LOGO

UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
December 31, 2003

Commission File No. 0-15886

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

Delaware(State or other jurisdiction of
incorporation or organization)

13-3138397(I.R.S. employer identification no.)One Penn Plaza, New York, New York(Address of principal executive offices)

10119(Zip code)


Company's telephone number, including area code:(212) 244-2333

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

Securities
registered pursuant to Section 12(g) of the Act:Common Stock, $.10 Par Value

(Title
of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K ý

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

The aggregate market value of voting stock held by non-affiliates as of June 30, 2003 was $127,123,000.

The
number of common shares outstanding as of March 1, 2004 was 12,553,865.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the Company's 2004 Proxy Statement are incorporated by reference in Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K.

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TABLE OF CONTENTS

|Description                                              |                                 | Page Number
|-------------------------------------------------------- | ------------------------------- | -----------
|                                                         |                                 |            
|Forward Looking Statements                               |                                 | 3          
|Business Description                                     |                                 | 4          
|Reinsurance Ceded                                        |                                 | 6          
|Loss Reserves                                            |                                 | 7          
|Investments                                              |                                 | 15         
|Regulation                                               |                                 | 21         
|Legal Proceedings                                        |                                 | 25         
|Selected Financial Data                                  |                                 | 27         
|Management's Discussion and Analysis                     |                                 | 28         
|                                                         | Overview                        |            
|                                                         | Critical Accounting Policies    |            
|                                                         | Results of Operations           |            
|                                                         | Segment Information             |            
|                                                         | Liquidity and Capital Resources |            
|Risk Factors                                             |                                 | 47         
|Controls and Procedures                                  |                                 | 53         
|Signatures                                               |                                 | 55         
|Index to Consolidated Financial Statements and Schedules |                                 | F-1        

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Note on Forward-Looking Statements

Some of the statements in this Annual Report on Form 10-K are "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are derived from information that we currently have and assumptions that we make. We cannot assure that anticipated results will be achieved,
since results may differ materially because of both known and unknown risks and uncertainties which we face. We undertake no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. Factors that could cause actual results to differ materially from our forward-looking statements include, but are not limited to,
the factors discussed in the "Risk Factors" section of this Form 10-K as well as:



In
light of these risks, uncertainties and assumptions, any forward-looking events discussed in this Form 10-K may not occur. You are cautioned not to place undue
reliance on any forward-looking statements, which speak only as of their respective dates.

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Part I

Item 1. BUSINESS

General

The accompanying consolidated financial statements consisting of the accounts of The Navigators Group, Inc., a Delaware holding company
established in 1982, and its twelve active wholly owned subsidiaries are prepared on the basis of accounting principles generally accepted in the United States of America ("GAAP"). The Company
consists of insurance company operations, insurance underwriting agencies and operations at Lloyd's of London. The terms "we", "us", "our" or "the Company" as used herein means The Navigators
Group, Inc. and its subsidiaries, unless the context otherwise requires. The term "Parent Company" is used to mean The Navigators Group, Inc. without its subsidiaries. All significant
intercompany transactions and balances have been eliminated.

We
are an international insurance holding company focusing on specialty products for niches within the overall property/casualty insurance market. Our largest product line and most
long-standing area of specialization is ocean marine insurance. We have also developed niches in specialty lines of business and professional liability insurance. We base our strategy of
developing specialty niches of business on the presence of what we perceive to be market opportunities for insurance products, our access to appropriately experienced personnel to manage a particular
niche business and our estimation of the likelihood of that niche business producing profitable results. We conduct our insurance operations through five wholly owned underwriting agencies (the
"Navigators Agencies") which underwrite on behalf of two wholly owned domestic insurance companies (Navigators Insurance Company and NIC Insurance Company, collectively referred to herein as the
"Insurance Companies"), as well as three unaffiliated insurers that participate in the marine business written by the Navigators Agencies. In addition to business that we underwrite in our insurance
company subsidiaries, we also participate in the Lloyd's of London market primarily through our ownership of Navigators Underwriting Agency, Ltd. ("NUAL") which manages the
Lloyd's Syndicate 1221.

Marine Insurance

Our marine insurance business is conducted both through our Insurance Companies and through our Lloyd's operations. Navigators Insurance Company
obtains marine business through participation with three other unaffiliated insurers in a marine insurance pool managed by the Navigators Agencies. Navigators Insurance Company has participated in
this marine insurance pool since 1983, when the company was formed. The composition of the pool and the level of participation of each member changes from time to time. Navigators Insurance Company's
net participation in the marine pool for 2002 and 2001 was 75%. Navigators Insurance Company had a 70% participation in the marine pool for 2003 until it consummated a commutation agreement with one
of the pool members, which retroactively increased our participation in the pool for 2003 to 80%. Somerset Insurance Ltd., a Bermuda corporation of which our Chairman and a member of his family
own, in the aggregate, 98% of the outstanding voting stock, continued to reinsure the portion of the amount commuted that it previously reinsured. This portion constituted approximately 3.1% of
Navigators Insurance Company's participation in the pool for the 2003 underwriting year which amounted to $2.3 million of gross written premium. Somerset Insurance Ltd. will not be
providing reinsurance to the Company for the 2004 underwriting year. Net recoverable balances due to Navigators Insurance Company from Somerset Insurance Ltd. at December 31, 2003 of
$3.5 million were fully collateralized by a funded trust account held by an independent third party. The Navigators Agencies generally receive commissions equal to 7.5% of the gross premium
earned on marine insurance and are entitled to receive a 20% profit commission on the net underwriting profits of

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the
pool. The Navigators Agencies' offices writing ocean marine business are located in major insurance or port locations in Chicago, Houston, London, Oakland, New York, San Franciso and Seattle.

Within
Navigators Insurance Company's ocean marine business, there are a number of different product lines. The largest is marine liability, which protects business from liability to
third parties for bodily injury or property damage stemming from their marine-related operations, such as terminals, marinas and stevedoring. We insure the physical damage to offshore oil platforms
along with other offshore operations related to oil exploration and production. Another significant product line is bluewater hull, which provides coverage to the owners of ocean-going vessels against
physical damage to the vessels. We also underwrite insurance for harbor craft and other small craft such as fishing vessels, providing physical damage and third party liability coverage. We underwrite
cargo insurance, which provides coverage for physical damages to goods in the course of transit, whether by water, air or land.

We
participate in the marine and related insurance lines of the Lloyd's market through NUAL, which manages Lloyd's Syndicate 1221. The majority of Lloyd's Syndicate 1221's capacity is
provided by Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd., which are wholly owned subsidiaries of NUAL. We provided 97.4%, 68.1% and 67.4% of Syndicate 1221's
capacity for the 2003, 2002 and 2001 underwriting years, respectively. In 2003, we provided a larger percentage of the gross capacity and reinsured 15.4% of our Syndicate 1221 capacity through the
utilization of quota share reinsurance agreements with third parties who provide letters of credit used as collateral at Lloyd's. Our share of the premiums, losses and expenses from Lloyd's Syndicate
1221 are included in our consolidated results. The largest product line within our Lloyd's marine business is currently cargo, and the other primary lines include marine liability, offshore energy,
bluewater hull, and assumed reinsurance of other marine insurers on an excess of loss basis. We have also developed a regional agency operation, Pennine Underwriting Limited, that generates cargo and
engineering business in the Manchester, Leeds and Basingstoke areas of the United Kingdom that are not traditionally served by Lloyd's of London.

Specialty

Navigators Specialty, a division of one of the Navigators Agencies which was acquired in 1999, primarily writes general liability insurance
focusing on small general and artisan contractors and other targeted commercial risks, mostly in California. We have developed underwriting and claims expertise in this niche which we believe has
allowed us to minimize our exposure to many of the large losses sustained in the past several years by other insurers, including losses stemming from coverages provided to larger contractors who work
on condominiums, cooperative developments and other large housing developments. Many former competitors that lacked the expertise to selectively underwrite in this niche have been forced to withdraw
from the market in the past several years, at a time when demand for coverage has remained, giving us the opportunity to selectively expand our underwriting in this area. As part of assessing the
profit potential of the various lines of our business, as well as the overall amount of business that we are prepared to write in this specific line, in early 2003 we began to reduce the number of
policies covering small artisan contractors, and to redirect our capacity to general contractors as well as to medium-sized artisan contractors. This shift in our business mix is consistent with our
approach of emphasizing underwriting profit over market share.

Beginning
in late 2002, Navigators Specialty began producing surety business from our Midwest office. Surety bonds guarantee the performance of a specific contractual or statutory
obligation, such as completion of a contractor's work on a publicly funded project. Our surety focus is on providing bid, performance and payment bonds for small to medium size contractors generally
requiring bonds for individual projects of $2 million or less. In addition, we write surety bonds to guarantee obligations outside of the construction industry, such as travel agents' bonds,
property brokers' bonds, notary bonds,

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miscellaneous
bonds, and license and permit bonds. We have hired a group of experienced surety underwriters in our Midwest office who focus exclusively on this business.

Also
in late 2002, Navigators Specialty began to write commercial multiple peril and commercial automobile insurance business from our Midwest office. Our commercial multi-peril products
include general liability and a small amount of property insurance. We do not underwrite workers compensation coverage. We generally avoid writing property risks in areas with high exposure to
earthquake or windstorm losses, such as California and Florida. In 2002, we also began underwriting personal umbrella insurance. This product is typically purchased by individuals who seek higher
limits of liability than are provided in their homeowners or personal automobile policies. When personal umbrella coverage is desired and these two primary coverages are placed with different
insurers, there is a need to place the personal umbrella insurance policy on a stand-alone basis.

Professional Liability

We commenced underwriting professional liability insurance in the fourth quarter of 2001 after attracting a team of experienced professionals.
This business is produced through Navigators Pro, a division of one of the Navigators Agencies. We believe that a compelling market opportunity exists in this line due to public perception of
diminished stockholder value resulting from numerous high profile financial and accounting scandals that have resulted in earnings restatements. This has resulted in increased class action litigation
activity involving potential large losses related to alleged mismanagement by directors and officers. Our principal product in this business is directors and officers liability, which we offer for
both privately held and small to mid-size publicly traded corporations. With respect to public corporations, we currently target corporations with a market capitalization of
$2 billion or less for this business. In addition, we provide fiduciary liability and crime insurance to our directors and officers liability clients. In 2002, we began offering employment
practices liability, lawyers professional liability and miscellaneous professional liability coverages. Our current target market for lawyers professional liability is law firms comprised of 75 or
fewer attorneys.

Engineering and Construction

The Lloyd's operations write engineering and construction business consisting of coverage for construction projects including damage to machinery
and equipment and loss of use due to delays. We believe this coverage, together with the cargo coverage provided through our Lloyd's operations marine business, provides our policyholders with risk
management protection for key exposures throughout a project's construction and operation.

Onshore Energy

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

Reinsurance Ceded

We utilize reinsurance principally to reduce our exposure on individual risks, to protect against catastrophic losses, to maintain desired ratios
of net written premium to statutory surplus and to stabilize loss ratios.

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

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We
are protected by various treaty and facultative reinsurance agreements. Our exposure to credit risk from any one reinsurer is managed through diversification by reinsuring with a
number of different reinsurers, principally in the United States and European reinsurance markets. To meet our standards of acceptability, when the reinsurance is placed, a reinsurer generally must
have an A.M. Best Company and/or Standard & Poor's rating of "A" or better, or equivalent financial strength if not rated, plus at least $250 million in policyholders' surplus.
Our Reinsurance Security Committee monitors the financial strength of our reinsurers and the related reinsurance receivables and periodically reviews the list
of acceptable reinsurers. The reinsurance is placed either directly by us or through reinsurance intermediaries. The reinsurance intermediaries are compensated by the reinsurers.

An
allowance was established for any amounts considered to be uncollectible. At December 31, 2003, 2002 and 2001, we had an allowance for uncollectible reinsurance of $33,068,000,
$8,534,000 and $6,905,000, respectively. The 2003 allowance included a charge of $25,700,000 for uncollectible reinsurance as a result of loss reserves established for asbestos exposures on marine and
aviation business written mostly prior to 1986. Charges for uncollectible reinsurance amounts recorded to incurred losses were $27,551,000, $1,632,000 and $320,000 for 2003, 2002 and 2001,
respectively.

The
following table lists our 10 largest reinsurers measured by the amount of reinsurance recoverable for ceded losses, ceded loss adjustment expense and ceded unearned premium
(constituting approximately 54.6% of the total recoverables) together with the reinsurance recoverables and collateral at December 31, 2003, and the reinsurers' rating from the indicated rating
agency:

|Reinsurer                               |  | Reinsurance
Recoverables |        | Collateral Held |   | Rating |  | Rating Agency
|--------------------------------------- |  | ------------------------ | ------ | --------------- | - | ------ |  | -------------
|
|General Reinsurance Corporation         |  | $                        | 79,944 |                 | $ | 7,578  |  | A++          
|Folksamerica Reinsurance Company        |  |                          | 37,538 |                 |   | 4,253  |  | A            
|Swiss Reinsurance America Corporation   |  |                          | 25,990 |                 |   | 1,794  |  | A+           
|Munich Re                               |  |                          | 23,615 |                 |   | 6,323  |  | A+           
|Lloyd's of London (primarily Equitas)   |  |                          | 18,206 |                 |   | 1,233  |  | A-           
|Employers Mutual Casualty Company       |  |                          | 16,555 |                 |   | 13,732 |  | A-           
|American Re-Insurance Company           |  |                          | 15,875 |                 |   | 1,392  |  | A+           
|Swiss Reinsurance Company (UK) Ltd.     |  |                          | 15,774 |                 |   | 796    |  | AA           
|Partner Reinsurance Company of the U.S. |  |                          | 15,340 |                 |   | 1,160  |  | A+           
|Everest Reinsurance Company             |  |                          | 12,655 |                 |   | 760    |  | A+           

Collateral includes letters of credit, ceded balances payable and other balances held by the Company.

Loss Reserves

Insurance companies and Lloyd's syndicates are required to maintain reserves for unpaid losses and unpaid loss adjustment expenses 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 loss adjustment expenses ("LAE") for insurance companies such as Navigators Insurance Company and NIC Insurance Company, and Lloyd's corporate members such as Navigators Corporate
Underwriters Ltd. and Millennium Underwriting Ltd. 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

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premiums
are written and related losses and loss adjustment expenses are incurred, and the time such events are reported to the pools and syndicates and, subsequently, to Navigators Insurance Company,
NIC Insurance Company, Navigators Corporate Underwriters Ltd. and Millennium Underwriting Ltd.

Loss
reserves are established by our Insurance Companies and Lloyd's Syndicate 1221 for reported claims when notice of the claim is first received. Reserves for such reported claims are
established on a case-by-case basis by evaluating several factors, including the type of risk involved, knowledge of the circumstances surrounding such claim, severity of
injury or damage, the potential for ultimate exposure, experience with the insured and the broker on the line of business, and the policy provisions relating to the type of claim. Reserves for
incurred but not reported losses ("IBNR") are determined in part on the basis of statistical information, in part on the basis of industry experience and in part on the basis of the judgment of our
senior corporate officers. To the extent that reserves are deficient or redundant, the amount of such deficiency or redundancy is treated as a charge or credit to earnings in the period in which the
deficiency or redundancy is recognized.

Loss
reserves are estimates of what the insurer or reinsurer expects to pay on claims, based on facts and circumstances then known. It is possible that the ultimate liability may exceed
or be less than such estimates. In setting our loss reserve estimates, we review statistical data covering several years, analyze patterns by line of business and consider several factors including
trends in claims frequency and severity, changes in operations, emerging economic and social trends, inflation and changes in the regulatory and litigation environment. Based on this review, we make a
best estimate of our ultimate liability. We do not establish a range of loss estimates around the best estimate we use to establish our reserves and loss adjustment expenses. During the loss
settlement period, which, in some cases, may last several years, additional facts regarding individual claims may become known and, accordingly, it often becomes necessary to refine and adjust
the estimates of liability on a claim upward or downward. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year's income statement. Even
then, the ultimate liability may exceed or be less than the revised estimates. The reserving process is intended to provide implicit recognition of the impact of inflation and other factors affecting
loss payments by taking into account changes in historical payment patterns and perceived probable trends. There is generally no precise method for the subsequent evaluation of the adequacy of the
consideration given to inflation, or to any other specific factor, because the eventual deficiency or redundancy of reserves is affected by many factors, some of which are interdependent.

Navigators
Insurance Company increased its gross and net asbestos reserves for losses by approximately $77.6 million and $31.6 million, respectively, in the fourth quarter
of 2003. As a result, gross and net incurred losses increased by the amount of the respective reserve increase. The $31.6 million of net asbestos losses includes $25.7 million of
uncollectible reinsurance.

The
reserve action was the result of a review of asbestos-related exposures conducted by the Company. The Company's management was notified in late January 2004 that an asbestos
claim would likely have to be settled for a significantly greater amount than previously anticipated. As a result of the unexpected adverse development on this individual claim, the Company retained a
leading independent consulting firm in this area to assist in the identification of its potential exposure to asbestos claims from policies written directly as well as those reinsured to Navigators
Insurance Company from prior members of the Company's insurance pools. The Company's increased reserves relate primarily to policies underwritten by the Navigators Agencies in the late 1970's and
first half of the 1980's on behalf of members of the pool, consisting of excess liability on marine related business and aviation products liability, including policies subsequently assumed by
Navigators Insurance Company pursuant to reinsurance arrangements with pool members who exited the pool. Following the Company's and the independent consulting firm's recent review, the Company
determined to increase its gross and net loss reserves for asbestos exposure to $78.5 million and $32.1 million, respectively, at December 31, 2003.

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Another
factor related to reserve development is that we record those premiums which are reported to us through the end of each calendar year and accrue estimates for amounts where there
is a time lag between when the policy is bound and the recording of the policy. A substantial portion of the estimated premium is from international business where there can be significant time lags.
To the extent that the actual premium varies from estimates, the difference, along with the related loss reserves are recorded in current operations.

The
following table presents an analysis of losses and loss adjustment expenses for each year in the three-year period ended December 31, 2003:

|                                                                                                         | Year Ended December 31,
|-------------------------------------------------------------------------------------------------------- | -----------------------
|
|
|Net reserves for losses and loss adjustment expenses at beginning of year                                |                        
|                                                                                                         |                        
|Provision for losses and loss adjustment expenses for claims occurring in the current year               |                        
|Lloyd's Operationsreinsurance to close                                                                  |                        
|Increase (decrease) in estimated losses and loss adjustment expenses for claims occurring in prior years |                        
|                                                                                                         |                        
|Incurred losses and loss adjustment expenses                                                             |                        
|                                                                                                         |                        
|Losses and loss adjustment expenses paid for claims occurring during:                                    |                        
|                                                                                                         | Current year           
|                                                                                                         | Prior years            
|                                                                                                         |                        
|Total losses and loss adjustment expenses paid                                                           |                        
|                                                                                                         |                        
|Net reserves for losses and loss adjustment expenses at end of year                                      |                        
|                                                                                                         |                        
|Reinsurance receivables on unpaid losses and loss adjustment expenses                                    |                        
|                                                                                                         |                        
|Gross reserves for losses and loss adjustment expenses at end of year                                    |                        
|                                                                                                         |                        

The segment breakdown of prior year reserve deficiency (redundancy) was as follows:

|Insurance Companies |       | $ | 61,476 |        | $ | 6,713 |       | $ | (4,503 | )     | 
|------------------- | ----- | - | ------ | ------ | - | ----- | ----- | - | ------ | ----- | 
|Lloyd's Operations  |       |   | (2,841 | )      |   | 325   |       |   | 9,888  |       | 
|                    |       |   |        |        |   |       |       |  
|                    | Total |   | $      | 58,635 |   | $     | 7,038 |   | $      | 5,385 | 
|                    |       |   |        |        |   |       |       |  

The $61.5 million deficiency recorded in 2003 for claims occurring in prior years for the Insurance Companies includes approximately $32.5 million
recorded for asbestos and environmental exposures (consisting of $31.1 million in marine business and $1.4 million in run-off business), $22.2 million recorded for
specialty business mostly for our California contractors liability business, approximately $4.0 million for marine business and $2.8 million for other run-off business (the
latter three being unrelated to the asbestos and environmental exposures). The additional asbestos and environmental reserves include $25.7 million of uncollectible reinsurance.

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Approximately
$6.7 million of the $7.0 million deficiency recorded in 2002 related to the Insurance Companies which resulted from adverse development in our specialty
business, predominantly from our California contractors' liability business. The $9.9 million deficiency recorded in 2001 for the Lloyd's operations was due to an increase in premium estimates
and related reserves for prior years and strengthening the Lloyd's reserves related to the 1999 underwriting year. The $4.5 million prior year redundancy recorded in 2001 for the Insurance
Companies was mostly related to marine business.

The
following table presents the development of the loss and loss adjustment expenses reserves for 1993 through 2003. The line "Net reserves for losses and loss adjustment expenses"
reflects the net reserves at the balance sheet date for each of the indicated years and represents the estimated amount of losses and loss adjustment expenses 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 loss adjustment expenses 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 1995 and was not reported until 1997, the amount of such loss will appear as a deficiency in both 1995 and 1996. Conditions and trends
that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on
the table.

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

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|                                                |                             | Year Ended December 31, |         |        
|----------------------------------------------- | --------------------------- | ----------------------- | ------- | -------
|
|
|Net reserves for losses and LAE                 |                             | $                       | 103,176 |        
|Reserves for losses and LAE re-estimated as of: |                             |                         |         |        
|                                                | One year later              |                         |         | 104,306
|                                                | Two years later             |                         |         | 102,831
|                                                | Three years later           |                         |         | 101,537
|                                                | Four years later            |                         |         | 100,432
|                                                | Five years later            |                         |         | 98,805 
|                                                | Six years later             |                         |         | 97,740 
|                                                | Seven years later           |                         |         | 93,812 
|                                                | Eight years later           |                         |         | 92,568 
|                                                | Nine years later            |                         |         | 91,444 
|                                                | Ten years later             |                         |         | 125,514
|                                                | Net cumulative (deficiency) |                         |         | (22,338
|Net cumulative paid as of:                      |                             |                         |         |        
|                                                | One year later              |                         |         | 32,700 
|                                                | Two years later             |                         |         | 53,603 
|                                                | Three years later           |                         |         | 62,769 
|                                                | Four years later            |                         |         | 69,356 
|                                                | Five years later            |                         |         | 75,534 
|                                                | Six years later             |                         |         | 80,308 
|                                                | Seven years later           |                         |         | 81,584 
|                                                | Eight years later           |                         |         | 82,435 
|                                                | Nine years later            |                         |         | 83,507 
|                                                | Ten years later             |                         |         | 86,811 
|Gross liabilityend of year                     |                             |                         | 247,346 |        
|Reinsurance recoverable                         |                             |                         | 144,170 |        
|                                                |                             |                         |         |        
|Net liabilityend of year                       |                             |                         | 103,176 |        
|Gross re-estimated latest                       |                             |                         | 337,257 |        
|Re-estimated recoverable latest                 |                             |                         | 211,743 |        
|                                                |                             |                         |         |        
|Net re-estimated latest                         |                             |                         | 125,514 |        
|Gross cumulative (deficiency)                   |                             |                         | (89,911 | )      

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The increases to the net asbestos reserves of $31.6 million and the gross asbestos reserves of $77.6 million in the fourth quarter of 2003 are
included in the net and gross cumulative deficiency figures, respectively, in each of the years shown in the table since the asbestos losses were prior to 1993.

The
following discussion in this paragraph excludes the increases to the asbestos reserves. We had a net cumulative redundancy in seven of the last ten years, meaning our initial net
reserve estimates for each of those years have not been increased in the aggregate upon re-estimation in subsequent calendar years. We have, however, experienced a net cumulative
deficiency in the latest three years as well as gross cumulative deficiencies in all of the ten years. The 1993 gross cumulative deficiencies resulted primarily from the 1989 Exxon Valdez loss. The
gross cumulative deficiencies for 1994 and 1995 resulted primarily from the 1994 Northridge Earthquake loss, the 1989 Exxon Valdez loss and a large marine liability claim reported in 1999 affecting
years 1994 through 1998. The 1996 gross cumulative deficiency resulted from adverse development in several lines of business. The 1997 gross cumulative deficiency resulted from adverse development in
the onshore energy business and from one large 1989 claim from a run-off book of business which also adversely affected years prior to 1997. The gross cumulative 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 our Lloyd's operations. The 2000 gross and net adverse
development resulted from our Lloyd's operations establishing reserves against premiums from prior years' which were received in excess of our original premium estimates and strengthening the Lloyd's
reserves related to the 1999 underwriting year. The net reserve deficiency for the 2001 year resulted primarily from adverse development in the specialty liability line of business. The gross
deficiency in the 2001 year resulted primarily from the adverse development in the specialty liability and marine lines of business. The gross and net reserve deficiency for 2002 resulted
primarily from reserve strengthening for specialty business written in prior years. The adverse development on our gross reserves has been mostly reinsured through excess of loss reinsurance treaties.
As a result of these reinsurance arrangements, while our gross losses and related reserve deficiencies and redundancies are very sensitive to adverse developments such as those described above, our
net losses and related reserve deficiencies and redundancies tend to be less sensitive to such developments.

Our
loss reserves include amounts related to short tail and long tail classes of business. Short tail business means that claims are generally reported quickly upon occurrence of an
event, making estimation of loss reserves less complex. Our longer tail business includes our specialty liability and professional liability insurance. For the long tail lines, significant periods of
time, ranging up to several years or more, may elapse between the occurrence of the loss, the reporting of the loss and the settlement of the claim. The longer the time span between the incidence of a
loss and the settlement of the claim, the more likely the ultimate settlement amount can vary from the original estimate.

Specialty Liability and Professional Liability.Substantially all of our specialty liability business involves general
liability policies which generate third party liability claims that are long tail in nature. A significant portion of our general liability reserves relate to California construction defect claims.
Reserves and claim frequency on this business may be impacted by legislation recently implemented in California, which generally provides consumers who experience construction defects a method other
than litigation to obtain construction defect repairs. This legislation may impact claim severity, frequency and length to settlement assumptions underlying our reserves. Accordingly, our ultimate
liability may exceed or be less than current estimates due to this variable, among others. As of December 31, 2003, we had 1,566 open claims on our general liability policies included in our
specialty business. During 2003, 2,074 new claims were reported.

The
professional liability class generates third party claims, which also are longer tail in nature. The professional liability policies provide coverage on a claims-made
basis, whereby coverage is generally provided only for those claims that are made during the policy period. Our professional liability business is relatively immature, with our first writing of the
business in late

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2001.
Accordingly, given the relative immaturity of this business, it will take some time to better understand the reserve trends on this business. Our professional liability loss estimates are based
on expected losses, actual reported losses, evaluation of loss trends, industry data, and the legal, regulatory and current risk environment because anticipated loss experience in this area is less
predictable due to the small number of claims and/or erratic claim severity patterns. We believe that we have made a reasonable estimate of the required loss reserves for professional liability. The
expected ultimate losses may be adjusted up or down as the accident years mature. As of December 31, 2003, we had 134 open claims for professional liability coverage. During 2003, 185 new
claims were reported.

The
following tables set forth our net loss and LAE loss reserves for our Specialty liability and professional liability businesses for the periods indicated:

|                       |       | December 31, 2003 |       
|---------------------- | ----- | ----------------- | ------
|
|
|Specialty liability    |       | $                 | 25,261
|Professional liability |       |                   | 159   
|                       |       |                   |       
|                       | Total |                   | $     
|                       |       |                   |       

|                       |       | December 31, 2002 |       
|---------------------- | ----- | ----------------- | ------
|
|
|Specialty liability    |       | $                 | 16,949
|Professional liability |       |                   |      
|                       |       |                   |       
|                       | Total |                   | $     
|                       |       |                   |       

Asbestos and Environmental Liability.Our exposure to asbestos and environmental liability principally stems from marine
liability insurance written on an occurrence basis during the mid-1980s. In general, our participation on such risks is in the excess layers, which requires the underlying coverage to be
exhausted prior to coverage being triggered in our layer. In many instances we are one of many insurers who participate in the defense and ultimate settlement of these claims, and we are generally a
minor participant in the overall insurance coverage and settlement.
Further, since most of our policies were issued after the industry was apprised of asbestos exposures, many of the policies on which we participate have exclusions that may preclude coverage. In
addition, many of our asbestos and environmental claims have been inactive for several years.

In
the fourth quarter of 2003, Navigators Insurance Company increased its gross and net asbestos reserves for losses by $77.6 million and $31.6 million, respectively. As a
result, gross and net incurred losses increased by the amount of the respective reserve increase. The $31.6 million of net asbestos losses includes $25.7 million of uncollectible
reinsurance.

The
reserve action was the result of a review of asbestos-related exposures conducted by the Company. The Company's management was notified in late January 2004 that an asbestos claim
would likely have to be settled for a significantly greater

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amount
than previously anticipated. As a result of the unexpected adverse development on this individual claim, the Company retained a leading independent consulting firm in this area to assist in the
identification of its potential exposure to asbestos claims from policies written directly as well as those reinsured to Navigators Insurance Company from prior members of the Company's insurance
pools. The Company's increased reserves relate primarily to policies underwritten by the Navigators Agencies in the late 1970's and first half of the 1980's on behalf of members of the pool,
consisting of excess liability on marine related business and aviation products liability, including policies subsequently assumed by Navigators Insurance Company pursuant to reinsurance arrangements
with pool members who exited the pool. Following the Company's and the independent consulting firm's recent review, the Company determined to increase its gross and net loss reserves for asbestos
exposure to $78.5 million and $32.1 million, respectively, at December 31, 2003.

The
following tables set forth our gross and net loss and LAE reserves, and claim counts for our asbestos and environmental exposures, which we believe is subject to uncertainties
greater than those presented by other types of claims:

|                       |  | Year Ended
December 31, 2003 |        | Year Ended
December 31, 2002
|---------------------- |  | ---------------------------- | ------ | ----------------------------
|
|
|Gross of Reinsurance   |  |                              |        |                             
|Beginning Reserve      |  | $                            | 813    |                             
|Incurred Loss & LAE    |  |                              | 77,837 |                             
|Calendar Year Payments |  |                              | 178    |                             
|                       |  |                              |        |                             
|Ending Reserves        |  | $                            | 78,472 |                             
|                       |  |                              |        |                             
|Net of Reinsurance     |  |                              |        |                             
|Beginning Reserve      |  | $                            | 441    |                             
|Incurred Loss & LAE*   |  |                              | 31,680 |                             
|Calendar Year Payments |  |                              | 38     |                             
|                       |  |                              |        |                             
|Ending Reserves        |  | $                            | 32,083 |                             
|                       |  |                              |        |                             

---

|Type of Business |       | Claim Count
December 31,
2003 |     | New Claims
During
Period |    | Claims Settled
or Resolved
During Period |     | Claim Count
January 1,
2003
|---------------- | ----- | ----------------------------- | --- | ------------------------ | -- | ---------------------------------------- | --- | ---------------------------
|Environmental    |       | 86                            |     | 15                       |    | 131                                      |     | 202                        
|Asbestos         |       | 108                           |     | 43                       |    | 210                                      |     | 275                        
|                 |       |                               |     |                          |    |                                          |     |                            
|                 | Total |                               | 194 |                          | 58 |                                          | 341 |                            
|                 |       |                               |     |                          |    |                                          |     |                            

Our management believes that the reserves for losses and loss adjustment expenses are adequate to cover the ultimate cost of losses and loss adjustment expenses
on reported and unreported claims.

Additional
information regarding our loss reserves can be found in "Management's Discussion and Analysis of Financial Condition and Results of OperationsResults of
Operations and OverviewOperating ExpensesNet Losses and Loss

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Adjustment
Expenses Incurred," "BusinessReserves," and Note 6 to our consolidated audited financial statements, all of which are included herein.

Investments

The investments of our insurance company subsidiaries must comply with the insurance laws of New York State, the domiciliary state of Navigators
Insurance Company and NIC Insurance Company. These laws prescribe the type, 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.

Our
insurance company subsidiaries' investments are subject to the direction and control of their respective boards of directors and our finance committee, 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 while
preserving and enhancing capital and statutory surplus. The insurance company subsidiaries seek to attain these objectives by investing in municipal bonds, U.S. Government obligations, corporate
bonds, mortgage-backed and asset-backed securities and common stocks. Our insurance company subsidiaries' 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.
Our insurance company subsidiaries' investment guidelines prohibit investments in derivatives other than as a hedge against foreign currency exposures or the writing of covered call options on the
equity portfolio.

The
Lloyd's operations' investments are subject to the direction and control of the board of directors and the investment committee of NUAL, as well as our finance committee, and
represent our share of the investments held by Syndicate 1221. These investments must comply with the rules and regulations imposed by Lloyd's of London and by certain overseas regulators. The
investments are managed by outside professional fixed-income portfolio managers. The performance of the investment managers is reviewed quarterly. Current investment objectives are to maximize
pre-tax income while preserving and enhancing capital. The investment managers for Syndicate 1221 seek
to attain these objectives by investing in government obligations, corporate bonds and mortgage-backed and asset-backed securities.

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

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The
table set forth below reflects investments and income earned thereon for the Company on a consolidated basis and for the Insurance Companies for each of the years in the three year
period ended December 31, 2003:

|                         | Year Ended December 31,
|------------------------ | -----------------------
|
|
|Invested Assets and Cash |                        
|                         | Insurance Companies    
|                         | Lloyd's Operations     
|                         | Navigators Agencies    
|                         | Parent Company         
|                         |                        
|                         | Consolidated           
|                         |                        
|Net Investment Income    |                        
|                         | Insurance Companies    
|                         | Lloyd's Operations     
|                         | Navigators Agencies    
|                         | Parent Company         
|                         |                        
|                         | Consolidated           
|                         |                        
|Average Yield            |                        
|                         | Insurance Companies    
|                         | Lloyd's Operations     
|                         | Navigators Agencies    
|                         | Parent Company         
|                         | Consolidated           

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The following tables show our cash and investments as of December 31, 2003 and 2002:

|December 31, 2003               |                                                   | Fair Value             |        | Gross
Unrealized
Gains |         | Gross
Unrealized
(Losses) |       | Cost or
Amortized
Cost
|------------------------------- | ------------------------------------------------- | ---------------------- | ------ | ---------------------- | ------- | ------------------------- | ----- | ----------------------
|
|Fixed maturities:               |                                                   |                        |        |                        |         |                           |       |                       
|                                | U.S. Government Treasury Bonds and GNMAs          |                        | $      | 221,919                |         | $                         | 4,107 |                       
|                                | States, municipalities and political subdivisions |                        |        | 88,093                 |         |                           | 2,599 |                       
|                                | Mortgage- and asset-backed (excluding GNMAs)      |                        |        | 141,831                |         |                           | 1,614 |                       
|                                | Corporate bonds                                   |                        |        | 136,702                |         |                           | 4,509 |                       
|                                |                                                   |                        |        |                        |         |                           |       |                       
|                                |                                                   | Total fixed maturities |        |                        | 588,545 |                           |       | 12,829                
|                                |                                                   |                        |        |                        |         |                           |       |                       
|Equity securitiescommon stocks |                                                   |                        | 13,446 |                        |         | 1,554                     |       |                       
|Cash and short-term investments |                                                   |                        | 91,601 |                        |         |                          |       |                       
|                                |                                                   |                        |        |                        |         |                           |       |                       
|                                |                                                   | Total                  |        | $                      | 693,592 |                           | $     | 14,383                
|                                |                                                   |                        |        |                        |         |                           |       |                       

|December 31, 2002               |                                                   | Fair Value             |        | Gross
Unrealized
Gains |         | Gross
Unrealized
(Losses) |       | Cost or
Amortized
Cost
|------------------------------- | ------------------------------------------------- | ---------------------- | ------ | ---------------------- | ------- | ------------------------- | ----- | ----------------------
|
|Fixed maturities:               |                                                   |                        |        |                        |         |                           |       |                       
|                                | U.S. Government Treasury Bonds and GNMAs          |                        | $      | 166,842                |         | $                         | 7,113 |                       
|                                | States, municipalities and political subdivisions |                        |        | 50,127                 |         |                           | 2,463 |                       
|                                | Mortgage- and asset-backed (excluding GNMAs)      |                        |        | 65,487                 |         |                           | 1,664 |                       
|                                | Corporate bonds                                   |                        |        | 84,220                 |         |                           | 4,017 |                       
|                                |                                                   |                        |        |                        |         |                           |       |                       
|                                |                                                   | Total fixed maturities |        |                        | 366,676 |                           |       | 15,257                
|                                |                                                   |                        |        |                        |         |                           |       |                       
|Equity securitiescommon stocks |                                                   |                        | 11,674 |                        |         | 245                       |       |                       
|Cash and short-term investments |                                                   |                        | 74,535 |                        |         |                          |       |                       
|                                |                                                   |                        |        |                        |         |                           |       |                       
|                                |                                                   | Total                  |        | $                      | 452,885 |                           | $     | 15,502                
|                                |                                                   |                        |        |                        |         |                           |       |                       

Fixed maturity securities include bonds, mortgage-backed securities (which include fixed-rate mortgage-backed securities issued by the Government
National Mortgage Association, or GNMAs) and asset-backed securities. All fixed maturity and equity securities are carried at fair value. The fair value is based on quoted market prices or dealer
quotes provided by independent pricing services.

At
December 31, 2003 and 2002, all fixed-maturity and equity securities held by us were classified as available-for-sale.

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

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

There
were no impairment losses recorded in our fixed maturity or equity securities portfolios for the year ended December 31, 2003. During 2002, $2,905,000 of impairment losses
were recorded on an asset backed fixed maturity security that was subsequently sold in 2002. During 2001, $1,618,000 of impairment losses were recorded on two asset backed fixed maturity securities
that were subsequently sold in 2002. There were no impairment losses recorded on our equity securities portfolio in 2001 or 2002.

The
following table summarizes all securities in an unrealized loss position at December 31, 2003 and December 31, 2002 showing the aggregate fair value and gross
unrealized loss by the length of time those securities have continuously been in an unrealized loss position:

|                                                  |  | December 31, 2003 |        | December 31, 2002
|------------------------------------------------- |  | ----------------- | ------ | -----------------
|
|
|Fixed Maturities:                                 |  |                   |        |                  
|U.S. Government Treasury Bonds and GNMAs          |  |                   |        |                  
|0-6 Months                                        |  | $                 | 51,249 |                  
|7-12 Months                                       |  |                   | 15,059 |                  
|> 12 Months                                       |  |                   |       |                  
|                                                  |  |                   |        |                  
|Subtotal                                          |  |                   | 66,308 |                  
|                                                  |  |                   |        |                  
|States, municipalities and political subdivisions |  |                   |        |                  
|0-6 Months                                        |  |                   | 6,340  |                  
|7-12 Months                                       |  |                   | 1,508  |                  
|> 12 Months                                       |  |                   | 648    |                  
|                                                  |  |                   |        |                  
|Subtotal                                          |  |                   | 8,496  |                  
|                                                  |  |                   |        |                  
|Mortgage- and asset-backed (excluding GNMAs)      |  |                   |        |                  
|0-6 Months                                        |  |                   | 45,381 |                  
|7-12 Months                                       |  |                   | 1,135  |                  
|> 12 Months                                       |  |                   | 138    |                  
|                                                  |  |                   |        |                  
|Subtotal                                          |  |                   | 46,654 |                  
|                                                  |  |                   |        |                  
|                                                  |  |                   |        |                  

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|Corporate bonds                 |  |   |         |  |   |       |  |   |       |  |   |    
|------------------------------- |  | - | ------- |  | - | ----- |  | - | ----- |  | - | ---
|0-6 Months                      |  |   | 25,049  |  |   | 123   |  |   | 2,037 |  |   | 72 
|7-12 Months                     |  |   | 7,124   |  |   | 191   |  |   | 515   |  |   | 7  
|> 12 Months                     |  |   |        |  |   |      |  |   | 1,841 |  |   | 271
|                                |  |   |         |  |   |       |  |  
|Subtotal                        |  |   | 32,173  |  |   | 314   |  |   | 4,393 |  |   | 350
|                                |  |   |         |  |   |       |  |  
|Total Fixed Maturities          |  | $ | 153,631 |  | $ | 2,188 |  | $ | 6,870 |  | $ | 402
|                                |  |   |         |  |   |       |  |  
|Equity securitiescommon stocks |  |   |         |  |   |       |  |   |       |  |   |    
|0-6 Months                      |  |   |        |  |   |      |  |   | 3,378 |  |   | 254
|7-12 Months                     |  |   |        |  |   |      |  |   | 2,736 |  |   | 446
|> 12 Months                     |  |   | 1,892   |  |   | 85    |  |   | 987   |  |   | 157
|                                |  |   |         |  |   |       |  |  
|Total Equity Securities         |  | $ | 1,892   |  | $ | 85    |  | $ | 7,101 |  | $ | 857
|                                |  |   |         |  |   |       |  |  

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

The
following table shows the composition by National Association of Insurance Commissioners ("NAIC") rating and the generally equivalent Standard & Poor's ("S&P") and Moody's
ratings of the fixed maturity securities in our portfolio with gross unrealized losses at December 31, 2003. Not all of the securities are rated by S&P and/or Moody's.

|  |  |              |  |              |  | Unrealized Loss |       | Fair Value |      
|- |  | ------------ |  | ------------ |  | --------------- | ----- | ---------- | -----
|
|
|1 |  | AAA/AA/A     |  | Aaa/Aa/A     |  | $               | 2,112 |            | 96.5 
|2 |  | BBB          |  | Baa          |  |                 | 76    |            | 3.5  
|3 |  | BB           |  | Ba           |  |                 |      |            |     
|4 |  | B            |  | B            |  |                 |      |            |     
|5 |  | CCC or lower |  | Caa or lower |  |                 |      |            |     
|6 |  |              |  |              |  |                 |      |            |     
|  | 
|  |  |              |  | Total        |  | $               | 2,188 |            | 100.0
|  |  |              |  |              |  |                 |       |            |      

At December 31, 2003, the gross unrealized losses in the table directly above are related to fixed maturity securities that are rated
investment grade, which is defined by us as a security having a NAIC rating of 1 or 2, a S&P rating of "BBB-" or higher, or a Moody's rating of "Baa3" or higher. Unrealized losses on
investment grade securities principally relate to changes in interest rates or changes in sector-related credit spreads since the securities were acquired. Any such unrealized losses are recognized in
income, if the securities are sold, or if the decline in fair value is deemed other-than-temporary.

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The
scheduled maturity dates for fixed maturity securities in an unrealized loss position at December 31, 2003 are shown below.

|                                       |                               | Unrealized Loss |       | Fair Value |     
|-------------------------------------- | ----------------------------- | --------------- | ----- | ---------- | ----
|
|
|Due in one year or less                |                               | $               | 40    |            | 1.8 
|Due after one year through five years  |                               |                 | 202   |            | 9.2 
|Due after five years through ten years |                               |                 | 242   |            | 11.1
|Due after ten years                    |                               |                 | 1,322 |            | 60.4
|Mortgage- and asset-backed securities  |                               |                 | 382   |            | 17.5
|                                       |                               |                 |       |            |     
|                                       | Total fixed income securities |                 | $     | 2,188      |     
|                                       |                               |                 |       |            |     

Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call
or prepayment penalties. Due to the periodic repayment of principal, the mortgage- and asset-backed securities are estimated to have an effective maturity of approximately six years.

Our
realized capital gains and losses were as follows:

|                           |          | Year Ended December 31, |      
|-------------------------- | -------- | ----------------------- | -----
|
|
|Fixed maturities:          |          |                         |      
|                           | Gains    |                         | $    
|                           | (Losses) |                         |      
|                           |          |                         |      
|                           |          |                         | 1,717
|                           |          |                         |      
|Equity securities:         |          |                         |      
|                           | Gains    |                         |      
|                           | (Losses) |                         |      
|                           |          |                         |      
|                           |          |                         | 158  
|                           |          |                         |      
|Net realized capital gains |          | $                       | 1,875
|                           |          |                         |      

The following table details the larger realized losses from sales and impairments during 2003 and the related circumstances giving rise to the
loss:

|Description |     | Date of
Sale |         | Proceeds
from Sale |   | Loss on
Sale |  | Impairment |      | Holdings at
December 31, 2003 |   | Net
Unrealized
Loss |   | Number of
Months
Unrealized Loss
Exceeded 20%
of Cost or
Amortized Cost
|----------- | --- | ------------ | ------- | ------------------ | - | ------------ |  | ---------- | ---- | ----------------------------- | - | ------------------- | - | -----------------------------------------------------------------------
|
|            | (1) |              | 2/13/03 |                    | $ | 425          |  | $          | (252 | )                             |  |                     |  |                                                                        
|            | (2) |              | 9/3/03  |                    | $ | 357          |  | $          | (222 | )                             |  |                     |  |                                                                        

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Regulation

United States

We are subject to regulation under the insurance statutes, including holding company statutes, of various states and applicable regulatory authorities in the
United States. 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 is our principal regulatory agency. The New York insurance law provides that no corporation or other person may acquire control of us, and thus
indirect control of our insurance company subsidiaries, unless it has given notice to our insurance company subsidiaries 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 our common stock would be presumed to have acquired control of us, unless such
presumption is rebutted.

Navigators
Insurance Company and NIC Insurance Company may only pay dividends out of their statutory earned surplus under New York insurance law. Generally, the maximum amount of
dividends Navigators Insurance Company and NIC Insurance Company may pay without regulatory approval in any twelve-month period is the lesser of adjusted net investment income or 10% of statutory
surplus. For a discussion of our current dividend capacity, see "Management's Discussion of Financial Condition and Results of OperationsLiquidity and Capital Reserves" in this
Form 10-K.

Under
insolvency or guaranty laws in most states in which Navigators Insurance Company and NIC Insurance Company operate, insurers doing business in those states can be assessed up to
prescribed limits for policyholder losses of insolvent insurance companies. During 2002, we were assessed by the California Insurance Guaranty Association and paid an amount of $798,000. This amount
was allowed to be recovered by a surcharge on policies written in California in 2003 and had been recorded as an asset. Through December 31, 2003, we recovered $559,000 of this amount and
expensed the remaining $239,000. Other than this California assessment, neither Navigators Insurance Company nor NIC Insurance Company were subject to any material assessments under state insolvency
or guarantee laws during the three year period ended December 31, 2003.

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

As
part of its general regulatory oversight process, the New York Insurance Department conducts detailed examinations of the books, records and accounts of New York insurance companies
every three to five years. Our insurance company subsidiaries were examined for the years 1996 through 2000 by the New York Insurance Department. No adjustments to the previously filed statutory
financial statements were required as a result of this examination.

The
Insurance Regulatory Information System, or IRIS, was developed by the 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

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certain
aspects of an insurer's business. As of December 31, 2003, Navigators' Insurance Company results were outside the usual values for five of the IRIS ratios. These five ratios and the
reasons for the unusual values are as follows: Investment yield due to a $95 million capital contribution in the fourth quarter increasing the average investments and lower interest rates;
Change in Policyholders Surplus increased 51.3%, with the maximum usual value being 50%, as a result of the $95 million capital contribution; and all three of the One Year Development and Two
Year Development and Estimated Current Reserve Deficiency to Policyholders' Surplus were outside of the usual range due to the additional asbestos reserves recorded in 2003. In addition, NIC Insurance
Company had two ratios outside of the usual values as follows: Investment yield due to a $25 million capital contribution in the fourth quarter increasing the average investments and lower
interest rates; and Change in Policyholders' Surplus increased 107.3% as a result of the $25 million contribution. All of the business written by NIC Insurance Company is reinsured by
Navigators Insurance Company.

The
NAIC completed a project which codifies statutory accounting practices for insurance enterprises. As a result of this process, the NAIC issued a revised statutory Accounting
Practices and Procedures Manual that became effective January 1, 2001. We prepared our statutory basis financial statements in accordance with the revised statutory manual subject to any
deviations prescribed or permitted by the New York Insurance Commissioner.

In
2002, in response to the tightening of supply in certain insurance and reinsurance markets resulting from, among other things, the September 11, 2001 terrorist attacks, the
U.S. Terrorism Risk Insurance Act, or TRIA, was enacted. TRIA is intended to ensure the availability of insurance coverage for "acts of terrorism" (as defined) in the United States of America
committed by or on behalf of foreign persons or interests. This law established a federal program through the end of 2005 to help the commercial property and casualty insurance industry cover claims
related to future losses
resulting from acts of terrorism and requires insurers to offer coverage for acts of terrorism in all commercial property and casualty policies. As a result, we will be prohibited from adding certain
terrorism exclusions to those policies written by insurers in our group that write business in the U.S. While these insurers are protected by federal indemnification as provided for in TRIA, there is
a substantial deductible that must be met. This deductible is based on a percentage of direct earned premiums for commercial insurance lines from the previous calendar year, equal to 7.0% during 2003,
10.0% in 2004 and 15.0% in 2005. For losses in excess of an insurer's deductible, our participating insurers will retain an additional 10.0% of the excess losses, with the balance to be covered by the
federal government (up to an annual aggregate cap of $100 billion). The imposition of these TRIA deductibles could have an adverse effect on our results of operations. Potential future changes
to TRIA could also adversely affect us by causing our reinsurers to increase prices or withdraw from certain markets where terrorism coverage is required. As a result of TRIA, we are required to offer
coverage for certain terrorism risks that we may normally exclude. Occasionally in our marine business, such coverage falls outside of our normal reinsurance program. In such cases, our only
reinsurance would be the protection afforded by TRIA.

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" 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 risk-based capital 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 risk-based capital. Based on calculations made by Navigators Insurance Company and NIC Insurance Company, their risk-based capital levels exceed a
level that would trigger

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regulatory
attention. In their respective 2003 statutory financial statements, Navigators Insurance Company and NIC Insurance Company have complied with the NAIC's risk-based capital
reporting requirements.

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

Our
Lloyd's operations are subject to regulation in the United States in addition to being regulated in the United Kingdom, as discussed below. The Lloyd's of London market is licensed
to engage in insurance business in Illinois, Kentucky and the U.S. Virgin Islands and operates as an eligible excess and surplus lines insurer in all states and territories except Kentucky and the
U.S. Virgin Islands. Lloyd's is also an accredited reinsurer in all states and territories of the United States. Lloyd's maintains various trust funds in the state of New York to protect its United
States business
and is therefore subject to regulation by the New York Insurance Department, which acts as the domiciliary department for Lloyd's U.S. trust funds. There are deposit trust funds in other states to
support Lloyd's reinsurance and excess and surplus lines insurance business.

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 have been enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the NAIC. We are 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 our operations and financial condition.

United Kingdom

Our United Kingdom subsidiaries and our Lloyd's operations are subject to regulation by the Financial Services Authority, as established by the Financial Services
and Markets Act, and our Lloyd's operations are also subject to regulation by the Council of Lloyd's. The Financial Services Authority has been granted broad authorization and intervention powers as
they relate to the operations of all insurers, including Lloyd's syndicates, operating in the United Kingdom. Lloyd's operates under a self-regulatory regime arising under the Lloyd's Act
1982 and the Financial Services and Markets Act and has the power to set, interpret and change the rules which govern the operation of the Lloyd's market. Lloyd's prescribes, in respect of its
managing agents and corporate members, certain minimum standards relating to their management and control, solvency and various other requirements. The Financial Services Authority monitors the
Lloyd's market to ensure that managing agents' compliance with the systems and controls prescribed by Lloyd's enable those managing agents to comply with its relevant requirements. If it appears to
the Financial Services Authority that either Lloyd's is not fulfilling its delegated regulatory responsibilities, or that managing agents are not complying with the applicable regulatory sections or
market requirements prescribed by Lloyd's, the Financial Services Authority may intervene in its discretion.

We
participate in the Lloyd's of London market through our ownership of NUAL, Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. NUAL is the managing
agent for Lloyd's Syndicate 1221. Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. provide underwriting capacity to Syndicate 1221 and are therefore Lloyd's
corporate members. By entering into a membership agreement with Lloyd's, Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. undertake to comply with all Lloyd's
bye-laws and regulations as well as the provisions of the Lloyd's Acts and the Financial Services and Markets Act. Syndicate 1221, as well as Millennium Underwriting Ltd. and
Navigators Corporate Underwriters Ltd. and their respective directors, are fully subject to the Lloyd's regulatory regime.

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Underwriting capacity of a member of Lloyd's must be supported by providing a deposit in the form of cash, securities or letters of credit (which are referred to
as Funds at Lloyd's) in an amount determined by Lloyd's equal to a specified percentage of the member's underwriting capacity. This amount is determined by Lloyd's through application of a risk based
capital formula. The consent of the Council of Lloyd's may be required when a syndicate proposes to increase its underwriting capacity for the following underwriting year.

In
December 2001, the Financial Services Authority introduced a new minimum solvency margin for all insurers, including corporate members of Lloyd's, which took effect for the
December 31, 2001 solvency calculation. Under the new requirements, Lloyd's must demonstrate that each member has sufficient assets to meet its underwriting liabilities plus a required solvency
margin. This margin can reduce the amount of distributable profits to the member or increase the liabilities required to be funded by the member.

If
the managing agency concludes that an appropriate reinsurance to close cannot be determined or negotiated on commercially acceptable terms in respect of a particular underwriting
year, it must determine that the underwriting year remain open and be placed into run-off. During this period there cannot be a release of the Funds at Lloyd's of a corporate member
without the consent of Lloyd's and such consent will only be considered where the member has surplus funds at Lloyd's.

The
Council of Lloyd's has wide discretionary powers to regulate members' underwriting at Lloyd's. It may, for instance, change the basis on which syndicate expenses are allocated or
vary the Funds at Lloyd's ratio or the investment criteria applicable to the provision of Funds at Lloyd's. Exercising any of these powers might affect the amount of a corporate member's overall
premium limit and consequently the return on an investment in the corporate member in a given underwriting year. In particular it should be noted that the annual business plans of a syndicate are
subject to the review and approval of Lloyd's.

Corporate
members continue to have insurance obligations even after all their underwriting years have been closed by reinsurance to close. In order to continue to perform these
obligations, corporate members are required to stay in existence; accordingly, there continues to be an administrative and financial burden for corporate members between the time their memberships
have ceased and their insurance obligations have not been extinguished, including the completion of financial accounts in accordance with the Companies Act 1985.

Whenever
a member of Lloyd's is unable to pay its debts to policyholders, such debts may be payable by the Lloyd's Central Fund, which acts similarly to state guaranty funds in the
United States. If Lloyd's determines that the Central Fund needs to be increased, it has the power to assess premium levies on current members of Lloyd's. The Council of Lloyd's has discretion to call
or assess up to 3% of a member's underwriting capacity in any one year as a Central Fund contribution.

Competition

The property and casualty insurance industry is highly competitive. We face competition from both domestic and foreign insurers, many of whom have
longer operating histories and greater financial, marketing and management resources. Competition in the types of insurance in which we are engaged is based on many factors, including our perceived
overall financial strength, 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 we face the risk that we will lose market share to higher rated insurers.

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Another
competitive factor in the industry involves banks and brokerage firms entering the insurance business. These efforts pose new challenges to insurance companies and agents from
industries traditionally outside the insurance business.

No
single insured or reinsured accounted for 10% or more of our gross written premium in 2003.

Employees

As of December 31, 2003, the Company had 210 full-time employees of which 161 were located in the United States and 49 in the
United Kingdom.

Available Information on the Internet

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

Item 2. PROPERTIES

Our New York underwriting office and certain executive offices are located at One Penn Plaza, New York, New York and occupied pursuant to a lease
from an unaffiliated company which expires December 31, 2010. Several of our subsidiaries have noncancellable operating leases for their respective office locations.

In
the second quarter of 2003, we elected to lease additional space in Rye Brook, New York, from an unaffiliated company. Rye Brook is approximately 30 miles north of Manhattan. Our
administrative, accounting and information technology staffs and certain executive offices are now located at our Rye Brook, New York office. Our lease for this space terminates in
February 2013.

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

Item 3. LEGAL PROCEEDINGS

We are 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 that we conduct, except for a suit concerning the draw down of letters of credit. In 1997 and 1998, Navigators Insurance Company entered into certain reinsurance contracts with a
reinsurer. In accordance with normal business practice, Navigators Insurance Company had secured this exposure with letters of credit. In April 1999, Navigators Insurance Company drew down the
letters of credit, in good faith and consistent with their terms. The liquidator of the reinsurer has commenced suit in Australia, seeking to void the draw downs. If the liquidator were to prevail in
its action to void the letters of credit, our maximum exposure would be approximately $4.0 million. We filed motions seeking a prompt dismissal of the liquidators's claims in Australian court
in June 2003, which motions were denied. We have appealed those denials and are vigorously defending our position. The appellate court ruled that the case needs to be fully tried before an
appeal can be pursued. Although we believe that we have strong defenses against these claims and a reasonable possibility of defeating the liquidator's claim, and that the liquidator's assertions run
counter to prevailing Australian and United States law, there can be no assurance as to the outcome of this litigation.

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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 2003.

Part II

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

Market Information

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

The
high and low bid prices and the closing price for the four quarters of 2003 and 2002 are as follows:

|               | 2003 |   | 2002 
|-------------- | ---- | - | -----
|
|First Quarter  |      | $ | 26.46
|Second Quarter |      | $ | 30.51
|Third Quarter  |      | $ | 35.42
|Fourth Quarter |      | $ | 33.93

There were approximately 139 holders of record of shares of the Company's common stock as of March 1, 2004. However, management believes there are in
excess of 1,000 beneficial owners of the stock.

Dividends

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

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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, 2003 derived from the Company's audited consolidated financial statements. See the Consolidated Financial Statements of the Company including notes thereto included herein.

|                                                 | Year Ended December 31, |  
|------------------------------------------------ | ----------------------- | -
|
|
|Operating Information  (1):                      |                         |  
|Gross written premium                            |                         | $
|Net written premium                              |                         |  
|Net earned premium                               |                         |  
|Net investment income                            |                         |  
|Net realized capital gains (losses)              |                         |  
|Total revenues                                   |                         |  
|Income (loss) before income taxes                |                         |  
|Net income (loss)                                |                         |  
|Net income (loss) per share:                     |                         |  
|                                                 | Basic                   |  
|                                                 | Diluted                 |  
|Average common shares:                           |                         |  
|                                                 | Basic                   |  
|                                                 | Diluted                 |  
|Balance Sheet Information (at end of year)  (1): |                         |  
|Total investments and cash                       |                         | $
|Total assets                                     |                         |  
|Gross loss and LAE reserves                      |                         |  
|Net loss and LAE reserves                        |                         |  
|Notes payable                                    |                         |  
|Stockholders' equity                             |                         |  
|Common shares outstanding (000s)                 |                         |  
|Book value per share  (2)                        |                         | $
|Combined loss & expense ratio  (3)               |                         |  

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction
with our consolidated financial statements and accompanying notes which appear elsewhere in this Form 10-K. It contains forward-looking statements that involve risks and
uncertainties. Please see "Note on Forward-Looking Statements" for more information. Our actual results could differ materially from those anticipated in these forward-looking statements as a result
of various factors, including those discussed below and elsewhere in this Form 10-K.

Overview

We are an international insurance holding company focusing on specialty products for niches within the overall property/casualty insurance market.
Our largest product line and most long-standing area of specialization is ocean marine insurance. We have also developed specialty niches in professional liability insurance and in
specialty liability insurance which primarily consists of contractors' liability coverages. We conduct operations through our insurance company subsidiaries, the Navigators Agencies and our Lloyd's
operations.

While
management takes into consideration a wide range of factors in planning the Company's business strategy and evaluating results of operations, there are certain factors that
management believes are fundamental to understanding how the Company is managed. First, underwriting profit is consistently emphasized as a primary goal, above premium
growth. Management's assessment of our trends and potential growth in underwriting profit is the dominant factor in its decisions with respect to whether or not to expand a business line, enter into a
new niche, product or territory or, conversely, to contract capacity in any business line. In addition, management focuses on managing the costs of our operations. Management believes that careful
monitoring of the costs of existing operations and assessment of costs of potential growth opportunities are important to our profitability. Access to capital also has a significant impact on
management's outlook for our operations. Our insurance company subsidiaries' operations and ability to grow their business and take advantage of market opportunities are particularly constrained by
regulatory capital requirements and rating agency assessments of capital adequacy. For example, we contributed $95 million of the approximately $110.8 million in net proceeds we received
from the October 2003 equity offering to the statutory surplus of Navigators Insurance Company in order to position the Company to be able to capitalize on domestic and international insurance
business opportunities that management believes will be profitable.

Although
not a financial measure, management's decisions are also greatly influenced by access to specialized underwriting and claims expertise in our lines of business. We have chosen
to operate in specialty niches with certain common characteristics which we believe provide us with the opportunity to use our technical underwriting expertise in order to realize underwriting profit.
As a result, we have focused on underserved markets for businesses characterized by higher severity and low frequency of loss where we believe our intellectual capital and financial strength bring
meaningful value. In contrast, we have avoided niches that we believe have a high frequency of loss activity and/or are subject to a high level of regulatory coverage requirements, such as workers
compensation and personal automobile insurance, because we do not believe our technical expertise is of as much value in these types of businesses. Examples of niches that have the characteristics we
look for include bluewater hull (which provides coverage for physical damage to, for example, highly valued cruise ships) and directors and officers liability (which covers litigation exposure of a
corporation's directors and officers). These types of exposures require substantial technical expertise. We attempt to mitigate the financial impact of severe claims on our results by conservative and
detailed underwriting, prudent use of reinsurance and a balanced portfolio of risks.

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Our
revenue is primarily comprised of premiums, commission and investment income. Our insurance company subsidiaries derive their premiums primarily from business written by the
Navigators Agencies. The Lloyd's operations derive their premiums from business written by NUAL. The Navigators Agencies and NUAL receive commissions and, in some cases, profit commissions and service
fees on the business produced on behalf of our insurance company subsidiaries and others.

Over
the past two years, we have experienced beneficial market changes in our lines of businesses. As a result of several large losses in the second quarter of 2001, the marine insurance
market began to experience diminished capacity and rate increases, initially in the offshore energy line of business. As conditions in the overall property/casualty insurance market have hardened
since the third quarter of 2001, certain property/casualty insurers who also compete in our marine
and specialty liability lines of business have reduced their capacity generally and in the marine and specialty liability lines specifically. Specialty liability losses have also resulted in
diminished capacity in the market in which we compete, as many former competitors who lacked the expertise to selectively underwrite this business have been forced to withdraw from the market. In the
professional liability market, the enactment of the Sarbanes-Oxley Act of 2002, together with recent financial and accounting scandals at publicly traded corporations and increased frequency of
securities-related class action litigation, has lead to an invigorated interest in professional liability insurance generally. These conditions have resulted in rate increases as well as an overall
improvement in policy terms and conditions for our professional liability line of business. While we believe that the hardening of the markets in which we operate will continue for the foreseeable
future, albeit at a less dramatic rate compared to the past twenty-four months, our business is cyclical and influenced by many factors that could cause our positive outlook to change.
These factors include price competition, economic conditions, interest rates, natural or man-made disasters (for example hurricanes and terrorism), state regulations, court decisions and
changes in the law. Additionally, because our insurance products must be priced, and premiums charged, before costs have fully developed, our liabilities are required to be estimated and recorded in
recognition of future loss and settlement obligations. Due to the inherent uncertainty in estimating these liabilities, we cannot assure you that our actual liabilities will not exceed our recorded
amounts.

For
additional information regarding our business, see "BusinessGeneral."

Critical Accounting Policies

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

Our
most critical accounting policies involve the reporting of the reserves for losses and loss adjustment expenses (including losses that have occurred but were not reported to us by
the financial reporting date), reinsurance recoverables, written and unearned premium, the recoverability of deferred tax assets, the impairment of invested assets, accounting for Lloyd's results,
goodwill and the translation of foreign currencies..

Loss Reserves and Loss Adjustment Expenses.Loss reserves represent an estimate of the expected cost of the ultimate
settlement and administration of losses, based on facts and circumstances then known. Actuarial methodologies are employed to assist in establishing such estimates and include judgments relative to
estimates of future claims severity and frequency, length of time to develop to ultimate, judicial theories of liability and other third party factors which are often beyond our control. Due to the
inherent uncertainty associated with the reserving process, the ultimate liability may be different from the

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original
estimate. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year's results. Additional information regarding our loss reserves can be
found in "Results of OperationsOperating ExpensesNet Losses and Loss Adjustment Expenses Incurred," "BusinessReserves," and Note 6 to our
consolidated audited financial statements, all of which are included herein.

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

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

Deferred Tax Assets.We have recorded valuation allowances related to deferred tax assets resulting from certain net
operating loss carryforwards due to the uncertainty associated with the realization of the deferred tax asset related to certain of our foreign, state and local operations. Our foreign operations were
profitable in 2002 and 2003 resulting in a portion of the valuation allowance being simultaneously released to the extent of the 2002 profits and the first nine months of profits in 2003. Due to the
continued profitability and projected favorable market conditions for the foreseeable future, it was determined to be more likely than not that the deferred tax assets resulting from those net
operating loss carryforwards will be realized, therefore the remaining valuation allowance related to the foreign operations was released in the fourth quarter of 2003. See Note 5 to our
consolidated audited financial statements, included herein.

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

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portfolio
at December 31, 2003 and 2002, including disclosures regarding other-than-temporary declines in investment value, see the "BusinessInvestments"
section and Note 2 to our consolidated audited financial statements, both included herein.

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

Goodwill.The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 142,
"Goodwill and Other Intangible Assets," effective January 1, 2002. SFAS 142 changes the accounting for
goodwill and intangible assets that have indefinite useful lives from an amortization approach to an impairment-only approach that requires that those assets be tested at least annually
for impairment. We completed our annual impairment review of goodwill resulting in no impairment as of January 1, 2003. If the carrying amount of goodwill exceeds its implied fair value, an
impairment loss will be recognized. See Note 1 to our consolidated audited financial statements, included herein.

Translation of Foreign Currencies.Financial statements of subsidiaries expressed in foreign currencies are translated into
U.S. dollars in accordance with SFAS No. 52"Foreign Currency Translation"issued by the FASB. Under SFAS 52, functional currency assets and
liabilities are translated into U.S. dollars using period end rates of exchange and the related translation adjustments are recorded as a separate component of accumulated other comprehensive income.
Functional currencies are generally the currencies of the local operating environment. Statement of income amounts expressed in functional currencies are translated using average exchange rates. Gains
and losses resulting from foreign currency transactions are recorded in "other income (expense)" in the Company's Consolidated Statements of Income.

Results of Operations and Overview

The following is a discussion and analysis of our consolidated and segment results of operations for the years ended December 31, 2003,
2002 and 2001.

Our
2003, 2002 and 2001 results of operations reflect increasing premium rates as a result of improved market conditions beginning in late 2000 and continuing through 2003. Net income
for 2003, 2002 and 2001 was $7.7 million or $0.80 per share, $16.4 million or $1.89 per share and $3.7 million or $0.43 per share, respectively.

We
experienced rapid premium growth as measured by net earned premium in 2003 and 2002 of 25.0% and 47.8%, respectively, due to the combination of increased premium rates and business
expansion. Underwriting profitability during such periods, as measured by the Company's combined ratios, has also improved for the 2003 and 2002 business written which has been adversely impacted by
reserve strengthening in 2003.

Cash
flow from operations has also increased in 2003 and 2002 by approximately 24.0% and 162.8%, respectively, contributing to the growth in invested assets and net investment income.
The growth in investment income has been mitigated

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in
2003 and actually declined in 2002 as a result of the overall declines in interest rates on the portfolios caused principally by overall declines in interest rates. Investment performance in 2002
and 2001 was also adversely impacted by investment losses described below.

2003 Results

The 2003 results of operations were adversely impacted by an after tax charge of $20.5 million or $2.14 per diluted share for incurred losses related to
asbestos exposures. The Company's 2003 combined ratio of 104.0% was negatively impacted by 11.7 percentage points for incurred losses related to asbestos and environmental exposures.

Navigators
Insurance Company increased its gross and net asbestos reserves for losses by $77.6 million and $31.6 million, respectively, in the fourth quarter of 2003. As a
result, gross and net incurred losses increased by the amount of the respective reserve increase. The reserve action was the result of a review of asbestos-related exposures conducted by the Company.
The Company's management was notified in late January 2004 that an asbestos claim would likely have to be settled for a significantly greater amount than previously anticipated. As a result of
the unexpected adverse development on this individual claim, the Company retained a leading independent consulting firm in this area to assist in the identification of its potential exposure to
asbestos claims from policies written directly as well as those reinsured to Navigators Insurance Company from prior members of the Company's insurance pools. The Company's increased reserves relate
primarily to policies underwritten by Navigators Agencies in the late 1970's and first half of the 1980's on behalf of members of the pool, consisting of excess liability on marine related business
and aviation products liability, including policies subsequently assumed by Navigators Insurance Company pursuant to reinsurance arrangements with pool members who exited the pool. Following the
Company's and the independent consulting firm's recent review, the Company determined to increase its gross and net loss reserves for asbestos exposure to $78.5 million and
$32.1 million, respectively, at December 31, 2003.

During
2003, the Company enhanced its financial position and ability to take advantage of market opportunities as a result of its October 2003 equity offering by paying off its
remaining outstanding debt, contributing $95 million to the statutory surplus of Navigators Insurance Company and increasing its stamp capacity at Lloyd's by increasing its letter of credit
facility.

2002 Results

The 2002 results of operations reflect a substantial improvement in underwriting profitability as evidenced by the Company's combined ratio of 98.5% compared to
104.1% for 2001. The 2002 results of operations were adversely impacted by an after tax charge of $1.9 million or $0.22 per diluted share for impairment losses on asset-backed securities.

2001 Results

The 2001 results of operations were adversely impacted by approximately $4.5 million, pre-tax and after-tax, resulting from the
World Trade Center attack, consisting of estimated net incurred losses of $4.1 million and the net effect of reinsurance reinstatement premiums of $0.4 million, all of which originated
from our Lloyd's operations. This represents our best estimate of our maximum exposure determined by an analysis of policies that may have incurred a loss resulting from the terrorist attack. No
additional losses related to the World Trade Center attack were incurred during 2002 or 2003. However, given the uncertainty surrounding this event, the estimate may change over time as additional
information becomes available.

The
2001 results of operations also include the adverse impact of an after tax charge of $2.5 million or $0.29 per diluted share for an investment in a corporate capital vehicle
which provided underwriting capacity to Lloyd's syndicates and $1.1 million or $0.12 per diluted share for impairment losses for asset-backed securities investments.

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Revenues.Gross written premium increased to $606.5 million in 2003 from $447.8 million in 2002 and
$278.2 million in 2001. The following table sets forth our gross and net written premium and net earned premium by segment and line of business for the periods indicated:

|                          |       | Year Ended December 31,        |                          
|------------------------- | ----- | ------------------------------ | -------------------------
|
|
|
|Insurance Companies:      |       |                                |                          
|                          |       | Marine                         |                          
|                          |       | Specialty                      |                          
|                          |       | Professional Liability         |                          
|                          |       | Assumed from Lloyds Operations |                          
|                          |       | Other                          |                          
|                          |       |                                |                          
|                          |       |                                | Insurance Companies Total
|                          |       |                                |                          
|Lloyd's Operations:       |       |                                |                          
|                          |       | Marine                         |                          
|                          |       | Other                          |                          
|                          |       |                                |                          
|                          |       |                                | Lloyd's Operations Total 
|                          |       |                                |                          
|Intercompany eliminations |       |                                | (31,552                  
|                          |       |                                |                          
|                          | Total |                                | $                        
|                          |       |                                |                          

---

Note:  Certain amounts for prior years have been reclassified to conform to the current year's presentation.

Insurance Companies' Gross Written Premium

Marine Premium.The 2003 and 2002 marine premium increased 9.6% and 65.5%, respectively, due to the increase in premium rates
resulting in higher premiums on new and renewal business. The generally improved pricing environment resulted in Navigators Insurance Company increasing its writing of new business which was partially
offset in 2003 by a reduction of business in certain specific areas due to pricing concerns. The increased premium in 2003 of $17.2 million, which is net of business that was not renewed,
includes approximately $13.8 million of premium resulting from rate increases which averaged 13%. The increased premium in 2002 of $70.9 million resulted from $49.2 million of new
business and $20.9 million from rate increases which averaged 21%. Navigators Insurance Company obtains its marine business through participation in the marine pool managed by the Navigators
Agencies. Its participation in the marine pool was 80% in 2003 and 75% in 2002 and 2001.

Specialty Premium.The Specialty premium increased 13.4% from 2002 to 2003 and 109.8% from 2001 to 2002 due to increased
rates and underwriting new policies. The increased premium in 2003 of $15.5 million, which is net of business that was not renewed, includes approximately $27.2 million of premium
resulting from rate increases which averaged 49%. During 2003, the number of California construction liability in-force policies decreased significantly as a result of our efforts to scale
back the number of small artisan policies we write. The increased premium in 2002 of $60.5 million resulted from $48.9 million of new business and $11.6 million of rate increases
which averaged 30%. The new business and the rate increases resulted from a tightening market for California contractors' liability insurance.

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Professional Liability Insurance.In late 2001, our insurance company subsidiaries began to write professional liability
insurance, primarily consisting of directors and officers liability insurance for privately held and publicly traded corporations. In 2002, the professional liability business was expanded to include
errors and omissions insurance and employment practices liability coverages. The professional liability premium increased to $53.0 million in 2003 from $23.4 million in 2002 reflecting
growth and the expansion of this business.

Assumed from Lloyd's Operations.Since 2002, the Insurance Companies have participated in quota share treaties on marine and
energy business written by the Company's Lloyd's operations.

Lloyd's Operations' Gross Written Premium

Marine Premium.Marine premium increased 63.2% in 2003 and 10.1% in 2002 partially due to the increase in premium rates
resulting in higher premiums on renewal and new business and due to the increased capacity provided to Syndicate 1221 by Navigators Corporate Underwriters Ltd. and Millennium
Underwriting Ltd. increasing from 67.4% in 2001 to 68.1% in 2002 to 97.4% in 2003. The higher premium rates, averaging approximately 15% in 2003 and 26% in 2002, made the business more
attractive resulting in the Lloyd's operations increasing its writings of new business.

Other.Other consists of engineering and construction premium which provides coverage for construction projects including
machinery, equipment and loss of use due to delays and of onshore energy premium which principally focuses on
the oil and gas, chemical and petrochemical industries with coverages primarily for property damage and business interruption.

Ceded Written Premium.In the ordinary course of business, we reinsure certain insurance risks with unaffiliated insurance
companies for the purpose of limiting our maximum loss exposure, protecting against catastrophic losses, and maintaining desired ratios of net premiums written to statutory surplus. The relationship
of ceded to written premium varies based upon the types of business written and whether the business is written by our insurance company subsidiaries or the Lloyd's operations. There are several
factors contributing to an increase in ceded premium when comparing 2003 to 2002. First, rate increases on our business resulted in higher premium levels, and consequently more ceded premiums. The
second factor is the cost of excess of loss reinsurance purchased to limit our exposure to an individual large loss. This increased reinsurance costs in the marine and specialty liability business.
Effective from April 1, 2003 to September 30, 2003, the reinsurance treaty for our specialty liability business was amended to incorporate a ceding commission from the reinsurer and a
rate increase. Third, we increased the amount of quota share reinsurance for certain product lines based upon management's assessment of expected loss activity. Fourth, Navigators Pro experienced
substantial premium growth, resulting in increased amounts of premium ceded to its quota share reinsurance program. Additionally, we entered into quota share reinsurance agreements to reinsure 15.4%
of our Syndicate 1221 capacity to third parties who provide letters of credit used as collateral at Lloyd's.

The
amount of ceded premium in 2002 increased over 2001 due to the increase in gross written premium and the increase in reinsurance rates in 2002. The percentage of the Lloyd's
operations' ceded premium increased from 28.5% in 2001 to 39.3% in 2002 due to additional quota share reinsurance. The percentage of our insurance company subsidiaries' premium which was ceded
decreased from 44.1% in 2001 to 43.1% in 2002 primarily due to the increase in the Specialty insurance premium, of which our insurance company subsidiaries retain more of the premium than in the other
lines of business.

Net Written Premium.Net written premium increased 15.4% from 2002 to 2003 as a result of the increase in the gross written
premium and the increase in the marine pool participation from 75% in 2002 to 80% in 2003, partially offset by the increased ceded premium, as discussed above. Net written premium increased 54.2% from
2001 to 2002 due to the increase in

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the
gross written premium partially offset by the increase in the percentage of ceded premium from 38.0% in 2001 to 39.5% in 2002.

Net Earned Premium.Net earned premium increased 25.0% in 2003 compared to 2002 and increased 47.8% in 2002 compared to 2001
as a result of rate increases and new business generated in 2003 and 2002, and for 2003, the increase in the participation in the marine pool from 75% in 2002 to 80% in 2003.

Commission Income.Commission income from unaffiliated business decreased by 11.3% in 2003 compared to 2002 as a result of a
decrease from 25% to 20% of unaffiliated insurers participating in the marine pool managed by Navigators Agencies. This decrease occurred effective January 1, 2003 as a result of Navigators
Insurance Company increasing its participation in the marine pool from 75% in 2002 to 80% in 2003. The increase of 13.9% in 2002 compared to 2001 resulted from increased premiums written on behalf of
unaffiliated insurers in the marine pool.

Net Investment Income.Net investment income increased 8.3% in 2003 due to the increase in invested assets resulting from
positive cash flow stemming from the increased premium volume and the proceeds from our October 2003 common stock offering. Our net proceeds from the offering amounted to $110.8 million.
Net investment income decreased 6.7% in 2002 from the previous year due to lower interest rates during 2002 partially offset by increased invested assets. See the "BusinessInvestments"
section included herein for additional information regarding our net investment income.

Net Realized Capital Gains.Pre-tax net income included $1,875,000 of net realized capital gains for 2003
compared to $1,668,000 for 2002 and $790,000 for 2001. On an after-tax basis, the net realized capital gains were $0.13 per share, $0.14 per share and $0.09 per share for 2003, 2002 and
2001, respectively. The 2002 and 2001 net realized capital gains include $2,905,000 and $1,618,000, respectively, of impairment losses recorded on three of our asset-backed securities.

Other Income/(Expense).Other income/(expense) for 2003 and 2002 consisted primarily of foreign exchange gains and inspection
fees related to the Specialty insurance business. Other income/(expense) for 2001 consisted primarily of a $3,800,000 charge related to our former investment in Riverside Corporate
Underwriters, Ltd., a Lloyd's corporate name. Lloyd's informed us in 2001 that it was liable for part of the adverse development in the Lloyd's syndicates in which Riverside Corporate
Underwriters, Ltd. provided capacity in 1999 and 1998. We had provided a letter of credit to Riverside Corporate Underwriters, Ltd. in order for Riverside Corporate
Underwriters, Ltd. to participate on various Lloyd's syndicates. We believe that we have no further exposure to Riverside Corporate Underwriters, Ltd.

Operating Expenses.

Net Losses and Loss Adjustment Expenses Incurred.The ratio of net loss and loss adjustment expenses incurred to net earned
premium was 76.0%, 64.6% and 70.7% in 2003, 2002 and 2001, respectively. The increase in the loss ratio in 2003 compared to 2002 was primarily due to the asbestos losses recorded in the fourth quarter
of 2003 accounting for 11.4 percentage points of the 2003 loss ratio and, to a lesser extent, the adverse development in the California contractors' liability portion of the Specialty business.
The decrease in the loss ratio in 2002 compared to 2001 was primarily due to the losses resulting from approximately $4.1 million of net losses related to the World Trade Center attack,
accounting for 2.7 percentage points of the 2001 loss ratio, and from approximately $1.9 million of net losses resulting from one large offshore energy claim (Petrobras) in the first
quarter of 2001, accounting for 1.3 percentage points of the 2001 loss ratio. Gross losses resulting from the terrorist attack were $17.6 million with the ceded portion of the losses
reinsured by highly rated reinsurers. We do not discount any of our loss reserves. The improvements in the premium rates have benefited the loss ratio.

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The
following tables set forth our net loss reserves by segment and line of insurance business and the total case reserves and IBNR as of the date indicated:

|                             | As of December 31,                     
|---------------------------- | ---------------------------------------
|
|
|Insurance Companies:         |                                        
|                             | Marine                                 
|                             | Specialty (primarily general liability)
|                             | Professional Liability                 
|                             | Assumed from Lloyd's Operations        
|                             | Other (primarily run-off business)     
|                             |                                        
|                             |                                        
|                             |                                        
|Lloyd's Operations:          |                                        
|                             | Marine                                 
|                             | Other                                  
|                             |                                        
|                             |                                        
|                             |                                        
|                             |                                        
|                             |                                        
|Total net case loss reserves |                                        
|Total net IBNR loss reserves |                                        
|                             |                                        
|                             |                                        
|                             |                                        

At December, 2003, the IBNR loss reserve was $219,640,000 or 58.7% of our total loss reserves compared to 48.9% in 2002 and 46.2% in 2001.

At
December 31, 2003, a 10% change in the net loss reserves would equate to $37.4 million which would represent an after-tax charge to net income of
$24.3 million and 8.4% of stockholders' equity. Loss reserve estimates are reviewed each quarter to evaluate whether the assumptions made continue to be appropriate. Any adjustments that result
from this review are recorded in the quarter in which they are identified.

Our
reserving practices and the establishment of any particular reserve reflect management's judgment concerning sound financial practice and do not represent any admission of liability
with respect to any claims made against us. No assurance can be given that actual claims made and related payments will not be in excess of the amounts reserved. During the loss settlement period, it
often becomes necessary to refine and adjust the estimates of liability on a claim either upward or downward. Even after such adjustments, ultimate liability may exceed or be less than the revised
estimates.

The
increase in net loss reserves in all active lines of business is generally a reflection of the growth in premium volume over the last two years. The net loss reserve increase for
2003 also includes an increase in reserves to $33.2 million from $1.5 million for asbestos and environmental exposures in the marine and run-off business as well as prior
year loss reserve strengthening of approximately $22.2 million in our Specialty business related to the California contractors liability business. Approximately $31.8 million of the
increase in asbestos and environmental reserves is recorded in marine and $1.4 million in other, primarily related to run-off aviation business.

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As
discussed under the caption "BusinessReserves," there are a number of factors that could cause actual losses and loss adjustment expenses to differ materially from the
amount that we have reserved for losses and loss adjustment expenses.

Commission Expense.Commission expense paid to brokers and agents is generally on a percentage of the gross written premium
and is reduced by ceding commissions the Company may receive on the ceded written premium. Commissions are generally deferred and recorded to deferred policy acquisition costs to the extent that they
relate to unearned
premium. Commission expense declined 7% in 2003 and increased 39% in 2002. The decrease in commission expense in 2003 was primarily the result of an increase in ceding commissions received as a result
of a change in a reinsurance treaty for specialty business coupled with a general decline in commissions paid to brokers and agents. The 2002 increase was caused principally by an increase in premium
revenue.

Other Operating Expenses.The increases in other operating expenses in 2003 and 2002 of 28.8% and 44.4%, respectively, are
consistent with revenue growth and attributable primarily to employee related expenses resulting from expansion of the business. Included in 2003 was $761,000 recorded for employee stock option
expense. The Company adopted the fair value method of accounting for stock-based employee compensation as of January 1, 2003. Included in 2002 was an expense reimbursement benefit of $1,141,000
in connection with a claims settlement.

Interest Expense.The decreases in interest expense in 2003 and 2002 were primarily due to lower interest rates charged on
the loan balance and a declining loan balance. The remaining loan balance was paid in October 2003 from a portion of the proceeds from the Company's common stock offering.

Income Taxes.The income tax expense (benefit) was $(4.9) million, $5.8 million and $1.7 million for 2003, 2002
and 2001, respectively. The effective tax rates for 2003, 2002 and 2001 were (175.2%), 26.2% and 31.6%, respectively. As of December 31, 2003 and 2002, the net deferred Federal, foreign, state
and local tax assets were $15.2 million and $6.5 million, respectively. We had alternative minimum tax carryforwards of $0, $1.0 million and $3.9 million at
December 31, 2003, 2002, and 2001, respectively. The alternative minimum tax carryforwards were primarily attributable to the tax benefits from municipal bond interest.

Included
in 2003 and 2002 were tax benefits related to the reversal of a tax valuation allowance related to the Company's foreign operations of $5,284,000 and $1,267,000, respectively.

The
Company had a valuation allowance of $4,529,000 as of the year ended December 31, 2002 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. The Company's foreign operations were profitable in 2002 and 2003 resulting in a portion of the valuation allowance being
simultaneously released to the extent of the 2002 profits and the first nine months of profits in 2003. Due to the continued profitability and projected favorable market conditions for the foreseeable
future, it was determined to be more likely than not that the deferred tax assets resulting from those net operating loss carryforwards will be realized, therefore the remaining valuation allowance
related to the foreign operations was released in the fourth quarter of 2003.

The
Company also had net state and local operating loss carryforwards amounting to potential future tax benefits of $3,274,000 and $2,147,000 at December 31, 2003 and 2002,
respectively. A valuation allowance was established for the full
amount of these potential future tax benefits due to the uncertainty associated with their realization. The Company's state and local carryforwards at December 31, 2003 expire from 2019 to
2023.

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Segment Information.

Following are the financial results of the Company's three segments: Insurance Companies, Lloyd's Operations and Navigators Agencies. We evaluate
the performance of each segment including Navigators Agencies, primarily based on underwriting results. Other items of revenue and expenditure, including net investment income and realized capital
gains and losses, are included herein based on the legal entity where they are recorded. Our underwriting performance is evaluated separately from the performance of our investment portfolios. See
Note 13 to the consolidated financial statements for further information. Certain amounts for prior years have been reclassified to conform to the current year's presentation.

Insurance Companies

Our two insurance companies are Navigators Insurance Company, which includes a United Kingdom branch, and NIC Insurance Company. Navigators Insurance Company is
our largest insurance subsidiary and has been active since 1983. It specializes principally in underwriting marine insurance and related lines of business, specialty liability insurance and
professional liability insurance. NIC Insurance Company, a wholly owned subsidiary of Navigators Insurance Company, began operations in 1990. It underwrites similar types of business but on a
non-admitted or surplus lines basis and is fully reinsured by Navigators Insurance. The Navigators Agencies produce business for our insurance company subsidiaries.

Following
are the results of the Insurance Companies for each of the years in the three-year period ended December 31, 2003:

|                                           | Year Ended December 31, 
|------------------------------------------ | ------------------------
|
|
|Revenues:                                  |                         
|Net earned premium                         |                         
|Net investment income                      |                         
|Net realized capital gains                 |                         
|Other income (expense)                     |                         
|                                           |                         
|                                           | Total revenues          
|                                           |                         
|Operating expenses:                        |                         
|Net losses and loss adjustment expenses    |                         
|Commission expense                         |                         
|Other operating expenses                   |                         
|                                           |                         
|                                           | Total operating expenses
|                                           |                         
|Income before income tax expense (benefit) |                         
|Income tax expense (benefit)               |                         
|                                           |                         
|Net income                                 |                         
|                                           |                         
|Loss and loss expense ratio                |                         
|Commission expense ratio                   |                         
|Other operating expense ratio              |                         
|                                           |                         
|Combined ratio                             |                         
|                                           |                         

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Following are the underwriting results of the Insurance Companies for each of the years in the three-year period ended December 31, 2003:

|                                  |  | Year ended December 31, 2003 |        
|--------------------------------- |  | ---------------------------- | -------
|
|
|
|
|                                  |  |                              |        
|Marine                            |  | $                            | 92,448 
|Specialty                         |  |                              | 84,842 
|Professional liability            |  |                              | 9,410  
|Assumed from Lloyd's Operations   |  |                              | 21,368 
|Other (includes run-off business) |  |                              | 121    
|                                  |  |                              |        
|Total                             |  | $                            | 208,189
|                                  |  |                              |        

|                                  |  | Year ended December 31, 2002 |        
|--------------------------------- |  | ---------------------------- | -------
|
|
|
|
|                                  |  |                              |        
|Marine                            |  | $                            | 71,122 
|Specialty                         |  |                              | 69,073 
|Professional liability            |  |                              | 1,780  
|Assumed from Lloyd's Operations   |  |                              | 5,548  
|Other (includes run-off business) |  |                              | 888    
|                                  |  |                              |        
|Total                             |  | $                            | 148,411
|                                  |  |                              |        

|                                  |  | Year ended December 31, 2001 |       
|--------------------------------- |  | ---------------------------- | ------
|
|
|
|
|                                  |  |                              |       
|Marine                            |  | $                            | 40,506
|Specialty                         |  |                              | 34,043
|Professional liability            |  |                              | 4     
|Other (includes run-off business) |  |                              | (462  
|                                  |  |                              |       
|Total                             |  | $                            | 74,091
|                                  |  |                              |       

The Insurance Companies experienced rapid premium growth in all three lines of business as reflected in the net earned premium increases of 40.3% and 100.3% in
2003 and 2002, respectively. Approximately 10.3% and 3.7% of the net premium

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recorded
in 2003 and 2002 is a result of the Insurance Companies participating on reinsurance treaties supporting the Lloyd's Operations' marine and energy business.

The
2003 underwriting results were adversely impacted by approximately $61.5 million for incurred losses related to years prior to 2002. Approximately $32.5 million of such
adverse development was for incurred losses recorded for asbestos and environmental exposures (consisting of $31.1 million in marine business and $1.4 million in run-off
business). As a result of recording such losses, intersegment profit commissions of $5.7 million due to Navigators Agencies were reduced.

The
Company also recorded adverse development in 2003 of approximately $22.2 million for specialty business mostly for California contractors liability business, and approximately
$7.0 million for other marine business and $2.8 million for other run-off business. The Company strengthened its reserves for the California contractors liability business as
a result of an internal actuarial analysis of the specialty business conducted during the 2003 fourth quarter.

The
2002 underwriting results were negatively impacted by approximately $6.7 million for prior year loss development recorded in specialty business mostly for the Company's
California contractors liability business. The 2001 underwriting results were favorably impacted by $4.5 million for a redundancy on prior year reserves mostly related to the marine business.

The
pre-tax yield on the Insurance Companies' investment portfolio approximated 4.26%, 4.99% and 6.29% for 2003, 2002 and 2001, respectively. The declining portfolio yields
in 2003 and 2002 reflect the overall declines in interest rates since 2001. Net investment income increased in 2003 compared to 2002 despite declines in the average investment yield on the portfolio
due to strong cash flows throughout 2003 coupled with the receipt of $95 million of statutory surplus contributions in the 2003 fourth quarter.

Lloyd's Operations

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

Our
Lloyd's Syndicate 1221's 2003 stamp capacity was £125 million ($203.5 million) compared to £75.0 million ($112.7 million) in 2002
and £66.3 million ($95.5 million) in 2001. Stamp capacity is a measure of the amount of premium a Lloyd's syndicate is authorized to write as determined by the Council of
Lloyd's. Syndicate 1221's stamp capacity is expressed net of commission (as is standard at Lloyd's) of approximately 21%. We provided 97.4%, 68.1% and 67.4% of Syndicate 1221's total capacity for the
2003, 2002 and 2001 underwriting years, respectively. In 2003, we provided a larger percentage of the gross capacity and are reinsuring 15.4% of our Syndicate 1221 capacity through the utilization of
quota share reinsurance agreements to third parties who provide letters of credit used as collateral at Lloyd's. The Lloyd's marine business had been subject to deteriorating pricing beginning in the
mid-1990's. The pricing competition showed some signs of stabilizing in 2000 and prices increased in 2001, 2002 and 2003. Lloyd's presents its results on an underwriting year basis,
generally closing each underwriting year after three years. We make estimates for each underwriting year and timely accrue the expected results. Our Lloyd's operations included in the consolidated
financial statements represent our participation in Syndicate 1221.

Lloyd's
syndicates report the amounts of premiums, claims, and expenses recorded in an underwriting account for a particular year to the companies or individuals that participate in the
syndicates. The syndicates generally keep accounts open

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for
three years. Traditionally, three years have been necessary to report substantially all premiums associated with an underwriting year and to report most related claims, although claims may remain
unsettled after the underwriting year is closed. A Lloyd's syndicate typically closes an underwriting year by reinsuring outstanding claims on that underwriting year with the participants for the next
underwriting year. The ceding participants pay the assuming participants an amount based on the unearned premiums and outstanding claims in the underwriting year at the date of the assumption. Our
participation in Lloyd's Syndicate 1221 is represented by and recorded as our proportionate share of the underlying assets and liabilities and results of operations of the syndicate since,
(a) we hold an undivided interest in each asset, (b) we are proportionately liable for each liability and (c) Syndicate 1221 is not a separate legal entity. At Lloyd's, the amount
to close an underwriting year into the next year is referred to as the reinsurance to close. The reinsurance to close amounts represent the transfer of the assets and liabilities from the participants
of a closing underwriting year to the participants of the next underwriting year. To the extent our participation in the syndicate changes, the reinsurance to close amounts vary accordingly. The
reinsurance to close transactions are recorded as additional written and earned premium, losses incurred, loss reserves and receivables, all in the same amount. There are no gains or losses recorded
on the transactions.

We
provide letters of credit to Lloyd's to support our participation in Syndicate 1221's capacity. If we increase our participation, or if Lloyd's changes the capital requirements, we
may be required to supply additional letters of credit or other collateral acceptable to Lloyd's, or reduce the capacity of Syndicate 1221. The letters of credit are provided through the credit
facility which we maintain with a consortium of banks. The credit facility agreement requires that the banks vote by November 19th of each year whether or not to renew the letter of credit
facility. If the banks decide not to renew the letter of credit facility, we will need to find other sources to provide the letters of credit or other collateral in order to continue to participate in
Syndicate 1221. The renewal amendment executed in November 2003 renewed the letter of credit facility for a two year period expiring in November 2005.

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Following
are the results of the Lloyd's operations for each of the years in the three-year period ended December 31, 2003:

|                                                  | Year Ended December 31, 
|------------------------------------------------- | ------------------------
|
|
|Revenues:                                         |                         
|Net earned premium                                |                         
|Commission income                                 |                         
|Net investment income                             |                         
|Net realized capital gains                        |                         
|Other income                                      |                         
|                                                  |                         
|                                                  | Total revenues          
|                                                  |                         
|Operating expenses:                               |                         
|Net losses and loss adjustment expenses           |                         
|Commission expense                                |                         
|Other operating expenses                          |                         
|                                                  |                         
|                                                  | Total operating expenses
|                                                  |                         
|Income (loss) before income tax expense (benefit) |                         
|Income tax expense (benefit)                      |                         
|                                                  |                         
|Net income (loss)                                 |                         
|                                                  |                         
|Loss and loss expense ratio                       |                         
|Commission expense ratio                          |                         
|Other operating expense ratio                     |                         
|                                                  |                         
|Combined ratio                                    |                         
|                                                  |                         

The Lloyd's operations have been experiencing business expansion coupled with improving underwriting results as a result of the generally favorable market
conditions for marine and energy business since late 2001. Net earned premium revenues were reduced by $21.4 million and $5.5 million in 2003 and 2002 for business ceded to the Insurance
Companies.

Underwriting
results in 2003 were favorably impacted by $2.8 million for prior year reserve savings compared to $0.3 million and $9.9 million of prior year
deficiencies recorded in 2002 and 2001, respectively. The 2001 deficiency was due to an increase in premium estimates and related reserves and strengthening of reserves for the 1999 underwriting year.
The 2001 underwriting results were also adversely impacted by $4.5 million of pre-tax and after-tax losses related to the World Trade Center terrorist attack.

The
pre-tax yields on funds at Lloyd's approximated 2.0%, 3.8% and 5.7% for 2003, 2002 and 2001, respectively, which are reflective of the declining interest rate environment
since 2001. Generally, funds invested at Lloyd's have been invested with an average duration of approximately 1.4 years in order to meet liquidity needs.

The
provision for income tax expense for 2003 and 2002 reflect the reversal of a previously established deferred tax asset valuation allowance. The valuation allowance was reversed up
until the fourth quarter of 2003 only to the extent of taxable

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profits.
The remaining valuation allowance was completely reversed in the 2003 fourth quarter since it was determined that it was more likely than not that the remaining deferred tax asset resulting
from net operating loss carryforwards will be realized.

Navigators Agencies

The Navigators Agencies produce business for our insurance company subsidiaries. They specialize in writing marine and related lines of business, specialty
liability insurance and professional liability coverages.

Each
of the Navigators Agencies underwrites marine and related lines of business for Navigators Insurance Company and three other unaffiliated insurance companies comprising a marine
insurance pool. Marine insurance policies are issued
by Navigators Insurance Company with the business shared with other pool members. Navigators Insurance Company had a 75% participation in the pool for business written with effective dates in 2002 and
2001. As described in more detail under "BusinessMarine Insurance", Navigators Insurance Company's participation in the marine pool increased to 80% for 2003.

Navigators
Specialty, a division of a Navigators Agency, produces business exclusively for our insurance company subsidiaries. It specializes in underwriting general liability insurance
coverage for small general and artisan contractors and other targeted commercial risks, with the majority of its business located in California. Navigators Specialty also writes surety, commercial
multiple peril, commercial automobile and personal umbrella insurance.

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

Following
are the results of the Navigators Agencies for each of the years in the three year period ended December 31, 2003:

|                                                  | Year Ended December 31, 
|------------------------------------------------- | ------------------------
|
|
|Revenues:                                         |                         
|Commission income                                 |                         
|Net investment income                             |                         
|Other income (expense)                            |                         
|                                                  |                         
|                                                  | Total revenues          
|                                                  |                         
|Operating expenses:                               |                         
|Other operating expenses                          |                         
|                                                  |                         
|                                                  | Total operating expenses
|                                                  |                         
|Income (loss) before income tax expense (benefit) |                         
|Income tax expense (benefit)                      |                         
|                                                  |                         
|Net income (loss)                                 |                         
|                                                  |                         

Commission income generally consists of intersegment management fees and profit commissions received from insurance premiums of the Insurance Companies for
marine, specialty and professional liability business as well as business from

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unaffiliated
insurance companies in the marine pool. Despite increased premium revenues recorded by the Insurance Companies in 2003 compared to 2002, the commission income of the Navigators Agencies
was flat due to the reduction of $5.7 million of intersegment profit commission as a result of the $32.5 million incurred losses recorded by the Insurance Companies for asbestos and
environmental losses.

Commission
income increased substantially in 2002 compared to 2001 due to the increased premium revenues generated on behalf of the Insurance Companies.

Net
investment income is earned on fiduciary funds. Other income generally represents fee revenues earned for services on behalf of third parties.

Other
operating costs consists of compensation and general and administrative expenses incurred in connection with underwriting, administrative and claims services performed on behalf of
the Insurance Companies and unaffiliated insurers participating in the marine pool. Such costs have been increasing each year commensurate with servicing the growth in the overall increased premium
volume that has been generated in 2003 and 2002 for the Insurance Companies and unaffiliated members of the marine pool.

Income
tax expense (benefit) includes federal and state income taxes related to the taxable income or loss of the Navigators Agencies. The 2001 income tax benefit contains a reversal of
a prior year accrual that was no longer deemed necessary for a tax contingency.

Off-Balance Sheet Transactions

For a discussion of our letter of credit facility, see "Liquidity and Capital Resources" included herein.

Tabular Disclosure of Contractual Obligations

The following table sets forth our known contractual obligations with respect to the items indicated at December 31, 2003.

|                 |       | Payments Due by Period
|---------------- | ----- | ----------------------
|
|
|                 |       |                       
|Operating Leases |       | $                     
|Capital Leases   |       |                       
|                 |       |                       
|                 | Total |                       
|                 |       |                       

Investments

For a discussion of our investments, see "BusinessInvestments" included herein.

Liquidity and Capital Resources

Cash flow provided by operations was $134.5 million, $108.5 million and $41.3 million for 2003, 2002, and 2001, respectively.
The increases in the 2003 and 2002 operating cash flows were primarily due to the increases in net written premium. Operating cash flow was used primarily to acquire additional investment assets and
to reduce debt.

Invested
assets and cash increased to $693.6 million at December 31, 2003 from $452.9 million at December 31, 2002 and $333.1 million at
December 31, 2001. The increases were primarily due to the positive cash flow and the $110.8 million of net

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proceeds
received from the secondary public stock offering in October 2003. Net investment income was $19.6 million for the year ended December 31, 2003, $18.1 million for
the year ended December 31, 2002 and $19.4 million for the year ended December 31, 2001.

The
average yield of the portfolio, excluding net realized capital gains, was 3.79% in 2003, 4.78% in 2002 and 6.14% in 2001 reflecting the prevailing interest rates during those years.
As of December 31, 2003 and 2002, all fixed maturity securities and equity securities held by us were classified as available-for-sale.

At
December 31, 2003, the weighted average rating of our fixed maturity investments was "AA" by Standard & Poor's and "Aa" by Moody's. We believe that we have no
significant exposure to credit risk since the fixed maturity investment portfolio consists of investment-grade bonds. At December 31, 2003, our portfolio had an average maturity of
5.3 years and duration of 3.7 years. Management continually monitors the composition and cash flow of the investment portfolio in order to maintain the appropriate levels of liquidity to
ensure our ability to satisfy claims. We incurred impairment
losses of $2.9 million in 2002 and $1.6 million in 2001 on asset-backed securities. We incurred no impairment losses in 2003.

We
have a credit facility provided through a consortium of banks. The credit facility provides for an $80.0 million letter of credit facility which was increased from
$55.0 million in November 2003. The credit facility also provided for a $9.0 million line of credit facility which was fully utilized prior to the October 2003 common stock
offering. As required by the credit facility agreement, the line of credit was fully paid from a portion of the proceeds from the common stock offering thereby eliminating the line of credit portion
of the credit facility. The letter of credit facility is utilized primarily by Navigators Corporate Underwriters Ltd. and Millennium Underwriting Ltd. for our participation in Lloyd's
Syndicate 1221. The credit facility agreement requires that the banks vote by November 19th of each year whether or not to renew the letter of credit portion of the facility. If the banks
decide not to renew the letter of credit portion of the facility, we will need to find other sources to provide the letters of credit or other collateral in order to continue our participation in
Syndicate 1221. The renewal amendment executed in November 2003 renewed the letter of credit facility for a two year period. At December 31, 2003, letters of credit with an aggregate
face amount of $77.6 million were issued under the letter of credit facility.

The
bank credit facility is collateralized by the common stock of Navigators Insurance Company. It contains covenants common to transactions of this type, including restrictions on
indebtedness and liens, limitations on mergers and the sale of assets, maintaining certain consolidated tangible net worth, statutory surplus and other financial ratios. At December 31, 2003,
we were in compliance with all covenants.

At
December 31, 2003, our consolidated stockholders' equity was $290.0 million compared to $171.3 million at December 31, 2002. The increase was primarily due
to the common stock offering and, to a lesser extent, the net income for the year ended December 31, 2003.

We
had annual rental commitments at December 31, 2003 under various noncancellable operating leases for our office facilities, which expire at various dates through 2013. The
commitments by year are $2.4 million for 2004, $2.3 million for 2005, $2.2 million for 2006, $1.9 million for 2007 and $6.0 million for 2008 and beyond.

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Our reinsurance has been placed with various U.S. and foreign insurance companies and with selected syndicates at Lloyd's. Pursuant to the implementation of
Lloyd's Plan of Reconstruction and Renewal, a portion of our recoverables are now reinsured by Equitas (a separate United Kingdom 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).

We
primarily rely upon dividends from our subsidiaries to meet our holding company obligations. The dividends have historically come primarily from Navigators Insurance Company. At
December 31, 2003, the maximum amount available for the payment of dividends by Navigators Insurance Company during 2004 without prior regulatory approval was $21,032,000. During 2003, 2002 and
2001, Navigators Insurance Company paid dividends to us of $6,000,000, $6,500,000 and $11,000,000, respectively.

We
believe that the cash flow generated by the operating activities of our subsidiaries will provide sufficient funds for us to meet our liquidity needs over the next twelve months.
Beyond the next twelve months, cash flow available to us may be influenced by a variety of factors, including general economic conditions and conditions in the insurance and reinsurance markets, as
well as fluctuations from year to year in claims experience.

Economic Conditions

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

We
also consider the potential impact of economic trends in estimating loss reserves. Our management believes that the underwriting controls it maintains, and the fact that a significant
amount of our 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 us.

Item 7a. 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 our primary market risk exposures and how those exposures have been managed through December 31, 2003. Our market risk sensitive instruments are entered into for purposes other
than trading.

The
carrying value of our investment portfolio as of December 31, 2003 was $693.6 million of which 84.9% was invested in fixed-maturity securities. The primary market risk
to the investment portfolio is interest rate risk associated with investments in fixed-maturity securities. Our exposure to equity price risk and foreign exchange risk is not significant. We have 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.

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There
were no significant changes regarding the investment portfolio in our primary market risk exposures or in how those exposures were managed between the year ended
December 31, 2003 and the year ended December 31, 2002, other than the impairment losses of $2.9 million in 2002 recorded on one of our asset-backed securities. There have been no
significant changes in our primary market risk exposures or how those exposures are managed from December 31, 2002 through December 31 2003. We do not currently anticipate significant
changes in our 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.

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 our 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 us to mitigate such hypothetical losses in fair value.

In
this sensitivity analysis model, we use fair values to measure our potential loss. The sensitivity analysis model includes fixed maturities and short-term investments. The
primary market risk to our 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, 2003.

The
sensitivity analysis model used by us produces a loss in fair value of market-sensitive instruments of $24.3 million based on a 100 basis point increase in interest rates as
of December 31, 2003. This loss amount only reflects the impact of an interest rate increase on the fair value of our fixed maturities and short-term investments, which constitute
approximately 48.7% of total assets as of December 31, 2003. The loss in fair value of market-sensitive instruments, as a result of a 100 basis point increase in interest rates as of
December 31, 2003, is not material.

Risk Factors

In addition to the items listed under "Note on Forward-Looking Statements," following are certain risk factors related to
the Company.

Our business is concentrated in marine and general liability insurance, and if market conditions change adversely, or we
experience large losses in these lines, it could have a material adverse effect on our business.

As a result of our strategy to focus on specialty products in niches where we have underwriting and claims handling expertise and to decline business where
pricing does not afford what we consider to be acceptable returns, our business is concentrated in the marine and specialty liability lines. For the year ended December 31, 2003, our marine
line accounted for approximately 63.7% of our gross written premiums and our specialty lines, consisting primarily of contractors' liability, accounted for

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approximately
21.6% of our gross written premiums. If our results of operations from either of these two specialty liability lines are less favorable for any reason, including lower demand for our
products on terms and conditions that we find appropriate, flat or decreased rates for our products or increased competition, the reduction could have a material adverse effect on our business.

We are exposed to cyclicality in our business that may cause material fluctuations in our results.

The property/casualty insurance business generally, and the marine insurance business specifically, have historically been characterized by periods of intense
price competition due to excess underwriting capacity as well as periods when shortages of underwriting capacity have permitted attractive premium levels. We have reduced business during periods of
severe competition and price declines, such as withdrawing from the majority of our aviation business in late 1998, and grown when pricing allowed an acceptable return, as with entering the
professional liability business in late 2001. We expect that our business will continue to experience the effects of this cyclicality, which, over the course of time, could result in material
fluctuations in our premium volume, revenues or expenses.

We may not be successful in developing our new specialty lines which could cause us to experience losses.

Since 2001, we have entered into a number of new specialty lines of business including professional liability, surety, personal umbrella insurance and commercial
automobile insurance. We continue to look for appropriate opportunities to diversify our business portfolio by offering new lines of insurance in which we believe we have sufficient underwriting and
claims expertise. However, because of our limited history in these new lines, there is limited financial information available to help us estimate sufficient reserve amounts for these lines and to
help evaluate whether we will be able to successfully develop these new lines or the likely ultimate losses and expenses associated with these new lines. Due to our limited history in these lines, we
may have less experience managing their development and growth than some of our competitors. Additionally, there is a risk that the lines of business into which we expand will not perform at the level
we anticipate.

We may be unable to manage effectively our rapid growth in our lines of business, which may adversely affect our
results.

We have experienced substantial increases in premium in many of our lines of business over the past few years. For example, gross written premium in the specialty
liability line increased 13.4% from 2002 to 2003, 109.8% from 2001 to 2002 and 94.4% from 2000 to 2001 due to increased rates and underwriting more business. Gross written premium in the marine line
for our insurance companies increased 32.5%, 65.5% and 9.6% in 2001, 2002 and 2003, respectively, due to an increase in premium rates resulting in higher premiums on new and renewal business, as well
as underwriting new business. In addition, since late 2001 we have been underwriting several new lines of business, including professional liability, surety, commercial automobile and personal
umbrella insurance.

To
control our growth effectively, we must successfully manage our new and existing lines of business. This process will require substantial management attention and additional financial
resources. In addition, our growth is subject to, among other risks, the risk that we may experience difficulties and incur expenses related to hiring and retaining a technically proficient workforce.
Accordingly, we may fail to realize the intended benefits of expanding into new specialty lines and we may fail to realize value from such lines relative to the resources that we invest in them. Any
difficulties associated with expanding our current and future lines of business could adversely affect our result of operations.

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We may incur additional losses if our loss reserves are insufficient.

We maintain loss reserves to cover our estimated ultimate unpaid liability for losses and loss adjustment expenses with respect to reported and unreported claims
incurred as of the end of each accounting period. Reserves do not represent an exact calculation of liability, but instead represent estimates, generally utilizing actuarial projection techniques at a
given accounting date. These reserve estimates are expectations of what the ultimate settlement and administration of claims will cost based on our assessment of facts and circumstances then known,
review of historical settlement patterns, estimates of trends in claims severity, frequency, legal theories of liability and other factors. Both internal and external events, including changes in
claims handling procedures, economic inflation, legal trends and legislative changes, may affect the reserve estimation process. Many of these items are not directly quantifiable, particularly on a
prospective basis. Additionally, there may be significant lags between the occurrence of the insured event and the time it is actually reported to the insurer. We continually refine reserve estimates
in a regular ongoing process as historical loss experience develops and additional claims are reported and settled. Adjustments to reserves are reflected in the results of the periods in which the
estimates are changed. Because establishment of reserves is an inherently uncertain process involving estimates, currently established reserves may not be sufficient. If estimated reserves are
insufficient, we will incur additional income statement charges.

Our
loss reserves include amounts related to short tail and long tail classes of business. Short tail business means that claims are generally reported quickly upon occurrence of an
event, making estimation of loss reserves less complex. For the long tail lines, significant periods of time, ranging up to several years or more, may elapse between the occurrence of the loss, the
reporting of the loss and the settlement of the claim. The longer the time span between the incidence of a loss and the settlement of the claim, the more likely the ultimate settlement amount will
vary. Our longer tail business includes general liability, including California construction defect claims, as well as historical claims for asbestos and environmental exposures through our marine and
aviation businesses and claims relating to our run-off businesses. As of December 31, 2003 and 2002, our net loss reserves for the asbestos and environmental exposures were
$33.2 million and $1.5 million, respectively. Navigators Insurance Company increased its gross and net asbestos reserves for losses by approximately $77.6 million and
$31.6 million, respectively, in the fourth quarter of 2003. As a result, gross and net incurred losses increased by the amount of the respective reserve increase. Our professional liability
business, though long tail with respect to settlement period, is produced on a claims-made basis (which means that the policy in-force at the time the claim is filed, rather
than the policy in-force at the time the loss occurred, provides coverage) and is therefore, we believe, less likely to result in a time lag between the occurrence of the loss and the
reporting of the loss. There can be no assurance, however, that we will not suffer substantial adverse prior period development in our business in the future.

We may not have access to adequate reinsurance to protect us against losses.

We purchase reinsurance by transferring part of the risk we have assumed to a reinsurance company in exchange for part of the premium we receive in connection
with the risk. The availability and cost of reinsurance are subject to prevailing market conditions, both in terms of price and available capacity, which can affect our business volume and
profitability. Since the September 11, 2001 terrorist attacks, we have seen, and expect to continue to see, a significant tightening in the pricing and terms and conditions for reinsurance in
some of our lines of business. Our reinsurance programs are generally subject to renewal on an annual basis. If we are unable to renew our expiring facilities or to obtain new reinsurance facilities,
either our net exposures would increase, which could increase our costs, or, if we were unwilling to bear an increase in net exposures, we would have to reduce the level of our underwriting
commitments, especially catastrophe exposed risks, which would reduce our revenues and possibly net income.

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Our reinsurers, including the other participants in the marine pool, may not pay on losses in a timely fashion, or at
all, which may increase our costs.

Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance arrangements do not
eliminate our obligation to pay claims to our policyholders. Accordingly, we bear credit risk with respect to our reinsurers. Specifically, our reinsurers may not pay claims made by us on a timely
basis, or they may not pay some or all of these claims. Either of these events would increase our costs and could have a material adverse effect on our business.

The
operations of the marine pool also expose us to reinsurance credit risk. Since 1998, all business underwritten by the marine pool has been written with Navigators Insurance Company
as the primary insurer. Navigators Insurance Company then reinsures its exposure in the marine pool to the other participants based on their percentage participation. From 1983 until 1998, Navigators
Insurance Company was the primary insurer for some of the pool business in excess of its participation amount. As a result of this arrangement, we remain primarily liable for claims arising out of
those policies written by Navigators Insurance Company on behalf of the marine pool even if one or more of the other participants do not pay the claims they reinsured, which could have a material
adverse effect on our business.

Intense competition for our products could harm our ability to maintain or increase our profitability and premium
volume.

The property and casualty insurance industry is highly competitive. We face competition from both domestic and foreign insurers, many of whom have longer
operating histories and greater financial, marketing and management resources. Competition in the types of insurance in which we are engaged is based on many factors, including our perceived overall
financial strength, 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 we face the risk that we will lose market share to higher rated insurers.

The
entry of banks and brokerage firms into the insurance business poses new challenges for insurance companies and agents. These challenges from industries traditionally outside the
insurance business could heighten the competition in the property and casualty industry.

We
may have difficulty in continuing to compete successfully on any of these bases in the future. If competition limits our ability to write new business at adequate rates, our ability
to transact business would be materially and adversely affected and our results of operations would be adversely affected.

We may be unable to attract and retain qualified employees.

We depend on our ability to attract and retain qualified executive officers, experienced underwriters and claims professionals and other skilled employees who are
knowledgeable about our specialty lines of business. If the quality of our executive officers, underwriting or claims team and other personnel decreases, we may be unable to maintain our current
competitive position in the specialty markets in which we operate and be unable to expand our operations into new specialty markets.

Increases in interest rates may cause us to experience losses.

Because of the unpredictable nature of losses that may arise under insurance policies, we may require substantial liquidity at any time. Our investment portfolio,
which is comprised largely of fixed-income investments, is our principal source of liquidity.

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The
market value of our fixed-income investments is subject to fluctuation depending on changes in prevailing interest rates and various other factors. We do not hedge our investment portfolio against
interest rate risk. Increases in interest rates during periods when we must sell fixed-income securities to satisfy liquidity needs may result in realized losses.

A downgrade in our ratings could adversely impact the competitive positions of our operating businesses.

Ratings are a critical factor in establishing the competitive position of insurance companies. Our insurance companies are rated by A.M. Best Company and
S&P. A.M. Best Company's and S&P's ratings reflect their opinions of an insurance company's financial strength, operating performance, strategic position and ability to meet its obligations to
policyholders, and are not evaluations directed to investors. Our ratings are subject to periodic review by A.M. Best Company and S&P, and we cannot assure the continued maintenance of our
current ratings. In 2003, A.M. Best Company reaffirmed its "A" (Excellent) rating for Navigators Insurance Company and NIC Insurance Company. In 2003, S&P's reaffirmed its "A" (Strong) rating
for Navigators Insurance Company and NIC Insurance Company.

Because
these ratings have become an increasingly important factor in establishing the competitive position of insurance companies, if these ratings are reduced, our competitive position
in the industry, and therefore our business, could be adversely affected. A significant downgrade could result in a substantial loss of business as policyholders might move to other companies with
higher claims-paying and financial strength ratings. There can be no assurance that our current ratings will continue for any given period of time.

Our business could be materially and adversely affected if Lloyd's was further downgraded by A.M. Best.

Following the September 11, 2001 terrorist attacks, the Lloyd's of London market was downgraded by A.M. Best to "A-" (Excellent) from
"A". On April 2, 2003, A.M. Best Company affirmed Lloyd's "A-" rating. Our Lloyd's operations' ability to market insurance policies to certain customers and brokers is
dependent, in part, upon Lloyd's maintaining an "A-" or better A.M. Best rating. A.M. Best Company's rating of the Lloyd's of London market is not a rating of our Lloyd's
operations. In the event that Lloyd's rating is further downgraded for any reason, it could have a material adverse effect on our ability to underwrite business through our Lloyd's operations and
therefore on our financial condition or results of operations.

Continued or increased premium levies by Lloyd's for the Lloyd's Central Fund and cash calls for trust fund deposits
could materially and adversely affect us.

The Lloyd's Central Fund protects Lloyd's policyholders against the failure of a member of Lloyd's to meet its obligations. The Central Fund is a mechanism which
in effect "mutualizes" unpaid liabilities among all members, whether individual or corporate. The fund is available to back Lloyd's policies issued after 1992. Lloyd's requires members to contribute
to the Central Fund, normally in the form of an annual contribution, although a special contribution may be levied. The Council of Lloyd's has discretion to call up to 3% of underwriting capacity in
any one year.

Policies
issued before 1993 have been reinsured by Equitas, an independent insurance company authorized by the Financial Services Authority. However, if Equitas were to fail or otherwise
be unable to meet all of its obligations, Lloyd's may take the view that it is appropriate to apply the Central Fund to discharge those liabilities Equitas failed to meet. In that case, the Council of
Lloyd's may resolve to impose a special or additional levy on the existing members, including Lloyd's corporate members, to satisfy those liabilities.

Additionally,
Lloyd's insurance and reinsurance business is subject to local regulation, and regulators in the United States require Lloyd's to maintain certain minimum deposits in trust
funds as protection for policyholders in the United States. These

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deposits
may be used to cover liabilities in the event of a major claim arising in the United States and Lloyd's may require us to satisfy cash calls to meet claims payment obligations and maintain
minimum trust fund amounts.

Any
premium levy or cash call would increase the expenses of Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd., our corporate members, without
providing compensating revenues, and could have a material adverse effect on our results.

Our businesses are heavily regulated, and changes in regulation may reduce our profitability and limit our growth.

Our insurance subsidiaries are subject to extensive regulation and supervision in the jurisdictions in which they conduct business. This regulation is generally
designed to protect the interests of policyholders, as opposed to insurers and their stockholders and other investors, and relates to authorization for lines of business, capital and surplus
requirements, investment limitations, underwriting limitations, transactions with affiliates, dividend limitations, changes in control, premium rates and a variety of other financial and nonfinancial
components of an insurance company's business.

Virtually
all states require insurers licensed to do business in that state to bear a portion of the loss suffered by some insureds as the result of impaired or insolvent insurance
companies. The effect of these arrangements could reduce our profitability in any given period or limit our ability to grow our business.

In
recent years, the state insurance regulatory framework has come under increased federal scrutiny, and some state legislatures have considered or enacted laws that may alter or
increase state authority to regulate insurance companies and insurance holding companies. Further, the National Association of Insurance Commissioners, or NAIC, and state insurance regulators are
re-examining existing laws and regulations, specifically focusing on modifications to holding company regulations, interpretations of existing laws and the development of new laws. Any
proposed or future legislation or NAIC initiatives may be more restrictive than current regulatory requirements or may result in higher costs.

In
response to the September 11, 2001 terrorist attacks, the United States Congress has enacted legislation designed to ensure, among other things, the availability of insurance
coverage for terrorist acts, including the requirement that insurers provide such coverage in certain circumstances. The Terrorism Risk Insurance Act of 2002 ("TRIA") established a program under which
the federal government will share the risk of loss from certain acts of international terrorism with the insurance industry. As a result, we will be prohibited from adding certain terrorism exclusion
clauses to the policies written by insurers in our group that write business in the U.S. While these insurers are protected by federally funded terrorism reinsurance as provided for in the TRIA, there
is a substantial deductible that must be met, the payment of which could have an adverse effect on our results of operations. Potential future changes to the TRIA could also adversely affect us by
causing our reinsurers to increase prices or withdraw from certain markets where terrorism coverage is required.

The inability of our subsidiaries to pay dividends to us in sufficient amounts would harm our ability to meet our
obligations.

We are a holding company and rely primarily on dividends from our subsidiaries to meet our obligations for payment of interest and principal on outstanding debt
obligations and corporate expenses. The ability of our insurance subsidiaries to pay dividends to us in the future will depend on their statutory surplus, on earnings and on regulatory restrictions.
For a discussion of our insurance subsidiaries' current dividend-paying ability, please see "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity
and Capital Resources" included herein. We and our underwriting subsidiaries are subject to regulation by some states as an insurance holding company. Such regulation generally provides that
transactions between companies within our consolidated group must be fair and equitable. Transfers of assets among affiliated

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companies,
certain dividend payments from underwriting subsidiaries and certain material transactions between companies within our consolidated group may be subject to prior notice to, or prior
approval by, state regulatory authorities. Our underwriting subsidiaries are also subject to licensing and supervision by government regulatory agencies in the jurisdictions in which they do business.
These regulations may set standards of solvency that must be met and maintained, such as the nature of and limitations on investments, the nature of and limitations on dividends to policyholders and
stockholders and the nature and extent of required participation in insurance guaranty funds. These regulations may affect our subsidiaries' ability to provide us with dividends.

Catastrophe losses could materially reduce our profitability.

We are exposed to claims arising out of catastrophes, particularly in our marine insurance line of business. We have experienced, and will in the future
experience, catastrophe losses which may materially reduce our profitability or harm our financial condition. Catastrophes can be caused by various natural events, including hurricanes, windstorms,
earthquakes, hail, severe winter weather and fires. Catastrophes can also be man-made, such as the World Trade Center attack. The incidence and severity of catastrophes are inherently
unpredictable. Although we will attempt to manage our exposure to such events, the frequency and severity of catastrophic events could exceed our estimates, either of which could have a material
adverse effect on our financial condition.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

None.

Item 9a. CONTROLS AND PROCEDURES

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

(b)   There
have been no changes during our fourth fiscal quarter in our internal control over financial reporting that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting. However, as a result of the recent asbestos reserve increases discussed elsewhere in this report, the Company is currently
reviewing its process for estimating loss reserves for asbestos and environmental loss and loss adjustment expenses, which may result in refinements to the procedures for making such estimates and the
internal audit process for evaluating compliance with such procedures.

A N N U A L  
R E P O R T  
2 0 0 3  53

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Part III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE  COMPANY

Information concerning the directors and the executive officers of the Company is contained under "Election of Directors" in the Company's 2004
Proxy Statement, which information is incorporated herein by reference.

The
Company has adopted a Code of Ethics applicable to our Chief Executive Officer, Chief Financial Officer, Treasurer, Controller and all other persons performing similar functions. A
copy of the Code of Ethics is available on the Company's website at www.navigators-insurance.com under the Financial Information link. Any amendments to, or waivers of, the Code of Ethics which apply
to any of the financial professionals listed above will be disclosed on our website under the same link promptly following the date of such amendment or waiver.

Item 11. EXECUTIVE COMPENSATION

Information concerning executive compensation is contained under "Compensation of Directors and Executive Officers" in the Company's 2004 Proxy
Statement, which information is incorporated herein by reference.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS

Information concerning the security ownership of the directors and officers of the Company is contained under "Election of Directors" and
"Compensation of Directors and Executive Officers" in the Company's 2004 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 2004 Proxy Statement, which information is incorporated herein by reference.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information concerning the principal accountant's fees and services for the Company is contained under "Independent Auditors" in the Company's
2004 Proxy Statement, which information is incorporated herein by reference.

Part IV

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

54  
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SIGNATURES

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

|                      | The Navigators Group, Inc.
(Company)
|--------------------- | ------------------------------------
|Dated: March 11, 2004 | By:                                 

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

|Name                                               |  | Title                                                                              |  | Date          
|-------------------------------------------------- |  | ---------------------------------------------------------------------------------- |  | --------------
|                                                   |  |                                                                                    |  |               
|/s/ TERENCE N. DEEKSTerence N. Deeks               |  | Chairman                                                                           |  | March 11, 2004
|/s/ STANLEY A. GALANSKIStanley A. Galanski         |  | President and Chief Executive Officer
(Principal Executive Officer)                |  | March 11, 2004
|/s/ PAUL J. MALVASIOPaul J. Malvasio               |  | Executive Vice President and Chief Financial Officer
(Principal Financial Officer) |  | March 11, 2004
|/s/ SALVATORE A. MARGARELLASalvatore A. Margarella |  | Vice President and Treasurer
(Principal Accounting Officer)                        |  | March 11, 2004
|/s/ PETER A. CHENEYPeter A. Cheney                 |  | Director                                                                           |  | March 11, 2004
|/s/ ROBERT W. EAGER, JR.Robert W. Eager, Jr.       |  | Director                                                                           |  | March 11, 2004
|/s/ LEANDRO S. GALBAN, JR.Leandro S. Galban, Jr.   |  | Director                                                                           |  | March 11, 2004
|/s/ JOHN F. KIRBYJohn F. Kirby                     |  | Director                                                                           |  | March 11, 2004
|/s/ MARC M. TRACTMarc M. Tract                     |  | Director                                                                           |  | March 11, 2004
|/s/ ROBERT F. WRIGHTRobert F. Wright               |  | Director                                                                           |  | March 11, 2004

A N N U A L  
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Index To Consolidated Financial Statements and Schedules

|Independent Auditors' Report                                                                                           |  | F-2                                                                          
|---------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------
|Consolidated Balance Sheets at December 31, 2003 and 2002                                                              |  | F-3                                                                          
|Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2003               |  | F-4                                                                          
|Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 2003 |  | F-5                                                                          
|Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 31, 2003 |  | F-6                                                                          
|Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2003           |  | F-7                                                                          
|Notes to Consolidated Financial Statements                                                                             |  | F-8                                                                          
|SCHEDULES:                                                                                                             |  |                                                                              
|Schedule I                                                                                                             |  | Summary of Consolidated InvestmentsOther Than Investments in Related Parties
|Schedule II                                                                                                            |  | Condensed Financial Information of Registrant                                
|Schedule III                                                                                                           |  | Supplementary Insurance Information                                          
|Schedule IV                                                                                                            |  | Reinsurance                                                                  
|Schedule V                                                                                                             |  | Valuation and Qualifying Accounts                                            
|Schedule VI                                                                                                            |  | Supplementary Information Concerning Property-Casualty Insurance Operations  

A N N U A L  
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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, 2003 and 2002, and the related consolidated statements of
income, stockholders' equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2003. In connection with our audits of the
consolidated financial statements, we also have audited the consolidated financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based
on our audits.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Navigators Group, Inc. and subsidiaries as
of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As
discussed in Note 9, the Company changed its method of accounting for stock compensation in 2003.

|                                 | KPMG LLP
|-------------------------------- | --------
|New York, New York
March 9, 2004 |         

F-2  
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The Navigators Group, Inc. and Subsidiaries
Consolidated Balance Sheets

($ in thousands, except share data)

|                                                                    |                                                                                                                                                                                  | December 31, |                                            |        
|------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ------------------------------------------ | -------
|
|ASSETS                                                              |                                                                                                                                                                                  |              |                                            |        
|Investments and cash:                                               |                                                                                                                                                                                  |              |                                            |        
|                                                                    | Fixed maturities, available-for-sale, at fair value (amortized cost: 2003, $577,904; 2002, $351,821)                                                                             |              | $                                          | 588,545
|                                                                    | Equity securities, available-for-sale, at fair value (cost: 2003, $11,977; 2002, $12,286)                                                                                        |              |                                            | 13,446 
|                                                                    | Short-term investments, at cost which approximates fair value                                                                                                                    |              |                                            | 83,202 
|                                                                    | Cash                                                                                                                                                                             |              |                                            | 8,399  
|                                                                    |                                                                                                                                                                                  |              |                                            |        
|                                                                    |                                                                                                                                                                                  |              | Total investments and cash                 |        
|                                                                    |                                                                                                                                                                                  |              |                                            |        
|Premiums in course of collection                                    |                                                                                                                                                                                  |              | 128,676                                    |        
|Commissions receivable                                              |                                                                                                                                                                                  |              | 3,970                                      |        
|Prepaid reinsurance premiums                                        |                                                                                                                                                                                  |              | 102,141                                    |        
|Reinsurance receivable on paid losses                               |                                                                                                                                                                                  |              | 26,270                                     |        
|Reinsurance receivable on unpaid losses and loss adjustment expense |                                                                                                                                                                                  |              | 350,441                                    |        
|Federal income tax recoverable                                      |                                                                                                                                                                                  |              | 8,747                                      |        
|Net deferred income tax asset                                       |                                                                                                                                                                                  |              | 15,195                                     |        
|Deferred policy acquisition costs                                   |                                                                                                                                                                                  |              | 24,720                                     |        
|Accrued investment income                                           |                                                                                                                                                                                  |              | 5,546                                      |        
|Goodwill                                                            |                                                                                                                                                                                  |              | 5,093                                      |        
|Other assets                                                        |                                                                                                                                                                                  |              | 15,067                                     |        
|                                                                    |                                                                                                                                                                                  |              |                                            |        
|                                                                    |                                                                                                                                                                                  |              | Total assets                               |        
|                                                                    |                                                                                                                                                                                  |              |                                            |        
|LIABILITIES AND STOCKHOLDERS' EQUITY                                |                                                                                                                                                                                  |              |                                            |        
|Liabilities:                                                        |                                                                                                                                                                                  |              |                                            |        
|                                                                    | Reserves for losses and loss adjustment expenses                                                                                                                                 |              | $                                          | 724,612
|                                                                    | Unearned premium                                                                                                                                                                 |              |                                            | 238,803
|                                                                    | Reinsurance balances payable                                                                                                                                                     |              |                                            | 97,583 
|                                                                    | Notes payable to banks                                                                                                                                                           |              |                                            |       
|                                                                    | Payable for securities purchased                                                                                                                                                 |              |                                            | 12,857 
|                                                                    | Accounts payable and other liabilities                                                                                                                                           |              |                                            | 15,575 
|                                                                    |                                                                                                                                                                                  |              |                                            |        
|                                                                    |                                                                                                                                                                                  |              | Total liabilities                          |        
|                                                                    |                                                                                                                                                                                  |              |                                            |        
|Stockholders' equity:                                               |                                                                                                                                                                                  |              |                                            |        
|                                                                    | Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued                                                                                                        |              |                                            |       
|                                                                    | Common stock, $.10 par value, 20,000,000 shares authorized for 2003 and 2002; issued and outstanding: 12,535,360 for 2003 and 8,486,272 (net of 16,423 treasury shares) for 2002 |              |                                            | 1,254  
|                                                                    | Additional paid-in capital                                                                                                                                                       |              |                                            | 151,765
|                                                                    | Treasury stock held at cost                                                                                                                                                      |              |                                            |       
|                                                                    | Accumulated other comprehensive income                                                                                                                                           |              |                                            | 8,537  
|                                                                    | Retained earnings                                                                                                                                                                |              |                                            | 128,472
|                                                                    |                                                                                                                                                                                  |              |                                            |        
|                                                                    |                                                                                                                                                                                  |              | Total stockholders' equity                 |        
|                                                                    |                                                                                                                                                                                  |              |                                            |        
|                                                                    |                                                                                                                                                                                  |              | Total liabilities and stockholders' equity |        
|                                                                    |                                                                                                                                                                                  |              |                                            |        

See accompanying notes to consolidated financial statements.

A N N U A L  
R E P O R T  
2 0 0 3  F-3

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The Navigators Group, Inc. and Subsidiaries
Consolidated Statements of Income

($ and shares in thousands, except net income per share)

|                                   |                                                  | Year Ended December 31,            |        
|---------------------------------- | ------------------------------------------------ | ---------------------------------- | -------
|
|Gross written premium              |                                                  | $                                  | 606,492
|                                   |                                                  |                                    |        
|Revenues:                          |                                                  |                                    |        
|                                   | Net written premium                              |                                    | $      
|                                   | (Increase) in unearned premium                   |                                    |        
|                                   |                                                  |                                    |        
|                                   | Net earned premium                               |                                    |        
|                                   | Commission income                                |                                    |        
|                                   | Net investment income                            |                                    |        
|                                   | Net realized capital gains                       |                                    |        
|                                   | Other income (expense)                           |                                    |        
|                                   |                                                  |                                    |        
|                                   |                                                  | Total revenues                     |        
|                                   |                                                  |                                    |        
|Operating expenses:                |                                                  |                                    |        
|                                   | Net losses and loss adjustment expenses incurred |                                    |        
|                                   | Commission expense                               |                                    |        
|                                   | Other operating expenses                         |                                    |        
|                                   | Interest expense                                 |                                    |        
|                                   |                                                  |                                    |        
|                                   |                                                  | Total operating expenses           |        
|                                   |                                                  |                                    |        
|Income before income tax expense   |                                                  |                                    | 2,792  
|                                   |                                                  |                                    |        
|Income tax expense (benefit):      |                                                  |                                    |        
|                                   | Current                                          |                                    |        
|                                   | Deferred                                         |                                    |        
|                                   |                                                  |                                    |        
|                                   |                                                  | Total income tax expense (benefit) |        
|                                   |                                                  |                                    |        
|Net income                         |                                                  | $                                  | 7,685  
|                                   |                                                  |                                    |        
|Net income per common share:       |                                                  |                                    |        
|                                   | Basic                                            |                                    | $      
|                                   | Diluted                                          |                                    | $      
|Average common shares outstanding: |                                                  |                                    |        
|                                   | Basic                                            |                                    |        
|                                   | Diluted                                          |                                    |        

See accompanying notes to consolidated financial statements.

F-4  
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The Navigators Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity

($ in thousands)

|                                              | Year Ended December 31,                                
|--------------------------------------------- | -------------------------------------------------------
|
|Preferred stock                               |                                                        
|                                              | Balance at beginning and end of year                   
|                                              |                                                        
|Common stock                                  |                                                        
|                                              | Balance at beginning of year                           
|                                              | Shares issued for public offering                      
|                                              | Shares issued under stock plans                        
|                                              |                                                        
|                                              | Balance at end of year                                 
|                                              |                                                        
|Additional paid-in capital                    |                                                        
|                                              | Balance at beginning of year                           
|                                              | Adoption of SFAS 123 for stock options                 
|                                              | Shares issued for public offering                      
|                                              | Shares issued under stock plans                        
|                                              |                                                        
|                                              | Balance at end of year                                 
|                                              |                                                        
|Treasury stock held at cost                   |                                                        
|                                              | Balance at beginning of year                           
|                                              | Shares issued for vested stock grants                  
|                                              | Shares issued to directors                             
|                                              |                                                        
|                                              | Balance at end of year                                 
|                                              |                                                        
|Accumulated other comprehensive income (loss) |                                                        
|                                              | Net unrealized gains (losses) on securities, net of tax
|                                              |                                                        
|                                              |                                                        
|                                              |                                                        
|                                              |                                                        
|                                              |                                                        
|                                              | Cumulative translation adjustments, net of tax         
|                                              |                                                        
|                                              |                                                        
|                                              |                                                        
|                                              |                                                        
|                                              |                                                        
|                                              | Balance at end of year                                 
|                                              |                                                        
|Retained earnings                             |                                                        
|                                              | Balance at beginning of year                           
|                                              | Net income                                             
|                                              |                                                        
|                                              | Balance at end of year                                 
|                                              |                                                        
|Total stockholders' equity at end of year     |                                                        
|                                              |                                                        

See accompanying notes to consolidated financial statements.

A N N U A L  
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The Navigators Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income

($ in thousands)

|                                                                                | Year Ended December 31,                                                                                                                                  
|------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|
|Net income                                                                      |                                                                                                                                                          
|                                                                                |                                                                                                                                                          
|Other comprehensive income (loss)                                               |                                                                                                                                                          
|                                                                                | Change in net unrealized gains (losses) on securities, net of tax expense (benefit) of $(455), $3,516 and $(216) in 2003, 2002 and 2001, respectively (1)
|                                                                                | Change in foreign currency translation gains (losses), net of tax expense (benefit) of $233, $(84) and $71 in 2003, 2002 and 2001, respectively          
|                                                                                |                                                                                                                                                          
|                                                                                | Other comprehensive income (loss)                                                                                                                        
|                                                                                |                                                                                                                                                          
|Comprehensive income                                                            |                                                                                                                                                          
|                                                                                |                                                                                                                                                          
|(1)  Disclosure of reclassification amount:                                     |                                                                                                                                                          
|Unrealized holding gains arising during period                                  |                                                                                                                                                          
|Less:  reclassification adjustment for
        net gains included in net income |                                                                                                                                                          
|                                                                                |                                                                                                                                                          
|Net unrealized gains (losses) on securities                                     |                                                                                                                                                          
|                                                                                |                                                                                                                                                          

See accompanying notes to consolidated financial statements.

F-6  
A N N U A L  
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The Navigators Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows

($ in thousands)

|                                                   | Year Ended December 31,                                                                    
|-------------------------------------------------- | -------------------------------------------------------------------------------------------
|
|Operating activities:                              |                                                                                            
|                                                   | Net income                                                                                 
|                                                   | Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|                                                   |                                                                                            
|                                                   |                                                                                            
|                                                   |                                                                                            
|                                                   | Changes in assets and liabilities:                                                         
|                                                   |                                                                                            
|                                                   |                                                                                            
|                                                   |                                                                                            
|                                                   |                                                                                            
|                                                   |                                                                                            
|                                                   |                                                                                            
|                                                   |                                                                                            
|                                                   |                                                                                            
|                                                   |                                                                                            
|                                                   |                                                                                            
|                                                   |                                                                                            
|                                                   |                                                                                            
|                                                   |                                                                                            
|Investing activities:                              |                                                                                            
|                                                   | Fixed maturities, available-for-sale                                                       
|                                                   |                                                                                            
|                                                   |                                                                                            
|                                                   |                                                                                            
|                                                   | Equity securities, available-for-sale                                                      
|                                                   |                                                                                            
|                                                   |                                                                                            
|                                                   | Change in payable for securities                                                           
|                                                   | Net change in short-term investments                                                       
|                                                   | Purchase of property and equipment                                                         
|                                                   |                                                                                            
|                                                   |                                                                                            
|                                                   |                                                                                            
|Financing activities:                              |                                                                                            
|                                                   | Net proceeds from stock offering                                                           
|                                                   | Repayment of bank loan                                                                     
|                                                   | Proceeds from exercise of stock options                                                    
|                                                   |                                                                                            
|                                                   |                                                                                            
|                                                   |                                                                                            
|Increase (decrease) in cash                        |                                                                                            
|Cash at beginning of year                          |                                                                                            
|                                                   |                                                                                            
|Cash at end of year                                |                                                                                            
|                                                   |                                                                                            
|Supplemental disclosures of cash flow information: |                                                                                            
|                                                   | Federal, state and local income tax paid                                                   
|                                                   | Interest paid                                                                              
|                                                   | Issuance of stock to directors                                                             

See accompanying notes to consolidated financial statements.

A N N U A L  
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The Navigators Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 1. Organization and Summary of Significant Accounting Policies

The accompanying consolidated financial statements consisting of the accounts of The Navigators Group, Inc., a Delaware holding company,
and its twelve active wholly owned subsidiaries, are prepared on the basis of accounting principles generally accepted in the United States of America ("GAAP"). Unless the context otherwise requires,
the term "Company" as used herein means The Navigators Group, Inc. and its subsidiaries. All significant intercompany transactions and balances are eliminated. Certain amounts for prior years
have been reclassified to conform to the current year's presentation.

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

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

Each
of the Navigators Agencies write marine and related business for Navigators Insurance Company and three unaffiliated insurance companies. The four insurance companies comprise a
marine insurance pool. Marine insurance policies are issued by Navigators Insurance Company with the business shared through the pool. Navigators Insurance Company had a 75% net participation in the
pool for underwriting years 2002 and 2001 and an 80% net participation in the pool for underwriting year 2003.

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

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

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

F-8  
A N N U A L  
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---

corporate
members with limited liability and provide capacity to Lloyd's Syndicate 1221. NUAL owns Pennine Underwriting Ltd., an underwriting managing agency with offices in Manchester, Leeds
and Basingstoke, England, which underwrites cargo and engineering business for Lloyd's Syndicate 1221.

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

Investments

As of December 31, 2003 and 2002, all fixed maturity and equity securities held by the Company were classified as
available-for-sale. 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. Premiums and discounts on fixed maturity securities are amortized into interest income over the life of the security under the interest method. Fixed maturity securities include
bonds and mortgage-backed and asset-backed securities. Equity securities consist of common stock. All fixed maturity and equity securities are carried at fair value. The fair values are based on
quoted market prices or dealer quotes provided by independent pricing services.

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

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

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

Lloyd's Syndicate

We record our pro rata share of Lloyd's Syndicate 1221's assets, liabilities, revenues and expenses, after making adjustments to convert Lloyd's
accounting to U.S. GAAP. The most significant U.S. GAAP adjustments relate to income recognition. Lloyd's syndicates determine underwriting results by year of account at the end of three years. We
record adjustments to recognize underwriting results as incurred, including the expected ultimate cost of losses incurred. These adjustments to losses are based on actuarial analysis of syndicate
accounts, including forecasts of expected ultimate losses provided by the syndicates. At the end of the Lloyd's three year period for determining underwriting results for an account year, the
syndicate will close the account year by reinsuring outstanding claims on that account year with the participants for the account's next underwriting year. The amount to close an underwriting year
into the next year is referred to as the "reinsurance to close". The reinsurance to

A N N U A L  
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close
transactions are recorded as additional written and earned premium, losses incurred, loss reserves and receivables, all in the same amount. The reinsurance to close was $0.5 million,
$1.6 million and $4.2 million for each of the years in the three year period ended December 31, 2003. There were no gains or losses recorded on the reinsurance to close
transactions.

Lloyd's
Syndicate 1221 had stamp capacity of £125.0 million ($203.5 million) in 2003, £75.0 million ($112.7 million) in 2002 and
£66.3 million ($95.5 million) in 2001. Stamp capacity is a measure of the amount of premium a Lloyd's syndicate is authorized to write as determined by the Council of
Lloyd's. Syndicate 1221's capacity is expressed net of commission (as is standard at Lloyd's) of approximately 21%. The Syndicate 1221 premium recorded in the Company's financial statements is gross
of commission. Syndicate 1221 entered
into a qualifying quota share agreement with a major reinsurer which increased the gross premium that could be written by Syndicate 1221 for the 2002 underwriting year from its stamp capacity of
£75.0 million to a total of £86.6 million ($130.2 million). A qualifying quota share is a reinsurance contract which provides additional capacity to
Lloyd's syndicates in order that they may write premiums up to 30% in excess of their stamp capacity. Only high quality reinsurers approved by Lloyd's can enter into a qualifying quota share
transaction with a Lloyd's syndicate. The Company participates for 97.4%, 68.1% and 67.4% of Syndicate 1221's capacity for the 2003, 2002 and 2001 underwriting years, respectively. The Lloyd's
operations included in the consolidated financial statements represent the Company's participation in Syndicate 1221.

The
Company provides letters of credit to Lloyd's to support its Syndicate 1221 capacity. If the Company increases its participation or if Lloyd's changes the capital requirements, the
Company may be required to supply additional letters of credit or other collateral acceptable to Lloyd's, or reduce the capacity of Syndicate 1221. The letters of credit are provided through the
credit facility which the Company maintains with a consortium of banks. The credit facility agreement requires that the banks vote whether or not to renew the letter of credit portion of the facility
each year. If the banks decide not to renew the letter of credit facility, the Company will need to find other sources to provide the letters of credit or other collateral in order to continue to
participate in Syndicate 1221. The renewal amendment executed in November 2003 renewed the letter of credit facility for a two year period.

Translation of Foreign Currencies

Financial statements of subsidiaries expressed in foreign currencies are translated into U.S. dollars in accordance with the Statement of
Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation" issued by the Financial Accounting Standards Board ("FASB"). Under SFAS 52, functional currency assets and
liabilities are translated into U.S. dollars using period end rates of exchange and the related translation adjustments are recorded as a separate component of accumulated other comprehensive income.
Functional currencies are generally the currencies of the local operating environment. Statement of income amounts expressed in functional currencies are translated using average exchange rates. Gains
and losses resulting from foreign currency transactions are recorded inother income (expense)in the Company's Consolidated Statements of Income.

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Premium Revenues

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

Commission Income

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

Deferred Policy Acquisition Costs

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

Reserves for Losses and Loss Adjustment Expenses

Unpaid losses and loss adjustment expenses are determined on an individual basis for claims reported on direct business for insureds, from reports
received from ceding insurers for insurance assumed from such insurers and on estimates based on Company and industry experience for incurred but not reported claims and loss adjustment expenses. The
provision for unpaid losses and loss adjustment expenses has been established to cover the estimated unpaid cost of claims incurred. Such estimates are regularly reviewed and updated and any resulting
adjustments are included in the current year's results. Management believes that the unpaid losses and loss adjustment expenses are adequate to cover the ultimate unpaid claims incurred, however, such
provisions are necessarily based on estimates and, accordingly, no representation is made that the ultimate liability will not exceed such amounts.

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Net Income Per Share

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

Reinsurance Ceded

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

Depreciation and Amortization

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

The
Company capitalizes the costs of computer software developed or purchased for internal use. As of December 31, 2003 and 2002, unamortized computer software costs were $338,000
and $680,000, respectively. Amortization of computer software expense amounted to $481,000, $450,000 and $395,000 in 2003, 2002 and 2001, respectively.

Goodwill

Goodwill was $5,093,000 and $5,167,000 at December 31, 2003 and 2002, respectively, net of accumulated amortization of $1,088,000 in each
year. Goodwill amortization expense was $298,000 in 2001. There was no goodwill amortization expense in 2003 and 2002.

The
FASB issued SFAS 141,Business Combinations, and SFAS 142,Goodwill and Other Intangible
Assets. The Company adopted both SFAS 141 and SFAS 142 effective January 1, 2002. SFAS 141 requires that the purchase method of accounting be used
for all business combinations initiated after September 30, 2001. It also specifies that intangible assets acquired in a purchase method business combination be recognized and reported apart
from goodwill. SFAS 142 changes the accounting for goodwill and intangible assets that have indefinite useful lives from an amortization approach to an impairment-only approach that
requires that those assets be tested at least annually for impairment. The Company completed its annual impairment review of goodwill resulting in no impairment as of January 1, 2003. No other
intangible assets were required to be reclassified and accounted for as an asset apart from goodwill upon adoption of SFAS 142. Goodwill of $2,534,000 was carried for the Navigators Agencies'
segment at both December 31, 2003 and 2002, and $2,559,000 and $2,633,000 for the Lloyd's Operations' segment at December 31, 2003 and 2002, respectively. Goodwill on the Company's
consolidated balance sheets may fluctuate due to changes in the foreign currency rates between the U.S. dollar and the British pound. The adoption of SFAS 141 did not have any effect on the
Company's results of operations or financial condition.

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Stock-Based Compensation

In December 2002, the FASB issued SFAS 148,Accounting for Stock-Based Compensation, Amendment of FASB
Statement No. 123 ("SFAS 148"). The provisions of this statement provide alternative methods of transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. The provisions are effective for financial statements for fiscal years ending after December 15, 2002.

SFAS 123,Accounting for Stock-Based Compensation,establishes financial accounting and reporting standards for stock-based
compensation plans. Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS 123. Under the modified prospective method of adoption selected by the
Company under the provisions of SFAS 148, compensation cost recognized in 2003 is the same as that which would have been recognized had the recognition provisions of SFAS 123 been
applied from its original effective date. Results for prior years have not been restated. Prior to 2003, the Company accounted for its stock compensation plans under the recognition and measurement
provisions of APB Opinion No. 25,Accounting for Stock Issued to Employees("APB 25"), and related interpretations, with certain pro forma
disclosures as required by SFAS 123. APB 25 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. See Note 9 to our consolidated financial statements, included herein.

Federal Income Taxes

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

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Application of New Accounting Standards

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

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

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

In
January 2003, the FASB issued Interpretation No. 46,Consolidation of Variable Interest Entities.Interpretation 46
requires variable interest entities to be consolidated by their primary beneficiaries. The adoption of Interpretation 46 did not have any impact on the Company's financial condition or results of
operations. In December 2003, the FASB issued a revision to Interpretation No. 46 effective for financial statements for periods ending after March 15, 2004. The Company does not
anticipate that the revision to Interpretation No. 46 will have a material effect on its financial condition or results of operations upon adoption.

In
April 2003, the FASB Derivative Implementation Group adopted Issue No. B36,Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments
That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under Those Instruments("B36"). B36 addresses the
recognition of embedded derivatives present in certain reinsurance agreements with funds held provisions and is applicable for quarters beginning after September 15, 2003. The adoption of Issue
No. B36 did not have a material impact on the Company's financial condition or results of operations.

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The Navigators Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 2. Investments

The Company's fixed maturities and equity securities at December 31, 2003 and 2002 were as follows:

|December 31, 2003               |                                                   | Fair
Value             |        | Gross
Unrealized
Gains |         | Gross
Unrealized
(Losses) |       | Cost or
Amortized
Cost
|------------------------------- | ------------------------------------------------- | ---------------------- | ------ | ---------------------- | ------- | ------------------------- | ----- | ----------------------
|
|Fixed maturities:               |                                                   |                        |        |                        |         |                           |       |                       
|                                | U.S. Government Treasury Bonds and GNMAs          |                        | $      | 221,919                |         | $                         | 4,107 |                       
|                                | States, municipalities and political subdivisions |                        |        | 88,093                 |         |                           | 2,599 |                       
|                                | Mortgage- and asset-backed (excluding GNMAs)      |                        |        | 141,831                |         |                           | 1,614 |                       
|                                | Corporate bonds                                   |                        |        | 136,702                |         |                           | 4,509 |                       
|                                |                                                   |                        |        |                        |         |                           |       |                       
|                                |                                                   | Total fixed maturities |        | $                      | 588,545 |                           | $     | 12,829                
|                                |                                                   |                        |        |                        |         |                           |       |                       
|Equity securitiescommon stocks |                                                   | $                      | 13,446 |                        | $       | 1,554                     |       | $                     
|                                |                                                   |                        |        |                        |         |                           |       |                       

|December 31, 2002               |                                                   | Fair
Value             |        | Gross
Unrealized
Gains |         | Gross
Unrealized
(Losses) |       | Cost or
Amortized
Cost
|------------------------------- | ------------------------------------------------- | ---------------------- | ------ | ---------------------- | ------- | ------------------------- | ----- | ----------------------
|
|Fixed maturities:               |                                                   |                        |        |                        |         |                           |       |                       
|                                | U.S. Government Treasury Bonds and GNMAs          |                        | $      | 166,842                |         | $                         | 7,113 |                       
|                                | States, municipalities and political subdivisions |                        |        | 50,127                 |         |                           | 2,463 |                       
|                                | Mortgage- and asset-backed (excluding GNMAs)      |                        |        | 65,487                 |         |                           | 1,664 |                       
|                                | Corporate bonds                                   |                        |        | 84,220                 |         |                           | 4,017 |                       
|                                |                                                   |                        |        |                        |         |                           |       |                       
|                                |                                                   | Total fixed maturities |        | $                      | 366,676 |                           | $     | 15,257                
|                                |                                                   |                        |        |                        |         |                           |       |                       
|Equity securitiescommon stocks |                                                   | $                      | 11,674 |                        | $       | 245                       |       | $                     
|                                |                                                   |                        |        |                        |         |                           |       |                       

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

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

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There
were no impairment losses recorded in our fixed maturity or equity securities portfolios for the year ended December 31, 2003. During 2002, $2,905,000 of impairment losses
were recorded on an asset-backed fixed maturity security that was subsequently sold in 2002. During 2001, $1,618,000 of impairment losses were recorded on two asset backed fixed maturity securities
that were subsequently sold in 2002. There were no impairment losses recorded on our equity securities portfolio in 2001 or 2002.

The
following table summarizes all securities in an unrealized loss position at December 31, 2003 showing the aggregate fair value and gross unrealized loss by the length of time
those securities have continuously been in an unrealized loss position:

|                                                  |  | December 31, 2003
|------------------------------------------------- |  | -----------------
|
|
|Fixed Maturities:                                 |  |                  
|U.S. Government Treasury Bonds and GNMAs          |  |                  
|Less than 12 months                               |  | $                
|12 months or longer                               |  |                  
|                                                  |  |                  
|Subtotal                                          |  |                  
|                                                  |  |                  
|States, municipalities and political subdivisions |  |                  
|Less than 12 months                               |  |                  
|12 months or longer                               |  |                  
|                                                  |  |                  
|Subtotal                                          |  |                  
|                                                  |  |                  
|Mortgage- and asset-backed (excluding GNMAs)      |  |                  
|Less than 12 months                               |  |                  
|12 months or more                                 |  |                  
|                                                  |  |                  
|Subtotal                                          |  |                  
|                                                  |  |                  
|Corporate bonds                                   |  |                  
|Less than 12 months                               |  |                  
|12 months or more                                 |  |                  
|                                                  |  |                  
|Subtotal                                          |  |                  
|                                                  |  |                  
|Total Fixed Maturities                            |  | $                
|                                                  |  |                  
|Equity securitiescommon stocks                   |  |                  
|Less than 12 months                               |  | $                
|12 months or more                                 |  |                  
|                                                  |  |                  
|Total Equity Securities                           |  | $                
|                                                  |  |                  

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

The
Company's fixed maturity securities by years of maturity as of December 31, 2003 were as follows:

|Period from December 31, 2003 to Maturity   |       | Fair
Value |         | Amortized
Cost
|------------------------------------------- | ----- | ---------- | ------- | --------------
|
|                                            |       |            |         |               
|One year or less                            |       | $          | 27,974  |               
|Over one year through five years            |       |            | 138,279 |               
|Over five years through ten years           |       |            | 99,871  |               
|More than ten years                         |       |            | 72,176  |               
|Mortgage and asset backed (including GNMAs) |       |            | 250,245 |               
|                                            |       |            |         |               
|                                            | Total |            | $       | 588,545       
|                                            |       |            |         |               

Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment
penalties. Due to the periodic repayment of principal, the mortgage-backed and asset-backed securities are estimated to have an effective maturity of approximately six years.

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

|                       | Year Ended December 31,
|---------------------- | -----------------------
|
|
|                       |                        
|Fixed maturities       |                        
|Equity securities      |                        
|Short-term investments |                        
|                       |                        
|                       |                        
|Investment expenses    |                        
|                       |                        
|Net investment income  |                        
|                       |                        

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

|                           | Year Ended December 31,
|-------------------------- | -----------------------
|
|
|Fixed maturities:          |                        
|                           | Gains                  
|                           | (Losses)               
|                           |                        
|                           |                        
|                           |                        
|Equity securities:         |                        
|                           | Gains                  
|                           | (Losses)               
|                           |                        
|                           |                        
|                           |                        
|Net realized capital gains |                        
|                           |                        

The 2002 and 2001 realized fixed maturities losses include $2,905,000 and $1,618,000, respectively, of impairment losses recorded on certain of the Company's
asset-backed securities. There were no impairment losses recorded in 2003.

At
December 31, 2003 and 2002, fixed maturities with amortized values of $8,842,000 and $8,162,000, respectively, were on deposit with various State Insurance Departments. In
addition, at December 31, 2003 and 2002, investments of $190,000 and $165,000, respectively, were on deposit with the Bank of England for Navigators Insurance Company's UK Branch. Also, at
December 31, 2003 and 2002, $290,000 of investments were pledged as security under a reinsurance treaty.

At
December 31, 2003, the Company did not have a concentration of greater than 10% of invested assets in a single issuer.

The
fair values of fixed maturity and equity securities are based on quoted market prices or dealer quotes provided by independent pricing services at the reporting date.
Short-term investments are carried at cost, which approximates fair value. The carrying amounts of premium receivables approximate fair value because of the short
maturity of those instruments. The fair value of the Company's notes payable to banks at December 31, 2002 approximates carrying value since the interest rate charged is computed using current
market rates.

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The Navigators Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 3. Letters of Credit and Notes Payable

The Company has a letter of credit credit facility provided through a consortium of banks. The facility provides for $80 million of
letters of credit (increased from $55 million in November 2003) which is utilized primarily by NCUL and Millennium to participate in Lloyd's Syndicate 1221. The cost of the letters of
credit is 1.125% for the used portion and 0.15% for the unused portion of the letter of credit facility. At December 31, 2003 and 2002, letters of credit with an aggregate face amount of
$77.6 million and $53.3 million, respectively, were issued under the letter of credit facility. No letters of credit were drawn down from the credit facility in 2003.

The
credit facility also provided for a line of credit which was being fully utilized for $9.0 million at the time of the October 2003 common stock offering. As required by
the credit facility agreement, the $9.0 million of notes payable were repaid from the proceeds of the offering. The line of credit was eliminated from the facility at that time. The interest
rate charged on the utilized line of credit facility was LIBOR plus 1.25%. At December 31, 2002, $14.5 million of loans were outstanding at a rate of 2.7%.

The
bank credit facility is collateralized by the common stock of Navigators Insurance Company. It contains covenants common to transactions of this type, including restrictions on
indebtedness and liens, limitations on mergers and the sale of assets, maintaining certain consolidated tangible net worth, statutory surplus, and other financial ratios. At December 31, 2003,
the Company complied with all covenants.

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

Note 4. Fiduciary Funds

The Navigators Agencies maintain fiduciary accounts for the insurance pools they manage. Functions performed by the Navigators Agencies include
underwriting business, collecting premiums from the insured, paying claims, collecting paid recoverables from reinsurers, paying reinsurance premiums to reinsurers and remitting net account balances
to member insurance companies. Funds belonging to the insurance pools are held in a fiduciary capacity and are not included in the accompanying consolidated balance sheets.

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The
fiduciary accounts as of December 31, 2003 and 2002 were as follows:

|                                          | December 31,     
|----------------------------------------- | -----------------
|
|
|                                          |                  
|Cash and short-term investments           |                  
|Premiums receivable                       |                  
|Reinsurance balances receivable (payable) |                  
|                                          |                  
|                                          | Total assets     
|                                          |                  
|Due to insurance companies                |                  
|                                          |                  
|                                          | Total liabilities
|                                          |                  

Note 5. Income Taxes

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

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

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

|                                                        | Year Ended December 31,    
|------------------------------------------------------- | ---------------------------
|
|
|Computed expected tax expense                           |                            
|Tax-exempt interest                                     |                            
|Dividends received deduction                            |                            
|State and local income taxes, net of Federal income tax |                            
|State and local tax net operating loss carryforward     |                            
|Valuation allowance                                     |                            
|Other                                                   |                            
|                                                        |                            
|                                                        | Actual tax expense and rate
|                                                        |                            

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

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

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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
that the Company will realize the benefits of its deductible differences at December 31, 2003, net of any valuation allowance.

The
Company had a valuation allowance of $4,529,000 as of the year ended December 31, 2002 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. The Company's foreign operations were profitable in 2002 and 2003 resulting in a portion of the valuation allowance being
simultaneously released to the extent of the 2002 profits and the first nine months of profits
in 2003. Due to the continued profitability and projected favorable market conditions for the foreseeable future, it was determined to be more likely than not that the deferred tax assets resulting
from those net operating loss carryforwards will be realized, therefore the remaining valuation allowance related to the foreign operations was released in the fourth quarter of 2003.

The
Company also had state and local operating loss carryforwards amounting to potential future tax benefits of $3,274,000 and $2,147,000 at December 31, 2003 and 2002,
respectively. A valuation allowance was established for the full amount of these potential future tax benefits due to the uncertainty associated with their realization. The Company's state and local
carryforwards at December 31, 2003 expire from 2019 to 2023.

Note 6. Reserves for Losses and Loss Adjustment Expenses

Insurance companies and Lloyd's syndicates are required to maintain reserves for unpaid losses and unpaid loss adjustment expenses 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 loss adjustment expenses ("LAE") for insurance companies such as Navigators Insurance Company and NIC Insurance Company, and Lloyd's corporate members such as Navigators Corporate
Underwriters Ltd. and Millennium Underwriting Ltd. 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 loss adjustment expenses are incurred, and the time such events are reported to the pools and syndicates and, subsequently, to
Navigators Insurance Company, NIC Insurance Company, Navigators Corporate Underwriters Ltd. and Millennium Underwriting Ltd.

Loss
reserves are established by our Insurance Companies and Lloyd's Syndicate 1221 for reported claims when notice of the claim is first received. Reserves for such reported claims are
established on a case-by-case basis by evaluating several factors, including the type of risk involved, knowledge of the circumstances surrounding such claim, severity of
injury or damage, the potential for ultimate exposure, experience with the insured and the broker on the line of business, and the policy provisions relating to the type of claim. Reserves for
incurred but not reported losses ("IBNR") are determined in part on the basis of statistical information, in part on industry experience and in part in the judgment of our senior corporate officers.
To the

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extent
that reserves are deficient or redundant, the amount of such deficiency or redundancy is treated as a charge or credit to earnings in the period in which the deficiency or redundancy is
recognized.

Loss
reserves are estimates of what the insurer or reinsurer expects to pay on claims, based on facts and circumstances then known. It is possible that the ultimate liability may exceed
or be less than such estimates. In setting our loss reserve estimates, we review statistical data covering several years, analyze patterns by line of business and consider several factors including
trends in claims frequency and severity, changes in operations, emerging economic and social trends, inflation and changes in the regulatory and litigation environment. Based on this review, we make a
best estimate of our ultimate liability. We do not establish a range of loss estimates around the best estimate we use to establish our reserves and loss adjustment expenses. During the loss
settlement period, which, in some cases, may last several years, additional facts regarding individual claims may become known and, accordingly, it often becomes necessary to refine and adjust the
estimates of liability on a claim upward or downward. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year's income statement. Even then,
the ultimate liability may exceed or be less than the revised estimates. The reserving process is intended to provide implicit recognition of the impact of inflation and other factors affecting loss
payments by taking into account changes in historical payment patterns and perceived probable trends. There is generally no precise method for the subsequent evaluation of the adequacy of the
consideration given to inflation, or to any other specific factor, because the eventual deficiency or redundancy of reserves is affected by many factors, some of which are interdependent.

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

|                                                                                    | Year Ended December 31,
|----------------------------------------------------------------------------------- | -----------------------
|
|
|                                                                                    |                        
|Net reserves for losses and LAE at beginning of year                                |                        
|                                                                                    |                        
|Provision for losses and LAE for claims occurring in the current year               |                        
|Lloyd's portfolio transferreinsurance to close                                     |                        
|Increase (decrease) in estimated losses and LAE for claims occurring in prior years |                        
|                                                                                    |                        
|Incurred losses and LAE                                                             |                        
|                                                                                    |                        
|Losses and LAE payments for claims occurring during:                                |                        
|                                                                                    | Current year           
|                                                                                    |                        
|                                                                                    | Prior years            
|                                                                                    |                        
|Losses and LAE payments                                                             |                        
|                                                                                    |                        
|Net reserves for losses and LAE at end of year                                      |                        
|                                                                                    |                        
|Reinsurance receivable on unpaid losses and LAE                                     |                        
|                                                                                    |                        
|Gross reserves for losses and LAE at end of year                                    |                        
|                                                                                    |                        

The segment breakdown of prior year reserve deficiency (redundancy) was as follows:

|Insurance Companies |       | $ | 61,476 |        | $ | 6,713 |       | $ | (4,503 | )     | 
|------------------- | ----- | - | ------ | ------ | - | ----- | ----- | - | ------ | ----- | 
|Lloyd's Operations  |       |   | (2,841 | )      |   | 325   |       |   | 9,888  |       | 
|                    |       |   |        |        |   |       |       |  
|                    | Total |   | $      | 58,635 |   | $     | 7,038 |   | $      | 5,385 | 
|                    |       |   |        |        |   |       |       |  

The $61.5 million recorded in 2003 for claims occurring in prior years for the Insurance Companies includes approximately
$32.5 million recorded for asbestos and environmental exposures (consisting of $31.1 million in marine business and $1.4 million in run-off business),
$22.2 million recorded for Specialty business mostly for our California contractors liability business, approximately $4.0 million for marine business and $2.8 million for other
run-off business (the latter three being unrelated to the asbestos and environmental exposures). The additional asbestos and environmental reserves include $25.7 million of
uncollectible reinsurance.

Approximately
$6.7 million of the $7.0 million deficiency recorded in 2002 related to the Insurance Companies which resulted from adverse development in our specialty
business, predominantly from our California contractors' liability business. The $9.9 million deficiency recorded in 2001 for the Lloyd's operations was due to an increase in premium estimates
and

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related
reserves for prior years and strengthening the Lloyd's reserves related to the 1999 underwriting year. The $4.5 million prior year redundancy recorded in 2001 for the Insurance
Companies was mostly related to marine business.

Lloyd's
syndicates report the amounts of premiums, claims, and expenses recorded in an underwriting account for a particular year to companies or individuals that participate in the
syndicates. The syndicates generally keep accounts open for three years. Traditionally, three years have been necessary to report substantially all premiums associated with an underwriting year and to
report most related claims, although claims may remain unsettled after the account is closed. A Lloyd's syndicate typically closes an underwriting account with the participants for the next
underwriting year. The ceding participants pay the assuming participants an amount based on the unearned premiums and outstanding claims in the underwriting account at the date of the assumption. Our
participation in Lloyd's Syndicate 1221 is represented by and recorded as our proportionate share of the underlying assets and liabilities and results of operations of the syndicate since,
(a) we hold an undivided interest in each asset, (b) we are proportionately liable for each liability and (c) Syndicate 1221 is not a separate legal entity. At Lloyd's, the amount
to close an underwriting year into the next year is referred to as the "reinsurance to close." The reinsurance to close amounts represent the transfer of the assets and liabilities from the
participants of a closing underwriting year to the participants of the next underwriting year. To the extent our participation in the syndicate changes, the reinsurance to close amounts vary
accordingly. In our case, our participation increased from 52.5% in 1999 to 64.5% in 2000, to 67.4% in 2001, to 68.1% in 2002 and to 97.4% in 2003. We therefore recorded our increasing proportionate
share of the assets and liabilities of Syndicate 1221. At December 31, 2003, 2002 and 2001, the Company closed its 2001, 2000 and 1999 underwriting years, respectively, the net effect of which
resulted in such transfers to NCUL and Millennium of $0.5 million, $1.6 million and $4.2 million, respectively. These transactions accounted for part of the increases in the
premium volume in the Lloyd's operations. The reinsurance to close transactions were recorded as additional written and earned premium, losses incurred, loss reserves and receivables, all in the same
amount. There were no gains or losses recorded on the transactions. The Company also purchased an additional £7,379,000 ($11,018,000) of capacity for 2001 through an annual auction process
in 2000 at a total cost of £133,000 ($199,000).

Navigators
Insurance Company increased its gross and net asbestos reserves for losses by approximately $77.6 million and $31.6 million, respectively, in the fourth quarter
of 2003. As a result, gross and net incurred losses increased by the amount of the respective reserve increases.

The
reserve action was the result of a review of asbestos-related exposures conducted by the Company. The Company's management was notified in late January 2004 that an asbestos
claim would likely have to be settled for a significantly greater amount than previously anticipated. As a result of the unexpected adverse development on this individual claim, the Company retained a
leading independent consulting firm in this area to assist in the identification of its potential exposure to asbestos claims from policies written directly as well as those reinsured to Navigators
Insurance Company from prior members of the Company's insurance pools. The Company's increased reserves relate primarily to policies underwritten by Navigators Agencies in the late 1970's and first
half of the 1980's on behalf of members of the pool, consisting of excess liability on marine related business and aviation products liability, including policies subsequently assumed by Navigators
Insurance Company pursuant to reinsurance arrangements with pool members who exited the pool.

A N N U A L  
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Following
the Company's and the independent consulting firm's recent review, the Company determined to increase its gross and net loss reserves for asbestos exposure to
$78.5 million and $32.1 million, respectively, at December 31, 2003.

During
2003, 2002 and 2001, the Company recorded net paid losses and LAE of $756,000, $262,000 and $86,000, respectively, for environmental and asbestos related claims. As of
December 31, 2003 and 2002, the Insurance Companies carried net reserves of $33,236,000 and $1,513,000, respectively, for the potential exposure to such claims. At December 31, 2003,
there were 194 open claims with environmental or asbestos exposures. Management believes that its reserves for such claims are adequate, however due to the significant assumptions inherent in
estimating these exposures, actual liabilities could materially differ from current estimates.

Note 7. Reinsurance

We utilize reinsurance principally to reduce our exposure on individual risks, to protect against catastrophic losses, to maintain desired ratios
of net written premium to statutory surplus and to stabilize loss ratios.

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

We
are protected by various treaty and facultative reinsurance agreements. Our exposure to credit risk from any one reinsurer is managed through diversification by reinsuring with a
number of different reinsurers, principally in the United States and European reinsurance markets. To meet our standards of acceptability, when the reinsurance is placed, a reinsurer generally must
have an A.M. Best Company and/or Standard & Poor's rating of "A" or better, or equivalent financial strength if not rated, plus at least $250 million in policyholders' surplus.
The Company's Reinsurance Security Committee monitors the financial strength of its reinsurers and the related reinsurance receivables and periodically reviews the list of acceptable reinsurers. The
reinsurance is placed either directly by us or through reinsurance intermediaries. The reinsurance intermediaries are compensated by the reinsurers.

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Note 7. Reinsurance (Continued)

The following table lists our 10 largest reinsurers measured by the amount of reinsurance recoverable for ceded losses, ceded loss adjustment
expense and ceded unearned premium (constituting approximately 54.6% of the total recoverables) together with the reinsurance recoverables and collateral at December 31, 2003, and the
reinsurers' rating from the indicated rating agency:

|Reinsurer                               |  | Reinsurance
Recoverables |        | Collateral Held |   | Rating |  | Rating Agency
|--------------------------------------- |  | ------------------------ | ------ | --------------- | - | ------ |  | -------------
|
|                                        |  |                          |        |                 |   |        |  |              
|General Reinsurance Corporation         |  | $                        | 79,944 |                 | $ | 7,578  |  | A++          
|Folksamerica Reinsurance Company        |  |                          | 37,538 |                 |   | 4,253  |  | A            
|Swiss Reinsurance America Corporation   |  |                          | 25,990 |                 |   | 1,794  |  | A+           
|Munich Re                               |  |                          | 23,615 |                 |   | 6,323  |  | A+           
|Lloyd's of London (primarily Equitas)   |  |                          | 18,206 |                 |   | 1,233  |  | A-           
|Employers Mutual Casualty Company       |  |                          | 16,555 |                 |   | 13,732 |  | A-           
|American Re-Insurance Company.          |  |                          | 15,875 |                 |   | 1,392  |  | A+           
|Swiss Reinsurance Company (UK) Ltd.     |  |                          | 15,774 |                 |   | 796    |  | AA           
|Partner Reinsurance Company of the U.S. |  |                          | 15,340 |                 |   | 1,160  |  | A+           
|Everest Reinsurance Company             |  |                          | 12,655 |                 |   | 760    |  | A+           

Collateral includes letters of credit, ceded balances payable and other balances held by the Company.

The
following table summarizes written premium:

|        | Year Ended December 31,
|------- | -----------------------
|
|
|        |                        
|Direct  |                        
|Assumed |                        
|Ceded   |                        
|        |                        
|Net     |                        
|        |                        

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The following table summarizes earned premium:

|        | Year Ended December 31,
|------- | -----------------------
|
|
|        |                        
|Direct  |                        
|Assumed |                        
|Ceded   |                        
|        |                        
|Net     |                        
|        |                        

The following table summarizes losses and loss adjustment expenses incurred:

|        | Year Ended December 31,
|------- | -----------------------
|
|
|        |                        
|Direct  |                        
|Assumed |                        
|Ceded   |                        
|        |                        
|Net     |                        
|        |                        

The 2003, 2002 and 2001 assumed written and earned premium includes $0.5 million, $1.6 million, and $4.2 million, respectively, of
reinsurance to close from the Lloyd's operations.

Ceded
losses and loss adjustment expenses incurred were $216,084,000, $107,256,000 and $99,982,000, in 2003, 2002, and 2001, 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.

In
September 2003, following receipt of the required regulatory approval, all of the reinsurance obligations and liabilities of Trenwick America Re Corporation and two of its
subsidiaries, Chartwell Insurance Company and The Insurance Corporation of New York (collectively referred to as Trenwick), to Navigators Insurance Company were commuted effective as of the beginning
of the 2003 underwriting year. Prior to the commutation, these obligations and liabilities were collateralized through a trust agreement established on October 28, 2002. Under the commutation
agreement, in addition to a lump-sum transfer of funds from the trust account to Navigators Insurance Company, Trenwick also assigned rights against its reinsurer, including rights in
additional trust assets, to Navigators Insurance Company. The reinsurer is Somerset Insurance, Ltd. a Bermuda Corporation of which our Chairman and a member of his family own, in the aggregate,
98% of the outstanding voting stock. Somerset Insurance Ltd. continued to reinsure the portion of the amount commuted that it previously reinsured. This portion constituted approximately 3.1%
of Navigators Insurance Company's participation in the pool for the 2003 underwriting year

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which
amounted to $2.3 million of gross written premium. Somerset Insurance Ltd. will not be providing reinsurance to the Company for the 2004 underwriting year. Net recoverable balances
due to Navigators Insurance Company from Somerset Insurance Ltd. at December 31, 2003 of $3.5 million were fully collateralized by a funded trust account held by an independent
third party.

Although
no assurances can be given, it is expected that this transaction will be protected from subsequent challenge as a preference in the event of a Trenwick liquidation or
rehabilitation proceeding. The results of the commutation did not have a material impact on our operating results.

An
allowance was established for amounts determined to be uncollectible. At December 31, 2003 and 2002, there was an allowance for uncollectible reinsurance of $33,068,000 and
$8,534,000, respectively. The 2003 allowance included a charge of $25,700,000 for uncollectible reinsurance as a result of loss reserves established for asbestos exposures on marine and aviation
business written mostly prior to 1986. Charges for uncollectible reinsurance recorded to incurred losses were $27,551,000, $1,632,000 and $320,000 for 2003, 2002 and 2001, respectively.

Note 8. Share Capital





|                           | Year Ended December 31, 
|-------------------------- | ------------------------
|
|
|                           |                         
|Balance, beginning of year |                         
|                           | Public offering         
|                           | Restricted shares issued
|                           | Stock options exercised 
|                           |                         
|Balance, end of year       |                         
|                           |                         

There are no preferred shares issued.

In
October 2003, the Company completed an underwritten public offering of 3,977,500 shares, including the over allotment option, and received net proceeds of
$110.8 million. The proceeds were used for capital contributions to Navigators Insurance Company and NIC Insurance Company, to repay outstanding indebtedness and for other general corporate
purposes.

A N N U A L  
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---

Note 9. Stock Option Plans, Stock Grants, Stock Appreciation Rights and Employee Stock Purchase Plan

The Company has an Incentive Stock Option Plan and a Non-Qualified Stock Option Plan which allow for the award to key employees of
the Company, its subsidiaries and affiliates, options to purchase an aggregate of 900,000 shares of its common stock. At the 2003 Annual Meeting, the stockholders approved the 2002 Stock Incentive
Plan which allows for the award of incentive stock options, non-incentive stock options and stock grants to employees, directors and consultants. The 2002 Stock Incentive Plan allows, in
the aggregate, awards for 1,000,000 shares of the Company's common stock, of which 100,000 of the shares can be in the form of stock grants. Upon the approval of the 2002 Stock Incentive Plan, no
further awards are to be issued from the Incentive Stock Option Plan or the Non-Qualified Stock Option Plan.

All
options are exercisable upon vesting for one share of the Company's common stock and are granted at exercise prices no less than 90% of the fair market value of the common stock on
the date of the grant.

Stock
grants are expensed as they vest. The amounts charged to expense were $572,000, $761,000 and $382,000 in 2003, 2002 and 2001, respectively. No stock grants were issued prior to
2001. The above does not include $12,000 of the Company's common stock issued each year to each non-employee director as a portion of the director's compensation for serving on the
Company's Board of Directors. The stock is issued in the first quarter of the year following the year of service and is fully vested when issued. The expense for 2003, 2002 and 2001 for the stock
issued to directors was $60,000, $60,000 and $72,000, respectively.

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

Unvested
restricted stock grants outstanding at December 31, 2003, 2002 and 2001 were as follows:

|                                              | Year Ended December 31,
|--------------------------------------------- | -----------------------
|
|                                              |                        
|Stock grants outstanding at beginning of year |                        
|                                              | Granted                
|                                              | Vested                 
|                                              | Forfeited              
|                                              |                        
|Balance at end of year                        |                        
|                                              |                        

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Stock options outstanding at December 31, 2003, 2002 and 2001 were as follows:

|                                         |                      | 2003    |         | 2002 |       | 2001 
|---------------------------------------- | -------------------- | ------- | ------- | ---- | ----- | -----
|
|Options outstanding at beginning of year |                      | 519,500 |         | $    | 14.76 |      
|                                         | Granted              |         | 82,000  |      | $     | 25.15
|                                         | Exercised            |         | (42,950 | )    | $     | 12.07
|                                         | Expired or forfeited |         | (8,000  | )    | $     | 20.93
|                                         |                      |         |         |      |       |      
|Options outstanding at end of year       |                      | 550,550 |         | $    | 16.43 |      
|                                         |                      |         |         |      |       |      
|Number of options exercisable            |                      | 328,441 |         | $    | 14.96 |      
|                                         |                      |         |         |      |       |      

Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS 123,Accounting for Stock-
Based Compensation. Under the modified prospective method of adoption selected by the company under the provisions of SFAS 148,Accounting for
Stock-Based Compensation?Transition and Disclosure, compensation cost recognized in 2003 is the same as that which would have been recognized had the recognition
provisions of SFAS 123 been applied from its original effective date. Results for prior years have not been restated. The effect on the Company's 2003 Stockholders' Equity was to increase
additional paid-in capital by $761,000 and reduce retained earnings by $495,000 through the charge to operating expenses and the related tax benefit. Prior to 2003, the Company accounted
for its stock compensation plans under the recognition and measurement provisions of APB Opinion No. 25,Accounting for Stock Issued to
Employees, and related interpretations, with certain pro forma disclosures as required by SFAS 123. APB 25 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, $59,000 had been recognized for stock options in 2002. Although no amount was expensed in
2001, had expense been recorded as described above, the amount would have been approximately $10,000.

A N N U A L  
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---

The
following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period in
2001 and 2002 as it was in 2003:

|                                                                                                                                                               | Year Ended December 31,
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------
|
|
|                                                                                                                                                               |                        
|Net income as reported                                                                                                                                         |                        
|Add: Stock-based employee compensation expense included in reported net income, net of related tax effects, for 2002 and 2001                                  |                        
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects, for 2002 and 2001 |                        
|                                                                                                                                                               |                        
|Net income for 2003 and pro forma net income for 2002 and 2001                                                                                                 |                        
|                                                                                                                                                               |                        
|Earnings per share:                                                                                                                                            |                        
|                                                                                                                                                               | Basicas reported      
|                                                                                                                                                               | Basicpro forma        
|                                                                                                                                                               | Dilutedas reported    
|                                                                                                                                                               | Dilutedpro forma      

---

N/A=Not applicable

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 in the year
indicated in the following table:

|                            | Year Ended December 31, |  
|--------------------------- | ----------------------- | -
|
|                            |                         |  
|Dividend yield              |                         |  
|Risk free interest rate     |                         |  
|Expected volatility         |                         |  
|Expected life               |                         |  
|Weighted average fair value |                         | $

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Note 9. Stock Option Plans, Stock Grants, Stock Appreciation Rights and Employee Stock Purchase Plan (Continued)

The
following table summarizes information about options outstanding at December 31, 2003:

|Price Range |  | Outstanding
Options |  | Average Remaining
Contract Life |  | Average
Exercise Price |       | Exercisable
Options |         | Average
Exercise Price
|----------- |  | ------------------- |  | ------------------------------- |  | ---------------------- | ----- | ------------------- | ------- | ----------------------
|$10 to $15  |  | 276,675             |  | 4.8                             |  | $                      | 11.98 |                     | 223,800 |                       
|$16 to $20  |  | 159,875             |  | 7.0                             |  | $                      | 16.96 |                     | 79,891  |                       
|$21 to $34  |  | 114,000             |  | 7.3                             |  | $                      | 26.48 |                     | 24,750  |                       

The Company has a Stock Appreciation Rights Plan which allows for the grant of up to 300,000 stock appreciation rights ("SARs") at prices of no less than 90% of
the fair market value of the common stock. The pre-tax amounts charged to expense in 2003, 2002 and 2001 were $1,717,000, $869,000 and $733,000, respectively.

Stock
appreciation rights outstanding at December 31, 2003, 2002 and 2001 were as follows:

|                                      |                      | Year Ended December 31,
|------------------------------------- | -------------------- | -----------------------
|
|
|SARs outstanding at beginning of year |                      | 208,250                
|                                      | Granted              |                        
|                                      | Exercised            |                        
|                                      | Expired or forfeited |                        
|                                      |                      |                        
|SARs outstanding at end of year       |                      | 192,750                
|                                      |                      |                        
|Number of SARs exercisable            |                      | 129,000                
|                                      |                      |                        

Effective July 1, 2003 the Company offered an Employee Stock Purchase Plan (the "ESPP") to all of its eligible employees. The employee is
offered the opportunity to purchase the Company's common stock at 90% of fair market value at the lower of the price at the beginning or the end of each six month offering period. Employees can invest
up to 10% of their base compensation through payroll withholding towards the purchase of the Company's common stock subject to the lesser of 1,000 shares or total market value of $25,000. There will
be 8,005 shares purchased in 2004 from funds withheld during the initial offering period of July 1, 2003 to December 31, 2003. The ESPP is compensatory under SFAS 123 and
therefore the Company is required to expense both the value of the 10% discount and the "look-back" option which provides for the more favorable price at either the beginning or end of the
offering period. The amount of expense recorded for 2003 was $58,000.

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

A N N U A L  
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---

regulations.
Employees vest at 20% per year beginning at the end of the second year and are therefore fully vested after six years of service. Plan expense, included within operating expenses,
amounted to $1,363,000, $1,052,000 and $890,000 in 2003, 2002 and 2001, respectively. The Company sponsors a similar plan under UK regulations for its UK employees for which the Company had expenses
of $535,000, $533,000 and $446,000 for 2003, 2002 and 2001, 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 Company may pay dividends to the Company out of its statutory earned surplus pursuant to statutory restrictions imposed
under the New York insurance law. At December 31, 2003, the maximum amount available for the payment of dividends by Navigators Insurance Company during 2004 without prior regulatory approval
was $21,032,000. Navigators Insurance Company paid $6,000,000 and $6,500,000 in dividends to the Company in 2003 and 2002, respectively. The UK Branch is required to maintain certain capital
requirements under UK regulations.

The
Insurance Companies' statutory net income (loss) as filed with the regulatory authorities for 2003, 2002 and 2001 was $(4,398,000), $9,499,000 and $11,219,000, respectively. The
statutory surplus as filed with the regulatory authorities was $210,324,000 and $128,543,000 at December 31, 2003 and 2002, respectively.

The
Insurance Companies, domiciled in New York State, prepare and file their statutory financial statements in accordance with accounting practices prescribed or permitted by the State
of New York Insurance Department (the "Department"). The National Association of Insurance Commissioners ("NAIC") completed a project which codifies statutory
accounting practices for insurance enterprises. As a result of this process, the NAIC issued a revised statutoryAccounting Practices and Procedures
Manualthat was effective January 1, 2002. The Company prepared its statutory basis financial statements in accordance with the revised statutory manual subject to the
deviations that were prescribed or permitted by the Department. Beginning in 2003, the Department permitted certain deferred income taxes to be included in surplus of the statutory basis financial
statements.

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

F-34  
A N N U A L  
R E P O R T  
2 0 0 3

---

As
part of its general regulatory oversight process, the Department conducts detailed examinations of the books, records and accounts of New York insurance companies every three to five
years. The Insurance Companies have been examined by the Department for the years 1996 through 2000. No adjustments were made to the previously filed statutory financial statements.

Note 12. Commitments and Contingencies

Year Ended December 31,

($ in thousands)2004

$
2,3912005


2,3192006


2,2362007


1,9132008 and subsequent


6,032Total

$
14,891




Note 13. Segment Information

The Company's subsidiaries are primarily engaged in the writing and management of property and casualty insurance. The Company's segments include
the Insurance Companies, the Navigators Agencies and the Lloyd's operations, each of which

A N N U A L  
R E P O R T  
2 0 0 3  F-35

---

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

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

Certain
amounts for prior years have been reclassified to conform to the current year's presentation.

F-36  
A N N U A L  
R E P O R T  
2 0 0 3

---

Financial
data by segment for 2003, 2002 and 2001 was as follows:

|                                        |                                         | Year Ended December 31, 2003 |          
|--------------------------------------- | --------------------------------------- | ---------------------------- | ---------
|
|
|Revenues:                               |                                         |                              |          
|                                        | Net earned premium                      |                              | $        
|                                        | Commission income                       |                              |          
|                                        | Net investment income                   |                              |          
|                                        | Net realized capital gains              |                              |          
|                                        | Other income (expense)                  |                              |          
|                                        |                                         |                              |          
|                                        |                                         | Total revenues               |          
|                                        |                                         |                              |          
|Operating expenses:                     |                                         |                              |          
|                                        | Net losses and loss adjustment expenses |                              |          
|                                        | Commission expense                      |                              |          
|                                        | Other operating expenses                |                              |          
|                                        | Interest expense                        |                              |          
|                                        |                                         |                              |          
|                                        |                                         | Total operating expenses     |          
|                                        |                                         |                              |          
|Income (loss) before income tax expense |                                         |                              | 2,355    
|Income tax expense (benefit)            |                                         |                              | (104     
|                                        |                                         |                              |          
|Net income (loss)                       |                                         | $                            | 2,459    
|                                        |                                         |                              |          
|Identifiable assets(2)                  |                                         | $                            | 1,036,183
|                                        |                                         |                              |          
|Loss and loss adjustment expenses ratio |                                         |                              | 80.5     
|Commission expense ratio                |                                         |                              | 25.1     
|Other operating expense ratio           |                                         |                              | 2.3      
|                                        |                                         |                              |          
|Combined ratio                          |                                         |                              | 107.9    
|                                        |                                         |                              |          

A N N U A L  
R E P O R T  
2 0 0 3  F-37

---

|                                        |                                         | Year Ended December 31, 2002 |        
|--------------------------------------- | --------------------------------------- | ---------------------------- | -------
|
|
|Revenues:                               |                                         |                              |        
|                                        | Net earned premium                      |                              | $      
|                                        | Commission income                       |                              |        
|                                        | Net investment income                   |                              |        
|                                        | Net realized capital gains              |                              |        
|                                        | Other income (expense)                  |                              |        
|                                        |                                         |                              |        
|                                        |                                         | Total revenues               |        
|                                        |                                         |                              |        
|Operating expenses:                     |                                         |                              |        
|                                        | Net losses and loss adjustment expenses |                              |        
|                                        | Commission expense                      |                              |        
|                                        | Other operating expenses                |                              |        
|                                        | Interest expense                        |                              |        
|                                        |                                         |                              |        
|                                        |                                         | Total operating expenses     |        
|                                        |                                         |                              |        
|Income (loss) before income tax expense |                                         |                              | 21,644 
|Income tax expense (benefit)            |                                         |                              | 6,780  
|                                        |                                         |                              |        
|Net income (loss)                       |                                         | $                            | 14,864 
|                                        |                                         |                              |        
|Identifiable assets(2)                  |                                         | $                            | 686,502
|                                        |                                         |                              |        
|Loss and loss adjustment expenses ratio |                                         |                              | 61.0   
|Commission expense ratio                |                                         |                              | 33.8   
|Other operating expense ratio           |                                         |                              | 2.2    
|                                        |                                         |                              |        
|Combined ratio                          |                                         |                              | 97.0   
|                                        |                                         |                              |        

F-38  
A N N U A L  
R E P O R T  
2 0 0 3

---

|                                        |                                         | Year Ended December 31, 2001 |        
|--------------------------------------- | --------------------------------------- | ---------------------------- | -------
|
|
|Revenues:                               |                                         |                              |        
|                                        | Net earned premium                      |                              | $      
|                                        | Commission income                       |                              |        
|                                        | Net investment income                   |                              |        
|                                        | Net realized capital gains              |                              |        
|                                        | Other income (expense)                  |                              |        
|                                        |                                         |                              |        
|                                        |                                         | Total revenues               |        
|Operating expenses:                     |                                         |                              |        
|                                        | Net losses and loss adjustment expenses |                              |        
|                                        | Commission expense                      |                              |        
|                                        | Other operating expenses                |                              |        
|                                        | Interest expense                        |                              |        
|                                        |                                         |                              |        
|                                        |                                         | Total operating expenses     |        
|                                        |                                         |                              |        
|Income (loss) before income tax expense |                                         |                              | 20,069 
|Income tax expense (benefit)            |                                         |                              | 6,181  
|                                        |                                         |                              |        
|Net income (loss)                       |                                         | $                            | 13,888 
|                                        |                                         |                              |        
|Identifiable assets(2)                  |                                         | $                            | 544,661
|                                        |                                         |                              |        
|Loss and loss adjustment expenses ratio |                                         |                              | 60.3   
|Commission expense ratio                |                                         |                              | 31.5   
|Other operating expense ratio           |                                         |                              | 2.8    
|                                        |                                         |                              |        
|Combined ratio                          |                                         |                              | 94.6   
|                                        |                                         |                              |        

---

The Insurance Companies net earned premium includes $33,755,000, $22,144,000 and $11,086,000 of net earned premium from the UK Branch for 2003, 2002 and 2001,
respectively.

A N N U A L  
R E P O R T  
2 0 0 3  F-39

---

The Navigators Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 14. Earnings Per Common Share

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

|                               | Year Ended December 31, 2003           
|------------------------------ | ---------------------------------------
|
|Basic EPS:                     |                                        
|                               | Income available to common stockholders
|Effect of Dilutive Securities: |                                        
|                               | Stock options                          
|Diluted EPS:                   |                                        
|                               | Income available to common stockholders

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

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

Certain outstanding options to purchase common shares were not included in the respective computations of diluted earnings per common share
because the options' exercise prices were greater than the average market price of the common shares. For each of the years presented, these outstanding options consisted of the following: for 2003,
21,500 shares at an average price of $34.00 expiring in 2004; for 2002, 22,500 shares at an average price of $34.00 expiring in 2004; and for 2001, 105,500 shares at an average price of $23.25
expiring in years 2002 to 2011.

F-40  
A N N U A L  
R E P O R T  
2 0 0 3

---

Note 15. Quarterly Financial Data (Unaudited)

Following is a summary of quarterly financial data for the periods indicated. The four quarters in 2003 reflect the fourth quarter 2003 adoption
of the fair value recognition provisions of SFAS 123,Accounting for Stock Based Compensation, effective January 1, 2003, as discussed in
Note 1 included herein. The effect on each quarter of 2003 was to reduce net income by $124,000 or $0.01 per diluted share in the first quarter; $117,000 or $0.01 per diluted share in the
second quarter; $114,000 or $0.01 per diluted share in the third quarter; and $110,000 or $0.01 per diluted share in the fourth quarter.

|                                                 | Three Month Period Ended
|------------------------------------------------ | ------------------------
|
|
|Gross written premium                            |                         
|Net written premium                              |                         
|Revenues:                                        |                         
|Net earned premium                               |                         
|Commission income                                |                         
|Net investment income                            |                         
|Net realized capital gains (losses)              |                         
|Other income (expense)                           |                         
|                                                 |                         
|Total revenues                                   |                         
|                                                 |                         
|Operating Expenses:                              |                         
|Net losses and loss adjustment expenses incurred |                         
|Commission expense                               |                         
|Other operating expenses                         |                         
|Interest expense                                 |                         
|                                                 |                         
|Total operating expenses                         |                         
|                                                 |                         
|Income before income tax expense                 |                         
|Income tax expense                               |                         
|                                                 |                         
|Net income                                       |                         
|                                                 |                         
|Comprehensive income                             |                         
|Combined ratio                                   |                         
|Per share data:                                  |                         
|Net income (loss) per shareBasic                |                         
|Net income (loss) per shareDiluted              |                         

The increase in 2003 revenues as compared to 2002 was primarily due to increased rates on renewal business, and new business written in 2003 and
2002. As discussed in Note 6 included herein, in the fourth quarter of 2003, Navigators Insurance Company increased its net asbestos reserves and incurred losses by $31.6 million
resulting in an after tax charge to earnings of

A N N U A L  
R E P O R T  
2 0 0 3  F-41

---

$20.5 million
or $2.14 per diluted share. The additional asbestos reserves include $25.7 million of uncollectible reinsurance. The asbestos losses added 44.2 percentage points to
the fourth quarter's combined ratio.

|                                                 | Three Month Period Ended
|------------------------------------------------ | ------------------------
|
|
|Gross written premium                            |                         
|Net written premium                              |                         
|Revenues:                                        |                         
|Net earned premium                               |                         
|Commission income                                |                         
|Net investment income                            |                         
|Net realized capital gains (losses)              |                         
|Other income (expense)                           |                         
|                                                 |                         
|Total revenues                                   |                         
|                                                 |                         
|Operating Expenses:                              |                         
|Net losses and loss adjustment expenses incurred |                         
|Commission expense                               |                         
|Other operating expenses                         |                         
|Interest expense                                 |                         
|                                                 |                         
|Total operating expenses                         |                         
|                                                 |                         
|Income before income tax expense                 |                         
|Income tax expense                               |                         
|                                                 |                         
|Net income                                       |                         
|                                                 |                         
|Comprehensive income                             |                         
|Combined ratio                                   |                         
|Per share data:                                  |                         
|Net income per shareBasic                       |                         
|Net income per shareDiluted                     |                         

The 2002 quarterly net income was adversely impacted by the impairment losses of $1.4 million and $0.5 million in the second and third quarters on
one asset-backed security, respectively, and approximately $0.4 million resulting from the oil tanker Prestige sinking in the fourth quarter, and approximately $1.1 million from the
Tricolor automobile carrier ship also sinking in the fourth quarter.

F-42  
A N N U A L  
R E P O R T  
2 0 0 3

---

SCHEDULE I

The Navigators Group, Inc. and Subsidiaries
Summary of Consolidated InvestmentsOther Than Investments
In Related Parties
December 31, 2003

($ in thousands)

|Type of Investment     |                | Amortized
Cost or Cost                            |                   | Fair value |         | Amount at which
shown in the
consolidated
balance sheet |  
|---------------------- | -------------- | ------------------------------------------------- | ----------------- | ---------- | ------- | ------------------------------------------------------- | -
|Fixed maturities:      |                |                                                   |                   |            |         |                                                         |  
|                       | Bonds:         |                                                   |                   |            |         |                                                         |  
|                       |                | United States Government Treasury Bonds and GNMAs |                   | $          | 219,197 |                                                         | $
|                       |                | States, municipalities and political subdivisions |                   |            | 85,610  |                                                         |  
|                       |                | Mortgage and asset backed (excluding GNMAs)       |                   |            | 140,590 |                                                         |  
|                       |                | Corporate bonds                                   |                   |            | 132,507 |                                                         |  
|                       |                |                                                   |                   |            |         |                                                         |  
|                       |                | Total fixed maturities                            |                   |            | 577,904 |                                                         |  
|                       |                |                                                   |                   |            |         |                                                         |  
|Equity securities:     |                |                                                   |                   |            |         |                                                         |  
|                       | Common stocks: |                                                   |                   |            |         |                                                         |  
|                       |                | Industrial, miscellaneous and all other           |                   |            | 11,977  |                                                         |  
|Short-term investments |                |                                                   | 83,202            |            |         | 83,202                                                  |  
|                       |                |                                                   |                   |            |         |                                                         |  
|                       |                |                                                   | Total investments |            | $       | 673,083                                                 |  
|                       |                |                                                   |                   |            |         |                                                         |  

A N N U A L  
R E P O R T  
2 0 0 3  S-1

---

SCHEDULE II

The Navigators Group, Inc. and Subsidiaries
Condensed Financial Information of Registrant
The Navigators Group, Inc.
Balance Sheets
(Parent Company)

($ in thousands, except share data)

|                                                   | December 31,                                                                                                                                                                       
|-------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|ASSETS                                             |                                                                                                                                                                                    
|Cash                                               |                                                                                                                                                                                    
|Investment in wholly owned subsidiaries, at equity |                                                                                                                                                                                    
|Short-term investments                             |                                                                                                                                                                                    
|Other assets                                       |                                                                                                                                                                                    
|                                                   |                                                                                                                                                                                    
|                                                   |                                                                                                                                                                                    
|                                                   |                                                                                                                                                                                    
|LIABILITIES                                        |                                                                                                                                                                                    
|                                                   | Notes payable to banks                                                                                                                                                             
|                                                   | Accounts payable and other liabilities                                                                                                                                             
|                                                   |                                                                                                                                                                                    
|                                                   |                                                                                                                                                                                    
|                                                   |                                                                                                                                                                                    
|STOCKHOLDERS' EQUITY                               |                                                                                                                                                                                    
|                                                   | Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued                                                                                                          
|                                                   | Common stock, $.10 par value, 20,000,000 shares authorized for 2003 and for 2002; issued and outstanding 12,535,360 for 2003 and 8,486,272 (net of 16,423 treasury shares for 2002)
|                                                   | Additional paid-in capital                                                                                                                                                         
|                                                   | Retained earnings                                                                                                                                                                  
|                                                   | Treasury stock held at cost                                                                                                                                                        
|                                                   | Accumulated other comprehensive income:                                                                                                                                            
|                                                   |                                                                                                                                                                                    
|                                                   |                                                                                                                                                                                    
|                                                   |                                                                                                                                                                                    
|                                                   |                                                                                                                                                                                    
|                                                   |                                                                                                                                                                                    
|                                                   |                                                                                                                                                                                    
|                                                   |                                                                                                                                                                                    

S-2  
A N N U A L  
R E P O R T  
2 0 0 3

---

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,
|----------------------------------------------------------------------------- | -----------------------
|
|Net investment income                                                         |                        
|Dividends received from wholly owned subsidiaries                             |                        
|Other (expense)                                                               |                        
|Operating expenses and income taxes                                           |                        
|                                                                              |                        
|Income before equity in undistributed net income of wholly owned subsidiaries |                        
|Equity in undistributed net gain (loss) of wholly owned subsidiaries          |                        
|                                                                              |                        
|Net Income                                                                    |                        
|                                                                              |                        

A N N U A L  
R E P O R T  
2 0 0 3  S-3

---

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,                                                       
|--------------------------- | ------------------------------------------------------------------------------
|
|Operating activities:       |                                                                               
|                            | Net income                                                                    
|                            | Adjustments to reconcile net income (loss) to net cash provided by operations:
|                            |                                                                               
|                            |                                                                               
|                            |                                                                               
|                            |                                                                               
|                            |                                                                               
|Investing activities:       |                                                                               
|                            | Investment in affiliate                                                       
|                            | Net (increase) decrease in short-term investments                             
|                            |                                                                               
|                            |                                                                               
|                            |                                                                               
|Financing activities:       |                                                                               
|                            | Net proceeds from stock offering                                              
|                            | Repayment of bank loan                                                        
|                            | Proceeds from exercise of stock options                                       
|                            |                                                                               
|                            |                                                                               
|                            |                                                                               
|Increase (decrease) in cash |                                                                               
|Cash Beginning of Year      |                                                                               
|                            |                                                                               
|Cash End of Year            |                                                                               
|                            |                                                                               

S-4  
A N N U A L  
R E P O R T  
2 0 0 3

---

SCHEDULE III

The Navigators Group, Inc. and Subsidiaries
Supplementary Insurance Information

($ in thousands)

|Period                       |                     | Deferred
policy
acquisition
costs |        | Reserve
for losses
and loss
adjustment
expenses |   | Unearned
premiums |         | Other policy
claims and
benefits
payable |         | Net
earned
premium |   | Net
investment
income (1) |   | Losses
and loss
adjustment
expenses
incurred |         | Amortization
of deferred
policy
acquisition
costs (2) |   | Other
operating
expenses (1) |        | Net
written
premium
|---------------------------- | ------------------- | --------------------------------- | ------ | ----------------------------------------------- | - | ----------------- | ------- | ---------------------------------------- | ------- | ------------------ | - | ------------------------- | - | -------------------------------------------- | ------- | ----------------------------------------------------- | - | ---------------------------- | ------ | -------------------
|Year ended December 31, 2003 |                     |                                   |        |                                                 |   |                   |         |                                          |         |                    |   |                           |   |                                              |         |                                                       |   |                              |        |                    
|                             | Insurance Companies |                                   | $      | 15,133                                          |   | $                 | 545,176 |                                          | $       | 155,819            |   | $                         |  |                                              | $       | 208,189                                               |   | $                            | 17,455 |                    
|                             | Lloyd's Operations  |                                   |        | 9,587                                           |   |                   | 179,436 |                                          |         | 82,984             |   |                           |  |                                              |         | 69,462                                                |   |                              | 2,009  |                    
|                             |                     |                                   |        |                                                 |   |                   |         |                                          |         |                    |   |                           |   |                                              |         |                                                       |   |                              |        |                    
|                             |                     | $                                 | 24,720 |                                                 | $ | 724,612           |         | $                                        | 238,803 |                    | $ |                          |   | $                                            | 277,651 |                                                       | $ | 19,464                       |        | $                  
|                             |                     |                                   |        |                                                 |   |                   |         |                                          |         |                    |   |                           |   |                                              |         |                                                       |   |                              |        |                    
|Year ended December 31, 2002 |                     |                                   |        |                                                 |   |                   |         |                                          |         |                    |   |                           |   |                                              |         |                                                       |   |                              |        |                    
|                             | Insurance Companies |                                   | $      | 14,532                                          |   | $                 | 338,872 |                                          | $       | 130,582            |   | $                         |  |                                              | $       | 148,411                                               |   | $                            | 15,489 |                    
|                             | Lloyd's Operations  |                                   |        | 9,100                                           |   |                   | 150,770 |                                          |         | 36,790             |   |                           |  |                                              |         | 73,693                                                |   |                              | 2,454  |                    
|                             |                     |                                   |        |                                                 |   |                   |         |                                          |         |                    |   |                           |   |                                              |         |                                                       |   |                              |        |                    
|                             |                     | $                                 | 23,632 |                                                 | $ | 489,642           |         | $                                        | 167,372 |                    | $ |                          |   | $                                            | 222,104 |                                                       | $ | 17,943                       |        | $                  
|                             |                     |                                   |        |                                                 |   |                   |         |                                          |         |                    |   |                           |   |                                              |         |                                                       |   |                              |        |                    
|Year ended December 31, 2001 |                     |                                   |        |                                                 |   |                   |         |                                          |         |                    |   |                           |   |                                              |         |                                                       |   |                              |        |                    
|                             | Insurance Companies |                                   | $      | 7,968                                           |   | $                 | 282,325 |                                          | $       | 75,333             |   | $                         |  |                                              | $       | 74,091                                                |   | $                            | 16,144 |                    
|                             | Lloyd's Operations  |                                   |        | 5,688                                           |   |                   | 118,852 |                                          |         | 21,702             |   |                           |  |                                              |         | 76,153                                                |   |                              | 3,078  |                    
|                             |                     |                                   |        |                                                 |   |                   |         |                                          |         |                    |   |                           |   |                                              |         |                                                       |   |                              |        |                    
|                             |                     | $                                 | 13,656 |                                                 | $ | 401,177           |         | $                                        | 97,035  |                    | $ |                          |   | $                                            | 150,244 |                                                       | $ | 19,222                       |        | $                  
|                             |                     |                                   |        |                                                 |   |                   |         |                                          |         |                    |   |                           |   |                                              |         |                                                       |   |                              |        |                    

---

A N N U A L  
R E P O R T  
2 0 0 3  S-5

---

SCHEDULE IV

The Navigators Group, Inc. and Subsidiaries
Reinsurance
Written Premium

($ in thousands)

|                             |                   | Direct
Amount |   | Ceded to
other
companies |  | Assumed
from other
companies |         | Net
amount |   | Percentage
of amount
assumed to net | 
|---------------------------- | ----------------- | ------------- | - | ------------------------ |  | ---------------------------- | ------- | ---------- | - | ----------------------------------- | 
|Year ended December 31, 2003 |                   |               |   |                          |  |                              |         |            |   |                                     | 
|                             | Property-Casualty |               | $ | 534,180                  |  | $                            | 297,896 |            | $ | 70,844                              | 
|                             |                   |               |   |                          |  |                              |         |            |   |                                     | 
|Year ended December 31, 2002 |                   |               |   |                          |  |                              |         |            |   |                                     | 
|                             | Property-Casualty |               | $ | 321,197                  |  | $                            | 181,748 |            | $ | 126,641                             | 
|                             |                   |               |   |                          |  |                              |         |            |   |                                     | 
|Year ended December 31, 2001 |                   |               |   |                          |  |                              |         |            |   |                                     | 
|                             | Property-Casualty |               | $ | 214,067                  |  | $                            | 105,659 |            | $ | 64,127                              | 
|                             |                   |               |   |                          |  |                              |         |            |   |                                     | 

S-6  
A N N U A L  
R E P O R T  
2 0 0 3

---

SCHEDULE V

The Navigators Group, Inc. and Subsidiaries
Valuation and Qualifying Accounts

($ in thousands)

|Col. A                                  |  | Col. B |       | Col. C
Additions |   | Col. D |   | Col. E
|--------------------------------------- |  | ------ | ----- | ---------------- | - | ------ | - | ------
|
|Allowance for uncollectible reinsurance |  | $      | 8,534 |                  | $ | 27,551 |   | $     
|                                        |  |        |       |                  |   |        |   |       
|Valuation allowance in deferred taxes   |  | $      | 6,676 |                  | $ | (3,402 | ) | $     
|                                        |  |        |       |                  |   |        |   |       

---

A N N U A L  
R E P O R T  
2 0 0 3  S-7

---

SCHEDULE VI

The Navigators Group, Inc. and Subsidiaries
Supplementary Information Concerning PropertyCasualty Insurance Operations

($ in thousands)

|                             |  |  |   |        |  |   |         |  |   |   |  |   |         |  | Losses and loss adjustment
expenses incurred related to |         |  |   |        |  |   |        
|---------------------------- |  |  | - | ------ |  | - | ------- |  | - | - |  | - | ------- |  | ------------------------------------------------------- | ------- |  | - | ------ |  | - | -------
|
|
|
|Consolidated Subsidiaries    |  |  |   |        |  |   |         |  |   |   |  |   |         |  |                                                         |         |  |   |        |  |   |        
|Year ended December 31, 2003 |  |  | $ | 24,720 |  | $ | 724,612 |  | $ |  |  | $ | 238,803 |  | $                                                       | 277,651 |  | $ | 19,464 |  | $ | 152,454
|                             |  |  |   |        |  |   |         |  |   |   |  |   |         |  |                                                         |         |  |   |        |  |   |        
|Year ended December 31, 2002 |  |  | $ | 23,632 |  | $ | 489,642 |  | $ |  |  | $ | 167,372 |  | $                                                       | 222,104 |  | $ | 17,943 |  | $ | 136,362
|                             |  |  |   |        |  |   |         |  |   |   |  |   |         |  |                                                         |         |  |   |        |  |   |        
|Year ended December 31, 2001 |  |  | $ | 13,656 |  | $ | 401,177 |  | $ |  |  | $ | 97,035  |  | $                                                       | 150,244 |  | $ | 19,222 |  | $ | 100,860
|                             |  |  |   |        |  |   |         |  |   |   |  |   |         |  |                                                         |         |  |   |        |  |   |        

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S-8  
A N N U A L  
R E P O R T  
2 0 0 3

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INDEX TO EXHIBITS

|Exhibit No. |  | Description of Exhibit                                                                                                                |  |    
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------- |  | ---
|3-1         |  | Restated Certificate of Incorporation                                                                                                 |  | (o)
|3-2         |  | Certificate of Amendment to the Restated Certificate of Incorporation                                                                 |  | (o)
|3-3         |  | By-laws, as amended                                                                                                                   |  | (a)
|4-1         |  | Specimen of Common Stock certificate, par value $0.10 per share                                                                       |  | (p)
|10-1        |  | Management Agreement between Navigators Insurance Company and Navigators Management Company, Inc. (formerly Somerset Marine, Inc.)    |  | (a)
|10-2        |  | Agreement between The Navigators Group, Inc. and Navigators Management Company, Inc. (formerly Somerset Marine, Inc.)                 |  | (a)
|10-3*       |  | Stock Option Plan                                                                                                                     |  | (a)
|10-4*       |  | Non-Qualified Stock Option Plan                                                                                                       |  | (b)
|10-5        |  | Amended and Restated Credit Agreement dated November 26, 1996, among The Navigators Group, Inc. and Lenders                           |  | (d)
|10-6        |  | Agreement with Bradley D. Wiley dated June 3, 1997                                                                                    |  | (e)
|10-7        |  | First Amendment dated April 9, 1997 to the Amended and Restated Credit Agreement dated November 26, 1996                              |  | (e)
|10-8        |  | Second Amendment dated December 11, 1997 to the Amended and Restated Credit Agreement dated November 26, 1996                         |  | (e)
|10-9        |  | Amended and Restated Credit Agreement dated December 21, 1998, among The Navigators Group, Inc. and Lenders ("1998 Credit Agreement") |  | (f)
|10-10       |  | Employment Agreement with Salvatore A. Margarella dated March 1, 1999                                                                 |  | (f)
|10-11       |  | Amendment No. 1 dated March 28, 2000 to the 1998 Credit Agreement                                                                     |  | (g)
|10-12       |  | Amendment No. 2 dated September 20, 2000 to the 1998 Credit Agreement                                                                 |  | (g)
|10-13       |  | Employment Agreement with Stanley A. Galanski effective March 26, 2001                                                                |  | (h)
|10-14       |  | Employment Agreement with R. Scott Eisdorfer dated September 1, 1999                                                                  |  | (i)
|10-15       |  | Amendment No. 3 dated December 31, 2001 to the 1998 Credit Agreement                                                                  |  | (i)
|10-16*      |  | 2002 Stock Incentive Plan                                                                                                             |  | (j)
|10-17       |  | Amendment No. 4 dated October 18, 2002 to the 1998 Credit Agreement                                                                   |  | (k)
|10-18*      |  | Employee Stock Purchase Plan                                                                                                          |  | (l)
|10-19*      |  | Executive Performance Incentive Plan                                                                                                  |  | (l)
|10-20       |  | Form of Indemnity Agreement by The Navigators Group, Inc. and the Selling Stockholders (as defined therein)                           |  | (m)
|10-21       |  | Amendment No. 5 dated November 10, 2003 to the 1998 Credit Agreement                                                                  |  | (n)
|10-22       |  | Agreement with Paul J. Malvasio dated October 9, 2003                                                                                 |  | ** 
|11-1        |  | Statement re Computation of Per Share Earnings                                                                                        |  | ** 
|21-1        |  | Subsidiaries of Registrant                                                                                                            |  | ** 
|23-1        |  | Consent of Independent Auditor                                                                                                        |  | ** 
|31-1        |  | Certification of CEO per Section 302 of the Sarbanes-Oxley Act                                                                        |  | ** 
|31-2        |  | Certification of CFO per Section 302 of the Sarbanes-Oxley Act                                                                        |  | ** 
|            |  |                                                                                                                                       |  |    

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|32-1 |  | Certification of CEO per Section 906 of the Sarbanes-Oxley Act (This exhibit is intended to be furnished in accordance with regulation S-K item 601(b)(32)(ii) and shall not be deemed to be filed for purposes of section 18 of the Securities Exchange
Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference). |  | **
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|32-2 |  | Certification of CFO per Section 906 of the Sarbanes-Oxley Act (This exhibit is intended to be furnished in accordance with regulation S-K item 601(b)(32)(ii) and shall not be deemed to be filed for purposes of section 18 of the Securities Exchange
Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference). |  | **

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|(a)                                      |  | Previously filed under Commission file No. 33-5667 as part of Form S-1, incorporated herein by reference thereto.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|---------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b)                                      |  | Previously filed under Commission File No. 33-75918 as part of Form S-4, incorporated herein by reference thereto.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(d)(e)(f)(g)(h)(i)
(j)(k)(l)(m)(n)(o)(p) |  | Previously filed with the Company's document as indicated and incorporated herein by reference thereto: Form 10-K for the year ended December 31, 1994 (c), 1996 (d), 1997 (e), 1998 (f), 2002 (i); Form 10-Q for September 30, 2000
(g), March 31, 2001 (h), September 30, 2002 (k); Proxy Statement for May 30, 2002 (j); Proxy Statement for May 29, 2003 (l); Amendment No. 2 to form S-3 dated October 1, 2003 (File No. 333-108424) (m);
Form 10-Q for September 30, 2003 (n); Form S-8 filed July 26, 2002 (File No. 333-97183) (o); Form S-8 Filed June 20, 2003 (File No. 333-106317) (p).
|*                                        |  | Compensatory plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|**                                       |  | Included herein.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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