Navigators (NAVG) 10-Q 2004 Q3 Quarterly report

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 the Quarterly Period Ended September 30, 2004

Commission file number     0-15886

The Navigators Group, Inc.

(Exact name of Registrant as specified in its charter)

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

(212)  244-2333

(Registrant’s telephone number, including area code)

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

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

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

The number of common shares outstanding as of October 27, 2004 was 12,625,706.

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

INDEX

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

Part 1.Financial Information

Item 1.Financial Statements

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

($ in thousands, except share data)

	September 30, 2004		December 31, 2003
	(Unaudited)
ASSETS
Investments and cash:
Fixed maturities, available-for-sale, at fair value (amortized cost: 2004, $688,993; 2003, $577,904)	$	699,828	$	588,545
Equity securities, available-for-sale, at fair value (cost: 2004, $17,708; 2003, $11,977)	19,198		13,446
Short-term investments, at cost which approximates fair value	104,794		83,202
Cash	16,029		8,399
Total investments and cash	839,849		693,592
Premiums in course of collection	155,209		128,676
Commissions receivable	2,829		3,970
Prepaid reinsurance premiums	138,957		102,141
Reinsurance receivable on paid losses	17,787		26,270
Reinsurance receivable on unpaid losses and loss adjustment expense	469,428		350,441
Federal income tax recoverable	—		8,747
Net deferred income tax benefit	17,292		15,195
Deferred policy acquisition costs	28,540		24,720
Accrued investment income	6,906		5,546
Goodwill	5,128		5,093
Other assets	10,578		15,067
Total assets	$	1,692,503	$	1,379,458
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses	$	909,507	$	724,612
Unearned premium	287,450		238,803
Reinsurance balances payable	139,518		97,583
Federal income tax payable	1,821		—
Payable for securities purchased	12,737		12,857
Accounts payable and other liabilities	24,872		15,575
Total liabilities	1,375,905		1,089,430
Stockholders’ equity:
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued	—		—
Common stock, $.10 par value, 20,000,000 shares authorized; issued and outstanding: 12,625,706 for 2004 and 12,535,360 for 2003	1,263		1,254
Additional paid-in capital	153,881		151,765
Accumulated other comprehensive income	8,752		8,537
Retained earnings	152,702		128,472
Total stockholders’ equity	316,598		290,028
Total liabilities and stockholders’ equity	$	1,692,503	$	1,379,458

See accompanying notes to interim consolidated financial statements.

3

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

	Three Months Ended September 30,
	2004			2003
	(Unaudited)
Gross written premium	$	151,178		$	139,632
Revenues:
Net written premium	$	65,992		$	70,631
Decrease in unearned premium	9,145			3,906
Net earned premium	75,137			74,537
Commission income	1,121			23
Net investment income	6,881			4,634
Net realized capital gains	271			349
Other income (expense)	(127		)	139
Total revenues	83,283			79,682
Operating expenses:
Net losses and loss adjustment expenses incurred	49,247			48,526
Commission expense	8,773			9,194
Other operating expenses	16,014			13,539
Interest expense	—			68
Total operating expenses	74,034			71,327
Income before income tax expense	9,249			8,355
Income tax expense (benefit):
Current	4,225			4,195
Deferred	(1,256		)	(2,148		)
Total income tax expense	2,969			2,047
Net income	$	6,280		$	6,308
Net income per common share:
Basic	$	0.50		$	0.74
Diluted	$	0.50		$	0.73
Average common shares outstanding:
Basic	12,612			8,535
Diluted	12,679			8,691

See accompanying notes to interim consolidated financial statements.

4

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

	Nine Months Ended September 30,
	2004			2003
	(Unaudited)
Gross written premium	$	508,756		$	455,526
Revenues:
Net written premium	$	235,616		$	223,295
(Increase) in unearned premium	(10,989		)	(17,180		)
Net earned premium	224,627			206,115
Commission income	3,608			2,748
Net investment income	19,408			13,847
Net realized capital gains	588			1,235
Other income	267			728
Total revenues	248,498			224,673
Operating expenses:
Net losses and loss adjustment expenses incurred	138,391			135,857
Commission expense	29,840			28,698
Other operating expenses	44,066			37,734
Interest expense	—			251
Total operating expenses	212,297			202,540
Income before income tax expense	36,201			22,133
Income tax expense (benefit):
Current	14,184			8,765
Deferred	(2,213		)	(3,807		)
Total income tax expense	11,971			4,958
Net income	$	24,230		$	17,175
Net income per common share:
Basic	$	1.93		$	2.02
Diluted	$	1.91		$	1.99
Average common shares outstanding:
Basic	12,584			8,515
Diluted	12,688			8,640

See accompanying notes to interim consolidated financial statements.

5

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

($ in thousands)

	Nine Months Ended September 30,
	2004		2003
	(Unaudited)
Preferred Stock
Balance at beginning and end of period	$	—	$	—
Common stock			��
Balance at beginning of year	$	1,254	$	851
Shares issued under stock plans	9		4
Balance at end of period	$	1,263	$	855
Additional paid-in capital
Balance at beginning of year	$	151,765	$	40,141
Effect of SFAS 123 for stock options	754		547
Shares issued under stock plans	1,362		883
Balance at end of period	$	153,881	$	41,571
Treasury stock held at cost
Balance at beginning of year	$	—	$	(236	)
Shares issued for vested stock grants	—		236
Balance at end of period	$	—	$	—
Accumulated other comprehensive income
Net unrealized gains on securities, net of tax
Balance at beginning of year	$	7,871	$	9,499
Change in period	139		(8		)
Balance at end of period	8,010		9,491
Cumulative translation adjustments, net of tax
Balance at beginning of year	666		233
Net adjustment for period	76		480
Balance at end of period	742		713
Balance at end of period	$	8,752	$	10,204
Retained earnings
Balance at beginning of year	$	128,472	$	120,787
Net income	24,230		17,175
Balance at end of period	$	152,702	$	137,962
Total stockholders’ equity at end of period	$	316,598	$	190,592

See accompanying notes to interim consolidated financial statements.

6

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ in thousands)

		Three Months Ended September 30,
		2004			2003
		(Unaudited)
Net income		$	6,280		$	6,308
Other comprehensive income (loss):
Change in net unrealized gains (losses) on securities, net of tax (benefit) expense of $4,073 and $(1,908) in 2004 and 2003, respectively (1)		7,564			(3,749		)
Change in foreign currency translation gains, net of tax (benefit) expense of $(89) and $100 in 2004 and 2003, respectively		(165		)	186
Other comprehensive income (loss)		7,399			(3,563		)
Comprehensive income		$	13,679		$	2,745
(1)	Disclosure of reclassification amount, net of tax:
	Unrealized holding gains (losses) arising during period	$	7,740		$	(3,477	)
	Less: reclassification adjustment for net gains included in net income	176			272
	Net unrealized gains (losses) on securities	$	7,564		$	(3,749	)

See accompanying notes to interim consolidated financial statements.

7

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ in thousands)

		Nine Months Ended September 30,
		2004		2003
		(Unaudited)
Net income		$	24,230	$	17,175
Other comprehensive income:
Change in net unrealized gains (losses) on securities, net of tax expense of $75 and $165 in 2004 and 2003, respectively(1)		139		(8		)
Change in foreign currency translation gains, net of tax expense of $41 and $258 in 2004 and 2003, respectively		76		480
Other comprehensive income		215		472
Comprehensive income		$	24,445	$	17,647
(1)	Disclosure of reclassification amount, net of tax:
	Unrealized holding gains arising during period	$	521	$	1,002
	Less: reclassification adjustment for net gains included in net income	382		1,010
	Net unrealized gains (losses) on securities	$	139	$	(8	)

See accompanying notes to interim consolidated financial statements.

8

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)

	Nine Months Ended September 30,
	2004			2003
	(Unaudited)
Operating activities:
Net income	$	24,230		$	17,175
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation & amortization	893			1,222
Net deferred income tax (benefit)	(2,213		)	(3,807		)
Net realized capital (gains)	(588		)	(1,235		)
Changes in assets and liabilities:
Reinsurance receivable on paid and unpaid losses and loss adjustment expenses	(110,504		)	(41,894		)
Reserve for losses and loss adjustment expenses	184,895			92,788
Prepaid reinsurance premiums	(36,816		)	(58,046		)
Unearned premium	48,647			74,625
Premiums in course of collection	(26,533		)	(21,951		)
Commissions receivable	1,141			201
Deferred policy acquisition costs	(3,820		)	790
Accrued investment income	(1,360		)	(1,486		)
Reinsurance balances payable	41,935			47,537
Federal income tax	10,568			3,137
Other	11,273			1,877
Net cash provided by operating activities	141,748			110,933
Investing activities:
Fixed maturities, available-for-sale
Redemptions and maturities	118,753			5,677
Sales	225,858			191,899
Purchases	(457,892		)	(287,825		)
Equity securities, available-for-sale
Sales	3,646			1,607
Purchases	(8,916		)	(1,480		)
Change in payable for securities	(120		)	3,965
Net change in short-term investments	(15,123		)	(27,642		)
Purchase of property and equipment	(1,446		)	(1,339		)
Net cash (used in) investing activities	(135,240		)	(115,138		)
Financing activities:
Repayment of bank loan	—			(5,500		)
Proceeds from Employee Stock Purchase Plan	434			—
Proceeds from exercise of stock options	688			426
Net cash provided by (used in) financing activities	1,122			(5,074		)
Increase (decrease) in cash	7,630			(9,279		)
Cash at beginning of year	8,399			13,443
Cash at end of period	$	16,029		$	4,164
Supplemental disclosures of cash flow information:
Federal, state and local income tax paid	3,597			5,761
Interest paid	—			252
Issuance of stock to directors	60			72

See accompanying notes to interim consolidated financial statements.

9

THE NAVIGATORS GROUP, INC.  AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)

Note 1.  Accounting Policies

The interim consolidated financial statements are unaudited but reflect all adjustments which, in the opinion of management, are necessary to provide a fair statement of the results of The Navigators Group, Inc. and its subsidiaries (the “Company”) for the interim periods presented on the basis of accounting principles generally accepted in the United States of America (“GAAP”).  All such adjustments are of a normal recurring nature.  All significant intercompany transactions and balances have been eliminated.  The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods.  The results of operations for any interim period are not necessarily indicative of results for the full year.  These financial statements should be read in conjunction with the consolidated financial statements and notes contained in the Company’s 2003 Annual Report on Form 10-K.  Certain amounts for prior periods have been reclassified to conform to the current period’s presentation.

Note 2.  Reinsurance Ceded

The Company’s ceded earned premiums were $84,858,000 and $65,184,000 for the three months ended September 30, 2004 and 2003, respectively, and were $237,565,000 and $174,299,000 for the nine months ended September 30, 2004 and 2003, respectively.  The Company’s ceded incurred losses were $69,907,000 and $32,888,000 for the three months ended September 30, 2004 and 2003, respectively, and were $194,095,000 and $96,393,000 for the nine months ended September 30, 2004 and 2003, respectively.

Note 3.  Segment Information

The Company’s subsidiaries are primarily engaged in the writing and management of property and casualty insurance.  The Company’s segments include the Insurance Companies, the Lloyd’s operations and the Navigators Agencies, each of which is managed separately.  The Insurance Companies consist of Navigators Insurance Company, which includes a branch in the U.K. (the “U.K. Branch”), and NIC Insurance Company and currently are primarily engaged in underwriting marine insurance and related lines of business, contractors’ general liability insurance, and professional liability insurance.  The Lloyd’s operations underwrite marine and related lines of business at Lloyd’s of London.  The Navigators Agencies are underwriting management companies which produce, manage and underwrite insurance and reinsurance for both affiliated and unaffiliated companies.  All segments are evaluated based on their GAAP results.

The Insurance Companies and the Lloyd’s operations are measured by taking into account net premiums earned, incurred losses and loss adjustment expenses (“LAE”), commission expense and other underwriting expenses.  The Navigators Agencies’ results include commission income less other operating expenses.  Parent and other operations include inter-segment income and expense in the form of affiliated commissions, income and expense from corporate operations and consolidating adjustments.  Each segment also maintains their own investments, on which they earn income and realize capital gains or losses.

10

Financial data by segment for the three months ended September 30, 2004 and 2003 was as follows:

	Three Months Ended September 30, 2004
	Insurance Companies				Lloyd’s Operations			Navigators Agencies				Parent & Other Operations (1)				Total
	($ in thousands)
Gross written premium	$		107,318		$	45,004						$		(1,144	)	$	151,178
Net written premium	44,904				21,088											65,992
Revenues:
Net earned premium	51,541				23,596							—				75,137
Commission income	—				300			$	7,797			(6,976			)	1,121
Net investment income	6,225				649			2				5				6,881
Net realized capital gains (losses)	326				(55		)	—				—				271
Other income (expense)	(7			)	(378		)	258				—				(127			)
Total revenues	58,085				24,112			8,057				(6,971			)	83,283
Operating expenses:
Net losses and LAE	35,401				13,846			—				—				49,247
Commission expense	11,682				4,067			—				(6,976			)	8,773
Other operating expenses	1,780				3,425			9,616				1,193				16,014
Total operating expenses	48,863				21,338			9,616				(5,783			)	74,034
Income (loss) before income tax expense (benefit)	9,222				2,774			(1,559			)	(1,188			)	9,249
Income tax expense (benefit)	2,871				971			(460			)	(413			)	2,969
Net income (loss)	$		6,351		$	1,803		$	(1,099		)	$	(775		)	$		6,280
Identifiable assets (2)	$	1,247,123			$	467,998		$		15,721		$		33,039		$	1,692,503
Loss and LAE ratio	68.7			%	58.7		%									65.5			%
Commission expense ratio	22.7			%	17.2		%									21.0			%
Other operating expense ratio	3.4			%	14.5		%									6.9			%
Combined ratio	94.8			%	90.4		%									93.4			%

(1) Includes inter-segment eliminations.

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

11

	Three Months Ended September 30, 2003
	Insurance Companies			Lloyd’s Operations			Navigators Agencies			Parent & Other Operations (1)			Consolidated Total
	($ in thousands)
Gross written premium	$	100,097		$	47,005					$	(7,470	)	$	139,632
Net written premium	54,831			15,800						—			70,631
Revenues:
Net earned premium	57,529			17,008						—			74,537
Commission income	—			136			$	7,990		(8,103		)	23
Net investment income	4,207			422			(2		)	7			4,634
Net realized capital gains	217			132			—			—			349
Other income (expense)	(82		)	(98		)	443			(124		)	139
Total revenues	61,871			17,600			8,431			(8,220		)	79,682
Operating expenses:
Net losses and LAE	37,732			10,794			—			—			48,526
Commission expense	14,189			3,108			—			(8,103		)	9,194
Other operating expenses	1,461			2,049			8,610			1,419			13,539
Interest expense	—			—			—			68			68
Total operating expenses	53,382			15,951			8,610			(6,616		)	71,327
Income (loss) before income tax expense (benefit)	8,489			1,649			(179		)	(1,604		)	8,355
Income tax expense (benefit)	2,726			—			(146		)	(533		)	2,047
Net income (loss)	$	5,763		$	1,649		$	(33	)	$	(1,071	)	$	6,308
Identifiable assets (2)	$	829,161		$	348,052		$	17,266		$	25,649		$	1,153,101
Loss and LAE ratio	65.6		%	63.5		%							65.1		%
Commission expense ratio	24.7		%	18.3		%							23.2		%
Other operating expense ratio	2.5		%	12.0		%							4.6		%
Combined ratio	92.8		%	93.8		%							92.9		%

(1) Includes inter-segment eliminations.

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

12

Financial data by segment for the nine months ended September 30, 2004 and 2003 was as follows:

	Nine Months Ended September 30, 2004
	Insurance Companies			Lloyd’s Operations			Navigators Agencies			Parent & Other Operations (1)			Total
	($ in thousands)
Gross written premium	$	326,755		$	186,471					$	(4,470	)	$	508,756
Net written premium	145,614			90,002									235,616
Revenues:
Net earned premium	156,506			68,121									224,627
Commission income	—			863			$	23,884		(21,139		)	3,608
Net investment income	17,538			1,844			6			20			19,408
Net realized capital gains (losses)	707			(119		)	—			—			588
Other income (expense)	6			(368		)	629			—			267
Total revenues	174,757			70,341			24,519			(21,119		)	248,498
Operating expenses:
Net losses and LAE	100,669			37,722			—			—			138,391
Commission expense	39,069			11,910			—			(21,139		)	29,840
Other operating expenses	3,967			9,654			27,314			3,131			44,066
Total operating expenses	143,705			59,286			27,314			(18,008		)	212,297
Income (loss) before income tax expense (benefit)	31,052			11,055			(2,795		)	(3,111		)	36,201
Income tax expense (benefit)	9,892			3,869			(852		)	(938		)	11,971
Net income (loss)	$	21,160		$	7,186		$	(1,943	)	$	(2,173	)	$	24,230
Identifiable assets (2)	$	1,247,123		$	467,998		$	15,721		$	33,039		$	1,692,503
Loss and LAE ratio	64.3		%	55.4		%							61.6		%
Commission expense ratio	25.0		%	17.5		%							22.7		%
Other operating expense ratio	2.5		%	14.2		%							6.1		%
Combined ratio	91.8		%	87.1		%							90.4		%

(1) Includes inter-segment eliminations.

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

13

	Nine Months Ended September 30, 2003
	Insurance Companies			Lloyd’s Operations			Navigators Agencies		Parent & Other Operations (1)			Consolidated Total
	($ in thousands)
Gross written premium	$	311,324		$	169,480				$	(25,278	)	$	455,526
Net written premium	160,289			63,006					—			223,295
Revenues:
Net earned premium	154,537			51,578					—			206,115
Commission income	—			480			$	23,713	(21,445		)	2,748
Net investment income	12,406			1,413			20		8			13,847
Net realized capital gains	642			593			—		—			1,235
Other income (expense)	6			116			980		(374		)	728
Total revenues	167,591			54,180			24,713		(21,811		)	224,673
Operating expenses:
Net losses and LAE	102,602			33,255			—		—			135,857
Commission expense	40,931			9,212			—		(21,445		)	28,698
Other operating expenses	3,964			5,895			23,813		4,062			37,734
Interest expense	—			—			—		251			251
Total operating expenses	147,497			48,362			23,813		(17,132		)	202,540
Income (loss) before income
tax expense (benefit)	20,094			5,818			900		(4,679		)	22,133
Income tax expense (benefit)	6,361			—			207		(1,610		)	4,958
Net income (loss)	$	13,733		$	5,818		$	693	$	(3,069	)	$	17,175
Identifiable assets (2)	$	829,161		$	348,052		$	17,266	$	25,649		$	1,153,101
Loss and LAE ratio	66.4		%	64.5		%						65.9		%
Commission expense ratio	26.5		%	17.9		%						24.3		%
Other operating expense ratio	2.5		%	11.4		%						4.8		%
Combined ratio	95.4		%	93.8		%						95.0		%

(1)Includes inter-segment eliminations.

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

The Insurance Companies’ net earned premium includes $7,670,000 and $7,442,000 of net earned premium from the U.K. Branch for the three months ended September 30, 2004 and 2003, respectively, and $23,849,000 and $23,442,000 of net earned premium for the nine months ended September 30, 2004 and 2003, respectively.

14

Note 4.  Comprehensive Income

Comprehensive income encompasses net income, net unrealized capital gains and losses on available for sale securities, and foreign currency translation adjustments.  Please refer to the ‘Consolidated Statements of Stockholders’ Equity’ and the ‘Consolidated Statements of Comprehensive Income’, included herein, for the components of accumulated other comprehensive income and of comprehensive income, respectively.

Note 5.  Stock-Based Compensation

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

SFAS 123, Accounting for Stock-Based Compensation, establishes financial accounting and reporting standards for stock-based compensation plans.  In the fourth quarter of 2003, effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS 123.  Under the modified prospective method of adoption selected by the Company under the provisions of SFAS 148, compensation cost recognized in 2003 and subsequent is the same as that which would have been recognized had the recognition provisions of SFAS 123 been applied from its original effective date.  Results for 2003 have been adjusted herein.  Prior to 2003, the Company accounted for its stock compensation plans under the recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations, with certain pro forma disclosures as required by SFAS 123.  APB 25 requires compensation expense to be recognized only if the fair value of the underlying stock at the grant date exceeds the exercise price of the option.

Stock based compensation is expensed as the awards vest.  The amount charged to expense for stock grants was $275,000 and $309,000 for the three months ended September 30, 2004 and 2003, respectively and $922,000 and $795,000 for the nine months ended September 30, 2004 and 2003, respectively.  The amount charged to expense for stock options was $276,000 and $191,000 for the three months ended September 30, 2004 and 2003, respectively, and $754,000, and $592,000 for the nine months ended September 30, 2004 and 2003, respectively.  Stock appreciation rights resulted in expense of $107,000 and $545,000 for the three months ended September 30, 2004 and 2003, respectively, and income of $152,000 and expense of $1,718,000 for the nine months ended September 30, 2004 and 2003, respectively, all of which were included in other operating expenses for the periods indicated.

In addition, $30,000 and $18,000 were expensed for the three months ended September 30, 2004 and 2003, respectively, and $90,000 and $72,000 for the nine months ended September 30, 2004 and 2003, respectively, for stock issued annually to non-employee directors as part of the directors’ compensation for serving on the Company’s Board of Directors.

Note 6.  Application of New Accounting Standards

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities.  Interpretation 46 requires variable interest entities to be consolidated by their primary beneficiaries.  The adoption of this interpretation did not have any effect on the Company’s financial condition or results of operations.  In December 2003, the FASB revised Interpretation 46 primarily to clarify certain requirements, ease some implementation problems and add new scope exceptions.  The result of the revisions tend to make it more likely that potential variable interest entities will be identified and consolidated.  The adoption of the revision to Interpretation 46 did not have any effect on the Company’s financial condition or results of operations.

In September 2004, the FASB approved issuing a Staff Position to delay the requirement to record impairment losses under Emerging Issues Task Force Issue No. 03-1 (“EITF 03-1”).  The approved delay applies

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to all securities within the scope of EITF 03-1 and is expected to end when new guidance is issued and becomes effective.  The Company will review the new guidance when it becomes available.

Note 7.  Lloyd’s Syndicate

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

Lloyd’s Syndicate 1221 has stamp capacity of £150.0 million ($273.8 million) in 2004 compared to £125.0 million ($200.3 million) in 2003.  Stamp capacity is a measure of the amount of premium a Lloyd’s syndicate is authorized to write as determined by the Council of Lloyd’s.  Syndicate 1221’s capacity is expressed net of commission (as is standard at Lloyd’s) of approximately 21%.  The Syndicate 1221 premium recorded in the Company’s financial statements is gross of commission.  The Company participates for 97.4% of Syndicate 1221’s capacity for both the 2004 and 2003 underwriting years.  The Lloyd’s operations included in the consolidated financial statements represent the Company’s participation in Syndicate 1221.

The Company provides letters of credit to Lloyd’s to support its Syndicate 1221 capacity.  If the Company increases its participation or if Lloyd’s changes the capital requirements, the Company may be required to supply additional letters of credit or other collateral acceptable to Lloyd’s, or reduce the capacity of Syndicate 1221.  The letters of credit are provided through the credit facility which the Company maintains with a consortium of banks.  The credit facility agreement requires that the banks vote whether or not to renew the letter of credit portion of the facility each year.  If the banks decide not to renew the letter of credit facility, the Company will need to find other sources to provide the letters of credit or other collateral in order to continue to participate in Syndicate 1221.  The renewal amendment executed in November 2003 renewed the letter of credit facility for a two year period expiring in November 2005.  The bank facility is collateralized by all of the common stock of Navigators Insurance Company.

Note 8.  Income Tax - Valuation Allowance

The Company’s valuation allowance relating to its foreign operations decreased by $572,000 and $2,056,000 in the three and nine months ended September 30, 2003, respectively, relating to the reduction in the loss carryforward at the Company’s foreign operations resulting from income generated by these operations in 2003.  At September 30, 2003, the Company had loss carryforwards remaining at its foreign operations amounting to potential future tax benefits of $2,473,000, along with a valuation allowance equal to those benefits.  Although the foreign operations were profitable in the first nine months of 2003, the valuation allowance was released only to the extent of those profits since, in management’s judgment, future profitability at that time remained uncertain.  This process continued for the first nine months of 2003.  Due to the continued profitability and projected favorable market conditions for the foreseeable future, it was determined in the fourth quarter of 2003 to be more likely than not that the deferred tax assets resulting from the foreign net operating loss carryforwards will be realized.  Therefore, the remaining valuation allowance related to the foreign operations was released in the fourth quarter of 2003.

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The Company also had state and local operating loss carryforwards amounting to potential future tax benefits of $4,523,000 and $3,274,000 at September 30, 2004 and December 31, 2003, respectively.  A valuation allowance was established for the full amount of these potential future tax benefits due to the uncertainty associated with their realization.

Note 9.  Commitments and Contingencies

The Company is not a party to or the subject of any material pending legal proceedings which depart from the ordinary routine litigation incident to the kinds of business conducted by the Company, except for a suit concerning the draw down of letters of credit.  In 1997 and 1998, Navigators Insurance Company entered into certain reinsurance contracts with a reinsurer.  In accordance with normal business practice, Navigators Insurance Company had secured this exposure with letters of credit. In April 1999, Navigators Insurance Company drew down the letters of credit, in good faith and consistent with their terms.  The liquidator of the reinsurer had commenced suit in Australia, seeking to void the draw downs.  Navigators Insurance Company appealed those denials and continued settlement discussions.  The settlement discussions resulted in a Settlement and Commutation Agreement (the “Agreement”) between Navigators Insurance Company and the reinsurer.  As a result of the Agreement, all reinsurance treaties between the parties have been commuted and the litigation proceedings against Navigators Insurance Company have been discontinued.  Navigators Insurance Company was adequately reserved for the settlement which had no material impact on the accompanying financial statements.

Note 10.  Reinsurance Recoverables

At September 30, 2004, the Company had reinsurance recoverables of $22.2 million, consisting of reinsurance recoverables for ceded losses and loss adjustment expenses of $15.9 million and ceded unearned premium of $6.3 million, due from Converium Holding Ltd. and subsidiaries (“Converium”).  The recoverables result from several run-off and active excess and pro-rata reinsurance agreements with Converium expiring through the beginning of 2005 that cover principally marine and energy risks for Navigators Insurance Company and the Lloyd’s operations.  Recoverable amounts at September 30, 2004 recorded by Navigators Insurance Company and the Lloyd’s operations were $2 million and $20.2 million, respectively.

Converium reported that its 2004 second quarter financial results were impacted by reserve strengthening and certain intangible write-offs resulting in a net loss for the 2004 six-month period.  Converium reported that its 2004 third quarter financial results continued to reflect an operating loss.  On October 13, 2004, Converium announced that it closed its shareholder rights offering which raised approximately $420 million of capital.  Converium is rated B++ from A.M. Best and BBB+ from S&P.

The Company continues to periodically monitor the financial condition and ongoing activities of its reinsurers, including Converium, in order to assess the adequacy of its allowance for uncollectible reinsurance.

Item 2.Management’s Discussion 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-Q are ‘‘forward-looking statements’’ as defined in the Private Securities Litigation Reform Act of 1995.   Whenever used in this report, the words “estimate”, “expect”, “believe” or similar expressions are intended to identify such forward-looking statements.  Forward-looking statements are derived from information that we currently have and assumptions that we make. We cannot assure that anticipated results will be achieved, since results may differ materially because of both known and unknown risks and uncertainties which we face. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Factors that could cause actual results to differ materially from our forward-looking statements include, but are not limited to:

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

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

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

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

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

•unexpected turnover of our professional staff;

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

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

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

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

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

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

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

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes which appear elsewhere in this Form 10-Q. It contains forward-looking statements that involve risks and uncertainties. Please see ‘‘Note on Forward-Looking Statements’’ for more information. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Form 10-Q.

Overview

We are an international insurance holding company focusing on specialty products for niches within the overall property/casualty insurance market. Our largest product line and most long-standing area of specialization is ocean marine insurance. We have also developed specialty niches in professional liability insurance, and in

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specialty liability insurance primarily consisting of contractors’ liability coverages. We conduct operations through our insurance company subsidiaries, the Navigators Agencies and our Lloyd’s operations.  Our insurance company subsidiaries consist of Navigators Insurance Company, which includes a United Kingdom Branch, and NIC Insurance Company which writes excess and surplus lines.  The Navigators Agencies consist of five wholly-owned insurance underwriting agencies which produce business for our insurance subsidiaries.  Our Lloyd’s operations include Navigators Underwriting Agency Ltd. (“NUAL”), a Lloyd’s of London (“Lloyd’s”) marine underwriting agency which manages Lloyd’s Syndicate 1221.  We participate in the capacity of Syndicate 1221 through two wholly-owned Lloyd’s corporate members.

While management takes into consideration a wide range of factors in planning the Company’s business strategy and evaluating results of operations, there are certain factors that management believes are fundamental to understanding how the Company is managed.   First, underwriting profit is consistently emphasized as a primary goal, above premium growth.  Management’s assessment of our trends and potential growth in underwriting profit is the dominant factor in its decisions with respect to whether or not to expand a business line, enter into a new niche, product or territory or, conversely, to contract capacity in any business line.  In addition, management focuses on managing the costs of our operations.  Management believes that careful monitoring of the costs of existing operations and assessment of costs of potential growth opportunities are important to our profitability.  Access to capital also has a significant impact on management’s outlook for our operations.  Our insurance company subsidiaries’ operations and ability to grow their business and take advantage of market opportunities are particularly constrained by regulatory capital requirements and rating agency assessments of capital adequacy.  For example, we contributed $95.0 million of the approximately $110.8 million in net proceeds we received from the October 2003 equity offering to the statutory surplus of Navigators Insurance Company in order to position the Company to be able to capitalize on domestic and international insurance business opportunities that management believes will be profitable.

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

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

Over the past three years, we have experienced generally beneficial market changes in our lines of business. As a result of several large industry losses in the second quarter of 2001, the marine insurance market began to experience diminished capacity and rate increases, initially in the offshore energy line of business.  The marine rate increases began to level off in 2004.  Specialty liability losses have also resulted in diminished capacity in the market in which we compete, as many former competitors who lacked the expertise to selectively underwrite this business have been forced to withdraw from the market.  Rates continue to increase in our specialty liability business, albeit at a slower pace.  In the professional liability market, the enactment of the

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Sarbanes-Oxley Act of 2002, together with recent financial and accounting scandals at publicly traded corporations and increased frequency of securities-related class action litigation, has lead to an invigorated interest in professional liability insurance generally. These conditions resulted in rate increases in 2002 and 2003 as well as an overall improvement in policy terms and conditions for our professional liability line of business.  The professional liability business has experienced single digit premium rate decreases in 2004.  We believe that the professional liability market will continue to see 2004 rates decrease in certain areas, including directors and officers coverages.

Our business is cyclical and influenced by many factors.  These factors include price competition, economic conditions, interest rates, natural or man-made disasters (for example hurricanes and terrorism), state regulations, court decisions and changes in the law. Additionally, because our insurance products must be priced, and premiums charged, before costs have fully developed, our liabilities are required to be estimated and recorded in recognition of future loss and settlement obligations. Due to the inherent uncertainty in estimating these liabilities, we cannot assure you that our actual liabilities will not exceed our recorded amounts.

Industry Investigations

The insurance industry recently has become the subject of increasing scrutiny with respect to insurance broker and agent compensation arrangements and sales practices.  The New York State Attorney General has filed a civil complaint against a large insurance broker alleging, among other things, that so-called contingent commission arrangements conflict with the broker’s duties to its customers and that the broker and several insurers for whom it produced business engaged in anti-competitive practices in connection with insurance premium quotes for commercial property and casualty insurance.  The New York State Attorney General’s ongoing industry-wide investigation may expand to include additional companies in both the property and casualty and life and health insurance businesses as well as other sales practices.    Similar legal and regulatory proceedings and investigations have been commenced by other regulatory bodies in other states and additional regulatory bodies may commence actions in the future.  These investigations and proceedings could result in legal precedents and new industry-wide legislation, rules or regulations that could significantly affect our industry and may also continue to cause stock price volatility for companies in the insurance industry.

Critical Accounting Policies

It is important to understand our accounting policies in order to understand our financial statements. Management considers certain of these policies to be critical to the presentation of the financial results, since they require management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the financial reporting date and throughout the reporting period. Certain of the estimates result from judgments that can be subjective and complex, and consequently actual results may differ from these estimates, which would be reflected in future periods.

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

Reserves for Losses and LAE.  Reserves for losses and LAE represent an estimate of the expected cost of the ultimate settlement and administration of losses, based on facts and circumstances then known. Actuarial methodologies are employed to assist in establishing such estimates and include judgments relative to estimates of future claims severity and frequency, length of time to develop to ultimate, judicial theories of liability and other third party factors which are often beyond our control. Due to the inherent uncertainty associated with the reserving process, the ultimate liability may be different from the original estimate. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year’s results.

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Reinsurance Recoverables. Reinsurance recoverables are established for the portion of the loss reserves that are ceded to reinsurers. Reinsurance recoverables are determined based upon the terms and conditions of reinsurance contracts which could be subject to interpretations that differ from our own based on judicial theories of liability. In addition, we bear credit risk with respect to our reinsurers which can be significant considering that certain of the reserves remain outstanding for an extended period of time. We are required to pay losses even if a reinsurer fails to meet its obligations under the applicable reinsurance agreement.

Written and Unearned Premium. Written premium is recorded based on the insurance policies that have been reported to us and the policies that have been written by agents but not yet reported to us. We must estimate the amount of written premium not yet reported based on judgments relative to current and historical trends of the business being written. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year’s results. An unearned premium reserve is established to reflect the unexpired portion of each policy at the financial reporting date.

Deferred Tax Assets. We have recorded valuation allowances related to deferred tax assets resulting from certain net operating loss carryforwards due to the uncertainty associated with the realization of the deferred tax asset related to certain of our foreign, state and local operations. Our foreign operations were profitable in 2003 resulting in a portion of the valuation allowance being simultaneously released to the extent of the first nine months of 2003 profits.  Due to the continued profitability and projected favorable market conditions for the foreseeable future, it was determined to be more likely than not that the deferred tax assets resulting from those net operating loss carryforwards will be realized, therefore the remaining valuation allowance related to the foreign operations was released in the fourth quarter of 2003.

Impairment of Investment Securities. Impairment of investment securities results in a charge to operations when a market decline below cost is other-than-temporary. Management regularly reviews our fixed maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. A number of criteria are considered during this process including, but not limited to: the current fair value as compared to cost or amortized cost, as appropriate, of the security; the length of time the security’s fair value has been below cost or amortized cost, and by how much; and specific credit issues related to the issuer and current economic conditions. 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 consecutive months. Other factors considered in evaluating potential impairment include the current fair value as compared to cost or amortized cost, as appropriate, our intent and ability to retain the investment for a period of time sufficient to allow for an anticipated recovery in value, specific credit issues related to the issuer and current economic conditions. Other-than-temporary impairment losses result in a permanent reduction of the cost basis of the underlying investment. Significant changes in the factors we consider when evaluating investments for impairment losses could result in a significant change in impairment losses reported in the consolidated financial statements.

Accounting for Lloyd’s Results. We record our pro rata share of Lloyd’s syndicate assets, liabilities, revenues and expenses, after making adjustments to convert Lloyd’s accounting to U.S. GAAP. The most significant GAAP adjustments relate to income recognition. Lloyd’s syndicates determine underwriting results by year of account at the end of three years. We record adjustments to recognize underwriting results as incurred, including the expected ultimate cost of losses incurred. These adjustments to losses are based on actuarial analysis of syndicate accounts, including forecasts of expected ultimate losses provided by the syndicate. At the end of the Lloyd’s three-year period for determining underwriting results for an account year, the syndicate will close the account year by reinsuring outstanding claims on that account year with the participants for the account’s next underwriting year. The amount to close an underwriting year into the next year is referred to as the ‘‘reinsurance to close.’’ The reinsurance to close transactions are recorded in the fourth quarter as additional written and earned premium, losses incurred, loss reserves and receivables, all in the same amount. There are no gains or losses recorded on the reinsurance to close transactions.

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Translation of Foreign Currencies. Financial statements of subsidiaries expressed in foreign currencies are translated into U.S. dollars in accordance with SFAS No. 52 Foreign Currency Translation issued by the FASB.  Under SFAS 52, functional currency assets and liabilities are translated into U.S. dollars using period end rates of exchange and the related translation adjustments are recorded as a separate component of accumulated other comprehensive income.  Functional currencies are generally the currencies of the local operating environment.  Statement of income amounts expressed in functional currencies are translated using average exchange rates.  Gains and losses resulting from foreign currency transactions are recorded in “other income (expense)” in the Company’s Consolidated Statements of Income.

Results of Operations and Overview

The following is a discussion and analysis of our consolidated and segment results of operations for the three and nine months ended September 30, 2004 and 2003.  All per share figures contained in this section are calculated based upon the diluted number of shares.

Our 2004 and 2003 third quarter and nine month overall results of operations reflect increasing premium rates as a result of improved market conditions beginning in late 2000 that continued through 2003 and at a reduced rate through the third quarter of 2004.  Net income for the three months ended September 30, 2004 and 2003 was $6.3 million or $0.50 per share and $6.3 million or $0.73 per share, respectively.  Net income for the first nine months of 2004 and 2003 was $24.2 million or $1.91 per share and $17.2 million or $1.99 per share, respectively.  The net loss from Hurricane Ivan, which occurred in September 2004, reduced net income by approximately $3.3 million or $0.26 per share in the 2004 third quarter.  The Hurricane Ivan net loss amount is inclusive of expected reinsurance recoveries and related cost for reinsurance reinstatement premiums.

We experienced premium growth as measured by net earned premium in the third quarter of 2004 of $75.1 million compared to $74.5 million in the third quarter of 2003, a 0.8% increase.  The 2003 third quarter and nine month period included approximately $8.6 million of earned premium as a result of a commutation agreement with a former member of the marine pool whereby Navigators Insurance Company, retroactively to January 1, 2003, increased its participation in the marine pool from 70% to 80% for the 2003 underwriting year.  Excluding this commutation, net earned premium increased 13.9% primarily due to business expansion and, to a lesser extent, increased premium rates.  The 9.0% increase (13.7% excluding the commutation) in net earned premium for the first nine months of 2004 compared to the same period in 2003 was also due to business expansion and premium rate increases.  The Company’s combined ratios, which is a measure of underwriting profitability, for the third quarter and first nine months of 2004 were 93.4% and 90.4%, respectively, compared to 92.9% and 95.0% for the third quarter and first nine months of 2003, respectively.  The combined loss and expense ratios for the 2004 third quarter and nine month period were increased by an aggregate 6.5 and 2.2 combined ratio points, respectively, for the net loss from Hurricane Ivan.

Cash flow from operations increased in the first nine months of 2004 to $141.7 million from $110.9 million in the first nine months of 2003, a 27.8% increase, contributing to the growth in invested assets and net investment income.  Cash flow from operations in the third quarter of 2004 increased to $48.5 million, a 7.1% increase over the 2003 third quarter.

Consolidated stockholders’ equity increased 9.2% to $316.6 million or $25.08 per share at September 30, 2004 compared to $290.0 million or $23.14 per share at December 31, 2003.  The increase was primarily due to net income of $24.2 million for the first nine months of 2004.  Net income was $6.3 million and other comprehensive income was $7.4 million for the third quarter of 2004.  Other comprehensive income (loss) consists of the change in both after-tax unrealized gains and losses on investments and after-tax currency translation gains on the Company’s foreign operations.

Revenues.  Gross written premium increased to $151.2 million and $508.8 million in the third quarter and first nine months of 2004, respectively, from $139.6 million and $455.5 million in the third quarter and first nine months of 2003, respectively, an 8.3% increase for the three months and an 11.7% increase for the nine months.  The following table sets forth our gross and net written premium and net earned premium by segment and line of business for the periods indicated:

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	Three Months Ended September 30,
	2004									2003
	Gross Written Premium			%		Net Written Premium		Net Earned Premium		Gross Written Premium			%		Net Written Premium		Net Earned Premium
	($ in thousands)
Insurance Companies:
Marine	$	48,413		32.0	%	$	15,576	$	17,862	$	45,716		32.7	%	$	28,691	$	27,322
Specialty	39,025			25.8	%	20,677		22,824		33,861			24.3	%	14,933		19,900
Professional Liability	18,723			12.4	%	6,703		5,692		12,428			8.9	%	3,182		2,680
Assumed from Lloyd’s	1,056			0.7	%	1,056		4,271		7,746			5.5	%	7,733		7,320
Other (includes run-off)	101			0.1	%	892		892		346			0.2	%	292		307
Insurance Companies Total	107,318			71.0	%	44,904		51,541		100,097			71.6	%	54,831		57,529
Lloyd’s Operations:
Marine	39,807			26.4	%	18,941		22,075		39,243			28.1	%	12,945		14,806
Other	5,197			3.4	%	2,147		1,521		7,762			5.6	%	2,855		2,202
Lloyd’s Operations Total	45,004			29.8	%	21,088		23,596		47,005			33.7	%	15,800		17,008
Intercompany elimination	(1,144		)	-0.8	%	—		—		(7,470		)	-5.3	%	—		—
Total	$	151,178		100.0	%	$	65,992	$	75,137	$	139,632		100.0	%	$	70,631	$	74,537

Note:  Certain amounts for the prior period have been reclassified to conform to the current period’s presentation.

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	Nine Months Ended September 30,
	2004									2003
	Gross Written Premium			%		Net Written Premium		Net Earned Premium		Gross Written Premium			%		Net Written Premium			Net Earned Premium
	($ in thousands)
Insurance Companies:
Marine	$	159,412		31.3	%	$	61,219	$	59,124	$	149,080		32.7	%	$	73,227		$	70,572
Specialty	110,739			21.8	%	60,229		65,728		97,475			21.4	%	51,558			62,311
Professional Liability	51,982			10.2	%	19,080		14,199		37,987			8.3	%	9,454			6,186
Assumed from Lloyd’s	4,398			0.9	%	4,191		16,554		26,164			5.8	%	26,151			15,500
Other (includes run-off)	224			0.0	%	895		901		618			0.1	%	(101		)	(32		)
Insurance Companies Total	326,755			64.2	%	145,614		156,506		311,324			68.3	%	160,289			154,537
Lloyd’s Operations:
Marine	168,564			33.2	%	81,979		64,918		145,708			32.0	%	54,260			47,912
Other	17,907			3.5	%	8,023		3,203		23,772			5.2	%	8,746			3,666
Lloyd’s Operations Total	186,471			36.7	%	90,002		68,121		169,480			37.2	%	63,006			51,578
Intercompany elimination	(4,470		)	-0.9	%	—		—		(25,278		)	-5.5	%	—			—
Total	$	508,756		100.0	%	$	235,616	$	224,627	$	455,526		100.0	%	$	223,295		$	206,115

Note:  Certain amounts for the prior period have been reclassified to conform to the current period’s presentation.

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Gross Written Premium

Insurance Companies’ Gross Written Premium

Marine. The marine gross written premium for the third quarter of 2004 increased 5.9% compared to the third quarter of 2003 partially due to the approximate 3.0% increase in premium rates resulting in higher premiums on new and renewal business. The generally improved pricing environment resulted in Navigators Insurance Company increasing its writing of new business.  Navigators Insurance Company obtains its marine business through participation in the marine pool managed by the Navigators Agencies. Its participation in the marine pool was 80% in the first nine months of 2004.  Navigators Insurance Company’s participation in the insurance pool was retroactively increased from 70% to 80% effective January 1, 2003 in the 2003 third quarter when it entered into a commutation agreement with a former pool member.  The marine gross written premium for the first nine months of 2004 increased 6.9% compared to the first nine months of 2003 partially due to the approximate 3.7% increase in premium rates resulting in higher premiums on new and renewal business.

Specialty. This business consists primarily of general liability business for small general and artisan contractors as well as other targeted commercial risks.  The specialty gross written premium for the third quarter of 2004 increased 15.3% compared to the third quarter of 2003 primarily due to the approximate 6.9% increase in the construction liability premium rates resulting in higher premiums on new and renewal business. The increase in the specialty gross written premium for the first nine months of 2004 of 13.6% compared to the first nine months of 2003 was primarily due to the approximate 18.5% increase in the California construction liability premium rates resulting in higher premiums on new and renewal business.  The number of California construction liability in-force policies decreased significantly over the last year as a result of our efforts to scale back the number of small artisan policies we write.  The new business and the rate increases resulted from a tightening market for California contractors’ liability insurance.

Professional Liability. Our insurance company subsidiaries write professional liability insurance, primarily consisting of directors and officers liability insurance for privately held and publicly traded corporations. In 2002, the professional liability business was expanded to include errors and omissions insurance and employment practices liability coverages.  The professional liability gross written premium for the third quarter and first nine months of 2004 increased 50.7% and 36.8%, respectively, compared to the third quarter and first nine months of 2003, reflecting the expansion of this business.  Premium rates for this business decreased approximately 10.4% and 5.5% in the third quarter and first nine months of 2004 compared to the third quarter and first nine months of 2003, respectively, following an approximate 28.0% increase for the twelve months ended December 31, 2003.  The 2004 premium rate decreases are reflective of softening market conditions.

Assumed from Lloyd’s Operations.  During 2002 and 2003, the Insurance Companies participated in quota share treaties written by the Company’s Lloyd’s operations.  The participations included marine and energy business.

Lloyd’s Operations’ Gross Written Premium

Marine. Themarine gross written premium for the third quarter and nine month period of 2004 increased 1.4% and 15.7%, respectively, compared to the same periods in 2003.  The increases were due to expansion of the business.  The premium rates for the three months and nine months ended September 30, 2004 were down approximately 2.0% and up 1.1%, respectively, compared to the same periods in 2003.

Other.  Other consists of engineering and construction gross written premium which provides coverage for construction projects including machinery, equipment and loss of use due to delays and of onshore energy

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premium which principally focuses on the oil and gas, chemical and petrochemical industries with coverages primarily for property damage and business interruption.

Ceded Written Premium.  In the ordinary course of business, we reinsure certain insurance risks with unaffiliated insurance companies for the purpose of limiting our maximum loss exposure, protecting against catastrophic losses, and maintaining desired ratios of net premiums written to statutory surplus. The relationship of ceded to written premium varies based upon the types of business written and whether the business is written by our insurance company subsidiaries or the Lloyd’s operations.

Ceded written premium for the 2004 and 2003 third quarters was $85.2 million and $69.0 million, respectively, or 56.3% and 49.4% of the gross written premium, respectively.  The 2004 third quarter’s ceded premium includes $2.2 million of reinstatement premium on reinsurance treaties from ceded losses resulting from Hurricane Ivan.  The 2003 ceded written premium reflects an increase in the premium ceded under the specialty business reinsurance treaty for the period from April 1, 2003 to September 30, 2003 which provided a statutory capital benefit.  The reinsurance treaty change had no impact on net income or stockholders’ equity.  The ceded premium for 2003 also reflects a decrease in ceded premium resulting from a commutation agreement with a former member of the marine pool.

The ceded written premium for the first nine months of 2004 and 2003 was $273.1 million and $232.2 million, respectively, or 53.7% and 51.0% of gross written premium, respectively.

Net Written Premium.Net written premium decreased 6.6% in the third quarter of 2004 and increased 5.5% in the first nine months of 2004 compared to the third quarter and first nine months of 2003.  The 2003 third quarter includes net written premium of $11.8 million recorded by the Company as a result of a commutation agreement with a former member of the marine pool whereby the Company, in the third quarter of 2003, retroactively increased its participation in the marine pool from 70% to 80% for the 2003 underwriting year.  Exclusive of such commutation, the 2004 third quarter and nine month period net written premium increased 12.1% and 11.4%, respectively, compared to the same periods in 2003.  The increase to the net written premium resulted from expansion of the business and rate increases on new and renewal business.

Net Earned Premium.  Net earned premium increased 0.8% in the third quarter of 2004 and 9.0% in the first nine months of 2004 compared to the third quarter and first nine months of 2003.  Without the affect of the commutation with the former pool member, the net earned premium for the 2004 third quarter and nine month period increased 13.9% and 13.7%, respectively, compared to the same periods in 2003.�� The increases resulted from the increased net written premium.

Commission Income.  Commission income from unaffiliated business increased to $1.1 million in the third quarter of 2004 from $23,000 in the third quarter of 2003 and to $3.6 million in the first nine months of 2004 from $2.7 million in the first nine months of 2003.  The increases resulted from the increased profit commissions on the Lloyd’s operations and from the decrease in the 2003 third quarter’s commission as the result of a commutation with a former marine pool member.

Net Investment Income.Net investment income increased 48.5% in the 2004 third quarter and 40.2% in the first nine months of 2004 compared to the same periods in 2003 due to the increase in invested assets resulting from positive cash flow stemming from the increased premium volume and the proceeds from our October 2003 common stock offering.  Our net proceeds from the offering amounted to $110.8 million.

Net Realized Capital Gains (Losses).  Pre-tax net income included a $271,000 net realized capital gain for the three months ended September 30, 2004 compared to a capital gain of $349,000 for the 2003 third quarter.  On an after-tax basis, the net realized capital gain was $177,000 or $0.01 per share and $272,000 or $0.03 per share for the 2004 and 2003 third quarters, respectively.  Pre-tax net income included $588,000 of net realized capital gains for the nine months ended September 30, 2004 compared to $1,235,000 for the first nine months of

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2003.  On an after-tax basis, the net realized capital gains were $382,000 or $0.03 per share and $1,010,000 or $0.12 per share for the first nine months of 2004 and 2003, respectively.

Other Income/(Expense). Other income/(expense) for the third quarter and first nine months of 2004 and 2003 consisted primarily of foreign exchange gains and losses, and inspection fees related to the specialty insurance business.

Operating Expenses

Net Losses and Loss Adjustment Expenses Incurred.  The ratios of net losses and loss adjustment expenses incurred to net earned premium (loss ratios) for the 2004 third quarter and nine month period were 65.5% and 61.6%, respectively, compared to 65.1% and 65.9% for the comparable periods in 2003.  The 2004 third quarter was adversely impacted by $2.9 million of net losses from Hurricane Ivan which, along with the affect of the $2.2 million of reinstatement premium caused by the ceded Hurricane Ivan losses, increased the loss ratio for the third quarter and first nine months of 2004 by 5.6 and 1.9 loss ratio points, respectively.  The loss ratios for the third quarter and first nine months of 2004 were favorably impacted by 1.6 and 2.3 loss ratio points, respectively, for a redundancy of prior year loss reserves in our Lloyd’s operations.  The first nine months of 2003 was negatively impacted by 1.4 loss ratio points for loss activity related to run-off lines of business, all of which occurred in the first six months of 2003.

The following tables set forth our net loss reserves by segment and line of insurance business and the total case reserves and incurred but not reported (“IBNR”) reserves as of September 30, 2004 and December 31, 2003:

	September 30, 2004		December 31, 2003
	($ in thousands)
Insurance Companies:
Marine	$	126,872	$	110,698
Specialty	143,762		114,167
Professional Liability	15,369		7,059
Assumed from Lloyd’s Operations	17,733		14,323
Other (primarily run-off business)	23,546		24,390
Total Insurance Companies	327,282		270,637
Lloyd’s Operations:
Marine	107,753		100,936
Other	5,044		2,598
Total Lloyd’s Operations	112,797		103,534
Total net loss reserves	$	440,079	$	374,171
Total net case loss reserves	$	177,384	$	154,531
Total net IBNR loss reserves	262,695		219,640
Total net loss reserves	$	440,079	$	374,171

At September 30, 2004, the IBNR portion of the net loss reserves was 59.7% of our total loss reserves compared to 58.7% at December 31, 2003.

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At September 30, 2004, a 10% change in the net loss reserves would equate to $44.1million which would represent an after-tax charge to net income of $28.7 million or 9.1% of stockholders’ equity.  Loss reserve estimates are reviewed each quarter to evaluate whether the assumptions made continue to be appropriate.  Any adjustments that result from this review are recorded in the quarter in which they are identified.

 Our reserving practices and the establishment of any particular reserve reflect management’s judgment concerning sound financial practice and do not represent any admission of liability with respect to any claims made against us.  No assurance can be given that actual claims made and related payments will not be in excess of the amounts reserved.  During the loss settlement period, it often becomes necessary to refine and adjust the estimates of liability on a claim either upward or downward.  Even after such adjustments, ultimate liability may exceed or be less than the revised estimates.  The increase in net loss reserves is also a function of the growth in premium volume over the past two years.

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

Specialty Liability and Professional Liability. Substantially all of our specialty liability business involves general liability policies which generate third party liability claims that are long tail in nature. A significant portion of our general liability reserves relate to California construction liability claims. Reserves and claim frequency on this business may be impacted by legislation implemented in California, which generally provides consumers who experience construction defects a method other than litigation to obtain construction defect repairs. The law became effective July 1, 2002 with a sunset provision effective January 1, 2011 and provides for an alternate dispute resolution system that attempts to involve all parties to the claim at an early stage. This legislation may impact claim severity, frequency and length to settlement assumptions underlying our reserves. Accordingly, our ultimate liability may exceed or be less than current estimates due to this variable, among others.  There were 1,007 specialty liability claims open at September 30, 2004.

The professional liability class generates third party claims, which also are longer tail in nature. The professional liability policies provide coverage on a claims-made basis, whereby coverage is generally provided only for those claims that are made during the policy period. Our professional liability business is relatively immature, with our first writing of the business in late 2001. Accordingly, it will take some time to better understand the reserve trends on this business.  Our professional liability loss estimates are based on expected losses, actual reported losses, evaluation of loss trends, industry data, and the legal, regulatory and current risk environment because anticipated loss experience in this area is less predictable due to the small number of claims and/or erratic claim severity patterns. We believe that we have made a reasonable estimate of the required loss reserves for professional liability. The expected ultimate losses may be adjusted up or down as the accident years mature.  There were 279 professional liability claims open at September 30, 2004.

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The following tables set forth our net loss and LAE loss reserves for our specialty construction liability and professional liability businesses for the periods indicated:

	September 30, 2004
Type of Business	Net Reported Reserves		Net IBNR		Total Net Loss Reserves		% of IBNR to Total Net Loss Reserves
Specialty construction liability	$	23,149	$	105,271	$	128,420	82.0	%
Professional liability	442		14,927		15,369		97.1	%
Total	$	23,591	$	120,198	$	143,789	83.6	%

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

Asbestos and Environmental Liability. Our exposure to asbestos and environmental liability principally stems from marine liability insurance written on an occurrence basis during the mid-1980s. In general, our participation on such risks is in the excess layers, which requires the underlying coverage to be exhausted prior to coverage being triggered in our layer. In many instances we are one of many insurers who participate in the defense and ultimate settlement of these claims, and we are generally a minor participant in the overall insurance coverage and settlement. Further, since most of our policies were issued after the industry was apprised of asbestos exposures, many of the policies on which we participate have exclusions that may preclude coverage. In addition, many of our asbestos and environmental claims have been inactive for several years.

In the fourth quarter of 2003, Navigators Insurance Company increased its gross and net asbestos reserves for losses by $77.6 million and $31.6 million, respectively.  As a result, gross and net incurred losses increased by the amount of the respective reserve increase.  The $31.6 million of net asbestos losses included $25.7 million of uncollectible reinsurance.

The reserve action was the result of a review of asbestos-related exposures conducted by the Company.  The Company’s management was notified in late January 2004 that an asbestos claim would likely have to be settled for a significantly greater amount than previously anticipated.  As a result of the unexpected adverse development on this individual claim, the Company retained a leading independent consulting firm in this area to assist in the identification of its potential exposure to asbestos claims from policies written directly as well as those reinsured to Navigators Insurance Company from prior members of the Company’s insurance pools. The Company’s increased reserves relate primarily to policies underwritten by the Navigators Agencies in the late 1970s and first half of the 1980s on behalf of members of the pool, consisting of excess liability on marine related business and aviation products liability, including policies subsequently assumed by Navigators Insurance Company pursuant to reinsurance arrangements with pool members who exited the pool.  Following the

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Company’s and the independent consulting firm’s recent review, the Company increased its gross and net loss reserves for asbestos exposure to $78.5 million and $32.1 million, respectively, at December 31, 2003.

Loss development activity for asbestos related exposures in the third quarter and first nine months of 2004 has not been significant.

Loss development activity for environmental losses in the third quarter and first nine months of 2004 has generally consisted of oil spill claims on marine liability policies written in the ordinary course of business by the Insurance Companies.

The following tables set forth our gross and net loss and LAE reserves, and claim counts for our asbestos and environmental exposures, which we believe is subject to uncertainties greater than those presented by other types of claims:

	Three Months Ended September 30, 2004
	Asbestos				Environmental			Total
	($ in thousands)
Gross of Reinsurance
Beginning Reserve	$		78,497		$	8,680		$	87,177
Incurred Losses & LAE	(85			)	(1,052		)	(1,137		)
Calendar Year Payments	83				(347		)	(264		)
Ending Reserves	$	78,329			$	7,975		$	86,304
Net of Reinsurance
Beginning Reserve	$	32,092			$	2,232		$	34,324
Incurred Losses & LAE	(35			)	(489		)	(524		)
Calendar Year Payments	65				(154		)	(89		)
Ending Reserves	$	31,992			$	1,897		$	33,889

	Nine Months Ended September 30, 2004
	Asbestos				Environmental			Total
	($ in thousands)
Gross of Reinsurance
Beginning Reserve	$		78,472		$	6,800		$	85,272
Incurred Losses & LAE	(18			)	1,192			1,174
Calendar Year Payments	125				17			142
Ending Reserves	$	78,329			$	7,975		$	86,304
Net of Reinsurance
Beginning Reserve	$	32,083			$	1,153		$	33,236
Incurred Losses & LAE	(10			)	734			724
Calendar Year Payments	81				(10		)	71
Ending Reserves	$	31,992			$	1,897		$	33,889

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Type of Business	Claim Count January 1, 2004	New Claims During Period	Claims Settled or Resolved During Period	Claim Count September 30, 2004
Environmental	86	30	18	98
Asbestos	108	33	20	121
Total	194	63	38	219

Our management believes that the reserves for losses and loss adjustment expenses are adequate to cover the ultimate cost of losses and loss adjustment expenses on reported and unreported claims.

Commission Expense. Commission expense paid to brokers and agents is generally on a percentage of the gross written premium and is reduced by ceding commissions the Company may receive on the ceded written premium.  Commissions are generally deferred and recorded to deferred policy acquisition costs to the extent that they relate to unearned premium.  Commission expense declinedas a percentage of earned premium in the third quarter and first nine months of 2004 compared to the 2003 third quarter and first nine months generally as the result of a decline in commissions paid to brokers and agents coupled with the receipt of ceding commissions from reinsurers.  The decrease in the commission percentage reflects lower commission rates and a trend among the major brokers to charge a flat fee to some of their major clients as opposed to a percentage of the premium.  Under flat fee arrangements, the amount of premium normally is correspondingly reduced since no commission is being paid to the broker by the Company.

Other Operating Expenses. The 18.3% and 16.8% increase in other operating expenses in the third quarter and first nine months of 2004, respectively, compared to the same periods in 2003 is attributable primarily to employee related expenses resulting from expansion of the business coupled with the increased costs incurred to comply with Section 404 of the Sarbanes-Oxley Act of 2002.

Interest Expense.  The outstanding loan balance was paid in October 2003 from a portion of the proceeds from the Company’s common stock offering and no additional borrowings have been made subsequently, therefore no interest expense was recorded in the third quarter and first nine months of 2004.

Income Taxes. The income tax expense was $3.0 million and $2.0 million for the third quarter of 2004 and 2003, respectively.  The effective tax rates for the 2004 and 2003 third quarters were 32.1% and 24.5%, respectively.  The first nine months of 2004 and 2003 had income tax expense of $12.0 million and $5.0 million, respectively, resulting in an effective tax rate of 33.1% and 22.4%, respectively.  As of September 30, 2004 and 2003, the net deferred Federal, foreign, state and local tax assets were $17.3 million and $15.2 million, respectively.

The Company’s valuation allowance relating to its foreign operations decreased by $572,000 and $2,056,000 in the three and nine months ended September 30, 2003, respectively, relating to the reduction in the loss carryforward at the Company’s foreign operations resulting from income generated by these operations in 2003.  At September 30, 2003, the Company had loss carryforwards remaining at its foreign operations amounting to potential future tax benefits of $2,473,000, along with a valuation allowance equal to those benefits.  Although the foreign operations were profitable in the first nine months of 2003, the valuation allowance was released only to the extent of those profits since future profitability remained uncertain.  This process continued for the first nine months of 2003.  Due to the continued profitability and projected favorable market conditions for the foreseeable future, it was determined in the fourth quarter of 2003 to be more likely than not that the deferred tax assets resulting from the foreign net operating loss carryforwards will be realized, therefore the remaining valuation allowance related to the foreign operations was released in the fourth quarter of 2003.

The Company also had state and local operating loss carryforwards amounting to potential future tax benefits of $4,523,000 and $3,274,000 at September 30, 2004 and December 31, 2003, respectively.  A valuation

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allowance was established for the full amount of these potential future tax benefits due to the uncertainty associated with their realization.

Segment Information

Following are the financial results of the Company’s three segments:  Insurance Companies, Lloyd’s Operations and Navigators Agencies. We evaluate the performance of each segment including Navigators Agencies, primarily based on underwriting results.  Other items of revenue and expenditure, including net investment income and realized capital gains and losses, are included herein based on the legal entity where they are recorded.  Our underwriting performance is evaluated separately from the performance of our investment portfolios.  Certain amounts for the prior period have been reclassified to conform to the current period’s presentation.

Insurance Companies

Our two insurance company subsidiaries are Navigators Insurance Company, which includes a United Kingdom Branch, and NIC Insurance Company, collectively referred to as the Insurance Companies. Navigators Insurance Company is our largest insurance subsidiary and has been active since 1983. It specializes principally in underwriting marine insurance and related lines of business, specialty liability insurance and professional liability insurance. NIC Insurance Company, a wholly owned subsidiary of Navigators Insurance Company, began operations in 1990. It underwrites similar types of business but on a non-admitted or surplus lines basis and is fully reinsured by Navigators Insurance Company.  The Navigators Agencies produce business for our insurance company subsidiaries.

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Following are the results of operations for the Insurance Companies for the three months and nine months ended September 30, 2004 and 2003:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
	($ in thousands)
Revenues:
Net earned premium	$	51,541		$	57,529		$	156,506		$	154,537
Net investment income	6,225			4,207			17,538			12,406
Net realized capital gains	326			217			707			642
Other income	(7		)	(82		)	6			6
Total revenues	58,085			61,871			174,757			167,591
Operating expenses:
Net losses and LAE	35,401			37,732			100,669			102,602
Commission expense	11,682			14,189			39,069			40,931
Other operating expenses	1,780			1,461			3,967			3,964
Total operating expenses	48,863			53,382			143,705			147,497
Income before income tax expense	9,222			8,489			31,052			20,094
Income tax expense	2,871			2,726			9,892			6,361
Net income	$	6,351		$	5,763		$	21,160		$	13,733
Loss and LAE ratio	68.7		%	65.6		%	64.3		%	66.4		%
Commission expense ratio	22.7		%	24.7		%	25.0		%	26.5		%
Other operating expense ratio	3.4		%	2.5		%	2.5		%	2.5		%
Combined ratio	94.8		%	92.8		%	91.8		%	95.4		%

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Following are the underwriting results of the Insurance Companies for the three months ended September 30, 2004 and 2003:

	Three Months Ended September 30, 2004
	Net Earned Premium		Losses and LAE Incurred		Underwriting Expenses		Underwriting Gain(Loss)			Loss Ratio		Expense Ratio		Combined Ratio
	($ in thousands)
Marine	$	17,862	$	13,222	$	4,785	$	(145	)	74.0	%	26.8	%	100.8	%
Specialty	22,824		15,749		6,516		559			69.0	%	28.5	%	97.5	%
Professional Liability	5,692		3,450		915		1,327			60.6	%	16.1	%	76.7	%
Assumed from Lloyd’s Operations	4,271		1,997		1,241		1,033			46.7	%	29.1	%	75.8	%
Other (includes run-off) business	892		983		5		(96		)	110.2	%	0.6	%	110.8	%
Total	$	51,541	$	35,401	$	13,462	$	2,678		68.7	%	26.1	%	94.8	%

	Three Months Ended September 30, 2003
	Net Earned Premium		Losses and LAE Incurred			Underwriting Expenses		Underwriting Gain(Loss)		Loss Ratio		Expense Ratio		Combined Ratio
	($ in thousands)
Marine	$	27,322	$	17,251		$	8,230	$	1,841	63.1	%	30.1	%	93.2	%
Specialty	19,900		14,486			5,053		361		72.8	%	25.4	%	98.2	%
Professional Liability	2,680		1,608			330		742		60.0	%	12.3	%	72.3	%
Assumed from Lloyd’s Operations	7,320		4,773			2,026		521		65.2	%	27.7	%	92.9	%
Other (includes run-off) business	307		(386		)	11		682		NM		NM		NM
Total	$	57,529	$	37,732		$	15,650	$	4,147	65.6	%	27.2	%	92.8	%

NM = Not meaningful

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Following are the underwriting results of the Insurance Companies for the nine months ended September 30, 2004 and 2003:

	Nine Months Ended September 30, 2004
	Net Earned Premium		Losses and LAE Incurred		Underwriting Expenses		Underwriting Gain(Loss)			Loss Ratio		Expense Ratio		Combined Ratio
	($ in thousands)
Marine	$	59,124	$	37,691	$	16,044	$	5,389		63.7	%	27.2	%	90.9	%
Specialty	65,728		44,551		19,361		1,816			67.8	%	29.5	%	97.3	%
Professional Liability	14,199		8,581		2,661		2,957			60.4	%	18.7	%	79.1	%
Assumed from Lloyd’s Operations	16,554		8,942		4,963		2,649			54.0	%	30.0	%	84.0	%
Other (includes run-off) business	901		904		7		(10		)	100.3	%	0.8	%	101.1	%
Total	$	156,506	$	100,669	$	43,036	$	12,801		64.3	%	27.5	%	91.8	%

	Nine Months Ended September 30, 2003
	Net Earned Premium			Losses and LAE Incurred		Underwriting Expenses		Underwriting Gain(Loss)			Loss Ratio		Expense Ratio		Combined Ratio
	($ in thousands)
Marine	$	70,572		$	42,503	$	21,011	$	7,058		60.2	%	29.8	%	90.0	%
Specialty	62,311			43,791		17,980		540			70.3	%	28.9	%	99.2	%
Professional Liability	6,186			3,887		1,404		895			62.8	%	22.7	%	85.5	%
Assumed from Lloyd’s Operations	15,500			9,633		4,474		1,393			62.1	%	28.9	%	91.0	%
Other (includes run-off) business	(32		)	2,788		26		(2,846		)	NM		NM		NM
Total	$	154,537		$	102,602	$	44,895	$	7,040		66.4	%	29.0	%	95.4	%

The Insurance Companies experienced a decrease in net earned premium of 10.4% and an increase in net earned premium of 1.3% when comparing the third quarter and first nine months of 2004 to the third quarter and first nine months of 2003, respectively.  Excluding the affect of the commutation agreement with a former pool member described above under the caption “Insurance Companies Gross Written Premium –Marine”, the net earned premium increased 5.3% and 7.2%, respectively, when comparing the third quarter and first nine months of 2004 to the same periods in 2003.  Approximately 8.3% and 12.7% of the net earned premium recorded in the third quarters of 2004 and 2003, respectively, and approximately 10.6% and 10.0% of the net earned premium recorded in the first nine months of 2004 and 2003, respectively, is a result of the Insurance Companies participating on reinsurance treaties supporting the Lloyd’s operations’ marine and energy business.

The 2004 and 2003 third quarter and first nine months underwriting results generally reflect the favorable industry market conditions over the last three years coupled with the favorable loss trends in the aforementioned quarterly periods.  The 2003 expense ratio for professional liability business reflects the start-up nature of this operation at that time.

The net loss to the Insurance Companies from Hurricane Ivan of approximately $3.1 million, increased the 2004 third quarter and first nine months marine combined ratios 16.2 and 4.9 ratio points, respectively, and

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the Insurance Companies combined ratios 5.7 and 1.9 ratio points, respectively.  The third quarter and first nine months of 2003 incurred losses included $(0.4) million and $2.8 million, respectively, of incurred loss activity on run-off business principally related to the assumed reinsurance business which reduced the Insurance Companies’ loss ratio by 0.7 loss ratio points in the 2003 third quarter and added 1.8 loss ratio points to the Insurance Companies’ 2003 nine month combined ratio.

The pre-tax yield on the Insurance Companies’ investment portfolio approximated 4.0% and 4.4% at September 30, 2004 and 2003, respectively.  The declining portfolio yields reflect the overall declines in interest rates up until the first quarter of 2004.  Net investment income increased in the first nine months of 2004 compared to the same periods in 2003 due to strong cash flows and $95 million of statutory surplus contributions in the 2003 fourth quarter.

Lloyd’s Operations

The Lloyd’s operations consist of NUAL, which manages Lloyd’s Syndicate 1221, Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. Both Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. are Lloyd’s corporate members with limited liability and provide capacity to Lloyd’s Syndicate 1221. NUAL owns Pennine Underwriting Ltd., an underwriting managing agency with offices in Manchester, Leeds and Basingstoke, England, which underwrites cargo and engineering business for Lloyd’s Syndicate 1221.  The Lloyd’s operations and Navigators Management (UK) Limited, a Navigators Agency which produces business for the United Kingdom Branch of Navigators Insurance Company, are subsidiaries of Navigators Holdings (UK) Limited located in the United Kingdom.

Lloyd’s Syndicate 1221 has stamp capacity of £150 million ($273.8 million) in 2004 compared to £125 million ($200.3 million) in 2003.  Stamp capacity is a measure of the amount of premium a Lloyd’s syndicate is authorized to write as determined by the Council of Lloyd’s. Syndicate 1221’s stamp capacity is expressed net of commission (as is standard at Lloyd’s) of approximately 21%. The Syndicate 1221 premium recorded in the Company’s financial statements is gross of commission.  The Lloyd’s marine business had been subject to intense price competition beginning in the mid-1990’s. The pricing competition showed some signs of stabilizing in 2000 and prices increased from 2001 through 2003 and again at a more modest pace in the 2004 first quarter. Lloyd’s presents its results on an underwriting year basis, generally closing each underwriting year after three years. We make estimates for each underwriting year and timely accrue the expected results. Our Lloyd’s operations included in the consolidated financial statements represent our participation in Syndicate 1221.

Lloyd’s syndicates report the amounts of premiums, claims, and expenses recorded in an underwriting account for a particular year to the companies or individuals that participate in the syndicates. The syndicates generally keep accounts open for three years. Traditionally, three years have been necessary to report substantially all premiums associated with an underwriting year and to report most related claims, although claims may remain unsettled after the underwriting year is closed. A Lloyd’s syndicate typically closes an underwriting year by reinsuring outstanding claims on that underwriting year with the participants for the next underwriting year. The ceding participants pay the assuming participants an amount based on the unearned premiums and outstanding claims in the underwriting year at the date of the assumption. Our participation in Lloyd’s Syndicate 1221 is represented by and recorded as our proportionate share of the underlying assets and liabilities and results of operations of the syndicate since, (a) we hold an undivided interest in each asset, (b) we are proportionately liable for each liability and (c) Syndicate 1221 is not a separate legal entity. At Lloyd’s, the amount to close an underwriting year into the next year is referred to as the reinsurance to close. The reinsurance to close amounts represent the transfer of the assets and liabilities from the participants of a closing underwriting year to the participants of the next underwriting year. To the extent our participation in the syndicate changes, the reinsurance to close amounts vary accordingly. The reinsurance to close transactions are recorded in the fourth quarter as additional written and earned premium, losses incurred, loss reserves and receivables, all in the same amount. There are no gains or losses recorded on the transactions.

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We provide letters of credit to Lloyd’s to support our participation in Syndicate 1221’s capacity. If we increase our participation, or if Lloyd’s changes the capital requirements, we may be required to supply additional letters of credit or other collateral acceptable to Lloyd’s, or reduce the capacity of Syndicate 1221. The letters of credit are provided through the credit facility which we maintain with a consortium of banks. The credit facility agreement requires that the banks vote by November 10th of each year whether or not to renew the letter of credit facility. If the banks decide not to renew the letter of credit facility, we will need to find other sources to provide the letters of credit or other collateral in order to continue to participate in Syndicate 1221. The renewal amendment executed in November 2003 renewed the letter of credit facility for a two-year period expiring in November 2005.  The bank facility is collateralized by all of the common stock of Navigators Insurance Company.

Following are the results of operations of the Lloyd’s operations for the three and nine months ended September 30, 2004 and 2003:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
	($ in thousands)
Revenues:
Net earned premium	$	23,596		$	17,008		$	68,121		$	51,578
Commission income	300			136			863			480
Net investment income	649			422			1,844			1,413
Net realized capital gains (losses)	(55		)	132			(119		)	593
Other income (expense)	(378		)	(98		)	(368		)	116
Total revenues	24,112			17,600			70,341			54,180
Operating expenses:
Net losses and LAE	13,846			10,794			37,722			33,255
Commission expense	4,067			3,108			11,910			9,212
Other operating expenses	3,425			2,049			9,654			5,895
Interest expense	—			—			—			—
Total operating expenses	21,338			15,951			59,286			48,362
Income before income tax expense	2,774			1,649			11,055			5,818
Income tax expense	971			—			3,869			—
Net income	$	1,803		$	1,649		$	7,186		$	5,818
Loss and LAE ratio	58.7		%	63.5		%	55.4		%	64.5		%
Commission expense ratio	17.2		%	18.3		%	17.5		%	17.9		%
Other operating expense ratio	14.5		%	12.0		%	14.2		%	11.4		%
Combined ratio	90.4		%	93.8		%	87.1		%	93.8		%

The Lloyd’s operations have been experiencing business expansion coupled with improving underwriting results as a result of the generally favorable market conditions for marine and energy business since late 2001 through 2003, and to a lesser extent in 2004.  Net earned premium revenues were reduced by $4.3 million and

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$7.3 million in the third quarter of 2004 and 2003, respectively, and by $16.6 million and $15.5 million in the first nine months of 2004 and 2003, respectively, for business ceded to the Insurance Companies.

The net loss to the Lloyd’s operations from Hurricane Ivan which approximated $2.0 million increased the Lloyd’s operations 2004 third quarter and first nine months combined ratios 8.0 and 2.8 ratio points, respectively.  Excluding the impact of Hurricane Ivan, the 2004 and 2003 third quarter and nine month underwriting results generally reflect the favorable industry market condition over the last three years coupled with favorable loss trends in the quarterly periods.  The loss ratio for the third quarter and first nine months of 2004 was favorably impacted by $1.2 million or 5.1 loss ratio points and $5.2 million or 7.6 loss ratio points, respectively, for redundancies in prior years Lloyd’s operations’ loss reserves.

The pre-tax yield on funds in the Lloyd’s operations’ investment portfolio approximated 1.7%, and 2.1% at September 30, 2004 and 2003, respectively, which are reflective of the declining interest rate environment up until the first quarter of 2004.  Generally, funds invested at Lloyd’s have been invested with an average duration of approximately 1.4 years in order to meet liquidity needs.

The provision for income tax expense for the third quarter and first nine months of 2003 reflects the reversal of $572,000 and $2,056,000, respectively, of a previously established deferred tax asset valuation allowance.  The valuation allowance was reversed up until the third quarter of 2003 only to the extent of taxable profits.  The remaining valuation allowance was completely reversed in the 2003 fourth quarter since it was determined that it was more likely than not that the remaining deferred tax asset resulting from net operating loss carry-forwards will be realized.

Navigators Agencies

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

Each of the Navigators Agencies underwrites marine and related lines of business for Navigators Insurance Company and three other unaffiliated insurance companies, which comprise a marine insurance pool. Marine insurance policies are issued by Navigators Insurance Company with the business shared with other pool members. Navigators Insurance Company had an 80% participation in the pool for business written with effective dates in 2004 and 2003.

Navigators Specialty, a division of a Navigators Agency, produces business exclusively for our insurance company subsidiaries. It specializes in underwriting general liability insurance coverage for small general and artisan contractors and other targeted commercial risks, with the majority of its business located in California.  Navigators Specialty also writes surety, commercial multiple peril, commercial automobile and personal umbrella insurance.

Navigators Pro, a division of a Navigators Agency, specializes in underwriting professional liability insurance and began producing directors and officers liability insurance exclusively for our insurance company subsidiaries in the fourth quarter of 2001. In late 2002, Navigators Pro introduced additional products to complement its directors and officers liability coverage. The products include employment practices liability, lawyers professional liability and miscellaneous professional liability coverages.

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Following are the results of operations of the Navigators Agencies for the three and nine months ended September 30, 2004 and 2003:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
	($ in thousands)
Revenues:
Commission income	$	7,797		$	7,990		$	23,884		$	23,713
Net investment income	2			(2		)	6			20
Other income	258			443			629			980
Total revenues	8,057			8,431			24,519			24,713
Operating expenses:
Other operating expenses	9,616			8,610			27,314			23,813
Total operating expenses	9,616			8,610			27,314			23,813
Income (loss) before income tax expense (benefit)	(1,559		)	(179		)	(2,795		)	900
Income tax expense (benefit)	(460		)	(146		)	(852		)	207
Net income (loss)	$	(1,099	)	$	(33	)	$	(1,943	)	$	693

Commission income generally consists of inter-segment management fees and profit commissions received from insurance premiums of the Insurance Companies for marine, specialty and professional liability business as well as business from unaffiliated insurance companies in the marine pool.

Net investment income is earned on invested funds.  Other income generally represents fee revenues earned for services on behalf of third parties.

Other operating expenses consists of compensation and general and administrative expenses incurred in connection with underwriting, administrative and claims services performed on behalf of the Insurance Companies and unaffiliated insurers participating in the marine pool.  Such costs have been increasing each year commensurate with servicing the growth in the overall increased premium volume that has been generated for the Insurance Companies and unaffiliated members of the marine pool.

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

Off-Balance Sheet Transactions

There have been no material changes in the information concerning off-balance sheet transactions as stated in the Company’s 2003 Annual Report on Form 10-K.

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Tabular Disclosure of Contractual Obligations

There have been no material changes in the information concerning contractual obligations as stated in the Company’s 2003 Annual Report on Form 10-K.

Investments

The objective of the Company’s investment policy, guidelines and strategy is to maximize total investment return in the context of preserving and enhancing shareholder value and statutory surplus of the insurance company subsidiaries.  Secondarily, an important consideration is to optimize the after-tax book income.

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

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

The Lloyd’s operations’ investments are subject to the direction and control of the board of directors and the investment committee of NUAL, as well as our finance committee, and represent our share of the investments held by Syndicate 1221. These investments must comply with the rules and regulations imposed by Lloyd’s of London and by certain overseas regulators. The investments are managed by outside professional fixed-income portfolio managers. The performance of the investment managers is reviewed quarterly. The investment managers for Syndicate 1221 seek to attain the investment objectives by investing in government obligations, corporate bonds and mortgage-backed and asset-backed securities.

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

The following tables show our cash and investments as of September 30, 2004 and December 31, 2003:

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September 30, 2004	Fair Value		Gross Unrealized Gains		Gross Unrealized (Losses)			Cost or Amortized Cost
	($ in thousands)
Fixed maturities:
U.S. Government Treasury Bonds, GNMAs, U.S. Government non-guaranteed agencies and foreign government bonds	$	263,730	$	3,559	$	(1,352	)	$	261,523
States, municipalities and political subdivisions	124,949		2,866		(339		)	122,422
Mortgage- and asset-backed securities (excluding GNMAs)	165,730		2,181		(228		)	163,777
Corporate bonds	145,419		4,551		(403		)	141,271
Total fixed maturities	699,828		13,157		(2,322		)	688,993
Equity securities - common stocks	19,198		1,942		(452		)	17,708
Cash and short-term investments	120,823		—		—			120,823
Total	$	839,849	$	15,099	$	(2,774	)	$	827,524

December 31, 2003	Fair Value		Gross Unrealized Gains		Gross Unrealized (Losses)			Cost or Amortized Cost
	($ in thousands)
Fixed maturities:
U.S. Government Treasury Bonds, GNMAs, U.S. Government non-guaranteed Agencies and foreign government bonds	$	221,919	$	4,107	$	(1,385	)	$	219,197
States, municipalities and political subdivisions	88,093		2,599		(116		)	85,610
Mortgage- and asset-backed securities (excluding GNMAs)	141,831		1,614		(373		)	140,590
Corporate bonds	136,702		4,509		(314		)	132,507
Total fixed maturities	588,545		12,829		(2,188		)	577,904
Equity securities - common stocks	13,446		1,554		(85		)	11,977
Cash and short-term investments	91,601		—		—			91,601
Total	$	693,592	$	14,383	$	(2,273	)	$	681,482

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All fixed maturity and equity securities are carried at fair value. The fair value is based on quoted market prices or dealer quotes provided by independent pricing services.  At September 30, 2004 and December 31, 2003, all fixed maturity and equity securities held by us were classified as available-for-sale.

We regularly review our fixed maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for 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 consecutive months. Other factors considered in evaluating potential impairment include the current fair value as compared to cost or amortized cost, as appropriate, our intent and ability to retain the investment for a period of time sufficient to allow for an anticipated recovery in value, specific credit issues related to the issuer and current economic conditions.

When a security in our investment portfolio has an unrealized loss that is deemed to be other-than-temporary, we write the security down to fair value through a charge to operations. Significant changes in the factors we consider when evaluating investments for impairment losses could result in a significant change in impairment losses reported in the consolidated financial statements.  There were no impairment losses recorded in our fixed maturity or equity securities portfolios for the three or nine months ended September 30, 2004 and 2003.

The following table summarizes all securities in an unrealized loss position at September 30, 2004 and December 31, 2003 showing the aggregate fair value and gross unrealized loss by the length of time those securities have continuously been in an unrealized loss position:

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	September 30, 2004				December 31, 2003
	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
	($ in thousands)
Fixed Maturities:
U.S. Government Treasury Bonds and GNMAs, U.S. Government non-guaranteed Agencies and foreign government bonds
0-6 Months	$	113,110	$	453	$	51,249	$	521
7-12 Months	982		13		15,059		864
> 12 Months	27,450		886		—		—
Subtotal	141,542		1,352		66,308		1,385
States, municipalities and political subdivisions
0-6 Months	13,660		162		6,340		58
7-12 Months	7,930		157		1,508		38
> 12 Months	1,363		20		648		20
Subtotal	22,953		339		8,496		116
Mortgage- and asset-backed securities (excluding GNMAs)
0-6 Months	44,359		182		45,381		341
7-12 Months	3,536		25		1,135		26
> 12 Months	788		21		138		6
Subtotal	48,683		228		46,654		373
Corporate bonds
0-6 Months	34,593		174		25,049		123
7-12 Months	2,432		42		7,124		191
> 12 Months	5,424		187		—		—
Subtotal	42,449		403		32,173		314
Total Fixed Maturities	$	255,627	$	2,322	$	153,631	$	2,188
Equity securities - common stocks
0-6 Months	$	2,562	$	189	$	—	$	—
7-12 Months	461		50		—		—
> 12 Months	1,406		213		1,892		85
Total Equity Securities	$	4,429	$	452	$	1,892	$	85

We analyze the unrealized losses quarterly to determine if any of them are other-than-temporary.  The above unrealized losses have been determined to be temporary and generally result from changes in market conditions.

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The following table shows the composition by National Association of Insurance Commissioners (“NAIC”) rating and the generally equivalent Standard & Poor’s (“S&P”) and Moody’s ratings of the fixed maturity securities in the Company’s portfolio with gross unrealized losses at September 30, 2004.  Not all of the securities are rated by S&P and/or Moody’s.

NAIC Rating	Equivalent S&P Rating	Equivalent Moody’s Rating	Unrealized Loss				Fair Value
			Amount		Percent to Total		Amount		Percent to Total
			($ in thousands)
1	AAA/AA/A	Aaa/Aa/A	$	2,220	96	%	$	243,665	95	%
2	BBB	Baa	102		4	%	11,962		5	%
3	BB	Ba	—		—		—		—
4	B	B	—		—		—		—
5	CCC or lower	Caa or lower	—		—		—		—
6	N/A	N/A	—		—		—		—
		Total	$	2,322	100	%	$	255,627	100	%

At September 30, 2004, the gross unrealized losses in the table directly above are related to fixed maturity securities that are rated investment grade, which is defined by the Company as a security having a NAIC rating of 1 or 2, a S&P rating of “BBB–” or higher, or a Moody’s rating of “Baa3” or higher.  Unrealized losses on investment grade securities principally relate to changes in interest rates or changes in sector-related credit spreads since the securities were acquired.  Any such unrealized losses are recognized in income, if the securities are sold, or if the decline in fair value is deemed other-than-temporary.

The scheduled maturity dates for fixed maturity securities in an unrealized loss position at September 30, 2004 are shown below.

	Unrealized Loss				Fair Value
	Amount		Percent to Total		Amount		Percent to Total
	($ in thousands)
Due in one year or less	$	503	22	%	$	101,666	40	%
Due after one year through five years	377		16	%	45,051		17	%
Due after five years through ten years	184		8	%	17,345		7	%
Due after ten years	1,030		45	%	42,882		17	%
Mortgage- and asset-backed securities	228		9	%	48,683		19	%
Total fixed income securities	$	2,322	100	%	$	255,627	100	%

Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Due to the periodic repayment of principal, the mortgage- and asset-backed securities are estimated to have an effective maturity of approximately 4.7 years.

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Our realized capital gains and losses were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
	($ in thousands)
Fixed maturities:
Gains	$	271		$	376		$	1,935		$	1,689
(Losses)	(45		)	(134		)	(1,760		)	(309		)
	226			242			175			1,380
Equity securities:
Gains	45			327			511			329
(Losses)	—			(220		)	(98		)	(474		)
	45			107			413			(145		)
Net realized capital gains	$	271		$	349		$	588		$	1,235

The following table details realized losses in excess of $200,000 from sales and impairments during the first nine months of 2004 and 2003 and the related circumstances giving rise to the loss:

Description	Date of Sale	Proceeds from Sale		Loss on Sale			Impairment	Holdings at September 30, 2004	Net Unrealized Loss	# of Months Unrealized Loss Exceeded 20% of Cost or Amortized Cost
	($ in thousands)
Nine months ended September 30, 2004:
None
Nine months ended September 30, 2003:
(1)	2/13/03	$	425	$	(252	)	—	—	—	6
(2)	9/3/03	$	357	$	(222	)	—	—	—	12

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

(2) Major tobacco company stock adversely affected by concerns over litigation.

Reinsurance Recoverables

At September 30, 2004, the Company had reinsurance recoverables of $22.2 million, consisting of reinsurance recoverables for ceded losses and loss adjustment expenses of $15.9 million and ceded unearned premium of $6.3 million, due from Converium Holding Ltd. and subsidiaries (“Converium”).  The recoverables result from several run-off and active excess and pro-rata reinsurance agreements with Converium expiring through the beginning of 2005 that cover principally marine and energy risks for Navigators Insurance Company and the Lloyd’s operations.  Recoverable amounts at September 30, 2004 recorded by Navigators Insurance Company and the Lloyd’s operations were $2 million and $20.2 million, respectively.

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Converium reported that its 2004 second quarter financial results were impacted by reserve strengthening and certain intangible write-offs resulting in a net loss for the 2004 six-month period.  Converium reported that its 2004 third quarter financial results continued to reflect an operating loss.  On October 13, 2004, Converium announced that it closed its rights offering which raised approximately $420 million of capital.  Converium is rated B++ from A.M. Best and BBB+ from S&P.

The Company continues to periodically monitor the financial condition and ongoing activities of its reinsurers, including Converium, in order to assess the adequacy of its allowance for uncollectible reinsurance.

Liquidity and Capital Resources

Cash flow provided by operations was $141.7 million and $110.9 million for the nine months ended September 30, 2004 and 2003, respectively. The positive operating cash flow in the first nine months of 2004 and 2003 was primarily due to the net written premium.  Operating cash flow was used primarily to acquire additional investment assets.

Invested assets and cash increased to $839.8 million at September 30, 2004 from $693.6 million at December 31, 2003. The increase was primarily due to the positive cash flow and the $110.8 million of net proceeds received from the common stock offering in October 2003.  Net investment income was $6.9 million and $4.6 million for the three months ended September 30, 2004 and 2003, respectively, and $19.4 million and $13.8 million for the nine months ended September 30, 2004 and 2003, respectively.

The yield of the portfolio, excluding net realized capital gains, was 3.5% at September 30, 2004 compared to 3.9% at September 30, 2003 reflecting the prevailing interest rates. As of September 30, 2004 and December 31, 2003, all fixed maturity securities and equity securities held by us were classified as available-for-sale.

At September 30, 2004, the weighted average rating of 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 risk since the fixed maturity investment portfolio consists of investment-grade bonds. At September 30, 2004, our portfolio had an average maturity of 5.0 years and duration of 3.7 years. Management continually monitors the composition and cash flow of the investment portfolio in order to maintain the appropriate levels of liquidity to ensure our ability to satisfy claims.

We have a credit facility provided through a consortium of banks. The credit facility provides for an $80.0 million letter of credit facility which was increased from $55.0 million in November 2003.  The credit facility also provided for a $9.0 million line of credit facility which was fully utilized prior to the October 2003 common stock offering.  As required by the credit facility agreement, the line of credit was fully paid from a portion of the proceeds from the common stock offering thereby eliminating the line of credit portion of the credit facility.  The letter of credit facility is utilized primarily by Navigators Corporate Underwriters Ltd. and Millennium Underwriting Ltd. for our participation in Lloyd’s Syndicate 1221. The credit facility agreement requires that the banks vote by November 10th of each year whether or not to renew the letter of credit portion of the facility. If the banks decide not to renew the letter of credit portion of the facility, we will need to find other sources to provide the letters of credit or other collateral in order to continue our participation in Syndicate 1221.  The renewal amendment executed in November 2003 renewed the letter of credit facility for a two-year period.  At September 30, 2004, letters of credit with an aggregate face amount of $78.4 million were issued under the letter of credit facility.

The bank credit facility is collateralized by the common stock of Navigators Insurance Company. It contains covenants common to transactions of this type, including restrictions on indebtedness and liens, limitations on mergers and the sale of assets, maintaining certain consolidated tangible net worth, statutory surplus and other financial ratios. At September 30, 2004, we were in compliance with all covenants.

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At September 30, 2004, our consolidated stockholders’ equity was $316.6 million or $25.08 per share compared to $290.0 million or $23.14 per share at December 31, 2003. The increase was primarily due to net income of $24.2 million for the nine months ended September 30, 2004.  The other comprehensive loss in 2004 resulted from unrealized losses in the Company’s investment portfolio due to a rising interest rate environment.

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, a portion of our recoverables are now reinsured by Equitas (a separate United Kingdom authorized reinsurance company established to reinsure outstanding liabilities of all Lloyd’s members for all risks written in the 1992 or prior years of account).

We primarily rely upon dividends from our subsidiaries to meet our holding company obligations. The dividends have historically come primarily from Navigators Insurance Company. At December 31, 2003, the maximum amount available for the payment of dividends by Navigators Insurance Company during 2004 without prior regulatory approval was $21,032,000.  Navigators Insurance Company did not pay any dividends in the first nine months of 2004.

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the information concerning market risk as stated in the Company’s 2003 Annual Report on Form 10-K.

Item 4.  Controls and Procedures

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

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

Part II - Other Information

Item 1.Legal Proceedings

The Company is not a party to or the subject of any material pending legal proceedings which depart from the ordinary routine litigation incident to the kinds of business conducted by the Company, except for a suit concerning the draw down of letters of credit.  In 1997 and 1998, Navigators Insurance Company entered into certain reinsurance contracts with a reinsurer.  In accordance with normal business practice, Navigators Insurance Company had secured this exposure with letters of credit. In April 1999, Navigators

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Insurance Company drew down the letters of credit, in good faith and consistent with their terms.  The liquidator of the reinsurer had commenced suit in Australia, seeking to void the draw downs.  Navigators Insurance Company appealed those denials and continued settlement discussions.  The settlement discussions resulted in a Settlement and Commutation Agreement (the “Agreement”) between Navigators Insurance Company and the reinsurer.  As a result of the Agreement, all reinsurance treaties between the parties have been commuted and the litigation proceedings against Navigators Insurance Company have been discontinued.  Navigators Insurance Company was adequately reserved for the settlement which had no material impact on the accompanying financial statements.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.Defaults Upon Senior Securities

None.

Item 4.Submissions of Matters to a Vote of Security Holders

None.

Item 5.Other Information

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

Item 6.Exhibits

Exhibit No.	Description of Exhibit
10-1	Form of Stock Grant Award Certificate and Restricted Stock Agreement for the 2002 Stock Incentive Plan (approved at Annual Meeting of Shareholders held May 30, 2002)	*
10-2	Form of Option Award Certificate for the 2002 Stock Incentive Plan (approved at Annual Meeting of Shareholders held May 30, 2002)	*
10-3	Agreement with Jane E. Keller	*
11-1	Statement re Computation of Per Share Earnings	*
31-1	Certification of CEO per Section 302 of the Sarbanes-Oxley Act	*
31-2	Certification of CFO per Section 302 of the Sarbanes-Oxley Act	*
32-1	Certification of CEO per Section 906 of the Sarbanes-Oxley Act (This exhibit is intended to be furnished in accordance with Regulation S-K item 601(b)(32)(ii) and shall not be deemed to be filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference).	*
32-2	Certification of CFO per Section 906 of the Sarbanes-Oxley Act	*

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(This exhibit is intended to be furnished in accordance with Regulation S-K item 601(b)(32)(ii) and shall not be deemed to be filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference).

* Included herein.

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SIGNATURE

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

		The Navigators Group, Inc.
		(Registrant)
Date:	November 4, 2004	/s / Paul J. Malvasio
		Paul J. Malvasio
		Executive Vice President and Chief Financial Officer

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INDEX OF EXHIBITS

Exhibit No.	Description of Exhibit
10-1	Form of Stock Grant Award Certificate and Restricted Stock Agreement for the 2002 Stock Incentive Plan (approved at Annual Meeting of Shareholders held May 30, 2002)	*
10-2	Form of Option Award Certificate for the 2002 Stock Incentive Plan (approved at Annual Meeting of Shareholders held May 30, 2002)	*
10-3	Agreement with Jane E. Keller	*
11-1	Statement re Computation of Per Share Earnings	*
31-1	Certification of CEO per Section 302 of the Sarbanes-Oxley Act	*
31-2	Certification of CFO per Section 302 of the Sarbanes-Oxley Act	*
32-1	Certification of CEO per Section 906 of the Sarbanes-Oxley Act (This exhibit is intended to be furnished in accordance with Regulation S-K item 601(b)(32)(ii) and shall not be deemed to be filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference).	*
32-2	Certification of CFO per Section 906 of the Sarbanes-Oxley Act (This exhibit is intended to be furnished in accordance with Regulation S-K item 601(b)(32)(ii) and shall not be deemed to be filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference).	*

*  Included herein.

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