NAVIGATORS GROUP INC - 10-K Annual Report

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 2000

Commission File No. 0-15886

THE NAVIGATORS GROUP, INC.
(Exact name of registrant as specified in its charter)

Delaware 13-3138397
State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)

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

Registrant's telephone number, including area code:(212) 244-2333

Securities registered pursuant to Section 12(b) of the Act:None

Securities registered pursuant to Section 12(g) of the Act:Common Stock, $.10
Par Value (Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K

The aggregate market value of voting stock held by non-affiliates as of March
20, 2001 was $57,305,000. The number of common shares outstanding as of March
20, 2001 was 8,419,762.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's 2001 Proxy Statement are incorporated by reference
in Part III, Items 10, 11, 12 and 13 of this Form 10-K.

Forward-looking statements

Some of the statements in this Annual Report on Form 10-K are not historical
facts and are "forward-looking statements" (as defined in the Private Securities
Litigation Act of 1995). These statements use words such as "believes,"
"expects," "intends," "may," "will," "should," "anticipates" (or the negative
forms of those words) and describe our strategies, goals, expectations of future
results and other forward-looking information. We derive forward-looking
information from information which we currently have and numerous assumptions
which we make. We cannot assure that results which we anticipate will be
achieved, since results may differ materially because of both known and unknown
risks and uncertainties which we face. Factors which could cause actual results
to differ materially from our forward looking statements include, but are not
limited to:

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

Part I

Item 1. BUSINESS

General

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

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

In order to establish a common identity under the Navigators name, the
Company changed the name of several of its subsidiaries in March 2001. The new
names will be used throughout this document. Five of the Company's subsidiaries
are marine underwriting management companies: Navigators Management Company,
Inc. (formerly Somerset Marine, Inc.), Navigators Insurance Services of Texas,
Inc. (formerly Somerset Insurance Services of Texas, Inc.), Navigators
California Insurance Services, Inc. (formerly Somerset Insurance Services of
California, Inc.), Navigators Insurance Services of Washington, Inc. (formerly
Somerset Insurance Services of Washington, Inc.) and Navigators Management (UK)
Limited (formerly Somerset Marine (UK) Limited) (collectively, the "Navigators
Agencies"). The Navigators Agencies described above (formerly referred to as the
Somerset Companies) produce, manage and underwrite insurance and reinsurance for
Navigators Insurance, NIC and four unaffiliated insurance companies.

The Navigators Agencies specialize in writing marine and related lines of
business. The marine business is written through a pool of insurance companies,
Navigators Insurance having the largest participation in the pool. The
Navigators Agencies derive their revenue from commissions, service fees and cost
reimbursement arrangements from their Parent Company, Navigators Insurance, NIC
and the unaffiliated insurers. Commissions are earned both on a fixed percentage
of premiums and on underwriting profits from business placed with the
participating insurance companies within the pool. Other than a small amount of
war and satellite business, the Company withdrew from the aviation business in
October 1998 due to inadequate pricing. In 1999, the Company produced its
onshore energy, engineering and construction business through the Company's
facilities at Lloyd's of London ("Lloyd's"). Prior to 1999, this business was
produced by the Navigators Agencies.

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

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

Lines of Business

The Company primarily writes marine, onshore energy, engineering and
construction insurance, and a contractors' general liability program. As
underwritten by the Company, marine insurance includes hull, energy, liability
and cargo; onshore energy primarily covers property damage with an emphasis on
the oil and petrochemical sectors; and engineering and construction primarily
covers construction projects including machinery, equipment and loss of use due
to delays. As discussed above, the Company has generally withdrawn from the
aviation market. In 1999, the production of onshore energy, engineering and
construction business was transferred from Navigators Insurance to the Company's
facilities at Lloyd's. See the table set forth in "Management's Discussion and
Analysis - Results of Operations - Revenues" for the Company's gross written
premium by segment and line of business, and ceded and net written premium by
segment for the periods indicated.

Marine Insurance

Navigators Insurance obtains marine business through participation in the
marine pool managed by the Navigators Agencies. The composition of the pool and
the level of participation of each member changes from time to time. Navigators
Insurance's net participation in the marine pool increased from 60% in 1998 to
75% in 1999 and 2000.

In 1998, 1999 and 2000, the Navigators Agencies received commissions equal
to 7.5% of the gross premium earned on marine insurance and are entitled to
receive a 20% profit commission on the net underwriting profits of the pool.

The Lloyd's marine premium is generated as the result of capacity provided
to Syndicate 1221 by NCUL and Millennium. The Company's share of the premiums,
losses and expenses from the Lloyd's marine syndicates are included in the
Company's results but are not included in the Insurance Companies' results since
NCUL and Millennium are not part of the Insurance Companies' operations.

Aviation Insurance

The Company's aviation business had been written by Navigators Insurance
until October 1998 when Navigators Insurance decided to no longer write aviation
business due to inadequate pricing, other than a small amount of war and
satellite business.

Onshore Energy

In 1996, Navigators Insurance began to underwrite onshore energy insurance
which principally focuses on the oil and gas, chemical and petrochemical
industries with coverages primarily for property damage. In 1999 and 2000, the
onshore energy business was written through the Company's facilities at Lloyd's.

Engineering and Construction

In 1997, Navigators Insurance began writing engineering and construction
business consisting of coverage for construction projects including the
machinery, equipment and loss of use due to delays. In 1999 and 2000, the
engineering and construction business was written through the Company's
facilities at Lloyd's.

Program Insurance

The program insurance, currently written by Anfield, consists primarily of
general liability insurance for contractors and a small amount of commercial
multi-peril insurance for restaurants and taverns.

Reinsurance Ceded

The Company utilizes reinsurance principally to reduce its exposure on
individual risks, to protect against catastrophic losses, to maintain desired
ratios of net premium written to statutory surplus and to stabilize loss ratios.

The ceding of reinsurance does not discharge the original insurer from its
primary liability to the policyholder. The ceding company is required to pay the
losses even if the assuming company fails to meet its obligations under the
reinsurance agreement.

Reinsurance is generally written under treaty contracts in which coverage
is either on a proportional basis, where the reinsurer shares proportionately in
premiums and losses, or on an excess of loss basis, where only losses above a
fixed amount are reinsured.

The Company is protected by various treaty and facultative reinsurance
agreements. The reinsurance is diversified by reinsuring with a number of
different reinsurers, principally in the United States and European reinsurance
markets. This coverage is placed on behalf of the Company's insurance operations
by a number of different reinsurance intermediaries, each of which is utilized
because of its expertise in placing a particular type of coverage. All such
intermediaries are compensated by the reinsurers.

The Company's Reinsurance Security Committee monitors the financial
strength of its reinsurers and the amounts of reinsurance receivables from those
reinsurers. To the extent that it is determined that the ultimate amount
collectible is less than the amount recorded as a receivable, a reserve is
established. At December 31, 2000 and 1999, the Company had an allowance for
uncollectible reinsurance of $2,500,000 and $1,250,000, respectively. In
addition, in 1999 the Company recorded a charge against earnings of $6.6 million
for unrecoverable reinsurance from New Cap Reinsurance Corporation Limited which
participated in the Company's 1997 and 1998 reinsurance programs.

Reserves

Insurance companies and Lloyd's syndicates are required to maintain
reserves for unpaid losses and unpaid loss adjustment expenses ("LAE") for all
lines of business. These reserves are intended to cover the probable ultimate
cost of settling all losses incurred and unpaid, including those incurred but
not reported. The determination of reserves for losses and LAE for insurance
companies such as Navigators Insurance and Lloyd's corporate members such as
NCUL and Millennium is dependent upon the receipt of information from the pools
and syndicates in which such companies participate. Generally, there is a lag
between the time premiums are written and related losses and LAE are incurred,
and the time such events are reported to the pools and syndicates and,
subsequently, to Navigators Insurance, NCUL and Millennium.

The Insurance Companies and Lloyd's syndicates establish reserves for
reported claims when they first receive notice of the claim. Reserves are
established on a case-by-case basis by evaluating several factors, including the
type of risk involved, knowledge of the circumstances surrounding such claim,
severity of injury or damage, the potential for ultimate exposure, experience
with the insured and the broker on the line of business, and the policy
provisions relating to the type of claim. Reserves for incurred but not reported
losses are determined in part on the basis of statistical information and in
part on industry experience.

Loss reserves are estimates of what the insurer or reinsurer expects to pay
on claims, based on facts and circumstances then known, and it is possible that
the ultimate liability may exceed or be less than such estimates. Such estimates
are based, among other things, on predictions of future events and estimates of
future trends in claim severity and frequency. During the loss settlement
period, which, in some cases, may last several years, additional facts regarding
individual claims may become known and, accordingly, it often becomes necessary
to refine and adjust the estimates of liability on a claim upward or downward.
Such estimates are regularly reviewed and updated and any resulting adjustments
are included in income currently. Even then, the ultimate liability may exceed
or be less than the revised estimates. The reserving process is intended to
provide implicit recognition of the impact of inflation and other factors
affecting loss payments by taking into account changes in historical payment
patterns and perceived probable trends. There is generally no precise method for
the subsequent evaluation of the adequacy of the consideration given to
inflation, or to any other specific factor, because the eventual deficiency or
redundancy of reserves is affected by many factors, some of which are
interdependent. The Company does not discount any of its reserves.

The Company records those premiums which are reported to it through the end
of each calendar year and accrues estimates for amounts where there is a time
lag between when the policy is bound and the receipt of the policy. A
substantial portion of the premiums are from international business where there
can be significant time lags. To the extent that the actual premiums vary from
estimates, the difference is recorded in current operations.

The following table presents an analysis of losses and LAE:

Year Ended December 31,

2000 1999 1998
(In thousands)

Net reserves for losses and LAE at
beginning of year.................................. $170,530 $150,517 $139,841

Provision for losses and LAE for
claims occurring in the current year................ 60,152 45,001 46,050

Lloyd's portfolio transfer - reinsurance to close........ 7,854 15,533 19,655

Increase (decrease) in estimated losses and
LAE for claims occurring in prior years............. (4,994) 9,380 (3,383)

Incurred losses and LAE ................................. 63,012 69,914 62,322

Losses and LAE payments for claims
occurring during:
Current year.................................... (15,358) (10,925) (9,848)
Prior years..................................... (43,301) (38,976) (41,798)
Losses and LAE payments.................................. (58,659) (49,901) (51,646)

Net reserves for losses and LAE at end of year........... 174,883 170,530 150,517

Reinsurance receivables on unpaid losses and LAE......... 182,791 220,564 191,927

Gross reserves for losses and LAE at end of year......... $ 357,674 $ 391,094 $ 342,444
======= ======= =======

The following table presents the development of the Company's loss and LAE
reserves for 1990 through 2000. The line "Net reserves for losses and LAE"
reflects the net reserves at the balance sheet date for each of the indicated
years and represents the estimated amount of losses and LAE arising in all prior
years that are unpaid at the balance sheet date. The "Reserves re-estimated"
lines of the table reflect the re-estimated amount of the previously recorded
reserves based on experience as of the end of each succeeding year. The estimate
changes as more information becomes known about the frequency and severity of
claims for individual years. The "Cumulative redundancy (deficiency)" lines of
the table reflect the cumulative amounts developed as of successive years with
respect to the aforementioned reserve liability. The cumulative redundancy or
deficiency represents the aggregate change in the estimates over all prior
years.

The table allocates losses and LAE reported and recorded in subsequent
years to all prior years starting with the year in which the loss was incurred.
For example, assume that a loss occurred in 1994 and was not reported until
1996, the amount of such loss will appear as a deficiency in both 1994 and 1995.
Conditions and trends that have affected development of the liability in the
past may not necessarily occur in the future. Accordingly, it may not be
appropriate to extrapolate future redundancies or deficiencies based on the
table.

Year Ended December 31,

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

(In thousands)
Net reserves for losses
and LAE................. $70,457 $77,507 $89,361 $103,176 $135,377 $138,761 $132,558 $139,841 $150,517 $170,530 $174,883
Reserves for losses and
LAE re-estimated as of:
One year later.......... 71,643 80,478 94,785 104,306 142,400 136,309 131,524 136,458 159,897 165,536
Two years later......... 73,849 80,937 98,062 102,831 139,139 134,324 127,901 138,991 149,741
Three years later....... 73,441 81,322 98,338 101,537 138,155 131,658 126,457 129,592
Four years later........ 73,349 80,652 97,257 100,432 135,482 131,018 117,388
Five years later........ 72,706 79,469 96,889 98,805 134,197 122,845
Six years later......... 71,730 79,239 96,358 97,740 129,213
Seven years later....... 71,620 78,742 94,457 93,812
Eight years later....... 71,003 77,167 93,578
Nine years later........ 70,622 77,549
Ten years later......... 71,336
Net cumulative redundancy
(deficiency)............ (879) 42 (4,217) 9,364 6,164 15,916 15,170 10,249 776 4,994

Net cumulative paid as of:
One year later.......... 22,784 25,741 37,998 32,700 47,187 39,741 32,416 41,798 38,976 43,301
Two years later......... 36,532 43,688 54,552 53,603 69,960 59,397 59,796 64,301 63,400
Three years later....... 47,060 51,753 65,997 62,769 83,921 78,821 71,420 74,588
Four years later........ 51,769 59,308 72,063 69,356 97,499 87,876 77,593
Five years later........ 57,421 63,138 75,864 75,534 104,454 92,189
Six years later......... 60,291 65,441 80,193 80,308 107,469
Seven years later....... 61,837 68,192 84,132 81,584
Eight years later....... 63,753 70,868 85,010
Nine years later........ 66,067 71,683
Ten years later......... 66,761

Gross liability-end of year........................ 224,191 247,346 314,898 273,854 269,601 278,432 342,444 391,094 357,674
Reinsurance recoverable............................ 134,830 144,170 179,521 135,093 137,043 138,591 191,927 220,564 182,791
------- ------- ------- ------- ------- ------- ------- ------- -------
Net liability-end of year.......................... 89,361 103,176 135,377 138,761 132,558 139,841 150,517 170,530 174,883

Gross re-estimated latest.......................... 290,608 272,071 356,589 302,199 294,593 312,859 376,796 394,259
Re-estimated recoverable latest.................... 197,030 178,259 227,376 179,354 177,205 183,267 227,055 228,723
------- ------- ------- ------- ------- ------- ------- -------
Net re-estimated latest............................ 93,578 93,812 129,213 122,845 117,388 129,592 149,741 165,536

Gross cumulative (deficiency)...................... (66,417) (24,725) (41,691) (28,345) (24,992) (34,427) (34,352) (3,165)

The net cumulative deficiency for the year ended December 31, 1992 resulted
from adverse development in certain lines of business. The 1992 and 1993 gross
cumulative deficiencies resulted primarily from the 1989 Exxon Valdez loss. The
gross cumulative deficiencies for 1994 and 1995 resulted primarily from the 1994
Northridge Earthquake loss, the 1989 Exxon Valdez loss and a large marine
liability claim reported in 1999 affecting years 1994 through 1998. The 1996
gross cumulative deficiency resulted from adverse development in several lines
of business. The 1997 gross cumulative deficiency resulted from adverse
development in the onshore energy business and from one large 1989 claim from a
runoff book of business which also adversely affected years prior to 1997. The
deficiency in 1998 resulted from the two marine liability claims mentioned, a
large energy claim incurred in 1998 and reported in 1999 and reserve
strengthening in the Company's Lloyd's Operations. The adverse development on
the Company's gross reserves has been mostly reinsured through excess of loss
reinsurance treaties.

Management believes that the reserves for losses and LAE are adequate to
cover the ultimate cost of losses and LAE on reported and unreported claims.

Environmental Pollution and Asbestos Related Claims

In 2000, 1999 and 1998, the Company paid gross losses and LAE of
$1,158,000, $665,000 and $2,091,000, respectively, resulting in net paid losses
and LAE of $173,000, $378,000 and $369,000, respectively, for environmental
pollution and asbestos related claims. As of December 31, 2000 and 1999, the
Company carried gross reserves of $3,364,000 and $3,712,000, respectively, and
net reserves of $994,000 and $1,088,000, respectively, for the potential
exposure to such claims. Management believes that its reserves for such claims
are adequate because the Company's participation in such risks is generally in
the higher excess layers and, based on a continuing review of such claims, it
believes that a majority of these claims will be unlikely to penetrate such high
excess layers of coverage; however, due to significant assumptions inherent in
estimating these exposures, actual liabilities could differ from current
estimates. At December 31, 2000, there were 412 open claims with environmental
pollution or asbestos exposures. Management will continue to review its exposure
to and reserves for such claims. Any potential exposure to these claims exists
predominantly in connection with the marine business.

Investments

The investments of the Insurance Companies must comply with the insurance
laws of New York State, the domiciliary state of Navigators Insurance and NIC.
These laws prescribe the kind, 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 Insurance Companies' investment
guidelines prohibit investments in derivatives other than as a hedge against a
foreign currency.

The Insurance Companies' investments are subject to the direction and
control of its Board of Directors and are reviewed on a quarterly basis. The
investments are managed by outside professional fixed income and equity
portfolio managers. Current investment objectives are to maximize annual after
tax income in the context of preserving and enhancing capital and statutory
surplus. The Insurance Companies seek to obtain these objectives by investing in
municipal bonds, U.S. Government obligations, corporate bonds, and preferred and
common stocks. Due to the Company being in an alternative minimum tax ("AMT")
position, the portfolio managers have been reducing the municipal bond
portfolio. The Insurance Companies' investment guidelines require that at least
90% of the fixed income portfolio be rated "A-" or better by a nationally
recognized rating organization. Up to 25% of the total portfolio may be invested
in equity securities that are actively traded on major U.S. stock exchanges. At
December 31, 2000 and 1999, all fixed maturity and equity securities held by the
Company were classified as available-for-sale.

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 pool members,
including Navigators Insurance.

The table set forth below reflects investments and income earned thereon
for the Company on a consolidated basis and for the Insurance Companies for each
of the three years ended December 31, 2000:
Year Ended December 31,
2000 1999 1998
(Dollars in thousands)
The Company Consolidated (1)
Average investments.................................. $281,770 $273,738 $259,121
Net investment income................................ 18,447 15,985 15,209
Average yield........................................ 6.55% 5.84% 5.87%
Insurance Companies
Average investments.................................. $241,208 $247,396 $251,422
Net investment income................................ 15,536 14,573 14,659
Average yield........................................ 6.44% 5.89% 5.83%

(1) The Company's average investments include NCUL's and Millennium's portion
of the investments held by Lloyd's Syndicate 1221 which is presented in the
Company's balance sheet as Funds due from Lloyd's syndicates.

The following table shows the cash and investments of the Company as of
December 31, 2000:

Carrying Value Percent
(In thousands) of Total

Cash and short-term investments.................. $ 19,788 7.9%
U.S. Treasury Bonds and GNMAs.................... 48,474 19.3
Municipal bonds.................................. 60,483 24.1
Mortgage backed securities (excluding GNMAs)..... 15,292 6.1
Asset backed securities.......................... 44,173 17.6
Corporate bonds.................................. 56,706 22.5
Common stocks ................................ 6,269 2.5
Total ................................. $ 251,185 100.0%
========= =====

Regulation

The Parent Company, the Insurance Companies and the Lloyd's Operations are
subject to regulation under the insurance statutes including holding company
statutes of various states, the UK regulatory authorities and Lloyd's. These
regulations vary but generally require insurance holding companies, and insurers
that are subsidiaries of holding companies, to register and file reports
concerning their capital structure, ownership, financial condition and general
business operations. Such regulations also generally require prior regulatory
agency approval of changes in control of an insurer and of transactions within
the holding company structure. The regulatory agencies have statutory
authorization to enforce their laws and regulations through various
administrative orders and enforcement proceedings.

The State of New York Insurance Department (the "Department") is the
Company's principal regulatory agency. The New York Insurance Law provides that
no corporation or other person may acquire control of the Company, and thus
indirect control of the Insurance Companies, unless it has given notice to the
Insurance Companies, and obtained prior written approval from the Superintendent
of Insurance of the State of New York for such acquisition. In New York, any
purchaser of 10% or more of the outstanding shares of the Company's common stock
would be presumed to have acquired control of the Company, unless such
presumption is rebutted. The UK authorities and Lloyd's also have regulatory
requirements concerning change in control.

Navigators Insurance and NIC may only pay dividends out of their statutory
earned surplus under New York insurance law. Generally, the maximum amount of
dividends Navigators Insurance and NIC may pay without regulatory approval in
any twelve-month period is the lesser of adjusted net investment income or 10%
of statutory surplus.

Under insolvency or guaranty laws in most states in which Navigators
Insurance and NIC operate, insurers doing business in those states can be
assessed up to prescribed limits for policyholder losses of insolvent insurance
companies.

Navigators Insurance is licensed to engage in the insurance and reinsurance
business in 49 states, the District of Columbia and Puerto Rico. NIC is licensed
to engage in the insurance and reinsurance business in the State of New York and
is an approved surplus lines insurer or meets the financial requirements where
there is not a formal approval process in 31 states and the District of
Columbia.

As part of its general regulatory oversight process, the Department
conducts detailed examinations of the books, records and accounts of New York
insurance companies every three to five years. Navigators Insurance and NIC were
examined by the Department for the years 1991 through 1995. The Department did
not recommend any adjustments to the Insurance Companies' previously filed
statutory financial statements. The Insurance Companies have been advised by the
Department that they are scheduled for an audit to begin in mid 2001.

The Insurance Regulatory Information System ("IRIS") was developed by the
National Association of Insurance Commissioners ("NAIC") and is intended
primarily to assist state insurance departments in executing their statutory
mandates to oversee the financial condition of insurance companies operating in
their respective states. IRIS identifies twelve industry ratios and specifies
"usual values" for each ratio. Departure from the usual values on four or more
of the ratios can lead to inquiries from individual state insurance
commissioners as to certain aspects of an insurer's business. As of December 31,
2000 and 1999, the Insurance Companies' results were within the usual values for
all IRIS ratios except for the 1999 `change in net writings' ratio for NIC due
to the reinsurance arrangement between NIC and Navigators Insurance.

The NAIC recently completed a project which codifies statutory accounting
practices for insurance enterprises. As a result of this process, the NAIC
issued a revised statutory Accounting Practices and Procedures Manual that will
be effective January 1, 2001 for the calendar year 2001. The Company will
prepare its statutory basis financial statements in accordance with the revised
statutory manual subject to any deviations prescribed or permitted by the New
York Insurance Commissioner. The Company has determined that these changes would
not have resulted in a negative impact to the statutory capital and surplus of
the Insurance Companies had the changes been implemented for 2000.

From time to time various regulatory and legislative changes have been
proposed in the insurance and reinsurance industry. Among the proposals that
have in the past been or are at present being considered are the possible
introduction of federal regulation in addition to, or in lieu of, the current
system of state regulation of insurers and proposals in various state
legislatures (some of which proposals have been enacted) to conform portions of
their insurance laws and regulations to various model acts adopted by the NAIC.
The Company is unable to predict whether any of these laws and regulations will
be adopted, the form in which any such laws and regulations would be adopted, or
the effect, if any, these developments would have on the operations and
financial condition of the Company.

State insurance departments have adopted a methodology developed by the
NAIC for assessing the adequacy of statutory surplus of property and casualty
insurers which includes a risk-based capital formula that attempts to measure
statutory capital and surplus needs based on the risks in a company's mix of
products and investment portfolio. The formula is designed to allow state
insurance regulators to identify potential weakly capitalized companies. Under
the formula, a company determines its "risk-based capital" ("RBC") by taking
into account certain risks related to the insurer's assets (including risks
related to its investment portfolio and ceded reinsurance) and the insurer's
liabilities (including underwriting risks related to the nature and experience
of its insurance business). The RBC rules provide for different levels of
regulatory attention depending on the ratio of a company's total adjusted
capital to its "authorized control level" of RBC. Based on calculations made by
Navigators Insurance and NIC, their RBC level exceeds a level that would trigger
regulatory attention. In their respective 2000 statutory financial statements,
Navigators Insurance and NIC have complied with the NAIC's RBC reporting
requirements.

In addition to regulations applicable to insurance agents generally, the
Navigators Agencies are subject to Managing General Agents Acts in their state
of domicile and in certain other jurisdictions where they do business.

The Company's subsidiaries domiciled in the UK are subject to regulation
from the government regulatory authorities in the UK and from Lloyd's.

Competition

The property and casualty insurance industry is highly competitive. The
demand for low-cost, high quality service has created difficult conditions in
the domestic property and casualty market, including a leveling or reduction in
premium rates in certain lines of business in which the Company competes.

The Company faces competition from both domestic and foreign insurers, some
of whom have longer operating histories and greater financial, marketing and
management resources. Competition in the types of insurance in which the Company
is engaged is based on many factors, including the perceived overall financial
strength of the Company, pricing and other terms and conditions of products and
services offered, business experience, marketing and distribution arrangements,
agency and broker relationships, levels of customer service (including speed of
claims payments), product differentiation and quality, operating efficiencies
and underwriting. Furthermore, insureds tend to favor large, financially strong
insurers, and the Company faces the risk that it will lose market share to
higher rated insurers.

No single insured or reinsured accounted for 10% or more of the Company's
gross written premium in 2000.

Another competitive factor in the industry involves banks and brokerage
firms breaking down the barriers between various segments of the financial
services industry, including insurance. These efforts pose new challenges to
insurance companies and agents from industries traditionally outside the
insurance business.

Employees

As of December 31, 2000, the Company had 121 full-time employees.

Item 2. PROPERTIES

The Company's administrative offices are occupied pursuant to a lease from
an unaffiliated company which expires June 30, 2010 in a building located at One
Penn Plaza, New York, New York. Several of the Company's subsidiaries have
noncancellable operating leases for their respective office locations.

In January 2000, the Company purchased a `flat' in London to accommodate
visitors to its London operations. The cost of the flat was(pound)507,375
($820,000) for a 75 year lease.

Item 3. LEGAL PROCEEDINGS

The Company is not a party to or the subject of, any material pending legal
proceedings which depart from the ordinary routine litigation incident to the
kinds of business conducted by the Company, except for an assessment on
Navigators Insurance by the Institute of London Underwriters ("ILU"). In late
1998, the ILU advised its then forty-one members, including Navigators
Insurance, that they were each being assessed approximately(pound)900,000 ($1.3
million) to pay for anticipated operating deficits arising from the long term
lease of the ILU building located in London (the "ILU Building"). This
assessment was to be paid in cash or by providing a letter of credit.

Even assuming that Navigators Insurance could be held responsible for the
assessment, Navigators Insurance has informed the ILU that it opposes the
assessment as inequitable and inappropriate since it purports to force the ILU's
members (without regard to the length of membership, proportionate usage of the
ILU's London Processing Centre or current or past occupancy of the ILU Building)
to pay now for potential worst case liabilities extending through 2011.

The ILU has, thus far, not filed suit to enforce the assessment against
Navigators Insurance. In the event the ILU does file such a suit, Navigators
Insurance intends to vigorously contest liability for payment of the assessment.
It is not possible to forecast the ultimate liability, if any, at the present
time.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the fourth
quarter of 2000.

Part II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

Market Information

The Company's common stock is traded over-the-counter (The Nasdaq National
Market) under the symbol NAVG. Over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commissions and may
not necessarily represent actual transactions.

The high and low bid prices for the four quarters of 2000 and 1999 are as
follows:

2000 1999
High Low High Low

First Quarter.............. $11.31 $ 8.75 $16.13 $13.50
Second Quarter............. $10.50 $ 8.63 $15.00 $14.00
Third Quarter.............. $12.25 $ 8.75 $16.00 $13.38
Fourth Quarter............. $14.13 $ 10.75 $14.13 $ 9.13

There were approximately 100 holders of record of shares of the Company's
common stock as of March 20, 2001. However, management believes there are in
excess of 1,000 beneficial owners of the stock.

Dividends

The Company has not paid or declared any cash dividends on its common
stock. While there presently is no intention to pay cash dividends on the common
stock, future declarations, if any, and the amounts of such dividends will be
dependent upon, among other factors, the earnings of the Company, its financial
condition and business needs, restrictive covenants under debt arrangements, the
capital and surplus requirements of its subsidiaries and applicable government
regulations.

Item 6. SELECTED FINANCIAL DATA

The following table sets forth summary consolidated financial information
of the Company for each of the years in the five-year period ended December 31,
2000 derived from the Company's audited consolidated financial statements. See
the Consolidated Financial Statements of the Company including notes thereto
included herein.

Year Ended December 31,

2000 1999 1998 1997 1996
(In thousands, except book value and net income per share data)
Operating Information:
Net earned premium.................. $ 97,240 $ 89,442 $ 91,203 $ 85,002 $ 78,731
Net investment income............... 18,447 15,985 15,209 14,435 13,614
Total revenues...................... 120,084 105,624 115,120 108,217 102,788
Income (loss)
before income taxes.............. 10,338 (5,392) 15,153 17,184 20,874
Net income (loss)................... 7,032 (3,652) 11,489 12,546 16,752

Net income (loss) per share:
Basic............................ $ 0.84 $ (0.43) $ 1.37 $ 1.51 $ 2.04
Diluted.......................... $ 0.84 $ (0.43) $ 1.36 $ 1.50 $ 2.02
Average common shares:
Basic............................ 8,414 8,419 8,414 8,296 8,197
Diluted ........................ 8,414 8,419 8,459 8,385 8,286
Balance Sheet Information
(at end of period):
Total investments & cash............ $ 251,185 $246,688 $257,232 $258,572 $240,720
Total assets........................ 614,975 631,324 592,086 501,207 457,095
Loss and LAE reserves............... 357,674 391,094 342,444 278,432 269,601
Notes payable....................... 22,000 24,000 23,500 20,942 17,942
Stockholders' equity................ 143,480 130,365 143,266 131,242 115,542
Book value per share................ $ 17.05 $ 15.51 $ 16.96 $ 15.68 $ 14.03

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

General

The Company is a holding company with twelve active wholly owned
subsidiaries. See "BUSINESS-General" included herein for a description of the
Company.

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

Results of Operations

General. The Company's 1998, 1999 and 2000 results of operations
reflect intense market competition in the marine business which started to ease
slightly in 2000.

The 1999 results include a charge against earnings of approximately $6.6
million pretax resulting in an after tax charge of approximately $4.3 million as
the result of unrecoverable reinsurance from New Cap Reinsurance Corporation
Limited ("New Cap Re") which participated in the Company's 1997 and 1998
reinsurance programs.

Revenues. Gross written premium decreased from $172.2 million in
1998 to $167.1 million in 1999 and increased to $188.4 million in 2000. The
following table sets forth the Company's gross written premium by segment and
line of business, and ceded and net written premium by segment for the periods
indicated:

Year Ended December 31,
2000 1999 1998
(Dollars in thousands)

Lloyd's Operations:
Marine............................... $ 76,101 40% $ 63,040 38% $ 46,637 27%
Engineering and Construction......... 936 1 961 1 - -
Onshore Energy....................... 520 - 1,346 1 - -
-------- -- -------- -- -------- --
Gross Written Premium.............. 77,557 41 65,347 40 46,637 27
-- -- --
Ceded Written Premium.............. (21,257) (12,250) (7,441)
-------- ------- --------
Net Written Premium................ 56,300 53,097 39,196
-------- -------- --------

Insurance Companies:
Marine............................... 81,664 44 82,086 49 64,043 37
Program Insurance.................... 28,360 15 18,581 11 15,684 9
Aviation............................. 191 - 180 - 23,405 14
Onshore Energy....................... 82 - 812 - 11,418 7
Engineering and Construction......... 452 - (77) - 9,976 6
Other................................ 119 - 183 - 1,048 -
-------- -- -------- -- -------- --
Gross Written Premium.............. 110,868 59 101,765 60 125,574 73
-- -- --
Ceded Written Premium.............. (59,075) (60,778) (76,288)
-------- -------- --------
Net Written Premium................ 51,793 40,987 49,286
-------- -------- --------

Total Gross Written Premium..... 188,425 100% 167,112 100% 172,211 100%
=== === ===

Total Ceded Written Premium..... (80,332) (73,028) (83,729)
------- ------- -------

Total Net Written Premium....... $ 108,093 $ 94,084 $ 88,482
======== ======== ========

Lloyd's Operations

The Lloyd's premium is generated as the result of NCUL and Millennium
providing capacity to Lloyd's Syndicate 1221 which is managed by MTC. The
premiums, losses and expenses from the Lloyd's Operations are included in the
Company's consolidated financials but are not included in the Insurance
Companies' results.

Lloyd's Syndicate 1221 had capacity of(pound)66.3 million ($96.0 million)
in 2000,(pound)67.0 million ($105.9 million) in 1999 and(pound)66.9 million
($111.1 million) in 1998. The Lloyd's marine business has been subject to
continued pricing competition resulting in less premiums per risk relative to
certain prior years. As a result, the Company wrote less than the capacity
available. The pricing competition showed some signs of easing in 2000.

Marine Premium. In 2000, marine premium increased 20.7% from 1999
due to the capacity provided to Syndicate 1221 by NCUL and Millennium in the
aggregate increasing from 52.5% in 1999 to 64.5% in 2000. The capacity provided
to Syndicate 1221 by NCUL and Millennium increased from 39.5% in 1998 to 52.5%
in 1999 resulting in the increase in premium volume.

Engineering and Construction Premium. In 1999, the Robertson
Consortium managed by MTC began writing engineering and construction business
for Syndicate 1221. The business consists of coverage for construction projects
including machinery, equipment and loss of use due to delays. Previously, the
engineering and construction business was written for Navigators Insurance.

Onshore Energy. In 1999, the Robertson Consortium also began writing
onshore energy business for Syndicate 1221. The business principally focuses on
the oil and gas, chemical and petrochemical industries with coverages primarily
for property damage. Previously, the onshore energy business was written for
Navigators Insurance.

Lloyd's presents its results on an underwriting year basis, generally
closing each underwriting year after three years. The Company makes estimates
for each year and timely accrues the expected results. At Lloyd's, the amount to
close an underwriting year into the next year is referred to as the "reinsurance
to close." At December 31, 2000, Syndicate 1221 closed its 1998 underwriting
year, the net effect of which resulted in a portfolio transfer to NCUL and
Millennium of $7.9 million at December 31, 2000. At December 31, 1999, Syndicate
1221 and an unaffiliated syndicate on which NCUL participated in 1997 closed
their 1997 underwriting year resulting in a portfolio transfer to NCUL of $15.5
million at December 31, 1999. At December 31, 1998, Syndicate 1221 and an
unaffiliated syndicate on which NCUL participated in 1997, closed their 1996
underwriting year resulting in a portfolio transfer to NCUL of $19.7 million at
December 31, 1998. These transactions accounted for part of the increases in the
premium volume in the Company's Lloyd's Operations. The reinsurance to close
transactions were recorded 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 transactions.

The Company controlled 75.6% of Syndicate 1221's capacity for the 2000
underwriting year. The actual capacity was (pound)66,297,000 ($95,985,000) of
which the Company directly controlled(pound)42,772,000 ($61,925,000) or 64.5%
and indirectly controlled(pound)7,340,000 ($10,627,000) or 11.1%. Since the
controlled capacity exceeded 75% in 2000, Lloyd's Mandatory Byelaw (No. 5 of
1999) required the Company to make a mandatory offer to noncontrolled
participants for their capacity at the first Lloyd's capacity auctions beginning
in July 2000. As a result, the Company purchased an additional(pound)7,379,000
($11,018,000) of capacity for 2001 through the auction process in 2000 at a
total cost of(pound)133,000 ($199,000).

The offer was made at 1.8 pence per(pound)1 of capacity which is the
minimum price that the Company was obliged to offer, being the highest price
paid for capacity during the prior 12 months. If the Company were to exceed the
90% control threshold, Lloyd's Major Syndicate Transactions Byelaw (No. 18 of
1997) allows for a Minority Buy-out to be effected. In such a transaction the
remaining participants are required to give up their capacity in return for
compensation which must be at least equal to the offer price preceding the
buy-out. Syndicate 1221's capacity for 2001 will be approximately(pound)66.3
million of which the Company will directly control 67.4% and indirectly control
20.7%.

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

Insurance Companies

Marine Premium. Marine gross written premium remained relatively
unchanged from 1999 to 2000. Written premium increased 28.2% from 1998 to 1999
primarily due to Navigators Insurance increasing its participation in the marine
pool. Navigators Insurance's participation in the marine pool was 75% in 2000
and 1999 and 60% in 1998.

Program Insurance Premium. The program insurance, currently written
by Anfield, consists primarily of general liability insurance for contractors
and a small amount of commercial multi-peril insurance for restaurants and
taverns. The premium increased 52.6% from 1999 to 2000 and 18.5% from 1998 to
1999 due to the expansion of these programs.

Aviation Premium. Navigators Insurance withdrew from aviation
business effective October 1998, other than a small amount of war and satellite
business, due to inadequate pricing in the aviation insurance market.

Onshore Energy Premium. In 1996, Navigators Insurance began to
underwrite onshore energy insurance which principally focused on the oil and
gas, chemical and petrochemical, and power generation industries with coverages
primarily for property damage. Beginning in 1999, the onshore energy business
was written through the Company's facilities at Lloyd's.

Engineering and Construction Premium. In 1997, Navigators Insurance
began writing engineering and construction business consisting of coverage for
construction projects including the machinery, equipment and loss of use due to
delays. Beginning in 1999, the engineering and construction business was written
through the Company's facilities at Lloyd's. In early 1999, the Company closed
its Somerset Asia Pacific Limited office in Australia which, along with
Navigators Management UK, had previously produced this business for Navigators
Insurance.

Ceded Written Premium. In the ordinary course of business, the
Company reinsures certain insurance risks with unaffiliated insurance companies
for the purpose of limiting its maximum loss exposure, protecting against
catastrophic losses, and maintaining desired ratios of net premiums written to
statutory surplus. The increase in ceded premium in the Lloyd's Operations
during 2000 was due to the purchase of additional quota share protection in the
marine business and increased gross written premium. The Insurance Companies'
ceded premium declined 2.8% from 1999 to 2000 primarily due to more favorable
reinsurance rates in the program insurance. The decrease in the ceded premium
from 1998 to 1999 resulted from the decrease in engineering and aviation
business which were heavily reinsured.

Net Written Premium. Net written premium increased 14.9% from 1999 to
2000 primarily due to the increases in the Lloyd's marine business and the
program business. Net written premium increased 6.3% from 1998 to 1999 primarily
due to increases in the marine premium partially offset by decreases in other
lines of business as described above.

Net Earned Premium. Net earned premium increased 8.7% from 1999 to
2000 primarily due to the increase in the written premium. The 1.9% decrease
from 1998 to 1999 was primarily due to higher unearned premium in the Lloyd's
Operations and a smaller reinsurance to close premium in 1999 which is recorded
as fully earned premium.

Commission Income. Commission income increased in 2000 primarily due
to the absence to a great extent of the factors that reduced commission income
in 1999. Commission income decreased from 1998 to 1999 due to Navigators
Insurance increasing its participation in the marine pool from 60% in 1998 to
75% in 1999, the losses related to unrecoverable reinsurance which reduced the
profit commission, the Company's reduction of its commission income estimates
due to the extremely competitive rate environment and less profit commission
earned by MTC in 1999 than in 1998.

Net Investment Income. Net investment income increased 15.4% from
1999 to 2000 and 5.1% from 1998 to 1999 primarily due to an increase in
investment income allocated to NCUL and Millennium from the investments at the
Lloyd's syndicates due to their increased participation in Syndicate 1221 and
reduction in the Insurance Companies' municipal portfolio. Increased yield in
the portfolio and reduction in the expenses to manage the portfolio also
increased investment income in 2000. The investments at NCUL and Millennium are
represented by funds due from the Lloyd's syndicates to the Company.

Operating Expenses

Net Losses and Loss Adjustment Expenses Incurred. The ratio of net
loss and loss adjustment expenses incurred to net earned premium was 64.8%,
78.2%, and 68.3% in 2000, 1999, and 1998, respectively. The decrease in the 2000
loss ratio compared to 1999 was primarily due to the unrecoverable reinsurance
for New Cap Re recorded in 1999 and to the lower reinsurance to close premium in
2000 of $7.9 million compared to $15.5 million in 1999. The increase in the 1999
loss ratio compared to 1998 was primarily due to unrecoverable reinsurance from
New Cap Re and higher loss ratios on the Lloyd's premium, partially offset by
the decrease in the reinsurance to close premium in 1999 of $15.5 million
compared to $19.7 million in 1998. The reinsurance to close premium is recorded
at a 100% loss ratio since the premium received represents estimated ultimate
losses. The 1999 loss ratio excluding the New Cap Re unrecoverable reinsurance
was 70.8%. The loss reserves were not discounted.

Commission Expense. Commission expense as a percentage of net earned
premium was 20.6%, 16.5% and 13.0% for 2000, 1999, and 1998, respectively. The
same ratios without the reinsurance to close premium were 22.5%, 19.9% and 16.6%
in 2000, 1999 and 1998, respectively. The increase in the 2000 commission
expense ratio compared to 1999 was primarily due to the increase in the Lloyd's
premium which generally has a higher commission expense. The reinsurance to
close premium increases earned premium but does not change the commission
expense, therefore the ratio of commission expense to earned premium decreases.
The increase in the 1999 commission expense ratio compared to 1998 was also
primarily due to increased commissions at Lloyd's.

Other Operating Expenses. The change in other operating expenses
from 1999 to 2000 was minimal. Other operating expenses increased 2.5% from 1998
to 1999 primarily due to the acquisition of Anfield on April 2, 1999 and
increased expenses in the Lloyd's Operations due to the Company's increased
participation in its Lloyd's syndicate, partially offset by reduced expenses
from the closing of the Somerset Asia Pacific Limited office in Australia from
which the company incurred a foreign exchange loss of $346,000.

Interest Expense. The increase in interest expense from 1999 to 2000
was primarily due to higher interest rates charged on the loan balance.

Income Taxes. The income tax expense (benefit) was $3.3 million,
($1.7) million, and $3.7 million for 2000, 1999, and 1998, respectively. The
effective tax rates for 2000, 1999, and 1998 were 32.0%, 32.3% and 24.2%,
respectively. The tax benefit in 1999 compared to the tax expense in 1998 was
primarily due to operating losses in 1999. The Company had alternative minimum
tax ("AMT") carryforwards of $5.3 million, $6.4 million and $4.7 million at
December 31, 2000, 1999, and 1998, respectively. The AMT carryforwards were
primarily attributable to the tax benefits from municipal bond interest. The
Company began reducing its municipal bond portfolio in 1997.

As of December 31, 2000 and 1999, the net deferred Federal, foreign, state
and local tax asset was $9.0 million and $12.9 million, respectively. At
December 31, 2000 the Company had a $5.8 million valuation allowance against its
deferred tax asset compared to a $4.5 million valuation allowance at December
31, 1999. The valuation allowance is necessitated by the uncertainty associated
with the realization of the deferred tax asset for the carryforward of operating
losses from certain of the Company's foreign, state and local operations.

Net Income (Loss). The Company had net income of $7.0 million
in 2000 compared to a net (loss) of ($3.7) million in 1999 and net income of
$11.5 million in 1998. The loss in 1999 was primarily due to unrecoverable
reinsurance, price competition, higher loss ratios in the Lloyd's Operations and
expenses related to the foreign expansion in London.

Liquidity and Capital Resources

Cash flow provided by (used in) operations was $1.6 million, $8.9 million
and ($3.0) million for 2000, 1999 and 1998, respectively. Operating cash flow in
1999 and 2000 was used primarily to acquire additional investment assets and to
reduce debt. The negative operating cash flow in 1998 was primarily due to the
payment of loss reserves on runoff business and less premiums received,
partially due to Lloyd's disbursing cash only after an underwriting year has
closed, normally three years later.

Invested assets and cash increased from $246.7 million at December 31, 1999
to $251.2 million at December 31, 2000. The increase was primarily due to the
fair value of the fixed maturities portfolio moving from a $5.3 million
unrealized loss at December 31, 1999 to a $3.3 million unrealized gain at
December 31, 2000. Net investment income was $15.2 million in 1998, $16.0
million in 1999 and $18.4 million in 2000. The average yield of the portfolio,
excluding net realized capital gains, was 5.87% in 1998, 5.84% in 1999, and
6.55% in 2000 reflecting the prevailing interest rates during those years, the
decrease in the tax-exempt portfolio and reduction in expenses to manage the
portfolio in 2000. As of December 31, 2000, all fixed maturity securities and
equity securities held by the Company were classified as available-for-sale.

The average rating of the Company's fixed maturity investments is AA by
Standard & Poor's and Aa by Moody's. The Company has no significant exposure
to credit risk since the Company's fixed maturity investment portfolio primarily
consists of investment grade bonds. The portfolio has an average maturity of
approximately seven years. Management continually monitors the composition and
cash flow of the investment portfolio in order to maintain the appropriate
levels of liquidity. This ensures the Company's ability to satisfy claims.

The decrease in reserves for losses and loss adjustment expenses and the
related decrease in the reinsurance receivable on paid and unpaid losses and
loss adjustment expenses at December 31, 2000 as compared to 1999 was primarily
due to the payment of reserves and recovery of reinsurance during 2000 on
various large energy and aviation claims.

On December 21, 1998, the Company entered into a new bank credit facility
which replaced the prior facility. The new credit facility, as amended on
September 20, 2000, provides a $26 million revolving line of credit at an
interest rate of either, at the Company's election, the base commercial lending
rate of one of the banks or at LIBOR plus 1.25% on the used portion of the line
of credit. The commitment fee on the unused portion of the line of credit is
0.25%. The line of credit facility reduces each quarter by amounts between $1.0
million and $2.25 million beginning January 1, 2000 until it terminates on
November 19, 2004. At December 31, 2000 and 1999, $22 million and $24 million in
loans were outstanding, respectively, under the revolving line of credit
facility at an interest rate of 7.6% and 7.1%, respectively. The credit facility
also provides for a $55 million letter of credit facility which is utilized
primarily by NCUL and Millennium to participate in Lloyd's Syndicate 1221
managed by MTC. The cost of the letters of credit is 1.3% for the used portion
and 0.25% for the unused portion of the letter of credit facility. At December
31, 2000 and 1999, letters of credit with an aggregate face amount of $46.6
million and $42.2 million, respectively, were issued under the letter of credit
facility. In 2000, $78,500 of these letters of credit were drawn upon.

The bank credit facility is collateralized by shares of common stock of the
Company's major subsidiary. It contains covenants common to transactions of this
type, including restrictions on indebtedness and liens, limitations on mergers
and the sale of assets, maintaining certain consolidated total stockholders'
equity, statutory surplus, minimum liquidity, loss reserves and other financial
ratios. At December 31, 2000, the Company complied with all covenants.

Total stockholders' equity was $143.5 million at December 31, 2000, a 10.1%
increase for the year as the result of the Company's net income in 2000 and the
unrealized gain in the investment portfolio.

The Company's reinsurance has been placed with various U.S. companies rated
"A-" or better by A.M. Best Company, as well as with foreign insurance companies
and with selected syndicates of Lloyd's. Pursuant to the implementation of
Lloyd's Plan of Reconstruction and Renewal, a portion of the Company's
recoverables are now reinsured by Equitas (a separate UK 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).

The Company believes that the cash flow generated by the operating
activities of the Company's subsidiaries will provide sufficient funds for the
Company to meet its liquidity needs over the next twelve months. Beyond the next
twelve months, cash flow available to the Company 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.

Economic Conditions

The Company is a specialty insurance company and periods of moderate
economic recession or inflation tend not to have a significant direct affect on
the Company's underwriting operations. They do, however, impact the Company's
investment portfolio. A decrease in interest rates will tend to decrease the
Company's yield and have a positive effect on the fair value of its invested
assets. An increase in interest rates will tend to increase the Company's yield
and have a negative effect on the fair value of its invested assets.

Management considers the potential impact of these economic trends in
estimating loss reserves. Management believes that the underwriting controls it
maintains, and the fact that the majority of the Company's business is in lines
of insurance which have relatively short loss payout patterns, assist in
estimating ultimate claim costs more reasonably and lessen the potential adverse
impact of the economy on the Company.

Quantitative and Qualitative Disclosures About Market Risk

Market Risk

Market risk is the risk of loss arising from adverse changes in market
rates and prices, such as interest rates, foreign currency exchange rates, and
other relevant market rate or price changes. Market risk is directly influenced
by the volatility and liquidity in the markets in which the related underlying
assets are traded. The following is a discussion of the Company's primary market
risk exposures and how those exposures are currently managed as of December 31,
2000. The Company's market risk sensitive instruments are entered into for
purposes other than trading.

The carrying value of the Company's investment portfolio as of December 31,
2000 was $251.2 million of which 89.6% was invested in fixed maturity
securities. The primary market risk to the investment portfolio is interest rate
risk associated with investments in fixed maturity securities. The Company's
exposure to equity price risk and foreign exchange risk is not significant. The
Company has no commodity risk.

For fixed maturity securities, short-term liquidity needs and the potential
liquidity needs of the business are key factors in managing the portfolio. The
portfolio duration relative to the liabilities' duration is primarily managed
through investment transactions.

For the Company's investment portfolio, there were no significant changes
in the Company's primary market risk exposures or in how those exposures are
managed compared to the year ended December 31, 1999. The Company does not
currently anticipate significant changes in its primary market risk exposures or
in how those exposures are managed in future reporting periods based upon what
is known or expected to be in effect in future reporting periods.

The Company is subject to interest rate risk on its notes payable to banks
as changes in interest rates would impact future earnings, however, this
interest rate risk exposure is not considered significant.

Sensitivity Analysis

Sensitivity analysis is defined as the measurement of potential loss in
future earnings, fair values or cash flows of market sensitive instruments
resulting from one or more selected hypothetical changes in interest rates and
other market rates or prices over a selected time. In the Company's sensitivity
analysis model, a hypothetical change in market rates is selected that is
expected to reflect reasonably possible near-term changes in those rates. The
term "near-term" means a period of time going forward up to one year from the
date of the consolidated financial statements. Actual results may differ from
the hypothetical change in market rates assumed in this disclosure, especially
since this sensitivity analysis does not reflect the results of any actions that
would be taken by the Company to mitigate such hypothetical losses in fair
value.

In this sensitivity analysis model, the Company uses fair values to measure
its potential loss. The sensitivity analysis model includes fixed maturities and
short-term investments. The primary market risk to the Company's market
sensitive instruments is interest rate risk. The sensitivity analysis model uses
a 100 basis point change in interest rates to measure the hypothetical change in
fair value of financial instruments included in the model.

For invested assets, modified duration modeling is used to calculate
changes in fair values. Durations on invested assets are adjusted for call, put
and interest rate reset features. Duration on tax exempt securities is adjusted
for the fact that the yield on such securities is less sensitive to changes in
interest rates compared to Treasury securities. Invested asset portfolio
durations are calculated on a market value weighted basis, including accrued
investment income, using holdings as of December 31, 2000.

The sensitivity analysis model used by the Company produces a loss in fair
value of market sensitive instruments of $11.0 million based on a 100 basis
point increase in interest rates as of December 31, 2000. This loss amount only
reflects the impact on an interest rate increase on the fair value of the
Company's fixed maturities and short-term investments, which constitute
approximately 39.6% of total assets as of December 31, 2000.

Based on the sensitivity analysis model used by the Company, the loss in
fair value of market sensitive instruments, as a result of a 100 basis point
increase in interest rates as of December 2000, is not material.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements required in response to this section
are submitted as part of Item 14(a) of
this report.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

None.

Part III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information concerning the directors and the executive officers of the
Company is contained under "Election of Directors" in the Company's 2001 Proxy
Statement, which information is incorporated herein by reference.

Item 11. EXECUTIVE COMPENSATION

Information concerning executive compensation is contained under
"Compensation of Directors and Executive Officers" in the Company's 2001 Proxy
Statement, which information is incorporated herein by reference.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information concerning the security ownership of the directors and officers
of the registrant is contained under "Election of Directors" in the Company's
2001 Proxy Statement, which information is incorporated herein by reference.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information concerning relationships and related transactions of the
directors and officers of the Company is contained under "Certain Relationships
and Related Transactions" in the Company's 2001 Proxy Statement, which
information is incorporated herein by reference.

Part IV

Item 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

1. Financial Statements and Schedules: The
financial statements and schedules listed in the
accompanying Index to Consolidated Financial Statements and
Schedules on page F-1.

2. Exhibits: The exhibits are listed on the
accompanying Index to Exhibits on the page which immediately
follows page S-8. The exhibits include the management
contracts and compensatory plans or arrangements required to
be filed as exhibits to this Form 10-K by Item
601(a)(10)(iii) of Regulation S-K.

(b) Reports on Form 8-K: There were no reports filed on Form 8-K during
the fourth quarter of 2000.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized. The Navigators Group,
Inc. (Registrant)

Dated: March 28, 2001 By:/s/ BRADLEY D. WILEY
Bradley D. Wiley
Senior Vice President,
CFO and Secretary

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Name Title Date

/s/ TERENCE N. DEEKS Chairman, President and CEO (Principal March 28, 2001
Terence N. Deeks Executive Officer)

/s/ BRADLEY D. WILEY Senior Vice President, CFO March 28, 2001
Bradley D. Wiley and Secretary
(Principal Financial Officer)

/s/ SALVATORE A. MARGARELLA Vice President and Treasurer March 28, 2001
Salvatore A. Margarella (Principal Accounting Officer)

/s/ ROBERT M. DEMICHELE Director March 28, 2001
Robert M. DeMichele

/s/ LEANDRO S. GALBAN, JR. Director March 28, 2001
Leandro S. Galban, Jr.

/s/ MARC M. TRACT Director March 28, 2001
Marc M. Tract

/s/ WILLIAM D. WARREN Director March 28, 2001
William D. Warren

/s/ ROBERT F. WRIGHT Director March 28, 2001
Robert F. Wright

/s/ HOWARD M. ZELIKOW Director March 28, 2001
Howard M. Zelikow

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

Independent Auditors' Report............................................................... F-2

Consolidated Balance Sheets at December 31, 2000 and 1999.................................. F-3

Consolidated Statements of Income for each of the years in the three-year
period ended December 31, 2000........................................................... F-4

Consolidated Statements of Stockholders' Equity for each of the years in
the three-year period ended December 31, 2000............................................ F-5

Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 2000................................................ F-6

Notes to Consolidated Financial Statements................................................. F-7

SCHEDULES:

Schedule I Summary of Consolidated Investments--other than
investments in related parties............................................. S-1

Schedule II Condensed Financial Information of Registrant............................. S-2

Schedule III Supplementary Insurance Information ....................................... S-5

Schedule IV Reinsurance................................................................ S-6

Schedule V Valuation and Qualifying Accounts.......................................... S-7

Schedule VI Supplementary Information Concerning
Property-Casualty Insurance Operations............................ S-8

F-1

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
The Navigators Group, Inc.

We have audited the consolidated balance sheets of The Navigators Group,
Inc. and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 2000. In connection
with our audits of the consolidated financial statements, we also have audited
the consolidated financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Navigators Group, Inc. and subsidiaries as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.

KPMG LLP

New York, New York
March 26, 2001

F-2

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
2000 1999

ASSETS
Investments and cash:
Fixed maturities, available-for-sale, at fair value
(amortized cost: 2000, $221,807; 1999, $227,875)....................................... $225,128 $222,555
Equity securities, available-for-sale, at fair value (cost: 2000, $5,608;
1999, $11,105) ........................................................................ 6,269 11,840
Short-term investments, at cost which approximates fair value........................... 18,186 6,747
Cash..................................................................................... 1,602 5,546
------- --------
Total investments and cash......................................................... 251,185 246,688
------- -------

Premiums in course of collection............................................................ 35,282 35,614
Funds due from Lloyd's syndicates........................................................... 68,912 55,243
Accrued investment income................................................................... 3,125 3,250
Prepaid reinsurance premiums................................................................ 26,274 24,765
Reinsurance receivable on paid and unpaid losses and loss adjustment expenses............... 195,713 229,111
Federal income tax recoverable.............................................................. 463 2,016
Net deferred Federal and foreign income tax benefit......................................... 9,399 13,227
Deferred policy acquisition costs........................................................... 8,400 5,878
Goodwill ................................................................................... 5,278 5,805
Other assets................................................................................ 10,944 9,727
------- --------

Total assets....................................................................... $614,975 $631,324
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses.......................................... $357,674 $391,094
Unearned premium.......................................................................... 66,238 55,003
Reinsurance balances payable.............................................................. 20,402 24,799
Notes payable to banks.................................................................... 22,000 24,000
Net deferred state and local income tax................................................... 398 374
Accounts payable and other liabilities.................................................... 4,783 5,689
------- --------
Total liabilities.................................................................. 471,495 500,959
------- -------

Commitments and contingencies...............................................................

Stockholders' equity:
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued................. -- --
Common stock, $.10 par value, authorized 10,000,000 shares,
issued and outstanding 8,414,356 in 2000 and 8,406,970 in 1999......................... 846 846
Additional paid-in capital................................................................ 39,413 39,447
Treasury stock held at cost (shares: 41,314 in 2000 and 48,700 in 1999).................. (594) (700)
Accumulated other comprehensive income (loss):
Net unrealized gains (losses) on securities available-for-sale (net of tax expense (benefit)
of $1,394 in 2000 and ($1,605) in 1999).............................................. 2,822 (2,980)
Foreign currency translation adjustment (net of tax expense of $146 in 2000 and
$34 in 1999)......................................................................... 271 62
Retained earnings......................................................................... 100,722 93,690
------- --------
Total stockholders' equity......................................................... 143,480 130,365
------- -------

Total liabilities and stockholders' equity......................................... $614,975 $631,324
======= =======
See accompanying notes to consolidated financial statements.
F-3

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

Year Ended December 31,
2000 1999 1998

Revenues:
Net earned premium................................................... $ 97,240 $ 89,442 $ 91,203
Commission income.................................................... 3,787 482 6,569
Net investment income................................................ 18,447 15,985 15,209
Net realized capital gains (losses).................................. 265 (443) 1,431
Other income........................................................ 345 158 708
------- ------- --------
Total revenues..................................................... 120,084 105,624 115,120
------- ------- -------

Operating expenses:
Net losses and loss adjustment expenses incurred..................... 63,012 69,914 62,322
Commission expense................................................... 20,078 14,721 11,864
Other operating expenses............................................. 24,775 24,879 24,264
Interest expense..................................................... 1,881 1,502 1,517
------- ------- --------
Total operating expenses........................................... 109,746 111,016 99,967
------- ------- --------

Income (loss) before income tax expense (benefit)....................... 10,338 (5,392) 15,153
------- ------- --------

Income tax expense (benefit):
Current.............................................................. 2,565 (450) 3,100
Deferred............................................................. 741 (1,290) 564
------- ------- --------
Total income tax expense (benefit)............................... 3,306 (1,740) 3,664
------- ------- --------

Net Income (Loss)....................................................... $ 7,032 $ (3,652) $ 11,489
======= ======== ========

Net income (loss) per common share:
Basic................................................................ $ 0.84 $ (0.43) $ 1.37
Diluted.............................................................. $ 0.84 $ (0.43) $ 1.36

Average common shares outstanding:
Basic................................................................ 8,414 8,419 8,414
Diluted.............................................................. 8,414 8,419 8,459

See accompanying notes to consolidated financial statements.

F-4

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)

Year Ended December 31,
2000 1999 1998

Preferred stock
Balance at beginning and end of year.............. $ -- $ -- $ --
========= ======== ========

Common stock
Balance at beginning of year...................... $ 846 $ 845 $ 837
Issuance of common stock during the year.......... -- 1 8
--------- -------- --------
Balance at end of year............................ $ 846 $ 846 $ 845
========= ======== ========

Additional paid-in capital
Balance at beginning of year...................... $ 39,447 $ 39,332 $ 38,119
Issuance of common stock during the year.......... (34) 115 1,213
--------- -------- --------
Balance at end of year............................ $ 39,413 $ 39,447 $ 39,332
========= ======== ========

Retained earnings
Balance at beginning of year...................... $ 93,690 $ 97,342 $ 85,853
Net income (loss)................................. 7,032 $ 7,032 (3,652) $ (3,652) 11,489 $11,489
--------- ------- -------- ------- -------- ------
Balance at end of year............................ $ 100,722 $ 93,690 $ 97,342
========= ======== ========

Treasury stock held at cost
Balance at beginning of year...................... $ (700) $ -- $ --
Purchase of Treasury stock........................ -- (700) --
Shares issued to Directors........................ 106 -- --
--------- -------- --------
Balance at end of year............................ $ (594) $ (700) $ --
========= ======== ========

Accumulated other comprehensive income (loss)
Balance at beginning of year...................... $ (2,918) $ 5,747 $ 6,433
Net unrealized gains (losses) on securities, net of
tax expense (benefit) of $2,999, ($4,792) and
($310) in 2000, 1999 and 1998, respectively (1). 5,802 (8,899) (575)
Foreign currency gain (loss) net of tax expense
(benefit) of $112, $126 and ($60) in 2000,
1999 and 1998, respectively.................... 209 234 (111)
------- ------- -------
Other comprehensive income (loss)................. 6,011 6,011 (8,665) (8,665) (686) (686)
--------- ------- -------- -------- -------- ------
Comprehensive income (loss)....................... $13,043 $(12,317) $ 10,803
====== ======= =======
Balance at end of year............................ $ 3,093 $ (2,918) $ 5,747
========= ======== ========

Total stockholders' equity at end of year............ $ 143,480 $ 130,365 $ 143,266
========= ======== =======

(1) Disclosure of reclassification amount:
Unrealized holding gains (losses) arising.......
during period................................. $ 6,005 $ (8,625) $ 628
Less: reclassification adjustment for net
(gains) included in net income................ (203) (274) (1,203)
------- ------- -------
Net unrealized gains (losses) on securities..... $ 5,802 $ (8,899) $ (575)
======= ======= =======

See accompanying notes to consolidated financial statements.

F-5

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
2000 1999 1998
Operating activities:
Net income (loss)........................................... $ 7,032 $ (3,652) $ 11,489
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation & amortization................................ 1,173 1,361 833
Net deferred income tax ................................... 741 (1,290) 564
Net realized capital (gains) losses........................ (265) 443 (1,431)
Changes in assets and liabilities, net of acquisitions:
Reinsurance receivable on paid and unpaid
losses and loss adjustment expenses...................... 33,398 (29,094) (52,913)
Reserve for losses and loss adjustment expenses............ (33,420) 48,650 64,012
Prepaid reinsurance premiums............................... (1,509) 934 (5,294)
Unearned premium........................................... 11,235 3,707 2,636
Premiums in course of collection........................... 332 6,361 (6,771)
Funds due from Lloyd's syndicates.......................... (13,435) (20,897) (23,703)
Deferred policy acquisition costs.......................... (2,522) (1,575) 1,100
Accrued investment income.................................. 125 (25) (59)
Reinsurance balances payable............................... (4,397) 242 8,319
Federal income tax......................................... 1,553 (1,651) (261)
Other...................................................... 1,524 5,383 (1,510)
-------- -------- --------
Net cash provided by (used in) operating activities.... 1,565 8,897 (2,989)
-------- -------- --------
Investing activities:
Fixed maturities, available-for-sale
Redemptions and maturities .............................. 11,516 43,295 24,074
Sales ................................................... 60,133 25,335 28,664
Purchases ............................................... (66,240) (64,365) (66,373)
Equity securities, available-for-sale
Sales ................................................... 9,653 3,341 3,285
Purchases ............................................... (3,422) (8,087) (3,083)
Payment for purchase of MTC, net of cash acquired of $489 ... -- (26) (5,321)
Payment for purchase of Anfield, net of cash acquired of $68. -- (2,591) --
(Receivable) payable for securities.......................... (1,800) (2,158) 2,832
Net (purchases) sales of short-term investments ............ (11,439) (1,100) 16,932
Other investments .......................................... -- 1,145 1,262
Purchase of property and equipment ......................... (1,910) (791) (1,166)
-------- -------- --------
Net cash provided by (used in) investing activities .. (3,509) (6,002) 1,106
-------- -------- --------
Financing activities:
Proceeds from bank loan .................................... 3,000 1,500 3,500
Repayment of bank loan ..................................... (5,000) (1,000) (340)
Proceeds from exercise of stock options .................... -- 44 1,221
Purchase of treasury stock................................... -- (700) --
Repayment of note payable to stockholder ................... -- -- (942)
-------- -------- --------
Net cash provided by (used in) financing activities (2,000) (156) 3,439
-------- -------- ---------
Increase (decrease) in cash ................................... (3,944) 2,739 1,556
Cash at beginning of year ..................................... 5,546 2,807 1,251
-------- -------- ---------
Cash at end of year ........................................... $ 1,602 $ 5,546 $ 2,807
========= ======== ========
Supplemental disclosures of cash flow information:
Federal, state and local income tax paid .................... $ 1,236 $ 1,050 $ 3,599
Interest paid .............................................. 1,805 1,530 1,605
Issuance of stock to directors............................... 72 72 72
Fair value of assets acquired................................ -- 4,204 10,495
Liabilities assumed in acquisitions.......................... -- 1,519 4,685

See accompanying notes to consolidated financial statements.

F-6

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Summary of Significant Accounting Policies

The accompanying consolidated financial statements consisting of the
accounts of The Navigators Group, Inc., a Delaware holding company, and its
sixteen wholly owned subsidiaries, are prepared on the basis of accounting
principles generally accepted in the United States ("GAAP"). Unless the context
otherwise requires, the term "Company" as used herein means The Navigators
Group, Inc. and its subsidiaries. All significant intercompany transactions and
balances are eliminated. Certain amounts for prior years have been reclassified
to conform to the current year's presentation.

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

In April 1999, the Company acquired Anfield Insurance Services, Inc.
("Anfield"), an insurance agency located in San Francisco, California, which
specializes in underwriting general liability insurance coverage for small
artisan and general contractors on the West Coast. The purchase price of
approximately $2.7 million, funded through a bank loan and working capital,
resulted in goodwill of approximately $2.3 million which is being amortized over
20 years. The acquisition has been accounted for under the purchase method of
accounting. Anfield produces business exclusively for the Insurance Companies
and is included with the Navigators Agencies unless otherwise noted. In 2001,
Anfield will become part of Navigators California Insurance Services, Inc.

Navigators Holdings (UK) Limited is a holding company for the Company's UK
subsidiaries. Navigators Management (UK) Limited produces business for the UK
Branch of Navigators Insurance. Navigators Corporate Underwriters Limited
("NCUL") is admitted to do business at Lloyd's of London ("Lloyd's") as a
corporate member with limited liability. In January 1998, the Company acquired
Mander, Thomas & Cooper (Underwriting Agencies) Limited ("MTC"), a Lloyd's
marine underwriting managing agency which manages Lloyd's Syndicate 1221, and
its wholly owned subsidiary, Millennium Underwriting Limited ("Millennium"), a
Lloyd's corporate member with limited liability. The purchase price consists of
initial cash payments, acquisition costs and contingent consideration based upon
future performance. The purchase price of approximately $6.2 million was funded
through a bank loan and working capital. In addition, the purchase agreement
requires payment of additional consideration based on the performance of Lloyd's
Syndicate 1221 managed by MTC. Goodwill of approximately $4.0 million has been
recorded to date in connection with the transaction. The goodwill is being
amortized over 20 years. Additional goodwill may be recorded in future years
when the amount of the future performance contingencies are determinable. The
acquisition has been accounted for under the purchase method of accounting. In
August 1999, MTC formed Pennine Underwriting Limited, an underwriting managing
agency located in Northern England, which underwrites cargo and engineering
business for Lloyd's Syndicate 1221. In March 2001, MTC's Board of Directors
approved that MTC's name would be changed to Navigators Underwriting Agency
Limited. The name change is expected to take place in 2001.

F-7

During 1999, the Company closed Somerset Asia Pacific Limited, a wholly
owned subsidiary operating in Australia from which it incurred a foreign
exchange loss of $346,000.

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

Investments

Investments are classified into one of three categories. Held-to-maturity
securities are debt securities that the Company has the positive intent and
ability to hold to maturity and are reported at amortized cost. Trading
securities are debt and equity securities that are purchased and held
principally for the purpose of selling them in the near term and are reported at
fair value, with unrealized gains and losses included in earnings.
Available-for-sale securities are debt and equity securities not classified as
either held-to-maturity securities or trading securities and are reported at
fair value, with unrealized gains and losses excluded from earnings and reported
in other comprehensive income as a separate component of stockholders' equity.
As of December 31, 2000 and 1999, all fixed maturity and equity securities held
by the Company were classified as available-for-sale. Premiums and discounts on
fixed maturity securities are amortized into interest income over the life of
the security under the interest method.

Prepayment assumptions for mortgage and asset backed securities were
obtained from broker/dealer survey values or from outside investment managers.
These assumptions are consistent with the current interest rate and economic
environment. The retrospective adjustment method is used to value all
securities.

Short-term investments are carried at cost, which approximates fair value.
Short-term investments mature within one year from the purchase date.

Realized gains and losses on sales of investments are determined on the
basis of the specific identification method. When a decline in fair value of
investments is considered to be "other than temporary," the investments are
written down to net realizable value. The write down is considered a realized
loss in the consolidated statement of income.

Funds Due From Lloyd's Syndicates

Funds due from Lloyd's syndicates consist primarily of investments, cash
and premiums receivable resulting primarily from the Company's participation in
Lloyd's Syndicate 1221. These assets are used for the settlement of losses and
payment of expenses related to the business written by the syndicates including
payment of the amount to close an underwriting year. The investments included in
the funds due from Lloyd's syndicates are recorded at fair value with unrealized
gains and losses reported in other comprehensive income as a separate component
of stockholders' equity.

F-8

Premium Revenues

Insurance premiums are recognized as income by the Company during the terms
of the related policies. Unearned premium reserves are established to cover the
unexpired portion of written premiums.

Commission Income

Commission income consists of commissions and profit commissions from the
unaffiliated insurance companies. Commissions from those unaffiliated insurers
are based on gross earned premiums and are recognized over the terms of the
related policies. Profit commission is based on estimated net underwriting
results of the unaffiliated insurers. Changes in prior estimates of commission
income are recorded when such changes become known.

Deferred Policy Acquisition Costs

Costs of acquiring business which vary with and are directly related to the
production of business are deferred and amortized ratably over the period that
the related premiums are recognized as earned. Such costs primarily include
commission expense, other underwriting expenses and premium taxes. The method of
computing deferred policy acquisition costs limits the deferral to their
estimated net realizable value based on the related unearned premiums and takes
into account anticipated losses and loss adjustment expenses and maintenance
expenses based on historical and current experience and anticipated investment
income based on a 5% rate of return.

Reserve for Losses and Loss Adjustment Expenses

Unpaid losses and loss adjustment expenses are determined on an individual
basis for claims reported on direct business for insureds, from reports received
from ceding insurers for insurance assumed from such insurers and on estimates
based on Company and industry experience for incurred but not reported claims
and loss adjustment expenses. The provision for unpaid losses and loss
adjustment expenses has been established to cover the estimated unpaid cost of
claims incurred. Such estimates are regularly reviewed and updated and any
resulting adjustments are included in the current year's results. Management
believes that the unpaid losses and loss adjustment expenses are adequate to
cover the ultimate unpaid claims incurred, however, such provisions are
necessarily based on estimates and, accordingly, no representation is made that
the ultimate liability will not exceed such amounts.

Net Income Per Share

The Company calculates its net income (loss) per share in accordance with
the Financial Accounting Standards Board's ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings Per Share. Basic earnings per
share was computed by dividing net income by the weighted average number of
shares outstanding for the period. Diluted earnings per share reflects the basic
earnings per share adjusted for the potential dilution that would occur if the
issued stock options were exercised.

Reinsurance Ceded

Reinsurance ceded which transfers risk, premiums, commissions and
recoveries on losses incurred is reflected as reductions of the respective
income and expense accounts. Unearned premiums ceded and estimates of amounts
recoverable from reinsu