SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   ----------

                                    FORM 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                            For the fiscal year ended

                                December 31, 1999

                           Commission File No. 0-15886

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

                  Delaware                               13-3138397
       (State or other jurisdiction of      (I.R.S. employer identification no.)
       incorporation or organization)

   123 William Street, New York, New York                  10038
  (Address of principal executive offices)               (Zip code)

Registrant's telephone number, including area code:  (212) 349-1600

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 X NO

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 X

The aggregate  market value of voting stock held by  non-affiliates  as of March
22, 2000 was  $40,761,000.  The number of common shares  outstanding as of March
22, 2000 was 8,414,356.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's  2000 Proxy Statement are incorporated by reference
in Part III, Items 10, 11, 12 and 13 of this Form 10-K.




<PAGE>



Forward-looking statements

     Some  of the  statements  in  this  Annual  Report  on  Form  10-K  are not
historical facts and are "forward-looking statements" (as defined in the Private
Securities  Litigation  Act  of  1995).  These  statements  use  words  such  as
"believes," "expects," "intends," "may," "will," "should," "anticipates" (or the
negative forms of those words) and describe our strategies,  goals, expectations
of  future   results   and   other   forward-looking   information.   We  derive
forward-looking  information  from  information  which  we  currently  have  and
numerous  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.  Factors which could
cause actual results to differ  materially from our forward  looking  statements
include, but are not limited to:

o    the effects of domestic  and foreign  economic  conditions  and  conditions
     which affect the market for property and casualty insurance;
o    laws, rules and regulations which apply to insurance companies;
o    the effects of competition from banks,  other insurers and the trend toward
     self-insurance;
o    risks which we face in entering new markets and  diversifying  the products
     and services we offer;
o    weather-related events and other catastrophes affecting our insureds;
o    our ability to obtain rate increases and to retain business;
o    Year 2000; and
o    other risks which we identify in future  filings  with the  Securities  and
     Exchange Commission,  although we do not promise to update  forward-looking
     statements to reflect  actual  results or changes in  assumptions  or other
     factors that could affect these statements.

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
sixteen  wholly  owned  subsidiaries,  are  prepared  on the basis of  generally
accepted accounting principles ("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.

     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  and  a
contractors'  general  liability  program.  NIC, a wholly  owned  subsidiary  of
Navigators  Insurance,  began operations in 1990. It underwrites a small book of
surplus  lines  insurance  in certain  states and cedes 100% of its gross direct
writings from this business to Navigators  Insurance.  Navigators  Insurance and
NIC are collectively referred to herein as the "Insurance Companies".

     Five of the  Company's  subsidiaries  are  marine  underwriting  management
companies:  Somerset Marine,  Inc.,  Somerset Insurance Services of Texas, Inc.,
Somerset Insurance Services of California,  Inc., Somerset Insurance Services of
Washington, Inc. and Somerset Marine (UK) Limited ("Somerset UK") (collectively,
the "Somerset Companies"). The Somerset Companies produce, manage and underwrite
insurance and reinsurance for Navigators  Insurance,  NIC and four  unaffiliated
insurance companies.


                                       1
<PAGE>


     The Somerset  Companies  specialize in writing  marine and related lines of
business.  The marine business is written through a pool of insurance companies,
Navigators Insurance having the largest  participation in the pool. The Somerset
Companies  derive  their  revenue  from  commissions,   service  fees  and  cost
reimbursement arrangements from their parent company,  Navigators Insurance, NIC
and the unaffiliated insurers. Commissions are earned both on a fixed percentage
of  premiums  and  on   underwriting   profits  on  business   placed  with  the
participating  insurance  companies  within  the  pool.  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, supply exceeds demand, and as a
result, premiums and commissions may decrease.  Other than a small amount of war
and  satellite  business,  the Company  withdrew  from the aviation  business in
October  1998 due to  inadequate  pricing.  In 1999,  the Company  produced  its
onshore energy,  engineering  and  construction  business  through the Company's
facilities  at Lloyd's of London  "Lloyd's".  Prior to 1999,  this  business was
produced by the Somerset Companies.

     Navigators  Holdings (UK) Limited is a holding company for the Company's UK
subsidiaries.  Somerset UK  produces  business  for the UK Branch of  Navigators
Insurance  and  four  unaffiliated  insurance  companies.  Navigators  Corporate
Underwriters Limited ("NCUL") is admitted to do business at Lloyd's of London as
a corporate member with limited liability. In January 1998, the Company acquired
Mander,  Thomas & Cooper  (Underwriting  Agencies)  Limited  ("MTC"),  a Lloyd's
marine  underwriting  managing agency which manages Lloyd's  Syndicate 1221, and
its wholly owned subsidiary,  Millennium Underwriting Limited ("Millennium"),  a
Lloyd's  corporate  member with limited  liability.  In August 1999,  MTC formed
Pennine  Underwriting  Limited,  an  underwriting  managing  agency  located  in
Northern England,  which underwrites cargo and engineering  business for Lloyd's
Syndicate 1221.

     In April 1999,  the  Company  acquired  Anfield  Insurance  Services,  Inc.
("Anfield"),  an insurance  agency located in San Francisco,  California,  which
specializes  in  underwriting  general  liability  insurance  coverage for small
artisan  and  general  contractors  on the West  Coast.  The  purchase  price of
approximately  $2.7  million,  funded  through a bank loan and working  capital,
resulted in goodwill of approximately $2.3 million which is being amortized over
20 years.  The  acquisition  has been accounted for under the purchase method of
accounting.

     The Company's revenue is primarily  comprised of premiums,  commissions and
investment income. The Insurance  Companies derive the majority of their premium
from  business  written by the Somerset  Companies  and Anfield.  The  Insurance
Companies are managed by Somerset  Marine,  Inc. The Lloyd's  operations  derive
their  premium from business  written by MTC, and in 1997 from one  unaffiliated
Lloyd's syndicate.

Lines of Business

     The business written by the Company was primarily marine, aviation, onshore
energy,  engineering  and  construction  insurance,  and a contractors'  general
liability  program.  As underwritten by the Company,  marine insurance  includes
hull,  energy,  liability  and  cargo;  aviation  insurance  includes  hull  and
liability on commercial aircraft and on aircraft  manufacturers;  onshore energy
primarily  covers property damage and machinery  breakdown;  and engineering and
construction  primarily covers the construction project including the machinery,
equipment  and  loss  of  use  due to  delays,  with  an  emphasis  on the  oil,
petrochemical and utility sectors. As discussed above, the Company has generally
withdrawn  from the  aviation  market.  In 1999,  the Company  produced  onshore
energy, engineering and construction business through its facilities at Lloyd's.
See the table set forth in  "Management's  Discussion  and Analysis - Results of
Operations  -  Revenues"  for the  Company's  gross  written  premium by line of
business and net written premium in the aggregate for the periods indicated.


                                       2
<PAGE>

Marine Insurance

     Navigators  Insurance obtains marine business through  participation in the
marine pool managed by the Somerset  Companies.  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 increased from 48% in 1997 to
60% in 1998 to 75% in 1999.

     In 1999, 1998 and 1997, the Somerset Companies  received  commissions equal
to 7 1/2% of the gross  premium  earned on marine  insurance and are entitled to
receive a 20% profit commission on net underwriting profits.

     The Lloyd's marine premium is generated as the result of capacity  provided
to Syndicate 1221 by NCUL and Millennium in 1999 and 1998, and capacity provided
to Syndicate 1221 and an  unaffiliated  syndicate by NCUL in 1997. The premiums,
losses and  expenses  from the Lloyd's  marine  syndicates  are  included in the
Company's results but are not included in the Insurance Companies' results since
NCUL and Millennium are not part of the Insurance Companies' operations.

Aviation Insurance

     The Company's  aviation  business had been written by Navigators  Insurance
until October 1998 when Navigators Insurance decided to no longer write aviation
business  due to  inadequate  pricing,  other  than a  small  amount  of war and
satellite business.

Onshore Energy

     In 1996,  Navigators Insurance began to underwrite onshore energy insurance
which principally  focuses on the oil and gas, chemical and  petrochemical,  and
power  generation  industries  with coverages  primarily for property damage and
machinery  breakdown.  In 1999, the onshore energy  business was written through
the Company's  facilities at Lloyd's and the UK Branch participated on the gross
risk.

Engineering and Construction

     In 1997,  Navigators  Insurance began writing  engineering and construction
business  consisting  of  coverage  for  construction   projects  including  the
machinery, equipment and loss of use due to delays. In 1999, the engineering and
construction  business was written  through the Company's  facilities at Lloyd's
and the UK Branch participated on the gross risk.

Program Insurance

     The program insurance,  currently written by Anfield, consists primarily of
general  liability  insurance for  contractors  and a small amount of commercial
multi-peril for restaurants and taverns.

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.

                                       3
<PAGE>

     The ceding of 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  reinsurance  is  diversified  by  reinsuring  with a number of
different reinsurers,  principally in the United States and European reinsurance
markets. This coverage is placed on behalf of the Company's insurance operations
by a number of different reinsurance  intermediaries,  each of which is utilized
because of its  expertise  in placing a particular  type of  coverage.  All such
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.  To the  extent  that it is  determined  that  the  ultimate  amount
collectible  is less than the  amount  recorded  as a  receivable,  a reserve is
established.  At December 31, 1999 and 1998,  the Company had an  allowance  for
uncollectible reinsurance of $1,250,000 and $800,000, respectively. In addition,
in 1999 the  Company  recorded a charge  against  earnings  of $6.6  million for
unrecoverable  reinsurance  from New Cap Reinsurance  Corporation  Limited which
participated in the Company's 1997 and 1998 reinsurance programs.

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 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, NCUL and Millennium.

     The  Insurance  Companies  and Lloyd's  syndicates  establish  reserves for
reported  claims  when they  first  receive  notice of the claim.  Reserves  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 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, and it is possible that
the ultimate liability may exceed or be less than such estimates. Such estimates
are based,  among other things, on predictions of future events and estimates of
future  trends in claim  severity  and  frequency.  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 income currently.  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.

                                       4
<PAGE>


     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  receipt  of the  policy.  A
substantial portion of the premiums are 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.

     The Company does not discount any of its  reserves.  The  following  tables
present an analysis of losses and LAE.
<TABLE>

                                                                        Year Ended December 31,
                                                           ---------------------------------------------

                                                                   1999         1998           1997
                                                                 ---------    ---------      ---------
                                                                             (In thousands)
<S>                                                               <C>          <C>             <C>
Net reserves for losses and LAE at
      beginning of year ......................................   $ 150,517    $ 139,841       $ 132,558
                                                                 ---------    ---------       ---------

Provision for losses and LAE for
     claims occurring in the current year ....................      45,001       46,050          53,654

Lloyd's portfolio transfer - reinsurance to close ............      15,533       19,655              __

Increase (decrease) in estimated losses and
     LAE for claims occurring in prior years .................       9,380       (3,383)         (1,034)
                                                                 ---------    ---------        ---------

Incurred losses and LAE ......................................      69,914       62,322          52,620
                                                                 ---------    ---------        ---------
Losses and LAE payments for claims
     occurring during:
         Current year ........................................     (10,925)      (9,848)        (12,921)
         Prior years .........................................     (38,976)     (41,798)        (32,416)
                                                                 ---------    ---------       ---------
Losses and LAE payments ......................................     (49,901)     (51,646)        (45,337)
                                                                 ---------    ---------       ---------

Net reserves for losses and LAE at end of year ...............     170,530      150,517         139,841
                                                                 ---------    ---------       ---------

Reinsurance receivables on unpaid losses and LAE .............     220,564      191,927         138,591
                                                                 ---------    ---------       ---------

Gross reserves for losses and LAE at end of year .............   $ 391,094    $ 342,444       $ 278,432
                                                                 =========    =========       =========

</TABLE>


                                       5
<PAGE>

     The following  table presents the development of the Company's loss and LAE
reserves  for 1989  through  1999.  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.


                                       6
<PAGE>
<TABLE>
                                                                                                 Year Ended December 31,
                                     1989        1990       1991      1992       1993      1994         1995        1996
                                  ---------   ---------  ---------  --------  ---------  --------    ---------   ---------
                                                                              (In thousands)
<S>                                 <C>       <C>        <C>        <C>        <C>       <C>        <C>         <C>
Net reserves for losses
   and LAE .........................$59,477   $  70,457  $  77,507  $  89,361  $ 103,176 $ 135,377  $ 138,761   $ 132,558
Reserves for losses and
LAE re-estimated as of:
   One year later ...................61,449      71,643     80,478     94,785    104,306   142,400    136,309     131,524
   Two years later ..................62,206      73,849     80,937     98,062    102,831   139,139    134,324     127,901
   Three years later ................61,255      73,441     81,322     98,338    101,537   138,155    131,658     126,457
   Four years later .................60,062      73,349     80,652     97,257    100,432   135,482    131,018
   Five years later .................60,476      72,706     79,469     96,889     98,805   134,197
   Six years later ..................60,490      71,730     79,239     96,358     97,740
   Seven years later ................60,382      71,620     78,742     94,457
   Eight years later ................60,364      71,003     77,167
   Nine years later .................59,787      70,622
   Ten years later ..................60,016

Net cumulative redundancy

   (deficiency) .....................  (539)       (165)       340     (5,096)     5,436     1,180      7,743       6,101

Net cumulative paid as of:
   One year later ...................17,593      22,784     25,741     37,998     32,700    47,187     39,741      32,416
   Two years later ..................29,694      36,532     43,688     54,552     53,603    69,960     59,397      59,796
   Three years later ................37,032      47,060     51,753     65,997     62,769    83,921     78,821      71,420
   Four years later .................43,270      51,769     59,308     72,063     69,356    97,499     87,876
   Five years later .................46,066      57,421     63,138     75,864     75,534   104,454
   Six years later ..................50,456      60,291     65,441     80,193     80,308
   Seven years later ................52,521      61,837     68,192     84,132
   Eight years later ................53,482      63,753     70,868
   Nine years later .................55,019      66,067
   Ten years later ..................56,758

Gross liability-end of year .......................................... 224,191   247,346    314,898   273,854    269,601
Reinsurance recoverable .............................................. 134,830   144,170    179,521   135,093    137,043
                                                                       -------   -------    -------   -------    -------
Net liability-end of year ............................................  89,361   103,176    135,377   138,761    132,558

Gross re-estimated latest ............................................ 292,031   276,917    363,655   313,484    305,074
Re-estimated recoverable latest ...................................... 197,574   179,177    227,458   182,466    178,617
                                                                       -------   -------    -------   -------    -------
Net re-estimated latest ..............................................  94,457    97,740    136,197   131,018    126,457

Gross cumulative (deficiency) .......................................  (67,840)  (29,571)   (48,757)  (39,630)   (35,473)

<CAPTION>
                                                    1997       1998       1999
                                                 ---------  ---------  ---------
<S>                                             <C>        <C>        <C>
Net reserves for losses
   and LAE .........................            $ 139,841  $ 150,517  $ 170,530
Reserves for losses and
LAE re-estimated as of:
   One year later ..................              136,458    159,897
   Two years later .................              138,991
   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) ....................                  850     (9,380)

Net cumulative paid as of:
   One year later ..................               41,798     38,976
   Two years later .................               64,301
   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 ........              278,432    342,444     391,094
Reinsurance recoverable ............              138,591    191,927     220,564
                                                  -------    -------     -------
Net liability-end of year ..........              139,841    150,517     170,530

Gross re-estimated latest ..........              326,239    393,503
Re-estimated recoverable latest ....              187,248    233,606
                                                  -------    -------
Net re-estimated latest ............              138,991    159,897

Gross cumulative (deficiency) ......              (47,807)   (51,509)
</TABLE>

                                       7
<PAGE>

     The net cumulative deficiency for the year ended December 31, 1992 resulted
from adverse  development  in certain lines of business.  The net deficiency for
the year ended  December 31, 1998  resulted from the  unrecoverable  reinsurance
from  one  reinsurer  and  reserve   strengthening  in  the  Company's   Lloyd's
operations.

     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  also  resulted from
adverse  development  in several  lines of business.  The 1997 gross  cumulative
deficiency also resulted from adverse development in the onshore energy business
and from  one  large  1989  claim  from a runoff  book of  business  which  also
adversely affected years prior to 1997. The 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  adverse  development  on the  Company's  gross  reserves  has  been  mostly
reinsured through excess of loss reinsurance treaties.

     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

     In 1999 and 1998,  the Company  paid gross  losses and LAE of $665,000  and
$2,091,000,  respectively,  resulting in net paid losses and LAE of $378,000 and
$369,000, respectively, for environmental pollution and asbestos related claims.
As of  December  31,  1999 and 1998,  the  Company  carried  gross  reserves  of
$3,712,000  and  $2,912,000,  respectively,  and net reserves of $1,088,000  and
$1,199,000,  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,  management  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.  At December 31, 1999,
there were 870 open claims 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  predominately 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 kind,  quality and  concentration of investments  which
may be made by insurance companies.  In general,  these laws permit 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.  Navigators  Insurance seeks to obtain these objectives by investing in
municipal bonds, U.S. Government obligations, corporate bonds, and preferred and
common stocks.  Due to the Company being in an  alternative  minimum tax ("AMT")
position, the Finance Committee of the Board of Directors reviewed the Company's
concentration in municipal bonds and instructed the portfolio managers to reduce
the municipal bond portfolio.  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.

                                       8
<PAGE>

     At December 31, 1999 and 1998,  all fixed  maturity  and equity  securities
held by the Company were classified as available-for-sale.

     The majority of the investment income of the Somerset  Companies 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. Beginning January 1, 1998 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 three years ended December 31, 1999:
<TABLE>
                                                           Year Ended December 31,
                                                ------------------------------------------
                                                      1999              1998          1997
                                                      ----              ----          ----
                                                             (Dollars in thousands)
          <S>                                         <C>             <C>            <C>
          The Company Consolidated (1) (2)
          --------------------------------
          Average investments...................      $273,738        $259,121       $259,636
          Net investment income.................        15,985          15,209         14,435
          Average yield.........................         5.84%           5.87%         5.56%
          Insurance Companies
          -------------------
          Average investments...................      $247,396        $251,422       $244,905
          Net investment income.................        14,573          14,659         13,696
          Average yield.........................         5.89%           5.83%         5.59%
</TABLE>
[FN]
(1)             Included in the Company's  average  investments  and  investment
                income for 1997 are fiduciary  cash and  short-term  investments
                not included in the balance sheet and the earnings  thereon from
                the Somerset Companies. See Note 4 to the Company's Consolidated
                Financial Statements.

(2)            The  Company's  average  investments  for 1999  and 1998  include
               NCUL's  and  Millennium's  portion  of the  investments  held  by
               Lloyd's  Syndicate  1221 and which is presented as funds due from
               Syndicate 1221 to the Company.

</FN>

                                       9
<PAGE>

         The following  table shows the cash and  investments of the Company as
          of December 31, 1999:

                                                Carrying Value      Percent
                                                                   of Total

                                                        (In thousands)

         Cash and short-term investments..........$   12,293        5.0%
         U.S. Treasuries .........................    13,456        5.4
         Municipal bonds  ........................    93,851       38.0
         Mortgage backed securities  .............    37,245       15.1
         Asset backed securities  ................    41,335       16.8
         Corporate bonds  ........................    35,650       14.5
         Redeemable preferred stocks..............     1,018        0.4
         Common stocks  ..........................    11,840        4.8
                                                   ---------      -----

                Total ............................$  246,688      100.0%
                                                     =======      =====

Regulation

     The 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.

     Navigators  Insurance and NIC may pay dividends only 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.

     Navigators Insurance is licensed to engage in the insurance and reinsurance
business in 49 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 31  states  and the  District  of
Columbia.

                                       10
<PAGE>

     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. Navigators Insurance and NIC were
examined by the  Department  for the years 1991 through 1995. The Department did
not  recommend any  adjustments  to the Insurance  Companies'  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,
1999 and 1998, the Insurance Companies' results were within the usual values for
all IRIS ratios except for the 1999 `change in net  writings'  ratio for NIC due
to the reinsurance arrangement between NIC and Navigators Insurance.

     The  NAIC  recently  completed  a  process  intended  to  codify  statutory
accounting practices for insurance enterprises. As a result of this process, the
NAIC will issue a revised statutory  Accounting  Practices and Procedures Manual
that will be effective  January 1, 2001 for the calendar year 2001.  The Company
will prepare 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.  The Company has not yet  determined  the
impact that this change will have on its statutory capital and surplus.

     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.

     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 level exceeds a level that would trigger
regulatory  attention.  In their respective 1999 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
Somerset  Companies and Anfield are subject to Managing  General  Agents Acts in
their  state of  domicile  and in  certain  other  jurisdictions  where  they do
business.

                                       11
<PAGE>

     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
demand for low-cost,  high quality service has created  difficult  conditions in
the domestic property and casualty market,  including a leveling or reduction in
premium  rates in certain lines of business in which the Company  competes.  The
Company  believes the current  situation  will not improve  dramatically  in the
foreseeable future.

     The Company faces competition from both domestic and foreign insurers, some
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.

     No single  insured or reinsured  accounted for 10% or more of the Company's
gross written premium in 1999.

     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.

Employees

         As of December 31, 1999, the Company had 125 employees.

Item 2. PROPERTIES

     The Company's  administrative offices are occupied pursuant to a lease from
an unaffiliated  company which expires May 14, 2000 in a building located at 123
William Street,  New York, New York. The Company has entered into a new ten year
lease  in a  different  building  in New York  City.  Several  of the  Company's
subsidiaries  have  noncancellable  operating leases for their respective office
location. The Company does not own any real estate at December 31, 1999.

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 an  assessment  on
Navigators  Insurance by the Institute of London  Underwriters  ("ILU"). In late
1998, the ILU advised its then current forty-one members,  including  Navigators
Insurance,  that they  were each  being  assessed  approximately  (pound)900,000
(converts to $1.5 million) to pay for  anticipated  operating  deficits  arising
from the long  term  lease of the ILU  building  located  in  London  (the  "ILU
Building").  This  assessment was to be paid in cash or by providing a letter of
credit.

                                       12
<PAGE>

     Even assuming that Navigators  Insurance could be held  responsible for the
assessment,  Navigators  Insurance  has  informed  the ILU that it  opposes  the
assessment as inequitable and inappropriate since it purports to force the ILU's
members (without regard to the length of membership,  proportionate usage of the
ILU's London Processing Centre or current or past occupancy of the ILU Building)
to pay now for potential worst case liabilities extending through 2011.

     The ILU has,  thus far,  not filed suit to enforce the  assessment  against
Navigators  Insurance.  In the event  the ILU does file such a suit,  Navigators
Insurance intends to vigorously contest liability for payment of the assessment.
It is not possible to forecast the  ultimate  liability,  if any, at the present
time.

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 1999.

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 (The Nasdaq National
Market)  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 1999 and 1998 are
          as follows:

<TABLE>

                                                1999                                          1998
                              ----------------------------------------     ----------------------------------
                                       High                Low                      High                Low

<S>                                   <C>                 <C>                      <C>                 <C>
First Quarter..............           $16.13              $13.50                   $30.75              $17.00
Second Quarter.............           $15.00              $14.00                   $19.25              $17.63
Third Quarter..............           $16.00              $13.38                   $19.50              $14.50
Fourth Quarter.............           $14.13              $ 9.13                   $16.25              $13.25
</TABLE>

     There were  approximately  100 holders of record of shares of the Company's
common stock as of March 22, 2000.  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, 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,
1999 derived from the Company's audited consolidated  financial statements.  See
the  Consolidated  Financial  Statements of the Company  including notes thereto
included herein.

                                       13
<PAGE>
<TABLE>


                                                Year Ended December 31,
                                          ----------------------------------

                                  1999        1998        1997       1996         1995
                                ---------   ---------   ---------   ---------   ---------

                                         (In thousands, except per share data)
<S>                             <C>          <C>         <C>         <C>        <C>
Operating Information:
Net earned premium              $  89,442    $  91,203   $  85,002   $ 78,731   $  87,908
Net investment income              15,985       15,209      14,435     13,614      14,143
Total revenues                    105,624      115,120     108,217    102,788     113,714
Income (loss)
   before income taxes             (5,392)      15,153      17,184     20,874      15,563
Net income (loss)                  (3,652)      11,489      12,546     16,752      12,582

Net income (loss) per share:
Basic                           $   (0.43)   $    1.37   $    1.51   $   2.04   $    1.54
Diluted                         $   (0.43)   $    1.36   $    1.50   $   2.02   $    1.53
Average common shares:
Basic                               8,419        8,414       8,296      8,197       8,154
Diluted                             8,419        8,459       8,385      8,286       8,213
Balance Sheet Information
   (at end of period):
Total investments & cash        $ 246,688    $ 257,232   $ 258,572   $240,720   $ 235,460
Total assets                      631,324      592,086     501,207    457,095     435,552
Loss and LAE reserves             391,094      342,444     278,432    269,601     273,854
Notes payable                      24,000       23,500      20,942     17,942      20,508
Stockholders'equity               130,365      143,266     131,242    115,542      99,076
Book value per share            $   15.51    $   16.96   $   15.68   $  14.03   $   12.12
</TABLE>


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

General

         The  Company  is  a  holding   company   with   sixteen   wholly  owned
subsidiaries.  See  "BUSINESS-General"  included herein for a description of the
Company.

         The Company's revenue is primarily  comprised of premiums,  commissions
and  investment  income.  The Insurance  Companies  derive the majority of their
premium  from  business  written by the  Somerset  Companies  and  Anfield.  The
Insurance  Companies are managed by Somerset Marine, Inc. The Lloyd's operations
derive  their  premium  from  business  written  by MTC,  and in 1997  from  one
unaffiliated Lloyd's syndicate.

Results of Operations

     General.  The Company's 1999,  1998 and 1997 results of operations  reflect
intense market competition in the marine and aviation lines.

         The 1999 results  include a charge  against  earnings of  approximately
$6.6  million  pretax  resulting  in an after tax charge of  approximately  $4.3
million  as the result of  unrecoverable  reinsurance  from New Cap  Reinsurance
Corporation  Limited ("New Cap Re") which participated in the Company's 1997 and
1998 reinsurance programs.

                                       14
<PAGE>

         Revenues.  Gross written premium  increased from $171.2 million in 1997
to $172.2 million in 1998 and decreased to $167.1 million in 1999. The following
table sets forth the Company's  gross written  premium by line of business along
with ceded and net written premium in the aggregate for the periods indicated:
<TABLE>

                                                                     Year Ended December 31,
                                            -------------------------------------------------------------------
                                                          1999                  1998                    1997
                                                          ----                  ----                    ----
                                                                         (In thousands)

<S>                                <C>                 <C>    <C>                 <C>   <C>                 <C>
Lloyd's Operations:
   Marine ......................   $  63,040           38%    $  46,637           27%   $  24,654           14%
   Engineering and Construction          961            1          --           --           --           --
   Onshore Energy ..............       1,346            1          --           --           --           --
--------------------------------   ---------    ---------     ---------    ---------    ---------    ---------
     Total Lloyd's Operations ..      65,347           40        46,637           27       24,654           14
                                   ---------    ---------     ---------    ---------    ---------    ---------

Insurance Companies:
   Marine ......................      82,086           49        64,043           37       56,231           33
   Aviation ....................         180           --        23,405           14       34,960           20
   Inland Marine ...............          12           --          (154)          --        8,327            5
   Onshore Energy ..............         812           --        11,418            7        9,854            6
   Engineering and Construction          (77)          --         9,976            6        7,592            4
   Program Business ............      18,581           11        15,684            9       24,515           14
   Other .......................         171           --         1,202           --        5,116            4
--------------------------------   ---------    ---------     ---------    ---------    ---------    ---------

     Total Insurance Companies:      101,765           60       125,574           73      146,595           86
                                   ---------    ---------     ---------    ---------    ---------    ---------

     Total Gross Written Premium     167,112          100%      172,211          100%     171,249          100%
                                   ---------    =========     ---------    =========    ---------    =========
     Total Ceded Written Premium     (73,028)                   (83,729)                  (80,369)
                                   ---------                  ---------                  ---------
     Total Net Written Premium .   $  94,084                  $  88,482                  $ 90,880
                                   =========                  =========                  =========

</TABLE>

Lloyd's Operations

         The Lloyd's  premium is generated as the result of NCUL and  Millennium
providing  capacity to Lloyd's  Syndicate  1221 managed by MTC, and in 1997 from
one unaffiliated Lloyd's syndicate.  The premiums,  losses and expenses from the
Lloyd's operations are included in the Company's consolidated financials but are
not included in the Insurance  Companies'  results since NCUL and Millennium are
wholly owned by the parent company.

     Marine Premium.  In 1999,  marine premium  increased 35.2% from 1998 due to
the capacity  provided to Syndicate 1221 by NCUL and Millennium in the aggregate
increasing  from  39.5% in 1998 to 52.5% in 1999.  NCUL wrote  $24.7  million of
marine  premium in 1997 through  providing  capacity to  Syndicate  1221 and one
unaffiliated syndicate.

         Lloyd's Syndicate 1221 had capacity of (pound)67.0 million (converts to
$105.9  million) in 1999,  (pound)66.9  million  (converts to $111.1 million) in
1998 and (pound)68.5  million  (converts to $113.1 million) in 1997. The Lloyd's
marine business has been subject to continued pricing  competition  resulting in
less premiums per risk relative to certain prior years. As a result, the Company
wrote less than the capacity available.

                                       15
<PAGE>


     Engineering and  Construction  Premium.  In 1999, the Robertson  Consortium
managed by MTC began writing engineering and construction business consisting of
coverage for construction  projects including  machinery,  equipment and loss of
use due to delays.  Previously,  the engineering and  construction  business was
written  by  Somerset  Asia  Pacific  Limited  in  Australia  and  Somerset  UK,
wholly-owned   subsidiaries  of  the  Company,  for  Navigators  Insurance.  The
Australia  office  was  closed in 1999 along  with the  Singapore  office  which
provided risk management services for the Australia office.

     Onshore  Energy.  In 1999,  the  Robertson  Consortium  also began  writing
onshore energy business which  principally  focuses on the oil and gas, chemical
and petrochemical,  and power generation industries with coverages primarily for
property damage and machinery breakdown.  The business was previously written by
Navigators Insurance.

     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.

     At Lloyd's,  the amount to close an underwriting year into the next year is
referred to as the "reinsurance to close." At December 31, 1999,  Syndicate 1221
and an  unaffiliated  syndicate on which NCUL  participated in 1997 closed their
1997 underwriting year, the net effect of which resulted in a portfolio transfer
to NCUL and  Millennium  of $15.5  million at December 31, 1999. At December 31,
1998, Syndicate 1221 and an unaffiliated syndicate on which NCUL participated in
1997 closed their 1996  underwriting  year resulting in a portfolio  transfer to
NCUL of $19.7 million at December 31, 1998. This  transaction  accounted for the
majority  of the  increase  from  1997  to  1998 in the  premium  volume  in the
Company's Lloyd's operations. The reinsurance to close transactions are recorded
as additional  written and earned premium,  losses  incurred,  loss reserves and
cash  received,  all in the  same  amount.  There  was no  gain  or  loss on the
transactions.

     The  Company  controls  75.6% of  Syndicate  1221's  capacity  for the 2000
underwriting  year.  The  actual  capacity  is  (pound)66,297,000  (converts  to
$107,089,000) of which the Company directly controls (pound)42,772,000 (converts
to $69,090,000) and indirectly  controls another  (pound)7,340,000  (converts to
$11,856,000).  Since the  controlled  capacity  exceeds 75%,  Lloyd's  Mandatory
Byelaw  (No.  5 of 1999)  requires  the  Company  to make a  mandatory  offer to
noncontrolled  participants for their capacity.  The offer will take the form of
an Announced  Auction Offer to be made at the first Lloyd's  capacity auction in
July 2000.

     The offer will be made at 1.8 pence per  (pound)1 of capacity  which is the
minimum price that the Company is obliged to offer, being the highest price paid
for  capacity  during the last 12 months.  Whether or not, or to what extent the
offer is accepted  by the  offerees  is to some  extent  dependent  on the price
offered.  As such, it is unlikely that the acceptance will result in a cost that
is material to the Company.  For the purposes of guidance,  each 10% of capacity
accepting will result in a cost to the Company of  approximately  (pound)120,000
(converts to $194,000).  In addition,  it is anticipated the  administrative and
legal costs of making the offer will be approximately (pound)25,000 (converts to
$40,000). If the Company were to exceed the 90% control threshold as a result of
the offer,  Lloyd's Major Syndicate  Transactions Byelaw (No. 18 of 1997) allows
for a Minority  Buy-out to be  effected.  In such a  transaction  the  remaining
participants  are required to give up their capacity in return for  compensation
which must be at least equal to the offer price preceding the buy-out.

     The Company  provides letters of credit to Lloyd's to support its Syndicate
1221 capacity. If the amount of capacity controlled increases,  the Company will
be  required  to  supply  additional  letters  of  credit  or  other  collateral
acceptable to Lloyd's, or to reduce the capacity of Syndicate 1221.

                                       16
<PAGE>

Insurance Companies

     Marine Premium.  Marine gross written premium  increased 28.2% from 1998 to
1999 due to Navigators Insurance writing 100% of the marine risk for all of 1999
but for only six months of 1998.  Navigators  Insurance's  participation  in the
marine pools  increased to 75% in 1999 from 60% in 1998. The 13.9% increase from
1997 to 1998 was due to, beginning July 1, 1998,  Navigators  Insurance  writing
100%  of the  marine  risk  and  then  ceding  40% to the  pool  members  and to
Navigators Insurance's  participation in the marine pools increasing from 48% in
1997 to 60% in 1998.

     Aviation Premium. Aviation gross written premium decreased 99% from 1998 to
1999  and  33.1%  from  1997 to 1998 as the  result  of  Navigators  Insurance's
withdrawal from aviation  business  effective  October 1998,  other than a small
amount of war and satellite business,  due to inadequate pricing in the aviation
insurance market.

     Inland Marine Premium. As of June 1997, the Company no longer writes inland
marine business, other than onshore energy.

     Onshore Energy Premium. In 1996,  Navigators  Insurance began to underwrite
onshore energy insurance which principally  focuses on the oil and gas, chemical
and petrochemical,  and power generation industries with coverages primarily for
property  damage and machinery  breakdown.  In 1999, the majority of the onshore
energy business was written through the Company's  facilities at Lloyd's and the
UK Branch participated on the gross risk.

     Engineering and Construction  Premium. In 1997,  Navigators Insurance began
writing  engineering  and  construction  business  consisting  of  coverage  for
construction projects including the machinery,  equipment and loss of use due to
delays.  In 1999, the engineering and construction  business was written through
the Company's  facilities at Lloyd's and the UK Branch participated on the gross
risk. In early 1999, the Company closed the Somerset Asia Pacific Limited office
in  Australia  which,  along with  Somerset  UK, had  previously  produced  this
business for Navigators Insurance.

     Program  Insurance  Premium.  The program  insurance,  currently written by
Anfield, consists primarily of general liability insurance for contractors and a
small amount of commercial multi-peril insurance for restaurants and taverns.

     Ceded 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
decrease in the ceded  premium from 1998 to 1999  resulted  from the decrease in
engineering and aviation business which were heavily reinsured.  The increase in
the  ceded  premium  from  1997  to  1998  resulted  from  the  engineering  and
construction  business and the program business,  which were heavily  reinsured,
and from  increasing  the  reinsurance  on the  marine  business.  In  addition,
beginning July 1, 1998,  Navigators  Insurance  began writing 100% of the marine
risks and then ceded 40% to the pool members for the 1998  underwriting year and
25% for the 1999 underwriting year.

     Net Written Premium.  Net written premium  increased 6.3% from 1998 to 1999
primarily due to increases in the marine premium  partially  offset by decreases
in other lines of business as described  above. The 2.6% decrease in net written
premium from 1997 to 1998 was primarily  due to the reduction in fourth  quarter
1998 aviation  premium and  competitive  pressure in the  marketplace  partially
offset by the increase in the Lloyd's marine  premium and  Navigators  Insurance
increasing its participation in the marine pool to 60% in 1998 from 48% in 1997.

                                       17
<PAGE>

     Net Earned  Premium.  Net  earned  premium  decreased  2% from 1998 to 1999
primarily due to increased  unearned premium in the Company's  Lloyd's operation
and a smaller  reinsurance  to close  premium  which is recorded as fully earned
premium. The 7.3% increase in net earned premium from 1997 to 1998 was primarily
due to the increase in the net written premium in 1997.

     Commission Income. Commission income decreased 93% from 1998 to 1999 due to
Navigators Insurance increasing its participation in the marine pool from 60% in
1998 to 75% in 1999 which decreased the commission income, the losses related to
unrecoverable  reinsurance  which reduced the profit  commission,  the Company's
reduction of its commission  income  estimates due to the extremely  competitive
rate environment and less profit  commission earned by MTC in 1999 than in 1998.
Commission income increased 29.2% from 1997 to 1998 due to the profit commission
earned by MTC from the 1996  underwriting  year  partially  offset by Navigators
Insurance  increasing its  participation  in the marine pool to 60% in 1998 from
48% in 1997.

     Net Investment  Income.  Net investment  income increased 5.1% from 1998 to
1999  and  5.4 % from  1997  to  1998  primarily  due to the  investment  income
allocated to NCUL and Millennium from the investments at the Lloyd's  Syndicates
on  which  they  participate.  Such  investments  represent  funds  due from the
syndicates to the Company.

Operating Expenses.
------------------

     Net Losses and Loss Adjustment Expenses Incurred. The ratio of net loss and
loss adjustment  expenses  incurred to net earned premium was 78.2%,  68.3%, and
61.9% in 1999, 1998 and 1997, respectively.  The increase in the 1999 loss ratio
compared to 1998 was primarily due to unrecoverable  reinsurance from New Cap Re
and higher loss ratios on the Lloyd's premium,  partially offset by the decrease
in the  reinsurance to close premium in 1999 of $15.5 million  compared to $19.7
million in 1998.  The  reinsurance  to close  premium is recorded at a 100% loss
ratio since the premium received represents  estimated ultimate losses. The 1999
loss  ratio  excluding  the  New Cap Re  unrecoverable  reinsurance  was  70.8%;
excluding the reinsurance to close was 70.7%;  and excluding both New Cap Re and
the reinsurance to close was 62.1%. The increase in the 1998 loss ratio compared
to 1997 was primarily due to the Company's  portion of the  reinsurance to close
the Lloyd's 1996  underwriting  year amounting to $19.7  million.  The 1998 loss
ratio  excluding the  reinsurance  to close was 59.6% which  decreased from 1997
primarily as the result of favorable loss experience on the Insurance  Companies
partially  offset by slightly  higher loss ratios on the Lloyd's  business.  The
loss reserves are not discounted.

     Commission  Expense.  Commission  expense  as a  percentage  of net  earned
premium was 16.5%, 13.0%, and 17.6% for 1999, 1998 and 1997,  respectively.  The
increase in the 1999 commission expense ratio compared to 1998 was primarily due
to increased  commissions  at Lloyd's  partially  offset by the $15.5 million of
reinsurance  to  close  premium  resulting  from  closing  of the  Lloyd's  1997
underwriting  year. The 1999 commission expense ratio without the reinsurance to
close  premium was 19.9%.  The  decrease in the 1998  commission  expense  ratio
compared to 1997 was primarily due to the $19.7 million of  reinsurance to close
premium resulting from closing of the Lloyd's 1996  underwriting  year. The 1998
commission  expense  ratio  without the 1997  reinsurance  to close  premium was
16.6%.  The reinsurance to close premium  increases  earned premium but does not
change the  commission  expense,  therefore the ratio of  commission  expense to
earned premium decreases.

     Other Operating  Expenses.  The 2.5% increase in other  operating  expenses
from 1998 to 1999 was  primarily due to the  acquisition  of Anfield on April 2,
1999 and  increased  expenses in the  Lloyd's  operations  due to the  Company's
increased  participation in its Lloyd's  syndicate,  partially offset by reduced
expenses  from the  closing  of the  Somerset  Asia  Pacific  Limited  office in
Australia from which the company  incurred a foreign  exchange loss of $346,000.
Other operating  expenses  increased 9.1% in 1998 over 1997 primarily due to the
acquisition of MTC in January 1998, and increased  expenses relating to Somerset
UK and Somerset Asia Pacific Limited.

                                       18
<PAGE>

     Interest  Expense.  The change in the interest  expense for 1997,  1998 and
1999 was due to higher loan balances and fluctuations in interest rates.

     Income Taxes.  The income tax (benefit)  expense was ($1.7)  million,  $3.7
million and $4.6 million for 1999,  1998 and 1997,  respectively.  The effective
tax rates for 1999, 1998 and 1997 were 32.3%, 24.2% and 27.0%, respectively. The
tax benefit in 1999  compared to the tax  expense in 1998 was  primarily  due to
operating  losses.  The decrease in the 1998 rate  compared to the 1997 rate was
primarily due to revenues in the foreign operations beginning to utilize some of
the operating losses generated by those operations.  The Company had alternative
minimum tax ("AMT") carryforwards of $6.4 million, $4.7 million and $5.1 million
at December 31, 1999, 1998 and 1997,  respectively.  The AMT carryforwards  were
primarily  attributable  to the tax benefits from municipal  bond interest.  The
Company began reducing its municipal bond portfolio in 1997.

     As of December 31, 1999 and 1998, the net deferred  Federal and foreign tax
asset was $13.2 million and $8.0 million, respectively. At December 31, 1999 the
Company had a $3.5 million valuation  allowance against its deferred Federal tax
asset compared to a $1.6 million  valuation  allowance at December 31, 1998. The
valuation  allowance is  necessitated  by the  uncertainty  associated  with the
realization of the deferred tax asset for the  carryforward of operating  losses
from the Company's foreign operations.

     Net Income  (Loss).  The Company had a net (loss) of ($3.7) million in 1999
compared  to net  income  of $11.5  million  in 1998 and $12.5  million  in 1997
primarily  due to  unrecoverable  reinsurance,  price  competition,  higher loss
ratios in the Lloyd's  operations and expenses related to the foreign  expansion
in London.

Liquidity and Capital Resources

     Cash flow provided by (used in) operations was $8.9 million, ($3.0) million
and $12.5 million for 1999, 1998 and 1997, respectively. Operating cash flow has
been used primarily to acquire additional investment assets during 1999 and 1997
of $6.0 million and $16.7  million,  respectively.  The negative  operating cash
flow in 1998  was  primarily  due to the  payment  of loss  reserves  on  runoff
business and less premiums  received,  partially due to Lloyd's  disbursing cash
only after an underwriting year has closed, normally three years later.

     Invested  assets and cash  (excluding  fiduciary funds held by the Somerset
Companies  and Anfield)  decreased  from $257.2  million at December 31, 1998 to
$246.7  million at December 31, 1999. The decrease was primarily due to the fair
value of the fixed income  portfolio  moving from an unrealized gain at December
31, 1998 to an unrealized loss at December 31, 1999. Investment income was $14.4
million in 1997,  $15.2 million in 1998 and $16.0  million in 1999.  The average
yield of the portfolio,  excluding net realized capital gains, was 5.6% in 1997,
5.9% in 1998, and 5.8% in 1999  reflecting the prevailing  interest rates during
those years and the decrease in the tax-exempt  portfolio  beginning in 1997. As
of December 31, 1999, 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 Company's fixed maturity  investment  portfolio  primarily
consists of investment  grade bonds.  The  portfolio has an average  maturity of
less than seven years.  Management continually monitors the composition and cash
flow of the investment  portfolio in order to maintain the appropriate levels of
liquidity.  This ensures the Company's  ability to satisfy claims or expenses as
they become due.

                                       19
<PAGE>

     The increase for 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, 1999 as compared to 1998, was primarily
due to energy  and  engineering  claims  reported  in 1999  which  were  heavily
reinsured,  and the Lloyd's  "reinsurance  to close" loss portfolio for the 1997
underwriting year.

     On December 21, 1998, the Company  entered into a new bank credit  facility
which  replaced  the prior  facility.  The new  credit  facility  provides a $25
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
0.875%. The line of credit facility reduces each quarter by amounts between $1.0
million  and $2.25  million  beginning  January 1, 2000 until it  terminates  on
November 19, 2003. At December 31, 1999 and 1998,  $24 million and $23.5 million
in loans were  outstanding,  respectively,  under the  revolving  line of credit
facility at an interest rate of 7.1% and 5.9%, respectively. The credit facility
also  provides  for a $60 million  letter of credit  facility  which is utilized
primarily  by NCUL and  Millennium  to  participate  in Lloyd's  Syndicate  1221
managed  by MTC.  At  December  31,  1999 and 1998,  letters  of credit  with an
aggregate  face amount of $42.2 million and $29.2  million,  respectively,  were
issued  under the letter of credit  facility.  These  letters of credit have not
been drawn upon.

     The bank credit facility is collateralized by shares of common stock of the
Company's major  subsidiaries.  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  total
stockholders' equity,  statutory surplus,  minimum liquidity,  loss reserves and
other  financial  ratios.  At December 31, 1999,  the Company  complied with all
covenants  except for one related to the surplus of the Insurance  Companies for
which a waiver and an amendment curing the  noncompliance  was received from the
banks providing the credit facility.

     Total stockholders'  equity was $130.4 million at December 31, 1999, a 9.0%
decrease for the year  primarily as the result of the Company's net loss in 1999
and the unrealized loss in the investment portfolio.

     The Company's reinsurance has been placed with various U.S. companies rated
"A-" or better by A.M. Best Company, as well as with foreign insurance companies
and with selected  syndicates of Lloyd's.  Certain  syndicates at Lloyd's ("Loss
Syndicates") and the Lloyd's market as a whole have reported  significant losses
in recent years.  The Company has not placed any material amounts of reinsurance
with these Loss Syndicates.  Pursuant to the  implementation  of Lloyd's Plan of
Reconstruction and Renewal, a significant portion of the Company's  recoverables
from the Loss  Syndicates 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.

                                       20
<PAGE>

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 the majority 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.

Year 2000 Compliance

     The "Year  2000  Issue"  or "Y2K  Issue"  is a term  used to  describe  the
predicted  problems  that could have arisen as a result of the inability of some
computer programs and embedded chips to distinguish dates beginning with 19 from
dates  beginning  with 20.  This Y2K Issue  could hav  resulted  in a variety of
potential  problems for all businesses from  inaccurate  processing of dates and
date-sensitive  calculations  to system  failures and disruptions in operations.
The  Company had  considered  the Y2K Issue a high  priority  since 1996 and had
taken  certain steps to address this  important  aspect of its  operations.  The
Company had formed an Executive  Committee  comprised of senior  management from
all departments to address the issues.  The efforts were rewarded as no computer
related Y2K problems were experienced.  The Company will continue to monitor the
situation  but  remains  confident  that there  will not be any future  computer
related Y2K problems.

     The Company is at risk from  policyholders'  claims for insurance  coverage
due  to  their  Y2K  exposures.  Although  the  Company  has  not  received  any
significant  insurance claims based on losses  resulting from Y2K Issues,  there
can be no assurance that  policyholders  will not suffer losses of this type and
seek  compensation  under the Company's  insurance  policies.  If any claims are
made,  the  Company's  obligations,  if  any,  will  depend  on  the  facts  and
circumstances  of the claim and  provisions  of the  policy.  At this time,  the
Company is unable to determine  whether an adverse impact, if any, in connection
with the foregoing circumstances would be material.

     The aforementioned Year 2000 discussion contains forward-looking statements
about  matters  that are  inherently  difficult  to  predict  the  effect on the
Company.  Such  statements  are made  under the safe  harbor  provisions  of the
Private  Securities  Litigation Reform Act of 1995 and involve a number of risks
and uncertainties that could materially affect future results.

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,
1999.  The  Company's  market risk  sensitive  instruments  are entered into for
purposes other than trading.

                                       21
<PAGE>

     The carrying value of the Company's investment portfolio as of December 31,
1999  was  $241.1  million  of  which  92.3%  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.

     For the Company's investment  portfolio,  there were no significant changes
in the Company's  primary  market risk  exposures or in how those  exposures are
managed  compared to the year ended  December  31,  1998.  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, 1999.

     The sensitivity  analysis model used by the Company produces a loss in fair
value of market  sensitive  instruments  of $10.3  million  based on a 100 basis
point increase in interest rates as of December 31, 1999.  This loss amount only
reflects  the  impact on an  interest  rate  increase  on the fair  value of the
Company's  fixed  maturities  and  short-term   investments,   which  constitute
approximately 36.3% of total assets as of December 31, 1999.

                                       22
<PAGE>

         Based on the sensitivity  analysis model used by the Company,  the loss
in fair value of market sensitive instruments,  as a result of a 100 basis point
increase in interest rates as of December 1999, 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 14(a) of this report.

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

         None.

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 2000 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 2000 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 2000 Proxy  Statement,  which  information is  incorporated  herein by
reference.

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  2000  Proxy  Statement,   which
information is incorporated herein by reference.

         Part IV

Item 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K

         (a)  The following documents are filed as part of this report:

               1.   Financial Statements and Schedules: The financial statements
                    and   schedules   listed  in  the   accompanying   Index  to
                    Consolidated Financial Statements and Schedules on page F-1.

               2.   Exhibits:  The exhibits are listed on the accompanying Index
                    to Exhibits on the page which immediately  follows page S-8.
                    The   exhibits   include  the   management   contracts   and
                    compensatory  plans or arrangements  required to be filed as
                    exhibits  to  this  Form  10-K by  Item  601(a)(10)(iii)  of
                    Regulation S-K.

                                       23
<PAGE>

          (b)  Reports  on Form 8-K.  There  were no  reports  filed on Form 8-K
               during the fourth quarter of 1999.





                                                    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 30, 2000                               By:/s/ BRADLEY D. WILEY
                                                        --------------------
                                                        Bradley D. Wiley
                                                        Senior Vice President,
                                                        CFO and Secretary

     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. DEEKS           Chairman, President and CEO       March 30, 2000
----------------------------
Terence N. Deeks               (Principal Executive Officer)

/s/ BRADLEY D. WILEY           Senior Vice President, CFO        March 30, 2000
----------------------------
Bradley D. Wiley               and Secretary
                               (Principal Financial Officer)

/s/ SALVATORE A. MARGARELLA     Vice President and Treasurer     March 30, 2000
----------------------------
                               (Principal Accounting Officer)
Salvatore A. Margarella


/s/ ROBERT M. DEMICHELE        Director                          March 30, 2000
----------------------------
Robert M. DeMichele

/s/ LEANDRO S. GALBAN, JR.     Director                          March 30, 2000
----------------------------
Leandro S. Galban, Jr.

/s/ MARC M. TRACT              Director                          March 30, 2000
----------------------------
Marc M. Tract

/s/ WILLIAM D. WARREN          Director                          March 30, 2000
----------------------------
William D. Warren

/s/ ROBERT F. WRIGHT           Director                          March 30, 2000
----------------------------
Robert F. Wright

/s/ HOWARD M. ZELIKOW          Director                          March 30, 2000
----------------------------
Howard M. Zelikow

                                       24

<PAGE>

            INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

Independent Auditors' Report ............................................... F-2

Consolidated Balance Sheets at December 31, 1999 and 1998 .................. F-3

Consolidated Statements of Income for each of the years in the three-year
  period ended December 31, 1999  .......................................... F-4

Consolidated Statements of Stockholders' Equity for each of the years in
  the three-year period ended December 31, 1999  ........................... F-5

Consolidated Statements of Cash Flows for each of the years in the
  three-year period ended December 31, 1999  ............................... 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
<PAGE>



                          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,  1999 and  1998,  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, 1999.  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  generally  accepted  auditing
standards.  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, 1999 and 1998, and
the  results of their  operations  and their cash flows for each of the years in
the  three-year  period ended  December 31, 1999, in conformity  with  generally
accepted  accounting  principles.  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 30, 2000


                                      F-2
<PAGE>
                  THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        (In thousands, except share data)
<TABLE>
                                                                                                           December 31,
                                                                                                   1999                     1998
                                                                                                   ----                     ----
                                     ASSETS
<S>                                                                                                 <C>                  <C>
Investments and cash:
   Fixed maturities, available-for-sale, at fair value
     (amortized cost: 1999, $227,875; 1998, $232,021)  .....................................        $  222,555             $240,233
   Equity securities, available-for-sale, at fair value (cost: 1999, $11,105;
     1998, $6,506)  ........................................................................            11,840                7,400
   Short-term investments, at cost which approximates fair value  .........................              6,747                5,647
   Cash  ...................................................................................             5,546                2,807
   Other investments  ......................................................................               --                 1,145
                                                                                                       -------            ---------

         Total investments and cash  .......................................................           246,688              257,232
                                                                                                       -------              -------

Premiums in course of collection  ..........................................................            90,857               76,321
Commissions receivable  ....................................................................             4,841                7,823
Accrued investment income  .................................................................             3,250                3,219
Prepaid reinsurance premiums  ..............................................................            24,765               25,699
Reinsurance receivable on paid and unpaid losses and loss adjustment expenses...............           229,111              200,017
Federal income tax recoverable  ............................................................             2,016                  398
Net deferred Federal and foreign income tax benefit  .......................................            13,227                8,002
Deferred policy acquisition costs  .........................................................             5,878                4,303
Goodwill ...................................................................................             5,805                3,855
Other assets  ..............................................................................             4,886                5,217
                                                                                                       -------            ---------
         Total assets  .....................................................................          $631,324             $592,086
                                                                                                       =======              =======

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
  Reserves for losses and loss adjustment expenses  ........................................          $391,094             $342,444
  Unearned premium  ........................................................................            55,003               51,295
  Reinsurance balances payable  ............................................................            24,799               24,858
  Notes payable to banks  ..................................................................            24,000               23,500
  Deferred state and local income tax ......................................................               374                1,152
  Accounts payable and other liabilities  ..................................................             5,689                5,571
                                                                                                       -------              --------
         Total liabilities  ................................................................           500,959              448,820
                                                                                                       -------              --------

Commitments and contingencies  .............................................................

Stockholders' equity:
  Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued  ...............               --                    --

  Common stock, $.10 par value, authorized 10,000,000 shares,
     issued and outstanding 8,406,970 in 1999 and 8,447,926 in 1998  .......................               846                  845
  Additional paid-in capital  ..............................................................            39,447               39,332
  Treasury stock held at cost, 48,700 shares in 1999........................................              (700)                  --
  Accumulated other comprehensive income:
     Net unrealized gains (losses) on securities available-for-sale (net of tax (benefit)
       expense of ($1,605) in 1999 and $3,187 in 1998)  ....................................            (2,980)               5,919
     Foreign currency translation adjustment (net of tax expense (benefit) of $34 in 1999 and
       ($93) in 1998........................................................................                62                 (172)
  Retained earnings  .......................................................................            93,690               97,342
                                                                                                       -------             --------
         Total stockholders' equity  .......................................................           130,365              143,266
                                                                                                       -------            ---------
             Total liabilities and stockholders' equity  ...................................          $631,324            $ 592,086
                                                                                                       =======             ========

                                     See accompanying notes to consolidated financial statements.
</TABLE>

                                      F-3
<PAGE>
<TABLE>

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


                                                                                             Year Ended December 31,
                                                                               ----------------------------------------------------
                                                                                  1999                 1998                1997
                                                                                  ----                 ----                ----
<S>                                                                             <C>                   <C>                <C>
Revenues:
   Net earned premium  .................................................        $ 89,442              $ 91,203            $ 85,002
   Commission income  ..................................................             482                 6,569               5,083
   Net investment income  ..............................................          15,985                15,209              14,435
   Net realized capital gains (losses)..................................            (443)                1,431               2,827
   Other income  .......................................................             158                   708                 870
                                                                                 -------               -------            --------
     Total revenues  ...................................................         105,624               115,120             108,217
                                                                                 -------               -------            --------

   Operating expenses:
   Net losses and loss adjustment expenses incurred  ...................          69,914                62,322              52,620
   Commission expense  .................................................          14,721                11,864              14,938
   Other operating expenses  ...........................................          24,879                24,264              22,231
   Interest expense  ...................................................           1,502                 1,517               1,244
                                                                                 -------               -------            --------
     Total operating expenses  .........................................         111,016                99,967              91,033
                                                                                 -------               -------            --------

   Income before income tax expense  ...................................          (5,392)               15,153              17,184

   Income tax expense (benefit):
       Current  ........................................................            (450)                3,100               3,879
       Deferred  .......................................................          (1,290)                  564                 759
                                                                                  ------                ------            --------
     Total income tax expense (benefit).................................          (1,740)                3,664               4,638
                                                                                  ------                ------            --------

   Net Income (Loss) ...................................................        $ (3,652)            $  11,489           $  12,546
                                                                                  ======              ========            ========


   Net income (loss) per common share:

      Basic  ...........................................................        $   (0.43)           $    1.37            $   1.51
      Diluted  .........................................................        $   (0.43)           $    1.36            $   1.50

   Average common shares outstanding:

      Basic.............................................................            8,419                8,414               8,296
      Diluted  .........................................................            8,419                8,459               8,385




                                                  See accompanying notes to consolidated financial statements.
</TABLE>

                                      F-4
<PAGE>


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

                                                                              Year Ended December 31,

                                                        1999                       1998                       1997
                                                        ----                       ----                       ----
<S>                                                   <C>                        <C>                         <C>
Preferred Stock
   Balance at beginning and end of year.....          $     --                   $    --                     $     --
                                                       ========                   =======                     =======

Common stock

   Balance at beginning of year.............          $     845                  $    837                    $     824
   Issuance of common stock during the year.                  1                         8                           13
                                                       --------                   -------                      -------
   Balance at end of year...................          $     846                  $    845                    $     837
                                                       ========                   =======                      =======

Additional paid-in capital
   Balance at beginning of year.............          $  39,332                  $ 38,119                    $  36,202
   Issuance of common stock during the year.                115                     1,213                        1,917
                                                       --------                   -------                      -------
   Balance at end of year...................          $  39,447                  $ 39,332                    $  38,119
                                                       ========                   =======                      =======

Retained earnings

   Balance at beginning of year.............          $  97,342                  $  85,853                   $  73,307
   Net income (loss)........................             (3,652)   $   (3,652)      11,489       $11,489        12,546     $ 12,546
                                                       --------     ---------     --------        ------      --------       ------
   Balance at end of year...................          $  93,690                  $  97,342                   $  85,853
                                                       ========                   ========                    ========

Treasury stock held at cost.................               (700)                       --                           --
                                                       ========                   ========                    ========

Accumulated Other Comprehensive Income

   Balance at beginning of year.............          $  5,747                   $  6,433                    $   5,209
   Net unrealized gains (losses) on securities,
     net of tax (benefit) expense of ($4,792),
     ($310) and $734 in 1999, 1998 and 1997,
     respectively (1)                                                   (8,899)                      (575)                    1,363

   Foreign currency loss net of tax benefit of $126,
     $60 and $75 in 1999, 1998 and 1997,
     respectively...........................                               234                       (111)                     (139)
                                                                        ------                      ------                  -------
   Other comprehensive income/(loss)........           (8,665)          (8,665)      (686)           (686)        1,224       1,224
                                                       -------          -------     ------          ------       -------    -------
   Comprehensive income/(loss)..............                       $   (12,317)                  $  10,803                 $ 13,770
                                                                       ========                    =======                  =======
   Balance at end of year...................         $ (2,918)                   $  5,747                     $    6,433
                                                      ========                    =======                       ========

Total stockholders' equity at end of year...         $130,365                    $143,266                     $  131,242
                                                      =======                     =======                       ========

(1)  Disclosure of reclassification amount:
     Unrealized holding gains (losses) arising
       during period........................                       $   (8,625)                    $     628                $  3,409
      Less: reclassification adjustment for net
       gains included in net income.........                             (274)                       (1,203)                 (2,046)
                                                                    ---------                       -------                  -------
     Net unrealized gains (losses) on securities                   $   (8,899)                    $    (575)                $ 1,363


                                     See  accompanying   notes  to  consolidated financial statements.
</TABLE>
                                      F-5
<PAGE>




<TABLE>


                                                  THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
                                                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                (In thousands)

                                                                                        Year Ended December 31,
                                                                       ------------------------------------------------------------
                                                                         1999                     1998                 1997
                                                                         ----                     ----                 ----
<S>                                                                   <C>                        <C>                  <C>
 Operating activities:
    Net income..................................................      $    (3,652)               $11,489              $12,546
    Adjustments to reconcile net income to net
       cash provided by (used in) operating activities:
    Depreciation & amortization  ...............................            1,800                    833                  526
    Net deferred Federal and foreign income tax   ..............             (560)                   595                  683
    Net realized capital (gains) losses.........................              443                 (1,431)              (2,827)
    Changes in assets and liabilities, net of acquistions:
     Reinsurance receivable on paid and unpaid
       losses and loss adjustment expenses  ....................          (29,094)               (52,913)              (3,759)
     Reserve for losses and loss adjustment expenses............           48,650                 64,012                8,831
     Prepaid reinsurance premiums  .............................              934                 (5,294)              (8,865)
     Unearned premium  .........................................            3,707                  2,636               14,743
     Premiums in course of collection  .........................          (14,536)               (30,474)             (10,738)
     Commissions receivable  ...................................            2,982                  2,272                  348
     Deferred policy acquisition costs  ........................           (1,575)                 1,100               (1,746)
     Accrued investment income  ................................              (25)                   (59)                 181
     Reinsurance balances payable  .............................              242                  8,319                4,958
     Federal income tax  .......................................           (1,651)                  (261)                (131)
     Other  ....................................................            1,232                 (3,813)              (2,253)
                                                                         --------                -------            ---------
Net cash provided by (used in) operating activities  ...........            8,897                 (2,989)              12,497
                                                                         --------                 ------             --------
 Investing activities:
    Fixed maturities, available-for-sale
      Redemptions and maturities  ..............................           43,295                 24,074                9,745
      Sales  ...................................................           25,335                 28,664               75,368
      Purchases  ...............................................          (64,365)               (66,373)             (93,679)
    Equity securities, available-for-sale
      Sales  ...................................................            3,341                  3,285                9,624
      Purchases  ...............................................           (8,087)                (3,083)              (4,017)
   Payment for purchase of MTC, net of cash acquired of $489 ...              (26)                (5,321)                --
   Payment for purchase of Anfield, net of cash acquired of $68.           (2,591)                   --                  --
   Payable for securities purchased  ...........................           (2,158)                 2,832               (2,815)
   Net sales (purchases) of short-term investments  ............           (1,100)                16,932              (10,757)
   Other investments  ..........................................            1,145                  1,262                 (132)
   Purchase of property and equipment  .........................             (791)                (1,166)                (974)
                                                                         ---------              --------             --------
         Net cash provided by (used in) investing activities  ..           (6,002)                 1,106              (17,637)
                                                                         ---------              --------               ------
Financing activities:
    Proceeds from bank loan  ...................................            1,500                  3,500                3,000
    Repayment of bank loan  ....................................           (1,000)                  (340)                 --
    Proceeds from exercise of stock options  ...................               44                  1,221                1,931
    Purchase of treasury stock..................................             (700)                   --                   --
    Repayment of note payable to stockholder  ..................              --                    (942)                 --
                                                                         --------               ---------             -------
         Net cash provided by (used in) financing activities                 (156)                  3,439               4,931
                                                                         --------               ---------             -------
Increase (decrease) in cash  ...................................            2,739                  1,556                 (209)
Cash at beginning of year  .....................................            2,807                  1,251                1,460
                                                                         --------              ---------             --------
Cash at end of year  ...........................................       $    5,546              $   2,807            $   1,251
                                                                        =========               ========             ========
Supplemental disclosures of cash flow information:
   Federal, state and local income tax paid (received)..........       $    1,050              $   3,599            $   4,080
   Interest paid  ..............................................            1,530                  1,605                1,222
   Issuance of stock to directors...............................               72                     72                 --
   Fair value of assets acquired................................            4,204                 10,495                 --
   Liabilities assumed in acquisitions..........................            1,519                  4,685                 --

                                     See  accompanying   notes  to  consolidated financial statements.
</TABLE>

                                      F-6
<PAGE>



                   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
sixteen  wholly  owned  subsidiaries,  are  prepared  on the basis of  generally
accepted accounting principles.  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.

     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,   and  a
contractors'  general  liability  program.  NIC, a wholly  owned  subsidiary  of
Navigators  Insurance,  began operations in 1990. It underwrites a small book of
surplus  lines  insurance  in certain  states and cedes 100% of its gross direct
writings from this business to Navigators  Insurance.  Navigators  Insurance and
NIC are collectively referred to herein as the "Insurance Companies".

     Five of the  Company's  subsidiaries  are  marine  underwriting  management
companies:  Somerset Marine,  Inc.,  Somerset Insurance Services of Texas, Inc.,
Somerset Insurance Services of California,  Inc., Somerset Insurance Services of
Washington, Inc. and Somerset Marine (UK) Limited ("Somerset UK") (collectively,
the "Somerset Companies"). The Somerset Companies produce, manage and underwrite
insurance and reinsurance for Navigators  Insurance,  NIC and four  unaffiliated
insurance companies.

     During 1999, the company closed the Somerset Asia Pacific Limited office in
Australia from which it incurred a foreign exchange loss of $346,000.

     Navigators  Holdings (UK) Limited is a holding company for the Company's UK
subsidiaries.  Somerset UK  produces  business  for the UK Branch of  Navigators
Insurance.  Navigators Corporate Underwriters Limited ("NCUL") is admitted to do
business at Lloyd's of London  ("Lloyd's")  as a corporate  member with  limited
liability.  In  January  1998,  the  Company  acquired  Mander,  Thomas & Cooper
(Underwriting Agencies) Limited ("MTC"), a Lloyd's of London marine underwriting
managing  agency which  manages  Lloyd's  Syndicate  1221,  and its wholly owned
subsidiary,  Millennium Underwriting Limited ("Millennium"), a Lloyd's corporate
member with  limited  liability.  The  purchase  price  consists of initial cash
payments,  acquisition  costs and  contingent  consideration  based upon  future
performance. The purchase price of approximately $6.2 million was funded through
a bank loan and working capital.  In addition,  the purchase  agreement requires
payment  of  additional  consideration  based  on  the  performance  of  Lloyd's
Syndicate 1221 managed by MTC.  Goodwill of approximately  $4.0 million has been
recorded  to date in  connection  with the  transaction.  The  goodwill is being
amortized  over 20 years.  Additional  goodwill  may be recorded in future years
when the amount of the future  performance  contingencies are determinable.  The
acquisition has been accounted for under the purchase  method of accounting.  In
August 1999, MTC formed Pennine Underwriting  Limited, an underwriting  managing
agency located in Northern  England,  which  underwrites  cargo and  engineering
business for Lloyd's Syndicate 1221.

     In April 1999,  the  Company  acquired  Anfield  Insurance  Services,  Inc.
("Anfield"),  an insurance  agency located in San Francisco,  California,  which
specializes  in  underwriting  general  liability  insurance  coverage for small
artisan  and  general  contractors  on the West  Coast.  The  purchase  price of
approximately  $2.7  million,  funded  through a bank loan and working  capital,
resulted in goodwill of approximately $2.3 million which is being amortized over
20 years.  The  acquisition  has been accounted for under the purchase method of
accounting.

                                      F-7
<PAGE>


     The Company's revenue is primarily  comprised of premiums,  commissions and
investment income. The Insurance  Companies derive the majority of their premium
from business  written by the Somerset  Companies.  The Insurance  Companies are
managed by Somerset  Marine,  Inc. The Lloyd's  operations  derive their premium
from  business  written  by  MTC,  and in 1997  from  one  unaffiliated  Lloyd's
syndicate.

Investments

     Investments are classified into one of three  categories.  Held-to-maturity
securities  are debt  securities  that the Company 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, 1999 and 1998, 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.

     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.   The  retrospective   adjustment  method  is  used  to  value  all
securities.

     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 net  realizable  value.  The write down is considered a realized
loss in the consolidated statement of income.

Premium Revenues

     Insurance  and  reinsurance  premiums  are  recognized  as  income  by  the
Insurance  Companies  during the terms of the related  policies based on reports
received from the Somerset  Companies and ceding  reinsurers.  Unearned  premium
reserves are established to cover the unexpired portion of written premiums.

Commission Income

     Commission   income,   based  on  estimated   gross  premiums  earned  from
non-affiliated  insurers,  is recognized over the terms of the related policies.
Contingent  commission income,  based on estimated net underwriting results from
non-affiliated  insurers,  is included in commission  income in the accompanying
consolidated  financial  statements.  Changes in prior  estimates of  commission
income and  contingent  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 earned.  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.

                                      F-8
<PAGE>


Reserve 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  estimates  are  regularly  reviewed and updated and any
resulting adjustments are included in income currently. 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

     The Company  calculates its net income (loss) per share in accordance  with
the  Financial  Accounting  Standards  Board's  ("FASB")  Statement of Financial
Accounting  Standards  ("SFAS") No. 128, Earnings Per Share. SFAS 128 supersedes
APB Opinion No. 15, Earnings Per Share,  and replaces primary earnings per share
and fully diluted  earnings per share with basic  earnings per share and diluted
earnings per share, respectively.

Reinsurance Ceded

     Reinsurance   ceded  which  transfers  risk,   premiums,   commissions  and
recoveries  on losses  incurred 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 five 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 obtained for
internal  use in  accordance  with the American  Institute  of Certified  Public
Accountants'  Statement  of  Position  No.  98-1  "Accounting  for the  Costs of
Computer  Software  Developed or Obtained for Internal Use" ("SOP 98-1").  As of
December  31,  1999 and 1998,  unamortized  computer  software  costs  were $1.3
million  and  $1.0  million,  respectively.  Amortization  expense  amounted  to
$332,000 in 1999. There was no computer software amortization expense in 1998 or
1997.

Goodwill

     Goodwill  was $5.8  million and $3.9 million at December 31, 1999 and 1998,
respectively,   net  of  accumulated  amortization  of  $487,000  and  $203,000,
respectively.  There was no goodwill in 1997.  Amortization expense was $283,000
and $203,000 in 1999 and 1998, respectively.

     The Company  regularly  evaluates the  recoverability of goodwill and other
acquired  intangible  assets. The carrying value of such assets would be reduced
through a direct  write-off if, in management's  judgment,  it was probable that
projected future operating income, before amortization of goodwill, would not be
sufficient on an undiscounted basis to recover the carrying value.

                                      F-9
<PAGE>


Stock-Based Compensation

     SFAS  No.  123,  "Accounting  for  Stock-Based   Compensation"  establishes
financial accounting and reporting standards for stock-based compensation plans.
As permitted by SFAS 123, the Company will continue 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  footnote  disclosures of net income and earnings per share as if the fair
value method of accounting, as defined in SFAS 123, had been applied.

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  bases.  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  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  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.

Adoption of Accounting Standards

     In December 1997, the American  Institute of Certified  Public  Accountants
issued  Statement  of Position  No.  97-3,  Accounting  by  Insurance  and Other
Enterprises for Insurance Related Assessments, ("SOP 97-3"). SOP 97-3, effective
for fiscal years  beginning after December 15, 1998,  establishes  standards for
accounting for guaranty-fund  and certain other insurance  related  assessments.
The adoption of this  Statement did not have a material  effect on the Company's
results of operations or financial condition.

     SOP 98-5, Reporting the Costs of Start-Up  Activities,  was issued in April
1998 and requires  costs of start-up  activities  and  organization  costs to be
expensed as  incurred.  SOP 98-5,  effective  for fiscal years  beginning  after
December 15, 1998, required that the initial application of this SOP be reported
as a cumulative catch-up adjustment.  Restatement of previously issued financial
statements  is not  allowed.  The  adoption  of the SOP did not have a  material
effect on the Company's results of operations or financial condition.

Future Application of Accounting Standards

     SFAS No. 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

                                      F-10
<PAGE>


either assets or liabilities in the statement of financial  position and measure
those  instruments  at fair value.  This  statement,  as amended by SFAS 137, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
Earlier application is encouraged,  but it is permitted only as of the beginning
of any fiscal  quarter that begins after  issuance of this  statement.  SFAS 133
should not be applied  retroactively  to financial  statements of prior periods.
The adoption of this statement is not expected to have a material  effect on the
Company's results of operations or financial condition.


                                      F-11
<PAGE>



Note 2. Investments

The Company's  fixed  maturities and equity  securities at December 31, 1999 and
1998 were as follows:
<TABLE>

                                                                       Gross               Gross
                                                Amortized            Unrealized          Unrealized          Fair
December 31, 1999                             Cost or Cost             Gains               (Losses)          Value
-----------------                             ------------          -------------       -------------        -----
                                                                              (In thousands)
<S>                                               <C>                     <C>             <C>             <C>
Fixed maturities:

   U.S. Government, government
      agencies and authorities...........      $  14,231              $     1           $   (776)      $  13,456
   States, municipalities and political
      subdivisions.......................         93,965                1,472             (1,586)         93,851

   Mortgage and asset backed.............         81,400                  209             (3,029)         78,580
   Corporate bonds.......................         37,258                   21             (1,629)         35,650
   Redeemable preferred stock............          1,021                    6                 (9)          1,018
                                               ---------               ------             ------        --------

      Total fixed maturities.............      $ 227,875              $ 1,709           $ (7,029)       $222,555
                                                 =======                =====             ======         =======

Equity securities - common stocks........      $  11,105              $ 1,222           $   (487)      $  11,840
                                                ========                =====            =======        ========

                                                                       Gross               Gross
                                               Amortized            Unrealized           Unrealized           Fair
December 31, 1998                             Cost or Cost             Gains               (Losses)           Value
-----------------                             ------------          -------------       -------------         -----
                                                                              (In thousands)
Fixed maturities:

   U.S. Government, government
      agencies and authorities...........      $  15,281              $   249           $    (68)      $  15,462
   States, municipalities and political
      subdivisions.......................        120,276                6,171                (57)        126,390
   Mortgage and asset backed.............         79,901                1,636               (204)         81,333
   Corporate bonds.......................         15,540                  420                 (4)         15,956
   Redeemable preferred stock............          1,023                   69                --            1,092
                                                --------               ------             -------       --------

      Total fixed maturities.............      $ 232,021              $ 8,545           $   (333)      $ 240,233
                                                 =======                =====               ====         =======

Equity securities - common stocks........      $   6,506              $ 1,364           $   (470)       $  7,400
                                                 =======                ======              ====         =======

</TABLE>


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


          Period from

       December 31, 1999                  Fair           Amortized
          to Maturity                    Value               Cost
          -----------                    ------              -----
                                                    (Dollars in thousands)

One year or less....................   $  5,396         $   5,326
Over one year through five years....     50,437            50,253
Over five years through ten years...     57,465            58,247
More than ten years.................     30,677            32,649
Mortgage and asset backed...........     78,580            81,400
                                        -------          --------
Total...............................   $222,555         $ 227,875
                                        =======           =======


                                      F-12
<PAGE>



         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,

                                   1999              1998             1997
                                   ----              ----             ----
                                                (In thousands)

  Fixed maturities..............  $ 15,713         $ 13,784          $13,248
  Equity securities.............       363              230              292
  Short-term investments........       573            1,874            1,613
                                   -------           ------           ------
                                    16,649           15,888           15,153
  Investment expenses...........     (664)            (679)            (718)
                                   -------           ------           ------

  Net investment income.........  $ 15,985         $ 15,209          $14,435
                                    ======           ======           ======


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

                                             Year Ended December 31,

                                           1999             1998           1997
                                           ----             ----           ----
                                                      (In thousands)

  Fixed maturities:
     Gains..............................$  1,108           $  768        $  786
     (Losses)...........................    (549)             (99)         (269)
                                          ------            -----         -----
                                             559              669           517
                                          ------            -----         -----
  Equity securities and other investments:
     Gains..............................     492            1,196         2,868
     (Losses)...........................  (1,494)            (434)         (558)
                                          ------            -----         -----
                                          (1,002)             762         2,310
                                          ------            -----         -----

  Net realized capital gains (losses)...$   (443)          $1,431        $2,827
                                         =======            =====         =====


         At December 31, 1999 and 1998,  fixed  maturities with amortized values
of $6,825,000 and $6,791,000,  respectively,  were on deposit with various State
Insurance Departments.  In addition, at December 31, 1999 and 1998, $132,000 and
$136,000,  respectively, were on deposit with the Bank of England for Navigators
Insurance's  UK Branch.  Also, at December 31, 1999 and 1998,  fixed  maturities
with amortized  values of $405,000 and $842,000,  respectively,  were pledged as
security under a reinsurance treaty.

         At December  31,  1999,  the Company  did not have a  concentration  of
greater than 10% of invested assets in a single issuer.

         In  1998,   the  Company   disposed  of  its  investment  in  Riverside
Underwriters Plc ("Riverside"). The Company received a payment of (pound)225,000
(converted  to  $382,000)  in  1998  and  recorded  a loss  on the  disposal  of
(pound)250,000 (converted to $420,000). The remaining payments of (pound)300,000
was due in 1999 and  (pound)225,000  is due in 2000. The payment due in 1999 was
not received and it is  considered  unlikely that the 1999 or 2000 payments will
be received in the  foreseeable  future.  Therefore,  the Company has recorded a
loss on the investment in 1999 of (pound)525,000 (converted to $865,000).

                                      F-13
<PAGE>



         In addition to the  disposal of the  investment  in  Riverside,  pretax
earnings  (losses) for 1999, 1998 and 1997 of ($215,000),  $393,000 and $561,000
are  included  in other  income.  The Company  records its share of  Riverside's
earnings from  underwriting  when sufficient  information  becomes  available to
provide   reasonable   estimates  of  earned  premiums  and  losses.   The  last
underwriting year that the Company participated at Lloyd's through Riverside was
1996 which closed in 1999 under the Lloyd's three year methodology.

Note 3.  Notes Payable and Letters of Credit

         On  December  21,  1998,  the  Company  entered  into a new bank credit
facility which replaced the prior facility.  The new credit facility  provides a
$25  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 0.875% on the used portion of the line of credit.  The commitment fee
on the  unused  portion  of the line of  credit  is  0.125%.  The line of credit
facility  reduces each quarter by amounts between $1.0 million and $2.25 million
beginning  January 1, 2000 until it terminates on November 19, 2003. At December
31,  1999 and 1998,  $24 million  and $23.5  million in loans were  outstanding,
respectively, under the revolving line of credit facility at an interest rate of
7.1% and 5.9%, respectively. The credit facility also provides for a $60 million
letter of credit facility which is utilized  primarily by NCUL and Millennium to
participate in Lloyd's Syndicate 1221 managed by MTC. The cost of the letters of
credit is 0.875% for the used  portion and 0.125% for the unused  portion of the
letter of credit facility. At December 31, 1999 and 1998, letters of credit with
an aggregate face amount of $42.2 million and $29.2 million, respectively,  were
issued  under the letter of credit  facility.  These  letters of credit have not
been drawn upon.

         The bank credit facility is collateralized by shares of common stock of
the Company's major  subsidiaries.  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  total
stockholders' equity,  statutory surplus,  minimum liquidity,  loss reserves and
other  financial  ratios.  At December 31, 1999,  the Company  complied with all
covenants  except for one related to the surplus of the Insurance  Companies for
which a waiver and an amendment curing the  noncompliance  was received from the
banks providing the credit facility.

Note 4.  Fiduciary Funds

         The Somerset  Companies  maintain  fiduciary accounts for the insurance
pools  they  manage.  Functions  performed  by the  Somerset  Companies  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 belonging to the insurance pools are held in a fiduciary capacity.


                                      F-14
<PAGE>


         The  fiduciary  accounts  as of  December  31,  1999 and  1998  were as
follows:

                                                              December 31,
                                                          1999           1998
                                                          ----           ----
                                                              (In thousands)

         Cash and short-term investments.............    $  7,019       $ 7,015
         Premiums receivable.........................      31,802        24,690
         Reinsurance balances receivable (payable)...       (378)         7,688
                                                          ------         ------

                Total assets.........................    $ 38,443       $39,393
                                                          =======        ======

         Due to insurance companies..................    $ 38,443       $39,393
                                                           ------        ------

                Total liabilities....................    $ 38,443       $39,393
                                                           ======        ======

         The  fiduciary  accounts  above were not  included in the  accompanying
consolidated balance sheets.

Note 5.  Income Taxes

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

                                                Year Ended December 31,

                                     1999             1998           1997
                                     ----             ----           ----
                                                 (In thousands)

Current:
   Federal and foreign..........   $  (499)          $ 2,887        $ 3,328
   State and local..............        49               213            551
                                    ------            ------         ------

      Total.....................   $  (450)          $ 3,100        $ 3,879
                                    ======             =====          =====

Deferred:
   Federal and foreign..........   $  (560)          $   595        $   683
   State and local..............      (730)              (31)            76
                                    ------            ------            ---

      Total.....................   $(1,290)          $   564        $   759
                                    ======            ======         ======


         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:
<TABLE>

                                                     1999                    1998                     1997
                                                     ----                    ----                     ----
                                                                        (In thousands)
<S>                                         <C>          <C>           <C>        <C>          <C>         <C>
Computed expected
   tax expense..........................   $(1,887)      (35.0)%     $  5,304      35.0%     $  6,014       35.0%
Tax-exempt interest.....................    (1,747)      (32.4)        (2,139)    (14.1)       (2,538)     (14.8)
Dividends received deduction............       (88)       (1.6)           (48)     (0.3)          (61)      (0.3)
State and local income taxes, net of
   Federal income tax...................      (442)       (8.2)           118       0.8           408        2.4
Valuation allowance.....................     1,938        35.9            465       3.0         1,108        6.4
Other...................................       486         9.0            (36)     (0.2)         (293)      (1.7)
                                             -----        ----        -------      ----        ------       ----
                                           $(1,740)      (32.3)%     $  3,664      24.2%     $  4,638       27.0%
                                            ======       =====          =====      ====         =====       ====
</TABLE>

                                      F-15
<PAGE>



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

                                                       December 31,
                                                1999                    1998
                                                ----                    ----
                                                       (In thousands)

Deferred tax assets:
   Loss reserve discount.....................  $  6,195                $  6,628
   Unearned premium..........................     1,309                   1,378
   Alternative minimum tax carryforward......     6,376                   4,674
   Deferred state and local income tax.......       151                     407
   Deferred compensation.....................        48                      52
   Net unrealized losses on securities.......     1,605                     --
   Loss from foreign operations..............     3,511                   1,794
   Other.....................................       332                     314
                                                 ------                 -------
Total gross deferred tax assets..............    19,527                  15,247
Less valuation allowance.....................    (3,511)                 (1,573)
                                                 -------                -------
     Total deferred tax assets...............    16,016                  13,674
                                                 -------                -------

Deferred tax liabilities:
   Deferred acquisition costs................      (824)                   (985)
   Net unrealized gains on securities........       --                   (3,187)
   Contingent commission receivable..........    (1,965)                 (1,300)
   Other.....................................       --                     (200)
                                                -------                 -------
     Total deferred tax liabilities..........    (2,789)                 (5,672)
                                                 ------                 -------

     Net deferred tax asset..................   $13,227                $  8,002
                                                 ======                 =======


         In 1999 and 1998,  a tax benefit of $1,000 and  $79,000,  respectively,
was credited directly to additional paid-in capital due to the exercise of stock
options.

         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, 1999, net of any valuation allowance.

         The valuation  allowances of $3,511,000  and  $1,573,000  for the years
ended  December  31,  1999  and  1998,  respectively,  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.

Note 6.  Reserves for Losses and Loss Adjustment Expenses

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

                                      F-16
<PAGE>



<TABLE>

                                                                    Year Ended December 31,
                                                         ------------------------------------------------
                                                               1999              1998                1997
                                                               ----              ----                ----
                                                                            (In thousands)
<S>                                                           <C>            <C>                <C>
Net reserves for losses and LAE at
      beginning of year .............................         $150,517        $139,841           $132,558
                                                               -------         -------            -------
Provision for losses and LAE for
    claims occurring in the current year.............           45,001          46,050             53,654
Lloyd's portfolio transfer - reinsurance to close....           15,533          19,655                __
Increase (decrease) in estimated losses and
    LAE for claims occurring in prior years..........            9,380          (3,383)            (1,034)
                                                                ------         -------            -------
Incurred losses and LAE..............................           69,914          62,322             52,620
                                                                ------         -------            -------
Losses and LAE payments for claims
    occurring during:
       Current year..................................          (10,925)         (9,848)          (12,921)
       Prior  years..................................          (38,976)        (41,798)          (32,416)
                                                                ------         --------          -------
Losses and LAE payments..............................          (49,901)        (51,646)          (45,337)
                                                                ------         -------           -------
Net reserves for losses and LAE at end of year.......          170,530         150,517            139,841
                                                               -------         -------            -------

Reinsurance receivable on unpaid losses and LAE......          220,564         191,927            138,591
                                                               -------         -------            -------

Gross reserves for losses and LAE at end of year.....         $391,094        $342,444           $278,432
                                                               =======         =======            =======
</TABLE>


         The  deficiency  for the year ended December 31, 1998 resulted from the
unrecoverable  reinsurance  from  New Cap Re and  reserve  strengthening  in the
Company's Lloyd's subsidiary.

     At Lloyd's,  the amount to close an underwriting year into the next year is
referred to as the "reinsurance to close." At December 31, 1999,  Syndicate 1221
and an  unaffiliated  syndicate on which NCUL  participated in 1997 closed their
1997 underwriting year, the net effect of which resulted in a portfolio transfer
to NCUL and  Millennium  of $15.5  million at December 31, 1999. At December 31,
1998, Syndicate 1221 and an unaffiliated syndicate on which NCUL participated in
1997 closed their 1996  underwriting  year resulting in a portfolio  transfer to
NCUL of $19.7 million at December 31, 1998. This  transaction  accounted for the
majority  of the  increase  from  1997  to  1998 in the  premium  volume  in the
Company's Lloyd's operations. The reinsurance to close transactions are recorded
as additional  written and earned premium,  losses  incurred,  loss reserves and
cash  received,  all in the  same  amount.  There  was no  gain  or  loss on the
transactions.

         During 1999,  1998 and 1997, the Insurance  Companies paid gross losses
and LAE of $665,000, $2,091,000 and $1,510,000,  respectively,  resulting in net
paid  losses and LAE of  $378,000,  $369,000  and  $723,000,  respectively,  for
environmental pollution and asbestos related claims. As of December 31, 1999 and
1998,  the  Insurance   Companies  carried  gross  reserves  of  $3,712,000  and
$2,912,000,  respectively,  and  net  reserves  of  $1,088,000  and  $1,199,000,
respectively,  for the potential  exposure to such claims. At December 31, 1999,
there were 870 open claims 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-17
<PAGE>



Note 7.  Reinsurance

         The following table summarizes earned premium:

                                                Year Ended December 31,
                                    1999              1998               1997
                                    ----              ----               ----
                                                   (In thousands)

         Direct.................  $107,939         $102,256          $110,453
         Assumed................    55,465           67,422            46,053
         Ceded..................   (73,962)         (78,475)          (71,504)
                                   -------          -------           -------
         Net....................  $ 89,442        $  91,203         $  85,002
                                   =======         ========          ========

         The following table summarizes written premium:

                                                Year Ended December 31,
                                    1999              1998              1997
                                    ----              ----              ----
                                                (In thousands)

         Direct.................   $120,426          $92,910         $119,597
         Assumed................     46,686           79,301           51,652
         Ceded..................    (73,028)         (83,729)         (80,369)
                                    -------          -------          -------
         Net....................   $ 94,084          $88,482          $90,880
                                     ======           ======           ======


         The 1999 and 1998 assumed  written and earned  premium  includes  $12.5
million and $19.7 million, respectively, of Lloyd's portfolio transfers to close
the 1996 and 1997 underwriting year, respectively.

         Ceded losses and loss adjustment  expenses incurred were  $112,870,000,
$126,392,000, and $57,340,000 in 1999, 1998, and 1997, 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.

         At December 31, 1999, the Company had reinsurance  receivables from the
following six reinsurers which were in excess of 5% of the Insurance  Companies'
statutory surplus:  Lloyd's of London,  $18,124;  American  Reinsurance Company,
$9,278;  Folksamerica  Reinsurance Company, $8,345; Insurance Corporation of New
York, $7,408; Swiss Re America, $6,688; and Scor Reinsurance Company $5,545.

         The Company's  Reinsurance  Security  Committee  monitors the financial
strength of its reinsurers and the related reinsurance receivables. An allowance
is  established  to the extent that it is  determined  that the ultimate  amount
collectible  is less than the amount  recorded as a receivable.  At December 31,
1999  and  1998,  there  was  an  allowance  for  uncollectible  reinsurance  of
$1,250,000 and $800,000,  respectively.  The expense recorded for  uncollectible
reinsurance  was  $7,016,000,  $58,000  and  $286,000  for 1999,  1998 and 1997,
respectively.  The 1999 expense for  uncollectible  reinsurance is the result of
New Cap Reinsurance  Corporation  Limited,  which  participated on the Company's
1997 and 1998 reinsurance programs,  being under the control of an Administrator
for possible liquidation.

   Note 8.  Financial Instruments

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

                                              December 31, 1999             December 31, 1998
                                       -----------------------------    ---------------------
                                       Carrying           Fair            Carrying              Fair
                                        Amount            Value           Amount               Value
     <S>                               <C>                <C>              <C>             <C>
     Financial assets:
        Fixed maturities............   $ 222,555          $222,555         $  240,233      $  240,233
        Equity securities...........      11,840            11,840              7,400           7,400
        Short-term investments......       6,747             6,747              5,647           5,647
     Financial liabilities:
        Notes payable to banks......   $  24,000         $  24,000         $   23,500      $   23,500
</TABLE>


                                      F-18
<PAGE>


         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
quoted  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  loans  payable to banks  approximates
carrying value since the interest rate charged is computed using market rates.

Note 9.  Stock Option Plans

         The  Company has an  Incentive  Stock  Option Plan and a Non  Qualified
Stock Option Plan which allow for the grant to key employees of the Company, its
subsidiaries and affiliates,  options to purchase an aggregate of 900,000 shares
of its common stock.

         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.  No  amounts  are
charged to expense  upon the granting of options  under the plans.  Options vest
equally over a four year period and have a maximum term of ten years.

         Stock options  outstanding at December 31, 1999,  1998 and 1997 were as
follows:

<TABLE>
                                             1999                      1998                      1997
                                    ----------------------    ----------------------    ---------------------
                                                  Average                   Average                  Average
                                    No. of        Exercise    No. of        Exercise    No. of       Exercise
                                    Shares         Prices     Shares         Prices     Shares         Prices
<S>                                <C>            <C>          <C>            <C>        <C>           <C>
Options outstanding at
   beginning of year.......        442,750        $19.79      477,925         $19.37     624,001       $18.73
     Granted...............         30,000        $14.00       79,500         $17.00      25,000       $17.00
     Exercised.............         (3,100)       $14.25       (75,925)       $14.09    (126,325)      $12.67
     Expired or forfeited..       (226,000)       $19.80       (38,750)       $20.07     (44,751)      $28.12
                                   -------                     -------                   --------
Options outstanding at
   end of year.............        243,650        $19.01       442,750        $19.79     477,925       $19.37
                                   =======                     =======                   =======
Number of options
   exercisable.............        176,338        $20.29       370,750        $20.33     365,650       $20.75

</TABLE>

         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 2,500,  13,500
and 25,500 stock appreciation rights in 1999, 1998 and 1997,  respectively.  The
amounts  charged  to  expense  (recovered)  in  1999,  1998  and  1997  were $0,
($171,000) and $147,000, 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,  no  compensation  cost  has been
recognized  for stock options.  Had  compensation  cost for the Company's  stock
options been determined consistent with SFAS No. 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:

                                      F-19
<PAGE>


<TABLE>

                                                      1999             1998           1997
                                                      ----             ----           ----

<S>                                                 <C>               <C>             <C>
Net income (loss) (in thousands):  As reported      $  (3,652)        $  11,489       $ 12,546
                                   Pro forma        $  (3,738)        $  11,243       $ 12,295

Basic income (loss) per share:     As reported      $   (0.43)        $    1.37       $   1.51
                                   Pro forma        $   (0.44)        $    1.34       $   1.48

Diluted income (loss) per share:   As reported      $   (0.43)        $    1.36       $   1.50
                                   Pro forma        $   (0.44)        $    1.33       $   1.47
</TABLE>

     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 33.0%, 32.3% and
31.8% in 1999,  1998 and 1997,  respectively;  risk free interest rate of 6%, 5%
and 6% for 1999, 1998 and 1997,  respectively;  and expected life of 6 years for
1999,  1998 and 1997.  The weighted  average  fair value of options  granted was
$6.16, $7.03 and $6.30 in 1999, 1998 and 1997, respectively.

         The following table summarizes information about options outstanding at
December 31, 1999:
<TABLE>

                       Outstanding        Average Remaining             Average            Exercisable      Average Exercise
Price Range               Shares            Contract Life           Exercise Price            Shares              Price

<S>                       <C>                 <C>                      <C>                 <C>                 <C>
   $14 to $17              183,650             6.7                      $15.17              116,338             $14.89
   $28 to $34               60,000             3.2                      $30.75               60,000             $30.75
</TABLE>

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 $731,000, $607,000
and  $686,000  in 1999,  1998 and 1997,  respectively.  The  Company  sponsors a
similar plan under UK regulations for its UK employees for which the Company had
expenses  of  $358,000,   $142,000  and  $121,000  for  1999,   1998  and  1997,
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.  The  maximum  amount  available  for the  payment  of
dividends by Navigators  Insurance during 1999 without prior regulatory approval
is $11,027,000. Navigators Insurance paid $8,500,000 in dividends to the Company
in 1999 and $5,000,000 in 1998.

         Navigators  Insurance  UK Branch  was  capitalized  at $10  million  in
October 1997 and is required to maintain certain capital  requirements  under UK
regulations.

                                      F-20
<PAGE>


         The  Insurance  Companies'  statutory  net  income  as  filed  with the
regulatory  authorities for 1999, 1998 and 1997 was $9,320,000,  $17,987,000 and
$15,714,000,  respectively.  The statutory  surplus as filed with the regulatory
authorities  was  $110,273,000  and  $109,659,000 at December 31, 1999 and 1998,
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 New York State Insurance  Department.  Prescribed
statutory  accounting practices ("SAP") include a variety of publications of the
National Association of Insurance Commissioners ("NAIC"), as well as state laws,
regulations,  and general  administrative rules.  Permitted statutory accounting
practices  encompass all accounting  practices not so prescribed.  The Insurance
Companies do not apply any permitted accounting practices.

         The  significant   differences   between  SAP  and  generally  accepted
accounting   principles  ("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  stockholder's  equity;  (3)
federal  income taxes are recorded when payable 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.

         The NAIC  recently  completed a process  intended  to codify  statutory
accounting practices for insurance enterprises. As a result of this process, the
NAIC will issue a revised statutory  Accounting  Practices and Procedures Manual
that will be effective  January 1, 2001 for the calendar year 2001.  The Company
will prepare 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.  The Company has not yet  determined  the
impact that this change will have on its statutory capital and surplus.

         As part of its general regulatory oversight process, the New York State
Insurance  Department (the "Department")  conducts detailed  examinations of the
books,  records and accounts of New York insurance companies every three to five
years.  The Insurance  Companies  were examined by the  Department for the years
1991  through  1995.  There  were no  adjustments  to the  Insurance  Companies'
previously filed statutory financial statements.

Note 12.  Commitments and Contingencies

a.   Future minimum annual rental commitments at December 31, 1999 under various
     noncancellable operating leases for the Company's office facilities,  which
     expire at various dates through 2010, are as follows:

                                                                (In thousands)

       Year Ended December 31,

              2000...................................             $   1,787
              2001...................................                 1,653
              2002...................................                 1,572
              2003...................................                 1,384
              2004 and subsequent....................                 3,714
                                                                   --------

              Total..................................             $  10,110
                                                                   ========

                                      F-21
<PAGE>



     The Company is also liable for  additional  payments to the  landlords  for
     certain  annual cost  increases.  Rent expense for the years ended December
     31,  1999,  1998  and  1997  was  $1,468,000,  $1,298,000  and  $1,522,000,
     respectively.

b.   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 an assessment on
     Navigators  Insurance by the Institute of London  Underwriters  ("ILU"). In
     late 1999, the ILU advised its then current  forty-one  members,  including
     Navigators  Insurance,  that they were each  being  assessed  approximately
     (pound)900,000 to pay for anticipated  operating  deficits arising from the
     long term lease of the ILU building located in London (the "ILU Building").
     This assessment was to be paid in cash or by providing a letter of credit.

     Even assuming that Navigators  Insurance could be held  responsible for the
     assessment,  Navigators  Insurance has informed the ILU that it opposes the
     assessment as inequitable and inappropriate  since it purports to force the
     ILU's members  (without  regard to the length of membership,  proportionate
     usage of the ILU's London Processing Centre or current or past occupancy of
     the ILU Building) to pay now for potential worst case liabilities extending
     through 2011.

     The ILU has,  thus far,  not filed suit to enforce the  assessment  against
     Navigators  Insurance.  In the  event  the  ILU  does  file  such  a  suit,
     Navigators Insurance intends to vigorously contest liability for payment of
     the assessment.  It is not possible to forecast the ultimate liability,  if
     any, at the present time.

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 Somerset Companies and the Lloyd's operations, each
of which is managed  separately.  The Insurance  Companies consist of Navigators
Insurance and NIC and are currently  primarily  engaged in  underwriting  marine
insurance  and related  lines of business.  The Somerset  Companies  (which when
referred  to  as  a  segment,  includes  Anfield)  are  underwriting  management
companies.  The Somerset Companies produce,  manage and underwrite insurance and
reinsurance  for both  affiliated  and  non-affiliated  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 in the summary of significant
accounting policies in Note 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 Somerset Companies' 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, as well as income and expense from corporate operations.

                                      F-22
<PAGE>


<TABLE>

Financial data by segment for 1997 through 1999 is as follows:

Year ended December 31:                                       1999           1998            1997
----------------------                                        ----           ----            ----
                                                                          (In thousands)
<S>                                                       <C>           <C>              <C>
Revenue, excluding net investment income and realized
gains (losses)on investments:
   Insurance Companies................................... $    42,001   $    50,983      $    73,415
   Somerset Companies....................................       5,430        12,935           14,634
   Lloyd's operations....................................      48,266        42,455           11,619
   Other operations (includes corporate activity and
     consolidating adjustments...........................      (5,615)       (7,893)          (8,713)
                                                           ----------    ----------        ----------
     Total............................................... $    90,082   $    98,480      $    90,955
                                                           ==========    ==========       ==========

Net investment income:
   Insurance Companies................................... $    14,573   $    14,658      $    13,696
   Somerset Companies....................................          65             8              636
   Lloyd's operations....................................       1,342           535               80
   Other operations......................................           5             8               23
                                                            ---------    ----------        ---------
     Total............................................... $    15,985   $    15,209      $    14,435
                                                           ==========    ==========       ==========

Realized gains and losses on investments:

   Insurance Companies................................... $       295   $     1,851      $     3,147
   Somerset Companies....................................          -              -                -
   Lloyd's operations....................................         127             -                -
   Other operations......................................        (865)         (420)            (320)
                                                           ----------    ----------       ----------
     Total............................................... $      (443)  $     1,431      $     2,827
                                                           ==========-   ==========       ==========

Income before tax expense (benefit):

   Insurance Companies................................... $    10,474   $    20,458      $    20,588
   Somerset Companies....................................      (9,857)       (2,619)          (1,962)
   Lloyd's operations....................................      (4,395)          279              112
   Other operations......................................      (1,614)       (2,965)          (1,554)
                                                            ---------    ----------       ----------
     Total............................................... $    (5,392)  $    15,153      $    17,184
                                                           ==========    ==========       ==========

Income tax expense (benefit):
   Insurance Companies................................... $     2,021   $     4,922      $     4,663
   Somerset Companies....................................      (3,286)          (76)             881
   Lloyd's operations....................................         221             -               37
   Other operations......................................        (696)       (1,182)            (943)
                                                           ----------    ----------       ----------
     Total............................................... $    (1,740)  $     3,664      $     4,638
                                                           ==========    ==========       ==========

Net income (loss):
   Insurance Companies................................... $     8,453   $    15,536      $    15,925
   Somerset Companies....................................      (6,570)       (2,543)          (2,843)
   Lloyd's operations....................................      (4,616)          279               75
   Other operations......................................        (919)       (1,783)            (611)
                                                           ----------    ----------       ----------
     Total............................................... $    (3,652)  $    11,489      $    12,546
                                                           ==========    ==========       ==========

Identifiable Assets:
   Insurance Companies................................... $   543,035   $   532,320      $   471,439
   Somerset Companies....................................       2,478        15,406           18,167
   Lloyd's operations....................................      70,112        50,069           17,043
   Other operations......................................      15,699        (5,708)          (5,442)
                                                           ----------    ----------        ---------
     Total............................................... $   631,324   $   592,087      $   501,207
                                                           ==========    ==========       ==========

                                      F-23
<PAGE>

</TABLE>


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 years ended
December 31, 1999, 1998 and 1997:
<TABLE>

                                                                              1999

                                                                            Average           Net
                                                             Net             Shares        (Loss)
                                                            (Loss)        Outstanding     Per Share
<S>                                                       <C>               <C>              <C>
Basic EPS:
    Income (loss) available to common stockholders....... $(3,652,000)      8,419,318        $(0.43)
Effect of Dilutive Securities:
   Stock options ........................................                          53
Diluted EPS:
  (Loss) available to common stockholders      .......... $(3,652,000)      8,419,371       $(0.43)


                                                                            1998

                                                                            Average           Net
                                                             Net             Shares        Income
                                                            Income        Outstanding     Per Share

Basic EPS:
    Income available to common stockholders    .......... $11,489,000      8,414,237        $1.37
Effect of Dilutive Securities:
   Stock options ........................................                     44,789
Diluted EPS:
   Income available to common stockholders     .......... $11,489,000      8,459,026        $1.36



                                                                            1997

                                                                           Average            Net
                                                             Net             Shares        Income
                                                            Income        Outstanding     Per Share

Basic EPS:
    Income available to common stockholders    .......... $12,546,000       8,296,429       $1.51
Effect of Dilutive Securities:
   Stock options  .......................................                      88,091
Diluted EPS:
   Income available to common stockholders     .......... $12,546,000       8,384,520       $1.50
</TABLE>

         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:  during 1999,  213,650 shares at an average price of
$19.71 expiring in years 2000 to 2008; during 1998, 156,125 shares at an average
price of $27.96 expiring in years 2000 to 2003; and during 1997,  173,125 shares
at an average price of $27.65 expiring in years 2000 to 2003.

                                      F-24
<PAGE>



Note 15.  Quarterly Financial Data (Unaudited)

         The results of  operations  for the quarterly  periods  during 1999 and
1998 were as follows.
<TABLE>

                                                                        Three Month Period Ended

                                                 March 31,             June 30,         Sept. 30,           Dec. 31,
                                                   1999                 1999              1999                1999
                                                   ----                 ----              ----                ----
                                                               (In thousands, except net income per share)

<S>                                               <C>                  <C>              <C>                <C>
Total revenues..........................          $  21,720            $  24,660        $  18,870          $  40,374
Income (loss) before income tax.........          $   2,926            $   2,264        $  (7,460)         $  (3,123)
Net income (loss).......................          $   2,107            $   1,937        $  (4,808)         $  (2,888)
Comprehensive income (loss).............          $     448            $  (1,454)       $  (6,895)         $  (4,416)

Per share data:
Net income (loss) per share - Basic.....          $    0.25            $    0.23        $  (0.57)          $  (0.34)
Net income (loss) per share - Diluted...          $    0.25            $    0.23        $  (0.57)          $  (0.34)


                                                                        Three Month Period Ended

                                                 March 31,             June 30,         Sept. 30,           Dec. 31,
                                                   1998                 1998              1998                1998
                                                   ----                 ----              ----                ----
                                                               (In thousands, except net income per share)

Total revenues......................              $  24,027            $  22,299        $  24,360          $  44,434
Income before income tax............              $   4,517            $   4,192        $   4,022          $   2,422
Net income..........................              $   3,390            $   3,119        $   2,882          $   2,098
Comprehensive income (loss).........              $   3,275            $   2,815        $   3,985          $     728

Per share data:
Net income per share - Basic........              $    0.40            $    0.37        $    0.34          $    0.25
Net income per share - Diluted......              $    0.40            $    0.37        $    0.34          $    0.25
</TABLE>

     The increase in fourth  quarter  1999 and 1998  revenues as compared to the
previous  three  quarters  was  primarily  due to the  $15.5  million  and $19.7
million, respectively, Lloyd's reinsurance to close portfolio transfer.

Note 16.  Subsequent Event

         The Company  controls 75.6% of Syndicate  1221's  capacity for the 2000
underwriting  year.  The  actual  capacity  is  (pound)66,297,000  (converts  to
$107,089,000) of which the Company directly controls (pound)42,772,000 (converts
to $69,090,000) and indirectly  controls another  (pound)7,340,000  (converts to
$11,856,000).  Since the  controlled  capacity  exceeds 75%,  Lloyd's  Mandatory
Byelaw  (No.  5 of 1999)  requires  the  Company  to make a  mandatory  offer to
noncontrolled  participants for their capacity.  The offer will take the form of
an Announced  Auction Offer to be made at the first Lloyd's  capacity auction in
July 2000.

     The offer will be made at 1.8 pence per  (pound)1 of capacity  which is the
minimum price that the Company is obliged to offer, being the highest price paid
for  capacity  during the last 12 months.  Whether or not, or to what extent the
offer is accepted  by the  offerees  is to some  extent  dependent  on the price
offered.  As such, it is unlikely that the acceptance will result in a cost that
is material to the Company.  For the purposes of guidance,  each 10% of capacity
accepting  will result in a cost to the Company of  (pound)120,000  (converts to
$194,000).  In addition, it is anticipated the administrative and legal costs of
making the offer will be approximately  (pound)25,000  (converts to $40,000). If
the Company  were to exceed the 90% control  threshold as a result of the offer,
Lloyd's  Major  Syndicate  Transactions  Byelaw  (No.  18 of 1997)  allows for a
Minority   Buy-out  to  be  effected.   In  such  a  transaction  the  remaining
participants  are required to give up their capacity in return for  compensation
which must be at least equal to the offer price preceding the buy-out.

         The  Company  provides  letters of credit to  Lloyd's  to  support  its
Syndicate 1221 capacity.  If the amount of capacity  controlled  increases,  the
Company  will be  required  to  supply  additional  letters  of  credit or other
collateral acceptable to Lloyd's, or to reduce the capacity of Syndicate 1221.

                                      F-25
<PAGE>


<TABLE>

                                                                                                          SCHEDULE I

                                         THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
                                  SUMMARY OF CONSOLIDATED INVESTMENTS--OTHER THAN INVESTMENTS
                                                      IN RELATED PARTIES
                                                      December 31, 1999
                                                        (In thousands)

                                                                                                          Amount at which
                                                                                                            shown in the

                                                        Amortized                                           consolidated
Type of Investment                                     Cost or Cost                Fair value               balance sheet
------------------                                     ------------                ----------               -------------
<S>                                                       <C>                      <C>                         <C>
Fixed maturities:
   Bonds:
     United States Government,
       government agencies
       and authorities...................                 $    14,231              $    13,456                 $    13,456
     States, municipalities

       and political subdivisions........                      93,965                   93,851                      93,851
     Mortgage and asset backed...........                      81,400                   78,580                      78,580
     Corporate bonds.....................                      37,258                   35,650                      35,650
     Redeemable preferred stock..........                       1,021                    1,018                       1,018
                                                              -------                  -------                     -------
           Total fixed maturities........                     227,875                  222,555                     222,555
                                                              -------                  -------                     -------

Equity securities:
   Common stocks:
     Industrial, miscellaneous

       and all other.....................                      11,105                   11,840                      11,840
   Short-term investments................                       6,747                    6,747                       6,747
                                                            ---------                ---------                    --------
           Total investments.............                 $   245,727              $   241,142                 $   241,142
                                                              =======                  =======                     =======

</TABLE>
                                      S-1
<PAGE>

<TABLE>

                                                                                                          SCHEDULE II

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

                                                                                       December 31,

A S S E T S                                                                       1999                     1998
                                                                                  ----                     ----
<S>                                                                             <C>                      <C>
Cash  ..........................................................             $      281             $         95
Investment in wholly owned subsidiaries,
   at equity....................................................                138,345                  154,454
Short-term investments..........................................                                              17
Other assets....................................................                 16,227                   12,599
                                                                              ---------              -----------
         Total assets...........................................             $  154,853             $    167,165
                                                                              =========              ===========

L I A B I L I T I E S

Notes payable to banks..........................................             $   24,000             $     23,500
Accounts payable and other liabilities..........................                    488                      399
                                                                              ---------              -----------
         Total liabilities......................................                 24,488                   23,899
                                                                              ---------              -----------

Commitments and contingencies...................................                     --                     --

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
   10,000,000 shares, issued and outstanding
   8,406,970 in 1999 and 8,447,926 in 1998......................                    846                      845
Additional paid-in capital......................................                 39,447                   39,332
Retained earnings...............................................                 93,690                   97,342
Treasury stock held at cost, 48,700 shares in 1999..............                   (700)                    --
Accumulated other comprehensive income:
   Net unrealized gains (losses) on securities
   available-for-sale, net of tax...............................                 (2,980)                   5,919
   Foreign currency translation adjustment, net of tax..........                     62                     (172)
                                                                              ---------              ------------

         Total stockholder' equity..............................                130,365                  143,266
                                                                              ---------              -----------

         Total liabilities and stockholders' equity.............             $  154,853             $    167,165
                                                                              =========              ===========


</TABLE>


                                      S-2
<PAGE>



<TABLE>


                                                                                                          SCHEDULE II

                                         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,
                                                                        1999                  1998                 1997
<S>                                                                     <C>                   <C>               <C>
Revenues:
   Net investment income.............................                   $      4              $     7           $     22
   Net realized capital loss.........................                       (865)                (420)              (320)
   Dividends received from wholly owned
     subsidiaries....................................                     11,000                5,000                 --
   Other Income......................................                       (222)                 591                727
   Operating expenses and income taxes...............                     (1,731)              (1,944)             (1,768)
                                                                          ------               ------              ------
   Income (loss) before equity in
     Undistributed net income
     of wholly owned subsidiaries....................                      8,186                3,234              (1,339)
   Equity in undistributed net income (loss)
     of wholly owned subsidiaries....................                    (11,838)               8,255              13,885
   Equity in undistributed net
     Income of affiliated company....................                      --                    --                   --
                                                                        ---------             -------              -----
   Net Income (Loss).................................                    $(3,652)             $11,489              $12,546
                                                                          ======               ======               ======

</TABLE>



                                      S-3
<PAGE>


<TABLE>




                                                                                                          SCHEDULE II

                                         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,
                                                              --------------------------------------------------------------------
                                                                             1999                  1998                 1997
                                                                             ----                  ----                 ----
<S>                                                                       <C>                    <C>                <C>
Operating activities:
   Net income..........................................                   $(3,652)               $11,489            $  12,546
   Adjustments to reconcile net income
     to net cash provided by (used in) operations:
     Net realized capital loss.........................                        864                   420                  320
     Equity in undistributed net income of wholly
       Owned subsidiaries..............................                     11,838                (8,255)             (13,885)
     Other.............................................                     (5,860)               (4,475)              (4,948)
                                                                            ------                ------             --------
   Net cash provided by (used in) operating activities.                      3,190                  (821)              (5,967)
                                                                           -------               -------             --------


Investing activities:
   Investment in affiliate.............................                     (2,865)               (5,144)                  --
   Sale of other investments...........................                         --                 1,356                   --
   Net (increase) decrease in short-term
     Investments.......................................                         17                   (17)                 933
                                                                           -------               -------             --------
   Net cash provided by (used in) investing activities.                     (2,848)               (3,805)                 933
                                                                           -------               -------             --------

Financing activities:
   Proceeds from bank loan.............................                      1,500                 3,500                3,000
   Repayment of bank loan..............................                     (1,000)                   --                   --
   Purchase of Treasury Stock..........................                       (700)                   --                   --
Proceeds from exercise of stock options................                         44                 1,221                1,931
                                                                           -------               -------             --------
   Net cash provided by (used in) financing activities.                       (156)                4,721                4,931
                                                                           -------               -------             --------

Increase (decrease) in cash............................                        186                    95                 (103)
Cash Beginning of Period...............................                         95                     0                  103
                                                                           -------               -------             --------
Cash End of Period.....................................                   $    281              $     95            $       0
                                                                           =======               =======             ========
</TABLE>


                                      S-4
<PAGE>




<TABLE>
                                                                                                                  SCHEDULE III

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

                                                      Reserve
                                     Deferred       for losses                   Other policy
                                      policy         and loss                     claims and          Net
                                    acquisition     adjustment      Unearned      benefits          earned
         Period                       costs          expenses       premiums       payable          premium
         ------                     ----------      ----------     ---------       -------          -------
<S>                                   <C>           <C>              <C>            <C>           <C>
Year ended December 31, 1999
   Insurance Companies..............  $ 2,355       $  333,262       $42,596        $     --      $  41,970
   Lloyd's Operations...............    3,523           57,832        12,407              --         47,472
                                        -----         --------        ------         -------         ------
                                      $ 5,878       $  391,094       $55,003        $     --      $  89,442
                                       ======          =======        ======          ======         ======


Year ended December 31, 1998
   Insurance Companies..............  $ 2,813       $  307,788       $44,681        $     --      $  51,033
   Lloyd's Operations...............    1,490           34,656         6,614              --         40,170
                                        -----         --------        ------         -------         ------
                                      $ 4,303       $  342,444       $51,295        $     --      $  91,203
                                        =====          =======        ======         =======         ======


Year ended December 31, 1997
   Insurance Companies..............  $ 3,393       $  270,521       $39,639        $     --      $  73,415
   Lloyd's Operations...............    2,010            7,911         9,020              --         11,587
                                        -----         --------        ------         -------         ------
                                      $ 5,403       $  278,432       $48,659        $     --      $  85,002
                                        =====          =======        ======         =======         ======


                                                        Losses      Amortization
                                                        and loss    of deferred
                                            Net        adjustment      policy         Other           Net
                                        Investment      expenses    acquisition     operating      written
         Period                          Income (1)     incurred      costs(2)     expenses(1)      premium
         ------                          ----------     --------     -----------   -----------      -------
Year ended December 31, 1999
   Insurance Companies..............      $14,573      $  31,070       $ 12,897       $ 2,428       $40,987
   Lloyd's Operations...............        1,222         38,844          9,632         4,586        53,097
                                           ------         ------        -------         -----        ------
                                          $15,795      $  69,914       $ 22,529       $ 7,014       $94,084
                                          =======         ======        =======         ======       ======


Year ended December 31, 1998
   Insurance Companies..............      $14,658       $ 30,123       $ 14,613       $ 2,299       $49,287
   Lloyd's Operations...............          347         32,199          5,032         2,720        39,195
                                           ------         ------        -------         -----        ------
                                          $15,005       $ 62,322       $ 19,645       $ 5,019       $88,482
                                           ======         ======         ======         =====        ======

Year ended December 31, 1997
   Insurance Companies..............      $13,696       $ 45,194       $ 21,676       $ 2,801       $72,468
   Lloyd's Operations...............           80          7,426          2,889         1,272        18,412
                                           ------        -------        -------         -----        ------
                                          $13,776       $ 52,620       $ 24,565       $ 4,073       $90,880
                                           ======         ======         ======         =====        ======

</TABLE>
(1)      Net investment  income and other operating  expenses  reflect only such
         amounts attributable to the Company's insurance operations.

(2)      Amortization  of deferred policy  acquisition  costs reflects only such
         amounts attributable to the Company's insurance  operations.  A portion
         of these costs is eliminated upon consolidation.


                                      S-5
<PAGE>




<TABLE>

                                                                                                                   SCHEDULE IV
                                         THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
                                                         REINSURANCE

                                                       Written Premium

                                                    (Dollars in thousands)

                                                      Ceded to            Assumed                        Percentage
                                    Direct            other             from other          Net          of amount
                                    Amount           companies           companies         amount      assumed to net
                                    ------           ---------          -----------       --------     --------------
<S>                                <C>                <C>                <C>               <C>               <C>
Year ended December 31, 1999
   Property-Casualty.......        $120,426           $73,027            $46,685           $94,084           50%
                                    -------            ------             ------            ------           ---
Year ended December 31, 1998
   Property-Casualty.......        $ 92,910           $83,729            $79,301           $88,482           90%
                                    -------            ------             ------            ------           ---
Year ended December 31, 1997
   Property-Casualty.......        $119,597           $80,369            $51,652           $90,880           57%
                                    -------            ------             ------            ------           ---

</TABLE>

                                      S-6
<PAGE>




<TABLE>



                                                                                                          SCHEDULE V

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

      Col. A                  Col. B                        Col. C                                Col. D                 Col. E
      ------                  ------                                                              ------                 ------
                                                           Additions
                                               ----------------------------------------

                            Balance at                                                                                 Balance at
                            January 1,           Charged to               Charged to           Deductions             December 31,
Description                  1999            Costs and Expensess       Other Accounts           Describe                1999
-----------                  ----            -------------------       --------------           --------                ----
<S>                         <C>                     <C>                     <C>                  <C>                    <C>
Allowance for
uncollectible
reinsurance                 $ 800                   $ 450                   $ -                  $ -                    $ 1,250
                             ----                    ----                    --                   --                     ------

Valuation allowance in
deferred taxes

                            $1,573                $ 1,938                   $ -                  $ -                    $ 3,511
                             -----                 ------                    --                   --                     ------

</TABLE>

                                      S-7
<PAGE>



<TABLE>
                                                                                                                   SCHEDULE VI

                                         THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

                         SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
                                                        (In thousands)

                                                   Reserve
                                   Deferred       for losses
Affiliations                        policy         and loss    Discount,                 Net

   with                          acquisition      adjustment    if any,     Unearned    earned
Registrant                          costs          expenses     deducted    Premium     premium
----------                          -----          --------     --------    --------    -------


<S>                                <C>            <C>          <C>          <C>          <C>
Consolidated subsidiaries

Year ended December 31, 1999       $5,878         $391,094     $     --     $55,003      $89,442
                                    -----          -------      -------      ------       ------

Year ended December 31, 1998       $4,303         $342,444     $     --     $51,295      $91,203
                                    -----          -------      -------      ------       ------

Year ended December 31, 1997       $5,403         $278,432     $     --     $48,659      $85,002
                                    -----          -------      -------      ------       ------








                                                                            Amortization
                                             Losses and loss adjustment      of deferred
Affiliations                        Net     expenses incurred related to        policy         Other       Net
                                            ----------------------------
   with                          investment      Current    Prior           acquisition      operating    written
Registrant                        income(1)       year      years             costs(2)       expenses(1)  premium
----------                        ------          ----      -----             -----          --------     -------


<S>                               <C>           <C>             <C>            <C>            <C>           <C>
Consolidated subsidiaries

Year ended December 31, 1999      $15,795       $58,030         $11,884        $22,529        $7,014        $96,057
                                   ------        ------          ------         ------         -----         ------

Year ended December 31, 1998      $15,005       $65,705         $(3,383)       $19,645        $5,019        $88,482
                                   ------        ------          ------         ------         -----         ------

Year ended December 31, 1997      $13,776       $53,654         $(1,034)       $24,565        $4,073        $90,880
                                   ------        ------          ------         ------         -----         ------
</TABLE>




(1)      Net investment  income and other operating  expenses  reflect only such
         amounts attributable to the Company's insurance operations.

(2)      Amortization  of deferred policy  acquisition  costs reflects only such
         amounts attributable to the Company's insurance  operations.  A portion
         of these costs is eliminated upon consolidation.



                                      S-8
<PAGE>






                               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 Somerset Marine, Inc.                             (a)
       10-2    Agreement between The Navigators Group, Inc. and Somerset
               Marine, Inc.                                                  (a)
       10-3    Stock Option Plan                                          (a)(b)
       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            (f)
       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)
       10-13   Consulting Agreement between The Navigators Group, Inc. and
               William D. Warren                                             (e)
      10-14    Amended and Restated Credit Agreement dated December 21,
               1998, among The Navigators Group, Inc. and Lenders            (f)
      10-15    Employment Agreement with Salvatore A. Margarella dated
               March 1,1999                                                  (f)
       11-1    Statement re Computation of Per Share Earnings
       21-1    Subsidiaries of Registrant
       23-1    Consent of Independent Auditor
       27-1    Financial Data Schedule





--------------

(a)  Previously   filed  under  Commission  file  No.33-5667  as  part  of  Form
     S-1,incorporated herein by reference thereto.

(b)  Management  contracts of compensatory plans or arrangements  required to be
     filed as exhibits to this Form 10-K by Item 601(10)(iii) of Regulation S-K,
     previously filed as indicated and incorporated herein by reference.

(c)(d)(e)(f)  Previously  filed with the Company's  Form 10-K for the year ended
     December 31, 1994 (c), 1996 (d), 1997 (e) and 1998 (f), incorporated herein
     by reference thereto.

<PAGE>
<TABLE>


                                                                                              EXHIBIT 11-1


                                         THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
                                         -------------------------------------------


                                              COMPUTATION OF PER SHARE EARNINGS

                               Earnings Per Share of Common Stock and Common Stock Equivalents

                                            (In thousands, except per share data)



                                                                               Year Ended December 31,

                                                           ----------------------------------------------------------------------
                                                                             1999              1998                  1997
                                                                             ----              ----                  ----

<S>                                                                     <C>                  <C>                   <C>
Net income (loss) applicable to common stock                            $(3,652)             $11,489               $12,546

Average number of common shares outstanding                                8,419               8,414                 8,296

Net income (loss) per share - Basic                                     $ (0.43)              $ 1.37                $ 1.51


Average number of common shares outstanding                                8,419               8,414                 8,296
Add: Assumed exercise of stock options                                        --                  45                    89
                                                                           -----              ------                ------
Common and common equivalent shares outstanding                            8,419               8,459                 8,385
                                                                           =====               =====                 =====

Net income (loss) per share - Diluted                                   $ (0.43)               $1.36                $1.50

</TABLE>


<PAGE>


                                                                    EXHIBIT 21-1


                           THE NAVIGATORS GROUP, INC.
                                AND SUBSIDIARIES

SUBSIDIARIES OF THE REGISTRANT AT DECEMBER 31, 1999

                                                           Jurisdiction in

Name                                                       which organized

Navigators Insurance Company                                   New York
NIC Insurance Company                                          New York
Somerset Marine, Inc.                                          New York
Somerset Insurance Services of Texas, Inc.                     Texas
Somerset Insurance Services of California, Inc.                California
Anfield Insurance Services, Inc.                               California
Somerset Insurance Services of Washington, Inc.                Washington
Somerset Marine Aviation Property Managers, Inc.               New Jersey
Somerset Asia Pacific Pty Ltd.                                 Sydney, Australia
Somerset Marine (UK) Ltd.                                      England
Navigators Corporate Underwriters Ltd.                         England
Navigators Holdings (UK) Ltd.                                  England
Somerset Services Pte Ltd.                                     Singapore
Mander, Thomas & Cooper
   (Underwriting Agencies) Ltd.                                England
Millennium Underwriting Ltd.                                   England
Pennine Underwriting Limited                                   England

<PAGE>


                                                                    EXHIBIT 23-1









               CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors
The Navigators Group, Inc.

     We consent to incorporation by reference in the registration statement (No.
33-51608) on Form S-8 of The  Navigators  Group,  Inc. and  subsidiaries  of our
report dated March 30, 2000, relating to the consolidated  balance sheets of The
Navigators  Group,  Inc. and  subsidiaries as of December 31, 1999 and 1998, 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, 1999,
and all related schedules,  which report appears in the December 31, 1999 Annual
Report on Form 10-K of The Navigators Group, Inc. and subsidiaries.

                           /s/ KPMG LLP

New York, New York
March 30, 2000