##### Table of Contents



FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

|                               |  |                   
|------------------------------ |  | ------------------
|For the Quarterly Period Ended |  | September 30, 2001

|                       |  |        
|---------------------- |  | -------
|Commission file number |  | 0-15886

The Navigators Group, Inc.

---

|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 13-3138397                       
|                                                              
|(State or other jurisdiction of
incorporation or organization) |  | (IRS Employer
Identification No.)

|                                         |  |  |            | 
|---------------------------------------- |  |  | ---------- | 
|One Penn Plaza, New York, New York       |  |  | 10119      | 
|                                        
|(Address of principal executive offices) |  |  | (Zip Code) | 

(212) 244-2333

---



---

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

|    |  |   |  |    |  |  | 
|--- |  | - |  | -- |  |  | 
|Yes |  | X |  | No |  | 

Indicate the number of shares outstanding of each of the issuers classes of
common stock as of the latest practicable date.

On October 22, 2001 there were 8,419,762 shares of common stock, $0.10 par
value, issued and outstanding.

1



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TABLE OF CONTENTS



|                            |                                                                                       |  |  |  |  |  |  | 
|--------------------------- | ------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                            | CONSOLIDATED BALANCE SHEETS                                                          
|                            | CONSOLIDATED STATEMENTS OF INCOME                                                    
|                            | CONSOLIDATED STATEMENTS OF CASH FLOWS                                                
|                            | Notes to Interim Consolidated Financial Statements                                   
|                            | Managements Discussion and Analysis of Financial Condition and Results of Operations
|Part II  Other Information
|                            | SIGNATURES                                                                           



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##### Table of Contents



THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

INDEX

|                               |                                                    |                                                |    |          |    | 
|------------------------------ | -------------------------------------------------- | ---------------------------------------------- | -- | -------- | -- | 
|                               |                                                    |                                                |    | Page No.
|                               |                                                    |                                                |    |         
|Part I. FINANCIAL INFORMATION: |                                                    |                                                |    |         
|                              
|                              
|                              
|                              
|                               |                                                    |                                                |    |         
|                              
|                              
|                              
|                              
|                               | Consolidated Balance Sheets                        |                                                |    |          |   
|                              
|                              
|                              
|                              
|                               |                                                    | September 30, 2001 and December 31, 2000       |    |          | 3  | 
|                              
|                              
|                              
|                              
|                               |                                                    |                                                |    |         
|                              
|                              
|                              
|                              
|                               | Consolidated
Statements of Income (Loss)           |                                                |    |          |   
|                              
|                              
|                              
|                              
|                               |                                                    | Three Months Ended September 30, 2001 and 2000 |    |          | 4  | 
|                              
|                              
|                              
|                              
|                               |                                                    | Nine Months Ended September 30, 2001 and 2000  |    |          | 5  | 
|                              
|                              
|                              
|                              
|                               |                                                    |                                                |    |         
|                              
|                              
|                              
|                              
|                               | Consolidated Statements of Cash Flows              |                                                |    |          |   
|                              
|                              
|                              
|                              
|                               |                                                    | Nine Months Ended September 30, 2001 and 2000  |    |          | 6  | 
|                              
|                              
|                              
|                              
|                               |                                                    |                                                |    |         
|                              
|                              
|                              
|                              
|                               | Notes to Interim Consolidated Financial Statements |                                                |    | 7        |   
|                              
|                              
|                              
|                              
|                               |                                                    |                                                |    |         
|                              
|                              
|                              
|                              
|                               | Managements Discussion and Analysis of Financial  |                                                |    |          |   
|                              
|                              
|                              
|                              
|                               |                                                    | Condition and Results of Operations            |    |          | 12 | 
|                              
|                              
|                              
|                              
|                               |                                                    |                                                |    |         
|                              
|                              
|                              
|                              
|Part II. OTHER INFORMATION     |                                                    |                                                | 18 |         

2



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##### Table of Contents






THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS(In thousands, except share data)

|                                                                              |                                                                                                                                                    |                                            |                                      |         |         |               |         |              |         |  |  | 
|----------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | ------- | ------- | ------------- | ------- | ------------ | ------- |  |  | 
|                                                                              |                                                                                                                                                    |                                            |                                      |         |         | September 30, |         | December 31,
|                                                                              |                                                                                                                                                    |                                            |                                      |         |         | 2001          |         | 2000        
|                                                                              |                                                                                                                                                    |                                            |                                      |         |         |               |         |             
|                                                                              |                                                                                                                                                    |                                            |                                      |         |         | (Unaudited)   |         |              |         | 
|                                                                              |                                                                                                                                                    |                                            |                                      |         |         |               |         |              |         | 
|                                                                              |                                                                                                                                                    |                                            |                                      | ASSETS  |         |               |         |              |         |  |  | 
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Investments and cash:                                                         |                                                                                                                                                    |                                            |                                      |         |         |               |         |             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Fixed maturities, available-for-sale, at fair value
(amortized cost: 2001, $238,674; 2000, $221,807)                                               |                                            | $                                    | 245,913 |         |               | $       | 225,128      |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Equity securities, available-for-sale, at fair value (cost: 2001, $6,482;
2000, $5,608)                                                            |                                            |                                      | 6,588   |         |               |         | 6,269        |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Short-term investments, at cost which approximates fair value                                                                                      |                                            |                                      | 15,808  |         |               |         | 18,186       |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Cash                                                                                                                                               |                                            |                                      | 2,339   |         |               |         | 1,602        |        
|                                                                              |                                                                                                                                                    |                                            |                                      |         |         |               |         |             
|                                                                              |                                                                                                                                                    | Total investments and cash                 |                                      |         | 270,648 |               |         |              | 251,185 | 
|                                                                              |                                                                                                                                                    |                                            |                                      |         |         |               |         |             
|Premiums in course of collection                                              |                                                                                                                                                    |                                            | 46,231                               |         |         |               | 35,282  |             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Funds due from Lloyds syndicate                                              |                                                                                                                                                    |                                            | 89,201                               |         |         |               | 68,912  |             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Commissions receivable                                                        |                                                                                                                                                    |                                            | 5,085                                |         |         |               | 3,374   |             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Accrued investment income                                                     |                                                                                                                                                    |                                            | 3,254                                |         |         |               | 3,125   |             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Prepaid reinsurance premiums                                                  |                                                                                                                                                    |                                            | 37,019                               |         |         |               | 26,274  |             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Reinsurance receivable on paid and unpaid losses and loss adjustment expenses |                                                                                                                                                    |                                            | 210,877                              |         |         |               | 195,713 |             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Federal income tax recoverable                                                |                                                                                                                                                    |                                            | 787                                  |         |         |               | 463     |             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Net deferred income tax benefit                                               |                                                                                                                                                    |                                            | 8,654                                |         |         |               | 9,001   |             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Deferred policy acquisition costs                                             |                                                                                                                                                    |                                            | 16,676                               |         |         |               | 8,400   |             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Goodwill                                                                      |                                                                                                                                                    |                                            | 5,020                                |         |         |               | 5,278   |             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Other assets                                                                  |                                                                                                                                                    |                                            | 5,278                                |         |         |               | 7,570   |             
|                                                                              |                                                                                                                                                    |                                            |                                      |         |         |               |         |             
|                                                                              |                                                                                                                                                    | Total assets                               |                                      | $       | 698,730 |               |         | $            | 614,577 | 
|                                                                              |                                                                                                                                                    |                                            |                                      |         |         |               |         |             
|                                                                              |                                                                                                                                                    |                                            | LIABILITIES AND STOCKHOLDERS EQUITY |         |         |               |         |              |         |  | 
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Liabilities:                                                                  |                                                                                                                                                    |                                            |                                      |         |         |               |         |             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Reserves for losses and loss adjustment expenses                                                                                                   |                                            | $                                    | 386,555 |         |               | $       | 357,674      |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Unearned premium                                                                                                                                   |                                            |                                      | 105,577 |         |               |         | 66,238       |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Reinsurance balances payable                                                                                                                       |                                            |                                      | 28,210  |         |               |         | 20,402       |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Notes payable to banks                                                                                                                             |                                            |                                      | 22,000  |         |               |         | 22,000       |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Accounts payable and other liabilities                                                                                                             |                                            |                                      | 8,892   |         |               |         | 4,783        |        
|                                                                              |                                                                                                                                                    |                                            |                                      |         |         |               |         |             
|                                                                              |                                                                                                                                                    | Total liabilities                          |                                      |         | 551,234 |               |         |              | 471,097 | 
|                                                                              |                                                                                                                                                    |                                            |                                      |         |         |               |         |             
|Stockholders equity:                                                         |                                                                                                                                                    |                                            |                                      |         |         |               |         |             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued                                                                          |                                            |                                      |        |         |               |         |             |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Common stock, $.10 par value, authorized 10,000,000 shares, issued and
outstanding (net of Treasury stock) 8,419,762 in 2001 and 8,414,356 in 2000 |                                            |                                      | 846     |         |               |         | 846          |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Additional paid-in capital                                                                                                                         |                                            |                                      | 39,407  |         |               |         | 39,413       |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Treasury stock, held at cost (shares: 35,908 in 2001 and 41,314 in 2000)                                                                           |                                            |                                      | (516    | )       |               |         | (594         | )      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Accumulated other comprehensive income                                                                                                             |                                            |                                      | 5,593   |         |               |         | 3,093        |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Retained earnings                                                                                                                                  |                                            |                                      | 102,166 |         |               |         | 100,722      |        
|                                                                              |                                                                                                                                                    |                                            |                                      |         |         |               |         |             
|                                                                              |                                                                                                                                                    | Total stockholders equity                 |                                      |         | 147,496 |               |         |              | 143,480 | 
|                                                                              |                                                                                                                                                    |                                            |                                      |         |         |               |         |             
|                                                                              |                                                                                                                                                    | Total liabilities and stockholders equity |                                      | $       | 698,730 |               |         | $            | 614,577 | 
|                                                                              |                                                                                                                                                    |                                            |                                      |         |         |               |         |             

See accompanying notes to interim consolidated financial statements.

3



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##### Table of Contents






THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)(In thousands, except net income (loss) per share)

|                                    |                                                  |                                    |        |                    |        |      |       |        |        | 
|----------------------------------- | ------------------------------------------------ | ---------------------------------- | ------ | ------------------ | ------ | ---- | ----- | ------ | ------ | 
|                                    |                                                  |                                    |        | Three Months Ended
|                                    |                                                  |                                    |        | September 30,     
|                                    |                                                  |                                    |        |                   
|                                    |                                                  |                                    |        | 2001               |        | 2000
|                                    |                                                  |                                    |        |                    |        |     
|                                    |                                                  |                                    |        | (Unaudited)       
|                                    |                                                  |                                    |        |                   
|Revenues:                           |                                                  |                                    |        |                    |        |      |       |       
|                                   
|                                   
|                                   
|                                   
|                                    | Net earned premium                               |                                    | $      | 35,364             |        |      | $     | 18,340 |       
|                                   
|                                   
|                                   
|                                   
|                                    | Commission income                                |                                    |        | 1,118              |        |      |       | 880    |       
|                                   
|                                   
|                                   
|                                   
|                                    | Net investment income                            |                                    |        | 4,740              |        |      |       | 4,714  |       
|                                   
|                                   
|                                   
|                                   
|                                    | Net realized capital gains                       |                                    |        | 389                |        |      |       | 46     |       
|                                   
|                                   
|                                   
|                                   
|                                    | Other income (expense)                           |                                    |        | (2,341             | )      |      |       | 144    |       
|                                    |                                                  |                                    |        |                    |        |      |       |       
|                                    |                                                  | Total revenues                     |        |                    | 39,270 |      |       |        | 24,124 | 
|                                    |                                                  |                                    |        |                    |        |      |       |       
|Operating expenses:                 |                                                  |                                    |        |                    |        |      |       |       
|                                   
|                                   
|                                   
|                                   
|                                    | Net losses and loss adjustment expenses incurred |                                    |        | 28,068             |        |      |       | 12,571 |       
|                                   
|                                   
|                                   
|                                   
|                                    | Commission expense                               |                                    |        | 7,671              |        |      |       | 3,491  |       
|                                   
|                                   
|                                   
|                                   
|                                    | Other operating expenses                         |                                    |        | 6,602              |        |      |       | 5,742  |       
|                                   
|                                   
|                                   
|                                   
|                                    | Interest expense                                 |                                    |        | 289                |        |      |       | 448    |       
|                                    |                                                  |                                    |        |                    |        |      |       |       
|                                    |                                                  | Total operating expenses           |        |                    | 42,630 |      |       |        | 22,252 | 
|                                    |                                                  |                                    |        |                    |        |      |       |       
|Income (loss) before income taxes   |                                                  |                                    | (3,360 | )                  |        |      | 1,872 |       
|                                    |                                                  |                                    |        |                    |        |      |       |       
|Income tax expense (benefit):       |                                                  |                                    |        |                    |        |      |       |       
|                                   
|                                   
|                                   
|                                   
|                                    | Current                                          |                                    |        | 116                |        |      |       | (46    | )     
|                                   
|                                   
|                                   
|                                   
|                                    | Deferred                                         |                                    |        | (555               | )      |      |       | 308    |       
|                                    |                                                  |                                    |        |                    |        |      |       |       
|                                    |                                                  | Total income tax expense (benefit) |        |                    | (439   | )    |       |        | 262    | 
|                                    |                                                  |                                    |        |                    |        |      |       |       
|Net income (loss)                   |                                                  | $                                  | (2,921 | )                  |        | $    | 1,610 |       
|                                    |                                                  |                                    |        |                    |        |      |       |       
|Net income (loss) per common share: |                                                  |                                    |        |                    |        |      |       |       
|                                   
|                                   
|                                   
|                                   
|                                    | Basic                                            |                                    | $      | (0.35              | )      |      | $     | 0.19   |       
|                                   
|                                   
|                                   
|                                   
|                                    | Diluted                                          |                                    | $      | (0.35              | )      |      | $     | 0.19   |       
|                                   
|                                   
|                                   
|                                   
|Average common shares outstanding:  |                                                  |                                    |        |                    |        |      |       |       
|                                   
|                                   
|                                   
|                                   
|                                    | Basic                                            |                                    |        | 8,420              |        |      |       | 8,414  |       
|                                   
|                                   
|                                   
|                                   
|                                    | Diluted                                          |                                    |        | 8,420              |        |      |       | 8,414  |       

See accompanying notes to interim consolidated financial statements.

4



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##### Table of Contents



THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME(In thousands, except net income per share)

|                                   |                                                  |          |                          |        |                   |         |       |        |       |        | 
|---------------------------------- | ------------------------------------------------ | -------- | ------------------------ | ------ | ----------------- | ------- | ----- | ------ | ----- | ------ | 
|                                   |                                                  |          |                          |        | Nine Months Ended
|                                   |                                                  |          |                          |        | September 30,    
|                                   |                                                  |          |                          |        |                  
|                                   |                                                  |          |                          |        | 2001              |         | 2000 
|                                   |                                                  |          |                          |        |                   |         |      
|                                   |                                                  |          |                          |        | (Unaudited)      
|                                   |                                                  |          |                          |        |                  
|Revenues:                          |                                                  |          |                          |        |                   |         |       |       
|                                  
|                                  
|                                  
|                                  
|                                   | Net earned premium                               |          | $                        | 99,897 |                   |         | $     | 60,148 |      
|                                  
|                                  
|                                  
|                                  
|                                   | Commission income                                |          |                          | 2,918  |                   |         |       | 2,172  |      
|                                  
|                                  
|                                  
|                                  
|                                   | Net investment income                            |          |                          | 14,481 |                   |         |       | 13,553 |      
|                                  
|                                  
|                                  
|                                  
|                                   | Net realized capital gains                       |          |                          | 996    |                   |         |       | 118    |      
|                                  
|                                  
|                                  
|                                  
|                                   | Other income (expense)                           |          |                          | (3,256 | )                 |         |       | 343    |      
|                                   |                                                  |          |                          |        |                   |         |       |       
|                                   |                                                  |          | Total revenues           |        |                   | 115,036 |       |        |       | 76,334 | 
|                                   |                                                  |          |                          |        |                   |         |       |       
|Operating expenses:                |                                                  |          |                          |        |                   |         |       |       
|                                  
|                                  
|                                  
|                                  
|                                   | Net losses and loss adjustment expenses incurred |          |                          | 69,670 |                   |         |       | 38,488 |      
|                                  
|                                  
|                                  
|                                  
|                                   | Commission expense                               |          |                          | 21,708 |                   |         |       | 12,062 |      
|                                  
|                                  
|                                  
|                                  
|                                   | Other operating expenses                         |          |                          | 19,443 |                   |         |       | 17,703 |      
|                                  
|                                  
|                                  
|                                  
|                                   | Interest expense                                 |          |                          | 1,108  |                   |         |       | 1,284  |      
|                                   |                                                  |          |                          |        |                   |         |       |       
|                                   |                                                  |          | Total operating expenses |        |                   | 111,929 |       |        |       | 69,537 | 
|                                   |                                                  |          |                          |        |                   |         |       |       
|Income before income taxes         |                                                  |          | 3,107                    |        |                   |         | 6,797 |       
|                                   |                                                  |          |                          |        |                   |         |       |       
|Income tax expense (benefit):      |                                                  |          |                          |        |                   |         |       |       
|                                  
|                                  
|                                  
|                                  
|                                   |                                                  | Current  |                          |        | 2,402             |         |       |        | 1,513 |       
|                                  
|                                  
|                                  
|                                  
|                                   |                                                  | Deferred |                          |        | (739              | )       |       |        | 584   |       
|                                   |                                                  |          |                          |        |                   |         |       |       
|                                   |                                                  |          | Total income tax expense |        |                   | 1,663   |       |        |       | 2,097  | 
|                                   |                                                  |          |                          |        |                   |         |       |       
|Net income                         |                                                  | $        | 1,444                    |        |                   | $       | 4,700 |       
|                                   |                                                  |          |                          |        |                   |         |       |       
|Net income per common share:       |                                                  |          |                          |        |                   |         |       |       
|                                  
|                                  
|                                  
|                                  
|                                   |                                                  | Basic    |                          | $      | 0.17              |         |       | $      | 0.56  |       
|                                  
|                                  
|                                  
|                                  
|                                   |                                                  | Diluted  |                          | $      | 0.17              |         |       | $      | 0.56  |       
|                                  
|                                  
|                                  
|                                  
|Average common shares outstanding: |                                                  |          |                          |        |                   |         |       |       
|                                  
|                                  
|                                  
|                                  
|                                   |                                                  | Basic    |                          |        | 8,419             |         |       |        | 8,413 |       
|                                  
|                                  
|                                  
|                                  
|                                   |                                                  | Diluted  |                          |        | 8,532             |         |       |        | 8,413 |       

See accompanying notes to interim consolidated financial statements.

5



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##### Table of Contents






THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)

|                                                   |                                                                                   |                                                 |                                                                               |                                           |       |                   |         |       |        |         |         |  
|-------------------------------------------------- | --------------------------------------------------------------------------------- | ----------------------------------------------- | ----------------------------------------------------------------------------- | ----------------------------------------- | ----- | ----------------- | ------- | ----- | ------ | ------- | ------- | -
|                                                   |                                                                                   |                                                 |                                                                               |                                           |       | Nine Months Ended
|                                                   |                                                                                   |                                                 |                                                                               |                                           |       | September 30,    
|                                                   |                                                                                   |                                                 |                                                                               |                                           |       |                  
|                                                   |                                                                                   |                                                 |                                                                               |                                           |       | 2001              |         | 2000 
|                                                   |                                                                                   |                                                 |                                                                               |                                           |       |                   |         |      
|                                                   |                                                                                   |                                                 |                                                                               |                                           |       | (Unaudited)      
|                                                   |                                                                                   |                                                 |                                                                               |                                           |       |                  
|Operating activities:                              |                                                                                   |                                                 |                                                                               |                                           |       |                   |         |      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Net income                                                                        |                                                 | $                                                                             | 1,444                                     |       |                   | $       | 4,700 |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Adjustments to reconcile net income to net
cash provided by operating activities: |                                                 |                                                                               |                                           |       |                   |         |       |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |                                                 | Depreciation & amortization                                                   |                                           |       | 886               |         |       |        | 850     |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |                                                 | Net deferred income tax                                                       |                                           |       | (739              | )       |       |        | 584     |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |                                                 | Net realized capital (gains)                                                  |                                           |       | (996              | )       |       |        | (118    | )      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   | Changes in assets and liabilities:              |                                                                               |                                           |       |                   |         |       |        |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |                                                 | Reinsurance receivable on paid and unpaid
losses and loss adjustment expenses |                                           |       | (15,164           | )       |       |        | 30,811  |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |                                                 | Reserve for losses and loss adjustment expenses                               |                                           |       | 28,881            |         |       |        | (43,034 | )      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |                                                 | Prepaid reinsurance premiums                                                  |                                           |       | (10,745           | )       |       |        | (7,601  | )      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |                                                 | Unearned premium                                                              |                                           |       | 39,339            |         |       |        | 26,379  |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |                                                 | Premiums in course of collection                                              |                                           |       | (10,949           | )       |       |        | (2,710  | )      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |                                                 | Funds due from Lloyds syndicate                                              |                                           |       | (20,289           | )       |       |        | (6,224  | )      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |                                                 | Commissions receivable                                                        |                                           |       | (1,711            | )       |       |        | 3,815   |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |                                                 | Deferred policy acquisition costs                                             |                                           |       | (8,276            | )       |       |        | (6,066  | )      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |                                                 | Accrued investment income                                                     |                                           |       | (129              | )       |       |        | 62      |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |                                                 | Reinsurance balances payable                                                  |                                           |       | 7,808             |         |       |        | (1,997  | )      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |                                                 | Federal income tax                                                            |                                           |       | (324              | )       |       |        | 787     |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |                                                 | Other                                                                         |                                           |       | 4,610             |         |       |        | 8       |        
|                                                   |                                                                                   |                                                 |                                                                               |                                           |       |                   |         |      
|                                                   |                                                                                   |                                                 |                                                                               | Net cash provided by operating activities |       |                   | 13,646  |       |        |         | 246     |  
|                                                   |                                                                                   |                                                 |                                                                               |                                           |       |                   |         |      
|Investing activities:                              |                                                                                   |                                                 |                                                                               |                                           |       |                   |         |      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   | Fixed maturities, available-for-sale            |                                                                               |                                           |       |                   |         |       |        |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |                                                 |                                                                               | Redemptions and maturities                |       |                   | 700     |       |        |         | 9,088   |  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |                                                 |                                                                               | Sales                                     |       |                   | 66,175  |       |        |         | 27,947  |  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |                                                 |                                                                               | Purchases                                 |       |                   | (83,094 | )     |        |         | (39,273 | )
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   | Equity securities, available-for-sale           |                                                                               |                                           |       |                   |         |       |        |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |                                                 |                                                                               | Sales                                     |       |                   | 2,119   |       |        |         | 7,637   |  
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   |                                                 |                                                                               | Purchases                                 |       |                   | (2,891  | )     |        |         | (2,391  | )
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   | Payable for securities                          |                                                                               |                                           | 1,868 |                   |         |       | 3,804  |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   | Net sales (purchases) of short-term investments |                                                                               |                                           | 2,378 |                   |         |       | (7,050 | )      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   | Purchase of property and equipment              |                                                                               |                                           | (164  | )                 |         |       | (1,813 | )      
|                                                   |                                                                                   |                                                 |                                                                               |                                           |       |                   |         |      
|                                                   |                                                                                   |                                                 |                                                                               | Net cash (used in) investing activities   |       |                   | (12,909 | )     |        |         | (2,051  | )
|                                                   |                                                                                   |                                                 |                                                                               |                                           |       |                   |         |      
|Financing activities:                              |                                                                                   |                                                 |                                                                               |                                           |       |                   |         |      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   | Proceeds from bank loan                         |                                                                               |                                           |      |                   |         |       | 3,000  |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   | Repayment of bank loan                          |                                                                               |                                           |      |                   |         |       | (2,000 | )      
|                                                   |                                                                                   |                                                 |                                                                               |                                           |       |                   |         |      
|                                                   |                                                                                   |                                                 |                                                                               | Net cash provided by financing activities |       |                   |        |       |        |         | 1,000   |  
|                                                   |                                                                                   |                                                 |                                                                               |                                           |       |                   |         |      
|Increase (decrease) in cash                        |                                                                                   |                                                 | 737                                                                           |                                           |       |                   | (805    | )    
|                                                  
|                                                  
|                                                  
|                                                  
|Cash at beginning of year                          |                                                                                   |                                                 | 1,602                                                                         |                                           |       |                   | 5,546   |      
|                                                   |                                                                                   |                                                 |                                                                               |                                           |       |                   |         |      
|Cash at end of period                              |                                                                                   | $                                               | 2,339                                                                         |                                           |       | $                 | 4,741   |      
|                                                   |                                                                                   |                                                 |                                                                               |                                           |       |                   |         |      
|Supplemental disclosures of cash flow information: |                                                                                   |                                                 |                                                                               |                                           |       |                   |         |      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   | Federal, state and local income tax paid        |                                                                               | $                                         | 2,653 |                   |         | $     | 636    |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   | Interest paid                                   |                                                                               |                                           | 1,112 |                   |         |       | 870    |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                   | Issuance of stock to Directors                  |                                                                               |                                           | 72    |                   |         |       | 72     |        

See accompanying notes to interim consolidated financial statements.

6



---



##### Table of Contents



THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES




Notes to Interim Consolidated Financial Statements(Unaudited)



|(1) |  | Accounting Policies
The interim consolidated financial statements are unaudited but reflect all
adjustments which, in the opinion of management, are necessary to provide a
fair statement of the results of The Navigators Group, Inc. and its
subsidiaries (the Company) for the interim periods presented. All such
adjustments are of a normal recurring nature. All significant intercompany
transactions and balances have been eliminated. The results of operations
for any interim period are not necessarily indicative of results for the
full year. These consolidated financial statements should be read in
conjunction with the financial statements and notes contained in the
Companys 2000 Annual Report on Form 10-K. Certain amounts for prior years
have been reclassified to conform to the current years presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Reinsurance Ceded
The Companys ceded earned premiums were $22,405,000 and $20,817,000 for the
three months ended September 30, 2001 and 2000, respectively, and
$67,181,000 and $58,172,000 for the nine months ended September 30, 2001 and
2000, respectively. The Companys ceded incurred losses were $38,561,000
and $12,178,000 for the three months ended September 30, 2001 and 2000,
respectively, and were $76,543,000 and $43,271,000 for the nine months ended
September 30, 2001 and 2000, respectively. The 2001 ceded incurred losses
include $13,561,000 from the September 11, 2001 terrorist attacks on the
World Trade Center.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(3) |  | Segments of an Enterprise
The Companys subsidiaries are primarily engaged in the underwriting and
management of property and casualty insurance. The Companys segments
include the Insurance Companies, the Navigators Agencies (formerly referred
to as the Somerset Companies) and the Lloyds Operations, each of which is
managed separately. The Insurance Companies consist of Navigators Insurance
Company and NIC Insurance Company which are primarily engaged in
underwriting marine insurance and related lines of business, and a
contractors general liability program. The Navigators Agencies are
underwriting management companies which produce, manage and underwrite
insurance and reinsurance for the Insurance Companies and four
non-affiliated companies. The Lloyds Operations consist primarily of a
Lloyds managing agency and two Lloyds corporate members which underwrite
marine and related lines of business at Lloyds of London. All segments are
evaluated based on their underwriting or operating results calculated on the
basis of accounting principles generally accepted in the United States of
America (GAAP). In order to establish a common identity under the
Navigators name, the Company changed the name of several of its agency
subsidiaries from Somerset to Navigators. 
The Insurance Companies and the Lloyds operations are measured taking into
account net premiums earned, incurred losses and loss expenses, commission
expense and other underwriting expenses. The Navigators Agencies results
include commission income less other operating expenses. Each segment
maintains its own investments on which it earns income and realizes capital
gains or losses. Other operations include intersegment income and expense
in the form of affiliated commissions, income and expense from corporate
operations, and consolidating adjustments.

7



---



##### Table of Contents



The following tables present financial data by segment for the periods
indicated:

|                                                                         |                     |       |   |                    |        |                   |   |        |        |      |   |         |        |  |   |        |        | 
|------------------------------------------------------------------------ | ------------------- | ----- | - | ------------------ | ------ | ----------------- | - | ------ | ------ | ---- | - | ------- | ------ |  | - | ------ | ------ | 
|                                                                         |                     |       |   | Three Months Ended |        | Nine Months Ended
|                                                                         |                     |       |   | September 30,      |        | September 30,    
|                                                                         |                     |       |   |                    |        |                  
|                                                                         |                     |       |   | 2001               |        | 2000              |   | 2001   |        | 2000
|                                                                         |                     |       |   |                    |        |                   |   |        |        |     
|                                                                         |                     |       |   | (In thousands)    
|                                                                         |                     |       |   |                    |        |                   |   |        |        |      |   |         |        |  |   |       
|Revenue, excluding net investment income
and net realized capital gains: |                     |       |   |                    |        |                   |   |        |        |      |   |         |        |  |   |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Insurance Companies |       | $ | 19,097             |        |                   | $ | 9,767  |        |      | $ | 51,757  |        |  | $ | 33,638 |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Navigators Agencies |       |   | 4,144              |        |                   |   | 3,322  |        |      |   | 11,395  |        |  |   | 8,437  |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Lloyds Operations  |       |   | 16,330             |        |                   |   | 8,647  |        |      |   | 48,435  |        |  |   | 26,714 |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Other operations    |       |   | (5,430             | )      |                   |   | (2,372 | )      |      |   | (12,028 | )      |  |   | (6,126 | )     
|                                                                         |                     |       |   |                    |        |                   |   |        |        |      |   |         |        |  |   |       
|                                                                         |                     | Total |   | $                  | 34,141 |                   |   | $      | 19,364 |      |   | $       | 99,559 |  |   | $      | 62,663 | 
|                                                                         |                     |       |   |                    |        |                   |   |        |        |      |   |         |        |  |   |       
|                                                                         |                     |       |   |                    |        |                   |   |        |        |      |   |         |        |  |   |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Income (loss) before income taxes:                                       |                     |       |   |                    |        |                   |   |        |        |      |   |         |        |  |   |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Insurance Companies |       | $ | 5,187              |        |                   | $ | 3,453  |        |      | $ | 16,984  |        |  | $ | 14,335 |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Navigators Agencies |       |   | 99                 |        |                   |   | (500   | )      |      |   | (607    | )      |  |   | (2,863 | )     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Lloyds Operations  |       |   | (5,344             | )      |                   |   | (193   | )      |      |   | (6,413  | )      |  |   | (1,718 | )     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Other operations    |       |   | (3,302             | )      |                   |   | (888   | )      |      |   | (6,857  | )      |  |   | (2,957 | )     
|                                                                         |                     |       |   |                    |        |                   |   |        |        |      |   |         |        |  |   |       
|                                                                         |                     | Total |   | $                  | (3,360 | )                 |   | $      | 1,872  |      |   | $       | 3,107  |  |   | $      | 6,797  | 
|                                                                         |                     |       |   |                    |        |                   |   |        |        |      |   |         |        |  |   |       
|                                                                         |                     |       |   |                    |        |                   |   |        |        |      |   |         |        |  |   |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Income tax expense (benefit):                                            |                     |       |   |                    |        |                   |   |        |        |      |   |         |        |  |   |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Insurance Companies |       | $ | 1,599              |        |                   | $ | 874    |        |      | $ | 5,301   |        |  | $ | 3,930  |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Navigators Agencies |       |   | (806               | )      |                   |   | (191   | )      |      |   | (1,188  | )      |  |   | (831   | )     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Lloyds Operations  |       |   |                   |        |                   |   |       |        |      |   |        |        |  |   |       |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Other operations    |       |   | (1,232             | )      |                   |   | (421   | )      |      |   | (2,450  | )      |  |   | (1,002 | )     
|                                                                         |                     |       |   |                    |        |                   |   |        |        |      |   |         |        |  |   |       
|                                                                         |                     | Total |   | $                  | (439   | )                 |   | $      | 262    |      |   | $       | 1,663  |  |   | $      | 2,097  | 
|                                                                         |                     |       |   |                    |        |                   |   |        |        |      |   |         |        |  |   |       
|                                                                         |                     |       |   |                    |        |                   |   |        |        |      |   |         |        |  |   |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Net income (loss):                                                       |                     |       |   |                    |        |                   |   |        |        |      |   |         |        |  |   |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Insurance Companies |       | $ | 3,588              |        |                   | $ | 2,579  |        |      | $ | 11,683  |        |  | $ | 10,405 |       
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Navigators Agencies |       |   | 905                |        |                   |   | (309   | )      |      |   | 581     |        |  |   | (2,032 | )     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Lloyds Operations  |       |   | (5,344             | )      |                   |   | (193   | )      |      |   | (6,413  | )      |  |   | (1,718 | )     
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Other operations    |       |   | (2,070             | )      |                   |   | (467   | )      |      |   | (4,407  | )      |  |   | (1,955 | )     
|                                                                         |                     |       |   |                    |        |                   |   |        |        |      |   |         |        |  |   |       
|                                                                         |                     | Total |   | $                  | (2,921 | )                 |   | $      | 1,610  |      |   | $       | 1,444  |  |   | $      | 4,700  | 
|                                                                         |                     |       |   |                    |        |                   |   |        |        |      |   |         |        |  |   |       



|(4) |  | Comprehensive Income
Comprehensive income encompasses all changes in stockholders equity and
includes net income, net unrealized capital gains and losses on available
for sale securities, and foreign currency translation adjustments.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8



---



##### Table of Contents



The following table summarizes comprehensive income for the three months
ended September 30, 2001 and 2000:

|                                        |                                                                                                   |                                                                                                                                     |                                    |                      |       |                |       |      |       |       |       | 
|--------------------------------------- | ------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------- | -------------------- | ----- | -------------- | ----- | ---- | ----- | ----- | ----- | 
|                                        |                                                                                                   |                                                                                                                                     |                                    |                      |       | September 30, 
|                                        |                                                                                                   |                                                                                                                                     |                                    |                      |       |               
|                                        |                                                                                                   |                                                                                                                                     |                                    |                      |       | 2001           |       | 2000
|                                        |                                                                                                   |                                                                                                                                     |                                    |                      |       |                |       |     
|                                        |                                                                                                   |                                                                                                                                     |                                    |                      |       | (In thousands)
|                                        |                                                                                                   |                                                                                                                                     |                                    |                      |       |                |       |     
|Net income (loss)                       |                                                                                                   | $                                                                                                                                   | (2,921                             | )                    |       | $              | 1,610 |     
|                                        |                                                                                                   |                                                                                                                                     |                                    |                      |       |                |       |     
|Other comprehensive income, net of tax: |                                                                                                   |                                                                                                                                     |                                    |                      |       |                |       |     
|                                       
|                                       
|                                       
|                                       
|                                        | Net unrealized gains on securities available for sale:                                            |                                                                                                                                     |                                    |                      |       |                |       |      |      
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                                   | Unrealized holding gains arising during period
(net of tax expense of $1,796 for 2001
and $913 for 2000)                            |                                    |                      | 3,972 |                |       |      | 1,695 |      
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                                                   | Less: reclassification adjustment for gains included in
net income (net of tax expense (benefit) of $27 for 2001
and $(9) for 2000) |                                    |                      | 362   |                |       |      | 55    |      
|                                        |                                                                                                   |                                                                                                                                     |                                    |                      |       |                |       |     
|                                        |                                                                                                   |                                                                                                                                     | Net unrealized gains on securities |                      |       | 3,610          |       |      |       | 1,640 |      
|                                       
|                                       
|                                       
|                                       
|                                        | Foreign currency translation gain adjustment, net of tax
expense of $26 for 2001 and $11 for 2000 |                                                                                                                                     |                                    | 49                   |       |                |       | 19   |      
|                                        |                                                                                                   |                                                                                                                                     |                                    |                      |       |                |       |     
|                                        |                                                                                                   |                                                                                                                                     | Other comprehensive income         |                      |       | 3,659          |       |      |       | 1,659 |      
|                                        |                                                                                                   |                                                                                                                                     |                                    |                      |       |                |       |     
|                                        |                                                                                                   |                                                                                                                                     |                                    | Comprehensive income |       | $              | 738   |      |       | $     | 3,269 | 
|                                        |                                                                                                   |                                                                                                                                     |                                    |                      |       |                |       |     

The following table summarizes comprehensive income for the nine months
ended September 30, 2001 and 2000:

|                                        |                                                                 |                                                                                                                      |                                                                                                                                      |                                    |      |                |       |      |     |       |       | 
|--------------------------------------- | --------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------- | ---- | -------------- | ----- | ---- | --- | ----- | ----- | 
|                                        |                                                                 |                                                                                                                      |                                                                                                                                      |                                    |      | September 30, 
|                                        |                                                                 |                                                                                                                      |                                                                                                                                      |                                    |      |               
|                                        |                                                                 |                                                                                                                      |                                                                                                                                      |                                    |      | 2001           |       | 2000
|                                        |                                                                 |                                                                                                                      |                                                                                                                                      |                                    |      |                |       |     
|                                        |                                                                 |                                                                                                                      |                                                                                                                                      |                                    |      | (In thousands)
|                                        |                                                                 |                                                                                                                      |                                                                                                                                      |                                    |      |                |       |     
|Net income                              |                                                                 | $                                                                                                                    | 1,444                                                                                                                                |                                    |      | $              | 4,700 |     
|                                        |                                                                 |                                                                                                                      |                                                                                                                                      |                                    |      |                |       |     
|Other comprehensive income, net of tax: |                                                                 |                                                                                                                      |                                                                                                                                      |                                    |      |                |       |     
|                                       
|                                       
|                                       
|                                       
|                                        | Net unrealized gains (losses) on securities available for sale: |                                                                                                                      |                                                                                                                                      |                                    |      |                |       |      |    
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                 |                                                                                                                      | Unrealized holding gains arising during period
(net of tax expense of $1,326 for 2001 and $1,287
for 2000)                           |                                    |      | 3,508          |       |      |     | 2,390 |      
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                 |                                                                                                                      | Less: reclassification adjustment for gains included in net
income (net of tax expense (benefit) of $149 for 2001 and
$(4) for 2000) |                                    |      | 847            |       |      |     | 122   |      
|                                        |                                                                 |                                                                                                                      |                                                                                                                                      |                                    |      |                |       |     
|                                        |                                                                 |                                                                                                                      |                                                                                                                                      | Net unrealized gains on securities |      |                | 2,661 |      |     |       | 2,268 | 
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                 | Foreign currency translation gain (loss) adjustment, net of
tax expense (benefit) of $(87) for 2001 and $81 for 2000 |                                                                                                                                      |                                    | (161 | )              |       |      | 150 |      
|                                        |                                                                 |                                                                                                                      |                                                                                                                                      |                                    |      |                |       |     
|                                        |                                                                 |                                                                                                                      |                                                                                                                                      | Other comprehensive income         |      |                | 2,500 |      |     |       | 2,418 | 
|                                        |                                                                 |                                                                                                                      |                                                                                                                                      |                                    |      |                |       |     
|                                        |                                                                 |                                                                                                                      |                                                                                                                                      | Comprehensive income               |      | $              | 3,944 |      |     | $     | 7,118 | 
|                                        |                                                                 |                                                                                                                      |                                                                                                                                      |                                    |      |                |       |     

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The following table summarizes the components of accumulated other comprehensive income:

|                                                                                                                |                                        |   |                |       |              |   |       |       | 
|--------------------------------------------------------------------------------------------------------------- | -------------------------------------- | - | -------------- | ----- | ------------ | - | ----- | ----- | 
|                                                                                                                |                                        |   | September 30,  |       | December 31,
|                                                                                                                |                                        |   | 2001           |       | 2000        
|                                                                                                                |                                        |   |                |       |             
|                                                                                                                |                                        |   | (In thousands)
|                                                                                                                |                                        |   |                |       |              |   |       |      
|Net unrealized gains on securities available-for-sale (net of tax
expense of $2,571 in 2001 and $1,394 in 2000) |                                        | $ | 5,483          |       |              | $ | 2,822 |      
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Foreign currency translation adjustment (net of tax expense of
$59 in 2001 and $146 in 2000)                    |                                        |   | 110            |       |              |   | 271   |      
|                                                                                                                |                                        |   |                |       |              |   |       |      
|                                                                                                                | Accumulated other comprehensive income |   | $              | 5,593 |              |   | $     | 3,093 | 
|                                                                                                                |                                        |   |                |       |              |   |       |      



|(5) |  | Adoption of Accounting Standards
The Financial Accounting Standards Boards (FASB) Statement of Financial
Accounting Standards (SFAS) 133, Accounting for Derivative Instruments
and Hedging Activities,was issued in June 1998 and establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred
to as derivatives), and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. SFAS
133, as amended by SFAS 137, Deferral of the Effective Date of SFAS 133, is
effective for all fiscal quarters of fiscal years beginning after June 15,
2000. SFAS 133 should not be applied retroactively to financial statements
of prior periods. In June 2000, the FASB issued SFAS 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an Amendment
of SFAS 133, which amends certain accounting and reporting standards of
SFAS 133. The adoption of these statements at January 1, 2001 did not have
any effect on the Companys results of operations or financial condition.
 
In July 2001, the FASB issued SFAS 142, Goodwill and Other Intangible
Assets. SFAS 142 addresses the initial recognition and measurement of
intangible assets acquired either singly or with a group of other assets,
as well as the measurement of goodwill and other intangible assets
subsequent to their initial acquisition. SFAS 142 changes the accounting
for goodwill and intangible assets that have indefinite useful lives from
an amortization approach to an impairment-only approach that requires that
those assets be tested at least annually for impairment. Intangible assets
that have finite useful lives will continue to be amortized over their
useful lives, but without an arbitrary ceiling on their useful lives. SFAS
142 is required to be applied starting with fiscal years beginning after
December 15, 2001 and is required to be applied at the beginning of an
entitys fiscal year. The statement is to be applied to all goodwill and
other intangible assets recognized in an entitys financial statements at
that date. Impairment losses for goodwill and indefinite lived intangible
assets that arise due to the initial application of SFAS 142 (resulting
from an impairment test) are to be reported as a change in accounting
principle. Retroactive application is not permitted. The Company has not
yet determined the impact that SFAS 142 will have on its consolidated
financial statements.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(6) |  | Lloyds Participation
The Company manages Lloyds Syndicate 1221, and directly and indirectly controls 88.1% of
its £66.3 million ($95.4 million) of capacity for the
2001 underwriting year. The Company directly controls 67.4% or £44.7
million ($64.4 million) of Syndicate 1221s capacity for the 2001
underwriting year. Syndicate 1221s capacity is expressed net of commission
(as is standard at Lloyds) of approximately 21%.
 
If the Company were to control more than 90% of Syndicate 1221s capacity,
Lloyds Major Syndicate Transactions Byelaw (No. 18 of 1997) allows for a
minority buy-out to be effected. In such a transaction, the remaining
participants are required to give up their capacity in return for
compensation which must be at least equal to the offer price preceding the
buy-out.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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|(7) |  | Commitments and Contingencies, and Subsequent Event
Other income/(expense) for 2001 consists primarily of a £2,585,000
($3,800,000) charge related to the Companys former investment in Riverside
Corporate Underwriters, Ltd. (RCUL), a Lloyds corporate name. Lloyds
recently informed the Company that it is liable for part of the adverse
development in the Lloyds syndicates in which RCUL provided capacity in
1998 and 1999. The Company has accrued its maximum exposure which is
equivalent to a letter of credit provided to RCUL in order for RCUL to
participate on various Lloyds syndicates. The charge represents the
Companys best estimate of its potential exposure based upon currently
available information.
 
Lloyds drew down all except £60,000 of the Companys £2,585,000 letter of
credit in October 2001.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(8) |  | Loss from Terrorist Attack
on the World Trade Center
The Companys results of operations were adversely impacted by
approximately $4.5 million resulting from the September 11, 2001
terrorist attack on the World Trade Center consisting of estimated
net incurred losses of $4.1 million and the net effect of reinstatement
premiums of $0.4 million. This represents the Companys best estimate of its
maximum exposure determined by an analysis of policies that may
incur a loss resulting from the terrorist attack. However, given the
uncertainty surrounding this event, the estimate may change over time
as additional information becomes available. The related ceded losses
recoverable of $13.6 million are
reinsured by highly rated reinsurers of which $8.1 million was
received from the reinsurers in October 2001.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES




Managements Discussion and Analysis of
Financial Condition and Results of Operations

Forward-looking statements

Some of the statements in this Form 10-Q are forward-looking statements,
as defined in the Private Securities Litigation Act of 1995, derived from
information we currently have and from assumptions we make. We cannot assure
that results which we anticipate will be achieved since results may differ
materially because of both known and unknown risks and uncertainties which we
face. Please refer to the Companys most recent Annual Report on Form 10-K for
additional information on the Companys business and the important factors
which may affect that business. Factors which could cause actual results to
differ materially from our forward looking statements include, but are not
limited to:



| |  |  | the effects of domestic and foreign economic conditions and
conditions which affect the market for property and casualty
insurance;                                                                                                                      
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | domestic and foreign laws, rules and regulations which apply to
insurance companies, insurance agencies and Lloyds of London;                                                                                                                           
|
| |  |  | the effects of competition from banks, other insurers and the trend toward self-insurance;                                                                                                                                                               
|
| |  |  | risks which we face in entering new markets and diversifying the products and services we offer;                                                                                                                                                         
|
| |  |  | weather-related events and other catastrophes affecting our insureds;                                                                                                                                                                                    
|
| |  |  | our ability to obtain rate increases and to retain business; and                                                                                                                                                                                         
|
| |  |  | other risks which we identify in future filings with the
Securities and Exchange Commission, though we may not update
forward-looking statements to reflect actual results or changes in
assumptions or other factors that could affect these statements.

General

The accompanying consolidated financial statements consisting of the
accounts of The Navigators Group, Inc., a Delaware holding company, and its
twelve active wholly owned subsidiaries, are prepared on the basis of
accounting principles generally accepted in the United States of America
(GAAP). Unless the context otherwise requires, the term Company as used
herein means The Navigators Group, Inc. and its subsidiaries. The term Parent
Company is used to mean the Company without its subsidiaries.

The Companys two insurance subsidiaries are Navigators Insurance Company
(Navigators Insurance), which includes a United Kingdom Branch (UK Branch),
and NIC Insurance Company (NIC). Navigators Insurance is the Companys
largest insurance subsidiary and has been active since 1983. It specializes
primarily in underwriting marine insurance and related lines of business, and a
contractors general liability program. NIC, a wholly owned subsidiary of
Navigators Insurance, began operations in 1990. It underwrites a small book of
surplus lines insurance which is 100% reinsured by Navigators Insurance.
Navigators Insurance and NIC are collectively referred to herein as the
Insurance Companies.

In order to establish a common identity under the Navigators name, the
Company changed the name of several of its agency subsidiaries in 2001. The new names are
used throughout this document. Five of the Companys subsidiaries are
underwriting management companies: Navigators Management Company, Inc.
(formerly Somerset Marine, Inc.), Navigators Insurance Services of Texas, Inc.
(formerly Somerset Insurance Services of Texas, Inc.), Navigators California
Insurance Services, Inc. (formerly Somerset Insurance Services of California,
Inc.), Navigators Insurance Services of Washington, Inc. (formerly Somerset
Insurance Services of

12



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##### Table of Contents



Washington, Inc.) and Navigators Management (UK) Limited
(formerly Somerset Marine (UK) Limited) (Navigators UK) (collectively, the
Navigators Agencies). The Navigators Agencies produce, manage and underwrite
insurance and reinsurance for Navigators Insurance, NIC and four unaffiliated
insurance companies.

The Navigators Agencies specialize in writing marine and related lines of
business. The marine business is written through Navigators Insurance and
then allocated to a pool of insurance companies with Navigators Insurance
having a 75% participation in the pool. The Navigators Agencies derive their
revenue from commissions, service fees and cost reimbursement arrangements
from their Parent Company, Navigators Insurance, and the unaffiliated
insurers. Commissions are earned both on a fixed percentage of premiums and on
underwriting profits on business placed with the insurance companies
participating in the pool.

In April 1999, the Company acquired Anfield Insurance Services, Inc.
(Specialty), an insurance agency located in San Francisco, California, which
primarily underwrites general liability insurance coverage for small artisan
and general contractors on the West Coast. Specialty also produces a small
amount of commercial multi-peril insurance for restaurants and taverns and,
beginning in 2001, a liability program for apartment buildings and a personal
article floater cover. It produces business exclusively for the Insurance
Companies and is included with the Navigators Agencies unless otherwise noted.
Specialty and Somerset Insurance Services of California, Inc. were merged in
April 2001 to form Navigators California Insurance Services, Inc.

Navigators Holdings (UK) Limited is a holding company for the Companys
subsidiaries located in the United Kingdom. Navigators UK produces business
for the UK Branch of Navigators Insurance and four unaffiliated insurance
companies. Navigators Underwriting Agency Limited (NUAL) (formerly Mander,
Thomas & Cooper (Underwriting Agencies) Limited), is a Lloyds marine
underwriting managing agency which manages Lloyds Syndicate 1221. Navigators
Corporate Underwriters Limited (NCUL) and Millennium Underwriting Limited
(Millennium) are admitted to do business at Lloyds of London as corporate
members with limited liability. The premium recorded by NCUL and Millennium is
the result of their participation in Syndicate 1221. NUAL owns Pennine
Underwriting Limited, an underwriting managing agency with two offices in
England, which underwrites cargo and engineering business for Lloyds Syndicate
1221.

The Companys revenue is primarily comprised of premiums, commissions and
investment income. The Insurance Companies, managed by Navigators Management
Company, Inc., derive their premium from business written by the Navigators
Agencies. The Lloyds Operations derive their premium from business written by
NUAL.

On November 5, 2001 the Company announced the formation of a new division
specializing in directors and officers, and professional liability insurance.
This division began operations in the fourth quarter of 2001.

Property and casualty insurance premiums historically have been cyclical
in nature and, accordingly, during a hard market demand for property and
casualty insurance exceeds supply or capacity and, as a result, premiums and
commissions may increase. On the downturn of the property and casualty cycle,
supply exceeds demand and, as a result, premiums and commissions may decrease.

Results of Operations

General. The Companys results of operations were adversely impacted by
approximately $4.5 million resulting from the September 11, 2001 terrorist
attack on the World Trade Center consisting of estimated net incurred
losses of
$4.1 million and the net effect of reinstatement premiums of $0.4 million.
This represents the Companys best estimate of its maximum exposure determined by
an analysis of policies that may incur a loss resulting from the
terrorist attack. However, given the uncertainty surrounding this
event, the estimate may change over time as additional information
becomes available. The related ceded losses recoverable of $13.6 million are reinsured by highly rated reinsurers
of which $8.1 million was received from the reinsurers in October
2001.

13



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##### Table of Contents



Revenues. Gross written premium for the first nine months of 2001
increased 41.6% to $206,427,000 from $145,775,000 for the first nine months of
2000.

The following table sets forth the Companys gross written premium by
line of business, and ceded and net written premium in the aggregate for the
periods indicated:

|                     |                              |                             |   |                                 |         |      |  |    |     |   |   |        |         |   |  |    |     |  
|-------------------- | ---------------------------- | --------------------------- | - | ------------------------------- | ------- | ---- |  | -- | --- | - | - | ------ | ------- | - |  | -- | --- | -
|                     |                              |                             |   | Nine Months Ended September 30,
|                     |                              |                             |   |                                
|                     |                              |                             |   | 2001                            |         | 2000
|                     |                              |                             |   |                                 |         |     
|                     |                              |                             |   | (Dollars in thousands)         
|                     |                              |                             |   |                                 |         |      |  |    |     |   |   |        |         |   |  |   
|Lloyds Operations:  |                              |                             |   |                                 |         |      |  |    |     |   |   |        |         |   |  |   
|                    
|                    
|                    
|                    
|                     | Marine                       |                             | $ | 84,300                          |         |      |  | 41 | %   |   | $ | 57,160 |         |   |  | 39 | %  
|                    
|                    
|                    
|                    
|                     | Engineering and Construction |                             |   | 2,355                           |         |      |  | 1  |     |   |   | 855    |         |   |  | 1  |    
|                    
|                    
|                    
|                    
|                     | Onshore Energy               |                             |   | 1,264                           |         |      |  | 1  |     |   |   | 475    |         |   |  |   |    
|                     |                              |                             |   |                                 |         |      |  |    |     |   |   |        |         |   |  |   
|                     |                              | Gross Written Premium       |   |                                 | 87,919  |      |  |    | 43  |   |   |        | 58,490  |   |  |    | 40  |  
|                     |                              |                             |   |                                 |         |      |  |    |     |   |   |        |         |   |  |   
|                     |                              | Ceded Written Premium       |   |                                 | (27,155 | )    |  |    |     |   |   |        | (19,330 | ) |  |    |     |  
|                     |                              |                             |   |                                 |         |      |  |    |     |   |   |        |         |   |  |   
|                     |                              | Net Written Premium         |   |                                 | 60,764  |      |  |    |     |   |   |        | 39,160  |   |  |    |     |  
|                     |                              |                             |   |                                 |         |      |  |    |     |   |   |        |         |   |  |   
|Insurance Companies: |                              |                             |   |                                 |         |      |  |    |     |   |   |        |         |   |  |   
|                    
|                    
|                    
|                    
|                     | Marine                       |                             |   | 77,843                          |         |      |  | 38 |     |   |   | 65,562 |         |   |  | 45 |    
|                    
|                    
|                    
|                    
|                     | Specialty Insurance          |                             |   | 38,716                          |         |      |  | 18 |     |   |   | 19,702 |         |   |  | 14 |    
|                    
|                    
|                    
|                    
|                     | Other                        |                             |   | 1,949                           |         |      |  | 1  |     |   |   | 2,021  |         |   |  | 1  |    
|                     |                              |                             |   |                                 |         |      |  |    |     |   |   |        |         |   |  |   
|                     |                              | Gross Written Premium       |   |                                 | 118,508 |      |  |    | 57  |   |   |        | 87,285  |   |  |    | 60  |  
|                     |                              |                             |   |                                 |         |      |  |    |     |   |   |        |         |   |  |   
|                     |                              | Ceded Written Premium       |   |                                 | (50,771 | )    |  |    |     |   |   |        | (46,443 | ) |  |    |     |  
|                     |                              |                             |   |                                 |         |      |  |    |     |   |   |        |         |   |  |   
|                     |                              | Net Written Premium         |   |                                 | 67,737  |      |  |    |     |   |   |        | 40,842  |   |  |    |     |  
|                     |                              |                             |   |                                 |         |      |  |    |     |   |   |        |         |   |  |   
|                     |                              |                             |   |                                 |         |      |  |    |     |   |   |        |         |   |  |   
|                    
|                    
|                    
|                    
|                     |                              | Total Gross Written Premium |   |                                 | 206,427 |      |  |    | 100 | % |   |        | 145,775 |   |  |    | 100 | %
|                     |                              |                             |   |                                 |         |      |  |    |     |   |   |        |         |   |  |   
|                     |                              |                             |   |                                 |         |      |  |    |     |   |   |        |         |   |  |   
|                    
|                    
|                    
|                    
|                     |                              | Total Ceded Written Premium |   |                                 | (77,926 | )    |  |    |     |   |   |        | (65,773 | ) |  |    |     |  
|                     |                              |                             |   |                                 |         |      |  |    |     |   |   |        |         |   |  |   
|                     |                              |                             |   |                                 |         |      |  |    |     |   |   |        |         |   |  |   
|                    
|                    
|                    
|                    
|                     |                              | Total Net Written Premium   |   | $                               | 128,501 |      |  |    |     |   |   | $      | 80,002  |   |  |    |     |  
|                     |                              |                             |   |                                 |         |      |  |    |     |   |   |        |         |   |  |   

Lloyds Operations Gross Written Premium

The Lloyds premium is generated as the result of NCUL and Millennium
providing capacity to Lloyds Syndicate 1221 which has capacity of £66.3
million ($95.4 million) for the 2001 underwriting year. It also had capacity
of £66.3 million for the 2000 underwriting year. Syndicate 1221s capacity is
expressed net of commission expense (as is standard at Lloyds) of
approximately 21%. Pricing competition in the Lloyds business began easing
in late 2000. Lloyds presents its results on an underwriting year basis,
generally closing each underwriting year after three years. The Company makes
estimates for each year and timely accrues the expected results. The
premiums, losses and expenses from the Lloyds Operations are included in the
Companys consolidated financials but are not included in the Insurance
Companies results.

The Company directly controls 67.4% and 64.5% of Syndicate 1221s capacity
for the 2001 and 2000 underwriting years, respectively. In addition, the
Company indirectly controls 20.7% and 11.1% of Syndicate 1221s capacity for
the 2001 and 2000 underwriting years, respectively. The Company records in its
financial statements the portion of the business directly controlled.

The Company provides letters of credit to Lloyds to support its Syndicate
1221 capacity. If the amount of capacity controlled increases, the Company may
be required to supply additional letters of credit or other collateral
acceptable to Lloyds, or to reduce the capacity of Syndicate 1221.

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##### Table of Contents



Marine Premium.In the first nine months of 2001, marine gross written
premium increased 47.5% from the first nine months of 2000 due to increased
writings resulting from new business, rate increases, increases from review of
prior estimates performed in the normal course of business and to the capacity directly
provided to Syndicate 1221 by NCUL and Millennium in the aggregate increasing
from 64.5% in 2000 to 67.4% in 2001. The third quarter 2001 includes $286,000
of assumed reinstatement premium resulting from losses related to the September
11, 2001 terrorist attack on the World Trade Center.

Engineering and Construction Premium.The Robertson Consortium, managed
by NUAL, writes engineering and construction business consisting of coverage
for construction projects including machinery, equipment and loss of use due to
delays. The increase in the engineering and construction premium resulted from
the increase in new business written.

Onshore Energy Premium.The Robertson Consortium also writes onshore
energy business which principally focuses on the oil and gas, chemical and
petrochemical industries with coverages primarily for
property damage and business interruption. The increase in the onshore energy
premium resulted from rate increases and an increase in new business written.

Insurance Companies Gross Written Premium

Marine Premium.Marine gross written premium increased 18.7% when
comparing the first nine months of 2001 to the first nine months of 2000
primarily due to new business and rate increases. The increase was 18.2% in
the third quarter of 2001 compared to the third quarter of 2000.

Specialty Insurance Premium.The specialty insurance (formerly referred
to as program insurance) is written by Specialty (formerly referred to as
Anfield) and consists primarily of general liability insurance for contractors
and a small amount of commercial multi-peril insurance for restaurants and
taverns and, beginning in 2001, liability insurance for apartment buildings
and a personal article floater cover. The increase in the premium of 96.5%,
when comparing the first nine months of 2001 and 2000, resulted from new
business and rate increases. The increase was 83.3% in the third quarter of
2001 compared to the third quarter of 2000.

Ceded Written Premium.In the ordinary course of business, the Company
reinsures certain insurance risks with unaffiliated insurance companies for
the purpose of limiting its maximum loss exposure, protecting against
catastrophic losses, and maintaining desired ratios of net premiums written to
statutory surplus. The relationship of ceded to written premium varies based
upon the types of business written and whether the business is written by the
Insurance Companies or the Lloyds Operations. The increase in ceded premium
when comparing the first nine months of 2001 to the first nine months of 2000
resulted from the increase in the gross written premium and $711,000 of ceded
reinstatement premium in the Lloyds Operations resulting from losses related
to the September 11, 2001 terrorist attack on the World Trade Center. The
decrease in the percentage of ceded written premium to gross written premium
primarily resulted from both the increase in the specialty insurance of which
the Company retains a larger percentage of the written premium, and excess of
loss costs which tend to decrease as a percentage of gross written premium as
the amount of written premium increases within designated limits.

Net Written Premium. Net written premium increased 60.6% for the first nine
months of 2001 to $128,501,000 compared to $80,002,000 in the first nine
months of 2000 primarily due to the increase in the gross written
premium and the decrease in the percentage of the premium ceded. The net
written premium was $37,999,000 and $22,303,000 for the three months ended
September 30, 2001 and 2000, respectively.

Net Earned Premium. Net earned premium increased 66.1% for the first nine
months of 2001 to $99,897,000 as compared to $60,148,000 for the first nine
months of 2000 as the result of the increase in the net written

15



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##### Table of Contents



premium. Net
earned premium for the three months ended September 30, 2001 and 2000 was
$35,364,000 and $18,340,000, respectively.

Commission Income. Commission income generated by the Navigators Agencies
increased to $2,918,000 for the first nine months of 2001 from $2,172,000 for
the first nine months of 2000 and increased 27.1% for the three months ended
September 30, 2001 from the same period in 2000. The increase was primarily
the result of increased profit commission on the marine business produced by
the Navigators Agencies.

Net Investment Income. Net investment income increased 6.8% to $14,481,000
for the first nine months of 2001 from $13,553,000 for the corresponding
period in 2000 and increased 0.6% to $4,740,000 for the three months ended
September 30, 2001 from $4,714,000 during the corresponding period in 2000.
These increases are primarily due to the increase in the Insurance Companies
investment portfolio and the Companys increased participation in the Lloyds
Operations which earn income on investments held by Lloyds Syndicate 1221 in
which the Company participates. The Companys portion of the Syndicate 1221
investments are included in Funds due from Lloyds syndicateon the Companys
consolidated balance sheets.

Net Realized Capital Gains. Pre-tax net income included $996,000 of net
realized capital gains for the first nine months of 2001 compared to $118,000
for the same period last year. On an after tax basis, the net realized
capital gains were $0.10 per share and $0.01 per share for the first nine
months of 2001 and 2000, respectively. Pre-tax net income for the three
months ended September 30, 2001 and 2000 included net realized capital gains
of $389,000 and $46,000, respectively. On an after tax basis, the net
realized capital gains were $0.04 per share and $0.01 per share for the three
months ended September 30, 2001 and 2000, respectively.

Other Income/(Expense). Other income/(expense) for 2001 consists primarily of
a £2,585,000 ($3,800,000) charge related to the Companys former investment in
Riverside Corporate Underwriters, Ltd. (RCUL), a Lloyds corporate name.
Lloyds recently informed the Company that it is liable for part of the adverse
development in the Lloyds syndicates in which RCUL provided capacity in 1998
and 1999. The Company has accrued its maximum exposure which is equivalent to
a letter of credit provided to RCUL in order for RCUL to participate on
various Lloyds syndicates. The charge represents the Companys best estimate
of its potential exposure based upon currently available information. Lloyds
drew down all except £60,000 of the Companys £2,585,000 letter of credit in
October 2001.

Operating Expenses.

Net Loss and Loss Adjustment Expenses Incurred. The ratio of net loss
and loss adjustment expenses incurred to net earned premium was 69.7% and
64.0% for the first nine months of 2001 and 2000, respectively. This increase
was primarily due to increased losses in the Lloyds Operations resulting from
approximately $4.1 million of net losses (gross losses in total were $17.6 million)
related to the September 11, 2001 terrorist attack on the World Trade Center
accounting for 4.3 points of the loss ratio, and from approximately
$1.6
million of net losses resulting from one large offshore energy claim
(Petrobras) in the first quarter of 2001 accounting for 1.6 points of the loss
ratio, partially offset by results in Navigators Insurance. The loss ratios
were 79.4% and 68.5% for the three months ended September 30, 2001 and 2000,
respectively. The World Trade Center losses accounted for 12.3 points of the
loss ratio in the third quarter for 2001.

Commission Expense.Commission expense as a percentage of net earned
premium was 21.7% and 20.1% for the first nine months of 2001 and 2000,
respectively. The increase was due to the increase in the
Lloyds and the Specialty premium
which generally has a higher commission rate. The percentage was 21.7% and
19.0% for the three months ended September 30, 2001 and 2000, respectively.

Other Operating Expenses.Other operating expenses increased 9.8% to
$19,443,000 during the first nine months of 2001 from $17,703,000 during the
corresponding period of 2000 and increased 15.0% for the

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##### Table of Contents



three months ended
September 30, 2001 compared to the same period in 2000 primarily due to
increased expenses related to the expansion of the Companys specialty
business, the increase in Lloyds premium and to the Companys employee stock
programs primarily resulting from the increase in the market price of the
stock.

Interest Expense.Interest expense was $1,108,000 during the first nine
months of 2001 compared to $1,284,000 during the corresponding period of 2000.
This decrease was due to lower interest rates on the loan and to a smaller
average loan balance. The interest expense for the three months ended
September 30, 2001 decreased to $289,000 from $448,000 for the same period in
2000.

Income Taxes. The effective tax rate was 53.5% and 30.9% for the nine months
ended September 30, 2001 and 2000, respectively. The rates differed from the
Federal statutory income tax rate due to tax-exempt interest income and a
valuation allowance. The tax-exempt income decreased and the valuation
allowance increased for the first nine months of 2001 compared to the same
period in 2000. At September 30, 2001 and 2000, the Company had $8,132,000 and
$4,970,000 of valuation allowances against its deferred tax asset. The
valuation allowance and its change for the nine months ended September 30, 2001
was necessitated by the uncertainty associated with the realization of the
deferred tax asset for the carryforward of operating losses from certain of the
Companys foreign, state and local operations.

Net Income.The Company had net income of $1,444,000 for the first nine months
of 2001 compared to $4,700,000 for the same period last year. On a diluted per
share basis, this represented net income per share of $0.17 and $0.56 for the
first nine months of 2001 and 2000, respectively. The Company had a net loss
of $(2,921,000) or $(0.35) per share for the three months ended September 30,
2001 compared to net income of $1,610,000 or $0.19 per share for the same
period in 2000.

Liquidity and Capital Resources

Cash flow from operations was $13,646,000 and $246,000 for the first nine
months of 2001 and 2000, respectively. Invested assets and cash increased to
$270,648,000 at September 30, 2001 from $251,185,000 at December 31, 2000.

The Companys bank credit facility provided for a $23,000,000 revolving
line of credit facility at September 30, 2001, which reduces each quarter by
amounts ranging between $1,000,000 to $2,250,000 beginning January 1, 2000
until it terminates on November 19, 2004, and a $55,000,000 letter of credit
facility. At September 30, 2001, $22,000,000 in loans were outstanding under
the revolving line of credit facility at an interest rate of 4.8%. The letter
of credit facility is utilized primarily by NCUL and Millennium to participate
in Lloyds Syndicate 1221. At September 30, 2001, letters of credit with an
aggregate face amount of $51,938,000 were issued under the letter of credit
facility.

As of September 30, 2001, the Companys consolidated stockholders equity
was $147,496,000 compared to $143,480,000 at December 31, 2000. The increase
was primarily due to the net income for the nine months ended September 30,
2001, partially offset by decreases in the unrealized gains in the investment
portfolio.

Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the information concerning market
risk as stated in the Companys Annual Report on Form 10-K for the year ended
December 31, 2000.

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##### Table of Contents



Treasury Stock

During the first quarter of 2001 and 2000, the Company issued 5,406 and
7,386 shares of treasury stock, respectively, to the non-employee directors as
part of the directors annual compensation for the prior year. The Company
expensed $72,000 in each of the prior two years relating to the issuance of
these shares.




Part II  Other Information



|Item 1. |  | Legal Proceedings:
 
The Company is not a party to or the subject of any material pending legal
proceedings which depart from the ordinary routine litigation incident to
the kinds of business conducted by the Company, except for an assessment
on Navigators Insurance by the Institute of London Underwriters (ILU).
In late 1998, the ILU advised its forty-one members, including Navigators
Insurance, that they were each being assessed approximately £900,000 ($1.3
million) to pay for anticipated operating deficits arising from the ILUs
long term lease of the building occupied by the ILU in London. Navigators
Insurance opposed the assessment as inequitable and inappropriate. The
matter was settled with the ILU in September 2001 for £350,000 ($504,000)
which was the approximate amount the Company had accrued at December 31,
2000.
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       
|Item 2. |  | Changes in Securities:
 
None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       
|Item 3. |  | Defaults Upon Senior Securities:
 
None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       
|Item 4. |  | Submissions of Matters to a Vote of Securities Holders:
 
None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       
|Item 5. |  | Other Information:
 
None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|       
|Item 6. |  | Exhibits and Reports on Form 8-K:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

(a)  Exhibits:

|            |  |                        |  |  | 
|----------- |  | ---------------------- |  |  | 
|Exhibit No. |  | Description of Exhibit
|            |  |                       
|None.      

(b)  Reports on Form 8-K:



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | There were no reports on Form 8-K filed for the nine months ended
September 30, 2001.

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##### Table of Contents






SIGNATURES

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

|       |                   |  |                                                                                                    | 
|------ | ----------------- |  | -------------------------------------------------------------------------------------------------- | 
|       |                   |  | The Navigators Group, Inc.(Registrant)                                                            
|      
|       |                   |  |                                                                                                   
|      
|Dated: | November 12, 2001 |  | /s / Bradley D. WileyBradley D. Wiley
Senior Vice President, Chief Financial
Officer and Secretary

19