**FORM 10-Q**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**QuarterlyReport Under Section 13 or 15 (d)of the Securities Exchange Act of 1934**

 

**Forthe Quarterly Period Ended  March 31, 2003**

** **

**Commissionfile number  0-15886**

 

**The Navigators Group, Inc.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                                         |   | **13-3138397**                     |
|--------------------------------------------------------------------------------------|--------|------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                      |   | (IRS Employer  Identification No.) |
|                                                                                 |   |                               |
| **One Penn Plaza, New York, New York**                                               |   | **10119**                          |
| (Address of principal executive offices)                                             |   | (Zip Code)                         |
|                                                                                 |
| **(212)   244-2333**                                                            |
| (Registrant’s telephone number, including area code)                            |
|                                                                                 |
|                                                                                 |
| (Former name, former address and former fiscal year, if changed since  last report.) |

 

Indicate by check mark whetherthe registrant: (1) has filed all reports required to be filed by Section 13 or15 (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 suchreports), and (2) has been subject to such filing requirements for the past 90days.

 

Yes    ý    No    o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

 

Yes    ý    No    o

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock as of the latestpracticable date.

 

On May 6, 2003, there were8,515,535 shares of $0.10 par value common stock issued and outstanding.

 

 

----

 

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

 

**INDEX**

 
| Part I.   FINANCIAL INFORMATION:                                                                      |
|------------------------------------------------------------------------------------------------------------|
|                                                                                                       |
| Item  1.  Financial Statements                                                                        |
|                                                                                                       |
| Consolidated Balance Sheets  March 31, 2003 (unaudited) and December 31, 2002                              |
|                                                                                                       |
| Consolidated Statements of Income  (unaudited)  Three Months Ended March 31, 2003 and 2002                 |
|                                                                                                       |
| Consolidated Statements of Cash Flows  (unaudited)  Three Months Ended March 31, 2003 and 2002             |
|                                                                                                       |
| Notes to Interim Consolidated Financial  Statements (unaudited)                                            |
|                                                                                                       |
| Item  2.  Management’s Discussion and  Analysis of Financial Condition and Results of Operations |
|                                                                                                       |
| Item  3.  Quantitative and Qualitative  Disclosures About Market Risk                                 |
|                                                                                                       |
| Item  4.  Controls and Procedures                                                                     |
|                                                                                                       |
| Part II.   OTHER INFORMATION                                                                          |
|                                                                                                       |
| Signature                                                                                                  |
|                                                                                                       |
| Certifications of Chief Executive Officer  and Chief Financial Officer                                     |
|                                                                                                       |
| Index of Exhibits                                                                                          |

 

2

----

 

**Part 1****.****           Financial Information**

 

**Item 1****.****           Financial Statements**

** **

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

**CONSOLIDATED BALANCE SHEETS**

*(In thousands,except share data)*

 
|                                                                                                                                                                            |   | **March 31,  2003** |      | **December 31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-----------|------------------------|--------|
|                                                                                                                                                                            |   | **(Unaudited)**     |      |                   |   |
| **ASSETS**                                                                                                                                                                      |   |                |      |                   |   |
| Investments and cash:                                                                                                                                                           |   |                |      |                   |   |
| Fixed maturities, available-for-sale, at  fair value (amortized cost: 2003, $362,122;  2002, $351,821)                                                                          |   | $                   | 377,406   |                   | $      | 366,676 |   |
| Equity securities, available-for-sale, at  fair value (cost: 2003, $11,972; 2002, $12,286)                                                                                      |   | 10,934              |      | 11,674                 |   |
| Short-term investments, at cost which  approximates fair value                                                                                                                  |   | 66,428              |      | 61,092                 |   |
| Cash                                                                                                                                                                            |   | 15,803              |      | 13,443                 |   |
| Total investments and cash                                                                                                                                                      |   | 470,571             |      | 452,885                |   |
|                                                                                                                                                                            |   |                |      |                   |   |
| Premiums in course of collection                                                                                                                                                |   | 137,766             |      | 108,672                |   |
| Commissions receivable                                                                                                                                                          |   | 3,514               |      | 3,112                  |   |
| Prepaid reinsurance premiums                                                                                                                                                    |   | 95,711              |      | 58,902                 |   |
| Reinsurance receivable on paid and unpaid  losses and loss adjustment expenses                                                                                                  |   | 252,675             |      | 243,153                |   |
| Federal income tax recoverable                                                                                                                                                  |   | —              |      | 826                    |   |
| Net deferred income tax benefit                                                                                                                                                 |   | 6,193               |      | 6,470                  |   |
| Deferred policy acquisition costs                                                                                                                                               |   | 28,553              |      | 23,632                 |   |
| Accrued investment income                                                                                                                                                       |   | 4,268               |      | 3,309                  |   |
| Goodwill                                                                                                                                                                        |   | 5,117               |      | 5,167                  |   |
| Receivable for securities                                                                                                                                                       |   | 647                 |      |                |   |
| Other assets                                                                                                                                                                    |   | 14,077              |      | 11,791                 |   |
| Total assets                                                                                                                                                                    |   | $                   | 1,019,092 |                   | $      | 917,919 |   |
|                                                                                                                                                                            |   |                |      |                   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                   |   |                |      |                   |   |
| Liabilities:                                                                                                                                                                    |   |                |      |                   |   |
| Reserves for losses and loss adjustment  expenses                                                                                                                               |   | $                   | 507,432   |                   | $      | 489,642 |   |
| Unearned premium                                                                                                                                                                |   | 226,691             |      | 167,372                |   |
| Reinsurance balances payable                                                                                                                                                    |   | 80,472              |      | 55,574                 |   |
| Notes payable to banks                                                                                                                                                          |   | 12,750              |      | 14,500                 |   |
| Payable for securities                                                                                                                                                          |   | —              |      | 5,327                  |   |
| Federal income tax payable                                                                                                                                                      |   | 219                 |      | —                 |   |
| Accounts payable and other liabilities                                                                                                                                          |   | 14,735              |      | 14,229                 |   |
| Total liabilities                                                                                                                                                               |   | 842,299             |      | 746,644                |   |
|                                                                                                                                                                            |   |                |      |                   |   |
| Stockholders’ equity:                                                                                                                                                      |   |                |      |                   |   |
| Preferred stock, $.10 par value; authorized  1,000,000 shares; none issued                                                                                                      |   | —              |      | —                 |   |
| Common stock, $.10 par value; authorized  shares 20,000,000 for 2003 and 2002; issued and outstanding shares (net of  treasury stock) 8,515,535 for 2003 and 8,486,272 for 2002 |   | 852                 |      | 851                    |   |
| Additional paid-in capital                                                                                                                                                      |   | 40,617              |      | 40,141                 |   |
| Treasury stock held at cost (shares: 16,423  for 2002)                                                                                                                          |   | —              |      | (236                   | )      |
| Accumulated other comprehensive income                                                                                                                                          |   | 9,703               |      | 9,732                  |   |
| Retained earnings                                                                                                                                                               |   | 125,621             |      | 120,787                |   |
| Total stockholders’ equity                                                                                                                                                 |   | 176,793             |      | 171,275                |   |
| Total liabilities and stockholders’ equity                                                                                                                                 |   | $                   | 1,019,092 |                   | $      | 917,919 |   |

 

See accompanying notes to interim consolidated financial statements.

 

3

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

**CONSOLIDATED STATEMENTS OF INCOME**

*(In thousands,except net income per share)*

 
|                                              |   | **Three  Months Ended  March 31,** |   |
|---------------------------------------------------|--------|------------------------------------|--------|
|                                              |   | **2003**                           |   | **2002** |   |
|                                              |   | **(Unaudited)**                    |   |
| Revenues:                                         |   |                               |   |   |   |
| Net earned premium                                |   | $                                  | 66,314 |   | $ | 39,849 |   |
| Commission income                                 |   | 1,239                              |   | 1,101 |   |
| Net investment income                             |   | 4,661                              |   | 4,942 |   |
| Net realized capital gains (losses)               |   | 218                                |   | (293 | ) |
| Other income                                      |   | 173                                |   | 210 |   |
| Total revenues                                    |   | 72,605                             |   | 45,809 |   |
|                                              |   |                               |   |   |   |
| Operating expenses:                               |   |                               |   |   |   |
| Net losses and loss adjustment expenses  incurred |   | 44,040                             |   | 23,783 |   |
| Commission expense                                |   | 10,627                             |   | 7,658 |   |
| Other operating expenses                          |   | 11,587                             |   | 9,887 |   |
| Interest expense                                  |   | 97                                 |   | 160 |   |
| Total operating expenses                          |   | 66,351                             |   | 41,488 |   |
|                                              |   |                               |   |   |   |
| Income before income tax expense                  |   | 6,254                              |   | 4,321 |   |
|                                              |   |                               |   |   |   |
| Income tax expense (benefit):                     |   |                               |   |   |   |
| Current                                           |   | 1,134                              |   | 1,317 |   |
| Deferred                                          |   | 286                                |   | (446 | ) |
| Total income tax expense                          |   | 1,420                              |   | 871 |   |
|                                              |   |                               |   |   |   |
| Net income                                        |   | $                                  | 4,834  |   | $ | 3,450 |   |
|                                              |   |                               |   |   |   |
| Net income per common share:                      |   |                               |   |   |   |
| Basic                                             |   | $                                  | 0.57   |   | $ | 0.41 |   |
| Diluted                                           |   | $                                  | 0.55   |   | $ | 0.40 |   |
|                                              |   |                               |   |   |   |
| Average common shares outstanding:                |   |                               |   |   |   |
| Basic                                             |   | 8,494                              |   | 8,436 |   |
| Diluted                                           |   | 8,721                              |   | 8,626 |   |

 

See accompanying notes to interim consolidated financial statements.

 

4

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

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

*(In thousands)*

 
|                                                                                         |   | **Three  Months Ended  March 31,** |   |
|----------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                         |   | **2003**                           |   | **2002** |   |
|                                                                                         |   | **(Unaudited)**                    |   |
| Operating activities:                                                                        |   |                               |   |   |   |
| Net income                                                                                   |   | $                                  | 4,834  |   | $ | 3,450 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |   |                               |   |   |   |
| Depreciation & amortization                                                              |   | 296                                |   | 225 |   |
| Net deferred income tax                                                                      |   | 286                                |   | (446 | ) |
| Net realized capital (gains) losses                                                          |   | (218                               | )      | 293 |   |
| Changes in assets and liabilities:                                                           |   |                               |   |   |   |
| Reinsurance receivable on paid and unpaid  losses and loss adjustment expenses               |   | (9,522                             | )      | 19,912 |   |
| Reserve for losses and loss adjustment  expenses                                             |   | 17,790                             |   | (419 | ) |
| Prepaid reinsurance premiums                                                                 |   | (36,809                            | )      | (22,740 | ) |
| Unearned premium                                                                             |   | 59,319                             |   | 53,344 |   |
| Premiums in course of collection                                                             |   | (29,094                            | )      | (16,455 | ) |
| Commissions receivable                                                                       |   | (402                               | )      | (1,982 | ) |
| Deferred policy acquisition costs                                                            |   | (4,921                             | )      | (8,713 | ) |
| Accrued investment income                                                                    |   | (959                               | )      | (437 | ) |
| Reinsurance balances payable                                                                 |   | 24,898                             |   | 166 |   |
| Federal income tax                                                                           |   | 1,045                              |   | 1,221 |   |
| Other                                                                                        |   | (508                               | )      | 690 |   |
| Net cash provided by operating activities                                                    |   | 26,035                             |   | 28,109 |   |
|                                                                                         |   |                               |   |   |   |
| Investing activities:                                                                        |   |                               |   |   |   |
| Fixed maturities, available-for-sale                                                         |   |                               |   |   |   |
| Redemptions and maturities                                                                   |   | 2,316                              |   | 324 |   |
| Sales                                                                                        |   | 66,544                             |   | 34,169 |   |
| Purchases                                                                                    |   | (78,909                            | )      | (49,674 | ) |
| Equity securities, available-for-sale                                                        |   |                               |   |   |   |
| Sales                                                                                        |   | 476                                |   | 176 |   |
| Purchases                                                                                    |   | (424                               | )      | (265 | ) |
| Change in receivable/payable for securities                                                  |   | (5,974                             | )      | (574 | ) |
| Net change in short-term investments                                                         |   | (5,337                             | )      | (5,824 | ) |
| Purchase of property and equipment                                                           |   | (637                               | )      | (101 | ) |
| Net cash (used in) investing activities                                                      |   | (21,945                            | )      | (21,769 | ) |
|                                                                                         |   |                               |   |   |   |
| Financing activities:                                                                        |   |                               |   |   |   |
| Repayment of bank loan                                                                       |   | (1,750                             | )      | (1,500 | ) |
| Proceeds from exercise of stock options                                                      |   | 20                                 |   | 211 |   |
| Net cash (used in) financing activities                                                      |   | (1,730                             | )      | (1,289 | ) |
|                                                                                         |   |                               |   |   |   |
| Increase in cash                                                                             |   | 2,360                              |   | 5,051 |   |
| Cash at beginning of year                                                                    |   | 13,443                             |   | 5,816 |   |
| Cash at end of period                                                                        |   | $                                  | 15,803 |   | $ | 10,867 |   |
|                                                                                         |   |                               |   |   |   |
| Supplemental disclosures of cash flow  information:                                          |   |                               |   |   |   |
| Federal, state and local income tax paid                                                     |   | $                                  | 100    |   | $ | 236 |   |
| Interest paid                                                                                |   | 97                                 |   | 15 |   |
| Issuance of stock to directors                                                               |   | 72                                 |   | 60 |   |

 

See accompanying notes to interim consolidated financial statements.

 

5

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

 

**Notes to Interim Consolidated FinancialStatements**

*(Unaudited)*

 

(1)                AccountingPolicies

 

The interim consolidated financial statements are unaudited but reflectall adjustments which, in the opinion of management, are necessary to provide afair statement of the results of The Navigators Group, Inc. and itssubsidiaries (the “Company”) for the interim periods presented on the basis ofaccounting principles generally accepted in the United States of America(“GAAP”).  All such adjustments are of anormal recurring nature.  Allsignificant intercompany transactions and balances have been eliminated.  The preparation of these financialstatements requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosures of contingentassets and liabilities at the date of the financial statements and the reportedrevenues and expenses during the reporting periods.  The results of operations for any interim period are notnecessarily indicative of results for the full year.  These financial statements should be read in conjunction with theconsolidated financial statements and notes contained in the Company’s 2002Annual Report on Form 10-K.  Certainamounts for prior periods have been reclassified to conform to the currentperiod’s presentation.

 

(2)                ReinsuranceCeded

 

The Company’s ceded earned premiums were $47,100,000 and $28,783,000for the three months ended March 31, 2003 and 2002, respectively.  The Company’s ceded incurred losses were$27,537,000 and $15,564,000 for the three months ended March 31, 2003 and 2002,respectively.

 

(3)                Segmentsof an Enterprise

 

The Company’s subsidiaries are primarily engaged in the underwritingand management of property and casualty insurance.  The Company’s segments include the Insurance Companies, theNavigators Agencies and the Lloyd’s Operations, each of which is managedseparately.  The Insurance Companiesconsist of Navigators Insurance Company (“Navigators Insurance”) and NICInsurance Company which are primarily engaged in underwriting marine insuranceand related lines of business, general liability insurance and professionalliability insurance.  The NavigatorsAgencies are underwriting management companies which produce, manage andunderwrite insurance and reinsurance for the Insurance Companies andnon-affiliated companies.  The Lloyd’sOperations consist primarily of a Lloyd’s managing agency and two Lloyd’scorporate members which underwrite marine and related lines of business atLloyd’s of London.

 

The results of the Insurance Companies and the Lloyd’s Operations aremeasured taking into account net earned premiums, incurred losses and lossexpenses, commission expense and other underwriting expenses.  The Navigators Agencies’ results include commissionincome less other operating expenses. Each segment maintains its own investments on which it earns income andrealizes capital gains or losses.  Otheroperations include intersegment income and expense in the form of affiliatedcommissions, income and expense from corporate operations, and consolidatingadjustments.

 

6

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The following tables presentfinancial data by segment for the periods indicated:

 
|                                                                               |   | **Three  Months Ended  March 31,** |   |
|------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                               |   | **2003**                           |   | **2002** |   |
|                                                                               |   | **(In thousands)**                 |   |
|                                                                               |   |                               |   |   |   |
| Revenue, excluding net investment income  and net realized capital gains (losses): |   |                               |   |   |   |
| Insurance Companies:                                                               |   |                               |   |   |   |
| Marine                                                                             |   | $                                  | 22,736 |   | $ | 16,094 |   |
| General Liability                                                                  |   | 22,910                             |   | 12,681 |   |
| Professional Liability                                                             |   | 1,427                              |   | 116 |   |
| Surety                                                                             |   | 40                                 |   | — |   |
| Other                                                                              |   | 471                                |   | 108 |   |
| Insurance Companies Total                                                          |   | 47,584                             |   | 28,999 |   |
| Lloyd’s Operations:                                                           |   |                               |   |   |   |
| Marine                                                                             |   | 17,638                             |   | 10,790 |   |
| Engineering and Construction                                                       |   | 279                                |   | 7 |   |
| Onshore Energy                                                                     |   | 836                                |   | 17 |   |
| Other                                                                              |   | 1,248                              |   | 105 |   |
| Lloyd’s Operations Total                                                      |   | 20,001                             |   | 10,919 |   |
| Navigators Agencies                                                                |   | 6,591                              |   | 6,108 |   |
| Other operations                                                                   |   | (6,450                             | )      | (4,866 | ) |
| Total                                                                              |   | $                                  | 67,726 |   | $ | 41,160 |   |
|                                                                               |   |                               |   |   |   |
| Income (loss) before tax expense (benefit):                                        |   |                               |   |   |   |
| Insurance Companies                                                                |   | $                                  | 5,044  |   | $ | 4,926 |   |
| Lloyd’s Operations                                                            |   | 1,915                              |   | 872 |   |
| Navigators Agencies                                                                |   | 362                                |   | 390 |   |
| Other operations                                                                   |   | (1,067                             | )      | (1,867 | ) |
| Total                                                                              |   | $                                  | 6,254  |   | $ | 4,321 |   |
|                                                                               |   |                               |   |   |   |
| Income tax expense (benefit):                                                      |   |                               |   |   |   |
| Insurance Companies                                                                |   | $                                  | 1,559  |   | $ | 1,531 |   |
| Lloyd’s Operations                                                            |   | —                             |   | — |   |
| Navigators Agencies                                                                |   | 127                                |   | 94 |   |
| Other operations                                                                   |   | (266                               | )      | (754 | ) |
| Total                                                                              |   | $                                  | 1,420  |   | $ | 871 |   |
|                                                                               |   |                               |   |   |   |
| Net income (loss):                                                                 |   |                               |   |   |   |
| Insurance Companies                                                                |   | $                                  | 3,485  |   | $ | 3,395 |   |
| Lloyd’s Operations                                                            |   | 1,915                              |   | 872 |   |
| Navigators Agencies                                                                |   | 235                                |   | 296 |   |
| Other operations                                                                   |   | (801                               | )      | (1,113 | ) |
| Total                                                                              |   | $                                  | 4,834  |   | $ | 3,450 |   |

 

7

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(4)                ComprehensiveIncome

 

Comprehensive income encompasses all changes in stockholders’ equityincluding net income, net unrealized capital gains and losses on available forsale securities, and foreign currency translation adjustments.

 

The following table summarizes comprehensive income for the threemonths ended March 31, 2003 and 2002:

 
|                                                                                                                                   |   | **March 31,**      |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|
|                                                                                                                                   |   | **2003**           |   | **2002** |   |
|                                                                                                                                   |   | **(In thousands)** |   |
|                                                                                                                                   |   |               |   |   |   |
| Net income                                                                                                                             |   | $                  | 4,834  |   | $ | 3,450 |   |
| Other comprehensive income (loss), net of  tax:                                                                                        |   |               |   |   |   |
| Net unrealized gains on securities  available for sale:                                                                                |   |               |   |   |   |
| Unrealized holding gains arising during  period (net of tax expense (benefit) of   $72 for 2003 and $(843) for 2002)              |   | 222                |   | (2,611 | ) |
| Less: reclassification adjustment for gains  included in net income (net of tax expense (benefit) of $41 for 2003 and  $(98) for 2002) |   | 177                |   | (195 | ) |
| Net unrealized gains on securities                                                                                                     |   | 45                 |   | (2,416 | ) |
| Foreign currency translation gain  adjustment (net of tax expense of $(40) for 2003 and $(252) for 2002)                               |   | (74                | )      | (486 | ) |
| Other comprehensive income (loss)                                                                                                      |   | (29                | )      | (2,902 | ) |
|                                                                                                                                   |   |               |   |   |   |
| Comprehensive income                                                                                                                   |   | $                  | 4,805  |   | $ | 548 |   |

 

The following table summarizes the components of accumulated othercomprehensive income:

 
|                                                                                                             |   | **March 31,  2003** |   | **December  31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|-------------------------|--------|
|                                                                                                             |   | **(In thousands)**  |   |
|                                                                                                             |   |                |   |                    |   |
| Net unrealized gains on securities  available-for-sale (net of tax expense of $4,724 in 2003 and $4,693 in 2002) |   | $                   | 9,544  |                    | $      | 9,499 |   |
| Foreign currency translation adjustment  (net of tax expense of $85 in 2003 and $125 in 2002)                    |   | 159                 |   | 233                     |   |
|                                                                                                             |   |                |   |                    |   |
| Accumulated other comprehensive income                                                                           |   | $                   | 9,703  |                    | $      | 9,732 |   |

 

(5)                Stock-basedCompensation

 

At March 31, 2002, the Company's stock option plans are accounted forunder the recognition and measurement principles of the *Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees*, which requirescompensation expense to be recognized only if the fair value of the underlyingstock at the grant date exceeds the exercise price of the option.  Accordingly, compensation expense of $15,000has been recognized for stock options in the first quarter of 2003.  Although no amounts were expensed in thefirst quarter of 2002, had expense been recorded as described above, the amountwould have been approximately $5,000. The following table illustrates the effect on net income and earningsper share if the Company had applied the fair value recognition provisions ofthe Financial Accounting Standards Board (“FASB”) in the Statement of FinancialAccounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensationto stock-based employee compensation.

 

8

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|                                                                                                                         |   | **Three  Months Ended  March 31,** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
| **(In  thousands, except per share data)**                                                                                   |   | **2003**                           |   | **2002** |   |
|                                                                                                                         |   |                               |   |   |   |
| Net income:                                                                                                                  |   |                               |   |   |   |
| As reported                                                                                                                  |   | $                                  | 4,834  |   | $ | 3,450 |   |
| Deduct:                                                                                                                      |   |                               |   |   |   |
| Total stock-based compensation expense  determined under fair value based method for all awards, net of related tax  effects |   | 124                                |   | 66 |   |
|                                                                                                                         |   |                               |   |   |   |
| Pro-forma                                                                                                                    |   | $                                  | 4,710  |   | $ | 3,384 |   |
|                                                                                                                         |   |                               |   |   |   |
| Basic income per share:                                                                                                      |   |                               |   |   |   |
| As reported                                                                                                                  |   | $                                  | 0.57   |   | $ | 0.41 |   |
| Pro-forma                                                                                                                    |   | $                                  | 0.55   |   | $ | 0.40 |   |
| Diluted income per share:                                                                                                    |   |                               |   |   |   |
| As reported                                                                                                                  |   | $                                  | 0.55   |   | $ | 0.40 |   |
| Pro-forma                                                                                                                    |   | $                                  | 0.54   |   | $ | 0.39 |   |

 

Stock grants are expensed as they vest.  The amount charged to expense was $276,000 and $216,000 for thethree months ended March 31, 2003 and 2002, respectively.  In addition, $18,000 and $15,000 wereexpensed for the three months ended March 31, 2003 and 2002 for stock issuedannually to non-employee directors as part of their directors' compensation forserving on the Company's Board of Directors.

 

(6)                Applicationof New Accounting Standards

 

The Financial Accounting Standards Board (“FASB”) issued Statement ofFinancial Accounting Standards (“SFAS”) 141, *Business Combinations*, andSFAS 142, *Goodwilland Other Intangible Assets*. The Company adopted both SFAS 141 and SFAS 142 effective January 1,2002. SFAS 141 requires that the purchase method of accounting be used for allbusiness combinations initiated after September 30, 2001.  It also specifies that intangible assetsacquired in a purchase method business combination be recognized and reportedapart from goodwill.  SFAS 142 changesthe accounting for goodwill and intangible assets that have indefinite usefullives from an amortization approach to an impairment-only approach thatrequires that those assets be tested at least annually for impairment.  The Company completed its impairment reviewresulting in no impairment as of January 1, 2003.  Intangible assets that have finite useful lives will continue tobe amortized over their useful lives, but without an arbitrary ceiling on theiruseful lives.  No other intangibleassets were required to be reclassified and accounted for as an asset apartfrom goodwill upon adoption of SFAS 142. No expense for amortization of goodwill has been recorded in the firstthree months of 2003 or 2002.  Goodwillof $2,534,000 was recorded for the Navigators Agencies’ segment at both March31, 2003 and December 31, 2002, and $2,583,000 and $2,633,000 for the Lloyd’sOperations’ segment at March 31, 2003 and December 31, 2002, respectively.  Goodwill on the Company’s consolidatedbalance sheets may fluctuate due to changes in the foreign currency ratesbetween the U.S. dollar and the British pound. The adoption of SFAS 141 did not have any effect on the Company’sresults of operations or financial condition.

 

In June 2001, the FASB issued SFAS 143, *Accounting for Asset RetirementObligations*.  SFAS 143addresses financial accounting and reporting for obligations associated withthe retirement of tangible long-lived assets and the associated assetretirement costs.  The provisions ofSFAS 143 are effective for financial statements issued for fiscal yearsbeginning after September 15, 2002, with early application encouraged.  The adoption of this statement did not haveany effect on the Company’s results of operations or financial condition.

 

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In July 2002, the FASB issued SFAS 146, *Obligations Associated with DisposalActivities*.  SFAS 146addresses financial accounting and reporting for costs associated with adisposal activity.  This statementrequires a liability for a disposal obligation be recognized and measured atits fair value when it is incurred and that the guidance of SFAS 5, *Accountingfor Contingencies*, and FASB Interpretation No. 14, *ReasonableEstimation of the Amount of Loss*, do not apply to the recognitionand measurement of the liability.  Theprovisions of SFAS 146 are effective for disposal activities initiated afterDecember 31, 2002, with early application encouraged.  The adoption of this statement did not have any effect on theCompany’s results of operations or financial condition.

 

In November 2002, the FASB issued Interpretation No. 45, *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*.  This Interpretation clarifies therequirements for a guarantor’s accounting for the disclosures of certainguarantees issued and outstanding.  Thedisclosure requirements in this Interpretation are effective for financialstatements of interim or annual periods ending after December 15, 2002.  The adoption of this interpretation did nothave any effect on the Company’s results of operations or financial condition.

 

In December 2002, the FASB issued SFAS 148, *Accounting for Stock-Based Compensation, Amendment of FASB StatementNo. 123 (“SFAS 148”)*.  Theprovisions of this statement provide alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation.  The provisionsare effective for financial statements for fiscal years ending after December15, 2002.  We follow the disclosureprovisions of SFAS 123 *Accounting for StockBased Compensation*, as amended by SFAS 148.  These require pro forma net income andearnings per share information, which is calculated assuming we had accountedfor our stock option plans under the “fair value method” described in thosestatements.

 

In January 2003, the FASB issued Interpretation No. 46, *Consolidation of Variable Interest Entities.*  Interpretation 46 requires variable interestentities to be consolidated by their primary beneficiaries.  The adoption of this interpretation did nothave any effect on the Company’s financial condition or results of operations.

 

(7)                Lloyd’sParticipation

 

The Company records in its consolidated financial statements, itsproportionate share of Lloyd’s Syndicate 1221’s assets, liabilities and resultsof operations.  Such participation was97.4% of the portion of Syndicate 1221’s £125.0 million ($200.3 million) ofcapacity utilized for the 2003 underwriting year and 68.1% of the portion ofSyndicate 1221’s £75.0 million ($112.7 million) of capacity utilized for the2002 underwriting year.  Syndicate1221’s capacity is expressed net of commission (as is standard at Lloyd’s) ofapproximately 21%.  In 2003, the Companyparticipates in a larger percentage of the gross capacity and is reinsuring15.4% of its capacity under quota share reinsurance agreements to third partieswhich provide letters of credit used as collateral at Lloyd's.

 

 

The Company provides letters of credit to Lloyd’s to support itsSyndicate 1221 capacity.  If the Companyincreases its participation or if Lloyd’s changes the capital requirements, theCompany may be required to supply additional letters of credit or othercollateral acceptable to Lloyd’s, or reduce the capacity of Syndicate1221.  The letters of credit areprovided through the credit facility which the Company maintains with aconsortium of banks.  The creditfacility agreement requires that the banks vote whether or not to renew theletter of credit portion of the facility each year.  If the banks decide not to renew the letter of credit facility,the Company will need to find other sources to provide the letters of credit orother collateral in order to continue to participate in Syndicate 1221.

 

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(8)                IncomeTax - Valuation Allowance

 

The Company’s valuation allowance relating to its foreign operationsdecreased by $630,000 in the three months ended March 31, 2003 relating to thereduction in the loss carryforward at the Company’s foreign operationsresulting from income generated by these operations in 2003.  At March 31, 2003 and 2002, the Company hadloss carryforwards remaining at its foreign operations amounting to potentialfuture tax benefits of $3,899,000 and $5,434,000, respectively, along with avaluation allowance equal to these benefits. Although the foreign operations were profitable in 2003, the valuationallowance was released only to the extent of the 2003 profits since futureprofitability remains uncertain.  TheCompany needs to generate $12,998,000 of future foreign pretax income in orderto fully utilize the foreign loss carryforwards which can be carried forwardindefinitely.

 

The Company also had net state and local loss carryforwards amountingto potential future tax benefits of $2,075,000 and $1,733,000 at March 31, 2003and 2002, respectively, along with a valuation allowance equal to thesebenefits.  The Company needs to generate$11,537,000 of future state and local pretax income in order to fully utilizethe loss carryforwards which expire from 2019 to 2023.

 

(9)          TreasuryStock

 

During the first quarter of 2003, the Company issued the remaining16,423 shares of Treasury stock representing the vested portion of stock grantsto the Company’s President and a senior officer of a subsidiary.  The effect of the issuance reduced Treasurystock by $236,000 in the three months ended March 31, 2003.  During the first quarter of 2002, theCompany issued 2,985 shares of treasury stock to the non-employee directors aspart of the directors’ annual compensation for the prior year.   The effect of the issuance reduced Treasurystock by $43,000 in the first three months of 2002.

 

(10)          LegalProceedings

 

The Company is not a party to or the subject of, any material pendinglegal proceedings which depart from the ordinary routine litigation incident tothe kinds of business conducted by the Company, except for a suit concerningthe draw down of letters of credit.  In1997 and 1998, Navigators Insurance entered into certain reinsurance contractswith an Australian reinsurer.  Inaccordance with normal business practice, Navigators Insurance had secured thisexposure with letters of credit.  InApril 1999, in good faith and consistent with the terms of the letters ofcredit, Navigators Insurance drew down $3.2 million of the letters ofcredit.  The liquidator of the reinsurerhas commenced suit in Australia seeking to void the draw downs.  Although the Company believes it has strongdefenses against these claims and that the liquidators’ assertions run counterto prevailing Australian and U.S. law, there can be no assurance as to theoutcome of this litigation.   TheCompany intends to vigorously defend its position and is currently in theprocess of filing affidavits and motions seeking a prompt dismissal of theliquidators’ claims in Australian court.

 

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

 

**Item 2****.****                       Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Forward-looking Statements**

 

Some of thestatements in this Form 10-Q are “forward-looking statements” as defined in thePrivate Securities Litigation Act of 1995. We derive forward-looking information from information which wecurrently have and from assumptions which we make.  We cannot assure that results which we anticipate will beachieved since results may differ materially because of both known and unknownrisks and uncertainties which we face. The Company undertakes no obligation to publicly update or revise anyforward looking statements.  Factorswhich could cause actual results to differ materially from our forward lookingstatements include, but are not limited to:

 

•                  the effects ofdomestic and foreign economic conditions, and conditions which affect themarket for property and casualty insurance;

•                  changes in thelaws, rules and regulations which apply to our insurance companies;

•                  the effects of emerging claim and coverageissues on our business, including adverse judicial or regulatory decisions andrulings;

•                  the effects ofcompetition from banks, other insurers and the trend toward self-insurance;

•                  risks which weface in entering new markets and diversifying the products and services weoffer;

•                  unexpectedturnover of our professional staff;

•                  changing legal and social trends and inherentuncertainties in the loss estimation process that can adversely impact theadequacy of loss reserves and the allowance for reinsurance recoverables;

•                  risks associatedwith our continuing ability to obtain reinsurance covering our exposures atappropriate prices and/or in sufficient amounts and the related recoverabilityof our reinsured losses;

•                  weather-relatedevents and other catastrophes (including acts of terrorism) impacting ourinsureds and/or reinsurers;

•                  our ability toattain adequate prices, obtain new business and to retain existing businessconsistent with our expectations;

•                  the possibility of downgrades in ourclaims-paying and financial strength ratings significantly adversely affectingus, including reducing the number of insurance policies we write generally, orcausing clients who require an insurer with a certain rating level to usehigher-rated insurers;

•                  the risk that our investment portfoliosuffers reduced returns or investment losses which could reduce our profitability;and

•                  other riskswhich we identify in future filings with the Securities and ExchangeCommission.

 

**General**

 

The accompanyingconsolidated financial statements consisting of the accounts of The NavigatorsGroup, Inc., a Delaware holding company, and its twelve active wholly ownedsubsidiaries, are prepared on the basis of accounting principles generallyaccepted in the United States of America (“GAAP”).  Unless the context otherwise requires, the term “Company” as usedherein means The Navigators Group, Inc. and its subsidiaries.  All significant intercompany transactionsand balances are eliminated.  Certainamounts for prior years have been reclassified to conform to the current year’spresentation.

 

Historically, the Companyreported *Funds due from Lloyd’s syndicate*as a separate line item on its balance sheets. The balance consisted primarily of investments, cash and premiumsreceivable resulting from the Company’s participation in Lloyd’s Syndicate1221.  Commencing at December 31, 2002,the Company recorded

 

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the amounts due from Lloyd’s Syndicate 1221as part of their separate components in its financial statements.  As a result, the amounts previouslyclassified as *Funds due from Lloyd’s syndicate* at March 31, 2002 have beenreclassified to conform to the current year’s presentation.

 

The Company’s two insurancesubsidiaries are Navigators Insurance Company (“Navigators Insurance”), whichincludes a United Kingdom Branch (“UK Branch”), and NIC Insurance Company(“NIC”).  Navigators Insurance is theCompany’s largest insurance subsidiary and has been active since 1983.  It specializes principally in underwriting marineinsurance and related lines of business, general liability insurance, andprofessional liability insurance.  NIC,a wholly owned subsidiary of Navigators Insurance, began operations in1990.  It underwrites similar types ofbusiness but on a “non-admitted” or surplus lines basis and is fully reinsuredby Navigators Insurance.  NavigatorsInsurance and NIC are collectively referred to herein as the “InsuranceCompanies”.

 

Five of the Company’s whollyowned insurance underwriting agencies (the “Navigators Agencies”) producebusiness for the Insurance Companies. They specialize in writing marine and related lines of business, generalliability insurance and professional liability coverages.

 

Each of the NavigatorsAgencies write marine and related business for Navigators Insurance and fourunaffiliated insurance companies.  Thefive insurance companies comprise a marine insurance pool.  Marine insurance policies are issued byNavigators Insurance with the business shared with other pool members.  Navigators Insurance had a 75% participationin the pool for business written with effective dates in 2002.  For 2003, Navigators Insurance expects toincrease its participation in the pool to 80%, subject to the expectedfinalization of a commutation agreement with one of the pool members.  Although no assurances can be given, it isexpected that this agreement will be entered into during 2003.  If the pool participation had been recordedat 80% for the 2003 underwriting year premium, the effect would have increasednet written premium by approximately $2.2 million for the first quarter of 2003.

 

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

 

NavigatorsPro, a division of a Navigators Agency located in New York, specializes inunderwriting professional liability insurance and began producing directors& officers liability insurance exclusively for the Insurance Companies inthe fourth quarter of 2001.  In late2002, Navigators Pro introduced additional products to complement its directors& officers liability coverage.  Theproducts include employment practices liability, lawyers professional liabilityand miscellaneous professional liability coverages.

 

Navigators Holdings (UK)Limited is a holding company for the Company’s UK subsidiaries consisting ofthe Lloyd’s Operations and Navigators Management (UK) Limited, a NavigatorsAgency, which produces business for the UK Branch of Navigators Insurance.  The Lloyd’s Operations consist of NavigatorsUnderwriting Agency Ltd. (“NUAL”), a Lloyd’s of London (“Lloyd’s”) marineunderwriting managing agency which manages Lloyd’s Syndicate 1221, MillenniumUnderwriting Ltd. (“Millennium”) and Navigators Corporate Underwriters Ltd.(“NCUL”).  Both Millennium and NCUL areLloyd’s corporate members with limited liability and provide capacity toLloyd’s Syndicate 1221.  NUAL ownsPennine Underwriting Ltd., an underwriting managing agency with offices inManchester and Leeds, England, which underwrites cargo and engineering businessfor Lloyd’s Syndicate 1221.

 

TheCompany’s revenue is primarily comprised of premiums, commissions andinvestment income.  The InsuranceCompanies derive their premium primarily from business written by theNavigators Agencies.  The Lloyd’sOperations derive their premium primarily from business underwritten by NUAL.  The Navigators Agencies and NUAL receivecommissions and in some cases, profit commissions and service fees on businessproduced.

 

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Propertyand casualty insurance premiums historically have been cyclical in nature and,accordingly, during a “hard market” demand for property and casualty insuranceexceeds supply or capacity and, as a result, premiums and commissions mayincrease.  On the downturn of theproperty and casualty cycle, supply exceeds demand and, as a result, premiumsand commissions may decrease.

 

**CriticalAccounting Policies**

 

It is important tounderstand the Company’s accounting policies in order to understand itsfinancial statements.  Managementconsiders certain of these policies to be critical to the presentation of thefinancial results since they require management to make estimates andassumptions.  These estimates andassumptions affect the reported amounts of assets, liabilities, revenues, expenses,and related disclosures at the financial reporting date and throughout theperiod being reported upon.  Certain ofthe estimates result from judgments that can be subjective and complex, andconsequently actual results may differ from these estimates, which would bereflected in future periods.

 

The Company’smost critical accounting policies involve the reporting of the reserves forlosses and loss adjustment expenses (including losses that have occurred butwere not reported to the Company by the financial reporting date), reinsurancerecoverables, written and unearned premium, the recoverability of deferred taxassets, the impairment of invested assets, accounting for Lloyd’s results, andgoodwill.

 

*Loss Reserves and LAE.*  Loss reserves represent an estimate of theexpected cost of the ultimate settlement and administration of losses, based onfacts and circumstances then known. Actuarial methodologies are employed to assist in establishing suchestimates and include judgments relative to estimates of future claims severityand frequency, length of time to develop to ultimate, judicial theories ofliability and other third party factors which are often beyond ourcontrol.  Due to the inherentuncertainty associated with the reserving process, the ultimate liability maybe greater or less than the original estimate. Such estimates are regularly reviewed and updated and any resultingadjustments are included in the current year’s results.  Additional information regarding theCompany’s loss reserves can be found in *“-Resultsof Operation-Operating Expenses-Net Losses and Loss Adjustment ExpensesIncurred”*.

 

*Reinsurance Recoverables. *Reinsurancerecoverables are established for the portion of the loss reserves that areceded to reinsurers.  Reinsurancerecoverables are determined based upon the terms and conditions of reinsurancecontracts which could be subject to interpretations that differ from our ownbased on judicial theories of liability. In addition, we bear credit risk with respect to our reinsurers whichcan be significant considering that certain of the reserves remain outstandingfor an extended period of time.  TheCompany is required to pay losses even if a reinsurer fails to meet itsobligations under the applicable reinsurance agreement.

 

*Written and Unearned Premium. *Written premium isrecorded based on the insurance policies that have been reported to the Companyand the policies that have been written by agents but not yet reported to theCompany.  The Company must estimate theamount of written premium not yet reported based on judgments relative tocurrent and historical trends of the business being written.  Such estimates are regularly reviewed andupdated and any resulting adjustments are included in the current year’sresults.  An unearned premium reserve isestablished to reflect the unexpired portion of each policy at the financialreporting date.

 

*Deferred Tax Assets. *The Company hasrecorded valuation allowances related to deferred tax assets resulting from netoperating loss carryforwards due to the uncertainty associated with therealization of the deferred tax asset related to certain of the Company’sforeign, state and local operations.  Although the Company’s foreign operationswere profitable in 2003, the valuation allowance was released only to theextent of the 2003 profits since future profitability remains uncertain.

 

*Impairment of Invested Assets. *Impairment of investment securities resultsin a charge to operations when a market decline below cost isother-than-temporary.  Managementregularly reviews its fixed maturity and

 

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equity securities portfolios to evaluate thenecessity of recording impairment losses for other-than-temporary declines inthe fair value of investments. A number of criteria are considered during thisprocess including, but not limited to, the current fair value as compared toamortized cost or cost, as appropriate, of the security, the length of time thesecurity’s fair value has been below amortized cost or cost, and by how much theCompany’s intent and ability to retain the investment for a period of timesufficient to allow for an anticipated recovery in value, specific creditissues related to the issuer and current economic conditions.  In general, we focus our attention on thosesecurities whose market value was less than 80% of their amortized cost orcost, as appropriate, for six or more consecutive months.  Other-than-temporary impairment lossesresult in a permanent reduction of the cost basis of the underlying investment. Significant changes in the factors theCompany considers when evaluating investments for impairment losses couldresult in a significant change in impairment losses reported in theconsolidated financial statements.

 

*Accountingfor Lloyd’s Results*.  We record our pro rata share of Lloyd’ssyndicate assets, liabilities, revenues and expenses, after making adjustmentsto 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 endof three years.  We record adjustmentsto recognize underwriting results as incurred, including the expected ultimatecost of losses incurred.  Theseadjustments to losses are based on actuarial analysis of syndicate accounts,including forecasts of expected ultimate losses provided by thesyndicates.  At the end of the Lloyd’s three year period for determining underwritingresults for an account year, the syndicate will close the account year by reinsuringoutstanding claims on that account year with the participants for the account’snext underwriting year.  The amount toclose an underwriting year into the next year is referred to as the *reinsurance to close*.  The reinsurance to close transactions arerecorded as additional written and earned premium, losses incurred, lossreserves and receivables, all in the same amount.  There are no gains or losses recorded on the *reinsurance to close* transactions.

 

Historically, the Companyreported *Funds due from Lloyd’s syndicate*as a separate line item on its balance sheets. The balance consisted primarily of investments, cash and premiumsreceivables resulting from the Company’s participation in Lloyd’s Syndicate1221.  Commencing at December 31, 2002,the Company recorded the amounts due from Lloyd’s Syndicate 1221 as part oftheir separate components in its financial statements.  As a result, the amounts previouslyclassified as *Funds due from Lloyd’s syndicate* at March 31, 2002 have beenreclassified to conform to the current year’s presentation.

 

*Goodwill. *The FinancialAccounting Standards Board issued Statement of Financial Accounting Standards142 (“SFAS 142”), *Goodwill and OtherIntangible Assets*, effective January 1, 2002.  SFAS 142 changes the accounting for goodwilland intangible assets that have indefinite useful lives from an amortizationapproach to an impairment-only approach that requires that those assets betested at least annually for impairment. The Company completed its impairment review resulting in no impairmentof goodwill as of January 1, 2003.  TheCompany tests for the impairment of goodwill at least annually.  If the carrying amount of goodwill exceedsits implied fair value, an impairment loss will be recognized.

 

**Results of Operations**

 

Revenues.  Gross written premium for the three monthsended March 31, 2003 increased 43.3% to $174,702,000 from $121,916,000 for thethree months ended March 31, 2002.

 

The followingtable sets forth the Company’s gross written premium by segment and line ofbusiness, and ceded and net written premium by segment for the periodsindicated:

 

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|                         |   | **Three  Months Ended March 31,** |   |
|------------------------------|--------|-----------------------------------|--------|
|                         |   | **2003**                          |   | **2002** |   |
|                         |   | **(Dollars in thousands)**        |   |
| Insurance Companies:         |   |                              |   |   |   |   |   |   |   |
| Marine                       |   | $                                 | 53,689 |   | 31 | % | $ | 49,394 |   | 40 | % |
| General Liability            |   | 31,676                            |   | 18 |   | 23,355 |   | 19 |   |
| Professional Liability       |   | 12,565                            |   | 7 |   | 4,398 |   | 4 |   |
| Surety                       |   | 217                               |   | — |   | — |   | — |   |
| Other                        |   | 487                               |   | — |   | 2,098 |   | 2 |   |
| Gross Written Premium        |   | 98,634                            |   | 56 | % | 79,245 |   | 65 | % |
| Ceded Written Premium        |   | (48,212                           | )      |   |   | (36,638 | ) |   |   |
| Net Written Premium          |   | 50,422                            |   |   |   | 42,607 |   |   |   |
|                         |   |                              |   |   |   |   |   |   |   |
| Lloyd’s Operations:     |   |                              |   |   |   |   |   |   |   |
| Marine                       |   | 66,552                            |   | 38 |   | 41,475 |   | 34 |   |
| Engineering and Construction |   | 4,424                             |   | 3 |   | 358 |   | — |   |
| Onshore Energy               |   | 5,092                             |   | 3 |   | 838 |   | 1 |   |
| Gross Written Premium        |   | 76,068                            |   | 44 |   | 42,671 |   | 35 |   |
| Ceded Written Premium        |   | (35,457                           | )      |   |   | (14,929 | ) |   |   |
| Net Written Premium          |   | 40,611                            |   |   |   | 27,742 |   |   |   |
|                         |   |                              |   |   |   |   |   |   |   |
| Total Gross Written Premium  |   | 174,702                           |   | 100 | % | 121,916 |   | 100 | % |
|                         |   |                              |   |   |   |   |   |   |   |
| Total Ceded Written Premium  |   | (83,669                           | )      |   |   | (51,567 | ) |   |   |
|                         |   |                              |   |   |   |   |   |   |   |
| Total Net Written Premium    |   | $                                 | 91,033 |   |   |   | $ | 70,349 |   |   |   |

 

InsuranceCompanies’ Gross Written Premium

 

*Marine Premium. *The marine premium for the three monthsended March 31, 2003 increased 8.7% compared to the first quarter of 2002, dueto the increase in premium rates resulting in higher premiums on new andrenewal business.  Navigators Insuranceobtained price increases of approximately 21% in the first quarter of2003.  Navigators Insurance obtains itsmarine business through participation in the marine pool managed by theNavigators Agencies.

 

*General Liability**Premium.*  This business consists primarily of generalliability insurance for general contractors and artisans contractors as well assmall commercial risks.  The generalliability premium increased 35.6% from the first quarter of 2002 to 2003 due tonew business and increased rates.  Theincreased premium in 2003 of $8.3 million resulted from $4.3 million of newbusiness and $4.0 million of rate increases which averaged 62%.  During the first quarter of 2003, the numberof in-force policies decreased by 20%. The new business and the rate increases resulted from a tighteningmarket for California contractors’ liability insurance.

 

*Professional Liability Insurance. *In late 2001, theInsurance Companies began to write professional liability insurance primarilyconsisting of directors and officers liability insurance for privately held andpublicly traded corporations.  More recently,the professional liability business has been expanded to include errors andomissions insurance and employment practices liability coverages.  The professional liability premium was $12.6million for the first quarter of 2003 compared to $4.4 million for the 2002 firstquarter, an increase of 185.7%, reflecting the expansion of this line ofbusiness.

 

*Surety.*  In late 2002, Navigators Insurance began towrite surety business which consists of bonds guaranteeing the performance of aspecific obligation.  Our focus is onproviding bid and performance bonds to small contractors requiring contractbonds for projects of $2 million or less.

 

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Lloyd’sOperations’ Gross Written Premium

 

The Lloyd’spremium is generated as the result of NCUL and Millennium providing capacity toLloyd’s Syndicate 1221 which is managed by NUAL.

 

Lloyd’sSyndicate 1221’s 2003 stamp capacity of £125 million ($200.3 million) comparedto £75.0 million ($112.7 million) in 2002. Syndicate 1221’s capacity is expressed net of commission (as is standardat Lloyd’s) of approximately 21%.  TheCompany participates for 97.4% and 68.1% of Syndicate 1221’s capacity for the2003 and 2002 underwriting years, respectively.  In 2003, the Company participates in a larger percentage of thegross capacity and is reinsuring 15.4% of its capacity under quota sharereinsurance agreements to third parties which provide letters of credit used ascollateral at Lloyd's.  The Lloyd’s marinebusiness had been subject to deteriorating pricing beginning in themid-1990’s.  The pricing competitionshowed some signs of stabilizing in 2000 and prices increased in 2001, 2002 andin the first quarter of 2003.  Lloyd’spresents its results on an underwriting year basis, generally closing eachunderwriting year after three years. The Company makes estimates for each underwriting year and timelyaccrues the expected results.  TheLloyd’s Operations included in the consolidated financial statements representthe Company’s participation in Syndicate 1221.

 

Lloyd’ssyndicates report the amounts of premiums, claims, and expenses recorded in anunderwriting account for a particular year to the companies or individuals thatparticipate in the syndicates.  Thesyndicates generally keep accounts open for three years.  Traditionally, three years have beennecessary to report substantially all premiums associated with an underwritingyear and to report most related claims, although claims may remain unsettledafter the account is closed.  A Lloyd’s syndicatetypically closes an underwriting account by reinsuring outstanding claims onthat account with the participants for the next underwriting year.  The ceding participants pay the assumingparticipants an amount based on the unearned premiums and outstanding claims inthe underwriting account at the date of the assumption.  Our participation in Lloyd’s Syndicate 1221is represented by and recorded as our proportionate share of the underlyingassets and liabilities and results of operations of the syndicate since, (a) wehold an undivided interest in each asset, (b) we are proportionately liable foreach liability and (c) Syndicate 1221 is not a separate legal entity.  At Lloyd’s, the amount to close an underwritingyear into the next year is referred to as the *reinsuranceto close.*  The reinsurance toclose amounts represent the transfer of the assets and liabilities from theparticipants of a closing underwriting year to the participants of the nextunderwriting year.  To the extent ourparticipation in the syndicate changes as a result of this transfer, thereinsurance to close amounts vary accordingly. The *reinsurance to close*transactions are recorded as additional written and earned premium, lossesincurred, loss reserves and receivables, all in the same amount.  There are no gains or losses recorded on thetransactions.

 

The Companyprovides letters of credit to Lloyd’s to support its participation in Syndicate1221’s capacity.  If the Companyincreases its participation or if Lloyd’s changes the capital requirements, theCompany may be required to supply additional letters of credit or othercollateral acceptable to Lloyd’s, or reduce the capacity of Syndicate1221.  The letters of credit areprovided through the credit facility which the Company maintains with aconsortium of banks.  The creditfacility agreement requires that the banks vote whether or not to renew theletter of credit portion of the facility each year.  If the banks decide not to renew the letter of credit facility,the Company will need to find other sources to provide the letters of credit orother collateral in order to continue to participate in Syndicate 1221.

 

*Marine Premium.*  In the first quarter of 2003, marine premiumincreased 60.5% from the first quarter of 2002 partially due to the increase inpremium rates resulting in higher premiums on renewal and new business and dueto the capacity provided to Syndicate 1221 by NCUL and Millennium increasingfrom 68.1% in 2002 to 97.4% in 2003. The increased premium in 2003 of $25.1 million resulted from $18.3million of new business and $6.8 million of rate increases.

 

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*Engineering and Construction Premium.*  The business consists of coverage forconstruction projects including machinery, equipment and loss of use due todelays.  The increase in the grosswritten premium in the first quarter of 2003 and 2002 was due to new business.

 

*Onshore Energy.*  The business principally focuses on the oiland gas, chemical and petrochemical industries with coverages primarily forproperty damage and business interruption. The increase in the gross written premium in the first quarter of 2003compared to the 2002 first quarter was primarily due to new business.

 

Ceded WrittenPremium*.* In the ordinary course of business, the Company reinsures certaininsurance risks with unaffiliated insurance companies for the purpose oflimiting its maximum loss exposure, protecting against catastrophic losses, andmaintaining desired ratios of net premiums written to statutory surplus.  The relationship of ceded to written premiumvaries based upon the types of business written and whether the business iswritten by the Insurance Companies or the Lloyd’s Operations.  There are several factors contributing to anincrease in ceded premium when comparing the three months ended March 31, 2003to the same period in 2002.  First, rateincreases on our business resulted in higher premium levels, and more cededpremiums.  The second is the cost of“excess of loss” reinsurance increased, which is purchased to limit theCompany’s exposure to an individual large loss.  Third, we increased the amount of quota share reinsurance forcertain product lines, based upon management’s assessment of expected lossactivity.  Fourth, Navigators Proexperienced substantial premium growth, resulting in increased amounts ofpremium ceded to its quota share reinsurance program.  Additionally, the Company entered into quota share reinsuranceagreements to reinsure 15.4% of its Syndicate 1221 capacity to third partieswhich provide letters of credit used as collateral at Lloyd's.

 

Net WrittenPremium*.* Net written premium increased 29.4% when comparing the threemonths ended March 31, 2003 to the same period in 2002, as a result of theincrease in the gross written premium partially offset by the increased cededpremium, each of which is discussed above.

 

Net EarnedPremium.  Netearned premium increased 66.4% for the three months ended March 31, 2003 to$66,314,000 as compared to $39,849,000 for the three months ended March 31,2002.  Net earned premium increasedacross virtually all product lines as a result of substantial rate increasesand new business generated in 2002 and 2003.

 

CommissionIncome*. *Commissionincome generated by the Navigators Agencies increased to $1,239,000 for thethree months ended March 31, 2003 from $1,101,000 for the same period in 2002,primarily as the result of the increased earned premium on the marine businessproduced by the Navigators Agencies.

 

Net InvestmentIncome*. *Netinvestment income decreased 5.7% to $4,661,000 for the three months ended March31, 2003 from $4,942,000 for the corresponding period in 2002 primarily due tothe decrease in interest rates.

 

Net RealizedCapital Gains (Losses)*. *Pre-tax net income included $218,000 of net realized capitalgains for the three months ended March 31, 2003 compared to $293,000 of netrealized capital losses for the same period last year.  On an after tax basis, the net realizedcapital gains were $177,000 or $0.02 per share for the three months ended March31, 2003 and the net realized capital losses were $195,000 or $0.02 per sharefor the same period of 2002.

 

Other Income.  Other income for the three months endedMarch 31, 2003 and 2002 consisted primarily of fees related to the generalliability business and foreign exchange gains and losses.

 

OperatingExpenses.

 

*Net Losses and Loss Adjustment ExpensesIncurred.*  The amount recorded for net losses and lossadjustment expenses reflects management’s estimate of dollar amounts requiredto pay all claims as well as related expenses to adjust and settle claims.  The estimates include payments made duringthe period, reserves

 

18

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establishedfor future payment on known claims (“case reserves”) and reserves establishedfor claims that are anticipated but that have not yet been reported toNavigators (“IBNR” or “incurred but not reported”).  Insurance companies typically evaluate their loss experience bycalculating a “loss ratio”, which is the ratio of losses and loss adjustmentexpenses incurred to the net earned premium for the period.  Navigators loss ratio for the first quarterof 2003 was 67.0%, compared to 59.7% for the first quarter of 2002.  The majority of this increase was due to anincrease in the loss ratio of Navigators Insurance increasing from 57.8% forthe first quarter of 2002 to 68.3% for the first quarter of 2003.  The largest factor impacting this was anincrease in incurred losses for the Navigators Insurance's U.S. marinebusiness.  To a lesser extent, theincrease in the loss ratio was affected by the growth in the general liabilityand professional liability lines of business for which we generally estimate ahigher ultimate loss ratio than the marine business.  Also, the Company strengthened its reserves on a runoff line ofbusiness by $1.0 million due to adverse development.

 

Insurancecompanies and Lloyd’s syndicates are required to maintain reserves for unpaidlosses and unpaid loss adjustment expenses (“LAE”) for all lines ofbusiness.  These reserves are intendedto cover the probable ultimate cost of settling all losses incurred and unpaid,including those incurred but not reported. The determination of reserves for losses and LAE for insurance companiessuch as Navigators Insurance and NIC, and Lloyd’s corporate members such asNCUL and Millennium is dependent upon the receipt of information from the poolsand syndicates in which such companies participate.  Generally, there is a lag between the time premiums are writtenand related losses and LAE are incurred, and the time such events are reportedto the pools and syndicates and, subsequently, to Navigators Insurance, NIC,NCUL and Millennium.

 

Reserves areestablished for the Insurance Companies and Lloyd’s Syndicate 1221 for reportedclaims when notice of the claim is first received.  Reserves for such reported claims are established on acase-by-case basis by evaluating several factors, including the type of riskinvolved, knowledge of the circumstances surrounding such claim, severity ofinjury or damage, the potential for ultimate exposure, experience with theinsured and the broker on the line of business, and the policy provisionsrelating to the type of claim.  Reservesfor incurred but not reported losses are determined in part on the basis ofstatistical information and in part on industry experience.

 

Loss reserves are estimatesof what the insurer or reinsurer expects to pay on claims, based on facts andcircumstances then known.  It ispossible that the ultimate liability may exceed or be less than suchestimates.  In setting its loss reserveestimates, the Company reviews statistical data covering several years,analyzes patterns by line of business and considers several factors includingtrends in claims frequency and severity, changes in operations, emergingeconomic and social trends, inflation and changes in the regulatory andlitigation environment.  Based on thisreview, the Company makes a best estimate of its ultimate liability.  During the loss settlement period, which, insome cases, may last several years, additional facts regarding individualclaims may become known and, accordingly, it often becomes necessary to refineand adjust the estimates of liability on a claim upward or downward. Suchestimates are regularly reviewed and updated and any resulting adjustments areincluded in the current year’s income statement.  Even then, the ultimate liability may exceed or be less than the revisedestimates.  The reserving process isintended to provide implicit recognition of the impact of inflation and otherfactors affecting loss payments by taking into account changes in historicalpayment patterns and perceived probable trends.  There is generally no precise method for the subsequentevaluation of the adequacy of the consideration given to inflation, or to anyother specific factor, because the eventual deficiency or redundancy ofreserves is affected by many factors, some of which are interdependent.

 

The following table sets forththe Company’s net loss reserves by segment and by line of business as of thedate indicated:

 

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|                          |   | **March 31,  2003**                   |    | **December 31,  2002**                |   |
|-------------------------------|--------|---------------------------------------|---------|---------------------------------------|--------|
|                          |   | **Net Loss Reserves  (In thousands)** |    | **Net Loss Reserves  (In thousands)** |   |
|                          |   |                                  |    |                                  |   |
| Insurance Companies:          |   |                                  |    |                                  |   |
| Marine                        |   | $                                     | 76,837  |                                  | $      | 73,521 |   |
| General Liability             |   | 75,227                                |    | 64,949                                |   |
| Professional Liability        |   | 2,163                                 |    | 1,240                                 |   |
| Surety                        |   | 29                                    |    | 7                                     |   |
| Other                         |   | 26,560                                |    | 26,690                                |   |
| Total Insurance Companies     |   | 180,816                               |    | 166,407                               |   |
|                          |   |                                  |    |                                  |   |
| Lloyd’s Operations:      |   |                                  |    |                                  |   |
| Marine                        |   | 100,049                               |    | 97,018                                |   |
| Engineering and  Construction |   | 991                                   |    | 726                                   |   |
| Onshore Energy                |   | 1,311                                 |    | 496                                   |   |
| Total Lloyd’s Operations |   | 102,351                               |    | 98,240                                |   |
|                          |   |                                  |    |                                  |   |
| Total Net Loss Reserves       |   | $                                     | 283,167 |                                  | $      | 264,647 |   |

 

Our loss reserves includeamounts related to short tail and long tail classes of business.  Short tail business means that claims aregenerally reported quickly upon occurrence of an event, making estimation ofloss reserves less complex.  Our longertail business includes general liability and professional liabilityinsurance.  For the long tail lines,significant periods of time, ranging up to several years or more, may elapsebetween the occurrence of the loss, the reporting of the loss and thesettlement of the claim. The longer the time span between the incidence of aloss and the settlement of the claim, the more likely the ultimate settlementamount can vary.

 

*General Liability and Professional Liability*

 

The general liability business generatesthird party liability claims that are longer tail in nature.  A significant portion of Navigators’ generalliability reserves relate to California construction defect claims.  Reserves and claim frequency on thisbusiness may be impacted by legislation recently implemented in California,which generally provides consumers who experienced construction defects amethod other than litigation to obtain construction defect repairs.  This legislation may impact claim severity,frequency and length to settlement assumptions underlying our reserves.  Accordingly, Navigators ultimate liabilitymay exceed or be less than current estimates due to this variable, amongothers.

 

For generalliability, a relatively small proportion of net losses in the more recentaccident years are reported claims and an even smaller proportion are paidlosses.  Therefore, a relatively largeproportion of our general liability net losses are reserves for IBNRlosses.  In fact, approximately 74% ofour general liability net loss reserves at March 31, 2003 were for IBNR.  As of March 31, 2003, the Company had 1,516open claims relating to general liability business compared to 1,275 openclaims as of December 31, 2002.  Duringthe first quarter of 2003, 512 new claims were made and 271 existing claimswere settled or dismissed.  TheCompany’s net loss and LAE reserves for its general liability business as ofMarch 31, 2003 was $75,227,000.

 

Theprofessional liability class generates third party claims, which also arelonger tail in nature.  The professionalliability policies provide coverage on a “claims made” basis, whereby coverageis generally provided only for those claims that are made during the policyperiod.  Navigators professionalliability business is relatively immature, with Navigators first writing the businessin late 2001.  Accordingly, given therelative immaturity of this business, it will take some time to betterunderstand the reserve trends on this business.  Where anticipated loss experience is less predictable because ofthe small number of claims and/or erratic claim severity patterns, our lossestimates are based on expected losses, actual reported losses, evaluation ofloss trends, and the legal, regulatory and current risk environment.  Navigators has reviewed the adequacy of theestablished loss reserves.  A reasonableestimate of the required reserve for professional liability has been made.  The expected ultimate losses may be adjustedup or down as the accident years mature.

 

Virtually allof the professional liability net loss reserves at March 31, 2003 were forIBNR.  As of March 31, 2003, the Companyhad 15 open claims for professional liability coverage compared to 7 openclaims as of December 31, 2002.  Duringthe first quarter of 2003, 8 new claims were made.  The Company’s net loss and LAE reserves for professionalliability coverage as of March 31, 2003 and $2,163,000.

 

*Asbestos and Environmental Liability*

 

Navigators has minimalexposure to asbestos and environmental liability, largely stemming from marineliability insurance written on an occurrence basis during the mid-1980’s.  In general, our participation on such risksis in the higher excess layers, which requires the underlying coverage to beexhausted prior to coverage being triggered in our layer.  In many instances we are one of manyinsurers who participate in the defense and ultimate settlement of theseclaims, and we are generally a minor participant in the overall insurancecoverage and settlement.  Further, sincemost of Navigators' policies were issued after the industry was apprised ofasbestos exposures, many of the policies on which Navigators participates haveexclusions that may preclude coverage. In addition, many of these claims havebeen inactive for several years and may be closed in the near future.

 

20

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Management believes that itsreserves for such claims are adequate because the Company’s participation insuch risks is generally in the higher excess layers and, based on a continuingreview of such claims, it believes that a majority of these claims will beunlikely to penetrate such high excess layers of coverage; however, due tosignificant assumptions inherent in estimating these exposures, actualliabilities could differ from current estimates.

 

The followingtables set forth the Company’s net loss reserves and claim counts for itsenvironmental and asbestos exposure, which it believes is subject touncertainties greater than those presented by other types of claims:

 
| **(Dollars  in thousands)**

**Type of  Business** |   |                    |   | **Net Losses  & LAE  incurred for  the three months  ended March 31,  2003** |   | **Net Paid Losses  & LAE  for the three  months ended  March 31, 2003** |   |
|----------------------------------------------------|--------|-------------------------|--------|----------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|--------|
| **Net Loss  & LAE  Reserves**                  |
| **March 31,  2003**                                |   | **December  31,  2002** |   |                                                                             |   |
|                                               |   |                    |   |                                                                             |   |                                                                                  |   |   |   |
| Environmental                                      |   | $                       | 914    |                                                                             | $      | 1,072                                                                                 |   | $ | 281 |   | $ | 439 |   |
| Asbestos                                           |   | 521                     |   | 441                                                                              |   | 104                                                                                   |   | 24 |   |
| Total                                              |   | $                       | 1,435  |                                                                             | $      | 1,513                                                                                 |   | $ | 385 |   | $ | 463 |   |

 
| **Type of  Business** |   | **Claim  Count  January 1, 2003** |   | **New Claims  During Period** |   | **Claims  Settled  or Resolved  During Period** |   | **Claim  Count  March 31, 2003** |   |
|-----------------------|--------|-----------------------------------|--------|-------------------------------|--------|-------------------------------------------------|--------|----------------------------------|--------|
|                  |   |                              |   |                          |   |                                            |   |                             |   |
| Environmental         |   | 202                               |   | 5                             |   | 7                                               |   | 200                              |   |
| Asbestos              |   | 275                               |   | 16                            |   | 5                                               |   | 286                              |   |
| Total                 |   | 477                               |   | 21                            |   | 12                                              |   | 486                              |   |

 

No materialtrends or developments were noted in the above net loss reserve and claim counttables.

 

*Commission Expense. *Commission expense as a percentage of netearned premium was 16.0% and 19.8% for the three months ended March 31, 2003and 2002, respectively.  The commissionexpense tends to fluctuate with changes in the mix of business.  The decrease during the first quarter 2003was primarily the result of the receipt of reinsurance ceding commissions fromthe professional liability and Lloyd’s marine operations.

 

*Other Operating Expenses. *Other operatingexpenses increased to $11,587,000 during the three months ended March 31, 2003from $9,887,000 during the corresponding period of 2002, primarily due to theincrease in employee related expenses resulting from expansion of thebusiness.  However, the percentage ofother operating expenses to net earned premium decreased to 17.5% for the firstthree months of 2003 from 24.8% for the 2002 first quarter due to the expensesbeing spread over a larger premium base.

 

*Interest Expense. *Interest expense was $97,000 for thethree months ended March 31, 2003 compared to $160,000 during the correspondingperiod of 2002.  This decrease was dueto a smaller loan balance and lower interest rates on the loan.

 

Income Taxes*.*  The effective tax rate was 22.7% and 20.2%for the three months ended March 31, 2003 and 2002, respectively.  The rates differed from the Federal statutoryincome tax rate primarily due to the change in the valuation allowance to theextent of income or loss generated in certain of its foreign operations, andalso to tax-exempt interest income.

 

The Company’svaluation allowance relating to its foreign operations decreased by $630,000 inthe three months ended March 31, 2003 relating to the reduction in the losscarryforward at the Company’s foreign operations resulting from incomegenerated by these operations in the first quarter of 2003.  At March 31, 2003 and 2002, the Company hadloss carryforwards remaining at its foreign operations amounting to potentialfuture tax benefits of $3,899,000 and $5,434,000, respectively, along with avaluation allowance equal to these benefits. Even though

 

21

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the foreign operations wereprofitable in the first quarter 2003, the valuation allowance was released onlyto the extent of the 2003 profits since future profitability remainsuncertain.  The Company needs to generate$12,998,000 of future foreign pretax income in order to fully utilize theforeign loss carryforwards which can be carried forward indefinitely.

 

The Companyalso had net state and local loss carryforwards amounting to potential futuretax benefits of $2,075,000 and $1,733,000 at March 31, 2003 and 2002,respectively, along with a valuation allowance equal to these benefits.  The Company needs to generate $11,537,000 offuture state and local pretax income in order to fully utilize the losscarryforwards which expire from 2019 to 2023.

 

The Companyhad alternative minimum tax carryforwards of $0 and $3,097,000 at March 31,2003 and 2002, respectively.

 

Net Income*.* The Company had net income of $4,834,000 forthe three months ended March 31, 2003 compared to $3,450,000 for the sameperiod last year.  On a diluted pershare basis, this represented net income per share of $0.55 and $0.40 for thethree months ended March 31, 2003 and 2002, respectively.

 

**Investments**

 

Theinvestments of the Insurance Companies must comply with the insurance laws ofNew York State, the domiciliary state of Navigators Insurance and NIC.  These laws prescribe the type, quality andconcentration 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, commonstocks, real estate mortgages and real estate. The Insurance Companies’ investment guidelines prohibit investments inderivatives other than as a hedge against a foreign currency.

 

The InsuranceCompanies’ investments are subject to the direction and control of its Board ofDirectors and are reviewed on a quarterly basis.  The investments are managed by outside professional fixed incomeand equity portfolio managers.  Currentinvestment objectives are to maximize annual after tax income in the context ofpreserving and enhancing capital and statutory surplus.  The Insurance Companies seek to attain theseobjectives by investing in municipal bonds, U.S. Government obligations,corporate bonds and mortgage and asset backed securities and commonstocks.  The Insurance Companies’investment guidelines require that at least 90% of the fixed income portfoliobe rated “A-” or better by a nationally recognized rating organization.  Up to 25% of the total portfolio may beinvested in equity securities that are actively traded on major U.S. stockexchanges.  At March 31, 2003 andDecember 31, 2002, all fixed maturity and equity securities held by the Companywere classified as available-for-sale.

 

The majorityof the investment income of the Navigators Agencies is derived from fiduciaryfunds invested in accordance with the guidelines of various state insurancedepartments.  These guidelines typicallyrequire investments in short-term instruments. This investment income is paid to the pool members, including NavigatorsInsurance.

 

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

 

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

 

22

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| **March 31,  2003**                                |   | **Amortized  Cost or Cost** |    | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  (Losses)** |   | **Fair  Value** |   |
|----------------------------------------------------|--------|-----------------------------|---------|------------------------------|--------|---------------------------------|--------|-----------------|--------|
|                                               |   | **(In thousands)**          |    |
| Fixed maturities:                                  |   |                        |    |                         |   |                            |   |            |   |
|                                               |   |                        |    |                         |   |                            |   |            |   |
| U.S. Government Treasury Bonds and GNMAs           |   | $                           | 163,951 |                         | $      | 5,898                           |   | $               | — |   | $ | 169,849 |   |
| States, municipalities and political  subdivisions |   | 48,031                      |    | 2,594                        |   | (31                             | )      | 50,594          |   |
| Mortgage and asset backed (excluding GNMAs)        |   | 64,411                      |    | 2,622                        |   | (17                             | )      | 67,016          |   |
| Corporate bonds                                    |   | 85,729                      |    | 4,729                        |   | (511                            | )      | 89,947          |   |
|                                               |   |                        |    |                         |   |                            |   |            |   |
| Total fixed maturities                             |   | $                           | 362,122 |                         | $      | 15,843                          |   | $               | (559   | ) | $ | 377,406 |   |
|                                               |   |                        |    |                         |   |                            |   |            |   |
| Equity securities – common stocks             |   | $                           | 11,972  |                         | $      | 255                             |   | $               | (1,293 | ) | $ | 10,934 |   |

 
| **December  31, 2002**                             |   | **Amortized  Cost or Cost** |    | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  (Losses)** |   | **Fair  Value** |   |
|----------------------------------------------------|--------|-----------------------------|---------|------------------------------|--------|---------------------------------|--------|-----------------|--------|
|                                               |   | **(In thousands)**          |    |
| Fixed maturities:                                  |   |                        |    |                         |   |                            |   |            |   |
|                                               |   |                        |    |                         |   |                            |   |            |   |
| U.S. Government Treasury Bonds and GNMAs           |   | $                           | 159,729 |                         | $      | 7,113                           |   | $               | — |   | $ | 166,842 |   |
| States, municipalities and political  subdivisions |   | 47,709                      |    | 2,463                        |   | (45                             | )      | 50,127          |   |
| Mortgage and asset backed (excluding GNMAs)        |   | 63,830                      |    | 1,664                        |   | (7                              | )      | 65,487          |   |
| Corporate bonds                                    |   | 80,553                      |    | 4,017                        |   | (350                            | )      | 84,220          |   |
|                                               |   |                        |    |                         |   |                            |   |            |   |
| Total fixed maturities                             |   | $                           | 351,821 |                         | $      | 15,257                          |   | $               | (402   | ) | $ | 366,676 |   |
|                                               |   |                        |    |                         |   |                            |   |            |   |
| Equity securities – common stocks             |   | $                           | 12,286  |                         | $      | 245                             |   | $               | (857   | ) | $ | 11,674 |   |

 

The Company regularlyreviews its fixed maturity and equity securities portfolios to evaluate thenecessity of recording impairment losses for other-than-temporary declines inthe fair value of investments.  Ingeneral, we focus our attention on those securities whose market value was lessthan 80% of their amortized cost or cost, as appropriate, for six or moreconsecutive months.  Other factorsconsidered in evaluating potential impairment include the current fair value ascompared to amortized cost or cost, as appropriate, the Company’s intent andability to retain the investment for a period of time sufficient to allow foran anticipated recovery in value, specific credit issues related to the issuerand current economic conditions.

 

When a security in theCompany’s investment portfolio has an unrealized loss that is deemed to beother-than-temporary, the Company writes the security down to fair valuethrough a charge to operations. Significant changes in the factors the Company considers when evaluatinginvestments for impairment losses could result in a significant change inimpairment losses reported in the consolidated financial statements.

 

The following table showsthe Company’s impairment losses recorded in its fixed maturity and equityportfolios for the periods indicated:

 

23

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| **(In  thousands)**               |   | **Total  Write-downs** |   | **Write-downs  On Securities  Sold During  Period** |   | **Write-downs  On Securities  Held at  Period End** |   |
|-----------------------------------|--------|------------------------|--------|-----------------------------------------------------|--------|-----------------------------------------------------|--------|
|                              |   |                   |   |                                                |   |                                                |   |
| Three Months Ended March 31, 2003 |   |                   |   |                                                |   |                                                |   |
|                              |   |                   |   |                                                |   |                                                |   |
| Fixed maturities                  |   | $                      | — |                                                | $      | —                                              |   | $ | — |   |
| Equity securities                 |   | —                 |   | —                                              |   | —                                              |   |
| Total Portfolio                   |   | $                      | — |                                                | $      | —                                              |   | $ | — |   |
|                              |   |                   |   |                                                |   |                                                |   |
| Three Months Ended March 31, 2002 |   |                   |   |                                                |   |                                                |   |
|                              |   |                   |   |                                                |   |                                                |   |
| Fixed maturities                  |   | $                      | — |                                                | $      | —                                              |   | $ | — |   |
| Equity securities                 |   | —                 |   | —                                              |   | —                                              |   |
| Total Portfolio                   |   | $                      | — |                                                | $      | —                                              |   | $ | — |   |

 

As of March 31, 2003, theCompany’s total portfolio had $16.1 million in gross unrealized gains and $1.9million in gross unrealized losses, compared to $15.5 million in grossunrealized gains and $1.3 million in gross unrealized losses at December 31,2002.

 

The following tablesummarizes all securities in an unrealized loss position at March 31, 2003 andDecember 31, 2001, the aggregate fair value and gross unrealized loss by thelength of time those securities have continuously been in an unrealized lossposition:

 
|                                              |   | **March 31,  2003** |   | **December  31, 2002**     |   |
|---------------------------------------------------|--------|---------------------|--------|----------------------------|--------|
|                                              |   | **Fair  Value**     |   | **Gross  Unrealized Loss** |   | **Fair  Value** |   | **Gross  Unrealized Loss** |   |
|                                              |   | **(In  thousands)** |   |
| Fixed Maturities:                                 |   |                |   |                       |   |   |   |   |   |
| U.S. Government Treasury Bonds and GNMAs          |   |                |   |                       |   |   |   |   |   |
| 0-6 Months                                        |   | $                   | — |                       | $      | — |   | $ | — |   | $ | — |   |
| 7-12 Months                                       |   | —              |   | —                     |   | — |   | — |   |
| > 12 Months                                    |   | —              |   | —                     |   | — |   | — |   |
| Subtotal                                          |   | —              |   | —                     |   | — |   | — |   |
|                                              |   |                |   |                       |   |   |   |   |   |
| States, municipalities and political subdivisions |   |                |   |                       |   |   |   |   |   |
| 0-6 Months                                        |   | 684                 |   | 10                         |   | 1,144 |   | 16 |   |
| 7-12 Months                                       |   | —              |   | —                     |   | — |   | — |   |
| > 12 Months                                    |   | 425                 |   | 22                         |   | 894 |   | 29 |   |
| Subtotal                                          |   | 1,109               |   | 32                         |   | 2,038 |   | 45 |   |
|                                              |   |                |   |                       |   |   |   |   |   |
| Mortgage and asset backed (excluding GNMAs)       |   |                |   |                       |   |   |   |   |   |
| 0-6 Months                                        |   | 1,984               |   | 15                         |   | 221 |   | 1 |   |
| 7-12 Months                                       |   | 287                 |   | 3                          |   | — |   | — |   |
| > 12 Months                                    |   | —              |   | —                     |   | 218 |   | 6 |   |
| Subtotal                                          |   | 2,271               |   | 18                         |   | 439 |   | 7 |   |
|                                              |   |                |   |                       |   |   |   |   |   |
| Corporate bonds                                   |   |                |   |                       |   |   |   |   |   |
| 0-6 Months                                        |   | 1,392               |   | 6                          |   | 2,037 |   | 72 |   |
| 7-12 Months                                       |   | 1,333               |   | 178                        |   | 515 |   | 7 |   |
| > 12 Months                                    |   | 1,784               |   | 325                        |   | 1,841 |   | 271 |   |
| Subtotal                                          |   | 4,509               |   | 509                        |   | 4,393 |   | 350 |   |
|                                              |   |                |   |                       |   |   |   |   |   |
| Total Fixed Maturities                            |   | $                   | 7,889  |                       | $      | 559 |   | $ | 6,870 |   | $ | 402 |   |
|                                              |   |                |   |                       |   |   |   |   |   |
| Equity securities – common stocks            |   |                |   |                       |   |   |   |   |   |
| 0-6 Months                                        |   | $                   | 3,505  |                       | $      | 498 |   | $ | 3,378 |   | $ | 254 |   |
| 7-12 Months                                       |   | 3,928               |   | 719                        |   | 2,736 |   | 446 |   |
| > 12 Months                                    |   | 391                 |   | 76                         |   | 987 |   | 157 |   |
|                                              |   |                |   |                       |   |   |   |   |   |
| Total Equity Securities                           |   | $                   | 7,824  |                       | $      | 1,293 |   | $ | 7,101 |   | $ | 857 |   |

 

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The above unrealized losseshave been determined to be temporary and resulted from changes in marketconditions.  We will continue to analyzethe unrealized losses quarterly to determine if any of them are other-than-temporary.

 

The following table showsthe composition by National Association of Insurance Commissions (“NAIC”)rating and the generally equivalent S&P and Moody’s ratings of the fixedmaturity securities in the Company’s portfolio with gross unrealized losses atMarch 31, 2003.  Not all of thesecurities are rated by S&P and/or Moody’s.

 

**(Dollarsin  thousands)**

 
| **Equivalent  NAIC  Rating** |   | **S&P  Rating** |   | **Equivalent********Moody’s  Rating** |   | **Unrealized  Loss** |   | **Percent   to Total** |   | **Fair  Value** |   | **Percent   to Total** |   |
|------------------------------|--------|---------------------|--------|--------------------------------------------|--------|----------------------|--------|------------------------|--------|-----------------|--------|------------------------|--------|
|                         |   |                |   |                                       |   |                 |   |                   |   |            |   |                   |   |
| 1                            |   | AAA/AA/A            |   | Aaa/Aa/A                                   |   | $                    | 360    |                   | 64     | %               | $      | 5,479                  |   | 69 | % |
| 2                            |   | BBB                 |   | Baa                                        |   | 199                  |   | 36                     |   | 2,410           |   | 31                     |   |
| 3                            |   | BB                  |   | Ba                                         |   | —               |   | —                 |   | —          |   | —                 |   |
| 4                            |   | B                   |   | B                                          |   | —               |   | —                 |   | —          |   | —                 |   |
| 5                            |   | CCC or lower        |   | Caa or lower                               |   | —               |   | —                 |   | —          |   | —                 |   |
| 6                            |   |                |   |                                       |   | —               |   | —                 |   | —          |   | —                 |   |
|                         |   |                |   | Total                                      |   | $                    | 559    |                   | 100    | %               | $      | 7,889                  |   | 100 | % |

 

At March 31, 2003, the grossunrealized losses in the table directly above are on fixed maturity securitiesthat are rated investment grade, which is defined by the Company as a securityhaving a National Association of Insurance Commissioners rating of 1 or 2, aS&P rating of BBB- or higher, or a Moody’s rating of Baa3 or higher.  Unrealized losses on investment gradesecurities principally relate to changes in interest rates or changes insector-related credit spreads since the securities were acquired.  Any such unrealized losses are recognized inincome, if the securities are sold, or if the decline in fair value is deemedother-than-temporary.

 

The scheduled maturity datesfor fixed maturity securities in an unrealized loss position at March 31, 2003are shown below.

 
| **(Dollars in thousands)**               |   | **Unrealized  Loss** |   | **Percent********To Total** |   | **Fair  Value** |   | **Percent  to Total** |   |
|------------------------------------------|--------|----------------------|--------|-----------------------------|--------|-----------------|--------|-----------------------|--------|
|                                     |   |                 |   |                        |   |            |   |                  |   |
| Due  in one year or less                 |   | $                    | — |                        | — | %               | $      | —                |   | — | % |
| Due  after one year through five years   |   | 4                    |   | —                      |   | 793             |   | 10                    |   |
| Due  after five years through ten years  |   | 85                   |   | 15                          |   | 2,559           |   | 32                    |   |
| Due  after ten years                     |   | 453                  |   | 82                          |   | 2,266           |   | 29                    |   |
| Mortgage  and asset backed securities(1) |   | 17                   |   | 3                           |   | 2,271           |   | 29                    |   |
|                                     |   |                 |   |                        |   |            |   |                  |   |
| Total  fixed income securities           |   | $                    | 559    |                        | 100    | %               | $      | 7,889                 |   | 100 | % |

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(1)  Due to the periodic repaymentof principal, the mortgage and asset backed securities are estimated to have aneffective maturity of approximately six years. Expected maturities may differ from contractual maturities becauseissuers may have the right to call or prepay obligations with or without callor prepayment penalties.

 

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The Company’srealized capital gains and losses were as follows:

 
|                                      |   | **Three Months Ended March 31,** |   |
|-------------------------------------------|--------|----------------------------------|--------|
|                                      |   | **2003**                         |   | **2002** |   |
|                                      |   | **(In thousands)**               |   |
|                                      |   |                             |   |   |   |
| Fixed  maturities:                        |   |                             |   |   |   |
| Gains                                     |   | $                                | 491    |   | $ | 307 |   |
| (Losses)                                  |   | (22                              | )      | (540 | ) |
|                                      |   | 469                              |   | (233 | ) |
| Equity  securities and other investments: |   |                             |   |   |   |
| Gains                                     |   | 2                                |   | — |   |
| (Losses)                                  |   | (253                             | )      | (60 | ) |
|                                      |   | (251                             | )      | (60 | ) |
|                                      |   |                             |   |   |   |
| Net  realized capital gains (losses)      |   | $                                | 218    |   | $ | (293 | ) |

 

The followingtable details the larger realized losses from sales and impairments during thefirst quarter of 2003 and the related circumstances giving rise to the loss:

 
| **Description** |   | **Proceeds  from Sale** |   | **Loss on  Sale** |   | **Impairment** |   | **Holdings  at  March 31, 2003** |   | **Net  Unrealized  Loss** |   | **# of  Months  Unrealized Loss  Exceeded 20%  of Cost or  Amortized Cost** |   |
|-----------------|--------|-------------------------|--------|-------------------|--------|----------------|--------|----------------------------------|--------|---------------------------|--------|-----------------------------------------------------------------------------|--------|
|            |   |                    |   |              |   |           |   |                             |   |                      |   |                                                                        |   |
| (1)             |   | $                       | 425    |              | $      | (252           | )      | —                           |   | —                    |   | —                                                                      |   | 6 |   |
|                 |        |                         |        |                   |        |                |        |                                  |        |                           |        |                                                                             |        |  |  |

 

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(1)  Major utilitycompany which had a deteriorating balance sheet, underperforming overseasoperations and a reduction in its dividend.

 

**Liquidity and Capital Resources**

 

Cash flowprovided by operations was $26,035,000 and $28,109,000 for the three monthsended March 31, 2003 and 2002, respectively, primarily due to increases in netwritten premium.  Operating cash flowwas used primarily to acquire additional investment assets and to reduce debt.

 

The Companyhas a credit facility provided through a consortium of banks.  The credit facility provides for a $12.8million revolving line of credit facility, which reduces each quarter byamounts totaling $5.5 million in 2003, and $9.0 million in 2004 until itterminates on November 19, 2004, and a $55.0 million letter of creditfacility.  At March 31, 2003,$12,750,000 in loans were outstanding under the revolving line of creditfacility at an interest rate of 2.7%. The letter of credit facility is utilized primarily by NCUL andMillennium for its participation in Lloyd’s Syndicate 1221.  The credit facility agreement requires thatthe banks vote whether or not to renew the letter of credit portion of thefacility each year.  If the banks decidenot to renew the letter of credit portion of the facility, the Company willneed to find other sources to provide the letters of credit or other collateralin order to continue its participation in Syndicate 1221.  At March 31, 2003, letters of credit with anaggregate face amount of $52,340,000 were issued under the letter of creditfacility.

 

The bankcredit facility is collateralized by the common stock of NavigatorsInsurance.  It contains covenants commonto transactions of this type, including restrictions on indebtedness and liens,limitations on mergers and the sale of assets, maintaining certain consolidatedtangible net worth, statutory surplus, and other financial ratios.  At March 31, 2003, the Company complied withall covenants.

 

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At March 31,2003, the Company’s consolidated stockholders’ equity was $176,793,000 comparedto $171,275,000 at December 31, 2002. The increase was primarily due to the net income for the three monthsended March 31, 2003 and the increase in the unrealized gains in the investmentportfolio.

 

**Item 3****.  Quantitativeand Qualitative Disclosures About Market Risk**

 

There havebeen no material changes in the information concerning market risk as stated inthe Company’s 2002 Annual Report on Form 10-K.

 

**Item 4****.  Controlsand Procedures**

 

(a)          The Chief Executive Officer and Chief Financial Officer of the Companyhave evaluated the effectiveness of our disclosure controls and procedures (asdefined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act) as of a datewithin 90 days prior to the filing date of this quarterly report (the“Evaluation Date”). Based on such evaluation, such officers have concludedthat, as of the Evaluation Date, the Company’s disclosure controls andprocedures are effective in identifying, on a timely basis, materialinformation required to be disclosed in our reports filed or submitted underthe Exchange Act.

 

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

 

**PartII****- Other Information**

 

**Item1.****                                   LegalProceedings**

 

The Company isnot a party to or the subject of, any material pending legal proceedings whichdepart from the ordinary routine litigation incident to the kinds of businessconducted by the Company, except for a suit concerning the draw down of lettersof credit.  In 1997 and 1998, NavigatorsInsurance entered into certain reinsurance contracts with a reinsurer.  In accordance with normal business practice,Navigators Insurance had secured this exposure with letters of credit.  In April 1999, in good faith and consistentwith the terms of the letters of credit, Navigators Insurance drew down $3.2million of the letters of credit.  Theliquidator of the reinsurer has commenced suit in Australia seeking to void thedraw downs.  Although the Companybelieves it has strong defenses against these claims and that the liquidators’assertions run counter to prevailing Australian and U.S. law, there can be noassurance as to the outcome of this litigation.   The Company intends to vigorously defend its position and iscurrently in the process of filing affidavits and motions seeking a promptdismissal of the liquidators’ claims in Australian court.

 

**Item2.****                                   Changesin Securities**

 

None.

 

**Item3.****                                   DefaultsUpon Senior Securities**

 

None.

 

**Item4.****                                   Submissionsof Matters to a Vote of Securities Holders**

 

None.

 

27

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**Item5.****                                   OtherInformation**

 

None.

 

**Item6.****                                   Exhibitsand Reports on Form 8-K**

 

(a)          Exhibits:

 
| **Exhibit  No.** |   | **Description of Exhibit** |
|------------------|--------|----------------------------|
|             |   |                       |
| 99-1             |   | Certification  of CEO      |
| 99-2             |   | Certification  of CFO      |

 

(b)         Reports on Form 8-K:

 

There were noreports on Form 8-K filed for the three months ended March 31, 2003.

 

SIGNATURE

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|   |                   | The  Navigators Group, Inc. |                                                           |
|--------|------------------------|-----------------------------|----------------------------------------------------------------|
|   |                   | (Registrant)                |
|   |                   |                        |
|   |                   |                        | /s / Bradley  D. Wiley                                         |   |
|   |                   | Bradley D.  Wiley           |
| Date:  | May 15, 2003 |                        | Senior Vice  President, Chief Financial  Officer and Secretary |
|        |                        |                             |                                                                |  |  |

 

28

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**CERTIFICATION****OF CHIEFEXECUTIVE OFFICER PERSECTION 302 OF THE SARBANES-OXLEY ACT**

 

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

 

1.                                       I have reviewed this quarterly report on Form10-Q for the three months ended March 31, 2003 of The Navigators Group, Inc.;

 

2.                                       Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of the circumstancesunder which such statements were made, not misleading with respect to theperiod covered by this quarterly report;

 

3.                                       Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

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

 

a) designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6.                                       The registrant’s other certifying officersand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date: May 15, 2003 |   | By:  /s/ Stanley  A. Galanski       |
|--------------------|--------|-----------------------------------------------|
|               |   | Name: Stanley A. Galanski                     |
|               |   | Title: President and Chief  Executive Officer |
|               |   | (principal executive  officer)                |

 

29

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**CERTIFICATION OFCHIEF FINANCIAL OFFICER PERSECTION 302 OF THE SARBANES-OXLEY ACT**

 

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

 

1.                                       I have reviewed this quarterly report on Form10-Q for the three months ended March 31, 2003 of The Navigators Group, Inc.;

 

2.                                       Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.                                       Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

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

 

a) designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated the effectivenessof the registrant’s disclosure controls and procedures as of a date within 90days prior to the filing date of this quarterly report (the “Evaluation Date”);and

 

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6.                                       The registrant’s other certifying officersand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date: May 15, 2003 |   | By:    /s/  Bradley D. Wiley |
|--------------------|--------|---------------------------------------------|
|               |   | Name:                                       | Bradley D. Wiley |
|               |   | Title:                                      | Senior  Vice President, Chief Financial Officer and Secretary |
|               |   |                                        | (principal financial  officer) |

 

30

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**INDEX OF EXHIBITS**

 
| **Exhibit  No.** |   | **Description of Exhibit** |
|------------------|--------|----------------------------|
| 99-1             |   | Certification  of CEO      |
| 99-2             |   | Certification  of CFO      |

 

31

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