March 31, 2001 10-Q

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.