March 31, 2001 10-Q

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CFWCLNAbKEcbhQQ9erTFCzRR+mc4lluymGL3DZeVxWmZUxxc/9zOanatagWMB+k2 pyqAPKLzeIcBIL1ocyap0g== 0000793547-01-500007.txt : 20010515 0000793547-01-500007.hdr.sgml : 20010515 ACCESSION NUMBER: 0000793547-01-500007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAVIGATORS GROUP INC CENTRAL INDEX KEY: 0000793547 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 133138397 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15886 FILM NUMBER: 1633200 BUSINESS ADDRESS: STREET 1: ONE PENN PLAZA STREET 2: 55TH FL CITY: NEW YORK STATE: NY ZIP: 10119 BUSINESS PHONE: 2122442333 MAIL ADDRESS: STREET 1: ONE PENN PLAZA 55TH FL CITY: NEW YORK STATE: NY ZIP: 10119 10-Q 1 march310110q.html March 31, 2001 10-Q

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

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

For the Quarterly Period Ended March 31, 2001

Commission file number 0-15886

The Navigators Group, Inc.
(Exact name of registrant as specified in its charter)

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

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

(212) 244-2333
(Registrant's telephone number, 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 X No

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

On May 1, 2001, there were 8,419,762 shares of $0.10 par value common stock outstanding.

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

INDEX

Page No.

Part I. FINANCIAL INFORMATION:

Consolidated Balance Sheets
March 31, 2001 and December 31, 2000 ......................................... 3

Consolidated Statements of Income
Three Months Ended March 31, 2001 and 2000..................................... 4

Consolidated Statements of Cash Flows
Three Months Ended March 31, 2001 and 2000............................ 5

Notes to Interim Consolidated Financial Statements .................................... 6

Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................................... 10

Part II. OTHER INFORMATION ................................................................. 15

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, December 31,
2001 2000
(Unaudited)
ASSETS
Investments and cash:
Fixed maturities, available-for-sale, at fair value
(amortized cost: 2001, $230,420; 2000, $221,807)............................... $234,215 $225,128
Equity securities, available-for-sale, at fair value (cost: 2001, $5,667;
2000, $5,608).................................................................. 5,955 6,269
Short-term investments, at cost which approximates fair value.................... 14,935 18,186
Cash............................................................................. 2,018 1,602
Total investments and cash................................................ 257,123 251,185

Premiums in course of collection................................................... 41,745 35,282
Funds due from Lloyd's syndicates.................................................. 84,490 68,912
Commissions receivable............................................................. 3,800 3,374
Accrued investment income.......................................................... 3,188 3,125
Prepaid reinsurance premiums....................................................... 36,908 26,274
Reinsurance receivable on paid and unpaid losses and loss adjustment expenses...... 188,551 195,713
Federal income tax recoverable..................................................... - 463
Net deferred income tax benefit.................................................... 9,238 9,001
Deferred policy acquisition costs.................................................. 15,442 8,400
Goodwill .......................................................................... 5,070 5,278
Other assets....................................................................... 5,219 7,570

Total assets............................................................ $650,774 $614,577
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses ................................ $349,234 $357,674
Unearned premium................................................................. 99,305 66,238
Reinsurance balances payable..................................................... 28,181 20,402
Notes payable to banks........................................................... 22,000 22,000
Federal income taxes payable..................................................... 747 -
Accounts payable and other liabilities........................................... 5,555 4,783
Total liabilities......................................................... 505,022 471,097

Stockholders' equity:
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued ....... - -
Common stock, $.10 par value, authorized 10,000,000 shares, issued and
outstanding 8,419,762 in 2001 and 8,414,356 in 2000............................ 846 846
Additional paid-in capital....................................................... 39,407 39,413
Treasury stock held at cost (shares: 35,908 in 2001 and 41,314 in 2000).......... (516) (594)
Accumulated other comprehensive income ....................................... 3,242 3,093
Retained earnings................................................................ 102,773 100,722
Total stockholders' equity................................................ 145,752 143,480

Total liabilities and stockholders' equity............................... $650,774 $614,577
======= =======

See accompanying notes to interim consolidated financial statements.

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

Three Months Ended
March 31,
2001 2000
(Unaudited)
Revenues:
Net earned premium................................................... $29,621 $19,572
Commission income.................................................... 805 516
Net investment income................................................ 4,769 4,350
Net realized capital gains (losses).................................. 453 (94)
Other income........................................................ 99 51
Total revenues................................................ 35,747 24,395

Operating expenses:
Net losses and loss adjustment expenses incurred..................... 19,183 12,100
Commission expense................................................... 6,721 3,833
Other operating expenses............................................. 6,128 6,217
Interest expense..................................................... 415 429
Total operating expenses....................................... 32,447 22,579

Income before income tax expense........................................ 3,300 1,816

Income tax expense (benefit):
Current.............................................................. 1,279 660
Deferred............................................................ (30) (188)
Total income tax expense...................................... 1,249 472

Net income ............................................................. $ 2,051 $ 1,344
====== ======

Net income per common share:
Basic................................................................ $ 0.24 $ 0.16
Diluted.............................................................. $ 0.24 $ 0.16

Average common shares outstanding:
Basic................................................................ 8,418 8,412
Diluted ............................................................. 8,455 8,412

See accompanying notes to interim consolidated financial statements.

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
2001 2000
(Unaudited)
Operating activities:
Net income................................................................... $ 2,051 $ 1,344
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation & amortization............................................... 289 275
Net deferred income tax .................................................. (30) (188)
Net realized capital (gains) losses....................................... (453) 94
Changes in assets and liabilities:
Reinsurance receivable on paid and unpaid
losses and loss adjustment expenses.................................... 7,162 7,406
Reserve for losses and loss adjustment expenses........................... (8,440) (11,818)
Prepaid reinsurance premiums.............................................. (10,634) (7,238)
Unearned premium.......................................................... 33,067 12,843
Premiums in course of collection.......................................... (6,463) (6,875)
Commissions receivable.................................................... (426) 3,218
Funds due from Lloyd's syndicate.......................................... (15,289) (1,129)
Deferred policy acquisition costs......................................... (7,042) (3,398)
Accrued investment income................................................. (63) 1
Reinsurance balances payable.............................................. 7,779 1,225
Federal and foreign income tax............................................ 1,210 420
Other..................................................................... 974 2,808
Net cash provided by (used in) operating activities.................... 3,692 (1,012)

Investing activities:
Fixed maturities, available-for-sale
Redemptions and maturities................................................ 210 4,501
Sales..................................................................... 22,156 10,603
Purchases................................................................. (30,830) (13,860)
Equity securities, available-for-sale
Sales..................................................................... 861 1,178
Purchases................................................................. (691) (1,194)
Payable for securities....................................................... 1,800 -
Net sales of short-term investments.......................................... 3,250 2,573
Purchase of property and equipment........................................... (32) (1,111)
Net cash provided by (used in) investing activities.................... (3,276) 2,690

Financing activities............................................................. - -

Increase in cash................................................................. 416 1,678
Cash at beginning of year........................................................ 1,602 5,546
Cash at end of period............................................................ $ 2,018 $ 7,224
======= =======

Supplemental disclosures of cash flow information:
Federal, state and local income tax paid.................................... $ 47 $ 23
Interest paid............................................................... 416 30
Issuance of stock to directors.............................................. 72 72

See accompanying notes to interim consolidated financial statements.

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements
(Unaudited)

(1) Accounting Policies
The interim consolidated financial statements are unaudited but reflect all adjustments which, in the
opinion of management, are necessary to provide a fair statement of the results of The Navigators Group,
Inc. and its subsidiaries (the "Company") for the interim periods presented. All such adjustments are of a
normal recurring nature. All significant intercompany transactions and balances have been eliminated. The
results of operations for any interim period are not necessarily indicative of results for the full year.
These financial statements should be read in conjunction with the consolidated financial statements and
notes contained in the Company's 2000 Annual Report on Form 10-K. Certain amounts for prior years have
been reclassified to conform to the current year's presentation.

(2) Reinsurance Ceded
The Company's ceded earned premiums were $22,380,000 and $19,097,000 and the ceded incurred losses were
$10,232,000 and $17,158,000 for the three months ended March 31, 2001 and 2000, respectively.

(3) Segments of an Enterprise
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 Navigators Agencies (formerly
referred to as the Somerset Companies) and the Lloyd's Operations, each of which is managed separately.
The Insurance Companies consist of Navigators Insurance Company and NIC Insurance Company and are primarily
engaged in underwriting marine insurance and related lines of business, and a contractors' general
liability program. The Navigators Agencies are underwriting management companies which produce, manage and
underwrite insurance and reinsurance for the Insurance Companies and four non-affiliated companies. The
Lloyd's Operations consist primarily of a Lloyd's managing agency and two Lloyd's corporate members which
underwrite marine and related lines of business at Lloyd's of London. All segments are evaluated based on
their underwriting or operating results calculated on the basis of accounting principles generally accepted
in the United States of America ("GAAP"). In order to establish a common identity under the Navigators
name, the Company changed or is in the process of changing the name of several of its subsidiaries.

The Insurance Companies and the Lloyd's Operations are measured taking into account net premiums earned,
incurred losses and loss expenses, commission expense and other underwriting expenses. The Navigators
Agencies' results include commission income less other operating expenses. Each segment maintains its own
investments on which it earns income and realizes capital gains or losses. Other operations include
intersegment income and expense in the form of affiliated commissions, income and expense from corporate
operations, and consolidating adjustments.

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

Three Months Ended
March 31,
2001 2000
(In thousands)

Revenue, excluding net investment income
and net realized capital gains (losses):
Insurance Companies.............................. $15,996 $11,751
Navigators Agencies.............................. 3,318 2,436
Lloyd's Operations............................... 13,657 7,857
Other operations................................. (2,446) (1,905)
Total.......................................... $30,525 $20,139
====== ======

Income (loss) before income taxes:
Insurance Companies.............................. $ 5,708 $ 4,675
Navigators Agencies.............................. (559) (1,457)
Lloyd's Operations............................... (1,056) (457)
Other operations................................. (793) (945)
Total.......................................... $ 3,300 $ 1,816
====== ======

Income tax expense (benefit):
Insurance Companies.............................. $ 1,779 $ 1,281
Navigators Agencies.............................. (278) (491)
Lloyd's Operations............................... - -
Other operations................................. (252) (318)
Total.......................................... $ 1,249 $ 472
====== ======

Net income (loss):
Insurance Companies.............................. $ 3,929 $ 3,394
Navigators Agencies.............................. (281) (966)
Lloyd's Operations............................... (1,056) (457)
Other operations................................. (541) (627)
Total.......................................... $ 2,051 $ 1,344
====== ======

(4) Comprehensive Income
Comprehensive income encompasses all changes in stockholders' equity (except those arising from
transactions with owners) including net income, net unrealized capital gains or losses on available for
sale securities, and foreign currency translation adjustments.

The following table summarizes comprehensive income for the three months ended March 31, 2001 and 2000:

March 31,
2001 2000
(In thousands)

Net income .......................................................... $2,051 $1,344
Other comprehensive income, net of tax:
Net unrealized gains (losses) on securities available for sale:
Unrealized holding gains arising during period
(net of tax expense of $123 for 2001 and
$110 for 2000).................................................. 720 205

Less: reclassification adjustment for gains (losses) included in
net income (net of tax expense (benefit) of $88 for
2001 and $(33) for 2000) ....................................... 365 (61)
Net unrealized gains on securities ...................... 355 266
Foreign currency translation gain (loss) adjustment, net of tax
expense (benefit) of $(111) for 2001 and $44 for 2000........... (206) 82
Other comprehensive income................................. 149 348

Comprehensive income...................................... $2,200 $1,692
===== =====

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

March 31, December 31,
2001 2000
(In thousands)

Net unrealized gains on securities available-for-sale (net of
tax expense of $1,429 in 2001 and $1,394 in 2000).................... $3,177 $2,822
Foreign currency translation adjustment (net of tax expense of
$35 in 2001 and $146 in 2000)........................................ 65 271

Accumulated other comprehensive income.................................. $3,242 $3,093
===== =====

(5) Adoption of Accounting Standards
The Financial Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued in June 1998 and
establishes accounting and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. SFAS No. 133, as amended by
SFAS No. 137, Deferral of the Effective Date of SFAS No. 133, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. SFAS No. 133 should not be applied retroactively to financial
statements of prior periods. In June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of SFAS No. 133, which amends certain accounting
and reporting standards of SFAS No. 133. The adoption of these statements at January 1, 2001 did not have
any effect on the Company's results of operations or financial condition.

(6) Lloyd's Participation
In the aggregate, the Company directly and indirectly controls 88.1% of Lloyd's Syndicate 1221's(pound)66.3
million ($96.7 million) of capacity for the 2001 underwriting year. The Company directly controls 67.4% or
(pound)44.7 million ($65.2 million) of Syndicate 1221's capacity for the 2001 underwriting year.

If the Company were to control more than 90% of Syndicate 1221's capacity, Lloyd's Major Syndicate
Transactions Byelaw (No. 18 of 1997) allows for a Minority Buy-out to be effected. In such a transaction,
the remaining participants are required to give up their capacity in return for compensation which must be
at least equal to the offer price preceding the buy-out.

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

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

Forward-looking statements

Some of the statements in this Form 10-Q are "forward-looking statements" (as defined in the Private
Securities Litigation Act of 1995). We derive forward-looking statements from information which we currently
have and from assumptions which we make. We cannot assure that results which we anticipate will be achieved,
since results may differ materially because of both known and unknown risks and uncertainties which we face.
Factors which could cause actual results to differ materially from our forward looking statements include, but
are not limited to:

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

General

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

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

In order to establish a common identity under the Navigators name, the Company changed or is in the
process of changing the name of several of its subsidiaries. The new names are used throughout this document.
Five of the Company's subsidiaries are underwriting management companies: Navigators Management Company, Inc.
(formerly Somerset Marine, Inc.), Navigators Insurance Services of Texas, Inc. (formerly Somerset Insurance
Services of Texas, Inc.), Navigators California Insurance Services, Inc. (Somerset Insurance Services of
California, Inc.), Navigators Insurance Services of Washington, Inc. (formerly Somerset Insurance Services of
Washington, Inc.) and Navigators Management (UK) Limited (formerly Somerset Marine (UK) Limited) ("Navigators UK")
(collectively, the "Navigators Agencies"). The Navigators Agencies produce, manage and underwrite insurance and
reinsurance for Navigators Insurance, NIC and four unaffiliated insurance companies.

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

In April 1999, the Company acquired Anfield Insurance Service, Inc. ("Anfield"), an insurance agency
located in San Francisco, California, which specializes primarily in underwriting general liability insurance
coverage for small artisan and general contractors on the West Coast. Anfield also produces a small amount of
commercial multi-peril insurance for restaurants and taverns and, beginning in 2001, a liability program for
apartment buildings. Anfield produces business exclusively for the Insurance Companies and is included with the
Navigators Agencies unless otherwise noted.

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

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

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

Results of Operations

Revenues. Gross written premium for the first three months of 2001 increased 66.1% to $85,803,000 from
$51,648,000 for the first three months of 2000.

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

Three Months Ended March 31,
2001 2000
(Dollars in thousands)

Lloyd's Operations:
Marine................................................... $42,653 50% $20,594 40%
Engineering and Construction............................. 1,129 1 176 -
Onshore Energy........................................... 442 1 133 -
Gross Written Premium................................ 44,224 52 20,903 40
Ceded Written Premium................................ (12,889) (9,631)
Net Written Premium.................................. 31,335 11,272

Insurance Companies:
Marine................................................... 30,096 35 24,436 48
Program Insurance........................................ 10,339 12 5,228 10
Other.................................................... 1,144 1 1,081 2
Gross Written Premium................................ 41,579 48 30,745 60
Ceded Written Premium................................ (20,125) (16,704)
Net Written Premium.................................. 21,454 14,041

Total Gross Written Premium........................ 85,803 100% 51,648 100%
=== ===

Total Ceded Written Premium........................ (33,014) (26,335)

Total Net Written Premium.......................... $52,789 $25,313
====== ======

Lloyd's Operations' Gross Written Premium

The Lloyd's premium is generated as the result of NCUL and Millennium providing capacity to
Lloyd's Syndicate 1221 managed by NUAL. Lloyd's Syndicate 1221 has capacity of(pound)66.3 million ($96.7 million)
for the 2001 underwriting year and also had capacity of(pound)66.3 million for the 2000 underwriting year. The
Lloyd's marine business was subject to continued pricing competition resulting in less premium per risk relative
to certain prior years. As a result, the Company wrote less than the capacity available. The pricing
competition showed signs of easing in late 2000. Lloyd's presents its results on an underwriting year basis,
generally closing each underwriting year after three years. The Company makes estimates for each year and
timely accrues the expected results. The premiums, losses and expenses from the Lloyd's Operations are included
in the Company's consolidated financials but are not included in the Insurance Companies' results.

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

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

Marine Premium. In the first quarter of 2001, marine premium increased 107% from the first quarter of
2000 due to increased writings resulting from new business, rate increases, increases in prior estimates
performed in the normal course primarily related to the Lloyd's premium and to the capacity directly provided to
Syndicate 1221 by NCUL and Millennium in the aggregate increasing from 64.5% in 2000 to 67.4% in 2001.

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

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

Insurance Companies' Gross Written Premium

Marine Premium. Marine gross written premium increased 23.2% when comparing the first three
months of 2001 to the first three months of 2000 primarily due to new business and rate increases. Navigators
Insurance's participation in the marine pools was 75% in both years.

Program Insurance Premium. The program insurance is written by Anfield and consists primarily
of general liability insurance for contractors and a small amount of commercial multi-peril insurance for
restaurants and taverns and, beginning in 2001, a liability program for apartment buildings. The increase in
the premium, when comparing the first three months of 2001 and 2000, resulted from new business and rate
increases.

Ceded Premium. In the ordinary course of business, the Company reinsures certain insurance risks with
unaffiliated insurance companies for the purpose of limiting its maximum loss exposure, protecting against
catastrophic losses, and maintaining desired ratios of net premiums written to statutory surplus. The
relationship of ceded to written premium varies based upon the types of business written and whether the
business is written by the Insurance Companies or the Lloyd's Operations. The increase in ceded premium when
comparing the first quarter of 2001 to the first quarter of 2000 resulted from the increase in the gross written
premium.

Net Written Premium. Net written premium increased 109% when comparing the first three months of 2001 to the
first three months of 2000 due to the increase in the gross written premium discussed above and to the decrease
in the ceded premium in the Lloyd's Operations.

Net Earned Premium. Net earned premium increased 51.3% for the first three months of 2001 to $29,621,000 as
compared to $19,572,000 for the first three months of 2000. The increase in net earned premium resulted from
the increase in net written premium in 2000 and the first quarter of 2001.

Commission Income. Commission income generated by the Navigators Agencies increased to $805,000 for the first
three months of 2001 from $516,000 for the first three months of 2000 primarily as the result of increased
profit commission on the marine business produced by the Navigators Agencies.

Net Investment Income. Net investment income increased 9.6% to $4,769,000 for the first three months of 2001
from $4,350,000 for the corresponding period in 2000. This increase is primarily due to a higher yield in the
Insurance Companies investment portfolio partially resulting from a decrease in the tax-exempt portfolio, and the
Company's increased participation in the Lloyd's operations which earn income on investments held by Lloyd's
Syndicate 1221 in which the Company participates. Such investments are included in Funds due from Lloyd's
syndicate on the Company's consolidated balance sheet.

Net Realized Capital Gains. Pre-tax results included $453,000 of net realized capital gains for the first three
months of 2001 compared to $94,000 of net realized capital losses for the same period last year. On an after tax
basis, the net realized capital gains were $0.04 per share in 2001 and the net realized capital losses were $0.01
per share in 2000.

Operating Expenses.

Net Loss and Loss Adjustment Expenses Incurred. The ratio of net loss and loss adjustment expenses
incurred to net earned premium was 64.8% and 61.8% for the first three months of 2001 and 2000, respectively.
This increase was primarily due to increased losses in the Lloyd's operations including approximately $1.8
million of losses resulting from one large offshore energy claim (Petrobras) partially offset by results in
Navigators Insurance.

Commission Expense. Commission expense as a percentage of net earned premium was 22.7% and 19.6%
for the first three months of 2001 and 2000, respectively. The increase was due to the increase in the Lloyd's
premium which generally has a larger commission rate.

Other Operating Expenses. Other operating expenses decreased slightly to $6,128,000 during the first
three months of 2001 from $6,217,000 during the corresponding period of 2000.

Interest Expense. Interest expense was $415,000 during the first three months of 2001 compared to
$429,000 during the corresponding period of 2000. This decrease was due to a smaller loan balance partially
offset by higher interest rates on the loan.

Income Taxes. The effective tax rate was 37.8% and 26.0% for the three months ended March 31, 2001 and 2000,
respectively. The rates differed from the Federal statutory income tax rate due to tax-exempt interest income
and a valuation allowance. The tax-exempt income decreased and the valuation allowance increased in the first
quarter of 2001 compared to the first quarter of 2000. The Company had alternative minimum tax carryforwards of
$4,542,000 and $6,276,000 at March 31, 2001 and 2000, respectively. At March 31, 2001 and 2000, the Company had
$5,885,000 and $4,498,000 of valuation allowances against its deferred tax asset. The valuation allowance and
its change in the quarter ended March 31, 2001 was necessitated by the uncertainty associated with the
realization of the deferred tax asset for the carryforward of operating losses from certain of the Company's
foreign, state and local operations.

Net Income. The Company had net income of $2,051,000 for the first three months of 2001 compared to net income
of $1,344,000 for the same period last year. On a diluted per share basis, this represented net income per share
of $0.24 and $0.16 for the first three months of 2001 and 2000, respectively.

Liquidity and Capital Resources

Cash flow from operations was $3,692,000 and ($1,012,000) for the first three months of 2001 and 2000,
respectively. Invested assets and cash increased to $257,123,000 at March 31, 2001 from $251,185,000 at December
31, 2000.

The Company's bank credit facility, as amended, provides for a $25 million revolving line of credit
facility, which reduces each quarter by amounts ranging between $1,000,000 to $2,250,000 beginning January 1, 2000
until it terminates on November 19, 2004, and a $55 million letter of credit facility. At March 31, 2001,
$22,000,000 in loans were outstanding under the revolving line of credit facility at an interest rate of 7.3%.
The letter of credit facility is utilized primarily by NCUL and Millennium to participate in Lloyd's syndicate
1221 managed by NUAL. At March 31, 2001, letters of credit with an aggregate face amount of $49,766,000 were
issued under the letter of credit facility.

As of March 31, 2001, the Company's consolidated stockholders' equity was $145,752,000 compared to
$143,480,000 at December 31, 2000. The increase was primarily due to the net income for the three months ended
March 31, 2001.

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
2000 Annual Report on Form 10-K.

Treasury Stock

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

Part II - Other Information

Item 1. Legal Proceedings:

The Company is not a party to or the subject of any material pending legal proceedings which depart
from the ordinary routine litigation incident to the kinds of business conducted by the Company,
except for an assessment on Navigators Insurance by the Institute of London Underwriters ("ILU").
In late 1998, the ILU advised its forty-one members, including Navigators Insurance, that they were
each being assessed approximately(pound)900,000 to pay for anticipated operating deficits arising from
the ILU's long term lease of the building occupied by the ILU in London. This matter is currently
not in litigation and Navigators Insurance continues to oppose the assessment as inequitable and
inappropriate. Discussions with the ILU are ongoing and the Company's ultimate liability, if any,
is not possible to forecast at the present time.

Item 2. Changes in Securities:

None.

Item 3. Defaults Upon Senior Securities:

None.

Item 4. Submissions of Matters to a Vote of Securities Holders:

None.

Item 5. Other Information:

None.

Item 6. Exhibits and Reports on Form 8-K:

(a) Exhibits:

Exhibit No. Description of Exhibit

10.18 Employment Agreement with Stanley A. Galanski effective March 26, 2001.

(b) Reports on Form 8-K:

There were no reports on Form 8-K filed for the three months ended March 31, 2001.

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)

Dated: May 14, 2001 /s / Bradley D. Wiley
Bradley D. Wiley
Senior Vice President, Chief Financial
Officer and Secretary

INDEX OF EXHIBITS

Exhibit No. Description of Exhibit

10.18 Employment Agreement with Stanley A. Galanski effective March 26, 2001.

EX-10 2 agreement.html Employment Agreement

                                                                                                     Exhibit 10.18
                                                EMPLOYMENT AGREEMENT
                                                --------------------



         THIS  AGREEMENT  is made the 26th day of March,  2001,  between THE  NAVIGATORS  GROUP,  INC.,  a Delaware
corporation  (unless  otherwise  specified,  hereinafter  referred  to as  "Navigators")  and  STANLEY A.  GALANSKI
(hereinafter referred to as the "Employee").
         WHEREAS,  Navigators  desires  to employ the  Employee,  and the  Employee  wishes to become  employed  by
Navigators,  as Executive  Vice  President and Chief  Operating  Officer of  Navigators  and as President and Chief
Operating Officer of the Navigators Insurance Companies, on the terms and conditions set forth herein.
         NOW,  THEREFORE,  in  consideration  of the premises and the mutual  covenants  and  conditions  contained
herein, Navigators and Employee covenant and agree as follows:
         1.       Employment.  Navigators  hereby  employs  Employee,  and  Employee  hereby  accepts and agrees to
                  ----------
employment  as  Executive  Vice  President  and Chief  Operating  Officer of The  Navigators  Group,  Inc.,  and as
President and Chief Operating Officer of Navigators Insurance Companies.
         2.       Responsibility.   Employee  will  be  responsible   for  Navigators'   operations,   (subject  to
                  --------------
consultation  with  the  Chairman  and  Board of  Directors  of  Navigators),  including  underwriting,  marketing,
staffing,  administration,  and profit and loss.  Employee  will report to the  Chairman of The  Navigators  Group,
Inc. and to its Board of Directors.
         Employee  shall  devote his full working  time and best  efforts to further the  interests of  Navigators.
Employee shall perform all duties  commensurate  with such  positions,  as well as such other related duties as may
be assigned to him from time to time by the Board of Directors.
         3.       Additional   Responsibilities/Directorships.   Upon  execution  of  this  employment   agreement,
                  -------------------------------------------
Employee  shall be  elected as a Director  to the  Boards of  Directors  of both The  Navigators  Group,  Inc.  and
Navigators'  Insurance  Companies.  Within 18 months of Employee's  employment with  Navigators,  Employee shall be
designated as the President and Chief Executive Officer of The Navigators  Group, Inc. and of Navigators  Insurance
Companies,  subject  to  acceptable  performance  as  determined  by the Board of  Directors  and the  Chairman  of
Navigators.
         4.       Location.  Employee's  position will be based in the New York City headquarters of Navigators,
                  --------
subject to any possible relocation of the office at some future date.
         5.       Term. The initial term of Employee's  employment will continue through  March 31, 2004,  and will
                  ----
continue for additional  one-year periods,  unless either party elects to terminate the employment  relationship by
written  notice to the other  party at least 120 days prior to  March 31, 2004  or prior to the  expiration  of any
subsequent one-year period.
         6.       Compensation.  For the  services  described  in  paragraph  2 above to be  rendered  by  Employee
                  ------------
hereunder, Navigators agrees as follows:
                  (a)      Base  Salary.  Employee's  initial  annual base  salary  shall be  $325,000,  subject to
                           ------------
         applicable  withholdings.  Future base  salaries  shall be no less than this amount,  but shall be subject
         to annual review by the Compensation Committee each July in accordance with Navigators' regular practice.






                  (b)      Bonus.   Employee  will  be  eligible  for  an  annual   performance  bonus  based  upon
                           -----
         Navigators'  actual  performance  as  compared to targets  pre-established  by the Board of  Directors  of
         Navigators.
                  (c)      Employee  Benefits.  Employee  shall  be  eligible  to  participate  in  all  Navigators
                           ------------------
         benefit plans made available to executive level  employees,  including  health  insurance,  money purchase
         pension plan and the 401-K plan.
                  (d)      Vacation;  Time Off.  Employee  shall be entitled to take such  holidays  and sick leave
                           -------------------
         as Navigators may reasonably  determine,  consistent with the performance of his duties  hereunder and the
         then current  policies of Navigators in respect to such matters.  Notwithstanding  any current policies of
         Navigators  with  respect  to  vacation,  however,  Employee  shall be  entitled  to four  weeks  vacation
         "annually."  Annually  shall be defined by the contract  year (e.g.,  the start date of this  Agreement to
                                                                       -----
         the same date the following  year).  Employee may "carry over" up to two weeks of unused  vacation days to
         the following  contract  year. In no event,  however,  shall Employee be entitled to accumulate a total of
         more than two weeks of time from  prior  contract  years.  Vacation  schedules  shall be  approved  by the
         Chairman.
                  (e)      Expenses.        Navigators  agrees  to  pay,  or  reimburse  Employee  for,  reasonable
                           --------
         expenses  incurred in connection with Employee's  performance of his duties  hereunder,  upon presentation
         of appropriate  receipts or other  documentation of such expense in accordance with Navigators'  published
         policies pertaining to business expenses.
                  (f)      Automobile.  Employee  shall  receive  a monthly  automobile  expense  allowance  in the
                           ----------
         amount of $1,000.
                  (g)      Moving  Allowance.  In the event that  Navigators  relocates its office from its current
                           -----------------
         New York City location to a location  requiring a  significantly  increased  commutation  from  Employee's
         current residence in Ridgefield,  Connecticut,  Navigators agrees to reimburse  Employee for the following
         expenses if Employee elects to move his residence closer to Navigators' new office:
                           (i)      brokerage  commission and reasonable legal expenses incurred in connection with
                  the sale of his existing residence;
                           (ii)     reasonable  legal  expenses  incurred in connection  with the purchase of a new
                  home;
                           (iii)    moving costs for furniture and other household possessions;
                           (iv)     temporary  accommodations  for Employee  (and,  if  necessary,  for  Employee's
                  family)  if  required  in  connection  with  such  move,  and  reasonable  and  necessary  family
                  transportation expenses.





                  (h)      Stock  Grant.  Employee is hereby  granted a total of 100,000  shares of common stock of
                           ------------
         Navigators,  with  such  grant  vesting  in  four  25,000  share  increments  on each  of the  first  four
         anniversary  dates of the  commencement of Employee's  employment.  In the event of one or more of (i) the
         sale or other transfer,  except for a transfer to an affiliated  entity of Navigators which does not cause
         a change of control of Navigators,  of  substantially  all of the assets of  Navigators,  (ii) a merger of
         Navigators  with another  business  entity in which  Navigators  is not the  surviving  entity,  (iii) the
         liquidation of Navigators,  or (iv) Terence N. Deeks or his family members or family interests  selling or
         otherwise  transferring  a  sufficient  number of  shares of  Navigators'  common  stock  that they own or
         control  so that they no longer  have  effective  day to day  control  over  Navigators,  then the  shares
         granted  hereunder  shall  vest  in  their  entirety  immediately  as of the  closing  date  of  any  such
         transaction.  In the event of the  termination of the  Employee's  employment for any reason before all of
         the stock grants have vested,  any unvested  shares will revert to Navigators,  unless the  termination of
         employment arises for Good Reason or one of the events set forth in the preceding sentence occurs.
         7.       TERMINATION OF EMPLOYMENT.
                  -------------------------
                  (a)      Termination  For Cause;  Resignation.  Employee's  employment  may be  terminated at any
                           ------------------------------------
         time for cause,  as defined  herein,  in which case  Employee  will not be  entitled  to any  compensation
         beyond the date of the  termination of Employee's  employment and all unvested stock grants will revert to
         Navigators.  If  Employee  resigns  his  employment  (other than for Good  Reason),  Employee  will not be
         entitled  to any  compensation  beyond  the  date of the  termination  of  Employee's  employment  and all
         unvested  stock grants will revert to  Navigators.  If  Employee's  employment is terminated by Navigators
         during the  initial  term for other than cause,  Employee  will be entitled to receive his base salary for
         the  remainder  of the  initial  term.  In the event there is a change of control of  Navigators,  whether
         through a merger  or sale of  Navigators,  and such  change  of  control  results  in the  termination  of
         Employee's  employment or any other  material  adverse  change in Employee's  position  constituting  Good
         Reason,  as set forth in Section (c)(iii) below,  Employee will be entitled to receive his base salary for
         the remainder of the initial term and all stock grants will immediately vest.
                  (b)      Disability;  Death.  If Employee  becomes  Permanently  Disabled prior to the expiration
                           ------------------
         of the Term of this Agreement,  Employee shall be deemed to have voluntarily  resigned from his employment
         hereunder as of the date the  disability  is deemed  permanent as defined in section  (c)(ii)  below,  but
         only if Navigators  provides  written  notice to that effect to Employee,  within thirty (30) days of such
         date.  If  Employee  dies  during  the  Term  of  this  Agreement,   Employee  shall  be  deemed  to  have
         involuntarily resigned from his employment hereunder as of the date of death.
                  (c)      Definitions.
                           -----------
                           (i)      For Cause.  The Company  shall be  entitled  to  terminate  the  employment  of
                                    ---------
                  Employee For Cause if any of the following shall occur during the term of this Agreement:
                                    (A)     The commission by Employee of a felony;
                                    (B)     Employee  engages  in  conduct   involving   fraud,   moral  turpitude,
                           dishonesty, gross misconduct, embezzlement, or theft;





                                    (C)     The failure of Employee to perform  material  duties assigned to him by
                           the  Chairman  or the Board of  Directors,  after  written  notice to  Employee  of such
                           failure  specifying  in detail the  circumstances  constituting  such  failure,  and the
                           expiration  of a thirty (30) day period  following  Employee's  receipt of such  written
                           notice,  during which  Employee  has failed to cure such  failure to perform;  provided,
                           however,  that in  circumstances  where such cure  reasonably  requires more than thirty
                           (30) days to  accomplish,  Employee's  failure to diligently  commence  effecting such a
                           cure  and  continue  efforts  at  effecting  such  cure so as to cure  such  failure  as
                           promptly as may be practicable will constitute Cause under this Section 7(c)(i)(C).
                                    (D)     Employee's  material  breach of any of the terms of this  Agreement  or
                           of any written,  lawful  directive of  Navigators'  Board of Directors or Chairman or of
                           any Navigators policy set forth in Navigators' Employee Policy Manual.
                           (ii)     Permanently  Disabled.  As used herein,  subject to any  applicable  laws,  the
                                    ----------------------
                  term  "Permanently  Disabled"  shall mean injury or  illness,  mental or  physical,  or any other
                  condition  or  circumstance  which  materially  interferes  with the  ability of the  Employee to
                  fulfill  the  responsibilities  described  in  Section  2 of this  Employment  Agreement  for any
                  consecutive  twelve-week  period or for an aggregate of four months out of a twelve-month  period
                  commencing with the onset of such injury or illness.
                           (iii)    Good  Reason.  Navigators  shall at all  times  during  the Term of  Employee's
                                    ------------
                  employment  hereunder  grant and  provide  to  Employee  the  authority  and  support  reasonably
                  required by Employee to perform the duties and  responsibilities  of his positions,  as set forth
                  in Sections 2 and 3 above.  In the event of the  occurrence of any of the  following,  any one of
                  which shall constitute  "Good Reason" as that term is used throughout this Employment  Agreement,
                  Employee may elect to resign his employment with  Navigators,  in which case any unvested portion
                  of the stock grant  referred  to in Section  6(h) will  immediately  become  vested and  Employee
                  shall be entitled to receive his  then-current  base salary for the remainder of the initial term
                  of this Employment Agreement.  Good Reason shall occur if:
                           (a)      Navigators  shall,  without the prior written  consent of Employee,  materially
                  reduce or alter the  rights,  responsibilities,  duties and  authority  of  Employee,  including,
                  without  limitation,  demoting  Employee from the positions  referred to in Sections 2 and 3 to a
                  lower level position;
                           (b)      Employee  shall be  required  to report to any  person  or  entity  other  than
                  Terence N. Deeks,  who is the current Chairman of Navigators,  or his successor,  and Navigators'
                  Board of Directors, without Employee's prior written consent;
                           (c)      The  employment of the Employee has been  involuntarily  terminated  during the
                  initial Term other than For Cause.






         8.       TERMINATION PAY IN CONSIDERATION OF RESTRICTIVE  COVENANTS.  Employee and Navigators  acknowledge
                  ----------------------------------------------------------
that, in  consideration of the Employee's  agreement to the restrictive  covenants set forth in Sections 10 and 11,
Navigators  has agreed that,  if it elects by written  notice to Employee to invoke and require  Employee to comply
with the restrictions set forth in Sections 10 and 11 of this Employment  Agreement,  it will,  notwithstanding the
provisions  of Section 7 of this  Employment  Agreement,  continue to pay to the  Employee on  Navigators'  regular
payroll dates during the twelve (12) month period (the  "Severance  Period")  following the effective  date of such
termination  of  employment,  base  salary at the rate last in effect for the  Employee  (the  "Termination  Pay").
Notwithstanding  the foregoing,  in the event that Employee  breaches any of the covenants set forth in Sections 9,
10, and 11, all payments of  Termination  Pay shall  thereupon  cease and no further  payments to Employee shall be
made by Navigators.  Navigators  shall provide to Employee,  within five (5) business days of the effective date of
the  termination  of the  employment  of  Employee,  written  notice as to whether it elects to invoke and  require
Employee  to comply  with the  restrictions  set  forth in  Sections  10 and 11 of this  Employment  Agreement.  If
Navigators  so  elects,  as set  forth  above,  it  shall  pay to  Employee  the  Termination  Pay.  Regardless  of
Navigators'  election with respect to Termination Pay,  Employee shall in all events be required to comply with the
restrictions set forth in Section 9, entitled "Confidentiality."
         9.       CONFIDENTIALITY.  For purposes of this  Section 9, and  Sections 8, 10 and 11 of this  Employment
                  ---------------
Agreement,  the term "Navigators" shall include The Navigators Group, Inc.,  Navigators  Insurance Company, and all
related or  affiliated  entities.  Employee  covenants  and agrees that,  from and after the date hereof,  Employee
shall not,  directly or indirectly  disclose any Confidential  Information,  as hereinafter  defined,  to any party
whatsoever,  except  to  the  extent  required  in the  performance  of  his  duties  for  Navigators,  or use  any
Confidential  Information for the benefit of himself or any other person,  firm,  corporation or other entity.  The
term  "Confidential  Information" shall mean any information  related to Navigators'  business  including,  without
limitation,  policy forms,  agency and  subproducer  relationships,  product and financial  plans,  information  on
pricing and customers,  fees and services provided therefor,  technical  information and data,  financial reserves,
other  financial  information,  business or product plans or costs,  existing or prospective  customers or customer
lists,  pricing  data or other  terms of sales,  customer  requirements,  buying  history or  underwriting  or risk
assessment  information,  the  identity  of agents or  customers  or  prospective  agents or  customers,  products,
coverages, the terms of any reinsurance,  fronting or other agreements of Navigators,  and all information to which
Employee has access  during his  employment  with  Navigators  which  belongs or relates to a third party and which
would  constitute  Confidential  Information if it belonged to or related to Navigators.  Confidential  Information
shall also include  knowledge  gained by Employee  through his  employment  by  Navigators.  Employee  shall not be
required to maintain the  confidentiality  of any information which is or becomes part of the public domain through
no act or omission attributable to Employee.
         All  Confidential  Information and all other data,  whether  written or  electronically  stored,  computer
printouts and other records and written  material  prepared or compiled by Employee or furnished to Employee  while
in the employ of Navigators  and which relates to the business of Navigators,  is the property of Navigators.  Upon
the  termination of Employee's  employment  with  Navigators,  Employee shall return to Navigators,  all documents,
files,  diskettes and other information storage media containing all such Confidential  Information and other data,
and shall not retain copies thereof.
         10. Non-Solicitation  of  Navigators'  Employees.  Employee  covenants and agrees that,  while employed by
             --------------------------------------------
Navigators and for a period of one year thereafter,  Employee will not, directly or indirectly,  solicit, or assist
any other party in  soliciting,  or seek to influence  any employee of  Navigators  to  terminate  employment  with
Navigators or to become employed by any other party.
         11.      Non-Competition  and  Non-Solicitation  of Customers,  Agents and Others.  Employee covenants and
                  ------------------------------------------------------------------------
agrees  that,  for a  period  of one  year  following  the  termination  of his  employment  with  Navigators  (the
"Restricted Period"), Employee shall not:
                  (a)      directly  or  indirectly  become  employed  by, own an  interest  in,  manage,  operate,
         control,  provide  services  to,  or become  associated  with as an  officer,  director,  partner,  agent,
         consultant,  stockholder, or otherwise any individual, firm, partnership,  corporation,  proprietorship or
         other business  entity which competes with the business of  Navigators,  as conducted by, or  contemplated
         by, Navigators at the time of the termination of Employee's employment with Navigators.





                  (b)      solicit  or  call  upon  any  person,  entity  or  business  which  was an  existing  or
         prospective  customer,  agent,  insured,  client,  broker or agent of  Navigators  at any time  during the
         period  commencing  thirty-six  (36)  months  prior  to the  termination  of  Employee's  employment  with
         Navigators  for the purpose of selling to or through such parties any  insurance  coverage  which has been
         offered for sale by Navigators  during  Employee's  employment with Navigators.  The  restrictions  herein
         shall  extend to any  persons,  corporations,  partnerships,  firms,  businesses  or entities  for whom or
         through whom Navigators  engages in the business of providing  insurance or conducting related business or
         for whom or  through  whom  Navigators  actively  sought or seeks to engage in such  business  during  the
         period  commencing  thirty-six  (36)  months  prior  to the  termination  of  Employee's  employment  with
         Navigators  through the end of the Restricted  Period and shall include agents and subagents of Navigators
         notwithstanding  that  such  persons  or  entities  may  have  been  induced  to  enter  into  a  business
         relationship with Navigators by the efforts of Employee or someone on his behalf.
                  The  restrictions  in this  Section  11  shall  be  limited  to any  county  of any  state or any
         comparable  jurisdiction of any foreign country in which Navigators,  directly or through  subsidiaries or
         affiliates,  during the period of Employee's  employment with Navigators or during the Restricted  Period,
         has  been  or is  engaged  in  the  business  of  providing  insurance  or  conducting  related  business.
         Notwithstanding  the  foregoing,  the  restrictions  set forth in this  Section  11 shall not apply to any
         jurisdiction whose laws prohibit enforcement of such restrictions.
         12.      JUDICIAL  MODIFICATION.  The  parties  hereby  agree that if the scope or  enforceability  of the
                  ----------------------
covenants  in  paragraphs  10 and 11 hereof are in any way disputed at any time, a court or other trier of fact may
modify and enforce  said  covenants  to the extent  that it  believes  them to be  reasonable  under  circumstances
existing at that time.
         13.      INJUNCTIVE RELIEF.  Employee  acknowledges that compliance with the restrictive  covenants herein
                  -----------------
is  necessary to protect the business and good will of  Navigators,  and that a breach of these  restrictions  will
cause  irreparable  damage to Navigators for which  monetary  damages may not be adequate.  Consequently,  Employee
agrees  that in the event that he  breaches  or  threatens  to breach any of the  restrictive  covenants  contained
herein,  Navigators may be entitled,  upon compliance with applicable requirements of law, to both (i) a temporary,
preliminary  and/or permanent  injunction in order to prevent the continuation of such harm, and (ii) money damages
insofar as they can be determined.  Notwithstanding  any of the foregoing,  and subject to the requirements of law,
nothing in this  Agreement  shall be construed to prohibit  Navigators  from also  pursuing any other  remedy,  the
parties having agreed that all remedies are to be cumulative to the extent permitted by law.
         14.      LITIGATION  EXPENSE.  In the event  that  Employee  brings  an  action in any court of  competent
                  -------------------
jurisdiction  seeking a determination  that Navigators'  discharge of the Employee For Cause was not authorized by,
and in compliance  with, the terms of this Employment  Agreement,  Employee,  if he is the prevailing  party in any
such court  proceeding,  shall be reimbursed  by  Navigators  for  Employee's  legal fees and expenses  incurred in
connection  with  such  litigation.  Similarly,  in the  event  that  Employee  brings  an  action  in any court of
competent  jurisdiction  seeking a determination that Navigators'  discontinuance of the payment of Termination Pay
to the Employee was not authorized by, and in compliance  with, the terms of this Employment  Agreement,  Employee,
if he is the  prevailing  party in any such court  proceeding,  shall be reimbursed by  Navigators  for  Employee's
legal fees and  expenses  incurred in  connection  with such  litigation.  Any  recovery of legal fees and expenses
hereunder shall be in addition to any other recovery or remedy directed by the court.
         15.      NOTICES.  Any and all notices  required or  permitted  to be given under this  Agreement  will be
                  -------
sufficient  if furnished in writing,  sent by personal  delivery,  telex,  telecopier  or  certified  mail,  return
receipt requested,  to each of the applicable  addresses set forth below (or such other address as may from time to
time be designated by notice by any party hereto for such purpose):
                           To Employee:     Stanley A. Galanski

                           With a copy to:  Metz Schermer & Lewis, L.L.C.
                                                     11 Stanwix Street, 18th Floor
                                                     Pittsburgh, PA 15222
                                                     Attn:    Leland P. Schermer

                           To Navigators:   Terence N. Deeks
                                                     The Navigators Group, Inc.
                                                     One Penn Plaza
                                                     New York, NY  10119

                           With a copy to:  Rosenman & Colin LLP
                                                     575 Madison Avenue
                                                     New York, NY  10022
                                                     Attn:  Marc M. Tract

Notice shall be deemed given,  if by personal  delivery,  on the date of such delivery or, if by telex or telecopy,
on the business day  following  receipt of answer back or telecopy  confirmation  or, if by certified  mail, on the
date shown on the applicable return receipt.





         16.      MISCELLANEOUS.
                  -------------
                  (a)      Except  for  other  documents  referenced  in this  Agreement,  this  written  Agreement
         contains the sole and entire  Agreement  between the parties,  and supersedes any and all other agreements
         between them.
                  (b)      The waiver by either  party of a breach of any  provision  of this  Agreement  shall not
         operate as, or be  construed a waiver of any  subsequent  breach  thereof.  No waiver or  modification  of
         this  Agreement or of any covenant,  condition or  limitation  herein  contained  shall be valid unless in
         writing and duly executed by the party to be charged therewith.
                  (c)      In case any one or more of the  provisions  contained  in this  Agreement  shall for any
         reason be held to be invalid,  illegal or  unenforceable in any respect,  such  invalidity,  illegality or
         unenforceability  shall not affect any other  provision  thereof and this Agreement  shall be construed as
         if such invalid, illegal or unenforceable provision had never been contained herein.
                  (d)      In any action,  special  proceedings or other  proceedings  that may be brought  arising
         out of, in  connection  with, or by reason of this  Agreement,  the laws of the State of New York shall be
         applicable  and  shall  govern  to the  exclusion  of the law of any other  forum,  without  regard to the
         jurisdiction in which the action or special proceeding may be instituted.
                  (e)      The section  headings  contained  herein are  inserted  for ease of  reference  only and
         shall not control or affect the meaning or construction of the provisions hereof.
                  (f)      This Agreement  shall be binding on and inure to the benefit of the  respective  parties
         and their respective heirs, legal representatives, successors and assigns.

         IN WITNESS  WHEREOF,  Navigators has hereunto  caused this Agreement to be executed by its duly authorized
officer  and the  Employee  has  hereunto  set his  hand,  all being  done in  duplicate  originals  with one being
delivered to each party on the              day of ________, 2001.
                               ------------
         Executed at New York, New York on the date set forth above.

THE NAVIGATORS GROUP, INC.                  EMPLOYEE:



By:
   --------------------------------------------------         -----------------------------------------------------
Its:                                                                   STANLEY A. GALANSKI
     --------------------------------------------------

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