UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

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

For the Quarterly Period Ended     March 31, 2005

Commission file number   0-15886

The Navigators Group, Inc.

(Exact name of Registrant as specified in its charter)

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

(212) 244-2333

(Registrant’s telephone number, including area code)

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

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

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

The number of common shares outstanding as of April 25, 2005 was 12,760,833.

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

INDEX

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Item 4.  Controls and Procedures

Part II.  OTHER INFORMATION

Item 1.  Legal Proceedings

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

Item 3.  Defaults Upon Senior Securities

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

Item 5.  Other Information

Item 6.  Exhibits

Signature

Index of Exhibits

2

Part 1. Financial Information

Item 1.    Financial Statements

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

($ in thousands, except share data)

	March 31,		December 31,
	2005		2004
	(Unaudited)
ASSETS
Investments and cash:
Fixed maturities, available-for-sale, at fair value (amortized cost: 2005, $771,506; 2004, $713,049)	$	771,307	$	722,434
Equity securities, available-for-sale, at fair value (cost: 2005, $19,254; 2004, $19,101)	20,884		21,170
Short-term investments, at cost which approximates fair value	107,574		96,653
Cash	7,652		14,676
Total investments and cash	907,417		854,933
Premiums in course of collection	179,181		176,720
Commissions receivable	3,138		3,062
Prepaid reinsurance premiums	147,012		130,761
Reinsurance receivable on paid losses	18,861		20,955
Reinsurance receivable on unpaid losses and loss adjustment expenses	520,262		502,329
Net deferred income tax benefit	21,427		17,348
Deferred policy acquisition costs	35,935		23,882
Accrued investment income	7,341		7,303
Goodwill	5,241		5,282
Other assets	19,218		14,103
Total assets	$	1,865,033	$	1,756,678
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses	$	999,766	$	966,117
Unearned premium	326,571		270,970
Reinsurance balances payable	140,451		143,427
Federal income tax payable	9,270		5,614
Payable for securities purchased	2,695		3,027
Accounts payable and other liabilities	52,524		38,945
Total liabilities	1,531,277		1,428,100
Stockholders’ equity:
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued	—		—
Common stock, $.10 par value, 20,000,000 shares authorized; issued and outstanding: 12,759,958 for 2005 and 12,657,160 for 2004
	1,276		1,266
Additional paid-in capital	156,514		154,670
Retained earnings	173,036		163,337
Accumulated other comprehensive income	2,930		9,305
Total stockholders’ equity	333,756		328,578
Total liabilities and stockholders’ equity	$	1,865,033	$	1,756,678

See accompanying notes to interim consolidated financial statements.

3

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

	Three Months Ended
	March 31,
	2005			2004
	(Unaudited)
Gross written premium	$	216,996		$	195,951
Revenues:
Net written premium	$	117,090		$	95,935
(Increase) in unearned premium	(39,552		)	(21,760		)
Net earned premium	77,538			74,175
Commission income	1,270			1,127
Net investment income	7,622			5,902
Net realized capital gains	167			422
Other income	897			128
Total revenues	87,494			81,754
Operating expenses:
Net losses and loss adjustment expenses incurred	46,221			43,752
Commission expense	9,604			11,028
Other operating expenses	17,444			13,432
Total operating expenses	73,269			68,212
Income before income tax expense	14,225			13,542
Income tax expense (benefit):
Current	5,172			5,007
Deferred	(646		)	(378		)
Total income tax expense	4,526			4,629
Net income	$	9,699		$	8,913
Net income per common share:
Basic	$	0.77		$	0.71
Diluted	$	0.76		$	0.70
Average common shares outstanding:
Basic	12,677			12,554
Diluted	12,760			12,654

See accompanying notes to interim consolidated financial statements.

4

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

($ in thousands)

	Three Months Ended March 31,
	2005			2004
	(Unaudited)
Preferred Stock
Balance at beginning and end of period	$	—		$	—
Common stock
Balance at beginning of year	$	1,266		$	1,254
Shares issued under stock plans	10			5
Balance at end of period	$	1,276		$	1,259
Additional paid-in capital
Balance at beginning of year	$	154,670		$	151,765
Effect of SFAS 123 for stock options	246			200
Shares issued under stock plans	1,598			1,069
Balance at end of period	$	156,514		$	153,034
Retained earnings
Balance at beginning of year	$	163,337		$	128,472
Net income	9,699			8,913
Balance at end of period	$	173,036		$	137,385
Accumulated other comprehensive income
Net unrealized gains (losses) on securities, net of tax
Balance at beginning of year	$	7,416		$	7,871
Change in period	(6,487		)	4,770
Balance at end of period	929			12,641
Cumulative translation adjustments, net of tax
Balance at beginning of year	1,889			666
Net adjustment for period	112			219
Balance at end of period	2,001			885
Balance at end of period	$	2,930		$	13,526
Total stockholders’ equity at end of period	$	333,756		$	305,204

See accompanying notes to interim consolidated financial statements.

5

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ in thousands)

	Three Months Ended March 31,
	2005			2004
	(Unaudited)
Net income	$	9,699		$	8,913
Other comprehensive income (loss):
Change in net unrealized gains or (losses) on securities, net of tax expense (benefit) of $(3,493) and $2,568 in 2005 and 2004, respectively (1)	(6,487		)	4,770
Change in foreign currency translation gains, net of tax expense of $60 and $118 in 2005 and 2004, respectively	112			219
Other comprehensive income (loss)	(6,375		)	4,989
Comprehensive income	$	3,324		$	13,902
(1)   Disclosure of reclassification amount, net of tax:
Unrealized holding gains (losses) arising during period	$	(6,378	)	$	5,044
Less: reclassification adjustment for net gains included in net income	109			274
Change in net unrealized gains (losses) on securities	$	(6,487	)	$	4,770

See accompanying notes to interim consolidated financial statements.

6

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)

	Three Months Ended March 31,
	2005			2004
\	(Unaudited)
Operating activities:
Net income	$	9,699		$	8,913
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation & amortization	349			271
Net deferred income tax (benefit)	(646		)	(378		)
Net realized capital (gains)	(167		)	(422		)
Changes in assets and liabilities:
Reinsurance receivable on paid and unpaid losses and loss adjustment expenses	(15,839		)	(32,519		)
Reserve for losses and loss adjustment expenses	33,649			61,476
Prepaid reinsurance premiums	(16,251		)	(28,204		)
Unearned premium	55,601			51,206
Premiums in course of collection	(2,461		)	(57,125		)
Commissions receivable	(76		)	89
Deferred policy acquisition costs	(12,053		)	(9,734		)
Accrued investment income	(38		)	(482		)
Reinsurance balances payable	(2,976		)	29,402
Federal income tax	3,656			4,930
Other	12,743			(690		)
Net cash provided by operating activities	65,190			26,733
Investing activities:
Fixed maturities, available-for-sale
Redemptions and maturities	7,795			52,720
Sales	77,968			45,059
Purchases	(147,561		)	(131,950		)
Equity securities, available-for-sale
Sales	—			—
Purchases	(117		)	(6,785		)
Change in payable for securities	(332		)	(4,013		)
Net change in short-term investments	(10,921		)	15,818
Purchase of property and equipment	(145		)	(266		)
Net cash (used in) investing activities	(73,313		)	(29,417		)
Financing activities:
Proceeds of stock issued from Employee Stock Purchase Plan	212			215
Proceeds of stock issued from exercise of stock options	887			175
Net cash provided by financing activities	1,099			390
(Decrease) in cash	(7,024		)	(2,294		)
Cash at beginning of year	14,676			8,399
Cash at end of period	$	7,652		$	6,105
Supplemental disclosures of cash flow information:
Federal, state and local income tax paid	1,506			77
Issuance of stock to directors	123			60

See accompanying notes to interim consolidated financial statements.

7

THE NAVIGATORS GROUP, INC.  AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)

Note 1.  Accounting Policies

The interim consolidated financial statements are unaudited but reflect all adjustments which, in the opinion of management, are necessary to provide a fair statement of the results of The Navigators Group, Inc. and its subsidiaries for the interim periods presented on the basis of accounting principles generally accepted in the United States of America (“GAAP”).  All such adjustments are of a normal recurring nature.  All significant intercompany transactions and balances have been eliminated.  The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods.  The results of operations for any interim period are not necessarily indicative of results for the full year.  The terms “we”, “us”, “our” and “the Company” as used herein mean The Navigators Group, Inc. and its subsidiaries, unless the context otherwise requires.  These financial statements should be read in conjunction with the consolidated financial statements and notes contained in the Company’s 2004 Annual Report on Form 10-K.

Note 2.  Reinsurance Ceded

The Company’s ceded earned premiums were $83,464,000 and $73,379,000 for the three months ended March 31, 2005 and 2004, respectively.  The Company’s ceded incurred losses were $53,435,000 and $64,818,000 for the three months ended March 31, 2005 and 2004, respectively.

Note 3.  Segment Information

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

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

8

Financial data by segment for the three months ended March 31, 2005 and 2004 was as follows:

	Three Months Ended March 31, 2005
	Insurance Companies			Lloyd’s Operations			Navigators Agencies			Parent & Other Operations (1)			Consolidated Total
	($ in thousands)
Gross written premium	$	129,288		$	87,830					$	(122	)	$	216,996
Net written premium	73,581			43,509						—			117,090
Revenues:
Net earned premium	47,363			30,175						—			77,538
Commission income	—			268			$	9,750		(8,748		)	1,270
Net investment income	6,855			749			2			16			7,622
Net realized capital gains (losses	266			(99		)	—			—			167
Other income (expense)	(2		)	628			271			—			897
Total revenues	54,482			31,721			10,023			(8,732		)	87,494
Operating expenses:
Net losses and LAE	28,842			17,379			—			—			46,221
Commission expense	12,586			4,881			—			(7,863		)	9,604
Other operating expenses	2,112			4,761			10,996			(425		)	17,444
Total operating expenses	43,540			27,021			10,996			(8,288		)	73,269
Income (loss) before income tax expense (benefit)	10,942			4,700			(973		)	(444		)	14,225
Income tax expense (benefit)	3,399			1,645			(362		)	(156		)	4,526
Net income (loss)	$	7,543		$	3,055		$	(611	)	$	(288	)	$	9,699
Identifiable assets (2)	$	1,339,245		$	579,464		$	16,192		$	11,915		$	1,865,033
Loss and LAE ratio	60.9		%	57.6		%							59.6		%
Commission expense ratio	26.6		%	16.2		%							22.5		%
Other operating expense ratio	4.5		%	15.8		%							8.9		%
Combined ratio	92.0		%	89.6		%							91.0		%

(1) Includes inter-segment eliminations.

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

9

	Three Months Ended March 31, 2004
	Insurance Companies			Lloyd’s Operations			Navigators Agencies			Parent & Other Operations (1)			Consolidated Total
	($ in thousands)
Gross written premium	$	111,829		$	87,158					$	(3,036	)	$	195,951
Net written premium	54,145			41,790						—			95,935
Revenues:
Net earned premium	53,182			20,993						—			74,175
Commission income	—			62			$	7,932		(6,867		)	1,127
Net investment income	5,484			404			3			11			5,902
Net realized capital gains	205			217			—			—			422
Other income (expense)	(61		)	4			185			—			128
Total revenues	58,810			21,680			8,120			(6,856		)	81,754
Operating expenses:
Net losses and LAE	32,710			11,042			—			—			43,752
Commission expense	14,145			3,750			—			(6,867		)	11,028
Other operating expenses	1,198			3,036			8,605			593			13,432
Total operating expenses	48,053			17,828			8,605			(6,274		)	68,212
Income (loss) before income tax expense (benefit)	10,757			3,852			(485		)	(582		)	13,542
Income tax expense (benefit)	3,478			1,348			(140		)	(57		)	4,629
Net income (loss)	$	7,279		$	2,504		$	(345	)	$	(525	)	$	8,913
Identifiable assets (2)	$	1,114,640		$	447,860		$	16,876		$	32,514		$	1,535,348
Loss and LAE ratio	61.5		%	52.6		%							59.0		%
Commission expense ratio	26.6		%	17.9		%							24.1		%
Other operating expense ratio	2.3		%	14.4		%							5.7		%
Combined ratio	90.4		%	84.9		%							88.8		%

(1) Includes inter-segment eliminations.

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

10

The Insurance Companies’ net earned premium includes $7,028,000 and $7,425,000 of net earned premium from the U.K. Branch for the three months ended March 31, 2005 and 2004, respectively.

Note 4.  Comprehensive Income

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

Note 5.  Stock-Based Compensation

Stock based compensation is expensed as the awards vest and included in other operating expenses for the periods indicated.  The amount charged to expense for stock grants was $378,000 and $362,000 for the three months ended March 31, 2005 and 2004, respectively.  The amount charged to expense for stock options was $246,000 and $200,000 for the three months ended March 31, 2005 and 2004, respectively.  Stock appreciation rights resulted in expense of $75,000 for the three months ended March 31, 2005 and income of $329,000 for the three months ended March 31, 2004.

In addition, $35,000 and $30,000 were expensed for the three months ended March 31, 2005 and 2004, respectively, for stock issued annually to non-employee directors as part of their directors’ compensation for serving on the Company’s Board of Directors.

Note 6.  Application of New Accounting Standards

In September 2004, the FASB approved issuing a Staff Position to delay the requirement to record impairment losses under Emerging Issues Task Force Issue No. 03-1 (“EITF 03-1”).  The approved delay applies to certain provisions relating to the recognition of other than temporary impairments for all securities within the scope of EITF 03-1 and is expected to end when new guidance is issued and becomes effective.  The Company will review the new guidance when it becomes available.

In December 2004, the FASB issued SFAS 123 (revised 2004), Share Based Payment, which is a revision of SFAS 123, Accounting for Stock-Based Compensation, eliminating the alternative use of APB 25.  SFAS 123 (revised 2004) has no effect on the Company’s results of operations or financial condition since the Company adopted the fair value recognition provisions of SFAS 123 in 2003.

Note 7.  Lloyd’s Syndicate

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

11

Our Lloyd’s Syndicate 1221’s stamp capacity is £135.0 million ($255.3 million) in 2005 compared to £150.0 million ($275.0 million) in 2004.  Stamp capacity is a measure of the amount of premium a Lloyd’s syndicate is authorized to write based on a business plan approved by the Council of Lloyd’s.  Syndicate 1221’s capacity is expressed net of commission (as is standard at Lloyd’s) of approximately 21%.  The Syndicate 1221 premium recorded in the Company’s financial statements is gross of commission.  The Company participates for 97.5% and 97.4% of Syndicate 1221’s capacity for the 2005 and 2004 underwriting years, respectively.  The Lloyd’s operations included in the consolidated financial statements represent the Company’s participation in Syndicate 1221.

The Company provides letters of credit to Lloyd’s to support its Syndicate 1221 capacity.  If the Company increases its participation or if Lloyd’s changes the capital requirements, the Company may be required to supply additional letters of credit or other collateral acceptable to Lloyd’s, or reduce the capacity of Syndicate 1221.  The letters of credit are provided through the credit facility which the Company maintains with a consortium of banks.  The credit facility agreement requires that the banks vote whether or not to renew the letter of credit portion of the facility periodically.  If the banks decide not to renew the letter of credit facility, the Company will need to find other sources to provide the letters of credit or other collateral in order to continue to participate in Syndicate 1221.  The renewal amendment executed in January 2005 renewed the letter of credit facility until June 30, 2007.  The bank facility is collateralized by all of the common stock of Navigators Insurance Company.

Note 8.  Income Tax - Valuation Allowance

The Company had state and local operating loss carryforwards amounting to potential future tax benefits of $5,409,000 and $4,493,000 at March 31, 2005 and December 31, 2004, respectively.  A valuation allowance was established for the full amount of these potential future tax benefits due to the uncertainty associated with their realization.

Note 9.  Commitments and Contingencies

The Company is not a party to, or the subject of, any material pending legal proceedings which depart from the ordinary routine litigation incident to the kinds of business it conducts.

The Company was recently informed by a lead reinsurer participating on excess of loss reinsurance agreements that it may formally dispute a loss payment recovery when billed.  The recovery is for the 2004 settlement of a class action suit involving a large asbestos claim which settlement will be paid over seven years starting in June 2005.  The reinsurer has not indicated any dispute with respect to recoveries on related pro rata reinsurance agreements.

The Company believes such a dispute, if it should arise, is without merit and intends to vigorously pursue collection of its reinsurance recoveries.  While it is too early to predict with any certainty the outcome of this matter, the Company believes that the ultimate outcome of this matter would not be expected to have a significant adverse effect on results of operations, financial condition or liquidity, although an unexpected adverse resolution could have a material adverse effect on the Company’s results of operations in a particular fiscal quarter or year.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Note on Forward-Looking Statements

Some of the statements in this Quarterly Report on Form 10-Q are ‘‘forward-looking statements’’ as defined in the Private Securities Litigation Reform Act of 1995.   Whenever used in this report, the words “estimate”, “expect”, “believe” or similar expressions are intended to identify such forward-looking statements.  Forward-looking statements are derived from information that we currently have and assumptions that we make.

12

We cannot assure that anticipated results will be achieved, since results may differ materially because of both known and unknown risks and uncertainties which we face. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Factors that could cause actual results to differ materially from our forward-looking statements include, but are not limited to:

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

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

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

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

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

•unexpected turnover of our professional staff;

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

•risks inherent with the collection of reinsurance recoverable amounts from our reinsurers over many years into the future based on their financial ability and intent to meet such obligations to the Company;

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

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

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

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

•the inability of our internal control framework to provide absolute assurance that all incidents of fraud or unintended material errors will be detected and prevented;

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

•other risks that we identify in future filings with the Securities and Exchange Commission (the “SEC”).

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

13

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

Overview

We are an international insurance holding company focusing on specialty products for niches within the overall property/casualty insurance market. Our largest product line and most long-standing area of specialization is ocean marine insurance. We have also developed specialty niches in professional liability insurance, and in specialty liability insurance primarily consisting of contractors’ liability coverages. We conduct operations through our insurance company subsidiaries, the Navigators Agencies and our Lloyd’s Operations.  Our insurance company subsidiaries consist of Navigators Insurance Company, which includes a United Kingdom Branch (the “U.K. Branch”), and NIC Insurance Company which writes excess and surplus lines.  The Navigators Agencies consist of five wholly-owned insurance underwriting agencies which produce business for our insurance subsidiaries.  Our Lloyd’s operations include Navigators Underwriting Agency Ltd. (“NUAL”), a Lloyd’s of London (“Lloyd’s”) marine underwriting agency which manages Lloyd’s Syndicate 1221.  We participate in the capacity of Syndicate 1221 through two wholly owned Lloyd’s corporate members.

While management takes into consideration a wide range of factors in planning the Company’s business strategy and evaluating results of operations, there are certain factors that management believes are fundamental to understanding how the Company is managed.   First, underwriting profit is consistently emphasized as a primary goal, above premium growth.  Management’s assessment of our trends and potential growth in underwriting profit is the dominant factor in its decisions with respect to whether or not to expand a business line, enter into a new niche, product or territory or, conversely, to contract capacity in any business line.  In addition, management focuses on managing the costs of our operations.  Management believes that careful monitoring of the costs of existing operations and assessment of costs of potential growth opportunities are important to our profitability.  Access to capital also has a significant impact on management’s outlook for our operations.  Our insurance company subsidiaries’ operations and ability to grow their business and take advantage of market opportunities are particularly constrained by regulatory capital requirements and rating agency assessments of capital adequacy.

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

Our revenue is primarily comprised of premiums, commission and investment income. Our insurance company subsidiaries derive their premiums primarily from business written by the Navigators Agencies. The Lloyd’s Operations derive their premiums from business written by NUAL. The Navigators Agencies and NUAL

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receive commissions and, in some cases, profit commissions and service fees on the business produced on behalf of our insurance company subsidiaries and others.

Over the past three years, we have experienced generally beneficial market changes in our lines of business. As a result of several large industry losses in the second quarter of 2001, the marine insurance market began to experience diminished capacity and rate increases, initially in the offshore energy line of business.  The marine rate increases began to level off in 2004 and into 2005.  Specialty liability losses, particularly for our California construction liability business, also resulted in diminished capacity in the market in which we compete, as many former competitors who lacked the expertise to selectively underwrite this business have been forced to withdraw from the market.  Rates for the California construction liability business have started to level off in 2005 after rate increases in 2004 and 2003.  In the professional liability market, the enactment of the Sarbanes-Oxley Act of 2002, together with recent financial and accounting scandals at publicly traded corporations and increased frequency of securities-related class action litigation, has lead to an invigorated interest in professional liability insurance generally. These conditions resulted in rate increases in 2002 and 2003 as well as an overall improvement in policy terms and conditions for our professional liability line of business.  The professional liability business experienced single digit premium rate decreases in 2004 and level rates in the 2005 first quarter.

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

Industry Investigations

The insurance industry has become the subject of increasing scrutiny with respect to insurance broker and agent compensation arrangements, and certain sales practices.  The New York State Attorney General and other state and federal regulators have commenced investigations and other proceedings relating to the payment of contingent commissions by insurance companies to insurance brokers and agents and the extent to which such compensation has been disclosed, and the solicitation and provision of fictitious or inflated quotes.  These investigations and proceedings are expected to continue, and new investigative proceedings may be commenced, in the future.  These investigations and proceedings could result in legal precedents and new industry-wide practices or legislation, rules or regulations that could significantly affect our industry and may also cause stock price volatility for companies in the insurance industry.

The Company has completed its own internal review with respect to such contingent commission arrangements and the anti-competitive sales practices discussed above.  In this internal inquiry, the Company did not find any evidence that it has engaged in the bid-rigging and price-fixing activities that are at the core of the industry investigations into these anti-competitive practices.  In addition, as a result of this internal inquiry, the Company is developing guidelines with respect to its future commission payment arrangements.

Largely as a result of these industry investigations, contingent commission and other commission practice standards are currently evolving.  For example, in December 2004 the National Association of Insurance Commissioners adopted an amendment to its Producer Licensing Model Act with respect to producer compensation disclosure obligations, and is considering further amendments to this Model Act.  The Company is supportive of industry efforts to encourage transparency in the disclosure of contingent commissions paid to brokers by insurers and does not expect to be adversely impacted by legislative developments in this area.

The reinsurance industry has also become the subject of increasing scrutiny with respect to the alleged improper use of reinsurance agreements to manipulate financial reporting results.  The New York State Attorney General and other state and federal regulators have commenced investigations and other proceedings

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related to reinsurance agreements in which the insurance risk transferred between the ceding company and reinsurer may have been insufficient to properly account for such transactions as reinsurance in financial statements filed with insurance regulatory authorities and the SEC.  Such transactions may include separate or “side” agreements that reduce, limit or mitigate the indemnification against loss or liability relating to the insurance risk transferred to the reinsurer in a reinsurance agreement.

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

The Company believes that all of its reinsurance transactions meet the risk transfer requirements to be accounted for as prospective reinsurance in its financial statements, and has no separate side agreements that would limit the insurance risk transferred to the reinsurer under its reinsurance agreements.  The Company is unable to determine the reinsurance industry financial reporting changes that could occur resulting from such investigations and the effects, if any, on its financial reporting of reinsurance transactions.

Critical Accounting Policies

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

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

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

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

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

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Deferred Tax Assets. We apply the asset and liability method of accounting for income taxes whereby deferred assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.

Impairment of Investment Securities. Impairment of investment securities results in a charge to operations when a market decline below cost is other-than-temporary. Management regularly reviews our fixed maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. A number of criteria are considered during this process including, but not limited to: the current fair value as compared to cost or amortized cost, as appropriate, of the security; the length of time the security’s fair value has been below cost or amortized cost, and by how much; and specific credit issues related to the issuer and current economic conditions. In general, we focus our attention on those securities whose market value was less than 80% of their cost or amortized cost, as appropriate, for six or more consecutive months. Other factors considered in evaluating potential impairment include the current fair value as compared to cost or amortized cost, as appropriate, our intent and ability to retain the investment for a period of time sufficient to allow for an anticipated recovery in value, specific credit issues related to the issuer and current economic conditions. Other-than-temporary impairment losses result in a permanent reduction of the cost basis of the underlying investment. Significant changes in the factors we consider when evaluating investments for impairment losses could result in a significant change in impairment losses reported in the consolidated financial statements.

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

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

Results of Operations and Overview

The following is a discussion and analysis of our consolidated and segment results of operations for the three months ended March 31, 2005 and 2004.  All earnings per share data is presented on a per diluted share basis.

Our 2005 and 2004 first quarters’ overall results of operations reflect improved market conditions beginning in late 2000 through 2003 that continued at a reduced rate through 2004 and are showing signs of softening in 2005.  Net income for the three months ended March 31, 2005 and 2004 was $9.7 million or $0.76 per share and $8.9 million or $0.70 per share, respectively.

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We experienced premium growth as measured by net earned premium in the first quarter of 2005 of $77.5 million compared to $74.2 million in the first quarter of 2004, a 4.5% increase.  The Company’s combined ratio, which is a measure of underwriting profitability, for the first quarter of 2005 was 91.0% compared to 88.8% for the first quarter of 2004.

Cash flow from operations increased in the first quarter of 2005 to $65.2 million from $26.7 million in the first quarter of 2004, a 144.2% increase, contributing to the growth in invested assets and net investment income.  Included in the 2005 first quarter cash flow is approximately $24 million attributable to the settlement of the RITC premium recorded by Lloyd’s Syndicate 1221 in the 2004 fourth quarter representing the transfer of assets and liabilities from the participants of the 2002 underwriting year to the participants of the 2003 underwriting year.  We had increased our participation in Syndicate 1221 to 97.4% for the 2003 underwriting year from 68.1% for the 2002 underwriting year.  Approximately 70% of the RITC settlement has been recorded as interest-earning funds withheld for reinsurers of the syndicate or will be distributed to third party participants of the 2002 year of account.

Consolidated stockholders’ equity increased 1.6% to $333.8 million or $26.16 per share at March 31, 2005 compared to $328.6 million or $25.96 per share at December 31, 2004.  The increase was primarily due to net income of $9.7 million for the first quarter of 2005, partially offset by a $6.4 million other comprehensive loss consisting of $6.5 million of decreases in unrealized gains on securities, resulting from higher interest rates, and $0.1 million increase in currency translation gains.  Other comprehensive income (loss) consists of the change in both after-tax unrealized gains and losses on investments and after-tax currency translation gains on the Company’s foreign operations.

Revenues.  Gross written premium increased to $217.0 million in the first quarter of 2005, from $196.0 million in the first quarter of 2004, a 10.7% increase for the three months.  The growth in gross written premium reflects a combination of business expansion in both new and existing lines of business coupled with premium rate changes on renewal policies.  The premium rate increases or decreases noted below for marine, specialty and professional liability are calculated primarily by comparing premium amounts on policies that have renewed.  The premiums are judgmentally adjusted for exposure factors when deemed significant and sometimes represent an aggregation of several lines of business.  The rate changes calculations provide an indicated pricing trend and are not meant to be a precise analysis of the numerous factors that affect premium rates or the adequacy of such rates to cover all underwriting costs and generate an underwriting profit.  The calculation can also be affected quarter by quarter depending on the particular policies and the number of policies that renew during that period.  Due to market conditions, these rate changes may or may not apply to new business which may be more competitively priced compared to renewal business.  The following table sets forth our gross and net written premium and net earned premium by segment and line of business for the periods indicated:

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	Three Months Ended March 31,
	2005											2004
	Gross Written Premium				%		Net Written Premium		Net Earned Premium			Gross Written Premium			%		Net Written Premium			Net Earned Premium
	($ in thousands)
Insurance Companies:
Marine	$		68,284		31.5	%	$	30,347	$		19,879	$	59,426		30.3	%	$	25,258		$		20,428
Specialty	42,949				19.8	%	36,398		20,022			34,230			17.5	%	20,511			21,539
Professional Liability	17,930				8.2	%	6,679		6,717			15,033			7.7	%	5,473			3,811
Assumed from Lloyd’s	125				0.1	%	126		711			3,054			1.6	%	2,906			7,405
Other (includes run-off)	—				0.0	%	31		34			86			0.0	%	(3		)	(1			)
Insurance Companies Total	129,288				59.6	%	73,581		47,363			111,829			57.1	%	54,145			53,182
Lloyd’s Operations:
Marine	73,931				34.1	%	40,060		29,627			79,316			40.5	%	39,059			20,518
Other	13,899				6.4	%	3,449		548			7,842			4.0	%	2,731			475
Lloyd’s Operations Total	87,830				40.5	%	43,509		30,175			87,158			44.5	%	41,790			20,993
Intercompany elimination	(122			)	-0.1	%	—		—			(3,036		)	-1.6	%	—			—
Total	$	216,996			100.0	%	$	117,090	$	77,538		$	195,951		100.0	%	$	95,935		$	74,175

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Gross Written Premium

Insurance Companies’ Gross Written Premium

Marine Premium. The marine gross written premium for the first quarter of 2005 increased 14.9% compared to the first quarter of 2004, reflective of growth across several lines of business including marine liability, hull, cargo, and protection and indemnity.  The average increase in renewal premium rates during the 2005 first quarter was flat.  Navigators Insurance Company obtains its marine business through participation in the marine pool managed by the Navigators Agencies.

Specialty Premium. This business consists of 69% general liability business for small general and artisan contractors, 12% personal umbrella business and 19% other targeted commercial risks.  The specialty gross written premium for the first quarter of 2005 increased 25.5% compared to the first quarter of 2004 reflective of growth across all lines of business.  The average renewal rates were flat in the contractors’ liability business in the first quarter of 2005.

Professional Liability Premium. Our insurance company subsidiaries write professional liability insurance, of which 54% represents directors and officers liability insurance (“D&O”) for privately held and publicly traded corporations. In 2002, the professional liability business was expanded to include errors and omissions insurance and employment practices liability coverages.  Commencing in October 2004, our U.K. Branch began writing professional liability coverages for U.K. solicitors and, in 2005, we began writing professional liability coverages for architects and engineers.  The professional liability gross written premium for the first quarter of 2005 increased 19.3% compared to the first quarter of 2004, reflecting the expansion of this business for all lines except for D&O which was flat.  Average overall renewal premium rates for this business increased approximately 2% with D&O rates declining approximately 2% in the first quarter of 2005.

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

Lloyd’s Operations’ Gross Written Premium

Marine Premium. Our gross written premium is based on the stamp capacity of Syndicate 1221 and the percentage of such stamp capacity we provide.  Our percentage of participation in the stamp capacity is 97.5% for 2005 compared to 97.4% for 2004.  Stamp capacity is a measure of the amount of premium a Lloyd’s syndicate is authorized to write as determined based on a business plan approved by the Council of Lloyd’s.  The stamp capacity for Syndicate 1221 has been reduced to £135 million ($255.3 million) in 2005 from £150 million ($275.0 million) in 2004, reflective of unused stamp capacity in 2004 coupled with anticipated declining market conditions in 2005.  Themarine gross written premium for the first quarter of 2005 declined 6.8% compared to the first quarter of 2004.  The average renewal premium rates for the three months ended March 31, 2005 increased approximately 2%.

Other Premium.  Other premium consists of engineering and construction gross written premium which provides coverage for construction projects including machinery, equipment and loss of use due to delays and of onshore energy premium which principally focuses on the oil and gas, chemical and petrochemical industries with coverages primarily for property damage and business interruption.

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

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The following table sets forth our ceded written premium by segment and major lines of business for the periods indicated:

	Three Months Ended March 31,
	2005					2004
	Ceded Written Premium			% of Gross Written Premium		Ceded Written Premium			% of Gross Written Premium
	($ in thousands)
Insurance Companies:
Marine	$	37,937		55.6	%	$	34,168		57.5	%
Specialty	6,551			15.3	%	13,719			40.1	%
Professional Liability	11,251			62.8	%	9,560			63.6	%
Assumed from Lloyd’s	(1		)	-0.8	%	148			4.8	%
Other (includes run-off)	(31		)	NM		89			NM
Subtotal	55,707			43.1	%	57,684			51.6	%
Lloyd’s Operations:
Marine	33,871			45.8	%	40,257			50.8	%
Other	10,450			75.2	%	5,111			65.2	%
Subtotal	44,321			50.5	%	45,368			52.1	%
Intercompany elimination	(122		)	NM		(3,036		)	NM
Total	$	99,906		46.0	%	$	100,016		51.0	%

NM = Not Meaningful

The decline in the ratio of ceded written premium to gross written premium to 46% from 51% resulted primarily from the cancellation of a quota share reinsurance agreement for specialty business effective March 31, 2005.  The cancellation resulted in a reduction of approximately $14.5 million in ceded unearned premium that has been retained and will be earned over the next 12 months by the Company.

Net Written Premium.Net written premium increased 22% in the first quarter of 2005 compared to the first quarter of 2004.  The increase in the net written premium resulted principally from the cancellation of the specialty quota share treaty effective March 31, 2005 discussed above, business expansion, and the increase in Navigators Insurance Company’s portion of the marine pool to 85% in 2005 from 80% in 2004.

Net Earned Premium.  Net earned premium which generally lags the increase in net written premium increased 5% in the first quarter of 2005 compared to the first quarter of 2004 as a result of the increased net written premium.

Commission Income.  Commission income from unaffiliated business increased 12.7% to $1.3 million in the first quarter of 2005 from $1.1 million in the first quarter of 2004.  The increase resulted from the increased profit commissions recorded by the Lloyd’s Operations.

Net Investment Income.Net investment income increased 29.1% in the 2005 first quarter compared to the first quarter of 2004 due to the increase in invested assets as a result of the positive cash flow from the increased premium volume.

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Net Realized Capital Gains (Losses).  Pre-tax net income included $167,000 of net realized capital gains for the three months ended March 31, 2005 compared to capital gains of $422,000 for the 2004 first quarter.  On an after-tax basis, the net realized capital gains were $109,000 or $0.01 per share and $274,000 or $0.02  per share for the 2005 and 2004 first quarters, respectively.

Other Income/(Expense). Other income/(expense) for the first quarters of 2005 and 2004 consisted primarily of foreign exchange gains and losses from our Lloyd’s Operations and inspection fees related to the specialty insurance business.

Operating Expenses

Net Losses and Loss Adjustment Expenses Incurred.  The ratios of net losses and loss adjustment expenses incurred to net earned premium (loss ratios) for the 2005 and 2004 first quarters were 59.6% and 59.0%, respectively.

The following tables set forth our net loss and LAE reserves by segment and line of insurance business and the total case reserves and incurred but not reported (“IBNR”) reserves as of March 31, 2005 and December 31, 2004:

	March 31, 2005		December 31, 2004
	($ in thousands)
Insurance Companies:
Marine	$	134,936	$	130,439
Specialty	155,313		150,347
Professional Liability	22,871		19,001
Assumed from Lloyd’s Operations	36,078		37,790
Other (primarily run-off business)	21,334		22,512
Total Insurance Companies	370,532		360,089
Lloyd’s Operations:
Marine	104,214		99,565
Other	4,758		4,134
Total Lloyd’s Operations	108,972		103,699
Total net loss reserves	$	479,504	$	463,788
Total net case loss reserves	$	198,632	$	189,746
Total net IBNR loss reserves	280,872		274,042
Total net loss reserves	$	479,504	$	463,788

At March 31, 2005, the IBNR net loss reserves were 58.6% of our total loss reserves compared to 59.1% at December 31, 2004.

At March 31, 2005, a 10% change in the net loss reserves would equate to $48.0 million which would represent an after-tax charge to net income of $31.2 million or 9.3% of stockholders’ equity.  Loss reserve estimates are reviewed each quarter to evaluate whether the assumptions made continue to be appropriate.  Any adjustments that result from this review are recorded in the quarter in which they are identified.

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

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

Specialty Liability and Professional Liability. Substantially all of our specialty liability business involves general liability policies which generate third party liability claims that are long tail in nature. A significant portion of our general liability reserves relates to California construction liability claims. Reserves and claim frequency on this business may be impacted by legislation implemented in California, which generally provides consumers who experience construction defects a method other than litigation to obtain construction defect repairs. The law, which became effective July 1, 2002 with a sunset provision effective January 1, 2011, provides for an alternative dispute resolution system that attempts to involve all parties to the claim at an early stage. This legislation may impact claim severity, frequency and length of settlement assumptions underlying our reserves. Accordingly, our ultimate liability may exceed or be less than current estimates due to this variable, among others.  There were 1,011 specialty liability claims open at March 31, 2005.

The professional liability class generates third party claims, which also are longer tail in nature. The professional liability policies provide coverage on a claims-made basis, whereby coverage is generally provided only for those claims that are made during the policy period. Our professional liability business is relatively immature, as we first began writing the business in late 2001. Accordingly, it will take some time to better understand the reserve trends on this business.  Our professional liability loss estimates are based on expected losses, actual reported losses, evaluation of loss trends, industry data, and the legal, regulatory and current risk environment because anticipated loss experience in this area is less predictable due to the small number of claims and/or erratic claim severity patterns. We believe that we have made a reasonable estimate of the required loss reserves for professional liability. The expected ultimate losses may be adjusted up or down as the accident years mature.  There were 431 professional liability claims open at March 31, 2005.

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

	March 31, 2005
Type of Business	Net Reported Reserves		Net IBNR		Total Net Loss Reserves		% of IBNR to Total Net Loss Reserves
Specialty construction liability	$	22,945	$	112,410	$	135,355	83.0	%
Professional liability	2,755		20,116		22,871		88.0	%
Total	$	25,700	$	132,526	$	158,226	83.8	%

	December 31, 2004
Type of Business	Net Reported Reserves		Net IBNR		Total Net Loss Reserves		% of IBNR to Total Net Loss Reserves
Specialty construction liability	$	21,338	$	110,263	$	131,601	83.8	%
Professional liability	1,166		17,835		19,001		93.9	%
Total	$	22,504	$	128,098	$	150,602	85.1	%

Asbestos and Environmental Liability. Our exposure to asbestos and environmental liability principally stems from marine liability insurance written on an occurrence basis during the mid-1980s. In general, our participation on such risks is in the excess layers, which requires the underlying coverage to be exhausted prior to coverage being triggered in our layer. In many instances we are one of many insurers who participate in the defense and ultimate settlement of these claims, and we are generally a minor participant in the overall insurance coverage and settlement.

The reserves we have established for asbestos exposures are for:  (i) estimated losses for excess insurance policy limits exposed to class actions suits against two insureds involved in the manufacturing or distribution of asbestos products; (ii) other insureds not directly involved in the manufacturing or distribution of asbestos products, but that have more than incidental asbestos exposure for their purchase or use of products that contained asbestos; (iii) attritional asbestos claims that could be expected to occur over time; and (iv) the 2004 settlement of a large claim exposed to a class action suit which settlement will be paid over seven years starting in June 2005.

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

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	Three Months Ended March 31, 2005
	Asbestos		Environmental		Total
	($ in thousands)
Gross of Reinsurance
Beginning Reserve	$	78,421	$	7,513	$	85,934
Incurred Losses & LAE	251		1,498		1,749
Calendar Year Payments	109		662		771
Ending Reserves	$	78,563	$	8,349	$	86,912
Net of Reinsurance
Beginning Reserve	$	31,394	$	1,494	$	32,888
Incurred Losses & LAE	199		900		1,099
Calendar Year Payments	3		569		572
Ending Reserves	$	31,590	$	1,825	$	33,415

Type of Business	Claim Count March 31, 2005	New Claims During Period	Claims Settled or Resolved During Period	Claim Count December 31, 2004
Environmental	98	17	8	89
Asbestos	135	12	6	129
Total	233	29	14	218

Loss development activity for asbestos related exposures in the first quarter of 2005 has not been significant.

Loss development activity on environmental losses in the first quarter of 2005 has generally consisted of oil spill claims on marine liability policies written in the ordinary course of business.

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

Commission Expense. Commission expense paid to brokers and agents is generally based on a percentage of the gross written premium and is reduced by ceding commissions the Company may receive on the ceded written premium.  Commissions are generally deferred and recorded to deferred policy acquisition costs to the extent that they relate to unearned premium.  Commission expense as a percentage of earned premium in the first quarter of 2005 was 12.4% compared to 14.9% in the first quarter of 2004  as the result of a decline in commissions paid to brokers and agents coupled with the receipt of ceding commissions from reinsurers.  The decrease in the commission percentage reflects lower commission rates and a trend among the major brokers to charge a flat fee to some of their major clients as opposed to a percentage of the premium.  Under flat fee arrangements, the amount of premium normally is correspondingly reduced since no commission is being paid to the broker by the Company.

Other Operating Expenses. The 29.9% increase in other operating expenses in the first quarter of 2005 compared to the same period in 2004 is attributable primarily to employee-related expenses resulting from expansion of the business coupled with the increased costs incurred to comply with Section 404 of the Sarbanes-Oxley Act of 2002.  Included in the three months ended March 31, 2005 and 2004, were $699,000 and $233,000, respectively, in the aggregate for employee stock option, stock grant and stock appreciation rights expense.

25

Income Taxes. The income tax expense was $4.5 million and $4.6 million for the first quarters of 2005 and 2004, respectively.  The effective tax rates for the 2005 and 2004 first quarters were 31.8% and 34.2%, respectively.  As of March 31, 2005 and December 31, 2004, the net deferred Federal, foreign, state and local tax assets were $21.4 million and $17.3 million, respectively.

We are subject to the tax regulations of both the United States and the United Kingdom.  The Company files a consolidated federal tax return, which includes all domestic subsidiaries and the U.K. branch.  The income from the foreign operations is designated as either U.S connected income or non-U.S. connected income.  The U.S. connected income under the Subpart F regulations of the Internal Revenue Code is taxed in the year earned for tax purposes and recorded in the Company’s tax return.  It is also included in the tax provision at the corporate 35% rate.  Foreign tax credits, where available, are utilized to offset as much of the U.S. tax as permitted on the U.S. connected income.  Non-U.S. connected income from a foreign subsidiary is subject to U.S. taxation only when distributed.  U.S. taxes are not accrued when the earnings are considered to be permanently reinvested in the foreign subsidiary.  The Company has demonstrated its intention that the foreign earnings are permanently reinvested in the foreign subsidiary, and therefore any distribution is postponed indefinitely.  The foreign earnings are subject to taxation in foreign jurisdictions which, in the case of the Company, approximates a rate of 35%.

We have not provided for U.S. deferred income taxes or foreign withholding taxes on the undistributed earnings of approximately $13.3 million of our foreign subsidiaries earnings since these earnings are intended to be reinvested indefinitely.  However, in the future, if we planned to distribute such earnings to the Company, taxes of approximately $1.0 million would be reflected in the tax provision and would then be payable in the year distributed assuming all foreign tax credits are realized.

The American Jobs Creation Act of 2004, enacted October 22, 2004, allows a deduction of 85% of certain foreign earnings that are repatriated by December 31, 2005.  If the Company were to repatriate the $13.3 million of earnings from its foreign subsidiaries under this provision, income tax of approximately $150,000 would be reflected in the 2005 tax provision.  The Company does not expect to repatriate any foreign earnings under the American Jobs Creation Act of 2004.

The Company had state and local operating loss carryforwards amounting to potential future tax benefits of $5.4 million and $4.5 million at March 31, 2005 and December 31, 2004, respectively.  A valuation allowance was established for the full amount of these potential future tax benefits due to the uncertainty associated with their realization.  The Company’s state and local tax carryforwards at March 31, 2005 expire from 2019 to 2025.

Segment Information

Following are the financial results of the Company’s three segments:  Insurance Companies, Lloyd’s Operations and Navigators Agencies. We evaluate the performance of each segment based on its underwriting or operating results.  Items of revenue and expenditure, including net investment income and realized capital gains and losses, are included herein based on the legal entity where they are recorded.  Our underwriting performance is evaluated separately from the performance of our investment portfolios.

Insurance Companies

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

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Following are the results of operations for the Insurance Companies for the three months ended March 31, 2005 and 2004:

	Three Months Ended March 31,
	2005			2004
	($ in thousands)
Revenues:
Net earned premium	$	47,363			$	53,182
Net investment income	6,855				5,484
Net realized capital gains	266				205
Other income (expense)	(2		)		(61		)
Total revenues	54,482				58,810
Operating expenses:
Net losses and LAE	28,842				32,710
Commission expense	12,586				14,145
Other operating expenses	2,112				1,198
Total operating expenses	43,540				48,053
Income before income tax expense	10,942				10,757
Income tax expense	3,399				3,478
Net income	$	7,543			$	7,279
Loss and LAE ratio	60.9		%		61.5		%
Commission expense ratio	26.6		%		26.6		%
Other operating expense ratio	4.5		%		2.3		%
Combined ratio	92.0		%		90.4		%

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Following are the underwriting results of the Insurance Companies for the three months ended March 31, 2005 and 2004:

	Three Months Ended March 31, 2005
	($ in thousands)
	Net Earned Premium		Losses and LAE Incurred			Underwriting Expenses		Underwriting Gain(Loss)			Loss Ratio		Expense Ratio		Combined Ratio
Marine	$	19,879	$	12,743		$	5,520	$	1,616		64.1	%	27.8	%	91.9	%
Specialty	20,022		11,533			6,850		1,639			57.6	%	34.2	%	91.8	%
Professional Liability	6,717		4,440			2,001		276			66.1	%	29.8	%	95.9	%
Assumed from Lloyd’s Operations	711		573			322		(184		)	80.6	%	45.4	%	126.0	%
Other (includes run-off)	34		(447		)	5		476			NM		NM		NM
Total	$	47,363	$	28,842		$	14,698	$	3,823		60.9	%	31.1	%	92.0	%

	Three Months Ended March 31, 2004
	($ in thousands)
	Net Earned Premium			Losses and LAE Incurred			Underwriting Expenses		Underwriting Gain		Loss Ratio		Expense Ratio		Combined Ratio
Marine	$	20,428		$	12,046		$	5,599	$	2,783	59.0	%	27.4	%	86.4	%
Specialty	21,539			14,317			6,968		254		66.5	%	32.3	%	98.8	%
Professional Liability	3,811			2,299			776		736		60.3	%	20.4	%	80.7	%
Assumed from Lloyd’s Operations	7,405			4,217			1,999		1,189		57.0	%	27.0	%	84.0	%
Other (includes run-off)	(1		)	(169		)	1		167		NM		NM		NM
Total	$	53,182		$	32,710		$	15,343	$	5,129	61.5	%	28.9	%	90.4	%

NM = Not meaningful

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The Insurance Companies experienced a decline in net earned premium of 10.9% when comparing the first quarter of 2005 to the first quarter of 2004 principally due to the decline of business assumed from the Lloyd’s Operations.  Approximately 1.5% and 13.9% of the net earned premium recorded in the first quarters of 2005 and 2004, respectively, was the result of the Insurance Companies participating on reinsurance treaties supporting the Lloyd’s Operations’ marine and energy business.

The 2005 and 2004 first quarter underwriting results generally reflect the favorable industry market conditions over the last three years coupled with satisfactory loss trends in the aforementioned quarterly periods.

The pre-tax yield on the Insurance Companies’ investment portfolio approximated 4.1% and 3.9% at March 31, 2005 and 2004, respectively.  The increase in the portfolio yield reflects the recent increases in interest rates.  Net investment income increased in the first quarter of 2005 compared to the same period in 2004 due to the increase in the yield and the strong cash flows resulting in a larger investment portfolio.

Lloyd’s Operations

The Lloyd’s Operations consist of NUAL, which manages Lloyd’s Syndicate 1221, Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. Both Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. are Lloyd’s corporate members with limited liability and provide capacity to Lloyd’s Syndicate 1221. NUAL owns Navigators Underwriting Ltd. (formerly Pennine Underwriting Ltd.), an underwriting managing agency with offices in Manchester, Leeds and Basingstoke, England, which underwrites cargo and engineering business for Lloyd’s Syndicate 1221.  In January 2005, we formed Navigators NV in Antwerp Belgium, a wholly owned subsidiary of NUAL.  Navigators NV produces transport liability, cargo and marine liability premium on behalf of Syndicate 1221.  The Lloyd’s Operations and Navigators Management (UK) Limited, a Navigators Agency which produces business for the U.K. Branch, are subsidiaries of Navigators Holdings (UK) Limited located in the United Kingdom.

Lloyd’s Syndicate 1221 has stamp capacity of £135 million ($255.3 million) in 2005 compared to £150 million ($275.0 million) in 2004.  The reduction in the 2005 stamp capacity compared to 2004 is reflective of unused stamp capacity in 2004 coupled with declining market conditions in 2005.  Stamp capacity is a measure of the amount of premium a Lloyd’s syndicate is authorized to write based on a business plan approved by the Council of Lloyd’s. We provide 97.5% and 97.4% of Syndicate 1221’s total stamp capacity in 2005 and 2004, respectively.  Syndicate 1221’s stamp capacity is expressed net of commission (as is standard at Lloyd’s) of approximately 21%. The Syndicate 1221 premium recorded in the Company’s financial statements is gross of commission.  The Lloyd’s marine business had been subject to deteriorating pricing beginning in the mid-1990’s. The pricing competition showed some signs of stabilizing in 2000 and prices increased from 2001 through 2003 and again at a more modest pace in the 2004 first quarter. Overall pricing in 2004 remained relatively stable and the 2005 first quarter showed a small increase.  Lloyd’s presents its results on an underwriting year basis, generally closing each underwriting year after three years. We make estimates for each underwriting year and timely accrue the expected results. Our Lloyd’s Operations included in the consolidated financial statements represent our participation in Syndicate 1221.

Lloyd’s syndicates report the amounts of premiums, claims, and expenses recorded in an underwriting account for a particular year to the companies or individuals that participate in the syndicates. The syndicates generally keep accounts open for three years. Traditionally, three years have been necessary to report substantially all premiums associated with an underwriting year and to report most related claims, although claims may remain unsettled after the underwriting year is closed. A Lloyd’s syndicate typically closes an underwriting year by reinsuring outstanding claims on that underwriting year with the participants for the next underwriting year. The ceding participants pay the assuming participants an amount based on the unearned premiums and outstanding claims in the underwriting year at the date of the assumption. Our participation in Lloyd’s Syndicate 1221 is represented by and recorded as our proportionate share of the underlying assets and liabilities and results of operations of the syndicate since, (a) we hold an undivided interest in each asset, (b) we

29

are proportionately liable for each liability and (c) Syndicate 1221 is not a separate legal entity. At Lloyd’s, the amount to close an underwriting year into the next year is referred to as the RITC transaction. The RITC amounts represent the transfer of the assets and liabilities from the participants of a closing underwriting year to the participants of the next underwriting year. To the extent our participation in the syndicate changes, the RITC amounts vary accordingly. The RITC transaction is recorded in the fourth quarter as additional written and earned premium, losses incurred, loss reserves and receivables, all in the same amount. There were no gains or losses recorded on the RITC transaction.

We provide letters of credit to Lloyd’s to support our participation in Syndicate 1221’s stamp capacity as discussed below under the caption “Liquidity and Capital Resources”.

Following are the results of operations of the Lloyd’s Operations for the three months ended March 31, 2005 and 2004:

	Three Months Ended March 31,
	2005			2004
	($ in thousands)
Revenues:
Net earned premium	$	30,175		$	20,993
Commission income	268			62
Net investment income	749			404
Net realized capital gains (losses)	(99		)	217
Other income	628			4
Total revenues	31,721			21,680
Operating expenses:
Net losses and LAE	17,379			11,042
Commission expense	4,881			3,750
Other operating expenses	4,761			3,036
Total operating expenses	27,021			17,828
Income before income tax expense	4,700			3,852
Income tax expense	1,645			1,348
Net income	$	3,055		$	2,504
Loss and LAE ratio	57.6		%	52.6		%
Commission expense ratio	16.2		%	17.9		%
Other operating expense ratio	15.8		%	14.4		%
Combined ratio	89.6		%	84.9		%

The Lloyd’s Operations have been experiencing business expansion coupled with improving underwriting results as a result of the generally favorable market conditions for marine and energy business since late 2001 through 2003, and to a lesser extent in 2004 and 2005.  The 2005 net earned premium was reduced by

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$0.7 million and $7.4 million in the first quarters of 2005 and 2004, respectively, for business ceded to the Insurance Companies.

The 2005 and 2004 first quarter underwriting results generally reflect the favorable industry market condition over the last three years coupled with satisfactory loss trends in the quarterly periods.  The loss ratio for the first quarter of 2004 was favorably impacted by $2.7 million or 12.9 loss ratio points for redundancies in prior years’ Lloyd’s Operations’ loss reserves.

The pre-tax yield on funds in the Lloyd’s Operations’ investment portfolio approximated 1.6%, and 1.3% at March 31, 2005 and 2004, respectively.  Generally, funds invested at Lloyd’s have been invested with an average duration of approximately 1.4 years in order to meet liquidity needs.  Such yields are net of interest credits to reinsurers for funds withheld by our Lloyd’s Operations.

Navigators Agencies

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

Each of the Navigators Agencies underwrites marine and related lines of business for Navigators Insurance Company and two other unaffiliated insurance companies, which comprise a marine insurance pool. Marine insurance policies are issued by Navigators Insurance Company with the business shared with other pool members. Navigators Insurance Company had an 85% participation in the marine pool for business written with effective dates in 2005 and an 80% participation for business written with effective dates in 2004.

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

Navigators Pro, a division of a Navigators Agency, specializes in underwriting professional liability insurance and began producing directors and officers liability insurance exclusively for our insurance company subsidiaries in the fourth quarter of 2001. In late 2002, Navigators Pro introduced additional products to complement its directors and officers liability coverage. The products include employment practices liability, lawyers professional liability and miscellaneous professional liability coverages.  In 2004, Navigators Pro began writing professional liability coverage for U.K. solicitors through our U.K. Branch.  In 2005, Navigators Pro commenced writing professional liability coverages for architects and engineers.

Navigators Specialty and Navigators Pro receive actual cost reimbursement from the Insurance Companies for the business produced.  The Navigators Agencies producing the marine business receive a 20% profit commission and a management fee of 8.75% for marine business produced with 2005 year effective dates and 7.5% for 2004 and prior year effective dates.

Following are the results of operations of the Navigators Agencies for the three months ended March 31, 2005 and 2004:

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	Three Months Ended March 31,
	2005			2004
	($ in thousands)
Revenues:
Commission income	$	9,750		$	7,932
Net investment income	2			3
Other income	271			185
Total revenues	10,023			8,120
Operating expenses:
Other operating expenses	10,996			8,605
Total operating expenses	10,996			8,605
(Loss) before income tax (benefit)	(973		)	(485		)
Income tax (benefit)	(362		)	(140		)
Net (loss)	$	(611	)	$	(345	)

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

Other income generally represents fee revenues earned for other services on behalf of third parties.

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

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

Off-Balance Sheet Transactions

There have been no material changes in the information concerning off-balance sheet transactions as stated in the Company’s 2004 Annual Report on Form 10-K.

Tabular Disclosure of Contractual Obligations

There have been no material changes in the operating lease or capital lease information concerning contractual obligations as stated in the Company’s 2004 Annual Report on Form 10-K.  Even though total reserves for losses and LAE increased to $999.8 million at March 31, 2005 from $966.1 million at December 31,

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2004, there were no significant changes in the Company’s lines of business or claims handling that would create a material change in the percentage relationship of the projected payments by period to the total reserves.

Investments

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

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

Our insurance company subsidiaries’ investments are subject to the direction and control of their respective boards of directors and our finance committee.  The investment portfolio and the performance of the investment managers are reviewed quarterly.  These investments must comply with the insurance laws of New York State, the domiciliary state of Navigators Insurance Company and NIC Insurance Company. These laws prescribe the type, quality and concentration of investments which may be made by insurance companies. In general, these laws permit investments, within specified limits and subject to certain qualifications, in Federal, state and municipal obligations, corporate bonds, preferred stocks, common stocks, real estate mortgages and real estate.

The Lloyd’s Operations’ investments are subject to the direction and control of the board of directors and the investment committee of NUAL, as well as the board of directors and finance committee of the Company, and represent our share of the investments held by Syndicate 1221. These investments must comply with the rules and regulations imposed by Lloyd’s and by certain overseas regulators.  The investment portfolio and the performance of the investment managers are reviewed quarterly.

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

All fixed maturity and equity securities are carried at fair value. The fair value is based on quoted market prices or dealer quotes provided by independent pricing services.  The following tables show our cash and investments as of March 31, 2005 and December 31, 2004:

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March 31, 2005	Fair Value		Gross Unrealized Gains		Gross Unrealized (Losses)			Cost or Amortized Cost
	($ in thousands)
Fixed maturities:
U.S. Government Treasury Bonds, GNMAs, U.S. Government non-guaranteed Agencies and foreign government bonds	$	239,713	$	2,027	$	(2,137	)	$	239,823
States, municipalities and political sub divisions	171,480		1,613		(1,722		)	171,589
Mortgage- and asset-backed securities (excluding GNMAs)	222,052		779		(2,040		)	223,313
Corporate bonds	138,062		2,629		(1,348		)	136,781
Total fixed maturities (1)	771,307		7,048		(7,247		)	771,506
Equity securities - common stocks	20,884		1,823		(193		)	19,254
Cash and short-term investments	115,226		—		—			115,226
Total	$	907,417	$	8,871	$	(7,440	)	$	905,986

(1) Approximately 13.2% of total fixed maturities investments are direct or collateralized obligations of FNMA and FHLMC.

December 31, 2004	Fair Value		Gross Unrealized Gains		Gross Unrealized (Losses)			Cost or Amortized Cost
	($ in thousands)
Fixed maturities:
U.S. Government Treasury Bonds, GNMAs, U.S. Government non-guaranteed Agencies and foreign government bonds	$	247,105	$	3,190	$	(1,451	)	$	245,366
States, municipalities and political subdivisions	138,902		2,688		(339		)	136,553
Mortgage- and asset-backed securities (excluding GNMAs)	191,459		1,911		(470		)	190,018
Corporate bonds	144,968		4,375		(519		)	141,112
Total fixed maturities (1)	722,434		12,164		(2,779		)	713,049
Equity securities - common stocks	21,170		2,157		(88		)	19,101
Cash and short-term investments	111,329		—		—			111,329
Total	$	854,933	$	14,321	$	(2,867	)	$	843,479

(1) Approximately 17.4% of total fixed maturities investments are direct or collateralized obligations of FNMA and FHLMC.

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At March 31, 2005 and December 31, 2004, all fixed-maturity and equity securities held by us were classified as available-for-sale.

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

When a security in our investment portfolio has an unrealized loss that is deemed to be other-than-temporary, we write the security down to fair value through a charge to operations. Significant changes in the factors we consider when evaluating investments for impairment losses could result in a significant change in impairment losses reported in the consolidated financial statements.  There were no impairment losses recorded in our fixed maturity or equity securities portfolios in 2005 or 2004.

The following table summarizes all securities in an unrealized loss position at March 31, 2005 and December 31, 2004, showing the aggregate fair value and gross unrealized loss by the length of time those securities have continuously been in an unrealized loss position:

35

	March 31, 2005				December 31, 2004
	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
	($ in thousands)
Fixed Maturities:
U.S. Government Treasury Bonds, GNMAs, U.S. Government non-guaranteed Agencies and foreign government bonds
0-6 Months	$	95,450	$	1,028	$	97,338	$	519
7-12 Months	57,289		652		33,916		283
> 12 Months	15,809		457		24,258		649
Subtotal	168,548		2,137		155,512		1,451
States, municipalities and political subdivisions
0-6 Months	91,263		1,245		18,966		94
7-12 Months	9,920		245		14,155		225
> 12 Months	7,722		232		518		20
Subtotal	108,905		1,722		33,639		339
Mortgage- and asset-backed securities (excluding GNMAs)
0-6 Months	143,922		1,524		64,598		208
7-12 Months	24,106		436		19,536		232
> 12 Months	1,634		80		774		30
Subtotal	169,662		2,040		84,908		470
Corporate bonds
0-6 Months	51,638		807		29,870		160
7-12 Months	15,706		276		16,069		189
> 12 Months	6,108		265		4,803		170
Subtotal	73,452		1,348		50,742		519
Total Fixed Maturities	$	520,567	$	7,247	$	324,801	$	2,779
Equity securities - common stocks
0-6 Months	$	1,964	$	63	$	3,779	$	23
7-12 Months	666		27		892		65
> 12 Months	847		103		—		—
Total Equity Securities	$	3,477	$	193	$	4,671	$	88

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

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The following table shows the composition by National Association of Insurance Commissioners (“NAIC”) rating and the generally equivalent Standard & Poor’s (“S&P”) and Moody’s ratings of the fixed maturity securities in our portfolio with gross unrealized losses at March 31, 2005.  Not all of the securities are rated by S&P and/or Moody’s.

	Equivalent	Equivalent	Unrealized Loss				Fair Value
NAIC Rating	S&P Rating	M oody’s Rating	Amount		Percent to Total		Amount			Percent to Total
	($ in thousands)
1	AAA/AA/A	Aaa/Aa/A	$	6,879	95	%		$	503,875	97	%
2	BBB	Baa	368		5	%		16,692		3	%
3	BB	Ba	—		—			—		—
4	B	B	—		—			—		—
5	CCC or lower	Caa or lower	—		—			—		—
6	N/A	N/A	—		—			—		—
		Total	$	7,247	100	%		$	520,567	100	%

At March 31, 2005, the gross unrealized losses in the table directly above are related to fixed maturity securities that are rated investment grade, which is defined as a security having a NAIC rating of 1 or 2, a S&P rating of “BBB—” or higher, or a Moody’s rating of “Baa3” or higher.  Unrealized losses on investment grade securities principally relate to changes in interest rates or changes in sector-related credit spreads since the securities were acquired.  Any such unrealized losses are recognized in income, if the securities are sold, or if the decline in fair value is deemed other-than-temporary.

The scheduled maturity dates for fixed maturity securities in an unrealized loss position at March 31, 2005 are shown in the following table:

	Unrealized Loss				Fair Value
	Amount		Percent to Total		Amount			Percent to Total
	($ in thousands)
Due in one year or less	$	978	13	%		$	103,369	20	%
Due after one year through five years	1,797		25	%		103,698		20	%
Due after five years through ten years	937		13	%		59,072		11	%
Due after ten years	1,495		21	%		84,766		16	%
Mortgage- and asset-backed securities	2,040		28	%		169,662		33	%
Total fixed income securities	$	7,247	100	%		$	520,567	100	%

Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Due to the periodic repayment of principal, the mortgage- and asset-backed securities are estimated to have an effective maturity of approximately 4.1 years.

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Our realized capital gains and losses were as follows:

	Three Months Ended March 31,
	2005			2004
	($ in thousands)
Fixed maturities:
Gains	$	713		$	439
(Losses)	(546		)	(17		)
	167			422
Equity securities:
Gains	—			—
(Losses)	—			—
	—			—
Net realized capital gains	$	167		$	422

The following table details realized losses in excess of $200,000 from sales and impairments during the first three months of 2005 and 2004 and the related circumstances giving rise to the loss:

Description	Date of Sale	Proceeds from Sale	Loss on Sale	Impairment	Holdings at March 31, 2005	Net Unrealized Loss	# of Months Unrealized Loss Exceeded 20% of Cost or Amortized Cost
	($ in thousands)
Three months ended March 31, 2005:
None
Three months ended March 31, 2004:
None

Reinsurance Recoverables

We utilize reinsurance principally to reduce our exposure on individual risks, to protect against catastrophic losses, to maintain desired ratios of net written premium to statutory surplus and to stabilize loss ratios and underwriting results.  The purchase of reinsurance does not discharge us, the original insurer, from our primary liability to the policyholder. We are required to pay the losses even if the reinsurer fails to meet its obligations under the reinsurance agreement.

We are protected by various treaty and facultative reinsurance agreements. Our exposure to credit risk from any one reinsurer is managed through diversification by reinsuring with a number of different reinsurers, principally in the United States and European reinsurance markets. To meet our standards of acceptability, when the reinsurance is placed, a reinsurer generally must have an A.M. Best Company and/or Standard & Poor’s rating of ‘‘A’’ or better, or equivalent financial strength if not rated, plus at least $250 million in policyholders’

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surplus.  Our Reinsurance Security Committee monitors the financial strength of our reinsurers and the related reinsurance receivables and periodically reviews the list of acceptable reinsurers. The reinsurance is placed either directly by us or through reinsurance intermediaries. The reinsurance intermediaries are compensated by the reinsurers.

The Company was recently informed by a lead reinsurer participating on excess of loss reinsurance agreements that it may formally dispute a loss payment recovery when billed.  The recovery is for the 2004 settlement of a class action suit involving a large asbestos claim which settlement will be paid over seven years starting in June 2005.  The reinsurer has not indicated any dispute with respect to recoveries on related pro rata reinsurance agreements.

The Company believes such a dispute, if it should arise, is without merit and intends to vigorously pursue collection of its reinsurance recoveries.  While it is too early to predict with any certainty the outcome of this matter, the Company believes that the ultimate outcome of this matter would not be expected to have a significant adverse effect on results of operations, financial condition or liquidity, although an unexpected adverse resolution could have a material adverse effect on the Company’s results of operations in a particular fiscal quarter or year.

An allowance for doubtful recoveries is maintained for any amounts considered to be uncollectible. At March 31, 2005 and December 31, 2004, we had allowances for uncollectible reinsurance of $33.4 million and $32.4 million, respectively.  The allowances include $25.7 million for uncollectible reinsurance as a result of loss reserves established in 2003 for asbestos exposures on marine and aviation business written mostly prior to 1986.  Charges (recoveries) for uncollectible reinsurance amounts, all of which were recorded to incurred losses, were $1.0 million and ($117,000) for the three months ended March 31, 2005 and 2004, respectively.

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

Liquidity and Capital Resources

Cash flow provided by operations was $65.2 million and $26.7 million for the three months ended March 31, 2005 and 2004, respectively. The increase in the operating cash flow in the first three months of 2005 compared to 2004 was primarily due to the increase in net written premium coupled with the $24 million RITC settlement discussed in Results of Operations and Overview.  Operating cash flow was used primarily to acquire additional investment assets.

Invested assets and cash increased to $907.4 million at March 31, 2005 from $854.9 million at December 31, 2004. The increase was primarily due to the positive cash flow.  Net investment income was $7.6 million and $5.9 million for the three months ended March 31, 2005 and 2004, respectively.

The average yield of the portfolio, excluding net realized capital gains, was 3.5% at March 31, 2005 compared to 3.4% at March 31, 2004, reflecting the prevailing interest rates. As of March 31, 2005 and December 31, 2004, all fixed maturity securities and equity securities held by us were classified as available-for-sale.

At March 31, 2005, the weighted average rating of our fixed maturity investments was ‘‘AA’’ by Standard & Poor’s and ‘‘Aa’’ by Moody’s. We believe that we have no significant exposure to credit risk since the fixed maturity investment portfolio consists of investment-grade bonds. At March 31, 2005, our portfolio had an average maturity of 5.1 years and duration of 3.8 years. Management continually monitors the composition and cash flow of the investment portfolio in order to maintain the appropriate levels of liquidity to ensure our ability to satisfy claims.

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We have a credit facility provided through a consortium of banks.  The credit facility, which is denominated in U.S. dollars, is utilized primarily by Navigators Corporate Underwriters Ltd. and Millennium Underwriting Ltd. to fund our participation in Lloyd’s Syndicate 1221 which is denominated in British pounds.  At March 31, 2005, letters of credit with an aggregate face amount of $82.4 million were issued under the credit facility.

The credit facility is collateralized by all of the common stock of Navigators Insurance Company.  The credit agreement contains covenants common to transactions of this type, including restrictions on indebtedness and liens, limitations on mergers and the sale of assets, maintaining certain consolidated tangible net worth, statutory surplus and other financial ratios.  Cash dividends to shareholders are limited to $2.5 million per year.  No dividends have been declared or paid through March 31, 2005.  At March 31, 2005, we were in compliance with all covenants.

The credit facility was amended in January 2005 to increase the letters of credit available under the facility from $80 million to $115 million and to add a $10 million line of credit facility.  The expiration of the credit facility was also extended from November 10, 2005 to June 30, 2007.  If at that time the banks do not renew the credit facility, we will need to find other sources to provide the letters of credit or other collateral in order to continue our participation in Syndicate 1221.

At March 31, 2005, our consolidated stockholders’ equity was $333.8 million or $26.16 per share compared to $328.6 million or $25.96 per share at December 31, 2004. The increase was primarily due to net income of $9.7 million for the three months ended March 31, 2005, partially offset by a $6.4 million other comprehensive loss consisting of $6.5 million of decreases in unrealized gains on securities, resulting from higher interest rates, and $0.1 million of increases in currency translation gains.

Our reinsurance has been placed with various U.S. and foreign insurance companies and with selected syndicates at Lloyd’s. Pursuant to the implementation of Lloyd’s Plan of Reconstruction and Renewal, a portion of our recoverables are now reinsured by Equitas which is a separate United Kingdom authorized reinsurance company established to reinsure outstanding liabilities of all Lloyd’s members for all risks written in the 1992 or prior years of account.

We primarily rely upon dividends from our subsidiaries to meet our holding company obligations. The dividends have historically come primarily from Navigators Insurance Company. At December 31, 2004, the maximum amount available for the payment of dividends by Navigators Insurance Company during 2005 without prior regulatory approval was $23.6 million.  Navigators Insurance Company did not pay any dividends in the first quarter of 2005.

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the information concerning market risk as stated in the Company’s 2004 Annual Report on Form 10-K.

Item 4.  Controls and Procedures

(a)The Chief Executive Officer and Chief Financial Officer of the Company have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-

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

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

Part II - Other Information

Item 1.Legal Proceedings

The Company is not a party to, or the subject of, any material pending legal proceedings which depart from the ordinary routine litigation incident to the kinds of business that it conducts.

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

None.

Item 3.Defaults Upon Senior Securities

None.

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

None.

Item 5.Other Information

None.

Item 6.Exhibits

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

41

Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference).

* Included herein.

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SIGNATURE

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

		The Navigators Group, Inc.
		(Registrant)
Date:	May 5, 2005	/s / Paul J. Malvasio
		Paul J. Malvasio
		Executive Vice President
		and Chief Financial Officer

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INDEX OF EXHIBITS

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

*  Included herein.

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