** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

**FORM 10-Q**

**Quarterly Report Under Section 13or 15(d)**

**of the Securities Exchange Act of 1934**

**For the Quarterly Period Ended March 31, 2007**

**Commission file number 0-15886**

**TheNavigators Group, Inc.**

(Exact name ofRegistrant 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, including area code)

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

Indicate by check mark whether the Registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes    x         No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check One):

| Large Accelerated Filer  o | Accelerated  Filer   x | Non-Accelerated  Filer  o |   |
|--------------------------------------|----------------------------------|-------------------------------------|--------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  Yes    o     No   x

The number of common shares outstanding as of April23, 2007 was 16,782,380.

 

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**THENAVIGATORS GROUP, INC. AND SUBSIDIARIES**

**INDEX**
|                                                                                                          | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------|------------|
| Part  I. FINANCIAL INFORMATION:                                                                          |       |       |       |
|                                                                                                     |       |       |       |
| Item  1. Financial Statements                                                                            |       |       |       |
|                                                                                                     |       |       |       |
| Consolidated  Balance Sheets  March 31, 2007 (Unaudited) and December 31, 2006                           |       |       |       |
|                                                                                                     |       |       |       |
| Consolidated Statements of Income (Unaudited)  Three Months Ended March 31, 2007 and 2006                |       |       |       |
|                                                                                                     |       |       |       |
| Consolidated Statements of Stockholders’ Equity  (Unaudited)  March 31, 2007 and 2006               |       |       |       |
|                                                                                                     |       |       |       |
| Consolidated Statements of Comprehensive Income  (Unaudited)  Three Months Ended March 31, 2007 and 2006 |       |       |       |
|                                                                                                     |       |       |       |
| Consolidated Statements of Cash Flows (Unaudited)  Three Months Ended March 31, 2007 and 2006            |       |       |       |
|                                                                                                     |       |       |       |
| 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  1A. Risk Factors                                                                                   |       |       |       |
|                                                                                                     |       |       |       |
| 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                                                                                        |       |       |       |
|                                                                                                     |       |       |       |
| Signature                                                                                                |       |       |       |
|                                                                                                     |       |       |       |
| Index of  Exhibits                                                                                       |       |       |       |

 

2

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**Part 1. Financial Information**

##### **Item 1.        FinancialStatements**

**THE NAVIGATORS GROUP, INC. ANDSUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

*($ inthousands, except share data)*

 
| ** **                                                                                                                                                          | ** **   | **March 31,** | ** **   | **December 31,** | ** **   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|--------------------|--------------|-----------------------|--------------|
| ** **                                                                                                                                                          | ** **   | **2007**           | ** **   | **2006**              | ** **   |
| **ASSETS**                                                                                                                                                          | *** *** | **(Unaudited)**    | *** *** | *** ***          | *** *** |
| Investments and cash:                                                                                                                                               |         |               |         |                  |         |
|                                                                                                                                                                |         |               |         |                  |         |
| Fixed  maturities, available-for-sale, at fair value (amortized cost: 2007,  $1,331,069; 2006, $1,263,284)                                                          |         | $                  | 1,328,824    |                  | $            | 1,258,717 |   |
| Equity  securities, available-for-sale, at fair value (cost: 2007, $39,484; 2006,  $31,879)                                                                         |         | 45,380             |         | 37,828                |         |
| Short-term  investments, at cost which approximates fair value                                                                                                      |         | 130,202            |         | 176,961               |         |
| Cash                                                                                                                                                                |         | 1,628              |         | 2,404                 |         |
| Total  investments and cash                                                                                                                                         |         | 1,506,034          |         | 1,475,910             |         |
|                                                                                                                                                                |         |               |         |                  |         |
| Premiums in course of  collection                                                                                                                                   |         | 225,797            |         | 163,309               |         |
| Commissions receivable                                                                                                                                              |         | 3,351              |         | 3,647                 |         |
| Prepaid reinsurance  premiums                                                                                                                                       |         | 199,544            |         | 179,493               |         |
| Reinsurance receivable  on paid losses                                                                                                                              |         | 131,336            |         | 108,878               |         |
| Reinsurance receivable  on unpaid losses and loss adjustment expenses                                                                                               |         | 872,436            |         | 911,439               |         |
| Net deferred income tax  benefit                                                                                                                                    |         | 29,502             |         | 30,422                |         |
| Deferred policy  acquisition costs                                                                                                                                  |         | 53,733             |         | 41,700                |         |
| Accrued investment  income                                                                                                                                          |         | 13,348             |         | 13,052                |         |
| Goodwill and other  intangible assets                                                                                                                               |         | 8,040              |         | 8,012                 |         |
| Other assets                                                                                                                                                        |         | 22,740             |         | 20,824                |         |
|                                                                                                                                                                |         |               |         |                  |         |
| Total assets                                                                                                                                                        |         | $                  | 3,065,861    |                  | $            | 2,956,686 |   |
|                                                                                                                                                                |         |               |         |                  |         |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                      | ** **   | ** **         | ** **   | ** **            | ** **   |
| Liabilities:                                                                                                                                                        |         |               |         |                  |         |
| Reserves for  losses and loss adjustment expenses                                                                                                                   |         | $                  | 1,606,283    |                  | $            | 1,607,555 |   |
| Unearned premium                                                                                                                                                    |         | 469,269            |         | 415,096               |         |
| Reinsurance  balances payable                                                                                                                                       |         | 203,185            |         | 194,266               |         |
| Senior notes                                                                                                                                                        |         | 123,587            |         | 123,560               |         |
| Federal income  tax payable                                                                                                                                         |         | 11,394             |         | 3,934                 |         |
| Payable for  securities purchased                                                                                                                                   |         | 9,089              |         | 166                   |         |
| Accounts payable  and other liabilities                                                                                                                             |         | 68,687             |         | 60,766                |         |
| Total  liabilities                                                                                                                                                  |         | 2,491,494          |         | 2,405,343             |         |
|                                                                                                                                                                |         |               |         |                  |         |
| Stockholders’ equity:                                                                                                                                          |         |               |         |                  |         |
| Preferred stock,  $.10 par value, authorized 1,000,000 shares, none issued                                                                                          |         | —             |         | —                |         |
| Common stock,  $.10 par value, shares authorized: 50,000,000 for 2007 and 50,000,000 for  2006; issued and outstanding: 16,781,583 for 2007 and 16,735,898 for 2006 |         | 1,678              |         | 1,674                 |         |
| Additional  paid-in capital                                                                                                                                         |         | 288,479            |         | 286,732               |         |
| Retained earnings                                                                                                                                                   |         | 279,136            |         | 259,464               |         |
| Accumulated  other comprehensive income                                                                                                                             |         | 5,074              |         | 3,473                 |         |
| Total  stockholders’ equity                                                                                                                                    |         | 574,367            |         | 551,343               |         |
|                                                                                                                                                                |         |               |         |                  |         |
| Total liabilities and  stockholders’ equity                                                                                                                    |         | $                  | 3,065,861    |                  | $            | 2,956,686 |   |

 

See accompanying notes tointerim consolidated financial statements

3

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**THE NAVIGATORS GROUP, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME**

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

** **
| ** **                                       | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | **March 31,**               | ** ** |
| ** **                                       | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                       | ** ** | **(Unaudited)**                  | ** ** |
|                                             | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Gross written  premium                           |       | $                                | 300,861    |   | $ | 263,784 |   |
| Revenues                                         |       |                             |       |   |   |
| Net written premium                              |       | $                                | 173,019    |   | 143,426 |   |
| (Increase) in unearned premium                   |       | (33,973                          | )          | (39,704 | ) |
| Net earned premium                               |       | 139,046                          |       | 103,722 |   |
| Commission income                                |       | 408                              |       | 1,286 |   |
| Net investment income                            |       | 16,216                           |       | 12,550 |   |
| Net realized capital gains (losses)              |       | 201                              |       | (424 | ) |
| Other income (expense)                           |       | (71                              | )          | 186 |   |
| Total revenues                                   |       | 155,800                          |       | 117,320 |   |
|                                             |       |                             |       |   |   |
| Operating  expenses:                             |       |                             |       |   |   |
| Net losses and loss adjustment expenses incurred |       | 81,192                           |       | 62,117 |   |
| Commission expense                               |       | 17,099                           |       | 13,705 |   |
| Other operating expenses                         |       | 26,289                           |       | 18,408 |   |
| Interest expense                                 |       | 2,215                            |       | — |   |
| Total operating expenses                         |       | 126,795                          |       | 94,230 |   |
|                                             |       |                             |       |   |   |
| Income before  income tax expense (benefit)      |       | 29,005                           |       | 23,090 |   |
|                                             |       |                             |       |   |   |
| Income tax  expense (benefit):                   |       |                             |       |   |   |
| Current                                          |       | 9,276                            |       | 9,332 |   |
| Deferred                                         |       | 57                               |       | (1,767 | ) |
| Total income tax expense                         |       | 9,333                            |       | 7,565 |   |
|                                             |       |                             |       |   |   |
| Net income                                       |       | $                                | 19,672     |   | $ | 15,525 |   |
|                                             |       |                             |       |   |   |
| Net income per  common share:                    |       |                             |       |   |   |
| Basic                                            |       | $                                | 1.17       |   | $ | 0.93 |   |
| Diluted                                          |       | $                                | 1.17       |   | $ | 0.93 |   |
|                                             |       |                             |       |   |   |
| Average common  shares outstanding:              |       |                             |       |   |   |
| Basic                                            |       | 16,756                           |       | 16,639 |   |
| Diluted                                          |       | 16,884                           |       | 16,757 |   |

 

See accompanyingnotes to interim consolidated financial statements.

 

4

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**THE NAVIGATORS GROUP, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY***($ in thousands)*
| ** **                                               | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **March 31,**               | ** ** |
| ** **                                               | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                               | ** ** | **(Unaudited)**                  | ** ** |
| Preferred Stock                                          |       |                             |       |   |   |
| Balance at  beginning and end of period                  |       | $                                | —     |   | $ | — |   |
|                                                     |       |                             |       |   |   |
| Common stock                                             |       |                             |       |   |   |
| Balance at  beginning of year                            |       | $                                | 1,674      |   | $ | 1,662 |   |
| Shares issued  under stock plans                         |       | 4                                |       | 5 |   |
| Balance at end  of period                                |       | $                                | 1,678      |   | $ | 1,667 |   |
|                                                     |       |                             |       |   |   |
| Additional paid-in  capital                              |       |                             |       |   |   |
| Balance at  beginning of year                            |       | $                                | 286,732    |   | $ | 282,463 |   |
| Effect of SFAS  123 for stock options                    |       | 159                              |       | 240 |   |
| Shares issued  under stock plans                         |       | 1,588                            |       | 1,396 |   |
| Balance at end  of period                                |       | $                                | 288,479    |   | $ | 284,099 |   |
|                                                     |       |                             |       |   |   |
| Retained earnings                                        |       |                             |       |   |   |
| Balance at  beginning of year                            |       | $                                | 259,464    |   | $ | 186,901 |   |
| Net income                                               |       | 19,672                           |       | 15,525 |   |
| Balance at end  of period                                |       | $                                | 279,136    |   | $ | 202,426 |   |
|                                                     |       |                             |       |   |   |
| Accumulated other  comprehensive income (loss)           |       |                             |       |   |   |
| Net unrealized  gains (losses) on securities, net of tax |       |                             |       |   |   |
| Balance at  beginning of year                            |       | $                                | 849        |   | $ | (884 | ) |
| Change in period                                         |       | 1,496                            |       | (9,330 | ) |
| Balance at end  of period                                |       | 2,345                            |       | (10,214 | ) |
| Cumulative  translation adjustments, net of tax          |       |                             |       |   |   |
| Balance at  beginning of year                            |       | 2,624                            |       | 96 |   |
| Net adjustment  for period                               |       | 105                              |       | 242 |   |
| Balance at end  of period                                |       | 2,729                            |       | 338 |   |
| Balance at end  of period                                |       | $                                | 5,074      |   | $ | (9,876 | ) |
|                                                     |       |                             |       |   |   |
|                                                     |       |                             |       |   |   |
| Total stockholders’  equity at end of period        |       | $                                | 574,367    |   | $ | 478,316 |   |

 

See accompanying notes to interim consolidated financial statements.

5

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**THE NAVIGATORS GROUP, INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME***($ in thousands)*
| ** **                                                                                                                                    | ** **                                                                       | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------|----------------------------------|------------|
| ** **                                                                                                                                    | ** **                                                                       | **March 31,**               | ** ** |
| ** **                                                                                                                                    | ** **                                                                       | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                                                                                                                    | ** **                                                                       | **(Unaudited)**                  | ** ** |
|                                                                                                                                          |                                                                             |                             |       |   |   |
| Net income                                                                                                                                    |                                                                             | $                                | 19,672     |   | $ | 15,525 |   |
| Other  comprehensive income (loss):                                                                                                           |                                                                             |                             |       |   |   |
| Change in net  unrealized gains (losses) on securities,  net of tax expense (benefit) of $771 and  ($5,024) in 2007 and 2006, respectively(1) |                                                                             | 1,496                            |       | (9,330 | ) |
| Change in  foreign currency translation gains,  net of tax expense of $56 and $130  in 2006 and 2005, respectively                            |                                                                             | 105                              |       | 242 |   |
| Other  comprehensive income (loss)                                                                                                            |                                                                             | 1,601                            |       | (9,088 | ) |
|                                                                                                                                          |                                                                             |                             |       |   |   |
| Comprehensive Income                                                                                                                          |                                                                             | $                                | 21,273     |   | $ | 6,437 |   |
|                                                                                                                                          |                                                                             |                             |       |   |   |
|                                                                                                                                          |                                                                             |                             |       |   |   |   |
|                                                                                                                                          |                                                                             |                             |       |   |   |
| (1)                                                                                                                                           | Disclosure of reclassification amount, net of tax:                               |                             |       |   |   |   |
|                                                                                                                                          | Unrealized holding gains (losses) arising during  period                         |                             | $     | 1,625 |   | $  | (9,606 | ) |
|                                                                                                                                          | Less: reclassification adjustment for net gains  (losses) included in net income |                             | 129        |   | (276 | ) |
|                                                                                                                                          | Change in net unrealized gains (losses) on  securities                           |                             | $          | 1,496 |   | $ | (9,330 | ) |
|                                                                                                                                               |                                                                                  |                                  |            |  |  |  |  |  |  |

 

See accompanying notes to interim consolidated financial statements.

6

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**THE NAVIGATORS GROUP, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS***($ in thousands)*
| ** **                                                                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                   | ** ** | **March 31,**               | ** ** |
| ** **                                                                                   | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                                                                   | ** ** | **(Unaudited)**                  | ** ** |
| Operating  activities:                                                                       |       |                             |       |   |   |
| Net income                                                                                   |       | $                                | 19,672     |   | $ | 15,525 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                             |       |   |   |
| Depreciation & amortization                                                              |       | 703                              |       | 1,199 |   |
| Net deferred income tax expense (benefit)                                                    |       | 57                               |       | (1,767 | ) |
| Net realized capital (gains) losses                                                          |       | (201                             | )          | 424 |   |
| Changes in assets and liabilities:                                                           |       |                             |       |   |   |
| Reinsurance receivable on paid and unpaid losses and  loss adjustment expenses               |       | 18,344                           |       | (25,810 | ) |
| Reserve for losses and loss adjustment expenses                                              |       | (3,699                           | )          | 44,092 |   |
| Prepaid reinsurance premiums                                                                 |       | (19,719                          | )          | (31,479 | ) |
| Unearned premium                                                                             |       | 53,426                           |       | 70,788 |   |
| Premiums in course of collection                                                             |       | (61,862                          | )          | (53,362 | ) |
| Commissions receivable                                                                       |       | 298                              |       | 9 |   |
| Deferred policy acquisition costs                                                            |       | (11,884                          | )          | (14,460 | ) |
| Accrued investment income                                                                    |       | (290                             | )          | (242 | ) |
| Reinsurance balances payable                                                                 |       | 8,347                            |       | 11,932 |   |
| Federal income tax                                                                           |       | 7,400                            |       | 5,470 |   |
| Other                                                                                        |       | 9,486                            |       | 6,318 |   |
| Net cash provided by operating activities                                                    |       | 20,078                           |       | 28,637 |   |
|                                                                                         |       |                             |       |   |   |
| Investing  activities:                                                                       |       |                             |       |   |   |
| Fixed maturities, available-for-sale                                                         |       |                             |       |   |   |
| Redemptions and maturities                                                                   |       | 50,738                           |       | 3,069 |   |
| Sales                                                                                        |       | 55,680                           |       | 74,850 |   |
| Purchases                                                                                    |       | (174,445                         | )          | (131,221 | ) |
| Equity securities, available-for-sale                                                        |       |                             |       |   |   |
| Sales                                                                                        |       | 4,464                            |       | 2,205 |   |
| Purchases                                                                                    |       | (11,877                          | )          | (5,762 | ) |
| Change in payable for securities                                                             |       | 8,863                            |       | (2,685 | ) |
| Net change in short-term investments                                                         |       | 47,079                           |       | 32,108 |   |
| Purchase of property and equipment                                                           |       | (1,898                           | )          | (878 | ) |
| Net cash (used in) investing activities                                                      |       | (21,396                          | )          | (28,314 | ) |
|                                                                                         |       |                             |       |   |   |
| Financing  activities:                                                                       |       |                             |       |   |   |
| Proceeds of stock issued from employee stock  purchase plan                                  |       | 301                              |       | 222 |   |
| Proceeds of stock issued from exercise of stock  options                                     |       | 241                              |       | 353 |   |
| Net cash provided by financing activities                                                    |       | 542                              |       | 575 |   |
|                                                                                         |       |                             |       |   |   |
| Effect of  exchange rate changes on foreign currency cash                                    |       | —                           |       | 6 |   |
| Increase  (decrease) in cash                                                                 |       | (776                             | )          | 904 |   |
| Cash at  beginning of year                                                                   |       | 2,404                            |       | 13,165 |   |
| Cash at end of  period                                                                       |       | $                                | 1,628      |   | $ | 14,069 |   |
|                                                                                         |       |                             |       |   |   |
| Supplemental  disclosures of cash flow information:                                          |       |                             |       |   |   |
| Federal, state and local income tax paid                                                     |       | $                                | 1,712      |   | $ | 3,256 |   |
| Issuance of  stock to directors                                                              |       | 181                              |       | 140 |   |

 

See accompanying notes to interim consolidatedfinancial statements.

7

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**THE NAVIGATORSGROUP, INC.  AND SUBSIDIARIESNotes to Interim Consolidated Financial Statements***(Unaudited)*

**Note 1. Accounting Policies**

The interim consolidatedfinancial statements are unaudited but reflect all adjustments which, in theopinion of management, are necessary to provide a fair statement of the resultsof The Navigators Group, Inc. and its subsidiaries for the interim periodspresented on the basis of accounting principles generally accepted in theUnited 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 2006 Annual Report on Form 10-K.  Certain amounts for the prior year have beenreclassified or restated to conform to the current year’s presentation.

**Note 2. Reinsurance Ceded**

The Company’s cededearned premiums were $107.9 million and $88.9 million for the three monthsended March 31, 2007 and 2006, respectively. The Company’s ceded incurred losses were $63.6 million and $63.1 millionfor the three months ended March 31, 2007 and 2006, respectively.

**Note 3. Segment Information**

The Company’ssubsidiaries are primarily engaged in the underwriting and management ofproperty and casualty insurance.

The Company classifiesits business into two underwriting segments consisting of the InsuranceCompanies and the Lloyd’s Operations, which are separately managed, and aCorporate segment.  Segment data for eachof the two underwriting segments include allocations of revenues and expensesof the Navigators Agencies’ and Parent Company’s expenses and related incometax amounts.

We evaluate the performance of each segment based on its underwritingand net income results.  The InsuranceCompanies’ and the Lloyd’s Operations’ results are measured by taking intoaccount net earned premiums, incurred losses and loss adjustment expenses,commission expense and other underwriting expenses.  The Corporate segment consists of theParent Company’s investment income, interest expense and the related taxeffect.  Each segment also maintains its own investments, on which it earnsincome and realizes capital gains or losses. Our underwriting performance is evaluated separately from theperformance of our investment portfolios.

OurInsurance Companies consist of Navigators Insurance Company, including itsUnited Kingdom Branch (the U.K. Branch), and Navigators Specialty InsuranceCompany (formerly NIC Insurance Company). Navigators Insurance Company is our largest insurance subsidiary and hasbeen active since 1983. It specializes principally in underwriting marineinsurance and related lines of business, specialty liability insurance andprofessional liability insurance. Navigators Specialty Insurance Company, awholly owned subsidiary of Navigators Insurance Company, began operations in1990. It underwrites specialty and professional liability insurance on anexcess and surplus lines basis fully reinsured by Navigators Insurance Company.  The Lloyd’s

8

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Operations primarilyunderwrite marine and related lines of business at Lloyd’s of London (“Lloyd’s”) through Lloyd’s Syndicate1221 (“Syndicate 1221”).  Our Lloyd’s Operations include NavigatorsUnderwriting Agency Ltd. (“NUAL”), a Lloyd’s underwriting agency which managesSyndicate 1221.  We participate in thecapacity of Syndicate 1221 through two wholly-owned Lloyd’s corporatemembers.  The Navigators Agenciesare wholly-owned insurance underwriting management companies which produce,manage and underwrite insurance and reinsurance for the Company.  All segments are evaluated based on theirGAAP results.

The Insurance Companies’and the Lloyd’s Operations’ underwriting results are measured based onunderwriting profit or loss and the related combined ratio, which are bothnon-GAAP measures of underwriting profitability.  Underwriting profit or loss is calculatedfrom net earned premiums, less net losses and LAE, commission expense and otheroperating expenses related to underwriting activities.  The combined ratio is derived by taking suchnet losses and LAE and operating expenses divided by net earned premiums.  A combined ratio of less than 100% indicatesan underwriting profit and over 100% indicates an underwriting loss.

Financialdata by segment for the three months ended March 31, 2007 and 2006 were asfollows:
| ** **                                    | ** ** | **Three Months Ended March 31, 2007** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Insurance**                                                  | ** ** | **Lloyd’s** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Companies**                                                  | ** ** | **Operations** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                    | ** ** | **($ in thousands)**                                 | ** ** |
| ** **                                    | * *   | * *                                                       | * *   | * * | * * | * * | * * | * * | * * |
| Gross written  premium                        |       | $                                                              | 208,874    |   | $ | 91,987 |   |   |   | $ | 300,861 |   |
| Net written  premium                          |       | 122,048                                                        |       | 50,971 |   |   |   | 173,019 |   |
|                                          |       |                                                           |       |   |   |   |   |   |   |
| Net earned  premium                           |       | 101,812                                                        |       | 37,234 |   |   |   | 139,046 |   |
| Net losses and  loss adjustment expenses      |       | (61,340                                                        | )          | (19,852 | ) |   |   | (81,192 | ) |
| Commission  expense                           |       | (11,083                                                        | )          | (6,016 | ) |   |   | (17,099 | ) |
| Other operating  expenses                     |       | (18,769                                                        | )          | (7,520 | ) |   |   | (26,289 | ) |
| Commission  income and other income (expense) |       | 489                                                            |       | (152 | ) |   |   | 337 |   |
|                                          |       |                                                           |       |   |   |   |   |   |   |
| Underwriting  profit                          |       | 11,109                                                         |       | 3,694 |   |   |   | 14,803 |   |
|                                          |       |                                                           |       |   |   |   |   |   |   |
| Investment  income                            |       | 13,654                                                         |       | 2,151 |   | $ | 411 |   | 16,216 |   |
| Net realized  capital gains (losses)          |       | 243                                                            |       | (42 | ) | — |   | 201 |   |
| Interest expense                              |       | —                                                         |       | — |   | (2,215 | ) | (2,215 | ) |
| Income (loss)  before income taxes            |       | 25,006                                                         |       | 5,803 |   | (1,804 | ) | 29,005 |   |
|                                          |       |                                                           |       |   |   |   |   |   |   |
| Income tax  expense (benefit)                 |       | 7,911                                                          |       | 2,054 |   | (632 | ) | 9,333 |   |
| Net income  (loss)                            |       | $                                                              | 17,095     |   | $ | 3,749 |   | $ | (1,172 | ) | $ | 19,672 |   |
|                                          |       |                                                           |       |   |   |   |   |   |   |
| Identifiable  assets(1)                       |       | $                                                              | 2,166,439  |   | $ | 828,689 |   | $ | 65,240 |   | $ | 3,065,861 |   |
|                                          |       |                                                           |       |   |   |   |   |   |   |
| Loss and loss  expenses ratio                 |       | 60.2                                                           | %          | 53.3 | % |   |   | 58.4 | % |
| Commission  expense ratio                     |       | 10.9                                                           | %          | 16.2 | % |   |   | 12.3 | % |
| Other operating  expense ratio(2)             |       | 18.0                                                           | %          | 20.6 | % |   |   | 18.7 | % |
| Combined ratio                                |       | 89.1                                                           | %          | 90.1 | % |   |   | 89.4 | % |

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(1)             Includesinter-segment transactions causing the row not to crossfoot.

(2)             Includes*other operating expenses*and*commission income and other income (expense)*.

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| ** **                                    | ** ** | **Three Months Ended March 31, 2006** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Insurance**                                                  | ** ** | **Lloyd’s** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Companies**                                                  | ** ** | **Operations** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                    | ** ** | **($ in thousands)**                                 | ** ** |
| ** **                                    | ** ** | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross written  premium(1)                     |       | $                                                              | 162,247    |   | $ | 101,748 |   |   |   | $ | 263,784 |   |
| Net written  premium                          |       | 89,644                                                         |       | 53,782 |   |   |   | 143,426 |   |
|                                          |       |                                                           |       |   |   |   |   |   |   |
| Net earned  premium                           |       | 67,352                                                         |       | 36,370 |   |   |   | 103,722 |   |
| Net losses and  loss adjustment expenses      |       | (39,954                                                        | )          | (22,163 | ) |   |   | (62,117 | ) |
| Commission  expense                           |       | (7,124                                                         | )          | (6,581 | ) |   |   | (13,705 | ) |
| Other operating  expenses                     |       | (13,433                                                        | )          | (4,975 | ) |   |   | (18,408 | ) |
| Commission  income and other income (expense) |       | 1,206                                                          |       | 266 |   |   |   | 1,472 |   |
|                                          |       |                                                           |       |   |   |   |   |   |   |
| Underwriting  profit                          |       | 8,047                                                          |       | 2,917 |   |   |   | 10,964 |   |
|                                          |       |                                                           |       |   |   |   |   |   |   |
| Investment  income                            |       | 10,410                                                         |       | 2,007 |   | $ | 133 |   | 12,550 |   |
| Net realized  capital (losses)                |       | (75                                                            | )          | (349 | ) | — |   | (424 | ) |
| Income before  income taxes                   |       | 18,382                                                         |       | 4,575 |   | 133 |   | 23,090 |   |
|                                          |       |                                                           |       |   |   |   |   |   |   |
| Income tax  expense                           |       | 5,916                                                          |       | 1,601 |   | 48 |   | 7,565 |   |
| Net income                                    |       | $                                                              | 12,466     |   | $ | 2,974 |   | $ | 85 |   | $ | 15,525 |   |
|                                          |       |                                                           |       |   |   |   |   |   |   |
| Identifiable  assets(1)                       |       | $                                                              | 1,867,521  |   | $ | 848,132 |   | $ | 24,529 |   | $ | 2,740,313 |   |
|                                          |       |                                                           |       |   |   |   |   |   |   |
| Loss and loss  expenses ratio                 |       | 59.3                                                           | %          | 60.9 | % |   |   | 59.9 | % |
| Commission  expense ratio                     |       | 10.6                                                           | %          | 18.1 | % |   |   | 13.2 | % |
| Other operating  expense ratio(2)             |       | 18.2                                                           | %          | 13.0 | % |   |   | 16.3 | % |
| Combined ratio                                |       | 88.1                                                           | %          | 92.0 | % |   |   | 89.4 | % |

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(1)             Includesinter-segment transactions causing the row not to crossfoot.

(2)             Includes*other operating expenses* and *commission income and other income (expense)*.

The Insurance Companies’ net earned premium includes$15.4 million and $8.2 million of net earned premium from the U.K. Branch forthe three months ended March 31, 2007 and 2006, respectively.

**Note4.  Comprehensive Income**

Comprehensiveincome encompasses net income, net unrealized capital gains and losses onavailable for sale securities, and foreign currency translation adjustments,all of which are net of tax.  Pleaserefer to the *Consolidated Statements of Stockholders’Equity* and the *Consolidated Statements ofComprehensive Income*, included herein, for the components of *accumulated other comprehensive income (loss)* and of *comprehensive income (loss)*, respectively.

**Note5.  Stock-Based Compensation**

Stockbased compensation 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 $1.2 million and $422,000 for the three months ended March31, 2007 and 2006, respectively.  Theamount charged to

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expense for stockoptions was $159,000 and $240,000 for the three months ended March 31, 2007 and2006, respectively.  Stock appreciationrights resulted in an expense of $251,000 and $829,000 for the three monthsended March 31, 2007 and 2006.

Inaddition, $50,000 and $35,000 was expensed in each of the three month periodsended March 31, 2007 and 2006 for stock issued annually to non-employeedirectors as part of their directors’ compensation for serving on the Company’sBoard of Directors.

**Note6.  Application of New AccountingStandards**

InFebruary 2006, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 155, *Accounting for Certain Hybrid Financial Instruments*.  SFAS No. 155 amends SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*,and SFAS No. 140, *Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities*, and allows anentity to remeasure at fair value a hybrid financial instrument that containsan embedded derivative that otherwise would require bifurcation from the host,if the holder irrevocably elects to account for the whole instrument on a fairvalue basis. Subsequent changes in the fair value of the instrument would berecognized in earnings. SFAS No. 133 also removed an exception included in aninterpretation of SFAS No. 133 (Implementation Issue No. B39) that kept holdersof mortgage-backed securities from testing for the need to bifurcate the valueembedded in mortgage-backed securities related to the ability to prepay.  Such exception was subsequentlyreinstated.  SFAS 155 is effective forfinancial instruments acquired or issued after the beginning of an entity’sfirst fiscal year that begins after September 15, 2006.  The Company’s adoption of SFAS No. 155 atJanuary 1, 2007 did not have a material effect on its financial condition orresults of operations.

InJuly 2006, the FASB issued Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes* (“FIN 48”), an interpretation ofFASB Statement No. 109.  FIN 48, whichbecomes effective in the first quarter of 2007, establishes the threshold forrecognizing the benefits of tax-return positions in the financial statements asmore-likely-than-not to be sustained by the taxing authorities, and prescribesa measurement methodology for those positions meeting the recognitionthreshold. The Company’s adoption of FIN 48 at January 1, 2007 did not have amaterial effect on its financial condition or results of operations.

InSeptember 2006, the FASB issued SFAS No. 157, *Fair ValueMeasurements*. SFAS No. 157 defines fair value, establishes aframework for measuring fair value in GAAP, and enhances disclosures about fairvalue measurements. SFAS No. 157, which becomes effective in the first quarterof 2008, applies when other accounting pronouncements require fair valuemeasurements; it does not require new fair value measurements. The Company hasnot yet determined the estimated impact on its financial condition or resultsof operations, if any, of adopting SFAS No. 157.

InFebruary 2007, the FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities*, whichpermits entities to choose to measure many financial instruments and certainwarranty and insurance contracts at fair value on a contract-by-contractbasis.  SFAS No. 159 is effective as ofthe beginning of an entity’s first fiscal year that begins after November 15,2007 (January 1, 2008 for calendar-year-end companies).  The Company has not yet determined theestimated impact on its financial condition or results of operations, if any,of adopting SFAS No. 159.

**Note7.  Lloyd’s Syndicate**

Werecord our pro rata share of 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.  These adjustmentsto losses are based on actuarial analysis of syndicate accounts, including

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forecasts of expected ultimate losses provided by Syndicate 1221.  At theend of the Lloyd’s three year period for determining underwriting results foran account year, Syndicate 1221 will close the account year by reinsuringoutstanding claims on that account year with the participants for the account’snext underwriting year.  The amount toclose an underwriting year into the next year is referred to as the “reinsuranceto close”.  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 toclose transaction.

Syndicate1221’s stamp capacity is £140 million ($274 million) in 2007 compared to £123million ($226 million) in 2006.  Stampcapacity is a measure of the amount of premium a Lloyd’s syndicate isauthorized to write based on a business plan approved by the Council of Lloyd’s.  Syndicate 1221’s capacity is expressed net ofcommission (as is standard at Lloyd’s) of approximately 22.5% for the 2007underwriting year and 21% for the 2006 underwriting year.  The Syndicate 1221 premium recorded in theCompany’s financial statements is gross of commission.  The Company participates for 100% ofSyndicate 1221’s capacity for both the 2007 and 2006 underwriting years.  The Lloyd’s Operations included in theconsolidated financial statements represent the Company’s participation inSyndicate 1221.

TheCompany provides letters of credit to Lloyd’s to support its Syndicate 1221capacity.  If the Company increases itsparticipation or if Lloyd’s changes the capital requirements, the Company maybe required to supply additional letters of credit or other collateralacceptable to Lloyd’s, or reduce the capacity of Syndicate 1221.  The letters of credit are provided through acredit facility with a consortium of banks which expires March 31, 2009.  If the banks decide not to renew the creditfacility, the Company will need to find other sources to provide the letters ofcredit or other collateral in order to continue to participate in Syndicate1221.  The bank facility iscollateralized by all of the common stock of Navigators Insurance Company.

**Note 8. Income Taxes**

Weare subject to the tax regulations of the United States and foreign countriesin which we operate.  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.  Lloyd’s is required topay U.S. income tax on U.S. connected income (U.S. source income) written byLloyd’s syndicates. Lloyd’s and the IRS have entered into an agreement wherebythe amount of tax due on U.S. connected income is calculated by Lloyd’s andremitted directly to the IRS.  Theseamounts are then charged to the corporate members in proportion to theirparticipation in the relevant syndicates. The Company’s corporate members aresubject to this agreement and will receive United Kingdom (“U.K.”) tax creditsfor any U.S. income tax incurred up to the U.K. income tax charged on the U.S.income.  The non-U.S. connected insuranceincome would generally constitute taxable income under the Subpart F incomesection of the Internal Revenue Code since less than 50% of Syndicate 1221’spremium is derived within the U.K. and would therefore be subject to U.S.taxation when the Lloyd’s year of account closes.  Taxes are accrued at a 35% rate on ourforeign source insurance income and foreign tax credits, where available, areutilized to offset U.S. tax as permitted. The Company’s effective tax rate for Syndicate 1221 taxable income couldsubstantially exceed 35% to the extent the Company is unable to offset U.S.taxes paid under Subpart F tax regulations with U.K. tax credits on futureunderwriting year distributions.  U.S.taxes are not accrued on the earnings of the Company’s foreign agencies asthese earnings are not subject to the Subpart F tax regulations.  These earnings are subject to taxes under U.K.tax regulations at a 30% rate.

As discussed in Note 6 to these Notes to InterimConsolidated Financial Statements, the Company adopted FIN 48 on January 1,2007.  FIN 48 applies to all taxpositions accounted for under SFAS 109, *Accountingfor Income Taxes*.  FIN 48 defines the confidence level that atax position must meet in order to be recognized in the financialstatements.  The tax position must be more-likely-than-not to be sustainedby the relevant taxing authority which means a likelihood of morethan 50%.  If the more-likely-than-not threshold can not be reached, thebenefit should not be reflected in the financial statements.  However, acompany should

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recognize the largest amount of the tax benefit that has a greater than50% likelihood of being realized upon ultimate settlement with the taxingauthorities.  The determination of the 50% threshold is highly judgmentaland depends on the individual facts and circumstances.  A tax benefit takenin the tax return but not in the financial statements is known as an ‘unrecognizedtax benefit’.  The Company had nounrecognized tax benefits at either January 1, 2007 or at March 31, 2007 anddoes not anticipate any significant unrecognized tax benefits within the nexttwelve months.

TheCompany is currently not under examination by any major U.S. or foreign taxauthority and is generally subject to U.S. Federal, state, local, or foreigntax examinations by tax authorities for years 2003 and subsequent. The Company’spolicy is to record interest and penalties related to unrecognized tax benefitsto income tax expense.  During the threemonths ended March 31, 2007 and 2006, the Company did not incur any interest orpenalties related to unrecognized tax benefits.

TheCompany had state and local operating loss carryforwards amounting to potentialfuture tax benefits of $6.8 million and $6.0 million at March 31, 2007 andDecember 31, 2006, respectively.  Avaluation allowance was established for the full amount of these potentialfuture tax benefits due to the uncertainty associated with their realization.

**Note 9. Commitments and Contingencies**

a).  Except as follows, the Company is not a partyto, or the subject of, any material legal proceedings which depart from theordinary routine litigation incident to the kinds of business it conducts.

Atthe end of April 2006, the Company was served as a defendant in an action inthe United States District Court for the Northern District of Georgia captioned*New Cingular Wireless Headquarters, LLC, et al. v.Marsh & McLennan Companies, Inc., et al.*, along withapproximately 100 other defendants.  OnMay 31, 2006, this action, which involved allegations of contingent commissionsand bid-rigging in the insurance industry, was conditionally transferred to theUnited States District Court for the District of New Jersey by the JudicialPanel on Multidistrict Litigation.  OnApril 12, 2007, the Company entered into a Confidential Settlement and ReleaseAgreement with the plaintiffs in this action, pursuant to which all claimsagainst the Company have been dismissed with prejudice.  The terms of this confidential settlement didnot have a material impact upon the Company’s results of operations orfinancial condition.

OnNovember 22, 2006, the Company filed a demand for arbitration against Equitas,a lead reinsurer participating in excess of loss reinsurance agreements, withrespect to unsatisfied loss payment recovery demands that the Company haspreviously presented to Equitas (the “Equitas Arbitration”).  The recovery demands are for the 2005settlement of two class action lawsuits involving large asbestos claims(together, the “2005 Settled Claims”), which 2005 Settled Claims are being paidthrough 2007.  Equitas has not indicatedany dispute with respect to recoveries on related pro rata reinsuranceagreements for such 2005 Settled Claims or with respect to excess of loss orpro rata reinsurance for the 2004 Settled Claim referred to below.  The aggregate amount of excess of lossrecoveries due from Equitas for ceded paid and unpaid losses on the 2005Settled Claims is approximately $2.7 million.

OnNovember 20, 2006, the Company also filed a demand for arbitration in New Yorkagainst INA International Insurance Company, n/k/a Ace International (“AceInternational”), a reinsurer participating in pro rata reinsurance agreements,with respect to unsatisfied loss payment recovery demands that the Company haspreviously presented to Ace International (the “Ace International Arbitration”).  The recovery demands are for the 2005 SettledClaims and for the 2004 settlement of another class action lawsuit involving athird large asbestos claim (the “2004 Settled Claim” and, together with the2005 Settled Claims, the “Settled Claims”), which 2004 Settled Claim is beingpaid over seven years beginning in 2005. The aggregate amount of pro rata recoveries due from Ace Internationalfor ceded paid and unpaid losses on the Settled Claims is approximately $1.6million.

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TheCompany has filed its demands for arbitration against Equitas and AceInternational in accordance with the respective applicable provisions of theexcess of loss reinsurance agreements and the pro rata reinsurance agreements.  The Company believes that the refusal ofEquitas and of Ace International to satisfy the Company’s payment demands iswithout merit and it intends to vigorously pursue collection of its respectivereinsurance recoveries.  While it is tooearly to predict with any certainty the outcome of the Equitas Arbitration orthe Ace International Arbitration, the Company believes that the ultimateoutcomes would not be expected to have a significant adverse effect on itsresults of operations, financial condition or liquidity, although an unexpectedadverse resolution of either or both of these arbitrations could have amaterial adverse effect on the Company’s results of operations in a particularfiscal quarter or year.

b). Whenever a member of Lloyd’s is unable to payits debts to policyholders, such debts may be payable by the Lloyd’s CentralFund.  If Lloyd’s determines that theCentral Fund needs to be increased, it has the power to assess premium levieson current Lloyd’s members up to 3% of a member’s underwriting capacity in anyone year.  The Company does not believethat any assessment is likely in the foreseeable future and has not providedany allowance for such an assessment. However, based on the Company’s 2007 capacity at Lloyd’s of £140million, the March 31, 2007 exchange rate of £1 equals $1.97 and assuming themaximum 3% assessment, the Company would be assessed approximately $8.3million.

**Note 10. Senior Notes due May 1, 2016**

OnApril 17, 2006, the Company completed a public debt offering of $125 millionprincipal amount of 7% senior unsecured notes due May 1, 2016 (the “SeniorNotes”) and received net proceeds of $123.5 million.  The Company contributed $100 million of theproceeds to the capital and surplus of Navigators Insurance Company andretained the remainder at the Parent Company for general corporatepurposes.  The interest payment dates onthe Senior Notes are each May 1 and November 1. The effective interest rate related to the Senior Notes, based on theproceeds net of discount and all issuance costs, is approximately 7.17%.

The Senior Notes, the Company’s only seniorunsecured obligation, will rank equally with future senior unsecuredindebtedness.  The Company may redeem theSenior Notes at any time and from time to time, in whole or in part, at a “make-whole”redemption price.  The terms of theSenior Notes contain various restrictive business and financial covenantstypical for debt obligations of this type, including limitations on mergers,and liens or dispositions of the common stock of certain subsidiaries.  As of March 31, 2007, the Company was incompliance with all such covenants.

Theinterest expense for the 2007 first quarter was $2.2 million.  The fair value, which is based on the quotedmarket price at March 31, 2007, was $130.1 million.

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

**Note on Forward-LookingStatements**

Some of the statements in this Quarterly Report onForm 10-Q are “forward-looking statements” as defined in the Private SecuritiesLitigation Reform Act of 1995.  Wheneverused in this report, the words “estimate”, “expect”, “believe” or similarexpressions are intended to identify such forward-looking statements.  Forward-looking statements are derived frominformation that we currently have and assumptions that we make.  We cannot assure that anticipated resultswill be achieved, since results may differ materially because of both known andunknown risks and uncertainties which we face. We undertake no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.  Factors that couldcause actual results to differ materially from our forward-looking statementsinclude, but are not limited to:

·      the effectsof domestic and foreign economic conditions, and conditions which affect themarket for property and casualty insurance;

·      changesin the laws, rules and regulations which apply to our insurance companies;

·      theeffects of emerging claim and coverage issues on our business, includingadverse judicial or regulatory decisions and rulings;

·      theeffects of competition from banks and other insurers and the trend towardself-insurance;

·      risksthat we face in entering new markets and diversifying the products and serviceswe offer;

·      unexpectedturnover of our professional staff;

·      changinglegal and social trends and inherent uncertainties in the loss estimationprocess that can adversely impact the adequacy of loss reserves and theallowance for reinsurance recoverables, including our estimates relating toultimate asbestos liabilities and related reinsurance recoverables;

·      risksinherent in the collection of reinsurance recoverable amounts from ourreinsurers over many years into the future based on their financial ability andintent to meet such obligations to the Company;

·      risksassociated with our continuing ability to obtain reinsurance covering ourexposures at appropriate prices and/or in sufficient amounts and the relatedrecoverability of our reinsured losses;

·      weather-relatedevents and other catastrophes (including acts of terrorism) impacting ourinsureds and/or reinsurers, including, without limitation, the impact ofHurricanes Katrina, Rita, and Wilma and the possibility that our estimates of lossesfrom Hurricanes Katrina, Rita and Wilma will prove to be materially inaccurate;

·      ourability to attain adequate prices, obtain new business and retain existingbusiness consistent with our expectations;

·      thepossibility of downgrades in our claims-paying and financial strength ratingssignificantly adversely affecting us, including reducing the number ofinsurance policies we write generally, or causing clients who require aninsurer with a certain rating level to use higher-rated insurers;

·      the inabilityof our internal control framework to provide absolute assurance that allincidents of fraud or unintended material errors will be detected andprevented;

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·      the riskthat our investment portfolio suffers reduced returns or investment losseswhich could reduce our profitability; and

·      otherrisks that we identify in future filings with the Securities and ExchangeCommission (the “SEC”), including without limitation the risks described underthe caption “Risk Factors” in our Annual Report on Form 10-K for the year endedDecember 31, 2006.

In light of these risks, uncertainties andassumptions, any forward-looking events discussed in this Form 10-Q may notoccur.  You are cautioned not to placeundue reliance on any forward-looking statements, which speak only as of theirrespective dates.

*The discussion and analysis of ourfinancial condition and results of operations contained herein should be readin conjunction with our consolidated financial statements and accompanyingnotes which appear elsewhere in this Form 10-Q. It contains forward-looking statements that involve risks anduncertainties.  Please see “Note onForward-Looking Statements” for more information.  Our actual results could differ materiallyfrom those anticipated in these forward-looking statements as a result ofvarious factors, including those discussed below and elsewhere in this Form10-Q.*

**Overview**

We are an international insurance holding companyfocusing on specialty products for niches within the overall property/casualtyinsurance market.  The Company’sunderwriting segments consists of insurance company operations and operationsat Lloyd’s of London.  Our largestproduct line and most long-standing area of specialization is ocean marineinsurance.  We have also developed specialtyniches in professional liability insurance and in specialty liability insuranceprimarily consisting of contractors liability and excess liabilitycoverages.  We conduct operations throughour Insurance Companies and our Lloyd’s Operations.  The Insurance Companies consist of NavigatorsInsurance Company, which includes a United Kingdom Branch, and NavigatorsSpecialty Insurance Company, which underwrites specialty and professionalliability insurance on an excess and surplus lines basis fully reinsured byNavigators Insurance Company.  Our Lloyd’sOperations include NUAL, a Lloyd’s underwriting agency which manages Syndicate1221.  We participate in the capacity ofSyndicate 1221 through two wholly-owned Lloyd’s corporate members.

While management takes into consideration a widerange of factors in planning the Company’s business strategy and evaluatingresults of operations, there are certain factors that management believes arefundamental to understanding how the Company is managed.  First, underwriting profit is consistentlyemphasized 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.  The Insurance Companies’ operations andability to grow their business and take advantage of market opportunities areparticularly constrained by regulatory capital requirements and rating agencyassessments of capital adequacy.

The discussions that follow include tables, whichcontain both our consolidated and segment operating results for the three monthperiods ended March 31, 2007 and 2006. In presenting our financial results we have discussed our performancewith reference to underwriting profit or loss and the related combined ratio,both of which are non-GAAP measures of underwriting profitability.  We consider such measures, which may bedefined differently by other companies, to be important in the understanding ofour overall results of operations. Underwriting profit or loss is calculated from premiums earned, less netlosses and loss adjustment expenses  (“LAE”),commission expense and other operating income and expenses related tounderwriting activities.  The combinedratio is derived by taking such net losses and LAE, commission expense andother income and 

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expenses divided by earned premiums. A combined ratio of less than 100% indicates an underwriting profit andover 100% indicates an underwriting loss.

Although not a financial measure, management’sdecisions are also greatly influenced by access to specialized underwriting andclaims expertise in our lines of business. We have chosen to operate in specialty niches with certain commoncharacteristics which we believe provide us with the opportunity to use ourtechnical underwriting expertise in order to realize underwriting profit.  As a result, we have focused on underservedmarkets for businesses characterized by higher severity and lower frequency ofloss where we believe our intellectual capital and financial strength bringmeaningful value.  In contrast, we haveavoided niches that we believe have a high frequency of loss activity and/orare subject to a high level of regulatory coverage requirements, such asworkers compensation and personal automobile insurance, because we do notbelieve our technical expertise is of as much value in these types ofbusinesses.  Examples of niches that havethe characteristics we look for include bluewater hull which provides coveragefor physical damage to, for example, highly valued cruise ships, and directorsand officers liability insurance (“D&O”) which covers litigation exposureof a corporation’s directors and officers. These types of exposures require substantial technical expertise.  We attempt to mitigate the financial impactof severe claims on our results by conservative and detailed underwriting,prudent use of reinsurance and a balanced portfolio of risks.

Our revenue is primarily comprised of premiums andinvestment income.  The InsuranceCompanies derive their premiums primarily from business written by theNavigators Agencies, which are wholly-owned insurance underwriting agencies ofthe Company.  The Lloyd’s Operationsderive their premiums from business written by NUAL.  Beginning in 2006, the Navigators Agenciesproduce and manage business only for the Insurance Companies and are reimbursedfor actual costs.  Prior to 2006, theNavigators Agencies received commissions and, in some cases, profit commissionson the business produced on behalf of the Insurance Companies and otherunaffiliated insurers.  NUAL isreimbursed for its actual costs and, where applicable, profit commissions onthe business produced for Lloyd’s Syndicate 1221.

Over the past several years, we have experiencedgenerally beneficial market changes in our lines of business.  As a result of several large industry lossesin the second quarter of 2001, the marine insurance market began to experiencediminished capacity and rate increases, initially in the offshore energy lineof business.  The marine rate increasesbegan to level off in 2004 and into 2005. As a result of the substantial insurance industry losses resulting fromHurricanes Katrina and Rita, the marine insurance market experienced diminishedcapacity and rate increases through the end of 2006, particularly for the offshoreenergy risks located in the Gulf of Mexico. The 2007 first quarter average renewal rate increases for all marinelines of business including offshore energy approximated 2% for both theInsurance Companies and the Lloyd’s Operations. Included in the marine renewal rate increases for the first quarter of2007 are offshore energy rate increases of approximately 6% in the InsuranceCompanies and 2% in the Lloyd’s Operations.

Specialty liability losses in 2001 to 2003,particularly for the construction liability business, also resulted indiminished capacity in the market in which we compete, as many formercompetitors who lacked the expertise to selectively underwrite this businesshave been forced to withdraw from the market resulting in approximate rateincreases of 13% in 2004 and 49% in 2003. This was followed by a slight decline in rates of approximately 1% in2005.  The 2006 year average renewalrates for the construction liability business declined approximately 6%,primarily due to additional competition in the marketplace.  This decline continued into the 2007 firstquarter with average renewal rates declining approximately 9%.  We expect these competitive conditions tocontinue during 2007 resulting in continuing moderate declines in pricing forconstruction liability and excess liability business.

In the professional liability market, the enactmentof the Sarbanes-Oxley Act of 2002, together with financial and accountingscandals at publicly traded corporations and the increased frequency of securities-relatedclass action litigation, has led to heightened interest in professionalliability insurance generally.  Averageprofessional liability renewal premium rates decreased approximately 4% in the2007 first quarter compared to relatively level renewal rates in 2006 and 2005after decreasing of approximately 3% in 2004 which followed 

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substantial renewal rate increases in 2003 and 2002, particularly forD&O insurance.  The D&O insurancepremium renewal rates decreased approximately 4% in the 2007 first quarterafter decreases of approximately 2% in 2005 and 10% in 2004.  We anticipate continuing moderate declines in2007 pricing given the overall favorable industry underwriting results since2002 for the professional liability lines of business.

Our business is cyclical and influenced by manyfactors.  These factors include pricecompetition, economic conditions, interest rates, weather-related events andother catastrophes including natural and man-made disasters (for examplehurricanes and terrorism), state regulations, court decisions and changes inthe law.  The incidence and severity ofcatastrophes are inherently unpredictable. Although we will attempt to manage our exposure to such events, thefrequency and severity of catastrophic events could exceed our estimates, whichcould have a material adverse effect on our financial condition.  Additionally, because our insurance productsmust be priced, and premiums charged, before costs have fully developed, ourliabilities are required to be estimated and recorded in recognition of futureloss and settlement obligations.  Due tothe inherent uncertainty in estimating these liabilities, we cannot assure youthat our actual liabilities will not exceed our recorded amounts.

**Catastrophe Risk Management**

Our Insurance Companies and Lloyd’s Operations haveexposure to losses caused by hurricanes and other natural and man-madecatastrophic events.  The frequency andseverity of catastrophes are unpredictable.

The extent of losses from a catastrophe is a functionof both the total amount of insured exposure in an area affected by the eventand the severity of the event.  Wecontinually assess our concentration of underwriting exposures in catastropheexposed areas globally and attempt to manage this exposure through individualrisk selection and through the purchase of reinsurance.  We also use modeling technologies andconcentration management tools that allow us to better monitor and control ouraccumulations of potential losses from catastrophe exposures.  Despite these efforts, there remainsuncertainty about the characteristics, timing and extent of insured lossesgiven the nature of catastrophes.  Theoccurrence of one or more severe catastrophic events could have a materialadverse effect on the Company’s results of operations, financial condition orliquidity.

The Company has significant catastrophe exposuresthroughout the world with the largest catastrophe exposure for offshore energyrisks due to hurricanes in the Gulf of Mexico. The Company believes that its estimated probable maximum pre-tax grossand net loss exposure in a one in two hundred and fifty year hurricane event inthe Gulf of Mexico would approximate $168 million and $32 million,respectively, including the cost of reinsurance reinstatement premiums.  There are a number of significant assumptionsand related variables related to such an estimate including the size, force andpath of the hurricane, the various types of the insured risks exposed to theevent at the time the event occurs and the estimated costs or damages incurredfor each insured risk.  There can be noassurances that the gross and net loss amounts that the Company could incur insuch an event or in any hurricanes that may occur in the Gulf of Mexico wouldnot be materially higher than the estimates discussed above given thesignificant uncertainties with respect to such an estimate.

The occurrence of large loss events could reduce thereinsurance coverage that is available to us and could further weaken thefinancial condition of our reinsurers, which could have a material adverseeffect on our results of operations. Although the reinsurance agreements make the reinsurers liable to us tothe extent the risk is transferred or ceded to the reinsurer, ceded reinsurancearrangements do not eliminate our obligation to pay claims to ourpolicyholders.  Accordingly, we bearcredit risk with respect to our reinsurers. Specifically, our reinsurers may not pay claims made by us on a timelybasis, or they may not pay some or all of these claims. Either of these eventswould increase our costs and could have a material adverse effect on ourbusiness.  We are required to pay thelosses even if a reinsurer fails to meet its obligations under the reinsuranceagreement.

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**Critical Accounting Policies**

It is important to understand our accountingpolicies in order to understand our financial statements. Management considerscertain of these policies to be critical to the presentation of the financialresults, since they require management to make 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 resultfrom judgments that can be subjective and complex and consequently actualresults may differ from these estimates, which would be reflected in futureperiods.

Our most critical accounting policies involve thereporting of the reserves for losses and loss adjustment expenses (“LAE”)(including losses that have occurred but were not reported to us by thefinancial reporting date), reinsurance recoverables, written and unearnedpremium, the recoverability of deferred tax assets, the impairment of investedassets, accounting for Lloyd’s results and the translation of foreigncurrencies.

***Reserves forLosses and LAE.***  Reserves for losses and LAE represent anestimate of the expected cost of the ultimate settlement and administration oflosses, based on facts and circumstances then known.  Actuarial methodologies are employed toassist in establishing such estimates and include judgments relative toestimates of future claims severity and frequency, length of time to develop toultimate, judicial theories of liability and other third party factors whichare often beyond our control.  Due to theinherent uncertainty associated with the reserving process, the ultimateliability may be different from the original estimate.  Such estimates are regularly reviewed andupdated and any resulting adjustments are included in the current year’sresults.

***ReinsuranceRecoverables.***  Reinsurance recoverables are established forthe portion of the loss reserves that are ceded to reinsurers.  Reinsurance recoverables are determined basedupon the terms and conditions of reinsurance contracts which could be subjectto interpretations that differ from our own based on judicial theories ofliability.  In addition, we bear creditrisk with respect to our reinsurers which can be significant considering thatcertain of the reserves remain outstanding for an extended period of time.  We are required to pay losses even if areinsurer fails to meet its obligations under the applicable reinsurance agreement.

***Written andUnearned 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 amount of writtenpremium not yet reported based on judgments relative to current and historicaltrends of the business being written. Such estimates are regularly reviewed and updated and any resultingadjustments are included in the current year’s results.  An unearned premium reserve is established toreflect the unexpired portion of each policy at the financial reporting date.

Substantiallyall of our business is placed through agents and brokers.  Since the vast majority of the Company’sgross written premium is primary or direct as opposed to assumed, the delays inreporting assumed premium generally do not have a significant effect on theCompany’s financial statements, since we record estimates for both unreporteddirect and assumed premium.  We alsorecord the ceded portion of the estimated gross written premium and relatedacquisition costs.  The earned gross,ceded and net premiums are calculated based on our earning methodology which isgenerally pro-rata over the policy period. Losses are also recorded in relation to the earned premium.  The estimate for losses incurred on theestimated premium is based on an actuarial calculation consistent with themethodology used to determine incurred but not reported loss reserves forreported premiums.

Aportion of the Company’s premium is estimated for unreported premium, mostlyfor the marine business written by our U.K. Branch and Lloyd’s Operations.  We generally do not experience anysignificant backlog in processing premiums. Such premium estimates are generally based on submission data receivedfrom brokers and agents and recorded when the insurance policy or reinsurancecontract is written or bound.  The 

19

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estimates are regularly reviewed and updated taking intoaccount the premium received to date versus the estimate and the age of theestimate.  To the extent that the actualpremium varies from the estimates, the difference, along with the related lossreserves and underwriting expenses, is recorded in current operations.

***Deferred TaxAssets.***  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 ofInvestment Securities.***  Impairment of investmentsecurities results in a charge to operations when a market decline below costis other-than-temporary.  Managementregularly reviews our fixed maturity and equity securities portfolios toevaluate the necessity of recording impairment losses for other-than-temporarydeclines in the fair value of investments. In general, we focus our attention on those securities whose marketvalue was less than 80% of their cost or amortized cost, as appropriate, forsix or more consecutive months.  Factorsconsidered in evaluating potential impairment include, but are not limited to,the current fair value as compared to cost or amortized cost of the security,as appropriate, the length of time the investment has been below cost oramortized cost and by how much, our intent and ability to retain the investmentfor a period of time sufficient to allow for an anticipated recovery in value,specific credit issues related to the issuer and current economicconditions.  Other-than-temporaryimpairment losses result in a permanent reduction of the cost basis of theunderlying investment.  Significantchanges in the factors we consider when evaluating investments for impairmentlosses could result in a significant change in impairment losses reported inthe consolidated financial statements.

As mentioned above, the Company considers its intentand ability to hold a security until the value recovers as part of the processof evaluatingwhether a security’s unrealized loss represents an other-than- temporarydecline.  The Company’s ability to holdsuch securities is supported by sufficient cash flow from its operations andfrom maturities within its investment portfolio in order to meet its claimspayment and other disbursement obligations arising from its underwritingoperations without selling such investments. With respect to securities where the decline in value is determined tobe temporary and the security’s value is not written down, a subsequentdecision may be made to sell that security and realize a loss.  Subsequent decisions on security sales aremade within the context of overall risk monitoring, changing information,market conditions and assessing value relative to other comparablesecurities.  Management of the Company’sinvestment portfolio is outsourced to third party investment managers.  While these investment managers may, at agiven point in time, believe that the preferred course of action is to holdsecurities with unrealized losses that are considered temporary until suchlosses are recovered, the dynamic nature of the portfolio management may resultin a subsequent decision to sell the security and realize the loss, based upona change in market and other factors described above.  The Company believes that subsequentdecisions to sell such securities are consistent with the classification of theCompany’s portfolio as available for sale.

Investmentmanagers are required to notify management of rating agency downgrades ofsecurities in their portfolios as well as any potential investment valuationissues at the end of each quarter. Investment managers are also required to notify management to the extentthe investment manager is contemplating a transaction or transactions that mayresult in a realized loss above a certain threshold.  Additionally, investment managers arerequired to notify management if they are contemplating a transaction ortransactions that may result in any realized loss up until a certain periodbeyond the close of a quarterly accounting period.

***Accounting forLloyd’s Results.***  We record our pro rata share of Syndicate1221’s assets, liabilities, revenues and expenses, after making adjustments toconvert Lloyd’s accounting to U.S. GAAP. The most significant GAAP adjustments relate to income recognition.Lloyd’s syndicates determine underwriting results by year of account at the endof three years.  We record adjustments 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 the syndicate.  At the 

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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. The amount to close an underwriting year into the next year is referredto as the reinsurance to close (“RITC”). The RITC transaction is recorded in the fourth quarter as additionalwritten and earned premium, losses incurred, loss reserves and receivables, allin the same amount.  There are no gainsor losses recorded on the RITC transaction.

***Translation of Foreign Currencies****. *Financialstatements of subsidiaries expressed in foreign currencies are translated intoU.S. dollars in accordance with SFAS No. 52, *ForeignCurrency 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*. Statement of income amounts expressed in functional currencies aretranslated using average exchange rates.

**Resultsof Operations and Overview**

The following is a discussion and analysis of ourconsolidated and segment results of operations for the three months ended March31, 2007 and 2006.  All earnings pershare data is presented on a per diluted share basis.

Net income for the three month period ended March31, 2007 was $19.7 million or $1.17 per share compared to $15.5 million or$0.93 per share for the three month period ended March 31, 2006.  Included in these results were net realizedcapital gains (losses) of $0.01 per share and $(0.02) per share for the threemonths ended March 31, 2007 and 2006, respectively.

The combined loss and expense ratio (the “combinedratio”) for both the 2007 and 2006 first quarters was 89.4%.  The combined ratio for the 2007 first quarterwas reduced by 4.9 loss ratio points for a net loss reserve redundancy of $6.8million relating to prior years.  Thecombined ratio for the 2006 first quarter was reduced by 3.7 loss ratio pointsfor a net loss reserve redundancy of $3.8 million relating to prior years.   Net paid loss ratios for the 2007 and 2006first quarters were 31.3% and 37.5%, respectively.

Cash flow from operations was $20.1 million for thefirst three months of 2007 compared to $28.6 million for the comparable periodin 2006.  The positive cash flowcontributed to the growth in invested assets and net investment income.  The 2007 and 2006 cash flow from operationswere reduced by approximately $21.5 million and $4.4 million for 2005 hurricaneloss reinsurance recoveries to be collected from reinsurers in subsequentaccounting periods.

Consolidated stockholders’equity increased 4% to $574 million or $34.23 per share at March 31, 2007compared to $551 million or $32.94 per share at December 31, 2006.  The increase was primarily due to net incomeof $19.7 million for the first quarter of 2007.

**Revenues****.**  Grosswritten premium increased 14% to $300.9 million in the first quarter of 2007from $263.8 million in the first quarter of 2006.  The growth in 2007 gross written premium generallyreflects a combination of business expansion in both new and existing lines ofbusiness coupled with premium rate changes on renewal policies.  As discussed below under *Lloyd’sOperations Gross Written Premium*, the 2007 first quarter excludesadvance premium, however advance premium was recorded as gross written premiumin our Lloyd’s Operations in the 2006 first quarter.  The inclusion or exclusion of advance premiumin gross written premium has no impact on revenues or net income for eitheraccounting period since premiums are earned commencing with the effective dateof an insurance policy.

The premium rate changes discussed above and belowfor marine, specialty and professional liability are calculated primarily bycomparing premium amounts on policies that have renewed.  The premiums are judgmentally adjusted forexposure factors when deemed significant and sometimes represent an aggregationof 

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several lines of business.  Therate change calculations provide an indicated pricing trend and are not meantto be a precise analysis of the numerous factors that affect premium rates orthe adequacy of such rates to cover all underwriting costs and generate anunderwriting profit.  The calculation canalso be affected quarter by quarter depending on the particular policies andthe number of policies that renew during that period.  Due to market conditions, these rate changesmay or may not apply to new business which may be more competitively pricedcompared to renewal business.  The followingtable sets forth our gross and net written premium and net earned premium bysegment and line of business for the periods indicated:

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** **
| ** **                     | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|
| ** **                     | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                     | ** ** | **Gross**                                            | ** ** | ** ** | ** ** | **Net** | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** | **Net** | ** ** |
| ** **                     | ** ** | **Written**                                          | ** ** | ** ** | ** ** | **Written** | ** ** | **Earned** | ** ** | **Written** | ** ** | ** ** | ** ** | **Written** | ** ** | **Earned** | ** ** |
| ** **                     | ** ** | **Premium**                                          | ** ** | **%** | ** ** | **Premium** | ** ** | **Premium** | ** ** | **Premium** | ** ** | **%** | ** ** | **Premium** | ** ** | **Premium** | ** ** |
| ** **                     | ** ** | **($ in thousands)**                       | ** ** |
| Insurance Companies:           |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                           |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Marine                         |       | $                                                    | 84,369     |   | 28.0 | % | $ | 44,927 |   | $ | 33,318 |   | $ | 81,794 |   | 31.0 | % | $ | 41,515 |   | $ | 22,501 |   |
|                           |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty                      |       | 95,720                                               |       | 31.8 | % | 58,554 |   | 53,612 |   | 62,131 |   | 23.5 | % | 40,519 |   | 36,134 |   |
|                           |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Professional  Liability        |       | 20,482                                               |       | 6.8 | % | 12,192 |   | 13,037 |   | 18,134 |   | 6.9 | % | 7,626 |   | 8,732 |   |
|                           |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other                          |       | 8,303                                                |       | 2.8 | % | 6,375 |   | 1,845 |   | 188 |   | 0.1 | % | (16 | ) | (15 | ) |
|                           |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Insurance  Companies Total     |       | 208,874                                              |       | 69.4 | % | 122,048 |   | 101,812 |   | 162,247 |   | 61.5 | % | 89,644 |   | 67,352 |   |
|                           |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Lloyd’s Operations:       |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                           |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Marine                         |       | 77,679                                               |       | 25.8 | % | 45,488 |   | 32,341 |   | 90,855 |   | 34.4 | % | 51,403 |   | 35,716 |   |
|                           |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Professional  Liability        |       | 5,478                                                |       | 1.8 | % | 3,383 |   | 2,957 |   | 2,020 |   | 0.8 | % | 829 |   | 241 |   |
|                           |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other                          |       | 8,830                                                |       | 3.0 | % | 2,100 |   | 1,936 |   | 8,873 |   | 3.4 | % | 1,550 |   | 413 |   |
|                           |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Lloyd’s  Operations Total |       | 91,987                                               |       | 30.6 | % | 50,971 |   | 37,234 |   | 101,748 |   | 38.6 | % | 53,782 |   | 36,370 |   |
|                           |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Intercompany  elimination      |       | —                                               |       | 0.0 | % | — |   | — |   | (211 | ) | -0.1 | % | — |   | — |   |
|                           |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                          |       | $                                                    | 300,861    |   | 100.0 | % | $ | 173,019 |   | $ | 139,046 |   | $ | 263,784 |   | 100.0 | % | $ | 143,426 |   | $ | 103,722 |   |

 

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**Gross Written Premium**

Insurance Companies’ GrossWritten Premium

*Marine Premium.*  Thegross written premium for the 2007 first quarter consisted of 31% marineliability, 18% offshore energy, 9% cargo, 9% transport, 14% protection andindemnity (P&I) and 9% bluewater hull with the remainder in several othermarine related classes of business.

The marine gross written premium for the 2007 firstquarter increased 3% compared to the first quarter 2006 reflecting growthprimarily from cargo and transport.  Theaverage renewal premium rates during the 2007 first quarter increased byapproximately 2%.  We expect overall flatto moderate declines in 2007 pricing for marine business, including offshoreenergy business, as additional capacity re-enters the marine market.

*Specialty Premium.*  Thegross written premium for the 2007 first quarter consisted of 53% generalliability business for small general and artisan contractors, 17% excesscasualty business, 6% primary casualty business, 13% commercial middle marketsbusiness, 8% personal umbrella business and 3% other targeted commercial risks.

The specialty gross written premium increased 54%for the 2007 first quarter compared to the same period in 2006 reflectinggrowth across all lines of business including premiums generated from ourprimary casualty business which started in the 2006 third quarter.  The average renewal premium rates decreasedby approximately 9% for the contractors liability business in the 2007 firstquarter.  The recent premium ratedecreases for the construction liability business and generally for thespecialty lines of business are reflective of softening market conditions whichare expected to continue throughout 2007.

*Professional Liability Premium.*  Thegross written premium for the 2007 first quarter consisted of 60% D&Oliability coverage for privately held and publicly traded corporations, 33%professional liability coverage for lawyers and other professionals and 7%professional liability coverage for architects and engineers.

The professional liability gross written premium forthe 2007 first quarter increased 13%, compared to the same period in 2006.  Average overall renewal premium rates for theprofessional liability business decreased by approximately 4% in the 2007 firstquarter.  D&O renewal premium rates,included in the overall professional liability rate change, also decreased byapproximately 4% in the 2007 first quarter.

*Other Premium.*  The gross written premium for the 2007 firstquarter includes inland marine business and European property business whichwere started by the Company in 2006.

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Lloyd’sOperations’ Gross Written Premium

Our gross written premiumis based on the amount of Syndicate 1221’s stamp capacity that we provide.  Our percentage of participation in the stamp capacityis 100% for both 2007 and 2006.  Stampcapacity is a measure of the amount of premium a Lloyd’s syndicate isauthorized to write based on a business plan approved by the Council of Lloyd’s.  Syndicate 1221’s stamp capacity is £140million ($274 million) in 2007 compared to £123 million ($226.0 million) in2006.

Gross written premium andnet written premium decreased approximately 10% and 5% respectively, in the2007 first quarter compared to the 2006 first quarter.  Commencing in 2007, advance premium has beenexcluded from quarterly gross written premium of our Lloyd’s Operations.  Advance premium represents gross writtenpremium on bound policies with effective dates subsequent to the end of thequarter.  Such excluded amounts in the2007 first quarter approximated $11 million and will be recorded as grosswritten premium in future quarterly periods based on their applicable effectivedates.  The 2006 first quarter grosswritten premium included $11 million of such advance premium.

The 2007 advance premiumamounts have been included in other liabilities on the balance sheet at March31, 2007.  The inclusion of such amountsin gross written premium in 2006 and exclusion of such amounts in the 2007gross written premium had no impact on revenues or net income for eitheraccounting period since premiums are earned commencing with the effective dateof an insurance policy.

*Marine Premium.* Thegross written premium for the 2007first quarter consisted of 38% cargo and specie, 18% offshore energy and 28% marineliability with the remainder in several other marine related classes ofbusiness.

The marine gross written premium for the 2007 firstquarter decreased 15% compared to the same period in 2006 due to the timing inthe recording of advance premium discussed above.  The average renewal premium rates during the2007 first quarter increased by approximately 2%.

*Professional Liability Premium.*  Thegross written premium for the 2007 first quarter consisted of 32% D&Oliability coverage for privately held and publicly traded corporations and 68%professional liability coverage for lawyers and other professionals.

*Other Premium. *The gross written premium for the 2007 first quarter consisted ofEuropean property business, and engineering and construction business whichprovides coverage for construction projects including machinery, equipment andloss of use due to delays and of premium for onshore energy business whichprincipally focuses on the oil and gas, chemical and petrochemical industrieswith coverages primarily for property damage and business interruption.

**CededWritten 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 the Insurance Companies or the Lloyd’s Operations.

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The following table sets forth our ceded writtenpremium by segment and major line of business for the periods indicated:
| ** **                | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------|------------|------------------------------------------------------|------------|
| ** **                | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                | ** ** | ** **                                           | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                | ** ** | **Ceded**                                            | ** ** | **Gross** | ** ** | **Ceded** | ** ** | **Gross** | ** ** |
| ** **                | ** ** | **Written**                                          | ** ** | **Written** | ** ** | **Written** | ** ** | **Written** | ** ** |
| ** **                | ** ** | **Premium**                                          | ** ** | **Premium** | ** ** | **Premium** | ** ** | **Premium** | ** ** |
| ** **                | ** ** | **($ in thousands)**                       | ** ** |
| ** **                | * *   | * *                                             | * *   | * * | * * | * * | * * | * * | * * |
| Insurance  Companies:     |       |                                                 |       |   |   |   |   |   |   |
| Marine                    |       | $                                                    | 39,442     |   | 46.7 | % | $ | 40,279 |   | 49.2 | % |
| Specialty                 |       | 37,166                                               |       | 38.8 | % | 21,612 |   | 34.8 | % |
| Professional Liability    |       | 8,290                                                |       | 40.5 | % | 10,508 |   | 57.9 | % |
| Other                     |       | 1,928                                                |       | NM |   | 204 |   | NM |   |
| Subtotal                  |       | 86,826                                               |       | 41.6 | % | 72,603 |   | 44.7 | % |
|                      |       |                                                 |       |   |   |   |   |   |   |
| Lloyd’s  Operations: |       |                                                 |       |   |   |   |   |   |   |
| Marine                    |       | 32,191                                               |       | 41.4 | % | 39,452 |   | 43.4 | % |
| Professional Liability    |       | 2,095                                                |       | 38.2 | % | 1,191 |   | 59.0 | % |
| Other                     |       | 6,730                                                |       | 76.2 | % | 7,323 |   | 82.5 | % |
| Subtotal                  |       | 41,016                                               |       | 44.6 | % | 47,966 |   | 47.1 | % |
|                      |       |                                                 |       |   |   |   |   |   |   |
| Intercompany  elimination |       | —                                               |       | NM |   | (211 | ) | NM |   |
|                      |       |                                                 |       |   |   |   |   |   |   |
| Total                     |       | $                                                    | 127,842    |   | 42.5 | % | $ | 120,358 |   | 45.6 | % |

 

NM = not meaningful

The increase in the total dollar amount ceded eachyear was primarily due to the increase in the gross written premium.

The ratio of total ceded written premium to grosswritten premium in the 2007 first quarter was 42.5% compared to the 2006 firstquarter ratio of 45.6%.  The decrease inthe ratio of ceded written premium to gross written premium in the 2007 periodcompared to the same period in 2006 was due to a combination of the followingfactors:

·                  Modest reductions in the amounts of marinereinsurance ceded on a pro rata basis by the Insurance Companies and the Lloyd’sOperations.

·                  An increase in the proportion of specialtygross premiums, in which we retain a higher proportion of premium relative toour other lines, to the overall total amount. However, the proportion of ceded premium compared to gross writtenpremium for the specialty business has increased reflective of the growth inrelatively new lines of business. Generally the Company reinsures a large percentage of its new lines ofbusiness and increases its retention as the business matures over time.

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·                  Increases in our net retentions on theprofessional liability pro rata reinsurance treaty which renewed April 1,2006.  No changes to retentions occurredfor the April 1, 2007 renewal.

**NetWritten Premium**.*** ***Net written premium increased 21% in the 2007 firstquarter compared to the same period in 2006. The increase in netwritten premium for the 2007 first quarter is principally due to business expansion inall of the Company’s business units coupled with retaining more of the businesswritten.

**Net Earned Premium**.  Net earned premium, which generally lags theincrease in net written premium, increased 34% in the 2007 first quartercompared to the same period in 2006 as a result of the increased net writtenpremium discussed above.

**CommissionIncome****.** Commission income from unaffiliated business was $0.4 million in the2007 first quarter compared to $1.3 million in the 2006 first quarter.  The decline reflects the elimination of the marine pooleffective January 1, 2006.

**NetInvestment Income****.* ***Net investmentincome increased 29% in the 2007 first quarter compared to the same period in2006 due to the increase in invested assets as a result of the positive cashflow from the increased premium volume, the $123.5 million of net proceeds fromthe April 2006 7% Senior Notes offering and the increase in the portfolio yield.

**NetRealized Capital Gains and Losses****.** Pre-tax net income included a net realized capital gain of $201,000 forthe three months ended March 31, 2007 compared to a net realized capital lossof $424,000 for the 2006 first quarter. On an after-tax basis, the 2007 first quarter net realized capital gainwas $129,000 or $ 0.01 per share compared to a net realized capital loss of$276,000 or $0.02 per share for the 2006 first quarter.

**OtherIncome/(Expense)****.**  Otherincome/(expense) for the first quarters of both 2007 and 2006 consistedprimarily of foreign exchange gains and losses from our Lloyd’s Operations andinspection fees related to the specialty insurance business.

**Operating Expenses**

*Net Losses and Loss Adjustment Expenses Incurred*.  The ratios of net losses andloss adjustment expenses incurred to net earned premium (loss ratios) for the2007 and 2006 first quarters were 58.4% and 59.9%. The 2007 and 2006 firstquarter loss ratios were favorably impacted by 4.9 and 3.7 loss ratio points,respectively, resulting from a redundancy of prior year loss reserves.

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The following tables setforth our net reported loss and LAE loss reserves and net IBNR reserves bysegment and line of business as of March 31, 2007 and December 31, 2006:
| ** **                        | ** ** | **March 31, 2007**   | ** ** |
|-----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **Net**                        | ** ** | **Net** | ** ** | **Total** | ** ** | **% of IBNR** | ** ** |
| ** **                        | ** ** | **Reported**                   | ** ** | **IBNR** | ** ** | **Net Loss** | ** ** | **to Total Net** | ** ** |
| ** **                        | ** ** | **Reserves**                   | ** ** | **Reserves** | ** ** | **Reserves** | ** ** | **Loss Reserves** | ** ** |
| ** **                        | ** ** | **($ in thousands)** | ** ** |
|                              | * *   | * *                       | * *   | * * | * * | * * | * * | * * | * * |
|                              |       |                           |       |   |   |   |   |   |   |
| Insurance  Companies:             |       |                           |       |   |   |   |   |   |   |
| Marine                            |       | $                              | 81,546     |   | $ | 101,223 |   | $ | 182,769 |   | 55.4 | % |
| Specialty                         |       |                           |       |   |   |   |   |   |   |
| Construction liability            |       | 45,283                         |       | 173,318 |   | 218,601 |   | 79.3 | % |
| All other liability               |       | 19,051                         |       | 45,359 |   | 64,410 |   | 70.4 | % |
| Total Specialty                   |       | 64,334                         |       | 218,677 |   | 283,011 |   | 77.3 | % |
|                              |       |                           |       |   |   |   |   |   |   |
| Professional liability            |       | 14,690                         |       | 42,855 |   | 57,545 |   | 74.5 | % |
| Other (includes run-off business) |       | 10,140                         |       | 9,638 |   | 19,778 |   | 48.7 | % |
|                              |       |                           |       |   |   |   |   |   |   |
| Total Insurance Companies         |       | 170,710                        |       | 372,393 |   | 543,103 |   | 68.6 | % |
|                              |       |                           |       |   |   |   |   |   |   |
| Lloyd’s  Operations          |       |                           |       |   |   |   |   |   |   |
| Marine                            |       | 84,347                         |       | 89,831 |   | 174,178 |   | 51.6 | % |
| Other                             |       | 3,696                          |       | 12,870 |   | 16,566 |   | 77.7 | % |
|                              |       |                           |       |   |   |   |   |   |   |
| Total Lloyd’s Operations     |       | 88,043                         |       | 102,701 |   | 190,744 |   | 53.8 | % |
|                              |       |                           |       |   |   |   |   |   |   |
| Total Company                     |       | $                              | 258,753    |   | $ | 475,094 |   | $ | 733,847 |   | 64.7 | % |

** **

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** **
| ** **                        | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **Net**                         | ** ** | **Net** | ** ** | **Total** | ** ** | **% of IBNR** | ** ** |
| ** **                        | ** ** | **Reported**                    | ** ** | **IBNR** | ** ** | **Net Loss** | ** ** | **to Total Net** | ** ** |
| ** **                        | ** ** | **Reserves**                    | ** ** | **Reserves** | ** ** | **Reserves** | ** ** | **Loss Reserves** | ** ** |
| ** **                        | ** ** | **($ in thousands)**  | ** ** |
|                              |       |                            |       |   |   |   |   |   |   |
| Insurance  Companies:             |       |                            |       |   |   |   |   |   |   |
| Marine                            |       | $                               | 83,295     |   | $ | 96,098 |   | $ | 179,393 |   | 53.6 | % |
| Specialty                         |       |                            |       |   |   |   |   |   |   |
| Construction liability            |       | 40,070                          |       | 166,179 |   | 206,249 |   | 80.6 | % |
| All other liability               |       | 15,214                          |       | 39,381 |   | 54,595 |   | 72.1 | % |
| Total Specialty                   |       | 55,284                          |       | 205,560 |   | 260,844 |   | 78.8 | % |
|                              |       |                            |       |   |   |   |   |   |   |
| Professional liability            |       | 14,013                          |       | 37,558 |   | 51,571 |   | 72.8 | % |
| Other (includes run-off business) |       | 9,867                           |       | 9,432 |   | 19,299 |   | 48.9 | % |
|                              |       |                            |       |   |   |   |   |   |   |
| Total Insurance Companies         |       | 162,459                         |       | 348,648 |   | 511,107 |   | 68.2 | % |
|                              |       |                            |       |   |   |   |   |   |   |
| Lloyd’s  Operations          |       |                            |       |   |   |   |   |   |   |
| Marine                            |       | 77,621                          |       | 95,876 |   | 173,497 |   | 55.3 | % |
| Other                             |       | 3,103                           |       | 8,409 |   | 11,512 |   | 73.0 | % |
|                              |       |                            |       |   |   |   |   |   |   |
| Total Lloyd’s Operations     |       | 80,724                          |       | 104,285 |   | 185,009 |   | 56.4 | % |
|                              |       |                            |       |   |   |   |   |   |   |
| Total Company                     |       | $                               | 243,183    |   | $ | 452,933 |   | $ | 696,116 |   | 65.1 | % |

 

The above net loss and LAE reserves represent grossreserves for losses and LAE reduced for reinsurance receivable on such amountsas follows:
| ** **                                                       | ** ** | **March 31,**             | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | **2007**                       | ** ** | **2006**              | ** ** |
| ** **                                                       | ** ** | **($ in thousands)** | ** ** |
|                                                             |       |                           |       |                  |       |
| Total gross  reserves for losses and LAE                         |       | $                              | 1,606,283  |                  | $          | 1,607,555 |   |
| Total  reinsurance recoverable on unpaid losses and LAE reserves |       | 872,436                        |       | 911,439               |       |
| Total net loss  reserves                                         |       | $                              | 733,847    |                  | $          | 696,116 |   |

 

The recoverable amounts above do not include $131.3million and $108.9 million of reinsurance recoverable for all paid losses atMarch 31, 2007 and December 31, 2006, respectively, of which $88.1 and $66.6million, respectively, related to the gross loss payments for the 2005Hurricanes.  With the recording of grosslosses, the Company assesses its reinsurance coverage, potential receivables,and the recoverability of the receivables. Losses incurred on business recently written are primarily covered byreinsurance agreements written by companies with whom the Company is currentlydoing reinsurance business and whose credit the Company continues to assess inthe normal course of business.

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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 us.  No assurance canbe given that actual claims made and related payments will not be in excess ofthe amounts reserved.  During the losssettlement 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.

There are a number of factors that could causeactual losses and loss adjustment expenses to differ materially from the amountthat we have reserved for losses and loss adjustment expenses.

The process of establishing loss reserves is complexand imprecise as it must take into account many variables that are subject tothe outcome of future events.  As aresult, informed subjective judgments as to our ultimate exposure to losses arean integral component of our loss reserving process.

IBNR loss reserves are calculated by the Company’sactuaries using several standard actuarial methodologies, including the paidand incurred loss development and the paid and incurred Bornheutter-Fergusonloss methods.  Additional analyses, suchas frequency/severity analyses, are performed for certain books of business.

While an annual loss reserve study is conducted foreach line of business, the timing of such studies varies throughout theyear.  Additionally, a review of theemergence of actual losses relative to expectations for each line of businessis conducted each quarter.  A separateanalysis of our asbestos and environmental liability exposures is alsoperformed annually and updated quarterly. Any adjustments that result from this review are recorded in the quarterin which they are identified.

The actuarial methods generally utilize analysis ofhistorical patterns of the development of paid and reported losses for eachline of business by underwriting year. This process relies on the basic assumption that past experience,adjusted for the effects of current developments and likely trends, is anappropriate basis for predicting future outcomes.  This basic assumption is particularlyrelevant for our marine and energy business written by our Insurance Companiesand Lloyd’s Operations where we generally rely on the substantial lossdevelopment data accumulated over many years to establish IBNR loss reservesfor immature underwriting years.

For certain long tail classes of business whereanticipated loss experience is less predictable because of the small number ofclaims and/or erratic claim severity patterns, estimates are based on bothexpected losses and actual reported losses. These classes include our California contractors liability business anddirectors and officers liability business, among others.  For these classes, we set ultimate losses foreach underwriting year reflecting several factors, including our evaluation ofloss trends and the current risk environment. The expected ultimate losses are adjusted as the underwriting yearmatures.

While we have a significant amount of lossdevelopment data that is utilized by our actuaries to establish the IBNR lossreserves for our California contractors liability business, there have beensignificant changes relating to this product and its market that could affectthe applicability of our data.  Forexample, one factor that may affect reserves and claim frequency is legislationimplemented in California, which generally provides consumers who experienceconstruction defects a method other than litigation to obtain defectrepairs.  The law, which became effectiveJuly 1, 2002 with a sunset provision effective January 1, 2011, provides for analternative dispute resolution system that attempts to involve all parties to theclaim at an early stage.  This legislationmay impact claim severity, frequency and length of settlement assumptionsunderlying our reserves.  Accordingly,our ultimate liability may exceed or be less than current estimates due to thisvariable, among others.  There wereapproximately 1,129 specialty construction liability claims open at March 31,2007 compared to 1,060 at December 31, 2006.

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The professional liability business generatesthird-party claims which also are longer tail in nature.  The professional liability policies mostlyprovide coverage on a claims-made basis, whereby coverage is generally providedonly for those claims that are made during the policy period.  These claims often involve a lengthylitigation period after being reported. Our professional liability business is relatively immature, as we firstbegan writing the business in late 2001. Accordingly, it will take some time to better understand the reservetrends on this business.  Given thelimited history of this business, the actuaries generally utilize industry datato initially establish IBNR loss reserves, which are subsequently adjustedbased on actual and expected claim emergence as each underwriting yearmatures.  There were approximately 934professional liability claims open at March 31, 2007 compared to 944 atDecember 31, 2006.

At the start of each underwriting year, ouractuaries and management determine an initial selected ultimate loss ratio foreach line of business.  Managementparticipation generally includes the underwriter for the particular line ofbusiness, executive management, and claims and finance personnel.  Generally, such determinations are based onprior year history modified where deemed appropriate for observed changes inpremium rates, terms, conditions, exposures, and loss trends.  Industry data is generally utilized for newlines of business.

As underwriting years age, for each subsequentquarter and following years, our actuaries, with management, continue to updateand refine their estimates of selected ultimate loss ratios for each line ofbusiness, by underwriting year, using the actuarial methods referred to aboveand incorporating relevant factors that generally include actual lossdevelopment, recent claims activity, number and dollar amount of open claims,risk characteristics of the particular line of business, the potential effectsof changes in underwriting and claims procedures, historic performance relativeto expectations and the relationship of the IBNR reserve levels acrossunderwriting years and between similar lines of business.  The output of this process results inrefinements to the ultimate loss ratios. Such refinements to the ultimate loss ratios for the prior underwritingyears generate prior year redundancies or deficiencies recorded in the yearsuch refinements are made.

*Asbestos Liability.*   Our exposure to asbestos liabilityprincipally stems from marine liability insurance written on an occurrencebasis during the mid-1980s. In general, our participation on such risks is inthe excess layers, which requires the underlying coverage to be exhausted priorto coverage being triggered in our layer. In many instances we are one of manyinsurers who participate in the defense and ultimate settlement of theseclaims, and we are generally a minor participant in the overall insurancecoverage and settlement.

The reserves for asbestos exposures at March 31,2007 and December 31, 2006 are for: (i) the 2005 fourth quarter settlements oftwo large claims aggregating approximately $28 million for excess insurancepolicy limits exposed to class action suits against two insureds involved inthe manufacturing or distribution of asbestos products, each settlement isbeing paid over a two year period that started in 2006; (ii) the 2004settlement of a large claim approximating $25 million exposed to a class actionsuit which settlement is being paid over a seven year period that started inJune 2005; (iii) other insureds not directly involved in the manufacturing ordistribution of asbestos products, but that have more than incidental asbestosexposure for their purchase or use of products that contained asbestos; and(iv) attritional asbestos claims that could be expected to occur overtime.  Substantially all of our asbestosliability reserves are included in our marine loss reserves.

The Company believes that there are no remainingknown claims where it would suffer a material loss as a result of excess policylimits being exposed to class action suits for insureds involved in themanufacturing or distribution of asbestos products.  There can be no assurances, however, thatmaterial loss development may not arise in the future from existing asbestosclaims or new claims given the evolving and complex legal environment that maydirectly impact the outcome of the asbestos exposures of our insureds.

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The following tables set forth our gross and net loss and LAE reservesfor our asbestos exposures for the periods indicated, which we believe aresubject to uncertainties greater than those presented by other types of claims:
| ** **                 | ** ** | **Three Months Ended** | ** ** | **Year Ended**             | ** ** |
|----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **March 31, 2007**     | ** ** | **December 31, 2006** | ** ** |
| ** **                 | ** ** | **($ in thousands)**   | ** ** |
| ** **                 | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| **Gross of Reinsurance**   | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Beginning gross  reserves  |       | $                                | 37,171     |                            | $          | 56,838 |   |
| Incurred losses  & LAE |       | 36                               |       | 246                             |       |
| Calendar year  payments    |       | 29                               |       | 19,913                          |       |
| Ending gross  reserves     |       | $                                | 37,178     |                            | $          | 37,171 |   |
|                       |       |                             |       |                            |       |
| Gross case loss  reserves  |       | $                                | 29,298     |                            | $          | 29,291 |   |
| Gross IBNR loss  reserves  |       | 7,880                            |       | 7,880                           |       |
| Ending gross  reserves     |       | $                                | 37,178     |                            | $          | 37,171 |   |
|                       |       |                             |       |                            |       |
| **Net of Reinsurance**     | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Beginning net  reserves    |       | $                                | 21,381     |                            | $          | 30,372 |   |
| Incurred losses  & LAE |       | 290                              |       | 229                             |       |
| Calendar year  payments    |       | 36                               |       | 9,220                           |       |
| Ending net  reserves       |       | $                                | 21,635     |                            | $          | 21,381 |   |
|                       |       |                             |       |                            |       |
| Net case loss reserves     |       | $                                | 13,932     |                            | $          | 13,678 |   |
| Net IBNR loss reserves     |       | 7,703                            |       | 7,703                           |       |
| Ending net reserves        |       | $                                | 21,635     |                            | $          | 21,381 |   |

 

To the extent the Company incurs additional gross loss development forits historic asbestos exposure; the Company’s allowance for uncollectiblereinsurance would increase for the reinsurers that are insolvent, in run-off orotherwise no longer active in the reinsurance business. The Company continues tobelieve that it will be able to collect reinsurance on the gross portion of itshistoric gross asbestos exposure in the above table. Net loss development forasbestos exposure was not significant in the 2007 first quarter or in 2006.

Loss reserves for environmental losses generallyconsist of oil spill claims on marine liability policies written in theordinary course of business. Net lossreserves for such exposures are included in our marine loss reserves and arenot separately identified.

*Hurricanes Katrina and Rita.* During the 2005 third quarter, the Company recorded gross and net lossestimates of $471 million and $22.3 million, respectively, exclusiveof $14.5 million for the cost of excess of loss reinstatement premiumsrelated to Hurricanes Katrina and Rita. Such estimates remain unchanged throughDecember 31, 2006.

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The followingtables set forth our gross and net loss and LAE reserves, incurred loss andLAE, and payments for Hurricanes Katrina and Rita for the periods indicated:
| ** **                | ** ** | **Three Months Ended** | ** ** | **Year Ended**             | ** ** |
|---------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **March 31, 2007**     | ** ** | **December 31, 2006** | ** ** |
| ** **                | ** ** | **($ in thousands)**   | ** ** |
| **Gross  of Reinsurance** | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Beginning gross reserves  |       | $                                | 319,230    |                            | $          | 465,728 |   |
| Incurred loss & LAE   |       | —                           |       | —                          |       |
| Calendar year payments    |       | 64,794                           |       | 146,498                         |       |
| Ending gross reserves     |       | $                                | 254,436    |                            | $          | 319,230 |   |
|                      |       |                             |       |                            |       |
| Gross case loss  reserves |       | $                                | 114,666    |                            | $          | 172,916 |   |
| Gross IBNR loss  reserves |       | 139,770                          |       | 146,314                         |       |
| Ending gross reserves     |       | $                                | 254,436    |                            | $          | 319,230 |   |
|                      |       |                             |       |                            |       |
| **Net of  Reinsurance**   | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Beginning net reserves    |       | $                                | 10,003     |                            | $          | 19,408 |   |
| Incurred loss & LAE   |       | —                           |       | —                          |       |
| Calendar year payments    |       | 3,478                            |       | 9,405                           |       |
| Ending net reserves       |       | $                                | 6,525      |                            | $          | 10,003 |   |
|                      |       |                             |       |                            |       |
| Net case loss  reserves   |       | $                                | 3,115      |                            | $          | 3,628 |   |
| Net IBNR loss  reserves   |       | 3,410                            |       | 6,375                           |       |
| Ending net reserves       |       | $                                | 6,525      |                            | $          | 10,003 |   |

 

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 the ultimate liability may exceed or beless 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. We continue to review all ofour loss reserves, including our asbestos reserves and Hurricanes Katrina andRita reserves, on a regular basis.

*CommissionExpense.* Commissionexpense paid to unaffiliated brokers and agents is generally based on apercentage of the gross written premium and is reduced by ceding commissionsthe Company may receive on the ceded written premium. Commissions are generallydeferred and recorded as deferred policy acquisition costs to the extent thatthey relate to unearned premium. Commission expense as a percentage of netearned premiums in the 2007 first quarter was 12.3% compared to 13.2% for the2006 comparable period.

*OtherOperating Expenses.*The 43% increase in other operating expenses in the 2007 first quarter comparedto the same period in 2006 was attributable primarily to employee-relatedexpenses resulting from expansion of the business and investments in technologyto support this growth. Included in the 2007 first quarter operating expenseswere $1.6 million in the aggregate for employee stock options, stockgrants and stock appreciation rights expense compared to $1.5 million forthe same period in 2006.

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**Income Taxes**. Theincome tax expense was $9.3 million and $7.6 million for the firstquarters of 2007 and 2006, respectively. The effective tax rates for the 2007and 2006 first quarters were 32.2% and 32.8%, respectively. The Company’seffective tax rate is less than 35% due to permanent differences between bookand tax return income, with the most significant item being tax exemptinterest. As of March 31, 2007 and December 31, 2006, the netdeferred Federal, foreign, state and local tax assets were $29.5 millionand $30.4 million, respectively.

We aresubject to the tax regulations of the United States and foreign countries inwhich we operate. The Company files a consolidated federal tax return, whichincludes all domestic subsidiaries and the U.K. Branch. The income from theforeign operations is designated as either U.S. connected income or non-U.S.connected income. Lloyd’s is required to pay U.S. income tax on U.S. connectedincome (U.S. source income) written by Lloyd’s syndicates. Lloyd’s and the IRShave entered into an agreement whereby the amount of tax due on U.S. connectedincome is calculated by Lloyd’s and remitted directly to the IRS. These amountsare then charged to the corporate members in proportion to their participationin the relevant syndicates. The Company’s corporate members are subject to thisagreement and will receive U.K. tax credits for any U.S. income tax incurred upto the U.K. income tax charge on the U.S. income. The non-U.S. connectedinsurance income would generally constitute taxable income under the Subpart Fincome section of the Internal Revenue Code since less than 50% of the Company’spremium is derived within the U.K. and would therefore be subject to U.S.taxation when the Lloyd’s year of account closes. Taxes are accrued at a 35%rate on our foreign source insurance income and foreign tax credits, whereavailable, are utilized to offset U.S. tax as permitted.  The Company’s effective tax rate forSyndicate 1221 taxable income could substantially exceed 35% to the extentthe Company is unable to offset U.S. taxes paid under Subpart F taxregulations with U.K. tax credits on future underwriting year distributions. U.S.taxes are not accrued on the earnings of the Company’s foreign agencies asthese earnings are not subject to the Subpart F tax regulations. These earningsare subject to taxes under U.K. tax regulations at a 30% rate.

Wehave not provided for U.S. deferred income taxes on the undistributed earningsof approximately $28.9 millionof our non-U.S. subsidiaries since these earnings are intended to bepermanently reinvested in the foreign subsidiary. However, in the future, ifsuch earnings were distributed to the Company, taxes of approximately$1.0 million would be payable on such undistributed earnings and would bereflected in the tax provision for the year in which these earnings are nolonger intended to be permanently reinvested in the foreign subsidiary assumingall foreign tax credits are realized.

TheCompany had net state and local operating loss carryforwards amounting topotential future tax benefits of $6.8 million and$6.0 million at March 31, 2007 and December 31, 2006,respectively. A valuation allowance was established for the full amount ofthese potential future tax benefits due to the uncertainty associated withtheir realization. The Company’s state and local tax carryforwards atMarch 31, 2007 expire from 2019 to2027.

InJuly 2006, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes*(“FIN 48”),**an interpretationof FASB Statement No. 109. FIN 48, which becomes effective in 2007,establishes the threshold for recognizing the benefits of tax-return positionsin the financial statements as more-likely-than-not to be sustained by thetaxing authorities, and prescribes a measurement methodology for thosepositions meeting the recognition threshold. The Company’s adoption ofFIN 48 at January 1, 2007 did not have a material effect on itsfinancial condition or results of operations.

**Segment Information**

TheCompany classifies its business into two underwriting segments consisting ofthe Insurance Companies and the Lloyd’s Operations, which are separatelymanaged, and a Corporate segment. Segment data for each of the two underwritingsegments include allocations of revenues and expenses of the NavigatorsAgencies and the Parent Company’s expenses and related income tax amountspreviously reported separately. 

34

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The Corporatesegment consists of the Parent Company’s investment income, interest expenseand the related tax effect.

Weevaluate the performance of each segment based on its underwriting and netincome results. The Insurance Companies’ and the Lloyd’s Operations’ resultsare measured by taking into account net earned premiums, incurred losses andloss adjustment expenses, commission expense and other underwriting expenses. TheCorporate segment consists of the Parent Company’s investment income, interestexpense and related tax effect. Each segment also maintains its owninvestments, on which it earns income and realizes capital gains or losses. Ourunderwriting performance is evaluated separately from the performance of ourinvestment portfolios.

Followingare the financial results of the Company’s two underwriting segments.

***Insurance Companies***

Our Insurance Companies consist of NavigatorsInsurance Company, including its U.K. Branch, and Navigators Specialty 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. Navigators Specialty Insurance Company, awholly owned subsidiary of Navigators Insurance Company, began operations in1990. It underwrites specialty and professional liability insurance on anexcess and surplus lines basis fully reinsured by Navigators Insurance Company.The Navigators Agencies produce business for the Insurance Companies.

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Following are the results of operations for theInsurance Companies for the three months ended March 31, 2007 and 2006:
| ** **                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **March 31,**               | ** ** |
| ** **                                    | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                    | ** ** | **($ in thousands)**   | ** ** |
|                                          |       |                             |       |   |   |
| Gross written  premium                        |       | $                                | 208,874    |   | $ | 162,247 |   |
| Net written  premium                          |       | 122,048                          |       | 89,644 |   |
|                                          |       |                             |       |   |   |
| Net earned  premium                           |       | 101,812                          |       | 67,352 |   |
| Net losses and  LAE                           |       | (61,340                          | )          | (39,954 | ) |
| Commission  expense                           |       | (11,083                          | )          | (7,124 | ) |
| Other operating  expenses                     |       | (18,769                          | )          | (13,433 | ) |
| Commission income  and other income (expense) |       | 489                              |       | 1,206 |   |
|                                          |       |                             |       |   |   |
| Underwriting  profit                          |       | 11,109                           |       | 8,047 |   |
|                                          |       |                             |       |   |   |
| Investment  income                            |       | 13,654                           |       | 10,410 |   |
| Net realized  capital gains (losses)          |       | 243                              |       | (75 | ) |
| Income before income  taxes                   |       | 25,006                           |       | 18,382 |   |
|                                          |       |                             |       |   |   |
| Income tax  expense                           |       | 7,911                            |       | 5,916 |   |
| Net income                                    |       | $                                | 17,095     |   | $ | 12,466 |   |
|                                          |       |                             |       |   |   |
| Loss and LAE  ratio                           |       | 60.2                             | %          | 59.3 | % |
| Commission  expense ratio                     |       | 10.9                             | %          | 10.6 | % |
| Other operating  expense ratio(1)             |       | 18.0                             | %          | 18.2 | % |
| Combined ratio                                |       | 89.1                             | %          | 88.1 | % |

----

(1)             Includes*other operating* expenses and *commission income and other income (expense).*

36

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Followingare the underwriting results of the Insurance Companies for the three monthsended March 31, 2007 and 2006:
| ** **              | ** ** | **Three Months Ended March 31, 2007** | ** ** |
|-------------------------|------------|----------------------------------------------------------------|------------|
| ** **              | ** ** | **($ in thousands)**                                 | ** ** |
| ** **              | ** ** | **Net**                                                        | ** ** | **Losses** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Earned**                                                     | ** ** | **and LAE** | ** ** | **Underwriting** | ** ** | **Underwriting** | ** ** | **Combined Ratio** | ** ** |
| ** **              | ** ** | **Premium**                                                    | ** ** | **Incurred** | ** ** | **Expenses** | ** ** | **Profit/(Loss)** | ** ** | **Loss** | ** ** | **Expense** | ** ** | **Total** | ** ** |
|                    | ** ** | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Marine                  |       | $                                                              | 33,318     |   | $ | 20,171 |   | $ | 7,113 |   | $ | 6,034 |   | 60.5 | % | 21.4 | % | 81.9 | % |
| Specialty               |       | 53,612                                                         |       | 31,766 |   | 16,492 |   | 5,354 |   | 59.3 | % | 30.7 | % | 90.0 | % |
| Professional  Liability |       | 13,037                                                         |       | 8,484 |   | 4,323 |   | 230 |   | 65.1 | % | 33.1 | % | 98.2 | % |
| Other                   |       | 1,845                                                          |       | 919 |   | 1,435 |   | (509 | ) | NM |   | NM |   | NM |   |
| Total                   |       | $                                                              | 101,812    |   | $ | 61,340 |   | $ | 29,363 |   | $ | 11,109 |   | 60.2 | % | 28.9 | % | 89.1 | % |

 
| ** **              | ** ** | **Three Months Ended March 31, 2006** | ** ** |
|-------------------------|------------|----------------------------------------------------------------|------------|
| ** **              | ** ** | **($ in thousands)**                                 | ** ** |
| ** **              | ** ** | **Net**                                                        | ** ** | **Losses** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Earned**                                                     | ** ** | **and LAE** | ** ** | **Underwriting** | ** ** | **Underwriting** | ** ** | **Combined Ratio** | ** ** |
| ** **              | ** ** | **Premium**                                                    | ** ** | **Incurred** | ** ** | **Expenses** | ** ** | **Profit/(Loss)** | ** ** | **Loss** | ** ** | **Expense** | ** ** | **Total** | ** ** |
|                    | ** ** | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Marine                  |       | $                                                              | 22,501     |   | $ | 13,500 |   | $ | 6,046 |   | $ | 2,955 |   | 60.0 | % | 26.9 | % | 86.9 | % |
| Specialty               |       | 36,134                                                         |       | 21,157 |   | 10,524 |   | 4,453 |   | 58.6 | % | 29.1 | % | 87.7 | % |
| Professional  Liability |       | 8,732                                                          |       | 5,309 |   | 2,711 |   | 712 |   | 60.8 | % | 31.0 | % | 91.8 | % |
| Other                   |       | (15                                                            | )          | (12 | ) | 70 |   | (73 | ) | NM |   | NM |   | NM |   |
| Total                   |       | $                                                              | 67,352     |   | $ | 39,954 |   | $ | 19,351 |   | $ | 8,047 |   | 59.3 | % | 28.8 | % | 88.1 | % |

 

Netearned premium of the Insurance Companies increased 51% in the 2007 firstquarter compared to the same period last year reflective of business expansionin all business units coupled with increased retention of the business written.

Excluding the 2005 HurricaneLosses, underwriting results generally reflect the favorable industry marketconditions over the last three to four years coupled with satisfactory losstrends in the aforementioned periods. The 2007 first quarter loss ratio wasfavorably impacted by prior year loss reserve redundancies of $5.7 millionor 5.6 loss ratio points. The 2006 first quarter loss ratio was favorablyimpacted by prior year loss reserve redundancies of $3.8 million or 5.6loss ratio points.

The approximate annualizedpre-tax yields on the Insurance Companies’ investment portfolio, excluding netrealized capital gains and losses, was 4.5% for both the 2007 and 2006 firstquarters. The average duration of our Insurance Companies’ invested assets atMarch 31, 2007 was 4.5 years. Net investment income increased in the 2007first quarter compared to the same period in 2006 primarily due to the positivecash flows resulting in a larger investment portfolio including the statutorysurplus contribution of $100 million from the net proceeds of our April2006 7% Senior Notes offering.

***Lloyd’s Operations***

The Lloyd’s Operationsconsist of NUAL, which manages Syndicate 1221, Millennium UnderwritingLtd. and Navigators Corporate Underwriters Ltd. Both Millennium UnderwritingLtd. and Navigators Corporate 

37

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Underwriters Ltd. are Lloyd’s corporate members withlimited liability and provide capacity to Syndicate 1221. NUAL ownsNavigators Underwriting Ltd., an underwriting managing agency with itsprincipal office in Manchester, England, which underwrites cargo and engineeringbusiness for Syndicate 1221. Navigators NV, a wholly owned subsidiary ofNUAL located in Antwerp, Belgium, produces transport liability, cargo andmarine liability premium on behalf of Syndicate 1221. The Lloyd’sOperations and Navigators Management (UK) Limited, a Navigators Agency whichproduces business for the U.K. Branch, are subsidiaries of Navigators Holdings(UK) Limited located in the United Kingdom.

Syndicate 1221 has stamp capacity of£140 million ($274 million) in 2007 compared to £123 million($226 million) in 2006. 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. The Company participates for 100% ofSyndicate 1221’s capacity for both the 2007 and 2006 underwriting years.

Syndicate 1221’s stamp capacity is expressed net ofcommission (as is standard at Lloyd’s) of approximately 22.5% for the 2007underwriting year and 21% for the 2006 underwriting year. The Syndicate 1221premium recorded in the Company’s financial statements is gross of commission. 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 inSyndicate 1221.

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 Syndicate 1221 is represented byand 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 are proportionately liablefor each liability and (iii) Syndicate 1221 is not a separate legalentity. At Lloyd’s, the amount to close an underwriting year into the next yearis referred to as the reinsurance to close (“RITC”) transaction. The RITCamounts represent the transfer of the assets and liabilities from theparticipants of a closing underwriting year to the participants of the nextunderwriting year. To the extent our participation in the syndicate changes,the RITC amounts vary accordingly. 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 transaction.

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

Whenever a member of Lloyd’s is unable to pay itsdebts to policyholders, such debts may be payable by the Lloyd’s Central Fund. IfLloyd’s determines that the Central Fund needs to be increased, it has thepower to assess premium levies on current Lloyd’s members up to 3% of a member’sunderwriting capacity in any one year. The Company does not believe that anyassessment is likely in the foreseeable future and has not provided anyallowance for such an assessment. However, based on the Company’s 2007 capacityat Lloyd’s of £140 million, the March 31, 2007 exchange rate of £1equals $1.97 and in the event of a maximum 3% assessment, the Company would beassessed approximately $8.3 million. In addition, beginning with the 2005underwriting year, Lloyd’s added a second tier of assets to the existingcentral fund. This second tier is being built up through a compulsory interestbearing loan to the Society of Lloyd’s from the Lloyd’s members based on thestamp capacity of each syndicate for the respective underwriting year. Thefunds are invested in assets eligible for Society of Lloyd’s solvency. Theloans will be repaid on a rolling year basis as each year closes. At March 31,2007, the Company had $3.8 million of assets loaned to this fund.

38

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Following are the results of operations of the Lloyd’sOperations for the three months ended March 31, 2007 and 2006:

|                                               | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **March 31,**               | ** ** |
| ** **                                    | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                    | ** ** | **($ in thousands)**   | ** ** |
| ** **                                    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Gross written premium                         |       | $                                | 91,987     |   | $ | 101,748 |   |
| Net written premium                           |       | 50,971                           |       | 53,782 |   |
|                                          |       |                             |       |   |   |
| Net earned premium                            |       | 37,234                           |       | 36,370 |   |
| Net losses and LAE                            |       | (19,852                          | )          | (22,163 | ) |
| Commission expense                            |       | (6,016                           | )          | (6,581 | ) |
| Other operating  expenses                     |       | (7,520                           | )          | (4,975 | ) |
| Commission income and  other income (expense) |       | (152                             | )          | 266 |   |
|                                          |       |                             |       |   |   |
| Underwriting profit                           |       | 3,694                            |       | 2,917 |   |
|                                          |       |                             |       |   |   |
| Investment income                             |       | 2,151                            |       | 2,007 |   |
| Net realized capital (losses)                 |       | (42                              | )          | (349 | ) |
| Income before income  taxes                   |       | 5,803                            |       | 4,575 |   |
|                                          |       |                             |       |   |   |
| Income tax expense                            |       | 2,054                            |       | 1,601 |   |
| Net income                                    |       | $                                | 3,749      |   | $ | 2,974 |   |
|                                          |       |                             |       |   |   |
| Loss and LAE ratio                            |       | 53.3                             | %          | 60.9 | % |
| Commission expense  ratio                     |       | 16.2                             | %          | 18.1 | % |
| Other operating expense  ratio (1)            |       | 20.6                             | %          | 13.0 | % |
| Combined ratio                                |       | 90.1                             | %          | 92.0 | % |

----

(1)             Includes*other operating expenses* and *commission income and other income (expense).*

The Lloyd’s Operations have been experiencing businessexpansion coupled with improving underwriting results as a result of thegenerally favorable market conditions for marine and energy business from late2001 through 2003, and continuing to a lesser extent in 2004.  Premium rate increases occurred in 2005 andcontinued into 2006 following Hurricanes Katrina and Rita, particularly in theoffshore energy business.

The 2007 first quarter was favorably impacted by prioryear loss reserve redundancies of $1.1 million or 3.0 loss ratio points.  The 2006 first quarter was not impacted byprior year loss reserve redundancies.

The increase in other operating expenses wasattributable primarily to the increase in employee-related expenses, investmentsin technology, the increase in the average exchange rate in the 2007 firstquarter of $1.95 per £1 from $1.75 per £1 in the first quarter of 2006 and tothe increase in the Lloyd’s related expenses.

The approximate annualized pre-tax yields on the Lloyd’sOperations’ investment portfolio, excluding net realized capital gains andlosses, for the 2007 first quarter was 3.6% compared to 3.5% for the comparable2006 period.  Generally, funds investedat Lloyd’s have been invested with a relatively short average duration, whichis reflected in the yield, in order to meet liquidity needs.  The average duration of our Lloyd’sOperations’

39

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invested assets at March 31, 2007 was 1.6 years.  Such yields are net of interest credits tocertain reinsurers for funds withheld by our Lloyd’s Operations.

**Off-Balance Sheet Transactions**

There have been no material changes in theinformation concerning off-balance sheet transactions as stated in the Company’s2006 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 2006 Annual Report on Form 10-K.  Total reserves for losses and LAE were $1.6billion at both March 31, 2007 and December 31, 2006.   There were no significant changes in theCompany’s lines of business or claims handling that would create a materialchange in the percentage relationship of the projected payments by period tothe total reserves.

The following table sets forth our contractualobligations with respect to the 7% senior unsecured notes due May 1, 2016discussed in Note 10 to the Notes to Interim Consolidated Financial Statements,included herein:
| ** **      | ** ** | **Payments Due by Period** | ** ** |
|-----------------|------------|-------------------------------------------|------------|
| ** **      | ** ** | ** **                                | ** ** | **Less than** | ** ** | ** ** | ** ** | ** ** | ** ** | **More than** | ** ** |
| ** **      | ** ** | **Total**                                 | ** ** | **1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **5 Years** | ** ** |
| ** **      | ** ** | **($ in thousands)**            | ** ** |
|            | * *   | * *                                  | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| 7% Senior Notes |       | $                                         | 208,125    |   | $ | 8,750 |   | $ | 17,500 |   | $ | 17,500 |   | $ | 164,375 |   |
|                 |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

** **

**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 its investment objectives by investing incash equivalents and money market funds, municipal bonds, U.S. Governmentbonds, U.S. Government agency guaranteed and non-guaranteed securities,corporate bonds, mortgage-backed and asset-backed securities and common andpreferred stocks.  Our investmentguidelines require that the amount of the consolidated fixed-income portfoliorated below “A-” but no lower than “BBB-” by Standard & Poor’s (“S&P”)or below “A3” but no lower than “Baa3” by Moody’s Investors Service (“Moody’s”)shall not exceed 10% of the total of fixed income and short-terminvestments.  Securities rated below “BBB-”by S&P or below “Baa3” by Moody’s combined with any other investments notspecifically permitted under the investment guidelines, can not exceed 5% ofconsolidated stockholders’ equity. Investments in equity securities that are actively traded on major U.S.stock exchanges can not exceed 20% of consolidated stockholders’ equity.  Our investment guidelines prohibitinvestments in derivatives other than as a hedge against foreign currencyexposures or the writing of covered call options on the equity portfolio.

The Insurance Companies’ investments are subject tothe direction and control of their respective Board of Directors and ourFinance Committee.  The investmentportfolio and the performance of the investment managers are reviewedquarterly.  These investments must complywith the insurance laws of New York State, the domiciliary state of NavigatorsInsurance Company and Navigators Specialty Insurance Company.  These laws prescribe the type, quality andconcentration of investments which may be made by insurance companies.

40

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In general, these laws permit investments, withinspecified limits and subject to certain qualifications, in Federal, state andmunicipal obligations, corporate bonds, preferred stocks, common stocks,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 Company’s Board of Directors and FinanceCommittee, and represent our share of the investments held by Syndicate1221.  These investments must comply withthe rules and regulations imposed by Lloyd’s and by certain overseasregulators.  The investment portfolio andthe performance of the investment managers are reviewed quarterly.

All fixed maturity and equity securities are carriedat fair value.  The fair value is basedon quoted market prices or dealer quotes provided by independent pricingservices.

Thefollowing tables show our cash and investments as of March 31, 2007 andDecember 31, 2006:

41

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| ** **                                                                 | ** ** | ** **                     | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Cost or** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------|------------|----------------|------------|----------------|------------|------------------|------------|
| ** **                                                                 | ** ** | **Fair**                       | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Amortized**    | ** ** |
| **March 31, 2007**                                               | ** ** | ** **                     | ** ** | **Value**      | ** ** | **Gains**      | ** ** | **(Losses)**     | ** ** | **Cost** | ** ** |
| ** **                                                                 | ** ** | **($ in thousands)** | ** ** |
| Fixed maturities:                                                          |       |                           |       |           |       |           |       |             |       |
|                                                                       |       |                           |       |           |       |           |       |             |       |
| U.S. Government  Treasury Bonds,  GNMAs and foreign  government bonds |       | $                         | 201,371    |           | $     | 990            |       | $           | (1,685     | ) | $  | 202,066 |   |
| States, municipalities  and political  subdivisions                   |       | 388,024                        |       | 2,426          |       | (2,208         | )          | 387,806          |       |
| Mortgage- and  asset-backed securities (excluding GNMAs)                   |       | 530,268                        |       | 1,445          |       | (3,764         | )          | 532,587          |       |
| Corporate bonds                                                            |       | 209,161                        |       | 1,985          |       | (1,434         | )          | 208,610          |       |
|                                                                       |       |                           |       |           |       |           |       |             |       |
| Total fixed  maturities                                                    |       | 1,328,824                      |       | 6,846          |       | (9,091         | )          | 1,331,069        |       |
|                                                                       |       |                           |       |           |       |           |       |             |       |
| Equity securities -  common stocks                                         |       | 45,380                         |       | 6,472          |       | (576           | )          | 39,484           |       |
|                                                                       |       |                           |       |           |       |           |       |             |       |
| Cash                                                                       |       | 1,628                          |       | —         |       | —         |       | 1,628            |       |
|                                                                       |       |                           |       |           |       |           |       |             |       |
| Short-term investments                                                     |       | 130,202                        |       | —         |       | —         |       | 130,202          |       |
|                                                                       |       |                           |       |           |       |           |       |             |       |
| Total                                                                      |       | $                              | 1,506,034  |           | $          | 13,318         |       | $                | (9,667     | ) | $ | 1,502,383 |   |
|                                                                       |       |                           |       |           |       |           |       |             |       |
|                                                                       |       |                           |       |           |       |           |       |             |       |
| ** **                                                                 | ** ** | ** **                     | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Cost or**      | ** ** |
| ** **                                                                 | ** ** | **Fair**                       | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Amortized**    | ** ** |
| **December 31,  2006**                                                     | ** ** | ** **                     | ** ** | **Value**      | ** ** | **Gains**      | ** ** | **(Losses)**     | ** ** | **Cost** | ** ** |
| ** **                                                                 | ** ** | **($ in thousands)**      | ** ** |
| Fixed maturities:                                                          |       |                           |       |           |       |           |       |             |       |
|                                                                       |       |                           |       |           |       |           |       |             |       |
| U.S. Government  Treasury Bonds, GNMAs and  foreign government bonds       |       | $                         | 206,214    |           | $     | 972            |       | $           | (2,086     | ) | $  | 207,328 |   |
| States, municipalities  and political subdivisions                         |       | 361,859                        |       | 2,719          |       | (2,345         | )          | 361,485          |       |
| Mortgage- and  asset-backed securities (excluding GNMAs)                   |       | 489,556                        |       | 939            |       | (4,488         | )          | 493,105          |       |
| Corporate bonds                                                            |       | 201,088                        |       | 1,672          |       | (1,950         | )          | 201,366          |       |
|                                                                       |       |                           |       |           |       |           |       |             |       |
| Total fixed  maturities                                                    |       | 1,258,717                      |       | 6,302          |       | (10,869        | )          | 1,263,284        |       |
|                                                                       |       |                           |       |           |       |           |       |             |       |
| Equity securities -  common stocks                                         |       | 37,828                         |       | 6,297          |       | (348           | )          | 31,879           |       |
|                                                                       |       |                           |       |           |       |           |       |             |       |
| Cash                                                                       |       | 2,404                          |       | —         |       | —         |       | 2,404            |       |
|                                                                       |       |                           |       |           |       |           |       |             |       |
| Short-term investments                                                     |       | 176,961                        |       | —         |       | —         |       | 176,961          |       |
|                                                                       |       |                           |       |           |       |           |       |             |       |
| Total                                                                      |       | $                              | 1,475,910  |           | $          | 12,599         |       | $                | (11,217    | ) | $ | 1,474,528 |   |
|                                                                            |            |                                |            |                |            |                |            |                  |            |  |  |  |  |  |  |  |  |

 

42

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At March 31, 2007 and December 31, 2006, allfixed-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 thosesecurities whose market value was less than 80% of their cost or amortizedcost, as appropriate, for six or more consecutive months.  Other factors considered in evaluatingpotential impairment include the current fair value as compared to cost oramortized cost, as appropriate, our intent and ability to retain the investmentfor a period of time sufficient to allow for an anticipated recovery in value,specific credit issues related to the issuer and current economic conditions.

As mentioned above, the Company considers its intentand ability to hold a security until the value recovers as part of the processof evaluating whether a security’s unrealized loss represents another-than-temporary decline.  TheCompany’s ability to hold such securities is supported by sufficient cash flowfrom its operations and from maturities within its investment portfolio inorder to meet its claims payment and other disbursement obligations arisingfrom its underwriting operations without selling such investments.  With respect to securities where the declinein value is determined to be temporary and the security’s value is not writtendown, a subsequent decision may be made to sell that security and realize aloss.  Subsequent decisions on securitysales are made within the context of overall risk monitoring, changinginformation, market conditions and assessing value relative to other comparablesecurities.  Management of the Company’sinvestment portfolio is outsourced to third party investment managers.  While these investment managers may, at agiven point in time, believe that the preferred course of action is to holdsecurities with unrealized losses that are considered temporary until suchlosses are recovered, the dynamic nature of the portfolio management may resultin a subsequent decision to sell the security and realize the loss, based upona change in market and other factors described above.  The Company believes that subsequentdecisions to sell such securities are consistent with the classification of theCompany’s portfolio as available for sale.

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 changes in the factors weconsider when evaluating investments for impairment losses could result in asignificant change in impairment losses reported in the consolidated financialstatements.  There were no impairmentlosses recorded in our fixed maturity or equity securities portfolios in thefirst quarter of 2007 or 2006.

The following table summarizes all securities in anunrealized loss position at March 31, 2007 and December 31, 2006, showing theaggregate fair value and gross unrealized loss by the length of time thosesecurities have continuously been in an unrealized loss position:

43

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| ** **                                                          | ** ** | **March 31, 2007**   | ** ** | **December 31, 2006** | ** ** | ** ** |       |
|---------------------------------------------------------------------|------------|--------------------------------|------------|---------------------------------|------------|------------|------------|
| ** **                                                          | ** ** | **Fair**                       | ** ** | **Gross**                       | ** ** | **Fair**   | ** ** | **Gross** | ** ** | ** ** |
| ** **                                                          | ** ** | **Value**                      | ** ** | **Unrealized Loss**        | ** ** | **Value**  | ** ** | **Unrealized Loss** | ** ** | ** ** |
| ** **                                                          | ** ** | **($ in thousands)** | ** ** | ** **                      |
|                                                                |       |                           |       |                            |       |       |       |   |   |   |   |
| Fixed Maturities:                                                   |       |                           |       |                            |       |       |       |   |   |   |   |
| U.S. Government  Treasury Bonds, GNMAs and foreign government bonds |       |                           |       |                            |       |       |       |   |   |   |   |
| 0-6 Months                                                          |       | $                              | 70,111     |                            | $          | 437        |       | $ | 34,085 |   | $ | 586 |   |   |   |
| 7-12 Months                                                         |       | 4,327                          |       | 23                              |       | 20,806     |       | 86 |   |   |   |
| > 12 Months.                                                     |       | 48,446                         |       | 1,225                           |       | 69,424     |       | 1,414 |   |   |   |
| Subtotal                                                            |       | 122,884                        |       | 1,685                           |       | 124,315    |       | 2,086 |   |   |   |
|                                                                |       |                           |       |                            |       |       |       |   |   |   |   |
| States, municipalities  and  political subdivisions            |       |                           |       |                            |       |       |       |   |   |   |   |
| 0-6 Months                                                          |       | 84,805                         |       | 414                             |       | 57,747     |       | 316 |   |   |   |
| 7-12 Months                                                         |       | 2,450                          |       | 36                              |       | 6,661      |       | 80 |   |   |   |
| > 12 Months.                                                     |       | 120,780                        |       | 1,758                           |       | 118,917    |       | 1,949 |   |   |   |
| Subtotal                                                            |       | 208,035                        |       | 2,208                           |       | 183,325    |       | 2,345 |   |   |   |
|                                                                |       |                           |       |                            |       |       |       |   |   |   |   |
| Mortgage- and  asset-backed securities  (excluding  GNMAs)     |       |                           |       |                            |       |       |       |   |   |   |   |
| 0-6 Months                                                          |       | 178,971                        |       | 869                             |       | 174,270    |       | 921 |   |   |   |
| 7-12 Months                                                         |       | 679                            |       | —                          |       | 10,444     |       | 65 |   |   |   |
| > 12 Months.                                                     |       | 181,587                        |       | 2,895                           |       | 184,515    |       | 3,502 |   |   |   |
| Subtotal                                                            |       | 361,237                        |       | 3,764                           |       | 369,229    |       | 4,488 |   |   |   |
|                                                                |       |                           |       |                            |       |       |       |   |   |   |   |
| Corporate bonds                                                     |       |                           |       |                            |       |       |       |   |   |   |   |
| 0-6 Months                                                          |       | 28,529                         |       | 188                             |       | 27,719     |       | 185 |   |   |   |
| 7-12 Months                                                         |       | 988                            |       | 1                               |       | 15,503     |       | 224 |   |   |   |
| > 12 Months.                                                     |       | 73,138                         |       | 1,245                           |       | 66,014     |       | 1,541 |   |   |   |
| Subtotal                                                            |       | 102,655                        |       | 1,434                           |       | 109,236    |       | 1,950 |   |   |   |
|                                                                |       |                           |       |                            |       |       |       |   |   |   |   |
| Total Fixed Maturities.                                             |       | $                              | 794,811    |                            | $          | 9,091      |       | $ | 786,105 |   | $ | 10,869 |   |   |   |
|                                                                |       |                           |       |                            |       |       |       |   |   |   |   |
| Equity securities -  common stocks                                  |       |                           |       |                            |       |       |       |   |   |   |   |
| 0-6 Months                                                          |       | $                              | 757        |                            | $          | 91         |       | $ | 3,265 |   | $ | 158 |   |   |   |
| 7-12 Months                                                         |       | 150                            |       | 23                              |       | 800        |       | 72 |   |   |   |
| > 12 Months.                                                     |       | 7,999                          |       | 462                             |       | 782        |       | 118 |   |   |   |
|                                                                |       |                           |       |                            |       |       |       |   |   |   |   |
| Total Equity Securities                                             |       | $                              | 8,906      |                            | $          | 576        |       | $ | 4,847 |   | $ | 348 |   |   |   |
|                                                                     |            |                                |            |                                 |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

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The following table shows the composition byNational Association of Insurance Commissioners (“NAIC”) rating and thegenerally equivalent S&P and Moody’s ratings of the fixed maturitysecurities in our portfolio with gross unrealized losses at March 31, 2007.  Not all of the securities are rated byS&P and/or Moody’s.
| ** ** | ** ** | ** **     | ** ** | ** **       | ** ** | **Gross**                      | ** ** | ** **          | ** ** | ** ** | ** ** |
|------------|------------|----------------|------------|------------------|------------|--------------------------------|------------|---------------------|------------|------------|------------|
| ** ** | ** ** | **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         |       | $                              | 8,658      |                | 95         | %          | $          | 767,917 |   | 97 | % |
| 2          |       | BBB            |       | Baa              |       | 433                            |       | 5                   | %          | 26,894     |       | 3 | % |
| 3          |       | BB             |       | Ba               |       | —                         |       | —              |       | —     |       | — |   |
| 4          |       | B              |       | B                |       | —                         |       | —              |       | —     |       | — |   |
| 5          |       | CCC  or lower  |       | Caa  or lower    |       | —                         |       | —              |       | —     |       | — |   |
| 6          |       | N/A            |       | N/A              |       | —                         |       | —              |       | —     |       | — |   |
|       |       | Total          |       |             |       | $                              | 9,091      |                | 100        | %          | $          | 794,811 |   | 100 | % |

 

At March 31, 2007, the gross unrealized losses inthe table directly above are related to fixed maturity securities that arerated investment grade.  Investment gradeis defined as a security having a NAIC rating of 1 or 2, an S&P rating of “BBB-”or higher, or a Moody’s rating of “Baa3” or higher.  Unrealized losses on investment gradesecurities principally relate to changes in interest rates or changes insector-related credit spreads since the securities were acquired.  Any such unrealized losses are recognized inincome, if the securities are sold, or if the decline in fair value is deemedother-than-temporary.

The scheduledmaturity dates for fixed maturity securities in an unrealized loss position atMarch 31, 2007 are shown in the following table:
| ** **                              | ** ** | **Gross**                      | ** ** | ** **          | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|--------------------------------|------------|---------------------|------------|------------|------------|
| ** **                              | ** ** | **Unrealized Loss**       | ** ** | **Fair Value** | ** ** |
| ** **                              | ** ** | ** **                     | ** ** | **Percent**         | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                              | ** ** | **Amount**                     | ** ** | **of Total**   | ** ** | **Amount** | ** ** | **of Total** | ** ** |
| ** **                              | ** ** | **($ in thousands)** | ** ** |
|                                    |       |                           |       |                |       |       |       |   |   |
| Due in one year or less                 |       | $                              | 244        |                | 3          | %          | $          | 35,622 |   | 4 | % |
| Due after one year  through five years  |       | 2,090                          |       | 23                  | %          | 194,868    |       | 25 | % |
| Due after five years  through ten years |       | 1,175                          |       | 13                  | %          | 121,340    |       | 15 | % |
| Due after ten years                     |       | 1,818                          |       | 20                  | %          | 81,744     |       | 10 | % |
| Mortgage- and  asset-backed securities  |       | 3,764                          |       | 41                  | %          | 361,237    |       | 46 | % |
|                                    |       |                           |       |                |       |       |       |   |   |
| Total fixed income  securities          |       | $                              | 9,091      |                | 100        | %          | $          | 794,811 |   | 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 of principal, the mortgage-backed andasset-backed securities are estimated to have an effective maturity ofapproximately 5.0 years.

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Our realized capital gains and losses for thethree months ended March 31, 2007 and 2006 were as follows:
| ** **                           | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **March 31,**               | ** ** |
| ** **                           | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **($ in thousands)**   | ** ** |
|                                 |       |                             |       |   |   |
| Fixed  maturities:                   |       |                             |       |   |   |
| Gains                                |       | $                                | 450        |   | $ | 272 |   |
| (Losses)                             |       | (438                             | )          | (1,166 | ) |
|                                 |       | 12                               |       | (894 | ) |
| Equity  securities:                  |       |                             |       |   |   |
| Gains                                |       | 250                              |       | 481 |   |
| (Losses)                             |       | (61                              | )          | (11 | ) |
|                                 |       | 189                              |       | 470 |   |
|                                 |       |                             |       |   |   |
| Net realized  capital gains (losses) |       | $                                | 201        |   | $ | (424 | ) |

 

Thefollowing table details realized losses in excess of $250,000 from sales andimpairments during the first three months of 2007 and 2006 and the relatedcircumstances giving rise to the loss:
| ** **      | ** ** | ** **       | ** ** | ** **   | ** ** | ** **         | ** ** | ** **                     | ** ** | ** **           | ** ** | ** **                   | ** ** | **# of Months** | ** ** |
|-----------------|------------|------------------|------------|--------------|------------|--------------------|------------|--------------------------------|------------|----------------------|------------|------------------------------|------------|---------------------------|------------|
| ** **      | ** ** | ** **       | ** ** | ** **   | ** ** | ** **         | ** ** | ** **                     | ** ** | ** **           | ** ** | ** **                   | ** ** | **Unrealized Loss**  | ** ** |
| ** **      | ** ** | ** **       | ** ** | ** **   | ** ** | ** **         | ** ** | ** **                     | ** ** | ** **           | ** ** | **Net**                      | ** ** | **Exceeded 20%**     | ** ** |
| ** **      | ** ** | **Date of** | ** ** | **Proceeds** | ** ** | **(Loss) on** | ** ** | ** **                     | ** ** | **Holdings at** | ** ** | **Unrealized**               | ** ** | **of Cost or**  | ** ** |
| **Description** | ** ** | ** **       | ** ** | **Sale**     | ** ** | **from Sale** | ** ** | **Sale**                       | ** ** | **Impairment**       | ** ** | **March 31, 2007** | ** ** | **(Loss)**                | ** ** | **Amortized Cost** | ** ** |
| ** **      | ** ** | ** **       | ** ** | ** **   | ** ** | ** **         | ** ** | **($ in thousands)** | ** ** | ** **           | ** ** | ** **                   | ** ** | ** **                | ** ** |
|                 |            |                  |            |              |            |                    |            |                                |            |                      |            |                              |            |                           |            |  |  |

 

Threemonths ended March 31, 2007 and 2006:

 
| TIPS(1) |   | 3/31/2007 |   | $ | 5,316  |   | $ | (335 | ) | — |   | — |   | — |   | — |   |
|---------|--------|-----------|--------|---|--------|--------|---|------|---|--------|--------|--------|--------|--------|--------|--------|--------|
| TIPS(1) |   | 3/31/2006 |   | $ | 15,418 |   | $ | (305 | ) | — |   | — |   | — |   | — |   |

----

(1)             Treasuryinflation protection securities (TIPS) were sold during the 2007 and 2006 firstquarters due to the widening breakeven yield spread between TIPS andTreasuries.

**Reinsurance Recoverables**

We utilize reinsurance principally to reduce ourexposure on individual risks, to protect against catastrophic losses, and tostabilize loss ratios and underwriting results. Although reinsurance makes the reinsurer liable to us to the extent therisk is transferred or ceded to the reinsurer, ceded reinsurance arrangementsdo not eliminate our obligation to pay claims to our policyholders.  Accordingly, we bear credit risk with respectto our reinsurers.  Specifically, ourreinsurers may not pay claims made by us on a timely basis, or they may not paysome or all of these claims.  Either ofthese events would increase our costs and could have a material adverse effecton our business.  We are required to paythe losses even if the reinsurer fails to meet its obligations under thereinsurance agreement.  HurricanesKatrina and Rita increased our reinsurance recoverables significantly whichincreased our credit risk.

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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, whenthe reinsurance is placed, a reinsurer generally must have an A.M. Best Companyand/or Standard & Poor’s rating of “A” or better, or equivalent financialstrength if not rated, plus at least $250 million in policyholders’surplus.  Our Reinsurance SecurityCommittee monitors the financial strength of our reinsurers and the relatedreinsurance receivables and periodically reviews the list of acceptablereinsurers.  The reinsurance is placedeither directly by us or through reinsurance intermediaries.  The reinsurance intermediaries arecompensated by the reinsurers.

The increase in *reinsurance receivable onpaid losses* was primarily due to the ceded portion of paid lossesresulting from Hurricanes Katrina and Rita which are in the process of beingcollected from various reinsurers.

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 $20.1 millionand $28.6 million for the three months ended March 31, 2007 and 2006,respectively.  The positive operatingcash flow was primarily due to the increase in net written premium.  Operating cash flow was used primarily toacquire additional investment assets. The 2007 and 2006 cash flow from operations were reduced byapproximately $21.5 million and $4.4 million for 2005 hurricane lossreinsurance recoveries to be collected from reinsurers in subsequent accountingperiods.

Beginning in 2006, the Company made certainadjustments to the Consolidated Statements of Cash Flows (“Cash Flow Statements”)to identify the impact of foreign exchange rate changes on each section of theCash Flow Statement.  The interim CashFlow Statements for 2006 have been restated to reflect this change.

Investments and cash increased to $1,506 million atMarch 31, 2007 from $1,476 million at December 31, 2006.  The increase was due to the positive cashflow from operations.  Net investmentincome was $16.2 million and $12.6 million for the three months ended March 31,2007 and 2006, respectively.

The approximate annualized pre-tax investment yieldsof the portfolio, excluding net realized capital gains and losses, was 4.4% forthe 2007 first quarter compared to 4.3% for the 2006 first quarter.  As of March 31, 2007 and December 31, 2006,all fixed maturity securities and equity securities held by us were classifiedas available-for-sale.

At March 31, 2007, the weighted average rating ofour fixed maturity investments was “AA” by Standard & Poor’s and “Aa” byMoody’s.  We believe that we have limitedexposure to credit risk since the entire fixed maturity investment portfolioconsists of investment-grade bonds.  AtMarch 31, 2007, our portfolio had an average maturity of 5.4 years and durationof 4.1 years.  Management continuallymonitors the composition and cash flow of the investment portfolio in order tomaintain the appropriate levels of liquidity in an effort to ensure our abilityto satisfy claims.

We have a credit facility provided through aconsortium of banks.  The credit facilitywas amended in February 2007 to increase the letters of credit available underthe facility from $115 million to $180 million and to increase the line ofcredit under the facility from $10 million to $20 million.  Also, the expiration of the credit facilitywas extended from June 30, 2007 to March 31, 2009.  If at that time, the bank consortium does notrenew the credit facility, we will need to find other sources to provide theletters of credit or other collateral required to continue our participation inSyndicate 1221.  The credit facility,which is denominated in U.S. dollars, is utilized primarily by Navigators CorporateUnderwriters Ltd. and Millennium Underwriting Ltd. to fund our participation inSyndicate 1221 which is denominated in British pounds.  At March 31, 2007, letters of credit with an

47

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aggregate face amount of $105.1 million were issuedunder the credit facility.  The line ofcredit was unused at March 31, 2007.

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 ondividends, stock buy backs, mergers and the sale of assets, maintaining certainconsolidated tangible net worth, statutory surplus and other financialratios.  No dividends have been declaredor paid by the Company through March 31, 2007. We were in compliance with all covenants at March 31, 2007.

An amendment to the credit facility was approved bythe bank consortium in April 2006 for the primary purpose of permitting theCompany to issue $125 million of senior unsecured notes.  The public debt offering of the senior noteswas completed on April 17, 2006.

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’sPlan of Reconstruction and Renewal, a portion of our recoverables are nowreinsured by Equitas (a separate United Kingdom authorized reinsurance companyestablished to reinsure outstanding liabilities of all Lloyd’s members for allrisks written in the 1992 or prior years of account).

Time lags do occur in the normal course of businessbetween the time gross losses are paid by the Company and the time such grosslosses are billed and collected from reinsurers.  Recoverable amounts at March 31, 2007 areanticipated to be billed and collected over the next several years as grosslosses are paid by the Company.

Generally, for pro-rata or quota share reinsurers,including pool participants, the Company issues quarterly settlement statementsfor premiums less commissions and paid loss activity, which are expected to besettled by the end of the subsequent quarter. The Company has the ability to issue “cash calls” requiring suchreinsurers to pay losses whenever paid loss activity for a claim ceded to aparticular reinsurance treaty exceeds a predetermined amount (generally $1million) as set forth in the pro-rata treaty. For the Insurance Companies, cash calls must generally be paid within 30calendar days.  There is generally nospecific settlement period for the Lloyd’s Operations cash call provisions, butsuch billings are usually paid within 45 calendar days.

Generally, for excess of loss reinsurers the Companypays monthly or quarterly deposit premiums based on the estimated subjectpremiums over the contract period (usually one year) which are subsequentlyadjusted based on actual premiums determined after the expiration of theapplicable reinsurance treaty.  Paidlosses subject to excess of loss recoveries are generally billed as they occurand are usually settled by reinsurers within 30 calendar days for the InsuranceCompanies and 30 business days for the Lloyd’s Operations.

The Company sometimes withholds funds fromreinsurers and may apply ceded loss billings against such funds in accordance withthe applicable reinsurance agreements.

At March 31, 2007, ceded asbestos paid and unpaidlosses recoverable were $21.2 million of which $11.4 million and $1.6 millionwere due from Equitas and Ace International, respectively.  In November 2006, the Company filedarbitration demands against Equitas and Ace International for paid lossesrecoverable on settled asbestos claims. The approximate ceded paid and unpaid recoverable amounts relating tosuch arbitrations are $2.7 million for Equitas and $1.6 million for AceInternational.  For a discussion of ourarbitration demands, see Part II Item 1 “Legal Proceedings”.  The Company generally experiences significantcollection delays for a large portion of reinsurance recoverable amounts forasbestos losses given that certain reinsurers are in run-off or otherwise nolonger active in the reinsurance business. Such circumstances are considered in the Company’s ongoing assessment ofsuch reinsurance recoverables.

The Company believes that it has adequately managedits cash flow requirements related to reinsurance recoveries from its positivecash flows and the use of available short-term funds when applicable.  However,

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there can be no assurances that the Company will beable to continue to adequately manage such recoveries in the future or thatcollection disputes or reinsurer insolvencies will not arise that couldmaterially increase the collection time lags or result in recoverablewrite-offs causing additional incurred losses and liquidity constraints to theCompany.  The payment of gross claims andrelated collections from reinsurers with respect to 2005 Hurricanes couldsignificantly impact the Company’s liquidity needs.  However, we expect to pay the 2005 HurricaneLosses over a period of years from cash flow and, if needed, short-terminvestments and expect to collect our paid reinsurance recoverables generallyunder the terms described above.

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

Our capital resources consist of funds deployed oravailable to be deployed to support our business operations.  At March 31, 2007 and December 31, 2006, ourcapital resources were as follows:
| ** **                             | ** ** | **March 31,**             | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|--------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2007**                       | ** ** | **2006**              | ** ** |
| ** **                             | ** ** | **($ in thousands)** | ** ** |
|                                   | ** ** | ** **                     | ** ** |                  |       |
| Senior debt                            |       | $                              | 123,587    |                  | $          | 123,560 |   |
| Stockholders’  equity             |       | 574,367                        |       | 551,343               |       |
| Total  capitalization                  |       | $                              | 697,954    |                  | $          | 674,903 |   |
| Ratio of debt to total  capitalization |       | 17.7                           | %          | 18.3                  | %          |

 

The Company completed its public offering of seniordebt on April 17, 2006 and received net proceeds of $123.5 million of which$100 million was contributed to the capital and surplus of Navigators InsuranceCompany.  The increase in stockholders’equity in 2006 was principally due to 2006 net income of $72.6 million.

We monitor our capital adequacy to support ourbusiness on a regular basis.  The futurecapital requirements of our business will depend on many factors, including ourability to write new business successfully and to establish premium rates andreserves at levels sufficient to cover losses. Our ability to underwrite is largely dependent upon the quality of ourclaims paying and financial strength ratings as evaluated by independent ratingagencies.  In particular, we require (1)sufficient capital to maintain our financial strength ratings, as issued byseveral ratings agencies, at a level considered necessary by management toenable our Insurance Companies to compete; (2) sufficient capital to enable ourInsurance Companies to meet the capital adequacy tests performed by statutoryagencies in the United States and the United Kingdom and (3) letters of creditand other forms of collateral that are necessary to support the business.

We primarily rely upon dividends from oursubsidiaries to meet our holding company obligations.  Since the issuance of the senior debt inApril 2006, the holding company cash obligations primarily consist ofsemi-annual interest payments of $4.4 million. Going forward, the interest payments will be made from a combination offunds at the Parent Company and dividends from its subsidiaries.  The dividends have historically been paid byNavigators Insurance Company. At March 31, 2007, the approximate maximum amountavailable for the payment of dividends by Navigators Insurance Company during2007 without prior regulatory approval was

49

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$53.6 million. Navigators Insurance Company declared a$2 million dividend in March 2007 which was paid to the Parent Company in April2007.  No dividends were paid byNavigators Insurance Company during 2006.

Condensed Parent Company balance sheets as of March31, 2007 (unaudited) and December 31, 2006 are shown in the table below:
| ** **                                       | ** ** | **March 31,**             | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2007**                       | ** ** | **2006**              | ** ** |
| ** **                                       | ** ** | **($ in thousands)** | ** ** |
|                                             | * *   | * *                       | * *   | * *              | * *   |
| Cash and  investments                            |       | $                              | 40,718     |                  | $          | 32,308 |   |
| Investments in  subsidiaries                     |       | 654,723                        |       | 634,299               |       |
| Goodwill and  other intangible assets            |       | 2,534                          |       | 2,534                 |       |
| Other assets                                     |       | 8,625                          |       | 12,939                |       |
| Total assets                                     |       | $                              | 706,600    |                  | $          | 682,080 |   |
|                                             |       |                           |       |                  |       |
| Accounts payable  and other liabilities          |       | $                              | 1,048      |                  | $          | 1,590 |   |
| Accrued interest  payable                        |       | 3,646                          |       | 1,458                 |       |
| Deferred  compensation payable                   |       | 3,952                          |       | 4,129                 |       |
| 7% Senior Notes  due May 1, 2016                 |       | 123,587                        |       | 123,560               |       |
| Total liabilities                                |       | 132,233                        |       | 130,737               |       |
|                                             |       |                           |       |                  |       |
| Stockholders’  equity                       |       | 574,367                        |       | 551,343               |       |
| Total  liabilities and stockholders’ equity |       | $                              | 706,600    |                  | $          | 682,080 |   |

 

AtMarch 31, 2007 approximately $4.2 million of investments are held in a taxescrow account on behalf of Navigators Insurance Company until the two-year taxloss carryback period expires.

Deferredcompensation payable represents accrued costs for employee stock appreciationrights which are paid by the operating subsidiaries when such stockappreciation rights are exercised.

##### **Item3.  Quantitative and QualitativeDisclosures about Market Risk**

Therehave been no material changes in the information concerning market risk asstated in the Company’s 2006 Annual Report on Form 10-K.

##### **Item4.  Controls and Procedures**

(a)          The Chief Executive Officer and Chief Financial Officer of the Companyhave evaluated the effectiveness of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under of the Securities Exchange Actof 1934, as amended (the “Exchange Act”)), as of the end of the period coveredby this quarterly report.  Based on suchevaluation, such officers have concluded that as of the end of such period theCompany’s disclosure controls and procedures are effective in identifying, on atimely basis, material information required to be disclosed in our reportsfiled or submitted under the Exchange Act.

(b)         There have been no changes during our first 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.

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**Part II -Other Information**

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

 Except as described below,****the Company is not a party to, or the subjectof, any material pending legal proceedings which depart from the ordinaryroutine litigation incident to the kinds of business that it conducts.

Atthe end of April 2006, the Company was served as a defendant in an action inthe United States District Court for the Northern District of Georgia captioned*New Cingular Wireless Headquarters, LLC, et al. v.Marsh & McLennan Companies, Inc., et al.*, along withapproximately 100 other defendants.  OnMay 31, 2006, this action, which involved allegations of contingent commissionsand bid-rigging in the insurance industry, was conditionally transferred to theUnited States District Court for the District of New Jersey by the JudicialPanel on Multidistrict Litigation.  OnApril 12, 2007, the Company entered into a Confidential Settlement and ReleaseAgreement with the plaintiffs in this action, pursuant to which all claimsagainst the Company have been dismissed with prejudice.  The terms of this confidential settlement didnot have a material impact upon the Company’s results of operations orfinancial condition.

OnNovember 22, 2006, the Company filed a demand for arbitration against Equitas,a lead reinsurer participating in excess of loss reinsurance agreements, withrespect to unsatisfied loss payment recovery demands that the Company haspreviously presented to Equitas (the “Equitas Arbitration”).  The recovery demands are for the 2005 settlementof two class action lawsuits involving large asbestos claims (together, the “2005Settled Claims”), which 2005 Settled Claims are being paid through 2007.  Equitas has not indicated any dispute withrespect to recoveries on related pro rata reinsurance agreements for such 2005Settled Claims or with respect to excess of loss or pro rata reinsurance forthe 2004 Settled Claim referred to below. The aggregate amount of excess of loss recoveries due from Equitas forceded paid and unpaid losses on the 2005 Settled Claims is approximately $2.7million.

OnNovember 20, 2006, the Company also filed a demand for arbitration in New Yorkagainst INA International Insurance Company, n/k/a Ace International (“AceInternational”), a reinsurer participating in pro rata reinsurance agreements,with respect to unsatisfied loss payment recovery demands that the Company haspreviously presented to Ace International (the “Ace International Arbitration”).  The recovery demands are for the 2005 SettledClaims and for the 2004 settlement of another class action lawsuit involving athird large asbestos claim (the “2004 Settled Claim” and, together with the2005 Settled Claims, the “Settled Claims”), which 2004 Settled Claim is beingpaid over seven years beginning in 2005. The aggregate amount of pro rata recoveries due from Ace Internationalfor ceded paid and unpaid losses on the Settled Claims is approximately $1.6million.

TheCompany has filed its demands for arbitration against Equitas and AceInternational in accordance with the respective applicable provisions of theexcess of loss reinsurance agreements and the pro rata reinsuranceagreements.  The Company believes thatthe refusal of Equitas and of Ace International to satisfy the Company’spayment demands is without merit and it intends to vigorously pursue collectionof its respective reinsurance recoveries. While it is too early to predict with any certainty the outcome of theEquitas Arbitration or the Ace International Arbitration, the Company believesthat the ultimate outcomes would not be expected to have a significant adverseeffect on its results of operations, financial condition or liquidity, althoughan unexpected adverse resolution of either or both of these arbitrations couldhave a material adverse effect on the Company’s results of operations in aparticular fiscal quarter or year.

**Item 1A.****                          RiskFactors**

Therehave been no material changes from the risk factors as previously disclosed inthe Company’s 2006 Annual Report on Form 10-K.

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

None.

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

None.

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

None.

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

None

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

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

----

*                   *Included herein.*

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**SIGNATURE**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                    | The Navigators Group, Inc.   |
|--------------------|------------------------------|
|               | (Registrant)                 |
|               |                         |
|               |                         |
| Date: May 3,  2007 | /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**                                                                                                                                                                                                                                                                                                                                           | ** ** | ** ** |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| 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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