**FORM 10-Q**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**QuarterlyReport Under Section 13 or 15 (d)**

**ofthe Securities Exchange Act of 1934**

 

**For the Quarterly Period Ended March 31, 2004**

 

**Commission file number  0-15886**

 

**The Navigators Group, Inc.**

(Exact name of Registrant as specified in itscharter)

 

| **Delaware**                                                                         |   | **13-3138397**      |
|--------------------------------------------------------------------------------------|--------|---------------------|
| (State or other jurisdiction of                                                      |   | (IRS Employer       |
| incorporation or organization)                                                       |   | 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 whether the Registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes  ý        No  o

 

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

 

The number of common shares outstanding as of April 28, 2004 was 12,582,249.

 

 

----

 

**THENAVIGATORS GROUP, INC. AND SUBSIDIARIES**

 

**INDEX**

 
| Part  I.  FINANCIAL INFORMATION:                                                                     |
|-----------------------------------------------------------------------------------------------------------|
|                                                                                                      |
| Item 1.  Financial Statements                                                                        |
|                                                                                                      |
| Consolidated Balance Sheets                                                                               |
| March 31, 2004 (unaudited) and December 31, 2003                                                          |
|                                                                                                      |
| Consolidated Statements of Income  (unaudited)                                                            |
| Three Months Ended March 31, 2004 and 2003                                                                |
|                                                                                                      |
| Consolidated Statements of Stockholders’  Equity                                                     |
| March 31, 2004 (unaudited) and December 31,  2003                                                         |
|                                                                                                      |
| Consolidated Statements of Comprehensive  Income (unaudited)                                              |
| Three Months Ended March 31, 2004 and 2003                                                                |
|                                                                                                      |
| Consolidated Statements of Cash Flows  (unaudited)                                                        |
| Three Months Ended March 31, 2004 and 2003                                                                |
|                                                                                                      |
| 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                                                                    |
|                                                                                                      |
| Item 1.  Legal Proceedings                                                                           |
|                                                                                                      |
| Item 2.  Changes in  Securities, Use of Proceeds and Issuer Purchases of Equity Securities           |
|                                                                                                      |
| Item 3.  Defaults Upon Senior  Securities                                                            |
|                                                                                                      |
| Item 4.  Submissions of  Matters to a Vote of Securities’ Holders                               |
|                                                                                                      |
| Item 5.  Other Information                                                                           |
|                                                                                                      |
| Item 6.  Exhibits and Reports  on Form 8-K                                                           |
|                                                                                                      |
| Signature                                                                                                 |
|                                                                                                      |
| Index of Exhibits                                                                                         |

 

2

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

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

 

**THENAVIGATORS GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCESHEETS**

*($ in thousands, except share data)*

* *
|                                                                                                                                    |   | **March 31,**   |      | **December  31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|-----------|-------------------|--------|
|                                                                                                                                    |   | **2004**        |      | **2003**          |   |
|                                                                                                                                    |   | **(Unaudited)** |      |              |   |
| **ASSETS**                                                                                                                              |   |            |      |              |   |
| Investments and cash:                                                                                                                   |   |            |      |              |   |
| Fixed maturities, available-for-sale, at  fair value (amortized cost: 2004, $614,328; 2003, $577,904)                                   |   | $               | 632,098   |              | $      | 588,545 |   |
| Equity securities, available-for-sale, at  fair value (cost: 2004, $18,806; 2003, $11,977)                                              |   | 20,484          |      | 13,446            |   |
| Short-term investments, at cost which  approximates fair value                                                                          |   | 67,384          |      | 83,202            |   |
| Cash                                                                                                                                    |   | 6,105           |      | 8,399             |   |
| Total investments and cash                                                                                                              |   | 726,071         |      | 693,592           |   |
|                                                                                                                                    |   |            |      |              |   |
| Premiums in course of collection                                                                                                        |   | 185,801         |      | 128,676           |   |
| Commissions receivable                                                                                                                  |   | 3,881           |      | 3,970             |   |
| Prepaid reinsurance premiums                                                                                                            |   | 130,345         |      | 102,141           |   |
| Reinsurance receivable on paid losses                                                                                                   |   | 21,495          |      | 26,270            |   |
| Reinsurance receivable on unpaid losses and  loss adjustment expense                                                                    |   | 387,735         |      | 350,441           |   |
| Federal income tax recoverable                                                                                                          |   | 3,817           |      | 8,747             |   |
| Net deferred income tax benefit                                                                                                         |   | 12,886          |      | 15,195            |   |
| Deferred policy acquisition costs                                                                                                       |   | 34,454          |      | 24,720            |   |
| Accrued investment income                                                                                                               |   | 6,028           |      | 5,546             |   |
| Goodwill                                                                                                                                |   | 5,173           |      | 5,093             |   |
| Other assets                                                                                                                            |   | 17,662          |      | 15,067            |   |
|                                                                                                                                    |   |            |      |              |   |
| Total assets                                                                                                                            |   | $               | 1,535,348 |              | $      | 1,379,458 |   |
|                                                                                                                                    |   |            |      |              |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                           |   |            |      |              |   |
| Liabilities:                                                                                                                            |   |            |      |              |   |
| Reserves for losses and loss adjustment  expenses                                                                                       |   | $               | 786,088   |              | $      | 724,612 |   |
| Unearned premium                                                                                                                        |   | 290,009         |      | 238,803           |   |
| Reinsurance balances payable                                                                                                            |   | 126,985         |      | 97,583            |   |
| Payable for securities                                                                                                                  |   | 8,844           |      | 12,857            |   |
| Accounts payable and other liabilities                                                                                                  |   | 18,218          |      | 15,575            |   |
| Total liabilities                                                                                                                       |   | 1,230,144       |      | 1,089,430         |   |
|                                                                                                                                    |   |            |      |              |   |
| Stockholders’ equity:                                                                                                              |   |            |      |              |   |
| Preferred stock, $.10 par value; 1,000,000  shares authorized; none issued                                                              |   | —          |      | —            |   |
| Common stock, $.10 par value; 20,000,000  shares authorized; issued and outstanding shares 12,582,249 for 2004 and  12,535,360 for 2003 |   | 1,259           |      | 1,254             |   |
| Additional paid-in capital                                                                                                              |   | 153,034         |      | 151,765           |   |
| Accumulated other comprehensive income                                                                                                  |   | 13,526          |      | 8,537             |   |
| Retained earnings                                                                                                                       |   | 137,385         |      | 128,472           |   |
| Total stockholders’ equity                                                                                                         |   | 305,204         |      | 290,028           |   |
|                                                                                                                                    |   |            |      |              |   |
| Total liabilities and stockholders’ equity                                                                                         |   | $               | 1,535,348 |              | $      | 1,379,458 |   |

 

#### **Seeaccompanying notes to interim consolidated financial statements**

 

3

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

**CONSOLIDATEDSTATEMENTS OF INCOME**

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

 
|                                              |   | **Three Months Ended  March 31,** |    |
|---------------------------------------------------|--------|-----------------------------------|---------|
|                                              |   | **2004**                          |    | **2003** |   |
|                                              |   | **(Unaudited)**                   |    |
|                                              |   |                              |    |
| Gross written premium                             |   | $                                 | 195,951 |   | $ | 174,702 |   |
| Revenues:                                         |   |                              |    |   |   |
| Net written premium                               |   | $                                 | 95,935  |   | $ | 91,033 |   |
| (Increase) in unearned premium                    |   | (21,760                           | )       | (24,719 | ) |
| Net earned premium                                |   | 74,175                            |    | 66,314 |   |
| Commission income                                 |   | 1,127                             |    | 1,239 |   |
| Net investment income                             |   | 5,902                             |    | 4,661 |   |
| Net realized capital gains                        |   | 422                               |    | 218 |   |
| Other income                                      |   | 128                               |    | 173 |   |
| Total revenues                                    |   | 81,754                            |    | 72,605 |   |
|                                              |   |                              |    |   |   |
| Operating expenses:                               |   |                              |    |   |   |
| Net losses and loss adjustment expenses  incurred |   | 43,752                            |    | 44,040 |   |
| Commission expense                                |   | 11,028                            |    | 10,627 |   |
| Other operating expenses                          |   | 13,432                            |    | 11,778 |   |
| Interest expense                                  |   | —                            |    | 97 |   |
| Total operating expenses                          |   | 68,212                            |    | 66,542 |   |
|                                              |   |                              |    |   |   |
| Income before income tax expense                  |   | 13,542                            |    | 6,063 |   |
|                                              |   |                              |    |   |   |
| Income tax expense (benefit):                     |   |                              |    |   |   |
| Current                                           |   | 5,007                             |    | 1,134 |   |
| Deferred                                          |   | (378                              | )       | 219 |   |
| Total income tax expense                          |   | 4,629                             |    | 1,353 |   |
|                                              |   |                              |    |   |   |
| Net income                                        |   | $                                 | 8,913   |   | $ | 4,710 |   |
|                                              |   |                              |    |   |   |
| Net income per common share:                      |   |                              |    |   |   |
| Basic                                             |   | $                                 | 0.71    |   | $ | 0.55 |   |
| Diluted                                           |   | $                                 | 0.70    |   | $ | 0.54 |   |
|                                              |   |                              |    |   |   |
| Average common shares outstanding:                |   |                              |    |   |   |
| Basic                                             |   | 12,554                            |    | 8,494 |   |
| Diluted                                           |   | 12,654                            |    | 8,724 |   |

 

See accompanying notes to interimconsolidated financial statements.

 

4

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**THENAVIGATORS GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

*($ in thousands)*

 

 
|                                             |   | **Three  Months Ended  March 31,** |    |
|--------------------------------------------------|--------|------------------------------------|---------|
|                                             |   | **2004**                           |    | **2003** |   |
|                                             |   | **(Unaudited)**                    |    |
| Preferred stock                                  |   |                               |    |   |   |
| Balance at beginning and end of period           |   | $                                  | —  |   | $ | — |   |
|                                             |   |                               |    |   |   |
| Common stock                                     |   |                               |    |   |   |
| Balance at beginning of year                     |   | $                                  | 1,254   |   | $ | 851 |   |
| Shares issued under stock plans                  |   | 5                                  |    | 1 |   |
| Balance at end of period                         |   | $                                  | 1,259   |   | $ | 852 |   |
|                                             |   |                               |    |   |   |
| Additional paid-in capital                       |   |                               |    |   |   |
| Balance at beginning of year                     |   | $                                  | 151,765 |   | $ | 40,141 |   |
| Effect of SFAS 123 for stock options             |   | 200                                |    | 206 |   |
| Shares issued under stock plans                  |   | 1,069                              |    | 461 |   |
| Balance at end of period                         |   | $                                  | 153,034 |   | $ | 40,808 |   |
|                                             |   |                               |    |   |   |
| Treasury stock held at cost                      |   |                               |    |   |   |
| Balance at beginning of year                     |   | $                                  | —  |   | $ | (236 | ) |
| Shares issued for vested stock grants            |   | —                             |    | 236 |   |
| Balance at end of period                         |   | $                                  | —  |   | $ | — |   |
|                                             |   |                               |    |   |   |
| Accumulated other comprehensive income           |   |                               |    |   |   |
| Net unrealized gains on securities, net of  tax  |   |                               |    |   |   |
| Balance at beginning of year                     |   | $                                  | 7,871   |   | $ | 9,499 |   |
| Change in period                                 |   | 4,770                              |    | 45 |   |
| Balance at end of period                         |   | 12,641                             |    | 9,544 |   |
| Cumulative translation adjustments, net of  tax  |   |                               |    |   |   |
| Balance at beginning of year                     |   | 666                                |    | 233 |   |
| Net adjustment for period                        |   | 219                                |    | (74 | ) |
| Balance at end of period                         |   | 885                                |    | 159 |   |
| Balance at end of period                         |   | $                                  | 13,526  |   | $ | 9,703 |   |
|                                             |   |                               |    |   |   |
| Retained earnings                                |   |                               |    |   |   |
| Balance at beginning of year                     |   | $                                  | 128,472 |   | $ | 120,787 |   |
| Net income                                       |   | 8,913                              |    | 4,710 |   |
| Balance at end of period                         |   | $                                  | 137,385 |   | $ | 125,497 |   |
|                                             |   |                               |    |   |   |
| Total stockholders’ equity at end of period |   | $                                  | 305,204 |   | $ | 176,860 |   |

 

See accompanying notes to interim consolidated financial statements.

 

5

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**THENAVIGATORS GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE INCOME**

*($ inthousands)*

 
|                                                                                                                                                                                                                                                          |   | **Three  Months Ended  March 31,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                                                                                                                                                                                          |   | **2004**                           |   | **2003** |   |
|                                                                                                                                                                                                                                                          |   | **(Unaudited)**                    |   |
|                                                                                                                                                                                                                                                          |   |                               |   |   |   |
| Net income                                                                                                                                                                                                                                                    |   | $                                  | 8,913  |   | $ | 4,710 |   |
| Other comprehensive income (loss):                                                                                                                                                                                                                            |   |                               |   |   |   |
| Change in net unrealized gains on  securities, net of tax expense of $2,568, and $31 in 2004, and 2003,  respectively(1)                                                                                                                                      |   | 4,770                              |   | 45 |   |
| Change in foreign currency translation  gains (losses), net of tax expense (benefit) of $118, and $(40) in 2004, and  2003, respectively                                                                                                                      |   | 219                                |   | (74 | ) |
| Other comprehensive income (loss)                                                                                                                                                                                                                             |   | 4,989                              |   | (29 | ) |
|                                                                                                                                                                                                                                                          |   |                               |   |   |   |
| Comprehensive income                                                                                                                                                                                                                                          |   | $                                  | 13,902 |   | $ | 4,681 |   |
|                                                                                                                                                                                                                                                          |   |                               |   |   |   |
|                                                                                                                                                                                                                                                               |   |                               |   |   |   |
| (1)                                  Disclosure  of reclassification amount, net of tax: |   |                               |   |   |   |
| Unrealized holding gains arising during period                                                                                                                                                                                                                |   | $                                  | 5,044  |   | $ | 222 |   |
| Less:  reclassification  adjustment for net gains included in net income                                                                                                                                                                                 |   | 274                                |   | 177 |   |
| Net unrealized gains on securities                                                                                                                                                                                                                            |   | $                                  | 4,770  |   | $ | 45 |   |

 

See accompanying notes to interim consolidated financial statements.

 

6

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**THENAVIGATORS GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

*($ in thousands)*

 
|                                                                                         |   | **Three  Months Ended  March 31,** |   |
|----------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                         |   | **2004**                           |   | **2003** |   |
|                                                                                         |   | **(Unaudited)**                    |   |
| Operating activities:                                                                        |   |                               |   |   |   |
| Net income                                                                                   |   | $                                  | 8,913  |   | $ | 4,710 |   |
| Adjustments to reconcile net income to net cash provided by (used in)  operating activities: |   |                               |   |   |   |
| Depreciation & amortization                                                              |   | 271                                |   | 296 |   |
| Net deferred income tax                                                                      |   | (378                               | )      | 286 |   |
| Net realized capital (gains)                                                                 |   | (422                               | )      | (218 | ) |
| Changes in assets and liabilities:                                                           |   |                               |   |   |   |
| Reinsurance receivable on paid and unpaid losses and loss adjustment  expenses               |   | (32,519                            | )      | (9,522 | ) |
| Reserve for losses and loss adjustment expenses                                              |   | 61,476                             |   | 17,790 |   |
| Prepaid reinsurance premiums                                                                 |   | (28,204                            | )      | (36,809 | ) |
| Unearned premium                                                                             |   | 51,206                             |   | 59,319 |   |
| Premiums in course of collection                                                             |   | (57,125                            | )      | (29,094 | ) |
| Commissions receivable                                                                       |   | 89                                 |   | (402 | ) |
| Deferred policy acquisition costs                                                            |   | (9,734                             | )      | (4,921 | ) |
| Accrued investment income                                                                    |   | (482                               | )      | (959 | ) |
| Reinsurance balances payable                                                                 |   | 29,402                             |   | 24,898 |   |
| Federal income tax                                                                           |   | 4,930                              |   | 978 |   |
| Other                                                                                        |   | (690                               | )      | (317 | ) |
| Net cash provided by operating activities                                                    |   | 26,733                             |   | 26,035 |   |
|                                                                                         |   |                               |   |   |   |
| Investing activities:                                                                        |   |                               |   |   |   |
| Fixed maturities, available-for-sale                                                         |   |                               |   |   |   |
| Redemptions and maturities                                                                   |   | 52,720                             |   | 2,316 |   |
| Sales                                                                                        |   | 45,059                             |   | 66,544 |   |
| Purchases                                                                                    |   | (131,950                           | )      | (78,909 | ) |
| Equity securities, available-for-sale                                                        |   |                               |   |   |   |
| Sales                                                                                        |   | —                             |   | 476 |   |
| Purchases                                                                                    |   | (6,785                             | )      | (424 | ) |
| Change in payable for securities                                                             |   | (4,013                             | )      | (5,974 | ) |
| Net change in short-term investments                                                         |   | 15,818                             |   | (5,337 | ) |
| Purchase of property and equipment                                                           |   | (266                               | )      | (637 | ) |
| Net cash (used in) investing activities                                                      |   | (29,417                            | )      | (21,945 | ) |
|                                                                                         |   |                               |   |   |   |
| Financing activities:                                                                        |   |                               |   |   |   |
| Repayment of bank loan                                                                       |   | —                             |   | (1,750 | ) |
| Proceeds from Employee Stock Purchase Plan                                                   |   | 215                                |   | — |   |
| Proceeds from exercise of stock options                                                      |   | 175                                |   | 20 |   |
| Net cash provided by (used in) financing activities                                          |   | 390                                |   | (1,730 | ) |
|                                                                                         |   |                               |   |   |   |
| Increase (decrease) in cash                                                                  |   | (2,294                             | )      | 2,360 |   |
| Cash at beginning of year                                                                    |   | 8,399                              |   | 13,443 |   |
| Cash at end of period                                                                        |   | $                                  | 6,105  |   | $ | 15,803 |   |
|                                                                                         |   |                               |   |   |   |
| Supplemental disclosures of cash flow information:                                           |   |                               |   |   |   |
| Federal, state and local income tax paid                                                     |   | $                                  | 77     |   | $ | 100 |   |
| Interest paid                                                                                |   | —                             |   | 97 |   |
| Issuance of stock to directors                                                               |   | 60                                 |   | 72 |   |

 

See accompanying notes to interimconsolidated financial statements.

###### ** **

7

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###### **THE NAVIGATORS GROUP, INC.  ANDSUBSIDIARIES**

 

**Notes to InterimConsolidated Financial Statements**

*(Unaudited)*

 

**Note 1.  Accounting Policies**

 

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 contingent assetsand 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 2003Annual Report on Form 10-K.  Certainamounts for prior periods have been reclassified to conform to the currentperiod’s presentation.

 

**Note 2.  Reinsurance Ceded**

 

The Company’s ceded earned premiums were $73,379,000 and $47,100,000for the three months ended March 31, 2004 and 2003, respectively.  The Company’s ceded incurred losses were$64,818,000 and $27,537,000 for the three months ended March 31, 2004 and 2003,respectively.

 

**Note 3.  Segment Information**

 

TheCompany’s subsidiaries are primarily engaged in the writing and management ofproperty and casualty insurance.  TheCompany’s segments include the Insurance Companies, the Lloyd’s operations andthe Navigators Agencies, each of which is managed separately.  The Insurance Companies consist ofNavigators Insurance Company and NIC Insurance Company and currently areprimarily engaged in underwriting marine insurance and related lines ofbusiness, contractors’ general liability insurance, and professional liabilityinsurance.  The Navigators Agencies areunderwriting management companies which produce, manage and underwriteinsurance and reinsurance for both affiliated and unaffiliated companies.  The Lloyd’s operations underwrite marine andrelated lines of business at Lloyd’s of London.  All segments are evaluated based on their GAAP results.

 

TheInsurance Companies and the Lloyd’s operations are measured taking into accountnet premiums earned, incurred losses and loss expenses, commission expense andother underwriting expenses.  TheNavigators Agencies’ results include commission income less other operatingexpenses.  Parent and other operationsinclude inter-segment income and expense in the form of affiliated commissions,income and expense from corporate operations and consolidatingadjustments.  Each segment alsomaintains their own investments, on which they earn income and realize capitalgains or losses.

 

8

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Financialdata by segment for the first quarter 2004 and 2003 was as follows:

 
|                                    |   | **Quarter  Ended March 31, 2004** |      |
|-----------------------------------------|--------|-----------------------------------|-----------|
|                                    |   |                              |      |   |   |   |   | **Parent  &** |   |   |   |
|                                    |   | **Insurance**                     |      | **Lloyd’s** |   | **Navigators** |   | **Other** |   | **Consolidated** |   |
|                                    |   | **Companies**                     |      | **Operations** |   | **Agencies** |   | **Operations(1)** |   | **Total** |   |
|                                    |   | **($ in thousands)**              |      |
|                                    |   |                              |      |   |   |   |   |   |   |   |   |
| Gross written premium                   |   | $                                 | 111,829   |   | $ | 87,158 |   | $ | — |   | $ | (3,036 | ) | $ | 195,951 |   |
| Net written premium                     |   | 54,145                            |      | 41,790 |   | — |   | — |   | 95,935 |   |
|                                    |   |                              |      |   |   |   |   |   |   |   |   |
| Revenues:                               |   |                              |      |   |   |   |   |   |   |   |   |
| Net earned premium                      |   | $                                 | 53,182    |   | $ | 20,993 |   | $ | — |   | $ | — |   | $ | 74,175 |   |
| Commission income                       |   | —                            |      | 62 |   | 7,932 |   | (6,867 | ) | 1,127 |   |
| Net investment income                   |   | 5,484                             |      | 404 |   | 3 |   | 11 |   | 5,902 |   |
| Net realized capital gains              |   | 205                               |      | 217 |   | — |   | — |   | 422 |   |
| Other income (expense)                  |   | (61                               | )         | 4 |   | 185 |   | — |   | 128 |   |
| Total revenues                          |   | 58,810                            |      | 21,680 |   | 8,120 |   | (6,856 | ) | 81,754 |   |
|                                    |   |                              |      |   |   |   |   |   |   |   |   |
| Operating expenses:                     |   |                              |      |   |   |   |   |   |   |   |   |
| Net losses and loss adjustment expenses |   | 32,710                            |      | 11,042 |   | — |   | — |   | 43,752 |   |
| Commission expense                      |   | 14,145                            |      | 3,750 |   | — |   | (6,867 | ) | 11,028 |   |
| Other operating expenses                |   | 1,198                             |      | 3,036 |   | 8,605 |   | 593 |   | 13,432 |   |
| Total operating expenses                |   | 48,053                            |      | 17,828 |   | 8,605 |   | (6,274 | ) | 68,212 |   |
|                                    |   |                              |      |   |   |   |   |   |   |   |   |
| Income (loss) before income tax expense |   | 10,757                            |      | 3,852 |   | (485 | ) | (582 | ) | 13,542 |   |
|                                    |   |                              |      |   |   |   |   |   |   |   |   |
| Income tax expense (benefit)            |   | 3,478                             |      | 1,348 |   | (140 | ) | (57 | ) | 4,629 |   |
|                                    |   |                              |      |   |   |   |   |   |   |   |   |
| Net income (loss)                       |   | $                                 | 7,279     |   | $ | 2,504 |   | $ | (345 | ) | $ | (525 | ) | $ | 8,913 |   |
|                                    |   |                              |      |   |   |   |   |   |   |   |   |
| Identifiable assets(2)                  |   | $                                 | 1,114,640 |   | $ | 447,860 |   | $ | 16,876 |   | $ | 32,514 |   | $ | 1,535,348 |   |
|                                    |   |                              |      |   |   |   |   |   |   |   |   |
| Loss and loss adjustment expenses ratio |   | 61.5                              | %         | 52.6 | % |   |   |   |   | 59.0 | % |
| Commission expense ratio                |   | 26.6                              |      | 17.9 |   |   |   |   |   | 24.1 |   |
| Other operating expense ratio           |   | 2.3                               |      | 14.4 |   |   |   |   |   | 5.7 |   |
|                                    |   |                              |      |   |   |   |   |   |   |   |   |
| Combined ratio                          |   | 90.4                              | %         | 84.9 | % |   |   |   |   | 88.8 | % |

 

9

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* *
|                                    |   | **Quarter  Ended March 31, 2003** |    |
|-----------------------------------------|--------|-----------------------------------|---------|
|                                    |   |                              |    |   |   |   |   | **Parent &** |   |   |   |
|                                    |   | **Insurance**                     |    | **Lloyd’s** |   | **Navigators** |   | **Other** |   | **Consolidated** |   |
|                                    |   | **Companies**                     |    | **Operations** |   | **Agencies** |   | **Operations(1)** |   | **Total** |   |
|                                    |   | **($ in thousands)**              |    |
|                                    |   |                              |    |   |   |   |   |   |   |   |   |
| Gross written premium                   |   | $                                 | 109,882 |   | $ | 76,084 |   | $ | — |   | $ | (11,264 | ) | $ | 174,702 |   |
| Net written premium                     |   | 61,654                            |    | 29,379 |   | — |   | — |   | 91,033 |   |
|                                    |   |                              |    |   |   |   |   |   |   |   |   |
| Revenues:                               |   |                              |    |   |   |   |   |   |   |   |   |
| Net earned premium                      |   | $                                 | 50,400  |   | $ | 15,914 |   | $ | — |   | $ | — |   | $ | 66,314 |   |
| Commission income                       |   | —                            |    | 964 |   | 6,600 |   | (6,325 | ) | 1,239 |   |
| Net investment income                   |   | 4,106                             |    | 547 |   | 8 |   | — |   | 4,661 |   |
| Net realized capital gains              |   | 119                               |    | 99 |   | — |   | — |   | 218 |   |
| Other income (expense)                  |   | 21                                |    | 15 |   | 262 |   | (125 | ) | 173 |   |
| Total revenues                          |   | 54,646                            |    | 17,539 |   | 6,870 |   | (6,450 | ) | 72,605 |   |
|                                    |   |                              |    |   |   |   |   |   |   |   |   |
| Operating expenses:                     |   |                              |    |   |   |   |   |   |   |   |   |
| Net losses and loss adjustment expenses |   | 34,000                            |    | 10,040 |   | — |   | — |   | 44,040 |   |
| Commission expense                      |   | 14,149                            |    | 2,803 |   | — |   | (6,325 | ) | 10,627 |   |
| Other operating expenses                |   | 1,146                             |    | 1,954 |   | 7,641 |   | 1,037 |   | 11,778 |   |
| Interest expense                        |   | —                            |    | — |   | — |   | 97 |   | 97 |   |
| Total operating expenses                |   | 49,295                            |    | 14,797 |   | 7,641 |   | (5,191 | ) | 66,542 |   |
|                                    |   |                              |    |   |   |   |   |   |   |   |   |
| Income (loss) before income tax expense |   | 5,351                             |    | 2,742 |   | (771 | ) | (1,259 | ) | 6,063 |   |
|                                    |   |                              |    |   |   |   |   |   |   |   |   |
| Income tax expense (benefit)            |   | 1,666                             |    | — |   | 127 |   | (440 | ) | 1,353 |   |
|                                    |   |                              |    |   |   |   |   |   |   |   |   |
| Net income (loss)                       |   | $                                 | 3,685   |   | $ | 2,742 |   | $ | (898 | ) | $ | (819 | ) | $ | 4,710 |   |
|                                    |   |                              |    |   |   |   |   |   |   |   |   |
| Identifiable assets(2)                  |   | $                                 | 735,057 |   | $ | 296,150 |   | $ | 14,431 |   | $ | 23,638 |   | $ | 1,019,159 |   |
|                                    |   |                              |    |   |   |   |   |   |   |   |   |
| Loss and loss adjustment expenses ratio |   | 67.5                              | %       | 63.1 | % |   |   |   |   | 66.4 | % |
| Commission expense ratio                |   | 28.1                              |    | 17.6 |   |   |   |   |   | 25.6 |   |
| Other operating expense ratio           |   | 2.3                               |    | 12.3 |   |   |   |   |   | 4.6 |   |
|                                    |   |                              |    |   |   |   |   |   |   |   |   |
| Combined ratio                          |   | 97.9                              | %       | 93.0 | % |   |   |   |   | 96.6 | % |

 

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(1)Includesinter-segment eliminations.

(2)Doesnot cross-foot due to inter-segment eliminations.

 

TheInsurance Companies net earned premium includes $7,425,000 and $7,778,000 ofnet earned premium from the UK Branch for the first three months of 2004 and2003, respectively.

 

**Note 4.  Comprehensive Income**

 

Comprehensive income encompasses net income, net unrealized capitalgains and losses on available for sale securities, and foreign currencytranslation adjustments.  Please referto the ‘Consolidated Statements of Stockholders’ Equity’ and the ‘ConsolidatedStatements of Comprehensive Income’, included herein, for the components ofaccumulated other comprehensive income and of comprehensive income,respectively.

 

**Note 5.  Stock-Based Compensation**

 

In December 2002, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) 148, *Accountingfor Stock-Based Compensation, Amendment of FASB Statement No. 123.*  The provisions of this statement providealternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation.  The provisions are effective for financialstatements for fiscal years ending after December 15, 2002.

 

SFAS 123, *Accounting for Stock-Based Compensation,* establishesfinancial accounting and reporting standards for stock-based compensationplans.  In the fourth quarter of 2003,effective January 1, 2003, the Company adopted the fair value recognitionprovisions of SFAS 123.  Under themodified prospective method of adoption selected by the Company under theprovisions of SFAS 148, compensation cost recognized in 2003 and

 

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subsequent is the same as thatwhich would have been recognized had the recognition provisions of SFAS 123been applied from its original effective date. Results for 2003 have been adjusted herein.  Prior to 2003, the Company accounted for its stock compensationplans under the recognition and measurement provisions of Accounting PrinciplesBoard (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*(“APB 25”), and related interpretations, with certain pro forma disclosures asrequired by SFAS 123.  APB 25 requirescompensation expense to be recognized only if the fair value of the underlyingstock at the grant date exceeds the exercise price of the option.

 

Stock based compensation is expensed as the items vest.  The amount charged to expense for stockgrants was $362,000 and $276,000 for the three months ended March 31, 2004 and2003, respectively.  The amount chargedto expense for stock options was $200,000 and $206,000 for the three monthsended March 31, 2004 and 2003, respectively. Stock appreciation rights resulted in income of $329,000 for the threemonths ended March 31, 2004 and expense of $334,000 for the three months endedMarch 31, 2003.

 

In addition, $30,000 and $18,000 were expensed for the three monthsended March 31, 2004 and 2003 for stock issued annually to non-employeedirectors as part of the directors’ compensation for serving on the Company’sBoard of Directors.

 

**Note 6.  Application of New Accounting Standards**

 

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 ofoperations.  In December 2003, the FASBrevised Interpretation 46 primarily to clarify certain requirements, ease someimplementation problems and add new scope exceptions.  The result of the revisions tend to make it more likely thatpotential variable interest entities will be identified and consolidated.  The adoption of the revision toInterpretation 46 did not have any effect on the Company’s financial conditionor results of operations.

 

**Note 7.  Lloyd’s Syndicate**

 

Werecord our pro rata share of Lloyd’s Syndicate 1221’s assets, liabilities,revenues and expenses, after making adjustments to convert Lloyd’s accountingto U.S. GAAP.  The most significant U.S.GAAP adjustments relate to income recognition. Lloyd’s syndicates determineunderwriting results by year of account at the end of three years.  We record adjustments to recognize underwritingresults as incurred, including the expected ultimate cost of lossesincurred.  These adjustments to lossesare based on actuarial analysis of syndicate accounts, including forecasts ofexpected ultimate losses provided by the syndicates.  At the end of the Lloyd’sthree year period for determining underwriting results for an account year, thesyndicate will close the account year by reinsuring outstanding claims on thataccount year with the participants for the account’s next underwriting year.  The amount to close an underwriting yearinto the next year is referred to as the “reinsurance to close”.  The reinsurance to close transactions arerecorded in the fourth quarter as additional written and earned premium, lossesincurred, loss reserves and receivables, all in the same amount.  No gains or losses are recorded on the reinsurance to close transactions.

 

Lloyd’s Syndicate 1221 has stamp capacity of £150.0 million ($276.0million) in 2004 compared to £125.0 million ($203.5 million) in 2003.  Stamp capacity is a measure of the amount ofpremium a Lloyd’s syndicate is authorized to write as determined by the Councilof Lloyd’s.  Syndicate 1221’s capacityis expressed net of commission (as is standard at Lloyd’s) of approximately21%.  The Syndicate 1221 premiumrecorded in the Company’s financial statements is gross of commission.  The Company participates for 97.4% ofSyndicate 1221’s capacity for both the 2004 and 2003 underwriting years.  The Lloyd’s operations included in theconsolidated financial statements represent the Company’s participation inSyndicate 1221.

 

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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.  The renewal amendment executed in November 2003renewed the letter of credit facility for a two year period.

 

**Note 8.  Income Tax - 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, the Company had losscarryforwards remaining at its foreign operations amounting to potential futuretax benefits of $3,899,000, along with a valuation allowance equal to thosebenefits.  Although the foreignoperations were profitable in the first quarter of 2003, the valuationallowance was released only to the extent of the first quarter 2003 profits sincefuture profitability remained uncertain. This process continued for the first nine months of 2003.  Due to the continued profitability andprojected favorable market conditions for the foreseeable future, it was determinedin the fourth quarter of 2003 to be more likely than not that the deferred taxassets resulting from the foreign net operating loss carryforwards will berealized, therefore the remaining valuation allowance related to the foreignoperations was released in the fourth quarter of 2003.

 

**Note 9.  Commitments and Contingencies**

 

TheCompany is not a party to or the subject of, any material pending legalproceedings which depart from the ordinary routine litigation incident to thekinds of business conducted by the Company, except for a suit concerning thedraw down of letters of credit.  In 1997and 1998, Navigators Insurance Company entered into certain reinsurancecontracts with a reinsurer.  Inaccordance with normal business practice, Navigators Insurance Company hadsecured this exposure with letters of credit. In April 1999, NavigatorsInsurance Company drew down the letters of credit, in good faith and consistentwith their terms. The liquidator of the reinsurer has commenced suit inAustralia, seeking to void the draw downs. If the liquidator were to prevail inits action to void the letters of credit, our maximum exposure would beapproximately $4.0 million. We filed motions seeking a prompt dismissal of theliquidator’s claims in Australian court in June 2003, which motions weredenied. We have appealed those denials and are vigorously defending ourposition. The appellate court ruled that the case needs to be fully triedbefore an appeal can be pursued. Although we believe that we have strong defenses against these claimsand a reasonable possibility of defeating the liquidator’s claim and that theliquidator’s assertions run counter to prevailing Australian and United Stateslaw, there can be no assurance as to the outcome of this litigation.

 

12

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

 

**Note onForward-Looking Statements**

 

Someof the statements in this Quarterly Report on Form 10-Q are ‘‘forward-lookingstatements’’ as defined in the Private Securities Litigation Reform Act of1995. Forward-looking statements are derived from information that we currentlyhave and assumptions that we make. We cannot assure that anticipated resultswill be achieved, since results may differ materially because of both known andunknown risks and uncertainties which we face. We undertake no obligation topublicly update or revise any forward-looking statements, whether as a resultof new information, future events or otherwise. Factors that could cause actualresults to differ materially from our forward-looking statements include, butare not limited to:

 

•      the effects of domestic and foreign economicconditions, and conditions which affect the market for property and casualtyinsurance;

 

•      changes in the laws, rules and regulationswhich apply to our insurance companies;

 

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

 

•      the effects of competition from banks, otherinsurers and the trend toward self-insurance;

 

•      risks that we face in entering new marketsand diversifying the products and services we offer;

 

•      unexpected turnover of our professionalstaff;

 

•      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,including our estimates relating to ultimate asbestos and environmentalliabilities and related reinsurance recoverables;

 

•      risks associated with our continuing abilityto obtain reinsurance covering our exposures at appropriate prices and/or insufficient amounts and the related recoverability of our reinsured losses;

 

•      weather-related events and other catastrophes(including acts of terrorism) impacting our insureds and/or reinsurers;

 

•      our ability to attain adequate prices, obtainnew business and to retain existing business consistent 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 ourprofitability; and

 

•      other risks that we identify in futurefilings with the Securities and Exchange Commission.

 

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Inlight of these risks, uncertainties and assumptions, any forward-looking eventsdiscussed in this Form 10-Q may not occur. You are cautioned not to place unduereliance on any forward-looking statements, which speak only as of theirrespective dates.

 

*The following discussion and analysis of ourfinancial condition and results of operations should be read in conjunctionwith our consolidated financial statements and accompanying notes which appearelsewhere in this Form 10-Q. It contains forward-looking statements thatinvolve risks and uncertainties. Please see ‘‘Note on Forward-LookingStatements’’ for more information. Our actual results could differmaterially from those anticipated in these forward-looking statements as aresult of various factors, including those discussed below and elsewhere inthis Form 10-Q.*

** **

**Overview**

 

Weare an international insurance holding company focusing on specialty productsfor niches within the overall property/casualty insurance market. Our largestproduct line and most long-standing area of specialization is ocean marineinsurance. We have also developed specialty niches in professional liabilityinsurance, and in specialty liability insurance primarily consisting ofcontractors’ liability coverages. We conduct operations through our insurancecompany subsidiaries, the Navigators Agencies and our Lloyd’s operations.  Our insurance company subsidiaries consistof Navigators Insurance Company (“Navigators Insurance”), which includes aUnited Kingdom Branch, and NIC Insurance Company which writes excess and surpluslines.  The Navigators Agencies consistof five wholly-owned insurance underwriting agencies which produce business forour insurance subsidiaries.  Our Lloyd’soperations include Navigators Underwriting Agency Ltd. (“NUAL”), a Lloyd’s ofLondon (“Lloyd’s”) marine underwriting agency which manages Lloyd’s Syndicate1221.  We participate in the capacity ofSyndicate 1221 through two wholly-owned Lloyd’s corporate members.

 

Whilemanagement takes into consideration a wide range of factors in planning the Company’sbusiness strategy and evaluating results of operations, there are certainfactors that management believes are fundamental to understanding how theCompany is managed.   First,underwriting profit is consistently emphasized as a primary goal, above premiumgrowth.  Management’s assessment of ourtrends and potential growth in underwriting profit is the dominant factor inits decisions with respect to whether or not to expand a business line, enterinto a new niche, product or territory or, conversely, to contract capacity inany business line.  In addition,management focuses on managing the costs of our operations.  Management believes that careful monitoringof the costs of existing operations and assessment of costs of potential growthopportunities are important to our profitability.  Access to capital also has a significant impact on management’soutlook for our operations.  Ourinsurance company subsidiaries’ operations and ability to grow their businessand take advantage of market opportunities are particularly constrained byregulatory capital requirements and rating agency assessments of capitaladequacy.  For example, we contributed$95.0 million of the approximately $110.8 million in net proceeds we receivedfrom the October 2003 equity offering to the statutory surplus of NavigatorsInsurance Company in order to position the Company to be able to capitalize ondomestic and international insurance business opportunities that managementbelieves will be profitable.

 

Althoughnot a financial measure, management’s decisions are also greatly influenced byaccess to specialized underwriting and claims expertise in our lines ofbusiness.  We have chosen to operate inspecialty niches with certain common characteristics which we believe provideus with the opportunity to use our technical underwriting expertise in order torealize underwriting profit. As a result, we have focused on underservedmarkets for businesses characterized by higher severity and low frequency ofloss where we believe our intellectual capital and financial strength bringmeaningful value. In contrast, we have avoided niches that we believe have ahigh frequency of loss activity and/or are subject to a high level ofregulatory coverage requirements, such as workers compensation and personalautomobile insurance, because we do not believe our technical expertise is ofas much value in these types of businesses. Examples of niches that have thecharacteristics we look for include bluewater hull (which provides coverage forphysical damage to, for example, highly valued cruise ships) and directors andofficers liability (which covers litigation exposure of a corporation’sdirectors and officers). These types of exposures require substantial technicalexpertise. We attempt

 

14

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to mitigate the financialimpact of severe claims on our results by conservative and detailedunderwriting, prudent use of reinsurance and a balanced portfolio of risks.

 

Ourrevenue is primarily comprised of premiums, commission and investment income.Our insurance company subsidiaries derive their premiums primarily frombusiness written by the Navigators Agencies. The Lloyd’s operations derivetheir premiums from business written by NUAL. The Navigators Agencies and NUALreceive commissions and, in some cases, profit commissions and service fees onthe business produced on behalf of our insurance company subsidiaries andothers.

 

Overthe past two years, we have experienced beneficial market changes in our lines ofbusiness. As a result of several large losses in the second quarter of 2001,the marine insurance market began to experience diminished capacity and rateincreases, initially in the offshore energy line of business. As conditions inthe overall property/casualty insurance market have hardened since the thirdquarter of 2001, certain property/casualty insurers who also compete in ourmarine and specialty liability lines of business have reduced their capacitygenerally and in the marine and specialty liability lines specifically.Specialty liability losses have also resulted in diminished capacity in themarket in which we compete, as many former competitors who lacked the expertiseto selectively underwrite this business have been forced to withdraw from themarket. In the professional liability market, the enactment of theSarbanes-Oxley Act of 2002, together with recent financial and accountingscandals at publicly traded corporations and increased frequency ofsecurities-related class action litigation, has lead to an invigorated interestin professional liability insurance generally. These conditions have resultedin rate increases as well as an overall improvement in policy terms andconditions for our professional liability line of business. While we believethat the hardening of the markets in which we operate will generally continuefor the foreseeable future, albeit at a less dramatic rate compared to the pasttwenty-four months, our business is cyclical and influenced by many factorsthat could cause our positive outlook to change. These factors include pricecompetition, economic conditions, interest rates, natural or man-made disasters(for example hurricanes and terrorism), state regulations, court decisions andchanges in the law. Additionally, because our insurance products must bepriced, and premiums charged, before costs have fully developed, ourliabilities are required to be estimated and recorded in recognition of futureloss and settlement obligations. Due to the inherent uncertainty in estimatingthese liabilities, we cannot assure you that our actual liabilities will notexceed our recorded amounts.

 

**Critical Accounting Policies**

 

Itis important to understand our accounting policies in order to understand ourfinancial statements. Management considers certain of these policies to becritical to the presentation of the financial results, since they requiremanagement to make estimates and assumptions. These estimates and assumptionsaffect the reported amounts of assets, liabilities, revenues, expenses, andrelated disclosures at the financial reporting date and throughout the periodbeing reported upon. Certain of the estimates result from judgments that can besubjective and complex, and consequently actual results may differ from these estimates,which would be reflected in future periods.

 

Ourmost critical accounting policies involve the reporting of the reserves forlosses and loss adjustment expenses (“LAE”) (including losses that haveoccurred but were not reported to us by the financial reporting date),reinsurance recoverables, written and unearned premium, the recoverability ofdeferred tax assets, the impairment of invested assets, accounting for Lloyd’sresults and the translation of foreign currencies.

 

***Reserves for Losses and LAE.*** Reserves for losses and LAE represent an estimate of the expected costof the ultimate settlement and administration of losses, based on facts andcircumstances then known. Actuarial methodologies are employed to assist inestablishing such estimates and include judgments relative to estimates offuture claims severity and frequency, length of time to develop to ultimate,judicial theories of liability and other third party factors which are oftenbeyond our control. Due to the inherent uncertainty associated with thereserving process, the ultimate liability may be different from the originalestimate. Such estimates are regularly reviewed and updated and any resultingadjustments are included in the current year’s results.

 

15

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***Reinsurance Recoverables.*** Reinsurance recoverables are established forthe portion of the loss reserves that are ceded 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 withrespect to our reinsurers which can be significant considering that certain ofthe reserves remain outstanding for an extended period of time. We are requiredto pay losses even if a reinsurer fails to meet its obligations under theapplicable reinsurance agreement.

 

***Written and Unearned Premium.*** Written premium is recorded based on theinsurance policies that have been reported to us and the policies that havebeen written by agents but not yet reported to us. We must estimate the amountof written premium not yet reported based on judgments relative to current andhistorical trends of the business being written. Such estimates are regularlyreviewed and updated and any resulting adjustments are included in the currentyear’s results. An unearned premium reserve is established to reflect theunexpired portion of each policy at the financial reporting date.

 

***Deferred Tax Assets.*** We have recorded valuation allowancesrelated to deferred tax assets resulting from certain net operating losscarryforwards due to the uncertainty associated with the realization of thedeferred tax asset related to certain of our foreign, state and localoperations. Our foreign operations were profitable in 2003 resulting in aportion of the valuation allowance being simultaneously released to the extentof the first nine months of 2003 profits. Due to the continued profitability and projected favorable marketconditions for the foreseeable future, it was determined to be more likely thannot that the deferred tax assets resulting from those net operating losscarryforwards will be realized, therefore the remaining valuation allowance relatedto the foreign operations was released in the fourth quarter of 2003.

 

***Impairment of Invested Assets.*** Impairment of investment securities resultsin a charge to operations when a market decline below cost isother-than-temporary. Management regularly reviews our fixed maturity andequity securities portfolios to evaluate the necessity of recording impairmentlosses for other-than-temporary declines in the fair value of investments. Anumber of criteria are considered during this process including, but notlimited to: the current fair value as compared to cost or amortized cost, asappropriate, of the security; the length of time the security’s fair value hasbeen below cost or amortized cost, and by how much; and specific credit issuesrelated to the issuer and current economic conditions. In general, we focus ourattention on those securities whose market value was less than 80% of theircost or amortized cost, as appropriate, for six or more consecutive months.Other factors considered in evaluating potential impairment include the currentfair value as compared to cost or amortized cost, as appropriate, our intentand ability to retain the investment for a period of time sufficient to allowfor an anticipated recovery in value, specific credit issues related to theissuer and current economic conditions. Other-than-temporary impairment lossesresult in a permanent reduction of the cost basis of the underlying investment.Significant changes in the factors we consider when evaluating investments for impairmentlosses could result in a significant change in impairment losses reported inthe consolidated financial statements.

 

***Accounting for 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. generally accepted accounting principles,or GAAP. The most significant GAAP adjustments relate to income recognition.Lloyd’s syndicates determine underwriting results by year of account at the endof three years. We record adjustments to recognize underwriting results asincurred, including the expected ultimate cost of losses incurred. Theseadjustments to losses are based on actuarial analysis of syndicate accounts,including forecasts of expected ultimate losses provided by the syndicate. Atthe end of the Lloyd’s three-year period for determining underwriting resultsfor 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 to close an underwriting year into the nextyear is referred to as the ‘‘reinsurance to close.’’ The reinsurance to closetransactions are recorded in the fourth quarter as additional written andearned premium, losses incurred, loss reserves and receivables, all in the sameamount. There are no gains or losses recorded on the reinsurance to closetransactions.

 

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***Translation ofForeign Currencies****.*Financial statements ofsubsidiaries expressed in foreign currencies are translated into U.S. dollarsin accordance with SFAS No. 52 *Foreign Currency Translation* issued by theFASB.  Under SFAS 52, functionalcurrency assets and liabilities are translated into U.S. dollars using periodend rates of exchange and the related translation adjustments are recorded as aseparate component of accumulated other comprehensive income.  Functional currencies are generally thecurrencies of the local operating environment. Statement of income amounts expressed in functional currencies aretranslated using average exchange rates. Gains and losses resulting from foreign currency transactions arerecorded in “other income (expense)” in the Company’s Consolidated Statementsof Income.

 

**Results of Operationsand Overview**

 

Thefollowing is a discussion and analysis of our consolidated and segment resultsof operations for the three months ended March 31, 2004 and 2003.

 

Our2004 and 2003 first quarter results of operations reflect increasing premiumrates as a result of improved market conditions beginning in late 2000 that hascontinued through 2003 and at a reduced rate through the first quarter of2004.  Net income for the first threemonths of 2004 and 2003 was $8.9 million or $0.70 per diluted share and $4.7million or $0.54 per diluted share, respectively.

 

Weexperienced premium growth as measured by net earned premium in the firstquarter of 2004 of $74.2 million compared to $66.3 million in the first quarterof 2003, an 11.9% increase, due to the combination of increased premium ratesand business expansion. Underwriting profitability during such periods, asmeasured by the Company’s combined ratios for the 2004 first quarter of 88.8%,has also improved****compared to 96.6% for the 2003 first quarter.

 

Cashflow from operations has also increased in the first quarter of 2004 to $26.7million from $26.0 million in the 2003 first quarter, a 2.7% increase,contributing to the growth in invested assets and net investment income.

 

Consolidatedstockholders’ equity increased 5.0% to $305.2 million or $24.26 per share, atMarch 31, 2004 compared to $290.0 million or $23.14 per share at December 31,2003.  The increase was primarily due tonet income of $8.9 million and other comprehensive income of $5.0 million forthe 2004 first quarter.  Othercomprehensive income consists of after-tax unrealized appreciation oninvestments and after-tax currency translation gains on the Company’s foreignoperations.

 

**Revenues.**  Gross written premiumincreased to $196.0 million in the first quarter of 2004 from $174.7 million inthe 2003 first quarter, a 12.2% increase. The following table sets forth our gross and net written premium and netearned premium by segment and line of business for the periods indicated:

 

17

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|                                 |   | **Three  Months Ended March 31,** |   |
|--------------------------------------|--------|-----------------------------------|--------|
|                                 |   | **2004**                          |   | **2003** |   |
|                                 |   | **Gross  Written Premium**        |   | **%** |   | **Net  Written Premium** |   | **Net Earned  Premium** |   | **Gross  Written Premium** |   | **%** |   | **Net  Written Premium** |   | **Net Earned  Premium** |   |
|                                 |   | **($ in  thousands)**             |   |
| Insurance Companies:                 |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Marine                               |   | $59,426                           |   | 30.3 | % | $25,258 |   | $20,428 |   | $53,720 |   | 30.8 | % | $23,061 |   | $22,275 |   |
|                                 |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty                            |   | 34,230                            |   | 17.5 |   | 20,511 |   | 21,539 |   | 31,893 |   | 18.3 |   | 23,899 |   | 22,950 |   |
|                                 |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Professional Liability               |   | 15,033                            |   | 7.7 |   | 5,473 |   | 3,811 |   | 12,565 |   | 7.2 |   | 2,949 |   | 1,427 |   |
|                                 |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Assumed from Lloyd’s Operations |   | 3,054                             |   | 1.6 |   | 2,906 |   | 7,405 |   | 11,598 |   | 6.6 |   | 11,598 |   | 3,574 |   |
|                                 |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other                                |   | 86                                |   | — |   | (3 | ) | (1 | ) | 106 |   | — |   | 147 |   | 174 |   |
|                                 |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Insurance Companies Total            |   | 111,829                           |   | 57.1 |   | 54,145 |   | 53,182 |   | 109,882 |   | 62.9 |   | 61,654 |   | 50,400 |   |
|                                 |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Lloyd’s Operations:             |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Marine                               |   | 80,964                            |   | 41.3 |   | 39,059 |   | 20,518 |   | 66,568 |   | 38.1 |   | 25,877 |   | 15,315 |   |
|                                 |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other                                |   | 6,194                             |   | 3.2 |   | 2,731 |   | 475 |   | 9,516 |   | 5.4 |   | 3,502 |   | 599 |   |
|                                 |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Lloyd’s Operations Total        |   | 87,158                            |   | 44.5 |   | 41,790 |   | 20,993 |   | 76,084 |   | 43.5 |   | 29,379 |   | 15,914 |   |
|                                 |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Intercompany eliminations            |   | (3,036                            | )      | (1.6 | ) | — |   | — |   | (11,264 | ) | (6.4 | ) | — |   | — |   |
|                                 |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                |   | $195,951                          |   | 100.0 | % | $95,935 |   | $74,175 |   | $174,702 |   | 100.0 | % | $91,033 |   | $66,314 |   |

 

Note:  Certain amounts for theprior period have been reclassified to conform to the current period’spresentation.

 

18

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***Insurance Companies’ Gross Written Premium***

 

*Marine Premium.* The marine premium for the first quarter of2004 increased 10.6% compared to the first quarter of 2003 partially due to theapproximate 4% increase in premium rates resulting in higher premiums on newand renewal business. The generally improved pricing environment resulted inNavigators Insurance Company increasing its writing of new business.  Navigators Insurance Company obtains itsmarine business through participation in the marine pool managed by theNavigators Agencies. Its participation in the marine pool was 80% in the 2004first quarter and 70% in the 2003 first quarter.  Navigators Insurance Company’s participation in the insurancepool was retroactively increased to 80% effective January 1, 2003 in the 2003third quarter when it entered into a commutation agreement with a former poolmember.

 

*Specialty Premium.* This business consists primarily of generalliability business for small general and artisan contractors as well as othertargeted commercial risks.  The specialtypremium for the first quarter of 2004 increased 7.3% compared to the firstquarter of 2003 primarily due to the approximate 28% increase in theconstruction liability premium rates resulting in higher premiums on new andrenewal business. The number of California construction liability in-forcepolicies decreased significantly over the last year as a result of our effortsto scale back the number of small artisan policies we write.  The new business and the rate increasesresulted from a tightening market for California contractors’ liabilityinsurance.

 

*Professional Liability Insurance.* Our insurance company subsidiaries writeprofessional liability insurance, primarily consisting of directors andofficers liability insurance for privately held and publicly tradedcorporations. In 2002, the professional liability business was expanded toinclude errors and omissions insurance and employment practices liabilitycoverages.  The professional liabilitypremium for the first quarter of 2004 increased 19.6% compared to the firstquarter of 2003 reflecting growth and the expansion of this business.  Premium rates for this business decreasedapproximately 1% when comparing the first quarter of 2003 to the first quarterof 2004, following an approximate 28% increase for the twelve months endedDecember 31, 2003.

 

*Assumedfrom Lloyd’s Operations. *Since 2002, the Insurance Companies haveparticipated in quota share treaties written by the Company’s Lloyd’soperations.  The 2003 participationincluded marine and energy business.  In2004, the Insurance Companies participated on the onshore energy businesswritten by the Lloyd’s operations.

 

***Lloyd’s Operations’ Gross WrittenPremium***

 

*Marine Premium.*Marine premium for the first quarter of 2004increased 21.6% compared to the first quarter of 2003 partially due to theapproximate 4% increase in premium rates resulting in higher premiums on newand renewal business and due to the increased capacity provided to Syndicate1221 by Navigators Corporate Underwriters Ltd. and Millennium Underwriting Ltd.

 

*Other. *Other consists of engineering andconstruction premium which provides coverage for construction projectsincluding machinery, equipment and loss of use due to delays and of onshoreenergy premium which principally focuses on the oil and gas, chemical andpetrochemical industries with coverages primarily for property damage andbusiness interruption.

 

Ceded WrittenPremium.  In the ordinary course of business, wereinsure certain insurance risks with unaffiliated insurance companies for thepurpose of limiting our maximum loss exposure, protecting against catastrophiclosses, and maintaining desired ratios of net premiums written to statutorysurplus. The relationship of ceded to written premium varies based upon the typesof business written and whether the business is written by our insurancecompany subsidiaries or the Lloyd’s operations.

 

19

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Cededwritten premium for the 2004 and 2003 first quarter approximated 51.0% and47.9% of 2004 and 2003 gross written premium, respectively.  There are several factors contributing to anincrease in ceded premium when comparing the first quarters of 2004 to 2003.First, rate increases on our business resulted in higher premium levels, andconsequently more ceded premiums. The second factor is the cost of excess ofloss reinsurance purchased to limit our exposure to an individual largeloss.  Third, we increased the amount ofquota share reinsurance for certain product lines based upon management’sassessment of expected loss activity. Fourth, Navigators Pro, which writes theprofessional liability business, has experienced substantial premium growth,resulting in increased amounts of premium ceded to its quota share reinsuranceprogram.

 

Net WrittenPremium.*** ***Netwritten premium increased 5.4% in the first quarter of 2004 compared to the2003 first quarter as a result of the increase in the gross written premium,partially offset by the increased ceded premium, as discussed above.

 

Net Earned Premium.  Net earned premium increased 11.9% in thefirst quarter of 2004 compared to the 2003 first quarter as a result ofincreased net written premium from rate increases and new business generated in2004 and 2003.

 

Commission Income.  Commission income from unaffiliated businessdecreased by 9.0% in the first quarter 2004 compared to 2003 first quarter as aresult of the 10% decrease in third party pool member participation in the 2004first quarter compared to the 2003 first quarter.

 

Net InvestmentIncome.*** ***Netinvestment income increased 26.6% in the 2004 first quarter due to the increasein invested assets resulting from positive cash flow stemming from theincreased premium volume and the proceeds from our October 2003 common stockoffering.  Our net proceeds from theoffering amounted to $110.8 million.

 

Net RealizedCapital Gains. Pre-tax net income included $422,000 of netrealized capital gains for the three months ended March 31, 2004 compared to$218,000 for the 2003 first quarter.  Onan after-tax basis, the net realized capital gains were $274,000 or $0.02 pershare and $177,000 or $0.02 per share for the 2004 and 2003 first quarters,respectively.

 

OtherIncome/(Expense). Other income/(expense) for the firstquarters of 2004 and 2003 consisted primarily of foreign exchange gains, andinspection fees related to the Specialty insurance business.

 

Operating Expenses

 

*Net Losses and LossAdjustment Expenses Incurred**.*** The ratio of net loss and loss adjustmentexpenses incurred to net earned premium was 59.0% and 66.4% for the firstquarters of 2004 and 2003, respectively. The decrease in the loss ratio in the2004 first quarter compared to the first three months of 2003 was generally dueto favorable loss experience among all lines of business particularly withrespect to the marine business written by the Insurance Companies and theLloyd’s operations.  The incurred lossesfor the Lloyd’s operations were reduced by approximately $2.7 million for lossesrecorded in years prior to 2004.

 

TheCompany recorded incurred losses of approximately $1.8 million in the 2003first quarter on run-off business principally related to the reinsuranceassumed business which added 2.7 points to the 2003 first quarter loss ratio.  Loss development for run-off business wasinsignificant in the 2004 first quarter.

 

20

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Thefollowing tables set forth our net loss reserves by segment and line ofinsurance business and the total case reserves and incurred but not reported(“IBNR”) reserves as of March 31, 2004 and December 31, 2003:

 
|                                    |   | **March 31,**        |    | **December  31,** |   |
|-----------------------------------------|--------|----------------------|---------|-------------------|--------|
|                                    |   | **2004**             |    | **2003**          |   |
|                                    |   | **($ in thousands)** |    |
| Insurance Companies:                    |   |                 |    |              |   |
| Marine                                  |   | $                    | 117,538 |              | $      | 110,698 |   |
| Specialty (primarily general liability) |   | 123,893              |    | 114,167           |   |
| Professional Liability                  |   | 9,314                |    | 7,059             |   |
| Assumed from Lloyd’s Operations    |   | 17,036               |    | 14,323            |   |
| Other (primarily run-off business)      |   | 24,744               |    | 24,390            |   |
| Total Insurance Companies               |   | 292,525              |    | 270,637           |   |
|                                    |   |                 |    |              |   |
| Lloyd’s Operations:                |   |                 |    |              |   |
| Marine                                  |   | 102,043              |    | 100,936           |   |
| Other                                   |   | 3,785                |    | 2,598             |   |
| Total Lloyd’s Operations           |   | 105,828              |    | 103,534           |   |
|                                    |   |                 |    |              |   |
| Total net loss reserves                 |   | $                    | 398,353 |              | $      | 374,171 |   |
|                                    |   |                 |    |              |   |
| Total net case loss reserves            |   | $                    | 159,749 |              | $      | 154,531 |   |
| Total net IBNR loss reserves            |   | 238,604              |    | 219,640           |   |
|                                    |   |                 |    |              |   |
| Total net loss reserves                 |   | $                    | 398,353 |              | $      | 374,171 |   |

 

AtMarch 31, 2004, the IBNR portion of the net loss reserves was 59.9% of ourtotal loss reserves compared to 58.7% at December 31, 2003.

 

AtMarch 31, 2004, a 10% change in the net loss reserves would equate to $39.8million which would represent an after-tax charge to net income of $25.9million and 8.5% of stockholders’ equity. Loss reserve estimates are reviewed each quarter to evaluate whether theassumptions made continue to be appropriate. Any adjustments that result from this review are recorded in the quarterin which they are identified.

 

Ourreserving practices and the establishment of any particular reserve reflectmanagement’s judgment concerning sound financial practice and do not representany admission of liability with respect to any claims made against us.  No assurance can be given that actual claimsmade and related payments will not be in excess of the amounts reserved.  During the loss settlement period, it oftenbecomes necessary to refine and adjust the estimates of liability on a claimeither upward or downward.  Even aftersuch adjustments, ultimate liability may exceed or be less than the revisedestimates.  The increase in net lossreserves is also a function of the growth in premium volume over the past twoyears.

 

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

 

21

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*Specialty Liability and Professional Liability.* Substantially all of our specialty liabilitybusiness involves general liability policies which generate third partyliability claims that are long tail in nature. A significant portion of ourgeneral liability reserves relate to California construction liability claims.Reserves and claim frequency on this business may be impacted by legislationrecently implemented in California, which generally provides consumers whoexperience construction defects a method other than litigation to obtainconstruction defect repairs. This legislation may impact claim severity,frequency and length to settlement assumptions underlying our reserves.Accordingly, our ultimate liability may exceed or be less than currentestimates due to this variable, among others.

 

Theprofessional liability class generates third party claims, which also arelonger tail in nature. The professional liability policies provide coverage ona claims-made basis, whereby coverage is generally provided only for thoseclaims that are made during the policy period. Our professional liabilitybusiness is relatively immature, with our first writing of the business in late2001. Accordingly, given the relative immaturity of this business, it will takesome time to better understand the reserve trends on this business.  Our professional liability loss estimatesare based on expected losses, actual reported losses, evaluation of loss trends,industry data, and the legal, regulatory and current risk environment becauseanticipated loss experience in this area is less predictable due to the smallnumber of claims and/or erratic claim severity patterns. We believe that wehave made a reasonable estimate of the required loss reserves for professionalliability. The expected ultimate losses may be adjusted up or down as theaccident years mature.

 

Thefollowing tables set forth our net loss and LAE loss reserves for our Specialtyliability and professional liability businesses for the periods indicated:

 
|                             |   | **March 31,  2004**  |   |
|----------------------------------|--------|----------------------|--------|
|                             |   |                 |   |   |   | **Total** |   | **% of IBNR** |   |
| **Type of**                      |   | **Net  Reported**    |   | **Net** |   | **Net Loss** |   | **to Total  Net** |   |
| **Business**                     |   | **Reserves**         |   | **IBNR** |   | **Reserves** |   | **Loss  Reserves** |   |
|                             |   | **($ in thousands)** |   |
|                             |   |                 |   |   |   |   |   |   |   |
| Specialty construction liability |   | $                    | 22,098 |   | $ | 90,000 |   | $ | 112,098 |   | 80.3 | % |
| Professional liability           |   | 214                  |   | 9,100 |   | 9,314 |   | 97.7 | % |
|                             |   |                 |   |   |   |   |   |   |   |
| Total                            |   | $                    | 22,312 |   | $ | 99,100 |   | $ | 121,412 |   | 81.6 | % |

 
|                             |   | **December  31, 2003** |   |
|----------------------------------|--------|------------------------|--------|
|                             |   |                   |   |   |   | **Total** |   | **% of IBNR** |   |
| **Type of**                      |   | **Net  Reported**      |   | **Net** |   | **Net Loss** |   | **to Total  Net** |   |
| **Business**                     |   | **Reserves**           |   | **IBNR** |   | **Reserves** |   | **Loss  Reserves** |   |
|                             |   | **($ in thousands)**   |   |
|                             |   |                   |   |   |   |   |   |   |   |
| Specialty construction liability |   | $                      | 20,365 |   | $ | 83,450 |   | $ | 103,815 |   | 80.4 | % |
| Professional liability           |   | 159                    |   | 6,900 |   | 7,059 |   | 97.7 | % |
|                             |   |                   |   |   |   |   |   |   |   |
| Total                            |   | $                      | 20,524 |   | $ | 90,350 |   | $ | 110,874 |   | 81.5 | % |

* *

*Asbestos and Environmental Liability.* Our exposure to asbestos and environmentalliability principally stems from marine liability insurance written on anoccurrence basis during the mid-1980s. In general, our

 

22

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participation on such risks isin the excess layers, which requires the underlying coverage to be exhaustedprior to coverage being triggered in our layer. In many instances we are one ofmany insurers who participate in the defense and ultimate settlement of theseclaims, and we are generally a minor participant in the overall insurancecoverage and settlement. Further, since most of our policies were issued afterthe industry was apprised of asbestos exposures, many of the policies on whichwe participate have exclusions that may preclude coverage. In addition, many ofour asbestos and environmental claims have been inactive for several years.

 

Inthe fourth quarter of 2003,  NavigatorsInsurance Company increased its gross and net asbestos reserves for losses by$77.6 million and $31.6 million, respectively. As a result, gross and net incurred losses increased by the amount ofthe respective reserve increase.  The$31.6 million of net asbestos losses includes $25.7 million of uncollectiblereinsurance.

 

Thereserve action was the result of a review of asbestos-related exposuresconducted by the Company.  The Company’smanagement was notified in late January 2004 that an asbestos claim wouldlikely have to be settled for a significantly greater amount than previouslyanticipated.   As a result of theunexpected adverse development on this individual claim, the Company retained aleading independent consulting firm in this area to assist in the identificationof its potential exposure to asbestos claims from policies written directly aswell as those reinsured to Navigators Insurance Company from prior members ofthe Company’s insurance pools. The Company’s increased reserves relateprimarily to policies underwritten by the Navigators Agencies in the late1970’s and first half of the 1980’s on behalf of members of the pool,consisting of excess liability on marine related business and aviation productsliability, including policies subsequently assumed by Navigators InsuranceCompany pursuant to reinsurance arrangements with pool members who exited thepool.  Following the Company’s and theindependent consulting firm’s recent review, the Company increased its grossand net loss reserves for asbestos exposure to $78.5 million and $32.1 million,respectively, at December 31, 2003.

 

Lossdevelopment activity for asbestos related exposures in the first quarter of2004 consisted of recording four new claims and the closing of one claim file,all of which resulted in net incurred loss activity of $10,000.

 

Lossdevelopment activity for environmental losses in the first quarter of 2004consisted of $648,000 of net incurred losses mostly related to two oil spillclaims on two marine liability policies written in 2002 and 2003.  Such coverage is written in the ordinarycourse of business by the Insurance Companies.

 

Thefollowing tables set forth our gross and net loss and LAE reserves, and claimcounts for our asbestos and environmental exposures, which we believe issubject to uncertainties greater than those presented by other types of claims:

 
|                     |   | **Three  Months EndedMarch 31, 2004** |   |
|--------------------------|--------|---------------------------------------|--------|
|                     |   | **Asbestos**                          |   | **Environmental** |   | **Total** |   |
|                     |   | **($ in thousands)**                  |   |
| **Gross of Reinsurance** |   |                                  |   |   |   |   |   |
| Beginning Reserve        |   | $                                     | 78,472 |   | $ | 6,800 |   | $ | 85,272 |   |
| Incurred Loss & LAE  |   | 11                                    |   | 664 |   | 675 |   |
| Calendar Year Payments   |   | 4                                     |   | 87 |   | 91 |   |
| Ending Reserves          |   | $                                     | 78,479 |   | $ | 7,377 |   | $ | 85,856 |   |
|                     |   |                                  |   |   |   |   |   |
| **Net of Reinsurance**   |   |                                  |   |   |   |   |   |
| Beginning Reserve        |   | $                                     | 32,083 |   | $ | 1,153 |   | $ | 33,236 |   |
| Incurred Loss & LAE  |   | 10                                    |   | 648 |   | 658 |   |
| Calendar Year Payments   |   | 2                                     |   | 68 |   | 70 |   |
| Ending Reserves          |   | $                                     | 32,091 |   | $ | 1,733 |   | $ | 33,824 |   |

 

23

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|                  |   |                |   |               |   | **Claims  Settled** |   |                 |   |
|-----------------------|--------|---------------------|--------|--------------------|--------|---------------------|--------|----------------------|--------|
|                  |   | **Claim  Count**    |   | **New Claims**     |   | **or  Resolved**    |   | **Claim  Count**     |   |
| **Type of  Business** |   | **March 31,  2004** |   | **During  Period** |   | **During Period**   |   | **January 1,  2004** |   |
|                  |   |                |   |               |   |                |   |                 |   |
| Environmental         |   | 94                  |   | 10                 |   | 2                   |   | 86                   |   |
| Asbestos              |   | 111                 |   | 4                  |   | 1                   |   | 108                  |   |
| Total                 |   | 205                 |   | 14                 |   | 3                   |   | 194                  |   |

 

Ourmanagement believes that the reserves for losses and loss adjustment expensesare adequate to cover the ultimate cost of losses and loss adjustment expenseson reported and unreported claims.

 

*Commission Expense.* Commission expense paid to brokers and agents is generally on apercentage of the gross written premium and is reduced by ceding commissionsthe Company may receive on the ceded written premium.  Commissions are generally deferred and recorded to deferredpolicy acquisition costs to the extent that they relate to unearnedpremium.  Commission expense declined****asa percentage of earned premium in the first quarter of 2004 compared to the2003 first quarter, generally as the result of a decline in commissions paid tobrokers and agents coupled with the receipt of ceding commissions fromreinsurers.  The decrease in the commissionpercentage reflects lower commission rates and a trend among the major brokersto charge a flat fee to some of their major clients as opposed to a percentageof the premium.  Under flat feearrangements, the amount of premium normally is correspondingly reduced sinceno commission is being paid to the broker by the Company.

 

*Other Operating Expenses.*  The14.0% increase in other operating expenses in the first quarter of 2004compared to the 2003 first quarter is consistent with revenue growth andattributable primarily to employee related expenses resulting from expansion ofthe business.

 

*Interest Expense.*  Theoutstanding loan balance was paid in October 2003 from a portion of theproceeds from the Company’s common stock offering and no additional borrowingshave been made subsequently, therefore no interest expense was recorded in thefirst quarter of 2004.

 

*Income Taxes.** *The income tax expense was $4.6 million and $1.4 million for the firstquarter of 2004 and 2003, respectively. The effective tax rates for the 2004 and 2003 first quarters were 34.2%and 22.3%, respectively.  As of March31, 2004 and 2003, the net deferred Federal, foreign, state and local taxassets were $12.9 million and $6.2 million, respectively.

 

The Company’s valuation allowance relating to its foreign operations decreasedby $630,000 in the three months ended March 31, 2003 relating to the reductionin the loss carryforward at the Company’s foreign operations resulting fromincome generated by these operations in 2003. At March 31, 2003, the Company had loss carryforwards remaining at itsforeign operations amounting to potential future tax benefits of $3,899,000,along with a valuation allowance equal to those benefits.  Although the foreign operations wereprofitable in the first quarter of 2003, the valuation allowance was releasedonly to the extent of the first quarter 2003 profits since future profitabilityremained uncertain.  This processcontinued for the first nine months of 2003. Due to the continued profitability and projected favorable marketconditions for the foreseeable future, it was determined to be more likely thannot that the deferred tax assets resulting from the foreign net operating losscarryforwards will be realized, therefore the remaining valuation allowancerelated to the foreign operations was released in the fourth quarter of 2003.

 

**SegmentInformation**

 

Followingare the financial results of the Company’s three segments:  Insurance Companies, Lloyd’s Operations andNavigators Agencies. We evaluate the performance of each segment includingNavigators Agencies, primarily based on underwriting results.  Other items of revenue and expenditure,including net

 

24

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investment income and realizedcapital gains and losses, are included herein based on the legal entity wherethey are recorded.  Our underwritingperformance is evaluated separately from the performance of our investmentportfolios.  Certain amounts for the priorperiod have been reclassified to conform to the current period’s presentation.

 

***Insurance Companies***

 

Ourtwo insurance company subsidiaries are Navigators Insurance Company, whichincludes a United Kingdom Branch, and NIC Insurance Company, collectivelyreferred to as the Insurance Companies. Navigators Insurance is our largest insurancesubsidiary and has been active since 1983. It specializes principally inunderwriting marine insurance and related lines of business, specialtyliability insurance and professional liability insurance. NIC InsuranceCompany, a wholly owned subsidiary of Navigators Insurance, began operations in1990. It underwrites similar types of business but on a non-admitted or surpluslines basis and is fully reinsured by Navigators Insurance.  The Navigators Agencies produce business forour insurance company subsidiaries.

 

Followingare the results of operations for the Insurance Companies for the three monthsended March 31, 2004 and 2003:

 

|                                    |   | **Three  Months Ended  March 31,** |   |
|-----------------------------------------|--------|------------------------------------|--------|
|                                    |   | **2004**                           |   | **2003** |   |
|                                    |   | **($ in  thousands)**              |   |
| Revenues:                               |   |                               |   |   |   |
| Net earned premium                      |   | $                                  | 53,182 |   | $ | 50,400 |   |
| Net investment income                   |   | 5,484                              |   | 4,106 |   |
| Net realized capital gains              |   | 205                                |   | 119 |   |
| Other income (expense)                  |   | (61                                | )      | 21 |   |
| Total revenues                          |   | 58,810                             |   | 54,646 |   |
|                                    |   |                               |   |   |   |
| Operating expenses:                     |   |                               |   |   |   |
| Net losses and loss adjustment expenses |   | 32,710                             |   | 34,000 |   |
| Commission expense                      |   | 14,145                             |   | 14,149 |   |
| Other operating expenses                |   | 1,198                              |   | 1,146 |   |
| Total operating expenses                |   | 48,053                             |   | 49,295 |   |
|                                    |   |                               |   |   |   |
| Income before income tax expense        |   | 10,757                             |   | 5,351 |   |
|                                    |   |                               |   |   |   |
| Income tax expense                      |   | 3,478                              |   | 1,666 |   |
|                                    |   |                               |   |   |   |
| Net income                              |   | $                                  | 7,279  |   | $ | 3,685 |   |
|                                    |   |                               |   |   |   |
| Loss and loss expense ratio             |   | 61.5                               | %      | 67.5 | % |
| Commission expense ratio                |   | 26.6                               |   | 28.1 |   |
| Other operating expense ratio           |   | 2.3                                |   | 2.3 |   |
| Combined ratio                          |   | 90.4                               | %      | 97.9 | % |

 

25

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Following are theunderwriting results of the Insurance Companies for the three months endedMarch 31, 2004 and 2003:

 
|                                 |   | **Three  Months Ended March 31, 2004** |   |
|--------------------------------------|--------|----------------------------------------|--------|
|                                 |   | **($ in  thousands)**                  |   |
|                                 |   | **Net  Earned**                        |   | **Losses  and LAE** |   | **Underwriting** |   | **Underwriting** |   | **Combined  Ratio** |   |
|                                 |   | **Premium**                            |   | **Incurred** |   | **Expenses** |   | **Gain** |   | **Loss** |   | **Expense** |   | **Combined** |   |
|                                 |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Marine                               |   | $                                      | 20,428 |   | $ | 12,046 |   | $ | 5,599 |   | $ | 2,783 |   | 59.0 | % | 27.4 | % | 86.4 | % |
| Specialty                            |   | 21,539                                 |   | 14,317 |   | 6,968 |   | 254 |   | 66.5 |   | 32.3 |   | 98.8 |   |
| Professional liability               |   | 3,811                                  |   | 2,299 |   | 776 |   | 736 |   | 60.3 |   | 20.4 |   | 80.7 |   |
| Assumed from Lloyd’s Operations |   | 7,405                                  |   | 4,217 |   | 1,999 |   | 1,189 |   | 57.0 |   | 27.0 |   | 84.0 |   |
| Other (includes run-off business)    |   | (1                                     | )      | (169 | ) | 1 |   | 167 |   | NM |   | NM |   | NM |   |
| Total                                |   | $                                      | 53,182 |   | $ | 32,710 |   | $ | 15,343 |   | $ | 5,129 |   | 61.5 | % | 28.9 | % | 90.4 | % |
|                                 |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |   | **Three  Months Ended March 31, 2003** |   |
|                                 |   | **($ in  thousands)**                  |   |
|                                 |   | **Net  Earned**                        |   | **Losses  and LAE** |   | **Underwriting** |   | **Underwriting** |   | **Combined  Ratio** |   |
|                                 |   | **Premium**                            |   | **Incurred** |   | **Expenses** |   | **Gain(Loss)** |   | **Loss** |   | **Expense** |   | **Combined** |   |
|                                 |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Marine                               |   | $                                      | 22,275 |   | $ | 14,137 |   | $ | 5,808 |   | $ | 2,330 |   | 63.5 | % | 26.1 | % | 89.6 | % |
| Specialty                            |   | 22,950                                 |   | 15,059 |   | 7,753 |   | 138 |   | 65.6 |   | 33.8 |   | 99.4 |   |
| Professional liability               |   | 1,427                                  |   | 927 |   | 681 |   | (181 | ) | 65.0 |   | 47.7 |   | 112.7 |   |
| Assumed from Lloyd’s Operations |   | 3,574                                  |   | 2,103 |   | 1,057 |   | 414 |   | 58.8 |   | 29.6 |   | 88.4 |   |
| Other (includes run-off business)    |   | 174                                    |   | 1,774 |   | (4 | ) | (1,596 | ) | NM |   | NM |   | NM |   |
| Total                                |   | $                                      | 50,400 |   | $ | 34,000 |   | $ | 15,295 |   | $ | 1,105 |   | 67.5 | % | 30.4 | % | 97.9 | % |
|                                      |        |                                        |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Insurance Companiesexperienced premium growth in all three lines of business as reflected in thenet earned premium increase of 5.5% when comparing the first three months of2004 to the 2003 first quarter. Approximately 13.9% and 7.1% of the net earned premium recorded in the firstquarters of 2004 and 2003 is a result of the Insurance Companies participatingon reinsurance treaties supporting the Lloyd’s operations’ marine and energybusiness.

 

The 2004 and 2003 firstquarter underwriting results generally reflect the favorable industry marketconditions over the last three years coupled with the favorable loss trends inthe aforementioned quarterly periods. The 2003 first quarter expense ratio for professional liability businessreflects the start-up nature of this operation at that time.  The 2003 first quarter incurred lossesincluded $1.8 million of incurred loss activity on run-off business principallyrelated to the reinsurance business which added 3.5 loss ratio points to theInsurance Companies 2003 first quarter combined ratio.

 

26

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The pre-tax yield on theInsurance Companies’ investment portfolio approximated 3.9% and 4.7% for thefirst quarters of 2004 and 2003, respectively. The declining portfolio yields reflect the overall declines in interestrates since 2002.  Net investment incomeincreased in the first three months of 2004 compared to 2003 due to strong cashflows and $95 million of statutory surplus contributions in the 2003 fourthquarter.

 

***Lloyd’s Operations***

 

TheLloyd’s operations consist of NUAL, which manages Lloyd’s Syndicate 1221,Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. BothMillennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. areLloyd’s corporate members with limited liability and provide capacity toLloyd’s Syndicate 1221. NUAL owns Pennine Underwriting Ltd., an underwritingmanaging agency with offices in Manchester, Leeds and Basingstoke, England,which underwrites cargo and engineering business for Lloyd’s Syndicate 1221.  The Lloyd’s operations and NavigatorsManagement (UK) Limited, a Navigators Agency, which produces business for theUnited Kingdom Branch of Navigators Insurance are subsidiaries of NavigatorsHoldings (UK) Limited located in the United Kingdom.

 

Lloyd’sSyndicate 1221 has stamp capacity of £150 million ($276.0 million) in 2004compared to £125 million ($203.5 million) in 2003.  Stamp capacity is a measure of the amount of premium a Lloyd’ssyndicate is authorized to write as determined by the Council of Lloyd’s.Syndicate 1221’s stamp capacity is expressed net of commission (as is standardat Lloyd’s) of approximately 21%. The Syndicate 1221 premium recorded in theCompany’s financial statements is gross of commission.  The Lloyd’s marine business had been subjectto intense price competition beginning in the mid-1990’s. The pricingcompetition showed some signs of stabilizing in 2000 and prices increased from2001 through 2003 and again at a more modest pace in the 2004 first quarter.Lloyd’s presents its results on an underwriting year basis, generally closingeach underwriting year after three years. We make estimates for eachunderwriting year and timely accrue the expected results. Our Lloyd’soperations included in the consolidated financial statements represent our participationin 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. The syndicates generally keep accounts open forthree years. Traditionally, three years have been necessary to reportsubstantially all premiums associated with an underwriting year and to reportmost related claims, although claims may remain unsettled after theunderwriting year is closed. A Lloyd’s syndicate typically closes anunderwriting year by reinsuring outstanding claims on that underwriting yearwith the participants for the next underwriting year. The ceding participantspay the assuming participants an amount based on the unearned premiums andoutstanding claims in the underwriting year at the date of the assumption. Ourparticipation in Lloyd’s Syndicate 1221 is represented by and recorded as ourproportionate share of the underlying assets and liabilities and results of operationsof the syndicate since, (a) we hold an undivided interest in each asset, (b) weare proportionately liable for each liability and (c) Syndicate 1221 is not aseparate legal entity. At Lloyd’s, the amount to close an underwriting yearinto the next year is referred to as the reinsurance to close. The reinsuranceto close 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 our participation in the syndicate changes,the reinsurance to close amounts vary accordingly. The reinsurance to closetransactions are recorded in the fourth quarter as additional written andearned premium, losses incurred, loss reserves and receivables, all in the sameamount. There are no gains or losses recorded on the transactions.

 

Weprovide letters of credit to Lloyd’s to support our participation in Syndicate1221’s capacity. If we increase our participation, or if Lloyd’s changes thecapital requirements, we may be required to supply additional letters of creditor other collateral acceptable to Lloyd’s, or reduce the capacity of Syndicate1221. The letters of credit are provided through the credit facility which wemaintain with a consortium of banks. The credit facility agreement requiresthat the banks vote by November 19th of each year whether or not to renew theletter of credit facility. If the banks decide not to renew the letter ofcredit facility, we will need to find other sources to provide the letters ofcredit or other collateral in order to continue to participate in Syndicate1221. The renewal

 

27

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amendment executed in November2003 renewed the letter of credit facility for a two year period expiring inNovember 2005.

 

28

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Followingare the results of the Lloyd’s operations for the three months ended March 31,2004 and 2003:

 

|                                    |   | **Three  Months Ended  March 31,** |   |
|-----------------------------------------|--------|------------------------------------|--------|
|                                    |   | **2004**                           |   | **2003** |   |
|                                    |   | **($ in thousands)**               |   |
| Revenues:                               |   |                               |   |   |   |
| Net earned premium                      |   | $                                  | 20,993 |   | $ | 15,914 |   |
| Commission income                       |   | 62                                 |   | 964 |   |
| Net investment income                   |   | 404                                |   | 547 |   |
| Net realized capital gains              |   | 217                                |   | 99 |   |
| Other income                            |   | 4                                  |   | 15 |   |
| Total revenues                          |   | 21,680                             |   | 17,539 |   |
|                                    |   |                               |   |   |   |
| Operating expenses:                     |   |                               |   |   |   |
| Net losses and loss adjustment expenses |   | 11,042                             |   | 10,040 |   |
| Commission expense                      |   | 3,750                              |   | 2,803 |   |
| Other operating expenses                |   | 3,036                              |   | 1,954 |   |
| Total operating expenses                |   | 17,828                             |   | 14,797 |   |
|                                    |   |                               |   |   |   |
| Income before income tax expense        |   | 3,852                              |   | 2,742 |   |
|                                    |   |                               |   |   |   |
| Income tax expense                      |   | 1,348                              |   | — |   |
|                                    |   |                               |   |   |   |
| Net income                              |   | $                                  | 2,504  |   | $ | 2,742 |   |
|                                    |   |                               |   |   |   |
| Loss and loss expense ratio             |   | 52.6                               | %      | 63.1 | % |
| Commission expense ratio                |   | 17.9                               |   | 17.6 |   |
| Other operating expense ratio           |   | 14.4                               |   | 12.3 |   |
| Combined ratio                          |   | 84.9                               | %      | 93.0 | % |

 

TheLloyd’s operations have been experiencing business expansion coupled withimproving underwriting results as a result of the generally favorable marketconditions for marine and energy business since late 2001.  Net earned premium revenues were reduced by$7.4 million and $3.6 million in 2004 and 2003, respectively, for businessceded to the Insurance Companies.

 

The2004 and 2003 first quarter underwriting results generally reflect thefavorable industry market condition over the last three years coupled withfavorable loss trends in the quarterly periods.

 

The2004 first quarter net losses and loss adjustment expenses were reduced by $2.7million for losses recorded in years prior to 2004, which resulted in a 12.9point reduction in the Lloyd’s operations’ first quarter loss ratio.

 

Thepre-tax yields on funds at Lloyd’s approximated 1.25%, and 2.67% for the firstthree months of  2004 and 2003,respectively, which are reflective of the declining interest rate environmentsince 2002.  Generally, funds investedat Lloyd’s have been invested with an average duration of approximately 1.4years in order to meet liquidity needs.

 

Theprovision for income tax expense for the first quarter of 2003 reflects thereversal of $630,000 of a previously established deferred tax asset valuationallowance.  The valuation allowance wasreversed up until the third quarter of 2003 only to the extent of taxableprofits.  The remaining valuation allowancewas completely

 

29

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reversed in the 2003 fourthquarter since it was determined that it was more likely than not that theremaining deferred tax asset resulting from net operating loss carry-forwardswill be realized.

 

***Navigators Agencies***

 

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

 

Eachof the Navigators Agencies underwrites marine and related lines of business forNavigators Insurance and three other unaffiliated insurance companies, whichcomprise a marine insurance pool. Marine insurance policies are issued byNavigators Insurance with the business shared with other pool members.Navigators Insurance had an 80% participation in the pool for business writtenwith effective dates in 2004 and 2003.

 

NavigatorsSpecialty, a division of a Navigators Agency, produces business exclusively forour insurance company subsidiaries. It specializes in underwriting generalliability insurance coverage for small general and artisan contractors andother targeted commercial risks, with the majority of its business located inCalifornia.  Navigators Specialty alsowrites surety, commercial multiple peril, commercial automobile and personalumbrella insurance.

 

NavigatorsPro, a division of a Navigators Agency, specializes in underwritingprofessional liability insurance and began producing directors and officersliability insurance exclusively for our insurance company subsidiaries in thefourth quarter of 2001. In late 2002, Navigators Pro introduced additionalproducts to complement its directors and officers liability coverage. Theproducts include employment practices liability, lawyers professional liabilityand miscellaneous professional liability coverages.

 

Following are the results ofthe Navigators Agencies for the three months ended March 31, 2004 and 2003:

 

|                               |   | **Three  Months Ended  March 31,** |   |
|------------------------------------|--------|------------------------------------|--------|
|                               |   | **2004**                           |   | **2003** |   |
|                               |   | **($ in  thousands)**              |   |
| Revenues:                          |   |                               |   |   |   |
| Commission income                  |   | $                                  | 7,932  |   | $ | 6,600 |   |
| Net investment income              |   | 3                                  |   | 8 |   |
| Other income                       |   | 185                                |   | 262 |   |
|                               |   |                               |   |   |   |
| Total revenues                     |   | 8,120                              |   | 6,870 |   |
|                               |   |                               |   |   |   |
| Operating expenses:                |   |                               |   |   |   |
| Other operating expenses           |   | 8,605                              |   | 7,641 |   |
| Total operating expenses           |   | 8,605                              |   | 7,641 |   |
|                               |   |                               |   |   |   |
| (Loss) before income tax (benefit) |   | (485                               | )      | (771 | ) |
|                               |   |                               |   |   |   |
| Income tax expense (benefit)       |   | (140                               | )      | 127 |   |
|                               |   |                               |   |   |   |
| Net (loss)                         |   | $                                  | (345   | ) | $ | (898 | ) |

 

30

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Commission income generallyconsists of intersegment management fees and profit commissions received frominsurance premiums of the Insurance Companies for marine, specialty andprofessional liability business as well as business from unaffiliated insurancecompanies in the marine pool. Commission income increased in the first quarter of 2004 compared to2003 due to the increased premium revenues generated on behalf of the InsuranceCompanies.

 

Net investment income isearned on invested funds.  Other incomegenerally represents fee revenues earned for services on behalf of thirdparties.

 

Other operating costsconsists of compensation and general and administrative expenses incurred inconnection with underwriting, administrative and claims services performed onbehalf of the Insurance Companies and unaffiliated insurers participating inthe marine pool.  Such costs have beenincreasing each year commensurate with servicing the growth in the overallincreased premium volume that has been generated for the Insurance Companiesand unaffiliated members of the marine pool.

 

Income tax expense (benefit)includes federal and state income taxes related to the taxable income or lossof the Navigators Agencies.

 

**Off-Balance Sheet Transactions**

 

There have been no materialchanges in the information concerning off-balance sheet transactions as statedin the Company’s 2003 Annual Report on form 10-K.

 

**Tabular Disclosure of ContractualObligations**

 

Therehave been no material changes in the information concerning contractualobligations as stated in the Company’s 2003 Annual Report on form 10-K.

 

**Investments**

 

Theinvestments of our insurance company subsidiaries must comply with theinsurance laws of New York State, the domiciliary state of Navigators InsuranceCompany and NIC Insurance Company. These laws prescribe the type, quality and concentrationof investments which may be made by insurance companies. In general, these lawspermit investments, within specified limits and subject to certainqualifications, in federal, state and municipal obligations, corporate bonds,preferred stocks, common stocks, real estate mortgages and real estate.

 

Ourinsurance company subsidiaries’ investments are subject to the direction andcontrol of their respective boards of directors and our finance committee, andare reviewed on a quarterly basis. The investments are managed by outsideprofessional fixed-income and equity portfolio managers. Current investmentobjectives are to maximize annual after-tax income while preserving andenhancing capital and statutory surplus. The insurance company subsidiariesseek to attain these objectives by investing in municipal bonds, U.S.Government obligations, corporate bonds, mortgage-backed and asset-backedsecurities and common stocks. Our insurance company subsidiaries’ investmentguidelines require that at least 90% of the fixed-income portfolio be rated“A-” or better by a nationally recognized rating organization. Up to 25% of thetotal portfolio may be invested in equity securities that are actively tradedon major U.S. stock exchanges. Our insurance company subsidiaries’ investmentguidelines prohibit investments in derivatives other than as a hedge againstforeign currency exposures or the writing of covered call options on the equityportfolio.

 

TheLloyd’s operations’ investments are subject to the direction and control of theboard of directors and the investment committee of NUAL, as well as our financecommittee, and represent our share of the investments held by Syndicate 1221.These investments must comply with the rules and regulations imposed by Lloyd’sof

 

31

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London and by certain overseasregulators. The investments are managed by outside professional fixed-incomeportfolio managers. The performance of the investment managers is reviewedquarterly. Current investment objectives are to maximize pre-tax income whilepreserving and enhancing capital. The investment managers for Syndicate 1221seek to attain these objectives by investing in government obligations,corporate bonds and mortgage-backed and asset-backed securities.

 

Themajority of the investment income of the Navigators Agencies is derived fromfiduciary funds invested in accordance with the guidelines of various stateinsurance departments. These guidelines typically require investments in short-terminstruments. This investment income is paid to the members of the marine pool,including Navigators Insurance.

 

Thefollowing tables show our cash and investments as of March 31, 2004 andDecember 31, 2003:

 
|                                               |   |                 |    | **Gross**      |   | **Gross**      |   | **Cost or**   |   |
|----------------------------------------------------|--------|----------------------|---------|----------------|--------|----------------|--------|---------------|--------|
|                                               |   | **Fair**             |    | **Unrealized** |   | **Unrealized** |   | **Amortized** |   |
| **March 31,  2004**                                |   | **Value**            |    | **Gains**      |   | **(Losses)**   |   | **Cost**      |   |
|                                               |   | **($ in thousands)** |    |
| Fixed maturities:                                  |   |                 |    |           |   |           |   |          |   |
|                                               |   |                 |    |           |   |           |   |          |   |
| U.S. Government Treasury Bonds and GNMAs           |   | $                    | 242,339 |           | $      | 5,999          |   | $             | (545   | ) | $ | 236,885 |   |
| States, municipalities and political  subdivisions |   | 95,576               |    | 2,965          |   | (202           | )      | 92,813        |   |
| Mortgage- and asset-backed (excluding  GNMAs)      |   | 147,663              |    | 3,351          |   | (325           | )      | 144,637       |   |
| Corporate bonds                                    |   | 146,520              |    | 6,647          |   | (120           | )      | 139,993       |   |
|                                               |   |                 |    |           |   |           |   |          |   |
| Total fixed maturities                             |   | 632,098              |    | 18,962         |   | (1,192         | )      | 614,328       |   |
|                                               |   |                 |    |           |   |           |   |          |   |
| Equity securities – common stocks             |   | 20,484               |    | 1,867          |   | (189           | )      | 18,806        |   |
|                                               |   |                 |    |           |   |           |   |          |   |
| Cash and short-term investments                    |   | 73,489               |    | —         |   | —         |   | 73,489        |   |
|                                               |   |                 |    |           |   |           |   |          |   |
| Total                                              |   | $                    | 726,071 |           | $      | 20,829         |   | $             | (1,381 | ) | $ | 706,623 |   |
|                                               |   |                 |    |           |   |           |   |          |   |
|                                               |   |                 |    | **Gross**      |   | **Gross**      |   | **Cost or**   |   |
|                                               |   | **Fair**             |    | **Unrealized** |   | **Unrealized** |   | **Amortized** |   |
| **December 31, 2003**                              |   | **Value**            |    | **Gains**      |   | **(Losses)**   |   | **Cost**      |   |
|                                               |   | **($ in thousands)** |    |
| Fixed maturities:                                  |   |                 |    |           |   |           |   |          |   |
|                                               |   |                 |    |           |   |           |   |          |   |
| U.S. Government Treasury Bonds and GNMAs           |   | $                    | 221,919 |           | $      | 4,107          |   | $             | (1,385 | ) | $ | 219,197 |   |
| States, municipalities and political  subdivisions |   | 88,093               |    | 2,599          |   | (116           | )      | 85,610        |   |
| Mortgage- and asset-backed (excluding  GNMAs)      |   | 141,831              |    | 1,614          |   | (373           | )      | 140,590       |   |
| Corporate bonds                                    |   | 136,702              |    | 4,509          |   | (314           | )      | 132,507       |   |
|                                               |   |                 |    |           |   |           |   |          |   |
| Total fixed maturities                             |   | 588,545              |    | 12,829         |   | (2,188         | )      | 577,904       |   |
|                                               |   |                 |    |           |   |           |   |          |   |
| Equity securities – common stocks             |   | 13,446               |    | 1,554          |   | (85            | )      | 11,977        |   |
|                                               |   |                 |    |           |   |           |   |          |   |
| Cash and short-term investments                    |   | 91,601               |    | —         |   | —         |   | 91,601        |   |
|                                               |   |                 |    |           |   |           |   |          |   |
| Total                                              |   | $                    | 693,592 |           | $      | 14,383         |   | $             | (2,273 | ) | $ | 681,482 |   |
|                                                    |        |                      |         |                |        |                |        |               |        |  |  |  |  |  |

 

32

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Allfixed maturity and equity securities are carried at fair value. The fair valueis based on quoted market prices or dealer quotes provided by independentpricing services.  At March 31, 2004 andDecember 31, 2003, all fixed maturity and equity securities held by us wereclassified as available-for-sale.

 

Weregularly review our fixed maturity and equity securities portfolios toevaluate the necessity of recording impairment losses for other-than-temporarydeclines in the fair value of investments. In general, we focus our attentionon those securities whose market value was less than 80% of their cost oramortized cost, as appropriate, for six or more consecutive months. Otherfactors considered in evaluating potential impairment include the current fairvalue as compared to cost or amortized cost, as appropriate, our 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.

 

Whena security in our investment portfolio has an unrealized loss that is deemed tobe other-than-temporary, we write the security down to fair value through acharge to operations. Significant changes in the factors we consider whenevaluating investments for impairment losses could result in a significantchange in impairment losses reported in the consolidated financial statements.  There were no impairment losses recorded inour fixed maturity or equity securities portfolios for the three months endedMarch 31, 2004 and 2003.

 

Thefollowing table summarizes all securities in an unrealized loss position atMarch 31, 2004 and December 31, 2003 showing the aggregate fair value and grossunrealized loss by the length of time those securities have continuously beenin an unrealized loss position:

 
|                                   |   | **March 31,  2004**   |   | **December  31, 2003** |   |
|----------------------------------------|--------|-----------------------|--------|------------------------|--------|
|                                   |   | **Fair**              |   | **Gross**              |   | **Fair** |   | **Gross** |   |
|                                   |   | **Value**             |   | **Unrealized  Loss**   |   | **Value** |   | **Unrealized  Loss** |   |
|                                   |   | **($ in  thousands)** |   |
| Fixed Maturities:                      |   |                  |   |                   |   |   |   |   |   |
| U.S. Government Treasury               |   |                  |   |                   |   |   |   |   |   |
| Bonds and GNMAs                        |   |                  |   |                   |   |   |   |   |   |
| 0-6 Months                             |   | $                     | 20,701 |                   | $      | 11 |   | $ | 51,249 |   | $ | 521 |   |
| 7-12 Months                            |   | 28,442                |   | 534                    |   | 15,059 |   | 864 |   |
| > 12 Months                         |   | —                |   | —                 |   | — |   | — |   |
| Subtotal                               |   | 49,143                |   | 545                    |   | 66,308 |   | 1,385 |   |
|                                   |   |                  |   |                   |   |   |   |   |   |
| States, municipalities and             |   |                  |   |                   |   |   |   |   |   |
| political subdivisions                 |   |                  |   |                   |   |   |   |   |   |
| 0-6 Months                             |   | 10,041                |   | 170                    |   | 6,340 |   | 58 |   |
| 7-12 Months                            |   | 1,057                 |   | 10                     |   | 1,508 |   | 38 |   |
| > 12 Months                         |   | 542                   |   | 22                     |   | 648 |   | 20 |   |
| Subtotal                               |   | 11,640                |   | 202                    |   | 8,496 |   | 116 |   |
|                                   |   |                  |   |                   |   |   |   |   |   |
| Mortgage- and asset-backed             |   |                  |   |                   |   |   |   |   |   |
| (excluding GNMAs)                      |   |                  |   |                   |   |   |   |   |   |
| 0-6 Months                             |   | 6,277                 |   | 230                    |   | 45,381 |   | 341 |   |
| 7-12 Months                            |   | 5,308                 |   | 90                     |   | 1,135 |   | 26 |   |
| > 12 Months                         |   | 127                   |   | 5                      |   | 138 |   | 6 |   |
| Subtotal                               |   | 11,712                |   | 325                    |   | 46,654 |   | 373 |   |
|                                   |   |                  |   |                   |   |   |   |   |   |
| Corporate bonds                        |   |                  |   |                   |   |   |   |   |   |
| 0-6 Months                             |   | 4,275                 |   | 21                     |   | 25,049 |   | 123 |   |
| 7-12 Months                            |   | 5,920                 |   | 99                     |   | 7,124 |   | 191 |   |
| > 12 Months                         |   | —                |   | —                 |   | — |   | — |   |
| Subtotal                               |   | 10,195                |   | 120                    |   | 32,173 |   | 314 |   |
|                                   |   |                  |   |                   |   |   |   |   |   |
| Total Fixed Maturities                 |   | $                     | 82,690 |                   | $      | 1,192 |   | $ | 153,631 |   | $ | 2,188 |   |
|                                   |   |                  |   |                   |   |   |   |   |   |
| Equity securities – common stocks |   |                  |   |                   |   |   |   |   |   |
| 0-6 Months                             |   | $                     | 2,912  |                   | $      | 79 |   | $ | — |   | $ | — |   |
| 7-12 Months                            |   | 199                   |   | 25                     |   | — |   | — |   |
| > 12 Months                         |   | 1,121                 |   | 85                     |   | 1,892 |   | 85 |   |
|                                   |   |                  |   |                   |   |   |   |   |   |
| Total Equity Securities                |   | $                     | 4,232  |                   | $      | 189 |   | $ | 1,892 |   | $ | 85 |   |

 

33

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Weanalyze the unrealized losses quarterly to determine if any of them areother-than-temporary.  The aboveunrealized losses have been determined to be temporary and generally resultfrom changes in market conditions.

 

Thefollowing table shows the composition by National Association of InsuranceCommissioners (“NAIC”) rating and the generally equivalent Standard &Poor’s (“S&P”) and Moody’s ratings of the fixed maturity securities in theCompany’s portfolio with gross unrealized losses at March 31, 2004.  Not all of the securities are rated byS&P and/or Moody’s.

 
| **NAIC  Rating** |       | **Equivalent  S&P  Rating** |                  | **Equivalent  Moody’s  Rating** |       | **Unrealized  Loss** |                  | **Fair Value** |   |
|------------------|------------|---------------------------------|-----------------------|--------------------------------------|------------|----------------------|-----------------------|----------------|--------|
|             | **Amount** |                            | **Percent  to Total** |                                 | **Amount** |                 | **Percent  to Total** |           |
|             |       |                            |                  |                                 |       | **($ in thousands)** |                  |
| 1                |       | AAA/AA/A                        |                  | Aaa/Aa/A                             |       | $                    | 1,172                 |           | 98     | % | $ | 79,484 |   | 96 | % |
| 2                |       | BBB                             |                  | Baa                                  |       | 20                   |                  | 2              |   | 3,206 |   | 4 |   |
| 3                |       | BB                              |                  | Ba                                   |       | —               |                  | —         |   | — |   | — |   |
| 4                |       | B                               |                  | B                                    |       | —               |                  | —         |   | — |   | — |   |
| 5                |       | CCC or lower                    |                  | Caa or lower                         |       | —               |                  | —         |   | — |   | — |   |
| 6                |       |                            |                  |                                 |       | —               |                  | —         |   | — |   | — |   |
|             |       |                            |                  | Total                                |       | $                    | 1,192                 |           | 100    | % | $ | 82,690 |   | 100 | % |

 

AtMarch 31, 2004, the gross unrealized losses in the table directly above arerelated to fixed maturity securities that are rated investment grade, which isdefined by the Company as a security having a NAIC rating of 1 or 2, a S&Prating 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.

 

Thescheduled maturity dates for fixed maturity securities in an unrealized lossposition at March 31, 2004 are shown below.

 

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|                                   |   | **Unrealized  Loss** |   | **Fair Value**        |   |
|----------------------------------------|--------|----------------------|--------|-----------------------|--------|
|                                   |   | **Amount**           |   | **Percent  to Total** |   | **Amount** |   | **Percent  to Total** |   |
|                                   |   | **($ in thousands)** |   |
| Due in one year or less                |   | $                    | 7      |                  | 1      | % | $ | 21,703 |   | 26 | % |
| Due after one year through five years  |   | 83                   |   | 7                     |   | 9,449 |   | 11 |   |
| Due after five years through ten years |   | 118                  |   | 10                    |   | 7,660 |   | 9 |   |
| Due after ten years                    |   | 639                  |   | 54                    |   | 32,166 |   | 39 |   |
| Mortgage and asset backed securities   |   | 345                  |   | 28                    |   | 11,712 |   | 15 |   |
|                                   |   |                 |   |                  |   |   |   |   |   |
| Total fixed income securities          |   | $                    | 1,192  |                  | 100    | % | $ | 82,690 |   | 100 | % |

 

Expectedmaturities may differ from contractual maturities because issuers may have theright to call or prepay obligations with or without call or prepaymentpenalties. Due to the periodic repayment of principal, the mortgage- andasset-backed securities are estimated to have an effective maturity ofapproximately 4.9 years.

 

Ourrealized capital gains and losses were as follows:

 
|                       |   | **Three  Months Ended March 31,** |   |
|----------------------------|--------|-----------------------------------|--------|
|                       |   | **2004**                          |   | **2003** |   |
|                       |   | **($ in thousands)**              |   |
|                       |   |                              |   |   |   |
| Fixed maturities:          |   |                              |   |   |   |
| Gains                      |   | $                                 | 439    |   | $ | 491 |   |
| (Losses)                   |   | (17                               | )      | (22 | ) |
|                       |   | 422                               |   | 469 |   |
| Equity securities:         |   |                              |   |   |   |
| Gains                      |   | —                            |   | 2 |   |
| (Losses)                   |   | —                            |   | (253 | ) |
|                       |   | —                            |   | (251 | ) |
|                       |   |                              |   |   |   |
| Net realized capital gains |   | $                                 | 422    |   | $ | 218 |   |

 

The following table details any relatively large realized loss fromsales and impairments during the first quarters of 2003 and 2004 and therelated circumstances giving rise to the loss:

 
| **Description**                    |   | **Proceeds  from Sale** |   | **Loss on  Sale** |   | **Impairment** |   | **Holdings  at  March 31, 2004** |   | **Net  Unrealized  Loss** |   | **# of  Months  Unrealized Loss  Exceeded 20%  of Cost or  Amortized Cost** |   |
|------------------------------------|--------|-------------------------|--------|-------------------|--------|----------------|--------|----------------------------------|--------|---------------------------|--------|-----------------------------------------------------------------------------|--------|
|                               |   |                    |   |              |   |           |   |                             |   |                      |   |                                                                        |   |
| Three months ended March 31, 2003: |   |                    |   |              |   |           |   |                             |   |                      |   |                                                                        |   |
|                               |   |                    |   |              |   |           |   |                             |   |                      |   |                                                                        |   |
| (1)                                |   | $                       | 425    |              | $      | (252           | )      | —                           |   | —                    |   | —                                                                      |   | 6 |   |
|                                    |        |                         |        |                   |        |                |        |                                  |        |                           |        |                                                                             |        |  |  |

 

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(1)          Issuerwas a major utility company which had a deteriorating balance sheet,underperforming overseas operation and a reduction in its dividend.

 

**Liquidityand Capital Resources**

 

Cashflow provided by operations was $26.7 million and $26.0 million for the threemonths ended March 31, 2004 and 2003, respectively. The positive operating cashflows in the first quarters of 2004 and

 

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2003 were primarily due to theincreases in net written premium. Operating cash flow was used primarily to acquire additional investmentassets and to reduce debt.

 

Investedassets and cash increased to $726.1 million at March 31, 2004 from $693.6million at December 31, 2003. The increase was primarily due to the positivecash flow and the $110.8 million of net proceeds received from the public stockoffering in October 2003.  Netinvestment income was $5.9 million and $4.7 million for the three months endedMarch 31, 2004 and 2003, respectively.

 

Theaverage yield of the portfolio, excluding net realized capital gains, was 3.4%in the first quarter of 2004, and 4.3% in the first quarter of 2003 reflectingthe prevailing interest rates during those years. As of March 31, 2004 andDecember 31, 2003, all fixed maturity securities and equity securities held byus were classified as available-for-sale.

 

AtMarch 31, 2004, the weighted average rating of our fixed maturity investmentswas ‘‘AA’’ by Standard & Poor’s and ‘‘Aa’’ by Moody’s. We believe that wehave no significant exposure to credit risk since the fixed maturity investmentportfolio consists of investment-grade bonds. At March 31, 2004, our portfoliohad an average maturity of 4.94 years and duration of 3.79 years. Managementcontinually monitors the composition and cash flow of the investment portfolioin order to maintain the appropriate levels of liquidity to ensure our abilityto satisfy claims.

 

Wehave a credit facility provided through a consortium of banks. The creditfacility provides for an $80.0 million letter of credit facility which wasincreased from $55.0 million in November 2003. The credit facility also provided for a $9.0 million line of creditfacility which was fully utilized prior to the October 2003 common stock offering.  As required by the credit facility agreement,the line of credit was fully paid from a portion of the proceeds from thecommon stock offering thereby eliminating the line of credit portion of thecredit facility.  The letter of creditfacility is utilized primarily by Navigators Corporate Underwriters Ltd. andMillennium Underwriting Ltd. for our participation in Lloyd’s Syndicate 1221.The credit facility agreement requires that the banks vote by November 19th ofeach year whether or not to renew the letter of credit portion of the facility.If the banks decide not to renew the letter of credit portion of the facility,we will need to find other sources to provide the letters of credit or othercollateral in order to continue our participation in Syndicate 1221.  The renewal amendment executed in November2003 renewed the letter of credit facility for a two year period.   At March 31, 2004, letters of credit withan aggregate face amount of $79.9 million were issued under the letter ofcredit facility.

 

Thebank credit facility is collateralized by the common stock of NavigatorsInsurance Company. It contains covenants common to transactions of this type,including restrictions on indebtedness and liens, limitations on mergers andthe sale of assets, maintaining certain consolidated tangible net worth,statutory surplus and other financial ratios. At March 31, 2004, we were incompliance with all covenants.

 

AtMarch 31, 2004, our consolidated stockholders’ equity was $305.2 million or$24.26 per share compared to $290.0 million or $23.14 per share at December 31,2003. The increase was primarily due to net income of $8.9 million and othercomprehensive income of $5.0 million for the three months ended March 31, 2004.

 

Ourreinsurance has been placed with various U.S. and foreign insurance companiesand with selected syndicates at Lloyd’s. Pursuant to the implementation ofLloyd’s Plan of Reconstruction and Renewal, a portion of our recoverables arenow reinsured by Equitas (a separate United Kingdom authorized reinsurancecompany established to reinsure outstanding liabilities of all Lloyd’s membersfor all risks written in the 1992 or prior years of account).

 

Weprimarily rely upon dividends from our subsidiaries to meet our holding companyobligations. The dividends have historically come primarily from NavigatorsInsurance. At December 31, 2003, the maximum

 

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amount available for thepayment of dividends by Navigators Insurance during 2004 without priorregulatory approval was $21,032,000.  NavigatorsInsurance did not pay any dividends in the first quarter of 2004.

 

Webelieve that the cash flow generated by the operating activities of oursubsidiaries will provide sufficient funds for us to meet our liquidity needsover the next twelve months. Beyond the next twelve months, cash flow availableto us may be influenced by a variety of factors, including general economicconditions and conditions in the insurance and reinsurance markets, as well asfluctuations from year to year in claims experience.

 

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

 

There have been no material changes in the information concerningmarket risk as stated in the Company’s 2003 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 of the Securities Exchange Actof 1934, as amended (the “Exchange Act”) as of the end of the period covered bythis annual report. Based on such evaluation, such officers have concluded thatas of the end of such period the Company’s disclosure controls and proceduresare effective in identifying, on a timely basis, material information requiredto be disclosed in our reports filed or submitted under the Exchange Act.

 

(b)         Therehave been no changes during our first fiscal quarter in our internal controlover financial reporting that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.  We have completed the reviewof our asbestos and environmental loss reserving process that was discussedunder the caption “Controls and Procedures” in our 2003 Annual Report on Form10-K and, as a result, expect to refine our internal controls in this area inthe future, primarily by increasing claims staff and emphasizing specializedknowledge of asbestos and environmental issues.

 

**Part II****- OtherInformation**

 

**Item 1.****                                   LegalProceedings**

 

TheCompany is not a party to or the subject of, any material pending legalproceedings which depart from the ordinary routine litigation incident to thekinds of business conducted by the Company, except for a suit concerning thedraw down of letters of credit.  In 1997and 1998, Navigators Insurance Company entered into certain reinsurancecontracts with a reinsurer.  Inaccordance with normal business practice, Navigators Insurance Company hadsecured this exposure with letters of credit. In April 1999, NavigatorsInsurance Company drew down the letters of credit, in good faith and consistentwith their terms. The liquidator of the reinsurer has commenced suit inAustralia, seeking to void the draw downs. If the liquidator were to prevail inits action to void the letters of credit, our maximum exposure would beapproximately $4.0 million. We filed motions seeking a prompt dismissal of theliquidator’s claims in Australian court in June 2003, which motions weredenied. We have appealed those denials and are vigorously defending ourposition. The appellate court ruled that the case needs to be fully triedbefore an appeal can be pursued. Although we believe that we have strong defenses against these claimsand a reasonable possibility of defeating the liquidator’s claim and that theliquidator’s assertions run counter to prevailing Australian and United Stateslaw, there can be no assurance as to the outcome of this litigation.

 

**Item 2****.****                                   Changesin Securities, Use of Proceeds and Issuer Purchases of Equity Securities**

 

None.

 

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**Item 3****.****                                   DefaultsUpon Senior Securities**

 

None.

 

**Item 4.****                                   Submissionsof Matters to a Vote of Securities’ Holders**

 

None.

 

**Item 5****.****                                   OtherInformation**

 

There have been no material changes in the procedures by which securityholders may recommend nominees to the Company’s board of directors.

 

**Item 6****.****                                   Exhibitsand Reports on Form 8-K**

 

(a)   Exhibits:

 
| **Exhibit No.** |   | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                           |   |   |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|            |   |                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 11-1            |   | Statement re Computation of Per Share Earnings                                                                                                                                                                                                                                                                                                                       |   | *      |
| 31-1            |   | Certification of CEO per Section 302 of the Sarbanes-Oxley Act                                                                                                                                                                                                                                                                                                       |   | *      |
| 31-2            |   | Certification of CFO per Section 302 of the Sarbanes-Oxley Act                                                                                                                                                                                                                                                                                                       |   | *      |
| 32-1            |   | Certification of CEO per Section 906 of the Sarbanes-Oxley Act                                                                                                                                                                                                                                                                                                       |   | *      |
|            |   | (This exhibit is intended to be furnished in accordance with  Regulation S-K item 601(b)(32)(ii) and shall not be deemed to be filed for  purposes of section 18 of the Securities Exchange Act of 1934, as amended, or  incorporated by reference into any filing under the Securities Act of 1933,  except as shall be expressly set forth by specific reference). |   |   |
| 32-2            |   | Certification of CFO per Section 906 of the Sarbanes-Oxley Act                                                                                                                                                                                                                                                                                                       |   | *      |
|            |   | (This exhibit is intended to be furnished in accordance with  Regulation S-K item 601(b)(32)(ii) and shall not be deemed to be filed for  purposes of section 18 of the Securities Exchange Act of 1934, as amended, or  incorporated by reference into any filing under the Securities Act of 1933,  except as shall be expressly set forth by specific reference). |   |   |

----

* *Includedherein*.

 

(b)   Reports on Form 8-K:

 

On February 13, 2004, the Company filed a Form 8-K relating to itspress release announcing its plan to strengthen its asbestos reserves.

 

On March 10, 2004, the Company furnished a Form 8-K relating to itspress release announcing its fourth quarter and full year 2003 earnings.

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|   |        |   |   |   |   |   | The Navigators Group, Inc.  |   |
|--------|-------------|--------|--------|--------|--------|--------|-----------------------------|--------|
|   |        |   |   |   |   |   | (Registrant)                |   |
|   |        |   |   |   |   |   |                        |   |
| Date:  | May 6, 2004 |   |   |   |   |   | /s / Paul J. Malvasio       |   |
|   |        |   |   |   |   |   | Paul J. Malvasio            |   |
|   |        |   |   |   |   |   | Executive Vice President    |   |
|   |        |   |   |   |   |   | and Chief Financial Officer |   |

 

39

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**INDEX OF EXHIBITS**

 
| **Exhibit No.** |   | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                           |   |   |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|            |   |                                                                                                                                                                                                                                                                                                                                                                 |   |   |
| 11-1            |   | Statement re Computation of Per Share Earnings                                                                                                                                                                                                                                                                                                                       |   | *      |
| 31-1            |   | Certification of CEO per Section 302 of the Sarbanes-Oxley Act                                                                                                                                                                                                                                                                                                       |   | *      |
| 31-2            |   | Certification of CFO per Section 302 of the Sarbanes-Oxley Act                                                                                                                                                                                                                                                                                                       |   | *      |
| 32-1            |   | Certification of CEO per Section 906 of the Sarbanes-Oxley Act                                                                                                                                                                                                                                                                                                       |   | *      |
|            |   | (This exhibit is intended to be furnished in accordance with  Regulation S-K item 601(b)(32)(ii) and shall not be deemed to be filed for  purposes of section 18 of the Securities Exchange Act of 1934, as amended, or  incorporated by reference into any filing under the Securities Act of 1933,  except as shall be expressly set forth by specific reference). |   |   |
| 32-2            |   | Certification of CFO per Section 906 of the Sarbanes-Oxley Act                                                                                                                                                                                                                                                                                                       |   | *      |
|            |   | (This exhibit is intended to be furnished in accordance with  Regulation S-K item 601(b)(32)(ii) and shall not be deemed to be filed for  purposes of section 18 of the Securities Exchange Act of 1934, as amended, or  incorporated by reference into any filing under the Securities Act of 1933,  except as shall be expressly set forth by specific reference). |   |   |

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*  Included herein.

 

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