 and 2001, the Insurance Companies' results were within the usual values for all IRIS ratios except that the change in net writings and estimated current
reserve deficiency to surplus ratios were outside the usual values for Navigators Insurance due to the increase in premiums resulting from the increase in premium rates and new business. In addition,
NIC's agents' balances to policyholders' surplus ratio was outside of the usual range due to the increase in premium writings. All of the business written by NIC is reinsured by Navigators Insurance.

The
NAIC completed a project which codifies statutory accounting practices for insurance enterprises. As a result of this process, the NAIC issued a revised statutory Accounting Practices and Procedures Manualthat was effective January 1, 2001. The Company prepared its statutory basis financial statements in
accordance with the revised statutory manual subject to any deviations prescribed or permitted by the New York Insurance Commissioner. Beginning in 2002, the Department permitted certain deferred
income taxes to be included in surplus of the statutory basis financial statements. This resulted in increasing the surplus of Navigators Insurance by $7.8 million.

From
time to time various regulatory and legislative changes have been proposed in the insurance and reinsurance industry. Among the proposals that have in the past been or are at
present being considered are the possible introduction of federal regulation in addition to, or in lieu of, the current system of state regulation of insurers and proposals in various state
legislatures (some of which proposals have been enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the NAIC. The Company is unable to predict whether
any of these laws and regulations will be adopted, the form in which any such laws and regulations would be adopted, or the effect, if any, these developments would have on the operations and
financial condition of the Company.

15

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In
2002, in response to the tightening of supply in certain insurance and reinsurance markets resulting from, among other things, the terrorist attacks of September 11, 2001, the
Terrorism Risk Insurance Act of 2002 ("TRIA") was enacted and is designed to ensure the availability of insurance coverage for foreign terrorist acts in the United States of America. This law
establishes a federal assistance program through the end of 2005 to help the commercial property and casualty insurance industry cover claims related to future terrorism related losses and requires
such companies to offer coverage for certain acts of terrorism. As a result, the Company will be prohibited from adding certain terrorism exclusions from its policies. While the Company is protected
by federally funded terrorism reinsurance as provided for in TRIA, there is a substantial deductible that must be met. The full impact of TRIA upon the Company is not yet known, as this law could
cause reinsurers to increase prices or withdraw from certain markets where terrorism coverage is required.

State
insurance departments have adopted a methodology developed by the NAIC for assessing the adequacy of statutory surplus of property and casualty insurers which includes a
risk-based capital formula that attempts to measure statutory capital and surplus needs based on the risks in a company's mix of products and investment portfolio. The formula is designed
to allow state insurance regulators to identify potential weakly capitalized companies. Under the formula, a company determines its "risk-based capital" ("RBC") by taking into account
certain risks related to the insurer's assets (including risks related to its investment portfolio and ceded reinsurance) and the insurer's liabilities (including underwriting risks related to the
nature and experience of its insurance business). The RBC rules provide for different levels of regulatory attention depending on the ratio of a company's total adjusted capital to its "authorized
control level" of RBC. Based on calculations made by Navigators Insurance and NIC, their RBC levels exceed a level that would trigger regulatory attention. In their
respective 2002 statutory financial statements, Navigators Insurance and NIC have complied with the NAIC's RBC reporting requirements.

In
addition to regulations applicable to insurance agents generally, the Navigators Agencies are subject to Managing General Agents Acts in their state of domicile and in certain other
jurisdictions where they do business.

The
Company's subsidiaries domiciled in the UK are subject to regulation from the government regulatory authorities in the UK and from Lloyd's.

Competition

The property and casualty insurance industry is highly competitive. The Company faces competition from both domestic and foreign insurers, many of whom have
longer operating histories and greater financial, marketing and management resources. Competition in the types of insurance in which the Company is engaged is based on many factors, including the
perceived overall financial strength of the Company, pricing and other terms and conditions of products and services offered, business experience, marketing and distribution arrangements, agency and
broker relationships, levels 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 the Company faces the risk that it will lose market share to higher rated insurers.

Another
competitive factor in the industry involves banks and brokerage firms breaking down the barriers between various segments of the financial services industry, including insurance.
These efforts pose new challenges to insurance companies and agents from industries traditionally outside the insurance business.

No
single insured or reinsured accounted for 10% or more of the Company's gross written premium in 2002.

16

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Employees

As of December 31, 2002, the Company had 169 full-time employees.

Available Information on the Internet

The Company's website address is http://www.navigators-insurance.com. Through its website (at http://www.navigators-insurance.com/finance/sec_filings.html), the
Company makes available, free of charge, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

Item 2. PROPERTIES

The Company's administrative offices are occupied pursuant to a lease from an unaffiliated company which expires June 30, 2010 in a building located at One
Penn Plaza, New York, New York. Several of the Company's subsidiaries have noncancellable operating leases for their respective office locations.

In
January 2000, the Company purchased an apartment in London to accommodate visitors to its London operations at a cost of approximately $820,000.

Item 3. LEGAL PROCEEDINGS

The Company is not a party to or the subject of, any material pending legal proceedings which depart from the ordinary routine litigation incident to the kinds of
business conducted by the Company, except for a suit concerning the draw down of letters of credit. In 1997 and 1998, Navigators Insurance entered into certain reinsurance contracts with a reinsurer.
In accordance with normal business practice, Navigators Insurance had secured this exposure with letters of credit. In April 1999, in good faith and consistent with the terms of the letters of
credit, Navigators Insurance drew down $3.2 million of the letters of credit. The liquidator of the reinsurer has commenced suit in Australia, seeking to void the draw downs. Although the
Company believes it has strong defenses against these claims and that the liquidators' assertions run counter to prevailing Australian and U.S. law, there can be no assurance as to the outcome of this
litigation. The Company intends to vigorously defend its position and is currently in the process of filing affidavits and motions seeking a prompt dismissal of the liquidators' claims in Australian
court.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the fourth quarter of 2002.

17

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Part II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

The Company's common stock is traded over-the-counter on NASDAQ under the symbol NAVG. Over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.

The
high and low bid prices for the four quarters of 2002 and 2001 are as follows:

|               |  | 2002 |       | 2001
|-------------- |  | ---- | ----- | ----
|
|First Quarter  |  | $    | 24.00 |     
|Second Quarter |  | $    | 29.02 |     
|Third Quarter  |  | $    | 27.46 |     
|Fourth Quarter |  | $    | 27.22 |     

There
were approximately 100 holders of record of shares of the Company's common stock as of March 14, 2003. However, management believes there are in excess of 1,000 beneficial
owners of the stock.

Dividends

The Company has not paid or declared any cash dividends on its common stock. While there presently is no intention to pay cash dividends on the common stock,
future declarations, if any, are at the discretion of our Board of Directors and the amounts of such dividends will be dependent upon, among other factors, the earnings of the Company, its financial
condition and business needs, restrictive covenants under debt arrangements, the capital and surplus requirements of its subsidiaries and applicable government regulations.

Item 6. SELECTED FINANCIAL DATA

The following table sets forth summary consolidated financial information of the Company for each of the years in the five-year period ended
December 31, 2002 derived from the Company's

18

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audited consolidated financial statements. See the Consolidated Financial Statements of the Company including notes thereto included herein.

|                                              |         | Year Ended December 31,
|--------------------------------------------- | ------- | -----------------------
|
|
|Operating Information:                        |         |                        
|Net earned premium                            |         | $                      
|Net investment income                         |         |                        
|Total revenues                                |         |                        
|Income (loss) before income taxes             |         |                        
|Net income (loss)                             |         |                        
|Net income (loss) per share:                  |         |                        
|                                              | Basic   |                        
|                                              | Diluted |                        
|Average common shares:                        |         |                        
|                                              | Basic   |                        
|                                              | Diluted |                        
|Balance Sheet Information
(at end of period): |         |                        
|Total investments & cash                      |         | $                      
|Total assets                                  |         |                        
|Loss and LAE reserves                         |         |                        
|Notes payable                                 |         |                        
|Stockholders' equity                          |         |                        
|Book value per share                          |         | $                      

|Item 7. |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------

General

The Company is a holding company with twelve active wholly owned subsidiaries. SeeBUSINESS-Generalincluded
herein for a description of the Company.

The
Company's revenue is primarily comprised of premiums, commissions and investment income. The Insurance Companies derive their premium primarily from business written by the
Navigators Agencies. The Lloyd's Operations derive their premium from business written by NUAL. The Navigators Agencies and NUAL receive commissions and, in some cases, profit commissions and service
fees on the business produced.

Critical Accounting Policies

It is important to understand the Company's accounting policies in order to understand its financial statements. Management considers certain of these policies to
be critical to the presentation of the financial results since they require management to make estimates and assumptions. These estimates
and assumptions affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the financial reporting date and throughout the period being reported upon. Certain
of the estimates result from judgments that can be subjective and complex, and consequently actual results may differ from these estimates, which would be reflected in future periods.

The
Company's most critical accounting policies involve the reporting of the reserves for losses and loss adjustment expenses (including losses that have occurred but were not reported
to the Company by the financial reporting date), reinsurance recoverables, written and unearned premium, the

19

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recoverability of deferred tax assets, the impairment of invested assets, accounting for Lloyd's results, and goodwill.

Loss Reserves and LAE.The Company's loss reserves are discussed under the BUSINESSReservessection andNote 6to the Company's consolidated financial
statements, both included herein. Loss reserves represent an estimate of the expected cost of the ultimate settlement and administration of losses, based on facts and circumstances then known.
Actuarial methodologies are employed to assist in establishing such estimates and include judgments relative to estimates of future claims severity and frequency, length of time to develop to
ultimate, judicial theories of liability and other third party factors which are often beyond our control. Due to the inherent uncertainty associated with the reserving process, the ultimate liability
may be different from the original estimate. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year's results.

Reinsurance Recoverables.Reinsurance recoverables are established for the portion of the loss reserves that are ceded to
reinsurers. Reinsurance recoverables are determined based upon the terms and conditions of reinsurance contracts which could be subject to interpretations that differ from our own based on judicial
theories of liability. In addition, we bear credit risk with respect to our reinsurers which can be significant considering that certain of the reserves remain outstanding for an extended period of
time. The Company is required to pay losses even if a reinsurer fails to meet its obligations under the applicable reinsurance agreement. See the BUSINESSReinsurance Cededsection andNote 7to the Company's consolidated financial
statements, included herein.

Written and Unearned Premium.Written premium is recorded based on the insurance policies that have been reported to the
Company and the policies that have been written by agents but not yet reported to the Company. The Company must estimate the amount of written premium not yet reported based on judgments relative to
current and historical trends of the business being written. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year's results. An unearned
premium reserve is established to reflect the unexpired portion of each policy at the financial reporting date. SeeNote 1to the Company's
consolidated financial statements, included herein.

Deferred Tax Assets.The Company has recorded valuation allowances related to deferred tax assets resulting from net
operating loss carryforwards due to the uncertainty associated with the realization of the deferred tax asset related to certain of the Company's foreign, state and local operations. Even
though the Company's foreign operations were profitable in 2002, the valuation allowance was released only to the extent of the 2002 profits since future profitability remains uncertain. See Note 5to the Company's consolidated financial statements, included herein.

Impairment of Invested Assets.Impairment of investment securities results in a charge to operations when a market decline
below cost is other-than-temporary. Management regularly reviews its fixed maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for
other-than-temporary declines in the fair value of investments. A number of criteria are considered during this process including, but not limited to, the current fair value as
compared to amortized cost or cost, as appropriate, of the security, the length of time the security's fair value has been below amortized cost or cost, and by how much, specific credit issues related
to the issuer and current economic conditions. In general, we focus our attention on those securities whose market value was less than 80% of their amortized cost or cost, as appropriate, for six or
more consecutive months. Other factors considered in evaluating potential impairment include the current fair value as compared to amortized cost or cost, as appropriate, the Company's intent and
ability to retain the investment for a period of time sufficient to allow for an anticipated recovery in value, specific credit issues related to the issuer and current economic conditions.
Other-than-temporary impairment losses result in a permanent reduction of the cost basis of the underlying investment. Significant changes in the factors the Company considers
when evaluating investments for impairment losses could result in a significant

20

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change in impairment losses reported in the consolidated financial statements. For additional detail regarding the Company's investment portfolio at December 31, 2002, including disclosures
regarding other-than-temporary declines in investment value, see theBUSINESSInvestmentssection and Note 2to the Company's consolidated
financial statements, included herein.

Accounting for Lloyd's Results.We record our pro rata share of Lloyd's syndicate assets, liabilities, revenues and expenses,
after making adjustments to convert Lloyd's accounting to U.S. GAAP. The most significant U.S. GAAP adjustments relate to income recognition. Lloyd's syndicates determine underwriting results by year
of account at the end of three years. We record adjustments to recognize underwriting results as incurred, including the expected ultimate cost of losses incurred. These adjustments to losses are
based on actuarial analysis of syndicate accounts, including forecasts of expected ultimate losses provided by the syndicates. At the end of the Lloyd's three year period for determining underwriting
results for an account year, the syndicate will close the account year by reinsuring outstanding claims on that account year with the participants for the account's next underwriting year. The amount
to close an underwriting year into the next year is referred to as the "reinsurance to close". The reinsurance to close transactions are recorded as additional written and earned premium, losses
incurred, loss reserves and receivables, all in the same amount. There are no gains or losses recorded on the reinsurance to close transactions. See Note 1to the Company's consolidated financial
statements, included herein.

Historically,
the Company reportedFunds due from Lloyd's syndicateas a separate line item on its balance sheets. The balance consisted
primarily of investments, cash and premiums receivables resulting from the Company's participation in Lloyd's Syndicate 1221. Commencing in 2002, the Company has recorded the amounts due from Lloyd's
Syndicate 1221 as part of their separate components in its financial statements. As a result, the amounts previously classified asFunds due from Lloyd's
syndicatehave been reclassified to conform to the current year's presentation.

Goodwill.The Financial Accounting Standards Board issued Statement of Financial Accounting Standards 142
("SFAS 142"),Goodwill and Other Intangible Assets, effective January 1, 2002. SFAS 142 changes the accounting for goodwill and
intangible assets that have indefinite useful lives from an amortization approach to an impairment-only approach that requires that those assets be tested at least annually for impairment.
The Company completed its impairment review resulting in no impairment of goodwill as of January 1, 2002. SeeNote 1to the Company's
consolidated financial statements, included herein.

Results of Operations

General.The Company's 2002, 2001 and 2000 results of operations reflect increasing premium rates beginning in late 2000 and
continuing in 2001 and 2002.

The
2001 results of operations were adversely impacted by approximately $4.5 million, both pretax and after tax, resulting from the September 11, 2001 terrorist attack on
the World Trade Center consisting of estimated net incurred losses of $4.1 million and the net effect of reinsurance reinstatement premiums of $0.4 million, all of which originated from
the Company's Lloyd's Operations. This represented the Company's best estimate of its maximum exposure determined by an analysis of policies that may have incurred a loss resulting from the terrorist
attack. No additional losses related to the World Trade Center attack were incurred during 2002. However, given the uncertainty surrounding this event, the estimate may change over time as additional
information becomes available.

Revenues.Gross written premium increased to $447.8 million in 2002 from $278.2 million in 2001 and from
$188.4 million in 2000. The following table sets forth the Company's gross written premium

21

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by segment and line of business, and ceded and net written premium by segment for the periods indicated:

|                     |                              | Year Ended December 31, |                            
|-------------------- | ---------------------------- | ----------------------- | ---------------------------
|
|
|Insurance Companies: |                              |                         |                            
|                     | Marine                       |                         | $                          
|                     | General Liability            |                         |                            
|                     | Professional Liability       |                         |                            
|                     | Surety                       |                         |                            
|                     | Onshore Energy               |                         |                            
|                     | Other                        |                         |                            
|                     |                              |                         |                            
|                     |                              | Gross Written Premium   |                            
|                     |                              |                         |                            
|                     |                              | Ceded Written Premium   |                            
|                     |                              |                         |                            
|                     |                              | Net Written Premium     |                            
|                     |                              |                         |                            
|Lloyd's Operations:  |                              |                         |                            
|                     | Marine                       |                         |                            
|                     | Engineering and Construction |                         |                            
|                     | Onshore Energy               |                         |                            
|                     |                              |                         |                            
|                     |                              | Gross Written Premium   |                            
|                     |                              |                         |                            
|                     |                              | Ceded Written Premium   |                            
|                     |                              |                         |                            
|                     |                              | Net Written Premium     |                            
|                     |                              |                         |                            
|                     |                              |                         | Total Gross Written Premium
|                     |                              |                         |                            
|                     |                              |                         | Total Ceded Written Premium
|                     |                              |                         |                            
|                     |                              |                         | Total Net Written Premium  
|                     |                              |                         |                            

Insurance Companies

Marine Premium.The 2002 and 2001 marine premium increased 64.8% and 32.5%, respectively, due to the increase in premium
rates resulting in higher premiums on new and renewal business. The improved pricing environment resulted in Navigators Insurance increasing its writing of new business. The increased premium in 2002
of $70.1 million resulted from $49.2 million of new business and $20.9 million from rate increases which averaged 21%. Navigators Insurance obtains its marine business through
participation in the marine pool managed by the Navigators Agencies. Its participation in the marine pool was 75% in 2002, 2001 and 2000.

General Liability Premium.This business consists primarily of general liability insurance for general contractors and small
artisans as well as small commercial risks. The general liability premium increased 109.7% from 2001 to 2002 and 94.4% from 2000 to 2001 due to increased rates and expansion of the business. The
increased premium in 2002 of $60.5 million resulted from $48.9 million of new business and $11.6 million of rate increases which averaged 30%. The new business and the rate
increases resulted from a tightening market for California contractors' liability insurance and expansion of the artisan business.

Professional Liability Insurance.In late 2001, the Insurance Companies began to write professional liability insurance
primarily consisting of directors and officers liability insurance for privately held and publicly traded corporations. More recently, the professional liability business has been expanded to include
errors and omissions insurance and employment practices liability coverages.

22

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Surety.In late 2002, Navigators Insurance began to write surety business which consists of bonds guaranteeing the
performance of a specific obligation. Our focus is on providing bid and performance bonds to small contractors requiring contract bonds for projects of $2 million or less.

Onshore Energy.During 2002, Navigators Insurance participated in the onshore energy business written by Syndicate 1221. The
business principally focuses on the oil and gas, chemical and petrochemical industries with coverages primarily for property damage and business interruption.

Lloyd's Operations

The Lloyd's premium is generated as the result of NCUL and Millennium providing capacity to Lloyd's Syndicate 1221 which is managed by NUAL.

Lloyd's
Syndicate 1221 had stamp capacity of £75.0 million ($112.7 million) in 2002, £66.3 million ($95.5 million) in 2001 and
£66.3 million ($96.0 million) in 2000. Syndicate 1221's capacity is expressed net of commission (as is standard at Lloyd's) of approximately 21%. Syndicate 1221 entered into
a qualifying quota share agreement with a major reinsurer which increased the gross premium that could be written by Syndicate 1221 for the 2002 underwriting year from its stamp capacity of
£75.0 million to a total of £86.6 million ($130.2 million). A qualifying quota share is a reinsurance contract which provides additional capacity to
Lloyd's syndicates in order that they may write premiums up to 30% in excess of their stamp capacity. Only high quality reinsurers approved by Lloyd's can enter into a qualifying quota share
transaction with a Lloyd's syndicate. The Company participates for 68.1%, 67.4% and 64.5% of Syndicate 1221's capacity for the 2002, 2001 and 2000 underwriting years, respectively. The Lloyd's marine
business had been subject to pricing competition for several years through 2000. The pricing competition showed some signs of easing in 2000 and prices increased in 2001 and 2002. Lloyd's presents its
results on an underwriting year basis, generally closing each underwriting year after three years. The Company makes estimates for each year and timely accrues the expected results. The Lloyd's
Operations included in the consolidated financial statements represent the Company's participation in Syndicate 1221.

Lloyd's
syndicates report the amounts of premiums, claims, and expenses recorded in an underwriting account for a particular year to the companies or individuals that participate in the
syndicates. The syndicates generally keep accounts open for three years. Traditionally, three years have been necessary to report substantially all premiums associated with an underwriting year and to
report most related claims, although claims may remain unsettled after the account is closed. A Lloyd's syndicate typically closes an underwriting account by reinsuring outstanding claims on that
account with the participants for the next underwriting year. The ceding participants pay the assuming participants an amount based on the unearned premiums and outstanding claims in the underwriting
account at the date of the assumption. Our participation in Lloyd's Syndicate 1221 is represented by and recorded as our proportionate share of the underlying assets and liabilities and results of
operations of the syndicate since, (a) we hold an undivided interest in each asset, (b) we are proportionately liable for each liability and (c) Syndicate 1221 is not a separate
legal entity. At Lloyd's, the amount to close an underwriting year into the next year is referred to as the "reinsurance to close." The reinsurance to close amounts represent the transfer of the
assets and liabilities from the participants of a closing underwriting year to the participants of the next underwriting year. To the extent our participation in the syndicate changes as a result of
this transfer, the reinsurance to close amounts vary accordingly. In our case, our participation increased from 52.5% in 1999 to 64.5% in 2000, to 67.4% in 2001, and to 68.1% in 2002. We therefore
recorded our increasing proportionate share of the assets and liabilities of Syndicate 1221. At December 31, 2002, 2001 and 2000, the Company closed its 2000, 1999 and 1998 underwriting years,
respectively, the net effect of which resulted in such transfers to NCUL and Millennium of $1.6 million, $4.2 million and $7.9 million, respectively. These transactions accounted for part of the
increases in the premium volume in the Lloyd's Operations. The reinsurance to close

23

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transactions were recorded as additional written and earned premium, losses incurred, loss reserves and receivables, all in the same amount. There were no gains or losses recorded on the
transactions.

The
Company also purchased an additional £7,379,000 ($11,018,000) of capacity for 2001 through an annual auction process in 2000 at a total cost of £133,000
($199,000).

The
Company provides letters of credit to Lloyd's to support its participation in Syndicate 1221's capacity. If the Company increases its participation or if Lloyd's changes the capital
requirements, the Company may be required to supply additional letters of credit or other collateral acceptable to Lloyd's, or reduce the capacity of Syndicate 1221. The letters of credit are provided
through the credit facility which the Company maintains with a consortium of banks. The credit facility agreement requires that the banks vote whether or not to renew the letter of credit portion of
the facility each year. If the banks decide not to renew the letter of credit facility, the Company will need to find other sources to provide the letters of credit or other collateral in order to
continue to participate in Syndicate 1221.

Marine Premium.In 2002, marine premium increased 10.5% from 2001 partially due to the increase in premium rates resulting in
higher premiums on renewal and new business and due to the capacity provided to Syndicate 1221 by NCUL and Millennium increasing from 67.4% in 2001 to 68.1% in 2002. The higher premium rates averaging
approximately 26% made the business more attractive resulting in the Lloyd's Operations increasing its writings of new business. The increased premium volume in 2001 compared to 2000 was also due to
the increase in premium rates and to the capacity provided to Syndicate 1221 by NCUL and Millennium increasing from 64.5% in 2000 to 67.4% in 2001.

Engineering and Construction Premium.The business consists of coverage for construction projects including machinery,
equipment and loss of use due to delays. The increases in the gross written premium in 2002 and 2001 were due to new business.

Onshore Energy.The business principally focuses on the oil and gas, chemical and petrochemical industries with coverages
primarily for property damage and business interruption. The increases in the gross written premium in 2002 and 2001 were due to new business and rate increases. The 2002 increase was approximately
50% new business and 50% rate increases.

Ceded Written Premium.In the ordinary course of business, the Company reinsures certain insurance risks with unaffiliated
insurance companies for the purpose of limiting its maximum loss exposure, protecting against catastrophic losses, and maintaining desired ratios of net premiums written to statutory surplus. The
relationship of ceded premium to gross written premium varies based upon the types of business written and whether the business is written by the Insurance Companies or the Lloyd's Operations. The
amount of ceded premium in 2002 increased over 2001 due to the increase in gross written premium and the increase in reinsurance rates in 2002. The percentage of the Lloyd's Operations' ceded premium
increased from 28.5% in 2001 to 30.5% in 2002 due to additional quota share reinsurance. The percentage of the Insurance Companies' premium which was ceded decreased
from 44.1% in 2001 to 43.1% in 2002 primarily due to the increase in the general liability insurance premium of which the Insurance Companies retain more of the premium than in the other lines of
business. The increase in ceded premium in the Lloyd's Operations from 27.4% in 2000 to 28.5% in 2001 was due to slightly higher reinsurance rates. The Insurance Companies' percentage of ceded premium
decreased from 53.3% in 2000 to 44.1% in 2001 primarily due to the increase in the specialty insurance.

Net Written Premium.Net written premium increased 56.9% from 2001 to 2002 due to the increase in the gross written premium
partially offset by the increase in the percentage of ceded premium from 38.0% in 2001 to 39.5% in 2002. Net written premium increased 59.6% from 2000 to 2001 primarily due to the increase in the
gross written premium and the decrease in the percentage of premium ceded.

Net Earned Premium.Net earned premium increased due to the increase in the net written premium.

24

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Commission Income.The increases in commission income from 2001 to 2002 of 13.9% and from 2000 to 2001 of 11.9% were due to
the increase in marine premium for which the Company receives commission from unaffiliated insurers.

Net Investment Income.Net investment income decreased 6.7% in 2002 from the previous year due to lower interest rates during
2002 partially offset by increased invested assets. Investment income increased 4.9% during 2001 from 2000 primarily due to an increase in investment income allocated to NCUL and Millennium from the
investments at the Lloyd's syndicates due to their increased participation in Syndicate 1221, reduction in the Insurance Companies' municipal portfolio, reduction in the expenses to manage the
portfolio and the increase in the size of the portfolio. SeeBUSINESSInvestments,included herein, for additional information regarding the
Company's net investment income.

Net Realized Capital Gains.Pre-tax net income included $1,668,000 of net realized capital gains for 2002
compared to $790,000 for 2001 and $265,000 for 2000. On an after tax basis, the net realized capital gains were $0.14 per share, $0.09 per share and $0.02 per share for 2002, 2001 and 2000,
respectively. The 2002 and 2001 net realized capital gains include $2,905,000 and $1,618,000 of impairment losses recorded on three of the Company's asset backed securities.

Other Income/(Expense).Other income/(expense) for 2002 consisted primarily of foreign exchange gains, and fees related to
the general liability insurance business. Other income/(expense) for 2001 consists primarily of a $3,800,000 charge related to the Company's former investment in Riverside Corporate
Underwriters, Ltd. ("RCUL"), a Lloyd's corporate name. Lloyd's informed the Company in 2001 that it was liable for part of the adverse development in the Lloyd's syndicates in
which RCUL provided capacity in 1999 and 1998. The Company had provided a letter of credit to RCUL in order for RCUL to participate on various Lloyd's syndicates. The Company believes that it has no
further exposure to RCUL.

Operating Expenses

Net Losses and Loss Adjustment Expenses Incurred.The ratio of net loss and loss adjustment expenses incurred to net earned
premium was 63.4%, 70.7% and 64.8% in 2002, 2001 and 2000, respectively. The decrease in the loss ratio from 2002 to 2001 was primarily due to the losses resulting from approximately
$4.1 million of net losses related to the September 11, 2001 terrorist attack on the World Trade Center accounting for 2.7 points of the 2001 loss ratio and from approximately
$1.9 million of net losses resulting from one large offshore energy claim (Petrobras) in the first quarter of 2001 accounting for 1.3 points of the 2001 loss ratio. Gross losses resulting from
the terrorist attack were $17.6 million with the ceded portion of the losses reinsured by highly rated reinsurers. In October 2001, $8.1 million of the losses were paid and fully
recovered from the reinsurers. The increase in the 2001 loss ratio compared to 2000 was primarily due to the 2001 losses described above. The Company does not discount any of its loss reserves.

25

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The
following table sets forth the Company's net loss reserves by segment and line of insurance business as of the date indicated:

|                     |                                      | As of December 31,       
|-------------------- | ------------------------------------ | -------------------------
|
|
|Insurance Companies: |                                      |                          
|                     | Marine                               |                          
|                     | General Liability                    |                          
|                     | Professional Liability               |                          
|                     | Surety                               |                          
|                     | Onshore Energy                       |                          
|                     | Other (reserves on run-off business) |                          
|                     |                                      |                          
|                     |                                      | Total Insurance Companies
|                     |                                      |                          
|Lloyd's Operations:  |                                      |                          
|                     | Marine                               |                          
|                     | Engineering and Construction         |                          
|                     | Onshore Energy                       |                          
|                     |                                      |                          
|                     |                                      | Total Lloyd's Operations 
|                     |                                      |                          
|                     |                                      |                          
|                     |                                      |                          

As
previously discussed under the captionBUSINESSReservesthere are a number of factors that could cause actual losses and
LAE to differ materially from the amount that the Company has reserved for losses and LAE. The risks and uncertainties associated with setting reserves include both fact specific matters associated
with particular claims as well as general trends and developments that affect all of our lines of business. These general trends and developments include changes in the judicial, legislative and
social environments as well as changes in economic conditions and claims handling practices. In particular, our reserves in the marine line of business over time tend to be most affected by inflation
and other economic conditions as well as the uncertainties previously discussed underBUSINESSEnvironmental Pollution and Asbestos Related
Claimswith respect to any asbestos and environmental exposure we have within this line. General uncertainties that we expect may have a large impact on our general liability
reserves include changing federal and state regulation and judicial interpretation as well as general social trends that affect the liability claims made in this line. Finally, engineering and
construction claims are also particularly impacted by general trends relating to liability theories and inflation.

The
increases in the loss reserves for the marine and general liability insurance was primarily due to the reserves on the increased premium volume. The Company started writing
professional liability insurance in late 2001.

The
Company's Reinsurance Security Committee monitors the financial strength of its reinsurers and the amounts of reinsurance receivables from those reinsurers. A reserve is established
for any amounts considered uncollectible. At December 31, 2002 and 2001, the Company had an allowance for uncollectible reinsurance of $8,534,000 and $6,905,000, respectively.

The
following table lists our 10 largest reinsurers measured by the amount of reinsurance recoverable for ceded losses, ceded loss adjustment expense and ceded unearned premium
(constituting 49% of the total recoverable), together with the reinsurance recoverables and collateral (including

26

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letters of credit, ceded balances payable and other balances held), at December 31, 2002, and the reinsurers' rating from the indicated rating agency:

|Reinsurer                                   |  | Reinsurance
Recoverables |        | Collateral
Held |   | Rating |  | Rating
Agency
|------------------------------------------- |  | ------------------------ | ------ | --------------- | - | ------ |  | -------------
|
|General Reinsurance Corporation             |  | $                        | 27,513 |                 | $ | 4,529  |  | A++          
|Trenwick America Re Corp. & Subsidiaries    |  |                          | 21,805 |                 |   | 19,248 |  | C            
|Swiss Reinsurance America Corporation       |  |                          | 18,219 |                 |   | 2,749  |  | A++          
|American Re-Insurance Company               |  |                          | 16,920 |                 |   | 2,419  |  | A+           
|Folksamerica Reinsurance Company            |  |                          | 13,335 |                 |   | 1,751  |  | A-           
|Employers Mutual Casualty Company           |  |                          | 12,066 |                 |   | 2,392  |  | A-           
|National Liability & Fire Insurance Company |  |                          | 10,613 |                 |   | 1,706  |  | A++          
|Munich Reinsurance Company                  |  |                          | 10,485 |                 |   | 3,173  |  | AA+          
|New Reinsurance Company                     |  |                          | 9,415  |                 |   | 1,109  |  | AA+          
|Partner Reinsurance Company of the U.S.     |  |                          | 7,378  |                 |   | 1,342  |  | A+           

See
theReinsurance Ceded, andReservessections under BUSINESS, included herein.

Commission Expense.Commission expense as a percentage of net earned premium was 20.9%, 20.7% and 20.6% for 2002, 2001, and
2000, respectively. The same ratios without the reinsurance to close premium were 21.1%, 21.3% and 22.5% in 2002, 2001 and 2000, respectively. The 2002 and 2001 commission expense ratios were similar.
The decrease in the 2001 commission expense ratio compared to 2000 was primarily due to the increase in the Insurance Companies' net earned premium for the marine business. The reinsurance to close
premium increased earned premium but did not change the commission expense, therefore the ratio of commission expense to earned premium decreased.

Other Operating Expenses.The increases in other operating expenses of 44.4% in 2002 and 8.8% in 2001 were primarily employee
related expenses resulting from expansion of the business as discussed under theRevenuessection included herein.

Interest Expense.The decreases in interest expense in 2002 and 2001 were primarily due to lower interest rates charged on
the loan balance and a declining loan balance.

Income Taxes.The income tax expense was $5.8 million, $1.7 million and $3.3 million for 2002, 2001 and
2000, respectively. The effective tax rates for 2002, 2001 and 2000 were 26.2%, 31.6% and 32.0%, respectively. The Company had alternative minimum tax ("AMT") carryforwards of $1.0 million,
$3.9 million and $5.3 million at December 31, 2002, 2001, and 2000, respectively. The AMT carryforwards were primarily attributable to the tax benefits from municipal bond
interest.

As
of December 31, 2002 and 2001, the net deferred Federal, foreign, state and local tax asset was $6.5 million and $10.0 million, respectively. At
December 31, 2002 the Company had a $6.7 million valuation allowance against its deferred tax asset compared to a $7.3 million valuation allowance at December 31, 2001. The
valuation allowance has been maintained because of the uncertainty associated with the realization of the deferred tax asset for the carryforward of operating losses from certain of the Company's
foreign, state and local operations. Even though the Company's foreign operations were profitable in 2002, the valuation allowance was released only to the extent of the 2002 profits since future
profitability remains uncertain. The Company will continue to evaluate the valuation allowance based on the results of its foreign, state and local operations.

Net Income.The Company had net income of $16.4 million in 2002, $3.7 million in 2001 and $7.0 million
in 2000. The increase in net income from 2001 to 2002 was primarily due to overall improved profitability in the insurance operations. The decrease in net income from 2000 to 2001 was

27

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primarily due to the losses resulting from the September 11, 2001 terrorist attack on the World Trade Center.

Liquidity and Capital Resources

Cash flow provided by operations was $108.5 million, $41.3 million and $20.1 million for 2002, 2001, and 2000, respectively. The increases in
the 2002 and 2001 operating cash flows were primarily due to the increases in net written premium. Operating cash flow was used primarily to acquire additional investment assets and to reduce debt.

Invested
assets and cash increased to $452.9 million at December 31, 2002 from $333.1 million at December 31, 2001. The increase was primarily due to the
positive cash flow. Net investment income was $18.1 million in 2002, $19.4 million in 2001 and $18.4 million in 2000. The average yield of the portfolio, excluding net realized
capital gains, was 4.78% in 2002, 6.14% in 2001 and 6.55% in 2000 reflecting the prevailing interest rates during those years. As of December 31, 2002, all fixed maturity securities and equity
securities held by the Company were classified as available-for-sale.

The
average rating of the Company's fixed maturity investments is AA by Standard & Poor's and Aa by Moody's. The Company has no significant exposure to credit risk since the fixed
maturity investment
portfolio consists of investment grade bonds. The portfolio has an average maturity of 5.1 years and a duration of 3.7 years. Management continually monitors the composition and cash
flow of the investment portfolio in order to maintain the appropriate levels of liquidity to ensure the Company's ability to satisfy claims. The Company incurred impairment losses of
$2.9 million in 2002 and $1.6 million in 2001 on asset backed securities.

The
increase in reserves for losses and loss adjustment expenses and the related increase in the reinsurance receivable on paid and unpaid losses and loss adjustment expenses at
December 31, 2002 as compared to 2001 was primarily due to the reserves on the increase in the earned premium in 2002 compared to 2001.

The
Company's bank credit facility provides a $14.5 million revolving line of credit at an interest rate of either, at the Company's election, the base commercial lending rate of
one of the banks or at LIBOR plus 1.25% on the used portion of the line of credit. The commitment fee on the unused portion of the line of credit is 0.25%. The line of credit facility reduces each
quarter by amounts totaling $5.5 million in 2003 and $9.0 million in 2004. At December 31, 2002 and 2001, $14.5 million and $19.0 million in loans were outstanding,
respectively, under the revolving line of credit facility at interest rates of 2.7% and 3.4%, respectively. The credit facility also provides for a $55 million letter of credit facility which
is utilized primarily by NCUL and Millennium to participate in Lloyd's Syndicate 1221. The cost of the letters of credit is 1.3% for the used portion and 0.25% for the unused portion of the letter of
credit facility. At December 31, 2002 and 2001, letters of credit with an aggregate face amount of $53.3 million and $47.5 million, respectively, were issued under the letter of
credit facility. In 2001, $3.8 million of letters of credit were drawn upon as discussed in the Other Income/(Expense) section. No letters of credit were drawn upon in 2002.

The
bank credit facility is collateralized by the common stock of Navigators Insurance. It contains covenants common to transactions of this type, including restrictions on indebtedness
and liens, limitations on mergers and the sale of assets, maintaining certain consolidated tangible net worth, statutory surplus, and other financial ratios. At December 31, 2002, the Company
complied with all covenants.

The
Company had annual rental commitments at December 31, 2002 under various noncancellable operating leases for the Company's office facilities, which expire at various dates
through 2013. The commitments by year are $2.1 million for 2003, $2.2 million for 2004, $2.1 million for 2005, $2.0 million for 2006 and $5.7 million for 2007 and
subsequent.

28

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Total
stockholders' equity was $171.3 million at December 31, 2002, a 16.4% increase for the year as the result of the Company's net income in 2002 and increase in the
unrealized gains in the Company's investment portfolio.

The
Company's reinsurance has been placed with various U.S. and foreign insurance companies and with selected syndicates at Lloyd's. Pursuant to the implementation of Lloyd's Plan of
Reconstruction and Renewal, a portion of the Company's recoverables are now reinsured by Equitas (a separate UK authorized reinsurance company established to reinsure outstanding liabilities of all
Lloyd's members for all risks written in the 1992 or prior years of account).

The
Company believes that the cash flow generated by the operating activities of the Company's subsidiaries will provide sufficient funds for the Company to meet its liquidity needs over
the next twelve months. Beyond the next twelve months, cash flow available to the Company 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.

Economic Conditions

The Company is a specialty insurance company and periods of moderate economic recession or inflation tend not to have a significant direct affect on the Company's
underwriting operations. They do, however, impact the Company's investment portfolio. A decrease in interest rates will tend to decrease the Company's yield and have a positive effect on the fair
value of its invested assets. An increase in interest rates will tend to increase the Company's yield and have a negative effect on the fair value of its invested assets.

Management
considers the potential impact of these economic trends in estimating loss reserves. Management believes that the underwriting controls it maintains, and the fact that a
significant amount of the Company's business is in lines of insurance which have relatively short loss payout patterns, assist in estimating ultimate claim costs more reasonably and lessen the
potential adverse impact of the economy on the Company.

Quantitative and Qualitative Disclosures About Market Risk

Market Risk

Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying assets are traded. The following is a
discussion of the Company's primary market risk exposures and how
those exposures are currently managed as of December 31, 2002. The Company's market risk sensitive instruments are entered into for purposes other than trading.

The
carrying value of the Company's investment portfolio as of December 31, 2002 was $452.9 million of which 80.9% was invested in fixed maturity securities. The primary
market risk to the investment portfolio is interest rate risk associated with investments in fixed maturity securities. The Company's exposure to equity price risk and foreign exchange risk is not
significant. The Company has no commodity risk.

For
fixed maturity securities, short-term liquidity needs and the potential liquidity needs of the business are key factors in managing the portfolio. The portfolio duration
relative to the liabilities' duration is primarily managed through investment transactions.

There
were no significant changes regarding the investment portfolio in the Company's primary market risk exposures or in how those exposures were managed compared to the year ended
December 31, 2001, other than the impairment losses of $2.9 million in 2002 and $1.6 million in 2001

29

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recorded on three of the Company's asset backed securities. The Company does not currently anticipate significant changes in its primary market risk exposures or in how those exposures are managed in
future reporting periods based upon what is known or expected to be in effect in future reporting periods.

The
Company is subject to interest rate risk on its notes payable to banks as changes in interest rates would impact future earnings, however, this interest rate risk exposure is not
considered significant.

Sensitivity Analysis

Sensitivity analysis is defined as the measurement of potential loss in future earnings, fair values or cash flows of market sensitive instruments resulting from
one or more selected hypothetical changes in interest rates and other market rates or prices over a selected time. In the Company's sensitivity analysis model, a hypothetical change in market rates is
selected that is expected to reflect reasonably possible near-term changes in those rates. The term "near-term" means a period of time going forward up to one year from the
date of the consolidated financial statements. Actual results may differ from the hypothetical change in market rates assumed in this disclosure, especially since this sensitivity analysis does not
reflect the results of any actions that would be taken by the Company to mitigate such hypothetical losses in fair value.

In
this sensitivity analysis model, the Company uses fair values to measure its potential loss. The sensitivity analysis model includes fixed maturities and short-term
investments. The primary market risk to the Company's market sensitive instruments is interest rate risk. The sensitivity analysis model uses a 100 basis point change in interest rates to measure the
hypothetical change in fair value of financial instruments included in the model.

For
invested assets, modified duration modeling is used to calculate changes in fair values. Durations on invested assets are adjusted for call, put and interest rate reset features.
Duration on tax exempt securities is adjusted for the fact that the yield on such securities is less sensitive to changes in interest rates compared to Treasury securities. Invested asset portfolio
durations are calculated on a market value weighted basis, including accrued investment income, using holdings as of December 31, 2002.

The
sensitivity analysis model used by the Company produces a loss in fair value of market sensitive instruments of $16.0 million based on a 100 basis point increase in interest
rates as of December 31, 2002. This loss amount only reflects the impact of an interest rate increase on the fair value of the Company's fixed maturities and short-term investments,
which constitute approximately 46.6% of total assets as of December 31, 2002. The loss in fair value of market sensitive instruments, as a result of a 100 basis point increase in interest rates
as of December 31, 2002, is not material.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements required in response to this section are submitted as part of Item 15(a) of this report.

Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND               FINANCIAL DISCLOSURE

None.

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Part III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information concerning the directors and the executive officers of the Company is contained under "Election of Directors" in the Company's 2003 Proxy Statement,
which information is incorporated herein by reference.

Item 11. EXECUTIVE COMPENSATION

Information concerning executive compensation is contained under "Compensation of Directors and Executive Officers" in the Company's 2003 Proxy Statement, which
information is incorporated herein by reference.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information concerning the security ownership of the directors and officers of the registrant is contained under "Election of Directors" in the Company's 2003
Proxy Statement, which information is incorporated herein by reference.

Equity Compensation Plan Information

The following chart includes information as of December 31, 2002 with respect to equity compensation plans where equity securities of the Company may be
issued:

|                                                              |  | A                                                                                                 |  | B                                                      |  | C                                                                                                                                        
|------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------
|                                                              |  | Number of securities to be issued upon exercise of outstanding options, and unvested stock grants |  | Weighted-average exercise price of outstanding options |  | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column A)
|Plan Category                                                 |  |                                                                                                   |  |                                                        |  |                                                                                                                                          
|                                                              |  |                                                                                                   |  |                                                        |  |                                                                                                                                          
|Equity compensation plans approved by security holders(1)     |  | 529,500                                                                                           |  | $14.76                                                 |  | 907,562                                                                                                                                  
|Equity compensation plans not approved by security holders(2) |  |                                                                                                  |  |                                                       |  |                                                                                                                                         
|                                                              |  |                                                                                                  
|Total                                                         |  | 529,500(3)                                                                                        |  | $14.76                                                 |  | 907,562(3)                                                                                                                               
|                                                              |  |                                                                                                   |  |                                                        |  |                                                                                                                                          

---

31

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Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information concerning relationships and related transactions of the directors and officers of the Company is contained under "Certain Relationships and Related
Transactions" in the Company's 2003 Proxy Statement, which information is incorporated herein by reference.

Item 14. CONTROLS AND PROCEDURES

(a)  The
Chief Executive Officer and Chief Financial Officer of the Company have evaluated the effectiveness of our disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Exchange Act) as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"). Based on
such evaluation, such officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in identifying, on a timely basis, material information
required to be disclosed in our reports filed or submitted under the Exchange Act.

(b)  There
have been no significant changes in our internal controls or in other factors that could significantly affect such controls since the Evaluation Date.

Part IV

Item 15. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K



32

---





SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|                      |  | THE NAVIGATORS GROUP, INC.
(REGISTRANT)
|--------------------- |  | ---------------------------------------
|Dated: March 28, 2003 |  | By:                                    

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.

|Name                                              |  | Title                                                                  |  | Date          
|------------------------------------------------- |  | ---------------------------------------------------------------------- |  | --------------
|                                                  |  |                                                                        |  |               
|/s/TERENCE N. DEEKSTerence N. Deeks               |  | Chairman                                                               |  | March 28, 2003
|/s/STANLEY A. GALANSKIStanley A. Galanski         |  | President and Chief Executive Officer
(Principal Executive Officer)    |  | March 28, 2003
|/s/BRADLEY D. WILEYBradley D. Wiley               |  | Senior Vice President, CFO and Secretary
(Principal Financial Officer) |  | March 28, 2003
|/s/SALVATORE A. MARGARELLASalvatore A. Margarella |  | Vice President and Treasurer
(Principal Accounting Officer)            |  | March 28, 2003
|/s/ROBERT M. DEMICHELERobert M. DeMichele         |  | Director                                                               |  | March 28, 2003
|/s/ROBERT W. EAGER, JR.Robert W. Eager, Jr.       |  | Director                                                               |  | March 28, 2003
|/s/LEANDRO S. GALBAN, JR.Leandro S. Galban, Jr.   |  | Director                                                               |  | March 28, 2003
|                                                  |  |                                                                        |  |               

33

---

|/s/MARC M. TRACTMarc M. Tract               |  | Director |  | March 28, 2003
|------------------------------------------- |  | -------- |  | --------------
|/s/GEORGE T. VAN GILDERGeorge T. Van Gilder |  | Director |  | March 28, 2003
|/s/ROBERT F. WRIGHTRobert F. Wright         |  | Director |  | March 28, 2003

34

---

Certifications

I,
Stanley A. Galanski, President and Chief Executive Officer of The Navigators Group, Inc. certify that:

1.    I
have reviewed this annual report on Form 10-K for the year ended December 31, 2002 of The Navigators Group, Inc.;

2.    Based
on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.    Based
on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.    The
registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



5.    The
registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent function):



6.    The
registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.

|Date: March 31, 2003 |  | By:
/s/STANLEY A. GALANSKIName: Stanley A. Galanski
Title: President and Chief Executive Officer
(principal executive officer)
|-------------------- |  | ------------------------------------------------------------------------------------------------------------------------------

35

---

I, Bradley D. Wiley, Senior Vice President, Chief Financial Officer and Secretary of The Navigators Group, Inc. certify that:

1.    I
have reviewed this annual report on Form 10-K for the year ended December 31, 2002 of The Navigators Group, Inc.;

2.    Based
on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.    Based
on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.    The
registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



5.    The
registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent function):



6.    The
registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.

|Date: March 31, 2003 |  | By:
/s/BRADLEY D. WILEYName: Bradley D. Wiley
Title: Senior Vice President, Chief Financial Officer
and Secretary
(principal financial officer)
|-------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

36

---



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

|Independent Auditors' Report                                                                                           |  | F-2
|---------------------------------------------------------------------------------------------------------------------- |  | ---
|Consolidated Balance Sheets at December 31, 2002 and 2001                                                              |  | F-3
|Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2002               |  | F-4
|Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended
December 31, 2002 |  | F-5
|Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2002           |  | F-6
|Notes to Consolidated Financial Statements                                                                             |  | F-7

|SCHEDULES:   |  |                                                                               |  |    
|------------ |  | ----------------------------------------------------------------------------- |  | ---
|Schedule I   |  | Summary of Consolidated InvestmentsOther Than Investments in Related Parties |  | S-1
|Schedule II  |  | Condensed Financial Information of Registrant                                 |  | S-2
|Schedule III |  | Supplementary Insurance Information                                           |  | S-5
|Schedule IV  |  | Reinsurance                                                                   |  | S-6
|Schedule V   |  | Valuation and Qualifying Accounts                                             |  | S-7
|Schedule VI  |  | Supplementary Information Concerning Property-Casualty Insurance Operations   |  | S-8

F-1

---



INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
The Navigators Group, Inc.

We
have audited the consolidated balance sheets of The Navigators Group, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2002. In connection with our audits of the consolidated financial
statements, we also have audited the consolidated financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Navigators Group, Inc. and
subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31,
2002, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

KPMG
LLP

New
York, New York
March 12, 2003

F-2

---



THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        (In thousands, except share data)

|                                                                              |                                                                                                                                                                                   | December 31,                                                                                                    |                                           
|----------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | ------------------------------------------
|
|ASSETS                                                                        |                                                                                                                                                                                  
|Investments and cash:                                                         |                                                                                                                                                                                   |                                                                                                                 |                                           
|                                                                              | Fixed maturities, available-for-sale, at fair value
(amortized cost: 2002, $351,821; 2001, $287,707)                                                                              |                                                                                                                 | $                                         
|                                                                              | Equity securities, available-for-sale, at fair value
(cost: 2002, $12,286; 2001, $7,225)                                                                                          |                                                                                                                 |                                           
|                                                                              | Short-term investments, at cost which approximates fair value                                                                                                                     |                                                                                                                 |                                           
|                                                                              | Cash                                                                                                                                                                              |                                                                                                                 |                                           
|                                                                              |                                                                                                                                                                                   |                                                                                                                 |                                           
|                                                                              |                                                                                                                                                                                   |                                                                                                                 | Total investments and cash                
|                                                                              |                                                                                                                                                                                   |                                                                                                                 |                                           
|Premiums in course of collection                                              |                                                                                                                                                                                   |                                                                                                                 | 108,672                                   
|Accrued investment income                                                     |                                                                                                                                                                                   |                                                                                                                 | 3,309                                     
|Prepaid reinsurance premiums                                                  |                                                                                                                                                                                   |                                                                                                                 | 58,902                                    
|Reinsurance receivable on paid and unpaid losses and loss adjustment expenses |                                                                                                                                                                                   |                                                                                                                 | 243,153                                   
|Federal income tax recoverable                                                |                                                                                                                                                                                   |                                                                                                                 | 826                                       
|Net deferred income tax benefit                                               |                                                                                                                                                                                   |                                                                                                                 | 6,470                                     
|Deferred policy acquisition costs                                             |                                                                                                                                                                                   |                                                                                                                 | 23,632                                    
|Goodwill                                                                      |                                                                                                                                                                                   |                                                                                                                 | 5,167                                     
|Other assets                                                                  |                                                                                                                                                                                   |                                                                                                                 | 14,903                                    
|                                                                              |                                                                                                                                                                                   |                                                                                                                 |                                           
|Total assets                                                                  |                                                                                                                                                                                   | $                                                                                                               | 917,919                                   
|                                                                              |                                                                                                                                                                                   |                                                                                                                 |                                           
|LIABILITIES AND STOCKHOLDERS' EQUITY                                          |                                                                                                                                                                                  
|Liabilities:                                                                  |                                                                                                                                                                                   |                                                                                                                 |                                           
|                                                                              | Reserves for losses and loss adjustment expenses                                                                                                                                  |                                                                                                                 | $                                         
|                                                                              | Unearned premium                                                                                                                                                                  |                                                                                                                 |                                           
|                                                                              | Reinsurance balances payable                                                                                                                                                      |                                                                                                                 |                                           
|                                                                              | Notes payable to banks                                                                                                                                                            |                                                                                                                 |                                           
|                                                                              | Payable for securities                                                                                                                                                            |                                                                                                                 |                                           
|                                                                              | Accounts payable and other liabilities                                                                                                                                            |                                                                                                                 |                                           
|                                                                              |                                                                                                                                                                                   |                                                                                                                 |                                           
|                                                                              |                                                                                                                                                                                   |                                                                                                                 | Total liabilities                         
|                                                                              |                                                                                                                                                                                   |                                                                                                                 |                                           
|Stockholders' equity:                                                         |                                                                                                                                                                                   |                                                                                                                 |                                           
|                                                                              | Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued                                                                                                         |                                                                                                                 |                                           
|                                                                              | Common stock, $.10 par value, authorized 20,000,000 shares in 2002 and 10,000,000 in 2001; issued and outstanding (net of treasury stock) 8,486,272 in 2002 and 8,427,262 in 2001 |                                                                                                                 |                                           
|                                                                              | Additional paid-in capital                                                                                                                                                        |                                                                                                                 |                                           
|                                                                              | Treasury stock held at cost (shares: 16,423 in 2002 and 35,908 in 2001)                                                                                                           |                                                                                                                 |                                           
|                                                                              | Accumulated other comprehensive income:                                                                                                                                           |                                                                                                                 |                                           
|                                                                              |                                                                                                                                                                                   | Net unrealized gains on securities available-for-sale (net of tax expense of $4,693 in 2002 and $1,177 in 2001) |                                           
|                                                                              |                                                                                                                                                                                   | Foreign currency translation adjustment (net of tax expense of $132 in 2002 and $216 in 2001)                   |                                           
|                                                                              | Retained earnings                                                                                                                                                                 |                                                                                                                 |                                           
|                                                                              |                                                                                                                                                                                   |                                                                                                                 |                                           
|                                                                              |                                                                                                                                                                                   |                                                                                                                 | Total stockholders' equity                
|                                                                              |                                                                                                                                                                                   |                                                                                                                 |                                           
|                                                                              |                                                                                                                                                                                   |                                                                                                                 | Total liabilities and stockholders' equity
|                                                                              |                                                                                                                                                                                   |                                                                                                                 |                                           

F-3

---



THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF INCOME        (In thousands, except net income per share)

|                                   |                                                  | Year Ended December 31, 
|---------------------------------- | ------------------------------------------------ | ------------------------
|
|Revenues:                          |                                                  |                         
|                                   | Net earned premium                               |                         
|                                   | Commission income                                |                         
|                                   | Net investment income                            |                         
|                                   | Net realized capital gains                       |                         
|                                   | Other income (expense)                           |                         
|                                   |                                                  |                         
|                                   |                                                  | Total revenues          
|                                   |                                                  |                         
|Operating expenses:                |                                                  |                         
|                                   | Net losses and loss adjustment expenses incurred |                         
|                                   | Commission expense                               |                         
|                                   | Other operating expenses                         |                         
|                                   | Interest expense                                 |                         
|                                   |                                                  |                         
|                                   |                                                  | Total operating expenses
|                                   |                                                  |                         
|Income before income tax expense   |                                                  |                         
|                                   |                                                  |                         
|Income tax expense (benefit):      |                                                  |                         
|                                   | Current                                          |                         
|                                   | Deferred                                         |                         
|                                   |                                                  |                         
|                                   |                                                  | Total income tax expense
|                                   |                                                  |                         
|Net income                         |                                                  | $                       
|                                   |                                                  |                         
|Net income per common share:       |                                                  |                         
|                                   | Basic                                            |                         
|                                   | Diluted                                          |                         
|Average common shares outstanding: |                                                  |                         
|                                   | Basic                                            |                         
|                                   | Diluted                                          |                         

See
accompanying notes to consolidated financial statements.

F-4

---



THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        (In thousands)

|                                                                       |                                                                                                                                                 | Year Ended December 31,                       
|---------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------
|
|Preferred stock                                                        |                                                                                                                                                 |                                               
|                                                                       | Balance at beginning and end of year                                                                                                            |                                               
|                                                                       |                                                                                                                                                 |                                               
|Common stock                                                           |                                                                                                                                                 |                                               
|                                                                       | Balance at beginning of year                                                                                                                    |                                               
|                                                                       | Issuance of common stock during the year                                                                                                        |                                               
|                                                                       |                                                                                                                                                 |                                               
|                                                                       | Balance at end of year                                                                                                                          |                                               
|                                                                       |                                                                                                                                                 |                                               
|Additional paid-in capital                                             |                                                                                                                                                 |                                               
|                                                                       | Balance at beginning of year                                                                                                                    |                                               
|                                                                       | Issuance of common stock during the year                                                                                                        |                                               
|                                                                       |                                                                                                                                                 |                                               
|                                                                       | Balance at end of year                                                                                                                          |                                               
|                                                                       |                                                                                                                                                 |                                               
|Retained earnings                                                      |                                                                                                                                                 |                                               
|                                                                       | Balance at beginning of year                                                                                                                    |                                               
|                                                                       | Net income                                                                                                                                      |                                               
|                                                                       |                                                                                                                                                 |                                               
|                                                                       | Balance at end of year                                                                                                                          |                                               
|                                                                       |                                                                                                                                                 |                                               
|Treasury stock held at cost                                            |                                                                                                                                                 |                                               
|                                                                       | Balance at beginning of year                                                                                                                    |                                               
|                                                                       | Purchase of treasury stock                                                                                                                      |                                               
|                                                                       | Shares issued to directors                                                                                                                      |                                               
|                                                                       | Shares issued to officers                                                                                                                       |                                               
|                                                                       |                                                                                                                                                 |                                               
|Balance at end of year                                                 |                                                                                                                                                 | $                                             
|                                                                       |                                                                                                                                                 |                                               
|Accumulated other comprehensive income (loss)                          |                                                                                                                                                 |                                               
|                                                                       | Balance at beginning of year                                                                                                                    |                                               
|                                                                       | Net unrealized gains (losses) on securities, net of tax expense (benefit) of $3,516, ($216) and $2,999 in 2002, 2001 and 2000, respectively (1) |                                               
|                                                                       | Foreign currency gains (losses), net of tax expense (benefit) of $(84), $71 and $112 in 2002, 2001 and 2000, respectively                       |                                               
|                                                                       |                                                                                                                                                 |                                               
|                                                                       | Other comprehensive income (loss)                                                                                                               |                                               
|                                                                       |                                                                                                                                                 |                                               
|                                                                       | Comprehensive income                                                                                                                            |                                               
|                                                                       |                                                                                                                                                 |                                               
|                                                                       | Balance at end of year                                                                                                                          |                                               
|                                                                       |                                                                                                                                                 |                                               
|Total stockholders' equity at end of year                              |                                                                                                                                                 | $                                             
|                                                                       |                                                                                                                                                 |                                               
|(1) Disclosure of reclassification amount:                             |                                                                                                                                                 |                                               
|                                                                       |                                                                                                                                                 | Unrealized holding gains arising during period
|                                                                       |                                                                                                                                                 |                                               
|Less: reclassification adjustment for net gains included in net income |                                                                                                                                                 |                                               
|                                                                       |                                                                                                                                                 |                                               
|Net unrealized gains (losses) on securities                            |                                                                                                                                                 |                                               
|                                                                       |                                                                                                                                                 |                                               

See accompanying notes to consolidated financial statements.

F-5

---



THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        (In thousands)

|                                                   |                                                                                   | Year Ended December 31,                                                       |                                          
|-------------------------------------------------- | --------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | -----------------------------------------
|
|Operating activities:                              |                                                                                   |                                                                               |                                          
|                                                   | Net income                                                                        |                                                                               | $                                        
|                                                   | Adjustments to reconcile net income to net cash provided by operating activities: |                                                                               |                                          
|                                                   |                                                                                   | Depreciation & amortization                                                   |                                          
|                                                   |                                                                                   | Net deferred income tax                                                       |                                          
|                                                   |                                                                                   | Net realized capital (gains)                                                  |                                          
|                                                   | Changes in assets and liabilities:                                                |                                                                               |                                          
|                                                   |                                                                                   | Reinsurance receivable on paid and unpaid losses and loss adjustment expenses |                                          
|                                                   |                                                                                   | Reserve for losses and loss adjustment expenses                               |                                          
|                                                   |                                                                                   | Prepaid reinsurance premiums                                                  |                                          
|                                                   |                                                                                   | Unearned premium                                                              |                                          
|                                                   |                                                                                   | Premiums in course of collection                                              |                                          
|                                                   |                                                                                   | Deferred policy acquisition costs                                             |                                          
|                                                   |                                                                                   | Accrued investment income                                                     |                                          
|                                                   |                                                                                   | Reinsurance balances payable                                                  |                                          
|                                                   |                                                                                   | Federal income tax                                                            |                                          
|                                                   |                                                                                   | Other                                                                         |                                          
|                                                   |                                                                                   |                                                                               |                                          
|                                                   |                                                                                   |                                                                               | Net cash provided by operating activities
|                                                   |                                                                                   |                                                                               |                                          
|Investing activities:                              |                                                                                   |                                                                               |                                          
|                                                   | Fixed maturities, available-for-sale
Redemptions and maturities                   |                                                                               |                                          
|                                                   |                                                                                   | Sales                                                                         |                                          
|                                                   |                                                                                   | Purchases                                                                     |                                          
|                                                   | Equity securities, available-for-sale                                             |                                                                               |                                          
|                                                   |                                                                                   | Sales                                                                         |                                          
|                                                   |                                                                                   | Purchases                                                                     |                                          
|                                                   |                                                                                   | Change in receivable/payable for securities                                   |                                          
|                                                   |                                                                                   | Net purchases of short-term investments                                       |                                          
|                                                   |                                                                                   | Purchase of property and equipment                                            |                                          
|                                                   |                                                                                   |                                                                               |                                          
|                                                   |                                                                                   |                                                                               | Net cash (used in) investing activities  
|                                                   |                                                                                   |                                                                               |                                          
|Financing activities:                              |                                                                                   |                                                                               |                                          
|                                                   | Proceeds from bank loan                                                           |                                                                               |                                          
|                                                   | Repayment of bank loan                                                            |                                                                               |                                          
|                                                   | Proceeds from exercise of stock options                                           |                                                                               |                                          
|                                                   |                                                                                   |                                                                               |                                          
|                                                   |                                                                                   |                                                                               | Net cash (used in) financing activities  
|                                                   |                                                                                   |                                                                               |                                          
|Increase (decrease) in cash                        |                                                                                   |                                                                               | 7,627                                    
|Cash at beginning of year                          |                                                                                   |                                                                               | 5,816                                    
|                                                   |                                                                                   |                                                                               |                                          
|Cash at end of year                                |                                                                                   | $                                                                             | 13,443                                   
|                                                   |                                                                                   |                                                                               |                                          
|Supplemental disclosures of cash flow information: |                                                                                   |                                                                               |                                          
|                                                   | Federal, state and local income tax paid                                          |                                                                               | $                                        
|                                                   | Interest paid                                                                     |                                                                               |                                          
|                                                   | Issuance of stock to directors                                                    |                                                                               |                                          

See
accompanying notes to consolidated financial statements.

F-6

---



THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Summary of Significant Accounting Policies

The accompanying consolidated financial statements consisting of the accounts of The Navigators Group, Inc., a Delaware holding company, and its twelve
active wholly owned subsidiaries, are prepared on the basis of accounting principles generally accepted in the United States of America ("GAAP"). Unless the context otherwise requires, the term
"Company" as used herein means The Navigators Group, Inc. and its subsidiaries. All significant intercompany transactions and balances are eliminated. Certain amounts for prior years have been
reclassified to conform to the current year's presentation. Historically, the Company reportedFunds due from Lloyd's syndicateas a separate line item
on its balance sheets. The balance consisted primarily of investments, cash and premiums receivable resulting from the Company's participation in Lloyd's Syndicate 1221. Commencing in 2002, the
Company has recorded the amounts due from Lloyd's Syndicate 1221 as part of their separate components in its financial statements. As a result, the amounts previously classified as Funds due from Lloyd's
syndicatehave been reclassified to conform to the current year's presentation.

The
Company's two insurance subsidiaries are Navigators Insurance Company ("Navigators Insurance"), which includes a United Kingdom Branch ("UK Branch"), and NIC Insurance Company
("NIC"). Navigators Insurance is the Company's largest insurance subsidiary and has been active since 1983. It specializes principally in underwriting marine insurance and related lines of business,
contractors' general liability insurance, and professional liability insurance. NIC, a wholly owned subsidiary of Navigators Insurance, began operations in 1990. It underwrites a small book of surplus
lines insurance fully reinsured by Navigators Insurance. Navigators Insurance and NIC are collectively referred to herein as the "Insurance Companies".

Five
of the Company's wholly owned insurance underwriting agencies (the "Navigators Agencies"), produce business for the Insurance Companies. They specialize in writing marine and
related lines of business, general liability insurance and professional liability coverages.

Each
of the Navigators Agencies write marine and related business for Navigators Insurance and four unaffiliated insurance companies. The five insurance companies comprise a marine
insurance pool. Marine insurance policies are issued by Navigators Insurance with the business shared through the pool. Navigators Insurance had a 75% net participation in the pool.

Navigators
Specialty, a division of a Navigators Agency located in San Francisco, California, produces business exclusively for the Insurance Companies. It specializes in underwriting
general liability insurance coverage for general contractors and small artisans as well as small commercial risks with the majority of the business located on the west coast of the U.S.

Navigators
Pro, a division of a Navigators Agency located in New York, specializes in underwriting professional liability insurance and began producing directors & officers
liability insurance exclusively for the Insurance Companies in the fourth quarter of 2001. In late 2002, Navigators Pro introduced additional products to complement its directors & officers
liability coverage. The products include employment practices liability, lawyers professional liability and miscellaneous professional liability coverages.

Navigators
Holdings (UK) Limited is a holding company for the Company's UK subsidiaries consisting of the Lloyd's Operations and Navigators Management (UK) Limited, a Navigators Agency,
which produces business for the UK Branch of Navigators Insurance. The Lloyd's Operations consist of Navigators Underwriting Agency Ltd. ("NUAL"), a Lloyd's of London ("Lloyd's")
marine underwriting managing agency which manages Lloyd's Syndicate 1221, Millennium Underwriting Ltd. ("Millennium")

F-7

---

and Navigators Corporate Underwriters Ltd. ("NCUL"). Both Millennium and NCUL are Lloyd's corporate members with limited liability and provide capacity to Lloyd's Syndicate
1221. NUAL owns Pennine Underwriting Ltd., an underwriting managing agency with offices in Manchester and Leeds, England, which underwrites cargo and engineering business for Lloyd's Syndicate
1221.

The
Company's revenue is primarily comprised of premiums, commissions and investment income. The Insurance Companies derive their premium primarily from business written by the
Navigators Agencies. The Lloyd's Operations derive their premium primarily from business written by NUAL. The Navigators Agencies and NUAL receive commissions and, in some cases, profit commissions
and service fees on the business produced.

Investments

Investments are classified into one of three categories. Held-to-maturity securities are debt securities that the owner has the positive
intent and ability to hold to maturity and are reported at amortized cost.
Trading securities are debt and equity securities that are purchased and held principally for the purpose of selling them in the near term and are reported at fair value, with unrealized gains and
losses included in earnings. Available-for-sale securities are debt and equity securities not classified as either held-to-maturity securities or
trading securities and are reported at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income as a separate component of stockholders' equity.
As of December 31, 2002 and 2001, all fixed maturity and equity securities held by the Company were classified as available-for-sale. Premiums and discounts on fixed
maturity securities are amortized into interest income over the life of the security under the interest method. Fixed maturity securities include bonds and mortgage and asset backed securities. Equity
securities consist of common stock. All fixed maturity and equity securities are carried at fair value. The fair value is based on quoted market prices or dealer quotes provided by independent pricing
services.

Prepayment
assumptions for mortgage and asset backed securities were obtained from broker/dealer survey values or from outside investment managers. These assumptions are consistent with
the current interest rate and economic environment.

Short-term
investments are carried at cost, which approximates fair value. Short-term investments mature within one year from the purchase date.

Realized
gains and losses on sales of investments are determined on the basis of the specific identification method. When a decline in fair value of investments is considered to be
"other-than-temporary," the investments are written down to fair value through a charge to operations.

Lloyd's Syndicate

We record our pro rata share of Lloyd's syndicate assets, liabilities, revenues and expenses, after making adjustments to convert Lloyd's accounting to U.S. GAAP.
The most significant U.S. GAAP adjustments relate to income recognition. Lloyd's syndicates determine underwriting results by year of account at the end of three years. We record adjustments to
recognize underwriting results as incurred, including the expected ultimate cost of losses incurred. These adjustments to losses are based on actuarial analysis of syndicate accounts, including
forecasts of expected ultimate losses provided by the syndicates. At the end of the Lloyd's three year period for determining underwriting results for an

F-8

---

account year, the syndicate will close the account year by reinsuring outstanding claims on that account year with the participants for the account's next underwriting year. The amount to close an
underwriting year into the next year is referred to as the "reinsurance to close". The reinsurance to close transactions are recorded as additional written and earned premium, losses incurred, loss
reserves and receivables, all in the same amount. The reinsurance to close was $1.6 million, $4.2 million and $7.9 million for each of the years in the three year period ended
December 31, 2002. There were no gains or losses recorded on the reinsurance to close transactions.

Premium Revenues

Insurance premiums are recognized as revenue ratably over the period of the insurance contract or over the period of risk if the period of risk differs
significantly from the contract period. Written premium is recorded based on the insurance policies that have been reported to the Company and the policies that have been written by the agents but not
yet reported to the Company. The Company must estimate the amount of written premium not yet reported based on judgments relative to current and historical trends of the business being written. Such
estimates are regularly reviewed and updated and any resulting adjustments are included in the current year's results. An unearned premium reserve is established to reflect the unexpired portion of
each policy at the financial reporting date.

Commission Income

Commission income consists of commissions and profit commissions from the unaffiliated insurance companies. Commissions from those unaffiliated insurers are based
on gross earned premiums and are recognized as revenue ratably over the same period as the related premiums are recognized as revenue. Profit commission is based on estimated net underwriting income
of the unaffiliated insurers and is accrued over the period in which the related income is recognized. The calculation consists of 20% of the excess, if any, of earned premium over incurred losses,
commissions and other expenses. There are no termination adjustments related to profit commissions. Changes in prior estimates of commission income are recorded when such changes become known.

Deferred Policy Acquisition Costs

Costs of acquiring business which vary with and are directly related to the production of business are deferred and amortized ratably over the period that the
related premiums are recognized as revenue. Such costs primarily include commission expense, other underwriting expenses and premium taxes. The method of computing deferred policy acquisition costs
limits the deferral to their estimated net realizable value based on the related unearned premiums and takes into account anticipated losses and loss adjustment expenses and maintenance expenses based
on historical and current experience and anticipated investment income.

Reserves for Losses and Loss Adjustment Expenses

Unpaid losses and loss adjustment expenses are determined on an individual basis for claims reported on direct business for insureds, from reports received from
ceding insurers for insurance assumed from such insurers and on estimates based on Company and industry experience for incurred but not reported claims and loss adjustment expenses. The provision for
unpaid losses and loss adjustment expenses has been established to cover the estimated unpaid cost of claims incurred. Such

F-9

---

estimates are regularly reviewed and updated and any resulting adjustments are included in the current year's results. Management believes that the unpaid losses and loss adjustment expenses are
adequate to cover the ultimate unpaid claims incurred, however, such provisions are necessarily based on estimates and, accordingly, no representation is made that the ultimate liability will not
exceed such amounts.

Net Income Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding for the period. Diluted earnings per share
reflects the basic earnings per share adjusted for the potential dilution that would occur if the issued stock options were exercised.

Reinsurance Ceded

Reinsurance ceded, which transfers risk and the related premiums, commissions and losses incurred to the reinsurer, is reflected as reductions of the respective
income and expense accounts. Unearned premiums ceded and estimates of amounts recoverable from reinsurers on paid and unpaid losses are reflected as assets.

Depreciation and Amortization

Depreciation of furniture and fixtures and electronic data processing equipment, and amortization of computer software is provided over the estimated useful lives
of the respective assets, ranging from three to seven years, using the straight-line method. Amortization of leasehold improvements is provided over the estimated lives of the leases using
the straight-line method.

The
Company capitalizes the costs of computer software developed or purchased for internal use. As of December 31, 2002 and 2001, unamortized computer software costs were $680,000
and $820,000, respectively. Amortization of computer software expense amounted to $450,000, $395,000 and $377,000 in 2002, 2001 and 2000, respectively.

Goodwill

Goodwill was $5,167,000 and $4,915,000 at December 31, 2002 and 2001, respectively, net of accumulated amortization of $1,088,000 and $1,088,000,
respectively. Amortization expense was $0, $298,000, and $304,000 in 2002, 2001, and 2000, respectively.

The
Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 141,Business Combinations,
and SFAS 142,Goodwill and Other Intangible Assets. The Company adopted both SFAS 141 and SFAS 142 effective January 1,
2002. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after September 30, 2001. It also specifies that intangible assets acquired
in a purchase method business combination be recognized and reported apart from goodwill. SFAS 142 changes the accounting for goodwill and intangible assets that have indefinite useful lives
from an amortization approach to an impairment-only approach that requires that those assets be tested at least annually for impairment. Intangible assets that have finite useful lives
will continue to be amortized over their useful lives, but without an arbitrary ceiling on their useful lives. The Company completed its impairment review resulting in no impairment of goodwill as of
January 1, 2002. In addition, no other intangible assets were required to

F-10

---

be reclassified and accounted for as an asset apart from goodwill upon adoption of SFAS 142. No expense for amortization of goodwill has been recorded in 2002 compared to an after tax expense
of $244,000 and $252,000 recorded in 2001 and 2000, respectively. Net income for the twelve months ended December 31, 2001 and 2000, excluding the amortization of goodwill expense, would have
been $3,912,000 and $7,284,000, respectively, and both basic and diluted earnings per share for the twelve months ended December 31, 2002 and 2001 would have increased by $0.03 per share for
each year. Goodwill of $2,534,000 was recorded for the Navigators Agencies' segment at both December 31, 2002 and 2001, and $2,633,000 and $2,381,000 for the Lloyd's Operations' segment at
December 31, 2002 and 2001, respectively. Goodwill on the Company's consolidated balance sheets may fluctuate due to changes in the foreign currency rates between the U.S. dollar and the
British pound. The adoption of SFAS 141 had no impact on the Company's consolidated financial statements.

Stock-Based Compensation

SFAS 123,Accounting for Stock-Based Compensation,establishes financial accounting and reporting standards
for stock-based compensation plans. As permitted by SFAS 123, the Company continues to use the accounting method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees("APB 25"). Companies using APB 25 are required to make pro forma disclosures of net income and earnings per
share as if the fair value method of accounting, as defined in SFAS 123, had been applied, as indicated in the following table:

|                           |  |             |  | Year Ended December 31,
|-------------------------- |  | ----------- |  | -----------------------
|
|Net income (in thousands): |  | As reported |  | $                      
|                           |  | Pro forma   |  | $                      
|Basic income per share:    |  | As reported |  | $                      
|                           |  | Pro forma   |  | $                      
|Diluted income per share:  |  | As reported |  | $                      
|                           |  | Pro forma   |  | $                      

Federal Income Taxes

The Company files a consolidated Federal income tax return with its U.S. subsidiaries. The Company applies the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of

F-11

---

contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these
estimates.

Application of New Accounting Standards

SFAS 133,Accounting for Derivative Instruments and Hedging Activities,was issued in June 1998 and
establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value.
SFAS 133, as amended by SFAS 137,Deferral of the Effective Date of SFAS No.133,is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. SFAS 133 should not be applied retroactively to financial statements of prior periods. In June 2000, the FASB issued SFAS 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of SFAS 133,which amends certain accounting and
reporting standards of SFAS 133. The adoption of these statements at January 1, 2001 did not have any effect on the Company's results of operations or financial condition.

In
June 2001, the FASB issued SFAS 143,Accounting for Asset Retirement Obligations. SFAS 143 addresses financial
accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The provisions of SFAS 143 are
effective for financial statements issued for fiscal years beginning after September 15, 2002, with early application encouraged. The adoption of this statement is not expected to have a
material effect on the Company's results of operations or financial condition.

In
July 2002, the FASB issued SFAS 146,Obligations Associated with Disposal Activities. SFAS 146 addresses financial
accounting and reporting for costs associated with a disposal activity. This statement requires a liability for a disposal obligation be recognized and measured at its fair value when it is incurred
and that the guidance of SFAS 5,Accounting for Contingencies, and FASB Interpretation No. 14,Reasonable Estimation of
the Amount of Loss, do not apply to the recognition and measurement of the liability. The provisions of SFAS 146 are effective for disposal activities initiated after
December 31, 2002, with early application encouraged. The adoption of this statement is not expected to have a material effect on the Company's results of operations or financial condition.

In
November, 2002, the FASB issued Interpretation No. 45,Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others. This Interpretation
clarifies the requirements for a guarantor's accounting for the disclosures of certain guarantees issued and outstanding. The disclosure requirements in this Interpretation are effective for financial
statements of interim or annual periods ending after December 15, 2002. The adoption of this interpretation did not have any effect on the Company's results of operations or financial
condition.

In
December 2002, the FASB issued SFAS 148,Accounting for Stock-Based Compensation, Amendment of FASB Statement
No. 123. The provisions of this statement provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based
employee compensation. The provisions are effective for financial statements for fiscal years ending after December 15, 2002. We follow the disclosure provisions of SFAS 123, Accounting for Stock
Compensation, as amended by SFAS 148. These require pro forma net income and earnings per share information, which is calculated
assuming we had accounted for our stock option plans under the "fair value method" described in those statements.

F-12

---

In
January 2003, the FASB issued Interpretation No. 46,Consolidation of Variable Interest Entities.Interpretation 46
requires variable interest entities to be consolidated by their primary beneficiaries. The adoption of this interpretation will not have a material impact on the Company's financial condition or
results of operations.

Note 2. Investments

The Company's fixed maturities and equity securities at December 31, 2002 and 2001 were as follows:

|December 31, 2002               |                                                   | Amortized
Cost or Cost |        | Gross
Unrealized
Gains |         | Gross
Unrealized
(Losses) |       | Fair
Value
|------------------------------- | ------------------------------------------------- | ---------------------- | ------ | ---------------------- | ------- | ------------------------- | ----- | ----------
|
|Fixed maturities:               |                                                   |                        |        |                        |         |                           |       |           
|                                | U.S. Government Treasury Bonds and GNMAs          |                        | $      | 159,729                |         | $                         | 7,113 |           
|                                | States, municipalities and political subdivisions |                        |        | 47,709                 |         |                           | 2,463 |           
|                                | Mortgage and asset backed (excluding GNMAs)       |                        |        | 63,830                 |         |                           | 1,664 |           
|                                | Corporate bonds                                   |                        |        | 80,553                 |         |                           | 4,017 |           
|                                |                                                   |                        |        |                        |         |                           |       |           
|                                |                                                   | Total fixed maturities |        | $                      | 351,821 |                           | $     | 15,257    
|                                |                                                   |                        |        |                        |         |                           |       |           
|Equity securitiescommon stocks |                                                   | $                      | 12,286 |                        | $       | 245                       |       | $         
|                                |                                                   |                        |        |                        |         |                           |       |           

|December 31, 2001               |                                                   | Amortized
Cost or Cost |       | Gross
Unrealized
Gains |         | Gross
Unrealized
(Losses) |       | Fair
Value
|------------------------------- | ------------------------------------------------- | ---------------------- | ----- | ---------------------- | ------- | ------------------------- | ----- | ----------
|
|Fixed maturities:               |                                                   |                        |       |                        |         |                           |       |           
|                                | U.S. Government Treasury Bonds and GNMAs          |                        | $     | 96,626                 |         | $                         | 1,840 |           
|                                | States, municipalities and political subdivisions |                        |       | 44,538                 |         |                           | 1,372 |           
|                                | Mortgage and asset backed (excluding GNMAs)       |                        |       | 63,513                 |         |                           | 2,952 |           
|                                | Corporate bonds                                   |                        |       | 83,030                 |         |                           | 2,193 |           
|                                |                                                   |                        |       |                        |         |                           |       |           
|                                |                                                   | Total fixed maturities |       | $                      | 287,707 |                           | $     | 8,357     
|                                |                                                   |                        |       |                        |         |                           |       |           
|Equity securitiescommon stocks |                                                   | $                      | 7,225 |                        | $       | 715                       |       | $         
|                                |                                                   |                        |       |                        |         |                           |       |           

F-13

---

The
Company's fixed maturity securities by years of maturity were as follows:

|Period from
December 31, 2002
to Maturity   |       | Amortized
Cost |         | Fair
Value
|------------------------------------------- | ----- | -------------- | ------- | ----------
|
|One year or less                            |       | $              | 25,572  |           
|Over one year through five years            |       |                | 91,555  |           
|Over five years through ten years           |       |                | 53,249  |           
|More than ten years                         |       |                | 43,118  |           
|Mortgage and asset backed (including GNMAs) |       |                | 138,327 |           
|                                            |       |                |         |           
|                                            | Total |                | $       | 351,821   
|                                            |       |                |         |           

Due
to the periodic repayment of principal, the mortgage and asset backed securities are estimated to have an effective maturity of approximately six years. 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.

Net
investment income of the Company was derived from the following sources:

|                       |  | Year Ended December 31, |       
|---------------------- |  | ----------------------- | ------
|
|
|Fixed maturities       |  | $                       | 17,085
|Equity securities      |  |                         | 378   
|Short-term investments |  |                         | 1,333 
|                       |  |                         |       
|                       |  |                         | 18,796
|Investment expenses    |  |                         | (738  
|                       |  |                         |       
|Net investment income  |  | $                       | 18,058
|                       |  |                         |       

The
Company's realized capital gains and losses were as follows:

|                                         |          | Year Ended December 31, |      
|---------------------------------------- | -------- | ----------------------- | -----
|
|
|Fixed maturities:                        |          |                         |      
|                                         | Gains    |                         | $    
|                                         | (Losses) |                         |      
|                                         |          |                         |      
|                                         |          |                         | 386  
|                                         |          |                         |      
|Equity securities and other investments: |          |                         |      
|                                         | Gains    |                         |      
|                                         | (Losses) |                         |      
|                                         |          |                         |      
|                                         |          |                         | 1,282
|                                         |          |                         |      
|Net realized capital gains (losses)      |          | $                       | 1,668
|                                         |          |                         |      

F-14

---

The
2002 and 2001 realized fixed maturities losses include $2,905,000 and $1,618,000, respectively, of impairment losses recorded on certain of the Company's asset backed securities.

At
December 31, 2002 and 2001, fixed maturities with amortized values of $8,162,000 and $7,989,000, respectively, were on deposit with various State Insurance Departments. In
addition, at December 31, 2002 and 2001, investments of $165,000 and $161,000, respectively, were on deposit with the Bank of England for Navigators Insurance's UK Branch. Also, at
December 31, 2002 and 2001, $290,000 of investments were pledged as security under a reinsurance treaty.

At
December 31, 2002 the Company did not have a concentration of greater than 10% of invested assets in a single issuer.

Note 3. Notes Payable and Letters of Credit

The Company's bank credit facility provides a $14.5 million revolving line of credit at an interest rate of either, at the Company's election, the base
commercial lending rate of one of the banks or at LIBOR plus 1.25% on the used portion of the line of credit. The commitment fee on the unused portion of the line of credit is 0.25%. The line of
credit facility reduces each quarter by amounts totaling $5.5 million in 2003 and $9.0 million in 2004. At December 31, 2002 and 2001, $14.5 million and
$19.0 million in loans were outstanding, respectively, under the revolving line of credit facility at interest rates of 2.7% and 3.4%, respectively. The credit facility also provides for a
$55 million letter of credit facility which is utilized primarily by NCUL and Millennium to participate in Lloyd's Syndicate 1221. The cost of the letters of credit is 1.30% for the used
portion and 0.25% for the unused portion of the letter of credit facility. At December 31, 2002 and 2001, letters of credit with an aggregate face amount of $53.3 million and
$47.5 million, respectively, were issued under the letter of credit facility. No letters of credit were drawn down from the credit facility in 2002.

The
bank credit facility is collateralized by the common stock of Navigators Insurance. It contains covenants common to transactions of this type, including restrictions on indebtedness
and liens, limitations on mergers and the sale of assets, maintaining certain consolidated tangible net worth, statutory surplus, and other financial ratios. At December 31, 2002, the Company
complied with all covenants.

Other
income/(expense) for 2001 consisted primarily of a $3,800,000 charge related to the Company's former investment in Riverside equal to a letter of credit previously provided to
Riverside Corporate Underwriters, Ltd. ("RCUL"), a subsidiary of Riverside and a Lloyd's corporate name. Lloyd's informed the Company in 2001 that the Company's letter of credit
would be utilized to fund part of the adverse development in the Lloyd's syndicates in which RCUL provided capacity in 1998 and 1999. The entire letter of credit was drawn down in late 2001. The
Company believes that it has no further exposure to Riverside.

Note 4. Fiduciary Funds

The Navigators Agencies maintain fiduciary accounts for the insurance pools they manage. Functions performed by the Navigators Agencies include underwriting
business, collecting premiums from the insured, paying claims, collecting paid recoverables from reinsurers, paying reinsurance premiums to reinsurers and remitting net account balances to member
insurance companies. Funds

F-15

---

belonging to the insurance pools are held in a fiduciary capacity and are not included in the accompanying consolidated balance sheets.

The
fiduciary accounts as of December 31, 2002 and 2001 were as follows:

|                                          |                   | December 31, |        
|----------------------------------------- | ----------------- | ------------ | -------
|
|
|Cash and short-term investments           |                   | $            | 49,131 
|Premiums receivable                       |                   |              | 40,013 
|Reinsurance balances receivable (payable) |                   |              | (13,685
|                                          |                   |              |        
|                                          | Total assets      |              | $      
|                                          |                   |              |        
|Due to insurance companies                |                   | $            | 75,459 
|                                          |                   |              |        
|                                          | Total liabilities |              | $      
|                                          |                   |              |        

F-16

---

Note 5. Income Taxes

The components of current and deferred income tax expense (benefit) were as follows:

|                         |                     | Year Ended December 31,
|------------------------ | ------------------- | -----------------------
|
|
|Current:                 |                     |                        
|                         | Federal and foreign |                        
|                         | State and local     |                        
|                         |                     |                        
|                         |                     | Total                  
|                         |                     |                        
|Deferred:                |                     |                        
|                         | Federal and foreign |                        
|                         | State and local     |                        
|                         |                     |                        
|                         |                     | Total                  
|                         |                     |                        
|Total income tax expense |                     | $                      
|                         |                     |                        

A
reconciliation of total income taxes applicable to pre-tax operating income and the amounts computed by applying the Federal statutory income tax rate to the
pre-tax operating income was as follows:

|                                                    |                    | Year Ended December 31, |      
|--------------------------------------------------- | ------------------ | ----------------------- | -----
|
|
|Computed expected tax expense                       |                    | $                       | 7,775
|Tax-exempt interest                                 |                    |                         | (712 
|Dividends received deduction                        |                    |                         | (84  
|State and local income taxes, net of                |                    |                         |      
|                                                    | Federal income tax |                         |      
|State and local tax net operating loss carryforward |                    |                         | (655 
|Valuation allowance                                 |                    |                         | (612 
|Other                                               |                    |                         | (101 
|                                                    |                    |                         |      
|                                                    |                    | $                       | 5,819
|                                                    |                    |                         |      

F-17

---

The
tax effects of temporary differences that give rise to Federal, foreign, state and local deferred tax assets and deferred tax liabilities were as follows:

|                                |                                                    | December 31,                   |       
|------------------------------- | -------------------------------------------------- | ------------------------------ | ------
|
|
|Deferred tax assets:            |                                                    |                                |       
|                                | Loss reserve discount                              |                                | $     
|                                | Unearned premium                                   |                                |       
|                                | Alternative minimum tax carryforward               |                                |       
|                                | Foreign operations net operating loss carryforward |                                |       
|                                | State and local net operating loss carryforward    |                                |       
|                                | Other                                              |                                |       
|                                |                                                    |                                |       
|Total gross deferred tax assets |                                                    |                                | 23,403
|Less: Valuation allowance       |                                                    |                                | (6,676
|                                |                                                    |                                |       
|                                |                                                    | Total deferred tax assets      |       
|                                |                                                    |                                |       
|Deferred tax liabilities:       |                                                    |                                |       
|                                | Deferred acquisition costs                         |                                |       
|                                | Contingent commission receivable                   |                                |       
|                                | Net unrealized gains on securities                 |                                |       
|                                | Net deferred state and local income tax            |                                |       
|                                |                                                    |                                |       
|                                |                                                    | Total deferred tax liabilities |       
|                                |                                                    |                                |       
|                                |                                                    | Net deferred tax asset         |       
|                                |                                                    |                                |       

In
assessing the realization of deferred tax assets, management considers whether it is more likely than not that the deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, tax planning strategies and anticipated future taxable income in making this assessment and believes it is more likely than not the Company will realize the benefits of its
deductible differences at December 31, 2002, net of any valuation allowance.

Valuation
allowances of $4,529,000 and $5,796,000 for the years ended December 31, 2002 and 2001, respectively, were established due to the uncertainty associated with the
realization of the deferred tax asset for the carryforward of operating losses from the Company's foreign operations. Even though the Company's foreign operations were profitable in 2002, the
valuation allowance was released only to the extent of the 2002 profits since future profitability remains uncertain. The Company's foreign gross loss carryforward of approximately
$15.1 million at December 31, 2002 can be carried forward indefinitely against future foreign income.

The
Company also had net state and local operating loss carryforwards amounting to potential future tax benefits of $2,147,000 and $1,492,000 at December 31, 2002 and 2001,
respectively. A valuation allowance was established for the amount of the tax benefit due to the uncertainty associated with the realization of the deferred tax asset. The Company's state and local
gross carryforwards of approximately $11.9 million at December 31, 2002 expire from 2019 to 2021.

F-18

---

Note 6. Reserves for Losses and Loss Adjustment Expenses

The following table summarizes the activity in the Company's reserve for losses and loss adjustment expenses ("LAE") during the three most recent years:

|                                                                                    |              | Year Ended December 31, |        
|----------------------------------------------------------------------------------- | ------------ | ----------------------- | -------
|
|
|Net reserves for losses and LAE at beginning of year                                |              | $                       | 202,759
|                                                                                    |              |                         |        
|Provision for losses and LAE for claims occurring in the current year               |              |                         | 134,721
|Lloyd's portfolio transferreinsurance to close                                     |              |                         | 1,641  
|Increase (decrease) in estimated losses and LAE for claims occurring in prior years |              |                         | 7,038  
|                                                                                    |              |                         |        
|Incurred losses and LAE                                                             |              |                         | 143,400
|                                                                                    |              |                         |        
|Losses and LAE payments for claims occurring during:                                |              |                         |        
|                                                                                    | Current year |                         |        
|                                                                                    | Prior years  |                         |        
|                                                                                    |              |                         |        
|Losses and LAE payments                                                             |              |                         | (81,512
|                                                                                    |              |                         |        
|Net reserves for losses and LAE at end of year                                      |              |                         | 264,647
|                                                                                    |              |                         |        
|Reinsurance receivable on unpaid losses and LAE                                     |              |                         | 224,995
|                                                                                    |              |                         |        
|Gross reserves for losses and LAE at end of year                                    |              | $                       | 489,642
|                                                                                    |              |                         |        

The
deficiency for the year end December 31, 2002 resulted from adverse development from our general liability line of business. The deficiency for the year ended
December 31, 2001 resulted from the Company's Lloyd's Operations due to an increase in premium estimates and related reserves for prior years and strengthening the Lloyd's reserves related to
the 1999 underwriting year.

Lloyd's
Syndicate 1221 had stamp capacity of £75.0 million ($112.7 million) in 2002, £66.3 million ($95.5 million) in 2001 and
£66.3 million ($96.0 million) in 2000. Syndicate 1221's capacity is expressed net of commission (as is standard at Lloyd's) of approximately 21%. Syndicate 1221 entered into
a qualifying quota share agreement with a major reinsurer which increased the gross premium that could be written by Syndicate 1221 for the 2002 underwriting year from its stamp capacity of
£75.0 million to a total of £86.6 million ($130.2 million). A qualifying quota share is a reinsurance contract which provides additional capacity to
Lloyd's syndicates in order that they may write premiums up to 30% in excess of their stamp capacity. Only high quality reinsurers approved by Lloyd's can enter into a qualifying quota share
transaction with a Lloyd's syndicate. The Syndicate 1221 premium recorded in the Company's financial statements is gross of commission. The Company participates for 68.1%, 67.4% and 64.5% of Syndicate
1221's capacity for the 2002, 2001 and 2000 underwriting years, respectively. The Lloyd's Operations included in the consolidated financial statements represent the Company's participation in
Syndicate 1221.

Lloyd's
syndicates report the amounts of premiums, claims, and expenses recorded in an underwriting account for a particular year to companies or individuals that participate in the
syndicates. The syndicates generally keep accounts open for three years. Traditionally, three years have been necessary to report substantially all premiums associated with an underwriting year and to
report most related claims, although claims may remain unsettled after the account is closed. A Lloyd's syndicate typically closes an underwriting account with the participants for the next
underwriting year. The ceding participants pay the assuming participants an amount based on the unearned premiums and outstanding claims in the underwriting account at the date of the assumption. Our
participation in Lloyd's Syndicate

F-19

---

1221 is represented by and recorded as our proportionate share of the underlying assets and liabilities and results of operations of the syndicate since, (a) we hold an undivided interest in
each asset, (b) we are proportionately liable for each liability and (c) Syndicate 1221 is not a separate legal entity. At Lloyd's, the amount to close an underwriting year into the next
year is referred to as the "reinsurance to close." The reinsurance to close amounts represent the transfer of the assets and liabilities from the participants of a closing underwriting year to the
participants of the next underwriting year. To the extent our participation in the syndicate changes as a result of this transfer, the reinsurance to close amounts vary accordingly. In our case, our
participation increased from 52.5% in 1999 to 64.5% in 2000, to 67.4% in 2001, and to 68.1% in 2002. We therefore recorded our increasing proportionate share of the assets and liabilities of Syndicate
1221. At December 31, 2002, 2001 and 2000, the Company closed its 2000, 1999 and 1998 underwriting years, respectively, the net effect of which resulted in such transfers to NCUL and Millennium of
$1.6 million, $4.2 million and $7.9 million, respectively. These transactions accounted for part of the increases in the premium volume in the Lloyd's Operations. The reinsurance to close transactions
were recorded as additional written and earned premium, losses incurred, loss reserves and receivables, all in the same amount. There were no gains or losses recorded on the transactions. The Company
also purchased an additional £7,379,000
($11,018,000) of capacity for 2001 through an annual auction process in 2000 at a total cost of £133,000 ($199,000).

The
Company provides letters of credit to Lloyd's to support its Syndicate 1221 capacity. If the Company increases its participation or if Lloyd's changes the capital requirements, the
Company may be required to supply additional letters of credit or other collateral acceptable to Lloyd's, or reduce the capacity of Syndicate 1221. The letters of credit are provided through the
credit facility which the Company maintains with a consortium of banks. The credit facility agreement requires that the banks vote whether or not to renew the letter of credit portion of the facility
each year. If the banks decide not to renew the letter of credit facility, the Company will need to find other sources to provide the letters of credit or other collateral in order to continue to
participate in Syndicate 1221.

During
2002, 2001 and 2000, the Company recorded net paid losses and LAE of $262,000, $86,000 and $173,000, respectively, for environmental pollution and asbestos related claims. As of
December 31, 2002 and 2001, the Insurance Companies carried net reserves of $1,513,000 and $1,185,000, respectively, for the potential exposure to such claims. At December 31, 2002,
there were 477 open claims on 304 policies with environmental pollution or asbestos exposures. Management believes that its reserves for such claims are adequate because the Insurance Companies'
participation in such risks was generally in the higher excess layers and, based on a continuing review of such claims, management believes that a majority of these claims will be unlikely to
penetrate such high excess layers of coverage; however, due to the significant assumptions inherent in estimating these exposures, actual liabilities could differ from current estimates.

F-20

---

Note 7. Reinsurance

The following table summarizes earned premium:

|        |  | Year Ended December 31, |         
|------- |  | ----------------------- | --------
|
|
|Direct  |  | $                       | 293,333 
|Assumed |  |                         | 91,929  
|Ceded   |  |                         | (158,968
|        |  |                         |         
|Net     |  | $                       | 226,294 
|        |  |                         |         

The
following table summarizes written premium:

|        |  | Year Ended December 31, |         
|------- |  | ----------------------- | --------
|
|
|Direct  |  | $                       | 321,197 
|Assumed |  |                         | 126,641 
|Ceded   |  |                         | (177,059
|        |  |                         |         
|Net     |  | $                       | 270,779 
|        |  |                         |         

The
2002, 2001 and 2000 assumed written and earned premium includes $1.6 million, $4.2 million, and $7.9 million, respectively, of reinsurance to close from the
Lloyd's Operations.

Ceded
losses and loss adjustment expenses incurred were $71,793,000, $124,164,000, and $60,602,000 in 2002, 2001, and 2000, respectively.

A
contingent liability exists with respect to reinsurance ceded, since the Company would be required to pay losses in the event the assuming reinsurers are unable to meet their
obligations under their reinsurance agreements.

The
Company's Reinsurance Security Committee monitors the financial strength of its reinsurers and the related reinsurance receivables. An allowance is established for amounts determined
to be uncollectible. At December 31, 2002 and 2001, there was an allowance for uncollectible reinsurance of $8,534,000 and $6,905,000, respectively. The expense recorded for uncollectible
reinsurance was $1,632,000, $320,000 and $1,250,000 for 2002, 2001 and 2000, respectively.

F-21

---

Note 8. Financial Instruments

The following table presents the carrying amounts and estimated fair values of the Company's financial instruments:

|                       |                        | December 31, 2002 |   | December 31, 2001
|---------------------- | ---------------------- | ----------------- | - | -----------------
|
|
|Financial assets:      |                        |                   |   |                  
|                       | Fixed maturities       |                   | $ | 366,676          
|                       | Equity securities      |                   |   | 11,674           
|                       | Short-term investments |                   |   | 61,092           
|Financial liabilities: |                        |                   |   |                  
|                       | Notes payable to banks |                   | $ | 14,500           

The
carrying amounts shown in the table are included in the consolidated balance sheets under the indicated captions.

The
fair values of fixed maturity and equity securities are based on market prices at the reporting date for those or similar investments. Short-term investments are carried
at cost, which approximates fair value. The carrying amounts of premium receivables approximate fair value because of the short maturity of those instruments.

The
fair value of the Company's notes payable to banks approximates carrying value since the interest rate charged is computed using current market rates.

Note 9. Stock Option Plans, Stock Grants and Stock Appreciation Rights

The Company has an Incentive Stock Option Plan and a Non-Qualified Stock Option Plan which allow for the award to key employees of the Company, its
subsidiaries and affiliates, options to purchase an aggregate of 900,000 shares of its common stock. At the 2002 Annual Meeting, the stockholders approved the 2002 Stock Incentive Plan which allows
for the award of incentive stock options, non-incentive stock options and stock grants to employees, directors and consultants. The 2002 Stock Incentive Plan allows, in the aggregate,
awards for 1,000,000 shares of the Company's common stock, of which 100,000 of the shares can be in the form of stock grants. Upon the approval of the 2002 Stock Incentive Plan, no further awards are
to be issued from the Incentive Stock Option Plan or the Non-Qualified Stock Option Plan.

All
options are exercisable upon vesting for one share of the Company's common stock and are granted at exercise prices no less than 90% of the fair market value of the common stock on
the date of the grant. The difference between the fair market value of the common stock on the grant date and the exercise price of the options is expensed as the options vest. The amount of the
expense was $59,000 in 2002. Although no amounts were expensed in 2001 or 2000, had expense been recorded as described above, the amounts would have been approximately $10,000 for each year.

Stock
grants are expensed as they vest. The amount charged to expense was $761,000 and $382,000 in 2002 and 2001, respectively. No stock grants were issued prior to 2001. The above does
not include $12,000 of the Company's common stock issued each year to each non-employee director as 50% of the director's compensation for serving on the Company's Board of Directors. The
stock is issued in the first quarter of the year following the year of service and is fully vested when issued. The expense for 2002, 2001 and 2000 for the stock issued to directors was $60,000,
$72,000 and $72,000, respectively.

F-22

---

Options
and grants generally vest equally over a four year period and the options have a maximum term of ten years.

Stock
options outstanding at December 31, 2002, 2001 and 2000 were as follows:

|                                         |                      | 2002    |         | 2001 |       | 2000 
|---------------------------------------- | -------------------- | ------- | ------- | ---- | ----- | -----
|
|Options outstanding at beginning of year |                      | 520,712 |         | $    | 14.44 |      
|                                         | Granted              |         | 97,438  |      | $     | 17.65
|                                         | Exercised            |         | (39,525 | )    | $     | 11.92
|                                         | Expired or forfeited |         | (59,125 | )    | $     | 18.56
|                                         |                      |         |         |      |       |      
|Options outstanding at end of year       |                      | 519,500 |         | $    | 14.76 |      
|                                         |                      |         |         |      |       |      
|Number of options exercisable            |                      | 332,660 |         | $    | 14.77 |      

The
Company has a Stock Appreciation Rights Plan which allows for the grant of up to 300,000 stock appreciation rights at prices of no less than 90% of the fair market value of the
common stock. The Company granted 17,500, 56,000 and 116,000 stock appreciation rights in 2002, 2001 and 2000, respectively. The amounts charged to expense in 2002, 2001 and 2000 were $869,000,
$733,000 and $32,000, respectively.

The
Company accounts for stock options in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued
to Employees, which requires compensation expense to be recognized only if the fair value of the underlying stock at the grant date exceeds the exercise price of the option.
Accordingly, compensation expense of $59,000 has been recognized for stock options in 2002. Had compensation cost for the Company's stock options been determined consistent with SFAS 123, Accounting for Stock Based
Compensation, the Company's net income and income per share would have been reduced to the pro forma amounts indicated in the
following table:

|                           |  |             |  | Year Ended December 31,
|-------------------------- |  | ----------- |  | -----------------------
|
|Net income (in thousands): |  | As reported |  | $                      
|                           |  | Pro forma   |  | $                      
|Basic income per share:    |  | As reported |  | $                      
|                           |  | Pro forma   |  | $                      
|Diluted income per share:  |  | As reported |  | $                      
|                           |  | Pro forma   |  | $                      

The
fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for the options granted: no
dividend yield; expected volatility of 34.6%, 33.4% and 33.9% in 2002, 2001 and 2000, respectively; risk free interest rate of 3.5%, 4.6%, and 6.0% for 2002, 2001 and 2000, respectively; and expected
life of 6 years for 2002, 2001 and 2000. The weighted average fair value of options granted was $7.00, $7.13 and $4.75 in 2002, 2001 and 2000, respectively.

F-23

---

The
following table summarizes information about options outstanding at December 31, 2002:

|Price Range |  | Outstanding
Options |  | Average Remaining
Contract Life |  | Average
Exercise Price |       | Exercisable
Options |         | Average
Exercise Price
|----------- |  | ------------------- |  | ------------------------------- |  | ---------------------- | ----- | ------------------- | ------- | ----------------------
|$10 to $15  |  | 317,000             |  | 6.6                             |  | $                      | 11.94 |                     | 243,641 |                       
|$16 to $20  |  | 168,000             |  | 7.6                             |  | $                      | 16.96 |                     | 64,769  |                       
|$21 to $34  |  | 34,500              |  | 3.9                             |  | $                      | 30.00 |                     | 24,250  |                       

Note 10. Employee Benefits

The Company sponsors a defined contribution plan covering substantially all its U.S. employees. Contributions are equal to 15% of each eligible employee's gross
pay (plus bonus of up to $2,500) up to the amount permitted by certain Federal regulations. Employees vest at 20% per year beginning at the end of the second year and are therefore fully vested after
six years of service. Plan expense, included within operating expenses, amounted to $1,052,000, $890,000 and $708,000 in 2002, 2001 and 2000, respectively. The Company sponsors a similar plan under UK
regulations for its UK employees for which the Company had expenses of $533,000, $446,000 and $420,000 for 2002, 2001 and 2000, respectively.

The
Company has a 401(k) Plan for all eligible employees. Each eligible employee can contribute up to 8% of their salary limited by certain Federal regulations. The Company does not
match any of the employee contributions.

Note 11. Dividends from Subsidiaries and Statutory Financial Information

Navigators Insurance may pay dividends to the Company out of its statutory earned surplus pursuant to statutory restrictions imposed under the New York insurance
law. At December 31, 2002, the maximum amount available for the payment of dividends by Navigators Insurance during 2003 without prior regulatory approval was $12,854,000. Navigators Insurance
paid $6,500,000 and $11,000,000 in dividends to the Company in 2002 and 2001, respectively. The UK Branch is required to maintain certain capital requirements under UK regulations.

F-24

---

The Insurance Companies' statutory net income as filed with the regulatory authorities for 2002, 2001 and 2000 was $9,499,000, $11,219,000 and $13,834,000, respectively. The statutory
surplus as filed with the regulatory authorities was $128,543,000 and $115,126,000 at December 31, 2002 and 2001, respectively.

The
Insurance Companies, domiciled in New York State, prepare and file their statutory financial statements in accordance with accounting practices prescribed or permitted by the State
of New York Insurance Department (the "Department"). The National Association of Insurance Commissioners ("NAIC") completed a project which codifies statutory accounting practices for insurance
enterprises. As a result of this process, the NAIC issued a revised statutoryAccounting Practices and Procedures Manualthat was effective
January 1, 2001. The Company prepared its statutory basis financial statements in accordance with the revised statutory manual subject to the deviations that were prescribed or permitted by the
Department. Beginning in 2002, the Department permitted certain deferred income taxes to be included in surplus of the statutory basis financial statements. This resulted in increasing the surplus of
Navigators Insurance by $7.8 million.

The
significant differences between SAP and GAAP are that under SAP: (1) acquisition and commission costs are expensed when incurred while under GAAP these costs are deferred and
amortized as the related premium is earned; (2) bonds are stated at amortized cost, while under GAAP bonds are held in an available-for-sale account and reported at fair
value, with unrealized gains and losses recognized in other comprehensive income as a separate component of stockholders' equity; (3) federal income taxes are recorded when payable except that
certain deferred tax assets are permitted to be included in surplus while under GAAP deferred taxes are provided to reflect temporary differences between the carrying values and tax basis of assets
and liabilities; (4) unearned premiums and loss reserves are reflected net of ceded amounts while under GAAP the unearned premiums and loss reserves are reflected gross of ceded amounts;
(5) agents' balances over ninety days due are excluded from the balance sheet, and uncollateralized amounts due from unauthorized reinsurers are deducted from surplus, while under GAAP they are
restored to the balance sheet, subject to the usual tests regarding recoverability.

As
part of its general regulatory oversight process, the Department conducts detailed examinations of the books, records and accounts of New York insurance companies every three to five
years. The Insurance Companies have been examined by the Department for the years 1996 through 2000. The audit work has been completed but a report has not yet been issued. No adjustments are expected
to the previously filed statutory financial statements.

Note 12. Commitments and Contingencies

|Year Ended December 31, |  | (In thousands)
|----------------------- |  | --------------
|2003                    |  | $             
|2004                    |  |               
|2005                    |  |               
|2006                    |  |               
|2007 and subsequent     |  |               
|                        |  |               
|Total                   |  | $             
|                        |  |               

F-25

---



Note 13. Segment Information

The Company's subsidiaries are primarily engaged in the writing and management of property and casualty insurance. The Company's segments include the Insurance
Companies, the Navigators Agencies and the Lloyd's Operations, each of which is managed separately. The Insurance Companies consist of Navigators Insurance and NIC and currently are primarily engaged
in underwriting marine insurance and related lines of business, contractors' general liability insurance, and professional liability insurance. The Navigators Agencies are underwriting management
companies which produce, manage and underwrite insurance and reinsurance for both affiliated and unaffiliated companies. The Lloyd's Operations underwrite marine and related lines of business at
Lloyd's of London. All segments are evaluated based on their GAAP underwriting or operating results which are prepared using the accounting policies described in the summary of significant accounting
policies inNote 1.

The
Insurance Companies and the Lloyd's Operations are measured taking into account net premiums earned, incurred losses and loss expenses, commission expense and other underwriting
expenses. The Navigators Agencies' results include commission income less other operating expenses. Each segment also maintains their own investments, on which they earn income and realize capital
gains or losses. Other operations include intersegment income and expense in the form of affiliated commissions, income and expense from corporate operations and consolidating adjustments.

F-26

---

Financial
data by segment for 2002, 2001 and 2000 was as follows:

|                                                                                  |                      | Year Ended December 31,      |                          
|--------------------------------------------------------------------------------- | -------------------- | ---------------------------- | -------------------------
|
|
|Revenue, excluding net investment income and net realized capital gains (losses): |                      |                              |                          
|                                                                                  | Insurance Companies: |                              |                          
|                                                                                  |                      | Marine                       |                          
|                                                                                  |                      | General Liability            |                          
|                                                                                  |                      | Professional Liability       |                          
|                                                                                  |                      | Surety                       |                          
|                                                                                  |                      | Onshore Energy               |                          
|                                                                                  |                      | Other                        |                          
|                                                                                  |                      |                              |                          
|                                                                                  |                      |                              | Insurance Companies Total
|                                                                                  |                      |                              |                          
|                                                                                  | Lloyd's Operations:  |                              |                          
|                                                                                  |                      | Marine                       |                          
|                                                                                  |                      | Engineering and Construction |                          
|                                                                                  |                      | Onshore Energy               |                          
|                                                                                  |                      | Other                        |                          
|                                                                                  |                      |                              |                          
|                                                                                  |                      |                              | Lloyd's Operations Total 
|                                                                                  |                      |                              |                          
|                                                                                  | Navigators Agencies  |                              |                          
|                                                                                  | Other operations     |                              |                          
|                                                                                  |                      |                              |                          
|                                                                                  |                      | Total                        |                          
|                                                                                  |                      |                              |                          
|Net investment income:                                                            |                      |                              |                          
|                                                                                  | Insurance Companies  |                              | $                        
|                                                                                  | Lloyd's Operations   |                              |                          
|                                                                                  | Navigators Agencies  |                              |                          
|                                                                                  | Other operations     |                              |                          
|                                                                                  |                      |                              |                          
|Total                                                                             |                      | $                            | 18,058                   
|                                                                                  |                      |                              |                          
|Net realized capital gains:                                                       |                      |                              |                          
|                                                                                  | Insurance Companies  |                              | $                        
|                                                                                  | Lloyd's Operations   |                              |                          
|                                                                                  | Navigators Agencies  |                              |                          
|                                                                                  | Other operations     |                              |                          
|                                                                                  |                      |                              |                          
|                                                                                  |                      | Total                        |                          
|                                                                                  |                      |                              |                          
|Income (loss) before tax expense (benefit):                                       |                      |                              |                          
|                                                                                  | Insurance Companies  |                              | $                        
|                                                                                  | Lloyd's Operations   |                              |                          
|                                                                                  | Navigators Agencies  |                              |                          
|                                                                                  | Other operations     |                              |                          
|                                                                                  |                      |                              |                          
|                                                                                  |                      | Total                        |                          
|                                                                                  |                      |                              |                          

F-27

---

|Income tax expense (benefit): |                     |       |   |         |         |   |         |         |   |        
|----------------------------- | ------------------- | ----- | - | ------- | ------- | - | ------- | ------- | - | -------
|                              | Insurance Companies |       | $ | 6,780   |         | $ | 6,181   |         | $ | 5,241  
|                              | Lloyd's Operations  |       |   |        |         |   |        |         |   |       
|                              | Navigators Agencies |       |   | 780     |         |   | (1,373  | )       |   | (484   
|                              | Other operations    |       |   | (1,741  | )       |   | (3,116  | )       |   | (1,451 
|                              |                     |       |   |         |         |   |        
|                              |                     | Total |   | $       | 5,819   |   | $       | 1,692   |   | $      
|                              |                     |       |   |         |         |   |        
|Net income (loss):            |                     |       |   |         |         |   |         |         |   |        
|                              | Insurance Companies |       | $ | 14,864  |         | $ | 13,888  |         | $ | 13,649 
|                              | Lloyd's Operations  |       |   | 2,671   |         |   | (6,134  | )       |   | (2,296 
|                              | Navigators Agencies |       |   | 1,601   |         |   | 922     |         |   | (1,463 
|                              | Other operations    |       |   | (2,739  | )       |   | (5,008  | )       |   | (2,858 
|                              |                     |       |   |         |         |   |        
|                              |                     | Total |   | $       | 16,397  |   | $       | 3,668   |   | $      
|                              |                     |       |   |         |         |   |        
|Identifiable assets:          |                     |       |   |         |         |   |         |         |   |        
|                              | Insurance Companies |       | $ | 686,502 |         | $ | 544,661 |         | $ | 506,863
|                              | Lloyd's Operations  |       |   | 219,341 |         |   | 149,841 |         |   | 96,668 
|                              | Navigators Agencies |       |   | 17,817  |         |   | 12,497  |         |   | 11,343 
|                              | Other operations    |       |   | (5,741  | )       |   | 5,758   |         |   | 1,142  
|                              |                     |       |   |         |         |   |        
|                              |                     | Total |   | $       | 917,919 |   | $       | 712,757 |   | $      
|                              |                     |       |   |         |         |   |        

F-28

---

Note 14. Earnings Per Common Share

Following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share ("EPS") computations for the periods indicated:

|                               |                                         | Year Ended December 31, 2002
|------------------------------ | --------------------------------------- | ----------------------------
|
|Basic EPS:                     |                                         |                             
|                               | Income available to common stockholders |                             
|Effect of Dilutive Securities: |                                         |                             
|                               | Stock options and grants                |                             
|Diluted EPS:                   |                                         |                             
|                               | Income available to common stockholders |                             

|                               |                                         | Year Ended December 31, 2001
|------------------------------ | --------------------------------------- | ----------------------------
|
|Basic EPS:                     |                                         |                             
|                               | Income available to common stockholders |                             
|Effect of Dilutive Securities: |                                         |                             
|                               | Stock options and grants                |                             
|Diluted EPS:                   |                                         |                             
|                               | Income available to common stockholders |                             

|                               |                                         | Year Ended December 31, 2000
|------------------------------ | --------------------------------------- | ----------------------------
|
|Basic EPS:                     |                                         |                             
|                               | Income available to common stockholders |                             
|Effect of Dilutive Securities: |                                         |                             
|                               | Stock options                           |                             
|Diluted EPS:                   |                                         |                             
|                               | Income available to common stockholders |                             

Certain
outstanding options to purchase common shares were not included in the respective computations of diluted earnings per common share because the options' exercise prices were
greater than the average market price of the common shares. For each of the years presented, these outstanding options consisted of the following: for 2002, 22,500 shares at an average price of $34.00
expiring in 2004; for 2001, 105,500 shares at an average price of $23.25 expiring in years 2002 to 2011; for 2000, 510,900 shares at an average price of $14.59 expiring in years 2001 to 2010.

F-29

---

Note 15. Quarterly Financial Data (Unaudited)

The results of operations for the quarterly periods during 2002 and 2001 were as follows:

|                             |  | Three Month Period Ended
|---------------------------- |  | ------------------------
|
|
|Total revenues               |  | $                       
|Income before income tax     |  |                         
|Net income                   |  |                         
|Comprehensive income         |  |                         
|Per share data:              |  |                         
|Net income per shareBasic   |  | $                       
|Net income per shareDiluted |  | $                       

|                                    |  | Three Month Period Ended |       
|----------------------------------- |  | ------------------------ | ------
|
|
|Total revenues                      |  | $                        | 35,747
|Income (loss) before income tax     |  | $                        | 3,300 
|Net income (loss)                   |  | $                        | 2,051 
|Comprehensive income (loss)         |  | $                        | 2,200 
|Per share data:                     |  |                          |       
|Net income (loss) per shareBasic   |  | $                        | 0.24  
|Net income (loss) per shareDiluted |  | $                        | 0.24  
|                                    |  |                          |       

The
increase in 2002 revenues as compared to 2001 was primarily due to increased rates and new business in 2002. The 2002 quarterly net income was adversely impacted by the impairment
losses of $1.4 million and $0.5 million in the second and third quarters on one asset backed security, respectively, and approximately $0.4 million resulting from the oil tanker
Prestige sinking in the fourth quarter, and approximately $1.1 million from the Tricolor automobile carrier ship also sinking in the fourth quarter.
The 2001 quarterly net income was adversely affected by the $4.5 million of losses related to the attacks on the World Trade Center in the third quarter; the $0.8 million second quarter
and $1.7 million third quarter Riverside losses; the impairment losses on two asset backed securities of $0.3 million in the second quarter, $0.2 million in the third quarter and
$0.6 million in the fourth quarter; and the Petrobras offshore energy platform loss of $1.8 million in the first quarter.

F-30

---



SCHEDULE I

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES  SUMMARY OF CONSOLIDATED INVESTMENTSOTHER THAN INVESTMENTS  IN RELATED PARTIES  December 31, 2002  (In thousands)

|Type of Investment     |                | Amortized
Cost or Cost                            |                        | Fair value |         | Amount at which
shown in the
consolidated
balance sheet
|---------------------- | -------------- | ------------------------------------------------- | ---------------------- | ---------- | ------- | -------------------------------------------------------
|Fixed maturities:      |                |                                                   |                        |            |         |                                                        
|                       | Bonds:         |                                                   |                        |            |         |                                                        
|                       |                | United States Government Treasury Bonds and GNMAs |                        | $          | 159,729 |                                                        
|                       |                | States, municipalities and political subdivisions |                        |            | 47,709  |                                                        
|                       |                | Mortgage and asset backed (excluding GNMAs)       |                        |            | 63,830  |                                                        
|                       |                | Corporate bonds                                   |                        |            | 80,553  |                                                        
|                       |                |                                                   |                        |            |         |                                                        
|                       |                |                                                   | Total fixed maturities |            | $       | 351,821                                                
|                       |                |                                                   |                        |            |         |                                                        
|Equity securities:     |                |                                                   |                        |            |         |                                                        
|                       | Common stocks: |                                                   |                        |            |         |                                                        
|                       |                | Industrial, miscellaneous and all other           |                        |            | 12,286  |                                                        
|Short-term investments |                |                                                   | 61,092                 |            |         | 61,092                                                 
|                       |                |                                                   |                        |            |         |                                                        
|                       |                |                                                   | Total investments      |            | $       | 425,199                                                
|                       |                |                                                   |                        |            |         |                                                        

S-1

---



SCHEDULE II

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES    CONDENSED FINANCIAL INFORMATION OF REGISTRANT  THE NAVIGATORS GROUP, INC.    BALANCE SHEETS  (Parent Company)(In thousands, except share data)

|                                                                                                                                                                                  |                                            | December 31, |        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------ | -------
|
|A S S E T S                                                                                                                                                                       |                                            |              |        
|Cash                                                                                                                                                                              |                                            | $            | 123    
|Investment in wholly owned subsidiaries, at equity                                                                                                                                |                                            |              | 164,622
|Short-term investments                                                                                                                                                            |                                            |              | 293    
|Other assets                                                                                                                                                                      |                                            |              | 22,972 
|                                                                                                                                                                                  |                                            |              |        
|                                                                                                                                                                                  | Total assets                               |              | $      
|                                                                                                                                                                                  |                                            |              |        
|L I A B I L I T I E S                                                                                                                                                             |                                            |              |        
|Notes payable to banks                                                                                                                                                            |                                            | $            | 14,500 
|Accounts payable and other liabilities                                                                                                                                            |                                            |              | 2,235  
|                                                                                                                                                                                  |                                            |              |        
|                                                                                                                                                                                  | Total liabilities                          |              |        
|                                                                                                                                                                                  |                                            |              |        
|S T O C K H O L D E R S'  E Q U I T Y                                                                                                                                             |                                            |              |        
|Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued                                                                                                         |                                            |              |       
|Common stock, $.10 par value, authorized 20,000,000 shares in 2002 and 10,000,000 in 2001; issued and outstanding (net of treasury stock) 8,486,272 in 2002 and 8,427,262 in 2001 |                                            |              | 851    
|Additional paid-in capital                                                                                                                                                        |                                            |              | 40,141 
|Retained earnings                                                                                                                                                                 |                                            |              | 120,787
|Treasury stock held at cost (shares: 16,423 in 2002 and 35,908 in 2001)                                                                                                           |                                            |              | (236   
|Accumulated other comprehensive income:                                                                                                                                           |                                            |              |        
|Net unrealized gains on securities available-for-sale, net of tax                                                                                                                 |                                            |              | 9,499  
|Foreign currency translation adjustment, net of tax                                                                                                                               |                                            |              | 233    
|                                                                                                                                                                                  |                                            |              |        
|                                                                                                                                                                                  | Total stockholders' equity                 |              |        
|                                                                                                                                                                                  |                                            |              |        
|                                                                                                                                                                                  | Total liabilities and stockholders' equity |              | $      
|                                                                                                                                                                                  |                                            |              |        

S-2

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THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES    CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)  THE NAVIGATORS GROUP, INC.    STATEMENTS OF INCOME  (Parent Company)(In thousands)

|                                                                              |  | Year Ended December 31, |       
|----------------------------------------------------------------------------- |  | ----------------------- | ------
|
|Net investment income                                                         |  | $                       | 20    
|Dividends received from wholly owned subsidiaries                             |  |                         | 7,500 
|Other (expense)                                                               |  |                         | (2,787
|Operating expenses and income taxes                                           |  |                         | 28    
|                                                                              |  |                         |       
|Income before equity in undistributed net income of wholly owned subsidiaries |  |                         | 4,761 
|Equity in undistributed net gain (loss) of wholly owned subsidiaries          |  |                         | 11,636
|                                                                              |  |                         |       
|Net Income                                                                    |  | $                       | 16,397
|                                                                              |  |                         |       

S-3

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THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES    CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)  THE NAVIGATORS GROUP, INC.    STATEMENTS OF CASH FLOWS  (Parent Company)(In thousands)

|                            |                                                                         | Year Ended December 31,                                         |                                          
|--------------------------- | ----------------------------------------------------------------------- | --------------------------------------------------------------- | -----------------------------------------
|
|Operating activities:       |                                                                         |                                                                 |                                          
|                            | Net income                                                              |                                                                 | $                                        
|                            | Adjustments to reconcile net income to net cash provided by operations: |                                                                 |                                          
|                            |                                                                         | Equity in undistributed net income of wholly owned subsidiaries |                                          
|                            |                                                                         | Other                                                           |                                          
|                            |                                                                         |                                                                 |                                          
|                            |                                                                         |                                                                 | Net cash provided by operating activities
|                            |                                                                         |                                                                 |                                          
|Investing activities:       |                                                                         |                                                                 |                                          
|                            | Investment in affiliate                                                 |                                                                 |                                          
|                            | Net (increase) decrease in short-term investments                       |                                                                 |                                          
|                            |                                                                         |                                                                 |                                          
|                            |                                                                         |                                                                 | Net cash (used in) investing activities  
|                            |                                                                         |                                                                 |                                          
|Financing activities:       |                                                                         |                                                                 |                                          
|                            | Proceeds from bank loan                                                 |                                                                 |                                          
|                            | Repayment of bank loan                                                  |                                                                 |                                          
|                            | Proceeds from exercise of stock options                                 |                                                                 |                                          
|                            |                                                                         |                                                                 |                                          
|                            |                                                                         |                                                                 | Net cash (used in) financing activities  
|                            |                                                                         |                                                                 |                                          
|Increase (decrease) in cash |                                                                         |                                                                 | (29                                      
|Cash Beginning of Year      |                                                                         |                                                                 | 152                                      
|                            |                                                                         |                                                                 |                                          
|Cash End of Year            |                                                                         | $                                                               | 123                                      
|                            |                                                                         |                                                                 |                                          

S-4

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SCHEDULE III

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES  SUPPLEMENTARY INSURANCE INFORMATION  (In thousands)

|Period                       |                     | Deferred
policy
acquisition
costs |        | Reserve
for losses
and loss
adjustment
expenses |   | Unearned
premiums |         | Other policy
claims and
benefits
payable |         | Net
earned
premium |   | Net
investment
income(1) |   | Losses
and loss
adjustment
expenses
incurred |         | Amortization
of deferred
policy
acquisition
costs(2) |   | Other
operating
expenses(1) |        | Net
written
premium
|---------------------------- | ------------------- | --------------------------------- | ------ | ----------------------------------------------- | - | ----------------- | ------- | ---------------------------------------- | ------- | ------------------ | - | ------------------------ | - | -------------------------------------------- | ------- | ---------------------------------------------------- | - | --------------------------- | ------ | -------------------
|Year ended December 31, 2002 |                     |                                   |        |                                                 |   |                   |         |                                          |         |                    |   |                          |   |                                              |         |                                                      |   |                             |        |                    
|                             | Insurance Companies |                                   | $      | 14,532                                          |   | $                 | 338,872 |                                          | $       | 130,582            |   | $                        |  |                                              | $       | 148,411                                              |   | $                           | 15,489 |                    
|                             | Lloyd's Operations  |                                   |        | 9,100                                           |   |                   | 150,770 |                                          |         | 36,790             |   |                          |  |                                              |         | 77,883                                               |   |                             | 2,454  |                    
|                             |                     |                                   |        |                                                 |   |                   |         |                                          |         |                    |   |                          |   |                                              |         |                                                      |   |                             |        |                    
|                             |                     | $                                 | 23,632 |                                                 | $ | 489,642           |         | $                                        | 167,372 |                    | $ |                         |   | $                                            | 226,294 |                                                      | $ | 17,943                      |        | $                  
|                             |                     |                                   |        |                                                 |   |                   |         |                                          |         |                    |   |                          |   |                                              |         |                                                      |   |                             |        |                    
|Year ended December 31, 2001 |                     |                                   |        |                                                 |   |                   |         |                                          |         |                    |   |                          |   |                                              |         |                                                      |   |                             |        |                    
|                             | Insurance Companies |                                   | $      | 7,968                                           |   | $                 | 282,325 |                                          | $       | 75,333             |   | $                        |  |                                              | $       | 74,091                                               |   | $                           | 16,144 |                    
|                             | Lloyd's Operations  |                                   |        | 5,688                                           |   |                   | 118,852 |                                          |         | 21,702             |   |                          |  |                                              |         | 76,153                                               |   |                             | 3,078  |                    
|                             |                     |                                   |        |                                                 |   |                   |         |                                          |         |                    |   |                          |   |                                              |         |                                                      |   |                             |        |                    
|                             |                     | $                                 | 13,656 |                                                 | $ | 401,177           |         | $                                        | 97,035  |                    | $ |                         |   | $                                            | 150,244 |                                                      | $ | 19,222                      |        | $                  
|                             |                     |                                   |        |                                                 |   |                   |         |                                          |         |                    |   |                          |   |                                              |         |                                                      |   |                             |        |                    
|Year ended December 31, 2000 |                     |                                   |        |                                                 |   |                   |         |                                          |         |                    |   |                          |   |                                              |         |                                                      |   |                             |        |                    
|                             | Insurance Companies |                                   | $      | 3,826                                           |   | $                 | 284,280 |                                          | $       | 49,216             |   | $                        |  |                                              | $       | 44,539                                               |   | $                           | 15,536 |                    
|                             | Lloyd's Operations  |                                   |        | 4,574                                           |   |                   | 73,394  |                                          |         | 17,022             |   |                          |  |                                              |         | 52,701                                               |   |                             | 2,578  |                    
|                             |                     |                                   |        |                                                 |   |                   |         |                                          |         |                    |   |                          |   |                                              |         |                                                      |   |                             |        |                    
|                             |                     | $                                 | 8,400  |                                                 | $ | 357,674           |         | $                                        | 66,238  |                    | $ |                         |   | $                                            | 97,240  |                                                      | $ | 18,114                      |        | $                  
|                             |                     |                                   |        |                                                 |   |                   |         |                                          |         |                    |   |                          |   |                                              |         |                                                      |   |                             |        |                    

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S-5

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SCHEDULE IV

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES  REINSURANCE    Written Premium  (Dollars in thousands)

|                             |                   | Direct
Amount |   | Ceded to
other
companies |  | Assumed from other companies |         | Net amount |   | Percentage
of amount
assumed to net | 
|---------------------------- | ----------------- | ------------- | - | ------------------------ |  | ---------------------------- | ------- | ---------- | - | ----------------------------------- | 
|Year ended December 31, 2002 |                   |               |   |                          |  |                              |         |            |   |                                     | 
|                             | Property-Casualty |               | $ | 321,197                  |  | $                            | 177,059 |            | $ | 126,641                             | 
|                             |                   |               |   |                          |  |                              |         |            |   |                                     | 
|Year ended December 31, 2001 |                   |               |   |                          |  |                              |         |            |   |                                     | 
|                             | Property-Casualty |               | $ | 214,067                  |  | $                            | 105,659 |            | $ | 64,127                              | 
|                             |                   |               |   |                          |  |                              |         |            |   |                                     | 
|Year ended December 31, 2000 |                   |               |   |                          |  |                              |         |            |   |                                     | 
|                             | Property-Casualty |               | $ | 155,888                  |  | $                            | 80,332  |            | $ | 32,537                              | 
|                             |                   |               |   |                          |  |                              |         |            |   |                                     | 

S-6

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SCHEDULE V

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES        VALUATION AND QUALIFYING ACCOUNTS        (In thousands)

|Col. A                                  |  | Col. B |       | Col. C Additions |   | Col. D |   | Col. E
|--------------------------------------- |  | ------ | ----- | ---------------- | - | ------ | - | ------
|
|Allowance for uncollectible reinsurance |  | $      | 6,905 |                  | $ | 1,629  |   | $     
|                                        |  |        |       |                  |   |        |   |       
|Valuation allowance in deferred taxes   |  | $      | 7,288 |                  | $ | (612   | ) | $     
|                                        |  |        |       |                  |   |        |   |       

S-7

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SCHEDULE VI

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS
(In thousands)

|                             |  |   |        |  |   |         |  |   |   |  |   |         |  | Losses and loss adjustment
expenses incurred related to |         |  |   |        |  |  
|---------------------------- |  | - | ------ |  | - | ------- |  | - | - |  | - | ------- |  | ------------------------------------------------------- | ------- |  | - | ------ |  | -
|
|
|
|Consolidated Subsidiaries    |  |   |        |  |   |         |  |   |   |  |   |         |  |                                                         |         |  |   |        |  |  
|Year ended December 31, 2002 |  | $ | 23,632 |  | $ | 489,642 |  | $ |  |  | $ | 167,372 |  | $                                                       | 226,294 |  | $ | 17,943 |  | $
|                             |  |   |        |  |   |         |  |   |   |  |   |         |  |                                                         |         |  |   |        |  |  
|Year ended December 31, 2001 |  | $ | 13,656 |  | $ | 401,177 |  | $ |  |  | $ | 97,035  |  | $                                                       | 150,244 |  | $ | 19,222 |  | $
|                             |  |   |        |  |   |         |  |   |   |  |   |         |  |                                                         |         |  |   |        |  |  
|Year ended December 31, 2000 |  | $ | 8,400  |  | $ | 357,674 |  | $ |  |  | $ | 66,238  |  | $                                                       | 97,240  |  | $ | 18,114 |  | $
|                             |  |   |        |  |   |         |  |   |   |  |   |         |  |                                                         |         |  |   |        |  |  

---

S-8

---

INDEX TO EXHIBITS

|Exhibit No. |  | Description of Exhibit                                                                                                                |  |    
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------- |  | ---
|3-1         |  | Restated Certificate of Incorporation                                                                                                 |  | (a)
|3-2         |  | By-laws, as amended                                                                                                                   |  | (a)
|10-1        |  | Management Agreement between Navigators Insurance Company and Navigators Management Company, Inc. (formerly Somerse Marine, Inc.)     |  | (a)
|10-2        |  | Agreement between The Navigators Group, Inc. and Navigators Management Company, Inc. (formerly Somerset Marine, Inc.)                 |  | (a)
|10-3*       |  | Stock Option Plan                                                                                                                     |  | (a)
|10-4*       |  | Non-Qualified Stock Option Plan                                                                                                       |  | (b)
|10-8        |  | Consulting Agreement between The Navigators Group, Inc. and Robert F. Wright Associates, Inc.                                         |  | (c)
|10-9        |  | Amended and Restated Credit Agreement dated November 26, 1996, among The Navigators Group, Inc. and Lenders                           |  | (d)
|10-10       |  | Agreement with Bradley D. Wiley dated June 3, 1997                                                                                    |  | (e)
|10-11       |  | First Amendment dated April 9, 1997 to the Amended and Restated Credit Agreement dated November 26, 1996                              |  | (e)
|10-12       |  | Second Amendment dated December 11, 1997 to the Amended and Restated Credit Agreement dated November 26, 1996                         |  | (e)
|10-14       |  | Amended and Restated Credit Agreement dated December 21, 1998, among The Navigators Group, Inc. and Lenders ("1998 Credit Agreement") |  | (f)
|10-15       |  | Employment Agreement with Salvatore A. Margarella dated March 1, 1999                                                                 |  | (f)
|10-16       |  | Amendment No. 1 dated March 28, 2000 to the 1998 Credit Agreement                                                                     |  | (g)
|10-17       |  | Amendment No. 2 dated September 20, 2000 to the 1998 Credit Agreement                                                                 |  | (g)
|10-18       |  | Employment Agreement with Stanley A. Galanski effective March 26, 2001                                                                |  | (h)
|10-19       |  | Employment Agreement with R. Scott Eisdorfer dated September 1, 1999                                                                  |  | (i)
|10-20       |  | Amendment No. 3 dated December 31, 2001 to the 1998 Credit Agreement                                                                  |  | (i)
|10-21       |  | Amendment to the Certificate of Incorporation                                                                                         |  | (j)
|10-22*      |  | 2002 Stock Incentive Plan                                                                                                             |  | (j)
|10-23       |  | Amendment No. 4 dated October 18, 2002 to the 1998 Credit Agreement                                                                   |  | (k)
|11-1        |  | Statement re Computation of Per Share Earnings                                                                                        |  | ** 
|21-1        |  | Subsidiaries of Registrant                                                                                                            |  | ** 
|23-1        |  | Consent of Independent Auditor                                                                                                        |  | ** 
|99-1        |  | Certification of CEO                                                                                                                  |  | ** 
|99-2        |  | Certification of CFO                                                                                                                  |  | ** 

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|(a)                         |  | Previously filed under Commission file No. 33-5667 as part of Form S-1, incorporated herein by reference thereto.                                                                                                                                                                                                          
|--------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b)                         |  | Previously filed under Commission File No. 33-75918 as part of Form S-4, incorporated herein by reference thereto.                                                                                                                                                                                                         
|(c)(d)(e)(f)(g)(h)(i)(j)(k) |  | Previously filed with the Company's document as indicated and incorporated herein by reference thereto: Form 10-K for the year ended December 31, 1994 (c), 1996 (d), 1997 (e), 1998 (f), 2001 (i); Form 10-Q
for September 30, 2000 (g), March 31, 2001 (h), September 30, 2002 (k); Proxy Statement for May 30, 2002 (j).
|*                           |  | Compensatory plan.                                                                                                                                                                                                                                                                                                         
|**                          |  | Included herein.                                                                                                                                                                                                                                                                                                           

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