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, 2004

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 o

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

The aggregate market value of voting stock held by non-affiliates as of June 30, 2004 was $254,580,000.

The
number of common shares outstanding as of February 15, 2005 was 12,670,536.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's 2005 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
|------------------------------------------------------------------ | ---------------------------------- | -----------
|                                                                   |                                    |            
|Note on Forward-Looking Statements                                 |                                    | 3          
|Business Description                                               |                                    | 4          
|Reinsurance Ceded                                                  |                                    | 7          
|Loss Reserves                                                      |                                    | 8          
|Investments                                                        |                                    | 18         
|Regulation                                                         |                                    | 23         
|Competition                                                        |                                    | 28         
|Employees                                                          |                                    | 28         
|Available Information on the Internet                              |                                    | 28         
|Properties                                                         |                                    | 28         
|Legal Proceedings                                                  |                                    | 29         
|Submission of Matters to a Vote of Security Holders                |                                    | 29         
|Market for Company's Common Equity and Related Stockholder Matters |                                    | 29         
|Dividends                                                          |                                    | 29         
|Selected Financial Data                                            |                                    | 30         
|Management's Discussion and Analysis                               |                                    | 31         
|                                                                   | Overview                           |            
|                                                                   | Industry Investigations            |            
|                                                                   | Critical Accounting Policies       |            
|                                                                   | Results of Operations and Overview |            
|                                                                   | Segment Information                |            
|                                                                   | Liquidity and Capital Resources    |            
|Risk Factors                                                       |                                    | 55         
|Controls and Procedures                                            |                                    | 61         
|Signatures                                                         |                                    | 63         
|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. Whenever used in this report, the words "estimate", "expect", "believe" or similar expressions are intended to identify such forward-looking statements. Forward-looking
statements are derived from information that we currently have and assumptions that we make. We cannot assure 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:



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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.

The discussion and analysis of our financial condition and results of operations contained herein should be read in conjunction with our consolidated financial
statements and accompanying notes which appear elsewhere in this 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.

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 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" and "the Company" as used herein mean The Navigators Group, Inc. and its
subsidiaries, unless the context otherwise requires. The term "Parent" or "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 marine insurance. We have also developed specialty niches in professional liability insurance, and in specialty liability insurance primarily
consisting of contractors' liability coverages. We conduct operations through our insurance company subsidiaries, five wholly owned underwriting agencies (the "Navigators Agencies") and our operations
at Lloyd's of London (the "Lloyd's Operations"). Our insurance company subsidiaries consist of Navigators Insurance Company, which includes a United Kingdom Branch ("UK Branch"), and NIC Insurance
Company, which writes excess and surplus lines (collectively referred to as the "Insurance Companies"). The Navigators Agencies consist of five wholly-owned insurance underwriting agencies which
produce business for our insurance subsidiaries. Our Lloyd's Operations include Navigators Underwriting Agency Ltd. ("NUAL"), a Lloyd's of London ("Lloyd's") marine underwriting
agency which manages Lloyd's Syndicate 1221. We participate in the capacity of Syndicate 1221 through two wholly-owned Lloyd's corporate members.

Marine Insurance

Our marine insurance business is conducted both through our Insurance Companies and our Lloyd's Operations. Navigators Insurance Company obtains marine business
through participation with 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 2004 was 80% and will increase to 85% in 2005. 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 its 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

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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. did not provide 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. These liabilities, including IBNR, were
commuted back to Navigators Insurance Company in December 2004 at 100% of their recorded value of approximately $3.0 million. No gain or loss was recorded on the commutation. Navigators
Insurance Company's participation in the 2002 marine pool was 75%.

Within
Navigators Insurance Company's 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.

During
2004, our UK Branch commenced writing primary marine P&I, or protection and indemnity business. This complements our marine liability business, which is generally written above
the primary layer on an excess basis.

The
Navigators Agencies generally received management fee commissions equal to 7.5% of the gross premium earned on marine insurance and are entitled to receive a 20% profit commission on
the net underwriting profits of the pool. The Navigators Agencies will receive management fee commissions equal to 8.75% of the gross premium earned on marine insurance written by the pool for the
2005 underwriting year. The Navigators Agencies' offices writing marine business are located in major insurance or port locations in Chicago, Houston, London, New York, San Francisco and Seattle.

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%, 97.4% and 68.1% of Syndicate 1221's
capacity for the 2004, 2003 and 2002 underwriting years, respectively. Navigators Insurance Company reinsured 15.4% of our Syndicate 1221 2003 underwriting year capacity through the utilization of
quota share retrocession agreements with third party reinsurers who provide letters of credit used as collateral at Lloyd's. Our share of the premiums, losses and expenses from Lloyd's Syndicate 1221
is included in our consolidated results. The largest product line within our Lloyd's marine business is currently cargo, and the other significant product lines include marine liability, offshore
energy, bluewater hull, and assumed reinsurance of other marine insurers on an excess of loss basis. We also developed a regional agency operation, Navigators Underwriting Limited (formerly Pennine
Underwriting Limited), that generates cargo and engineering business in the Manchester, Leeds and Basingstoke areas of the United Kingdom, which are not traditionally served by Lloyd's of London.

We
will provide 97.5% of Syndicate 1221's capacity in 2005 through Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. Also, in January 2005, we
formed Navigators NV, a subsidiary of NUAL. Navigators NV is located in Antwerp, Belgium, and will write transport liability, cargo and marine liability business on behalf of Syndicate 1221.

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Specialty

Navigators Specialty, a division of one of the Navigators Agencies, was acquired in 1999 and 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 our various lines of 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 continue 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.

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. At the end of 2004, we hired a small team of experienced underwriters to target excess casualty, and
commercial and personal umbrella business for Navigators Insurance Company.

Beginning
in late 2002, Navigators Specialty also 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 was 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 wrote surety bonds to guarantee obligations outside of the construction industry, such as travel agents' bonds,
property brokers' bonds, notary bonds, miscellaneous bonds, and license and permit bonds. During 2004, the Company's gross written premium for surety business approximated $5 million.
Commencing in March 2005, the Company discontinued its surety business unit given the competitive market conditions and current inability to purchase cost-effective reinsurance
protection.

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 solid demand for directors and officers
liability insurance from independent board members serving as directors of publicly traded corporations resulting from their increased exposure after the passage of the Sarbanes-Oxley Act of 2002.
This has led to increased class action litigation activity involving potential large losses related to alleged mismanagement by directors and officers. Our principal product in this division 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

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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 150 or fewer attorneys. Commencing in October 2004,
our UK Branch began writing professional liability coverages for U.K. solicitors. Beginning in 2005, we commenced writing professional liability coverages for architects and engineers. We anticipate
developing additional new coverages for professionals in 2005.

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 and underwriting results. The purchase of reinsurance does not discharge us, the original insurer, from our primary liability
to the policyholder. We are required to pay the losses even if the reinsurer 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.
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 for doubtful recoveries is maintained for any amounts considered to be uncollectible. At December 31, 2004, 2003 and 2002, we had allowances for uncollectible
reinsurance of $32,439,000, $33,068,000 and $8,534,000, respectively. The 2003 allowance included $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, all of which were recorded to incurred losses, were $1,959,000, $27,551,000 and
$1,632,000 for 2004, 2003 and 2002, respectively.

The
following table lists our 20 largest reinsurers measured by the amount of reinsurance recoverable for ceded paid and unpaid losses and loss adjustment expense and ceded unearned
premium (constituting approximately 77% of the Company's

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total
recoverables) together with the collateral held by the Company at December 31, 2004, and the reinsurers' financial strength rating from the indicated rating agency:

|                                       |  | Reinsurance Recoverables |       |  |   |       |  |   |      
|-------------------------------------- |  | ------------------------ | ----- |  | - | ----- |  | - | -----
|
|
|General Reinsurance Corporation        |  | $                        | 5.5   |  | $ | 91.2  |  | $ | 96.7 
|Folksamerica Reinsurance Company       |  |                          | 17.9  |  |   | 45.8  |  |   | 63.7 
|Munich Re                              |  |                          | 7.9   |  |   | 30.6  |  |   | 38.5 
|Swiss Reinsurance Company (U.K.) Ltd   |  |                          | 9.3   |  |   | 24.1  |  |   | 33.4 
|Arch Reinsurance Company               |  |                          | 10.9  |  |   | 20.0  |  |   | 30.9 
|Swiss Reinsurance America Corporation  |  |                          | 5.2   |  |   | 23.8  |  |   | 29.0 
|Employers Mutual Casualty Company      |  |                          | 6.4   |  |   | 18.8  |  |   | 25.2 
|Converium AG                           |  |                          | 4.5   |  |   | 17.2  |  |   | 21.7 
|Partner Reinsurance Company of the U.S |  |                          | 4.2   |  |   | 17.4  |  |   | 21.6 
|Everest Reinsurance Company            |  |                          | 5.9   |  |   | 14.6  |  |   | 20.5 
|Platinum Underwriters Re               |  |                          | 5.2   |  |   | 11.8  |  |   | 17.0 
|American Reinsurance Company           |  |                          | 3.4   |  |   | 13.5  |  |   | 16.9 
|Lloyd's of London (primarily Equitas)  |  |                          |      |  |   | 16.1  |  |   | 16.1 
|National Liability & Fire Insurance Co |  |                          | 3.7   |  |   | 10.7  |  |   | 14.4 
|GE Reinsurance Corporation             |  |                          | 2.6   |  |   | 10.4  |  |   | 13.0 
|Alea North America Insurance Co        |  |                          | 8.5   |  |   | 2.0   |  |   | 10.5 
|Hannover Re                            |  |                          | 2.5   |  |   | 6.5   |  |   | 9.0  
|New Re                                 |  |                          |      |  |   | 9.0   |  |   | 9.0  
|GE Frankona Ruckversicherungs AG       |  |                          | 0.6   |  |   | 8.0   |  |   | 8.6  
|XL Re Limited                          |  |                          | 1.9   |  |   | 5.0   |  |   | 6.9  
|All others                             |  |                          | 24.7  |  |   | 126.7 |  |   | 151.4
|                                       |  |                          |       |  |   |       |  |   |      
|                                       |  | $                        | 130.8 |  | $ | 523.2 |  | $ | 654.0
|                                       |  |                          |       |  |   |       |  |   |      

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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. Loss reserves consist of both reserves for reported claims, known as case reserves, and reserves for losses that have occurred but have not yet been reported, known as incurred but not
reported losses ("IBNR"). 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

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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 insureds, brokers, agents or 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 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 identified.

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.

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 premiums and loss
reserves 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, is recorded in current operations.

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The
following table presents an analysis of losses and loss adjustment expenses for each year in the three-year period ended December 31, 2004:

|                                                                                                         |              | Year Ended December 31, |         |        
|-------------------------------------------------------------------------------------------------------- | ------------ | ----------------------- | ------- | -------
|
|
|Net reserves for losses and loss adjustment expenses at beginning of year                                |              | $                       | 374,171 |        
|                                                                                                         |              |                         |         |        
|Provision for losses and loss adjustment expenses for claims occurring in the current year               |              |                         | 179,094 |        
|Lloyd's Operationsreinsurance to close                                                                  |              |                         | 12,756  |        
|Increase (decrease) in estimated losses and loss adjustment expenses for claims occurring in prior years |              |                         | (3,836  | )      
|                                                                                                         |              |                         |         |        
|Incurred losses and loss adjustment expenses                                                             |              |                         | 188,014 |        
|                                                                                                         |              |                         |         |        
|Losses and loss adjustment expenses paid for claims occurring during:                                    |              |                         |         |        
|                                                                                                         | Current year |                         |         | (18,363
|                                                                                                         | Prior years  |                         |         | (80,034
|                                                                                                         |              |                         |         |        
|Total losses and loss adjustment expenses paid                                                           |              |                         | (98,397 | )      
|                                                                                                         |              |                         |         |        
|Net reserves for losses and loss adjustment expenses at end of year                                      |              |                         | 463,788 |        
|                                                                                                         |              |                         |         |        
|Reinsurance receivables on unpaid losses and loss adjustment expenses                                    |              |                         | 502,329 |        
|                                                                                                         |              |                         |         |        
|Gross reserves for losses and loss adjustment expenses at end of year                                    |              | $                       | 966,117 |        
|                                                                                                         |              |                         |         |        

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

|Insurance Companies |       | $ | 2,830  |        | $ | 61,476 |        | $ | 6,713 |      
|------------------- | ----- | - | ------ | ------ | - | ------ | ------ | - | ----- | -----
|Lloyd's Operations  |       |   | (6,666 | )      |   | (2,841 | )      |   | 325   |      
|                    |       |   |        |        |   |        |       
|                    | Total |   | $      | (3,836 | ) | $      | 58,635 |   | $     | 7,038
|                    |       |   |        |        |   |        |       

The $2.8 million deficiency recorded in 2004 for claims occurring in prior years for the Insurance Companies includes deficiencies of approximately
$4.8 million for marine business, $2.3 million for specialty business and $0.7 million for run-off business, partially offset by $2.8 million of prior year
savings for professional liability business and $2.2 million for business assumed from our Lloyd's Operations.

The
$61.5 million deficiency recorded in 2003 for claims occurring in prior years for the Insurance Companies includes a deficiency of 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), as well as deficiencies for other exposures of
$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 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, and resulted from adverse development in our specialty
business, predominantly from our California contractors' liability business.

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The
following table presents the development of the loss and LAE reserves for 1994 through 2004. 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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2 0 0 4  11

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|                                                |                                        | Year Ended December 31, |         |        
|----------------------------------------------- | -------------------------------------- | ----------------------- | ------- | -------
|
|
|Net reserves for losses and LAE                 |                                        | $                       | 135,377 |        
|Reserves for losses and LAE re-estimated as of: |                                        |                         |         |        
|                                                | One year later                         |                         |         | 142,400
|                                                | Two years later                        |                         |         | 139,139
|                                                | Three years later                      |                         |         | 138,155
|                                                | Four years later                       |                         |         | 135,482
|                                                | Five years later                       |                         |         | 134,197
|                                                | Six years later                        |                         |         | 129,213
|                                                | Seven years later                      |                         |         | 126,537
|                                                | Eight years later                      |                         |         | 124,491
|                                                | Nine years later                       |                         |         | 159,426
|                                                | Ten years later                        |                         |         | 159,244
|                                                | Net cumulative redundancy (deficiency) |                         |         | (23,867
|Net cumulative paid as of:                      |                                        |                         |         |        
|                                                | One year later                         |                         |         | 47,187 
|                                                | Two years later                        |                         |         | 69,960 
|                                                | Three years later                      |                         |         | 83,921 
|                                                | Four years later                       |                         |         | 97,499 
|                                                | Five years later                       |                         |         | 104,454
|                                                | Six years later                        |                         |         | 107,469
|                                                | Seven years later                      |                         |         | 109,066
|                                                | Eight years later                      |                         |         | 111,346
|                                                | Nine years later                       |                         |         | 115,061
|                                                | Ten years later                        |                         |         | 115,937
|Gross liabilityend of year                     |                                        |                         | 314,898 |        
|Reinsurance recoverable                         |                                        |                         | 179,521 |        
|                                                |                                        |                         |         |        
|Net liabilityend of year                       |                                        |                         | 135,377 |        
|Gross re-estimated latest                       |                                        |                         | 414,154 |        
|Re-estimated recoverable latest                 |                                        |                         | 254,910 |        
|                                                |                                        |                         |         |        
|Net re-estimated latest                         |                                        |                         | 159,244 |        
|Gross cumulative redundancy (deficiency)        |                                        |                         | (99,256 | )      

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The following tables identify the approximate gross and net cumulative redundancy (deficiency) for the Insurance Companies and Lloyd's Operations contained in the
preceding ten year table:

Gross Cumulative Redundancy (Deficiency)

|     |  | Consolidated |          | Insurance Companies |   |         |  
|---- |  | ------------ | -------- | ------------------- | - | ------- | -
|
|
|2003 |  | $            | 13,265   |                     | $ | 14,448  |  
|2002 |  |              | (144,248 | )                   |   | (65,228 | )
|2001 |  |              | (130,847 | )                   |   | (51,470 | )
|2000 |  |              | (131,048 | )                   |   | (51,423 | )
|1999 |  |              | (66,349  | )                   |   | 13,387  |  
|1998 |  |              | (70,283  | )                   |   | 9,300   |  
|1997 |  |              | (86,865  | )                   |   | (15,907 | )
|1996 |  |              | (77,540  | )                   |   | (959    | )
|1995 |  |              | (85,683  | )                   |   | (8,814  | )
|1994 |  |              | (99,256  | )                   |   | (21,875 | )

---

Net Cumulative Redundancy (Deficiency)

|     |  | Consolidated |         | Insurance Companies |   |         |  
|---- |  | ------------ | ------- | ------------------- | - | ------- | -
|
|
|2003 |  | $            | 3,836   |                     | $ | 4,328   |  
|2002 |  |              | (64,036 | )                   |   | (31,864 | )
|2001 |  |              | (63,338 | )                   |   | (31,018 | )
|2000 |  |              | (52,671 | )                   |   | (20,257 | )
|1999 |  |              | (20,300 | )                   |   | 12,219  |  
|1998 |  |              | (22,171 | )                   |   | 10,311  |  
|1997 |  |              | (15,766 | )                   |   | 16,733  |  
|1996 |  |              | (11,601 | )                   |   | 20,990  |  
|1995 |  |              | (14,037 | )                   |   | 18,701  |  
|1994 |  |              | (23,867 | )                   |   | 8,944   |  

---

A N N U A L  
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The 2003 consolidated grand total gross and net cumulative reserve redundancies of $13.3 million and $3.8 million, respectively, were generated
mostly from the marine and energy business written by the Lloyd's Operations.

The
2002 consolidated grand total gross and net cumulative reserve deficiencies of $144.2 million and $64.0 million, respectively, were generated mostly from reserve
actions taken in the 2003 fourth quarter for Navigators Insurance Companies as follows:



The
remaining gross and net cumulative reserve deficiency for the Insurance Companies in the `All Other' column for the years 2002 through 2000 is mostly from the marine and
run-off lines of business recorded over several years that was not related to any specific reserve action.

The
2000 Lloyd's Operations gross and net cumulative reserve deficiency of $30.5 million and $15.0 million, respectively, 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. Such amounts
also affected the 1999 and 1998 year-end reserves for the Lloyd's Operations in the above table.

The
1997 gross cumulative deficiency of $14.2 million for the Insurance Companies in the `All Other' column mostly 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 the years prior to 1997.

The
1995 and 1994 gross cumulative deficiencies of $8.8 million and $21.9 million, respectively, for the Insurance Companies in the `All Other' column 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.

For
each of the years 1999 through 1994, exclusive of the 2003 asbestos and environmental reserves strengthening, the Company experienced net cumulative reserve redundancies on a
consolidated basis principally due to favorable development from marine business.

The
adverse development on our gross reserves has mostly been ceded to our 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 refers to claims that are generally reported quickly upon occurrence of an
event, making estimation of loss reserves less complex. Our longer tail

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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. Generally, the longer the time span between the incidence of a loss and the settlement of the claim, the more likely
the ultimate settlement amount will vary from the original estimate.

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 implemented in California, which generally provides consumers who experience construction defects a method other than
litigation to obtain construction defect repairs. The law, which became effective July 1, 2002 with a sunset provision effective January 1, 2011, provides for an alternative dispute
resolution system that attempts to involve all parties to the claim at an early stage. This legislation may impact claim severity, frequency and length of settlement assumptions underlying our
reserves. Accordingly, our ultimate liability may exceed or be less than current estimates due to this variable, among others. We had 1,028 open claims on our specialty construction liability policies
at December 31, 2004 compared to 1,029 at December 31, 2003. There were 1,387 new claims reported during 2004 compared to 1,389 new claims reported during 2003.

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. These claims many times involve a lengthy litigation period after being reported. Our
professional liability business is relatively immature, as we first began writing the business in late 2001. Accordingly, 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. We had 337 open claims on our professional
liability policies at December 31, 2004 compared to 134 at December 31, 2003. There were 271 new claims reported during 2004 compared to 185 new claims reported during 2003.

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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, 2004 |       
|-------------------------------- | ----- | ----------------- | ------
|
|
|Specialty construction liability |       | $                 | 21,338
|Professional liability           |       |                   | 1,166 
|                                 |       |                   |       
|                                 | Total |                   | $     
|                                 |       |                   |       

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

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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 are subject to uncertainties
greater than those presented by other types of claims:

|                       |  | Year Ended
December 31, 2004 |        | Year Ended
December 31, 2003
|---------------------- |  | ---------------------------- | ------ | ----------------------------
|
|
|Gross of Reinsurance   |  |                              |        |                             
|Beginning Reserve      |  | $                            | 78,472 |                             
|Incurred Losses & LAE  |  |                              | 1,183  |                             
|Calendar Year Payments |  |                              | 1,234  |                             
|                       |  |                              |        |                             
|Ending Reserves        |  | $                            | 78,421 |                             
|                       |  |                              |        |                             
|Net of Reinsurance     |  |                              |        |                             
|Beginning Reserve      |  | $                            | 32,083 |                             
|Incurred Losses & LAE* |  |                              | 405    |                             
|Calendar Year Payments |  |                              | 1,094  |                             
|                       |  |                              |        |                             
|Ending Reserves        |  | $                            | 31,394 |                             
|                       |  |                              |        |                             

---

|Type of Business |       | Claim Count
December 31, 2004 |     | New Claims
During
Period |     | Claims Settled
or Resolved
During Period |    | Claim Count
January 1,
2004
|---------------- | ----- | ----------------------------- | --- | ------------------------ | --- | ---------------------------------------- | -- | ---------------------------
|Environmental    |       | 89                            |     | 40                       |     | 37                                       |    | 86                         
|Asbestos         |       | 129                           |     | 67                       |     | 46                                       |    | 108                        
|                 |       |                               |     |                          |     |                                          |    |                            
|                 | Total |                               | 218 |                          | 107 |                                          | 83 |                            
|                 |       |                               |     |                          |     |                                          |    |                            

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 for an insured 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 for an insured 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 review,
the Company increased its gross and net loss reserves for asbestos exposure to $78.5 million and $32.1 million, respectively, at December 31, 2003. Generally, the reserves
established were

A N N U A L  
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---



for: (i) estimated
losses for excess insurance policy limits exposed to class actions suits against four insureds involved in the manufacturing or distribution of asbestos products;
(ii) other insureds not directly involved in the manufacturing or distribution of asbestos products, but that have more than incidental asbestos exposure for their purchase or use of products
that contained asbestos; and (iii) attritional asbestos claims that could be expected to occur over time.

Loss
development for asbestos related exposures in 2004 was not significant. During 2004 one of our four large claims for excess insurance policy limits exposed to class action suits was
settled within amounts reserved and one other such claim settled below our layer of coverage. Loss development activity for environmental losses generally consisted of oil spill claims on marine
liability policies written in the ordinary course of business.

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. We continue to review all of our loss reserves, including our asbestos reserves, on a regular basis.

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

Investments

The objective of the Company's investment policy, guidelines and strategy is to maximize total investment return in the context of preserving and
enhancing shareholder value and statutory surplus of the insurance company subsidiaries. Secondarily, an important consideration is to optimize the after-tax book income.

The
investments are managed by outside professional fixed-income and equity portfolio managers. The Company seeks to achieve its investment objectives by investing in cash equivalents
and money market funds, municipal bonds, U.S. Government bonds, U.S. Government guaranteed and U.S. Federal Agency securities, corporate bonds, mortgage-backed and asset-backed securities and common
and preferred stocks. Our investment guidelines require that the amount of the consolidated fixed-income portfolio rated below "A-" by Standard & Poor's ("S&P") or A3 by Moody's
shall not exceed 20% of the statutory surplus of the Insurance Companies. Securities rated below BBB- by S&P or Baa3 by Moody's are not eligible to be purchased. Up to 15% of the statutory
surplus of the Insurance Companies may be invested in equity securities that are actively traded on major U.S. stock exchanges. Our 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.

Our
insurance company subsidiaries' investments are subject to the direction and control of their respective boards of directors and our finance committee. The investment portfolio and
the performance of the investment managers are reviewed quarterly. These investments 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.

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 the board of directors and finance
committee of the Company, and represent our share of the

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investments
held by Syndicate 1221. These investments must comply with the rules and regulations imposed by Lloyd's and by certain overseas regulators. The investment portfolio and the performance of
the investment managers are reviewed quarterly.

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.

The
table set forth below reflects investments, the net investment income earned thereon and the related average yield for each of the years in the three year period ended
December 31, 2004:

|                                     | 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 (amortized cost basis) |                        
|                                     | Insurance Companies    
|                                     | Lloyd's Operations     
|                                     | Navigators Agencies    
|                                     | Parent Company         
|                                     | Consolidated           

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All fixed maturity and equity securities are carried at fair value. The fair value is based on quoted market prices or dealer quotes provided by independent
pricing services. The following tables show our cash and investments as of December 31, 2004 and 2003:

|December 31, 2004               |                                                                                                             | Fair
Value                 |         | Gross
Unrealized
Gains |         | Gross
Unrealized
(Losses) |       | Cost or
Amortized
Cost
|------------------------------- | ----------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ---------------------- | ------- | ------------------------- | ----- | ----------------------
|
|Fixed maturities:               |                                                                                                             |                            |         |                        |         |                           |       |                       
|                                | U.S. Government Treasury Bonds, GNMAs, U.S. Government non-guaranteed Agencies and foreign government bonds |                            | $       | 247,105                |         | $                         | 3,190 |                       
|                                | States, municipalities and political subdivisions                                                           |                            |         | 138,902                |         |                           | 2,688 |                       
|                                | Mortgage- and asset-backed securities (excluding GNMAs)                                                     |                            |         | 191,459                |         |                           | 1,911 |                       
|                                | Corporate bonds                                                                                             |                            |         | 144,968                |         |                           | 4,375 |                       
|                                |                                                                                                             |                            |         |                        |         |                           |       |                       
|                                |                                                                                                             | Total fixed maturities (1) |         |                        | 722,434 |                           |       | 12,164                
|                                |                                                                                                             |                            |         |                        |         |                           |       |                       
|Equity securitiescommon stocks |                                                                                                             |                            | 21,170  |                        |         | 2,157                     |       |                       
|Cash and short-term investments |                                                                                                             |                            | 111,329 |                        |         |                          |       |                       
|                                |                                                                                                             |                            |         |                        |         |                           |       |                       
|                                |                                                                                                             | Total                      |         | $                      | 854,933 |                           | $     | 14,321                
|                                |                                                                                                             |                            |         |                        |         |                           |       |                       

---

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

---

At December 31, 2004 and 2003, 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 years ended December 31, 2004 or 2003. During 2002,
$2,905,000 of impairment losses were recorded on an asset-backed fixed maturity security that was also sold later in 2002.

The
following table summarizes all securities in an unrealized loss position at December 31, 2004 and 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, 2004 |         | December 31, 2003
|----------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | -----------------
|
|
|Fixed Maturities:                                                                                           |  |                   |         |                  
|U.S. Government Treasury Bonds, GNMAs, U.S. Government non-guaranteed Agencies and foreign government bonds |  |                   |         |                  
|0-6 Months                                                                                                  |  | $                 | 97,338  |                  
|7-12 Months                                                                                                 |  |                   | 33,916  |                  
|> 12 Months                                                                                                 |  |                   | 24,258  |                  
|                                                                                                            |  |                   |         |                  
|Subtotal                                                                                                    |  |                   | 155,512 |                  
|                                                                                                            |  |                   |         |                  
|States, municipalities and political subdivisions                                                           |  |                   |         |                  
|0-6 Months                                                                                                  |  |                   | 18,966  |                  
|7-12 Months                                                                                                 |  |                   | 14,155  |                  
|> 12 Months                                                                                                 |  |                   | 518     |                  
|                                                                                                            |  |                   |         |                  
|Subtotal                                                                                                    |  |                   | 33,639  |                  
|                                                                                                            |  |                   |         |                  
|Mortgage- and asset-backed securities (excluding GNMAs)                                                     |  |                   |         |                  
|0-6 Months                                                                                                  |  |                   | 64,598  |                  
|7-12 Months                                                                                                 |  |                   | 19,536  |                  
|> 12 Months                                                                                                 |  |                   | 774     |                  
|                                                                                                            |  |                   |         |                  
|Subtotal                                                                                                    |  |                   | 84,908  |                  
|                                                                                                            |  |                   |         |                  
|Corporate bonds                                                                                             |  |                   |         |                  
|0-6 Months                                                                                                  |  |                   | 29,870  |                  
|7-12 Months                                                                                                 |  |                   | 16,069  |                  
|> 12 Months                                                                                                 |  |                   | 4,803   |                  
|                                                                                                            |  |                   |         |                  
|Subtotal                                                                                                    |  |                   | 50,742  |                  
|                                                                                                            |  |                   |         |                  
|Total Fixed Maturities                                                                                      |  | $                 | 324,801 |                  
|                                                                                                            |  |                   |         |                  
|                                                                                                            |  |                   |         |                  

A N N U A L  
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|Equity securitiescommon stocks |  |   |       |  |   |    |  |   |       |  |   |   
|------------------------------- |  | - | ----- |  | - | -- |  | - | ----- |  | - | --
|0-6 Months                      |  | $ | 3,779 |  | $ | 23 |  | $ |      |  | $ |  
|7-12 Months                     |  |   | 892   |  |   | 65 |  |   |      |  |   |  
|> 12 Months                     |  |   |      |  |   |   |  |   | 1,892 |  |   | 85
|                                |  |   |       |  |   |    |  |  
|Total Equity Securities         |  | $ | 4,671 |  | $ | 88 |  | $ | 1,892 |  | $ | 85
|                                |  |   |       |  |   |    |  |  

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, 2004. 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     |  | $               | 2,661 |            | 96 
|2 |  | BBB          |  | Baa          |  |                 | 118   |            | 4  
|3 |  | BB           |  | Ba           |  |                 |      |            |   
|4 |  | B            |  | B            |  |                 |      |            |   
|5 |  | CCC or lower |  | Caa or lower |  |                 |      |            |   
|6 |  | N/A          |  | N/A          |  |                 |      |            |   
|  | 
|  |  |              |  | Total        |  | $               | 2,779 |            | 100
|  |  |              |  |              |  |                 |       |            |    

At December 31, 2004, 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.

The
scheduled maturity dates for fixed maturity securities in an unrealized loss position at December 31, 2004 are shown in the following table:

|                                       |                               | Unrealized Loss |     | Fair Value |   
|-------------------------------------- | ----------------------------- | --------------- | --- | ---------- | --
|
|
|Due in one year or less                |                               | $               | 614 |            | 22
|Due after one year through five years  |                               |                 | 622 |            | 22
|Due after five years through ten years |                               |                 | 189 |            | 7 
|Due after ten years                    |                               |                 | 884 |            | 32
|Mortgage- and asset-backed securities  |                               |                 | 470 |            | 17
|                                       |                               |                 |     |            |   
|                                       | Total fixed income securities |                 | $   | 2,779      |   
|                                       |                               |                 |     |            |   

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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 4.1 years.

Our
realized capital gains and losses were as follows:

|                           |          | Year Ended December 31, |      
|-------------------------- | -------- | ----------------------- | -----
|
|
|Fixed maturities:          |          |                         |      
|                           | Gains    |                         | $    
|                           | (Losses) |                         |      
|                           |          |                         |      
|                           |          |                         | (79  
|                           |          |                         |      
|Equity securities:         |          |                         |      
|                           | Gains    |                         |      
|                           | (Losses) |                         |      
|                           |          |                         |      
|                           |          |                         | 1,001
|                           |          |                         |      
|Net realized capital gains |          | $                       | 922  
|                           |          |                         |      

The following table details the larger realized losses from sales and impairments during 2004 and 2003 and the related circumstances giving rise
to the loss:

|Date of Sale                  |  | Proceeds
from Sale |     | Loss on
Sale |   | Impairment |   | Holdings at
December 31, |  | Net
Unrealized
Loss |  | # of Months
Unrealized Loss
Exceeded 20%
of Cost or
Amortized Cost
|----------------------------- |  | ------------------ | --- | ------------ | - | ---------- | - | ------------------------ |  | ------------------- |  | ------------------------------------------------------------------
|
|Year ended December 31, 2004: |  |                    |     |              |   |            |   |                          |  |                     |  |                                                                   
|11/15/04                      |  | $                  | 456 | (1)          | $ | (360       | ) |                         |  |                    |  |                                                                  
|Year ended December 31, 2003: |  |                    |     |              |   |            |   |                          |  |                     |  |                                                                   
|2/13/03                       |  | $                  | 425 | (2)          | $ | (252       | ) |                         |  |                    |  |                                                                  
|9/3/03                        |  | $                  | 357 | (3)          | $ | (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,

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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 was subject to any material assessments under state insolvency or guarantee laws during the three year period ended December 31, 2004.

Navigators
Insurance Company is licensed to engage in the insurance and reinsurance business in 50 states, the District of Columbia and Puerto Rico. 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
43 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 State of New York Insurance Department has advised us that the Insurance Companies will be examined for the years 2001 through
2004 during 2005.

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 certain aspects of an insurer's business. As of December 31, 2004,
Navigators' Insurance Company results were outside the usual values for two of the IRIS ratios. These two ratios and the reasons for the unusual values are as follows: investment yield due to the
lower market rates during 2004 and two year reserve development due to the additional asbestos reserves recorded during 2003. In addition, NIC Insurance Company had one ratio outside of the usual
values as follows: investment yield due to the lower market rates during 2004. All of the business written by NIC Insurance Company is reinsured by Navigators Insurance Company.

The
NAIC has codified 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 and is updated each year. We prepare our statutory basis financial statements in accordance with the most recently updated statutory manual subject
to any deviations prescribed or permitted by the New York Insurance Commissioner.

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The
NAIC adopted model legislation in December 2004 implementing new disclosure requirements with respect to compensation of insurance producers. The model legislation requires
that insurance producers obtain the consent of the insured and disclose to the insured, where such producers receive any compensation from the insured, the amount of compensation from the insurer. In
those cases where the contingent commission is not known, producers would be required to provide a reasonable estimate of the amount and method for calculating such compensation. Producers who
represent companies and do not receive compensation from the insured would have a duty to disclose that relationship in certain circumstances. The NAIC directed its task force on broker activities to
give further consideration to the development of additional requirements for the model legislation, such as recognition of a fiduciary responsibility of producers, disclosure of all quotes received by
a broker, and disclosures relating to agent-owned reinsurance arrangements. We cannot be certain whether the model legislation will be adopted by any particular states.

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. The expiration date for TRIA is December 31, 2005 and it is uncertain whether or not, and on what terms,
the U.S. Congress will renew 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
the level that would trigger regulatory attention or company action. In their respective 2004 statutory financial statements, Navigators Insurance Company and NIC Insurance Company have complied with
the NAIC's risk-based capital reporting requirements.

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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 2000. 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 enables 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.

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

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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 the Lloyd's Franchise Board. The Lloyd's Franchise Board was formally constituted on January 1, 2003 and has now become the managing agent's principal
interface with the Society of Lloyd's. The main goal of the Franchise Board is to seek to create and maintain a commercial environment at Lloyd's in which underwriting risk is prudently managed while
providing attractive long term returns to capital providers.

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 the time their insurance obligations are 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. In addition, Lloyd's is considering a proposal to add a second tier of central assets to the
existing central fund. The second tier would be built up through a compulsory interest bearing loan to the Society from the members. The Society would invest the proceeds of the loans in assets
eligible for Society solvency. It is anticipated that the loans would be repaid on a rolling year basis as each year closes.

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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.

Another
competitive factor in the industry is the entrance of other financial services providers such as banks and brokerage firms into the insurance business. These efforts pose new
challenges to insurance companies and agents from financial services companies traditionally not involved in the insurance business.

No
single insured or reinsured accounted for 10% or more of our gross written premium in 2004.

Employees

As of December 31, 2004, the Company had 264 full-time employees of which 201 were located in the United States, 62 in the
United Kingdom and one in Belgium.

Available Information on the Internet

This report and all other filings made by the Company with the Securities and Exchange Commission ("SEC") pursuant to Section 13(a) or
15(d) of the Exchange Act are made available to the public by the SEC. All filings can be read and copied at the SEC Public Reference Room, located at 450 Fifth Street, NW, Washington, DC 20549.
Information pertaining to the operation of the Public Reference Room can be obtained by calling 1-800-SEC-0330. Further, the Company is an electronic filer, so all
reports, proxy and information statements, and other information can be found at the SEC website, www.sec.gov. The Company's website address is http://www.navg.com. Through its website at
http://www.navg.com/finance/sec_filings.phtml), 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 SEC. The
Annual Report to stockholders, press releases and recordings of our earnings release conference calls are 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 first quarter of 2003, we leased 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.

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Item 3. LEGAL PROCEEDINGS

The Company is not a party to, or the subject of, any material pending legal proceedings which depart from the ordinary routine litigation
incident to the kinds of business that it conducts.

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 2004.

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 2004 and 2003 were as follows:

|               | 2004 |   | 2003 
|-------------- | ---- | - | -----
|
|First Quarter  |      | $ | 33.37
|Second Quarter |      | $ | 29.81
|Third Quarter  |      | $ | 30.42
|Fourth Quarter |      | $ | 30.28

There were approximately 166 holders of record of shares of the Company's common stock as of December 31, 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 its credit facility, the capital and surplus requirements of its subsidiaries and applicable government regulations. There were
no repurchases of the Company's shares of common stock during the year ended December 31, 2004.

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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, 2004 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:                      |                         |  
|Gross written premium                       |                         | $
|Net written premium                         |                         |  
|Net earned premium                          |                         |  
|Net investment income                       |                         |  
|Net realized capital gains                  |                         |  
|Total revenues                              |                         |  
|Income before income taxes                  |                         |  
|Net income                                  |                         |  
|Net income per share:                       |                         |  
|                                            | Basic                   |  
|                                            | Diluted                 |  
|Average common shares (000s):               |                         |  
|                                            | Basic                   |  
|                                            | Diluted                 |  
|Combined loss & expense ratio (1)           |                         |  
|Balance Sheet Information (at end of year): |                         |  
|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)                    |                         | $

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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 primarily consisting of contractors' liability coverages. We conduct operations through our insurance company subsidiaries, the Navigators Agencies and our Lloyd's
Operations. Our insurance company subsidiaries consist of Navigators Insurance Company, which includes a United Kingdom Branch, and NIC Insurance Company which writes excess and surplus lines. The
Navigators Agencies consist of five wholly-owned insurance underwriting agencies which produce business for our insurance subsidiaries. Our Lloyd's Operations include NUAL, a Lloyd's marine
underwriting
agency which manages Lloyd's Syndicate 1221. We participate in the capacity of Syndicate 1221 through two wholly-owned Lloyd's corporate members.

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

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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 disciplined underwriting, prudent use of reinsurance and a balanced portfolio of risks.

Our
revenue consists primarily 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 three years, we have experienced generally beneficial market changes in our lines of business. As a result of several large industry 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. The marine rate increases began to level off and in several
lines of business declined during 2004. Specialty liability losses in the contractors' business 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. Rates continue to increase in our specialty liability business, albeit at a slower pace.
In the professional liability market, the enactment of the Sarbanes-Oxley Act of 2002, together with financial and accounting scandals at publicly traded corporations and increased frequency of
securities-related class action litigation, has led to an invigorated interest in professional liability insurance generally. These conditions resulted in rate increases in 2002 and 2003 as well as an
overall improvement in policy terms and conditions for our professional liability line of business. However, the professional liability business has experienced low single digit premium rate decreases
in 2004. We believe that the professional liability market will continue to see rates decrease in certain areas in 2005, including directors and officers coverages.

Our
business is cyclical and influenced by many factors. 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 the recorded amounts.

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

Industry Investigations

The insurance industry recently has become the subject of increasing scrutiny with respect to insurance broker and agent compensation arrangements
and sales practices. The New York State Attorney General and other state and federal regulators have commenced investigations and other proceedings relating to compensation and bidding arrangements
between producers and issuers of insurance products, and unsuitable sales practices by producers on behalf of either the issuer or the purchaser. The practices currently under investigation include,
among other things, allegations that so-called contingent commission arrangements may conflict with a broker's duties to its customers and that certain brokers and insurers may have
engaged in anti-competitive practices in connection with insurance premium quotes. The New York State Attorney General has recently entered into a settlement agreement with one large
insurance broker against whom a civil complaint had been filed. These investigations and proceedings are expected to continue, and new investigative proceedings may be commenced, in the future. These
investigations and proceedings could result in legal precedents and new industry-wide practices or legislation, rules or regulations that could significantly affect our industry and may
also cause stock price volatility for companies in the insurance industry.

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In
response to these various industry investigations, the Company recently completed its own internal review with respect to such contingent commission arrangements and
anti-competitive practices. In this internal inquiry, the Company did not find any evidence that it has engaged in the bid-rigging and price-fixing activities that are at the
core of the New York State Attorney General's investigation into these anti-competitive practices. In addition, as a result of this internal inquiry, the Company is developing guidelines
with respect to its future commission payment arrangements.

Largely
as a result of these industry investigations, contingent commission and other commission practice standards are currently evolving. For example, in December 2004 the
National Association of Insurance Commissioners adopted an amendment to its Producer Licensing Model Act with respect to producer compensation disclosure obligations, and is considering further
amendments to this Model Act. The Company is supportive of industry efforts to encourage transparency in the disclosure of contingent commissions paid to brokers by insurers and does not expect to be
adversely impacted by legislative developments in this area.

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 LAE (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 and the translation of
foreign currencies..

Reserves for Losses and LAE.Reserves for losses and LAE 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 liability, judicial theories of liability and other third party factors which are often beyond our control. Due
to the inherent uncertainty associated with the reserving process, the ultimate liability may be different from the original estimate. Such estimates are regularly reviewed and updated and any
resulting adjustments are included in the current year's results. 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 reserves for losses and LAE 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. Additional information regarding our reinsurance
recoverables can be found in the "BusinessReinsurance Ceded" section and Note 7 to our consolidated audited financial statements, both included herein.

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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. Additional information regarding our written and unearned premium can be found in Notes 1 and 7 to our consolidated
audited financial statements, both included herein.

Deferred Tax Assets.We apply the asset and liability method of accounting for income taxes whereby deferred 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. Additional information regarding our deferred tax assets can be found in Notes 1 and 5 to our consolidated audited financial statements, both included herein.

Impairment of Investment Securities.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 portfolio at December 31, 2004 and 2003, 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 1221 assets, liabilities, revenues and
expenses, after making adjustments to convert Lloyd's accounting to GAAP. The most significant 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 or RITC." The RITC transaction is recorded in the fourth quarter 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 transaction. Additional information regarding
our accounting for Lloyd's results can be found in Note 1 to our consolidated audited financial statements, included herein.

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Translation of Foreign Currencies.Financial statements of subsidiaries expressed in foreign currencies are translated into
U.S. dollars in accordance with SFAS No. 52Foreign Currency Translationissued 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, 2004,
2003 and 2002. All earnings per share data is presented on a per diluted share basis.

Our
2004, 2003 and 2002 results of operations reflect increasing premium rates as a result of improved market conditions beginning in late 2000 and continuing through 2004, albeit to a
much lesser extent in 2004. Net income for 2004, 2003 and 2002 was $34.9 million or $2.74 per share, $7.7 million or $0.80 per share and $16.4 million or $1.89 per share,
respectively.

We
experienced premium growth as measured by net earned premium in 2004, 2003 and 2002 of 12.0%, 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 2004, 2003 and 2002 business written. The 2003 year
was adversely impacted by reserve strengthening from prior years.

Cash
flow from operations increased in 2004 and 2003 by approximately 20.8% and 24.0%, respectively, contributing to the growth in invested assets and net investment income. The growth
in investment income has been mitigated in 2004 and 2003, and investment income actually declined in 2002, as a result of the overall declines in interest rates in the portfolios and the broader
market.

2004 Results

The 2004 results of operations reflect improved financial performance compared to 2003 and 2002 due to a combination of improved underwriting results and the
growth in net investment income.

The
2004 underwriting results benefited from the improved market conditions as reflected in increased premium rates coupled with the recording of a net redundancy of prior year loss
reserve of $3.8 million which reduced the 2004 combined ratio of 90.1% by 1.2 loss ratio points.

While
pre-tax investment yields declined to 3.5% in 2004 compared to 3.8% in 2003, net investment income increased 37% due to the cash flow from operations of
$162.5 million coupled with the net proceeds of $111 million as a result of the Company's October 2003 equity offering, of which $95 million of the net proceeds was
contributed to Navigators Insurance Company and invested in fixed maturity investments.

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

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reserve
increase. The reserve action was the result of a review of asbestos-related exposures conducted by the Company and an independent consulting firm. Following such review, the Company increased
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.

Revenues.Gross written premium increased to $696.1 million or 14.8% in 2004 from $606.5 million in 2003, and
by 35.4% from $447.8 million in 2002. The growth in gross premiums over the three year period reflects a combination of business
expansion in both new and existing lines of business coupled with premium rate changes on renewal policies. The premium rate increases or decreases as noted below for marine, specialty and
professional liability are calculated primarily by comparing premium amounts on policies that have renewed. The premiums are judgmentally adjusted for exposure factors when deemed significant and
sometimes represent an aggregation of several lines of business. The rate changes calculation provides an indicated pricing trend and is not meant to be a precise analysis of the numerous factors that
affect premium rates or the adequacy of such rates to cover all underwriting costs and generate an underwriting profit. The calculation can also be affected quarter by quarter depending on the
particular policies and the number of policies that renew during that period. Due to market conditions, these rate changes may or may not apply to new business which may be more competitively priced
compared to renewal business. 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 Lloyd's     
|                         |       | Other (includes run-off) 
|                         |       |                          
|                         |       | Insurance Companies Total
|                         |       |                          
|Lloyd's Operations:      |       |                          
|                         |       | Marine                   
|                         |       | Other                    
|                         |       |                          
|                         |       |                          
|                         |       |                          
|Intercompany elimination |       |                          
|                         |       |                          
|                         | Total |                          
|                         |       |                          

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Gross Written Premium

Insurance Companies' Gross Written Premium

Marine Premium.The 2004 marine gross written premium increased 7.1% principally due to the addition of protection and
indemnity business written by our UK Branch commencing early in the year coupled with the 4.7% average increase in renewal premium rates during the year. Primary marine protection and indemnity (P&I)
business complements our marine liability business which is generally written above the primary layer on an excess basis. The rate increases in the marine business slowed in 2004 compared to the prior
two years. The 2003 and 2002 marine premium increased 9.6% and 65.5%, respectively, from the prior years due to business expansion in existing lines of business coupled with an 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 in 2002,
which was partially offset in 2003 by a reduction of business in certain specific areas due to pricing concerns. Rate increases in 2003 and 2002 averaged approximately 13% and 21%, respectively.
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 2004 and 2003 and
75% in 2002. Commencing in 2005, Navigators Insurance Company's participation will increase to 85%.

Specialty Premium.This business consists primarily of general liability business for small general and artisan contractors
as well as other targeted commercial risks. The specialty premium increased 14.4% from 2003 to 2004, 13.4% in 2003 compared to 2002 and 109.8% in 2002 compared to 2001 due to increased rates and
underwriting new policies. The average renewal rate increases in the contractors' liability business were approximately 13%, 49% and 30% in 2004, 2003 and 2002, respectively. During 2003 and 2004, 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 new
business and the rate increases resulted from a tightening market for California contractors' liability insurance. In December 2004, we hired a small team of experienced underwriters to write
excess casualty and commercial and personal umbrella business for Navigators Insurance Company.

Professional Liability Insurance.The professional liability premium increased to $71.0 million in 2004 from
$53.0 million in 2003 and $23.4 million in 2002 reflecting growth and the expansion of this business. Renewal premium rates for this business decreased approximately 3.2% in 2004
compared to increases of approximately 28% in 2003. The 2004 premium rate decreases are reflective of softening market conditions which may continue into 2005. 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. Commencing in October 2004, our U.K. Branch began writing
professional liability coverages for U.K. solicitors. Beginning in 2005 we commenced writing professional liability coverages for architects and engineers.

Assumed from Lloyd's Operations.Gross premiums written assumed from our Lloyd's Syndicate 1221 through quota share treaties
consisted of marine and energy business of $26.0 million in 2004 compared to $33.0 million in 2003 and $8.2 million in 2002. The 2004 gross premiums written includes
$22.2 million of gross and net premiums written and earned, representing Navigators Insurance Company's share of reinsurance to close premiums recorded by our Lloyd's Syndicate 1221 as a result
of the transfer of assets and liabilities from the participants of the 2002 underwriting year to the 2003 underwriting year of Syndicate 1221.

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Lloyd's Operations' Gross Written Premium

Marine Premium.Our gross written premium is based on the amount of stamp capacity to write business that we provide to
Lloyd's Syndicate 1221 which was 97.4% in 2004 and 2003 and 68.1% in 2002. 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. The Syndicate's stamp capacity was £150 million ($275 million), £125 million ($203.5 million) and £75 million
($112.7 million) in 2004, 2003 and 2002, respectively. The 2004 marine gross written premium increased 21.5% in 2004 compared to 2003, 63.2% in 2003 compared to 2002 and 10.1% in 2002 compared
to 2001.

Substantially
all of the increase in 2004 represents premiums recorded as RITC premium representing the transfer of assets and liabilities from the participants of the 2002 underwriting
year to the 2003 underwriting year in which Navigators had increased its participation to 97.4% from 68.1%. The RITC transaction is recorded as additional written and earned premium, losses incurred,
loss reserves and receivables all in the same amount, net or gross of applicable ceded reinsurance amounts. There are no gains or losses recorded on the transaction. The comparable 2003 RITC amount
was $514,000.

The
2003 increase compared to 2002 resulted from the increase in the Company's participation coupled with the increase in stamp capacity of Syndicate 1221.

The
generally improved pricing environment since 2002 resulted in the Syndicate 1221 increasing its stamp capacity to take advantage of favorable market conditions as reflected in higher
renewal premium rates averaging 0.6% in 2004, 15% in 2003 and 26% in 2002.

The
stamp capacity for 2005 has been reduced to £135 million ($247.5 million), reflective of unused stamp capacity in 2004 coupled with anticipated declining
market conditions in 2005. In January 2005, we formed Navigators NV, a subsidiary of NUAL. Navigators NV is located in Antwerp, Belgium, and will write transport liability, cargo and marine
liability business on behalf of Syndicate 1221.

Other.Other consists of engineering and construction gross written 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 our Lloyd's Operations.

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The
following table sets forth our ceded written premium by segment and major line of business for the periods indicated:

|                         |                        | 2004     |         | 2003    |         | 2002    |     
|------------------------ | ---------------------- | -------- | ------- | ------- | ------- | ------- | ----
|
|
|Insurance Companies      |                        |          |         |         |         |         |     
|                         | Marine                 |          | $       | 131,048 |         | 62.3    | %   
|                         | Specialty              |          |         | 70,124  |         | 46.7    | %   
|                         | Professional Liability |          |         | 44,330  |         | 62.5    | %   
|                         | Assumed from Lloyd's   |          |         | 215     |         | 0.8     | %   
|                         | Other                  |          |         | (850    | )       | NM      |     
|                         |                        |          |         |         |         |         |     
|                         |                        | Subtotal |         |         | 244,867 |         | 53.5
|                         |                        |          |         |         |         |         |     
|Lloyd's Operations       |                        |          |         |         |         |         |     
|                         | Marine                 |          |         | 137,580 |         | 59.6    | %   
|                         | Other                  |          |         | 26,307  |         | 79.6    | %   
|                         |                        |          |         |         |         |         |     
|                         |                        | Subtotal |         |         | 163,887 |         | 62.1
|                         |                        |          |         |         |         |         |     
|Intercompany elimination |                        |          | (25,338 | )       | 100.0   | %       |     
|                         |                        |          |         |         |         |         |     
|                         |                        |          | Total   |         | $       | 383,416 |     
|                         |                        |          |         |         |         |         |     

The increases in the total dollar amount ceded each year were primarily due to the increases in the gross written premium.

The
increase to 62.3% for 2004 marine business ceded premium, compared to 53.1% in 2003 and 54.7% in 2002, reflects increased purchases of quota share reinsurance for certain lines of
business, net reinstatement premium costs of $2.2 million for Hurricane Ivan losses coupled with an overall increase in excess of loss reinsurance premium since 2002. The decline in the
2003 percentage of ceded marine premium compared to 2002 reflects a decline in ceded premium resulting from a commutation agreement with a former member of the marine pool offset by an overall
increase in excess of loss reinsurance premiums.

The
increase to 46.7% for 2004 specialty business ceded premium, compared to 34.5% in 2003, is principally due to the purchase of a quota share treaty for the construction and certain
other specialty lines of business coupled with rate increases for an excess of loss treaty. The 2003 increase in the percentage of ceded specialty premiums to 34.5% compared to 18.4% in 2002 was
principally due to a reinsurance treaty change for a portion of 2003 that provided a statutory accounting benefit but had no impact on net income, increased costs for the excess of loss treaty coupled
with a higher percentage of ceded premium for several new lines of business.

The
percentage of ceded premium for professional liability business has declined each year since the Company is retaining more of its risks on a net basis as the business grows and
becomes more seasoned.

The
2004 ceded premium amount for the Lloyd's Operations includes $47.6 million or 18.0% of Syndicate 1221 gross written premium in connection with the RITC transaction of which
$22.2 million was assumed by Navigators Insurance Company through a retrocession of the Syndicate's reinsurance. The 2003 ceded premium percentage of 63.4% compared to 39.3% in 2002 reflects
our providing a greater percentage of capacity at Lloyd's in 2003 compared to 2002 and then reinsuring a

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substantial
portion of our stamp capacity through the utilization of quota share reinsurance agreements to third parties who provide letters of credit used as collateral at Lloyd's. A portion of this
reinsurance was assumed by Navigators Insurance Company.

Net
Written Premium.    Net written premium increased 1.8% and 15.4% in 2004 and 2003, respectively, while gross written premium increased 14.8% and 35.4%,
respectively, reflecting the cession by the Company of a greater percentage of its overall gross written premiums as discussed above. The 2004 net premium written increased $12.8 million as a
result of the RITC transactions recorded in the 2004 fourth quarter, while the 2003 net written premium contains $13.9 million as a result of the commutation with a former pool member compared
to 2002.

Net
Earned Premium.    Net earned premium increased 12.0% in 2004 compared to 2003 and 25.0% in 2003 compared to 2002. The 2004 earned premium includes
$12.8 million as a result of the RITC transaction compared to 2003, while the 2003 amount contains $11.0 million as a result of the commutation with a former pool member compared to
2002.

Commission
Income.    Commission income from unaffiliated business increased 11.0% to $4.8 million in 2004 compared to $4.3 million in 2003. The
increase principally resulted from the increased profit commission on the Lloyd's Operations business. 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.

Net
Investment Income.    Net investment income increased 37.1% and 8.3% in 2004 and 2003, respectively, due to the increase in invested assets resulting from
positive cash flow from operations and the $110.8 million of net proceeds from our October 2003 common stock offering. See the "BusinessInvestments" section included herein for
additional information regarding our net investment income.

Net
Realized Capital Gains.    Pre-tax net income included $0.9 million of net realized capital gains for 2004 compared to $1.9 million
for 2003 and $1.7 million for 2002. On an after-tax basis, the net realized capital gains were $0.6 million or $0.05 per share, $1.2 million or $0.13 per share and
$1.2 million or $0.14 per share for 2004, 2003 and 2002, respectively. The 2002 net realized capital gains include $2.9 million of impairment losses recorded on one of our asset-backed
securities.

Other
Income/(Expense).    Other income/(expense) for 2004, 2003 and 2002 consisted principally of both foreign exchange gains and (losses) of $(1,310,000),
$612,000 and $928,000, respectively, primarily related to the Lloyd's Operations, and of inspection fees of $873,000, $750,000 and $893,000, respectively, related to the specialty insurance business.

Operating
Expenses.

Net Losses and Loss Adjustment Expenses Incurred.The ratios of net loss and loss adjustment expenses incurred to net earned
premium (loss ratios) were 60.5%, 76.0% and 64.6% in 2004, 2003 and 2002, respectively. The decrease in the 2004 loss ratio compared to 2003 was primarily due to the adverse development that
negatively affected the 2003 loss ratio. The 2004 loss ratio increased by 1.6 loss ratio points as a result of $2.9 million of net losses and $2.2 million of reinstatement premium from
Hurricane Ivan. We incurred minimal losses from other 2004 hurricanes in the U.S. and from the 2004 tsunami in Asia. The 2004 loss ratio was favorably impacted by 1.2 loss ratio points resulting from
the $3.8 million net redundancy of prior year loss

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reserves.
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 loss ratio points of the 2003 loss
ratio and, to a lesser extent, the adverse development in the California contractors' liability portion of the specialty business accounting for 10 loss ratio points and by 1.4 loss ratio points for
loss activity related to run-off lines of business. The improvements in the premium rates since 2001 have benefited the loss ratios each year. We do not discount any of our loss reserves.

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                         
|                             | 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, 2004, the IBNR loss reserve was $274.0 million or 59.1% of our total loss reserves compared to 58.7% in 2003 and 48.9% in 2002.

At
December 31, 2004, a 10% change in the net loss reserves would equate to $46.4 million which would represent an after-tax charge to net income of
$30.2 million and 9.2% 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.

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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 three 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 asbestos and environmental reserves are recorded in marine and $1.4 million in other, primarily related to run-off aviation business. Asbestos and
environmental net loss reserves at December 31, 2004 were $32.9 million.

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 based 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 as deferred policy acquisition costs to the extent
that they relate to unearned premium. Commission expense as a percentage of net earned premium was 12.6% in 2004, 14.5% in 2003 and 19.5% in 2002. The two year decrease in commission expense was
primarily the result of an increase in ceding commissions from reinsurers coupled with a general decline in commission expense to brokers and agents.

Other Operating Expenses.The 26.8% and 28.8% increases in other operating expenses when comparing 2004 to 2003 and comparing
2003 to 2002, respectively, are attributable primarily to employee related expenses resulting from expansion of the business coupled with the increased costs incurred to comply with Section 404
of the Sarbanes-Oxley Act of 2002. Included in 2004 and 2003 were $992,000 and $761,000, respectively, 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.

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, therefore no interest
expense was recorded in 2004.

Income
Taxes.    The income tax expense (benefit) was $17.2 million, $(4.9) million and $5.8 million for 2004, 2003 and 2002, respectively. The
effective tax rates for 2004, 2003 and 2002 were 33.1%, (175.3%) and 26.2%, respectively. As of December 31, 2004 and 2003, the net deferred Federal, foreign, state and local tax assets were
$17.3 million and $15.2 million, respectively.

We
are subject to the tax regulations of both the United States and the United Kingdom. The Company files a consolidated federal tax return, which includes all domestic subsidiaries and
the U.K. branch. The income from the foreign operations is designated as either U.S connected income or non-U.S. connected income. The U.S. connected income under the Subpart F regulations
of the Internal Revenue Code is taxed in the year earned for tax purposes and recorded in the Company's tax return. It is also included in the tax provision at the corporate 35% rate. Foreign tax
credits, where available, are utilized to offset as much of the U.S. tax as permitted on the U.S. connected income. Non-U.S. connected income from a foreign subsidiary is subject to U.S.
taxation only when distributed. U.S. taxes are not accrued when the earnings are considered to be permanently reinvested in the foreign subsidiary. The Company has demonstrated its intention that the
foreign earnings are permanently reinvested in the foreign subsidiary, and therefore any distribution is postponed indefinitely. The foreign earnings are subject to taxes in foreign jurisdictions
which, in the case of the Company, approximate 35%.

We
have not provided for U.S. deferred income taxes or foreign withholding taxes on the undistributed earnings of approximately $11.0 million of our non-U.S.
subsidiaries since these earnings are intended to be reinvested indefinitely. However, in the future, if such earnings were distributed to the Company, taxes of approximately $1.0 million would
be payable

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on
such undistributed earnings and would be reflected in the tax provision for the year distributed assuming all foreign tax credits are realized.

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.
Additional information regarding our tax valuation allowance can be found in Note 5 to our consolidated audited financial statements, included herein.

The
Company had net state and local operating loss carryforwards amounting to potential future tax benefits of $4,493,000 and $3,274,000 at December 31, 2004 and 2003,
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
tax carryforwards at December 31, 2004 expire from 2019 to 2024.

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 based on their GAAP underwriting or operating results. 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.

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 Company. The Navigators Agencies produce business for our insurance company subsidiaries.

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Following
are the results of operations for the Insurance Companies for each of the years in the three-year period ended December 31, 2004:

|                                 | 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 LAE               |                         
|Commission expense               |                         
|Other operating expenses         |                         
|                                 |                         
|                                 | Total operating expenses
|                                 |                         
|Income before income tax expense |                         
|Income tax expense               |                         
|                                 |                         
|Net income                       |                         
|                                 |                         
|Loss and LAE ratio               |                         
|Commission expense ratio         |                         
|Other operating expense ratio    |                         
|                                 |                         
|Combined ratio                   |                         
|                                 |                         

Following are the underwriting results of the Insurance Companies for each of the years in the three-year period ended
December 31, 2004:

|                                  |  | Year Ended December 31, 2004 |        
|--------------------------------- |  | ---------------------------- | -------
|
|
|                                  |  |                              |        
|Marine                            |  | $                            | 80,476 
|Specialty                         |  |                              | 86,437 
|Professional Liability            |  |                              | 21,021 
|Assumed from Lloyd's Operations   |  |                              | 39,714 
|Other (includes run-off business) |  |                              | 1,111  
|                                  |  |                              |        
|Total                             |  | $                            | 228,759
|                                  |  |                              |        

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|                                  |  | 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
|                                  |  |                              |        

The Insurance Companies experienced premium growth in all three lines of business as reflected in the net earned premium increases of 9.9%, 40.3% and 100.3% in
2004, 2003 and 2002, respectively. The 2004 assumed premium from Lloyd's Operations net earned premium includes $22.2 million as a result of the RITC transaction recorded for the close of the
2002 year of account at Syndicate 1221. The 2003 marine earned premium included approximately $11.0 million as a result of a commutation agreement with a former pool member.
Approximately 17.4%, 10.3% and 3.7% of the net earned premium recorded in 2004, 2003 and 2002, respectively, is a result of the Insurance Companies participating on reinsurance treaties supporting the
Lloyd's Operations' marine and energy business.

The
2004 underwriting results benefited from improved market conditions since 2002 across all lines of business as reflected in the 92.4% combined ratio. The 2004 underwriting results
were negatively impacted by approximately $2.8 million or 1.2 loss ratio points for net prior year loss development of which $4.8 million was for marine business, $2.3 million for
specialty business and $0.7 million for run-off business, offset by $2.8 million of prior year savings for professional liability business and $2.2 million from
business assumed from our Lloyd's operations. The net loss to the Insurance Companies from Hurricane Ivan of approximately $3.1 million increased the 2004 marine combined ratio by 3.7 ratio
points and the Insurance Companies' combined ratio by 1.3 ratio points.

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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 $4.0 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
pre-tax yield on the Insurance Companies' investment portfolio approximated 4.02%, 4.26% and 4.99% for 2004, 2003 and 2002, respectively. The portfolio yields reflect the
overall declines in interest rates since 2001. Net investment income increased in 2004 compared to 2003 and in 2003 compared to 2002 despite declines in the average investment yield on the portfolio
due to strong cash flows throughout 2004 and 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 Navigators Underwriting Limited (formerly 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 Lloyd's Operations and
Navigators Management (UK) Limited, a Navigators Agency which produces business for the UK Branch of Navigators Insurance Company, are subsidiaries of Navigators Holdings (UK) Limited located in the
United Kingdom.

Our
Lloyd's Syndicate 1221's stamp capacity was £150 million ($275 million) in 2004 compared to £125 million ($203.5 million) in 2003
and £75.0 million ($112.7 million) in 2002. The stamp capacity for 2005 has been reduced to £135 million ($247.5 million) reflective of unused stamp
capacity in 2004 coupled with anticipated declining market conditions in 2005. 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%. The Syndicate 1221 premium recorded in our financial statements is
gross of commission. We provided 97.4%, 97.4% and 68.1% of Syndicate 1221's total capacity for the 2004, 2003 and 2002 underwriting years, respectively. In 2003, we reinsured 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. The 2004 pricing stayed
relatively stable. 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 for three years. Traditionally, three years have been necessary to report substantially all premiums associated with an

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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 transaction is recorded in the fourth quarter 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 RITC transaction.

We
provide letters of credit to Lloyd's to support our participation in Syndicate 1221's stamp capacity as discussed below under the caption "Liquidity and Capital Resources".

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Following
are the results of operations of the Lloyd's Operations for each of the years in the three-year period ended December 31, 2004:

|                                           | Year Ended December 31, 
|------------------------------------------ | ------------------------
|
|
|Revenues:                                  |                         
|Net earned premium                         |                         
|Commission income                          |                         
|Net investment income                      |                         
|Net realized capital gains (losses)        |                         
|Other income (expense)                     |                         
|                                           |                         
|                                           | Total revenues          
|                                           |                         
|Operating expenses:                        |                         
|Net losses and LAE                         |                         
|Commission expense                         |                         
|Other operating expenses                   |                         
|                                           |                         
|                                           | Total operating expenses
|                                           |                         
|Income before income tax expense (benefit) |                         
|Income tax expense (benefit)               |                         
|                                           |                         
|Net income                                 |                         
|                                           |                         
|Loss and LAE 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 from late 2001 through 2003, and
continuing to a lesser extent in 2004. The 2004 net earned premium and incurred losses were increased by $12.8 million as a result of the RITC transaction for the 2002 year of account.

The
RITC recorded in 2004 when compared to 2003 reflects the increase in our participation in Lloyd's Syndicate 1221 to 97.4% for the 2003 year of account from 68.1% for the
2002 year of account. Two participants in Lloyd's Syndicate 1221 for the 2002 year of account changed their status for the 2003 year of account from participants to reinsurers.
Upon closing the 2002 year of account at the end of 2004, substantially all of the RITC assumed on a gross basis for the 2002 year of account was ceded to these reinsurers for the
2003 year of account. One of these reinsurers ceded a large portion of their reinsurance

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participation
for the 2003 year of account to Navigators Insurance Company. A summary of the effect of the RITC transaction on our financial statements is as follows:

|                                                |  | Lloyd's
Operations |      | Insurance
Companies |   | Eliminations |  | Consolidated
|----------------------------------------------- |  | ------------------ | ---- | ------------------- | - | ------------ |  | ------------
|
|Income Statement:                               |  |                    |      |                     |   |              |  |             
|Gross written premium                           |  | $                  | 38.1 |                     | $ | 22.2         |  | $           
|Ceded premiums                                  |  |                    | 47.5 |                     |   |             |  |             
|                                                |  |                    |      |                     |   |              |  |             
|Net written premium                             |  |                    | (9.4 | )                   |   | 22.2         |  |             
|                                                |  |                    |      |                     |   |              |  |             
|Net earned premium                              |  |                    | (9.4 | )                   |   | 22.2         |  |             
|Net loss and LAE incurred                       |  |                    | (9.4 | )                   |   | 22.2         |  |             
|                                                |  |                    |      |                     |   |              |  |             
|Net income                                      |  | $                  |     |                     | $ |             |  | $           
|                                                |  |                    |      |                     |   |              |  |             
|Balance sheet:                                  |  |                    |      |                     |   |              |  |             
|Reserves for losses and LAE                     |  | $                  | 38.1 |                     | $ | 22.2         |  | $           
|Reinsurance receivable on unpaid losses and LAE |  |                    | 47.5 |                     |   |             |  |             
|                                                |  |                    |      |                     |   |              |  |             
|Net reserves for losses and LAE                 |  | $                  | (9.4 | )                   | $ | 22.2         |  | $           
|                                                |  |                    |      |                     |   |              |  |             

The table below illustrates Navigators' participation each year of account in the Lloyd's Syndicate 1221:

|                                                |  | 2004 |      | 2003 |   | 2002 |  
|----------------------------------------------- |  | ---- | ---- | ---- | - | ---- | -
|
|Syndicate stamp capacity                        |  | £    | 150  |      | £ | 125  |  
|Navigators' corporate capital participation     |  |      | 97.4 | %    |   | 97.4 | %
|Third party participants                        |  |      | 2.6  | %    |   | 2.6  | %
|Two participants /reinsurers referred to above: |  |      |      |      |   |      |  
|As participants                                 |  |      |     |      |   |     |  
|As reinsurers                                   |  |      | 12.5 | %    |   | 40.0 | %
|Retrocessions to Navigators Insurance Company   |  |      |     |      |   | 25.0 | %
|Navigators' consolidated net participation (1)  |  |      | 84.9 | %    |   | 82.4 | %

---

For 2005, Syndicate 1221's stamp capacity has been reduced to £135 million ($247.5 million) and Navigators participation is 97.5%, while
the cessions to the former participants referenced above will increase to 14.1%.

The
net loss to the Lloyd's Operations from Hurricane Ivan of approximately $2.0 million increased the Lloyd's Operations 2004 combined ratio by 2.3 ratio points. The 2004 loss
ratio was favorably impacted by $6.7 million or 8.1 loss ratio points for redundancies in prior years' loss reserves. Underwriting results in 2003 were favorably impacted by $2.8 million
for prior year reserve savings compared to a $0.3 million deficiency recorded in 2002.

The
pre-tax yields on funds at Lloyd's approximated 1.7%, 2.0% and 3.8% for 2004, 2003 and 2002, respectively, which are reflective of the declining interest rate environment
since 2001. Generally, funds invested at Lloyd's have been invested with a

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relatively
short average duration in order to meet liquidity needs. The average duration of our Lloyd's Operations invested assets at December 31, 2004 was 1.4 years.

In
2004, the Lloyd's Operations was taxed at a 35% rate as previously discussed under "Results of Operations and OverviewIncome Taxes". The provision for income tax expense
for 2003 and 2002 reflects the reversal of a previously established deferred tax asset valuation allowance. The valuation allowance was reversed up until the third quarter of 2003 only to the extent
of taxable 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 would 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 the 2002 underwriting year. As described in more detail under "BusinessMarine Insurance", Navigators Insurance Company's participation in the marine pool increased to 80% for 2003 and
2004 and will increase to 85% in 2005.

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. In December 2004, a group of experienced underwriters was hired to expand our excess casualty business, particularly the
commercial excess and umbrella liability business.

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. In 2004, Navigators Pro began writing professional liability
coverage for U.K. solicitors in our U.K. Branch. Beginning in 2005 Navigators Pro commenced writing professional liability coverages for architects and engineers.

Through
the end of 2003, the Navigators Specialty and Navigators Pro generally received a 7.5% management fee commission for the business they produced. Effective from January 1,
2004, Navigators Specialty and Navigators Pro received actual cost reimbursement from the Insurance Companies for the business produced. The Navigators Agencies producing the marine business received
a 7.5% management fee and a 20% profit commission for the marine business produced. Beginning with the 2005 underwriting year, this management fee has been increased to 8.75%.

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Following
are the results of the Navigators Agencies for each of the years in the three-year period ended December 31, 2004:

|                                                  | Year Ended December 31, 
|------------------------------------------------- | ------------------------
|
|
|Revenues:                                         |                         
|Commission income                                 |                         
|Net investment income                             |                         
|Other income                                      |                         
|                                                  |                         
|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 unaffiliated insurance companies in the marine pool. Commission income increased in 2004 compared to 2003 due to the
increased premium revenues generated in 2004 coupled with the recording of profit commission income. 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.

Other
income generally represents fee revenues earned for services on behalf of third parties.

Other
operating expenses consist 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 expenses have increased each year commensurate with servicing the
growth in the overall premium volume coupled with the increased costs incurred to comply with Section 404 of the Sarbanes-Oxley Act of 2002.

Income
tax expense (benefit) includes Federal and state income taxes related to the taxable income or loss of the Navigators Agencies.

Off-Balance Sheet Transactions

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

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Tabular Disclosure of Contractual Obligations

The following table sets forth our known contractual obligations with respect to the items indicated at December 31, 2004:

|                                |       | Payments Due by Period
|------------------------------- | ----- | ----------------------
|
|
|Reserves for losses and LAE (1) |       | $                     
|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 $162.5 million, $134.5 million and $108.5 million for 2004, 2003, and 2002,
respectively. The increases in the 2004, 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 in 2003 and 2002.

Investment
assets and cash increased to $854.9 million at December 31, 2004 from $693.6 million at December 31, 2003 and $452.9 million at
December 31, 2002. The increases were primarily due to the positive cash flow and the $110.8 million of net proceeds received from the secondary public stock offering in
October 2003. Net investment income was $26.8 million for 2004, $19.6 million for 2003 and $18.1 million for 2002.

The
average yield of the portfolio, excluding net realized capital gains, was 3.54% in 2004, 3.79% in 2003 and 4.78% in 2002 reflecting the prevailing interest rates during those years.
As of December 31, 2004 and 2003, all fixed maturity securities and equity securities held by us were classified as available-for-sale.

At
December 31, 2004, 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, 2004, our portfolio had an average maturity of
4.8 years and a duration of 3.7 years. Management continually monitors the composition and cash flow of the investment portfolio in order to maintain the appropriate levels of liquidity
to ensure our ability to satisfy claims. We incurred impairment losses of $2.9 million in 2002 on asset-backed securities. No impairment losses were incurred in 2004 or 2003.

We
have a credit facility provided through a consortium of banks. The credit facility which is in U.S. dollars is utilized primarily by Navigators Corporate Underwriters Ltd. and
Millennium Underwriting Ltd. to fund our participation in Lloyd's Syndicate 1221 which is in British pounds. At December 31, 2004, letters of credit with an aggregate face amount of
$83.8 million were issued under the credit facility.

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The credit facility is collateralized by all of the common stock of Navigators Insurance Company. In addition, at December 31, 2004, a pledge account was
funded for $3.3 million, as required by the credit agreement, whenever our funding requirement at Lloyd's, which is in British pounds, exceeds the equivalent of $80 million. The overage
resulted from the conversion of the letters of credit from British pounds to U.S. dollars due to the weakening dollar. The pledge account is updated monthly for exchange rate movements between the
U.S. dollar and British pounds. The credit agreement 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. Cash dividends to shareholders are limited to $2.5 million per year. No dividends have
been declared or paid through December 31, 2004. At December 31, 2004, we were in compliance with all covenants.

The
credit facility was amended in January 2005 to increase the letters of credit available under the facility from $80 million to $115 million and to add a
$10 million line of credit facility. The expiration of the credit facility was also extended from November 10, 2005 to June 30, 2007. If at that time the banks do not renew the
credit 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. This new credit facility contains
covenants similar to the covenants in the expiring credit facility discussed above.

At
December 31, 2004, our consolidated stockholders' equity was $328.6 million compared to $290.0 million at December 31, 2003. The increase was primarily due
to the net income for the year ended December 31, 2004.

We
had annual rental commitments at December 31, 2004 under various noncancellable operating leases for our office facilities, which expire at various dates through 2013. The
commitments by year are $2.9 million for 2005, $2.9 million for 2006, $2.6 million for 2007, $2.4 million for 2008, $2.3 million for 2009 and $3.6 million for
2010 and beyond.

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, 2004, the maximum amount available for the payment of dividends by Navigators Insurance Company during 2005 without prior regulatory approval was $23,556,000. During 2004, 2003 and
2002, Navigators Insurance Company paid dividends to us of $6,000,000, $6,000,000 and $6,500,000, 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.

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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, 2004. Our market risk sensitive instruments are entered into for purposes other
than trading.

The
carrying value of our investment portfolio as of December 31, 2004 was $854.9 million of which 84.5% 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.

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, 2004 and the year ended 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, 2004.

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The
sensitivity analysis model used by us produces a loss in fair value of market-sensitive instruments of $29.7 million based on a 100 basis point increase in interest rates as
of December 31, 2004. 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 46.6% of total assets as of December 31, 2004. 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, 2004, 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 energy 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, 2004, our marine and
energy line accounted for approximately 68.1% of our gross written premiums and our specialty lines, consisting primarily of contractors' liability, accounted for approximately 21.6% of our gross
written premiums. If our results of operations from either of these two 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
levels we anticipate.

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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 14.4% from 2003 to 2004, 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 7.1%, 9.6% and 65.5% in 2004, 2003 and 2002, 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. In December 2004, we hired a group of experienced underwriters to expand our excess casualty business, particularly the commercial excess and
umbrella liability business. We formed Navigators NV in January 2005, a subsidiary of NUAL. Navigators NV is located in Antwerp, Belgium, and will focus on transport liability, cargo and marine
liability business.

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 results of operations.

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. Our professional liability business,

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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 significant 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. 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.

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.

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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 consists largely of fixed-income investments, is our principal source of liquidity. 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 2004, A.M. Best Company reaffirmed its "A" (Excellent) rating for Navigators Insurance Company and NIC Insurance Company. In 2004, 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.

Continued or increased premium levies by Lloyd's for the Lloyd's Central Fund and cash calls for trust fund deposits or
a significant downgrade of Lloyd's A.M. Best rating 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

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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 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.

The
Lloyd's of London market is currently rated "A" (Excellent) by A.M. Best and "A" by S&P. We believe that in the event that Lloyd's rating is downgraded below "A-"
in the future, the downgrade 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.

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

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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 TRIA could also adversely affect
us by causing our reinsurers to increase prices or withdraw from certain markets where terrorism coverage is required. TRIA expires at the end of 2005 and it is uncertain whether or not, and on what
terms, the U.S. Congress will renew TRIA.

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 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, 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.

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Item 9A. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we
conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange act of 1934, as amended
(the Exchange Act). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the
period covered by this annual report.

Management's Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in
Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of the
effectiveness of our internal control over financial reporting based on the framework inInternal ControlIntegrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework inInternal ControlIntegrated
Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2004.

Our
management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by KPMG LLP, an independent registered
public accounting firm, as stated in their report which is included herein.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during our fourth fiscal quarter that have materially affected, or are
reasonably likely to materially affect our internal control over financial reporting.

Item 9B. OTHER INFORMATION

None.

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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 2005
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.navg.com under the Corporate Governance 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 2005 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 2005 Proxy Statement, which information is incorporated herein by reference. Information concerning securities issuable under the
Company's equity compensation plans is contained under "Compensation of Directors and Executive Officers" in the Company's 2005 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 2005 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 Registered Public Accounting
Firm" in the Company's 2005 Proxy Statement, which information is incorporated herein by reference.

Part IV

Item 15. EXHIBITS AND FINANCIAL SCHEDULES

The following documents are filed as part of this report:



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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: February 28, 2005

By:

/s/PAUL J. MALVASIOPaul J. Malvasio Executive Vice President and Chief Financial
Officer


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

February 28, 2005/s/STANLEY A. GALANSKIStanley A. Galanski

President and Chief Executive Officer (Principal Executive Officer)

February 28, 2005/s/PAUL J. MALVASIOPaul J. Malvasio

Executive Vice President and Chief Financial Officer (Principal Financial Officer)

February 28, 2005/s/SALVATORE A. MARGARELLASalvatore A. Margarella

Vice President and Treasurer (Principal Accounting Officer)

February 28, 2005/s/H.J. MERVYN BLAKENEYH.J. Mervyn Blakeney

Director

February 28, 2005/s/PETER A. CHENEYPeter A. Cheney

Director

February 28, 2005/s/ROBERT W. EAGER, JR.Robert W. Eager, Jr.

Director

February 28, 2005/s/LEANDRO S. GALBAN, JR.Leandro S. Galban, Jr.

Director

February 28, 2005/s/JOHN F. KIRBYJohn F. Kirby

Director

February 28, 2005/s/MARC M. TRACTMarc M. Tract

Director

February 28, 2005/s/ROBERT F. WRIGHTRobert F. Wright

Director

February 28, 2005


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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

|Report of Independent Registered Public Accounting Firm                                                                |  | F-2                                                                          
|---------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------
|Report of Independent Registered Public Accounting Firm                                                                |  | F-3                                                                          
|Consolidated Balance Sheets at December 31, 2004 and 2003                                                              |  | F-4                                                                          
|Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2004               |  | F-5                                                                          
|Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 2004 |  | F-6                                                                          
|Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 31, 2004 |  | F-7                                                                          
|Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2004           |  | F-8                                                                          
|Notes to Consolidated Financial Statements                                                                             |  | F-9                                                                          
|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  

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Report of Independent Registered Public Accounting Firm

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

We
have audited the accompanying consolidated balance sheets of The Navigators Group, Inc. and subsidiaries as of December 31, 2004 and 2003, 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, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31,
2004, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of The Navigators Group, Inc. and
subsidiaries' internal control over financial reporting as of December 31, 2004, based on criteria established inInternal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2005 expressed an unqualified opinion
on management's assessment of, and the effective operation of, internal control over financial reporting.

|                                     | KPMG LLP
|------------------------------------ | --------
|New York, New York
February 28, 2005 |         

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Report of Independent Registered Public Accounting Firm

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

We
have audited management's assessment, included in the accompanyingManagement's Report on Internal Control over Financial Reportingthat The Navigators Group, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Navigators
Group, Inc. and subsidiaries' management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our
audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, evaluating management's assessment, testing, and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, management's assessment that The Navigators Group, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31,
2004 is fairly stated, in all material respects, based on criteria established inInternal ControlIntegrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, The Navigators Group, Inc. and subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2004 based on criteria established inInternal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated balance sheets of The Navigators
Group, Inc. and subsidiaries as of December 31, 2004 and 2003, 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, 2004 and our report dated February 28, 2005 expressed an unqualified opinion.

|                                     | KPMG LLP
|------------------------------------ | --------
|New York, New York
February 28, 2005 |         

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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: 2004, $713,049; 2003, $577,904)                            |             
|                                                                    | Equity securities, available-for-sale, at fair value (cost: 2004, $19,101; 2003, $11,977)                                       |             
|                                                                    | Short-term investments, at cost which approximates fair value                                                                   |             
|                                                                    | Cash                                                                                                                            |             
|                                                                    |                                                                                                                                 |             
|                                                                    |                                                                                                                                 |             
|                                                                    |                                                                                                                                 |             
|Premiums in course of collection                                    |                                                                                                                                 |             
|Commissions receivable                                              |                                                                                                                                 |             
|Prepaid reinsurance premiums                                        |                                                                                                                                 |             
|Reinsurance receivable on paid losses                               |                                                                                                                                 |             
|Reinsurance receivable on unpaid losses and loss adjustment expense |                                                                                                                                 |             
|Federal income tax recoverable                                      |                                                                                                                                 |             
|Net deferred income tax benefit                                     |                                                                                                                                 |             
|Deferred policy acquisition costs                                   |                                                                                                                                 |             
|Accrued investment income                                           |                                                                                                                                 |             
|Goodwill                                                            |                                                                                                                                 |             
|Other assets                                                        |                                                                                                                                 |             
|                                                                    |                                                                                                                                 |             
|                                                                    |                                                                                                                                 |             
|                                                                    |                                                                                                                                 |             
|LIABILITIES AND STOCKHOLDERS' EQUITY                                |                                                                                                                                 |             
|Liabilities:                                                        |                                                                                                                                 |             
|                                                                    | Reserves for losses and loss adjustment expenses                                                                                |             
|                                                                    | Unearned premium                                                                                                                |             
|                                                                    | Reinsurance balances payable                                                                                                    |             
|                                                                    | Federal income tax payable                                                                                                      |             
|                                                                    | Payable for securities purchased                                                                                                |             
|                                                                    | 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; issued and outstanding: 12,657,160 for 2004 and 12,535,360 for 2003 |             
|                                                                    | Additional paid-in capital                                                                                                      |             
|                                                                    | Retained earnings                                                                                                               |             
|                                                                    | Accumulated other comprehensive income                                                                                          |             
|                                                                    |                                                                                                                                 |             
|                                                                    |                                                                                                                                 |             
|                                                                    |                                                                                                                                 |             
|                                                                    |                                                                                                                                 |             
|                                                                    |                                                                                                                                 |             

See accompanying notes to consolidated financial statements.

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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                      |                                                  | $                                  | 696,146
|                                           |                                                  |                                    |        
|Revenues:                                  |                                                  |                                    |        
|                                           | Net written premium                              |                                    | $      
|                                           | (Increase) in unearned premium                   |                                    |        
|                                           |                                                  |                                    |        
|                                           | Net earned premium                               |                                    |        
|                                           | Commission income                                |                                    |        
|                                           | Net investment income                            |                                    |        
|                                           | Net realized capital gains                       |                                    |        
|                                           | Other income                                     |                                    |        
|                                           |                                                  |                                    |        
|                                           |                                                  | 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 (benefit) |                                                  |                                    | 52,092 
|                                           |                                                  |                                    |        
|Income tax expense (benefit):              |                                                  |                                    |        
|                                           | Current                                          |                                    |        
|                                           | Deferred                                         |                                    |        
|                                           |                                                  |                                    |        
|                                           |                                                  | Total income tax expense (benefit) |        
|                                           |                                                  |                                    |        
|Net income                                 |                                                  | $                                  | 34,865 
|                                           |                                                  |                                    |        
|Net income per common share:               |                                                  |                                    |        
|                                           | Basic                                            |                                    | $      
|                                           | Diluted                                          |                                    | $      
|Average common shares outstanding:         |                                                  |                                    |        
|                                           | Basic                                            |                                    |        
|                                           | Diluted                                          |                                    |        

See accompanying notes to consolidated financial statements.

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

See accompanying notes to consolidated financial statements.

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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:                                                    |                                                                                                                                                             
|                                                                               | Change in net unrealized gains or (losses) on securities, net of tax expense (benefit) of $(245), $(455) and $3,516 in 2004, 2003 and 2002, respectively (1)
|                                                                               | Change in foreign currency translation gains or (losses), net of tax expense (benefit) of $658, $233 and $(84) in 2004, 2003 and 2002, respectively         
|                                                                               |                                                                                                                                                             
|                                                                               | Other comprehensive income (loss)                                                                                                                           
|                                                                               |                                                                                                                                                             
|Comprehensive income                                                           |                                                                                                                                                             
|                                                                               |                                                                                                                                                             
|(1)  Disclosure of reclassification amount, net of tax:                        |                                                                                                                                                             
|Unrealized holding gains (losses) arising during period                        |                                                                                                                                                             
|Less:  reclassification adjustment for net gains included in net
       income |                                                                                                                                                             
|                                                                               |                                                                                                                                                             
|Change in net unrealized gains or (losses) on securities, net of tax           |                                                                                                                                                             
|                                                                               |                                                                                                                                                             

See accompanying notes to consolidated financial statements.

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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 of stock issued from Employee Stock Purchase Plan                                 
|                                                   | Proceeds of stock issued from exercise of stock options                                    
|                                                   |                                                                                            
|                                                   |                                                                                            
|                                                   |                                                                                            
|Increase (decrease) in cash                        |                                                                                            
|Cash at beginning of year                          |                                                                                            
|                                                   |                                                                                            
|Cash at end of period                              |                                                                                            
|                                                   |                                                                                            
|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.

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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
established in 1982, and its 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 "Lloyd's Operations"). 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" or "Parent Company" is used to mean The Navigators Group, Inc. without its subsidiaries. All
significant intercompany transactions and balances have been 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, specialty liability insurance 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 year 2002 and an 80% net participation in the pool for underwriting years 2003 and 2004.

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

A N N U A L  
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of
London ("Lloyd's") marine underwriting managing agency which manages Lloyd's Syndicate 1221, Millennium Underwriting Ltd. ("Millennium") and Navigators Corporate Underwriters Ltd.
("NCUL"). Both Millennium and NCUL are Lloyd's corporate members with limited liability and provide capacity to Lloyd's Syndicate 1221. NUAL owns Navigators Underwriting Ltd.
(formerly 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, 2004 and 2003, 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

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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" ("RITC"). The RITC transactions are recorded by the Company as additional written and earned premium, losses incurred, loss reserves and receivables, all in
the same amount. The RITC was $38.1 million, $0.5 million and $1.6 million for each of the years in the three year period ended December 31, 2004. There were no gains or
losses recorded on the reinsurance to close transactions.

Lloyd's
Syndicate 1221 had stamp capacity of £150 million ($275 million) in 2004, £125.0 million ($203.5 million) in 2003,
£75.0 million ($112.7 million) in 2002. 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 in excess of their stamp
capacity within guidelines established by Lloyd's. 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%, 97.4% and 68.1% of Syndicate 1221's capacity for the 2004, 2003 and 2002 underwriting years, respectively. The Lloyd's operations included in the consolidated financial
statements represent the Company's participation in Syndicate 1221.

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.

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.

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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 liability it has recognized for unpaid losses and loss adjustment expenses is a reasonable estimate of 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 differ from such amounts.

Net Income Per Share

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

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.

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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, 2004 and 2003, unamortized computer software costs were $310,000
and $338,000, respectively. Amortization of computer software expense amounted to $172,000, $481,000 and $450,000 in 2004, 2003 and 2002, respectively.

Goodwill

Goodwill was $5,282,000 and $5,093,000 at December 31, 2004 and 2003, respectively, net of accumulated amortization of $1,088,000 in each
year. There was no goodwill amortization expense in 2004, 2003 or 2002. The goodwill consists of $2,534,000 for the Navigators Agencies' segment at both December 31, 2004 and 2003, and
$2,748,000 and $2,559,000 for the Lloyd's Operations' segment at December 31, 2004 and 2003, 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.

SFAS 141,Business Combinations,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, Goodwill and Other Intangible Assets,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 December 31, 2004.

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.

A N N U A L  
R E P O R T  
2 0 0 4  F-13

---



Generally,
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. See Note 5 to our consolidated financial statements, included herein.

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 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 revision to Interpretation No. 46 did not have a material effect on the Company's financial condition or results of operations.

In
September 2004, the FASB approved issuing a Staff Position to delay the adoption of certain provisions of Emerging Issues Task Force Issue No. 03-1 ("EITF
03-1"). The approved delay applies to certain provisions relating to the recognition of other than temporary impairments for all securities within the scope of EITF 03-1 and is
expected to end when new guidance is issued and becomes effective. The Company will review the new guidance when it becomes available.

In
December 2004, the FASB issued SFAS 123 (revised 2004),Share Based Payment, which is a revision of SFAS 123, Accounting for Stock-Based
Compensation. The revision eliminates the alternative use of APB 25 in 2005. SFAS 123 (revised 2004) has no effect on
the Company's results of operations or financial condition since the Company adopted the fair value recognition provisions of SFAS 123 in 2003.

F-14  
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R E P O R T  
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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, 2004 and 2003 were as follows:

|December 31, 2004               |                                                                                                             | Fair
Value                 |         | Gross
Unrealized
Gains |         | Gross
Unrealized
(Losses) |       | Cost or
Amortized
Cost
|------------------------------- | ----------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ---------------------- | ------- | ------------------------- | ----- | ----------------------
|
|Fixed maturities:               |                                                                                                             |                            |         |                        |         |                           |       |                       
|                                | U.S. Government Treasury Bonds, GNMAs, U.S. Government non-guaranteed Agencies and foreign government bonds |                            | $       | 247,105                |         | $                         | 3,190 |                       
|                                | States, municipalities and political subdivisions                                                           |                            |         | 138,902                |         |                           | 2,688 |                       
|                                | Mortgage- and asset-backed securities (excluding GNMAs)                                                     |                            |         | 191,459                |         |                           | 1,911 |                       
|                                | Corporate bonds                                                                                             |                            |         | 144,968                |         |                           | 4,375 |                       
|                                |                                                                                                             |                            |         |                        |         |                           |       |                       
|                                |                                                                                                             | Total fixed maturities (1) |         | $                      | 722,434 |                           | $     | 12,164                
|                                |                                                                                                             |                            |         |                        |         |                           |       |                       
|Equity securitiescommon stocks |                                                                                                             |                            | 21,170  |                        |         | 2,157                     |       |                       
|Cash and short-term investments |                                                                                                             |                            | 111,329 |                        |         |                          |       |                       
|                                |                                                                                                             |                            |         |                        |         |                           |       |                       
|                                |                                                                                                             | $                          | 854,933 |                        | $       | 14,321                    |       | $                     
|                                |                                                                                                             |                            |         |                        |         |                           |       |                       

---

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

---

A N N U A L  
R E P O R T  
2 0 0 4  F-15

---



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 years ended December 31, 2004 or 2003. During 2002, $2,905,000 of impairment
losses were recorded on an asset-backed fixed maturity security that was subsequently sold in 2002.

F-16  
A N N U A L  
R E P O R T  
2 0 0 4

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The
following table summarizes all securities in an unrealized loss position at December 31, 2004 and 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, 2004 |         | December 31, 2003
|----------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | -----------------
|
|
|Fixed Maturities:                                                                                           |  |                   |         |                  
|U.S. Government Treasury Bonds, GNMAs, U.S. Government non-guaranteed Agencies and foreign government bonds |  |                   |         |                  
|0-6 Months                                                                                                  |  | $                 | 97,338  |                  
|7-12 Months                                                                                                 |  |                   | 33,916  |                  
|> 12 Months                                                                                                 |  |                   | 24,258  |                  
|                                                                                                            |  |                   |         |                  
|Subtotal                                                                                                    |  |                   | 155,512 |                  
|                                                                                                            |  |                   |         |                  
|States, municipalities and political subdivisions                                                           |  |                   |         |                  
|0-6 Months                                                                                                  |  |                   | 18,966  |                  
|7-12 Months                                                                                                 |  |                   | 14,155  |                  
|> 12 Months                                                                                                 |  |                   | 518     |                  
|                                                                                                            |  |                   |         |                  
|Subtotal                                                                                                    |  |                   | 33,639  |                  
|                                                                                                            |  |                   |         |                  
|Mortgage- and asset-backed securities (excluding GNMAs)                                                     |  |                   |         |                  
|0-6 Months                                                                                                  |  |                   | 64,598  |                  
|7-12 Months                                                                                                 |  |                   | 19,536  |                  
|> 12 Months                                                                                                 |  |                   | 774     |                  
|                                                                                                            |  |                   |         |                  
|Subtotal                                                                                                    |  |                   | 84,908  |                  
|                                                                                                            |  |                   |         |                  
|Corporate bonds                                                                                             |  |                   |         |                  
|0-6 Months                                                                                                  |  |                   | 29,870  |                  
|7-12 Months                                                                                                 |  |                   | 16,069  |                  
|> 12 Months                                                                                                 |  |                   | 4,803   |                  
|                                                                                                            |  |                   |         |                  
|Subtotal                                                                                                    |  |                   | 50,742  |                  
|                                                                                                            |  |                   |         |                  
|Total Fixed Maturities                                                                                      |  | $                 | 324,801 |                  
|                                                                                                            |  |                   |         |                  
|Equity securitiescommon stocks                                                                             |  |                   |         |                  
|0-6 Months                                                                                                  |  | $                 | 3,779   |                  
|7-12 Months                                                                                                 |  |                   | 892     |                  
|> 12 Months                                                                                                 |  |                   |        |                  
|                                                                                                            |  |                   |         |                  
|Total Equity Securities                                                                                     |  | $                 | 4,671   |                  
|                                                                                                            |  |                   |         |                  

A N N U A L  
R E P O R T  
2 0 0 4  F-17

---



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, 2004 were as follows:

|Period from December 31, 2004 to Maturity    |       | Fair
Value |         | Amortized
Cost
|-------------------------------------------- | ----- | ---------- | ------- | --------------
|
|Due in one year or less                      |       | $          | 38,653  |               
|Due after one year through five years        |       |            | 185,154 |               
|Due after five years through ten years       |       |            | 134,832 |               
|Due after ten years                          |       |            | 87,692  |               
|Mortgage- and asset-backed (including GNMAs) |       |            | 276,103 |               
|                                             |       |            |         |               
|                                             | Total |            | $       | 722,434       
|                                             |       |            |         |               

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 4.1 years.

The
Company's net investment income was derived from the following sources:

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

F-18  
A N N U A L  
R E P O R T  
2 0 0 4

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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 |                        
|                           |                        

There were no impairment losses recorded in 2004 or 2003. The 2002 realized losses on fixed maturities include $2,905,000 of impairment losses recorded on one of
the Company's asset-backed securities.

At
December 31, 2004 and 2003, fixed maturities with amortized values of $9,325,000 and $8,842,000, respectively, were on deposit with various State Insurance Departments. In
addition, at December 31, 2004 and 2003, investments of $216,000 and $190,000, respectively, were on deposit with the Bank of England for Navigators Insurance Company's UK Branch. Also, at
December 31, 2004 and 2003, $290,000 of investments were pledged as security under a reinsurance treaty.

At
December 31, 2004, the Company did not have a concentration of greater than 10% of invested assets in a single non-U.S. government 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 duration of those
instruments.

A N N U A L  
R E P O R T  
2 0 0 4  F-19

---



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

Note 3. Credit Facility

We have a credit facility provided through a consortium of banks. The credit facility which is in U.S. dollars is utilized primarily by
Navigators Corporate Underwriters Ltd. and Millennium Underwriting Ltd. to fund our participation in Lloyd's Syndicate 1221 which is in British pounds. At December 31,
2004, letters of credit with an aggregate face amount of $83.8 million were issued under the credit facility.

The
credit facility is collateralized by all of the common stock of Navigators Insurance Company. In addition, at December 31, 2004, a pledge account was funded for
$3.3 million, as required by the credit agreement, whenever our funding requirement at Lloyd's, which is in British pounds, exceeds the equivalent of $80 million. The overage resulted
from the conversion of the letters of credit from British pounds to U.S. dollars due to the weakening dollar. The pledge account is updated monthly for exchange rate movements between the U.S. dollar
and British pounds. The credit agreement 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. Cash dividends to shareholders are limited to $2.5 million per year. No dividends have been
declared or paid through December 31, 2004. At December 31, 2004, we were in compliance with all covenants.

The
credit facility was amended in January 2005 to increase the letters of credit available under the facility from $80 million to $115 million and to add a
$10 million line of credit. The expiration of the credit facility was also extended from November 10, 2005 to June 30, 2007. If at that time the banks do not renew the credit
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. This new credit facility contains
covenants similar to the covenants in the expiring credit facility discussed above.

The
cost of the letters of credit prior to the amendment in January 2005 was 1.125% for the used portion and 0.15% for the unused portion of the letter of credit facility. The
cost of the letters of credit under the January 2005 amendment is 1.00% for the used portion and 0.125% for the unused portion of the letter of credit facility. The cost of the line of credit
is 1.00% over the Company's choice of LIBOR or prime for the used portion and 0.125% for the unused portion of the letter of credit facility.

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.

F-20  
A N N U A L  
R E P O R T  
2 0 0 4

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The
fiduciary accounts as of December 31, 2004 and 2003 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 Company is subject to the tax regulations of both the United States and the United Kingdom. The Company files a consolidated federal tax
return, which includes all domestic subsidiaries and the U.K. branch. The income from the foreign operations is designated as either U.S connected income or non-U.S. connected income.

The
U.S. connected income under the Subpart F regulations of the Internal Revenue Code is taxed in the year earned for tax purposes and recorded in the Company's tax return. It is also
included in the tax provision at the corporate 35% rate. Foreign tax credits, where available, are utilized to offset as much of the U.S. tax as permitted on the U.S. connected income.
Non-U.S. connected income from a foreign subsidiary is subject to U.S. taxation only when distributed. U.S. taxes are not accrued when the earnings are considered to be permanently
reinvested in the foreign subsidiary. The Company has demonstrated its intention that the foreign earnings are permanently reinvested in the foreign subsidiary, therefore any distribution is postponed
indefinitely. The foreign earnings are subject to taxes in foreign jurisdictions which, in the case of the Company, approximates 35%.

We
have not provided for U.S. deferred income taxes or foreign withholding taxes on the undistributed earnings of approximately $11.0 million of our non-U.S.
subsidiaries since these earnings are intended to be reinvested indefinitely. However, in the future, if such earnings were distributed to the Company, taxes of approximately $1.0 million would
be payable on such undistributed earnings and be reflected in the tax provision for the year distributed assuming all foreign tax credits are realized.

A N N U A L  
R E P O R T  
2 0 0 4  F-21

---



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) |                        
|                                   |                        

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           |                            
|Change in the state and local tax net operating loss carryforward |                            
|Change in the valuation allowance                                 |                            
|Other                                                             |                            
|                                                                  |                            
|                                                                  | Actual tax expense and rate
|                                                                  |                            

F-22  
A N N U A L  
R E P O R T  
2 0 0 4

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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                                  
|                                | 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           
|                                |                                                   
|                                |                                                   
|                                |                                                   
|                                |                                                   
|                                |                                                   

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, 2004, 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.

A N N U A L  
R E P O R T  
2 0 0 4  F-23

---



The
Company had state and local operating loss carryforwards amounting to potential future tax benefits of $4,493,000 and $3,274,000 at December 31, 2004 and 2003, 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, 2004 expire from 2019 to 2024.

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 on 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

F-24  
A N N U A L  
R E P O R T  
2 0 0 4

---



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.

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                                                                 |                        
|Lloyd's Operations                                                                  |                        
|                                                                                    |                        
|                                                                                    |                        
|                                                                                    |                        

The $2.8 million deficiency recorded in 2004 for claims occurring in prior years for the Insurance Companies includes approximately $4.8 million for
marine business, $2.3 million for specialty business and $0.7 million for run-off business, partially offset by $2.8 million of prior year savings for professional
liability business and $2.2 million for business assumed from our Lloyd's operations.

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

A N N U A L  
R E P O R T  
2 0 0 4  F-25

---



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.

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 64.5% in 2000 to 67.4% in 2001, to 68.1% in 2002 and to 97.4% in 2003 and 2004. We therefore recorded our increasing proportionate share of
the assets and liabilities of Syndicate 1221. At December 31, 2004, 2003 and 2002, the Company closed its 2002, 2001 and 2000 underwriting years, respectively, the net effect of which
resulted in such transfers to NCUL and Millennium of $38.1 million, $0.5 million and $1.6 million, respectively. The RITC transaction accounted for part of the increase in the
premium volume in the Lloyd's Operations. The reinsurance to close transaction was 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 RITC transaction.

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

F-26  
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R E P O R T  
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---



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.

Loss
development for asbestos related exposures in 2004 has not been significant. One of four large claims has been settled within amounts reserved and one other large claim settled
below our layer of coverage. Loss development activity for environmental losses in 2004 has generally consisted of oil spill claims on marine liability policies written in the ordinary course of
business.

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. We continue to review our asbestos reserves, along with all of our reserves, on a regular basis.

During
2004, 2003 and 2002, the Company recorded net paid losses and LAE of $1,391,000, $756,000 and $262,000, respectively, for environmental and asbestos related claims. As of
December 31, 2004 and 2003, the Insurance Companies carried net reserves of $32,888,000 and $33,236,000, respectively, for the potential exposure to such claims. At December 31, 2004 and
2003, there were 218 and 194 open claims, respectively, 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 us, the original insurer, from our primary liability to the policyholder. The Company is required to pay the losses even if the reinsurer 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.

A N N U A L  
R E P O R T  
2 0 0 4  F-27

---



Note 7. Reinsurance (Continued)

The following table lists our 20 largest reinsurers measured by the amount of reinsurance recoverable for ceded losses and loss adjustment
expense and ceded unearned premium (constituting approximately 77% of the total recoverables) together with the reinsurance recoverables and collateral at December 31, 2004, and the reinsurers'
rating from the indicated rating agency:

|                                       |  | Reinsurance Recoverables |       |  |   |       |  |   |      
|-------------------------------------- |  | ------------------------ | ----- |  | - | ----- |  | - | -----
|
|
|                                       |  |                          |       |  |   |       |  |   |      
|General Reinsurance Corporation        |  | $                        | 5.5   |  | $ | 91.2  |  | $ | 96.7 
|Folksamerica Reinsurance Company       |  |                          | 17.9  |  |   | 45.8  |  |   | 63.7 
|Munich Re                              |  |                          | 7.9   |  |   | 30.6  |  |   | 38.5 
|Swiss Reinsurance Company (U.K.) Ltd   |  |                          | 9.3   |  |   | 24.1  |  |   | 33.4 
|Arch Reinsurance Company               |  |                          | 10.9  |  |   | 20.0  |  |   | 30.9 
|Swiss Reinsurance America Corporation  |  |                          | 5.2   |  |   | 23.8  |  |   | 29.0 
|Employers Mutual Casualty Company      |  |                          | 6.4   |  |   | 18.8  |  |   | 25.2 
|Converium AG                           |  |                          | 4.5   |  |   | 17.2  |  |   | 21.7 
|Partner Reinsurance Company of the U.S |  |                          | 4.2   |  |   | 17.4  |  |   | 21.6 
|Everest Reinsurance Company            |  |                          | 5.9   |  |   | 14.6  |  |   | 20.5 
|Platinum Underwriters Re               |  |                          | 5.2   |  |   | 11.8  |  |   | 17.0 
|American Reinsurance Company           |  |                          | 3.4   |  |   | 13.5  |  |   | 16.9 
|Lloyd's of London (primarily Equitas)  |  |                          |      |  |   | 16.1  |  |   | 16.1 
|National Liability & Fire Insurance Co |  |                          | 3.7   |  |   | 10.7  |  |   | 14.4 
|GE Reinsurance Corporation             |  |                          | 2.6   |  |   | 10.4  |  |   | 13.0 
|Alea North America Insurance Co        |  |                          | 8.5   |  |   | 2.0   |  |   | 10.5 
|Hannover Re                            |  |                          | 2.5   |  |   | 6.5   |  |   | 9.0  
|New Re                                 |  |                          |      |  |   | 9.0   |  |   | 9.0  
|GE Frankona Ruckversicherungs AG       |  |                          | 0.6   |  |   | 8.0   |  |   | 8.6  
|XL Re Limited                          |  |                          | 1.9   |  |   | 5.0   |  |   | 6.9  
|All others                             |  |                          | 24.7  |  |   | 126.7 |  |   | 151.4
|                                       |  |                          |       |  |   |       |  |   |      
|                                       |  | $                        | 130.8 |  | $ | 523.2 |  | $ | 654.0
|                                       |  |                          |       |  |   |       |  |   |      

---

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The following table summarizes written premium:

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

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 2004, 2003 and 2002 assumed written and earned premium includes $38.1 million, $0.5 million, and $1.6 million, respectively, of
reinsurance to close from the Lloyd's Operations.

Ceded
losses and loss adjustment expenses incurred were $264.7 million, $216.1 million and $107.3 million in 2004, 2003, and 2002, 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.

A N N U A L  
R E P O R T  
2 0 0 4  F-29

---



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. Under the commutation agreement, in addition to a lump-sum transfer of funds from a 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 which amounted to $2.3 million of gross written
premium. Somerset Insurance Ltd. did not provide 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. These liabilities were commuted back to
Navigators Insurance Company in December 2004 at 100% of their recorded value of approximately $3 million. No gain or loss was recorded on the commutation.

An
allowance was established for amounts determined to be uncollectible. At December 31, 2004 and 2003, there were allowances for uncollectible reinsurance of $32,439,000 and
$33,068,000, respectively. The allowance for 2004 and 2003 included $0 and $25,700,000, respectively, 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 $1,959,000, $27,551,000 and $1,632,000 for 2004, 2003 and 2002,
respectively.

Note 8. Share Capital



F-30  
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---





|                           | Year Ended December 31,     
|-------------------------- | ----------------------------
|
|
|                           |                             
|Balance, beginning of year |                             
|                           | Public offering             
|                           | Restricted shares issued    
|                           | Employee stock purchase plan
|                           | 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.

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

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. The Company also has two prior plans, an Incentive Stock Option Plan and a Non-Qualified Stock Option Plan,
which allowed for the award of options to purchase an aggregate of 900,000 shares of its common stock. Upon the approval of the 2002 Stock Incentive Plan, no further awards are being issued from the
two prior plans. All stock 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 $1,471,000, $572,000 and $761,000 in 2004, 2003 and 2002, respectively. The above does not include $20,000 in
2004 and $12,000 in each of 2003 and 2002 of the Company's common stock earned by 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 2004, 2003 and 2002 for the stock earned by directors
was $60,000, $60,000 and $60,000, respectively.

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

A N N U A L  
R E P O R T  
2 0 0 4  F-31

---



Unvested
restricted stock grants outstanding at December 31, 2004, 2003 and 2002 were as follows:

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

Stock options outstanding at December 31, 2004, 2003 and 2002 were as follows:

|                                         |                      | 2004    |         | 2003 |       | 2002 
|---------------------------------------- | -------------------- | ------- | ------- | ---- | ----- | -----
|
|                                         |                      |         |         |      |       |      
|Options outstanding at beginning of year |                      | 550,550 |         | $    | 16.43 |      
|                                         | Granted              |         | 190,000 |      | $     | 29.12
|                                         | Exercised            |         | (70,425 | )    | $     | 13.03
|                                         | Expired or forfeited |         | (28,250 | )    | $     | 32.02
|                                         |                      |         |         |      |       |      
|Options outstanding at end of year       |                      | 641,875 |         | $    | 19.87 |      
|                                         |                      |         |         |      |       |      
|Number of options exercisable            |                      | 362,375 |         | $    | 14.45 |      
|                                         |                      |         |         |      |       |      

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.

F-32  
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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 2002 as it was
in 2003 and 2004:

|                                                                                                                                                      | 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                                  |                        
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects, for 2002 |                        
|                                                                                                                                                      |                        
|Net income for 2004 and 2003 and pro forma net income for 2002                                                                                        |                        
|                                                                                                                                                      |                        
|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 |                         | $

A N N U A L  
R E P O R T  
2 0 0 4  F-33

---



The following table summarizes information about options outstanding at December 31, 2004:

|Price Range |  | Outstanding
Options |  | Average Remaining
Contract Life |  | Average
Exercise Price |       | Exercisable
Options |         | Average
Exercise Price
|----------- |  | ------------------- |  | ------------------------------- |  | ---------------------- | ----- | ------------------- | ------- | ----------------------
|            |  |                     |  |                                 |  |                        |       |                     |         |                       
|$10 to $15  |  | 215,375             |  | 4.1                             |  | $                      | 11.85 |                     | 215,375 |                       
|$16 to $20  |  | 151,750             |  | 6.1                             |  | $                      | 16.98 |                     | 121,750 |                       
|$21 to $30  |  | 274,750             |  | 8.8                             |  | $                      | 27.76 |                     | 25,250  |                       

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 2004, 2003 and 2002 were ($41,000), $1,717,000 and $869,000, respectively.

Stock
appreciation rights outstanding at December 31, 2004, 2003 and 2002 were as follows:

|                                      |                      | Year Ended December 31,
|------------------------------------- | -------------------- | -----------------------
|
|
|                                      |                      |                        
|SARs outstanding at beginning of year |                      | 192,750                
|                                      | Granted              |                        
|                                      | Exercised            |                        
|                                      | Expired or forfeited |                        
|                                      |                      |                        
|SARs outstanding at end of year       |                      | 179,750                
|                                      |                      |                        
|Number of SARs exercisable            |                      | 158,750                
|                                      |                      |                        

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 8,237
shares purchased in 2005 from funds withheld during the July 1, 2004 to December 31, 2004 offering period. There were 16,412 shares purchased in 2004 from funds withheld during the
offering periods of July 1, 2003 to December 31, 2003 and January 1, 2004 to June 30, 2004. 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 2004 and 2003 was $109,000 and $58,000, respectively.

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Note 10. Employee Benefits

The Company sponsors a defined contribution plan covering substantially all its U.S. employees. Contributions are equal to 15% of each eligible
employee's gross pay (plus bonus of up to $2,500) up to the amount permitted by certain Federal regulations. Employees vest at 20% per year beginning at the end of the second year and are therefore
fully vested after six years of service. Plan expense, included within operating expenses, amounted to $1,826,000, $1,363,000 and $1,052,000 in 2004, 2003 and 2002, respectively. The Company sponsors
a similar plan under U.K. regulations for its U.K. employees for which the Company had expenses of $835,000, $535,000 and $533,000 for 2004, 2003 and 2002, 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, 2004, the maximum amount available for the payment of dividends by Navigators Insurance Company during 2005 without prior regulatory approval
was $23,556,000. Navigators Insurance Company paid $6,000,000 in dividends to the Company in each of 2004 and 2003 and $6,500,000 in 2002. The UK Branch is required to maintain certain capital
requirements under U.K. regulations.

The
Insurance Companies' statutory net income (loss) as filed with the regulatory authorities for 2004, 2003 and 2002 was $31,943,000, $(4,398,000) and $9,499,000, respectively. The
statutory surplus as filed with the regulatory authorities was $235,561,000 and $210,324,000 at December 31, 2004 and 2003, 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.

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.

A N N U A L  
R E P O R T  
2 0 0 4  F-35

---



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. The State of New
York Insurance Department has advised us that the Insurance Companies will be examined for the years 2001 through 2004 during 2005.

Note 12. Commitments and Contingencies

Year Ended December 31,

($ in thousands)2005

$
2,8812006


2,8812007


2,6212008


2,4432009 and subsequent


5,878Total

$
16,704




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 Lloyd's Operations and the Navigators Agencies, each of which is managed separately. The Insurance Companies consist of Navigators Insurance Company, which includes the UK
Branch, 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 Lloyd's Operations underwrite marine and related lines of business at Lloyd's of London. The Navigators Agencies are underwriting management companies which produce, manage
and underwrite insurance and reinsurance for both affiliated and unaffiliated companies. 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

F-36  
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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.

Financial
data by segment for 2004, 2003 and 2002 was as follows:

|                                                  |                                     | Year Ended December 31, 2004 |          
|------------------------------------------------- | ----------------------------------- | ---------------------------- | ---------
|
|
|Gross written premium                             |                                     | $                            | 457,617  
|Net written premium                               |                                     |                              | 212,750  
|Revenues:                                         |                                     |                              |          
|                                                  | Net earned premium                  |                              |          
|                                                  | Commission income                   |                              |          
|                                                  | Net investment income               |                              |          
|                                                  | Net realized capital gains (losses) |                              |          
|                                                  | Other income (expense)              |                              |          
|                                                  |                                     |                              |          
|                                                  |                                     | Total revenues               |          
|                                                  |                                     |                              |          
|Operating expenses:                               |                                     |                              |          
|                                                  | Net losses and LAE                  |                              |          
|                                                  | Commission expense                  |                              |          
|                                                  | Other operating expenses            |                              |          
|                                                  |                                     |                              |          
|                                                  |                                     | Total operating expenses     |          
|                                                  |                                     |                              |          
|Income (loss) before income tax expense (benefit) |                                     |                              | 42,824   
|Income tax expense (benefit)                      |                                     |                              | 13,625   
|                                                  |                                     |                              |          
|Net income (loss)                                 |                                     | $                            | 29,199   
|                                                  |                                     |                              |          
|Identifiable assets (2)                           |                                     | $                            | 1,287,319
|                                                  |                                     |                              |          
|Loss and LAE ratio                                |                                     |                              | 65.2     
|Commission expense ratio                          |                                     |                              | 24.1     
|Other operating expense ratio                     |                                     |                              | 3.1      
|                                                  |                                     |                              |          
|Combined ratio                                    |                                     |                              | 92.4     
|                                                  |                                     |                              |          

A N N U A L  
R E P O R T  
2 0 0 4  F-37

---



|                                                  |                            | Year Ended December 31, 2003 |          
|------------------------------------------------- | -------------------------- | ---------------------------- | ---------
|
|
|Gross written premium                             |                            | $                            | 414,194  
|Net written premium                               |                            |                              | 225,142  
|Revenues:                                         |                            |                              |          
|                                                  | Net earned premium         |                              |          
|                                                  | Commission income          |                              |          
|                                                  | Net investment income      |                              |          
|                                                  | Net realized capital gains |                              |          
|                                                  | Other income (expense)     |                              |          
|                                                  |                            |                              |          
|                                                  |                            | Total revenues               |          
|                                                  |                            |                              |          
|Operating expenses:                               |                            |                              |          
|                                                  | Net losses and LAE         |                              |          
|                                                  | Commission expense         |                              |          
|                                                  | Other operating expenses   |                              |          
|                                                  | Interest expense           |                              |          
|                                                  |                            |                              |          
|                                                  |                            | Total operating expenses     |          
|                                                  |                            |                              |          
|Income (loss) before income tax expense (benefit) |                            |                              | 2,355    
|Income tax expense (benefit)                      |                            |                              | (104     
|                                                  |                            |                              |          
|Net income (loss)                                 |                            | $                            | 2,459    
|                                                  |                            |                              |          
|Identifiable assets (2)                           |                            | $                            | 1,039,629
|                                                  |                            |                              |          
|Loss and LAE ratio                                |                            |                              | 80.5     
|Commission expense ratio                          |                            |                              | 25.1     
|Other operating expense ratio                     |                            |                              | 2.3      
|                                                  |                            |                              |          
|Combined ratio                                    |                            |                              | 107.9    
|                                                  |                            |                              |          

F-38  
A N N U A L  
R E P O R T  
2 0 0 4

---



|                                                  |                            | Year Ended December 31, 2002 |        
|------------------------------------------------- | -------------------------- | ---------------------------- | -------
|
|
|Gross written premium                             |                            | $                            | 328,601
|Net written premium                               |                            |                              | 189,673
|Revenues:                                         |                            |                              |        
|                                                  | Net earned premium         |                              |        
|                                                  | Commission income          |                              |        
|                                                  | Net investment income      |                              |        
|                                                  | Net realized capital gains |                              |        
|                                                  | Other income (expense)     |                              |        
|                                                  |                            |                              |        
|                                                  |                            | Total revenues               |        
|                                                  |                            |                              |        
|Operating expenses:                               |                            |                              |        
|                                                  | Net losses and LAE         |                              |        
|                                                  | Commission expense         |                              |        
|                                                  | Other operating expenses   |                              |        
|                                                  | Interest expense           |                              |        
|                                                  |                            |                              |        
|                                                  |                            | Total operating expenses     |        
|                                                  |                            |                              |        
|Income (loss) before income tax expense (benefit) |                            |                              | 21,644 
|Income tax expense (benefit)                      |                            |                              | 6,780  
|                                                  |                            |                              |        
|Net income (loss)                                 |                            | $                            | 14,864 
|                                                  |                            |                              |        
|Identifiable assets (2)                           |                            | $                            | 689,948
|                                                  |                            |                              |        
|Loss and LAE ratio                                |                            |                              | 61.0   
|Commission expense ratio                          |                            |                              | 33.8   
|Other operating expense ratio                     |                            |                              | 2.2    
|                                                  |                            |                              |        
|Combined ratio                                    |                            |                              | 97.0   
|                                                  |                            |                              |        

---

The Insurance Companies net earned premium includes $33,545,000, $33,755,000 and $22,144,000 of net earned premium from the UK Branch for 2004, 2003 and 2002,
respectively.

A N N U A L  
R E P O R T  
2 0 0 4  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, 2004           
|------------------------------ | ---------------------------------------
|
|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, 2003           
|------------------------------ | ---------------------------------------
|
|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, 2002           
|------------------------------ | ---------------------------------------
|
|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 2004,
10,000 shares at an average price of $29.24 expiring in 2014; for 2003, 21,500 shares at an average price of $34.00 expiring in 2004; and for 2002, 22,500 shares at an average price of $34.00 expiring
in 2004.

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



Note 15. Quarterly Financial Data (Unaudited)

Following is a summary of quarterly financial data for the periods indicated. Each quarter reflects 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.

|                                                 |  | March 31,
2004 |         | June 30,
2004 |   | Sept. 30,
2004 |   | Dec. 31,
2004 |         |  
|------------------------------------------------ |  | -------------- | ------- | ------------- | - | -------------- | - | ------------- | ------- | -
|
|Gross written premium                            |  | $              | 195,951 |               | $ | 161,626        |   | $             | 151,178 |  
|Net written premium                              |  |                | 95,935  |               |   | 73,689         |   |               | 65,992  |  
|Revenues:                                        |  |                |         |               |   |                |   |               |         |  
|Net earned premium                               |  |                | 74,175  |               |   | 75,314         |   |               | 75,137  |  
|Commission income                                |  |                | 1,127   |               |   | 1,361          |   |               | 1,121   |  
|Net investment income                            |  |                | 5,902   |               |   | 6,625          |   |               | 6,881   |  
|Net realized capital gains (losses)              |  |                | 422     |               |   | (105           | ) |               | 271     |  
|Other income (expense)                           |  |                | 128     |               |   | 266            |   |               | (127    | )
|                                                 |  |                |         |               |   |                |   |               |         |  
|Total revenues                                   |  |                | 81,754  |               |   | 83,461         |   |               | 83,283  |  
|                                                 |  |                |         |               |   |                |   |               |         |  
|Operating Expenses:                              |  |                |         |               |   |                |   |               |         |  
|Net losses and loss adjustment expenses incurred |  |                | 43,752  |               |   | 45,392         |   |               | 49,247  |  
|Commission income                                |  |                | 11,028  |               |   | 10,040         |   |               | 8,773   |  
|Other operating expenses                         |  |                | 13,432  |               |   | 14,620         |   |               | 16,014  |  
|Interest expense                                 |  |                |        |               |   |               |   |               |        |  
|                                                 |  |                |         |               |   |                |   |               |         |  
|Total operating expenses                         |  |                | 68,212  |               |   | 70,052         |   |               | 74,034  |  
|                                                 |  |                |         |               |   |                |   |               |         |  
|Income before income tax expense                 |  |                | 13,542  |               |   | 13,409         |   |               | 9,249   |  
|Income tax expense                               |  |                | 4,629   |               |   | 4,372          |   |               | 2,969   |  
|                                                 |  |                |         |               |   |                |   |               |         |  
|Net income                                       |  | $              | 8,913   |               | $ | 9,037          |   | $             | 6,280   |  
|                                                 |  |                |         |               |   |                |   |               |         |  
|Comprehensive income                             |  | $              | 13,902  |               | $ | (3,135         | ) | $             | 13,679  |  
|Combined ratio                                   |  |                | 88.8    | %             |   | 88.8           | % |               | 93.4    | %
|Per share data:                                  |  |                |         |               |   |                |   |               |         |  
|Net income (loss) per shareBasic                |  | $              | 0.71    |               | $ | 0.72           |   | $             | 0.50    |  
|Net income (loss) per shareDiluted              |  | $              | 0.70    |               | $ | 0.71           |   | $             | 0.50    |  

The increase in 2004 revenues as compared to 2003 was primarily due to the increase in written premium resulting from rate increases on new and
renewal business in 2003 and the effect of the reinsurance to close on the Lloyd's Operations. Net investment income increased as the result of positive cash flow increasing the investment portfolio
and an increase in the overall

A N N U A L  
R E P O R T  
2 0 0 4  F-41

---



yield.
The third quarter was negatively impacted by Hurricane Ivan which caused pretax incurred losses of $2.9 million and net reinstatement premium costs of $2.2 million.

|                                                 |  | March 31,
2003 |         | June 30,
2003 |   | Sept. 30,
2003 |   | Dec. 31,
2003 |         |  
|------------------------------------------------ |  | -------------- | ------- | ------------- | - | -------------- | - | ------------- | ------- | -
|
|Gross written premium                            |  | $              | 174,702 |               | $ | 141,192        |   | $             | 139,632 |  
|Net written premium                              |  |                | 91,033  |               |   | 61,631         |   |               | 70,631  |  
|Revenues:                                        |  |                |         |               |   |                |   |               |         |  
|Net earned premium                               |  |                | 66,314  |               |   | 65,264         |   |               | 74,537  |  
|Commission income                                |  |                | 1,239   |               |   | 1,486          |   |               | 23      |  
|Net investment income                            |  |                | 4,661   |               |   | 4,552          |   |               | 4,634   |  
|Net realized capital gains (losses)              |  |                | 218     |               |   | 668            |   |               | 349     |  
|Other income (expense)                           |  |                | 173     |               |   | 416            |   |               | 139     |  
|                                                 |  |                |         |               |   |                |   |               |         |  
|Total revenues                                   |  |                | 72,605  |               |   | 72,386         |   |               | 79,682  |  
|                                                 |  |                |         |               |   |                |   |               |         |  
|Operating Expenses:                              |  |                |         |               |   |                |   |               |         |  
|Net losses and loss adjustment expenses incurred |  |                | 44,040  |               |   | 43,291         |   |               | 48,526  |  
|Commission income                                |  |                | 10,627  |               |   | 8,876          |   |               | 9,194   |  
|Other operating expenses                         |  |                | 11,778  |               |   | 12,418         |   |               | 13,539  |  
|Interest expense                                 |  |                | 97      |               |   | 86             |   |               | 68      |  
|                                                 |  |                |         |               |   |                |   |               |         |  
|Total operating expenses                         |  |                | 66,542  |               |   | 64,671         |   |               | 71,327  |  
|                                                 |  |                |         |               |   |                |   |               |         |  
|Income before income tax expense                 |  |                | 6,063   |               |   | 7,715          |   |               | 8,355   |  
|Income tax expense                               |  |                | 1,353   |               |   | 1,558          |   |               | 2,047   |  
|                                                 |  |                |         |               |   |                |   |               |         |  
|Net income                                       |  | $              | 4,710   |               | $ | 6,157          |   | $             | 6,308   |  
|                                                 |  |                |         |               |   |                |   |               |         |  
|Comprehensive income                             |  | $              | 4,805   |               | $ | 10,338         |   | $             | 2,860   |  
|Combined ratio                                   |  |                | 97.9    | %             |   | 95.3           | % |               | 92.9    | %
|Per share data:                                  |  |                |         |               |   |                |   |               |         |  
|Net income (loss) per shareBasic                |  | $              | 0.55    |               | $ | 0.72           |   | $             | 0.74    |  
|Net income (loss) per shareDiluted              |  | $              | 0.54    |               | $ | 0.71           |   | $             | 0.73    |  

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 $20.5 million or $1.68 and $2.14 per diluted share for the fourth quarter and twelve months of 2004, respectively. 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.

F-42  
A N N U A L  
R E P O R T  
2 0 0 4

---



SCHEDULE I

The Navigators Group, Inc. and Subsidiaries
Summary of Consolidated InvestmentsOther Than Investments
In Related Parties
December 31, 2004

($ in thousands)

|Type of Investment              |                                                                                                             | Amortized
Cost or Cost |         | Fair value |  | Amount at which
shown in the
consolidated
balance sheet |        
|------------------------------- | ----------------------------------------------------------------------------------------------------------- | ---------------------- | ------- | ---------- |  | ------------------------------------------------------- | -------
|Fixed maturities:               |                                                                                                             |                        |         |            |  |                                                         |        
|                                | U.S. Government Treasury Bonds, GNMAs, U.S. Government non-guaranteed Agencies and foreign government bonds |                        | $       | 245,366    |  | $                                                       | 247,105
|                                | States, municipalities and political subdivisions                                                           |                        |         | 136,553    |  |                                                         | 138,902
|                                | Mortgage- and asset-backed securities (excluding GNMAs)                                                     |                        |         | 190,018    |  |                                                         | 191,459
|                                | Corporate bonds                                                                                             |                        |         | 141,112    |  |                                                         | 144,968
|                                |                                                                                                             |                        |         |            |  |                                                         |        
|                                | Total fixed maturities (1)                                                                                  |                        |         | 713,049    |  |                                                         | 722,434
|                                |                                                                                                             |                        |         |            |  |                                                         |        
|Equity securitiescommon stocks |                                                                                                             |                        | 19,101  |            |  | 21,170                                                  |        
|Cash and short-term investments |                                                                                                             |                        | 111,329 |            |  | 111,329                                                 |        
|                                |                                                                                                             |                        |         |            |  |                                                         |        
|                                | Total                                                                                                       |                        | $       | 843,479    |  | $                                                       | 854,933
|                                |                                                                                                             |                        |         |            |  |                                                         |        

---

A N N U A L  
R E P O R T  
2 0 0 4  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                                        |                                                                                                                                
|                                                   | Accounts payable and other liabilities                                                                                         
|                                                   |                                                                                                                                
|                                                   |                                                                                                                                
|                                                   |                                                                                                                                
|STOCKHOLDERS' EQUITY                               |                                                                                                                                
|                                                   | Preferred stock, $.10 par value, 1,000,000 shares authorized, none issued                                                      
|                                                   | Common stock, $.10 par value, 20,000,000 shares authorized; issued and outstanding: 12,657,160 for 2004 and 12,535,360 for 2003
|                                                   | Additional paid-in capital                                                                                                     
|                                                   | Retained earnings                                                                                                              
|                                                   | Accumulated other comprehensive income:                                                                                        
|                                                   |                                                                                                                                
|                                                   |                                                                                                                                
|                                                   |                                                                                                                                
|                                                   |                                                                                                                                
|                                                   |                                                                                                                                
|                                                   |                                                                                                                                
|                                                   |                                                                                                                                

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

---



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 income of wholly owned subsidiaries               |                        
|                                                                              |                        
|Net Income                                                                    |                        
|                                                                              |                        

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

---



SCHEDULE II

The Navigators Group, Inc. and Subsidiaries
Condensed Financial Information of Registrant (Continued)
The Navigators Group, Inc.
Statements of Cash Flows
(Parent Company)

($ in thousands)

|                            |                                                                         | Year Ended December 31,                                           |                                                     |                                                    
|--------------------------- | ----------------------------------------------------------------------- | ----------------------------------------------------------------- | --------------------------------------------------- | ---------------------------------------------------
|
|Operating activities:       |                                                                         |                                                                   |                                                     |                                                    
|                            | Net income                                                              |                                                                   | $                                                   | 34,865                                             
|                            | Adjustments to reconcile net income to net cash provided by operations: |                                                                   |                                                     |                                                    
|                            |                                                                         | Equity in undistributed net (income) of wholly owned subsidiaries |                                                     |                                                    
|                            |                                                                         | Other                                                             |                                                     |                                                    
|                            |                                                                         |                                                                   |                                                     |                                                    
|                            |                                                                         |                                                                   | Net cash provided by (used in) operating activities |                                                    
|                            |                                                                         |                                                                   |                                                     |                                                    
|Investing activities:       |                                                                         |                                                                   |                                                     |                                                    
|                            | Investment in affiliate                                                 |                                                                   |                                                     | (25,039                                            
|                            | Net (increase) decrease in short-term investments                       |                                                                   |                                                     | 1,165                                              
|                            |                                                                         |                                                                   |                                                     |                                                    
|                            |                                                                         |                                                                   |                                                     | Net cash provided by (used in) investing activities
|                            |                                                                         |                                                                   |                                                     |                                                    
|Financing activities:       |                                                                         |                                                                   |                                                     |                                                    
|                            | Net proceeds from stock offering                                        |                                                                   |                                                     |                                                   
|                            | Repayment of bank loan                                                  |                                                                   |                                                     |                                                   
|                            | Proceeds of stock issued from Employee Stock Purchase Plan              |                                                                   |                                                     | 434                                                
|                            | Proceeds of stock issued from exercise of stock options                 |                                                                   |                                                     | 1,144                                              
|                            |                                                                         |                                                                   |                                                     |                                                    
|                            |                                                                         |                                                                   |                                                     | Net cash provided by (used in) financing activities
|                            |                                                                         |                                                                   |                                                     |                                                    
|Increase (decrease) in cash |                                                                         |                                                                   | (1,859                                              | )                                                  
|Cash at beginning of year   |                                                                         |                                                                   | 2,047                                               |                                                    
|                            |                                                                         |                                                                   |                                                     |                                                    
|Cash at end of year         |                                                                         | $                                                                 | 188                                                 |                                                    
|                            |                                                                         |                                                                   |                                                     |                                                    

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

---



SCHEDULE III

The Navigators Group, Inc. and Subsidiaries
Supplementary Insurance Information

($ in thousands)

|                             |                     | 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, 2004 |                     |                                   |        |                                                 |   |                   |         |                                          |         |                    |   |                           |   |                                              |         |                                                       |   |                              |        |                    
|                             | Insurance Companies |                                   | $      | 8,067                                           |   | $                 | 683,118 |                                          | $       | 180,667            |   | $                         |  |                                              | $       | 228,759                                               |   | $                            | 24,118 |                    
|                             | Lloyd's Operations  |                                   |        | 15,815                                          |   |                   | 282,999 |                                          |         | 90,303             |   |                           |  |                                              |         | 82,236                                                |   |                              | 2,645  |                    
|                             |                     |                                   |        |                                                 |   |                   |         |                                          |         |                    |   |                           |   |                                              |         |                                                       |   |                              |        |                    
|                             |                     | $                                 | 23,882 |                                                 | $ | 966,117           |         | $                                        | 270,970 |                    | $ |                          |   | $                                            | 310,995 |                                                       | $ | 26,763                       |        | $                  
|                             |                     |                                   |        |                                                 |   |                   |         |                                          |         |                    |   |                           |   |                                              |         |                                                       |   |                              |        |                    
|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 |                                          |         | 36,780             |   |                           |  |                                              |         | 73,693                                                |   |                              | 2,454  |                    
|                             |                     |                                   |        |                                                 |   |                   |         |                                          |         |                    |   |                           |   |                                              |         |                                                       |   |                              |        |                    
|                             |                     | $                                 | 23,632 |                                                 | $ | 489,642           |         | $                                        | 167,362 |                    | $ |                          |   | $                                            | 222,104 |                                                       | $ | 17,943                       |        | $                  
|                             |                     |                                   |        |                                                 |   |                   |         |                                          |         |                    |   |                           |   |                                              |         |                                                       |   |                              |        |                    

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A N N U A L  
R E P O R T  
2 0 0 4  S-5

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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, 2004 |                   |               |   |                          |  |                              |         |            |   |                                     | 
|                             | Property-Casualty |               | $ | 617,228                  |  | $                            | 383,416 |            | $ | 78,918                              | 
|                             |                   |               |   |                          |  |                              |         |            |   |                                     | 
|Year ended December 31, 2003 |                   |               |   |                          |  |                              |         |            |   |                                     | 
|                             | Property-Casualty |               | $ | 534,180                  |  | $                            | 299,364 |            | $ | 72,312                              | 
|                             |                   |               |   |                          |  |                              |         |            |   |                                     | 
|Year ended December 31, 2002 |                   |               |   |                          |  |                              |         |            |   |                                     | 
|                             | Property-Casualty |               | $ | 321,197                  |  | $                            | 181,748 |            | $ | 126,641                             | 
|                             |                   |               |   |                          |  |                              |         |            |   |                                     | 

S-6  
A N N U A L  
R E P O R T  
2 0 0 4

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SCHEDULE V

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

($ in thousands)

|Description                             |  | Balance at
January 1,
2004 |        | Charged (Credited) to
Costs and Expenses |   | Charged to
Other Accounts |  | Deductions
Describe |   | Balance at
December 31,
2004
|--------------------------------------- |  | -------------------------- | ------ | ---------------------------------------- | - | ------------------------- |  | ------------------- | - | ----------------------------
|Allowance for uncollectible reinsurance |  | $                          | 33,068 |                                          | $ | 1,959                     |  | $                   |  |                             
|                                        |  |                            |        |                                          |   |                           |  |                     |   |                             
|Valuation allowance in deferred taxes   |  | $                          | 3,274  |                                          | $ | 1,219                     |  | $                   |  |                             
|                                        |  |                            |        |                                          |   |                           |  |                     |   |                             

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A N N U A L  
R E P O R T  
2 0 0 4  S-7

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SCHEDULE VI

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

($ in thousands)

|                             |  |  |   |        |  |   |         |  |   |   |  |   |         |  | Losses and loss adjustment
expenses incurred related to |         |  |   |        |  |   |        
|---------------------------- |  |  | - | ------ |  | - | ------- |  | - | - |  | - | ------- |  | ------------------------------------------------------- | ------- |  | - | ------ |  | - | -------
|
|
|
|Consolidated Subsidiaries    |  |  |   |        |  |   |         |  |   |   |  |   |         |  |                                                         |         |  |   |        |  |   |        
|Year ended December 31, 2004 |  |  | $ | 23,882 |  | $ | 966,117 |  | $ |  |  | $ | 270,970 |  | $                                                       | 310,995 |  | $ | 26,763 |  | $ | 191,850
|                             |  |  |   |        |  |   |         |  |   |   |  |   |         |  |                                                         |         |  |   |        |  |   |        
|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
|                             |  |  |   |        |  |   |         |  |   |   |  |   |         |  |                                                         |         |  |   |        |  |   |        

---

S-8  
A N N U A L  
R E P O R T  
2 0 0 4

---



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 Company 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 Company and the 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 Company and the 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 Company 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                                                                                                                 |  | (c)
|10-23       |  | Form of Stock Grant Award Certificate and Restricted Stock Agreement for the 2002 Stock Incentive Plan (approved at Annual Meeting of Shareholders held May 30, 2002) |  | (q)
|10-24       |  | Form of Option Award Certificate for the 2002 Stock Incentive Plan (approved at Annual Meeting of Shareholders held May 30, 2002)                                     |  | (q)
|10-25       |  | Agreement with Jane E. Keller                                                                                                                                         |  | (q)
|10-26       |  | Common Stock Grant Award to Stanley A. Galanski under the 2002 Stock Incentive Plan                                                                                   |  | (r)
|10-27       |  | Commutation Agreement between Navigators Insurance Company and Somerset Insurance Limited                                                                             |  | (s)
|10-28       |  | Second Amended and Restated Credit Agreement among the Company and the Lenders dated January 31, 2005                                                                 |  | (t)
|11-1        |  | Statement re Computation of Per Share Earnings                                                                                                                        |  | ** 
|21-1        |  | Subsidiaries of Registrant                                                                                                                                            |  | ** 
|            |  |                                                                                                                                                                       |  |    

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|23-1 |  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                                                                                        |  | **
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|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                                                                                                                                                                                                                                                                                                                                                                  |  | **
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(c)(d)(e)(f)(g)(h)
(i)(j)(k)(l)(m)(n)
(o)(p)(q)(r) |  | Previously filed with the Company's document as indicated and incorporated herein by reference thereto: Form 10-K for the year ended December 31, 1996 (d), 1997 (e), 1998 (f), 2002 (i); 2003 (c); Form 10-Q for
September 30, 2000 (g), March 31, 2001 (h), September 30, 2002 (k); September 30, 2003 (n); September 30, 2004 (q); 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 S-8 filed July 26, 2002 (File No. 333-97183) (o); Form S-8 Filed June 20, 2003 (File No. 333-
106317) (p); Form 8-K filed December 14, 2004 (r); Form 8-K filed January 18, 2005 (s); Form 8-K filed February 4, 2005 (t).
|*                                                  |  | Compensatory plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|**                                                 |  | Included herein.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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