**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-Q**

 

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

**of the Securities Exchange Act of 1934**

 

**For theQuarterly Period Ended March 31, 2006**

 

**Commissionfile number****          0-15886**

 

**The Navigators Group, Inc.**

(Exact name of Registrant asspecified in its charter)

 

| **Delaware**                              | ** ** | **13-3138397**       |
|-------------------------------------------|------------|----------------------|
| (State or  other jurisdiction of          |       | (IRS  Employer       |
| incorporation  or organization)           |       | Identification  No.) |
|                                      |       |                 |
| **One Penn  Plaza, New York, New York**   | ** ** | **10119**            |
| (Address of principal  executive offices) |       | (Zip Code)           |

 

**(212)244-2333**

(Registrant’s telephone number,including area code)

 

 

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

 

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

 

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

 

Large Accelerated Filer                     o                                    AcceleratedFiler                                                      ý                                    Non-AcceleratedFiler                           o

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes  o  No  ý

 

The number of common shares outstanding as of April 25, 2006 was 16,667,681.

 

 

----

 

**THENAVIGATORS GROUP, INC. AND SUBSIDIARIES**

 

**INDEX**

 
| Part I. FINANCIAL INFORMATION:                                                                           |   |   |
|---------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                          |   |   |
| Item 1. Financial Statements                                                                                  |   |   |
|                                                                                                          |   |   |
| Consolidated Balance Sheets  March 31, 2006 (Unaudited) and December 31, 2005                       |   |   |
|                                                                                                          |   |   |
| Consolidated Statements of Income  (Unaudited)  Three Months Ended March 31, 2006 and 2005               |   |   |
|                                                                                                          |   |   |
| Consolidated Statements of Stockholders’ Equity  (Unaudited)  March 31, 2006 and 2005               |   |   |
|                                                                                                          |   |   |
| Consolidated Statements of Comprehensive  Income (Unaudited)  Three Months Ended March 31, 2006 and 2005 |   |   |
|                                                                                                          |   |   |
| Consolidated Statements of Cash Flows  (Unaudited)  Three Months Ended March 31, 2006 and 2005           |   |   |
|                                                                                                          |   |   |
| Notes to Interim Consolidated Financial  Statements (Unaudited)                                               |   |   |
|                                                                                                          |   |   |
| Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations           |   |   |
|                                                                                                          |   |   |
| Item 3. Quantitative and Qualitative  Disclosures About Market Risk                                           |   |   |
|                                                                                                          |   |   |
| Item 4. Controls and Procedures                                                                               |   |   |
|                                                                                                          |   |   |
| Part II. OTHER INFORMATION                                                                               |   |   |
|                                                                                                          |   |   |
| Item 1. Legal Proceedings                                                                                     |   |   |
|                                                                                                          |   |   |
| Item 2. Unregistered Sales of Equity  Securities and Use of Proceeds                                          |   |   |
|                                                                                                          |   |   |
| Item 3. Defaults Upon Senior Securities                                                                       |   |   |
|                                                                                                          |   |   |
| Item 4. Submissions of Matters to a Vote of  Security Holders                                                 |   |   |
|                                                                                                          |   |   |
| Item 5. Other Information                                                                                     |   |   |
|                                                                                                          |   |   |
| Item 6. Exhibits                                                                                              |   |   |
|                                                                                                          |   |   |
| Signature                                                                                                     |   |   |
|                                                                                                          |   |   |
| Index of Exhibits                                                                                             |   |   |

 

2

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

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

#####  

**THENAVIGATORS GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

*($ inthousands, except share data)*

 
| ** **                                                                                                                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                        | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| ** **                                                                                                                        | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                        | * *   | * *           | ** ** | ** **            | ** ** |
| ** **                                                                                                                        | * *   | * *           | ** ** | ** **            | ** ** |
| Investments  and cash:                                                                                                            | ** ** | ** **         | ** ** | ** **            | ** ** |
| Fixed  maturities, available-for-sale, at fair value (amortized cost: 2006,  $1,039,859; 2005, $986,726)                          |       | $                  | 1,022,603  |                  | $          | 984,113 |   |
| Equity  securities, available-for-sale, at fair value (cost: 2006, $23,637; 2005,  $19,667)                                       |       | 25,181             |       | 20,911                |       |
| Short-term  investments, at cost which approximates fair value                                                                    |       | 132,817            |       | 164,047               |       |
| Cash                                                                                                                              |       | 14,069             |       | 13,165                |       |
| Total  investments and cash                                                                                                       |       | 1,194,670          |       | 1,182,236             |       |
|                                                                                                                              |       |               |       |                  |       |
| Premiums in  course of collection                                                                                                 |       | 210,039            |       | 155,977               |       |
| Commissions  receivable                                                                                                           |       | 3,489              |       | 3,467                 |       |
| Prepaid  reinsurance premiums                                                                                                     |       | 168,114            |       | 136,341               |       |
| Reinsurance  receivable on paid losses                                                                                            |       | 40,091             |       | 37,055                |       |
| Reinsurance  receivable on unpaid losses and loss adjustment expenses                                                             |       | 1,006,505          |       | 979,015               |       |
| Net deferred  income tax benefit                                                                                                  |       | 34,961             |       | 28,317                |       |
| Deferred  policy acquisition costs                                                                                                |       | 44,251             |       | 29,697                |       |
| Accrued  investment income                                                                                                        |       | 10,548             |       | 10,297                |       |
| Goodwill and  other intangible assets                                                                                             |       | 7,399              |       | 7,341                 |       |
| Other assets                                                                                                                      |       | 20,246             |       | 13,506                |       |
|                                                                                                                              |       |               |       |                  |       |
| Total assets                                                                                                                      |       | $                  | 2,740,313  |                  | $          | 2,583,249 |   |
|                                                                                                                              |       |               |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                    | ** ** | ** **         | ** ** | ** **            | ** ** |
| Liabilities:                                                                                                                      | ** ** | ** **         | ** ** | ** **            | ** ** |
| Reserves for  losses and loss adjustment expenses                                                                                 |       | $                  | 1,608,735  |                  | $          | 1,557,991 |   |
| Unearned  premium                                                                                                                 |       | 388,113            |       | 316,516               |       |
| Reinsurance  balances payable                                                                                                     |       | 193,113            |       | 180,059               |       |
| Federal  income tax payable                                                                                                       |       | 6,777              |       | 1,274                 |       |
| Payable for  securities purchased                                                                                                 |       | —             |       | 823                   |       |
| Accounts  payable and other liabilities                                                                                           |       | 65,259             |       | 56,348                |       |
| Total liabilities                                                                                                                 |       | 2,261,997          |       | 2,113,011             |       |
|                                                                                                                              |       |               |       |                  |       |
| Stockholders’  equity:                                                                                                       | ** ** | ** **         | ** ** | ** **            | ** ** |
| Preferred  stock, $.10 par value, authorized 1,000,000 shares, none issued                                                        |       | —             |       | —                |       |
| Common  stock, $.10 par value, 20,000,000 shares authorized; issued and outstanding:  16,667,681 for 2006 and 16,616,781 for 2005 |       | 1,667              |       | 1,662                 |       |
| Additional  paid-in capital                                                                                                       |       | 284,099            |       | 282,463               |       |
| Retained  earnings                                                                                                                |       | 202,426            |       | 186,901               |       |
| Accumulated  other comprehensive (loss)                                                                                           |       | (9,876             | )          | (788                  | )          |
| Total  stockholders’ equity                                                                                                  |       | 478,316            |       | 470,238               |       |
|                                                                                                                              |       |               |       |                  |       |
| Total  liabilities and stockholders’ equity                                                                                  |       | $                  | 2,740,313  |                  | $          | 2,583,249 |   |

 

#### **See accompanying notes to interim consolidatedfinancial statements.**

 

3

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#### ** **

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

**CONSOLIDATEDSTATEMENTS OF INCOME**

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

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **March 31,**               | ** ** |
| ** **                                        | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                                        | ** ** | **(Unaudited)**                  | ** ** |
|                                              |       |                             |       |   |   |
| Gross  written premium                            |       | $                                | 263,784    |   | $ | 216,996 |   |
| Revenues:                                         |       |                             |       |   |   |
| Net written  premium                              |       | $                                | 143,426    |   | $ | 117,090 |   |
| (Increase)  in unearned premium                   |       | (39,704                          | )          | (39,552 | ) |
| Net earned  premium                               |       | 103,722                          |       | 77,538 |   |
| Commission  income                                |       | 1,286                            |       | 1,270 |   |
| Net  investment income                            |       | 12,550                           |       | 7,622 |   |
| Net realized  capital gains (losses)              |       | (424                             | )          | 167 |   |
| Other income                                      |       | 186                              |       | 897 |   |
| Total  revenues                                   |       | 117,320                          |       | 87,494 |   |
|                                              |       |                             |       |   |   |
| Operating  expenses:                              |       |                             |       |   |   |
| Net losses  and loss adjustment expenses incurred |       | 62,117                           |       | 46,221 |   |
| Commission  expense                               |       | 13,705                           |       | 9,604 |   |
| Other  operating expenses                         |       | 18,408                           |       | 17,444 |   |
| Total  operating expenses                         |       | 94,230                           |       | 73,269 |   |
|                                              |       |                             |       |   |   |
| Income  before income tax expense                 |       | 23,090                           |       | 14,225 |   |
|                                              |       |                             |       |   |   |
| Income tax  expense (benefit):                    |       |                             |       |   |   |
| Current                                           |       | 9,332                            |       | 5,172 |   |
| Deferred                                          |       | (1,767                           | )          | (646 | ) |
| Total income  tax expense                         |       | 7,565                            |       | 4,526 |   |
|                                              |       |                             |       |   |   |
| Net income                                        |       | $                                | 15,525     |   | $ | 9,699 |   |
|                                              |       |                             |       |   |   |
| Net income  common share:                         |       |                             |       |   |   |
| Basic                                             |       | $                                | 0.93       |   | $ | 0.77 |   |
| Diluted                                           |       | $                                | 0.93       |   | $ | 0.76 |   |
|                                              |       |                             |       |   |   |
| Average  common shares outstanding:               |       |                             |       |   |   |
| Basic                                             |       | 16,639                           |       | 12,677 |   |
| Diluted                                           |       | 16,757                           |       | 12,760 |   |

 

See accompanying notes tointerim consolidated financial statements.

 

4

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**THENAVIGATORS GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

*($ inthousands)*

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **March 31,**               | ** ** |
| ** **                                               | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                                               | ** ** | **(Unaudited)**                  | ** ** |
| Preferred  Stock                                         |       |                             |       |   |   |
| Balance at  beginning and end of period                  |       | $                                | —     |   | $ | — |   |
|                                                     |       |                             |       |   |   |
| Common stock                                             |       |                             |       |   |   |
| Balance at  beginning of year                            |       | $                                | 1,662      |   | $ | 1,266 |   |
| Shares  issued under stock plans                         |       | 5                                |       | 10 |   |
| Balance at  end of period                                |       | $                                | 1,667      |   | $ | 1,276 |   |
|                                                     |       |                             |       |   |   |
| Additional  paid-in capital                              |       |                             |       |   |   |
| Balance at  beginning of year                            |       | $                                | 282,463    |   | $ | 154,670 |   |
| Effect of  SFAS 123 for stock options                    |       | 240                              |       | 246 |   |
| Shares  issued under stock plans                         |       | 1,396                            |       | 1,598 |   |
| Balance at  end of period                                |       | $                                | 284,099    |   | $ | 156,514 |   |
|                                                     |       |                             |       |   |   |
| Retained  earnings                                       |       |                             |       |   |   |
| Balance at  beginning of year                            |       | $                                | 186,901    |   | $ | 163,337 |   |
| Net income                                               |       | 15,525                           |       | 9,699 |   |
| Balance at  end of period                                |       | $                                | 202,426    |   | $ | 173,036 |   |
|                                                     |       |                             |       |   |   |
| Accumulated  other comprehensive income (loss)           |       |                             |       |   |   |
| Net  unrealized gains (losses) on securities, net of tax |       |                             |       |   |   |
| Balance at  beginning of year                            |       | $                                | (884       | ) | $ | 7,416 |   |
| Change in  period                                        |       | (9,330                           | )          | (6,487 | ) |
| Balance at  end of period                                |       | (10,214                          | )          | 929 |   |
| Cumulative  translation adjustments, net of tax          |       |                             |       |   |   |
| Balance at  beginning of year                            |       | 96                               |       | 1,889 |   |
| Net adjustment  for period                               |       | 242                              |       | 112 |   |
| Balance at  end of period                                |       | 338                              |       | 2,001 |   |
| Balance at  end of period                                |       | $                                | (9,876     | ) | $ | 2,930 |   |
|                                                     |       |                             |       |   |   |
| Total  stockholders’ equity at end of period        |       | $                                | 478,316    |   | $ | 333,756 |   |

 

See accompanying notes to interim consolidatedfinancial statements.

 

5

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

**CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME**

*($ in thousands)*

 
| ** **                                                                                                                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                          | ** ** | **March 31,**               | ** ** |
| ** **                                                                                                                          | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                                                                                                                          | ** ** | **(Unaudited)**                  | ** ** |
|                                                                                                                                |       |                             |       |   |   |
| Net income                                                                                                                          |       | $                                | 15,525     |   | $ | 9,699 |   |
| Other  comprehensive income (loss):                                                                                                 |       |                             |       |   |   |
| Change in  net unrealized (losses) on securities, net of tax (benefit) of ($5,024) and  ($3,493) in 2006 and 2005, respectively (1) |       | (9,330                           | )          | (6,487 | ) |
| Change in  foreign currency translation gains, net of tax expense of $130 and $60 in  2006 and 2005, respectively                   |       | 242                              |       | 112 |   |
| Other  comprehensive (loss)                                                                                                         |       | (9,088                           | )          | (6,375 | ) |
|                                                                                                                                |       |                             |       |   |   |
| Comprehensive  income                                                                                                               |       | $                                | 6,437      |   | $ | 3,324 |   |

 
|        |                                                                             |
|--------|----------------------------------------------------------------------------------|
| (1)    | Disclosure  of reclassification amount, net of tax:                              |   |   |   |   |   |
|   | Unrealized  holding (losses) arising during period                               |   | $ | (9,606 | ) | $ | (6,378 | ) |
|   | Less:  reclassification adjustment for net gains (losses) included in net income |   | (276 | ) | 109 |   |
|   | Change in  net unrealized gains or (losses) on securities                        |   | $ | (9,330 | ) | $ | (6,487 | ) |

 

See accompanying notes to interim consolidatedfinancial statements.

 

6

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**THENAVIGATORS GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

*($ inthousands)*

 
| ** **                                                                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                    | ** ** | **March 31,**               | ** ** |
| ** **                                                                                    | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                                                                                    | ** ** | **(Unaudited)**                  | ** ** |
| Operating  activities:                                                                        |       |                             |       |   |   |
| Net income                                                                                    |       | $                                | 15,525     |   | $ | 9,699 |   |
| Adjustments  to reconcile net income to net cash provided by (used in) operating  activities: |       |                             |       |   |   |
| Depreciation &  amortization                                                         |       | 1,199                            |       | 349 |   |
| Net deferred  income tax (benefit)                                                            |       | (1,767                           | )          | (646 | ) |
| Net realized  capital (gains) losses                                                          |       | 424                              |       | (167 | ) |
| Changes in  assets and liabilities:                                                           |       |                             |       |   |   |
| Reinsurance  receivable on paid and unpaid losses and loss adjustment expenses                |       | (30,526                          | )          | (15,839 | ) |
| Reserve for  losses and loss adjustment expenses                                              |       | 50,744                           |       | 33,649 |   |
| Prepaid  reinsurance premiums                                                                 |       | (31,773                          | )          | (16,251 | ) |
| Unearned  premium                                                                             |       | 71,597                           |       | 55,601 |   |
| Premiums in  course of collection                                                             |       | (54,062                          | )          | (2,461 | ) |
| Commissions  receivable                                                                       |       | (22                              | )          | (76 | ) |
| Deferred  policy acquisition costs                                                            |       | (14,554                          | )          | (12,053 | ) |
| Accrued  investment income                                                                    |       | (251                             | )          | (38 | ) |
| Reinsurance  balances payable                                                                 |       | 13,054                           |       | (2,976 | ) |
| Federal  income tax                                                                           |       | 5,503                            |       | 3,656 |   |
| Other                                                                                         |       | 4,387                            |       | 12,743 |   |
| Net cash  provided by operating activities                                                    |       | 29,478                           |       | 65,190 |   |
|                                                                                          |       |                             |       |   |   |
| Investing  activities:                                                                        |       |                             |       |   |   |
| Fixed  maturities, available-for-sale                                                         |       |                             |       |   |   |
| Redemptions  and maturities                                                                   |       | 3,069                            |       | 7,795 |   |
| Sales                                                                                         |       | 74,681                           |       | 77,968 |   |
| Purchases                                                                                     |       | (131,022                         | )          | (147,561 | ) |
| Equity  securities, available-for-sale                                                        |       |                             |       |   |   |
| Sales                                                                                         |       | 2,205                            |       | — |   |
| Purchases                                                                                     |       | (5,762                           | )          | (117 | ) |
| Change in  payable for securities                                                             |       | (2,672                           | )          | (332 | ) |
| Net change  in short-term investments                                                         |       | 31,230                           |       | (10,921 | ) |
| Purchase of  property and equipment                                                           |       | (878                             | )          | (145 | ) |
| Net cash  (used in) investing activities                                                      |       | (29,149                          | )          | (73,313 | ) |
|                                                                                          |       |                             |       |   |   |
| Financing  activities:                                                                        |       |                             |       |   |   |
| Proceeds of  stock issued from Employee Stock Purchase Plan                                   |       | 222                              |       | 212 |   |
| Proceeds of  stock issued from exercise of stock options                                      |       | 353                              |       | 887 |   |
| Net cash  provided by financing activities                                                    |       | 575                              |       | 1,099 |   |
|                                                                                          |       |                             |       |   |   |
| Increase  (decrease) in cash                                                                  |       | 904                              |       | (7,024 | ) |
| Cash at  beginning of year                                                                    |       | 13,165                           |       | 14,676 |   |
| Cash at end  of period                                                                        |       | $                                | 14,069     |   | $ | 7,652 |   |
|                                                                                          |       |                             |       |   |   |
| Supplemental  disclosures of cash flow information:                                           |       |                             |       |   |   |
| Federal,  state and local income tax paid                                                     |       | $                                | 3,256      |   | $ | 1,506 |   |
| Issuance of  stock to directors                                                               |       | 140                              |       | 123 |   |

 

See accompanying notes tointerim consolidated financial statements.

 

7

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

**Notes to InterimConsolidated Financial Statements**

*(Unaudited)*

 

**Note 1. Accounting Policies**

 

The interim consolidated financial statementsare unaudited but reflect all adjustments which, in the opinion of management,are necessary to provide a fair statement of the results of The NavigatorsGroup, Inc. and its subsidiaries for the interim periods presented on thebasis of accounting principles generally accepted in the United States ofAmerica (“GAAP” or “U.S. GAAP”). All such adjustments are of a normal recurringnature. All significant intercompany transactions and balances have beeneliminated. The preparation of these financial statements requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosures of contingent assets and liabilities at thedate of the financial statements and the reported revenues and expenses duringthe reporting periods. The results of operations for any interim period are notnecessarily indicative of results for the full year. The terms “we”, “us”, “our”and “the Company” as used herein mean The Navigators Group, Inc. and itssubsidiaries, unless the context otherwise requires. The term “Parent” or “ParentCompany” is used to mean The Navigators Group, Inc. without itssubsidiaries. These financial statements should be read in conjunction with theconsolidated financial statements and notes contained in the Company’s 2005Annual Report on Form 10-K. Certain amounts for the prior year have beenreclassified or restated to conform to the current year’s presentation.

 

**Note 2. Reinsurance Ceded**

 

The Company’sceded earned premiums were $88,880,000 and $83,464,000 for the three monthsended March 31, 2006 and 2005, respectively. The Company’s ceded incurredlosses were $63,109,000 and $53,435,000 for the three months ended March 31,2006 and 2005, respectively.

 

**Note 3. Segment Information**

 

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

 

Effective in2006, the Company classifies its business into two underwriting segments,consisting of the Insurance Companies and Lloyd’s Operations, which areseparately managed, and a Corporate segment. Segment data for each of the twounderwriting operations include allocations of revenues and expenses of the NavigatorsAgencies’ and Parent Company’s expenses and related income tax amountspreviously reported separately. The Corporate segment consists of the ParentCompany’s investment income and related tax effect. Each segment maintains itsown investments, on which it earns income and realizes capital gains or losses.Income tax expense is recorded based on the respective income of each segment. Segmentdata for 2005 and prior periods have been restated to reflect this change insegment reporting.

 

The InsuranceCompanies consist of Navigators Insurance Company, which includes the U.K.Branch, and NIC Insurance Company and are primarily engaged in underwritingmarine insurance and related lines of business, contractors’ general liabilityinsurance, and professional liability insurance. The Lloyd’s Operationsunderwrite marine and related lines of business at Lloyd’s of London. TheNavigators Agencies are underwriting management companies which produce, manageand underwrite insurance and reinsurance for the Company. All segments are evaluatedbased on their GAAP results.

 

The InsuranceCompanies’ and the Lloyd’s Operations’ performance are measured based onunderwriting results which is a non-GAAP measure and the related combined ratiowhich is another non-GAAP measure of

 

8

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underwriting profitability. Underwriting profit or loss is calculatedfrom net earned premiums, less net losses and LAE, commission expense and otheroperating expenses related to underwriting activities. The combined ratio isderived by taking such net losses and LAE and operating expenses divided by netearned premiums. A combined ratio of less than 100% indicates an underwritingprofit and over 100% indicates an underwriting loss.

 

Financialdata by segment for the three months ended March 31, 2006 and 2005 was asfollows:

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

 

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| (1) |   | Certain amounts included in  the segment columns include inter-segment transactions causing certain rows  not to crossfoot. |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------|
| (2) |   | The *other  operating expense ratio* is adjusted to include *commission and other income (expense).*                        |

 

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| ** **                               | ** ** | **Three Months Ended March 31, 2005** | ** ** |
|------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                               | ** ** | **Insurance**                                                  | ** ** | **Lloyd’s** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Companies**                                                  | ** ** | **Operations** | ** ** | **Corporate** | ** ** | **Total (1)** | ** ** |
| ** **                               | ** ** | **($ in thousands)**                                 | ** ** |
| ** **                               | ** ** | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross  written premium                   |       | $                                                              | 129,288    |   | $ | 87,830 |   |   |   | $ | 216,996 |   |
| Net written  premium                     |       | 73,581                                                         |       | 43,509 |   |   |   | 117,090 |   |
|                                     |       |                                                           |       |   |   |   |   |   |   |
| Net earned  premium                      |       | $                                                              | 47,363     |   | $ | 30,175 |   |   |   | $ | 77,538 |   |
| Net losses  and loss adjustment expenses |       | (28,842                                                        | )          | (17,379 | ) |   |   | (46,221 | ) |
| Commission  expense                      |       | (4,723                                                         | )          | (4,881 | ) |   |   | (9,604 | ) |
| Other  operating expenses                |       | (11,939                                                        | )          | (5,505 | ) |   |   | (17,444 | ) |
| Commission  and other income (expense)   |       | 1,271                                                          |       | 896 |   |   |   | 2,167 |   |
|                                     |       |                                                           |       |   |   |   |   |   |   |
| Underwriting  profit                     |       | 3,130                                                          |       | 3,306 |   |   |   | 6,436 |   |
|                                     |       |                                                           |       |   |   |   |   |   |   |
| Investment  income                       |       | 6,857                                                          |       | 749 |   | $ | 16 |   | 7,622 |   |
| Net realized  capital gains (losses)     |       | 266                                                            |       | (99 | ) | 0 |   | 167 |   |
| Income  before income tax expense        |       | 10,253                                                         |       | 3,956 |   | 16 |   | 14,225 |   |
|                                     |       |                                                           |       |   |   |   |   |   |   |
| Income tax  expense                      |       | 3,136                                                          |       | 1,385 |   | 5 |   | 4,526 |   |
| Net Income                               |       | $                                                              | 7,117      |   | $ | 2,571 |   | $ | 11 |   | $ | 9,699 |   |
|                                     |       |                                                           |       |   |   |   |   |   |   |
| Identifiable  Assets                     |       | $                                                              | 1,355,437  |   | $ | 579,464 |   | $ | 11,915 |   | $ | 1,865,033 |   |
|                                     |       |                                                           |       |   |   |   |   |   |   |
| Loss and  loss expenses ratio            |       | 60.9                                                           | %          | 57.6 | % |   |   | 59.6 | % |
| Commission  expense ratio                |       | 10.0                                                           | %          | 16.2 | % |   |   | 12.4 | % |
| Other operating expense  ratio (2)       |       | 22.5                                                           | %          | 15.2 | % |   |   | 19.7 | % |
| Combined  ratio                          |       | 93.4                                                           | %          | 89.0 | % |   |   | 91.7 | % |

 

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| (1) |   | Certain amounts included in  the segment columns include inter-segment transactions causing certain rows  not to crossfoot. |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------|
| (2) |   | The *other  operating expense ratio* is adjusted to include *commission and other income (expense)*.                        |

 

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The Insurance Companies’ net earned premiumincludes $8,227,000 and $8,350,000 of net earned premium from the U.K. Branchfor the three months ended March 31, 2006 and 2005, respectively.

 

**Note 4. Comprehensive Income**

 

Comprehensive income encompasses net income,net unrealized capital gains and losses on available for sale securities, andforeign currency translation adjustments. Please refer to the *Consolidated Statements of Stockholders’ Equity* and the *Consolidated Statements of Comprehensive Income*, includedherein, for the components of *accumulated othercomprehensive income (loss)* and of *comprehensiveincome (loss)*, respectively.

 

**Note 5. Stock-Based Compensation**

 

Stock based compensation is expensed as the stockawards vest with the expense being included in *otheroperating expenses* for the periods indicated. The amount charged toexpense for stock grants was $422,000 and $378,000 for the three months ended March 31,2006 and 2005, respectively. The amount charged to expense for stock optionswas $240,000 and $246,000 for the three months ended March 31, 2006 and2005, respectively. Stock appreciation rights resulted in expense of $829,000 and$75,000 for the three months ended March 31, 2006 and 2005, respectively.

 

In addition, $35,000 and $35,000 wereexpensed for the three months ended March 31, 2006 and 2005, respectively,for stock issued annually to non-employee directors as part of theirdirectors’ compensation for serving on the Company’s Board of Directors.

 

**Note 6. Application of New AccountingStandards**

 

In December 2004, the FinancialAccounting Standards Board (the “FASB”) issued Statement of FinancialAccounting Standard (“SFAS”) No. 123 (revised 2004), *Share BasedPayment*, which is a revision of SFAS 123, *Accountingfor Stock-Based Compensation*, eliminating the alternative use of APB25. The adoption of SFAS No. 123 (revised 2004) on January 1, 2006 hadno material effect on the Company’s results of operations or financialcondition since the Company adopted the fair value recognition provisions ofSFAS No. 123 in 2003.

 

**Note 7. Lloyd’s Syndicate**

 

We record our pro rata share of Lloyd’sSyndicate 1221’s assets, liabilities, revenues and expenses, after makingadjustments to convert Lloyd’s accounting to U.S. GAAP. The most significant U.S. GAAP adjustmentsrelate to income recognition. Lloyd’s syndicates determine underwriting resultsby year of account at the end of three years. We record adjustments torecognize underwriting results as incurred, including the expected ultimatecost of losses incurred. These adjustments to losses are based on actuarialanalysis of syndicate accounts, including forecasts of expected ultimate lossesprovided by the syndicates. At the end ofthe Lloyd’s three year period for determining underwriting results for anaccount year, the syndicate will close the account year by reinsuringoutstanding claims on that account year with the participants for the account’snext underwriting year. The amount to close an underwriting year into the nextyear is referred to as the “reinsurance to close”. The reinsurance to closetransaction is recorded in the fourth quarter as additional written and earnedpremium, losses incurred, loss reserves and receivables, all in the same amount.No gain or loss is recordedon the reinsurance to close transaction.

 

Our Lloyd’s Syndicate 1221’s stamp capacity is£112.5 million ($197.2 million) in 2006 compared to £135.0 million ($246.0million) in 2005. Stamp capacity is a measure of the amount of premium a Lloyd’s

 

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syndicate is authorized to write based on a business plan approved bythe Council of Lloyd’s. Syndicate 1221’s capacity is expressed net ofcommission (as is standard at Lloyd’s) of approximately 21%. The Syndicate 1221premium recorded in the Company’s financial statements is gross of commission. TheCompany participates for 100% and 97.5% of Syndicate 1221’s capacity for the 2006and 2005 underwriting years, respectively. The Lloyd’s Operations included inthe consolidated financial statements represent the Company’s participation inSyndicate 1221.

 

The Company provides letters of credit toLloyd’s to support its Syndicate 1221 capacity. If the Company increases itsparticipation or if Lloyd’s changes the capital requirements, the Company may berequired to supply additional letters of credit or other collateral acceptableto Lloyd’s, or reduce the capacity of Syndicate 1221. The letters of credit areprovided through the credit facility which the Company maintains with aconsortium of banks. The credit facility agreement requires that the banks voteperiodically whether or not to renew the credit facility. If the banks decidenot to renew credit facility, the Company will need to find other sources toprovide the letters of credit or other collateral in order to continue toparticipate in Syndicate 1221. The renewal amendment executed in January 2005renewed the letter of credit facility until June 30, 2007. The bankfacility is collateralized by all of the common stock of Navigators InsuranceCompany.

 

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

 

The Company had state and local operatingloss carryforwards amounting to potential future tax benefits of $5,236,000 and$5,009,000 at March 31, 2006 and December 31, 2005, respectively. Avaluation allowance was established for the full amount of these potentialfuture tax benefits due to the uncertainty associated with their realization.

 

**Note 9. Commitments and Contingencies**

 

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

 

At the end of April 2006, the Companywas served as a defendant in an action in the Northern District Court ofGeorgia captioned *New Cingular Wireless Headquarters, LLC, etal. v. Marsh & McLennan Companies, Inc., et al*., alongwith approximately 100 other defendants. While it is not possible at this verypreliminary stage to predict the outcome of this litigation, the Companybelieves the allegations, which involve contingent commissions and bid-riggingin the insurance industry, to be without merit and intends to vigorously defenditself against them.

 

**Note 10. Subsequent Event – Senior Notes**

 

On April 17, 2006, the Company completeda public debt offering of $125 million principal amount 7% senior unsecurednotes due May 1, 2016 (the “Senior Notes”) and received net proceeds of$123.5 million. The Company contributed $100 million of the proceeds to thecapital and surplus of Navigators Insurance Company and retained the remainderat the Parent Company for general corporate purposes. Interest will be paid onthe Senior Notes each May 1 and November 1 with the first payment dueon November 1, 2006. The Company may redeem the Senior Notes at anytime and from time to time, in whole or in part, at a make-whole redemptionprice. The Senior Notes are the Company’s only senior unsecured obligations andwill rank equally with future senior unsecured indebtedness. The effectiveinterest rate related to the Senior Notes, based on the net proceeds received,is approximately 7.15%.

 

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

 

**Note on Forward-Looking Statements**

 

Some of the statements in this Quarterly Report on Form 10-Qare “forward-looking statements” as defined in the Private SecuritiesLitigation Reform Act of 1995. Whenever used in this report, the words “estimate”,“expect”, “believe” or similar expressions are intended to identify suchforward-looking statements. Forward-looking statements are derived frominformation that we currently have and assumptions that we make. We cannotassure that anticipated results will be achieved, since results may differmaterially because of both known and unknown risks and uncertainties which weface. We undertake no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise. Factors that could cause actual results to differmaterially from our forward-looking statements include, but are not limited to:

 

•  theeffects of domestic and foreign economic conditions, and conditions whichaffect the market for property and casualty insurance;

 

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

 

•  theeffects of emerging claim and coverage issues on our business, including adversejudicial or regulatory decisions and rulings;

 

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

 

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

 

•  unexpectedturnover of our professional staff;

 

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

 

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

 

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

 

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

 

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

 

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

 

•  theinability of our internal control framework to provide absolute assurance thatall incidents of fraud or unintended material errors will be detected andprevented;

 

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•  therisk that our investment portfolio suffers reduced returns or investment losseswhich could reduce our profitability; and

 

•  otherrisks that we identify in future filings with the Securities and ExchangeCommission (the “SEC”), including without limitation the risks described underthe caption “Risk Factors” in our Annual Report on Form 10-K for the yearended December 31, 2005.

 

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

 

*The discussion and analysis of ourfinancial condition and results of operations contained herein should be readin conjunction with our consolidated financial statements and accompanying noteswhich appear elsewhere in this Form 10-Q. It contains forward-lookingstatements that involve risks and uncertainties. Please see “Note onForward-Looking Statements” for more information. Our actual results coulddiffer materially from those anticipated in these forward-looking statements asa result of various factors, including those discussed below and elsewhere inthis Form 10-Q.*

 

**Overview**

 

We are an international insurance holding companyfocusing on specialty products for niches within the overall property/casualtyinsurance market. The Company consists of insurance company operations,insurance underwriting agencies and operations at Lloyd’s of London. Our largest product line and mostlong-standing area of specialization is ocean marine insurance. We have alsodeveloped specialty niches in professional liability insurance, and inspecialty liability insurance primarily consisting of contractors’ liabilitycoverages. We conduct operations through our insurance company subsidiaries,our underwriting agencies (the “Navigators Agencies”) and our operations atLloyd’s of London (the “Lloyd’s Operations”). Our insurance companysubsidiaries (the “Insurance Companies”) consist of Navigators InsuranceCompany, which includes a United Kingdom Branch (the “U.K. Branch”), and NICInsurance Company, which underwrites specialty and professional liabilityinsurance on an excess and surplus lines basis fully reinsured by NavigatorsInsurance Company. The Navigators Agencies consist of five wholly-ownedinsurance underwriting agencies which produce, manage and underwrite insuranceand reinsurance for the Company. Our Lloyd’s Operations include NavigatorsUnderwriting Agency Ltd. (“NUAL”), a Lloyd’s of London (“Lloyd’s”) underwritingagency which manages Lloyd’s Syndicate 1221. We participate in the capacity ofSyndicate 1221 through two wholly-owned Lloyd’s corporate members.

 

While management takes into consideration a widerange of factors in planning the Company’s business strategy and evaluatingresults of operations, there are certain factors that management believes arefundamental to understanding how the Company is managed. First, underwritingprofit is consistently emphasized as a primary goal, above premium growth. Management’sassessment of our trends and potential growth in underwriting profit is thedominant factor in its decisions with respect to whether or not to expand abusiness line, enter into a new niche, product or territory or, conversely, tocontract capacity in any business line. In addition, management focuses onmanaging the costs of our operations. Management believes that carefulmonitoring of the costs of existing operations and assessment of costs ofpotential growth opportunities are important to our profitability. Access tocapital also has a significant impact on management’s outlook for ouroperations. The Insurance Companies’ operations and ability to grow theirbusiness and take advantage of market opportunities are particularlyconstrained by regulatory capital requirements and rating agency assessments ofcapital adequacy.

 

The discussions that follow include tables, whichcontain both our consolidated and segment operating results for each of the quartersended March 31, 2006 and 2005. In presenting our financial results we havediscussed our performance with reference to underwriting results which is anon-GAAP measure and the related combined ratio which is another non-GAAPmeasure of underwriting profitability. We consider such measures, which may bedefined differently by other companies, to be important in the understanding ofour overall results

 

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ofoperations. Underwriting profit or loss is calculated from premiums earned,less net losses and LAE, commission expense and other operating expensesrelated to underwriting activities. The combined ratio is derived by takingsuch net losses and LAE and expenses divided by earned premiums. A combinedratio of less than 100% indicates an underwriting profit and over 100%indicates an underwriting loss.

 

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

 

Our revenue is primarily comprised of premiums andinvestment income. The Insurance Companies derive their premiums primarily frombusiness written by the Navigators Agencies. The Lloyd’s Operations derivetheir premiums from business written by NUAL. Beginning in 2006, the NavigatorsAgencies produce and manage business only for the Insurance Companies and arereimbursed for actual costs. Prior to 2006, the Navigators Agencies receivedcommissions and, in some cases, profit commissions on the business produced onbehalf of the Insurance Companies and other unaffiliated insurers. NUAL isreimbursed for its actual costs and, where applicable, profit commissions onthe business produced for Lloyd’s Syndicate 1221.

 

Over the past three to four years, we haveexperienced generally beneficial market changes in our lines of business. As aresult of several large industry losses in the second quarter of 2001, themarine insurance market began to experience diminished capacity and rateincreases, initially in the offshore energy line of business. The marine rateincreases began to level off in 2004 and into 2005. As a result of thesubstantial insurance industry losses resulting from Hurricanes Katrina andRita, the marine insurance market is experiencing diminished capacity and rateincreases, particularly for the offshore energy risks located in the Gulf ofMexico. The 2006 first quarter average renewal rate increase for all marinelines of business approximated 11% inclusive of offshore energy rates increasesof 31% in the Lloyd’s Operations and 59% in the Insurance Companies. Specialtyliability losses over the past several years, particularly for our Californiaconstruction liability business, also resulted in diminished capacity in themarket in which we compete, as many former competitors who lacked the expertiseto selectively underwrite this business have been forced to withdraw from themarket. The first quarter 2006 renewal rates for the California constructionliability business declined 5.9%. These rates declined slightly in 2005 afterrate increases in 2004 and 2003. In the professional liability market, theenactment of the Sarbanes-Oxley Act of 2002, together with recent financial andaccounting scandals at publicly traded corporations and the increased frequencyof securities-related class action litigation, has led to heightenedinterest in professional liability insurance generally. Average renewal premiumrates increased approximately 1% in the first quarter of 2006 compared torelatively level rates in 2005 and a decrease of 3.2% in 2004 which followed substantialrate increases in 2003 and 2002, particularly for D&O insurance. D&Opremium rates also increased approximately 1% in the 2006 first quarter afterdecreases of approximately 2.3% in 2005 and 9.5% in 2004.

 

Our business is cyclical and influenced by manyfactors. These factors include price competition, economic conditions, interestrates, weather-related events and other catastrophes including natural and man-madedisasters (for example hurricanes and terrorism), state regulations, courtdecisions and changes in the law. The incidence and severity of catastrophesare inherently unpredictable. Although we will attempt to manage our

 

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exposureto such events, the frequency and severity of catastrophic events could exceedour estimates, which could have a material adverse effect on our financialcondition. Additionally, because our insurance products must be priced, andpremiums charged, before costs have fully developed, our liabilities arerequired to be estimated and recorded in recognition of future loss andsettlement obligations. Due to the inherent uncertainty in estimating theseliabilities, we cannot assure you that our actual liabilities will not exceedour recorded amounts.

 

**Catastrophe Risk Management**

 

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

 

The extent of losses from a catastrophe is afunction of both the total amount of insured exposure in an area affected bythe event and the severity of the event. We continually assess ourconcentration of underwriting exposures in catastrophe exposed areas globallyand attempt to manage this exposure through individual risk selection andthrough the purchase of reinsurance. We also use modeling technologies andconcentration management tools that allow us to better monitor and control ouraccumulations of potential losses from catastrophe exposures. Despite theseefforts, there remains uncertainty about the characteristics, timing and extentof insured losses given the nature of catastrophes. The occurrence of one ormore severe catastrophic events could have a material adverse effect on the Company’sresults of operations, financial condition or liquidity.

 

As a result of the offshore energy losses sufferedby the marine and energy market in 2005 stemming from Hurricanes Katrina andRita, the 2006 marine reinsurance capacity has declined, reinsurance terms andconditions have tightened and reinsurance costs have dramatically increased,particularly for excess of loss reinsurance protection. As a result, throughthe 2006 first quarter, the Company has achieved significant improvements inpricing, terms and conditions for the offshore energy business as it renewswhile reducing its aggregate loss exposures in the Gulf of Mexico. The Company willalso have an increased net retention for a catastrophic offshore energy loss in2006 compared to 2005 as a result of less available reinsurance protection atan increased reinsurance cost.

 

The occurrence of additional large loss events couldreduce the reinsurance coverage that is available to us and could furtherweaken the financial condition of our reinsurers, which could have a materialadverse effect on our results of operations. Although the reinsuranceagreements make the reinsurers liable to us to the extent the risk istransferred or ceded to the reinsurer, ceded reinsurance arrangements do noteliminate our obligation to pay claims to our policyholders. Accordingly, webear credit risk with respect to our reinsurers. Specifically, our reinsurers may notpay claims made by us on a timely basis, or they may not pay some or allof these claims. Either of these events would increase our costs and could havea material adverse effect on our business. We are required to pay the losseseven if a reinsurer fails to meet its obligations under the reinsuranceagreement. Hurricanes Katrina and Rita increased our reinsurance recoverablessignificantly, which increased our credit risk.

 

**Industry Investigations**

 

The insurance industry has become the subject ofincreasing scrutiny with respect to insurance broker and agent compensationarrangements, and certain sales practices. The New York State Attorney Generaland other state and federal regulators have commenced investigations and otherproceedings relating to the payment of contingent commissions by insurancecompanies to insurance brokers and agents and the extent to which suchcompensation has been disclosed, and the solicitation and provision offictitious or inflated quotes. These investigations and proceedings couldresult in legal precedents and new industry-wide practices or legislation, rules orregulations that could significantly affect our industry and may alsocause stock price volatility for companies in the insurance industry.

 

The Company has completed its own internal reviewwith respect to such contingent commission arrangements and the anti-competitivesales practices discussed above. In this internal inquiry, the Company did

 

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notfind any evidence that it has engaged in the bid-rigging and price-fixingactivities that are at the core of the industry investigations into theseanti-competitive practices. The Company is supportive of industry efforts toencourage transparency in the disclosure of contingent commissions paid tobrokers by insurers.

 

The reinsurance industry has also become the subjectof increasing scrutiny with respect to the alleged improper use of reinsuranceagreements to manipulate financial reporting results. The New York StateAttorney General and other state and federal regulators have commencedinvestigations and other proceedings related to reinsurance agreements in whichthe insurance risk transferred between the ceding company and reinsurer may havebeen insufficient to properly account for such transactions as reinsurance infinancial statements filed with insurance regulatory authorities and the SEC. Suchtransactions may include separate or “side” agreements that reduce, limitor mitigate the indemnification against loss or liability relating to theinsurance risk transferred to the reinsurer in a reinsurance agreement.

 

As a result of these industry investigations,accounting and reporting requirements for reinsurance transactions, includingrisk transfer guidance used to determine when sufficient insurance risk hasbeen transferred by the ceding company to properly account for suchtransactions as reinsurance, may change.

 

The Company believes that all of its reinsurancetransactions meet the risk transfer requirements to be accounted for asprospective reinsurance in its financial statements, and also believes it hasno separate side agreements that would limit the insurance risk transferred tothe reinsurer under its reinsurance agreements. The Company is unable todetermine any reinsurance industry financial reporting changes that could occuras a result of such investigations and the effects, if any, on its financialreporting of reinsurance transactions.

 

**Critical Accounting Policies**

 

It is important to understand our accountingpolicies in order to understand our financial statements. Management considerscertain of these policies to be critical to the presentation of the financialresults, since they require management to make estimates and assumptions. Theseestimates and assumptions affect the reported amounts of assets, liabilities,revenues, expenses, and related disclosures at the financial reporting date andthroughout the reporting period. Certain of the estimates result from judgmentsthat can be subjective and complex, and consequently actual results may differfrom these estimates, which would be reflected in future periods.

 

Our most critical accounting policies involve thereporting of the reserves for losses and loss adjustment expenses (“LAE”) (includinglosses that have occurred but were not reported to us by the financialreporting date), reinsurance recoverables, written and unearned premium, therecoverability of deferred tax assets, the impairment of invested assets,accounting for Lloyd’s results and the translation of foreign currencies.

 

***Reserves forLosses and LAE.***Reservesfor losses and LAE represent an estimate of the expected cost of the ultimatesettlement and administration of losses, based on facts and circumstances thenknown. Actuarial methodologies are employed to assist in establishing suchestimates and include judgments relative to estimates of future claims severityand frequency, length of time to develop to ultimate, judicial theories ofliability and other third party factors which are often beyond our control. Dueto the inherent uncertainty associated with the reserving process, the ultimateliability may be different from the original estimate. Such estimates areregularly reviewed and updated and any resulting adjustments are included inthe current year’s results.

 

***ReinsuranceRecoverables.***Reinsurance recoverables are established for the portion of the loss reservesthat are ceded to reinsurers. Reinsurance recoverables are determined basedupon the terms and conditions of reinsurance contracts which could be subjectto interpretations that differ from our own based on judicial theories ofliability. In addition, we bear credit risk with respect to our reinsurerswhich can be significant considering that certain of the reserves remainoutstanding for an extended period of time. We are required to pay losses evenif a reinsurer fails to meet its obligations under the applicable reinsuranceagreement.

 

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***Written andUnearned Premium.***Written premium is recorded based on the insurance policies that have beenreported to us and the policies that have been written by agents but not yetreported to us. We must estimate the amount of written premium not yet reportedbased on judgments relative to current and historical trends of the businessbeing written. Such estimates are regularly reviewed and updated and anyresulting adjustments are included in the current year’s results. An unearnedpremium reserve is established to reflect the unexpired portion of each policyat the financial reporting date.

 

Substantiallyall of our business is placed through agents and brokers. Since the vastmajority of the Company’s gross written premium is primary or direct as opposedto assumed, the delays in reporting assumed premium generally do not have asignificant effect on the Company’s financial statements, since we recordestimates for both unreported direct and assumed premium. We also record theceded portion of the estimated gross written premium and related acquisitioncosts. The earned gross, ceded and net premiums are calculated based on ourearning methodology which is generally pro-rata over the policy period. Lossesare also recorded in relation to the earned premium. The estimate for lossesincurred on the estimated premium is based on an actuarial calculationconsistent with the methodology used to determine incurred but not reportedloss reserves for reported premiums.

 

Aportion of the Company’s premium is estimated for unreported premium, mostlyfor the marine business written by our U.K. Branch and Lloyd’s Operations. Wegenerally do not experience any significant backlog in processing premiums. Suchpremium estimates are generally based on submission data received from brokersand agents and recorded when the insurance policy or reinsurance contract isbound and written. The estimates are regularly reviewed and updated taking into account the premiumreceived to date versus the estimate and the age of the estimate. To the extentthat the actual premium varies from the estimates, the difference, along withthe related loss reserves and underwriting expenses, is recorded in currentoperations.

 

***Deferred TaxAssets.*** We applythe asset and liability method of accounting for income taxes whereby deferredassets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax basis. In assessingthe realization of deferred tax assets, management considers whether it is morelikely than not that the deferred tax assets will be realized.

 

***Impairment of InvestmentSecurities.*** Impairmentof investment securities results in a charge to operations when a marketdecline below cost is other-than-temporary. Management regularly reviews ourfixed maturity and equity securities portfolios to evaluate the necessity ofrecording impairment losses for other-than-temporary declines in the fair valueof investments. In general, we focus our attention on those securities whosemarket value was less than 80% of their cost or amortized cost, as appropriate,for six or more consecutive months. Factors considered in evaluating potentialimpairment include, but are not limited to, the current fair value as comparedto cost or amortized cost of the security, as appropriate, the length of timethe investment has been below cost or amortized cost and by how much, ourintent and ability to retain the investment for a period of time sufficient toallow for an anticipated recovery in value, specific credit issues related tothe issuer and current economic conditions. Other-than-temporary impairmentlosses result in a permanent reduction of the cost basis of the underlyinginvestment. Significant changes in the factors we consider when evaluatinginvestments for impairment losses could result in a significant change inimpairment losses reported in the consolidated financial statements.

 

***Accounting forLloyd’s Results.***We record our pro rata share of Lloyd’s Syndicate 1221 assets, liabilities,revenues and expenses, after making adjustments to convert Lloyd’s accountingto U.S. GAAP. The most significant GAAP adjustments relate to incomerecognition. Lloyd’s syndicates determine underwriting results by year ofaccount at the end of three years. We record adjustments to recognizeunderwriting results as incurred, including the expected ultimate cost oflosses incurred. These adjustments to losses are based on actuarial analysis ofsyndicate accounts, including forecasts of expected ultimate losses provided bythe syndicate. At the end of the Lloyd’s three-year period for determiningunderwriting results for an account year, the syndicate will close the accountyear by reinsuring outstanding claims on that account year with the

 

18

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participantsfor the account’s next underwriting year. The amount to close an underwritingyear into the next year is referred to as the reinsurance to close (“RITC”). TheRITC transaction is recorded in the fourth quarter as additional written andearned premium, losses incurred, loss reserves and receivables, all in the sameamount. There are no gains or losses recorded on the RITC transaction.

 

***Translation of ForeignCurrencies****.*Financialstatements of subsidiaries expressed in foreign currencies are translated intoU.S. dollars in accordance with SFAS No. 52, *ForeignCurrency Translation,* issued by the FASB. Under SFAS 52, functionalcurrency assets and liabilities are translated into U.S. dollars using periodend rates of exchange and the related translation adjustments are recorded as aseparate component of *accumulated**other comprehensive income*. Functional currencies aregenerally the currencies of the local operating environment. Statement ofincome amounts expressed in functional currencies are translated using averageexchange rates. Gains and losses resulting from foreign currency transactionsare recorded in *other income (expense)* in theCompany’s Consolidated Statements of Income.

 

**Results of Operations and Overview**

 

The following is a discussion and analysis of ourconsolidated and segment results of operations for the three month period endedMarch 31, 2006 and 2005. All earnings per share data is presented on a perdiluted share basis.

 

Net income for the three month period ended March 31,2006 was $15.5 million or $.93 per share compared to $9.7 million or $0.76 pershare for the three month period ended March 31, 2005. Included in theseresults were net realized capital gains (losses) of ($0.02) per share and $0.01per share for the three months ended March 31, 2006 and 2005,respectively.

 

Cash flow from operations was $29.5 million for thefirst quarter of 2006 compared to $65.2 million for the 2005 first quarter. Thepositive cash flow contributed to the growth in invested assets and netinvestment income. Included in the 2005 first quarter cash flow isapproximately $24 million attributable to the settlement of the 2002underwriting year reinsurance to close premium recorded by Lloyd’s Syndicate1221 in the 2004 fourth quarter. Paid loss activity for the 2006 first quarterincluded gross paid losses of approximately $10 million for Hurricanes Katrinaand Rita of which $4 million is recoverable from reinsurers and $1.9 millionfor settled asbestos claims of which $1.1 million is due from reinsurers.

 

Consolidatedstockholders’ equity increased 2% to $478.3 million or $28.70 per share at March 31,2006 compared to $470.2 million or $28.30 per share at December 31, 2005. Theincrease was primarily due to net income of $15.5 million for the first quarterof 2006, partially offset by an increase of $9.1 million in other comprehensiveloss substantially all due to net unrealized losses in the investmentportfolios due to rising interest rates.

 

19

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**Revenues****.**Gross written premium increased to $263.8 millionin the first quarter of 2006, from $217.0 million in the first quarter of 2005,a 22% increase. The growth in gross written premium reflects a combination ofbusiness expansion in both new and existing lines of business coupled withpremium rate changes on renewal policies. The marine business experiencedgrowth of 20%, primarily as a result of significant rate increases in theoffshore energy line of business coupled with a net modest increase in premiumsin the other classes of business. Gross written premium for professionalliability business written both in the Insurance Companies and Lloyd’s Operationsincreased 12% during the 2006 first quarter. Specialty business grew 45%primarily due to continued product and geographic diversification. The premiumrate changes discussed above and below for marine, specialty and professionalliability are calculated primarily by comparing premium amounts on policiesthat have renewed. The premiums are judgmentally adjusted for exposure factorswhen deemed significant and sometimes represent an aggregation of several linesof business. The rate change calculations provide an indicated pricing trendand are not meant to be a precise analysis of the numerous factors that affectpremium rates or the adequacy of such rates to cover all underwriting costs andgenerate an underwriting profit. The calculation can also be affected quarterby quarter depending on the particular policies and the number of policies thatrenew during that period. Due to market conditions, these rate changes may ormay not apply to new business which may be more competitively pricedcompared to renewal business. The following table sets forth our gross and netwritten premium and net earned premium by segment and line of business for theperiods indicated:

 

20

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| ** **                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------|------------|------------------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **Gross**                                            | ** ** | ** ** | ** ** | **Net** | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** | **Net** | ** ** |
| ** **                    | ** ** | **Written**                                          | ** ** | ** ** | ** ** | **Written** | ** ** | **Earned** | ** ** | **Written** | ** ** | ** ** | ** ** | **Written** | ** ** | **Earned** | ** ** |
| ** **                    | ** ** | **Premium**                                          | ** ** | **%** | ** ** | **Premium** | ** ** | **Premium** | ** ** | **Premium** | ** ** | **%** | ** ** | **Premium** | ** ** | **Premium** | ** ** |
| ** **                    | ** ** | **($ in thousands)**                       | ** ** |
| Insurance Companies:          |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                          |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Marine                        |       | $                                                    | 81,794     |   | 31.0 | % | $ | 41,515 |   | $ | 22,501 |   | $ | 68,284 |   | 31.5 | % | $ | 30,347 |   | $ | 19,879 |   |
|                          |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty                     |       | 62,131                                               |       | 23.5 | % | 40,519 |   | 36,134 |   | 42,949 |   | 19.8 | % | 36,398 |   | 20,022 |   |
|                          |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Professional Liability        |       | 18,134                                               |       | 6.9 | % | 7,626 |   | 8,732 |   | 17,930 |   | 8.2 | % | 6,679 |   | 6,717 |   |
|                          |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Assumed from Lloyd’s     |       | 216                                                  |       | 0.1 | % | 13 |   | 13 |   | 125 |   | 0.1 | % | 126 |   | 711 |   |
|                          |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other                         |       | (28                                                  | )          | 0.0 | % | (29 | ) | (28 | ) | — |   | 0.0 | % | 31 |   | 34 |   |
|                          |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Insurance Companies Total     |       | 162,247                                              |       | 61.5 | % | 89,644 |   | 67,352 |   | 129,288 |   | 59.6 | % | 73,581 |   | 47,363 |   |
|                          |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Lloyd’s Operations:      |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                          |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Marine                        |       | 90,855                                               |       | 34.4 | % | 51,403 |   | 35,716 |   | 73,931 |   | 34.1 | % | 40,060 |   | 29,627 |   |
|                          |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Professional Liability        |       | 2,020                                                |       | 0.8 | % | 829 |   | 241 |   | — |   | 0.0 | % | — |   | — |   |
|                          |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other                         |       | 8,873                                                |       | 3.4 | % | 1,550 |   | 413 |   | 13,899 |   | 6.4 | % | 3,449 |   | 548 |   |
|                          |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Lloyd’s Operations Total |       | 101,748                                              |       | 38.6 | % | 53,782 |   | 36,370 |   | 87,830 |   | 40.5 | % | 43,509 |   | 30,175 |   |
|                          |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Intercompany elimination      |       | (211                                                 | )          | -0.1 | % | — |   | — |   | (122 | ) | -0.1 | % | — |   | — |   |
|                          |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                         |       | $                                                    | 263,784    |   | 100.0 | % | $ | 143,426 |   | $ | 103,722 |   | $ | 216,996 |   | 100.0 | % | $ | 117,090 |   | $ | 77,538 |   |

 

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**GrossWritten Premium**

 

Insurance Companies’ GrossWritten Premium

 

*Marine Premium.*The 2006 first quarter gross written premiumconsists of 31% marine liability, 20% offshore energy, 13% protection andindemnity (P&I) and 9% bluewater hull with the remainder in several othermarine related classes of business.

 

The marine gross written premium for the 2006 firstquarter increased 20% compared to the 2005 first quarter, reflecting growthacross several lines of business including offshore energy, liability andP&I. The average renewal premium rates during the first quarter of 2006increased by approximately 11%. Navigators Insurance Company has in the pastobtained its marine business through participation in the marine pool managedby the Navigators Agencies. Commencing in 2006, the marine pool has beeneliminated and, therefore, all of the marine business generated by theNavigators Agencies is exclusively for the Insurance Companies. NavigatorsInsurance Company participated for 85% of the marine pool in 2005.

 

*Specialty Premium.* The business written in the first threemonths of 2006 consists of 52% general liability business for small general andartisan contractors, 22% excess casualty business, 12% personal umbrellabusiness and 14% other targeted commercial risks. The specialty gross writtenpremium for the 2006 first quarter increased 45% compared to the 2005 firstquarter reflecting growth across all lines of business and premiums generatedfrom our excess casualty business, which started in the first quarter of 2005.The average renewal premium rates decreased by approximately 6% for thecontractors’ liability business in the 2006 first quarter.

 

*Professional Liability Premium.* Our insurance company subsidiaries writeprofessional liability insurance. The 2006 first quarter consisted of 59%directors and officers liability insurance (“D&O”) for privately held andpublicly traded corporations, 34% professional liability coverage for lawyersand other professionals and 7% professional liability coverage for architectsand engineers. In 2002, the professional liability business was expanded toinclude errors and omissions insurance and employment practices liabilitycoverages. Commencing in October 2004, our U.K. Branch began writingprofessional liability coverages for U.K. solicitors and, in 2005, we beganwriting professional liability coverages for architects and engineers. Theprofessional liability gross written premium for the 2006 first quarterincreased 1% compared to the 2005 first quarter. Included in the 2005 firstquarter gross written premium was approximately $1.6 million of internationalD&O business written by the Insurance Companies that has been renewed inthe Lloyd’s Operations. Average overall renewal premium rates for this businessincreased by approximately 1% in the 2006 first quarter. D&O rates alsoincreased by approximately 1% in the 2006 first quarter.

 

During the 2006 first quarter, the Company enteredinto an agreement to acquire the renewal rights to the D&O and employmentpractices liability policy portfolios of Genesis Professional LiabilityManagers, Inc. (“Genesis”). The transaction does not include any past orexisting liabilities of the policy portfolios. The Company will pay an annualoverride or fee to Genesis based on gross written premium for a two year periodto the extent the Genesis business is underwritten and renewed by the Company.The Company believes that it may renew anywhere from $5 million to $10million of premium from such business over an annual period. However, theCompany may renew a lesser or greater amount than expected.

 

Lloyd’sOperations’ Gross Written Premium

 

*Marine Premium.*The 2006 firstquarter**consisted of 32% cargoand specie, 23% marine liability and 18% offshore energy with the remainder inseveral other marine related classes of business.

 

Our gross written premiumis based on the stamp capacity of Syndicate 1221 and the percentage of suchstamp capacity we provide. Our percentage of participation in the stampcapacity is 100% for 2006 compared to 97.5% for 2005. Stamp capacity is ameasure of the amount of premium a Lloyd’s syndicate is authorized to

 

22

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write as determined based on a business planapproved by the Council of Lloyd’s. The stamp capacity for Syndicate 1221 hasbeen reduced to £112.5 million ($197.2 million) in 2006 from £135 million($246.0 million) in 2005, which could be increased by the Company during the2006 calendar year based on opportunities in the market place subject toapproval by Lloyd’s. The**marine gross written premium for the firstquarter of 2006 increased 23% comparedto the first quarter of 2005. The average renewal premium rates increasedapproximately 11% in the 2006 first quarter.

 

*Professional Liability Premium.*Our Lloyd’sOperations commenced writing international D&O business during the 2005second quarter and produced $2.0 million of gross written premium in the 2006first quarter.

 

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

 

**CededWritten Premium****.**In the ordinary courseof business, we reinsure certain insurance risks with unaffiliated insurancecompanies for the purpose of limiting our maximum loss exposure, protectingagainst catastrophic losses, and maintaining desired ratios of net premiumswritten to statutory surplus. The relationship of ceded to written premiumvaries based upon the types of business written and whether the business iswritten by the Insurance Companies or the Lloyd’s Operations.

 

23

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The following tables set forth our ceded writtenpremium by segment and major lines of business for the periods indicated:

 
| ** **                 | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------|------------|---------------------------------------|------------|
| ** **                 | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                 | ** ** | ** **                            | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                 | ** ** | **Ceded**                             | ** ** | **Gross** | ** ** | **Ceded** | ** ** | **Gross** | ** ** |
| ** **                 | ** ** | **Written**                           | ** ** | **Written** | ** ** | **Written** | ** ** | **Written** | ** ** |
| ** **                 | ** ** | **Premium**                           | ** ** | **Premium** | ** ** | **Premium** | ** ** | **Premium** | ** ** |
| ** **                 | ** ** | **($ in thousands)**        | ** ** |
| ** **                 | * *   | * *                              | * *   | * * | * * | * * | * * | * * | * * |
| Insurance Companies:       |       |                                  |       |   |   |   |   |   |   |
| Marine                     |       | $                                     | 40,279     |   | 49.2 | % | $ | 37,937 |   | 55.6 | % |
| Specialty                  |       | 21,612                                |       | 34.8 | % | 6,551 |   | 15.3 | % |
| Professional  Liability    |       | 10,508                                |       | 57.9 | % | 11,251 |   | 62.8 | % |
| Assumed from  Lloyd’s |       | 203                                   |       | NM |   | (1 | ) | -0.8 | % |
| Other                      |       | 1                                     |       | NM |   | (31 | ) | NM |   |
| Subtotal                   |       | 72,603                                |       | 44.7 | % | 55,707 |   | 43.1 | % |
|                       |       |                                  |       |   |   |   |   |   |   |
| Lloyd’s Operations:   |       |                                  |       |   |   |   |   |   |   |
| Marine                     |       | 39,452                                |       | 43.4 | % | 33,871 |   | 45.8 | % |
| Professional  Liability    |       | 1,191                                 |       | 59.0 | % | — |   | NM |   |
| Other                      |       | 7,323                                 |       | 82.5 | % | 10,450 |   | 75.2 | % |
| Subtotal                   |       | 47,966                                |       | 47.1 | % | 44,321 |   | 50.5 | % |
|                       |       |                                  |       |   |   |   |   |   |   |
| Intercompany elimination   |       | (211                                  | )          | NM |   | (122 | ) | NM |   |
|                       |       |                                  |       |   |   |   |   |   |   |
| Total                      |       | $                                     | 120,358    |   | 45.6 | % | $ | 99,906 |   | 46.0 | % |

 

----

NM = not meaningful

 

The ratio of ceded written premium to gross writtenpremium in the 2006 first quarter was 45.6%, compared to 46.0% the 2005 firstquarter. The decrease in the ratio of ceded written premium to gross writtenpremium in the 2006 first quarter compared to the 2005 first quarter was due toa combination of factors.

 

Commencing with the 2006 underwriting year, themarine pool has been eliminated and therefore, all the marine businessgenerated by the Navigators Agencies is exclusively for the InsuranceCompanies. The 2005 underwriting year marine business was ceded 15% to poolmembers and 85% retained by the Insurance Companies. In 2005, members sharedthe 15% pro rata costs and benefits of all quota share and excess of lossreinsurance ceded by the pool which was also eliminated in 2006.

 

Also commencing with the 2006 underwriting year, ourLloyd’s Operations is retaining more of Syndicate 1221’s business with the 2005purchase of the 2.5% minority interest in Syndicate 1221 and the replacement ofa 5% capacity provider with our own letter of credit funding.

 

Somewhat offsetting the reduction in ceded premiumsdue to the marine pool elimination and increased retention of business inSyndicate 1221 were changes in the 2006 reinsurance structure and amounts cededunder

 

24

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marinequota share and excess of loss agreements for the Insurance Companies and Lloyd’sOperations reflecting higher reinsurance costs resulting from the tightenedmarket conditions for catastrophe loss protection as a result of the 2005industry-wide hurricane losses.

 

The net effects of the items discussed above on thedecrease in the ratio of ceded written premium to gross written premium werelargely offset as the 2005 first quarter ceded premium was reduced byapproximately $14.5 million resulting from the cancellation of a quota sharereinsurance agreement for specialty business effective March 31, 2005.Such amount represented the unearned portion of the premium ceded to thereinsurance agreement that was retained. This retained amount was offset by$8.2 million of premiums ceded to the reinsurance agreement during the 2005first quarter. The 2005 first quarter ratio of ceded written premium to grosswritten premium was 48.9%, excluding these amounts.

 

**NetWritten Premium**. Net written premiumincreased 22% in the 2006 first quarter compared to the first quarter of 2005. The 2005 first quarter net written premiumwas increased by a reduction of approximately $14.5 million in cededreinsurance premium resulting from the cancellation of a quota sharereinsurance agreement for specialty business effective March 31, 2005, asnoted above. Such amount represented the unearned portion of the premium cededto the reinsurance agreement that was retained. This retained amount was offsetby $8.2 million of premiums ceded to the reinsurance agreement during the 2005first quarter. The 2006 first quarter net written premium increasedapproximately 30% excluding the net effect of the quota share treatycancellation on the 2005 first quarter. The 30% increase in net written premium, whenexcluding these effects, in 2006 is primarily due to business expansion, andthe increase in Navigators Insurance Company’s portion of the marine pool to100% in 2006 from 85% in 2005.

 

**Net Earned Premium**. Net earned premium,which generally lags the increase in net written premium, increased 34% in the2006 first quarter compared to the first quarter of 2005 as a result of theincreased net written premium discussed above.

 

**CommissionIncome****.**Commission income from unaffiliated businesswas $1.3 million compared to $1.3 million in the first quarter of 2005.

 

**NetInvestment Income****.**Net investment income increased 65% in the 2006 first quarter comparedto the same period in 2005 due to the increase in invested assets as a resultof the positive cash flow from the increased premium volume and the $123.8million of net proceeds from the October 2005 common stock offering.

 

**NetRealized Capital Gains****(Losses)****.**Pre-tax net income includeda net realized capital loss of $424,000 for the three months ended March 31,2006 compared to a net realized capital gain of $167,000 for the 2005 firstquarter. On an after-tax basis, the net realized capital loss was $276,000 or$0.02 per share compared to a net realized capital gain of $109,000 or $0.01per share for the 2005 first quarter.

 

**OtherIncome/(Expense)****.**Other income/(expense) for the first quarterof both 2006 and 2005 consisted primarily of foreign exchange gains and lossesfrom our Lloyd’s Operations and inspection fees related to the specialtyinsurance business.

 

**OperatingExpenses**

 

*NetLosses and*Loss Adjustment Expenses Incurred. The ratiosof net losses and loss adjustment expenses incurred to net earned premium (lossratios) for the 2006 and 2005 first quarters were 59.9% and 59.6%,respectively. The 2006 first quarter loss ratio was favorably impacted by 3.7loss ratio points resulting from a $3.8 million net redundancy of prior yearloss reserves for the Insurance Companies.

 

25

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The following tables set forth our net loss and LAEreserves by segment and line of insurance business and the total case reservesand incurred but not reported (“IBNR”) reserves as of March 31, 2006 and December 31,2005:

 
| ** **                            | ** ** | **March 31,**             | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|--------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2006**                       | ** ** | **2005**              | ** ** |
| ** **                            | ** ** | **($ in thousands)** | ** ** |
| Insurance Companies:                  |       |                           |       |                  |       |
| Marine                                |       | $                              | 166,351    |                  | $          | 162,644 |   |
| Specialty                             |       | 206,730                        |       | 193,755               |       |
| Professional  Liability               |       | 36,785                         |       | 33,133                |       |
| Assumed from  Lloyd’s Operations |       | 1,206                          |       | 1,218                 |       |
| Other  (primarily run-off business)   |       | 19,076                         |       | 19,613                |       |
| Total  Insurance Companies            |       | 430,148                        |       | 410,363               |       |
|                                  |       |                           |       |                  |       |
| Lloyd’s Operations:              |       |                           |       |                  |       |
| Marine                                |       | 162,817                        |       | 161,262               |       |
| Other                                 |       | 9,265                          |       | 7,351                 |       |
| Total Lloyd’s  Operations        |       | 172,082                        |       | 168,613               |       |
|                                  |       |                           |       |                  |       |
| Total net  loss reserves              |       | $                              | 602,230    |                  | $          | 578,976 |   |
|                                  |       |                           |       |                  |       |
| Total net case loss reserves          |       | $                              | 228,999    |                  | $          | 228,423 |   |
| Total net IBNR loss reserves          |       | 373,231                        |       | 350,553               |       |
| ** **                            | ** ** | ** **                     | ** ** | ** **            | ** ** |
| Total net  loss reserves              |       | $                              | 602,230    |                  | $          | 578,976 |   |

 

Our reserving practices and the establishment of anyparticular reserve reflect management’s judgment concerning sound financialpractice and do not represent any admission of liability with respect to anyclaims made against us. No assurance can be given that actual claims made andrelated payments will not be in excess of the amounts reserved. During the losssettlement period, it often becomes necessary to refine and adjust theestimates of liability on a claim either upward or downward. Even after suchadjustments, ultimate liability may exceed or be less than the revisedestimates.

 

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

 

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

 

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

 

While an annual loss reserve study is conducted foreach line of business, the timing of such studies varies throughout the year.Additionally, a review of the emergence of actual losses relative toexpectations for 

 

26

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eachline of business is conducted each quarter. A separate analysis of our asbestosand environmental liability exposures is also performed annually and updatedquarterly. Any adjustments that result from this review are recorded in thequarter in which they are identified.

 

The actuarial methods generally utilize analysis ofhistorical patterns of the development of paid and reported losses for eachline of business by underwriting year. This process relies on the basicassumption that past experience, adjusted for the effects of currentdevelopments and likely trends, is an appropriate basis for predicting futureoutcomes. This basic assumption is particularly relevant for our marine andenergy business written by our Insurance Companies and Lloyd’s Operations wherewe generally rely on the substantial loss development data accumulated overmany years to establish IBNR loss reserves for immature underwriting years.

 

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

 

While we have a significant amount of lossdevelopment data that is utilized by our actuaries to establish the IBNR lossreserves for our California contractors liability business, there have beensignificant changes relating to this product and its market that could affectthe applicability of our data. For example, one factor that may affectreserves and claim frequency is legislation implemented in California, whichgenerally provides consumers who experience construction defects a method otherthan litigation to obtain defect repairs. The law, which became effective July 1,2002 with a sunset provision effective January 1, 2011, provides for analternative dispute resolution system that attempts to involve all parties tothe claim at an early stage. This legislation may impact claim severity,frequency and length of settlement assumptions underlying our reserves.Accordingly, our ultimate liability may exceed or be less than currentestimates due to this variable, among others. There were approximately 1,021specialty construction liability claims open at March 31, 2006 compared to1,012 at December 31, 2005.

 

The professional liability business generates third-partyclaims which also are longer tail in nature. The professional liabilitypolicies mostly provide coverage on a claims-made basis, whereby coverage isgenerally provided only for those claims that are made during the policyperiod. These claims often involve a lengthy litigation period after beingreported. Our professional liability business is relatively immature, as wefirst began writing the business in late 2001. Accordingly, it will take sometime to better understand the reserve trends on this business. Given thelimited history of this business, the actuaries generally utilize industry datato initially establish IBNR loss reserves, which are subsequently adjustedbased on actual and expected claim emergence as each underwriting year matures.There were 697 professional liability claims open at March 31, 2006compared to 638 at December 31, 2005.

 

At the start of each underwriting year, ouractuaries and management determine an initial selected ultimate loss ratio foreach line of business. Management participation generally includes theunderwriter for the particular line of business, executive management, andclaims and finance personnel. Generally, such determinations are based on prioryear history modified where deemed appropriate for observed changes in premiumrates, terms, conditions, exposures, and loss trends. Industry data isgenerally utilized for new lines of business.

 

As underwriting years age, for each subsequentquarter and following years, our actuaries, with management, continue to updateand refine their estimates of selected ultimate loss ratios for each line ofbusiness, by underwriting year, using the actuarial methods referred to aboveand incorporating relevant factors that generally include actual lossdevelopment, recent claims activity, number and dollar amount of open claims,risk characteristics of the particular line of business, the potential effectsof changes in underwriting and claims procedures, historic performance relativeto expectations and the relationship of the IBNR reserve levels across

 

27

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underwritingyears and between similar lines of business. The output of this process resultsin refinements to the ultimate loss ratios. Such refinements to the ultimate lossratios for the prior underwriting years generate prior year redundancies ordeficiencies recorded in the year such refinements are made.

 

The following tables set forth our net loss and LAEreserves for our specialty liability and professional liability businesses asof March 31, 2006 and December 31, 2005:

 
| ** **                       | ** ** | **March 31, 2006**         | ** ** |
|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | **Total** | ** ** | **% of IBNR** | ** ** |
| **Type of**                 | ** ** | **Net Reported**           | ** ** | **Net** | ** ** | **Net Loss** | ** ** | **to Total Net** | ** ** |
| **Business**                     | ** ** | **Reserves**                    | ** ** | **IBNR** | ** ** | **Reserves** | ** ** | **Loss Reserves** | ** ** |
|                             |       |                            |       |   |   |   |   |   |   |
| Specialty construction liability |       | $                               | 26,634     |   | $ | 148,941 |   | $ | 175,575 |   | 84.8 | % |
| Professional liability           |       | 6,319                           |       | 32,006 |   | 38,325 |   | 83.5 | % |
|                             |       |                            |       |   |   |   |   |   |   |
| Total                            |       | $                               | 32,953     |   | $ | 180,947 |   | $ | 213,900 |   | 84.6 | % |
|                             |       |                            |       |   |   |   |   |   |   |
| ** **                       | ** ** | **December 31, 2005** | ** ** |
| ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | **Total** | ** ** | **% of IBNR** | ** ** |
| **Type of**                 | ** ** | **Net Reported**           | ** ** | **Net** | ** ** | **Net Loss** | ** ** | **to Total Net** | ** ** |
| **Business**                     | ** ** | **Reserves**                    | ** ** | **IBNR** | ** ** | **Reserves** | ** ** | **Loss Reserves** | ** ** |
|                             |       |                            |       |   |   |   |   |   |   |
| Specialty construction liability |       | $                               | 25,329     |   | $ | 141,078 |   | $ | 166,407 |   | 84.8 | % |
| Professional liability           |       | 6,142                           |       | 28,079 |   | 34,221 |   | 82.1 | % |
|                             |       |                            |       |   |   |   |   |   |   |
| Total                            |       | $                               | 31,471     |   | $ | 169,157 |   | $ | 200,628 |   | 84.3 | % |

 

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

 

The reserves we have established for asbestosexposures at March 31, 2006 and December 31, 2005 are for: (i) the2005 fourth quarter settlements of two large claims aggregating approximately$28 million for excess insurance policy limits exposed to class actionsuits against two insureds involved in the manufacturing or distribution ofasbestos products, each settlement to be paid over two years; (ii) the2004 settlement of a large claim approximating $25 million exposed to a class actionsuit which settlement will be paid over seven years starting in June 2005;(iii) other insureds not directly involved in the manufacturing ordistribution of asbestos products, but that have more than incidental asbestosexposure for their purchase or use of products that contained asbestos; and (iv) attritionalasbestos claims that could be expected to occur over time.

 

The Company has now settled the four large asbestosclaims where excess policy limits were exposed to class action suits whichgave rise to the reserve action taken in the fourth quarter of 2003. TheCompany believes that there are no remaining known claims where it would suffera material loss as a result of excess policy limits being exposed to class actionsuits for insureds involved in the manufacturing or distribution of asbestos

 

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products.There can be no assurances, however, that material loss development may notarise in the future from existing asbestos claims or new claims given theevolving and complex legal environment that may directly impact theoutcome of the asbestos exposures of our insureds.

 

Substantially all of our asbestos liability reservesare included in our marine loss reserves.

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Year Ended**             | ** ** |
|---------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **March 31, 2006**     | ** ** | **December 31, 2005** | ** ** |
| ** **                      | ** ** | **($ in thousands)**   | ** ** |
| * *                        | * *   | * *                         | * *   | * *                        | * *   |
| **Gross of Reinsurance**        |       |                             |       |                            |       |
| Beginning  reserve              |       | $                                | 56,838     |                            | $          | 78,421 |   |
| Incurred  losses & LAE |       | 80                               |       | (17,409                         | )          |
| Calendar  year payments         |       | 1,902                            |       | 4,174                           |       |
| Ending  reserves                |       | $                                | 55,016     |                            | $          | 56,838 |   |
|                            |       |                             |       |                            |       |
| **Net of Reinsurance**          |       |                             |       |                            |       |
| Beginning  reserve              |       | $                                | 30,372     |                            | $          | 31,394 |   |
| Incurred  losses & LAE |       | 43                               |       | 529                             |       |
| Calendar  year payments         |       | 761                              |       | 1,551                           |       |
| Ending  reserves                |       | $                                | 29,654     |                            | $          | 30,372 |   |

 

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

 

*CommissionExpense.* Commissionexpense paid to unaffiliated brokers and agents is generally based on apercentage of the gross written premium and is reduced by ceding commissionsthe Company may receive on the ceded written premium. Commissions are generallydeferred and recorded as deferred policy acquisition costs to the extent thatthey relate to unearned premium. Commission expense as a percentage of earnedpremium in the first quarter of 2006 was 13.2%, compared to 12.4% for the 2005comparable period. The increase in the 2006 commission ratio principallyreflects the reduction of ceding commissions from quota share reinsurance asmore business written is being retained by the Company.

 

*OtherOperating Expenses.*The 6% increase in other operating expenses in the first quarter of 2006,compared to the 2005 first quarter is attributable primarily toemployee-related expenses resulting from expansion of the business. Included inthe three months ended March 31, 2006 were $1.5 million in the aggregatefor employee stock options, stock grants and stock appreciation rights expensecompared to $699,000 for the 2005 first quarter.

 

**Income Taxes**. The income tax expensewas $7.6 million and $4.5 million for the first quarters of 2006 and 2005,respectively. The effective tax rates for the 2006 and 2005 first quarters were32.8% and 31.8%, respectively. As of March 31, 2006 and December 31,2005, the net deferred Federal, foreign, state and local tax assets were $35.0 millionand $28.3 million, respectively.

 

We are subject to the tax regulations of theUnited States and foreign countries in which we operate. The Company files aconsolidated federal tax return, which includes all domestic subsidiaries andthe U.K. Branch.

 

29

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The income from the foreign operations is designated as either U.Sconnected income or non-U.S. connected income. Lloyd’s is required to pay U.S.income tax on U.S. connected income (U.S. source income) written by Lloyd’ssyndicates. Lloyd’s and the IRS have entered into an agreement whereby theamount of tax due on U.S. connected income is calculated by Lloyd’s andremitted directly to the IRS. These amounts are then charged to the corporatemembers in proportion to their participation in the relevant syndicates. TheCompany’s corporate members are subject to this agreement and will receive U.K.tax credits for any U.S. income tax incurred up to the U.K. income tax chargeon the U.S. income. The non-U.S. connected insurance income would generallyconstitute taxable income under the Subpart F income section of theInternal Revenue Code since less than 50% of the Company’s premium is derivedwithin the U.K. and would therefore be subject to U.S. taxation when the Lloyd’syear of account closes. Taxes are accrued at a 35% rate on our foreign sourceinsurance income and foreign tax credits, where available, are utilized tooffset U.S. tax as permitted. U.S. taxes are not accrued on the earnings of theCompany’s foreign agencies as these earnings are not subject to the Subpart Ftax regulations. These earnings are subject to taxes under U.K. tax regulationsat a 30% rate.

 

We have not provided for U.S. deferred incometaxes on the undistributed earnings of approximately $11 million of ournon-U.S. subsidiaries since these earnings are intended to be permanentlyreinvested in the foreign subsidiary. However, in the future, if such earningswere distributed to the Company, taxes of approximately $2 million would bepayable on such undistributed earnings and would be reflected in the taxprovision for the year in which these earnings are no longer intended to bepermanently reinvested in the foreign subsidiary assuming all foreign taxcredits are realized.

 

The Company had state and local operatingloss carryforwards amounting to potential future tax benefits of $5.2 million and $5.0million at March 31, 2006 and December 31, 2005, respectively. Avaluation allowance was established for the full amount of these potentialfuture tax benefits due to the uncertainty associated with their realization.The Company’s state and local tax carryforwards at March 31, 2006 expirefrom 2021 to 2026.

 

**Segment Information**

 

Effective in2006, the Company classifies its business into two underwriting segmentsconsisting of the Insurance Companies and Lloyd’s Operations, which areseparately managed, and a Corporate segment. Segment data for each of the twounderwriting operations include allocations of revenues and expenses ofNavigators Agencies and the Parent Company expenses and related income taxamounts previously reported separately. Data for the Corporate segment consistsof the Parent Company’s investment income and related tax effect. Segment datafor 2005 and prior periods have been restated to reflect this change in segmentreporting.

 

Weevaluate the performance of each segment based on its underwriting and netincome results. The Insurance Companies’ and the Lloyd’s Operations’ resultsare measured by taking into account net premiums earned, incurred losses andloss adjustment expenses (“LAE”), commission expense and other underwritingexpenses. The Corporate segment consists of the Parent Company’s investmentincome and related tax effect. Each segment also maintains its own investments,on which it earns income and realizes capital gains or losses. Our underwritingperformance is evaluated separately from the performance of our investmentportfolios.

 

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

 

***Insurance Companies***

 

Our Insurance Companies consist of NavigatorsInsurance Company, including its U.K. Branch, and NIC Insurance Company.Navigators Insurance Company is our largest insurance subsidiary and has beenactive since 1983. It specializes principally in underwriting marine insuranceand related lines of business, specialty liability insurance and professionalliability insurance. NIC Insurance Company, a wholly owned subsidiary ofNavigators Insurance Company, began operations in 1990. It underwrites similartypes of business but on a non-admitted or surplus lines basis and is fullyreinsured by Navigators Insurance Company. The Navigators Agencies producebusiness for the Insurance Companies.

 

30

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Following are the results of operations for theInsurance Companies for the three months ended March 31, 2006 and 2005:

 
| ** **                            | ** ** | **Three Months Ended**         | ** ** |
|---------------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | **March 31,**             | ** ** |
| ** **                            | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| ** **                            | ** ** | **($ in thousands)** | ** ** |
| ** **                            | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Gross written premium                 |       | $                              | 162,247    |   | $ | 129,288 |   |
| Net written premium                   |       | 89,644                         |       | 73,581 |   |
|                                  |       |                           |       |   |   |
| Net earned premium                    |       | $                              | 67,352     |   | $ | 47,363 |   |
| Net losses and LAE                    |       | (39,954                        | )          | (28,842 | ) |
| Commission expense                    |       | (7,124                         | )          | (4,723 | ) |
| Other operating expenses              |       | (13,433                        | )          | (11,939 | ) |
| Commission and other income (expense) |       | 1,206                          |       | 1,271 |   |
|                                  |       |                           |       |   |   |
| Underwriting profit                   |       | 8,047                          |       | 3,130 |   |
|                                  |       |                           |       |   |   |
| Investment income                     |       | 10,410                         |       | 6,857 |   |
| Net realized capital gains (losses)   |       | (75                            | )          | 266 |   |
| Income before income tax expense      |       | 18,382                         |       | 10,253 |   |
|                                  |       |                           |       |   |   |
| Income tax expense                    |       | 5,916                          |       | 3,136 |   |
| Net Income                            |       | $                              | 12,466     |   | $ | 7,117 |   |
|                                  |       |                           |       |   |   |
| Loss and LAE ratio                    |       | 59.3                           | %          | 60.9 | % |
| Commission expense ratio              |       | 10.6                           | %          | 10.0 | % |
| Other operating expense ratio (1)     |       | 18.2                           | %          | 22.5 | % |
| Combined ratio                        |       | 88.1                           | %          | 93.4 | % |

 

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

 

31

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Followingare the underwriting results of the Insurance Companies for the three monthsended March 31, 2006 and 2005:

 
| ** **                | ** ** | **Three Months Ended March 31,  2006**                    | ** ** |
|---------------------------|------------|----------------------------------------------------------------|------------|
| ** **                | ** ** | **($ in thousands)**                                 | ** ** |
| ** **                | ** ** | **Net**                                                        | ** ** | **Losses** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                | ** ** | **Earned**                                                     | ** ** | **and LAE** | ** ** | **Underwriting** | ** ** | **Underwriting** | ** ** | **Combined Ratio** | ** ** |
| ** **                | ** ** | **Premium**                                                    | ** ** | **Incurred** | ** ** | **Expenses** | ** ** | **Gain(Loss)** | ** ** | **Loss** | ** ** | **Expense** | ** ** | **Total** | ** ** |
| Insurance Companies:      | ** ** | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Marine                    |       | $                                                              | 22,501     |   | $ | 13,500 |   | $ | 6,046 |   | $ | 2,955 |   | 60.0 | % | 26.9 | % | 86.9 | % |
| Specialty                 |       | 36,134                                                         |       | 21,157 |   | 10,524 |   | 4,453 |   | 58.6 | % | 29.1 | % | 87.7 | % |
| Professional Liability    |       | 8,732                                                          |       | 5,309 |   | 2,711 |   | 712 |   | 60.8 | % | 31.0 | % | 91.8 | % |
| Assumed from Lloyd’s |       | 13                                                             |       | 15 |   | (7 | ) | 5 |   | NM |   | NM |   | NM |   |
| Other                     |       | (28                                                            | )          | (27 | ) | 77 |   | (78 | ) | NM |   | NM |   | NM |   |
| Total                     |       | $                                                              | 67,352     |   | $ | 39,954 |   | $ | 19,351 |   | $ | 8,047 |   | 59.3 | % | 28.8 | % | 88.1 | % |
|                      |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **                | ** ** | **Three Months Ended March 31, 2005** | ** ** |
| ** **                | ** ** | **($ in thousands)**                                 | ** ** |
| ** **                | ** ** | **Net**                                                        | ** ** | **Losses** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                | ** ** | **Earned**                                                     | ** ** | **and LAE** | ** ** | **Underwriting** | ** ** | **Underwriting** | ** ** | **Combined Ratio** | ** ** |
| ** **                | ** ** | **Premium**                                                    | ** ** | **Incurred** | ** ** | **Expenses** | ** ** | **Gain(Loss)** | ** ** | **Loss** | ** ** | **Expense** | ** ** | **Total** | ** ** |
| Insurance Companies:      | ** ** | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Marine                    |       | $                                                              | 19,879     |   | $ | 12,743 |   | $ | 6,129 |   | $ | 1,007 |   | 64.1 | % | 30.8 | % | 94.9 | % |
| Specialty                 |       | 20,022                                                         |       | 11,533 |   | 6,972 |   | 1,517 |   | 57.6 | % | 34.8 | % | 92.4 | % |
| Professional Liability    |       | 6,717                                                          |       | 4,440 |   | 1,913 |   | 364 |   | 66.1 | % | 28.5 | % | 94.6 | % |
| Assumed from Lloyd’s |       | 711                                                            |       | 573 |   | 321 |   | (183 | ) | NM |   | NM |   | NM |   |
| Other                     |       | 34                                                             |       | (447 | ) | 56 |   | 425 |   | NM |   | NM |   | NM |   |
| ** **                |       | $                                                              | 47,363     |   | $ | 28,842 |   | $ | 15,391 |   | $ | 3,130 |   | 60.9 | % | 32.5 | % | 93.4 | % |

 

Netearned premiums of the Insurance Companies increased 42% in the 2006 firstquarter compared to the same period last year. Such increase primarily resultedfrom the March 31, 2005 cancellation of a quota share reinsuranceagreement for specialty business.

 

Underwriting results generally reflect the favorableindustry market conditions over the last three to four years coupled withsatisfactory loss trends in the aforementioned quarterly periods. The 2006first quarter loss ratio was favorably impacted by 5.6 loss ratio pointsresulting from a $3.8 million net redundancy of prior year loss reserves.

 

The approximate annualized pre-tax yields on theInsurance Companies’ investment portfolio, excluding net realized capital gainsand losses, for the 2006 first quarter was 4.5% compared to 4.1% for thecomparable 2005 period. Net investment income increased in the first threemonths of 2006 compared to the same period in 2005 due to the increase in theyield and the strong cash flows resulting in a larger investment portfolioincluding the $120 million statutory surplus contribution from the net proceedsof our October 2005 equity offering, in an environment of graduallyincreasing interest rates as monetary policy tightened.

 

32

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***Lloyd’s Operations***

 

The Lloyd’s Operations consist of NUAL, whichmanages Lloyd’s Syndicate 1221, Millennium Underwriting Ltd. and NavigatorsCorporate Underwriters Ltd. Both Millennium Underwriting Ltd. and NavigatorsCorporate Underwriters Ltd. are Lloyd’s corporate members with limitedliability and provide capacity to Lloyd’s Syndicate 1221. NUAL owns NavigatorsUnderwriting Ltd., an underwriting managing agency with its principal office inManchester, England, which underwrites cargo and engineering business for Lloyd’sSyndicate 1221. In January 2005, we formed Navigators NV in Antwerp,Belgium, a wholly owned subsidiary of NUAL. Navigators NV produces transportliability, cargo and marine liability premium on behalf of Syndicate 1221. TheLloyd’s Operations and Navigators Management (UK) Limited, a Navigators Agencywhich produces business for the U.K. Branch, are subsidiaries of NavigatorsHoldings (UK) Limited located in the United Kingdom.

 

Lloyd’s Syndicate 1221 has stamp capacity of £112.5million ($197.2 million) in 2006 compared to £135 million ($246.0 million) in2005. Stamp capacity is a measure of the amount of premium a Lloyd’s syndicateis authorized to write based on a business plan approved by the Council ofLloyd’s. We provide 100% and 97.5% of Syndicate 1221’s total stamp capacity in2006 and 2005, respectively. In September 2005, the Company purchased theremaining outstanding minority interest of the Syndicate 1221’s capacity forthe 2006 underwriting year.

 

Syndicate 1221’s stamp capacity is expressed net ofcommission (as is standard at Lloyd’s) of approximately 21%. The Syndicate 1221premium recorded in the Company’s financial statements is gross of commission.The Lloyd’s marine business had been subject to deteriorating pricing beginningin the mid-1990’s. The pricing competition showed some signs of stabilizing in2000 and prices increased from 2001 through 2003. The marine rate increasesbegan to level off in 2004 and into 2005. As a result of substantial insuranceindustry losses resulting from Hurricanes Katrina and Rita in August and September 2005,the global marine insurance market is experiencing diminished capacity and rateincreases, particularly for the Gulf of Mexico offshore energy lines ofbusiness. Lloyd’s presents its results on an underwriting year basis, generallyclosing each underwriting year after three years. We make estimates for eachunderwriting year and timely accrue the expected results. Our Lloyd’sOperations included in the consolidated financial statements represent ourparticipation in Syndicate 1221.

 

Lloyd’s syndicates report the amounts of premiums,claims, and expenses recorded in an underwriting account for a particular yearto the companies or individuals that participate in the syndicates. Thesyndicates generally keep accounts open for three years. Traditionally, threeyears have been necessary to report substantially all premiums associated withan underwriting year and to report most related claims, although claims may remainunsettled after the underwriting year is closed. A Lloyd’s syndicate typicallycloses an underwriting year by reinsuring outstanding claims on thatunderwriting year with the participants for the next underwriting year. Theceding participants pay the assuming participants an amount based on theunearned premiums and outstanding claims in the underwriting year at the dateof the assumption. Our participation in Lloyd’s Syndicate 1221 is representedby and recorded as our proportionate share of the underlying assets andliabilities and results of operations of the syndicate since (i) we holdan undivided interest in each asset, (ii) we are proportionately liablefor each liability and (iii) Syndicate 1221 is not a separate legalentity. At Lloyd’s, the amount to close an underwriting year into the next yearis referred to as the reinsurance to close (“RITC”) transaction. The RITCamounts represent the transfer of the assets and liabilities from theparticipants of a closing underwriting year to the participants of the nextunderwriting year. To the extent our participation in the syndicate changes,the RITC amounts vary accordingly. The RITC transaction is recorded in thefourth quarter as additional written and earned premium, losses incurred, lossreserves and receivables, all in the same amount. There are no gains or lossesrecorded on the RITC transaction.

 

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

 

33

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Whenever a member of Lloyd’s is unable to pay itsdebts to policyholders, such debts may be payable by the Lloyd’s CentralFund. If Lloyd’s determines that the Central Fund needs to be increased, it hasthe power to assess premium levies on current Lloyd’s members up to 3% of amember’s underwriting capacity in any one year. The Company does not believethat any assessment is likely in the foreseeable future and has not providedany allowance for such an assessment. However, based on the Company’s 2006capacity at Lloyd’s of £112.5 million, the March 31, 2006 exchange rate of£1 equals $1.74 and in the event of a maximum 3% assessment, the Company wouldbe assessed approximately $5.9 million.

 

Following are the results of operations of the Lloyd’sOperations for the three months ended March 31, 2006 and 2005:

 
| ** **                            | ** ** | **Three Months Ended**         | ** ** |
|---------------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | **March 31,**             | ** ** |
| ** **                            | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| ** **                            | ** ** | **($ in thousands)** | ** ** |
| ** **                            | * *   | * *                       | * *   | * * | * * |
| Gross written premium                 |       | $                              | 101,748    |   | $ | 87,830 |   |
| Net written premium                   |       | 53,782                         |       | 43,509 |   |
|                                  |       |                           |       |   |   |
| Net earned premium                    |       | 36,370                         |       | 30,175 |   |
| Net losses and LAE                    |       | (22,163                        | )          | (17,379 | ) |
| Commission expense                    |       | (6,581                         | )          | (4,881 | ) |
| Other operating expenses              |       | (4,975                         | )          | (5,505 | ) |
| Commission and other income (expense) |       | 266                            |       | 896 |   |
|                                  |       |                           |       |   |   |
| Underwriting profit                   |       | $                              | 2,917      |   | $ | 3,306 |   |
|                                  |       |                           |       |   |   |
| Investment income                     |       | 2,007                          |       | 749 |   |
| Net realized capital (losses)         |       | (349                           | )          | (99 | ) |
| Income before income tax expense      |       | 4,575                          |       | 3,956 |   |
|                                  |       |                           |       |   |   |
| Income tax expense                    |       | 1,601                          |       | 1,385 |   |
| Net Income                            |       | $                              | 2,974      |   | $ | 2,571 |   |
|                                  |       |                           |       |   |   |
| Loss and LAE ratio                    |       | 60.9                           | %          | 57.6 | % |
| Commission expense ratio              |       | 18.1                           | %          | 16.2 | % |
| Other operating expense ratio (1)     |       | 13.0                           | %          | 15.2 | % |
| Combined ratio                        |       | 92.0                           | %          | 89.0 | % |

 

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(1)  Includes *commissionand other income (expene).*

 

The Lloyd’s Operations have been experiencingbusiness expansion coupled with improving underwriting results as a result ofthe generally favorable market conditions for marine and energy business fromlate 2001 through 2003, and continuing to a lesser extent in 2004. Premium rateincreases occurred following Hurricanes Katrina and Rita, particularly in theoffshore energy business. Net earned premium ceded to the Insurance Companiesin the first quarters of 2006 and 2005 was $13,000 and $711,000, respectively.

 

34

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The approximate annualized pre-tax investment yieldson the Lloyd’s Operations’ investment portfolio, excluding net realized capitalgains and losses, for the 2006 first quarter was 3.5% compared to 1.6% for thecomparable 2005 period. Generally, funds invested at Lloyd’s have been investedwith a relatively short average duration in order to meet liquidity needs. Theaverage duration of our Lloyd’s Operations invested assets at March 31,2006 was 1.4 years. Such yields are net of interest credits to certainreinsurers for funds withheld by our Lloyd’s Operations.

 

**Off-Balance Sheet Transactions**

 

There have been no material changes in theinformation concerning off-balance sheet transactions as stated in the Company’s2005 Annual Report on Form 10-K.

 

**Tabular Disclosure of Contractual Obligations**

 

There have been no material changes in the operatinglease or capital lease information concerning contractual obligations as statedin the Company’s 2005 Annual Report on Form 10-K.

 

Total reserves for losses and LAE were $1.6 billionat both March 31, 2006 and December 31, 2005. There were nosignificant changes in the Company’s lines of business or claims handling thatwould create a material change in the percentage relationship of the projectedpayments by period to the total reserves.

 

**Investments**

 

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

 

The investments are managed by outside professionalfixed-income and equity portfolio managers. The Company seeks to achieve itsinvestment objectives by investing in cash equivalents and money market funds,municipal bonds, U.S. Government bonds, U.S. Government agency guaranteed andnon-guaranteed securities, corporate bonds, mortgage-backed and asset-backedsecurities and common and preferred stocks. Our investment guidelines requirethat the amount of the consolidated fixed-income portfolio rated below “A-” byStandard & Poor’s (“S&P”) or A3 by Moody’s shall not exceed 20% ofthe statutory surplus of the Insurance Companies. Securities rated below BBB-by S&P or Baa3 by Moody’s are not eligible to be purchased. Up to 15% ofthe statutory surplus of the Insurance Companies may be invested in equitysecurities that are actively traded on major U.S. stock exchanges. Ourinvestment guidelines prohibit investments in derivatives other than as a hedgeagainst foreign currency exposures or the writing of covered call options onthe equity portfolio.

 

The Insurance Companies’ investments are subject tothe direction and control of their respective boards of directors and ourFinance Committee. The investment portfolio and the performance of theinvestment managers are reviewed quarterly. These investments must comply withthe insurance laws of New York State, the domiciliary state of NavigatorsInsurance Company and NIC Insurance Company. These laws prescribe the type,quality and concentration of investments which may be made by insurancecompanies. In general, these laws permit investments, within specified limitsand subject to certain qualifications, in Federal, state and municipalobligations, corporate bonds, preferred stocks, common stocks, real estatemortgages and real estate.

 

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

 

35

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

 

All fixed maturity and equity securities are carriedat fair value. The fair value is based on quoted market prices or dealer quotesprovided by independent pricing services. The following tables show ourcash and investments as of March 31, 2006 and December 31, 2005: 

 

36

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| ** **                                                                                                    | ** ** | ** **                     | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Cost or** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|----------------|------------|----------------|------------|------------------|------------|
| ** **                                                                                                    | ** ** | **Fair**                       | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Amortized**    | ** ** |
| **March 31, 2006**                                                                                  | ** ** | **Value**                      | ** ** | **Gains**      | ** ** | **(Losses)**   | ** ** | **Cost**         | ** ** |
| ** **                                                                                                    | ** ** | **($ in thousands)** | ** ** |
| Fixed  maturities:                                                                                            |       |                           |       |           |       |           |       |             |       |
|                                                                                                          |       |                           |       |           |       |           |       |             |       |
| U.S.  Government Treasury Bonds, GNMAs, U.S. Government non-guaranteed Agencies and  foreign government bonds |       | $                              | 226,221    |           | $          | 732            |       | $                | (4,680     | ) | $ | 230,169 |   |
| States,  municipalities and political subdivisions                                                            |       | 247,173                        |       | 768            |       | (3,952         | )          | 250,357          |       |
| Mortgage-  and asset-backed securities (excluding U.S. Govt.)                                                 |       | 381,062                        |       | 352            |       | (7,869         | )          | 388,579          |       |
| Corporate  bonds                                                                                              |       | 168,147                        |       | 967            |       | (3,574         | )          | 170,754          |       |
|                                                                                                          |       |                           |       |           |       |           |       |             |       |
| Total fixed  maturities (1)                                                                                   |       | 1,022,603                      |       | 2,819          |       | (20,075        | )          | 1,039,859        |       |
|                                                                                                          |       |                           |       |           |       |           |       |             |       |
| Equity  securities - common stocks                                                                            |       | 25,181                         |       | 2,134          |       | (590           | )          | 23,637           |       |
|                                                                                                          |       |                           |       |           |       |           |       |             |       |
| Cash and  short-term investments                                                                              |       | 146,886                        |       | —         |       | —         |       | 146,886          |       |
|                                                                                                          |       |                           |       |           |       |           |       |             |       |
| Total                                                                                                         |       | $                              | 1,194,670  |           | $          | 4,953          |       | $                | (20,665    | ) | $ | 1,210,382 |   |

 

----

(1)   Approximately 4.7% and 16.6% of total fixed maturitiesinvestments are direct and collateralized obligations, respectively, of FNMAand FHLMC.

 
| ** **                                                                                                    | ** ** | ** **                     | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Cost or** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|----------------|------------|----------------|------------|------------------|------------|
| ** **                                                                                                    | ** ** | **Fair**                       | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Amortized**    | ** ** |
| **December 31, 2005**                                                                               | ** ** | **Value**                      | ** ** | **Gains**      | ** ** | **(Losses)**   | ** ** | **Cost**         | ** ** |
| ** **                                                                                                    | ** ** | **($ in thousands)** | ** ** |
| Fixed  maturities:                                                                                            |       |                           |       |           |       |           |       |             |       |
|                                                                                                          |       |                           |       |           |       |           |       |             |       |
| U.S.  Government Treasury Bonds, GNMAs, U.S. Government non-guaranteed Agencies and  foreign government bonds |       | $                              | 244,890    |           | $          | 2,432          |       | $                | (2,249     | ) | $ | 244,707 |   |
| States,  municipalities and political subdivisions                                                            |       | 216,345                        |       | 1,563          |       | (2,115         | )          | 216,897          |       |
| Mortgage-  and asset-backed securities (excluding U.S. Govt.)                                                 |       | 358,062                        |       | 758            |       | (3,682         | )          | 360,986          |       |
| Corporate  bonds                                                                                              |       | 164,816                        |       | 2,115          |       | (1,435         | )          | 164,136          |       |
|                                                                                                          |       |                           |       |           |       |           |       |             |       |
| Total fixed  maturities (1)                                                                                   |       | 984,113                        |       | 6,868          |       | (9,481         | )          | 986,726          |       |
|                                                                                                          |       |                           |       |           |       |           |       |             |       |
| Equity  securities - common stocks                                                                            |       | 20,911                         |       | 1,893          |       | (649           | )          | 19,667           |       |
|                                                                                                          |       |                           |       |           |       |           |       |             |       |
| Cash and  short-term investments                                                                              |       | 177,212                        |       | —         |       | —         |       | 177,212          |       |
|                                                                                                          |       |                           |       |           |       |           |       |             |       |
| Total                                                                                                         |       | $                              | 1,182,236  |           | $          | 8,761          |       | $                | (10,130    | ) | $ | 1,183,605 |   |

 

----

(1)   Approximately 5.6% and 10.7%of total fixed maturities investments are direct and collateralized obligations,respectively, of FNMA and FHLMC.

 

37

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At March 31, 2006 and December 31, 2005,all fixed-maturity and equity securities held by us were classified asavailable-for-sale.

 

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

 

When a security in our investment portfolio has anunrealized loss that is deemed to be other-than-temporary, we write thesecurity down to fair value through a charge to operations. Significant changesin the factors we consider when evaluating investments for impairment lossescould result in a significant change in impairment losses reported in theconsolidated financial statements. There were no impairment losses recorded inour fixed maturity or equity securities portfolios in the first quarters of2006 or 2005.

 

The following table summarizes all securities in an unrealizedloss position at March 31, 2006 and December 31, 2005, showing theaggregate fair value and gross unrealized loss by the length of time thosesecurities have continuously been in an unrealized loss position:

 

38

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| ** **                                                                                                    | ** ** | **March 31, 2006**   | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                    | ** ** | **Fair**                       | ** ** | **Gross**                       | ** ** | **Fair** | ** ** | **Gross** | ** ** |
| ** **                                                                                                    | ** ** | **Value**                      | ** ** | **Unrealized Loss**        | ** ** | **Value** | ** ** | **Unrealized Loss** | ** ** |
| ** **                                                                                                    | ** ** | **($ in thousands)** | ** ** |
|                                                                                                          |       |                           |       |                            |       |   |   |   |   |
| Fixed  Maturities:                                                                                            |       |                           |       |                            |       |   |   |   |   |
| U.S.  Government Treasury Bonds, GNMAs, U.S. Government non-guaranteed Agencies and  foreign government bonds |       |                           |       |                            |       |   |   |   |   |
| 0-6 Months                                                                                                    |       | $                              | 70,483     |                            | $          | 1,571 |   | $ | 66,229 |   | $ | 772 |   |
| 7-12 Months                                                                                                   |       | 65,635                         |       | 1,976                           |       | 52,994 |   | 690 |   |
| > 12  Months                                                                                               |       | 45,994                         |       | 1,133                           |       | 51,234 |   | 787 |   |
| Subtotal                                                                                                      |       | 182,112                        |       | 4,680                           |       | 170,457 |   | 2,249 |   |
|                                                                                                          |       |                           |       |                            |       |   |   |   |   |
| States,  municipalities and political subdivisions                                                            |       |                           |       |                            |       |   |   |   |   |
| 0-6 Months                                                                                                    |       | 90,105                         |       | 1,005                           |       | 82,167 |   | 696 |   |
| 7-12 Months                                                                                                   |       | 58,435                         |       | 1,216                           |       | 43,875 |   | 776 |   |
| > 12  Months                                                                                               |       | 63,414                         |       | 1,731                           |       | 24,786 |   | 643 |   |
| Subtotal                                                                                                      |       | 211,954                        |       | 3,952                           |       | 150,828 |   | 2,115 |   |
|                                                                                                          |       |                           |       |                            |       |   |   |   |   |
| Mortgage-  and asset-backed securities (excluding U.S. Govt.)                                                 |       |                           |       |                            |       |   |   |   |   |
| 0-6 Months                                                                                                    |       | 188,358                        |       | 2,978                           |       | 184,145 |   | 1,847 |   |
| 7-12 Months                                                                                                   |       | 95,201                         |       | 3,193                           |       | 53,485 |   | 942 |   |
| > 12  Months                                                                                               |       | 71,849                         |       | 1,698                           |       | 52,115 |   | 893 |   |
| Subtotal                                                                                                      |       | 355,408                        |       | 7,869                           |       | 289,745 |   | 3,682 |   |
|                                                                                                          |       |                           |       |                            |       |   |   |   |   |
| Corporate  bonds                                                                                              |       |                           |       |                            |       |   |   |   |   |
| 0-6 Months                                                                                                    |       | 70,956                         |       | 1,342                           |       | 45,995 |   | 576 |   |
| 7-12 Months                                                                                                   |       | 31,717                         |       | 1,213                           |       | 9,109 |   | 202 |   |
| > 12  Months                                                                                               |       | 29,744                         |       | 1,019                           |       | 26,904 |   | 657 |   |
| Subtotal                                                                                                      |       | 132,417                        |       | 3,574                           |       | 82,008 |   | 1,435 |   |
|                                                                                                          |       |                           |       |                            |       |   |   |   |   |
| Total Fixed  Maturities                                                                                       |       | $                              | 881,891    |                            | $          | 20,075 |   | $ | 693,038 |   | $ | 9,481 |   |
|                                                                                                          |       |                           |       |                            |       |   |   |   |   |
| Equity  securities - common stocks                                                                            |       |                           |       |                            |       |   |   |   |   |
| 0-6 Months                                                                                                    |       | $                              | 3,745      |                            | $          | 183 |   | $ | 2,200 |   | $ | 167 |   |
| 7-12 Months                                                                                                   |       | 2,865                          |       | 190                             |       | 3,120 |   | 235 |   |
| > 12  Months                                                                                               |       | 1,108                          |       | 217                             |       | 756 |   | 247 |   |
|                                                                                                          |       |                           |       |                            |       |   |   |   |   |
| Total Equity  Securities                                                                                      |       | $                              | 7,718      |                            | $          | 590 |   | $ | 6,076 |   | $ | 649 |   |

 

We analyze the unrealized losses quarterly todetermine if any are other-than-temporary. The above unrealized losses havebeen determined to be temporary and generally result from changes in marketconditions.

 

39

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The following table shows the composition byNational Association of Insurance Commissioners (“NAIC”) rating and thegenerally equivalent Standard & Poor’s (“S&P”) and Moody’s ratingsof the fixed maturity securities in our portfolio with gross unrealized lossesat March 31, 2006. Not all of the securities are rated by S&P and/orMoody’s.

 
| ** ** | ** ** | **Equivalent** | ** ** | **Equivalent**   | ** ** | **Gross Unrealized Loss** | ** ** | **Fair Value** | ** ** |
|------------|------------|----------------|------------|------------------|------------|--------------------------------|------------|---------------------|------------|
| **NAIC**   | ** ** | **S&P**    | ** ** | **Moody’s** | ** ** | ** **                     | ** ** | **Percent**         | ** ** | ** ** | ** ** | **Percent** | ** ** |
| **Rating** | ** ** | **Rating**     | ** ** | **Rating**       | ** ** | **Amount**                     | ** ** | **of Total**   | ** ** | **Amount** | ** ** | **of Total** | ** ** |
| ** ** | ** ** | ** **     | ** ** | ** **       | ** ** | **($ in thousands)** | ** ** |
|       |       |           |       |             |       |                           |       |                |       |   |   |   |   |
| 1          |       | AAA/AA/A       |       | Aaa/Aa/A         |       | $                              | 18,731     |                | 93         | % | $ | 830,400 |   | 94 | % |
| 2          |       | BBB            |       | Baa              |       | 1,344                          |       | 7                   | %          | 51,491 |   | 6 | % |
| 3          |       | BB             |       | Ba               |       | —                         |       | —              |       | — |   | — |   |
| 4          |       | B              |       | B                |       | —                         |       | —              |       | — |   | — |   |
| 5          |       | CCC or lower   |       | Caa or lower     |       | —                         |       | —              |       | — |   | — |   |
| 6          |       | N/A            |       | N/A              |       | —                         |       | —              |       | — |   | — |   |
|       |       |           |       | Total            |       | $                              | 20,075     |                | 100        | % | $ | 881,891 |   | 100 | % |

 

At March 31, 2006, the gross unrealized lossesin the table directly above are related to fixed maturity securities that arerated investment grade, which is defined as a security having a NAIC rating of1 or 2, a S&P rating of “BBB–” or higher, or a Moody’s rating of “Baa3” orhigher. Unrealized losses on investment grade securities principally relate tochanges in interest rates or changes in sector-related credit spreads since thesecurities were acquired. Any such unrealized losses are recognized in income,if the securities are sold, or if the decline in fair value is deemedother-than-temporary.

 

The scheduled maturity dates for fixed maturitysecurities in an unrealized loss position at March 31, 2006 are shown inthe following table:

 
| ** **                              | ** ** | **Gross Unrealized Loss** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------|------------|--------------------------------|------------|---------------------|------------|
| ** **                              | ** ** | ** **                     | ** ** | **Percent**         | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                              | ** ** | **Amount**                     | ** ** | **of Total**   | ** ** | **Amount** | ** ** | **of Total** | ** ** |
| ** **                              | ** ** | **($ in thousands)** | ** ** |
|                                    |       |                           |       |                |       |   |   |   |   |
| Due in one  year or less                |       | $                              | 342        |                | 2          | % | $ | 46,084 |   | 5 | % |
| Due after  one year through five years  |       | 4,413                          |       | 22                  | %          | 209,675 |   | 24 | % |
| Due after  five years through ten years |       | 4,274                          |       | 21                  | %          | 137,949 |   | 16 | % |
| Due after  ten years                    |       | 3,177                          |       | 16                  | %          | 132,775 |   | 15 | % |
| Mortgage-  and asset-backed securities  |       | 7,869                          |       | 39                  | %          | 355,408 |   | 40 | % |
|                                    |       |                           |       |                |       |   |   |   |   |
| Total fixed  income securities          |       | $                              | 20,075     |                | 100        | % | $ | 881,891 |   | 100 | % |

 

Expected maturities may differ from contractualmaturities because issuers may have the right to call or prepayobligations with or without call or prepayment penalties. Due to the periodicrepayment of principal, the mortgage-backed and asset-backed securities areestimated to have an effective maturity of approximately 5.1 years.

 

40

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Our realized capital gains and (losses) for thethree months ended March 31, 2006 and 2005 were as follows:

 

| ** **                           | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **March 31,**               | ** ** |
| ** **                           | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **($ in thousands)**   | ** ** |
|                                 |       |                             |       |   |   |
| Fixed  maturities:                   |       |                             |       |   |   |
| Gains                                |       | $                                | 272        |   | $ | 713 |   |
| (Losses)                             |       | (1,166                           | )          | (546 | ) |
|                                 |       | (894                             | )          | 167 |   |
| Equity  securities:                  |       |                             |       |   |   |
| Gains                                |       | 481                              |       | — |   |
| (Losses)                             |       | (11                              | )          | — |   |
|                                 |       | 470                              |       | — |   |
|                                 |       |                             |       |   |   |
| Net realized  capital gains (losses) |       | $                                | (424       | ) | $ | 167 |   |

 

The following table details realized lossesin excess of $250,000 from sales and impairments during the first three monthsof 2006 and 2005 and the related circumstances giving rise to the loss:

 
| ** **                                        | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **         | ** ** | ** **     | ** ** | ** **                   | ** ** | ** **     | ** ** | **# of Months** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|--------------------|------------|--------------------|------------|----------------|------------|------------------------------|------------|----------------|------------|---------------------------|------------|
| ** **                                        | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **         | ** ** | ** **     | ** ** | ** **                   | ** ** | ** **     | ** ** | **Unrealized Loss**  | ** ** |
| ** **                                        | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **         | ** ** | ** **     | ** ** | ** **                   | ** ** | **Net**        | ** ** | **Exceeded 20%**     | ** ** |
| ** **                                        | ** ** | **Date of**           | ** ** | **Proceeds**       | ** ** | **(Loss) on** | ** ** | ** **     | ** ** | **Holdings at**              | ** ** | **Unrealized** | ** ** | **of Cost or**  | ** ** |
| **Description**                                   | ** ** | **Sale**                   | ** ** | **from Sale** | ** ** | **Sale**           | ** ** | **Impairment** | ** ** | **March 31, 2006** | ** ** | **(Loss)**     | ** ** | **Amortized Cost**   | ** ** |
| ** **                                        | ** ** | **($ in  thousands)** | ** ** |
| Three months ended March 31,  2006 and 2005: |       |                       |       |               |       |               |       |           |       |                         |       |           |       |                      |       |
|                                              |       |                       |       |               |       |               |       |           |       |                         |       |           |       |                      |       |
| TIPS (1)                                          |       | 3/31/2006                  |       | $                  | 15,418     |               | $          | (305           | )          | —                       |       | —         |       | —                    |       | — |   |
|                                                   |            |                            |            |                    |            |                    |            |                |            |                              |            |                |            |                           |            |  |  |

 

----

(1)   Treasuryinflation protection securities (TIPS) were sold during the 2006 first quarterdue to the widening breakeven yield spread between TIPS and Treasuries.

 

**Reinsurance Recoverables**

 

We utilize reinsurance principally to reduce ourexposure on individual risks, to protect against catastrophic losses, tomaintain desired ratios of net written premium to statutory surplus and tostabilize loss ratios and underwriting results. Although reinsurance makes thereinsurer liable to us to the extent the risk is transferred or ceded to thereinsurer, ceded reinsurance arrangements do not eliminate our obligation topay claims to our policyholders. Accordingly, we bear credit risk with respectto our reinsurers. Specifically, our reinsurers may not pay claims made byus on a timely basis, or they may not pay some or all of these claims.Either of these events would increase our costs and could have a materialadverse effect on our business. We are required to pay the losses even if thereinsurer fails to meet its obligations under the reinsurance agreement.Hurricanes Katrina and Rita increased our reinsurance recoverablessignificantly which increased our credit risk.

 

41

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We are protected by various treaty and facultativereinsurance agreements. Our exposure to credit risk from any one reinsurer ismanaged through diversification by reinsuring with a number of different reinsurers,principally in the United States and European reinsurance markets. To meet ourstandards of acceptability, when the reinsurance is placed, a reinsurergenerally must have an A.M. Best Company and/or Standard & Poor’srating of “A” or better, or equivalent financial strength if not rated, plus atleast $250 million in policyholders’ surplus. Our Reinsurance SecurityCommittee monitors the financial strength of our reinsurers and the relatedreinsurance receivables and periodically reviews the list of acceptablereinsurers. The reinsurance is placed either directly by us or throughreinsurance intermediaries. The reinsurance intermediaries are compensated bythe reinsurers.

 

An allowance for doubtful recoveries is maintainedfor any amounts considered to be uncollectible. At March 31, 2006 and December 31,2005, we had allowances for uncollectible reinsurance of $32.9 million and$33.1 million, respectively. The allowances include $21.6 million foruncollectible reinsurance as a result of loss reserves established in 2003 forasbestos exposures on marine and aviation business written mostly prior to1986. Charges (recoveries) for uncollectible reinsurance amounts, all of whichwere recorded to incurred losses, were $0.3 and $1.0 million for the three monthsended March 31, 2006 and 2005, respectively.

 

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

 

**Liquidityand Capital Resources**

 

Cash flow provided by operations was $29.5 millionand $65.2 million for the three months ended March 31, 2006 and 2005,respectively. The positive operating cash flow in the first three months of2006 was primarily due to the increase in net written premium. Operating cashflow was used primarily to acquire additional investment assets.

 

The cumulative inception to date payment of grosslosses from Hurricanes Katrina and Rita has approximated $15 million of which$10 million was paid in the 2006 first quarter. Such payments reduce cash flowfor the gross amount paid until the ceded portion of the loss is collected fromthe reinsurers.

 

Investments and cash increased to $1,195 million at March 31,2006 from $1,182 million at December 31, 2005. The increase was primarilydue to the positive cash flow. Net investment income was $12.6 million and $7.6million for the three months ended March 31, 2006 and 2005, respectively.

 

The approximate annualized pre-tax investment yieldsof the portfolio, excluding net realized capital gains and losses, for both the2006 and 2005 first quarters were 4.3% and 3.5%, respectively. The increase inthe pre-tax investment yield was due to the increase in interest rates asmonetary policy continued to tighten. The positive cash flow along with theproceeds from maturities, calls and redemptions were reinvested at the higherprevailing rates. As of March 31, 2006 and December 31, 2005, allfixed maturity securities and equity securities held by us were classified asavailable-for-sale.

 

At March 31, 2006, the weighted average ratingof our fixed maturity investments was “AA” by Standard & Poor’s and “Aa”by Moody’s. We believe that we have no significant exposure to credit risksince the fixed maturity investment portfolio consists of investment-gradebonds. At March 31, 2006, our portfolio had an average maturity of 4.8 yearsand a duration of 3.6 years. Management continually monitors the compositionand cash flow of the investment portfolio in order to maintain the appropriatelevels of liquidity to ensure our ability to satisfy claims.

 

We have a credit facility provided through aconsortium of banks. The credit facility was amended in January 2005 toincrease the letters of credit available under the facility from $80 million to$115 million and to add a $10 million line of credit facility. The expirationof the credit facility was also extended from November 10, 2005 to June 30,2007. If at that time the banks do not renew the credit facility, we will needto find other 

 

42

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sourcesto provide the letters of credit or other collateral in order to continue ourparticipation in Syndicate 1221. The credit facility, which is denominated inU.S. dollars, is utilized primarily by Navigators Corporate Underwriters Ltd.and Millennium Underwriting Ltd. to fund our participation in Lloyd’s Syndicate1221 which is denominated in British pounds. At March 31, 2006, letters ofcredit with an aggregate face amount of $80.8 million were issued under thecredit facility. The credit line was unused at March 31, 2006.

 

The credit facility is collateralized by all of thecommon stock of Navigators Insurance Company. The credit agreement containscovenants common to transactions of this type, including restrictions onindebtedness and liens, limitations on mergers and the sale of assets,maintaining certain consolidated tangible net worth, statutory surplus andother financial ratios. Cash dividends to shareholders are limited to $2.5million per year. No dividends have been declared or paid through March 31,2006. At March 31, 2006, we were in compliance with all covenants.

 

An amendment to the credit facility was approved bythe bank consortium in April 2006 to allow the Company to issue $125million of senior unsecured notes. The public debt offering of the senior noteswas completed on April 17, 2006. The amendment which was for the purposeof permitting the issuance of the debt also, among other items, increased theamount of annual dividends that could be paid by the Company from $2.5 millionto $5.0 million.

 

At March 31, 2006, our consolidatedstockholders’ equity was $478.3 million or $28.70 per share compared to $470.2million or $28.30 per share at December 31, 2005. The increase wasprimarily due to net income of $15.5 million for the first three months of 2006partially offset by an increase of $9.1 million in other comprehensive losssubstantially all due to net unrealized losses in the investment portfolios dueto rising interest rates.

 

Our reinsurance has been placed with various U.S.and foreign insurance companies and with selected syndicates at Lloyd’s.Pursuant to the implementation of Lloyd’s Plan of Reconstruction and Renewal, aportion of our recoverables are now reinsured by Equitas (a separate UnitedKingdom authorized reinsurance company established to reinsure outstandingliabilities of all Lloyd’s members for all risks written in the 1992 or prioryears of account).

 

Time lags do occur in the normal course of businessbetween the time gross losses are paid by the Company and the time such grosslosses are billed and collected from reinsurers. Recoverable amounts at March 31,2006 are anticipated to be billed and collected over the next several years asgross losses are paid by the Company.

 

Generally, for pro-rata or quota share reinsurers,including pool participants, the Company issues quarterly settlement statementsfor premiums less commissions and paid loss activity, which are expected to besettled within 45 days after the quarter end. The Company has the ability toissue “cash calls” requiring such reinsurers to pay losses whenever paid lossactivity ceded to a particular reinsurance treaty exceeds a predeterminedamount (generally not more than $1 million) as set forth in the pro-ratatreaty. For the Insurance Companies, cash calls must generally be paid within30 calendar days. There is generally no specific settlement period for theLloyd’s Operations cash call provisions, but such billings are usually paidwithin 45 calendar days.

 

Generally, for excess of loss reinsurers the Companypays monthly or quarterly deposit premiums based on the estimated subjectpremiums over the contract period (usually one year) which are subsequentlyadjusted based on actual premiums determined after the expiration of theapplicable reinsurance treaty. Paid losses subject to excess of loss recoveriesare generally billed as they occur and are usually settled by reinsurers within30 calendar days for the Insurance Companies and 30 business days for the Lloyd’sOperations.

 

The Company sometimes withholds funds fromreinsurers and may apply ceded loss billings against such funds inaccordance with the applicable reinsurance agreements.

 

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At March 31, 2006, approximately $26.6 millionwas due from reinsurers under pro rata and excess of loss reinsurance treatiesin connection with our asbestos exposures of which $15.4 million is due fromEquitas. Approximately 80% of such amounts will be due and payable to theCompany over the next two years as the gross asbestos losses are billed andpaid by the Company. The Company generally experiences significant collectiondelays for a large portion of such balances given that certain reinsurers arein run-off or otherwise no longer active in the reinsurance business. Suchcircumstances are considered in the Company’s ongoing assessment of suchreinsurance recoverables.

 

The Company believes that it has adequately managedits cash flow requirements related to reinsurance recoveries from its positivecash flows and the use of available short-term funds when applicable. However,there can be no assurances that the Company will be able to continue toadequately manage such recoveries in the future or that collection disputes orreinsurer insolvencies will not arise that could materially increase thecollection time lags or result in recoverable write-offs causing additionalincurred losses and liquidity constraints to the Company. The payment of grossclaims and related collections from reinsurers with respect to HurricanesKatrina and Rita could significantly impact the Company’s liquidity needs.However, we expect to pay the 2005 hurricane losses over a period of years fromcash flow and, if needed, short-term investments and expect to collect our paidreinsurance recoverables generally under the terms described above.

 

We primarily rely upon dividends from oursubsidiaries to meet our holding company obligations. The dividends havehistorically come primarily from Navigators Insurance Company. At December 31,2005, the maximum amount available for the payment of dividends by NavigatorsInsurance Company during 2006 without prior regulatory approval was $35.6million. No dividends have been paid by Navigators Insurance Company in 2006.

 

We believe that the cash flow generated by theoperating activities of our subsidiaries will provide sufficient funds for usto meet our liquidity needs over the next twelve months. Beyond the next twelvemonths, cash flow available to us may be influenced by a variety offactors, including general economic conditions and conditions in the insuranceand reinsurance markets, as well as fluctuations from year to year in claimsexperience.

 

In April 2006, the Company completed a publicdebt offering of $125 million 7% senior unsecured notes due May 1, 2016and contributed $100 million of the proceeds to Navigators Insurance Company.The remaining net proceeds will remain in the Parent Company for generalcorporate purposes.

 

Condensed Parent Company balance sheets as of March 31,2006 (unaudited) and December 31, 2005 follows:

 
| ** **                                       | ** ** | **March 31, 2006**   | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **($ in thousands)** | ** ** |
|                                             |       |                           |       |                            |       |
| Cash and  short-term investments                 |       | $                              | 16,973     |                            | $          | 16,926 |   |
| Investments  in subsidiaries                     |       | 459,995                        |       | 453,023                         |       |
| Other assets                                     |       | 7,556                          |       | 6,229                           |       |
| Total assets                                     |       | $                              | 484,524    |                            | $          | 476,178 |   |
|                                             |       |                           |       |                            |       |
| Accounts  payable and other liabilities          |       | $                              | 6,208      |                            | $          | 5,940 |   |
|                                             |       |                           |       |                            |       |
| Stockholders’  equity                       |       | 478,316                        |       | 470,238                         |       |
| Total  liabilities and stockholders’ equity |       | $                              | 484,524    |                            | $          | 476,178 |   |

 

At March 31, 2006 approximately $4.0million of investments are held in a tax escrow account on behalf of NavigatorsInsurance Company until two-year tax loss carryback periods expire.

 

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##### **Item 3. Quantitative and QualitativeDisclosures About Market Risk**

#####  

There have been no material changes in theinformation concerning market risk as stated in the Company’s 2005 AnnualReport on Form 10-K.

 

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

#####  

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

 

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

 

**Part II - Other Information**

 

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

 

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

 

At the end of April 2006, the Companywas served as a defendant in an action in the Northern District Court ofGeorgia captioned *New Cingular Wireless Headquarters, LLC, etal. v. Marsh & McLennan Companies, Inc., et al*., alongwith approximately 100 other defendants. While it is not possible at this verypreliminary stage to predict the outcome of this litigation, the Companybelieves the allegations, which involve contingent commissions and bid-riggingin the insurance industry, to be without merit and intends to vigorously defenditself against them.

 

**Item 1a.****                             RiskFactors**

 

There have been no material changes from therisk factors as previously disclosed in the Company’s 2005 Annual Report on Form 10-K.

 

**Item 2.****            Unregistered Salesof Equity Securities and Use of Proceeds**

 

None.

 

**Item 3.****            Defaults UponSenior Securities**

 

None.

 

**Item 4.****            Submissions ofMatters to a Vote of Security Holders**

 

None

 

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

 

None.

 

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

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

 

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**Included herein*.

 

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SIGNATURE

 

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

 
|                                    | The  Navigators Group, Inc. |   |   |
|-----------------------------------------|----------------------------------|--------|--------|
|                                    | (Registrant)                     |   |
|                                    |                             |
| Date:   May 2, 2006 | /s / Paul J. Malvasio            |   |
|                                    | Paul J. Malvasio                 |
|                                    | Executive Vice President         |
|                                    | and Chief Financial Officer      |
|                                         |                                  |        |        |  |  |

 

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**INDEX OF EXHIBITS**

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

 

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*  *Included herein.*

 

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