**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM10-Q**

 

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

 

**For the Quarterly Period Ended   June 30, 2005**

 

**Commission file number  0-15886**

 

**The Navigators Group, Inc.**

(Exact name of Registrant as specified in its charter)

 

| **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, includingarea code)

 

 

(Former name, former address and formerfiscal year, if changed since last report.)

 

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

 

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

 

The number of common sharesoutstanding as of July 20, 2005 was 12,782,833.

 

 

----

 

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

 

**INDEX**

 
| Part I. FINANCIAL INFORMATION:                                       |   |
|----------------------------------------------------------------------|--------|
|                                                                 |   |
| Item 1.  Financial Statements                                        |   |
|                                                                 |   |
| Consolidated Balance Sheets                                          |   |
| June 30, 2005 (unaudited) and December 31, 2004                      |   |
|                                                                 |   |
| Consolidated Statements of Income (unaudited)                        |   |
| Three Months Ended June 30, 2005 and 2004                            |   |
| Six Months Ended June 30, 2005 and 2004                              |   |
|                                                                 |   |
| Consolidated Statements of Stockholders’ Equity                 |   |
| June 30, 2005 and 2004 (unaudited)                                   |   |
|                                                                 |   |
| Consolidated Statements of Comprehensive Income (unaudited)          |   |
| Three Months Ended June 30, 2005 and 2004                            |   |
| Six Months Ended June 30, 2005 and 2004                              |   |
|                                                                 |   |
| Consolidated Statements of Cash Flows (unaudited)                    |   |
| Six Months Ended June 30, 2005 and 2004                              |   |
|                                                                 |   |
| 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.  Unregistered Sales of Equity Securities and Use of Proceeds |   |
|                                                                 |   |
| Item 3.  Defaults Upon Senior Securities                             |   |
|                                                                 |   |
| Item 4.  Submissions of Matters to a Vote of Security’ Holders  |   |
|                                                                 |   |
| Item 5. Other Information                                            |   |
|                                                                 |   |
| Item 6. Exhibits and Reports on Form 8-K                             |   |
|                                                                 |   |
| Signature                                                            |   |
|                                                                 |   |
| Index of Exhibits                                                    |   |

 

2

----

 

**Part 1.    FinancialInformation**

 

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

 

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

**CONSOLIDATED BALANCE SHEETS**

*($ in thousands, except share data)*

 
| ** **                                                                                                                        | ** **   | **June 30,  2005** | ** **   | **December 31,  2004** | ** **   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------------|--------------------|--------------|------------------------|--------------|
| *** ***                                                                                                                      | *** *** | **(Unaudited)**    | *** *** | *** ***           | *** *** |
| **ASSETS**                                                                                                                        |         |               |         |                   |         |
| Investments and cash:                                                                                                             |         |               |         |                   |         |
| Fixed maturities, available-for-sale, at  fair value (amortized cost: 2005, $784,211; 2004, $713,049)                             |         | $                  | 795,332      |                   | $            | 722,434 |   |
| Equity securities, available-for-sale, at  fair value (cost: 2005, $18,869; 2004, $19,101)                                        |         | 20,453             |         | 21,170                 |         |
| Short-term investments, at cost which  approximates fair value                                                                    |         | 130,474            |         | 96,653                 |         |
| Cash                                                                                                                              |         | 18,784             |         | 14,676                 |         |
| Total investments and cash                                                                                                        |         | 965,043            |         | 854,933                |         |
|                                                                                                                              |         |               |         |                   |         |
| Premiums in course of collection                                                                                                  |         | 178,864            |         | 176,720                |         |
| Commissions receivable                                                                                                            |         | 3,903              |         | 3,062                  |         |
| Prepaid reinsurance premiums                                                                                                      |         | 152,798            |         | 130,761                |         |
| Reinsurance receivable on paid losses                                                                                             |         | 38,026             |         | 20,955                 |         |
| Reinsurance receivable on unpaid losses and  loss adjustment expenses                                                             |         | 506,542            |         | 502,329                |         |
| Net deferred income tax benefit                                                                                                   |         | 20,569             |         | 17,348                 |         |
| Deferred policy acquisition costs                                                                                                 |         | 34,684             |         | 23,882                 |         |
| Accrued investment income                                                                                                         |         | 8,434              |         | 7,303                  |         |
| Goodwill                                                                                                                          |         | 5,104              |         | 5,282                  |         |
| Other assets                                                                                                                      |         | 13,905             |         | 14,103                 |         |
|                                                                                                                              |         |               |         |                   |         |
| Total assets                                                                                                                      |         | $                  | 1,927,872    |                   | $            | 1,756,678 |   |
|                                                                                                                              |         |               |         |                   |         |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                    |         |               |         |                   |         |
| Liabilities:                                                                                                                      |         |               |         |                   |         |
| Reserves for losses and loss adjustment  expenses                                                                                 |         | $                  | 1,005,838    |                   | $            | 966,117 |   |
| Unearned premium                                                                                                                  |         | 338,742            |         | 270,970                |         |
| Reinsurance balances payable                                                                                                      |         | 160,695            |         | 143,427                |         |
| Federal income tax payable                                                                                                        |         | 8,046              |         | 5,614                  |         |
| Payable for securities purchased                                                                                                  |         | 6,452              |         | 3,027                  |         |
| Accounts payable and other liabilities                                                                                            |         | 56,026             |         | 38,945                 |         |
| Total liabilities                                                                                                                 |         | 1,575,799          |         | 1,428,100              |         |
|                                                                                                                              |         |               |         |                   |         |
| Stockholders’ equity:                                                                                                        |         |               |         |                   |         |
| Preferred stock, $.10 par value, authorized  1,000,000 shares, none issued                                                        |         | ––       |         | ––           |         |
| Common stock, $.10 par value, 20,000,000  shares authorized; issued and outstanding: 12,780,833 for 2005 and 12,657,160  for 2004 |         | 1,278              |         | 1,266                  |         |
| Additional paid-in capital                                                                                                        |         | 157,059            |         | 154,670                |         |
| Retained earnings                                                                                                                 |         | 184,316            |         | 163,337                |         |
| Accumulated other comprehensive income                                                                                            |         | 9,420              |         | 9,305                  |         |
| Total stockholders’ equity                                                                                                   |         | 352,073            |         | 328,578                |         |
|                                                                                                                              |         |               |         |                   |         |
| Total liabilities and stockholders’ equity                                                                                   |         | $                  | 1,927,872    |                   | $            | 1,756,678 |   |

 

See accompanying notes to interim consolidated financial statements.

 

3

----

 

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

**CONSOLIDATED STATEMENTS OF INCOME**

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

 
| ** **                                        | ** **   | **Three Months Ended  June 30,** | ** ** |
|---------------------------------------------------|--------------|----------------------------------|------------|
| ** **                                        | ** **   | **2005**                         | ** ** | **2004** | ** ** |
| ** **                                        | *** *** | **(Unaudited)**                  | ** ** |
| ** **                                        | ** **   | ** **                       | ** ** |
| Gross written premium                             |         | $                                | 190,133    |   | $ | 161,626 |   |
| Revenues:                                         |         |                             |       |   |   |
| Net written premium                               |         | $                                | 93,257     |   | $ | 73,689 |   |
| (Increase) decrease in unearned premium           |         | (7,425                           | )          | 1,625 |   |
| Net earned premium                                |         | 85,832                           |       | 75,314 |   |
| Commission income                                 |         | 1,514                            |       | 1,361 |   |
| Net investment income                             |         | 8,961                            |       | 6,625 |   |
| Net realized capital gains                        |         | 416                              |       | (105 | ) |
| Other income                                      |         | 470                              |       | 266 |   |
| Total revenues                                    |         | 97,193                           |       | 83,461 |   |
|                                              |         |                             |       |   |   |
| Operating expenses:                               |         |                             |       |   |   |
| Net losses and loss adjustment expenses  incurred |         | 53,611                           |       | 45,392 |   |
| Commission expense                                |         | 9,242                            |       | 10,040 |   |
| Other operating expenses                          |         | 17,628                           |       | 14,620 |   |
| Total operating expenses                          |         | 80,481                           |       | 70,052 |   |
|                                              |         |                             |       |   |   |
| Income before income tax expense                  |         | 16,712                           |       | 13,409 |   |
|                                              |         |                             |       |   |   |
| Income tax expense (benefit):                     |         |                             |       |   |   |
| Current                                           |         | 8,069                            |       | 4,951 |   |
| Deferred                                          |         | (2,637                           | )          | (579 | ) |
| Total income tax expense                          |         | 5,432                            |       | 4,372 |   |
|                                              |         |                             |       |   |   |
| Net income                                        |         | $                                | 11,280     |   | $ | 9,037 |   |
|                                              |         |                             |       |   |   |
| Net income per common share:                      |         |                             |       |   |   |
| Basic                                             |         | $                                | 0.88       |   | $ | 0.72 |   |
| Diluted                                           |         | $                                | 0.88       |   | $ | 0.71 |   |
|                                              |         |                             |       |   |   |
| Average common shares outstanding:                |         |                             |       |   |   |
| Basic                                             |         | 12,763                           |       | 12,587 |   |
| Diluted                                           |         | 12,853                           |       | 12,647 |   |

 

See accompanying notes to interim consolidated financial statements.

 

4

----

 

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

**CONSOLIDATED STATEMENTS OF INCOME**

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

 
| ** **                                        | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------|------------|--------------------------------|------------|
| ** **                                        | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| ** **                                        | ** ** | **(Unaudited)**                | ** ** |
| ** **                                        | ** ** | ** **                     | ** ** |
| Gross written premium                             |       | $                              | 407,129    |   | $ | 357,577 |   |
| Revenues:                                         |       |                           |       |   |   |
| Net written premium                               |       | $                              | 210,347    |   | $ | 169,624 |   |
| (Increase) in unearned premium                    |       | (46,977                        | )          | (20,135 | ) |
| Net earned premium                                |       | 163,370                        |       | 149,489 |   |
| Commission income                                 |       | 2,784                          |       | 2,488 |   |
| Net investment income                             |       | 16,583                         |       | 12,527 |   |
| Net realized capital gains                        |       | 583                            |       | 317 |   |
| Other income                                      |       | 1,367                          |       | 394 |   |
| Total revenues                                    |       | 184,687                        |       | 165,215 |   |
|                                              |       |                           |       |   |   |
| Operating expenses:                               |       |                           |       |   |   |
| Net losses and loss adjustment expenses  incurred |       | 99,832                         |       | 89,144 |   |
| Commission expense                                |       | 18,846                         |       | 21,068 |   |
| Other operating expenses                          |       | 35,072                         |       | 28,052 |   |
| Total operating expenses                          |       | 153,750                        |       | 138,264 |   |
|                                              |       |                           |       |   |   |
| Income before income tax expense                  |       | 30,937                         |       | 26,951 |   |
|                                              |       |                           |       |   |   |
| Income tax expense (benefit):                     |       |                           |       |   |   |
| Current                                           |       | 13,241                         |       | 9,958 |   |
| Deferred                                          |       | (3,283                         | )          | (957 | ) |
| Total income tax expense                          |       | 9,958                          |       | 9,001 |   |
|                                              |       |                           |       |   |   |
| Net income                                        |       | $                              | 20,979     |   | $ | 17,950 |   |
|                                              |       |                           |       |   |   |
| Net income per common share:                      |       |                           |       |   |   |
| Basic                                             |       | $                              | 1.65       |   | $ | 1.43 |   |
| Diluted                                           |       | $                              | 1.64       |   | $ | 1.42 |   |
|                                              |       |                           |       |   |   |
| Average common shares outstanding:                |       |                           |       |   |   |
| Basic                                             |       | 12,720                         |       | 12,570 |   |
| Diluted                                           |       | 12,815                         |       | 12,671 |   |

 

Seeaccompanying notes to interim consolidated financial statements.

 

5

----

 

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

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

*($ in thousands)*

 
| ** **                                               | ** ** | **Six Months Ended  June 30,** | ** **   |
|----------------------------------------------------------|------------|--------------------------------|--------------|
| ** **                                               | ** ** | **2005**                       | ** **   | **2004** | ** ** |
| ** **                                               | ** ** | **(Unaudited)**                | ** **   |
| ** **                                               | ** ** | ** **                     | ** **   |
| Preferred Stock                                          |       |                           |         |   |   |
| Balance at beginning and end of period                   |       | $                              | –– |   | $ | –– |   |
|                                                     |       |                           |         |   |   |
| Common stock                                             |       |                           |         |   |   |
| Balance at beginning of year                             |       | $                              | 1,266        |   | $ | 1,254 |   |
| Shares issued under stock plans                          |       | 12                             |         | 6 |   |
| Balance at end of period                                 |       | $                              | 1,278        |   | $ | 1,260 |   |
|                                                     |       |                           |         |   |   |
| Additional paid-in capital                               |       |                           |         |   |   |
| Balance at beginning of year                             |       | $                              | 154,670      |   | $ | 151,765 |   |
| Effect of SFAS 123 for stock options                     |       | 517                            |         | 478 |   |
| Shares issued under stock plans                          |       | 1,872                          |         | 1,077 |   |
| Balance at end of period                                 |       | $                              | 157,059      |   | $ | 153,320 |   |
|                                                     |       |                           |         |   |   |
| Retained earnings                                        |       |                           |         |   |   |
| Balance at beginning of year                             |       | $                              | 163,337      |   | $ | 128,472 |   |
| Net income                                               |       | 20,979                         |         | 17,950 |   |
| Balance at end of period                                 |       | $                              | 184,316      |   | $ | 146,422 |   |
|                                                     |       |                           |         |   |   |
| Accumulated other comprehensive income                   |       |                           |         |   |   |
| Net unrealized gains (losses) on  securities, net of tax |       |                           |         |   |   |
| Balance at beginning of year                             |       | $                              | 7,416        |   | $ | 7,871 |   |
| Change in period                                         |       | 842                            |         | (7,424 | ) |
| Balance at end of period                                 |       | 8,258                          |         | 447 |   |
| Cumulative translation adjustments, net of  tax          |       |                           |         |   |   |
| Balance at beginning of year                             |       | 1,889                          |         | 666 |   |
| Net adjustment for period                                |       | (727                           | )            | 241 |   |
| Balance at end of period                                 |       | 1,162                          |         | 907 |   |
| Balance at end of period                                 |       | $                              | 9,420        |   | $ | 1,354 |   |
|                                                     |       |                           |         |   |   |
| Total stockholders’ equity at end of period         |       | $                              | 352,073      |   | $ | 302,356 |   |

 

Seeaccompanying notes to interim consolidated financial statements.

 

6

----

 

**THENAVIGATORS GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE INCOME**

*($ inthousands)*

 
| ** **                                                                                                                                         | ** ** | **Three Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                         | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| ** **                                                                                                                                         | ** ** | **(Unaudited)**                  | ** ** |
|                                                                                                                                               |       |                             |       |   |   |
| Net income                                                                                                                                         |       | $                                | 11,280     |   | $ | 9,037 |   |
| Other comprehensive income (loss):                                                                                                                 |       |                             |       |   |   |
| Change in net unrealized gains or (losses)  on securities, net of tax expense (benefit) of $3,947 and $(6,566) in 2005  and 2004, respectively (1) |       | 7,329                            |       | (12,194 | ) |
| Change in foreign currency translation  gains or (losses), net of tax expense (benefit) of $(411) and $12 in 2005 and  2004, respectively          |       | (839                             | )          | 22 |   |
| Other comprehensive income (loss)                                                                                                                  |       | 6,490                            |       | (12,172 | ) |
|                                                                                                                                               |       |                             |       |   |   |
| Comprehensive income (loss)                                                                                                                        |       | $                                | 17,770     |   | $ | (3,135 | ) |
|                                                                                                                                               |       |                             |       |   |   |
| (1) Disclosure of reclassification amount, net of tax:                                                                                             |       |                             |       |   |   |
| Unrealized holding gains (losses) arising during  period                                                                                           |       | $                                | 7,599      |   | $ | (12,361 | ) |
| Less: reclassification adjustment for net gains  (losses) included in net income                                                                   |       | 270                              |       | (167 | ) |
| Change in net unrealized gains (losses) on  securities                                                                                             |       | $                                | 7,329      |   | $ | (12,194 | ) |

 

Seeaccompanying notes to interim consolidated financial statements.

 

7

----

 

**THENAVIGATORS GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE INCOME**

*($ inthousands)*

 
| ** **                                                                                                                                      | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                      | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| ** **                                                                                                                                      | ** ** | **(Unaudited)**                | ** ** |
|                                                                                                                                            |       |                           |       |   |   |
| Net income                                                                                                                                      |       | $                              | 20,979     |   | $ | 17,950 |   |
| Other comprehensive income:                                                                                                                     |       |                           |       |   |   |
| Change in net unrealized gains or (losses)  on securities, net of tax expense (benefit) of $454 and $(3,998) in 2005 and  2004, respectively(1) |       | 842                            |       | (7,425 | ) |
| Change in foreign currency translation  gains or (losses), net of tax expense (benefit) of $(391) and $130 in 2005  and 2004, respectively      |       | (727                           | )          | 241 |   |
| Other comprehensive income (loss)                                                                                                               |       | 115                            |       | (7,184 | ) |
|                                                                                                                                            |       |                           |       |   |   |
| Comprehensive income                                                                                                                            |       | $                              | 21,094     |   | $ | 10,766 |   |
|                                                                                                                                            |       |                           |       |   |   |
| (1) Disclosure of reclassification amount, net of tax:                                                                                          |       |                           |       |   |   |
| Unrealized holding gains or (losses)  arising during period                                                                                     |       | $                              | 1,221      |   | $ | (7,242 | ) |
| Less: reclassification adjustment for net gains  included in net income                                                                         |       | 379                            |       | 183 |   |
| Net unrealized gains (losses) on securities                                                                                                     |       | $                              | 842        |   | $ | (7,425 | ) |

 

Seeaccompanying notes to interim consolidated financial statements.

 

8

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

*($ in thousands)*

 
| ** **                                                                                   | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                   | ** ** | **June 30,**         | ** ** |
| ** **                                                                                   | ** ** | **2005**             | ** ** | **2004** | ** ** |
| ** **                                                                                   | ** ** | **(Unaudited)**      | ** ** |
| ** **                                                                                   | ** ** | ** **           | ** ** |
| Operating activities:                                                                        |       |                 |       |   |   |
| Net income                                                                                   |       | $                    | 20,979     |   | $ | 17,950 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                 |       |   |   |
| Depreciation & amortization                                                              |       | 800                  |       | 561 |   |
| Net deferred income (benefit)                                                                |       | (3,283               | )          | (957 | ) |
| Net realized capital (gains)                                                                 |       | (582                 | )          | (317 | ) |
| Changes in assets and liabilities:                                                           |       |                 |       |   |   |
| Reinsurance receivable on paid and unpaid losses  and loss adjustment expenses               |       | (21,284              | )          | (71,291 | ) |
| Reserve for losses and loss adjustment  expenses                                             |       | 39,721               |       | 119,831 |   |
| Prepaid reinsurance premiums                                                                 |       | (22,037              | )          | (36,586 | ) |
| Unearned premium                                                                             |       | 67,772               |       | 57,600 |   |
| Premiums in course of collection                                                             |       | (2,144               | )          | (27,787 | ) |
| Commissions receivable                                                                       |       | (841                 | )          | 1,574 |   |
| Deferred policy acquisition costs                                                            |       | (10,802              | )          | (7,533 | ) |
| Accrued investment income                                                                    |       | (1,131               | )          | (1,044 | ) |
| Reinsurance balances payable                                                                 |       | 17,268               |       | 33,072 |   |
| Federal income tax                                                                           |       | 2,432                |       | 8,374 |   |
| Other                                                                                        |       | 29,038               |       | (287 | ) |
| Net cash provided by operating activities                                                    |       | 115,906              |       | 93,160 |   |
|                                                                                         |       |                 |       |   |   |
| Investing activities:                                                                        |       |                 |       |   |   |
| Fixed maturities, available-for-sale                                                         |       |                 |       |   |   |
| Redemptions and maturities                                                                   |       | 16,745               |       | 88,242 |   |
| Sales                                                                                        |       | 161,192              |       | 136,955 |   |
| Purchases                                                                                    |       | (259,847             | )          | (295,894 | ) |
| Equity securities, available-for-sale                                                        |       |                 |       |   |   |
| Sales                                                                                        |       | 3,375                |       | 2,292 |   |
| Purchases                                                                                    |       | (2,855               | )          | (8,169 | ) |
| Change in payable for securities                                                             |       | 3,425                |       | (9,749 | ) |
| Net change in short-term investments                                                         |       | (33,821              | )          | (1,552 | ) |
| Purchase of property and equipment                                                           |       | (1,390               | )          | (965 | ) |
| Net cash (used in) investing activities                                                      |       | (113,176             | )          | (88,840 | ) |
|                                                                                         |       |                 |       |   |   |
| Financing activities:                                                                        |       |                 |       |   |   |
| Proceeds of stock issued from Employee  Stock Purchase Plan                                  |       | 212                  |       | 434 |   |
| Proceeds of stock issued from exercise of stock  options                                     |       | 1,166                |       | 373 |   |
| Net cash provided by financing activities                                                    |       | 1,378                |       | 807 |   |
|                                                                                         |       |                 |       |   |   |
| Increase in cash                                                                             |       | 4,108                |       | 5,127 |   |
| Cash at beginning of year                                                                    |       | 14,676               |       | 8,399 |   |
| Cash at end of period                                                                        |       | $                    | 18,784     |   | $ | 13,526 |   |
|                                                                                         |       |                 |       |   |   |
| Supplemental disclosures of cash flow  information:                                          |       |                 |       |   |   |
| Federal, state and local income tax paid                                                     |       | $                    | 10,798     |   | $ | 1,577 |   |
| Issuance of stock to directors                                                               |       | 123                  |       | 60 |   |

 

See accompanying notes to interimconsolidated financial statements.

 

9

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

 

**Notes to Interim Consolidated Financial Statements**

*(Unaudited)*

** **

**Note1.  Accounting Policies**

 

The interimconsolidated financial statements are unaudited but reflect all adjustmentswhich, in the opinion of management, are necessary to provide a fair statementof the results of The Navigators Group, Inc. and its subsidiaries for theinterim periods presented on the basis of accounting principles generallyaccepted in the United States of America (“GAAP” or “U.S. GAAP”).  All such adjustments are of a normalrecurring nature.  All significantintercompany transactions and balances have been eliminated.  The preparation of these financial statementsrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosures of contingent assets andliabilities at the date of the financial statements and the reported revenuesand expenses during the reporting periods. The results of operations for any interim period are not necessarilyindicative of results for the full year. The terms “we”, “us”, “our” and “the Company” as used herein mean TheNavigators Group, Inc. and its subsidiaries, unless the context otherwiserequires.  The term “Parent” or “ParentCompany” is used to mean The Navigators Group, Inc. without itssubsidiaries.  These financial statementsshould be read in conjunction with the consolidated financial statements andnotes contained in the Company’s 2004 Annual Report on Form 10-K.

 

**Note2.  Reinsurance Ceded**

 

The Company’s ceded earned premiums were $90,160,000 and $79,328,000for the three months ended June 30, 2005 and 2004, respectively, and were$173,624,000 and $152,707,000 for the six months ended June 30, 2005 and 2004,respectively.  The Company’s cededincurred losses were $30,163,000 and $59,370,000 for the three months endedJune 30, 2005 and 2004, respectively, and were $83,598,000 and $124,188,000 forthe six months ended June 30, 2005 and 2004, respectively.

 

**Note3.  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 of NavigatorsInsurance Company, which includes a branch in the U.K. (the “U.K. Branch”), andNIC Insurance Company and are primarily engaged in underwriting marineinsurance and related lines of business, contractors’ general liabilityinsurance, and professional liability insurance.  The Lloyd’s Operations underwrite marine andrelated lines of business at Lloyd’s of London. The Navigators Agencies are underwriting management companies whichproduce, manage and underwrite insurance and reinsurance for both affiliatedand unaffiliated companies.  All segmentsare evaluated based on their GAAP results.

 

TheInsurance Companies’ and the Lloyd’s Operations’ results are measured by takinginto account net premiums earned, incurred losses and loss adjustment expenses(“LAE”), commission expense and other underwriting expenses.  The Navigators Agencies’ results includecommission income less other operating expenses.  Results of the Parent and Other Operations includeinter-segment income and expense in the form of affiliated commissions, incomeand expense from corporate operations and consolidating adjustments.  Each segment also maintains its owninvestments, on which it earns income and realizes capital gains or losses.

 

10

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Financial data by segment for the three months ended June 30, 2005 and2004 was as follows:

 

 
| ** **                                         | ** ** | **Three Months Ended June 30, 2005** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                         | ** ** | **Insurance  Companies**             | ** ** | **Lloyd’s  Operations** | ** ** | **Navigators  Agencies** | ** ** | **Parent &  Other  Operations****(1)** | ** ** | **Consolidated  Total** | ** ** |
| ** **                                         | ** ** | **($ in thousands)**            | ** ** |
| Gross written premium                              |       | $                                    | 130,680    |   | $ | 58,547 |   |   |   | $ | 906 |   | $ | 190,133 |   |
| Net written premium                                |       | 66,675                               |       | 26,582 |   |   |   | –– |   | 93,257 |   |
|                                               |       |                                 |       |   |   |   |   |   |   |   |   |
| Revenues:                                          |       |                                 |       |   |   |   |   |   |   |   |   |
| Net earned premium                                 |       | 59,107                               |       | 26,725 |   |   |   | –– |   | 85,832 |   |
| Commission income                                  |       | ––                         |       | 359 |   | $ | 11,431 |   | (10,276 | ) | 1,514 |   |
| Net investment income                              |       | 7,485                                |       | 1,454 |   | 1 |   | 21 |   | 8,961 |   |
| Net realized capital gains (losses                 |       | 681                                  |       | (265 | ) | –– |   | –– |   | 416 |   |
| Other income                                       |       | 209                                  |       | 1 |   | 260 |   | –– |   | 470 |   |
| Total revenues                                     |       | 67,482                               |       | 28,274 |   | 11,692 |   | (10,255 | ) | 97,193 |   |
|                                               |       |                                 |       |   |   |   |   |   |   |   |   |
| Operating expenses:                                |       |                                 |       |   |   |   |   |   |   |   |   |
| Net losses and LAE                                 |       | 38,682                               |       | 14,929 |   | –– |   | –– |   | 53,611 |   |
| Commission expense                                 |       | 13,868                               |       | 4,833 |   | –– |   | (9,459 | ) | 9,242 |   |
| Other operating expenses                           |       | 2,009                                |       | 4,310 |   | 11,163 |   | 146 |   | 17,628 |   |
| Total operating expenses                           |       | 54,559                               |       | 24,072 |   | 11,163 |   | (9,313 | ) | 80,481 |   |
|                                               |       |                                 |       |   |   |   |   |   |   |   |   |
| Income (loss) before income tax expense  (benefit) |       | 12,923                               |       | 4,202 |   | 529 |   | (942 | ) | 16,712 |   |
| Income tax expense (benefit)                       |       | 4,045                                |       | 1,471 |   | 245 |   | (329 | ) | 5,432 |   |
| Net income (loss)                                  |       | $                                    | 8,878      |   | $ | 2,731 |   | $ | 284 |   | $ | (613 | ) | $ | 11,280 |   |
|                                               |       |                                 |       |   |   |   |   |   |   |   |   |
| Identifiable assets (2)                            |       | $                                    | 1,404,146  |   | $ | 570,647 |   | $ | 16,812 |   | $ | 17,191 |   | $ | 1,927,872 |   |
|                                               |       |                                 |       |   |   |   |   |   |   |   |   |
| Loss and LAE ratio                                 |       | 65.4                                 | %          | 55.9 | % |   |   |   |   | 62.5 | % |
| Commission expense ratio                           |       | 23.5                                 | %          | 18.2 | % |   |   |   |   | 21.7 | % |
| Other operating expense ratio                      |       | 3.4                                  | %          | 16.1 | % |   |   |   |   | 7.4 | % |
| Combined ratio                                     |       | 92.3                                 | %          | 90.2 | % |   |   |   |   | 91.6 | % |

 

----

(1)           Includes inter-segment eliminations.

(2)           Does not cross-foot due to inter-segmenteliminations.

 

11

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| ** **                                         | ** ** | **Three Months Ended June 30, 2004** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                         | ** ** | **Insurance  Companies**             | ** ** | **Lloyd’s  Operations** | ** ** | **Navigators  Agencies** | ** ** | **Parent &  Other  Operations****(1)** | ** ** | **Consolidated  Total** | ** ** |
| ** **                                         | ** ** | **($ in thousands)**            | ** ** |
| Gross written premium                              |       | $                                    | 107,608    |   | $ | 54,308 |   |   |   | $ | (290 | ) | $ | 161,626 |   |
| Net written premium                                |       | 46,565                               |       | 27,124 |   |   |   | –– |   | 73,689 |   |
|                                               |       |                                 |       |   |   |   |   |   |   |   |   |
| Revenues:                                          |       |                                 |       |   |   |   |   |   |   |   |   |
| Net earned premium                                 |       | 51,782                               |       | 23,532 |   |   |   | –– |   | 75,314 |   |
| Commission income                                  |       | ––                         |       | 501 |   | $ | 8,155 |   | (7,295 | ) | 1,361 |   |
| Net investment income                              |       | 5,829                                |       | 791 |   | –– |   | 5 |   | 6,625 |   |
| Net realized capital gains (losses)                |       | 176                                  |       | (281 | ) | –– |   | –– |   | (105 | ) |
| Other income                                       |       | 74                                   |       | 5 |   | 187 |   | –– |   | 266 |   |
| Total revenues                                     |       | 57,861                               |       | 24,548 |   | 8,342 |   | (7,290 | ) | 83,461 |   |
|                                               |       |                                 |       |   |   |   |   |   |   |   |   |
| Operating expenses:                                |       |                                 |       |   |   |   |   |   |   |   |   |
| Net losses and LAE                                 |       | 32,558                               |       | 12,834 |   | –– |   | –– |   | 45,392 |   |
| Commission expense                                 |       | 13,242                               |       | 4,093 |   | –– |   | (7,295 | ) | 10,040 |   |
| Other operating expenses                           |       | 989                                  |       | 3,193 |   | 9,093 |   | 1,345 |   | 14,620 |   |
| Total operating expenses                           |       | 46,789                               |       | 20,120 |   | 9,093 |   | (5,950 | ) | 70,052 |   |
|                                               |       |                                 |       |   |   |   |   |   |   |   |   |
| Income (loss) before income tax expense  (benefit) |       | 11,072                               |       | 4,428 |   | (751 | ) | (1,340 | ) | 13,409 |   |
| Income tax expense (benefit)                       |       | 3,543                                |       | 1,550 |   | (252 | ) | (469 | ) | 4,372 |   |
| Net income (loss)                                  |       | $                                    | 7,529      |   | $ | 2,878 |   | $ | (499 | ) | $ | (871 | ) | $ | 9,037 |   |
|                                               |       |                                 |       |   |   |   |   |   |   |   |   |
| Identifiable assets (2)                            |       | $                                    | 1,158,875  |   | $ | 463,300 |   | $ | 14,682 |   | $ | 32,160 |   | $ | 1,593,120 |   |
|                                               |       |                                 |       |   |   |   |   |   |   |   |   |
| Loss and LAE ratio                                 |       | 62.9                                 | %          | 54.5 | % |   |   |   |   | 60.2 | % |
| Commission expense ratio                           |       | 25.6                                 | %          | 17.4 | % |   |   |   |   | 23.0 | % |
| Other operating expense ratio                      |       | 1.9                                  | %          | 13.6 | % |   |   |   |   | 5.6 | % |
| Combined ratio                                     |       | 90.4                                 | %          | 85.5 | % |   |   |   |   | 88.8 | % |

 

----

(1)           Includesinter-segment eliminations.

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

 

12

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Financial data by segment for the six months ended June 30, 2005 and2004 was as follows:

 
| ** **                                         | ** ** | **Six Months Ended June 30, 2005** | ** ** |
|----------------------------------------------------|------------|------------------------------------|------------|
| ** **                                         | ** ** | **Insurance  Companies**           | ** ** | **Lloyd’s  Operations** | ** ** | **Navigators  Agencies** | ** ** | **Parent &  Other  Operations****(1)** | ** ** | **Total** | ** ** |
| ** **                                         | ** ** | **($ in thousands)**          | ** ** |
| Gross written premium                              |       | $                                  | 259,968    |   | $ | 146,377 |   |   |   | $ | 784 |   | $ | 407,129 |   |
| Net written premium                                |       | 140,256                            |       | 70,091 |   |   |   | –– |   | 210,347 |   |
|                                               |       |                               |       |   |   |   |   |   |   |   |   |
| Revenues:                                          |       |                               |       |   |   |   |   |   |   |   |   |
| Net earned premium                                 |       | 106,470                            |       | 56,900 |   |   |   | –– |   | 163,370 |   |
| Commission income                                  |       | ––                       |       | 627 |   | $ | 21,181 |   | (19,024 | ) | 2,784 |   |
| Net investment income                              |       | 14,340                             |       | 2,203 |   | 3 |   | 37 |   | 16,583 |   |
| Net realized capital gains (losses)                |       | 947                                |       | (364 | ) | –– |   | –– |   | 583 |   |
| Other income (expense)                             |       | 207                                |       | 629 |   | 531 |   | –– |   | 1,367 |   |
| Total revenues                                     |       | 121,964                            |       | 59,995 |   | 21,715 |   | (18,987 | ) | 184,687 |   |
|                                               |       |                               |       |   |   |   |   |   |   |   |   |
| Operating expenses:                                |       |                               |       |   |   |   |   |   |   |   |   |
| Net losses and LAE                                 |       | 67,524                             |       | 32,308 |   | –– |   | –– |   | 99,832 |   |
| Commission expense                                 |       | 26,454                             |       | 9,714 |   | –– |   | (17,322 | ) | 18,846 |   |
| Other operating expenses                           |       | 4,121                              |       | 9,071 |   | 22,159 |   | (279 | ) | 35,072 |   |
| Total operating expenses                           |       | 98,099                             |       | 51,093 |   | 22,159 |   | (17,601 | ) | 153,750 |   |
|                                               |       |                               |       |   |   |   |   |   |   |   |   |
| Income (loss) before income tax expense  (benefit) |       | 23,865                             |       | 8,902 |   | (444 | ) | (1,386 | ) | 30,937 |   |
| Income tax expense (benefit)                       |       | 7,444                              |       | 3,116 |   | (117 | ) | (485 | ) | 9,958 |   |
| Net income (loss)                                  |       | $                                  | 16,421     |   | $ | 5,786 |   | $ | (327 | ) | $ | (901 | ) | $ | 20,979 |   |
|                                               |       |                               |       |   |   |   |   |   |   |   |   |
| Identifiable assets (2)                            |       | $                                  | 1,404,146  |   | $ | 570,647 |   | $ | 16,812 |   | $ | 17,191 |   | $ | 1,927,872 |   |
|                                               |       |                               |       |   |   |   |   |   |   |   |   |
| Loss and LAE ratio                                 |       | 63.4                               | %          | 56.8 | % |   |   |   |   | 61.1 | % |
| Commission expense ratio                           |       | 24.8                               | %          | 17.1 | % |   |   |   |   | 22.1 | % |
| Other operating expense ratio                      |       | 3.9                                | %          | 15.9 | % |   |   |   |   | 8.1 | % |
| Combined ratio                                     |       | 92.1                               | %          | 89.8 | % |   |   |   |   | 91.3 | % |

 

13

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| ** **                                         | ** ** | **Six Months Ended June 30, 2004** | ** ** |
|----------------------------------------------------|------------|------------------------------------|------------|
| ** **                                         | ** ** | **Insurance  Companies**           | ** ** | **Lloyd’s  Operations** | ** ** | **Navigators  Agencies** | ** ** | **Parent &  Other  Operations****(1)** | ** ** | **Consolidated  Total** | ** ** |
| ** **                                         | ** ** | **($ in thousands)**          | ** ** |
| Gross written premium                              |       | $                                  | 219,437    |   | $ | 141,466 |   |   |   | $ | (3,326 | ) | $ | 357,577 |   |
| Net written premium                                |       | 100,710                            |       | 68,914 |   |   |   | –– |   | 169,624 |   |
|                                               |       |                               |       |   |   |   |   |   |   |   |   |
| Revenues:                                          |       |                               |       |   |   |   |   |   |   |   |   |
| Net earned premium                                 |       | 104,964                            |       | 44,525 |   |   |   | –– |   | 149,489 |   |
| Commission income                                  |       | ––                       |       | 563 |   | $ | 16,087 |   | (14,162 | ) | 2,488 |   |
| Net investment income                              |       | 11,313                             |       | 1,195 |   | 3 |   | 16 |   | 12,527 |   |
| Net realized capital gains (losses)                |       | 381                                |       | (64 | ) | –– |   | –– |   | 317 |   |
| Other income                                       |       | 13                                 |       | 9 |   | 372 |   | –– |   | 394 |   |
| Total revenues                                     |       | 116,671                            |       | 46,228 |   | 16,462 |   | (14,146 | ) | 165,215 |   |
|                                               |       |                               |       |   |   |   |   |   |   |   |   |
| Operating expenses:                                |       |                               |       |   |   |   |   |   |   |   |   |
| Net losses and LAE                                 |       | 65,268                             |       | 23,876 |   | –– |   | –– |   | 89,144 |   |
| Commission expense                                 |       | 27,387                             |       | 7,843 |   | –– |   | (14,162 | ) | 21,068 |   |
| Other operating expenses                           |       | 2,187                              |       | 6,229 |   | 17,698 |   | 1,938 |   | 28,052 |   |
| Total operating expenses                           |       | 94,842                             |       | 37,948 |   | 17,698 |   | (12,224 | ) | 138,264 |   |
|                                               |       |                               |       |   |   |   |   |   |   |   |   |
| Income (loss) before income tax expense  (benefit) |       | 21,829                             |       | 8,280 |   | (1,236 | ) | (1,922 | ) | 26,951 |   |
| Income tax expense (benefit)                       |       | 7,021                              |       | 2,898 |   | (392 | ) | (526 | ) | 9,001 |   |
| Net income (loss)                                  |       | $                                  | 14,808     |   | $ | 5,382 |   | $ | (844 | ) | $ | (1,396 | ) | $ | 17,950 |   |
|                                               |       |                               |       |   |   |   |   |   |   |   |   |
| Identifiable assets (2)                            |       | $                                  | 1,158,875  |   | $ | 463,300 |   | $ | 14,682 |   | $ | 32,160 |   | $ | 1,593,120 |   |
|                                               |       |                               |       |   |   |   |   |   |   |   |   |
| Loss and LAE ratio                                 |       | 62.2                               | %          | 53.6 | % |   |   |   |   | 59.6 | % |
| Commission expense ratio                           |       | 26.1                               | %          | 17.6 | % |   |   |   |   | 23.6 | % |
| Other operating expense ratio                      |       | 2.1                                | %          | 14.0 | % |   |   |   |   | 5.6 | % |
| Combined ratio                                     |       | 90.4                               | %          | 85.2 | % |   |   |   |   | 88.8 | % |

 

14

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The Insurance Companies’ netearned premium includes $12,285,000 and $8,612,000 of net earned premium fromthe U.K. Branch for the three months ended June 30, 2005 and 2004,respectively, and $20,635,000 and $16,174,000 of net earned premium for the sixmonths ended June 30, 2005 and 2004, respectively.

 

**Note4.  Comprehensive Income**

 

Comprehensiveincome encompasses net income, net unrealized capital gains and losses onavailable for sale securities, and foreign currency translationadjustments.  Please refer to the *Consolidated Statements of Stockholders’ Equity* and the *Consolidated Statements of Comprehensive Income*, includedherein, for the components of *accumulated othercomprehensive income* and of *comprehensive income*,respectively.

 

**Note5.  Stock-Based Compensation**

 

Stock basedcompensation is expensed as the stock awards vest with the expense beingincluded in *other operating expenses* for the periodsindicated.  The amount charged to expensefor stock grants was $358,000 and $286,000 for the three months ended June 30,2005 and 2004, respectively, and $736,000 and $647,000 for the six months ended June 30, 2005and 2004, respectively.  The amountcharged to expense for stock options was $271,000 and $278,000 for the threemonths ended June 30, 2005 and 2004, respectively, and $517,000 and $478,000 for the six months ended June 30,2005 and 2004, respectively. Stock appreciation rights resulted in expense of $259,000 and $69,000for the three months ended June 30, 2005 and 2004, respectively, and $334,000of expense and $259,000 of income for the six months ended June 30, 2005 and2004, respectively.

 

In addition,$35,000 and $30,000 were expensed for the three months ended June 30, 2005 and2004, respectively, and $70,000 and $60,000 were expensed for the six monthsended June 30, 2005 and 2004, respectively, for stock issued annually tonon-employee directors as part of their directors’ compensation for serving onthe Company’s Board of Directors.

 

**Note6.  Application of New AccountingStandards**

 

In September2004, the FASB approved the issuance of a Staff Position to delay therequirement to record impairment losses under Emerging Issues Task Force IssueNo. 03-1 (“EITF 03-1”).  The approveddelay applies to certain provisions relating to the recognition of other thantemporary impairments for all securities within the scope of EITF 03-1.  At its June 29, 2005 meeting the FASB decidednot to provide additional guidance on the meaning of other-than-temporaryimpairment.  Instead, the FASB will issueproposed FSP EITF 03-1-a, *Implementation Guidancefor the Application of Paragraph 16 of EITF Issue No. 03-1*, asfinal.  The Company will review the finaldocuments as they become available.

 

In December2004, the FASB issued SFAS 123 (revised 2004), *Share BasedPayment*, which is a revision of SFAS 123, *Accountingfor Stock-Based Compensation,* eliminating the alternative use of APB25.  SFAS 123 (revised 2004) has noeffect on the Company’s results of operations or financial condition since theCompany adopted the fair value recognition provisions of SFAS 123 in 2003.

 

**Note7.  Lloyd’s Syndicate**

 

We record ourpro rata share of Lloyd’s Syndicate 1221’s assets, liabilities, revenues andexpenses, after making adjustments to convert Lloyd’s accounting to U.S. GAAP.  Themost significant U.S. GAAP adjustments relate to income recognition. Lloyd’ssyndicates determine underwriting results by year of account at the end ofthree years.  We record adjustments torecognize underwriting results as incurred, including the expected ultimatecost of losses incurred.  Theseadjustments to losses are based on actuarial analysis of syndicate accounts,including forecasts of expected ultimate losses provided by thesyndicates.  At the end of the Lloyd’s three year period for determining underwritingresults for an account year, the syndicate will close the account year byreinsuring outstanding claims on that account year with the participants forthe account’s next underwriting year.

 

15

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The amount to close anunderwriting year into the next year is referred to as the “reinsurance toclose”.  The reinsurance to closetransaction is recorded in the fourth quarter as additional written and earnedpremium, losses incurred, loss reserves and receivables, all in the sameamount.  No gain or loss is recorded on the reinsurance to close transaction.

 

Our Lloyd’sSyndicate 1221’s stamp capacity is £135.0 million ($252.9 million) in 2005 comparedto £150.0 million ($275.0 million) in 2004. Stamp capacity is a measure of the amount of premium a Lloyd’s syndicateis authorized to write based on a business plan approved by the Council ofLloyd’s.  Syndicate 1221’s capacity isexpressed net of commission (as is standard at Lloyd’s) of approximately21%.  The Syndicate 1221 premium recordedin the Company’s financial statements is gross of commission.  The Company participates for 97.5% and 97.4%of Syndicate 1221’s capacity for the 2005 and 2004 underwriting years,respectively.  The Lloyd’s operationsincluded in the consolidated financial statements represent the Company’sparticipation in Syndicate 1221.

 

The Companyprovides letters of credit to Lloyd’s to support its Syndicate 1221 capacity.  If the Company increases its participation orif Lloyd’s changes the capital requirements, the Company may be required tosupply additional letters of credit or other collateral acceptable to Lloyd’s,or reduce the capacity of Syndicate 1221. The letters of credit are provided through the credit facility which theCompany maintains with a consortium of banks. The credit facility agreement requires that the banks vote whether ornot to renew the letter of credit portion of the facility periodically.  If the banks decide not to renew the letterof credit facility, the Company will need to find other sources to provide theletters of credit or other collateral in order to continue to participate inSyndicate 1221.  The renewal amendmentexecuted in January 2005 renewed the letter of credit facility until June 30,2007.  The bank facility iscollateralized by all of the common stock of Navigators Insurance Company.

 

**Note 8. Income Tax - Valuation Allowance**

 

The Companyhad state and local operating loss carryforwards amounting to potential futuretax benefits of $4,767,000 and $4,493,000 at June 30, 2005 and December 31,2004, respectively.  A valuationallowance was established for the full amount of these potential future taxbenefits due to the uncertainty associated with their realization.

 

**Note 9. Commitments and Contingencies**

 

Other than asset forth below, the Company is not a party to, or the subject of, any materiallegal proceedings which depart from the ordinary routine litigation incident tothe kinds of business it conducts.

 

The Companywas recently advised informally by Equitas, a lead reinsurer participating onexcess of loss reinsurance agreements, that it does not intend to satisfy aloss payment recovery demand that the Company presented to it on June 1,2005.  The Company has not yet received aformal written response to its demand. The recovery is for the 2004 settlement of a class action suit involvinga large asbestos claim (the “Settled Claim”) which settlement is being paidover seven years starting in June 2005. Equitas has not indicated any dispute with respect to recoveries onrelated pro rata reinsurance agreements.

 

Equitas alsoparticipates as a lead reinsurer in respect of the Company’s two other largeasbestos claims that involve class action lawsuits.  The Company believes it is likely thatEquitas will take a similar position when such claims are eventually settledand presented to Equitas for payment.

 

The aggregateamount of excess of loss recoveries due from Equitas on all three of theseclaims is approximately $9 million, and represents approximately 50% of thetotal excess of loss recoveries for such claims.  The Company has not been advised of anydisputes by other excess of loss reinsurers with respect to such asbestos claims.

 

16

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The Companyhas filed a demand for arbitration against Equitas in New York with respect tothe Settled Claim in accordance with the applicable provisions of the excess ofloss reinsurance agreements.  The Companybelieves that the refusal of Equitas to satisfy the Company’s payment demand iswithout merit and it intends to vigorously pursue collection of its reinsurancerecoveries.   While it is too early topredict with any certainty the outcome of this matter, the Company believesthat the ultimate outcome would not be expected to have a significant adverseeffect on its results of operations, financial condition or liquidity, althoughan unexpected adverse resolution could have a material adverse effect on theCompany’s results of operations in a particular fiscal quarter or year.

 

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

 

**Note onForward-Looking Statements**

 

Some of the statements inthis Quarterly Report on Form 10-Q are ‘‘forward-looking statements’’ asdefined in the Private Securities Litigation Reform Act of 1995.   Whenever used in this report, the words “estimate”,“expect”, “believe” or similar expressions are intended to identify such forward-lookingstatements.  Forward-looking statementsare derived from information that we currently have and assumptions that wemake. We cannot assure that anticipated results will be achieved, since resultsmay differ materially because of both known and unknown risks and uncertaintieswhich we face. We undertake no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise. Factors that could cause actual results to differ materiallyfrom our forward-looking statements include, but are not limited to:

 

•      the effects of domestic and foreign economic conditions, and conditionswhich affect the market for property and casualty insurance;

 

•      changes in the laws, rules and regulations which apply to our insurancecompanies;

 

•      the effects of emerging claim and coverage issues on our business,including adverse judicial or regulatory decisions and rulings;

 

•      the effects of competition from banks and other insurers and the trendtoward self-insurance;

 

•      risks that we face in entering new markets and diversifying theproducts and services we offer;

 

•      unexpected turnover of our professional staff;

 

•      changing legal and social trends and inherent uncertainties in the lossestimation process that can adversely impact the adequacy of loss reserves andthe allowance for reinsurance recoverables, including our estimates relating toultimate asbestos and environmental liabilities and related reinsurancerecoverables;

 

•      risks inherent in the collection of reinsurance recoverable amountsfrom our reinsurers over many years into the future based on their financialability and intent to meet such obligations to the Company;

 

•      risks associated with our continuing ability to obtain reinsurance coveringour exposures at appropriate prices and/or in sufficient amounts and therelated recoverability of our reinsured losses;

 

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

 

17

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•      our ability to attain adequate prices, obtain new business and retainexisting business consistent with our expectations;

 

•      the possibility of downgrades in our claims-paying and financialstrength ratings significantly adversely affecting us, including reducing thenumber of insurance policies we write generally, or causing clients who requirean insurer with a certain rating level to use higher-rated insurers;

 

•      the inability of our internal control framework to provide absoluteassurance that all incidents of fraud or unintended material errors will bedetected and prevented;

 

•      the risk that our investment portfolio suffers reduced returns orinvestment losses which could reduce our profitability; and

 

•      other risks that we identify in future filings with the Securities andExchange Commission (the “SEC”), including without limitation the risksdescribed under the caption “Risk Factors” in our Annual Report on Form 10-Kfor the year ended December 31, 2004.

 

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

 

*The discussion and analysis of our financial condition andresults of operations contained herein should be read in conjunction with ourconsolidated financial statements and accompanying notes which appear elsewherein this Form 10-Q. It contains forward-looking statements that involve risksand uncertainties. Please see ‘‘Note on Forward-Looking Statements’’ for moreinformation. Our actual results could differ materially from those anticipatedin these forward-looking statements as a result of various factors, includingthose discussed below and elsewhere in this Form 10-Q.*

** **

**Overview**

 

We are an internationalinsurance holding company focusing on specialty products for niches within theoverall property/casualty insurance market. Our largest product line and mostlong-standing area of specialization is ocean marine insurance. We have alsodeveloped specialty niches in professional liability insurance, and inspecialty liability insurance primarily consisting of contractors’ liabilitycoverages. We conduct operations through our insurance company subsidiaries,the Navigators Agencies and our Lloyd’s Operations.  Our insurance company subsidiaries (the “InsuranceCompanies”) consist of Navigators Insurance Company, which includes a UnitedKingdom Branch (the “U.K. Branch”), and NIC Insurance Company which writesexcess and surplus lines.  The NavigatorsAgencies consist of five wholly-owned insurance underwriting agencies whichproduce business for our insurance subsidiaries and unaffiliated insurers.  Our Lloyd’s operations include NavigatorsUnderwriting Agency Ltd. (“NUAL”), a Lloyd’s of London (“Lloyd’s”) marineunderwriting agency which manages Lloyd’s Syndicate 1221.  We participate in the capacity of Syndicate1221 through two wholly owned Lloyd’s corporate members.

 

While management takes intoconsideration a wide range of factors in planning the Company’s businessstrategy and evaluating results of operations, there are certain factors thatmanagement believes are fundamental to understanding how the Company ismanaged.   First, underwriting profit isconsistently emphasized as a primary goal, above premium growth.  Management’s assessment of our trends andpotential growth in underwriting profit is the dominant factor in its decisionswith respect to whether or not to expand a business line, enter into a newniche, product or territory or, conversely, to contract capacity in anybusiness line.  In addition, managementfocuses 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 significantimpact on management’s outlook for our operations.  Our insurance company subsidiaries’operations and ability to grow their business and take

 

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advantage of market opportunities areparticularly constrained by regulatory capital requirements and rating agencyassessments of capital adequacy.

 

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

 

Our revenue is primarilycomprised of premiums, commission and investment income. Our insurance companysubsidiaries derive their premiums primarily from business written by theNavigators Agencies. The Lloyd’s Operations derive their premiums from businesswritten by NUAL. The Navigators Agencies and NUAL receive commissions and, insome cases, profit commissions and service fees on the business produced onbehalf of our insurance company subsidiaries and others.

 

Over the past three years,we have experienced generally beneficial market changes in our lines ofbusiness. As a result of several large industry losses in the second quarter of2001, the marine insurance market began to experience diminished capacity andrate increases, initially in the offshore energy line of business.  The marine rate increases began to level offin 2004 and into 2005.  Specialtyliability losses, particularly for our California construction liabilitybusiness, also resulted in diminished capacity in the market in which wecompete, as many former competitors who lacked the expertise to selectivelyunderwrite this business have been forced to withdraw from the market.  Rates for the California constructionliability business have started to level off in 2005 after rate increases in2004 and 2003.  In the professionalliability market, the enactment of the Sarbanes-Oxley Act of 2002, togetherwith recent financial and accounting scandals at publicly traded corporationsand increased frequency of securities-related class action litigation, has ledto an invigorated interest in professional liability insurance generally. Theseconditions resulted in rate increases in 2002 and 2003 as well as an overallimprovement in policy terms and conditions for our professional liability lineof business.  The professional liabilitybusiness experienced single digit premium rate decreases in 2004 and relativelylevel rates in the 2005 second quarter and first six months.

 

Our business is cyclical andinfluenced by many factors.  Thesefactors include price competition, economic conditions, interest rates, naturalor man-made disasters (for example hurricanes and terrorism), stateregulations, court decisions and changes in the law. Additionally, because ourinsurance products must be priced, and premiums charged, before costs havefully developed, our liabilities are required to be estimated and recorded inrecognition of future loss and settlement obligations. Due to the inherentuncertainty in estimating these liabilities, we cannot assure you that ouractual liabilities will not exceed our recorded amounts.

** **

**Industry Investigations**

 

Theinsurance industry has become the subject of increasing scrutiny with respectto insurance broker and agent compensation arrangements, and certain salespractices.  The New York State AttorneyGeneral and other state and federal regulators have commenced investigationsand other proceedings relating to the payment of contingent commissions byinsurance companies to insurance brokers and agents and the extent to whichsuch compensation has been disclosed, and the solicitation and provision offictitious or inflated quotes.  These

 

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investigations andproceedings are expected to continue, and new investigative proceedings may becommenced, in the future.  Theseinvestigations and proceedings could result in legal precedents and newindustry-wide practices or legislation, rules or regulations that couldsignificantly affect our industry and may also cause stock price volatility forcompanies in the insurance industry.

 

TheCompany has completed its own internal review with respect to such contingentcommission arrangements and the anti-competitive sales practices discussedabove.  In this internal inquiry, theCompany did not find any evidence that it has engaged in the bid-rigging andprice-fixing activities that are at the core of the industry investigationsinto these anti-competitive practices. In addition, as a result of this internal inquiry, the Company isdeveloping internal guidelines with respect to its future commission paymentarrangements.

 

Largelyas a result of these industry investigations, contingent commission and othercommission practice standards are currently evolving.  For example, in December 2004 the NationalAssociation of Insurance Commissioners adopted an amendment to its ProducerLicensing Model Act with respect to producer compensation disclosureobligations, and is considering further amendments to this Model Act.  The Company is supportive of industry effortsto encourage transparency in the disclosure of contingent commissions paid tobrokers by insurers and does not expect to be adversely impacted by legislativedevelopments in this area.

 

Thereinsurance industry has also become the subject of increasing scrutiny withrespect to the alleged improper use of reinsurance agreements to manipulatefinancial reporting results.  The NewYork State Attorney General and other state and federal regulators havecommenced investigations and other proceedings related to reinsuranceagreements in which the insurance risk transferred between the ceding companyand reinsurer may have been insufficient to properly account for suchtransactions as reinsurance in financial statements filed with insuranceregulatory authorities and the SEC.  Suchtransactions may include separate or “side” agreements that reduce, limit ormitigate the indemnification against loss or liability relating to theinsurance risk transferred to the reinsurer in a reinsurance agreement.

 

Asa result of these industry investigations, accounting and reportingrequirements for reinsurance transactions, including risk transfer guidanceused to determine when sufficient insurance risk has been transferred by theceding company to properly account for such transactions as reinsurance, maychange.

 

TheCompany believes that all of its reinsurance transactions meet the risktransfer requirements to be accounted for as prospective reinsurance in itsfinancial statements, and also believes it has no separate side agreements thatwould limit the insurance risk transferred to the reinsurer under itsreinsurance agreements.  The Company isunable to determine any reinsurance industry financial reporting changes thatcould occur as a result of such investigations and the effects, if any, on itsfinancial reporting of reinsurance transactions.

 

**CriticalAccounting Policies**

 

It is important tounderstand our accounting policies in order to understand our financialstatements. Management considers certain of these policies to be critical tothe presentation of the financial results, since they require management tomake estimates and assumptions. These estimates and assumptions affect thereported amounts of assets, liabilities, revenues, expenses, and relateddisclosures at the financial reporting date and throughout the reportingperiod. Certain of the estimates result from judgments that can be subjectiveand complex, and consequently actual results may differ from these estimates,which would be reflected in future periods.

 

Our most critical accountingpolicies involve the reporting of the reserves for losses and loss adjustmentexpenses (“LAE”) (including losses that have occurred but were not reported tous by the financial reporting date), reinsurance recoverables, written andunearned premium, the recoverability of deferred tax assets, the impairment ofinvested assets, accounting for Lloyd’s results and the translation of foreigncurrencies.

 

20

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***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.

 

***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 apply the asset and liability method ofaccounting for income taxes whereby deferred assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax basis.  In assessingthe realization of deferred tax assets, management considers whether it is morelikely than not that the deferred tax assets will be realized.

 

***Impairment of Investment Securities.*** 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 allow foran anticipated recovery in value, specific credit issues related to the issuerand current economic conditions. Other-than-temporary impairment losses resultin a permanent reduction of the cost basis of the underlying investment.Significant changes in the factors we consider when evaluating investments forimpairment losses could result in a significant change in impairment lossesreported in the consolidated financial statements.

 

***Accounting for Lloyd’s Results.*** We record our pro rata share of Lloyd’s Syndicate1221 assets, liabilities, revenues and expenses, after making adjustments toconvert Lloyd’s accounting to U.S. GAAP. The most significant GAAP adjustmentsrelate to income recognition. Lloyd’s syndicates determine underwriting resultsby year of account at the end of three years. We record adjustments torecognize underwriting results as incurred, including the expected ultimatecost of losses incurred. These adjustments to losses are based on actuarialanalysis of syndicate accounts, including forecasts of expected ultimate lossesprovided by the syndicate. At the end of the Lloyd’s three-year period fordetermining underwriting results for an account year, the syndicate will closethe account year by reinsuring outstanding claims on that account year with theparticipants for the account’s next underwriting year. The amount to close anunderwriting year into the next year

 

21

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is referred to as the reinsurance to close (“RITC”).  The RITC transaction is recorded in thefourth quarter as additional written and earned premium, losses incurred, lossreserves and receivables, all in the same amount. There are no gains or lossesrecorded on the RITC.

 

***Translation of Foreign Currencies****.*Financial statements of subsidiaries expressed in foreigncurrencies are translated into U.S. dollars in accordance with SFAS No. 52, *Foreign Currency Translation,* issued by the FASB.  Under SFAS 52, functional currency assets andliabilities are translated into U.S. dollars using period end rates of exchangeand the related translation adjustments are recorded as a separate component of*accumulated**othercomprehensive income*. Functional currencies are generally the currencies of the localoperating environment.  Statement ofincome amounts expressed in functional currencies are translated using averageexchange rates.  Gains and lossesresulting from foreign currency transactions are recorded in *other income (expense)* in the Company’s ConsolidatedStatements of Income.

 

**Results ofOperations and Overview**

 

The following is adiscussion and analysis of our consolidated and segment results of operationsfor the three and six month periods ended June 30, 2005 and 2004.  All earnings per share data is presented on aper diluted share basis.

 

Our 2005 and 2004 secondquarters’ and six months’ overall results of operations reflect improved marketconditions beginning in late 2000 through 2003 that continued at a reduced ratethrough 2004 and are showing signs of softening in 2005.  Net income for the three months ended June30, 2005 and 2004 was $11.3 million or $0.88 per share and $9.0 million or$0.71 per share, respectively. Net income for the first six months of 2005 and2004 was $21.0 million or $1.64 per share and $18.0 million or $1.42 per share,respectively.

 

The 2005 second quarter andsix month periods include after-tax realized capital gains (loss) of $0.02 pershare and $0.03 per share, respectively, compared to ($0.01) per share and$0.02 per share for the comparable 2004 periods.

 

We experienced premiumgrowth as measured by net earned premium in the second quarter of 2005 of $85.8million compared to $75.3 million in the second quarter of 2004, a 14%increase, primarily due to the March 31, 2005 cancellation of the quota sharereinsurance treaty for the specialty business and, to a lesser extent, businessexpansion and increased premium rates. Net earned premium increased to $163.4 million in the first six monthsof 2005 compared to $149.5 million in the 2004 first six months, a 9% increase,due to the same reasons stated above for the 2005 second quarter increase.

 

The Company’s combinedratio, which is a measure of underwriting profitability, for the second quarterof 2005 was 91.6% compared to 88.8% for the 2004 second quarter.  The combined ratio for the first six monthsof 2005 was 91.3% compared to 88.8% for the 2004 first six months.  The 2005 second quarter net income includes a$0.05 per share benefit from the receipt of a non-recurring profit commissionwhich reduced commission expense and the combined ratio for the 2005 secondquarter by 1.0 expense ratio point.  Thecombined ratios for the 2004 second quarter and six month periods werefavorably impacted by 1.9 and 2.7 loss ratio points, respectively, from a redundancyof prior year loss reserves in our Lloyd’s operations.

 

Cash flow from operationsincreased to $115.9 million for the first six months of 2005 compared to $93.2million for the 2004 first six months. The positive cash flow contributed to the growth in invested assets andnet investment income.

 

Included in the 2005 firstquarter cash flow is approximately $24 million attributable to the settlementof the RITC premium recorded by Lloyd’s Syndicate 1221 in the 2004 fourthquarter representing the transfer of assets and liabilities from theparticipants of the 2002 underwriting year to the participants of the 2003underwriting year.  We had increased ourparticipation in Syndicate 1221 to 97.4% for the 2003 underwriting year from68.1% for the 2002 underwriting year. Approximately 70% of the RITC settlement was recorded as

 

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interest-earning funds withheld forreinsurers of the syndicate to be distributed to third party participants ofthe 2002 year of account.  The RITCsettlement payment was partially paid in the 2005 second quarter and theremainder is expected to be paid in the 2005 third quarter.  Included in the 2005 second quarter cash flowis approximately $8 million related to a subrogation recovery collected onbehalf of quota share reinsurers which has been recorded as other liabilitieson the balance sheet.

 

Consolidatedstockholders’ equity increased 7.2% to $352.1 million or $27.55 per share atJune 30, 2005 compared to $328.6 million or $25.96 per share at December 31,2004.  The increase was primarily due tonet income of $21.0 million for the first six months of 2005.

 

**Revenues****.**  Gross written premium increased to $190.1million and $407.1 million in the second quarter and first six months of 2005,respectively, from $161.6 million and $357.6 million in the second quarter andfirst six months of 2004, respectively, an 18% increase for the second quarterand a 14% increase for the first six months. The growth in gross written premium reflects a combination of businessexpansion in both new and existing lines of business coupled with premium ratechanges on renewal policies.  The premiumrate increases or decreases noted below for marine, specialty and professionalliability are calculated primarily by comparing premium amounts on policiesthat have renewed.  The premiums arejudgmentally adjusted for exposure factors when deemed significant andsometimes represent an aggregation of several lines of business.  The rate changes calculations provide anindicated pricing trend and are not meant to be a precise analysis of thenumerous factors that affect premium rates or the adequacy of such rates tocover all underwriting costs and generate an underwriting profit.  The calculation can also be affected quarterby quarter depending on the particular policies and the number of policies thatrenew during that period.  Due to marketconditions, these rate changes may or may not apply to new business which maybe more competitively priced compared to renewal business.  The following table sets forth our gross andnet written premium and net earned premium by segment and line of business forthe periods indicated:

 

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| ** **                     | ** ** | **Three Months Ended June 30,** | ** ** |
|--------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| ** **                     | ** ** | **Gross**                       | ** ** | ** ** | ** ** | **Net** | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** | **Net** | ** ** |
| ** **                     | ** ** | **Written**                     | ** ** | ** ** | ** ** | **Written** | ** ** | **Earned** | ** ** | **Written** | ** ** | ** ** | ** ** | **Written** | ** ** | **Earned** | ** ** |
| ** **                     | ** ** | **Premium**                     | ** ** | **%** | ** ** | **Premium** | ** ** | **Premium** | ** ** | **Premium** | ** ** | **%** | ** ** | **Premium** | ** ** | **Premium** | ** ** |
| ** **                     | ** ** | **($ in thousands)**       | ** ** |
| Insurance  Companies:          |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                           |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Marine                         |       | $                               | 60,132     |   | 31.6 | % | $ | 26,464 |   | $ | 23,330 |   | $ | 51,573 |   | 31.9 | % | $ | 20,384 |   | $ | 20,834 |   |
|                           |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty                      |       | 50,198                          |       | 26.4 | % | 33,280 |   | 29,442 |   | 37,484 |   | 23.2 | % | 19,041 |   | 21,365 |   |
|                           |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Professional  Liability        |       | 21,250                          |       | 11.2 | % | 7,831 |   | 6,990 |   | 18,227 |   | 11.3 | % | 6,903 |   | 4,697 |   |
|                           |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Assumed from  Lloyd’s     |       | (930                            | )          | -0.5 | % | (922 | ) | (675 | ) | 288 |   | 0.2 | % | 229 |   | 4,878 |   |
|                           |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other (includes  run-off)      |       | 30                              |       | 0.0 | % | 22 |   | 20 |   | 36 |   | 0.0 | % | 8 |   | 8 |   |
|                           |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Insurance  Companies Total     |       | 130,680                         |       | 68.7 | % | 66,675 |   | 59,107 |   | 107,608 |   | 66.6 | % | 46,565 |   | 51,782 |   |
|                           |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Lloyd’s  Operations:      |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                           |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Marine                         |       | 47,189                          |       | 24.8 | % | 22,730 |   | 25,563 |   | 47,793 |   | 29.6 | % | 23,978 |   | 22,325 |   |
|                           |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Professional  Liability        |       | 1,587                           |       | 0.9 | % | 624 |   | 166 |   | –– |   | 0.0 | % | –– |   | –– |   |
|                           |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other                          |       | 9,771                           |       | 5.1 | % | 3,228 |   | 996 |   | 6,515 |   | 4.0 | % | 3,146 |   | 1,207 |   |
|                           |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Lloyd’s  Operations Total |       | 58,547                          |       | 30.8 | % | 26,582 |   | 26,725 |   | 54,308 |   | 33.6 | % | 27,124 |   | 23,532 |   |
|                           |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Intercompany  elimination      |       | 906                             |       | 0.5 | % | –– |   | –– |   | (290 | ) | -0.2 | % | –– |   | –– |   |
|                           |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                          |       | $                               | 190,133    |   | 100.0 | % | $ | 93,257 |   | $ | 85,832 |   | $ | 161,626 |   | 100.0 | % | $ | 73,689 |   | $ | 75,314 |   |

 

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| ** **                     | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| ** **                     | ** ** | **Gross**                     | ** ** | ** ** | ** ** | **Net** | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** | **Net** | ** ** |
| ** **                     | ** ** | **Written**                   | ** ** | ** ** | ** ** | **Written** | ** ** | **Earned** | ** ** | **Written** | ** ** | ** ** | ** ** | **Written** | ** ** | **Earned** | ** ** |
| ** **                     | ** ** | **Premium**                   | ** ** | **%** | ** ** | **Premium** | ** ** | **Premium** | ** ** | **Premium** | ** ** | **%** | ** ** | **Premium** | ** ** | **Premium** | ** ** |
| ** **                     | ** ** | **($ in thousands)**     | ** ** |
| Insurance  Companies:          |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                           |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Marine                         |       | $                             | 128,416    |   | 31.5 | % | $ | 56,811 |   | $ | 43,209 |   | $ | 110,999 |   | 31.0 | % | $ | 45,642 |   | $ | 41,262 |   |
|                           |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty                      |       | 93,147                        |       | 22.9 | % | 69,678 |   | 49,464 |   | 71,714 |   | 20.1 | % | 39,552 |   | 42,904 |   |
|                           |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Professional  Liability        |       | 39,180                        |       | 9.6 | % | 14,510 |   | 13,707 |   | 33,260 |   | 9.3 | % | 12,376 |   | 8,507 |   |
|                           |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Assumed from  Lloyd’s     |       | (805                          | )          | -0.2 | % | (796 | ) | 36 |   | 3,342 |   | 0.9 | % | 3,135 |   | 12,283 |   |
|                           |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other (includes  run-off)      |       | 30                            |       | 0.0 | % | 53 |   | 54 |   | 122 |   | 0.0 | % | 5 |   | 8 |   |
|                           |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Insurance  Companies Total     |       | 259,968                       |       | 63.8 | % | 140,256 |   | 106,470 |   | 219,437 |   | 61.3 | % | 100,710 |   | 104,964 |   |
|                           |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Lloyd’s  Operations:      |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                           |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Marine                         |       | 121,120                       |       | 29.7 | % | 62,790 |   | 55,190 |   | 128,757 |   | 36.0 | % | 63,038 |   | 42,843 |   |
|                           |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Professional  Liability        |       | 1,587                         |       | 0.5 | % | 624 |   | 166 |   | –– |   | 0.0 | % | –– |   | –– |   |
|                           |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other                          |       | 23,670                        |       | 5.8 | % | 6,677 |   | 1,544 |   | 12,709 |   | 3.6 | % | 5,876 |   | 1,682 |   |
|                           |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Lloyd’s  Operations Total |       | 146,377                       |       | 36.0 | % | 70,091 |   | 56,900 |   | 141,466 |   | 39.6 | % | 68,914 |   | 44,525 |   |
|                           |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Intercompany  elimination      |       | 784                           |       | 0.2 | % | –– |   | –– |   | (3,326 | ) | -0.9 | % | –– |   | –– |   |
|                           |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                          |       | $                             | 407,129    |   | 100.0 | % | $ | 210,347 |   | $ | 163,370 |   | $ | 357,577 |   | 100.0 | % | $ | 169,624 |   | $ | 149,489 |   |

 

25

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**Gross Written Premium**

 

Insurance Companies’ Gross Written Premium

 

*Marine Premium.* The marine gross written premium for the 2005 second quarter increased17% compared to the 2004 second quarter, reflective of growth across severallines of business including cargo and offshore energy.  The marine gross written premium for thefirst six months of 2005 increased 16% compared to the first six months of2004, again due to growth across several lines of business including cargo,offshore energy and protection & indemnity .  The average renewal premium rates during thesecond quarter and first six months of 2005 increased by less than 1%.  Navigators Insurance Company obtains itsmarine business through participation in the marine pool managed by theNavigators Agencies.  Its participationis 85% for the 2005 underwriting year compared to 80% for the 2004 underwritingyear.

 

*Specialty Premium.* This business consists of 67% general liability business for smallgeneral and artisan contractors, 13% personal umbrella business and 20% othertargeted commercial risks.  The specialtygross written premium for the 2005 second quarter increased 34% compared to the2004 second quarter reflective of growth across all lines of business andpremiums generated from our excess casualty business, which started in thefirst quarter of 2005.  The specialtygross written premium for the first six months of 2005 increased 30% comparedto the first six months of 2004 for the same reasons stated for the 2005 secondquarter increase.  The average renewalpremium rates increased 4% and 2% in the contractors’ liability business in thesecond quarter and first six months of 2005, respectively.

 

*Professional Liability Premium.* Our insurance company subsidiaries writeprofessional liability insurance, of which 58% represents directors andofficers liability insurance (“D&O”) for privately held and publicly tradedcorporations. In 2002, the professional liability business was expanded toinclude errors and omissions insurance and employment practices liabilitycoverages.  Commencing in October 2004,our U.K. Branch began writing professional liability coverages for U.K.solicitors and, in 2005, we began writing professional liability coverages forarchitects and engineers.  Theprofessional liability gross written premium for the 2005 second quarterincreased 17% compared to the 2004 second quarter, reflecting the expansion ofthis business for all lines.  Averageoverall renewal premium rates for this business decreased approximately 1% inthe 2005 second quarter and increased approximately 1% in the first six monthsof 2005, with D&O rates declining approximately 3% in both the secondquarter and first six months of 2005.

 

*Assumed from Lloyd’s OperationsPremium. *During 2002 and 2003, the Insurance Companiesparticipated in quota share treaties written by the Company’s Lloyd’soperations.  The participations includedmarine and energy business.

 

Lloyd’s Operations’ GrossWritten Premium

 

*Marine Premium.*Our gross written premium is based on thestamp capacity of Syndicate 1221 and the percentage of such stamp capacity weprovide.  Our percentage of participationin the stamp capacity is 97.5% for 2005 compared to 97.4% for 2004.  Stamp capacity is a measure of the amount ofpremium a Lloyd’s syndicate is authorized to write as determined based on abusiness plan approved by the Council of Lloyd’s.  The stamp capacity for Syndicate 1221 hasbeen reduced to £135 million ($252.9 million) in 2005 from £150 million ($275.0million) in 2004, reflective of unused stamp capacity in 2004 coupled withanticipated declining market conditions in 2005.  The**marine gross written premium for the secondquarter of 2005 decreased 1% compared to the second quarter of 2004 anddecreased 6% for the first six months of 2005 compared to the first six monthsof 2004.  The average renewal premiumrates decreased approximately 2% for the 2005 second quarter and increasedapproximately 1% for the first six months of 2005.

 

*Professional Liability Premium.*  The Syndicate commenced writing internationalD&O business during the 2005 second quarter and produced $1.6 million ofgross written premium.

 

26

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*Other Premium. *Other premium consists of premium forengineering and construction business which provides coverage for constructionprojects including machinery, equipment and loss of use due to delays and ofpremium for onshore energy business which principally focuses on the oil and gas,chemical and petrochemical industries with coverages primarily for propertydamage and business interruption.

 

**Ceded Written Premium****.**  Inthe ordinary course of business, we reinsure certain insurance risks withunaffiliated insurance companies for the purpose of limiting our maximum lossexposure, protecting against catastrophic losses, and maintaining desiredratios of net premiums written to statutory surplus. The relationship of cededto written premium varies based upon the types of business written and whetherthe business is written by our insurance company subsidiaries or the Lloyd’sOperations.

 

The following tables setforth our ceded written premium by segment and major lines of business for theperiods indicated:

 
| ** **                | ** ** | **Three Months Ended  June 30,** | ** ** |
|---------------------------|------------|---------------------------------------|------------|
| ** **                | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                | ** ** | ** **                            | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                | ** ** | **Ceded**                             | ** ** | **Gross** | ** ** | **Ceded** | ** ** | **Gross** | ** ** |
| ** **                | ** ** | **Written**                           | ** ** | **Written** | ** ** | **Written** | ** ** | **Written** | ** ** |
| ** **                | ** ** | **Premium**                           | ** ** | **Premium** | ** ** | **Premium** | ** ** | **Premium** | ** ** |
| ** **                | ** ** | **($ in thousands)**             | ** ** |
| ** **                | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Insurance  Companies:     |       | $                                     | 33,668     |   | 56.0 | % | $ | 31,189 |   | 60.5 | % |
| Marine                    |       | 16,918                                |       | 33.7 | % | 18,443 |   | 49.2 | % |
| Specialty                 |       | 13,419                                |       | 63.1 | % | 11,324 |   | 62.1 | % |
| Professional Liability    |       | (8                                    | )          | 0.9 | % | 59 |   | 20.4 | % |
| Assumed from Lloyd’s |       | 8                                     |       | NM |   | 28 |   | NM |   |
| Other (includes run-off)  |       | 64,005                                |       | 49.0 | % | 61,043 |   | 56.7 | % |
| Subtotal                  |       |                                  |       |   |   |   |   |   |   |
|                      |       |                                  |       |   |   |   |   |   |   |
| Lloyd’s  Operations: |       |                                  |       |   |   |   |   |   |   |
| Marine                    |       | 24,459                                |       | 51.8 | % | 23,815 |   | 49.8 | % |
| Professional Liability    |       | 963                                   |       | 60.7 | % | –– |   | NM |   |
| Other                     |       | 6,543                                 |       | 67.0 | % | 3,369 |   | 51.7 | % |
| Subtotal                  |       | 31,965                                |       | 54.6 | % | 27,184 |   | 50.1 | % |
|                      |       |                                  |       |   |   |   |   |   |   |
| Intercompany  elimination |       | 906                                   |       | NM |   | (290 | ) | NM |   |
|                      |       |                                  |       |   |   |   |   |   |   |
| Total                     |       | $                                     | 96,876     |   | 51.0 | % | $ | 87,937 |   | 54.4 | % |

 

27

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| ** **                | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------|------------|------------------------------------|------------|
| ** **                | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| ** **                | ** ** | ** **                         | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                | ** ** | **Ceded**                          | ** ** | **Gross** | ** ** | **Ceded** | ** ** | **Gross** | ** ** |
| ** **                | ** ** | **Written**                        | ** ** | **Written** | ** ** | **Written** | ** ** | **Written** | ** ** |
| ** **                | ** ** | **Premium**                        | ** ** | **Premium** | ** ** | **Premium** | ** ** | **Premium** | ** ** |
| ** **                | ** ** | **($ in thousands)**          | ** ** |
| ** **                | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Insurance Companies:      |       | $                                  | 71,605     |   | 55.8 | % | $ | 65,357 |   | 58.9 | % |
| Marine                    |       | 23,469                             |       | 25.2 | % | 32,162 |   | 44.8 | % |
| Specialty                 |       | 24,670                             |       | 63.0 | % | 20,884 |   | 62.8 | % |
| Professional Liability    |       | (9                                 | )          | 1.1 | % | 207 |   | 6.2 | % |
| Assumed from Lloyd’s |       | (23                                | )          | NM |   | 117 |   | NM |   |
| Other (includes run-off)  |       | 119,712                            |       | 46.0 | % | 118,727 |   | 54.1 | % |
| Subtotal                  |       |                               |       |   |   |   |   |   |   |
|                      |       |                               |       |   |   |   |   |   |   |
| Lloyd’s Operations:  |       |                               |       |   |   |   |   |   |   |
| Marine                    |       | 58,330                             |       | 48.2 | % | 65,719 |   | 51.0 | % |
| Professional Liability    |       | 963                                |       | 60.7 | % | –– |   | NM |   |
| Other                     |       | 16,993                             |       | 71.8 | % | 6,833 |   | 53.8 | % |
| Subtotal                  |       | 76,286                             |       | 52.1 | % | 72,552 |   | 51.3 | % |
|                      |       |                               |       |   |   |   |   |   |   |
| Intercompany elimination  |       | 784                                |       | NM |   | (3,326 | ) | NM |   |
|                      |       |                               |       |   |   |   |   |   |   |
| Total                     |       | $                                  | 196,782    |   | 48.3 | % | $ | 187,953 |   | 52.6 | % |

 

----

NM= not meaningful 

 

Theratio of ceded written premium to gross written premium in the 2005 secondquarter and six month periods was 51.0% and 48.3%, respectively, compared tothe 2004 second quarter and six month periods of 54.4% and 52.6%. The declinein the ratio of ceded written premium to gross written premium in the first sixmonths of 2005 compared to the same periods in 2004 resulted primarily from theMarch 31, 2005 cancellation of a quota share reinsurance agreement for thespecialty business. The cancellation resulted in a reduction of approximately$14.5 million in ceded unearned premium in the 2005 first quarter and $7.0million of ceded written premium in the 2005 second quarter that have beenretained by the Company and will be earned over a 12 to 15 month period.

 

**Net Written Premium**.******Netwritten premium increased 27% in the 2005 second quarter and increased 24% inthe first six months of 2005 compared to the second quarter and first sixmonths of 2004. The increase in the net written premium resulted principallyfrom the March 31, 2005 cancellation of the specialty quota share treatydiscussed above, business expansion, and the increase in Navigators InsuranceCompany’s portion of the marine pool to 85% in 2005 from 80% in 2004.

 

**Net Earned Premium**. Net earned premium,which generally lags the increase in net written premium, increased 14% in the2005 second quarter and increased 9% in the first six months of 2005 comparedto the second quarter and first six months of 2004 as a result of the increasednet written premium.

 

28

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**CommissionIncome****.** Commission income from unaffiliated business increased 11% and 12% to$1.5 million and $2.8 million for the 2005 second quarter and six months,respectively, from $1.4 million and $2.5 million in the second quarter andfirst six months of 2004, respectively. This growth resulted from an increase in the management fee to 8.75%from 7.5% on our marine pool, additional profitability in our marine pool thatresulted in greater profit commissions and a higher volume of writings,partially offset by the increase in our participation.

 

**NetInvestment Income****.* ***Net investmentincome increased 35% in the 2005 second quarter and 32% in the first six monthsof 2005 compared to the same periods in 2004 due to the increase in investedassets as a result of the positive cash flow from the increased premium volume.

 

**NetRealized Capital Gains****(Losses)****.** Pre-tax net income included $416,000 of net realized capital gains for thethree months ended June 30, 2005 compared to capital losses of $105,000for the 2004 second quarter.  On anafter-tax basis, the net realized capital gains (losses) were $270,000 or $0.02per share and ($68,000) or ($0.01) per share for the 2005 and 2004 secondquarters, respectively.  Pre-tax netincome included $583,000 of net realized capital gains for the six months endedJune 30, 2005 compared to $317,000 for the first six months of 2004.  On an after-tax basis, the net realizedcapital gains were $379,000 or $0.03 per share and $206,000 or $0.02 per sharefor the first six months of 2005 and 2004, respectively.

 

**OtherIncome/(Expense)****.** Other income/(expense) for the secondquarter and first six months of both 2005 and 2004 consisted primarily offoreign exchange gains and losses from our Lloyd’s Operations and inspectionfees related to the specialty insurance business.

 

**OperatingExpenses**

 

*NetLosses and Loss Adjustment Expenses Incurred. *The ratios of net losses and loss adjustmentexpenses incurred to net earned premium (loss ratios) for the 2005 and 2004second quarters were 62.5% and 60.2%, respectively, and for the first sixmonths of 2005 and 2004 were 61.1% and 59.6%, respectively.

 

Theprovision for loss adjustment expenses includes defense cost containmentexpenses for outside adjustors, attorney’s fees and internal operating expensesconsisting principally of claims department costs incurred in the processingand settlement of claims.  Commencing in2005, the Company allocated paid claims department costs in losses incurredwhile previously such payments were included in other operating expenses.  Such payments included in incurred losses forthe 2005 second quarter and six month period were $1.2 million and $2.5million, respectively, compared to $700,000 and $1.4 million for the comparable2004 periods included in other operating expenses.  Such reclassifications have no impact on netincome and the combined loss and expense ratios for all current and priorperiods.

 

The following tables set forth our net loss and LAEreserves by segment and line of insurance business and the total case reservesand incurred but not reported (“IBNR”) reserves as of June 30, 2005 and December 31,2004:

 

29

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| ** **                            | ** **   | **June 30,  2005**   | ** **   | **December 31,  2004** | ** ** |
|---------------------------------------|--------------|---------------------------|--------------|-----------------------------|------------|
| *** ***                          | *** *** | **($ in thousands)** | *** *** |
| Insurance  Companies:                 |         |                      |         |                        |       |
| Marine                                |         | $                         | 137,852      |                        | $          | 130,439 |   |
| Specialty                             |         | 167,846                   |         | 150,347                     |       |
| Professional  Liability               |         | 27,227                    |         | 19,001                      |       |
| Assumed from  Lloyd’s Operations |         | 32,119                    |         | 37,790                      |       |
| Other  (primarily run-off business)   |         | 20,849                    |         | 22,512                      |       |
| Total  Insurance Companies            |         | 385,893                   |         | 360,089                     |       |
|                                  |         |                      |         |                        |       |
| Lloyd’s  Operations:             |         |                      |         |                        |       |
| Marine                                |         | 109,529                   |         | 99,565                      |       |
| Other                                 |         | 3,874                     |         | 4,134                       |       |
| Total Lloyd’s  Operations        |         | 113,403                   |         | 103,699                     |       |
|                                  |         |                      |         |                        |       |
| Total net  loss reserves              |         | $                         | 499,296      |                        | $          | 463,788 |   |
|                                  |         |                      |         |                        |       |
| Total net  case loss reserves         |         | $                         | 200,978      |                        | $          | 189,746 |   |
| Total net  IBNR loss reserves         |         | 298,318                   |         | 274,042                     |       |
|                                  |         |                      |         |                        |       |
| Total net  loss reserves              |         | $                         | 499,296      |                        | $          | 463,788 |   |

 

At June 30, 2005, the IBNR net loss reserveswere 59.7% of our total loss reserves compared to 59.1% at December 31,2004.

 

At June 30, 2005, a 10% increase in the netloss reserves would equate to $49.9 million which would represent an after-taxcharge to net income of $32.4 million or 9.2% of stockholders’ equity.  Loss reserve estimates are reviewed eachquarter to evaluate whether the assumptions made continue to beappropriate.  Any adjustments that resultfrom this review are recorded in the quarter in which they are identified.

 

Our reserving practices and the establishment of anyparticular reserve reflect management’s judgment concerning sound financialpractice and do not represent any admission of liability with respect to anyclaims made against the Company.  Noassurance can be given that actual claims made and related payments will not bein excess of the amounts reserved.  Duringthe loss settlement period, it often becomes necessary to refine and adjust theestimates of liability on a claim either upward or downward.  Even after such adjustments, ultimateliability may exceed or be less than the revised estimates.  The increase in net loss reserves is also afunction of the growth in premium volume over the past two years.

 

Our loss reserves include amounts related to shorttail and long tail classes of business. Short tail business refers to businesswhere claims are generally reported quickly upon occurrence of an event, makingestimation of loss reserves less complex. Our longer tail business includes ourspecialty liability and professional liability insurance. For the long taillines, significant periods of time, ranging up to several years or more, mayelapse between the occurrence of the loss, the reporting of the loss and thesettlement of the claim.  Generally, thelonger the time span between the incidence of a loss and the settlement of theclaim, the more likely the ultimate settlement amount can vary from theoriginal estimate.

 

*Specialty Liability andProfessional Liability.*Substantially all of our specialty liability business involves generalliability policies which generate third party liability claims that are longtail in nature. A significant

 

30

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portion of our general liability reserves relates to Californiaconstruction liability claims. Reserves and claim frequency on this businessmay be impacted by legislation implemented in California, which generallyprovides consumers who experience construction defects a method other thanlitigation to obtain construction defect repairs. The law, which becameeffective July 1, 2002 with a sunset provision effective January 1,2011, provides for an alternative dispute resolution system that attempts toinvolve all parties to the claim at an early stage. This legislation may impactclaim severity, frequency and length of settlement assumptions underlying ourreserves. Accordingly, our ultimate liability may exceed or be less thancurrent estimates due to this variable, among others.  There were 1,138 specialty liability claims open at June 30,2005 compared to 1,028 at December 31, 2004.

 

The professional liability class generates thirdparty claims, which also are longer tail in nature. The professional liabilitypolicies provide coverage on a claims-made basis, whereby coverage is generallyprovided only for those claims that are made during the policy period.  The substantial majority of our claims madepolicies provide coverage for one year periods. The Company has also issued a limited number of multi-year claims madeprofessional liability policies known as “tail coverage” that provide forinsurance protection for wrongful acts prior to the runoff date.  Such multi-year policies provide insuranceprotection for several years.

 

Our professional liability business is relativelyimmature, as we first began writing the business in late 2001.  Accordingly, it will take some time to betterunderstand the reserve trends on this business. Our professional liability loss estimates are based on expected losses,actual reported losses, evaluation of loss trends, industry data, and thelegal, regulatory and current risk environment because anticipated lossexperience in this area is less predictable due to the small number of claimsand/or erratic claim severity patterns. We believe that we have made areasonable estimate of the required loss reserves for professional liability.The expected ultimate losses may be adjusted up or down as the accident yearsmature.  There were 528 professionalliability claims open at June 30, 2005 compared to 337 at December 31,2004.

 

31

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The following tables set forth our net loss and LAEreserves for our specialty liability and professional liability businesses asof June 30, 2005 and December 31, 2004:

 
| ** **                        | ** ** | **June 30, 2005**     | ** ** |
|-----------------------------------|------------|----------------------------|------------|
| **Type of  Business**             | ** ** | **Net Reported  Reserves** | ** ** | **Net  IBNR** | ** ** | **Total  Net Loss  Reserves** | ** ** | **% of IBNR  to Total Net  Loss Reserves** | ** ** |
|                              |       |                       |       |   |   |   |   |   |   |
| Specialty  construction liability |       | $                          | 24,911     |   | $ | 120,829 |   | $ | 145,740 |   | 82.9 | % |
| Professional  liability           |       | 5,195                      |       | 22,132 |   | 27,327 |   | 81.0 | % |
|                              |       |                       |       |   |   |   |   |   |   |
| Total                             |       | $                          | 30,106     |   | $ | 142,961 |   | $ | 173,067 |   | 82.6 | % |

 
| ** **                        | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------|------------|----------------------------|------------|
| **Type of  Business**             | ** ** | **Net Reported  Reserves** | ** ** | **Net  IBNR** | ** ** | **Total  Net Loss  Reserves** | ** ** | **% of IBNR  to Total Net  Loss Reserves** | ** ** |
|                              |       |                       |       |   |   |   |   |   |   |
| Specialty  construction liability |       | $                          | 21,338     |   | $ | 110,263 |   | $ | 131,601 |   | 83.8 | % |
| Professional  liability           |       | 1,166                      |       | 17,835 |   | 19,001 |   | 93.9 | % |
|                              |       |                       |       |   |   |   |   |   |   |
| Total                             |       | $                          | 22,504     |   | $ | 128,098 |   | $ | 150,602 |   | 85.1 | % |

 

*Asbestos and EnvironmentalLiability.* Ourexposure to asbestos and environmental liability principally stems from marineliability insurance written on an occurrence basis during the mid-1980s. Ingeneral, our participation on such risks is in the excess layers, whichrequires the underlying coverage to be exhausted prior to coverage beingtriggered in our layer. In many instances we are one of many insurers whoparticipate in the defense and ultimate settlement of these claims, and we aregenerally a minor participant in the overall insurance coverage and settlement.

 

The reserves we have established for asbestosexposures are for: (i) estimated losses for excess insurance policy limitsexposed to class action suits against two insureds involved in themanufacturing or distribution of asbestos products; (ii) other insuredsnot directly involved in the manufacturing or distribution of asbestosproducts, but that have more than incidental asbestos exposure for theirpurchase or use of products that contained asbestos; (iii) attritionalasbestos claims that could be expected to occur over time; and (iv) the2004 settlement of a large claim exposed to a class action suit whichsettlement will be paid over seven years starting in June 2005.

 

The following tables set forth our gross and netloss and LAE reserves, and claim counts for our asbestos and environmentalexposures, which we believe are subject to uncertainties greater than thosepresented by other types of claims:

 

32

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| ** **                      | ** ** | **Three Months Ended  June 30, 2005** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|
| ** **                      | ** ** | **Asbestos**                               | ** ** | **Environmental** | ** ** | **Total** | ** ** |
| ** **                      | ** ** | **($ in thousands)**                  | ** ** |
| **Gross of  Reinsurance**       |       |                                       |       |   |   |   |   |
| Beginning  Reserve              |       | $                                          | 78,563     |   | $ | 8,349 |   | $ | 86,912 |   |
| Incurred  Losses & LAE |       | 55                                         |       | 1,995 |   | 2,050 |   |
| Calendar  Year Payments         |       | 3,875                                      |       | 1,452 |   | 5,327 |   |
| Ending  Reserves                |       | $                                          | 74,743     |   | $ | 8,892 |   | $ | 83,635 |   |
|                            |       |                                       |       |   |   |   |   |
| **Net of  Reinsurance**         |       |                                       |       |   |   |   |   |
| Beginning  Reserve              |       | $                                          | 31,590     |   | $ | 1,825 |   | $ | 33,415 |   |
| Incurred  Losses & LAE |       | 38                                         |       | 138 |   | 176 |   |
| Calendar  Year Payments         |       | 1,437                                      |       | 453 |   | 1,890 |   |
| Ending  Reserves                |       | $                                          | 30,191     |   | $ | 1,510 |   | $ | 31,701 |   |

 
| ** **                      | ** ** | **Six Months Ended  June 30, 2005** | ** ** |
|---------------------------------|------------|------------------------------------------|------------|
| ** **                      | ** ** | **Asbestos**                             | ** ** | **Environmental** | ** ** | **Total** | ** ** |
| ** **                      | ** ** | **($ in thousands)**                | ** ** |
| **Gross of  Reinsurance**       |       |                                     |       |   |   |   |   |
| Beginning  Reserve              |       | $                                        | 78,421     |   | $ | 7,513 |   | $ | 85,934 |   |
| Incurred  Losses & LAE |       | 306                                      |       | 3,493 |   | 3,799 |   |
| Calendar  Year Payments         |       | 3,984                                    |       | 2,114 |   | 6,098 |   |
| Ending  Reserves                |       | $                                        | 74,743     |   | $ | 8,892 |   | $ | 83,635 |   |
|                            |       |                                     |       |   |   |   |   |
| **Net of  Reinsurance**         |       |                                     |       |   |   |   |   |
| Beginning  Reserve              |       | $                                        | 31,394     |   | $ | 1,494 |   | $ | 32,888 |   |
| Incurred  Losses & LAE |       | 237                                      |       | 1,038 |   | 1,275 |   |
| Calendar  Year Payments         |       | 1,440                                    |       | 1,022 |   | 2,462 |   |
| Ending  Reserves                |       | $                                        | 30,191     |   | $ | 1,510 |   | $ | 31,701 |   |

 
| **Type of Business** | ** ** | **Claim Count  June 30, 2005** | ** ** | **New Claims  During Period** | ** ** | **Claims Settled  or Resolved  During Period** | ** ** | **Claim Count  December 31, 2004** | ** ** |
|----------------------|------------|-------------------------------------|------------|-------------------------------|------------|------------------------------------------------|------------|-----------------------------------------|------------|
| ** **           | ** ** | ** **                          | ** ** | ** **                    | ** ** | ** **                                     | ** ** | ** **                              | ** ** |
| Environmental        |       | 105                                 |       | 32                            |       | 16                                             |       | 89                                      |       |
| Asbestos             |       | 136                                 |       | 13                            |       | 6                                              |       | 129                                     |       |
| Total                |       | 241                                 |       | 45                            |       | 22                                             |       | 218                                     |       |

 

Loss development activity for asbestos relatedexposures in the first six months of 2005 has not been significant.

 

Loss development activity on environmental losses inthe first six months of 2005 has generally consisted of oil spill claims onmarine liability policies written in the ordinary course of business.

 

33

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Our management believes that the estimates for thereserves for losses and loss adjustment expenses are adequate to cover theultimate cost of losses and loss adjustment expenses on reported and unreportedclaims.  However, it is possible that theultimate liability may exceed or be less than such estimates.  To the extent that reserves are deficient orredundant, the amount of such deficiency or redundancy is treated as a chargeor credit to earnings in the period in which the deficiency or redundancy isidentified.

 

*CommissionExpense.* Commissionexpense paid to brokers and agents is generally based on a percentage of thegross written premium and is reduced by ceding commissions the Company mayreceive on the ceded written premium. Commissions are generally deferred and recorded to deferred policyacquisition costs to the extent that they relate to unearned premium.  Commission expense as a percentage of earnedpremium in the second quarter and first six months of 2005 was 10.8% and 11.5%,respectively, compared to 13.3% and 14.1% for the second quarter and first sixmonths of 2004, respectively, as the result of a decline in commissions paid tobrokers and agents coupled with the receipt of ceding commissions fromreinsurers.  The decrease in thecommission percentage reflects lower commission rates and a trend among themajor brokers to charge a flat fee to some of their major clients as opposed toa percentage of the premium.  Under flatfee arrangements, the amount of premium normally is correspondingly reducedsince no commission is being paid to the broker by the Company.

 

The 2005 second quarter commission expense alsoincludes an aforementioned reduction of $900,000 for the receipt of anon-recurring profit commission from quota share reinsurers as a result of ahull loss subrogation recovery on aviation run-off business that was fullyreinsured.

 

*OtherOperating Expenses.*The 21% and 25% increases in other operating expenses in the second quarter andfirst six months of 2005, respectively, compared to the same periods in 2004are attributable primarily to employee-related expenses resulting fromexpansion of the business.  Included inthe three and six months ended June 30, 2005 were $888,000 and $1,587,000,respectively, in the aggregate for employee stock options, stock grants andstock appreciation rights expense compared to $633,000 and $866,000 for thesame periods in 2004, respectively.

 

**Income Taxes**. The income tax expensewas $5.4 million and $4.4 million for the second quarters of 2005 and 2004,respectively.  The effective tax ratesfor the 2005 and 2004 second quarters were 32.5% and 32.6%, respectively.  The first six months of 2005 and 2004 hadincome tax expense of $10.0 million and $9.0 million, respectively, resultingin an effective tax rate of 32.2% and 33.4%, respectively.  As of June 30, 2005 and December 31,2004, the net deferred Federal, foreign, state and local tax assets were $20.6million and $17.3 million, respectively.

 

Weare subject to the tax regulations of both the United States and the UnitedKingdom.  The Company files aconsolidated federal tax return, which includes all domestic subsidiaries andthe U.K. Branch.  The income from theforeign operations is designated as either U.S connected income or non-U.S.connected income.  The U.S. connectedincome under the Subpart F regulations of the Internal Revenue Code is taxed inthe year earned for tax purposes and recorded in the Company’s tax return.  It is also included in the tax provision atthe corporate 35% rate.  Foreign taxcredits, where available, are utilized to offset as much of the U.S. tax aspermitted on the U.S. connected income. Non-U.S. connected income from a foreign subsidiary is subject to U.S.taxation only when distributed.  U.S.taxes are not accrued when the earnings are considered to be permanentlyreinvested in the foreign subsidiary. The Company has demonstrated its intention that the foreign earnings arepermanently reinvested in the foreign subsidiary, and therefore anydistribution is postponed indefinitely. The foreign earnings are subject to taxation in foreign jurisdictionswhich, in the case of the Company, approximates a rate of 35%.

 

Wehave not provided for U.S. deferred income taxes or foreign withholding taxeson the undistributed earnings of approximately $13.3 million of our foreignsubsidiaries earnings since these earnings are intended to be reinvestedindefinitely.  However, in the future, ifwe planned to distribute such earnings to the Company, taxes

 

34

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of approximately $1.0 million would be reflected in the tax provisionand would then be payable in the year distributed assuming all foreign taxcredits are realized.

 

TheAmerican Jobs Creation Act of 2004, enacted October 22, 2004, allows adeduction of 85% of certain foreign earnings that are repatriated by December 31,2005.  If the Company were to repatriatethe $13.3 million of earnings from its foreign subsidiaries under this provision,income tax of approximately $150,000 would be reflected in the 2005 taxprovision.  The Company does not expectto repatriate any foreign earnings under the American Jobs Creation Act of2004.

 

The Company had state and local operatingloss carryforwards amounting to potential future tax benefits of $4.8 million and $4.5 million at June 30, 2005 and December 31,2004, respectively.  A valuationallowance was established for the full amount of these potential future taxbenefits due to the uncertainty associated with their realization.  The Company’s state and local taxcarryforwards at June 30, 2005 expire from 2019 to 2025.

 

**Segment Information**

 

Following are the financial results of the Company’sthree segments:  Insurance Companies,Lloyd’s Operations and Navigators Agencies. We evaluate the performance of eachsegment based on its underwriting or operating results.  Items of revenue and expenditure, includingnet investment income and realized capital gains and losses, are includedherein based on the legal entity where they are recorded.  Our underwriting performance is evaluatedseparately from the performance of our investment portfolios.

 

***Insurance Companies***

 

Our Insurance Companies consist of NavigatorsInsurance Company, which includes a United Kingdom Branch, and NIC InsuranceCompany. Navigators Insurance Company is our largest insurance subsidiary andhas been active since 1983. It specializes principally in underwriting marineinsurance and related lines of business, specialty liability insurance andprofessional liability insurance. NIC Insurance Company, a wholly ownedsubsidiary of Navigators Insurance Company, began operations in 1990. Itunderwrites similar types of business but on a non-admitted or surplus linesbasis and is fully reinsured by Navigators Insurance Company.  The Navigators Agencies produce business forour insurance company subsidiaries.

 

35

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Following are the results of operations for theInsurance Companies for the three and six months ended June 30, 2005 and2004:

 
| ** **                        | ** **   | **Three Months Ended  June 30,** | ** **   | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------|--------------|---------------------------------------|--------------|-------------------------------------|------------|
| ** **                        | ** **   | **2005**                              | ** **   | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| *** ***                      | *** *** | **($ in thousands)**             | *** *** |
| Revenues:                         |         |                                  |         |                                |       |   |   |   |   |
| Net earned  premium               |         | $                                     | 59,107       |                                | $          | 51,782 |   | $ | 106,470 |   | $ | 104,964 |   |
| Net investment  income            |         | 7,485                                 |         | 5,829                               |       | 14,340 |   | 11,313 |   |
| Net realized  capital gains       |         | 681                                   |         | 176                                 |       | 947 |   | 381 |   |
| Other income                      |         | 209                                   |         | 74                                  |       | 207 |   | 13 |   |
| Total  revenues                   |         | 67,482                                |         | 57,861                              |       | 121,964 |   | 116,671 |   |
|                              |         |                                  |         |                                |       |   |   |   |   |
| Operating  expenses:              |         |                                  |         |                                |       |   |   |   |   |
| Net losses  and LAE               |         | 38,682                                |         | 32,558                              |       | 67,524 |   | 65,268 |   |
| Commission  expense               |         | 13,868                                |         | 13,242                              |       | 26,454 |   | 27,387 |   |
| Other  operating expenses         |         | 2,009                                 |         | 989                                 |       | 4,121 |   | 2,187 |   |
| Total  operating expenses         |         | 54,559                                |         | 46,789                              |       | 98,099 |   | 94,842 |   |
|                              |         |                                  |         |                                |       |   |   |   |   |
| Income  before income tax expense |         | 12,923                                |         | 11,072                              |       | 23,865 |   | 21,829 |   |
|                              |         |                                  |         |                                |       |   |   |   |   |
| Income tax  expense               |         | 4,045                                 |         | 3,543                               |       | 7,444 |   | 7,021 |   |
|                              |         |                                  |         |                                |       |   |   |   |   |
| Net income                        |         | $                                     | 8,878        |                                | $          | 7,529 |   | $ | 16,421 |   | $ | 14,808 |   |
|                              |         |                                  |         |                                |       |   |   |   |   |
| Loss and LAE  ratio               |         | 65.4                                  | %            | 62.9                                | %          | 63.4 | % | 62.2 | % |
| Commission  expense ratio         |         | 23.5                                  | %            | 25.6                                | %          | 24.8 | % | 26.1 | % |
| Other  operating expense ratio    |         | 3.4                                   | %            | 1.9                                 | %          | 3.9 | % | 2.1 | % |
| Combined  ratio                   |         | 92.3                                  | %            | 90.4                                | %          | 92.1 | % | 90.4 | % |

 

36

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Followingare the underwriting results of the Insurance Companies for the three monthsended June 30, 2005 and 2004:

 
| ** **                           | ** **   | **Three Months Ended June 30, 2005** | ** **   |
|--------------------------------------|--------------|-------------------------------------------|--------------|
| *** ***                         | *** *** | **($ in thousands)**                 | *** *** |
| ** **                           | ** **   | **Net  Earned  Premium**                  | ** **   | **Losses  and LAE  Incurred** | ** ** | **Underwriting  Expenses** | ** ** | **Underwriting  Gain(Loss)** | ** ** | **Loss  Ratio** | ** ** | **Expense  Ratio** | ** ** | **Combined  Ratio** | ** ** |
|                                 |         |                                      |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Marine                               |         | $                                         | 23,330       |   | $ | 15,868 |   | $ | 5,592 |   | $ | 1,870 |   | 68.0 | % | 24.0 | % | 92.0 | % |
| Specialty                            |         | 29,442                                    |         | 18,922 |   | 8,901 |   | 1,619 |   | 64.3 | % | 30.2 | % | 94.5 | % |
| Professional Liability               |         | 6,990                                     |         | 5,031 |   | 1,926 |   | 33 |   | 72.0 | % | 27.6 | % | 99.6 | % |
| Assumed from Lloyd’s Operations |         | (675                                      | )            | (888 | ) | (16 | ) | 229 |   | NM |   | NM |   | NM |   |
| Other (includes run-off)             |         | 20                                        |         | (251 | ) | (526 | ) | 797 |   | NM |   | NM |   | NM |   |
| Total                                |         | $                                         | 59,107       |   | $ | 38,682 |   | $ | 15,877 |   | $ | 4,548 |   | 65.4 | % | 26.9 | % | 92.3 | % |

 
| ** **                           | ** **   | **Three Months Ended June 30, 2004** | ** **   |
|--------------------------------------|--------------|-------------------------------------------|--------------|
| *** ***                         | *** *** | **($ in thousands)**                 | *** *** |
| ** **                           | ** **   | **Net  Earned  Premium**                  | ** **   | **Losses  and LAE  Incurred** | ** ** | **Underwriting  Expenses** | ** ** | **Underwriting  Gain(Loss)** | ** ** | **Loss  Ratio** | ** ** | **Expense  Ratio** | ** ** | **Combined  Ratio** | ** ** |
|                                 |         |                                      |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Marine                               |         | $                                         | 20,834       |   | $ | 12,423 |   | $ | 5,660 |   | $ | 2,751 |   | 59.6 | % | 27.2 | % | 86.8 | % |
| Specialty                            |         | 21,365                                    |         | 14,485 |   | 5,877 |   | 1,003 |   | 67.8 | % | 27.5 | % | 95.3 | % |
| Professional Liability               |         | 4,697                                     |         | 2,832 |   | 969 |   | 896 |   | 60.3 | % | 20.6 | % | 80.9 | % |
| Assumed from Lloyd’s Operations |         | 4,878                                     |         | 2,728 |   | 1,723 |   | 427 |   | 55.9 | % | 35.3 | % | 91.2 | % |
| Other (includes run-off)             |         | 8                                         |         | 90 |   | 2 |   | (84 | ) | NM |   | NM |   | NM |   |
| Total                                |         | $                                         | 51,782       |   | $ | 32,558 |   | $ | 14,231 |   | $ | 4,993 |   | 62.9 | % | 27.5 | % | 90.4 | % |

 

----

NM = Not meaningful

 

37

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Followingare the underwriting results of the Insurance Companies for the six monthsended June 30, 2005 and 2004:

 
| ** **                           | ** ** | **Six Months Ended June 30, 2005** | ** ** |
|--------------------------------------|------------|-----------------------------------------|------------|
| ** **                           | ** ** | **($ in thousands)**               | ** ** |
| ** **                           | ** ** | **Net  Earned  Premium**                | ** ** | **Losses  and LAE  Incurred** | ** ** | **Underwriting  Expenses** | ** ** | **Underwriting  Gain(Loss)** | ** ** | **Loss  Ratio** | ** ** | **Expense  Ratio** | ** ** | **Combined  Ratio** | ** ** |
|                                 |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Marine                               |       | $                                       | 43,209     |   | $ | 28,611 |   | $ | 11,112 |   | $ | 3,486 |   | 66.2 | % | 25.7 | % | 91.9 | % |
| Specialty                            |       | 49,464                                  |       | 30,455 |   | 15,751 |   | 3,258 |   | 61.6 | % | 31.8 | % | 93.4 | % |
| Professional Liability               |       | 13,707                                  |       | 9,471 |   | 3,927 |   | 309 |   | 69.1 | % | 28.7 | % | 97.8 | % |
| Assumed from Lloyd’s Operations |       | 36                                      |       | (315 | ) | 306 |   | 45 |   | NM |   | NM |   | NM |   |
| Other (includes run-off)             |       | 54                                      |       | (698 | ) | (521 | ) | 1,273 |   | NM |   | NM |   | NM |   |
| Total                                |       | $                                       | 106,470    |   | $ | 67,524 |   | $ | 30,575 |   | $ | 8,371 |   | 63.4 | % | 28.7 | % | 92.1 | % |

 
| ** **                           | ** ** | **Six Months Ended June 30, 2004** | ** ** |
|--------------------------------------|------------|-----------------------------------------|------------|
| ** **                           | ** ** | **($ in thousands)**               | ** ** |
| ** **                           | ** ** | **Net  Earned  Premium**                | ** ** | **Losses  and LAE  Incurred** | ** ** | **Underwriting  Expenses** | ** ** | **Underwriting  Gain(Loss)** | ** ** | **Loss  Ratio** | ** ** | **Expense  Ratio** | ** ** | **Combined  Ratio** | ** ** |
|                                 |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Marine                               |       | $                                       | 41,262     |   | $ | 24,469 |   | $ | 11,258 |   | $ | 5,535 |   | 59.3 | % | 27.3 | % | 86.6 | % |
| Specialty                            |       | 42,904                                  |       | 28,802 |   | 12,845 |   | 1,257 |   | 67.1 | % | 30.0 | % | 97.1 | % |
| Professional Liability               |       | 8,507                                   |       | 5,131 |   | 1,744 |   | 1,632 |   | 60.3 | % | 20.5 | % | 80.8 | % |
| Assumed from Lloyd’s Operations |       | 12,283                                  |       | 6,945 |   | 3,722 |   | 1,616 |   | 56.5 | % | 30.3 | % | 86.8 | % |
| Other (includes run-off)             |       | 8                                       |       | (79 | ) | 5 |   | 82 |   | NM |   | NM |   | NM |   |
| Total                                |       | $                                       | 104,964    |   | $ | 65,268 |   | $ | 29,574 |   | $ | 10,122 |   | 62.2 | % | 28.2 | % | 90.4 | % |

 

38

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Netearned premiums of the Insurance Companies increased 14% and 1% in the 2005second quarter and six month periods, respectively, compared to the sameperiods last year.  Such increases werenot of the same magnitude as the increases in the 2005 net written premium of43% and 39% compared to the same 2004 periods principally due to the decline ofbusiness assumed from the Lloyd’s Operations.

 

The2005 and 2004 six month underwriting results generally reflect the favorableindustry market conditions over the last three years coupled with satisfactoryloss trends in the aforementioned quarterly periods.

 

Thepre-tax yield on the Insurance Companies’ investment portfolio approximated4.2% and 4.0% at June 30, 2005 and 2004, respectively.  The increase in the portfolio yield reflectsthe recent increases in interest rates. Net investment income increased in the first six months of 2005 comparedto the same period in 2004 due to the increase in the yield and the strong cashflows resulting in a larger investment portfolio.

 

***Lloyd’s Operations***

 

The Lloyd’s Operations consist of NUAL, whichmanages Lloyd’s Syndicate 1221, Millennium Underwriting Ltd. and NavigatorsCorporate Underwriters Ltd. Both Millennium Underwriting Ltd. and NavigatorsCorporate Underwriters Ltd. are Lloyd’s corporate members with limitedliability and provide capacity to Lloyd’s Syndicate 1221. NUAL owns NavigatorsUnderwriting Ltd. (formerly Pennine Underwriting Ltd.), an underwritingmanaging agency with offices in Manchester, Leeds and Basingstoke, England,which underwrites cargo and engineering business for Lloyd’s Syndicate1221.  In January 2005, we formedNavigators NV in Antwerp, Belgium, a wholly owned subsidiary of NUAL.  Navigators NV produces transport liability,cargo and marine liability premium on behalf of Syndicate 1221.  The Lloyd’s Operations and NavigatorsManagement (UK) Limited, a Navigators Agency which produces business for theU.K. Branch, are subsidiaries of Navigators Holdings (UK) Limited located inthe United Kingdom.

 

Lloyd’s Syndicate 1221 has stamp capacity of £135million ($252.9 million) in 2005 compared to £150 million ($275.0 million) in2004.  The reduction in the 2005 stampcapacity compared to 2004 is reflective of unused stamp capacity in 2004coupled with declining market conditions in 2005.  Stamp capacity is a measure of the amount ofpremium a Lloyd’s syndicate is authorized to write based on a business planapproved by the Council of Lloyd’s. We provide 97.5% and 97.4% of Syndicate1221’s total stamp capacity in 2005 and 2004, respectively.  Syndicate 1221’s stamp capacity is expressednet of commission (as is standard at Lloyd’s) of approximately 21%. TheSyndicate 1221 premium recorded in the Company’s financial statements is grossof commission.  The Lloyd’s marinebusiness had been subject to deteriorating pricing beginning in the mid-1990’s.The pricing competition showed some signs of stabilizing in 2000 and pricesincreased from 2001 through 2003. Overall pricing in 2004 remained relativelystable and the 2005 first six months showed a 1% increase while the 2005 secondquarter indicated a 2% decrease.  Lloyd’spresents its results on an underwriting year basis, generally closing eachunderwriting year after three years. We make estimates for each underwritingyear and timely accrue the expected results. Our Lloyd’s Operations included inthe consolidated financial statements represent our participation in Syndicate1221.

 

Lloyd’s syndicates report the amounts of premiums,claims, and expenses recorded in an underwriting account for a particular yearto the companies or individuals that participate in the syndicates. Thesyndicates generally keep accounts open for three years. Traditionally, threeyears have been necessary to report substantially all premiums associated withan underwriting year and to report most related claims, although claims mayremain unsettled after the underwriting year is closed. A Lloyd’s syndicatetypically closes an underwriting year by reinsuring outstanding claims on thatunderwriting year with the participants for the next underwriting year. Theceding participants pay the assuming participants an amount based on theunearned premiums and outstanding claims in the underwriting year at the dateof the assumption. Our participation in Lloyd’s Syndicate 1221 is representedby and recorded as our proportionate share of the underlying assets andliabilities and results of operations of the syndicate since (i) we holdan undivided interest in each asset, (ii) we

 

39

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areproportionately liable for each liability and (iii) Syndicate 1221 is nota separate legal entity. At Lloyd’s, the amount to close an underwriting yearinto the next year is referred to as the RITC transaction. The RITC amountsrepresent the transfer of the assets and liabilities from the participants of aclosing underwriting year to the participants of the next underwriting year. Tothe extent our participation in the syndicate changes, the RITC amounts varyaccordingly. The RITC transaction is recorded in the fourth quarter asadditional written and earned premium, losses incurred, loss reserves and receivables,all in the same amount. There are no gains or losses recorded on the RITCtransaction.

 

We provide letters of credit to Lloyd’s to supportour participation in Syndicate 1221’s stamp capacity as discussed below underthe caption *Liquidity and Capital Resources*.

 

Following are the results of operations of the Lloyd’sOperations for the three and six months ended June 30, 2005 and 2004:

 
| ** **                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                           | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **($ in thousands)**             | ** ** |
| Revenues:                            |       |                                  |       |                                |       |   |   |   |   |
| Net earned  premium                  |       | $                                     | 26,725     |                                | $          | 23,532 |   | $ | 56,900 |   | $ | 44,525 |   |
| Commission  income                   |       | 359                                   |       | 501                                 |       | 627 |   | 563 |   |
| Net  investment income               |       | 1,454                                 |       | 791                                 |       | 2,203 |   | 1,195 |   |
| Net realized  capital gains (losses) |       | (265                                  | )          | (281                                | )          | (364 | ) | (64 | ) |
| Other income                         |       | 1                                     |       | 5                                   |       | 629 |   | 9 |   |
| Total  revenues                      |       | 28,274                                |       | 24,548                              |       | 59,995 |   | 46,228 |   |
|                                 |       |                                  |       |                                |       |   |   |   |   |
| Operating  expenses:                 |       |                                  |       |                                |       |   |   |   |   |
| Net losses  and LAE                  |       | 14,929                                |       | 12,834                              |       | 32,308 |   | 23,876 |   |
| Commission  expense                  |       | 4,833                                 |       | 4,093                               |       | 9,714 |   | 7,843 |   |
| Other  operating expenses            |       | 4,310                                 |       | 3,193                               |       | 9,071 |   | 6,229 |   |
| Total  operating expenses            |       | 24,072                                |       | 20,120                              |       | 51,093 |   | 37,948 |   |
|                                 |       |                                  |       |                                |       |   |   |   |   |
| Income  before income tax expense    |       | 4,202                                 |       | 4,428                               |       | 8,902 |   | 8,280 |   |
|                                 |       |                                  |       |                                |       |   |   |   |   |
| Income tax  expense                  |       | 1,471                                 |       | 1,550                               |       | 3,116 |   | 2,898 |   |
|                                 |       |                                  |       |                                |       |   |   |   |   |
| Net income                           |       | $                                     | 2,731      |                                | $          | 2,878 |   | $ | 5,786 |   | $ | 5,382 |   |
|                                 |       |                                  |       |                                |       |   |   |   |   |
| Loss and LAE  ratio                  |       | 55.9                                  | %          | 54.5                                | %          | 56.8 | % | 53.6 | % |
| Commission  expense ratio            |       | 18.2                                  | %          | 17.4                                | %          | 17.1 | % | 17.6 | % |
| Other  operating expense ratio       |       | 16.1                                  | %          | 13.6                                | %          | 15.9 | % | 14.0 | % |
| Combined  ratio                      |       | 90.2                                  | %          | 85.5                                | %          | 89.8 | % | 85.2 | % |

 

The Lloyd’s Operations have been experiencingbusiness expansion coupled with improving underwriting results as a result ofthe generally favorable market conditions for marine and energy business fromlate 2001 through 2003, and to a lesser extent in 2004 and 2005.  Net earned premium has not been materially

 

40

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affectedin 2005 for business ceded to the Insurance Companies while it was reduced by$4.9 million in the second quarter of 2004 and by $12.3 million in the firstsix months of  2004 for such business.

 

The 2005 and 2004 second quarter and six monthunderwriting results generally reflect the favorable industry market conditionsover the last three years coupled with satisfactory loss trends in thequarterly periods.  The Company’s lossratio for the second quarter and first six months of 2004 was favorablyimpacted by $1.3 million or 1.9 loss ratio points and $4.0 million or 2.7 lossratio points, respectively, for redundancies in prior years’ Lloyd’s Operations’loss reserves.

 

The pre-tax yield on funds in the Lloyd’s Operations’investment portfolio approximated 2.2% and 1.7% at June 30, 2005 and 2004,respectively.  Generally, funds investedat Lloyd’s have been invested with an average duration of approximately 1.5years in order to meet liquidity needs. Such yields are net of interest credits to reinsurers for funds withheldby our Lloyd’s Operations.

 

***Navigators Agencies***

 

The Navigators Agencies produce business for ourinsurance company subsidiaries. They specialize in writing marine and relatedlines of business, specialty liability insurance and professional liabilitycoverages.

 

Each of the Navigators Agencies underwrites marineand related lines of business for Navigators Insurance Company and two otherunaffiliated insurance companies, which comprise a marine insurance pool.Marine insurance policies are issued by Navigators Insurance Company with thebusiness shared with other pool members. Navigators Insurance Company had an85% participation in the marine pool for business written with effective datesin 2005 and an 80% participation for business written with effective dates in2004.

 

Navigators Specialty, a division of a NavigatorsAgency, produces business exclusively for the Insurance Companies. Itspecializes in underwriting general liability insurance coverage for smallgeneral and artisan contractors and other targeted commercial risks, with themajority of its business located in California. Navigators Specialty also writes commercial multiple peril, excesscasualty, commercial automobile and personal umbrella insurance.

 

Navigators Pro, a division of a Navigators Agency,specializes in underwriting professional liability insurance and beganproducing directors and officers liability insurance exclusively for theInsurance Companies in the fourth quarter of 2001. In late 2002, Navigators Prointroduced additional products to complement its directors and officersliability coverage. The products include employment practices liability,lawyers professional liability and miscellaneous professional liabilitycoverages.  In 2004, Navigators Pro beganwriting professional liability coverage for U.K. solicitors through our U.K.Branch.  In 2005, it commenced writingprofessional liability coverages for architects and engineers.

 

NavigatorsSpecialty and Navigators Pro receive actual cost reimbursement from theInsurance Companies for the business produced. The Navigators Agencies producing the marine business receive a 20%profit commission, and a management fee of 8.75% for marine business producedwith 2005 year effective dates and 7.5% for 2004 and prior year effectivedates.  Operating costs are specificallyidentified to each line of business or allocated based on employee head countsand gross written premium.

 

Followingare the results of operations of the Navigators Agencies for the three and sixmonths ended June 30, 2005 and 2004:

 

41

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| ** **                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                          | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                          | ** ** | **($ in thousands)**             | ** ** |
| Revenues:                           |       |                                  |       |                                |       |   |   |   |   |
| Commission  income                  |       | $                                     | 11,431     |                                | $          | 8,155 |   | $ | 21,181 |   | $ | 16,087 |   |
| Net  investment income              |       | 1                                     |       | —                              |       | 3 |   | 3 |   |
| Other income                        |       | 260                                   |       | 187                                 |       | 531 |   | 372 |   |
| Total  revenues                     |       | 11,692                                |       | 8,342                               |       | 21,715 |   | 16,462 |   |
|                                |       |                                  |       |                                |       |   |   |   |   |
| Operating  expenses:                |       |                                  |       |                                |       |   |   |   |   |
| Other  operating expenses           |       | 11,163                                |       | 9,093                               |       | 22,159 |   | 17,698 |   |
| Total  operating expenses           |       | 11,163                                |       | 9,093                               |       | 22,159 |   | 17,698 |   |
|                                |       |                                  |       |                                |       |   |   |   |   |
| (Loss)  before income tax (benefit) |       | 529                                   |       | (751                                | )          | (444 | ) | (1,236 | ) |
|                                |       |                                  |       |                                |       |   |   |   |   |
| Income tax  (benefit)               |       | 245                                   |       | (252                                | )          | (117 | ) | (392 | ) |
|                                |       |                                  |       |                                |       |   |   |   |   |
| Net (loss)                          |       | $                                     | 284        |                                | $          | (499 | ) | $ | (327 | ) | $ | (844 | ) |

 

Commissionincome generally consists of inter-segment management fees and profit commissionsreceived from insurance premiums of the Insurance Companies for marine,specialty and professional liability business as well as business fromunaffiliated insurance companies in the marine pool.

 

Otherincome generally represents fee revenues earned for other services on behalf ofthird parties.

 

Otheroperating expenses consists of compensation and general and administrativeexpenses incurred in connection with underwriting, administrative and claimsservices performed on behalf of the Insurance Companies and unaffiliatedinsurers participating in the marine pool. Such costs have been increasing each year commensurate with servicingthe growth in the overall increased premium volume.

 

Incometax expense (benefit) includes Federal and state income taxes related to thetaxable income or loss of the Navigators Agencies.

 

**Off-Balance Sheet Transactions**

 

There have been no material changes in theinformation concerning off-balance sheet transactions as stated in the Company’s2004 Annual Report on Form 10-K.

 

**Tabular Disclosure of Contractual Obligations**

 

There have been no material changes in the operatinglease or capital lease information concerning contractual obligations as statedin the Company’s 2004 Annual Report on Form 10-K.  Even though total reserves for losses and LAEincreased to $1,006 million at June 30, 2005 from $966.1 million at December 31,2004,

 

42

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therewere no significant changes in the Company’s lines of business or claims handlingthat would create a material change in the percentage relationship of theprojected payments by period to the total reserves.

 

**Investments**

 

The objective of the Company’s investment policy,guidelines and strategy is to maximize total investment return in the contextof preserving and enhancing shareholder value and statutory surplus of theInsurance Companies.  Secondarily, animportant consideration is to optimize the after-tax book income.

 

The investments are managed by outside professionalfixed-income and equity portfolio managers. The Company seeks to achieve itsinvestment objectives by investing in cash equivalents and money market funds,municipal bonds, U.S. Government bonds, U.S. Government guaranteed and U.S.Federal Agency securities, corporate bonds, mortgage-backed and asset-backedsecurities and common and preferred stocks. Our investment guidelines requirethat the amount of the consolidated fixed-income portfolio rated below ‘‘A-’’by Standard & Poor’s (“S&P”) or A3 by Moody’s shall not exceed 20%of the statutory surplus of the Insurance Companies.  Securities rated below BBB- by S&P orBaa3 by Moody’s are not eligible to be purchased. Up to 15% of the statutorysurplus of the Insurance Companies may be invested in equity securities thatare actively traded on major U.S. stock exchanges. Our investment guidelinesprohibit investments in derivatives other than as a hedge against foreigncurrency exposures or the writing of covered call options on the equityportfolio.

 

The Insurance Companies’ investments are subject tothe direction and control of their respective boards of directors and theFinance Committee of the Company’s Board of Directors.  The investment portfolio and the performanceof the investment managers are reviewed quarterly.  These investments 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 andconcentration of investments which may be made by insurance companies. Ingeneral, these laws permit investments, within specified limits and subject tocertain qualifications, in Federal, state and municipal obligations, corporatebonds, preferred stocks, common stocks, real estate mortgages and real estate.

 

The Lloyd’s Operations’ investments are subject tothe direction and control of the board of directors and the investmentcommittee of NUAL, as well as the board of directors and finance committee ofthe Company, and represent our share of the investments held by Syndicate 1221.These investments must comply with the rules and regulations imposed byLloyd’s and by certain overseas regulators. The investment portfolio and the performance of the investment managersare reviewed quarterly.

 

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

 

All fixed maturity and equity securities are carriedat fair value. The fair value is based on quoted market prices or dealer quotesprovided by independent pricing services. The following tables show our cash and investments as of June 30,2005 and December 31, 2004:

 

43

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| ** **                                                                                                    | ** **   | ** **                | ** **   | **Gross**      | ** ** | **Gross**      | ** ** | **Cost or**   | ** ** |
|---------------------------------------------------------------------------------------------------------------|--------------|---------------------------|--------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                                                                                                    | ** **   | **Fair**                  | ** **   | **Unrealized** | ** ** | **Unrealized** | ** ** | **Amortized** | ** ** |
| **June 30, 2005**                                                                                        | ** **   | **Value**                 | ** **   | **Gains**      | ** ** | **(Losses)**   | ** ** | **Cost**      | ** ** |
| *** ***                                                                                                  | *** *** | **($ in thousands)** | *** *** |
| Fixed  maturities:                                                                                            |         |                      |         |           |       |           |       |          |       |
|                                                                                                          |         |                      |         |           |       |           |       |          |       |
| U.S.  Government Treasury Bonds, GNMAs, U.S. Government non-guaranteed Agencies and  foreign government bonds |         | $                         | 247,282      |           | $          | 5,008          |       | $             | (812       | ) | $ | 243,086 |   |
| States,  municipalities and political subdivisions                                                            |         | 183,336                   |         | 2,803          |       | (608           | )          | 181,141       |       |
| Mortgage-  and asset-backed securities (excluding U.S. Govt.)                                                 |         | 229,061                   |         | 1,907          |       | (828           | )          | 227,982       |       |
| Corporate  bonds                                                                                              |         | 135,653                   |         | 4,204          |       | (553           | )          | 132,002       |       |
|                                                                                                          |         |                      |         |           |       |           |       |          |       |
| Total fixed  maturities (1)                                                                                   |         | 795,332                   |         | 13,922         |       | (2,801         | )          | 784,211       |       |
|                                                                                                          |         |                      |         |           |       |           |       |          |       |
| Equity  securities - common stocks                                                                            |         | 20,453                    |         | 1,913          |       | (329           | )          | 18,869        |       |
|                                                                                                          |         |                      |         |           |       |           |       |          |       |
| Cash and  short-term investments                                                                              |         | 149,258                   |         | —         |       | —         |       | 149,258       |       |
|                                                                                                          |         |                      |         |           |       |           |       |          |       |
| Total                                                                                                         |         | $                         | 965,043      |           | $          | 15,835         |       | $             | (3,130     | ) | $ | 952,338 |   |

 

----

(1)          Approximately 5.4% and 9.5% of total fixed maturities investments aredirect and collateralized obligations, respectively, of FNMA and FHLMC.

 
| ** **                                                                                                    | ** **   | ** **                | ** **   | **Gross**      | ** ** | **Gross**      | ** ** | **Cost or**   | ** ** |
|---------------------------------------------------------------------------------------------------------------|--------------|---------------------------|--------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                                                                                                    | ** **   | **Fair**                  | ** **   | **Unrealized** | ** ** | **Unrealized** | ** ** | **Amortized** | ** ** |
| **December 31, 2004**                                                                                    | ** **   | **Value**                 | ** **   | **Gains**      | ** ** | **(Losses)**   | ** ** | **Cost**      | ** ** |
| *** ***                                                                                                  | *** *** | **($ in thousands)** | *** *** |
| Fixed  maturities:                                                                                            |         |                      |         |           |       |           |       |          |       |
|                                                                                                          |         |                      |         |           |       |           |       |          |       |
| U.S.  Government Treasury Bonds, GNMAs, U.S. Government non-guaranteed Agencies and  foreign government bonds |         | $                         | 247,105      |           | $          | 3,190          |       | $             | (1,451     | ) | $ | 245,366 |   |
| States,  municipalities and political subdivisions                                                            |         | 138,902                   |         | 2,688          |       | (339           | )          | 136,553       |       |
| Mortgage-  and asset-backed securities (excluding U.S. Govt.)                                                 |         | 191,459                   |         | 1,911          |       | (470           | )          | 190,018       |       |
| Corporate  bonds                                                                                              |         | 144,968                   |         | 4,375          |       | (519           | )          | 141,112       |       |
|                                                                                                          |         |                      |         |           |       |           |       |          |       |
| Total fixed  maturities (1)                                                                                   |         | 722,434                   |         | 12,164         |       | (2,779         | )          | 713,049       |       |
|                                                                                                          |         |                      |         |           |       |           |       |          |       |
| Equity  securities - common stocks                                                                            |         | 21,170                    |         | 2,157          |       | (88            | )          | 19,101        |       |
|                                                                                                          |         |                      |         |           |       |           |       |          |       |
| Cash and  short-term investments                                                                              |         | 111,329                   |         | —         |       | —         |       | 111,329       |       |
|                                                                                                          |         |                      |         |           |       |           |       |          |       |
| Total                                                                                                         |         | $                         | 854,933      |           | $          | 14,321         |       | $             | (2,867     | ) | $ | 843,479 |   |

 

----

(1)          Approximately 6.0% and 11.4% of total fixed maturities investments aredirect and collateralized obligations, respectively, of FNMA and FHLMC.

 

44

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At June 30, 2005 and December 31, 2004,all fixed-maturity and equity securities held by us were classified asavailable-for-sale.

 

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

 

When a security in our investment portfolio has anunrealized loss that is deemed to be other-than-temporary, we write thesecurity down to fair value through a charge to operations. Significant changesin the factors we consider when evaluating investments for impairment lossescould result in a significant change in impairment losses reported in theconsolidated financial statements.  Therewere no impairment losses recorded in our fixed maturity or equity securitiesportfolios in 2005 or 2004.

 

The following table summarizes all securities in anunrealized loss position at June 30, 2005 and December 31, 2004,showing the aggregate fair value and gross unrealized loss by the length oftime those securities have continuously been in an unrealized loss position:

 

45

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| ** **                                                                                                    | ** **   | **June 30, 2005**    | ** **   | **December 31, 2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------|--------------|---------------------------|--------------|----------------------------|------------|
| ** **                                                                                                    | ** **   | **Fair**                  | ** **   | **Gross**                  | ** ** | **Fair** | ** ** | **Gross** | ** ** |
| ** **                                                                                                    | ** **   | **Value**                 | ** **   | **Unrealized Loss**        | ** ** | **Value** | ** ** | **Unrealized Loss** | ** ** |
| *** ***                                                                                                  | *** *** | **($ in thousands)** | *** *** |
|                                                                                                          |         |                      |         |                       |       |   |   |   |   |
| Fixed  Maturities:                                                                                            |         |                      |         |                       |       |   |   |   |   |
| U.S.  Government Treasury Bonds, GNMAs, U.S. Government non-guaranteed Agencies and  foreign government bonds |         |                      |         |                       |       |   |   |   |   |
| 0-6 Months                                                                                                    |         | $                         | 63,426       |                       | $          | 182 |   | $ | 97,338 |   | $ | 519 |   |
| 7-12 Months                                                                                                   |         | 36,020                    |         | 279                        |       | 33,916 |   | 283 |   |
| > 12  Months                                                                                               |         | 32,558                    |         | 351                        |       | 24,258 |   | 649 |   |
| Subtotal                                                                                                      |         | 132,004                   |         | 812                        |       | 155,512 |   | 1,451 |   |
|                                                                                                          |         |                      |         |                       |       |   |   |   |   |
| States,  municipalities and political subdivisions                                                            |         |                      |         |                       |       |   |   |   |   |
| 0-6 Months                                                                                                    |         | 47,387                    |         | 242                        |       | 18,966 |   | 94 |   |
| 7-12 Months                                                                                                   |         | 11,944                    |         | 128                        |       | 14,155 |   | 225 |   |
| > 12  Months                                                                                               |         | 14,073                    |         | 238                        |       | 518 |   | 20 |   |
| Subtotal                                                                                                      |         | 73,404                    |         | 608                        |       | 33,639 |   | 339 |   |
|                                                                                                          |         |                      |         |                       |       |   |   |   |   |
| Mortgage-  and asset-backed securities (excluding U.S. Govt.)                                                 |         |                      |         |                       |       |   |   |   |   |
| 0-6 Months                                                                                                    |         | 65,092                    |         | 231                        |       | 64,598 |   | 208 |   |
| 7-12 Months                                                                                                   |         | 46,747                    |         | 335                        |       | 19,536 |   | 232 |   |
| > 12  Months                                                                                               |         | 17,236                    |         | 262                        |       | 774 |   | 30 |   |
| Subtotal                                                                                                      |         | 129,075                   |         | 828                        |       | 84,908 |   | 470 |   |
|                                                                                                          |         |                      |         |                       |       |   |   |   |   |
| Corporate  bonds                                                                                              |         |                      |         |                       |       |   |   |   |   |
| 0-6 Months                                                                                                    |         | 11,221                    |         | 90                         |       | 29,870 |   | 160 |   |
| 7-12 Months                                                                                                   |         | 21,225                    |         | 225                        |       | 16,069 |   | 189 |   |
| > 12  Months                                                                                               |         | 11,831                    |         | 238                        |       | 4,803 |   | 170 |   |
| Subtotal                                                                                                      |         | 44,277                    |         | 553                        |       | 50,742 |   | 519 |   |
|                                                                                                          |         |                      |         |                       |       |   |   |   |   |
| Total Fixed  Maturities                                                                                       |         | $                         | 378,760      |                       | $          | 2,801 |   | $ | 324,801 |   | $ | 2,779 |   |
|                                                                                                          |         |                      |         |                       |       |   |   |   |   |
| Equity  securities - common stocks                                                                            |         |                      |         |                       |       |   |   |   |   |
| 0-6 Months                                                                                                    |         | $                         | 5,382        |                       | $          | 162 |   | $ | 3,779 |   | $ | 23 |   |
| 7-12 Months                                                                                                   |         | 525                       |         | 16                         |       | 892 |   | 65 |   |
| > 12  Months                                                                                               |         | 826                       |         | 151                        |       | — |   | — |   |
|                                                                                                          |         |                      |         |                       |       |   |   |   |   |
| Total Equity  Securities                                                                                      |         | $                         | 6,733        |                       | $          | 329 |   | $ | 4,671 |   | $ | 88 |   |

 

We analyze the unrealized losses quarterly todetermine if any are other-than-temporary. The above unrealized losses have been determined to be temporary andgenerally result from changes in market conditions.

 

46

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The following table shows the composition byNational Association of Insurance Commissioners (“NAIC”) rating and thegenerally equivalent Standard & Poor’s (“S&P”) and Moody’s ratingsof the fixed maturity securities in our portfolio with gross unrealized lossesat June 30, 2005.  Not all of thesecurities are rated by S&P and/or Moody’s.

 
| ** ** | ** ** | **Equivalent**            | ** ** | **Equivalent**   | ** ** | **Unrealized Loss** | ** ** | **Fair Value** | ** ** |
|------------|------------|---------------------------|------------|------------------|------------|---------------------|------------|----------------|------------|
| **NAIC**   | ** ** | **S&P**               | ** ** | **Moody’s** | ** ** | ** **          | ** ** | **Percent**    | ** ** | ** ** | ** ** | **Percent** | ** ** |
| **Rating** | ** ** | **Rating**                | ** ** | **Rating**       | ** ** | **Amount**          | ** ** | **of Total**   | ** ** | **Amount** | ** ** | **of Total** | ** ** |
| ** ** | ** ** | **($ in thousands)** | ** ** |
|       |       |                      |       |             |       |                |       |           |       |   |   |   |   |
| 1          |       | AAA/AA/A                  |       | Aaa/Aa/A         |       | $                   | 2,689      |           | 96         | % | $ | 367,460 |   | 97 | % |
| 2          |       | BBB                       |       | Baa              |       | 112                 |       | 4              | %          | 11,300 |   | 3 | % |
| 3          |       | BB                        |       | Ba               |       | —              |       | —         |       | — |   | — |   |
| 4          |       | B                         |       | B                |       | —              |       | —         |       | — |   | — |   |
| 5          |       | CCC or lower              |       | Caa or lower     |       | —              |       | —         |       | — |   | — |   |
| 6          |       | N/A                       |       | N/A              |       | —              |       | —         |       | — |   | — |   |
|       |       |                      |       | Total            |       | $                   | 2,801      |           | 100        | % | $ | 378,760 |   | 100 | % |

 

At June 30, 2005, the gross unrealized lossesin the table directly above are related to fixed maturity securities that arerated investment grade, which is defined as a security having a NAIC rating of1 or 2, a S&P rating of “BBB–” or higher, or a Moody’s rating of “Baa3” orhigher.  Unrealized losses on investmentgrade securities principally relate to changes in interest rates or changes insector-related credit spreads since the securities were acquired.  Any such unrealized losses are recognized inincome, if the securities are sold, or if the decline in fair value is deemedother-than-temporary.

 

The scheduled maturity dates for fixed maturitysecurities in an unrealized loss position at June 30, 2005 are shown inthe following table:

 
| ** **                              | ** ** | **Unrealized Loss**       | ** ** | **Fair Value** | ** ** |
|-----------------------------------------|------------|---------------------------|------------|----------------|------------|
| ** **                              | ** ** | ** **                | ** ** | **Percent**    | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                              | ** ** | **Amount**                | ** ** | **of Total**   | ** ** | **Amount** | ** ** | **of Total** | ** ** |
| ** **                              | ** ** | **($ in thousands)** | ** ** |
| ** **                              |       |                      |       |           |       |   |   |   |   |
| Due in one  year or less                |       | $                         | 563        |           | 20         | % | $ | 91,972 |   | 24 | % |
| Due after  one year through five years  |       | 900                       |       | 32             | %          | 99,857 |   | 26 | % |
| Due after  five years through ten years |       | 121                       |       | 4              | %          | 13,872 |   | 4 | % |
| Due after  ten years                    |       | 389                       |       | 14             | %          | 43,984 |   | 12 | % |
| Mortgage-  and asset-backed securities  |       | 828                       |       | 30             | %          | 129,075 |   | 34 | % |
|                                    |       |                      |       |           |       |   |   |   |   |
| Total fixed  income securities          |       | $                         | 2,801      |           | 100        | % | $ | 378,760 |   | 100 | % |

 

Expected maturities may differ from contractualmaturities because issuers may have the right to call or prepay obligationswith or without call or prepayment penalties. Due to the periodic repayment ofprincipal, the mortgage- and asset-backed securities are estimated to have aneffective maturity of approximately 2.5 years.

 

47

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Our realized capital gains and losses were asfollows:

 
| ** **                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                  | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                  | ** ** | **($ in thousands)**             | ** ** |
|                        |       |                                  |       |                                |       |   |   |   |   |
| Fixed maturities:           |       |                                  |       |                                |       |   |   |   |   |
| Gains                       |       | $                                     | 546        |                                | $          | 1,225 |   | $ | 1,259 |   | $ | 1,664 |   |
| (Losses)                    |       | (411                                  | )          | (1,698                              | )          | (957 | ) | (1,715 | ) |
|                        |       | 135                                   |       | (473                                | )          | 302 |   | (51 | ) |
| Equity  securities:         |       |                                  |       |                                |       |   |   |   |   |
| Gains                       |       | 415                                   |       | 466                                 |       | 415 |   | 466 |   |
| (Losses)                    |       | (134                                  | )          | (98                                 | )          | (134 | ) | (98 | ) |
|                        |       | 281                                   |       | 368                                 |       | 281 |   | 368 |   |
|                        |       |                                  |       |                                |       |   |   |   |   |
| Net realized  capital gains |       | $                                     | 416        |                                | $          | (105 | ) | $ | 583 |   | $ | 317 |   |

 

The following table details realized lossesin excess of $200,000 from sales and impairments during the first six months of2005 and 2004 and the related circumstances giving rise to the loss:

 
| ** **                                     | ** ** | ** **                | ** ** | ** **    | ** ** | ** **    | ** ** | ** **     | ** ** | ** **             | ** ** | ** **     | ** ** | **# of Months**     | ** ** |
|------------------------------------------------|------------|---------------------------|------------|---------------|------------|---------------|------------|----------------|------------|------------------------|------------|----------------|------------|---------------------|------------|
| ** **                                     | ** ** | ** **                | ** ** | ** **    | ** ** | ** **    | ** ** | ** **     | ** ** | ** **             | ** ** | ** **     | ** ** | **Unrealized Loss** | ** ** |
| ** **                                     | ** ** | ** **                | ** ** | ** **    | ** ** | ** **    | ** ** | ** **     | ** ** | ** **             | ** ** | **Net**        | ** ** | **Exceeded 20%**    | ** ** |
| ** **                                     | ** ** | **Date of**               | ** ** | **Proceeds**  | ** ** | **(Loss) on** | ** ** | ** **     | ** ** | **Holdings at**        | ** ** | **Unrealized** | ** ** | **of Cost or**      | ** ** |
| **Description**                                | ** ** | **Sale**                  | ** ** | **from Sale** | ** ** | **Sale**      | ** ** | **Impairment** | ** ** | **June 30, 2005** | ** ** | **(Loss)**     | ** ** | **Amortized Cost**  | ** ** |
| ** **                                     | ** ** | **($ in thousands)** | ** ** |
| Six months  ended June 30, 2005 and 2004: |       |                      |       |          |       |          |       |           |       |                   |       |           |       |                |       |
|                                           |       |                      |       |          |       |          |       |           |       |                   |       |           |       |                |       |
| None                                           |       |                      |       |          |       |          |       |           |       |                   |       |           |       |                |       |

 

**Reinsurance Recoverables**

 

We utilize reinsurance principally to reduce ourexposure on individual risks, to protect against catastrophic losses, tomaintain desired ratios of net written premium to statutory surplus and tostabilize loss ratios and underwriting results. The purchase of reinsurance does not discharge us, the original insurer,from our primary liability to the policyholder. We are required to pay thelosses even if the reinsurer fails to meet its obligations under thereinsurance agreement.

 

We are protected by various treaty and facultativereinsurance agreements. Our exposure to credit risk from any one reinsurer ismanaged through diversification by reinsuring with a number of differentreinsurers, principally in the United States and European reinsurance markets.To meet our standards of acceptability, when the reinsurance is placed, areinsurer generally must have an A.M. Best Company and/or Standard &Poor’s rating of ‘‘A’’ or better, or equivalent financial strength if notrated, plus at least $250 million in policyholders’ surplus.  Our Reinsurance Security Committee monitors thefinancial strength of our reinsurers and the related reinsurance receivablesand periodically reviews the list of acceptable reinsurers. The reinsurance isplaced either directly by us or through reinsurance intermediaries. Thereinsurance intermediaries are compensated by the reinsurers.

 

48

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The Company was recently advised informally byEquitas, a lead reinsurer participating on excess of loss reinsuranceagreements, that it does not intend to satisfy a loss payment recovery demandthat the Company presented to it on June 1, 2005.  The Company has not yet received a formalwritten response to its demand.  Therecovery is for the 2004 settlement of a class action suit involving a largeasbestos claim (the “Settled Claim”) which settlement is being paid over sevenyears starting in June 2005. Equitas has not indicated any dispute with respect to recoveries onrelated pro rata reinsurance agreements.

 

Equitas also participates as a lead reinsurer inrespect of the Company’s two other large asbestos claims that involve classaction lawsuits.  The Company believes itis likely that Equitas will take a similar position when such claims areeventually settled and presented to Equitas for payment.

 

The aggregate amount of excess of loss recoveriesdue from Equitas on all three of these claims is approximately $9 million, andrepresents approximately 50% of the total excess of loss recoveries for suchclaims.  The Company has not been advisedof any disputes by other excess of loss reinsurers with respect to suchasbestos claims.

 

The Company has filed a demand for arbitrationagainst Equitas in New York with respect to the Settled Claim in accordancewith the applicable provisions of the excess of loss reinsurance agreements.  The Company believes that the refusal ofEquitas to satisfy the Company’s payment demand is without merit and it intendsto vigorously pursue collection of its reinsurance recoveries.   While it is too early to predict with anycertainty the outcome of this matter, the Company believes that the ultimateoutcome would not be expected to have a significant adverse effect on itsresults of operations, financial condition or liquidity, although an unexpectedadverse resolution could have a material adverse effect on the Company’sresults of operations in a particular fiscal quarter or year.

 

An allowance for doubtful recoveries is maintainedfor any amounts considered to be uncollectible. At June 30, 2005 and December 31,2004, we had allowances for uncollectible reinsurance of $32.2 million and$32.4 million, respectively.  Theallowances include $25.7 million for uncollectible reinsurance as a result ofloss reserves established in 2003 for asbestos exposures on marine and aviationbusiness written mostly prior to 1986. Charges (recoveries) for uncollectible reinsurance amounts, all of whichwere recorded to incurred losses, were ($420,000) and ($164,000) for the threemonths ended June 30, 2005 and 2004, respectively, and $613,000 and($281,000) for the six months ended June 30, 2005 and 2004, respectively.

 

The Company continues to periodically monitor thefinancial condition and ongoing activities of its reinsurers, in order toassess the adequacy of its allowance for uncollectible reinsurance.

 

**Liquidityand Capital Resources**

 

Cash flow provided by operations was $115.9 millionand $93.2 million for the six months ended June 30, 2005 and 2004,respectively. The increase in the operating cash flow in the first six monthsof 2005 compared to 2004 was primarily due to the increase in net writtenpremium in combination with the receipt of an $8 million hull loss subrogationrecovery collected on behalf of quota share reinsurers and the $24 million RITCsettlement discussed in *Results of Operations and Overview*.  Operating cash flow was used primarily toacquire additional investment assets.

 

Invested assets and cash increased to $965.0 millionat June 30, 2005 from $854.9 million at December 31, 2004. Theincrease was primarily due to the positive cash flow.  Net investment income was $9.0 million and$6.6 million for the three months ended June 30, 2005 and 2004,respectively, and $16.6 million and $12.5 million for the six months ended June 30,2005 and 2004, respectively.

 

The average yield of the portfolio, excluding netrealized capital gains, was 3.7% at June 30, 2005 compared to 3.5% at June 30,2004, reflecting the prevailing interest rates. As of June 30, 2005 and December 31,2004, all fixed maturity securities and equity securities held by us wereclassified as available-for-sale.

 

49

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At June 30, 2005, the weighted average ratingof our fixed maturity investments was ‘‘AA’’ by Standard & Poor’s and ‘‘Aa’’by Moody’s. We believe that we have no significant exposure to credit risksince the fixed maturity investment portfolio consists of investment-gradebonds. At June 30, 2005, our portfolio had an average maturity of 3.5years and duration of 3.7 years. Management continually monitors the compositionand cash flow of the investment portfolio in order to maintain the appropriatelevels of liquidity to ensure our ability to satisfy claims.

 

We have a credit facility provided through aconsortium of banks.  The creditfacility, which is denominated in U.S. dollars, is utilized primarily byNavigators Corporate Underwriters Ltd. and Millennium Underwriting Ltd. to fundour participation in Lloyd’s Syndicate 1221 which is denominated in Britishpounds.  At June 30, 2005, lettersof credit with an aggregate face amount of $78.4 million were issued under thecredit facility.

 

The credit facility is collateralized by all of thecommon stock of Navigators Insurance Company. The credit agreement contains covenants common to transactions of thistype, including restrictions on indebtedness and liens, limitations on mergersand the sale of assets, maintaining certain consolidated tangible net worth,statutory surplus and other financial ratios. Cash dividends to shareholders are limited to $2.5 million per year.  No dividends have been declared or paidthrough June 30, 2005.  At June 30,2005, we were in compliance with all covenants.

 

The credit facility was amended in January 2005to increase the letters of credit available under the facility from $80 millionto $115 million and to add a $10 million line of credit facility.  The expiration of the credit facility wasalso extended from November 10, 2005 to June 30, 2007.  If at that time the banks do not renew thecredit facility, we will need to find other sources to provide the letters ofcredit or other collateral in order to continue our participation in Syndicate1221.

 

At June 30, 2005, our consolidated stockholders’equity was $352.1 million or $27.55 per share compared to $328.6 million or$25.96 per share at December 31, 2004. The increase was primarily due tonet income of $21.0 million for the six months ended June 30, 2005.

 

Our reinsurance has been placed with various U.S.and foreign insurance companies and with selected syndicates at Lloyd’s.Pursuant to the implementation of Lloyd’s Plan of Reconstruction and Renewal, aportion of our recoverables are now reinsured by Equitas which is a separateUnited Kingdom authorized reinsurance company established to reinsureoutstanding liabilities of all Lloyd’s members for all risks written in the1992 or prior years of account.

 

We primarily rely upon dividends from oursubsidiaries to meet our holding company obligations. The dividends havehistorically come primarily from Navigators Insurance Company. At December 31,2004, the maximum amount available for the payment of dividends by NavigatorsInsurance Company during 2005 without prior regulatory approval was $23.6million.  Navigators Insurance Companypaid $3.0 million of dividends to the Company in the first six months of 2005.

 

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

 

##### **Item 3. Quantitative andQualitative Disclosures About Market Risk**

#####  

There have been no material changes in theinformation concerning market risk as stated in the Company’s 2004 AnnualReport on Form 10-K.

 

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##### **Item 4. Controls and Procedures**

#####  

(a)          The Chief Executive Officer and ChiefFinancial Officer of the Company have evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)), as of the end of the period covered by this quarterly report. Based onsuch evaluation, such officers have concluded that as of the end of such periodthe Company’s disclosure controls and procedures are effective in identifying,on a timely basis, material information required to be disclosed in our reportsfiled or submitted under the Exchange Act.

 

(b)         There have been no changes during our second fiscal quarter in ourinternal control over financial reporting that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

**Part II - Other Information**

 

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

 

Other than as set forth below, the Company isnot a party to, or the subject of, any material legal proceedings which departfrom the ordinary routine litigation incident to the kinds of business itconducts.

 

The Company was recently advised informallyby Equitas, a lead reinsurer participating on excess of loss reinsuranceagreements, that it does not intend to satisfy a loss payment recovery demandthat the Company presented to it on June 1, 2005.  The Company has not yet received a formalwritten response to its demand.  Therecovery is for the 2004 settlement of a class action suit involving a largeasbestos claim (the “Settled Claim”) which settlement is being paid over sevenyears starting in June 2005. Equitas has not indicated any dispute with respect to recoveries onrelated pro rata reinsurance agreements.

 

Equitas also participates as a lead reinsurerin respect of the Company’s two other large asbestos claims that involve classaction lawsuits.  The Company believes itis likely that Equitas will take a similar position when such claims areeventually settled and presented to Equitas for payment.

 

The aggregate amount of excess of lossrecoveries due from Equitas on all three of these claims is approximately $9million, and represents approximately 50% of the total excess of lossrecoveries for such claims.  The Companyhas not been advised of any disputes by other excess of loss reinsurers withrespect to such asbestos claims.

 

The Company has filed a demand forarbitration against Equitas in New York with respect to the Settled Claim inaccordance with the applicable provisions of the excess of loss reinsuranceagreements.  The Company believes thatthe refusal of Equitas to satisfy the Company’s payment demand is without meritand it intends to vigorously pursue collection of its reinsurancerecoveries.   While it is too early topredict with any certainty the outcome of this matter, the Company believesthat the ultimate outcome would not be expected to have a significant adverseeffect on its results of operations, financial condition or liquidity, althoughan unexpected adverse resolution could have a material adverse effect on theCompany’s results of operations in a particular fiscal quarter or year.

 

**Item 2.****                                   UnregisteredSales of Equity Securities and Use of Proceeds**

 

None.

 

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

 

None.

 

**Item 4.****                                   Submissionsof Matters to a Vote of Security Holders**

 

On May 20, 2005, the Company’s stockholdersvoted for the following matters at the annual stockholders’ meeting:

 

a)               The election of nine (9) directors toserve until the 2006 Annual Meeting of Stockholders or until their respectivesuccessors have been duly elected and qualified.  The results of the voting were as follows:

 
| **Name**                     | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|------------------------------|------------|------------|------------|--------------|------------|
|                         |       |       |       |         |       |
| H. J. Mervyn  Blakeney       |       | 11,564,054 |       | 690,571      |       |
| Peter A.  Cheney             |       | 11,564,054 |       | 690,571      |       |
| Terence N.  Deeks            |       | 11,449,170 |       | 805,455      |       |
| Robert W.  Eager, Jr.   |       | 11,564,054 |       | 690,571      |       |
| Stanley A.  Galanski         |       | 11,449,170 |       | 805,455      |       |
| Leandro S.  Galban, Jr. |       | 11,079,053 |       | 1,175,572    |       |
| John F.  Kirby               |       | 11,535,051 |       | 719,574      |       |
| Marc M. Tract                |       | 8,063,566  |       | 4,191,059    |       |
| Robert F.  Wright            |       | 11,307,985 |       | 946,640      |       |

 

b)              The approval ofthe 2005 Stock Incentive Plan, which was approved with 10,378,780 votes for,1,170,549 votes against and 14,860 votes abstaining.

 

c)               The ratificationof the appointment of KPMG LLP as the Company’s independent auditors for 2005,which received 12,223,244 votes for, 29,381 votes against and 2,000 votesabstaining.

 

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

 

None.

 

**Item 6.****                                  ****Exhibits**

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                     | ** ** | ** ** |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                           |       |       |
| 10-1                 |       | Agreement with Elliot S. Orol                                                                                                                                                                                                                                                                                                                                                  |       | *          |
| 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                                                                                                                                                                                                                                                                                                            |       | *          |

 

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|   |   | (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). |   |   |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|

 

----

*                                         *Included herein*.

 

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SIGNATURE

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                             |   | The Navigators Group, Inc. |   |
|----------------------------------|--------|---------------------------------|--------|
|                             |   | (Registrant)                    |   |
|                             |   |                            |
| Date:   August 4, 2005 |   | /s / Paul J. Malvasio           |   |
|                             |   | Paul J. Malvasio                |
|                             |   | Executive Vice President        |
|                             |   | and Chief Financial Officer     |
|                                  |        |                                 |        |  |

 

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**INDEX OF EXHIBITS**

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                      | ** ** | ** ** |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                            |       |       |
| 10-1                 |       | Agreement with Elliot S.  Orol                                                                                                                                                                                                                                                                                                                                                  |       | *          |
| 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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